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Pendulum Swings Building Stamina

June 1, 2000

Languishing action . . . more than trepidations, dominated the second half of Wednesday's rally efforts, which were also moderately throttled during the late month-end Indexing adjustments; an exact mix of which can never be especially foreseen. This month's weren't particularly robust, as there were few changes to the S&P 500 compelling any great adjustments. Our most favored of all sectors (for years, allowing for intervening corrections) continued to be at the helm yesterday and today as well; that being the Semiconductor sector (SOX). That of course relates fully with our long-standing belief of focusing less on risky e-commerce, but primarily on "infrastructure".

Economic data was supportive to the market today; you're getting the indications of at least more or less minimal slowing (but nevertheless across a broad swath of sectors) in the economy. The New Housing data was off 5.8% for April; the Chicago Purchasing Managers Index was reported at 53.9 vs. 56.5, which is moderating sufficiently to potentially keep the Fed at bay, if not retard in a direct fashion their bias (though it's moving in that direction, as previously anticipated). While of course mild, the Leading Economic Indicators did nevertheless drop, by .1% as reported today. It is our view that the Fed has already moved sufficiently to discourage discretionary spending very much at the same time as the market's break (and impact on the wealth effect) accomplished the very same goal of the Fed, and as forewarned for months likely for 2000's late Winter & Spring. The T-Bonds seem to be concurring; witness the very decent recovery of late; some of which is money coming out of equities into debt (almost a daily oscillation), but not all of it. Bond bears in our view are dead wrong, as all we had was the expected correction from near 100 to under 94.

This has been a year that required alacrity in the markets, while maintaining stamina with respect to long-term holdings. It was even necessary to determine in advance which categories of stocks an investor wanted to retain (and basically not be disturbed by erosion) during the forecast drops of the April/May timeframe, which were not only part of the overall forecast, but analyzed during the ferocious (but nailed) volatility in the year's 1st Quarter, which in-and-of itself wasn't a sign of a healthy market. I got an occasional kick out of comments from a few (obviously inexperienced or one-way headed) investors who thought we flipped-flopped too much early this year, when in fact what we did was to call (often fairly precisely) the wild swings of the market. They in essence wanted something in short supply this year; an enduring uptrend. We shifted short-term direction accordingly a few times because that's what the market required. And minor versions (not nearly as frenetic) are afoot to a degree now, but the uptrend (especially in NASDAQ) is established as desired from May 23rd / 24th, ironically the dates speculated before the year began as the Spring ideal low point area. Again, we believe our analysis remains on target; that this is all going to be resolved favorably, but not on a dime as is desired by some; and we would love that too…it's just not that kind of market; shouldn't be yet. As noted last week, aggressive NDX upside was a key.

Pendulum Behavioral Characteristics

Shouldn't be? Nope. When you crash a market (and our March comparisons of the preceding hit and comeback compared the odds for April only to 1987 and 1929 as there were no other years quite so close in fact (building up to the smash), and that included the real economic disparities between the financial centers and the heartland), you do have violent updrafts thereafter (to run shorts and accommodate specialists and even the market-makers), but you generally go into a period of basing, which historically doesn't "flat-line". That has characterized the last several key weeks during which various sectors have accomplished (with angst) essentially the desired goal.

What occurred was a series of moves that play-out aggressive traders penchant for buying every dip; that played-out the permabears penchant to believe that every hard hit is a beginning of the end (talk about one-way mentalities, even if the underlying premises they cite are often accurate, they forget the Fed knows this best of all, which is why those fine-lines tend to repel extremes by policy-makers, or alternatively reverse policies just in time); and that wear-out investors who had thought there was some chance of a serious bottom to have been made in April/May, which was our well-in-advance ideal pattern call all this year. Guess what? This is how pendulums swing in both directions, until settling into an equilibrium and basically winding down all volatility. Then, as some allocation ideas shift to conservative tactics (typically after the horse is out of the barn door or the like, as we argued for semiconductors enthusiastically last week), you get the completions of that rocking pendulum action, and then stock markets start to have rallies of a type that will be suspicious, sharp and short-lived, but the pullbacks don't go to lower lows. Instead, higher highs.

Our current view of market action has held that the Tuesday/Wednesday rally would be halted at or about the vicinity of the gap remaining from the way down around the middle 1440's or so for the June S&P (reserved). Should matters not adjust as outlined (so far so good actually), we'll adjust rapidly, even getting a bit bearish again if the market says that becomes necessary. So far it doesn't, with even breadth today along with NYSE action satisfactory, while the always more volatile NASDAQ eased a bit more (but also it rallied a good bit proportionately more as noted for Tuesday). Barring currency or new energy debacles (reserved, as it's a key forward action call).

Again, we are fairly confident (subject to revision if the market requires it) that those technicians so confident of lower than April / May buying opportunities this Fall (like October, because they remember recent history) will have missed the best buying spots in a host of multinationals and especially techs, in harmony with our view that the multinationals (old economy stocks) bottomed before Spring lows, while the "grand dames" were scheduled to be trimmed heartily in April/mid-May (and were, as it developed), with both sectors coming back Tuesday and early Wednesday before going on a bit of a "hold" pending Friday's Employment Report (sometime late Thursday).

We had suggested the pullback low (dual tests) would be complete ideally around May 23-24 or so, which was fun because it coincided with that date in our annual forecast as being something like where the Spring break would trough out, in this case as a test of the April lows, with our call being that most big-cap stocks (outside of a few creamed "grand dames") wouldn't make a lower low. Complex; but mostly the way it worked-out. The next part of that call was for the most recent rally, with a fade in front of the Employment Report (and then the balance of our overall outlook). That outlook foresees what few others see by around October; (reserved for subscribers only).

Technicals (support & resistance, and targets); Daily Action & Economic News: (reserved).

We were probably among the pioneers warning of the debt implosion and derivatives risks back in 1997 and 1998, at the very start of Thailand's currency morass, which we thought then would permeate almost all Asia before the Contagion ended. And then (via derivatives) you got LTCM's debacle, which we caught and turned immediately bullish once the Fed came in, like the cavalry to the rescue. And therein lies the difference; we will absolutely try to capture downtrend moves when there's a catalyst appearing capable of unleashing them. Beyond that, the ultimate market backbreakers tend to stay bottled up or sort of back-burnered, where they really should be mildly addressed (or discreetly) by the world's monetary authorities, although most tend to do nothing unless or until push-comes-to-shove. Asia was a push, with LTCM being the shove that moved the Fed. And nothing has been so systemically risky for the financial markets since that time. (It doesn't mean those more concerned don't retain small gold or defensive plays; in fact that's what the Letter's done for some time, since assessing anything under the 280 oz. level as low-risk.)

The point? We've argued for months that deleveraging is going on, and that the folding of certain hedge funds (collapse really) again contributed to a big unwinding. The unwinding has not gone as badly as it could have, and was in harmony with our overall forecasts. What helped has been addressed as well: that's primarily because the hedgers that got caught were thought by us to be shorting the Dollar and long (normally stable currencies like) the Swiss Franc; precisely just the opposite of what they needed to do then, and precisely why the Greenback's eased a bit since.

In essence these problems are either nearing behind, or worked-through. The time to anticipate them was as far back as last Spring (of '99) and as late as this March's forecast rally, where we already saw how the narrowly-based interest had concentrated in a handful of stocks, while the old multinationals had essentially (mostly) completed a two-year old "stealth bear market". Now, we are a couple hundred points from the NASDAQ's 200 day Moving Average, which signified some of the downside acceleration in the indicated final climactic phase this past April, and as it turned out, a slightly lower low in this Index and the NDX (impacted by the "grand dames") only, during the expected Mid-May decline. Hence we should be looking for (reserved), if all goes just right, for much of the rest of the year. Slowly at first, then more aggressively. Surely, we can't speak for the Fed, don't know what out-of-the-blue events may occur, and totally agree there are international risks and concerns that support macro bearish arguments. What they mostly miss however, is that unless those concerns hit home in the U.S., money's happier in New York than in almost any currency or market worldwide, and that's especially when there's foreign instability.

Daiy action . . . reserved as a forward forecast. As noted, the 900.933.GENE hotline nailed most of the recent upside, and correctly forecast it to be led by the Nasdaq 100 (NDX) more than DJI. (The most recent series of guidelines has been almost solidly bullish since 1407-09 to 1450 in a conservative way. The shift to macro bullishness in the S&P dates generally to the mid 1300's. It of course was shifted as need be to mostly catch those purges or surges during violent testing.)

Bits & Bytes . . is of course a reserved section, but touches tonight on such stocks as long-held Anadigics (ANAD), the late Fall pick-of-the-year Analog Devices (ADI), Comcast (CMCSA) as well as the first-ever "small-cap favorite" late last year; LightPath Technologies (LPTHA). We in fact called for these to surrender good chunks of gains from the March highs, suggesting sales of partial (or more; individual decision) positions at that time, and then reentered during the lows of April, with a secondary buying opportunity outlined to ideally occur around May 23rd or 24th. It should not be construed mentioning these indicates a buy, sell or hold at this particular point as of this point. Specific selections and forward projections are provided to ingerletter.com readers.

In summary . . . the market generally didn't care about the increased "consumer confidence" as reported Tuesday, or the contracting LEI and Chicago PM reports, which were cues for stocks to at least try to rally this morning (at one point the DJIA was up over 70, but finished off 4.80). We indicated scalping parameters on the 900.933.GENE hotline for those inclined to swing rapidly.

The McClellan Oscillator currently is around +36; eroding just a little, and after failing just right at or below a declining tops configuration, which will be very important to breakout from, heading higher over time in the weeks ahead. Little change in our view overall; it holds subtle institutional biases towards reaccumulation are still undergoing the early stages; however, if we get through some of these numbers, and we get any hint of slowing (or to the market's surprise even if we don't), technology may continue to take off to the extent that the managers' buying efforts may become increasing less subtle and more overt. That would be the type of breakout that, yes, would precede a pullback, but then higher (reserved parameters). That's why we emphasized the timing and pattern, more than trying to insist on the market (especially the less-important DJIA vs. the S&P and NDX) hitting any particular number here. We hope the skeptics keep waiting for a late Summer or October low, as we suspect there is almost no chance of the market remaining on the defensive that long, though the immediate future may surely be more volatile. As of 6:30 p.m. Wed., S&P premium on Globex is 190, with futures ahead slightly from Chicago's close.


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