The Inger Letter Forecast

July 1, 1999

Good evening:

A neutral bias on the Fed's part . . . assisted in rewarding our bullish bias towards the market, which we have held for awhile on T-Bonds, and through this week with regard to equities. That's of course why we've been long each day (with only a couple scalping shorts on our hotline), and in fact fairly insistent that traders willing to play the 2:15 "Fedspeak", not even consider shorting.

One never knows for sure; but in this case it was becoming increasingly evident that there was a gradual buildup of cash, which had the potential (at least we hoped) to come off the sidelines late this month, thus giving us the desired "spike" into early-mid July. Certainly we were prepared had we gotten window undressing instead, but given the modest hike we were in agreement that this would (at least temporarily) have explosive upside potential for the stock market, completing our pattern theoretically, over the next couple of weeks. Retaining the original ideal schedule through this, we have optimally suggested a potential top (forward; but date range reserved), as we get past this year's version of "Mom's B'day rally", and into the earnings reporting season. Certainly there are few, but evident, indications of internal technicals, and psychological indications, that intrinsically could have denied the pattern, or held back the Dow Industrial Averagerelatively, as we all know. However, at least at this point the Fed's willingness to accommodate perceptions of a successful rate "vaccination" were able to give us our preference, which was an upside-run.

At the same time the proximity of a new high for Nasdaq, or the S&P filling a yawning overhead gap has been noted, simply because it would be so much easier than for a weaker Dow Jones. It was helpful that the Russell 2000 (RUT) was "jammed" late today, despite it being reweighted as of tomorrow. Psychologically that probably helped the mood, and ran-in anyone shorting it; of course that did not include us (and never has). Now you see the combinations we were "crossing our fingers" for this week, particularly as we had no new equity shorts (or even defensive Puts) at all, since we were betting on the perception taking-hold that all problems are now ended. Surely, we do not intend to maintain our own upward-biased neutrality (for the market; having fun with it) on a consistent basis, as the idea that there would be twin selling opportunities (one into Triple Witching, then a pullback before another rally) into early-mid July, per our long-standing forecast.

All of it was thus gratifying on an intraday basis, in addition to intraweek optimism ahead of news released from the FOMC's Wednesday meeting. And by the way, as noted on the hotline earlier Wednesday morning, we emphasized our rethought outlook about the Fed Chairman's approach, in a way that suggested he would not only be non-heroic (as previously noted), but indicate they would embrace "neutrality" as policy, pending other developments as the year progresses. That was a departure from what we said last night about bias, but then we thought about it, and these existing slowdowns in housing and autos (still more important than computers in our economy), to arrive at the conclusion he'd ponder whether the economy was already easing down due to so much work done (as noted) over the recent months for him by the T-Bond market, which we did repeatedly say would go up initially if the Fed raised rates. Wayne Angel (of Bear Stearns) was thinking that way; and while he didn't give the reasons, and isn't right on Fed moves all the time (no one is), we did think about that, and the news, and arrived at a conclusion that matched his.

At the same time there are a couple disturbing factors in this market, not the least of which is the Dow Utility Index (and Philadelphia Electric for that matter), both of which were hard-down in the wake of the "desired" news from Washington (the latter, which is a pure electric reflection, by more than 2% today). On top of that daily and weekly stochastics are now working their way to new potentially extended levels (if they keep this up for just a short while) over the days ahead. It is not our intention to rain on this parade; and as noted the other day, some of us hold longs or a related approach, that date from earlier in June, in harmony with this big picture call. It is a desire to say that whatever we get on the upside in the days ahead should complete the overall pattern.

Further, some of the calm ongoing earnings forecasts for Q2 may be challenged by developing reality; that things are measurably already slowing down a bit. That was involved with concluding the Chairman might do the least (rather than most) possible; and as slowing months of higher rates were already starting to make perceptible. After the close today, even Starbucks (SBUX) said results would be "disappointing", and the stock plunged by over 11 in Instinet. Concurrently, Nike (NKE) made a similar revelation, and it's down as well (neither are ours; but they very well do make a point about excessive expectations). Keep in mind we're more concerned about Q3 and Q4, outside of limited areas where demand can be pulled from next year due to Y2k fears. If there's two shorts on our list (which have recently reached targets) emphasizing such risks, they are Delta Airlines (DAL) and General Motors (GM). (Now of course they can rally short-term.)

As far as the Dow Industrials, which is the weaker of both Senior Averages, it's just academic whether they do reach new highs. If you ask, we'd have to say sure, why not, the others already have accomplished that as of today. However, if you ask whether this warranted any investing by other than traders, the answer is the same; not so in our opinion. Trading and investing are not the same; and internals are not likely to catch up with the Averages, despite the market tossing aside a potentially negative short-term pattern and moving ahead, which has been a recognized preferred pattern call for June's finale; which is why we recently emphasized the long side.

So while the concept of a small rate hike was a broad favorite, and we allowed for an explosive rally if they got that; please do not assume that means all will be well for the longer-term, beyond the parameters given each day. If the Street's lucky (not to mention that stock markets, even last week were in fact working in sideways action, in a new pattern noted as not being symmetrical; nor was it "3 peaks and a dome" as was possible at one point, but noted changed as of late last week (more on that again in tonigh's "technical" section). Thus there was no triangle; and while technical analysis never tells you what will happen (or what the Fed will do); it was hinting go up.

The morning's decision on expecting a neutral bias, in fact contributed to our being long officially four times Wednesday (two profitable shorts additionally), in ways that certainly did score some decent upside gains for those inclined to trade right in the middle of a semi-circus environment. (By the way we then bought Thursday's dip at 1374; later selling around Sept. S&P 1387 area; in a general desire to get out of the way in front of Friday's non-farm payroll and economic data.)

Daily action . . . by the time all was said and done, saw guideline gains Wednesday, on our S&P 900.933.GENE hotline, which were in the vicinity of 4500 points, with admonitions here in DB's and in the Letter, not to emphasize any new equity shorting until further-out in July, which surely appears reasonably appropriate. Even though it has been clear since last weekend that we had a perception that a Fed hike would be (daily) bullish, not bearish, and help continue our pattern call for upside into early July, there are some areas to clearly focus on, including the final portion of that overall call. One of which might be to notice the behavior of the 10-day Moving Average of Arms (or TRIN), which got fairly oversold just a few days ago, and is now working to overbought.

(Balance of Daily Action reserved, per normal, as relates to forward forecasting aspects. Ditto for sections on; Technicals. .Economic News. .and individual stock Bits & Bytes. . comments.)

The bottom line: the market, as gauged by the S&P, had worked its way sideways over several weeks, dropped after the Expiration, just below the moving averages, but didn't extend, and was able to hold a rising bottoms short-term pattern. That wasn't particularly compelling, but it was at least a visible fact, which caused us to retain faith in the overall forecast for the post-Expiration pause to be just that, which set-in-motion what amounted to a consolidation prior to an upside breakout that certainly was doable in the wake of a Fed doing what the Street (and we) agreed.

Repeating last night's summary: "the upward move from June's lows isn't quite over, though it is probable that many of these stocks will complete this phase of upside, ideally in this upcoming week, possibly extending into the middle of July, but not likely much beyond that. While we do understand how confusing such repetitive down and up action can be for many investors, for a trader this should not be particularly challenging. That's especially so as it's within pattern calls". This Fed is not primarily trying to "prick" a stock market bubble, but constrain demand at a time that foreign and domestic pricing power is being gradually reestablished, which is their mandate. That interestingly; means the Fed will look at today's market response, and ponder another hike.

We have increasingly been playing the long side of the ledger in recent days, because our call was for just that type of action following a pause-to-refresh after the Expiration a couple weeks ago. As noted last night: "it is also a spot where they could either set-up an explosive breakout of the market (generally desired short-term as you know) and do it by first rallying, then declining, then rallying again on the Fed rate news". Essentially that is what happened, so we're pleased to have not only forecast it, but to have caught it in hotline guideline trading also. Hope you did well.

So, as Fed fears flail and fade from focus, keep in mind that earnings come next, with a move on the Fed's part, primarily intended to immunize this country, which a ¼ point won't accomplish. Further, stronger earnings cannot offset a series of rate hikes, as the market is extraordinarily in front of wherever normal relationships between debt and equity sectors should have it. That by no mean says we can't have further daily or weekly basis rallying; in fact we expect it. Happened last year; happened this year to a mini-extent, which we think previewed what's on tap in the next couple months, with allowance for the completion of the June/July irregular snapback behavior after the (forecast and nailed) May break; and very much as outlined in recent Daily Briefings.

Bits & Bytes. . . notes excellent behavior in the majority of our long stocks, which we reasonably hope maintain upside into July; though it remains a news-sensitive market. This is unchanged, in an analytical sense from recent days. Lagging other internet stocks, look who's came back, and now through, its moving average of late: TCI Music (TUNE), which today popped by a strong 4 ! (As of July 1, TCI Music's name is slated to be changed to Liberty Digital, reflecting a changed nature of its business model, and becoming the interactive dynamic component of Liberty/AT&T, relative to older business lines which are essentially analogue or static. We're honored this pick last Fall at $ 3, became the number 2 gainer on the entire Nasdaq market, for '99's first half.)

(Comments reserved on stocks such as: American Online (AOL), Apple Computer (AAPL), Intel (INTC), Rambus (RMBS), Silicon Graphics (SGA), little Wave Systems (WAVX) (which just added the legendary Nolan Bushnell to its Board; the early pioneer of touch-screens & Atari), Unisys (UIS), Compaq (CPQ), InfoSeek (SEEK), EarthLink (ELNK), PSINet (PSIX), Conexant (CNXT), Merck (MRK), (long held favorite pick several years ago), Texas Instruments (TXN) and one recent short-sale suggestion; WorldCom (WCOM) (not warranted in weakness; nor is suitability of any of these for anyone implied by simply mentioning Letter stocks noted moving. It should be noted that in most cases we've used rallies to cut back positions, so as to reduce our overall exposure to markets in periods of strength; with some now balances held since last Fall. The main point of referencing here is to denote the type of stocks we participate in; without even designating which are longs or shorts, though most have been on the long side, and this is not a majority of stocks that we additionally cover. New shorts haven't been added yet; per forecast.)

In Summary . . . the greatest risk remaining this week is Friday's non-farm payroll number; which ideally won't be so huge (with construction contracting a tad) to negate upside behavior into July. The McClellan Oscillator moved from Friday's -53 to Monday's -10; that was another trip back to the vicinity of the "neutral zone", and on Tuesday moved up to the +31 level. Wednesday got to +64, as the market works on reestablishing an overbought short-term condition, per forecast. So, ideally none of this derails the overall move tending higher into early-mid July, and maybe it even helps a bit, particularly if we can get some further broadening out of the move near-term.

As of 7:30 p.m. EDT Wednesday, on Globex, Sept. S&P is trading up a few ticks near 1383.10, lifting to a 1054 premium. Again; we suspected the Fed to move but timidly, so as to see whether a quarter has much effect (it won't immediately, but the signal is thus officially given, and albeit grudgingly, others will come around to grasping longer-term implications of a "trending" series of hikes), or whether it roils foreign markets or currencies. It probably will have a dampening effect on foreign markets, but not disastrous. As noted in the last Letter, we're looking for pullbacks in certain key foreign markets; but that can be (particularly in Asia) constructive for the future. Ditto for our market, as the most dangerous specter would be something like straight-up to all-time high without subsequent corrective action. That's what we said last night; looks to be underway. (Again; the Thursday 900.933.GENE hotline bought the morning dip, and held long into the p.m.)

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."

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