Seduced by a Sell Signal

One strategist is predicting something more ominous than a consolidation or a correction. Plus, transports tell all.
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SAN FRANCISCO -- Good news! Scott Bleier, chief investment strategist at

Prime Charter

, says stocks are about to break out of the trading range they've been in for months now (and one he's been talking about since at least

June 22).

The bad news (for those long) is he does not see the trading range

resolving itself

(lingo alert!) in a favorable fashion.

I'll preface this by noting Bleier made these comments

yesterday, before the final-hour selling and before

today's wild and woolly (mammoth of a) session. Furthermore, the strategist's indicators are best at forecasting the market's "next move" of two to four months, so the exact timing of the call isn't paramount. (Is it?)

"Every time I get this indicator and don't listen, I kick myself in the ass," he said. Back in June the indicator was saying "trading range." On Monday, it signaled there's a selloff coming, "something more than a consolidation

or correction," the strategist said. "I'm putting my balls on the table."

Cards, that is. I'm sure he meant "cards on the table."

Like nearly every strategist, Bleier has a proprietary model and thus declined to specify the underpinnings of his call. It's based on both technical and fundamental gauges, he said, as well as less-easily measured variables such as the "mood" of salesmen. (

Stock salesmen, I imagine.

)

"Maybe

Elaine Garzarelli has an exact science because her model is all numbers, but every strategist uses a modicum of subjective interpretation," Bleier said. "My technical indicators are flashing a nice strong sell signal."

Due to the admittedly subjective nature of the model, Bleier is able to trust his "gut" and make the call "regardless off how strong tech is

and how everybody is getting bearish."

It's also enabled him to look beyond the fact the

S&P 500

has been making a "perfect contracting triangle," or a series of lower highs and higher lows. Such technical patterns generally "preclude big moves" and most have "concluded higher" in the past decade, Bleier acknowledged. But not this time.

He recommends investors buy protective puts "a few dollars out of the money." For example, someone with a $50 basis in

Cisco

(CSCO) - Get Report

should buy $60 puts "out a couple of months," he said. Cisco closed at 70 1/2 today.

Additionally, "I'd sell stocks that have acted incredible," he said, mentioning

Harmonic

(HLIT) - Get Report

,

Red Hat

(RHAT)

and

Redback Networks

(RBAK)

as examples. "They could rise in my face again, but they are candidates for sale. Everything else is spinning its wheels." (Prime Charter has done no underwriting for any of the aforementioned.)

Bleier isn't calling for the end of the bull market, foreseeing another five years of favorable demographics. "But I think September and October are going to be true to form."

Transports Need A Lift

The

Dow Jones Transportation Average

fell 100.72, or 3.3%, to 2986.88. Like

Milli Vanilli

you can blame it on the rain, although today's decline was probably more a function of

FDX

(FDX) - Get Report

shedding 13% after its profit shortfall and subsequent warning. The transportation average is now down 21% from its May 12 record of 3783.50, which is bear market territory any way you lip-synch it.

But this does not necessarily portend a similar decline for the

Dow Jones Industrial Average

, according to Richard Moroney, editor of

Dow Theory Forecasts

.

The industrial and transportation averages moving in tandem is key to Dow Theory, Moroney said, noting they "confirmed" new highs in May, thus providing a bullish indicator. Additionally, the transports have been in "one big long correction since," he said, vs. a pattern of correcting after hitting a high, then enjoying a "meaningful retracement" followed by a reversal to "lower lows."

The action in the transports is certainly negative and suggests "the risk of a correction in the industrials is higher," he said. But "it doesn't change the primary move of the market" which is still bullish according to those with the DTs ... er, Dow Theory.

Should the industrials and the broader market follow the transports, investors should "use that to fill out portfolios and buy," the newsletter writer said, recommending telecom services firms

Sprint

,

AT&T

(T) - Get Report

and

BellSouth

(BLS)

; and telecom equipment plays

Lucent

(LU)

"on a dip,"

ECI Telecom

(ECIL)

and small-cap

Vari-L

(VARL)

.

Among transports, Moroney favors

Southwest Airlines

(LUV) - Get Report

and today's whipping boy, FDX.

"There's no hurry to jump in now, but looking out 2-3 years

the decli is creating a pretty good buying opportunity," he said of the latter. "I like their long-term prospects."

Jack Schannep, president of

The Dow Theory Investment Timing Newsletter

, agreed pure Dow Theory still gives a "buy" signal. But his proprietary (see above) market timing indicator is flashing a sell signal.

"Dow Theory is still in the buy, although there are reasons to be cautious because of its proximity to changing," he said, suggesting 10,466.93 is the "magic number" for the DJIA. While "just" 7.6% below the Dow's

Aug. 25 all-time high of 11,326.04, it's the level to which the average retreated to on

May 27 . That's significant because the last time both the industrials and transports made new highs

'n synch was on May 13 and May 12, respectively.

Funny, I always thought

three was a magic number.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com.