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Market's Rally Efforts Labored

September 2, 1999

Activity somewhat mimicked Tuesday . . . as first efforts at gains disappeared, while stocks of course again came back a little bit later as prices continue to range superficially at what appears to many to simply be action taking place all over the map, which is not really what's afoot. What occurred was fairly abysmal efforts to buoy stocks ahead of a long Labor Day weekend holiday, one of mostly "dependable" upside daily-basis phases. That it's in fact having so much trouble catching-on, is both a function of 4 preceding days of sharp declines and increasing "angst" both on the currency and interest rate fronts. (That's certainly the case given the Thursday action.)

Markets Dislike Uncertainty

Investors increasingly are becoming aware of the huge debt offering calendar coming up, and are understandably further nervous in front of what has been an often-rocky September/October timeframe, as far as excessive or premature optimism; not to mention reticence to invest in front of Y2k, a time that even some pension managers have deferred additional investment positions. Again; that doesn't mean there will be broad problems related to Y2k; but uncertainty has quite a historic way of impacting the markets even if specific equity-impacting troubles don't even occur.

This, in hindsight, may turn-out to be akin to the old-saw of the stock market anticipating 8 out of the last 5 recessions of course; but for investors what doesn't matter now is what may or may not happen at the turn of the new year, while what does matter is the broaderinvestor-perception of a willingness to take risks. The notable mutual fund net redemption's, reflects such hesitation.

(Portion reserved.) The bottom-line remains that an absence of buyers can be sufficient to allow an otherwise nervous market to fall while sporadic rebounds will occur particularly at technically crucial levels, which can actually enhance the downside when, in the fullness of time, they fail. All rallies, including the huge one we forecast from early August on a break of S&P 1280, in our view were taking place within harmony of the larger decline dating from the 1428 July short-sale; which from the start indicated we'd only get one major wave down, initially, before comeback efforts were mounted, both earlier in August, and then ideally from the lower levels in front of Labor Day, with the probabilities of risk then returning per the forecasts, almost nearly anytime.

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This, as a matter of fact, would also be the case for the S&P, though the overall pattern already has "confirmed" some more negative characteristics, but not decisively. Remember; the first drop to the 1320 +/- area, taken together with the seasonal norms, tends to allow for an appearance, if only illusive, of a secondary test kind of action, which keeps hope alive until it ideally later fails. If this fails now; in the middle of a semi-holiday environment that is seasonally traditionally firm, the risk of some sort of market implosion could not be ruled-out. That's why we're tentative even with our own forecasts of seasonal bouncebacks; and as we're just hovering under the 18-day MA.

(Again; we don't know the stock market "crashes" next month; or this week for that matter. But we do know that the technical work is progressing in a manner that definitely suggests unfinished business on the downside, and an ultimate test, and later penetration, of the early August lows. It is particularly interesting that a fair number of earnings shortfall warnings could upset apple carts bulls are counting on; to wit ideas earnings will expand greatly regardless of interest rates, or of contracting consumer demand for a number of reasons; one of which could be market declines.)

In the meantime these hundred point up and down moves of the Dow Industrials are jockeying between the pullback control limits just under 10,800 and the 40-day moving average, which still comes in around 11,000. Now; you've had crossovers in recent weeks of the 18 and 40 days; a worrisome factor no doubt; but one that more often than not precedes a bear-trap rally, as it did.

Wednesday's market price behavior was a little firmer on the New York Stock Exchange than it was on the Nasdaq market or Nasdaq 100 (NDX) stocks, which retained snapback gains better than multinational big-cap led Averages for the week as a whole so far; though not impressively, as far as this day taken as an island. Just as both faded late in the session Tuesday, when stock prices caved-in fairly dramatically, as moderately serious sell-programs apparently hit the list, our hotline (900.933.GENE) warned from the get-go Wednesday not to expect a repeat of Tuesday.

Part of that sentiment had to do not only with our forecast pattern this week, requisite snapbacks from oversold (often engineered by specialists and market makers) and month-end bits of buying efforts that had been mounted by the funds, which presumably and typically continue into early in a new month, even if certain professionals absorbing supply plan feeding it out shortly thereafter.

Bigger picture . . . it should be noted that analysts will continue to look for rallies almost always, while the market may be simply working its way down over protracted periods of time. It's normal if not particularly convenient for those bulls or bears who want instant gratification or vindication of their own viewpoints. And it fits the mold we've outlined not only for this season, but this year; a time in which mutuals and other investors wouldn't let go of this in one "fell swoop" until there was little choice left. Their overly committed investment profiles suggests that time is closer; with an ongoing view since late April that the internal market high was behind, with the S&P high very specifically noted with the "macro" 1428 S&P short-sale guideline back in July.

Until investors by-and-large grasp the rally affairs are temporary, and not new legs starting-up for the overall stock market, you don't typically get risk of a washout kind of liquidation wave. Many of the Nation's investors are getting ever-closer to nervously considering it, as reflected by most recent mutual fund data, which shows some net outflows. This is easier to achieve this time of a year, as savvy mutual fund investors are reticent to buy funds until after late-year distributions.

If all goes just right, we'll have a further series of these failing rebounds over time (as outlined), a break below this week's low, then another snapback, and then a grander slam-dunk decline, of a type sufficient to (move) many stocks towards being attractive once again, beyond trading-only. At the same time our view has been that what's good for T-Bonds isn't necessarily great for the stock market (depends on the context), but that we don't have so much evidence yet that bonds have completed all downside activity; just lots of it. Bonds continue working-off daily overbought.

Amidst all this the Dollar hit a new pullback low against the Yen; which contributed to the Index being fairly soft today. Failing around 101.5 in the Index the other day, the basket of currencies versus the dollar risks breaking support in the 99 area quite soon; and it may be hard for stocks to "hang fire" while such a currency drubbing is going on. So that's a more immediate caveat.

In summary . . . as of Wednesday's close, following unchanged levels for two days around the -52 area, the McClellan Oscillator has an approximate -11 reading; improved from prior day's. This week, which continues conforming to an early down-up-down idea, features nearly-frantic efforts to keep the market above key supports, at a time that is normally more easily seasonally firm. This evening premium is 323, which is little changed from Chicago's regular S&P close.

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