Early-week Drop Enhanced Pre-Holiday Traditions

Rumors of Bin Laden's capture . . . were denied later on, but generally were what was attributed as igniting Wed.'s late rebound behavior. When you have lethargic or negative price action, day-after-day, there may not be a compelling reason to buy of course; but it was the nearly-ideal set-up for a rally able to catch shorts unexpectedly.

That is why our remarks in the past couple days, that while rallies could easily be in the context of a short-term consolidation, they could nevertheless occur as trading got thinner amidst anxieties facing the Nation, and expanding macro worldwide risks. This reality has tended to weigh more on the Dow Industrials and the multinationals, than domestic-centrics; a point generally unobserved by those just reacting to news.

Some players are probably distressed that the blue-chips were easing while they got their desired short-term weakness in the Dollar; an evolution they thought impossible since a weak Greenback in theory bolsters earnings from foreign operations. With the world immersed in various crises or controversies; economies are heavy, so while the attempts to emerge from many recessed environments evolve; profits are elusive. At the same time, we should denote that much of the world is doing reasonable well if in fact one considers the nature of the ongoing tension; in a semi-warfare daily climate.

In a sense, the implication of this condition, is that as the world stabilizes (potentially in any event; one can at least hope for that, as the alternative could be fairly messy), many economies will be building up the potential for subsequent comebacks. This is going to actually be enhanced over time, not reduced, if the world goes from one war to another; such as from the initial terror war(s) to the Middle East's expanded crisis; to a direct fighting with terror, to the prospect (not immediately likely, as we have said all along) of a confrontation with Iraq. If these keep coming in sequence the economy will remain somewhat restrained (albeit not necessarily doubled-dipped in any classic sense), with demand becoming increasingly pent-up, despite all the protestations.

People want to get back to their perception of normal living, beyond going through all the daily motions, and while whether that's ever really attainable, human nature will (in this Country at least, and probably most, because there's little else to do) strive for recapturing a more idyllic time; again, even if that isn't fully attainable. Sure, if there's another attack on the U.S., the first reaction will be to suspect ramifications are going to be worse; but that's what the enemy expects. Therefore counter it one or another ways. If something does happen, it could spark a decline from forthcoming or interim highs, into mid-June or even later. It could also presage a subsequent rally; at the time few will focus on that aspect, though that probably emerges at a later stage.

At the moment; strings of weird news stories hardly did more than to mildly extend downside follow-through; to on-top of the vicinity we had in mind for a pullback. The rebound may be temporary, but possibly reignites over the next couple of days. The stories are as diverse as A-10 (Warthogs) attacking al Qaeda terrorists threatening our troops in Eastern Afghanistan (successfully, we're pleased to note); to another of the too-numerous homicide bombings, this time against a Tel Aviv suburb; to tension associated with the President being in Germany (infiltrator risks); to a little-noticed report of al Qaeda terrorist leaders having possibly traversed Eastern Europe enroute to the heart of Europe (via Bulgaria, Slovakia, Hungary and Austria) back in March (it was reported that one was captured by Austrian police, but the rest got away when they couldn't show identity papers); to the strangest (and unconnected) of all stories; that being an assault yesterday against an INS Agent; within U.S. territory in Arizona, as 3 Mexican soldiers are reported to have fired at, and struck, his official vehicle. Of course they were probably pursuing drug dealers (or is that politically correct; maybe they were smuggling illegals across the border; we have no idea); it's not likely they were trying to commit an attack against the United States. Buried story; but curious.

In the meantime, most are focused on New York; where Fleet Week commenced, as a story came out suggesting confirmation (from the top detainee terrorist in Cuba) of the planned attack on the White House by the hijacked jet that crashed in western Pennsylvania, through the heroic efforts of its doomed passengers and crew. What it all suggests isn't specific going forward, but it is that being a bit paranoid about what might occur, doesn't mean it doesn't occur. We all pray not, but remain vigilant. For the stock market it's much the same story; not to get excited because Gold rallies to higher highs (it was expected to move for months; is becoming extended short-term, and reflecting concerns abroad more than in the U.S.; though the perception of the U.S. as an ultimate safe harbor eased a bit); and not buy-into the soft-Dollar is good story; though certainly the disparity between currencies narrows a bit as tensions are distributed around the world, and as economies remain a little restrained by all of it.

At the same time, remember that some of these antagonistic responses are almost becoming quite emotional, often a good time to be alert for movement the other way; at least temporarily. For now, the idea of (reserved for ingerletter.com subscribers), remains. The overall scenario also helps sustain a relatively firm T-Bond market, and keeps interest rates relatively low, despite tentative Fed overtures affecting standards for lending out there, which are gentle; intentional so as not to roil sensitive markets.

In the course of this, Wednesday's hotline (900.933.GENE or direct-dial access) was able to book theoretical S&P gains of several hundred points; a combination of good longs on the opening dip post-Tuesday's decline, partially offsetting midstream chop, and then a reversal -again long- fairly early in the day's final hour of trading action.

Keep in mind that Wednesday's June S&P low was just a tick below the high back on May 13th; the day we've focused on as likely associated with negative tries recently. Of course the close on that day was a couple points (that's all) below today's low; but closing price gaps are clearly of reduced relevance contrasted to spatial gaps. None are engraved in stone in importance; but we suspected that area was a logical target.

Now, with tensions varied, and specifics scarce, one might easily anticipate what can be a muddled sort of market into the holiday weekend. However, we continue to be a bit alert for hourly-basis upside shots, even if they're of questionable sustainability. In this case, in addition to occasional pre-holiday short-covering sprees, there is always the technical aspect; a market that is trying to hold from the vicinity of the S&P's daily moving average, and (by so doing) attempting to suggest (reserved). This is going to be dicey or potentially unresolved, for even an extended period of time, as the market thrusts ahead for an assault on overhead psychological (noted) resistance, but likely finds it hard, if not impossible, to yet stimulate enough enthusiasm to attack that key weekly resistance level, a bit higher. There is a tad better-case scenario (reserved).

….That creates another one of the bifurcated markets (not all the time, but at times), which isn't comforting to a majority of equity participants who want to reflect on what 'the market' is doing, but to a great degree is an appropriate statement of what the overall market actually is doing. (reserved portion). Then, if enough negativity flows forth, we can speculate about some improvement, provided such negativity's merely based on market psychology, not physical attacks occurring.

In summary . . little is changed anytime soon; with economic reports coming in the morning likely notably not deteriorating in any significant manner. One figure that is dropping, is the number of new mortgage applications, but if you look at it all closely, sales as a percentage of inventory are gradually improving in many desirable areas.

As to McClellan Oscillator readings: improving a tad from near oversold; with a read of -83 for the NYSE; with relative stability for NASDAQ; down to -20 (ideally a test of the recent breakout, we suggested Tuesday, but we'll see what daily events bring as we digest today's rebound and try to revive it). Remember once mechanical after-the-fact buy signals occur; they sometimes (as noted) precede profit-taking, but overall are a plus from a grander perspective; affirming basically about everything thought about these markets over recent weeks; but, which to resume, longer-run, depend on events. That's why technicals cannot change fundamental aspects, especially amidst constant drones of 'alerts', that until wolf-crying proportion, keep investors very edgy.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of this week explicitly continue to remind us of various new risks the Allied fighting forces face, or may face, we try to keep in mind that the unexpected remains a risk as civilization cheers human progress, but worries about those trying to reverse hundreds of years of modernity. Got over-the-weekend warnings the new week didn't have a chance to try to extend the move before fading and rebounding, which would likely have been the outcome anyway, before a pre-holiday rebound attempt. Keep in mind that further rallies will more clearly deal with challenging important overheads; just as short-term declines, were expected to be resisted in terms of undoing all that was gained before, as noted last night, hours ahead today's turnaround, in harmony with a fairly classic set-up ahead of Memorial Day; albeit again of a temporary nature. Mid-evening S&P futures up 40 with near a -92 discount. Enjoy the holiday weekend!