Even now it is still not too late to sell!

Today's stock market action completes an assumed weekly Lindahl sell signal for the SP 500. There is a new daily sell signal as a result of the assumed outside down day, including the early evening trade after the Nortel results. The rally appears to have failed in textbook fashion at the downtrend line from the September 1 high and at the declining 25 day moving average.

Given the market's exceptionally adverse response to the Nortel results, we want to pass on our observation that the stock market is set up even more bearishly than it was as the 1987 crash was starting to unfold. This time the 40 week moving average has just rolled over for the SP, which was not the case in 1987. We are not saying that there will be a market crash like the one in 1987 for there are more setups than there are actual crashes. Nevertheless, the risk of owning stocks here, let alone of buying more, is inordinate. The only exception is that we would still retain all our oil and oil service stocks even though they too could set back a fair piece in a general meltdown.

While we do not necessarily forecast a meltdown like the one in 1987, almost all the parameters for defining a secular bear market are now in place. Therefore the question is not so much whether there will be a meltdown but whether the continuation of the bear market will be fast or slow.

Apart from the technical factors described above we note the following storm signals:

1. Consumer confidence is at a record high, which is bearish. It often tops out at stock market peaks, as it did for the major top in the Russell 2000 small cap stock index in April 1998.

2. There are real and serious signs of an economic slowdown which could lead to a recession. Manufacturing has lost 183,000 jobs in the past two months. Some companies like Rockwell International have noted a sudden and dramatic fall-off in sales beginning in August.

3. Inventories appear to be growing.

4. Sales growth is often being reported below what was expected and this goes even for Nortel reporting tonight.

5. Investors are finally waking up to the fact that reported profits may in fact be an exercise in smoke and mirrors. Nortel has the honesty to report that including acquisition costs and the real cost of options granted to employees, it lost half a billion dollars in the latest quarter. Its reported operating profits were reasonably all right except for the fact that the price/earnings multiple discounts a future that extends into the afterlife. There is a big article in this week' Barron's which pulls apart the accounting reported by Cisco and concludes that in reality the company is losing money, not making it. When you start with multiples of a hundred or more for reported profits and then find the companies are actually losing money, the attraction of owning such stocks diminishes considerably.

6. Bank credit quality is deteriorating sharply and seriously, to the point of almost certainly making all bank stocks ones to sell and possibly ones even to sell short. A bank that has to make huge charges for bad loans is one that is wary of extending new loans. So businesses that need credit to grow may not be able to get it.

7. Corporate bonds have been selling down hard, in recognition of deteriorating corporate creditworthiness even as stocks have been soaring. They can't both be right, and we expect the sellers of bonds to have done better homework.

8. Consumer credit is at record levels and it keeps on growing at a rate that is unsustainable. Given that many retailers are already in trouble, what happens when consumers rein in their buying?

9. The impact of higher energy costs is real. An extra dollar spent on heating or at the gas pump is one that cannot be spent elsewhere. Some observers have correctly noted that the rise in energy costs has had the effect of slowing the economy, doing Alan Greenspan's job for him and making it unnecessary to raise interest rates.

10. Telephone and data transmission companies are seriously overextended even as growth looks unlikely to reach forecast levels. They have overpaid for G3 licenses and simply don't have the cash with which to exploit them. Nor are the debt markets and the banking system likely to be able to accommodate them. Look at what has happened to stocks like Vodaphone or Deutsche Telekom and you see what we mean. Vendor credits extended by the likes of Nortel, Cisco, Lucent and other suppliers are already starting to turn bad, and this trend can only worsen.

11. Profit forecasts for Quarter 4 earnings and Quarter 1 next year are dropping fast, but nowhere near fast enough. They could actually turn negative some time next year. Surprising as this may seem to say now, it is essential to note that this has happened before. Many times.

In sum, we see a bear market in the early stages of development, and we also see a high probability of a serious recession next year.

Stock market action is likely to be extremely erratic but the major trend is now DOWN.

We see minimum downside targets of 1200 for the SP 500, 2500 for the NASDAQ 100 and 8000 for the Dow Jones Industrials. However, you have to bear in mind that every real bear market sets back in proportion to the excesses of the preceding bull market. This means that the major indexes could easily decline by more than 50 percent from here, and many of the apparently strongest stocks today could decline by anything between 50 and 90 percent. There are many, many stocks already showing what can happen, stocks like Xerox, for example, and that has happened in good times. Imagine therefore what can happen in bad times.

Of course, there will be time again to buy stocks aggressively. However, the object of the exercise now is to conserve capital. That means selling stocks and parking the money in the money market.

Stockscom