The Inger Letter Forecast

April 29, 1999

Recovery in cyclical stocks. . . expected to mask one of history's most enduring distributions, continued at full-stride throughout much of Wednesday, asOils, Aluminums and several other shares, that have already had big moves contributing to the Dow Jones Industrial Average run, did not bring in serious broader-based S&P 500 buying that many assumed would automatically follow. We were very open-minded to yet-higher-highs in this market, but increasingly became a bit more worried during the session, noting the tight rangebound trading continuing in the S&P, despite getting the Dow to move from +50 to +100, which we indicated on the hotline was likely.

Equity Vertigo

So, we warned about a risk that the market forming a bit of a "ledge". And, having played much (but certainly not all) of the recent comeback on the long side, we're a bit exhausted from just all the trading necessary to so closely catch the vast majority of these repetitive up & down waves; not to mention never knowing (not even now; though we still think we do) where this is leading a very pricey market, at least as measured by the Senior Averages. But we're surely nevertheless pleased to have walked traders -as well as investors- through what we continue to see as a time of building risk, not bulllish opportunity, at least for the near-term; even if we're not expecting an exact '98 repeat. So, while not ready to bury this market, it may need a long respite at the rehab.

Of course we used the term "rehab" by intent; as rehabilitation implies that the market one day in all likelihood will emerge better-off for the rest, and ready to hit the links again (internet links; not Golf). However, in extended markets it's usually better for one's financial health (if not physical health we might mention in the case of those who take markets extraordinarily seriously) to sell a bit early, than a bit late. The latter types usually have just too much of their net worth committed to the stock market, and thus are fiscally "at risk". Of course if the market goes higher, then they say they didn't have enough in; and if it goes lower, they invariably will say they had too much in.

We believe in balance. Not balanced portfolios in the conventional academic sense; though that is not a bad idea either over time. But rather balancing enthusiasm, versus despair. That allows the luxury of cheering the upside through the 4th Quarter of last year, and parts of early this year, while more or less not looking back excessively on profits taken into rallies (not declines) during a year that has been topsy-turvy already, to say the least. Proper balance prevents not only risk of Vertigo, but probably allows "normal" investors to savor the fruits of a wonderful advance with less health-threatening risks of being fully invested when the plug's pulled, while the majority of over-stayers try to head through a keyhole exit rather simultaneously. We aren't suggesting that investors all send their portfolios to the "equity retirement homes", but that they give it a rest as pertains to over-enthusiasm towards particularly those sectors that have advanced most rapidly.

An Exxon Valdez market developing?

We definitely are not convinced this supertanker market has seen it's best day's -long term- as we just noted. That's not the case for the short-term, where many of the year '99's hottest stocks have been docked for days, weeks, or months, depending on the sector, or the issue. And we're less reticent to hold some of the short-term winners bought last Fall, where they haven't been so over-exploited as the Computers (XCI) at first, then the Internet's (DOT), or for that matter now the Cyclicals. The Dow is not a perfect indicator for the Cyclicals, but it will suffice. Investing into strength now may become portfolio equivalent of loading a single-hulled tanker with knowledge it will probably make the voyage safely, but knowing that you'd be better off waiting for a correction which would be the equivalent of using a double-hulled tanker. Still no guarantee against a spill, but with a correction under the belt, the next voyage would be less likely to risk landing portfolios on the rocks. "Cleanup's" from that kind of spill can be messy and protracted work indeed.

Tuesday night's DB reiterated needs to sell into strength from our viewpoint; reminding anyone excited by a sharp rally in the wake of a near-collision of the market's supertanker last month, how in fact close it became to being the Real McCoy. Much has been made about the rise of the cyclicals; so some old-timers are particularly thrilled, because it involves stocks they understand. And that's great. But most of us are more interested in non-smokestack industry newer bargains this Generation understands, not to mention ideas that if Asian and/or European demand comes in shy of analyst expectations, then you've got a major earnings disappointment in just such very stocks; ie: a wrecked supertanker, which is the Dow Jones Industrial Average. What if the results abroad, which follow-on to our very own forecast for currency and market stabilization's last Fall, in both areas, followed only later by a resurgence of corporate profitability and an increased consumption of American goods, happens in fact faster than by our measure (which pointed more to 2001-02 than '99 for overall economic recoveries reaching the levels that impact profitability of American multinational stocks greatly)?

You would have to deal with still higher forecast Oil & Commodity prices; and interest rates. Do you wonder why we're not so bearish on the T-Bondmarket now, after calling the spike into the mid 130's correctly as a "peak" last year? Because as stocks come out, money goes into debt, in a very traditional flight-to-yield. Rosie Scenario is back; mostly in wishful thinking. If she's really back; to wit, no higher interest rates or price pressures, well, then guess what? You're looking at peaking profits and margins right now, with the Dow's unconfirmed breakout, just a brief fakeout.

…In the interim, recognize that it should; that the recent comeback a week after such a dramatic decline was (and/or is) somewhat of a "hook", and that this market may start looking a bit more like a boat anchor than a soaring sail.

In the meantime, we each guide our own portfolio (suggesting how we think generally one might do well in this environment) with a slow-and-steady hand on the wheel, using thrusters if needed, to gently dock, but remembering that a primary focus should always be protection of capital, not greed. That is probably why most of us gingerly guard our own portfolios more carefully than any whose interests may lie in the overwhelming entire market environment, which should mean less to you and to me than how each of us personally does, and most important, to strive not to get in a mess like the Captain of the Exxon Valdez, who certainly wishes he charted a different course.

In a nutshell. . . as we're fond of saying; we usually don't get the exact highs or lows (sometimes we do though), but on most occasions capture a nice chunk out of the middle of a trend in either direction. It is our view that we captured virtually all the decline last year, and the heart of the up action coming off that low. For some techs and computers we nailed the highs in January; for a few later, but not for all. Now; we're definitely less interested in pressing the upside, and believe the next meaningful trend is to the downside, though it doesn't have to be a total disaster market.

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In Summary. . . this point of view is in direct contrast to those analysts who find solace within movements of a chorus of by-no-means cheap Energy orCyclical stocks. Historically outcomes of an advance can be something other than the majority expect, even if the earnings they project are realized. It doesn't matter too much to us in that regard; as we trade the market, not opinion. And we clearly indicated the anticipated recovery in any number of stocks from last Fall's lows; some sold early, some sold just right, with some stocks (or portions) certainly retained. That's because we rarely are negative on the long-term of the American markets, having indicated as well three years ago a target that sounded nuts to many; that being Dow 15,000 by around 2006; though a timetable isn't very relevant. That's especially so if very long term goals are reached by an indirect Southern Route, which is the market equivalent of flying from Seattle to Boston, but via Houston. We think the "market" is already in Reno, and far from Houston, much less Boston.

Regular Inger Letter and DB readers know what we're expecting in the months ahead, and why recent (or even next) upside efforts are probably all part-and-parcel of an ongoing protective, but nevertheless distributive DJIA umbrella, while the "real market" is undergoing a varying pattern. Meanwhile after thousands of S&P points achieved in recent days on the 900.933.GENE hotline trading guidelines, today was another very good gainer, in harmony with our rather complicated, but surprisingly actually delivered, down-up-down-up-fade overall advance pattern projection.

We think that the recent blast above the double-top, much of which we caught, was just a sucker rally, (as the balance of this is a forecast for rebound and declining action in stages, it must fairly be reserved for DB subscribers). Once that (support) goes, we can think about a market freefall risk (probably not until, rapid swings in the interim), with buy-the-dippers fighting this all the way, which will make it interesting to trade (as opposed to a straight-line decline), but nevertheless help break it each time they get frustrated when markets don't come immediately right back.

Oh, by the way, It was our suggestion in last night's DB, that we were again getting much closer to an up-and-down reversal of greater import. TheMcClellan Oscillator is now at +123 from a +120 reading, which is a nominal +3 chnage. That's normally a bullish divergence, suggesting a 1% move of the market 3 out of 4 times in the direction of change, which would be up. That's fine; except for one little detail. The times that generality isn't valid, often tend to correlate with an exhaustion and/or at an already-extended level of the market. Breadth actually had deteriorating from it's best levels days ago, and never really confirmed the comeback contrary to most popular views of this market, despite the moves to higher highs in some of the Senior Averages. So, with a call for a drop and rebound; we will keep trading, knowing pretty much where last supports are.

Tuesday was called to be basically up; and we didn't have a problem with Wednesday being up; but we cautioned that an early dose of selling would be likely, followed by a late fade, particularly if the Street's nervous about Amazon.com's (AMZN) earnings, which came out after the close, and particularly if the 'nets that were already hit somewhat didn't rebound nicely by mid-session on Wednesday. They did somewhat, but reversed pretty fast, and then AMZN (not ours) came in with a less-than-optimistic outlook. That is one reason the S&P premium on Globex is down to a soft 559 reading at posting time. We expected (Wed.) ideally to be a bit of a down-up-down-up-fade session; and thought that was probably too tight a call, but it wasn't. We did just fine with a few S&P trades overall, but after a final hour 700 point short gain, and 300 point long gain, went flat overnight; just for comfort.

Don't be surprised if we buy (Thursday's) first drops and then sell an ensuing rally in pretty fast-paced action in Thursday's market. We knew that odds favored another effort to the upside this week, since the market didn't tank last week at the end. So, we got that and in fact don't dismiss that an el tanko is still on the horizon for this once-supertanker market, threatening to emerge from the depths, briefly reincarnated as a submarine. We'll see how the Street's permabulls feel about it then. Hopefully, they'll capitulate, setting up some wonderful buys from those depths.

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce