The Inger Letter Forecast

July 22, 1999

Quiescent Federal Reserve gradualism . . . as opposed to dramatically overt intervention, is a perception of Greenspan's approach tomonetary policy, that aptly describes his perception of the world's ongoing fragility, in which moves have been taken to ensure a systemic liquidity (both domestically and foreign, in a more indirect way via currency moves on behalf of the BOJ) that in fact was the basis of our forecast for bullish currency and market stabilization's last Fall, leading into a perceived time of increased risk, sector by sector, and market general from time-to-time.

One of those times was in late April/early May, and it worked beautifully, as did our forecast runs back up (a little ragged, in a series of "pops", but it evolved per expectations) to a projected high just shy of the key inflection area (by our determination anyway) of 1430 basis the Sept. S&P. It was again gratifying to identify this "rotational" process in advance, rather than in very common hindsight quarterbacking remarks, that are of course so prevalent since the market's recent key tumble. Everyone now sees the market's July "jinx", including those who were bullish last week.

In addition to remarks here in the DB, our 900.933.GENE hotline anticipated that the U.S. stock market would be somewhat defensive in front of Greenspeak, regardless of whether his remarks are comparatively benign or not, which many expect to be the likely case, given various travails in the world which aren't completed resolved. Put differently, the world retains sufficient fragility, in a way that makes once a gradualist, so as not to inadvertently rock the boat needlessly. What is happening around the world is nothing different than assessed over the course of this volatile year, which focuses on the initial steps to ignite the fires of internal optimism abroad, which then can create the ultimate demand for increased goods and services from the United States, thus in fact eventually proving beneficial to our multinational big-cap stocks.

That, however, can be such a lagging event, especially in the face of demand pulled from early next year by Y2k preparations and other factors, that it becomes virtually impossible for these stocks to produce results worthy of their most recent multiple valuations, without a time period during which these are ratcheted down considerably. That is a good part of our bigger picture, or "macro" forecast, for the market to have more trouble in the middle to later portions of this year, but please do not assume that means all the way through the entire year. This is not last year; it is not an environment that requires quite the bearish fundamental conclusions of last Spring, but the patterns continue reflecting an uncanny resemblance, which we not only forecast, but stand by, until or unless the market tells us not to.

During the forecast "rebound" from the June lows into July, we determined that the action was in fact coming from a high enough level that new highs for the Senior Averages would be realistic, and we played it thusly. That was the basis of the advance measured goal just shy ofS&P 1430, of course in the front month futures (always, unless otherwise noted as being cash). We decided that the move would (amazingly) be akin to last year, in that it would turn-out to be "unconfirmed" amidst some desperate rotational efforts by some major mutual funds to make it otherwise.

With a dearth of new cash coming in seasonally, our view regarding "robbing Peter to pay Paul", as far as what earnings were likely showing relative to late this year or early next, we concluded that there was a fundamental and technical basis for at least a modicum of caution. Then, when we got some response to our warnings about the Dollar being overbought, and even T-Bonds, on a short-term basis (we are not particularly negative on them for a very long investment term), it seemed appropriate (for the first time since the Spring peak) to embrace some Put and/or the requisite short-positions last Friday, so that one became appropriately hedged or insured. For a conservative investor who doesn't feel such efforts are suitable, the ideas may have contributed to simply a cautious tone, not putting cash to work, and avoiding being swept up in the euphoria of the moment last week. We thought the market would simply "grind-out" a top; and it did. That we got our1428-30 highs essentially nailed, was so much the better as far as delineating the top that unfolded; though certainly the market doesn't have to comply to any forecast so precisely.

Daily action . . . (reserved per usual, but guideline wasahead near 1600 points just for Wed.)

Tomorrow is a bit of a conundrum . . . given "Greenspeak" testimony at Humphrey Hawkins. Of course there's a debate as to whether the Chairman will defend his tightening bias, or rather expound more benign responses, given the fragility of the world's recovery efforts. We suggest a bit of both. And we even wonder if talk of determinations not to sell Gold on world markets, is actually reflective of a policy determination here, that all those doing so overseas, are putting more faith in paper, than even the U.S. Government (a primary and original advocate of doing so) is willing to embrace. We can't yet pontificate on this subject in depth, because motives of Washington in this regard aren't clearly known. Stay tuned.

However, when tied-in to earlier comments on the IMF's lack of willingness (or ability) to fund further bailouts, it's not out of the question that the Establishment is somewhat worried about a new unfolding crisis. Hard to pin down; but gathering the Dollar's response to intervention that commonly might have supported it; something's likely in flux just now; and this requires some degree of apprehension, in addition to projected caution anyway at the anticipated mid-July top.

Technically . . . it would be easy to look at the confirmed penetration of the bottom of our flag formation forecast to be "ground-out" over the preceding couple weeks, with a forecast pop-over the top, and then slice through the bottom, which has occurred normally, and get very negative.

However, we're not in the guru business of trying to assuage probabilities of apocalyptic events, or sequences by any rigid system. Those who purely follow such matters, including the heavens and lunar cycles, can always (in hindsight) point to some event; for the simple reason that there's always something happening in the world that one can hang one's hat on in retrospect, when or if something shifts. (portion reserved)

The market has seen plenty of corrections, and a couple bear markets in this decade (which we tend to measure by any 20% or so decline, more so in sectors than in the Senior Averages), and will likely have at least one more, which probably is in the early phases right now. Any number of analysts (bull and bear alike) are talking about yet-another unconfirmed new high before the "real McCoy" starts moving to the downside, and while that's livable, it's not our basic expectation. We rather suspect the high's essentially a done-deal, with a new post-Greenspeak relief rally just the ticket to substantiate the market's inability to get-up and go "one more time". Even before calling for the rally into July, we noted some money managers talking about selling the "summer rally" in August or September, and then coming back in around October or November.

We suspected to many were looking for that oft-seen pattern (quite predominant before 1997 or 1998), so a market pattern that accommodated them, might just have been barely strong enough to hold, further out. That would be because it would catch nobody by serious surprise. In our own view, the way to "prove" heady negativity, was for a decline to occur before August, forcing those guys (and a couple gals) to sell into weakness or in a desperate "hail Mary" rebound effort. That kind of pattern would leave everyone edgy (timing reserved), which almost preordains its failure.

In a nutshell . . . the market cracked yesterday, rebounded Wed. morning, but couldn't get above the first ideal support (floor), which became resistance (ceiling) on the rebound, and that was the 1395 area of S&P futures. That is also where we did today's nice reversal to ashort-sale from.

(That refers to intraday trading only. It's been noted each day that simply holding bearish trades from last week's over-the-weekend shorting area of 1428-30 was also acceptable, for those who don't shift frequently. For most real S&P players, long-term can be between breakfast and lunch.)

By failing there, and then going to a slightly lower-low, you're emphasizing not only our forecast (which included selling and/or shorting and/or buying Puts into strength at Friday's close and into opening all-time highs just this past Monday), but showing how "the boys" are doing something else we forecast for some weeks would be the case: selling into the so-called good earnings.

This "buy the rumor, sell the news" activity is interesting not only for the event, but because we're fast running out of even that kind of news, and moving into a traditionally often-soft time of year. (Forward strategy interpretation ideas occurs here, and must be reserved for subscribers.)

For now, we see no reason to change anything we're doing; nor are our forecasts modified at all. There is no reason to, as everything continues marching very close to the numbers, and even to a string of (900.933.GENE) hotline calls affirming these expectations here in the Daily Briefings.

(More strategy perspectives; and rebound parameter identifications, which must be reserved.) A partial retracement of all this which fails, and then goes to a lower-low, would be anything but bullish, and that's the kind of a drop which could gravitate towards a moderate plug-pulling, with the market getting frustrated at first, and then, after a series of minor half-hearted rallies, lead to a serious risk of a market el foldo.

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

In Summary. . . the market moved towards a rollover, and rolled-over Tuesday, with a very huge Nasdaq drop, from which only nominal recovery was provided on Wednesday. Our S&P trading continues on-track, with the alternatives remaining of a position statement (started as a trade of course) including the assumption of Puts last Friday (first time in ages; and within minutes of the highs) and the over-the-weekend 1428 short-sale. Moving in-and-out of the S&P has been more profitable than staying with a single guideline trade, though either way has worked out very well. Hotline gains for Wednesday's trade included a couple longs in the morning, and a single short in the afternoon, from the 1395 level, closed-out in the day's finale at the 1385 level by intent on the final commentary; resulting in intraday net gains (for nimble swingers) in the area of 1600 points.

Tomorrow's pattern may be a bit squirrelly, because of likely vagaries of Chairman Greenspan's testimony at Congress. While very open-minded to trying to scalp (short-term trade) a relief-rally after that's out of the way, we will probably play that close-to-the-vest because he might again in fact attack the wealth-effect of the stock market, as having promulgated the ongoing "prosperity", with incumbent inflationary risks, as he sees it. Clearly the drop in housing starts was not ample to dissuade fears of such things, or the stock market would have done better on Wednesday.

Of course we must not forget that our forecast pressures on the Dollar Index continue, and that they have been unfettered by periodic interventions on the part of the Bank of Japan by the Fed, in an effort to assist Japan in keeping the Dollar strong, strangely enough. A strong Dollar was a hallmark of our upside call in recent weeks heading into early-mid July, and that is now melting, in a way that dovetails very well with the forecast. Finally, with the domestic growth-rate running at about double the Government's target rate of growth, Chairman Greenspan has ammunition, if he wants to use it, to defend his existing asymmetric policy direction. The question is whether he will dare to do so; and that's where the market's action comes in. He may tie the two together.

Note that even when T-Bonds stabilize, you're not seeing the Bank Stock Index (BKX) firming, which is something to cause one to remain on-guard for yet-another head-fake on the upside, in fact later followed by the market trying to decline in earnest again. Forecasting theSept. S&P to move above the top of the flag pattern last week, and then slice through it to the downside, we're definitely pleased with the action that has ensued, and hope you are as well. We know this isn't particularly easy for many investors on a day-to-day basis, because they're biased towards some kind of "trending market". While we knew this year wouldn't be straight-up or straight-down (and thus expected a more complex pattern throughout the year), we're getting closer to what has at least modest risk of becoming the closest thing to a 'trending" move seen, at least since the May market tanking, so well nailed literally to the hour, at that time as well.

Those not inclined to trade may consider simply what we've suggested as reasonable; keeping one's powder dry, and anticipating the bargains coming up as the year goes forward. Ideally it will get extremely frustrating for the permabulls, and permabears too, who can't get a straight-line drop (exactly as we said would be the case for months). Some stocks are starting to work their ways towards more attractive prices, and that's our primary interest in stocks down the pike a bit; preferably amidst the greatest despair of the year. Before the financial media picked up on it; we pointed out the weakness in the Euro; the cross-trades with the Yen, and the Dollar weakness. It is partially a reflection of repatriation, and either repatriation or flights-out of temporary parking in New York, can unwind precissely the kind of money that helped propel the upside, as outlined.

The McClellan Oscillator posting: on Tuesday, we got all the way down to a -64 posting, and on Wednesday is at -54; which is underwhelming for a snapback, but understandable in front of the Greenspan testimony. We continue to think the market is basically moving to a "catch-down" with the real internals, which never improved so much as the Senior Averages did in their projected rally from May-June lows into early-mid July. By that we mean that internal highs of this market was in the spring, or sooner for some groups, with push-ups intoJuly the forecast effort to rotate sectors infinitely in a way that would prevent the market from ever really having a normal decline. That's what the Street attempted (at least some funds and a few brokerage analysts) and was in our view a lost cause before it started, though we knew the upside assault would be mounted.

Again; the break in the Dollar has contributed to the instability of the current environment, and it has been singled-out for monitoring in the recent couple of week's action. We continue viewing the 1428-30 area as the market's top, based on the September S&P, unless the market requires that opinion to be revised. That is why, a week or two ago, as others increased a few targets, we did not. There is no change in our overall forecasts. As of 7:30 p.m., on Globex, S&P premium has contracted to 671, with Sept. futures trading at 1386, but up 50 from Chicago's daily close.

We remain flexible in this stock market with a bearish bias for the short-to-intermediate term, as it unfolds virtually as close to "schedule" as is humanly feasible to anticipate. Undergoing nothing more than the forecast for this particular phase, the market will decline (intervening rebounds of course from time to time), we think, due to underlying unsupportable fundamentals, not because of any physical or spiritual factors. And while we viewed the enthusiasm a few days ago, urging a player then not to forget to sell, as the market crumbles, and others are in despair, we'll later urge most not to forget to be buying (ideally as those who recently were, are selling in despair).

Buying in panics is most feasible when one is not particularly worried about all existing holdings eroding. That's because it's very unrealistic to think anyone sells everything or even buys totally, at any point, so a serious investor reduces risk into upside extremes, so that he or she can buy into later opposite extremes on the downside, which is the only reasonably comfortable approach to have in the markets. That is assisted by being off margin, having lots of cash, and even some bearish trading strategies utilized from time-to-time; as we embraced for the first time in a couple months (the nailed early May high being the last), since this past Friday's admonition to take an immediate defensive stand just shy of Sept. S&P 1430; per the well-in-advance forecast top.

It cannot be repeated often enough; even to traders: we don't sell or short "confirmation" of either strength or weakness; but anticipate short-lived duration contratrend (potentially volatile) rallies. In our view the trend's developing to the downside, and certainly isn't completed. At some point you'll get a rebound worthy of the name, which you haven't so far. If you don't, we will see public recognition of what's going on, that would conceivably be more dramatic than yet recognized. Be alert for this possibility, as it's amazing how a sudden galvanizing of investor opinion can occur.

Gold's special properties mean that it has a greater variety of uses than almost any metal.

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