The Inger Letter Forecast

April 15, 1999

Distribution under the cover of a firm Dow Jones umbrella . . . has been our straight forward multi-day assessment here. Thus nothing should be particularly "taxing" to experienced analysts about Wednesday's action, other than it confirmed exactly the pattern that was developing before this session, and came into full fruition during this day. Needless to say after a solid series of four realized gains and one large unrealized S&P gain in Tuesday's 900.933.GENE hotline guideline trading, the ability to achieve even greater success Wednesday was extremely gratifying. While there's little doubt Internet and technology stocks will try to "file a return" engagement tomorrow, our view about where that leads has been very much validated by past and present deadlines. If this market gets an extension, those who overstay may have to pay interesting penalties for it. At the risk of denoting an obvious negative besides Nasdaq and the NYSE Composite; look at the Dow Utilities, which this time virtually matched the action of the Philadelphia Electric (UTY).

We are not particularly concerned about all the debates regarding the nature of all this rotation at the outside taking place between the Nasdaq and cyclicals, because that's exactly what we were forecasting that the money managers would do during this distribution under a strong DJ. In fact, it happens to be the definition of such an effort. And it did not start today; though the media focus achieved a fever pitch today. It is based on the idea that the economy is not and will not slow for an quantifiable period, with which we vehemently disagree. That's exactly why our intraday trade, that had in fact reversed a short to a long during Mrs. Cohen's (of Goldman Sachs) talk, turned right back to the short side, expecting the final hour sell-off. If Europe does not recover rapidly; if the world actually falls apart anew; if Asia's forecast market recovery is well ahead of profitability; if the war widens and retards consumption in Europe this Summer, so that revenue from there is unable to replace revenue lost by the big multinationals domestically, why would the managers in fact be buying these stocks today?

Subterfuge

First of all, they may not (as you could see from Mrs. Cohen's view) agree with our assessment. (It should be noted that we often agree, but did not through the 2nd & 3rd Quarters of last year.) And second, even if they do, they're happier in high-volume big-cap multinationals, because they are the type of stocks with not only high average daily trading volume; which means that in the coming pinch (not if, but when) they'll be able to "move supply" out the door with relative ease. In fact are we arguing that their purchase of such stocks is defensive in nature? Absolutely. Should, by some miracle the foreign markets (here, we mean closer to supermarkets than stock markets) actually be able to absorb lost business streams from domestic and other sources, that's great. If not, they know that in the coming redemption run (not if, but when), they'll have more of a market (and here we do mean equity arena liquidity) to move their merchandize so as to generate huge cash reserves they'll need to meet those redemptions. By not doing so they would risk collapsing the markets more visibly by remaining in relatively volatile stocks, for which there is high activity, but for which there would be a more rapid pulling of bids, once the horse is out of the barn door.

By assessing the movement into cyclical stocks as a dangerous ploy on the part of mutual fund money managers), we forewarned right at Wednesday's high point on the hotline, why we saw all buying of such stocks in the Dow as fraught with peril, and probably not advisable for investors in fact interested in making money, as opposed to simply "parking" money somewhere. Mutuals will "park" money, so as not to reveal how they've moved out of technology and internet stocks, while still appearing to be more or less fully invested (don't ask me why; we think right now is one great time to have huge cash balances, and/or defensively hedged positions). Anyway, while we made it clear on the hotline and here in last night's DB, that in the fullness of time European demand, and Asia's as well, will chime in, we emphasized here and in recent Letters our view that there is probably such a large lag-time between the forecast foreign stock and currency market increases from last year, and a return of consumption and profitability, that it leaves open time for the U.S. stock market to have a disappointing Quarter or two going forward for the multinationals, and the current serious correction in the Senior Averages. So, is it payoff, or payback? Both; beware.

Sound funny coming on the day of an all-time high in the Dow Jones Industrial Average? Yes. Great; that increases the probability that we're right in viewing it as distribution masked within the very DJ strength. Further, just the other day we talked about the curiosity of the S&P lagging a full measured 1390-1410 move (which we identified, but didn't believe particularly, ahead of similar arithmetic forecasts that followed ours), and pondered a move to Dow 10,500 on this run, but not the full measured 11,500 (that we also had originally allowed for coming off last October's low). Today's high was 10,526. Was this the market top? Well, probably not quite for the Dow, as we're sure they'll try to muster another hour or two of strength at least, especially given proximity of a nominal Expiration Friday, and this sector shift that's ongoing, until it's disproved by results.

Flash-in-the-pan. . . is therefore probably not the correct explanation for the Dow's action, and all incipient opposite reactions in the Nasdaq marketplace. "Experts" should not be scratching the top of their heads today; not if they understand the nuance of why the sector shifts are occurring. We are only reasonably benevolent to this new generation of so-called analysts, as opposed to a crowd of permabulls that will never have an unkind word to say about the market (except near a low point). That's because compassion for their youth is tempered by knowledge they saw these kind of events last Spring, and never grasped it until the market was collapsing in late July and in August. That was excusable for them, besides the fact you and we caught it very well, but now in fact these same guys & gals are veterans of recent similar events, so that should thus not have them in their current quandary about how the Dow can go up while the "real market" goes down.

Now, before you label me potentially very bearish on this market (though it may be justified), we do know what the other side of the coin is. That would be: a market consolidating or broadening-out, preparing for an astounding rally. Do we believe that? Nope; not on what we see so far. We however, are not doctrinaire investors, as that's a stupid approach to the stock market. All we do is try to make money in stocks, whether as investments or trades, and scale-out into strength to make sure we at least protect our investments, and then put that money back to work if the stock market gives us enough of a decline to warrant it (it's a little more complicated than that for sure).

One of the best hedge fund managers we know, is currently nearly a raving lunatic, worried that the market is going to settle back a couple hundred points on the Dow Jones, and then take-off for the stratosphere, with the Dow going to 20,000 (again; that's his view, not mine). You just in fact heard mine, which suspects the multiples on multinationals are quickly becoming perilously extended again, particularly if they don't get the international rotation of consumption they want. It is my view that we are more likely on the threshold of a 2000 point Dow decline than a rally of an equivalent or much greater magnitude, though I'm definitely bullish between now and hitting the age of Medicare, which thankfully is still a good ways off in the future. But so is Dow 15,000, even if we were first to first propose that number being seen by around 2006 (and I'm not at the age of formal retirement even then). What we're talking about is another hit of the magnitude of last year's, or something approaching that, albeit not in a straight-line, and not instantaneously.

From the get-go this year (actually late last), when we talked about the techs and computers in fact running into a brick wall of resistance (most did not make highs higher than in January, while many of our Internet stocks did), we argued this year would not be easy, would take weeks or months to accomplish the distribution. And while we did not originally expect it to take this long (sorry; but as we also forewarned, markets rarely follow anyone's well-in-advance roadmap very closely, and we've adjusted along the way, still catching the vast majority of short-term swings in either direction), we did expect a Spring rally into the beginning of the 2nd Quarter from whatever low was reached in the 1st, and we did view this action as preceding something very nasty from around this nominal Expiration (this week) into late May at the earliest. There is absolutely not a shred of change in that forecast, except to notice that it's underway in many sectors, delayed in a few, and yet to start in others (welcome to the stock market; and this is not particularly unusual).

What's unusual is that people don't understand it; which proves my recent point that broad-based sector moves in a more-or-less straight-up market are the aberrations; whereas this is normal. In any event, we don't think the hedge fund guy is correct; quite the contrary. He's sweating, we are not. In fact we have had some terrific trading in both stocks and S&P's, beyond expectations just recently; so we have no complaints at all. And for those who think approaching the market needs one to stick to being bullish or bearish; we say that's nonsense. Yes, we have a bearish bias as to how this resolves short-term, and a bullish bias for the very long-run. And, we've had gains for the most part on the long side of the market in recent weeks, while often worried while long. That is just fine; in fact it's better to be worried than cocky while longs are going up, and feed-out into strength, so you don't have to fight for room with the crowd exiting through a narrow keyhole exit.

As far as this short-term concern of an upward explosion; we think it's ridiculous, and actually is mostly behind us. And if the S&P continues to collapse while the Dow goes up; well, gee, most of us playing the S&P would cry all the way to the bank. Yesterday we had four out of four intraday gains on the hotline's guideline trades (your own may have done better or worse, as we try to be of help, but don't expect anyone to rigidly follow exactly what we outline on the hotline, though it certainly did work about as well as any approach we know of in this fairly wild environment). As far as Wednesday, we had five out of six profits; with the two largest gains being 1500 points on a prior unrealized short in the June S&P from 1370, and 1100 on a short form 1360 to 1349, as well as an unrealized gain of 1070 on the overnight live guideline short from 1350. The only loss was a mediocre 100, and thus the net result for Wednesday was 2900 points realized, and 1370 pending tomorrow's closing (probably) of this particular overnight position. Not a bad day at all, for the 900.933.GENE hotline guideline trading efforts.

Beware Unholy Alliances

If we have to shift back to another temporarily bullish stance, as the nervous wreck (he must be really bearish on Dow stocks or something) suggests, we'll certainly do so. But because one's approach to the market absolutely needs to say: if the clouds, which appear to be forming, clear, it may then become a better day. That doesn't mean that if a storm doesn't hit you're wrong for in fact ducking; it does mean that if the storm passes you by, you need to recognize it and get back in the game on the long side. Some cynics don't like this approach, because they want the stock market to be black or white all the time. Those types do not tend to be successful over time with investing, because the market isn't even usually black or white, but various shades of gray. Such is life too, as most of you of course understand, which is why trading has to recognize changes. I would love to be a screaming bull again as we were in the 4th Quarter last year, and probably will in time. But for now, we don't see that time as now, and suspect we just navigated mostly gently through what will have proven to be a topping formation for the majority of new paradigm stocks.

The insane-hold the Dow Industrial market "snapshot" has on investors will generally cause them to sell well after the peak's completed, and in fact by the time the DJIA collapses, we'll be getting interested in looking for buying spots for the stocks of this Generation that topped before the DJ. We warned at the beginning of this week that the combination of strong financials, banks, oils, and techs wasn't long for this world, and it wasn't. It was an unholy alliance that would give way.

The bottom line: we have few if any regrets for selling around half our tech-stock holdings earlier this year, and the vast majority are lower today than at that time. The idea was to sell enough so that we'd be more excited about bargain opportunities if and when the market broke, rather than worry about potential erosion of retained holdings. And, if it did not fold, we'd still be represented in some of the best of the major holdings, both in the technology, telecom & internet sectors. As far as the smaller stocks that were retained, with TCI Music (TUNE) just one of several, we're in fact pleasantly surprised by the upside action. In some cases portions were sold just days ago at what (without knowing at the time) turned out to be approximate short-term 12-fold peaks. This is not the kind of year anyone can proclaim himself or herself a hero by being bullish or bearish, as this is not that type of monolithic market. The closest to heroic is that we said from the get-go we would have such a year, where stock picking and quick moving S&P trades would set the pace. (More on TUNE inBits & Bytes; reserved for subscribers, and why we hope sour grapes articles from some analysts who missed this one, will bring it down to an attractive reaccumulation level.)

Daily trading & Technical sections are forward-looking; thus per-usual are reserved just for DB subscribers. This is the case for stock Bits & Bytes and theEconomic calendar outlook as well.

In summary. . . the McClellan Oscillator was at +92, up from +73. That's very interesting, as it's right after a nominal -2 change. A nominal change (less than +/- 5) often equates with a 1% move or greater of the market within 2 or 3 sessions. About 3 out of 4 times the move is in the direction of change, which in this case would be down. However since we're in the midst of an Expiration, we speculated last night that we're looking (as we already suspected anyway) at an exhaustion for the real market, while the superficial DJIA holds up and advances. That was not a bad interpretation, given the strength in the Dow today, while the "real" market declined in many areas. Keep in mind that today not only was the S&P down over 2300, but the NY Composite, which was off 1.46, equivalent to something like a 30 point Dow drop on Tuesday, was down an astonishing 6 Dollars on Wednesday or approximately 1%, which is just what the Mc change implied was coming. So, definitely the DJIA was not, and is not, the real market; plus you wonder what happens when the Dow itself breaks. Stay tuned, and you'll likely find out.

Internals are in fact not confirming this Dow move up; though impacted by Expiration, they were a little firmer on Wednesday. We go into Thursday short in the June S&P from 1350, at least for now, and with more net gains today than what the market offered, by virtue of the 1370 short that was retired around 1355, and a series of mostly profitable trades, culminating with the 1350 live short at the moment. It is trading at 1340.50 on Globex, as we go to press, with a 1206 premium, and that is up 120 from the regular daytime Chicago close. Tomorrow if all goes just right will be up-down-up-down, with a chance of late expiration-related firming, though we'd be thrilled if it did fall apart again, though we doubt such a Senior Average capitulation is quite here; but is close.

Goldschläger and Goldwasser are liqueurs containing pure gold flakes.

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