An Emerging Enigma?

June 1, 2001

An emerging consensus . . . against an imminent economic or technology recovery is occurring, and is perceived to be the excuse for the market's increased volatility of late. Further, the round of warnings that have been released, and are also generally anticipated coming up, are cited as somehow a 'newly sobering' aspect to all of this. Actually it's not; and we're not personally aware of anyone who expected technology overall, or capital spending in particular, to even meaningfully expand at this soon.

We think that's one reason the NASDAQ and Nasdaq 100 (NDX) have lagged their counterparts during the Spring rally; and because of that we actually suspect risk for these stocks (in general) tends to happen almost implosively (or over a few weeks), and is unlikely to be dragged-out into the actual transition to better profitability later in this year for the best, and probably early next year for the mainstream in technology.

There is no doubt cap-ex (capital expenditures) has contracted; that's been evident for industries beyond technology, for over a year, and in some cases two years. So, analysts that are worried about cap-ex and earnings aren't generally wrong; but this is not a new problem, nor is the idea that housing would swoon a bit after long-rates firmed (and that's why we suspect they'll start easing again soon, lifting T-Bonds at least a bit in the process by the way), while IT (information technology) fields remain at-bay until late this year, or more likely fiscal 2002 budget consideration at firms.

This all may be surprising to some investors, though we're perplexed to consider why a professional would have expected any early low for techs in general, outside of the requisite rebounds of the past couple of months, and telecoms in particular. Our own view consistently has been that such fundamental recoveries are forestalled until late this year and into next, at the earliest. (There has been some resilience in a very few areas; and the general economy and stock market have not experienced so deep a purge as the tech sectors; nor should they. And that's a redeeming factor in all this, as relates to the markets ability to weather the not-unexpected storm, or more later.)

Technically . . . this is the kind of matter we discussed in last night's DB, as relates to a likely 'L' shape to the economic recovery, or at best a 'U', while stocks may have a rough go of it for awhile, though that doesn't mean our forecast correction won't be more than (at worst) a test of the lows, though ideally this wouldn't happen for major Indexes or Averages such as the Dow Jones Industrials or S&P.

…And this is what in fact was described by our warnings over a year ago, relating to a collapse, rebound, secondary purge (etc. in the market), while the economy and the market had to go through varying variations of a 'basing period' before confidence to any large degree would return. Now that's where things get tough, because what we got was what we projected for the past couple months; a run-up that broke-out from technical resistance just slightly; enough to bring-in doubting technicians or even the reticent managers, during the short-term topping process, where risk would increase.

We didn't mean to poke fun at them (none of us are right all the time), but we did note and expect that it would take 'confirmation' of strength to bring in high-level buyers for a short-term peaking process, after which the market would drop ideally hard enough to make the very same players doubt the wisdom of their belated market entry, and if all went well (later this Summer) we'd have a new upside quietly developing while the very late buyers (for the completed rally) are flip-flopping back to a bearish stance, in an idyllic setting as the market 'confirms' big new weakness, before probably rallying.

Now we don't mean to make light of this (despite having forecast something like it; a little early June upside fling or not, with lower prices later), as we aren't oblivious to a chance for the rebound to appear to be a bear market rally with a false-breakout (in any event a pattern we looked-for), with some expectation that the structure will hold sufficiently so that the pullback from overbought will (in hindsight) prove to have been just that in the months ahead, and not the beginning of a major and painful new rout.

An Emerging Enigma?

In this regard, a lack of depth to the overall market's internal decline, comes into stark contrast with the fear (which we are not unaware of) that this could be the time where debt is just too huge, and where help from the Fed is just too insufficient to stimulate the degree of 'reflation' necessary to offset the woes of the debt laden consumer; not just the debt-laden companies. Our view has been that is probably not the case; with at the same a belief that there will be more consolidations, mergers, and failures, that should play out before the end of this year. Of course if consumer spending contracts extremely fast (and so far it hasn't), then it could offset the speedy-but-belated efforts by the Fed, and that could result in a vastly more difficult quagmire to emerge from.

However, at this time we view the absurd debt as being concentrated in telecom most particularly; see general business as soft, but not horrendous; and don't see matters in a total black and white (everything or nothing) way for the U.S. economy, but with a shade of gray. (Balance is a short-term forecast; reserved in fairness to readers.)

(Discussion of Oil, aluminum and other basic stocks.) We know this is very early to be worrying about that, but it probably makes sense, rather than just taking a totally dismal attitude towards the future, rather than accepting a reality, as we had for these past couple weeks, that some sort of decline was setting-up for the market, and might even be temporarily be exacerbated by short-term concerns.

In the meantime the intraday hotline (900.933.GENE) has endeavored to address the short-term by viewing these past couple weeks (and beyond if the market were or is able) as all part of finessing a short-term top, with the intervening rallies labored, and within what we termed last week's erosion a 'preview of coming attractions', not as the 'main event on the downside'. So as we addressed the enigma aspects of this stock market decline (the dichotomy of participation, and the overpriced blue-chips at the time the financial media seems to focus as if there was nothing wrong but tech), it is interesting to ponder whether the defensive areas will be more at risk than so many value areas, which tech is and will become; though there isn't an urgency to buy; that is for sure; but there is an urgency to maintain discipline and not lose sight of a future that will not be bereft of tech (or blue-chips), no matter how awful fundamentals look now, which is as they should, and as they were anticipated to appear into Summer.

Also, as previously assessed, too many technicians and analysts got excited about two months after the lows fairly recently. That psychologically supported our view that upside was temporarily exhausted even if we ultimately see much higher levels. That, in the fullness of time, remains expected, though there was no reason for meaningful or dramatic upside recently; though there will be intervening rallies on occasion, of course. And it's notable daily stochastic work is now easing down to neutral or lower.

We suspect the Employment Report late this week will not be encouraging; that many investors are defensive in-front of that, and we suspect if we do get a rally afterwards, it will be (at best) a kind of upside fling which (on the short-term) won't be particularly sustainable. However, we would not get into a funk about this market; because every day and week that goes by brings us closer to the market's looking-ahead to growth in the years ahead (not days, months or weeks). Meanwhile, rallies are within bearish short-term structures, as forecast to develop, and which are and will remain ongoing.

In summary . . . while the immediate period continues rough, if not crucial (though at this point the crucial part is probably resolved, in favor of the downside, as expected), there may be some efforts at new upside rebounds; but our view that there's probably not much more than that, continues; especially in-front of the Employment numbers. Then we can ponder a rebound preceding further corrective action, but this all may be likely a series of knocking-around after a very terrific advance already suspected having been exhausted over the preceding two weeks, right in upside target areas.

McClellan Oscillator data continued a minor contraction of the Summation dots from last week, with favorable behavior reversing as Summation's crossed below the zero-line. Anyway just at the moment, Wednesday's -72 NYSE reading, or NASDAQ's -25 or so, reflects further internal consolidation (no surprise here), previously masked by blue-chip strength as prior breakouts gathered following, months after turnaround, but had been rotationally labored last week. An idea of a little short-squeeze towards the forthcoming weekend might be within an ongoing short-term downtrend structure if it occurs; and in any event note we're moving rapidly from overbought to oversold from a short-term perspective anyway. Much longer-term, there is no change in our view.

For now the 900.933.GENE hotline is flat the June S&P, which carries about a 252 premium Wed. evening as the futures are up a hair from their regular 1250 Chicago close. These sessions are choppy, with a downside bias, which may continue in the a.m., then try to bounce, but probably become defensive (or at minimum flat) ahead of the Friday jobs data. In any event, though the intraday hotline was on a short-sale, we closed it before the bell (with ideas of attempting an early short on a false-start rally, and then maybe a long intraday guideline, after any subsequent first-hour hit).

Gold is still being mined and refined at the rate of almost 2,600 tonnes per year.