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Market Wrap

Warnings, witches, warlocks and hurricanes

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         WE 9-17          WE 9-10           WE 9-3          WE 8-27
DOW     10803.63 -224.80 11028.43 - 50.02 11078.45 - 11.72  - 10.44  
Nasdaq   2869.64 - 17.32  2886.96 + 43.85  2843.11 + 84.21  +110.57  
S&P-100   704.96 -  7.83   712.79 -  1.10   713.89 +  5.92  + 11.38  
S&P-500  1335.42 - 16.23  1351.65 -  5.59  1357.24 +  8.97  + 11.66  
RUT       434.46 -  6.73   441.19 +  5.22   435.97 +  3.52  -  1.93  
TRAN     2999.79 - 91.04  3090.83 - 66.07  3156.90 - 14.45  + 20.62  
VIX        24.22 +  1.87    22.35 -   .96    21.39 -  1.82  -  0.85  
Put/Call     .67              .52              .57              .73

Warnings, witches, warlocks and hurricanes

Sounds like a new action movie from Steven King but it pretty well sums up the action for the week. The good, the bad and the ugly came in the form of earnings warnings and downgrades from some big name companies. The big names from earlier in the week were followed on Friday by a downgrade on IBM but the market seemed to say "enough is enough." A Merrill Lynch analyst cut growth estimates on IBM hardware revenues from +6% to +4% and IBM dropped -$5 on the news. IBM is a Dow component and the drop took -25 points off the Dow at midday. HWP was caught in the same downdraft for -$3 to take another -15 points off the index. The Dow had been up +120 points at midday after a terrible first four days this week.

Triple witching option expiration Friday was credited with some of the big swings on Thr/Fri and we are likely to see some carry over into Monday. This option cycle was somewhat more rocky than most. September is normally considered the worst performing month of the year and many traders take negative positions in anticipation of a market drop. Don't look now but we are only trading -25 points from where we started the month and most of the last two weeks was spent over 11,000. Not exactly a down month in anybody's book. With the exception of the the first four days of the week the market has been holding it's own very well. In fact the Nasdaq is only 30 points from a new high. Not too shabby!

The Fed warlocks tried their best to curse the bull this month but their fire and brimstone speeches are impacting the market less and less. Prosperity is still breaking out all over and inflation is still weak at best. We had a benign CPI, soft August jobs and on Friday a drop in housing permits. All market friendly events. The drop in housing permits should mean a corresponding drop in housing starts in the coming months. This means the interest rate hikes and their impact on mortgage rates is having the desired result of putting the brakes on the economy. An article in the Washington Post on Friday by John Berry was very positive that the Fed would not raise rates at the Oct 5th FOMC meeting. (full text of article) The market celebrated with a resounding bounce off it's Thursdays lows. Some Fed watchers think the Fed has moved from a pre-emptive stance to a reactive stance. Instead of acting in advance of inflation the Fed appears to be reacting to the actual appearance of inflation in economic reports. This is a major change in Fed policy and could mean a more erratic Fed policy in the future.

Hurricane Floyd caused only minimum disruption in the market with flood related problems. The flood of negative earnings warnings caused more damage but even so the expected third quarter profits are still very strong. The quantity of earnings warnings was much more than expected but many of the warnings came from non-S&P-500 companies and have no impact on the +20% or so profits expected in the third quarter. This 20% profit growth will not be lost on investors and in fact is probably what is holding the market so close to record levels. I still look for the market to rise into the October earnings cycle but the next hurdle will be the earnings from banks and brokers next week. These will be scrutinized for signs of weakness and then factored into the October outlook.

Alan Greenspan spoke before the Presidents Council on Y2K Friday and he basically said he was not concerned about the problem with computers as much as he was concerned with the actions of the public in preparing for the possible disruptions. (text) This is what I have been saying for over a year. There may not be a crisis at all on 1/1/2000 but the worry by the investing public is the real problem. I talk to more and more people every day that are moving out of stocks and into money market funds. The thought is simple. Yes, we could lose another 5-10% profits in the stock market if the sell off never materializes but that is lost "profit" not lost "money". If the sell off in the market DOES start in October then Dow 9000 is easily possible. Better safe than sorry appears to be the plan and I have yet to speak with anyone who plans to keep all their money in the market and ride it out. The exception to this is of course those who would suffer a substantial taxable event by selling. If your own Dell at a cost of $5 or MSFT at $10 then it is best for you to ride out any dip and hope for a quick rebound in January. There are many funds that will take advantage of any rally over the next three weeks to sell into strength and hope for the mother of all blue light specials in December to open new positions at a significant discount. Check out the great article in today's newsletter on Y2K by one of our editors.

Speaking of mothers, the mother of the bull rally, Abbey Cohen, came out and restated her bullish stance again on Friday. She feels the current worry about another Fed increase in October is over blown and even if they do raise rates she feels it will be the last for some time.

Probably the best news on Friday was the rebound of the dollar against the Yen. The dollar posted a +2.03 gain against the Yen and closed at 107.13. Abbey Cohen thinks the dollar slide is actually positive long term since it means the global economy is improving.

Note the Advance/Decline line stopped skidding. Temporary?

The Nasdaq is only a few ticks away from another new high.

My outlook for the week is positive. The Yom Kippur holiday on Monday is sure to wreak havoc on volume again. There are no economic events of note for the week so interest rate worries are likely to subside due to lack of new data. Traders should be cautious long term since we only have three more weeks before the start of the October earnings cycle and a possible market event. Make your planning short term and go with the flow.

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A parting thought. You have seen those ads that say "there are only xxx shopping days until Christmas" well in case your interested there are only 71 trading days before Y2K.

Pick your entry points and sell too soon.

Jim Brown

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