A Bullish Fed Endorsement?

Multiple concerns . . . combined with an overbought short-term market condition, to see our first warning about market declines of modestly noteworthy quality, as early as last Thursday; looking forward to a failing early-week rally this week, followed by down in front of Humphrey Hawkins (in hope that Mr. Greenspan would offer a benign commentary, setting the stage for a renewed rally which was all part of the plan for this week's ideal trading pattern). It was coincidental we kidded about turning cautious-to-defensive late last week, just as some multi-month or so "technicians" were increasing their belief in the rallies, and hence optimism. Nevertheless, it is often how the market works, provoking fear after declines and optimism well into advances. Of particular note here has been the maintained strength ofOil, which eased just a bit today, but which is probably more important to the market's bigger picture, than all the recent fears about the Fed Chairman.

That's at least the case with respect to the Dow Industrials, though in a cyclical economic decline there are few sectors able to remain totally detached from mainstream economics. The good part of this is that there's a window, which commenced in May and extends through the Elections, for money managers to do their utmost to define their results for this year, or in many cases recover from excess-ebullience with a host of stocks (especially dot.coms) in the year's first part, which in fact we thought was so very dangerous due to the parabolic nature of that phase in narrow areas of stock groups; action that almost always presages serious decline. This year was no exception.

The most important macro analysis probably centers around the cyclical and multinationals; that sector that really benefits from lower oil, and also aDollar Index that doesn't firm much further. It is not really an irony that (we) who have called for a strong Greenback over the past decade are in the position of desiring it not to firm much more; and that's because the strong Dollar was right at the heart of our thinking about why we'd have that two-year-long stealth bear in multinationals, which began in April of '98, and hopefully bottomed earlier this year (as forecast and assessed), provided Oil slips a bit more, and strength in the Dollar doesn't greatly accelerate. We are aware that historically currency pressures tend to occur in the latter Summer if at all (often starting from European causes, such as during August holidays for reasons that vary), so we're open-minded to factoring that into our work should it be required.

So far we suspect it isn't; for all the myriad of reasons frequently outlined. Our thinking as to the longer-term remains unchanged, though now the market drops-into a crucial area per our work, as outlined in last night's Daily Briefing and hotline (900.933.GENE) technically-based remarks. I speculated about the market dropping down and filling the gap left on the way up around 1495 in the September S&P, and that has now been accomplished. Because it's done before Thursday's testimony, there is some modest concern about probing even lower levels, based on the outlined "congestion" just under these levels, and also presuming it's contained as per last night's limits. (I should emphasize we grabbed the early housing starts news to immediately reenter long S&Ps.)

With respect to Mr. Greenspan, who will be the center-of-attraction at what are still called these semi-annual Humphrey Hawkins testimonies (not simply Fed-grilling sessions, though they are), we outlined days ago what we suspected he'd say and not say, and while we can't speak for him, do suspect the balance of the forecast can unfold if we get through the remarks o.k., thus equity markets would try to advance into the nominal Expiration of Friday. Much of the unwinding ahead of the Expiration already occurred as expected last week, so the market might take a bit of time to get its footing, rather than simply roar forward, though such an outcome would be welcome. In as much as the probabilities for S&P players are going to be even better post-Greenspeak, we're still inclined to suspect the lower-risk position trades will return in the wake of the testimony (or in the moments before, as the pre-release of prepared remarks comes out), as is already outlined. The previous lower-risk trading stance was seen to be from S&P1480 to around 1530, which was the upper-limit of our multiweek measured target goal, to be completed by mid-July. (As the goal on the downside was reached, and that little gap filled, we were delighted to get back long.)

Daily action . . . actually suspects that the market will rally almost before the Chairman starts to talk, if the prerelease of his testimony does point out the signs of economic slowdown, and notes how the Fed doesn't want to attack energy-cost-induced inflation, if it won't ameliorate and only hit productivity, without the benefits the Fed would normally aspire to achieve. That's also why in fact we're concerned about pricing, (balance of daily action thoughts are reserved for readers).

In summary . . . the McClellan Oscillator eased to a reading of -23; probably won't probe much lower without stabilizing, but still awaits "Greenspeak" before the coast can possibly become that much clearer. We recently suggested the market might become short-term overbought around last Thursday or so, which was two sessions before the actual intraday highs in the target zone of the S&P. The first dip was expected to probe higher early this week, and did do that. However that does not necessarily mean the ensuring decline (now ended) was expected as likely pulling back dramatically, before rebounding, potentially significantly higher in the weeks head. Aware of just how tenuous the short-term is, we do not consider (yesterday's) drop a particular larger or more perilous decline than called-for. An 84 cent drop in Oil today is the kind of action needed.

While calling for a rare midweek decline even late last week, we weren't and aren't very inclined to side with new serious bearishness or fear-mongering, so aren't enthused about the downside, as this continues to reflect the type of behavior that was, in a very perfect scenario, corrective as per forecast, then eventually resume upside trending later in July or even next month, after these concerns are out of the way (Thursday is a rebound; too soon to call it a trend-resumption, but it is absolutely a good sign for that). We forewarned you'd probably not have a common intraweek rally, because of nervousness over Greenspeak & economic numbers. So, that's why we thought up-down-up overall (as the pattern call made for the week in advance). Anyway Globex premium on Globex is 1813; futures at 1500 around 7:30 ET. We're flat S&P guidelines again, in front of Thursday, after calling for a morning rally to fail, and a defensive downtrending market through late Wednesday. (And newly entered the long-side at the 1500 level of the S&P early Thursday; along with the statement for a couple days that the next lower-risk upside effort would start then. Please do not assume that this posture will be maintained for any period of time; though it may.)