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The Inger Letter Forecast

April 22, 1999

A "B Wave" Rebound. . . or the first phase of a thrust to new highs. That's the question many of Wall Street's "finest" are pondering tonight, as they view a humongous recovery in the DJIA, with the knowledge that a certain amount is genuine buying, while a goodly portion is short-covering. I know that this is not comforting to those who are playing the market strictly bearishly. But. we are not in a position to more than understand, because, while suspicious of this market and definitely more interested in shorting rallies than buying dips (though we did both today) in principle.. with a very overbought market condition.. we usually tend to profit better when stocks go up, because it is our approach to always be net long stocks. Our bearish trades are intended to hedge longs.

This is not tounge-in-cheek, because there's little doubt we're on alert for a market accident. So are many on the Street, or you could not have had the type of air-pocket you saw on Monday. It's also because we've seen so many of such breaks where traders get excited on the downside, as or after the market drops; but the market comes back "yet one more time", that we tend to abhor putting on bearish strategies (much less selling equities, into the hole). We just don't do it. What we do advocate at times of a bearish bias, is selling surges, and if necessary, buying purges.

Daily action. . in Wednesday's market saw us, after an inside-day Tuesday (high, low and close within the prior day's), covering our homerun short from1347 at the 1322 level, taking a very excellent 2500 points gain. That was followed by some horsing around what we saw as a 1330 inflection area intraday, and that didn't work-out, costing a couple whipsaws for those who rigidly traded around that, to the tune of 600 points (or more). Then, a 1335 long, where we decided if the market went that high, we had to play it, because there was little doubt they'd scramble the remaining shorts in this market if it was seen. It was, and they did. And, by the close that trade is ahead over 1600 points.

Interestingly, on a pre-close comment (before hearing the IBM news), it was decided to retain that guideline long overnight, on a hunch we could have a gap-up opening. In any event, an absolutely frenetic rally is underway, spurred by the post-close IBM (IBM) news; and we are holding this trade long overnight, for those so inclined. Again this kind of resolution is not cast in stone, and you might even get new highs out of this; because stock market analysis is as much psychology as it is science; sometimes more so.

(Balance of section is forward looking, and thus reserved for subscribers only per usual.)

……We suspect that's the case. While there's a sensitive area between guys in Street firms that would only be on the buy-side of the ledger because they believe it, and those who will say so for marketing reasons (as we touched-on last night), there's probably little doubt among investors as far as whether the Street has an ingrained bullish bias. Of course they do; after all New York is a Company town in that regard, and the products of the Company center around equity marketing.

So, while we didn't mean to imply per se that the Street manipulates the market, we did mean to imply that many mutual funds, by design or intent, end up buying or selling the same stocks, for in many cases the same reasons, and in herd-like fashion, almost dutifully at the same time. So, when the funds rotate from industry-to-industry, they sure are doing it for self-interest. Certainly, many of them hope that their decisions somehow benefit their relative performance results, and if it helps their investors, so much the better. However having been around the scene awhile, we're not averse to a little cynicism about institutional motives, and even while they hope for price gain, they basically have shifted back into the big-cap stocks because they also provide easier egress, if push comes to shove, and they actually do require a means to squeeze through a keyhole exit.

Technically. . . (most of this section reserved for subscribers, as per usual)

Besides suggesting that there would be a rebound in the market from an "inside day" following a the wild Monday up-and-down reversal ride that we caught so well, Wednesday's action in fact was able to "confirm" an upside turnaround, based on the 1325 June S&P key level (on the way back) & DJ 10,580, which happens to be where we finished on the Dow. Thus, today, partially because of relatively softer Oil stocks, both the NYSE Composite & S&P 500 were considerably stronger than the Dow Jones Industrial Average. Meanwhile, with a fast multi-thousand point gain on the short side from Monday's1347 June S&P guideline short, we're long with a couple thousand points gain on the long side, achieved extremely rapidly Wednesday afternoon. There has never been a market with quite this ferocity, and we question whether it's actually all healthy.

The best gains Wednesday were again in the Nasdaq 100 (NDX), where most of our longs and probably also the larger shorts are present. We would think that the NDX will press 2200 before this rebound is over; though Nasdaq futures aren't up very much Wed. evening, despite huge gains in Dow futures and the Globex S&P behavior, which has about a 2000 premium on June's. We'd expect the Dow to rush 10,720 or so in the morning, and then try to turn down (but likely in fact come back up to test or challenge that as the day goes on). We plan to sell into strength in the S&P, and try a reversal trade, though that doesn't mean we won't play for a rebound later in Thursday's, even if the market turns down after the first pop-up. It would be quality of secondary rebounds that will likely determine a final hour fate for Thursday. If it is negative (we'll see); then we can talk or speculate about a potential Friday reversal session. If not; we'll address it in the Thursday night Daily Briefing.

Basically, we're still looking at a market where institutional investors are overweight in a wider variety of stocks, have aggressively shifted money as best they could, and with greatest speed, into a variety of sectors, for reasons we've enumerated regarding liquidity, professional egress abilities (desire to utilize the specialist system on the NYSE; versus market makers on Nasdaq), and while a "B" wave rebound is not unexpected, though this is a bit wilder than most seen in all recent times (maybe all recorded times; as in case you think this is an unusually volatile market, you are right), it's not possible to totally dismiss such broadening as bearish in quality. We think it may turn out to be so; but we won't know that until we see how this turns down over the next few days (presumably from what could be a totally wild & perilous transition, for anyone not quite willing to be nimble; which means selling surges & buying purges; not the other way around).

At the risk of being too bearish about the coming newest explosion, let me suggest that what we in fact would briefly like to see is the Dow stopping around 10,700, or the S&P around 1372 (yes, again, as that would be a double-top possibility). And of course, as we all know, a double-top or continuation pattern will look exactly the same until disproved or proven; which is why we'll trade it fairly nimbly. For the moment, we're long the S&P, happy many of our stocks have come back, while not particularly planning to sell any more because we're already cutback to what we feel is a defensive level of market exposure, and we might be inclined to take a couple bearish shorts in the a.m., but on a trading basis only. As most funds are definitely not so cash-rich as we thought appropriate, they will show their intents if they do use every meaningful rally that presents itself for selling into, not buying for, and if so that would tend to keep a "lid" on rallies beyond whatever lift short-covering, and out-of-the-box explosion buyers can provide (and the secondary rallies).

Fortunately we're long with our S&P trading at the moment; so all we have to do is pick a spot to try a reversal, or via trailing stops. Of course; if the secondary rally takes out the first peak with a vengeance; then the (at-the-time thought excessive) measured move of 1390-1410 comes right back into play. Can this market be the kind that meanderers around, holds support (it never did break 1290, which was necessary to confirm bearishness) and then waits for early May to break down? Sure it can; but we don't necessarily believe this will take that long. Too fast and furious.

Bits & Bytes (on stocks) & Economic News & Releases: (reserved for subscribers per usual)

In summary. . . we go into Wednesday long the June S&P from 1335, and ahead about 2000 based on this evening's Globex price. Actually a tad more; as wer'e at 1358.60 as of 8 p.m., and that is ahead around 600 from the regular Chicago close of 1351.70. Premium's now over 2000.

The buying climax (phase 1 anyway) may be behind, but we certainly have not yet had a selling climax, as we already knew, and now comes the mostdramatic test of the highs of 1999. This is either going to be a fantastic breakout, or a major up-and-down reversal from a buying panic that turns into an ensuing selling crisis those doing the buying are not even contemplating (for May).

We're doing less stock trading than one might think; because we don't short all that much, and mostly are interested in waiting for value; with occasional exceptions here and there. Our S&P action will continue seeking to catch these waves, which is the only reason we're long right here, with the McClellan Oscillator at the +159 level; speaking of an overbought market environment. As everything in today's market is exaggerated; we wouldn't be shocked to see it over +200 in a final buying frenzy; after all, the selling climax last Fall got down to around the -250 level. Ponder how long it will take to go from +250 to -250, so you have an idea of levels of newly building risk.

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