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Market Wrap

Pre-emptive strike by the Fed on the way?

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        5-27-99          High     Low     Volume   Advances Decline
DOW    10466.93 -235.23 10701.28 10434.26  813,703k  1,042   1,897
Nasdaq  2419.15 -  8.03  2440.08  2400.94  834,343k  1,615   2,214 
S&P-100  647.78 - 11.80   659.58   645.57   Totals   2,657   4,111
S&P-500 1281.41 - 23.35  1304.76  1277.31            39.3%   60.7%
$RUT     432.92 -  2.49   435.41   431.72
$TRAN   3378.77 - 75.11  3468.13  3374.76
VIX       28.69 +   .41    30.56    28.16
Put/Call Ratio      .63    

Pre-emptive strike by the Fed on the way?

A major Fed watch firm released a report today that called for the Fed to raise interest rates soon. Their analysis pointed to a rate increase as soon as the June FOMC meeting. A rumor at Prudential had the Fed raising rates in a pre-strike tomorrow! The combination of these two factors terminated the technical bounce from Wednesday.

The last three days have left investors undecided as to which way to jump. Tuesday -123, Wednesday +171, Thursday -235, whiplash anyone? On Tuesday I said I expected a technical bounce soon and Wednesday was a textbook example. The Nasdaq performed as if on command and bounced strongly off my 2350 bottom target. The Dow however did not break 10,500 Wednesday, much less my 10,300 dip target, before rebounding. I personally hope it does not hit it but after bottoming at 10,434 today it is still possible. I think that is the level where buyers will not be able to resist taking the bait.

The Nasdaq showed remarkable strength today in the face of the Dow sell off and I think that is where the plays will be on Tuesday. With the long weekend ahead of us, and interest rate worries I don't think we will get a major move up on Friday but Tuesday starts a new week.

The GDP came in today with a tame +4.1% increase after estimates were calling for +4.5%. The big inflation number today showed that consumer spending rose at it's highest rate in 11 years. This is bad news for the Fed which sees runaway spending as fuel for inflation. The jobs report was unchanged at +300,000 and had no impact on traders.

The dow is not looking very healthy and the advance/decline line is accelerating with decliners beating advancers 6:4 today. The interest rate club that the Fed uses has always had a dramatic impact on a bull market. You can see with the results of the past week that even a simple mention of a change in bias has rippled around the world.

Worries of an interest rate hike has caused the markets to bleed fund cash as investors run for safety. Another blow that I wrote about several weeks ago is also coming to pass. The two words a small investor dreads, "margin call". When markets are rising and showing no signs of changing, the small investor leverages his account by purchasing more and more stock on margin as his stock appreciates in his account. When the markets turn, and most new investors have never lived through a serious correction, the stock drops below the margin requirements and you get the dreaded call. Your only choice, sell something. On Monday one online broker reported that margin calls were running +20% over normal and as of today they were running +50% over normal. This causes two problems. The first is additional selling pressure on a market already under pressure. The second is the change in psychology of the trader. Suffering from the loss of a forced sell, they are reluctant to venture out and buy aggressively again. This creates a lack of buying pressure when the market turns upward again. A down market also causes fund managers to be more restrained about buying. They hate to sell positions to meet redemption's and would rather hoard cash.

The flip side is good also. Sharp corrections take out the weak investors above and put stocks back into the strong hands of the bigger more stable buyers. This gives us a more stable market in the long term. Some analysts are now calling the last two weeks of drops as the culmination of the needed profit taking and are now looking for the next uptrend.

Bank Boston analyst Keith Benjamin, today said the recent drop in the Internet stocks and then the relative strength in the Nasdaq today as proof that the quarterly Internet drop cycle was over. The cycle he was referring to is the trend for the Internet stocks to run up +100% in the month before earnings and then drop -40% the month after on profit taking. He called for buys on all the major Internet stocks and said he was recommending to his clients to load up now. We are are also optimistic on Internets. We just want to get past Friday before making any new Internet plays. Almost all are down -30% to -50% and we want to see who the leaders are going to be coming out of the slump. Just because YHOO is down -45% from it's recent high does not make it a buy. Check back Sunday for the five best choices in our opinion.

Get out the caffeine and send the kids to bed early, the Nasdaq has decided to open for an evening session starting in September. If the high stress, high anxiety, daytime session is not enough to keep your Prozac prescription current then extended hours will surely ruin your day. The new hours will be from 5:30ET to 9:00 or 10:00 each night. The NYSE has already said they would match any move by the Nasdaq. While this is a good thing for traders it may be a bad thing for families. At least now, when the market closes at 4:ET you can breath a sigh of relief that nothing else can crater your portfolio until 9:30ET the next day. You have time to decompress and actually start using full sentences to the spouse again. During daytime hours Johnny and Susie are in school and are not a distraction. Yes, I know most of you work a full time job and don't have the luxury of trading from home. Did I say "work" a full time job? At least you are at the office full time. I know most of the work gets done after 4:ET but trust me, I won't tell your boss. Trading at home, at night, with the spouse and kids watching could be a whole new experience for most. Just remember, you are trading for them, not in spite of them.

As for Friday we have several negative factors gaining speed. The S&P is trading under 1300 and the Russell-2000 looks like it did a double top at 450 and has now reversed downward. We are definitely at a critical point in the market direction and we have a long weekend staring us in the face. We dropped a bunch of plays tonight and are going into the Sunday newsletter lean and focused. Friday should be a low volume day and pressure in either direction could magnify the move. A good day to just watch or simply take the day off. These last two weeks have been tough to trade and I am sure some of you wish you had taken them off as well. My trading plan is to trade "only when profitable" not "whenever the market is open". There is a difference!

Have a great weekend!

Jim Brown
Editor

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