Agora Outlook

January Expiration December 26th 1997

Hope you had a great Christmas with lots of toys and turkey! Please excuse all grammar, spelling and overall writing as I’m the only one filling out this letter and as you know I love writing but its not my strong point! This is also very short and concise but I hope you like it.

This week was rather interesting being a holiday week for trading. Normally you see the start of the Christmas rally early on but this year saw down arrows most of the week. We may have started the rally today. The Dow closed up +19.18 to 7679.31. S & P 500 up +3.76 to 936.46. Last year we saw profit taking in the last few days of 1996. The profit taking may have already been done for this year so we could continue up next week. Trading will also pick up a little bit next week but don’t expect anything to be normal as it is still considered holiday trading which can cause strong volatile days! This will help to see the rest of our trades filled next week. Have a great weekend!

Economic Effects

On Tuesday Durable goods orders shot up 4.8% in November, the largest increase in five years, fueled mostly by demand for aircraft. Orders for durable goods, products expected to last more than three years, totaled a record, seasonally adjusted $195 billion, up from $186.1 billion a month earlier. It was the biggest advance since a 7.5% gain in December 1992. Analysts had expected only a 0.5% rebound from October’s 0.1% decline. You can tell that its holiday trading as bonds didn’t even move on the number. The reason was probably because three quarters of the number was due to aircraft orders which is something you don’t buy everyday. By the way, does anyone know who may be interested in a used 747 with low mileage and great tires!!haha I think I like writing this segment, its great for jokes!! U.S. chain store sales fell 0.9% last week, according to BTM/Schroders weekly chain store sales index. Johnson Redbook numbers were also weak, only being up 1.6% for the past week. These numbers probably helped bonds forget the durable goods number as this is supposed to be the busiest week of the year for sales. Christmas shopping is sure not that slow in my town! Gross domestic product grew at a 3.1% annual rate in the third quarter rather than the 3.3% rate reported a month ago. Analysts anticipate further easing in GDP growth during the fourth quarter, partly because of reduced sales to struggling Asia, though the key impact from Asian economic woes is not likely to be felt until later next year.   The University of Michigan's final index of consumer sentiment for December fell to 102.1 from 107.2 in the November final.   The current conditions component fell to 111.4 in the final December survey from 114.9.  The number was much lower then expected but had little impact on the market as we were in Holiday trading. Wednesday saw consumer spending rise steadily in November as personal incomes surged at the strongest rate in nearly 1 1/2 years. Spending was up 0.4% to a seasonally adjusted annual rate of $5.587 trillion after a 0.5% October gain, while incomes from wages, salaries and all other sources climbed 0.8% to a rate of $7.028 trillion following a 0.6% October rise. The rise in income was the strongest since June 1996. The rise in personal spending was in line with expectations. Wages and salaries, which comprise over half of personal income, rose 1.1% to $3.987 trillion in November after climbing a revised 0.7% the prior month. There were no real surprises in this report but we need to note that wages are continuing to rise. Bonds fell a bit after the release of the number so they were feeling the pressure also. Initial jobless claims fell -13,000 to 307,000 in the week ended Dec. 20 from 320,000 in the prior week. The four week average of new claims, viewed as a more accurate indicator of longer term labor conditions, reached 315,750 in the week ended Dec. 20, up from 315,000 a week earlier. Numbers this week should even be reported as there aren’t enough people around to react to them.

Next week’s Economic data

Monday we will take a look at the National Association Purchasing Managers report. A significant number for a thinly traded holiday market. We could see some huge swings if there are any surprises in this market. Also out is Existing Home Sales. Another important indicator. Could be an interesting day! On Tuesday we get weekly chain store sales reports and Consumer Confidence. This number will help to confirm the publics response to Christmas sales shopping which appears to be weak this season. Wednesday once again has early weekly jobless claims. This number won’t even be noticed as everyone gets ready for their New Years Party for 1998!!

Technically

Technically the market is quite oversold and due for a bounce. Relative strength and stochastics are both giving low readings. The arms index is giving a strong oversold indication both short and long term.  Were sorry for the short analysis but our techi is sick.

Mclellan Oscillator: n/a -100 oversold +100 overbought
Summation Index: n/a

Five day arms: 1.24 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.18 .80 and below, overbought 1.00 and above, oversold

Bulls: 50.8 previous week 52.5 50% plus overbought/bearish
Bears: 31.5 previous week 30.8 50% plus oversold /bullish
Correction: 17.7 previous week 16.7

Five day Qvix: 30.12 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Current Trades

We had great success filling our trades for January this week even though it was a thinly traded holiday week. Many people filled both long trades on calls and puts. Since it was a holiday trading week, it is miracle that anyone was filled. Brokers appeared to have to really work to get fills as it never looked like any fills could have been done. The trades look great with the market relatively flat this week.

Program Trades

Copyright c 1996. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.

Agora Outlook

Economic Effects

Monday showed existing home sales fell slightly in November to an annual rate of 4.38 million units. While that was down 0.2% from October's revised 4.39 million unit annual rate, it exceeded forecasts and remained 7.9% above the November, 1996 rate. The national median price for an existing home was $124,400 in November, up from November 1996's $117,400. The numbers were good news for bonds but they reacted very little to the report as they were already set into profit taking from an overbought situation. Tuesday BTM/Schroders weekly chain store sales rose 1.5%.  The increase marked the biggest weekly jump since February 15th 1997. Adjusted year-over-year sales were up 2.0% for the week versus a gain of 1.5% in the prior period. Sales were generally up during Christmas week as retailers stepped up their promotional activity. Late Christmas buying combined with strong post-Christmas selling contributed to the outsized gain for the week. Compared to November, Johnson Redbook numbers rose 2.1% in the four weeks ended December 27. The Christmas week provided the type of sales gains many retailers had been waiting for to bring the month more into line with revenue growth expectations. Consumer confidence jumped to 134.5 from a revised 128.1 in November, the highest reading since June of 1969 when the index stood at 137.9. The present situation index also rose to a fresh 28-year high of 161.7 versus a revised reading of 156.8 in November. This was mainly due to the strength in the labor market, as employment lifts consumers' spirits and bolsters their expectations. These current readings are the highest experienced this year, and continue to ride at historically strong levels. Consumers are clearly entering the new year extremely satisfied with ongoing conditions, and have high expectations for 1998! The strong BTM, Johnson Redbook and consumer confidence numbers took all the steam out of the bond market as the 30 year bond fell a full point in early morning trading, falling to 5.98% from 5.93% the day before. Thursday showed unemployment claims jumped 13,000 for the week. Benefit applications totaled a seasonally adjusted 318,000 last week, up from 305,000 the week before. Claims have fluctuated in a narrow range between 304,000 and 322,000 for the past six weeks. The four-week moving average of initial claims edged down by 1,000 to 314,250. The Chicago Purchasing Management business barometer fell to a seasonally adjusted 58.1 in December from 59.5 in November. (An index below 50 signals a slowing manufacturing economy, while a reading above 50 suggests expansion.) The Chicago number is usually a great indication of what the National number may be, but this number had little effect on the market. A measure of future economic activity rose for the seventh straight month in November, indicating that the economy will continue expanding into the early part of the new year. Leading Indicators rose 0.1% to 104.6, exceeding analysts expectations that it would be unchanged from October. In March, the economy will begin its eighth year of an expansion that already is the third-longest in U.S. history. On Friday factories received fewer orders and production dipped, according to a closely watched survey of corporate purchasing executives. The National Association of Purchasing Management’s monthly index of business activity fell to 52.5% from 54.4% in November. While the number was lower, the report still marked 19 straight months of manufacturing growth and an eighth straight month of growth for the overall economy. A component of the survey on prices paid by manufacturers showed a reading of 50.3 compared with 51.9 in November, indicating that inflationary pressures are not overheating. The key number that took the steam out of the stockmarket was the net export orders index of 50.6 versus 54.2 in November. That is a huge drop and was mostly due to the Asian turmoil. The Dow was up +20 before the release but afterward fell to -20 points. This week the market seemed to give a lot of attention to indicators out but this may have been because of the thin trading volume. It did reveal that people will probably be paying more attention to economic indicators in the weeks to come!

Next week’s Economic data

On Tuesday there is the weekly chain store sales and manufacturers' shipments, inventories and orders. Wednesday has new home sales. The existing home sales report was ignored the week before so this one may also be ignored. An aspect of this number to watch will be the overall price indicator. There was a whiff of strength in overall economic reports last week and that may be why bonds were struggling. On Thursday there will be weekly jobless claims and overall chain store sales. Also out will be the producer price index number. The number is not likely to have an impact on the market since inflation has been very weak all year and most traders will be focusing on Friday’s all important unemployment report. This has been the most important indicator all year and is likely to have a great effect on the market.

Technically

The market moved up smartly on thin volume this past week and brought the market into a high neutral technical position. Short term, the market has moved into an overbought situation indicated by the arms and Mclellan numbers. Stochastics and Relative strength indicators are fast approaching an overbought level. An indicator that has been in accurate in showing short term tops in the past is the tick indicator. At the close today it was a high +1160. Usually +700 and is regarded as high. What it means is that very few issues were driving the market up which means it is not sustainable.

We had three of the best market technicians give their opinion on the direction of the market this week. Gene Inger feels the Dow will break below the 6000 level halfway into 1998 as momentum is beginning to waiver. He also thinks the situation in Asia will slow down demand for U.S goods thus lowering earnings reports. Dick Arms said that his monthly equivolume chart is currently showing more selling in big volume instead of buying. His famous Arms index is also registering a top when he looks at the long term trend. When the indicator stays in an oversold position and the market rallies it reveals that there is little conviction in traders that it is a solid rally. This confirms the new reading in the equivolume chart. The most accurate technician this past year was Arch Crawford. He likes to combine technical analysis with astronomy. According to Crawford, the stars are showing that a market top was established Dec. 31st 1997. He believes that the market could begin to run into real trouble in March or late February. He didn’t mention how far down the market could go but doesn’t expect any great down moves until late February or March. Great for trading spreads!!

Mclellan Oscillator: 109 -100 oversold +100 overbought
Summation Index: 1663

Five day arms: .71 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.04 .80 and below, overbought 1.00 and above, oversold

Bulls: 47.6 previous week 50.8 50% plus overbought/bearish
Bears: 35.2 previous week 31.5 50% plus oversold /bullish
Correction: 17.2 previous week 17.7

Five day Qvix: 27.26 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Current Trades

Everyone finished getting there trades this past week. With the big rise in the market this week our sold calls are still looking good. We put them through the program and it still came up with a high 91% reliability for the 1005 calls expiring worthless. The 900 puts are also very strong, at 96%!

Program Trades

Copyright c 1996. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services. 

Agora Outlook

January Expiration January 9th 1998

Well, we can officially say 1998 started with a bang! Very unlike the past few years. This week was the sharpest descent for the market in 8 years! The Dow today lost -222 points or 2.8%. The "Asian financial crisis" was once again the reason for the fall. Worries about Asian financial markets, and even social order in some cases, overcame another demonstration of strength on the employment front. The Dow fell nearly 80 points at the opening bell following another overnight tumble in Asia’s financial markets. A brief move higher proved short lived, and the index moved between a loss of -75 and -100 points until shortly after 11 a.m. est, when it turned decidedly negative. Thirty minutes later, the Dow was off more than 130 points, and used that level as a base through mid- afternoon. In the last hour of the day, the index fell to a low of -275 points and recovered somewhat at the close. The index lost -222.21 points, closing at 7,580.42. The S & P 500 was off -28.35 or nearly 3% to 927.69. The continued decline in international markets is not offering investors much of solitude and it may not be until the end of January before they stabilize. Looking at the overall market, the biggest disappointment is that the broader market is participating in the sell off and you rarely see that in January. The unemployment report that came out this morning was irrelevant because of the unrest overseas. 370,000 new jobs were created in December, nearly double the level expected by analysts. The unemployment rate rose to 4.7%, up slightly from a 24 year low of 4.6% in November. Bond prices fell initially on the employment data, but reversed amid concern about worldwide economic slowdown and because average hourly earnings rose a less than expected 0.1%. By the end of the day, bond prices fell to 5.68%, setting another all time low. Overseas, the focus remained on Jakarta, with President Bill Clinton putting in a call to Indonesian President Suharto, who promised to "seriously implement" reforms required by the International Monetary Fund. With speculation of a military coup ebbing, Indonesia’s stock market gained more than 4% early on, but ended down another 1.2%. In Asia’s other markets, Hong Kong’s Hang Seng Index lost 3.9%, Singapore’s Straits Times fell 7.43%, Philippines PSE Composite declined 8.3% and Malaysia’s KLSE Composite fell 3.1%. Despite IMF approval for another $2 billion, South Korea’s Composite Index ended down 2.35%. Japan’s Nikkei index closed off just -0.2%. The situation appears so bad in Southeast Asia that Clinton sent a U.S. delegation to the region. "What we’re witnessing here is a true crisis of confidence. The economies are capable, but people are paralyzed," said Douglas Wilde, international economist at Merrill Lynch. It will be interesting to see how the overseas markets open on Sunday night. Whatever happens overseas this weekend could have a strong affect on North American markets next week.

Economic Effects

Monday showed spending on new construction dropped unexpectedly in November. Total spending on all types of construction work, both by the private sector and by governments, fell 0.9% in November to a seasonally adjusted annual rate of $609.0 billion after a sharply revised 1.4% gain in October. The decrease in November spending was unexpected. Economists had forecast a 0.7% increase in construction spending. Stocks and bonds both liked the number. Bonds rallied well over a full point to bring the 30 year bond level down to 5.75%. The last time it was at this level was on October 15, 1993. Tuesday showed a rise 0.7% in U.S. chain store sales for the week ending January 3 versus the prior week, according to BTM/Schroders weekly chain store sales index. Johnson Redbook retail sales rose 7.3% versus the same week a year ago and were up 0.2% versus the previous week. Retail sales rose 6.0% compared to the same month a year ago. It seems that the consumer had been waiting for the big sales to come after Christmas before they went shopping by the appearance of these numbers. More and more we have been seeing this trend develop over the past decade. Also out today were Factory orders. A surge in demand for new aircraft pushed factory orders up sharply in November, but shipments of finished goods fell for the second straight month. Total orders rose 2.5% to $345.1 billion after a revised 0.1% gain in October. The November rise was the strongest since a matching 2.5% increase in September 1996 and beat economists' forecasts for a 2.3% gain. The gain came from increased demand for new aircraft and parts, which seemed to mask an expected slowdown in U.S. manufacturing as troubled Asian nations cut back or delayed orders. Excluding transportation, orders received by the factories fell 0.3% in November after declining 0.8% in October. The turmoil in Asia will take a toll in the U.S. this year, slowing the pace of manufacturing as corporations rein in capital spending plans. Bonds fell after the report but came back to end the day higher, dropping the yield down on the 30 year bond to a record 5.72%. Stocks also fell on the release of the number but had already been in a downfall on concern over corporate profits. On Wednesday we saw new homes sales were very strong in November. Their highest rate in more than 11 years as the supply of unsold homes fell to its lowest level in more than 26 years. New home sales jumped 5.1%, the biggest increase in a year to a seasonally adjusted annual rate of 830,000 units, the strongest pace since April 1986. The housing market is benefiting from solid consumer confidence levels and declining mortgage rates, which are hovering near the 7% mark for 30-year fixed rate loans. The supply of unsold homes fell to 4.2 months' worth, based on current sales rates, the smallest inventory of new homes on that basis since July 1971. There were 4.4 months' worth of unsold homes in October. Regionally, sales soared 23.4% in the Northeast, 14.9% in the Midwest and 4.9% in the South. In the West, sales fell 6.3%. The median sales price of new houses sold in November fell to $140,000 from $142,300 in October, while the mean price rose to $175,100 from $174,100. The unexpectedly strong rise in home sales helped to temporarily bring down the 30 year bond. The market was more focused on the economic crisis in Asia and the fact that we’re only two days away from Friday's release of U.S. employment data for December. Stocks also ignored the number as Asia was once again looking ugly overnight. On Thursday we saw a fall in producer prices for December for the ninth month this year, bringing the cumulative price drop for 1997 to 1.2%, the sharpest deflation since oil prices collapsed in 1986. Only this time, in contrast to the 2.3% drop in 1986, declines were much more broad based, ranging from gasoline to eggs to cars to computers. The core rate, goods that exclude the volatile food and energy components declined 0.1%. For all of 1997 it was 0.1% higher after rising 0.6% in 1996. It was the smallest rise on record since 1973. Economists expect the good inflation news to continue into 1998 as Asian nations with sharply devalued currencies flood the U.S with cheap exports. Stocks and bonds ignored the number as it was in line with expectations. Also out today was jobless claims, jumping by +20,000 to 334,000 last week, matching the level in mid November. Claims haven’t been higher since mid-August. Still, the level signals healthy demand for labor. But the rise, the second in a row, may signal some slowing in the economy as the new year begins. The four week moving average rose to 318,250 from a revised 313,250. Friday had the much anticipated Unemployment number. There were 370,000 new jobs created across a broad spectrum of industries in December, showing a strong labor market at the end of the year. The large number of nonfarm jobs exceeded economists' forecast of 209,000, and followed growth of 412,000 in November. Despite this, the unemployment rate rose to 4.7% from a 24 year low of 4.6% in November, mainly because of a signifagant increase in the work force. S & P 500 futures were off -6.00 points before the number was released and rallied to only being down -1.00 point with the release of the number but then began to fall again with the worries of Asia taking hold. The 30 year bond was only down -3/32nds but fell to profit taking, moving down to -21/32nds. It looked like the good economic news was forgotten fast as bonds made a new intra-day high due to more money being diverted to bonds from stocks. The average workweek fell by 0.2 hour to 34.6 hours. Economists took heart from the small increase in hourly average earnings, which rose only 1 cent to $12.48 last month and was up 3.7 % from a year ago. It looks like the data will encourage the Fed to keep interest rates on hold as it gauges the impact of Asia's economic crisis and the potential wage pressures in the labor market.

Next week’s Economic data

Tuesday has the consumer price index, Atlanta fed survey, and the weekly chain store sales reports. None of the reports will probably have much of an effect on the markets. Inflation this year is dead and gone so it is unlikely that this number will affect the market. Wednesday has new home sales out. This number has been strong of late. With interest rates falling to new lows you could expect to see a strong number here. It shouldn’t affect the market that much, though, as analysts are expecting it to be higher. Thursday has jobless claims, business inventories, and the Philly fed survey. Inventories will be an interesting number to see. The question is, will manufacturers stockpile goods even though there may be a slowdown this year? Friday has industrial production and capacity utilization. This will be a important number this year because if we have a slowdown on the way, production levels will become all important. This number is probably the most important number of the week but none of them are likley to move the market in any way. It could turn out to be a technical week for the market and as it’s an expiration week, that will probably be the focus.

Technically

Well, according to our ARMS 5 day index, we went from an overbought situation to an oversold situation in short order. For all of last year and the start of this year the ARMS indicators have been giving us great readings on the condition of the market. Stochastics have begun to roll over and are almost neutral. What is really interesting is that our relative strength indicator is still smack in the middle of the chart showing that traders are undecided about this market. Overall the market is now short term oversold, being down four out of days this week.

Joe Granville, the famous technical perma bear from 1990-July 1997 said that the market is in great shape and should continue to move higher later in the year. He observed that the Dow has an inverted head & shoulders pattern. It does look that way but does he realize what’s happening in Asia! Interesting outlook, but its hard to listen to a guy who was wrong for 7 years.

We had a great example of why a person should never use technicals to leg into a credit spread on Wednesday. We had a screaming buy on Wednesday night from the technicals, showing the market was supposed to continue its rally into Thursday. All the technicals proved to be wrong because the market collapsed the next day. If we had bought the call side of the trade and then hoped to sell the other side later on we would have had huge losses.

Mclellan Oscillator: - 35 100 oversold +100 overbought
Summation Index: 1629

Five day arms: 1.70 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.21 .80 and below, overbought 1.00 and above, oversold

Bulls: 45.9 previous week 47.6 50% plus overbought/bearish
Bears: 36.9 previous week 35.2 50% plus oversold /bullish
Correction: 17.2 previous week 17.2

Five day Qvix: 27.37 10-15 bullish, low volatility 15-40 bearish, high volatility

Davidson’s View

Well, it’s time for my yearly prediction which everyone knows I deplore. The Agora Outlook has seen some changes this past year and we’re likely to see some more this year. We are considering including our "ultra conservative trades" that used to be supplied to the print edition people of the Outlook. We gave up the print edition of the Agora Outlook midway through last year and this year we want to get out of faxing the letter. More and more people are buying computers and so we want everyone to go paperless. Now I just have to convince my editor so I don’t have to print hardcopy!

We finished the year up 108% for short trades and 188% for long trades and it looks like we’re going to start January out with 43% profits. At the start of this year we will be counting each trade separately upon the request of a few subscribers so our percentage profits are probably going to jump quite a bit. Interestingly, the S&P 500 beat 90% of diversified U.S. equity mutual funds in 1997 and the gap between the S&P and the typical fund is 9%. Only a handful of the top 50 funds in the country beat the index. The S&P also beat the Dow, the Nasdaq and the Russell 2000. The S&P rose 31% (excluding dividends), while the Dow was up 23%, the Nasdaq, 22%, and the Russell, 21%. This marks the fourth straight year of futility for the fund industry. Last year 75% of funds trailed the S&P, and the average fund trailed the index by about five points. In 1995, the S&P beat 85% of funds, after topping 78% in 1994. In only three of the past 15 years - 1991, 1992 and 1993, have more than half of all funds surpassed the S&P.

This is the first time that the S & P 500 has had 3 consecutive years of returns of 20% plus gains. If you review the S & P’s five best 2-year periods, you see that the 5 years following those periods have only shown single-digit returns. Since this is a new phenomenon it is hard to tell what this year could portray! Looking at last year I said that the market would be up 10% before it would fall 20%. The market did rise 10% right from the start and then it corrected, but only 10%. Not quite the 20% I thought would occur but at least it was down. The market then took off straight up into August gaining about 32% for the year. From there we stayed pretty flat for the rest of the year with the S & P 500 gaining 31% for the year overall. As I mentioned above, its kind of hard to give a prediction when you’re dealing with new history. From my own studies of the market, it looks like we’re going to be in for a volatile and turbulent market for sure, mostly due to the Asian problems that we’re still dealing with. If you just look at the markets reaction to this month’s national association of purchasing managers report you will see that the market isn’t going to take any type of slowdown well. The number took the Dow from being up +30 points to being down -20 in just two minutes, after analysts took a second look at the number. The key to the report was the net export orders index fell to 50.6 from 54.2 in November. That is a huge drop and was mostly due to the Asian turmoil as they have flatly quit buying American goods! This reveals that the market is going to have a hard time making any ground at least at the start of the year. So far, it has struggled if you look at the official start of 1998. This week saw the Dow have its worst performance in 8 years. It looks like were in for an exciting year. We still think the overall market will stay basically flat all year. It will be similar to 1993. Which was slightly up, except, this year will see greater volatility. In 1993 the QVIX (volatility index) was between 8-12 all year. You could tell from that alone that the market would be very flat in its movement. Right now the Vix is floating around 27. Over two times as strong! When the market had its second correction of the year the Vix was around 40 with huge intraday swings. We expect the same thing this year, giving us great opportunities for placing spreads. The "program" is yet to indicate when we may see a change in ranges in how far we’re going out, so we expect the market to probably only be up about 10%. If we even go that far the entire year. That seems small now but when you look at the big picture that is an average return. We don’t expect to see much downside for the market either. We could see a quick 20% drop but one thing that will help to hold the market up is the inflows into mutual funds. As we get closer to the baby boomer’s retirement dates we’ll continue to see more and more cash move towards the market. But, it won’t be until the year 2002 that we’ll start to see cash start coming out. This year will probably be even more exciting than last year because of the volatility but it may get boring in trades as we sit back and watch those premiums slip away!

MARKET CLOSES

We will continue to show the 1997 chart plus the 1998 chart until we get further into year.

Current Trades

Well even though the market collapsed on Friday were still in good shape for our puts according to the program. It is still showing a strong 91% probability of success for the 900/895 puts expiring worthless Friday morning. Calls are looking great of course! It looks like the first part of the week will be volatile but as the weeks goes on we should see some stability.

Copyright c 1996. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services. 

Agora Outlook

February Expiration January 23rd 1998

Because of last Friday’s all important event of the birth of our cute baby girl, we missed last weeks letter so we thought we’d comment on some highlights of the past 2 weeks. You may want to watch the superbowl as part of your analysis for the market this weekend as it has been one of the best indicators for the direction of the market in past years. The Super Bowl indicator has been correct 27 out of the past 31 years. In years in which an original NFL team has won, the market has generally gone up, while a victory by an old AFL team has been bearish. The original NFL and AFL teams were those in the respective leagues before the 1969 merger that created the current National Football Conference and American Football Conference. Since Pittsburgh was an original NFL team, a victory over the Denver Broncos in the AFC championship game would have ensured a win by an old NFL team in the Super Bowl. However, that didn’t happen. Now we have Denver and Green bay playing. Much of America is rooting for the Broncos to finally win a Super Bowl, but if that happens, we’ll be down for the year. If Greenbay wins we’ll have an up year!

Asia was once again in the headlines this week. How bad is the Asian economy? One of the most popular companies overseas is Amway Asia Pacific. They saw earnings plunge to 15 cents per share in the quarter ended November 30, down from 50 cents in the year-earlier period, and revenues fell almost 25%. Amway's stock fell 3 3/8 to 16 1/2 last week, and remains way below its 52-week high of 50. If Amway's sales and profits are any indication of the situation in Asia, some of the big consumer multinationals could be in for trouble here in the U.S.

One of the most widely watched headlines last week was that the yield on the 30-year bond fell to a new low of 5.70%. Yields in the short and intermediate term sectors of the treasury market plunged even more sharply than that of the long bond, while prices of futures contracts on Eurodollar and Federal funds rates soared. Interest rates in this portion of the yield curve saw their sharpest decline in almost a year and a half, and to a level that indicates the market is expecting the Fed to ease monetary policy. Interest rates, short and long term alike, continued falling in the face of economic news that typically has given the fixed-income markets pause, namely another surge in job creation by the U.S. economy. Nobody views with alarm the idea of hundreds of thousands of people finding jobs. Part of that can be traced to the absence of price increases. Plus, the prospect of balancing the budget, an unthinkable notion for nearly three decades, couldn't help but cheer those who had come to expect deficits for as far as the eye can see. It was bad news that was good news to the bond market. The continuing crisis in Asia, whose hot spot moved to Indonesia last week, cast a shadow throughout the global capital markets, with the short end of the U.S. Treasury market again the major beneficiary of investors' flight to quality. Just the utterance of the D word (deflation) and E word (easing) by these leading monetary officials was enough to induce the credit markets to discount their actualities. Still, to give the long bond its due, its attainment of a yield around 5 3/4 % now actually is more remarkable than four plus years ago. Short term rates in 1993 were far lower, producing a steep, upwardly sloped yield curve. This implies buyers are willing to sacrifice current yield for the time being in anticipation of still lower yields later on. As long as the economy remains strong however, the Fed is not likely to ease. Ominously, the lower rate structure isn't supporting stock prices. This phenomenon is unheard of in this generation and the last. Every post-World War II bear market has been a result of central banks' raising rates to snuff out inflation. Now equities are falling while bond yields are declining. Today the 30 year bond took a big spill but this may just be due to some much required profit taking. Stocks actually rallied off of their lows so it looks like the trend remains unchanged. The bulls always say this time it's different. This time, they may be right.

Economic Effects

Weekly chain store sales which usually come out on Tuesday’s were unavailable this week. Thursday showed housing starts eased in December but they were strong for the year. December starts were down -0.8% to a seasonally adjusted annual rate of 1.52 million. Slightly below economists' expectations for a 1.54-million-unit rate as building slowed at year-end in three of four major regions. For the full year 1997, builders broke ground on 1.476 million new homes. That was down a razor thin -0.1% from 1996's 1.477-million-unit rate when homes were going up at the fastest clip since 1.488 million a year in 1988. Regionally, starts fell everywhere last month except in the Midwest, where they jumped +16.4 to an annual rate of 320,000. In the Northeast, starts declined -18% to 132,000 a year and in the South they were down -0.6% to 672,000. Starts on new homes in the West fell -5.7% in December to an annual rate of 395,000. Also out were jobless claims. They gave analysts a surprise coming in lower than higher. Jobless claims fell -13,000 to 326,000. A better measure of the trend saw the four week average move to 329,000. On Wednesday the Beige Book summary of economic conditions was released. It summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials. They reported that as 1997 came to a close the pace of economic growth continued to be moderate. After a slow start in early December, retail sales gathered momentum in the days before Christmas and during the post-holiday weeks. Overall, retail sales for the holiday season were mainly at or slightly above expectations. Motor vehicle sales picked up at yearend due mainly to strong sales of sport utility vehicles, minivans, and light trucks. Manufacturing activity remained fairly strong, although some Districts reported signs of easing. Construction and real estate markets were strong at yearend, with tight markets for office and industrial space in several regions. Some Districts reported evidence of more speculative construction in response to increasing rental rates. Lending activity was brisk throughout the nation despite softer demand for consumer loans. There was some evidence of increased competition from Asian products in U.S. markets. Despite lower prices, oil and natural gas drilling activity was strong last month. Labor markets remained tight or very tight in all Districts. Reports of firms scaling back production or expansion plans due to labor shortages were more common. Some Districts reported increased wage pressures, particularly for retail workers and some skilled occupations. According to business respondents, prices were generally flat due to intense competition and lower import prices. All Districts reported that labor markets were tight or very tight last month. Although labor shortages appeared to be broad-based, some skilled workers were in especially short supply. Most areas noted problems in finding computer-related workers, construction skilled tradesmen, and technicians. Lower oil imports and cheaper imported goods fueled a big drop in the trade deficit in November. This helped the economy avoid the effects of Asia's financial crisis, for now. The trade deficit fell -11.6% in November to $8.0 billion after a -19.8% drop in October. Acting Undersecretary of Commerce Lee Price said lower oil imports and declining prices for other imports such as computers, (due partly to Asian currency devaluation’s,) contributed to the November decline. Deficits with Asian countries, including China and Japan, fell across the board. Private economists said the full impact of Asia's financial crisis, which started last summer picked up steam in the autumn but has yet to be fully reflected in trade data. Many economists expect the trade deficit with Asia to explode this year as products cheapened by falling Asian currencies flood into the U.S. At the same time, slower growth in the region will probably curtail U.S. exports. Indicators weren’t very significant overall this week. The best news this week was the trade deficit but that got bumped because of President Clinton’s extra-marital affairs.

Next week’s Economic data

On Monday existing home sales are out. New home sales were lower last week so this number shouldn’t have an effect on the market. Tuesday has weekly chain store sales reports and the employment cost index. The employment number could be an important indicator as we get another look at the pressures from rising wages. The number has moved markets in the past. On Wednesday we get durable goods orders. This number will give us a good read as to the strength in the economy. It has moved the markets in the past but this number has seen little response from the market of late. Thursday we get weekly jobless claims. On Friday we get gross domestic product and the Chicago purchasing managers report. The GDP number could be important as we should be able to see if there are any effects of the Asia crisis hurting us yet. This will probably be the most important indicator of the week. None of these economic indicators are likely to have much effect on the overall market.

Technically

The market is smack in the middle of being overbought or oversold once again from what indicators are saying. Stochastics are just turning over from a high neutral position. Relative strength is still stuck right in the middle of the chart. This is great as it shows indeciveness. Both our ARMS indexes are also undecided. They are continuing their great predictive ways so we must take what they are showing seriously.

More technical analysts were speaking out this past week. Elaine Garzerelli once again said that the Dow will be in a trading zone of 7000-8500 for this year. She said that the S & P 500 could lose 1-1.5% for the entire year. The 30 year bond could move down to 5.4% this year. John Murphy has moved into bear alert. He thinks the Dow needs to break below its old low to allow a real rally to start. His indicators are signaling that we could see a break. John Bollinger is also sounding cautious as he doesn’t like the way the advance/decline line is setting up. He feels we need to see a strong breakout to see new highs in the Dow and S & P.

Mclellan Oscillator: - 31 100 oversold +100 overbought
Summation Index: 1512

Five day arms: .96 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.18 .80 and below, overbought 1.00 and above, oversold

Bulls: n/a previous week 46.3 50% plus overbought/bearish
Bears: n/a previous week 35.0 50% plus oversold /bullish
Correction: n/a previous week 18.7

Five day Qvix: 22.52 10-15 bullish, low volatility 15-40 bearish, high volatility

Davidson’s View

The stock market was volatile in 1997, the options industry stayed in step, signaling to many that the business had, at long last, found their way. Volume, mostly that of equity options, set records. Even the long resistance from Dow Jones & Co. Gave in to licensing option products on its historic market averages; the Industrials, the Transports, and the Utilities. There were some hard times associated with options this past year. Speculator Victor Niederhoffer took a beating after making a spectacular bet that the stock market would rally on October 27 by selling out-of-the-money put options on S & P 500 futures. The market posted its biggest one day point drop ever. Ouch!! Credit spreads rule!!

One of the trademarks of this bull market has been the positive correlation between bonds and stocks. A strong bond market has provided a backdrop of low inflation that has helped fuel the bull market in stocks. But the fourth quarter of 1997 suggested that bonds and stocks may go their separate ways. While money flowing into stocks showed signs of slowing, bond funds attracted their biggest net inflows in four years. Not surprisingly, then, stocks had a flat to negative fourth quarter, and bonds and utilities led the way. What’s the likely reason for this switch from stocks into bonds? The growing deflationary threat arising from the problems in Asia. Ever since mid-year, when Asian currencies began to devalue, the ripple effect throughout the rest of Asia has produced a noticeable impact on the U.S. markets. If this deflationary scenario continues to unfold in 1998 as we expect, we may see bonds and stocks continuing to move in opposite directions. That may well mean a good year for bond investors and stengthen the possibility of us seeing a nice flat market!

MARKET CLOSES

We will continue to show the 1997 chart plus the 1998 chart until we get further into year.

Current Trades

Last week we were filled on the 900/895 February puts for a much higher credit than we expected and then this week we saw fills on the 1010/1015 calls. The volatility indicator (VIX) was holding its own around 20 so we were able to get decent spreads. The market had a lackluster week which is great for our trades. The sold side (900) of our puts saw the biggest premium decay. At it’s peak the option traded at $28.00! Today, it lost over half its value! The S & P index remained right in the middle of this expiration cycle this week which was great for premium decay!

Copyright c 1996. 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.