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Market Wrap

Internet turnaround sparks Nasdaq rally again.

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        5-11-99          High     Low     Volume   Advances Decline
DOW    11026.15 + 18.90 11102.32 10970.59  841,361k  1,709   1,276
Nasdaq  2566.68 + 40.29  2574.37  2542.42  956,217k  2,220   1,803 
S&P-100  683.77 +  5.85   687.10   677.92   Totals   3,929   3,079
S&P-500 1355.61 + 15.31  1360.03  1340.30            56.0%   44.0%
$RUT     446.81 +  4.96   446.94   441.85
$TRAN   3770.91 + 39.01  3775.06  3733.01
VIX       26.37 -  1.05    27.66    26.10
Put/Call Ratio      .51    

Internet turnaround sparks Nasdaq rally again.

An upgrade to AOL by Mary Meeker at Morgan Stanley to "strong buy" lit a fire under the Internet sector. Calling the -27% drop from it's recent highs a "buying opportunity" and calling AOL a "must have" helped AOL add +13.13 after large gains on Monday as well. Yahoo! also benefited from strong language from Henry Blodget at Merrill Lynch. He called Yahoo! a great buy with many new features coming up including several acquisitions. Yahoo! announced Yahoo! Radio today in a joint deal with Broadcast.com and Spinner.com.

This just shows you what a few well placed words can do to a stock/sector heading south at a rapid rate. On Sunday the Internet sector was crashing and YHOO was leading the slide. On Monday several positive comments and the rumor that the Lycos/USA deal was terminated stopped the sector cold and signs of life appeared. Today the comments by Merrill and Morgan Stanley overcame all the negativity reversed the entire sector. Was YHOO a bad pick as some emails have suggested? Sure it was if we had know in advance about the upgrades. Just like the stocks you choose yourself, what looks good one day can be the worst play possible the next. Some you win, some you lose and you never know in advance which is which.

Bonds out of control or in control?

The productivity numbers out today were very strong and beat estimates easily. The +4% increase in productivity on top of the +4.3% last qtr is amazing. The wage costs were up only an insignificant +.3%. The reasons were the same Greenspan gave last week. Better technology, more educated workers producing more goods in less time. The bad news, and you knew there was a negative side, is that we continue to be at full employment. 4.3% unemployed is about as low as you can go before you start dragging the bottom of the barrel. The chronically unemployable, the under motivated. The people that you would never hire if given a choice are all that is left. These workers require more training, produce less and tend to change jobs more often. This increases wage costs that have to be added to the price of goods. I know this is stretching some to provide a reason for bond yields going up again in the face of very favorable economic numbers but this is the reason given. There is just a fear in the bond market that Greenspan will raise rates eventually.

Bond yields ended the day at 5.83% and several analysts are forecasting a 6% yield soon. This is very bad news for the market. Above 5.5% wary investors tend to start moving cash into the safety of bonds and at 6.0% the trickle could become a flood. The DOW was up over 90 points today until the five year note auction was met with lackluster demand. Reports of the auction results sent the average back to negative territory to trade close to zero the rest of the day. Tomorrow the ten year note auction will determine market direction again. The PPI and CPI reports later this week will also cause traders to hold off buying. The constant search for any sign of inflation is going to be our undoing. Is the glass half full or half empty? Eventually some report when scrutinized under a magnifying glass will show some faint sign of inflation and it will be like yelling fire in a crowded theater. Until then trade the rally!

Another Dow record?

Not quite! After trading in record territory most of the day the Dow closed just five points under the record. The Nasdaq is making up recent lost ground. The rotation back into techs is slowing the recent cyclical rally. The recent big DOW gainers all gave up some profits today as money rotated out of drugs, paper, metals and back into Nasdaq techs. IBM continues to power forward and lead the NYSE tech charge and added +2.38 to another new record high. The transports set another new record as oil drifted back under $18 a barrel.

The biggest gainer today was of course an Internet IPO. TheStreet.com went public at $19 a share after teasing investors with $13, $15, $17 price ranges over the last few weeks. Sorry, Kramer, I did not hold my allotment. I took the opportunity to sell at $61 when the price started sliding from the +$70 price range. IPOs like this make me want to start looking for an investment banker for OIN!

Several people questioned the recent claim I made about May and June not being good months for the market (S&P). According to The Stock Traders Almanac, by Yale Hirsch, the following are the results by month since 1950.

This book has 190 pages of info like this and is the acknowledged reference book for market statistics. If you would like one I have ten left over from the seminars at $14.95 each.

Tomorrow we have the ten year note auction which will drive the market depending on the results. Thursday we have the Producer Price Index (PPI) and Friday the Consumer Price Index (CPI). Next Tuesday is the Fed FOMC meeting and even though nothing negative is expected from any of these events there "should" not be any meaningful buying before they are over. Of course the market has not been acting rationally lately and anything is possible. The DOW has failed to pass 11,100 twice this week only to drop immediately after touching the mark. Whether or not this means anything or will continue remains to be seen but technical traders will read something ominous into every repeated market event. The number of "reputable" analysts now calling this a market top is assuming epidemic proportions. Since the larger market is continuing to post broad advances and the small caps as evidenced by the Russell-2000 are making good progress, it seems like the "toppers" are being used as contrarian indicators and stepping stones to the next level. Even if the toppers are being ignored in public there is still the knowledge lurking in the back of traders minds that they could be right. This will provide a weak bottom as we move forward. Professional traders will insure their fire escapes (stops) are in place and take profits quickly. We should do the same. Trade the rally but lock in profits when available.

CSCO announced earnings after the close and beat estimates by .01 with $.38 vs est of $.37 and missed the whisper number of $.39. They did announce a 2:1 split and traded up +4.13 in after hours. The conference call was positive and we could benefit from it at the open tomorrow. Watch for any weakness in the market after the opening bump before making new plays.

Wait for an entry point, sell too soon.

Jim Brown

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