The Market's Structural Case

March 8, 2002

Not wasting a moment . . . on Wednesday, the market cobbled together almost the exact kind of pattern speculated about; one led by the Dow Industrials, but it is very normal given the necessity for Senior Averages to lead, and the average stock to lag. With thousands of points theoretically gained since the 'W bottom's' construction last month, we certainly have a more cynical eye on the action than those who embrace a 'confirmation' of strength, though that may only impact our forward day-to-day action.

Part of the expanded 'mass enthusiasm' is desirable; part is the frantic short-covering by a myriad of supposedly technically-oriented types, who clustered together to short similar issues, but as we warned repeatedly, somehow conjured bearish arguments out of a bullish set-up, for months. They often weren't incorrect about high valuation criteria, but from a standpoint of price performance, it's little different that downgrades by analysts for cratered stocks that suddenly they start shorting at a fraction of where at one time they were buying; makes little sense, even if they get lucky and it works. Not that we're huge proponents, but small defensive Gold positions have made more sense than short-selling stocks in this monetary backdrop; for months. (Of course it has done far better in countries with devaluing currencies, than in the U.S., all along.)

Sure, the sentiment remains somewhat skeptical and that's psychologically bullish of course; but that doesn't mean this doesn't gel into some sort of further parabolic that blows-off and sets-back a bit. The month began with essentially the upside start and a step-back that we talked about, and then another pulse forward, which might have been more bullish had it occurred about a week or two down the line, but we'll take it.

What is important is that, barring catastrophe, there really remains no bearish case of substance for this market, and that's both (hopefully) going to cushion declines when they occur, and keep the longer-term structure of the market continuingly positive for the foreseeable future. That doesn't mean one should get excited when the market's roaring; (reserved). But being less enthused isn't the same as shorting stocks, which generally is 'trend-fighting'. Example: we know that's popular in home building sectors or the donut industry; both are fully priced or more; no argument. But that's often not a sufficient criteria for risking a short (incredible that some have been doing this for months, against an historically terrific condition for the stock and money markets, that was climbing the highest 'worry wall' of modern times) strategy in equities, as noted.

Sure, capturing individual shots down in the stock futures is another story; we do that ourselves here and there; though every time we have since September 20th; we have indicated that the declines are against a clearly favorable backdrop that would later in fact take stock prices higher in the overall view, or macro perspective, and not only is that what has happened, but we have captured virtually each and every upside pulse.

There's not been a structurally bearish investment case for more than duration of just a few weeks, in months, aside from concerns about war(s) and terrorism, which defy timing. So what do you do? Precisely what we've argued since September 20th; trade markets on their own merits, and respond to events, if events require. They haven't as of yet. However, as complacency returns about the upside, and as our short-term maximum range targets are breeched, especially depending when that happens, the prospects for the near-term may briefly be the opposite of then-popular thinking. In the interim, the 'overpriced' arguments continue (with some validity, but not the same as factors that take prices down instead of up, for long, which simply put is why we've pointed out for months that things like PE's will be high at bottoms, not just at tops).

It is only in the middle of a move, or even better, when things are emerging from most awful conditions, such as telecom (including some fiber) and wireless for example, it is not particularly relevant to look at typical measurements of price, but of prospects. A good example of a transition, likely little noticed, was Tuesday, where the DJIA was down, but the internals and NASDAQ up. Does that transmit a subtle signal to traders that they should take the DJ up again? Sure, and then after they settle the pricey DJI a bit, they may loft the NASDAQ a bit more; even the stoicNasdaq 100 (NDX).

We should also note several events today that contribute to a better mood out there: the FTC approval (without opposition or caveat) to the Hewlett Packard / Compaq merger helps the backdrop; the Beige (or Tan) Book report indicated improvements of a gradual manner underway; and the statement from Corning (GLW) that they see the current Quarter as a bottom of the optical industry, helped fiber optics particularly; and we are not surprised. After the close, a short statement came from Iraq, that they will be 'more flexible' (whatever that may actually mean) in letting the UN weapons inspectors back in; certainly would be an important move in diffusing tensions just a bit (probably means Saddam is seriously worried about an attack, and either wants to obfuscate until his weapons are more advanced, or is simply having second thoughts about his policies that threaten his neighbors; wouldn't take it at face value).

In Afghanistan, things remain tough; in some aspects because we are using our own forces in direct confrontation with those barbarian al Qaeda forces, instead of hitting it with bombs for days long, possibly because we underestimated the force projections needed (at least initially). All our Apache helicopters used in the operations, were hit essentially by shrapnel as they provided cover-fire (that was achieved by the enemy firing RPG's in the air more or less at maximum range, causing them to explode at about 1500', and raining down metallic pieces at our choppers, all of which safely managed to return to base). Older Cobra helicopters (it appears) weren't intended to be used, but were called from the Marines as reserve support for the Army troopers there, and as they are an earlier generation of fighting machines, don't have quite the Apaches' firepower. But, AC130's saved the day. Did anyone forget how great results were garnered early-on; bombing, bombing, bombing; only then land blocking forces.

The risk in all this, of course, is that while we prevail over time, terrorists may have once again escaped, into Pakistan, where interception is -shall we say- problematic. A further risk, is that as Spring evolves, and snow melts, enemy guerrillas may find an easier task of infiltrating our lines, or mingling among the Afghan citizenry. Tough situation, to be sure. And then there is the Middle East; it's own involved enigma.

The connection of all this with markets is that presumptions are to an extent involved in correlations of market timing with military success, or even to a movement towards peace. To wit; the comparison with battles of the Persian Gulf War or even World War II or Korea prevail, and bullish extensions require certain outcomes (reserved).

(If, certain events transpire, after the short-term market thrust expires), that would be able to enhance continuity of the pattern of doubt, of 'worry wall' climbing overall, and allow the economy to continue its comeback amidst suspicion and doubt. (Comments in fairness are for subscribers; so while points are clear to all, specifics are reserved.) We've consistently argued since heavy panic phases after Sept.'s NYSE re-opening, there's no macro bearish argument, in the view of ingerletter.com; short-term varies.

The stimulus bill is back; believe it or not, and will probably pass the House tomorrow we hear (who knows about the Senate). We don't want too much, but an Investment Tax Credit would be a big help for the U.S. economy; contribute to demolishing any fundamental long-term bear case for the foreseeable future; though obviously we'll try to finesse short-term trends in opposition to the primary trend (which is and has been up for months) as best able, on a short-term basis, or as contemplated Thursday a.m.

We have no idea why some normal American, especially market analysts, have been bearish or fighting the reality that the recession ended as we projected in Q3 last year or why they have been fighting the Fed. We don't know why they focused on shorting or puts; as it made no financial or economic sense for such conclusions. We know of course that the treatment of derivatives and options certainly trims results of the past, but those sorts of considerations do not abort a powerful trend, or monetary policy as it kicks in aggressively, appropriately, in the wake of the interest rate lows, and in the wake of a classic liquidation (September) that followed minor rebounds from earlier capitulation moves (the prior Spring) that could not hold. Keep in mind that internals, such as the Advance/Decline Line, did not make lower lows as the market collapsed in the wake of the attack, and that, though few others agreed, was also a positive divergence. Combine such things with a unanimity of negativity; this is what you get.

Having called this move, not only since the actual panic September low points, but as well leaning against some absurd bearish thinking dominant during our projected very feisty decline in February, we thought a 'W bottom' formation was being constructed in the March S&P, and that allowed us not only to forecast that much of March would be (as postulated for months, barring catastrophe) a lot different than February, but in fact that it would create the kind of false starts, sidesteps, and equivocations that we have seen, enroute to the initial (and then later) target levels we have clearly forecast during the preparation, not just the execution, of the event. That strategy has outlined what we think of the levels we are now toying with, at least on a short-run basis.

Besides allowing us to capture virtually (and maybe more considering the pauses that occurred along the way) the entire move up in recent weeks, we were again delighted that the (direct-dial or 900.933.GENE) hotline was able to capture Wednesday, via a single guideline, as far as the final efforts in the March S&P, before it is supplanted by the June S&P, which we'll start monitoring Thursday, as the new lead front-month contract. This final (and single effort) in the March was in at 1146 and out near 1164, for almost a double-homerun of 1800 'official' theoretical points gained just for today.

(Section reserved for subscribers.) In the fullness of time, much higher prices remain anticipated; especially for domestic-centric firms. Further, though not something we need to dwell on, this is roughly something we talked about five years ago; the idea of the market flying from Seattle to Boston, but via Houston (a southern route); essentially the run then to 12,000; a drop to 8,000 (did that), and later 16,000. It was the idea that the bulls back in the '90's were right, but they'd only get there with an interim purge; so after the extreme optimists surrendered, we could get on with it.

In summary . . steel tariff news was a non-starter, as suspected; so we rallied again. We were delighted to be able to not only call for another rally extension last night here on ingerletter.com, but simply do a single (900.933.GENE) hotline long, from 1146 today; exited near the close around 1164 in the March S&P; and now we move to the June front-month contract, effective with the first efforts on Thursday. In economic progress the Beige Book showed modest but definitive improvements.

Today, extending daily overbought just slightly, McClellan Oscillator readings are about +173 on the NYSE, and just at +41 for the guardedly improving NASDAQ stock market (interpretations reserved for readers).

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of the week explicitly continue to remind us of various new risks the Allied fighting forces face, or may face, we try to keep in mind that the unexpected remains a risk; while normal human beings, certainly hope for the best. This evening, S&P's on Globex carry a near 223 premium, with futures off about 110 tonight before a roll.

A majority of the initial move from our forecast February W bottom low has occurred of course, and that remains as it should be, once investors or analysts think upside's too easy. However, hourly (after potential roiling) or later as outlined, depending upon the news backdrop. A trade war with Europe is a fundamental worry of old-fashioned types, but may be more political posturing than more; as noted last night.

24 karat gold is pure elemental gold.

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