first majestic silver

Maestro You Say

April 19, 2001

Couldn't have scripted it better. . . said one reader of today; that in reference to the Fed's rate-cut timing we presume, rather than our (interesting) listing of 'Wednesday' as a day to be on 'Fed Watch' (per last weekend's economic releases as a speculation on our part). The move was surprising to the extent that recent data such as Industrial Production, wasn't really weak enough to make a move compelling before the next meeting; but nevertheless we placed a great emphasis on the Fed in our discussions just Tuesday night, probably because we already detected some sort of efforts afoot; that's why we described the Fed as moving 'silently but aggressively'.

Though we've had this idea of an inter-meeting cut in our minds for a couple of weeks overall, one observation we trotted-out last month here, was the idea that if our rally was able to get into the low-1200's of the June S&P, and somehow find the Fed just smart enough to respond to that at an 'inflection point', the timing would be perfect. It is just what they did (and no, we don't know if Mr. G reads our DB, but do believe he watches charts too), and is an absolutely perfectly-timed effort to bust-out resistance, after which at some point the market can certainly settle back, but not too much, as is already our position. Last night we speculated that it made no sense to chase prices, as March was one of the best buying opportunities in ages, and presumed that any of the most mechanical technicians around, just had to be bullish for a couple of weeks.

Clearly, we could see the 'commercial shorts' trying to work-off those bearish position trades, and that left them exposed, which is why we alluded specifically to that in last night's remarks, which suggested that's when you can get an outsized rally resulting. Certainly we couldn't 'know' this was coming, but we're both pleased to have called a 'Fed Watch' alert a couple times during our forecast multi-week uptrend, including for the Wednesday session alone for this week (gee, just a feeling, plus an emphasis on the LEI numbers; knowing how the Fed can respond to those), and very pleased to have called for more upside, warned against getting negative, and being long ahead of the move, from a macro structural standpoint, as well as in the intraday guidelines.

As it developed we didn't believe this would be one of those 'buy the rumor sell into the news' scenarios, for several reasons: 1) there was no rumor other than our own; 2) the Yield Curve was still a bit bizarre, meaning 'the boys' weren't ready for this; 3) there were all those poor souls on the short-side (wouldn't listen would they; as their time has been past for over a month now, and the curiousity they were even starting rumors a few weeks ago about defaults etc., with no downside follow-through, was a good reason to believe they were about done with their overstayed negativity as we labeled it last month), and that crowd needed to cover; 4) even some specialists are likely feeding out stock to enable the upside, which means they're increasing shorts when they might not want to, thus they either get a shakeout to close those positions or this market really nudges them out of position into strength, which could conclude it on an hourly basis shortly thereafter, but probably not much more; and finally, 5) it was our view that poor corporate results were being well-absorbed (before today), we would note, and we even thought that IBM (IBM), per Tuesday's comments, would be o.k., which it was (with a near 7 point gain today, and more in Instinet trading tonight).

Of course there are several other reasons we could explore, the most basic one of which was 'technical', and evident to all who would look at the tape, rather than listen to the bearish banter of some pundits, many of which got belatedly negative around a very challenging low point last month, that wasn't easy for anyone (ourselves too) but we weren't about to address a beaten-down market, where all our work pointed up at the time, by joining the herd instinct to get defensive after the selling was old history.

We also believed that some of the very debt and derivatives concerns pointed to here and elsewhere were correct, but the interpretations of that being negative were not; a prime reason we felt the Fed was on our side in this, and would come through in time again. We believed fervently (and often said so) that they overstayed their tightening, and that they set-the-stage for the entire unprecedented combination by virtue of the excess profligacy ahead of the Y2k transition, which had a very lengthy hangover. As we did not believe the world was going to come to an end on January 1, 2000, we'd already warned that what they were doing would contribute to excess speculation, as the market headed towards a bust, and correction of the inventory cycle, before a low (that was not deeper in price for the Senior Averages, but sure took a bit longer aside from the Dow Industrials) could be cemented, with 2001 being time for consolidation and preparation for the bull market expansion of 2002-'03, and ideally beyond that.

In that respect, of course, individual stocks made their lows either last year or in this, and not everything survives (especially in NASDAQ), which is why diversification will always be a prime requisite in such situations, which fortunately don't often rival this past period of time. As for the Nasdaq 100 (NDX), we thought it would follow the lead of the Semiconductor Index (SOX), and it did. Both are fairly wild, marching by our outlined numbers, and neither has completed this move yet, in our opinion. Pauses of course will occur; buying into strength now anticipates nothing, as we observed in the remarks last night (because there was ample opportunity to do so while the shrill bear sirens were being squawked ages after they could have technically been squelched), and there is another reason (besides anticipating a better economy next year) too.

That is to also keep in mind that this Fed rate cut is the 4th in a series; with no reason not to expect the Fed to cut further if they feel the need to do so. Additionally they cut the Discount Rate, which is probably more important than the Fed Funds cut in this situation. The Fed is of course worried about the consumer; worried about business; probably figured-out their own (though they'll never say so) contribution to the mess; and aware of how this economic ratchet-down could get out-of-hand if they didn't get to continue the trend. So, though there's no single seminal event like the LTCM mess to sink one's bullish teeth into (we turned dramatically from bear to bull on that day), it was nevertheless evidentiary to us that the Fed needed to continue the trending ease we've discussed; again just why we called it 'silent but aggressive'. Not so silent now.

As expansive monetary policy required, the underpinnings of the Nation are being at least moderately shored-up; which means more than the forthcoming Tax Cut (that also helps somewhat); and combined with the tempered mood of consumers that will follow the realization of the Fed on their side (increasingly), we'll cushion the slowing that is (and should be) bothering the Fed, setting the stage for a gradual turnaround, in the economy, following the lead of the stock market, which bottomed last month in our opinion (as stated then as the probability, without waiting for anything like today).

Hence, while it took 4 rate hikes to really 'bust the market', we thought it might take a 4-pronged cut series to 'prop the market' in a sustainable way; though certainly this is going to be fought from time-to-time. In our opinion the bears lost the war last month, because the market was telling us they were supposed to, and though they'll win one or two short-term battles (in the weeks and months ahead), again; they lost the war. If one is a permabear, fine; they won last year's war; but they were supposed to. This is a new ballgame; you had timeline overruns maing everyone nervous as to whether all normal factors were at work. Some weren't for awhile, and are now (the Fed's lag that is finally being compensated for; that was a rather specific expectation here). Others in aspects that range from busted dot.coms to over-leveraged telecoms are individual in nature, and many were not expected to survive, at least not in the former perceived glory of their founders. Still others, via merger or dumb luck, will muddle through this, particularly where they're soberly (in time) contracted expenditures so as to survive it.

Technically . . . we've already hit our target for the short-term move, and now it's one day at a time as far as very short-term moves are concerned. The goal from a 'selling climax' briefly into sub-1100 territory for the June S&P was to rebound to the lower or slightly higher levels in the 1200's. Tuesday we hinted at higher measures pointing to something like 1250-1280; though that didn't have to be attained all in one day. As it has, and despite having captured it, we continue to believe the 1280 (or just shy of it) resistance will be overcome, though not in one fell swoop (our thinking is reserved). In the interim, floor traders really don't want an instant extension here; though they may want higher levels later-on; so what is likely on tap will be some sort of mark-'em-down drop (ideally Thursday morning) before you put-'em-up again to the higher levels (that we speculated about for readers).

Balance of Technicals reserved; Daily Action; Bit & Bytes, Economic News; ditto. (If you would like to see a full Daily Briefing, or an Inger Letter, we invite you to visit our web site, where very recent sample issues are newly provided.)

Anyway it all happened, on top of the multi-thousands of theoretical points accrued, most frequently on the long side since we identified the break below June S&P 1100 last month as a 'selling climax'. We found ourselves in a long intraday Wed morning at around the June S&P 1217 level, with (by advance early morning outline) the idea of moving to a fixed-mental stop (rather than trailing) at 10:25 a.m. ET; with the point being to just stay there from then on. That's how the (900.933.GENE) hotline was so fortunate as to be long in-front of the Fed rate cut by about 45 minutes; and ongoing.

(Comments on 'breakaway gap' meaning and other factors, is reserved for readers; as are remarks on the Fed, and the history of rates miscues, that must sober them.)

Overall… in recent weeks, we've talked of how it takes 'confirmation' of very negative conditions, and contracted supply, to basically initiate the general exhaustion that we already noted (from IT auctions etc.) of inventory for some weeks now, which almost ensured the subsequent recovery; not to mention the other structural factors in place.

For a month we had stocks tentatively, then decisively ignoring bad news; bullish said we. For sure, only now there's greater fear among the permabears (some of whom have incredibly ridden short positions all the way up of late) that this isn't failing soon enough for them. That was called to spike markets just enough to freak such types, and prepare the way so then the market can have a pullback. However that pullback is not likely the commencement of another leg down in a bear market; just corrective price behavior before heading higher; maybe the lower-to-middle (speculative target). (Comments on minimal chances of lasting decline.) Foreign considerations of course are trotted-out by some; not a worry (actually we're their best hope for now). It is also a concern in some quarters about the Dollar; that too isn't a meaningful risk just now.

Tuesday we observed that If IBM (IBM) is able to make their numbers (and we had a sneaking suspicion they would do just that, and did), it left-open opportunity for short sellers to be filleted, which we projected to be the mirror-image of what occurred to bulls for a long-while earlier this year. Again, commercials are rarely wrong; but when they get caught, implications tend to be huge; some big rallies start; and you see this. (By the way, including tonight's aftermarket, IBM is up something like 11 points now. I also emphasize Hewlett Packard's (HWP) comments about a low unfolding, which is a further factor, on top of Intel (INTC) and Texas Instruments (TXN), for our views.)

Before this week calling for a 'silent but aggressive Fed' to ideally move when S&P resistance in the 1200's was reached, we continued to lean for successful breach of resistance, a pause, and then another hard rally. Commercials are still heavily short; intransigent bears will increase pressure on a 'buy spike' (by selling into it I suspect), and because the Fed, rather than being obvious, (said we Tuesday) silently was as a matter of fact moving to achieve the responsibility they're charged to do (at least they think so; though we won't get into mandates). That doesn't mean things will go back to the halcyon days of parts of the '90's; nor should they, but evidence of both a stock market low preceding a forthcoming economic low are building almost exponentially.

Tuesday we observed again that the bottom's probably behind us, but only a nervous bear or frenetic optimist would initiate buying into or after upside 'confirmations'. That makes little more sense than anyone who idiotically sold or got sell-signals in mid-March (which was a wonderful time to buy stocks), on the downside 'confirmations' that typically occur just before or accompanying bottoms, while the 'affirmations' of strength coming just about now are the types of blow-offs that (just for the short-term) that could be associated with a spike of the sort that is sold into. However, because stocks are ignoring bad news; because certain resistance levels we outlined have in fact been run-through (very bullish); because of the heavy sidelined cash that missed the boat; because there are still too many short-sellers around; because of the capital markets that have been effectively closed all year (we think that's a reason 'the boys' want this to succeed; after all a large chunk of the industry does derive their income from investment banking these days, more so than brokerage, so they care heavily about floating some shares more than they do just interest rates, but won't say); and because the Yield Curve variations argued to us for weeks, a continuing or complex bottom (argued for a couple months, and it's not always been fun) that precedes for all practical purposes what could be a most pleasant economic condition in 2002-'03.

So here we are; the 4th largest NASDAQ rally ever; the 3rd largest DJIA point gain of all time, and an optimistic stance here (because while lamenting what preceded, you can only look at the present and future every day and every week) dating from March with a (fingers crossed at times) selling climax and secondary test; but in any event a belief that ideally that should have done it. So far it appears it certainly did, with DJIA pulling the rest of the market up, in ways that emphasize what we called 'upside risk', not downside potential. Repeatedly emphasizing that if there was an 'accident', it was likely to be on the upside, we are delighted that there remain no shortage of skeptics.

Bits & Bytes . . does not discuss individual stocks in the Letter's list beyond allowing visitors to know which ones typify those that may appear in our daily DB discussions. Selections occur in the Letter; and if there's merit, may be discussed in the DB. In the Wednesday night report, we touched on Hewlett Packard (HWP); Intel (INTC); a rise in Microsoft (MSFT); Dell (DELL); Analog Devices (ADI) (working with Intel we might note); AOL Time Warner (AOL); Micron (MU); little Nanometrics (NANO); Nokia (NOK); Sony (SNE); Tyco (TYC); Digital Lightwave (DIGL); Apple (AAPL); LightPath (LPTH); Compaq (CPQ) and Metricom (MCOM). (Mention here should be recognition only; so does not reflect whether we see any as buys, sells or holds.)

In summary. . . as projected, hourly and daily moving average declining trends, were handily penetrated in the prior two weeks, there was reasonable continuation calls in-front of today's news, for the move to be still ongoing; though interestingly we had the specific day of Wednesday as a 'Fed Watch' per our report last weekend. We are still circumspect about chasing our own forecast breakout, because we don't need to for sure, but also despite the technical 'confirmations' that have roused the world tonight.

Last evening, the Nasdaq 100 (NDX) futures were actually up their limit and pointing to higher numbers; we're happy to announce that a very favorable aftermarket exists tonight as well; though we wouldn't be shocked if there's some intraday selling (even of structural necessity) after the initial upward phase Thursday. However, beware any effort to make it appear to be an up-to-down reversal, because will not stick, at least that's our view. So while the best of the short-term projected move is behind, overall we're going to work higher; in what was repeatedly noted the best time for just this. At the same time there are no illusions about capital spending restraints, about some bit of additional time to work-through the overhangs of the past year in many sectors for sure; but at the same time the stock market is appropriately following the lead of rate and timelines, as they have been telling us all along that last month turned this up.

McClellan Oscillator data continues improving; and currently is working higher near the +103 level for the NYSE and about +60 for the NASDAQ (after a favorable and a nominal +4 change we might note). We expected both markets to work higher over time, with only periodic corrections along the way, and that continues for now.

At this time we are long June S&P guidelines, which recognizes that many players of course never hold overnight; and we're simply representing our continuing optimism, at least for early action as we read it. With expectations of more upside into nominal Expiration to be considered too, we are thinking something like up-down-up, but may find the first rally better than the second (as far as Thursday is concerned). Really will not matter for investors, but is something to consider as we approach the S&P action. For investors, recession risk isn't eliminated, but the importance of that to the market is clearly reduced, by the action of stocks well before Wednesday's news, and as we bridge the gap to anticipate something further on the upside; though short-term goals are now attained (though we have no objection to more). If we get synchronized ease from Europe, that will not only help the Dollar's stability, but ensure general recovery.

As of 8:00 p.m. S&P premium's high, around 1564, with futures around 1253.80; that is about 700 higher than the regular 1246.20 close today. We anticipated and got a turnaround Tuesday scenario; and every bit as much as we wanted from Wednesday of course. We are looking for more upside, but let's not be greedy with the masses of course; and allow for the market to ebb-and-flow in a fairly robust structural manner. By the way, as Thursday opens, Hong Kong has cut rates there by one-half point too.

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