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Market Punches & Counterpunches

July 28, 2000

Was Wednesday surprising? Not really for several reasons; including what already was clearly struggling rally behavior during the poor excuse for a turnaround on Tuesday, and air pockets so visible in many stocks, including some that in recent sessions had met their earnings goals. First reaction is to say, oh that's what happens in a bear market, and that's true, but not necessarily at this point what one is looking at. That may be particularly so with a seasonally common pullback ahead of nervousness regarding August, and of course the ECI (Employment Cost Index) report in the morning; but it's not the first time this year we've seen such behavior. And unless one has a clear conviction that the Nation's moving into recession (very hard to discern something severe beyond the soft landing; the Fed's desired condition), such "good news" selling isn't so unusual.

Yes, this is a tough question; witness our remarks last night about the Fed Chairman talking of a "recovery", almost in the same breath as he spoke of the "longest uninterrupted prosperity". So, unless you believe he's still targeting the stock market (spell that NASDAQ), which he denies, we find it difficult to imagine what "recovery" he's talking about, unless it's the market, or the slowing in the economy we've discerned for months (and forecast for this year's first half primarily), while holding out optimism that the second half and next year will be better, if not upside barnburners.

Keep in mind we've seen numerous occasions where key stocks were downgraded near lows, or stocks that some continued to argue would go lower (like major semiconductors); instead looked at the breakdowns, and just about when it appeared they'd "confirm" weakness, turned around in a snappy rally, outside of those related to the cellular industry, which we've warned of for awhile. (Believe it or not we thought the spin-off of AWE reflected worries that emissions concerns would hurt handset sales, amidst microwave clouds, until likely next generations of lower-emitting sets. Nokia and Erickkson were named early this week as potentially vulnerable to the spreading spill.)

We definitely don't want to lose objectivity about the current decline; yes a bit sharper than what we ideally wanted to see from the second of two expected July declines (the first early; a second after the breakout, which was achieved barely two weeks ago, and expected likely to be "faded" from the September S&P 1520-30 target area, before anything higher could become realistic; and yes short-term measures on breaks under the 1480 SPU support was to slightly over 1450.)

Now, meanwhile, the market had to contend with some non-recurring events in the S&P today, though that's not sufficient to describe the entire session of course. When you allow for the shifts necessary to adjust Index Funds to the addition of JDS Uniphase (JDSU) that we described last night, it took a lot of money out of components of the S&P in the late going. Is this an argument for more coming out in the morning? Not really, beyond emotional follow-through to today's drop. (And as a matter of fact JDSU reported good results and an excellent forecast after the close, to see the shares down 5 on Instinet, which reflects more good news profit-taking as well as those initial sales by any who waited for buying from Index managers; which should be completed.) In any event, while we don't want to overemphasize the impact JDSU had on the market, we do in fact want to note how, primarily the Dow had divergence with respect to a downside acceleration, while the other markets eased, but did not tank proportionately to the extent the DJIA did.

In any event; what we're thinking about is yet-another comeback effort tomorrow afternoon, with no particular confidence as to how sustainable it will be. However, it would not surprise us with a slew of new bears around, if the market actually finished on the upside Thursday. Generally, we look at the individual stock action, the monetary situation, and the patterns, and see for sure how borderline this action is. While extremely choppy in recent days to trade effectively (for anyone of any intraday persuasion), it is a market that reached upside targets and then "faded", and did so in a rather serendipitous way that took-out short-term supports without the kind of breakdowns in the Senior Averages that makes this look like the real McCoy on the downside, though it did find its way to weaken after every support noted in recent days was taken-out, and it did reveal limits of liquidity, by virtue of the money having to come out of one stock every time a manager bought another. But again that's the kind of tepid behavior that frequently characterizes July's second ½.

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And with respect to the Semiconductor Index (SOX), which we've selectively commented about (as regards different perspectives for varying stocks and types of chips in the sector), we'd watch (reserved forward levels). No, it is not to say they aren't going down; this is not news. But it is to emphasize that while most that are defending the sector focus on "communications" (read; cell phones), that just happens to be the portion of the industry we have repeatedly warned about, and initially early this Summer, not only recently. Now, what we dispute is the prevailing thinking that the greater risk is in computer chips; we disagree in that argument or lumping all together.

. . . . . . Now, while the financial press dwells on sentiment as so optimistic (data from the highs), some information, like Put/Calls and stochastic readings, are working towards levels normally associated with downside exhaustion, if even for the short-term. Further, while investors bemoan the chances of some big Dow components impacted more than others by the economic slowing; that's actually an opportunity for a positive divergence, and not in the DJIA stocks primarily, but interestingly (though it will take some time again, as outlined,) in NASDAQ.

In summary . . . the monetary environment remains friendlier, in our view, though surely there is precedent for markets that decline in the face of favorable earnings (often into recession, and in a couple of cases primarily because Oil was rising, and/or the Dollar was falling). The former is easing overall, but only slightly so far, while the latter is stable, but remains overbought overall.

Plus of course you have a market conditioned, as we discussed frequently, to be wary ahead of August action. Our thinking centers around already-seen traumas in the market, but is not going to be so optimistic as to suspect a stock market not capable of dropping if enough managers don't grasp that misplaced fundamental optimism for this year's results late last year, and early this year (for the 1st parts), isn't so misplaced for the latter part of the year, and even next; mostly for companies that haven't indicated particularly problems that will derail or lengthen their goals. These views were touched-upon in our 900.933.GENE hotline too, and the next Letter as well.

The McClellan Oscillator eased to a reading of -63; slightly softer (nominal decline, which often is a harbinger of further downside action, as would not surprise us hourly, though commentary earlier indicated what we suspect is being set-up, at least on a daily basis). Flat S&P's overnight, it has a modestly weaker premium of 1508 this evening, with futures at 1467.70, down 130 from the regular close. While below short-term supports, we're open-minded to a turnaround, though continue to believe the market has more work ahead of it, per the "fade" expected from the goal achieved in the S&P just a couple weeks ago for the July breakout. That's why we were adamant about not buying breakouts or chasing price; which is an understatement in current turbulence. It remains a market working towards oversold on an hourly and daily basis (or more), but not quite there yet; stay tuned. In the interim; thinking about an intervening fast rebound after the ECI in the morning. And yes, for now the former supports are now resistance, for just about all major Senior Averages. (We'll update and assess where these levels settle-down, in tomorrow's DB.)

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