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MORNING COMMENTS WEEK OF 10/18/99-10/22/99

 

10/22/99

NO COMMENTARY PUBLISHED

10/21/99

A trio of unsavory characters tried to put a damper on spirits during Thursday's trading.  For the better part of the day they succeeded, but then just in the nick of time the tables began to turn, spirits began to rise, and the major averages began to rally after one of the miscreants departed for the day and a hawk in shining dove armor rode into town speaking words that soothed and uplifted.

The day's trio of villains were of course IBM, Philip Morris, and the bond market.  The hawk in shining dove armor none other than Fed Governor Edward Kelley.  If not for the presence of IBM and Philip Morris, the Dow would have gained 33 points, and the day might have been much brighter.  On the flip side, if not for a late day speech by Edward Kelley, the day might have been much darker.

As the last hour of trading began today, spirits were once again sinking towards their lows of the day.  By the end of the day's final hour, a remarkable transformation had occurred: the mood was brighter, losses had narrowed, and in the case of the NASDAQ and CBOE Internet Index, losses had turned to gains.

The down trodden bond market's close and the departure of pessimistic bond traders for home perhaps played a small part in the last hour recovery by stocks as it temporarily removed one of the day's voices of gloom, freeing the stock market from the tedious task of watching bonds sink to new lows, but the real credit for the last hour rally must be given to Fed Governor Edward Kelley.

In times of interest rate uncertainty, a few little words can move markets, and today was no exception.  After Kelley hinted that the Fed will not make a move based solely on excessive stock market valuations, spirits revived.  Although the words gave solace to those who had erroneously come to believe that there existed a magic target price which would prompt Fed action, the speech actually contained no great new revelations.

What should be remembered, however, is that while the Fed will not act to put a lid on "irrational exuberance" in the stock market, it will act to put a lid on the economic excesses and imbalances that result from that "irrational exuberance", as has been the case this year.

While Kelley's speech met with a favorable reception, neither the speech nor today's latest tidbits of economic data did little to increase or decrease the odds of a November tightening by the Fed.

Today's economic data was a mixed bag. Initial jobless claims came in at a stronger than expected 298,000 and the four-week moving average moved above 300,000 for the first time since this summer, but the numbers are still suffering the aftereffects of Hurricane Floyd related distortions, and the numbers thus need to be taken with a grain of salt.

The Philadelphia Fed survey also proved to be a mixed bag, but one tilted toward the negative side of the street.  The general conditions index fell, but the prices paid component hit a four year high, and the prices received component rose, indicating an increase in pricing power by manufacturers.

The bond market took note of the renewed signs of rising inflationary pressures contained in the report, giving up early day gains, with 30-year yields ending the day at 6.35%.

Despite the last hour recovery by the stock market, the current level of bond yields, Fed policy uncertainty, and the increasing deterioration of market internals will continue to throw a wet blanket on any market rallies.

Troubling during recent weeks has been the contrast between the performance of the broader market during days when the major averages rallied strongly and its performance during days when the major averages suffered steep declines.  Advancing issues barely nudged out declining issues during Wednesday's rally, while decliners easily trounced advancers during Thursday's IBM led decline, a pattern that has become increasingly common.

Equally troubling are other market internals: the advance/decline line hit yet another new multi-year low today, the cumulative four-week new high/new low index sank to its lowest level since June 1997.  The number of stocks that are in their own personal bear markets has also shown a steep jump in recent weeks: 62.9% of stocks are now trading below their 200 day moving averages, 71.7% of stocks are now in intermediate term downtrends.

With nearly two-thirds of stocks in long term downtrends, the present market can only be described as a stealth bear market, the market's internal deterioration hidden by a narrow basket of stocks that have kept the major averages within striking distance of their summer highs until recently.

At this point, among the major averages, only the NASDAQ remains above its 200 day moving average as a handful of stocks continue to hold it aloft, a condition which we do not expect to continue. Divergences have a way of working themselves out, and in the present unfavorable interest rate environment, it is likely to be the narrow strata of high P/E (or, in may cases, no P/E) stocks that have held the NASDAQ near record levels that bear the brunt of any further market declines.

A stealth bear market, the weakness of the dollar, and an unfavorable interest rate environment continue to be major reasons to avoid the U.S. stock market until uncertainty has run its course.  With the risk/reward ratio decidedly more favorable in several global economies where the economic cycle is still in its infancy, the profit potential is greater elsewhere.  At this point, we continue to favor markets in South Korea, Indonesia, Malaysia, Singapore, and select Latin American markets.  We would avoid the UK, Germany, Italy, Spain, and Hong Kong.  Japan remains a hold as long as the Nikkei is unable to move above resistance at 18400-18500. 

10/20/99

Stretch a rubber band far enough and eventually one of two things will happen: it will break, or it will snap back with a vengeance.

Today, the rubber band snapped back with a vengeance.

Better than expected earnings and an upbeat forecast from Microsoft lit a fire under the tech sector today, pushing the NASDAQ to its third largest point gain ever, with the index finishing up 99.95 on the day.  Box maker IBM surged, leading the Dow Industrials to a gain of 187.43 on the day. 

Today's Microsoft led rally pushed all sectors of the tech world higher, with the AMEX Computer Technology Index rising 4.71%, the PHLX Semiconductor Index tacking on a gain of 2.48%, the PHLX Computer Box Maker Index soaring 5.33%, and the Interactive Week Internet Index jumping 4.06%.

Sentiment also enjoyed a noticeable rebound today, with investors convinced that the time to buy on the dip had arrived, that stellar tech sector earnings were poised to lead the market higher, that a bottom was in place.  Interest rate jitters were pushed to the background as optimism began to bubble forth.

The question remains, was today's optimism warranted, or were today's sharp rallies in the major averages just a severe case of bear market fakeout drawing in the unsuspecting before the next leg down.

If the inter- and intra-market divergences apparent today, and events after the bell, are any guide, the unsuspecting bought into what can only be described kindly as a sucker's rally.

Stellar performances by the major averages masked a resurgence in intramarket divergences.  Today's rally was a narrow based rally, led by financial issues, paper and energy issues, the crowd pleasing large cap techs, and the Internet stocks.  Outside of the large caps, the rally became a little less spectacular, with the Russell 2000 gaining 0.73% on the day and the S&P SmallCap 600 inching up by 0.4%.

For Dow Theorists, the day was anything but "stellar" as the Dow Utilities posted a fractional loss and the Dow Transports slid 51.77 to a new 1999 low.  Market internals were also nothing to write home about, with advancers beating decliners by a narrow margin of 16.2 to 13.7 on the NYSE, and new lows swamping new highs 329 to 20.  All in all, beyond the major averages, today's market contained nothing to suggest a new leg up was in store.

While the intramarket divergences were a minor sore spot, the intermarket divergences stood out like a throbbing sore thumb. The bond market failed to take part in today's rally, despite a lower than expected reading from the latest trade gap figures.  The trade gap in August narrowed to $24.1 billion from July's record $24.8 billion.  The consensus estimate had been for the trade deficit to hit $25 billion.

The bond market failed to rally on the better than expected numbers because beyond the headline figure, the trade numbers told a different story, a story that only reinforced the view that further Fed action will be required.

Imports and Exports both hit new records in August, with exports surging 3.7% as the global economic recovery continued to gain momentum, and imports rising 2% as domestic consumer led demand remained on an upward trajectory.  While surging exports are good news for American manufacturers, they are bad news for anyone who is looking for signs of a slowing economy, or for an easing of labor market tightness.  Third quarter GDP will likely come in stronger than expected, with growth rising to 4.5%-5% in the quarter.  The import figures once again reinforce the fact that this year's rise in interest rates has been ineffective in slowing down consumer spending, and that more severe action will be required to curb demand growth.

While stock market internals, the bond market, and today's reading on the trade deficit took some of the glow off the gains enjoyed by the major averages, the release of earnings by IBM after the bell has thrown a bucket of cold water on the market's new found optimism.

IBM met expectations, but warned of a Y2K related fourth quarter slowdown.  The news turned what was perceived as a good day sour, with IBM giving back all of today's gains in after hours trading, and the futures market throttling into reverse, with the S&P 500 futures losing 7.4 and the NASDAQ 100 futures tumbling 28.  A mere meeting of the whisper number by AOL, and a lower than expected growth forecast from Amgen only added to the after hours down turn.

The stock market enjoyed a bounce today, and a temporary respite from the jitters, but with interest rate uncertainty set to continue, and Y2K jitters now surging to the forefront, a retest of the 10,000 level on the Dow is in order.

Finally, on the subject of this week's two high profile IPO's, perhaps a little story is in order.  In the mid '70's someone made a lot of money on pet rocks, but times and fads change, and there are no longer profits to be made by investing in pet rocks...and therein lies the danger of investing in the latest hot flavor of the day....short term gains, long term heartache. 

10/19/99

On a day with one of the heaviest earnings release calendars this quarter, the word spread like wildfire, "Expectations were met, but the results fell short of the whisper number!".  With those words, an ecstatic sigh of relief went through the crowd as early morning fears were quickly cast aside and thoughts turned from escaping the carnage to entering the bargain basement.

The eagerly anticipated release that caused the early morning stir?
The Consumer Price Index.

This morning's release of September CPI data met the consensus estimate of a 0.4% rise in the headline figure and a 0.3% rise in Core CPI, but came in far better than the doomsday scenario "whisper number" which had emerged in the wake of last Friday's PPI report.  While today's CPI was distorted to the upside by one-time increases in tobacco and autos, the numbers did show a slight upward bias in trend, not enough by themselves to prompt the Fed to act, but still something that bears watching.

Today's numbers, as has become the custom in the age of 10 second sound bytes, were viewed by many in a vacuum, with many onlookers believing that today's CPI data deceased the chances of a Fed rate hike at the November FOMC meeting....we wish that it were that easy.

While today's numbers once again indicated that inflation remains tame on the consumer level, the numbers are but one piece of the larger puzzle.  Inflationary pressures have begun to emerge on the producer front, largely due to this year's trend reversal in commodity prices, and a distinct upward bias has become apparent on the wage front as employers compete for an ever shrinking pool of available qualified workers.  Many companies have also started to regain pricing power. Add to this mix strong consumer demand and a recovering global economy, and the threat of inflation emerging still remains very much alive.

Today's CPI figures merely showed us that inflation has yet to work itself all the way through the pipeline to the consumer level.  The numbers indicate that the Fed still remains ahead of the curve, that at this stage it hasn't been forced into a position of being reactive rather than pre-emptive.  The numbers do not indicate, however, that the Fed's job is done.

We would continue to look to forward looking economic data (rather than the backward looking CPI), in particular readings on consumer demand and consumer confidence, when trying to assess the future interest rate scenario.  With global growth on the rebound, foreign economic figures must also be factored into the equation.

Despite today's relatively benign reading on inflation at the consumer level, the larger picture still points to further rate hikes on the horizon, a fact which was not lost on the bond market today as yields on 30-year treasury bonds shot up to 6.342%.

Relief, deeply oversold conditions, and a bit of vacuum economics reading, allowed the stock market to put its rate hike jitters on the backburner for the larger part of the day until intensified selling in the bond market forced uncertainty to the forefront once again.

Technically, we were looking for two things today: the Dow to take back the ground lost on Friday and close above Friday's open, and the bond market to enjoy a relief rally.

During the first half of the day the Dow met our challenge, comfortably moving above the 10286 level we were looking for and coming within 10 points of the next resistance at 10345 as it shot out of the gate to a 219 point gain.  The bond market never enjoyed its day in the relief rally sun, managing at best a 2 basis point gain before crumbling during the afternoon on fears of an impending European Central Bank rate hike.  The stock market's relief rally was stopped dead in its tracks by the sharp selloff in bonds, with the Dow struggling to keep its nose above the 10200 level at day's end.  At the end of the day, we didn't' get what we were looking for, and the phrase "technically ugly" echoed off the walls.

Better than expected earnings from Microsoft after the bell have lifted the Globex NASDAQ 100 futures to a 23.5 point gain at 5 p.m., but today's late day bond crumble and tomorrow's release of the latest episode of As the Trade Deficit Grows have stacked the odds against a sustainable rally developing from Microsoft's better than expected news.

The day ended as it began, with the Dow and S&P in short, intermediate, and long term downtrends. With uncertainty set to continue its dominance over the coming weeks, now is not the time to buck the prevailing trends, Microsoft earnings or not.        

10/18/99

On the eve of the twelfth anniversary of the death of portfolio insurance as a viable concept, the world shivers and market participants from New York to London, from Kuala Lumpur to Sao Paulo, tread carefully on fragile eggshells, all the time wondering if history will repeat itself, if the death of an era is at hand, if the days of buy on the dip are gone.

Summer has given way to Fall, pre-earnings season bullishness has ceded the stage to rate jitter paranoia, and thoughts of new record highs have been replaced by pensive talk of bottoms being put in place.  The world of irrational complacency has been turned upside down, but talk of an end to the carnage remains premature because something is missing: the necessary ingredient needed to stem the selloff has yet to arrive.

That necessary ingredient is panic in all the right places, specifically panic among retail investors .  Granted, recent action in the bond market suggests that panic has made an appearance in the bond pit, and Friday's closing CBOE equity put/call ratio of 0.91 suggests a touch of paranoia has arrived in the equity market, but these instances of panic have largely been localized among professionals and it is not the professional who holds the winning card needed to end the reign of uncertainty.

The individual investor, specifically the buy and hold long term investor, holds the winning card needed to put a bottom in place.  The average "mom & pop" investor remains relatively unscathed by the winds of fear that have swept across the financial landscape, and herein lies the danger for the market.  Historically during market declines it is necessary for panic to spread to the average investor before a bottom can be put in place, and this time is no different, but the stakes have been raised.  The fear this time around must be great enough to psychologically give a slap on the wrist to the hand reaching into the cookie jar of unquenchable consumer spending, but it must not be so great as to send the highly leveraged patient into cardiac arrest.

If the past is any guide, the odds are stacked against this market decline ending in an orderly fashion with little pain.  Typically, when sentiment overswings on the upside, reaching an extreme level, the path to normal levels of sentiment is not reached without the pendulum first swinging farther than expected to the downside.

A slowdown in consumer spending, rather than the latest reading on CPI or PPI, holds the key to ending interest rate uncertainty and the market's malaise, but with fear still confined to the outskirts of Main Street the necessary slowdown could be a while in the making.

Today's 96 point rally by the Dow Industrials and 6.72 point bounce in the S&P 500, and the outcome of tomorrow's CPI report, thus need to be taken with a grain of salt because the consumer has yet to call a bottom.

On the subject of the Dow, and specifically the financials which pulled it higher today, the rally must be viewed in the context of what it is: a one day countertrend move.  Despite their rally today, the financials remain a major cause for concern, a major source of divergence that suggests a major top is in place.  The NYSE Financial index peaked in July 1998 and today's rally left the index still on the south side of a critical long term support Fibonacci fan line at 469, a support which has held for 5 years with only two brief interweek forays beneath the line in July 1997 and October 1998, as today's market chart shows. A failure by the index to climb back above support would have bearish implications for the entire market.

Like today's countertrend Dow rally, tomorrow's CPI numbers will also have to be viewed in the context of the larger picture, a picture that now shows inflationary pressures emerging at the producer level and consumer demand undiminished by rising rates.  While a better than expected CPI reading would spark a relief rally, the CPI is unlikely to have little bearing on the Fed's next move.  As we have said before, if the Fed waits for inflationary pressures to show up in the CPI report  before it acts, it will have fallen behind the curve.

Any relief rally could be short lived however, because Wednesday will bring the latest reading on the ever widening trade deficit, a number that could put serious pressure on an already weakening dollar.

Button-up, it promises to be a bumpy ride going forward.

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Last modified: April 02, 2001

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