Will June's Early Fling Sting?

June 8, 2001

Did our forecast late-May/early-June 'fling' . . . come to an end Wednesday? Well, actually it was probably Tuesday; though in the midst of expected tech warnings and forecast Oil price declines, damage was actually within acceptable limits in our views.

Meanwhile, having forewarned that our 'fling' would cause some potentialsting to all the after-the-fact bulls chasing price, we were pleased that the recent move barely exceeded our advance targeted goal of approximately1275-85 basis the June S&P. Moving out of the most recent guideline longs (from first 1249 and then1259) we took a couple other shots that in one case gave back a couple points, and in another was a breakeven, while believing for these last two days that 1290 was going to be tough to reach, with 1300 about out of the question. A real question might be was our call of a recent 'fling' a test of a preceding highs, or just the beginning of the next structural move to the upside longer-term? (Comments to subscribers fully answer our views on this; so please understand the purpose of excerpts is to provide an outline of what we are saying, and approach to analysis; not unfairly reveal work provided our readers.)

In our view, the prior measured targeted move to June S&P 1320 +/- was the primary rebound, with the first easing-down a preview of the real decline, to be interrupted by a 'fling' rebound in early June, which possibly is now completed, but with a new week including Triple Witching Expiration coming up, we're going to be very open-minded, in terms of trying to capture short-term moves in either direction. Later-on, readers do know where we think this market goes in late June and probably early July as well.

In a sense, with the key forecast here for some days being the erosion of


prices, as well as a belief that technology wasn't really ready to broadly (or at least in a real enduring way) take-over the mantle of leadership, we speculated about a period of time in which the markets could have some setback towards midmonth, but not the disaster some of the permabears anticipate. This would be a reasonable construction that allows the institutions to accumulate desired positions on a scale-in, while they're distributing defensive mainstream stocks that they continue to emphasize publicly, in modest rallies that may be toppy. That has been ingerletter.com big-picture thinking.

Certainly, if it turns-out that profit-margins won't start to improve for two more years, as some suggest, then the depth of downside risk, and debt considerations imploding many American consumer dreams, would have to be considered. So far, we aren't in general agreement with that worst-case pessimistic interpretation, though aware of it for sure, and for that reason keeping a keen eye on some of the areas the Fed also views as important (consumption, confidence, productivity, and consumer debt levels that are historically high). Debt scenarios are real, but probably a problem further out.

Though the average age of investors may be older (younger investors can take long-views on stocks, and are thus less nervous, and hence older investors worry more as regards the market's future over the immediate few years), the average age of most consumers heavily in debt (on average) tends to be considerably younger, and thus one reason you do not see this slowdown impacting consumption across the board, because younger citizens are actually less nervous about preserving capital (as yet). The impact on the middle-aged (or older) American with a mortgage paid-off or down is comparatively low, with comparatively modest (other than psychological) changes on his or her life; though emotions certainly typically don't react that way. Because there is nothing of a new nature about this Summer's business slowdown (including technology) for the host of institutions and professionals who perceive this preceding a new prosperity in the U.S., there's comparatively low pressures of a horrendous nature to actually fear, although the insatiable noise in the media about 'warnings' is not presenting it thusly, for the most part, as if stocks will be priced on current results.

In the meantime, various Fed-heads are coming-into-line (if they're not already) with the Fed's Chairman's views, and those tend to emphasize the need to remain totally expansive with regard to the Money Supply; contemplating slight eases in rates from here (but not much more, because that would actually engender fear and be too big a departure from extremes of recent years); and welcoming (instead of criticizing) stock market advances when they occur, because they will accept the market's importance to the economy, and to confidence in general. At the same time, the Fed likely also understands the importance of maintaining general Dollarstrength, which continues.

Technical levels are unchanged from prior comments the past few nights, as we were expecting this move to run-out-of-steam, and to settle back before the next phase. In terms of the June S&P, we'd watch 1280 above the market tomorrow and 1265 or so under the market, with the idea of trying to capture a rebound from early selling into a mid-session rebound, at least in terms of preliminary expectations (for Thursday). We also have theNasdaq 100 (NDX) pattern moving in the suggested manner right here.

The June S&P was expected to run-out-of-steam, because our measured rebounds have been achieved, but as long as the market wants to head higher, that's fine by us and is why we continue very flexible for now. (Reserved portion.) However, if money managers as a whole conclude the economy is in a bottoming process here (actually after a test of the Winter lows; which was very mild), there will be no assurance that the kind of prices available before will again appear. As noted the other night, funds' mentality will increasingly shift to performance from capital preservation, though that ideally would be sort of a creeping process that takes time to fully blossom. In any event, the idea here that those Winter lows will not be revisited continues, and that is not changed by any news late today (such as from Broadcom) or coming from Intel.

Finally the Dow Industrials were deflected from the 11,200 area (11,063 right now) after reaching a level we targeted for the Spring comeback (11,200), followed ideally by a pullback of a mild nature, then eventually overcoming such resistance levels, heading higher yet (down the road). While the Dow Jones has been relatively strong compared to other Senior Averages (mostly due to Oils and basic materials, which got very pricey and require rotation to some new leadership), action tends to suggest the vicinity (price level reserved) might just be inviolate for some time out. If that's not the case, then the pattern is considerably more negative. That outcome shouldn't be the result, given that it doesn't take brilliance to grasp the softness in the economy or superficially high energy prices; all of which can cause psychological negativity of a degree that must be overcome by understanding the discounting nature of markets.

A Fed-head comment about 'not too much leeway remaining to cut rates' after the close Tuesday, was not expected to be received particularly negatively by the stock market, because (as noted here in the past) we'll need to see the economy recover, not live on a rate-cutting dole. It wasn't; though the hundred point Dow decline might give some a different feeling. Generally the expected pullback in Oils led the decline.

As for this ongoing panting for Fed ease, a characteristic of nothing-but-ease beyond a certain point isn't very bullish; because it may suggest an inability to get the desired fundamental improvement. Therefore, what investors do want to see, in our opinion at least, is relatively mild rate cuts (one or two, not more) from here, a maintenance of an expansive monetary policy (this one is very expansive and nearly historical as we haven't pointed-out essentially all year on-occasion), and we need the troughing-out of economic activity, which results gradually in improved cash flow and eventually renewed profitability. As this has been a profits recession, those conditions that allow a return of adequate (and eventually improved) margins are very key. Our view is that the U.S. stock market is not slam-dunk yet (nor would such a presumption be good), and that the stair-step approach we've advocated for months is the bullish alternative.

Last night we had some comments about Gold, and while we really aren't interested in taking sides in never-ending debates about it's worth (or lack) as a financial tool of any sort, we do want to observe that the recent post-Russian implosion has it quite oversold on a daily basis, and it's working on being there on a weekly view; not quite yet, but almost. Sideways movement in the 255-265 area could be preparatory to the next move up, though we don't project much more than a ½-2/3 retracement of drops from the rally to near 300 down to this area in the 260's. More would require maybe a break in the Dollar; though that's not likely high probability until late Summer, if then.

We fully realize that some speculation is out there about central bankers trying to pull the rug out from recent gold rallies, or even phony compassionate announcements of gold sales (such as after the Russian floods, with few believing Moscow's 'heartfelt' concern, though we suspect, like other countries, they have to preannounce sales). Some make a big deal of interpreting this as reflecting money-center control. Sure, it is; but so what. Hate to mention the analogy to Las Vegas, but if you're shooting in a 'craps' game, sometimes it can pay to play the back with the house versus players. In some cases (like England) the tradition is to pre-announce a policy, even if that policy would impact the price available to such a seller at market prices.

This is mentioned, as some bears think there's a contrived effort to stabilize markets or currencies, at the expense of metals and the like. Of course there is; and so what. It's gone on for ages; is in the interest of citizens, because in developed countries, gold is not currency, nor is it perceived (rightly or wrongly) as having a meaningful financially meaningful role. Some will disagree about whether central banks should have such power; but that's not important either. What is important is catching moves correctly, not out there trying to prove a point with one's own money against primary trends, or powerful national or regional forces. We foresaw a shift earlier this year, which appeared to be (and temporarily was) an exhaustion in the Gold market, and then we had the rally, an blow-off and new correction. There may be another fast rally later this Summer (actually we expect it) but it's not the easiest trading in the world.

As a market participant, the objective should be to understand the vast power money centers in the modern world wield, rather than embrace contrary approaches just to be contrary, in all but the direst circumstances. And this situation in the U.S. is not so dire; though in parts of the world it's a different story, which is not only why Gold has been stronger in non-Dollar-denominated currencies (often debased), and part of why the U.S. market is firmer; part of why the Dollar's stable, and part of why T-Bonds are firming again amidst economic softness that clearly extends (as investors grasp that recovery takes basing and time). The U.S. situation is not only not dismal, but is in the process of getting ready to improve; though historically these things take time.

Keep in mind, almost all the Fed's members are focused on avoiding more of a Credit Crunch, which is part of why the Richmond Fed-head's remarks were shaped thusly, and because the slump has been quite lengthy and so far as shows only the tentative signs of ending (which isn't a surprise here for some months still), but does keep a mood in Washington oriented to stimulate or be friendly to the economy, which helps.

Some of that was even visible in the President's approach to the Steelindustry that we touched on yesterday, via the 'unfair trade' case, which could restrict imported steel. Of course there are the risks to trade restraints, though the previous 'dumping' allegations haven't resulted in the type of counterpunches some are worried about, especially when they're essentially correct charges about anticompetitive measures from foreign low-cost produces. It's ironic however, that among the big end-users, are American automakers using foreign steel, and a leadership that has championed very open trade that has allowed the low-priced imports. However, with the Dollar strong, there is mild logic to this, provided it doesn't start chain-reactions in many industries.

In the meantime, while the most recent 'fling' may still sting buyers into strength one more time (or short plays for more than brief scalps), we may try to 'pop the top' first, then rollover a bit (reserved), with roots and views from our part, which are generally in harmony with the overall game-plan from Winter, and continuing Summer outlook.

In summary . . . every number and sentiment (reported or otherwise) tends to affirm semi-recessionary conditions. This should not be news to anyone understand how it takes time to work-through the aftermath of what has gone before; nor should so few realize how the combination of lower energy prices (that's right, not higher) later this year in concert with rebates and lower taxes, is a powerful tonic. That doesn't have a lot to do with our short-term forecast that you know, but should be the backdrop idea.

McClellan Oscillator data continues consolidating slightly as markets are barely now above the zero-lines, close to mechanically shifting the appearance of internals soon; although that's superficial. At the moment, Wednesday's +7 NYSE reading, and post on NASDAQ of +2 are deteriorations, reflecting internal consolidation and rebounds, though this will still be within a short-term term previously masked cycle (for a week or so) by blue-chip strength, as the prior breakouts gathered following, months after our turnaround, had been rotationally labored in the preceding couple weeks, then of course had the forecast upside 'fling', but remain in harmony with our big-picture call anyway; and the June pattern expectation. Last night we suggested not chasing the strength in this market; at best letting the market tell us when it's exhausted, as this move was expected to be a rebound 'fling' (and not the start of a big new advance).

For now the (900.933.GENE) hotline is flat the June S&P, which is likely somewhat on hold pending Intel's announcement, but may rally thereafter. In the interim, we're delighted to have called the move from the 1250's up to the 1275-85 S&P target, and the ensuing contraction prospects before any upside is likely to resume. As of 8:15 p.m. ET, Globex futures sport a 220 premium; futures at 1272.30, down a point or so from the regular close.

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