first majestic silver

The Inger Letter Forecast

October 29, 1999

Irregular price behavior . . . dominated Wednesday's action most of the day, with a "relief rally" of sorts in the "interest rate sensitive" areas as the afternoon progressed. None of the markets in fact took-out any key technical points with the sole (and important) exception of the Dollar Index which tried to engage in a short-term breakout. It is not convincing, and may reflect expectations of a generalized series of European rate hikes coming within the next couple of weeks. And late this afternoon, Hewlett Packard (HWP) confirmed what we warned of all year; rather specifically with respect to that firm, based upon personal encounters with their staff this past Summer.

What this does do is temper-in-advance any Thursday morning upside from economic numbers; and while it will be interesting if the numbers aid the T-bonds a bit more; there's going to be a tendency to sell big rallies that do occur. If they don't get the numbers, plus you've already got warnings in a number of computer and technology companies; that's a prescription for serious market swings in an environment where bearishness really hasn't come out of the woodwork, which is bearish. (Nevertheless, there was nothing particularly surprising about interim rallies.)

As far as the T-Bonds are concerned, while they have recently looked heavy, there's been not a shred of change in our view, which is that while the bonds hammer-out a low (between 111 & not likely below 108) in the December T-Bond contract, that's not an excuse for an enduring market turn on the equity side, beyond the knee-jerk (follow-the-leader) nature that would typically occur.

Also, this might be a good spot to note that Gold is likely to find some reasonable support soon. A glance at the December Gold chart shows how many chased the metal when Europeans did recently restrict sales. We viewed that as more deflationary than inflationary, because they were trying to sustain the worth of their national treasures, in many cases. However, if the metal is to make a successful secondary test of that breakout, such support would ideally be experienced in this general neighborhood, preferably not below the 280 area. At the time, besides the Letter's bit of a play via a single representative gold stock (because we're not in the world-ending gold bug camp, plus our primary focus is elsewhere and not in any way leaning towards an overweighting of long-dormant sectors), we indicated that the Letter had looked for a low in the upper-middle 200's, thought we'd pop (run shorts) into the low-to-mid 300's, and then come back below 300 in a possible secondary test of the lows. That is what may become fairly key in the days ahead for those who do have a particular interest in this sector. If "stagflation" increasingly looms as likely for the U.S., and as we get more nervousness ahead of Y2k, the secondary test could succeed.

Yes, we know equities are groping for a bottom of sorts, as often is expected late in an October; but that so far is essentially a reflection of nervous shorts (and they should be nervous more than half a year after the market internals peaked), and some nervous buying, as well as the Treasury leadership, which almost always omits the fact that equities tend to lag bonds by several months. The stock market remains very fully-priced, though bonds continue to be considerably lower risks as argued for the past few weeks. We see the vulnerability in bonds as only temporary whenever it does occur; while the hook for equities could easily be stocks rebounding on the back of bonds but then not getting the fundamental or other backdrops which really would sustain rebounds.

We've already indicated that some sort of "hooray, October's gone" rally would be seen into early November as a possibility, with the shock to many being the ability of the market to decline in the face of being through October. How demoralizing would that be; a post-October market decline? We're skeptical of the financial stocks, though of course when you factor-in presumed courtships and eventual marriages from the repeal of Depression-era legislation, you have some building of a "floor" under some of the less bloated stocks in the Banks (BKX)or in the insurance sectors.

Nibbling at the food-chains

On the other hand these are comparatively lower risk plays (at least in the eyes of some buyers) relative to other stocks, and probably also reflect a disdain of the computer and technology areas for now. This is entirely as forecast, as we approach the first Comdex in my memory (and we will be there again this year, actually expecting to find a few new ideas in the debris of tech declines) where we had actually forecast a decline in the weeks and months ahead of the beloved annual computer conference, versus the huge rallies from oversold that we're usually looking for.

Last week we essentially beat-the-Street with the story of Microsoft (MSFT) delaying Window's 2000 until next year, even if the "formal" premier took place (as it should) coming up at Comdex. This was particularly important, because we also shared the revelation that Office accounts for a rousing approximate 50% of Microsoft's total revenue, and that it was reportedly selling poorly in advance of Y2k, as well as the delay in Window's 2000, which incorporates features that utilize a bit more fully, the abilities of Office 2000. Office sales are rumored to be down around 12% now.

Rotation . . . definitely is accounting for the stock market's relatively stability of the moment; but it is not more than that. And, it's going to be fairly tough to get a protracted advance without the heart & soul of this generation, technology, leading the upside parade. Maybe it would help this a bit if Microsoft would do a hostile takeover of Chevron (CHV) or of Sears (S) for instance; but that's more bullish that even the most laughable stories making the rounds among permabulls would consider. Of course I'm alluding to the implied volatility increase in theDow Industrials as a result of yesterday's decisions by Dow Jones & Co., which we thought would "bear" those large tech stocks, despite the fact we like them in the extreme long run; especially from lower levels. It of course isn't the point here, as the point is that they are removing stocks that already broke and replacing them with stocks that essentially haven't very much, which is a very dicey proposition.

As the forecast "expense lockdown" contraction continues, and it may last longer than some are thinking, this tends to gnaw all along the computer industry food-chain, much as in the old days a slowdown in car sales would impact not just the motors, but steel, rubber, glass and plastics. The component makers (balance reserved, including the duration of the projected tech slowdown).

This also impacts retailers, and delays efficiencies that many were counting-on from the latest or greatest systems; especially on the Server side. Generally that affirms what we said almost this time last year; that techs and software companies would advance into the first half of 1999, but be on the defensive generally in the last half, simply because nobody was going to wait to order new machines or system, or train staff on new software and procedures right at the millennium. If one asks whether they will down-the-road, the answer is without a doubt. But then there's that bit of a factor of what valuation you put on technology now; with the signal from the establishment of it being a "real business", which probably means an increasingly "maturing" business. (reserved)

No doubt; there's nothing at all wrong with accumulating a reasonable number of depressed and tax-selling candidates as time proceeds this year; we plan to do it ourselves. But we aren't going to focus on the most dangerous sectors of the market, or embrace that attitude we used-to for a great number of years in the '90's, which was to buy all tech dips, and believe momentum games as an enduring methodology would carry prices in exorbitantly higher. (balance reserved)

At the same time you've got a better mirror of the market's world with the "new Dow", you've also got a more volatile Average, which will be increasingly sensitive to even the smallest moves that, particularly due to Oil, were relatively mitigated by that Average. That allowed a gradualism in so much of the market's personae that will be no more. That's going to be just fascinating for many of the investing communities nervous Nellie's for at least awhile. Moves will be amplified, rather than quite suppressed, in the way they reflect the real market, and that makes for more volatility.

An absence of buyers combined with retained "heavy" tension on the tape to deliver both the Monday and Tuesday heaviness, if not outright pressure, relieved later Wednesday in a fast but questionable rally (it can go sharply higher, but doesn't have to change anything, as we'll outline in the technical section tonight), and may be little more than another effort to kick-start intraweek rallies, before risk of newly-accelerated declines which essentially melts a rebound into basically the sunset of the day's price behavior. Many traders were nervous about Thursday's ECI number maybe coming in a little milder, so that helped run-in the shorts during Wednesday afternoon.

Daily action; Technicals; Bits & Bytes, and Economic News: (reserved for subscribers)

Bottom-line: the Dow has entered the 20th. Century; quite awhile after the market completed it. A feisty (essentially bordering on neurotic) Fed is caught between the desire to flood liquidity into the system in front of the Y2k transition, while the numbers may compel an immediate hike, if they come-in as firm as occasionally rumored, without potentially even waiting for the FOMC meeting next month. If not, you could get a rally, that is nevertheless sold into; maybe heavily. If companies mimick what we've heard from IBM, Amazon.com and Microsoft, you're looking at a time of (at best) higher revenues, but with greater costs, and lower profit margins, going forward.

In Summary. . . we expected significant risk returning, and were not disappointed in recent days, although nothing has really broken-out or down, in a decisive manner. Evening action on Globex is not yet interesting (with an 829 premium at 5:30), but soon could get that way with the recent revelation from Hewlett Packard (HWP), which is down 3 in aftermarket action after "revealing" a key story we've felt we knew for months, as shared here and on the (900.933.GENE) hotline; that their 4th Quarter would not meet earnings expectations. Sure is a lot of rose-colored-glass viewing going on, as we've said this at least weekly since Summer, are no longer alone in such concerned views, and yet these stocks still react only when news is very late, and after-the-fact thrown in investors faces to digest.

We have no idea why anyone needs a big computer company to tell them what has been evident by talking to engineers and the marketing arms of these companies for months; and it's not like this has recently been such a closely-guarded secret or anything like that. IBM (IBM)said so at the time of their report; and even pointed to Servers, PC's or workstation sales as troubling. Only the Street insisted on saying the slowing was strictly in the mainframe area. Again; IBM did not say that; analysts who only like to upgrade stocks seemed to say (or imagine) the problems were isolated to IBM, and not sector general. Besides arguing this as a concept from the year's earlier start, and thus a justification for selling some stocks (like Compaq (CPQ) in the 40's) at the time, or others in April and then again in July, and for those who missed that, around Labor Day, we're certainly gratified that managements of some of the world's largest companies agreed with us on a first-hand basis (nervously at InterOp), and then via a first-hand encounter (as you know about) in August. What would be surprising would be if business was to soar; none of these reports out of MSFT, IBM, INTC, or even HWP just tonight, should be particularly revealing to cognoscenti.

The McClellan Oscillator reading dropped to -6, back across the zero line, Monday, which was able to essentially able to suggest that all we needed to do was move back to the neutral zone, before the market would be deflected again. The Tuesday reading was around –23; but the post on Wednesday was around +19; another reversal about the neutral area on the back of financial stocks, and interest-rate sensitive, which can't support the entire market, nor may accurately be yet reflecting an enduring change in the rate picture; though we have forecast such to occur over a reasonable period of time. But, lower rates are not automatically good for stocks; though it will be helpful in the fullness of time. Remember; much of the world is muddling through economic recoveries (not very robustly in some cases; but navigating the treacherous waters). That almost presses the Fed to keep rates relatively firm here, to attract shorter-term monies, versus ongoing slightly restive repatriations, that had made it tough on Dollar-denominated assets in general.

(section reserved for subscribers)

In the interim there will be (perfectly normal structural) rallies; though they will tend to be false or abortive, or potentially worse at some point difficult to define. For now, discretion remains logical, whether or not there's a further lift in the a.m. If there is, it will likely be sold into, as noted tonight in the Daily Action and Technical sections. Beyond daily rally allowances, there is no shift in the "macro" stance, which remains bearish from 1428 in the then-front-month S&P, way back in July. Probabilities are this market, squirrelly though it is, has eventual unfinished downside to go.

Conviction in technology . . . set the tone, not only for Wednesday morning's predicable rally in the wake of stellar (rearview mirror) results from Microsoft (MSFT), but for the overall market in the Senior Averages, to the extent that reflects beliefs that America's "rolling love-affair" with big consumer spending, as well as a technology-driven disinflationary environment, will dominate. Of course life, and the market, somewhat reflect each other; and in this case are more a perception than a likely reality for the next few months. And IBM (IBM) said as much after today's close, via their affirming our long-held views about Q4 and Q1, as well as what likely occurs thereafter. We also have learned of a report coming that says "web-use growth is slowing", which will not help those arguing there's nothing generally wrong with the stock market or the Internet economy at this stage of the year. Many will say we'll go up eventually; after Y2k gets digested; no surprise.

However, there's no disagreement here as far as being secularly negative; because we're not. At the same time the problem remains that (our long-held forecast) leadership tech stocks haven't seriously discounted the next couple Quarter's risk, beyond minor lip service to these issues. We further suspect that they need to, because of the behavior of stocks that haven't shown results of a stellar nature just behind (like -reserved- or a couple others), which implies there remains at least modest sensitivity to results as they flow-in. If results are "peaking", or have already, as we suspect for the old cycle, then this market still has to discount what's in front of it, before it can at least comfortably (with a degree of reliability) start to bridge the gap for the ensuing next phase.

Beyond that, while in the same timeframe after this Fall, as you know, many stocks that lead the next advancing phase won't necessarily be just the same narrow-leadership that dominated the forecast false breakouts to '99 highs, and quite evidently led narrow Tuesday-Wednesday rallies.

Meanwhile, after an excellent reversal from long-to-short at the December S&P 1287 area in the Tuesday trading, we addressed what was expected to generally be an up Wednesday morning, followed by erosion as the afternoon progressed. The (900.933.GENE) hotline's S&P guidelines were fairly staunch in leaning conservatively against the wind for traders every time Dow Jones moved above the plus 150 area, and by the time all was said and done we actually managed to surrender a few hundred points of the thousands recently gained. Always frustrated when even a single day goes against (or partially against in this case, by not eroding much) our pattern calls in the S&P arena, we continue to suspect we're analytically correct about what might happen next. (Don't forget several Fed Governors are speaking-out tomorrow; as well as the Phily Fed data.)

Daily action; Technicals; Bits & Bytes and Economic News: (subscriber-reserved sections)

Internally Wednesday's action was considerably softer than met the eye; as breadth ran negative through much of the session, or was barely favorable in the case of the NASDAQ market. We're inclined to suspect that the Nasdaq 100 (NDX) lead will erode tomorrow, particularly as there is very little "positive" news to be anticipated on the immediate horizon, because most short-sellers into weakness last week have been run-in, and because the market will soon focus again not on the last Quarter, but the next, and the probabilities of nasty monetary news forthcoming sooner.

In after-hours trading, American Online (AOL) briefly halted after topping analysts consensus expectations, is now down 2 ¾ ; while IBM (IBM) is down around 10 points and almost broke the 100 level. (Forecast about how this action determines whether the decline will be "for real", must be reserved for subscribers, as it is specific). All this does is confirm what we've talked about for months regarding "IS expense lockdowns", though apparently fewer realized this situation than one would think. We were not the only analysts moving towards that view; even if clearly among the first to forewarn (as early as January) that some buying earlier this year (computer buying) was of a non-recurring "one shot" purchase, to gear up for Y2k concerns. We also thought that a slew of inventory builds ahead of Y2k would presage a period of digestion as we transit into Y2k.

If we are right in this, and even IBM seems to say we have been, then the ideas of the majority as far as responding to any impact from Y2k only "if and as" presented in the new year, might of course apply to computer glitches (like flying for instance), but not to investment decisions, or to advance ordering, which we thought (particularly for tech) has mostly been a long-done-deal. Do note how few stocks were participating in this forecast failing rally (balance must be reserved).

We also have been asked if we're being contrary just to be contrary; which absolute must come only from new readers since we tend to do that at extremes sometimes, but love following trends when there are trends to follow. So we'll comment a bit about "contrariness", and emphasize that the contrary player here is the buyer, since there's not internal evidence of any enduring low; but we are multiple months off the highs (internally or for the S&P), so of course it gets a bit tougher. On top of that, you probably had lots of players excessively comfortable getting bearish late last week, which was a pretty decent prescription for a rebound, even if but within a downward trend.

Contrariness . . . as a function of trading is certainly not always an appropriate strategy, and it definitely is oversimplification in the way some pundits or observers are presenting it. An old wag once said that in a bull market the bulls are right; while in a bear market the bears are right. That too, is oversimplification, but comes closer to the mark than the idea that just because technician worries persist, that somehow means the stock market must advance. That only works briefly at best; probably merely capable of temporarily sustaining the kind of reflex rebound we just had.

The future of the stock market is a combination of monetary, psychological, fundamental, and for the most minor longer-term aspect, technical considerations. On a short-term basis, no doubt the technical analysis aspect takes on greater significance. The psychological aspects will not; not if the underlying fundamentals are as bullish as some perceive them, and definitely not if the top is well behind this stock market (it is). And certainly the T-Bond market, which makes arguments about all the bull vs. bear categorization of this market somewhat mentally challenging, as there is not an argument, since the stock market is long-fractured as discussed last night, with bonds having of course been descending since last year, well ahead of the Senior Averages in equities.

Yes, we identified the area around 130 in T-Bond futures as the top in bonds (low in rates) last year; even suggesting it as a great time to be buying or refinancing a home (last best chance in that entire phase; and nailed it). Now is not a great time to be buying a fabulous home or a boat, unless you're selling yours at an astronomical price, and buying another from some hedge guy who likely got a margin call and is underwater in more ways than not (no offense, but kudo's to the few who probably also got it right in the past 6-9 months, which tested everyone's mettle). One of the interesting hooks this year, would be if bonds found an early low, but stocks (here we refer to the Senior Averages, not the already-throttled run-of-the-mine stocks) didn't hold well. That would cause lots of new-era analysts and managers to ponder how bonds could perform at all well, without stocks extending a move. Doubt the knowledge of anyone you hear so pondering in the weeks or months ahead. Classic interaction would have bonds topping-out months ahead of the large-cap stock Indexes, and it follows that they would bottom earlier as well. Specifically, that is how you may anticipate less risk in bonds than in stocks in the months ahead. Part of that will of course reflect a shifting of assets from equity to debt sectors, defensively as more realize that the days of consumer-driven or foreign-funds-buoyed equity prices are increasingly behind.

Of course as the "mass psychology" increasingly grasps that concept, we'll be looking more and more to buy stocks; not because we'resuperbulls (some will probably say that just for the heck of it), but because the idea is to scale-out (as we did) into strength early this year, and start to of course scale-in, particularly as no one wants stocks, or as tax pressures ebb, or a little of both. I suspect we'll touch on a few more possibilities in the next Letter; but again there's no rush to this.

Pundits fighting last war

By the way; while pundits pontificate on contrary thinking, remember we're nowhere near a high; they are fighting the last war the bears won back in August and September, and long before that in small-caps. We absolutely agree multinational big-caps and tech-laden Nasdaq 100 (NDX) is where risks more currently are, and have said so. We are not interested in buying strength in this area; that's solely the no-brainer decision-maker purvey (who buy after good earnings results), or those who follow into-strength upgrading, which works only in a momentum market, which this is not, and hasn't been for quite some period of time. Liquidity-driven moves are dying on the vine; despite what may seem arguably a few hours of extension against that idea in today's market.

Meanwhile; the Dow Transports are near 52-week lows, as Dow Utilities are essentially near there also. A near 190 point DJ rally NYbreadth predominantly negative; not exactly a bullish factor overall. So, in the presence of such matters, though not resolved, the idea that "everyone" is bearish, so the market should go up, is not a correct interpretation of "contrariness". Ponder what might be considered as truly contrary here, in an environment with bears slowly "giving up the ghost" (because of the rebound), while the bulls are "newly complacent". What single market pattern is not being considered or heard much about at this point? O.k., you say explosion higher and that would be right. But the fundamentals don't support that, nor the multiple levels. Thus the antithesis might at least be considered, though the Street will do everything they can to prevent or forestall it from happening. The antithesis would of course be a short-term collapse, or worse.

(reserved) Either way will suffice overall, as we work through a projected down-up-down pattern as a preliminary outlook for Thursday. For now, S&P 1302 is resistance; while cash S&P topped right at the 18-day moving average (by our calculations; yours may be slightly at variance, as this is not an exact science, but an art) around 1290. Note the cash closed on the high; futures didn't. While happy for those who shorted the S&P with respect to their chances for morning gains, we'd be surprised if "the boys" didn't try to bring 'em back at least one more time. Fail that, and stock markets could readily be in trouble, anytime now, and within the parameters discussed Tuesday.

Grand Finale?

No one who understands markets, or is a professional with years of experience, should ever find themselves selling (or advising to sell) into extreme weakness after a breakdown. Rather, easing out of stocks (even into strength while everyone's still so-in-love with the euphoria that sellers are able to essentially vanish into the night almost unnoticed by anyone or without breaking markets) was the approach earlier in '99. This was our argument last April into strong markets, then again for the Averages into early-mid July, leading to nailing a "macro" 1428 highin then-front-month S&P contracts. This means that once the big leadership capitulates, one has to expect either a devastation, or an environment which "rains on the parade", interestingly of (balance reserved).

At this point, we view the mini-washout and reflex rebound this week, as a preview of the coming possible main event, whether it's the "grand finale" or not. Therefore, clear and present danger persists, per yesterday's warning of an up market Wednesday, and is emphasized at this time. If all goes well, we'll get the "climax" (climaxes are good, not bad) and ensuing automatic rally. We are not willing to commit new funds to the market in size now, because we may be too optimistic.

Investors in general are still overweight this market. That doesn't mean the market has to "crash" about (reserved) from now but it does mean there's risk. Tuesday's DB noted there was a "clear and present danger" of an up-and-then-down reversal over the next several days, that will be a most dangerous spot for this particular market on a short-term basis. In advance; we went on full alert for real short-term risk to actually increase if we got upward price behavior Wednesday. No change is seen as required, or appropriate, in this continuing saga towards any "grand finale".

(reserved). Therefore we suspect the Senior Averages should now ideally resume a continuation pattern to our larger bearish goals, as implied by internals both Tuesday and Wednesday, which were "bearish rallies" as we've termed them, fraught with peril and due to fail. They've already failed, we think, but there will be a mid-session fight tomorrow (Thursday).

It was -and is- our view that a non-Prozac market would have better institutional control. In this case, an absence of buyers means you get unsustainable bouncebacks which fail miserably, in a way that would not be dissimilar to the quick rallies after the first plunge that preceded an "event" in 1987. If we get such an "event" this year, that's great, because of our forecast. But we're not in the least bit interested in ego gratification, or getting excited about the downside after a smash. It should again be noted that when the market's shredded (parts are already), we'll put part of that well-determined 75% cash to work in earnest; but at this point there's no rush to catch numerous "falling safes", as the overall downtrend continues as outlined in recent days and weeks, with the structural mark-up rally (by specialists and market-makers) actually helping ease a daily oversold and setting the stage for the next purge. We argued the other day that this rally would enhance a downside risk within days; so there's no reason to change that interpretation at an inflection spot.

In Summary: will U.S. investors step-up to the plate yet again and buy stocks? They may try to; said we over the last weekend; but there's was a special rub noted this year. Profits are (or have) peaked for many of the largest leadership sectors, in harmony with our forecast; we emphasized.

Last night noted that's especially so for multinationals not directly involved in, or benefiting from, commodity-price-sensitive earnings expectations. Last year's Fed rescue occurred while ramp-ups for the Y2k transitions (in computer and technology sectors) were still in full swing; and that is no longer so. This forecast technology aberration: is a slower 2nd half, based on problems that mostly have less to do with earthquakes (convenient scapegoat for analysts who missed all this ), and very much to do with IS manager (Information Systems) "expense lockdowns" or delays of the combination which everyone awaits in the PC arena. This is precisely what we've talked about since early in the year, emphasized in July, and in the wake of a chance encounter with certain computer executives a couple months ago. We couldn't have put it better than IBM did today, and are almost stunned that everyone's initial reaction seems to be some surprise.

At Wednesday's posting, the McClellan Oscillator reading is -43, which is up considerably from Monday's -139 and Tuesday's -90 posting. We doubted the market would make it back to neutral areas before new selling strikes; potentially with some fervor; and that appears to be the case of course. There's little to do for investors outside of S&P trading, except study what they're going to be interested in later this year, as far as investing, and a caveat to keep some powder dry in that regard, to at least see if the stock market can implode in a fairly dramatic manner in the days coming up; after today as noted last night. As of 7:30 p.m. the S&P premium on Globex is -593, a huge discount-to-cash with Dec. S&P at 1283.50, down around 900 from the regular close. It's a rough approximation, but down-up-down-bounce-hard down, would be the ideal continuation.


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