Ripe for a short-covering rally . . . including potential bumps up, following the State of the Union Address; found the market well poised for the initial snapback Tuesday, and the projected resumption Wednesday; only slightly erratic (no problem) at times.

Gains were initially rangebound, following a gap-down opening on the very evidently somber tone that accompanies this war-time State of the Union, but a symmetrical or stable pattern (early failing rallies, but also failing declines) set-up what to us was the probability of a challenge and penetration of the first rebound high, which occurred. It was all potentially complicated by the FOMC meeting later, but we suspect that would not have a deleterious affect, and it didn't. T-Bonds actually eased a bit as equities of course benefited from the day, and there was no Fed movement (none expected).

Hence we were able to stay with it; and the Dow Industrials managed to hold an up day together (with some late fade), while the S&P did the same; ditto NASDAQ, as well as techs overall, likewise. None, including the Nasdaq 100 (NDX) are yet up to daily resistance points, though all are capable of challenging those in the near future (might be the limitation of the forecast call… specifics reserved for ingerletter.com).

Absent something startling like that, this market is otherwise unlikely to go that much impressively higher, or for that matter lower just yet, though everyone tries to get the market to make draconian decisions, which we believe it doesn't want to as of yet. Few concur this market has more upside opportunity down the road, which is a good factor, as that enhances the prospects they'll have to pay up to get in (or cover) if they are proven wrong, as we continue to suspect odds are (not now but) later this year. Again if all goes just right, for key techs in particular (more so than multinational stocks), there is (long-range projection reserved for readers); that's why w bottoms are potentially important in scenarios of the preceding half-year leading to this point.

Even the FOMC statement believes, as have we, that Oil prices were stretched, and that chances are some of the adversarial anxieties contributing to economic restraints will be self-correcting by virtue of events that change the backdrop creating those. Of course at the moment we suggested that Oil had actually given signs of a short-term low of late, and action backed-that-up. We even had a tinge of arbitrage in the sector earlier today, as oil prices firmed mildly, while oil stocks eased, then both recovered. Of course part of the rub is that the Fed is skating on potentially thin ice, believing the adage that they need not to unnecessarily meddle with policy so close to a potential war, and we already concurred with doing nothing, but emphasizing supportive ideas. As time evolves the Fed will either do nothing for a long time, or cut again if essential.

As a result, the interpretation is that the Fed won't have to take drastic action now, as we are likely to see economic revival promulgate itself as matters adjust; and if they'd cut further, it would not make the risks of deflationary trends disappear. Rates are low enough so that there's no hesitancy about such things as refinancing and the like, so a further cut now, wouldn't likely help things more than the stable level they already in fact are at, and would risk the possibility of hindering recovery if it frightened people a bit more, by implying recessionary tendencies, ahead of renewed risks of open war.

War and terror, of course, are the primary risks, and if they don't evolve satisfactorily in the near-term, the Fed can revisit the topic at their next meeting coming in March. Hence there's really no reason to act hastily now, and they appropriately didn't. We'd concurred, expecting they would do nothing other than emphasize the evident needs to maintain liquidity, and found their statement (with a bias maintained other than just references to that) entirely in harmony with prior thoughts shared here on the subject.

All of this contributed to the backdrop for Wed.'s market advance, with a little hook in the morning, that actually played-to-the negative tone from last night's tome, readily giving shorts and bears the opportunity to evacuate their incorrect posture if they did notice the light volume or simply withheld bid climate early-on, if they were motivated. If not, they got caught. We used the early weakness to enter the long side and stayed there all day long, with intended control efforts not to over-finesse intra-hour moves.

As to the meat of the President's remarks, they really were sober, as it seemed to me that the intensity of the issues wasn't lost on any of the officials or honored guests. At the same time, there was a focus on domestic affairs, but clearly the emphasis was a war message, pending resolution of these crisis aspects (and you know the details of course). We should note that Wed., British PM Tony Blair mentioned to the House of Commons, essentially that after dealing with Saddam, the Allies will have to confront North Korea. While this didn't get much press, it is important to put in perspective. As is the return from the North of a South Korean delegate on nuclear weapons, who did not get an 'audience' with the North Korean dictator, who's clearly sending messages of his own by the lack of courtesy in receiving a guest of such high official ranking. As the representative returned to Seoul, he remarked it would be a very lengthy process.

So, how do you translate these factors into investment strategy? Challenging. It's an historical reality that things fall inline somewhat once a seminal point is reached in a conflict; almost any conflict. We have not been there as yet vis-ŕ-vis al Qaeda (at the same time as the pacification of Afghanistan has been somewhat successful, mostly because they weren't expecting us to strike so hard and fast, and they scattered); but that in itself is a risk of splintered and dangerous terror cells that continue worldwide.

If a linkage between al Qaeda and Saddam is resolutely provided at next week's UN gathering, that will have significant symbolism. If not, the veracity of opposition will of course continue, and so will the progress towards mostly unilateral action it seems. If we awake one day to find that the Iraqi dictator has cut a deal with the U.S. to give up his powers and flee, this market takes out overhead resistance post haste. If not; we slug it out for awhile; a little higher, a little lower, but probably not a lot lower we might add, because most who want to make sweeping all-encompassing decisions of such a type probably have; so the question will be more appropriately asked when do they come back in, which means on the buy-side, and/or the short-covering side. That will not preclude the prospect of certain price behavior in February, within the overall call.

That's a consideration that gets little thought, but should, as if everyone's sour, they are likely to already be negatively positioned, or disinterested, and the only question is when a mood swing takes them to the optimistic side of the ledger. Hearing at least a couple analysts say 'after the war is won' is a little ridiculous, though we hope they wait that long. It's likely to be a time of considerably higher prices, almost regardless of any swoon in the weeks just ahead (after this particular rally), barring some utter catastrophe. We think multinational stocks could be defensive for some time to come, as you know, but believe leading technology core holdings are simply poised to rally; a determination of when not if, the next upward phase occurs (when's reserved, if not sooner). By then we could be through this projected rebound; any swan dive resulting from open hostilities, and a period of reactive (reserved forecast).

Daily action . . . will continue to endeavor capturing moves as we have done here in a very tough environment, oscillating between ominous concerns, or optimism about the future of the Nation, even if that's hard to discern from the troubling portends that for the most part reflect a stagnant, rather than deteriorating, U.S. economic climate.

As a matter of fact, the hotline (900.933.GENE or direct-dial access) caught it all very well, by virtue of a single guideline long at the March S&P 845 level, and then a very gradually increased protective control, that enabled a truly beautiful single-shot gain, of something around 2000 points (from 845 to 865 roughly) as all was said and done.

For now; suspect something like (reserved) is reasonable; while more on the upside might require some relief news (like Saddam leaves), or North Korea has a sudden burst of humanity from behind their nuclear bluster. As to the downside, no change in the thinking for now, that on-occasion of open hostilities there could be yet another hit of course, but whether that attacks the 2002 lows or not (sorry must be reserved). If we 'go' into Iraq formerly, the ability to have Airborne Forces literally on Baghdad's outskirts in a couple days (not a couple weeks), that might be the tip-off as to how successful the adventure will be. (Reserved daily forecast to readers follows.)

In summary . . . the market again scrambled meaningfully, in a tense backdrop, which actually had a steady flow of worrisome stories to maintain disinterest before now of course, but was long-in-the-tooth for uninterrupted downside in-front of the Address to the Nation. The prior day's curtailed early rebound was perceived as a preview of this rebound, and apparently was.

Serious events (and potential ones) still continue reminding us of various risks Allied fighting forces may face, not only given new threats received (some reported, some not) in the midst of solemn and challenging times for sure, and not limited to an easily definable theater of operations. We have to keep in mind that the unexpected, which we unfortunately can't dismiss as overwrought citizen worry, remain a risk as western civilization cheers human progress, amidst ongoing concern about barbarians trying to reverse hundreds of years of modernity, in their quest against the advancement of mankind. We have said this for well over a year now, and nothing has changed this.

Gene Inger
Publisher

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