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A Quadruple Bypass Market

May 12, 2000

A "Quadruple Bypass" . . . of a sort has been surgically able to divert the flow of monies into tech stocks for the moment; much of which owes the characteristic to the Motorola (MOT) worries; to IBM's (IBM) acknowledged slow comeback from tough quarters (not surprising given the dependency on servers and mainframes, which few would have tried replacing, but simply fix in the anticipation of Y2k worries (and with no rush to embrace new technology at the year's start of course); to warnings about Cisco (CSCO) being a "house of cards" (our view clearly stated on Monday as relates to that subject), while now Intel (INTC) worries about replacing even more of the initial advanced chipsets than they had already acknowledged in last year's late glitches.

It's now a "Letterman market"

Put it all together, and there's just no way to have a stabilization or rally that sustains for awhile in the Nasdaq 100 (NDX). And now, after today's close, you get a disappointment from another tech stock (which we don't own, or none of the earlier ones other than INTC), Applied Materials (AMAT), which disappointed. Who wouldn't expect these shockers, and who would need bypass surgery after hearing these stories? Only those who didn't concur the entire sector (not just 'nets) was expensive in the late Winter, and due for the expected big April and May decline (with one or two intervening bounces). This now borders on a "quintuple bypass" procedure, which when combined with the reticence to buy stock ahead of the Retail Sales report and an FOMC meet in Washington next week, clearly see why there's not a panic out, but no interest in buying equities.

Even the fabled talk show host was up and running within weeks of the complex procedure, and so we suspect it will be with the key technology stocks of the times. The problem is none of them are willing to dispel gloom entirely and go on the offense by forecasting good times later this year though probably all are hoping (even expecting) that to be the case if the Nation is able to avoid recession later this year. After not dissuading the consensus estimators overly-aggressive calls (of which we've warned for at least six months or longer) for the year's start, and ignoring the late '99 demand which we thought was simply a precautionary inventory build ahead of Y2k transition worries, these firms are scared to get analysts hopes up again. Nevertheless, we suspect that in the absence of recession, all the "glitch" writeoffs, and the eating-through inventory, as well as all the major purges in the old e-tailing and portal stocks (many of which we've warned of for at least a year now), could set up a very strong fundamental business scenario for late this year or next.

None of this is comfortable, but neither is it outside of the bounds of our long-standing forecasts for this timeframe. If the balance of that forecast (which is only valid if we avoid heavy recession) develops, then these series of pummeling's sets up a very good opportunity for positioning ahead of the expected Summer rallying, which could be fairly strong well ahead of the November voting event. And that's one reason we suspected that whatever medicine the Fed meted out in all likelihood had to occur in the year's first half, and that the plan was to either stand aside or if need be even backpedal in the year's second half. The reasons we've discussed before (risk of something very negative if they push it too far), and for now there are no changes in the outlook.

Technically . . . the stock market continues to work-off it's recently overbought condition from all the wild rebounds coming off the April climactic low, in continuing what is a low volume potential further test of those lows (we say potential, because if it fails, then the lows come out in a higher volume decline, which we've all known all along was and is the risk). As noted ten days ago or so after the little buying pulse at the month's start; the next phase on the downside would look more or less the same whether or not it was going to be a test, or whether it was more ominously the start of another entire phase to the downside. The reason for the statement then was the stock market's inability to surmount key levels (in the very high 1480's or so) repeatedly, which was a warning as noted then. Further, we expected to see further pressure this month anyway, with an open mind as to whether it works into a lower-low via a panicky frenzy, which we hope it doesn't.

However, Wednesday was more noteworthy than Tuesday, as this session performed very much in harmony with the outline for a general "down-up-down" session, with increased nervousness in front of Thursday's economic report. As the Beige Book and other retail hints this week weren't as soft as some of the anecdotal stories, the Street generally expects a strong number therefore. (Frankly we even considered going long in-front of the Retail Report, believing it would be lower.) So, a near-total absence of buyers again characterized the day, and stocks penetrated the minor support at the June S&P 1408 area, accelerating downwards more aggressively thereafter. One very firm rebound occurred in the period between the 2 o'clock balloon and just after 3 p.m. (a bit of an unusual timeframe for that, though we caught a good chunk of it), but it couldn't maintain it.

The proximity of the 1340's can't be missed now, and with the market only oversold hourly, we're not discounting the chances that could be attained, after what should be some additional rallies. During the final hour we even toyed with the idea of staying long overnight (had we had enough of a cushion), but we didn't have sufficient cushion, so with just a gamblers thought in that regard only, we opted not to, took the gain from the good earlier rebound long, going went flat overnight on our 900.933.GENE S&P hotline, as far as the guidelines are concerned. If the market rallies in the morning (Thursday), it will likely be sold into briefly; if it drops, it may not rebound much more than filling any down-gap, because of worries then instantly shifting to next week's FOMC meeting. We think the majority of analysts are responding to economic information that anyone looking at the Energy, Food or Retail pipelines would have spotted months ago. We think that it's interesting that both the Dow Industrials & NASDAQ were under pressure, which implies that this was a broad disinterest in the buy side of the market, taking tech and big-cap down together.

If we break the old lows, sure, technical measures would exist first to the high 1200's in the S&P, and thereafter the mid 1200's, though that's not different than any bearish progression. We're not interested in position shorting of this activity however, since it may well be conclusive in the April-May pattern, rather than initiating any new trend. The most bullish longer-term case probably of course would be a further purge, really driving this market into an oversold condition, though that always risks things becoming more unglued than even the Fed wants (presumably), so we'll see. Hence, it's not always true that "removing the excess" is healthy, especially when that already in many cases happened last month, and thus the healthy pattern would be a successful test. We knew from the start that the failure to penetrate 1480 or so on a closing weekly basis (to 1505-10 for instance) set up this risk, and we knew it would be psychologically dicey through the 3rd or 4th week of May, which is continuously impacted by the "buyer's strike" which of course is ongoing.

In a buyer's strike, there is really a dangerous scenario, and a terrific one; if the market takes out the low and the mass of investors succumb to panic, you've got a market disaster on it's hands. I again emphasize that spreads are narrow, market makers and specialists non-heroic (they can't be, as these days they don't have the liquidity or capitalization, if even the desire), and new cash generally not coming in this time of year (though mutual funds still have some accumulated from when they prepared for the redemption run that didn't occur last month). These very "liquidity" limiting factors work the other way too, if they wash-out and turn this market, especially as now we have more interesting in bearish sides of the ledger, well after a top of the market per usual. (And while we're aware of the risks (having forecast the April-May decline), we're not comfortable in a doctrinaire bearish stance, with so many former bulls now crowding into that broadening sort of camp, that is convinced they're looking at a "broadening top", but isn't when you break-out the technology stocks from multinationals -which were in a long bear trend for two years- overall.)

Daily action . . . was fairly flexible for Wednesday on our (900.933.GENE) hotline, while we said to expect a down-up-down day. And now we're basically looking for a rally, regardless of opening action on Thursday. (balance reserved, though we caught about 2000 points of theoretical gain).

We have noted the technical work is fairly neutral, with prices heavy mostly from disinterest rather than a big selling wave (in an absence of buyers, incremental relatively light volume sales can take stocks easily and readily down); and with news right in front of us, we're not inclined to press the downside, when so many are positioned thusly. (reserved) For the moment the Euro in fact firmed a bit, based on rumors of intervention (hope we didn't start those inadvertently), while T-Bonds benefited from the monies moving somewhat out of equities and into the debt market. It is not impossible that any further sharp hit on bonds will create fairly good buys in some high-grade corporates, as well as even in zero's, as time goes on here. Remember, we had warned of bonds being overbought as they pressed 100, coming off our buy ideas in the high 80's target of course following a warning a year ago that they'd get potentially that low before rallying anew. In this case the drop was forecast as corrective, not beginning any newly enduring T-bond decline.

In summary . . . the market tried valiantly to rally once today, near the final hour, but failed which was in harmony with the forecast. The pattern remains fluid and very unresolved (unless viewed in the obvious bearish context as if it will be enduring for more than the forecast risk into as far as the 3rd or 4th week of the month), in front of the retail numbers Thursday, and then the FOMC meeting next week. Of course none of this is resolved for the longer-term of the market. You may even see a rally next week after the FOMC meeting into May Expiration (a nominal one) and the market might still try to drop again after that, before likely rallying into early June, we suspect.

The McClellan Oscillator is currently around -79, working on become oversold once again. The S&P premium on Globex is very low at 165, around 8:00 p.m., because nobody's willing to buy in front of the numbers. June S&P futures are shy of 1385 right now, down about 280 from regular Chicago closing prices for the S&P. We're flat in the guideline efforts overnight, and actually are hoping to buy a long, whether on the first pullback (if up at the opening), or into a sharp down if that's the opening. (The 900.933.GENE hotline did a single guideline S&P long at June 1398-99.)

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