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The Inger Letter Forecast

November 12, 1998

Financial Panic . . . truly gripped the Street, not so many weeks ago. Aggressive Fed ease was called for here, weeks in advance to calm things, and to psychologically help stabilize currencies abroad, and thus indirectly our markets. This occurred. What also occurred was a resumption of momentum games and speculation, which probably isn't what Chairman Greenspan had in mind, when he led the Fed's Calvary charge, that we suspected (as you know) was forthcoming. Surely he didn't assume that within several weeks the markets go beyond stabilization into a new frenzy actually not only rivaling but exceeding past degrees of froth generated within a few short weeks.

Earlier, at the panic's height, money flowed into Treasuries creating just the type of "train wreck" we called for in the Dec. T-Bonds mid 130's, despite believing that higher rates for a brief period of time (investment-grade timeframe) are not what is being reflected by foreign repatriations from a short-term perspective (which was our advance call to take place under cover of a fright-driven domestic frenzy into Treasuries). What comes next, including after the FOMC meeting Nov. 17th, was noted the other night, and may also surprise the Street, in a slightly different way. Further on down the line, providing the stabilization's succeed (a forecast and necessary first step), this will sow the seeds for something quite different that the deflationary fears; even stagflation is a risk.

Just keep in mind, as we often denote; that the establishment (or efforts at) currency stabilization abroad, are absolutely essential early moves towards global recovery (and rekindled demand for hosts of American products, depending on currencies variables). Also, calling specifically for the currency markets to stabilize, including incidentally at least a temporary bottom for the Nikkei, we have a complicated scenario again shaping up for next year, as expectations exceed profitability restorations, not only in many companies (and sectors we've noted), but also for entire countries.

(Where our trading is now. . as we were flat in S&P trading in front of Tuesday's late going, and then specifically expected an early Wednesday rally following Intel's (INTC) upbeat story, later to fade as traders who weren't aboard Tuesday's late sell-off exited. And, we didn't want to be short overnight that day as their has been a tendency of short or Put buyers to get on late-bandwagon type washouts, which sets them up for at least nominal snapbacks even if we head lower later. In response to this analysis, we thus moved to the short-side December S&P Wed. morning, at around 1135-36 on our trading hotline (900.933.GENE), while also affirming a slightly more of a macro trade from the 1140+ area as being acceptable to maintain. Currently; short with stops.)

Technically. .we came into this week viewing a short-term overbought daily condition against an otherwise ongoing expectation for higher prices at yearend and into 1999 as outlined in previous DB's, and The Inger Letter. There's was no change in our observation that stocks won't just fall out of bed absent adefinitive reversal. So far selling-squalls remain shy of what can be called a definitive turn. Not so innocuous by the time Wednesday ended, we played this well, including a decision to be flat overnight Tuesday, and not go for the bait of the late selling-wave appearing in the final minutes, before Intel's (INTC) upbeat post-close message (validating most everything we've said about the PC industry for months regarding Q3 & Q4). The upside action, particularly as it impacts our relatively well-priced Internet-related stock longs like has been terrific lately; but here again we see preliminary signs of exhaustion, though we prefer to see a couple failing flings before having any compulsion of shorting, even for scalpers (though investment holds continue).

Daily trading. . .correctly dodged a bullet by assuming the late Tuesday shorts wouldn't be in a good position, with risk of a gap-up Wednesday on the heels of the Intel story, which occurred. We took advantage of that, and moved to the short-side at 1135-36, unable to get 1140 in the 2nd half hour (for day, as opposed to macro-traders) even though the Dow pushed back up to around a +55 reading. This was satisfactory, and we kept the stops wide through the balance of the day. (Currently the stop is a breakeven, which may be tightened up Thursday morning. Added shorter term comments regarding daily trading, are always reserved for hotline & DB subscribers only.)

Psychologically. . . .we finally broke the steep ascending trendline, and anticipate nothing more exciting than a rebound to it (if that) before heading lower. Granted many stocks (including lots of ours) aren't participating in this financial-sector led decline, it could broaden out, and in fact be a bit masked by firmer oil (which can impact capitilization intensive Dow stocks) during any early phase of any conflict, though likely would be a minus later, interestingly enough. For now, we'll refer you to last night's technical levels and downside progressive numbers, which remain valid.

In any event, as noted last night all this helped shape-up the pattern call for the pre-Thanksgiving progression to the downside, interspersed with rebounds as generally noted. Keep in mind in fact because of the market's reticence in getting something going to the downside, this pattern of contraction can be pushed-forward well into mid-December overall, with rebounds (today's was an expected likely failing one) around the Thanksgiving Holiday, and then more significantly later on. On top of all this, we started allowing for combat conditions unfolding anytime in the Persian Gulf; with a defiant Iraq apparently still confident the U.S. is bluffing by sending USS Enterprise, or even in a graver tone, suggesting they can absorb a Tomahawk strike, while confident we wouldn't send in manned aircraft. That of course increases the risk that we'd have to do just that.

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In Summary. . . we continue to view this market as high risk, but decided to remain flat overnight on our S&P trading hotline Tues., which enabled us to very nicely dodge the bullet of a gap-up opening on Wednesday, which were, after a second effort, sold into as projected. Again, this is not yet a definitive reversal (they are really fighting it), but it's getting there. Wed. was, by a very precise term, an outside-down day, with the close of 1124.90. By virtue of the closing premium of 523, it wouldn't be hard to have a down opening tomorrow, especially if early Bonds are soft. (An ensuing rally to bring 'em back alive, dominated by strength in Oils, may falter later in the day.)

The McClellan Oscillator posting's eased-down throughout last week's late action, which in fact continued to be the case Monday, with a +142 reading. Tuesday's posting was only +91, so we then had a moderately overbought daily reading, against a more extreme stochastic reading for the short-term. Wednesday's "Mac" posting was +41. The action allowed for a final fling towards the recent peaks, but it became riskier, per last night's remarks, and was sold into. We estimated a couple days before a harder hit, though we expected to get short the S&P into follow-through rallying after the Intel story, and did from 1135-36 in the Dec. S&P. In harmony with the down-up-down call for the week, we are looking for chances of a more aggressive decline later tomorrow and maybe a down-up-down Friday in front of what looks very likely to be a "military weekend".

Just now, at 5:15 p.m., the premium on the S&P in Chicago's Globex session is 393, actually slipping the S&P about 130 from the regular Chicago close of 1124.60; we're short from over 1135, so we have a good 1000 basis point paper gain, on the overnight short from this a.m. (By the way we're going to be atComdex next week; populated by few analysts and many engineers and guys and gals that work in the real world outside of Wall Street "Roadshows"; just how we like it. We'll try to afford Letter readers a few new gems from these gatherings, as in the past.)

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