The Inger Letter Forecast

April 1, 1999

After briefly again printing Dow 10,000 . . . in early Wednesday trading, the market sold-off a bit, in harmony with our call for what would happen if there was an early rally as opposed to early decline. Helping accelerate loss of steam was the Chicago Purchasing Manager's Report. The report came in higher than the Street's consensus expected, which pressed the T-Bonds rapidly, and took stocks down fairly swiftly. Are we back to a time of "good news equals bad markets"?

Though the Federal Reserve left interest rate policy unchanged Tuesday, as we as well as most everyone else expected, investors are still concerned about the long-term inflation picture, which isn't ameliorated by the continued firmness in Oil, while traders remain nervous in any extended level; at least those traders who are open-minded to markets moving in more than one direction. Also; the approach of tax deadlines, a long Easter weekend, with traders celebrating Passover, which starts tonight probably leaving even earlier, and the clear worsening of the Kosovo conflict, with Serbia said to have established "concentration camps", and having illegally kidnapped three U.S. Army infantrymen from Macedonia, have combined to increase caution at what would often be a firm Quarter's end, preventing investors making major moves ahead of a military weekend.

More important; if institutional investors have used (and we believe some have) the recent rallies for selling, not buying, then you're actually getting "window dressing or undressing crosscurrents" as a classic bull/bear battle here at the end of an amazingly volatile, but mostly irresolute, '99 1st Quarter. Before it began, we knew this would be no series of broad brushstroke moves like 1998 was, at least in the second half, and expected what would amount to a stairstep series of moves, both up and down, in what we assessed as a major distribution. Whether near conclusion or not, it has endured in some sectors (but not all) longer than we initially thought. However suggestions on our part to use the 1st Quarter rallies mostly to build cash and reduce rather than increase the exposure in the equity market for the normal investor still seems to have been a viable guideline. (It has also worked exceedingly well most of the time for short-term swings against this pattern.)

That's especially so in the major computer and technology stocks, which outside of some of our own Internet plays (and some we're not in, as we just pick typically a couple -in this case a few- picks in an industry, which we feel are representative) have looked to be more distributive than in an accumulation pattern. The 'net darlings, which we've mostly kept so far, including a parabolic America Online (AOL) which has an extraordinary low cost-basis adjusted for an excellent buy of the now-merged Netscape; which correlates to around an AOL cost of 18 a share (Netscape of course bought when hardly anyone wanted it near 16). While we also kept InfoSeek (SEEK), Earthlink (ELNK), Comcast (CMCSA) (for cable and broadband) and of course the majority of the Lucent's (LU) or other infrastructure stocks, we've gradually picked a few short-sales in the sector, not because we have anything against those stocks fundamentally (although in a couple cases they are very much ahead of themselves fundamentally we think), but because we needed to hedge those longs against the risk of a potential market meltdown (or more moderate decline) as the Spring and Summer progress.

We're not in the permabear camp; though we easily identify with arguments for a serious decline. In most of market history, the really violent declines occurred after the market went much higher than early bears suggested, giving equity investors a sense of infallibility and immortality that of course was unrealistic. It's sort of a psychological high that accompanies an actual market high; but not simply the first high, but rather the inability of sellers to take the market down and keep it down. This fosters a belief that it will never happen; or if it does it must (based on the experience they've had in the modern markets) be considered a temporary event that can be surmounted in a minimum of time, with only a modicum of inconvenience. Of course that's exactly how you can get a Bull Trap (spelled with a T) developed, with an ensuing decline harder than many modest bears are looking for. Certainly we're open for the prospect of that time being even anytime now.

Strategy. . . during this distribution has clearly had us leaning short on the "spiky" rallies, which is the thing to do if you're looking for a potentially dramatic reversal. At the same time, we've spent quite a sufficient amount of time in the markets to know that the market doesn't have to fold or do anything on our calendar, or anyone else's for that matter, something we occasionally point out.

That is one reason that outside of conventional longs and shorts, we have some strategy ideas, in related but slightly distinct areas such as Options, which we have also noted from time to time. One of those is to assume that none of us are smart enough to know how high is high, or low is low (once it breaks for real again). That is why we don't like buying forward Puts or under-market Put options (such as the OEX) which have low premiums simply due to a strike that is so distant in time and/or price that it would take a veritable market crash to achieve such levels. By virtue of the word "crash", such an event is a rarely seen aberration, and even more rarely comes when a lot of people are uttering the word. The point is that if the break came from (for instance original measurements of Dow 11,500) rather than right here, you could still get a hard hit in the market as the weeks and months go on, but if you had married a trade to a distant month or strike price well under the market, you could still not make any money on a market collapse if the evacuation came from a higher level.

Our approach (though we do not make specific picks in the field at all here) is to buy Puts on any spike that we happen to view as potentially an important top, and then if within days (not even it might be noted, weeks) we don't get the break, we'll tend to step aside those Options, whether or not they have some profit (some will some won't, some we'll be thrilled to retrieve some premium from) or not. Then we'll look at the next thrust of the market. Interestingly, of the couple times we have mentioned this approach this year (without possibly noting our opposition to any long-term Options), at least on the short-run gains could have been made, even though within the several weeks thereafter, the market was back up. This is the difference between positioning hedges for one's portfolio within reason (never any serious money used for this, and normally in equity Puts, not expensive Index Puts), versus being stubborn about trying to "hold out" for a market break. It was originally mentioned as one approach to hedge huge multi-month or multiyear longs that an investor for one reason or another refuses to sell any of; particularly at times of spiking strength.

We again note this approach tonight, because we've had several queries as to whether we still think particular low numbers are possible in the months ahead. This may be presumptuous; but that suggests to me that at least some investors are tying themselves to strike prices that could become intractable or irrelevant should the market go yet higher (we don't expect much more, of course allowing for an effort to rally in the first couple days of the month before selling resumes). Anything's possible, including such a post-Holiday rebound effort before markets still breakdown rapidly thereafter. Our view is to take it one month (or less) at a time, and that's why we denoted Wednesday morning's repeat rally above Dow 10,000 as an interesting spot to make some bets (that's basically what buying options are) or shorts during the early morning upside.

And, as noted the other night; we thought the tops for most stocks or sectors were behind (some of the excellent Q4 of '98 winners as far back as January for that matter, inline with our recession or slowdown call for the PC industry before the Street started increasingly worrying about that). It is basically academic whether we get a little rebound early in April; and it's where it comes from that in fact means more. For the majority of stocks people actually trade (outside of 'net gambles) the tops either are or will be in place well before market "mechanics" get "confirmed" sell signals. Any feeble daily (morning) rally would be an April Fool's affair; likely retraced pretty quickly later on, if not in fact before tomorrow's close. (As things developed; the market gapped-up then sold off fairly rapidly, before stabilizing just moderately at the time of this posting.)

Tension on the tape. . in summary was building, and that was a great set-up for the rarely seen, but absolutely welcomed reversal on the last day of the Quarter. We're sure some efforts will be made to redress the damage done by this "Window Undressing", but we suspect such efforts will be modest, and temporary in nature. Money managers may be increasingly nervous about taking on new positions now. Wednesday's McClellan Oscillator was at +12, down from +19.

Warning that a morning rally would have the best chance of leading to an afternoon fade, we're particularly gratified at the action Wednesday, which leaves the (900.933.GENE) guideline short live on the hotline going into Thursday in the June S&P from a range of 1310 to 1312 without stop for now pending new discipline. Today we closed at 1293.30, so the guideline trade's ahead almost 2000 points. (Actual trades are on your own recognizance, as per usual, and may have in fact done better than this, given our outlook for the early rally to fade. Numbers primarily serve to give a structure to the hotline, beyond simply forecasting the market's pattern, which we also do on a daily basis.) This evening there is no meaningful improvement on Globex, with the evening premium around 593, and futures at 1292 even, down about 130 from the regular Chicago close.

We'll be here (hotline) during tomorrow's testy April Fool's session (and we hope those are the buyers), looking ideally for a failing session (following the outside-down daily reversal). Reasons for the final down would be to a large part nervousness about Friday's Employment Report that the Street won't be responding to, since Bonds trade, but stocks are closed. We won't be doing hotlines on Friday, but will in fact update Thursday's night's DB (there will not be another over the holiday weekend) on Sunday, if the job's data has really telling influence, which we doubt. Meanwhile we wish all of our Jewish friends a very joyous Passover, and an early Happy Easter to everyone leaving early for a deserved long relaxing weekend.

In every cubic mile of sea water there is 25 tons of gold