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Competitive Threats Challenge Stock Market

May 18, 2000

A moderately negative Wednesday . . . was the expectation all week, particularly as we got the desired rallying ahead of the FOMC meeting, and during the Retail, PPI and CPI numbers as we desired. Hence, a selling wave was called for in the wake of the FOMC rate hike, both initially as well as after the comeback into Wednesday's closing action. The balance of the forecast remains as outlined, as there's nothing about Wednesday's decline that inherently changes the equation.

If there was a concern about that further comeback into the nominal Expiration, it might be tied to the fears emanating out of Chernobyl Russia, where another nuclear accident has quickly fanned recollection of how fallout spread across the Eastern parts of Western Europe and boosted most key commodity prices sharply in the wake of that catastrophe (an inflationary consideration). Not to be presumptuous on this subject, we're very delighted Russia is denying an accident occurred.

Overall. . . for days ahead of the FOMC meeting, we forecast "nearly defiant behavior" on the part of the stock market, by virtue of expecting the Dow Industrials and S&P 500 essentially to rally ahead of the key rate decision, which everyone expected would be on the upside, although the Discount Rateaspect was generally not considered. Many technicians who became worried about the market (primarily) after the April breakdown were proclaiming continued worries before and after the run-up, and are probably hoping for the market to break further so they can enter a slew of well-advanced stocks relative to the April lows they missed. Some are fund managers in fact, who embraced yield-oriented equity approaches, which was essentially getting religion after the horse was out of the barn door (April break). Ideally this would result in high level support at a series of levels coming in the future, although there has not yet been a sufficient upside thrust or breakout ample enough to engender great confidence on this score.

In any event, expecting a down Wednesday in the wake of higher market action of the preceding four trading sessions, we're preparing for another intervening low, and then efforts to lift into the nominal Expiration, while clearly recognizing that some of the Expiration's "spunk" has probably already been reflected in the call for upside coming off Wednesday's low of last week, and earlier this week ahead of the FOMC. So, while we are suspecting one more thrust up, the June S&P is now increasingly overbought hourly, and daily basis, so we're getting prepared for the forecast's continuation, which is bump-up from a low by midday Thursday, and then (reserved). It's all fluid in a choppy environment, and remains very news sensitive also.

Hence, while we'll continue to do our best to identify these moves, nothing should be taken at all as cast in stone, as that's impossible in this kind of situation. Nevertheless, the general patterns as called for have continued to unfold, not only early this year, but in March, April and in May too. The May idea was the early month high, the mild decline, the secondary test completion over a week ago, and then the bump-up into Expiration before ideally you'd sell-off a bit again, run up a bit into early June, and then we'll see. For now we're less willing to take staunch bullish positions on an overnight basis, because we've stewarded this market through the declines and again well towards an overbought short-term condition. That doesn't mean ensuing declines won't be gentle and contained and controlled, as in fact that's what we're hoping for barring external shock over the course of the weeks and even months ahead. If the market holds certain levels when it's again tested (milder versions of the previously identified tests), then we're potentially set to see higher levels than hardly anyone really believes, despite occasional major-firm handholding that remains (almost always) oriented towards a favorable bias. We do not do that unless we believe it; and in this situation while tentative, it has been our position since calling the day of April's low that we could well have an early bottom to the bear market in tech, that followed the completion of a 2-year bear market is most big-caps.

Fundamentally . . . to us the riskiest aspect of this stock market must be the competitive threat provided now by simple interest rates available in such instruments as retail-offered CD's. When a pension manager can obtain 7% without risk in short-to-intermediate paper, there's a real great temptation to not take untoward risks in the equity markets. That may not sound impressive to a lot of new era players (especially those not interested in 7% pre-tax, for sure those that in mostly high brackets), but we know how managers will demur risk when able, and don't fault that at all. The actuarial goal of a pension manager is based on total return over the years, and when he or she can double a portfolio without risk in a 7 or 8 year period, they'll tend to do that. Less or no angst, fewer hours of research and work, lower transaction costs, and they meet their targets.

Individual investors are not normally satisfied with such goals (not in this era), especially when a new argument of inflation-adjusted returns will likely be the clarion call to keep them interested in stocks. (Funny, because those calls will be coming from the same crowd that didn't believe us at all in the past year when we indicated inflation was coming, with some stagflation risks of a sort.) In any event, with no-risk yields climbing, and the M's (money supply) contracting, there's not the kind of backdrop which suggests a market taking off to the moon, but that doesn't mean it has to collapse either. What it will probably do is essentially adhere to the forecast overall, as it has up to now, and that means on the defensive after Expiration, up a bit thereafter into early June, and then probably down somewhat, but not new lows. That would give us an indecisive market tone, probably in front of us into approximately mid-June, but indecisive may be bullish further out, as the market starts to grasp the bridging-of-a-gap (of the perceived economic slowdown), which is all part and parcel of our macro-call for the year. It's "fine tuning"; we know that, the Fed knows it of course, and the market knows it. And some of this has to be irresolute, because engineering a soft-landing is always a tricky challenge. If it fails, we'll try to recognize the elongation of market woes until a later date; if it doesn't, then the political mood will be more robust later this year (as will the Nation's as a whole), and the markets will be potentially considerably higher than now.

To us there are no certainties in the market; rarely are. However, the idea was to recommit some money to the market at the climactic low in April (calling for that Monday-Tuesday turn over that particular weekend, which we enjoyed both here as a forecast, and also personally trading for at least a decent comeback), and then to put some more money to work in a May decline that was thought to be less severe than the April collapse (thank goodness it was). Our bias has leaned to the bullish side of the ledger for the Senior Averages in a series of waves which were realistic as related to the distinct movements of the so-called "old economy" stocks and the 'net bubble burst almost at the same time. Now, we have a market that has proven the stance of recent weeks as valid, while we indicated last night that on a daily basis the market still had its work cut out for it.

Here, in summary, the call last week was for a softer-than-consensus Retail number; softer-than-consensus PPI data; and Tuesday morning's softer-than-consensus CPI report. We got them all; massaged or not by Government is barely important, because to us it emphasizes the Herculean efforts on the part of the U.S. Government to engineer at least the perception of a soft landing. It might not be that; and we might have higher rates next year, but probably not much more in time frames a market can most readily address; the next 3-9 months. And therein likes a confidence, slightly related to the Elections, that the Fed is trying very hard to get tightening out-of-the-way. It was expected that the steepest Fed rate hike in 5 years would precede a day of profit-taking, and then another upside shot, which is what we have in mind for the Expiration, though some of that clearly was consumed by the unwinding to the upside forecast earlier in this trading week.

Daily action . . . again notes a day that was actually a fairly light volume session considering all the extreme volatility (both on the NYSE and on the NASDAQ). We saw the (900.933.GENE) hotline capture the vast majority of the upside action coming off last Wednesday's low (a week ago), of course went flat over the weekend, and then got nicely long from the June S&P 1426 level during a choppy Monday morning. That particular guideline should have been closed-out on Tuesday, particularly since we were calling for a likely down Wednesday. (balance reserved)

Bits & Bytes . . . touches on Intel's (INTC) announced new split; Analog Devices (ADI) (pick of the year last fall); LightPath Technologies (LPTHA);Hewlett Packard (HWP) and others like Digital Lightwave (DIGL); MRV Communications (MRVC) and Liberty Digital (LDIG). (Share selections originate in the monthly Letter, with occasional comments as time permits and action warrants in the Daily Briefing. Mentioning names here does not imply that we perceive any as in fact buys into current strength, and should not be construed as a buy, sell or hold commentary, as our suggestions are intended solely for our regular ingerletter.com subscribers.)

Technicals and Economic News & Releases: (reserved sections, as was most of the Daily)

In Summary . . . the defiant market did precisely what we expected of it over the past week or so, got overbought on both an hourly and increasingly on a daily basis; hence we looked for some selling at the margin, and even a short-term top completed within a few days (allowing for Expiration upside), as outlined even before this week began with respect to Wednesday's action. At this time we are not yet suggesting any significant decline forthcoming, though we know how hard it is traditionally to move a market up in the face of rates hikes when the M's are dropping at an increasing rate. We are watching this, as noted last night, and it has the potential to make us more cautious than we have been in the weeks ahead, though for now we're pleased to have gone against the grain in recent days, anticipating the market's healthy behavior coming off a secondary-test activity a week ago Wednesday, and then calling for this particular down day.

The McClellan Oscillator is currently around +1, easing from a moderately overbought +52 in yesterday's action. We allowed for choppy volatility in the FOMC's immediate wake of course, and again on Wednesday in particular. For now we're flat the S&P, and looking for a down and possibly then up Thursday, subject to evaluation in the a.m. S&P premium at 8:15 ET is around 750, with futures off about 130 from the regular Chicago close. (Much of the expiration-related unwinding is behind now, so rallying efforts will be occasionally frisky, but often short-lived.)


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