Agora Outlook

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

                                                                   August Expiration                                        July 24th 1998

Davidson’s View

I'm sorry if I offended anyone by my comment about guns yesterday but please accept my opinion as mine as I respect yours for what it is. The Fact still remains, however, that if there were NO guns we wouldn't have all of these shootings. Personally, I put life above the right to own guns because sometimes irresponsible people get a hold of these things and kill people. My comment was meant to be a simple one and when I said no guns I meant that literally. If there were a way that every gun on earth could vanish it would be good.

We saw a nice correction this past week but I didn’t think my remark that we would be on crash alert would have that much of an effect! Just to let everyone relax, I don't think that we’re in anything more than a correction at this time. The market picked a perfect time to correct as we are right at the start of the August expiration cycle. We still have 20 trading days left and the market is unlikely to lose 4.0% every week! We need to see failed re-tests of the old highs before I would say were even starting to move into a more serious slide. The other thing is that money continues to pour into the market and until people start to get really worried about it or so enthusiastic that they put 3rd mortgages on their houses it will help support the market. I think the biggest factor for the market is that if 3rd quarter earnings disappointments become more commonplace the market will struggle even more. Louie Navelier said that 54% of all companies in the S&P 500 have reported above average earnings. This is not very good, however, as now all of the good companies have reported, so we could see the average fall to 49-50% and that is a very poor reading. If we continue on the path of lower earnings into the September, October time frame it could once again become a dangerous time to be in the market. August will likely see a lot of volatility but a relatively flat month until traders really believe that earnings are moving lower!

Economic Effects

Tuesday

Construction starts on new homes and apartments soared in June, rising more than analysts had expected. Total starts rose 5.6% to a seasonally adjusted annual rate of 1.615 million units, the second highest this year after February's 1.616 million. Starts fell a revised 1.0% in May to a 1.530 million annual rate. The June figure was well ahead of the 1.56 million that analysts had predicted. Bonds edged off early gains after the strong housing data, but markets were focused instead on Federal Reserve Board Chairman Alan Greenspan, who was to testify later on Tuesday to the Senate Banking Committee.

Starts in June were buoyed by a 2.5% increase in the construction of single-family homes, to a 1.25 million annual rate, and a 17.4% increase in apartment building, to an annual rate of 365,000 units. June starts were 7.5% above the pace of June 1997, when the annual rate of starts was 1.502 million. Permit applications fell 1.7% last month to an annual rate of 1.517 million.

Thursday

There were 315,000 people filing for jobless claims in the week ended July 18, down –22,000 from a revised 337,000 in the previous week and the lowest since 314,000 in the June 6, 1998 week. The figures were the lowest since 9,200 united autoworkers struck two GM parts plants in Flint, Mich. beginning June 5. To date the strike has idled 192,800 workers. The strike caused the suspension of production at 27 of 29 assembly plants in the United States, Canada and Mexico. The four-week average fell to 360,000 from a revised 372,750 in the prior week and was the lowest since 351,250 in the June 27, 1998 week.

Next week’s Economic data

On Monday we will get Existing home sales. With the past week’s new home sales up strongly we should expect to see strength in this number also. The number could be worrisome for the market if it is strong, based on the comments from Allan Greenspan the previous week of an overheating market and his worries about inflation. Tuesday there is Consumer confidence. Weak or strong, this number but it won’t have much of an effect on the market at this time. Consumer confidence has been very strong the past 3 years. On Wednesday we get Durable goods orders. These figures could move the market. Within the figure is a component called prices paid which reveals what things are selling for. If it is a strong number the market could fall from the comments Allan Greenspan made last week about inflation or if they are weak we could see the market move higher. Thursday has weekly Jobless claims, New Home sales and the Help Wanted index. These numbers are unlikely to move the market much in either direction very much as home sales have been reported on for a couple of weeks now. The biggest number for the week is on Friday. We will get to look at 2nd quarter Gross Domestic Product figures. Some analysts have suggested a flat to lower quarter. We need to see a neutral number for the market. If it is strong traders may be worried about inflation, conversely, if it is too weak they may worry about a recession on the way so the market may not win either way. This is why it would be good to see a neutral number. The week overall isn’t a strong one for indicators but the market will probably pay attention to a few of the numbers.

Technically

We were bang on predicting the correction that came this past week but we didn’t expect it to be so strong! The McClellan Oscillator has now fallen to deeply oversold levels. As long as the summation index can hold above 0 the rally should continue. If it falls below 0 we may have further down to go. The Arms indicators are pushing towards the oversold level now and their accuracy in predicting the market has been astounding this year. The bull/bear consensus has now worsened even more, seeing 54.3% bulls. This is not a good indication but is more of a longer-term indicator so caution is warranted. Anything over 50 usually means there will be some type of correction. 55-60% bulls usually indicates the market is destined for more than just a correction. Our concern about the volatility index came true; it wasn’t giving a rally signal it was giving a complacency signal. Normally, when the volatility index comes off of a peak high and moves lower it means that the market has finished correcting and is moving into a rally mode. Unfortunately, the market is not coming off of a low but is hitting new highs. Last year when this happened the market peaked and saw a 10% plus correction. The volatility index is now giving a normal reading since it has moved back into the 23 area with this correction. What we need to watch now is how high it does go. The first signs of moving lower will mean the correction is finished. Basic indicators like stochastics and momentum indicators are all deeply oversold but this doesn’t mean the market will snap back right away. We could see the S&P 500 test its 50-day moving average of 1125 before we get a bounce. It will be very important for the market to hold around the 1125-1130 area, as that is where this rally began. If we bounce off of this level and continue up, the longer-term rally is still intact. If the S&P 500 fails here and closes around the 1120 level, that whole rally we just came through was most likely a false rally and we could see a bigger correction on the way. So far it looks like the Bradley indicator that we mentioned last week has called the top in the market as it doesn’t look like the Dow made new highs this week.

Mclellan Oscillator: -154 -100 oversold +100 overbought
Summation Index: 381

Five day arms: .91 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .93 .80 and below, overbought 1.00 and above, oversold

Bulls: 54.3 previous week 52.0 50% plus overbought/bearish
Bears: 23.3 previous week 22.0 50% plus oversold /bullish
Correction: 22.4 previous week 24.0

Five day Qvix: 21.25 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

9337.20

8937.36

-399.84

4.3

S & P 500

1186.69

1140.80

-45.89

3.9

S & P 100

581.34

558.22

-23.12

3.9

Nasdaq

2008.75

1931.09

-77.66

3.9

30 Year bond

5.74%

5.68%

Program Trades  

Well, we sure started this expiration cycle with a bang! We got fully loaded with our put trades much faster then expected with the sharp correction we saw this past week. If we can now get fills on our call trades we’ll be in a perfect world once again! It is always better to get fills on put trades first, and then work on calls anyhow as the market can rally for weeks on end but when a correction comes it is usually hard and fast. The biggest thing about getting fills on put trades is more on the price than on the actual levels themselves. This is why we usually try to place put prices higher then average so the market has to come down to those price levels before you see fills. So far this month we have Short, Long and Ultra put trades in place. With the extra bit of downside we saw on Thursday, our Short trade came under pressure but with 20 days left to expiration there is lots of time left for a rally to develop. We also placed an outright buy on the 1250 August S&P 500 call for an average entry of .88. With the slide on Friday the premium died on the trade and most people dumped it for a .38 cent loss. For those still hanging on were still hoping for a rally to develop next week to see the S&P 500 move into the 1170-1180 area to allow us to sell the 1250 or sell the August 1240 or 1245 to develop a long call trade. We would like to see the August 1245 come on as that is the Long trade program level but the 1240 will make due if needed.

Current Trades

Average Entry price

Bid

ask

last

1075 sold SPX Put $7.32

Ultra trade

7.25

8.00

8.00

1080 bought SPX Put $6.82

$.50

8.00

9.00

8.13

1115 sold SPX Put $11.00

Long trade

14.25

15.50

19.00

1120 bought SPX Put $12.00

$1.00 spread

15.50

16.50

17.50

1130 bought SPX Put $13.00

Short trade

18.75

20.00

18.75

1140 sold SPX Put $14.00

$2.00 spread

21.75

23.75

22.00

1075 sold SPX Put $2.68

Outright sell $2.68

7.25

8.00

8.00

1250 bought SPX Call

.88

.44

.50

.44

August 1225 sold SPX Call $6.75

Outright Sell $6.75. Bought back for $4.75, profit $2.00

0

0

0

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

Short Trades

Long Trades

Ultra Trades

Short Sales

1998

Current

31%

1998

Current

-03%

1998

Current

60%

1998 Current

31%

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

                                                                   August Expiration                                        July 31st 1998

Davidson’s View

Friday's sell-off was due in part to nervousness over Asia, relatively weak earnings growth in the second quarter, and Monica Lewinsky. Over the weekend it may be revealed that President Clinton has some of his DNA on one of her dresses! Many analysts are now claiming we’re moving into a bear market because of the failure of the small cap issues to move. However, looking at the moves of the market it appears that portfolio managers, who have been receiving large cash inflows, have invested most of their money in large cap-stocks according to the divergence of big caps still being up +15% and small caps now down about –4% for the year. Over the past couple of years, money flow into U.S. equity funds has grown substantially, primarily due to problems in Asian countries, weakness in Russia and to some extent, uncertainty over the European Union. Portfolio managers have put that money to work to keep pace with the S&P 500. The NYSE advance-decline line has continued to deteriorate and is now far from its old high. This is the first time since 1990 that this indicator has diverged so much from popular indices. The a/d line started to deteriorate in May while the big averages made new highs just two weeks ago. Now the indexes are starting to follow the a/d line as more stocks have moved lower. The biggest problem is that fewer and fewer stocks are doing better, and more and more are doing worse despite all of the money pouring into the market from mutual funds, 401(k)s and foreigners. The good thing though is that institutional investors today are not hired to manage cash as they used to be. They are always 100% invested, even if they never sleep. The good thing, though, is that as long as cash flow continues positive, a trend which demographics help support, will help sustain the current rally and hold off any type of bear market in the near future. If we look at the bigger picture there has been only two other times when the Dow has been at a new high and over half the other stocks were below their 200-day averages. First, in May-June of 1990 and then in December 1993, ahead of the February '94 top, the start of a sideways market that lasted almost 10 months. As long as cash continues to flow into this market the only thing I see in the future is that the market could do a repeat of 1994. The longer-term rally has been going since 1982 and the current stage of it since 1995, so it will take more topping action than just a couple weeks in order to break it. The 1120 level on the S&P 500 has contained every major market sell off since the bull market started to rise in 1995 including last October’s sell off so it should hold again but don’t expect just a little volatility in the near future!

Economic Effects

Monday

Sales of existing homes fell 2.3% in June from May's high level but are still expected to set a record in 1998. The National Association of Realtors said sales dropped to a seasonally adjusted annual rate of 4.72 million units. The decline followed a 1.3% rise in May to 4.83 million. The overall strength of the U.S. economy has fueled the housing market.

Tuesday

Consumer confidence fell in July from June's 29-year high as Americans grew more concerned about their jobs, a report said on Tuesday, the latest sign the economy was slowing. The Conference Board said its Consumer Confidence Index fell to 135.4 in July from a revised 138.2 in June, the highest reading since February 1969. Job uneasiness helped push down consumer confidence in July. Nearly 15% of those surveyed said jobs were ``hard to get'' this month, up from 13.5% in June. Consumers fuel two-thirds of the economy by buying goods and services so changes in sentiment are closely watched by analysts and policy-makers. The dip in confidence follows other reports showing slower exports and a jump in the trade deficit, largely because of the turmoil in Asia, while the strike by General Motors Corp workers has hurt scores of suppliers and other businesses at home. The markets showed little reaction to the report, though stocks fell sharply on worries about corporate earnings. The Dow Jones industrial average fell 159 points to 8,869. The yield on the 30-year Treasury was unchanged at 5.71 percent. Despite the dip in confidence, consumers continue to be optimistic about current business conditions.   Nearly 45% of those surveyed rated current conditions as positive, up from 42% in June.

Wednesday

Factory orders for big-ticket items declined in June for the second consecutive month as manufacturers struggled to cope with battered export markets in Asia. The 0.2% decrease, coming on top of a steep 3.3% slide in May, reduced orders for durable goods.

It was the first back to back decline in a year and a half and the fourth drop this year. Asia’s economic turmoil has leaked into the once red-hot U.S. economy through American manufacturers. They’ve seen Asia sales plummet and have been forced to compete at home against Asian goods produced more cheaply overseas due tosteep declines in currencies such as the Japanese yen and Korean won. June’s order decrease was in automobiles, aircraft and primary metals.

Thursday

A confident consumer, strength in the U.S. employment picture and low borrowing costs helped propel June new home sales to record levels, economists said. June new home sales rose 3.8% to a 935,000 unit annualized level. Economists said the strength in housing comes as little surprise because U.S. interest rates have been low and consumers have been confident in the midst of strong U.S. employment. According to a poll of economists conducted by Reuters, June new homes sales were expected to have reached 888,000, off slightly from 890,000 reported in the previous month. Looking ahead, economists questioned whether new homes sales could continue their rapid pace.

Workers' pay and benefits grew briskly in the second quarter as a tight job market helped boost salaries. The Employment Cost Index, a broad gauge of worker compensation that is watched closely by policy-makers rose a seasonally adjusted 0.9% in the quarter after a 0.7% rise in the first quarter. Private economists had expected a slightly smaller 0.8% gain, according to a Reuters survey.

The Employment Cost Index is a favorite indicator of Federal Reserve Chairman Alan Greenspan, who told Congress last week in his semi-annual testimony that the central bank was worried about potential inflationary pressures if wages picked up too fast.

Signs that the economy has been slowing, however, may temper some concerns about the slight pickup in wage costs. Another sign of a strong job market was a separate report indicating that new applications for jobless benefits fell –13,000 last week to the lowest level in more than three months. New claims for state unemployment insurance fell to 304,000 last week from 317,000 the prior week. It was the lowest since 288,000 in the week ended April 11.

Friday

The Chicago Business Barometer rose to a seasonally adjusted 57.6 in July from 52.9 in June, the National Association of Purchasing Management (NAPM) said on Friday. An index below 50 signals a slowing manufacturing economy, while a reading above 50 suggests expansion. The prices paid index fell to 42.8 in July from 44.2 in June. The employment component of the barometer fell to 50.3 in July from 51.5 in June. The market ignored the number because of the lower prices paid component.

The U.S. economy’s production of goods and services slowed sharply in the April-June quarter, hurt by lost trade to Asia and a prolonged strike at the nation’s largest corporation. The gross domestic product, (GDP) the sum of goods and services produced within U.S. borders, increased at a modest 1.4% annual rate, down sharply from 5.5% rate during the first three months of the year. Nevertheless it wasn’t nearly as bad as many analysts expected. Some had thought the economy’s output actually had decreased for the first time since the 1990-91 recession rather than just slowed a bit. The inventory component was cut in half and the General Motors strike took off a full point of growth, but we still saw a 1.4% growth level. It shows the strong underlying pace of the economy paced by consumption and business spending. Still, it was the most sluggish quarter in three years and at least temporarily interrupted a remarkable run of robust growth unseen in this country since the economy was climbing out of the deep slump of the early 1980s. Reflecting both the strike and the slump in trade, production of goods for inventory decreased sharply after soaring in the first quarter. On the positive side for the second quarter, inflation all but disappeared. A price measure tied to the GDP rose at a 0.8% annual rate, the smallest increase since 1963. The economy remained healthy in many other ways as well. Consumer spending increased at a brisk 5.8% annual rate, down only slightly from the 6.1% rate of the first quarter. The inflation component of the report was the best news of the whole report but the market mainly ignored the number and traded more off of technical factors.

Next week’s Economic data

On Monday we have three important indicators out. Personal income, National Association of Purchasing Managers report and finally Construction spending. All of these numbers can point to inflation or a slowdown in the economy but they will likely be ignored for technical factors in the market. On Wednesday we get the beige book out revealing what the Federal Reserve thoughts were at their last meeting and this indicator could move the market if they are continuing to lean toward tightening. Thursday we’ll see Jobless claims and Factory Orders. Neither of these numbers will have much of an effect as the market will have a good reading from Monday’s NAPM report. On Friday we get the most important indicator of the week out, Unemployment figures. This number has always been important but this month’s report may need to reveal a neutral reading to help the market. If it’s too strong analysts will worry about inflation. If it is too weak they’ll worry about a recession.

Technically

Almost all indicators are now oversold. Of course, just as an overbought reading can take time to see a market move lower it can take time to get out of an oversold indication. Of particular note is that technical bears are appearing all over the place. This is a good sign in many ways as one normally sees them appear at the end of a correction. There are a few highly respected technical analysts that one shouldn’t ignore, however. One of them is Peter Eliades who publishes the Stockmarket Cycle report. He has identified two patterns that may signal that stocks are about to tumble and which, he says, are consistent with the warning of a 1998 downturn, possibly in the summer, that he issued three months ago. The Sign of the Bear flashed for the second time this year on July 20. Now, an indicator is useful only if it has worked on numerous occasions. His signal has flashed eight times prior to this year and each time it was followed by a sharp decline. The sign flashed in July 1929, December 1955, December 1961, January 1966, September, October and December in 1968 and December 1972. After each of those dates, the market slid dramatically. Prior to 1998, the sign hadn't been seen in over 25 years. The sign may have even more significance right now because the market is, in Eliades' view, forming a double top. Such a top occurs when the market hits a new high, only to decline moderately and then rebound back to a point close to or above the previous high to establish a second top. After the second top, the market declines sharply. Now this could actually occur but a person could have almost said the same thing just last year when the market made a top and then another top and then went sideways for 4 months before rallying again. Something to take note of. Being a spread trader though it is important to note that even bear markets have bounces but we really could finally see a true bear appearing. Ken’s commentary on cash in-flows will be important to note the next few months to see if people continue to "buy the dips".

Mclellan Oscillator: -166 -100 oversold +100 overbought
Summation Index: -186

Five day arms: .94 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .96 .80 and below, overbought 1.00 and above, oversold

Bulls: 52.5 previous week 54.3 50% plus overbought/bearish
Bears: 26.3 previous week 23.3 50% plus oversold /bullish
Correction: 21.2 previous week 22.4

Five day Qvix: 23.97 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8937.36

8883.29

-54.07

0.6

S & P 500

1140.80

1120.73

-20.07

1.8

S & P 100

558.22

550.99

-7.23

1.3

Nasdaq

1931.09

1872.78

-58.31

3.0

30 Year bond

5.68%

5.72%

Program Trades

It sure would have been a good week to buy back our sold sides of our put trades and then resell them or sell the bought side of our options. It was surprising to see the market collapse once again on Friday as it appeared that there was a rally starting on Thursday as the market rallied on good fundamentals. With the time span available we will continue to see where the bottom will come in for the market.

Current Trades

Average Entry price

Bid

ask

last

1075 sold SPX Put $7.32

Ultra trade

10.75

10.50

10.50

1080 bought SPX Put $6.82

$.50

10.50

11.25

10.75

1115 sold SPX Put $11.00

Long trade

20.13

22.13

21.00

1120 bought SPX Put $12.00

$1.00 spread

21.88

23.88

22.50

1130 bought SPX Put $13.00

Short trade

26.50

28.50

26.50

1140 sold SPX Put $14.00

$2.00 spread

31.50

33.50

34.00

1075 sold SPX Put $2.68

Outright sell $2.68

9.50

10.50

10.50

August 1225 sold SPX Call $6.75

Outright Sell $6.75. Bought back for $4.75, profit $2.00

0

0

0

 

 

Agora Outlook

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

                                                                  August Expiration                                       August 7th 1998

Economic Effects

Monday

The strike at General Motors slashed U.S. personal income growth in June by about $2 billion, reducing growth in monthly incomes to the lowest in more than a year. Incomes rose 0.2% overall to a seasonally adjusted annual rate of $7.102 trillion, down from a revised 0.4% gain in May. It was the smallest increase in monthly incomes since a matching 0.2% rise in April 1997. Despite the drop in incomes, spending increased solidly by 0.6% in June to a seasonally adjusted annual rate of $5.81 trillion. Savings hit an all time low in June, with only 0.2 cents out of each dollar earned going into savings accounts. This was the lowest proportion since the Commerce Department began reporting the statistics on a monthly basis in 1959. In May 0.5 cents out of each dollar of earnings was saved.

Spending on new U.S. construction projects rebounded in June, gaining 1.7% for the largest increase since February 1997. The June increase was the largest since a 2.7% rise in February 1997. Analysts had expected construction spending to rise by only 0.9% in June. Construction of new houses rose 1.3% in June to $207.1 billion, after falling by 1.3% in May. The housing sector has been extremely strong this year, helped by low interest rates and rising household incomes.

The National Association of Purchasing Management's manufacturing index fell to 49.1 in July from 49.6 in June, matching the average of forecasts offered by economists in a Reuter’s poll. The survey's employment index fell to 44.4 in July from 47.8 in June. It seems that would certainly be a good indication that the manufacturing sector has peaked in terms of employment and probably wouldn’t be a source of new jobs, at least in the short term. When the index is below 50 it usually means the economy is contracting. When the index gives three readings below 50 some analysts believe the economy is headed for a recession.

The Conference Board reports today that the composite index of leading economic indicators fell 0.2% in June. The leading index also fell in May, based on revised data after the original May report showed the index holding steady. This is the first two-month decline since early 1995. The other components of the leading index are mixed, suggesting the slowdown in the economy evident in second-quarter Gross Domestic Product data will be sustained, but it is too early to consider this a recession warning. The Conference Board also reports that the coincident index rose 0.1%, while the lagging index rose 0.6% in June.

Wednesday

The Fed's Beige Book on U.S. business and economic conditions through late July contained just one surprise as inventories generally were characterized as balanced.

U.S. inventories rose by a record amount in January-March, a factor that subtracted from second-quarter growth and which many analysts expected to still weigh on the economy in July-September. Anecdotal evidence gathered by the Fed, however, signaled little need for a further inventory drawdown. We're not facing the risk of inflation, despite strong domestic demand, nor the risk of a recession, despite Asia. Asia was also blamed for slowing manufacturing growth in many areas. Consumers remained the backbone of the healthy U.S. expansion as retailers attributed the continued strength of sales to strong consumer confidence and favorable financial terms for large purchases. There were no real surprises in the report at all so the market didn’t even flinch on its release.

Thursday

The number of applications filed for unemployment benefits edged higher last week but remained at a level signaling a plentiful supply of jobs. Claims rose +6000 to a seasonally adjusted 307,000, up from a 15-week low of 301,000 the week before. The four-week moving average of claims fell to 315,500, down from 337,250 for the period ended a week earlier. It was the lowest level since mid-May. Economists like to track the average because it is less volatile than the weekly number. The average suggests demand for labor remained strong at midsummer despite a dramatic slowdown in overall economic growth in the April-June quarter.

Orders to the nation's factories barely moved in June, hurt by the GM strike, but were expected to bounce back now that work at the plants has resumed. Orders rose only 0.1% to a seasonally adjusted $330.5 billion in June after a revised 2.2% decline in May. Excluding transportation goods, though, June orders rose a robust 1.1%, the strongest monthly gain since a matching 1.1% jump last December. Analysts said the report reflected the economy's resilience, bolstered by strong consumer spending in the face of fading exports to Asia. But consumer spending and confidence hinged in part on the booming stock market, which is under pressure after recent big declines. A consumer-spending spree was the main force behind economic growth in the first half of 1998. But stocks have tumbled in recent weeks, culminating in Tuesday's 299-point drop in the Dow.

The markets showed little reaction to the reports. June factory orders clearly reflected the drag from the strike at GM. Transportation orders tumbled 7.2% after a 4.5% decline in May. Some of the downturn also stemmed from weaker aircraft demand as Asian nations canceled orders and returned some airplanes to leasing companies. In a sign that companies expected continued economic growth, orders for capital goods such as gas turbines, engines, computers and electrical transmission equipment rose a solid 2.7% in Jun. Shipments of finished goods rose in June after two straight declines, rising 0.3% after a 0.6% drop in May.

Friday

Employment grew by 66,000 last month, a sharp slowdown from the downwardly revised 196,000 rise in June. It was the weakest job data since a -48,000 drop in employment in January 1996. The jobless rate came in at 4.5%, unchanged from June. The recently ended strikes at two GM plants in Flint, Mich. lasted nearly eight weeks, bringing the automaker’s North American operations to a virtual halt last month. Taking into account both the striking workers and those off the job because of layoffs, the labor dispute reduced payrolls by 140,600 in July. The report also showed the average length of the workweek remained the same at 34.6 hours, but average weekly hours for factory workers fell slightly to 41.7 from 41.8. Average hourly earnings rose by three cents to $12.79 last month from $12.76. The market liked the report and rallied from early morning losses as the report was neutral not revealing any inflation or a possible slowdown in the economy.

Next week’s Economic data

On Tuesday Productivity and Costs comes out. The past few months have seen little inflationary pressures so even if this number was a bit stronger it wouldn’t likely affect the market. On Thursday there is Jobless Claims and overall Retail Sales. On Friday there is the Producer Price Index, Industrial Production and finally Business Inventories. All of these numbers will be helpful in giving an indication of where the economy is headed. The question will be if productivity increases will continue to help corporate profit margins from erosion due to rising labor costs. In the past, these indicators have moved the market and this week should be no different, considering the current state of the market.

Davidson’s View

Many people have been giving long-term predictions on where the market is going to go in the next six months. I have never seen so many different opinions! I’m sure that someone will be correct but personally I don’t believe that giving predictions that long term is very significant. I prefer to only give opinions on the market in-between expiration cycles so please take note of this when you read my commentaries. Currently, all I’m looking out to is August 21st.
Last month we over did it to the upside and this month we’re overdoing to the downside. The S&P 500 rallied over +8% in-between option cycles last month and have now touched the –11% mark in this expiration cycle. Volatility is good for spread traders but this amount is a bit much! This year is turning out to be the most volatile year since 1982 percentage wise! I mentioned last month that we were blowing off to the upside so the market correction wouldn’t look so bad and even said we were now on "crash alert"! I didn’t expect to see the market come down so quickly just after making a new high, however. And I still believe that even if this turns out to be a prolonged correction we are likely to see a bounce into the August expiration before the next downturn starts. It appears to have started with the low this past Tuesday with the big slide in the Dow. I have studied the past expiration cycles dating back to 1982 which have seen over 7% increases and all but 1 time saw the major indexes continue to move up or only have small 2% corrections. The one difference was in August of 1987 where there was a 7.1% increase from the July expiration and the following September saw a –7.1% loss.
It appears that all President Clinton did was have a sexual affair with Monica Lewinsky from her testimony last week and that isn’t enough to impeach the president so there are no fears there. Asia is a concern but 2/3rds of our economy is based in North America so there isn’t any reason to think things will change by August 21st. If anything, an initial correction always has a bounce and this bounce should last into August 21st. Timing is so important in spread trading. I’m sure the institutions have made a fortune in selling puts to worry warts! The important factor will be if we hold onto the recent low or not. Only time will tell, but a good upstart next week would form a W bottom in the market meaning we’re moving higher.

Longer term, most everyone seems to be looking at the past for this correction and are missing the obvious traits of this market that will probably lift it back up once again. In 1987, when the last crash occurred, the economy was in a much different state. We had high inflation, few jobs, consumer confidence was terrible and the 30-year bond was much higher. Right now we have the lowest inflation of all time, the lowest unemployment in over 30 years and the long bond is moving down to 5.00%. If the market is going to correct it’s not going to go straight down! Cash Inflows into mutual funds are still very strong and that money is put right to work so the market will always have a base to work from. Yes, technically the market looks pathetic and Ralph Acampora appeared correct in changing his tune on the market but in reality he should have stuck with his first statement about there being in a stealth bear market. There are many more decliners than advancers but one must look at the weightings of the companies in the major indexes to realise those companies alone can help support the major indexes. Joe Granville made a good point last year when he departed from his bearish stance to say that volatility would increase in the Dow and the S&P 500 because the companies with the biggest weightings would be splitting their stocks, causing their price movements to make the indexes move even more. Even with this decline he is still bullish on the market. One concern down the road is that the inflows of cash are creating a wealth effect. The biggest check right now on American business pessimism is American consumer optimism. Household spending is strong, and it may well stay strong because of plentiful jobs, rising incomes and unprecedented gains in the stock market. The market has seven mega stocks, Cisco, Coke, Dell, Lucent, Microsoft, Pfizer, and Warner-Lambert. These are responsible for one-third of the S&P 500's advance year-to-date. All of them possess P/E ratios greater than 50. This focus on so few has all the trademarks of a speculative bubble but as I have always said the market never goes straight up and it never goes straight down. It is nearly impossible to call the top or bottom in a market so it’s smartest to trade the outsides of the market.

Technically

There was a lot of damage inflicted on the markets this past week led by the nearly 300-point drop in the Dow Tuesday but the big-caps are still in reasonable long-term shape. A corrective bounce is due here but the small stocks are officially in a bear market although they have finally reached support! Our most faithful indicator the past few years has been the ARMS indexes and on at least a short-term technical basis the market is oversold according to market technician Dick Arms following last Tuesday's sell off. Flashing a buy signal is his widely followed Arms Index, which captures not only the number of stocks advancing versus those declining but also the comparative volume they attract. A reading above one in the ratio shows a preponderance of selling pressure and pessimism. Tuesday, the index hit an extreme level of 1.9 that implied a massive capitulation to fear on the part of market participants. "This kind of washout normally sets the stage for a strong market rally," Arms observed when contacted at his office in Albuquerque. "We'll only know how far any rally can carry on as the technical data comes in, but at least we ought to have a good shot at heading up to the old market highs."

We made some new records this past week. Both 10-day net advances on the advance/decline ratio -10,000 and net up volume –2 billion indicators have made a new record for lows. Usually you see something like this at the end of a correction but it is hard to say that we're finished correcting. The cumulative a/d line on all of the indexes combined has rolled over for the first time since 1994 or even 1990 and that is a bad sign. It would take a 20,000-unit advance to see new highs in this indicator and since that is unlikely, this rally may be finished.

Another great indicator is the Bollinger put volume indicator. It went on a buy on 8/4/98. A buy signal is generated when the index exceeds 2.0. The calculation hit 2.01 on Tuesday. It rarely gives a signal but has been quite accurate in the past. It shows when there is an excessive amount of bearishness in the option markets on the put side.

Mclellan Oscillator: -87 -100 oversold +100 overbought
Summation Index: -1139

Five day arms: 1.12 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.03 .80 and below, overbought 1.00 and above, oversold

Bulls: 50.0 previous week 52.5 50% plus overbought/bearish
Bears: 27.6 previous week 26.3 50% plus oversold /bullish
Correction: 22.1 previous week 21.2

Five day Qvix: 29.05 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8883.29

8598.02

-285.27

3.2

S & P 500

1120.73

1089.45

-31.28

2.8

S & P 100

550.99

535.33

-15.66

2.8

Nasdaq

1872.78

1846.77

-26.01

1.4

30 Year bond

5.72%

5.63%

 

 

 

 

 

 

 

 

 

Program Trades

It’s looking unlikely that were going to get any call trades placed this month as Call premiums have collapsed on the negative’s of the market but if the market can take off next week we may be able to place a good Call Short Trade. We ran the numbers through the program and most of the trades still have a good chance of making it through to August 21st. The Ultra Conservative trade is still showing an 89% reliability for expiring worthless by expiration. The Long Put trade has 84% odds but the Short trade is a low 71%. We will be looking for places to exit the trade because of this.

Current Trades

Average Entry price

Bid

ask

last

1075 sold SPX Put $7.32

Ultra trade

11.50

12.75

12.25

1080 bought SPX Put $6.82

$.50

13.00

14.25

14.25

1115 sold SPX Put $11.00

Long trade

29.38

31.38

23.50

1120 bought SPX Put $12.00

$1.00 spread

32.48

34.83

33.00

1130 bought SPX Put $13.00

Short trade

40.75

42.75

41.00

1140 sold SPX Put $14.00

$2.00 spread

49.25

51.25

43.13

1075 sold SPX Put $2.68

Outright sell $2.68

11.50

12.75

12.25

August 1225 sold SPX Call $6.75

Outright Sell $6.75. Bought back for $4.75, profit $2.00

0

0

0

Agora Outlook

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

                                                                      August Expiration                                August 14th 1998

Economic Effects

Tuesday

The productivity of U.S. workers shrank for the first time in more than three years, prompting a sharp pickup in labor costs. The productivity of workers outside the farm sector declined at a seasonally adjusted annual rate of 0.2% in the three months ended June 30 after a surge of 3.5% in the first quarter. Productivity, or output per worker hour, is a closely watched indicator of the economy's health. Strong productivity increases such as those seen in the U.S. economy during recent years allow businesses to operate more efficiently. This enables them to boost workers' pay without raising their overall costs or hurting profits. Financial markets didn’t care much about the productivity figures. The Dow was down by more than 180 points mid-morning after the yen tumbled against the dollar. Because of the productivity decline in the most recent quarter, unit-labor costs jumped 4.1%, the strongest rise since the first quarter of 1994, when labor costs increased 4.5%. Economists had expected a rise in productivity of 0.7%, instead of a drop.

Thursday

Jobless claims fell by 7,000 last week indicating the U.S. job market is still strong.

Initial claims for the week ended Aug. 8 dropped to 301,000, well below analysts' expectations of 312,000 new claims. The four week moving average was also at its lowest since 306,000 claims were filed in the April 11 week. The initial jobless claims figures were consistent with other economic reports that show the labor market is tight.

Retail sales fell for the first time in nine months in July, hurt by the General Motors strike, but consumer demand excluding car sales remained.

Retail sales fell 0.4% to a seasonally adjusted $224.7 billion last month, the first decline since last October, after rising 0.1% in June. But the decline, smaller than analysts' forecasts for a 0.8% drop in sales, was concentrated at auto dealers, where sales fell 3%, the steepest decrease in 15 months. GM shut most of its North American plants in July after two parts plants strikes, since settled, curtailed supply of GM cars and light trucks while rival automakers cut back on incentives they had offered in May and June.

Excluding autos, retail sales rose 0.5% in July, boosted by demand for building supplies, furniture, food and gasoline, after a 0.1% decline in June. Analysts said retail sales should rebound, and that the stock market's recent declines may cause consumers to temper spending but not to cut back too sharply. Consumer confidence is up. (Confidence is most highly correlated with employment.) The latest ABC News/Money magazine survey showed 72% of Americans were optimistic about the economy, in spite of the Asian crisis and the gyrating stock market. The markets, worrying over a developing financial crisis in Russia, paid little heed to the reports. The Dow ended down -93.46 points at 8,459.50 while the yield on the 30-year bond rose to 5.65

Friday

Prices charged by producers such as factories and food-processing plants rose a moderate 0.2% in July, propelled in part by a drought-induced jump in vegetable prices. Prescription drug costs surged for the third consecutive month. The overall seasonally adjusted increase in Producer Prices for finished goods was more than analysts were expecting. Nevertheless, it followed a 0.1%t decline in June and, for the first seven months of the year, the index fell at a 0.3% annual rate. Deflation (ugly word) in goods prices, stemming in part from the falling cost of imports from economically troubled Asia is helping to keep a lid on inflation. Service costs not measured in Friday’s report are rising faster, reflecting labor shortages. Excluding the often-volatile food and energy components, prices edged just 0.1% higher. Economists like to track this figure, considering it to be a better gauge of underlying inflation pressure.

The now settled strike against GM depressed industrial production in July, but economists said that aside from that temporary affect, the Federal Reserve's output report revealed some evidence of overall slowing in the manufacturing sector. The central bank reported on Friday that U.S. industrial production fell 0.6% in July, while capacity utilization, the portion of the nation's mines, factories and utilities employed in that production, slipped to 80.5%. Economists had estimated, that production would fall 0.5% in July. They estimated capacity utilization at the nation's factories, mines and utilities stood at 80.9%.

Downward revisions to June production data reinforced the picture of weak U.S. summer output. Economists agreed that the GM strike had exaggerated the weakness portrayed by the data for both June and July. Economists said there would be some bounce back in production in September as GM plants begin making up for lost production earlier in the summer. It will necessitate some increase in capacity utilization, economists agreed, but this would ring no alarm bells. Stocks of unsold goods on the shelves of U.S. manufacturers and retailers rose slightly in June, although automobile inventories fell sharply. Total business inventories edged up 0.1% to a seasonally adjusted $1.071 trillion after being unchanged in May. Previously, the department estimated that May inventories slipped by 0.1%. We went through another week of the market concentrating on Asia, Russia, Hong Kong, and Dollar worries so indicators had little effect on the market overall. But it is reassuring that there have been no real surprises outside of what economists have been estimating.

Next week’s Economic Indicators

On Tuesday we will see the consumer side of the inflation picture with the release of the Consumer Price Index. The other important indicator, although not economic, is the meeting of all of the Federal Reserve Governors to decide on interest rates. It is unlikely that we’ll see any rate increase with the markets already edgy about Asia and the economy. On Wednesday we get Housing Starts. The numbers have been so strong of late that it would be surprising to see a decrease. On Thursday we get Jobless Claims and the Philadelphia Federal Reserve Survey. This number will likely be ignored as well since FOMC just met last Tuesday.

Davidson’s View

Many people are asking why the market is continuing to move lower. Is it because of the slide of the Asian markets and Russia? The U.S. exports very little to these countries. Is it the strength of the dollar? This could be a part of it as most big cap issues in the S&P 500 and Dow have set up shop overseas, but it’s not enough to warrant this much of a decline. Could it be earnings? This is a strong possibility but it is more of a longer-term prospect. President Clinton’s testimony before the grand jury? So far it just looks like he is going to be caught with his pants down and that’s not enough to impeach him. So what is it then? Psychology seems to be the biggest factor right now. It’s been a while since I have heard analysts who are completely bearish. The past few weeks have seen the market suck people into what looks like the start of a rally and then the market heads lower once again breaking down confidence with each descent. As I mentioned the other day, people I have never even heard of have been asking me how they could cut their losses on their put and call outright buys because the volatility is killing their very high premiums. In this type of market it is near impossible to go long and spreads work best when it is this volatile as premium gets eaten up. But even we have been caught as the market has moved into our put spread levels. I still suspect, though, that a short-term rally will come from another short wave of denial of everything that has been going on. This being an expiration week and the fact that institutions have been selling expensive puts should be reason enough to rally the market. Another factor is that the lowest the market has gone in-between expiration cycles after a huge increase the month before has been a 7% decline and we’re down over 10% now. If the rally does not come now, it will be a big surprise, and really be scary. Longer term, there are not yet signs of maximum capitulation or intense fear. That will come, but let's throw the bulls another little bone to keep them growling a little longer before they are totally taken out. As overpriced and volatile as the stock market is today, it's almost impossible to know how rapidly things will change. Every time we get down to these lower levels we get short trade signals and have yet to act on one but with this our last week before expiration it may be time to take a second look.

Technically

The market is baffling technicians with all of the buy signals that have been generated and still the market doesn’t even move at least for a secondary bounce. The put/call ratio bollinger signal gave a buy signal. The Arms indicator gave a buy signal. The daily tick indicator has given about four signals. The percentage of stocks above their 21-day moving averages had reached an extended reading of 8% at last Tuesday's low close. This is a level from which the market has always begun a substantial rally from the re-test of lows. This Tuesday's lower close in prices saw 13% of stocks above their 21-day moving averages, an improvement, a non-confirmation of the lower price lows, and an historically rare but 100% accurate buy signal. The Mclellan Oscillator has been moving up even with these downward moves. If it reaches 0 it will also give a buy signal. The summation index continues to fall, though, but is in one of the worst oversold positions ever. Sentiment readings have also reached oversold levels. The most important factor right now is that the market seems to have put in a triple bottom with a reverse head and shoulders pattern, which usually signals a huge rally higher. Until we start moving higher with some significance it will be hard to tell if any of these indicators are correct as every time the market does start higher it gets knocked back down again.

Mclellan Oscillator: -81 -100 oversold +100 overbought
Summation Index: -2017

Five day arms: 1.08 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.05 .80 and below, overbought 1.00 and above, oversold

Bulls: 43.4 previous week 50.0 50% plus overbought/bearish
Bears: 21.9 previous week 27.6 50% plus oversold /bullish
Correction: 27.0 previous week 22.1

Five day Qvix: 29.86 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8598.02

8425.00

-173.02

2.0

S & P 500

1089.45

1062.75

-26.70

2.5

S & P 100

535.33

522.66

-12.67

2.4

Nasdaq

1846.77

1790.22

-56.55

3.1

30 Year bond

5.63%

5.54%

 

 

 

 

 

 

 

 

 

Program Trades

It’s looking unlikely that were going to get any call trades placed this month as Call premiums have collapsed on the volatility of the market. Any premiums in calls are to close for comfort. We could easily see a 5% up day. If we can see a few strong days next week we still may be able to place some trades. With next week being expiration and our short and long put trades under pressure we ran the numbers through the program and found good reason to look to exit the short and long trade. The Ultra Conservative 1080/1075 trade is still showing an 84% reliability for expiring worthless by expiration so we’ll wait on getting out of it. The Long 1120/1115 Put trade has dropped from 84% to only 73% odds of being successful but even worse is the Short trade as being a low 69%. We will be looking for places to exit the trades because of this.

Current Trades

Average Entry price

Bid

ask

last

1075 sold SPX Put $7.32

Ultra trade

22.25

23.25

23.00

1080 bought SPX Put $6.82

$.50

25.50

26.00

25.00

1115 sold SPX Put $11.00

Long trade

55.25

57.25

45.00

1120 bought SPX Put $12.00

$1.00 spread

60.13

62.13

51.00

1130 bought SPX Put $13.00

Short trade

69.88

71.88

66.00

1140 sold SPX Put $14.00

$2.00 spread

79.88

81.88

81.00

 

Agora Outlook

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

                                                                August Expiration                                      August 21st. 1998

This article was in Barron’s last week and had such a good explanation of naked selling we thought we would re-print it here for you to read. Out of all option strategies we believe this is one of the best ways to make money in the market if controlled properly, as a person doesn’t have to be concerned with establishing a spread. The optimum strategy is to sell first and then buy to protect the sold side reducing your risk. The only problem with this perfect way of doing spreads is that to sell first your capital must be very large to cover the margin requirements. When you establish a normal credit spread your margin is much lower but harder to fill and it must be filled together. Selling outright first puts time premium depreciation on your side and if the market goes against you you can just place a stop and wait for the premium to fall.

A dramatically underused options strategy -- the sale of uncovered, or naked, options yielded a return of 93.9% for my clients in 1997. And while I can't promise such profits in the future, the strategy has produced an average annual return of 35% for the last seven years.

As the term implies, naked option writing leaves you exposed, in this case to risk. By selling, or writing, an option, your profit consists of the premium on the option you've sold. The aim is for that option to expire worthless, so you pocket that entire premium. The risk is that the option won't expire worthless and indeed could rise in price. The option writer then would have to buy back the option, at a higher price, for a loss (since there is no underlying position in the security to offset the option). The probability that options actually will expire worthless, however, can be increased by utilizing two of their unique characteristics:

The first is the wide range of strike prices available. By writing only options that are far out of the money, you increase the necessary price change in the underlying security for the option to have any value when it expires, thus greatly magnifying the odds of profitability.

The second characteristic -- the time until the option's expiration -- also can increase the likelihood of its expiring worthless. Very short-term options say with only a few weeks to run have a lower probability of moving into the money because it would take an extraordinary move in the underlying security.

I take advantage of these two characteristics by writing options that are as far out of the money as possible, and with as short a life span as possible, yet with reasonable prices.

Depending upon many variables, including the volatility of the underlying security and the market price of the option, in about only 10% of instances will short-term, far-out-of-the-money options be worth anything at expiration. This means that writing uncovered options theoretically can have a chance of being profitable 90% of the time. These are good odds to start with.

Some sophisticated options traders obviously buy the very options I choose to write. They recognize that their probability of winning is low, but they expect that in the 10% of the times when they do win, they will occasionally have tremendous profits from "outliers" that will more than offset all their losers. They may prove to be right. And if they end up making a lot of money, I will lose a lot of money.

So I have developed a four-point risk-control program to reduce the possibility of large losses on those 10% of the trades. The first element, as noted, is to write only short-term, deep-out-of-the-money options.

Second, I strictly limit the number of options that I write for each $100,000 of equity in the account. This rule is the foundation to limiting one's exposure to loss; disregarding this is probably the biggest source of problems people have had with uncovered option writing.

Third, I check the market value of my options daily to verify the relationship to value of the account. If the option prices move up, then my risk has increased without any action on my part, and it may become necessary to reduce that risk by closing out options.

Fourth, and perhaps most important, is to have a stop-loss order entered on the floor of the exchange for each option. Many traders do not want to tie their hands in advance of any adverse moves. But the best time to decide when to exit a position is when you enter it. By placing my stop-loss orders in advance, I eliminate the chance of making a possibly fatal mistake later. When things go badly, traders often decide to wait just a few minutes longer in the hope that things will turn around. And sometimes the traders never act and things get only worse.

One key attraction of uncovered options writing is that it can be used equally well in a bear market or a bull market. Who should utilize this strategy? Only those with money they can afford to lose. As with any risk-capital investment, when properly managed, the rewards can be handsome indeed.

Max Anasbacher is chairman of Ansbacher Investment Management in New York City.

Economic Effects

Tuesday

U.S. consumer prices rose moderately in July, offering reassuring inflation news as the Federal Reserve was meeting on interest rates. The Consumer Price Index, the government's main inflation gauge, rose a seasonally adjusted 0.2% in July following a 0.1% rise in June. The closely watched core CPI, which excludes food and energy costs, also rose 0.2% after a 0.1% gain in the prior month. Over the past 12 months, the CPI was up 1.7% and the core rate was 2.2% higher. The rise in both the overall CPI and the index excluding food and energy prices during July matched the average forecast of U.S. economists. Some analysts are starting to talk about deflation so it would be good to actually see inflation rise in the near term.

In June the U.S. trade deficit fell for the first time in five months, largely because a deepening Asian crisis made the cost of imported goods, including oil, cheaper. The monthly shortfall between exports and imports decreased a steeper than expected 8.9% to $14.15 billion from a revised $15.54 billion in May. Exports shrank for a third month in a row, down 0.5% from May to $76.17 billion the lowest since $75.1 billion in February 1997. The June deficit was significantly lower than the $15.44 billion gap forecast by economists but did not alter the picture of a deteriorating U.S. trade position stemming from the financial crisis racking Asia. The U.S. trade deficit for the April-June second quarter hit a record $44 billion, surpassing the previous record quarterly trade gap of $38.8 billion set more than a decade ago in the fourth quarter of 1987. In 1987 this number would have brought the market to its knees but since the market was already oversold it bounced higher.

U.S. workers' real average weekly earnings, after adjusting for inflation and seasonal factors, rose 0.1% in July. The July rise followed a revised 0.1% drop in June real average weekly earnings, which was previously reported as down 0.3%. The July increase resulted from average weekly hours that were unchanged from June and a 0.2% rise in the Consumer Price Index for urban wage earners and clerical workers. It was partially offset by a 0.2% increase in average hourly earnings. In current dollars, weekly earnings averaged a seasonally adjusted $442.53 in July, compared to $441.50 in June and $423.32 in July of last year.

Fed policy makers were to meet at 9:00 a.m. est. to weigh possible interest rate changes. Although Fed Chairman Alan Greenspan has warned of concerns that the robust economy could start to overheat, analysts widely believed he would support keeping interest rates unchanged for now. After the meeting was finished there were no interest rate changes and no comments made. With the current state of the overseas markets, there doesn’t appear to be any reason to adjust rates.

Wednesday

New homes and apartments were built at their fastest rate in more than 11 years during July, as favorable interest rates and ample jobs fueled a countrywide building boom.

Construction starts jumped 5.7% to a seasonally adjusted annual rate of 1.72 million sharply contrary to Wall Street analysts' forecasts for a moderate slowing after a matching 5.7% surge in June. The July building rate was the strongest for any month since March 1987, when new homes were being built at a rate of 1.73 million a year. Every region of the country shared in the pickup in construction activity in July and a 4% rise in applications for new building permits indicated builders expect the market for new homes to remain strong in coming months.

Thursday

Jobless claims fell by -2,000 last week indicating the U.S. job market is still strong.

Initial claims for the week dropped to 301,000, well below analysts' expectations of 312,000 new claims. The four week moving average was also at its lowest since 303,000 claims were filed. The initial jobless claims figures were consistent with other economic reports that show the labor market is tight.

Retail sales fell for the first time in nine months in July, hurt by the GM strike, but consumer demand excluding car sales remained strong. Retail sales fell 0.4% to a seasonally adjusted $224.7 billion last month, the first decline since last October, after rising 0.1% in June. But the decline, smaller than analysts' forecasts for a 0.8% drop in sales, was concentrated at auto dealers, where sales fell 3%, the steepest decrease in 15 months. Excluding autos, retail sales rose 0.5% in July, boosted by demand for building supplies, furniture, food and gasoline, after a 0.1% decline in June. Analysts said retail sales should rebound, and that the stock market's recent declines may cause consumers to temper spending but not to cut back too sharply. Consumer confidence is up. The markets, worrying over a developing financial crisis in Russia, ignored the reports. The Dow ended down -93.46 points while the yield on the 30-year bond rose to 5.65%.

Several Federal Reserve policy makers argued at their July meeting that the central bank should "take advantage of any early opportunity" to raise interest rates and snuff out signs of inflation, according to a summary of the deliberations released today. But the overwhelming majority agreed to hold off on tightening monetary policy for a while, partly because they feared fallout in struggling Asia and elsewhere. A rate increase, the group concluded, could have "destabilizing effects on financial markets in the growing number of countries abroad that were experiencing severe financial difficulties," according to the summary, which was made public after the customary six-week lag. "The repercussions," members said, "could be quite severe" if much-needed capital flowed out of weakened economies, drawn by higher returns in the U.S.

Next week’s Economic Indicators

On Tuesday we will get Consumer Confidence and Existing Home Sales. It will be interesting to see if the public is starting to lose their upbeat outlook on the economy and stock market as were hearing more and more about the overseas markets collapsing and our own markets struggling. On Wednesday we get Durable goods orders. This indicator has moved markets in the past and may again if it looks like the economy is slowing down dramatically. On Thursday we get Jobless Claims and the second estimate out on 2nd quarter Gross Domestic Product. Neither of these indicators should affect the market. On Friday we get Personal Income. This number will probably be the most important indicator of the week as there are signs of "deflation" in the economy and if wages are continuing to increase this could be an ugly number.

Davidson’s View

This has been one of the hardest years since 1987 for spread trading. Volatility is very high, making it hard for us spread traders to make any money. The chart below gives an indication of what we’re dealing with. This high degree of volatility hasn’t affected our Ultra Conservative or Outright sell trades, although this month we were only .24 away from seeing a partial loss on our 1080/1075 ultra trade as the S&P 500 expiration for August was 1080.24. We have never seen complete losses on our Ultra trades or Outright sells. Since they are always placed so far out and we normally only place one trade per month in the direction of where the market is headed and according to what the program calculations are. August’s Ultra trade was 9.3% away from the July expiration number. We were a little surprised when the program gave a reading to outright sell the 1175 option as it seemed like a low number but it proved to be okay. Long trades, however, have been hit harder as the percentage away is closer to expiration.

When we look at the chart it looks like a replay of 1987 with the market being up strongly one month and then falling the same distance the next month. Does this mean that we should see the market fall -11% this expiration cycle? That would put the S&P 500 around 965 and the Dow around 7600. I have heard many analysts saying that it is a possibility to see those levels. In total, that would be about a 20% correction. You may think that the crash occurred during that October expiration but you’d be surprised to know that Black Monday was the start of the November expiration period! The November expiration cycle was down –13%!

With the 30-year bond yield now below 5.50% and inflation near zero it is hard to believe that we could see a correction that steep this month. I could see a combined September-October period being that low but not another slide that big. The move up we had in July was a blowoff period and now that that is rectified the market can move into a trending market either higher or lower. The battle is likely to be between poor pre-earnings warnings and money moving into mutual funds. Investors have pulled back in their purse strings a little but money is still flowing into funds. It needs to be put to work so if we continue lower the descent should be slow. When you look at our percentage expiration chart you can see that it looks like we’re headed back into the upper channel so the market could be in for some downward action for some time to come.  

Date

Percent Moves

Date

Percent Moves

Jan-87

6.0

Jan-98

1.0

Feb-87

5.0

Feb-98

8.0

Mar-87

7.0

Mar-98

6.0

Apr-87

-2.0

Apr-98

3.0

May-87

0.7

May-98

-0.8

Jun-87

6.0

Jun-98

-0.5

Jul-87

3.0

Jul-98

8.0

Aug-87

7.0

Aug-98

-8.0

Sep-87

-7.0

 

?

Oct-87

-11.0

 

?

  Technically

The market is showing signs this week of putting in a short-term bottom and may be moving higher as daily momentum and relative strength indicators have turned upward. Weekly indicators are still headed lower so it will be hard to tell how high we may go. Another indication of the market moving higher short term is that the daily Arms index on Friday hit 4.00 plus. That is bearishness at its highest. The last time the number was that high was on the day of the crash October 1987 and last year when the Dow saw a 7% correction in one day! The Mclellan Summation index looks like it is bottoming out but the Oscillator, which gives daily readings, has turned down again. The most disturbing factor is that even though the market was barely up on the week the 5-day Arms indicator is almost in overbought territory once again. Overall indicators are mixed but with the momentum turning to the upside we should see some type of move higher or even better, a sideways market for a time.

Mclellan Oscillator: -81 -100 oversold +100 overbought
Summation Index: -2017

Five day arms: .85 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .95 .80 and below, overbought 1.00 and above, oversold

Bulls: 40.7 previous week 43.4 50% plus overbought/bearish
Bears: 34.5 previous week 21.9 50% plus oversold /bullish
Correction: 24.8 previous week 27.0

Five day Qvix: 29.73 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

8425.00

8533.65

+108.65

1.3

S & P 500

1062.75

1081.24

+18.49

1.7

S & P 100

522.66

534.19

+11.53

2.2

Nasdaq

1790.22

1797.63

+7.41

0.4

30 Year bond

5.54%

5.46%

S&P 100 Expiration 534.19
S&P 500 Expiration 1080.24

Program Trades

This past month we saw 4 winning trades and 2 losing trades. Sadly, this is the first time ever that we have had a put trade loss on our Long trades. The market never once gave us a chance to get out of the trades either, which was frustrating, so we had to take complete losses on the Long and Short trades. The market has done a wonderful job this year of looking as though it is giving you room to turn around but then it turns on you again. The best thing, however, and the reason why we cut the percentage losses, in half is because at the end of the July expiration cycle, 7/17/98, we told everyone to be on "CRASH ALERT" and to trade cautiously. The market at the time had just made a new all time high and we felt it was just blowing off to the upside so a correction wouldn’t look as bad. Overall, it was a frustrating month for call trades also as the floor traders weren’t offering any calls to trade higher up so we didn’t see any fills there to offset the put losses.

This coming month should be very good for fills as volatility is high and there are many trading options to choose from. We’ll make up these past losses in a couple months time trading both sides. We now know we’re in the middle of a correction so we know to trade cautiously.

Current Trades

Average Entry price

Bid

ask

last

1075 sold SPX Put $7.32

Ultra trade

0

0

0

1080 bought SPX Put $6.82

$.50

0

0

0

1115 sold SPX Put $11.00

Long trade

34.76

34.76

34.76

1120 bought SPX Put $12.00

$1.00 spread

39.76

39.76

39.76

1130 bought SPX Put $13.00

Short trade

49.76

49.76

49.76

1140 sold SPX Put $14.00

$2.00 spread

59.76

59.76

59.76

1075 sold SPX Put $2.68

Outright sell $2.68

0

0

0

1010 sold SPX Put $4.25

Short trade

0

0

0

1005 bought SPX Put $3.50

$.75 spread

0

0

0

1005 sold SPX Put $1.00

Outright sell $1.00

0

0

0

September Trades

800 sold SPX Put $2.50

Outright sell $2.50

1.50

2.00

1.50

975 sold SPX Put $12.50

Ultra trade

9.00

10.00

9.00

970 sold SPX Put $12.00

$.50 spread

8.38

9.38

11.50

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