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The Inger Letter Forecast

January 7, 1999

More optimistic than most strategists . . has been a lot of fun in these past months, especially when some of the most bullish analysts were calling for numbers (now being achieved) as likely to be seen only later in 1999, while we were saying "no, they'd be seen in the 1st Quarter. Most crucially, that was our forecast that the real March S&P number to look for was 1265 and ideally 1270-1275 in the first overall "shot up" in the New Year, which has now occurred. You know our view about S&P 1300, and when we think it will occur. At the same time, it is stimulating to hear stock market skeptics for the past few months now talking about Dow 10,000+, when all the way back in October, at the very moment of the second Fed rate cut, we argued you had to look for a powerful move, maybe even to 10 or 11,000 on the Dow. Remember, that we suggested once you got the broader appearance of the market, and the "confirmed" breakout, that would be nearer at least a short-term finale of this frothy affair, not the beginning of much of anything immediate.

If you want to put an extremely bullish count on this you could view this as "leg 2" up off the October low, then a forecast mid-month consolidation before "leg 3", which at least in theory could equal "leg 1", which if you want to get that excited measures 1390 on the March S&P for "leg 3". Does that sound absurd? Sure. But every time I do one of these, it is eventually seen. Obviously the fundamentals will determine whether such a technical measure for the Spring is feasible or not, but it is far more bullish that anyone I know of is thinking; not that we care about that per se. So, even if we get a good short in the 1300 vicinity (or in a perfect world 1320); there's no way to ascribe importance to it ...yet...or put differently, whether we expect any such short would be a macro-play or not. At this time we're just thrilled the market "fell up" to this forecast higher plateau and savoring the fruits of a 4000 point single two day profitable trade. Clearly the next thing will be sale and then a short, though we don't necessarily want to jump the gun. Within two-to-three days reasonable enough, don't you think?

Some traders and investors, who had a perception of our approach as leaning bearish, probably because of the rather superb (if we say so in our totally humble opinion) identifying of the lengthy distributional top last Spring, and also nailing the precise Senior Averages' July high (the "now famous" Mom's B'day top projected to occur between July 6-15), didn't like our on-a-dime shift to a predominantly bullish strategy literally on that October day, which included an emphatic view to do "no equity shorting" for the balance of the year and into '99, plus simply buying every dip.

Such people (they are not investors, but biased observers) do not understand that we'll often be influenced by strong fundamentals, such as our forecastdebt implosions and even derivatives crisis projected over a year ago, which all came to pass as outlined. Aside from such events, we try to trade from a mostly opinion-neutral basis, which seeks to catch moves, not particularly care in which direction they occur. It's always more fun on the upside, because you can make more money percentage-wise on the upside. However, it is a bit special on the downside, because so few ever catch that, and the ones that do are so often mostly always bearish, which the past few months have again proven we are not. One big difference: we love buying great stocks cheap; besides having fun on the short-side occasionally. Most bears hate stocks, or got so burned somewhere along the line that they seem to have an axe to grind. And they get excited about downside, as do we, but we mostly because downside (no matter how severe) is a buying spot sooner or later. And while the shorts can be sometimes very profitable, we know that in the ultimate we want to buy good stocks coming off a low, typically on a secondary test.

Permabears tend to view all rallies (even this huge one) as bear market rallies, and as we said 3 months ago, this was not a Bear Market rally, and we also said then anyone (most technicians, mechanics and even some strategists) who said it was, would later regret their own words. They regret those words, and amazingly some still proclaim them. We also said it was nonsense then to look at the Advance/Decline Line as that had zero chance of improving until we got into 1999 due to the severe near-meltdown of the '98 Deluge. Of course this will top out, but so what. Look my God where it's topping out! All time highs! An entire new Bull Market has occurred, even if it ended today (Wed.). Very wild stuff indeed; but hey... it's the '90's! A cyclical Bull ended last year on schedule, a wild Bear occurred as forecast, and entire cyclical Bull Market in 90 days. That's life. And it is not over. If I'm right on what this is, the insanity is that we were bullish to a greater extent than the presumed most bullish strategist, and already got our number that (she) thought wouldn't occur until later this year. Ha. Now; how about S&P 1390? (Not just yet; but regular DB and Letter readers know exactly my views about such matters.)

I assure you that real fortunes in the market have historically been made by buying hot sectors in the computer & technology sector (with real businesses), and holding them for years, which just happens to be what we've suggested with the nucleus of The Letter's investments for the past few years. And in most of these we didn't buy them before their business models were known, but simply expressed confidence in them, buying at times others panicked, particularly in '94, 1996, or even '97 and '98, where we tended to add internet infrastructure stocks to the list in a deliberate manner. Our always being net long, and adding shorts at time of extremes, has been the key to preserving asset valuation during the bearish phases, not because we're "bears", but because if your hedges can simply prevent meaningful erosion (or if you're aggressive make bits of money on the downside), you're in decent shape for taking them off (as we did in October), so as to be more clearly exposed to the upside in a strong combined seasonal & structural picture.

Fortunately, the T-Bonds and Dollar Index held key supports on Wednesday, which really were the enabling factors to allow the market to accomplish the historic feats we expected anyway. It's even nifty as Oil rallied, which allowed a serious percentage gain in depressed oil service stocks. On stocks, this was a parabolic above-trend spike; which clearly will be reversed, if but for the short-term. Don't be surprised if you find there is or was (another) short-sale before Thursday's over, as far as our (900.933.GENE) hotline S&P trading. And if you're long 'net stocks; not a bad place to take off a little bit of gains, if not the whole trade. Not at all sure you're looking at the actual top and ideally you're not; but there's no doubt this is becoming stretched-out on an hourly basis, precisely at our projected early Jan. goal; something we absolutely need to point out.

A perspective. . . of our approach is necessary for the fairly large number of new readers who in some cases are still saddled with other advisor's or analyst's habits of trying to give "traffic light" signals, which we think isn't how money is consistently made in the stock market. It is fun to do it with a portion of funds (such as in S&P's or related indexes or options, if one can find selections to do so while not getting creamed by absurd premiums) which is why we simply focus on S&P's. Regular readers know how well our "scaling-in" or "scaling-out" equity approach has done over recent years, and absolutely protected or enhanced capital during both Bear & Bull Markets.

In this strategy, it is also not important if the current forecast Bull Market (which we labeled so in October) does or doesn't justify that label (we think it does), because of a narrow leadership. At the same time, whether stock participation broadens-out in the week's ahead does matter to very great degrees in fact, as it will be impossible to maintain and extend this without broadening out. It is necessary to point this out, as we had argued correctly all Fall that breadth didn't matter, that all the internal negative divergences were irrelevant, or that those waiting for such "confirmation" were dropping the context, as so much damage was done to the list earlier in the year, there was no way that could happen in 1998, in front of first institutional, then retail, tax selling pressures. It is very important now, in the new year, no longer saddled by those restraints. So, again, we're introducing new readers to our way of thinking not only about investing, but when to place value on indicators, and when not to. That's why, as we're fond of saying: this is an art, not science.

Alley Cats

Now, some of "the Streeters" are convinced their living's would be destroyed if they ever shorted again; other of the permabear strategists are continuing to wax negative, or have just shifted to a more bullish stance (after-the-fact), and guess what? At some point you're going to find us short a slew of primarily multinational stocks, though we may toss in a couple Internet Rocket Stocks just for "flavor". And since we're (likely) not going to sell blossoming less-absurdly priced ones, like our InfoSeek (SEEK) and EarthLink (ELNK), we suspect this will set up an effective hedge.

Let's use another example of why you can't just use technical analysis alone, in selling stocks. (Many do, but they usually don't have the stamina to stay aboard the really big moves.) Our work tends to focus on making "core" holdings out of stocks that fundamentally are very compelling. A number of examples could be given, but let's just take one, in this case Comcast (CMCSA). We bought the stock at the bottom of the "information superslideway" off-ramp, along with others like Time Warner (TWX), at around 8 and 19 respectively. Comcast doubled, then came all the way back down to the buy zone a second time, during the 1996 Summer rout that freaked oh so many strategists & quantitative analystsl that we incidentally forecast. We stuck with Comcast; the only way to have played their coming investment from Microsoft (MSFT), the expansion of cellular and cable systems, the acquisition of primarily fiber-optic systems (which peaked our interest at the time), and the then very promising alliance with @home (ATHM). How many other analysts stayed in through all this? And here we are over 60, with the stock working on an eight-fold gain. Today, a stock that might otherwise be viewed "overbought", announced (at Morgan Stanley's technology meeting) the "Comcast Interactive Capital Group", which seeks to invest in dynamic interactive technologies, which obviously implies a focus on connectivity, and Digital TV-PC convergence.

I might suggest we still have no interest in selling this stock, especially as they're now positioned exactly where we think they need to be in this new era. Does that mean Comcast can't drop 20% or even more at some time? Of course not. It means we will look elsewhere for hedges, and plan to stay with this Company. At the time hedges come off, that is when newer investors can buy in if they haven't already during many opportunities this stock gave over the preceding three years.

What about the risk of a new "info-slideway", such as we forecast back around the middle of '93? Newer readers of the DB or the Letter should understand that we view investing as taking place in three stages: conceptual hype, a bust, and then an investment-grade move. We in fact shorted some of the 500-channel hype stocks way back then, and turned around and bought them at the perceived (we were right) bottom of the "slideway". The key to us was actually TCI's (TCOMA) difficulties in making their 500-channel system work, even after the staged demonstration. In fact we decided shortly thereafter that the only early way to "invest" rather than gamble in the sector then, was via GM Hughes (GMH) DirecTV, which we still own from an adjusted cost of around 5. Later, we came in and bought several of the stocks near the bottom of the off-ramp, keeping the two noted here, plus GMH.

That of course takes us to the current mania; which in some ways is similar, and in some isn't. It is in terms of "mania", and it isn't as the technology actuallyworks today and will only get better. We tend to hedge (in hindsight we could and should have bought, but either way worked out well for investors) our more-or-less "assured" winners in the Internet field by shorting the puff & fluff at occasional times. That we haven't even mentioned ideas of shorting stocks in months tells you of course that we're approaching a time that will require at least considering doing just that. We've tended to own not just the ones mentioned above, but particularly Texas Instruments (TXN) & Lucent (LU), viewed as assured indirect winners from all this (cost 20 and 16, respectively). This past year, in the mid-to-upper 20's, we added 3Com (COMS). Sure Cisco Systems (CSCO) would have worked too, but we saw it as more risky, and not quite the compelling value of 3Com. Most analysts panned 3Com; we believed they had pending deals up their sleeves. And they did.

When we bought InfoSeek (SEEK) this year around 15, the Disney (DIS) deal had already been announced. Don't ask me why speculators freaked in our forecast July-August collapse and took this affordable dream Internet stock down by two-thirds, but we were ready to buy it, and did. It is a bit funny, but even more recently (the stock's now around 52) analysts have backburnered it to an extent, which is probably because they turned inappropriately negative last Summer and don't want to admit that decision. Even now, while it will correct when (not if) the 'net bubble is pricked, it has a lot less risk (in our view) than a host of others, and after that maybe even more potential.

Then of course there's Netscape (NSCP), also bought in the 'teens after a break, and now held with every intention to assume the America Online (AOL)shares after this merger is completed. Despite everyone focusing on the synergies between the two, and AOL denying there's any plan to confront Microsoft (MSFT) going forward, we actually think the little-discussed aspect of this deal is Sun Microsystem's (SUNW) role, which may tie the others together with their products, in way that enables other non-computer devices to access email and internet capabilities of AOL.

Strategy Focus

One other thing some newer investors misunderstood about last year, was the repeated caveats (after an initial break) not to do new shorts on the rebounds unless you were hedging longs. This again was a reference to being constantly "net long", and not being bearish for the sake of being bearish. There is rarely a time that one should be bearish for the sake of it; as those types do not understand the long-term requirements of the stock market. There are about two or three times a year when it is important to have some shorts (or conversely Puts) aboard to hedge longs, and to lighten up stocks, even the ones you love, simply because their dollar contribution to portfolios is becoming a highly focused part of your equity. Coming off a low, theirs is no doubt that you only need one or two out of five new stocks bought to hit, and then of course cut the losses (if any) on the others as time goes on. However, for us, those are yearend stocks that are complementing a slew of higher-quality major winners, and that's important. There are "advisors" who recommend focusing only on a single stock that works for you and dumping everything else. We think that's a very dangerous approach in this market, once it stops working, as your goal is total return over a year, well in excess of what you can do in a mutual fund or the Indexes, but not one-trick ponies.

The crowd that focuses on "one trick ponies" might find they're up an investor's alley, without any escape, and have instead hinged their future to a single stock or industry group. That's how one can turn a fine feline collection into a bunch of alley cats, if an investor isn't careful. Conservative with aggressive stocks? That's our motto, and you know it works. As everyone gets crazy on the upside, you start scaling-out (today wasn't a bad time, even if a hair early) a bit and gradually get a tad more defensive. Last October, with most people still defensive, we turned our approach on a dime, but became gradually more optimistic, with more stocks added or old ones increased, as it was progressively clearer that we would get a forecast move to new all time highs; now reached.

Daily trading….(specifics and parameters reserved as usual for subscribers only).

After making money on the long & short side (nice 2000 points) Monday, we stepped back up to the plate in that portion of our daily activities aimed at S&Ptrading, by buying Tuesday's first moments at the 1240 +/- area of the March contract. That trade was held long throughout Tues., and Wednesday. Now, while we were using a round number five point trailing mental stop (as is always the approach), and the market did hit 1285 in the late going before an expected fade, the touching of 1280 didn't happen until very late in the day, thus little time would exist to in fact exit and/or reverse direction for the trade. On the other hand, being realistic, very few S&P traders hardly ever hold overnight so we have to assume (given the forecast of a late fade in any event) that many of you were fortunate enough to have actually yanked 4000 points or more out! That's because we were calling for a fade anyway, and the prior night emphatically expected more rally.

So, those who did exit and take an extraordinary 4000 basis points gain on a single 2-day trade; fine by us, or any yardstick I can think of. If you're (by any chance) also short, well; you're ahead actually for now, but we generally suggest reversing either in early a.m. weakness for a rebound.

Fact, Folklore, and Frogs

Finally. .yesterday we did expect intraday traders to take some steam out of the market after the T-Bond and Dollar closes, then try to bring it back late in the day. They did all that, but not quite by enough to give us new highs in DJIA. This then becomes a goal for Wednesday, which ideally "would be an up-down-up session, with of course some risk of a late fade, especially if the highs are made too soon and without struggle". That's exactly what happened of course, with the triple historic highs in all key indexes, including the Dow Industrials, S&P 500 and the Nasdaq.

The predictive value of strong January starts is the stuff Wall Street folklore has been made of. In 1994, for instance, you had a good January, and run-up into February, with a fairly well-known controversy at the beginning of that month between a certain lady (quantitative analyst) and me, as regards opinions of that year. We thought it would be quite tough, and that the predictive fact of a strong January would not suffice to hold up the market, and we were right. Late that year we got a "frog or W" bottom formation, not dissimilar from what we had in the Fall of 1998, and that of course led to the explosive ensuing market action, as it did in the more recent example. All of you are of course well aware of how frequently we've pointed to the "frog or W" pattern this Fall, as something that had to be respected as potentially leading to a very powerful advance, which it did of course, after a bit of help from a concerned Fed, which we also thought increased odds of it succeeding exponentially.

Now there's a new "frog" in town; and that's the potential "W bottom" developing in the overall CRB commodity index. It's not fully developed, yet, but it threatens to surprise investors mostly of the low-interest rosy scenario ilk, considerably. First of all, it's not a risk yet because markets very frequently see slightly higher commodity prices this time of year; second of all Oil has been absurdly cheap, which it can't remain if Asia is indeed in the formative stages of coming back; and third; we analytically don't see higher commodity prices as a negative, but actually as slightly supportive to cyclical stock earnings recoveries, and in fact ultimately a psychological boost to all markets, as it would be a quantifiable sign that considerably lower commodity prices (deflation) is not on tap. We made a big point last year that deflation is bearish; inflation is bearish and that only equilibrium is bullish; in at least a half dozen Letters. However, a short-term increase in key commodity prices can argue that at least we're not going into a deeper (and dangerous) big new deflation (or Depression beyond those parts of the world already impacted).

So from a viewpoint of that perspective, higher commodity prices might be viewed as bullish. As this probably will not be the case for long in the day-to-day world, even though we think as noted that it's a long-term plus, we'll have to suggest that much of the world will react negatively to any suggestion that interest rates will move up rather than down, or that prices levels are increasing. In actuality, increasing prices are a normal function of an advancing or maturing economic cycle, and it is only because of the Asian Contagion that we got the unprecedented period of low prices in this country, in terms of goods and parts. Thus, a change in that condition, while favorable for the world overall, will not for long be received that way in the U.S. financial markets, as it was in today's exuberance. This is thus an advance warning of that break. Now, it is possible that we're just seeing a temporary bubble-up in commodity prices, particularly ag prices. And if so, the low-interest rate, disinflationary perfect world game can continue, as we have forecast it would from our indicated manic-depressive low points of 1998. However, if not, and if the Euro regains early stability (we forecast the first round of governmental supports would give way, and they did), we can then envision a scenario which undoes much of the upside in several markets seen today.

Of course this isn't all going to happen overnight; it might be an ebb and flow over several weeks especially becoming troublesome after the newly corralled domestic reinvestment monies have been fully put to work, just as we forecast would be the case as they were captured and tossed into the market by money managers who have no particular concern other than not being left by the wayside in performance games, or being under-invested in a perceived runaway bull market.

The other night's point: most on the Street seem to feel that a new Dow high would unleash an explosive push to 10 or 11,000, and we hope they're right; after all we're not against such a development, and are still long with no new equity short-sales for several months, and plenty of late '98 new longs to boot. It may happen; technically we made the argument, and did in earlier 1998 commentaries, in terms of measured moves, particularly if we could hold the trend intact going into the new year, which we did. But at the same time this newly "kindled" optimism comes at the time daily stochastic (and other indicators) are pretty overbought, albeit not jammed, while weeklies are essentially worthy of the same designation. Our thinking is that we got a sort of "last hurrah" kind of push, now a reversal worthy of the name, then up again, then a harder down. The surprise (as noted in last night's DB) would then be any renewed push-up into early February.

Economic News & Releases: and Bits & Bytes. . . begins by noting that, again, most of The Inger Letter's stocks went up, not down, in all sessions this week; particularly the core longs. Smaller-caps were truly a mixed bag but that's acceptable, as we knew the money would be focused on doing what it had to, which of course was to push the Dow Industrials over the top, get the publicity, as they joined the other key Averages that have already been there repeatedly over the past few weeks. (the balance of commentary is -per usual- reserved for subscribers.)

In Summary. . . tonight's McClellan Oscillator posting is +132, up from +101, after a nominal plus 3 change the prior day. It was our view that the improving breadth could take the "Mc" into the +130 area or so. Funny; that is exactly what happened. At 150 to 200, things become dicey.

It's a pleasure yet again to get the new market year off to a good start with 3 consecutive days totaling many thousands of points gain in the (900.933.GENE)S&P hotline trading, and also in most equity investments. Tomorrow? (Thursday: obviously, an early sell-off, then up-down-up, with the second up crucial, and in fact more likely to fade than today's, though it did in the final moments.) We may trade it more aggressively, as opposed to just staying long all day, as we have during this most recent incredible move.

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