Inflection-Zone Combat

Persistent erosion . . . characterized Wednesday's action, in harmony with our call for an ideal down-up-down overall session (the up's were minimal), after the belief on Tuesday that the quality of the rally (particularly the upward final hour concentrations) was suspect, and with our targets reached for that particular December S&P run-up. We would not be surprised if Thursday's action takes-out the preceding daily high, in response to IBM's news, as it subsequently prepares for contractions a bit thereafter.

Despite Wednesday's obvious across-the-Board strength, and proximity to a nominal Expiration, you know we've felt the defining meaning to an after-the-fact cheerleading 'confirmation' of the upside fling we'd forecast from the breakdown below the July low of the S&P, was occurring quite near the end of that phase regardless of what comes later on. It's only been ten days or so from a low (which occurred earlier in NASDAQ, and other focused areas like the Nasdaq 100 (NDX) which were exhausted well prior to the expected September/October hits on the blue-chip grand dame sacred cows.

The forecast reversal action was almost historic as it 'locked-out' overly-enthusiastic bears, but that led us to lean slightly against the recent tailwind of over-optimism from Johnnie-come-latelies in after-the-fact extensions; Expiration unfolding or not. Given that the 880 measure was (all-too-perfectly) attained, there was additional reason to be a bit suspicious of any upward move that probes beyond the reversal from up-to-down-to-up in the wake of IBM's report. (May help longer-term, but short-term dicey.)

Now granted even the desired breaking of the old July S&P low looked manufactured to some extent, while 'mechanics' were dutifully trotted-out at just the right inflections, in an apparent effort to scare everyone after the lows came out without a meaningful further internal deterioration of the broad market (which was already killed), whereas in the more recent scenario, few bulls were proclaiming optimism about the breakouts chances on the upside. Basically that made the low look suspect and the absence of any confidence on the upside (once it got going) possibly helping establish at least a modicum of contraction (at minimum), so those who missed the move can proclaim it as a 'false' bear market rebound; even a false initial pullback, but more on that later.

It may be far more than that developing overall in the long-run, but for the moment it's just fine to hear alternating drumbeats return. That helps establish increased chances for (and it's not necessarily more) the renewed downward sort of action to become an important validation to the first turnaround over time (balance reserved for readers).

So, anything that drops to around there in the days immediately ahead (again, don't try to require preciseness from a market) and jockeys around and tries to hold, might embolden an important late-month rally in a period of angst, though the irony would be if that occurred (failed looking like the beginning of a sharper decline, but revived later-on) essentially towards month-end. That would theoretically be the stuff of which 'complex' bottoms could be engineered, though asking for that in this environment for sure isn't certain, and has all kinds of risks, including terrorist and geopolitical ones.

On the geopolitical front, we made the remark the other day that regardless of heavy political pressures on the United States regarding Iraq, it wouldn't prevent Israel, if it is attacked, from responding. We have been more concerned (and remain so) that an attack might be launched by terrorists based in Lebanon or Syria, rather than directly from Iraq; hence providing some (transparent) political cover to an attack on Israel. At the same time, that wouldn't prevent the modern version of the 'Cuban Missile Crisis', in terms of 'atmosphere'; as the U.S. could say any attempted WMD attack on Israel is considered an attack on the U.S. or Israel itself could simply say itself; any WMD attack mounted by surrogates would be considered an attack by Iraq (or whomever it appears to have been sponsored by). This is not warmongering at all, but might turn-out to be a necessary statement to leave no misplaced thinking in Baghdad, that they could even remotely think they could get away with an attack via agents on anyone. It is noteworthy that President Bush today stated shortly after a key meeting with Israeli Prime Minister Ariel Sharon that he was sure Sharon 'would retaliate if Iraq attacked Israel'. Bush gave no indication in an Oval Office news conference that he had tried to restrain Sharon who already has said his country could not stand by if it's attacked.

On the issue of the very troubled borders between Israel and Lebanon, due to what is clearly multi-year subversion of the Lebanese sovereignty by Syrian and Iraqi-backed terrorists, the President expressed support for the Israeli government in the event of an escalation of attacks by Hezbollah guerrillas: "We are making it clear we will fight terror wherever it exists," Bush said. "We expect Hezbollah not to attack our friends." That's what he said, and that may actually help promote stability. Our concern from a market and economic standpoint tends to be more focused on domestic risks; which we all realize would ramp significantly in the 'sniper' turned-out to be Middle Eastern, or if ideas that terror cells are planning some major push of that nature in other cities in event of open warfare with Iraq (there is some quiet speculation about such fears; as of course nobody knows if the terrorist(s) are domestic lunatics or enemy agents). If the latter, and it expands, the impact on society (even martial law) would be huge.

Elsewhere much of the action continues draining funds from the T-Bond markets, as would be a normal event for a source of 'fuel' for the move up; although now it is also occurring on the way down too. Interesting; tends to amplify our recent remarks that Treasuries not be able to resume the prior spiky forward thrust, as there's not much reason for lower rates. Note that not only are spreads wide, but (rest is reserved).

Daily action . . . reiterates we were not impressed by those focused on Tuesday's 378 point Dow Industrial's gain, while we had and have a feeling that after modest corrections there would be an attempt at attacking the most-recent highs, even if it's short-lived. Thereafter we may resume the downside, as noted in terms of an overall retracement, but thereafter likely rise again. So, that sets-up a complex pattern that in this case could see an early failing rally Thursday morning; another dip, and rebound, and then later set-back (reserved for ingerletter.com readers; basic idea provided).

The reality of Tuesday was that 880 was nailed on December S&P, and that much of the action looked like frantic short-covering, just modest venturing-in, by the hosts of investors who deferred action during the Columbus Day semi-holiday going. Then we got the obvious downtrend developing on Wednesday, and we leaned toward it being an all-daylong affair, as far as intraday guidelines; hence hotline (900.933.GENE or direct-dial access) nailed perfectly solid theoretical gains from 872 down to 859 or so. Now we have the S&P (in the wake of IBM) immediately gap-over the 880's, contest the action a bit; then maybe try entering a gap-up opening in Thursday's early-going.

In summary . . economic news was not a particular factor on Wednesday, and will of course likely be only modestly relevant on Thursday. Not a particular focus here, as we presume people are oriented to expect the worst; not prepared for improvements. Most CEO's are cautious to negative too. It's an interesting environment that could put upward pressure on rates and prices over a period of time, particularly if tensions with Iraq are resolved expeditiously, or there's a revived spate of consumerism which generally isn't the common expectation. Of course the common expectation is that rallies will occur, that economic rebounds are within ongoing contractions, and that big-cap prices do not generally reflect it all yet.

McClellan Oscillator readings reversed from extreme last week. For now; with the NYSE at -10 level, and on NASDAQ which never got too much going either way, is eased a bit at +27; with techs having been excessively robust and now consolidating.

Our prayers and thoughts remain with our troops fighting anywhere in the world, and that includes the troops manning security posts during the eased alert status at home in the United States. The events this week explicitly continue reminding us of various risks Allied fighting forces face, or may face, and not only given new threats received in the midst of solemn times. We have to keep in mind that the unexpected, which we unfortunately cannot dismiss as overwrought concerns, remains a risk, as civilization cheers human progress amidst ongoing worries about barbarians trying to reverse hundreds of years of modernity, in their quest against the advancement of mankind. In mid-evening activity, the S&P on Globex is up dramatically; by 1300 or so, in the wake of the IBM report. This is going to increase volatility on Thursday, with a likely gap-up, profit-taking wave, and renewed upside attempt, albeit slightly prematurely.