Bill Cara: Industrial sector of Dow 30 getting over-bought, Mon., Mar. 27, 2006, 6:34 AM

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March 27, 2006

Industrial sector of Dow 30 getting over-bought, Mon., Mar. 27, 2006, 6:34 AM

Technically speaking, it appears to me that a market correction is being set up by the Industrials sector. Boeing (BA), Caterpillar (CAT), Honeywell (HON) and United Technologies (UTX) are over-bought on the basis of the Relative Strength Index (RSI) technical indicator. In addition, I'd say JP Morgan is also over-bought.

When I look down the list of 30 Dow stocks, I count ten or eleven that are likely to sidetrack at best for a couple months, and see maybe only one or two, Intel (INTC) and possibly Johnson & Johnson (JNJ), that are over-sold.

In addition to BA, CAT, HON, UTX and JPM, I also note that technically speaking, this is not a good time to be adding to positions in Disney (DIS), Wal-Mart (WMT), Pfizer (PFE), Merck (MRK), Verizon (VZ) and AT&T (T).

I take note of this situation because the broad equity market needs a further boost by the Fed to continue moving higher, I believe, and Bernanke's Fed is starting meetings today to determine policy. I think the Fed is in a bad spot, and that traders may start to lighten up here unless the Fed announces a policy change to cease raising the Funds Rate. And that is unlikely.

Decision time is at hand because Earnings Season starts in two weeks. Sure, there is a lot of cash building on the sidelines, but is it going to go into U.S. equities or be sent abroad?

Moreover, a solid three-year advance in equity prices has taken PE multiples up to a point that cannot be stretched further unless First Quarter earnings and 2006 guidance are both very positive. That will take a combination of lower interest rates and lower commodity prices, which is unlikely.

So, if there is to be a pullback, traders ought to be able to see it in the Dow 30. To help you make this call, I put together a list of the Dow 30 files I continuously access.

And while you do, just remember that you are not an investor, but a trader of prices. You are trying to add holdings at low enough prices that your dividend to cost base is greater than economic returns you can make in long-term, risk-free U.S. Treasury Bonds.

Just think that Intel may be a wonderful company to work for, or use semiconductor chips from etc, but you are trding shares of INTC. And, INTC at 25-plus is a different deal than 20-minus.

Obviously, if INTC were to move to 30, that would be a +20-pct move from 25, but a 50-pct move from 20. But that may not happen. The important consideration is that a 40 cent dividend on 25 is a yield of 1.6-pct, but on 20, the yield is 2.0-pct. Since the risk-free return (30-year T-Bond) is presently 4.70-pct, you need to either hold the bond or continue trading INTC (options over-writing plus some timely puchases and sales is my recommendation) in order to get your cost base to about $8, not $18, 20, or 25.

You cannot do this overnight, but over time you can, and you have to if you are going to manage your portfolio successfully.

Ironically, this is the same approach (i.e., cash on cash returns) that professional real estate investors use. As I see it, there is no difference. Money is money. The only value is the return you can get from it.

(AA) (AA) Financials (Here is the Jan. 20 Value Line report on AA: next one is due Apr. 21)

(AIG) (AIG) Financials (Here is the Feb. 25 Value Line report on AIG: next one is due May 26)

(AXP) (AXP) Financials (Here is the Feb. 25 Value Line report on AXP: next one is due May 26)

(BA) (BA) Financials (Here is the Mar. 24 Value Line report on BA: next one is due Jun. 23)

(CAT) (CAT) Financials (Here is the Jan. 27 Value Line report on CAT: next one is due Apr. 28)

(DD) (DD) Financials ( Here is the Jan. 20 Value Line report on DD: next one is due Apr. 21)

(DIS) (DIS) Financials (Here is the Feb. 18 Value Line report on DIS: next one is due May 19)

(GE) (GE) Financials ( Here is the Jan. 13 Value Line report on GE: next one is due Apr. 14)

(GM) (GM) Financials Here is the Mar. 3 Value Line report on GM: next one is due Jun. 2)

(HD) (HD) Financials (Here is the Jan. 6 Value Line report on HD: next one is due Apr. 8)

(HON) (HON) Financials (Here is the Jan. 27 Value Line report on HON: next one is due Apr. 28)

(HPQ) (HPQ) Financials (Here is the Jan. 13 Value Line report on HPQ: next one is due Apr. 14)