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Market Wrap

What Was Everyone So Worried About?

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        10-28-99           High     Low    Volume Advances Decline
DOW    10622.50 + 227.60 10637.70 10397.70 1,135,150k 2,194    883
Nasdaq  2875.22 +  72.70  2875.48  2830.24 1,245,806k 2,363  1,644
S&P-100  704.21 +  20.40   704.26   684.29    Totals  4,557  2,527
S&P-500 1342.44 +  45.73  1342.47  1298.06            64.3%  35.7%
$RUT     422.81 +   6.31   422.81   416.76
$TRAN   3013.11 +  94.41  3013.81  2920.39
VIX       22.45 -   3.86    23.53    21.85
Put/Call Ratio       .58

What Was Everyone So Worried About?

One look at the closing numbers for the stock market is all it takes to know how this morning's ECI and GDP numbers came in. Traders were waiting for those to reports before deciding what to do and judging by today's very strong upward push they liked what they saw. The much-anticipated results say a lot about the strength of the economy, which is truly impressive. The Gross Domestic Product report showed that for the third quarter the GDP grew at an astounding 4.8% annualized basis, which is much higher than the 3.7% and 1.9% reported in the first and second quarters and higher than the 4.4% expectation. That kind of growth is almost unheard of, particularly when you combine it with the relatively low inflation and interest rate environment. The ECI, or Employer cost index grew 0.8%, down from the 1.1% growth reported during the second quarter and lower than the 0.9% economists had expected. That kind of economic growth combined with low inflation is a very good sign. The weekly jobless claims report also came in today and the readings were the lowest they have been in over a month.

While these types of data are just small snapshots of the economy, they basically tell us that productivity and earnings are growing while expenses are growing at a much slower pace. It doesn't take a genius to figure out that is how wealth is built. Numbers, however, don't always tell the whole story and in many cases inflation often does not show up in reports until months after the fact.

Those who were trying to make a short-term play on the economic data this morning by putting in buy orders might have been a little disappointed by what they paid. As the market opened it shot up 150 points before options even opened for trading. Many stocks gapped open much higher than they closed so much of the opportunity for getting in the market was gone. After the first hour or so the indexes traded pretty steady for the rest of the day. It is notable that the higher prices did not attract any significant selling any time during the day. The following hourly chart shows how far the Dow has come the last two weeks.

The Dow closed at 10,622.53, up a very strong 227.64, or 2.20% and the NASDAQ finished the day at 2875.22, up 72.70, or 2.59%. If you look at the "new" Dow which will begin trading on November 1, the Dow would have been up 273 points. A couple of days like this and the NASDAQ will again be at record levels. In a turnaround the formerly under performing S&P 500 put in the strongest performance of the day. It jumped 45.73 points, which is 3.53%, to close at 1,342.44. I did not want to even go back and find the last time the S&P had a one day move that big. Just a couple of weeks ago the S&P had only risen about 3% on the year.

Even more than the actual point changes in the indexes, internal market data tell the story of just how strong today's move was. Volume on the NYSE was the heaviest it's been since June at 1.13 billion shares traded. The NASDAQ hit 1.2 billion and what makes the strong volume interesting is that about 83% of today's volume was focused in rising stocks. Advancers beat decliners about 21 to 9 on the NYSE and about 3:2 on the NASDAQ. The new high/new low data has greatly improved from a couple of weeks ago. New lows still lead on the NYSE, but their lead has narrowed significantly. The tally for today was 122 to 72. A few weeks ago that new high figure was in the single digits and new lows topped 500. It is apparent that most stocks are off of their lows. On the NASDAQ the new highs lead 121 to 116.

It would take too much space to list all of the sectors that performed well today, but the clear winners were the financial stocks. The positive economic numbers and the drop in interest rates today put banking stocks in higher demand than Pokemon junk at an elementary school. Big banks such as American Express, JP Morgan and Citigroup all made big moves and closed near 52-week highs. The PHLX/KBW Banking index rose an eye-popping 6.3% and is up about 20% from its recent low 8 trading days ago. Brokers fared even better with the AMEX Broker/Dealer index rising 8.3% in one day.

Telecommunications and semiconductor stocks were not far behind, with the PHLX Telecom index rising 5.2% and the SOXX index up 5.9%. The CBOE Software rose 3.9% and retailing stocks bounced back from a rough Tuesday, finishing up 5.2%. The Internet sector lagged a little, with TheStreet.Com Internet index ascending a mere 1.8% (a very good day most of the time).

So did anybody (aside from those holding short positions) lose money today? Sort of. The Oil Service index fell about 2.8% and the PHLX Forest and Paper Product index fell .3%. The only sectors that suffered were in commodity arenas, which normally do better in more inflationary environments. Other than that most every sector index is up for the day.

Several more important earnings announcements came in today. Proctor and Gamble met estimates at 88 cents per share, meeting expectations. The Street must have liked that, since the stock rose 5.4%. MCIWorldcom announced results that tripled last year's figure, beating estimates by a penny, and CBS beat estimates by a cent, with income of 5 cents per share. As we have mentioned in earlier market comments, earnings this quarter have been spectacular, with only 11% of companies falling short of expectations and about 65% of companies exceeding estimates.

Bond prices got a huge boost from the GDP and ECI numbers as well. The yield on the 30-year Treasury bond fell to 6.25%, after hitting 6.4% on Monday, and the price rose over a point to 98 9/32. That kind of action eases the minds of both stock and bond traders, causing some analysts see a possible light at the end of the tunnel. Of course when it's been dark for a long time your eyes can play tricks on you. Time will tell.

Most analysts are now expecting the Fed to raise rates another quarter point when the FOMC meet again on November 16. They have already raised rates twice this year and one more would neutralize the three rate cuts the Fed made last year. The good thing about the current situation is that with most everyone expecting a rate hike, that is already priced in and if they surprise us it will only help. It's hard to disappoint someone with low expectations.

Going forward the market outlook is much more positive than it was just a week ago. From a technical point of view yesterday's late-day turnaround and today's big spike upward on huge volume makes a better bullish argument than bears would like. It is definitely too early to sell all of your possession and load up on tech stocks, but after October ends the fourth quarter is typically a good one. The S&P 500 broke out to the upside of a trading channel formed in July. While you never know for sure a market bottom is in place until after the fact, support levels have held and today was one of the strongest days in recent memory. At these times it is still good to keep stops tight because there is still downside risk, but the bulls seem to be taking control.

Good luck and happy trading

Chad Poulson
Research Analyst

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