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The Inger Letter Forecast

March 4, 1999

Hanging onto support by its fingernails . . . the stock market managed to climb back up from a very precarious position; though by no means has the market secured a good footing. You know what we think will impact the market from here; where the risks are and when opportunities -of at least modestly lower risk- will be presented. As far as the current cliffhanger; we're never keen at the margin about establishing positions into weakness; preferring toanticipate -rather than react to- major events or technical conditions that can upset the market balance, or the Street's desire.

(The Street, by virtue of the strong closing premium Wednesday, is showing every effort to bring things back from the brink, so that even if the non-farm number Friday is strong, a hit wouldn't in fact break the last ditch supports which were precisely touched in Wednesday's trade. To wit: the need for maneuvering room temporarily extending tense rangebound action, barring total shock.)

Each DB over these past several sessions has not only outlined our profitable S&P trading; but pattern progressions for last week and this that was at variance with most of the black-box guys that responded to weakness by shorting into the hole; whether that was on stocks or bonds as a matter of fact. Our long held view has been that the T-Bond market topped last Fall per forecast, then in the mid-130's, that interest rates could firm as foreign money was gradually repatriated, regardless of the overall economic conditions abroad, but simply (particularly in Japan) as initial stabilization of currencies set the mode for an eventual resurgence of industrial markets, whether or not the Latin and Russian situations remain more precarious. On the stocks, we interestingly in fact, at last week's end, went against the grain of the accelerated negative forecasts, calling in fact for a brief rebound in techs and the market before the lows would be again put at risk.

This in fact allowed for some minor long side gains by buying the S&P a couple times Monday & Tuesday, for scalpers only, and then shifting that daily scalping back to the short side Tuesday at the 1245-47 level, which was closed in Wednesday's final hour for a fine approximate 2000 point gain at the 1225tightened stop area which was progressively trailed behind the trade and in fact tightened only in the final hour to guard against a late comeback in Wednesday's trade, which in fact we got. At the same time, the macro trade (and we've defined the difference repeatedly as to whom it impacts) from last week at the 1284 level has been consistently held and we've touched on how it might come out based on the technical section parameters in recent days. Those are in fact slightly revised now, but the basic premise of current risk/reward is not; and is even clearer.

While we didn't get a hundred point drop at day's end this may be nothing but a brief calm before a frightening storm as we approach the week's end. While this market's never going to surrender easily, when it goes, this has potential to become quite dramatic. If it doesn't; it doesn't, and we'll do our best to recognize that and work out of what are fairly bearishly-prepared positions. But if it does, we won't be competing with all the after-the-fact sellers into the hole, which could open up. (In fact we planned playing early upside Thursday; to be followed by at least one shorting effort.)

Investment advisory sentiment. . .has been overwhelmingly bullish throughout January and in fact February, and only now has dropped by 4%, but still leans significantly bullish; just as it last year leaned bullish well past the high in July, and only in August (after the big break) started very reluctantly to deteriorate. That didn't mean that a decline didn't happen beyond that (it did), but in fact that at some point the most reluctant optimists will throw in the towel and then once a market breaks, the "crowd" won't get bullish until well into the ultimate advance after a selling climax.

My point is that a few commentators are making a big deal out of the slight drop in surveyed guru optimism; that's not all that different from the feeling among most on Wall Street, for that matter. I am making the point that the majority will catch (or at least recognize) a slice out of the middle of a trend (any trend), rather than stubbornly being bearish or bullish. It was primarily permabears, or to a lesser extent some strategists at major firms who simply didn't grasp the irrelevancy of the Advance/Decline Line in the 4th Quarter, who stayed bearish through the lows, and all the way for that matter until now in some cases. The point is that a) the A/D Line wasn't important to us at all in late '98, as there was no way it could improve in tone until after tax selling (reminding many, but primarily for new readers who need to understand this), but; b) became very important if by late in February the breadth (market internals) hadn't meaningfully improved. They in fact have not, so c) we are on the cusp of a make it or break it scenario for the market.

Right at the brink . . we assure you the sentiment of guru's is relatively unimportant. Mutual fund managers do not have much money coming in and are praying it means something. The Pension fund guys and gals are in better cash positions, and will be buyers of sector-rotational stocks if in fact the market holds the lower end of the range. If it does (temporarily that's so) you'll likely find us not only long in our S&P trading, but calling for new highs, as you're not going to go back up to the top of the now-prosaic trading range without breaking it out (4th time would be a charm).

However; capital cannot likely be allocated to new opportunities fast enough to prevent a market risk of short-term "crash and burn"; so to speak. That's especially so if they keep issuing buys on a host of damaged goods (computer and technology stocks) that we cut back or sold in January, per the monthly Inger Letter's guidelines. What we mean is that if you can shift into cyclical and a host of consumer non-durables fast enough to offset the tech carnage, there's at least a chance.

Our view: there's major problems with that; though we'd likely recognize it if it happened. Trouble is that such stocks would only continue benefiting from a return of foreign demand for our goods; as we outlined over these past two months. As Japan buys primarily natural resource products, not intellectually-derived goods such as Brazilbuys; you can see the dichotomy between what is good for one sector, but not the other. Computers; airplanes and automobiles go south; while paper, chemical and oil go west. The former are at risk of further slowdown (as the world clearly is not in a monolithic stage of universal decline), while the latter would spook the stock market as they already are. To wit: today's 42-cent oil price increase to $12.93 reflects exactly what we've talked about, and why we thought the very recent Airline rally would run out of steam.

More than once in the last couple days, we (unusual as the focus is usually just the markets and S&P) did in fact single out Delta Airlines (DAL) as in an unsustainable daily-basis rally. It was just an example (not an official trade) of the fallacious thinking about the airlines heard recently on the Street, as we see them. If we're in fact going to get a domestic slowdown, not to mention airline revenue "hits" briefly if total chaos rules later, during Y2k times, and on top of that slightly higher energy prices, then what do we have? We have an airline industry that has increased our ticket prices while reducing service, and in a time of cheaper fuel costs. In an economic slowing, they would be suffering from higher fuel costs, lower margins as farewars would likely return, and the combination would put pressure on profit margins, making a big run-up from Fall a secondary test of last year's highs, not the signal to buy or get excited about the upside after the advance.

If oil is going to advance; won't airlines have an inverse move? Sure could. And if energy's rising won't interest rates increase as well; not to mention the increased demand overseas? Sounds at least like a reasonable prospect to us. But what about all those proclamations regarding political decisions that ended inflation forever? Hah! Certainly they helped; the biggest one being not the Fed's alone, but the President's decision (backed by Secretary Rubin) several years ago to drop deficits rather than focus on fiscal stimulus, which the President was originally keen on doing.

Amazing how few notice this; but it's probably one most important thing Bill Clinton did on his watch bar none; and gets minimal attention from the financial press. We assure you that outside of this particular political/fiscal decision; nothing else means more than energy prices. Now; what does that mean in '99? It means that the National agenda is set but that much of a very extended period of low interest rates resulted from low Asian demand for U.S. natural resources, which in a key way kept natural resource and commodity-based prices cheap over here. If Oil prices rise, in the wake of the troughing over there; interest rates will move higher here, precisely in the very traditional manner outlined in the last three issues of our monthly Letter, and occasionally here in these Daily Briefings. So much for media saying "no one" expected an orthodox finish to all this.

Peaks and Valleys

Just a couple examples of why we think sectors (airlines are one of many) are at risk of running out of steam, or have run out of steam, as in the case of PC's and Networking, for the short run. As noted before; about eight months ago we called for a strong 3rd and 4th Quarter in computer and technology stocks, with some sort of ill-defined slowdown (with recession risk) during 1999's middle. That was a basis of being very bullish on the sector in Q4 (after selling some last Spring) and then suggesting positions be sold or basically cut in half during the expected January rallies that were projected to ideally run into a brick wall of resistance, which they repeatedly did, and in which we caught virtually all the short-term trending S&P moves, alternating up and down in this wild but irresolute Coney Island roller-coaster market.

(The early Thursday Dell / IBM equipment deal reflects long-term consolidations and expansion, between both companies in the very long-run; not just mainframe purchases which Dell needs. It should be noted we have already indicated great optimism on the sector for the long-term future; but that doesn't mean that the road won't be the stock market equivalent of flying from Seattle to New York with Houston stopovers. You can arrive at an ultimate destination via southern routes.)

That takes us back to sentiment: with recognition that in a bull market the bulls are right; while in a bear market the bears are right. That over-simplifies that classic statement, as turning points are where most flexible players miss the nuances of transition. In some cases the longer such a transition lasts, the greater the explosion (orconcussion in an inverse situation) can logically be expected to be. That is by our definition (we don't read market books, use systems, or anything other than experience) the shifting of stocks from weak hands to strong (like last October) or now from strong hands to weak, which was our argument on the false rallies post-Greenspeak, very recently. That is why we established guideline representative equity shorts for price levels above the market in a false upside breakout, and got all the zones entered, with only a couple stopped.

This was an anticipatory effort at the conclusion of the distribution by making it look bullish, when it in fact was never that by our proprietary work. So; should the market hold the lower end of the now-old trading range; we have plenty of working space to exit our short-sales at still nice profits, because we sold and shorted spikes in the market, while others that didn't (or worse regardless of how it ultimately resolves, stayed bullish through the whole distribution) will be forced to sell in a panic, as everyone tries to get out a keyhole-sized exit simultaneously. Fine for us; we're short already, with all equity, Put, or futures positions established at higher levels than currently seen.

Now; again…that does not mean we expect this to hold; the third time could well be the charm, and in fact our call included a little bit up at the very beginning of March before they hit it again. If we get a relief rally after a strong non-farm payroll number roils the bonds, and then they bounce as stocks are hit, that's fine. We suspect it won't hold either; though as you know our bond call is not the same now as it was for all those months people pretended rates weren't firming (we even went so far as to urge anyone who hadn't refinanced their homes to consider doing so last Fall at what turned out to be the lowest rates available, though no one, including us, knew for sure, but it was so terrific that one would have had to be unrealistically greedy to wait for still lower rates).

Technically. . parameters spelled-out in recent days remain valid; as markets struggles to regain their footing. Note that exact, and we mean exact, lows in cash and S&Pfutures hit the gradually rising bottoms from January and February; to wit the high end of the 1210-16 support. (Balance reserved for DB subscribers; as are regular Daily action, Bits & Bytes and Economic News & Releases: sections, per the usual custom.)

In summary. . . the McClellan Oscillator is at -29, which is a -2 nominal change from yesterday. (Balanced reserved for subscribers.) This is a fairly sharp gain (market turnaround), but is not at this point seen as more than a desperate rebound effort coming off key last ditch support after an outside-down Tuesday. (We're trading it; but suspicious, and even of an ensuing decline should it not take out the recent lows in something approaching the manner desired, if it tries to do so.)

The King James Bible mentions gold 417 times. Not once does it mention a paper currency.
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