Dow -.64, just another boring day in the market!
If you just checked the closing stats when you got home tonight then you probably thought it was a really slow day. If you explored further you would have seen a really wild ride for those with open positions. The Dow was up +109 points before the conclusion of the FOMC meeting in anticipation of no rate increase. At 2:15 when the Fed did announce there would not be a rate increase now but they were changing the bias to a tighten stance the market dropped -232 points to a low of 10277. Considering we were over 10500 at the high, it was a substantial drop to support.
As you can see by the Dow chart above the 10300 line, which had been upward resistance for us all last week, became support for us today after the Fed reaction sell off. The Nasdaq showed the same trends and bounced off 2765 which had been previous resistance. These are good signs but the market still has some challenges to move upward from here.
So why did the market crash when the Fed did just as everyone expected. We view it as a buy the rumor and sell the news event. Yes, most analysts expected the bias change to tighten in formal statements but in their hearts everyone wanted a continuance of the neutral status and a green light to move ahead. The bias change was a reality check for many traders. Too much bullishness clouds your expectations. (I know from experience!) The bias change means that the Fed can pull the trigger on another rate increase at any time. For example, if the jobs report came in too strong on Friday then Greenspan could simply make the rate announcement with no warning. The FOMC tried to blunt this threat by saying in their announcement that a change in the bias to tighten "did not commit them to action in the future." Just changing the bias does not necessarily mean they are planning to raise the rate. Essentially this is like raising a guillotine over the market and daring anyone to put their head in it.
Now, without actually raising rates, the Fed has put a cloud of uncertainty over the market. They have taken a position where they can say "we didn't do it" if the market crashes, but they can also take credit if the economy continues to slow. It is a win-win for the Fed and pain in the neck for us. Bond yields spiked up to 6.18% today and every point it moves higher will cause more Y2K cautious investors to consider bonds instead of stock.
I know you have heard this before but the next 10 days will be very critical in the market. We are very close to the beginning of the end if the Y2K problem is going to cause a sell off. If it is going to happen it could start anytime. Investors who wanted to get one last earnings cycle under their belt before moving to the sidelines could start selling into the earnings rallies. We are also entering the October Zone. October has not been kind to investors. In 1998 we hit the bottom on Oct-8th after the market was rocked by the Japan crisis. The market then rallied strong from the Oct-8th low of 7472 to 9645 in the first week of January. A whopping +2200 point gain. The market low in Oct-97 was 6970 and occurred on the 28th of the month. We then rallied +1200 points into the first of December when we were hit with another drop. Still, the case in point here is the tendency for October to host short term market bottoms followed by strong rallies into January. This is the RECENT NON-Y2K trend. What will actually happen this year is anybody's guess. Our challenge is to trade any rally while constantly looking for signs of investors moving to the sidelines in time to capitalize from it. There is also a group of analysts that think the Y2K cloud will actually provide an increasing three month wall of worry that will actually fuel the market into solid gains between now and the end of the year. The latter scenario now must carry the additional weight of the possible rate increase.
In other news oil prices fell for the second day in a row amid fears that an upcoming meeting of three key oil ministers would cause changes in global oil output. This put pressure on oil stocks again but is a long term plus for the market. High oil causes higher consumer prices on thousands of products and adds to inflation.
MCI Worldcom announced today that it would buy Sprint for $115 billion in stock. This would be the largest merger in history but it could be years before it happens, if at all. A government spokesman said it would be anti-competitive and there are sure to be many legal hurdles to the transaction.
AAPL announced a new sub-$1000 iMac today to launch their bid into that market. AAPL stock soared +3.36 on the announcement and the news that the Taiwan earthquake damage had been repaired and computers were again shipping.
AOL rocketed for a +4.38 gain after announcing a major software upgrade that would allow users to connect in more ways than before. Micron (MU) jumped +5.69 after posting better than expected earnings. Not all news was positive today. Haliburton issued a profit warning and fell -6.06. Dropping oil prices are worse than a Y2K virus to oil service firms.
Where to from here? I view the market rebound from the -123 low at 3:10 as a positive sign. The market still wants to go up. There is money on the sidelines that doesn't want to miss any possible rally. Tomorrow should give us a clue to the market direction. Remember, we were very oversold going into this week and some of that pressure was removed with yesterday's +128 gain. We are now starting the fourth quarter and the score is tied to use a football analogy. If we can get to Friday's Jobs Report without a major sell off AND the Jobs Report is not strong enough to trigger the Fed then the weight of the interest rate cloud will lighten. Even though the NYSE finished at a break even the advance/decline reversed its gains from yesterday and turned negative again. Many analysts feel we still have not had a cleansing sell off and are waiting for another big drop before moving back into the market.
Obviously no one has the answer. A good plan for entering the market today would be to average your buys. Open only one half or one third of the position you eventually want. As the trade progresses you can decide if you want to hold, or add to it the remaining contracts. If it goes down on a market dip you can enter the rest of your position cheaper and average down. The only worry here is a continuing declining position. Please reevaluate your decision based on current research before entering the rest of the trade.
This is a great market for target shooting. The big swings give you opportunities to buy options at 25-50% less than the highs of the day. I target shot CMGI puts on Monday by placing five different orders before the open at different increments below the then current price. I got filled on four of them and one was the low of the day. These big spikes work well on profit stops as well. There is nothing wrong in setting multiple sell stops and taking some profit off the table along the way.
Pick your entry points carefully until you are sure of the market direction and sell too soon.