Option Investor
Market Wrap

It's official, pre-emptive strike by the Fed is iminent.

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        6-17-99          High     Low     Volume   Advances Decline
DOW    10841.63 + 56.68 10870.44 10714.35  698,784k  1,820   1,165
Nasdaq  2544.15 + 26.32  2549.99  2494.28  889,941k  2,135   1,714 
S&P-100  682.36 +  5.44   684.49   673.41   Totals   3,955   2,879
S&P-500 1339.90 +  9.49  1343.54  1322.78            57.9%   42.1%
$RUT     443.38 +  2.18   443.64   439.60
$TRAN   3373.24 - 38.04  3411.83  3362.03
VIX       22.54 -   .67    24.46    22.27
Put/Call Ratio      .61    

It's official, pre-emptive strike by the Fed is iminent.

Alan Greenspan served notice that the anti-inflation cruise missile had been launched and was on auto pilot for an impact on June-30th. Saying that "a modest pre-emptive action now would obviate the need for more drastic action later", big Al served notice that a .25% increase was a sure thing. The market expressed relief by gaining +56 points to close over 10,800 for the first time since June 8th. The advance/decline line also is showing renewed strength.

The fact that we closed positive after the Fed head and Compaq warned on the same day that Intel was downgraded is amazing. Compaq made a surprise announcement today that they expected to post a loss instead of a +$.20 profit. They cited a PC price war and a tangled web of resellers as the cause for the loss, Compaq announced a restructuring program to reverse the trend. They will try to slash $2 bln in expenses and straighten their channel reseller problem. Believe it or not, CPQ closed up +$.25 for the day!

Abby Joseph Cohen said today after the Greenspan speech that she felt the markets would have no trouble digesting a +.25% rate increase since some feel that more than that had already been priced into the market. Elaine Garzareli was still bullish although she thought the current rampant bullishness was a problem. She said that any pullback at this point was a buying opportunity.

The analyst consensus now is a win-win situation. Most feel that a +.25% rate hike will be seen as simply an inflation flu shot and the Fed went out of their way today to say there will not be any more any time soon. They view this as medicine already taken and the market should continue up from here. Even if the Fed does not raise rates in June they feel the market will only expect a +.25% in August and the market should move up from here. Either way the market should move up through July earnings.

The problem with this rosy picture is the glare. With everybody bullish and expecting an up market then where are the sellers going to come from? Sounds stupid but it is a real problem that I have written about many times before. Without turnover nothing happens.

The VIX is very low today at 22.54 and could provide a news reversal drop on any negative news like the Gillette earnings warning tonight. Note the reverse images for the DOW/Nasdaq and the VIX. When the VIX is up the markets are down and the VIX is dropping out of sight.

We are not out of earnings warning season as you can see by the big names announcing today. CPQ, G, WDC among others. Until we get into the July announce cycle everything is still up for grabs. With a big consumer products company like Gillette warning of single digit growth the "world economy on the mend" theory may lose some steam. Any other major warnings next week could also cause some rethinking of the current market rally.

The good news for the day was the bond rally. After Mr G. spoke the bonds soared on the hopes that any rate increase would be minor. Many think interest rates have topped and can only go down from here. The yield on the long bond settled to 5.96 at the close and provided most of the reason behind the continued stock rally today.

After Greenspan's direct and to the point comments today, I retract my previous suggestion about cautious traders waiting until after the Fed meeting to start new positions. I think the FOMC meeting is now a non-event. We could still see some calm before the meeting but I think we all know the outcome.

The Nasdaq did an amazing thing today. After the record gain of over +100 points yesterday, it tacked on another +26 points today. Remember, nothing goes up in a straight line and every major move is met with a corresponding opposite move. Does anybody else think that we could possibly see some profit taking on a summer Friday? The Dow is up +350 points for the week and the Nasdaq is up +144 (+600 Dow points) since the low on Wednesday. We have a summer Friday, low volume, no news events scheduled. Personally I am hoping to see a pull back to provide an entry point into some of the stocks that left the station without me this week. If we get a pullback then I would be a buyer on Friday. If we do not get a pullback the my next target for a pullback would be Tuesday. Typical summer Fridays are up in the morning, down or flat midday and up on bargain hunting in late afternoon. Profit from it!

Friday could be a good day for target shooting. Set your bids about 25% lower than today's close and you might be surprised with what fills. The triple witching options expiration should have already played out but you can bet there are some leftovers and some itchy mouse fingers in the morning.

Have a great weekend, sell too soon!

Jim Brown

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