"Stretched" "Overheated" "Overvalued"...
Greenspan definitely "raised questions" and not many answers as traders looked to the Fed chairman for some direction once again. What we witnessed today was a classic Greenspan performance. Not overly optimistic or pessimistic but with enough comments pointing both directions to keep everyone utterly confused. Most market watchers did not anticipate any revealing comments from Alan today, but traders were looking for some clues as to the Fed's bias towards interest rates.
The markets had sold off quickly after yesterday's surge sending the Dow to its low of the day at 9473 before recovering in front of Greenspan's semi-annual Humphrey- Hawkins testimony before Congress. As always the market seemed poised on his every word but traders didn't quite seem how to interpret comments like "the economy is sound, but is stretched...". His comments about "equity prices are high enough to raise questions about whether shares are overvalued" echoed darkly of his previous "irrational exuberance" comment back in 1996 when the Dow was near 6400. Indexes promptly dropped on fears that his hidden meanings foreshadowed a rise in interest rates. Basically, Greenspan said that if the Fed was going to take a bias towards rates it would be to raise them. However, with developing economies like Latin America and Asia still a threat to the U.S. economy, the Fed will not take any action that might jeopardize their recoveries. Greenspan said that our economy should remain strong but he cautioned that a potential stock market crash or inflation pressures still represent a threat. [nothing new]
While the Blue chips basically closed the day even, tech stocks continued their recent drive higher. MSFT lead the Nasdaq to a 34 point gain (to 2376) on comments from Morgan Stanley Dean Witter analyst, Mary Meeker. She said that MSFT would most likely receive nothing more than a slap on the wrist and there would be no material effect on earnings. [gosh, that sounds familiar]. Mary went on to share her bullish comments about the Internet and companies that do business there. Plus, to add even more visibility for the tech sector, the Robertsons Stephens Tech conference in San Francisco is underway allowing companies to talk about the future and what is in store.
The score today showed that the Nasdaq Four did well. MSFT, INTC, DELL, and CSCO closed positive with all of them up almost $6 (or more) for the week. The internets also continued their rally another day as ATHM gained $9.06, AMZN +8.69, XCIT +8.88, and YHOO +7.13. Software also continued its rally from yesterday while Drugs participated as well. Retail consumables were mostly down, while Banks (mostly mixed) trended lower.
Considering what the market had to juggle today with the Greenspan testimony and another day of it tomorrow, it did surprisingly well. International markets were of little help as most of them rallied on yesterday's gains here at home. Tokyo was up +1.71%, Hong Kong up +2.22%, Frankfurt +2.94%, Paris +1.01%, and London up +1.41%.
We continue to see a decline in the internals of the market as Declines beat Advances by 3853 to 3260. Volume remains low with 769 mln shares traded on the NYSE and 914 mln for the Nasdaq. Yet light volume is understandable considering the Greenspan testimony today. Investors have learned to be cautious anytime the Fed chairman speaks. The advance/decline line is a growing concern for traders. One comment we heard today was that the NYSE adv/dec line threatened to break its October lows!
What was encouraging was the Dow's bounce of 9500 twice in the middle of the day. Its intraday high of 9611 is close to its all time high. After Monday's 200 point gain, to only lose 8 points is a strong sign. Plus, the Nasdaq and the RUT are on a four day winning streak. If we are to recover, it will have to be confirmed in the RUT and today it closed just under 400 at 399.
In sum: Greenspan continues his testimony tomorrow. No one is expecting much to come of it. The markets are likely to trade sideways but then Monday was a surprise. The markets tend to drop the day after Greenspan speaks in sort of a sigh of relief (which would be Thursday). If you have to trade pick your stocks and wait for the market to give you the best entry point. Many of the stocks that have been climbing are potential profit taking candidates at this point. Adjust your stop losses!