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The Inger Letter Forecast

October 1, 1999

Aftershocks following Tuesday's Wall Street circus . . . were more than just trepidtations, or worries about technical deterioation, with much of it resulting from many in this generation still in some sort of overly complacent "long term" investing mode. Those kind of "funds" tend to end in a poor way, with historically investors capitulating towards the end, not early-in, a given decline.

You would have thought the frenetic drops last year, on our forecast fallouts from both the Asian Contagion and later systemically-riskyderivatives crisis, greatly acerbated by the (nuts) LTCM debacle at about this time, would have been sufficient to dissuade the investing majority from all the marketing-hype from mutual funds sales, about one-way orientation (which many managers don't embrace themselves, by the way). But that hasn't been the case, sadly enough for many.

Is that bearish or bullish? Well; if the market breaks it's not bullish immediately, because there's not a large amount of seasonal buying coming in now (nor should there be), in front of the typical large fund closing the books on their fiscal years tomorrow, and then not making distributions from a capital gains point of view, commonly until December's first half. Savvy mutual fund types know this; and are loathe to risk paying gains for profits someone else made earlier in the year of course; which tends to keep a lid on the market, especially when there's no compelling reason to be a buyer just now.

When we hear some analysts talking about "long-term" orientation as being the only respectable or "patriotic" way to invest, we wonder what they would have suggested in those few eras in our history when the only liquidity provided was from those who had determined not to be greedy, or had for other reasons, squirreled-away their own hard-earned capital. Before dismissing that to a rare event, such as after World War I, or the Depression in the 1930's, or even post-World War II America, when the markets were surprisingly dormant into the '50's, consider that to be the case for the long-fought comeback after the Energy Crisis exploded onto the scene, or in 1987, 1990, or as recently as the wake of the LTCM debacle, when only the cash-rich were able to profit then as has already been the case for months, or possibly for weeks ahead, despite protestation from those who are living some sort of charade, as if the market hasn't been declining for months. Or, maybe they just again (like last year) forgot the existence of that other dastardly word: "sell". We do not know how they could have again repeated such errors, because the market's telegraphed this for months-on-end now; which we've dutifully assessed or guided, as best any resource can.

Technically . . . we would love to tell you that just because the market's under the 200-day lines for both the Dow and the S&P, that somehow the downside is over; or that just because (a tech) is bearish, or our own interpretation of what (a strategist) really meant was, that the stock market would stop going down; but it's won't be so, for long. There are more fundamental forces at work in this environment.

Our time is somewhat limited tonight, so with all of this progressing close-to-the-mark, we'll not worry about how low is low, but about the market's inability to deliver even a modicum of normal rebound behavior, which suggests that the same mutual fund and other managers urging normal investors to "stay the course", aren't. The turnover is becoming a frenzy, and most investors are not the sellers; the managers who have been in shameful fully-invested posture, are doing much of it. Some have had as little as 2-3% cash balances, quite a few with 7-10% cash reserves (this is typical for no-loads where shareholders are a little more skittish) and very few with even 20%.

In our view anything shy of 50% cash since Spring, has risked investors well-being, given that an upside potential never existed "in size" for this market; not even by the most bullish strategists. In a sense, when the Dow Jones Industrials were near and then just over the key 11,000 level; we rhetorically asked; "what if we're wrong; would you buy at 11,000 for a move to 12-13,000?" Of course not; unless one is greedy. "Let the other guy get the last 10%; if there is 10%" said we; and we offered the thought there was not. Risk/reward ratios were not very attractive then, nor are they at this time yet. We are not inclined to have navigated this sometimes-tough year well, to only turn around and try bailing-out all those buying the highs from their enormous mistakes. (portion is reserved).

Now that we've addressed that, let's consider daily basis action; where Wednesday's trading was extremely successful given the limitations of the narrowness that prevailed during much of the middle of the day. How so? Because our forecast was essentially for "up in the morning, and down in the late afternoon", which came as close as humanly possible to nailing the pattern for a Wednesday the majority were hoping would continue the comeback efforts (they were no more than that) seen on Tuesday. The market opened up, dropped back per call, rebounded, horsed around awhile; then moderately succumbed in the final hour, very much inline with expectations.

S&P guidelines on the (900.933.GENE) hotline weren't very easy during a midday rangebound-action period (assessed for several hours as being just that, between roughly an upside around 1300 and a downside around 1290 basis the December S&P); but made gains in the morning on two rebounds to the 1300 area, and then later in the day (after shorting at 1300), did a short from 1296 that did not progressively trail a regular stop discipline, as soon as we had a chance to limit that. The argument was that given the earlier cumulative gains, we could just drop that stop to a breakeven at 1296, and leave it there, as essentially a riskless trade, and encouraged by our interpretation of what was ongoing in the Nasdaq 100 (NDX) and Bank Stocks (BKX) as well.

That is where it stayed, through the close, which was called to be on the downside, with our own expectations that the market would finish near the day's low. Decent call; because there were so many little efforts up and down in the 2-3:45 timeframe, that trying to scalp anything tighter would have been probably futile for most players; with this somewhat stubbornly-held short both better, as a way to play it seen at the time, and as it turned-out moving into the close. One factor that of course emboldened us a little in this regard was the failure to get much meaningful upside earlier and of course the proximity of the lows yesterday, which are immediately now again looming.

We continue to caution how tentative any rally would be in front of next week's FOMC meeting. Even if you get one afterwards, what if its coming from oh…just for conversation….1230-40 on the S&P? Well; it would have no chance of even taking a lunge at last week's highs, and might not even make today's. Should be interesting to see how a course of super (red, white and black & blue presumably) optimists will handle that; especially if the Dow Jones drops a few hundred more or cannot rally more than it dropped, before new drops threaten to befall the stock market.

Daily Action; Technicals; Bits & Bytes and Economic News Analysis: (reserved for readers)

Analytically. . . one shouldn't get too excited about several things now, and one of them is really a fundamental; that being next week's FOMC meeting. A couple weeks ago when we first talked about the idea of the market being defensive in front of the October Fed Meeting, it was really an unusual opinion, because most of the mass-selling bailouts have occurred subsequently to that.

Everyone, however, it seems is now talking about the subject, with an almost universal "feeling" that the Federal Reserve won't hike rates again at Tuesday's gathering next week. That's getting to be worrisome, because if everyone's feeling the market will rally thereafter, then consideration of something different might be appropriate. For example; what if it rallies, but the rally originates below where the market's been for the last couple days? And if so, what are the chances that the rally (which we suspect anyway) would only confirm bearishness to all the holdouts, simply as it's sold into aggressively, and thus "confirms" weakness to one more recalcitrant crowd, who enter the fray on the sell-side of the ledger, potentially more aggressively. See how the risks line up?

Myopic Vision

Of course you do. At the same time investors that are in a lightly exposed and/or partially bearish allocation position towards this market, such as we've advocated since April (25%, our lowest in a great many years; probably dating to the Summer of 1987 or the Yom Kippur War's start way back in 1973 for that matter or more moderately similar coming off a July of 1998 forecast high); well, such investors aren't about to get their dander up about frenetic day-to-day mascinations of a market flirting with completing a distribution that has gone on superficially for at least 6 months as often warned, or internally for over a year, as also noted if you wish to view the broad market comeback (noted here) from early October of '98 into earlier this year, as part of that distribution.

Active vs. Passive Funds

Actually, we called it thusly; while allowing the Senior Averages to move-on-out to new highs, in part because we were (at the time a year ago) bullish on commodity and Asian recoveries hiking demand for petroleum products, and hence the increased price of Oil, which impacts large-caps in the Dow particularly. That was a great part of our distribution under cover of a strong Dow argument this year, and we do have an idea why so few grasped it exactly for what it was. That's because money that is active, and not static, tends to watch and play just the "what works" stock market; which is inherently dangerous, but "doable" as long as they're able to, which we forecast they would. Long-term holders aren't more patriotic, they're just onlookers basically, which is fine at least only for a portion (not the majority) of a portfolio, especially after a long cyclical uptrend.

That means you had a form of narrow-vision, or myopia, going on parts of last year, and much of this year. A true market technician, or analyst, would have seen the divergences months ago and would be underwhelmed by the "confirmations" rolling-out as fast as dice on a roulette wheel, at this point. Now, not then, casual observers start "preparing" for new declines, or warn of chart patterns, such as a "head and shoulders" top. A market looks like a head & shoulders until it is either broken, or it's denied, which is why it's so ridiculous to make investment decisions on such factors after, or as, they unfold. A continuation pattern will often look just the same as an "H&S".

How to know? You never do for sure; that's why you sell extreme strength and the opposite, the scaling-into extreme weakness. Of course that's where the interrelationship of markets especially such as T-Bonds and the Dollar Index, come in to the picture, and where one gets a flow-feel, that makes conclusions about where money is going, and how the patterns will go, a bit easier. Of course, as so many have recently been pushing Oil stocks, because some are trying to hold up the Dow we suspect, we have warned that Oil would be coming down somewhat, and it is. If you ask if this is helping make it difficult to impossible for permabulls to sustain Dow lifts; yup.

However, how in the world could we tell that in April, and call the failing rally into July? Ah; much of that is frequently discussed here, and which was based on the analytical conclusions you well know, which had to be made before anyone pulled the trigger on "taking one line below another", which seems to be what market analysis is being reduced to in the financial media these days.

Galvanic Market-Timing

At the same time we don't want to minimize the importance of galvanized thinking among traders or investors. Years ago, at a Conrad Hilton seminar in Chicago I spoke at, one gentleman asked what the point of market-timing was, since (he said) the stock market had "anticipated five out of the last three recessions", and we only had the three. That's the common logic that is shocking in simplicity, because many (who can't time the market worth a darn), will still use that perspective.

We would emphasize that the market has to be handled based on people's perceptions of it; not just the fundamental reality that they see (hope) for. I remember answering the man's question in this way; "sir"; said I, "you just answered your own question. You're telling me the market went down twice when the economy didn't. Wouldn't you like to have cut back and then bought based on the pattern in the market, rather than waiting for the economy to confirm or deny any trouble?"

We added; that "in the times the economy follows, or leads, the bottom in stocks almost always is going to occur before a resurgence of business is evident at the retail or wholesale levels"; just as has been the case for generations. That's what we said then, and reiterate now. That's as we again are getting a few questions or opinions about whether the economy will or won't slow; if we are going to be "right" as some put it about earnings; or whether the Nation will navigate into Y2k without incident. Well; this is not a hedge, because we're already on record for months arguing a slowing of profits growth rates late this year and early next, at minimum. But it is a reminder to some who apparently still don't understand that the market can move based on "perceptions".

If enough investors simply worry that a slowdown will occur, the perception of trouble occurs. If a perception spreads sufficiently, it may or may not become an economic self-fulfilling prophecy, of course; but it certainly can galvanize the views of market participants, which is what everyone is looking at in recent months; not just weeks. This has really been evident since the humongous decline we nailed in May, and viewed the forecast rebound into July as a massive little "fake-out" that it turned-out to be. There is absolutely no reason for anyone to be reactive to this market at this point, unless anyone (we know of no one) has remained fully invested, or worse margined, or is still trying to play the market of 1992-'97, instead of the market of 1998-2001.

We have not, for those who wonder, arrived at the point where most investors have embraced an outlook emphasizing negativity; quite the opposite; they're still trying to "buy the dips". They may, of course, get a really good one; but the key will be if they have the liquidity and courage to do so at the time.

And yes, we wouldn't make fun of those technicians who are bailing-out belatedly, because they may have the last laugh on that call, as noted last night; though of course you're going to get fast rallying from those who think the market is so simple as to go contrary to any noted individual. Of course that's not going to be the case when there's a fundamental underlying deterioration which is why we've constantly forewarned what the real risk to the stock market is this year, and it's not a technical indicator or even liquidity, or even the T-Bonds and theDollar that we mostly nailed, but earnings. And there is no "guru" whose influence in the market extends beyond a day or two.

In other words; if the market is going to go down, because it wants to for real reasons, nothing said by anyone is going to forestall that unfolding for long; and if it wants to go up, nothing said by any technician or strategist (many tried, from some major brokerage firms too), will prevent it from doing so for very long. And remember; the market doesn't pay premium multiples for just maintaining the earnings levels; it pays premium multiples for growing, not stagnant, profits.

The economy . . . continues to flex its muscles; which is what we suspected for the 3rd Quarter; but not necessarily for the 4th and 1st of 2000. And it doesn't matter, beyond trading-basis swings, as to whether the Fed moves next week or not; if growth in profits is not growing meaningfully.

Are we saying, given the strong durables number today, that the Fed has to hike rates? Nope; and we don't even care if they issue a meaningless "bias towards tightening" next week. They're likely more afraid of breaking the market by some inadvertent move than the Street worries on it. And Chairman Greenspan, for reasons hard to fathom, doesn't want to take credit for a National renaissance, and just hang up his victorious gloves, and retire while he's on top, a.k.a. former Treasury Secretary Rubin, who did just that. It is not unpatriotic to retreat; just as it's not lacking in patriotism to protect one's financial and family wellbeing, which is precisely what we advocated here for these past months, in anticipation of the downside being experienced by non-believers.

So, we aren't going to argue the downside from here with a fervor best left for evangelists. (They are doing fine, as more converts join chicken-ranks day-by-day; which happens to be realistic, in lieu of permabull or permabear.) Au contraire. The more stock prices drop, or erode in the case of those of the mass of stock under pressure for some time, the more interested we'll become on the buy side of the ledger. We have no interest in selling markets into weakness with babybears, because we did so virtually at the top (our reasonably well-known 1428 S&P short-sale in July), denoted as such at the time, and previously scaled-out of stocks into periods of strength, not weakness, ahead of that time, depending on the equity sector. At the same time, we're not going to "catch a falling safe" yet in a market with "c word" potential, whether or not that magnitude of event actually transpires. Our intraday and daily work will focus on identify the next major shift as so many continue to worry about the one that is already several months or longer behind us now.

In an oversold daily-basis condition, which can worsen before it improves, the next thing we'll be looking to do will be buy; but not for anything but a trade, unless determined otherwise over time. In the meantime, we continue swinging in the S&P, mostly very successfully, and suspect we've not seen the lows for this move. When we outlined in this DB, and also in the Inger Letter, our overall plan for this year's unfolding, back in April, it included "not emerging from May without a big hit", a "rebound into July", a "drop into August"; then we short-circuited our own decline with a call for a "rebound into August Expiration, a drop, and an irregular lumbering lift into September", with a "collapsing market ideally in the second half of September, continuing into October". (Visitors reading our free capsules should understand forecasts are reserved.)

Maybe it goes beyond that; maybe it does not. That's what we're here for Daily; to assess these messages from the market; not a predetermined outline, though it's always nice when the market closely follows our roadmaps. And certainly not to dictate to the market. That's certifiable lunacy.

In Summary . . . the McClellan Oscillator reading is at the –61 level, which almost seems a misnomer, but isn't. We suspect a month-end flurry has something to do with it; as breadth was only modestly favorable at best. As some have gone on record saying that there "won't" be more selling after the fiscal year ends, it will be interesting to see if we get a "false" rally off the FOMC post-meeting action next week, but no more than that; and then of course whether it comes from lower levels than where we are just now, or has simply eliminated a daily-basis oversold status.

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