The Inger Letter Forecast

December 11, 1998

Bobbing around like a corked bottle adrift at sea. .the stock market, at least as defined by the Senior Averages, wasn't able to resolve the rangebound activity of the past couple of sessions. There is every risk of a short-term pullback trying to get underway, but unless some big numbers are taken-out, you have a struggle that isn't settled, even though we know what our work still is suggesting regarding a mid-month shakeout that might still come back into yearend, depending on still-later events, which might in this case include what does or doesn't happen in Washington.

Fundamentals. . are really not particularly changed, other than an increasing likelihood of a vote against the President in the House, which yesterday was noted as newly sobering to the Street. At the same time, the latest Merck (MRK) warnings joined a host of Dow components previously warning the Street about next year. Increasingly, we're hearing talk about a number of investors with big positions in winning stocks, that beyond their positions sold into strength against earlier losses they may have, are just biding time until the new tax year dawns. (Certainly not trying to be particularly trite, but we are fortunately not in that same position, having hardly any losses of size this whole year. It was mostly a question of degree of gain, whether in our longs or even in the year's earlier successful short sales for the Summer & Fall declines. We haven't at all been focusing on offsetting loss, but rather carefully trying to shepherd core long gains into next year.)

This subject of taking gains (and when) is a legitimate serious concern for the stock market, and not one we dismiss lightly. (It's one reason the mutual funds sold their losers not their winners, so as not to add insult to injury to their shareholders in recent months.) That's why we've already speculated about the market having somewhat real risk of running into a brick wall of resistance early next year. (We're not definitive on that as a forecast yet.) That's likely to be psychologically influenced by whether the market is able to "pump up" enthusiasm into Jan. by holding supports and blasting forward anew at yearend, which of course can't yet be known. (An interesting spot to break the market, and potentially deny that pattern progression, happens to be right here.)

Technically. . what we do know is that the market will be in trouble if the Dec. S&P futures break the 1150 level, which isn't around the corner. Structurally, at this point intraweek traders probably are not very interested in buying for the balance of this week, which makes the upside tougher at the moment. At the same time we have increasingly negative divergences in all our technical work, while simultaneously some of sentiment data surveys are showing increasingly lopsided bullish leanings on the part of many investment advisory services; typically a warning that a trend is nearer ending, than beginning. Certainly that's not an exact indication. (Coming from a money management background, we don't often join a parade of manic-depressive "guru signal"calls, which are a bit after-the-fact usually, or tend to respond to "cofirmations" of strength or weakness rather than attempt to really anticipate either. Investors seriously concerned about their portfolios tend to "scale" in or out, rather than make grandiose judgement calls of everything "in" or "out". Of course we all enjoy trading a few positions for "sport", which is entirely a different portion of an account that's properly handled, at least in our opinion.)

Generally, we'd think in terms of a market that if it does break will probably still come up into next week's Triple Witch, but it's a tough call. For the moment, with the cash S&P and Nasdaq 100 (NDX) up in the vicinity of new highs, the burden of proof is still on the Bears, with the upside still alive if at risk. TheBanks are looking a bit ragged; Transports are failing to play catch-up with an ardor you'd like to see (if you're bullish) and Utilities are facing a moment of truth near-term. It requires little comment to compare the Internet stocks with bubble-manias of past times, even if we are very enthused about the eventual outcome of the industry, as we were with cable and a host of other technologies, but not buying them on top of their moves, and often after first wave hype-moves collapsed. Nothing will probably be different in treating this Generation's darlings. Of course we do have to be careful with our telecom and chipstocks, which are at their highs now. There is no doubt in our minds that the market can't permanently fight-off the Profits Recession we ourselves anticipate for next year, so what we're doing is finessing the final stages of upside.

Daily action. .Economic News & Releases. . and Bits & Bytes. . .are reserved for subscribers. Extensive focus in this evening's comments: Comcast (CMCSA), Apple Computer (AAPL), Compaq (CPQ), Friedman Jewelers (FRDM), Micron Electronics (MUEI), Novell (NOVL) and Unisys (UIS). Also discussion of the convergence, opportunity and risk aspects of such stocks as Hauppauge Digital (HAUP), WavePhore (WAVO) and others. Remarks about homeruns like Texas Instruments (TXN), Lucent (LU) or 3Com (COMS) as ways to play the Internet or even for IP Telephonyaspects, are included. (As the market was narrow, we focused more on stocks than we typically have time for in our Daily. Stock picks originate in the Letter, not Daily Briefing.)

Other homerun discussions included InfoSeek (SEEK), and their Disney (DIS) agreement about which we've previously commented favorably,EarthLink (ELNK), a major homerun from about 6 bucks, that's now over 60, and has hit 70 (and that's after a split of course). There are others, but the main point about the long-in-the-tooth game has been made, and that while we don't intend ever putting "serious" money into small stocks (nor should anyone who's not a pure gambler), an argument can be made that the bigger ones are played for the most part, so we're tracking trend, not buying bargains there. The small-ones can either become homeruns or flameouts, so there is not the comfort of putting more serious money into, which we did suggest on the original buys in the Lucent's and Texas Instrument's of the world, along with all our favored computer stocks. Of course you see the point, and why there is no way we can give a resounding endorsement to just a "concept", though we can nibble at it, and have a hand in the water in case it works out.

Finally, remarks about our excellent buy in 3Com (COMS) is included, and Dell (DELL) remarks along with Intel (INTC), which made a new high in a recent climate we said all along would be favorable for it. Novell (NOVL), Rambus (RMBS), Netscape (NSCP) & America Online (AOL) price movements round-out this evening's commentary.

Summing up. . .the McClellan Oscillator is acting negative, but not very oversold. The market is hanging out in the mid-1180's, and is rangebound, while negative divergences increase. (The number of skeptical "mechanic" and technicians recently increasing their optimism is a negative divergence of the psychological variety, though putting it all together near-term risk is increasing. As far as what happens regarding next week's Triple Witching; that was last night's topic.) For now, we're short, with an open mind towards reversing in the morning on the 900.933.GENE S&P trading hotline, for a rebound, or if the market fails to decline aggressively in the first hour.

The term “carat” comes from “carob seed,” which was standard for weighing small quantities in the Middle East.