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Market Wrap

The day after...

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8-25-99                   High     Low      Volume Advances Decline
DOW    11326.04 + 53.23 11334.59 11198.45  847,894k  1,611   1,382
Nasdaq  2805.60 + 42.74  2810.10  2750.72 1029,000k  1,906   1,957
S&P-100  723.83 + 10.27   724.92   711.07   Totals   3,517   3,339
S&P-500 1381.79 + 18.29  1382.75  1359.18             51.3%   48.7%
$RUT     437.86 +   .74   438.26   435.40
$TRAN   3309.25 + 74.35  3306.25  3233.78
VIX       20.67 -  1.62    23.36    20.31
Put/Call Ratio      .55

The day after...

What rate hike? Now that the FOMC meeting is over, the market breathed a huge sigh of relief. Normally, the Dow is down the day after a Fed meeting. Yet, stocks took off today again despite the 25% move in the Fed funds and Discount rate from the Federal Reserve on Tuesday. Apparently investors just aren't as nervous of a future interest rate rise as they were two weeks ago. If that is the case, there could be some legs underneath this rally. But before we get in to today's market action, let's look at some facts. Last fall when foreign economies were coming unglued on a daily basis, Alan Greenspan came flying in with cape, tights and a capital G on his chest to save the world. His weapon of choice, an interest rate cut. Three of them to be precise. The IMF also helped with a much needed reform-for-a-loan program and investors came back to the markets with new found enthusiasm and it's been new highs ever since.

So now what does our super hero want? He wants his rate cuts back. The data that has been trickling in this summer seems to suggest that inflation is perhaps in the pipeline. You have to look hard to see it but it is more prevalent than it was during 1998. Most of the potential worry stems from higher oil prices which have been holding above $20 for the past few weeks or about an 80% increase from 6 months ago. That leaves Alan and friends wondering whether or not they have provided too much stimulus to the financial markets. We all know how much Mr. Greenspan dislikes irrational exuberance! Therefore we have seen two rate hikes of 25 basis points so far this summer and some analysts predict there may be more ahead.

But now let's flip the coin over for a look at the other side. What has the 30-year treasury bond done during this same period of one year? If you look closely at the chart below you will notice that it has climbed more than 150 basis points to its high just 9 trading days ago. That is a potential over-shot of 200% from what has actually come to fruition. This is why you have seen such a massive correction in the yield of the 30-year in the past two weeks. Do you remember where the yield was on Thursday the 12th when power went out at the CBOT? It was 6.28% on the high. That is quite a contrast from the 5.85% that we finished at today. If the bond can stay below 6%, then there will be a flood of money pouring into the stock market.

The directive that came out of the Fed meeting was the real gem in the rough for stock traders. The FOMC signaled no change in their neutral bias towards raising rates. In fact some of their comments make it sound as if they won't raise rates anytime soon. The prospect of stable or lower interest rates from the bond market is always an appealing factor for stock traders. In reality, unless we get some strong data signaling inflation, most traders feel another hike is unlikely. This one question lingers in the back of our minds, "Would Alan really chance another increase so close to Y2K?" The next Fed meeting isn't until October and most economists are answering with an astounding, No! More important, most big money traders are answering "NO" as well. It is this sentiment that the Fed is unwilling to raise rates again this year that has trader's rejoicing. Normally, higher rates impede corporate earnings by making it more expensive to borrow money which companies use to finance growth. So now that investors believe that rates are going to remain firm for the rest of the year, high growth stocks are reaping the benefit in their stock prices. The Internet stocks in particular will benefit from this atmosphere. Look at today: AMZN +12.81, AOL +4.56, YHOO +5.63, INKT +9.75, EBAY +10.13. However, notice these are all the Internet elite. While they are not the only ones to benefit, buying was concentrated on the big name stocks.

So here we are at a new record high for the Dow Jones at 11326.04. The rally off of intraday lows looked very convincing. We have yet to determine what the key was, but around 1:20 pm ET this afternoon, someone or something yelled "go" and a market wide buying spree ensued. The closest we can guess is that right near 1:20 pm the 30 year bond yield dropped to 5.86%. It was amazing to see the Dow rally slightly over 120 points from 1:20 pm to the close. Fortunately, volume was strong for the first time in awhile at 847 mln shares on the NYSE which is indicative of institutional investing. Almost one third of the Dow 30 put in a strong performance with 9 out of the 30 gaining almost a point and a half or more. The Dow wasn't the only one reaching new highs either as the NASDAQ 100 breached the old high of 2459 and was able to hold on to close at 2460. In case you are wondering, the NASDAQ 100 is the largest one hundred, non-financial stocks in the NASDAQ. The volume was also heavy on the NASDAQ at almost 1.03 billion shares. Fueling rallies in both the NASDAQ 100 and the NASDAQ were strong gains in the big six: DELL +2.63, CSCO +2.25, WCOM +2.25, MSFT +3.13, SUNW +2.31, and INTC +0.56 (a notable laggard as the semiconductors came under some selling pressure). The NASDAQ is another index near a record. It needs only 58 more points before piercing its old high. And to make sure we don't leave anyone out, the S&P 500 closed only 37 points off the old high hit on July 16th at 1418. Here are their respective charts.

What are the other factors pushing the market? Well we didn't lack for news today, that is for sure. The reason the Dow had a hole to climb out of early this morning was due to Bank One and quite possibly Merrill Lynch. We were actually poised to open higher on the day as S&P futures were up late this morning with a good showing by the London FTSE and the German DAX in response to our Fed decision yesterday. Unfortunately, Bank One warned after the close yesterday that they would miss 1999 earning estimates by 8% due to the acquisition of First USA and a highly competitive credit card market. Their stock paid the price today by losing 25% (-12.63 to 43.13). Ouch! This put the financial sector in a bad mood from the outset this morning. Companies like Capital One Financial (COF) and Providian Financial (PVN) were found guilty by association and suffered as well. Several of the financial stocks, not just credit card companies, did dip early on but managed to stage an impressive rally and closed well off their lows. Unfortunately for ONE shareholders their stock never did mount a rally.

Merrill Lynch did their part to depress the market today with a round of downgrades that hit both retail and biotech stocks. On Merrill's hit list was: Sears (S), Borders Group (BGP), J.C. Penney (JCP), Dayton Hudson (DH), Nordstrom, Inc. (JWN), Kohl's (KSS), Wal-Mart (WMT), K-Mart (KM), and Barnes & Noble (BKS) rounded out the retailers. Merrill's said that they were merely moving to a "conservative position" on the sector. Analysts at the brokerage felt that tough sales comparisons for year of year growth, a tendency for the sector to slow down during the second half of the year, and competition from Internet companies would all factor into stock prices throughout the rest of 1999. Other stocks getting singled out today were five biotechs. Amgen (AMGN), Biogen (BGEN), Genzyme (GENZ), Idec Pharmaceuticals (IDPH), and Medimmune (MEDI) were all slapped with an "accumulate" from a "buy" because of valuations. Eric Hecht, an analyst from Merrill, believes that the fundamentals of these companies are still very "strong and intact". All of them opened lower, although most made gains off of intraday lows.

MSFT was one of the stocks on the go today after Lehman Brothers previewed their estimates for Microsoft for 1999 and 2000. Lehman stated they see no slow down due to Y2K and strong sales trends. They gave MSFT a price target of $130. Microsoft responded by trading up to $95.63, only $5.44 from a new high (have you caught today's theme in the market? sounds like new highs). MSFT is now up 12.50% on the week. As you can imagine technology stocks were really moving today in the rally. Software, Internet and Hardware sectors were all higher today.

Other sectors on the move include Cell and Wireless. For example, stocks like VOD, NOK, DT and BTY are all back in the winner's circle. Most of these had strong breakouts today in a sector that most traders felt were in an over-sold condition. This is in contrast to the paper sector which wore the dunce cap today. Lumber prices helped spark the sell-off in paper companies like Champion International (CHA) who led the slide after a downgrade. Others like IP, GP, BCC and WY also surged lower.

Oil was also big news on the day. Many of you may have noticed the surge in the Dow Jones Transport Index (+74.35). This was propelled by a jump in a handful of airline stocks. Why? Crude oil futures fell $0.89 to less than $21 a barrel for the first time since August 5th. Recent API data is showing a far less than expected drop in stockpiles. AMR, DAL, FDX, NWAC, UAL, and U (all airlines) rallied on the news. For the Dow theorist out there, any bull run in the Dow needs to be confirmed by a positive move in the Dow Transports. The question is whether the transports will be able to keep this up.

These stocks may not be done for the day either since extended market hours begins tonight at 6:00pm ET. It is a two-hour session offered by Market XT to trade 200 widely known companies. It will be very different from current trading rules. For instance, there will be times when the best bid and best ask are not being shown. Also since it is strictly limited to just limit orders with no market maker, you may accidentally place a bid or ask well out of range of the current price. This can be taken by another trader and you are left with the consequences of your mistake. You would be wise to contact your broker for further instruction. There are only two brokers that we have heard of that is even going to allow trades for tonight. They are Discover Brokerage and e-Dreyfus.

Finally, it is important to note the economic data released this morning which gave us mixed results. The existing home sales data showed a 3.9% decrease in sales for July. This is positive for the markets as it shows that the economy may not be overheating but it should be taken with a grain of salt after a 12.6% increase from the month of June. We also got the Durable Goods number showing a gain of 3.3% for July. This is the largest jump since December and is not a positive sign for the markets. Even though some may say that we are even-steven after the first two reports since the Fed meeting, it doesn't always work that way. Alan Greenspan has a knack for singling out the data he wants to see. You can be sure any negative data will find its way to the top of his briefcase. Tomorrow will give us a couple of more economic reports, the GDP for the second quarter and the weekly jobless claims. Unless something comes out catastrophic, it will likely be a non-event. We still have until September 2nd before the next employment report. Alan will be watching it for wage and labor pressures.

In summary, the market is looking a little euphoric at the moment. The NYSE had volume it hasn't seen since the 5th of August. The Nasdaq looks very strong and market pundits are predicting a new high very soon with only 58 points to go. The OEX, SPX are both supporting the move. What looks good for tomorrow is that both major indices closed near their highs on strong volume. Unfortunately, the Russell 2000 is not truly participating and is still humbled by its 100 dma. However, as long as the bond yield stays flat to down, money that has been sitting on the sidelines ahead of the Fed meeting will probably make its way into the market shortly. Especially now that there is a growing belief that the Fed will not raise rates again until next year. With so much profit built into the market already we need to be very careful not to get bit by the next round of profit taking. Odds are it will be very fast and sharp.

On that thought, sell too soon.

Ryan Nelson
Research Analyst

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