Proximity of the Shark Pools

August 11, 1999

Proximity concerns . . . dominated our analysis of Monday's labored "heaviness" in most all the major stock market Averages, as very much we've been noting unfinished downside business; a large chunk of which was subsequently addressed during much of Tuesday's session. There are now a chorus of opinions as to whether Tuesday's reversal was "the turn", with few of them even considering that while structural "norms" require periodic market rebounds to effect even a minor distribution preceding the next decline, or that there is little internal reason for a low here of more than a short-term variety. Concurrently there were numerous reasons to have the short-term low.

By that we mean that the gap dating from March has now been filled; a gap that few others were even bothering to recognize until Tues. morning or Monday; a good reason to anticipate that they would try to rebound the market once it was filled. That it's been overlooked by the majority (with the exception of a few of you, who are very much on top of these things) is testimony to the odds they are still heavily laden with equities; and are primarily trying to turn this up to bail out shares they've already got on board. Meaning: limited cash reserves are now experiencing a further sort of "draw-down" as they put what could later be good money against bad; trying to turn a market.

Of course that doesn't mean that the market can't sooner or later in here hold a rally together. In fact it's expected by us before this day even began, as only a fanatic would get enthusiastic for a downside collapse, after the market's already gone about as far as it should for the first leg down from the highs. The almost-sole exception to this would be a market crash; an environment that isn't really appropriate to anticipate yet; and that's been our ongoing view. Now; that doesn't at all suggest we're going to the highs, as we're not likely to do that. We're not even likely to get far on this first effort to turn before stocks are again put on the defensive; although that could be ideally just on an hourly basis, before new rallying comes in anew. (The hotline and DB call were for an up-down-up Wednesday session; which is generally on target at the time of this posting release.)

For sure nothing's changed fundamentally, and likely nothing's going to change from a monetary standpoint for the immediate future, and also nothing's going to change regarding the "macro" concerns. However, a structural rebound is not only looked-for, but is the norm. In a sense, you could say the market was way ahead of itself on the upside some weeks and months back, and now (Monday & Tuesday) is getting ahead more or less (of itself) on the downside; albeit only for the short-term. So; you rally from oversold, get a host of one-dimensional types bullish again, and then you take 'em down under this week's lows; eventually. (large portions are reserved)

Where's the panicky peddling?

That's the trouble with this market right now; any rally may be an interim affair within a broader or more grandly-negative longer-term perspective. And that's no longer unknown, by the majority on the Street; regardless of how they "package" the idea of buying stocks to investors at large. What that means is that the market either gets something to provide added impetus to the upside, or it remains sluggish in its efforts to recover, because there is not yet a comfort-level with monetary, or other factors including currencies, to embolden a more aggressive posture to the markets. For technically oriented; an absence of panic or a capitulation, helps make the forecast rally suspect.

Panicky peddling wasn't expected to rear its head on this particular wave down; but only at the outset of selling (primarily in recent weeks), and then-again after these failing rebounds make the forgoing perception of the overall stock market's (big picture negative trend-reversal) abundantly clear to the mass of investors. Only then would you get the kind of a capitulation that either gets a selling climax of intermediate proportions, or worse, a liquidation wave that collapses a market into something bordering on consequences of more major than intermediate proportion. (Again; this refers to the Monday early Tuesday drop; forecast to have a short-term turn from oversold.)

Absent at least such modest intraday behavior; we'd have to hesitate to enthusiastically embrace the upside, even though it is the action we've been contemplating for this time of the month; after a penetration of the 1290 September S&P area, and the filling of the Spring gap well under 1280. (Again; sizeable portions reserved. The 900.933.GENE hotline guidelines continue very flexible.)

Pools of Sharks

Also; intraday action has been inverse almost constantly for T-Bonds versus stocks. That's not so great; because while bonds are definitely more interesting investments as they get cheaper, it appears superficially that every time stocks get hit, bonds are firming, and every time stocks are rallying a bit, bonds are weakening. That's not the stuff "trends" are made of; but is the stuff seen in a "fluid" market, where largepools of money are looking for places to park with comparatively low risk. Sometimes when that happens; neither shifting into debt or equities works well for long; a precursor to abandonment, which has the sharks (those trying to capitalize on such short-lived or compressed moves) departing the feeding grounds altogether. Of course that ideally creates a potential for the capitulation we have in mind as conceivable for an ideal eventual market bottom (of more than short-term variety), which is why it is so tenuous right here.

Technically . . . the market is oversold on a daily basis, as the often-noted McClellan Oscillator is very deeply into negative territory, with a -231 reading as of today (Tues.; balance reserved).

It was this combination that promulgated our view of a narrowly-based advance into 1999, but no change in the belief that the first part of the year would be better than the latter; with some odds in favor of a rally closer to the end of this year (stay tuned on that one). What you are seeing now is not that move; just a projected interim snapback (which can be fairly sizeable if things go just right over the days immediately ahead), before prices head lower. The trouble technically with it now; is a) that it hasn't gone above the most minimum bearish control, and b)that if this fails (we actually hope it doesn't, but don't know yet), there remains some risk of a short-term capitulation.

If we could get a failure and a driving-down that really appears frightening; we'd be more bullish. It is not helpful when you get the most pressed (most shorts trapped) stocks running, but not yet a variety of stocks moving. And the ones that are down are often fundamentally most challenged.

Our main point, outside of a more realistic fundamental outlook than typically prevails around the Street, has been noting seriously increasingly risky ongoing internal deterioration of the stock market for months; most specifically into our forecast July 16th top which denoted completion of upside behavior in the narrowing group of Dow Jones Industrials leaders. Of course you've got the Dow Transportsbeing killed further (that's no surprise to regular readers), which risk giving a "theory sell signal", which normally occurs near the end of a short-term move, not the onset as so many (for whatever reason) still argue. (Parameters to recognize failure of rally are reserved.)

Daily action . . . saw us certainly not getting excited about negative action, well after-the-fact of a multi-week-long reversal, as was the dominant characteristic of many analysts and technicians who downgraded allocations well after an old intermediate uptrend was broken over a week ago; and even before that, the short-term trend reversed weeks ago, as we'd telegraphed in advance.

In our S&P activity for Tuesday, much of the gains were easy to come by early on, and fought for later; but nevertheless caught. That's because we were constantly on guard for a turn once a key level of 1280 for S&P futures was taken out; which was our goal. For the day; ahead nearly 4100 S&P points on the guideline ideas, via our 900.933.GENE hotline. One's own trading may have been a little more or less successful; in this case more, as the key was the pattern and expected reversal from sub-1280; albeit not necessarily of greater magnitude than we already outlined.

Balance; plus Bits & Bytes. . & Economic News & Releases: (are normally reserved sections)

In Summary. . . in a sense; these markets were akin to the Generals charging ahead, out in front of the regular troops; while thosemassed-armies just hunker-down back in their trenches. Our views on proximity held, that with a broader NYSE Composite already breaking the relative level from the late May/early June lows; the Dow needed to play the sort of cat-and-mouse game with the market, that either held temporarily, or a bit more probably, turned into a bearish catch-down scenario to that Index, helping aggravate the oversold short-term stock market condition.

Both factors occurred in Tueday's wide-ranging action, with a superficial effort at recovering the market later in the day, that was barely grander than the generals coming back for more ammo, and then returning to the front, but still without the confidence of having the troops behind them; or at least close behind. But (and that's where the oversold factor comes in); they know that lots of cavalry are supposed to be charging in behind them; so they throw care to the wind, and try.

Try is all they can do at the moment; as you're a couple weeks from a Fed Meeting, with most of the big players still overloaded with stocks, and more worried about existing inventory than urges to take on more holdings at least until they feel clearer about the unfolding monetary picture. Any new derivatives or currency worries, could easily roil a budding short-term lift from oversold; as all of this is happening in atight proximity to the forecast 1280 goal, and the break from the low of last week, which clearly aligns with the lows for the prior moves, coming off the demarcation of the late May and early June lows; which creates ongoing tension of sorts. The older intermediate uptrend was broken days ago, and only mediocre rebounds have since been mounted; including the snapback seen today (Tuesday).

It would be very unusual to have anything dramatically lower before this feisty rebound effort; so with the market so "pressed", let's anticipate some sort of curious (uncommon) reversal rally, as opposed to simply a Turnaround Tuesday that doesn't have at least the lows challenged after an upward thrust possibly Wednesday morning. This could readily set-up an up-down-up Wednesday for us; though that may be oversimplification for now. Resistance is at 1304, and then a goal of 1320. (Please do not presume that we require the market to make 1320; we don't.)

(Specifics, including support and resistance, are reserved for subscribers, as they are crucial just now.) As of 6:30 ET Tuesday; the Globex S&P premium is 1000; continuing firm after the Cisco (CSCO) report. Up opening on Wednesday without follow-through would of course be the risk; then down (ideally to fill any gap-up opening), and then a very crucial further rebound effort.

China has only 2% of its Total Foreign Reserves in gold.