Nasdaq 2300 or Bust -- or 2300, Then Bust

Major equity averages are entering a period of high volatility, and recent trading ranges are more likely to break to the downside, even if modestly higher levels are achieved first. Since my thesis has been that the Nasdaq Composite provides leadership up or down, my market call is simple: "Nasdaq 2300 or bust" or "Nasdaq 2300, then bust."

My sector work, seen on the chart below, shows that technology remains the cheapest sector at 16.0% undervalued. Consumer durables are in second place at 6.6% undervalued. Energy is 6.5% overvalued vs. 17.2% overvalued last month. The fundamental screens thus agree with my theme that the tech-heavy Nasdaq must lead, or the stock market is a bust.

Taking this tech-must-lead theme one level deeper, technology leadership needs to be confirmed by the Philadelphia Semiconductor Sector Index (SOX). The SOX's 200-week simple moving average is important support at 421.08, and downside momentum could accelerate on a weekly close below it. A weekly close above my new monthly pivot at 438.20 would be a stabilizer and would signal renewed technology leadership. The October high of 483.20 was a failed test of quarterly resistance at 487.90.

Traders can certainly make money to the upside, as 2300 would tack on another 7.3% vs. the 2144 level as of Wednesday's close. One reason I expect short-term upside is that my model suggests a dollar reversal is near as resistance builds. The euro should hold the 1.1847/1.1354 range, and the dollar should peak vs. the Japanese yen around 117.37/117.83. A weak dollar tends to be positive for multinationals such as General Electric (GE Quote), which should trade up toward my quarterly risky levels at $37.31 and $37.58.

But if this broader market upside were to occur, it should be viewed by long-term investors as an opportunity to raise cash. There are several crosscurrents in the U.S. capital markets to support my call that the Nasdaq, and hence stocks in general, are vulnerable with or without this modest gain first.

Sector Valuations
Sectors	Valuation On Sept. 30, 2005	Valuation On Nov. 1, 2005
Basic Industries	9.43% overvalued	3.09% overvalued
Capital Goods	6.15% overvalued	2.15% overvalued
Consumer Durables	2.11% undervalued	6.60% undervalued
Consumer Nondurables	1.40% overvalued	0.16% overvalued
Consumer Services	1.71% undervalued	1.87% undervalued
Energy	17.2% overvalued	6.52% overvalued
Finance	3.71% overvalued	2.11% overvalued
Health Care	1.34% undervalued	4.19% undervalued
Public Utilities	11.45% overvalued	2.84% overvalued
Technology	9.85% undervalued	15.98% undervalued
Transportation	2.66% overvalued	0.49% overvalued
Source: ValuEngine.com