Discerning Pluses From Negative Vibes

Negative vibes . . . from a myriad of analysts or economists who just yesterday started focusing on 'earnings' rather than monetary policy in the wake of the 'Fed pass' on rate hikes, moved us to say "no no no", that's not the problem, as we had simply forecast daily-basis 'good-news selling', because the Fed's non-move was fully discounted by preceding upward action. That is precisely why we looked for merely a moderate continuation this morning (Wednesday), followed by new buying, which was expected to bottom in the 1490's and then challenge Tuesday's S&P highs.

Both of these events transpired. Also the hotline (900.933.GENE) projected a completion of the selling between 10 and 10:30 this morning (ET), with a gradual recovery as the day progressed. This was addressed basically (repeatedly if necessary) and ties-into our call for early Thursday, which in a perfect world (even if more profit-taking is ultimately seen) would give us a brief dip, then early higher action, followed by another dip, a renewed rebound, and only then postulate about a possible late fade (as we'll address on the hotline as and if necessary).

As for earnings concerns, these typically come from analysts who were overly optimistic about a continuation of stellar results in the 1st half, and then became concerned after the targeted drop; a condition that should have them revisiting their crystal balls (especially in computers and tech), but finds them trying to defend the idea of troubled results later this year and next. Just as stock markets anticipate slowdowns, they also anticipate recoveries, which was the fundamental core of our argument for the decline earlier this year, and the nearly-constant optimism for the second half rebound, with moderate caveats (and seasonal tidbits) as pointed out in last night's remarks.

For most of the key technology sectors (particularly computers, semiconductors and value-priced optic stocks) we continue anticipating overall higher behavior for now, though not for every single day or not every hour within each day. The other night we remarked about 'component shortage' concerns expressed by a couple companies; something the financial press is obsessed with now it seems. Our conclusion was that while it is worrisome if not addressed over time, that backlogs are a sort of 'good problem' to have, as opposed to sluggish demand which some analysts (often the same ones, just trying to find something bearish within the pricing structure) previously noted as the case. These things will ebb & flow, of course, but for now key demand remains strong just as we've indicated would be the case for computers (and their core components) for this year's 2nd half; very much the heart of why we thought the market would come back from that indicated low in late May, which in our view completed the heart of the correction, which always tends to of course occur last in the strongest sectors, and first in the weakest, with the speculative craze of a moment somewhere in the middle. (Cooling demand for durables is expected and transitory; while special comments on Intel, disputing typical reactions to Xeon capacity limits, are noted.)

In that regard this year's entire equity behavior was fairly classic, so we presume the knowledge of those facts by experienced managers and analysts has handily contributed to an overall stock market comeback (and particularly the SOX and NDX) since May. We know there's a school that thinks the market, particularly the NASDAQ and Nasdaq 100 (NDX) will tank in a final 'cleansing' of speculation this Fall. Certainly that could happen, though outside of (the indicated parameters) in the weeks ahead, we're not embracing that particularly way of thinking. Frankly, those money managers who are waiting (still waiting?) for lower levels, probably will already have missed what we called the 'heart of 2000's advance', the move from the May lows, through an August test, to an intermediate (peak of sorts) in early September, prior to a pause and then (reserved) levels.

Though certain sectors continue under pressure, like consumer-dominated retailing, some of this is offset by newly refreshing action in the real estate sector (not yet discernible in 'official' data), which contributes to a 'soft landing' case, an economic goal we included within our long-ago call for this year's necessary contraction of speculation and consumer exuberance; even as the Fed was within its early stages of tighter policies, and that of course was a realization that the Fed was (and you'll not often see that) right in the midst of increasing the monetary aggregates as they tightened the cost of rented money. It was our opinion this was a distortion due to the build-up of the M's ahead of Y2k, and that they in fact would contract immediately thereafter, but try very hard not to drive us into a recession. That has turned-out to be what has occurred thus far, as the delicate balancing act is being won by a Fed that increasingly understands what they can impact and what they can't move. Hence our remarks on Oil, and requirement for Dollar stability maintenance during an often-rocky month of August.

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Comments tonight are led by remarks on Intel (INTC), about Rambus (RMBS), Wave Systems (WAVX), Analog Devices (ADI), Conexant (CNXT), Texas Instruments (TXN), and also Apple Computer (AAPL), as well as Dell (DELL), LightPath (LPTH), Hewlett Packard (HWP) and on America Online (AOL). Merely mentioning here should not be construed as a suggestion as to whether we view them as buys, sells, holds or shorts, and is to give an idea of the type of issues we tend to follow. (All selections occur in the Letter, with notable interim comments in the Daily.) Of these, some (like Intel and Texas Instruments have been mostly retained for years, with parts sold from time-to-time when shares spike in unsustainable parabolic moves, or noted for new or replacement buying when purges, such as the April / May forecast decline), while ADI was what we call the 'pick of the year' stock last Christmas, and LPTH a first-ever similar small size choice.

In summary . . . the McClellan Oscillator reading dropped last week, amidst structural market improvement. It continues to actually be a plus that the Oscillator got down to only +4 yesterday and is at –13 today, as breadth erodes while price levels generally hold together. As we said for a few days; we'd love to see it slide below zero in a corrective mode that eliminates overbought daily conditions without much price erosion. This idea we speculated about, and continues rolling along in the desired manner. If all goes just right this will be just modestly oversold by early next week, and we'll get more decent pre-holiday rally from the market in front of a Labor Day recess.

Generally looked for renewed rallying; then pullbacks and eventually higher after we got through the FOMC meet, good-news profit-taking, and then more upside. There is no structural change in the overall stock market or Treasury outlook other than certain caveats here about Energy prices and also the Dollar, as noted. For now we expect any lower opening to have little follow-through, with another rally effort likely to be seen, even if sold into, at least on an hourly basis. As of 9:00 p.m. ET, on Globex, S&P premium's 463, with futures little changed from Chicago's 1510 close.