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Market Wrap

"It's Official"...

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        6-30-99          High     Low     Volume   Advances Decline
DOW    10970.80 +155.45 11003.41 10731.45 1109,000k  1,914   1,144
Nasdaq  2686.12 + 44.01  2696.87  2621.06 1263,000k  2,501   1,518 
S&P-100  704.42 + 12.91   704.50   684.85   Totals   4,415   2,662
S&P-500 1372.66 + 21.21  1372.93  1338.80            62.4%   37.6%
$RUT     457.68 +  3.60   460.21   453.93
$TRAN   3404.36 -  5.26  3441.22  3386.93
VIX       21.01 -   .02    24.28    20.44
Put/Call Ratio      .42    

"It's Official"...

Alan and friends have been officially nominated as closet bulls. Out of all the choices available to the Fed chief and company, they chose the most bullish one available. I guess they were just as tired of this six week rut as we were. This morning things were not looking so rosy. The Chicago PMI report (Purchasing Managers Index) came out stronger than expected and the market fell to -81 while new fears that the Fed would have to begin a string of rate hikes to keep inflation in check. Fortunately, the market showed some resilience and bounced off of 10731 (its low for the day) but it remained in the red while traders held their breath or placed their bets on the Fed's crucial decision. At 2:14 pm ET the market paused and the Dow sat at 10765 the Nasdaq was at 2626 and the yield on the 30 year bond was sitting at 6.07% (down from 6.10% early today). At 2:15 pm ET, the Fed decision to raise rates .25% and reposition their bias back to neutral jumped started the markets into overdrive.

It was like someone yelled, "CLEAR!" and Dr. Greenspan's news shocked the ears of traders and analysts alike. Within 15 minutes the Dow had risen to 10971 and the Nasdaq was at 2672 (+206 and +46 respectively) while the Bond had rallied driving the yield to under the critical 6%. The rate hike was no shock but rather the move to "neutral" for the Fed's bias. While many of us had hoped for just such a decision, most of the market pundits believed that it was not meant to be. Flooded with a sense of relief that a series of rate hikes was not in the works, investors poured money into the markets with fervor. Of course the bears were going into cardiac arrest proclaiming (and truthfully so) that this decision in no way prevents the Fed from raising rates again at their next meeting in August. The bulls quickly pointed out that this merely reduces the chances of such a follow up rate hike.

What did the Fed really say? We just so happened to have a copy of the Fed's press release that came out this afternoon. Edited by OIN for a [clearer understanding].

Fed Press release

The Federal Open Market Committee [Alan Greenspan and the 10 person committee] today voted to raise its target for the federal funds rate 25 basis points to 5 percent [that is a 1/4 point raise to the rate banks charge each other for over night loans]. Last fall the Committee reduced interest rates to counter a significant seizing-up of financial markets in the United States [the Asian flu was rampant and the Brazilian and Russian economies were on the verge of collapse and our own markets were in a tailspin because of it]. Since then much of the financial strain has eased, foreign economies have firmed, and economic activity in the United States has moved forward at a brisk pace [foreign economies are on the mend, Brazil is getting its IMF bailout, Japan appears to be the improving, and Russia is still sick but the chemotherapy has hidden most of the symptoms from the publics eyes and the U.S. consumer has no concept of savings while they continue to spend at an incredible rate]. Accordingly, the full degree of adjustment is judged no longer necessary [what the Fed giveth, the Fed can taketh away].

Labor markets have continued to tighten over recent quarters, but strengthening productivity growth has contained inflationary pressures [our major concerns over the labor markets have seen some tightening but we are amazed at the productivity growth our economy has been able to maintain keeping any signs of inflation to mere shadows].

Owing to the uncertain resolution of the balance of conflicting forces in the economy going forward [2Q earnings are supposed to be great, but Y2K concerns are still a mystery and we don't want to jeopardize the budding growth we see overseas by being to pessimistic], the FOMC has chosen to adopt a directive that includes no predilection about near-term policy action [we are going to move our bias back to neutral like we have always done after every tightening since 1994]. The Committee, nonetheless, recognizes that in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth [sure, have fun while you can but if we even see a hint of inflation we'll slap you upside the head with another rate hike so fast your IRA will still be spinning by the time we have another FOMC meeting].

Where were investors throwing their money today? Almost every where! The market advance was very wide spread with advancers beating decliners on the NYSE 1914 to 1144 and on the Nasdaq 2501 to 1518. Obvious winners were the banking stocks... C +1.44, CMB +3.88, JPM +4.75, COF +4.13, and beleaguered PVN +9.13. Another winning group was the drug group who have recently been trying to make a comeback... MRK +2.13, PFE +4.13, JNJ +4.00, LLY +3.63, and SGP +2.81. Of course with a positive interest rate decision, tech stocks were back in vogue. Look at computer hardware... IBM +4.63, HWP +3.13, SUNW +2.38. And even the semiconductors had some standouts... AMAT +4.75, LSCC +3.75, KLAC +3.19, and TXN +4.19. But, the biggest winners today appeared to be the brokers and the internets. Some of the brokers... LEH +3.25, MER +2.50, MWD +7.88, SCH +8.88, and an unbelievable NDB +12.50. The net stock winners... AMZN +9.06, DCLK +6.56, INKT +12.38, and YHOO +12.25.

Everyone wants to know what can we expect for tomorrow. We have a lot to look at. What do we have going for us in our favor for a renewed rally? The rally today in the bonds drove the yield down to end the day at 5.97%. This is a positive factor for the stock market longer term as it is below the psychological level of 6%. The rally today was on extremely strong volume with 1.109 bln shares traded on the NYSE (its 5th largest trading day in history) and 1.263 bln shares traded on the Nasdaq. Plus we have new highs on the S&P 500 as well as the tech heavy Nasdaq (with an intraday high just 3 points shy of 2700). We had two positive earnings announcement today with FDX beating estimates by $0.02 and NKE beating theirs by $0.01. We also saw an extremely large number of large buy on close orders coming in today. As we mentioned earlier, the advancers beat decliners by a large margin. Furthermore, MSFT spinned a meeting with the SEC into a positive analysts meeting. MSFT said that because of the revisions in their accounting practices that they would have to restate several quarters with higher revenues and analysts should be revising current estimates higher. As a result they were trading up in after hours trading today. This should be a positive influence on the Nasdaq tomorrow.

Unfortunately, I feel that we have more negatives weighing in on us tomorrow than the positives above can handle. Never fear, it should only be short lived. Number one, the day after a Fed meeting, even with a positive outcome, is almost always down. Number two, the Dow has climbed 417 points in 3 days. The Nasdaq has climbed 133 points (equivalent to 665 Dow points) in the same 3 days. Has anyone ever heard of "buy on rumor, sell on fact"? Yes, the Fed decision is exactly what we wanted. However, this is just too much too fast and we need to pullback. That is okay. This will provide the necessary consolidation before we rocket into a very strong earnings season. Number three, we still have the NAPM index tomorrow and the non-farm payrolls report coming out on Friday. While these should be construed as non-events after the Fed meeting, if there is a negative surprise this market can deflate very quickly. Conservative traders should wait until after the reports come out before staking a position. Number four, today ended the 2nd half of the year and thus any window dressing fund buying is over. There were a few other negative influences like KO announcing their earnings warning and WCOM getting hammered over two different brokerages concerned over a long-distance phone service price war; but those should probably be stock or sector specific.

Again, I'm only being cautious about tomorrow and would like to see a pullback only to offer a better position for traders to find their entry point. Volume on Friday is likely to be light ahead of the long weekend but expect to see bargain hunters trying to get a head start into earnings season next week (actually, the season gets kicked off on the 12th but there are a few good announcements next week as well).

This is the time for individual traders to be doing their homework as they look out ahead of the earnings landscape. Four times a year the market offers us an awesome opportunity to make a lot of money if we chose wisely and time our plays appropriately. Don't get caught off guard.

Sell too soon.

Kimo
asst. editor

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