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The Inger Letter Forecast

February 4, 2000

Upward price behavior ahead of the FOMC decision . . . was the call, in harmony with the DB last weekend indicating an immediate cessation of bearish leaning, at least temporarily; which in fact helped set the pattern for our nice guideline gains this week; of which the vast majority were on the long-side of S&P's. The expected response to the FOMC meeting was a run-up ahead of the news; then the requisite selling (buy-the-rumor sell-the-news), followed by a further rally after which another profit-taking wave would commence. That was the call; that was how it unfolded.

The Dow Industrials traversed a couple hundred points through all this, and did not quite make it to key resistance noted last night, but certainly approached it in the manner anticipated. By the way, cash S&P did just about precisely what was outlined as a forward march to the battle lines, before withdrawing to essentially reconnoiter a bit, before determining where to move towards. It is noteworthy that T-Bonds continued the projected advance in the face of all the early worries; very much as outlined in recent weeks from the low-point in the targeted upper 80's. Longer-term bullishness on bonds is maintained (though they are no longer so cheap), while so long as the strong U.S. currency bulwarks endure, other implied positives about the background continue.

Daily action . . . came into Wednesday flat, but with probably 5-6000 garnered via this Monday's and Tuesday's guidelines, in the forecast upward S&P meandering dominating price action. For sure, the (900.933.GENE) hotline remarks thought that most likely the overall directional bias (as far as odds) would remain to the upside during early week action ahead of the news, despite the several sporadic hiccups, and even be firm in the early afternoon before knee-jerk profit-taking in the immediate wake of whatever hiking decision the Fed made (more favorable had they moved more; less so with small hikes, just what we got). (Balanced of remarks reserved for readers.)

By no means would we have fought a profit-taking wave in the wake of the rate hike; in fact we were calling for just that, as you know. But viva la difference; we thought the first selling wave wouldn't be sustained, and that we would "pop the top" with yet another high, before new selling appeared. Nailed it. For the day; gains near the 2500 area were reasonably doable; interesting given the wild oscillations.

The main effort (and very hard at points around the rate hike, other than for those on the Floors of course, though the pattern was essentially as anticipated, which we're very please about) was the idea of a profit-taking wave, rebound, and further later selling. Now, in the course of that, an unforeseen "event" occurred; the Federal Trade Commission opposing the BP/Amoco merger.

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Dangerfield Markets

Further, while knowing the history of inflationary pressures undermining growth, such as the Fed Chairman spoke of, we also see the basically strong Dollar Index. As noted the other night, U.S. markets are not particularly off balance while the Greenback remains strong; though it is getting overbought. In this regard we're suspicious of the very small hikes not being sufficient medicine to complete the overall course of treatment; as the Fed made it clear risks are weighted toward inflation, which was the hawkish statement generally thought likely as forthcoming from the Fed. If the Employment cost information completes this pattern on Friday, you could have what we speculated about earlier in the week, and that means something like a down-up-down Thursday (after a false start rally maybe), and a speculative riskier bit of a Friday. So, given the thousands of S&P points accrued in the past few days (first down and then up), and given that we were right back above the last demarcation area around S&P 1420, we determined the reasonable logic for reestablishing a slightly "leaning" posture to the downside pretty much as a precautionary move.

In a sense, we're pretty sure the stock market will try to rebound again tomorrow, despite what is likely a down opening, but doubt it's going to handily take-out Wednesday's highest levels easily. Then we suspect it will be on the defensive anew in front of Friday's Employment Report. We're not opposed to being long again (and probably will for a scalping effort in the morning), but are a little suspicious of the pattern that's now unfolding, particularly because we got our pre-FOMC rally, and the ensuing waves in the wake of the announcement. On top of everything, with many perceiving this Fed as relatively impotent, they may be compelled to derail things more than they really desire to do, simply because they are suffering the Dangerfield complex; get no respect.

If the Fed gets little respect, the interest rate environment is likely to ratchet-upwards higher than might otherwise be the case, until the Federal Reserve Board is able to command respect. In the final analysis, they clearly have the capability to do that. Whether that can be done without hard hits to U.S. equity markets is the question of course; and history is not friendly on that subject for the most part. We know that, and so do many analysts. That was the reason we suspected first a rally ahead of the numbers, partially because very few were expecting that upside behavior; thus they were generally caught unprepared. Now they're believing the markets impervious to decline; a reason to again be somewhat nervous, if not worried outright. Hence the overnight stance for now, which may amount to reestablishing a better-than-seamless short all the way down from at the year's start, simply because the majority of these intervening trades (contratrend rallies?) are and have been successful. While this is a fine era (an evolution of technology, but revolution with the methods of doing business), certain variables are fairly constant in life: housing and autos as an example. Not everything lives on the Internet, nor will it; hence a certain respect for orthodoxy as implied we would do, if the pattern evolved very much as it has, with only modest rate hikes.

Interspersed through particularly the first half of the Wednesday session again, was strength in a host of our technology "core" longs, as well as some of the "new media" and favored optical type stocks. This firm ongoing behavior of most techs, especially the Nasdaq 100 (NDX), relates not just to the NDX, but even the S&P, given the capitalization weighting tech has now accumulated, which is one reason for our increasingly open-minded attitude towards surprising upside actions. This keeps us optimistic about the long-term future, in harmony with our well-in-advance views to the idea of the Fed continuing their trending rate hike actions in the year's first half, but not later.

There is not reason to get too excited -as yet- about more upside, though we're pleased to have identified the potentially important washout and reversal ahead of Monday's opening. Investors shouldn't expect this to be resolved instantly, as most investors recognize what a battle looms in the days immediately ahead. Resistance lies directly overhead, and a halfway retracement of the forecast move from Monday's lows could either be a secondary test of that low, or the beginning of a newer decline, as outlined in last night's remarks. We're not awfully negative of course, but it was determined to corral this week's longside gains as a logical daily basis defensive move here.

Bits & Bytes . . . comments on a several stocks followed by the monthly Letter, worthy of news, or price movement notations. Among those on the list included tonight were: America Online (AOL), Time Warner (TWX), Anadigics (ANAD), PSINet (PSIX), Analog Devices (ADI) , little Brilliant Digital (BDE), Digital Lightwave (DIGL), Hauppauge Digital (HAUP), Intel (INTC), LightPath Technologies (LPTHA), Liberty Digital (LDIG), MRV Communications (MRVC), Rambus (RMBS), Thompson Multimedia (TMS), and Texas Instruments (TXN).

In summary . . . we found ourselves with an excellent 900.933.GENE hotline trading session, with patterns extremely close to expectations, and also an exit of the final long at the 1420 area and a new March S&P short-sale from the 1420 level. I'm sure we surprised a lot of players with our conclusion this market was going to take-off to the sky a week ago; but regular readers knew why, even if some clouds in the temporarily rekindled silver lining ahead of the FOMC remained. The cloudiest aspect was of course the nominal incremental moves taken by a very timid Fed in a catch-22 situation, while a silver lining has been the long-running strength in the U.S. Dollar.

We got our "double pump" rally as outlined likely Wednesday, after the Fed's awaited (albeit muted) decision was announced Thursday. The hotline addressed it very much as anticipated, which included repeated longs earlier in the day (and earlier in the week), followed by a newly tightened reversal stop on the news, and then a deliberate long after the initial profit-taking, and a later short; all as outline and discussed. While not easy in the few minutes after the news for most we're sure, of course (it rarely is after Fedspeak), the advance thinking about it was correct, and the pattern unfolded extremely in harmony with the theoretical early roadmap (including the increased at least temporarily rekindled risk as we moved towards Thursday and Friday).

The McClellan Oscillator improved to +4, which is a mechanical buy-signal (crossing zero) after the near-nominal plus 6 or so change at the beginning of the week, which followed our washout and reversal from down-to-up condition change after last week's close, just before the bottom.

Keep in mind that the Employment Report is coming this Friday, and that could be a potential set-up for a negative Thursday/Friday, with immediate response to FOMC action as forecast. As of 7:45 p.m., ET, S&P futures have a firmer 918 premium, with futures at 1418.30, up about 280 from the regular Chicago close in the March S&P at the 1415.50 level. We prefaced the shift into the end of January/early February, warning that the market could go up; which it has been doing. Last night we suggested that the odds favor the majority of this rebound is going to be exhausted in a day to day-and-a-half or so (if that), and then some sort of renewed defensive effort will start. Last night we outlined what it would take for the pattern to be firmer that that; there is no change. (As of midday Thursday, the hotline has reversed a long-to-short at March S&P 1421 for now.)

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