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Capitulation Psychology?

March 2, 2001

No Fed action and no market leadership . . . highlight the latest effort to penetrate the old lows, which is underway, and being transported from a NASDAQ affair to the Senior Averages like Dow Industrials and S&P 500, as capitulation psychology again grips the markets. While rallies have been unsustainable, and some failures in the areas speculated, we did not expect the Fed Funds rates to be cut inter-meeting (or at least in the proximity of a Presidential Budget address or Greenspan testimony) but have not changed our viewpoint that rates are going lower in normal progression.

While the Fed Chairman's allusion to the slowdown being possibly 'weather related' was absurd (couldn't believe that's what he actually said), and certainly that muted a market that was overly-prepared for Mr. Greenspan to emphasize the negative, we're not at all convinced that his remark is a good reason for any further macro surrender, though tinges of that are evident in the current market. Rather we suspect he knows, or suspects, the NAPM number in the morning won't be quite so horrendous as many champions of lower rates (or dire economic straits) would like, and has thus landed a counter-punch to anyone so brazen as to try to preempt any announcement of a rate cut by the Fed. For the moment, the action's about as wild as any in 'Wayne's World'.

Again, we think the economy is borderline on a harder break; that earnings are awful, and will not immediately improve (though there are always some exceptions), and the Fed, in the process, has the markets exactly where they want them; more vulnerable to a 'surprise' or conventional cut in rates, in the normal manner. If the NAPM or other data is not supportive of ideas of deepening economic woes, then the cut will be less, but probably not nonexistent. However, we would remind everyone that many critics of the market lately, have switched from emphasizing poor business conditions, to all the critiques of how rate and tax matters won't impact the market. Interesting, that's a trend of negativity, that implies everything that can go wrong will go wrong, or worse, that all alternatives are bearish. And it presupposes that more damage must be done before a stabilized tone can be reestablished. The Earthquake in Seattle (along lines of, seriously, one of our concerns for 'earthquakes' being a major worry this year, in our yearend outlook; which tended to focus on Japan, but also nominally on the West Coast), which presumably won't awaken Mt. Saint Helens, fits into this psychology.

Sure, in a bear market things feel almost insurmountable for awhile; most assuredly in sectors that have a traditionally slower benefit from easier monetary policies. Point is, we don't believe monetary policy is going to 'cease-up' or anything, and we always will welcome an earlier internal halt to an economic slide, without the necessity of putting the onus more on the Fed's part; though we are suspicious of claims for improvement at this point, and certainly the 'weather' as an explanation. However, a couple nights ago, we did observe in our Daily Briefing that computer sales were actually improving for at least one company (our own tests of demand, not formally announced reports), and that might be an early hint of some favorable trends expected for later this year. The positioning of the VIX (Volatility Index) again approaches short-term low points.

In the interim there's no doubt the burden of proof is on business (not the Fed); but that historical probabilities remain pointed towards lower rates to assist, just not in a manner coincident with public testimony's; nor were they expected to be, nor should they be; lest the market become accustomed to speculative between-meeting shifts.

Daily action . . meanwhile, saw the (900.933.GENE) hotline guidelines calling for a sell-off starting midstream during the Fed Chairman's testimony Wednesday, though we actually did not play that particular move. However, despite two small losses in the morning tries (and a later breakeven), we more than made up for that as the day unfolded, by virtue of a very intentional reversal from short-to-long at 1232 (didn't know it would only be just a point off the low, but was); then reversing back long-to-short at 1242. Taking gains on that final effort; today's net results were again quite good for those persistent players. (Balance reserved.)

Bits & Bytes . . is a reserved section, but touches on conditions for stocks like Intel (INTC), LightPath Technologies (LPTH), JDS Uniphase (JDSU),Rambus (RMBS) and Analog Devices (ADI) tonight. Not all are recommendations of ours; nor are any to be considered as a buy-sell-hold-or short, merely by their inclusion as a mention.

In summary . . . the McClellan Oscillator data eased by an often-negative (-1) for the NYSE yesterday, with today's reading at -104, while NASDAQ's reading at -45. which happens to be a potentially negative -4 nominal daily change in today's action.

That there's poor business conditions and no leadership goes without saying, and it's a time when it will take political initiatives (including taxes) and an optimistic society to turn the outlook around. When that happens the favorable impact can be very fast. We don't expect Washington cheerleading in earnest until after the Tax Cut is voted. CEO's are almost always reacting (understandably) to the absence of visible orders, and that's precisely how shortages crop-up in the earlier phases of cyclical upswings.

Whether that's a curiosity for later this year or next isn't known yet; though what we're fairly confident of is that such a change in demand is forthcoming, and that the stock market will anticipate that before it's visible in corporate optimism or economic trends. This was the thrust of our comments last night, and today we have a market that now is disappointed with the idea that things don't look worse. Interestingly, while we have no doubt interest rates are still headed lower, an early arrest of decline is desirable if at all feasible, though for now it's not unlikely the Fed's Chairman merely had a good story about this economy, which won't be (yet) supportable by many industry results.

For now we are flat the S&P, after very impressive gains overall in recent days. That includes the long from last Friday at 1219 sold Tuesday, and today's mostly shorts in response to the action. As of 7:30 p.m. ET, March S&P is around 1238.70; down about 330 from Chicago's regular close today; currently with a -134 discount to cash. (Again; after good short-sales -and successful interim long- Wednesday, the hotline's first effort Thursday has been to enter a guideline March S&P long at the 1227 level.)

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