first majestic silver

2002: An Auspicious Start

January 4, 2002

An auspicious beginning to 2002 . . . was delivered on Wednesday, fueled by what can only be described as 'standout' behavior in some of our favored technology stock areas (denoted in recent months on ingerletter.com as likely leaders coming off a key panic September low) and also energized by improved readings in the manufacturing sectors (formerly we used to call it a Napalm Index), affirming ideas about consumed inventory as relates to state-of-the-art equipment or new, rather than holdover, styles.

Action in the Nasdaq 100 (NDX) and in semiconductor areas was particularly strong; it's even more interesting given the recurrent rumors ofIntel (INC) reducing R&D costs. To us the visibility for such companies has been clear for over a year, with the expectation of a 'rocky' summer, some softness after Labor Day (anticipated before the war), and then viewing the tragic attack as horrific, but a market buying 'gift'; most particularly in the leading tech stocks. Thus, why would we chase here, even though it is another matter for certain institutions, committing seasonal reinvestment funds.

To us; R&D reductions are probably not in the offing, but if it was (since the roadmap for the next two years is already pretty much cast in stone; delivering most everything that anyone wants within reason, as far as Intel's end of the 'box', or even servers, is concerned), we'd only see more profits accrue to the bottom-line. Do we think now is a great time to be a buyer? Not particularly, as noted (why would we, having ridden a staunch bullish stance all the way from the war's 'crash' lows; but again we've tried to be clear about differentiating between multinationals, technology leaders and small-caps that typically have seasonal benefit potential this time of year (and for awhile).

That's how we felt about tech stocks after the attack; a time that many argued such things (some still do) as very conservative approaches to stocks, without hardly ever considering that what they embraced as theoretically 'safe', didn't come down in price as technology already had, and for that matter fails to consider ongoing or post-war environments, where businessmen may be more, not less, reluctant to invest in those politically and militarily questionable areas of the world, regardless of proclamations to the contrary. This had been true in almost every case, except the fall of the Soviet Empire, where Americans ran helter-skelter with money into Russia, and got burned on the short-run; though later many such investments have actually gradually faired a bit better. However, today's corporate leaders are generally the same guys (or a few gals) running these behemoths, thus cannot fail to recall what happened in the earlier '90's, when they chose to invest abroad, rather in the then-depressed U.S. economy.

At the same time almost nobody addresses a subject of how any possible prospect of de-urbanization would impact the markets, or those major companies with particular concentration in just a few major metro areas. Now, maybe, we won't have to worry in that regard; but what if we do? What does that say about multinationals perceived by so many as safe refuge versus domestic-centric companies with some dispersion?

And does that suggest that regardless of behavior of the Dow Jones Industrials, we may find much of the year populated by gains in smaller-caps, most of which tend to be domestic-centric stocks? We think it does; though again selectively, with more of the emphasis on the sectors (such as selective depressed telecom, fiber optic that is so popular to disdain, cable, and other areas; with retail sidelined for now, given that it had such a nice run as expected in Q4, primarily led by consumer electronics) that can benefit from service industry upgrades, that become almost essential this year. (All of which aids a primary focus area; computers and to lesser extents, the chips.)

Daily action . . . does not fail to note the extended short-term condition that predates the new year; and also does not fail to note the expected assault on, and proximity of key resistance above the market, basically the 1170's for the March S&P presently. It was our thinking that there might be sort of a 'false start', and then after a 'false drop', we'd go ahead and have the early year upside speculated about. Later, we might get a midmonth pullback (extent and backdrop ideas reserved in fairness to subscribers).

If we can get through the above-market resistance, there will be a bit of a spurt, but it would not prevent a subsequent pullback. However, the structure of that pullback will likely be in a very favorable context, rather than a false upside move, such as we had properly warned of back in 2000. Then we could have further upside (when reserved for readers), so then we'll see. Most important is that many concur with at least some of our multi-month ideas about a good year of moderate growth starting; though few concurred that the low point would be seen in 2001, not 2002. Now they typically talk about using first-half declines for buying; we doubt markets will be so accommodative as to let them in at any sort of renewed rock-bottom prices, barring true catastrophe; though there will be (and that's healthy) occasionally spooky swoons in at least a couple likely scenarios, as we'll outline as best able, over time, for the longer-term.

(Portion reserved.) The greatest risk to all this might be a premature (or preemptive) 'hike' in official rates by the Fed, though we don't see that yet likely. It's unlikely they'd take such a determination with the war(s) by no means concluded, even with Mullah Omar about to be captured/surrendered, with other campaigns on the agenda; and it's unlikely with so many key industries (and communities) pressed. In essence; the job of the Fed becomes to underpin the economy mostly behind-the-scenes, so that the war(s) can be prosecuted without fear of a new meltdowns that would potentially (if the Fed was the culprit) be more dangerous to the economy than actual attacks.

As for daily action, the New Year's Eve special comments, suggested we'd run into a semblance of a 'brick wall of resistance' early-on, but that the subsequent pullback in fact would also be a false (downside) move; leading to the real McCoy on the upside; at least in harmony (and it is so far) with the parameters of that overall monthly call.

As a result, we were able to subsequently suggest important March S&Pguideline longs from 1139; then again later from 1141 or at worst close to that mark, with the hotline (900.933.GENE) outcome in any event being better than a mere homerun net result considering the long retention until near the closing NYSE bell around 1155-56.

Technically . . . from a market perspective, what occurred in the post-attack 'daze' after the NYSE reopened, was a 'liquidation' wave that was far more compressed, and clearly more classic, than the prior washout seen in the Spring, described more as a 'capitulation' wave (and we said this in September). Anyway, in the historically-relevant comparisons, the capitulation comes before the liquidation, which basically is a time when although having already recognized the preceding collapse, investors do tend to 'surrender', or give-up on the market coming back. At that point, there are few bulls left, and that means that sellers have had the opportunity, prodding, and excuse to do their liquidation. The next event normally simply awaits an 'automatic' rebound.

As we got that post-September collapse automatic rebound, the subsequent dips and consolidations were -for the most part- shallow, typically characterized by an absence of buyers more so than any big selling. That even was a quality seen in the final hour decline on Monday and during the fits of selling Wednesday; both fitting for times that have been entirely perceived as treacherous by most analytical assessments. To us, the quiescent completion of the yearend rally efforts actually enhanced the chances for a renewed upside effort early in the year, regardless of short-term sustainability, and irrespective of an established short-term overbought condition, or the seasonal folklore of the Street; though they all can help psychology (self-fulfilling prophecies to an extent) that the preceding months of very well achieved upside, has bequeathed to the favorable start of 2002. Remember, long-term technicals are barely up from the lows, which tends to suggest (barring bad news) that declines are within uptrends of a longer-term perspective. Most investors remain skeptical, which probably is bullish.

Sure, there are times historically, when heavy-hitter investors got whacked more than once by a market that they thought topped, and then bottomed; like in 1927 and 1929 as we've occasionally noted over the years. And that kind of history probably plays at least a partial role in those who describe the Fall's rebound as a 'bear market' event; which is not formerly denied yet by the market, though we suspect fundamentals are in fact denying that; not just the order-book reported today, but streamlined inventory management, and the perception that the Nation has so much of a service economy, that companies will be committed to gradual re-ramping, whether they'll say so or not. Note that Internet-industry layoffs have quietly bottomed (leveling off was months ago we think), and that some hints of fiber employee recalls (from layoffs) are out there.

Of course there's an argument about the inability to extend the old 'bullish cycle', but it is difficult for us to embrace, since we thought that cycle really ran out-of-steam in 1998, and was resurrected by the (then identified) LTCM rescue late that year, later by a final fling (which like 1929) that made the market appear bulletproof in the early part of 2000; a move we vehemently argued was unsustainable and would fail big. It was in fact the core of our taking-to-task (then) the Fed for expanding money supply growth, while hiking rates; essentially triggering the very speculation they derided.

In the time since there was not a Y2k crisis, for which the Fed presumably prepared; otherwise you'd have to believe they really wanted to break the market for years… it was a more sane (and more traditional) Fed that moved to create the backdrop we've got now; which is normally not one that leads to disaster; though wartime, as well as the bringing of war to our shores, makes absolute historical comparisons impossible.

Hence, for some months, since identifying panic lows in the wake of the 9-11 tragedy, we have questioned some of the negative presumptions dominating a bearish crowd psychology. And in fact we didn't believe the real psychology of the American people to be so downbeat. While the U.S. won't achieve everything it wants, key changes in monetary and fiscal policies have (contrary to what the bears argue) likely modified the prospects of any major (not nominal) negative action, yet (balance reserved).

We'll eventually get to some point where seasonal reinvestment monies often thrown at the market by fund managers (irrespective of price levels) are exhausted, and then we get a pullback of significance. What will be interesting will be how enthused many of the skeptics (or under-invested fund managers) get about the downside then, most particularly if any selling (consequential tip-offs to significance reserved.) Stay tuned.

Bits & Bytes . . . reflects the tone we've looked for in computers and technology. It's only now that some analysts seem to have figured-out that Windows XP uses more memory (you'd think they'd have realized that over a year ago, since Windows 2000 is the same 'kernel'); and thus helps the memory and computer stocks. While some will bemoan IT managers buying anything with a version .0 (such as the first XP's, in a desire to wait for 'bug fixes' to be incorporated, rather than downloaded), our view for almost a year expected late '01 and '02 to be excellent computer years. To us, it's really not a .0 XP that's the concern, because the basics predate this latest system. It rather is the arrival (just starting, and quietly at that) of Intel's 2.2 GIG P4, which has not only a few more robust characteristics, but has double the cache memory of old.

In summary . . the year starts (technical status; reserved). January Effect episodes may reflect a twin-effort (over time) from seasonal reinvestment mony, short-covering in many most depressed stocks, and also absence of tax pressures. There's a certain degree of momentum nervously characterizing this market, so loathe to acknowledge that a primarily reversal (several months old) is potentially borderline near confirmed. This is primarily because some money managers regret their excess negativity (and faith in the U.S.) after 9-11, so 'wish' prices would come to them, rather than the other way around. While we suspect there will be some moderate drops (within outlined frameworks for this year's early weeks) later on, at this point maneuvering room is moderately sufficient for further upside (after all it's only Wednesday) in Thursday's session, which could handily be an up-down-up day (generally) overall pattern.

The McClellan Oscillator readings were about +77 on the NYSE, and near +15 for the NASDAQ stock market. The timing of significant recovery may be debatable; the emphasis on negativity by a slew of politicians may be related to unbalanced budgets (and necessary cutbacks) in several key states; and the general feeling that pressure has to be kept on the Fed (yes) to maintain relatively low interest rates with continued expressed fear about the sustainability of recoveries, until the Nation's clearly out-of-the-woods. (Future status comment reserved.) The concerns of low savings rate (as we discussed the other day) probably reflect American optimism, not the pessimism those dwelling on that aspect of the National character, maintain. We'll watch that.

None of this will prevent a prospective post-rally interim decline down-the-road, but we're addressing the year's first couple sessions in the initial 2002 call. The proximity of resistance continues to make this next daily rally really interesting, given that the weekly is still right between (reserved), and slightly above where bears expected the market would have stopped, if the overall long-term structure was negative, which of course it hasn't been for many months now, as argued here clearly since Sept. 20th.


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