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Will There Be A Pre-Fed Rally Or Sell-off?

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        08-16-2000        High      Low     Volume Advance/Decline
DJIA    11008.40 - 58.60 11089.00 10961.10  934 mln   1599/1239
NASDAQ   3861.20 +  9.54  3914.84  3844.17 1.40 bln   2028/1905
S&P 100   806.91 -  4.90   816.44   803.76   totals   3627/3144   
S&P 500  1479.85 -  4.58  1496.09  1475.74           53.6%/46.4%
RUS 2000  512.74 +  2.81   513.33   509.93
DJ TRANS 2875.81 -  8.60  2884.17  2866.46
VIX        20.67 -  0.30    20.86    20.22
Put/Call Ratio       .55

Will There Be A Pre-Fed Rally Or Sell-off?

The DJIA did its best to hold above the key support level of 11,000, but investors are beginning to wonder if it can hold. The blue chips had a tough day right from the open, steadily declining as the day went on. The day low was put in during the last hour of trading as the DJIA bounced off support near the 10-dma. This helped propel the recently resurgent Dow to a close of 11,008.39. Whew, support holds on a closing basis and the bulls have something to lean on.

Nasdaq who? I have more to say about DJIA which has had only a minimal amount of focus this year relative to the Nasdaq. Not anymore though. Most traders are now watching this as the main index for determining market sentiment and direction. Most of the new found popularity is from the Financials and Utilities which have been hot sectors in July and August. Oil has also been on a steady run for nearly three weeks. Could it be that times are changing and that tech stocks are less important to investors? Maybe for now, but I wouldn't bet on that come mid- October when the techs usually bottom out.

Still our focus is now in the options world and for now the action is in the aforementioned sectors. So if these three sectors are the main drivers, how do they look going forward? I have added charts of those indices for individual analysis. As you can see, the Financials worry me as this is the exact level and time they sold off before the last FOMC meeting. It just doesn't look like it has the gas to get over 900 any time soon.

The Utilities, on the other hand, are looking pretty strong as it makes new highs almost daily. There is no resistance in sight and (as most Peter Lynch fans would tell you) stocks that are hitting new 52-week highs, usually continue to do so.

Finally, the Oil sector is back from the dead. Just when we thought they had the production problems under control, oil has spiked back above $30. Up $0.13 to $31.80 today, to be exact. It's bad for our wallets at the gas station, but good for oil stocks. There was even word today that Pres. Clinton sent a letter to Saudi Arabia to help relieve conditions. Nevertheless, from natural gas to oil drillers, stocks have been climbing.

Anyhow, this look at the three hottest sectors pushing blue chips higher could be concluded with saying that two are still looking strong (Oil and Utilities) and one looking lower (Banks). The downside is when Bank stocks fall they can affect the entire market sentiment.

Back to today's action. The Nasdaq finished up 9.54 to 3861.20 while the DJIA lost 58.61 to 11008.39. Volume was average at 1.37 bln and 931 mln, respectively. Advancers beat Decliners by a 15-12 margin on the NYSE and 20-19 on the Nasdaq. The S&P 500 closed down 4.58 to 1479.85. The Russell 2000 was up 2.81 to 512.74. Banks, Biotechs and Retailers lead the way down while Semis, Oils, and Drugs held the averages up.

The big news was the CPI that was released before the open this morning. It came in right in line with most expectations at a gain of 0.2%. This is the fourth straight month of 0.2% gains for the consumer price index. While this is an acceptable rate of growth according to most, any fluctuations upward from here will be met with hawkish comments from the Fed. Also, July housing starts fell 3.3% to a 1.512 million rate, lower than the expected 1.55 million. And building permits slipped by 2% to 1.497 million. At this point, traders are mostly waiting for the July employment report. "Inflation hawks may be eating crow today," said Oscar Gonzalez, an economist with John Hancock Financial Services. "Despite their fears of tight labor markets and a strong economy, inflation is only creeping higher, not accelerating."

Hewlett-Packard was in the news today, after the close, with their earnings report. Adjusted earnings from operations jumped 37% to $1.05 billion, or $0.97 a share, an increase from $0.71 in the year-ago period. Analysts expected earnings of $0.85 according to First Call. The gain was mostly attributed to strong home computer and notebook sales. Carly Fiorina, HWP's CEO, commented that "last year at this time, we committed to becoming a more aggressive and focused H-P, delivering strong top and bottom line growth on a consistent basis. Today's results demonstrate the tremendous progress we're making in all of our businesses around the world." To add to the euphoria for HWP call buyers and put sellers was the announcement of a 2:1 stock split. This is the third major split announcement in two days as CIEN and GLW announced splits. HWP was trading up nearly $10 after-hours to $120.75.

International Business Machines and Kana Communications said on Wednesday they had formed a global strategic alliance to provide systems that will allow businesses to manage interactions with customers and business partners over the Web. This helped to propel shares of KANA by 17.3% today to $38.13. This is the second major announcement by KANA this week too. On Monday, they announced that Cisco has chosen their eRM (enterprise relationship management) solution.

As far as tomorrow goes, you would have to figure a rally for the DJIA given the plus 11,000 close and the after-hours HWP news. If HWP can hold a $10 gain tomorrow, that would be a nice head start for the index. It will be interesting to see if it can hold those gains. The Nasdaq will likely follow suit based on Hewlett's "tech" status.

My concerns are two-fold. First, the Financials need to hold their current ground. A post-Fed collapse like we witnessed after the last FOMC meeting will curb the current bullish bias. Many of these stocks were heading into new 52-week highs and a reversal now could spell trouble. Second is the situation once again developing in the oil patch. We were never really able to kick the inflation fears before until oil dropped back below the $30 mark in mid-June. Now we are back near the high end of the range and it won't be long until economists start pointing to this and screaming the "I" word. Investors and analysts may start selling first and asking questions later on any minor uptick in economic data. It will hang over the markets like a dark cloud, just like we saw from March to June.

But I may be getting ahead of the markets in the short-term. Right now the Fed is expected to sit back and let the markets work. The VIX sits at 20.71 with very little movement. There is some word that professionals are selling into rallies, but you wouldn't be able to tell by looking at the Dow. That is still the area to focus on in this market. If you are playing the Nasdaq, continue to do it on a stock-by-stock basis. With the FOMC outcome already wildly anticipated, the volatility going into Tuesday should be less than normal. Trade wisely and stick to familiar roads.

Ryan Nelson
Editor

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