Stocks to Lighten Up on for a Hard Landing

This column was originally published on RealMoney on Sept. 22 at 11:28 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Most strategists are optimistic that the economy is heading for a soft landing and that stocks are ready to climb to new highs. I disagree.

The Federal Reserve has no choice but to remain on hold and show confidence that the economy is headed for a soft landing. If it raises rates more, it could push the economy into a hard landing. If it cuts rates, it will be admitting that it has overshot, and I would consider that event a downgrading of the U.S. economy. This would be a signal that we are indeed heading for a hard landing.

I believe now is the time to book profits on highflying stocks.

Signals to Fasten Seatbelts

U.S. Treasury yields are 50 basis points and more below the federal funds rate. This is a sign that bond investors expect that the FOMC will be forced to make cuts.

The deleveraging of speculative commodity positions is a sign of uncertainty, including the corrections in Comex gold and Nymex crude oil. The secular uptrend for Comex gold shows major support around $460 an ounce. This will likely line up with the 200-week simple moving average, which was rising at $443.50 this week. It was last tested in February 2002, when the average was $282.

A slowing economy, a quiet hurricane season (so far) in the Gulf of Mexico, luck on the geopolitical front and the unwinding of speculative positions have burst the energy bubble -- Nymex crude oil has declined more than 22% since hitting a high of $78.40 in July. My price target for crude remains my annual support of $51.87, which appears achievable by the end of 2007, if not sooner. This will likely line up with the 200-week simple moving average, which was rising at $47.60 this week. It was last tested in October 2003, when the average was $29.95. Keep in mind that former ExxonMobil Chairman Lee Raymond testified before Congress last October that he felt crude oil was probably $20 a barrel too high because of speculation.

My major concern is the regional banks and their overexposure to residential construction and development loans, which totals $514 billion among the 8,788 FDIC-insured institutions.