Armed for Battle at S&P 1200

July 27, 2001

Tenaciously holding overnight . . . (guidelines for those inclined), the DB retained a very successful 'bet' on the projected final hour recovery Tuesday, continuing into Wednesday at a minimum. Our call here last night (Tuesday) was for a strong day in a difficult environment; an ideal up-down-up Wednesday, and after early irregularity, more upside attempted on Thursda. Though few would have agreed Tuesday, at the time possibly, well, we got just that on the upside, so even more may be on-tap. (We are referring to the DB's projected turn and 900.933.GENE hotline's 1171 S&P long.)

It's impossible to argue that anything going on here is more than a short-squeeze for the moment; though we would not complain if something more dramatic is unfolding in the wake of so many surrendering to the bear's cause, just yesterday. While our own view of the late Summer has (for months) been for an oscillating difficult market, and we expected new pressures last week when repeated assaults at the S&P 1230 resistance were repelled, we also suspected that an approach or breech of the earlier lows in the 1174 vicinity could spook a 'confirmation' of weakness; so thus a washout and likely reversal probability, whether of a short-term nature, or even more at least for the short-term (doubtful, but in times when we have to be on Fedwatch, nothing stubbornly bearish should be inscribed in stone). The longer-term remains volatile.

We're not on a bullish crusade here; not with earnings remaining as miserable as expected, and as there is so little motivation or inclination for anyone to invest. We understand that, just as we understand why investors seeking 'perceived safety' in Oils, Utilities or the like, got creamed instead; per forecast. (Made no sense that companies staring at lower profits and higher costs over a year or two ahead would somehow remain the new 'momentum darlings', just because of a short-term crisis; besides we'd uniquely and persistently forecast over 30 Oil and climbing Gasoline, would break meaningfully, before the end of this Summer's driving season.)

(Reserved end-of-month and early August discussion), and then we're looking for potentially more selling in August, per the original game-plan, but much may depend on how high this overall rebound is going to get first, which will again define some rough technical parameters for the new month, as in July for the rise and breakdown.

While the past week's downside behavior negated worrying about surmounting 1230 in order to deny the bearish weekly structural pattern, we are generally glad to have distinguished between the former 'daily' resistance that got many euphoric into more strength above the initial target of 1220 (on the previous important buy from 1175 or so), while we didn't believe it likely to continue unless the primary downtrend turned around, which would have required that weekly 1230+ close, which was not coming.

That increased the likelihood of coming down to 1210 support (as noted last week), and then if that broke, 1200-05 would likely too, with a deeper challenge of old lows. We would have liked to see it turn sooner on Tuesday, though the turn suited us fine given conditions, and absence of much NASDAQ or Nasdaq 100 (NDX) weakness, while the Senior Averages were clobbered during much of Tuesday's earlier trading; a session not at all helped by the abstinence from optimism by the Fed Chairman. Of course we had to be prepared for an earlier turn if his remarks were mollified from the prior week's horrendous stance on believing lower rates would automatically help the markets, but his were not. Nevertheless, and maybe because of that, more bears in fact were vulnerable to the late comeback catching them; but that was the basic idea.

Now, for the September S&P, we have to watch 1200-1205 again (why, and what is a barrier or inflection level for Dow Industrials & NASDAQ, are reserved reviews.)

That prospect, and the realization that the magnetic attraction of those gaps was out there, had at least something to do with suggesting there was more to come from the late Tuesday turn, and up-down-up Wednesday (and in the morning after maybe a slight period of ease to see what sellers can do, which shouldn't be too much as yet), and thus the overnight retentions of our guideline Sept. S&P long from 1171 or so. We are not suggesting 'the battle for 1200' will be successful; but it's worth playing with partial theoretical profits, for those willing to bet we're going to attack that level at minimum, regardless of any intervening attempt to soften prices first early Thursday.

Daily action . . after three days of nothing much for Wall Street to really hold onto, generally saw 'Streeters' remain very skeptical, which is understandable. However, with a few technicians (and others) just in the past day were switching from bullish to bearish, that actually more-likely contributed to the upside recovery, and extension.

Why they would reverse negative with oversold hourly and daily technicals, and with weeklies almost oversold, is hard to fathom. That doesn't mean prices won't weaken in the future again; but tends to suggest washouts that uniformly depresses everyone for the most part, which is a decent backdrop for a turnaround, sustainable or not. For now, the hotline (900.933.GENE) has remained long the 1171 or so entry at the start of Tuesday's final hour, throughout Wednesday, and into Thursday's early going.

(Balance of Daily Action commentary is reserved, in fairness to regular subscribers.)

At the same time we continue to believe, such rebounds aside, that the stock market has lots more work to do, and that's likely even doubly so with terribly internationally-dependent Dow Industrials, where in many cases the majority of corporate revenue is abroad. As we suspect the Gillette (G)offering Tuesday consumed available cash too; none of that was helped by the concurrent Fed testimony. What may have been a plus for the Dow (though we disagree with the outcome) was the call from politicos for a softer Dollar, to 'help' big companies; something we continue to believe will not only hurt international recovery (the opposite of some prevailing views), and set-up a very difficult market should that policy (acknowledged or otherwise) be implemented.

Amidst all this, we have efforts by OPEC to firm Oil prices by cutting production by a reported million barrels per day; a strategy almost inevitably destined to fail, due to continued slack crude demand, especially abroad. If anything, OPEC's contemplated actions will delay overseas recoveries and help ensure lower not higher, energy price levels over time. That will help the eventual U.S. economic revival, and the absence of a power crisis this Summer (as forecast, particularly for fossil fuel consumption and retail gasoline prices, which we long forecast would drop before the driving season's end) does too. It should also be noted that Dow Utilities recovered a bit, after being among the worst decliners; probably as a result of OPEC's action, and partially as a result of a number of firms trapped in overpriced energy stocks trying to 'bull them' to higher levels. The drops were not unexpected pressures at all, coming in the wake of ridiculous chasing of power prices, and concepts, in the wake of an energy crisis that actually did not and has not materialized just as 'advertised', and had no institutional investment logic at any time, because California alone has many new generators that will be coming online over a couple years; ensuring that power will be not only fairly plentiful, but surprisingly affordable for a majority of citizens; another indirect stimulus to the economic recovery we have envisioned not this year, but for down-the-road.

In summary . . . the economy remains miserable as affirmed by dire disappointments which were expected during this time of the year. As for earnings power in the future; many companies have now contracted costs severely enough, so as to allow forward estimates (once the economic turn is later affirmed, down-the-road) to ramp-results faster than many will expect; and that's the best hope for recent selling-on-news to be comparatively well-absorbed. Sustainability of this current run-up: still questionable; though we're delighted to have expected a turnaround, and subsequent continuation, with the general up-down-up pattern call for Wednesday.

McClellan Oscillator data turned-around a bit; as expected for Wednesday. For now near -47 for the NYSE, and at -14 for NASDAQ. Irregularity early Thursday should in fact again yield to new upside tries (balance reserved).

However, despite the efforts at rebounds, we have stayed in a mental mode prepared for temporary harder hits ahead, if needed, and still are for that matter. But our work, here and on the (900.933.GENE) hotline (even our gut as well) looked for turnaround efforts Tuesday; with a down-and-then-up reversal prospect, and up-down-up Wed. It is still ongoing, and in our view is not completed, despite Globex efforts to trim gains.

As of 8 p.m. ET, S&P premium is very soft, at about a -150 Discount to Cash; that's a negative of course, but we suspect could become a 'hook' for those selling weakness at Thursday's opening; and likely for the 2nd half of Thursday's session too; subject to revision if needed on the hotline. We're long in S&P guidelines on an overnight basis from around 1171, and this evening September futures are around 1189 or so.

The purity of gold is measured in carat weight.

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