Yearend Rally; End of the Sleighride?

Immediate long-side trading . . . commenced upon traders post-Christmas holiday return; very much as expected, given the comparatively abbreviated trading week we have to work with. We certainly hope everyone enjoyed the holiday, but after the flat action on Monday it was (to us) pretty clear that there was no appetite for selling this market heavily yet; so we already suspected that there would be almost immediate rallies, with allowance for some 'trimming' of the intraday gains ahead of the close.

Certainly there was enough nervousness from the late-afternoon news, to account for half the gains vanishing; however, much of the reports (such as on Bin Laden) were initial emotional reactions. In the OBL case there was the mysterious video tape; said to be recent, but experts suspect it dates from November. And there continue to be a slew of reports that he 'may' (that's the operative word) be dead; which would be very welcomed by markets (and civilized peoples); though the first reaction to the release of a new tape was of course the opposite; oh my, he survived all that bombing, and is as reported, in Pakistan. Well it's more like maybe he did, or maybe he didn't; nobody really knows for sure, yet. Geopolitical risk? Clearly greater between India & Pakistan we'd think; but hopefully clearer heads will prevail, and dissuade immediate conflicts.

In any event, while the limited maneuvering room pretty much assured an upside try after Christmas, the Dow Industrials surrendered over half their gains from higher levels seen earlier. We might get a little weakness follow-through at the opening, then a fairly rapid bump-up, based on an apparent realization that the tape was dated, and that even if alive, the barbarian looks like his evil deeds are getting the better of him (did you ever notice all the terrorists seem to have similarly devious and deep eyes?). Can't suggest that for airline travel profiling; but it's almost like they're all on drugs. Of course considering where they trained, who knows, maybe they are! A most notable aspect, by the way, is that in this tape bin Laden takes responsibility directly for those dastardly bombings of our embassies in Africa; that should dispel those whiners who harp at saying there's little evidence connecting him to the crimes. Now even more.

Technically . . . what you have is essentially a short-term appearance of a daily-basis head & shoulders top, but it is unlikely to be just that, at least at this particular point. It is clear that the lowest risk of the September panic buy-spot is past; it is clear that the bulk of big blue-chips will be hard-pressed to improve their numbers immediately; and it is clear that the skeptics have argued this point all the way up. Some think we're in a denial mood about corporate results; but au contraire; we have pointed-out frailties in the blue-chip growth methodology for years, while believing the fundamentals were not yet improved for many such stocks, but that many would rebound anyway. What is also in our belief is that many managements recognize their problems, and have in fact cut overhead to the bone; in such a manner that profits may be easier rather than more difficult to come by later next year, and that they will more rapidly accrue to the bottom-lines. Now sure, the PE's are high, and we're well off the indicated Fall bottom now. Forward PE's are high too, and we have not said their won't be a correction for a lot of the stocks that are well-off their lows (some have moved up 50-100% since in a relatively short period of time); but again we suspect this does not happen short of a try at challenging the late November/early December highs of the Senior Averages.

That resistance, to be challenged (barring catastrophic news) is about the same; the (levels in fairness must be reserved for subscribers) for theMarch S&P, and just shy of (noted) for the Dow Industrials. A bit more interesting; the Nasdaq 100 (NDX), where we are a tad below the daily moving average now, and need to surmount (it) to show that it's moving higher in a way that denies the short-term daily pullback. As the mix of issues in this Index are a bit of a hodgepodge compared to the past, it's not impossible that some tax selling is mixed-up in this, and that the sector tries to pop resistance early in the new year as a better probability than doing so just now. The Semiconductor Index (SOX) is quite a similar picture.

Daily action . . . also observes the influence Oil is having; holding up some big-caps in the Senior Averages (where they still exert a sizeable petroleum influence); mostly as a result of OPEC saying today there is a '100% chance' of cutting production in '02 (an irony lost on the Street when they announced a cut within the hour). One finds it a bit less credible than historically however, since cuts typically don't hold when they are not accompanied by similar moves from Russia, or the North Sea producers.

In any event, we were looking for a post-holiday rally, as bears could do nothing with the market before Christmas, and buyers typically were in thin attendance. While that is essentially the case all the way until after New Year's, it is less so now than at the week's start of course, and that was evidenced by upside action earlier Wednesday.

As this was an expectation, the opening hotline (900.933.GENE) comment entered a guideline long in the upper-middle 1140's (it was at 1146, but almost immediately did a climb-up, regardless of defensive pre-opening Globex activity). We were sufficiently confident about the upside, that we simply utilized a fixed (not trailing) mental stop; a good move, as it allowed the single effort to remain long for the entire upside phase; with an exit of not less the 500 March S&P points theoretically ahead; maybe more as markets started fading in Wednesday's final hour, as the 'tape' news hit the tape.

Again, we'll look for another comeback try on Thursday, barring some awful news, and suspect (particularly on NASDAQ) it will run-into crosscurrents of yearend tax-related selling, but also offsetting buying in the very downtrodden expected survivors of this incredible year. Most analysts who talk about how 'overpriced' the market is at this point, per usual tend to describe it in terms of a monolith, which it surely is not. A host of small stocks are selling at or near the year's low, possibly bound for January Effect behavior, and in some cases that could be irrespective of big-cap behavior at the year's start, or beyond an early rally that sometimes has trouble extending far.

Of course, we'll eventually get to a point where seasonal reinvestment monies often thrown at the market by fund managers (irrespective of price levels) are exhausted; but that shouldn't be yet. The question is how far it will be into the new year, and the answer (reserved comment for ingerletter.com readers)' maybe some neutrality for gainers in the last phase of the year, including consumer electronics retailers, thought to rise in response to 'cocooning'; as we described a most likely trend for 2001's Fall.

In essence, some financial concerns remain; beyond the corporate earnings so many focus on, though nobody expects many to do well, yet; though really we have fewer non-travel related equity warnings this year than most everyone expected, which is a market plus incidentally. At the same time, fear of 'contagion' from Argentina's mess continues; something of course we were afraid they'd face by pushing the old 'peg' to the edge; instead of dollarizing the Peso, while there was still time to possibly avoid crisis. (Reserved.) The Dollar and T-Bonds eased just a tad today; not directly because of Latin affairs, which have wound-down a bit, at least for the moment.

Overall, whether or not renewed rallying is durable beyond the year's start is almost moot; it's been a terrific short-to-intermediate move, which is what we called for just before it started per September's panic reversal call, and that's irrespective of what happens in '02. Nevertheless, it is our preliminary thinking that any pause here will be comparatively shallow (news sensitive of course); then renewed upside commences, though in smaller stocks is primarily a function of the earliest parts of the upcoming year; likely it's already started in selective stocks, generally perceived to be survivors.

Little will prevent those floods of liquidity likely to embrace the markets as seasonal reinvestment funds appear next month; at the same time as the overall move again is going to try surpassing resistance for various benchmarks, and probably will succeed (reserved for readers). The idea all along was that the market's structural appearance would improve, before our Nation emerged from recession, but actually help chances for it to occur. More optimism than that implied by public sentiment or even political leadership statements isn't particularly warranted; although there is no doubt that the stage-of-siege mentality the bears have felt, has bolstered the projected upside odds.

In summary . . economic data continues to be less negative than the perceptions; basically as projected for months, and as economic data reveals. Oscillators for the NYSE McClellan dipped to +2 on Wednesday, and rose to near +4 on the NASDAQ.

Nothing much is analytically changed by Wednesday action; relatively normal profit-taking late last week; neutrality on Monday; leading to a targeted new upside effort on Wednesday; after realization by large numbers of players due to breakouts, that they may have to pay-up to get in; then the inevitable nervous movements (almost shy of warranting the term 'breakdown") after buying on-strength, after which those who chased upside (as warned about), do basically get nervous, often near a time the market prepares for yet-another rally, sustainable or not, and that contributes to helping the upside swings to evolve into early 2002, barring catastrophic news.

Some of Wednesday's upside action was probably short-covering too; not particularly relevant just here, and so the overall structure's still o.k.; pretty decent ahead of year-end efforts. (As noted on occasion, visitors to our site or reading excerpts of our work should not assume that -though insatiably optimistic from September's forecast panic lows, and glad for it- they should not misinterpret these months of great bullishness in any way that suggests a blindly euphoric view toward 2002 that rivals late '01 action.)

We hope everyone enjoyed a peaceful, reflective holiday, and of course to all, of all faiths, a good time to pray for a peaceful and secure Happy New Year coming ahead.