A Healthy Pause On-Tap?

November 9, 2001

Is everybody looking for a top . . . if even on a short-term basis? Or, is the idea that we won't drop because 'everyone' thinks we will, actually an excess of double-think? I have focused on the most recent 'punch-up' as running-in those who shorted early; at the same time as emphasizing it sure wasn't bargain day, compared to the inverse, at the September 21st panic bottom, outlined in advance to be the ideal selling climax in what had been a forecast down post-Labor Day September market even before 9-11.

While the deplorable 'attack on America' caught our response somewhat ragged from the start, as has been the case in every surprise attack on our Country, the U.S. and its Allies are responding far more efficiently than is generally realized as we mark the first month of the air campaign. That has contributed to our forecast significant rally of the preceding weeks, and barring new disaster, has something to do with the future, as well; but doesn't mean there won't be short-term drops in the Dow Industrials. Of course next week is a nominal Expiration, and mid-week upside ahead of it is normal.

Hopefully December S&P players are pleased with the guidelines throughout what by any comparison has been a most unusual couple of months; commencing with a view of the post-WTC/Pentagon panic attacks as creating an important low point for stocks (at the same time many were exiting, rather than entering, the market), while special emphasis was placed on the NASDAQ, Semiconductors and Nasdaq 100 (NDX) as most likely to outperform the Senior Averages on the rebound (they did just that). We thought that Tuesday's rate cut (regardless of how much) would see some squirrelly profit-taking, then move up late in the day; which it did. We thought that we would get some efforts to rebound a soft start on Wednesday, and that they might in fact run the highs (they did so three times, the third to a higher high than the first two) and then ease down later in the day, with some late squaring. It happened that way.

Let's go right to the events of the day, as we allow time for special preview remarks in advance of next week's computer gathering (Comdex) in Las Vegas, which likely will be thinly-attended, mostly due to security concerns, and diminished IT budgets now, but will give ideas as to trends in computer networking, security and VoIP telephony.

Daily action: Technicals: Bits & Bytes: Economic Releases: (subscriber areas)

The (900.933.GENE) hotline was delighted to have captured most all of that, via the late Tuesday guideline long-side entry at 1100 and sale around 1120; followed by a couple of efforts early Wednesday (about breakeven), followed by a short-sale at the 1126 level, which (though stop points weren't breeched), most players would have harvested gains towards the close, as noted. (New short-term thrusts likely Thursday, as noted, and will probably be leaned-against temporarily, if pressed into the 1130's.)

Technically . . . it would be surprising if Thursday didn't see at least a couple efforts to revive the advance, though we suspect such moves (while likely sharp) may turn-out to be short-lived. This will be a volatile fight that eventually surrenders to some sort of drop; albeit not a huge plunge, barring unforeseens, to which we won't speak.

In any event, the colossal short-squeeze on December T-Bond bears continues; and for those of us with partial positions (since the 80's really) in bonds, it's a lot of fun. At the same time, just as homeowners debating whether to refinance or gamble on low rates continuing to improve for long, fail to recognize the bulk of the decline has to be behind, we wouldn't be greedy, and while keeping certain bond holdings (particularly in corporates that are primarily domestic-centric), recognize that one of the reasons a market extension has been feasible, has been last night's discussion of Fed policies, and how they've eliminated yield to the point of making equities look less deplorable. It's a tough scenario, because many blue-chips are not exactly cheap, though techs were, and that was the basis of the focus coming into September's low panic levels.

As to our perspective (described in detail last night), we suspected some motivation is not only to underpin the domestic economy, but to draw funds closer to corporate bonds, which have a much higher general return (with risk varying, depending on the sector and company) than do Governments. Argumentative divisions over whether rates would go down a half or a quarter percentage point (before the announcement) were quite academic in our view, as there already were a sufficient combination in the Fed's armamentarium, needed to lift the economy, once fundamental backdrop shifts in both the psychological and military realm occur (transition to recovery and a dramatically strong market for stocks; despite the perception of relatively high PE or other comparisons today; which are only important at market extremes). The current action is not an 'extreme' as previously pointed out, but is a short-term inflection area. In the meantime, the Dollar stabilized again; International tension does keep it firm.

Oil broke below 20 yesterday (then rebounded a tad today); a plunge speculated as likely, all the way from calling the double-top around 30, reinforcing what is believed to contribute to the equivalent of a major tax-cut for the citizenry, and thus is in itself more stimulative than these further rate cuts, which typically doesn't work its way all the way through to the consumer aspects of the economy, as does Oil price declines. We are delighted to have indicated the quick thrust towards 30 as the war started, as a 'false rally', that would be retraced, given no correlation between this war and Oil; to the contrary, we thought it imperative that OPEC nations not impede production, as to do otherwise would risk their entire relationship with must of the world. Since then, a time when we called for 30 to be followed by 20, the two efforts to cut production in these quarters were seen as non-starters, which would also not meaningfully rally oil, though we are getting to a point where some modest temporary rebound may occur.

The cessation (for at least awhile) of 30-year offerings, is the type of thing that really can help the rates in consumer areas, though initially the retail rates didn't drop as much as the market's response, which was particularly sharp in the T-Bond rates (price up, yield down). It's partially a realization that the ingredients are being put in place for a prolonged rise in the economy down the road; conditions that don't 'lend' themselves (pun intended) to too many lenders locking themselves into low rates for a very long time. Thus, the impact on mortgage rates (etc.) have been comparatively minimal, though visible in some quarters, as noted in last night's remarks. Yes, we're not suggesting shorting equities (haven't for months; why would one with a mountain of money waiting to enter); just expecting fatigue soon for forecast short-term phases.

Bits & Bytes . . . will touch upon trends likely to be brought into focus at this year's annual gathering of diggerrati at Comdex. (A long special preview for subscribers.)

Among areas and stocks discussed in this report (without implying a buy, sell or hold to ingerletter.com visitors) are: Microsoft's (MSFT); WiFi (also known as 802.11b); a note on the new cellular GPRS and GSM integration; on AT&T Wireless (AWE); Motorola (MOT) and Nokia (NOK). Also noted: Biometrics and VoIP; updates on the possible plans of strappedLucent (LU) in new fields and those of Cisco (CSCO). An idea about optics, with little LightPath (LPTH) mentioned. Discussion includes Bill Gates, Paul Allen, MCI WorldCom, Comcast (CMCSA), AOL Time Warner (AOL), Scientific Atlanta (SFA), Motorola (MOT), GM Hughes (GMH), Sony (SNE), TiVo (TIVO), AT&T (T) and finally the Compaq (CPQ) and Hewlett Packard (HWP) saga.

In summary . . . the FBI's alert continues; as the threat matrix still concentrates on a mix of nuclear and/or radiological type weapon, as back as various biochemical and bacteriological threats. As noted back in September, during the panic, the surprises later this year and early next, in absence of total disaster, could be how high, not how low, the overall market goes, in particular technology sectors, which were so shunned by so many, instead of the blue chips of old; increasingly representing multinationals dependent on sales from abroad. While this may not sound particularly dramatic now, we emphasize that was our view in the mist of mid-September chaos, and now that it seems 'comfortable to be optimistic', we suspect short-term risk will again increase.

Wednesday's NYSE McClellan Oscillator eased a bit to +124 and on NASDAQ, so strong lately compared to the NYSE, eased a bit, to the +30 level; in harmony with our expectations that while longer-term is another story, this breakout is potentially an effort at completing near-term upside, while the market thursts just high enough to, in some quarters, suggest there would never be a pullback. Is that how players buy into a high? Interesting how many hated the market when we liked it in mid-September, at the same time as they just love it now that prices are substantially higher. Either that, or they expect some total disaster (most likely because they didn't buy in September) or debacle, that could only happen with a 'second-shoe' dropping; not impossible that is for sure, but something the Nation's increasingly gaining control of; so that's great.

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