first majestic silver

Hysteria Yields Opportunity

May 17, 2002

Harmonious behavior . . . was delivered on Wednesday to Tuesday night's forecast that Wednesday would not emulate the previous two sessions, during which we just comfortably held single-effort guideline S&P longs for virtually each full session (in both cases entered on the first fades from gap-up openings). The anticipated 'roiling' worked to our advantage however, as we had ideas what would happen on Wed.

We were particularly concerned not about the early going, where some profit-taking was expected in the morning anyway (even if it had opened up instead of down), but the session's second rally try to resume the overall projected uptrend, was what we'd focused on. Sure, rumors concurrently abounded about an assassination attempt, on the controversial Venezuela President (later denied), sparking a solid sell-program hit to the list. Pundits used it to explain-away excess optimism in the wake of the recent thrusts up; though there's no way to really know if the selling would have occurred in any event; though we thought it might. We also believe it was reasonably contained.

Days ago, we speculated about a key thrust above the psychologically-significant June S&P 1100 level, which we thought would cause a mini-capitulation by bears, as they covered shorts (believing the bearish alternative denied), and spiked the market. We thought such a spike was an invitation for profit-taking; no more and no less. As a matter of fact, the S&P might just have held slightly higher levels (by a few points; not more) if you hadn't had the little post-2 p.m. news scare and ensuing program-decline that came about); though the overall action would have been essentially identical. We thought you'd spike above 1100 (did that), drop back to last resistance (near 1085-90 or so, as we barely did for that matter); then firm-up a tad (did that too). And you're aware of our bigger-picture view, which remains unchanged about overall action next.

Our appreciation to those of you commending our stamina about the March and April declines, and even remembering that we had in mind (ideally) taking just part of early May to resume downside, but finding much of the rest of the month doing something else. That 'something else' was identified for weeks as likely being a turn-up from the area described as a 'no-man's land' between the 'w-bottom' lows of February and the Fall's panic lows, with actual reversal points being emotionally driven, as indeed the last reversals sure were. More significantly were notes amazed we'd be calling an 'illusion' of running into a brick wall, with a decline Thursday and Friday of last week as a likely 'bullish alternative', when others thought going up would be the bullish approach, and we thought that would be bearish, while down would be bullish. Thank you; some of our thinking is proprietary on that; but it sure worked-out wonderfully.

Now, having called the lead of the Dow Industrials and S&P, followed by technology in particular (all before they occurred), we suspect (barring calamitous news) that the 'powers that be' will attempt to revitalize the upside, hoping to finish the week-out on a favorable tone. We have called for a favorable tone overall and internally, from just before the so-called 'one-day wonder' (we said it would drop back, but was a market key), throughout all the sifting sands of daily action; that's because market internals have been improving for many months, as repeatedly noted, so anyone gazing within the market, or even (though we don't dwell on such pedestrian factors as systemic approaches to the market) such things as 'wave surfing', would realize that not only does price behavior appear darkest before the dawn, but that techs and internals, not to mention the number of downward sequences, were all dovetailing nicely with what we thought would be a market washout, climax, and reversal; all before mid-May.

We have been asked why others didn't arrive at the same conclusion; we don't know. It's certain that some did of course, or the market couldn't have turned as expected. In fact we suspected (and stated here before the turnaround last week) that we were thinking some of the naysayers and fund managers were quietly nibbling into purges, but that was presuming they had the same handle on this we did. It's also known that human nature, being as it is, gets even some technicians to get negative on declines or positive on rallies after-the-fact, which basically is reactive rather than anticipatory, of market turns. It was also curious why some thought certain established indicators 'weren't working', when what we thought was that they expected them to work much too soon, and that the decline needed to break certain levels and have the washout.

All of that happened; and hopefully the balance of the month will also go according to Hoyle (no, that's not my middle name); we'll do our best, which may not be as precise as these two weeks, though we'll try where the market allows broad transitions. But, if you want a projection, let me hint that with the turn behind, and the economy moving ahead acceptably (if not robustly), there is no reason to repeat the extreme reversals in alternating directions. But if the market (or events that cannot be known) insists on a pressure play sorting-out further, we'll try to continue to catch most of these swings. It may also be noted that T-Bonds and stocks are basically alternating, because that is where the funds come from this time of year. Just now T-Bonds (June) are fiddling at support (levels of support and resistance must be reserved for subscribers only).

Also don't forget that while some will call for a softer Dollar is a modest economy, for the most part we think they are praying for that to help currency conversions of sales by their multinational holdings, not really because they believe it in the Nation's better interest (it isn't other than short term adjustments). Just now the Dollar is hovering at the area just over 114, with support (and resistance for ingerletter.com readers only), even if -or particularly if- that's achieved.

Certainly there are lots of concerns out there besides the economy; or more directly, whether the economic progress will be interrupted by barbaric attacks against U.S. infrastructure; which of course everyone assumes is the terrorists general target. Of course every market bottom (and ensuing next phase up) through history has had a slew of fears surrounding the disbelief accompanying any cyclical Bull's early days, which is how so many missed the big tech moves in the '90's, including some of our own forecasts (then) for huge moves of theNasdaq 100 (NDX) before the bubble was expected to burst (not that far from the time everyone starting believing upside, that dated from lows in 1994 and again in the summer of 1996 and culminating from an internal standpoint as early as April of 1998, with unsustainable swings later on, that were often ineptly stimulated by the Fed itself, who bemoaned such moves).

Among the concerns that might (repeat, might) be addressed; are such diverse and challenging items as; the actual infiltration of even more terrorists into our peaceful land; the secret talks between the U.S. and Iran (reserved); promises from Arafat today to hold elections in a process to 'reform' the Palestinian Administration (greeted with lukewarm responses from his own people); curiosity about Saudi Arabian capability to deploy Chinese-built ground-to-ground missiles (heretofore never heard much about we might add); and incredible speculation that in a break with the West, (reserved) could be the prospective target of those (according to unknown journalists with wilder thoughts than we contemplate, which are dangerous enough for us all).

Little noticed amidst all this, the NASDAQ Financial Index reached a new high (that is a plus point); while the overall NASDAQ was up today too. Market internals are o.k. As to the CPI, it was higher-than-consensus (core or overall); and that was the basis of the gap-down opening. Business inventories dropped a bit; but we think that's not negative, and is a plus, as it means everyone is playing things so close to the vest, that as the economy recovers they'll have to scramble to catch back up somewhat. It is our view that the market is only going to appear to be in a trading range around the current area for a short time, and may even pop the daily-basis top into Expiration on Friday, as they try to put a favorable conclusion onto the week. Stay tuned on that as we remain flexible in either direction, particularly on an hourly basis, but suspect that Thursday will probably open mixed, move a little higher, fade back and then try again.

Daily action . . . notes it is interesting that our work suggested something like a post-lunch failure anyway Wednesday, so it should be no great surprise (to any who don't regularly check the 900.933.GENE or direct-dial intraday hotline) to learn that on top of the superlative gains Monday & Tuesday we scored another approximate homerun net total, mostly by virtue of buying the first dip, and then the noon-hour dip; both of which were nicely exited. (Balance reserved for regular subscribers.)

Q2 absent terrorist attacks on reversals in the War, was expected to be stronger; Q2 is starting to reflect the super-slimmed inventories and employment cutbacks, which we have thought (for many months) would make estimates hard not to overachieve as time went on, for many companies, particularly technology. Q2 reflects American traditional tenacity to get back to work (and shopping), rather than moping around in a 'funk' for many more months (we didn't think they would do that, and they aren't). It is also notable that Q2 had a stock market decline that did just what we thought likely for June S&P's; stop below the February 'w bottom' low, and above the Fall's panic.

To the extent that we have looked at forward-order-flow for semiconductors, chips, and the like for months as quietly preparing for a gradual improvement, none of the specific economic items come as a particular surprise; given relative solemnity here at home (so far). In fact the surprise would be if the Nation wasn't rebounding as we see it doing. Market internals reflected this too, allowing similar conclusions from the same data to be gleaned; some other analysts did; many didn't, and their propensity to be emotional and follow a herd instinct was repeatedly noted in these remarks, not to cast aspersions, but to focus on market and economic realities; not daily hysteria.

However; keep in mind our remarks of last night. Just as this overall projected turning was so important, the next or interim selling squall will be just about the macro-bears (key comment for the future must be withheld for subscribers). We allowed for a little 'overrun' (that was the call for a low in no-man's land, as termed), and then washout reversals; surreptitious pullbacks from the first major upside impulse, and then for a renewed strong upside. In the past day we suggested Wednesday wouldn't replicate the prior sessions, but suspected after a profit-taking bit of a binge, more upside tries. The bear's technical case is bordering on being left for the new honeybees; and you'll recall from last night how they're able to sting those who got bearish into washouts.

So, while we don't expect the overall market to go from impulse power to warp drives in a flash (forgive the pun; been a fun week); we did expect the market to run-in bear types, and have that happen amidst economic data we've been consistently seeing. Many continue to say things couldn't change quite so fast as it appears over the last week or two. Well; they're sort of right; they didn't. In fact they've been changing for months now; but the people saying that, didn't recognize it. Therefore, the economic realization and market response is a technical reaction to a forecast (here) correction that transpired over the preceding couple months, during which we anticipated that most fundamental domestic worries were related to reports of previous business results, and didn't recognize the improving undertone; albeit some PE's are dubious.

In summary . . at the end of last week's post-rebound purge, we saw no reason to get emotional with the crowd when who saw the type of plug-pulling acceleration that was stubbornly resisted for so long; probably due to what we called the crowding-in mentality of the momentum management crowd, or the selling after a 'compressed' rally last Wednesday. Anyway, we emphasized that accumulation into extremes was probably afoot into the purges, because no fund or manager interested in building a position can do so on a dime; hence even with that hit, and even a lingering malaise, we suspect the same worriers moaned, but quietly nibbled at equities, particularly during extreme weak periods, while superficially protesting about the market risks.

It's dicey from a threat matrix standpoint, but the economic fundamentals have been improving in a way forecast, and that defies the bearish arguments, contrary to what has happened in similar historical periods of hysteria; though nothing is ever assured, particularly given the high values of blue-chips versus likely earnings, and of course the uncertainties of an ongoing likely long-ranging wartime environment ramping-up.

As to McClellan Oscillator readings: little changed at near +3 for the NYSE; with a slight additional rebound for NASDAQ; up to +9; both are above the zero-line, which is a mechanical after-the-fact buy signal; sometimes preceding profit-taking as stated last night for Wednesday, but is a plus from a grander perspective; affirming basically everything we've been saying about this market over these past couple two months.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of next week explicitly continue to remind us of various new risks the Allied fighting forces face, or may face, we try to keep in mind that the unexpected remains a risk as civilization cheers human progress, but worries about those trying to reverse hundreds of years of modernity. For this week a resumption of upside then pendulum like scenarios; no change, other than being prepared for some pause after they ramp this over the 1100 area (got it); the degree of was more a function of emotions, than chart-work, and might be similar on the next shot-up (reserved). We're delighted that the news backdrop didn't mute upside altogether; particularly as we caught most of the further swings too, expecting the changes not to replicate Tuesday. As of mid-evening on Wednesday, the S&P is ahead about 70 with a 343 recent premium or so.


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