first majestic silver

The Inger Letter Forecast

February 18, 1999

Panicky peddling. . was not our expectation Tues. night when S&P premiums evaporated, and a big discount prevailed on the overnight Globex market. In fact, while recognizing that our seminal description of the Dell (DELL) story might indeed be valid, we had a different trading plan for this Wednesday's action, which went swimmingly well. Indicating that we'd probably ideally do three significant S&P swings (on our 900.933.GENE trading hotline); that's exactly what we did. Two were longs; and one was a short. The morning longs netted around 1300 points total gain, and a key reversal short (identified as we shifted from long-to-short Wednesday's noon ET high), right at the March S&P 1250-52 level. (This short-sale; ahead over 2000 basis points, is currently live with no tight stop pending Thursday's opening hotline, typically available 5 min. into trading.)

In summary: an intentional call for buy-the-dippers to combine with complacent fund managers and some vestiges of the nominal Expiration to combine with a bring 'em back rally, we identified several (proprietary) reasons why we thought the market would run into trouble in the low 1250's of the March S&P, and near Dow 9350; having a good chance (nothing is certain, but it worked) to break down in the afternoon. That is why we in fact widened the stops, then removed them, in fact identifying from the onset of the trade that it was potentially an important one. Several things need to happen over the next three or four trading days to affirm that, and we'll touch on these in tonight's DB's technical section.

Technically. . readers knew last night to keep an eye on the 1230 area of both cash and futures, with the expectation that if these did not come out early-on Wednesday, you'd get a sharp rally if even it failed later-on, which became the call. Note that neither broke 1230 in the first hour, thus a good control for the ensuing acceleration to the upside was provided, so shorts could be run-in, buyers start streaming-in, providing a rebound for a few with a bigger-picture perspective waiting in the wings to be afforded a good opportunity to sell stocks to them gladly on that brief advance.

March S&P. . . still hasn't spooked most strategists from their lofty optimistic perches, except for those who were already cautioning (but most of those missed the 4th Quarter forecast advance). Note that the fairly interesting pattern failed where it needed to (declining tops line by the way); a second effort took the market under the little most-recent rising bottoms pattern; and key support looms. One might think there would be more fear expressed from the Street's inner-sanctums. Do you know why there isn't? We do. They haven't finished their distribution, in fact many in fact are just now starting to figure out that they've hung-in too long, for too little gain. Surely once the market confirms decline, they'll tell us why it was so clear (though it hasn't been to them so far) in a way that may resemble all the people explaining Dell's problems, but only after the breakdown.

(After all, we agreed weeks ago that a report of massive insider selling by Michael Dell warranted attention and reaction, by our Jan. plan to take some chips off the table, which we did. Reiterated that again last week, before Tuesday's report hit the wires; even talking about shorting it in fact, for those inclined, but not officially doing so for reasons explained; selling some was sufficient.)

Within this overall framework of the past few months, cutting-back was indicated in any stocks or even the market as a whole, to be completed by January's end; per the month-in-advance call for the top to be done before a "false start" rally in February, leading to a forecast hard-break in the February 2-9time span, which as you know, was nicely accomplished. This correlated to the (somewhat too-pat) double-top in the March S&P, while the DJ never even emulated that effort.

Since we just had the noted failure; what now? Well; Wednesday's strong closing premium will of course embolden traders to believe the upside's not completed. We view it instead as a reflection of excess optimism, just like last night's deep discounts was perceived an a perception of excess pessimism (interestingly enough), even though we expected serious selling after they ran shorts. Thursday a.m., we absolutely allow for a little rebound to something like 1232-34 or so, early on.

Up to now we've responded to every effort that failed to take-out the lower 1200's by reversing to a long. It's not out of the question we'll do that again (after all we trade the market, not opinion) if necessary. However, now that the Expiration is winding down, and a monetary weekend is again approaching (G7Meeting, with some squirrelly comments today from Secretary Rubin, that imply an emphasis on foreign growth, which isn't necessarily bullish for American markets in the earlier stages as the last Inger Letter noted) we ponder how many traders are really enthused or eager to "take 'em home long" this weekend. We suspect very few actually, regardless of what they say to the financial press, to which clearly they tend to "talk their book".

(Certain technical parameters reserved for subscribers here.) In our custom of trading markets, we don't "require" the market to do anything; though it often will accommodate us anyway (very kind of it, don't you think?). We just have a suspicion that there is more damage than the Street generally acknowledges, that the overall market's not oversold as optimists proclaim (particularly on a weekly or monthly basis), and that the proximity of short-term oversold stochastics can also be a trap as a market moves from distribution to a later stage, which is the onset of a liquidation.

(The initial forecast breaks of late January/early February are behind us. This section explains in detail why many analysts and technicians are missing a correct analysis of the market condition. Thus, as that is our proprietary thinking, parts of it must be reserved solely for DB subscribers.)

If investors weren't suffering …we'd poke fun at all of the analysts idiotically saying there are "no signs of a bear market in the Internet stocks". What market are they watching? Those stocks and the tech sector, topped last month, precising the point (at that time) of suggesting one consider a short (AMZN) or eBay (EBAY), whether anyone did so or not, and the indicated big macro 1280 S&P short, that specifically was indicated to signify a trend change from bull-to-bear in effect since our last macro-shift in early October '98, a bear-to-bull shift reversing an early July bull-to-bear huge call. Our current view: little doubt more downside will be seen over time.

Last July (the now-famous -should be anyway- forecast "Mom's B'day top" in that month's 1st ½). Then our forecast cyclical bear unfolded per pattern call. If we are truly in a new bull market from last Fall (which in our view, for the best stocks including virtually all our cores, already happened by the requisite percentage goal of 50-100% moves into early this year), then we ought not to go below the high of the previous cyclical peak. (Portion withheld; it denotes a logical progression.) But the point is how that resolves isn't yet particularly relevant. What is; will be whether we can break key supports on this next effort down over the days immediately ahead; because if so, a) we just did another very important trade with the March S&P short above 1250, and b) there's no telling how much selling can come out of the woodwork if investors and funds get spooked, the opposite of how they're behaving. (If not, our trailing stops ideally take us out with gains anyway.)

One more thing: last week we made a point about T-Bonds rallying, albeit for the short-run kind of rebound, and that's underway. Some see this as evidence that low interest rates are here to stay. We see it as evidence of money shifting from equity into debt temporarily, and little more.

There is no doubt that long rates could drop below 5% easily if we get a severe slowdown, but in fact that would be during an inverse equity/bond relationship. First, if we're cranking the economy and foreign markets are going to grow (per the Treasury Secretary's remarks today, and our long standing forecasts), that's initially a negative for rates, and the current flight-safety rally can mask the underlying trend, which has been in force since we identified the T-Bond 130+ top last Fall, at the time pointing out to investors that that was a temporary bubble as money sloshed into that sector, and by no means a safe place to "park" money. We know that others said and did just the opposite; but that's not our problem. As far as we were concerned then, rates troughed; period.

The Market As a Discounting Mechanism

A major tenet of our 1999 work is to recognize that firming, flat, or softening earnings in a higher rate environment, cannot and will not support an expansion of multiples, much less maintenance. That is why we said that theoretically there is more secular risk this year, than last year, which all along we said was cyclical in nature, with a powerful rally coming in the 4th Quarter, but not at all very far beyond the early weeks of 1999, which were seen for a variety of analytical reasons, as a barrier to further immediate progress, as you all know well. (We also forecast that the Jan/Feb markets wouldn't be easy for investors, as the expectation was for alternating rallies and declines to occur. Maybe not fun for those spoiled by sweeping "trending" moves; but a correct and a well handled period of time. Label it good trading of an imperfect market..we made real extra effort to catch the swings during this irresolute overall period of time, and know you appreciate that work.)

We have friends that are even market analysts (at least they say they are…friends we mean, not analysts) who roundly are worried about risk later in the Spring or towards the Y2k fears later this year. That's fine; and they mostly think this market is getting ready to explode upwards (it likely is not; but if that changes; we'll shift gears in a New York minute, which is what a trader should do). It is mentioned here because if they are all waiting for the Spring to sell, why should the market accommodate them? It shouldn't, probably won't, and already isn't. Some say there's no reason for the market to be declining now. Last we heard the market is a discounting mechanism, so that's exactly what it should do if the economy's going to slow late this year, or early in 2000.

They do teach this at the Harvard Business School, and the Wharton School at Penn. (which I turned down to go to the University of Miami, believe it or not, as Winter golfing was much better, incidentally). So, it's likely that it's not me that has been in the Sun too long (that's another story, but it hasn't dulled my financial way of thinking); and that these guys are forgetting the market in fact has to discount, typically 6-8 months in advance, an economic slowing, while by the time we get to it, the market will be starting to bridge-the-gap and preparing for the ensuing recovery just at the time everyone will probably be most worried and depressed. Now; we know, the market's discounted six of the last two recessions, including last Summer and Fall. But that's not the point.

In fact maybe it is the point. The same analysts fought with us last Spring about the market, and we got a decline, if not a profits contraction. There is a difference: we were bullish on computer & technology coming right back; especially the PC industry then…not now. Our argument then was dominated by our well-known view on debt implosions & derivatives risk; many, many months before LTCM. That was the hook for their missing it; as they said profits were fine; but we agreed on that. This year they still say that, and we sort of agree. Sort of because we think there's a type of "bulge" ahead of Y2k, which won't be prevalent late this year, and sort of because in a higher interest rate environment, you don't put such a high value on those earnings, even if maintained. Our argument this year is contracting multiples. If that coincides, as we suspect, with peaking profit margins, then you have a duality of problems, and potential secular risk to the market.

In summary. . . after a terrific Wed. morning on the long side, and 1300 points gain, we are again on the short side via yet another new short from above1250 in the March S&P, which closed at a modest downside gain of 2070 or more; closing at 1229.30; for realized and paper gains for the day totaling around 3300+ for the moves, intended as guidelines as you know is necessary to put structure to the hotline in these volatile moves. (While there are days players can do fine with the noted levels; we urge everyone to solely make their own decisions with their brokers, to evaluate analytical factors that are mentioned and encouraged. It is correct we continue to nail the swings; but we really don't want our trading opinions to be taken as gospel, or acted upon independently from your own fine decision-making process or with the aid of your advisor. In response to many requests, we are retired from money management, do not handle accounts, and cannot suggest any particular brokers that embrace our approach, though we're sure quite a few might do so. It is hoped that with our views as a resource, it will help contribute to your equity thought process.)

The McClellan Oscillator was back to -130 or so last Friday, and -103 on Tuesday. Now; the Mac is back down to -126, which simply means rallies are failing, and it's working lower. Not too bullish, dare we say. The Summation …get this … went from Friday's minus 516, then Tuesday to -617 and now on Wednesday a -743 (more widening of daily posting dots, which is negative).

Don't forget one more concern: the recent debut of widened trading bands, or collar restrictions, which now allow DJIA (here it is a factor) to decline or rally180 points, not the former 50, before restrictions that slightly inhibit arbitrage trading, come into play. This in fact will amplify volatility, and in fact potentially contribute to the kind of latitude to get a decisive breakdown in the Senior Averages that the market has been struggling with for some weeks, that we have analyzed well in markets that by no means are easy ones to trade; oscillating as we warned it would for weeks.

It's a bit of irony that this potentially happens now; as the NYSE certainly did not intend to see an increase of such volatility in the first several days the new guidelines take place, which will serve to encourage some of the opposition (to the range broadening) to believe they were in fact right. With a 100 point Dow decline Wednesday, it wouldn't take too many more failing rallies before it becomes reasonable to see the market put to a test upon confronting the first of the new collars.

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