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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) - Get Free Report

, 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.

A rising 30-year bond yield is negative for stocks: I expect U.S. Treasury yields to continue to move higher as the Federal Reserve raises the federal funds rate. The trend to higher yields is propagating out to the yield curve, ending both the bond "conundrum" and carry trade.

The bond conundrum began as the Fed started to raise the federal funds rate at a measured pace on June 30, 2004. As the funds rate moved higher, the yield on the 30-year moved lower. That's the conundrum that's ending now. The carry trade is also being reversed -- it becomes more difficult for speculators to borrow short-term and buy long-term as the funds rate rises. Wednesday morning, the U.S. Treasury announced that it will auction its first new 30-year bond in February; this added supply could aggravate a rise in yield. A higher 30-year bond yield is a negative for stocks, as that yield is an input to my calculation for the fair value for all stocks and thus would make every sector more overvalued or less undervalued.

Commodity prices are topping out, led by crude: The main reason for this, in my judgment, is the unwinding of speculative positions. Speculation was fueled by the FOMC's low interest-rate policy, which pushed the federal funds rate to 1% in June 2003, franchising commodity speculation via the same "free money" environment that propelled the carry trade.

Over the near term, lower commodities prices are a positive for stocks, and given the bond market's weakness, the hot money is getting back into stocks: That's why a Nasdaq 2300 is possible before higher yields trump this trade and push shares lower. The consumer is still reeling from higher energy costs and faces higher mortgage payments. In addition, future tax legislation puts interest deduction and state and local tax deductions in jeopardy. This could lead to a slower-than-expected economy; this would cause the

Dow Transports

-- which reached an all-time high at 3983 Thursday morning -- to fail, just as utilities did in early October after a new all-time high.

Lower energy costs helped power the transports above my annual resistance at 3940 Thursday. On this strength, long-term investors should look to reduce holdings in the transports, particularly those trading near 52-week highs and within reach of longer-term risky levels. When I set my Power Scans to find transportation stocks with a hold or sell rating according to my model (at least 10% overvalued and trading within 5% of their 52-week high), three railroads are among the seven companies that come up:

Kansas City Southern

(KSU) - Get Free Report

, which has monthly and quarterly risky levels at $23.90 and $25.08;

Norfolk Southern

(NSC) - Get Free Report

, which shows a quarterly risky level at $45.35; and

Union Pacific

(UNP) - Get Free Report

, for which my model shows semiannual and quarterly risky levels at $72.37 and $73.50.

Among the other names identified by the screen,

Airtran Holding

( AAI),

CNF Transport

( CNF) and

Expeditors International

(EXPD) - Get Free Report

met the criteria, but could continue higher as there are no risky levels.

Ryanair Holdings

(RYAAY) - Get Free Report

shows a semiannual risky level at $55.10.

One of the themes of my


columns is that since the economy is more dependent upon productivity gains achieved through technology, the Nasdaq should be looked at for leadership up or down. Older theories calling for transports to lead are still supported by many market strategists, but they are on the way out as the U.S. outsources manufacturing jobs and depends more on the service economy and technological advances. However, I do not detect a meaningful correlation between the Nasdaq and transports.

Levels to Watch

Here are the key technical levels for the equity averages:

Dow Jones Industrial Average: Monthly support is 10,125, with the 200-day simple moving average at 10,497. The Dow was above its 200-day SMA Thrusday morning and resistance for the day is 10,570. It's flashing a long-term warning, as its monthly chart profile shifted to negative and stays negative on a close in November below the five-month modified moving average at 10,466. A daily close above the 200-day simple moving average could fuel a detour higher.

Nasdaq: Holding monthly pivots at 2121/2095 targets quarterly resistance at 2319. However, a close in November below the five-month modified moving average at 2097 shifts the monthly chart profile to negative.

Dow Utilities: October was a monthly key reversal, with a close below the September low of 405.56 after a record high of 438.74 in October. Annual support is 373.40 with monthly/quarterly resistances at 429.53/430.69. My call in this sector has been to sell strength.

Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan, and the author of Technology Report

newsletter. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --

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