Gloomy Outlooks Ignite New Fears

February 9, 2001

Gloomy guidance reignited fears . . . that are somewhat correct regarding what is a litany of concerns that may continue to weigh-heavily on the equity markets. Those in fact include the idea that this economy takes at least another six months (maybe lots longer, depending on the sector, but not likely for the real estate and building trades, outside of overly inflated areas that were lofted directly due to 'dot.bomb' speculation) to come out of recession; an extreme 'off the cliff' slowing seen here earlier last year.

In such a scenario, there is little doubt but that the Fed is trying (desperately?) now, to get-out from behind the curve we've felt they were gazing around for months, and in the process stimulate the economy without the unwinding to historically normal or typical price/earnings ratio drops, or other measures seen preparatory to bottoms. In our view this isn't so simple, though that is a fact regarding historical troughs. What's lost on many who take that posture however, is that there are two times that multiple compression is typically seen; on the way down into a bottom, and on the way up, off the lows. And yes, whether we're coming off a bear market rally or the correction (our preferred structure, though there are no assurances), such gauges would be similar.

It might again be emphasized that high multiples are normally seen at tops of market action, and again at bottoms; the former because prices (like 1998 and as late as the first part of 2000) are discounting the hereafter primarily, and the latter because profit results collapse, and even with prices cut in half or more, you've got high earnings. It is a reason why PE ratios are not a particularly good measure of price performance, or particularly as an assessment useable in a current rating of almost any stock. Let's take Cisco (CSCO) as a for instance; their earnings were actually just 12 cents or so; without allowing for non-recurring items and other costs. It's mentioned here primarily because, unlike some other companies that progressed a bit in creative approaches to accounting, the reflection's one that is still trying to impress a skeptical Wall Street crowd, rather than reporting miserable results, letting the pain be felt come what may; then hoping to surprise on the upside many months later (if business turns back up).

Does this matter to the Street? Shouldn't all that much; mostly is psychological. What investor would expect a technology stock to outperform (meaningfully) in Q4 would in fact be a rare bird indeed; outside of a few newer-tech stocks that have only recently been coming into their prime, which can't be said for the old standby's like a Cisco. In fact, we would argue, that (these type stocks, balance of this commentary reserved).

However one of those worries shouldn't stem from a superficial assessment of simple 'sentiment' from the advisory industry, for various reasons. Nevertheless that doesn't mean we are not going to simply continue this rapid oscillating correction, as forecast for February's first half. And a break of 2600 in the NASDAQ doesn't make the stock market a buy in-and-of-itself, but was a 'benchmark' we expected to be broken on the way towards (a benchmark of, specifics reserved) the correction, which oscillates. So that's not to say the markets a buy here (it's probably not), but means that as players tend to surrender, as reasonable pullback areas are met and/or exceeded, we want to be increasingly alert to the prospect of a completion of bottoming activity down the road. (Comments on Nasdaq 100 (NDX)levels follow here, and must be reserved.)

As far as behind-the-scenes 'sentiment', we can't agree with the backdrop provided in a slew of surveys. 'Bullishness' is said to be almost historic, yet we can't find analysts or managers who are 'really' that optimistic. If so; very few. We think the surveys tend (and that's from some knowledge of these offhand 'polls') to ask questions like; 'now, with prices fluctuating in the wake of the Fed's move to ease rates, do you expect the stock market to be higher or lower in 12 months?'. Or how about 6 months? Typically an advisor may answer 'yes' to the first question, and possibly to the second. But, no surveys tend to ask 'are you buying with your own money, right now?'. We suspect if they asked that question, the answer might be something like 'carefully watching', or seeing how stocks 'settle-out', or 'waiting for a test of the lows', or something similar.

The point here is that the actual sentiment, in our view, cannot be as optimistic as the surveys portray, or you'd have had a more monolithic advance in the market over this past month. Rotation, which is what we had, tends to come when sidelined money's at least moderately in a quandary about what to do, not when it's robustly optimistic. In a sense, we think this augurs well for the Springtime, because if commitments are as restrained (or were) as we suspect, then the chances of that money coming-in on the buy-side of the ledger (during March and/or April for example) are enhanced. For now, this is a decline that we forecast; that is not over, but that is working its way off of recent highs in alternating fashion, but nevertheless doing what it was supposed to in our view. May not be ebullient, but was a realistic call for the market, and isn't over.

Summarizing; the market was projected to rally from late December/early January, to approximately late January/early February, and then to have a fairly orderly decline of the character that would look about the same, whether the drop was following a basic 'bear market rally', or whether it was just a normal pullback after a bullish upside leg. I might add that while there are always possibilities of more downside than we targeted for this decline, there is nothing about the action to suggest that, as of yet. In fact, as a slew of corporate disappointments exacerbates (or reinforces) this reticence to buy on the part of some under-invested managers, it may increasingly look like the kind of drop that helps set-up the ensuing next upward phase, very much as desired. But, we are not likely there yet; though we are about two weeks into the short-term rollover. It is probable that we are about half-way (or further through it), but every time we get an intervening rally that fails, it probably takes that much longer to conclude the affair.

It still remains a market where the growth strategy must be augmented by the Fed, and other monetary and fiscal stimulus, plus a resurgence in consumer confidence. It is not because we merely care what technology stocks do (though we do care a lot), but because (as I've remarked before), there is no incidence of an ebullient America without technology advancing. Hence, smokestack (old economy) stocks can only be capable of providing interim support, but can't be looked-to for long-term leadership; at least not alone. And that is what's inherently wrong with analytical conclusions that presuppose the tech speed-bumps are going to be enduring, but that somehow there is a capability of the old-line companies to rotate into control. Nope. If the quality of a decline is enduring, then while the old-line stocks can help maintain strength (or there can be an illusion of strength), they can't buttress the overall market alone forever.

We should emphasize that isn't leading to a long-term bearish conclusion, but to why it's our suspicion that technology will bottom (the serious stocks that haven't already), and why the projected pullback in February is presumably just that, not the start of an irrecoverable drop. And that's not just because of monetary stimulus; which assists. If we look at the T-Bondpattern, we see what appears to be a correction conclusion as a matter of fact (a projected drop), not the beginning of enduring higher rates. It may even be that the Fed will have to pull-the-trigger on an interim rate cut, but not in any rapid-fire fashion yet, though that may still occur later this month or early in the next.

Overbought stochastic readings have continued for days now; even in the venerable Dow Jones Industrials, that had been playing catch-up with previously roaring NDX and S&P, as well as small and mid-cap action. Rebounds that (from our perspective) weren't expected to be a greater move than what we got (something like 1370 at best on the S&P futures earlier this week); a secondary phase of decline (possibly later in the week after an effort to revive things in the wake of early post-Cisco selling early Wednesday) that will probably fail and really make them a bit more nervous; and then ideally the balance of the call, and ideal completion of forecast February corrections. (Most of these moves have been successfully caught by 900.933.GENE guidelines in addition to the generally correct interpretations and recent ingerletter.com forecasts.)

For now, with the belief that last week's rally essentially completed the move, with the rebound this week ideally to lower highs (that's likely ensured by the ongoing action), and internals turning mildly south before today; well, there's really little surprising with all of this market schizophrenia following Cisco's news, as that and the pattern calls were in our expectations. Since there apparently were crowds expecting another run on the highs (that was not our early February view, thus no angst or disappointment in the Dow's and S&P's inability to hold their rallies in recent days, as we didn't think they probably would do so in any case), and of course have outlined problems that could create the desired swings when or if the market breaks to lower levels as we move towards mid-month, or even slightly beyond. This could get a bit melodramatic, but that would (we think) actually help a subsequent upside. Stay tuned on all this.

In summary . . the market this evening seems unusually nervous after Cisco's poor report, though we thought the Company had indicated this likely coming for weeks prior; no idea why anyone rallied the shares ahead of that, or was disappointed later, although we suppose those who took a second look at the stated results would have been sobered; though again, their inventory-build and slowdown is fairly typical (from what we're hearing) within the networking, and electronics industries in general too. It is definitely tough to define where a stock (or sector) bottoms-out, sources previously 'on the mark' in the tech parts business, continue to note a dearth of new order flows.

The McClellan Oscillator data is around +11 for the NYSE as the NASDAQ reading is around -7 (following a nominal +3, which meant less when occurring around what's the 'zero-line', thus probably wasn't calling for a meaningful down-to-up reversal yet, that would 'stick', as suggested again last night. There's no overall change in our call.

So far this is a well-handled internal correction; previously noted to have some risk of things getting a bit nervous as it evolves towards a suggested likely completion later. S&P premium on Globex is totally different than last night; at around 1041 instead of at a discount to cash. Futures are around 1351.20; that's up around 170 from regular way closeing of 1349.50 or so. We might also note that, in a short month that started last week, that February's nominal Expiration is the end of next week already. We got the market falling-back some more, per overall plan, with a miniscule comeback that is probably going to try to extend, but probably is generally premature, so far. Given a belief that our original target goals were hit (and wouldn't be exceeded much) back at the month's start around 1380 in the March S&P, we don't find anything untoward for this projected decline, aside from laughable humor from the supposedly bullish (but in our view not heavily invested) crowd, or those surprised by the poor earnings reports. For Thursday, while it's not particularly pertinent to the overall game-plan, something like an up-down-up-fade day, might be a reasonable expectation. We'd tread lightly.

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.

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