Option Investor
Market Wrap

Where's the rally?

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        7-15-99          High     Low     Volume   Advances Decline
DOW    11186.41 + 38.10 11217.76 11149.37  824,088k  1,299   1,657
Nasdaq  2839.37 + 21.24  2840.03  2813.52 1047,000k  2,016   1,929 
S&P-100  726.88 +  5.30   727.43   721.58   Totals   3,315   3,586
S&P-500 1409.62 + 11.45  1409.72  1398.17            48.0%   52.0%
$RUT     465.80 +  4.34   465.80   461.46
$TRAN   3397.03 - 24.48  3434.51  3386.24
VIX       19.69 -   .69    20.80    19.09
Put/Call Ratio      .60    

Where's the rally?

Did I miss something? The CPI number on Wednesday could not have been better. The PPI number today was unchanged overall and only +.01% for the core rate. Flat for the second month in a row. Very market friendly. The retail sales figures were tame and the unemployment numbers showed a +11,000 rise in claims. The bond is trading under 6% at 5.91%. Earnings are coming in mostly higher than expected and the market should be rocking. So where is the beef?

Terms like "wall of worry" and "dangerously overbought" are making the rounds on CNBC. Abbey Joseph Cohen was very cautious in her wording today as she was interviewed. She likes the "long term" outlook and is still bullish on techs which in her words "are not quite fairly valued". She sees no storm clouds on the horizon and her economic for the third quarter was good. Did she raise her forecast on the Dow? No, nope, nada. Her firm, which has a target of 10,300 for the year, did say they would consider it later in August.

Elaine Garzarelli, long a bull, said her internal indicators are nearing the bottom trigger point which would turn her bearish. Not yet but getting closer. She does expect another rate increase by the Fed in August and said there was rumors of rate hikes worldwide which could slow the global recovery. Several of the indicators she watches are creeping up into dangerous territory. The NAPM for instance has shown an increase in prices for four months in a row. Price increases will eventually be seen as bearish signs of inflation. The Columbia survey has shown the economy growing at a +4.5% rate for several months and normally precedes the government numbers by several months. These are the things that market technicians are concerned about.

The DOW is trading in a very tight range when it should be exploding based on the economic reports. Why?

Except for the gap downs on Tue/Wed the Dow has been in a 50 point range for the week. 50 points during an earnings cycle! We appear to be stuck just under 11200. Don't get me wrong. Stuck is better than falling. The longer we stay here bumping our head on 11200 the better chance we have at busting through on a solid base. The downside would be if we run out of earnings news before the breakout. We would then have nothing to keep us going. Granted we did not have much profit taking last week from the +500 point run and we could be undergoing a stealth correction or consolidation. Time will tell.

The Nasdaq is still setting records and tech is still where the money is going. Actually we should probably say thanks because I believe the Nasdaq is holding up the Dow.

This is a good solid chart. Up three days, rest, up three days, rest, up two days..... Good, obvious cycle that you can trade with the down days to take the pressure off. The Nasdaq closed at the high of the day but the DOW was -32 points from the top.

I think we are stuck here because investors are worried. Some point to the Greenspan testimony on the 22nd as the next mile post in the rally. They want Greenspan to bless the economic numbers again. This is an excuse by lazy analysts. The numbers could not be any better. The Fed went back to neutral. His testimony is still a week away. I think investors are scared of history repeating itself. Most retail investors, people like us, have a very short memory. Funds and institutional investors who do this as a business are not as big on risk taking as the troops. Because of this they analyze every conceivable factor.

What I think they are worried about is a repeat of the past two years. August 7th 1997 began a sharp drop of -600 points which led to an even bigger drop in October. The market was at 8300, an all time high the day before. July 20th 1998 started a drop of -1900 points from its all time intraday high of 9374 that day. Is there any wonder that investors with a memory longer than three months could be queasy? In both instances there was a strong earnings run the weeks preceding. The market was at an all time high. The DOW had run up almost exactly +2000 points since Jan 1st each year. Investor sentiment was very bullish.

Contrast those years with this year. The DOW on Jan 1st was 9183. We closed today at 11186, +2,003 points. Could cautious investors be selling into the earnings rally? It is possible. With $10 bln coming into mutual funds weekly the last couple weeks, why are we not moving up. I think it is caution by the big boys who can read historical charts. They know if they are patient they MAY be able to buy at a significant discount soon. Now throw in the Y2K unknown. I got another newsletter this week advising clients to sell everything over the next six weeks and wait for the buying opportunity of a lifetime at year end. If only 5% of the readers of every newsletter that is recommending this action actually take it then it will be a self fulfilling prophecy.

Am I crying wolf? Do I look like chicken little? I hope not! I am only trying to make sense out of the ramblings of hundreds of "experts". My suggestion is not to sell everything and shift into money markets. My suggestion is simply "be aware" of the market tone and look for subtle shifts that could warn of trouble ahead. Maybe a shift like no rally on good earnings AND good economic news. Nobody knows for sure and everybody is just guessing. If you act like an ostrich and hide in the sand you could get caught in a huge downdraft. The two week drop from intraday high to intraday low starting August 7th 1997 was -600 points. The three week drop starting July 20th 1998 was -1000 points. Do you think everyone was expecting those big numbers the day it started? Of course not. This is a perfect case for stop losses. You never know if the next drop is "the big one" or just profit taking.

If the market charges off tomorrow to another new high then mark my comments off as the ramblings of a frustrated analyst. It will not have cost you anything. If sometime in the next couple weeks the market turns and you are ready to pull the trigger, then I will have done my job. You be the judge.

Have a great weekend!

Jim Brown

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