A Rolling Pause-to-Refresh

November 3, 2000

A 'pause to refresh' . . . was the expectation, as last night's DB warned that we had achieved all the short-term (but not the long-term) objectives for the first phase to the upside, including the selling climax and automatic reversal from our December S&P 1328 buy point, a secondary test (in last week's nailed up-down-up pattern), and then this week's initial efforts to extend the move, expected to run into temporary resistance, which could take a couple days or even longer before the next phase is expected to chime-in (to the upside). Ideally we'd get late week firmness from a technical standpoint (after the payroll data allows a relief rally), but with the proximity of Elections next week, it's very hard to require the market to do anything so specific over the next few days.

The neck-and-neck fight between NYSE leadership, vs. a tricky NASDAQ market, resolved just sufficiently to give us Wednesday's cooling in the Dow, while the NASDAQ & Nasdaq 100 (NDX) actually rebounded; then both pulled-back in unison, before a suspected short-covering frenzy near the day's close. (Thursday was expected to see upside in the leading techs, due to our Intel and Cisco providing favorable statements last evening.) Virtually everything we were prepared to see unfold over these last several days occurred, seemingly very fast at times, but nevertheless so technically satisfying and structurally just what was needed. Now, we can envision a market in an oscillating mode a bit, before taking-out what we see as key resistance in the December S&P while the Dow Industrials simply pull back a bit. NASDAQ may simply work gradually higher.

While we know all the statistics about pre-and-post Election rallies, that doesn't heavily influence us here; nor has it lately. Further, we are not engrossed in worrying about whether the next four- year occupant of the White House is one who might help the traditional 'old economy' stocks to a greater degree than the 'new economy' issues; though there is some evidence (reserved).

As it is certainly not our intention to become embroiled in all this (though we did discuss details more in the most recent Letter), we think the importance to most Americans is that a) we got our forecast market turn; b) the 'honeymoon period' typically benefits either Party for awhile; and c) that almost all citizens are involved (directly or indirectly) in the U.S. stock market these days, so neither party risks upsetting the apple cart in a more significant way, especially given the current economic tenderness. That includes the Fed. It is clearly not about to hike rates as some think. By the way when asked in a Q & A session today about the impact of a tax-cut on the 'surplus', Candidate Bush said that if the impact is too severe, then the tax cut would simply be graduated, and not come in a short period of time, thus not having an impact on any such surplus concerns.

Thus, as we've argued since nailing October's wild mid-month low -literally to the minute- on our (900.933.GENE) hotline (in the 'just plain buy the darn market' comment as the Dow opened off 400 that morning), and also pre-warned here that the next move would be a washout and rally, we had our climactic selling wave, later secondary test, later moving up to short-term resistance. Note that the Dow Industrials are now pulling back to clear breakout points, as the S&P simply reached it; and remember that this first part of the early phase was expected to be led by the big-cap or cyclical stocks, not because technology is dead (total utter nonsense by those suggesting such, as we said at the time), but because that was the best (most visible) way to turn climaxing markets, with the NASDAQ and run-of-the-mine stocks following over time, as many are doing.

Many indications of potential players with at least nominally positive action are already visible in the market's action, with managers who missed the turn likely out there entering the market and absorbing supply on pullbacks, in those issues they wish to own. It is not only our view that some of these shifts into (specific sectors, thus these are reserved), are already visible, but in a couple cases are in stocks that we had sold a very long time ago and are now long once again in, which is working-out very well. (Sometimes there's no need to venture to totally new investment areas, as you become familiar with certain stocks or industry groups; just understand their cyclicality.) That is one reason no experienced technician could have been bearish in final downside phases of the market, as they occurred over 2 ½ years from the big-cap top, over eight months from the forecast 'dot.com' bubble-bursting; eighteen months after the warning right here about overpriced online and ISP stocks, and after a nauseating 'grinding crash' in the NASDAQ and S&P, which was essentially the opposite of an unsustainable parabolic blow-off, such as earlier this year or in last year's earlier spike. That doesn't mean no risk next year; just the end of this year's catharsis.

The foregoing is part of why we argued for it to be the culmination of the downside rout, not the initiation of something. Why some managers chose to switch from techs over to cyclicals at the lows, was probably their version of panic, as to us that made no sense (though we agreed that at least many cyclicals were also very oversold). When we singled-out a few stocks for rallies from those areas, including stocks previously avoided, such as once-hot wireless or other depressed areas, we did so not only based on 'pricing', but on value that had totally reversed former excess or upside extremes, seen in the same stocks at times over a couple years. Our view thus shifted.

As to technicians (including one we respect) arguing there was not sufficient capitulation yet; we respectfully disagree with that, in a way. We've already shared our concerns (which do agree) about several possible aspects of 2001, but felt differently, in that we believed the most sensible way to handle it was to be a scale-in buyer during October's purges, then re-evaluate later on as outlined. What if (for instance) things shape up more bullishly than some technical worries? That would compel managers (and investors) to pay-up to get in, which is not only riskier, but would of course be well off the bottom. Frankly we suspect some of that will occur, which is why moving at least modestly above (outlined measures) could trigger a market melt-up, even if only temporary.

The key of course will be getting above 1450-70, because that would deny all the right triangle or 'diamond pattern' arguments, and would mean our speculation some weeks back about breaking down in a 'confirmation of weakness' to the superficial viewers, followed by eventually taking-out the upside of the triangle, would make them completely crazed, and they would have to buy-in at the high points as the downside breakout eventually worked into an upside breakout (leg up). It's not 100%; is subject to revision, and would of course be a very bullish but fascinating alternative. I hesitate to even write this, because I'll get a lot of notes telling me earnings don't support that; however we know that earnings are not the market all the time; perceptions are. And if you have a perception of a 'soft landing', lower interest rates, and moderately good business coming back, it is not out of question that a more important bottom was made, than many will even consider.

Anyway, a rolling rally can be a given as more investors become aware of the chances of a 'soft landing' being the case; as shorts are run-in, and there's an absence of sellers, given the demise (thanks for that too) of another difficult October. We are honored to have called the lows, wish it all would have been simpler (but we can't make the market, just do our best to analyze it over a period of time), so actually believe the best is yet to come, but including today's expected pause. (section reserved).

As for the overall market, so long as the action remains contained and controlled (it has been), it is our continuing view that the market will work higher. Whether it can do very much so close to a National Election now is debatable, but ideally we'd fiddle a little in the morning, try to rally, try to decline, and then possibly advance again, in front of the upcoming Employment Report. No huge trouble there, and you could readily see the stock market finish on a firm note ahead of weekend speculation about the impact of one candidate winning over the other. In summary, Tuesday was not a 'one-day wonder' as some speculate, but simply too-much too-fast, and needed a rest. As I view today as decently supported, and doubt that retail tax-selling is going to prevent the market from rallying any more than retail buying could prevent it from declining last month, we suspect in no way have you seen the highs for this move, which won't come until way after we break above the 40-day Moving Average, which should occur by just after the Elections, if not slightly before.

It is also feasible that once we penetrate that area, with no huge interspersed decline, that risks of a 'melt-up' replace fears of the 'melt-downs', that dominated last month's thinking in so many corners of the markets, will take over. That would account for so many analysts rapidly shifting to not only a more optimistic stance about the long-term, but completely forgetting how some were (just a week or two ago) preaching the 'death of technology' and movement permanently into the cyclical sectors, which though (agreed) oversold, were not going to replace the focus on growth in the American markets. That never happens for the long run, except for brief interruptions, and is ridiculous for anyone to have expected during October's (not unprecedented) purges, which in fact we saw as tough, but buying opportunities nevertheless. (As noted last night, that's why the crowd thinking the 'Dow Theory' was bearish, missed the boat again, because they don't grasp what it meant, what it was created for, and why 'confirmations' come near ends, not the starts.)

It is only recently that breadth started to improve, with the restraining yoke of mutual fund fiscal year-end sales out of the way (some of that right down to the wire even yesterday, though very overwhelmed by supply absorption), and with psychology greatly improved simply by being over this period of time. Given the reputation of the preceding month, it's amazing that so many fund managers, and some analysts, actually didn't just shift, but evacuated technology altogether. We thought that was a sign of panic, typically seen at bottoms, and that the whole affair concluded a downward phase, not initiated one, regardless of what may or may not be troublesome later on.

Bits & Bytes. . . tonight (for readers) touches on new or relatively recent discussed issues from our Letter (which should not be interpreted as a buy, sell, hold, or short or make any suggestion as to suitability; just stocks interested in one way or the other, such as) Digital Island (ISLD), iBeam (IBEM), and a comment about the meaning of (and interim risk) of 'lockout restrictions' coming to an end; LightPath (LPTH); Intel (INTC); Cisco (CSCO); Analog Devices (ADI) and Rambus (RMBS), as well as Micron (MU) and Liberty Digital (LDIG).

In summary . . . the NASDAQ market was expected to chime-in, and pull back a bit today. We're a long way from affirming 'trending' strength to all, but entry levels for recommitment should go a long way to easing the tensions down the road when the next bull-bear battle flares anew. In a perfect world struggles will stall, pullback a bit, and then advance heartily, above key resistance.

Meanwhile the McClellan Oscillator eased a hair to +115, still way above declining tops per the forecast of the past weeks; in the wake of expected successful efforts to engineer these phases of moves. For now, after blowing-through resistance around 1420-30 zone attacks (generally for us thousands of theoretically S&P guideline points), up to the low 1440's, which cemented this forecast overall advance as far as going to the high-points of former 'congestion' or rangebound zones, we got our pause from there for a bit, and once through there, look out above (not quite yet). For now we're flat December S&P's after another good day. As of 9:00 p.m. Wednesday, S&P premium on Globex is 1038, with futures around 1431.60, little changed from Chicago's regular close. Tomorrow's pattern should ideally be down-up-dip-up-flat, in front of Friday's Employment Report.

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