Mapping Out the Bear Tracks

Among the other major averages, the S&P 500 is below a new quarterly resistance at 1448.20, below the multiyear high. On the Nasdaq, quarterly support is 2274, with my annual pivot at 2483 and quarterly and semiannual resistance at 2544. For the Dow Jones Utilities Average, my monthly pivot is 492.35, with semiannual and quarterly resistances at 507.00 and 511.13, respectively.

I believe a key warning comes from the Dow Jones Transportation Average. It set a new all-time high of 5211 on Feb. 22, and the quarter's close was 7.7% below that high. Transports are noted as a leading indicator for the economy, so I consider this index one of my bear tracks. Semiannual support is 4360 with a quarterly pivot at 4749 and monthly, quarterly and semiannual resistances at 4985, 5074 and 5280, respectively.

The stock market is operating under a Dow Theory Buy -- Nonconfirmation, which happens when the Dow industrials don't follow the transports to a new closing high. With the Dow Jones Industrial Average now some 400 points below its closing high of 12,795.93, a new confirmation appears difficult. This is another one of my bear tracks.

Among other commonly followed measures, Russell 2000 futures ended the quarter 3.1% below the new all-time high of 831.50, set on Feb. 22. My annual and semiannual supports are 763.20 and 750.77, respectively, with a monthly pivot at 808.26, quarterly resistance at 852.86 and monthly resistance at 853.92.

The Philadelphia Stock Exchange Semiconductor index, or SOX, is down 5.4% from its Feb. 26 high of 492.27. Keep in mind that the SOX peaked at 560.68 in January 2004 and at 559.60 in January 2006, and it has declined nearly 17% from those peaks. This is another bear track, as technology is another leading indicator for the U.S. economy, with semiconductors a raw material for growth.

Philadelphia Stock Exchange Semiconductor Index

Click here for larger image.

Source: Reuters

I don't show any supports from my model, so a weekly close below the 200-week simple moving average at 454.42 would be yet another bear track. The SOX is below semiannual and quarterly pivots at 475.26 and 482.15, with quarterly and monthly resistances at 509.26 and 514.09, respectively.

Stretched Equity Valuations

Many strategists have lowered earnings growth estimates from the high single digits to low single digits. Plus, several sectors, such as basic industries, capital goods, consumer services, energy and transportation, ended the first quarter more overvalued than they were at the end of 2006. Consumer durables, consumer nondurables, finance and public utilities are slightly less overvalued. Health care and technology are less undervalued.

Basic industries are more overvalued on renewed speculation in precious metals and on M&A potential involving industrial metals. Energy is also more overvalued as geopolitical risks mount, such as the latest standoff between the U.K. and Iran; this sector has 29 of 93 strong buy ratings.

The finance sector is less overvalued as it weakens on the fallout from real estate woes. The subprime mortgage mess is the tip of the iceberg, with balance-sheet issues growing at community and regional banks. According to recent FDIC data, banks are exposed to $565 billion in construction and development loans, which represent about 60% of the pipeline of commitments to the industry.

Investors are flocking to the dividend and M&A prospects in public utilities. If the sector returns to fair value, it could take at least five years for dividends to offset share-price weakness.

Valuations, Sector by Sector
Sectors	29-Dec-06	30-Mar-07
Basic Industries	11.8% overvalued	17.5% overvalued
Capital Goods	4.0% overvalued	6.4% overvalued
Consumer Durables	16.9% overvalued	15.9% overvalued
Consumer Non-Durables	13.6% overvalued	11.6% overvalued
Consumer Services	5.7% overvalued	7.1% overvalued
Energy	0.2% overvalued	9.3% overvalued
Finance	10.1% overvalued	4.8% overvalued
Health Care	3.1% undervalued	1.4% undervalued
Public Utilities	17.5% overvalued	16.2% overvalued
Technology	3.2% undervalued	0.4% undervalued
Transportation	8.3% overvalued	10.4% overvalued
Source: ValuEngine