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Fed heads rest, AOL soars again. Split, Split, Split !!

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        12-22-98         High     Low     Volume   Advances Decline
DOW     9044.72 + 55.87 9069.44  8948.69  683,399k  1,251   1,732
Nasdaq  2120.99 - 17.04 2144.61  2105.54  2,120.9k  1,797   2,400
S&P-100  596.24 +  0.08  599.70   591.25   Totals   3,048   3,529
S&P-500 1203.58 +  0.74 1209.22  1192.81            44.0%   51.0%
$RUT     400.21 -  1.62  402.19   399.00
$TRAN   3035.90 + 10.38 3047.06  2977.26 
VIX       22.35 -  0.87   24.46    22.00 
Put/Call Ratio      .48

Fed heads rest, AOL soars again. Split, Split, Split !!

The Federal Reserve FOMC left interest rates unchanged today and the market that had been down in cautious optimism rebounded on the news. Normally a no rate cut announcement would have been a let down for the market but after three in a row investors looked at a no cut message as confirmation that the economy is improving and the Fed is in control.

The Dow bounded ahead. Led by IBM +5.88 (again) MRK +3.31, KO +1.69, PG +2.75, UK +1.63.

The Nasdaq was off early with profit taking from its recent record breaking run. The techs were soft even after repeated strong comments from analysts about the current PC boom phase. This just shows what we preach comes true. Every rally must rest before it can continue to higher ground. We recommended last night to use the expected pull back today to open new positions in several tech stocks. If you took our advice you would now be poised for the Santa Claus rally after Christmas.

The new continuing to move the market is the bipartisan move to only censure the president. It is becoming increasingly apparent that this will blow over quickly and we will be on with business as usual.

Big upgrades continue to bless the tech sector. IBM was upgraded to a new price target of $215 by Merrill Lynch along with Lucent to $135 and Nokia $170. Nokia was named the best play due to the current global cellular revolution. Nokia and IBM have been great plays for us and show no signs of a letup.

3Com announced earnings after the bell and beat the street by $.05 cents. The estimate was $.31 and they were able to earn +$.36 before a charge. The telecom sector, led by CSCO, should benefit from the news.

The big news tonight...AOL had gapped up this morning +$8.00 but weakened midday as caution about the FOMC meeting and the Nasdaq weakness caused some profit taking. When the Nasdaq and Dow firmed after the FOMC announcement, AOL took off again to close at +5.75. In after hours trading AOL was hitting new highs on rumors it was going to be added to the S&P-500. Within minutes the rumor was confirmed and AOL shot up another +16.00 to $138. As we all know addition of any stock to the S&P requires all the different S&P index funds (over 1,000) to buy the stock. AOL currently has 458Mil shares outstanding. 77% (352mil) are owned by existing mutual funds and institutions. This leaves 106 mil shares available. Average daily volume is 10.4 million. If over 1000 index funds have to now buy AOL they will be competing with each other for the 106 million shares available. Can you say "feeding frenzy"? Now to compound all of this we are now calling for an "aggressive buy" on AOL as a stock split candidate. The last time we recommended AOL as a splitter some readers made 400-500% returns. Based on the current news and Internet frenzy this should also provide an easy double. The last split was announced at $120 and immediately had a $30 split run to actually split over $150. The split was on November 17th. One month ago! From $90 when we recommended a split play in September to $276 (post split adjusted 2x$138 currently) in three months! Get on the train, we are leaving again! Please use the gap open trading method if you try to buy AOL in the morning. NEVER place a market order before the open. Wait for 45min to an hour before placing a buy order. Let the price settle from the opening hysteria before joining the fray.

At the risk of sounding too bullish let me again caution you about the decreasing fundamentals of the market. Declines again beat advancers 1732 to 1251 on the NYSE and 2400 to 1797 on the Nasdaq. Problems are basically just year end profit taking and portfolio restructuring. We look at any pullbacks like this morning as buying opportunities and still expect a Santa Claus rally after Christmas. I said "expect". Remember, the market is a living breathing creature just waiting to eat you for breakfast. If you do open a position on a pullback you still must be ready to sell if the market goes against us next week. If I could tell you with 100% certainty that the market would go up x% next week then I could sell the newsletter for $10,000 a month and you would be happy to pay it. I can't. Nobody can.

S&P futures are down -3.20 at 7:30 which would lead us to believe we will have another down open. Low volume will also magnify any market moves. Be patient.

Jim Brown
Editor

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