Turmoil Exacerbates Crisis

October 12, 2000

Panicky peddling pummeled prices persistently . . . only after thecollective capitulation we discussed in the preceding couple sessions failed in the first couple small efforts to rebound. It's also a market that broke key levels in the December S&P, but didn't do so in the NASDAQ; not a good sign; at least from the respect of not being enthused about turnarounds when too many are prepared, or gunning, for them (like the first half hour this morning). That scenario actually pulled money from the market's later efforts), hence not negating the ability to washout below the lows and turn (what we termed -as a matter of fact- as an intraday 'V bottom' for that moment, pretty much nailing the lows), but limiting some of the fuel for what were fleeting follow-up efforts that indeed ensued. Further there are interesting short-term phenomena to continue grappling with. (In that regard, we elected to be flat overnight on the hotline in front of a likely tense Wed. battle.)

(Special Thursday morning update: the hostilities that have broken out against American forces by an attack, or accident, to the U.S.S. Cole in a Yemeni port, coincident with the kidnapping as well as murder of Israeli policemen by a Ramallah mob, were followed up by an airship and tank response against Yasser Arafat's HQ. The Oil futures immediately spiked by nearly $4 per bbl, and the whole combination smashed an early rally attempt, of the type that is normally suspect in any event, though probably more institutionally-driven than most lately. These events combined to immediately halt buying, so the market collapsed more in a vacuum absent buyers than it did in a renewed orgy of structural liquidation. Usually such emotional events precede lows within at least he ensuing few days; though there are no assurances in markets, ever. In response to this, our hotline shorted the first fading rally as the sad news flowed-out, then reversed long at 1348, in at least temporary efforts on the 900.933.GENE hotline to capture some potential snapbacks. As we moves to either resolution, cease-fires, or conflagration, Gold is rising but below technical resistance, whileOil has again responded in predictable fashion; with variable outcomes to this.)

Contributing to this way of thinking was the absolute or critical prospect of further margin selling, as recently outlined, melding with many mutual funds compelled liquidations for capital gains as they prepare to close the books on their fiscal years, which also are uncompleted factors. But, as these rebound efforts falter, you have other crosscurrents, which include some bottom-fishing (of a type is fairly predictable), as well as rotational switching, as some of the funds try their hardest to offset the year's early gains with losses (so as to mitigate the adjusted impact on investors that will not be happy to see some of their mutual funds annually down while still incurring tax gains), which sometimes are handled by simply rotating into similar securities in the very same sectors.

Perspectives . . . on this entire market affair must include what we've described for some time in fact as a 'grind' (or slow 'crash', in itself a function of modern market structural impediments from folding all at once in a single fell swoop); the most visible portions of which have followed a clear warning here back in late August (on top of our previously forecast advance) that all our targets had been reached; that we had no more upside targets at the time (by our technical measures); and that we would drop from there, with chances for something worse if (and it was so) Energy and/or currency woes contributed to an in-place decline (though we would have been delighted had it not been so); and that such a decline could continue into October's first third, finishing in a veritable 'orgy of liquidation', with some risk to the levels proximate to the former May lows.

Sure, we're not feeling heroic, certainly don't want to encourage the growing (absurd) discussion about any new 'bear market' starting (if this is something newly developed, we'd be interested in knowing what it would be called, unless it's a stagflation spiral of the type speculated a year ago, as regarded the primary risks for the year 2000); and are as interested as ever in finessing what historically could be an impressive October turnaround, under certain circumstances. However, it must be reiterated that we are not particularly bullish about 2001 (and say that almost constantly) as far as the broad fundamentals are concerned (there are always outperforming stocks in any of the market's years); though suspect much of that is being discounted by market action currently.

Hence, while not 'crowing' about anything, and enjoying the decline no more than anyone with all the holdings (absent margin, as forewarned all year) that do remain in long-term retirement-style holdings, we would emphasize several aspects of the action that can culminate downside action over time, while simultaneously (per usual) indicating how impossible it is to divine any indicator or 'system' (outside of experience) to interpret the market's characteristics. Let's remember that a) this 'bear market' as we labeled it for the big-cap multinationals began over 2 ½ year ago back in April of 1998, and that b) we concluded that far back that the concentration into a 'narrowly-focused group of leaders' was distorting the impression of a strong market that already cracked; which led us to c) criticize the ongoing restructuring of the Senior Average component issues to a point where the renewed emphasis on technology and 'new economy' issues pretty much was ensuring that when the market cracked newly, it would appear to break while others exhausted; and that d) the low-points of April/May would be tested in September/October, whether or not we saw that hold slightly higher (we hate the idea of focused supports, because in bears they exist primarily to be broken) or slightly lower levels, with almost no chance of precisely matching those earlier levels.

What's the point? Nothing new, but basically everything. That's because e)one should not get too excited about talking-down stocks that are already crashed; f) if you factored-out the newer component changes, you'd conclude the market had long-ago reached much lower price levels; g)we're out in time about 2 ½ years from our major sell indication on blue-chips; so would make this a nearly historically lengthy bear market, not the start of something new; h) we're over a year and a half since we first warned about a coming debacle of the Internet stocks, and about ten months or so since we emphasized that the remaining dot.com and b-2-b stocks were ascending at what we thought would not only be unsustainable upside rates, but that when they cracked it would be similar to what happen in cable years ago (when they slid down the off-ramp), before just a very few strong survivors would dominate the fields when the shakeout was completed.

Thus; i) while not in the least happy to have even a small remaining percentage of the long-held tech favorites of older 1990s era stocks on-board (that's what usually happens in either direction, because a professional approach is going to assume you're not smart enough to know where the final top or a bottom is, so you scale-in during extreme duress, scale-out during euphoria), thus it is the result to sometimes have small portions of homerun stocks of previous years remaining for even a decade. That is incredibly normal as opposed to those who think the market is comprised of stop-and-go traffic light signals; and i) in accordance with all this, I tend to suspect the media's on the cusp of convincing the world that the so-called 'bull market' ended, when in reality it did so of course, but in harmony with the 'advance/declines' at a peak back in 1998, was rescued from a first climax during the LTCM fiasco late that year, but never put back together again entirely, as it now internally is cracking the strongest stocks; typically the last to collapse or emerge into hard downtrends; not the first.

In conclusion this market's been unraveling in stages for over 2 ½ years, in a panoply of purges that were indicated to be interspersed with surges, that shouldn't be chased, that weren't likely to become outsized gains on-top of outsized gains, and that were typified by the forecast break of a Wall Street sacred technology cow we called for early this year; the wireless cellular industry. For some months we had (one) such stock on our under-market list at about half-price, which gave a representation of the risk we saw (that was after a long-held now closed WorldCom short-sale), and are now in a sense afraid we may get the zone entered (hasn't happened yet) for such longs in handsets; something we're really not very interested in as of yet, though it's getting lots closer.

Why? When we directly went against the popular culture, it was because we thought one or two cellular chip makers would do better (did, though lately of course falling down to overrun normal correction measures), after original investments were previously sold at the good gains that are incumbent whenever any stock doubles or triples) as infrastructure plays, while at the same time feeling that the 3G systems would be what it takes for consumers, and businesses, to upgrade radically; something our own contacts had said as early as a year ago wouldn't be on the scene for another 2-3 years. Well, as regular readers know, those conversations were mostly held with engineers at major firms; but not with executives commonly seen at investment road shows. Well ahead of the 3G rollouts (with little to interest anyone from crippled older technology cellular or in fact 2 ½ G phone web access, with 'bluetooth' too limited initially to have a sizeable impact yet) it is not surprising that the sector is down on its haunches. Just an example of forecastable trends.

Another consideration of course is the relative recovery of the past year overseas, which as all of you know negated the component parts advantage that (equally with productivity) contributed to a spate of rapid profits growth during Asia's Contagion; something we thought was non-recurring, and said so at the time. The Dollar strength helped this somewhat, but decimated export and of course currency-conversion considerations, one of the main reasons we were bearish on the DJI old-economy stocks for the two-plus years.

There are surely others, such as the computer chip makers who missteped, and won't see really compelling volume and pricing of next-generation gear for another 6-12 months; though with the major media now recognizing the downside risks of bulls turning into bears, we have to ponder if it is going to make at least an intermediate bottom (possibly more) actually quite soon, but with a Friday the 13th approaching, we wouldn't be shocked to see a further failing rebound, another yet more dramatic failure, and then (anyone interested in Monday/Tuesday turnarounds?) a reversal.

So, while time doesn't permit more discussion of how we got to this difficult point (and such finale affairs always are), or include the myopic vision of the Fed that continues to obscure the unclear (but present) shift to expansive policies (on money supply; not the cost to rent money) we have suggested that investors not respond to (essentially) this perceived calamity in the marketplace by panicking after-the-fact, anymore than they should have believed the nonsense about buyers after Labor Day, which we distinctly couldn't envision as then forthcoming, with all goals reached.

(Derivatives discussion reserved.)That's of course where systemic concerns come into-play; is why markets were relieved when at least JP Morgan noted they are not facing such problems (further part reserved). I might also mention that if we presumably 'crash' (again; we're not sure what this has been other than a slow 'grinding crash' as previously outlined) in days ahead, you'll provoke action (reserved).

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Because of the flexibility on the hotline, it is not impossible that a player could have made quite a few thousand points today; or considerably less, because of the wild swings in fast markets that for sure meant most quotes any of us saw were lagging the actual action repeatedly; both ways. In any event, with more selling expected in the a.m. (at least for the start, or after a false rally yet again), and then a more important washout effort which is dubious (has to be this time of week; at the same time we wouldn't object if it bottomed before a crash into next Monday or Tuesday); with that concern we are thus flat onvernight (900.933.GENE) hotline S&P guidelines, as Friday the 13th looms after the upcoming session; near the midst of October that's by no means through with crosscurrents. What it is through with is what so many suddenly think is starting; a new bear market. The sad part for many analysts is that they failed to see the distribution back in 1998, as well as now panic and deny the series of purges that likely constitutes a new accumulation in '00; after a series of routs that has basically cleaned the clock of every sector of the stock market.

As that area increasingly capitulates, chances of a washout amidst capitulation that can precede a more-enduring rebound will increase. Today's low for the NDX was 3047; close at 3100 after a 300 point roller-coaster ride to a plus-side reading of 3220 at one point. The NASDAQ itself was a high of 3258, low of 3103 and close of 3168. Breadth remained too negative for a meaningful turn on both the NASDAQ and the NYSE; though again these can be previews of the real thing in the days ahead; crash or not in the immediate interim. Remember; crashes are very bullish for at least trading moves; as every such October breakdown in history has historically implied. This is hard because the Senior Averages are at relatively high levels historically (due to the structural changes we bemoaned), but nevertheless that doesn't mean one shouldn't be alert for just that.

In summary . . . further declines were (and are at this point) unsupported; thus lead to systemic and/or derivatives risks, tending to compel attention regardless of many diverse considerations, including politics. The action is building towards a seminal event; or reversal, or even of both. At least a cursory glimpse of what a turn can look like was seen today; though the first efforts were too soon (too obvious to too many), which may very likely go through a couple more such bouts in the process of completing, not initiating, the rotational bear market ongoing for a couple years, or at least this phase of it. (No analyst can know if stupid economic policies, wars, or famines will change the coming year, but they can know what at least a short-term reversal should look like in the days immediately ahead, or already pending for at least stronger or more desirable stocks.)

Meanwhile, the McClellan Oscillator is down to –155, a fairly oversold reading, after failing at a declining tops pattern; which is what a failing rebound would (and did) look like during last week. With the gap remaining in the December S&P from late May now filled, we got a couple failing and flailing rallies, with modest late capitulation that this time does not continue this evening. Flat overnight; we have not had a successful or temporarily bullish resolution to the market's current pattern, but may be seeing preliminaries (as discussed). As so many give up on just such ideas, either you 'crash' the market (sort of doing that, as outlined day after day), and turn it back up, or both; much depending on events or structural abilities, or desire of big players to do so; though many will not until they are reassured that forced (or compelled) selling is generally done. As of 8:00 p.m., the S&P premium's 1721, with futures around 1381, up 200 from the Chicago regular close. A turn is not assured (yes, there will be one; but we're talking about longevity) but when it comes, washout/reversal action will be extremely fast and furious; possibly repeatedly just as we noted last night, handled reasonably today, and will again, in these continuing (outlined) phases.

78 percent of the yearly gold supply is made into jewelry.

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