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Holiday Rallies Luring Investors?

December 21, 2001

Are investors being 'lured' into the markets . . . in the wake of a colossal move up from the lows of September; or is this really a market anticipating the post-recession conditions? Or, to what extent are favorable results being worked-into price levels?

Probably the answer remains a combination of ingredients. While we have little doubt many major cyclical stocks, particularly multinational blue-chips, are bordering on the achievement of full-value pricing based on what they'll actually make next year, and that some of the retail stocks (particularly involved in consumer electronics, which we have been very excited about for this year's 4th Quarter, and appropriately so), will be more than discounting this terrific (yes, excellent) holiday selling season. A key word for all this we've repeatedly used, was 'digital', and that included everything from the ubiquitous game machines, to digital flash/memory stick cameras or DV camcorders, to particularly widescreen HDTV capable (or already enabled) sets, expected to start ramping-up late this year, and incidentally expand even more later next year, as once the cable companies broadly embrace HD, there should be a flood of relatively higher ticket sales by these firms. But shorter-term, much of this is becoming priced-in now.

So, no, we don't see this as a 'luring' of investors into stocks, but do recall that more than one of our DB's back in September, during the panic, outlined how the majority would likely be twixt-and-between about what to do at higher late-year price levels; a reason we thought not only that risk was best avoided by buying when 'sale prices' at the time existed, but because there would be some risk of buying a short-term high at a point logically (barring catastrophe) in the opening weeks of the new year (how far into them to be assessed depending whether we get some key levels from this move) but probably not sooner. The pressing of available liquidity into the Dow Industrials, at the same time as breadth appears mediocre, is probably making some nervous.

But at the same time, as we've also discussed coming off many important washouts over these many years, you get points that are very interesting in terms of 'structure'. One of those can be on breakout moves late in a year, when institutional managers are aware not much will happen with depressed stocks until investor tax-selling fully abates, while it's necessary to keep the anticipation of better times alive; so they tend to focus what active interest they have on the big-cap stocks that can move the most Senior Averages. That's why you got more upside in the DJIA than on the NASDAQ.

At the same time, technology appears to be extended on only the very shortest-term; along with some misunderstanding of what some of these consolidations may mean. In our view, the memory consolidation will conceivably allow some pricing power later and is thus precisely what (certain manufacturers, as noted) would want to do at what to the layman might appear to be the worst time; expand sector control dramatically.

A little tougher might be the wireless stocks (particular issue noted), which we do not own, but are pondering. Several major financial media outlets have panned cellular stocks (we did that two years ago), and so we can't help but be curious as to whether late-year pressures will exhaust selling for now, in the field. We know we disagree with some of their fundamental analysis, which we suspect is sort of a plausible try at an explanation at why their buys in the field at higher levels long ago didn't pan-out.

Clearly what interests us is financial publications focusing on 'older' systems, while at the same time not even lip-service is accorded some important new shifts, which if at worst aren't as exciting as true 3G services (told everyone the majors would be very late at the table with those, and unfortunately the few who tried it regionally didn't get anywhere, for a number of reasons and that includes some PDA wireless marketing), is at least promising to move in decent directions, via GSM/GPRS voice-data service. There is only one Company that has the ability to roll this out digitally in every major market over the coming year, and in several (such as Seattle and Las Vegas) already has. South Florida is starting. Others can compete, but have to work within 3rd party roaming agreements in certain key markets, like New York and Los Angeles; tough.

This is a totally separate issue from (comments on the new Comcast (CMCSA) deal with AT&T (T) broadband, that is assessed in reserved commentary). (Digital cable, as marketed by most, has nothing at all to do with HDTV, and contrary to customer services reps who typically say things like 'sure, we have HGTV; as if they thought HDTV was House & Garden television, it is the mandated 16x9 and full-digital ATSC, not NTSC, medium that we have argued means a lot for the Nation, and markets, not just for TV buffs. Now others agree too.) And by the way, AOL Time Warner's (AOL) Time Warner Cable's been a leader in rolling-out HD services, although in most cities delay in compatible boxes slowed down availability. (Don't tell them that network HD can be included without boxes, in most cases; mostly in hybrid fiber/copper systems.)

However let's focus on the current overall market (though integrating more individual stock and sector comments is on our agenda for the Daily Briefing as next year will evolve, and as daily time permits, as it already has on numerous occasions). Many of those tech stocks were also taking a rest after the expected push of drugs into a well-watched Nasdaq 100 (NDX) in recent days; after this consolidation it should probably work into higher levels again. Semiconductors (SOX) were entitled to profit-taking of course, so probably are responding to memory stories with unnecessary pessimism. It might also be worth noting that sellers in the sector's downtrodden will likely have vanished for awhile within some days going forward; another renewed rebound plus.

Also you have the continuing fears we discussed in detail last night about whether or not Congress passes an economic recovery Bill. We still think they will. But if they are not able, it still won't prevent the Nation from emerging from the economic quagmire. As for the war, we've speculated about OBL's 'evil-Elvis' mystique becoming more or less a mantra for Islamic extremists, and some threats against major countries by a ragged few 'vessels' on the high seas, as alluded to before the Defense Secretary's comment about risks to major NATO members capital cities. We pray it never occurs of course, but have said from the day after the 'attack on America' that breaking-up a slew of these 5th columnist and infiltrator cells, and protecting our shores, was a key.

Separately, this evening you have Argentina declaring a 'State of Emergency', as riot and/or looting conditions start to prevail in various communities of their nation. That's too bad of course, but over these past weeks we've alluded to their growing crisis as an underpinning of theDollar, which indeed stabilized as noted earlier this week, and continue to suspect that a swallowing of pride would have the peso-dollar peg left in the dust, in favor of simply adopting the Greenback as their legal tender. Not that we particularly want countries to do that, but it can be an alternative to new defaults that maintaining some artificial parity doesn't really permanently resolve, and is partially a throwback to the imposed austerity of the IMF loan guarantees, as argued back then.

Daily action . . . meanwhile had a tremendously straightforward Wednesday session; by virtue of being 'excited' about the day's early gap-down fade, again using it in this case on an assumption (as repeatedly noted in these DB's too) that 10,000 on the Dow Industrials was coming this week, and hence the (900.933.GENE) hotline was eager to buy the first dip to 1135-36 this morning; retained through to the day's close.

With that exit allowing a theoretical gain on a single effort (the only one of the day) of as much as 1500 points in the March S&P, we are hopeful they fade prices again in the a.m., so we can once more try to go long into relative weakness for a subsequent rebound, almost irregardless of what comes later-on. Though there have been some hints of 'on-close' selling, presumably related to institutional shifts, and probably will be a factor in early Thursday action to, as an integral part of Triple Witching. (Balance reserved for our regular subscribers.)

Technical & Economic comments reserved, in fairness, for our regular readers.

Now of course there's floods of liquidity likely to embrace markets with the seasonal reinvestment funds appearing next month (at or near the high of this overall phase?); at the same time as the overall move (in stages, as expected) surpassed resistance for various benchmarks, and continues to do so. The idea all along was that the U.S. market's structural appearance would improve, before our Nation would emerge from recession, but actually help chances for it to occur. More optimism, than that implied by public sentiment or even political leadership statements, isn't warranted; although there is no doubt that the stage-of-siege mentality the bears have felt, has bolstered the projected upside rout, and the achievement of our forecasts since September 20.

At the moment, with the Dow accomplishing what we wanted for the moment, we still think the focus remains in the big-caps, with some nervousness about Argentina and (if necessary) 'wayward vessels', and then at attempt to challenge DJIA 10,200 or so. As for the March S&P, the 1170's are the next goal if we going to challenge the later November highs over time; now that we got through the most recent forecast success with the 'inflection' around the 1130's and 1140's achieved and holding on, this week.

For years, we properly disdained the Dow's importance, aside from mass psychology of course, though the shuffling of some techs and domestic-centric stocks into what in previous years had been nearly a multinational and Oil Index, has changed that a bit. Now certainly, when the good folks at Dow Jones & Co. decided to make the shift a couple years back, at the time you'll recall we derided the timing, what it did was to set-up stocks for a greater fall, since they were doing so after the series of multiyear tech advances, that had gone parabolic and unsustainable, as suggested. Now, this is not that kind of condition, and while there will be pullbacks, the structure's better.

Things are different today, because of rampant skepticism rather than optimism, first of all, and as we had an expected 'crunch' by technology sectors (starting rotationally as outlined with the Internet stocks, which were typical manifestations of a mania, as observed as far back as 1998 and 1999), and sympathetic declines elsewhere over time. We have (and continue) to question a lot of pricing imponderables in blue-chips who've derived the bulk of their 'growth in gross' overseas over the last generation, and that remains problematic, which isn't a new point of view here, to ingerletter.com regular readers, but certainly is increasingly evident to all since the war commenced.

There are signs, and have been for months, that the economy will grow next year; the extent to which is factored into some equities, and isn't into others. For the moment; it is gratifying to have so many weeks and months of market adherence to our forecast, even as we expressed a little concern about some surreptitious threats, as outlined in last night's DB as well. Yesterday, to NATO ministers, Secretary Rumsfeld did outline (vaguely to that portion that wasn't closed-door) threats to major cities of the Alliance; which I thought was fairly candid. While there was notable anxiety (my interpretation of his remarks, or some from other officials, who seemed to be more knowledgeable than usual about what they didn't say; just by their voice tone or nervous inflections), nobody mentioned specifics of 'vessels' rumored under surveillance since leaving at least several ports, rumored to be particularly in West Africa, and also North Africa.

Barring events, we suspected Wednesday would see new efforts to surpass inflection at the high-end of key levels, as a matter of fact) where technically a key daily moving average intersects the March S&P. A failure would be notable, but isn't expected and isn't what happened. As we were able to surge through these price areas, we still see a compelling run into Expiration, or just shy of it; on the upside (already has been and is); contrary to popular misconceptions of selling squalls some technicians talked of, which made little if any sense to us before, and as market action proved all along.

Bits & Bytes . . . already did touch on many areas. However, most stocks were firm, with breadth modestly on the negative side for NASDAQ, and negative but better on the NYSE, as they need to 'pop' the Senior Averages through inflection, before trying to again focus on a lower-priced, and lower-capitalization inventory, which would be a fight against seasonality anyway, for a few more days at least. (Particular comments to our readers are made on; Comcast (CMCST), AT&T (T), GM Hughes (GMH) andMicrosoft (MSFT), as well as Analog Devices (ADI), Intel (INTC), TiVo (TIVO) and Dell (DELL). Apple (AAPL) and Micron (MU) are also discussed. None should be at all considered a buy, sell or hold for visitors.

In summary . . today the early fade we reasonably thought a buying invitation for the hotline (900.933.GENE) players, that allowed traders to try to position, and that was actually a plus for a continuing pattern that allows renewed lifts. Hopefully something similar, though more minor, may occur Thursday, depending on response or worry as relates to Argentina (though that shouldn't be huge) with the added impetus of having penetrating moving averages, accomplished, and a plus for the overall structure. By all means keep in mind we first suspect failure to continue the move, then a new try.

Wednesday's NYSE McClellan Oscillator improved to +4, while NASDAQ worked a bit lower, due to softer techs, basically mixed multinationals & cyclical stocks, to -3. The market remains healthy from an intermediate and longer-term basis; very clearly assisted as a result of consolidation forecast for December's first half. Nothing much is analytically changed in that regard; relatively normal profit-taking; after realization by a large number of players due to breakouts, that they may have to pay-up to get in; then the inevitable breakdowns after on-strength buying, after which those who chased upside (that we warned about) just a few weeks ago, basically get nervous, often near the time the market prepared for yet-another rally, sustainable or not.

Our hopes and prayers remain with U.S. 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 it's all evolving. We remain favorable towards the market overall, as we have since about the 20th of September; though obviously risk increases on strength, just as it was so minimal back during the post-attack panic. This evening, a 364 premium has March S&P's basically unchanged; in narrow trading continuously since the regular close.

Our best wishes to all visitors reading these comments for a very MerryChristmas, as we reflect on the genuine meanings of the holiday season to peoples of all faiths.


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