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Seesawing Woes & Fears

June 24, 1999

Seesaw behavior . . . characterized Wednesday's alternating action, with the S&P low exactly that we looked for on the morning 900.933.GENE hotline call. Certainly all the woes and fears noted ongoing, and warranted in the last few days continue. But at this point it's hard to decipher more than can be from a day's "tale of two markets", with Nasdaq 100 (NDX) up strongly, while most of the Senior Averages, such as the Dow Industrials, finished sloppily down per the daily forecast. (Early Thursday, after very good Wednesday gains; we went short again at S&P 1340.)

Permabulls can be paraded before the Nation, extolling the virtues of a not-too-overbought stock market, and permabears can call forArmageddon. The former will ride through a horrendous DJ decline as they did last year; or even in 1987 for that matter, not caring about it, while the latter will always hate the stock market, which is irrelevant for anyone who strives to make money with equities; as shorting the market constantly is not a winning formula over years. There are times though, when timing becomes more than just a factor of "discretion being the better part of valor". So with such an extended level surrounding everything that's been going on in recent weeks, we find it totally irrelevant whether the Dow makes it back to 11,000 or not, for a normal investor considering buying now. (900.933.GENE successfully shorted virtually every daily rally; but also caught portions of a couple key rallies including an expected one ahead of Expiration.)

It's also plausible that even projecting moves to Dow 12,000 wouldn't warrant the risk involved as a 10-12% move (even if it occurred, and we are not projecting that) would be more of a selling, than a buying, opportunity. Typically you get no more than 2 or 3 important buying opportunities yearly, and often no more than 1. And the inverse is of course true for selling squalls. What we're seeing is essentially the forecast (albeit not smooth or easy sailing for strictly rigid bulls or bears) pattern in action before and after Expiration. In the interim we're sort of stuck (or worse) ahead of Tuesday's FOMC meeting so it doesn't pay to press one's luck on the upside. Interest rates have not only anticipated and gradually led (for 2/3 of a year) the Fed by a nose; but are putting them potentially even further behind the curve. This is viewed as an unfounded fear by many; but they are myopically looking only at a domestic economic situation, and rarely will consider that they're missing an international hook. (We've made a major point last weekend about that risky hook.)

We think they are missing this; on top of an inability of foreign countries to pick up any slack in a potentially slowing domestic growth era. We were extremely bearish last Spring (and especially in July), extremely bullish last October, and became increasing bearish sector-by-sector this year (not a monolithic market movement at any point really), viewing the top as a done deal. While it's likely (and we've said this before) that most of the damage has been seen to technology or other related stocks in computer or internet fields, we do not believe ultimate lows have been yet seen for these stocks; not to mention multinational blue-chips, which are relatively even further away.

Basically, and of more importance to investors than traders; the highs this year were expected to be in the first half, with the lows in the final part of the year; and volatility (trouble) in the middle.

Not a Yen for a free lunch

It was particularly interesting to see rumors and analysts gravitating to our report last weekend; regarding a variation on the Yen carry trade; spotted here last Friday via the noted Euro/Yen cross trade. There are even (only somewhat ludicrous) spins on a story we provided, that stretch reported sales in Europe as intended to allow Tokyo players to sell European holdings, simply to leverage that money in Japan, buy more T-Bonds here, and capture a higher return. But, when a U.S. T-Bond market is ravaged, if the Yen isn't pummeled, you then have the same crowd forced to sell their T-Bond holdings before the higher U.S. yields are off-set by their eroding currency; a factor than (when it happens; or if that is already going on) tends to depress the U.S. Treasuries.

One rumor making the rounds is that the Soros crowd is involved in this now; and that would be a factor if some of their sizeable holdings have been in T-Bonds (and we think that's the case), or in the derivative's play, or both. And this is the kind of thing (whether true regarding them or not) that we've warned of as typically capable of roiling a market in the middle of a stormy year. It also would explain why there's talk of a 7-8% long-bond yield later this year, even when domestic economic conditions, in-and-of-themselves, don't warrant such pessimism. But it is why we said not to watch the U.S. perspective myopically, and to understand how the backside of a derivative crisis could come back this Summer and/or Fall. It also ties into our warnings about all the LTCM rescuers wanting out by Q3, a factor that creates supply concerns of its own, and weighs on both T-Bonds and stocks until its resolved.

So; that's how you get an essentially horizontal pattern in a U.S. stock market that's aborting the first efforts to rebound, after a typical post-Expiration downward move within harmony of a longer term pattern call here. We've not only recognized and responded to this (capturing good trading gains in the process in these recent days again), but also alerted you weeks ago to the prospect that any 4th of July rally could be coming from lower levels than seen at Triple Expiration's end. If so then the probabilities increase that any rallying into early July will be a sale; particularly if this ingrained optimism on the Street finds itself facing disappointments on the earnings front. In any event; this market will not make it easy; nor was it expected to. It's an elongated overall pattern call that's prevailed here for several weeks now, because this kind of market doesn't give up until it has to. That means that while the outcome isn't known yet, there's not going to be a free lunch for either bulls or bears; while traders should be doing quite well. Remember; there are at least 1 or 2 hooks that can derail the technical pattern we've been talking about this week; and one will be if the Fed hikes more than a Quarter percent, while the other would be disappointing earnings from more than a couple major multinational firms (not the knee-jerk responses typically heard). Either would be a negative; but the timing is crucial. (Specific rate hike response call's reserved.)

Daily action . . . hit the nail pretty much on the head (section reserved; but do know we did about 2000 points gain Wednesday, and are ahead over 1000 points Thursday at the posting time.) At this point, we're trading S&P's against a preordained overall pattern, behind us, and in front of us as we see it; aware of the damage Quarterly "window undressing" would do to sentiment, and adjusting intraday action on the hotline only a couple days out of ten, from that called-for in these DB estimations (posted on our web site the night before).

While the market recently rallied more than an orthodox rebound, or textbook pattern analysis in fact would call for, that is irrelevant as all market pattern recognition derives from experience. In that realm there is little experience of a bull market such as the type that ended in April & May, because there never was one in which so many American were involved, but lots of experience in recognizing distribution and accumulation, which generally have similar characteristics. One of those is the lack of interest on the part of those participants interested in coming in beyond what you get from intraday or intraweek traders on the buy side; and that's a potentially ominous one. (And yes we responded to that by again shorting Thursday's early stability; just as a daily trade.)

Technically . . Economic News & Releases: (normally these portions are reserved for readers)

In a perfect world we'd break today's low, drop down to Sept. S&P 1326-8 or so; which would fill the noted gap remaining under the market, and then squeeze shorts with a "hail Mary" rebound effort. However; with Wed. post-close weakness in Micron Technology (MU), Advanced Micro Devices (AMD), plus others warning of earnings troubles after today's close (neither are ours), filling a major gap above the market becomes little more than just an optimistic long shot, at least for just now. If we can fill the gap under the market and then rally after the Fed meeting (not at all certain unless the Street and the Bonds fall in love with Washington's action), a more realistic bit of a probability would be a couple failing flings between the range of this week's action, a drop to fill that gap, and maybe even an absence of bids allowing prices to work their way lower into the 1315-20 area before finding itself in neutral ahead of the Fed heads gathering next week. (That was of written Wednesday night, and is being approached as we post these remarks. We'll likely take our gains on the morning's trade into such extreme weakness, step aside and then decide.)

That is a bit bearish, but the market's not making it very easy to be particularly more optimistic, at least not as of yet. Remember that total neutrality would be doing that, coming up (or down from a lift, as the case develops) and then finding ourselves around 1320 after the 4th of July. At that point, if the stock market should actually do that (we don't particularly care; as long as we catch most of the moves, as we're not doing new "investments", only trading this time of year per calls for this overall kind of action), then you'll have failed to take the market out to new highs even as FOMC action is behind; which will be a negative omen for later action in July and August. Period.

There are other alternatives (since it's not exactly fair to ask where the market will be two weeks forward of here), and frankly we would prefer to see a sell-off exhausting, leading to a rally that in fact is able to fill the humongous gap up above here. That's because we absolutely hate to see a big gap like that left unfilled technically; but it can stay there, and of course has less relevance as time goes on, and trades become more distant from it; which is one reason we dropped any bias for an effort to come back up there, which the market was briefing really trying to do. And for now a trendless behavior of the market makes it appropriate not to have major trading commitments beyond day-to-day action; so we don't. There is no change in our overall bearishness that tracks from earlier in the year, from a strategy perspective and April-May in terms of the Senior Indexes as represented by the indicated top in the S&P around the 1392 level, adjusted to the Sept. S&P.

Against that backdrop we've organized a pattern call for May, June and July that's mostly on cue; though the market clearly will not (and should not) follow anyone's roadmap like it's glued to it. Of course, as most of you recognize, straight-lines exist on roadmaps and very rarely in real driving. So; we think navigating to the destination, with occasional slight detours or rest-stops for the DJ, which of course is the weaker of the two Averages, will adhere to a Summer game-plan outline.

Bits & Bytes. . . first of all anticipates some pressures on techs in the a.m., resulting from these post-close reports; though we had no particular illusions about good earnings there that others of course did. As far as we're concerned the profit-peak was already behind, and the buying ideal a forward expectation this year, which has not yet been approached for the majority of tech stocks, beyond the short-term scalping that was possible a couple weeks back, and is mostly exhausted.

Exceptions of course include stocks that are in-play; such (comments on stocks like Gateway (GTW) / EarthLink (ELNK), PSINet (PSIX),InfoSeek (SEEK), GM Hughes (GMH) and surely America Online (AOL), are reserved for subscribers, as are those on Conexant (CNXT), on Texas Instruments (TXN), Lucent (LU), Merck (MRK), Apple Computer (AAPL), Comcast (CMCSA), Silicon Graphics (SGA), Cisco Systems (CSCO), CMGI (CMGI), General Motors (GM), and Nat'l. City Bank (NCC). (Not all are longs in our Letter; some are shorts, and all new picks originate normally in the Letter, with interim comments and remarks in our Daily Briefings. For everyone's information; the S&P big-picture is outlined in the monthly Letter, reflected on in the Daily Briefing's guidelines, to recognize support, resistance and targets; with hourly guideline trading taking place in the shortest-term work we do, which is the intraday hotline service.)

In Summary . . . a failed but interesting rally (while it lasted) again was correctly played. Durable Goods reports could negatively impact markets in the morning; after that yet another attempted afternoon comeback will likely be mounted. Meanwhile; stocks overall were mixed again on Wed.

The McClellan Oscillator was deflected in the neutral zone the other day, as that move above the zero line was transitory (and somewhat related to the Expiration), more than anything else. It did give a worrisome sequence of nominal plus readings, but these turned into exhaustion, and a noteworthy decline to the forecast intraday lows (Wed) in the 1336-38 area of the Sept. S&P. We now have a -16 posting, which is down from Tuesday's +12, and a "mechanical" sell signal, of a type that typically occurs only after the fact of a turn, which is the short-term case this time too. It should be noted that failures in or around the neutral zone can be quite nerve-wracking, because initially a pullback pause to consolidate will look nearly identical to a reversal that later plunges.

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