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Momentum Precedes Price

February 1, 2001

Momentum precedes price . . . is an old 'Ingerism' that can be used to denote both a bullish or bearish interpretation of Wednesday's action, which superficially wasn't at all bad, given the prior day's near 180 point rally of the Dow Industrials, and nearly a 25% advance of the NASDAQ over the entire month. It's noteworthy that the DJI isn't looking particularly vulnerable on a daily basis, and consolidated quite well today, but it is a crucial spot nevertheless. If you want to look at a declining tops trendline from a top last year, guess what, it intersects today's highs approximately. If you argue that a bear market rebound however, wouldn't go this high in the Dow, you'd be right too.

I suspect what this means is an effort to consolidate (as projected anyway) overall, at the same time that it is impossible to deny that there might be at least some minor or early February buying attempts, first. Another reason for the advance idea being 'on-guard' for a late January/early February short-term top, and then we'll assess what it suggests, in terms of technical implications, and downside risk. Certainly the question is whether the Fed can move quickly enough to 'rescue' the economy; and we know a probable answer: of course.

That doesn't mean they weren't late to the task; we said that while they were stupidly out there still hiking rates under some (conservative Fed) illusions about inflation risk existing, which it didn't. They made the classic mistake of confusing high Oil costs as inflation, when in fact that is often an independently-derived factor from consumption.

The punishment the Nation got from the Fed's tardiness was the extended decline in the 4th Quarter, that was augmented by the incredible absence of a resolute National Election promptly. And the Nation is still paying the price in economic softness; that's in fact now exceeding the pressures in the equity markets. For the Fed to accompany their 'bias statement' by remarking energy costs did ebb, is a form of their admitting they blew it last year by not moving sooner, though they'll never say that just so.

At the same time the Fed's largesse last year, and the acceleration of moves now, is a potential blessing in disguise for the Senior Averages to have a chance to breakout of this logjam (technically speaking; while the month has been terrific for traders and investors agreeing with our stance, generally speaking), and that is augmented by all the pressing-out of excess last year. Because everyone can start to pull-in their horns at the same time, risking a deeper recession than the one we've felt began months or longer ago, as you know, there is every reason to expect the Fed to move faster now, and that possibly includes another interim cut before the next FOMC meeting. That, in our view, means the admonition of a 'crash' we were criticized for making last year (about this time) is now on the minds of so many, after it occurred (in case they didn't notice) on a rotational basis (completing the cyclical bear that began as stated in '98), and this incredible focus on risk now, can either be overlooked by the market, or we'll simply have the Fed (and Congress) do whatever is needed to sidestep the disaster.

Now, of course there's another argument. That would be that things have gone so far South, that there's no hope, and that whatever the Fed does is too late (like Japan in the early '90's, after the 'crash' we called there in our yearend 1989 Letter). It's not at all out of the question that for a week or two things could look like that alternative. At least sufficiently to spook a renewed stoking of shorts, a contraction in too-optimistic sentiment at last take (turning bullish weeks into the rally, which figures), and after an expected correction makes things look sufficiently dicey to draw-out the permabears, at least briefly, and to dissuade under-invested money managers from buying the dip, after which (reserved ideas). That would probably be when they embrace the upside romp, particularly after prices take-out the highs established this week as a waypoint.

For sure, as noted all week basically, there's a crowd of shorter-term oriented players who would be remiss not to have taken something off the table, and that's normal too for traders. For investors, we're hopeful (but there are no assurances) that any drops in February will not only be within reason, but may find those who are totally out of all positions 'hanging fire' if the Fed determines to implement an interim rate cut several weeks forward, but well ahead of the next FOMC meeting; just to ensure a recovery.

In our view the Fed said so today; the Fed said that at the Humphrey Hawkins earlier, and the Fed will do whatever it takes. (Balance of section reserved for subscribers.)

As for the March S&P, we would emphasize that the daily stopped only slightly over our 1370-80 month-ago target, with a slight overrun (not bad for a month-ago goal in fact made from the high 1200's), that actually hit 1390, never made it to 1400, which would have been more spiky. The weekly technical condition remains interesting, and probably favorable; that's a technical complement to monetary backdrops, though will recognize that stock prices got about as far as they should have short-term, based on our projections for a favorable January. As goes January goes the year? Don't forget.

In the interim, the bears will probably argue something like 1320 followed by a failing or bearish rally to a lower peak, and then a drop to 1270, and then a bounce, a crash, and then the 900's. They will say the Fed 'doesn't matter', so we say they'll be wrong. They will say it's Japan all over again; we'll say there's no correlation, with the capital markets already improving, and with knowledge here of how to do that, which Japan simply wouldn't permit, due to their tight intertwined corporate, banking & government relationships (a reason we have opposed over-integrating financials etc. in the U.S.).

Tension on the Tape

Are we saying the Fed targeted the market? They say they don't do that. Sure. We believe they mean not to do so, but in this climate, with so much wealth involved (and that's true even after last year's carnage), they basically have no alternative but to do so. It's the most direct way of letting the world know they're not asleep (err…awoke) at the switch, and the simplest way of restoring confidence (balance reserved).

Those are still the major movers of the Nation, though it would be welcomed if we're able to have a greater 'enlightenment' about technology on the part of a Government that is older than many of us (myself included I'm sort of happy to say), especially the Fed head. If there's any surprise (that's why the question as to whether he's a fuddy duddy) from this Fed, it's that this Chairman is not technologically illiterate, and while we have heard commentators say he should have learned by now, that makes little sense, since the man outlined (if didn't write) software for a Chicago econometric firm before going to the Fed. Therefore one has to ask what in the world was he seeing in last year's slowdown, when he (of all people) should have had access to at least the anecdotal (and serious) evidence of slowing we had. That suggests just maybe (if I'm too kind I'm sorry) he surreptitiously wanted to expunge the speculative zeal solidly, so that retroactive tax cuts and stimulus could be mounted this year without the risks of re-igniting the ardors of a speculative fever taking investors down that path again. (Meanwhile many non-investing Americans now lose their jobs due to Fed missteps.)


Thus, we don't think the Fed's commitment to a series of further cuts is so crucial; we think there's no doubt they'll do it, as often and as heavily as required to stopgap this economic trauma from being a tragedy. Therefore there is no long-term bearish case. We hate being in agreement with all now arguing sidelined money's coming in over time; but with one difference…we argued that last month; they do so only now. We're thinking corrective fights at hand, then (well forward forecast reserved for readers).

Daily action . . . meanwhile, with the expectation of a selling squall, whether the final hour returned or not to the upside, saw the (900.933.GENE) hotline determined sell (by intent, not mental stop) theMarch S&P around the 1387 area on the 2 o'clock ET comment (which was only briefly available for that very price spot, though we couldn't know so at the time of recording), or for those brave souls that in fact expected quick surges (if very fast enough to respond, or maybe right on the Floor, though even that would have taken lots of alacrity), an exit and 1390 short, in the wake of the Fed cut, along with a reentry attempt around 1378. Of necessity in fast-market conditions, the 'kneejerk' moves were given as 'semi-official' ideas. By day's end, we intentionally did go flat overnight into Thursday. If anyone active pulled less than a couple thousand S&P points out of this week's action I'd be surprised; more wouldn't surprise me. As guidelines worked splendidly, we congratulate staunch late Dec./early January bulls.

This month, which we're delighted was as procedural as projected, and accordingly in harmony with our belief that the chaos of the prior January would be nowhere seen in this advance, has been just terrific, and particularly for the NASDAQ. Rotational shifts between techs and 'old economy' stocks (along with financials) have contributed to at least some of the 'stair-step' characteristics of this market, with the reticence of newer money to come-in, being a part of the rest. Contrary to those who viewed 'rotation' as a negative, we saw it as a positive; believing such sidelined monies will appear only after the market's path is 'confirmed' to be clear, and some of that was hinted at.

At the same time, we can't imagine why any reader here (or our Letter), need to be a buyer in any celebration of the Fed coming further to their belated senses, as it was anticipated in December, that they basically had to bite the bullet and do their job. There was no alternative, and our 'bet' at the Holidays, was that they would just do it. Therefore while we agree (in spirit) with many new bulls; we were there last month; a lot of them were not. So, we're open-minded to corrective action, scaring then anew, and only then the outlined goals we've repeatedly reviewed as ultimate upside runs.

In summary . . the McClellan Oscillator data is around +72 for the NYSE (that's a nominal -2 change, which often foretells corrective action), while +37 for NASDAQ (a normal drop of 10 after a super run-up of late). Again we suspected stocks might rally sharply from Monday lows into the FOMC, then we'll see how heavily the market can subsequently be throttled once more in oscillating fashion. We've definitely suspected the Fed does knows they needed to characterize the changes in stimulation, in ways that don't panic the marketplace (or domestic consumers); so as to try to sidestep an unraveling economy; not hard to do once a broad recognition of downward ramping is grasped. What is being done is historically normal; just commenced a little late for more relaxed comfort from an overall standpoint. However that shouldn't mean it's unsuccessful taken overall. Meanwhile the late December forecast of an early Jan. 'hiccup', followed by a move to March S&P 1380 +/- nailed this action. The last part of that call was (as you know) for the consolidation preceding the next measured goals.

As of 8:15 p.m. ET, Globex S&P premium's around 650; March futures little changed from the regular close at 1372,90, coming off the intraday high of 1390 even. We're open-minded to another effort to rally after a little more consolidation early, but a new month starting, so that could be just opening positioning with little behind it near-term.

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