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Market Wrap

Did somebody hear the Fed decision in advance?

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        6-29-99          High     Low     Volume   Advances Decline
DOW    10815.35 +160.20 10815.35 10633.93  816,260k  1,829   1,111
Nasdaq  2642.11 + 39.67  2642.11  2594.32  949,646k  2,267   1,626 
S&P-100  691.51 + 11.75   691.52   678.49   Totals   4,096   2,737
S&P-500 1351.45 + 20.10  1351.51  1328.40            59.9%   40.1%
$RUT     454.08 +  5.47   454.43   448.47
$TRAN   3409.62 + 12.45  3410.72  3375.31
VIX       22.99 +   .43    24.06    22.71
Put/Call Ratio      .45    

Did somebody hear the Fed decision in advance?

The bargain hunters hit Wall Street today like lumberjacks at an all you can eat buffet. In the face of all logic, buyers stepped up and paid the piper today and totally ignored the possibility of any adverse action from the Fed tomorrow. Investors saw the big drop in home sales reported this morning as the green light in the earnings drag race. Immediately analysts began downplaying the Fed decision to only a +.25% increase which was already priced into the market. This was the starting gun that had traders jostling each other to try and sneak into positions before the actual announcement and land rush tomorrow afternoon. At this point it is almost a foregone conclusion that ANY announcement by the Fed will be ignored or rationalized to justify a continued spending spree. Some worry that the pre-announcement rally could impact the Fed's decision and cause them to possibly take a stronger step than they would had the market remained depressed. While the economy is growing well and showing almost no inflation the market is poised to breakout with a favorable rate announcement. The Fed has repeatedly said they thought stocks were overvalued and we were experiencing a speculative bubble which needed to be deflated. Tomorrow we will see if they put actions on their words.

The markets appear poised to break into record territory with anything short of a Fed disaster. The Dow has tacked on a whopping 262 points in two days and is currently only about 200 points from a new record high. The Nasdaq, not to be outdone, is only 10 points from a new high. A far cry from their 10,470 and 2400 levels only two weeks ago. Volume came back today with the NYSE posting 816 mln shares and the Nasdaq 949 mln shares. The advance/decline line was also positive with a 3:2 margin. Of the 335 stocks that I personally track everyday only 67 were negative and most of them only fractionally. That represents a 4:1 advance/decline for actively traded stocks. Every sector appeared to take part in the rally.

The rally this week has been simply amazing. Fed meeting? What Fed meeting? Since the Dow low last Thursday at 10,471 and the brief intraday drop on Friday it has been all uphill. The Nasdaq held support at the 2550 level and never looked back.

The Fed will undoubtedly raise rates tomorrow but the current market sentiment is "who cares". Before you rush out and bet the farm tomorrow afternoon, my last caution is this. Thursday and Friday should be extremely low volume and volatility is sure to be high in front of the long weekend. Traders who did take an early position could decide to take profits before going to the beach for the weekend. Also, historically the day after a Fed meeting has been a down market, more often than not, even when the decision was favorable. Should investors shy away from starting new positions for the next earnings cycle this week? That is for you to decide based on your risk profile. Personally I will try to target shoot on any pullback and if I am unsuccessful then Tuesday morning would be my entry point. (after amatuer hour of course)

The Internets are recovering nicely. The next stumbling point for them will be the Yahoo earnings on July-7th (next Wednesday). A less than stellar earnings report could set a negative tone for the entire sector again. The tech stocks are showing nice moves, except for Dell. Intel has been up strongly after being beat up a couple weeks ago. It needs to break $60 before we would call it a play. The semiconductor sector was upgraded today after analysts upped their capital spending estimates for the rest of the year on stronger than expected orders. Microsoft is moving nicely without the trial news hanging over their head. Their earnings are not until July-16th and they could make a nice run. CSCO overcame it's post split depression and broke out to a new high today and earned a spot on our recommended play list. Lucent, which recently completed the Ascend acquisition, also broke out of its recent basing period and is close to a new high and also a new play tonight. Dell is the black sheep of the Nasdaq fearsome foursome. Since Dell reports earnings a month later than most other companies, they are now in their pre-earnings slump period as traders concentrate on others with earnings soon. They are also slumping in sympathy to Gateway. Gateway is rumored to be buying Earthlink for $75 and the stock is tanking on the news. Dell has several analysts, in denial of the facts, saying they are going to beat estimates by a wide margin. I have touched on this before but with 3 billion shares it would take a major revenue windfall of almost $1 bln to beat estimates by more than a penny. Are they going to beat revenue estimates by a billion dollars? I don't think so! Still, we will play Dell for earnings when their time is right.

With most major earnings in the next three weeks and options expiration on July 16th, we are approaching that magic time for the July/Aug decision. Should I buy cheap July options and sell before the announcements like I should, or should I buy August options and incorrectly hold over earnings? The July/August decision is entirely up to you. Buy all the time you want, you don't have to use it. The holding over earnings should not even be a question. I wish I could convince readers to perform their own survey this season. Just keep track of any group of stocks, a statistically large enough sample of 25-50 please, and note how many go up after earnings and how many go down. Prove it to yourself and then you can sleep better next time after having sold for a profit the day before. This works best if you make your list before earnings. Otherwise you will tend to add stocks to the list that are featured on CNBC or in the news and those are usually the exceptions that actually went up.

Good Luck, Pick an entry point and sell too soon.

Jim Brown
Editor

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