The Inger Letter Forecast

July 29, 1999

The market environment . . . has included the projected swing-up into the high by July 16th and the ensuing sharp decline, which was not been expected to take-out the S&P 1340's until we got a normal rebound, which some might call a "B wave", within a bigger potential "A-B-C decline". As noted we're not "wave surfer's", though the simplicity of the call was pretty straight-forward. It included the head-fake upside breakout, in July's first half, a slicing all-the-way-through the low-end of the old "pennant" formation, a "rebound" that ideally would stop shy of former floors, that are now a bit of a ceiling, and then resume overall intermediate DB pattern projections here.

Of course that includes the belief that almost every time players get too enthralled with downside activity, the market will rebound; although the rebounds should fail and the market progressively, over time, should work its way to lower levels. (Specific forecast time and price level is reserved.)

Clearly we have quite serious concerns about the market in the second half of the year, viewing a projected rally during parts of June and July's first half, as likely the last good opportunity for an exit, for those seeking to have done so gracefully. Just looking at the market internals, it's not too hard to recognize that the internals topped earlier in the year. That includes various sectors, as many topped in anirregular fashion during the first half, which was the extremely complex way this year was expected to (and in a sense still is continuing to) evolve. We've done the best that we could (in an inexact world) to cull-out the nuances of these shifts from the year's get-go, and even included the belief that Oil and some other long-depressed stocks would help the Averages hold up longer than the real market. Glancing back on all of that forecast distribution, we were as right as possible, though you never know for sure in advance, which made it a tad challenging.

There's No Market Entitlement

It is pretty amazing, when on occasion, we hear from investors who want a "simpler" explanation of market action, as far as when to buy or sell pretty much everything. They must be conditioned by aberrational affairs, when everything rallies or declines in unison. The norm is something like we are seeing this year, with the occasional parabolic thrust tossed-in. Going forward, and this is a tough call that we've touched-on before; if the majority of players view annualized gains as just something that can be reliably and regularly quantified, more or less like an entitlement, then we have some risk of something far nastier coming to the market, as the year goes forward.

That of course doesn't mean it can't be played, which is just why we identified an internal top in the Spring, and then depending on how far down we dropped in May, a rally that (in this case did of course) attacked the highs with unconfirmed breakouts that were merely desired fake-outs. It's that particular move that triggered suggested July 16th embrace of the first bearish portfolio strategies, since the nailed early May high. It's the downside move, with preservation of capital deemed most important in the coming weeks and months, which should deliver a terrific buying opportunity. That's all that matters when one looks at the heart of the admonition to be positioned so that one worries a tiny bit about whatever has already been determined by an investor for him or her to retain (meaning having sold to the sleeping pointway before now), with most focused instead of gearing up for anticipated (or at least potential) late-year bargain days. Stay tuned.

If all goes really well (again, we never have next months Journal's this month), we'll be hearing of investors that never want to play again; ofmutual fund redemption runs (at least modestly), or a lot of analysts and technicians scrambling to sound conservative, when prices are attractive at last, because of a multiple adjustment, which brings the market down to something sensible, at least relatively speaking. That of course was the key of emphasizing that flat or slightly improved earnings aren't enough; the Senior Averages need serious gains to warrant the high multiples we still see. For new investors, let's explain: the market pays high multiples for growth of profits, not for maintenance of earnings. For only forward maintenance of margins or results, the market will pay lower multiples than at present; and that's why we called for downward multiple revisions.

Perspective

Certainly there were some sectors where the pressures were anticipated to be rougher earlier in the year, and which may do better later in the year, though we may have to contend with a "toss-out the baby with the bath water" syndrome, as things progress, depending on how nasty it gets (and it will get nasty before this is over, in our humble opinions). One of the problems may turn to be something I mentioned earlier this year as a forward risk: a Nation or corporate community reducing debt, may not have the paper to offer foreign buyers, if they implode and seek to come here. That's a long-shot, surely, but some are pondering whether repatriation, warned-of here at some distance to this wave of T-bond declines which were notable from a short-term overbought condition in recent weeks (against a bigger-picture oversold status), could run into supply worries we noted. Meanwhile, companies rush-out bond offerings while they can, at comparatively lower rates, with some starting to offer high enough returns to be slightly inviting to institutional types).

The T-Bond action is probably the weakest factor favoring the downside, though we did project a period in which stocks and bonds decline essentially in lockstep. We think everyone's engaged in a sort of double-think to try figuring-out how they're going to get higher rates if little warrants it so far. We think that there's too much worrying about bond availability, about Y2k (though that is a part of it), and about inflation vs. no inflation. We think there's not enough curiosity about levels of the market that make sense if you presume either, a) slower growth, or,b) a time of slowdown of profits growth. Choice "a" would take markets down (alternative decline proportions reserved). (Also; as the900.933.GENE hotline noted, the combination of slower GDP and higher ECI was inline with our forecasts, as outlined for some weeks now; slower growth with increasing wages.)

Do we see another abyss? Not exactly like last year; but as noted from those 1428 S&P highs, the stock market has a funny way of making its own destiny ("rolling stone gathering moss"). The big "hook" can easily be the idea that if rates don't spike much higher, that stocks would be fine. Again: what's good for bonds isn't necessarily always good for stocks. We'd go right back to earnings being crucial, for that point to be understood, by any who may find this complicated.

(Section reserved.) And interestingly, we are the optimists. We say that, because (as everyone knows) we said a month ago that if they did manage to lunge this to say Dow 12,000 (which they didn't, and we didn't favor so ridiculously high for that run-up anyway), that would have had a much more bearish cast to it, and therefore the so-called permabulls unknowingly were bears.

If they had gotten their cherished targets, it would have been even more parabolic than what we looked-for, and hence precipitated something even more dramatic (and harder to recover from), on the downside. Strangely enough, for an investor, this can turn out to be the bullish alternative, but only over the very long-term. Here I'm getting carried-away with the long-term, as this is the Daily Briefing, after all. Sorry about that:-}. Anyway; the important top was made July 16th. and it held were it was supposed to, then we got a rebound to the old floor which became the ceiling, and it's run into renewed trouble on cue. (Hotline and DB had called for a down-up-down week, with the best chance of breaking the 1340 area of the Sept. S&P occurring in the second drop.)

As a result of expectations we thought a forecast high just shy of the September S&P 1430 area was a great spot for a "macro" short-sale (done at the 1428+ price-point very specifically), along with the embrace of a few limited additional bearish strategies at that time. Subsequently, as the market commenced and accelerated it's rollover last week we warned that (on) daily basis, one would reach a point of negative mass recognition that would turn a "bull trap of early July" into a "bear trap" within this week, due to forecast noted procedural and structural rebound behavior.

Daily action . . . in harmony with that call, not only had us successfully scalp both the Tuesday morning long, as well as the afternoon short, from the highs into that session's late fade (via our 900.933.GENE guidelines on the hotline), but projected that the stock market would open up on Wednesday (because the S&P premium was so absurdly low at Tuesday's finish), immediately sell-off a bit, then rebound at least some, ease back down and then ideally start a spirited rally preferably right in the middle of the Federal Reserve Chairman's Question & Answer period, of course providing no surprises were heard. They weren't, it happened, plus an ideal late fade.

Fortunately, that forecast outlined both here in the Daily Briefing and on the hotline, worked-out so well, that we were able not only to garner about 1600 points gain on Tuesday, but another run of around 2500 points from Wednesday's activity, primarily resulting from the a.m.long at 1364, and an ideal short-sale into the final hour between 1376-77. (Thursday is ongoing, with daily potential S&P guideline gains well ahead of 2000. Trader's actual results may be better or worse, depending on their decisions, as we strive to be a resource of ideas and analysis; not trading for anyone in our retirement. All decisions are solely the determination of investors or traders; so of course we can't assure anyone's future results will continue to equal or exceed their past results, or ours. Of course the balance of daily comments and projections are reserved for subscribers.)

All investors . . . should ponder why we projected the forecast break in May to culminate with a feisty unconfirmed rally into July, and thus not simply "collapse" without a series of rebound tries. The answer, outside of some technical work, which must remain proprietary (though we share so much of our thinking, and occasionally logic), can be deduced to one key word: psychology.

Investors were (and are) so entrenched with seemingly never-ending perceptions, that increased productivity enhancements and a near-permanent low-interest environment, will always allow the superior total returns they've become "accustomed to", that they've become one-way oriented so far beyond what makes common sense. They behave this way because we had so many years, as they perceive it (we'd argue that last year was in-and-of itself a forecast bear trend from July-October), without challenges to the bulls' primacy, that many investors think the market can hold-up in the face of higher rates, or a peaking (or flattening) of earnings and profit margins.

Little do most of them (which is particularly surprising for institutional investors) know it, but they have been and remain in a "Fed fighting" mode, which is rarely productive for long. We did think they would fight the Fed though, which is exactly why, going back to this Spring, we forecast that the market wouldn't turn on a dime, but would evolve a top over time, including the rally into July.

Take this back all the way to last year, to recall an admonition, that while the stock market would rally into 1999 because the "fix" was in (after LTCM), that the internal high was behind, with that '99 upside expected to be somewhat of a "man-made" effort, which couldn't readily be repeated anew when ultimately ended. In some ways there is a structural similarity to historical swings that preceded serious breaks in the past, but let's not particularly reference 1987 or 1929 just now. It is not our desire to embrace extreme bearish arguments; though it's definitely not our desire to in any way have main portfolios decimated, should such unfortunate chains of events be emulated.

The end-result of this is likely nothing particularly at variance with what we've have outlined from an overall standpoint: a belated grasp of the challenges this year, a contraction in multiples from too much faith in continuing an aging-cycle, and ideally culminating when and as forecast later in the outline, as these participants start to regret their overly-entrenched super-optimism. Surely, it will dawn on those strategists and analysts who elevated their targets so near the highs (a time, we're reasonably proud of, when we overtly refused to do so in early July), that they're risking a long-term (sorry, balance, including Bits & Bytes & Economic News & Releases:, reserved for daily readers only).

In Summary. . . keep in mind our overall forecast was for this to be a "stair-step" affair, which means something like two steps down, one up, two down, or basically a kind of action that gives out hope for the majority, but disappoints them over time. We believe as you know, that overall activity of the past two weeks has defined the false upside breakout, and this downside rout, to be followed by a fade back up, with more ultimate downside unlikely to be completed yet, nor will it be, for all but shortest-term perspectives, from what we can see now. Today reinforces that.

As of 8 p.m EDT, on Globex, the S&P premium is 250, actually up from Chicago's regular close by one-half of a point or so. We still view the recent Sept. S&P 1428-30 area as the market's top, unless the market requires that opinion to be revised. Weeks ago, as others increased targets to the upside, we did not. Nor did we increase downside goals on an immediate basis, warning that a "B wave" rally (rebound within a bigger picture decline), was likely at any point, in harmony with the ideal pattern call for this week, which was down-up-down. It continues; very much on target.

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