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MARKET > Commentary Wednesday, May 16, 2001
by: S.P. Brown

Three Cuts and a Bump

No, I'm not referring to a bad outing with a dull razor. What I am referring to is the old Wall Street adage of "Don't Fight the Fed," which many traders wisely took to heart today. After yesterday's fifth-consecutive 50 basis point cut in the fed funds rate, traders raised the white flag and decided to put some of those long-accumulating money market reserves to work.

In reality, though, they've been putting these reserves to work ahead of yesterday's latest cut in interest rates. In fact, they've been putting them to work since the third-consecutive 50 basis point cut that occurred on March 20. Since then, the three major market indices have rallied a minimum of 13 percent. More impressively, they've rallied more than 16 percent from their 2001 lows.

Historically, or least for 12 out of the past 13 times, when the Fed has cut interest rates three-consecutive times the S&P 500 Index (SPX) has traded higher six months later. This is why three-consecutive fed funds rate cuts has been dubbed "three cuts and a bump."

Few stocks were bumped harder than the Old-Economy issues were today. The Dow Jones Industrial Average (INDU) roared to life to trade above the magical 11,000 level for the first time in four months. More importantly, though, it closed above this level for the first time since last September by posting a 342.95 point, or 3.15 percent, gain to finish the session at 11,215.95.

As most of us are aware (if only because we've been droning on about it for the past 10 months), the INDU has had a heckuva time breaching, much less closing above, above 11,000. Now, with today's close, the INDU can consider challenging resistance at 11,250, which coincides with the year 2000 mid-summer closing highs.

To say the rally in the INDU issues was broad-based would be an understatement. In fact, 29 of the 30 blue-chip stocks finished today's session in the black. The biggest gains were seen in shares of Alcoa (NYSE:AA), American Express (NYSE:AXP), Caterpillar (NYSE:CAT), Coca-Cola (NYSE:KO), United Technologies (NYSE:UTX), International Paper (NYSE:IP) and Minnesota Mining and Manufacturing (NYSE:MMM). The only slacker among the industrials was retail behemoth Wal-Mart (NYSE:WMT), which closed down $0.35 to $51.65.

Equally impressive to many INDU followers was the breadth and volume on the NYSE. More than two stocks rose for every one that fell on the Big Broad, as more than 1.3 billion shares changed hands, a 9.7 percent increase over the three-month daily average. In other words, there was definitely trader enthusiasm behind today's advance.

As for the New Economy, it performed even better than the Old Economy on a percentage measure. The Nasdaq Composite Index (COMPX) surged ahead 80.86 points, or 3.88 percent, to end the session at 2,166.66, which means the COMPX is once again approaching resistance at 2,200.

Powering much of the COMPX's gains today were its semiconductor issues. The PHLX Semiconductor Index (SOX) soared 6.5 percent despite a downgrade by Goldman Sachs on three communications chip companies: Applied Micro Circuits (Nasdaq:AMCC), PMC-Sierra (Nasdaq:PMCS) and Vitesse Semiconductor (Nasdaq:VTSS). For the record, all three finished the day in the black.

As did the broader market. The S&P 500 Index (SPX) surged 35.55 points, or 2.84 percent, to close at 1,284.99, a level not seen since February 20th. What's more, today's advance put the SPX above resistance at the 38 percent retracement from its 2001 high, which means it's now well-position to challenge resistance at 1,300.

Another portfolio of stocks that's well-position to challenge resistance is the Splittrader Current Play list (which, by the way, we increased by two members today thanks to a strong rally in two of our Watch List stocks). As it now stands, everyone of our Current Play list stocks is in the black (although we use green on the Website). Our biggest gainers on the day were OM Group (NYSE:OMG) and H & R Block (NYSE:HRB), which finished the day up 3.42 percent and 4.58 percent, respectively.

In earnings news, gourmet donut maker to the gourmand, Krispy Kreme (Nasdaq:KREM), soared $7.00 to $56.40 after reporting fiscal first-quarter earnings of $20 a share, surpassing the First Call estimate by $0.03. In addition, Krispy Kreme raised its EPS forecast for fiscal 2002 to $0.77 from current expectations of $0.70.

Another earnings winner was Federated Department Stores (NYSE:FD), which gained $2.29 to $46.29 after posting fiscal first-quarter earnings of $0.42 a share, $0.06 better than the First Call estimate. The retailer also said it expects to meet earnings expectations for its full fiscal year.

The Fed's interest rate cuts appear to finally be taking hold on the corporate bottom line. According to First Call, analysts see profits for S&P 500 companies growing 8.9 percent in the fourth quarter, rebounding from declines of 11.4 percent in the current quarter and 2.8 percent in the third quarter. Moreover, these same analysts see a surge of 15.3 percent in corporate earnings for first quarter of 2002.

On the economic front, the data released today seemed to support the Fed's assertion that inflation remains under control. To that end, the Consumer Price Index (CPI) came in under expectations in April, advancing 0.3 percent for the month against expectations of 0.4 percent, while the core rate posted a 0.2 percent gain, which matched the consensus forecast. All in all, today's CPI report did not contain any information that would alter the Fed's liquidity-adding bias.

Given the latest slate of earnings and economic news, it's probably safe to say the longer-term trend looks promising, which has to be a kick in the pants to those morose dunderheads predicting COMPX 1,000 and INDU 7,000 as recently as last month on CNBC (remember, Wall Street is filled with interminable extrapolators).

Short-term, however, I'd be leery about jumping in at this moment, particularly after today's strong gains. I wouldn't be surprised if the market succumbs to profit taking for the remainder of the week. The key will be whether the INDU and the COMPX can hold 11,000 and 2,100, respectively. If they do, I think the market should retain much of its gains accumulated over the past six weeks.

On the other hand, should the INDU close the week below 11,000, I think traders will be wary about committing new money to the market, which means we could see a brief period of stagnation. With that said, I think better entry points will present themselves over the coming weeks.

S.P. Brown


Copyright 2001

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