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Late day rally sets tone for PPI tomorrow...

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        9-09-99          High     Low     Volume  Advances Decline
DOW    11079.40 + 43.06 11095.86 10981.89  771,746k  1,446   1,463
Nasdaq  2852.02 + 43.28  2852.04  2807.95 1029,974k  1,978   1,860
S&P-100  709.81 +  2.15   710.02   701.99   Totals   3,424   3,323
S&P-500 1347.66 +  3.51  1347.66  1333.91            50.7%   49.3%
$RUT     437.77 +  1.87   437.77   435.78
$TRAN   3113.27 +  8.83  3118.74  3031.21
VIX       23.40 -  0.78    24.98    23.31
Put/Call Ratio      .52

Late day rally sets tone for PPI tomorrow...

Volatility is the one thing in the market that investors can confidently bet on lately. Most were expecting today to be fairly quiet ahead of Friday’s PPI numbers, but we did see a somewhat surprising rally in stocks toward the end of the day. The Dow again had a range of over 100 points and even if you spend your days with your eyes glued to a quote terminal, you might miss major moves if you turn to sneeze. But was Thursday a foreshadowing of things to come or one last gasp before things get worse? Right now it is hard to say. Until we see either a breakout to new highs or a breakdown of key support, we should characterize the current market as range-bound.

Several aspects of today’s market activity seem to defy common economic sense, although one should not read too much into the activity of any one individual day. With persistent interest rate fears, a weakening dollar, skyrocketing fuel prices, and some indications of inflation on the horizon, one would not normally predict a rally for stocks. A rally, however, is exactly what we had toward the end of the trading day. Particularly strong were the technology stocks, which are the undisputed leaders of the markets.

Over the past week or so the Nasdaq has looked stronger than the other indices and is now very close to a new record high. We are currently just under 23 points below the record, and up over 30% year-to-date, while the Dow is up about 20% and the S&P is up about 10%. We may be seeing the beginning of an autumn rally in techs, which we have seen the past three years, although the autumn rally usually begins later in the year.

Looking closely at the situation we can come up with a few possible explanations for today’s rally. First, tomorrow at 8:30 AM we will get PPI figures for August. The consensus calls for a .3% increase with an unchanged core rate, which excludes food and energy prices. The Fed looks closely at both these figures and CPI data to assess levels of inflation. It is possible that some money managers and traders are betting on a lower figure (or a non-inflationary number), which could cause the market to take off tomorrow and next week. Thus, today’s late day rally is merely investors trying to get the jump on the rest of the crowd. It is definitely impressive to have a rally going into such an important number and at a time when there is so much uncertainty about interest rates and inflation.

Another possibility is that the ship of the world’s largest economy (a.k.a. Abby Cohen’s supertanker theory) has built enough momentum to propel it through the relatively minor waves we have seen so far. It may be too difficult for a market this large, with over ten years of momentum building, to stop on a dime (we have had only two down years since 1987). Even if inflation is on the horizon, it might take some time before it has a major affect on stocks. Some analysts are attributing the recent tech move to a lack of selling pressure than a sign of major strength. Many of the same analysts look at charts and see a dangerous head and shoulders formation in process, which if correct would indicate at east a short-term top. They are, however, in the minority. If this assessment is correct, we will have increasing upside resistance and more and more bad economic news as the ship turns around.

The Fed has not given us much meat to chew on this week, although several Fed members, including Mr. Greenspan, gave public speeches this week. Fed governor Edward Gramlich made some positive comments about inflation and productivity late today and warned against reading too much into comments by FOMC members, which may have been part of the reason the markets rallied. While the Fed has been tight-lipped, most everyone assumes the Fed to be fairly hawkish, ready to raise rates if much of the upcoming economic data smells of inflation.

Several things kept the morning fairly light and uneventful. Oil prices are nearing 2 year highs with many analysts predicting $25 a barrel of oil. The dollar dropped to a three- year low against the yen today, and a weak dollar means more expensive imports. The CRB index is high and it was another down day for bonds. These factors kept stock prices moderately lower, but the afternoon attracted much more volume and pushed the major indices up. Some of the downtrodden sectors, financial stocks - worried about interest rates and the weakening dollar, transports - worried about oil prices, and healthcare stocks - worried about being under investigation, weighed on the markets, although rebounds at day’s end could indicate some bargain hunters are jumping into the market, believing these sectors are now at attractive levels.

The Nasdaq, on the other hand, enjoyed a relatively good day all day, rallying strongly and with good volume toward the close. Speaking of volume, we are seeing a seasonal post-Labor Day rise in volume that could be seen as a positive for the market. The Nasdaq traded over a billion shares today and NYSE volume was up about 83 million shares from last Thursday. For several weeks both the Nasdaq and the NYSE languished with below average volume. The increased volume could help push the averages enough to get to new highs. Money managers have to put that money to work sooner or later.

Among individual sectors, Internet and computer stocks were strong with positive comments by analysts and forecasts of strong computer demand both domestically and worldwide. The Interactive Week Internet Index was up 2.36% and AMEX Computer Index was up 1.8%. IBM was up 4 points on the news and HWP gained 4.13 by the end of the day.

As mentioned earlier, the energy sectors were strong, with the Oil & Gas Index up 2.41%, while banking and pharmaceuticals were weak. The PHLX KBW Bank Index was down 1.4% on worries over the weak dollar and rising interest rates. The AMEX Pharmaceutical Index was down .4%, with American Home Products under investigation by the government.

In perhaps the most surprising development of the day, the airline stocks made a strong rebound near the close. After a miserable stretch with higher oil prices falling stock prices, most airline stocks were up strongly today, even as oil prices rose. The AMEX Airline index rose 4.7%. At least part of the jump can be attributed to an internal report by PaineWebber which pointed out that airline stocks were down about 34%, the third largest non-recessionary decline in decades, making the sector a value play. It may, however, take awhile before airlines can get anywhere close to new highs.

The 30-year Treasury bond fell more than 1/4 point, closing with a yield of 6.09%. As the yield inches higher it will put increasing pressure on stock prices as bonds become a more attractive investment.

It goes without saying that tomorrow’s PPI figures are very important to the market. Because it is the Producer Price Index, any inflationary pressures here are likely to show up later in the CPI or Consumer Price Index. An unexpected result on either side could push the market strongly one way or the other. Overseas markets, interest rate uncertainty and possible inflation make current market conditions somewhat muddled. The best advice for now would be to keep your stops fairly tight and stick with the winners. It might be wise to wait until the market chooses a direction before adding new money to the market. Although a lot of traders are hoping for the PPI tomorrow to point that new direction skyward. One thing we can probably be sure of is a triple digit move in the Dow. We’ve been trading in a very narrow range (almost 100 points) all week long. Investors are ready and they want to focus on 3rd quarter earnings, not another Fed rate hike in October. Overhead resistance for the Dow is likely to be at 11,300 and support down near 10,800. Of course, if the PPI is favorable we could easily see a new high on the NASDAQ tomorrow. Remember, trying to pick a top or a bottom is risky and listening too closely to analysts can make one dizzy, so choose carefully and sell too soon.

Chad
Research Analyst

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