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The Inger Letter Forecast

April 7, 2000

Remember the Plunge Protection Team? That was a rumored Washington "financial rescue" working group, about which everyone has been very secretive since the first musing about such a structure for potential intervention were first surfaced by the Washington Post back in 1997. A degree of speculation has again appeared regarding curiosity as to whether that's how the stock market managed its fantastic recovery on Tuesday. No complaints here; we were calling for the comeback anyway, and caught the vast majority on the way down and then the ride back up. But we are a bit concerned about the magnitude of current or future "testing", not because others are but because there are stories around suggesting that participants in the cloistered group are said to have been among those helping trigger yesterday's massive S&P futures buy programs. (That doesn't mean the market can't work through this; as clearly it's the initiation of a move that is key, as most players will prefer the upside when the prevailing directional stability is restored.)

What does concern us, if that happened (with Goldman Sachs and Merrill Lynch the rumored big players in the "save"), is why the next day you have the Chairman of the Federal Reserve almost directly contradicting the intended results of a "plunge protection" intervention, by his remarks at today's White House Economic Conference. For ages there has been a connection between the ebb & flow of interest rates and the market's direction, although usually monetary policy and the money supply expansion or contraction are in harmony with the direction of interest rates. Not so in this year's environment as you know; and we suspect the Fed Chairman was thinking just that when he made the remarks expressing a disconnect between rates and stock market direction.

Nevertheless, to say so publicly is almost a challenge to the market's stabilization efforts, and of course that would be more curious if there was what amounts to a clandestine intervention in the reversal of Tuesday (again; we agreed with the turn, and were looking for a comeback, so that's just fine, but we do like contemplating what underlies the action, and where it may lead to next). We're not critical of calculated buying at certain points (as a matter of fact we pretty much nailed it in the NASDAQ with our advance goal of 3700-3800 as a downside target for support, wash it out slightly and then turn up before any further testing, and a week ago we indicated that a break in the June S&P would have to take out 1460 to find meaningful support and buying interest); but we are curious about the quality level of buyers in the past couple days, basically concerned as to whether a rebound merely buys time, or reflects genuine buying. (We have a view on this.)

At this point the remarks of last night still prevail, regarding seasonal difficulties, and even what's likely a diminished amount of sidelined cash available to come into the buy side of equities. For a glance beyond that, we have to consider whether or not the primary focus should be availability of ready money for commitment, or whether stock prices (in the various sectors) justify additional commitments; not simply whether the money is there to come into the buy side of the ledger. The market, based on intermediate and major trend indicators had simply turned down from very high levels, and doing so in a staggered way with regard to the NYSE, which is hampered in parabolic moves by the nature of the restrictive "trading collars" implemented after the 1987 Crash, and as a matter of fact revised just last year. The NASDAQ market did make it into an oversold situation as of yesterday (by virtue of dropping pretty much in an unencumbered straight-line) and is trying to reassert stability at this time). There is a majority of discussion among "market timers" trying to imply that the NASDAQ must go to lower lows after a failing rebound. That's not necessarily what must take place, although if it does there would almost of necessity be a longer rebuilding time in the markets than many expect. Such a further purging would expunge too many short-term types (in the so-called stocks) who might have been extremely leveraged, or otherwise unable or unwilling to fight for a comeback.

Not to mention that the history of such breaks often sees the wildest comeback efforts, but then if the bearish trend is going to extend, a slow erosion sets-in, that inevitably takes a protracted toll. Given that last years lows had so many characteristics of a climactic washout in the NASDAQ market (more so than in the Nasdaq 100 (NDX), which is of course populated more by big-cap technology stocks), we are more inclined to view what took place as an intermediate (and totally warranted) retracement, of the type we had to expect in the big tech stocks (and did), as well as a continuation of the downtrends in the first-generation internet commerce and e-tailing stocks, as forewarned not only since last year, but felt to have commenced then, not any time recently.

For the smaller-cap new techs, the climate of fear brought them under pressure (many already in fact have rebounded smartly off yesterday's lows); and for those that have potentially real service ideas or products forthcoming (such as "new media" and "new optical"), our view that yesterday afforded new investors an opportunity to nibble at such stocks isn't changed; that doesn't mean of course that they don't go through a period of further testing; doesn't mean that the action isn't dicey for awhile, and doesn't mean all will do well or be survivors in the fullness of time. Some will of course, and as we often have we'll continue to distinguish those with better products and odds of not merely survival but prosperity, as can be best assessed. For the moment, while there has been a multi-month overall decline in (examples and comments on future action is reserved), we thought the selling was emotionally reflective of a type of player (as previously warned) that had come into such stocks along with others after it had already tripled or more, and that to us set up a high-cost group of shareholders that ideally would be at risk (boy were they). Typically the high-cost buyers get washed-out severely, before stocks prepare for new upward trends. That the stocks rebounded as rapidly as they did seems to reveal, in our opinion, an underlying interest by somebody in accumulating shares cheaply when available; from our vantage-point.

Last week and last night we talked about liquidity again; assessing concerns that leverage in the form of margin debt would play a factor in the forecast swoons during the April/May timeframe in the wake of the beautiful upside we enjoyed for the S&P in the previous month. We pointed out the Tuesday selling in NYSE big-cap stocks likely accelerated to meet margin calls deriving from NASDAQ pressures (portions of diversified portfolios), and the idea that such pressure would be a diminishing force in Wednesday's action. Thursday could be a little dicey given the soft finish on Wednesday for the Senior Averages; however the late selling was more than likely primarily a function of the inability of the June S&P to surmount the earlier highs, and intra-day squaring. For sure this is normally routine, except that just now few are willing to be heroic traders overnight.

We expected as much, and do not see anything particularly earth-shattering in Wednesday's key events that requires special assessment, other than observing that Fed Chairman Greenspan's comments were superficially at odds with the mantra of Government views, but were not unusual if you accept the postulation we ourselves have made for some time that it is the availability of money, not the cost to rent it (interest rates) that actually determines most noteworthy enduring economic impacts. He did not put it that way; but we often have, and suspect that is essentially what he meant when he said rates don't affect a market like this. He also may simply have been thinking about the indirect ability of hedge funds and other major leveraged players to borrow outside of margin controls (which the Fed would be loathe to touch right now we suspect), which means they to are concerned about the availability of monies and the ability to "turn" it, not the cost to simply rent it, or telling the market not to worry about another forthcoming Fed funds hike.

A couple Congressmen made overtures (they always do after a market spills; hardly ever before) about revisiting margin regulations; well, they need to look at other regulations that relate to the hypothecation of funds and borrowing for the purpose of investment speculation, by hedgers, not by normal individual investors, who are unfairly being painted together within such broad brush implications by politicians who probably don't even know the proportions and degree of leverage that are out there for certain players (with even less, if any, impact on offshore players we'll add).

Having forecast problems for April, we indicated last night that we're not overconfident about a sustained market recovery, or complacently chipper about not having an eventual test of these lows yesterday (or worse), more so in the S&P than in the NASDAQ interestingly (though both in theory could do it). Outside of a seasonal and immense psychological trauma (that the market broke, combined also with an absence of large cash-flows this time of year) experienced by the market, and the very high level that it still is trading at in the key Senior Averages of course; just looking at the action did and does give the market the opportunity to successfully test the lows, and maybe successfully, by conventional technical interpretation. To deny that we'd need to put in a rally that takes out today's highs in the S&P, and eventually the key 1540 inflection area. (A timeframe for this has been provided, so ideally the market will work on extending the rally now.)

We noted, that in this volatile world, we prefer not to see a full-fledged test of the lows. That's as a full-blown test might be dicey, because of the huge leverage, plus a knowledge that real turns don't usually let players in as cheaply as they would "wish", if the move up is going to be for real. This is April, not October or February, so that makes a big difference. It means "the boys" are not quite in the type of control dominance they'd like to be, that accidents can occur, that there are at least moderately greater risks of losing that control, which was exhibited before all of this market notoriety, by virtue of muti-sector rotated upside that had to pull back, but which of course many would have preferred hold the higher levels. That was not possible because NASDAQ had to fail; although the Nasdaq 100 (NDX) only broke it's uptrend structure in the final phase of downside (a normal behavior for leading big-cap stocks in a market, which they surely are). The NDX today surrendered a very nice recovery to finish about 100 off the best levels of the session; mostly in late selling, which tends to suggest an effort to decline the market again on Thursday, but we do not think the downside will hold for now.

In summary . . . it remains a very tough time of year to get meaningful new cash into the market, and the market does not like environments where "cash flow", timing of any retirement needs or potential liquidity are seen as paramount considerations, which the market (in it's infinite wisdom) actually doesn't know or care about (though it can reflect mass movements of course). What we disdain is the automatic assumption by so many that because they're "in it for the long term" that somehow diminishes risk across a broad front, which we've never felt valid, especially in volatile and speculative sectors of the market. The markets always like technology, in every era of this Country's history; but not the same technology for any protracted period. Don't forget; in their old heyday the Utilities were the hottest (internet type) stocks of the time; when electricity was not a commodity, but a cherished and relished service, until it eventually became totally ubiquitous.

The internet (the survivors) will itself become a modern utility service (already is for most of us) as it is taken for granted and treated accordingly. But we are not past the strong growth era for the entire sector, just the old e-players we've argued for ages should have shown profits before even this year developed; and where they do, presumably greater profits to warrant the prices certain stocks got to, which clearly we always thought needed to have some correlation to their growth in gross; not growth in share price. That is why we referred last month to insurmountable highs in some of them, and the brewing risk for the month of April, which became incredibly right in the middle of everyone's eyesight, days after the negative divergences of strong market rallies without any positive breadth or favorable internal indicators, even before the 1st Quarter ended. It is also our view that following the catharsis, the last think many will expect is all-time highs, one of the reasons they might consider that within the realm of possibility, strange as it may seem.

It remains our view that (barring a cataclysm in the next few weeks) this will still be the overdue corrective action setting the stage for an advance into the latter part of the year. With the Tiger funds selling out of the way; with margin liquidation eviscerating any who didn't heed our caution specifically in that regard last month; with the bell already rung (but not definitively stilled as yet) for the buy-the-dips forever crowd of speculators; and with the non-profitable (nor particularly very promising) old e-commerce and portal stocks from last year continuing their swoon forecast almost a year ago, while the new tech stocks simply retrench emotionally, but not unexpectedly, we are reasonably optimistic that the process expected (not by degree, but by direction) for this April and May will move to the expected conclusion and/or tests as the markets shall require.

The McClellan Oscillator is bouncing modestly at +69; that's not crucial now as the market did drop and turn; which actually is detectable only by virtue of a tightening of the summation's dots. After potentially excellent gains (for those willing to do it) Tuesday in the realm potentially around 8000 points, and with around 4500 realized Wednesday on the long side, we are flat overnight. As of 8:45 p.m. ET, S&P premium on Globex was 1513, with futures around the 1502 level now. (Again long on the first dip Thursday, with the 900.933.GENE hotline long at the time of posting.)

Tuesday's panic into blue-chips, and out of tech did not end, but was interrupted by the swoon on NASDAQ which likely compelled serious selling on the NYSE to meet margin calls yesterday. Our admonition to avoid leverage was reasserted in late March, and again validated in spades most recently. A reversal of another big decline again was a likely prospect Tuesday, although it was more pronounced than anything we've seen in modern times, with the exception of the LTCM debacle, which turned equally fast, but even that was not so frenetic. Then as now we are open-minded and continue to catch moves; but this time the weekly preceding declines did not establish an oversold condition generally, which made the first recovery somewhat suspect. The jury is still out on whether the market can and will hold higher support; we desire it do just that.

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