Congestive Chart Failure

Midweek heaviness . . . in the wake of a false rally after Sunday night, was our call a week ago as you know; and while there are some structural nuances to review regarding mutual funds and other short-term aspects, there is no doubt we hit the nail on the head with the idea of this drop. Before getting into more details, keep in mind that much of the caution elicited from the financial press is after-the-fact recognition of busted-bubbles; caution about buying stocks (including likely survivor candidates) at depressed prices (irrespective of whether short or long-term workouts), in a response to negativity; almost the mirror-image of the outcry for ever-higher goals heard near the peaks of the preceding couple years (and it rotated for that long, though not convenient for a simplistic view of the market as 'bearish or bullish'; but that is what occurred since 1998 at least.

Even when the Fed (led by the NY Fed) bailed-out the system after the LTCM debacle, we said then it was likely a multi-month band-aid, but the narrow concentrated focus was still dangerous. Of course the purpose of reminding this now, is to counter the nonsense about a new bear wave starting; rather than considering an old one is in the process of being completed; albeit painfully. It too may take months (and amidst rotational sector bottoms), and will certainly not be a straight-line decline from here (in our view, and we don't mean the obvious hourly drop in the morning) as the modern structure of market flows will not prevent breaks, but will minimize scenarios where it takes years or longer for the market to come back, such as the 1930's, the 1970's, or even late in the '80's, where the Averages may have bottomed, but things really didn't get cranking for years.

The worst-case scenario (and we doubt it), is that a secular top was completed in April of 1998 (no, we do not include internet speculative bubbles as part of that, because it was the absence of sustainable upside in the broad market that invited concentration into the 'what works' stocks, as we noted at the time). The really worst case scenario is not worries about Turkey's market one heard today; though the concerns about what would happen after a major Tokyo earthquake are real; though not as significant as maybe ten years ago, before our forecast 1990 Nikkei crash. If the press again wants to say we're calling for a disaster in Japan; sure, eventually, but you can't time such matters; it might happen closer to home sooner; though we pray neither one of course. The best case scenario is that the markets (and the Fed) go about their affairs unimpacted by an external event, and that the last residues of speculation are washed out of this market, which will subsequently rocket upward (in harmony with the eventual forward call), drop back, consolidate even for months, and then aided by a (well alerted here as behind-the-curve) Fed, gradually rise.

Now as far as investors are concerned here, many will likely panic immediately upon recognizing a factor that the market already knew; the economy's slowing. One would think that was mostly in the market; however, knee-jerk responses to Gateway's (GTW) post-close warning suggests it isn't fully yet. Nevertheless, if this evolves into a 'surrender phase', we have to be prepared to catch it, whether for a trade or more. And that brings in several considerations we speculated on.

Meanwhile, while this convoluted economic and political environment continues, there's sure little surprise that Wednesday's pattern was 'heavy', with some comeback towards the close (we're of course not focusing on the Dow Industrials, but both breadth and the NASDAQ markets), and all of it generally adhered to our forecast outlook in this ongoing search for market direction, which remains particularly crucial in NASDAQ markets. We'd be cautious that tonight's news isn't sort of a 'hook', given that outside of problems attributable to Gateway (a stock we've never owned); there isn't that much about the slowing that hasn't been known by market strategists for months, or at least since they finally embraced our multi-month / multi-year view on economic woes. We will gladly acknowledge again that this entire affair has lasted longer in time than originally had been thought; but originally who knew we'd have a contested Election, though we were among the few who thought the late-August upside was a sell, not a buy, for the short-to-intermediate or as necessary term. Ironically, the NASDAQ has only this week achieved the levels targeted then.

The other point we want to make, is in response to a couple notes from readers curious to how it might factor into this that 'mutual funds' are under redemption. Well, the answer is considerably. (details reserved). While they desire not adding 'insult to injury' to shareholders, and because they'd prefer not to 'book' all those gains without offsetting losses (of which they are likely no shortage), there probably was a rush to sell before fiscal year-ends in October, and now a fear about maintaining some cash (while occasionally nibbling in an ongoing accumulation phase which takes time for institutions, as outlined yesterday) to meet redemptions associated with these pre-distributions selling squalls, aforementioned. Well, the latest statistics show funds overall back up near 6% cash balances, so if redemptions appear, they're ready for. (reserved)

Once again, we have (all year) expressed concern about the first couple Quarters of next year so little (if any of this) should be surprising. However, we have also suspected that a yearend rally is in the cards, 'crash' event or not intervening first (and we have viewed these recent months as a sort of 'grinding crash' of the salami type, which is among the most persistent, and draining, both emotionally and financially). And that is exactly how you arrive at irrational pessimism or at least some stocks; albeit as argued a year ago not all will survive, which is why needed diversification.

In any event, regardless of next year's woes (which should conclude what began last year for the PC and technology industries, though not always the shares, and of course divergent patterns all along for lots of sub-sectors, and as far as two years ago for some of the ISP and portal stocks in exclusion of the big-cap multinationals which topped closer to 2 ½ to 3 years ago, which is why it is an old, not new, bear market that is ongoing or even working on wrapping-up for many areas, in theory), we are targeting panic, a yearend rally and more, and we actually suspect that it will be gigantic, although again we're not quite there yet, warning of that in this week's pattern calls.

As for December S&P action intraday today, we did a number of theoretical guideline efforts, in harmony with the hotline (900.933.GENE) view, expressed here too, that early rallies would fail, but maybe get a bit of a late rally, which as a matter of fact we did; prior to huge psychological post-close non-shockers, that are shocking the apparently overoptimistic average investor..(etc.)

Politically . . judicial reviews are continuing in Florida (including the dragging of voting machines from Miami-Dade to Leon County; not just the ballots, and the late ruling today includes all those by the way), and there is little mechanism existing for a faster resolution as some hoped (and we concur would have let the market initiate a rebound of at least moderate substance; a message the market itself has now telegraphed more than several times, as frequently outlined here). And while again avoiding the nuances of today's politics, we emphasize how accumulation takes not an hour or two, but weeks or months; the inverse of the distribution. You saw (and we forecast) distribution in this year's opening weeks and months; which is why the action was so incredibly frenetic, doing all that without a news backdrop like the current environment; all the more exciting in that sense. We knew then that institutions cannot accumulate overnight; though they can tend to respond instantly, if the fundamental underlying backdrop changes on a dime. The last time in fact we identified such a sea-change (and the need for aggressive upside non-stop) was during a brewing systemic LTCM-dominated mess in 1998, which indeed shifted direction and continued on the upside, once the cavalry came to the rescue (and that was the interpretation on the spot).

Though many wish for Fed intervention; few statistics support that yet; though once they reverse (and that should not be the sole reason one ascertains value), stocks will initially rally rapidly, fall in the wake of that (if the Fed move comes while earnings are still softening) and then rise again. Let's see; the media focuses now on daytrading and gambling; we thought that was a worthy and well-discussed warning here last year and even at the very start of this year; certainly not now. If those who see the DJIA at 30,000 or 100,000 were prevalent then, what does it mean when few have vision to see a new cyclical advance starting in the months ahead and lasting for years? So surely this is tough stuff; but so was our warning that wireless would tank (remember Qualcomm; a stock headed south big-time in our view a year ago?). This downside unfortunately isn't over; but as the permabears come out of the woodwork and even bulls doubt recovery; it's closer.

Again as noted last night, we do know what congestive chart failure looks like, so superficially we can't dispute ideas of a heavy NASDAQ having to drop to something like an orderly (almost sort of too easily predictable) measure of 2200 or so; which is probably why something either blunts that, or make things even worse in the fullness of time. We also know that we forecast the middle of this week to be heavy, with rallies primarily at the start (the gap-up we felt confident would be retraced, and certainly was, in all markets save maybe the Dow Industrials, which typically lag), and possibly again towards the weekend; though the flow of events sure makes timing tougher.

The degree of misery, particularly on the NASDAQ, might be graphically depicted by one chart of several, that a major House provided, that not only illustrates the pain investors understand, but strives to show comparative relational extremes (in both directions) over the last 20 years or so. Let's call this the 'pain chart' or more accurately, the 'irrational exuberance vs. irrational panic' chart; which doesn't mean the market has to turn on a dime here; but suggests watching for that.

Meanwhile, the markets were simply heavy. Whether the big stocks, or the small, outside of just a few of the big-caps, there was no strength to be found today. We could discuss telecoms; but there's nothing to discuss; we could assume that these two will issue warnings about Q4, but that should be a given, and to some extent be factored-in. However, so long as events such as that GTW story have impacts in the market (we'll see what it does in the morning), one has to believe that many investors somehow look at depressed prices, but don't expect slowing economic data. If that's the case then not only are we going lower before higher, but it could trigger an event kind of breakdown, with caution that since professionals expected (we presume) this slowdown, one might not conclude a turn-up out of the hole as being out of the question. No way to know with a degree of confidence, but definitely something to be watching for, in an oversold market with the structural considerations we discussed earlier contributing to the chances of an interim washout.

In summary . . . stock action rebounded routinely in the Dow; only a little in the NASDAQ, and is caving-in tonight, as outlined. Do not assume that actual pressures will extend so deeply after of course the opening swoon, thus (assuming a gap-down) our first S&P effort may be a long; with a realization that down-up-down would likely characterize the first hour, with the second down a bit lower (or in the vicinity of) the first down, because of the structural instability that is ongoing.

The McClellan Oscillator on the NYSE is around +16, while on NASDAQ down to about -35; as we're continuing to suggest pullbacks are of the psychologically optimism-breaking variety, as the initiation of more entire downside legs to the market are unlikely; even as charts briefly break in panic. As a matter of fact, with an oversold condition prevalent, even a 'crash' would likely be a type of finality, rather than an initiation, to problematic scenarios, and would sure get Fed notice.

Once again the Volatility data shows gravitation towards levels often associated with bottoming behavior; though today's stats will clearly be moving into the extreme range (we think) tomorrow. We are flat the S&P overnight on the hotline; looking for Thursday as outlined (and speculative of course). As of 7:30 or so, S&P premium is an astounding -1743 discount to cash (here we go), a collapse of over 1000 from Chicago's regular closing price of 1335.30 (now at 1324.70 or so). Thursday turnarounds that stick are hard, especially in fundamental and political environments of this nature; which of course are generally unprecedented. However it may be attempted later, so we'll be on-guard for that; though a subsequent failure could set-up a very interesting Friday.