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Breakout Over Inflection: The Wake

May 18, 2001

Tuesday's assessment of the action as favorable . . . with Equilibrium at day's end by our interpretation, was not only the result given a Fed cut inline with expectations here (and elsewhere), but was accompanied by favorable breadth/volume indications regardless of what others had to say about it. We have argued for weeks that market internals were actually improved slightly; that it was ideally an important consolidation under 'inflection'; that superficial bears shorting or selling the market were missing all the messages from the market; and that a dull market should not be sold or shorted. Wednesday was the culmination of the 'rangebound battle', that blew above inflection or resistance, and achieved quite precisely the goals we thought were thusly likely.

Throughout this, seemingly taking forever, we stuck to our guns about first taking-out the upside, with a measured move to ideally June S&P 1290, and beyond over time. The recent earnings spate, and even forthcoming profit warnings for the nearer-term as well, are irrelevant to this forecast stock market action, regardless of precautionary concerns we have about ramping-profitability later this year and next. For sure that is not to say there won't be corrections and pauses (as outlined already for this year as time goes on); but there is a great importance of moving above targeted resistance.

It's somewhat amusing, that on this day the Dow Jones Industrial Average moved into the rarified breakout-air above 11,000, that the DJIA almost precisely made our month-long target for the move to afford a degree of comfort (for particular reasons), by moving to 11,200 (actually closed at 11,216 which we find very pleasing). All the while some technicians fought this (just a few agreed with us lately, but not many, and our measures for these targets probably predates all of their positions), internal conditions in the market were improving and consolidating, not deteriorating overall.

Technically . . . it's even more incredible that the financial media has somehow not found time (if they knew) to realize that 'trading curbs' were revised effective Monday of this week, and that the first so-called Circuit Breaker kicks-in at 55 S&P points shift not 27 as before this week. That's important, as some reporters alluded to things that would settle-down with the tripwires in; but the first of the important ones never was.

An S&P gain of 3000 is above the old tripwire, but below the new one; and that's it. It all did seem curious enough to compel me to check with the Chicago Merc again, but yes, nothing got changed or postponed, and those new rules were put into place this week, which were expected by us to enhance 'volatility', ideally first on the upside as well as (maybe) later-on to the downside, but not yet. Beyond the hotline's efforts, we can't imagine anyone reading this who wasn't ably prepared to see this week's surge.

Now, you still don't have so-called mainstream sidelined money coming into stocks in a big way; so that's probably bullish, with respect to 'climbing a continuing worry wall'. Mutual fund committees may be embracing the upside, and there may be some sort of follow-through; though there is the possibility of more given the growing fears that those remaining intransigent are 'fighting the Fed', and probably next year's revenues and profits. Sure, we could debate 'chickens and eggs' forever; but if the market does what it might over the whole year, business and consumer demand will come back in an impressive way next year, almost regardless of how it looks to CEO's or estimator types here; almost the inverse of how they exaggerated the upside in the past years.

For now, we got our 1290 in the June S&P; our 11,200 for the Dow Industrials, and if all goes well, we'll even get the move (extended, but with target levels reserved), which would be more of a measured move, than the psychological one we projected, and is now achieved.

For the moment, we're thinking in terms of NASDAQ and the Nasdaq 100 (NDX) as better players tomorrow, given that the bulk of interest had to go into the NYSE big-caps today, to get the resistance surmounted, and then the move can broaden out. The financials, such as the Bank Stock Index (BKX) have been pointing to this, the inability of Oil to expand crude pricing is helpful (though oil stocks are doing fine), as is the desired surmounting of resistance that should have evacuated stubborn shorts.

Discussions of targets, including key points for the Nasdaq 100 (NDX) and others, of course must be reserved in fairness to subscribers. Watch and see if ithe NDX kicks-in, as discussed last night. That skepticism still is quite high is a help; but now much of the short-term action is accomplished (reserved).

As for T-Bonds, they are getting quite oversold; though again, it's bullish that longer-term rates have generally firmed, while short-term rates eased. That tends to drive all short-term funds into action, while the long-rate increase points towards belief in the U.S. economic recovery prospects for next year. Much of the talk about this year will be noise, as relates to earnings, though stability in basic consumption and housing absolutely help, and are absolutely where we needed to see continued U.S. stability.

As for Capital Spending, that's not something that changes much because of rates; it changes because business improves. And that's why we argued many managers (for sure they want to portray their prowess better, but that's reality) and CEO's would cut only after business deteriorated, and re-ramp only after things were expanding. That in fact was and is the basis for expecting an inventory exhaustion and ultimately even shortages in key products (as well as pressure on services that have been cut back). Interestingly, by the time we get to next year, that could include some of the weakest sectors, like telecom, because absorptions and consolidations (and failures) will have removed a lot of firms from competitive challenges, while personnel will often already have found other jobs. So you could find inadequate services and insufficient people. And yes, that's inflationary in time, but won't be soon, because such companies most typically are so-far under the eight-ball, that they will need to jealously guard revenue newly coming-in for awhile, and then they'll be compelled to newly hire or outsource.

As to Gold, there is that inflation fear contributing to a renewed interest in the sector from time-to-time (as outlined again a week ago). That certainly contributes to Dollar-denominated Gold moving up into the low 270's now, as it continues penetrating the (now) weekly-basis declining-tops pattern, after moving above short-term resistance about three weeks ago. Short-term resistance in the June is around 276, and then it's about the low 280's that will have to be worked-through. So long as long-rates firm in the U.S., the fears about eventual inflation (not the Deflation most gold fans expected to be the basis for a metals' move) will contribute to this overall firming effort in Gold.

At the same time, though repelled short-term shy of 118, the U.S. Dollar Index has its work cut-out for it too; given a daily-basis stochastic reversal, and a key challenge of 115-116 coming-up quite soon. Penetration of that would likely be viewed as a test and reversal shy of the year's earlier highs, and bring-on a challenge of nearer-term supports around 113-114 in the June contract. We actually doubt that will be broken at this point; but that doesn't mean the Summer's navigated without such an 'event'.

Yesterday we noted pressures on the Ten-Year Note, which renews fears of inflation which neither we nor the Fed see as a problem to contend with here, at least as yet. We remain a little more focused on 'stagflation' risks for this Summer, not because of the continued cutting by the Fed, but as a result of pricing in the Energy area; though indications continue to suggest that won't be sustainable. The drop in the Two-Year is what contributed to making short-term cash equivalents a less attractive holding, and for sure contributed to this forecast upside resolution; at least for the short-term.

The Fed's move, to cut Funds Rates by the broadly-desired 50 basis points and also (equally important to us) another half-point in the key Discount Rate, focused on the Fed's determination not to be so slow about monetary and rate stimulus (they aren't precisely the same) so as to be meaningless (as was the case in Japan). There isn't a case since 1930 where such a series of consecutive cuts hasn't elicited favorable responses over time, though there is also no doubt that it takes time to work through the system; the inverse of the overstayed previous hikes by the very same Fed boys. (And we previously discussed the 'clout' of the Fed now, versus a generation ago.)

Daily action . . . for weeks has recognized we were still hovering around 'inflection', and it definitely occurred amidst a tense undertone. At the same time, just the way the market came back in the final minutes Tuesday, was an attribute to how nervous shorts are, in all this, as they ran for the hills aggressively when further downside was reversed. And that contributed to our advance perspective on Wednesday's likely first drop, but subsequent turnaround, and warning that we were only 'one rally' from DJIA 11,000; which of course has now been surmounted by just the degree we desired.

For the moment the hotline (900.933.GENE) is long, from the most recent 1249 entry this morning, after a couple sub-minor efforts, that were slightly profitable if attempted for that matter. By day's end, a solid 1288.40 June S&P close leaves us positioned at least for now, for a continuation or follow-through in the morning. Then we'll see if this quiets down a bit, though with nominal Expiration coming; another bump-up may occur. We'll approach guidelines conservatively in that regard, remaining optimistic. (Any balance of technical and daily comments are reserved for our regular readers.)

In summary . . . their was no shock from the CPI; no big profit-taking; though efforts were made, and just before these expected market oscillated finished, we had moved back to the long-side of the S&P guidelines in the high 1240's, and stayed there all of the rest of the day. We suspect Thursday will be less dramatic, but will be favorable.

McClellan Oscillator data followed a minor expansion the Summation dots, with the strong behavior today, that isn't visible in these criteria, because most of the focus of course had to go into the blue-chips, to substantiate the breakout move. What may be called 'more general' breadth improvements can follow over time; keeping in mind the interruptions we have already discussed would eventually follow, and others this Summer. At the moment, Wednesday's +112 read for the NYSE reflects this forecast turn-up, and at about +18 for the NASDAQ (following a nominal +4 change), also was in the continuing thrust we've suspected as likely.

As of 7:30 p.m. EDT, Globex futures sport about a 702 premium, with futures around the 1292 area; up over 300 from the regular Chicago close of 1288.40. Again, none of this preempts what could be corrective phases in weeks (or months) ahead, but for the moment we'd expected another (hoped-for breakout) move to the upside. As for a full-blown test or the more bearish alternative coming (new lows); that was not on our recent screens from anything we saw before this week, or after this desired bust-out.

Now obviously, there is going to be a slow Summer in many areas, there's a pressure potential from energy prices; there's contracted capital spending of course (not new, so no reason to dwell on what's been obviously a risk for the past year or so, though we too were surprised by the ferocity of the downside, in response to the number of CEO's that somehow saw demand and earnings that made no sense for a long time to thee and me, but do make sense in the years ahead, now that they've given up on such improvements, coincidentally). A conundrum still exists fundamentally for sure; but that's just the way it still is. We continue to believe the market's bottom is behind, as we reemphasized last night, and there will be occasional drops to keep people on-edge, while market internals do not look particularly negative, nor was the reaction to the selling squalls, when they inevitably occurred over the preceding couple weeks.

At this point, at least, we'll continue to project higher prices (with less drama) during Thursday's session, possibly with some catch-up from the lagging NASDAQ, which would really buoy confidence should it workout that way. Still holding long for now, and will review more of this in Friday's Daily Briefing, posted on late Thursday. (By the way, in the process of moving to a new server; may link to it; but if not, just key-in the backup IP address our webmaster provided you last week. If you have any questions, or lost this, please email: [email protected])

A single ounce of gold (about 28 grams) can be stretched into a gold thread 5 miles (8 kilometers) long.
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