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Market Wrap

The rally gains steam as inflation news comes in tame.

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        WE 7-14           WE 7-7           WE 6-30         WE 6-23
DOW    10812.75 +176.77 10635.98 +188.09 10447.89 + 43.14  - 44.55
Nasdaq  4246.18 +222.98  4023.20 + 57.09  3966.11 +120.77  - 15.22
S&P-100  815.52 + 12.52   803.00 + 12.75   790.25 +  9.18  -  7.67
S&P-500 1509.98 + 31.08  1478.90 + 24.30  1454.60 + 13.12  - 22.98
RUT      542.63 + 14.41   528.22 + 10.99   517.23 +  6.82  -  3.33
TRAN    2919.04 +134.40  2784.64 +139.27  2645.37 + 14.66  - 42.48
VIX       22.61 +   .79    21.82 -   .44    22.26 -  3.63  +  2.34
Put/Call    .38              .48              .48              .61

The rally gains steam as inflation news comes in tame.

Investors cheered when the economic results were announced Friday morning. The PPI headline number came in only slightly stronger than expected with a +.6% increase but the core rate actually fell -.1% for June. No rampant inflation there! The Retail Sales however did show a slight increase of +.5% for June showing that consumers were still braving the heat and the market downdraft to hit the shopping malls. Industrial Production was up +.2% and Capacity Utilization steady at 82.1. All appears to be well in the economy and the markets are responding positively. The Nasdaq is streaking for the sky while the Dow is still suffering from sector rotation back into techs.

The big news of course was the record $145 billion judgement against the tobacco industry. The tobacco stocks reacted with a yawn trading down only fractionally. Tobacco analysts and investors had anticipated the event for some time. They called the trial constitutionally flawed and a sure win on appeal. The tempers and emotions ran high on the announcement with the attorney for the smokers actually yelling a verbal challenge to the Phillip Morris CEO to step up to the table and face the music. Some analysts expect appeals could last a decade.

On the opposite side of the news ledger Salomon Smith Barney issued a research note that said, "Clearly, we believe the concerns over Amazon.com's bankruptcy are overstated." Contrary to a Barrons article claiming they would run out of cash in 22 months or less, SSB said "Amazon won't run out of cash within the next year or the next 10 years." AMZN soared +7.50 on the news. That along with the YHOO earnings on Tuesday helped pump new life into the Internet sector. The Internet incubators CMGI, ICGE, SFE all posted solid gains with ICGE closing the week +30% off its lows.

The Nasdaq soared to close at 4246 the highest close since April 7th and clearly in breakout mode. The Nasdaq gained +5.5% for the week and is now up +4.3% for the year. The Dow is the only major index that is still below its Y2K level and down -6% YTD. Drug stocks provided the major drag on the Dow on Friday with MRK and JNJ falling to profit taking after the denial on their over the counter cholesterol medication application.

The good news bad news story in the chip sector was Altera and Vitesse. Altera (ALTR) beat earnings by $.05 and jumped +$8.38 and Vitesse only matched estimates and dropped -$11. Takes guts to hold over earnings in my opinion. The 90/10 rule always seems to impact my hold over plays. The 90/10 rule? There is a 90% chance the company will miss estimates on any stock I own. This also works inversely as well. There is a 90% chance of a blowout on any stock I don't own. The 10%? That is the profit I make on any stock I actually guess right on after the premiums deflate before I can get my closing order executed.

I have people sending me emails with so much excitement they are like kids in a candy store with a pocket full of new money. All memories of the March/April market drop have been forgotten as investors rejoice at double digit moves in their favorite stocks. Bullishness abounds in every corner. Warning season is over although there may be some stragglers yet to confess. The focus is entirely on earnings. Blowouts abound, stock splits are like popcorn. There is no negativity in the news other than the tobacco judgement. Nasdaq 6000 is already being mentioned before year end. Scary!

Before we start targeting 6000 I think we need to focus a little closer first. The market is totally focused on earnings with the Fed a distant memory, at least until August. Earnings are incredible with 14% of the S&P already announced with a +23% average growth in earnings. Only two of the S&P companies that have announced actually missed their estimates. Tech stocks are coming in at almost +35% and analysts can't say enough good things. Next week should be another love fest with over 200 S&P companies announcing. This is the busiest week of the season. Fourteen Dow stocks announce including GM, BA, KO, EK, MSFT, INTC. It is a party with guests squeezed into every corner guzzling champagne and raking gourmet portions off the buffet table. Tick tock, tick tock. As the calendar quickly counts off the days, the week we have waited for the last three months is finally upon us. The Cinderella ball is in full swing. Enjoy the party! Join the fun!

Remember what happened to the last big party you hosted? As the evening wore on the entertainment faded the revelers with too much to eat and drink started slipping away. Home to baby sitters and Alka Seltzer. Fickle friends making excuses to leave once the drinks dried up and the food turned brown around the edges. The Cinderella market may also find its carriage turned back into a pumpkin and the horses into angry bears. Once the smorgasbord of earnings turns into a trickle of crumbs after next Friday the attention of traders will then focus on summer vacations, family events, kids returning to school and staying out of the heat. That is when the real strength of the rally will be tested. Investors will start to focus on the August Fed meeting and July economic data. Is it for real? We will find out week after expirations. Meanwhile enjoy the party and don't forget the Alka Seltzer. The hangover may not be fun.

Austin Passamonte makes an interesting point in the Market Sentiment Section today. Institutional traders, the ones that trade in mega-millions of dollars and are seldom wrong, are shorting the S&P-500 and even added to their positions last week. The short interest is at a five year high. Now this can work two ways. If the market does a nose dive next week as they expect then they will profit handsomely. However, if there is enough retail sentiment to nudge the markets up another couple hundred points then we could see the father of all short squeezes. Record short interest could create a record rally. It is a showdown at Wall and Main. A game of chicken between the retail traders who are adding to long positions with reckless abandon and the huge commercial traders like hedge funds who are shorting like there is no tomorrow. Either outcome is likely to produce some serious financial fireworks. Money coming into funds slowed last week. AMG Data claimed only $1.8 bln in new cash went into equity funds and TrimTabs.com only reported $1.1 bln in the week ended on Wednesday. This is a far cry from the almost $7.5 billion that TrimTab.com said flowed into equity funds the week before. I would say that was a significant difference. If you have been following Mary Redmond's articles on "Follow the Money" you know how important these numbers are. Also, the put/call ratios are the lowest in five weeks and the VIX is still stuck around 22. These are both bearish signals.

The economic calendar is light this week with the only major release being the CPI report on Tuesday. This is not normally a market mover. More important in my opinion is the testimony by Greenspan on Thursday to the Senate Banking Committee. He has been very tame recently in his public comments but you never know when the tide will turn. Maybe the oncoming election will keep him muted and on the sidelines but be aware.

Don't forget the 3-day stock/option seminar in Seattle starts next Friday and there are still a few seats available. Instructors include Chris Verhaegh, Steve Rohades and Scott Zimmerman. See the rest of the schedule below.

Trade smart, sell too soon.

Jim Brown

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