first majestic silver

August Dogday Dogfights

August 20, 1999

Efforts to fill a "gap" . . . left from Tuesday's close to Wednesday's opening, dominated market action about as much as more basic pursuits, such as preventing a breakdown below support, at the margin even including the late 125 point Dow decline, which hasn't broken key numbers, but could as soon as tomorrow afternoon (Thursday). Thus, even at the end; nothing was resolved on this bigger picture; nor should it have been before the middle of a nominal Expiration week. It should be noted that the S&P was retarded (more later) right at crucial resistance, which is great.

S&P trading wasn't terribly rewarding until that late decline (after all action was narrow until then) but guidelines should have allowed modest gains in earlier repeated efforts to bull and bear the market during Wednesday's initial actions, which was somewhat akin to a dogfight session for several hours. Ahead somewhere near a thousand (theoretically) for the session, we did assess several important things during the day, which included belief that a rebound into the T-Bond close would exist, but that final hour's rallying would not hold, and we'd get at least one final swoon, which we did, and it was caught. It will be discussed in more detail later in tonight's commentary.

At this point, the market is not in the "half-empty/half-full" mode that some think; with action quite a bit more basic from our view; which is the same view we've maintained for weeks. Partially that included a realization that Tuesday's late rallying was definitely sloppier than Monday's, despite a majority of market commentators suggesting the similarity of patterns, and very opposite to the idea (with which we agree), that professional sentiment is best-gleaned during late daily trading.

It is because this week's Monday/Tuesday late day rallying was selective; and because breadth, -in a rebound, as opposed to a full-leg developing to the upside- is typically tending to expand slightly towards the end of such recoveries (as many players start believing or worrying it might be for real)- that you get difficult advances, that force one to take a position of belief or disbelief.

Before jumping to any conclusions that we are convinced all upside activity is over, we are not. If you ask however if we continue to believe that this particular move, coming off last week's violent and volatile forecast Tuesday turnaround, is a transitory event as opposed to a big up-move; our answer remains, yes; the odds favor that being the case. That's the way we tended to view such rallying off of a "V bottom" pattern last week, as opposed to a more tightly-compressed "W" type of formation. Now of course the question will be whether we will drop down and try to test recent lows, with what appears to be a "W" completion; then take off to the moon. (Opinion is reserved.)

Wednesday's are often strong (in any week and) particularly in an Expiration week. It is the noted late fade Tuesday that we were particularly skeptical about, and which promulgated our view that Wednesday would be squirrelly at best, and potentially a little ugly at worst, even though there was little doubt that the bulls would not give up on a dime. It has been our consistent view that a) even if we got new highs, not our favorite idea, they would be unconfirmed by breadth or by that much more (than the Dow) important Average; the S&P 500, which normally should be the cue; and b) that the September S&P would have some troubles surmounting the 1350-60 level, and if they did that (which has not happened, and will become increasingly difficult) then c) such a rally would most likely be a "hook" or sucker-play event, that would tend to confirm strength to many, just before the market caved-in anew; with a next leg then occurring in the overall stock market.

That Wednesday was fairly hard down is not totally surprising. Tuesday did not close firm; even if others said so. Last night we voiced the opinion that there was nothing but a little short-covering, and an early bit of further options unwinding, both of which occurred when "the boys" couldn't get a decline worthy of the name during the course of midday Tuesday. Now; again; we respect later session rallies, more than we get excited about opening market action, reactive in either direction in the event of news. In the same vein, it could be said we respect late declines more than initial ones in a given session; and that's of course true. However, we believed the minimization of that upside seen on Tuesday was (as noted here and on the 900.933.GENE hotline) a consideration of an impact being seen by shorts scrambled not only due to unwinding, but because a number of analysts were starting to go for the bait, late in a perfectly normal rebound within a downtrend.

There was news Wednesday, which centered around the primary focus (outside of earnings and multiples) we've shared here for many weeks; even before our forecast rally into the July 16 high point. And that focus was the Dollar; highlighted just the other night as being overbought then on a short-term basis, concurrently with the impressive forecast move in the Oil stocks; a specific combination that has a number of implications for the stock market. One of those implications will be the capitalization-related impact (noted both Monday & Tuesday) of Oil stocks on the Dow.

A Dow that's led by oil stocks may be up; but it's up because of increasingly worldwide demand of course; which by definition ties-into inflationary concerns that many say are nonexistent. All of our readers certainly know that fuel and foodstuff prices have been increasing progressively for the majority of the time this year, while they are a little overbought on a near-term basis. While it is easy to say that "rig" utilization will increase in response to higher prices, and that may be true in the long-run, there nevertheless would be the reflection of growing economic strength that will have several effects; most of which we've outlined for months.

Those include: a) later inflation risk that is far beyond any considered by myopic domestic-centric analysts who aren't looking askance for explanations of rate behavior; b) an understanding that world recovery is very good for the markets generally long-term, but not short-term; a reason for a cyclical rather than secular worry emphasis; c) a temporary swoon in some of the best foreign markets, as expectations have risen faster than the realities of new economic prosperity; and d) the totally unprecedented Y2k environment (as far as market experience), which we do suspect is not only pulling some forward demand into last year and this year's first half, but which risks an Information System (IS) lockdown from expenditures until we're physically in year 2000. More of an elaboration, if needed, will be in next week's Letter, as the outlines were previously featured.

Monday's DB reiterated my airport delay-related discussions with a major computer firm exec's, and how they are concerned more about foreign offices and/or partners having more troubles as far as both business and currency conversion processing, as we get into Y2k. Interestingly, while possibly reticent to use their own company's example; they mentioned that (a Dow component we'll not publicly name here) ordered staff to be prepared to stay in (at home offices) over the holidays, and interestingly, keeping many key people in their offices overnight even, as well. It's not our practice to be alarmist; nor are we even in the Y2k frenetic camp; so we hope that the precautions are just that, and not a sign of greater concerns. However, it would be naïve for any in the stock market to make assumptions that just because the United States may be prepared a bit better for any challenges, that travails elsewhere in the world won't matter to U.S. companies.

Of course it might. Now; with no big opinion on (sic) it may be simply well-advised management precautions with which we would agree, though are a little surprised by the personnel aspects. If, of course, (sic) is concerned, then how about other big multinationals such asGeneral Electric (GE), IBM (IBM), or a host of others? The majority of the world's growth in gross for most big-cap stocks has occurred overseas over the last Generation; which means that a majority of possible negative impacts, would also likely occur overseas. And that is the risk for the Dow Industrials. If there is such risk, then how in the world (no pun intended) do you put a higher multiple on such questionable earnings, which (temporarily) may not be able to attain even those modestly higher goals promulgated by most permabull analysts? The answer is it's not possible; but a contraction is feasible, if for no reason than precautionary. And again; that's an ongoing cyclical risk function.

Technically. . . regular readers know our overall pattern call well, which included the P/E multiple concerns since Spring; the forecast break in May and recovery from June into an expected July 6-16 top, which then featured a specific general July 16th sell-signal at the Sept. S&P 1428 level (not particularly common for us, as we are often more gradualist, based on tried-and-true money management approaches; which made the success all the more rewarding); the market's nailed subsequent collapse in July which was later expected to conclude with a semi-climactic washout last Tuesday (also fairly specific, as we had identified any break below the September S&P 1280 level as likely to conclude the selling and trigger a sharp but fairly short-lived August recovery); a developing currency risk, as well as repatriationhints in the late Summertime, which are also only now getting some incremental attention from most major financial media; and of course that most recent call for that low early last week; which would precede a recovery into "but not necessarily all the way through" this week's nominal Expiration. (Further reasons provided.)

Daily action (plus most of the Technicals) & Economic News Releases: (reserved per usual)

Conflict Avoidance

One might ask "why" more so than usual? Because the market internals are weaker than normal; regardless of what you may hear elsewhere, and because the seasonal contributions from savvy investors do not increase now, whereas only the relatively less-informed will buy funds ahead of the late-Fall distributions. That means any downside has a better chance of getting out of hand in the Fall, than at other times of the year. That is not so general as some may think; just because it happened pattern-wise last year. It is rather specific because DJIA multiples are higher now, with risks of disappointments in corporate results equally greater as well. You certainly don't need any war, or earthquakes, to shake foundations of this market; and we sincerely pray neither occurs. It is not a desire to see trade or currency confrontations between nations either; we're just realistic.

It is also realistic to recognize that conflict avoidance is not only a political, but economic, choice when it can be implemented; and we hope that's the case in all areas where that applies. What is not appropriate is to say (and some are) that an investor should do nothing defensive at all, and simply stay totally fully invested (or worse, leveraged) during this year's second half. That may be o.k. when we look back at this year's final months sometime next year; but that will only be known in what's a wisdom borne of hindsight. Since we don't have that, of course, and stock prices have rebounded in a way that should be more or less sufficient to constitute a "B wave" in an "A-B-C" decline, we don't see reasons to take heroic chances on the buy side of the ledger, and with a mixed view of the downside coming, not even an heroic approach to big bearishness, since we're of course not part of the end-of-the-world nonsense crowd; but have nailed the top.

What we suspect is no different than what we felt we could forecast, or measure, based on many such events in the past, and some knowledge about how pro's would behave in their presence. It is probably more of a professional crowd out there now, with so many rank speculators crowded-out of the market by the forecast drubbings both in May and again in August; which helps to thin the field in ways that promulgate a little less of an overrun on the downside or the upside than we had to contend with on occasion in recent years. Basically that means the market comes closer to doing what it's supposed to; to the extent that there's ever some modest logic to all of this. Or, if you prefer to say we always say the market can't be divined, and then do it; well, sometimes it is a bit more probable than others, and we're happy to share such moments. (Balance reserved; as it the Bits & Bytes stock talk section, per usual.)

In Summary. . . the McClellan Oscillator came back from the sub-200 area early last week, per expectations. At this point it is around -7, down from the +14 area; which was above neutral, and might not get overbought, as noted last night. If it's going to, this would take a couple weeks; not instantly. However, reversing from the forecast move above the zero line, back to crossing below it, after working into neutrality, is technically a negative. Interim moves are always tougher than a significant bottom, or fake-out top. This is an interim rebound that's fading, but doesn't have to be a single-phase move, in harmony with potentialities outlined for the August-September period.

The market had a moment Tuesday that scampered some shorts near a top of the move seen thus far, as right at (amazingly) a slight trending breakout for the Dow, while the S&P did nothing of the sort beyond reason, and within the ranges we suggested after the minimal goal (which will always be conservative) was achieved earlier. After Wednesday's notable gap-down occurred after Tuesday's sloppy finish (in our view anyway, at the time), there were two evident rebound efforts to fill that gap; both of which failed approximately at the intraday times outlined as most likely on the hotline; that being noon, and around the 3 p.m. bond close. Stocks later caved-in.

There is no change in our view that the Sept. S&P high of 1428 was the key top for the trend, and while we forecast last week's rallyingaction, there has not been a forecast for a new S&P high, regardless of what the narrow DJIA does. As of 8 p.m. Wednesday evening; the Sept. S&P premium is at an extremely low 56; with futures at 1333.20, down 140 from the regular Chicago close of 1334.60. (Portions of this summary section are also reserved solely for subscribers. As it is we tend to share more of our overall analysis to non-subscribers than we should, and trust that normal investors appreciate it. More cannot be provided, in fairness to regular web site readers.)

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