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Market Wrap

The winning streak ends on fading Internet euphoria...

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        12-30-98        High     Low     Volume   Advances Decline
DOW     9274.64 - 46.34 9326.39  9268.20  597,880k  1,593   1,388
Nasdaq  2166.95 - 14.82 2196.64  2160.93  926,807k  2,168   2,084 
S&P-100  607.33 -  6.46  615.90   607.24   Totals   3,753   3,472
S&P-500 1231.93 -  9.88 1244.93  1231.20            57.8%   42.2%
$RUT     411.91 +  1.50  412.24   409.61
$TRAN   3129.84 + 63.45 3130.10  3065.36 
VIX       23.79 +  1.88   24.06    22.42

The winning streak ends on fading Internet euphoria...

Wall Street stocks sagged Wednesday as high-flying Internet stocks struggled to hold their recent gains. At the close, the Dow Jones industrial average was down 46.34 points at 9274.64, failing to extend its recent winning streak to nine sessions. The Nasdaq was off 14.83 at 2166.94 and the S&P finished down 9.88 at 1231.93. Most issues were lackluster on light volume ahead of the Friday holiday with declines and advances about even. While the blue-chip issues remained mired in a pre-New Year's slumber, smaller-company shares perked up with the Russell 2000 index rising 1.50 to 411.91, hinting at the start of the "January Effect" bounce.

With one session to go, the Dow is up 17% for the year but while strong money flows from year-end bonuses and retirement plans have fueled a strong finish to 1998, analysts are concerned the company profits may not justify the market's lofty levels in 1999. Most of the pessimistic experts are focused on one main concern; the lack of breadth behind the current rally. Some point-out the figures are actually worse now than they were last summer. The big problem is that investors are having a hard time finding stocks that are attractively valued following the recent rise in share prices.

Internet-related stocks, a focus of the buying frenzy in recent weeks, fell overall as investors took some profits. A Wall Street Journal article that questioned the valuations of some shares also weighed on the market. New signs of fear were evident in stocks that rode the wave early in the week, with some losing almost half of their recent gains. Some of the well-known Internet companies that fell sharply on profit-taking inluded; AOL, CMGI, ELNK, XCIT and YHOO. One of the issues that avoided the stampede was Inktomi, an Internet software maker. The stock climbed $5 to $132 today, following a two-for-one stock split announcement late Tuesday.

Most analysts were little surprised that the euphoria was fading so quickly since so many of the recent gainers were previously out of market favor and had changed little (fundamentally) to recommend them. Some of these rebounding internet issues were previously in the worst (historically) performing groups in the market and even with these enthusiastic rallies, most will eventually retrace their gains.

Economic news...

The index of leading economic indicators rose an unexpected 0.6% in November, a sign the economy is poised to maintain its strength in 1999. Seven of the 10 indicators in the index rose in November, led by stock prices, money supply, the interest rate spread and consumer expectations. These leading indicators are designed to help forecast turning points in the economy six to nine months away and together, the three composite indexes and their components reflect a healthy economy with growth of 2.5%-3% in the fourth quarter and continuing expansion in 1999.

U.S. bonds rose for a third day as investors wagered that inflation will stay low in 1999. The 30-year bond rose 5/32 pushing its yield down 1 basis point and two-year notes rallied amid the new optimism generated by stronger-than-expected demand. Investors said bonds look attractive after four days of selling and last week boosted yields to the highest in a month. (Higher yields are made even more attractive by the outlook for low inflation, which helps bonds hold more of their value.)

Stocks in the news...

Investors dumped shares in Amoco (AN) on record volume ahead of the stock's departure from the all-important Standard & Poor's 500 index, even after the company cleared the final hurdle for merger with the British Petroleum Co. The merger approval came in record short time but the bad news is that the stock of both companies is taking a beating because it drops out of the S&P 500. Other issues of oil exploration and development companies were hit hard amid a decline in crude oil prices and thin trading volume in the U.S. and domestic markets. Additionally, there was a bit of profit taking in the illiquid market due to the New Year's holiday.

The U.S. Department of Justice said it has conditionally approved the $48 billion merger between AT&T (T) and Tele-Communications Inc. (TCOMA), removing a key regulatory hurdle. Some of the resolutions in today's settlement were stringent but they are expected to ensure that the merger will not blunt the move towards a more competitive market in wireless services.

The Justice Department Wednesday joined a second lawsuit alleging Columbia/HCA Healthcare, the country's largest health care provider, defrauded Medicare and other federally funded insurance programs by filing false reimbursement claims. About a third of the company's hospitals are named in the suit which involves disagreements in accounting practices.

Emerging and International Markets...

Latin American markets were slightly positive, as Brazil announced new fiscal measures to compensate for recent set-backs. The Caracas stocks also ended higher but trading volumes remained thin as both local and foreign investors closed up shop for the New Year holiday. Colombia's stocks ended mixed in the final session of 1998, closing a calendar year that brought hefty losses across the board. In other overseas markets, the Nikkei stock average edged lower, Germany's DAX index fell 0.6%, Britain's FT-SE 100 fell 1.0%, and France's CAC-40 rose 1.3%.

The Outlook...

The market's had a tremendous run and many stocks have moved up dramatically in just a short time. With many investors and traders on vacation for the year-end holidays, tomorrow's outlook is for light trading with more profit taking as there's no real catalyst pushing the market higher. The majority of investors recognize that most large stocks are overvalued and that's why smart money's being taken off the table. Some experts are saying that investors who want to put off paying taxes on their profits for another year will be selling in earnest next week. The market has the potential to begin on a very sour note should the selloff in the Internet stocks increase and spread to other sectors.

A conservative trader would agree that "Cash is King" right now but at the same time, there may be some good bargains available for those that work diligently at "buying the dips" so consider using the "target-shooting" method to enter any new positions. Those of you holding January call options have to make a decision on whether or not to sell for a final profit (or close losing positions) if the market continues to tumble. You may try to extend recent gains by holding into a possible "New Year's Rally" but don't get greedy, take some of your profits off the table and just enjoy the holiday season with your family and friends...Good Luck!

Ray Cummins
Spreads/Combo's editor

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