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The Inger Letter Forecast

November 27, 1998

A short-term market top? That's the most obvious interpretation of this week's push against a rising-tops continuation channel, simply as both a straight-line shot above previous highs argued, and as the most-likely outcome for a market condition characterized by an overbought short-term stochastic reading, plus notable "froth" in a host of primarily -but not exclusively- hot speculative Internet-sweepstakes stocks leading the recent upside surge. As noted a few days ago here, and on our (900.933.GENE) hotline, there was a hesitation to embrace our own projection of such a short-term top, for a couple of reasons. One was that it's theory, until you see how stock markets act when put on the defensive, which really hasn't happened yet. Another, is the embrace of that viewpoint due to weeks of upside finally arriving at quite conventional overbought daily readings, thus possibly bringing in a new chorus of bearish calls and short-selling. That of course can fuel yet a further extension to the move. In fact, shorting has been quite light, which actually supports the idea that a top could be at hand, but that few are willing to attempt to step in front of a train. I should note that most tops do occur amidst bears being worn out, or giving up on trading thusly.

Nevertheless, as DB readers know, we leaned towards the bulls not surrendering on a dime, and that they would at least try to bring this back alive, right into the present time. Reinforcing an idea that this had more to go, was implied by last Friday's minimalist efforts to pull Dec. S&P premium down, as just a nominal Expiration came to an end, followed later by only minimal efforts to take prices down after an ensuing "spike" on Monday of this week. In fact, we even argued a potential down-up-down or down-up-down-up pattern for Wednesday, with our hotline gravitating to odds favoring the upside late in the day. Those who played our Tuesday & Wednesday pattern calls in fact should be reasonably ahead for the effort including the idea to lean long at day's end if at all, which followed a very deliberate effort to reverse the profitable Dec. S&P short from 1191-2 late Tuesday into weakness early Wednesday, capturing a few hundred basis points gain.

Not turning into a Turkey for Thanksgiving . . . the stock market leaves open the question as to whether it can avoid presenting a lump of coal upon investors' Holiday mantles, still delivering a Goose for Christmas. The answer is yes it can, though it would be normal for at least some of the market's recent "stuffing" to first come out. What could cause the stuffing to start exiting?

This would likely require something out-of-the-blue, combining with normal seasonal forces, thus temporarily stalling the advance. For instance if Russia's Yeltsin wasn't to survive his pneumonia and Primakov continues moves towards unwinding free market and currency conditions, that will have more impact than the Street thinks (they've relegated Russia to financial irrelevance, which is a mistake with respect to the psychological implications it can have on the "new world order".) Another prospect that would really spook the Street would be a drop to single digits for crude oil, an event that initially would likely "pop stocks", and then on reflection bring fears of a deflationary trend replacing the disinflationary trend in the Western world. That is actually a quite potentially bearish consideration, which would likely be initially "missed" in its importance, as analysts just celebrate the idea of cheap fuel and profitable airlines, not thinking far enough ahead. Of course, the opposite extreme in oil prices (such as fostered by conflict with Iraq) would also be negative.

So, why are we still leaning long the market, even though the Averages definitely went higher for sure than our original thinking, but not higher than our adjusted thinking weeks ago once a trend of Fed cuts was evident, whether based on panic decisions in Washington or not? Because trend following techniques say this is still going higher, because our weekly work is not overbought and because everyone seems to be looking for a high in here. And because the market usually rallies into and right after Thanksgiving, especially when you've got really serious reasons for the Street to make that outcome happen if they possibly can (year-end commish & performance bonuses.) I can look at an S&P premium plug-pulling late Wednesday to argue that the bears tried sneaking in a decline, at about the only time they could; when the NYSE was already closed. That leaves a very interesting Friday opening ahead, which if it gaps-up will show Wednesday's late selling to be nothing more than a sneak-attack, while if it follows-through on the downside, that would also be (at least initially) an opportunity for intraday traders to try to bring things back. Given that most of the important sectors in the market did not decline at Wednesday's end, we can only assume, at least so far, that this was a combination of bears trying to mount a fight, and position squaring in front of the Holiday, and not much more. If otherwise, we'll trade Friday's abbreviated action.

Technically. . .we remain on the lookout for an up-and-down reversal over the very short-term, but have not backed-off at all from our view since the day of the low over six weeks ago, that no new general equity short-selling is appropriate (for other than scalpers occasionally). Certainly, the resistance at a spike above-trend (or to the trend, depending on the Index or Average) was a logical place to see some selling come in, and we did. If it gets out of hand (unlikely), we'll be on the lookout for a rally after the Holiday, rather than a decline in Friday's abbreviated session. The late Wednesday S&P premium plug-pulling tells you bears are planning a sneak attack, and that they are weak or they wouldn't have to try it this way. They are fighting a sea of money coming in along with strong sectors across a reasonably broad front, and normal seasonals that argue relative strength overall into the new year. We emphasize that we are looking for a pullback over the short-term, but suspect the late effort Wednesday, absent any key stocks dropping sharply might be just a hair premature. In fact, a neat daily-basis bullish pattern would be for the market to hold high level supports, run-in Wednesday's late shorts, then pop the highs before rolling over in early December. However, this (gap-up Friday a.m. idea) is all tentative and sensitive.

At the moment, Dec. S&P support is limited above 1180, but important at 1168-72, so we'll have to see if the bears can even deliver that on a thinly attended Friday session. If they do, it won't be absent a fight. Under that 1158 must not be taken out for a near-term bullish argument to remain. For Cash S&P, just watch 1170. That's the conventional rising-tops that was taken-out this week. For the Dow Industrials, we're on the equivalent point right now, around 9300. Under that 9200 is key, with (for now) resistance around 9380, and then a measured move to 9520 if they can do it.

In Summary. .we continue to view this market as moving into higher short-term risk, after the recognized post-expiration further push up, which made a potential short-term top on Monday-Tuesday, which will be challenged. As far as tricky Holiday week behavioral characteristics, we are simply trading the market, and willing to allow this to migrate into a late month rally, even into early December potentially, before the overdue short-term pause-to-refresh really gets going. It's being kept on a short leash however. A look at the Advance-Decline Line is quite a bit sobering against recent or even superficial euphoria, and that we do increasingly recognize that. That can mean either the overall up-move broadens-out quickly, which in fact isn't thus automatically thus quite so bearish as some think, or we fail at or just above Monday's highs, and risk a rollover.

Again, neither will likely prevent a pullback in December's first half, from an overall standpoint, though there's just so much money chasing the brass ring it's amazing. Further, if there is any structural argument for a pause, it's the money managers trying to make up for lost performance and lost time, by pressing every nickel into the stock market on top of an historic move, coming at the time of year most intelligent investors wouldn't even think of buying a mutual fund in front of their capital gains distributions (typically done by mid-December, but there are exceptions like the Vanguard funds). On a daily basis, we have theNasdaq 100 (NDX) and Bank Stock Index (BKX) quite strong Wednesday, finishing on their highs. You normally don't get a decline that sticks, not with techs and the financials finishing strong. That makes the late plug-pulling of the S&P premium suspect, at least for now. For the moment, after a good trading day, our hotline (900.933.GENE) is long for those who stay long overnight. Wed's. McClellan Oscillator reading was a warning, as a –3 nominal change from + 29 to +26. We'll certainly respect that, and the possibility of an early Friday decline leading to a pop then a flop. (But we're still long right now.)

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