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The Inger Letter Forecast

May 6, 1999

Morale boosting rallies . . . were the centerpiece of Wednesday's fairly impressive comeback; an advance no doubt emphasizing a liquidity-drivencharacter of this market, more than recent ones, as a matter of fact. That's because rotational independence, characterizing many hard-pressed groups, including some Internet and technology stocks, seemed to vanish concurrently as this market accelerated late today. Is this a temporary phenomenon?Depends on Friday; but likely will be sold into early Thursday, just because of the Fed Chairman's Chicago remarks.

Stock Market TKO

Our view varies on this, tending to believe that a really more meaningful correction, besides of course being seen in the weeks ahead, needs to besufficiently spooky to knock lots of people that see a broadening-out of the market, essentially out of this market. That means that it should help lots if the consensus (which is only gradually building to a bullish extreme) got scalded for at least the short-term, and we get a market driving down despite an ability of liquidity -just by itself- able constantly to pull the stock market back from the brink of a short-term technical knockout.

Technically. . . we still have not violated any of the numbers given in recent Daily Briefing's that would be required, either in the S&P 500 or the Dow Jones Industrial Average, to "confirm" that a decline is underway. That's the difference between knowing rallies are within a downtrend and of course ongoing speculation that such a decline is forthcoming. The variance between ourselves, and a slew of others looking for a correction (as we are not alone in this general viewpoint), is an ongoing willingness to buy these declines (such as Wed.'s) after just tightening our stops from a short that is most commonly put-on during a preceding orgy of buying; and that often succeeds. (Which is again how we approached, and traded at least the morning part of Thursday's action.)

What's the difference from a bear doing so? Well, opinions about declines, as overdue, are likely similar. However, at the same time most permabears get scared by the rallies, and tend to either cover shorts into that strength, or they're just always bearish, which is not trading (by definition).

The ideal TKO: a secondary pop-and-flop

The really interesting phenomenon would be: if we could pop-the-top one more time, and then in fact flop it, giving both a confirmation of strength to always malleable market "mechanics", and then create a confirmation of weakness within an ensuing three-to-five trading sessions, which of course would generate exactly the opposite signal to those who try to play the market like they think it's a traffic light. That would be great; would be a nifty follow-up to the kind of schizophrenic alternating up-and-down action we've been getting (which isn't healthy by itself incidentally); and it would have the increased probability of thus being a Technical Knockout …a proverbial TKO.

We first coined that term back in 1987, when we had a wildly oscillating market in the Summer of that year that we thought frustrated Bears, while giving false hope to the Bulls, because it always kept coming back. The TKO then was an unconfirmed higher-high unaccompanied by increasing favorable momentum and participation; and in a risky Dollar and interest rate environment. This is not totally dissimilar, either fundamentally or psychologically. That's why it's dangerous, even if the market manages to poke-out into new high territory again; and maybe especially if it does so.

Simply put: opinion (or bias) is this remains an overextended market that needs correcting, to say the least. At the same time, our bearish trades are mostly "insurance" to protect portfolios, as opposed to preferring to see what we don't like about the market or stocks, than what we do like. We actually believe the Internet as we know it today is simply a prototype of what we'll be using in a few years (or sooner), and frankly many of our equity picks are focused on that forward-'net.

We love the future, continue to believe that the United States will maintain financial hegemony for years to come (this rally is partially assisted by the Euro softness, and political nonsense over on the Continent), with the Dollar remaining the dominant Reserve Currency. That doesn't take for granted onward and upward for the Greenback (in fact it's overbought short-term and starting corrective action which can and will be attributed as part of the backdrop for an equity decline) at all times, but it does mean that the primary trend probably won't be put "at risk". That's one of the reasons we remain secular bulls and are primarily interested only in cyclical downside activity. It is also why we can reflect favorably on Gold occasionally (including even XAU stocks), but not as an alternative to conventional equity investing; an attitude that has long served us well.

…. (portion reserved). Does that mean we're now looking for a meaningful upside extension before the next purge? Not particularly, unless it comes (as did last year's) after a May-June market break, up into July, and in fact only then sees a drive down. Last year many became bullish, just as we got bearish into that dubious July rally, which we specifically had forecast). And maybe it's going to take that kind of event again; although we're definitely not counting on anything like that. Actually, it can be argued we already had a "swing-rule" pop above the former top, and that was only a week-and-a-half ago. (That would create increased vulnerability now.)

Now, for sure we can state the obvious on a daily basis: you've got Greenspeak tomorrow; that's in Chicago, and then a very important Employment Report on Friday. The Fed Chairman would likely be only accorded a brief knee-jerk response by the market (which has learned, or thinks it has, to minimize reaction to his remarks over the near-term), but then non-farm payroll numbers would be regarded significantly, and instantly, by both T-Bonds, and followed shortly, by stocks.

So, if you see a Friday report of say 300,000 (many are thinking 270 or so), then the bonds likely break anew, financials decline and the comeback is rapidly aborted, once again. If however, that number is light (unlikely), then T-Bonds have a relief rally, stocks follow their lead as is becoming increasingly more common, and stocks push new high territory yet again. Our caution would be a rally in absence of a correction beyond an occasionally swift day-or-two down, would also be just a temporary event, occasioned by short-covering, and generally not long for this world. So, while we trade the market more than opinion (or we couldn't be long for a good chunk of Wednesday's afternoon gains), and that keeps us catching most of the swings; our bias is that a rally now will be an extension to sell into, not to buy for. It might turn into a "gift" for those who haven't taken a defensive stance, or who are lulled into a false sense of complacency by the market's repeated "Hail Mary" comebacks, such as we in fact forecast coming off last Friday's lows, but which is in a second stage, which we are also playing on an hourly-to-daily basis only at this time. (As this was posted Wednesday, it should be noted our 900.933.GENE hotline forecast a rebound after the first hit Thursday morning; then used that lift to reverse to the short-side at June S&P 1351.)

Daily action. . . (section reserved solely for subscribers, per usual.) Comments surround calling this a "zonal" market; sort of an Area 51 market, which seems detached from the real world. It is a market that while continuing trading S&P's both ways has us expecting meaningful corrections. When this extraterrestrial orbiting is completed, we suspect the market will have a hard landing.

Bits & Bytes. . and Economic News & Releases: (sections reserved for subscribers per usual; comments focused on some of our 'net stocks, like America Online (AOL), TCI Music (TUNE) and Comcast (CMCSA); all of which are impacted in varying ways by not only the AT&T (T) / MediaOne deal, but also T's new Microsoft (MSFT) agreement, which could have wide ranging impact on several of our stocks long term.)

In Summary. . . the market came back from the edge of the abyss, one more time. It is more, not less, stretched. The McClellan Oscillator's Tuesday reading was + 91. Overbought moderately yesterday; and turning down, with Wednesday's posting of +79, despite a huge late turnaround. This remains anatypical market, which means one shouldn't be complacent, even with this rally. That's the same case whether it turns up or down until something's resolved. Tues. night I noted here the suspicion of one or two more rally efforts needing to be contested, before this rolls over; though that does not mean the top itself isn't a done deal. Particularly so for the S&P or even for the Dow, if we can take out some high level supports first. That did happen for the highest levels, which is how we got today's profitable purge, and interestingly, the subsequent rebound. Main point: not a great time to let money burn a hole in one's pocket; not on the buy side of the ledger.

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