first majestic silver

Waving the Flag Pattern

July 15, 1999

Taking a breather . . . in the midst of a nominal Expiration week is fairly unusual; but since this was mostly a function of the Dow Industrials alone, more so than the rest of the market, it's still suspect on a daily basis. By that we mean that the rebounds are suspect, that market internals of course remain mediocre at best, and that probably this Expiration is going to be upward-tilted but risks being sold into, which we suspect is something you're already seeing somewhat, in at least the blue-chip stocks. Some analysts are starting to denote the deterioration of assorted stocks at the forefront of strength at one time, and while that's dated information (many such issues made tops months ago, which shows in relative strength later on), it's important as many are in Indexes that are pricey and can be fairly heavy, once current efforts at an inevitable rotation wind down.

Meanwhile the NASDAQ scored a new all-time high concurrently, while T-Bond rates firmed just a little, as various concerns at least superficially came to the fore. With the majority of our longs in technology and Internet stocks, we're not displeased to see this firmness in these sectors, but are pressed to believe it will remain that way through the late Summer and early Fall. The same relative strength indications that have some focusing on the rotation back into technology stocks, tends to confirm strength just about the time the sectors will be ripe for a potential interim (if all is well, not longer) correction. Again; we are cyclically bearish for the big-caps (primarily) going into August and (after an interim rally) probably thereafter for awhile (way early to determine that) but are not secularly bearish. For instance; a 1500 point drop in the Dow Jones Industrials would be just a cyclical decline; even 2500 would fall into that description. That's the kind of potential drop one would put in the category of being enthused about for buying; with enough money available to take advantage of it. It's also the kind of decline one would not panic and head for the hills for, although the way it likely unfolds, we'll conceivably see some of that in the latter (or final) stages.

Daily action . . . (reserved per usual for subscribers only)

Tactically . . . we have embraced a slight bias at this point for selling rallies more so than buying dips, for reasons known well, going into the Expiration's finale. These do include the likely-latter portions of this upside "grind" that ideally should complete this pattern in the days immediately ahead, per forecast; a continued stability in the Oilsector, reflecting more demand perceptions (especially with climatic changes impacting worldwide weather, a factor probably not considered significantly by the markets at all going forward, but which may become so, over a long period of time); an overbought short-term Dollar condition that -if it breaks- might have some contributing influence on the downside for domestic equities; a softening T-Bond market, at an overbought developing short-term condition that -for awhile- has some potential to drop in lockstep with a weakening stock market in the weeks ahead (but not on an investment basis most likely); and an unconfirmed new high in the September S&P recently, which is singularly most important to us.

"Don't cry for me Argentina" . . . led the market's Tuesday swoon, as their leading presidential candidate's threat to ask lenders for temporary force majeurs on his Nation's debt did spook U.S. markets briefly, with some hangover in the T-Bonds and currencies today. While not forecasting major debt implosions as we correctly did last year; we do believe that last Fall's projected new currency and market stabilization's are entitled to some correction, which would tie-in to holidays so commonly honored by Europeans in August, and to some extent by everyone in the Northern hemisphere. This doesn't compel any single bearish air pocket, of the depth or breadth expected in 1998, though that doesn't mean to imply we don't see corrective action coming; as we do.

Technically..Bits & Bytes..and Economic News & Releases: (sections reserved as per usual)

In a nutshell. . .Tuesday's action, and Wednesday's yo-yo, went a long ways towards explaining a very interesting incongruity between the T-Bonds and Oil, that we particularly noted recently. That had to do with a firming Treasury market in the face of higher Energy costs; something not frequently seen. However; if you assume the buying in Bonds is accentuated by flight-to-safety buying predominantly from South America, it all makes sense; besides that we were calling for a recently firmer T-Bond environment anyway. If you combine higher Oil prices, you find that Rosy Scenario has not returned, but rather the higher price pressures are being offset by flight-capital cruising at least a little, into the port of New York. Note that the bonds eased down as Argentina was said to be simply "political posturing", but it shows how sensitive markets are to derivatives, New York bank loan portfolios, or anything harking back to 1998; like the stock market's pattern.

For Wednesday, a rally back to the 1410 area was projected to be resisted, while filling a closing price gap from Monday. A break of 1390 would affirm more negative daily price behavior, but is not particularly anticipated, yet, barring news. Poor results (such as might reflect the moderating consumer buying power in Europe) fromGillette (G) and/or Coca Cola (KO) could contribute to this. Most likely (and we hoped for it) was the move above 1410 which tries reestablishing near-overbought daily-basis conditions (stochastic, not other), priming an upside Expiration finale of a nature that may not be sustained all the way through it; though that's of course still pending.

Continue to watch the U.S. Dollar Index; as it is slipping just a hair; with some risk that should it break 103 (now at 103.64) you might get a little acceleration to the downside, impacting stocks.

In Summary. . . this remains a market more or less warming up for the main event. Given we've already had the upside event from June into July; the next main event should be a reversal; not on a dime, but in reasonable time (likely commencing over the next 3-6 trading sessions; after a desired further upside "pop" in front of this nominal Expiration, hopefully continuing to be led by the technology stocks, and not the boring consumer nondurable and cyclical types). It's still early to project how far down (in price or in time parameters) this could go in August, but let's just say for now, that if we don't surmount S&P 1430 this week, we do envision 1350 or so as reasonable next month, and at the outside 1320. Not a big disaster; but it should be playable.

The McClellan Oscillator posting is at -00-, down from the +10 level. Double goose-eggs with a spirited rally in techs in unusual, but reflects the effort at rotation away from the multinationals, at a minimum. At 7:00 p.m. EDT, Globex S&P premium is firmer, at 1013, with Sept. S&P futures at 1408.10, which is down 110 from Chicago's regular-time close, at the 1409.20 level today. From here, we would remain (as we were last night) suspicious of any effort to take prices down early Thursday, and would suggest that you might not get an interesting combination of slightly higher CPI (consumer prices), given price pressures in computers, a little slowing in autos and housing, and some early seasonal tendencies (pre-model changeovers of any number of products). Look again for rebound efforts running-in those shorting weakness, at this stage, followed by what will gradually become increasing late-session risk, each day forward. Given proximity of the nominal Expiration, we're not looking for a downside blow-out just yet; remaining on-guard as a forecast "grinding-out" in the Senior Averages likely comes to a conclusion the Street won't much like.

In 1934 President Franklin Delano Roosevelt devalued the dollar by raising the price of gold to $35 per ounce.
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