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The Inger Letter Forecast

January 28, 2000

A defensive market was the call . . . again for Wednesday action, and we weren't disappointed in the outcome. It's always great to see tech stocks advancing uninterruptedly, but realistically as a continuing saga without hiccups, is absurd. Remember our pattern call for this month, which so far is coming along not only according to Hoyle (per plan), but even respecting technical levels at both resistance and interim support points, as the market makes its way towards eventual goals.

We suspect those goals are going to be below the early January lows in the March S&P, and do not consider the brief flurry below those levels by the Dow Industrials, as being key to denoting this achievement. The Dow so far has failed on rebounds at an hourly-basis standard deviation mean, which is fairly ominous if they can't get it above that in the next day or so, at least from the standpoint of the short-term. That hourly level is around 11,100, while on a daily basis the 11,400 level would be denoted, although we really don't see probabilities of this market going so high at this time. Ultimately all levels get exceeded, but not in these next few days, or probably longer.

In the event one asks if the widely-anticipated rate hike is already factored into the markets; sure it is. That's one reason the T-Bonds are firming, and a reason why we've already indicated that it wouldn't be surprising to see the knee-jerk response to a rate hike at the FOMC meeting, only to then have the market rebound sharply, albeit temporarily, before new pressures were presented. This is early speculation, and of course subject to change between now and then. Should, for an example, the market do an el foldo first, then the impetus for the Fed to move would be retarded.

This Fed Chairman is a gradualist, and doesn't want to relive the 1987 experience if avoidable. In fact he shouldn't want to; which is why they tread lightly while speak obliquely, and act gradually. If the market breaks, and further economic slowing is inferred, then the absence of a rate hike is not necessarily so terrific, because of the implication that consumption and wage pressures may ameliorate. At the same time, when this Fed Chairman was reappointed, we felt there were clear political overtones afoot; which meant that the decks were cleared with the Fed greenlighted in a sense, to do whatever they thought best for the economy. (section reserved). Hence; our view: that whatever corrective actions were going to be mounted would occur in the first half, with the first break of the New Year being a preview of sorts, as the next thing the market would do was to take the Dow Industrials to new highs before another drop, all of which was forecast to occur within January ideally, and very nicely has accommodated this outline for all reasons previously elucidated in recent days and weeks.

On Wednesday, the stock market didn't react particularly dramatically to Chairman Greenspan's testimony on the Hill, regarding margin requirements, and that's specifically because the subject was well-broached earlier this month when the Fed's head spoke at the New York Economics Club, and outlined then his reasons for believing that the hiking of the maintenance or leverage levels wouldn't solve the speculation problem. Today he acknowledged the margin increases of course, but the unspoken backdrop for his reticence to lean on individual investors likely isn't at all different, because of the reasons we outlined previously, and the fear of punishing "innocents" while not being able to touch the real leverage players. Anyway, that's our interpretation of this.

We totally agree with the Chairman for reasons outlined in this DB at the time of that NY speech. Generally that dovetails-in with the concerns regarding who would be impacted; as margin rates generally impact the small investor more than the institutions or speculative trading pools. (Don't anyone kid themselves into believing pools were permanently drained after the 1920's; modern versions exist .. (details reserved, as is discussion on the subject, rarely heard on the Street).

How Wind Leaves The Market's Sails

(Discussion of spreads, the specialist system and hedge funds; reserved for subscribers only.)

By all means keep in mind that even on the venerable NYSE these days, a strained or traditional specialist system cannot absorb supply for any lengthy period of time as in the old days, and this can make a big difference in any implosion, as we've outlined in recent days. You saw that first, earlier this month, and you've got a crowd out there that believes a correction can't exceed three days; which is certifiably nuts. Once again; the key to the future is the correction sustaining near 9000 on the Dow, not 11,000 on the Industrials; a level that it is presumed will fair fairly shortly.

Market internals have continued somewhat weak structurally amidst all this roiling, and is despite the superficial bullishness implied by a number of advisors, or sentiment survey readings that try to estimate the market by being contrary (oversimplification although somewhat traditionally valid as you know). It's funny how bullishness has increased dramatically without breadth doing so this month. Breadth has never improved even as much as we would have liked to see here in the first month of the year. Although certainly many of our stocks have done very well indeed in January, we do know what this pattern likely is (as discussed earlier this week), and why caution's correct.

Also, the divergence in the NASDAQ markets, where the NASDAQ Composite has outperformed the Nasdaq 100 (NDX), ties-into the fears about higher interest rate pressures, hence small-cap issues were the intended and historically temporary beneficiary of such matters. And still, though many talk about rate hikes (or whatever), almost none come out point blank and say what we're looking at (albeit modestly) is an inverted yield curve; a traditional yellow light for any investor. And yes, we personally continue to retain NDX Puts (or QQQ shorts) established near the highs.

(Computer and other discussion reserved.) Generally, this totally remains an environment where focusing on next-generation areas and stocks (where revenues immediately behind aren't at all relevant, and neither are those immediately ahead), interestingly has some relatively mitigated risk contrasted to older tech favorites. This does not apply to older-line cellular phone companies that we warned of when others recently upgraded them (you'll recall), nor e-tailing stocks, which in fact we also thought were headed for trouble, and seem indeed to have found plenty of that. So besides being happy a majority of holdings are nicely ahead in this volatile month, we'd briefly note that it's fairly important sometimes what areas we didn't invest in, other than where we did.

Technically . . . the March S&P never moved anywhere near the 1430 price level that we had determined as a mental stop discipline for the position-trade that dates from last Thursday at the 1471 level. That short continues without an interruption; and when combined with other moves caught (not all, but most) in this incredible month, leaves us better-than-seamlessly short S&P's, from the original first homerun effort at the 1494 level in the first hour of this New Year. So, in essence we, by virtue of the swings, have accomplished what amounts to being on the short side from (adjusted to) somewhere well into the 1500's, where of course the S&P never has traded. In any event, we continue this position effort, with no change going into Thursday, after a good day.

(Balance of technical analysis section reserved, as is the normal custom.)

Daily action; Bits & Bytes and Economic News: (Normally reserved subscriber discussions.)

In summary . . . the McClellan Oscillator actually rebounded a hair to -19, though that barely serves to characterize the heavy market action, even though we very much expected some sort of minor upside tries in Tuesday/Wednesday timeframes, or even early Thursday. We continue short the position guideline in front of early Thursday, and this retained position effort is in the March S&P since 1471.

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