Hoping for a Miracle

August 5, 1999

Looming economic reports . . . contributed to the "buyer's strike" atmosphere on Wall Street in the final hour, which was marvelously easy to trade with respect to intraday S&P activity during Wed. late going. In fact; after a series of choppy trades in which we hit 4 out of 6 with meaningful gains and two with either breakeven or a very small loss, the 900.933.GENE S&P hotline simply advocated staying with the most recent intraday short (from 1330 or slightly under) throughout that final hour, or via trailing stops, which in this case were never hit. The hourly and daily action certainly maintains a bearish bent. As a result; another excellent trading day, with guideline gains over 3000, or even pushing 3500, depending on how individuals acted with the earlier volatility.

While we estimate what an aggressive player could have done today; and maybe even better; for sure there's no doubt much of Wed. was choppy; but that's where the best gains often stem out of. By that we mean that traders sometimes surrender to the volatility; which is not the same as a trending market (up or down); and this was not a trending market. What it was simply, was a very heavy market that maintained risks that have prevailed each week, as we approached a serious trendline confrontation, that has been rather precisely associated with the very old intermediate uptrend, a market condition already "confirmed" as negative, and forecast to commence around mid-July. (Meaning those selling weakness are "reacting"; where our July call was "anticipating".)

Each day this week continues that projected "heaviness" associated with trepidation's regarding any overnight holds, and thus reflected relative strength in the morning, versus in the afternoons. It goes further than that, of course, which is why we've repeatedly emphasized importance's that surrounded the now-broken 1322 area of the September S&P, and 1320 area of the cash S&P.

Technically. . . that penetration confirms what was expected to occur; not only well in advance or analytically, but based on the slip-sliding behavior of a host of tech, or particularly Internet stocks that have been under pressure overall from the Springtime highs; and most recent for at least the past few weeks. (portion reserved) The plan was to reduce holdings this Spring, then do it again in early-mid July, so that market exposure was ideally no greater than 25% of available assets, or more or less, depending on an investor's perception of their strategy, and/or willingness to do some shorting or Put buying around July 16th, as a key defensive capital preservation measure.

We emphasize this now, because after 20-50% declines in a number of stocks (which we clearly forewarned was coming in our opinion, and has already, despite the Senior Averages "relative" strength, which you knew would be the case as "the boys" tried to rotate the market to salvation), a number of analysts are only now capitulating, or thinking about it, which is the kind of activity at best which can precipitate a forecast climactic daily-basis washout, or at worst, a market crash.

Hoping for a miracle?

As these analysts talk about either getting drunk and holding, or biting the bullet and selling, we'd rather alert you to a coming snapback rally-affair risk, which normally occurs after non-believers (in the decline) do convert overwhelmingly to believers. In many cases these are more or less of the same sort of financial evangelism pleadings that occurred urging investors to buy strength at or near the market peak last month, and of course will only dislike stocks well into their dives.

This is not to say the stock market can't go lower; it both can and will over time. It is to say that the stock market is getting very oversold on a daily basis; has broken a key trendline just as we said would be the case, and whenever that happens after the fact of semi-mass selling, it's often not wise to become reactive to the market. Otherwise those who do may find results no better of course than "hoping for a miracle" to save them from whatever terminal illness they're suffering. (Which is exactly why we prepared to scalp a rebound long from Thursday's early first washout.)

In this case the diagnosis remains of a slowing economy; a slowing rate of profits growth, and growing currency risks externally along with moderate repatriation from T-Bonds, per forecast for a couple months now. There is no change in our forecast; or in the caveat that all rallies will be false and abortive, with the intermediate and/or major downtrend continuing overall. There is just the recognition that everyone seems to now be trying to do what we successfully did in April, in May, and in June and July; which is figure out what underlies the market's concerns. We might not always be right; but we were during that timeframe, and so far very much within this one.

One thing's for sure; we were anticipating this; not reacting to it. Reactive kind of trading risks the player getting bullish into strength and bearish after a mini-capitulation. And it sets-up increasing probabilities for such late-sellers to get caught-up in a structurally normal rebound of the market. (That's why an intended scalp from the 1290's Thursday morning; and possibly short again later.)

That's all we're trying to say here; and we don't have tomorrow's economic numbers today. As to that, what we said was that no one would want to "take 'em home long" Wednesday night, ahead of the Productivity report on Thursday; and that if that report was favorable you could rebound the market, even if it is sold-into later, as the morning progresses (which in fact is quite likely how it may go). On the other hand; if the data suggests a diminution of productivity, even a washout is likely to invite contratrend behavior of the shortest-term variety. Stay tuned on that in the a.m., but be aware that this is now a daily basis oversold condition, against the backdrop of a modest oversold weekly situation, and a barely turned-down monthly basis stochastic reading.

We simply denoted the risk of a break of 1320 in the S&P as likely bringing an outpouring from the stock market, and got that. As far as next goals (reserved appropriately for subscribers only).

Analysis of Keyholes

If there's one point we've made this whole year, it was that this would be a complex market; not the type that anyone not approaching it dispassionately, would do particularly well in; and that it would not be so simple as 1998; which was also a July high; but moved down more distinctly as it unfolded, and then turned on a dime when the Fed intervened once systemic risk appeared. You know our view on that subject to; which we won't get into tonight. Because some are now in the grip of the so-called August jinx (forgetting it was actually the July jinx, if there is one at all), it is possible that there's some "crowding out" through the narrow keyhole exit that's provided.

If these economic reports don't provide the fear quotient that the Street's obviously worried over, then it's just a great excuse for a relief rally. The real hook would be when that rebound fails at a lower high (consider the 1320's now as some sort of above-market resistance), then pummeling returns in an even bigger way. While S&P trading is flat overnight; we're certainly open-minded to something like that occurring, particularly as what's transpired so far is primarily an absence of buyers, more than heavy institutional selling waves. I know; in the fullness of time that's actually an argument for lower prices, and it may happens sooner. But for now, we're thinking something like a break into the high 1200's at the most, before we get a turnaround; ironically unless news is good, in which case you could have yet-another false rally, and then a fairly heavy new selling squall. In this situation, given that the Friday Employment Report is probably more key to stock market macro perspectives, it's not out of the question that we deal with a false rally, whether out of the box or later, before new pressures (timing of possible risks is "forward"; so thus reserved).

Lethargic, albeit desperate, efforts . . . were definitely pointing, as noted each day this week, to the mass of investors discovering the reality of this deteriorated internal market condition, sloppiness in many groups, including the Internets and many leading techs, which of course represent the focus of this Generation's investments. Thus we saw much hopeless sector shifting into blue-chips as a) desperate efforts to stem the tide; and b) efforts designated totally to fail, in advance, which means c) we got several efforts to mount a defense at very difficult spots to have them succeed, thus why d) we forecast the break of the 1320 trendline, and what you're seeing.

Daily action: Bits & Bytes: and Economic News & Releases: (reserved per usual for readers)

In Summary. . . panic is just beginning to creep out of the woodwork. That's was forecast as a formula for a drive down to the rising trendlines (noted, such as Sept. S&P 1320+), then failing rallies, such as seen yesterday and today, early-on; then the line came out as expected, given a propensity not to be long in front of the numbers, which actually might surprise the other way. Of course the McClellan Oscillator is at the -174 level today, down from -152 yesterday. (Very oversold; albeit just as short-term basis. Capable of rallies within longer-term downward trends.)

Last night we said that the Dow had about a 100 point cushion; which is why we got a 150 point rally that was totally obliterated by the close. Note the S&P moved down more than the DJIA; as was the case yesterday, when the DJ was up; but the broader NY Composite was hard down.

We continue our admonition to remember the first low is expected only to be a trading low, not a likely investment-grade bottom formation for the overall stock market. This continues the likely robust down-up-down week, with a possible false start early Monday lift; exactly as forewarned, then down-up-down as outlined. S&P futures on Chicago's Globex market at 8 p.m., are up 240. (After super gains on Wednesday; at mid-Thurs. posting time, Gene's 900.933.GENE hotline is on the long side from the 1297 area, and looking for an optimum spot to reverse back to a short.)

China has only 2% of its Total Foreign Reserves in gold.