Systematic Destruction or Exhaustion?

October 6, 2000

Downside follow-through . . . was viewed suspiciously enough to compel a reversal of what in fact was a homerun short-sale, as we anticipated a fairly serious effort to turn the market back up on Wednesday. While it's not surprising that the gains faded a bit late in the session (although for sure breaking the back-to-back NASDAQ declines that had preceded for several days), we didn't expect the rallying effort to be completely unwound, which sets-up some interesting testing as far as Thursday's action's concerned.Dell's (DELL) pre-close remarks are partially involved factors.

Dell's profit warning Wednesday, in a stock with our few remaining shares having a cost basis as low as 1 (adjusted for the splits over all these years), was the latest in the tech sector confirming what investors already suspected; business isn't as good as the original guidance to analysts. If softness persists into the fourth quarter (particularly due to the delay now of the Pentium 4 as we approach the holidays, because it's the next high-margin product to power high-end PC's), Dell's full-year revenue could be $32 billion, an increase of about $7 billion, or 27 percent, rather than the 30% growth rate from sales for fiscal 2000, according to a Company statement just after the NY bell (3 p.m. Austin time). Although that growth rate is good for the industry, it isn't so hot for Dell, but is likely largely factored-into the shares by virtue of the preceding halving of that stock.

Dell may actually be in a surprisingly interesting spot to influence the chances for the entire rally (which is lacking in impressive breadth or upside volume, though hints of this effort coming were present before this day began), (for reasons reserved for ingerletter.com subscribers only).

So is there any risk from here? Sure there is; because non P-4 machines will have to drift down in price-class, a boon for PIII consumers & business users, but somewhat lower margin than the forthcoming P4's will be -when available in size- and that's not until the middle of next year at the earliest, when the move to .13 micron architecture begins. So what is so optimistic now? Maybe not much; other than price, and the realization that the slowing in Europe, slowing in Government sales, and the nearly 100% tie with Intel are really not news to shareholders. And the market will tell us whether 'price' has discounted that risk as the new day finishes, not how it commences. At the same time, Dell's growth rate (while disappointing, because we too thought that by now we'd have many of these delayed product-mixes about ready for market, which they unfortunately are not) .. but their growth rate even now remains the envy of the entire PC industry, with multiples at least nominally inexpensive, by virtue of the ongoing price decline in recent months of heaviness.

So the market will tell the tale, of course, but for us, having anticipated this and others to top-out earlier in the year, while new products are rolling-out slower than desired, we think much of it's in the price already; which if so may also be the case for competitors; hence the impact on all PC's. If the Country is moving into recession in 2001, then the slowing of business thus far will pale by comparison with the next couple Quarters; if the Nation muddles through, next year will be better than many think, especially as an economic revitalization would coincide with renewed products, and commitments from IS managers that have been (understandably) miserable during this year.

While the foregoing lengthy commentary on Dell isn't meant to imply (reserved for readers) might very well spell the fate of the market's current efforts to rebound, as anticipated amidst the gloom and despair prevalent earlier yesterday. (Sorry if this is confusing to visitors; but the main points are reserved for subscribers; with casual visitors invited to simply glimpse our overall analysis.)

Market action . . . meanwhile, is restricted by reticence ahead of the at least temporarily further disappointing results from a great many companies; but just like Dell or Alcoa, much of this must be in the market, based upon preceding declines; though there are no assurances. Participation is miserable; and though the market internals were hinting at a coming rebound, the actual rally was as lacking as possible in developing the type of comeback that would do more than get us a good rebound; though certainly not strong enough to say it's not within an ongoing downtrend. At the same time there is a degree of suspicion about the downside, given the extent of pressure in a slew of sectors, the realization (outside of slap-investors-in-the-face results) that the market in fact already declined considerably; a realization that money managers were not (by us) expected to go for the bait of an out-of-the-box October rally, but were likely to accumulate subsequent big or exhaustion drops; and of course the knee-jerk disappointment that the Fed didn't fire-out more supportive statements recognizing the impact a slowing could have on the economy and jobs.

In a sense that disappointment enabled the retained overnight short-sale yesterday, and clearly did contribute to our viewing the first couple downside efforts Wednesday morning as exhaustive temporarily, while the very nice reversal pleased us intraday, it does not necessarily commit the markets to any sort of enduring rebound, though given the proximity of the remaining May gap, it may not be that far away (though gaps mean less the further out in time they become removed).

In any event, we determined to do something (and shared that on the 900.933.GENE hotline) in the morning, that we haven't done in months; moved into Calls on the Nasdaq 100 (NDX), which is commonly done using the QQQ vehicle; actually nailing the low tick of the morning (though for sure likely gone, as a scalp, by the time you read this). It's not out of the question this morning's prices will be again available, or even penetrated, very soon again; so regardless of the optimism and personal buy-side action, we wouldn't presume trading efforts be retained with anything but short-leashes for the moment, unless one's simply accumulating (undetermined) long-term holds.

Technically . . .

at the same time nothing has changed structurally from our previous support or resistance levels (though rebounds that fail at certain spots almost always encourage an attack or break of the preceding lows), we need to emphasize that the weekly condition is just bordering on becoming oversold; something we've desired for weeks prior to a more meaningful low to this. Concurrently the daily work remains slightly turning up from bumping along oversold, while long-term monthly work at best remains in neutral. That in itself creates overhead problems while the market continues to await further earnings reports; few of which will likely be excessively rosy. In this kind of situation, all rallies have to be considered continuingly suspect and within downtrends until proven otherwise; while at the same time there's little doubt but that the market is closer to a lining-up of the ducks necessary to technically sustain a more meaningful rebound effort.

While it's not our purpose either to prematurely gun-for a low, it is also not productive to require a market to simply drop to the next 'measured' alternative low; because the long history of markets often is to take out one level, and then stop somewhere in 'no-man's land', before the next is hit. Given what is an increasingly oversold condition, further thrashing or not, we need to be alert for a turn that holds, or a subsequent test that does, and essentially be less bearish as many mostly give up hope, which historically is when you get washouts and/or tests, with potentially very key capitulations, which possibly don't have a liquidation element, given the pressures already seen.

Had we had a friendlier Fed 'officially' (we say that because unofficially they continue to stoke the M's; an effort that absolutely is essential if the Nation is to have sufficient liquidity to thwart-off at least a moderate chance of avoiding a really bad recession), the pattern might have been slightly at variance to the one we looked for today, though just as it did go our way again, and we bought some trading basis positions early Wednesday; that doesn't tend to mean the stock market's out of the woods at all; just that the deeper it gets into the entangled underbrush, it likely means one of these moves is going to stick, and while scalping fast moves, we are increasingly interested in sniffing-out at least temporary lows, amidst the seemingly endless series of unending declines.

Today was a good example, as we did expect somewhat of a late stock fade, but did not expect comparable repeats of previous NASDAQ and S&P fades late in the session. That gives at least the onus on the bears for the moment, to take this market down in the morning below what would be reasonable pullbacks (levels for the NDX and December S&P are proprietary for subscribers) after which another upside thrust would presumably be tried. For the Dow Industrials, which are already stronger than the other Averages, that would equate to something like support at 10,700 and resistance around 10,875, which is getting incredibly tight. Some think the market would be bearish if the Dow dropped 500 from here; we don't. Rather we suspect that it either bottoms in this general area discussed, or becomes far more problematic than sinking to simply the lower 10,000's; though for the moment the key is how well earnings reports coming up are factored-into the market already, despite the excessive profits optimism from estimators all this year. If that's already discounted, then the market can gradually move into a mode of anticipating the coming-out on the other side of the energy, currency and Y2k related pressures, but not if we go into the economic soup in ways that make already lowered (reserved) targets just too optimistic.

Daily action . . . as a result, saw (900.933.GENE) hotlines closing theDecember S&P guideline short at the 1439 level this morning, and after a couple interim (and successful) efforts, moved to the long-side at what was seen to be an at-least-interim exhaustion price level, that being 1436. I suspect that gains (including 1100 from the overnight short from 1450 to 1439) might have been near 2800 before we got fairly stubborn with the 1436 long; but either way was a decent series.

As of day's end, we of course knew that many players closed any efforts; while theoretical gains bordered on 2800 (with the overnight short included, but not the retained long) minimum, or 4200 points if one includes both the overnight preceding short-sale guideline, and unrealized gains on the 1436 long effort. We do emphasize and understand that nobody shoots for every little move; that the numbers often are to provide some structure to the hotline, though today was a day that even if one rigidly adhered to that (which we discourage), things worked-out just fine. The point's not to emphasize any price level to precision, but to capture the essence of the goal; which was a turn in the market, from down to up in choppy volatile fashion, with some meaning to the finish at the 1450 level. That leaves it very neutral ahead of Thursday; a session that will very likely try to sell-off in the wake of the Dell story (because everyone thought they'd emphasize making their numbers; not failing just slightly to do so), with (subsequent action a forward reserved outlook).

Government 'by crisis' . . . may unfortunately loom as one of the ways to contain & control what risks rapidly becoming a rotational breakdown (amidst rebounds repelled at resistance points), in what investors generally may perceive as something even more bearish than what it really is. We again note that the Fed has failed to see long-speculated (here) 'stagflation' risks from a current mix; something we have considered all year as a resultant risk of overstayed tightness. We also would emphasize that the Fed is unlikely to stand-by their 'inflation' fears if new perils threaten.

That's the good news, as the Fed (just like late last year) may not be acting as they pontificate in official releases. That's because monetary aggregates are again growing at rates sufficiently of note (around 9% annualized) to suggest a slowing is limited to cyclical impacts, not for sure of a secular nature. The only rub to that is realization that there's an ongoing lot of nervousness now, in the marketplace, which can contribute to accelerated economic impacts by virtue of plain old worry; reduced spending, and conservative investment approaches. That's been reflected for at least a few weeks in the lack of leadership of this market, where movement of monies into more or less 'old economy' stocks (including financials) represents a response to slower earnings for a slew of companies, and the resultant lower interest rates forthcoming, that tend to help sectors of that sort. But that's not the kind of leadership capable of inspiring market enthusiasm generally in a 'new economy' driven world, that of course accepts the Internet-bubble-bursting, but doesn't in any way accept concurrent decimation of many premier (profit-making) technology stocks.

Nevertheless, it is the (generally unrecognized) paradigm shift from commoditized chips, to what we think is connectivity and a ferreting-out of content providers in the coming interactive age (not quite upon us, which is partially a problem for most stocks in the area) that both results in current pressures, and probably forward opportunities; just not all at once -barring a seminal event- that forces the Fed's hand towards forgetting their 'inflation' fears (as varying unfolding oil and foreign recovery inflation, post the Asian Contagion's end), were our growing concern starting two years ago, not now. It is for that reason that we were convinced earnings estimates were too high early this year, and probably bordering on the other extreme going well forward from this general area.

Forward Daily Action; Technicals; stock Bits & Bytes: and Economic News: (reserved areas) Among several issues discussed: Dell (DELL),Digital Lightwave (DIGL), Texas Instruments (TXN), Analog Devices (ADI), LightPath (LPTH), Advanced Tissue Sciences (ATIS), shares ofLiberty Digital (LDIG) and others. None should be construed as suggesting we would be long or short or holding any; though most long-held core longs were trimmed repeatedly in scaling-out during surges over the last couple years; not days or weeks. Decisions are at investors own risk and determination; thus they should consult with their own advisor regarding portfolio structures.

In summary . . . systematic destruction was interrupted by a briefly impressive rebound that we caught, on top of the hotline's capture of intervening moves, all of which were theoretical gains. At the same time Dell's story will put this to the test in the a.m., and if surmounted later, will be a very important statement by the market; provided it is able to make such an utterance as of yet.

Market sentiment continues its mood shift between complacency and despair; the latter of which will be very interesting again if we get a sharp pullback in the morning, following a mini-washout identified Wednesday. If not, and early rallies again appear (unlikely), that's probably a relatively negative alternative, while later rallies would be favorable; though we need to assess this almost on an hourly basis as the market increasingly has worked into a general oversold condition as all supports have pretty much decimated psychology, as a surrender can lead into a low point.

The McClellan Oscillator got increasingly deeply oversold, rebounded, eased just a bit before continuing subtle improvements much of last week; now slipping a bit to –45, which continues to see congestion in Summation dots, while failing slightly at a declining tops (crucial spot) for the overall Oscillator rebound. This remains tense regardless if the (identified area) in the December S&P is filled should the entire upside affair fail in days ahead; though that would be a next logical target should we did not get upside follow-through later in the week, but with an allowance for a decline in Thursday's a.m.. For now our short-term pessimism was reversed at least temporarily with today's reversal from down-to-up, all within an oversold daily (only) condition. Premium 1378 around 8 in the evening; with futures off about 170 from Chicago's regular 1450.20 close.

The average human body contains 0.2 mg of gold with the bone containing .016 ppm and the liver .0004 ppm.

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