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The Inger Letter Forecast

January 7, 2000

Snapback behavior could not be sustained . . . which is not particularly surprising given hard hits continuing in the T-Bond arena, though the downside action's becoming increasingly suspect due primarily to strength seen today in the Dow Utilities, which had their best up-day in ages. In this regard we have some preliminary ideas that may not dovetail in with common perceptions of this as necessarily bullish. What we suspect is that institutional money shifting from technology is finding its new home (to some extent) in the depressed interest-rate sensitive Ut's, which they're using as a place to park funds temporarily.

That might imply that T-Bonds don't have extensive further downside, as periodically noted here. Our goal for March T-Bonds has long been 86-88, and we're basically there, or at least almost. It is probable that the bond drop is anticipating several things; a) a strong rearview mirror report on Employment coming Friday, b) a further decline in the stock market which defers the Fed's effort at contracting the expansionist monetary policy that prevailed ahead of Y2k, and c) repatriation of Dollar-denominated assets, in harmony with our forecast of what would happen if the world in fact was able to migrate reasonably well into the new millennium, which we felt the U.S. certainly would. Our view was that if the entire world did, that was bearish, and if they had big snafu's that would have been bullish for the U.S. market. We absolutely positively nailed that analogy. We're also on alert for a potential rally Friday, after the requisite knee-jerk response to economic news.

Sure, everyone can talk about Y2k impact draining money from here (in meaningless hindsight), but we've been saying that for at least the last two weeks as foresight, which is a key reason we thought the big stocks were sells as they were shepparded into December's last weeks forecast rally, and not buys, but that larger tax gains would be taken very early in this New Year, which occurred in spades. Further, we did view the Greenspan reappointment as bearish for bonds short-term, because it meant the decks were cleared for the Federal Reserve to do whatever, and not be politically impacted later on in the New Year. All along, our call has been for whatever they did, and whatever drop the market itself did, would occur in the first half, and not in front of Elections. We basically thought the very common expectations of pushing the old trend higher, by some technicians and strategists, was not justifiable by any kind of logic, market analysis, economics, Y2k factors, or even technicals; so we have no idea whatsoever as to where they got ideas of a stock market going higher this year early on. And we clearly said that the upgrades into strength had no vision or were more or less just "nuts", even if the stocks managed to go higher on the short run. That's why we made a big deal about "risk management" in recent weeks, which has proven to be a correct decision.

Meanwhile, Internet e-tailing stocks got totally creamed, very much as we've warned they would in the post-holiday environment. Many are seasonal vehicles, and are misunderstood by analysts or those investors who would somehow see them as investment plays for all seasons. We're so glad, and appreciate a few notes about the "head's-up" we provided last week; that investors in a slew of technology sectors have learned (at least our readers presumably) to differentiate those overpriced stocks promoted by some brokerages and analysts into strength, from lower risk very assuredly survivable stocks in internet and telecommunications infrastructure. Viva la difference.

There are never guarantees in life, and we're all grownups or presumably learning rapidly (that's especially so for the permabulls this week we presume). Our approach to the market isn't that of a "bear" per se; but is to cull-out technology ideas (primarily) which may be of interest to readers with some vision of the future, rather than playing the last generation of stocks (e-tailing or portal plays can work, but are not the new generation in our view, right or wrong), while retaining "core" infrastructure and other stocks that are seen (right or wrong) as long term survivors. In fact, we used the term "survivors" just last week, with a little quip that that sounded funny at the time as a reflection on the market's mood, but wouldn't within a very short indeterminant period of time, if all went as anticipated. That was the basis of our assumption (first time in our life) of NDX Puts, as we thought the Nasdaq 100 (NDX) was about the most extended parabolic pattern ever seen. Note that others had also noted the extreme NASDAQ upside angle of attack, but we waited 'till we saw the whites of their eyes before shooting, and scored an essentially direct "bull's-eye".

Actual valuation plays have also been presented in recent weeks, and will be focused upon in an upcoming issue of the Letter, which will emphasize "new media". However, in lieu of an intended Inger letter, which most investors realize was impossible given the confluence of events in a very amazing (mind-boggling almost) week, we have shared a few thoughts here more than is usual, in the Daily Briefing's, and also on the 900.933.GENE hotlines, where time has allowed us to. It's also probable that the second phase of corrective action is about to be seen, in harmony with the forecast last month, that you'd see the first break rebound, and then head somewhat lower. This is impossible to finesse better this week, but after the close today a couple companies warned in regards to their business-to-business models (we warned about excess chasing of that last week by the way, as you may recall), and that could sober any rally in the wake of the coming numbers if in fact that's what occurs. For Thursday, markets could readily fail rebound efforts in advance of the Friday numbers, though we suspect the Senior Averages will have mid-session rebounds.

Further, we don't think there's anything going on now that compels immediate equity investments beyond that already on-board, therefore while overwhelmed slightly this week, it's a good time to not publish the monthly Letter, even if we could find time. Since virtually everything anticipated in December's Letter for early in 2000 was outlined in advance, it's probable that there's no rush to complete the Letter started last week before the press of events, though I will certainly do so as soon as time permits, but not through this week just for the heck of pumping it out to the website. What I may do is provide a briefer one, then follow-up further commentary when time permits, as it is totally impossible right now. For Letter only readers (who missed my Daily Briefing personal remarks) that do not know, New Year's preceded my Mom's loss, and as an only child, with Dad gone for years, there isn't any way to create more hours than exist to fulfill responsibilities. Doing my best in this unusual confluence of events in the first week of the millennium.

In summary . . . while there will definitely be intervening and volatile rebounds, such as forecast for today, they are unlikely to denote the market coming off any ultimate low for the year 2000. If anyone is listening to types that haven't the courage to admit there's no chance for the market to move dramatically higher other than the noted interim rallies, and continue to believe this is just a bump in the road, well, maybe they're right. However, some of those have encouraged leveraged or margin buying too, which we thought crazy, and railed against last month. In a normal decline of the market, a 20% drop can be twice that in the most volatile drops, without too much trouble.

Given tighter margin requirements at many firms, that would be an engraved invitation for trouble for any investor who was still panting for the upside. We know we're not bears as such, because we have mostly owned nothing but evolving technology stocks throughout the last decade, and will probably do much of the same this year, in harmony with our view of the bull's next up cycle, as outlined from time-to-time (but not due to start as of yet, though we never know for sure, just exactly why we're never completely out of the market, or totally in, but use the market to scale in at extreme pressure points, and out during extreme euphoria; which makes more sense than all those ridiculous "traffic light signal" approaches to market exit and entry areas).

Daily action . . . has us doing enough of that with respect to our S&P guidelines, and these have probably outperformed most people who view the market as if they were directing traffic. We're not always right (though it took part of the Fall to prove that to some people), we're fond to say, but the approach is generally founded in proven approaches to "risk management" over years of addressing these markets, and being aware that things can go down faster than they go up, and of not wanting to ever suggest an approach to the market which would endanger basic capital of an investor who agrees we us. That may or may not be possible; we don't know the future. But we do know that capital preservation, and a belief the last series of rallies was best used not for any big buying of the already played-out extended stocks, but for conservatism, was the plan.

That's a big reason we viewed this last Fall's rally as best used for meaningful or even a seminal institutional distribution, rather than buying or reaccumulation, outside of mild selection of deeply downtrodden tax-depressed issues, many of which even now are little changed from where they were just before this wild year began. The year promises to be extremely volatile, as forecast. At the same time, there has not been any doubt here but that the Federal Reserve would take any determined actions in the year's first half, and not in the second ahead of the National Elections.

We are continuing to hold the guideline March S&P short from 1494 from Monday's first half hour and shifted to that one from the preceding (and profitable) 1487 guideline short because thinking many wouldn't have played over the weekend made that sensible. The earlier one was profitable in theory by 2000 points and the current live one is ahead on paper by an astounding 8000 or so (balance of comment and stop discussions etc., are reserved).

Technically . . the Dow penetrated the 40-day Moving Average Tuesday as did the March S&P. For the Dow, 10,900 was postulated as "might get a little buying yesterday (Wed.)", but that any such rally would be temporary if at all. We got to around 10,930 and the rally was blunted later. Those analysts proclaiming "bargain days" for bigger caps especially, are not correct in our view.

For the March S&P, the 40-day came in around 1438, where only momentary holding occurred, before the market accelerated to the downside quite aggressively. While noting the 40-day break would likely precipitate a drop to the 1390 area, and then a specialist/market-maker mark 'em up rally, we did not believe the advance could yet garner sufficient steam to keep going, though we did indicate on the early Wednesday hotlines a 200 point Dow rally as fairly probable before new selling came in. We did not retire our defensive positions; and see the oversold daily conditions as "relative" factors, given the short-term behavior last month against which statistics are simply compiled, which doesn't reflect that longer-term work has essentially only barely turned down.

Beware Orderly Markets

Clearly we were convinced the next significant move was down, not up, and that's why we were rather specific that the push to just shy of the 1500 level of the S&P would represent a big top. It is not likely that an effort to hold the 1390's of the S&P would be particularly successful, though it was anticipated as an area where some buying would come in, and it temporarily did. (reserved)

That the market is negative, but said to be not terrifying, is the kind of handholding complacency you'll see until the market approaches the bottom, but likely not hear this close to the top (this is still close to the top, from an overall standpoint, and thus is not encouraging to bulls, but should be a worrisome consideration). Investors who have been through these matters understand what a freefall looks like, and generally will be standing back and watching for establishment of a new base, which is what we prefer to see anyway over time. Last week we clearly and decisively did state "all the ducks were finally lined-up" to support a significant decline unfolding in the early part of the New Year. Early rebounds are of course attractive to some, but most likely will be shown to be what are called "sucker rallies", before the next defensive phase of this forecast.

Bits & Bytes and Economic News: (reserved sections for subscribers only, as per usual)

In Summary. . . the Dow essentially collapsed and rebounded, as did the NASDAQ market, as gains sheparded into the New Year were taken, primarily in large cap stocks, as we've long been forewarning via the position short-sales in the S&P here, and in the 900.933.GENE hotline. The pattern is very much as outlined in the late November Inger Letter as well. We're sorry we can't find time to update it sooner; although there's interestingly nothing that needs changing beyond overall gameplans originally outlined. (comment reserved) However, we wouldn't rush-in to use anyone's reserve capital in this market, which is on the verge of something considerably nastier (just possibly) after this brief forecast rebound, and yet another possible after Friday's reports.

After an undetermined number of ensuing rebounds fail, the word disintegration may be heard in a few places, most notably near the lows from those recently championing new all-time highs of late, which is and was a ridiculous risk to ask investors to embrace with their hard-earned capital.

As of 6 p.m. ET, the S&P is little changed, around the 1406 area. We continue short the March S&P from the 1494 or so area; a position established right after Monday's New Year's opening. The McClellan Oscillator closed around +61 Wednesday, up from Tuesday's read of +32 or so, and is still slightly overbought territory, which is not so much a plus or minus, but reflects many small-caps stocks lifting slightly in the wake of the ending of tax-pressures, which relieves this, without necessarily suggesting that it should be read favorably with regard to market direction.

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