Stocks to Lighten Up on for a Hard Landing

This exposure was up 31.8% year over year at the end of the second quarter. The banks' exposure 15 years ago was only $160 billion, and back then 13% to 14% of these loans became noncurrent.

Putting this exposure in perspective, the GDP of the U.S. is $13 trillion, with the total assets held by FDIC-insured institutions at $11.5 trillion. Residential construction loans thus make up roughly 4% of GDP and 4.4% of the exposure of the banking system. In my judgment, this is a ticking time bomb.

The America's Community Bankers Index (ACBQ), which tracks over 500 publicly traded regional banks, reached a new high Thursday morning on the theory that the Fed will orchestrate a soft landing. This is deemed positive for financial stocks. I disagree -- I believe investors should reduce exposure to regional banks and consider booking profits on positions that are trading near their 52-week highs.

How Now Dow?

The Dow Is poised to test its January 2000 high at 11,750. If not now, when? In May, with the Russell 2000 testing 787.75 and the Dow Jones Transportation Average testing 5013, the Dow should have hurdled above 11,750 -- but it didn't. Now the first two averages are at 733.50 and 4347, which is a drag. In addition, the Nasdaq peaked at 2375 in April and is stuck about 100 points lower.

Semiconductors should be leading, but instead the Philadelphia Semiconductor Index (SOX) failed shy of its 200-day simple moving average of 480.50. Finally, the Dow Utility Average reached a high of 443.49 on Sept. 1 and is down 4% this month.

If stocks fail now, the focus could shift to the uncertainties of the upcoming elections. If the Democrats take the House and/or the Senate, the uncertainties could persist until after the 2008 presidential election.