Agora Outlook

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

                                                                          November Expiration                                                November 20th 1998

Davidson’s View

The November expiration has come and gone and with it brought a couple records. The first one was breaking the November expiration cycle high. The old record only saw a 5% gain. This November’s expiration cycle was up 10%! The second record was that we have now had 3 stronger than 8% moves during one expiration cycle in one year. That has never been done before and it is even more unbelievable because November has always been the weakest month of the year for expiration gains! This month only had a 2% probability of such an occurrence. When you look at our expiration chart we have now made a double top in the index. The November close is at a new record high but it is less than a 100th of a percent higher so one can conclude that we’re just back to the old high made in July.

This past expiration cycle should have been down on fundamentals and technicals alone but the psychological factor was even stronger. Fundamentally, earnings revealed that they remain on a downward track and economic indicators are getting weaker so the market can’t be finding any strength there. Technically, the market is very overbought and momentum indicators have been falling for over a week now. The advance decline line is turning over again and volume was pathetic the whole move this month. One of the biggest signs that we may be reaching an intermediate top is the number of bulls in this week’s reading of the Investors Intelligence reports, 57%. Aside from all of this, the market has now returned to its former upper high levels so the advance should at least slow a bit.

Although everything points to a down move, analysts have the market psyched, so how will it move lower? We just left the supposedly weak November expiration cycle and now we’re coming into the supposed strongest expiration cycle of the year, December! Will they reverse themselves this year? The probability is high as the expiration cycle after a 10% move has never been that strong, but we’ll trade accordingly to our program numbers. There is always one good thing about new highs in expirations, though, you don’t have to worry about anymore upward explosions!!

Economic Effects

Monday

U.S. industrial production fell for a second straight month in October as businesses ran at their slowest operating rate in more than six years. A day before policymakers met to consider trimming interest rates, the Fed said total industrial output declined 0.1% last month after a revised 0.5% September drop. Industries' operating rate dropped to 80.6% of capacity, the lowest since 80.2% in September 1992, a further indicator that inflation pressures were muted. Economists had forecast a 0.2% increase in October industrial output instead of a decline, counting upon a surge in auto production. Motor vehicle assembly rates did rise, though to a relatively modest annual rate of 13 million from 12.7 million in September. The Fed noted there were ``fairly widespread'' increases in manufacturing production by other industries, including furniture makers, fabricated metal production and computers and semiconductor output. Manufacturing industries overall raised their production in October by 0.3%, partly rebounding from a 0.6% drop in September.

Tuesday

Inflation inched up in October, as prices rose for consumer goods, from fruits and vegetables to gasoline and baby clothes. The seasonally adjusted Consumer Price Index climbed 0.2% after remaining unchanged in September. Still, the inflation rate for the first 10 months of this year, at just 1.6%, is better than the 11-year low of 1.7% for all of 1997.

The small increase in October was expected and unlikely to blow the confidence of Fed officials if they are inclined to again cut interest rates at their meeting today. Although export sales have plummeted, causing some factories to lay off workers, unemployment remains near its lowest in a generation. American consumers, responsible for 2/3rds of the nation’s economic activity, continue to spend.

Core prices which exclude volatile food and energy costs closely watched by economists rose 0.2%, the same as the overall index. There were no surprises in the report as inflation continues to fall. The market was more concerned about the Fed meeting than anything else today.

Wednesday

The U.S. trade deficit narrowed to $14 billion in September from a record in August helped by a surge in overseas sales of aircraft and a decline in oil imports. The seasonally adjusted September gap between exports of goods and services and imports was 11.7% lower than a revised record deficit of $15.9 billion in August. The deficit for the July-September quarter, at $44.5 billion, rose to a record, from $43.6 billion in April-June. This reflects the impact the Asian economic problems are having on the U.S. economy. So far this year, the deficit in goods and services is running at an annual rate of $166 billion, 50 percent above last year’s $110 billion imbalance. Currency crises leveled a number of Asian economies as well as Russia’s and, until last week’s $42 billion international rescue of Brazil, threatened Latin America. That crisis has flattened U.S. export sales of manufactured goods and farm products.

U.S. exports of goods and services rose 3.3% to $77.1 billion in September, but for the first nine months of the year, they were off 0.5%. Imports fell 0.2% to $91.2 billion but are up 4.8 percent for the first nine months. In goods alone, the U.S. trade deficit with Pacific Rim countries soared 36% to $119 billion from January through September, compared to the same period a year earlier. In September, the trade deficit with China fell just $6 million short of August’s $5.91 million record. But with Japan, it declined to $5.07 billion from $5.2 billion the month before. The deficit with Canada, our largest trading partner, jumped 40% to $2.3 billion in September, the highest since December 1996. The increase in U.S. exports overall was the second in a row and came after four consecutive declines.

Thursday

Construction of new homes and apartments rebounded strongly in October as builders in the South worked overtime to make up for time lost to Hurricane George. Nationally, builders started work on new housing units at a seasonally adjusted annual rate of 1.695 million last month, up 7.3% from September. The increase, the largest in 14 months, returned starts to the 1.704 million rate of July, an 11-year high. Nationwide, low mortgage rates, strong income growth and a plentiful supply of jobs have contributed to the strongest year for housing construction since the mid-1980s. Analysts expect another good year in 1999, although with overseas economic turmoil causing job losses in U.S. manufacturing, activity won’t be as brisk as this year.

Housing permits, a gauge of future construction, jumped 9.9% in October to a rate of 1.697 million, the most since January 1990.

The Federal Reserve Bank of Philadelphia's November manufacturing data showed a decline in activity but pointed to price stability rather than deflation, Philadelphia Fed economist Michael Trebing said today. Trebing told reporters in a telephone that the monthly Business Outlook Survey's shipment index had fallen below zero for the first time in about three years and, together with other indicators, painted a weak picture overall for manufacturing in the month. The shipments index fell to -9.5 from 10.9 in October.

Jobless claims rose by 9,000 to 332,000 in the week ended Nov. 14 from the previous week's revised figure of 323,000. Initial claims in the latest week were at there highest since the week ended on July 11, when layoffs in the auto industry due to a strike at GM helped push claims to 337,000. The rise experienced in the last two weeks contain at least some weather component as colder weather and snows move into parts of the Midwest and West. Analysts saw the latest claims figure, showing a rise for the third straight week, as confirming forecasts of a gradual slowing in the U.S. economy. This is partly due to weaker exports to distressed Asian economies, which have cut into company profits and caused layoffs. The report helped boost bond prices in early trading. The closely watched four-week moving average moved up to 317,000 from the prior week's 313,750. This average, considered a more reliable indicator of job market trends is at its highest levels since July 25, when it hit 337,000.

Next week’s Economic Indicators

Tuesday we get the 3rd quarter Gross Domestic Product numbers, Durable Goods and Consumer Confidence figures. At the moment, it doesn’t appear that consumer confidence will have much of an effect on the market as the Fed has now lowered interest rates three times which in time should lift confidence. The GDP could give an indication of how much the economy has been slowing so this figure may move the market, along with the durable goods number. Wednesday has Personal Income, Jobless Claims, and Existing Home Sales. The only number that will likely cause the market any grief is the personal income number if it is stronger then expected. A slowing economy with higher wages is the worst case scenario in the Fed’s eyes. Economic indicators this week will probably become more significant as time goes by as it now appears that the Fed is not likely to loosen again this year.

Technically

Surprise, surprise! The big change in sentiment continues its streak! This was the ninth week in a row that the percentage of bulls increased. The last time we had eight straight weeks of increased bullishness was in 1981, near the end of a bear market rally, according to Michael Burke, editor of Investor’s Intelligence.

The breadth of the advance beginning to narrow. While the small-cap, broad stock market enjoyed several weeks of superior performance, the Dow and S & P 500 has definitely regained leadership.

Last week’s equity put/call ratio dropped to 40.7%, sharply lower than the heightened level of fear of the last few months. When the 3-week average of this put/call ratio drops 8% under the 39-week moving average, it is about the peak that can be expected in optimistic speculation, and needing a little renewed fear to release the tension. It is not quite there yet, but the 3-week average is 6.4% under the 39-week average, and almost certain to drop under the 8% danger level on any further rally in the market this week.

The Mclellan Summation index is starting to roll over once again as the a/d line is fading. If it does turn over it will confirm another lower high since peaking in July.

The 5-day arms index has returned to overbought levels and the 10-day average is on its way. A strong push up on Monday without strong advancing stocks will probably move the 10-day into overbought territory. The only savior once again this week is the volatility index hovering around the 25 point level. Of late whenever we have seen a rise in it the market has started to fall so it will be important to watch.

Mclellan Oscillator: +34 -100 oversold +100 overbought
Summation Index: +2087

Five day arms: .78 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .89 .80 and below, overbought 1.00 and above, oversold

Bulls: 57.0 previous week 53.1 50% plus overbought/bearish
Bears: 31.6 previous week 35.4 50% plus oversold /bullish
Correction: 11.4 previous week 11.5

Five day Qvix: 25.34

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8919.59

9159.55

+239.96

2.7

S & P 500

1125.72

1163.55

+37.83

3.4

S & P 500 Futures Dec.

1133.30

1167.50

+34.20

3.0

S & P 100

554.26

574.97

+20.71

3.7

Nasdaq

1847.99

1928.19

+80.20

4.3

Russell 2000

389.36

394.29

+4.93

1.3

30 Year bond

5.25%

5.20%

S&P 100 Expiration: 574.97
S&P 500 Expiration: 1162.55
S&P 500 November Expiration: 1167.50 Dec. Contract

Program Trades

This was an active week for trades as we covered some trades and placed some Short put trades to cover any losses. Long call trades saw an average loss of 43% but were offset by Short trades seeing a profit of 35%. These trades were made this week to offset the losses in the Ultra and Long trades. Ultra trades lost 29% this month. It was there first loss in 2 years. We also had a very good outright sell made for a strong 18% in the cash market.

Futures trades didn’t see a loss this month but only made a 7.0% profit this month because the strangle had to be bought back.

Current Trades

Average Entry price

Bid

ask

last

550 sold OEX Call $6.00

Long trade

555 bought OEX Call $4.75

$1.25 credit spread

Bought back $3.50

-$2.25 loss

565 sold OEX Call $2.25

Ultra trade

570 bought OEX Call $1.56

$.63 credit spread

Bought back $2.25

-$1.62 loss

465 sold OEX Put $3.25

Ultra Trade

460 bought OEX Put $2.75

$.50

Full Profit

1125 sold SPX Call $14.00

Long trade

1130 bought SPX Call $12.50

$1.50

Bought back $3.50

-$2.00 loss

1140 sold SPX Call $7.75

Ultra Trade

1150 bought SPX Call $5.00

$2.75

Bought back $5.00

-$2.25 loss

1075 sold SPX Puts $4.25

Short Trade

1070 bought SPX Puts $3.50

$.75

Full profit

1125 sold SPX Puts $4.00

Short Trade

1120 bought SPX Puts $3.00

$1.00

Full profit

1160 sold SPX Puts $22.00

Short Sale

Full profit

S&P 500 Options Futures Trades

Sold 1140 Call

$10.50 Strangle

Sold 940 Put

$5.75 Strangle

Total sold $16.25

Bought back for $13.00

Profit $3.25

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

Short Sales

1998

Current

52%

1998

Current

-08%

1998

Current

69%

1998 Current

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
2nd month of trading

Outright Sells Long Trades
1998 Current 29% 1998 Current 45%

Agora Outlook

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

                                                                         November Expiration                                                November 13th 1998

Davidson’s View

The market this week was flat to slightly down mostly because of the new worries about no Fed rate reduction and an overbought market. The market didn’t really seem to care that much about the possible hostilities with Iraq. It didn’t work off much of its overbought condition but still showed strength in that it didn’t collapse even with all the negative news. Daily technicals have all turned lower, especially momentum and volume, and are revealing that the market isn’t going to get a lot of help from them.

Once again, timing is going to be important as we’re now coming into the November expiration this week and with the Fed deciding about interest rates, this week is going to be interesting. So far, the market has moved perfectly for us into expiration week. It wasn’t surprising to see the market up a bit today. Even though it closed near its highs it didn’t seem to show a lot of strength. It had remained there for three hours before the close making it appear like it was running out of gas. If the market does continue to move higher into the Federal Reserve meeting on Tuesday or remain flat into the meeting we could see a sell off no matter what the decision is. If the announcement is made that they will do nothing, the market will likely sell off. Traders may be thinking there won’t be anymore rate cuts as the economy has been looking very healthy and wholesale inflation is looking as though it may be starting to turn up. Friday's news that retail sales rose a strong 1% in October made it clear that the economy is picking up steam once again. The past weeks economic indicators have also revealed that the economy isn't falling apart.

When the Fed surprised the financial markets with a point rate cut on October 16, it specifically cited "unsettled conditions in financial markets" as a reason for the move. The markets are hardly unsettled these days. Looking at a 20% rally in one month seems a little exuberant actually. Just look at the recent surge in the Internet stocks. Neither the global financial crisis nor the stock market's gyrations are causing sleepless nights anymore. No one really knows if the Fed will cut rates and it will be really hard to tell which way the market will go until it happens but one can watch the tape for clues Monday and Tuesday and so I’ll be watching closely. If the Fed doesn’t cut one thing will become very obvious, stocks are richly priced and bonds are cheap and due for a rally.

Economic Effects

Tuesday

Growth in productivity, the key to rising living standards, improved in the July-September period after nearly stalling during the previous quarter. The productivity of workers, measured as output per hour of work rose at seasonally adjusted 2.3% annual rate in the third quarter. Productivity was robust during the first three months of the year, rising at a 3.5% rate. Economists consider productivity the key to prosperity. Sizable gains mean companies can pay workers more, hold the line on prices and still earn the kind of profits that keep stock prices rising. After growing at a brisk 2.9% annual rate in the 1960s and early 1970s, productivity slowed to a paltry 1% from 1974 through 1995. Since then, it’s been growing at around 2%. That’s led some economists to speculate that the economy has embarked on a new era of productivity growth, driven by computers and other high-tech innovations. However, within today’s report were signs of the strain imposed on the economy by the world financial turmoil that began in Asia last year and has depressed U.S. export sales. Manufacturing output, which represents 18% of the economy, declined at a 0.6% rate, the first drop since the last recession in 1991. Hours worked at factories fell even further, at a 4.1% rate. So, productivity within the sector remained strong, growing at a 3.7% rate. For all nonfarm businesses, output rose at a moderate 3.5% rate. Growth in hours worked was the smallest in a year, rising at a 1.2% rate. Unit labor costs, a key measure of inflation pressures, rose modestly at a 1.7% rate, after shooting up at a 3.7% rate in the second quarter.

Thursday

The number of newly laid off workers filing for unemployment benefits jumped by 12,000 last week to the highest level since the summer. Initial jobless claims, which gives an early reading on the resilience of the labor market, rose to 321,000 in the week ended Nov. 7 and the highest level since 337,000 in the July 11 week, backing economists' belief that market is softening. The weekly jobs data, which analysts had forecast at 311,000, has crept upward over the last few weeks as current conditions in the labor market deteriorate. Jobless claims are starting to increase, continued claims are moving off their lows, and there is data that says we've turned the corner, not necessarily for the better. The four-week average, viewed as a more accurate indicator of longer-term labor conditions, measured 312,500 in the week ended Nov. 7, up from 311,000 a week earlier.

Friday

Wholesale prices rose slightly more in October than economists had expected. Prices charged by factories, farms and other producers rose 0.2% in October, reflecting rising costs for vegetables and eggs and the first increase in energy prices in five months. The increase in the Producer Price Index for finished goods was slightly more than expected. It wasn’t likely to shake economists’ belief though that inflation is largely being kept in check by lack of demand resulting from a worldwide economic slump. For the first 10 months of this year, producer prices declined at a 0.5% annual rate, compared to a drop of 1.2% for all of 1997. Many analysts believe continued low inflation could give Federal Reserve officials confidence to cut interest rates again at their next meeting on Nov. 17 but they also note a worrisome rise in commodities. In October, seasonally adjusted energy prices rose 1.2%, the first increase since May and the largest in nearly two years. Residential gas and electricity prices also rose in October. Food prices rose 0.4% in October, following a similar increase the month before. Declining meat and seafood prices were more than offset by a 13.5% increase in vegetable prices and rising costs for fruit and dairy products. Core prices, which exclude volatile food and energy costs and are watched most closely by economists, rose a mild 0.1%. They’re up at a 1.5% annual rate from January through October, compared to no change for all of 1997.

In a hopeful sign for holiday sales, people spent briskly on cars and clothing in October, shrugging off the falling stock market at home and economic turmoil overseas. Retail sales, which account for roughly 2/3rds of the nation’s economic activity, rose 1% to a seasonally adjusted $227 billion last month, the Commerce Department said Friday. It was the biggest increase in five months. Though the number was supported by a 2.6% surge in auto purchases, the largest in 15 months, all broad categories of goods managed at least modest gains and most did even better. Excluding autos, sales rose 0.5%. It could be a sign that Christmas sales, which account for half of some stores’ annual receipts, might not be as weak as some analysts feared. Earlier this year, consumers’ responses to survey questions showed their confidence at levels unseen since the high level of the late 1960s. But, as the international economic crisis hit home, roiling financial markets in the late summer and early fall, their exuberance began to wane and some economists worried consumers would severely cut their spending. It hasn’t happened so far. The labor market isn’t quite as strong as it was this spring and the unemployment rate has crept up from 4.3% to 4.6% but, by historical standards, jobs remain plentiful. Also, incomes are rising roughly double the very-low inflation rate and interest rates are low. Low rates reduced the cost of car and other installment loans and allowed many homeowners to refinance their mortgages, cutting their monthly payments and freeing up cash for other purposes. Though credit conditions tightened for many business borrowers in response to the world financial crisis, consumers have still been able to borrow. All that presents a dilemma for Federal Reserve policy-makers. Opting for unchanged rates could send renewed tremors through still shaky financial markets. Cutting rates risks over-stimulating a still strong economy and dampening its exceptional inflation performance.

The University of Michigan's preliminary index for November rose to 102.4 from a reading of 97.4 in the final October index. The current conditions component rose to 116.8 in the preliminary reading for November, from 112.8 in the final reading for October. The consumer expectations index rose to 93.1 versus 87.5 in the final reading for October. The number was much stronger then expected as it doesn’t look like consumers have given up their buying frenzy.

All of the indicators today were strong. The Retail sales number pulled the Globex S&P 500 futures off of its highs and when the University of Michigan’s consumer sentiment number came in stronger than expected the cash market retreated as sentiment was much stronger than expected. This may mean that the Fed will be even more hesitant to lower interest rates on Tuesday.

Next week’s Economic Indicators

On Monday we get Industrial Production. The market may not like the number if it reveals that workers are not being very productive. This is a possibility as consumer sentiment is falling and when people are not happy they are less productive. When a company is less productive it cuts into profits and can create wage pressure because the company still needs to pay workers the same amount.

Tuesday has the Consumer Price Index, Business inventories and most importantly, the Federal Reserve meeting to decide about interest rates. The CPI number is not likely to have much of an effect on the market as inflation has been very low the past few months. Inventories will give an indication of how the trade deficit is and if business is slowing. Indicators today will be ignored for the FOMC meeting as many people are hoping for another rate cut. The market has run up 20% because of the past 2 rate cuts and has discounted the possibility of a third cut so if there is no cut, the market is likely to not react well. On Wednesday we get International trade figures. If we show another record trade deficit figure the market may react negatively. High trade deficits and recessions do not mix well in the market. On Thursday we get Jobless claims, Housing Starts, and the September 29th FOMC meeting’s minutes. Housing Starts have been slipping the past few months so a strong number may lend support to the market. The FOMC minutes will probably be disregarded since the Fed will have just met on Tuesday.

Indicators this week probably won’t be that signifagant considering the Fed will be deciding about interest rates on Tuesday. It is also an expiration week and the market seems to trade more on technical matters since traders close out their positions over the week.

Technically

Stocks have grudgingly suggested topping action and the market continues to show signs of tiring this week. Momentum, relative strength, and stochastic indicators are starting to weaken. At the beginning of the week the S&P 500 broke down from a rising wedge pattern followed by the S&P 100 breaking a couple days later. Finally, today the Dow broke through the wedge. Rising wedge patterns usually come to an end to the downside and so far this wedge has been the same. Normally, when a rising wedge is broken the market will return to where the rally began but that probably won’t be the case this time. Right now, our biggest concern is just for next week and this breakdown came at a good time. The only thing that could indicate a return to the rally is if the previous highs are taken out in a short amount time.

Investor’s Intelligence reported this week that the lemmings certainly screeched to a halt in their bearish stampede of early October, and are now running toward the bullish cliffs. The latest survey shows that 53.1% of them are currently bullish, right back to the levels reached as the market top was being formed in late July of 1998. Anything over 50 indicates an overbought, bearish market.

The Mclellan Oscillator has returned from being overbought to a neutral position with the market downturn this week but the summation index is just starting to turn lower. This is giving a mixed picture as the Oscillator suggests a bottom but the summation index looks like it has peaked and is turning lower. When you look at the summation index longer term you will see that there are now three lower highs since the top in July. As long as we turn down from here we could say this rally is finished.

The Arms indicators are revealing that the market is oversold on a short-term basis and almost oversold longer term. As the indicator was overbought for some time it could stay oversold for just as long.

Volatility turned up this past week indicating that the market is going to see some more choppiness next week. This is not surprising considering volume has been weak the past few weeks and we’re having the November expiration next Friday.

Mclellan Oscillator: +9 -100 oversold +100 overbought
Summation Index: +2019

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

Bulls: 53.1 previous week 47.8 50% plus overbought/bearish
Bears: 35.4 previous week 38.3 50% plus oversold /bullish
Correction: 11.5 previous week 13.9

Five day Qvix: 27.18 Last week 40.41 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8975.46

8919.59

-55.87

0.6

S & P 500

1141.00

1125.72

-15.28

1.3

S & P 500 Futures Dec.

1148.00

1133.30

+14.70

1.2

S & P 100

558.87

554.26

-4.61

0.8

Nasdaq

1856.56

1847.99

-8.57

0.5

Russell 2000

400.32

389.36

-10.96

2.7

30 Year bond

5.38%

5.25%

Program Trades

Although the market was basically flat to slightly down this week premiums on our trades fell like a stone. Our trades are still looking pretty good for the coming expiration with the Call Ultra trades holding an 89% probability of success. Our long call trades are showing that they are a little under pressure with only a 76% probability of success and that is a bit worrisome. Usually we get concerned at 75% but 1% away is good reason to be concerned. We may have to close them out but we will send out an ALERT e-mail if needed. Our futures Long trade may also be closed out but we still have an 84% probability of success. Our futures strangle is holding well also at an 88% probability.

Current Trades

Average Entry price

Bid

ask

last

550 sold OEX Call $6.00

Long trade

9.75

9.88

9.75

555 bought OEX Put $4.75

$1.25 credit spread

6.38

6.50

6.25

565 sold OEX Call $2.25

Ultra trade

2.00

2.13

1.98

570 bought OEX Call $1.56

$.63 credit spread

1.25

1.38

1.13

465 sold OEX Put $3.25

Ultra Trade

.06

.13

.06

460 bought OEX Put $2.75

$.50

.06

.13

.06

1125 sold SPX Call $14.00

Long trade

14.25

15.00

14.50

1130 bought SPX Call $12.50

$1.50

12.00

13.50

11.00

1140 sold SPX Call $7.75

Ultra Trade

7.63

8.63

6.63

1150 bought SPX Call $5.00

$2.75

13.63

14.82

13.50

1075 sold SPX Puts $4.25

Short Trade

2.00

2.50

2.25

1070 bought SPX Puts $3.50

$.75

1.88

2.32

2.25

S&P 500 Options Futures Trades

High

Low

Close

Sold 940 Put

$10.50 Strangle

.15

.15

.15

Sold 1140 Call

$5.75 Strangle

9.80

9.80

6.50

Total sold $16.25

1130 sold Call

Long trade

15.20

11.80

15.20

1135 bought Call

$2.00 credit spread

12.30

12.30

10.00

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

Short Sales

1998

Current

17%

1998

Current

35%

1998

Current

98%

1998 Current

53%

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

Long Trades

1998 Current

22%

1998 Current

45%

Agora Outlook

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

                                        November Expiration                             November 6 th 1998

Davidson’s View

Federal Reserve Chairman Alan Greenspan, less than two weeks before the Fed's next policy meeting, said he is "already seeing significant signs of some reversals" in the peculiar bond market behavior that prompted the Fed to cut rates in September and October. Analysts expect another rate cut at the Nov. 17 meeting, but Greenspan's remarks and the latest economic indicators have made them less certain of their predictions. Greenspan said so little about the economy in his speech this past Thursday that none of those who track his every word could tell if he is leaning in favor of or against a rate cut. Other Fed officials have said that the sense of urgency that led to last month's surprise rate cut has gone away. The stock market has bounced back and employers are still hiring, although at a slower pace, and the economy doesn’t seem to be stronger than what they had expected at this time. There is even a hint of wage inflation. At least a few Fed officials will likely argue that they can afford to wait a while before cutting rates again.

This could be the reason we are seeing the dramatic pull back in the bond market. The bond market collapsed on Friday, at one point sending the yield on the 30-year bond up to 5.41%, giving even more of a boost to stocks as money flowed out of bonds and into stocks. Because we’re stuck in this divergence of bonds and stocks, one would expect a pull back in stocks when a rally begins in bonds. As stocks sit at resistance levels, bonds sit at support levels. At this point, bonds are once again slightly more attractive than stocks. If I were putting new money into the markets today, I would prefer the weakness in bonds as a more attractive buying juncture than the short-term overbought stock market.

In the past, November, December and January have proven to be the most bullish consecutive months of the year. This may be true for the overall November months but unfortunately for expiration cycles November has been the worst month of the year. There have been 8 down months compared to 7 up months. The strongest up month has only ever been 5%. Since 1950, the probability of the S&P 500 rallying usually sees an even distribution in the month of November, higher near the end of December and highest in the beginning of January. We've analyzed the month-over-month % changes for the S&P 500 for the months spanning November-January during the 1990’s. The October-November period has averaged a 2.5% gain, the November-December period has averaged a 0.8% gain and the December-January period has averaged a 3.0% gain. This suggests the S&P 500, a close of 1120 in November, 1135 in December, and 1165 in January.

So far this scenario has repeated itself as we have rallied off of October lows. And so far this expiration cycle has seen the S&P 100 and 500 up 7.5% and 8.0%. With 10 trading days to expiration I don’t expect the market to move much higher from here on a weekly basis. With new sentiment worries starting to come forth about the next rate cut, bonds deeply oversold and the fact that November is the weakest month of the year for expiration, I also expect to see some type of pull back this week.

Economic Effects

Monday

The Savings rate, the portion of after-tax dollars left over after spending, fell to -0.2%, the first negative monthly savings rate since the department began reporting the figures on a monthly basis in 1959. Prior to that, figures were calculated quarterly. The last time those figures showed a negative savings rate was in 1933, when the rate was -2.1%. The savings rate has been falling steadily for years, but in July of this year the Commerce Department made a change in how the rate is calculated making the rate even smaller. September's Income gain was the smallest monthly increase since a matching 0.2% increase in April 1997. The gain in spending in September matched forecasts by economists in a Reuters survey, though the income gain exceeded the 0.1% rise that was projected. Analysts have been impressed by the willingness to spend despite financial turmoil in the U.S and around the world that has dented confidence in the economy's health.

Manufacturing contracted for the fifth straight month in October as new orders tumbled and exports to troubled markets overseas showed no signs of improvement, the nation's purchasing managers said today. The National Association of Purchasing Management said its index of industrial activity fell to 48.3 in October from 49.4 in September. A reading above 50 indicatesto growth in manufacturing while one below that indicates contraction. Manufacturing accounts for about one quarter of the total economy. Orders diminished last month for the first time in 2-1/2 years. This latest survey shows that the manufacturing sector is still very weak. This slowdown, especially the decline in orders points to further weakness that could stretch into early next year. If we don’t reverse this situation in the next month or two a significant slowdown for 1999 is highly probable.
Weakness overseas continued to pummel American exports as new export orders fell for the 10th straight month. The economic turmoil in Asia, Russia and parts of Latin America has hurt American manufacturers who export to those regions. We could have disappointing Christmas for retailers if the manufacturing sector remains low. The market turned out to be neutral today as the income numbers were liked but the NAPM numbers were disliked.

Construction spending rose modestly, though more than expected, in September, led by jumps in outlays on government projects and private housing. September construction spending rose 0.4% to a seasonally adjusted annual rate of $660.6 billion after being unchanged in August. Economists in a Reuter’s survey had expected construction spending to be unchanged in September. The September gain was led by the public sector, where spending jumped 1.8% to a $148.9 billion annual rate after falling 0.6% in August. Increases included spending on school buildings, highways, sewers and water supply facilities. Spending on privately financed projects was unchanged at a $511.7 billion rate in September as higher spending on housing offset smaller outlays for new factories and commercial facilities. In August private construction spending rose 0.2%.

Spending on the construction of houses, townhomes and apartments rose 1.1% in September to a $302.7 billion rate after a 0.1% gain in August. Although the housing market enjoyed a banner year in 1998, amid falling interest rates and a robust job market, sales have slowed recently and inventories of unsold new homes have been rising. The Construction Spending report wasn’t even acknowledged by the market today.

Tuesday

The Composite Index of Leading Economic Indicators held steady in September for the second consecutive month. For two straight months the leading indicators have languished, which means the economy will be hard pressed to match the robust growth posted the past few years. The leading index is still considerably higher now than last year, suggesting that rising consumer spending and low interest rates should keep us out of a recession. The coincident index held steady (after a downward revision in August) and the lagging index fell 0.1% in September.  Both the leading and coincident indexes held steady while the lagging index fell 0.1% in September. Taken together, their components show a slowing, but still healthy economy.

The leading index stands at 105.5 for the third straight month (1992 equals 100). The last increase was 0.5% in July. During the six month span through September, the leading index rose 0.3% and four of the ten components advanced (diffusion index, six-month span equals 40.0%. Two of the three available components of the coincident index-employees on nonagricultural payrolls and personal income less transfer payments-increased in September. Industrial production fell. By holding steady in September, the coincident index stands at 121.0 (1992 equals 100). Based on revised data, this index increased 0.5% in August and also held steady in July. During the six-month period through September, the coincident index increased 1.1%, with all four components making positive contributions.

Wednesday

The Federal Reserve's Beige Book reported that economic growth slowed over the past two months despite tight labor markets and robust real estate and construction activity. The Beige Book is a summary of economic activity prepared for use at the central bank's next Federal Reserves meeting on November 17th. The Federal Reserve's Beige Book on recent U.S. economic conditions confirmed that the U.S. economy is losing some of its stellar momentum, giving policymakers a free hand at lowering interest rates again later this month. The pace of economic expansion moderated in September and October amid signs of slowing in some sectors. The report pointed out that retail sales were basically at or below merchants' expectations, while more stringent credit standards were a factor slowing commercial real estate activity and many lenders were reported to be tightening standards somewhat, mostly on business loans. While the Beige Book noted labor markets remain very tight in most districts, it also acknowledged manufacturing employment was started to soften and upward pressure on most wages remained subdued.

Factory orders rose for the fourth straight month in September, but parts of the report pointed to slower manufacturing activity ahead. Orders received by factories rose 0.4% to a seasonally adjusted $339.2 billion after rising 0.9% in August, a sign that manufacturing still had strength as the third quarter ended. Orders for defense goods, industrial machinery and electronic products all rose from August. But unfilled orders were unchanged after a 0.3% increase in August with no addition to inventories of finished goods, pointing to a slowdown ahead as manufacturers try to work off stocks of unsold goods. Inventories and unfilled orders data imparted some weakness to the report with both indicators remaining flat over the month. The nation's purchasing managers said Monday that their closely watched index of manufacturing activity fell to the lowest level in 2-1/2 years last month, the latest sign that the turmoil in Asia and elsewhere has hurt demand for exports. Businesses were scaling back on inventory building for fear of being caught with excess unsold goods. He noted consumers dipped into savings in order to spend in September. For this reason, manufacturers may well try to work inventories off in the fourth quarter so as not to be caught with an overhang.

Separately, retailers' group said its members expect the strongest Christmas shopping season in four years. The ``mood survey'' of retailers found the average holiday shopper is expected to increase spending 4.5% from last year to $814 a person. This could make the 1998 holiday season the best since 1994's 8 % gain. There was strong demand for costly durable goods such as heavy machinery and electronic equipment, with durables orders up 0.8% after a 2% August increase. Federal Reserve Vice Chair Alice Rivlin, in an interview published in USA Today, said U.S. growth will slow next year. Due in part to global economic turmoil but right now the economy is ``quite strong,'' fueled by robust consumer confidence, brisk activity in housing, and ample jobs.

Thursday

Low unemployment in the United States continues to be little changed by hard times abroad. The number of first-time claims for unemployment benefits rose last week by +10,000 to a seasonally adjusted 312,000, the Labor Department said today. Claims had fallen by a revised 17,000 the week before. A more reliable four-week moving average of claims was at 312,000 for the period ended Oct. 24, reflecting a slight 2,500 rise.  Through most of this year, a spending spree by American consumers has helped insulate U.S. companies from economic problems spreading around the world.

The Unemployment numbers were supposed to be released on Friday but they were accidentally released at the labor department’s website this morning. We have always said that they have the numbers much earlier than the release and today they admitted that they usually have all the data a few days prior to the actual release.

The U.S. economy added a weaker than expected 116,000 non-farm jobs in October, while the nation's unemployment rate held steady at 4.6%. Payrolls rose by a revised 157,000 in September. October's gain was well shy of the 175,000 claim advance expected by analysts, who predicted the unemployment rate would remain steady. The data is adjusted for seasonal factors. Average hourly earnings rose a penny to $12.88. The sluggish growth in payrolls over the last six months could add fuel to requests for further cuts in interest rates. Since late September, the Federal Reserve has twice reduced interest rates, in part to fend off a recession.  Analysts widely assumed more cuts were on the way but economic data released since the last cut on Oct. 15th has pulled in different directions. On the one hand, gross domestic product was estimated at a healthy 3.3% in the third quarter. On the other hand, we're in the fourth quarter now and consumer confidence and manufacturing activity are slipping steadily.

Retailers reported modest sales gains for October, reinforcing forecasts that this Christmas season won't be as strong as last year's.   In the first full month of fall, strong sales from specialty apparel retailers were offset by weaker results from many department stores. In the end, same-store sales, or those at stores open at least a year, rose a tepid 3.6% in October, according to the Goldman Sachs index of 60 retailers, weighted by sales. The firm had expected a gain of 3% to 5%.  The numbers are yet another negative indicator for retailers headed into the crucial holiday season. In recent months, the volatile stock market, corporate layoffs and waning consumer-confidence figures have prompted industry experts to predict quieter cash registers at the tail end of 1998.

Next week’s Economic Indicators

On Tuesday Productivity and Costs and Wholesale trades will be released. The Wholesale numbers may move the market if the deficit figures are showing continuing growth. This whole year the deficit figures have been ignored but eventually the market will have to pay attention. On Thursday, Jobless Claims will be out. Friday has the Producer Price Index and Retail Sales figures. Inflation has been low this past year so there is no reason to expect the market to react to the release. The numbers this week aren’t of much significance to the market so we will probably see more reactions to technical data.

Technically

All technical indicators are now extremely overbought, but we have been saying that for a while now! The strength of this rally continues to feed on itself. The upside break-out of the bottoming formations since last week has certainly caught the attention of the flip-flop technicians, and the momentum players as they hasten to get back into the market. The S&P 500 is now above its 200-day moving average and has exceeded the 61.8% retracement of the July 20-October 8 declines.

The McClellan 21-day oscillators have joined the even shorter McClellan oscillators in sharply overbought territory. Respectively, the McClellan and 21-day oscillators for the NYSE are +250 and +9001. Traditionally, +100 and +4000 are normal overbought levels, so you can see that these are indeed extreme levels.

The ARMS indicators are hovering just above the overbought level but short term RSI, Momentum and Stochastics are strongly overbought. When the market is this overbought there is usually a pullback in the 3-5% range and then the market goes back to retest the prior move. Volume this week averaged around 700 million shares, but needs to exceed that number because a decline in volume in a rising market indicates that the market is tiring.

On another note, just as hemlines started to go down in the spring when the market fell, they have now started to go back up again but it is still mixed so does that indicate we could be seeing a sideways market for a while?

Mclellan Oscillator: +206 -100 oversold +100 overbought
Summation Index: +532

Five day arms: .86 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .86 .80 and below, overbought 1.00 and above, oversold

Bulls: 47.8 previous week 45.3 50% plus overbought/bearish
Bears: 38.3 previous week 39.3 50% plus oversold /bullish
Correction: 13.9 previous week 15.3

Five day Qvix: 25.34 Last week 40.41 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8592.35

8975.46

+383.11

4.4

S & P 500

1098.69

1141.00

+42.31

3.8

S & P 500 Futures Dec.

1110.00

1148.00

+38.00

3.4

S & P 100

536.97

558.87

+21.90

4.1

Nasdaq

1771.52

1856.56

+85.04

4.8

Russell 2000

378.15

400.32

+22.17

5.9

30 Year bond

5.15%

5.38%

Program Trades

With 10 trading days left in the November expiration cycle our trades are still looking healthy even though they are now under pressure as the S&P 500 has moved right through our sold levels. With 10 days left however, a lot can happen and as long as the S&P doesn’t move much higher from here our trades should still be profitable. The probabilities for full profits are holding above an 85% success rate, which means that the market is indicating it will turn here. We’ll continue to watch how the overall market is moving. If bonds start to rally from their oversold position stocks will probably start to retreat.

Current Trades

Average Entry price

Bid

ask

last

550 sold OEX Call $6.00

Long trade

15.00

15.25

15.00

555 bought OEX Put $4.75

$1.25 credit spread

11.50

11.63

11.50

565 sold OEX Call $2.25

Ultra trade

5.50

5.75

5.50

570 bought OEX Call $1.56

$.63 credit spread

3.50

3.63

3.63

465 sold OEX Put $3.25

Ultra Trade

.32

.38

.32

460 bought OEX Put $2.75

$.50

.25

.32

.25

1125 sold SPX Call $14.00

Long trade

28.75

30.00

29.00

1130 bought SPX Call $12.50

$1.50

25.25

27.25

24.50

1140 sold SPX Call $7.75

Ultra Trade

19.32

20.63

19.00

1150 bought SPX Call $5.00

$2.75

13.63

14.82

13.50

S&P 500 Options Futures Trades

High

Low

Close

Sold 940 Put

$10.50 Strangle

.60

.60

.60

Sold 1140 Call

$5.75 Strangle

21.50

16.30

16.50

Total sold $16.25

1130 sold Call

Long trade

28.00

22.00

28.00

1135 bought Call

$2.00 credit spread

22.50

21.50

21.50

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.

Futures Trades

Outright Sells

Long Trades

1998 Current

22%

1998 Current

45%

Agora Outlook

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

                                                                   November Expiration                                              October 30th 1998

Davidson’s View

The comment of the week was, the "Bears are now in hibernation"! Quite interesting, considering that not three weeks ago the expression on everyone’s lips was that "the Bull market is finished and the Bear now rules the market". So then, what have we been having the past few weeks; a bull rally or a bear market fake out! And people ask me why I changed over to selling options! It seems that analysts change their minds now according to whatever direction the market is taking!

This month the market brags of being the second strongest month of all time, being up 9.0%. The strongest month ever was in January 1987 where the market saw a 13.8% advance. Over the past few days, bears had a chance to gain the upper hand, as concern over currency devaluation in Brazil could have taken the market down. But that was not the case and the stock market moved on. Poor earnings and a back up in bond yields did not deter the bulls from buying stocks even though there is a chance now that the Fed won’t ease at the next meeting on Nov. 17th. The combination of all these factors suggests bulls will be in charge, at least for the next little while.

It is hard to say that we have started a new bull market until we have surpassed the old highs however so one must be cautious and aware that this rally could turn to the downside at any time. For this expiration cycle the market is already up about 3% and we could see it move another 2% at which level the market would see heavy resistance. Historically speaking, November has not been a great month for expirations. I know it’s old news but things like countries overseas collapsing, poor earnings and a possible North American slowdown are things that are not going to just disappear, but can be forgotten for a while. The rally will likely continue Monday and into Tuesday but then we should start to see some type of topping action just due to the move we have been seeing. The election is on Tuesday and no matter what the results are, it may start a short-term correction.

Economic Effects

Monday

Sales of U.S. existing homes dropped for the second straight month in September but are still expected to hit record levels for 1998. The National Association of Realtors said home resales fell 1.1% in September to a seasonally adjusted annual rate of 4.68 million units, the lowest since a rate of 4.37 million in January 1998.

Despite the recent drops, the housing market remains healthy. September sales were down from a 4.73 million unit annual rate in August but up from the 4.30 million-unit rate of September 1997. With the Federal Reserve Board expected to cut interest rates once more in 1998, a strong close of the year for the housing market is expected.

The housing market should soften slightly to about 4.3 million units resold in 1999, but should not be severely hurt unless consumer confidence drops. The September rate was below economists' forecast of 4.75 million units. The median price for an existing home was $131,300 in September, down from $132,900 in August but up from $125,800 in September 1997. The biggest decline in September home sales came in the South, with a drop of 4.9%. Home resales fell 0.8% in the Midwest, rose 5.8% in the West, and was flat in the Northeast.

Tuesday

Consumer confidence tumbled in October to its lowest level in nearly two years amid global economic and political troubles. The drop marks the fourth straight monthly decline for the index.

The index of consumer confidence fell 9.1 points to 117.3 in October from a revised 126.4 in September. The last time it was lower was in December 1996. October’s decline was much larger than analysts expected. The index now is down 20.9 points from its 29-year high in June. Growing anxiety regarding the financial markets, combined with political concerns and recent layoff announcements, has given consumers the jitters. Consumer sentiment is an important economic indicator since consumer spending accounts for 2/3rds of the nation’s overall economic activity. The report comes amid increasing evidence that the U.S. economy is slowing as a result of the financial crisis in Asia and Russia that is now threatening Latin America. In reaction to the report, stocks fell before beginning to rebound. Delos Smith, Conference Board economist, noted, "There’s a good reason for the consumer to be nervous. People in financial markets have the jitters, too! The crucial Christmas retail season will now become the big question mark. The survey was done does not reflect consumer reaction to the surprise second rate cut on Oct. 15. It does show that consumers are nervous about the gyrating stock market and slowing economy. Consumers said they were most concerned about what’s to come in the future, sending the index that measures expectations for the next six months down 10.2 points to 86.6. Fewer people said they would buy a home or major appliance or plan a vacation. More consumers expect business conditions to worsen; meaning fewer jobs and lower paychecks. Although consumers are worried about future economic conditions, they remain somewhat confident about the current economic situation. The index that measures sentiment on present conditions dropped 7.2 points to 163.5 in October, but it is still high. The consumer confidence index, started in 1967, is compiled from responses to questions sent to 5,000 households nationwide. The survey polls consumers on matters ranging from job prospects to buying plans. The index compares results to its base year, 1985, when it stood at 100.

Wednesday

Orders to U.S. factories for big-ticket durable goods rose 0.9% in September pulled higher by demand for automobiles, communications equipment and military goods. The number was a complete surprise to economists. They had expected about a 1% drop, with world financial turmoil diminishing demand for U.S. products, instead, not only were last month’s orders estimated to increase but the August increase, 2%, was revised up from a previous estimate of 1.7%.

Crosswinds from two highly volatile categories buffeted the September report. Orders for defense goods, from ships to tanks, soared 44.9%, the largest rise in 10 months. Excluding that large jump, orders for everything else edged down 0.2%, the worst performance in four months. That was largely due to orders for aircraft plummeting 45.5% following a 50% increase a month earlier. Excluding transportation, orders rose 2.6%. Economists consider orders for durable goods, big-ticket items expected to last three or more years, a key barometer of how busy U.S. factories will be in the months ahead. Shipments of durable goods, a measure of current production, rose 1.5% in September to a seasonally adjusted $191.7 billion. It was the fourth consecutive increase. This good news gave a boost to the market.

Thursday

Workers pay and benefits grew strongly in the third quarter of 1998. A report showing tight U.S. labor market conditions is putting upward pressure on labor costs. The Employment Cost Index, a broad gauge of worker compensation closely watched by the Federal Reserve for signs of inflation in the economy, rose a seasonally adjusted 1.0% after a 0.9% increase in the April-June period. Economists surveyed in advance of the report had expected a more modest 0.8% gain. U.S. workers received a 3.7% increase in wages and salaries over the past year, the biggest boost in more than six years! The rise for the year ended in September shows workers are still benefiting from two years of robust economic growth, which slowed this spring as spillover from world financial turmoil hurt U.S. trade.

Today’s report raises questions for Federal Reserve policy-makers. Last month, they began cutting interest rates in an effort to get the economy from the dampening impact of the global financial slump. However, until August, they were ready to increase rates to slow the economy and prevent brisk wage increases from fueling price inflation. Wages and salaries have been increasing faster than benefits, rising 4% during the year ended in September, the most in seven years. Benefits increased 2.6%. For the third quarter alone, wages and salaries rose 1.2%. That’s the most since an identical increase in 1990. They haven’t increased more than that since 1984. Benefits increased 0.8% in the third quarter. Analysts expected the number to move stocks but it was completely ignored, as it was mostly in-line with expectations.

Jobless Claims fell last week for the first time in four weeks. Claims dropped by 18,000 to a seasonally adjusted 301,000. The four-week moving average of claims, which smoothes fluctuations in the volatile data series, rose to a 12-week high of 309,250, up from 306,500 for the period ending one week earlier.

Friday

U.S. economic growth perked up over the summer as healthy consumer spending offset a continued decline in export sales and a lapse in business investment. The Gross Domestic Product, the sum of all goods and services produced within the U.S., advanced at a 3.3% seasonally adjusted annual rate in the July-September quarter.

Hurt by Asia, the economy had grown at a subdued 1.8% rate in the April-June period after soaring at a 5.5% rate during the first three months of the year. Though showing stronger overall growth than the 2% forecast by economists, today’s report nevertheless clearly delineated the impact of the world financial crisis that began in Thailand a year and a half ago. Exports fell at a 2.9% rate, the third consecutive quarter of decline, while imports rose at a 3.4% rate. The resulting deterioration in the trade deficit knocked nearly a percentage point from the overall growth rate. Still, that wasn’t as bad as the previous two quarters, when the sharply deteriorating trade balance reduced growth by more than two percentage points in each. Businesses, meanwhile, turned cautious in the third quarter. Though investment in new computers remained strong, overall spending on new equipment increased at a scant 1.1% annual rate, the smallest gain in nearly seven years. Spending on new buildings and structures fell at a 6.5% rate, the worst showing in 4 years.  Consumer spending, which represents about 2/3rds of economic activity, grew at a healthy 3.9% annual rate, after shooting up at a 6.1% rate during the first half of the year.

However, to achieve that pace, consumers reduced their saving to almost nothing. They saved just 0.1% of their after-tax income in the third quarter. That’s the lowest savings rate since the department began estimating it on a quarterly basis in 1946. Third-quarter growth was heavily influenced by a shift in inventory growth and by the GM strikes, which began in June. Without a sharp slowdown in inventory accumulation in the second quarter and a rebound in the third, the economy would have grown at a 4.6% pace in the second and a 2.3% rate in the third. Auto production fell in both quarters. And, a decline in auto sales in the third completely offset increased consumer spending on other big-ticket durable goods. Thus, all the third-quarter growth in consumer spending came in services and non-durable goods such as food, fuel and clothing. Inflation, as measured by a price gauge tied to the GDP, hit a 35-year low. Prices rose at a 0.8% annual rate. The various changes left the economy producing goods and services at a $8.53 trillion annual rate, unadjusted for inflation. The market loved the number since it appeared the economy wasn’t slowing down as much as first thought. Bonds fell on the news as the report made it clear that with this much strength in the economy the Fed may not choose to ease anymore.

A half-hour into today’s trading, the following reports came out giving bonds a little hope for a slowing economy and pulled stocks off of their highs.

The University of Michigan's final October index of consumer sentiment fell to 97.4 from a reading of 100.9 for the final September index. The current conditions component rose to 112.8 in the final reading for October, from 111.7 in the final reading for September. The consumer expectation index fell to 87.5 versus 93.9 in the final reading for September. The October numbers for sentiment will be important to note as that period will have the recent interest rate cuts taken into account.

September New Home Sales were dampened in the South due to the hurricane season and demand for housing in the West may have experienced the first pinch from financial crises overseas, according to U.S. economists. Housing has benefited from low borrowing costs, but stock market volatility may also be eroding demand, housing market observers said. They also added that some moderation in housing after the summer of 1998's heady pace of sales and construction should be expected. September new home sales declined 1.0% to an 822,000 unit annual rate, while August new home sales were revised to register a 4.9% decline to 830,000 units. August new home sales were previously reported to have declined 4.4% to an 838,000 unit annual rate. The latest report also showed that the supply of homes inched up to 4.3 months from August's 4.2 months and July's 4.0 months. Economists had expected September new home sales to be at an annual rate of 849,000 units.

The Chicago Business Barometer fell to a seasonally adjusted 48.1 in October from 55.2 in September, the National Association of Purchasing Management (NAPM) in Chicago said. An index below 50 signals a slowing manufacturing economy, while a reading above 50 suggests expansion. The prices paid index rose to 43.4 in October from 42.1 in September, which is not a good number if things are slowing down. The employment component of the barometer fell to 48.2 in October from 50.4 in September.

This number indicates a slowing economy. Production and inventories fell sharply with production sinking to its lowest level since February, 1996. New orders order backlog, employment and supplier deliveries all declined with supplier deliveries falling to their lowest level in 30 months. On Monday we will get the National Purchasing Managers report which will give a good indication of what is happening overall. Indicators are starting to show slowing growth. This is something the market will need to take into account, and may keep traders on edge for sometime.

Next week’s Economic Indicators

This week is going to be a significant one for indicators. On Monday Personal Income will be released along with Construction Spending and the National Association of Purchasing Managers report. The income report will dictate whether or not wages are continuing to rise and spending is continuing at the same rate. If they are both lower it will be a good confirmation of the recent numbers revealing a coming slowdown. The NAPM number could now be more important considering the Chicago Purchasing Managers report on Friday affected the market. The NAPM number has been below 50 for the past two months and economists believe that if you get three numbers in a row below 50 the economy is headed for recession. On Wednesday Factory Orders come out along with the Beige Book. On Thursday we get Jobless claims and overall Chain Store Sales. The biggest number of the week and month will be the Employment report. This number will give us the clearest indication of the status of the overall economy.

Technically

The Volatility index has dropped steadily over the last few weeks and now stands at 26.56. Less then three weeks ago it was in the 40 plus range. The minimum it hit prior to the correction was around 18 last July and peaked out around 50 near September 1st and again at the beginning of October. Low cap stocks do well when the VIX is low and the buying has certainly spread into secondary issues. However, many of the stocks are still rebounding within the context of their downtrend, but are moving in the right direction. The question is whether the current rally will continue to move the volatility index lower or not. Volume and money flow has supported the rally so far and we are also noticing group rotation, which is supporting performance of major averages.

The Mclellan Oscillator is registering a strong overbought signal but is being supported by the rising summation index. Until we see the summation index start to break down it will be hard to get a good signal from the Oscillator.

The Arms indicators remain neutral to overbought but with the market trending it is hard to get a solid overbought reading of .80. Thursday and Friday both had low Arms readings, indicating only a few stocks were pushing the market higher so the upside looks limited if these readings continue.

Sentiment indicators show that bullish sentiment is on the rise again, but not to the point where it would be of concern yet. If bullish sentiment rises to 50% or above, we would become more bearish on the market.

Overall resistance on the Dow is at 8800 and the S&P 500 at 1120, S&P 100 at 545. The markets started to rally strongly on Friday but lost a lot of ground at the close. This type of action may continue until the indexes see those heavy resistance levels. Because of this though it also gives higher odds that there will be a correction.

Mclellan Oscillator: +206 -100 oversold +100 overbought
Summation Index: +532

Five day arms: .86 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .93 .80 and below, overbought 1.00 and above, oversold

Bulls: 45.3 previous week 44.0 50% plus overbought/bearish
Bears: 39.3 previous week 39.7 50% plus oversold /bullish
Correction: 15.3 previous week 16.3

Five day Qvix: 29.54 Last week 40.41 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8452.29

8592.35

+140.06

1.7

S & P 500

1070.67

1098.69

+28.02

2.6

S & P 100

527.79

536.97

+9.18

1.7

Nasdaq

1693.85

1771.52

+77.67

4.6

Russell 2000

367.05

378.15

+11.10

3.0

30 Year bond

5.18%

5.15%

Program Trades

With 15 trading days left in the November expiration cycle our trades are continuing to look very good. Our call trades may see a little pressure in the coming week but the program numbers are holding at the 93% level for a expiration close below 1120 on the S&P 500, 550 on the S&P 100.

Current Trades

Average Entry price

Bid

ask

last

550 sold OEX Call $6.00

Long trade

5.38

5.50

5.50

555 bought OEX Put $4.75

$1.25 credit spread

3.50

3.75

3.50

565 sold OEX Call $2.25

Ultra trade

1.44

1.56

1.56

570 bought OEX Call $1.56

$.63 credit spread

.88

.93

.88

465 sold OEX Put $3.25

Ultra Trade

1.13

1.32

1.12

460 bought OEX Put $2.75

$.50

.93

1.00

1.06

S&P 500 Options Futures Trades

High

Low

Close

Sold 940 Put

$10.50 Strangle

2.20

1.80

1.90

Sold 1140 Call

$5.75 Strangle

8.00

5.50

7.20

Total sold $16.25

1130 sold Call

Long trade

12.00

8.70

10.50

1135 bought Call

$2.00 credit spread

10.00

8.80

8.80

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

                                                                              November Expiration                                                October 23rd 1998

Davidson’s View

"Crash of 1999" covered the front of the last issue of Newsweek. The article spoke of the threat of recession and what we can do to prepare for it. It may have been appropriate considering the Fed just cut rates again even before their next scheduled meeting in November. Do they know something we don’t? First, there's the negative wealth effect. Never have so many people had so much money in stocks, and if the market goes back into a slump, consumption will suffer. Second, a market decline hurts consumer confidence, which also weighs on consumption. Much of the recent decline in confidence is probably market-related. Thirdly, with confidence and consumption low, poor earnings follow.

What all of this is telling us is that, based on the selloff that began after the high on the S&P 500 of 1186.75, the odds of recession might now be 65%. The word "might" must be used here because, strictly speaking, based on closing prices, analysts say we haven't yet seen a bear market. So far, the S&P has fallen 19.3% from high to low, and to qualify as a true bear, the fall must go at least 20%. Still, we're close enough to start worrying. In four of the past seven cases of a better-than-20% drop, a recession occurred. Since 1950, bear markets in stocks have occurred seven times, but recessions have followed in only four of those times, usually within a year or two. It is possible that the economy may weather the market's latest sell off, however…

It also looks as if the earnings to be announced for the third quarter will be the worst since the first quarter of 1991. The quarters this year have seen terrible earnings progress, with the 1st quarter's earnings up 1.7%, the 2nd quarter's up 1.1%, and now analysts are predicting that the 3rd quarter's earnings will be down by about 6%! To make things look better, analysts have been cutting estimates strongly. With this sharp reduction in estimates, the actual earnings will almost certainly be better than anticipated, but after a while that begins to run thin.

The bottom-up forecast on the S&P for the 3rd quarter is running negative 3.3% versus a year ago. But for the current quarter, analysts are posting a positive 8.1%, and for the first quarter of 1999, 13.4%. First Call's research director, Charles Hill, confidently predicts that, as reporting periods draw near, reality will set in, and these percentages will start to decline. So I guess we should now expect the market and economy to boom after everyone is worried. Somehow, I don’t think so!

Last week’s purchasing managers' report said that their price index fell to the lowest level in half a century. Put another way, corporate pricing power has collapsed; it was never more than weak, and now it's zero. That doesn't bode well for future earnings and what's bad for earnings is also bad for the economy, employment and finally, the stock market as indicated by the latest fall.

Eventually, it will be time to come back into a "safe" market but for now stock traders need to be cautious. The good news is that the Fed is at least now on the side of the small investor. The Fed's action last week certainly started that process. For example, the Russell 2000 moved up 7.69% last week and 7.0% this week. With rates being pushed lower by the desire to evade an economic financial collapse and doses of deflation thrown in as an additional concern, (that’s another column) short-term interest rates will lose their attractiveness and then the public investor will have control of the stock markets once again. At the same time the big caps will not likely move as much as the public begins to dump money into the small caps and their mutual funds. This will be good for us as spread trading may return to the early 90’s style trading. Small caps were strong and the S&P 500 and the Dow moved steadily higher with low volatility and only 10% yearly gains! A dream come true for option sellers!

Economic Effects

Tuesday

The U.S. trade deficit surged to a record $16.8 billion in August as the Asian economic crisis pushed exports down for a fifth straight month. Overseas sales of American farm products hit their lowest point in more than four years. The deficit for August was 15.3% higher than a revised $14.5 billion gap in July as exports of U.S. goods and services dipped 0.3% while imports rose by 2.2%. The deficit with China hit an all-time high of $5.9 billion. The new report dramatically underscored the impact the Asian crisis is having on the U.S. economy.

Last week, the Federal Reserve unexpectedly reduced interest rates in an effort to make sure that a weakening trade performance does not push the U.S into recession. So far this year, the deficit in goods and services is running at an annual rate of $165 billion, 50% above last year’s $109.9 billion imbalance. This marked deterioration represent the loss of key overseas export markets due to the currency crisis in Asia and Russia economies.

The market turmoil is now threatening to strike closer to home in Latin America, a region that buys nearly 1/3rd of U.S. exports. In addition to the loss of export markets, domestic manufacturers of such items as cars and computers are facing increased competition from foreign goods made suddenly cheaper for American consumers by the steep decline in Asian currencies.

The U.S deficit with Pacific Rim countries rose by 5.6% in August to $15.7 billion and at $103.5 billion is 41% higher than in the first eight months of last year. The $5.9 billion deficit with China was the highest monthly imbalance with any country other than Japan. Imports from China hit a record high with 2/3rds of the $260 million increase coming from a rise in shipments of toys and games. U.S. exports to China fell to their lowest point in two years, reflecting big declines in sales of aircraft and farm fertilizers.

The deficit with Japan was up 0.5% in August to $5.2 billion and is running 16% higher than the 1997 pace.

The Clinton administration has been trying to step up pressure on Japan to deal effectively with severe banking problems and its worst recession in a half century in order to provide a stronger market for its troubled Asian neighbors as well as American exporters. The 0.3% drop in U.S. exports of goods and services marked the fifth straight month in which exports have declined. The $74.84 billion August total was the lowest since January 1997. Exports of farm products fell 3.9% to $3.57 billion, the lowest level since July 1994. American farmers are suffering this year from depressed export demand and lower commodity prices, both reflecting in large part the global economic crisis.

Imports jumped 2.2% to $91.6 billion, led by the increase in shipments of automotive products with the ending of the strikes at GM.

The deficits with both Canada and Mexico, partners in the North American Free Trade Agreement, were up in August, reflecting the end of the GM strikes, which had depressed imports of automotive products in July. The deficit with Mexico was up 53.9% to a record $1.76 billion, with half the surge in imports coming in the automotive area. The deficit with Canada rose 4.5% to $1.82 billion.

The August performance would have been even worse except for a continued decline in world oil prices. Total oil imports dipped 0.4% to $4.04 billion. That reflected an increase in volume to 9.33 million barrels per day on average but a drop in price to $10.63 per barrel, compared to $10.71 in July. The August price was the lowest since August 1986.

The market has continued to ignore the rising deficit as it did 1987 before the stock market crash. The first warning has come from Charlene Barshefsky who said that the U.S. trade deficit could balloon to around $300 billion in 1999, a level that is ``not politically sustainable.’’ The troubled conditions of the global marketplace continue to strongly influence the U.S. trade balance. Manufacturing has posted solid growth during much of the seven-year expansion but has been hit hard by the global economic crisis, forcing some companies to cut jobs.

Wednesday

It looks like Housing has really seen a downturn. Housing starts in Septembers were down another 2.5% from August. Construction starts had reached an 11-year high of 1.70 million in July. In another sign that the housing construction market probably reached a peak in the summer, housing permits plunged 4.5% in September, the largest decline since January 1995.

Separately, according to a National Association of HomeBuilders survey, traffic of prospective buyers through model homes fell sharply this month, though sales remained very good.

Both new and existing homes have been selling briskly this year, supported by mortgage rates sinking to levels unseen since the 1960’s and by low unemployment and strong income growth. The big stock market gains through midsummer also gave some buyers the wherewithal for down payments on larger homes. However, overseas financial turmoil has begun to slow U.S. economic growth, and the stock market, despite its recent rebound is still well off its mid-July peak. The recent erosion of consumer confidence, is that the housing market will be slowing a bit in the months to come.

Thursday

Jobless Claims rose for the third consecutive week, inching up by 2,000 last week. They increased to a seasonally adjusted 318,000 in the week ended Oct. 17 up from a revised 316,000 the week prior. This was the highest level since 337,000 in the week ending July 11. California accounted for the bulk of the upward revision from the previous week's original estimate of 303,000.

Overall, new claims have stayed relatively low at a level economists feel would be consistent with fairly strong payroll growth in October. Economists had forecast new claims of 305,000 for the past week. The four-week moving average of new claims, a less volatile and therefore more useful measure of jobless claims, also rose last week, jumping by 6,000 to 306,500.

Next week’s Economic Indicators

Monday will have Existing Home Sales and this number will confirm the slowing demand for housing that has recently started. Tuesday has Consumer Confidence. Last month this number unexpectedly shook the market up a bit as slowing confidence means consumers are spending less. 2/3rds of the U.S economy is based on purchases so this number could affect the market. On Wednesday we get Durable Goods orders. This number also represents a slowing or accelerating economy which can give a good indication of the future. On Thursday we get the Employment Cost Index and Jobless Claims. The ECI number will reveal if wages are still rising or not. History teaches that when an economy begins to turn and confidence begins to diminish the first response from the public is a demand for increased wages. As sales slow this cuts into profits and helps to turn the economy even faster as wage inflation really takes off! On local levels there is much talk of strikes so the future may already be here! On Friday we get Gross Domestic Product. These numbers have been ratcheted down since the strong trade deficit figures have come out. The average estimate for third-quarter growth is now 2.5%, down from 3.5%. Also out will be New Home Sales. This number could put the final nail in the coffin revealing slowing home sales. By now, however, housing start numbers have already been over published so are not likely to affect the market.

Technically

The McClellan oscillator and almost every other short-term indicator moved to high levels of overbought conditions during the week. On Thursday the McClellan oscillator moved to an extremely over-bought level of +237 while the Summation index continued to move back to the 0 level. During the week the 10-day average of the Arms index slipped below 0.80 and still remains in overbought territory. The 5-day average has now moved back to neutral territory. The 10-day Arms index needs to move back towards the 1.00 level before the market can advance much more. None of these indicators should alarm anyone, but they are excellent indications that all the optimism that appeared earlier in the week may give reason for a new round of pessimism in the next few weeks.

Almost all the indexes, except the small-cap indices, have moved up to resistance, which will make it pretty tough for them to move much higher without at least a small correction. The put/call ratio jumped to extreme optimism this week, so the market did end up, but ever so slightly. If this continues, a fall is surely in the cards.

We mentioned how the Dow Transports turned lower on Wednesday and since it is a leading index, it bumped into its resistance area first, and has since turned down quite a bit. Unless we start to diverge here, the market should pull back at least early in the week. Volatility has also continued to move lower this week indicating that any correction may turn out to be mild. It will be important to watch for increased volatility levels in the coming weeks.

Longer term, the number of investment advisory bulls, which had been low at the end of September, around 36% is now up to 44%. The bear numbers, which were as high as 46%, are now down to 39.7%. The numbers could see even more bulls next week as newsletter writers will tell people that the dip we started today is just another buying opportunity with the market "being orderly" as it pulls back from these resistance levels. This should get all the bears back into the bull camp. If that occurs, the outlook for the market will turn to the downside once again. (The bull/bear indicator is a contrary indicator.)

Mclellan Oscillator: +188  -100 oversold +100 overbought
Summation Index: -1465

Five day arms: .84  .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.00 
.80 and below, overbought 1.00 and above, oversold

Bulls: 44.0 previous week 41.0  50% plus overbought/bearish
Bears: 39.7 previous week 42.0 
50% plus oversold /bullish
Correction: 16.3 previous week 17.0

Five day Qvix: 31.48 Last week 40.41  10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8416.76

8452.29

+35.53

0.4

S & P 500

1056.42

1070.67

+7.81

1.3

S & P 100

520.95

527.79

+6.84

1.3

Nasdaq

1620.95

1693.85

72.90

4.5

Russell 2000

342.86

367.05

+24.19

7.0

30 Year bond

4.97%

5.18%

Program Trades

This week we were able to get into all of our call trades with decent credits. It’s always nice to see when the market is up on the week and the premiums in your sold options have gone down substantially. Especially the futures 1140 call and 940 put strangle!

We placed Long and Ultra Conservative trades on the OEX this month as trades for the S&P 500 were non-existent and still are. On the call side we never worry that much about using the OEX but I’m not sure we’ll use them for the put trades next week. For an Outright sell on the cash market we missed out on selling the November 1150 by an 1/8th of a point. We are eyeing the November 825 put for both the cash and futures market but we’ll let you know more about them next week along with the other put trades.

Current Trades

Average Entry price

Bid

ask

last

550 sold OEX Call $6.00

Long trade

4.63

4.75

4.88

555 bought OEX Put $4.75

$1.25 credit spread

3.25

3.38

3.38

565 sold OEX Call $2.25

Ultra trade

1.50

1.54

1.50

570 bought OEX Put $1.56

$.63 credit spread

1.00

1.06

1.00

S&P 500 Options Futures Trades

High

Low

Close

Sold 940 Put

$10.50 Strangle

6.70

5.50

6.70

Sold 1140 Call

$5.75 Strangle

6.40

5.00

5.00

Total sold $16.25

1130 sold Call

Long trade

7.90

6.80

7.20

1135 bought Call

$2.00 credit spread

N/T

N/T

6.10

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.

Cash Trades

Short Trades

Long Trades

Ultra Trades

Short Sales

1998

Current

17%

1998

Current

35%

1998

Current

98%

1998 Current

53%

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

Long Trades

1998 Current

22%

1998 Current

45%

 

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