Trench Warfare Tussles

Emerging from an enforced slumber . . . the bears were expected to return yesterday, and did. However, while bulls couldn't wrest control back from them, several distinct efforts to 'break' the market below identified key levels, weren't particularly successful either. That leaves a short-term tussle very much alive and ongoing at least for now. (Most downside action on Wednesday was the gap-down opening; than in-fighting.)

Part of the tussle was agitated by another Presidential comment right after 2 p.m. ET, which alluded to the suffering of technology, but expressing his long-term faith in that. Prior to the remark the market was engaged in a strong comeback, that aborted just as fast, and nevertheless managed to get a grip on things, and improve its tone once more, as time went on. Outside of the big gap-down (which we surely expected last night in the wake of the Nortel (NT), Palm (PALM) and Disney (DIS) stories), by the time all was said and done, the market generally oscillated in a wide trading range of sorts, primarily between the high 1150's and mid-1160's of theJune S&P. Breadth remained fairly constant at 2-3 to 1 negative throughout the session, for both NYSE and NASDAQ markets. Heaviness in theNasdaq 100 (NDX) was accordingly mostly a constant, as realization that some telecom (more so than computers we suspect) demand quotients are still not only heavy, but continuing to deteriorate moderately.

In any event, before all these stories surfaced after Tuesday's close, we viewed spiky action earlier in that day as semi-conclusive for the first phase up of the market (from last week's nailed lows); so while we don't fully label this a 'bear trap', we were telling investors to be prepared for the market to go South for awhile, or at least to withhold optimistic buying several days after the indicated reversal, following a projected drop in the wake of the Fed's rate cut at the prior week's FOMC meeting. Now, the key will be where we hold (assuming we do) on pullbacks, as some 'cushion' is provided. To us the importance of the movement higher earlier this week was to establish sort of a 'zone defense', more so than expecting markets to accomplish any more nearer-term.

There are conflicting fundamentals out there; a strong 'official' Consumer Confidence number; a weak unofficial one from ABC; a weak Durable Goods number; but then a fairly optimistic outlook from one of the major appliance makers (Durable Goods yes; but warnings from a industry competitor; with both Whirlpool and Maytag moving up in unison today). Makes it tough to figure out whether there is an actual exhaustion of downside activity, while some resurgence in housing-related spending is fairly typical towards Spring anyway. It also points out bifurcated natures of markets and sectors.

Fear that more warnings are coming early in the new week probably contributed to all the hesitation here near Quarter's end; a time that often is accompanied by what may often be 'window dressing'. What you're seeing is not 'undressing', but near neurosis. For reasons we'll outline in the next Letter (ideally this weekend) there are concerns that dwarf traditional ones, which if they don't blossom, would be very helpful later. In the interim, we'll continue focusing on these short-term technical waypoints outlined.

Daily action . . . meanwhile, saw the (900.933.GENE) hotline exit a major homerun guideline long from the 1091 area a week ago, today, at no lower than 1165 (and for some players likely higher) in the course of the day. Looking to scalp present drops.

In Tuesday's comments we commenced warning that the bulk of the first phase was to all practical purposes becoming history, and subsequent action bore that out. Now it's a little dicey daily basis, given very hard hits seen (month-end crosscurrents and subsequent profits warnings that were expected, but continually seem to surprise the investment community), even though they are from big companies that are already known to be struggling. All that makes shorts risky, and immediate longs lots more speculative (in our view) than was our leaning against the 'bearish winds' last week. Hence, while we'll still attempt to capture rebounds, we suspect anything nearly as robust as recent days will be sometime off in the future, though we expect recovery efforts, at least, after a down opening on Thursday.

With the recent move to near June S&P 1190; the forecast move (also seen likely at a short-term end before the middle of this week) was quite astounding, for less than six days; much to the chagrin of any who proclaimed a 'new bear' emerging recently. (That doesn't mean they don't get more downside, at least short-term, but often that's interspersed by rebounds, just when 'confirmations' of negativity are available.) Yes, we expected to steadily move into more challenging or ultimately important times with respect to 'defining' the quality of actions 'down the road'. And that was thought to be put to a test almost instantly starting Tuesday, and was. Wednesday's hit was rather direct for a nervous market; as NASDAQ had one of '01's largest percentage drops.

In any event, there's an ongoing debate among economists as to whether confidence will erode further in future reports, or how important the ABC report disputing 'official' ones was. We think that's truly an academic argument with the stimulus underway at the Fed (more aggressively than generally known), and so even if the bears are able to (we said we'd be surprised if they couldn't) take a whack or two at the market, we would not expect the energized scenario (in terms of price action and Fed behavior) to let it deteriorate as dramatically as they did in weeks preceding last week's turn.

Now certainly we're aware that there's something to be said about 'end of Quarter' or 'window dressing' buying going on to, which tends to be from mutual funds that must (they say must, we don't know why) commit available funds before the Quarter's end. As that wanes, the bears (especially in-front of tax-time too) have some chance to hit the markets again; which is why we were so cognizant of the need to lift prices above certain 'waypoints' before the risk of a new setback materialized. We're pleased to be able to say that, though moves got a little too spiky for our tastes at points Tuesday, it appears we've put in just enough clearance to increase the odds of cushioning a next drop, though the first day expected to be off of rebound highs, was really quite heavy.

In the interim, we got quite overbought on an intraday and hourly basis, just neutral in daily basis work (within harmony of a longer-term upside move), and barely turning to the upside on a weekly basis. That indicates over time there's more upside potential, albeit we didn't expect it today, and don't expect much in the very immediate term. I'll include those caveats we've already noted, as well as numerous technical obstacles, and of course tough-to-quantify matters, such as risks of international trade, diseases and other aspects that could stymie global expansion requirements in the future; that of course have already been impacted by the conventional factors. (More later on.) Bits & Bytes . . touches tonight on issues like Merck (MRK), Liberty Digital (LDIG), LightPath (LPTH), JDS Uniphase (JDSU), Microsoft (MSFT), Intel (INTC), AT&T (T), Comcast (CMCSA),AOL Time Warner (AOL), Nokia (NOK), New Focus (NUFO), Digital Lightwave (DIGL), Tyco (TYC), Micron (MU) and old stalwart here,Texas Instruments (TXN). Please do not construe non-subscriber mere designation here as a buy, sell, or hold on any, as our opinions and reactions are for our readers.

In summary . . . the market folded as expected, and was unable to mount recoveries worthy of the term, making the reversal (technically) fairly crucial as observed already in our remarks (and rebound targets). Even with further downside, we wouldn't get so carried away with fear as to forget the backdrop against which the action is occurring.

McClellan Oscillator data turned down considerably from projected recoveries to the vicinity of the zero-lines, and that finds the NYSE data currently around -65, while the NASDAQ currently is around -6. Volatility data is not yet challenging that of last week, and short-term TRIN data had already moved to around the short-term overbought or extended vicinity, in-front of today's drop. At least around here there was no sign of a 'bear trap', since we didn't expect more upside short-term than what we got. However we will be open-minded about a 'bull trap' coming out of declines that don't plummet beyond parameters considered realistic, though for NASDAQ a break of old lows was a consideration for the post-rebound phase; more so than is the case for the NYSE.

Last week's post-FOMC drop and turnaround ideas weren't easy. After a couple tries we got a very successful guideline long from June S&P 1091, which is of course now history. We saw slight parabolic warnings Tuesday, and do not believe the pullback is at an immediate low, though this could evolve into a 'sucker decline'. We'll continue emphasizing the short-term as the highly probable move was nicely achieved beyond minimal goals, so that required us to become increasingly cautious earlier this week. As of 7:30 p.m. or so, S&P premium on Globex is around 671; futures little changed.