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'Harvest of Optimism'

November 22, 2001

An increasingly aggressive attitude . . . among analysts and strategists, was seen here as most likely sort of preparing the way for a short-term 'harvest of optimism', which at least preliminarily seems to be trying to get underway over these couple of days, in which maneuvering room is limited anyway during a broken-up trading week.

As the persistent upside was becoming exhausted (as forewarned) for some days in front of this time, the overall extended move featured an almost equidistant move up, from the October low point to today's highs, somewhat equivalent of the run-up move from the September 21st panic lows, to the first rebound highs in mid-October. This comparison is more valid for the S&P 500, than it is for the Dow Jones Industrial Average. However, that's likely partially due to something we've warned of: that the stoic DJIA has so many cyclicals, oils and multinationals included, that it's difficult for it to emulate superior stellar behavior of the more-tech-laden Indexes and Averages, as we have alerted investors to expect for move than 2 months now.

At the same time, the Dow was coming off a relatively far higher level, because many institutional managers had sought hiding places in the DJ components initially in the wake of the attacks, instead of (later) gravitating to technology, or other areas. Since then, the behavior of the Nasdaq 100 (NDX), for instance, has in most forecast ways outshined that of the Senior Averages, on a comparative basis, while both areas are strong, but theSemiconductors (SOX) and other techs have led much of the move.

This was projected, as was the more-recent cooling-off in the leading tech areas after the Comdex meeting, which ended last week. As a matter of fact, that's traditional to at least some extent (balance of this tech-thought reserved for subscribers only).

Ideally, as confidence returns a bit in the U.S. economy, and companies become a bit more willing to discuss the interrelationship of technologies, you may see somewhat more significant indications of where some trends are heading at this year's CES that occurs in January. Our experience in the last few years has suggested a wider frame of reference (because of the interconnected trends) at Consumer Electronics Shows, than at the traditional computer expos. We were nevertheless pleased to see more of a focus on the traditional PC this year at Comdex, and that's not surprising, given the expected rejuvenation of the field, not only by Microsoft's (MSFT) Windows XP, or the latest Pentium 4 chips from Intel (INTC), but because of the emphasis placed on electronic communications and data access, after the horrific surprise attacks of 9-11.

Culling-out the thinly-traded (and hence volatile) moves surrounding Thanksgiving of course has only limited relevance for the 'big picture', though we're delighted to again have caught most of the moves. That included believing that Tuesday morning's twin pullbacks wouldn't result in a cascade to the downside, at least until a post-lunch rally tried to fill the gap left from the downward opening. That occurred nicely around our 2 o'clock hotline (900.933.GENE) comment, allowing the reversal (by intent) from long-to-short at the time, around the 1152 December S&P price level, or even a tad better depending on executions, if one indeed concurred with our guideline thinking. As the afternoon progressed the downside took us out at in the 1146 (or lower) area, so the combination should have yielded a theoretical net gain in homerun (+1000) territory. (Guidelines are intended to assist, with investor decisions entirely their responsibility.)

Daily action . . . for Wednesday anticipates some sort of effort to turnaround again, if only because the market (though having a little late-squaring) eased to the downside in later trading, partially on another Anthrax scare (unusually in an octogenarian lady) and partially on various rumors of unauthorized helicopter flights over secure areas; in this case Camp David (though the President wasn't there; he was dedicating the Robert Kennedy Justice Department building name change).

Also there was probably some concern that Oil might have bottomed. We suspect at the moment it's just a rebound from oversold, but is not out-of-line with prior remarks that traders were getting too excited about the downside after it had fallen-out-of-bed. Certainly stories that Norway and Mexico might go along with OPEC if Russia does, contributed to the rebound; though we would suspect that kind of thinking is just a bit short-sighted (especially from allies) until we get the economic recovery in full swing next year. Later, we were the first to argue some equilibrium away from extremes in pricing make sense; having forecast both that $30 oil would collapse below 20, and that ideas of $10 oil were not only unlikely, but would not be bullish beyond just very short-term considerations, due to the implication that prolonged cheap oil could not of course be expected to prevail if the economy indeed recovers; thus it may be bullish short-term to see our forecast recent plunge in Crude, but bearish long-term should it maintain low price levels beyond a few months overall, during which it is stimulative. (Reasons for an advantage to price equilibrium vs. extreme, noted in last night's DB.)

Technically . . . this is a reserved section for our regular subscribers only, as is most of the technical, daily or other comments most always. Thanks for understanding.

Meanwhile, T-Bonds dropped over a point again, pushing long-rates solidly over 5%; a further indication that bond rebounds (drops in yield) are (at best) tests of the lows for rates achieved about 2-3 weeks ago, and as suspected a very likely evolution that would complete the cycle for rates, barring catastrophic news that sets the U.S. back. That is why this DB emphasized 3 weeks ago that it was a great time to nail low rates in refinancings and new mortgages, and not be greedy. Interestingly, it was the low.

The Dollar Index eased a tad, but remains relatively firm; and is at about a 50% level of retracement of the drop from the indicated mid-Summer highs, to the pre-war lows. Since the New York and Washington surprise attacks, the Dollar Index has firmed quite a bit. This supports the idea of confidence in American economic recovery, that we have argued has been assisted, not thwarted, by everything that has happened on the fiscal and monetary fronts, both ahead of 9-11, and certainly thereafter. One of the most compelling has been the long-bond cessation, which reduced all effective no-risk returns, and pushed monies to corporates and also to an extend into equities.

For now, there is no change in our general belief that the December S&Pwas or is in a short-term topping phase (specific comment about targets, pullbacks or the ultimate goals are reserved for readers). We suspect price levels will considerably exceed that in time, and suspect that (as we argued since mid-September) odds favor accidents on the upside on occasion, more so than the downside, barring kinds of cataclysmic events we can't really factor in a market picture, except to note that when overbought any event can have more of a short-term heavy impact, than on an already oversold one, especially after a market's already crashed so long ago. That means there isn't much of a crowd to be 'spooked-out of stocks', as we argued the September purge would complete, in any sector that the year's earlier sell-offs hadn't been able to.

As for the NDX, on the short-term we'd be surprised if vulnerability was greater than a dip to (reserved) or so, and then later-on maybe a long march (reserved, higher). After all, having targeted the 1500-1600 area as a first goal enunciated back in the sub-1200 areas of the post-attack dark days, we can't imagine why anyone would have chased strength more recently. If there are negative events, a full retracement would measure (a proportionate drop), but we really don't expect that to be fully seen.

(Overall comments about the Dow's structure, and it's measured targets are reserved for readers.) We recognize what a tough year this has been, but also are proud not to have leaned with mass panic after the attacks in September, and instead to have had faith that our expected post-Labor Day panic was ending (drops expected anyway in the post-Labor Day timeframe), and that big rallies were on tap, instead of the views of naysayers, who if not waiting for an October crash (we've believed all along that wouldn't be the case, and it wasn't), were leaning on traditional (and valid, just not of course happening when Government realizes the risk, and pulls out all the tricks to deny or defer it, as the case may be) against fears of consumer-debt-based crises. (Such concern has been in many minds for decades, but that's not the same as any sort of market timing, or especially interrelating monetary and fiscal policy actions.)

Surely, while reminding everyone that (barring horrendous news) the long-term was and is up since the attacks' washout and reversals, we aren't going to get caught-up in the idea that 'confirmation' means up without rest periods. It also doesn't mean we go straight-up from here without a pause, though complacency by both the sold-out bulls and probably wrong-positioned bears, made the cool-off forecast interesting in these past couple days of alternating shots at higher levels and intraday reversals.

Again, this is not an exact science; if bin Laden is eliminated on any given day soon, the market will still add to gains; although if it happened this week, because the stock market had become short-term extended, the probabilities would shift from a big rally, to a big blow-off and short-term reversal from up-to-down, with a parabolic spike on a development such as that almost too inviting not to be sold; again for the short-term. If it occurs (presuming it does) after a reasonable correction, then sure, a big bounce.

Keep in mind the abbreviated broken-up nature of this holiday week's trading; with of course many taking-off part of Wednesday and of course Friday. (We'll be here with limited comments and an abbreviated DB Friday, which features an early close at 1). We've of course seen Wednesday and post-Thanksgiving days sharply down or up; either is conceivable as the days are thinly attended (players can be run-in), and sure can become news-sensitive to an extreme, even though it then has so little to do with action the following week. We just want everyone to realize that anything that 'spikes' this stock market from here may be sold into, as noted Monday night before Tuesday did just that; but probably will hold decent supports when put on the defensive, which is hardly different than what we have been saying, barring some disappointing news.

Now, not for one second does this make everything easy, nor necessarily desirable; just sort of pragmatic. The markets will be roiled from time to time; terrorists may now panic more significantly, though suicide-bent ones will be reduced, as there's unlikely going to be anyone to pay their beneficiaries abroad (yes, we've heard it's about faith; but we say it's more about money and power, as is usually the case with fanaticism).

Special note . . . South Florida investors planning to attend the Investment Expo at the Fontainebleau Hilton in Miami Beach may want to say hi. As I have a winter home in the area, I have agreed to host a short seminar Sunday (December 2nd) from 4-5 p.m., tentatively in the Fontainebleau 'Le Mans' room (no pun intended), but will not provide elaborate charts or anything like that. Just a pleasant chat with investors and traders about current and post-war prospects. I'll also try to be available between 2-3:30 in the Exhibition Hall both Saturday and Sunday (Dec. 1 & 2) of the Fontainebleau's Ballroom at the Hilton; located at 4441 Collins Avenue, Miami Beach, for casual chat about market and financial trends unfolding. If you're attending, there's either no charge, or a reduced $20 charge, which of course is not determined by us, but by the hosts.

Economic News Releases: a reserved section; though the Univ. of Michigan data showed greater Consumer Confidence Wednesday morning, and Unemployment in fact showed lower Claims; both signs of a downside exhaustion, which contributes to the higher interest rates, which so many hate, but actually can be a necessary plus.

In summary . . . this week is broken-up by Thanksgiving, with markets capable of a freewheeling sort of behavior on either side of the holiday, which often means little in the greater specter of things. Thin markets allow such behavior, particularly worth at least keeping an eye on both Wednesday and in limited trading on Friday, thereafter.

Tuesday's NYSE McClellan Oscillator eased to near +87, while NASDAQ's finally backing-off a bit at +20 now. Of course the move from September's climactic reversal lows, has been long-in-the-tooth as outlined (short-term only), and was noted as on borrowed time for the short-term, but intermediate and longer-term, ideally will head to projected later levels noted (in DB's), barring major interruptions to Allied efforts. Tuesday night, S&P futures were off about 230, recovering a bit from a 5 point hit in earlier Globex action. Some of the selling may be related to the final tax bill providing only a modicum single year of depreciation relief, less than businesses had desired.

God bless our Forces, especially Allied Forces fighting on the ground in Afghanistan, and to all fighting the airport travel crowds, our best wishes for a safe holiday season.

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