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Market Wrap

One hike, two hikes, three hikes, more?

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        6-24-99          High     Low     Volume   Advances Decline
DOW    10534.83 -132.03 10666.86 10471.20  691,818k    951   1,961
Nasdaq  2553.99 - 44.13  2596.71  2550.14  909,605k  1,626   2,204 
S&P-100  670.85 -  7.75   678.60   665.67   Totals   2,576   4,165
S&P-500 1315.78 - 17.28  1333.06  1308.50            38.2%   61.8%
$RUT     443.16 -  3.88   447.47   442.77
$TRAN   3326.07 - 52.84  3395.51  3326.07
VIX       23.67 +  1.71    25.39    21.96
Put/Call Ratio      .65    

One hike, two hikes, three hikes, more?

Bonds down, rates up, market down, FOMC next week. End of story. Good Luck, Sell too soon!

That could be the end of the commentary tonight. Last week the market rallied on the heels of Greenspan's comments of "modest hike now, no need for hikes later". This week the tone continues to be worry that "modest" may mean a .50% hike instead of .25%. Others hope for a .25% hike and a change in bias to "neutral" but worry we will only get the hike and the bias to tighten will remain. If the bias remains "tighten" then this whole story will play out again before the Fed meeting in August. Greenspan's history is one of small incremental steps not one big blow. This causes the fear of "possible" future hikes. The bond market has already factored in a .50% rate hike at this point and anything less will cause a covering rally.

If we did get a reduction in bias back to neutral then Fed watchers would feel at least two FOMC meetings would be needed to raise rates again. One to tighten and then one to raise. Two meetings would give us a 60-90 day "free market" period without a rate increase hanging over our head. Last week I mentioned it would be wise to just sit out until after the FOMC meeting. The market then soared +365 points last week on Greenspan's "modest" comments. This week the Dow has dropped -320 points in four days to put us back to square one again. Makes you think sitting out was not a bad idea now!

I pointed out Tuesday that the Dow was range bound and had tested the 10450 level to 10900 level twice in June and we were headed down again. While I did not expect the Dow to break minor support at the 10600 level the real support was still at 10450. We came very close today and the Dow bounced off 10471 convincingly at 1:30. The Dow rebounded over +113 points off the low to 10584 but dropped -50 at the close to settle at 10534. Summer Fridays are known for their volatility due to lack of volume. Add in a pinch of FOMC and anything is possible. Cycle traders should be quick to note that after four strong down days the "relief rally" syndrome is looming strongly. While we could see yet another test of 10450 tomorrow I do expect the bargain vultures to be circling all day looking for cripples. Even with the Nasdaq off –44 it still held above 2550 support.

When the Dow bounced this afternoon off the 10470 I backed up the truck as Chris Verhaegh is prone to saying. I saw entry point written all over it. Whether I end up tomorrow as a freeway driver on the road to profit or simply road kill remains to be seen.

My justifications look like this. The bond market has been terrorized by the bond bears for weeks and many analysts think the yields are at or near the top. There is a very strong possibility of a covering rally as the FOMC meeting nears. The DOW is at strong support after dropping -320 points. The earnings express is roaring down the tracks and even the FOMC cannot stop it, only slow it. Many stocks have put in bottoms the last two days. Even with the Dow drop IBM only lost -.38 cents. Goodyear strongly warned this morning but rebounded to close only down -.13. On the Nasdaq, -44.13, Dell only dropped -.19. Another wild card is the end of quarter window dressing by the funds. All the big guys will want to put as much cash to work as possible so they can show the market leaders in their portfolios for shareholders. The MSFT trial is in recess for several months and you can bet they will make a run into earnings. (MSFT is a Nasdaq leader) Intel, another leader, is sure to rebound since AMD basically surrendered today. With INTC, DELL, MSFT starting earnings runs the Nasdaq is ready to rock.

Don't get me wrong. All the positive factors can line up on our side of the field and the market can still win. It can and does change the rules quite often. The only rule today is the FOMC. (First Open Market Commandment) Never make a major commitment before a Fed meeting. The chances of a favorable outcome are directly impacted by the amount of your investment. Ie: The more you invested, the better chance of a knock out blow by the Fed heads. Yes, do as I say not as I do. I broke the commandment and backed up the truck based on my view of the mitigating circumstances. Time will tell! I do not expect any major move upward until after the meeting but with a good meeting the Thr/Fri before the long holiday could be outstanding. Otherwise remember to stock up on your Rolaids if you own anything over the next four trading days.

Have a great weekend, sell too soon!

Jim Brown

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