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August's Anything But "The Doldrums"

August 18, 2000

Moribund price behavior . . . continued the drifting lower characteristics following several good upside days. Sure, as noted last night this market was entitled to a pause-to-refresh, though it is not that common to see corrective action (as we did last week too) on a Tuesday or Wednesday; and that's doubly so in any Expiration week, though we suspected most upside unwinding was in fact done last week. Trouble inducing buyers into this market might be correlated to the FOMC of course (meeting next week), or the increasing corporate debt calendar coming up next week.

From our view, we see the day as primarily an absence of buyers, increasingly and progressively increasing after the September S&P failed around the morning pullback low, and a subsequent rebound failed to go higher than that area, which equated to the lows of Tuesday, by the way. As it failed from there, led primarily by the same financials that had been so recently robust, and the brokerage and retailing stocks as well, many of the firmer shares reluctantly just eased, without a tone that was particularly negative; appearing mostly as an absence of buying than real selling.

In such scenarios, incremental selling can take stocks (or the Averages) lower, without the kind of pummeling normally associated with extensions on the downside of significance. Nevertheless we were compelled to engage in at least one intraday short sale on the (900.933.GENE) hotline, mostly to offset a preceding potential small whipsaw and we covered that into oversold pressure as an anticipation of a further rebound, even if that would turn-out to be within a downward trend. (That guideline long was closed on the run-up above 1490 late Wednesday, and reentered early Thursday at the 1488-89 level, and retained through the day, inline with our call for 1500+ today. Both Wednesday and Thursday have been successful; just approached differently intraday. We'd like to note that our key view last week was that we were turning up and that selling pressures to us were over in the NDX & SOX, while Senior Averages could oscillate, then try breaking out.)

While our call all year has been for the Federal Reserve to be done in the 1st half and friendlier at least, from then into the Elections (or beyond, depending on several factors we've earlier outlined here); there's a greater proportion of analytical thinking that has belatedly embraced our forecast, as you know, and we hope (for the sake of the Nation too, as further hikes would risk recession), that what has become first our own, and later a consensus view, turns-out to be correct. Ongoing arguments as to whether the glass is half full or half empty, are typical characteristics of shifts on a monetary basis (that's why we once said on a short-term beware when the Fed worries about having hiked too much, but later on that will be very bullish for the market); though we remain of a view that many cyclical (and even financial) stocks have made their lows, with just enough sort of testing behavior to keep players feisty, and nervous. In the long-run, the market works higher.

Meanwhile the market's strongest sectors, including the Semiconductors (SOX) forecast to rally from last week's lows, either held their gains or faded a bit when the retail and banking stocks did fade; which is characteristic of a stand-aside attitude, more than a wholesale equity evacuation. I might add that Analog Devices (ADI), which reported those superlative results, and further was suggested here last night not to fade much after gapping up, did not fade much, though we sure would not chase a stock that is working on a quadruple for us (the "pick of the year" stock, from split-adjusted levels in the 20's), and because of several factors we noted in last night's remarks. (Others recognize strength in SOX this week; we pounded the table about this turning last week.)

Let the institutions or others that buy strength breakouts buy it or others; while most of us are just content to navigate through this kind of a market, which in some ways is healthier than going just straight up, by the way. Our expectations for the ultimate outcome aren't changed by this, though in a sense the continued rotation into technology (as managers worry about robust revenues that may fade in the slowdown), simply continues the ebb-and-flow between cyclicals and leadership stocks in the tech areas. In our view both sectors continue pointing higher overall; but there just simply isn't the kind of cash entering this market to propel everything up in unison. Some thinking points to the market going up with more enthusiasm after the FOMC meeting; if they pass.

While we don't disagree, and don't expect an interest rate cut by the way, the easiest phase of gains from the lows from April or May are behind, with the market fiddling below key resistance that would deny any bearish case, if penetrated successfully on a weekly closing basis. That is what part of the ongoing battle being fought is about, and that's why (so long as no key numbers come out below here), we view all of this choppiness as not necessarily a bunch of daily fun, but within harmony of the overall intermediate condition, that while shy of a clearly defined uptrend, outside of the Dow Industrials, which are clearly in an uptrend. It's internally and consistently a kind of improvement we've indicated for many months; something noteworthy for all investors.

Daily action . . . by the time all was said and done, actually caught a pretty good short-sale with the afternoon drop, and an excellent recovery, by virtue of the final hour's hotline call to cover the short in an oversold condition (speculating about doing a reversal from short-to-long right around the 1483-84 level, and that was just about right, as the low turned-out to be 1482.50). Then, just a few minutes before the close, we suspect you'd get above 1490 (balance reserved and bought again on the first pullback on Thursday, with the outcome and plan for that effort shared tonight.)

Given the Energy levels and increasing medical costs; we were worried a bit more than the stock market consensus, with respect to ideas of a brief "hit" in the event that number came-in firmer than broadly expected, and in-front of a Fed meeting next week. As a matter of fact it did come in a tad higher (.2%) than broadly expected, though to us more meaningful was the revision to +.6 of the preceding month's report. Nevertheless the market absorbed that with ease (initially stock markets were more interested in the strong tech leadership), and rallied above yesterday's highs, before succumbing to repeated bouts of selling, until the expected late comeback due to the light nature of pressures outside of retailing, banking and a few individual issues. To us, these were at minimum good enough reasons to pretty much stay out of the final minutes fray today, as also in fact was the case yesterday, and while we did catch the final comeback in the September S&P, the determination was to approach Thursday fresh, since some of that late action was a running of shorts (we thought) and that probably gives us a little pullback after potentially an up opening. (That was the call for Thursday morning; so as noted the hotline reentered SPU's around 1488.)

Technicals; Daily Action (balance); Economic News and Bits & Bytes:(reserved for readers)

In any event, following the "V-Bottom" indicated last Friday, we generally suspected that the S&P would come back-up to challenge the 1490's and eventually attack 1500 anew. We got both such moves; repeatedly. Today it got to 1503, dropped to 1482.50, and then finished about mid-range. (The call for Thursday was to get the first close above 1500 and that was handily accomplished.)

Carry it back to early this month, and the whole effort, for the most part on the long-side, is better than seamlessly long from 1435 or so, in several very distinct efforts; including a couple of rocky days of angst tossed-in to keep technicians doubting. And Wednesday's rocky middle was offset for staunch intraday players by virtue of the late short and subsequent long-side hotline efforts. Most investors are more concerned about implications for the longer-term, and while overbought to a modest extent daily, the weekly work remains on a favorable trek, encountering what we see as a more important battle than many think (between bulls & bears), because you do have what is an intact rising bottoms configuration with a denial of any "head & shoulders", by simply going to new recovery highs in the S&P, which theNYSE Composite already has; thus the burden of proof is actually on the bears, though technicians really have to look at the totality of this action, factor in the Fed, and make certain assumptions about a "soft landing" to remain staunch bulls.

In our preferred pattern for all this, several corrective days (including pullbacks here, postulated for that matter for Wed.), are in harmony with the unfolding (reserved) coming off the May lows; if you prefer to call the indicated corrective action in June before the breakout more than just that. Either way makes no difference to the ultimate upside, as long as we get above preceding resistance areas (reserved) over the course of the next few weeks, but likely not instantly despite favorable responses to tech splits, as many of the more pedestrian stocks are likely to make it tougher for the averages & sentiment to improve rapidly (that's probably a bullish factor, although indirectly). Even with eventual further corrections after Labor Day, all this does is keep players dubious about the merit of upside thrusts, ideally awakened to strength by the achievement of (reserved); while many wait of course for renewed disaster (whether in August or October), which we doubt likely for this year, in harmony with our annual call for 1st half chaos, then relief.

While comebacks briefly faltered again, this time at standard deviation means for the NASDAQ market, it continues improving for theSemiconductor Index (SOX); something we specifically in fact outlined as likely in the last several days, coming off last week's little mini-washout. While it is easy to say Monday's breadth reversed this picture; that's oversimplification, with at this point just a repelling from moving averages, and a pause after quite good gains for a couple of days, as outlined last night, and seen in many sectors outside of this area and other recovering groups.

So again, as expected, this has been a year of stock and sector selection not just more macro or simplistic "bull or bear" market interpretations. However; this type of rotation, which tends to see exhaustion in many of the most downtrodden, is not unusual, was forecast, and as most August markets tend to be dominated not by daytraders or private speculators, but by institutions such as mutual or pension fund managers, who really tend to gravitate to the bigger (perceived) liquid stocks, wherein they desire an ease of entry and exit, we find this overall month so far as a plus.

To summarize . . . our view on this year remains unchanged; an unsustainable blowoff spike that needed to be faded, not bought, on a rotational basis in the 1st Quarter; a concurrent bottoming (tough for the newer investors and analysts to grasp, we understand) in the old-line stocks that were in a cyclical bear market for as long as two years, and then "grand dame" corrective moves. Even these have varied; a characteristic that's exacerbated by the impact of Oil prices and even of the Inverted Yield Curve, by those issues that are more sensitive to higher short-end rates. If one wanted to complicate this year further, which probably is why so many analysts were far too optimistic early-on, and much too pessimistic after the breakdown, it might include an awareness (of which they mostly do know now), that such curve-inversions quite often precede recessions.

We're optimistic that what we're seeing here in 2000, is somewhat different than typical orthodox relationships between Bills & Bonds, most probably because of the year's forecast Fed timetable, and because of perceived shortages of T-Bonds forthcoming (impact, and balance, is reserved).

We again emphasize that the New York Composite Index simply has pulled back to high level breakout points of that big move that so recently took it to all-time highs several days ago. So if you manage to get the most-watched Senior Averages above (specified levels for the DJIA and the S&P 500), then there is no bearish argument based on structure; that's why battles roil along.

Meanwhile, we expected both the Nasdaq 100 (NDX) and the keySemiconductor Index (SOX) to survive their recent tests (the former much sooner, the latter last week basically), and then to have some really terrific run-ups. This has been underway, the former is pausing, then the latter, then both go up more. It was not our view that on-news selling will ignite any protracted decline in the semi's today (such as in Analog Devices (ADI), our "pick of the year" from last Christmas, which advanced almost 18 points from yesterday's NYSE closing price and held those gains). It did not, but simply elicited pauses-to-refresh speculated about last night (Tuesday), after which we see this going higher Thursday; and that remains the most likely case both for SOX and for NDX. (Technical levels do remain as outlined last night; there are no changes in that regard.)

Bits & Bytes . . . is reserved, but touches on Hewlett Packard (HWP),Analog Devices (ADI), Corning Glass (GLW), LightPath Technolgoies (LPTH), Cabletron (CS), Compaq (CPQ), homerun (since under $1)Digital Lightwave (DIGL) and more. Simple mention here does not in anyway suggest a buy, sell, hold or short at this particular time, nor reflect on suitability of any.

In summary . . . internal indicators actually remained favorable last week, and this week, despite a couple of rocky days, including the recent expected consolidation, and that continues while bull and bear slugfests continue; against a favorable monetary and Advance/Decline perspective for this market, as outlined, and in harmony with the overall call. We looked for up-dip-up-dip-up for Wednesday, and got that, though an ideal close above the September S&P 1500 level remains a bit illusive, which might turn out to be a plus, by allowing an elimination of daily-basis overbought conditions in a rotational (potentially healthy) way. The economic softening was anticipated last year, in harmony with the rate hike calls then, and now the market ideally is bridging the gap as it looks for the upward cycles later on, making worries about retroactive earnings reports irrelevant analytically, though of course they have a sobering effect on stocks and sectors as announced. It is also noteworthy that certain turnaround candidates continue ever-so-slowly marching ahead, which is what you want to see from stocks that were suppressed early this year, but have made a slew of changes intended to capitalize on results next year, which price action suggests. By no means do we suggest chasing price, but (certain stocks; reserved) come to mind most readily.

The McClellan Oscillator reading dropped earlier this week (from +100 to +50), and actually improved on Wednesday to the +56 area. Generally looking for renewed rallying on Thursday, then maybe mild pullbacks and then higher. There is no structural change in the overall outlook.

As of 8:00 p.m. ET; 5 p.m. PT; the S&P carries a firmer 1415 premium, with futures at 1494; up a fairly large 250 from Chicago's regular close. For now we are flat the September S&P, expecting to either sell a spike, or buy the first pullback, for a scalp, depending on early Thursday action. (The hotline only bought the first pullback, very well, and retained it through the entire session.)

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