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The Inger Letter Forecast

August 27, 1999

Is the market thumbing its nose at reality? In a fundamental sense, yes; in a technical sense, no; and from a seasonal sense, this goes on mostly as it should for all the enumerated reasons, that the Daily Briefing has outlined. At the same time, that is not to say the market will hold up as long, or go so far as some wish; as certainly all reasonable targets have already been achieved.

At the same time, there was some good support for Wednesday's recovery effort, as noted within our intraday (900.933.GENE) hotlinecomments during the session. That included a fairly robust advance in the Dow Transports, along with good strength in Dow Utilities and T-Bonds, while the Industrials were on the defensive by around 70 points. Besides the pattern call, these factors contributed to our reversing a short to the long side at the 1367 level during the day; later selling it maybe a tad shy of the highs, but having captured the bulk of the move, with good gains today.

Daily action: Technical: Economic News & Releases: & Bits & Bytes: (reserved for readers)

Dropping back into the low-to-mid 1360's by midday, the S&P futures simply tested yesterday's lows technically, with traders emboldened to bring 'em back alive by the strength in sectors noted as well as modest firmness in the Dollar Index. It's very hard to break a market when you've got the bonds and the dollar on the same side of the ledger; not to mention Transports and Ut's (and easier when you don't). This was a little interesting because of a concurrent drop in the Bank Stock Index (BKX) on the back of the credit card worries; but those weren't clear enough to convince everyone they (the credit card worries) should be tied to the overall financial sector, at least as of yet.

Noting potential inflection areas . . . a couple days ago, we initiated efforts at emphasizing the selling of rally spikes, more than a "buy the dips" approach that we embraced in the first third of August; though that didn't prevent us from a willingness to buy the first pullback Wednesday after the initially expected up-down-up in the first half hour, followed by a selling wave. That of course had to do with several factors; the testing of yesterday's low; a presumption that traders would try like the dickens to bring 'em back once more (and not give up until they have to); our own view of the seasonal pattern as not totally exhausted yet; and as far as the morning downside, belief that there would be another daytime selling wave before the market attempted the crucial "breakout" come back.

It, in our view, is not the kind of breakout some perceive, and becomes riskier over a reasonable period of time, rather than something fostering more complacency. Yes, this market's a bit higher than we thought the S&P would go; while Dow Jones Industrials are flipping around that ideal recently estimated target high around 11,335 (we closed just 10 shy of that level today).

Put this all in perspective, one recognizes the forecast break July/early August break of 1280 in the September S&P, as ideally completing the S&P purge forecast from the 1428 level several weeks earlier, which assuaged odds for the recovery effort mounted inline with that call, to come into some resistance into the August nominal Expiration, then dip a little and rally into Labor Day, or close to it, with some further potential buying right after the holiday. There's no change in that view of the overall seasonal ideal, while the action is a little more robust than it might have been.

At the same time, because we respect our own seasonal forecast, we deferred any ideas of new equity shorts (in the last Letter), and didn't do any. Combine with the basic-logical tenet that any who might have been short would play the comeback we called for, starting on the break into the high S&P 1200's, and we assume that hardly anyone would have pressed the downside lately. It was our approach to take the chance on believing that the best time to consider adopting bearish trades anew would be next month, not this, and that's been a consistent part of the approach. So in a nutshell that means we are probably under-invested in equities if one perceives this as long-term oriented advancing, or just about right if one views the rebound as an overrun on the upside but not a new bullish phase of the market that endures for weeks or months (investment grade, as opposing to trading-based).

In this regard we are making no strategy changes, but are almost worried that parabolic action of this market is more at risk of reversingbefore we get to Labor Day than after. How that may play is about as clear (at this point) as whether or not the Southeast is about to be hit by a Hurricane, while we're considering that this may spike and reverse at any time, and then come up from a bit of a lower level next week, and again after the Holiday. It's not impossible that whatever one gets from this particular trend now, will denote the highs, reduce the latent bearishness on the Street (and there is some among some of the conservative firms); setting the stage for a fast reversal.

If today's early action revealed anything new, it's how fast the market can be roiled if confidence is lost; as surely is also suggested by the light S&P premium this evening, which should concern professionals. Nevertheless we suspect they'll pop some premium right back on the S&P early in the a.m., especially if we're getting firm T-Bonds again Thursday, with odds that we'll then see yet another, but slightly more crucial effort to challenge Wednesday's highs, which were so very much a factor of "scrambling", than a reflection of any real institutional buying interest. (Morning premium return assisted in getting a rebound for S&P shorting before interesting new pressures.)

As of Wednesday's close, the McClellan Oscillator continues its totally mild forward march; now reading at +54, up from around +40, and oscillating without the superficial improvement of these major Averages. Volume has expanded significantly; while both NYSE and Nasdaq breadth has decidedly not accompanied such gains making the move more suspect than many gather. Again it is the usual suspects moving on the upside; which won't work if the troops fail to run-up behind.

In summary. . . yes, we're well aware that some permabulls are out there increasing targets, as the bears are pretty much eliminated from immediate contention; unless you look at unconfirmed moves, and actually agree that puts the market at risk of an up-and-then-down reversal. From a standpoint of having forecast the turnaround in early August (and the July top preceding that); it's a mixed feeling right here. That's because the pattern call was up into or slightly after Labor Day anyway; though price goals are met and slightly exceeded. (portions reserved)

There's no assurance that will occur; so stay tuned. There's also the chance, that as capitulation is completed on the part of any remaining bears, what you'll get is a very swift up and down turn. If that happens and again it's a fluid situation until we get into September, we'll continue to do our very best with regards to all S&P guidelines (note that we have not kept a single overnight trade, while catching more potential points on the downside and upside this month than the total move); and we'll be quite content that we've not increased long-side exposure to this market, and mostly satisfied not to have pressed the downside with any shorts or Puts, or other defensive structures.

To put this in some perspective, for those who inquire about last year versus this year, the 1998 scenario was different in scope, albeit not in pattern, yet. However, the pre-Labor Day rebound in the prior year was milder, stopped at a limited retracement level, and certainly failed to surmount a few key technical points and moving averages. Nevertheless the market was trying, as it often has done, to make a low-point in August. Then came the next phase of a Russian meltdown and of course LTCM. There is little argument that absent a catalyst (we've said repeatedly here in the DB & the Letter) there's no assurance that the market will make a lower low in the coming Fall.

However we are considering that the catalyst in this market may become a combination of the Fed, which is stoking liquidity regardless of what the short-end policy suggests, the strong Bond market that we have definitely favored coming, as short-term rates firmed, anticipating a slowing that wouldn't be so great for earnings, supply concerns (later on) and a firming Dollar as money flows back to the U.S., particularly as non-performing loans put some foreign banks in theoretical jeopardy. We have already noted that there is no triggering mechanism per se; outside of absurd multiples; so, that's exactly why we're not becoming heroic about selling or shorting anything for weeks now, while letting this market "grind-out" a completion of this forecast rally as it chooses. If we get an opportunity (and we've said this since early July) to do new shorts next month we may; and if not, our primary focus will remain buying under-appreciated stocks later this year, per plan, outside of fairly routine (for us) S&P guidelines, which identified both July's top and August's low.

That (pattern) ties-in to the idea of shorting 1376 in the Sept. S&P Tuesday, and then again the 1372+ area first thing Wednesday morning, mostly in harmony with the call for up-down-up in the first 30 minutes, and then down, before a rally that we caught much of from the 1367 area, with a flat overnight position. The risks, with a 91 only premium this evening, is that you're looking at an effort to complete the pattern, just as everyone recognizes the market's exceeded typical norms. (Again; as of Thursday the shorting idea was doable twice, at 1383 and on the noon comeback.)

In a sense the Fed essentially said they'll hike again in October if the punchbowl's still stoked; so there's an argument of this entire upside being the swan-song of this forecast interim August rebound into early-mid September (at best; and subject to early uptrend termination). It's also interesting that the Nasdaq 100 (NDX), and overall Nasdaq market, were slightly stronger than the NYSE. While many major stocks are traded on the Nasdaq; professional sentiment may still be gleaned a bit better from the Big Board, which is decidedly more defensive than Nasdaq is.

Normal "price" targets have all been reached, so it's now a matter of finessing the August-Sept. rally's completion phases; with Tuesday identified as being an up-and-down overall reversal, but a little too pat for a single day with such powerful (complacent) psychology out there; even if increasingly analytically unwarranted. Thus, "what's next" is a completion or reversal, with some flexibility of course needed as far as getting it underway. Consider, if the S&P catches up, that it has potential (in a best-case scenario) to become what's called a broadening top formation. At worst, it fails in this area, drives down, rebounds to a slightly lower or higher high, and rolls over.

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