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Market Wrap

Buy the rumor, sell the news?

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        08-22-2000        High      Low     Volume Advance/Decline
DJIA    11139.20 + 59.40 11189.70 11081.30  819 mln   1440/1327
NASDAQ   3958.22 +  5.07  4011.15  3957.85 1.41 bln   1988/2007
S&P 100   818.58 +  0.14   824.85   818.06   totals   3428/3334   
S&P 500  1498.13 -  1.35  1508.45  1497.42           50.7%/49.3%
RUS 2000  517.46 +  1.01   518.98   516.48
DJ TRANS 2823.08 +  4.49  2824.88  2809.92
VIX        19.62 +  0.06    20.07    19.19
Put/Call Ratio       .55

As expected the Feds left interest rates unchanged and they are not now considered a threat until the Nov-15th meeting. The Fed had some pretty encouraging words which should have catapulted the indexes into the stratosphere. Saying that "demand is moderating" and "closer to potential" sounded like less bias toward raising rates in the future. Also they mentioned that the ever increasing productivity was increasing the growth potential going forward. Whoa !!! Did they actually say that? Yep! In English this means that they may be coming to a realization that the economy (GDP) can grow at a faster rate than previously thought. That is a radical change in agreement among the Fed members. This would be very positive for the market going forward.

The Fed announcement was met with an immediate drop in the markets as the statement was read that they were still biased toward possible future inflation. Once the entire statement was analyzed and the bullish sentiment was seen the major indexes soared to recent highs. The Dow hit almost 11190, the Nasdaq broke 4000 for the first time since July-26th and the Wilshire-5000 broke above 14000 again for only the second time since April. However, you knew it was coming, the "buy the rumor, sell the news crowd" was ready and waiting.

The Dow bounced off resistance yet again and dropped over -50 points from its high but still managed a respectable +59 point gain. The Nasdaq however barely managed to remain positive with a +5 gain after dropping -53 points from its intraday high. The Wilshire-5000 dropped almost -100 points back to close almost unchanged at 13969. The real test will come on Wednesday to see if the selling trend from the last two years continues. The bullish Fed comments will give investors a sleepless night as they try to decide if they want to buy now with the Fed on hold for two months or wait for confirming volume to return after Labor Day.

With the Fed on the sidelines investors and analysts will have to focus on something else to provide market moving news. The fall back is usually earnings. That might not be a good thing to focus on right now. With earnings dropping due to past Fed hikes investors are concerned that many stocks may already be over valued. First quarter S&P earnings were up +23.6%, second quarter came in at only +21.6% and the third quarter is now forecasted at only +17.6%. The normally healthy fourth quarter is expected to post only +15.7% gains and all of 2001 is now in question. These earnings are still stellar since historically the S&P is only expected to gain +8% or less than half of the current quarter estimate. Still investors have been moving back into more of a value mode and have been leaning away from stocks with falling earnings. This earnings focus will now be more important moving into the next earnings cycle. This cycle begins on Sept-5th for the third quarter. Analysts are quietly lowering estimates on big name companies. Microsoft estimates by some analysts have dropped -7%, Lucent -33%, Federated -64% for example. These stealth changes are based on guidance from the companies themselves and reflect sales trends on a broad scale. Add to that earnings warnings like we had after hours today from VNWK and ABS and the target starts getting a little blurred.

Looking a the positive spin on the news today is very encouraging. Even though the markets pulled back there were some notable events. The NYSE composite hit an all time high as well as the S&P Financial Index. The Nasdaq is sitting right at the 4000 door and the Dow is right at upper resistance and only 600 points from a new high. Financial stocks JPM, MER and C all hit new 52 week highs and with the Fed sidelined there is no reason the financial stocks should not continue their run. Investors sitting on the sidelines are probably having serious second thoughts. Fed watchers feel the Fed will not raise without a serious jump in economic factors at the October meeting due to the election. There is a contingent that thinks we could see another hike at the Nov or Dec meeting. The main point, in my opinion, is the almost three months before the November-15th meeting. This gives the markets plenty of time to establish a positive direction and make a major move. The bad news, the month of October is right in the middle of the rally path. We all remember previous Octobers. Most of us in our nightmares!

The main thing to keep in focus for the next several weeks is to follow the market. Just because all the factors are lining up for a huge rally, that rally does not have to happen when we think or even happen at all. The key is simply trade what the market gives us. As I stated in Sunday's commentary the next two weeks in 1998 and 1999 were not good weeks to be in the market. Two years does not make a trend but it should give us cause for caution. The drop from the highs today into the close could have just been profit taking from the pre-Fed rally during the last several weeks. However, it could also be the start of a repeat of the last two years pre-Labor Day drop. I know I could build a very convincing case for a rally instead but the point is we should not go into this period with a preconceived idea of which way the market will go. Whenever you trade on the direction you think or hope the market WILL go (short term) those trades have higher risk. I know we all trade directionally every day based on the best information we have at that time but the market is known for going against conventional wisdom when we least expect it. Now, with every market pundit seeing the starters flag drop with the Fed decision today does that mean we are at the extreme for bullishness? The VIX is still flashing caution with another 52 week low of 19.19 intraday today.

What about the sentiment indicators? Are you ready for this one? I am the biggest contrairian sentiment indicator I know. When I start getting the itch to really go long with every dollar I have, then the market is at the top. Same with my pain threshold. When I just positively cannot bear to hold those long positions any longer and I sell for substantial losses then I can look back later and point to the exact market bottom. When all the smoke clears I am just an investor just like everybody else. My urge to buy or sell is no different than anyone else. I sit on the sidelines and watch stocks rocket that I was going to buy on the next pull back. I watch all my stop losses get hit on a spike and the options double in price the next day. I tell you all this only to say, I really want to buy something based on all the positive market factors. That ladies and gentlemen may be the best indicator of market direction of all. If I am itching to buy and it is not a bottom then it must be the opposite, a top. I know you never thought that your purchase was the signal for everybody else to sell, right? Been there, done that, a lot! I have readers who email me and say "buy puts on XXX because I just bought calls" so I know I am not the Lone Ranger when it comes to that feeling.

While all the indexes appear poised to break out and run to new highs they are also sitting right below resistance. The opportunity is clear for them to either run or break but there are no news events left to power them upward. News moves the market and lack of news makes traders start to focus on the negative events. Possible negative events remaining this week include FOMC minutes of the last meeting which will be released on Thursday as well as a Greenspan speech at the Kansas City Fed Confab on the same day. Volume should continue to be low as traders start leaving early for vacation before the Labor Day weekend and this could make moves in either direction sharper. I simply urge you to be fully aware of all the factors before you go long during this Twilight Zone period for traders. In short, if we rally go long above 4000, close positions if we break back below 4000 again. If we get a pull back then go long on any bounce from below 3800. Let the market tell you when to buy.

We were bombarded with complaints for not scheduling a seminar in San Diego in the fall. We are trying to get a room and will update you as soon as we know something. Those not in San Diego see the seminar schedule below.

Good luck and sell too soon.

Jim Brown
Editor

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