Option Investor
Market Wrap

Into every pocket, some profit must settle

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        6-08-99          High     Low     Volume   Advances Decline
DOW    10765.64 -143.74 10909.07 10724.17  685,146k  1,131   1,789
Nasdaq  2474.51 - 49.65  2534.48  2472.05  850,934k  1,660   2,251
S&P-100  665.50 - 10.65   676.15   663.02   Totals   2,791   4,040
S&P-500 1317.33 - 17.19  1334.52  1312.93            40.9%   59.1%
$RUT     443.77 -  2.89   447.82   443.41
$TRAN   3424.83 - 57.13  3480.85  3417.78
VIX       23.47 +  0.02    24.45    23.20
Put/Call Ratio      .56

Into every pocket, some profit must settle

Straight from last nights Market Wrap, we bring you the following reminder, "though this doesn't negate the trend, we have had 4 solid days of gains and may get a profit taking day or two along the way." To this we add another tidbit from last night's closing comments, "we stress again, trade only when it is profitable to do so." That said, you should have found it difficult to start a new play today (unless it was a put) and stayed firmly planted on the side of the road, out of harm's way. Remember, first and foremost, our job is to protect our trading capital. Missed money is always better than lost money. While we're at it, and probably didn't consciously think of it anytime today, part of Trading Rule #10 applies. Here it is in case you missed it: When in doubt, stay out. That's pretty simple, right? Yes, but it's also difficult to do if you depend on trading for a livelihood, especially in a sideways market. We don't mean to admonish anyone. It's just an important reminder that down days happen and we shouldn't force a play when the trend is not our friend. Now, let's get down to business.

To begin with, the market started down from the open on a slightly sour note, as another airline (US Air) issued an earnings warning citing lighter traffic and greater expenses, which followed a similar warning last Friday from United. Not only that, Donaldson, Lufkin, and Jenrette offered negative comments on many of the box makers, including DELL, CPQ, IBM, and HWP citing a corporate IT survey that suggested corporations would prescribe a lockdown on purchasing new equipment in anticipation of Y2K, which will likely affect earnings. Doh! Jeez Marge, why didn't you tell us sooner? Pity the poor Compaq investor who was also slapped in the face by Piper Jaffrey analyst, Ashok Kamur's comments that CPQ could report a loss for the quarter, while most analysts still have earnings estimates pegged at $0.22. He further stated that CPQ had about 8 weeks worth of over-priced, obsolete inventory in the channel, then added that CPQ could fall to the "mid-teens" if they miss estimates. OUCH! Oh, did we mention that a new survey released today puts Dell as the #1 business market share leader ahead of IBM and a now #3 CPQ? Some days, it just doesn't pay to get out of bed. Even in the pessimism, we can all take some solace in that the sector has not seen a slowdown in unit growth (though maybe not revenue growth), especially from Dell, who reports great results so far this quarter.

The Internets like AMZN, YHOO, AOL and CMGI all gave back yesterday's gains too, despite that AMZN announced entering the digital music fray, currently led by CDNow. Talking heads on CNBC couldn't help pointing out that "every trader we talk to is expecting a triple bottom" in this sector. That's technical jargon for "we expect another dip before it goes up." While that is certainly one possibility, remember that Internets typically form a bottom at this point in the earnings season anyway. One Internet that finished the day significantly in the green was Infoseek (SEEK, $48.62, +$5.62) on news that Disney would like to buy the 57% of the company it does not already own. A second Internet to finish up nicely today was the IPO, Drkoop.com, a medical advice site. The issue, priced last night at $9, closed up at $16.44 on its first day of trading. If you are interested, that makes the former Surgeon General worth $41 mln. on paper.

As if a tech fizzle wasn't enough, along came more inflation comments from yet another illustrious member of the Federal Reserve Board (The Fed). This time, William Poole, St. Louis Fed President (who has no voting power we might add) cautioned that inflation is a greater problem now in our economy than it was 6 months ago and that markets should expect a tighter monetary policy going forward. Bonds then took it in the shorts as the yield dropped to close the day at 5.99%. Equity investors didn't wait around either.

Pardon us for this reminder, but hasn't that been the expectation for the last 3 weeks? We don't see any news here. The question of whether we have inflation or not is still debatable. Until we get a clearer picture of the PPI (a reflection of inflation on the producer level) on Friday and the CPI next week, we really won't know the answer. Until then, expect more exhibitions of inflation-induced schizophrenic behavior from investors. It's almost like Pavlov's spontaneously salivating dogs after hearing the sound from a ringing bell. Someone says "inflation" and investors run like roaches under a spotlight. Anyway, suffice it to say another sell-off ensued. The good news, and really the point to taken from the whole day's events was that the markets again moved on low volume - the third lowest volume day of the year so far. There simply is no major conviction from sellers to sell or buyers to buy. Nonetheless, the overall bias still appears to be up. A true scare would have juiced the volume and taken a bigger bite out of the market's hide.

So how did we finish the day? The DOW lost 143 points to close at 10,765, 40 points up from its lowest point of the day. Though decliners edged out advancers, advancers remained surprisingly strong given what appeared on the surface to be an otherwise bad day. The margin 3:2 favored decliners. A total of just 686 mln. shares traded hands, again the third lowest volume day this year. NASDAQ followed a similar trajectory by closing down 49 points at 2474, losing most of its ground in the final 2 hours of trading. Decliners slipped past advancers here too by a 3:2 margin on light volume of just 852 mln. shares. Our interpretation of this light volume remains that there is no conviction to sell at these current prices. Also, the Russell 2000 closed off by only 2.89 points today. One thing to notice is that our closing index values today were mostly higher than yesterday's low points.

We'd like to keep it a bit short tonight so let's try to pull the sentiment all together. We need to keep these down days in perspective. Not to cover old ground, but with 4 solid days of gains, it's not unusual to see profit taking. Nothing goes up in a straight line. The selling lacks conviction. What else? Our old buddies, Mr. Gold and Mr. Oil, not to mention their other commodity cousins, are drifting lower. Yes, Fed-speak regarding inflation has jawboned bond rates up to just shy of 6%, yet no panic. Indicators are that a rate hike is already a foregone conclusion. Still in our opinion, the case for inflation is overblown, but we won't fight the market on this issue. With a rate hike priced in, we think the general trend is up. Nonetheless, investors will stay on the sidelines temporarily until we get some indication from the PPI and CPI. Thus, expect more choppiness in the near term as long as volume remains low. The coast will be clear once we see green numbers accompanied by a return of larger trading volumes.

Until then, trade only when it is profitable to do so, use stops and sell too soon.

Buzz Lynn
Research Analyst

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