Contested October Reversals

October 26, 2000

Hello Mr. Watson, is that you? Judging by the evaporation (speculated as potentially occurring here for a couple days before the Nortel (NT) led implosion), you'd almost think the world was in an abandonment mood regarding all the new telecommunications technologies; about to be once again content to communicate with the most primitive of early telephony methods. It won't be so.

And a market that ignores good news (such as the breakup of AT&T (T), which many have long pressed for), is of course a bearish one, but also one that may be driving towards yet another of these series of climaxes (almost 'clusters' of high down-volume days) in a miserable October on top of a horrendous September, which we did not expect to be back-to-back downward months. Now, let's even assume that the market turns and rallies at the tail-end of the month into the new one (because lots of investors will believe this can't possibly continue); well, we've got to throw in a possibility of the first rally into November failing (though temporarily) just to keep everyone so on edge that they remain essentially frightened to do what comes normally: buy depressed but likely to survive stocks, which is the normal institutional (and individual) pursuit nearer year-end.

Wouldn't it be interesting if (our former short-sale) WorldCom (WCOM) also restructures now? A surefire way to grasp how the world's not completely falling apart, is the argument from some as regards IP Telephony not yet ready for primetime, with voice-over-IP said to be years from a surrogate for packet-switched telephony. Well if so, then are these becoming value stocks? Yes, we think, though this is all very complicated. Even as the CEO's gathering in Boca Raton worry about the economy (should about their overly inflated outlook from a year ago, as we assessed at the time), there are other stories out there that shake confidence; not the least of (though few would probably think of it) is the Goodyear (GD) story; as their tires may also pose a problem, on top of SUVs overall, as one network profiled recently. All of this undermines the corporate image of stocks in this Country, and interestingly if let out of total control, can actually impact the much bigger Pax Americana stature, relating to world stability in this era, not just fiscal solvency, so we would suggest that how this bottoms in the short-run will include this temporary flight from financial assets, an intervention (possibly now or more likely in a few days), and a sharp drop in the price of Oil, which is already descending. At the risk of being too hopeful, that's a chemistry that would also logically follow, and would help this scenario, at least potentially, which otherwise risks key factors distinct from, but related to, stocks (and more).

Sure, in bear markets this is what you get, so the rallies occur but fail, but with an overwhelming perception that the market can't bottom until the economy does. No; but the market can be tough until the guidance and expectations are somewhat closer to reflecting the actual quality of results from many large companies, to which you have to add the excess Dollarstrength in the face of a yet-weaker Euro, which also contributed (though little discussed, though were primary worries in late August when warning of a September decline's risk of extension) to these further pressures. We might mention that a further intervention could occur generally any morning we awake now, despite no one discussing it yet (particularly because of that), but is more likely after the markets have digested the ECI and the next day's GDP data, and reacted over the next day or so.

Mr. Bell would be adequately amazed with the speed not only at which telephony developed, but more recently the dramatic restructuring of infrastructure; something that had to result in cracking of the strongest before a finale (or test) can be completed, which comes as no surprise for Daily Briefing readers, though of course we have empathy for the interim pain that investors suffer; for that matter even if they concurred with our call for solid declines in markets during this midweek. That is why we are less focused on the negatives of 'fragmentation' than some, who tend to still live in a world that saw only benefits of single-firm control of the telecommunications systems (a philosophy that is pre-1929 in origin, and relates to times before computers could route calls or data); thus we suspect this is a time when all news is reacted to as bad news, which either gets us a market crash immediately, or more likely an exhaustion of this selling in the general pattern call for this week, albeit probably more dramatically in the next couple of days (per DB's outline).

Our curiosity about the forecast secondary decline from resistance was several-fold: a) a belief, after having nailed last week's low with the 1328December S&P buy, that the rebound had no chance to exceed the prior congestion area on the rebound; hence our 1420-30 maximum call (and as fortune would have it, the rebound peak was dutifully there, at 1428.50 on Tuesday); b) the pattern expectation for struggling efforts to extend last week's (pre-Expiration) rally that had a high risk of failure in the beginning of this week, thus a midweek decline forecast (and balance in fact allowing for a very late comeback this Friday, or more likely next week absent terrorism or in fact anything that further undermines the skimpy remain confidence out there); c) concern that a modestly higher ECI (Employment Cost Index) Thursday could create more fears of 'stagflation', our primary worry heading into 2000, as economic slowing continues (which might be affirmed by Friday's weak GDP, generally rumored to be the report); so that d) investors would conclude no bottom had in fact been achieved last week, they would freak, while forgetting that this is fairly normal in the wake of failed extension forecasts, and proves something more, on top of all that.

Pollyanna's Myopia

That something else is emotion; the painting of all stocks in a group (to some extent) by simply single brushstrokes, rather than culling out the vast variations in many of the companies, at least so far as the way they're run, and the debt structure some have (or have not) incurred over time. We suspected, that at least on a daily basis, all would suffer to some extent, which they did. For sure it's additionally interesting that investors (and some analysts) seemed surprised by Nortel's warnings; which we don't understand. We discussed their risk profile weeks ago, and noted that it was one of the companies embracing large debt, and higher cost structures for the type of new devices they contracted for. Presumably many investors don't realize that some companies have less debt (or even cash on hand), have not committed to earlier generation technology, and may in fact be better positioned to embrace new generation optical products built more cheaply with a judicious use of laser fusing and automation (rather than the high-tech tweezers of the past), so as to be able to make satisfactory potential profit margins while offering product more cheaply as contrasted to their would-be competition. Of course this may all get sorted-out among analysts in the days and weeks ahead; but for the moment there was a general evacuation from the sector.

So, is this how we make a bottom? Maybe is the best we can say; because it remains a bearish climate (thus you have such broad-brushstroke activity), and the most recent decline (that just happens to be a bearish Island Reversal now in the NASDAQ market, given the big gaps as it rallied last week, and the downward gap this morning), clearly threatens to take-out a NASDAQ low from the prior week that was really just awfully pat (at 3000), and didn't fulfill our lower count (as readers know), unlike action of the S&P which along with the Dow Industrials, barely did so.

Where that leaves us is near the end of institutional fiscal-yearend selling; pending a resolution, as regards today's forecast decline, whether that be in the milder form (reserved) in December S&P (unlikely sufficient to complete this), or more likely (reserved for ingerletter.com readers).

If so, why not be more optimistic about upside goals? Well, we are reasonably so with respect to November/December; but hate to remind everyone of something we've had to repeat for weeks on end; we're not that bullish about (reserved), though there sure are political and even military variables that could also impact matters. Even after warning of this week's drop, some continue to 'paint' us as permabulls, which isn't correct. We do see higher prices over a longer period of time (years), probably lower as outlined last night again, and potentially view a rally in November & December (should it occur, and not necessarily from the starting line), as a questionable rally, because the structure of markets are too codified to allow constant volatility in one direction, which means all of this is likely part and parcel of one structure, but not a one-way decision (or all-encompassing) market movement, which means that when extremes of a bearish oversold condition are seen, one has to be prepared to shift (as did we last week for a limited goal, which just happened to be exactly the 100 full S&P points we ideally targeted for the rally) on a dime, and while most of our gains are on the short-side in the December S&P for the moment, that doesn't mean that will be the case next week or month, even if (remaining outlook is reserved).

Daily action . . . thus has remained flexible (not perfect, but not doctrinaire bullish or bear either) during these past weeks, having anticipated the late August top, known what was involved with a harder decline in September (as excessive Dollar and Oil strength combined as caveats to draw-out the declining phase into October, which stopped in almost a too-pat way, but we caught it as you know), and now is declining (per call) at midweek after entering our rebound target zone. (As of posting-time, a most recent short from Thursday morning in the 1380's, was closed in the high 1350's, playing for speculative rebounds; not necessarily more on the 900.933.GENE hotline.)

Though not particularly pertinent for those who don't scalp S&P's, we are proud of the somewhat between 3000-4000 points gained in Wednesday theoretical hotline guidelines (900.933.GENE), though there were a couple of data-feed gaps (thus the noted range). Certainly this was one of those days were S&P scalpers, considered aggressive, in fact fared far better than shareholders, almost in any investment sector; not just in the session's cracking of fiber optic victims.

Technical; (most) Daily Action; Bits & Bytes and Economic News: (reserved for subscribers)

Remember, just the other day you had a 15% rally in NASDAQ and the NDX; this is just as fast on the downside, which the powers-that-be don't like to see, but can be a normal way to cement an eventual upside, but first presenting the market in a way that makes hope appear vanished. It is, as outlined last night, ironically the bullish alternative to take this straight-down, for reasons as speculated last night; though of course there is a more negative prospect if it doesn't reverse as postulated (and as we'll explore more about right here, in comments for our regular DB readers).

Finally, we should point out that a normal bear market characteristic includes fast-paced but very short-lived rallies; which we knew before this week was a risk inherent within the wild ride up last week, and into this week. And we knew something like this (for the Senior Averages anyway) in fact was likely; hence an early call for up early this week to congestion, then big midweek drops.

In summary . . . the market fought, but ran into resistance Tuesday precisely where expected, was expected to falter into the current price area (at least), and has done so. The drama of this may exceed the forward risks; though probably we have to get through the ECI & GDP numbers, and possibly into a washout of the character described (in tonight's comments). The bigger saga of the market remains questionable, with the proviso that the 'stealth bear' actually has been well underway for over 2 ½ years now (almost historically lengthy) by our work since April of 1998, as money concentrated into a narrow handful of leaders to give an illusion of bullishness for months thereafter, particularly after the LTCM fiasco led to a Fed-led intervention. This point is again for the edification of those who think some sort of new bear has started, when that's impossible for a very old existing one (outside of the modern version of the 'nifty 50' that have now cracked hard), though months of languishing price action can certainly occur, interspersed by outlined rallies.

It's also important to make the point of multinational downside duration, because there's so much talk about a 'bearish duration' out there, when those typically doing so are counting from the high of the Averages, not the highs of individual stocks viewed with some adjustment for capitalization or for the changes wrought in the Averages over the past couple of years. Maybe the question to ask is whether the fear accompanying the narrow remaining leadership cracking signals a low in the near future, as opposed to measuring some new bear, when there isn't one. The major risk to average investors probably is the misperception that they've been in a 10 year bull market alive to this day, which hasn't been true for the 'new economy' stocks for most of this year, or for the multinationals as a whole for working on 3 years, and that's a very important perspective on this.

Meanwhile the McClellan Oscillator dropped to -59 in perfectly normal fashion after the move to near the neutral zone, and in harmony with our call for failing upside in the last couple of days; a drop down, and then we'll see if the market (and powers that be) engineer the next phase move. For now, flat the S&P after a very good day and a terrific prior week's turn, we are flat overnight pending the opening. Wednesday was forecast Tuesday night to drop fairly hard, rebound, and then sell-off again. It sure did; to say the least. As of 8:30 ET, S&P premium is a surprisingly firm 1180, with futures actually up 280 from Chicago's 1374 close; following our indicated top in the 1420-30 zone yesterday, right at the lower reaches of the preceding outlined 'congestion' prior to last week's well-handled reversal, which was expected to falter accordingly this week so far.

Gold is widespread in low concentrations in all igneous rocks.

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