The Inger Letter Forecast

April 14, 2000

Not alleging conspiracies . . . but nevertheless curious about the fairly direct opposition to the market's efforts to recover, by the Federal Reserve's comments the day after last week's big turn in the market, we speculated that something was afoot indeed, if investors were resorting to the perceived return of the rumored "Plunge Protection Team", while in fact the supposed members of such a clandestine group were at odds with each other in the very public financial press. This focused our thinking not on the rebound (which we indeed had expected at the time), but on how the so-called much-lamented "secondary test" would go. Unfortunately, from the start, we shared our candid view that the initial outcome would not likely go well, if indeed the market was put to the test, as it certainly has been. It might further be argued that the financial media's emphasis on certain so-called "support" levels (that often are non-existent in our technical work by the way) actually enhances panic, by virtue of creating some supposed meaning to the breaking of levels.

Actually, we're less pessimistic now, the lower the market goes, because of several reasons: a) the NASDAQ market is reestablishing value by virtue of the brutal decline seen most recently; b) some selling in the Nasdaq 100 (NDX) may shift to the blue-chips which have been relatively in a stable condition, which would set the stage for OTC rebounds, but likely still within downtrends, and c) Americans will be finishing filing their Income Taxes, a time of compulsory sobriety, after which a very slow but nevertheless perceptible return to their regular pursuits may be looked for.

Within the scope of broadening April / May momentum (that's downside momentum), few like it, but analytically it's basically the inverse of the preceding parabolic moves; hence a reality check of the type we expected this month, and forewarned towards the end of March as forthcoming. I am not suggesting the market has to bottom right here; in fact the last few days Daily Briefings in fact have indicated the probability of rally failures, including Tuesday's call for down-up-down for Wednesday (boy was that an understatement, but traded very decently in both directions today).

I am suggesting that certain NASDAQ stocks may surprise investors by bottoming before some of the old-economy stocks do; as the former began corrections sooner than the latter, while the latter were wonderful bargains in late February (as indicated), but are now somewhat working on hanging fire, in terms of having superior moves which in some cases actually invite profit-taking. Again, this is a form of disparity between the markets, which is something many analysts almost constantly argue can't continue, but in fact is a main characteristic of the year 2000 stock market.

Then there are those taxes. Some weeks ago we warned that would be a consideration of risk in April, and though generally ignored, we really think it's taking a toll. Many investors have only in the past year or so embraced online trading, and probably were shocked simply by enormous complexities involved in their tax preparation this year, besides often (where successful) having to sell stocks to generate the funds to pay for those taxes, which was our point late last month.

Ah, but don't most Americans hire accountants to do the "line item" input for them? Actually not. While we know this isn't a great concern for heavyweight investors (including most readers here), who simply notice a higher charge from their CPA for all the line-item input (since the IRS doesn't accept simple summaries of short or long-term gains and losses; they must still be individually entered), it's likely the mass of investors are loosing sleep over their final computations and sales of still-substantial holdings to pay those taxes. Our argument last month centered generally with a reflection around this time of year of how investments are "real", not "virtual", monies, and that the entire realization of the amount of risk and percentage of gains surrendered to tax authorities was going to be an extremely sobering experience during the first half of April. Well it sure was; and for the avoidance of margin leverage, and the caution that the forecast March rally was most useful for partial selling, not for buying, we're indeed grateful and hope you all did reasonably.

Well, now what? A post-tax rebound? Yes. We suspect the market is setting-up for just that. And it better be very good, because market bottoms of significance rarely occur at so-called "support" levels, as frequently noted here (because the market tends to break these and establish its own newly determined levels that the markets of the future will focus upon). In the last several days or weeks we had to outline probable further selling ideas, not because we don't have understanding for investors that are "wishing" stocks to hold, but because it's our responsibility to call 'em as we see 'em, which in this case remained to the downside, especially in-front of the forthcoming PPI and CPI data. In our estimation, as noted all week, there was no prospect of a very meaningful rebound until we got at least the first of those numbers, and that the most bullish interpretation would be inflationary data further spooking the markets (after all it's rearview mirror information taken before the peak in Oil prices, and hence should be more inflationary than what the Nation is actually experiencing now) after which a rally and little washout could set-the-stage for at least a meaningful, albeit short-run, rally effort. It's also important to note thatJune Oil, declining as forecast, got oversold, so had a big rally today. That in itself is a bearish factor for rates and the economy if not constrained with limited moves. So again we must keep an eye on the oil market.

Never impugn logic

If such a rebound occurs, and sustains or resumes after these last moments for tax-return-filing, then we could get an "extension" on the upside (pun intended), just as the "confirmed" deep bear is celebrated by most permabears, and the evacuees from NASDAQ who have not only stopped buying dips, but of course are waiting for non-existent rallies to do more selling on. Historically, when there are not a series of bounces ongoing (that was last week, not this week), you're in a downside vacuum with everyone realizing what's afoot; which is exactly how it drives to its rapid and logical completion, whether or not that turns out to be just an interim situation as outlined.

Logic has some place in the scheme of things here; not because we suggest the market ever will stop at a predetermined price-point (it does not, and when it does you're in a fictitious market that has a lot of trend-followers and other system-types involved in it; that ultimately is self-defeating in most historical comparisons), but because the market will perform in certain manners that very much have a normal out-falling. Again; logic for us may simply be "panic" for others. For example we referred to last Tuesday (over a week ago) as a capitulation that would be (as forecast) going on with many margin calls and desperate rebounds that probably would have some trouble; with the ensuing drop (if there was a so-called effort at a "test", which we warned was so dangerous) probably failing, thus inciting a "liquidation" phase, when things go basically straight-down sans a rally of size; that's essentially what's going on now, although still at comparatively high levels one must realistically still note. Ideally, if the pain for the average investor is going to be more brutal, you'd still bottom this on a daily basis while nobody any longer expects such a possibility, then it goes up (after taxes) just enough (balance a further-out forecast and accordingly is reserved).

Of course that's general (which is all we can address when talking about "the" market), while we do recognize that the heavier weight stocks (mostly institutionally dominated) are coming under a bit more pressure now, but that's presumably because of angst, of the need to sell what can be sold (by those who disagreed with the conservative non-leveraged and partial sell strategy of last month), and by some feeling that a deeper-than-normal bear market is underway. Well, that also has various interpretations; it's been underway for two years for the multinational blue-chips, that had either a major bottom and turn or a major rebound (per our late February forecasts) and is a contraction in technology that was overdue, even for some of our own favorites, as forewarned. It is also a case where they "take the good gals with the bad", in an old vernacular, because a raid is a raid, and can tend to be indiscriminate. That is also usually the final stage of a selling wave, although we are extremely aware that this decline is occurring without bearish "news" so typically associated with recent era declines.

(section reserved)

However, there are numerous examples of markets turning on a dime given the background shift or a perceived policy shift (witness the LTCM turn in 1998) that changes psychology dramatically again. And we have to be alert for that, and are. Right now as a matter of fact, into further selling. Our bearish prospects for the year's first half centered fundamentally around Y2k inventory and other build-outs that would squelch demand until generally the second half of the year 2000, as outlined repeatedly. Either that, or the market is discounting something that isn't very evident yet, but we don't think so. Rather we think investors clamored into expensive stocks (at the crest of a bubble in the Internet sector, but also by osmosis other areas) which had no analytical basis for the price levels that were reached; many will in a year or two, but didn't for anything imminently.

We thought (and think) that a lot of investors anticipated much better results than did we for this first half of the year; and they're somehow disappointed. And that's where emotion fits in. Those who concurred with our view that the first Quarter or even second would be poor comparisons in terms of rate of growth of profits are not shocked at all this, and were probably more surprised by the extent of mindless trend-chasing that was going on just a scant few weeks ago. (Gains can be fine in specific terms, but the slowing rates of profit growth are not at all something stocks like historically. That is what we warned of in our discussions of how the market doesn't pay higher multiples for slowing rates of profit growth, even though raw numbers may appear satisfactory.) It fell upon the market to "adjust" prices to reflect reality. Now, interestingly, as selling gets into the very depths of despair, the Nation has two choices (reserved).

So, as we complete these comments the night before the PPI, we're looking for a daily washout, an essential bounce thereafter, and then more trouble unless while such is underway, finds the Fed a bit friendlier, the derivatives market not deteriorating (ah yes, therein lies the totally major risk), and hence the Nation not pushed into recession while the prosperity of most our citizens remains at least moderately satisfactory. We don't know that sufficient "puff" has been exhausted from the markets, but we do know that it won't take much more before the pressures start to be felt in the so-called "real economy", including upscale automobiles and luxury housing. Then, the trickle-down formula would see wages easing, but with jobs lost, particularly in the Internet and in financial areas, where so many younger Americans have recently focused their career paths on.

It should be known by the various Cabinet-level heads where this goes if economic stability isn't maintained, which does have a very direct connection to the stock markets these days. Maybe it is such an unfavorable economic outcome the market's worried about; however the market also is famous for discounting something like 9 of the last 5 recessions; which means that 4 of those feared events never unfolded. And remember, the market went parabolic without justification as relates to fundamentals, although we did expect the move; and the market can also collapse just as rapidly, without that magnitude of deterioration of the fundamentals. Neither has to modify in a great way the behavior of American consumers (who must already be psychologically tempered by all this), provided that the extremes move towards a visible equilibrium in fairly short-order.

So even though we are not technically defending this particular level of the S&P, we are warning what will happen if ensuing rebounds aren't greeted or stimulated by actual factors encouraging most of the Nation's investors, which any "financial working group" couldn't by simply intervening, even remotely think of sustaining. That is precisely why a "team" effort between Washington and even New York could have taken the edge off declines briefly last week, but can't engineer truly enduring rallies, unless or until investors see not only a prosperous economy in the second half, but also a friendlier rapprochement from the Fed, which of course has been pressured by needs to contract a bit, after the expansive preparations for Y2k; totally as forewarned before this year.

None of this is beyond the realm of the overall call here for the year; but the expectations for a prosperous second half depend on emotions being limited in ways that do not go further to risk undermining the general assumptions about the domestic economy that are inherent in most of the Nation's thinking, including those not in direct ways related to market action. You can have a downtrend that doesn't take the economy with it, as we saw with the bear market in blue-chips in 1998-2000. However, this now is becoming sufficiently broad (and risking the DJIA patterns as well), which endangers the wider perspective. Just imagine (balance reserved for readers).

Daily action . . . continued fighting for the next meaningful move out of a combat zone in S&P's, and caught the vast majority, including parts of the rebounds. It was our strategy to suggest a guideline overnight short-sale as a precaution Tuesday, because of the further rebuff at the 1540 area, which we had identified as crucial inflection once again, and the sloppy action during the course of Monday and Tuesday action. The more recent action included a guideline short at the 1524 area covered around 1500; a long from 1500 which was reversed (a couple times), with a good short from the 1512 area (+/-) that was retained through Wednesday's close; no stop for now, in front of Thursday's opening. We are contemplating realizing theoretical gains of nearly 3400 points on a single hotline (900.933.GENE) effort into any sharp early Thursday weakness. (Endurance probabilities, and advance risk/opportunity for Friday are reserved commentaries.)

In summary . . . as feared and postulated, the market had one heck of a new swoon, although it is not reflected in a cursory look just at the Dow Jones Industrial Average, though even that was able to reverse by almost 300 points today, in total roundtrip action. So we remain deeply into a dubious "test" configuration, which far too many have been counting on, and we warned about it.

At this stage of the market, of course we would not deny the need for such; but we know anytime you count on something, how poorly the odds are for it's successful resolution, especially at this time of year, and it is in that respect that we worried about the markets ability to absorb selling into weakness should the selling spread and become a higher volume situation, as contrasted to Monday's lighter volume, actually normal for secondary tests, and Tuesday's high volume, which was seen as very dangerous in a way. It did not let-up on Wednesday, though high volume days with no rallying are what you want to lead into a bottoming situation; but just remember where it is all occurring at. Excessive investor optimism and general complacency are actually not helpful in all of this, as it means the majority of investors and mutual fund managers aren't prepared for this anticipated new siege; so that's what they may have to deal with if the market can't turn and run particularly after the PPI numbers, even before the CPI comes out, starting with Thursday.

The McClellan Oscillator eased modestly at +67; actually a nominal negative change after one in the positive direction the day before. As of 9:00 p.m. on Globex, there's a 1223 premium, with S&P futures up about 180 or so. We are temporarily short June S&P's into early Thursday, which could easily be a down-up-dip-up session in the wake of important inflation data beyond kneejerk reactions to the news, as a lack of interest in buying allows heaviness ahead of awaited news, which we think will be inflationary, but may clear the air interestingly for at least intervening rallies, and in a perfect world even a bit more. If it does the opposite, then a measured move to (reserved) comes to the fore as we have previously outlined the other night. Good luck to all!

Gold is widespread in low concentrations in all igneous rocks.

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