The Inger Letter Forecast

December 30, 1998

All-time highs were again our call . . . for Tuesday's "real" market, and we got them! No short selling has been our motto; only buying the dips. That was the plan for any Tuesday morning dip, and our (900.933.GENE) S&P trading hotline attacked the buy-side with an "ideal" March S&P 1233 buy into first hour weakness, which in any event was expected to fill the gap-up opening, or correcting a hair more, then take-off firmly to the upside. From the opening we were convinced the market would surge by noon, and push a hundred point DJ gain before all was said & done.

As we've consistently said: next year & next month....are just that, and they have quite a lot to do with investing (obviously), but nothing to do with trading. Many players have dropped the context. Unusual for us again (with respect to Index trading, as this has been our approach for months for equities); we hadno interest in shorting no matter what, and in fact when the index, where so many of our long-held core longs are domiciled, the Nasdaq 100 (NDX), dipped while the Bank Stock Index (BKX) remained strong, we made an unusual statement to ignore the NDX and just stay with the upside. Normally we're very cognizant of these Indexes and respond to their action.

Regular readers of this DB, and callers to our hotline, know why we've held this attitude, why we called for a mid-month decline to yield to a yearend rally, and why we thought so many of the analysts and technical "mechanics" had it completely wrong when they talked about narrowness and limited sector-participation being negative divergences. Of course they are! But that, in our view, would have nothing to do with getting the market to new highs again late this month. That was our call, and here we are. And we're long overnight with no particular stop on the S&P long.

The key. . . to understanding why the majority of "technicians" are now scrambling to get into the market, and why they missed the nuance of the mid-month drop was several-fold (we could have been wrong, but we weren't): First of all; given that all rallies in 1998, including the Spring fling, a precisely forecast rebound from June-into-early-July (the Mom's B'day peak) and Labor Day comeback…all of these were comparatively narrowly-based advances. We correctly forecast all of those to give-way to new selling, so why did we view this time differently? Simple. So few hot stocks (along with the S&P & NDXcapitalization leaders) dominated the year's gains, that there was every likelihood traders & investors would continue liquidating losses where they had any, to offset gains in the big winners, right up 'til yearend. Therefore there was no way the Advance/Decline or other indicators or oscillators based on breadth were going to give anything other but a negative reading right up to the end of the year, and then some. In fact, let's forewarn that if they do broaden out in the First Quarter (dubious as previously commented on, beyond the requisite January effect), and "confirm" strength, that's quite likely to get the naysayers enthused again, and us increasingly less excited about the long-side of major stocks, not just 'net plays.

Thinking is a "Filter" of market technical & quantitative data. . . To us it remains amazing so many technical market mechanics look at "rawly read" indicators, and don't stop to think about the context at a given time of year. Once you have such broad parts of the market so heavily decimated in the second half (you consistently have had that reality; that the market wants to ignore in a different sense, particularly those underperforming mutual funds so saddled with loosing stocks), you just weren't going to turn raw indicators bullish. It couldn't be done basically. Therefore, in the final phase of the year, the thinking analyst plays the trend, and charts a bit more basically, so that's precisely what we meant by not over-intellectualizing the market at this time of year, per our December Daily Briefing and Inger Letter forecasts. It also might provide an understanding of how our "catch-up" game could press a normal advance to new highs here in the Senior Averages, as forecast, and disengage as the downtrodden are (possibly) buoyed early in the new year….ahhh….. Well, we'll see how far that goes.

Sector Rotation: Internet down; big-caps up amidst crosscurrents.

Further; part of Tues. action included traditional sector rotation, which we think we signaled Mon. night by our warning of rumors (confirmed Tues.) that Intel (INTC) had been a seller of positions in both C/Net (CNWK), and Inktomi (INKT), neither of which we currently own (but we did have CNWK profitably in the past which is not relevant). Some of our own Letter's picks (whether they work or not won't be known for some weeks) have emphasized the smaller more speculative and risky 'net plays, versus the larger and supposedly comfortable current Internet plays. Our view is that these stocks (the big ones) have mostly been played, and as JP Morgan was fond of saying in another era (and me in this era): "you don't go broke taking profits; just push some of the gains into the new year and take some chips off the table (that's my contribution, not his); and play the stocks that haven't been overcooked, not the ones that are steaming, other than what's already on your table (that's my contribution too)". (In this case, simplistic or not, for those that have already won, as was the case early last July when we nailed the high; it pays to build cash into strength gradually, which is the focus of what we call a "scalable" strategy for residual uptrending action into 1999, as relates to the "school of what works" onboard gains.)

Point is: we have no idea whether our small 'net-related, or small-cap picks in general will work. But we are pretty sure there's less risk than chasing or adding to the hottest stocks of this year, including our own. We might not sell any of long-held Lucent (LU) -cost 16 or so- or Dell (DELL) - cost 1 ½ - orRambus (RMBS) -average cost 37- (whether all or parts are currently retained) in this scenario, but we definitely wouldn't have the nerve to chase those for new readers, though in all sincerity we hope everyone who is buying them makes money, because we'll make more too!

Betting with the House. . .

The plan on these, and more recent buys like Netscape (NSCP) -cost 16-, InfoSeek (SEEK) -average cost 15- or even EarthLink (ELNK) -cost 6 ½-, was simply to shepherd these gains into the new year and then decide whether to take portions (or more, it all depends) off the table. We are thrilled that this combination of forecast higher price level achievements and deferring taxing gains until 1999 has combined. It might not have, but it is exactly what we hoped would happen, and projected. Our entire 4th Quarter approach was simply trend-following in our homerun stocks along with a belief that the "fix was in" by the Fed and major Moneycenter banks, starting with an absurd LTCM bailout. Our point wasn't to fight (as some did) the move by the Government and a few major Street players; but to be on the same side of the table as they were. Betting with the house, if you prefer.

Those major players didn't own the small-caps of the world; they could care less. They did own a slew of major big-caps, not to mention derivative situations, that were dependent on psychology returning closer to the norm. That was another reason we not only downplayed small-caps, but in fact only included a few and did not add a slew of them until the current Letter, believing tax-sale pressure would continue essentially into the year's end. Again; we've told readers to spread-out into a number of more-or-less equal dollar amount "bets" in smaller-cap (or fundamentally under-priced mid-cap) issues as they see fit, and not necessarily our picks. We'd go crazy (er) if we did try watching dozens of such issues; so we made a dozen representative picks and nothing more.

I think the point is sufficiently made, and what the fundamentals of such companies will be far out is only of secondary importance. We've said for six months that the January Effect would occur in 1999, and in January, not before, for downtrodden, and even some damaged-goods stocks. It is an impossibility to yet determine which of these will be held beyond a few weeks, and become longer-term investments, but some will. That is essentially buying "value" and "speculation" in the particular stocks we've noted, or similar, or any you think are underpriced, and then giving it just a reasonable chance to prove you right or wrong on a stock-by-stock basis.

While we don't envision an environment where the downtrodden can rise from the ashes while the big-cap leaders are crashing, we do see limited timeframes where both can migrate forward together, in harmony with our unusual forecast for January's pattern, which subscribers already know. An important aspect to this strategy was to keep the big winners of this year, including the long-held ones as well as those picked-up during the two major declines of 1998 in the Summer & Fall, which we were so honored to have mostly traded quite well (humbly stated, as no one is perfect, and if you're looking for absolute perfection, you'll not find it until possibly the hereafter), and the added intention of keeping monies available to play the January effect. If you're thinking that we mean increasing overall allocations to the market for now, to do just that temporarily, well fine…that's a personal choice, and beyond the scope of whatever guidelines we can or desire to provide here. We've done that in the Letter; in line with the strategy of keeping all our longs this Fall during many protestations from bulls & bears alike (our stocks are mostly up; not down), or adding modicums of cash (within reason) to downtrodden stock cross-sections, near or at lows.

(Are broad market tops being formed. beyond one-day reversals? Subscribers know our view. As we are usually right about such matters, though there are no guarantees ever, or going forward, it is not fair to us or subscribers to say more than we already have, which is quite a lot. Since we are not brokers, and are retired from money management at Inger & Co.; what we offer is a type of thinking that is very independent and doesn't always embrace Street jargon or terminology, as we never worry whether interpretations fit some pre-defined mold, or not. We care about results. That's exactly what's meant when we sometimes say market success is more art than science.)

Strategy. .

Again; don't expect the overall market to do the impossible, as some manic-depressive technical types who are only now increasing their goals are suggesting. We hope it does too; that would be just terrific, but don't count on it. And don't overstay those January effect plays that don't work as not all will. In the Letter we've noted that if half do, and half don't, and you cut the cords on the ones that don't, you'll likely still be well ahead, because even non-performers shouldn't easily fold after we're past this time of final tax-loss selling. Personally, we're using every downtick to add or to buy positions where we're interested for the January effect, and actually think some can rally a good bit while some of today's media-crazed over-puffed internet stocks have pauses-to-refresh at best. At worst they burst. After all, how many times do we need to hear about more "auction site inaugurations"; ridiculous. Eventually, that will bring the whole sector down again; we'll just have to see if those that spring from the depths go to lower lows or simply test late Dec. lows. At best, new seasonal monies coming into the market will buy enough time to get this market higher inline with our bigger picture forecasts (much already accomplished, given the all-time high calls) and then we'll come back out and reduce our allocation exposures accordingly. Don't forget what we've expecting for January, as that will make it a bit of a roller-coaster for any simply looking for straight up, which is not exactly our call. (And don't forget that while calling the Internet euphoria "nuts", we're playing our share of those ourselves; we just don't view many of them as "real", and thus are temporary trades for the past few months, not infinite investments. Comments on Daily action & the Euro. also come into our assessment of how to handle '99, but only for subscribers.)

Keep in mind that we viewed the correction earlier this month to the March S&P 40-day Moving Average Line (at 1148) as potentially starting an entire new leg to the upside. It increasingly appears that was exactly the correct interpretation of that move, while others were excited about deteriorating internals, which we were not, and we said so then. It is now not out of the question that we'll reverse direction on this move about the time certain analyst types are increasing their targets to the next level. Stay tuned.

The fun part has been being more bullish that the bulls, clearly more so than the pseudo analysts (technicians who fail to think about the context of their indicators along with other variables), and as we said back in October; once old permabears came out of the woodwork, you had to know it was going up. Just hearing those characters in the financial arena (center ring of the circus) was a good clue that the market would surprise everyone on the upside; thus a "powerful move" call.

Now, before we get too excited about all this; let's recognize we're again dealing with (by the way for the second time in two weeks) a multi-thousand basis point March S&P trading gain on a day-trade, in both cases on the long-side of the ledger. In this one too, we're holding overnight, for better or worse. The optimism out there is so high, we absolutely expect a pullback into the mid-session Wednesday, but it won't hold and the market will likely (no guarantee of course) rally anew later in the day. With the Dow only 50 points or so from an all-time high, what do you think the interest is on the Street to have this market finish 1999 with an all-time high in Dow Jones Industrials? You know the answer; and that's what the game is right now, even if they're selling the (formerly??) hot Internet stocks to get the cash to push the Senior Average over the hump.

Gunfight at the "O.K." Corral

This all goes back to our 4th Quarter post-LTCM call for the Street to "corral" seasonal retirement money, which might have been gravitating into more conservative or debt-oriented investments. I would never be cynical (not me) about the motives of the securities industry (right) to ensure that complacency is restored as fully as possible going into New Years; or their desire to fully remove from memories of most investors what (we forecast) would happen in the middle of the past year. Or far be it for us to think any of the guys & gals were influenced by equity performance-bonus considerations; or shall we call it "making their own game"?

Now, while we certainly don't know (we never do for sure, who does?) what the future holds, goal post standards for the Street to achieve at yearend were expected to be "a given". And we nailed it including the forecast for the S&P to make all-time highs, the Nasdaq 100 (NDX) easily, and if all went just right (it did) for the Dow Industrials to maybe accomplish the same feat.. lagging.

We do believe the Street would like to put together another 20% upward year ahead, like this bit of a record breaker, and we haven't said they won't. (For us this was more like a 50% year, with the rally, catching one of history's largest S&P drops almost entirely this Summer, and selling the Labor Day rally; and later covering the day of October's low and never adding new equity shorts since by intent, and then surprising many with our overall bullish bias up to now; better than 20% for most of us, in equities, and in the S&P for the year, who's gonna believe the percentages….. except all of you who traded consistently for the entire year, or any large part, and stayed with it.)

Not every trade was good; some market days were like shifting sands, and just wouldn't define themselves. But just about every week was net ahead, certainly in the year's second half, and definitely each month of the year was profitable for S&P players who even remotely followed our trading guidelines (they are not intended as precise rigid trades, though that would work overall), with the possible exception of last February. Believe me, I'll be watching February this time .

Of course we don't presume to be flawless, and much of the year we kept saying we just can't be keeping this up. And we didn't all the time. But we hope you found it close enough, and definitely trust it has all been helpful to your philosophy and approach to trading markets. (After so many years in "semi-retirement", I wouldn't put forth the effort if it didn't seem to contribute something.)

Economic News & Release & Bits & Bytes. . . (reserved for subscribers, as usual).

In Summary. . . tonight's McClellan Oscillator posting is at +16, back across the zero-line from a -13 posting yesterday (really pretty good considering the number of stocks still undergoing tax pressures), and a "mechanical" after-the-fact sort of buy signal. All we want is further up into our target areas, which on the short-term basis are realized, but can work a bit higher per forecast. (It should be remembered we're forecasting a decline Wednesday morning; the afternoon's key.)

Taking the market's foot off small-cap and downtrodden stock jugulars. . . is the bottom-line for next week, and the answer won't be even remotely visible until next week. Stay tuned on that. Just now, at 7:30 p.m. ET, the S&P March futures on Globex, are trading with a1379 premium; that's about 100 higher than the Chicago close of 1254.60, near the day's high. Regarding a live trade on the 900.933.GENE hotline from 1233 (plus or minus, but that was our preferred price to pay, and it was briefly overrun to the downside before the turn-up), that's a paper gain of just over 2000 points so far. The key will be whether or not the break in the 'net stocks affects others, in Wednesday morning's expected purge, or investors recognize that for what it is, a bit of sector rotation, that doesn't stymie upward progress 'till we get more overbought. (This can be scalped.)

The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.