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Market Wrap

Nasdaq spell subdues the double witch.

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        WE 11-19         WE 11-12         WE 11-05         WE 10-29
DOW     11003.89 +234.57 10769.32 + 64.84 10704.48 - 25.38  +259.61
Nasdaq   3369.25 +148.10  3221.15 +119.95  3102.29 +135.86  +149.88
S&P-100   749.30 + 18.21   731.09 + 12.29   718.80 +  1.77  + 31.40
S&P-500  1422.00 + 25.96  1396.04 + 25.84  1370.23 +  7.30  + 61.28
RUT       461.27 + 11.58   449.69 +  7.28   442.41 + 13.77  + 10.22
TRAN     2976.50 -113.07  3089.57 + 85.58  3003.99 - 54.99  +195.83
VIX        19.63 -  2.05    21.68 -   .38    22.06 -  2.50  -  0.33
Put/Call     .47              .51              .51              .55

Nasdaq spell subdues the double witch.

It was just last Sunday that we were concerned about the Fed meeting and the possible rate increase. It seems like weeks ago to me. The undercurrent of tension in the market is rising and traders eyes are glazing over. The record Nasdaq run continues to defy gravity and logic. Traders on the floor are finding it harder every day to find something that has not jumped +20% in the last two weeks. But, the buying continues. Even when a dog of the Dow barked out an earnings warning Friday and dropped -12%, the blue chip tech leader, IBM, soared $7.00 and held the Dow to only a minor loss. More to the point the Dow held 11,000 when the advance/decline line was severely negative all day long. The buyers came off the bench on every dip and while volume was not heavy it was strong.

The Nasdaq continued it's vertical climb with no hint of being tired. There was a small drop at the open and again shortly after the morning rally but the outcome was never in doubt. This rolling rotation could be taking the pressure off as we move forward. The rally is moving on a different set of leaders every day. This is a good sign but it only prolongs the future and eventual correction. When I was writing about the Nasdaq's +700 point gain on Thursday and the lack of substantial profit taking, I neglected to paint the picture in its entirety. First, I did not say the Nasdaq was going to crash. I only said we were due for some profit taking. You know I like to point to historical trends to forecast future events. The chart below contrasts the Nasdaq from this period in 1998 to the same period today. You can see we have had an identical rally this year compared with 1998. There are some differences. In 1998 we were coming off the lows from October disaster. The Nasdaq had dropped -33% (-660)from the July high of +2000. The Dow had only dropped -21% in the same period. There had been significant and complete capitulation. This year there was only a -300 point drop from the October high. Also note that the angle of ascent is steeper this year. You can see from the charts that we started later this year and moved faster but both appear to have arrived at Thanksgiving week with the same +700 point gains. Also you can see the Nasdaq hit 2000 and went sideways for the first couple weeks of December as prices equalized from the big gains. Also, this week in 1998 we did not have Y2K only 28 trading days away.

Now to be fair to the historical picture, the Nasdaq did continue on up to a high of 2510 on Feb 1st for an astounding +1163 point gain from the October lows. After the rocky December period beginning with Thanksgiving week, the index really did not have any serious problems until mid January with a -200 point drop.

History never repeats itself exactly but as you can see by the dual charts above the trends are scary. If the trend continues then next week could be a challenge. If you were a fund manager would you place large bets next week? The volume on the Nasdaq was the ninth heaviest on record again Friday with 1.4 bln shares. The index is now up +53% YTD. The divergence between the Nasdaq and its 200 day moving average now exceeds 25%. Only twice this year has the Nasdaq passed this threshold. In July and February and both times it dropped over 10% in the next two weeks.

The double witching options expiration Friday could have been choreographed by the tooth fairy for as little volatility as it brought. The money continued to flow into the blue chips but the small caps slowed somewhat. The conventional wisdom going forward has less and less money going into smaller stocks with unknown Y2K risks and moving more into larger stocks due to their apparent liquidity and safety. Even though the Dow was only down slightly the negative adv/decl line could be an omen.

The Caterpillar earnings warning was ignored by the market in general. CAT lost -6.75 but it was a yawner in the broader market. IBM however energized the techs with comments to a Soundview analyst that their troubled PC division may be profitable in the fourth quarter. IBM soared +7 on the news and that was on top of large gains Thursday as well.

The telecom sector got another boost from the Vodaphone deal. They went hostile with a +$130 billion offer after they were turned down by the Mannesmann board. The combination of the two companies would give Vodaphone over 42 million customers and make it the eleventh largest company in the world. The deal is being rejected by German workers who fear layoffs and cutbacks if Vodaphone is successful. The merger of the two companies would provide a more united front and actually increase the number of cell phone users through better pricing and service. Companies like Motorola and Qualcom would benefit from standardization and increased volume.

Here is the list of the other top ten companies and their market cap.

General Electric (NYSE:GE) 463.1 bln conglomerate
Microsoft (NASDAQ:MSFT) 438.6 bln software
Exxon-Mobil (NYSE:XON) 277.3 bln energy
Cisco Systems (NASDAQ:CSCO) 277.2 bln communications
NTT (TOKYO:9432) 270.6 bln telecom
MCI WorldCom-Sprint (NASDAQ:WCOM) 264.7 bln telecom
Wal-Mart (NYSE:WMT) 262.0 bln retail
Intel (NASDAQ:INTC) 249.7 bln semiconductor
Lucent (NYSE:LU) 241.2 bln communications
BP Amoco-Arco (ISEL:BPA) 231.1 bln energy
VODAFONE-MANNESMANN 225.6 bln telecom
Royal Dutch/Shell (AMS:RD) (ISEL:SHEL) 225.3 bln energy
Pfizer-Warner Lambert (NYSE:PFE) (NYSE:WLA) 206.8 bln health

One of today's market events that will eventually bite us is the oil price increases. With oil trading over $26 a bbl it is hard to remember the $10 oil from earlier in the year. The tech buyers may be ignoring oil prices but the transportation sector is beginning to crumble. Oil is the second biggest expense airlines have and oil futures contracts are now showing strong odds for even higher prices next quarter. The higher oil prices will eventually show up in the inflation numbers and $28-29 oil will not win any friends at the Fed.

One of the market movers for Monday will be MSFT. The judge in the Microsoft case, after discussing with both sides, appointed a mediator to help resolve issue. This is a huge step forward. By appointing a mediator and pushing back until February the next phase of the trial, the judge is giving both parties time for a peaceful resolution before the next phase begins. Judge Jackson does not want the MSFT trial to take the rest of his life. He realizes that the best way out is a compromise instead of a judicial ruling that will be appealed for the next decade. There is now light at the end of the Microsoft tunnel. Bill Gates may not like what he sees but at least he has an opportunity to control some of the outcome. MSFT was up strong after the close and should rebound next week even though a resolution could be months away.

Y2K melt up? This is the phrase that is being used repeatedly by analysts to describe the lack of a Y2K sell off. According to the Fed only 39% of the public now plans to withdraw extra cash before year end for emergencies. This is down from 62% last march. This represents the dwindling Y2K fears and is setting the tone for the markets. The Fed is out of the way and investors see no Y2K disasters building in the market and purse strings are easing. Investors that had planned to sit on cash for the great buying opportunity in December are now not sure it will happen. This cash is coming back into the market and is not showing signs of fading. We will need to keep close watch on the money flows in/out of mutual funds over the next four weeks to see if the sentiment changes. Funds however are now faced with a dilemma. Many have large gains of 30-50% or better in many tech stocks and there is still uncertainty ahead. Should they move some cash to the sidelines to lock in their gains and prepare for some withdrawals or just sit tight and hope the run continues through December. When you consider the large bonuses that ride on their yearly percentage returns, some may opt for the conservative stance and safety of cash. The next five weeks will be very interesting in the market as each money manager executes his Y2K plan.

The VIX closed at 19.63 and is now solidly under 20. This is like waving a red flag at an angry bull. Anything under 22 is cause for concern and under 20 is dangerous. Cautious traders should be moving to the sidelines until it moves back up into at least the 21-22 range. Aggressive traders should continue to examine the market internals before making every trade to determine market direction. If the advances are being beat by the decliners and the ticks are negative then you should be very cautious about going long.

Next week is typically light in terms of volume as traders close positions early and prepare for the long weekend. Thin volume could increase the volatility and any directional changes could be magnified. To recap, oil prices are up and fueling inflation. Bond yields were up to 6.18% intraday. Decliners beat advancers. The Dow, S&P-100, S&P-500 were all down slightly but held right at support. The Wilshire Total Market Index for all stocks was down but only slightly at 13,126, -22 for the day. The VIX is at it's lowest level since July-19th, the day before the July correction. Market internals are deteriorating but the major indexes are holding. Caution should be the watchword for the week. Economic reports are very light this week with only Durable Goods on Tuesday and Personal Income/Spending on Friday. The week after Thanksgiving is a problem with nine reports including the critical Nonfarm Payrolls closing the week on Friday.

News alert: The famous Wall Street saying, "Buy low, sell high", has been replaced with, "Buy high, sell higher."

My educational article this week is called "Pay Check or Lottery Ticket." This is the third in the series. Look for it on the website.

Have a safe week in the market. Pick you entry points VERY CAREFULLY and sell too soon.

Jim Brown

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