Targeted Turn vs. Grand Illusions

July 13, 2001

Rescued from the putrefaction stage? Not exactly, but when emotions get so very negative, and nobody expects a life-preserver to be thrown to the drowning technical pattern; that's often when it pays not to chase the mood of the moment, and prepare for a rebound, whether particularly expected to be a sustainable rebound, or not. We saw tidbits of this Tuesday evening via inability of negative news to take stocks down (Compaq (CPQ) gave a clue on this, as well as new daily-basis oversold conditions).

So we were as cognizant as anyone about the monetary matters, risk of derivative or debt implosions returning to the fore; recollections of our own view that injections of liquidity in late 1998's LTCM near-systemic-debacle, were expected to buy 'time' at the time, but not dispel the seeds of problems that were (and are) deeply rooted for a number of years. However, then as now, that doesn't mean Wall Street can't or won't pull a rabbit out of the hat, or (with Treasury trading desks and vast influences on the same side of the alliance), buy this market the most precious asset we've alluded to as necessary during this year's difficult but expected period of consolidation: time.

It's 'time' that makes beaten-down price levels not seem so expensive (as businesses and control returns to statistical 'means', or at least moves in that direction), and it's 'time' that exhausts both the patience of bulls and impatient bears (who typically think the end is coming with about a second's notice). Tuesday's remarks focused on such worries as are propagating now; including risks of a 'Latin Contagion' emulating the 'Asian Contagion' we anticipated unraveling back in '97-'98. We also speculated the leverage & controls on hedge fund borrowings (not to mention lack of grand illusion thinking in Asia) were contained somewhat in the wake of LTCM, while other nations (and their currencies) are likely already so depreciated, that any spillover's unlikely to catch any by surprise this go-round, which was certainly not the case several years ago. Exposed banks as we outlined, are not primarily New York banks, though the Bank Stock Index (BKX) acted thusly. If the onus is not on money-center banks, the question's whether combined forces of Washington & New York can turn bears back.

In the intermediate term (through the Summer) the answer may be at best stability, if they're able to spread the perception of a downside exhaustion (which is potentially a real factor, so long as the public doesn't panic further, such as the ABC News piece on Monday, emphasizing the size of average credit card debt, contributed to slightly worsening). After all, if (those of) us in the leading edge of the 'baby boomers' have learned the risks of credit and deficit financing over the years, and maintain basically no credit balance (and probably lower mortgages on balance relative to home equity) at high rates, or know enough to pay for vehicles and the like in full (or if needed, via lower-rate variable-rate deductible credit lines at worst), then those dire statistics tend to suggest that the younger set's (18-35) even more heavily indebted than suggested in the media. That's precisely why Government (and the Street) have to get a handle on the situation almost immediately, or things could unravel quite unpleasantly. We're not changing our views about the choppiness of the Summer, or ideally retrospective perceptions a year hence that these recent prices (especially in tech) will look good, if for no other reason than assuming some stability and comeback, plus companies that have good sense to get all the worst news out now, so comparisons will look great.

If that assumes that the Fed and the Street get a handle on this market over this time, then so be it. If that leaves the short-term less certain until we surmount resistance of some important sort, then so be it. If that skews the pattern for July (in terms of early shakeouts and turn-up's now, which may sustain towards next week's Expiration, of a nominal quality), whether or not it gets rocky again (much depends on the Dollar); it's fine by us. We've tried to err on the side of optimism by using declines this Summer for buying zones; otherwise we'd have shorted more. We've believed you can't tank, or 'crash' the market without taking-down the 'undead'; basically big-cap stocks most frequently seen in the Dow Industrial Average and the S&P 500. (reserved section)

It's also likely that since investors remain so frightened (forward outline must be kept for readers), the rest takes care of itself. Sure, this is as hard as anything we've seen in modern times (because there's a paucity of much to hang one's fundamental hat on), and it's technically extremely volatile. But, with the picture being one of 'declining bottoms' being broken threateningly yesterday and definitively Wednesday morning, that was a perfect reason to be alert for a turnaround, and our instant enthusiasm.

That's why Tuesday's DB cautioned investors about all the problems (including those of a foreign-born nature), but at the same time warned short-term players to prepare for a mini-washout and turn, which is what we got in Wednesday's reversal action. As we look at this pattern, and our determination to hold the (well-placed) 1175 long in September S&P's overnight (for those so-inclined), we are primarily making a point: that our technical work suggests we'll take-out Wednesday's highs (and approach the month's start levels), before any risks of new negative phases commence, which will not mean they'll immediately start at such a time. As a matter of fact, negativity is so ingrained, that anything other is viewed as 'surprising', whether or not professionals think there's too much optimism in this market or not (there isn't; just 'official' wishful thinking lists; most participants in fact are about as negative as anytime we can recall which suggests any selling ….sorry too analytical; reserved for our subscribers).

Will this market 'zone-out', one might question. Well, so far it remains structurally the same heavy market we've assessed for days, and expected to be a feature of July's action, no matter the crowd calling for a Summer rally, rather than a Summer decline. However, despite respectable recent gains (including forecasting the mid-June drop, a subsequent rebound and new decline; all as part of the overall game-plan) we had a feeling last night that something could temporarily transform the pattern, and that's a reason we thought the lows-beneath-lows would lead to a tradable reversal, which they did. Now certainly, we're not above (nor even at) resistance levels outlined as a 'key' to this market doing something better on a sustainable basis; but nevertheless it is a decent rebound, and has our 1175 long estimating a move over 1200 in the a.m.

Some might say that the pattern from here is appropriate for the date; 7-11. Whether the rally rolls 'craps' or not is debatable (you know our view), though the overall plan is unchanged, regarding the Summer's structural evolution. Breadth was miserable in Wednesday's rise; and the Dow Industrial's 65 point advance was not affirmed by the behavior of the New York Composite, which was off 2.71 for the session. Most of the improvements in the Senior Averages were courtesy of some technology rebound action, particularly in the NASDAQ and Nasdaq 100 (NDX), which rallied, dropped in mid-session declines, but recovered to finish slightly ahead in the day's late going.

The news background is increasingly somewhat encouraging; we got a mini-washout (to say the least), and incredibly (at least as well-timed as anything of recent times), nailed the S&P (or by inference the NDX) intraday low just after 11 a.m. Wednesday on the (900.933.GENE) hotline. Now we have these cautiously optimistic outlooks, that are occurring near the middle of July, a time when if they undercut these minimal goals, or if something extraneous occurs (not just Argentina); then troubles return. It's not easy, but for the moment a number of new selections became buys, the S&P did just what we wanted (the upper 1100's), and maybe we have to deal with extensions on the downside later-on; but not now. For the moment if GE comes inline with goals (and some would say they'll make that happen), then the market flies for the moment.

Speculation . . . was rampant in the morning, as investors worried about earnings, from the likes of Yahoo! (YHOO), Motorola (MOT), General Electric (GE) and even IBM (IBM), all on the week's agenda. At presstime, Yahoo!'s came out, and was said to be a 'penny better' than expectations, but it was from dramatically lower year-over-year revenue. (The shares rallied about a buck in aftermarket trading.) For Motorola (MOT), handset orders were slightly higher than expected, and they were moderately optimistic. While GE's report may come-out in the morning, and is now a key focus.

More important, and contributing to the expected purge Wednesday morning, after an early failing rebound, was that break of a 'declining bottoms', which was almost just a textbook set-up to cause players to give up hope, while actually being a turnaround. I am reserving the balance of this, in fairness to ingerletter.com regular subscribers.

Remember, the idea was that too many analysts were getting optimistic in late June; a perfect time for a July decline (after some early expected-to-fail efforts to rally) to of course get them to lose their conviction just in time for a more dramatic rally, whether sustainable or not. Analytically, the news isn't great; just less terrible. Meanwhile, we do have sufficient numbers of important stocks (including Intel (INTC) by the way) in a favorable mode for the moment, to suggest this turn may have some staying power for now; even if we have to deal with more market trauma later this month or next. As Intel, Microsoft, GE or other leaders take this higher, a good rally's a minimum goal.

Daily action . . . was quite pleased to be able to capture a few points out of the early rebound from a negative start; move aside (miss shorting the expected break of the initial low points), but then essentially nailing the low on the hotline's (900.933.GENE) 11 a.m. comments, with a guideline long that came right at September S&P 1175 (a very rare 1 point buy-stop, because we were gunning for a turnaround), and that was retained for the day's balance. While we realize many players don't hold overnight, it is not our function to give trades, just guidelines. As our opinion (or guidance if you like) was and is favorable for the morning, we determined to remain long overnight.

Technically . . . little of this differs from expectations; although keep-in-mind that the confirmations of weakening demand (here and abroad), are occurring after an historic slowing in some countries (Japan comes to mind; though others are more depressed) and amidst (semi-frantic) efforts to stimulate in the U.S., which initiated too late for a recovery as fast as some of the optimists have expected recently. So the challenge is still 'time', and the strength and stamina of the Dollar through the rest of the Summer.

While none of this is cast is stone, and we don't want to throw fuel on a fire or create undue hope either; there is little reason for us to withdraw our thinking about Summer risks, the possibility of an 'event' that culminates matters (which is what occurred just today in a mini-fashion (more so in big techs and the NASDAQ), but not breadth, and that's why broad market reflections were not more favorable (will be tomorrow we are thinking), and after all today was the Wednesday of a week before minor Expiration.)

We were very bearish during much of the incredible market 'air pocket' preceding that situation; only to turn on a dime when the Fed intervened; which is not the same as a series of rate cuts, but the die was cast (in the LTCM crisis), and that too wasn't from a technically strong position. This year, in the current quagmire, there are variables that are considerably different too. Hedge fund leverage is either contained, or evacuating (probably now we observed Tuesday evening), and other countries, for the most part, were already weak this time, rather than living in a grand illusion of prosperity, based on borrowed money as they were then. Yes, they owe huge sums now, yes there may be some sort of financial crisis before this ends, but reform has in many cases taken hold; where it hasn't, it's in the works, as also discussed in the DB.

In summary . . . virtually every number and sentiment (reported or otherwise) until very recently, has tended to affirm semi-recessionary conditions or worse, and this is a continuing concern, as now consumer psychology may be impacted by late-stage warnings by companies of what was generally evident. Friday's Employment data did not dissuade worries, as the numbers were recessionary, in specifics. Yesterday we got inventory data suggesting a renewed slowing of sales and new bulges in some inventory; more so in some of the retail areas. That could be an excuse to take the upside edge off the market early; but could easily be offset if GE makes their targets, and may be anyway. If those two items are absorbed, the market levitates newly, at least on a temporary basis, in our view. Ingerletter.com thinks S&P 1205 comes out.

If we had to worry about what else (fundamentally) will worry investors later-on this Summer, it might be failure (which is normal) of a late-season economic comeback, currencies, (including Latin American woes, which might impact the energy market just a bit), and also the worry about write-offs, as some companies try to mark-down their losses not only in inventory, but in valuation due to debt service and declining prospects, as some accounting firms require since the FASB rules changes. How important these issues will turnout to be is debatable, due to the possibility that such write-downs may not occur until we're at a point of inflection, where the economic recovery is increasingly visible. We have mentioned these matters repeatedly, and it is interesting that they finally got general financial coverage a day or two before what we saw as a short-term low at 1175, not confirmed, but seemed to be fairly logical.

McClellan Oscillator data reversed Monday's feeble rebound day, with enthusiasm on the downside, easily exceeding any upside glee. Wednesday erosion occurred in spite of the identified turnaround at 11 a.m. NYSE readings at the end were lower by a bit; near -81, and the NASDAQ -29 or so (a nominal -4 change that we don't see as reflective of the turnaround, but probably will tomorrow). The short-term remained heavy, and did a semi-climax under declining bottoms today. Long September S&P for the moment overnight, from 1175, after a terrific day; we are willing to continue an approach to catching brief moves, but clearly have something bigger in play for now.

This evening; S&P futures, at 1200 are actually up an extraordinary 1470 from the regular close of 1184.50. This may of course ease overnight, or as the Retail Sales numbers come out, but ideally would be offset later by other events. If there's a gap up, it may retrace to about today's high around 1190-92 (not low, in a perfect world), and then proceed higher, as we have recently outlined, to resistance that currently is paramount way up around the S&P 1220 level or so, over the day's just ahead of us.

Please keep in mind that the key idea for the late Summer, was that hope would be at least superficially lost, and that as nobody saw how things could improve, they'd likely be moving in that direction…just enough of a decline to get managers to give-up; and then after they start writing-off not just this year, a rebound (rest reserved). It's premature to say that all took place in one fell-swoop on Wednesday (awfully fast for such a 'return to normalcy' market); but should be good for the moment. If it falters at key levels in the days ahead, then the market could be in for a new kind of daze. Let us hope for the best (especially since we nailed this), and prepare for a reversal back the other way, if necessary, as time goes on. Stay tuned to our thinking on all of this.

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.

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