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Neurosis and the Unbombed

December 17, 1999

Huge, almost neurotic, volume and swings . . . are in harmony with our call for Wednesday's action, but belie the underlying nervousness that increasingly is prevailing in the stock markets. The NASDAQ managed to post another near-record volume session, while the action was roiled by occasional rumors, actual news, and typical crosscurrents that prevail at this time of the year. Despite the bearish breadth (by around 800 issues) in the overall NASDAQ action, the heart of it, the Nasdaq 100 (NDX), managed to close at the day's best level, led byIntel (INTC) and also by Microsoft (MSFT), which managed to make a new high in the process.

The Unbombed

The Dow Industrials had their 100+ rally cut almost in half when a story surfaced that Russia's tanks were cruising into Grosny, as the Chechnya battle heats up after minor postponements to allow citizens to flee for their lives. The market nearly resembled Chechnya also; worried about bombing, only partially bombed so far, but with their major players unbombed, worried about the risk of their capital leaders (big-cap stocks) becoming newly bombed. Horrible analogy for sure; but these things are fairly accurate, as the market is in the equivalent of hunkered trenches for a majority of stocks (negative breadth) while the tanks roll along unimpeded, crushing only a few of the recent leaders, under that portion of their treads that passes directly overhead.

The irony in the weeks ahead would be if Wall Street's unbombed are attacked, while those early victims that are hunkered in the shelters, essentially emerge into a modicum of new light as 2000 dawns. If anything will confuse the majority of analysts out there, that would be it. And it would in fact fit nicely with the idea of an extended Senior Average sector, while the run-of-the-mine (big trench) stocks presumed not of interest, come alive, as they at least catch a breadth of new life.

Simply put; that's a prescription for a decent January Effect next month, almost regardless of the behavior of the Senior Averages concurrently. It is easy to say that a rising tide lifts all boats; but that's not what's happening this year, even though some analysts have portrayed the Jan. Effect as coming early. It did not, outside of some stocks which were in their own unique situations. We wouldn't have theAdvance/Decline Line where it continues to be had that been the case. At the same time we have indicated that the A/D Line had no chance to lift-off late this year, because at the outside just too many stocks were hunkered down. This was and is a correct interpretation of the market's broadly held action.

At the same time, we understand the excitement that prevails among many investors; we tend to feel some of that ourselves, having had more than our share of stocks that are multifold gainers in this year. Nevertheless, it is based on a tempered enthusiasm borne of living through neurotic markets (or preview versions, as you wish to interpret them) of the past that we decline to chase excess enthusiasm. There are plenty of examples out there; ranging from leading "core longs" in our list where many didn't understand why we cut back after they doubled or tripled (but kept just a portion, because that was playing with profits), to recent speculative issues added as quality of buys had to become more speculative as the market moved to higher level plateaus. Even some of these moved up nicely, but we indicated we'd have no choice but to argue taking some profits off the table, and keeping the rest. Certainly we understand the desire to shepard gains into '00, as is the case almost in any year where investors have good annualized gains in many stocks. It should also be recognized that an unusually large number of investors have this also in mind; so it may become slightly competitive in finding an exit strategy next month, depending on events.

Daily action . . . forecasts for Wednesday's intraday action were met (down-up-down in the first hour, then down-up-down-bounce-fade for the session overall), and while today's afternoon was more treacherous versus the morning, scalpers should have managed to pull around 1000-1500 once again (nearly about the same each day this week so far) out of guideline S&P action on the (900.933.GENE) hotline. The more-macro short-sale from 1441 (rolled from the December just a couple weeks ago, more recently to the March; so is equivalent to a 1470 March S&P guideline short) continues, with no particular stop overnight. Again, we've done our best (and it succeeded) to play intraday long-side "popping" that may be associated with this Triple Witching Expiration week, while worrying about the market's structure further out.

As for Thursday, we'd be a little more tentative in this regard; that's as much of the unwinding so related to Expiration is likely spent, while the market will be concerned about next week's FOMC meeting at least modestly. Most do not expect the Fed to act while expanding liquidity now, but it is enough to keep many holding their wallets cautiously in front of the meeting, and then trying to engineer a yearend rally if they can get by the FOMC meeting unscathed. If so, that would fit the ideal mold established for the month (most remains as a specific forecast, and thus is reserved).

We think the narrow breadth reflects this trepidation in front of Expiration, and ahead of the next week's FOMC meeting. Again, we're not particularly bearish here (especially without key levels we've outlined taken out), but cautious. When the going gets almost neurotic, and investors are trying to create a market that doesn't exist, that should be a warning. The NASDAQ leaders are showing that, while much of the Dow's action is concentrated in the lifts of MSFT, INTC & MRK, all of which we've recently been expressing generally favorable thoughts about (INTC and MRK are long held with MSFT an intended under-market buy which never entered recent zones before new advances). And we believe the downtrodden (including speculative cheapo candidates) may not do much, while at the same time they (at least) tend to possess relatively less risk in this kind of dicey yearend scenarios. (Comments follow on internet & Linux stocks, as well as XML plays.)

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In Summary. . . the market resumed fading late today, after an early decline didn't carry through, very much in harmony with our intraday (900.933.GENE) calls once again, and inline with ideas of interim rallies related to Expiration, but not related to the market's ability to truly get-up-and-go anew. (Again; we've indicated for two weeks that enough volatility preceded this Expiration to not make it as volatile on the upside as some Triple Witches have historically been; hence the short.)

The McClellan Oscillator is at –89 now, and has been tracing an interesting pattern that barely broke down the rising bottoms configuration. If you look closely despite a slight Friday comeback and even an almost neutral Monday, that's essentially what happened Tuesday, with Wednesday a rebound to no better than the breakdown are. Expecting this to have set-up another bounce at mid-week and then a new down wave, there is no change whatsoever in our overall market view.

Again, we hold the guideline short from 1441 in the March S&P going into Thursday, without stop at a particular price for now. The March's close in Chicago's regular trading was at 1428.70, and we're holding overnight short from 1441, in what is the essentially seamless position trading from 1470, adjusted for the roll from the December to the new March front month. (Guidelines are just that; a resource intended to provide structures that may assist your putting our market view in an overall perspective that, if continuing reasonably correct, and added to your own efforts and well thought out determinations of risk and diversification, may contribute to your own market results.)

In the Aztec language the name for gold is teocuitlatl which means "excrement of the gods."
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