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The Inger Letter Forecast

December 18, 1998

Climbing a "wall of worry". . . might be a typical reaction to Thursday's action by investors, and no doubt that's true, but only to an extent. Disparatesurreal turmoil, was the key test or pause in a Triple Witching Expiration week that, while certainly not easy to trade, proceeded grudgingly into an ideally anticipated Expiration-based upside affair, even absent the huge Put positions that characterized many of the year's prior "Witches". That's why last night's remarks here and on the (900.933.GENE) hotline indicated we might cover the precautionary short at whatever we would be able to get, since all along we've projected the actual Expiration-related pressures as to the upside. That short was a precaution, and clearly well before the opening it was a given that we'd be on the long-side of the market once again. Foreign markets had stabilized and firmed, and so had the Globex S&P activity, suggesting the First Strike against Iraq had been absorbed by the market, and we could proceed as intended, with a challenge on March S&P 1178-80 resistance.

That level, indicated all week as a crucial declining-tops pattern, was taken out spendidly for the first time, putting an end to the frenetic hourly swings that were needed to achieve net gains for so many of the prior sessions. That is not to suggest the going won't be tough again, especially with the unknown implications of a coming Saturday Vote in the House (newly scheduled) on the Impeachment. Increasingly, there are sentiments to vote it through, send it to the Senate, and in fact "get it over with one way or the other", as we've heard in the media today. If so, this might in fact become a bullish factor for a bit more of the First Quarter of '99 than previously thought. How so? Well, if the Senate were to concentrate on the whole matter over a two week period and then have it resolved with finality (regardless how it goes) the Country could go about it's business at least with a bit less reticence about 1999. Fundamental changes? Too early to say that. Also too early to say whether the new Speaker of the House –designate-, Bob Livingston, will caused his colleagues to tone down their ardor, now that he's admitting to indiscretions outside of marriage.

Most likely we're probably hearing about not-so-horrendous results from analysts with key vested interests in emboldening investors (in general) to commit funds to the stock market early in the new year. Also a fair number of companies have constricted their overhead on an assumption of a slowdown, so if there wasn't much of one, they'd have to re-expand fairly quickly. Are we revising a cautious yet invested outlook for next year? No. Just noting why we were buyers (and are in a few issues) of smaller-cap value plays during weakness for months and reserving judgement on how long most will be held. Further, decisions on trimming major long-term holdings once shepherded into 1999 don't have to be made yet. Let's see if this market can indeed make the pullback to the 40-day Moving Average earlier this week (more than once) the beginning of an entire new leg-up, as speculated the other night, rather than just a year-end rally.

Some on the Street are focusing on next week's Fed Meeting, and chances for further rate cuts; but actually the relatively robust strength indicated by contracting Unemployment Claims, and slightly diminished Trade Deficit, argue against any needed Fed action now, particularly since a mini-war hasn't even meaningfully broken the market's stride. There's really little need for action on the part of the Fed., particularly as they're likely not very interested in stoking speculation, as the more recent cuts were intended to bring the market back from the edge of meltdown (as loan activity had come to a grinding halt at the time of LTCM), not exacerbate irrational exuberance.

Daily trading. .has our March S&P long being held from the opening at 1178 (or as close as any could get since that was the opening and the low; with the balance of this remark reserved for subscribers). As of the Thursday close, the trade is ahead something like 1400 basis points, or as close as a trader could come to entering at Thursday's get-go. We stayed long all day.

(Continuing). . that we're long the 1178 long overnight while having no argument with those who grabbed the terrific profit towards the end of Thursday's trading, we expect an up-down-up-fade pattern as the ideal on Friday. A pulling of premium at the end of Expiration is something that often occurs, but it doesn't always. So, we'll have to trade Friday as it unfolds, but for now the call will preliminarily be what we ideally looked for through this month; the mid-month drop; rally into the Triple Witch, a pause briefly thereafter, then some more upside into the end of the year. That can be "ragged", both as a result of continuing mind-boggling events that may unfold, and because the Christmas and New Years holidays give us shortened trading weeks coming up. If anything it may exacerbate volatility all through this, making for more great trading swings.

Technically. .we remain open-minded for varying alternatives, which is what you have to do in trading. Our bias has been for this week to feature a penetration of the declining tops pattern, then a pullback to it maybe early next week (or less if all goes even better), and then yet another surge forward. Since the March S&P, which is based on 500 stocks, not 30 like the Dow Jones Industrials, held its 40-day Moving Average Line, there was a chance that if we could get this out and above 1178 we'd take off, press 1196 (key number noted here Wednesday) and then pause before trying for even higher levels, like 1210-1220 basis the March S&P; all would remain in gear with our big-picture forecast (as revised back in October for a "W bottom" formation call).

First though, let's get through the Friday remainder of the Triple Witch, and see if the market then goes into a ditch. If it's only a revetment, then we can continue adhering to that forecast made at least two months ago, which was for a powerful rally, dip in mid-December, up into Expiration, a dip, then up at yearend into the new year, and then we'll see whether or not a brick wall looms as key resistance to this market or not, as we shepherd Inger Letter core investments into the new year. Since the day after the low in October one thing has been made abundantly clear, and it in fact was quite a change from earlier in the year: we concluded no short-selling was appropriate in equities, and probably not until we get into the new year, and then we'll see. Very bullish for us this Fall, as we commonly are always on the lookout for shorts, not just longs. Not just because it was the right move not to do so during this timeframe, though it was, but because we weren't going to fight the Fed, the uptrend that we ourselves had decided would occur, and because one's "opinion" on valuation should not be the same thing as trading the market.

For instance, we see now arguments that may become important over time of a bearish nature. Of course you can include breadth, add the Dow Transportbehavior, note the recovery of the Bank Stock Index appears to be nothing more, and derive "non-confirmations". But concluding all that and acting upon it would have had any such trader on the wrong side of the market for quite some time. Not to mention that even if this turns out to be an early-harbinger of trouble in 1999 (we'll let you know, hopefully correctly once again if that becomes necessary), it hasn't at all paid to listen to the permabears reciting such statistics this Fall; they have been dead wrong. That is precisely why we mention that the ever-narrowing quality of the market's advance can be a warning, but that these things are typically early, sometimes by months. We're credited with a saying about the market; "momentum precedes price", which is tantamount to saying indicators sometimes turn down well before the market will. That's why trading is more art than science.

Triple Witching draws near. An Impeachment Vote is almost here. Saddam shows no fear. And against key resistance for the DJ and S&P, the market finally got in gear. Now, we have to watch and see whether the Dow has just aborted a decline and turned up (almost from a saucer kind of pattern), with a target of 9100 by Christmas, and very crucial resistance there. Of course, since this is all tentative, and subject to extraneous variables on a political, military and even do we say sexual basis, let's not jump through hoops and call for an immediate 11,000 goal again. It might be important to note that if the tentative low of 8670 or so is broken, at least on a closing price basis, much trouble could loom. Ideally that won't happen now, and we'll pull back to 8780-8820 or so, and then advance anew.

For the March S&P in this remarkable news environment, the 1148 level is sacrosanct, with the gap thereabouts serving as an attraction for a future decline, but ideally not the post-expiration pause-to-refresh we've been talking about as part of the "normal" procedural happenings. (As normal as anything can be in these unprecedented times.) For now, with the breakout scored, it seems like 1178-80 should prove to be impenetrable support if this is the new leg-up speculated as possible in Tuesday night's report, all as part of the intermediate advance coming off a "frog" or "W bottom" as we identified the late August and mid-October lows as having formed. Our main concern about that going forward (because it is otherwise a beautiful bottom, as far as they go) is earnings; so that's what we'd need to see positive surprises about as we go into the new year on the market's long side, with most (but not all) of our S&P trades, and without new equity shorts.

Structurally. . .all this was preceded by internal deterioration noted in this DB for almost three weeks, plus increasing "fundamental, technical andpsychological negative divergences" following clear turns-down in stochastics (both hourly & daily) and oscillators three weeks ago. But, coming into this week, we already had an oversold daily Dow, and a midstream S&P, all commingling with the usual volatile factors in mid-December, as noted in recent nights. These include most of the last vestiges of investor tax-loss selling, avoiding of new investor mutual fund commitments until most major funds go ex-dividend (by tomorrow that point will be past) and of course the Expiration impact, which already was assessed to be a little bit less of a factor than at prior key expirations, because of a very low degree of Put buying or short-selling in the recent environment. However we still felt the Triple Witch would be up, and that there was a shot at the market being in the process to again challenge the highs soon.

Two months ago we called for all time highs in the S&P and NDX (the Dow is structurally weaker based on its component stocks), with less liklihood of theDow Industrials making it; but that in fact was not relevant to emphasizing the long side. It is now past the roughest part of the month, we have a homerun long on board, and have bought some small-cap stocks during these most volatile downdrafts in recent days. The point is that we may indeed face an important top not so far in front of us; but if not, the time to buy is behind for most key stocks. The idea was to buy a selection of smaller-caps across a spectrum of industry groups (with a tech emphasis, but not in just one narrow category) and then see whether that works out, along with keeping our long-held stocks, which others like now, but are well past bargain day. That doesn't mean they can't move higher; it means the risk-reward ratio to new investments is somewhat less than favorable there. So we keep those, and buy only where the valuations are compelling, whether they work or not. If they do, or even the majority do, and the rest don't get clobbered, it's a reasonable risk to take.

In Summary. . .the McClellan Oscillator has improved from –138 to –95, coming off the depths of –180 earlier in the week. Before the December decline began, we suggested –150 or lower as a realistic goal for the mid-month drop, and got only slightly more. This isn't the easiest week to trade, but we're glad to have done relatively well each day, within what the market allows. Ahead each day in net S&P trading, we have a live-long currently from 1178 (or slightly higher) in the March S&P going into Friday. Again; our target is very close now; 1196. And if we just back away from that slightly, before taking it out, that would be very nice indeed, and bullish. Still we'll allow for a potential pullback after the Expiration, and trade accordingly as this gets closer. But that by no means cancels the ideas of 1204, then 1210-1220 afterwards, moving towards New Years. At 8 p.m. ET, evening S&P Globex trading shows an 1062 premium, with the March futures at 1190.60, down 160 from the regular Chicago close. (Again; the ideal pattern call for Friday is: up-down-up-fade. Check the 900.933.GENE intraday hotline if you'd like our finessing of this.)

God bless our Armed Forces, and the United States of America. The real (non remote control) part of the air war is now underway.

Gold is the official state mineral of Alaska.
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