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The Inger Letter Forecast

March 11, 1999

The "Three Faces of Eve" . . . replaced disturbing international developments or Fed worries as determinants mostly ignored by the market much of Wednesday, a day that projected to be a bit soft early, then basically an up-down-up session. Actually; it was just that. However nothing is so simple about the ongoing market schizophrenia, not quite yet at an increasingly feverish pitch. Tonight's technical discussions will touch on why this pattern argued slightly higher before lower, but why you've got ongoing roiling that absolutely continues to present a split-personality market. (Our view since late last week has been the failure to breakdown virtually assured a breakout for the market above the earlier top of the old trading range; since it wouldn't go back up from triple bottom pattern to a triple top, without breaking it out, even if it horsed around for a couple days.)

In the meantime a March S&P short-sale from 1290 was covered (or from 1283 for players who engaged in more aggressive final hour rigid trading after during a successful Tuesday session) at 1278-80, and a series of tricky intraday trades was attempted, leaning to the long side especially in the morning. Keep in mind an important prior trade was the previous long from the 1267 level. At Wed.'s end our interpretation of the short-term's probably still more bullish than most common knee-jerk reactions to computer fears and financial concerns though our bigger picture view's not changed. During the afternoon we reversed a long to a short at the 1287 level, briefly viewed as an intended overnight precaution on the hotline (900.933.GENE), but that one was closed for a tiny loss before day's end, leaving us flat on a short-term and macro-basis ahead of Thursday. (As noted we then went immediately long at March S&P1292; holding & ahead nicely by noon.)

Now we have all kind of market dichotomies including today's late warnings by bank regulators, which you are probably aware of. This is all very interesting against a backdrop of record highs in the Averages, and is not unexpected given the approach of a Triple Witching Expiration late next week, and a fairly common tendency of the Wednesday in the week before such events to be up.

Earnings warnings. . . (pre-announcements) are very much expected to be forthcoming shortly. However; we think the primary concerns for the technology and computer demand are forward of the current time, not backwards, so we're not going to be surprised if 1st Quarter numbers are not so far from the mark. We continue to believe that numbers (or targets) were simply raised above realistic expectations early this year, and that was precisely why we argued that stocks like many long-term cores were appropriate for partial sale, even the Intel's (INTC) or Dell's (DELL). With all of the market chaos (and it is chaotic) since, those highs have mostly not been taken out, with the exception of stocks like Texas Instruments (TXN), where particular news stimulated buying.

We remain represented in these, and others, simply because we thought positions should just be trimmed as we moved into the new year, not abandoned. And we felt the best suggestion for the normal investor out there was to cut back to the sleeping point, not become big bears, but mostly become enthusiastically conservative. That meant; no debt; no margin and limited exposure with speculative positions. And it meant recovering at least original investments in the best sectors for the long term over these past few years, so that one was not only avoiding leverage, but playing with profits as opposed to new capital. One can certainly drop the context of that strategy to note particular stocks that have advanced more so; but as stated then, even if the market goes to DJ 11,000 and the S&P makes 1390 (1305-1320 has been noted as likely for the immediate future, ahead of the Triple Witching Expiration); we felt the extended nature of this market warranted the cautious stance. We're sure that if the recent decline would have continued, or for that matter the next one takes an even bigger spill, that many investors will be relieved they haven't pressed the upside or taken serious financial risks in what -by any measure- is an extended market condition.

In the final hour. . longs were briefly flipped around (the market had finally started "trending" up) as Government regulators released a "warning" for banks to "increase loss provisions", resulting in fact from "global credit instability". We interpret this as an expectation for new phases of last year's extended Contagion, which means likely from Latin America. Interestingly, we don't view a crisis of this type as particularly bearish on a daily basis (though we worried others might), since history has shown the American markets to benefit from currency flowing here amidst crisis, as in fact we felt (and just discussed again the other night) would be the case in 1997 and early '98.

The market stumbled only briefly Wed. on that "flash" report, and then regrouped and proceeded to rally to new highs into the close. One reason for (not shorting overnight) was that our hourly work is not yet reaching into the overbought areas we anticipate before this upcoming Expiration is completed, or for that matter the minimum measured goals we have for this leg-up, which we don't think will evolve into a full-leg to the upside, but which we already measured to potentially 1390 some weeks back. The key to understanding recent upside was not the achievement of new highs, but simply the turn-back last week from the edge of the abyss; and our own view of the then-present inflection area around the 40-day moving average, which was in the 1252-54 vicinity. Once that was taken out; we presumed the upside of the long multi-month trading range would be breached; just because they wouldn't likely take this up a 4th time without succeeding.

Fundamentally there are many concerns that dwarf these measured and of course the technical analysis conditions we've alluded to. One is recognition that techs and financials (represented by the Nasdaq 100 (NDX) and Bank Stock Index (BKX) must both basically remain firm in order to pull-off upside of any significance coming out of an indecision pattern prevailing overall this year, in line (unfortunately for those who want a definitive answer to what big move comes next) with a call essentially for just that. (Correct call; but nobody's particularly thrilled with irresolute markets. It is doubly the case whenever moves, mostly for traders, narrow again into tighter formations.)

And, it's oversimplification to suggest that just because the market's broken-out to the upside the forward action will be clear-sailing. That's part of a split-personality (Three Faces of Eve) market, in which investors basically require multiples to be maintained for all Senior Averages in the face of fairly constant (forecast) higher Oil prices, reasonably higher interest rates (as represented by T-Bonds, and an absence of increased money flows into most mutual fund sectors. Does this in fact mean the market runs out of steam within the next few days in some sort of blow-off that will be reversed just about the time managers think they've got enough air under them to provide the good "clearance" above the old pattern that they feel comfortable with? It's a very real risk that in fact can build in the days immediately ahead. Stay tuned on that. Are we there yet? Without that kind of news inferred by the bank regulators, no, we are not there yet; just slowly working toward that condition as previously outlined. Again; not an easy market to trade; filled with angst; but this is what we thought would be happening this week, and the call for next week isn't changed; yet.

Oil complex strengthening can only go so far before it pulls down the Transports again, which in fact would probably have a similar impact on T-Bonds. Supply considerations have been cited in most cases by debt traders for the recent overhang that mutes efforts to lift an oversold Treasury sector, but that will ease, and may occur with the last fling of equities to the upside on this run. At the same time, it's reasonable to allow Oil to advance a certain degree without being concerned. That is because petroleum was unreasonably cheap due primarily to slack Asian demand, not at all related to brilliant policy from Washington (unless IMF policy intended poor advice to financial leaders abroad, and DC initially believed their approach, which we doubt). Latin America is a low cost producer themselves, so given their current problems, a temporary lower-cost supplier. That interestingly brings some supply here less impacted by Asian demand for Persian Gulf crude oil.

The inference of this is a period of time bought by the problems in Latin America, which offset an increased perception of forward-demand from Asia, particularly Japan, then secondarily, Korea. I suspect there is a limit to how long this creates an unusual chemistry of factors; though this likely is an explanation of why certain sectors are not yet particularly impacted by higher oil. The other is more conventional; that temporary militarily-derived supply or price-constraint-led interruptions, are the causal factors of higher Oil prices. This latter is a common view, with which we disagree.

Oil's well isn't as ends well

If our view is valid, then over time higher Oil will persist (not each day, or each week), and that in such a situation must eventually impact commodity-based sectors and also interest rates. We do believe that's the case; though we won't know until supply concerns are assuaged in bonds, not just in the oil world. One of our main concerns this year has been the developing rate trends, and a basing of petroleum and commodity prices, as much of the Pacific world (at least) steps back a bit from its (more-than) brush with disaster. Sector shifts so far have taken the higher road, which of course is what we talked about the other day that absolutely positively had to happen for this rise in the stock market to have even a semblance of "legs". That meant that cyclicals, consumer non-durables, technology and even interest-rate sensitive stocks all had to combine temporarily at least to allow this to happen. The key wasn't that any had to move up a lot (and most haven't), but that lot's of stocks had to move up a little. (Our 4th Quarter virtually total bullishness in fact to a great extent was also based on beliefs that Asian currencies were stabilizing; the essential first step towards foreign economic recovery; well before the stocks, jobs or markets might reflect it.)

In this kind of sequential rotation, the argument can be made that things are buoyed sufficiently to keep things alive, particularly as demand remains firm in front of Y2K concerns, something we have never been particularly worried about per se; as relates to the market up to now, but that's not the case at midyear. We suspect the market will fail in this quest for new upside glory, but at a slightly higher level, inline with the (projected) numbers that were pretty much a given once we got above the 40-day moving average. So, as noted last week, unless one's timeframe is very limited, moves higher don't warrant increased exposure to markets generally, but does suggest that with a new crowd of owners in lots of pricey stocks at higher levels, a decline when it comes may unfold fairly rapidly and in dramatic fashion. Again; that is not looked for just yet, but we're moving towards a condition capable of preceding a new effort at a spill. And, once that happens, we're in fact going to outline an interesting pattern progression. So, all is superficially very well.

Technically. . . we aren't opposed to a short-term continuation of this rally into the days ahead of Expiration, and suspect that earnings warnings for the Quarter about to end, won't be horrible. In fact, that has all along been the thought surrounding the support for early ideas of a Spring rally, before the market is hit hard. It's particularly tough, not because the market came back from it's very recent visit with a plunge (after all, we do not encourage selling or shorting into the hole but only during market surges from time to time, recognizing that a collapse from oversold is a final, not initial, confirmation of weakness). It's tough because quite a few of the bulls are looking for a top in April. That makes us think either it's much later, and much higher, or sooner. For just now, subject to revision, we're thinking that a push-up into the previously-targeted S&P 1305-1320 level, in association with expiration-related short-covering pressures, may be about all you get. (And of course; per plan we got long to play that effort Thursday morning; and may or may not be long as you read this posting on a delayed basis, in fairness to regular DB subscribers.)

That would be a market failure shy of a full measured move (1390) but high enough to make the majority think the market's clear. (Portion reserved.) At the same time there's little "punch" to the move, despite the gradual advance in many areas. It very much looks like a retest of the highs (at best) for many techs and other stocks, while cyclical types help give the Averages an aura of strength that is not being replicated by stocks formerly in the lead. We don't have trouble with this assessment, as we've approached the prospect of it even before the market turned up, as exactly what would happen if we didn't immediately go over the edge. We knew the combination of ingredients they'd have to put together to save it from doom, which they did. At the same time, while prepared for something nastier, we concluded in advance that you wouldn't get an upside failure at the top of a lengthy trading range again; but take out the old highs in fairly procedural fashion. That meant a first effort to fail again at the highs, but that it wouldn't workout. Of course that has unfolded thusly, but you never know until it has happened. It's just that buyers here are hoping for an economic miracle that even the technical internals argue isn't what this is.

So, a breakout is accomplished in the Senior Averages, not yet seriously impeded by Treasuries or by Oil, and at the same time the market internals (such as breadth and volume criteria) have a minimum improvement at best, and in some cases deterioration while the stock "market" rallies, believe it or not. Where does that leave things? Exactly as discussed. Not denying a market that can climb a "wall of worry" is capable of advancing further; in fact expecting it for a short while. It is also a market that has many experienced hands on tenterhooks, which can be a plus because it drives them out of shorts over time, or forces them (if they manage mutual funds) to be buyers, but it also can be a burden, because the same guys and gals know they have to scurry-out of the market in a hurry, if things turn turtle. That is where keyhole exit concerns can return; ultimately.

In summary. . the McClellan Oscillator was at +67, up from +49. This is an indicator that just keeps swinging back and forth on the overbought side of neutral, but not appreciably. We go into Thursday flat the March S&P short from 1290 for now, with an open mind about Thursday. We will probably buy an early pullback if the financials aren't battered from the combination of the after-today's-close indication of insider selling, on top of the increasingly unfavorable regulatory climate, which seems to foresee a restrictive lending approach, presumably regarding overseas borrower's, though that was not clarified at this time. The Averages made new highs again today.

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