A Golden Summer

May 11, 2001

Dried-up trading volume . . . in the wake of predictable responses toCisco (CSCO) selling, says volumes about the short-term condition of the market developing, and is despite the nervousness surrounding the week's intraweek rallying efforts. Actually, it is very noteworthy that (on huge volume of almost 20,000,000 shares), Cisco selling was absorbed relatively speaking. That doesn't mean we buy-into Cisco's argument of a 'bottom' (which some see as proclaiming ultimate visibility), nor does it mean we don't have secular problems continuing in Networking or some telecom areas, as we outlined again last evening. However, what it does suggest is that the Street is able to contain & control pressure right here, and that leaves the opportunity to rebound in a very much alive status, whether or not we get a couple more days of consolidation.

We are generally considering two patterns here; one by which the market would 'stop declining and try to pop the top' in the next few days, and another by which the stock market is comparatively dormant for a couple weeks, and then tries the upside into a potential early June spike. We have technical evidence to support the latter case, but fundamentally the former seems more logical. The former actually is a 'more bearish' short-term argument because the edge would hardly have come-off overbought short term stochastic (and other) indications, before the market quickly reestablishes them.

The former would allow a couple weeks of indecisive behavior and then a move up; a pattern that some would argue is bearish, but more likely would be bullish, because it would have occurred after an elimination of the short-term overbought condition. Now we look at the fundamentals, which include the realization that volume was light on all declining phases; that the market's flailing right under key resistance, and all this is in front of not only next week's FOMC meeting, followed by the nominal Expiration, but is occurring before a Greenspeak address tomorrow, which might be a market-mover in-and-of itself. (Actually we've argued for several days, we'd like to see these cuts in European interest rates, which would help markets here and abroad, and preserve strength in the Dollar Index, by virtue of the lower yields available in Europe as well.)

A 'Golden' Summer?

Again, we're not requiring the Fed Chairman to lend all the weight here, and actually don't believe anything he's doing will eradicate all the problems in technology areas of concern (such as telecom) all that much faster than would anyway be the case. It is probably why the T-Bonds are firming (besides a little debt/equity shifting), though they were expected to complete their correction and have a rebound anyway in these past couple weeks (key resistance remains 103-104 or so). And the Dollar Index has remained stable (with an upside test of 117 on-tap in the days just ahead), as -at last- Gold has managed to work into overbought, with the rebound rally we've speculated likely in the Letter (and occasionally in the nightly reports) over the past months from an oversold in late March. Gold's primary trend in Dollars remains down, but this may shift in the months ahead, especially if portions of the Summer make it appear that all the efforts (the Fed etc.) will be insufficient to reflate major portions of the economy.

(After a gap-up opening here around 270, June Gold, which has not been as strong as we assessed it as being for some time in off-shore currencies, as makes perfect sense given the strength of the Greenback versus heavily debased currencies in some countries. Anyway, after that gap-up, June Gold did very little and meandered within an approximate 3 point range, though closed at its best levels seen recently. It is overbought short-term, but not weekly, so might be set for some further short-term gains of a few additional points in dollar-denominated terms. Later, much will depend on our discussion of currency matters as relates to later Summer conditions, not just the near-term, which probably sees metals spike and pause, while stocks finish their pause and rebound, and then we can address chances of a later turnaround again.)

It is not our function to pontificate on unchanging 'opinions' regarding any future price movements, or base a strategy on being permanently optimistic or pessimistic on one commodity, which isn't a strategy at all, but simply a doctrinaire stance. We've been bullish on the Gold market several times over 30 years, and while not raving optimists here, took a March posture -as regular readers know- that Gold was due for overdue rebounds. It might be more (after the aforementioned pullback from short-term spikes alluded to); that will be a function of events that cannot yet be fundamentally gleaned.

As to the Fed, we have often said that it's doubtful Chairman Greenspan is ready to submit to the 1990-'91 syndrome; at least not without a less-timid approach to money stimulus, which continues ongoing. That an incredible expansion of the money supply did not have more effect sooner, was a result of the U.S. market skirting the edges of a Deflation risk, and that masked the aggressive policy reversal we hammered home, as ongoing. That had to lead (and did) to the 3rd and 4th short-term rate cuts and even a 5th next week. The faith in those efforts continuing (and they're not likely through as of yet) compelled our equity bullishness these past couple months; appropriately.

On a short-term basis, investors are about to see the diminution of concern about the corporate earnings morass (which is not across the board, but bifurcated in sectors); a rekindled spate of reflection on the Fed's actions and monetary and fiscal trends (just today we got the House approving an almost $2 trillion 2002 budge, which does promise $1.35 trillion in tax cuts, over 11 years); and probably a brief foray over and above the resistance levels we've discussed in recent days. We doubt that won't be at least attempted again, given the proximity of Fed-related news (even if sold-into as it occurs, temporarily), and there is no change in our view of what likely happens then (at least for the near-term). We are very open-minded to another full-leg to the upside but doubt the timing works well for that (as previously outlined), beyond a short-term 'pop', after which we can address the extent of corrective risk (and maybe before too) but likely within the overall framework desired for this year and next.

Mr. Greenspan may think that he's capable of impacting everything sufficiently to be able to forestall a Recession, and that's absolutely debatable from an 'official' position over the next Quarter or two. However, if we do get the Summer interruption, look for it as potentially a 'sucker decline', particularly if certain levels aren't penetrated then.

Meanwhile, we've exited the 'macro' S&P long from the other day at 1237; later did a little comeback long at the end, for a theoretical hotline(900.933.GENE) June S&P gain of around 2200 points or so. (Our optimism continues past a pullback after a gap up on Thursday, which should become, after pausing, a challenge of the old highs.)

Superficially the market may appear more than just somewhat on hold throughout the week's sort of reluctant comeback behavior so far; though these days tried and failed early, and repeatedly managed to cobble-together some comebacks as the sessions wore on, though today's was unsustainable (but a little better at day's end). Yes we're of course aware of the reality that there's not an infinite number of times for bump-up moves into resistance without it increasing risk of a failure, but at the same time this long period (relatively speaking for a few days) of comparative short-term struggle, at the same time is eliminating some of the overbought conditions that exist, and those periods of decline are typically on light volume, which is a short-term positive factor.

For all practical purposes, as regards equity investors, we see nothing different in the picture to dissuade a belief that visibility is improving a tad (for late this year and next year, not immediately here, though some believe that, and it's too optimistic for many sectors) as time goes on. We continue to envision 2002 as potentially a decent year, for many of the most-watched tech sectors, such as PC's and computing in general, though we are not expecting early rollouts by 3G carriers (still bidding on spectrum for some) to be a big help to the major wireless players, or to the traditional Network providers. In a sense some will manage a nice comeback (or continuation) by the nature of market mood shifts; not because their own fundamentals are particularly improving. However long the haul may be, eventually many larger (therefore capable to handle their debt) networkers (or different emerging competitors) will come-back, as very surprisingly, will some infrastructure stocks that are not generally perceived to be in the midst of the revival. A few aren't financed to survive; but a couple will be.

In summary . . . productivity data suggested sluggishness in the economy; quite the contradiction to how investors welcome that, but then don't welcome poor earnings. What do they expect? Of course, immediate ebullience and recovery. No, and that's probably a plus, as the market has shakeouts such as today's, and probably in the morning (Wednesday) as well, and then hopefully takes a crucial shot at resistance.

Regardless of opening action, we anticipate yet-higher prices, for the moment, and then we'll evaluate from where (hopefully above resistance) corrective behavior might become more decidedly likely. As of 7 p.m. ET Wednesday, on Globex, the S&P futures were showing a 202 premium, around 1257.55, down a couple ticks since Chicago's regular close of 1257 today. Looking for post-open pullback; then higher.

18 karat gold is 75% pure gold.

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