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Retail Sales Fine, PPI Good...Now Bring On The Fed

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         WE 5-12          WE 5-5           WE 4-28          WE 4-20          
 DOW    10609.37 + 31.51 10577.86 -156.05 10733.91 -110.14  +538.28 
 Nasdaq  3529.07 -287.75  3816.82 - 43.84  3860.66 +216.78  +322.59 
 S&P-100  761.67 -  8.12   769.79 - 11.63   781.42 +  4.30  + 45.18 
 S&P-500 1420.96 - 11.67  1432.63 - 19.80  1452.43 + 17.89  + 77.23 
 RUT      490.94 - 21.90   512.84 +  6.59   506.25 + 24.41  + 28.12 
 TRAN    2874.02 -  2.09  2876.11 + 26.10  2850.01 + 16.76  +106.21 
 VIX       29.95 -  0.44    30.42 +  1.64    28.78 +   .37  - 10.92 
 Put/Call    .53              .53              .51              .75              

Retail Sales Fine, PPI Good...Now Bring On The Fed

The numbers are in with a market-friendly bias, so now we are officially on Fed watch. Ok, let's all stop and synchronize our watches. The Fed decision will come Tuesday afternoon at 2:15pm EST, after their one-day May meeting. The big question isn't if they are going to raise rates, but by how much? Out of 10 economists polled by CNBC this last week, eight voted for a 50-basis point tightening. While this is highly likely, the chatter on Wall Street on Friday was about the benign Retail sales numbers on Thursday and an inflation- free PPI on Friday. Oddly enough, traders were disappointed by this turn of events. I know, I know, why can't we live in harmony for just one day! Here is their thinking and it is justified. If these reports had signaled more inflation filtering its way down the pipeline, then the Fed would have had no choice but to move by 50 points. Now that we saw a decline in both the Retail Sales and Producer Price Index, traders are wondering if Greenspan will only make a 25-point move. Although you might initially find that as a positive, all it does is keep the Street fearful of another move by the Fed in June. Thus is the dilemma and we will cover this further below.

There was no dilemma on Wall Street Friday though after the PPI was released before the market open. It came in with a decline of 0.3% versus estimates of a 0.1% loss. This was the biggest decline in the index since February of 1999. On the good news, the futures were up big and the market didn't disappoint by rallying for most of the day. We did get the typical Friday afternoon sell-off that we have become accustomed too over the past month or so to wash out some gains, but the major indices still closed on the plus side. The DJIA closed up 63.40 to 10,609.37 on weak volume of 859 million shares. The Nasdaq finished up 29.48 to 3529.06 on volume of 1.2 billion shares. This doesn't paint an accurate picture though as the intraday highs were much higher. The DJIA was up 127 on its high and the Nasdaq was up 119 intraday. Here are the charts for the month of May.

The S&P 500 added 13 points to close at 1420. Speaking of the S&P, it was announced Friday morning that MEDI would be added to the prestigious index. They are going to replace Central & South West Corp. Never heard of them? That is why they are being dropped. This news gave MEDI a nice $10 gap up opening on Friday and made us happy since it is on the call list. It's no Big Game prize, but congrats to all who were long calls or short puts. The other S&P 500 whisper was that Agilent (A) is the next in line for such an announcement. Proving that rumors are stronger than the actual event, Agilent was up over $20 intraday before closing with a $14 gain, or 18%. It's hard to say if this will come true or not, but it would be difficult to imagine any further gains based on this news as it seems to now be priced in.

What may spur investors this week are some key earning reports. Agilent will report on Tuesday along with HWP, BEAS, HD, JCP, and KSS. On Wednesday will hear about LCOS, ADI, ADCT, and AEOS. Followed by SCMR, PRSF, CIEN, and NTAP on Thursday. We expect the trend of strong earnings to continue. Stocks are so battered in some groups that we are actually seeing prices rise after earnings. DELL is the prime example. They reported decent numbers on Thursday, after the close, and were met with a strong reception by investors on Friday. DELL climbed over $5 on strong volume. We may see more of this affect, but again market sentiment lies in the hands of Greenspan.

One aspect of the market that didn't react positively to the tame wholesale inflation news was the bond market. The 30-year sold off ahead of the Fed meeting. It lost 24/32 to yield 6.21%. It has been climbing on a regular basis for a few weeks now and is continuing to hold financial stocks underwater. Oil prices are doing a little creeping up of their own. They are back to nearly $30 a barrel. This is a little disheartening because it will negatively affect the PPI in May and June. How about we ignore this issue because if we focus on it, we will ruin any chance we have for one day of serenity. We need to think happy thoughts to bring the buyers back and kick start this market.

The VIX looks pretty good as it is still sitting above 30. The last time it hit 20 was in early December. Can you believe it? The last time it was even below 25 was mid-March. I would love to see a monster post-Fed rally back to 20 to bring buying interest back to the street. You would probably see the stock piles of cash get thrown into the markets in a hurry if that happened.

Here are some reasons why I am hopeful of a rally this week. Granted, I have my fingers crossed under the desk because there are equal reasons to stay range-bound, but I see the glass as half full here, not half empty. First, there is the Fed. My guess is they are going to do the right thing, which is to raise by 50 points and step back for awhile to see how this affects the market. Some are calling for a 50-point move in May and June. That would be very irresponsible in my mind. Let's stop and think for a second. Why has Alan been raising rates for nearly a year when we haven't seen signs of inflation until recently? It's because these moves take time to have an impact. If he were to rattle off two 50-pointers in a row, he could have us in a recession in six months. Also, half of the reasoning behind the moves, even though he may not admit it, is to calm the euphoria that was going on in the markets. Fair enough, it was getting out of hand there for awhile, but the market has paid the price. The last thing Greenspan wants is to scare the Nasdaq down to 2500 and be remembered for killing the markets. And if that happened, he would probably be forced to cut rates, which would nil the hikes. He knows this and will continue to be a gradualist like he has all along.

There are two other facts to this story. His last move during a series of moves in 94-95 was a 50-pointer. After that move he stood pat for a year and a half. Second, we are entering presidential election time. Greenspan doesn't want to get caught in the cross-fire. Easier to move 50 now, and let the debate and election take their own course. Besides, every presidential election year since 1950, the markets have gone up between May and December. Coincidence or was it premeditated? Maybe a little of both, but it puts the bias on our side.

OK, enough with the Fed. You know where I stand, a 50-point move to spark a REAL rally. The evidence will need to come by a volume day of around 2 billion shares and a breakout over the down-trending line in the Nasdaq chart above. If either of those two criteria are not met, then I will turn my computer off and head out for a round of golf. If this last month has taught us anything, it is that you can't fight the tape. I will stick to some covered call strategies, LEAP plays, and possibly some spread plays, but front month call buying will be a dangerous place to play.

One final note, we have the April industrial production and capacity utilization on Monday, followed by the April CPI and Fed meeting on Tuesday. But, after that the week is pretty calm in economic data. This helps to set the stage for a rally after Tuesday, barring a Fed or CPI disaster. No news is good news right now. So keep your fingers crossed too, but when in doubt...get out.

Ryan Nelson
Asst. Editor

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