Market Jitters again this week
canoe.com
The Coming Week
Greenspan Holds Match to Powder-Keg
Market
By JUSTIN LAHART
Senior Writer, The Street.com
6/11/99 7:59 PM ET
The coming week should probably be cordoned off with police tape.
It certainly looks dangerous enough. With the release of the May
consumer price index Wednesday, Alan Greenspan speaking to
Congress Thursday and a triple-witching Friday, we could be in for
some rocky action.
The CPI, while highly anticipated, will probably be benign. At least to
some extent, most economists feel that last month's surprising
strength, while it got the direction right, was an anomaly. "I expect
we'll see a much softer number," said Suzanne Rizzo, U.S. economist at
MFR. "If we don't, it's going to be very alarming."
The market, however, is not as sanguine about Greenspan's oration,
which many think will signal what the Federal Open Market
Committee will do. The news that Fed Chairman Greenspan would
speak Thursday morning before Congress' Joint Economic Committee
broke on the day the Purchasing Managers Index sent the bond
market into paroxysms. Said JEC vice-chairman Representative Jim
Saxton when he announced the hearing, "The current stance of
monetary policy, and the scheduled release of new producer and
consumer price data in the days leading up to this testimony of
Chairman Greenspan, make this hearing especially timely."
No kidding. Ever since the meeting was announced, investors have
been looking to it for the definitive word on what the FOMC is going
to do June 29 and 30. A string of strong economic reports and a
parade of Fed types making hawkish comments have pretty much
convinced the market that the FOMC is going to hike rates, but what
everyone wants to know now is what the character of that hike will be.
A quarter point and a bias to tighten? A half point? A quarter now
and a quarter later? When the Fed hikes, is it fighting inflation? Or is it
just taking back this fall's emergency cuts?
Because people don't know the answer to these questions, there's
been a terrible lack of conviction in the market. "Who's willing to step
up to the plate and sustain their buy?" asked Dick Dickson, technical
analyst at Scott & Stringfellow. "That's one of the reasons you see
all these shifts around with the rapid rotation from sector to sector,
but you don't get enough follow-through to take the market up
substantially higher. You get a really nice rally for a couple of days
and then they take it all away."
That lack of conviction has kept people out of the market, a
development that has cropped up in turnover statistics. On an
average day in early May, more than 900 million shares would change
hands on the New York Stock Exchange. In the week just finished,
there was only one day where volume topped 700 million shares on
the NYSE.
The way stocks trade from here to the Fed meeting will have a lot to
do with how far Greenspan goes to clear the air. If he sufficiently maps
out the Fed's current views on monetary policy, giving markets some
sense of what (and how much) the FOMC may move rates, it could set
the stage for the next leg up in the stock market -- either because the
market perceives its fears are overblown or because Greenspan speaks
to those fears. That could lead to the kind of capitulative selling
needed to shake out weak holders and bring in real buyers. It may well
be the former. There is a sense that the selling in the bond market,
which has already priced in the Fed hiking half a point, is way
overdone.
Said Howard Simons, quantitative strategist at Fimat Futures: "The
bond market has traded terribly for the last month, but where have we
gone in stocks? Sideways. One market is wrong and the bond market
is usually the wrong one."
There have been a couple things going on in the bond market that
support that view. One is a tremendous raft of corporate supply.
Corporations are trying to tap the debt market before rates go up and
that's been pressuring the market.
Another, which Simons thinks may be having an effect, is the
mechanics of mortgage hedging. When rates are going down,
mortgage companies buy Treasuries to protect themselves from
losses when people refinance mortgages. When rates are going up,
and nobody's refinancing anymore, they sell that protection.
As a result of what the bond market's been doing, "we've gotten into
this lather over how the Fed is going to beat us up for the rest of the
year," said Simons. "If the news is benign, if nothing happens, than
we could pop to the upside."
If there is an upside pop, triple-witching Friday -- the quarterly
expiration of index futures and options on stocks and index futures --
could exaggerate it. Simons' sense is a lot of people sold calls on the
June S&P 500 contract around the 1350 level, and haven't covered
them -- playing with fire. "I think perversely, guys won't buy short
calls back for a teeny or an eighth," he said. If the market runs higher,
they'll be sorry they didn't, and run the market higher as they try to
cover before expiration.
But conversely, Steve Kim, equity derivative analyst at Merrill
Lynch, has noted that there is considerably near-the-money open
interest not just on June S&P calls, but puts, too. Not just any move
higher, but any move lower, could be greatly exaggerated. As if the
stock market wasn't enough of a powderkeg already.
Anybody got a match?
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