first majestic silver

The Inger Letter Forecast

December 24, 1999

Holiday focuses . . . may have been other than aimed at the markets, but if so that's not what we saw, especially after the first spike-up and then again in the late going, when volume surges tended to appear, although relatively concentrated. Yes, they somewhat duplicated Wednesday in terms of the final moments of S&P comeback, though there's hardly a doubt that this kind of behavior is defensive (in terms of shorts ducking for cover after the break doesn't expand), and defensive for the bulls also, as they are just scared to heck to let this drop. Santa Claus indeed.

And seasonally they should be right, if they can contain and control the March S&P pressures, above (key areas), which held during most of the course of Wednesday's session, though barely. Does this sound like "technicals" are more important than any economic or fundamental outlook just now? Sure; actually. Even permabulls concede profit growth rates may be contracting, or will in the early parts of the New Year; but they won't concede that can connect with multiple levels that are put on the leading (or impacted) stocks. In our work since midyear, we've occasionally noted that if, when put on the defensive, certain levels hold, that the bullish case for later next year is actually enhanced. And in the several hard corrections this year, key levels did hold. We mention this now, because the upside is on limited duration fuel, which may (hopefully) extend slightly into the New Year, but will not commence any kind of meaningful extension in the S&P, unless there's a broadening-out of the market (such as we've often discussed) that allows those current leaders to progress higher almost without interruption. (Short-term that was expected.)

The Kennel Club

That's unlikely (longer-term, beyond early 2000) which is why we suggested temporary reprieves in the Advance/Decline Lines of essentially sufficient natures to probably corral lots of seasonal reinvestment money because if (and it is a heck of an "if") there's not a noteworthy Y2k problem, and you've got a temporary betterment in the breadth, you'll likely see less reticence on the part of investors to indicate their retirement monies into equities, rather than in debt or money market funds. Some of this we won't engage in an excess of speculation about (because there's no way to know until early January), but we're able to distinguish money starting to roll-out of old leaders a bit, and into some stocks that some would even argue have had a slight canine aroma of late.

Such aromatic stocks would include the dogs of the Dow, the downtrodden NYSE stocks, as well as a host of small-cap stocks (mostly on the NASDAQ) that are starting to see selling exhaustion as the tax-selling time winds down (the last day to sell and have settlement in this calendar year is Tuesday). For a period of time this aroma lets investors sniff-out a higher destiny, and tends to promote a feeling of euphoria that is already quite rampant. What we'd like to note besides some of the exhausted in the throes of at least the beginnings of temporary turnarounds, are the efforts to identify areas of interest that the mutual funds are likely trying to put money into, that's coming out of recent winners or available cash.

Tortoise/Hare Racing

Those are running a large gamut from insurance to (some) banking, to food stores to commodity producers; a series of sectors that while certainly not particularly overvalued (some are actually fairly cheap), aren't likely sufficient in business scope to tickle the fancy of this era's enthusiasts. For instance; our own Kellogg (K), shorted near 50 last year, was covered some time back, with a buy zone of 28-32, entered briefly just yesterday. For normal investors over recent years, 15 points gain on the downside over time, and then reversing to the long side would seem fine; but not in this era. And we're guilty ourselves (because of past tech stocks successes from a series of recent years) of heavily focusing on the new paradigm, and even next paradigm (new media) stocks. However, for the conservative (which there's nothing wrong with being) investor, we are inclined to include a few stocks, that while not setting the world on fire, probably are reasonable holds (tech aficionados including myself wouldn't normally invest in many, so please understand we are trying to provide a sprinkling of selections for investors with different perspectives on risk to consider, as they manage their affairs and make decisions within their tolerance levels).

One that comes to mind (though not particularly cheap now) has been Merck (MRK), a superb hold all the way from the 20's (with less risk at any time than internet stocks, which should be at least understood, even by those of us who've successfully held some of them), while a stock like Intel (INTC), definitely a survivor no matter what happens next year (if there are any, which there should be plenty of if we get an early top, then a low-point later in the first half) from under 13. It is not to disdain short-term frequent trading efforts; but to point out how a tortoise approach most of the time has also worked well for those a bit reticent to get drawn-into the more recent chaos. It is not to suggest "momentum" doesn't work; it does in a trending market. However, we still find it essential to emphasize that probabilities favor current upside in the mature internet stocks are rallies best used for selling, not buying, whether they make it a tad higher or not, as we suspect. For new media or telecom stocks that are not yet fully matured (and won't be for at least a year or two we think), there is no reason to sell these in our view, but to simply hold, and buy more on dips when available in the coming year's first half (that's fairly broad; and presumes investors not overly involved with this market that he or she would panic when, not if, these stocks do correct).

It is also noteworthy that we haven't suggested any shorting of equities, or buying of Puts, ahead of the Fall's lows (or since), stating at the time that we didn't plan to do so until early in the New Year if the market was (and so far certainly has been) firm enough to shepard gains past the Y2k worry. This remains the plan, though not rigidly depending on events. It is not surprising to see the rotation that's going on in this market; it's in fact essential. It's not a bit surprising to see the selling in retail stocks, or some of the e-commerce leaders; as we expected this particular sector (which has recently drawn-in money) to become dangerously extended.

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Meanwhile, in the wake of Tuesday's stellar gains on the long-side of the trading ledger from the March S&P low 1440's (or even better), these holiday-bound (but angst-filled) sessions left us again flat overnight. It's not that there won't be a "Santa Claus" rally effort tomorrow; there is probably at least one (given the proximity of the old highers wherever not already broken-out of). It is also occurring at the same time that the T-Bonds are threatening to break their recent lows.

(Section reserved). Should market Averages continue to defy gravity, and risk management not replace gambling (because buying stocks in a fury is not normal investing, it is something else), then it becomes inevitable that the Fed will reign things in until it takes hold, reasserting their primacy not because it's not up to the market, but because they do not want a market collapse closer to the National Elections. They will do, we think, whatever they are going to do (if needed) in the first months of the year, so they can be stimulative again in front of the Elections. That is partially why we believe corrective action will dominate the earlier half of the year, but only after the Street attempts to corral all the seasonal reinvestment monies.

The rotation that is being mounted right now (out of the old and into the new, which so far is not a minus as we view corrective action as healthy in many stocks that are not simply in retailing or commoditized e-commerce businesses) is the beginning of the attempt to secure a year-end rally of a dimension that cannot be projected with specificity, but which can be said to point towards a further new high, or at least at an effort there. Each of these is increasingly dicey, and subject to rapid (even intraday) reversals. Again; there is no doubt that the convergence of the Internet and digital communications are relatively young, with years of growth ahead. That is not the same as pressing the lowest common denominator (retail e-commerce) into permanent orbit at valuation levels that would be akin to keep having just the only fast-food restaurant in quite a high traffic intersection for decades not just a brief period of years, and not expecting the pie to be sliced-up.

We aren't against online e-tailing of course; as we are in it indirectly by various holdings of some of our stocks (not just Liberty Digital (LDIG), though that's indirectly one key player). However, we are a lot more interested in those who can benefit from the interactivity of the next generation of devices, which starts later next year. (Commentary reserved.)

And yes, we still remain (and intend to remain) focused on technology probably for the rest of our career; while recognizing that there are times of opportunity and increased risk. This is one that is not completed yet in the Senior Averages, can be briefly helped by a broadening-out in the list, but is still going to characterize the multi-faceted, multi-tiered market that continues dominating. I should add that while we are hopeful the market can continue muddling into the New Year, we're not going to suggest anything but a moderate approach during the froth, as it is temporary, likely transitory, and increasingly in a few stocks already shows current rallies best used for selling, not for buying. That will become increasingly true in early 2000, if nothing untoward occurs sooner (although we are certainly expecting an early relief rally assuming no horrendous disruptions).

In Summary. . . the market resumed rallying today, in areas, after forecast failing early pop-up. The NASDAQ market, best represented by the Nasdaq 100 (NDX), remains parabolic, which is a reflection of the pressing of prices as managers gun for yearend bonuses at this point, which probably has comparatively little at this stage to do with asset protection, and lots to do with the desire to show themselves owning everything that has (past tensed) moved this year.

The McClellan Oscillator is at –14 now, essentially unchanged, with dots remaining congested in the Summation Index, trying to trace out a better pattern (we believe downside exhaustion if we're going to get a yearend pop), as market respond favorably (especially in the NASDAQ), in the wake of Fed non-action, which is actually likely to be deferred action, as suspected here.

As many will be leaving early for the holiday weekend, let me take a moment to wish you and yours a most happy and safe time of reflection and celebration over the Christmas season. We hope that after a Merry Christmas, everyone will return to a hardy market able to carry-on into the early part of the New Year, and that our Nation and much of the world celebrates safely.

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