Market's Battle Royale Looms

March 1, 2002

A Mini-Battle Royale . . . rained across the market's plains Wednesday, as buyers and sellers -for the most part- were married to a struggle that superficially was never resolved, but was not annulled either. We dispute the idea that complacency reigns, when in reality the inability to take the market down, and keep it down, whenever we do see buyers vanish, has for many recent sessions been the bane of the bears, and the sustenance which lets incremental buying take it back up; the opposite of what is commonly assessed. Remember, most bears (and critics) have long-ago sold-out; so the next thing they have to do is decide where to recommit.

Whether they do or don't is clearly less significant than the reality that they can't sell what they've already sold. And those that continue invested at this point likely aren't about to liquidate; nor is there the fundamental (or technical) backdrop to effect that. Or sure, you could get a brief (but not enduring) banking woe here or there; you may have a company here or there that has curious accounting or drawn-out prospects in the recovery, but what you don't have is a backdrop pulling funds out of U.S. Dollar, or dollar-denominated assets, which would also need to break the general consumer zeal for continuity, for a real bearish case. Important factors in service-based society.

Those were among the reasons that we have argued both the depth of the recession and the speed of emergence would be comparatively benign (not the market, but out there in the daily world); also the patterns have evolved, as discussed before, more in a cyclical than secular way, and that may be the most important macro aspect to this.

On a daily-basis, that's probably an important aspect to this market too, which rose moderately in response to Chairman Greenspan's remarks (actually the pre-release testimony Wed.), that to a great degree barely deviated from what we've thought he would say, via ingerletter.com comments made here in recent Daily Briefings. That centered around the idea that the economy's recovering, but tentative; that rebounds in spending are only gradual (interesting that some newest higher-end computers are again in short-supply, suggesting a start of fairly robust buying in the wake of normal seasonal breath-catching by consumers after the holidays are over), and that higher investments in technology have (interestingly, and in harmony with our view) started to be witnessed (we suspect they never really ended, just went through the expected transition phase, and that's why inventories can become low, failing to see a trough).

In any event, we suspected the Chairman would defend 'gradualism' primarily so that there would be no reason for deviation from the relatively helpful monetary policies of the era (now, not when we criticized the profligacy around Y2k, for which we'll always remember this Chairman's legacy, as they stoked the frenzy while urging the inverse) continuing for some months to come. At the same time his remarks were anticipated not to be so optimistic as to head-off any semblance of chance for Congress to adopt an Investment Tax Credit, or other stimulative help for business, which would assist the Nation's citizens more so than nominal dole-outs, that trivialize their knowledge of the taxing system, and do virtually nothing to assist capital creation or growth levels. Assist growth, and by the nature of capitalism, you put more people to work with not only a resulting stimulus to the economy, but an increase (not decrease) to Treasury coffers; especially helpful during wartime, and in-front of the baby-boomers maturity.

In a sense, today (Wed.) was like 'buy the rumor, sell the news', as the market acted accordingly. Interest rates in general eased a bit, on the perceived economic softness that was expected in the Chairman's comments (though days ago we projected that a stronger-than-consensus rise would be seen in the GDP, favorable purchasing mgr's data, etc.), but the Fed comments were appropriate for a Congressional audience to whom he played. The earlier drop in new home sales, on the heels of higher existing home sales, probably reflects a contraction in sales of very high-end homes (fewer in speculative build-outs in recent months; no big surplus inventory) while first-time or starter home buyers, were likely to hold-back on heavy buying decisions, soon after war(s) started. Do we all remember how nervous we were signing our first mortgage?

Also, about a week ago we thought we had a hint of movement towards movement of a tentative nature towards peace talks, amidst the horror of Mid-East terrorism. As it's turning out, we did spot that potential, though its origins may have been other than in Riyadh. It's also not inconceivable, that though we spotted positive divergences on a DJ down-100 or so day at the time; these preliminary movements are contributors to the market's improvement overall; something that makes sense from our perspective.

What we see longer-term is particularly interesting, as we continue to believe (clearly, presuming shocks or military surprises don't change the chemistry's mix) that the firm CPI (etc.), and even slightly higher interest rates over time, do not automatically kill a recovering market, to the chagrin of the majority of analysts who argue otherwise (we guess they never heard of Japan, where continuingly lower rates certainly didn't help) almost constantly. Anyway, that's not likely a problem here, because the economy is in the 4th month of economic recovery (yes, that's right), from the Q3 low stated here to the day upon us, appropriately as the Government 'officially' proclaimed recession.

Now, as we look forward into March, we do not expect a repeat of February's pattern. Many managers are afraid of the immediate future, because they remember January late action, which soared at the finale, and then stumbled, before falling off a cliff, in the preordained February decline we had outlined as likely weeks before it started. In the March case, ingerletter.com has suggested that an initial stumble might be seen (in our view it would not be instantly, as we'd get some rebound next week anyway in ways we'll outline on a preliminary basis in our technical section), and then we'd likely (have the balance of the forecast, that in fairness, must be reserved for subscribers).

Perspective . . . summarizes that by observing such a pattern, would confound the majority of players, but make some sense, both technically and psychologically, too. It would generate the higher prices, but not in a way that accommodates those who for some unknown reason think trading or investing is easy, or follows some system (which of course it does not). It would follow my (slightly cynical?) idea of how we'd get to higher levels by getting the bulls to see (what they think) is 'confirmation' near a short-term (or repeated) interim high, and bears to sell (or short) what they think is a failure of a rally, not too far in advance of about the time the market surges forward once more. If this type rolling scenario (prospective S&P levels withheld) decimates trend reactors to the max, it may accommodate the market with renewed rallying fuel.

Is there a more bearish alternative? Of course. And if we sense it more than what we have outlined, we'll be pleased to share that. But for now the mood (as it has for most of the past six months -everyone does realize it's almost that long- since the attack) I think remains laughable. The majority of bulls give only lip-service to an advance; or even an economic recovery, and are as doubtful about long-term upside as they were dismissing of downside prospects anytime in the 1998-2000 period. That cynicism is a big help to the market, is what we've asked for, and what can help a cyclical style of economic recovery to persist and actually accelerate, even as the world languishes in a state of unknown. Certainly this is all subject to events; doesn't mean we don't get a later decline (reserved), but let's not speculate about that until March has a chance to unfold somewhat. Every now and then there's been a moment that could derail this generally optimistic stance we embraced in the post-NYSE opening a few days after the September attack on the United States. However, bears have never been able to meaningfully build upon those hiccups; so while we remain on alert (should they be able to, or events change), while suspecting analysts, money managers, and even CEO's, have underestimated America's longer-term future.

As they play catch-up, inventories have to be re-stoked, price elasticity has to appear gently, and hiring has to subsequently ramp-up. In such a way (even though the Fed Chairman didn't say it, we will) the vicious cycle will have completed the circle from a year earlier, into a virtuous cycle, transitioning with great dramatic trauma last Sept.

As the market is preoccupied with why so many analysts failed to ask why, when they said buy, it figures the market is absorbing all this, while an incredible number of so-called savvy players, have forgotten what a worry-wall looks like, much less what we have termed a possible 'W bottom' formation, that is behind us, not in-front of us. If the September bottom was a panic liquidation (we contended at the time that it was, and still do), and the January/February affair the post-first-phase secondary test of a sorts, then a breakout will still pullback somewhat (and dependent on events), but it's all part of a rising configuration that measures levels (higher than even I care to say).

(Of course, though they didn't want to hear about dot.com bursts coming, derivatives or debt implosions, one could hearken back to a comment or two I made on CNBC in the late '90's, where the idea was of a drop from something like 12,000 to maybe the 8,000 level -if we didn't have to drop into the 5,000's, and that would take a crash in the major multinationals, where most of the hiding took place- we might later, after a cyclical bear market I forecast then -the one to the 8,000's- meander to 16,000 over a period of time. I believe my forecast then was in the bull market from 2001 to 2006 or so; with particular emphasis on a robust market in the 2003-04 period, and later after a sizeable correction, a fling up to seriously higher prices by 2006 or so. So, what in all of that has changed, for those who adequately protected themselves in 1998 and beyond, and who bought in the carnage of 2001, some early, and some just right. I'd have to say not a whole lot has changed; except nobody thinks about such numbers these days….hmmmm…. well, don't tell anyone; keep them worried for a few years.)

Seriously, even if the civilized world prevails, business recovers (it's well on the way, never really collapsed outside of technology, but nobody hardly agrees, oh well) and we head up there one way or the other, it won't be a straight-line affair, and that's the good part, not just the exciting part (balance of this section reserved for subscribers).

How this relates to end-of-month behavior is interesting, with the days immediately in front of us potentially complex. However, our idea about how it tentatively might go is differentiated from a week ago, when (in the midst of daily purges) our work showed positive divergences. The (900.933.GENE and direct-dial) hotline will try to capture as many of these moves as feasible, but we see no reason from the evolving pattern action to (yet) deviate from ongoing outlines that incredibly date from last September, as we've outlined in the majority of tonight's commentary.

In summary . . we remain a little optimistic here, though the majority of most recent upside is of course completing, on a daily basis. If one wants to worry about the war, I suppose one could toss-in the horrific attack on a Hindu train by Moslems today; a barbaric relic of the conflict everyone civilized is trying to end. Clearly more has to be done. As for the widening of the war on terror by moving our forces into Georgia, as I speculated Tuesday here, that is a positive, because it can help block sanctuaries for the Moselm rebels in Chechnya, and affirms some support for Russia's claim that al Qaeda members are tying to take refuge in Georgia, and circumvent the area. This is not much discussed, but is more important than all the little squabbles with Russians, because rather than looking like American efforts to encircle them, it effectively allies us with Russian efforts preventing those rebels (or freedom-fighting extremists, if one believes that) from regrouping to attack. This particular new infusion we noted in last night's remarks, is the closest to a unified major allied effort since so far in all the war efforts, as far as potential ground coordinated thrusts, and is meaningful to shaping the world's future, while most eyes focus elsewhere instead. This is the first time since World War I that an American Expeditionary Force was in previous Russian territories; though this time with apparently comparable goals as Russia's. If this is perceived differently, that will be another story (watch for the opposition to this) but from the prospect of a U.S./Russian alliance, this is indeed a very important deal.

Last Thursday despite miserable markets we observed positive technical divergences visible (incredible as it must have seemed) amidst the carnage, so that made an alert perspective ahead of that Friday less challenging, since we respected our technical work, even if it couldn't yet be seen in the Senior Averages -or most stocks- just then.

In the interim the market has staged a very nice rebound to flirt with key resistance in the S&P, and with comparatively lethargic action on NASDAQ. Such activity was expected to be similar in nature this week, whether outcomes are bullish or bearish, in the fullness of time. The 900.933.GENE hotline opts bullish-on (later), but is not dog-headed about it, with intentions to remain flexible. Thursday's pattern; probably, up-dip-up again. Stay tuned.

Small amounts of natural gold were found in Spanish caves used by the Paleolithic Man about 40,000 B.C.

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