July 4, 1999
Last week, the Dow Jones Industrial Average was up 586.68 points to a record 11,139.24 (+5.56%), the Nasdaq Composite was up 188.37 points to a record 2741.02 (+7.38%), the S&P 500 was up 75.91 to a record 1391.22 (+5.77%) and the Russell 2000 index of small cap stocks was up 13.40 to 456.51 (+3.02%).
For the year, the Dow is up +21.32%, the Nasdaq up +25.01%, the S&P up +13.18% and the Russell 2000 up 8.19%. The StockMotions Newsletter Tracking Portfolio is up 23.64%.
The Fed opened the floodgates and the waters came with full force!
On Wednesday, the Federal Reserve did what everyone had expected – they raised the Fed Funds rate by 0.25% to 5.00%. That alone would have been a bit sobering for the market. However, the announcement of a shift to a neutral bias literally triggered an avalanche of buying. Volume following the announcement literally exploded.
The shift to a neutral bias was a total surprise to anyone who follows the market. One week ago, it was very hard to find anyone who even entertained the idea (including yours truly). The market interpretation of the move now assumes that no other rate hikes are in the future.
But wasn't the Fed worried about "irrational exuberance"?
Listening to comments by Fed officials over the past couple of months, one got the sense that the Fed was genuinely concerned with a frothy stock market. It was one area where inflationary pressures resided. Certainly the Fed knew what type of reaction a shift to a neutral bias would have…so why announce the shift…it would seem counterproductive to their "frothy" market concerns.
Well, I have a few theories.
First, the state of the market just one week ago. One week ago, many market internal indicators were in weakened states. There really wasn't much breathing room for any more market interest rate hikes. Fed officials may have realized this. By keeping a tightening bias, the bond market probably would have sold off and thus set off a market selloff….which in turn would have more than likely spread overseas…possibly hurting the ongoing recoveries.
Since the ¼ point move was all but a certainty, the perception of the possibility of more rate hikes (by staying in the tightened bias) may have been too much for the market at this point.
So they are left with two alternatives.
1 – don't raise rates
2 – go back to a neutral bias.
Let's visit the first – the Fed doesn't raise the Fed Funds rate. The interpretation by the market could well have been that the Fed isn't willing to fight "inflation"….since that is a bad perception, then the market sells off…similar fall out as above.
Finally, shift to a neutral bias while raising rates. It allowed the Fed to do what they had basically told the markets in the weeks prior and it allowed the stock market to recover from its poor technical state. It also gives the Fed the freedom to go ahead and raise rates again should they wish….and ironically, they could conceivably use the excuse that the equity markets are "frothy" again…..SIMPLY BRILLIANT!
The resulting outcome may be that the mother of all blowoffs may have begun on Wednesday afternoon. Has anyone noticed that the internet IPO market has sprung back to life? This group of stocks may very well be in the beginning stages of an excessive blowoff upwards to insane valuations. Some that caught my eye during the past week are: CLRN, CYBS, EDGR, EELN, GOTO, STMP, MYSW, TFSM, INTM, PASA, PHCM, NPLS, ASKJ….now don't get me wrong, I'm not saying that these are great long term buys but only that the conditions are there for some blowoff types of returns in some of these in the next few weeks (of course, it could also just be the next few market hours – TREAD CAREFULLY!)
Is the OEX Put/Call Ratio Signaling Trouble Ahead?
As of Friday, the OEX Put/Call ratio stood at 1.03, down from 1.29 the previous week. This put/call ratio tends to reflect institutions and professional strategies. The general view of this indicator is that the lower it gets the more bearish it is for the market…and vise-versa. However, I created some scatter plots of the OEX Put/Call ratio versus the Dow's % movement over the next 250 and 30 market days (with data going back to February of 1983 through May of 1998).
The 30 day chart does show that there is a cluster of –20% to –30% returns when the ratio was between ~0.60 and ~1.40….however, the bulk of the ratio readings are in this area anyway…so not much can be interpreted historically with a ratio in this range.
Where this indicator is especially strong is in its ability to look ahead 250 market days (1 year) when the OEX put/call ratio is above 2.00. The Dow gains an average of 24.21% over the next 250 market days when the ratio is greater than 2.00. This compared to an average gain of 16.00% in the Dow over the same period for all ratio readings.
More recently, there has been a cluster of readings in the OEX Put/Call ratio closing above 2.00. On April 14th, 19th, 22nd, 23rd and May 7th, 1999, this ratio closed above 2.00.
Indicators – The Fed Saved The Day
The Dow's 50 day MA has resumed its upward trend. The % daily change in the 50-day MA was 0.76 on Friday. Back into the "safe" zone.
The Dow is obviously back above its 50 day moving average. It spent 10 days below its 50-day MA in the past three weeks. The Dow dropped only -5.76% from its May 13th peak close of 11,107.19 to its correction low of 10,466.93 on May 27th. This is the first time in four years that the Dow didn't drop at least 10% after trading below its 50 day MA for such a period. (You see, the Fed saved the day - for now).
The NYSE cumulative Advance/Decline line staged a nice rebound this week. It tacked on 3,005 points to close the week at 52,705. Its high occurred on April 3, 1998 at 81,712. The NYSE would need to stage 29 consecutive days with 1000 more advancing issues than declining ones in order to get the A/D line back to that high….a monumental task!
New lows are back into the high 30's to low 40's. The new highs on the NYSE are rather anemic given the advance that has just occurred. Of course, usually there is a climax of new highs at tops, which lends support to more upward movements to come.
What the heck does all this mean?
It seems as though some spectacular gains (in selective issues) could be in store. Should that happen, it would put the market in a much more dangerous state than where it was just one week ago. Stay tuned!
The Major Moving Averages
For those who are interested in the moving average levels, here they are. As of the close on Friday, July 2, 1999: The Dow's 200 day MA is at 9555.40, its 50 day MA is 10790.50. The 200-day MA is in an uptrend and the 50-day MA is in an up trend. The Nasdaq 200day MA is 2224.80, and its 50-day MA is 2532.60. The 200-day MA is in a slight up-trend, the 50 day MA is rising. If any reader would like to see the charts that indicated the relative movement of the 50 day MAs on the Dow and the Nasdaq, please click on
stockmotions.com for the Dow and
stockmotions.com for the Nasdaq.
Paulo
stockmotions.com |
