Bear Trap Risks Rising

September 29, 2000

Emphasizing the bear-trap risks . . . as we work through the 3rd Quarter's final week, we have spent virtually every day not just focusing on base hits (per the assumptions about alternating or very short-lived market moves during the course of each session, as opposed to grand trending moves), but on emphasizing what the alternatives if we get another break below last week's low, or not. And in that regard there is little change from the Monday and Tuesday remarks, including our thoughts regarding the variation in timeframe-based indicators exuding extreme pessimism.

It is that pessimism, presumably following the Oil and currency-based woes which we knew were risks before this month even started, that combined with concerns over earnings announcements to dominate financial media and/or investment thinking, while most experienced players seem to express more of a constant worry (or desire, on the part of those who actually want the market to go down), while the condition of the market really fulfills neither basic interpretation (though both play a part) in a very complex environment. One of the main points we've made over the years is a realization that if a market is going to 'crash', it usually does so from oversold not overbought daily basis patterns; which is why we've gone to some pain to indicate that if there's a time not to become overly enthused about such a downside calamity (even if confirmed by breaking levels so many think are again key) . . . well, it's when you're moving towards the end of a messy finale to the 3rd Quarter; which traditionally does not have both September and October heavily down.

There's been, in our view, a rash of earnings warnings of late; which really implies that whatever pressure can be brought about as a result, will likely culminate either now or in the days ahead, as we complete the Quarter and begin the new one; with increasingly October reserved mostly for companies that simply make (or surprisingly even slightly exceed) some of their numbers. If so, then the majority of negativity that can be engendered from earnings worries, either ongoing now or about to reach points of maximum impact on the markets, is essentially already old news.

That doesn't really mean we look for lots of upside surprises; but simply that downside ones may be fewer than moods suggest, going forward, outside of the obvious; a potential break of a semi-climactic low last Friday, which led to the nevertheless unsustainable rebound. Even today, there were a couple major companies noting that they are on target for previously projected numbers; and that may possibly contribute slightly to allowing this market to extend further Thursday a.m., before trying another defensive move again. For that reason we determined (though not at all yet confident with respect to expecting a nearly-perfect double-bottom superficially implied by what was) an expected late comeback in Wednesday's market to be sustained into the day's close. It was; so a most recent long-side effort (after several shorts) was thusly retained overnight just for now on the (900.933.GENE) hotline, pending the opening action Thursday morning. Wednesday was expected to have a volatile session, with a failing midday rally, then a better chance in what was called to be a very late recovery; that we weren't disappointed with, though remains suspect. (Nevertheless, the hotline continues a new Dec. S&P long from 1441, amidst mass pessimism, the reverse of yesterday morning's 1456 short; realizing that double-bottoms are certainly of rare occurrence; but when held -if- the ensuing pattern, with or without washouts, can be powerful. If not we have fairly confident views of how the action unfolds; as outlined in Daily Action remarks.)

Daily action . . . (specifics as to how the ebbing and flowing may unfold is reserved for readers; it should be noted for those visitors on other sites, that our work is an independent idea resource, based on decades of market analysis and experience, and not 'customized' in any way for other sites, who may focus on a particular single sector or have a longstanding bullish or bearish bias; as our emphasis, right or wrong, is to understand intertwined markets, as independent thinkers).

For the day, because this was again expected to be a very choppy environment, we had to have a lot of guidelines; which actually did reasonably well, netting about 1600 points on top of 1700 gained yesterday; mostly on the short side, but not exclusively. Today's included a 1452-53early short-sale, and the hotline's most recent effort (paper theoretical gain not included) from 1441. It is probable, but not automatically to be assumed, that we will exit this last long into a.m. strength. (As of 10 a.m. Thursday, with futures probing above 1450, the 900.933.GENE hotline continues long the theoretical guidelines; pleased with the initial action and response of early action today.)

Technical; Daily Action; Economic News and Bits & Bytes: (reserved subscriber only areas.)

We do not know that will be the case here; we do know that breakdowns in September (foreseen anyway, with extension risk unfortunately only if the very problems that were sustained did so, as occurred) . . . breakdowns in September of this magnitude usually complete themselves (almost regardless of pattern) either towards the end of the month or the first part of October; sometimes in a orgy of surrendering types of liquidation. We actually prefer that sort of selling to this 'grind', because it washes out anyone who can be, setting-a-stage for another effort to embark upon a more sustainable rally, at least potentially. For now the S&P resistance will be key in the middle 1450's, and of course down the road (regardless of timing) the key rebound failure (former floors that are now ceilings) in the 1480's and vicinity. And of course, only if after a morning extension, the market collapses, then we can speculate about gut-wrenching drops to high 1300's, though we are decidedly less convinced than some others that this market is heading there at this time.

Absence of Leadership

In recent days, we have referred to this market as potentially (in the S&P) looking to be a failure of a right triangle, after first moving above it last month, and then repeatedly dropping when Oil or currency matters made all efforts to recover it unsustainable. And at no point (though closer of course) has the market really become oversold on a weekly basis, and is nowhere near that on a monthly basis; yet. The daily basis oversold condition continues; interrupted by occasional rallies and yes, we probably originated the term that all 'crashes' historically come from oversold market environments; not overbought. So why not flat out be bearish for more than a short-term washout from here? As outlined last night, because that's not impossible, odds favor that the powers-that-be understand how systemic risk (always on the back burner, related to derivative or even other intertwined market scenarios we have occasionally discussed for years, against the backdrop of markets that were obscured somewhat by frequent changes to the components in the DJIA and S&P) … how that systemic risk instantly would return if the market capitulates. Now, we certainly can't base investing solely on assuming there will always be a 'Calvary' charging to the rescue of markets, but we can be sure not to be short in an oversold market (daily), which turns worse, and that risks awakening to just such intervention, or climactic reversal. That was the point last night; that correlates with the history of either September or October being negative; but rarely both of them, and would also fit ideas of a capitulation implied by the absence of remaining leadership.

Again; as we review our existing thoughts regarding this late September action; technicians who simply look at the already-achieved failures of recent rebounds without any Fed or other factors considered may be right about the 'definitions' of what they're looking at; or may even be correct that prices work lower; we see exactly the same thing. We saw it during 1998's debacle leading into the LTCM crisis; and while not jumping the gun for days (catching that decline), suspected we were going to see some coordinated rescue (which many later decided to refer to, or we did, as the Plunge Protection Team) coming into the scene; though you never do know for sure, until they do. However, as Government already spoke about further intervention "if necessary", why should we not believe that? We should at least respect it, and be suspicious of further downside, remembering that we disputed the crowd in late August, expected a September drop, realized it had more downside chances if currency and oil interfered (unfortunately they did), and of course had the further complication of various earnings concerns in multinationals, many of which really are companies under pressure for a majority of the last two years, or even longer in some cases.

What that summarizes into is either a (rare double bottom), further minor washouts that probably reverse within a week or so (with only modest intervention); or conversely a 'crash' of the market which relates not just to 'earnings'; not just to 'right triangle breakdowns'; not just to the 'diamond pattern breakdown'; not just to absence of longer-term oversold condition; not just to 'derivatives & debt' worries (of a long-standing nature); not just to the elimination of many remaining 'groups with strength'; but rather specifically because all of that happening gels in a single term: a clear absence of buyers, a collapse of leadership, hence psychology, historically and even hysterically culminating in dramatic swoons, compelling renewed stabilization efforts, with or without formal interventions. (Even now, this is closer to what building bottoms looks like; not market tops.)

Where this leaves us is unchanged: the edge of the precipice; again staring into the same abyss, realizing how this can implode rapidly, but realizing similar scenarios recently brought-forth not instant change but promises of more favorable corporate (or currency and energy) environments; which is why markets suddenly can shift from worries of Armageddon, to scrambling to discount what in most instances turns into a dramatic reversal from down-to-up, occasionally very rapidly. (Reserved.) That does not mean the low's at this junction; it means it's approaching more rapidly than believed by the majority; could happen 'automatically' in a stock market, or by edict (hate to say that, but this world of markets does have interference from time-to-time) essentially, which happens to be why we maintained a very risky speculative long overnight after reversing a short.

Bits & Bytes . . . continues to ponder the 3rd Quarter selling by fund mangers (that are not at all constrained as are we mere mortals by tax considerations), seeking to remove from many, those end-of-Quarter reports their holdings of any such stocks (or stocks they'd rather not have any great acknowledgement for); even if they reenter the very same stocks into residual weakness in the days and weeks ahead; and yes, they are fully capable of doing things just like that at times. (Daily comments & news reflections, as relates to stocks; reserved for ingerletter.com readers.)

In summary . . . market sentiment and mood shifts between complacency and despair; with our continued efforts at finessing an upcoming low, in either of the manners outlined (long just now).

The McClellan Oscillator got increasingly deeply oversold last week, rebounded, and eased. At this point it continues a subtle improvement to –115 today, with 'Summation dots' narrowing just a bit now. (Separately -for those who wonder- Gold washed-out a little from the double-tops that we warned of late last year and early this year in the areas over 320; but while not exceeding the expected filling of a gap in the 260-270 zone left from the brief upward thrust this time last year; are still under the same constraints which appropriately limit investor enthusiasm, per the Letter.)

Long Dec. S&P's overnight, premium around 8:30 p.m. is around 2013, with futures changed just a bit from their 1447 close during Chicago's regular way trading today. We would caution about getting too negative, despite rallies hardly sustainable beyond a limited period of time. This final week of the Third Quarter can remain rough; can break supports or briefly accelerate, but may in fact precede something quite different very early in the 4th Quarter; though primarily after all of the companies so inclined to warn have done so, and almost regardless of whether the market (already broken meaningfully) is able to engineer a downside acceleration first, or not. We'd be remiss not to note where we are relative to last week's lows, and the skepticism about believable double-bottoms; but also remiss if not realizing that September/October slides in recent history culminated (one way or the other) fairly rapidly; especially about the time everyone surrenders.

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