New Year's Compression Relief

December 29, 2000

A delicate balancing act . . . continues, as supply coming from last minute individual tax sales is being essentially fully absorbed, which continues to affirm our view about forthcoming action, as it has these couple weeks gradually (albeit sometimes reluctantly) working towards this type of favorable anticipated outcome. And the rallying is likely to accelerate, not decelerate, as we're moving into the New Year itself; quite the contrary to what was seen at this time just a year ago.

One reason for that determination relates to stocks soaring before year 2000, and our firm belief that the 'dot.com' bubbles were already in a bursting mode, though more would likely be seen in a final fling from the Winter lows into Spring. This year, with so much pressure being relieved as the heavy foot of selling comes off the jugular of the market (adjusted to be similar to a revived downing victim, recovering from the putrefaction stage); an opportunity for a true January Effect has been our forecast, and remains the expectation. The upside seen here is probably just what we'll call a 'preview of coming attractions', and that's doubly so for the small and mid-cap stocks, for which survivability's a decent fundamental prospect, which of course doesn't include them all.

Compression Relief

Why sentiment's increased recently on the bearish side of the advisory ledger, we have no idea, as it makes no logical sense, other than human nature to be pessimistic when times are rough or optimistic (greedy?) when times are good. But professionals should know to scale-out during the mania types of excitement, and to scale-in (with patience as is almost always needed) during the times that are so antithetical to desires to buy, but tend to be just when the best entry-points are often achieved whether for short-term or longer-term trading, or investing, the latter ascertained later in the new year as seen appropriate to distinguish between the quality of various moves.

This type of 'compression relief' is especially so when you have many investors (and funds too), coming off a forecast fairly bizarre year, in which selling accelerated to not only offset gains from the year's start, but as eternal optimists became despondent as the economy not only slowed as logically would follow, but as media-circulated visions of levitating stock prices turned to fear that a technology depression would destroy internet interest, deflecting the 'new economy', ultimately resulting in a secular destruction of the future. Some of that occurred; some was expected as far back as our 'online internet' warnings of 1998, which centered around the probable emergence (as noted then) of no more than a handful of emerging survivors after the tulip-mania exploded.

It is clear that finicky technologies are not being embraced by consumers; but even in wireless, though criticized for it, we have long warned that certain leaders in that field would be dethroned. And they were. What did we suggest? Well, we bought the one leading cellular stock, and what is in our view the only near-term candidate in wireless broadband, as we remain convinced that use of WAP-enabled cellular will not catch on soon, but use of high-speed internet in PDA's and even sub-notebooks, will probably be a rapidly growing application over the next couple of years. It's a horserace to be sure, but at this point there's no reason to believe that the representative stocks, bought at or near lows, following declines we had never owned a share of either in, are well positioned as speculations not only for current (or forthcoming) rebounds, but maybe more.

Again for example (section discusses new selections, and hence is reserved, not only as a given courtesy for subscribers, but as investors could not otherwise know if subsequent views adjust).

Step Back From the Pack

Why focus on this tonight? Particularly to emphasize the bargains that have been created by the greatest rally, and subsequent crash, in modern times. Sure, all of this will take time to work-out, we're sure, and nobody would be so cavalier to expect 4th Quarter earnings not to take a toll as they come out; though it will be extremely interesting watching which stocks absorb even that as well. And this ties-into our belief that most analysts have embraced defensive stocks (even some as terrific as our long-held (major pharmaceutical), which we hold since 20; is increasingly pricey now at 90), well after the horses are out of the barn-door in mostly every sector, whereas the real bargains may be created in the very fields being studiously avoided by the same managers and some analysts who were heavily endorsing those stocks, as we all know, throughout last year.

It is a time, in our view, to take a step back from the pack, and contemplate who is buying, who is selling, and why, rather than just be reactive as so many most recently have become. The stock market isn't reactive; recently going up as projected, and that alone says volumes about all this, we think. It speaks to absorption of supply, positioning for the next phases (which won't happen as quickly as the latest generation got used to, along with we presume some older folk normally not so enthralled about chasing momentum spikes, which invariably end poorly), and if nothing is sustainable, at least what might be one of history's more notable January Effects, coming up.

It's not a conspiracy by investors to utilize their stock losses, but there's so much of that going on in this convoluted year, that one has to wonder what happens to players who (understandably) are said to be 'fed-up' with the stock market, and who have recently sold into the final throes of weakness (in our opinion), something we did our best (within the limits of never fully knowing the future; who does after all) to counter in these recent nightly missives. And that was only after the market got to extreme oversold; as the ducks not only lined-up in a row (which took quite a while, longer than first thought, but not longer than as assessed as it unfolded in recent weeks), but started quacking loudly. We do not know how sustainable the ongoing rise will be (though think virtually all overstaying short-sellers will be creamed in the process), but have our thoughts as in the recent past we've outlined (there are no changes in those ongoing projections for this rally in the Dow Industrials, the Nasdaq 100 (NDX) or the S&P for that matter) for the overall rebound.

Technical projections; Bits & Bytes; Daily S&P Action & Economic News: (reserved areas) . it cannot be said that the market's still oversold; though just because Oscillator levels are working into overbought territory doesn't mean the market overall has to top-out as of yet, given how stochastic levels are just turning up from a longer-term perspective, the January Effect is in nascent stages (presumably) and the cynics on the Street increasingly abound. Might that be because they fear this rally going so far as to deny them the opportunity to comfortably come into the market on a post-January pullback, without having to pay-up to get in then? Don't know the answer to that, but do suspect that with our first target of the 1350's for the March S&P accomplished today, that the odds are increased that this area provides decent support on what we suspect will be a pullback not particularly now, but after we get the first rate cut, on top of this rally, and thus complete the action overall next month, ideally closer to 1400 plus, than to 1300.

Well, it occurs to us (reserved goals) that something like that would be an interesting rally target for the overall phase, and then we'll see. With the fading of tax pressures; the input of seasonal monies being corralled, and the prospect of a formally-friendlier Fed on tap, why wouldn't many of the 'sports' who were so bullish when we forewarned a year ago, and for a springtime decline, see these factors? Probably because they finally recognize an economic slowing, finally know of fear, hear the same stories about internet depressions (and they are real of course, though what we suspect is that consolidations and takeovers will rule the waves next year), and are emotional as is human nature. Not all will survive; whether human or equity; but some will. And probably in the fullness of time be known as the 'new' new economy stocks, just as we warned would occur in this industry as it did in cable, or earlier automobiles, radio, television, movies, or even in steel and railroads at times too far back to remotely recall. And speaking of television, the interactivity we hoped once would be seen in the new millennium is going to arrive (balance is reserved).

It will be fascinating to see if a year of fractured hopes and unrealistic dreams morphs into a new bullish environment; though in theory it should happen gradually over a couple of years; actually a more bullish foundation for a market that has spooked the unspookable, and for which there is of course much commiserating, but little willingness to realize this is coming off mood swings that are normally associated with bottoms; not tops. After all, what are markets, if not raw emotion?

Finally . . . as noted the other night, we are just a bit suspicious of P-E Bush's desire to press the Federal Reserve to overtly move to a stimulative stance (because it might not be in the new Administration's interest to heavily be stimulating the economy before tax cuts are passed, and to make sure the economy is firming in another year or two, and not at the cusp of rolling-over again about that time), though concluding that this is a Fed that's almost always reactive (rather than anticipative), believe the T-Bondshave been telegraphing this whole scenario to markets, for over a year, by virtue of long-rates almost steadily moving to the downside, even while the Fed was still tightening short rates. We thought the bond market at the time was telegraphing signs of a slowing (sure was, along with other information compiled in that regard); in essence signaling that higher rate environments couldn't hold, with a domestic economy viewed incapable of being reinvigorated without a corrective hiatus. Surely this has all been chilling beyond desire, for some beyond reason, and in other cases overdue (for the 'dot.coms') by about a year. Now, while there are absolutely challenges and variables as we'll explore more of moving into the new year, becoming defensive now logically fights the last war. It is not my purpose to suggest that next year couldn't (under certain circumstances) see a lower low for the Senior Averages; though we suspect not for the Dow Jones Industrial Average, and probably not for the S&P either. For NASDAQ, it will be a market of stocks, not a stock market, though for now this continues higher.

The Dow Industrials dutifully moved above their 'standard deviation mean', challenged the goal we set-out of 10,700-10,800 and then higher. They should surpass that, enroute to 11,000 plus. The March S&P, projected to challenge comparable areas around 1350 or so, may pause a bit, and then move higher. (Thursday's preliminary thinking is up-sideways-up, or up-down-up or so.) As reemphasized the other day, an eventual attack (reserved) again, has been in our plans for this type of market action, and there is no reason we know of to change that expectation for now. As for theNasdaq 100, we suspect there will be a bit of a fight (area reserved), but that it should be overcome within a couple weeks (if not sooner), with a (higher) measured goal for now. (Talk about what happens depending on when the Fed cuts, follows, but is, as a courtesy, reserved.)

In summary . . for a couple months now we have concurred with views that the first couple of Quarterly comparisons in 2001 are going to be difficult-to-miserable for any large number of companies, as reiterated repeatedly, and expanded upon beyond our anecdotal concerns early this year, and early in the Fall. In some cases that's in stock prices; in others not yet so; also as occasionally seen recently, though we believe the short-term selling squall is essentially behind. Most earlier December selling was freaked, panicky, and more generalized. Based on emotions, not reason, that prevails at extremes, on the upside earlier this year, or downside recently, we've tended to view it as a preamble to the year-end and January rallies, which seem well underway. Even with chance (probably prospect) of a Recession (already there for so many businesses, we think), markets will anticipate subsequent recovery, and that will tie into forward action, sensitive to monetary policy, oil prices, and ultimately even more downside risks; though that's something to address down the road a bit, and not a particular concern just now. For now we're looking for higher levels, as incidentally increasingly implied by the behavior of the various noted gauges.

The McClellan Oscillator on the NYSE firmed today to around +142 on the NYSE now, with the NASDAQ recovering just a tad, to around +5. Again, we expected the next 'meaningful' move to be up, and believe it is increasingly underway. Our thinking was and still is that chances for this to be more than a holiday stocking stuffer were likely to be enhanced in these and further weeks ahead, particularly with all the after-the-fact breakdown warnings from technicians, now history.

The hotline (900.933.GENE) continues long March S&Ps seamlessly from 1309 (now near 1350) after quite a solid week once again. There are no changes in the expectation or the realization.

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.

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