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Negativity Risks After Downside 'Confirmation'

June 7, 2002

Staggered rallying behavior . . . was the expectation for Wednesday; as we warned not to expect too dramatic a follow-through, but the probability of challenging or even surpassing the prior Tuesday's highs, as over-confident short-sellers were projected to be run-in further, at least temporarily. At some point over the next couple weeks, it is still suspected that almost all the bearishly-oriented positions will be under severe pressure, and will have to be unwound, likely making the recent breakdown below the May lows the optimum place to have (at least temporarily) ceased negativity, just per the warnings that it was increasingly risky to get bearish on downside 'confirmations'.

Remember, much of the recent downside was fueled by projected weakness in Oil and bank shares, among some of the areas that represented over-concentration in a comparatively narrow number of big-cap grand dames, that simply were joining a far broader list of stocks previously in negative trends. That was suspected to result from the crowding-in of the multinationals, preparatory to a crowding-out as they headed to the exits, en masse. That is precisely why we suggested repeatedly much technology in fact was becoming exhausted, and why the vulnerability was in sacrosanct stocks mostly; not the already downtrodden. It's also why tech measures were extremely negative on the NYSE, while they were basically sideways over on the NASDAQ.

At the same time Nasdaq 100 (NDX) reflected lethargy after lengthy post-basing. In that respect the minimalist response from Intel (INTC) to suspected caveats about growth rates, typifies what you'd expect to see if the majority of investors 'spookable' in the sector were mostly wrung-out. That doesn't mean a subsequent market drop can't erode some shares further; but it does mean one shouldn't be excited with the mass of bears out there; something we've warned of once we got the downside that we've suspected, from the early May upside deflection, and overall since the March near-triple peaks. Basically then the idea was anticipation of erosion and faltering. At this point, even with an alternating May/June 'swoon', the challenge is identifying low points, not seeking a reason to be negative after-the-fact of a significant old decline.

Nowhere is that clearer than technology; multinational stocks so dependant on world sales for the core of their revenue base have varying challenges; one reason we've questioned the wisdom of all those piling into admittedly liquid, but questionably solid, big-cap stocks that have had the majority of their growth-in-gross overseas for years. These are commonly represented by the Dow Jones Industrial Average, which has in fact borne the brunt of the recent selling; and interestingly of course snaps-back as pressures come-off at least temporarily. As noted Monday, we don't believe the DJIA is immediately going to challenge 9000, any more than we believe the S&P is going to break 900. Events (especially geopolitics) could precipitate such things later on of course; but not likely when the majority of players are galvanized in negative thinking as they were just a couple days ago. That yields fits & starts; but can exhaust selling.

One example of how traders are misreading some things includes the focus on the weak Dollar; which is only recently being emphasized by many. The Greenback had a solid decline; after the vulnerability it had from excess several months ago, not now it might be reemphasized. Further, if one wanted to anticipate (and we discussed that at the time) a drop in the Senior Averages, there was a correlation with the Dollar; at the time, not now. As noted, too many investors (probably at the behest of the special interests who champion the old economy multinational stocks) perceived a very weak Dollar as helping stocks; we disputed that. Now, with the Dollar groping for a bottom, it is probable that a stabilizing Greenback will actually correlate with rebounding stock markets. Is the overall decline ending? Not necessarily; but absence of much rallying in the intervening 'unsustainable' period, probably enhances a moving-up of a bottom from a technical perspective; though terrorist threats and events can limit enthusiasm of course. However, all of this supports the continuation of relatively low interest rate climates; and that helps sustain both the housing market and overall economic tones.

There are risks of all types; the reported 23 terrorists unaccounted for in the U.S. per news reports are worrisome (not to mention their fellow-travelers and 5th columnists already here earlier). Tensions between India and Pakistan are tentatively easing just a bit; but it's premature to say more than that. The Middle East cauldron remains hot; with last night's dastardly assault on a civilian Israeli bus (the poor bus driver had his 4th attack in something like seven months) coming on the heals of the revelation that the terrorists had attempted to release cyanide in the Passover seder attack. What is increasingly realized is not only present, but preceding attempts were efforts at mass terror attacks, including an attempted destruction of Israel's big petrochemical facility. Result; the IDF is responding with renewed attempts to quarantine the terrorists, and tonight is engaged in a penetration of Arafat's compound; with reports of shots being fired. It is a fact nobody knows where this all leads; though from a market standpoint one reason we focus on intraday Index plays, and not overnight positions, reflects a good bit on the day-to-day uncertainties of growing war(s) heightening world tension.

Earlier in the week, the market was projected to stop declining within the zone we described as essentially another 'no-man's land' (below May's contested low point, but above the September panic lows), while also indicating a turn was unlikely to have the gusto of some former complex reversals, such as seen back at that time.

Wednesday's activity was generally as desired, including the morning's sell-off from the early rally; the dip below the first low, and the subsequent rangebound activity resulting in an assault on new intraday highs, per the hotline's (900.933.GENE or via direct-dial access) guidelines during the day. Potential results near 1300 points gain or so; not bad considering the choppy series of shifts leading to expected late pops.

Remember, in the overall structure of this market, it was a turnaround that preceded the week's-earlier thrusts to attack the June S&P 1100 area; so as that failed (a key level both technically and psychologically), the U.S. market rolled-over in a continuing evolution that was expected to see unsustainable sporadic rebounds, but within an overall downtrend, that would proceed during much of May and June. Accelerations on the downside were sufficient to get a bit of a washout, and tentative as it may be of course, we are delighted that the lopsided negative leanings have evolved thusly.

This overall action was the idea of getting 'confirmations' of the downside, from those who respond to emotional triggers, and they're generally getting washed-out into the alternating rallies and renewed weakness, hence setting up not necessarily enduring rebounds, but a stage from which both intervening rallies as develop can sometimes have a bit of a romp such as witnessed Wednesday, while anything favorable coming along (if it does, maybe technology will be the surprise there), it could immediately squash those getting newly enthused about downside. For sure, if nothing favorable develops, and in the instance of some horrible catastrophe, the market works lower later, after the intervening upside efforts but not necessarily with a broad-brushstroke participation so many are cheering for. The key may be a feisty Thursday a.m. drop.

In summary . . the market went through several generally-expected cycles over the past couple days, as evidence continues to support ideas of a resilient U.S. economy (essentially what we've said for quite some time about the U.S. economy in the face of many seemingly-overwhelming challenges). While it is suspected further upside attempts are likely, subsequent downside probes are first, but may become relatively limited, and tricky to navigate; thus we wouldn't be enthused about a Thursday purge.

As to McClellan Oscillator readings: turning up slightly from very near oversold with notable shifts in today's trade; with a read of -85 for the NYSE; with slightly stronger behavior on NASDAQ; now at -26, after the noted nominal +3 change yesterday. As so many were beyond edgy recently, the prospect of the interim turnaround reviving was realistic, but beyond a daily-basis (or intraweek) trade at best, probably is about all we'll get just for now, but more later in absence of catastrophe; stay tuned on that.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of this 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 as civilization cheers human progress, but worries about those trying to reverse hundreds of years of modernity. Stay focused to news trends aside from paramount concerns about India and Pakistan; but certainly keying on those hotspots for now.

Keep in mind renewed rally attempts remain against a backdrop of geopolitical risks that can be a concern as they combine with the late stages of the early summer dips, as well as deferred profits realizations, though the long-run may still see this year as a transition following very basic economic exhaustion; though rallies for now should still be of an unsustainable nature, as far as any particular upside effort, but we would increasingly disavow downside enthusiasm with the mass of over-confident bears out there. Economic data supports arguments on these scores. As of mid-evening, the S&P shows modest easing of 130, with premium flat-to-cash given the night's news.

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce
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