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A Diffused Time Bomb?

October 20, 2000

Was the 'time bomb' defused? Partially; which is about all one can say about the kind of day in fact starting precisely as negatively as suggested, particularly in the wake of the IBM (IBM) post-close report Tuesday, which we thought would give us a huge downside in the morning, aided by the drop in JP Morgan (JPM) and other financials, which have had some comments regarding at least some lending and other debt structures, that have worked on taking the Bank Stock Index (BKX) down fairly hard of late, after what had been an impressive rally in that area. We generally viewed the previous evenings wild and wide ride on Intel (INTC) as anticlimactic, expecting it in position to rebound, whether than rebound turned into a rally in a downtrend, or a good bit better.

Tuesday we argued that the time to worry about 'ticking time bombs' was not now, and that the expected plunge Wednesday morning would likely be a washout, whether a pivotal one or one of a series which happens to include last week's, which was described as likely a 'preliminary to a bottom' or 'preview of coming attractions'. It was both, emotionally, and from a capitulation standpoint; thus in characteristic fashion for this year, a uniform bullish or bearish description of the stock market surely doesn't describe the rotational destruction, or conceivably, the rotational bottoming process. Sure we have empathy for those who can't take the heat; though probably many either haven't been through these type of markets in the past, or tend to go with the flow of panic, rather than leaning against it. Sometimes it doesn't pay to try catching falling safes; as warned earlier in September, when it became clear our forecast drop starting in late August (when all upside rebound targets had been achieved), would indeed be aggravated by excess Dollar strength, Oil popping its top, and as time wore on, low-grade war that unfolded in the simmering Middle East caldron. (As of presstime, the ceasefire is not effectively implemented.)

These in fact were the caveats we warned at August's end could make things worse than we had outlined; and they did. Definitely not levels as preordained as frantic market moves we'd caught over a slew of calls in the past two years (and partially because we don't like being too bearish in front of a National Election, which obviously took a backseat to all these other factors this year); but at the same time a series of moves that had a better chance of culminating something, than of initiating anything, contrary to popular technical wisdom, the madness of crowds, or the grand delusions of permabears, who somehow think you'll eviscerate a market that already exceeded the 'quantitative analytical' movements of all modern peak-to-trough drops for various sectors, and that includes assessment of the 1987 'crash' magnitude. And yes, October itself for sure was a part; not only because of emotion, but because of mutual fund fiscal yearend tax-related sales.

As for the stability in T-Bonds, that goes a long way to suggest that today's selling in Utilities was not an indication of higher interest rates, but rather some of the money recently going into Dow Ut's, coming out and probably moving back into technology, from where much of it likely emigrated in recent weeks, as the panic accelerated. The market remains spooked aboutOil on the ascent a bit, but shouldn't be afraid of the Fed hiking rates, regardless of the higher CPI data. We have no illusions about the Fed; and do not think they tend to bail out markets or desire to be seen as always there to bailout markets; especially after the pressure put on them back in 1998. Nevertheless, the illusions they have about inflation will be derailed by simple economic realities.

Technically . . . this worked down to a potential maximum target measurement from last month's Inger Letter (December S&P 1325 or so), which filled a gap from last October in the process and which reversed in 'V bottom' character once more, again resembling a key reversal. Certainly it is similar to what occurred last week, but a bit earlier (better) and in-front of the nominal Expiration.

(Much of this section is reserved for subscribers.)…we were excited at prospects of jumping into the market under extreme pressure once again early Wednesday, and did that from the get-go. ……Interestingly this coming year we may have more problems for those big companies heavily involved overseas (lingering effects), while smaller and mid-caps, that are not cash-starved, and survivors (especially those making money or key high-tech products), may do particularly well.

But, it should be considered that all this is now taking place in a series of mini-capitulations, most of the former leaders are already down to fundamentally-pertinent relationships, which can mean something, particularly for those companies that are not providing 'grim' guidance for Q4 and/or Q1 results, and that history is rife with 'non-confirmed' turns in October that weren't embraced by a lot of players, but that nevertheless turned-out to be quite important when viewed in retrospect down the road. It is partially this realization that will not get us excited about the downside after it is essentially the horse out the barn door (now about seven weeks into the overall selling phase, coming off the late August highs), and explains why (for only a second time), yours truly stepped up to the plate with respect to short-term instrument aggressive buying near Wednesday lows as noted on the hotline both before and again minutes after, the low point of the day and the move.

Increasingly, another reason (though no road map is every particularly precise for the market) for not getting more bearish recently, is theproximity of indicators to historic relationships to lows and oversold conditions historically associated with lows, absent anything but total disasters of a type that would compound carnage already witnessed. Certainly, this is where the secular versus cyclical battles would come into play; but we think the secular decline in multinationals has been underway for over 2 ½ years, had a chance to bottom earlier this year, failed repeated attempts to reinstate interim strength, and now will conclude (we think) the downside, especially if Middle East tensions ease (a fairly long shot sure, but not the only factor), Oil eases too, and the Dollar Index temporarily pulls back a bit. Tall orders to be sure; but essential if one wants an argument that would suggest earnings estimators (and corporate guidance) has gone from overly optimistic (as suggested late last year and early this) to overly pessimistic, while they now err on the side of caution. Just a thought; but possibly the kind of thought that would dovetail in with a market in the midst of extremes, almost mirroring what was done in the other direction almost a year ago.

To be sure, things may not fall-inline so perfectly, but if they do, watch out on the upside. If they do not, then (outlined alternatives, regardless of when they come into play, will be addressed). At the same time, certain money managers who were extremely optimistic last month, now cannot see anyearnings visibility (or market recovery) for months ahead, are probably are reacting to what has just happened, more so than expressing analytical conclusions. We do not disagree as regards the next couple of Quarters for a number of companies; even for some banks that are going to be challenged with certain aspects of their loan portfolios. But we do know the market is a discounting mechanism, so at least for now, much of the discounting exhausted as desired.

For Thursday, we suspect early rallies will be resisted, but not hugely, then later run-ups may be able to challenge today's highs, which would of course measure to an eventual challenge of the 1380-1400 area again, which could very well be about where the week finishes, with much angst and without a trending resolution, as the fight about whether the post-Expiration market 'crashes' or holds. On a preliminary basis we suspect it drops a bit after Expiration, then advances newly.

Daily action . . . Interestingly, after a series of sessions in which we mostly captured base hits in both directions, including some respectable short-sale efforts; saw expectations for Wednesday as very clear with direct expectations for a washout try and turn, whether or not that confirmed strength right away, or if not, for at least another meaningful and tradable move. More to come, we suspect, after some agitation in the early going, but then we'll look for yet-higher price levels.

That call's why the opening guideline on our (900.933.GENE) hotline simply went long; observing the potential importance of the 1325 S&P area, leading to our long at not higher than Dec. S&P 1328. Though the day had not less than a 2800 point upside theoretical single-effort gain, we will (reserve our thoughts about forward patterns, outside of expecting some higher prices for now.)

We have explored our expectations for tomorrow, assessed the meaning of what was somewhat an equivocal daily close (open to interpretation), and concluded that more upside will be seen as the week progresses. We cannot be sure that the downside pressures fit every textbook finale as some would like, but also know that few of the October lows in recent history did so other than in hindsight; so interestingly if we'll err, it's as noted Tuesday; on the side of washouts that turn and are handled essentially as we did Wednesday. It is conceivable the worst is behind at least for the best, and that the rest will languish for awhile, as key stocks set the pace, and shift the trend. Hence, psychology remains fragile here, despite the market taking taking-out support points, and turning as desired. It's actually quite amazing that NASDAQ still hasn't broken 3000 even though Dow Industrials did finally take-out 10,000. We were less sure about NASDAQ (interestingly) as far as breaking further than the original ideas (such as 2800, which hasn't and may not be seen), and were pretty certain that it was essential to take the DJI down to something like the minimum downside goal of 9800 or more or less in that neighborhood, which has also been long artificially defended in an epoch struggle. That occurred today, and cleared-the-decks for a nailed rebound.

Last night we noted that we finally were jammed oversold on a daily basis (whether viewed as a test, or worse, a failing rebound, which seems evident), finally there on a weekly basis (almost as long as typically seen), and amazingly working on becoming as oversold monthly as at anytime in the recent past, since the 1998 low that Fall, which only occurred after the LTCM debacle. You know my suspicions about the nature of the action since then; and these worries continue mostly unabated, though even if valid (secular discussion last week) do not deny a late year comeback.

(Reserved.) All part of what we said last night; got us in position for leaning long all day today, or beyond, particularly if things go the way we expect Thursday; then rally towards the Expiration.

Bits & bytes . . . notes a continuation of earnings reports; some glum about the next Quarter (in harmony with our view about Q4 and Q1 meaning much more than Q3 at this point), some not.

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Economic News & Releases: (reserved section, as is most of Bits & Bytes, Dailies & Technical)

In summary . . . the morning decline of 400 Dow points maximized the pain; which (no offense) was thrilling, as it potentially ended the suffering though it didn't seem like that at the moment of increased market duress, which is why we cheered the market to the upside when it looked the worst early Wed. The time for protective measures is way behind (weeks, months or even years, depending on the stocks), with the next (albeit uncertain) effort said last night being a potentially more sustainable rebound than recently experienced. So far so good, with a little indecision o.k.

Meanwhile the McClellan Oscillator eroded to -171, renewing downside as breadth didn't chime in with the reversal, though in a sense a great many stocks were down a bit, but well of the lows of the day; thus that data looks negative, with action nearly bordering on a confirmed turnaround. We also pointed out the VIX (Volatility Index) Tuesday night, which we thought was action of the type that should culminate, not initiate, downside action, for at least the nearer-term. It did that.

After a huge single long-side effort, the (900.933.GENE) hotline is flat the S&P's overnight. With a 1767 premium around 8:45 p.m. the December S&P's are little changed from Chicago's regular close of 1352.80, with very little response to post-close earnings reports. That's a plus for Thurs.

Certainly Tuesday looked for efforts to turn a washout; in an incredibly volatile, and dubious way (due to the expectation of Dow 9800 and S&P levels being broken) but an inflection of fear seen as at hand. Therefore, we cheered the opening Wednesday collapse, sought oversold reversals, in harmony while remaining aware of our views regarding the most recent efforts being 'false' or preliminary rallies before this week; as increasing volatility accordingly generatrf better chances to complete the October continuation of September's extended decline, with (outlined) variables. For now, we continue to look for higher numbers overall, but just a little bit of a fight intraday.


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