This week, we are giving some of our other editors an opportunity to express their thoughts on the current market conditions. Today, the contributing editor is Ray Cummins (Spreads/Combination Plays).
Many US stocks closed higher today with investors now hopeful that the Federal Reserve's recent interest rate cut will keep the economy on the right track. Technology stocks led the market for the second day in a row but broader markets also closed higher. The NASDAQ is about 100 point short of its all-time closing high and most of that momentum today came from a rally on semiconductor giant Intel. INTC told analysts that its fourth quarter results will be stronger than anticipated, and other technology shares followed suit. (One of our recent spread favorites TXN jumped $5)
Many of the higher priced Internet stocks closed lower and experts said that much of the current volatility now stems from short-term (day) traders that thrive on the gapping moves. Stocks that fell in that group included; INKT, CMGI, MSPG, NSOL, RNWK, SEEK, YHOO.
Some of the other sectors had significant news and announcements; Time Warner soared to a record high of $106 following the news of its plans for a two-for-one stock split. Immunex shot up $10 as the speculation on the arthritis drug Enebrel(R) continues. MCI gained $3 after unveiling a new service that will offer faster Internet access over standard phone lines. A couple of the notable downers; UAL suffered a $3 loss when three of the major airlines were downgraded by Salomon and Lycos actually edged out estimates with a smaller-than-expected 1st QTR loss, but still dropped with the Internet group.
Of course the biggest stock news was the after hours announcement by Amazon. They set a three-for-one stock split with a record date of 12/18. AMZN has seen its shares skyrocket with the now expected boost in holiday online shopping but I don't think anyone forecast this split. Where will it stop now?
In other news, investors basically shrugged off the start of House Judiciary Committee hearings on impeachment proceedings against the President. Independent Counsel Ken Starr laid out his case against the President, then fended off searing criticism about his allegations of presidential misconduct. Of course the Republicans focused on Clinton's conduct, while Democrats tried to put Starr on the defensive by attacking his methods. The committee's ranking Democrat, Rep. John Conyers, ridiculed Starr as "a federally paid sex policeman" who was obsessed with driving Clinton from office because of his sexual affair with Lewinsky. On the positive side, (depending on how you view the whole issue) Starr said there was no evidence of impeachable offenses in other activities that he investigated, including the gathering of FBI files on Republicans by the Clinton White House and the firing of White House travel office workers. Clinton, on an official trip to Asia, could not escape the aftermath of his affair with Lewinsky. At a town hall meeting, a woman asked him how he had apologized to his wife and daughter for his "inappropriate" relationship with Lewinsky and if they had forgave him. Most of us agree that investors, along with the general public are tired and weary from the whole affair (how poignant!) and only a significant new discovery or the eventual resolution of the entire matter will have any profound effect on the market.
The account of the relatively rare between-meeting action by the U.S. central bank on September 29 was released today. The minutes showed that the Fed had grown increasingly worried that the impact of international economic and financial turmoil was threatening a long-running U.S. expansion. That concern continued into the mid October telephone conference, when FOMC members agreed weakening business confidence and tighter credit markets were continuing to pose a risk to the domestic economy and justified a further cut. Since the Tuesday rate cut, Greenspan has moved swiftly to portray the latest round of interest rate reductions as the last of a fine tuned triumvirate of monetary tweaks expected this year. I'm sure the new double-speak will keep the analysts guessing...
The upcoming domestic economic data has taken on added importance, given that analysts say it will take new evidence there to push the Fed to ease again. But there's nothing major in terms of data on the calendar for the rest of the week. Mortgage rates finally fell after rising three consecutive weeks. The fact that the rates remain low and affordable is good news for the average American and particularly the housing industry. Affordable interest rates undoubtedly were a large part of the reason October housing starts were so high and that could certainly have a positive affect on the building/materials industry.
As far as world economic events; Overnight news from Asia was indecisive, but even with Wall Street's uninspirational opening, European markets seemed determined to put in a good performance. A gradual pick up in confidence helped the markets move upward, although there was little news of substance to justify the marked change in mood during the day. The Bourses eventually posted gains around the 2% mark. With continuing domestic debate over economic matters, two of Latin America's most-watched bolsas, Brazil and Mexico, were hit by investors seeking profits. However, most of the exchanges in the rest of the region added significant gains to their leading stock indexes on the back of new political optimism.
A fearless forecast...
As far as the technical outlook; The recent rally is very narrow, and the quality is somewhat poor. The A/D statistics are mediocre and the speculation index is completely off-the-scale (with the current Internet craze). The percentage of bullish market advisors is at its worst level in seven years and short-selling (although slightly lower this month) is still significant. The weekly high and low differential gauges for all of the exchanges are lagging and the DOW's price dividend ratio is very overvalued. (Yucckkk!)
With that in mind, it pays to remember that the market is driven mainly by sentiment. Thus, even with all of the negative signs, I don't see any reason that this intermediate-term advance won't continue for a couple more weeks. If a small consolidation does take place, it will present an opportunity for additional buying on stronger stocks and profitable selling on the issues that are starting to exhibit (technical) signs of a near-term top or failed rally. Always be sure to check the sector performance and outlook for positive confirmation before starting new plays.
Something else to consider...
It's that time of the year to start thinking about the historical trading relationship between small-cap and large-cap stocks. Some experts refer to this phenomenon as the JANUARY EFFECT. The change is barely noticeable but generally the big-caps outperform smaller issues from mid-November to mid-December due to profit taking in the lower priced stocks. As we move towards the new year, many investors transition into the small-caps and the trend reverses. The historically strong performance of small stocks in the first few months of the year is well known and easily proven. The less obvious cycle in November and December is probably more profitable as the majority of traders don't use the trend to their advantage, thus leaving the effect intact for those that are aware of it's existence. Some of the analysts that participate in this strategy are debating whether or not the recent market decline has skewed the cycle for this year. Many refer to severe October declines in previous years which did not significantly affect the trend. The impressive performance of big-caps stocks over the last week may support this theory. Whatever the outcome, a successful trader should be aware of these market tendencies and use that knowledge to his/her advantage...
We may need seat belts for Friday's double-witching expiry of stock and index options. Trading can be bumpy (and volume heavy) both at the open and the close. I think Jim might say, "Plan your trades and execute your plans..." Good Luck!