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The Inger Letter Forecast

March 30, 2000

A return of "bipolar" market behavior . . . has been evident for several days before this recent spate of selling in the NASDAQ market. However, this variation is considerably at variance with a series of oscillations prevailing when we coined that "bipolar market" term earlier in the year, with a focus on the breaking January market, but with expectations then of money moving into a more concentrated focus in the narrow universe of leading (and new) technology issues.

That action of course basically set a preliminary stage for the evacuation of big-cap stocks near the end-stage of their early 2000 declines; a time that we became increasingly bullish right at the tail-end of February on big-caps, expecting that Nasdaq 100 (NDX), in particular, would correct (only mildly at the time) while the focus went into the big-cap stocks, without whose rejuvenated strength the rest had little chance. That forecast worked terrifically, we got our rally, then began looking for markets to traverse more dangerous consolidations with values no longer compelling. (Again this week was assessed as being different for NASDAQ vs. big-caps; next week also.)

Flagpole & Pennant Identified

Last week, after the parabolic "flagpole" was built upon a compressed levitation of prices across the board almost, it finally started languishing in the manner suggested before this week began. We thought much of last week's upside was related to a scramble into stocks many managers at the time were thought to have missed being in (still true, but the pressures to enter are of course vanished now), and took clear notice of the market's inability to turnaround both on Monday and Tuesday, which featured environments that made it tough to get much renewed interest in stocks for several reasons.

These included not so much "guru" worriers, but the Oil cartel's hesitations, as well as renewed fears that the Federal Reserve would move as much as necessary until they achieved the illusive results intended by their restrictive rate increases, which haven't impacted money supply; hence have not expanded nor really contracted, but maintained the monetary aggregate levels. During this the T-Bonds had their terrific move up, but have faltered also, and are in neutral just now; a regression that so far is no more than a correction, but which was definitely on the expected list.

Wednesday saw more "guru" concerns (reflections on that reserved for subscribers), as well as unfolding patterns in the Senior Averages that very much closely resembles a "pennant" or flag we looked to build this week upon a dangerously parabolic flagpole. (How they are resolved, in the majority of cases, reserved for readers.) Part of the draining is taxes; part hedge fund sales of course; and part the selling on the rebound from a slew of overexposed traders looking to get even and out, after their experience a few weeks ago, such as in the still-heavy biotech stocks.

The other night we again emphasized the risk of "momentum" playing, of buying parabolics, of chasing stocks after splits, or makes a relative-strength list when it's already quite a bit up from the lows, and certainly all this reflected the return of risk to center stage, at least temporarily. It would be a nice result to see this renewed stress relieved right into the Quarter's end, as it is in the Dow Industrials at this point, but clearly the market internals were considered to once more work towards renewed risk, and they generally did. Further, we have the "agency" commitments worrying the Street's inner circles (which always care about derivatives much more than general investors do), that created our renewed mention some days ago about debt and derivatives risk, which could turn ugly. Typical comparisons involve Fannie Mae, but there are many others. Now before getting too distressed about that, while some of the agencies are seen as sacrosanct by a majority of heavy investors, anything that briefly broke that area would instantly be addressed by a frantic Fed, and regardless of proclamations to the contrary, they would likely respond rapidly. I do not know that any such crisis proportion event is unfolding, but that's the general peripheral scuttlebutt that's out there. Interestingly, anything like that would collapse things short term if that unravels (timeframe reserved), but would almost ensure a subsequent flurry of interest rate cuts. If the problem's again a series of bond and bill shorts at trading desks, the cure could be tougher.

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The only variation in all of this is the total inability to bring NASDAQ back, which is probably just the after-the-fact nervousness and crosscurrents in these final days of the Quarter, as well as the paucity of liquidity available ahead of a tax-time that is not only sobering to successful traders of course, but may require sale of stocks to fund tax payments. That's what we said the other day in anticipation of some such problems, and said it because we suspect 1999 was really the first full tax year that short-term traders may have had outsized gains in online trading. It's reasonable to assume that many didn't make appropriate quarterly estimated payments (if they even had ideas as to what their payable tax would be, which would be impossible to accurately estimate for most we'd think), and will have to sell in the open market as they discover the joys of higher brackets.

Fairly Furious Faltering

In any event, it's been about a week since we not only celebrated the terrific upside nailed almost entirely over the preceding month (after nailing the downside oscillations before that), but looked ahead at the extended short-term condition and warned that outside of Quarter's-end activity, not much could be readily anticipated going into April. That conclusion may change slightly, due to a fairly furious faltering this week, but not generally the progressive outcome we see over several weeks going forward. By that we have in mind both an effort to rebound the NASDAQ, maybe as the S&P and Dow Industrials come under renewed pressure once we get into April (they may in fact surprise on the upside over the next day or so), but retaining risk of a NASDAQ challenging key double-bottom lows earlier this year. Nothing shy of fast new highs would be able to thwart risk of such an outcome, which was a high level consolidation to say the least, from which sure, a further immediate advance would be nice, but is at best problematic (for reserved reasons).

What worries us is the response the market sees from a few Internet or assorted tech stocks that are really development companies that shouldn't be expected to report much in the way of profits at this stage (though investors seem to expect more than is realistic), and as we'd already clearly warned that the preceding 1st Quarter parabolic action had essentially discounted the "past, this present era, and the hereafter", which meant that even where companies are terrific players, this was not a time of realistic value, but of outsized pricing which sent almost impossible demands to even the best of stocks, as far as delivering results that would please high-priced buyers. That is a reason we resumed expressing concern some days ago, and it's a reason we cautioned that splits and parabolic moves are typically opportunities to cut back market exposure, not increase anyone's bet, and certainly not a time to venture into the market utilizing market leverage (that's a tool that should be reserved almost exclusively for the occasional major purge in our view).

You also do have the concerns about earnings warnings next week (the typical time for these) in front of results, and the realization that we thought the 1st Quarter had more landmines within the tech sector, as far as revenues, than the latter portion of the year, when the embrace of new tech should be enhanced, as Information Systems managers (and others) digested the inventory build in front of, and transition into, Y2k. And yes, if that comes back to what we wrote late last week in terms of pressures in the overall April/May timeframe, subsequently moving to the next good buy point, so be it. After all, the overall call was for the lows yielding a rally into the Spring then down, after a return of risk-spooked trend-chasers, once we rebuilt an overbought daily-basis condition.

Window Stripping

We do have a slightly different thought about the early April prospects, however. If this month's "window dressing" continues shedding shares in ways more akin to "window undressing", we're going to quickly strip the facades of optimism from anywhere it remains, and will do so just as it rolls into a new Quarter. Interestingly, that could set-up some sort of mini-washout again (albeit it isn't likely to boggle minds on the upside), in the presence of whatever shortfall warnings might in fact be forthcoming, which temporarily would have those selling this week feel largely vindicated.

However, at that point the daily condition might again be fairly oversold (if it drives down enough in the interim, which we can't yet assess), so you could envision a rebound which might drive into the actual earnings, many of which would tend to be favorable. The problem remains "multiples", a concern of ours all along in this market, which really are hardly sustainable, much less barely even believable, with respect to the analysts who see no problem with price/earnings ratios here.

(Down the road preliminary expectations are reserved for readers.)

One final thought on all this; the NASDAQ is not having the "third correction of year 2000" as the prevailing pundits would have it; nothing of the sort. NASDAQ's pattern looked like the double-bottom we forecast in January/February, and it is faltering after failing to breakout above old year 2000 highs in the 5100 area. Keep in mind we moved from 3700 to 5100 just this year; so how anyone can call this a 3rd correction is ridiculous, since this week is really the first effort to fail the new highs that were put in historically just earlier this month. Is there more volatility; surely there is, but this is not new. And the March lows were so nominal before the comeback launch, as to question their significance in the grander scheme of things. (Balance reserved.)

That is why we already emphasized that the upside was not a signal to get excited, but a reward for doing so a month ago in the big-caps, and early this year in many smaller caps and/or hotter techs. To see some of the Press about the failing Internet commerce stocks (of a first generation generally) is to see what is not an anticipation, but a reflection, on many stocks we've been just a bit negatively inclined towards for months in some cases, not days or weeks. True, some newer specialized tech and content stocks have become a bit unstable lately, but that's going to happen when the market is "raided". Later, they should stabilize and forge ahead where business models warrant; and not because of earnings, which aren't generally yet expected to be very meaningful.

Another LTCM coming?

That's a worry out there, so this is the second or third time we're recently mentioning the subject, so that at least our readers won't be shocked and will carefully watch any unraveling or squeezes that impact either hedgers, trading desks, or even the quasi-essential agencies trading paper in the maze of secondary mortgage and esoteric derivatives markets, which have grown hugely this past year, as if the warning shot across the bow of LTCM in 1998 (which vindicated our public as a matter of fact warnings back in 1997 of debt and derivatives problems moving beyond Asia in a period of time) hadn't even occurred. Actually, the willingness of the Fed to rescue that bunch of mathematicians in Connecticut, probably emboldened the rest to resume the aggressive pursuits which are portrayed as being "conservative" and of low risk, but aren't anything of the kind, and are a much bigger concern for Government, as far as "leverage", dwarfing the equity arena fears.

Credit spreads are widening; earnings nervousness is growing; the markets ignored easing Oil and even housing that should have been calming (always worry whenever desired news doesn't move markets as a majority wishes); all of which creates "window undressing", and might set-up both a purge in the market and opportunity, as a breaking market would likely deter the Fed from what some thought would be a worst-case series of much higher rates, and also herald the lows from which next upward phased of the market could be mounted, ahead of National Elections. It is going to be crucial to watch the action next week (more so than this), because it will be trading without the influences of Quarter-end positioning, likely at the tail-end of any tax-related selling of course (because a player would likely have completed taxes by now, or at least prepared funds to pay the Treasury with), but with a better technical perspective of what challenges are lined up. And, any hedger that was trying to become "square" by the Quarter's-end, should be finished.

In summary . . . we suspected some sort of profit-taking, although all along we saw the several seeds of potential problems for (post rally) markets before potentially higher levels much later on. Let's hope April's not tough, but after our near-historic upside moves in a compressed timeframe, and given we had caught almost all of it as well as the preceding decline, we'd be remiss in just getting too excited about upside, that we miss the questionable action in several diverse areas. That's what we essentially have said for three nights now, and market internals did worsen. We would love to be bullish all the time, but that's not realistic, especially given these patterns. The caution returned regarding any moves this week being related to Quarter's-end; but so far this is more of a "window undressing" than an adding to positions, although DJ will come back again. It's almost a repeat of tanking tech whenever DJ rallies, then rallying tech when the DJIA drops.

The McClellan Oscillator reversed last week, got fairly overbought on a daily basis, remaining so today, rising a tad to +92 approximate reading (a nominal +3 change; often preceding rallies.) We're overnight flat the S&P right at the moment after an overnight short last night from the 1540 level and then a couple intraday ones, plus a long from 1525 which was closed around 1535. As of 9:00 p.m. ET, the S&P premium on Globex is 1968, with futures around 1528.20; off near 170. Last minute adjustments associated with end-of-quarter activities will foster more crosscurrents.

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