Positive Divergences?

November 9, 2000

Even before the House Voted or the Judge tipped his hand . . . we were looking for stocks to have a pretty good chance to surprise on the upside, indicating on the (900.933.GENE) hotline that we'd be leaning to the long side rather specifically starting around 1:30 p.m. ET Wednesday. We did, and though there were a couple spots were longs could have been spooked by the fast pace of action, every hotline (including special interims) emphasized our optimism about results.

Until then we did a mix of guideline efforts, including a belief that the out-of-the-box morning rally had little immediate likelihood for follow-through, so we did catch a couple modest-to-moderate shorts in the process, but belief that subsequent rallies in the afternoon did have good prospects became our focus, especially as we looked for a dip during the NY lunch hour, and then up into the 2 o'clock balloon, a little more testing, then ideally jam-'em higher as the day unfolded. Sure, it might not have worked, but our bias was partially based on two ideas: one that the market just needed to get the Microsoft matter behind, and that with that and the China Vote behind, stocks could finally catch a good intraweek rally while there was still time before many players left for a long holiday weekend (full trading week, but many players will make it a 4 day holiday we think).

Further, without expressing our moral viewpoints on the subject, we felt in prior day's comments here and in the Letter, that the China Trade Bill would pass the House, which it did late today. As outlined during the day we thought Judge Jackson's decision didn't matter; just that it be over. As that turns out, it's apparently not over, and Chairman Gates and President Balmer won't get their requested opportunity to testify during the penalty phase of the adjudication in Washington. But, to us, that wasn't the key today, the key was just getting above the declining tops and running it, and probably getting these pending matters behind the market, regardless of varying outcomes.

That's why we made it clear that while some investors (especially those who were more heavily invested than our tendency this year, especially since March) might be more conservative, some of us would use periods of weakness (Wed.) morning to step moderately up to the buy-side plate continuing the partial process of reaccumulation outlined over these recent weeks during purges, on a scale discussed; again for those for whom they decide such decisions are appropriate. And to us, when a market drops and you hear all these downgrades or conservative allocation ideas, that doesn't make a whole lot of sense after long decliens. While nobody wants to catch a falling safe, we've believed the internal (non-tech) Dow Industrials lows to be well behind, as forecast crumbling of the Grand Dames, that we did look for, helped give the illusion of broader weakness than has really existed, towards the end (not the start) of a downtrend. In a sense that was a big expected positive divergence, while appearing to be the opposite to some, though resolving will of course take some time. Anyway, it was interesting enough to increase equities, not sell them.

Positive Divergences?

And while impossible to yet know to what degree this rally has "legs", we do know that risk for all of us who lightened up months ago, avoided leverage, and believed well before their peaks that the "dot.coms" were going to burst, risk… is actually much lower now that everyone worries hard on the subject. Don't forget our comments last night about how this was building, not reducing all liquidity, exactly the opposite of our view in February and March about how liquidity was actually disappearing while the market was soaring to such lofty heights. I doubt many analysts will agree with us that liquidity's actually improving, except for those with at least a generation's experience. (Besides the fund factors talked about last night, the allocation shifts also mean there's more that can come scampering back from debt or cash into equities when they're afraid of missing a ride.)

The falling prices made stocks at least attractive enough for nibbling (reserved), and even for at-minimum rebounds in some of the "grand dames", as specifically outlined last night. Last night's DB kidded a bit about our "annual call" late last year suggesting the market's troubles would end somewhere around oh say "the 23rd or 24th of May"; and while there was no particular reason, then or Tuesday, to base faith on some tremendously-in-advance forecast (no such precision can be expected to exist in a market of stock), we weren't going to fight our own stated belief that some sort of turnaround was brewing both very recently and in harmony with the entire pattern call ideal for this calendar year.

That doesn't mean the market won't be on the defensive again from early June into mid-June, or that it won't be nervous in-front of the June 2nd Employment Report and later on the FOMC again of course. And of course "experts" will (and they should be) reluctant to endorse a strong rally in just such a short period of time since they (after-the-fact mostly) downgraded stocks and started to talk about bear markets; two years plus after the multinational (and many NASDAQ) stocks in fact started their bears, a period of time during which few acknowledged a "stealth bear market", while even staid old DJ & Co. rejiggered the components of the DJIA to stave-off the new reality.

In any event, the Street got their Trade Bill passed through the House; the Microsoft (MSFT) travails still languish, and we got our forecast Wednesday market turnaround. The potential in the year's second half is as indicated from the start, there have been small detours, and some excesses in both directions; but nothing to deter our view that whatever the Fed was going to do would occur in the year's 1st half, with a more favorable climate in the 2nd half. And we continue to believe the greatest confusion to investors has come from the extreme hype before the year started from some of the presumed-conservative (they weren't) earnings estimator firms, who extrapolated what we correctly thought was simply excess inventory building (and Fed money supply stoking) ahead of Y2k in a way that nevertheless made goals clearly impossible for many companies to achieve early on in this year. We thought if Y2k was navigated successfully at the start (it was) that was bearish, not bullish, as it would create excesses in inventory, liquidity, and earnings estimates, that would be redressed during the course of the first half before the way was clear for an impressive rebuild.

Much of that inventory is eaten-through now, the M's (money supply) have been contracting very rapidly as outlined for some weeks now, basically catching up with the rate tightening (that's just what we meant earlier this year when we lambasted the Fed's liquidity pumping, which pushed a lot of money into stocks indirectly, while they criticized investors for action they contributed to in a way), and now everyone understands what we meant by saying it wasn't the "cost" (rates) of money to borrow, but the availability of that money, which determined the impact on the market.

The crunch is out there, lending standards are increasingly stringent, the actual monetary policy has contracted (not just the Fed funds rate), and this is exactly how you got the forecast April / May smash, with an anticipated late May turnaround that may mark some important lows, with a realization (as occurs in all bears or crashes) that some stocks bottom in April, some in May and some probably not until mid-June or even August; depends on the stock and group action. And, as outlined earlier this year, we do not expect the majority of "dot.coms" without zero business models that made sense to come back, which is bullish for those few well-heeled survivors. As you may recall, in the 1st Quarter we compared the Internet industry with automobiles early in the 20th Century, or Television in the 1950's; literally dozens and dozens of companies that correctly identified a hot area to be in business, but where only a handful of the best and brightest survive.

In any event; we're delighted to have forewarned of this complicated year; it remains trendless, with exhausted downside leadership from most Internets, and efforts at bottoms in lead techs, as the multinationals ideally complete tests of prior lows. Meanwhile T-Bonds have had the forecast correction from pressing 100 to around 94 or a bit under, and will (reserved), we suspect. In our view this expected pullback is a secondary test of their late 1999 low. There is no argument for long-term interest rates (reflected by the long bond) to increase significantly now as the markets are discounting mechanisms that anticipated this with forecast drops of last year.

Also, volume on the NASDAQ was huge, at over 2 billion….that's 2 billion shares. The bit higher volume on the way down was said by some to be bearish; they like light volume. Nope, we had so much light volume on the way down, that we needed higher volume for a mini-capitulation at this point, (balance reserved, including parameters for both Nasdaq 100 (NDX) & the S&P 500, as well as comments about how the market indeed does convey messages about its condition).

Bits & Bytes . . touches on Intel (INTC), LightPath (LPTHA), Lucent (LU), Broadwing (BRW) and Ramtron (RMTR), as well as Liberty Digital (LDIG)and Rambus (RMBS) tonight. None for visitors should be considered a buy, sell, short, or hold, as we just want to share an ideas of the type of stocks we cover along with some that might surprise as to conservatism.

In summary . . . the preliminary expectation for the new week overall was down-up-down-up-fade, with some chance of running the bears-in prior to the holiday weekend. Last night noted a desire to nibble into Wednesday weakness in the morning, which we did, and were happy that a couple of the new additions to the list did enter the high end of their under-market buy zones for those interested in scaling-in, or as they determine. Today we actually targeted a 1405-10 S&P comeback area for the late going, and were pleased that it was entered before fading a bit late.

The McClellan Oscillator currently is around -60; importantly reversing intraday. Note yesterday was a +1 change, (-74), as commented upon at the time. For now we're happily long June S&P's overnight for the official guideline. As of 8 p.m. ET S&P premium's 155, with futures not rallying on the China Vote. Right now at 1400.60, they are down about 110 in evening Globex action, from Chicago's regular close. Little change in our view overall, and as noted last night, so many were coming rapidly, which is what invited some nibbling for the boldest. Now we'll see, but with an institutional bias towards reaccumulation (yup, that's what we think), odds remain favorable.

Gold is widespread in low concentrations in all igneous rocks.

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