Amidst Enronitis; Are Techs on the Mend?

Are technology stocks on the mend? For those with controlled debt, that's more or less precisely the prospect of this whole era, believing September 20-21st lows were an absolutely spectacular buying opportunity, while dangers of short-term 'cratering' returned to the fore, after so many institutions put seasonal reinvestment monies to work. Now, the question is what the depth of a potential decline extension is, and as regards any continuing risk being greater in the Dow Industrials than for NASDAQ.

Accounting and disclosure issues are all the rage; assured of course after a maniacal drumming-into the average investors mindset about equities has transpired. While we were protesting corporate debt bubbles, accounting irregularities, or even somewhat dubious accounting standards that weren't addressed for years (and allowed a very inappropriate subordinating of shareholder interests to several crafty corporate executives); seriousderivative risks (that nobody wanted to hear about), internet bubbles, and what we'd termed 'unsustainable' rallies from time-to-time in 1999 and 2000; well now finally, everyone is at last on the same page. But it's likely nearer the end of that story, or at least moving toward the final chapters of the saga; as fiduciary or auditing reforms are essentially a given regardless (or because) of non-stop noise.

Where that leaves the market is to digest (or exploit) the remaining excesses built-up in their prior 3-4 months of rallying, respond to those (comparatively few) companies remaining with debt and controlled costs, but unable to meander remaining minefield obstacles to survival; and to do all that with some flair and drama, while the otherwise important economic backdrop quietly is actually improving. If the perennial all-Enron-all-the-time purveyors of what has been, are not able to proselytize what will be, then how does one make assumptions about the future? First of all, one assumes that this is going to be before investors eyes and ears probably up until the off-year Elections; a factor making it hard for the average participant to focus on value, only on troubles.

Ah; but the average participant is not particularly interested in this market, or more to the point, has probably sworn-off stocks forever (or so they say, until new highs over time occur, about when (miraculously) speculator interest will again be at fever pitch levels (even though some of the younger generations, swept-up in the internet fields, will foreswear stocks probably for a couple decades, or most of their active lives). It's a formula somewhat reminiscent of the post-Depression '30's or even the post-war '40's and '50's; during which none of the preceding excitement was regularly present, but slow-and-steady (sometimes rocking & rolling) gains were actually achieved. The structure for the forthcoming more aggressive phases, and the best price levels, took place during those disdained times in market history too. (Abridged.) Some will talk about further vulnerability; that's our forecast since the March S&P failure to extend into the 1170's in January, or an ongoing pattern 'head & shoulders top' progression.

The irony of that 'vulnerability' is that most analysts see it only now in technology; we don't for the most-part; though we do question some reports currently coming out, as we have questioned accounting methodologies for a few, including Cisco's inventory (details were discussed the other night). It strikes us that surviving technology stocks have bottomed, or aren't at all far from that in the weeks ahead, while those sectors many perceive as 'safe', are actually of higher risks, including many big multinational stocks. Because there has been a 'crowding out' of tech holders, and a crowding-into big-cap blue-chips; that may turn-out to be (as we have contended, and rightfully so in the case of many stocks) both the market's Achilles Heel; plus how sizeable drops, complete the downside (in terms of tests or less), rather than starting anything new.

Daily action . . . has targeted a 'respite' within the downtrend from January's highs; a squirrelly intraweek rally of sorts this week, but one that doesn't have to give way to a true catharsis, unless the market gets carried-away with rampant bearish psychology, aided or abetted by those who believe they're doing the public's business, while that's essentially a 'given', compared or contrasted to similar financial scandals of the past.

Therefore, just as other crises purged investors (often after-the-fact as the regulatory types got to work), so does this one; though on the presumption that most executives have their shareholder interests at heart (and if they didn't they sure will now), we are nearer-the-end, than the beginning, of the actual market impact. That's why we urge pundits and reporters not to dwell on what they can do little about, aside from what is helpful, and that is constructive ideas to encourage protection of retirement funds, or any sort of institutional management that (conceptually) has come under question.

Of course we're in favor of diversification; of restricting percentages in one's holding (this is nothing new for a professional) of a single position (although restrictions are just a bit pollyannaish, as ownership 'caps' are pretty touchy at a time when many pensions or 401K's are on-average over half in the particular company's shares; so how do you do such a 'reform' instantly; you probably don't. Allocation, sure; but not of cries for a type of discipline that is impossible in capitalism, or would decimate the system. And you don't want to inhibit employer-matching funds, or potential benefits to employees, in firms and their workers that essentially are merely victims of the time's psychology. What might be feasible is somehow to impact 'vesting', so as to change related balances, and the ability (after a period of time) to sell as one likes.

In terms of hotline (900.933.GENE) action, Wednesday was about as narrowly dull, as the preceding couple of days were exciting. Theoretical gains in the thousands of points doable then, were of course not available in Wednesday's too-and-fro action; although the point amidst Monday's rubble, that we'd get a couple days hiatus as a minimum interlude, was certainly followed by just that. Now, are rebound tries over?

Maybe an extension is feasible; or at least a try. (But that's a forward subject for our subscribers, so that portion of this discussion must, in fairness to them, be reserved.)

Sure, events could turn-into a short-term panic (tinges of that are have been evident), but at the same time, the (non-war-related) surprise elements are already somewhat digested, so maybe not. You know our view about theNasdaq 100 (NDX) versus the Dow Jones Industrials. To be blunt, everyone warns about depressed technology, ignoring the steady (almost unrelenting) pressure on banks and big blue-chips. Why do they ignore that? Because that's what the big boys mostly hold; not NASDAQ.

Is the core of the market risk? (Our view has been shared with subscribers.) We don't think this is a debate on merits of old Keynesian economic theory, though that would tend to suggest new bullish runs; whereas extreme conservatism historically doesn't.

And it is wartime; in a climate where it's already clear the Fed has done their job, and the risks aren't from Mr. Greenspan's group, but rather from Congress's overplaying the issues we are in complete agreement with, but which will clearly be dealt with. As this plays-out, there is no doubt that corporate hierarchies will realize that they have to regain (where it was lost; which is not every company; again, contrary to the tirade) that which most of us grew-up believing in; corporate executive's primary fiduciary responsibility is to their shareholders, not Boards of Directors, or for themselves.

Support (which exist to be broken, and were hourly) and resistance levels and targets are unchanged from last night's DB discussion.

In summary . . productivity was enhanced in data reported today, though the stock market reversed the intraday rally, but that was generally expected on Tues. evening. We suspect Thursday starts soft, or mixed, drops and rebounds, and then we'll see.

At least Government (and private sectors) are finally thoroughly aware of many policy flaws, and illegalities by some executives; though little of this is terribly new (in the derivatives field too), and is what we had in mind back in '99 talking about FASB, and the avoidance of off-balance-sheet complex corporate transactions (which we've all heard stories about, but can hardly begin to dissect). The risk here, since the news and the failed fiduciary activities by some companies are going to be discussed for at least some time, is that of market air-pockets (balance of this discussion reserved). It exists; but isn't essential; so absent catastrophe (or too much politics) we might see a suspected short-term low developing over (parameters) ahead, probably amidst a bit of drama, and possibly coming (as often occurs) from a period of quiescence like this.

McClellan Oscillator readings are about -132 on the NYSE, and near -51 for the NASDAQ stock market, as markets reversed as expected, but only temporarily, in an existing nervous environment. Watch carefully, the NYSE is moving toward oversold.

Our prayers and thoughts remain with our troops fighting for freedom and tolerance. As of mid-evening, S&P is around a -20 discount, with futures off 350 or so now. So, again; ingerletter.com looks for another market washout effort within hours ahead; and again tentatively some sort of rebound thereafter, that should be quite playable. (As of near 11 a.m. ET Thursday morning, the 900.933.GENE hotline's long at 1180.)