Option Investor
Market Wrap

The Santa Claus rally tripped leaving the starting gate today.

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        12-28-98        High     Low     Volume   Advances Decline
DOW     9226.75 +  8.76 9262.79  9189.42  532,387k  1,392   1,654
Nasdaq  2180.30 + 17.30 2190.11  2164.67  868,524k  1,912   2,340 
S&P-100  608.01 -  0.89  611.64   606.14   Totals   3,304   3,994
S&P-500 1225.40 -  0.78 1231.52  1221.17            57.9%   58.6%
$RUT     408.28 +  2.72  409.04   405.56
$TRAN   3040.83 -  3.25 3059.26  3033.96 
VIX       22.81 +  0.77   23.37    22.38
Put/Call Ratio      .42  

The Santa Claus rally tripped leaving the starting gate today.

The widely expected end of year rally failed to materialize today as the broader market was still lifeless. The Dow and Nasdaq did manage to post small gains but the S&P finished negative.

The Dow was plagued by the seventh inning stretch worries. The longest consecutive positive day streak this year has been six days, until today. The seventh day rest and test cycle was broken but just barely. Now we have a seven day string and traders will be looking for the coming down day to enter the market. The theory behind this is strictly profit taking. After logging a +450 point gain in the last seven days the traders feel the market is ripe for a sell off. The afternoon dip below 9200 today was jumped on by hungry buyers and rebounded sharply. The quick, buy any dip mentality, shows the buyers are there but just waiting.

Volume was light until the afternoon dip and then it picked up to slightly over 750 million shares.

The Internet stocks were hot again. AOL soared to $157.25 (+20.63) as index funds scrambled to add AOL to their portfolios. Volume was over 25 million shares, more than twice normal volume. YHOO added $28.38, AMZN +$27.13 and CMGI +9.63. The Internet boom was prompted by news that some online retailers had already beaten their sales projections and some as many as 600%. Traditional brick and mortar retailers are expecting sales increases of +3-5%. The new online paradigm is exploding at the expense of old line walk in stores. AOL for instance, said it had over one million new first time buyers so far this month. While other retailers have been reporting earnings warnings the online sector has not. It is hard to miss earnings when you don't have any.

The Internet blowout powered the Nasdaq to a new record high and there seems to be no stopping this sector. The normal tech blue chips were mixed. MSFT +.63, INTC -2.88, DELL +.19, CSCO -0-. No record setting help there.

The online brokers exploded today after it was announced that Schwab had surpassed Merrill Lynch as the largest broker. So much for the rumor that the giant Merrill was going to buy little Schwab. Could the tables be turning on Merrill? Etrade also announced that over 500,000 new customers had signed up for its new information service site. If they want the info, can signing up for new trading accounts be far behind? EGRP was up +11.75. The CEO said their target is 12-15 million accounts!!!

Why would the online brokers not prosper? The 60,000 new Internet users per hour provide a huge audience for new online trading converts. With the major averages setting new highs, and investor confidence reaching new highs as well, the new national pastime is rapidly becoming investing.

The major averages year to date are showing tremendous gains in spite of the September/October correction.

DOW +16.7%
S&P +26.3%
Nasdaq +38.8%

Not participating were:

TRAN -6.6%
RUT -6.6%

The Russell-2000 was the biggest percentage performer today adding +2.72 or a .7% gain. The Russel-2000 is the first place to expect results from a new year rally. Since the small caps have been the most beat up they will be the biggest gainers going forward.

We are still advising caution about blindly starting new positions until the market dips again on profit taking but this is going to be hard to call and quick to rebound. Substantial profits could be made by quick trades on any up days but you must be prepared for the eventual bout of profit taking. Stocks could dip individually outside of the broader market. You need to be faithful on your stop loss orders and not buy back in until the option trades through the origional price at which you were stopped out.

While quickness on the trigger is good, patience is a winning virtue.

S&P futures have been up as much as +1.00 since the close and are currently trending up at 8:PM.

Good Luck

Jim Brown

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