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Market Wrap

Greenspan sticks to the script. Now what?

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        7-28-99          High     Low     Volume   Advances Decline
DOW    10972.07 -  6.97 11023.99 10925.85   692,794k  1,340   1,592
Nasdaq  2705.83 + 26.50  2709.76  2660.62   965,598k  1,884   2,004
S&P-100  703.04 +  1.53   706.08   698.55    Totals   3,224   3,596
S&P-500 1365.40 +  2.56  1370.53  1355.54             47.3%   52.7%
$RUT     446.61 +  0.13   446.92   444.79
$TRAN   3418.39 +  1.13  3417.26  3425.68
VIX       23.20 -  1.52    24.98    22.84
Put/Call Ratio      .69

Greenspan sticks to the script. Now what?

Quickly, let's dispense with some international stuff. When your eyeballs first opened this morning, perhaps prior to 9:30 a.m. EST, you would have found the Nikkei, Hang Seng, Taiwan's TWSE, Korean Kospi, and the Singapore Straits Times Index all up overnight. In Europe, the FTSE and the German DAX were also up. That said, don't read a lot into this. Without major international events to grab the headlines, the U.S. markets become the leaders, and these indexes most likely followed our lead from yesterday. 'Nuff said.

In what should have been real news, Alphonso the Great Greenspan strode to the microphone in front of the Senate Banking Committee and repeated almost verbatim his testimony from last week. There was no element of surprise, pearl of wisdom, or tender morsel offered from the Opaque Orator, with one minor exception. He added the words (and we're paraphrasing here), . . ."if indicators suggest. . .the Fed will act forcefully." The implication here is that current government indicators have not shown the need to raise rates again, however, Greenspan and Co. may see an Employment Cost Index (ECI)or GDP figure, which will both be released tomorrow, or a future CPI/PPI that will spark a rise in future rates. In short, he sees no reason to raise rates now and will only do so if future indicators suggest the Fed should. Sounds reasonable to us. The Durable Goods Orders, which were up just .3% in June vs. 1.0% expected didn't give impetus to the bond or equity market either. You would think, given the paranoia of Fed watchers and willing accomplices on financial TV, the news of low Durables and no additional rate hike would have bond traders throwing an all-night dance party hosted by Dick Clark! Not even close. . .the 30-year bond rate remained almost unchanged by the close today at just 6.002%, down from 6.006%.

So what really happened? The DOW started the day with a push from a southerly wind, taking it down to its low of the day at 10,925 by the time Greenspan grabbed the microphone. From there, it began a steady rise, lasting 3 hours through Greenspan's comments, where it plateaued at 11,023. Following a descent back below 11,000, the DOW mounted another offensive over 11,000, but sellers then took control to drive it back down to its close of 10,972, a loss of 6 points for the day. The advance/decline line remained noticeably negative all day, as decliners reigned over advancers by a 5:4 margin. Volume was weak at 693 mln. shares. You may think it's no big deal, but note for the last week that the DOW has tried on 4 occasions to break back over the 11,050 mark and has failed progressively lower each time. If there was going to be a breakout back to 11,200, it should have happened today after Al's testimony. It didn't. Red Flag.

The NASDAQ was a different story. Riding the coattails of yesterday's 60 point gain, the NASDAQ scored another 26 points today, led mostly by strong Internet and semiconductor sectors, which of course, rubbed off on PC's too. Though the morning began with some further sell-off from yesterday's close, like the DOW, the NASDAQ found its legs when Greenspan began his chat. However, Intel was the only notable leader at that time and pulled the rest of the sector, along with Internets and PC's up with it. The recent favorable comments that sub-$1000 machines would be a benefit to those companies lent support to their stock prices. Once the index pierced the 2700 mark, it traded around that level for most of the rest of the day. The final close flashed at 2705 points, up 26 on volume of 969 mln. shares. This caused some to speculate (including us yesterday) that we might have put in a bottom at the 2650-2675 range. Maybe. Advancers actually trailed decliners in a 9:10 ratio, despite the "rally". But, the market flattened out following Greenspan's comments. Word from some traders is that today's rally was "uninspired". Again, we should have seen that dance party, but didn't.

One other note. After 6 days of declines, it's not unusual to see some reversal upward, like in the past 2 days. As we've often said, nothing goes up or down in a straight line. Keep in mind, the success of the last 2 days can be traced directly to Intel's movement. That action is based on expectations that may not be deliverable. We've seen it before. The promise of a new dawn in the semiconductor industry has sparked a sideshow rally, wherein better performance is promised "next quarter" or in the "second half of the year" after a disappointment - in short, a recurring case of over-promise and under-deliver. INTC sits at $70.31, very close to a new high (anything over $72), which also serves as resistance. Though INTC may pierce it and hold for a day, there just aren't any market-wide conditions conducive to supporting it, then moving it higher. Suffice it to say that nobody is entirely sure that "this time, it's different". We concede that history does generally repeat itself until some event happens to change it. Given the run-up, which we hope is for real (hope is also one of the killer emotions in trading), it is more likely that this sector is getting a bit over-extended in relation to the rest of the market and will experience a pullback. It does not appear to be different this time either.

While we're talking about the downside, it helps to remember too that earnings season is winding down. After that, there won't be much in the news to prop up stock prices, except on an individual basis. Market behavior abhors an informational vacuum. Thus the markets will begin focussing on other events. If the positive stuff, like earnings, won't be on the docket until October (where Y2K monsters reside under the bed, and earnings are weak anyway) the market will find the negative stuff (Y2K, international monetary devaluations, political flare-ups, turf wars, etc.) upon which to focus its worry. In typical fashion, expect a retracement in August until the smell of earnings season begins to fill the air again in late September. It's not a matter of if, but when.

Don't get us wrong, in the long run, we're still as bullish as they get. We're also pragmatists with an eye on the southerly end of the chart for the next few days, perhaps 2 weeks. If the sell-off can be painful sharp and fast with astounding volume, much as we aren't wishing for it, we could make a case for getting back in at that time. We probably won't be that lucky. Sitting on our hands in cash is sometimes the best thing we can do for ourselves. First and foremost, it protects our capital. If you absolutely have to play, and it fits your own tolerance for risk, consider some of the put plays or the OEX Skybox. For the more sophisticated, thanks to some short-term consolidation, you may also want to look at some OEX straddles with lots of time to maturity. We aren't telling you what to play. We just want you to start thinking about a more defensive strategy.

OK. Let's try to recap:

1) Employment cost index and GDP reports tomorrow (should be benign and well-received - green flag)

2) Negative and deteriorating advance/decline line (red flag).

3) Earnings winding down (big red flag)

4) Low volume, flat trading (red flag)

5) Interest rates back over 6% (We think they will drop, inflation is nowhere to be found - green flag)

6) (Bonus) Compaq reported a loss 1 cent narrower than their own revised expectations or a loss of $0.11. While revenues were up huge over last year, at $9.4 bln., they were flat compared to last quarter (red flag). Sub-$1000 machines are eating into their margins, which negates the notion that sub-$1000 is healthy for the rest of the technology market (red flag). The unfortunate news (the market will likely call it good) is that 6000-8000 employees will receive pink slips in what will become a $700 mln. to $900 mln. writedown for the company (ouch, but probably a green flag). Overall, this may put a damper on technology tomorrow. (AT&T and MCIWorldcom report tomorrow.)

Exercising caution is a good idea. Low volumes, negative A/D line, the end of earnings season, and lack of response to Greenspan testimony point to the negative. The current market will not let us recover from a bad trade very easily. The field is littered with landmines. Plan your trades carefully and avoid trades rooted in emotion. Oh yes, lest we forget, sell too soon.

Buzz Lynn
Research Analyst

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