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Market Wrap

A hard act to follow...

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        5-12-99          High     Low     Volume   Advances Decline
DOW    11000.37 - 25.78 11043.61 10812.81  828,203k  1,389   1,620
Nasdaq  2606.54 + 39.86  2610.33  2548.24 1034,000k  2,199   1,790 
S&P-100  687.45 +  3.68   689.00   671.42   Totals   3,588   3,410
S&P-500 1364.00 +  8.39  1366.95  1332.95            51.3%   48.7%
$RUT     449.26 +  2.45   449.61   444.07
$TRAN   3783.50 + 12.59  3797.05  3726.10
VIX       27.82 +  1.45    29.64    27.03
Put/Call Ratio      .62   

A hard act to follow...

Larry Summers, the newly appointed candidate to take over for Treasury Secretary Robert Rubin, admitted that Rubin would be a hard act to follow. If you are looking at a chart of the Dow today, that 200 point spike downward is not an error. Early on in the trading day, news of Rubin's resignation hit the market like a meteor and in mere minutes the Dow was down about 213 points (a low of 10,812). The situation appeared grim before the market abruptly rebounded as traders came to their senses over the news (more on this later).

The Dow managed a strong comeback and rallied just as fast to re-claim over half its early losses in a very short amount of time. Yet it was the Nasdaq that stole the glory today. Gapping open, it too reacted negatively to the Rubin news before quickly regaining its composure and stealing into positive territory. With technology stocks like CSCO leading the charge, traders were quick to buy the dip and the Networking, Software, Semiconductor, Hardware, and Storage devices sectors were all positive while Internets as a group appeared to be left behind.

The Dow did manage to break into positive territory before giving way to weakness in the recently popular cyclical stocks. Volume was strong with 828 mln shares on the NYSE. Volume was stronger on the Nasdaq with over 1 bln shares trading hands again. Market breadth was mixed with advancers losing to decliners on the NYSE near a 14 to 16 ratio while advancers beat decliners on the Nasdaq nearly 2200 to 1800.

So what happened to the 10 year note bond auction that we were suppose to be watching for? This afternoon the government auctioned about $12 bln worth of notes and as expected more supply caused the price of bonds drop. But any reaction was overshadowed by the news of Rubin's resignation.

Hopefully you were targeting shooting this morning as the market nose dived on the announcement. Yet the satisfaction of being filled at your target price could have quickly turned to panic as the market kept falling. Thankfully, the selling stopped as word came out of Summers' quick appointment to succeed Rubin. As many are aware, rumors of Rubin wanting to leave had been out for some time.

What initially came out as bad news actually turned into positive reinforcement for traders. The belief was that as long as the world financial crisis continued, Rubin would stay in office. His resignation is merely confirmation that things are improving on the global scale. Many are calling the coming change in leadership a "seamless transition". Fortunately Summers has been a part of the scene for sometime and his instant appointment soothed the fears of nervous traders.

This afternoon, while high profile figures were lamenting the loss of Rubin, they were quick to compliment Summers' skill and experience. President Clinton remarked, "Rarely has any individual been so well-prepared to become secretary of the Treasury." Of course the trading public realizes that a market moving moment just isn't complete without a comment from Fed chief Alan Greenspan. Alan gave Summers his seal of approval and the markets responded in kind.

Also in the news, cable company Cox Communications brought us our merger du jour with a $3.3 bln buyout of rival TCA Cable. Cox will gain about 880,000 customers making it the fourth largest cable company in the States. Also on the merger front, talks between Johnson & Johnson (JNJ) and Centacor (CNTO) have broken down and CNTO's stock fell over 4 points in response.

An earnings surprise was music to the ears of Federated Dept. Stores shareholders. FD beat estimates of $0.30 with earnings per share of $0.40. FD's stock closed the day +3.31. Yet, we shouldn't share positive earnings news without a timely and important lesson. We do not recommend holding a position over an earnings announcement because the odds are against you. Abercrombie & Fitch is our example today. Yesterday, after the bell, the super successful clothing retailer beat estimates by $.06 with same store sales rising 22% for the quarter. Clearly an upside surprise. Plus, as we predicted, they declared a 2:1 stock split. But what happened to the stock price today? Investors punished it for a loss of over $4. Too many times, companies come out with great numbers but traders will sell on the news as they move on to the next play. Obviously this applies more to options "traders" than to long term stock "holders" since time is normally against us. It is crucial as an options trader to do everything we can to stack the odds in our favor for each and every trade.

So how do the odds look tomorrow. Actually things look pretty good. The market was quick to recover from the news this morning. The tech stocks are on a roll as the Nasdaq is within 2% of its all time high. The Dow, while it did close negative, still managed to close above 11,000. Overall market breadth was positive (granted not by much). The market rally continues to broaden out as evidenced by the S&P 500 new record today. Plus, the Russell 2000 is on its 3rd day of gains following a breakout above resistance at 436.

With all this good news, what do we watch out for? We still have the PPI report tomorrow, and the CPI report due out on Friday. While those may not be enough to de-rail this bull market, we still have to be prepared for the unexpected. What will remain on our target screens is the FOMC meeting next week. Friday or Monday could be in jeopardy despite the fact that no one really expects the Fed to touch rates this soon.

Plan your trades and trade your plan.

As always, sell too soon.

asst. editor

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