Equity V-Turn; did Gold Help?

A 'V-bottom' and afternoon rally . . . was our preferred outcome for the daily basis, and we got it! We really do care about the pattern from which the rally emanated, and particularly the notion dominating most thinking (even as it started) that it was orderly, so absent the 'spunk' one might need to see. We're glad 'spunk' was initially lagging.

As a matter of fact only the March S&P (as opposed to merely the big-cap Dow) had an outside-up day, which can be viewed as a 'key reversal'. Because of other aspects of technicals, we reserve judgment on sustainability, though we were looking for a hit after the post-Expiration holiday, leading to a rebound, and then the prospect of very key efforts to soften again followed by the forecast's next phase. (Forecast reserved.) Since this 2002 market works in a bifurcated manner so much of the year (today was a rare example of broad-based reversal action, across many types & capitalization), it's important to note the DJI are more overbought than the S&P, and both Averages are the inverse of the NASDAQ. In fact, even the heftier (100 largest non-financial stocks on the NASDAQ) Nasdaq 100 (NDX), is quite oversold, not overbought, on a daily basis, to the consternation (we suspect) of big-cap bulls who own only some of the richer-valued stocks. As for the performance of the NDX, it had a reversal, but not an outside-up session either, with the overall NAZ having nearly similar performance.

Even though the Dow Industrials didn't quite replicate the performance of the S&P, it was an impressive near-200 point gain. One little-noticed reason for its comparative lag, was the softness in Oil, after Russia indicated its self-imposed (they're not OPEC so it was voluntary) production restrictions will not be extended beyond April 1. You'll recall (at the time of proposed production limitations and implementations) we felt no chance was viable that OPEC's efforts to manage prices of Oil in a deeper worldwide recession, with curtailed demand would succeed. Besides the call for oil to collapse from near 30 dollars a barrel, we also felt it wasn't going to 10/bbl., as some felt, nor the economy into permanent purgatory (at least not this Country's). So, we suspected Oil would vacillate generally between 15-25, and it has (currently near 20). Oil issues are still very big-cap contributors to the DJIA, so that is both why today's move could not quite keep pace with the S&P's, but also makes the Dow's gain more impressive.

It's also particularly important today's (Wed.) move started in a 'V' formation; that it was gradual so as to impress hardly anyone else but thee or me (as together we had been looking for this reversal), and that skeptics remained, virtually to their bitter end. Some wanted to see more-dramatic surges, we said no; it's better for few to believe.

While we cannot say all periods of pressure are completed (beyond the overall calls), we can say that the billions coming out of mutual funds (forcing liquidations last week as observed) were in some cases panic by the same buyers last month, that we had warned were doing so near the end of the first phase up from indicated panic lows in September. We thought they'd get frightened by the expected February drop, more or less into and around mid-month, and that the selling combination could set-in-gear the subsequent activity, which is as you know (reserved for readers) overall.

To traders, we've tried to catch this swings (and mostly have) in very fragile markets; and will continue to do so as the Senior Averages approach some key rebound levels in the hours and days just ahead. It's also important to note that corporate executives can do little about questionable historical accounting (where applicable), other than not get hysterical, and simply lay things out on-the-line, just as IBM did. And surely it goes without saying that the same senior exec's, some of whom we criticized several times over the years, can make sure their auditing is squeaky-accurate in the future. I have suggested, not without empathy, but for the sake of the rest of the markets, that investors realize Enron is an historical factor (dropping from a high price unlike some others that had problems revealed, but only after share prices had imploded), while it understandably retards interest in the markets, but has already had its impact. Sure it is feasible that a couple other firms will be indirectly impacted, but already those who were trying to cease upon that tragedy to undermine the system (again, with agendas having nothing to do with the interests of American investors, citizens at large or even of the free world), have been thwarted, though generally they don't realize it as of yet.

For instance, many banks are being perused for their intertwined relationships, as we have pondered for weeks now; at the same time the decline in petroleum combining with continued stable pricing in non-devalued countries (as distinguished from others) makes it difficult if not impossible to ignite a durable rally in most tangible assets. The Gold rally, as discussed thoroughly a couple times in the past week or so, faltered as the U.S. equity markets rebounded, and now the metal has to complete a crucial test. As observed last night, outside of the U.S., it has sometimes been extremely strong; as (for example) people worried about currencies or banks withdraw money, putting it into Gold, such as is going on in Japan, where it may ironically even help the Nikkei, as new protection limits by banks pushes investors into anything but fixed accounts. It would be more that fascinating if that decision was an effort to prod their economy.

Keep in mind Gold often looks like it tests successfully, but then does little more than that here, and that's both because of the relativity of gold to the U.S. Dollar, although it has had (as noted frequently) periodic explosive rallies in devalued foreign currency terms. Again, to those who have terminal bias, all I can say is we don't; having looked on occasion for precious metal rallies, but viewing those technically, and realistically. In the very short-run, hints from Germany's Bundesbank, about initiating gold sales in the future, contributed to our views both about a short-term Gold ease and stock rise, as extensively discussed Tuesday night. Clearly the trends in Germany versus Japan seem juxtapositioned, at least superficially. So, we continue to be flexible with metals, but will not succumb to orchestrated campaigns designed to destabilize confidence in Western currencies, of which the ones that are weak are actually old existing trends.

As far as the Euro, we predicted its mediocrity for political reasons on the Continent as well, at least for awhile, before it premiered, so nothing surprising has occurred. It seems that some try to capitalize on the anxiety of the moment to spread fears that are really nothing new; and that's doubly true for countries with lingering effects from the Contagion, that we first alerted everyone to back in May of 1997, in harmony with derivative and debt worries that predated that. Clearly there are debt concerns that in many cases have been brewing for years; it's in the interest of civilized peoples to be a bit defensive in terms of their personal investments if they like, but not to cry 'fire' in a semi-deserted theatre (where markets haven't had much interest in years, stocks included in many nations) to try to motivate investors to flee a panic that started years ago, and which may be working towards an interim hiatus, not a new conflagration.

Of course one reason many 'investors' either sink or swim in a lone sector, is often an inflexibility or rigid interpretation of what 'must' happen, or when it 'has' to occur. That is of course not trading, but embracing a viewpoint. They may be right or wrong; but it doesn't matter. For years (over ten) we've talked about the pyramiding debt structure, and where it could lead; however, unlike others who agreed with the point, that didn't keep us out of the '90's markets, both long and short (at different times), because of a tight unrelenting fear that froze so many. Flexibility, then and now, remains the key to investing; with an eye on risk, and rarely a temptation to sell weakness, which usually is nuts, just as we wrote Tuesday on a daily basis. Now, the quality of the current rise in stocks can be judged to be successful or not, and if this market falters at particular levels, we may move back to the bearish side of the ledger, again for the short-term.

It's an environment with relatively low (essentially flat) interest rates, and that means no meaningful inflation, which points to the prospect of a grudging economic recovery that is somewhat masked due to the preponderance of service-industry revenues that dominate the U.S. economy, and that really never eroded in the recession (which we thought ended in Q3 of last year, about the time it was proclaimed upon us 'officially', and there's nothing we've yet seen to dispute that probability). A rocky start is a start; and we expected nothing less after the initial smooth rebound from the Fall's panic.

But for the moment, and that means the moment, not eternity, the trend has shifted to the upside again, as projected, and we're actually holding the first overnight S&P long guideline, I believe, of the year, on our 900.933.GENE and direct-dial hotline. Few do that, we understand, but it reflects both what is a significant daily-basis turn, and the belief prices have further to rise for now. Sure we are likely to see the first punch-up in the morning sold-into, but then after a little rocky start to Thursday; higher later.

Risks: not the least of which are terrorist threats, such as the one nipped-in-the-bud today by the Rome Police, involving cyanide threats to their central water supply. We don't know how they figured that out, but they (and we?) deserve kudos for doing so well. Of course there is the Middle East, where presumably bolstered by al Qaeda or associates, the terrorists have been very active. We find the silence in terms of any immediate response to the Saudi proposal (if it was made by the Saudi's, and not just a trial balloon lofted by the New York Time's accomplish journalist Tom Friedman), as possibly meaning something's in the works, despite critical day-to-day risks. Maybe clarification on whether they include provisions for Israel's defensive perimeters, not peace with no assurance of a defensible border, is key. Sure, Washington may be contributing quietly to these proposals, but one has to believe there's something up.

For the first time in ages (as best I recall, for this year) we have maintained overnight March S&P guideline longs on the (900.933.GENE or direct-dial) hotline, from 1076, not because we're confident of unusual sustainability (and with knowledge that most players never stay long overnight, because they're using leveraged approaches), but to make our point about a probable continuation (absent bad news of course) for the initial phases on Thursday, and then we'll see. Another reason of course is to reflect the potential importance of this projected turnaround, a little later in the abbreviated trading week than would be normal, but technically much more interesting than usual.

The pessimism about the oversight and corporate outcomes has been anything but a calm procedural situation. The mood essentially is more rabid than the action, though this acted yesterday like a market where no one is willing to pull the trigger on a big move (either way); only one catastrophe shy of a breakdown; with a mood wanting to take things lower (which probably means to be alert to go the other way, we thought, and did). One way or the other, we'll complete various 'oversolds' in the few weeks ahead (with or without much more of a rebound, though we did and do expect more tries this week); as we may put together the framework for (the ingerletter.com calls).

Bits & Bytes . . . is always reserved; though we indicated the type of stocks noted in our remarks. Tonight's comments highlighted without suggesting to visitors whether we view any as buy, sell or hold: Texas Instruments (TXN), Intel (INTC),Conexant (CNXT), Analog Devices (ADI), Comcast (CMCSA), Apple (AAPL),Dell (DELL), Microsoft (MSFT), Micron (MU), Nokia (NOK), Sony (SNE),LightPath (LPTH), Corning (GLW), TiVo (TIVO), news at tiny VerticalNet (VERT) and Merck (MRK).

In summary . . the CPI was up .2%; not bad, and impossible to imagine if we weren't having a quiet overall improvement in the U.S. economy. So, just as stable-to-firm (it is not the same as higher) interest rates are not necessarily bearish, price elasticity in some aspects can be interpreted as a favorable sign about America's prospects. Still not a lot of conviction to this market, nor has there been. That's an indirect positive.

Meanwhile, recovery movement in the McClellan Oscillator; readings about -21 on the NYSE, and -23 for the NASDAQ stock market as markets traversed heavily, with a probable effort back to the neutral zone, from which preceding rallies got deflected. The continued lack of market enthusiasm into Wednesday, was seen a positive for a couple of days this week, but as noted, won't prevent an ensuing further retreat tries later, though not yet, barring news that goes beyond the limits of market tolerances.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and as events of the 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; while all normal human beings, certainly hope for the best. As of mid-evening, we've got a 302 premium on Globex, with S&P futures up about 20 or so. We looked for an ideal down-and-up reversal for Wednesday. Sustainability is of course dubious, and all of this is news sensitive, but we suspect continuation efforts later Thursday.