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Market Wrap

Atlas shrugs, but it doesn't work

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        8-12-99          High     Low     Volume   Advances Decline
DOW    10807.75 + 19.95 10900.83 10780.84   745,630k  1,484   1,528
Nasdaq  2549.54 - 15.49  2586.10  2548.51   959,442k  1,985   1,848
S&P-100  673.07 -  0.32   681.52   673.02    Totals   3,469   3,376
S&P-500 1298.16 -  3.77  1313.61  1298.06             50.6%   49.3%
$RUT     428.82 +  0.63   429.70   428.19
$TRAN   3157.46 + 26.94  3182.43  3130.53
VIX       26.07 +  0.25    26.08    24.29
Put/Call Ratio      .69  

Atlas shrugs, but it doesn't work

First thing this morning, traders fresh with retail sales news shrugged off July's .7% jump in retail sales once they understood that June's figures were revised downward to show a decline of .2% for the month. An almost convincing gain ensued, but couldn't hold up into the close, as someone turned out the lights (literally). To understand what happened, take a look at the action on the NYSE (the DOW in particular) and the NASDAQ.

As we alluded to last night, the DOW carried on yesterday's strength through amateur hour this morning, touching 10,850 before falling back to 10,800 (actually, 10,780), where it found support (surprise!). Recall that this was the resistance level up 'til then. The 30-yr. bond rate was rising during that period too from 6.20% to 6.23%. Just as the bond rate reversed direction back toward 6.20% (hesitating briefly at 6.21%), so too did the DOW reverse back up to 10,850, where it hesitated before leading a charge all the way to 10,900. The recovery was looking very real as advancers were edging out decliners 1520 to 1298 at the time. Remember that bonds had been leading the index all day, since as goes inflation fear (as reflected in bond rates), so goes stock price. As rates go up, stock prices fall. At almost the very peak of the day, bond rates began to rise again (the 30-yr. treasury auction didn't go so well - weak demand from the usual inflation fears) and stocks began to fall in sympathy until the close. Despite being up as high as 120 points from the open, the DOW finished up just 19 points at 10,807 on 748 mln. shares traded. The A/D line had crossed over to show decliners edging out advancers 1484 to 1528 - almost even. Significantly improving, but still negative, new lows were down to 163, while new highs progressed to 55. The last 2 days were certainly worse.

Suffice it to say that the NASDAQ had a similar pattern, but with its own nuances. Keeping a damper on NASDAQ was Merrill Lynch's issuance of a PC sector warning, wherein they predicted that PC sales prices would fall 11.5% this year and 11% each in the next 2 years. Sorry folks, but how is that any different from the last 15 years where the $3000, 4 MHz, Intel 286 box has morphed into a $1000 400 MHz Celeron? Oh well. . . monkey see; monkey do; PC makers get pounded all in a day's work. The chip sector got crunched too as reflected by the SOX (semiconductor index), down almost 3% from 521 to 506, with the biggest hits taken by AMAT (-$5.13) and KLAC (-$3.56). Who said markets are rational? In the end, paralleling the trend of the DOW (and bond rates - remember technology issues are a bit more rate sensitive), the NASDAQ gave up 15 points to close right at support of 2549. Advancers were ahead of decliners 1871 to 1665 at the high point of the day. Though the NASDAQ finished down, advancers still won 1985 to 1848 over decliners. New highs gained lost ground on new lows compared to previous session - 55 new highs to 78 new lows. Volume clocked in at 959 mln. shares, slightly more than Yesterday.

Hmmm. . .Dow just over 10,800; NASDAQ 2549. Is that support or resistance? There are 2 sides to this story. So let's start with the negatives to get it out of the way.

Notice the relationship between movement of the DOW and the NASDAQ. They reflect an inverse relationship to interest rates.

Both indices fell back from their intra-day highs by a significant number, as we suspected they might in front of the PPI release tomorrow. Also, volume hasn't reflected money mangers getting back in the game yet. We need to see over 1 bln. shares traded on both indices to give us that clue. When that happens, the recovery is probably for real. Also, though the A/D line has improved a bit in the last 2 days, a 2:1 ratio would be more convincing (maybe wishful thinking). We'd also like to see new lows best new highs by at least 2:1. We're not there yet. Furthermore, any "bad" news in the PPI will likely point us south again.

Now for the good. Recall that today's action, as in the past, was tied to interest rate fears borne of perceived inflation by the Fed, as reflected in the bond rate. First, we expect the PPI to be friendly, which given the still bearish tone of the market, may put a real squelch on the idea of a second rate increase later in the year. That could actually spark a rally back over 10,900. Here's the kicker. Remember that bond rate hike that sent everything lower? Well, right about that time, the electricity literally went out at the Chicago Board of Trade where bonds are traded, traders had to make a decision on what to do with their holdings, since their trading day ended abruptly and early. These guys (and gals) don't want to go home with positions in their pockets with the chance that the power may not be on tomorrow morning, especially in the face of a PPI report. What to do? Sell of course. Sell early and call it a day. That's just what they did. When a bunch of sell volume comes into any commodity, what happens to the price? Right, it drops. If bond prices drop, what happens to the corresponding rate? Right, it goes up. Now if you are an equity trader and all you know is that bond rates are spiking up, what do you do with the positions you hold? Right again, you sell. Isn't it great that there are buyers ready to support prices at their current levels (yesterday's closing prices) - that's bullish.

In short, what we are saying is that equity prices, while continuing to take their cue from falling bond rates derived from power outages, may have blindly sold off without understanding exactly why. It is thus possible that the sell-off is artificial and not truly reflective of the market's underlying real sentiment. Think of it this way. Had power remained on, bonds would not have likely sold off, thus equities would not have likely sold off, and today's close might have looked a whole lot better in a technical light.

Now before you buy everything at the open tomorrow with a market order, remember, this is only a theory! We may be out to lunch on this and you can write it off as a nut case conspiracy theory, while going about your business.

Today's action, aside from the machinations of power outage, didn't look too bad. Watch for tomorrow's interpretation of the PPI numbers though. If it's "bad", we could resume course downward and dismiss the last 2 days as a temporary breather before things turn ugly. After all, the CPI comes out next Tuesday and will be feared if inflation shows up in the PPI first, bringing the market down with it - and that still leaves an FOMC meeting on August 24. We remind you too that except for DELL and HD next week, earnings season is all but over. That's no longer a reason for a move up. If the PPI is "good" or just inconclusive, we might get a bump borne of relief from the simple elimination of more uncertainty. (The devil known is better than the devil unknown.) We're optimistic, but still cautious. Decide on your course of action tomorrow morning and stick to your plan. Let the market give you the signal to take a bullish or bearish position if you must play. Of course, sell too soon.

Buzz Lynn
Research Analyst

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