Finnessing Bottoms

September 22, 2000

Finessing the area of a bottom . . . even if it only turns into a trading-basis move, was what we have said all week; with some greater emphasis on a soft morning followed by strong afternoon, a focal point of Wednesday's sometimes stressed (early in the day), but nevertheless right, idea.

Our thoughts on 'finessing' were clear all week, and really all month for that matter. They related to concepts of any seasoned money manager (we would think), who realizes he or she may not nail the low, or a high, but that the area just before Labor Day (our expected robust August rally) got the market extremely overbought, as our S&P 1520-30 targets were reached on schedule. At that point we couldn't understand the whole idea of buying after the holiday (that was prevalent), while at the same time looked for a drop in September, that should consume most of the 1st half, but would likely exhaust itself in the high 1400's unless Oil rallied further and/or theDollar lifted.

Well, we got all of that; which definitely stretches-out the timeframe for many multinationals to hit some of the earnings goals that analysts expect (that's the part that shocked them, though as we have felt consistently here that weakening Euros would damage currency exchange profitability, well before the financial press embraced the view. This only amplified the pattern; didn't change it outside of some stocks that are dependent on foreign revenues (which generally we don't own) as a result of globalization over the last generation, which engendered the phrase here regarding companies having'a majority of their growth in gross' overseas for most of our modern lives.

It is not something to be for or against (at this stage; though we sure warned what would be risks even before the 1987 'crash', and why a subtle insulation from some of these matters can and in fact has helped the American markets in the past); though you can see what sectors are notably relatively immune from the frenetic downgrading of earnings expectations for large multinationals in varying areas. There's a plus side to that as well, which we'll touch on in the upcoming Letter; as while it doesn't help earnings now, the strong Dollar does allow some attractive investments.

Galvanization

The same scenarios have often contributed to America being a refuge of sorts amidst turmoil in a number of tense situations abroad, and given our status as 'Reserve Currency', this will remain a condition dominating the 'parking' of funds in T-Bonds (though they were forecast here to correct just before a recent short-term top, as short-rates eased and long-rates firmed to adjust the Yield Curve a bit). Unlike some previous bearish warnings, we do not have the same circumstances of the Asian Contagion; though we do have emotions that have galvanized together simultaneously as Oil soared, and the Euro dropped, a risk we warned about since before the month started.

Now that we have a galvanization of thinking, there is a lopsided degree of worrying about stocks beyond the equivalent (and unjustified) elation that prevailed as we entered the month. Things of course changed fast; and that's been a characteristic of markets and emotions throughout 2000. The persistent rise of the price of Oil has caught everyone's attention (especially the Persian Gulf as we rather poignantly discussed last night), and has relatively helped most tech stocks that are domestic centric, as we suspected and also discussed relative to multinationals, also last night.

Sure, with the Euro as another record low (following continued weakness in Germany, after that counterproductive rate hike we assessed some weeks ago), and as Oil contracts are priced only in Dollars, the economic impact on the Continent is far greater than here. Thus it can't continue. Ah; is that a bullish comment now? Yes; and that's part of the 'finessing' a potential low, but with a realization that it would be nonsensical to assume (though that would be great) that we did it in one fell swoop, with today's low enduring, outside of possibly NASDAQ or Nasdaq 100 (NDX).

It might be noted that our targets in the NASDAQ and NDX were also reached before Labor Day, which is why the comment that anything more would have been a 'gift'. However, our downside's reached too; but these conclusions and measures are restricted by several things: a) not being able to know if a new -unprovoked madman or other scenario- could tip the scales towards more rather than less conflict in certain parts of the world (such as if Sadamm actually thinks he can use his temporary leverage against the West, which would have incalculable consequences); b) the realization that the stock market is almost never a straight-line series of trending moves (the only roadmaps with straight-lines are actual maps; as even roads have twists, turns and detours) so that c) anyone who believes the market is 'good' if it goes above a certain point or 'bad' if just the opposite occurs, is simply looking at the roadmap as a purist, and while generally something to focus on, does not mean the markets can't reverse after slightly deviating from orthodoxy.

As a matter of fact they usually do, as this week is no exception; depending on one's perspective of the action. For instance, while the NASDAQ held 3700 (our pullback goal was 3700-3800 after we got 4100, though neither had to be on the nose), we would have been very prepared to see it take that area out slightly (as did the equivalent NDX action), before turning. At the same time, it was the S&P that broke equivalent patterns more, and that's many days after taking-out the 200 day Moving Average. All the while the Dow Industrials have remained relatively the weakest part of the market, which is something we've addressed daily, due to most pressed multinationals just being domiciled right there. Frankly, if not for the 'new economy' components; it would be lower.

Technicals (reserved section).

Realizing that even the politicians are only now scrambling to side-step potential trouble, there are also several things to speculate take place: a)Oil, while not far from 40, doesn't get over it for any enduring period of time, or if so that demand is almost automatically impacted by that; so it drops anyway (the point being that the next meaningful move in Oil in any event will be down, barring war of course); b) the Dollar should ease towards equilibrium as outlined last night, in an effort to keep the currency firm, but not to the degree that it damages foreign economic designs that are dependent on related oil-contract-pricing, and c) that the Federal Reservecertainly will tend to conforming to ideas here; which means ideally they do nothing at the upcoming meeting.

If all these areas are addressed satisfactorily, there might not be a bargain opportunity to enter the market in October, which is why the idea of scaling-into stocks was also part of 'finessing' it. (This is the 'real world', so our opinion may be very optimistic on this score, but with a willingness to turn direction on a dime if something untoward occurs out there, or the fundamental desires as outlined, don't gravitate towards not only statistical, but sensible, means.) We continue to believe that technology is relatively insulated from some of the concerns; but not all companies (depends who their alliances are with, or who/where their customers are), and not all sub-sectors. As a for instance, we have less concern about development optical companies that have accepted newer products, but aren't expected to commence heavy deliveries for some time anyway; while just as a converse; we would be less enthused about the senior stocks in optics or networking that are of course dependent already on current telecom business, where larger debt remains a factor.

At the same time, one could argue less risk in (reserved) which is now not only more or less at half price from the year's high, but might have some interesting prospects once a delayed line of optics suddenly appears to be more state-of-the-art than offered by certain rivals in California. We won't even mention competition, because (reserved) overall business won't be awful either.

Panicky Peddling Pummeled Prices

Also, as speculated this week, we got the inverse of what we saw in late August; where that was a 'false breakout', this was seen as potentially a 'false breakdown'; thus warranting scaling-in, in an attempt to initially bottom-fish, but also being alert to the prospect of some sort of rapid series of turns, that could culminate with an explosive rally, at least in the more-insulated market areas.

Expecting (in last weekend's remarks) that panicky peddling would again pummel prices, we took the stance that either the market 'crashed' (unlikely, though we did have our bearish oil & dollar considerations all month long), or more likely had a washout low and climax of some sort. We in fact said it that way, because in an oversold (not perfectly lined-up) market, you can get the first rebound essentially unsustainable, then drop to a lower low, which convinces many that it's all over in terms of hope, and nevertheless turn at that point of maximum inflection, and run 'em up.

Given the news backdrop, we did not think this week would be simple; but we did think it would turn. Actually we viewed Monday as the washout, Tuesday as the first effort, and Wednesday as the second drop, which would imply no necessity for December S&P's testing these lows again; though we repeat, this is all news-sensitive (to say the least) and subject to change anytime. We had a structured support area of 1480-90 which was broken, and that, unlike NASDAQ (which in fact held the ideal early measure, benefiting from rotation out of multinationals to a much greater extent, as it's technology component is greater than the S&P's approximately 30%), was purged further. Our intraday guidelines did very well with this, though consistently retained pure shorts of course would have been even better, early in the week; but as everyone gets excited about the downside in an oversold market; we generally don't (anymore than we'd get excited about upside in an overbought market, like late August). And on Wednesday we did an 'enthusiastic' long.

Daily action . . . meanwhile went through a series of only slightly profitable (net ahead) efforts in the morning, but with the Dow Industrials off over 200, thought this was going to turn. The idea was not that the DJIA would recover everything (it recovered half), but that the NASDAQ & NDX (which were off between 30 and 40 points then) would likely move all the way to the plus side of the ledger by the close of market action (that they did, gaining over 30 each for the day).

That remark, made on the 2 o'clock hotline (900.933.GENE), which found us long December S&P's from 1453, was expressed as a potential 'V-bottom', and as a "guideline with enthusiasm" for the upside. We (slightly kidded) about being 'long with no stop', then modified that remark to a breakeven mental stop; which was gradually raised, and never touched. While we surely couldn't fault anyone who jumped in and then took a 2000-3000 point profit before the close; we structure the guidelines to represent our opinion, as well as discipline the hotline between comments; with a repeated admonition that nobody's going to take every shot in a theoretical structure; nor do we encourage that. But, at that particular hour we expressed (for the moment) enthusiasm for an upside effort. Yes, the market did not really look back, and no, we don't think we had anything to do with it. And yes (balance reserved, as we discuss personal strategies and forward factors).

Oblique Divergences In A Soupbowl . . . was the tone of this market this week, and while sure we got the intervening drop below the first low, that's often how a meaningful low is established. At the same time we are not unaware of how 'anti-business populism' has entered the minefields of politics; and even that plays a small part into the market's terse responses, despite the typical pro-business voting records of both Democratic candidates, in the past. We don't believe this to be a 'class warfare' struggle as the Republicans argue either; but do think the entire matter of Oil and the Euro (and probably many diminished portfolios this year) have ruffled feathers and even injected issues into the campaign that would not otherwise be present. Fewer Americans than at this time last year are comfortable with their corporate options situations; much less the markets.

Outside of the recent fundamental events we speculated about as September risks last month, little has varied from the pattern idea almost a year ago, which warned of a treacherous 2000; a break with a low ideally in May (sooner for some sectors, no time or need to review that), and a summer rally with a Fall test; and that's where we are potentially right now. We do not need to see a 'confirmation' of a rally, rather we'd need to see a denial of the weekly forecast to change gears in this market; and that would have to be accompanied with something other than emotion.

In the interim, we continue long for the moment, with a paper gain on the 'official' guideline nearly of 1700 points, but with an expected edge coming off the rebound towards day's end. Tomorrow we're actually expecting markets to open (pattern calls are reserved in fairness to subscribers).

Last night we remarked that there are suspicions that actually help the market's chances; though clearly much more work is lying ahead if it's to have a chance to successfully accomplish upside attempts. That character was expected to include Wednesday's initial effort to pullback (because there's wasn't enough oomph to just soar in an uninterrupted parabolic move from Tuesday's low point), though we noted such things have unfolded successfully in the past, as technical purists constantly argued the negative divergences, lack of breadth or a number of other bearish factors. Of course they could be right, we noted; but the market knows best. And if action can make it above the 'rim' of the soup bowl (essentially prior supports that broke down; which at this point are now short-term resistance), then much of that money that's been 'sidelined' for this month so far (as expected in at least the first half), which some commitments reluctantly coming in the second half (also desired and generally expected), could commence with some more gusto. We got the drop; got the reversal, were on alert for it, and that's why the guideline is long from 1453.

The main point last night was that the Dollar, which is just starting to drift a bit lower (good, even if it invites a slight bit of foreign selling of assets, though really shouldn't evoke very much of that, because conditions are a good bit worse and less stable in many countries), would firm anew; not good. Equilibrium is desirable; extremes are not. That's true in many aspects of life for sure as we all know, and essentially is a call on our part both for the currency markets, and for the energy market, with respect to all this. Recently, we've encountered a year of extremes; none of which were sustainable (and that's been our expectation of virtually all such moves, in various areas outside of Oil and the Dollar). This was expected to be a year where trend-following didn't work, and where selling surges, and buying purges, did work. We have not been disappointed.

Technical levels . . of short-term resistance are little changed (if at all) from last night's remarks on the subject (and please understand, must be reserved as a courtesy to regular subscribers), as are Bits & Bytes . . . also focused on 'finessing' though the results are mixed between stocks. It is about positioning, about a lot of stocks that dropped so rapidly, that while they were (clearly noted) overbought just about three weeks ago; they became essentially equally oversold of late.

Economic News & Releases: (also a reserved section)

In summary . . . the Trade Balance was again unfavorable (by favorable if you're importing, not exporting), and the Beige Book reflected slowing economic activity, which encourages us to think the Fed continues as no problem. As we move into these latter parts of September/early October timeframes, it was expected to become very interesting, because most all the negative fears are out there, but occurring after a very sharp short-term drop, at a time of year when we suspect at least some managers will be hoping to pick up bargains as the last of the 'warning' companies state their concerns, and good results of the remaining companies generally follow; commonly the way Quarterly results should flow. There is no doubt that many multinationals will be pressed beyond this Quarter, due to the Oil and Euro matters; but that actually is assisting techs for now.

As 'fear' crept into what had been a fairly orderly decline, chances of a washout were increased as noted all week; but the market basically rallied, dropped, no selling appeared in size, and just rallied progressively and moderately, again in satisfactory fashion (we don't care so much about the Dow in this scenario, though it would have been down a lot more if not for INTC and MSFT just alone, as components in both NASDAQ and the DJIA). Again, there is debate about whether this is short-covering or a turn; it can be both, and it can be better sustained in the NDX than in the DJIA, which is why we'll watch key levels as pullbacks and rallies challenged in days ahead.

The McClellan Oscillator is back down to -128, after lifting nominally yesterday; and this is what it would do if it's going to again test and then potentially reverse back up, given that breadth was still poor today (though many stocks were down less than earlier). In any event, we wouldn't want to get negative on a stock market after this kind of decline; though certainly the risks are known.

As of 9:00 p.m. we have a 2100 premium on Globex, with Chicago futures up about two points. Going into Thursday, the hotline (900.933.GENE) retains the December S&P 1453 long, with an open mind about disposition, and with expectations as outlined in our daily pattern call forecasts.

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