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Market Wrap

Thank you Hewlett-Packard !

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        11-18-99           High     Low    Volume Advances Decline
DOW    11035.70 + 152.60 11054.30 10886.10 1,022,810k 1,508  1,525
Nasdaq  3347.11 +  77.72  3347.11  3288.68 1,585,102k 2,326  1,733
S&P-100  749.11 +   9.94   749.98   740.40    Totals  3,834  3,258
S&P-500 1424.94 +  14.23  1425.27  1412.61            54.0%  46.0%
$RUT     462.04 +   4.97   462.04   457.07
$TRAN   3018.16 +  14.03  3020.13  2968.64
VIX       20.10 -   0.97    21.99    19.99
Put/Call Ratio       .47

Thank you Hewlett-Packard !

The markets soared today on the back of HWP. It was really hard typing those words. I can't remember when HWP has done anything good for the markets with an earnings announcement. They have often been the spoiler, not the charger. After beating reduced estimates last night by +.02, which was not a barn burner quarter, they had a fairly upbeat outlook. That coupled with the spin-off IPO of Agilent this morning sent HWP stock up +13.31. The biggest driver here was the Agilent IPO. HWP sold about 13% of the company and the share price soared this morning after being priced above expectations already. The single character IPO, "A" is the symbol, hit $50 at the open and settled to $42.44 at the close. This values the 452 million shares HWP kept at almost $20 billion. This was a huge windfall for HWP and their shareholders.

The Dow had actually opened with some weakness but after HWP began trading the Dow jumped to +125. After two attempts to sell off during the day the last hour disconnected from bonds and soared to close over 11,000 for the first time since Sept-13th.

On the surface the markets look like there is no upper limit. The Nasdaq set yet another record day with only a couple of minor pull backs which were meaningless. The Russell-2000 is setting the world on fire. The small cap rally is keeping pace with the Nasdaq in consecutive higher closes.

The Nasdaq volume today was the second largest in history again. Market wisdom has always held that rallies on strong volume are the holy grail of investing. There is a catch. Yes, we have had a flood of volume but not in the normal historical perspective. The volume we are experiencing is due mainly to new market factors. The Internet IPO effect is pumping hundreds of millions of shares into the market each week. In recent weeks we have had over 20 IPOs per week. The minimum shares for each ranging around 5 mil and the upper limit 170 million in the Charter IPO. Considering most IPO traders flip their shares in the first week and some shares are flipped several times, the 100+ million new shares per week could amount to 300 million or more in new volume. The second cause is the China effect from the last two weeks. With the admission of China to the WTO stocks that were trading 100k per day in volume are now trading 5-8 million shares per day. Yes there is volume but it is not volume in the historical sense. The high volume rallies give the impression that the train is leaving the station without you on it and investors are racing to throw money at anything that is moving. The China effect is also impacting the small cap rally as well since most of the China stocks are very low dollar. Nasdaq volume has increased +35% in the last month alone.

The Fed bears met, raised rates and disappeared into the forest again until spring, right? It appears this is not so. Did anyone notice the disconnect between the bond and the stock market today? With yields rising to 6.17% today analysts were finally reacting to the parting shot in the Fed report. "growth in excess of what the economy can sustain" OOPS! Maybe they are not done. Maybe they really will raise rates in February without any look and see. The bond futures are slowly indicating an expected rate increase. How much longer until the market stops for a breath and sees the cloud forming over its head again?

The Nasdaq was up strong again. The S&P set another new record high. The Dow closed over 11,000 again with a strong +152 performance. Or did it really? Inquiring minds will want to know that 114 of the 152 points was due to only four stocks. The rest were only along for the ride. The four stocks were HWP +13.31, IBM +4.25, INTC +3.75, HD +3.06. We all know why HWP was up strong and IBM was up on a combination of the HWP outlook and the Intel news that PC sales were so strong they could not make enough chips. Home Depot was up on their split announcement. Only four stocks represented over 2/3 of the gains on news events. What happens tomorrow?

Who knows? I surely don't but based on historical norms I would say we are real close to some profit taking and possibly serious profit taking. At the risk of boring you with too many charts tonight I will state my case. The Dow, which had been range bound and dormant for weeks suddenly ran up +490 points in the last five days. By itself that would cause some alarm but we are also approaching some heavy resistance. The first at 11,100 then 11,200 then 11,325. This will be a tough obstacle course to overcome without building a base here or better yet pulling back some to get a better run at the next level.

You know the Nasdaq story. We had a 10% pull back in October then ran for +717 points in four weeks with NO PROFIT TAKING. You can't call the minor stops this week profit taking, they were totally inconsequential. Any way you look at the Nasdaq chart there is no support at this level. We are here on faith alone and the day of reckoning will come.

The Russell-2K has been blazing a trail the last three weeks. Investors, believing the year end rally had begun, simply bought anything with a pulse. The China effect also helped keep the small cap rally alive the last two weeks. Don't look now but we are entering a period of high turbulence. Fasten your seatbelts when we hit 465. We have failed to penetrate that level three of the last four attempts.

You knew I would get to the VIX eventually. The VIX fell below 20 today for only the third time since Oct 1998. This is a dangerous level. Every time we hit this in the past there was a corresponding market top. Remember the VIX does not mean the markets will blow off tomorrow but it does indicate the pressure is building. In reality it indicates a lack of pressure. A total complacency. Everybody is bullish. When everybody is bullish there is nobody left to buy. They have already bought. We all know what happens when the buyers dry up.

What is going to happen tomorrow? Who knows. History has a way of repeating itself and those who can't read are doomed to repeat it as well. I am not saying sell everything and take two weeks off. The only point I am trying to make is WE ARE IN NOSEBLEED TERRITORY and, as QCOM proved this week, the law of gravity has not been repealed. Just keep those stop losses close and don't buy every dip. The next one could be a killer.

Speaking of QCOM, those of you who were not able to react fast enough to the special trading alert we issued when QCOM reached $330 on Wednesday, had another chance at a killer entry point today. After a +$20 rally off the low yesterday, QCOM gave in to pressure again this morning and touched $330 again. Two perfect chances in two days. It just does not get any better than this. +$20 on Wed and then +$25 on Thursday from the lows.

Futures are flat as of 9:00 and tomorrow's direction is still up for grabs. My GUESS would be a follow through rally at the open followed by a slow fade in the afternoon as traders lock in their profits.

Good Luck, Sell Too Soon.

Jim Brown
Editor

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