Option Investor
Market Wrap

Surprise, surprise, surprise! That is the rally cry on Wall Street tonight.

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        12-15-98         High     Low     Volume   Advances Decline
DOW     8823.30 +127.70 8823.30  8678.61  778,656k  1,605   1,463
Nasdaq  2012.33 + 45.41 2012.65  1981.26  769,407k  2,146   1,975
S&P-100  576.08 + 13.45  576.08   562.63   Totals   3,751   3,438
S&P-500 1162.79 + 21.59 1162.79  1141.20            52.2%   47.8%
$RUT     389.57 +  1.63  390.37   387.85
$TRAN   2883.32 + 24.66 2896.55  2847.76 
VIX       29.70 -  2.77   31.83    29.09 
Put/Call Ratio      .52

Surprise, surprise, surprise! That is the rally cry on Wall Street tonight.

The snapback relief rally caught many analysts by surprise and shorts ran for cover. The drop on Monday had the bears crawling out of their hibernation and starting to growl again. The strength and breadth of the rally today caught them off guard. At 2:PM I was also sitting with my finger on the sell button. The Dow was dropping and was only 5 points away from going negative after a 50 point morning bump. I was prepared to take my lumps if we broke zero. Only 5 points away from a $40k loss. Now I am a happy camper again! (more below)

This "Turnaround Tuesday" was music to our ears. The Dow had dropped five straight days to close over -7% from the recent highs. I had warned you last week that we had come too far, too fast and we were due for some profit taking. The Nasdaq was up +45% from its lows. The final breakdown of the tech blue chips on Monday was the sign technicians had been wanting to see. The techs are normally the first to rally and the last to fall. You saw both sides recently.

The political turmoil had given investors a case of upset stomach and they had taken the crisis as a reason to lighten up. Did the crisis go away? Not hardly, but analysts say the bad news is now factored into the market and earnings for next year are shaping up better than expected. Yes, we will still have some more warnings in the coming weeks but the positive tech forecasts are putting a rosy tint to the overall outlook.

The House vote has been pushed back to Friday. A dozen moderate fence sitters have now thrown their votes into the impeach column which leaves only about 30 undecided votes left. Most traders now understand that the final outcome will not be known until January or February and they will worry about market impact then.

This is also a triple witching options expiration week and the bias is normally up. There were several large buy programs today which traders said were the result of covering option positions.

The warning of the day was Dow component Caterpillar (CAT) who blamed _ _ _ _ (four letter word, starts with "A" ends with "a".) What are we going to use for a scapegoat when Asia gets well? Eastman Chemical (Kodak) also warned that the fourth quarter would be short. Boise Cascade warned after the close today and said they would cut 400 jobs.

We are still in the tax selling, window dressing, cash shortage period. Fund cash outflows are up as investors withdraw their funds trying to beat the year end tax assessment. Other investors are holding their deposits until the capital gains taxes have been allocated to existing fund depositors. You don't want to make a deposit and immediately get hit with capital gains for someone else.

The good news was Citigroup. If you can call it good news, 10,400 job cuts, but the market liked the restructuring and (C) was up strong today. (+2.81) General Electric also said they were looking for a +14% increase in earnings and was up strong also. +6.31 !!

The Internet sector was rocking again with AMZN +20.50 again !! CMGI +8.25, AOL +3.50, YHOO +6.75. The major reasons were a buying spree by Fingerhut as it positions itself as an Internet sales force. AOL also announced a new plan to open up Latin America and expand service offerings. The rally cry here seems to be "America Online in 99" as they expand around the world and into the cable delivery sector.

The Internet sector should do well tomorrow also after CMGI blew away estimates of -.53 with a +1.50 announcement. Simply incredible!! JBL also announced after the bell with an analyst beating +.50 compared to estimates of +.43

The Nasdaq gained back 75% of what it lost yesterday with MSFT, INTC, CSCO all making large gains. Now that the Nasdaq is back over 2,000 tech traders are breathing easier.

The rally today proved what I have been saying that the market wants to go up. We just keep walking softly through the minefield of political crisis, global recession, earnings warnings and profit taking. We are still looking for a serious jump after Christmas and traders may be trying to open positions before the run begins.

Historically, in the last 45 years only 10 have failed to produce a +1.5% or better jump in the Dow in the last five days of the year and the first two days of the new year. Also in the last 100 years, only 20 had five straight days of losses in December. Of those 20 years, 18 saw a rally following the drops of +3% or greater before December was over.

I did not say we would not see any more down days or volatility but we do expect the trend to be up. We could have another bounce at the open Wednesday since the DOW and the Nasdaq both closed at the high of the day with strong positive ticks. Futures are up slightly +1.50 at 7:00ET.

Pick your targets carefully. Caution is still the watchword until after Christmas.

Good Luck

Jim Brown

PS. We keep getting emails asking where to find the "text version" of the newsletter on the new website. Look under the "pick" section in the left navigation bar. The link is titled "Email Version."

Also the "Dreyfus, after hours quotes" are still there as well. Look on the "Research" page for that and other great tools.

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