The PPI was benign. The CPI was the lowest since 1965. Greenspan did not turn his speech into a market roast. Intel beat the whisper numbers and the Internets survived the AOL/TWX merger news. The Fed meeting is not for two weeks but the rate hike is already priced into the markets. Y2K is history and the Retail Sales showed the consumers spending all that Y2K cash. What is wrong with this picture? I hate it when everything is too good to be true!
The markets roared back into record form again on Friday after the PPI posted the smallest gains since 1965 with only a +1.9% increase. After four failed attempts to close over 10600 the Dow exploded to a new record high close at 11722. There was no holding back the big caps or the techs even though the bond yields traded as high as 6.71% before falling back to close at 6.69%. Financials soared on the news and completely disregarded the coming rate increase. Citigroup closed at a new high and other Dow components AXP and JPM posted strong gains.
The Nasdaq gapped open +65 and quickly ran up to trade near 4100 all day but could not break out completely. I am not complaining but many Nasdaq stocks did not participate in the rally. Most of the Nasdaq gains were on the back of Intel's outstanding earnings and the new Microsoft CEO. Intel added +$12 and MSFT +4.44. The other Nasdaq leaders were soft with CSCO only adding +1.38 and Dell +.88.
Friday, Intel set the mood. Their earnings report was inspiration for a host of analyst upgrades on the chip sector. This spilled over into tangible and large scale moves in technology stocks across the board. Intel is rolling out a new chip for laptops this week. It's a 600 megahertz chip with power management capabilities built in. In other technology stock news, Lucent is in more trouble. There are now questions about accounting practices being raised. The tech sector appears to have digested most of the bad news in this stock, and is disregarding it.
On the Economic front, Greenspan's Speech to the NY Economics Club last week was greeted well by Wall Street. Most encouraging, from our standpoint was that he seems to be assigning greater importance to the idea that the old models may not apply anymore. Under the old Phillips curve economic model, the Labor rate was the single largest component for inflation. Under the new Internet economy/New Paradigm, productivity growth is so rapid that the impact labor has on inflation has to be re-thought significantly. Some of the language in his speech showed signs that he may be becoming a little more comfortable with the idea that these older models are giving way to the New Paradigm.
The Fed began draining some of the liquidity out of the market this week that had been pumped in for concerns over Y2K. Before the end of the year, there was a great deal of speculation about how and when this would be done, and what it's impact on the financial markets would be. The impact appears to have been negligible.
Coming up soon, Mr. Greenspan will be speaking in front of the Senate Budget Committee. While this appearance will not be a rate policy speech, you can count on the Senators to badger him to death about interest rate policy and to make futile attempts to ascertain and to influence his opinion on interest rate policy matters. Any time Mr. Greenspan speaks, Wall Street pays attention. None of us want to be caught flat footed if he says something with direct and immediate impact. Treasury Secretary Summers will be giving testimony next week as well. He'll be addressing the Administrative Budget for the 2001 fiscal year. While we don't believe there will be any market moving news, we'll want to keep a close watch on this testimony.
Next week is a short week, but there are going to be some key earnings announcements we'll want to keep an eye on. Tuesday, Broadcom and DoubleClick will be reporting. These two leaders hold big sway in the internet community. On Wednesday, AMD, Ameritrade (AMTD), AOL (AOL), E*Trade (EGRP), IBM, and Redback (RBAK) will report. On Thursday, Sun Micro (SUNW), Lucent (LU), and Gateway (GTW) are reporting.
This week there were several key split events. Among them were DoubleClick (DCLK), CMGI (CMGI), Novellus (NVLS), and Juniper Networks (JNPR). For next week, Vitria (VITR), KLA Tencor (KLAC), and Oracle (ORCL) all have splits on the 19th.
The only index not included in the party this week was the transports. With oil setting a new high of $28 per bbl the transports lost ground. This energy component will eventually make its way through the CPI/PPI numbers and cause trouble. This along with the FOMC meeting in two weeks is contributing to the rising bond yields.
Everything appears rosy. Earnings announcements are picking up speed this week and most of the news has been good so far this month. So why should you remember last February? After a strong period and record profits by many traders during the end of 1998 the Nasdaq started a sell off on Feb 1st that took -300 points off the index by the middle of February. Well over -10% considering the high on Feb 1st was 2533. The market traded sideways from mid-February through March and did not regain the 2500 level until early April as the next earnings cycle kicked into gear.
In 1998 the Nasdaq had run up from the October crash low of 1360 to a Feb 1st high of 2533 or +1173 points. The February sell off lasted six weeks as traders shuffled profits from this record gain. Don't look now but the Oct-1999 low was 2640 and we are now at 4100 for another record gain of +1460 points. The challenge here is to be in the market in case it does continue upward but be ready to get out of the market quickly should any market weakness begin to appear. I think I have received well over 1000 emails in the last year that went something like "I did real well the last four months (Oct-Jan) but I gave it all back and then some in February, what am I doing wrong?" Think about it. How did you do last February? Do you want to do it again? I doubt it.
Now I want everybody to focus on this point. There may be a good chance the market will drop starting in the next two weeks. There is also a good chance the Y2K money coming off the sidelines could cushion this drop but once the earnings are basically over there will be some market weakness. This is hard to rationalize since market breadth is now more positive than it has been for sometime. New highs are beating new lows. The Nasdaq, Dow, S&P, RUT are all at new record highs. Investor sentiment is at an all time high. Yet, almost all the analysts are expecting some profit taking soon. Those concepts are not opposites. You can be bullish and still recognize that some short term profit taking will occur.
Why am I trying to be so forceful in warning you about a possible bout of profit taking? Because most traders are so accustomed to buying the dip that they either try to hold their positions until it is over or they jump back in on the first or second dip and then get killed when the market continues downward. Everybody always thinks the correction will only impact everyone else. The stocks they own are good, strong and bullet proof. Sorry, but there has never been a stock that was bullet proof. Technicians differ on the exact amount but most will agree that 60% to 80% of a stocks movement is caused by market movement. Take any ten stock charts and overlay the corresponding market chart (Dow or Nasdaq) and you will see what I mean. We are entering a very critical period in the markets. I do not want you to give back your recent gains by ignoring the facts. Trade the current rally until it fails and then step aside. When it fails, and it eventually will, step aside. The end of this earnings cycle will leave investors with a Fed that is raising rates and no short term reason to be in the market. The Fed meets on February 1-2nd and that should be the catalyst for profit taking to begin. The next meeting is on March 21st and that meeting should be the signal for the April earnings runs to begin. Everything in between could be rocky. The low points last year during this period were Feb-18th and March 4th. Be careful the next few weeks. Ignore the warning signs and it could be expensive. Trade smart and avoid the mistakes of the past.
The economic calendar this week is a non-event. With the markets closed on Monday for Martin Luther King Day there are no scheduled releases until Wednesday. The Housing Starts and Building Permits on Wednesday and International Trade, Philadelphia Fed Survey on Thursday are not significant compared with the PPI/CPI last week. It is earnings, earnings, earnings this week and then we start over the week before the Fed meeting with Consumer Confidence, Durable Goods and the Employment Cost Index.
I got several hundred emails last week on the Covered Straddle Options 101 article. I can not answer them all but I plan on posting the most commonly asked questions with the answers on the website this week. My article this week is a much simpler strategy and almost as profitable. Check it out on the website.
We are announcing our annual Options Expo Seminar in Denver for March. Last year this seminar sold out in only two days. This years seminar will be taught by over 15 OIN staff along with numerous guest speakers. The advanced seminar is a full three days with an optional additional day before the advanced seminar for those that need a better understanding of all the basic option strategies before attending the advanced sessions. Look for the announcement notice on the website or in the newsletter. If you think you are interested in attending you need to register immediately as seating is limited.
The Options Clearing Corp reported that Friday was the fourth heaviest day ever for U.S. options volume with over 3.6 million contracts traded. This compares with an average of 2 million per day in 1999 and 1.6 million in 1998. Average daily volume in January has been over 3 million contracts. Looks like our readers are trading hard!
With options expiring on on Friday the bias is normally up. Trade smart, sell too soon.