Agora Outlook

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

                                                                   September Expiration                             August 28th 1998

Economic Effects

Tuesday

Consumer confidence fell for a second straight month in August as Americans worried about gyrations in global stock markets and new political turmoil stemming from attacks on U.S. embassies in Africa. Consumer confidence fell 4.1 points to 133.1 in August from a revised 137.2 reached in July. August’s decline was larger than analysts had expected. Consumer concern over the economy the next six months is the key reason for the August decline in overall confidence. Consumer sentiment is important since consumer spending accounts for two-thirds of the nation’s overall economic activity. The report comes as economist’s search for new data for signs pointing to the direction of the economy. Many worry that Asia’s economic crisis, as well as financial troubles in Russia and Latin America, will drag down the U.S. economy and hurt corporate profits. The summer drop in confidence from the 29-year high reached this year reflects worries that business conditions will worsen in the coming months, and jobs will be tougher to find. The Expectations Index, which measures the outlook for the next six months, fell 5.9 points to 107.5 in August. Despite their pessimism about future economic conditions, consumers still haven’t lost all faith in their current economic situation. The index that measures feelings about present conditions only dropped 1.4 points to 171.5 in August.

The National Association of Realtors reported that sales of existing single-family homes jumped 4% in July to 4.93 million units, surpassing the previous record set in March of a 4.89 million-unit rate. Those who live in the Southeast and Southwest regions of the country were most confident in the economy, while those living in the Middle Atlantic States were least confident. I think when you put all that together you conclude that we’re going to have a really good housing market. The strong sales rate is in part due to an increasing number of households entering the prime buying market. The report also said that the market was balanced, with homebuyers benefiting from relatively inexpensive financing and sellers profiting from appreciation in the value of their houses.

Wednesday

Surging demand for semiconductors, stereos and other electrical equipment in July powered the largest increase in orders for long lasting factory goods in eight months. Orders to U.S. factories for durable goods, big-ticket items expected to last at least three years, rose 2.4% to a seasonally adjusted $187.5 billion. The increase far exceeded projections by analysts who expected spillover from Asia’s economic slump would hold growth in orders to a standstill. July’s sizable increase, the most since November, followed a small, 0.2% rise in June which previously had been reported as a 0.1% decline and a 3.3% drop in May, the worst in five months. Durable-goods orders now have risen three of the last four months, despite Asia. Durable-goods orders are an important indicator of how busy factories will be in the months ahead. Since the start of the year, Asia-related sluggishness in manufacturing has led to declining factory employment.

Thursday

U.S. economic growth slowed sharply in the April-June quarter as export sales to Asia slumped, but corporations managed to eke out a small rise in profits anyway. The gross domestic product, the sum of goods and services produced within U.S. borders increased at a seasonally adjusted 1.6% annual rate. That’s down from a torrid 5.5% rate during the first three months of the year. The trade balance wasn’t quite as bad as first thought. Exports fell at a 7.4% rate instead of the predicted 8% while imports surged at a 10% rate rather than the expected 11.9%. Profits fell in the final three months of last year and the first three months of this year. Many companies are facing a profit squeeze, pressured to pay higher wages because skilled workers are scarce, but unable to raise prices in the face of competition from Asia. Inflation remained dormant in the second quarter. A price measure tied to the GDP rose at a tiny 0.8% annual rate, the best since 1963. In addition to trade, the other big factors restraining economic growth were the GM strikes, which idled nearly 200,000 workers from early June through late July, and a slump in production of goods for inventories. Inventories of unsold goods shot up in the first quarter and factories curbed production to allow some of the backlog to be sold off. This swing in inventories subtracted 2.6% points from the second-quarter growth rate. Consumer spending was up at a 5.8% annual rate and housing construction at a 14.8% annual rate. Businesses increased investment in new equipment, including computers, at an 18.1% rate. All three categories have been fueled by low interest rates, which have been the silver lining of the Asian downturn. Plus, U.S. consumers haven’t been hurt much yet by Asia. The nation’s unemployment rate in June and July, 4.5%, was near a 29-year low. As coming quarters pass it will be interesting to see if we see any effect from any of the other countries now having problems.

The nation's labor market tightened a bit more as -6,000 fewer people waited in unemployment lines to collect jobless benefits last week. Initial claims fell to 297,000 in the week ended Aug. 22, down from the 303,000 reported for the previous week. The four-week moving average, a broader way look at the jobless applications trend, dropped to 302,750 in the week ended Aug. 22, down from 303,500 recorded for the previous week and the lowest since Aug. 9, 1997, when it totaled 299,500. When we get the September employment report we may be looking at confirmation of a very strong domestic economy.

Friday

Consumers cut their spending in July for the first time in more than two years, as the strike at GM not only slowed growth in incomes but also caused shortages of popular new car models on dealers' lots. Spending fell by 0.2% last month to a seasonally adjusted annual rate of $5.798 trillion. The first monthly decline since a 0.3% fall in June 1996. Incomes grew by 0.5% to an annual rate of $7.137 trillion after a revised 0.3% June gain. Economists had forecast that July spending would be flat and that incomes would grow by 0.3%. The July spending decrease was wholly concentrated in durable goods, especially cars, but full GM production has since resumed so consumers can once again find the models they prefer.

The University of Michigan's August final index of consumer sentiment fell to 104.4 from a reading of 105.2 for the final July index. The current conditions component rose to 113.9 in the final reading for August from 113.3 in the final July survey. The consumer expectations index fell to 98.3 versus 100.0 for the final reading in.

Next week’s Economic Indicators

This week’s indicators will probably not affect the market at all since it is mostly focused on overseas problems. If we do see some strong numbers the market may actually like it as there is talk of deflation now. On Monday we get New Home Sales. The number should be strong like all the other numbers of late. Tuesday has Construction Spending and the National Association of Purchasing Managers Report. This is a great forecaster for future growth in the economy and could be significant this month. On Wednesday Factory Orders are out. This number will give a good indication of whether the overall economy is slowing down or not. Thursday we get Jobless Claims, Productivity and Costs and Overall Chain Store sales. These numbers will likely be ignored. Friday once again has the most important report of the week, Unemployment. If any of the number for the week will help lift the market or knock it back down, it will be this one. This time around, the market is probably looking for just the right number. A little stronger than normal but not too much. If it’s weak you can say goodbye to any rally that had occurred, as deflation and recession fears will haunt the market.

Davidson’s View

Commodity prices fell to their lowest level in more than 20 years Thursday as the economic crisis in Russia added to the gloom hounding the global economy. The Commodity Research Bureau index, which measures a basket of 17 leading commodities, fell to a 21-year low when a low of 184.77 points was reached at 195.38 points Thursday. The Russian economic crisis is obviously the catalyst for much of the slide in commodities and financial markets this week, as Asian problems spread to other emerging markets. Commodities markets were already under pressure from the slump in Asian demand in the past year and the oversupply of crude oil and some grains. Asia’s economic woes started in July 1997 in Thailand and spread to the rest of the Pacific Rim region and Russia. Demand for commodities has dried up in the ailing economies and the backup of unwanted supplies have depressed prices. The Russian crisis exploded this week, with the ruble in a freefall a week after Moscow allowed the currency to devalue. Gold prices fell to $278.50 an ounce, equaling the 18-year low set in January this year. Copper prices were near 12-year lows, corn prices were at their lowest levels in a decade, sugar was near a seven-year low and crude oil was the lowest in about 11 years. The economies of the industrial countries are impacted by lower commodity prices, but economic demand in the U.S. and Europe was good in the first half of 1998 and is still helping to cushion the impact of the Asian financial crisis. Some commodities prices are reaching multi-year lows, but it’s debatable how much lower commodities prices can go as some of them are reaching their marginal cost of production. Today, with retail prices falling in China and the risk of deflation also taking hold in Japan, fears are rising that deflation could again spread throughout global markets. On the surface, it looked like good news for investors Thursday when the interest yield on long-term Treasury bonds dropped to 5.3%, its lowest level in almost 30 years. But the stock market didn’t celebrate at all. For one thing, many analysts see recent declines in interest rates as a possible symptom of trouble, in the form of price deflation working its way through economies around the world. What's more, the drop in long-term rates, while short-term rates remain steady, has produced what economists call an inverted yield curve. This phenomenon occurs when longer-term rates, which are normally higher than short-term rates (because lenders' risks increase with the amount of time they commit their money), fall below the level of short-term rates. The rate on federal funds, or overnight loans between financial institutions, has been hovering at around 5.5%, the level where the Federal Reserve, in managing monetary policy, has kept it for the past year and a half. So when other longer-term market rates dropped below that point, they created an unusual situation. The 30-year Treasury bond traded through the Fed funds target rate for the first time in eight years. With yields across all maturities now below the federal funds rate, the markets seem to have concluded that global circumstances require a more globally accommodative monetary policy. Monetary policy has become progressively tighter in recent months. Policymakers have not lowered rates because commodity prices have plunged, inflation has fallen, and the yield curve has flattened. If the Federal Reserve continues to fight inflation, it may provoke a far more dangerous enemy, namely deflation. Despite the collapse of the Asian economies, the Fed is still biased toward raising interest rates. It is generally presumed that the Fed has more than inflation on its mind when it resists the idea of stimulative moves. Alan Greenspan has also made clear his desire not to foster a runaway stock market, with the perils that might arise. Now, in any case, the central bank is feeling heat from markets in both directions. While the stock market has long been pushing the Fed in the direction of a relatively restrictive credit policy, the bond market has lately stepped up the pressure for an easing.

Pressure on commodities has brought pressure to some of the more developed economies like Canada and Australia that rely heavily on commodity exports. The currencies of both Australia and Canada have been battered and on Thursday, Canada became the first Group of Seven (G-7) state to show signs of succumbing to the problems. The Bank of Canada, faced with a Canadian dollar at its weakest levels in more than a century, resorted to extreme measures with a sharp interest rate increase. With our economy being so strong it is unlikely to spread to us as long as the U.S dollar remains the safe haven of the world but if our economy slows down significantly the market may be in trouble for some time to come. The stockmarket has always predicted economic changes in the future, is it revealing something for us now or is it just the bearish sentiment that is affecting the market right now.

Technically

The overall market fell below support levels this week and the Dow fell below crucial support at 8300 and this triggered further selling and drove the Dow down below its 200-day moving average, which is not a good thing for the bulls. On Friday the Volatility index closed at 40.95, which could mean the decline, is drawing to a close. At this point technicals have little meaning for the market, as fundamentals are the main focus. Bank and brokerage stocks continued their slide on Friday, as it started to become clear that a large number of U.S. financial institutions would incur trading losses from investments in Russia. BancAmerica announced that it would lose $220 million from trading this quarter, BankBoston will lose $30 million and J.P. Morgan, Citicorp and Chase are all expected to lose money. Earlier, Credit Suisse, Republic New York Corp and Quantum fund, run by George Soros, said that they would incur losses once Russia restructured its short-term ruble debt into new bonds. Technical indicators are extremely oversold and sentiment indicators are pointing to increased bearish sentiment. This means that a relief rally is definitely a possibility. However, you can expect the rally to be confined within a downtrend. On a reflex rally, which could start as early as Monday or Tuesday of next week, the Dow could rise to 8300 and then maybe even 8400-8500. There it will encounter heavy resistance. Unless the Dow can break above the near-term downtrend line, we would view the rally to be nothing more than a rebound from a deeply oversold situation.

Mclellan Oscillator: -217 -100 oversold +100 overbought
Summation Index: -2393

Five day arms: 1.11 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .98 .80 and below, overbought 1.00 and above, oversold

Bulls: 40.4 previous week 40.7 50% plus overbought/bearish
Bears: 38.6 previous week 34.5 50% plus oversold /bullish
Correction: 21.0 previous week 24.8

Five day Qvix: 33.99 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8533.65

8051.68

-481.97

5.6

S & P 500

1081.24

1027.20

-54.04

5.0

S & P 100

534.19

507.70

-26.49

5.0

Nasdaq

1797.63

1639.82

-157.81

8.8

30 Year bond

5.46%

5.35%

Program Trades

Even with the volatility going over 40 on Friday both our calls and especially our puts went down in price on Friday. Even with the S&P 500 at new lows our puts are cheaper then when we sold them! Premium decay, the spread trader’s favorite occurrence! Out of the money puts may have closed lower in price on Friday because traders are smelling a rally on the way. The trades we have placed this week are looking great and because of the price of the calls falling so much we may even buy the 1145 back. We could either have a free 1150 to sell later if a rally does occur or we could resell the 1145. So far the program is giving a 95% success rate, indicating that all trades will expire worthless for the September expiration.

Current Trades

Average Entry price

Bid

ask

last

925 sold SPX Put $8.75

Ultra trade

8.65

9.13

10.00

920 bought SPX Put $8.25

$.50 spread

8.13

9.13

8.00

975 bought SPX Put $12.88

Long trade

15.50

16.75

16.88

970 sold SPX Put $12.25

$.63 spread

14.50

15.75

16.25

800 sold SPX Put $2.50

Outright sell $2.50

1.63

1.75

1.75

1145 sold SPX Call $9.50

Long trade

.50

1.00

1.00

1150 bought SPX Put $8.50

$1.00 spread

.63

.93

.93

1170 sold SPX Call $9.00

Ultra Trade

.06

.75

.50

1175 bought SPX Call $8.50

$.50

.25

.75

.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.

Short Trades

Long Trades

Ultra Trades

Short Sales

1998

Current

-02%

1998

Current

-43%

1998

Current

70%

1998 Current

40%

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

Agora Outlook

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

                                                           September Expiration                                 September 4th 1998

Found this article at the MSNBC site and thought you might find it interesting:

Some big-spending consumers, feeling queasy from the stock market’s recent gyrations, are deep-sixing some of their purchase plans. In Washington, D.C., Sherry Davis, a sales associate with W.C. & A.N. Miller Realtors, is beginning to get a little concerned about her commissions. Last Friday, after the market’s first round of declines, a partner from a big accounting firm backed out of his contract to buy a house for nearly $900,000. "He felt a little less wealthy than he did at the beginning of the week," she said, sighing. Ms. Davis is hoping consumers will decide, in light of the stock market’s behavior, that real estate is a safer investment than stocks, particularly since she’ll have two homes worth more than $2.5 million each to sell after Labor Day. Still, she said, "I get a general feeling people just aren’t as confident about making really big purchases." For much of this decade, consumers have been powering the economy. They’ve been inspired by plentiful jobs, healthy income growth, low inflation and heady stock market gains. Some of the decade’s stomach-churning declines, like the drop last October, have done little to shake their confidence. But this time, there appears to be enough uncertainty about global political and financial unrest that consumers are feeling uneasier. And at least for now, some are thinking twice about buying that summer home or third car.

And while the stock market rebounded Tuesday from Monday’s sharp plunge, with the Dow Jones Industrial Average surging 288.36 points to 7827.43, there is anecdotal evidence from retailers, real-estate brokers and others that spending on big-ticket products is slowing.

While spending is likely to ebb a bit, analysts note that confidence levels are still high. "There may be somewhat of a dip in confidence, but it’s so high right now that it’s not going to lead anywhere near a depression," said Lynn Franco of the Conference Board, a New York research group that tracks consumer confidence monthly. Analyst Mike Niemiracq of Bank of Tokyo-Mitsubishi in New York added that other consumer fundamentals — such as income growth and job stability — are "far more significant" than the market’s behavior in determining consumer spending. Also, even before the market swooned, consumers were already starting to curb their spending habits after splurging in the first half of the year. In July, the government said, personal spending slipped 0.2%, the first decline in two years. In the past 18 months, Jerry Wong, a 37-year-old electronics technician, dropped $10,000 to revamp his home-theater system. But now, caution about the market is watering down his expensive tastes. He just sold all of his stock in 3Com Corp. and has instructed his broker to "beep me" if the market drops suddenly. At a Skokie, Ill., electronics store Monday night, Mr. Wong decided against buying a $3,000 amplifier. "I can’t be spending too much," he says, clutching his one purchase of the evening: a $7 set of stereo cables. To the extent that the market’s recent drops bother anyone, they’re most likely to bother the consumers that do the most spending. Although a lot more people are in the market now than were a decade ago, stock-market wealth and therefore, market losses are still concentrated among the wealthiest Americans. As of 1995, less than half of households earning $50,000 to $100,000 owned stock, and less than a quarter of households with income of $25,000 to $50,000 were in the market, according to the Federal Reserve’s survey of consumer finances. Some of the cutbacks likely will be subtle. Carl Rehrmann, a 49-year-old vice president of a lighting business in Baltimore, said he’s wondering whether the market’s recent setbacks will postpone his retirement. With two kids in college and another in a private high school, he said he and his wife probably would start going out to dinner less often. "We’re going to be cautious," he said. In Chicago, Bonnie Price is now reconsidering a weekend vacation to Toronto this fall, but said she’ll watch the market for a few days before deciding. "I’m not terribly concerned," she said, "but I’m beginning to be watchful."

Economic Effects

Monday

Sales of new single-family homes leveled off in July after a record-setting period. July sales dropped 1.6% to a seasonally adjusted annual rate of 886,000. That was the lowest sales rate since March, and followed record-breaking months in April and June. The June high however, was less impressive than first thought, coming in at 900,000 units instead of the 935,000 units originally reported. Economists had been expecting this year’s home buying spree, fed by low interest rates, plentiful jobs and healthy growth in incomes to slow a bit. Sales during the first seven months of this year were 9.8% higher than in 1997. The median price of a new home rose 1.4% in July to $147,900. That’s not far off from the $145,900 median price of new homes a year ago, analysts say, partly because favorable buying conditions mean vacation homes, usually costing less, are accounting for an increasing share of sales. Interest rates on 30-year, fixed-rate mortgages have stayed under 7% for nearly three months. Except for a brief period in 1993, they haven’t been better since the 1960s. The market, too busy selling off, ignored this report, but the surprising slowdown may have been taken as bad news with worries of a coming slowdown and deflation.

Tuesday

The nation’s manufacturing sector slowed in August for the third month in a row, although a key gauge of future economic activity rose 0.4% in July. The National Association of Purchasing Management reported its monthly index of business activity stood at 49.4% in August, a slight increase from the previous month but still a sign of a slower manufacturing economy. A reading below 50 is a sign of a contraction in the industrial sector of the economy. The overall economy, meanwhile, grew for the 88th straight month, according to the NAPM survey.

Leading Economic Indicators rose to 105.4 in July. The increase was well ahead of economists’ expectations of a 0.2% gain. The measure signals that "the economy is in good health.

Construction spending rose 0.4% in July to a record high. A jump in residential building more than offset commercial declines and essentially flat government outlays. That brought total construction spending to a seasonally adjusted annual rate of $650.4 billion. The July rise follows a broad-based and even bigger than first reported 1.95% increase in June. Spending on residential building set records in both months, along with total construction spending. Demand for new homes has been particularly strong this year as plentiful jobs have boosted family incomes. Construction spending is also being powered by low interest rates and competition among banks eager to finance real estate investment.

Wednesday

New orders received by U.S. factories posted the strongest increase in eight months during July despite a strike at GM that was finally settled at the end of the month.

Total new orders increased 1.2% to $335.2 billion, the largest monthly rise since a 2.3% surge in November last year, following a 0.3% June gain. Excluding transportation orders were up even more strongly by 1.4% in July after a matching 1.4% rise in June. The July factory orders rise was modestly below economists' forecasts for a larger 1.4% increase but still reflected a relatively broad based pickup in demand for manufactured goods. Orders for costly durable goods items like appliances and machinery intended to last three years or more rose a revised 1.9% to $186.4 billion in July after a 0.1% June rise. Nondurable orders for goods like food and gasoline grew 0.4% to $148.8 billion following a 0.5% June rise. The report was good news for the market since it is looking for strength. Such strength is helping to keep the bond market from moving any higher.

Thursday

First-time applications for U.S. unemployment benefits crept up by +1,000 in the latest week, reversing a decline in the previous week. Total jobless claims numbered 302,000, up from a revised 301,000 in the prior week and just above economists' forecast of 301,000. This number was so close to estimates that there was no reason to change estimates for tomorrow’s Unemployment report. The four-week moving average has been holding in a relatively steady range since mid-1997 with only minor fluctuations. Economists monitor the average closely as a more reliable indicator than the individual weekly figures because it smoothes out weekly blips and helps to reveal trends in the data.

Completed new homes for sale during July was at the strongest rate in nearly 1&1/2 years as completions of new single-family homes and apartments increased 3.5% to a seasonally adjusted annual rate of 1.53 million. The highest rate since February 1997 after a 1.4% rise in June.

Friday

The U.S. unemployment rate held steady at 4.5% in August as job losses in other industries outweighed the return to work of GM laborers. August’s seasonally adjusted unemployment rate was the same as June and July, when nearly 150,000 workers in automotive and other factories were either on strike or laid off due to strike related production slowdowns. The unemployment rate did not move back to the 4.3% level of April and May the lowest since 1970. Economists believe it’s because American manufacturers are beginning to feel effects of economic hard times in Asia. Jobs created in August were 365,000. But the gain of 95,000 manufacturing jobs in August would have actually been a loss of 55,000 without the return of workers after GM settled its labor disputes the last week in July. Taking July and August together, gains in total U.S. employment averaged 217,000 jobs a month, compared to an average monthly gain of 244,000 for the first half of 1998. The average workweek in August was unchanged from July at 34.6 hours but average hourly wages picked up to $12.86 from $12.79 in July. With wages up +.07 cents it would normally help the market to fall but it appears that the market is discounting the raise that workers received from the GM strike. The markets didn’t seem to react to the number very much.

Davidson’s View

So we now have the percentage of stocks above their 50-day moving average dropping to only 9% and the major averages trading under the 200-day, or 9-month moving averages. 1000 stocks on the Nasdaq Composite are making new 52-week lows, and 991 on the Nyse. If you look back you see that this degree of weakness has only occurred on four different occasions in the last 18 years. These instances saw strong sell-offs but also saw a few good rallies inbetween. These were: March, 1980; September-October, 1981; September-October, 1987; and August, 1990. These are all quite different in how they occurred, however. For instance, in 1980, the market immediately went up as the Fed dramatically dropped interest rates. In 1981, the market also had a 3-month rally, but turned very weak in the ensuing months resulting in that major market low of 1982. The 1987 occurrence was, of course, post-crash, and was a tremendous buying juncture, but it took a little while to reach the dramatic moves upward. In 1990, after the Saddam Hussein panic sell-off, the market was reaching a low, but did not really take off until January, 1991. There is still a strong possibility that we’ll see a bounce shortly as technically the market is extremely oversold. Whether or not that bounce becomes a strong rally immediately is still up to the monetary conditions as that is the key factor affecting the market right now. As you know, our big declines came because of the deepening global currency and financial crises. From Thailand and Indonesia, the tide of devaluations and instability moved west, as the Ruble and indeed the entire Russian economic system appear to be imploding. Latin America has been the latest victim. The Venezuelan bolivar is now under severe pressure because of persistently weak oil prices. Chile, Brazil and even Mexico are looking vulnerable and finally, Canada’s currency is being hit, causing them to raise interest rates. In all regards, its amazing the U.S market isn’t down 50% with all that’s going on. The reason I believe it isn’t is because we already have low interest rates, no inflation and economic growth is good but not overheated. Plus, the biggest driver for higher prices I think is that people are still dumping money into the market even with this downturn. Trim tabs reported that there were 1.3 billion dollars of outflows this week from mutual funds but on Wednesday alone there was 6.5 billion put into mutual funds. The main problem to work through right now then is to see psychology change and have monetary conditions confirm the change. Undoubtedly, we'll have some rallies in the next two weeks and by then it won’t matter if they are sustained or not as we’re just looking to get through to the end of the September expiration cycle on the 18th. We’ll worry about what happens to the market after that!

Technically

As we have been for the past couple of weeks we continue to be in an oversold condition in the market. Today we re-tested the lows made on Monday and it is not clear if we’re going to continue to move lower yet. The Mclellan Summation index is hitting lows haven’t been seen since 1987. Both of our Arms indicators have moved into the most oversold condition in quite sometime so this alone should help to lift the market a bit. The volatility index is also hitting old highs and this is usually a signal for a short-term bottom.

We thought we would put a few quotes here of how bearish people really are so you can decide for yourself what you think of the condition of the market. It makes us feel contrairian.

Arch Crawford said today that he has gone completely short the market as he believes we are now into a crash cycle scenario until October 31st.

What we are seeing now is not a short-term flash in the pan, insists Richard Russell, who simultaneously got major bearish signals from his readings on both the Dow Theory and his own proprietary index. "All my signs say we are in a new primary bear market slump. What this means is that I now believe the major trend is down and it will continue down for months, even years." Looking ahead, Russell warns of the three coming phases of the bear market. "The first phase, which is where we are now, is the one where we cut all the speculative foam and froth. The second phase, the longest-lasting, is where the market steadily declines due to deteriorating business conditions. The third and final phase is the liquidation frenzy, where blue chips collapse below realistic values and buyers emerge."

John Murphy, a columnist for Barron's Online and president of the company that runs murphymorris.com, a technical analysis Web site, is very bearish right now, insisting that "we are now in the very early stages of a very serious decline." He adds, "I'm looking for an initial 20% selloff and a test of both the January level of 7500 and last October's low of about 7000, probably before this year is out. "That's the easy call," Murphy avers. "The tougher call is, what happens after that? Is that it, or is there further to go? It's a bit early to be sure, but it's my sense that there will be more downside after that. I think we have moved into a secular bear market where the drop will be more serious and long-lasting. A decline of 30%-40% from the peak is quite possible. I see the Dow falling to at least 6000, with the Nasdaq underperforming the broad market."

Yet another bearish chartist is Peter Eliades, California-based editor and publisher of Stockmarket Cycles. "The July top of just over 9300 will be a very important top in the history of this market," he cautions. "I don't mean important in the same sense as 1966, which saw the Dow hit 1000 only to spend the next 16 years trying to get higher, but more like 1929. That top marked the point where the market turned sharply lower. I think that right now we are in the early stages of a dramatic bear market that will see stock prices falling at least 50%, with the Dow dropping to about 4600." Eliades worries that we might get to the new market bottom a lot faster than many expect. "There is only a small chance, but I can't ignore a scenario of a real out-and-out crash. The greatest danger, for all sorts of reasons, lies in the weeks immediately after Labor Day. There has been such a buildup of speculative froth, we could see the selloff concentrated into just a couple of weeks, and the Dow could be down to under 5000 by late September or early October."

The CBOE put-call ratio is another contrary measure that has trapped observers into offering a forecast of an imminent rebound. It surpassed 1:1 a week ago Friday (anything above 0.7:1 or so is considered high), an extraordinary level that indicated some panicked put buying. The VIX and the put-call ratio were two key elements of a call last Monday by Schaeffer's Investment Research proclaiming the selloff to be nearing an end.

And an oscillator signal from Larry McMillan's McMillan Analysis, which tracks cumulative advancing and declining stocks, reached its lowest level in 27 years after Thursday's rout, causing him to conclude that "this market is screaming 'oversold.' " Yet even though his barometer has been "officially" oversold since July 23, McMillan isn't willing to firmly call a bottom, realizing that the market can overshoot far on the downside on fundamentals and sentiment.

John Bollinger is of the opinion that we are in a correction. Specifically, we are in a rotational correction. Originally, we dated the correction as having started in April and thought it might run six months or so. Upon reflection, we suspect it started considerably earlier, was hidden by the strength in the blue chips and will turn out to have been a rotational bear market. We still suspect that our original estimate that the end of the correction will occur in the fall might be right. And our gut, strongly influenced by seasonal trends, suggests a final washout.

Mclellan Oscillator: -127 Thursday close -100 oversold +100 overbought
Summation Index: -3429 Thursday close

Five day arms: 1.41 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.26 .80 and below, overbought 1.00 and above, oversold

Bulls: n/a previous week 40.4 50% plus overbought/bearish
Bears: n/a previous week 38.6 50% plus oversold /bullish
Correction: n/a previous week 21.0

Five day Qvix: 42.70 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8051.68

7640.25

-411.43

5.1

S & P 500

1027.20

973.90

-53.30

5.2

S & P 100

507.70

477.44

-30.26

6.0

Nasdaq

1639.82

1566.52

-73.30

4.5

30 Year bond

5.35%

5.28%

Program Trades

The volatility on Tuesday was great for increasing our spreads on our 975/970 & 925/920 put trades with the market moving strongly down mid-day. The market is under pressure but our program is still showing that the 975/970 puts have a 90% probability of expiring worthless on Sept. 18th. The 925/920 puts still have a 96% probability of expiring worthless. The outright sell on the 800 put is now showing a 99% probability of success. We’re not even worried about the 1145/1150 and 1170/1175 call trades as they are looking fantastic. We are sorry we can’t list the closing prices of the options for you. If you would like to get them you can see them all at:

http://cboe.pcquote.com/cgi-in/cboeopt.exe?TICKER=SPX&ALL=1

Current Trades

Average Entry price

Bid

ask

last

925 sold SPX Put $18.65

Ultra trade

8.65

9.13

10.00

920 bought SPX Put $17.59

$1.06 spread

8.13

9.13

8.00

975 bought SPX Put $25.75

Long trade

15.50

16.75

16.88

970 sold SPX Put $23.87

$1.88 spread

14.50

15.75

16.25

800 sold SPX Put $5.50

Outright sell $5.50

1.63

1.75

1.75

1145 sold SPX Call $9.50

Long trade

.50

1.00

1.00

1150 bought SPX Put $8.50

$1.06 spread

.63

.93

.93

1170 sold SPX Call $9.00

Ultra Trade

.06

.75

.50

1175 bought SPX Call $8.50

$.50

.25

.75

.50

Agora Outlook

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

                                                      September Expiration                                    September 11th 1998

Economic Effects

Wednesday

Stocks of unsold goods on U.S. wholesalers' shelves declined for the second consecutive month in July, while sales picked up. Wholesale inventories fell 0.2% in July to a seasonally adjusted $276.9 billion after a 0.1% drop in June. They were the first back-to-back monthly declines since August and September 1996. Economists had expected July inventories to rise 0.2%. Wholesale sales rose for the past two consecutive months, rising 0.3% in July to $214.54 billion after a 0.2% increase in June. The inventories-to-sales ratio for wholesale goods, a measure of the amount of time needed to sell stored goods at the current sales rate, slipped to 1.29 months' worth in July from 1.30 in June. The decreases in wholesale stocks were fairly widespread and included drops in inventories of cars and car parts. Other wholesale inventory declines in July occurred in such durable goods as professional equipment, metals, hardware and electrical supplies and such nondurable goods as paper, drugs, groceries, petroleum and alcohol.

Thursday

The pilot strike and related layoffs at Northwest Airlines pushed up the number of first-time applications for unemployment benefits last week to a seven-week high. Claims totaled a seasonally adjusted 312,000, up from 304,000 the week before, the most since the week ended July 18. Just two weeks earlier, claims had hit a four-month low of 299,000. For two consecutive weeks in late June and early July, they soared to 394,000, a result of the GM strike. A four-week moving average of claims, which smoothes weekly fluctuations, rose to 304,500, up from 302,500 and the most in four weeks.

Despite global financial turmoil and weakness in American manufacturing, jobs remain plentiful. The nation's unemployment rate, at 4.5%in August, remains near a 28-year low.

The U.S. current account deficit, the broadest measure of the nation's trade performance, soared 21% to a record $56.5 billion during the second quarter as Asia's economic woes sapped exports. It also underlined a continuing flight to safety by foreign investors sending money to the U.S in search of a U.S. government-guaranteed return. The flow of money has resulted in lower U.S. interest rates but has also complicated other nations' efforts to stabilize their economies since it drains capital from abroad. The April-June current account deficit was up from a previous revised record shortfall of $46.74 billion in the prior three months. Originally, the first-quarter deficit was $47.2 billion, but it was revise downward. Separate monthly reports from the government on goods and services trade already have shown a steady deterioration in U.S. trade as recession-racked Asian countries buy fewer American-made goods and export more to the United States. The current account report gave some insight into another offshoot from the Asian crisis: the flood of foreign capital into U.S. markets in search of a safer haven. There was a significant shift in foreign investors' portfolios of U.S. investments in the second quarter as holdings of U.S. stocks were lightened and money poured into U.S. Treasury securities, which offer a guaranteed return. Markets ignored the data, preoccupied instead by the domestic political fury surrounding President Clinton and continuing woes in Asia and Russia. Bond prices kept soaring, but stock prices plunged. Investors appeared to be worried that business and earnings prospects were dimming due to international economic insecurity.

Friday

The producer price index, such as factories and farms fell 0.4% in August, pulled down by deflation in gasoline, automobiles and vegetables. The seasonally adjusted decline in the Producer Price Index was the largest since January and exceeded analysts’ expectation for a slight 0.1% drop. Global demand for manufactured goods and commodities is putting pressure on producers but benefiting buyers through lower prices. For the first eight months of the year, producer prices have fallen at a 1.4% annual rate, compared to a 1.2% decrease for all of 1997. Much of the decline has come in energy costs, down 8.5% in August, at a 14.8% annual rate so far this year. The core producer-price number which excludes the volatile food and energy components edged 0.1% lower in August and, for the first eight months of the year, has risen at just a 1.2% annual rate. The market actually fell for the first time in quite a while, reacting to economic indicators as worries of deflation became clearer in trader’s minds. The Dow was off –100 points early on after the indicator came out. Later on in the day the market turned around on a speech from President Clinton assuring people he was not going to resign.

Next week’s Economic Indicators

On Tuesday Overall Retail Sales will be out and may reveal that consumers are cutting back on their record breaking past purchases. This indicator could be an important one as analysts are getting worried about a recession. Also out will be Import and Export Prices. This indicator will give more of an indication if prices are moving into a deflationary mode or not. On Wednesday Business Inventories will be released along with Industrial Production and the Fed’s Beige Book. The Industrial Production could be a big number if capacity utilization is beginning to slip. With higher wages and earnings starting to move lower, it could give the market a chill, as poor production creates either higher prices or decreased profits. With so much competition it is highly unlikely we would see higher prices. The beige book is kind of old news now that Fed chief Allan Greenspan has hinted of an interest rate cut in the future. On Thursday we get Jobless claims, the Consumer Price Index and the Philadelphia Fed Survey. The only indicator that may move the market here is the CPI number. If it is as low as the PPI number was this week the market is likely to again react negatively. For some reason the date of this indicator may be wrong as normally it comes out right after the PPI number. On Friday we get Housing Starts. All of the housing numbers of late have been so strong it isn’t probable that the number will move the market.

Davidson’s View

As the Dow went over 9000 you had the feeling it would never see 7500 again. But here we are around 7800, wondering whether the market is one big buying opportunity or if it's headed even lower. This time seems to be a bit different then buy the dips mentality. Obviously, reasons for concern abound. Currency-related crises have spread from Asia to Russia to Venezuela, Mexico and Canada. President Clinton now has to deal with the Kenneth Starr report and possible impeachment hearings and most of all corporations are warning of slower earnings ahead. Although Intel, American Express, Sears and Dell all said late this past week that their 3rd quarter forcasts will be met. Consumers remain confident, inflation is under control, and the yields on long-term Treasury bonds have fallen to the lowest levels since 1977. I mentioned a couple of weeks ago of how analysts are divided. Bulls believe lower interest rates and no inflation will save the day. Bears predict that creeping global deflation will overtake any benefits of those lower rates.

One key indication that deflation may be winning the day is the breakdown in the correlation between stock prices and bond yields. Normally, when bond yields fall, stock prices rise. It's easy to explain. Lower interest rates raise price/earnings multiples while also reducing financing costs for companies, and therefore boost corporate earnings.

Looking ahead, it's also tough to see how the market can rise dramatically now that corporate earnings are deteriorating. The S&P 500 trades at 19.6 times expected earnings from continuing operations for the coming 12 months, according to Charles Hill, director of research at First Call. In past bull markets, optimism had boosted this "forward" P/E to a peak of only 18. Analysts now expect third-quarter earnings to rise 2.1% from a year earlier, down from the 10% gain they had been expecting as of July 1. So far, analysts haven't adjusted their earnings expectations dramatically downward for either the fourth quarter of this year or for 1999, even though the international crises don't appear to be going away any time soon. At the beginning of 1998, analysts expected fourth-quarter earnings to be up 19.1% from a year earlier. That expected gain shrank to 16% by July 1 and now stands at 11.9%. The good news is that there is nothing that would force interest rates dramatically higher. With the economy slowing and the bond market serving as a safe haven, both the fundamentals and the technical readings favor interest rates remaining near current levels or heading lower. In 1966, the Dow Jones Industrial Average hit 1000 for the first time, with great headlines detailing low inflation, low interest rates, a new era of U.S supremacy, and so on. It did not go back above 1000 to any appreciable extent until 1982. In 1982, with the headlines heralding high inflation, high interest rates, massive deficits, and so on, the greatest bull market in history began. The media today is even stronger in driving investor’s decisions by using strong headlines and I believe a person needs to get past all of the fluff and look at the fundamentals and history for investment decisions. From there we’ll be able to see the market move in accordance with its inner fundamentals.

Technically

Interestingly, about 2 months ago we saw our bull bear indicator give an overbought reading due to an excessive number of bulls predicting the market would likely pull back. The indicator is considered a contrary indicator. We’re now close to having too many bears for the market to stay down so we should see a bounce soon as evidenced by the move we saw on Friday. Today's big move was led by the financial and consumer cyclicals with nearly as strong performances in technology. The rising trendline on weekly log scale charts (from late 1994) is still intact, so the long-term bull is still alive for the big stocks.

In the past five weeks, 58% of insider transactions have been purchases. On the rare occasion that they become net buyers, it is a sign that they see such value that they can’t resist. In the last sixteen years, insiders have bought stocks at the rate of the last five weeks only three times: after the 1987 panic decline, after the 1990 panic decline, and then in late 1994 and early 1995 as the bull market was preparing for the strongest four-year rise in history.

The equity put/call option in the last three weeks and especially last week, have seen total panic. The only other time in the last eight years when fear has been so strong was on October 9, 1992, the end of a nine-month period when the average stock was really hit. Overall, the market is still very oversold. Another test of the 7400 Dow area on Friday resulted in even more extreme negative sentiment. The new trading range appears to be Dow 7400 on the down side and 7950 to 8100 on the up side. A close below 7400 would be very bearish and could cause the Dow to move to 7000 or 6800. It looks as though like we’re going to test the 8100 level maybe as early as next week but don’t expect that level to hold yet. Indicators will likely become overbought very quickly so we could head lower once again. If we can break the down trend line then we may move higher but we’ll have to wait to see.

Mclellan Oscillator: +24 -100 oversold +100 overbought
Summation Index: -3510

Five day arms: 1.15 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .98 .80 and below, overbought 1.00 and above, oversold

Bulls: 37.3 previous week 40.7 50% plus overbought/bearish
Bears: 46.6 previous week 43.2 50% plus oversold /bullish
Correction: 16.1 previous week 16.1

Five day Qvix: 41.93 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

7640.25

7795.50

+155.25

2.0

S & P 500

973.90

1009.06

+35.16

3.6

S & P 100

477.44

492.98

+15.54

3.2

Nasdaq

1566.52

1641.66

+75.14

4.7

30 Year bond

5.28%

5.22%

Program Trades

We are looking good for expiration next Friday. With the strong close this Friday, the probability of all our trades expiring worthless except one, is 97% and above. The only trade showing any type of possible loss is the 975/970 put trade which is revealing a 91% probability of success. That is still a high probability, mind you, and with the uptrend line still intact this Triple witch expiration is looking to be volatile but holding an upside bias so all of our trades should expire worthless, giving us full profits.

Agora Outlook

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

September Expiration September 18th 1998

When you look at the expirations chart you can see we have broken down from the peak in the index. We believe that for a true correction to occur the market needs to move lower for a period longer than a couple of weeks or today’s standard of hours! To support our view we will compare previous corrections (since 1982) to that of the last expiration period. (Sept. 98) We have now had a 15% correction in-between expirations.

Rally Period

Percentage Rally

Correction

Correction length , Months

1982-1983 16mths.

63%

-13%

5

6/84-8/87 38 mths.

125%

-28%

3

11/87-6/90 31 mths.

46%

-14%

3

9/90-3/94 43 mths.

47%

-6%

1

4/94-present (July.98) 52mths.

182%

Current -15% into September

2

9/90-present (July. 98) 87mths

291%

Current -15% into September

2

A true correction doesn’t just go down a little but is dragged out until every last bear is slaughtered. As already mentioned we, along with others, do not consider the 1994 sharp drop as a correction but more of a sideways market, so we show the results without the correction.

Percentage-wise, we were well past the high of 1987 when you look at the rally since 1990. Interestingly, even if we do include the 1994 correction, we’re still above (in percentage terms) the `87 high. Twice last year the overall market had quick 10% "corrections" inbetween expirations but we don’t consider them true bear corrections to reveal a true restart of the bull, just a continuation. Both times the market came off its lows with sharp 6% plus rallies. As we already said, we believe that a genuine bear correction in the market lasts longer than a few days or hours. Also, the market needs to consolidate the decline as in 1987 and 1990. With our chart above just coming off the top of the upward channel it looks like we could continue to see further declines until we can work off the overbought situation.

We believe that a good correction will endure through expiration periods, like the one we’re having now, giving the institutions problems with their option selling. It has always been our view that with the multiple of derivative strategies being employed it is not to the benefit of institutions for an expiration period to be too low or too high since institutions are now big sellers of options. They prefer to keep 82% of all options expiring worthless since it’s a great cash grab for them. The past few years have seen volatility die down around expiration as the institutions now complete their strategies before expiration finishes. The past expiration period was a great example of that. Volume was way down this past week so either there was nothing happening or it was all done last week. The market rallied most of last week and this week, helping to take pressure off of the out of the money put options. Since we like to follow what the big guys are doing, for us this was a great month for profits, (see program profits below).

Next week we should move back into a normal period of trading for at least a few days until a new surprise comes up! The market may become more and more listless in its movement until the Federal Reserve meeting on Sept 29th! Everyone is expecting and needing a rate cut so the market may wait to see what happens before it moves in either direction. We could also see pressure put on the Fed to ease if the market collapsed from now until the meeting. The important thing though is to wait and trade cautiously until then. In 1994 the Fed’s interest rate actions moved the market strongly both up and down and this could be another one of those times its best to be patient. I am going to be watching the market tape closely the next week to see how it is reacting to comments or hints about a rate cut.

Next week we are also starting to include trades for the S&P 500 futures options. We have had a lot of questions about them and so we are sending out a separate report tomorrow night in regards to all of the questions with next months trades included.

Economic Effects

Tuesday

Although American consumers continued to fill new homes with furniture and bought plenty of back-to-school clothes in August, analysts see signs of a slowdown in the shopping spree that has helped insulate U.S. companies from economic crises abroad.

Retail sales increased a mild 0.2% to a seasonally adjusted $224.8 billion in August.

At first glance that looks like a big improvement from a 0.6% drop in July, an even larger plunge than first reported, but the strike at GM knocked car sales way out of kilter this summer, and outside the automobile category, sales of other retail goods have slowed. In August, retail sales excluding autos grew by a relatively modest 0.3% compared to a 0.6% jump in July that was nearer the average for this year. Heavy spending by consumers has been the most important factor keeping production by U.S. companies on the upswing in spite of big increases in the trade deficit. A spreading global financial crisis, which started in Asia, is drying up markets for products overseas. Analysts say people have one eye on the rest of the world's troubles and are also starting to shop more cautiously even though unemployment remains near a 28-year low, and most incomes continue to rise.

Inflows of foreign goods turned the U.S. trade gap wider again in July, but the strong dollar and falling import prices are masking a more consequential import explosion, economists said. Forecasters expected July's data to show a reversal of most of June's 8.9% deficit narrowing, as July exports fell about half a percent amid evaporating global demand. Meanwhile, the robust U.S. economy drew demand for products made elsewhere, threatening a disappointing second half for U.S. manufacturers. But the trade imbalance was much more pronounced when viewed in unit terms rather than dollars. Domestic producers are experiencing a fairly dramatic loss of market share to foreign manufacturers. They blame the J-curve effect for distorting the import picture. In a textbook-like example, the dollar values of goods bought from countries with sharply depreciated currencies fell enough to balance volume increases. This may have accounted for June's improvement in the trade balance, experts said. J-curve theory holds that an even uglier surge in imports should inevitably rear after a long lag.

On a rate-of-change basis, deterioration of the U.S. trade imbalance with neighboring countries is expected soon to outgrow its deficits with Asia, economists said. The extreme weakness of the Canadian dollar is going to come home to roost, but that's all stuff that went on in August. With no seasonal adjustment to filter the country-by- country trade numbers, economists said a pre-Christmas flood of foreign merchandise could begin to inflate some July imports.

Wednesday

Stocks of unsold goods on the shelves of U.S. manufacturers and retailers were flat for the third straight month in July as the strike at G M depressed auto inventories. Total business inventories were $1.071 trillion, unchanged from both June and May. It was the first time since August 1991 that inventories failed to increase for three or more consecutive months. In the auto sector, however, inventories fell 1.3% in July after a decline of 2.8 percent in the prior month. Throughout much of the economy, though, inventory building has been restrained over the past few months following a rapid buildup early in the year that left firms well stocked. Many economists had previously worried that an inventory overhang might drag down U.S. economic growth in the future as companies slowed production to try to work off a surfeit of unsold goods. Worries have faded as the slowdown in inventory building has brought supplies more in line with the demand. The inventory-to-sales ratio, a measure of how quickly existing inventories would be drawn down at the current sales pace, was 1.38 months' worth in July, unchanged from June.

U.S. industrial output surged at the strongest rate in 14-1/2 years during August as GM ramped up production after their lengthy strike. Outside of autos and computers, though, business was relatively quiet, which analysts said means the Fed could lower interest rates without concern about fanning potential inflation. Weaker sales to distressed Asian economies have put a drag on the U.S. manufacturing pace. Total production by the nation's mines, factories, and utilities shot up 1.7% last month after drops of 0.4% in July.

Excluding motor vehicles and parts, however, August industrial output edged up just 0.1% after a 0.2% July rise. Businesses ran at 81.7% of their maximum operating capacity in August. That was up from 80.6% in July and 81.2% in June, two months when GM plants were closed by the strike that idled hundreds of thousands of workers. This data tells us that outside of the auto sector, manufacturing activity is expanding, but only at about half the pace of a year ago. The markets ignored the report, focusing instead on planned testimony by Fed Chairman Alan Greenspan and Treasury Secretary Robert Rubin on global financial woes.

In its periodic summary of national economic conditions called the Beige Book, the Fed found business slowed in several districts even though the economy overall expanded moderately. It summarized that conditions in all 12 Fed districts were notably more downbeat than the last such report, issued on Aug. 5, which said the economy was running at a high level and expanding in July. The report was prepared by the Cleveland Fed on the basis of interviews conducted before Sept 8. The latest report said some industries, chemicals, construction materials, steel were experiencing a growing downturn in sales to distressed Asian countries that was slowing manufacturing. But domestic demand was strong enough to keep industrial activity steady at a relatively high level in many regions. U.S. retail sales and construction were strong in August. Builders were constrained only by a shortage of construction workers in many regions, the Fed said, and rents were on the rise. Jobs remained plentiful, and that was pushing wages up at a faster rate. But retail prices were steady or falling and cheap imports were pushing prices for industrial commodities lower, suggesting little or no inflation pressure. Falling import prices were especially notable for a variety of retail goods like clothing, consumer electronics and food. Prices for services were on the rise, though, with airline tickets, cable television and health care costs all increasing.

Thursday

Falling energy prices held the main U.S. inflation gauge to a moderate gain in August but prices of clothing and medical care strengthened. The Consumer Price Index rose by a seasonally adjusted 0.2%, the same as in July, bringing annual inflation to 1.6%. Stripping out the often volatile food and energy costs, core CPI also increased by 0.2% in August after a 0.2% rise in July. The rise in CPI was slightly higher than the 0.1% gain forecast by U.S. economists in a Reuters survey. The reading on the core index matched expectations. According to analysts the CPI report showed that the current trend for low inflation was continuing, but they were divided on whether it would help prompt the Fed to cut interest rates. Falling prices for imports such as gasoline have been restraining the CPI. But August saw an unexpectedly large 1.1-% gain in apparel prices, the sharpest since a 1.5-% spike in March 1990.

The July trade deficit was 2.1% above June’s imbalance of $13.6 billion. That made July the third-highest monthly deficit on record, surpassed only by May and April of this year. The deterioration in July reflected a big jump in the U.S. deficit with Pacific Rim countries, the epicenter of the currency crisis that began in Asia but has now spread to Russia and is threatening Latin America. So far this year, the deficit in goods and services is running at a record annual rate of $185 billion, 68% higher than last year’s deficit of $110 billion. U.S deficit with Pacific Rim countries, which includes hard-hit South Korea, Thailand and Indonesia, rose by 5.1% in July and for the first seven months this year totals $87.8 billion, a whopping 42% above the imbalance for the same period a year ago. The deficit with China widened to $5.4 billion in July, the largest imbalance with any country, surpassing perennial front-runner Japan for only the eighth time in history. America’s deficit with Japan narrowed slightly to $5.2 billion in July but so far this year is running 16 percent above the 1997 pact. The July overall trade deficit reflected the 1.3-% drop in U.S. exports to $75.4 billion, the lowest level since February 1997. U.S. imports were also down, but by a smaller 0.8% to $89.3 billion. (The deficit is the difference between imports and exports.)

New claims for unemployment benefits fell by 15,000 in mid-September. There were 299,000 applications filed in the week ended Sept. 12, down from a revised 314,000 claims for the prior week. Holiday shortened weeks often mean fewer claims, although the department's seasonal adjustment procedures are intended to smooth out many such fluctuations. Still, claims have been running at relatively low levels, indicating a strong job market. The drop in claims brought the weekly average rate of new claims over the past four weeks, a more accurate measure of employment trends than the more volatile weekly numbers, to 304,0000, down from 305,000 in the prior four week period.

Friday

U.S. housing starts in August dipped from record levels hit in July, but economists said the numbers are now at more sustainable levels and do not signal a slowdown in the market. Starts on new homes slipped 5.5%, the largest drop since the 7.2% decline in December 1996. Starts came in at a rate of 1.613 million annualized units. Rates for 30-year mortgages averaged 6.92% in August, down from 6.95% in July. Building starts fell in every region during August, led by an 8.6% drop in the West to a construction rate of 394,000 a year. In the Northeast, starts dropped 7.3% last month to 139,000 a year and in the South they were down 4.3%to 771,000. Building starts in the Midwest declined 3.1% to an annual rate of 309,000. August building starts still were 16.6% higher than a year earlier in August 1997 when they were running at 1.38 million a year. The National Association of Homebuilders said on Thursday that ``a slight slowdown'' was developing in housing markets. It seems the recent market losses that have reduced investors' wealth might be limiting the potential for homebuilding and sales.

We have gone through another week of indicators not having much of an effect on the market overall as worries about oversea’s markets and interest rates have held the attention of traders.

Next week’s Economic Indicators

This will be a quiet week. On Thursday we get Jobless claims, Durable Goods Orders and Gross Domestic Product figures. None of these reports are significant and will not likely move the market in any direction. On Friday we get Personal Income and Existing Home sales. All of the housing numbers of late have been so strong it isn’t likely that the number will move the market but the Personal Income number could create some action if it is too strong, revealing that manufacturers need to pay workers more. With falling sales and prices higher, wages begin to be key for the market.

Technically

After closing at a four day high the Dow reversed and moved lower on Thursday. It could not generate enough momentum to move through overhead resistance at 8150. Thursday’s sell-off is an indication that the Dow needs to consolidate more before a sustained rally can develop. In general, most indicators are still pointing to a move higher as Momentum indicators have just started turning up and Stochastics are just above 50 and moving higher. The Mclellan Oscillator is approaching overbought territory but the summation index has just turned upward. We will have to watch it closely to see if the two diverge too much indicating a false rally. The Arms indicators are still revealing that the market is oversold and showing little indication of approaching an overbought situation. The past two weeks have seen extreme daily levels a few times of .40 and lower and this normally means short term tops are in place as few advancers moved the market higher but don’t indicate any type of a sell off approaching. Longer term, the bull/bear indicator is pointing towards a long-term buy signal but we need to see 50% plus bears to get an outright buy signal. A good indication of normalcy is that the volatility index peaked and has started to move down.

It appears that the market is holding within its newly formed upward channel. Currently, the upper line is 1060 on the S&P 500 and 1010 for the lower line. If in the next week we break below the 1010 level, the rally is likely over. Many analysts are still worried that the market could break down here and we could see the Dow move much lower. If we were to break the previous low of 7400 we could move all the way back to the 6500-7000 level.

Mclellan Oscillator: +137 -100 oversold +100 overbought
Summation Index: -2874

Five day arms: 1.08 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.03 .80 and below, overbought 1.00 and above, oversold

Bulls: 36.4 previous week 37.3 50% plus overbought/bearish
Bears: 47.5 previous week 46.6 50% plus oversold /bullish
Correction: 16.1 previous week 16.1

Five day Qvix: 38.89 Last week 41.93 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

7795.50

7895.66

+100.16

1.3

S & P 500

1009.06

1020.09

+11.03

1.1

S & P 100

492.98

495.18

+2.2

0.4

Nasdaq

1641.66

1663.77

+22.11

1.3

30 Year bond

5.22%

5.15%

Program Trades

Healthy profits are all around this month. The S&P 500 expired with a value of 1020.88 meaning that we have full profits on all 6 trades we had on this month. Total profits combined were 88%! Long trades saw a 40% gain, Ultra Conservative's 21%, Short trades, 19% and finally Outright sells were 8%. With the market having had a few days of meltdowns and then moving higher once again we were able to get great fills for trades both on the upside and downside of the market. We also knew that we needed to fill call trades quickly, as the market may not have stayed up very long. The volatility index fluctuated around 45 all month, indicating very high premium prices for options so we were able to get good prices. The only trade we did not get off this month was to Outright Sell a Call but that was okay, as our spread fills were very high for the month. One indication that it was going to be a good month was the strength of the September 800 Put selling price. A put selling for $5.50 and above seemed to indicate that a short term bottom was going to come into play since that level was well over 20% away and our program indicated there was only a 1% probability of that level being touched. We have once again only displayed half of the percentage gains on the Long and Ultra Conservative Put trades this month since we are still in Crash Alert Mode and not applying much capital to put trades. This coming month should be exciting as we begin to include the S&P 500 option futures in our program and interesting, overall, as we move into the always feared October expiration cycle.

Current Trades

Average Entry price

Bid

ask

last

925 sold SPX Put $18.65

Ultra trade

0

0

0

920 bought SPX Put $17.59

$1.06 spread

0

0

0

975 bought SPX Put $25.75

Long trade

0

0

0

970 sold SPX Put $23.87

$1.88 spread

0

0

0

800 sold SPX Put $5.50

Outright sell $5.50

0

0

0

1145 sold SPX Call $9.50

Long trade

0

0

0

1150 bought SPX Put $8.50

$1.06 spread

0

0

0

1170 sold SPX Call $9.00

Ultra Trade

0

0

0

1175 bought SPX Call $8.50

$.50

0

0

0

1060 Sold SPX Call $1.93

Short Trade

0

0

0

1065 Bought SPX Call $1.00

$.93

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

-03%

1998

Current

88%

1998 Current

48%

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