Bull Market Meets Bear Economy?

December 8, 2001

Prior to Wednesday's 'explosion' . . . which merely 'confirmed' the breakouts of so many weeks ago in the key technology sectors, as we had continuously pointed-out, we had described Tuesday as the "week's best chance for a rally", after considering that there was quite a good prospect that what we had seen (similarly to October's), was an internal (this one lasted two weeks) correction with only nominal price drops.

By no means does that suggest it's simply only onward and upward without pauses from time-to-time, though the basic thrust of our technical argument (barring horrific new catastrophes) has been that the market made a 'v bottom' on September 21st; the day after we suggested (in the midst of post-attack market-reopening panic) that investors not second-guess the oscillations forthcoming, and simply view it as a 'buy' then; with risks of accidents this year being to the upside, rather than the downside.

Fundamentally, a large number of participants are searching-in-vane for more than an iota of evidence that the economy's problems are out of the way. Don't they know that markets are discounting mechanisms? Didn't they see the September collapse go below a declining-bottoms formation, which creates what some may call (as we did on September 20th) the 'sign of the bull'? And why would they expect to see some sort of 'confirmed' economic affirmation of an economic revival, when that's never the way stock markets work? Have they forgotten climbing a 'worry wall', and what about the thought we've mentioned before (though few have) that the Dow Industrialmove can conceivably make it, not into disaster, but to all-time highs before bears get it.

Then there is the topic of earnings; the economy is not as distraught as some think at this point; and you've had a contraction in layoffs, and an increase in orders. Sure, it's logical that we can't correct the excesses of the '90's without a bust; but didn't we get that in the sectors viewed (right here, when we were very bearish) as risky back near the Spring high of '98, then bullish for a rebound within the bear (to higher highs was still a bearish internal rebound) in the late part of that year, part of '99, and the insane speculative orgy (fueled by the Fed, while they argued against it) in late '99 and early 2000, as under intense distribution on a rotational basis? Yes, we did; very tough for most investors to address, because it was rotational, but that was the idea then; and as they got around to every sector, the fluff came out of each and every sector; sans maybe some of the multinational blue-chips, which were used for hiding places. That is a reason we remained skeptical (while allowing for rebounds) on many such blues; it's a condition likely aggravated by prospects of a post-war(s) investment-reticence.

Also, we've talked about an Argentine default in recent days; and after Wednesday's close you had the IMF essentially call Argentina's 'bluff' (presumably), by saying they won't make new loans to them. Well, the austerity demands that come with that may not make such loans desirable; and this might not be quite the bearish factor some are hoping it is tonight. Rather, it may be what we discussed last weekend, and that's a default to some extent (the reason for a fleeing from some of their bonds); maybe a revised version of pegging the peso to the dollar, or even the adoption of the Dollar in their country; something that impacts pride, but might make economic sense. As to the Dollar, we've thought such international worries and woes would keep it relatively firm, along with an obvious bullish impact of the threat of war(s) spreading; and it has.

Finally, there's the issue of what the bears have been thinking about in wartime. No, I don't just mean the ideas we've previously shared about only a radiological disaster, or something similar, as being capable of bringing down this market (though that risk is still out there; let's hope that it's merely part of the 'worry wall' being climbed over); but the idea that somehow you'd get a renewed earnings-based bear market resume. Do they really believe that's realistic, much less the Depression they seem to want, in the midst of war? Don't they believe we already had a market implosion forecast back in 1998 to rotationally develop, and don't they understand that all the stops needed to reverse the Nation's fortunes (in a favorable manner) have been accelerated?

Now of course we continue to realize that chasing equities is increasingly fraught with peril; that the markets are technically overbought (for now); but that they can stay that way for awhile; and historically the most important moves (in either direction) have in fact done just that; remain extended (with pauses within uptrends). Some strategists think the market is trying to make a bottom here; no idea what that means, since the bottom was in September, dramatic, climactic, and historically relevant. A short-term top in the wake of the expected breakout extension (the internal breakout being many weeks ago, with an internal correction begun two weeks ago, and slightly similar to October's, as noted last night, concluded a couple days ago) is always a prospect.

However, with the FOMC meeting coming next week, and T-Bondsbreaking hard again; there is a chance that all we'll get is an extension higher, a mild pullback to the breakout point, and then move higher. But what if they cut rates, wouldn't that help? Ah; maybe just the opposite. A rate cut might suggest to the Street that things are still very soft, and you might see temporary profit-taking on such a move. Or you might in fact get a Fed that does nothing; look at the market and say, well, we're on our way (of course they say they don't look at it thusly, but do). If they don't cut, a little selling as a reaction. So then what? (Let's reserve that prospect for our regular subscribers.)

That would play-in with what interest rates are doing, which is firming again after the rebound in bonds (fade in rates) following the pattern we've discussed in recent days; all perfectly normal in the wake of the short-squeeze blow-off when the 30 year bond issues were terminated, the expected selling squall, retracement rebound, then drop. We really don't want rates to go too much higher now, so that economic resurgences aren't choked-off, as we've discussed. At the same time, though not our focus area of course, we did share the idea that long-term rates were probably bottoming a month ago; and are pleased that we nailed that for anyone refinancing or similar. The idea was (and still is) that waiting for lower would have been absurdly greedy. Now, while rates are marching-up, there may be a sobering point when earnings do come out, or brief drift rates lower (such as in the 1st Quartre), so borrowers might be tempted to withhold any new borrowing needs until that occurs next year. At the same time, we don't see appreciably lower rates (why would we; after all history shows us economic lows occur about the time 'recessions' are officially proclaimed); we do see gradually stronger economic trends next year; and much better the year after. Sure this U.S. market is getting ahead of itself on a short-term basis, but 'the boys' needed to try to pop resistance on this one, so as to cement the structure of the improved market's picture (technically), and that is now done for those who disagreed with our post-war views since September 20th. Just remember what can happen after an 'affirmation'.

Technically . . . many Senior Averages are now 'formally' threatening key levels that almost absolutely deny a bearish case, which has many bears incredibly frightened. I am not speaking to the 200-day moving averages or daily or weekly downtrend lines, that are also after-the-fact of what has occurred in recent weeks, but for the DJI now back into the zone of (overhead supply?) that existed prior to the Fall's climactic fall.

(Balance of technical discussion, including yearend targets and beyond, are reserved for our subscribers, as are the Daily Action, which among other things summarizes what we're doing on the 900.933.GENE hotline;Economic Releases; and more).

……. partial reasons why cutting back enthusiasm as the market 'confirms' strength is sensible, but that doesn't mean that after periodic pauses, we don't work higher. It is also what we have described for some time as a reflection upon the market nearly as we saw from the '98 low; with shallow declines and upside flings, working-off the overbought conditions with more-or-less lateral movement, without big price declines. Sure, there were points we allowed for more notable corrections, but when they didn't fully blossom, we have realized that, and (again in advance) suggested more upside. So no, we won't join the pedestrian technicians who only now see an all-clear market condition; though we have an affirmation, which should lend support to pullbacks and is hence a positive for subsequent action. To us; the market's a buy since 9-20, and a hold since 9-21. A very extended Recession, much less Depression, is unacceptable.

It is interesting that if they'd done what we've mentioned almost daily, culled-out solid (or leadership) techs from the rest of the mundane stocks, especially multinationals, it would have been evident do them weeks ago that our pretext was generally correct, if most had looked at what technology was doing; particularly the Nasdaq 100 (NDX). In more recent days the Semiconductors (SOX), expected to become the secondary leads, also gained in favor, and staged an important indication with today's breakout. Of course bears will argue the consumer is tapped-out, and that tech can't improve in the future. Are they sure? We don't think so; so we think the last 2 years washed-out the excesses, though there's little argument that this could get a bit frothy short-term.

In summary . . the qualitative nature of the buying on Tuesday, not unexpected, was in a proximity to a breakout that was again particularly interesting, though old news of course for the non-multinational technology sector, achieving that some weeks ago.

Wednesday's NYSE McClellan Oscillator rose to around +64 (after decline from an overbought condition preceding over two weeks ago), as NASDAQ worked modestly higher, to +24 now. Of course the upward move from September's climactic reversal lows, had been long-in-the-tooth as outlined these past two weeks or so, and noted as on borrowed time since, but capable of correcting laterally in a most-bullish way. It still remains healthy intermediate and longer-term; nothing analytically has changed in that regard; only the realization by a larger number of players due to the breakouts. Ideally, after a rest, or the breakout and rest, markets will head to projected far higher levels very late this year or the first part of the next (as outlined previously and again tonight), barring nothing major as far as interruptions to Allied efforts; but such a rise is really not yet sustainable; though possibly significant declines aren't sustainable either. For all practical purposes, that is a continuation of 'stairstep' advances, over time, as we wrote last night, and in harmony with the (only) shallow-pullback views.

New daily shorts were run-in Tuesday, and we expected to see more of that towards midweek, with an ideal up-down-up pattern on Wednesday, and got it. As of 8:30 in the evening (ET), there's a -165 discount just now, with S&P futures actually off a few ticks from the regular close. Our hopes and prayers remain with U.S. Marines, Army and all other free world troops, that have joined Allied Forces fighting on the ground in Central Asia, or even elsewhere, and our sorrow over the unfortunate losses today for Special Forces; and particularly from so-called 'friendly' blue-on-blue fire. Patterns for tomorrow may be as outlined; with expected early profit-taking, but ideally it will be absorbed, temporarily. Yes it's questionable whether traders will stay long beyond, but structurally this is the overall pattern we've discussed for nearly three months.

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