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Market Wrap

We Got What Was Expected, Yet Uncertainty Prevails

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       5-16-2000           High     Low     Volume Advance Decline
DOW    10934.60 + 126.80 10971.20 10816.00   951,590k 1,672  1,267
Nasdaq 3,717.57 + 109.92  3729.12  3626.99 1,497,969k 2,329  1,749
S&P-100  784.23 +   7.70   787.61   775.67    Totals  4,001  3,016
S&P-500 1466.04 +  13.68  1470.40  1450.76            57.0%  43.0%
$RUT     505.98 +   8.17   507.52   497.81
$TRAN   2865.27 +  27.23  2885.24  2841.03
VIX       26.71 -   0.74    28.21    25.98
Put/Call Ratio       .63      .50

We Got What Was Expected, Yet Uncertainty Prevails

Well, we finally got it. There is no longer any uncertainty as to what the Fed will do...until next month. And hopefully the CBNC hype will subside. Today, the FOMC proved their vigilance in fighting inflation by serving up a 50 basis point rate hike for both the Fed Funds and the discount rate. Widely expected, overly hyped. This has been priced into the markets since late-April when they began their slow declines on light volume.

The question still remains, do we need a 50 basis point hike? This is the biggest rate hike in five years. It is interesting to look at because the fear of 50 all started when last month's PPI and CPI came in higher than expected. All of a sudden, the paranoid inflation-watchers began screaming armageddon. Next thing you know, everyone's talking about a 50 point hike and it became the expectation, and eventually a self-fulfilling prophecy. Why? Because if the Fed didn't raise by 50 and investors thought the Fed was getting behind the yield curve, the markets would have reacted quite negatively. Yet, I would like to point out that last Friday's PPI was in line and today's CPI was benign. The point is that when looking at these inflationary data reports, it is important to look at the trend and not to put so much merit in an anomaly. Last month's increases were a blimp on the map. The uncertainty for May has been quenched but talk about what the Fed will do in June is already heating up. Along with the rate hike came some fierce rhetoric from the FOMC, stating that they will continue to be aggressive. So will the volume come back now? Has enough certainty returned to our markets? This brings me to the market's reaction.

In regards to yesterday's NASDAQ turnaround late in the session, a trader said it was the rally before the rally. And today, we opened higher and flat-lined prior to the Fed announcement. On the positive side, volume was a bit stronger in the morning. As we fought off heavy eyelids until 2:15 EDT, nothing was happening in the market. The bets had been made and the waiting game began. The NASDAQ was holding on just above the 3700 level and the DJIA was strong at the 10900 level. There was nothing but green on the NASDAQ ticker, showing many tech favorites up $4, $7, $9. With great anticipation, 2:15 EDT rolled around and the expected became certain. It was the typical, "Buy the rumor, sell the news" trading, and both markets took a dip down. Which way we would go was as uncertain as you get, with the bulls and the bears battling it out. So who won? Well, both indices finished up on the day almost exactly where they were right when the Fed announced. The bounce was nice to see but the volume still continues to be the main concern. Volume on the NYSE was 950 mln, not too impressive. NASDAQ volume was 1.46 bln. We're still waiting for the good ol' days of NYSE 1 bln and NASDAQ 2 bln.

Looking at the DJIA chart, we can see that the Industrials have made a quiet rally since last Wednesday's low of 10292. Having climbed over 600 points on four consecutive up-sessions, the DJIA tacked on 6% and is approaching formidable resistance at 11000. DJIA ended up 126.79 to 10930.

DJIA standouts included HWP(+5.00), IBM(+4.81), and MMM(+4.13).

As for the NASDAQ, it was encouraging to see it hold the 3700 level throughout the day. Even after the post-rate hike dip which bounced from 3626, the NASDAQ managed to claw its way back above 3700. Notice how choppy trading has been given the weak volume on the NASDAQ. Less volume means more dramatic moves. It continues to trade in a range and will continue to do so until strong volume returns. And with the summer nearing, the return may be further off then thought.

Well, as we patiently await the return of volume, we have seen some increased activity in the merger and acquisition business lately. Today, Terra Networks(TRRA) announced that it will be buying Lycos, Inc.(LCOS). The Spanish Internet group offered $12.5 bln in stock for the U.S. Internet search engine, which will create one of the world's largest Internet companies. In a bid to expand its global reach, this merger will allow TRRA to target 30 mln Spanish-speakers in the U.S. Once completed, the combined company will be called Terra Lycos, Inc. and will have an estimated 50 mln unique users. They will have operations in 37 countries. LCOS closed at $72.63, up $11. TRRA fell $3.31 to $53.56.

With late-season earnings, HWP came out after the bell and beat the Street estimates by five cents, posting 2nd quarter earnings of $0.87 per diluted share. Revenues rose 15% to $12 bln from $10.5 bln in the same period one year prior. The company attributes this increase to its notebook revenue and unit growth year-over-year. Although a good earnings report, HWP was down in after hours trading by $3 to $137.

HWP's recent spin-off company, Agilent(A) also posted earnings after the close. Their net earnings came in at $166 mln, or $0.36 per share, including a one-time gain. Minus that gain, earnings were $0.32 per share, in line with analysts' estimates. Agilent manufactures testing equipment for Internet service providers and chip makers. HWP still holds an 85% stake in the company and is expected to distribute those remaining shares in early June. Agilent rose $7.81 to $96 in today's trading.

It appears that some life may be coming back to the markets as companies continue to show good earning's growth and venture back into the merger and acquisition market. We finally got what we were waiting for: a 50 basis point rate hike. The market's reaction to this announcement today exemplifies investor indecision as to where they should take the market next. Look for both the DJIA and the NASDAQ to continue their range-bound trading. During these choppy trading times, utilize support and resistance levels in helping choose entries and exits. Watch for strong volume to confirm any breakout moves. Even though we got the rate hike, there is still uncertainty in the markets. Uncertainty breeds volatility and volatility equals trading opportunity. Remember, there's nothing wrong with taking profits, no matter how small, and cut your losses early.

Matt Russ
Research Analyst

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