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Market Wrap

Ready, Set, Hike!

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       11-16-99            High     Low    Volume Advances Decline
DOW    10932.30 + 171.50 10937.80 10757.40   942,260k 1,787  1,256
NASDAQ  3293.05 +  73.51  3295.52  3219.54 1,470,038k 2,244  1,810
S&P-100  742.89 +  14.13   743.16   729.23    Totals  4,031  3,066
S&P-500 1420.03 +  25.64  1420.36  1395.62            56.7%  43.3%
$RUT     456.88 +   3.91   456.88   452.97
$TRAN   3099.67 +  35.01  3102.47  3063.08
VIX       21.42 -   1.43    23.54    21.16
Put/Call Ratio       .50

Ready, Set, Hike!

Just another boring lazy day on Wall Street, until 2:17 PM ET. Yes, the Fed used their "get out of trouble free" card and took advantage of the strongly bullish market to raise both the Fed Funds rate and the Discount rate by +.25% each. The raise was accompanied by some statements that had traders running in circles and the Dow traded in a 175 point range after the announcement.

Immediately after the news the Dow spiked up to almost 10900 or +135 points. Then the actual wording of the release was made public and the Dow dropped as low as 10758 or -3 points in less than five minutes. After analyzing the release traders felt that in spite of some frank words, the Fed was probably on hold until next year. The markets started recovering almost immediately and the Dow made an incredible run to close at 10933. This was the first close over 10900 since Sept-14th.

The Dow finally broke out of its trading range and pierced the 10800 barrier. Can resistance become support intraday? Sure looks like it here with the afternoon pull back stopping dead on 10800 before the rebound.

The NASDAQ also soared to yet another record and closed near the 3300 level at 3295. This NASDAQ run is incredible and it appears as though it will never stop. The NASDAQ is up over well over 50% for the year. The only other year the numbers came even close was 1991 with a +56.8% gain. Traders are becoming very concerned. In reality the NASDAQ is up over 68.9% in the last twelve months. The Dow only +19.9 and the S&P +22%. I think traders are not taking into consideration that the new Internet economy is driven by NASDAQ stocks. Old paradigms do not apply. Eventually this soaring growth will slow but not as long as the Internet is exploding. After making those bullish comments I will point out on the chart below that we are at the top of the regression channel and could see a real pull back at any time.

The big news of course was the Fed meeting and the rate hike. It appears the Fed bears have gone back into hibernation for the winter. They did all the damage they could do with the hike on both rates. They did revert the bias back to neutral although this is basically meaningless. The language they used gave some comfort to some traders. Things like "final take back of previous easing" would sound like a posture away from future rate hikes. Today's rate hike, coupled with the two previous hikes, should "markedly diminish" the inflation risk going forward. But the Fed always talks with a forked tongue and finished the release with the following warning. "This expansion of activity continues in excess of the economy's growth potential" and there are "a persistence of risks to sustainable growth" which means they will take steps in the future to slow the growth below the current +5% rate. You know Alan did not want the markets to rocket forward and that verbal anchor was all he had left to use. Most analysts are now looking at March as the next rate hike. In reality the Fed did the best thing for the markets. By raising the rates now it takes out the possibility of a rate hike in December and gives us 3-4 months without a major rate hike problem.

The interest rate sensitive stocks soared on the news. This is normally contrary to the event. Rate hikes normally drive down financial stocks but the outlook for no hikes in four months has put a calm over the markets. JPM +3.88, MER +5.13, MWD +6.19, AMTD +4.56.

The volume on the NASDAQ was very high again but today will not go down in the record books. About 15 min before the close the NASDAQ experienced a technical break down and about ten minutes of trades were either delayed or lost. Traders were unable to get executions during that period.

According to all indicators, the market is now in overbought mode. All the news is good and there is no bad news expected. All the arrows are green. This should worry most traders. When everything is too good too be true, you should start looking over your shoulder. The next challenge is the CPI tomorrow and after raising the rates today the Fed is out of ammo should the CPI come in much higher than expected. The Industrial Production this morning did come in much higher than expected but it was a non-event. Bonds initially soared with yields dropping under 6.0% temporarily but then rising again to 6.6%. Seems they were not convinced. $25 oil is going to continue to impact inflation but it is being ignored. Up volume has been substantially stronger than down volume and the advance decline line is improving.

Several Dow stocks soared to new highs or very close to a new high. GE $139.44 +4.13, C $58.19 +2.13, MMM $101.13 +3.69, JNJ $106 +2.63. Stocks were splitting like popcorn today led by some high flying Internets. ARBA 2:1 $215.56 +6.63, JNPR 3:1 $328 +45, BEAS 2:1 $72.50 +1.38, NTAP 2:1 $103.50 +13.56, ATML 2:1 $46.50 +2.44, and NTRS 2:1 $101.25 +2.56. The S&P set a new closing high at 1420.03. The old high was set back on July 19th.

So what should we expect now? I am being cautious. The VIX dropped to 21.42 at the close which could indicate an overbought condition and imminent profit taking. I am out of the market except for some OEX puts I bought at the close. With the Dow up +400 points from Friday's low and the NASDAQ up +500 points since Halloween, without a pause to refresh, we are over due for trouble. I am afraid we could have a "buy the rumor, sell the news" event later this week. The CPI report tomorrow could be the trigger for this but in reality I think it would have to be very bad to cause any trouble. The market is in rally mode and is showing no weakness. Until it does we should ride the trend. There is money coming into the market from all directions. A rumor reported on CNBC at the close had one European money management firm buying the S&P to the tune of $1 billion. That is a person I would not want to play poker with. Until we do get another buying opportunity I am going to be very careful about my entry points and get out quickly. It seemed like every stock I looked at today had spiked $8-15 in the last couple of days and those gains have to hold before we buy them.

Good Luck, Sell Too Soon.

Jim Brown

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