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Market Wrap

The Forest Animals' Picnic

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Corrected on 06/03/99 @ 12:35 am

       6-02-99          High     Low     Volume   Advances Decline
DOW    10577.89 - 18.37 10627.60 10464.55  732,649k  1,329   1,612
Nasdaq  2432.41 + 20.38  2436.57  2364.59  899,635k  1,644   2,234
S&P-100  655.69 +  1.48   656.96   645.93   Totals   2,973   3,846
S&P-500 1306.65 - 23.64  1332.96  1303.46            43.6%   56.4%
$RUT     436.74 -  0.72   437.44   431.04
$TRAN   3427.60 - 39.00  3468.23  3381.40
VIX       26.36 -  1.56    29.27    26.17
Put/Call Ratio      .52

The Forest Animals' Picnic

"Look Out! Here comes a car!" said one deer to the other. They both froze in the middle of the road, eyes glazed with fear. You know the rest of the story. . .fresh venison. Investors, not wanting to be helpless deer in the headlights (inflation) of an oncoming car (Federal Reserve), are learning to scamper back to the forest quickly, or not set hoof on the road at all. "Look out, Bambi. Here it comes again!" This time they ran for cover and watched from the edge of the road as the headlights came to a stop. The driver (Greenspan) stepped out of the car with a handful of nuts for some other forest animals, but gave nothing to the deer in search of "comfort food". "Maybe he'll give us something we can chew on next time", lamented Bambi to the other deer. "No", responded the second deer. "I rather he plow through the herd and get the inevitable over with, so we don't have to be scared of headlights anymore."

Does this sound absurdly familiar? What we are trying to say is that investors have become extremely skittish at the first mention of, or even suspicion of inflation (there's that "i" word again). Today's daily dose of inflation fear came early as the new home sales figures were released. Market watchers, commentators, analysts, and investors alike expected about 895 K new homes to have been built last month. Instead, figures showed 978 K as the final count. The market took a tumble right from the open on fears of rekindled inflation, then waited patiently for Alan Greenspan to step up to the microphone, where listeners expected a tidbit on which way the Fed was leaning relative to a rate increase. Alas, Greenspan stuck to the speech on trade balances, imports, exports and tariffs. Investors took that as "no rate rise today". For the rest of the day, up the market went.

Many "experts" are going on record stating their belief that the Fed will raise rates on or before the next Fed meeting on June 30, as though it was inevitable. While we got another inflation straw for the camel's (deer's?) back, Greenspan has already done a good job of talking rates up without having to act. No matter, as we've said before, we must play the market we're given, even if it behaves contrary to logic. Sentiment is what really moves the market, and current sentiment is a mixture of optimism for the future (boy, if he'd just raise rates now, we could get back to investing) and fear for the worst (rising rates will hamper corporate profits). That fear is keeping money to the sidelines, and thus volume to the low side.

Today's action looked awful from the start, but made a nice recovery even if volume was again weak. The DOW took a 130 point nosedive at the open (following a temporary spike up), all the way down to 10,465, where it bounced upward 50 points only to fall and bounce again off 10,465. Then Greenspan began to speak, sparking a recovery that would last the rest of the day. Though volume remained low, the DOW finished the day down just 18 points from the open, nicely recovering 130 points from its low.

NASDAQ was similar, only better, as the Internets and big- cap technology issues staged a nice recovery from their early morning lows. Despite a deficit of 47 points at the low point of the day, the index rallied 68 points to 2432, up 20 points from yesterday's close. Volume was still light.

Even on low volume, we can't help but be impressed by the firm support that these indexes are showing. In particular, the Internets really came to the rescue today, while the generals, INTC, WCOM, DELL, and CSCO (excepting MSFT, off $0.06) all showed nice gains too. Some market watchers attribute the Internet recovery to YHOO, who reported reaching an agreement with Sprint PCS (PCS) to provide YHOO's content over Sprint's network to PCS's CDMA- compatible devices. This is actually huge news, as CDMA is the cutting edge capable of carrying enormous streams of data. Just think of all those ears and eyeballs that will soon get wireless YHOO content! Anyway, that spelled good news for AOL, who rallied 10 points to as high as $116, only to close at $110 (-$3). No cause for panic here considering the $7 retreat from its high came minutes before the close on light volume. AMZN did even better closing up almost $7 at $112, despite falling to $97 (!!) this morning before the recovery. (You AMZN spread traders are still alive!) Possibly helping AMZN too was that Barnes and Noble officially called off their intended purchase of Ingram Books, supplier of over 60% of AMZN sales, due to the federal government's objections to the perceived monopoly

As we've noted previously, the Internets traditionally look ugly about this time during the quarter, but these 3 bouncing out of their holes today lends some credibility to the idea that there may be a bigger recovery coming in the sector. Again, don't run out and buy these on the suggestion. We still need to see a real recovery here.

A token mention for the weak points in today's trading: airlines and financials, especially brokerages, were taken to the woodshed as bond rates spiked to 5.97% for the 30- year treasury, before backing off to 5.93% by the close. Still, the damage was done and will remain until the inflation scare goes away or manifests itself in the form of a rate hike. Even a 3:1 stock split announced by AMTD (brokerage exception, +$5.88) had no effect on the market or the stock until after Greenspan spoke. Fortunately, American Home Product's earnings warning that they would come in $0.07 below current expectations didn't shape the attitude of today's traders all that much.

The next crisis is the non-farm payrolls on Friday. Prior to the Fed meeting on June 30, Greenspan will testify in front of Congress on June 17. There will be opportunities and choppiness until then

So what's a deer to do? Stay mostly to the edge of the road. Learn to scamper. Avoid being a regular member of the herd that waits frozen in the lights while the car is only yards away. If you hear the car, it's probably too late. Be observant by looking a bit further down the road

Thanks, Bambi. We'll take over from here. Wait for a clear reversal in your pick and sector, accompanied by market volume. To keep the highly charged emotions out of your trading (sometimes tough, but you must if you are to preserve your capital) plan your plays the night before. Use stop orders to get you out. It helps to enforce the discipline of the plan. Execute when it is profitable to do so, then sell too soon.

Buzz Lynn
Research Analyst

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