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The Inger Letter Forecast

February 25, 1999

"A pototypical distribution. . . that sporadically (yesterday wasn't the first) blasts off into what appears to be bullish resolutions that are (for one reason or another) subsequently sold into by institutional money managers", was our comment last night about this rangebound market that in fact has been nearly as stubborn to resolve as any seen…since as we noted….last June & July.

Wednesday also noted the fact of sharp T-Bond declines which didn't recover in any meaningful manner, though our thoughts about that and the meaning of rebounds, are unchanged from that prior view. Yesterday and repeated on Wed. morning's (900.933.GENE) hotline, we emphasized the Fed Chairman's early prepared remark to the effect that "as last Fall's disturbances abate, the Fed must consider whether to maintain policies adopted then". We may have analysts arguing that the foreign condition is improving, so that's bullish for stocks. And while that's true, as we've already noted, for the very long run, our view on the short-term is quite the opposite.

The Dow and S&P's rangebound activity has been wonderful for hotline players; not every trade and not every hour of every day; with trader's "mettle" definitely tested. Last night's remarks were clearly focused on the building tension on the tape which had to be released, but that it might in fact be via afalse upside breakout that was subsequently (or rapidly) retraced to the downside. (And that's how we came to reverse a long-to-a-short on the post-Greenspeak rally Wednesday. The trade got us short from March S&P 1284, with DJIA near 9600, and we're holding short.)

We talked about a proximity of those recent all-time high levels making that a probability; though we noted that we've seen markets fail by the slimmest of margins. Boy was that the case for Wednesday, where the S&P cash made a new high (it actually did) by .27; just above the former high on February 1, which also was called a "false start rally" that would fail while yours truly was off to Disneyworld the next day (very humble but both were apparently decent observation calls).

We then wrote in last night's DB (and since it's still valid, why wear my fingers out retyping this), that: "if you fail in the 1280's, and this then takes out 1250; well that's a significant event; and qualifies as yet another rally to the upper reaches of this (old, now increasingly tiring to everyone we presume) trading range that fails. In this case, failure now is sufficiently advanced in time and price (and distribution?) that one in fact might draw the broader conclusion that we finally take out the bottom of the range, with quite a clear recognition that a break of roughly 1240 would probably be sufficient to set-in-motion the kind of decline that would have some staying power to it (an actual developing trend maybe; and thus potentially the first trending move of 1999!)".

(It's not our problem that vociferous hedgers unable to handle the wide-swinging range trading of 1998 or 1999 are moaning in the media, or telling the public that the market is "impossibly crazy", as it is not. In both cases roiling has been our advance forecast, so we handled it. So a swinging market can be tough but results as graceful as a Swan, if you buy the dips and sell the rallies. No future assurance; as we can all fall flat on our faces. But recognizing the market is smarter than us, tends to keep one on his or her toes; rather than those trying to tell the markets what to do.)

How narrow is the keyhole exit?

Yet another of the Chairman's Tuesday remarks we focused on was his then saying that the Fed "would allow institutions to fail". This in fact was not especially liked by the Bank Stock Index (BKX), which tried to rebound certainly, but was at risk of faltering at a rebound towards a failed secondary test of last year's high, by our work, which occurred in early January. Why so many analysts are more bullish with regard to the sector, and think that's going to lead the market up, is their problem, not ours.

We view the financials (banks & brokers) as one of the keys; but our interpretation of the pattern has not been so favorable as others see it. I have represented that by our first short-sale addition of a bank stock to the Letter's recent list, as readers know, and just in the last three sessions. It's no doubt that if techs, banks, cyclicals and consumer non-durables all advance simultaneously, a more bullish macro stance would be adopted here; and we've said that. However, no, you aren't likely to see that for more than the most sub-minor timeframes; so everything isn't cranking on all cylinders, as the Street would like, and incorrectly proclaims it as so.

Speaking of cranking; there's been lots of talk about turnover, mostly negatively. We've noted the majority of it is either in the most rank-speculations (like the ' stocks) with high structures of ownership costs, or conversely (though they love to deny it) in the nifty-ten (if that many in fact can still be counted as leading the market) beloved by mutual funds and other institutions. This in fact has created a whole level of distribution; which last night we describedmoving stocks from strong hands to weak hands; or some reasonable facsimile thereof. If you "x-out" the public, or mutual funds in their typical performance frenzy, you'll find the turnover extraordinarily lighter.

An interesting implication of this is, that while few stocks avoid some damage in an ensuing drop, of the general market, carnage in the newly-high-level cost basis stocks can exceed those with a lower cost-of-acquisition cost basis. (Please don't confuse this with low cost stocks in the Letter, as my point refers to that ever-narrowing group just behind the marching band's drum major; whether we own portions of some for the longer-term or not. What we're describing is how crowd psychology can find everyone with high-cost-basis stock scrambling to get through a keyhole exit in a rush, which is usually not a pleasant or successful endeavor for those attempting it. It also is the kind of behavior which can turn a "normal" drop into a rout or something conceivably worse.)

Technically. . we were fairly conventional in last night's Daily Briefing; noting that it was unlikely stocks without more stability or strength in T-Bonds, were going very far. This was conventional, but in an unresolved "mixed" market affair; sometimes a conventional interpretation is important, because absent anything else to get this market off nearly dead-center, we though that stocks in fact would likely watch the bonds, which needless to say they did.

At the risk of belaboring references to last night; though this brings the overall understanding of the ebb-and-flow into perspective for new subscribers, the remark regarding a post-Greenspan rally effort on Tuesday was: "if the move is for real; that will be very straight-forward in terms of blasting above today's high (Wed.). If that occurs without Treasury support; on mediocre volume or basically more churning.. well, then you have to be on-guard for it to be a likelyfalse upside breakout". Well sportsfans; that's exactly what we were worried about, willing to look for, and in fact is exactly why we were able to call for a probably rally after Greenspeak, but also reverse a nominally profitable long into a hugely profitable short-sale from the March S&P 1284 level.

The High And The Mighty

Of course we never know for sure how it will go; because this is the stock market which gave us a message as to perilous churning, but this is not the Ten Commandments; so it isn't inscribed in stone. The last two night's DB's were complex and lengthy (over seven pages as I recall), not something I relish on a regular basis, but will delve into when it becomes necessary because it's of a crucial nature in recognizing what's right and what's wrong about the market, and how you in fact could recognize whether a rally was a false breakout sucker play. (It was; and very closely to the mark as far as levels we talked about; both on the upside progression and in terms of what it would take to accelerate the downside once it broke, and how low the first move could go before it would risk being beyond the point of no return.)

Of course we're not referring to your humble analyst's work, but to an old Pan Am Clipper flying between Honolulu and San Francisco, when (as old movie buffs will recall … not that you are old but the movies are) an engine failed. With speed slowed, drag worsened, accelerating their fuel consumption. Finally, realizing they wouldn't make SFO, and with the Coast Guard unable to do more than dispatch crews to search for survivors, they planned to ditch into the sea. As it turned out, they nursed the crippled DC-6B (if you remember those, then you too are at least 39) all the way to SFO, and safety. But they didn't know they would make it, and the Coast Guard couldn't bet the ranch on their ability to reach the West Coast, albeit running just on fumes.

So it is with the stock market. One engine failed last month; thus our forecast January break. A second engine failed on February 2, rather precisely as forecast for that date weeks in advance (just incidentally; and don't get spoiled by such calls, please…absolute precision is not typically required to make money trading the stock market; but a concept of reality and intertwining bonds with equities sure is). And a third engine failed today, after a nominal false breakout as warned, and which was the basis of our most recent (and overall again profitable) trading approach.

Now, none of this is easy. Can the market make it to the equity equivalent of San Francisco (DJ 10,000) on this run? Not easily, and not without coaxing from the best flight instructors. Even so, it would be a market running out of fuel, with money exiting -not entering- mutual fund coffers, or in fact finding sector rotation efforts more like a Musical Chairs game than rotating rescue craft (shifting quadrants or periodically refueling) in their ongoing shepherding of the disabled Clipper.

The path of least resistance. . . is bordering on being to the downside per exactly the inflection levels outlined here during these past few days. New readers should know that coming out of the enduring symmetrical pattern in the Dow Industrials (which was weaker for sometime vs. S&P), and the wild rangebound activity that featured essentially a forecast double top in Jan. & Feb., and an intractable double-bottom, we've had almost as many S&P trading profits on the upside, as on the downside, and as tensions on the tape built, it was harder to catch large swings for a few days, as with the exception of Monday's big rally (which we did catch virtually all of), there in fact weren't any large moves. (That's why it was amazing that some investors mistook irresolute market action for an aircraft trying to gain altitude every time it got favorable winds, but otherwise was at the right stage, and the right time, to generally get into trouble, with risk of a nosedive.)

Speaking of nose dives; it was funny that the (900.933.GENE) hotline talked about the market in fact moving down to around the low 1250's (the old inflection point of the now-ended symmetrical short-term pattern of the S&P which is not what you're easily going to see on the charts, but was a part of our work as noted), where some last ditch fight would be fought. We recall mentioning it Tues. night here too for that matter; saying you'd have to "slice through it" to have a downside in fact confirmed. That set's-up the next two days as potentially the most fun in several weeks, and it is fascinating that the financial media thinks this is a particularly tough market to trade now.

It's actually anything but; now that the market has been juiced into movement! As noted the other day; when they narrow these things into a compressed engagement of locals trading amongst themselves on the Floor, it's not resolving things (isn't that true of all kinds of fast engagements) but just delaying them. We called last week for some late Expiration rallying, and interestingly the nuance of a technology and internet stock rally was also called for in the early parts of this week.

(It was our view that this not be overemphasized in terms of a "greater meaning" for the markets, and we think you'll see that over the next few days, even as now the 'net darlings are stronger for the most part than the general market.) At the same time we saw risk of a false breakout that in fact could be reversed in a protocol that very much in some aspects (but not in all) resembled the situation that prevailed last June and July. Actually the market internals there were stronger than now, as the investing public was rapidly tossing (and we mean tossing) money into mutual funds.

The American investor is far more sophisticated now by his trepidation of doing that; either that's the case or (worse) he's become addicted to online daytrading with what should be capital that's on reserve (like a reserve fuel tank on a potentially endangered aircraft) for retirement investing. One thing that should be worrying everyone about all this is that so few are worried. In fact; the common conclusion after this day's action is that "everyone will forget about it by tomorrow". The chance of that exist only if we do not close below the lower inflection level around 1250. And if in fact we break 1240; forget it…the market will be in the equivalent of a death-spiral dive that will in fact have the same permabulls trotted-out by the media in the midst of today's failure running for their life rafts, which (the inverse of short-covering) means heading through the keyhole exit.

Presumably none of these "experts" have ever looked at a chart; and invariably must be cynical about market timing (do what?). Good thing they're not Captaining our airplane; or they'd just go jam those throttles and fully use up our fuel, effectively removing any chance of safely reaching an airport, increasing the odds of a "crash dive". (Have they already "spent" all that fund fuel?)

Daily action. . . has been oriented towards all this, (balance reserved for subscribers, per usual).

In a nutshell. . . we actually moved the inflection point up to the 1284 area of the March S&P; in fact ready to reverse a long-to-a-short on a dime, with the chances real of a false breakout. And that is what happened. We did forecast a rebound after Greenspeak's Q&A, and got it, with the serious money not made until the breakdown, and ahead about 3000 points at Wednesday's close. We did widen, rather than tighten, stops, as we felt this could be significant, bringing what in fact was a trailing stop to a fixed one, and then leaving it alone so as not to take us out of this clearly important trade in the event of a little rebound effort as intraday traders squared positions.

In this case we are looking for a down-up-down pattern Thursday as an ideal market behavioral climate overall, and will adjust as best we can, only if necessary, during the day on the hotline. At this time (balance of comment relates to forward strategy, and must be reserved for subscribers.)

At the risk of being relaxed (since we've finally got wonderful action going again after the market in fact took a break from being decisive, not me, though it's on my mind to do so); let's give some bit of an idea how a bearish progression could look: try 1232-42; then bounce to the 1250's or so, a test of the first low that fails within a day or two, then (possibly later next week, if not sooner as in this Friday and/or Monday), we get a penetration of the first lows and accelerate, quickly as a matter of fact, to the 1210-1216 level, bounce from there to below the first upcoming low, then we could measure a move (lower; but we must limit that projected level for subscribers). How to tell the difference? Well; rumor has it that we know something about such matters; stay tuned.

In summary. . . we weren't particularly enthusiastic about any rally crystallizing into a new broad-based enduring advance, as were and are others. But, as most are cynical towards it; to us that meant we could have a post-Greenspeak rally Wednesday, with the next resistance (noted here in the DB last night) of 1284-85; it only got slightly above that, and our short is right from there.

The McClellan Oscillator (as some of these comments are interpretative going forward, they in fact must be reserved). Again; if you wish to compare this market with last year's false breakouts (not perfect, but not terribly at variance…we don't want to be perfectionists, because the market sure isn't), it too turned-down per expectations, with then-forecast aborting of a "Mc" rally without a requisite achievement of an overbought reading so many were looking for. This is very similar.

We go into Thursday short the March S&P from 1284, with no stop just now, and we'll decide in the morning where to put one in; or conversely (assuming we're not looking at a plug-pulling yet) determining a price area that we'll intend reversing for a rebound. It's sometimes too complicated to separate macro trades from intraday trades; but suffice to say that odds are fairly good that a resolution of this old rangebound pattern is being accomplished very much like last year; where we looked for and got a false upside breakout (and thought it would be that if it occurred), then a drop, a rebound and a plunge. (portion reserved)

Wednesday was an up-and-down key reversal session; an outside-down day (a higher high; lower low, lower close, but not exactly an "island" pattern, other than on a daily basis). This does not always succeed; but more often than not they do over time, as far as the implications of the outside day. So for now, we go not only with our own well-fought-for call (and live trade), but the odds, which say the next rebound will be in fact very suspect; unless it comes from no lower than today's low, which is unlikely. Enjoy the decline!

Goldschläger and Goldwasser are liqueurs containing pure gold flakes.
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