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No One-Day Wonder; Bulls Ready Next Charge

May 10, 2002

Warning bears would get burned . . . . for days now, as we departed our 'complex' March / April projected decline, with an expected continuation (after a rebound) into early May, we were entirely on alert for the market to reverse after penetrating those so-called 'support' levels so many made a big deal of (typically the same type players we noted being last enthusiastic on -predicted here- unsustainable rises last March).

Anyway, besides looking for the turnaround in no-man's land (as we termed it) in this very week, there are a number of issues that this market had to, and has to, grapple with; a few of which we'll touch upon tonight. And, just as we thought it nuts to short (or even sell) into the hole as the mini-capitulation evolved over a few days, we're inclined to address the sustainability of this move, but not in the way most doubters are. For instance, while we can understand the common argument about 'too far too fast', we also know the majority of market moves (in either direction) happen swiftly; it is almost like studying for an exam in school; 90% of the time is preparation, and just 10% (if even) determines the results. That's why we thought it so important to realize the 'context', the market was functioning in recently, which was conclusive of bearish action (at least for awhile); not starting some new downside, when the then-current downtrend was two months old; more so in the June S&P than some other sectors.

The S&P capitulated generally as outlined we thought it might; below the old lows of February, but above the Fall's lows; and turned. The NASDAQ surged; in contrast to a majority of analysts who thought it couldn't; and technology -still buried by most- in fact, was at the helm. And it wasn't just Cisco (CSCO) in our opinion; though surely we're not complaining (having bought it virtually at the lows; took full cost gains with the rest kept). In our view there were slight, but discernible, positive divergences of a sort in technology over a couple days earlier, as we shared such thoughts with you. Sure we do not believe the Nasdaq 100 (NDX) is going to double overnight, but we made the point about potential, primarily because we thought it basically nuts to be selling extreme weakness, and even worse to take insane risks like shorting beaten-down stocks, on a breakdown that was evident to the most pedestrian thinking. It's why we made the point that nobody knows (always) what 'reason' turns a market (do we know for sure now, not really); but that doesn't matter; markets do this anyway.

And, not to be forgotten, this was the Wednesday prior to Expiration; albeit a nominal one. Such days are frequently good times to catch shorts asleep at the switch, and a number of participants completely crammed-into the 'lemming momentum blue-chips' which is why we thought that the best way to rescue the Dow Industrials, which had broken down as desired, was to have the technology-components of the DJI replace the possible erosion in the overpriced multinationals; some of which precisely is why and how the DJIA was able to add 300 today. Heaven forbid we discuss our recent interpretation of 'wave-counts', which we thought was a perfect set-up for what we've termed 'false downside breakouts'. And thank you for the kind comments about that.

Anyway, we would love to see the market fail some follow-through, and then selling in brief strength, with subsequent rebounds that seems to run into a brick wall. Analysts and money managers who for the most part missed this (sometimes by what we have termed incredibly mechanical thinking by selling on simple penetration of ten dollar or so price levels, by fiat from their bosses, not analytical thinking) will scream hooray at the sight of a faltering move up, and conclude this was a glorified 'one day wonder'.

Certainly much of the day's action was short-covering; an upside panic if you will. In a solid move, or 'lockout', the perception is often that the bears will not be afforded the opportunity to cover 'comfortably'. Well, they already weren't; that's why we saw such huge moves, even in companies that are laden with debt. Ah; but what may happen, at least in the interim in a couple days (give or take), is that the market appears to be unable to maintain a lockout thrust, and the bears say 'see, we told you so', and they go on to short anew…setting themselves up to be skewered one more time down the road. Ideally that would set-up a post-Expiration decline (briefly at least), which might just turn into (this is too much of a specific forecast, and must be reserved for readers at ingerletter.com). At this point this is hypothetical a little more than usual, because anyone can only interpret so much from a single day, no matter how powerful. We're just glad for a slew of readers (judging from comments) that it was one of their better trading days, and for some, if not that great an experience, they heeded the warnings not to short markets in recent days, along with hysterical masses and permabears.

Daily action . . . notes that there was real buying in this market; and a climax and reversal (as we also indicated likely in last weekend's Letter, and shared that thought here too, as after all this is the primary service we provide, along with the hotline). It's the kind of powerful turn that can shelve the movement higher of Oil into the deepest background, as it should be (because energy rallies on further terrorist or war fears in most cases are temporary phenomenon, and should be treated as such by markets).

It's also the kind of market that can affirm a topic we broached recently; slight higher interest rates; as has prevailed gently for some time now. T-Bonds are becoming a source of funds for equity buyers; and that's basically the only reason for today's big drop. At the same time they broke their daily uptrend, which was overbought anyway, and essentially tested the highs of February's rally, coming all the way off the low last Fall. Though bonds might drop (again specifics; which are reserved for our readers).

As yields firm (and they have been) you're seeing greater strength in the Dollar; just as observed in yesterday's remarks. We thought that when the 'jerky' (a very specific technical description we had forecast for the post-FOMC action…slightly humorously) action in the market was accompanied by strength in the Greenback, that, well, it was both a sign of a laying-off of foreign pressures, and a bullish factor for stock markets. (Balance; along with Bond, Dollar and foreign trading efforts; are served comments.)

All of this is fairly fascinating, but the bottom-line is that we got our turnaround; there is going to be some contesting of the move; but so many think this is an upside false rally, that it may at some point appear thusly, but in the fullness of time not be that. It is also impressive to see the performance of the Semiconductor Index (SOX) which rallied an incredible 10% (almost exactly) today alone. That is rather the norm for this particular Index, coming off an important low, likely tested later-on a bit, then higher.

Anticipating the improved tone, our intraday hotline (900.933.GENE or direct-dial access) previously emphasized the improved action Tuesday, well before the Cisco story (or anything else), as did these DB comments Tuesday night and even before. As for Wednesday, after realizing the forecast gap-up opening wouldn't pull back (a couple efforts, but nothing meaningful), we just got long and stayed there basically for the rest of the day, hopefully resulting in players achieving a homerun gain.

Overall . . . we concluded Tuesday's 1147 finish of the June S&P was a fake-out washout, with discounts that bordered on capitulation, setting-up the pattern we're speculating about as likely this week, and possibly getting those negative who drop the context of that fade likely culminating, not initiating, anything on the downside. Remember, the idea was that it would break the old lows of the past couple weeks, stumble around the FOMC Tuesday (a better rebound in the Senior Averages would have been fine, but we suspected the action was so deceiving to most, to actually be better from a strategy or illusion of weakness perspective); then turn higher. Sure did.

That was projected for days to occur from the area we've essentially called 'no-man's land'; below the February lows and above the September panic lows of course. Again that doesn't reflect a lot on sustainability, but the market became very oversold which didn't assure our turnaround, but after what we've already had (which has been price eroding after negative momentum dating back to early March), getting negative into this week anticipates nothing (as we wrote), and potentially would get such players in position either to be hurt, or miss the snapback, or both. Yes, it that all that and more.

Technically . . . we considered the implications of penetrations of certain key levels (well, presumed key to many) as nearly foregone conclusions for some weeks now. It was stated Monday and remains the case, that we perceived those occurrences (and they were not at all an across-the-board scenario) as semi-conclusive drives down; in that they invite sellers interested in evacuating the downtrodden (and/or debt-ridden) -at such late stages- an opportunity to do so; which would probably prove to be very unwise in most cases from recent purge levels of those days and immediately ahead.

The character of today's run-up is what you want for a key reversal day, though the gap-up quality leaves a bit of a short-term magnet, which would diminish -in import- as time evolves going forward.

In any event we thought it would be jerky (was), but thought some sort low was being put in during recent days; durability of which is questionable; but longer-term working on it. We noted what the TRIN (or Arms) was doing; which was completing a bottom of some import as we suggested last week was starting to unfold for recent vacuums; not being viewed thusly prior to the action in the wake of those 'supports' breaking; a very important event that 'confirmed' bearishness to many and just the opposite here.

Tuesday we showed a shot of a Russian rocket; not knowing if the stock market was ready to soar like a missile; but saying it was feasible. We never show rocket shots.

Economic News Releases: (reserved subscriber section)

In summary . . we have been fully on alert for a turning-up from this projected purge lasting into May, which is very important, whether just preliminary to the bottom, but let's not be too specific about the nuances of it; since we've been cautious on big-caps for many months, appropriately so; thus there was no reason to get emotional with the crowd when we saw the type of plug-pulling acceleration that was stubbornly resisted for so long; probably due to what we called the crowding-in mentality of the momentum management crowd that somehow feels comfortable doing those same things at the same time. They bought together; and we thought they were selling and panicking together. Yup. Anyway, the call was a fairly broad snapback (not chased initially, but later on), and then we'll see how the market acts when later put on the defensive; maybe into next week. We have emphasized accumulation into extremes was probably afoot before this week, because no fund or manager building a position can do so on a dime; hence even if there is a lingering malaise after this run, into later May and early June activity (we don't think it lasts that long, but even if), we suspect the same worriers (well, we don't think they'll be very heroic…reserved area).

As to McClellan Oscillator readings: rebounded to near -19 for the NYSE; with very acceptable improvement for NASDAQ; up to -8. Stay tuned; remembering that small and mid-cap sectors are doing far better than the superficial major Senior Averages, and have for months now. This pattern continues in harmony with overall forecasts.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of next 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. In this new week, we projected emotional selling to be followed by crucial rebound tries. Got that. S&P futures ahead 3 points tonight.


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