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Sniff, Sniff. Is That a Rally I Smell?

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         6-19-2000          High     Low     Volume Advance Decline
DOW    10557.80 + 108.50 10597.40 10440.10   923,114k 1,498  1,362
Nasdaq  3989.83 + 129.27  3990.79  3825.69 1,410,141k 2,046  1,898
S&P-100  798.88 +   8.53   804.95   788.81    Totals  3,544  3,260
S&P-500 1486.00 +  21.54  1488.93  1459.05            52.1%  47.9%
$RUT     522.79 +   9.05   522.79   510.05
$TRAN   2680.67 +   7.48  2687.55  2669.00
VIX       22.80 -   0.75    24.00    22.32
Put/Call Ratio       .42

Sniff, Sniff. Is That a Rally I Smell?

It wasn't apparent in this morning's lackluster trading, but this afternoon's rally on the NASDAQ, Dow, and OEX looks encouraging for the immediate future. Recall last week that PG's warning rendered a terrible script for the rest of the market that day. In a 180 degree turnabout, Honeywell scripted its own warning by stating that it would miss estimated earnings of $0.78 by $0.01 to $0.04 (Honey[well], I Shrunk the Bids?) and gave up $7.50 to close at $41. Who says only tech companies get whacked? Yet, the rest of the markets paid no attention today and left HON to wallow in its own misery. The sentiment has definitely changed for the better as financials staged a partial comeback from last Friday's route too, while strong tech issues again led the buying interest.

Why the change of heart over the weekend? Simple. Investors seem to think now that the Fed will no longer raise interest rates next week. Maybe so, but that doesn't mean that we're in the clear and back to the good old days of February. There are still four more previous rate increases that need to filter their way into the economy. In my opinion, that spells more earnings warnings and more punishment for the issues that miss. But for today, my opinion doesn't count. Investors were mostly focused on an increasing unemployment rate, lower retail sales growth the last two months in a row, and the 4% decrease in both housing starts and new home permits. Those are all things that Alphonso the Great (Greenspan) watches closely for signs of inflation. Yep, based on those, inflation, and thus the need to raise rates, appears in check. One other factor that appears to be at work here is a huge supply of cash on the sidelines that not only comes from continued 401K inflows, but according to chief market strategist at C.E. Unterberg Towbin, Brian Finnerty, also comes from anticipated March redemptions that never materialized. Apparently that money has never been put back to work.

That's the sentiment. Let's look at the technicals starting with our favorite, the NASDAQ. Finally, we saw a breakout over 3900 from the last two weeks of sideways trading. The OEX too broke over its resistance at 800, closing at 802. Making the NASDAQ pattern look even better is a series of higher lows over the past five trading days. After touching a low of 3695 on Tuesday, then 3764 on Thursday followed by 3818 in this morning's opening hour, the NASDAQ made it's move in a gradual, yet solid, ascent over 3900 starting at 1:30 ET. Finally, it finished the day at its high just shy of the magic 4000 level. Ideally, we'd like to see a pullback to 3900 followed by a volume-backed bounce and a breakthrough of the 4000 level. (I have a dream and tomorrow's another day to make it come true!)

While volume wasn't inspirational at 1.4 bln shares, it beats a poke in eye with a sharp stick. Also noteworthy was that in the final hour of trading, advancers slipped ahead of decliners, which had previously held the upper hand for most of the day. In the end, the NASDAQ gained 129 points to close at 3989 on 1.4 bln shares traded, with 2050 advancers beating 1895 decliners, and up volume beating down volume by almost 3:1. No promises, but let's see if this can continue for a couple more days.

Contributing to both the Dow and the NASDAQ's move was another big gain by INTC, up $10.44 to $136.50! This when AMD announces its new Duron line of chips, supposedly with superior performance to INTC's Celeron line? Yes. INTC said that it would again increase capacity to meet incredibly strong chip demand. The announcement nicely coincided with Lehman Bros. increasing their earnings estimates for FY 2000 and FY 2001. One might be tempted to think that this is a rehash of old news with an analyst upgrade. We think not. Largely unreported Friday was Michael Dell noting that Q2 sales at DELL were the strongest in seven years. Yes, seven years! Any doubt as to why DELL was up over $2 on strong volume along with INTC? Both led the technology charge, but DELL did it silently without press coverage. MSFT followed suit with a $1.13 gain despite the Appeals Court's denial of MSFT's motion to dismiss the proposed breakup. CSCO too was up, as was WCOM, JDSU, SUNW, MU and ORCL. Note that ORCL reportS earnings tomorrow, which could move the markets Wednesday on a good report. Drat - should have kept SMH as a Sector Trader play for one more day!

Even the Dow pulled out a nice move into the close, recovering part its loss from last Friday. It was up 108 points to close at 10,557 on 923 mln shares. Were it not for HON's loss, the index would have been up another 45 points. In the final hour on the NYSE, 1498 advancers here too edged past 1362 decliners, which held the lead position most of the day, while up volume was 140% greater than down volume. It's a little harder to get excited about today's Dow move since it continues to establish the formation of a neutral pennant - no breakout here. The Dow's expected trading range has now narrowed considerably to a range of about 10,500 to 10,700, or 200 points. That's about as tight as we've seen it, and it begs for a breakout, which might even happen in front of the FOMC meeting next week. Why? Just an observation, but since the Dow is still considered more "low tech" than the NASDAQ with its component companies still more affected by the price of crude, any announcement on oil production increases from the OPEC meeting on Wednesday could provide a catalyst for a breakout. Cross your fingers that it's to the upside.

In interesting, but not necessarily market-moving news, AOL again made waves by announcing they will enter the interactive TV business by selling set-top boxes exclusively through Circuit City at $250 a pop. You can now chat with friends while remaining a dedicated couch potato. It will reportedly work via regular TV signal (If anybody can explain this, I'd appreciate a note.) and begin rolling out in Baltimore, Phoenix, and Sacramento the first week in July. Microsoft's WebTV is in the same market, but has met with limited success. There are reportedly "only" 1 mln customers. AOL has its work cut out for it. But if anyone can pull it off, AOL with its base of 23 mln users has the best shot.

Speaking of rolling out new service, AT&T Wireless today announced their agreement to purchase the operations of Vodafone/AirTouch in San Francisco, GTE in Houston, and Primeco in San Diego for a combined $3.3 bln. This gives them a footprint of 1.3 mln more customers than they had before, and is a plus for AWE going forward.

We'll wrap it up short tonight. It's tough to say that the NASDAQ's move over 3900 is a permanent change in sentiment that will return us to the glory days of the 5000 level. Earnings warnings and a slowing economy will keep that in check. However, today's technical move was very encouraging for us short term traders and may yet deliver us more gains as the uncertainty of OPEC and the FOMC meeting becomes more predictable, or better yet, known. The OEX close over 800 supports the idea that today's rally wasn't limited to just a few issues and can continue, at least for the near term. The Dow on the other hand is still rangebound, but has become a tightly compressed spring. It too is pushing hard for a breakout that may be successful this week, though we won't predict a direction on it right now. In short, as the Williams Energy commercial says, "You are free to trade". Just don't end up like that daytrader in his underwear who says, "I just made $13 like it was nothing!", followed shortly by "I am destroyed." Sell too soon.

Buzz Lynn
Research Analyst

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