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Market Wrap

June arrives with a bang on tame economic numbers!

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       6-01-2000           High     Low     Volume Advance Decline
DOW    10652.20 + 129.90 10673.40 10513.10   958,953k 2,070    904
Nasdaq  3582.50 + 181.59  3583.27  3400.91 1,581,798k 2,730  1,274
S&P-100  777.59 +  16.04   777.59   764.41    Totals  4,800  2,178
S&P-500 1448.81 +  28.21  1448.81  1425.53            68.9%  31.1%
$RUT     492.47 +  16.29   492.47   476.18
$TRAN   2776.71 +  66.72  2777.01  2710.29
VIX       24.74 -   1.83    26.35    24.74
Put/Call Ratio       .47

June arrives with a bang on tame economic numbers!

With more evidence daily that the economy may actually be slowing the money is gradually coming back to the market. Tech stocks are shaking off the last of the sellers and the rally is broadening. Internet stocks, telecom stocks, chip stocks, almost any sector is benefiting from the rally with the possible exception of the drug sector. Advances are strongly beating declines and volume is slowly increasing.

This was a great day if you were long in the market. The economic reports today all showed indications that the rate hikes are finally slowing the economy. Combined sales from the top three auto makers showed the first decline since Aug 1998. Ford was the only positive number with an increase of +1.1%, GM dropped -5.8% and DCX posted a drop of -2%.

The NAPM report also showed a drop to 53.2 for May after coming in at 54.9 for April. This was the lowest level in more than a year. The prices paid component was also lower. This indicates a slowing in the manufacturing sector and a leading indicator for economic growth. Construction spending also slowed as well as a jump in the weekly unemployment claims. Greenspan gets to be the hero again if the non-farm payroll numbers come in weaker than expected as well. The current estimates from 18 economists surveyed are for +375,000 new jobs and a 3.9% unemployment rate.

With all the positive news out today it may not matter what the jobs report has to say. Hewlett Packard held an analyst meeting yesterday and the results were amazing. They said business was so good that estimates for +15% growth were probably too low. The analysts could not say enough good things and the stock rocketed +$14 accounting for over 70 Dow points.

A management meeting at Motorola gave that stock a boost by confirming that demand for cell phones was very strong and showed no signs of easing. MOT gained +$5. This also boosted stocks like Nokia, Ericsson and Vodaphone. The chip sector benefited indirectly from this as well. Micron also set a new high as DRAM prices continued to soar as demand for chips increases.

BestBuy soared over +$6 after saying first quarter sales were so good that earnings estimates were now too low. Do you see a trend here? Maybe a contradiction of trends? How can the economy be cooling if HWP, MOT, BBY and others are telling analysts that business is so strong that estimates are too low? It is not up to me to resolve this quandary but it appears to be the best of both worlds. Big ticket items like cars and homes are slowing and small ticket items like cell phones are growing. PC sales are pulling out of their slump as more users logon to the Internet generation.

To go along with the booming business sector was the news that Oracle was having a great quarter supplying software to the Internet sector. This prompted Internet stocks to bounce as evidenced by YHOO, ICGE, INKT, ITWO. This sector is still down -36% from its highs so there is plenty of room for investors to profit. ORCL soared +$6 on the news.

Another leading indicator for the rally was the Banking Index $BKX. Up +10% from its lows and gaining daily this indicator seems to be forecasting an end to Fed rate hikes.

As if we were transported back in time to last fall when nothing could go wrong, even new IPO stocks soared on opening day. Well, it was only one, but it did soar +237%, up +$57 from the offering price. ONIS did what no IPO has been able to do for three months, overcome investor pessimism!

So what is wrong with this picture? Maybe nothing but we have gone from oversold to overbought in only three days. Some of the leaders have been tacking on double digits every day and profit taking has got to be just around the corner. Clearly this is a seasonal rally as I mentioned last week. Historically this is a bullish week but the following weeks are not as positive. We are setting up for a buy the rumor (tame jobs report) sell the fact event. Once the news is out tomorrow morning the focus will move to the PPI/CPI next week. Even if the jobs report is tame the ensuing rally may suffer from profit taking before the close. It is simply too much too fast to not expect some consolidation. Last week's low of 3042 to today's close of 3582 is a whopping +540 point gain in five days. Profit anyone?

The Nasdaq stumbled at the 3500-resistance level on Wednesday but cleared it cleanly today on the weak economic numbers. It appeared to be rolling over this afternoon but once the trend reversed upward about an hour before the close there was actually panic buying. Really! Since everybody expected it to roll over at 3500 resistance once it appeared to be heading higher at the close there was a rush of orders as some investors expecting tame numbers on Friday rushed to buy in order not to be left behind. Wow, what a concept. Panic buying!

The Dow rallied on the strong performance by HWP which added +70 points to the Dow. We are getting ever so closer to upper resistance at 10700, only 53 points away. Take away the HWP points and the Dow would have been much tamer at +59 and the Nasdaq may have reacted differently as well. Still, we won't complain.

While everything rests on the jobs numbers tomorrow I don't think anything but a blowout will make much difference. The market wants to run and the bias is now bullish. This is the problem. Remember last week when I painted the negative picture of the market but reminded you that "it is always darkest before the dawn"? It was dark and we had a great dawn. Now the reverse is also true. When everything appears to be going our way we are just not looking in the right direction. While we are laying on our blow up rafts basking in the brightness of the current rally and riding the gentle swells up and down, the shadow of danger may be approaching. Is that a shark fin I see in the water heading for us? Do you hear ominous music in the background? Does the term VIX mean anything to you? The VIX, at 25.14 is at the lowest point it has been since mid-March when this sell off started. At 25 it is not in a danger zone yet but at 22 I would start getting worried. It was 41 on Apr-17th and almost 32 last week. The trend is definitely down. As is the put/call ratios at .47. Not a danger zone but not a bullish signal either.

The most telling indicator is the volume. At 1.6 bln the Nasdaq is starting to look healthy again but still significantly under the 2 bln plus from the glory days. The biggest reason for the bullish change is the Fed outlook. Many analysts are now calling for no rate hike on Jun-28th and that is music to investors ears. That wonderful music may change to Fed rap if the jobs report is too high and is followed by a stronger than expected PPI/CPI next week. We all know how disruptive Fedspeak can be. Just picture Greenspan at the first luncheon after a strong report. Actually an image of Mr. Magoo may be easier for this analogy. Now add the voice of Snoop Doggy Dog and you get Fed rap at its worst. You supply the words, nobody can understand Greenspan or Rap, but the end result is more rate hikes and a retest of the recent market lows. Not the kind of music investors want to dream by.

The bottom line? I would not be a buyer on Friday. If the market has legs they will still be there next week. Patience is king and many investors, as indicated by lack of heavy volume, are not yet convinced. Everything moves in cycles and it should cycle down, even if it is only a couple hundred points, soon.

Good luck and sell too soon.

Jim Brown
Editor

Current long positions include:

NOK, VOD, VIGN, MSFT, YHOO, SDLI, PMCS, CIEN

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