The Inger Letter Forecast

September 24, 1999

Markets have shown no signs of broadening-out. . not only now, but during the entire year as a whole. Given our annual forecast, not just our shorter-term assessments, this isn't surprising. It was of course not easy occasionally, when many didn't concur that the market run-up into Spring strength was the end of a rebound, not the beginning of something. But we were right in advance and in the manner the distribution evolved. For many stocks that was snapback behavior from an awful prior year (which we nailed, as most of you know), and a combination of short-running. The expectation was never that this would be a terrific year for the broad market; but that there would be some excellent buys towards the end of year; which remains our desired market expectation.

A handful of analysts, and even strategists, were newly enthused in July, where a "sucker play" rally we had forecast to be nothing but what it was; a flailed basically feeble unconfirmed thrust to new highs by the Senior Averages (Dow and S&P). Then we broke, and the Dow did a "solo" to new highs, which the S&P, as forecast, never had a chance to match. This actually helped just a bit to denote the market's vulnerability to many, as it started to shake their confidence that this year the market could somehow make it through the Summer or Fall without a serious shakeout. Of course it already hasn't; though the pattern is closer to a broadening-top than anything else.

As far as earnings go; we've said all along the Q3 results generally shouldn't be a problem; it's a Q4 and/or Q1 concern that looms; especially if we get signs the market figures out that Fed rates aren't the answer to everything; which anyone looking at basic investing principles should know. We've correctly argued for months that all permabulls were fighting the Fed whether or not they realized it; and that the most interesting hook would be if the Fed doesn't hike on October 5, but stocks fold anyway, after what would likely be a sharp knee-jerk reaction to a Fed non-move. Of course you know what our intention is should it happen, (conclusion reserved for subscribers).

The importance of reiterating this has to do with this past weekend's DB's discussions about the overall condition of the market, and of course the balance of both our annual and short-term calls for which we see no reason to change the strategy outline. Things are marching along quite fine; so yes, we've had more precautionary guideline S&P shorts, which did very well again on Wed. and we have one again tonight. We forecast selling into the rallies; and that took place in size. At the same time it proves how the vast majority of momentary extremes preceded contrary moves, at least for the very short-term. And by the way, while there is more downside out there ahead of us, the fact they keep trying to bring the market back is bearish, not bullish. (Details reserved.)

Daily action . . . featured the key to Wednesday being a call for a down-up-down in today's first hour, then a bounce and a failure of the lows of last week (and this Tuesday) to hold, resulting in a quick move to lower lows after 11 a.m., EDT, which we suspected correctly wouldn't be bearish as far as sustainability. The hotline (900.933.GENE) guidelines were very interesting on this, as we did not expect that selling wave to sustain without first leading to a "mark 'em up" rebound, as forewarned last night. That enabled not only very good intraday results, but allowed a final hour maintained 1328 short. In the meantime (especially during the mid-afternoon jockeying) not each effort worked; but most did. No doubt the 11 EDT idea of a plunge that came back, was the best call of the day, and made us pretty pleased; especially a cover/reverse at the S&P 1312-13 area.

This was (of necessity; as there was not any monolithic trend, and the rebound was expected) a very aggressively handled day, with a bearish "more-macro" bias of course, which included sane respect for how supply would be absorbed and a reversal attempted after a mini-washout below the prior lows; and it all worked generally very well. Are we finished with rally efforts? Probably it will be attempted again in the morning; so we're thinking something like down-up-down Thurs.; though it could be more volatile than that, surely. Even today, theNasdaq 100 (NDX) was up 40 points while the Dow was off 74 points; quite an interesting divergence. Even cash S&P was up; with the key to success today requiring the belief of a mark-'em up rally within the downtrend.

Technical; Bits & Bytes & Economic News: (these sections are reserved for subscribers only.)

Today Dollar/Yen took another precipitous drop; though overall the Index was reasonably firm. And even the currency, which we correctly highlighted as a key to watch at mid-Summer, tends to be a subjective argument. More on that in the Letter; but suffice to say that intellectually more importance can be attributed to Dollar strength, or conversely weakness, that is correlated to the shifting of money into Dollar-denominated assets, or the converse. Right now that's actually near nebulous which means one shouldn't be surprised if the market broke without currency pressure, which we assure you is not what all the boys who've just discovered focusing on it would believe.

Probably, what you have is nothing different than what we outlined before, and in depth already, in the last few reports, so no need to belabor these technical support and resistance levels again tonight; as they're generally the same provided readers. Our call this week was a couple rebound efforts after the drubbing that would show the market's "impotency"; with those rebounds just the kind of structurally necessary affairs the pro's require before taking stocks down again. That means nothing has changed overall; the risk of a last-ditch support penetration is increasing; the expected failure in the vicinity of the 18-day and 40-day Moving Averages are already behind; an absence of buyers can be sufficient to take prices down when everyone's nervous even if they're not enthusiastic sellers abounding; and you've got an FOMC meeting (interpretation is reserved).

As far as the NASDAQ rallying while the Dow declined today; we'd expect nothing less than that. That's primarily a reflection of the crowd playing their favorites as long as it works. Then they will be hard to find (the players and managers; not just the stock rallies.) And while the NDX (for one instance) is extremely overbought and at risk of declining, the daily oversold condition of the DJI does not engender optimism. That is specifically contrary to what one respected strategist today had to say, and we know it. We also know how difficult this can get to be. If the market holds and does not get smashed, then you again have a rebound from daily oversold, and nothing more. Of course this is the time for increased risk, regardless of those saying it can "stay oversold" awhile.

(entire section regarding "crash" risk is reserved; please do not assume that's what we expect)

In a bull market we'd be optimistic, not concerned, in a daily oversold. This is not a bull market in a cyclical sense. It hasn't been for quite awhile, despite the narrowly-derived recent forecast rally advances in the DJIA or slightly shy of that in the S&P. Most commentators aren't analytical, or they would have understood it months ago, rather than only recently discovered the A/D Lines. It may be in a secular sense; but we're not willing to "bet the ranch" on that; nor have we been. We understand that many younger readers will simply ask for "stock picks" for the "long-term" and its not a bad idea. However, the market is not going to accommodate us baby boomers by simply waiting for us to retire necessarily, and it's not going to accommodate the 20-something's by just going straight up for the next 40 years of their lives. To argue it will do so, is a disservice to them.

We're very hopeful the coming decline-extension will be contained and controlled within reason, which is why we're looking forward to later-year buys and even more so next year. That makes a lot more sense for the 20-something's too, because if we're right they'll be accumulating cheaply, rather than chasing the older generation's tarnished brass ring, which has already had most run-ups. However, what if we are, instead of too pessimistic, as some have argued for months, too optimistic? Well, that's where the heavy continued cash allocation comes-in. There is nothing at all written that "requires" us or anyone to commit funds at any particular price level. We'll let the market tell us where that is; and if that turned out to be tomorrow (it won't be), that will be fine. In a sense what I'm saying is that we'd rather err on the side of caution from an investing standpoint now, as we correctly have much of this year. Certainly I'm biased by our generation's investment success; but most of our generation should be focused on preserving those accomplishments, in lieu of taking absurd risks recently above Dow 11,000, as some where advising people to do.

(We also made some comments about the absurd nonsense of people writing books promoting a consistently higher level -particularly since the market has been declining internally for months-, but as a courtesy in this public abridged version of our DB, we won't address it more specifically. The same is true with regards to previous comments last week about how Dow Theory confirms on the upside, did actually warning the opposite, almost six months ago, by our way of analysis. Each of the last several days we have reemphasized the foolishness of waiting for some defined number to be broken, as in a bear trend support levels primarily exist to be broken; that's all.)

We don't know how low is low; but we hopefully will when we get there, we suspect, and that's of course what matters (when we commit fresh safe money to equities). We did know how high was high, and couldn't understand why some analysts failed to look at basic internals, fundamentals, or technicals. Yes; if the market collapses here they will blame it on currency, repatriation, Y2k, interest rates, or something. Yet all these factors have been proclaiming for months that super-high DJI multiples weren't warranted. And they have not come down appreciably; in fact where earnings slide now, they will just become higher (which is as it's supposed to be in an economic slowdown). Then as profits and prices decline in lockstep, you'll get to an attractive relationship.

We'll conclude this report tonight by noting that the most bullish action would be a plunge that is able to take the market through supportsprocedurally, but without meaningful fleeting rallies. In each of the rallies a certain amount of capital (beyond the specialists normal pursuits) gets used up. In an orthodox selling climax, you'll eventually start seeing down-down-down days, which is a capitulation. That, not the kind of market that we nevertheless projected or played so well today, would be the kind of decline that points to a completion of selling in the Senior Averages. At this time, particularly for the Dow, we're still closer to the former highs than the forthcoming low point.

(More specific section comments about Dow component stock valuations and how to recognize a climactic sell-off and eventual automatic reversal that holds, are reserved for subscribers only.)

In Summary. . . we booked over a couple thousand on the S&P 900.933.GENE hotline (Wed.), doing far better than just retaining the very nearly seamless series of shorts from nearly 1380 seen in the past couple of weeks, since the little (small version) "island" that gapped-up around Labor Day. That's because we had a nice homerun reversal trade included within the forecast temporary washout and turnaround on Wednesday, and then got short again at the 1328 level, through the close. Of course, though not perfect, anywhere over a couple of thousand beats the net change which was essentially flat for the S&P Dec. today. Last night guidelines stayed short from the 1332 short-sale overnight; knowing in advance that we were looking for some snapback attempt. Got it; and we are prepared again for a more serious decline that takes out these lows, which were expected to first get a washout and a comeback that wouldn't go higher than it did today (in Thursday's action). As of 7:30 p.m. ET Wednesday, the Globex S&P premium is 1159, with futures up only about a half point from Chicago's close.

The McClellan Oscillator reading deteriorated from Monday's posting of -59, to Tuesday's –121; and then improved to –115 on Wednesday. That's a near-nominal upside change, often it's a harbinger of more rallying action within a couple days. While certainly prepared to reverse in a heartbeat again, we're thinking this is more reflective of temporary exhaustion and the specialist mark-up rally we looked for, a second version of which we are suggesting should occur Thursday by midday again. If it fails or we then take out today's lows, there's someincreasing quick risk.

In a nutshell. . we did get the desired forecast little "washout and bear trap rebound", and it did occur by midday, as ideally desired here, and successfully guided on the (900.933.GENE) S&P hotline. And the Internet stocks did better than others, as suspected, for today. Ditto tomorrow.

The Dow and S&P can drop a lot, in theory; so in a Bear Market supports exist to be broken. That's why much too much focus is being given on Dow 10,500 holding (it won't for long) or even 10,000 (it won't, of course, either). The main point for investors to just consider has been made here repeatedly in recent days: that the stock market must be an early discounting mechanism.

If you believe things won't grow rapidly to the sky (or have been there already), or just holding there own is insufficient beyond this Quarter, the market has to discount that in advance. And the market has been telling you that for months now; by just the virtue of selling rallies, of very little "trending follow-through" action failing, and by analysts talking about investing for targets only 10-15% above the levels at the time they so indicated. That's was not worth the risk then, said we here, and today's overall market climate is bringing that point home once again. (Of course you'll get a so-call "theory" sell signal; which always occurs well after the fact of a turn; that doesn't mean that, given the fundamental warnings we've issued, you can't work lots lower.)

Our call, as many freaked, was for the August 10th turnaround to confound most of the players who figured out there was some trouble in the market, following our nailed July forecast peak. And we thought the market would lumber into at least early September's first half before bigger risks returned. It did just that, and is now within that "sweetspot" for failing post-breakdown brief rallies to show the market's impotency, and basically thus take it down. If it happens just right, you will then find us quite other than bearish down the road a bit, or a good bit, further-out. Or simply put: buy low, sell high, don't buy high hoping some other guy will pay you even more (which has been the core of our warnings regarding rallies much of this year).

Special update for complimentary internet visitors: as of mid-afternoon Thursday in harmony with the forecast for a couple impotent rally efforts Wednesday and Thursday surrendering to the hard breakdowns; we are again short from Dec. S&P at 1325 on the hotline, after actually going long this morning (reversing the prior short) around 1314 and then selling and reversing at 1325; which means our theoretical results vastly again exceed the net move of the S&P; even today. At this time it is our plan to retain this short overnight; but not necessarily all through the day Friday.

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."

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