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KO and MO or Kosovo? To investors, it did not matter...

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         3-31-99          High     Low      Volume  Advances Decline
DOW     9786.16 -127.10 10002.34  9781.45   927,241k 1,392   1,867
Nasdaq  2461.40 - 18.89  2520.63  2458.77 1,101,400k 1,645   2,240 
S&P-100  646.59 -  9.39   662.72   646.24    Totals  3,259   3,885
S&P-500 1286.37 - 14.38  1313.60  1285.87            45.6%   54.4%
$RUT     397.63 -  1.15   401.48   397.03
$TRAN   3299.04 - 68.76  3386.75  3287.10
VIX       24.45 +   .71    24.77    22.84
Put/Call Ratio      .63

KO and MO or Kosovo? To investors, it did not matter...

While tonight ends Day 8 of the Kosovo entanglement, the U.S. military may not be the only ones making a strategy shift. Yesterday's sell off of 93 points in the Dow appeared to be merely a pause to rest after Monday's close over 10,000. This morning investors felt sure of it and the S&P futures were up 5 points.

Once the market opened we quickly shot forward and the Dow again pierced the 10K barrier hitting 10,002. The Nasdaq, likewise opened positive, gapping up about 38 points. Eventually it made into record territory, but like the Dow, it could not hold its gains.

So what happened? This morning you would have thought that the market was making a run for 10K and we might close there. The markets were sabotaged by the Chicago PMI or the Chicago Purchasing Managers Report which came in stronger than analysts had expected. Because this came in higher, the numbers told analysts that Chicago businesses were paying more for goods and inflationary concerns rose again.

Just the shadow of the inflation demon sent worries through the bond market and the yield on the 30 year bond rose to 5.62% (a bad sign for stocks). Plus, inflation worries mean the FED might have to tighten interest rates which sent another shiver down the backs of stock investors. Equities quickly sold off until we hit a narrow trading range that would last most of midday.

While we waited for a new direction to appear, news that Guidant (GDT) was having problems with some of its pacemakers hit the markets. GDT is in a very competitive field and news like this can be heart stopping (yes, that was a joke). GDT later told the press that some of their products held batteries that were losing power quicker than expected but they only estimated defects at 1% (or so). Traders pushed the stock lower by 1.50.

MSFT was also in the news again today. Yesterday was the first day of their settlement talks the DOJ. Legal teams from both sides are tight lipped about the prospects as the meeting was inconclusive. What we did hear today was that the judge presiding over the case has delayed its resumption by another 6 weeks and the case should re-open in mid May. This should have been seen as a positive for the company as they have more time to work over a settlement, but investors dropped the stock some $3.38.

Still tugging at the Dow was KO and MO. Coca-cola (KO) continued to slide after yesterday's earnings warning. Philip Morris also slipped further. This time to a 2 year low. The tobacco company has been coughing up steep losses since the recent court ruling awarding $81 mln to the family of a man who died of lung cancer after smoking Marlboros for most of his life.

Yet can we blame these stocks for igniting the sell-off. I doubt it. Investors were surprised by the rise in the Chicago PMI report but they should also be concerned about corporate profits. The Commerce Dept. reported that our GDP barely missed estimates of 6.1% growth for the fourth quarter of 1998. The U.S. economy surged at a 6% rate while adding almost 4% for the entire year. However, 1998 marked the first time since 1989 that corporate profits have slipped. Prior to the 1990-91 recession earnings fell by 4.8%. In 1998, earnings dropped by 2.2%.

While earnings are a major concern, faith in our economy is still strong. Even so, it seemed that at 2:30 ET somebody threw the switch and everyone hit the "sell" button. Both the major averages began falling and did not stop until the close.

What can we expect for tomorrow and why the sudden drop this afternoon?

After all, isn't the first few days of a new month generally positive? and the trading days before a holiday are also normally positive?

The answer is yes and yes. But those are just trends. We have to evaluate the trends in face of current circumstances.

Evaluating the market's performance does not forecast a positive market tomorrow. Both the Nasdaq and the Dow closed near the lows for the day and on strong volume. The Dow did 927 mln while the Nasdaq turned in over 1.1 bln shares. (Not usually a good sign).

Some of the reporters on the NYSE trading floor said that traders were very unhappy with the late day drop. Most felt it was an unhealthy signal of things to come and some went so far as to say it looked like the "front end of a correction".

Market and sentiment analysts felt that investors were worried that with the short holiday week and Easter and Passover falling so close together that there would not be enough volume in the markets tomorrow. Extremely low volume days tend to exaggerate market moves one way or the other.

On top of a light trading crowd tomorrow, nobody wants to be holding over the long weekend while the conflict in the Balkans heats up and Russia moves warships into the area.

The nearest support for the Dow is between 9660 and 9600. Beyond that, we are looking at 9400 to 9200. However, it is quite possible that we may not get that low. Bargain hunters could be merely waiting on the sidelines to get a better price. Earnings season starts soon as INTC kicks it into high gear with their earnings report after the bell April 13th.

Nobody is going to want to miss the earnings excitement unless things really start to turn sour for us in Yugoslavia. All in all, if this is the best we could get for an end of the quarter window dressing, then the markets look less than healthy and then trend tomorrow is likely to be down.

Good luck. Remember there will be no Thursday newsletter due to the short trading week.

Kimo

asst. editor

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