Internal Erosion; How Serious?

Internal erosion became evident on Tuesday . . . and blossomed a bit more on Wednesday; to no surprise of those viewing both forecasttechnical resistance as our measured June S&P goals were reached (1320 +/-), and we got some fading in front of Greenspeak. At the same time, tipping the balance of power in Washington (by a Vermont Senator's shift) didn't encourage immediate new buying in any event.

Does the market's pullback portend something more ominous? That depends on how one views the risks ahead, and the shorter-term action which may not be so obvious, as outlined again last night. That surrounds the prospect that earnings warnings will be forthcoming this Summer, not to mention the 'blackout' risks out West, that might have National overtones in slowing economic recovery. And then there's the Dollar, which has been impressively stable, but may run into more trouble during mid-year.

Earnings are a toss-up, not that they'll be particularly good (outside of a few, which in most cases are nearly overpriced, they won't), but whether they'll show an undertone of resilience, which would be particularly impressive if it occurs while the market's undergoing a bit of a swoon. That would presumptively be suggesting that money managers are (correctly) putting their emphasis on next year, not this, in terms of their focus, while absorbing the almost-assured mediocre news in the shorter-run. If the economy's especially resilient, that leans more universally towards a favorable ultimate resolution, because it would show that the greatest impact of 'wealth effect' damage to the markets is behind, not head, with consumption less sensitive to all the machinations of the market on the intermediate term (this Summer). That there's not much more upside room in some of the basic materials and energy stocks that as you know have primarily led the upside romp, is a given. And that's why coming shifts to technology and under-exploited stock-groups are essential as the year goes on.

It was because the odds were so incredibly against the seemingly-unflappable kind of transition between leadership sectors, that we not only forecast (at last week's end) a trimming of gains in Oil stocks (XOI), but also thought the Nasdaq 100 (NDX) would in time be able to take-over that mantle, but not necessarily as smoothly as would be nice, but unrealistic. Then we also had a number of analysts and technicians (among the continuously skeptical crowd from February or March) who flipped to the bullish or optimistic camp in the last several days, which isn't to use them as contrary forces per se, but is to suggest that at about such time everyone who wanted to buy the last run-up, was probably about done coming in. Digest this a bit (as noted), and we'll see if we can get further upside. But we wouldn't be too excited over the immediate term.

Clearly the Street's worried about all this; hence the erosion in financials (after recent run-ups), such as the Bank Stock Index (BKX), which was mild, or the Securities and Brokers (XBD), which was not so mild in pullback quality today. Oil eased too, as it should after having a thrust above recent highs that was fairly quickly reversed. Rally extensions next month (in all) but Oil would be viewed favorably by pundits.

Daily action . . at the same time, saw us exiting a truly lengthy guideline S&P long, for about a 5100 point gain (or better). Before Wednesday, action had us cautioning against pressing the upside, especially after certain technicians of a bearish-bent for a few months finally capitulated to the upside in recent days, and in harmony with the guidelines here and on our (900.933.GENE) intraday hotline. (Balance reserved.)

If it goes that way, then the key would be whether early June tries the upside (likely) a bit, but whether it's accompanied by favorable internals or not. (Portion reserved for ingerletter.com readers). That we'll have to play as it unfolds, but generally we still believe most of this particular upside phase has been exhausted; something we've argued all week; and to which there's really no change. We don't understand why some analysts only now have started talking about rampant upside for the Summer, and then maybe the downside, as that scenario does not make a lot of sense to us. Rather, we suspect a rough spate of oscillations (potential fun for traders) is on-tap for this Summer, and by the time we get to the end of the year and early next, prices could be engaged in very meaningful upside again, almost irrespective of what level (beyond disaster) it's from. Stay tuned to our thoughts on that, as they may vary later.

Technically . . . support & resistance parameters are reserved for subscribers, along with (per usual) most Daily Action thoughts, Economic News, and Bits & Bytes.

Yes, we're getting closer to those variables that may give the Summer a tougher time than recent weeks; a Spring that we correctly didn't think would be particularly tough, though for sure we were almost alone (not totally) with optimism throughout this very extraordinary and wonderful run-up in the Senior Averages, which was expected to at least temporarily peak almost precisely at the levels seen early this week, with some possibility (not a serious trend, just a rally) for recovery efforts in early June.

For sure, many individual stocks are burdened with large debt, have not (as of yet) appreciated to the degree people want (or we want); though some basic industry and energy stocks are already overpriced relative to what they can possibly earn anytime in the foreseeable future. However, that type of leadership off the lows is not only the very normal rebound, as it should be for a healthier market capable of more enduring gains out there in the future, but can set the pattern for eventual follow-through. And of course those who insist on a bearish big-picture resolution are still fighting the Fed, though we continue suspecting there will be points this Summer that look otherwise.

Bits & Bytes . . is reserved for ingerletter.com readers, and mentioning of stocks that are discussed doesn't constitute a buy, sell or hold. Touched on tonight; Blue Martini (BLUE); the long-depressed VerticalNet (VERT);Dell Computer (DELL) and recent firming in LightPath Technologies (LPTH); along with Texas Instruments (TXN); Analog Devices (ADI);Intel (INTC); Conexant (CNXT); Digital Lightwave (DIGL); Merck (MRK);Sony (SNE); Metricom (MCOM); Micron (MU); volatile Nanometrics (NANO) and even more controversial and volatile, shares of Broadcom (BRCM).

In summary . . . the paucity of economic news takes a turn Thursday, as not only will we get a possible move in jobless claims, and maybe some slacking in housing as far as new sales (that's the hint out there from some in the industry, partially from steady climba in mortgage rates from their earlier year lows), and then Thursday evening remarks from the Fed Chairman, as noted. We suspect he'll emphasize how the U.S. is still not fully in-gear for the upside, but is on the road to recovery if we should stay-the-course. And that this situation fully warrants the Fed's ongoing expansionist policy; especially as pricing pressures aren't a result of monetary changes (so far).

Arguing solidly for a focus on next year, not this year, we've believed recent earnings or early warnings, are basically irrelevant, and say little about the next technology or expansion cycle, or resuscitation (as the case may be). For over 2 years we warned as you know, that 'bubble stocks' would break, and then either be absorbed, merged away, or just vanish, with only a few muddling through and prospering. Though clear that those with cash in lieu of debt are often better postured, this isn't universal, as is the degree of R&D commitment by some firms. And as usual, the problem with taking technology as a group, tends to be technology. There are never assurances that the next cycle won't be populated by newer technologies than the former big players had. In some cases, particularly leading semiconductor companies, there is little concern in this regard, which is one reason for our recent remarks about their patterns as well, and why we believe any declines this Summer (in that area) may be bullish declines.

McClellan Oscillator data continues a minor expansion of the Summation dots last week, with the strong behavior continuing as long as Summation is over the zero-line. That wasn't visible in daily criteria occasionally, but became very evident recently and is possibly a contributor to some technicians reversing their bearish stances belatedly in our view (at least for the short-term, where risk was expected to increase slightly, and as the day showed, did). At the moment, Wednesday's +34 NYSE read reflects a further consolidation (no surprise here), previously masked by blue-chip strength, as prior breakouts gathered a following, months after the turnaround, but is appropriately labored at present. At the same time NASDAQ's got about +17; with the speculated hiatus apparently underway, but suspect beyond Thursday (reserved comments).

For now the 900.933.GENE hotline is flat the June S&P, after exiting a superb long from 1249, held longer than anticipated because it had not backtracked to challenge our gently increasing mental stops, which it finally did. Not to get excited about this now; but we're honored that our ideal goal (a breakout over 1290 and eventual push to 1320 +/-) was fought-for and essentially achieved. As of 8 p.m. Wednesday evening, we've got a -308 Discount in the June futures; down about 300 from Chicago's regular session close. Still thinking some fade ahead of Greenspeak.