'May Day' bows . . . after a projected terrific April rally; particularly on NASDAQ, led by decent (if not spectacular) gains in a host of mainstream technology companies; as earnings tended to be at least as good as most downward-ratcheted estimates; at the same time as Oil prices caved-in; which was a key basis of our overall outlook. It has been a couple weeks since we warned of short-term upside exhaustion as target goals in the vicinity of 920 were hit; backed-away from; then briefly exceeded. This is likely a pattern allowing contractive activity to take the edge of upside in early May.

A terrific upward move (percentage wise one of the best) took place in Nasdaq 100 (NDX) stocks, and the Semiconductors (SOX); both of which have been digesting the gains even before now; as the Senior Averages played catch-up with where the market already was. Some are afraid of missing-the-boat now, but in reality prices of course completed their secondary test lows in late January/early February, so there should be an ease in this general region before an attempt to exceed recovery highs of April, on the way to eventually challenging (reserved for ingerletter.com readers).

In the process, some investors have responded in after-the-fact fashion to unwinding of negative expectations, gradual as it may have been. That's desirable, but certainly wouldn't prevent a market from becoming short-term extended, about the time those only belatedly recognizing they might be missing the departing (upside) boat start the process of buying-into-strength, which is the upside capitulation expected, and at the same time emphasized our caution about chasing when there's nothing anticipated in such a 'reactive' mode. Those buying in reaction to the world not ending, may do o.k. in a grander perspective, but they have to know they didn't exercise anticipatory risk.

The market rarely rewards (for very long immediately) those who buy on top of strong moves, or for that matter those who sell after collapses into-the-hole. Buying after the war is resolved, or after SARS seems to be contained (unfortunately that may be just too early to ordain), are not anticipatory buyers, so hence responding emotionally. Of course that does not reduce, but increases daily-basis risks, unless there's reason for a lockout, which to an extent has been guardedly attempted, but there isn't quite the compelling rationale for that to accelerate (though ideally there's no reason for all the interested buyers to ever in the near future see downside extremes .. more).

Chasers may very well see such movements as indicative of future action, but usually they tend to finish rather than start short-term behavior. When a market is particularly biased one-way (as this one has been for in our view about eight months or more to the upside from a construction standpoint, and more recently from a generally visible structural pattern), the contrary moves (those would be the dips in this case) can tend to be shorter-lived and aborted without every classic sign of a washout, and that's as it should be. We thought even the overly-suppressed multinationals, such as the very traditional Dow Industrial Average represent, had a chance to rebound last month as it did.

There are variables (like SARS), but generally even in those big-cap areas it was becoming evident that things were overdone back in early March, setting-up the prospects for a successful advance, almost regardless of how worries went then, as it was apparent that (believe it or not) it looked like there was a shortage of stock for sale. How is that possible? Well, we thought so then because technology failed to go down when the big-cap Averages tried to drop, and that was a clue about exhaustion.

Also, anyone who wanted to 'fade' the war; the economy or politics, had plenty time to do so; thus if scary events couldn't take the broad market down; nothing could do so short of catastrophe, and calamity isn't something one can normally easily invest for. So we didn't see what the bears were talking about then, and don't now either, other than obvious sluggishness of the economy and long-term deficit risks that the Fed Chairman particularly seemed to worry about in today's testimony. Well, if while rarely cynical about the Fed Chairman's observations (since absurd monetary expansion in the lead into Y2k while they were hiking rates then; a prescription for speculative ruin we thought at the time), this time we tend to detach his observations slightly again.

It is likely that the soft-Dollar (non?) policy isn't really helping, as suspected all along; and that the Greenback is going to trough and stabilize as the economy comes back, or as stimulative measures gradually accomplish more than 'pushing-on-a-string'. Thus, for the moment, cutting rates as some speculate about at next week's FOMC meeting is irrelevant, while other Governmental measures can help; a lot. In this environment Consumer Confidence has remained (as suggested) quite decent all through the war and other challenges, and that's possibly going to be a solid boost in time. But you don't respond to that by chasing prices of stocks; one simply retains the faith in the outcome by only slightly fading excess, while buoying purges that occur. It strikes us that this move is becoming stretched, but only on a daily-basis for now, and as noted a couple days ago as we moved into an attempted breakout above our goal.

But again, what we'll likely get is nothing worse than (reserved), barring any sort of terrorist strike (that remains a risk, though today's capture of a top al Qaeda suspect helps that area even more); and then eventually (maybe in a couple weeks) we get a solid boost to the lateral resistance area (more). Clearly, among risks, remain SARS. China may be encountering a 'relapse' scenario; though it's too soon too tell. They are running short of meds as noted the other night, and for sure the world will help. The interesting political aspect of this could remotely be a challenge of communist apparatus that bungled the handling of a very personal calamity for families with victims of the scourge (China's sad version of the Chernobyl tragedy?). That the Party hierarchies messed-up so badly, reflects upon the inherent unsoundness of state control and the associated clamping-down or censure of accurate statistical reporting, that peoples may find something like this a more compelling reason to throw-out the old guard. If it happened, would the markets respond nervously? (Reserved commentary for our readers.)

Many skeptics continue to abound, and that too helps the tenacity of the market. Very few (if any) technicians have observed the basics we've oft-repeated here; that there was no need for a high-volume sell-off and reversal this year, because what we got in this situation was projected to be a secondary test of last year's primary w bottom or potentially major low; a pattern expected to develop before it did last year. This year, because the sell-offs were seen as secondary tests in nature, there was not a reason for any sort of high-volume washout, as institutional sellers were long-ago liquidated or exhausted, thus there was (as repeatedly noted) a mountain of cash on the side of a quality capable of absorbing meaningful declines, and thus being a sort of 'cache' to contain, control, and limit the sell-offs, that inevitable are sprinkled to keep skeptics hopeful of some awful result. That 'cache' was and remains enormous in T-Bonds of course; so that it's not that interest rates are going to ramp-up dramatically, but with such concentration there, it's a reason to believe declines can and will be contained.

That is what we meant by saying the rally was the reward for those of us having faith that last year was the primary w bottom market formation and that this year's prewar purge (into the S&P high 700's) was a secondary test of that low (more). And buying that test or occasional selling squall that appears, has been (and probably remains) a reasonable way to continue participating in this cyclical bull market indicated to start last year and be tested this year, with no special reason to chase ensuing surges.

Especially in a market responding to relatively lean times and continuing questions of an international nature (though much has been resolved), particularly related to the SARS epidemic (which we felt more risky to economics than the war ever was), why would anyone feel reason to chase price after things appear to be more 'comfortable' for buying? We don't know; it's human nature. It's also something warned likely for a good bit of time, including the semi-ranging pattern call as May evolves. Goals for the June S&P have been reached; that was the intermediate multi-month held 920 target of course, with something like (well forward goals reserved for our web site visitors).

Daily action . . . noted last night that of course it will get overdone at the ascent rate, but that's not the point. What is important is that some institutions were capitulating into the market during targeted strength; a ticket for a large crowd of skeptics to pay-up to get in, which of course tends to develop increased risk on the shorter-term, but all within the improved structural pattern forecast for months. Thus it's quite likely why we thought it likely to get a penetration of the highs, a pullback then a higher-high, then we at least keep an eye out for the more protracted pause.

Hotline (900.933.GENE or direct-dial worldwide access) guidelines nailed Tuesday to the tune of more than a couple thousand theoretical points, with not as much seen as available on Wednesday; though the June S&P's still garnered maybe 500 ahead or so; in harmony with the primary long around the 912 level intraday (out in high teens).

In summary . . . economic results remain mixed, though we find most of it satisfactory. 'Consumer Confidence; was slightly higher; as suspected. Chicago PMI data sends a message that wholesale buying is still soft; but that too isn't really expected to gain at least much until the latter portion of the year if all goes well. It all helps the perception of an economy where people are making money and not spending much at this point, which should improve the prospects for later-on in this year as projected.

Events (beyond Iraq) still continue reminding us of various risks Allied fighting forces may face, not only given threats received amidst challenging times, but also SARS. We have to keep in mind the unexpected, that we unfortunately can't dismiss as overwrought worries, as they remains a risk as western civilization cheers human progress, amidst ongoing but milder concern about barbarians trying to reverse hundreds of years of modernity. Since their quest against the advancement of mankind has been dealt a heavy blow, and we fully celebrate that, the backdrop is theoretically improved, though there is no way to know for sure just as of yet.

Gene Inger
Publisher

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