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The Inger Letter Forecast

October 7, 1999

Gauging the wind . . can be tougher than evaluating the Fed's motives, a virtually-constant sort of ongoing drone from those in the financial media that seem almost fixated on weighing a selling squall in the wake of Tuesday's forecast profit-taking on the non-news, versus later interpreting nearly-persistent rallying later somehow denying the market's initial non-hike knee-jerk response.

In actuality, both Tuesday's and Wednesday behavior, have more of a "disconnect" with actions by the FOMC than is commonly recognized, with the behavior essentially the "factored-in" lack of a move by the Fed, followed by a profit-taking wave; later followed by another effort to rebound. I emphasize this not because that was our advance expectation, though it was, but because this is an extraordinary effort to promulgate strength and to "shepherd" the stock market through most of the rest of this vulnerable "window of risk", in the remaining timeframe previously outlined. Positive earnings, such as presented after the close by Yahoo! (YHOO), are not surprising now. What would be surprising would be anything but good results from a number of companies, as is evident by the actions in those stocks that have decent results, versus those that don't. And even the data from that firm, shows the impact of budding competitive threats, as "page views" weren't increasing at the rates that leading "portal and search" site had encountered. It might be a bit of a moniker for tomorrow's action, except thatGeneral Electric (GE) will be much more important, (good news factored in) as will behavior of T-Bonds in front of the Friday Employment Report.

GE is of course the bellwether, whose failure to drop in harmony with much of the market indeed contributed to recent "downside not being inscribed in stone", while bonds might give an idea as to whether we've got some risk from a strong non-farm payroll report, which might be implied in an indirect way, by strong Factory Orders reported this morning (continued business growth). At the same time that would be another reason some smaller (as previously noted) domestic stocks are doing better than many of large cyclical and/or multinational Dow Jones component issues.

Concurrently, despite a proximity to new highs in the NASDAQ stock market, or similar behavior in the Nasdaq 100 (NDX), where many of our long-held stocks are domiciled, breadth was not impressive at all either on NASDAQ or the NYSE during Wednesday's trade, something sobering to consider while hearing much cheering about a recovering 190 point rally Dow Industrial rally.

In a market that is increasingly "winded" for this phase of upside, it's time to be conservative, not to plunge in just because the market has shown relative strength after a false downside breakout as noted last week. Where this goes further out is harder to gauge, but our ongoing views on the short-term, versus the intermediate and long-term, remain unchanged for now. That's how it was determined that the market was viewed as daily-oversold as it broke down last week, and thus of course had the opportunity to rally in front of "Fedspeak" yesterday. And, as we'll review tonight in the technical section, certain short-term upside rebound targets are essentially now achieved.

How the market behaves in the next several sessions will help "gauge the wind" beyond, with no expectation that the market is somehow in a miraculous "jetstream" that will send it zooming at a near-maximum rate towards some pie-in-the-sky targets that many continue to promulgate anew. That is where breadth comes in; as the reticence to see market internals broadening out now are hinting that fears put aside just in the last few days by many, might soon be applicable again. We remain open-minded in this regard, having lightened months ago (even before the nailed short in the S&P in July at 1428 on a big-picture basis), with the investment-grade shift being to the buy-side next, and being only on a short-term basis with respect to the coming off the recent lows, so it requires more evidence to be excited for more than targeted (and reached) rebound behavior, unless the market shows something (in its wisdom) beyond what it has very recently. It was very obvious the market had no deep penetration last week when given the chance; obvious that (as forewarned) it rebounded in front of the Fed meeting, and obvious that both profit-taking would occur thereafter and a subsequent buying wave (both expected from a pattern perception).

Technical; Daily Action; Bits & Bytes and Economic News: (sections reserved for readers)

We are well aware that some technicians have a different take on this action, and we don't mean the bears. We mean those who have in mind a huge rally now, and then a big collapse next year. (outcome reserved for subscribers) Since so few analysts are anticipating trouble with results in the early part of next year, we can't imagine the market (if it's going to drop further than it has already in the months past) just waiting simply for the reports to come in at after-the-fact times.

Rollover risk?

If the outcomes are worse, then this rebound in the market from about the time many figured-out that there was a problem only in the previous couple weeks (which dates from the Spring at least as regards the market; not the Averages), will turnout to be just what it should be, an orthodox rally within a downtrend, and snapback after some key levels are first breached. Given that most rebounds within downtrends don't require the market to become "jammed" overbought again; it's both harder but necessary to keep an eye on the alternatives. Simply "up" is not very difficult.

Accordingly, we must mention what would be a bearish alternative going forward, although not many investors want to hear of it on a 190 point up Dow day. (specifics reserved for subscribers) However, "when" the next decline comes makes a huge difference now. That's because if it's on a perception of the numbers, or simply after a "gap-up" (should that be the case on Friday, which we hope it's not), then selling will be just fairly controllable or reactionary; again being bought.

Scratching the Bottom?

Everyone has an "opinion" on whether or not the market is bullish or bearish overall. And there is no doubt, as noted last week, that in the wake of several strategists and technicians getting more excited about downside potential (after the market had broken), that there was an evident lack of downside follow-through, which is why it was described here as a "false downside breakout" with a chance of becoming aninverted head & shoulders; essentially precisely opposite of what the newer babybears feared. And it was choppy, wasn't easy, and isn't now, despite having had the requisite run-up pressing the 40-day moving average in the front-month S&P, which we knew was the outcome if they went through yesterday's high a second time, which is why we captured quick (almost surprising) gains on the long-side of the ledger earlier today.

Fed-funds traders expect higher rates over time . . . and that little detail based on the futures markets in funds, is being overlooked in all the verbalizing of whether the Fed's "rate-hike pass" that we forecast well in advance, was a bearish or bullish "trending" element emerging from the overly-anticipated FOMC meeting yesterday, by virtually everyone. And hardly anyone is talking about any economic slowing, or conceivable recalcitrance on the part of American consumers.

Of course, simple "front-running" ahead of the FOMC was not only our interpretation of rallying Monday and on Tuesday ahead of the non-news from the Fed, but a selling wave and comeback effort, were also anticipated. That didn't make it a "cakewalk" for most S&P players of course (as angst was running fast-paced as well), but did make it profitable for any who generally followed (or some may have outperformed) the (900.933.GENE) hotline guidelines.

The market remains hostage . . . again to nearly every piece of economic news coming in the weeks and days immediately ahead; and that's occurring at a time of year that investors are, as we have previously written, already loathe to investing in mutual funds or stocks, in general. For now, subject to changing our minds if the market tells us that's needed, we continue to see this natural rebound completed, and then a very reluctant further slide to the downside, with at least some modest danger of a "spill" as many realize there's not going to be other factors capable of dramatically bulling stocks on a short-term basis. The bullish alternative would be a breakout of the S&P above the level noted in the technical discussion, followed by a pullback to just slightly under the current levels, and then higher. However, that is not necessarily the preferred pattern.

Once the "window" of opportunity to break the market has expired, if it hasn't by then, we'll again be primarily optimistic about stock prices for reasons the market would be telegraphing, not from an analytical basis based on valuation. Quite to the contrary; but we'll listen to the market. In the interim, let's give the market the opportunity to complete the generally noted rebound off the lows last week, when so many got negative as warned into the hole, and let's see if it can fail where it might from an orthodox standpoint. So far that pattern progression's not denied by today's action.

In Summary . . . the McClellan Oscillator yesterday is at a +51 posting, which is just above a declining tops in this indicator. Risk has increased in the wake of the Fed non-move, and that's why "the boys" in fact are trying to create as much distance (cushion) between market prices and support as they possibly can during this treacherous time of the year. As we said last night; if the Fed did "pass", on at least a scalping basis, the market's likely an intraday sale (it was), then it comes back "one more time", and that next fade (possibly connected with the Employment data) might be the one to look out for; or within several days.

Be aware that the market (measured by the S&P) had broken the 200-day moving average and is now almost right back to it. An orthodox bearish continuation pattern would see the market just have a further fling briefly above it (enough to run shorts around it) and then reverse.

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