first majestic silver

Lockout?

January 5, 2001

Halleluiah . . . aptly describes Wall Street's prevailing mood, and our own for that matter, in the wake of the Federal Reserve finally succumbing to the wide-ranging pressures to move (with our own minimal humble contribution in that regard), before the long-forecast economic slide turned into risks of something more secular, rather than just the cyclical drop that we have presumed was already 'in the cards' for the bulk of the past two years, interspersed by rallies as many players fought not only the Fed while the rates were ramping-up, but the market internals, which were telegraphing trouble commencing with a primary top indicated back in April of 1998.

As noted last evening the Advance/Decline Line in this market, was notlooking shabby, and we indicated (a rare moment, essentially similar to the inverse occurring before Labor Day) that we'd not been able to measure any further short-term downside targets for the Senior Averages; thus Wednesday was a session with all the characteristics we ideally required, to feature a turn from down-to-up, as stated in Tuesday's remarks. We continue to believe that would have occurred anyway (and was firming towards the lunch hour's end again incidentally), though certainly not with the ferocity of this explosive move, which is decisive and meaningful.

Dow Jones Industrials, to the chagrin of those trying to make a bearish case out of this lately in fact were positioned for what we described as first a move to 10,700-800, and then a 'hiccup' as the New Year started, followed by the desired pump over 11,000, which is currently underway. It is obvious why the timing required a turn here; not only because the other Indexes and Averages were dangerously postured to again challenge last month's lows, but because if Senior Averages were to pull-off this lead, without the Dow having to drop into the 9,000's (and others even worse proportionately of course), you needed to reverse the negativity which kicked-off the year, and in a way that would catch the bears by the shortest hairs possible, thus going for maximum impact.

Our suspicion last night was that we would turn with a 'test' of the prior week's lows, but ideally it would not need to be a lower-low (and if so nominally, which was the case in a couple Indexes). In any event the advance call was for Wednesday to ideally take-out the first highs heading up. It was an understatement of course, but we feel honored to have caught it, and hope our thoughts in recent days helped investors navigate the treacherous waters of despair and negativity, which we thought had to be resolved to the upside almost irrespective of whatever came down the line.

Distinguishing Ceilings From Floors

The inevitability of a rate-cut was already telegraphed for weeks (one reason for nobody to have been structurally short this stock market for sometime, regardless of day-to-day action beyond a few scalps here and there, but certainly not in common stocks, which would be ludicrous after a huge decline); that's why the Federal Reserve had to time the move (easy conclusion after those awful NAPM readings we discussed last night) to hopefully restore confidence before the reports from many companies, which will include poor earnings, and many short-fall warnings. These will still create brief knee-jerk reactions, but generally will be cushioned by the decisions taken today. We're not going to debate whether this is going to turn-out to be a "W bottom" or soupbowl-style completion pattern, assessing this on an ongoing basis, of course, as it unfolds in weeks ahead.

Of course T-Bonds have been telegraphing this coming for just over one year (really), and had to encounter technical profit-taking once news hit, as did some overbought or interest-rate sensitive areas, like many Utilities. And, as discussed last night, T-Bills of a short-to-intermediate nature, were already signaling their willingness to join the long-ongoing rate decline of bonds, indicating just another reason to anticipate sizable cuts (yes, plural, and not finished) by the Fed. When the Fed moves direction, a policy they stated unmistakably last month, but didn't sufficient effect with the lack of actual movement, they almost never do so with a single move, but initiate a series. In a sense this means that there will be periodic (or new-based) declines, but that the primary trend in equities is now up (and if not now, they'll do what's needed to ensure that occurs), and that as monies complete a partial exit out of T-Bonds and other defensive sectors into growth stocks for example, you'll get a 'smoothing' that allows the already-forecast decimation of an already-aging Inverted Yield Curve, which will lower home mortgage and other key consumer-sensitive rates, for basically all of the rest of the year (from a trending standpoint). That's why Oil firmed just a bit as it implies demand indeed is lower, but eventually will increase, absent a depressing economy.

In such a scenario, we have gone to lengthy pains to emphasize why (in our opinion) the ceiling of the market was about 2 ½ years old, and that the recent promulgation of bears was absurdly after-the-fact, regardless of the difficult (even we) had with the post-Election wild market traumas (though the last few weeks have been much more in-harmony with the daily basis expectations). That is one reason for the occasional comments about the 1928-'29 comparison, because there was a deterioration in the market while the Averages went on-up to their historic pre-crash highs. The thought here has centered around the comparison with the post-LTCM rally being a narrowly based upside affair, that while accompanied with a vulnerable 'bubble, was not really a move to a new high, anymore than a move over Dow 11,000 now reflects the real internal market condition.

If, as suspected, the elongated and ferocious decline this Fall was not the start of a new bear (in our view it was not), but instead was thecompletion, then we were working on constructing sort of a 'floor' under the market, even though at times it looked like termites had eaten the stringers of support, with an awful lot of creaking most recently as investors took baby-steps back in. With no hesitation of avoiding margin leverage ('cause that's basically nuts and gambling stuff), we're proud to have said we did personally recommit additional funds on the last day of the year, aided somewhat by the dutiful conservatism from so many strategists, who either weren't to be seen, or were advocating the very basic materials, foodstuffs, and drugs that we warned were too pricey.

It is also our opinion that the Fed's early move does not mean the economy is too late to rescue, but rather that the Fed Chairman just recaptured control (political-economic reserved comment).

Lockout?

That (reserved discussion from ingerletter.com) means that while skeptics will view (and there's likely something to that from time-to-time) a solid base as taking forever to develop, and will be skeptical of all short-term rallies, part of that's likely they're becoming accustomed to downside squalls, and part of that is probably because they're at minimum under-invested (some of the mutual funds are, as they await the public reaction to yearend or summary statements), and at maximum still in a bearish mode. That should provide for interest support of pullback efforts.

In a sense, such as today's action which displayed only one post-news pullback, and that was in no-time recovered, markets may resist giving those who failed to invest during the last vestiges of the downside catharsis, the opportunity to get those prices in the near future. Candidly, if this advance is for real, and not a one-day wonder, then you really should make institutional manager types who were cynically comfortable about being out or defensive, pay-up to get back in. Now in all candor also, many techs are not really 'cheap' relative to earnings drops; but with the fact of a shift in monetary policy (the increasing emphasis here recently), they may not be expensive as it relates to 2002 earnings, which is what the markets will increasingly focus upon. So, lockout try, or not; while it may take a couple pullbacks to affirm the trend turnaround in the S&P and NDX, we think (subject to revision if necessary, as is the case and should be the case in every market) the probabilities are that the bottom remains behind, that the Fed moved to test it (in the S&P) at precisely the right time technically, and that whether they have a mandate to move markets or do not (they do not, but let's not quibble) is less important that a simple axiom: 'don't fight the Fed'.

Daily action . . . over the last several days, saw these Daily Briefings emphatically pointing to a need to shore-up confidence, as the economy was observed for the last few months as basically falling off the proverbial cliff. While we knew there was a 'glass half-full versus half-empty' argument, and thus a very fluid situation regarding which would come first (the poor earnings or an obvious rate cut of some proportion, basically signaled for weeks already), we remained fairly flexible in our short-term guideline efforts, interestingly until today, when we reversed from a few morning scalps (including shorts not just longs), which were generally successful by the way, to a 'position long' as we described it, at 'noon' ET, on the (900.933.GENE) hotline, interestingly just barely over an hour before the major Fed move. We were already ahead about 1400 on the March S&P at the time, before the long from 1291, that was intended as a 'bet' on afternoon rise probabilities; the understatement of the year evidently.

Not only did we thus capture the entire (thus the halleluiah) -and near historic- single upside gain in the March S&P, from 1291 through the close of the day at 1359.20, and still retained, but our admonition to switch from selling-the-rallies to buying-the-dips, as a primary structural directive in respect to our way of thinking about the current market in recent days, was amply vindicated. For sure, the despair was just what we forecast with respect to the initial new-year 'hiccup' Tuesday; an early-year (belch) hook to catch bears, and then take markets well-above 2001's initially poor opening. And by the way today's Nasdaq 100 (NDX) soared almost 400 points, a record rise, on huge record volume. (Balance of daily, Technicaland other structural comments are reserved.)

Finally . . . just as we had no further short-term upside measures in-front of Labor Day, and while of course acknowledging this whole affair has taken longer in time (albeit generally not price for the Averages, which was actually a bit disconcerting for down-the-road), we noted late Tuesday, that we had no particular remaining downside measures from there, on the short-term. That may not have meant a lot to some, but it did to us, as "it usually means we're not far away from a time that this turns, and goes the other way", as noted Tuesday night. In the case of March S&P, what we'd wanted to see was an ability to first move over something like 1305-10, hold together on the ensuing efforts to sell it off, and then take-out that area heading higher. That of course more than occurred given the news, but was being attempted anyway. Wednesday was expected to start in fact with a false rally, a shot down, then turn, which is what we leaned toward and got in spades.

Thursday should start higher, see an effort at profit-taking, but not a whole lot, then head higher. Of course we will become short-term overbought on a short-term, so chasing strength is dubious, though the real test is not how high we get here, but how well we act when put on the defensive. For now, view S&P resistance around (reserved), as previously targeted for a January rally after the first fake-out, and then after a pause, which should hold (reserve) ideally, think about what we discussed last week; subsequent run-ups against an old 'congestion zone' (details reserved).

Bits & Bytes; (reserved section); though touches on comments aboutCisco (CSCO); on EMC (EMC); Sun Microsystems (SUNW); Rambus (RMBS); LightPath (LPTH); Metricom (MCOM); Intel (INTC) and AT&T (T) tonight. (Comments are reserved, and just listing these should not be construed as buy-sell-hold-or short on any; though readers know new entries & looked-for turns.)

In summary . . the recent focus was the shift of the pressure to the biggest of the IT companies (which were down from their highs, but not devastated), to some old-line blue-chips; a warning of the need for insipient reversal action, whether natural or Fed-augmented, to occur. Interestingly it was our comment summing up last night, that; "we would not be willing to be short overnight in a climate that could get the Fed's attention any given morning; as that leadership remains as we have suggested; stubborn, reactive and capable of being swayed only by a confluence of events" … well it was right after NY lunchtime, but sure glad we were on the lookout for early Fed action.

As of 8:30 p.m. ET, the S&P premium has firmed slightly; at around 1524, with futures up in the plus 300 area from the 1359.20 regular close (as of posting time around 1362 or so). Implication is that traders expect early upside again, but doesn't mean there won't be a (relatively minor sort of) effort to sell-off thereafter. It's the subsequent rally potential we are particularly interested in, though of course nothing like Wednesday's. Remember, the majority of big moves are captured via one being in ahead of a move where possible, which is why, in equities, scaling-in when few want to own stocks, and why, sometimes, you take a long-side position. We had no particular new reason to expect today to be the day for the Fed to move, though it was interestingly on the Tuesday night agenda to become alert for, and we did get stubborn about being long the March S&P from 1291. The (900.933.GENE) hotline's still long as we move into Thursday's early action.


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