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Benign Data Met With Muted Reaction

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       6-14-2000           High     Low     Volume Advance Decline
DOW    10688.00 +  66.20 10737.70 10624.70   928,995k 1,676  1,257
Nasdaq  3797.41 -  53.65  3883.34  3797.00 1,397,988k 1,796  2,233
S&P-100  790.35 +   0.92   798.01   788.49    Totals  3,472  3,490
S&P-500 1470.54 +   1.10  1483.62  1467.71            48.0%  52.0%
$RUT     509.67 -   4.08   517.58   509.49
$TRAN   2748.29 -   6.58  2767.73  2743.20
VIX       24.51 +   0.14    25.17    23.69
Put/Call Ratio       .57

Benign Data Met With Muted Reaction

The market's reaction to the CPI number was a non-event. So what happened today on The Street? Well, it was a case of we got what was expected. Nowadays, without something extraordinary, there's really nothing to get excited about. Traders yawned at the benign CPI, and after an initial euphoric pop in the morning, the DJIA flat- lined around 10700 and the NASDAQ slowly bled to close at the lows of the day. So now we sit back and scratch our heads, pondering what appeared to be good news for inflation. Here's what happened.

The CPI came in at +0.1% versus analysts' forecasts of +0.2%. That's good, right? Yes. The Core CPI, excluding food and energy prices, was +0.2%, right in line with expectations. A closer look at the CPI shows that food prices gained 0.5% while gas prices fell 3.5%. Sounds great, right? Well, maybe not. Some of the cautiousness on the Street comes from the fact that these May numbers were compiled prior to the most recent surge in oil prices. Therefore, there is an increased likeliness that the June CPI will have a hefty gain in energy prices. Luckily, that will be after the June 27-28 Fed meeting.

Overall, these numbers proved to be benign and certainly indicate that the economy is slowing. Yet, there are a variety of inflationary concerns that haven't yet been dispelled, and it showed in today's trading session. It was a good news, bad news scenario. The Fed's Beige Book revealed signs that economic growth is slowing, yet remains "solid." It also indicated that while labor markets remain tight, they haven't intensified. A caveat to this is that wage pressures are NOT accelerating. That is great news for the economy if we maintain low unemployment and low wage inflation. Forget the Philips Curve, this is the Internet Era. Continuing to play both sides, the Fed stated that inflationary pressures are "worsening" but not "widespread." One thing we do know is that consumer spending is slowing and that's one of the first indications of a slowdown.

Yet, investors hesitated to commit money as they try to discern just how much the economy will slow and how much the Fed wants it to slow. Right now, the Fed has everybody guessing. They do this by talking down the market while easing off their tightening monetary policy. No matter what you hear, the Fed watches the market. Hence, their rhetoric when investors rejoice to benign numbers. Echoing the Beige Book today, San Francisco Fed President Robert Parry said that inflationary pressures due to demand are still growing faster than productivity. Just a little something to take the air out of the CPI. Remember, the last thing the Fed will ever do is declare victory over inflation as an exuberant market reaction would only disappoint them. Further inflated stock prices are not what they want to see.

So how did stocks react to all this Fed and inflation talk? After the initial pop at the open, the DJIA managed to hold on to some of its early gains as money rotated out of techs and into cyclicals. The DJIA closed at 10687, up 66.11. It was a pretty dull day on the trading floors and the DJIA's narrow range exemplifies that. Looking at the chart, the DJIA needs to break through the 10800 level convincingly in order to end its current downtrend. For this to happen, it is absolutely essential that financials lead the way. Given the perception that rate hikes may be over before the Presidential Election, financials mounted a nice rally today. Better-than-expected earnings from Bear Stearns, BSC(+1.38), fueled financials. The AMEX Broker/Dealer Index gained 3.5%. Some standouts in the sector included: GS(+4.81), LEH(+4.69), MER(+3.81), AXP(+2.25), MWD(+2.13), and C(+2.00).

DJIA techs took a beating with INTC(-5.06) leading the way. Close behind was HWP(-5.00) and IBM(-3.31). Bucking the trend was MSFT, which closed at $70.50, up $2.63 on news that the District of Columbia Court of Appeals will hear Microsoft's case. The drug sector also held up well.

Equally dull was the NASDAQ. While slight consolidation isn't a bad thing, it sure is boring. Yet, given the recent run-up in the techs since Memorial Day, a breather for the NASDAQ isn't surprising. After a morning pop, the techs flat-lined and then slowly deteriorated into the close. The NASDAQ closed just below the key 3800 level at 3797, down 53.63. Once again, the first thing that comes to mind is a lack of conviction. No real excitement for the real prospect that the Fed may pass on an interest rate hike in June. No real excitement on the up or downside. Volume was light at 1.4 bln shares. Notice the narrow range to which the NASDAQ is confined. As boring as it may be, there have been a handful of stocks that have performed nicely, namely the fiber-optics.

So with today's CPI being the last major economic data before the Fed meeting, what's going to drive the markets? Earnings. Therefore, it is going to be a stock picker's market. Most of the tech favorites felt the profit taking today, such as RMBS(-18.75), GLW(-12.00), SDLI(-11.88), and CHKP(-11.25). All of these stocks have had healthy gains during the past month.

One of the bigger losers on the NASDAQ that hasn't had healthy gains as of late is QCOM. It was on the NASDAQ most active list today as it lost 13%, or $10.88, to close at $70.50. Recently, news has not been kind to QCOM. Citing slower sales in South Korea, Bear Stearns lowered its earnings forecasts for fiscal 2001 to $1.30 per share from $1.40. This is concerning to investors as South Korea is Qualcomm's biggest market.

Bigger than QCOM's woes are those of anyone involved in what was reported as "the largest securities fraud takedown in history." Today, Federal Prosecutors indicted more than 100 people on stock fraud charges. Officials said the one year investigation resulted in over $50 mln dollars in losses, mostly by elderly investors. The SEC sued 63 individuals and entities in five related enforcement actions. It was a classic pump-and-dump scheme where the defendants would purchase shares of micro-cap stocks and start propping the stocks to the public to increase the share price. Brokers were bribed or scheduled to receive kickbacks to promote the stocks. Once they get enough buyers to inflate the price, they begin selling their shares. This is commonly known as front-running. "The securities fraud involved in today's actions is among the most egregious witnessed in recent years," said SEC Enforcement Director Richard Walker. "These manipulations of numerous stocks were designed for the sole purpose of stealing investors' hard-earned dollars." The government wants to clean up this type of activity so that micro-cap stocks can be seen as reputable investments.

Looking forward into the market crystal ball, it appears that we will have much of the same type of trading activity until the Fed meeting on June 27-28. The analysts will continue to argue about the probability of rate hikes. As of today, the June Fed Funds futures contract has a 25 basis point hike priced into it. Yet, that will probably change. What is important to remember is that the Fed has never raised rates immediately after a 50 basis point rate hike. Since the last hike in May, we have seen convincing economic data that clearly shows a slowing economy. With the earnings season right around the corner, a rally could follow. Meanwhile, trade the current range and take your profits quickly as the market can turn on dime these days. Look for the financials to remain strong if we are to have this June rally. Good luck and when in doubt, stay out.

Matt Russ
Research Analyst

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