Option Investor
Market Wrap

One down, two to go!

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       1-13-2000           High     Low     Volume     Advance Decline
DOW    11582.40 +  31.30 11656.60 11524.10 1,032,543k   1,877  2,547
Nasdaq  3957.21 + 107.19  3957.47  3858.22 1,470,623k   2,547  1,558
S&P-100  787.96 +   5.23   791.35   780.17    Totals    4,424  4,105
S&P-500 1449.68 +  17.43  1454.20  1432.55              51.8%  48.2%
$RUT     501.19 +  11.15   501.19   490.04
$TRAN   2892.89 -  43.35  2935.12  2877.88
VIX       23.35 -   1.28    25.08    22.59
Put/Call Ratio       .43

One down, two to go!

The Producer Price Index (PPI) was announced this morning and a huge sigh of relief was heard on the market floor. Prices rose only +.3% for all categories and only +.1% for the core rate which excludes food and energy. This was exactly inline with expectations and showed no increase in inflation. The less important Retail Sales Report came in above expectations with an increase in December of +1.2% and a revised +1.4% for November. The November rate had been previously reported as +.7%. This increase shows that the consumer is still shopping till they drop and the trend is accelerating. Of course this covered the two biggest shopping months of the year but still this is an alarming move in the Fed's eyes.

The next major event comes tonight as Alan Greenspan takes the podium at the Economics Club of New York and rambles for 30 min about technology and the economy. Everyone remembers his "irrational exuberance" speech several years ago and with the markets setting new highs daily he may try to talk it down again in lieu of a +.50% rate increase next month. Tomorrow we have the Consumer Price Index (CPI) which is the retail version of the inflation number. Should this number come in as forecast there are not any more major hurdles until the Fed meeting on Feb-1st. More on Greenspan later.

The markets celebrated this morning opening higher on the PPI news. The Dow moved quickly down but recovered to trade flat most of the day. Just after 2:00 something ignited and the Dow ran up over +100 points to almost 11660 but traders sold into the rally again and the Dow closed under 11600 for the fourth day in a row. Still it was another closing record for the Dow and it was probably just fear of Greenspan and the CPI that caused the drop.

The Nasdaq has been putting in some troubling days recently. Up +100, down -100, repeat. Traders are mixed as to the reason. There are two camps and each claim volatility at both ends of the spectrum, tops and bottoms. Since we know it is not a market bottom, although we wish it was, the volatility we are experiencing is a good sign of a market top. After gapping open +65 points the index lost almost of it as some Internets failed to rally and showed signs of lingering profit taking. Around 2:00 the same rally that seized the Dow also hit the Nasdaq but the Nasdaq was able to hold on to its +100 point gains. Of the big four Nasdaq leaders only Intel was negative on the day. CSCO, DELL and MSFT all posted decent gains.

Bonds actually rallied by the end of the day after yields broke into the 6.71% range. The yield dropped slightly to 6.65% by the close as traders increasingly felt that the Fed will only raise +.25 based on the lack of inflation in the PPI. Lets hold that thought and hopefully add to that sentiment with the CPI tomorrow.

Earnings are upon us but earnings warnings are still in full bloom. United Airlines warned this morning that oil prices and labor costs were going to put a crimp in their earnings. Did they say "labor costs"? Let's hope Greenspan was preparing his speech and not listening to the news.

Microsoft dropped a bomb after the close as Bill Gates demoted himself to Software Architect and promoted Steve Ballmer to CEO. Citing a growing company with increasing diversity Gates said his position must continue to evolve with the best interests of the company and shareholders in mind. Initially MSFT dropped in after hours trading but as the question and answer session continued and Ballmer took more control of the situation the stock rallied to recover the loss. The Nasdaq rally accelerated at 3:00 when MSFT announced the news conference at 4:30. Most traders thought it might have something to do with a settlement in the antitrust trial and MSFT jumped +6.00 on the news.

The next big earnings announcement was Intel who posted blow out earnings after the bell. When first announced on the wires it was reported that they had missed the estimates by -.02 and the stock dropped significantly. Once the correct number was announced of $.69, which beat estimates by +.06 and the whisper number by +.04, the stock rallied as high as $99 in after hours. Most expected a strong showing since Intel cannot make high end chips fast enough to meet the supply. In characteristic fashion Intel predicted lower results in the next two quarters. After missing estimates two quarters in a row they appear to be back on track and trying to manage estimates and lower the bar in the future.

AOL rose from the ashes today regaining +5.44 of what they lost for the week to $65.50. Traders do not feel they are out of the woods yet and think this was simply an oversold relief rally. I wanted to buy some yesterday when it was $59 but I was afraid we could see the low $50s before the bleeding stopped. I personally think AOL is worth much more as a diversified company than simply an Internet portal. Looks like a good leap play to me!

After the close Boeing also announced they were buying GMH for $3.75 billion. This was a current play and readers will be rewarded with about a +$18 gain for a three day play. This rumor has been around for about two weeks and we were glad to be on the winning side.

The markets are closed on Monday so that leaves only five trading days until January options expire. If you want to write options to capture some remaining January premiums then this Friday is the best day. If I was going to sell time tomorrow I would be very careful about selling puts. Even though the Nasdaq was up strongly today it was not a broad rally. The Dow has tried and failed for four days to close over 11600 and failed. It is entirely possible that we have reached a plateau where big gains are going to be harder and harder to make. The -10% Nasdaq sell off last week was not severe enough to satisfy all the profit built into this market. It is also possible that many traders have been waiting for that last earnings run before shuffling positions. We will have a rate increase in two weeks. Most feel Greenspan will not raise +.50% because of the possible negative impact. A +.25% increase is already built into the market but the uncertainty of the coming Fed meeting always causes market volatility. After taking time to read the Greenspan speech, which just became available, I am not sure how the markets will react tomorrow. He talked both bullish and bearish. He talked of speculative bubbles and overly tight labor markets. He talked of a new model of productivity. I think you could interpret this speech to fit your bias regardless of which side of the market you favored. Futures which had been up +3.90 before the speech, dropped -8.00 after it became public. It is quite lengthy and as traders absorbed the content, more than just the "speculative bubble" phrase in paragraph four, the futures began to rise again. Currently they are +4.00. Every news site I have seen has titled the speech with very negative market connotations. Futures are up but we have a lot of dark before morning.

Considering the positive Intel earnings news and Greenspan did not adopt a scorched earth policy in his remarks we may be over this hump. Nobody will know for sure until the market opens. Still I would be cautious about new positions and continuing to maintain losing positions. With options expiration next week the bias is normally up but after next week is over we could be looking at a rocky February.

Good Luck, Sell too Soon

Jim Brown

Here is the link for the text of Greenspan's speech. It is sure to put you to sleep.


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