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Market Wrap

They came, they talked, they cut. Now what?

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        11-17-98         High     Low     Volume   Advances Decline
DOW     8986.28 - 24.97 9103.16  8929.12  703,482k  1,478   1,492
Nasdaq  1878.52 + 16.84 1887.31  1845.84  828,597k  1,834   2,319 
S&P-100  560.93 +  1.39  568.02   556.74   Totals   3,312   3,811
S&P-500 1139.32 +  3.45 1151.71  1129.67            46.5%   53.5%
$RUT     389.43 +  0.99  390.42   385.63
$TRAN   2927.82 +  8.17 2936.64  2871.25 
VIX       27.94 +  0.51   30.42    26.13
Put/Call Ratio      .62

They came, they talked, they cut. Now what?

The Fed heads met again today as scheduled and cut rates again as most expected. Aggressively cut rates! Both the Fed Funds rate -.25% and the Discount Rate -.25%. Basically they took out an insurance policy on the already rebounding economic outlook.

In their official statement they said that although recession fears have calmed and credit spreads have eased there are still some unusual strains remaining. While the Oct-15 cut was to stabilize the market, today's cut was designed to give the economy a nudge in the right direction.

Their language also hinted that this might be the end of the cuts for some time. They are likely to wait and watch for signs of direction before taking another step. The Fed will want to watch the retail sales for Nov/Dec to see if the consumer buying frenzy is still intact.

You would think that since we have another rate cut that everything should be rosy in the market. Wrong again!

The market is a very conscious, living entity. Today's rate cut was already priced in to the market. A lack of cut would have been a disaster. With the possibility of no more cuts until next year the market has to look somewhere else for news to drive any movement.

Lack of news would cause the market to stagnate and range trade with a downward trend. The underlying positive bullishness from the last three cuts should give us a near term bottom. The +1100 points from the last four weeks will keep us from going too much farther too fast. We still have not re-tested to a higher low yet.

So we are looking for news to drive the market. We didn't have to look far for bad news to find us. Applied Materials (AMAT) announced earnings after the bell today. They posted $.07 vs. estimates of $.02 ..BUT... the forward looking statements were not good. They said that despite the general euphoria in the chip sector over Intel's success they (AMAT) were uncertain about the future outlook of the chip business in general. They expected several more quarters of weak demand.

Second Microsoft lost a landmark case to Sun Micro today concerning the Microsoft "polluted Java." Microsoft has 90 days to modify Windows98 and Explorer to conform to the Sun Java or REMOVE Windows98 from the market. A judge issued an order preventing Microsoft from shipping any product that does not conform to the Sun compatibility testing procedures. While the action may not hurt MSFT financially immediately the actual ruling might. The judge said that Sun was likely to prevail based on the merits of the case and government lawyers said this was just another part of the Microsoft pattern of anti-competitive behavior. Microsoft, in an effort to downplay the decision, said it was disappointed in the outcome but would comply. Microsoft did say in a late press release that they expected no impact to any products and were looking at their legal options.

The handwriting on the wall does not look good for Microsoft. These things take on a mind of their own. When one domino falls and then another it does not take long before you have an avalanche. Every suit Microsoft loses adds fuel to the governments current antitrust case.

Based on MSFT and AMAT the Nasdaq could have a tough open in the morning.

Third, adding to the overall negativity Hewlett Packard warned that revenue was slowing due to the overall global slowdown. Knock -$6 off their stock price!

On the national front we are only two days from the start of the "Clinton Impeachment Hearings." Just the title tells you that the markets will be watching closely for any hint of strength from the Republicans. They already have changed their "only one witness" remarks and may call others. The Democrats are threatening to walkout if the process changes. While we do not expect any negative outcome from the process there is always the chance of a someone dropping a bombshell that changes the picture. One of the possible witnesses could be Democratic fund raiser John Huang. (wonder why the Democrats would want to walk out on him??)

Thursday the UN weapons inspectors are scheduled to make some surprise inspection attempts at secret locations that they have never been allowed to visit. Should they be turned away, and you can count on it if there is something hidden there, then we will immediately be back on the bombing threshold again. Again we do not think Iraq impacts our market other than in the oil prices but it is just another worry factor.

The market did just what was expected today. Down before the meeting, up on the news and down as traders sold into the rally to capture the quick profits. Historically the day after a Fed meeting is a down day, even when they cut rates. This is just like an earnings announcement. Up on the expectation down on the fact. While we feel the overall market sentiment is positive and we look for the Dow to pass the previous high shortly, we could see a day or two of pullback or choppiness until the news is digested. Look at any dip as a buying opportunity but wait for the market to start back up before starting a new position.

The transports were very weak today at +8.17 and the Russell continues to be weak at -.99 although it did pull back from an over $4.00 loss at midday. If the Russell starts back up that will be confirmation that the rally is back underway.

After being down -1.50 the S&P futures have rallied back to +1.80 at 9:PM as Japan and Hong Kong both opened higher on news of the Fed rate cut. Should this continue we could see a positive open on Wednesday.

Good Luck,

Jim Brown
Editor

Jim's Plays

I had recommended that everyone wait till Wednesday to open a new position but on Friday afternoon I bought some OEX puts as I expected the market to slide in front of the Fed meeting. The IMF Brazil bailout gave the market more lift than I anticipated. I closed the position for a loss the instant the rate cut announced today. I bought some Yahoo at the same time and sold it 10min later on the first market dip. If I had held on I could have done much better but I was expecting the closing drop and only intended to be in the trade a few minutes.

Date Action Stock  Qty  Symbol Price  Sold Price  Profit/Loss
  
FRI  Buy    $OEX   10   OEW-WL  11.00 Tue  $ 7.75 - 3,250
Tue  Buy    YHOO   10   YHQ-KN   8.25 Tue  $ 9.25 + 1,000
                                   Total change   - 2,250

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