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MARKET > Commentary Wednesday, April 18, 2001
by: S.P. Brown

Fed Speaks, Wall Street Listens

Well, the Street finally got what it wanted today -- an inter- FOMC meeting interest rate cut, and the response was as swift as it was bullish. Both major market exchanges were literally blasted into orbit thanks to the Fed's surprise announcement to cut both the fed funds and discount rates by 50 basis points.

Since the beginning of the year, the Fed has cut the fed funds rate four times and 200 basis points to lower this key overnight lending rate from 6.5 to 4.5 percent. Of these four cuts, two have been inter-meeting and for 50 basis points each. The last inter-meeting cut occurred on January 3rd and sparked a month- long rally in the equity markets.

The reason for the Fed's blind-side move was obvious to even the most obtuse market observer. Still, Greenspan & Co. took the time to explain its actions: "Capital investment has continued to soften and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seem poised to dampen capital spending going forward. This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, threatens to keep the pace of economic activity unacceptably weak."

Whatever the reason, traders immediately took to rotating out of the safer sectors and into the growth-oriented sectors.

Of course, most of the so-called growth issues reside on the Nasdaq Composite Index (COMPX). This formerly high-octane index reverted to form today to add 156.22 points, or 8.12 percent, to close at 2,079.44, its fourth-largest percentage gain in its 30- year history.

What's more, much of the gain occurred before the Fed announcement, as the COMPX was trading 5 percent higher after Intel (Nasdaq:INTC) said business is improving. The good folks at the computer giant reported first-quarter sales that beat reduced forecasts and said second-quarter sales will be better than some analysts expected as business from personal-computer makers picked up in March. For the day, Intel soared $5.24 to $31.28.

Also adding fuel to the COMPX rocket were Oracle (Nasdaq:ORCL), Applied Materials (Nasdaq:AMAT), JDS Uniphase (Nasdaq:JDSU) and Juniper Networks (Nasdaq:JNPR), all of which added more than 10 percent to their share value today.

But don't think that technology was the only winning sector today, because it wasn't. Deep cyclicals and financials found room on the podium as well. General Motor (NYSE:GM), International Paper (NYSE:IP) and DuPont (NYSE:DD) moved higher, as did financial behemoths J.P Morgan Chase (NYSE:JMP), Citigroup (NYSE:C) and American Express (NYSE:AXP).

As the more perceptive reader will easily discern, all of the aforementioned dinosaurs reside on the Dow Jones Industrial Average (INDU), which engaged in a nifty rally of its own today. This Old Economy barometer surged 399.10 points, or 3.91 percent, to close at 10,615.83. More impressively, though, today's advance removed two key resistance levels in one shot - 10,300 and 10,600.

The S&P 500 Index (SPX) rounded out today's trifecta by adding 46.35 points, or 3.89 percent, to close at 1,238.16. The SPX advance was indeed fortuitous for Goldman Sachs' fabled stock siren Abbey Joseph Cohen, who once again called the market undervalued this morning. According to Ms. Cohen, profit growth should reaccelerate in the second half of 2001.

Today's monster rally occurred on huge volume and wonderful breadth. Volume stood at 1.90 billion on the NYSE, its second- busiest day, and at 3.18 billion on the Nasdaq Stock Market, its second-busiest day too. Market breadth was extremely positive, with winners trouncing losers by 20 to 11 on the NYSE and by 29 to 12 on the Nasdaq.

Today's gains in stock was darn close to being a totally free lunch, meaning Treasurys weren't sacrificed for equities' gains. In fact, the 10-year Treasury note was up nearly 5/8 point to yield 5.146 percent while the 30-year bond rose 1/5 to yield 5.657%. Moreover, at today's prices, the 2-year note has widened to nearly 1.50 percentage points from the 30-year bond, which is the biggest difference in nearly seven years. In layman's terms, we once again have a true normal yield curve, which historically has boded well for the market. In the past, there has been an observable relationship between the slope of a yield curve and subsequent economic growth.

As for economic news (which also contributed to the Treasury market's gains) the February trade gap narrowed to $26.99 billion vs. expectations of a $32.7 billion deficit. It was the narrowest level in 14 months. Meanwhile, the index of leading indicators fell 0.3 percent, while the coincident index increased 0.1 percent in March. Taken together, these indices suggest further weak growth ahead, but do not yet signal a recession is imminent.

Looking ahead, traders will be watching for Thursday's jobless claims number, which will be released at 8:30 AM EDT. The trend has been up in recent weeks, so it will be interesting to see if the Fed's action today was an attempt to avert a prolonged recession.

At this point, the $1 million question on everyone's mind is, can this rally last? To which I'll answer, the market is probably split. Many trader are still concerned over the state of corporate profits. Earnings growth is expected to fall to 1.6 percent in 2001 compared to 9.2 percent in 2000, according to First Call.

Nevertheless, given market reaction to companies beating lowered earnings expectation, don't be surprised if the rally should continue. To that end, International Business Machines (NYSE:IBM) reported first-quarter earnings of $0.98 a share, which was inline with the consensus estimate. What's more, revenue increased to $21 billion from $19.3 billion a year ago, beating the market consensus for $20.7 billion. Big Blue finished the day up $6.80 to $106.50. In after-hours trading, though, it was trading near $113.50.

Another company moving in anticipation of its earnings announcement was Apple Computer (Nasdaq:AAPL). After the market close, the Technicolor computer maker said it earned $40 million, or $0.11 a share, which handily beat the First Call estimate by $0.03. Apple closed normal trading up $2.34 to $22.75. However, in after-hours trading, it was changing hands at $26.00 a share.

So, don't be surprised if the COMPX continues to rally tomorrow, at least for the first hour or so of trading. Traders seem to be genuinely heartened by the unexpectedly strong corporate results. (Okay, so they're beating a lowered bar. At least they are beating something.)

As for me, I don't expect the rally to go on much longer before we get a pullback. The Nasdaq has advanced 27 percent since April 4, when it touched a year-to-date low of 1,619. Let's face it, market rallies don't extrapolate indefinitely. In fact, all of the market surges of the last 13 months have led to lower lows, though I don't see us going that way either.

To be sure, the chart on the COMPX looks darn good. In fact, the COMPX could run as high as 2,250 to 2,300 before it again runs into resistance. Furthermore, the index has not only broken free of its intermediate down trend, but it has also cleared immediate resistance at 2,000.

It appears traders may have finally found that "V" bottom they've long been waiting for. Then again, appearances can be deceptive, so trade carefully.

S.P. Brown


Copyright 2001

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