Zeev's Turnips Patch-No Politics (ZEEV)

[Ace Hanlon]

Steve Saville comments this morning:



Over the past several weeks our expectation has been that the stock indices would rebound back to, or above, their August highs
before the next major downward leg in the bear market got underway. This remains the case. In fact, although last week's stock
market action could be described as downright ugly, it was encouraging (as far as our forecast for another rebound is concerned) that
the level of fear rose much more than the stock indices fell. For example, the S&P500 Index dropped by only 5% last week and
remains above both its July low and its August low, yet the 5-day moving-average of the equity put/call ratio just hit its highest level in
many years (our records don't go back that far, but it is likely that the 5-DMA of the equity put/call ratio just reached its highest level
since the 1987 stock market crash). As another example of the extreme fear in the market, the TSI Index of Bullish Sentiment has
moved down to near its July lows (see chart below) and would probably have fallen to new lows except that some of the inputs to this
index (the sentiment surveys) don't yet reflect the effects of last week's stock market action.



Last week's sharp increase in fear reduces the probability that the stock indices will plunge well below their July lows without first
putting together another substantial rebound, although an October-1998-style intra-day spike below the July lows in the NASDAQ100
Index and/or the Dow Industrials Index would not surprise us given the power of the short-term downtrends and the capitulation that is
now taking place.

In terms of market sentiment our only concern at this time is that the NASDAQ100 Volatility Index (VXN) remains well below the peaks
reached in July-2002, September-2001 and April-2001. The VXN closed at 59 on Friday and until it moves up to at least 75 we will be
very cautious with regard to any new buying.

We will continue to offer our Dow March-2003 $76 put options for sale at $7.00. Unless the Dow drops to near its July low the puts
won't trade that high, but we are in no hurry to sell. In time, the Dow will trade well below the July low. The only reason we are
attempting to take any profits now is that the extremes of fearfulness that are currently being seen suggest that a powerful rebound
will occur in the near future, particularly if we get a sharp upward spike in volatility over the next 2 days.

Lastly, the FOMC meets again on Tuesday. We will be surprised, to say the least, if the Fed cuts interest rates at this meeting. This is
because a) the effects of inflation are starting to be seen in all the wrong places, b) a rate cut might spook the bond market, and c)
another 25 or 50 basis point reduction in the Fed Funds Rate has no chance of having anything more than a fleeting effect on the
stock market.