Agora Outlook

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

                                                                                                            May Expiration                May 21st 1999

Davidson’s View

Since everyone is talking about inflation, I thought I would also make a comment on it.   Since WWII, our stock market has experienced 10 big turning points where the market peaked and turned decidedly lower. Five of these lasted only three to six months but the other five continued for one to two years. Each of the 10 peaks was caused by a rise in inflation coupled with a tight monetary policy, and each of the 10 troughs was accompanied by a reversal in one or the other of those two factors. In the previous periods, politicians and the Federal Reserve seemed to make all the wrong decisions on what to do with interest rates. In contrast, today's politicians, and the Federal Reserve, are more aware that good markets serve their interests best so they are very aware of interest rate levels.

Currently, inflation may be dormant, but interest rates do matter. In fact, interest rates correlate more closely with market movement than earnings trends. Earnings trends may seem positive as we enter the second quarter, but the plunge in bonds late last week was a warning. These are the signals that may cause the fall: emerging economies are beginning to come back to life, oil and gas prices have continued to soar, and industrial metals have now taken off. The GDP price deflator rose by 1.4% in the first quarter, its highest rate in two years and, finally, with the jobless rate already at a 29-year low, FOMC members won't wait forever for the slowdown to materialize. Stock market traders haven’t seemed concerned about any of this, whereas nervous bond traders fighting the ''last generation's'' inflation wars are.

Although inflation remains "generally quite subdued," the Fed said in a 134-word statement, "domestic financial markets have recovered and foreign economic prospects have improved" since it slashed rates by three-quarters of a percentage point last fall. It also suggested that demand in the economy is growing faster than the economy's ability to supply goods and services, despite gains in productivity. The Fed's decision to adopt an end of meeting statement, that says a rate increase is more likely than a rate cut doesn't mean that higher rates are a certainty. Rather, it is a clear statement that Fed officials at this moment see a much greater risk of accelerating inflation than of a worrisome slowdown in the economy.

With Robert Rubin's resignation and the FOMC's decision to lean towards tightening monetary policy, there are valid reasons for long term fundamentalists to believe that our decade-long disinflationary expansion may indeed be drawing to a close. The decision to hold rates steady for now, and the statement's reference to the possible need for action in the "coming months," suggests the Fed is willing to wait a little while longer though the market’s message is clear. While the Fed may raise interest rates, it still has not. And for now that is what the market is interested in.

The bigger picture for the longer term is that this may be a last hurrah for the bull market for awhile. This will be perfect for our type of trading. There really is no reason to worry as of yet but as in 1994 no one expected an increase either and when it came the market took a big tumble. Federal Reserve meetings for the next few months are going to see a lot of attention from traders who’ll be keeping one finger on a sell button just in case there is a rate increase.

Technically

The short-term trend for stocks remains neutral to bearish. However, most indicators are oversold. This trend is contained in an intermediate term trend that is neutral to bullish. Momentum indicators for price, volume, and breadth continue to trend lower. While this is occurring the S&P 500 Cash is correcting sideways. We can have a situation where the momentum indicators bottom out with the S&P in neutral, having completed a sideways correction. When this has occurred in the past, we have seen powerful rallies.

Market sentiment‘s recent fear, as illustrated by increased put option buying on stock indexes, has faded, making us wonder if the risk to the down side in the short term is actually increasing. Bulls went over 60% in the past week and that is not a good sign longer term. The market may be living on borrowed time as the worries over the Fed and the prospect for higher interest rates sets in. As long as the S&P 500 stays above 1280, the technical trend for stocks remains up. If the Fed raises rates, it will not be fun at all.

Breadth has also turned negative once again and that is indicated in the Mclellan Summation index turning decidedly lower. The one thing that is good news for the market is that both the five and ten day Arms indicators are oversold. They are the most important indicator in our view so the sideways action in the market will likely continue.

Mclellan Oscillator: -14 -100 oversold +100 overbought
Summation Index: +1982

Five day arms: 1.03 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .99 .80 and below, overbought 1.00 and above, oversold

Bulls: 60.9 previous week 56.9 50% plus overbought/bearish
Bears: 28.7 previous week 31.0 50% plus oversold /bullish
Correction: 10.4 previous week 12.1

Five day Qvix: 27.26

Economic Effects

Tuesday

    Construction of new homes plummeted 10.1% in April, the sharpest decline in more than five years. Housing starts fell to an annual rate of 1.574 million units last month, compared to 1.751 million in March, marking the third straight monthly decline. After reaching a 12-year high in January. This report suggests the housing sector will play a less significant role in the economy's overall growth this year.

The weather has to take some of the blame for the sudden change. Construction that normally would have begun in the spring was started during the unusually mild winter. Costs are also part of the picture. Both mortgage rates and housing prices have been creeping up in recent months. Consumer prices shot up 0.7% in April, the biggest jump in almost nine years, driven in part by higher housing costs. Also, the interest rate on 30-year mortgages rose to an average 7.10% last week, approaching the 10-month high of 7.11% hit in mid-March. For much of this expansion, low mortgage rates, low unemployment and strong consumer confidence have propelled the housing market to levels that analysts kept saying were unsustainable.

February and March figures were both revised down from their original estimates. The housing-starts data, which is easily influenced by changes in interest rates, often fluctuate sharply from month to month. Indeed, compared to a year ago, construction of new single and multi-family homes was still up 2.1%. Demand continues to be robust. So much so that builders had difficulty in April finding enough building materials to meet demand. Single-family starts fell 11.1% in April after rising 1.3% in March, while multifamily starts, which are notoriously volatile, dropped 6.5% last month after falling 5.1% in March. Meanwhile, building permits fell 5% last month, reaching their lowest point since September, and confirming that spring building activity has leveled off, analysts said. Regionally, the West was the only part of the country that saw an increase in housing starts, with a 2% rise. The Northeast, Midwest and South reported declines of 7.2%, 6.8% and 14.6%, respectively.

Thursday

    The U.S. trade deficit hit a record $19.7 billion in March, the third record in a row as imports of both goods and services hit their highest levels ever.
U.S. exports of goods and services also rose in March, reflecting improving economic conditions in Asia, but the increase was not enough to offset record imports into the booming American market where consumer demand is strong. The widening gap was a surprise to economists who had expected a slight decline in the deficit to $18.5 billion from February's record $19.15 billion deficit. Some economists said they may lower their forecasts for economic growth because of the higher-than-expected deficits.  U.S. imports rose to a record $97.22 billion in March from $95.95 billion in February, while exports rose to $77.52 billion from $76.80 billion. The increase in March imports reflected higher crude oil prices as the volume of crude oil imports fell to 8.5 million barrels per day from 8.8 million barrels in February, but the average price rose to $10.43 per barrel from $9.46 per barrel, the department said. The March price was the highest since November 1998.
We know our manufacturing sector is doing better. Stronger exports will just take a little longer than expected. Steel imports were up in March to 2.6 million metric tons from 2 million metric tons in February, the department said. But preliminary data on politically sensitive steel imports showed that increase being reversed in April. Preliminary data showed steel imports dropping to 2.2 million metric tons in April. U.S. steelmakers have been pressing the government to curb imports of foreign steel which they say have hurt domestic companies and cost jobs.
 
The U.S. trade gap with Japan jumped to $6.49 billion from $5.27 billion in February. That was the highest monthly gap with Japan, America's third largest trading partner after Canada and Mexico, since October 1994, the department said. U.S. exports to Japan rose slightly to $5.29 billion in March from $4.79 billion in February. Imports from Japan jumped to a record $11.78 billion from $10.06 billion. The trade deficit with China fell to $4.14 billion in March from $4.62 billion in February as U.S. exports to China rose and imports fell slightly. The U.S. trade deficit with Western Europe rose to $3.16 billion in March from $2.25 billion in February. March imports of $18.4 billion from Western Europe were a record. At the same time, the U.S. trade gap with its North American Free Trade Agreement (NAFTA) partners also rose. The deficit with Mexico rose to a record $2.53 billion in March from $2.01 in February. The gap with Canada widened to $2.41 billion in March from $2.25 billion in February.
 
    The number of Americans filing new applications for unemployment benefits in mid-May fell by 12,000, a government report said Thursday, defying economists' expectations that new claims would hold steady. Initial claims for state benefits fell to 299,000 for the week ended May 15 from an upwardly revised 311,000 applications in the prior week. Economists polled by Reuters expected the fresh claims at 303,000, unchanged from the originally reported 303,000 for the week ended May 8. A computer error in one state the previous week caused most of the upward revision.
Claims have been hovering near 300,000 since early this year, a level consistent with a very tight job market, with no sign of weakening as the overall economy continues to grow at a healthy pace. Some economists believe that jobless claims will remain at low levels until the end of this year and that a break in this pattern is unlikely unless the Federal Reserve acts to slow economic activity.  The more closely watched four-week moving average number of claims, which irons out the more volatile weekly figures, fell for the second week in a row to reach 302,750, its lowest level since April 10.

Next Week’s Economic Indicators

On Tuesday we get Existing Home Sales and Consumer Confidence. This last week showed new housing starts fell 10% in the previous month. If existing home sales also fall it may help to show the Federal Reserve that consumers are slowing down on their spending which will help to keep the economy on a steady pace instead of overheating. A release on Consumer Confidence may also help to reveal this. If both of the numbers are strong bonds may not like it and sell off. In this case, stocks would probably also move lower. On Wednesday we get Durable Goods Orders. This indicator hasn’t moved the market very much in the past few months but once again, if there is strength revealed both stocks and bonds will fall. On Thursday we get Jobless Claims and Gross Domestic Product. The GDP number could be important, especially the price deflator part of the report. Last months deflator number was very strong. If it is strong, the market will fall sharply since this is about the most important indicator for the week. On Friday Personal Income and Spending will be out. This indicator has been in-line with expectations the last few months so it is unlikely we’ll see any surprises. Overall, the market is nervous about economic indicators and doesn’t want to see any type of strength in the economy at this time as inflation appears to be creeping back in.

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

10913.32

10829.20

-84.12

0.7

S&P 500

1337.75

1330.29

-7.46

0.5

S&P 500 Futures June.

1340.00

1334.80

-5.20

0.3

S&P 100

673.57

671.68

-1.89

0.2

Nasdaq

2527.88

2520.64

-7.24

0.3

Russell 2000

443.13

449.14

+6.01

1.4

30-Year bond

5.92%

5.77%

                     S&P 100 Expiration: 671.68
                     S&P 500 Expiration: 1339.44
                     S&P 500 May Futures Options Expiration: 1334.80

Program Trades

Full profits all around! In total this month we made 111% for cash trades and 49% in futures. Profits this month were lower because we couldn’t get into many put trades. This was because the market refused to move lower and our program indicated that there was a possibility for a break to the downside so we played it safe. We’ll be sending out more information about June’s expiration cycle in Sunday night’s e-mail which will include this month’s program numbers.

Current Trades

**Trades listed below are all for the current expiration cycle unless otherwise noted. Fill prices are averaged out as reports come in by subscribers being filled.**

Average Entry price

   

Weekly

 
   

Bid

Ask

last

         
 

S&P 500 Cash Trades:

     
May 1400 sold call for $8.75. This trade is left over from last months Strangle position of $31.75.

Sold Trade

0

0

0

         

1400 sold Call $14.00

Short Trade

0

0

0

1425 bought $7.00

$7.00 Credit spread

0

0

0

         
 

S&P 100 CashTrades:

     
         

710 sold OEX Calls $4.25

Long trade

0

0

0

715 bought OEX Calls $3.13

$1.13 credit spread.

0

0

0

720 sold OEX Call $2.25

Ultra trade

0

0

0

730 bought OEX Calls $1.25

$1.00 credit spread

0

0

0

         

700 sold Call $10.50

Short Trade

0

0

0

705 bought Call $8.50

$2.00 credit spread

0

0

0

         
 

S&P 500 Options Feb. Futures Trades

     
         

Sold 1400 Call average $10.50

Long Trade

0

0

0

Bought 1410 Call average $8.35

$2.15 credit spread

0

0

0

         

Sold 1425 Call $4.50

Ultra Trade

0

0

0

Bought 1430 Call $4.00

$.50 credit spread

0

0

0

         

May 1400 call for $9.50 This trade is continuing from a strangle last month.

Sold Trade $9.50

0

0

0

         

Sold 1220 Put $3.75

Long trade

0

0

0

Bought 1215 Put $3.25

$.50 credit spread

0

0

0

         

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

Short Trades

Long Trades

Ultra Trades

Outright Short Sales

1999 Current

170%

1999 Current

68%

1999 Current

74%

1999 Current

42%

1998

66%

1998

43%

1998

79%

1998

71%

1997

108%

1997

188%

1997

82%

   
1996

163%

1996

169%

1996

99%

   
    1995

93%

1995

76%

   
    1994

79%

1994

89%

   
    1993

177%

1993

long

   
    1992

112%

1992

long

   
    1991

162%

1991

long

   
    1990

166%

1990

long

   

Futures Trades

Outright Sells & Strangles

Long Trades

Ultra Trades

1999 Current 135% 1999 Current 46% 1999 Current 88%
1998 3 mths. 130% 1998 3 mths. 93% 1998 3 mths. 16%

Agora Outlook

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

                                                                                                            May Expiration                                            May 14th 1999

Davidson’s View

Newspapers read on Friday morning, Dow rises because of good inflation news. On Saturday they read Dow "collapses" on bad inflation news. Thursday’s gains in the Dow and other big cap indices appeared weak even though the producer inflation news was good news.

When the unwelcome uptick in inflation drove long-term interest rates to 5.92%, that was good enough to take the Dow down –194.00 points on Friday. A loss that will have investors thinking about what to do, at least over the weekend, giving them time to contemplate how the Federal Reserve might react to it all at its meeting Tuesday. Friday's fall erased all the gains amassed in the Dow through Thursday and then some, leaving the average off 118 points for the week at 10,913. If not for the huge advance by IBM, which in effect pronounced itself to be an Internet company, the Dow would have fallen –100.00 points further. The S&P 500 index held up somewhat better, seeing a –7.00 point drop on the week after losing 2% in Friday's sell off.

The consumer price index climbed a strong 0.7% in April, driven by a record 6.1% rise in energy costs. Gasoline prices saw the biggest rise since 1935. It was the biggest CPI gain since October 1990. Even worse, the "core" rate, which excludes energy and food prices, jumped 0.4% after gaining just 0.1% in each of the first three months of 1999. Next came news that industrial production rose 0.6% in April, the strongest advance since the summer of 1998. The capacity utilization rate edged up to 80.6% from a revised 80.4% in March.

Before the release of the CPI number, Globex S&P 500 futures were up but quickly fell to a –20.00 point deficit on the news. I have said for a few years now that the market has taken it for granted that inflation will always remain low and one day they would be surprised. Friday seemed to be that day. Even in an environment of strong productivity gains, there are limits to the economy's growth potential.

One factor that may help to save the market is that one month's data on inflation doesn't provide the Fed with enough information to get an accurate read on inflation. But the breadth of gains in the CPI, along with rising industrial material prices (the Journal of Commerce index reached a six-month high last week), strong U.S. growth and the turnaround in the global economy, give the central bank plenty of reason to adopt a tightening bias.

One thing for sure is that if they do adopt a tightening bias a person could say that the stock market has probably seen its high for the year or at least until the bond market moves away from the 6.00% level. In 1994 the tightening by the Fed first rocked the market but after investors realized that it was a good thing, both bonds and stocks rallied when the Fed actually tightened. It is hard to know how the market will react to an announcement of a tightening bias but with bonds oversold we may see a slight bounce which may support stocks in the short term. If the Fed doesn’t make an announcement it is also hard to tell what the market may do but because the bulls are still basically in charge we could see a rally. Over the longer term we may be entering a period of sideways action, which would be great for our type of trading. Generally May to September is a quiet time for the market, anyhow, as traders are going on holiday’s, etc.

Of note this coming week is the fact that we are very close to April’s expiration close and I mentioned at the beginning of this cycle that we have had 7 straight up expirations and the strongest percentage gains ever so it is time for a break. We only have to fall about 1% on the week to see a lower expiration close. In a way, I’d rather see an up close for the week as then it would make it great for trading in the month of June!!

 Technically

Most Indicators are oversold short term, dailies are mixed and weekly indicators remain overbought. 72% of all the stocks are now above their 50-day moving average. That is overbought, and with that many above, it will be hard for the market to move much higher. The average volume on the NYSE has been tapering off on the higher Dow readings. Typically, that is also a sign that the market is losing momentum.

One interesting piece of data that tends to shed light on the public mood is the amount of stock that NYSE specialists, the buyers and sellers of last resort on the exchange floor, have sold short. The recent numbers show an unusually high short reading, highest in about a year, which tends to indicate that there haven't been enough public sellers to accommodate all the rabid buying interest recently; a gap which is made up by specialists going short to fulfill demand. This tends to occur just before public buying demand peaks. Specialists trading has proven to be a useful turning-point signal in the past as they generally go opposite of what the public is doing.

Mclellan Oscillator: -40 -100 oversold +100 overbought
Summation Index: +2231

Five day arms: .94 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .87 .80 and below, overbought 1.00 and above, oversold

Bulls: n/a previous week 58.6 50% plus overbought/bearish
Bears: n/a previous week 27.6 50% plus oversold /bullish
Correction: n/a previous week 13.8

Five day Qvix: 27.55

 

Economic Effects

Tuesday

The productivity of workers surged in the first three months of this year signaling the economy is in top shape with no signs of inflation in its ninth year of expansion. Productivity, measuring the efficiency of the work force, climbed 4% in the first quarter ended in March. Even though that was a bit of a slowdown from the 4.3% gain in the fourth quarter, the performance was remarkably strong, especially in the advanced stage of the business cycle when productivity growth is typically much more subdued.

The first-quarter advance in productivity for workers outside the farm sector was well above the 3% increase expected by economists. Productivity is crucial to healthy, non-inflationary growth. When more workers produce more goods and services per hour, businesses can become more competitive, enabling them to keep prices lower. Productivity growth also enables firms to afford to grant workers solid wage gains without cutting into profits. Indeed, consistent with the robust productivity in the January through March quarter, unit-labor costs, a key gauge of wage inflation, rose just 0.3% following a 0.4% drop in late 1998. Economists had expected a larger gain of 0.5% in the first quarter.

Although productivity figures can be volatile from quarter to quarter, the latest figures add weight to the notion of a marked pickup in productivity over the past few years from its trend growth-rate of around 1.1% in recent decades. The rise in productivity in the first quarter of this year compared to the same quarter a year ago, a closely watched barometer of longer term trends was up 2.8%. In the fourth quarter, productivity was up 2.7% versus the same period a year ago.

Thursday

U.S. wholesale prices jumped in April as energy costs recorded their biggest rise since just before the Gulf War, but analysts saw little cause for concern in the inflation outlook. The Producer Price Index, measuring prices paid to the nation's factories, farms and refineries, rose 0.5% last month after a 0.2% gain in March. Stripping out the volatile food and energy costs, the core PPI rose just 0.1% in April after a flat reading in the prior month. The numbers were in line with the expectations of private economists. Economists in a Reuters survey had predicted a 0.6% rise in the PPI and a 0.1% increase excluding food and energy. The PPI is running at a year-on-year rate of 1.1%, the biggest 12 month rise since a 1.5% gain in the year to March 1997.  Because energy prices were behind the latest gain in the PPI, many economists have said a blip higher in the index would not suggest a broad trend of rising inflation pressures at the wholesale level. In fact, inflation is still expected to remain tame, though it may not keep falling as it has been in recent years.

Oil prices have risen higher because of a deal by the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC oil producers to cut production in an effort to reduce the supply overhang. The energy component of the PPI climbed 5.1%, the largest increase since a 7.5% increase in October 1990, just before the start of the Gulf War. The surge follows a long decline in oil prices that began more than two years ago.

Gasoline costs soared 29.1% last month, the largest rise on record. Heating oil costs were up 14.3%. In other components, food costs fell 0.9% in April. Passenger car costs edged up 0.2%, and prices of capital equipment were flat. Crude oil futures in New York hit $19.05 a barrel on May 5, the highest level since December 1997. The markets rallied on the good news, at one point the 30-year bond was up over a full point.

Sales at U.S. retail stores barely edged up in April, a second straight month of slim gains that implied some leveling off in the pace of consumer demand. Total retail sales increased 0.1% to a seasonally adjusted $239.33 billion after a revised 0.1% gain in March that previously was reported as a 0.2% rise. That was weaker than economists' forecasts for a 0.3% pickup in April sales and partly reflected declines in new-car and department-store sales.

The news helped to confirm to bond traders that it meant reduced chances that Federal Reserve policymakers, who meet next Tuesday would consider a higher interest-rate strategy. Analysts said the early evidence of some second-quarter slowing in retail sales was not worrisome after a period of exceptionally robust spending.  Sales of new cars, which account for one-quarter of total monthly business, dropped 0.8% to $59.05 billion on top of a 1.1% plunge in March. Excluding autos, April retail sales were up 0.4% after a matching 0.4% March gain.

The softer-than-expected rise in overall April retail sales came despite big price-driven gains at gasoline service stations. Gasoline sales jumped 2.4% to $13.11 billion following a 2.5% surge in March. Excluding gasoline, retail sales would have dropped 0.1% in each of March and April, the department calculated. April sales at department stores selling general merchandise were down 0.4% to $31.48 billion, a reversal after a 0.9% increase in March.

Despite the apparent easing in monthly retail business, analysts said before the report was released that there was little reason to fear a sharp downturn in consumer spending, a primary driving force behind the economy's growth. Consumer confidence remained at high levels throughout April, cushioned by ample jobs, rising incomes and a buoyant stock market.

The number of applications for U.S. unemployment benefits came in slightly higher than expected at 303,000 in the latest week, government figures showed Thursday, but there was no sign of a weakening in the red-hot job market. Initial jobless claims were unchanged in the week ending May 8 compared to the prior week, the Labor Department reported. It said claims for the week ending May 1 were revised up to 303,000 from a previously reported 301,000. Claims have been hovering near 300,000 since early this year, a level consistent with a very tight job market. In the latest week, the closely watched four-week average of claims, considered a more accurate barometer of job activity fell to 304,250 from 308,250 in the prior week.

 Friday

Consumer prices rose in April at the fastest rate since just before the Gulf War, the government said Friday, marring a near-perfect inflation picture in the economy and stoking fears of higher interest rates. The Labor Department's Consumer Price Index rose 0.7% last month after a 0.2% gain in March. But the closely watched core CPI, which strips out volatile food and energy costs, also picked up sharply, rising by 0.4% after a 0.1% gain in March. Bond prices fell sharply on the news, which markedly stepped up the level of suspense surrounding next week's meeting by Federal Reserve policymakers to discuss interest rates.

It puts the Fed back into again and I would have to assume they're going to adopt a bias to tighten. Prior to the CPI report market players were relatively confident that a near-term rise in interest rates was not in the cards despite the economy's strong growth. But after the data came out, the market was full of speculation that the Fed might adopt a formal ``bias'', or inclination, toward higher rates as early as Tuesday.

Economists had braced for some strength in the CPI because oil prices have been climbing in the last few months in response to a deal by major oil-producing countries to slash production. But the consensus of economists in a Reuters poll was nowhere near what the actual report showed. The CPI had been expected to rise by 0.4%and the core rate was projected to have increased by 0.2%.  April's gain in the overall CPI was the largest since October 1990, just a few months before the Gulf War when a tightening of oil supplies triggered price rises. The core index showed its biggest gain since January 1995.

A stronger-than-expected pickup in industrial output during April, reported by the Federal Reserve Friday, confirmed a quickening heartbeat in the nation's manufacturing sector. Total industrial output by the mines, factories and utilities climbed 0.6% last month, the strongest monthly gain since a 1.4% jump in August last year. That exceeded Wall Street economists' forecasts for a 0.4% increase and reflected solid gains among a broad array of manufacturing industries, the Fed report showed. The robust increase in April industrial output followed a sharply upward revised March advance of 0.5%. Businesses were running at 80.6% of their total capacity in April, up from 80.4% in March for the fastest operating rate this year. Production by manufacturing industries climbed 0.6% in April, the strongest monthly pickup since a 0.7% rise last October following 0.4% gain in March. Automakers, for example, cranked up assembly lines to churn out new vehicles at a rate of 12.9 million a year, up from 12.6 million in March. It meant auto factories were turning out new cars and trucks at the fastest rate since a matching 12.9 million a year last November, the report showed.  The inventory-to-sales ratio that measures how long it would take to totally deplete existing stocks of goods fell to a record low of 1.35 months' worth, down from 1.36 months' in February. Previously, the department said February inventories had risen by 0.4 percent and that sales had increased 0.9%.

Next Week’s Economic Indicators

This week is an expiration week so indicators are not likely to have much of an effect on the market and it is quiet, anyhow. On Tuesday we get Housing Starts but this number will be ignored as the Federal Reserve is meeting to discuss interest rate policy. There is a wide belief now that they will announce that they are turning towards a tightening bias. The announcement will come at 2:15 p.m. est. On Thursday we get Jobless Claims, International trade figures and the March Federal Open Market Committee meetings minutes. This indicator is the only one that may move the market as it will reveal if the Fed was even thinking of changing their bias back then.

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

11031.59

10913.32

-118.27

1.1

S&P 500

1345.00

1337.75

-7.25

0.5

S&P 500 Futures June.

1351.00

1340.00

-11.00

0.8

S&P 100

681.74

673.57

-8.17

1.1

Nasdaq

2503.61

2527.88

+24.27

0.9

Russell 2000

436.11

443.13

+7.02

1.6

30-Year bond

5.81%

5.92%

 

Program Trades

We haven’t been able to get into any other put trades yet other than the one we placed last week, as the market has not remained lower for very long. Our program is on the cautious side right now so we don’t want to expose ourselves to any possible losses in case the market does take a steep dive this week so we are sticking to this month’s Program numbers. We may get a signal for a Short trade if the market does fall and we’ll let you know if there is a trade available as any of our program number trades will not likely be able to be filled because premiums will start to decline rapidly. All of our current trades are showing a 95% probability of expiring worthless this coming Friday.

 Current Trades

**Trades listed below are all for the current expiration cycle unless otherwise noted. Fill prices are averaged out as reports come in by subscribers being filled.** 

Average Entry price

   

Weekly

 
   

Bid

Ask

last

         
 

S&P 500 Cash Trades:

     
May 1400 sold call for $8.75. This trade is left over from last months Strangle position of $31.75.

Sold Trade

N/a

N/a

Na/

         

1400 sold Call $14.00

Short Trade

N/a

N/a

Na/

1425 bought $7.00

$7.00 Credit spread

N/a

N/a

Na/

         
 

S&P 100 CashTrades:

     
         

710 sold OEX Calls $4.25

Long trade

N/a

N/a

Na/

715 bought OEX Calls $3.13

$1.13 credit spread.

N/a

N/a

Na/

720 sold OEX Call $2.25

Ultra trade

N/a

N/a

Na/

730 bought OEX Calls $1.25

$1.00 credit spread

N/a

N/a

Na/

         

700 sold Call $10.50

Short Trade

N/a

N/a

Na/

705 bought Call $8.50

$2.00 credit spread

N/a

N/a

Na/

         
 

S&P 500 Options Feb. Futures Trades

     
         

Sold 1400 Call average $10.50

Long Trade

N/a

N/a

Na/

Bought 1410 Call average $8.35

$2.15 credit spread

N/a

N/a

Na/

         

Sold 1425 Call $4.50

Ultra Trade

N/a

N/a

Na/

Bought 1430 Call $4.00

$.50 credit spread

N/a

N/a

Na/

         

May 1400 call for $9.50 This trade is continuing from a strangle last month.

Sold Trade $9.50

N/a

N/a

Na/

         

Sold 1220 Put $3.75

Long trade

N/a

N/a

Na/

Bought 1215 Put $3.25

$.50 credit spread

N/a

N/a

Na/

         

 

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

Agora Outlook

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

                                                                                                            May Expiration                                     May 7th 1999

Davidson’s View

 

The market sold off on Thursday as a result of Federal Reserve Chairman Allan Greenspan’s comments given before the Chicago Fed. In the past, the market has hung on every word Greenspan utters and has always had trouble predicting his thoughts. His choice of words has always been very carefully selective and his interpretation of the English language is second only to President Clinton.

Of most concern were his comments about stock valuations. The last time he made the comment about "irrational exuberance" the market scoffed at him. Once again, he was like fox, refusing to give investors any clue on his thoughts with respect to monetary policy. Analysts interpreted his comments as negative because he did not explicitly say that he plans to raise interest rates at the Fed's next meeting. "The breadth of technological advance," he said, "and its application has engendered a major upward revaluation of business assets, both real and intangible. That revaluation has induced a spectacular rise in equity prices that to many has reached well beyond the justifiable." Analysts have been saying this for several years, yet people were making money so they didn’t care. The market has decided that perhaps a re-evaluation is in order. 30-year bond yields are at their highest levels in almost a year, so the credit markets have decided that this period of easy money isn't going to last. It appears that only now the stock market is finally waking up to that fact.

There is no real reason for the Fed to raise rates right now. The global economy is still recovering; inflation is not a concern; there is a war in Yugoslavia and the European Monetary Union isn’t lowering rates. Higher U.S. interest rates would lead to global financial calamity, and that’s just not allowed right now. His comments seemed to be warming us up to the idea that while interest rates will remain stable for now, prepare yourselves, because there is a good chance that rates will rise before the end of the year.

Last year interest rates were falling and now they are rising but exactly like last year, at least so far, the markets have been strong in April, and the economic news has been very upbeat. Just like last year, when the S&P 500 made a new all-time record high on April 22, 1998, this year it made its high on April 27, 1999. The Dow continued to climb, reaching a new high on May 12, 1998, but the S&P 500 and Nasdaq Composite failed to tag along. So far, this year, the S&P 500 and Nasdaq are following last year’s example, continuing to trade sideways the last two weeks, even with the Dow continuing to move ahead.

The character of this rally has obviously changed because the broader market has also started to move up. Many analysts believe that we are having a sector rotation instead of a correction. Maybe so, but until we get through these next few weeks, I remain skeptical.

 Technically

Most indicators are in a neutral position and the stochastics oscillator is nearing an oversold reading. Momentum is still moving lower which is a bad sign overall, however, the Summation index is giving support to the market now that it has broken its long term trend line.

The speed at which the Dow Industrials ran from 10,000 to 11,000 has been unprecedented. It is particularly interesting when we look at the difficulty in crossing through 10,000. The question is, have we declined enough? In mid-March we declined from 10,158 to 9547 (roughly 600 intra-day points or 6%). So far, on this decline we've retraced from 11140 to 10703 (roughly 430 intra-day points or 4%). In comparison, the Nasdaq Composite declined 7% in mid-March as compared to a current decline of 9%. On a pure percentage basis, it appears we may have declined enough, but we haven’t seen a huge volume sell off or a big spike up saying that the decline is over yet. Besides that, it appears the S&P 500 is remaining in its upward channel line and is starting to set up a triangular formation which will probably last until expiration. Because of this the market will likely continue to move sideways unless we see a break in either direction with a solid close below one of the trend lines.

Mclellan Oscillator: +67-100 oversold +100 overbought
Summation Index: +2012

Five day arms: .93 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .96 .80 and below, overbought 1.00 and above, oversold

Bulls: 58.6 previous week 56.1 50% plus overbought/bearish
Bears: 27.6 previous week 30.7 50% plus oversold /bullish
Correction: 13.8 previous week 13.2

Five day Qvix: 26.78

 

Economic Effects

Monday

Consumers dipped further into their savings to maintain the pace of spending in March as they extended a shopping spree that has fueled strong economic growth. Consumer spending rose 0.4% in March to a seasonally adjusted annual rate of $6.080 trillion, half the 0.8% February gain. Incomes also increased by 0.4% to $7.383 trillion in March after a larger 0.5% advance in February. Incomes also increased by 0.4% to $7.383 trillion in March after a larger 0.5% advance in February. A booming stock market that has brought profits to investors and fattened pension plans has helped foster consumers' willingness to spend, analysts say, while low interest rates have made them less fearful of debt.

Wage rises have been minimal, though, despite complaints from construction companies and others about the difficulty in finding skilled workers to hire. As a result, there is little or no evidence of current inflation pressures from wages and few signs of accelerating prices.

Savings suffered again in March, with consumers withdrawing money at an annualized rate of $36.1 billion. That came after drops in savings at rates of $37.3 billion in February and $19.4 billion in January. Savings had been depleted at a smaller $14.5-billion rate, but that number was scaled up sharply in the March report.

The markets paid little attention to the income and spending data. Bond prices weakened, continuing a trend that set in Friday after the government reported vigorous first-quarter economic growth. That fanned fears that a potential pickup in inflation might trigger higher interest rates by the Federal Reserve to keep prices in check.

March incomes reflected modest job gains during the month as the private sector wages and salaries rose at an $8.8-billion rate during the month compared to a stronger $22.1-billion jump in February. Still, analysts said before the report was issued that an increase in early income tax refunds and relatively low inflation were bolstering consumers' readiness to spend. The March spending increase was concentrated in services, which climbed 0.7% to $3.564 trillion, more than double February's 0.3% rise. Spending on non-durables like food and clothing gained 0.4% to $1.746 trillion a year, down from a 1.1% advance in February. But spending on costly durables like new cars fell 0.7% to $770.9 billion, a reversal after February's big 2.2% jump.

Manufacturing grew for a third straight month in April, the National Association of Purchasing Management (NAPM) reported, but economists said the pace of production was not strong enough to revive inflation. The NAPM said its closely watched manufacturing index stood at 52.8 in April, down from 54.3 in March, and falling short of economists' forecast for a reading of 55. A reading above 50 suggests growth while a level below 50 implies contraction.

The NAPM index had come in below 50 for eight straight months through January 1999. Economists said the rise in the NAPM employment index to 49.5 in April from 48.0 in March could foreshadow some growth in manufacturing employment in the Labor Department's monthly jobs data in April or May.

Economists said that later this year demand for U.S. goods from strengthening economies in Europe and Japan could increase demand for U.S. exports and offset, at least partly, any slack created by more moderate U.S. consumer demand. Even the rise in the NAPM prices index to 49.9 in April from 43.2 in March would not be read as a sign of upward inflation pressure, economists said.

Stocks rallied as news of moderate U.S. manufacturing activity in April helped quell concerns about inflation. The bond market, which had feared a more robust reading on manufacturing, reacted to the news by erasing most of its early morning losses.

The March incomes number reflected fairly modest job gains in the month, when severe weather curbed some construction activity. Commerce said wages and salaries paid by private-sector employers rose at an $8.8-billion annual rate after a much stronger $22.1-billion jump in February. 

A separate report from Commerce showed March construction spending advanced 0.5% to a seasonally adjusted $708.1 billion, down from a 2% increase in February.

Tuesday

Rising stock prices and signs of a backlog in the delivery of orders by vendors pushed a key gauge of future economic activity higher for the sixth straight month in March, signaling continued strength in the economy. The Index of Leading Economic Indicators rose 0.1% to 107.3 in March, up from a revised level of 107.2 in February. The results were in line with economists expectations. Because the leading index is up 1.6% since September of last year, there is strong confidence that this expansion will continue at a robust pace. The index of leading indicators is designed to forecast economic activity six to nine months in advance. A backlog in delivery of goods indicates increased demand, helping to drive the index higher. A decline in building permits and consumer expectations limited the gain.

It was also reported that its coincident indicators, which measure current activity, rose 0.2% and the lagging index, which measures the economy's past performance, rose 0.2% in March. Taken together, the board said the three index components show a healthy economy that will continue to expand through to late 1999 at least. The leading indicators are calculated from a base of 100, set in 1992. First calculated in the late 1960s, it is periodically fine-tuned, with figures from past years revised.

Wednesday

Stronger demand for transportation equipment helped factory orders rise 2% in March, reversing a contraction of 1.8% in February, a sign the sluggish manufacturing sector may have begun its recovery. The February decline was also revised to a fall of 1.8% from a previously reported drop of 2.5%. The March rise, helped by larger orders for long-lasting durable goods, industrial machinery, electronics and transportation equipment, was the fourth increase in the past five months.

Excluding transportation equipment such as aircraft and shipbuilding, orders rose a more modest 1.4%. Transportation equipment led March's increase rising 6.2% to $48.2 billion, reversing a sharp drop of 13.3% in February, which was the largest drag on February's performance. Economists had expected a more modest rise for March factory orders of 1.2%. Shipments of finished products increased 1.5% in March to $348.9 billion after a rise of 0.6% in February and order backlogs increased 0.2% to $527 billion following a 0.1% February decrease. Orders for electronics rose 4% to $34 billion after a drop of 6.4% in February, orders for industrial machinery and equipment rose 3.2% to $38.2 billion after a fall of 0.3% in the previous month while orders for long-lasting durable goods increased 2.9% to $199.4 billion after a contraction of 3.9% in February.

Thursday

Initial jobless claims rose by a larger than expected 6,000 last week, in a report that suggested employment prospects for workers remained strong. Insurance benefits rose to 301,000 in the week ended May 1 from a revised 295,000 in the prior week. Economists had forecast a rise to 298,000. The closely watched four-week moving average fell to 307,000 in the latest week from 307,500 in the prior week. The moving average irons out weekly fluctuations, giving a more reliable picture of labor market trends.

Friday

The economy created jobs at a healthy pace in April even as wage pressures remained muted and the nation's unemployment rate inched higher, the government said today. The jobless rate crept up to 4.3% from 4.2% in April, the Labor Department reported. The number of workers on payrolls outside the farm sector grew by 234,000. That compared to an increase of a mere 7,000 in the previous month which had originally been reported as a 46,000 gain.

The April report largely matched analysts' expectations. Economists polled by Reuters had forecast payrolls to rise by 230,000 and the unemployment rate to remain steady at 4.2%. They initially greeted the report with relief, saying it had reduced the chances that the Federal Reserve would raise interest rates soon in a bid to cool off the booming economy. The 30-year bond rallied after the report's release, but then fell back. The bond had been falling Thursday after Federal Reserve Chairman Alan Greenspan warned of inflation risks and raised fears of higher interest rates.

Average hourly earnings, a closely watched gauge of wage pressures that could mean higher inflation, increased by only 3 cents to $13.11 in April. Over the past year as a whole, hourly earnings grew by 3.2%, the smallest increase since a 3.0% annual gain in March 1996. The length of the average work week rose to 34.5 hours from 34.4 in March, it added. April's job gains were led by the service sector, where 131,000 new jobs were created. The construction industry, where bad weather had caused steep job losses in March, added 8,000 new jobs. Friday's data was the latest in a string of reports indicating the world's top economy continues to defy all expectations of a slowdown even in its ninth year of an unbroken expansion.

 Next Week’s Economic Indicators

On Tuesday we get Productivity and Costs. This indicator is always a leading indicator to let us know if companies productivity is holding up to their expense costs. The numbers could move the market if wage pressures reveal coming inflation. On Thursday we get Jobless Claims, Overall Retail Sales and the Producer Price Index. The PPI number could have an effect on the market as commodity prices have been increasing the past few months. On Friday we get the Consumer Price Index, Business Inventories and Industrial Production. Once again the CPI number could have an effect on the market but the industrial production number could move the market even more if it confirms a strong productivity costs number from Monday.

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

10788.70

11031.59

+242.89

2.2

S&P 500

1335.16

1345.00

+9.84

0.7

S&P 500 Futures June.

1338.00

1351.00

+13.00

0.9

S&P 100

675.64

681.74

+6.10

0.9

Nasdaq

2542.88

2503.61

-39.27

1.5

Russell 2000

432.82

436.11

+3.29

0.8

30-Year bond

5.66%

5.81%

Program Trades

So far, this month it has been easy to get Call trades but getting into Put trades has been difficult, as the market hasn’t moved lower and stayed for any length of time. Even when it has, Puts have not been very liquid, as premiums are very tight. The put/call ratio on the S&P 100 is now at its lowest reading in three years as investors have been buying puts hoping for a correction. This usually causes prices to be very tight so it is hard to get spread fills. Because it is a contrary indicator it also means that the market is unlikely to fall very much. So far, this has been the case since the May expiration cycle started. The market could move into a corrective period at any time so we will continue to keep our put trades on at their current levels. Call trades are in great shape with a reading above 92% probability for all of this month’s current Call trades to expire worthless.

Current Trades

**Trades listed below are all for the current expiration cycle unless otherwise noted. Fill prices are averaged out as reports come in by subscribers being filled.**

Average Entry price

   

Weekly

 
   

Bid

Ask

last

         
 

S&P 500 Cash Trades:

     
May 1400 sold call for $8.75. This trade is left over from last months Strangle position of $31.75.

Sold Trade

2.88

3.50

2.50

         

1400 sold Call $14.00

Short Trade

2.88

3.50

2.50

1425 bought $7.00

$7.00 Credit spread

.63

1.06

.68

         
 

S&P 100 CashTrades:

     
         

710 sold OEX Calls $4.25

Long trade

1.88

2.00

1.88

715 bought OEX Calls $3.13

$1.13 credit spread.

1.13

1.18

1.13

         

720 sold OEX Call $2.25

Ultra trade

.68

.75

.88

730 bought OEX Calls $1.25

$1.00 credit spread

.32

.38

.38

         

700 sold Call $10.50

Short Trade

4.13

4.25

4.25

705 bought Call $8.50

$2.00 credit spread

2.88

3.00

3.00

         
 

S&P 500 Options Feb. Futures Trades

Hi

Low

Close

         

Sold 1400 Call average $10.50

Long Trade

4.50

3.00

4.00

Bought 1410 Call average $8.35

$2.15 credit spread

2.60

2.00

2.60

         

Sold 1425 Call $4.50

Ultra Trade

1.40

1.00

1.40

Bought 1430 Call $4.00

$.50 credit spread

.80

.70

.80

         

May 1400 call for $9.50 This trade is continuing from a strangle last month.

Sold Trade $9.50

4.50

3.00

4.00

         

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

Agora Outlook

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

                                                                                                            May Expiration                                             April 30th 1999

This week the Dow almost hit the 11,000 level coming only 60 points away at one juncture. It’s important to note that the Dow is currently trading almost 18% above its 200-day moving average, which historically leads to healthy corrections. In the meantime, the Dow remains in an uptrend and one has to respect the uptrend but it looks like a possible reversal may be on its way.

If you look at the market action, trends began to change substantially last week. In an exact reversal of the recent trend, the big cap, technology weighted S&P 500 and Nasdaq indices experienced declines, while the broad-based Value-Line Arithmetic average zoomed up 5.00%. Only once before (1971-73) has there been this much fragmentation in the stock market favoring a few large cap stocks over all the other stocks that trade on U.S Exchanges.

It appears that we have the safest market in the world as we have seen billions of dollars being funneled into a few stocks. Since the S&P 500 and the Nasdaq composite are market cap weighted, this handful of stocks dominate the massive over valuation of those indices. One study we read this week illustrated this very clearly, as it segregated the price/earnings ratio of the top 10 stocks in the S&P 500 from the other 490 issues covered by that index. The median P/E of the top 10 stocks was 39, while the median of the 490 remaining issues was only 19. This shows very clearly, that unless investors have been totally invested in those 10 issues, they have obviously had disappointing results in recent years.

Another study said that if you removed the top 10 stocks from the Nasdaq Composite index, it would have declined 18% in 1998, instead of the overall gain of 38% that went into the record book. Based upon the close two weeks ago, if you look at the 2000 stocks that compose the Russell 2000, and just remove the few internet stocks, the year over year loss would have been 37%. Few would argue that while the Dow sets daily new all-time record highs, most stocks have been in a protracted bear market.

So you can see, the stock market gains of recent years have not been all that they have appeared to be. But since they have, by and large, been made by the biggest market capitalized stocks, the gains have managed to move the total market cap of the U.S stock market up substantially. These large-cap indices are the most prominent measure of U.S stocks.

My long-term projection has been that the over-valuation of the S&P 500 will be corrected, with the large-cap domination experiencing long periods of under performance resulting in either a down market of even better a sideways market. Perfect for our type of trading. This would also mean that the broader market would start to see some money flow into it, as has been the case the past few weeks. Last week's performance, when the Russell 2000 moved up 6% in relation to the S&P 500, certainly made people take notice. At the same time, we saw the Value-Line arithmetic average breaking out from a 1-year bottoming head and shoulders formation on big volume. On the positive side technically, we continue to see a broadening out of the rally, with small and mid-cap stocks breaking out of recent trading ranges.

As I have mentioned before, this broadening out occurred last year also and the last week of April proved to be a major top for most stocks. With the new all-time record highs in the S&P 500 and the Nasdaq Composite, only 76 stocks were able to join the indices into that new high territory two weeks ago. So, as we enter May it is still hard to tell what will happen to the market but it looks like the worries of inflation, overvaluation and higher interest rates may hold the big caps back from any new highs.

Technically

In the short term, most technical indicators are oversold but intermediate term indicators are just starting to roll over from an overbought condition. One of the most important indicators for the overall market is momentum. Weekly momentum gauges have now turned decidedly lower which could indicate any further upside would likely be met with strong resistance and selling. The Mclellan Oscillator is near overbought territory but it has been sitting around +100 for a few weeks now. The summation index has moved higher showing that the broader market is starting to rally also. However, it is about to reach a down trend line that was started two years ago. If it breaks the down trend line we may see the broader market continue its rally. Arms indicators are in a neutral pattern. Overall, the market looks tired and even though it sold off most of this week it looks like the selling may continue. One could expect a slight bounce for the first couple of days to work off the oversold condition but it wouldn’t be surprising to see selling continue as we move into the end of the week.

Mclellan Oscillator: +85 -100 oversold +100 overbought
Summation Index: +1591

Five day arms: .99 .80 and below, overbought 1.00 and above, oversold
Ten day arms: 1.00 .80 and below, overbought 1.00 and above, oversold

Bulls: 56.1 previous week 56.4 50% plus overbought/bearish
Bears: 30.7 previous week 30.8 50% plus oversold /bullish
Correction: 13.2 previous week 12.8

Five day Qvix: 25.19

 

Economic Effects

Tuesday

A robust labor market, affordable interest rates and strong consumer demand pushed existing home sales to a new record in March, signaling a surge in retail sales and possible Federal Reserve action early next year.

The National Association of Realtors (NAR) said March existing home sales rose 0.6% to a record 5.05 million unit annual rate from 5.02 million units in February. March resales were up 3.7% from 4.87 million units a year ago in March 1998. It was the fourth consecutive month that sales were above five million units, easily beating economists' forecasts for 4.92 million units. The rise in real incomes has enabled people to buy cars and homes at the same time, further fueling the spending boom. Incomes aren't constraining people. People not only are buying very heavily for the home but they also have more income to buy automobiles.

By region, March resales were strongest in the West, where they rose 2.8%, and weakest in the Northeast, which had a 2.7% drop last month. Sales rose 0.8% in the Midwest but were unchanged in the South. The median price for an existing home was $132,700 in March, up from $129,500 in February and also up from $127,100 a year ago in March 1998. Half of the homes sold for above the median price and half below.

A strong job market and a surge in wages unseen in a generation boosted consumer confidence for the sixth straight month in April, as consumers shrugged off the war in Kosovo, rising gas prices and concerns that stocks are too high. The fact is, life is going on in spite of those things. Few see doom around the corner.

The Conference Board, a private business research group, reported its consumer confidence index rose nearly a full point to 134.9 from a revised 134 in March, a stronger performance than economists had expected. An index designed to measure consumer expectations for the next six to nine months had an even bigger increase, rising to 108 from 105.5. The survey is an important economic indicator because consumer spending accounts for 2/3rds of the nation's overall economic activity.

The driving force behind the current bullishness has been the lift provided by a labor market where jobs are more plentiful than any time in recent memory and, as a result, starting wages for skilled workers are on the rise. The economy's steady growth has created the rare combination of low unemployment and low inflation, giving people greater ability to spend. The average income last year was $26,412, up 4.4% from 1997, significantly outpacing inflation. Between the early 1970s and the early 1990s, real wages grew by a meager half percent a year.

Nonetheless, economists had anticipated the consumer confidence figure would remain flat in April. Instead it continued a steady rise that began last fall, in tandem with a rebound in the market. The rising stock market has been a help in lifting confidence. Consumers generally feel better about day to day life and with how they are spending their money.

The consumer confidence index, started in 1967, is compiled from responses to questions sent to 5,000 households nationwide. The survey polls consumers on matters ranging from job prospects to buying plans. The index compares results to its base year, 1985, when it stood at 100.

Wednesday

New orders for most manufactured goods, from new cars to computers, bounced back in March from a February slump. The value of new orders for all types of durable goods, items intended to last three years or more, gained 2% last month to a seasonally adjusted $197.75 billion after a revised 3.9% drop in February. The March pickup surpassed economists' forecasts for a 1.2% increase in orders. Manufacturing had lagged other sectors of the steadily expanding U.S. economy, partly because exports suffered after Asian countries entered a financial crisis in mid-1997. Transportation orders, which account for more than one-fifth of monthly business, gained 3.6% to $47.34 billion in March after plunging 12.8 percent in February. Excluding transportation, March orders rose 1.5% after a 0.8% drop in February.

Analysts said the report implied U.S. manufacturing industries might soon benefit from an easing in Asia's financial woes that should make the region a better customer for American-made goods. We are still faced with a picture of a very robust domestic economy, a weak external environment, but the external environment is becoming less weak than it was and there's no sign of a domestic slowdown. Bond prices initially weakened on the report of stronger orders, apparently fearing it might raise chances of an increase in interest rates.

Thursday

The pay and benefits of U.S. workers increased at the slowest pace on record in the first three months of this year, defying expectations that wages would pick up.

The Labor Department said its Employment Cost Index, which measures what employers pay for their workers' wages, salaries and benefits, rose a mere 0.4% in the first quarter ended in March following a 0.7% gain in the fourth quarter of last year. The increase in the first quarter was half the 0.8% rise projected by economists in a Reuters survey and it was the smallest quarterly rise since the ECI series began in mid-1982. The surprisingly mild gain in the ECI, which is closely watched by Fed Chairman Alan Greenspan, may soothe the concerns of economists and some policymakers who have worried that the robust labor market would start to fuel wage inflation.

The index was subdued by mild trends in both wages and salaries, and benefits. Worker pay rose by 0.5% in the first quarter, the smallest gain since September 1992. Benefits costs rose a tiny 0.3%, the weakest increase in two years. At least part of the restraint on ECI may have been linked to a decline in real estate commissions as the red-hot housing market cooled off a bit from record levels. Labor costs for the highly volatile category of finance, insurance and real estate fell 0.7% in the first quarter following a 1.1%t rise in the final quarter of last year.

In the 12 months ended in March, overall labor costs were up 3.0%, a sharp slowdown from 3.4% in the year ended in December, and down from 3.3% in the year ended March 1998. The good news helped to rally the bond market as it rose a full point after the release.

New applications for unemployment benefits fell sharply last week suggesting job growth remains brisk. Initial claims dropped -20,000 in the week ended April 24 to 294,000 from 314,000 in the prior week. It was the second week in a row that claims were down. The decline was much steeper than expected. Economists in a Reuter’s survey had projected claims for the latest week would total 308,000.

Despite lower overall claims, the closely watched four-week moving average, which irons out week-to-week volatility, edged up slightly to 307,500 in the week ended April 24 from 306,250 in the April 17 week. Although the four-week average has been rising gently over the past six weeks, the average is still close to the 300,000 level, which indicates a vigorous job market.

The falling jobless claims could reinforce expectations for signs of strength in the April employment report scheduled for release on May 7. In a preliminary Reuters poll, economists predicted a 234,000 rise in April, which would be a rebound from growth of just 46,000 in March. The monthly employment report gives a broad look at labor-market conditions throughout the economy. The unemployment rate is at a 29-year low of 4.2% and is expected to have remained unchanged in April.

Sales of new U.S. homes rose in March, after three straight months of declines, spurred by a sharp rise in sales in the West. Sales rose 2.1% to a seasonally adjusted annualized rate of 909,000, well above the 876,000 forecast by analysts. Analysts said they expected the latest rise to be short-lived as the housing market cools off later this year. New home sales hit record highs of 985,000 in November as a combination of low interest rates and unseasonably warm weather encouraged buyers to snap up homes in record numbers.

March sales were up 8.7% from the 836,000 rate for the same month last year. However, the only area of the country were sales rose in March was in the West, where they jumped 24% to 274,000 from 221,000 in February.

In the Northeast, sales fell 2.5% to 79,000 from 81,000 in February. In the Midwest, sales fell 6.4% to 161,000 from the previous month's 172,000. And, in the South, sales fell 4.8% to 395,000 from 415,000 in the prior month. After very high levels in November, sales dropped in December, January and February to slower but still strong levels. The average price of new homes rose to a record $188,800, beating the previous record of $187,800 set in February. House prices are rising, but at a slowing pace. The price levels are record highs in both new home sales and existing home sales, but the growth rate is slowing pretty substantially. The number of new houses on the market rose to its highest level since January 1997, to 302,000 from 298,000 in March. At current inventory levels it would take 4.1 months for all homes on the market to sell, compared to 4 months in February. The report pulled down an earlier jump in bond prices, which had risen after the Labor Department released a report showing subdued wage pressures.

Friday

The strongest consumer spending in a decade helped expand the economy in the first quarter far faster than expected, heightening fears of higher interest rates. Gross domestic product, the broadest measure of goods and services output within our borders, moved ahead at a 4.5% annual rate in January through March, down only moderately from a strong 6.0% in the fourth quarter last year.

The economy continues to defy the aging process. The only discernible weakness is the trade deficit and this has merely slowed the economy from warp speed. The report sent bond prices reeling on fears it could prompt the Fed to raise interest rates as a damper on potential price rises. The 30-year bond dropped a full point by mid-morning as its yield kicked up to 5.60%. Prices, measured by the GDP price index, rose 1.4% in the first quarter, a pickup from a 0.8% rise in the closing quarter last year. It was the strongest increase in nearly two years.

Consumers provided the driving force behind first-quarter growth, draining savings to boost spending at a 6.7% annual rate in the first quarter. It was the strongest advance in personal consumption spending since 1988 and up from a 5% increase in the fourth quarter of last year. President Clinton welcomed the hearty GDP growth, saying that ``strong growth, high investment, low inflation, and low unemployment are a winning combination'' enabling the economy ``to grow steady and strong.''

The report said that personal savings, measured as the proportion of earnings devoted to bank accounts and other savings shrank at a 0.5% rate or by $30.9 billion in the first quarter after being flat in the fourth quarter. It was the weakest performance for the quarterly savings rate since the government began compiling the figure in 1946 and meant consumers were borrowing heavily to keep shopping.

    A separate report from regional purchasing managers in Chicago showed a quickening pulse for the nation's manufacturing heartland. The Chicago Purchasing Management Index shot up to 63.3 in April from 57 in March. It also showed rising prices paid for the goods used in manufacturing. This is a number that traders take seriously as it gives a preliminary outlook for the National number that comes out on Monday. Since this number was so strong it also put downward pressure on the market.

    The University of Michigan's consumer sentiment index for April fell to a final reading of 104.6 from a final reading of 105.7 in March, according to sources. The current conditions component slipped to a final reading of 115.9 in April from 116.3 in March. The consumer expectations index fell to a final reading of 97.4 in April from a final reading of 99.0 in March.

 Next Week’s Economic Indicators

On Monday we get Personal Income, Construction Spending and the National Association of Purchasing Managers report. The NAPM number could move the market if it is as strong as the CPM number was on Friday. The GDP report on Friday also revealed that incomes were stronger than expected so if the personal income number is also strong we could see more pressure on the market. Even if these numbers are bad for the market we have seen a lot of selling of late so there should be less downside pressure. On Tuesday we get Leading Indicators. This number will likely be ignored. On Wednesday Factory Orders are out. If there is strength in this number you will likely see selling as inflation concerns seem to be kicking up once again. The Beige Book will also be out today and traders will be interested in hearing what the Fed talked about at their last meeting. The Beige Book reports economic and financial conditions nearly everywhere. On Thursday we get Jobless Claims. This past week the market pulled back a bit from the strong showing of claims falling –20,000 so if we see another fall in claims the market may presuppose that the unemployment number out on Friday will be strong so it will sell off. On Friday we get the all-important Employment Report and Wholesale trade numbers. The market will only move on whatever the employment number reveals and with volatility being strong the past few weeks one should expect a sharp move in either direction for the market.

MARKET CLOSES

Index

Last Week

This Week

Change

Percent

Dow Jones

10689.67

10788.70

+99.03

0.9

S&P 500

1356.80

1335.16

-21.64

1.6

S&P 500 Futures June.

1363.00

1338.00

-25.00

1.8

S&P 100

687.41

675.64

-11.77

1.7

Nasdaq

2590.38

2542.88

-47.50

1.8

Russell 2000

431.77

432.82

+1.05

0.2

30-Year bond

5.59%

5.66%

 

Program Trades

It took us a while to get into our sold and credit spread Calls this month but after we received a Short signal for a trade it was easy to get everyone filled. The best part was that the market sold off this week making all of the Call trades look great. We now have 15 trading days to expiration and all of the Call trades are showing a high probability of success, i.e. that they will expire worthless. Lowest was the Short trade still showing an 89% probability of a worthless expiration. This coming week we’ll go after the Put trades. However, I don’t plan on moving numbers very much as I’m still worried that the market could collapse and we would see the market fall to around our trade levels.

Current Trades

**Trades listed below are all for the current expiration cycle unless otherwise noted. Fill prices are averaged out as reports come in by subscribers being filled.**

Average Entry price

   

Weekly

 
   

Bid

Ask

last

         
 

S&P 500 Cash Trades:

     
May 1400 sold call for $8.75. This trade is left over from last months Strangle position of $31.75.

Sold Trade

3.50

4.25

4.75

         

1400 sold Call $14.00

Short Trade

3.50

4.25

4.75

1425 bought $7.00

$7.00 Credit spread

1.13

1.50

1.00

         
 

S&P 100 CashTrades:

     
         

710 sold OEX Calls $4.25

Long trade

1.75

1.88

2.00

715 bought OEX Calls $3.13

$1.13 credit spread.

1.06

1.18

1.25

         

720 sold OEX Call $2.25

Ultra trade

.75

.88

.82

730 bought OEX Calls $1.25

$1.00 credit spread

.32

.38

.32

         

700 sold Call $10.50

Short Trade

3.65

3.88

3.75

705 bought Call $8.50

$2.00 credit spread

2.50

2.75

2.50

         
 

S&P 500 Options Feb. Futures Trades

Hi

Low

Close

         

Sold 1400 Call average $10.50

Long Trade

8.50

3.70

1.20

Bought 1410 Call average $8.35

$2.15 credit spread

3.30

2.20

2.20

         

Sold 1425 Call $4.50

Ultra Trade

2.30

1.70

1.70

Bought 1430 Call $4.00

$.50 credit spread

2.70

1.60

1.60

         

May 1400 call for $9.50 This trade is continuing from a strangle last month.

Sold Trade $9.50

8.50

3.70

1.20

         

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

Cash Option Profits for April

Short Trades

Outright Sells

Long Trades

Ultra Conservative Trades

1310/1305 SPX Puts
.75=15%
Strangle trade. May 1200 SPX puts and 1400 SPX Calls. Puts bought back for $6.50, profit = 10%. May 1400 call still sold.

1375/1380 SPX Calls

$1.00=20%

1200/1175 SPX Puts

$2.50=10%

610/605 OEX Puts
$1.00=20%
 

610/605 OEX Puts

.88=18%

600/595 OEX Puts

.50=10%

   

685/690 OEX Calls

bought back $1.00 loss=20%

700/710 OEX Calls

.75=8.0%

   

695/700 OEX Calls

replacement of the 685/690 trade

$1.25=25%

 
Total 35% Short trades are considered individual trades similar to outright buying so there is no average. Total +10% Total +43%. Long trades are averaged for the record sheet as we normally place both up and down trades. Average 21% Total 28%. Ultra trades are averaged for the record sheet as we normally place both up and down trades. Average 10%

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

S&P 500 Futures Option Profits for March

Short Trades

Outright Sells

Long Trades

Ultra Conservative Trades

1395/1400 Calls
.70=14% 
Strangle trade. May 1200 SPX puts and 1400 SPX Calls. Puts bought back for $7.00, profit =$15.00 or 25%. May 1400 call still sold.

1220/1215 Puts

$1.00=20%

1200/1195 Puts

$.65=13% and

1200/1190 Puts

$1.20=12%

1310/1305 Puts
$1.00=20%
 

1385/1390 Calls

$1.00=20%

1400/1410 Calls

$.70=14%

Total 34% Short trades are considered individual trades similar to outright buying so there is no average. Total 25%. Outright Sells are calculated separately because they can be placed at anytime. Total +40%. Long trades are averaged for the record sheet as we normally place both up and down trades. Average 20% Total 26%. Ultra trades are averaged for the record sheet as we normally place both up and down trades. Average 14%

  Current Cash Trades Profits

Short Trades

Long Trades

Ultra Trades

Outright Short Sales

1999 Current

102%

1999 Current

45%

1999 Current

64%

1999 Current

32%

1998

66%

1998

43%

1998

79%

1998

71%

1997

108%

1997

188%

1997

82%

   
1996

163%

1996

169%

1996

99%

   
    1995

93%

1995

76%

   
    1994

79%

1994

89%

   
    1993

177%

1993

long

   
    1992

112%

1992

long

   
    1991

162%

1991

long

   
    1990

166%

1990

long

   

Futures Trades

Outright Sells & Strangles

Long Trades

Ultra Trades

1999 Current 118% 1999 Current 25% 1999 Current 77%
1998 3 mths. 130% 1998 3 mths. 93% 1998 3 mths. 16%

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.