A Bear Market Bounce, or More?

March 10, 2000

A bear market bounce . . . is oversimplification to describe Wednesday's activity. And in fact, it is notable that the S&P futures were not able to penetrate the prior day's deep-discount lows on an enduring basis, which of course set-up the bounce (which we mostly caught) that hasn't as of yet defined itself with respect to the ability to penetrate certain levels above the market, although today's bias was bullish on the hotline for a turnaround, starting in the low 1350's of March S&P.

Late today, a second phase of decline in big Oil stocks kicked-in anew, which rapidly contributed to the Dow Industrials being trimmed a bit toward the day's end, along with new discounts in the S&P trading activity. However, most other individual stocks did not match that downside, which is a reason we determined to be flat overnight in the hotline (900.933.GENE) S&P guidelines unlike Tuesday evening, when we simply maintained the 1375 (most recent of that day) short-sale, as a precaution in front of Wednesday action (that trade was the latest in a series which started early Tuesday at the S&P 1398 level, and which continued, essentially the opposite of the Wednesday bias). Mostly the main point here means that outside of these late Oil stock declines, there really wasn't much deterioration late in the session, so you can't be sure they won't toss premium right back onto the S&P in the morning, hence we didn't want to hold any defensive overnight efforts.

Wallet Squeezing?

Absolutely amazing to hear analysts talking about higher gasoline prices, and finally fretting what we have argued was coming for months, especially if Y2k was navigated successfully, which for the short-term was seen starting with the 1st moment of January as a bearish, not bullish factor, for the short-run, and probably very bullish for longer-term macro worldwide economic growth.

That was based primarily on the ability of much of the world to breath a sigh of relief, to increase demand for raw materials (including Oil of course), and to encourage repatriation of monies that were "parked" in the United States or Great Britain, hence compelling higher interest rates to be offered on the short-term (not the long-end, as we'd predicted an Inverted Yield Curve) to retain such monies in domestic repositories of various Dollar-denominated assets. This all occurred.

So, as Crude Oil worked it's way into end-user refined-product price increases, this was a result of what's been seen going on in the pipeline of prices, not new, as frequently reported by media. After a series of rate highs and higher oil (they are connected, and the former won't help a latter trend, though it does help currency stabilization), anticipations should be for things to reverse at least for the near-term, and that is one reason we're open-minded to the market being friendlier than some think, provided these factors become a trend, rather than simply a possibility out there in the future. At the same time, there's little doubt on our part that the "easy money" times for this year's first half are behind, interestingly, even though we were delighted to have seen such huge gains in so many technology and biotech selections; especially in the face of a correctly forecast drop in the Dow Industrials and S&P 500 during the short time, but extreme volatility, this year.

Clearly we expected the higher Oil product prices to essentially run out-of-gas on the upside, via political pressures (if demand wouldn't constrict), and for the pullback to help spark Spring rallies in a perfect world. This isn't (and won't be soon) a perfect world, but it is one that requires open-minded flexibility to the markets, and the willingness to consider that inflation may spike and top, at least for awhile, more from the price of Energy, than from a series of Fed-based rate moves.

The impact of high energy prices has been forecast in our work for a very long time, and now we have many others fretting about it, which inevitably meant the excess thrust of Oil was nearer an end, than any beginning. That's why in the final throes of such inflation-boosting factors, we have to be able to handle a negative outcome should that be necessary, but at the same time history's on the side of market balance, which is exactly the kind of political and energy pressure outlined in last night's remarks. Not that Saudi Arabia or Iran read our DB, but somehow they arrived to a point that amounts to getting such messages, which we're sure major Capitals were impressing.

How and when do you find a bottom in this market? That's the challenge of course; but note that we are having an oversold daily and weekly condition in stochastic and other indicators, which is often associated with downside exhaustion, not the beginning of a dramatic new downward leg (at least for the moment). To this end we discussed inflationary aspects; because without their amelioration, odds for a bear market bounce exceed that of a turnaround test; whereas with their amelioration, odds for a rally of some surprising sustenance reappear soon, and that will not be related to the delayed (via pipeline) price of gas at the pump; as markets have to anticipate what comes later on, not merely react to current prices alone. So, it's amazing how many analysts are making so much of what's been telegraphed for so many months by the various factors ranging from Energy raw materials prices to higher interest rates, while so many ignored these real world factors, while dreaming of Pollyanna new eras somehow defying common sense. (They also did not address the ridiculous way in which the CPI smoothed seasonal energy costs, by adjustment that in no way reflected very steadily rising prices that have been ebbing through the economy.)

We have a new era; we play new era tech stocks almost exclusively, but we don't (and haven't) believed that there was a time to outlaw the "Business Cycle", and facts have proven that to be precisely correct, as it is and has been a different cycle for some months now, but remember what we think about Q3, Q4 and 2001. This is not a terrific time for buy-and-hold-forever thinking in the blue-chips, and hasn't been for years; this isn't a terrific time for over-enthusiasm for last generation tech stocks, and hasn't been since about this time last year, and this probably is just a pause-to-refresh for new media and newer (not older) optical stocks, though none are cheap.

The bear market in "unadjusted" DJ components (minus last year's "new economy" additions) is almost two years in development, and is absolutely not news, despite all the media hype as if the failure to compress profit margins further was some sort of discovery. This was the expectation if we got into year 2000 without major glitches, as was the expectation for higher Oil demand. Now that everyone's figured that out (after a year and a half of higher Crude prices, and nonsense as to how it wasn't inflationary in the "new era", because nothing conventional mattered anymore), it is almost time to ponder the ensuing contraction in Oil and refined products later this year, as we discussed thoroughly in last night's DB, right before Wednesday's sharp pullback inCrude Oil.

Daily action . . . following Tuesday's tremendous 4500-6000 points of theoretical S&P gains, for sure didn't have that kind of broad volatility, but we did fine nevertheless on the (900.933.GENE) hotline's guideline efforts, though it was more jerky from time-to-time. March S&P possible gains were in the neighborhood of 2400 points we'd estimate, and that includes a bit of allowance for at least one or two potential minor whipsaws for players who handled it extremely rigidly and also is estimated without the 1500 or so from Tuesday's overnight short-sale from March S&P 1375. (These are guidelines of our views of course; and one's own efforts and study are suggested for any specific decision-making, with our views as merely one resource perspective on the market. Surely there's no assurance that future performance will equal or exceed past stellar results that are ongoing once again from the get-go this year, both in S&P action and tech stock selections.)

Balance of Daily Action; Technicals; Bits & Bytes & Economic News: (reserved for readers).

Our work continues to turn-up from oversold, and while are willing to consider (forward projection portions must be reserved for subscribers only).

While the near-term risks primarily exist in any hope for "old economy" stocks to compress their profit margins further, which this week's P&G story clearly portrays, closely in harmony with our fundamental argument about the inventory build through the last portion of a 1999 that had to be worked through, and a mediocre return of profitability to U.S. multinationals, from foreign sales so long as the Dollar remained so strong versus foreign currencies, which are mostly what every essentials company has to deal with as far as foreign-originated revenues; it nevertheless gets to a point where everybody figures this out, and everyone who wants to sell completes doing so. At the risk of sounding like an old economy bull (which I'm not particularly), we'd mention that there are certain times (today was one) where you just have to rally the Averages, or the rest become "at risk". Then, after the Senior Averages have rebounded moderately, everyone runs back into what they want to own, which is tech rather than old economy; and that makes getting a "trend" out of this action fairly difficult at best, and extremely complex if at all, at worst.

Making things more complicated, the NASDAQ market is about as extended as the old-line stock groups are depressed. The Nasdaq 100 (NDX) likely is going to have another shot up from here and that is helped by the increase in Put buying and shorting reported over the last day or two. It might also be noted that during times of extreme market duress in the past, the best stocks of a generation often came back repeatedly after corrections, and hang around (duration remarks).

If we start to get more early warnings from multinationals, we won't be surprised at all based on our outlook for late 1999 and early 2000. What would surprise the Street would be if this were to happen, and instead of breaking the market galvanizes or reinforces the thinking of investors as regards being in the "new tech" stocks; a risky poker game, but not totally out of the question.

Bits & Bytes . . . comments on the 1998 pick of the year (still mostretained), Rambus (RMBS), (which some seem to be mad at because it dominates the seimiconductor index due to price; oh well), this year's small-cap pick of the year (from the 'teens) LightPath Technologies (LPTHA), which many others are only recently discovering, and also remarks on Brilliant Digital (BDE), Creative Technologies (CREAF), Anadigics (ANAD), Conexant (CNXT) andMerck (MRK). (None of these mere references should be construed as a buy, sell, hold or short; and it should be noted that virtually all longs were previously selected by the Letter at much lower levels. The references in the Daily Briefing are simply because of interesting news or price action; the actual number of technology longs is and has been considerably more extensive for years, especially in the semiconductor sector, which has been the most significant ongoing single area of focus.)

In summary . . . our enthusiasm for chances on the upside dimmed by the stock market's defeat just above resistance Tuesday, which took us back into a series of shorts from the 1398 level, as you know, and then a reversal series of longs in Wednesday's activity. The roiling still continues. We hoped not to see a collapse here, and have continued to believe Oil is the major culprit in the pricing structure of everything, isn't a shock, but is a crucial key to all of this, as noted last night.

The McClellan Oscillator halted its recovery from oversold a couple days ago and is around -46 now. Last week the market passed the first test, and was expected anyway to have a pullback upcoming this week, in harmony with an ideal up-down-up series of days, which is fairly unusual. That pullback in the big-cap stocks, with techs ebbing & flowing, became more than a pullback, as it was essentially panic-driven due to the PG warning that so many analysts could not grasp forthcoming for the multinational stocks. Deductive reasoning now has them worried about most of the big-caps, some of which deny there's any problem. We went below support, but stayed in an open-minded mode to catching a turn, whether it becomes a basic rebound, or is something more important over time. Yesterday we looked for a lower opening, a failing bounce, then more pressure (margin calls probably), and then a later rally of a more interesting nature, but probably unsustainable so far. And that's basically what we got for Wednesday. For Thursday we think the pattern actually has a chance to broaden out a bit (upside after failing early dips), particularly if Oil stays defensive or T-Bonds don't get hit very hard. It is not impossible that the session would start an early rally, drop back a bit, and then rally anew later. (It turns out that is what happened.)

Flat overnight, after another good (if stressful) day, the S&P Globex premium is just 90 or so this evening, with futures at 1367.60 around 8:20 p.m. ET, which is actually up 140 from the Chicago regular close of 1366.20. (Again, as of midday Thursday, guidlines continue long from 1361.)

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