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A new one for the record books

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        8-23-99          High     Low     Volume   Advances Decline
DOW    11299.76 +199.15 11299.76 11098.08   679,388k  1,706   1,252
Nasdaq  2719.70 + 71.24  2719.91  2648.33   918,634k  2,113   1,832
S&P-100  709.93 + 13.34   710.00   696.59    Totals   3,819   3,084
S&P-500 1360.22 + 23.61  1360.24  1336.61             55.3%   44.7%
$RUT     437.25 +  2.87   437.27   434.38
$TRAN   3198.42 + 47.69  3199.83  3148.26
VIX       23.02 -  0.17    23.65    22.57
Put/Call Ratio      .80

A new one for the record books

Wow! What a day. Undaunted in the face of tomorrow's FOMC meeting, equity traders launched the Dow to new intra-day and closing highs in today's action. Steering this positive equity market movement is the continued falling long bond rate, which dropped again today to 5.974%. It was only 10 trading days ago that the rate peaked at around 6.28%. Following the bond's lead, it was also 10 days ago that the DOW bottomed at 10,575. The DOW is now up over 700 points since then, while the NASDAQ index has gained over 300 points (the equivalent of about 1250 DOW points) in the same period. Anybody nervous? While we think the long run for equities is generally positive (given the strong U.S. economy, great business conditions, high productivity and relatively low interest rates), nothing goes up in a straight line. There will be bumps along the way.

That said, investors have both eyes and ears firmly fixed on tomorrow's FOMC meeting, where it is widely expected that the Fed will raise interest rates by 25 basis points around 2:15 ET. Furthermore, there is increasing sentiment that this would be the last move for the rest of the year, however, that's where the debate begins. While there are some (a small minority) that think the Fed will raise rates by 50 basis point tomorrow, others (another small minority) think there may be another 25 basis point increase when the Fed meets again in October. The debate also encompasses whether or not the Fed will change their current "neutral" bias to a tightening bias. All the news has been gathered, hashed, cogitated over, turned, examined and debated to last most of us a lifetime. It is sufficient to say that all available data appears priced into the market. Given today's excitement, it appears that market sentiment favors a relief rally, further extending today's gains, just so long as there are no surprises. With no surprises and a clearer picture of the future, lots of money mangers will have a greater comfort level getting their money back into equities. When those folks raise the tide, everyone's boat floats better.

Conversely, there is also the argument that the markets' recent gains have resembled an earnings run, wherein investors buy in anticipation of good news, only to sell upon its announcement - perhaps a textbook case of "buy the rumor; sell the news". After all, the DOW and NASDAQ are up over 700 and 300 points, respectively in a short time period. There is a lot of profit for the taking if investors decide they'd like to claim it. Remember too that a negative surprise could also make a pretty big crater if it hits the Street.

No matter which course of direction the market takes tomorrow, the long bond rate will be the beacon of light for us to follow. As long as the Fed/interest rates/inflation remain on the radar scopes of investors (which we'd expect since there is another FOMC meeting in October), the bond rate will likely remain our guide through uncertainty. Check out the inversely related charts.

Long Bond (TYX.X)



Now that you know this, you can use it as a tool to your advantage

Just a few words of caution for those who think a rally tomorrow is a sure thing, based on the experience of the June 30 rally following the Fed's last decision to raise interest rates a quarter of a percent. First, the shift to a neutral bias from a tightening bias on June 30 was a big factor in that rally. We won't have that luxury this time around - the bias is already neutral. Furthermore, should the Fed decide to move the bias back to a tightening stance (highly unlikely, but you never know), the situation could turn really ugly. Third, we understand that the Kansas City Fed is sponsoring a conference in Jackson Hole, WY for Fed Board members (including Greenspan), wherein 2 of the topics will be "What's the Appropriate Role For Monetary Policy In The Presence Of Asset Bubbles And Financial Crises" and "Practical Experience With Financial Bubbles". Did they say "asset bubbles" and "financial bubbles/crises"? Yep. . .sure did. With language like that, perhaps they are tipping their hand about their thinking on stock values, which could affect future interest rate policy. We bring you the facts, you decide what it means. It could just be an exercise in creative Fed thinking. Let's hope that's all.

As for the DOW's record-setting day, it finished at a new intra-day and closing high of 11,299, over 90 points higher than its previous closing high back on July 16. The advance was broad based, as financials, technology and drug stocks showed us the money. Even airlines got into the action today. Volume was still only moderate at 679 mln. shares. But advancers put it to decliners by a 3:2 margin. Finally, we're starting to see new highs outpace new lows in a score of 81 to 74. Needless to say, closing at the high of the day and at a new all time high is a really positive development. On a daily basis, the lows keep getting higher, which also looks good.

Concerning financial stocks, Lehman Bros. did a study that essentially shows that the old paradigm, where financial issues suffer as rates rise, just doesn't hold true any longer. The old theory went that rising rates increased the institution's cost of funds - an expense increase and profit decrease. The study now shows a correlation that has financial issues rising as interest rates rise. Perhaps that's why AXP set a new high today of $146.38, up over $22 since August 10. JPM and C were both up again too, by $6.81 and $2.25, respectively, though not at new highs.

The NASDAQ too soared with eagles, but not to a new record. Technology and Internets were the stars, led by the 5 generals, MSFT, INTC (which set another new high today just shy of $83), DELL (up on huge volume, perhaps in anticipation of news from an analysts' conference to start this week), CSCO and WCOM (also huge volume). In the end, the NASDAQ charged up 71 points to finish at 2719 on 918 mln. shares (still just moderate volume). Aside from that, advancers squeaked by decliners 7:6. Really impressive was that 128 new highs that smoked past 55 new lows.

While volume still remains low by traditional standards on both indices, investors have apparently learned to be patient with what they currently hold. We haven't seen any selling pressure coming into this FOMC meeting. Prices don't generally rise without substantial volume to back it up. But in this case, there has simply been a lack of sellers, establishing buyers firmly in control. This rally has proven that markets can move up on low volume as long as there are no sellers to thwart it.

Of course, Monday wouldn't be complete without mergers. In the third largest utility deal in history, Carolina Power agreed to purchase Florida Progress in a deal valued at $5.3 bln. This appears to be an emerging trend in this sector, as utility companies consolidate into super regional powerhouses (pun), as a result of deregulation. Keep your eye on PG&E as they could be next to purchase another utility.

On the technology front, it's worth noting that even though the value of the deal is cheap at $540 mln., or $22.28 per share, SUNW announced that it will be purchasing Forte Software (FRTE). The move adds key components of network computing to Sun's lineup of products.

In other short takes, not everybody was a winner today. Look no further than the basement. . .Filene's Basement, who filed Chapter 11 today. They operate over 50 stores in the Northeast and Midwest, and closed at under $1. Ouch!

Here's an "ouch" of a different kind. A seat on the NYSE sold today for $2.65 mln., a new record! That's the price one pays for the right to trade on the floor of the exchange. Nice work if you can get it.

So, in a nutshell, what happens tomorrow? The market could go either way - up on a relief rally, or down on "sell the news" theory/Fed surprise. We'll all have to make our own determinations after the announcement, but the bond rate will be a big clue. At key moments in the market, it's always a good idea to protect the downside, and we suggest using stops just in case the Fed does the unexpected. Other than that, confirm market direction and sell too soon.

Buzz Lynn
Research Analyst

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