Guest Author - Guido Deboeck

Tobias Levkovich, chief US equity strategist at Citigroup suggests that it may be time. He argues in today’s NYTs (Business section, June 24th, 2006) that based on his panic/euphoria model valuations are such that the market may be signaling a 20 percent jump in share prices within a year.

The model is based on “math that is a bit complicated {as if we the readers are not smart enough to understand some slightly complicated math, please…} but the idea is to assume that whatever companies earn today is all they are ever going to earn, year in and year out, then calculate how much they should fetch based on Treasury bond yields and a component representing the added risk of holding stocks instead of bonds.” If all that is crystal clear to you, without the math, read on and find out what his number crunching produces in terms of specific stock recommendations.

Here is the list in symbol terms (don’t you wish the NYT would provide the curtsy of providing symbols to its readers…): OXY, MRO, NUE, HES, RYL, COP, MTH, CMI, CVX, TO, ALK, RAI (sorted based on highest price increase on Friday). Levkovich’s recommendations happen to be all “buy signals” for Citigroup. Are you surprised?

Let’s analyze Levkovich’s list of 12 stocks based on a few common IBD criteria: ALK has an EPS rating of 6; TOL, MTH and RYL have an RS rating of 2; OXY, MRO, HES, COP, CVX have an accumulation/distribution rating (A/D) of D or E. Hence, 9 out 12 stocks suggested by Levkovich do not meet any major IBD criteria.

This leaves NUE with A/D rating of C, an RS of 98 and EPS ranking of 74. It also leaves CMI with an A/D of B+, an RS of 65, and EPS of 97. And there is RAI with B-, 49, and 58 respectively.

How far away are these 3 stocks from a potential “buy point”: RAI closed at $110.66 on Friday and needs to reach to $113.34 to become a buy; CMI closed at $110.64 and requires $113.68; NUE closed at 51.37 and needs to reach to 55 to get again above its 50 day moving average. Hence, three stocks out of twelve which meet some important IBD criteria are still some distance away from a buy point.

Does the overall market justify that you jump back in? The A/D on the S&P500 is a C, the A/D on NASDAQ is a C+ and the A/D on NYSE is a D+. IBD’s current market outlook is still “market in downtrend with day 8 of an attempted rally”.

Does this give you confidence that is time to put a toe back in the market? Without a panic/euphoria model, without any complicated math – I like to observe volume and price and derive from it what the market is doing --, and without the pressure to provide buy recommendations (for Citigroup or any other firm), I don’t think so. Wait till the market tells you in unequivocal terms that large institutional investors have changed their mind and show via volume and price increases that there is new rally.

John Quincy Adams said:” Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.”