Option Investor
Market Wrap

Will he or won't he? Only Andrea Mitchell knows for sure.

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        WE 11-12         WE 11-05         WE 10-29         WE 10-22
DOW     10769.32 + 64.84 10704.48 - 25.38 10729.86 +259.61  +450.54
Nasdaq   3221.15 +119.95  3102.29 +135.86  2966.43 +149.88  + 84.69
S&P-100   731.09 + 12.29   718.80 +  1.77   717.03 + 31.40  + 33.88
S&P-500  1396.04 + 25.84  1370.23 +  7.30  1362.93 + 61.28  + 88.12
RUT       449.69 +  7.28   442.41 + 13.77   428.64 + 10.22  +  3.99
TRAN     3089.57 + 85.58  3003.99 - 54.99  3058.98 +195.83  +  7.67
VIX        21.68 -   .38    22.06 -  2.50    22.56 -  0.33  -  8.59
Put/Call     .51              .51              .55

Will he or won't he? Only Andrea Mitchell knows for sure.

Only a week ago the Down gained +263 points from Thursday's lows to Fridays high of 10843 to lift the Dow out of a week long slump. The Dow would have finished much closer to the magic 10800 number if Judge Jackson had not announced the pending Microsoft verdict which weighed heavily on the market to drag it back down to close at 10704. This Friday the market spiked at the open on favorable economic news only to be quickly drawn back down to test the low for the week for the third time on news that Merrill Lynch had downgraded Intel, a new Dow component. Microsoft also weighed heavily on the Dow with an opening drop based on numerous class action suits being filed in light of the monopoly verdict.

The Dow had not been participating in the Nasdaq rally and had lagged downward all week. The different news events all week created a triple bottom retest of the 10600-10550 support. 10600 was the previous baseline and we successfully fought off the intraday sellers the last three days. The break down and recovery today covered a 227 point spread from the almost exact bottom to almost the exact top of our recent trading range.

By looking at the longer scale you can see the Dow clearly locked in the trading range while we wait for all the economic reports and the Fed meeting climax. The Nasdaq sold off at the open on a combination of events. The downgrade of Intel, the class action suits on MSFT and a major trading error by a major New York brokerage company. Even with the INTC, MSFT and DELL anchors the Nasdaq successfully rallied back into the trading channel and even closed above 3200 for the first time.

The rumor making the rounds had a broker buying 2,000,000 S&P and 2,000,000 QQQ (Nasdaq) for their customer. Shortly thereafter the broker realized the customer meant $2,000,000 not 2,000,000 shares and had to dump it back into the market. Because nobody knew what was happening the markets thought there was mass selling and the dip was dramatic. The Nasdaq was down over -70 points on great economic news. Was that fear we smelled briefly? Probably so for those riding huge gains from the last two weeks but they went home happy when the day was done.

With only one trading session remaining before the Fed meeting there were no indications that anyone wanted to cash in their chips. Unless of course you were holding QCOM at +45 for the day just before the close. There was a panic drop from $394 to $372 as the daytraders ran for cover but there was no real selling. UNBELIEVABLE! Only 12 days ago QCOM was trading at $202. JP Morgan raised their price target today from $315 (duh!) to $460 and said good things about the company. $460, Tuesday, Wednesday maybe? If/when this thing turns it is going to be very ugly. I tried to short QCOM on the morning drop and the shares were not available. Wonder why? Did everybody else have the same idea?

Meanwhile, back in the real world, the Nasdaq did set another record high on the fourth largest volume day ever. (2nd fourth this week) As I have said before, rallies on strong volume are very hard to stop. If we see the upward momentum slow but the volume remain high then we could be nearing the top. In spite of the daily positive gains the Nasdaq is beginning to draw more flys than praise. The background whispers of worry by veteran traders are starting to become a roar that could prevent us from going much higher without a rest. The contrarian view however would point to the unrest as an undercurrent of fear that will propel the Nasdaq even higher. Even though the law of gravity has been repealed in the case of QCOM, the last fool theory is still alive and well.

Just the facts. The productivity numbers came in much higher than expected this morning with an increase of +4.2%. The Goldilocks economy is still alive and well! The unit labor costs came in much lower than expected at +.6%. To summarize, we have the tightest labor market in 30 years, the highest productivity and the lowest increase in labor costs since 1998. Add to this the Retail Sales from October coming in unchanged and you have a recipe for the Dow rally. After the Intel and Microsoft induced dip at the open, the DOW powered forward to start tacking on some gains. There was a brief pause during the early afternoon while President Clinton spoke and signed the Financial Reform Bill. I think everyone was holding their breath hoping that he would not make a grandstand play and announce some new economic reform/tax/spending proposal while he had everybody's attention. Once it was all over the banks exploded on the possibilities for new business and acquisitions. The large gains by Dow components AXP +8.50, JPM +6.56 and C +2.75, made up for the Intel downgrade loss. Bonds soared on the economic news and the yield dropped to 6.03%.

All the preliminaries are almost over and we are ready for the main event. The $64 billion question is "will the Fed raise rates on Tuesday". Or in reality, do we care? Some analysts say this is the closest decision they can remember. The sides are evenly divided and each has some very good arguments.

FOR: Greenspan has said repeatedly "productivity cannot continue to accelerate forever and the end result will be inflation." Although the most recent economic reports may indicate the economy may be slowing it is still growing at an alarming rate. (for the Fed) This is the last chance to take back the third rate cut from last year before February 2000. The next Fed meeting is Dec-21st, only a week before Y2K. Failure to raise rates will make all the Fed lions look like paper tigers after they have warned us all year. The Fed wants to get back to a pre-emptive stance instead of a reactive stance. The runaway market is a sore spot for the Fed and even though they say publicly that they won't raise rates "just to burst the speculative bubble" it does remain a strong supporting reason.

AGAINST: What inflation? Labor costs flat. Productivity up. Inflation nonexistent. The Fed has been strangely quiet for the last several weeks. Normally the Fed heads drop hints in their weekly speeches about their mindset so a raise will not catch anyone by surprise. There have not been any notable remarks in recent weeks. Three steps and a stumble. As the saying goes, three rate hikes historically causes a stumble in the markets. The Fed does not want to do anything this close to Y2K to rock the markets. Actually, by not raising rates, some feel that the cloud of rate speculation may help keep the market in check. (Sure, just like the last two weeks speculation held the Nasdaq back.)

My position: They will because they can get away with it. This is the last time they can justify a hike before February. The market is in strong rally mode and a hike is already priced in. If they do not raise rates the market will explode like an F15 on after burner. There will be a six week party in the markets instead of Y2K caution. The $2 trillion in cash on the sidelines will be fighting for the same high flying stocks. In reality this is the best of all possible scenarios. They do not raise rates, we party. They do raise rates, we moan and groan and then party a day later. They get a rate hike for free. Almost all the analysts think we will see at least three more rate hikes next year to slow down the +5% growth in the economy. A hike now makes them even from the three cuts last year and puts us back to square one. Next year can start out on a level interest rate policy and the Fed will feel more comfortable.

Not only the Nasdaq and the Dow are poised to breakout even higher, for once the broader market is also coming along for the ride. This chart shows the Wilshire 5000 Total Market Index close to a new all time high.

To be fair the contrarian view would show the DOW, NASDAQ and Wilshire 5000 dead on their upper resistance and did I mention that the VIX closed under 22 again? Breakout or break down, we are only ten trading hours away from the answer.

The tension is mounting. The fuse is lit. The countdown has begun. What are you going to do Mr. Greenspan? You can come out of the FOMC meeting as a cheerleader or a party pooper. Don't take that special invitation on Friday to the signing table by President Clinton as a guarantee to be re-appointed. A major market disaster could decide your fate sooner than you expected. If you are nice to the markets maybe Andrea Mitchell (Greenspan's wife and MSNBC reporter) will start going by Andrea Greenspan instead of her alias.

Speaking of Y2K, there is another rumor making the rounds that the majority of the major fund managers have agreed to go dark the last two weeks of December. They will neither buy nor sell in that period to avoid complicating the already very low volume that is expected. While that may be a good idea, if you believe it will actually come to pass then I have some lake front property in Death Valley I would like to sell you. The greed factor is alive and well and most fund managers will be positioned to take advantage of any year end volatility instead of avoid it.

We received a ton of email on the "Ask the Analyst" section last week. Thank you, thank you, and thank you. This section is going to be very popular. Check it out every Sunday and send us the stocks you would like us to research for you. Send them to Contact Support.

The Entry Point educational article last Sunday was also well received. Numerous emails said it was like a fog had been lifted and now they could see for the first time what we meant about picking an entry point. This week the topic is "Fishing for Profits". It is only on the website because it is too big to email.

Also please check out the "State of the Art Stop Losses" article as well for the best answer I have found to the stop loss problem.

With the Nasdaq in nosebleed territory, the Fed meeting on Tuesday and CPI on Wednesday, pick your entry points carefully and sell too soon. If you are not out of November options yet, you should get out soon. They expire on Friday.

Jim Brown
Editor

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