Agora Outlook

Publisher Ken Davidson                                                                                                    Fax 250-860-2051
e-mail davidson@silk.net                                                                                         www.agoraoutlook.com

                                                                                               March Expiration           March 19th 1999

Davidson’s View

We had the most unusual expiration today that I have seen in quite a few years. As everyone knows, every month we trade the cash and futures S&P 500 options. These options expire on the Friday morning ending an expiration cycle. We also trade the S&P 100 options and these options expire at the close of trading on Friday. This month we had a total of 11 trades on.

Trading for the S&P 500 options finishes at the close on Thursday and then the expiration number is calculated Friday morning by taking the first trade number of every stock on the S&P 500 and calculating the average of all 500 stocks. Generally, the average expiration is within 5 points of Thursday’s close. On Thursday the S&P 500 closed at 1316.55. That left a 3.45 point buffer for any holders of 1320 call index options. It wasn’t surprising to see the market continuing higher Friday morning, as there was a big push up at the close on Thursday. The push up, however, only lasted fifteen minutes with the S&P 500 reaching a high of 1323.85. After that the market started a downward turn and never saw that level again for the rest of the day. At the close, the market filled in the gap higher close the previous day that I suggested would happen after Thursdays close.

I was very frustrated to hear after talking to the CBOE that the expiration number for the S&P 500 was 1325.65. I found this surprising, considering the index high was only 1323.85 and only stayed there for about 10 seconds before the market again turned below the 1320 level. I do realize that the calculation can be different but it was frustrating to see that number come out as the market was only that high for such a brief period of time. I have a call into the Standard & Poor’s Corporation questioning the calculation.

The Dow went through the 10,000 level three times this past week but couldn’t hold it. Everyone was surprised that the Dow didn’t close above 10,000 on Friday as it closed at 9997.62 on Thursday. I’m sure many are is thinking that it may take another 16 years to get through the 10,000 level as it did the last time it tried to cross a millenium mark.

What will happen after the Dow surpasses 10,000 is anyone’s guess. Stocks are trading at their highest multiples of their earnings, sales and cash flow. The 30 stocks in the Dow, for example, currently have a collective price-to-earnings ratio of nearly 25, which represents nosebleed territory. The P/E on the Standard & Poor's 500 Index is even higher, at more than 28. Both measures are well over double their typical readings. The stock market is some 30% overvalued using the model that Fed Chairman Alan Greenspan uses. The last time the Fed model showed the market to be so overpriced was on the eve of the October 1987 stock market crash. This time around, the overvaluation could be even worse, given that today's inflated expectations for corporate earnings are not likely to be met.

When I saw the Dow go through the 10,000 level for all of 60 seconds on Tuesday and then watched as a sell program took it back down to the 9950 level within two minutes I knew that sellers were sitting waiting to drive it back down. It was basically repeated on Friday. The 1000 barrier was approached in 1966, 1968, 1972, 1976, 1977 and 1981, and each attempt failed miserably until the Dow pushed above 1000 for good in late 1982.

I don’t think it will take that long for the Dow to stay over 10,000 but with the overvaluation and public interest in stocks, we could be entering another correction period in big cap stocks. I can’t believe how many ads I’m seeing about how anyone can make huge profits at the click of a keystroke. There are also newly established trading houses that allow a person to get trained and then become professional day traders to put in trades on internet stocks at market. As far as I remember, being a stock trader you have to be crazy to put in any order at market. Maybe more training is needed!

It has always been believed that when the public finally gets involved in the market any current rally is near an end. People are becoming stock gunslingers on the Internet. Sky-high consumer confidence and hefty spending patterns rest on the shifting sands of newly obtained winnings in the stock market. From a technical point of view the ongoing plunge in market breadth and the recent rise in interest rates is alone signaling troubled times for the market. Unless these factors improve, they will create more problems. This pattern has seen a positive trend less than 3% of the time in market history and has invariably keyed dramatic market declines such as those in 1929, 1973-1974 and 1987.

If we see a decent correction here this could all be alleviated but if the market continues higher we could see a blow off and be put in a position of a more serious decline later in the spring. For now, I hope that the Dow does struggle around the 10,000 level as that would be great for this months upcoming trades.

 Technically

The market was in an overbought position going into Thursday’s close but with the sell off on Friday afternoon it is now back into neutral territory for the short term. Of late, the whole move higher has been in a few select stocks and that is evident by how low both the 5 and 10 day Arms indexes are near overbought levels. Unless the broader market starts to join this parade, volatility will probably remain high.

The Mclellan Osicallator has moved off of an overbought level and the summation index is attempting to get back to the 0 level which is good for the longer term. Bulls and Bears are seeing another pickup in bullish advisors but this should be of no concern yet. The 10,000 level on the Dow may be inspiring them to get bullish once again.

The vast majority of options traders apparently cannot wait for Dow 10,000, either. The Chicago Board Options Exchange (CBOE) has been reporting consistently low put/call ratios for the past several days, including Monday's very low 52%. That brings the 10-day average of the Put/Call ratio to 58%, the lowest since the January 8 record high in the market and similar to the situation in 1987 when Put/Call indicators reached extreme levels. We could be entering some interesting times in the next few months and volatility will likely be on the rise once again.

Mclellan Oscillator: +22 -100 oversold +100 overbought
Summation Index: -369

Five day arms: .88 and below, overbought 1.00 and above, oversold
Ten day arms: .85 .80 and below, overbought 1.00 and above, oversold

Bulls: 52.6 previous week 49.1 50% plus overbought/bearish
Bears: 29.8 previous week 32.5 50% plus oversold /bullish
Correction: 17.6 previous week 18.4

Five day Qvix: 26.16

 

Economic Effects

Tuesday

Builders broke ground on new single-family homes at the fastest pace in more than 20 years in February, the Commerce Department reported Tuesday. A falloff in apartment building caused the overall rate of starts to ease slightly during February by 0.6% to a seasonally adjusted annual rate of 1.80 million.

Starts on single-family homes alone, a better measure of individual consumer behavior climbed 1.1% last month to 1.41 million a year, the strongest rate since 1.46 million in December 1978. The new housing starts were slightly higher than analysts' expectations of a 1.77 million-a-year February building rate. The market, waiting for the release of February figures on industrial production later Tuesday, barely reacted to the data.

Though mortgage interest rates have edged higher this year, topping 7% earlier this month, analysts say a strong stock market and healthy job markets are putting a firm foundation under the housing market. Regionally, building starts soared 35.7% in the Northeast during February to 209,000 a year and were up 8% in the Midwest to 349,000. But in the South, the nation's largest regional market, February starts were down 2.5 percent to an annual rate of 872,000 and in the West they plunged 15.9% to 369,000 a year.

The housing sector is expected to level off in 1999 after a sizzling year for sales and construction in 1998. Monday, the National Association of Home Builders said its forward-looking Housing Market Index turned down for a third month in a row during March.

Industrial output showed U.S. business running at a surprisingly low operating rate last month, this signaled little likelihood of price pressures on the production side of the economy. The capacity use rate for factories, mines and utilities, a gauge of how close to their maximum that they were running, fell to 80.3% from 80.4% in January. That was the lowest operating rate in 6-1/2 years, since 80.2% in August 1992, and far below the 82% level that economists say can be a warning signal of potential inflation pressures.

The report showed manufacturers boosted production last month for the fifth month in a row, up 0.2% after a 0.1% January rise. Mining production was also up 0.3% in February after a 3% January drop. But exceptionally mild weather caused a 0.6% fall in utilities output after a 1.9% January increase. The market paid little attention to the data. A powerful rally that was building for days pushed the Dow briefly through the historic 10,000 mark at mid-morning before falling back. The 30-year bond climbed strongly by 20/32nds while the yield fell to 5.48% from Monday's close of 5.56%. Stock market euphoria and a feeling that there was little reason for the Fed to boost interest rates soon helped fuel optimism among buyers.

Wednesday

There were increasing signs that wage pressures were mounting as companies scrambled to find workers in a still-growing economy at the beginning of 1999, the Federal Reserve said on Wednesday. The latest Beige Book report, a summary of interviews with businessmen across the country, even found evidence that many manufacturing business were perking up after lagging for most of last year. The summary, which will be used by Fed policymakers when they gather to consider interest-rate strategy on March 30 found a few soft spots but noted consumer spending remained vigorous, real estate markets were booming and companies were borrowing money.

Analysts have noted that U.S. central bank policymakers have little reason to raise interest rates in the absence of clear signs of inflation pressures. The latest Fed report said wages were on the rise but prices were well controlled. Still, some economists said the report showed the Fed faced competing risks with the economy now in a ninth year of unbroken growth and national unemployment at barely 4.4% in February.

The Fed summary said prices were well contained and that many businesses were reluctant even to ask for price increases. It said that low farm commodity prices were plaguing the U.S. agricultural sector, putting a rising number of farmers under financial stress.

Financial markets did not show any direct response to the publication of the Fed report. Bond and stock prices both weakened, however with the 30-year bond down -12/32nds of a point and its yield, which moves in the opposite direction, up to 5.50% from Tuesday's close of 5.48%. The Dow slipped -51.06 points to close at 9,879.41.  The report added to other signs that the manufacturing sector might be joining in the expansion and that consumers were still shopping heartily after Christmas, helped by price discounting and mild weather.

Thursday

Consumer prices showed a tiny gain in February, offering the latest evidence that inflation is well behaved. The Consumer Price Index, the main inflation gauge, rose 0.1% last month, both overall and in the closely watched ``core'' index, which strips out food and energy costs. February's modest increase brought the 12-month gain in the CPI to a modest 1.6%. The core index was up 2.1% from a year ago. Federal Reserve policy makers hold their next session to deliberate interest rates on March 30. The inflation news could help to reassure them that there is no immediate need to raise interest rates, despite rapid economic growth.

The overall CPI gain for February of 0.1% matched the expectations of U.S. economists in a Reuters survey, but economists had been braced for a slightly larger increase of 0.2% for the core CPI. Food prices rose a slight 0.1%, as surging meat prices were offset by steep declines for fresh vegetables. Energy prices were flat.

In a separate report released Thursday, the Commerce Department said the U.S. trade deficit soared unexpectedly to a record $16.99 billion in January from $14.06 in December. The January gap was much higher than the $14.9 billion analysts said they were looking for. Bonds firmed after the release of the trade and CPI data as dealers viewed the bigger than expected deficit as an indication that the U.S. economy may not be growing as quickly as previously thought.

The January gap in goods and services trade was much higher than the $14.9 billion analysts said they were looking for and was fueled by a record deficit in trade in manufactured goods and a surge in the trade deficit with China. There was a $23.42 billion deficit in merchandise trade. It was the highest on record as imports of consumer goods and computers and other capital goods rose and exports of industrial materials and farm goods fell.

The big jump in the January trade gap after a record $170 billion deficit for all of 1998 is likely to weigh on Congress which is now considering legislation to limit imports of foreign steel and is about to review U.S. trade relations with China. Steel imports from China were up sharply in January. China surpassed Japan in January as the source of the biggest trade gap. The deficit with China rose to $4.88 billion from $3.98 billion in December, the department said. The deficit with Japan fell to $4.66 billion from $5.88 billion.

Jobless claims rose unexpectedly last week, but there was little sign of any weakness in the labor market. Initial claims for benefits rose by 6,000 in the week ended March 13 to 298,000 from 292,000 in the week ended March 6. The prior week's claims were revised upwardly from the originally reported 289,000. However, for the seventh week in a row, claims remained below the key 300,000 level, a sign of a thriving job market. It was the first seven-week run of claims below that level since April and May of 1974. The closely watched four-week moving average of claims, which smooths out weekly volatility, slipped in the latest week. It eased to 292,750 from 293,000.

Real average weekly earnings, after adjusting for inflation and seasonal factors, rose 0.7% in February after a 0.1% drop in January. February's rise resulted from a 0.6% increase in average weekly hours and a 0.1% gain in average hourly earnings. Real average weekly earnings in February were up 1.9% from February 1998. In constant 1982 dollars, weekly earnings for nonsupervisory private workers outside the farm sector averaged a seasonally adjusted $271.77 in February, versus $269.99 in January and $266.71 in February 1998. In current dollars, weekly earnings averaged a seasonally adjusted $452.49 in February, compared to $449.54 in January and $436.87 in February 1998.

Next Week’s Economic Statistics

This will be a quiet week for indicators. On Wednesday we get Durable Goods Orders. With the economy in a mixed state and no one really knowing which way we’re headed the number is not likely to move the market very much. On Thursday we get Jobless Claims and Existing Home Sales. Neither of these indicators will influence the market very much either. The market will probably concentrate more on technical factors than on economic indicators this week.

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

9876.35

9903.55

+27.20

0.3

S & P 500

1294.59

1299.28

+4.69

0.4

S & P 500 Futures Dec.

1303.40

1310.00

+6.60

0.5

S & P 100

648.27

650.11

+1.84

0.2

Nasdaq

2381.55

2421.32

+39.77

1.7

Russell 2000

398.38

396.77

-1.61

0.4

30 Year bond

5.54%

5.54%

Program Trades

Our five month streak of wins for Long trades was broken this month. It was still a great day for most of our trades as 9 out of 11 expired worthless this morning. With the market opening higher this morning our Long 1320/1325 S&P 500 cash and futures call trades took a hit. The good thing was that very few people were in the 1320/1325 cash trades anyhow as most people had chosen to do the S&P 100 660/665 Long call trade because there were no S&P 500 options available until late last week. We were also worried about the 660/665 OEX call trade but with the sudden sharp drop in the market, prices on the 660 call dropped like a stone so the average fill reported was .50. Most people informed us they would hold the trade on as they didn’t think the market would hold. Even with the buyback there was still a .75 profit or 15% profit supplied.

Cash Option Profits for March

Short Trades

Outright Sells

Long Trades

Ultra Conservative Trades

No trades made this month

No trades made this month

1160/1150 SPX Puts $1.25, 13% profit

570/560 OEX Puts $.75 7% profit

   

580/575 OEX Puts $.75 15% profit

670/ 680 OEX Calls $.82 credit, 8% profit

   

1320/1325 SPX Calls -$3.62 72% loss

 
    Total -44%. Long trades are averaged for the record sheet as we normally place both up and down trades. Average 28% Total 15%. Ultra trades are averaged for the record sheet as we normally place both up and down trades. Average 18%

Cash option outright sells margin is calculated with an average margin of $7500.00 per contract and spreads with a $500.00 per contract basis. We do not include interest profits on credit taken. (Margin estimates are based on the average subscribers account requirements.)

Futures Option Profits for March

Short Trades

Outright Sells

Long Trades

Ultra Conservative Trades

No trades this month

Sold 1150 S&P500 Puts $9.00 credit, 19% profit

1150/1140 S&P 500 Puts $1.50 credit, profit 20%

1350/1360 S&P 500 Calls $1.00 credit, 10% profit

 

Sold 1100 SPX Puts $5.00 credit, 10% profit

1320/1325 S&P 500 Puts -$3.45 loss, 69%

1150/1140 S&P 500 Puts $1.50 credit, profit 20%

  Total 29%. Outright Sells are calculated separately because they can be placed at anytime. Total- 49%. Long trades are averaged for the record sheet as we normally place both up and down trades. Average 20% Total 30%. Ultra trades are averaged for the record sheet as we normally place both up and down trades. Average 13%

 

Average Entry price

 

Bid

ask

last

         
 

S&P 500 Cash Trades:

     

1160 sold SPX Put for $11.25

Long Trade

0

0

0

1150 bought SPX Put for $10.00

$1.25 credit spread.

0

0

0

         

1320 sold SPX Put for $6.50

Long Trade

0

0

5.65

1325 bought SPX Put for $5.15

$1.38 credit spread.

0

0

.65

         
 

S&P 100 CashTrades:

     
         

580 sold OEX Put $5.00

Long trade

0

0

0

575 bought OEX Put $4.25

$.75 credit spread

0

0

0

         

570 sold OEX Put $3.75

Ultra trade

0

0

0

560 bought OEX Put $3.00

credit spread $.75

0

0

0

         

660 sold OEX Call $5.00

Long trade

0

0

0

665 bought OEX Call $3.75

credit spread $1.25

0

0

0

         

670 sold OEX Call $2.63

Ultra trade

0

0

0

680 bought OEX Call $1.82

credit spread $.82

0

0

0

         
 

S&P 500 Options Feb. Futures Trades

High

Low

Close

         

Sold 1320 Calls $11.55

Long Trade

0

0

5.65

Bought 1325 Calls $10.00

$1.55 Credit

0

0

.65

         

Sold 1350 Calls $3.25

Ultra Trade

0

0

0

Bought 1360 Calls $2.25

$1.00 Credit

0

0

0

         

Sold 1150 Puts $9.00

Ultra/Long Trade

0

0

0

Bought 1140 Puts $7.50

$1.50 Credit

0

0

0

         

Sold 1150 Put $9.50

Outright Sell

0

0

0

         

Sold 1100 Put $5.00

Outright Sell

0

0

0

Copyright 1998. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.

Short Trades

Long Trades

Ultra Trades

Outright Short Sales

1999 Current

67%

1999 Current

24%

1999 Current

54%

1999 Current

22%

1998

66%

1998

43%

1998

79%

1998

71%

1997

108%

1997

188%

1997

82%

   
1996

163%

1996

169%

1996

99%

   
    1995

93%

1995

76%

   
    1994

79%

1994

89%

   
    1993

177%

1993

long

   
    1992

112%

1992

long

   
    1991

162%

1991

long

   
    1990

166%

1990

long

   

Futures Trades

Outright Sells & Strangles

Long Trades

Ultra Trades

1999 Current 66% 1999 Current 5% 1999 Current 63%
1998 130% 1998 93% 1998 16%

 

Agora Outlook

Publisher Ken Davidson                                                                                                              Fax 250-860-2051
e-mail davidson@silk.net                                                                                                   www.agoraoutlook.com

                                                                                               March Expiration                        March 5th 1998

Davidson's View

As I expected, the market broke out to the upside today. The Dow even hit new record territory. For the past few weeks the market has been testing support and moving in a sideways pattern. At the start of this expiration period our Program indicated that there was much more of a probability that the markets could move to the upside than the downside so numbers were positioned further out to take that into account.

With the market being oversold here it looks like it could continue to rally but I believe we are moving into a period such as we were in July 1998. This will be the prelude to another correction in the summer and bonds will likely rally to new lows in yield. Bonds are undervalued, and investor sentiment has turned pessimistic (look at technicals below.)

In both instances the markets on the NYSE and the Nasdaq Comp. had reached oversold levels. Only 30% of all stocks were trading above their 50-day moving average. Then and now, the volume had dropped to much lower levels than in previous weeks. In both instances, bond yields had moved up, with worries of a Federal Reserve interest rate increase. Now we will have to wait to see if the similarity continues. In 1998, the oversold market had one last rally, moving the large-cap indices to new highs. The bond market started a rally which encouraged traders who were trying to find excuses to justify their over-valued investments.

The first obstacle for the S&P 500 will be getting through the 1285.00 level. The unemployment report set off the market’s rally today but that wasn’t surprising considering the 30-year bond has backed up all the way to 5.70% from 4.75% just a couple of months ago. The unemployment report was forecast to be much stronger than it probably ever could have been. It basically came in in-line with expectations but hourly earnings were the biggest surprise, being up only one cent. Next week will probably see follow through to the upside, at least early in the week, as there will be no important economic indicators out to affect the good mood of the market.

Technically

The S&P showed real strength last week and is now retesting the 1280 resistance level for the fourth time this year and is very close to a new all time high. The strong breakout above the 9400 resistance level has propelled the Dow to a new record high.

On Wednesday, the market hit a deeply oversold level and then turned sharply higher. Many times it bounced off of support levels but finally moved higher when everyone realized that stocks refused to move lower. Unfortunately, the strength we have seen in the past two days alone has moved the market back into an overbought situation signaling that the rally is likely not true to form so we may see volatility return sooner than later. One concern is that the NYSE Advance Decline line has broken below the October low levels. The advance/decline ratio continues to make lower lows, now under the lows of last October. It accurately predicted the current market’s difficulty when it failed to confirm the new highs on the major indices in January.

The Mclellan Oscillator is almost at overbought levels but the good news is that the summation index has started to turn up again. It may take another few days, though to give us an actual reading of what is going on. The Five day Arms index has not been this severely overbought for a couple of years indicating that there were very few stocks pushing the market the last couple of days. The 10-day Arms is almost overbought once again also so we need to see at least some sideways action to alleviate this problem.

The good news for the week is that the bulls have quieted down a bit from their excessiveness and the volatility index has also started to turn down. These indicators are not as important as the Arms indicators above and are more for the longer term.  With indicators so overbought the market will struggle if it attempts to make any big gains as the week goes so it will likely just be a sideways pattern to get into an oversold condition.

Mclellan Oscillator: 79 -100 oversold +100 overbought
Summation Index: -984

Five day arms: .63 and below, overbought 1.00 and above, oversold
Ten day arms: .88 .80 and below, overbought 1.00 and above, oversold

Bulls: 50.9 previous week 54.1 50% plus overbought/bearish
Bears: 32.1 previous week 28.7 50% plus oversold /bullish
Correction: 17.0 previous week 15.6`

Five day Qvix: 28.54

 

Economic Effects

Monday

Manufacturing finally appears to be pulling higher. The National Association of Purchasing Management's index of manufacturing activity climbed in February to 52.4 from 49.5 in January, following eight consecutive months of sub-50 readings. A reading above 50 indicates an expansion of the manufacturing sector; below 50, a contraction. Both the production and new-orders portions shot up last month, a sign that manufacturing may be on the rebound. The new-orders index rose to 57.2 from 51.3 in January. The production index, which indicates current activity, jumped to 56.9 from 53.1. And new export orders were up to 54 after spending 14 months below the 50 mark. The February employment index rose moderately to 45 from 44.8 in January, but analysts caution that it is still too early to expect much of an upward shift in the manufacturing-employment situation. Factories tend to hire more workers a few months after demand increases.

The economy also showed signs of continued strength in January as Americans' personal income rose by a robust 0.6% and personal spending rose modestly. The jump in income followed a dip of 0.1% in December. Coupled with spending that grew 0.3% in January after the sizzling revised gain of 0.7% in December, the reports indicate consumers took a breather in January after their year-end spending spree. That leaves enough money in consumers' wallets to drive the economy upward in the first quarter, economists said.

That prospect, along with other data showing the largest jump in highway and street construction in nearly a quarter century, sending shivers through the bond market as investors increasingly worry that the Federal Reserve will move to raise short-term interest rates to prevent a surge in inflation.

A surge in public money spent on highways and roads drove up U.S. construction spending to the fastest rate in seven months. Construction spending climbed 1.6% in January after a 1.4% rise in December. January's rise was the largest since a 2.4% increase in June and it was well above the 0.3% rise expected by economists.

While the construction sector has flourished lately amid strong demand in the private sector for new homes and office buildings, most of January's gain was driven by public expenditures, which rose 5.9% compared to a 0.5% gain for private spending. Within the public sector, spending on highways and roads was by far the largest source of the increase, rising 25.7 percent. Construction spending throughout the economy totaled $692.3 billion in January, up from $681.1 billion in December. Overall spending was up 9.2% from a year earlier and up 9.8% in the private-sector. Public spending was 7.5% higher than a year ago.

Tuesday

    Sales of new homes in January fell for the second straight month in January, implying that higher interest rates may be starting to take some sizzle out of housing markets. Sales dropped 5% to a seasonally adjusted annual rate of 918,000 - well below the 975,000-unit rate that economists had forecast, after a 3.6% decline in December. Mortgage rates have started to edge up recently, sapping one of the most potent influences that sent construction and sales soaring in 1998.

Three interest-rate cuts by the Federal Reserve late last year fostered sales by bolstering stock prices and driving consumer optimism up. But in recent weeks, long-term interest rates have been edging upward amid uneasiness about future Fed rate moves, with 30-year mortgage rates topping 7% for the first time in months. Despite the back-to-back monthly declines in December and January, sales in January remained 8.3% above the pace a year earlier, when new homes were moving at a rate of 848,000 per year. The Commerce Department said that January was the 38th month in which new homes were selling at a rate of 700,000 or more, setting a record. Regionally, new-home sales fell everywhere except in the West where they rose 8% during January to 271,000 a year. In the Midwest, sales plunged 24.9% to an annual rate of 133,000, the sharpest decline for the region in more than two years. Sales in the Northeast were down 7.2% during January to an annual rate of 77,000 and in the South they declined 3.7% to 437,000.

    The Index of Leading Economic Indicators, a measure of future economic activity, rose 0.5% in January following a revised 0.2% increase in December that was previously reported as up 0.3%. Economists surveyed by Reuters had expected a gain of 0.4%. The past six months has seen the index increase 1.2%, which is far above its historical average, and the prospects for growth in income and employment are very bright. Changes in the leading indicators index are intended to predict turning points in the business cycle, such as a pickup in growth or a recession.

January marks the fourth consecutive month in which leading indicators have been up. The Conference Board said it predicts continued economic growth through mid-1999 and added that signs of any imbalances that could jeopardize economic growth ``remain relatively subdued.'' Nine of the 10 factors that make up the index were positive contributors in January led by stock prices, manufacturers' orders for non-defense capital goods, and vendor performance. Only the average factory workweek was a negative contributor. The report also said the index of coincident indicators, a measure of present economic conditions, rose 0.2% in January after a revised 0.2% rise in December that was previously reported as up 0.3%. The index of lagging indicators, which shows past economic performance, rose 0.4% in January after a revised 0.1% drop in the prior month that was previously reported as a 0.2% decline.

 

Thursday

    U.S. factory orders rose in January for the third consecutive month amid strong demand in the transportation sector. January orders rose 1.7%, bringing the total amount of goods orders to a seasonally adjusted annual rate of $349.6 billion, a record. In December, factory orders were up 2.3%.

Although January's gain was less than the 2.1% increase expected by economists, the data corroborated recent evidence of a rebound in the manufacturing sector and a strong start to the economy this year. Earlier this week, the National Association of Purchasing Management said its manufacturing index for February registered an expansion for the first time in eight consecutive months. Factory orders reached a 24-month high in January, signaling that continued strong production growth will help keep the economy humming in the first half of 1999. The balance of growth in the first month of 1999, however, shows that certain sectors of the economy are still running faster than others.

Excluding demand for transportation-related goods, which jumped 15%, factory orders were down 0.3%, the first decline since October. Factory orders excluding defense goods were up 1.5% in January. Durable-goods orders were revised slightly downward to a 3.6% growth rate, from the 3.9% jump reported by the Commerce Department last week. The growth in durables offset a 0.8% decline in nondurables for January. Manufacturers tightened their inventories at the beginning of the year. Inventories of durable goods slipped 0.5% in January, while nondurable goods inventories were up only 0.2%. The decline in durable-goods stockpiles was the third straight monthly decrease.

    Jobless Claims fell last week, and the average weekly level of initial claims for all of February reached a 10-year low. Jobless claims totaled a seasonally adjusted 286,000 for the week ended Feb. 27, down 8,000 from the week before. It was the fifth consecutive week the measure has been under 300,000. The decline surprised analysts, who predicted a reading of 295,000. Jobless claims in the Feb. 20 week were revised slightly upward to 294,000 from 293,000. The four-week moving average of claims, which evens out the volatile weekly totals, declined to 290,750 from 293,000 for the four-week period ending a week earlier. Last week's average was the lowest it's been since February 1989 and reflected the continued strength of U.S. labor markets. The unemployment rate, at 4.3%, is at a 28-year low amid robust economic growth powered by healthy consumer demand. Neither stocks nor bonds reacted to these numbers as they were expected to be this strong.

Friday

The economy added jobs at a rapid pace in February but an absence of inflationary pressures dampened speculation that the Federal Reserve might raise interest rates, creating a powerful rally in the market today.  There were 275,000 jobs added last month. Meanwhile, the unemployment rate inched higher to 4.4% from 4.3% last month. But even though the market for available workers remained about as tight as it has been in nearly two decades, the factory sector shed 50,000 jobs last month and workers throughout the economy saw only a meager wage gain.

The 30-year bond soared by a point and half, sending its yield, which moves in the opposite direction of the price, tumbling to 5.61% from 5.69% yesterday. The stock market also took off, giving the Dow a gain of +270.00 points, and the S&P 500 +29.00 points. February's hefty jobs gain followed a 217,000 increase in January. The January figure was revised downward from a previously reported 245,000 rise. The February report came in close to the expectations of economists who had forecast a 245,000 jobs gain and no change in the unemployment rate. Most economists had thought the report might show some signs of a recovery, or at least some stabilization, in the manufacturing sector, which has taken a beating over the past year as economic crises in Asia, Russia and Latin America have devastated export markets.

One major source of strength in the jobs report was retail, which added 123,000 jobs, the largest monthly gain in more than a decade. Construction jobs surged 72,000 in February, which the Labor Department said reflected both warm weather for the month and general industry strength. Workers took home a one-cent gain in their average hourly earnings, which increased to $13.04 in February from $13.03 in January. The length of the average workweek grew to 34.7 hours from 34.5 hours. Earnings increases were up 3.6% in the 12 months ended in February, down from 3.9% in January. The year-on-year increase for last month was the smallest since July 1997. But wage gains were still running at more than double the rate of inflation, boosting workers' living standards.

Next Week’s Economic Statistics

On Tuesday we get Productivity and Costs Numbers. This number is important when it comes to inflation because if productivity is slipping and costs are rising, earnings begin to fall for companies. In such case the market will move lower so this number is considered the most important of the week. On Thursday we get Jobless Claims, Current Accounts and Import Export Prices. None of these indicators will likely move the market unless the jobless claims number has fallen again and then we could see some movement in the markets. On Friday we get Producer Price Index numbers but since inflation has continued to fall this number will likely be ignored. We also get Business Inventories but with the strength in the economy of late it’s not likely to hurt the market even if there was a build up of inventories.

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

9306.58

9736.08

+429.50

4.6

S & P 500

1238.33

1275.46

+37.13

3.0

S & P 500 Futures Dec.

1236.00

1278.50

+42.50

3.4

S & P 100

618.42

638.99

+20.57

3.3

Nasdaq

2288.03

2338.27

+100.24

4.3

Russell 2000

392.26

398.01

+5.75

1.5

30 Year bond

5.58%

5.61%

Program Trades

The volatility of this past week was great for premium decay in all of our trades. All our trades are basically set to go into expiration, now only10 days away. We came very close to putting on a Short trade this past week but were a few points away from a signal so we waited. This could mean that there is more volatility yet to come. All trades are still indicating about an average 91% probability of expiring worthless March 19th. Thank you to those who pointed out that we didn’t have the Outright Sell on the futures 1150 put listed last week so it is now below.

Average Entry price

 

Bid

ask

last

         
 

S&P 500 Cash Trades:

     

1160 sold SPX Put for $11.25

Long Trade

1.13

1.63

1.75

1150 bought SPX Put for $10.00

$1.25 credit spread.

.88

1.32

1.32

         
 

S&P 100 CashTrades:

     
         

580 sold OEX Put $5.00

Long trade

.82

.88

.88

575 bought OEX Put $4.25

$.75 credit spread

.68

.75

.75

         

570 sold OEX Put $3.75

Ultra trade

.56

.63

1.06

560 bought OEX Put $3.00

credit spread $.75

.32

.88

.32

         

660 sold OEX Call $5.00

Long trade

2.25

2.32

2.32

665 bought OEX Call $3.75

credit spread $1.25

1.32

1.38

1.38

         

670 sold OEX Call $2.63

Ultra trade

.88

.93

.88

680 bought OEX Call $1.82

credit spread $.82

.32

.38

.38

         
 

S&P 500 Options Feb. Futures Trades

High

Low

Close

         

Sold 1320 Calls $11.55

Long Trade

4.00

2.90

3.90

Bought 1325 Calls $10.00

$1.55 Credit

3.40

2.40

3.10

         

Sold 1350 Calls $3.25

Ultra Trade

1.00

.60

.50

Bought 1360 Calls $2.25

$1.00 Credit

.60

.40

.50

         

Sold 1150 Puts $9.00

Ultra/Long Trade

1.80

1.05

1.05

Bought 1140 Puts $7.50

$1.50 Credit

1.40

.90

.90

         

Sold 1150 Put $9.50

Outright Sell

1.80

1.05

1.05

         

Sold 1100 Put $5.00

Outright Sell

.70

.45

.50

Copyright 1998. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.

Agora Outlook

Publisher Ken Davidson                                                                                                       Fax 250-860-2051
e-mail davidson@silk.net                                                                                             www.agoraoutlook.com

                                                                                               March Expiration         February 26th 1998

Davidson’s View

What a week for the market! Strongly up, then strongly down, just like a rollercoaster! It was great for getting this month’s trades filled and I’m hoping it keeps up, this kind of action as it is the best way to see premium decay in options.

It’s good to see that the market is moving with bonds once again. It has been about 9 months since stocks and bonds have moved in synch. This scenario reminds me of 1994. When the 30-year bond yield hit its low in January of 1994 and then started to move higher, stocks continued higher for a few months. When the Federal Reserve decided to raise interest rates stocks finally started to fall. 1994 was the worst year the bond market had ever seen.

We’re kind of in the same boat now. Bond yields are backing up because of worries that the Federal Reserve may raise rates next fall. The economy looks so strong right now it’s not that much of a surprise. Once again, stocks are only a few percentage points from their all time highs. So why aren’t stocks falling?

Bonds have always been a great indicator of the future and usually move ahead of stocks. With inflation remaining near record lows, the yield on the 30-year bond shouldn’t back up too much. Stockholders may also be thinking about that and are perhaps torn between great value in buying bonds or in the possible good earnings that could be coming out in the future quarters. Some analysts have been talking of a slowdown in the coming year but if we do see one it’s not going to be that sharp of a turn.

The yield, which is now at 5.58%, represents a very attractive alternative to the stock market. Bonds are substantially less volatile, with returns that are becoming increasingly attractive when compared to the high valuations offered by stocks. On the other hand, dip buyers refuse to let stocks fall too far, quickly propping them up at the first sign of weakness. In 1994, although bonds had a bad year, stocks only had a swift 3 day correction and then remained flat for a couple of months before they started to rally once again. Rising bond yields and "concern" over slow PC sales have increased nervousness among traders but since bonds are not likely to back up much, we should see stocks continue to move sideways for a while, albeit with lots of volatility.

 Technically

So far, the weakness of the last few days has resisted the big breakdown that would feed on itself. There are a lot of short-term watch points to heed, and the market has been checking out some of these levels but each time it gets close to breaking one, it rallies once again.

The Dow’s critical support is at 9100 and the S&P 500’s is at about 1212. The Dow closed at a critical support level of 9400 with yesterday’s decline pushing it back below its breakout level. This certainly is negative and the Dow may have to spend more time within its previous trading range to regroup. While it took several weeks for it to break above 9400, it took just a few days for it to fall back below that level and suggesting that there is not enough momentum nor are the internal market dynamics healthy enough to support a rally yet.

One good thing is that the hourly Dow and SPX were extremely oversold at today’s lows but daily indicators are still in middle ground and weekly information is just starting to turn down from overbought levels. This means there could still be more weakness longer term. The market still seems more inclined to move sideways for awhile, however, to work off any overbought indicators since most are oversold.

The Mclellan Oscillator is moving towards oversold levels and the summation indicator seems to be bottoming. That is good for the longer term. Both 5 and 10 days arms indicators are oversold. However, they seem to be leaning towards more downside action, as they are not extremely oversold yet. This makes sense considering that the market was not that low if you look at the weekly change in the indexes. The only difference is that volatility grew. The most interesting thing though, is that volatility fell for the week, which could mean more sideways action.

Mclellan Oscillator: -42 -100 oversold +100 overbought
Summation Index: -987

Five day arms: .93 and below, overbought 1.00 and above, oversold
Ten day arms: .95 .80 and below, overbought 1.00 and above, oversold

Bulls: 54.1 previous week 55.7 50% plus overbought/bearish
Bears: 28.7 previous week 28.7 50% plus oversold /bullish
Correction: 15.6 previous week 15.6`

Five day Qvix: 27.85

 

Economic Effects

Tuesday
Consumer confidence stayed at a robust pace in February as consumers shrugged off the impeachment trial of President Clinton and focused on continued economic strength. The overall consumer confidence index scored a six-month high, rising to 132.1 from a revised 128.9 in January.
Confidence about current conditions moved to 178.4 in February from a revised 172.9 in January, the highest level in the Conference Board's 32-year history of tracking this behavior. The expectations index also advanced, edging up to 101.2 in February from a revised 99.6 in January. Consumers are most concerned about their jobs, their salaries and the overall health of the economy so President Clinton's personal problems and the impeachment trial have had little or no impact on consumer attitudes.
The number of consumers reporting that jobs are ``hard to get'' fell to an all-time low of 11.7%, and those labeling current business conditions at ``good'' rose to 43.1% in February from 39.8% in January. But consumers were slightly more tentative about the future. Those anticipating business conditions to improve over the next six months held steady at 15.4%. Their employment outlook rose slightly in February, with nearly 14% expecting jobs to become more plentiful between now and next survey. February’s showed some 25.7% expect their incomes to rise in the next six months, the survey found, up from 23.9% in January.
 
Thursday
Orders for costly U.S. manufactured goods soared in January, the fastest rate in more than a year, powered by strong orders for airplanes and cars. It was the second month in a row of blockbuster gains in durable goods orders. Such orders were 3.9% last month after a 3.4% gain in December. January's gain was the largest since a 4.4% rise in November 1997. Economists in a Reuters survey had expected durable goods to fall by 0.2% in January.
 
We are seeing evidence of the very robust pace of household expenditures, which would include housing activity, providing a lift to manufacturing activity. The strength in durable goods, which include items like cars and furniture built to last three years or more, were the latest sign the U.S. economy entered 1999 with a full head of steam. The data's release caused bonds to fall taking the stock market with them. It is difficult to draw definitive conclusions from the numbers, which can swing sharply from month to month, partly due to the volatile transportation component. Excluding transportation orders, durable goods orders rose only 0.4% in January, but that followed a 3.7% surge in December. The trend for non-transportation orders has been consistently strong, recording in January its third straight monthly increase.
Robust durable goods orders in the final months of 1998 and the first month of this year marked a big pickup from the middle of last year. Orders at that time were weighed down by weak demand in Asia, economically crippled Asia.
Durable goods unfilled orders, a sign of future demand, climbed 1.6% last month, while total shipments, an indicator of past demand, were flat. New orders for industrial machinery fell 3.1% after a gain of 7.6% in December.
 
The number of U.S. workers filing new claims for unemployment benefits fell by 5,000 last week. The Labor Department said initial jobless claims, which gives an early reading on the state of the labor market, fell to 293,000 in the week ended Feb. 20 from 298,000 in the prior week. Claims had originally been reported at 288,000 for the week ending Feb. 13th. The department attributed the upward revision to the President's day which shortened the amount of time states given to report preliminary data.
The weekly jobs data has been inching downward since mid-January on the back of a strong economy that has so far defied expectations of a slowdown. The four-week average, viewed as a more accurate indicator of longer-term labor conditions, fell for the fifth week in a row, slipping to 292,500, its lowest level since February 1989, from the previous week's 294,500.
Next Friday, the Labor department will release its employment report for February, which will give a more accurate look at labor market conditions throughout the economy. Economists are forecasting that February's unemployment rate will remain unchanged at 4.3% with 218,000 new jobs created outside the farm sector. That compares with a January job creation rate of 245,000.

Friday

The economy recorded one of the fastest growth rates of the 1990s in the final quarter of last year as auto plants kicked into high gear and exports grew more strongly than expected. The Commerce Department boosted its estimate of gross domestic product, the broadest measure of the economy's health. It said GDP surged at an annual rate of 6.1% in the three months ending in December, revised up from the 5.6% growth rate reported a month ago.

The GDP deflator, a closely watched price gauge, rose at an annualized 0.7% in the quarter, the smallest gain in four decades. The GDP price index, measuring the inflation rate of goods and services produced in the economy, also rose 0.7%, the lowest gain since the second quarter 1963. The 6.1% GDP growth rate in the October to December quarter was almost double the 3.1% rate averaged during the now eight-year old expansion. This helped to lift bonds today. Most of the data suggesting that a good deal of the fourth quarter's strength has carried over into 1999 has depressed bonds, provoking fears that the Federal Reserve might move to raise interest rates, something that would hurt the value of existing bonds with a lower yield. Traders expressed relief that the revision to fourth-quarter GDP did not show an even higher growth rate.

Data for the fourth quarter revealed that businesses poured more money into plant and equipment than Commerce had assumed earlier, and exports surpassed expectations. Those factors largely accounted for the higher GDP rate, which came in close to economists' forecasts for a revision to 6.0%. Even though the fourth-quarter GDP estimate was raised, the change did not affect the overall growth rate for 1998, which came in at 3.9%, the same as the estimate a month ago.

The fourth-quarter growth spurt was one of the strongest of any quarter in the 1990s economic expansion, and even much of the 1980s. Inflation-adjusted GDP has not been this robust since the matching 6.1% rise for the second quarter of 1996, and the last time it was stronger was the second quarter of 1984, when it rose 6.4%. Production of cars and trucks were a major reason for the strength. Excluding motor vehicles, GDP rose by 4.0% in the fourth quarter. There was also ample evidence consumers were a key force driving the economy forward. Final sales, which measure demand for the goods and services produced in the economy, climbed 6.5% in the fourth quarter. Purchases of durable goods were especially strong, rising a breathtaking 20.1%. The free-spending habits of consumers have protected the economy from the worst effects of an economic crisis that has spread turmoil through Asia, Russia and Brazil, causing markets for U.S. exports to dry up. For much of last year, most economists braced for the worst, fearing a sharp slowdown in the U.S. economy or even a recession. So far, they have been wrong.

Next Week’s Economic Statistics

This is a busy week for indicators and we’ll probably see the market react strongly since the bond market fell so much last week.

On Monday we get Personal Income and Construction Spending. The personal income number could have a significant effect on the market. With the unemployment rate already very low and jobless claims continuing to fall, if we see strength in wages we could see the market fall further. On Tuesday we get New Home Sales and Leading Indicators. Neither of these indicators should move the market. LEI has been moving lower for over 6 months even though the economy has been strengthening so numbers have been considered outright wrong. On Wednesday we get the National Association of Purchasing Managers report. The report may move the market if it is too strong. Analysts will be looking to see if there is restocking of shelves going on or if they are holding inventories with worries of a slowing economy. On Thursday we get Jobless Claims, Factory Orders and Overall Chain Store Sales. The Factory Orders number will be looked at about the same as the NAPM number. On Friday the all-important Unemployment report comes out. If there is any number that will move the market it will be this one. With bonds acting the way they are, the stock market will pay close attention to this number. If the number is strong you can expect a sell off. If it is weak, look for a strong rally. If it is in-line with expectations it will depend on where the market has been going all week.

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

9339.95

9306.58

-33.37

.03

S & P 500

1239.16

1238.33

-.83

.06

S & P 500 Futures Dec.

1243.00

1236.00

-7.00

0.5

S & P 100

620.25

618.42

-1.83

0.3

Nasdaq

2283.44

2288.03

+4.59

0.2

Russell 2000

392.30

392.26

-.04

.01

30 Year bond

5.38%

5.58%

S&P 100 Expiration   618.42
S&P 500 Expiration  1325.65
S&P 500 March Futures Option Expiration 1325.65

Program Trades

The market worked out perfectly for placing trades this past week. On Monday, when the market opened lower, we were able to fill most of our put trades. When the market rallied for the rest of the day and most of Tuesday we were able to get into our call trades. With the market falling on Wednesday it brought the market back to neutral ground for the week and we saw a lot of premium loss in trades. When the market fell to new lows on Thursday we were able to get into the rest of our put futures trades. When it came back to close around neutral territory, both our call and put trades looked great with a lot of premium decay. The market looks like it will continue this seesaw action for a few more weeks which is probably why readings are indicating about an average 95% probability of all our trades expiring worthless March 19th.

Average Entry price

 

Bid

ask

last

         
 

S&P 500 Cash Trades:

     

1160 sold SPX Put for $11.25

Long Trade

8.88

9.88

10.00

1150 bought SPX Put for $10.00

$1.25 credit spread.

7.63

8.63

7.25

         
 

S&P 100 CashTrades:

     
         

580 sold OEX Put $5.00

Long trade

4.63

4.88

4.63

575 bought OEX Put $4.25

$.75 credit spread

4.00

4.13

4.00

         

570 sold OEX Put $3.75

Ultra trade

3.38

3.50

3.13

560 bought OEX Put $3.00

credit spread $.75

2.50

2.63

2.50

         

660 sold OEX Call $5.00

Long trade

1.13

1.25

1.25

665 bought OEX Call $3.75

credit spread $1.25

.75

.88

.88

         

670 sold OEX Call $2.63

Ultra trade

.44

.56

.50

680 bought OEX Call $1.82

credit spread $.82

.18

.25

.25

         
 

S&P 500 Options Feb. Futures Trades

High

Low

Close

         

Sold 1320 Calls $11.55

Long Trade

3.10

1.90

1.90

Bought 1325 Calls $10.00

$1.55 Credit

2.10

1.55

1.55

         

Sold 1350 Calls $3.25

Ultra Trade

1.00

.60

.60

Bought 1360 Calls $2.25

$1.00 Credit

nt

nt

.35

         

Sold 1150 Puts $9.00

Ultra/Long Trade

10.00

6.80

8.20

Bought 1140 Puts $7.50

$1.50 Credit

7.10

7.10

7.10

         

Sold 1100 Put $5.00

Outright Sell

5.00

3.00

4.00

Copyright 1998. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.

Short Trades

Long Trades

Ultra Trades

Outright Short Sales

1999 Current

67%

1999 Current

68%

1999 Current

39%

1999 Current

22%

1998

66%

1998

43%

1998

79%

1998

71%

1997

108%

1997

188%

1997

82%

   
1996

163%

1996

169%

1996

99%

   
    1995

93%

1995

76%

   
    1994

79%

1994

89%

   
    1993

177%

1993

long

   
    1992

112%

1992

long

   
    1991

162%

1991

long

   
    1990

166%

1990

long

   

Futures Trades

Outright Sells & Strangles

Long Trades

Ultra Trades

1999 Current 37% 1999 Current 53% 1999 Current 33%
1998 130% 1998 93% 1998 16%

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