first majestic silver

Buzz Bombs

February 21, 2001

Within striking distance of late December lows . . . the NASDAQ, led by a heavy and noteworthy absence of leadership (that we've spoken repeatedly of), in the well-watched Nasdaq 100 (NDX), unless you view the leadership as simply continuing on the downside, have combined with a measured (doubted event, but here) leg down in the S&P futures, and topped by a growing sobriety about a troubled future.

It was our thinking that if we had to deal with such an additional (post-midmonth) sort of downside move, it measured something like March S&P 1275-85 on a short-term basis, and we're in the high-end of that range right now. We realize that not all of our indicators are lined-up like 'ducks in a row', so what we suspect (barring Fed action; an event we do contemplate sooner rather than later) is that a low-point comes from this very shortly, then a bump-up (volatile and sharp one too), that then gets tested over the ensuing several days; subsequently moving up, whether from slightly lower lows, or better yet, from slightly higher lows. That all remains to be seen or assessed.

Fundamentally, for sure, the failure of Dell's (DELL) Michael Dell (that we discussed) to make remote assumptions about next Quarterly results (or beyond); the gravitation of major corporate paper to reduced, or even questionable status (like Lucent's (LU) for instance), and today's sobering cut-backs by Intel (INTC), though may somewhat be token-like on their part, are nevertheless sobering to those looking for some easy conclusion to downside velocity, starting to reaccelerate recently; though commenced from our expected late January/early February short-term top in the (big-cap) market.

And there's even a rude awakening (gee what's new) that Microsoft's (MSFT) much-vaunted 'Windows XP' Operating System might not rollout quite on schedule later in the year. Well, we hear that 'Office XP' will by June or so, and that Win. XP will make it to final (gold) by that time, which should still enable it (with or without glitches) to hit the retail and other distribution channels well in time for this year's holiday season. It is not that we are that enamored with MSFT as a stock (though it's not badly priced), but that XP (the successor to the crash-prone ME, according to many, based on '98) is the first consumer version of Windows 2000; hence is based on a different 'kernel', and is presumed to be extremely stable, without the operating complexity of W2k. It's thus that we suspect it will be very successful, and pull many players (including likes of Dell and Compaq (CPQ) out of the doldrums, though we suspect the stocks will be turning higher again before then, in anticipation of the Fall rollout (plus or minus a few weeks). Inventory concerns (such as computers we warned for months would come to market from the former 'dot.bombs' will have dissipated by then, interest rates will be lower of course as the equity arena will likely be anticipating new upward phase of this economy, not the alternative (which isn't unspeakable, but not particularly likely).

Buzz Bombs

That alternative, of course, would be a 'deflation', which we suspect parts of the world are in, but that the U.S. structurally is not in. Therefore it becomes imperative, not just a political or market-wealth matter, to see the American engine turned back on anew. This cannot happen overnight, because as we've previously commented, there's just too much debt, too much damage, and too nearly a hangover from last year's 'crash'. We suspect this whole affair is the lingering backwash of that event, of an old bear in fact essentially behind (dating from our internal high warning, back in April of 1998), but if it's grander than that, we won't know until after a solid or major rebound effort, the nuances of which we can again see shaping up just ahead of us.

If there is (or was) too much optimism about corporate results, or prospects, that has been squelched by the constant drone of zingers from corporate America lately; not the least of which was Nortel's (NT) last week, and Intel's (INTC) today. We could in fact (and shared that thought at the time) see the strain and woes on Craig Barrett's (President of Intel) face at the news conference following last month's Hilton keynote, at CES in Las Vegas, where he was extremely testy to challenges from anyone, and hence a bit defensive. We have been warning, for oh about a year, that first rendition variations of Pentium 4 were going to be generally unprofitable due to the .18 micron architecture, while the next (later in this year) will be, on a .13 micron construction.

But that's besides the point for the moment; all of this psychologically contributes to being the equivalent of 'buzz bombs' flying over London just days after the prepared Allies successfully launched a long-awaited invasion of France. England knew victory was implied by the Normandy beachhead, but if a V1 or V2 landed on top of you in London, success across the Channel was of small significance, at least momentarily.

So it is on Wall Street; the 'buzz bombs' keep dropping, but they are probably what is the equity equivalent of desperate responses that really won't change the overall tide. That tide is about as far South as it's going to likely get for this market, despite what's a displeasure that money managers are being afforded the opportunity to enter stock positions at prices as low as late December, which hints that the coming rally will be hard-pressed (outside of maybe the Dow) to surmount the initial forecast January rise that failed right were sustainability was expected to falter; theMarch S&P 1380 area.

The vast majority of stocks reflect a grim outlook; the WSJ opines that tax cuts won't help much; Fed stimulation moves are relegated to second-tier consideration versus the total absence of earnings transparency for so many companies; and the market, in an early attempt to bounce back, fails miserably. Are we so bearish about this, now that many players have figured-out that putting in a low isn't merely automatic, or are we (despite being short parts of this particular day) looking for a low, maybe soon?

Technically . . . this is a borderline make-it-or-break-it scenario right about now. For sure, analysts are going to 'push-back' the timeline on recovery (as they perceive it), to next year, from the 2nd half of this year. We generally agree with parts of that, and have said so already (about bull market chances in 2002-04, with it's start in '00 and '01, depending on the stocks, and maybe even later for some of the most extended), but just as CEO's and estimators were overly ecstatic about last year, we suspect the crowd is now going to be overly dire about late this year and next. And the market, in its infinite wisdom, has got to figure out a way to diffuse the optimistic viewpoints that just because the Fed starts to cut, the market recovers. Not so quick; which was quite frankly part of the basis of calling for a February decline in the first place. However, in the fullness of time a continued 'tone' that helps the economy by the Fed (and for that matter Congress too, on the fiscal front, which is a longer-range phenomenon, and is not the negative that the editorial antagonists suggest), sets the backdrop for what in time is going to be an evolving recovery, which should not be glaringly perceptible at first. In fact, the start of it already can be seen, in the lower mortgage rates that allow both purchases and refinancing of homes; the former contributing more to economic revitalization of course. And the Spring/Summer automobile selling season might be a tad better than the gloomsters suggest; though certainly won't be overly impressive. Technology and computers? That comes later but is an orderly way for this to evolve.

Actually we're looking for a trading low; possibly dramatic, and probably decisive. The determination to hold short at day's end today (which may or may not be successful), isn't because we expect much more downside, but just to be positioned for any early washout that may occur in the a.m., as we'd be suspicious of any out-of-the-box rally that was attempted. However, we do not expect being short this market beyond first-hours action, if that long, in the March S&P, and we definitely wouldn't do it in stocks. In other words, it's one thing to try to finesse a washout in the Senior Averages or the Indexes; quite another to short individual equities at this stage of the short-term drop.

And certainly we recall our own notable contribution to technical interpretations, with a saying from years ago that markets only 'crash' from oversold. Well, we're oversold. However, our technical work does not suggest that's the next event for this market, at the same time that if something that horrific is on the agenda, we're positioned for it in the S&P. (Portion reserved.) Either way, this year should tell the tale on whether (or to what extent) the 'wealth effect' really has impacting American consumer trends.

We suspect that much of the heartland never got as inebriated with the market as the major technological (and financial) centers did; so if New York, Chicago, Boston and San Francisco aren't in real estate recessions by now as a result of the market break, and they're not, that there is little reason to expect the rest of the Country to implode. In fact we know a couple (bottom fishers?) in property that keep waiting to buy those big mansions in Northern California at half of last year's prices; they're softer, but not to the extent the potential buyers were hoping would occur after the 'net bubble burst. So what does that mean; have we simply evolved, and are new players consolidating the businesses, much as even a renegade like Napster tries to strike a deal with big music? Yes to an extent; as the tech savvy are still finding (incredibly) gainful jobs in the field, though not with the many skeletons of the first wave. This is not particularly at variance with what we talked about as long as two years ago as forthcoming for all the 'bubble dot. Bombs', in the spirit of consolidation of every hyped new technology during their early stages in history, but is a kind of messy time-consuming aftermath, to the extent of making investors and managers doubt their staying power (even for cheap buys) before the market probably goes ahead and does what it should next.

If we want to assess it to the contrary, we could, but in our view most of the big-caps previously collapsed over multiyear periods, then the 'dot.bombs', then the strongest stocks last. Therefore, their low PE's are really not low; but reflect the evaporation of earnings temporarily; that's not particularly different than has been the economic case at almost every major historical, or hysterical, low point. Can this bounce and then head down into May or beyond? Sure but let's not worry about that yet. Let's limit ourselves to the short-term expectations; not to worst-case permabear dreams.

In fact, to the contrary, our work supports the idea of a dramatic trading turn unfolding soon, with some question as to longevity, but not necessarily as to whether it occurs (in theory), though again, technical factors could be a little smoother, though we have a hunch rebounds will occur before everything's flawlessly lined-up. Stated thusly for several reasons; 1) because you can always have a trading turn that gets aborted too soon due to 'events', like a war-scare, another new corporate shocker, or something political; 2) the proximity of Dow Industrials to their all-time high could (surprisingly) herald a theoretical move there over the next several months, but not be a godsend for NASDAQ (though it would bounce relatively); 3) a specter of 'head & shoulders' completion (bearish) would stare at the market until it didn't; and 4) no assurance that those Federal Reserve 'geniuses' will have a quotient of sensible timing remaining (like last month), though we are looking for that; particularly as so many give up on it.

Structurally . . . that's one reason that anyone who is short (S&P or otherwise) might consider not only keeping any such position on a very short-leash, but unwinding it into declines that take place effective almost immediately. Now that some permabulls have either turned-turtle just lately, or capitulated into neutrality, and many more are increasingly cautious, we finally have a kind of February decline that is also capable of having provided any who want to sell, ample excuses to do just that, which means selling may mostly be done. So for that reason alone, we're on alert for a trading turn.

Daily action . . . in the meantime, notes the (900.933.GENE) hotline, after a couple small (1 and 3 point loss scalps), and also a solid short from 1302 in the March S&P which added 9 points (900 if you prefer), currently holds briefly short overnight, from the most recent 1290 level, pending the determination we suspect will be required as we move into Wednesday's session. That determination should be a reversal from down-to-up, with the specifics pending our opening hotline comment. Ideally there would be a false rally early, then an attempt to probe this days lows, even breaking it briefly, then turning up, testing and moving up; procedurally as time goes on. This is of course an abbreviated trading week; so we're thinking this could start Wednesday.

In summary . . . after the March S&P failed around the 40-day Moving Average this past week (not a particular surprise), we were open-minded to capturing a Tuesday turnaround, but with the CPI staring the market in the face for Wednesday, that was not anything sustainable, so we shorted the S&P guidelines. Wednesday's hook may be a firmer CPI, which has a very generally anticipated negative impact, and then the market sells-off, and subsequent turns up. The prospect that could happen is really part of the reason for the still-retained overnight short in the S&P guidelines; pending the early action on Wednesday.

The McClellan Oscillator data eased to around -100 for the NYSE (eliminating prior overbought conditions almost fully now) as the NASDAQ reading is around -38 now (interpretation reserved). Things continue happening pretty fast, but there's no overall change in our call for the last rally having ensuing risks for insurmountablility of the last top, and (unfortunately) got that in recent days; to no surprise (and in harmony with a February decline call). After the holiday, chances were expected to gradually increase for a turn-up, though in-front of the CPI, caution was the logical expectation from last week. Less so after it is out of the way; hence the aforementioned strategy thoughts; as an early possibility. For now, with a 915 premium on Globex, the S&P is over 1387; up almost 2 tonight. We hold short, for now, going into early Wednesday.

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