Healthy Secondary Reaction?

December 14, 2001

A secondary reaction . . . will create a lot of nervousness, especially when the drop commenced (as expected) upon 'confirmation' of an upside breakout, and more so in a climate where there's hardly an iota of immediate earnings expectations to support the recovery most investors (and citizens in general) expect or hope is forthcoming, and amidst unsettling domestic and foreign stories (corporate and terrorist-related).

Of course that upside breakout occurred weeks after the Nasdaq 100 (NDX) leaders had done similar action, so by merely dragging along many of the tired multinationals, it was not too hard to get the market back up to a crucial monthly resistance, which is solidly overcome by the NDX (even though entitled to a bit of a pause, in harmony of course with the erratic 1st half of December pullback expectation, though little seen in spite of many negative comments about technology and the like from some analysts).

That's not the case for the S&P, but can become that if prices hold moderately well in here, and then rally into next week's Triple Witching, pause, and potentially advance a bit after that. Sure, the bears are protesting loudly about earnings of multinationals, of job layoffs not even completed yet (such as in the Seattle area), and are unnerved by historical comparisons which make the overhead supply and pricing look daunting, until or sometimes after, you get the recovery that monetary and fiscal policies have in fact set-in-motion; theoretically, and particularly after the war(s). As noted last night in this DB, many companies have cut expenses to the bone, and that will help profits (yes, they will reappear over time) accrue directly to the bottom-line over time. As for chasing prices; well, of course we've felt for weeks that a correction of sorts was the probable follow-on to an overbought condition and excess after-the-fact optimism, at the same time as we suspected it would be comparatively shallow. It has been both.

This is sort of an enigmatic market, where we have felt for several months, since the panic following the reopening of the NYSE in September, that the lowest risk buying point was then, with subsequent consolidations likely to be comparatively shallow as the year progressed, but with risk increasing as former naysayers became more open to favorable market patterns (after-the-fact). Nevertheless we have deferred shorting any equities (aside from per-usual efforts to catch intraday swings in both directions), because of the belief that the risk of accidents to the upside, outweighed all downside risks. Certainly the bears can argue the opposite, though history (especially wartime) is not on their side, and the chance of their being steamrolled if we surmount the late November highs later in the month (or early next) is certainly a real one.

That's true as well for the Dow Industrial Average, not just the Nasdaq and/or S&P. Whether there's a meaningful pullback after an exhaustion of seasonal reinvestment funds, depends to a great extent on what the technical picture looks like then, more so than earnings, contrary to the prevailing viewpoint out there right now. It also will depend on capital spending initiatives, though there is little reason for companies to engage in much until they see a perceptible reason to do so. Historically they tend to become cautious about such things near the economic nadirs, just as they become a bit too optimistic when things are roaring ahead. Hence, you get inventory shortages and a ratcheting-up contest when things recover, because they'll be playing catch-up.

In essence the Country is increasing savings rates (little noticed), but not like Japan's insatiable appetite to save. It isn't consumerism that's going to be totally responsible for an American recovery; but a combination of that and capital spending increases as the recovery evolves, slowly at first, and more rapidly later-on, per our outlines for 2002 and beyond, if all goes just right. The nervousness in the short-to-intermediates on the Yield Curve are sort of substantiating why bringing rates down again hasn't yet had the effect some might have thought the T-Bond drop (after the forecast rebound that followed the spike blow-off squeeze) would on lower mortgage rates, and is also why we thought the low rates over a month ago were just about it for refinancing or a new mortgage. For now that has sure been the case, though such rates may ease for awhile in the 1st half, but only as the economy tries to cool-down a bit after a holiday bump-up. That is also why erring on the side of caution, calls for the fiscal stimulus.

At the same time, today evoked some sobering reflections about the war on terrorism as you likely know. Both the stories from the Washington Post we talked about in the last DB, and the purported assault risk gleaned from the American Taliban traitor that was portrayed by some as merely on 'the other side', but couldn't (or shouldn't) have access to even talk about such matters unless wired-into the al Qaeda operation. We don't know if UBL split to Pakistan (suspect he hasn't, as that story came from there), but are worried about an attempt on this Nation during the holidays, even though we very much suspect a lot of zeal for their perverted cause should be deflated when the followers of UBL see his own videotape, when it's finally released early Thursday.

(Section reserved as it has to do with remarks about Washington security that should best not be generally shared outside of our daily readership.) So, it's hard not to say that such things can have an influence on the market, as there for sure isn't anything like the inviting late September pricing to encourage venturing in; nor would we for that matter. But paying-up is quite different than holding what were bargain buys at the time, and therein lies the rub. We don't believe prices are going to drop back (for the most part, especially in leading techs) to September lows, and that's enough reason to give the market the opportunity to rest and commence a next phase of upside, in harmony with the overall December pattern call (for dip, then up later-on).

Daily action . . . expected some sort of late comeback, and got it, though we tend to not believe it has anything to do with the tensions of various types. Yes, the B1 USAF bomber that crashed (and fortunately all 4 crew survived and were plucked from the sea) was outbound on a mission and returning after mechanical problems, not shot at by the enemy, and yes, some of the stocks hit earlier showed good comebacks. Most of this probably relates to running-in shorts on a Wednesday afternoon, which was as projected (balance reserved).

Meanwhile, the (900.933.GENE) hotline continues seeking to capture moves, which after a fairly predictable on-hold market ahead of the FOMC meeting, the subsequent profit-taking and failing rebounds, set-up what we suspected even Tuesday would be a nevertheless sort of ideal up-down-up Wednesday session. That it was, and results for December S&P players should have eclipsed a homerun gain as a result thereof.

Most Daily, Technical, Economic and other forward-looking remarks are reserved, in fairness, for our regular subscribers. We might note intraday downside accelerated Wednesday when a daily moving average came out (as hotline's speculated might), but that it was not built-upon, and a gradual rising uptrend from the September lows (that low, the late October low, and now this one) is being attempted to construct a continuation move. However, there is the prospect that if we fail a rally extension, you might take it out briefly later (such as into the weekend, but we'll see about that), and if so we'll quickly be daily oversold again (from projected overbought in early Dec.).

As for the bigger-picture, again barring catastrophe, recovery is not really debatable; though the bears believe it completely to be so. Fed statements accompanying the 'cut' denoted continued soft economic conditions; but with tentative indications (we've said the same thing for awhile now) that demand is bottoming-out. They referred to them as 'tentative and preliminary'; a description that is entirely reasonable. Parts of the Country continue to struggle; parts will not return to former security or dynamism (second terrorist shoe or not; hopefully of course it will be not); though every area impacted by the war(s) should recover to some reasonable degree as time evolves.

To us, the mix is already in-place; now the question is, as we have argued for some months, a matter solely of 'time'. One can debate whether the market anticipates the economic trough by 6-9 months historically; but we suspect the actual trough both in the economy and market are already behind; slightly. Post market-reopening panic-selling waves set the pace for the low, as it also created the nexus for massive jobs being lost, if even on a temporary basis before the gearing-up for both war and what will be (barely started) a huge post-war (reserved; generally potentially optimistic).

Part of that, as noted last night, could be helped by an enlightened Congress (that's not an oxymoron we hope), a feeling that Washington needs to sort of give a 'goose' to Congress to stop wrangling and pass a bipartisan stimulus bill with their expressed 'concerns' that indications of bottoming are all tentative. Once the Congress provides the Christmas Goose (after all, since the market wasn't a Turkey for Thanksgiving, it often pauses and needs a little goose for Christmas) we can envision a Fed that later, in the midst of the winter doldrums following a yearend rally, surprisingly tells us that monetary and fiscal stimulus should be sufficient to help this Nation's recovery, and that they believe things indeed have bottomed. Then many of the constant naysayers will likely be pondering why they didn't buy a December pullback, or the October one.

Bits & Bytes . . . reserved for readers; each night focuses on a few stocks. This area will also include certain sector analyses segments later in 2002. Mentioned tonight; to give an idea of some of the equities we touch upon, without being a buy, sell or hold to visitors, are: Merck (MRK); IBM (IBM);Micron (MU); Ramtron (RMTR); Texas Instruments (TXN); Intel (INTC);Microsoft (MSFT); Analog Devices (ADI) and other chips. Small special situation stocks, like LightPath (LPTH) or TiVo (TIVO), are mentioned, as are Motorola (MOT) and Nokia (NOK).

In summary . . barring a catastrophic 'second shoe' dropping (terrorist act), we were optimistic the post-Fed cut contractions would be reasonably contained & controlled on Wednesday, then it (the market) generally moves higher once again in late going. It did, and a continuation attempt is likely for at least a good part of Thursday, right in a crucial area incidentally (though subject to an early reactive economic news drop). The 900.933.GENE hotline will try to finesse these shifts as best we are able.

Wednesday's NYSE McClellan Oscillator dipped to near -74, as NASDAQ worked mostly sideways (stronger techs versus multinationals and cyclicals, again), to +4. The market still remains healthy from an intermediate and longer-term basis; nothing analytically has changed in that regard since the lowest-risk late September buying point; relatively normal profit-taking, and realization by a large number of players due to breakouts, that they may have to pay-up to get in; so they're trying to talk-down stocks beyond a pullback that had to occur anyway. Ideally, rest, or even a break of the daily moving average, which might create a bit of additional nervousness, and yield an interesting turn of sorts, the market may subsequently still head to projected (..) levels later this year or the first part of the next (as outlined in previous DB's), barring nothing major interrupting Allied efforts.

Our hopes and prayers remain with U.S. Marines, Army and other free world troops, that have joined Allied Forces fighting on the ground in Central Asia, or elsewhere. Structurally this is generally the overall pattern we've discussed for these nearly 3 months, and we got another Fed cut, on-news profit-taking, and subsequent up effort today. Wednesday evening, the December S&P is off a point on Globex, with almost a flat-to-cash pricing as of mid-evening. Any profit-taking should be initially absorbed. We invite you to visit www.ingerletter.com for a summary of how Thursday finished with our approach, and of course updated charts of the DJ and S&P. Entire DB's are available only by quarterly subscription, available on-site, or via our California office.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.