Beware Pompom-Bearing Cheerleaders

July 8, 1999

Optimism ahead of Yahoo! . . . probably enhanced the late Wednesday market tone, though it's not something that impacted the futures, given the low premium at day's end. Now we'll see how it is responded to in the morning, particularly in the wake of confirmation-of-strength upgrades, so common lately, both in stocks and in the Averages. Remember; the Senior Averages have of course made new highs while the "average stock" certainly has not. That's a pattern that indeed exudes shades of last Summer's unfolding events; though our expectations aren't for any precise sequel. Not in an environment where cyclical risk's seen as greater than secular; at least for now.

So on Wednesday many basically just awaited the Yahoo! (YHOO) report (not one of our stocks, though its response certainly could impact a few on the Letter's list) for a clue on the rebounding Internet sector of late, which some believe is more important than cyclical stocks, as divining the future action of the overall stock market. We actually don't think that's how institutional managers view it; though definitely daytrading types do. Institutions are more likely worried about major-cap stocks that are coming in above consensus estimates (whisper numbers are a bit of a game), but aren't capable of advancing thereafter. That's the kind of thing we've warned-of as a most visible risk in the current market environment that so many think is almost riskless.

Pattern's similar; but this is not last year . . .

….(comments on a couple stock movements in the day's action). Of course that's not the point; while the market's ability to sell relatively good earnings reports is the point. It can be a very big one, potentially. Last year a lot of analysts and money managers were able to plead ignorance to the world's developing derivative & debt crisis (we don't know how, as we forecast it in advance, but that's what they said; some still say it regarding last year), and you don't have that this year.

What you do have this year is a pattern that is uncanny in duplicity of a market making an earlier internal high (such things asadvance/declines); and you do have all market participants (trader and investors and institutions alike) cued-in to the earnings situation; especially in such levitated environments. We don't argue that this is a strong rearview mirror 2nd Quarter for any number of the most-watched stocks; we have already noted an agreement regarding earnings expectations. What is different is the idea that if the stocks don't respond (it will only take a few more) to such earnings results, then the Street might utter a collective "uh-oh", and increasingly lean toward the sell side of the ledger. We are not worried about the next decade particularly (at least not as of yet), we're not inclined to disagree (and in fact several years ago we talked about Dow Jones 15,000 before most mentioned 10,000, targeting the year 2006 for example); but we don't think you get from here-to-there without a serious correction at best, and something nastier at worst.

Now that's not daily action, which we focus on in this DB, but is crucial just now as we're pushing up in the region of the two weeks considered most likely to complete the topping phase for now; thus it is clearly relevant for both traders and investors. If you ask about "odds", we'd have to say challenge the highs of yesterday (the 6th) first; and conceivably a slightly higher high, though we did assess the rally on the 6th {Mom's B'day} as a bit parabolic with potential to spike & reverse it. If you ask… on a closing-price basis, we're not particularly confident (of not having a higher high) as this is not a market crowd that's going to drop the ball on this, until or unless they have to. So, yes, getting spooked about earnings that aren't received resoundingly well can be a potential market mover to respect (but that doesn't mean you don't get a rally on them which is then sold).

It's not a headline from Asia (though those can occur from a minor perspective); it's not a hedge fund chaos (though that's out there too, including the revelation that LTCM backers withdrew lots of money, as suspected), but it can be a market-breaker, for the simple reason thateveryone of all persuasions in the markets can see how stocks respond to earnings; without interrelating key markets or monetary indicators. Nobody is surprised when stocks go down on disappointments of course, but that is not what this is about. We're talking about what might happen if you get the desired string of good reports that arrive to a glib or cool response. That means it's in the market.

Thus, the point is simple: whether a tech, an Internet or a multinational, if a stock responds just a minimal amount to a good or great report, then what does it say? That growth assumptions for at least the near-term are already in a given stock or sector, and that the good results are a reward for those who were holding, or buying a few weeks ago for a rebound. Combine the narrowness of breadth in this environment, and the skewed monetary scene where rates had firmed while the nervous Fed makes money consistently available (no Money Supplycontraction, as of yet) and you have a picture of a market that has the potential to churn-out a top amidst the releases.

Technically . . . (section reserved for subscribers, per usual)

Just to make this more complicated, the Florida court ruling went (as broadly expected) against Phillip Morris (MO), which is a Dow component, and will weight on it a little bit early tomorrow. But, a continued series of higher-highs in General Electric (GE) more-or-less offsetts that. Now, it's not our expectation to suggest a disappointment from GE; in fact we don't expect that. But we do suggest that a smaller and smaller group of stocks is garnering the trend-following monies of mangers in all this, and that's not something that bodes well for the future beyond the near-term.

For now, we'd have to call for the S&P to challenge yesterday's (Tuesday's) highs once more but would be anything but complacent about closing there. The prospect for an up-and-then-down reversal day is actually not totally out of the question (parameters reserved). So, that's how you "grind this out" for awhile, with a series of volatile swings such as yesterday and today, watching closely to see if earnings are mostly ignored.

In a nutshell. . . it of course remains our opinion that our forecast pattern resolution need not be modified by hiking targets or changing the outlook, when so far things are moving close to Hoyle. We do not have jammed overbought indications, though that's close. We don't have to get them either, which is something everyone extending their targets might not be recognizing. How so? If the top was, as we suspect, in the Spring, then this is a rebound that has made higher highs than occurred then, but in an ever-narrower universe of stocks participating; and that's not so bullish. It is aided and abetted by strength in Oils and other formerly undervalued stocks, which aren't so undervalued any longer. Outside of the few stocks that are working, distribution is ongoing, and it is taking place once again, at least to an extent, under cover of a strong Dow Jones umbrella.

Daily action . . . again Wednesday, saw our hotline (900.933.GENE), where all S&P guideline action takes place (it must; though the general outline is provided in the DB), having an excellent day with guideline trades. It in fact was not particularly heavy at day's end, though many of the Internet and related stocks did ease down in the late going. Tomorrow becomes crucial if they sell the Yahoo! report by noon (early selling on Phillip Morris, then up into midday, then down.) Specifics are reserved per usual, which includes the immediate probable forward outlook; ditto for Economic News & Releases.)

Again; these DB's are a perspective of where we are, and where we think we're going; subject to change and varying detours that the market, in its infinite wisdom, tells us it requires. We cannot demand that the market do anything particular; as that would be a clear prescription for disaster. In fact we hope the market's upside cheerleaders are right, and we never correct. Very doubtful. Normally our calls tend to be fairly close to the mark, which is the best any reasonable market player can expect us to achieve. If we nail a call (which we often do), that's great; but for any to expect that, or requiring precise prices well ahead of time is a bit ridiculous; if not something no seasoned analyst would consider realistic. We'll give you our best longer-range shot, and our best daily-basis estimate; and then finesse it on the hotline for those to whom that will matter.

We think this is especially critical in an environment where (for whatever reason) some analysts are acting as if this was a "trending" market, which it is not. It has taken almost all available cash to push the Senior Averages this high, and the amount of money that comes in from here tends to be seasonally slow; and that's going to be the way it is whether one's a bull or a bear. We like to think of ourselves as realists, and if you prefer chickens in an extended market; that's all right. We're proud to say you don't go broke taking profits, and this isn't the time to press one's luck. At the outside, must we remind this continues the general pattern call for months. Why fight it, when there's been no significant deviation from the overall pattern call that impacts anyone other than hourly traders, and a couple minor daily detours in recent weeks; but no major change needed. It just doesn't make sense to increase targets when they're reached; with market internals slipping.

While things were not heavy late in the day (other than the premium easing off towards the end), we again managed to basically scalp nearly 2000 points (almost as good as yesterday's 2000+) on the 900.933.GENE hotline. So, we're looking for something like an earlier rally effort, a sell-off (good news selling on the earnings reports), a secondary rally that has a good shot at a higher-high (midday Thursday), followed by selling yet again (and potentially more significantly) later in the session. Call it: up-down-up-down or similar, with the second decline having more chance of an aggressive sell-off than the first. We aren't yet totally comfortable calling for a bigger-picture decline, but we're clearly working towards that; thus everyone but daily Index scalpers should presume this remains the swan-song event of a rebound.

Bits & Bytes. . begins with what we already discussed; signs of weakening beneath or superficial action of the Senior Averages. What's good for GE is not automatically good for the market; as it is analytically meaningful only if the mass of Indians will follow their Chief's big leading push-up. So far, they remain peacefully smoking their pipes. If that condition remains, then those buying in the wake of good earnings or general upgrades, will risk getting stoned (in quite different ways). (Commentary on individual stocks that are "in the news" from our Letter, are reserved for subscribers.

Longs and/or shorts mentioned in tonight's DB include: Lucent (LU), Texas Instruments (TXN), America Online (AOL), Comcast (CMCSA),Dell (DELL),Compaq (CPQ), Digital Lightwave (DIGL), Conexant (CNXT), a forward remark about eBay (EBAY), our GM Hughes (GMH), InfoSeek (SEEK), PSINet (PSIX), Rambus (RMBS), Novell (NOVL), Time Warner (TWX), Unisys (UIS), Tyco (TYC),TCI Music (TUNE), Wave Systems (WAVX), MCI Worldcom (WCOM), Wet Seal (WTSLA) & Applied Materials (AMAT). Listing here just gives some idea of the type of stocks the monthly Letter addresses; remarked on in the DB when moving notably.

In Summary. . . our view, which would allow the stock market to drop over a period of time, into the Fall, by at least 1500 points, measured by the Dow, is conservative. In our view, just chasing the rally doesn't take into account market internals (technicals); is reactive and not anticipatory, and it is more reckless, even if it should occur anyway. New highs have been achieved in many of the Averages; and we have traded the market successfully in this projected extension in July. We are not increasing our targets beyond the July 6th (or so) goals; and stand by our forecasts.

The McClellan Oscillator; +82 as of Friday's posting, at +63 on Tuesday, is now at +30, which, in our view, shows the internal deterioration (or distribution) that is going on while the DJ rallies.

As of 7 p.m. EDT Tuesday, the S&P premium is at 964, with futures at 1405.50; up one from the regular Chicago close. Tomorrow is at best going to be up-down-up, and more likely has a shot at being mixed, with the up-dip-up-down overall pattern of a potential (albeit not highly likely) bit of a reversal effort session. We would feel most comfortable with that if we get higher highs in a second "up" of the session. Basically, we are now in what should be the finessing or completion of the overall pattern call from the April top, through the May break, the twin rallies in June, and a furhter extension into this week (as more specifically outlined to subscribers).

We might also point out that "grinding" kinds of corrections, can sometimes be more bearish than an "air pocket" collapse, because in the "grind" very few investors will believe it initially. That's of course why we call such a decline a salami decline, because they take investors gains away so very slowly; just one slice at a time, while eventually getting the whole salami. That's one of the most dangerous types of declines, and typically starts gradually, ending with a selling catharsis. Again; there are no confirmed big sell "signals" yet; but such a reversal is increasingly pending.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."

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