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.

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

The Dow held up better than the Nasdaq but the Dow Jones index is still lagging behind the Nasdaq so far this year. The Dow is up 1.3% in 1999, way behind the Nasdaq's 8.3% increase. The S&P 500 was off 3.1% last week, cutting its year to date gain to 0.8%.

This week AMG data reported that about $2.9 billion was withdrawn from mutual funds. The past few weeks has revealed that in-flows have seemed to plateau. I continue to believe that most of the money is in the market so it will take something else to move the market. Without the momentum of the money coming in, one must look at fundamentals.

With the 30-year bond backing up to 5.34% this week it indicates that the S&P 500 is about 15% overvalued with current earnings estimates and even more overvalued if earnings start to back up. It suggests that the market will have a tough time moving forward unless bonds rally. But, poor earnings have not been the chief cause of a lower stock market in the past century. So what if interest rates continue to back up?

Rising interest rates and inflation have triggered bear markets in the past. Data suggests that the market has largely shrugged off earnings drops as temporary spills but has reacted negatively to changes in inflation and interest rates. Interest rates are indeed important and their ability to influence the stock market was shown last year when the Fed, faced with a free falling stock market, dropped interest rates to ensure that the U.S would not be dragged down by the economic crisis overseas. The cuts did work and also sent the market to record highs. This past week, traders waited patiently to see if the Federal Reserve was going to change interest rates and monetary policy. They decided to leave keep rates unchanged, even though the economy expanded at the fastest pace in two and a half years, which heightens the risk of inflation.

The last time interest rates had any type of an impact on stocks was in 1994, when the Fed doubled rates from 3% to 5.75% in a preemptive strike against what it saw as the threat of inflation. This sent stocks plummeting. Inflation never did show up and the Fed never lowered rates back to their old levels. They have been maintaining them until they lowered them this past spring because of the economic worries.

As long as there is still a chance that the economy may slow down, it should prevent the Fed from raising or lowering interest rates. We also have to watch the Year 2000 computer bug since it could cause problems. With interest rates at current levels, we’re not likely to see much progress in either direction in the near future. However, if rates start to go down, the Dow could see 10,000! Or, it could see 8,000-8,500 if they back up to 5.50%. Most likely, the market will continue its sideways action, going nowhere too fast so our type of trading is going to be perfect for this scenario.

We have seen the daily S&P 500 chart forming a sideways triangle formation this past week. This usually indicates a breakout to the upside. On Thursday and Friday, the S&P 500 touched the bottom of the uptrend triangle line that started on October 8^th. There is still a possibility of a breakout higher but with the index touching the bottom of the lower trendline it makes us cautious as we could still see a break to the downside. The formation will end around Feb. 10^th so we should have a better indication then of what may happen.

The Mclellan Oscillator is hovering around the oversold area but the summation index continues to move lower indicating there may be more downside movement left in the market.

The 5-day Arms indicator has pushed into oversold territory while the 10-day Arms indicator is now near overbought levels. For the time being this indicates a neutral reading, but if the market rises too fast without the broader market following, we could move into an extremely overbought situation.

The Bull/Bear indicator has gotten worse on the bear side this week as bears are approaching the low 20’s area making it possible to see an outright sell for the market fast approaching. We are dealing with the same numbers that were coming out in 1987. With the market spill this week, hopefully bulls will retreat a bit. (This is a contrary indicator.)

With the whipsaws that occurred this week it was surprising to see little change in volatility. That could be bad in the end as were still not seeing enough fear out there as people buy puts. The last 4 equity call/put ratios were at or very close to topping values. Multiple days, 4 or more, very often lead to declines. With the closing tick on Wednesday being a high +894 we may see further corrective action but Thursday and Friday may have been enough to remedy the situation.

Stochastics are remaining near overbought levels and momentum is stalling both daily and weekly. With half of the indicators in oversold territory and the other half still overbought, the most one should expect for the downside I think is a grinding sideways motion.

Mclellan Oscillator: -98       -100 oversold +100 overbought
Summation Index: +30

Five day arms: .79              .80  and below, overbought 1.00 and above, oversold
Ten day arms: .88               .80 and below, overbought 1.00 and above, oversold

Bulls: 60.0 previous week 60.7                 50% plus overbought/bearish
Bears: 26.7 previous week 28.2                50% plus oversold /bullish
Correction: 13.3 previous week 11.1

Five day Qvix: 29.25

Monday

According to the National Association of Purchasing Management, overall manufacturing activity jumped to 49.5 in January from 45.3 in December, putting the index just below 50, the threshold indicating that industrial output is expanding. The index has been below 50 for the past eight months. The survey showed that new orders for factory goods made a strong comeback in January, rising to 51.3 from 46.4 in December, while production jumped to 53.1 from 46.8. Those readings indicate that at least some parts of the manufacturing sector are back on their feet.

Though overall export orders didn't grow last month, five industries an increase: wood products, paper, printing and publishing, food, and fabricated metals. When truck orders increase, that is a sign of market confidence.

Bonds didn’t like the strength of the report as it indicated a very slight chance that the Federal Reserve would lower rates at their upcoming meeting this week. Stocks also lost much of their gains on the news, as it appears manufacturing is picking up once again.

The public ended 1998 with a spending spree, giving the economy momentum as it entered the New Year. Still, economists wonder how long consumers can sustain the pace. Incomes grew strongly, but consumers spent every bit of the increase, and more.

Personal income jumped 0.5% in December, the best gain in 10 months. Spending surged an even stronger 0.8%, the most since May. Consumers are ready and willing to spend. Strong stock market gains, low interest rates and strong wage gains are supporting consumer spending, which accounts for 2/3rds of the nation's economic activity.

The problem is that people spent more than they earned in December. Their personal savings rate went negative to minus 0.1% for the second time last year. The measure of savings as a percentage of after-tax income has fluctuated around zero for four months. Spending was bolstered in December by two factors, a surge in holiday shopping and very strong auto sales. For the year, Americans saved just 0.5% of their income, the least since 1933, compared to 2.1%in 1997 and 2.9% in 1996. But, the figure is not as grim as it appears. It reflects the fact that prosperous people spent a portion of their stock market gains and tapped their home equity during a wave of refinancing spurred by the lowest mortgage rates since the 1960s.

Construction spending surged 1.7% in December, the largest gain in six months helped by unseasonably mild weather for most of the month. For the year, it rose 6.3% percent to $657 billion, following a 5.9% rise in 1997. The categories with the biggest gains included single-family homes, 13.9%; apartments, 8%; offices, 16.4%; and hotels and motels, 12.6%. December marked the seventh consecutive month that construction spending rose, while total construction reached an annual rate of $688.5 billion, adjusted for seasonal factors, but not for inflation.

Tuesday

New home purchases slipped slightly in December from the high pace of the month before but easily set a record for all of 1998. People purchased new homes at a seasonally adjusted annual rate of 978,000 in December, down 3.6% from a record 1.02 million rate in November. For the entire year, they bought 888,000 new homes, up 10.4% from 1997. That beat the previous record, 819,000 in 1977, and was the highest since 1963.

Housing and related purchases such as furniture and appliances have helped the economy weather problems from the global economic slump that has spread from Asia to Russia and Latin America. Sales have been supported by low mortgage rates, averaging lower than 7% during the last half of 1998, the longest such stretch since the 1960’s. Also, jobs were plentiful and the nation's unemployment rate averaged 4.5% last year, a 29-year low. The stock market spurred some sales, especially of vacation homes. With inflation low, wage gains gave many consumers increased purchasing power.

The Index of Leading Economic Indicators rose 0.3% in December after a 0.5% increase in November, signalling above average economic growth in the months to come.

The leading index is designed to forecast economic activity six to nine months in advance. The results indicate the U.S. economy will continue to outrun the troubles roiling economies in Asia, Russia and Latin America. The expansion shows no sign of ending, a run of almost eight years. The results were slightly better than the 0.2% rise economists had expected.

Six of the ten indicators which make up the leading index rose in December. The most significant increases in order from the largest positive contributor to the smallest are money supply in 1992 dollars, stock prices, and manufacturers' new orders of consumer goods and materials. The most significant negative contributors to the composite leading index in December are average weekly initial claims for state unemployment insurance and vendor performance (slower deliveries diffusion index).

Thursday

U.S. manufacturers ended 1998 with a surge in orders, but the rest of the year was among the most lackluster of the 1990’s.

Factory orders jumped 2.3% in December, their biggest gain since November 1997, to a seasonally adjusted $343.5 billion after a meager 0.4% gain in November. The increase, which reflected strength in all major industrial sectors except primary metals, far surpassed the 0.9% gain expected by economists in a Reuters survey.

For all 1998, orders for manufactured goods rose just 2.1% to $4.03 trillion after a 5.4% rise in 1997. Last year's increase was the smallest since recession year 1991, when orders actually declined 2.3%. Orders for items meant to last three years or more, such as cars and refrigerators, surged 3.1% in December after a 0.4% rise in the prior month. Demand for nondurable goods rose 1.2% after a 0.4% gain in November. Orders for transportation equipment rose 1.8% in December, while industrial machinery orders surged 7.4% and electrical equipment orders rose 3.6%. Primary metal orders fell 1.3% in December.

The number of people filing new claims for state jobless benefits fell for the third consecutive week, hitting the lowest level since mid-December. 292,000 people filed new claims in the week ended Jan. 30, the lowest level since 289,000 claims were filed in the Dec. 19, 1998 week, and down from 301,000 in the previous week. It was well below economists' expectations of a rise to 311,000. The four-week moving average, considered a more accurate gauge of conditions in the labor market, fell to 317,250 in the week ended Jan. 30 from 333,250 the previous week. In the week ended Jan. 23, the latest week for which state-by-state figures are available, labor said 29 states reported a decrease in claims exceeding 1,000, led by North Carolina with 22,458 fewer claims.

Friday

U.S. companies added 245,000 jobs to their payrolls in January, another sign that the economy has started the year off with almost as much momentum as it displayed at the end of 1998, analysts said on Friday. The report, which also showed the unemployment rate holding steady at this business cycle's low of 4.3%, further dispelled speculation that the global financial crisis is taking its toll on the U.S. expansion.

The Labor Department reported non-farm payrolls rose 245,000 in January, after being up a revised 298,000 in December. The Department had first reported December payrolls at up 378,000. The report immediately put pressure on the 30-year bond and it fell more than a half-point as its yield rose to 5.33% versus 5.29% yesterday. This is the fifth down day in a row for bonds. At first, the news helped to lift the stock market since growth supports earnings but when traders realized that there was even less chance of a rate cut by the Fed, the market fell.

The report did not show any acceleration in wage inflation. Average hourly earnings rose six cents in January to $13.04, in line with the roughly 4.0% average gain seen in several gauges of labor compensations.

Current evidence, indeed that of recent years, is that the relationship between tight labor markets and wage and price increases is clearly a far more complex process than is captured by the more simplistic economic theories. Still, the bond market fell under the healthy job report, way above the analysts' consensus in a Reuter’s poll that had called for a 135,000 payrolls gain in January.

The employment report also delivered tentative evidence that U.S. manufacturing may be weathering the global economic crisis better than expected. Manufacturing lost only 13,000 jobs in January and 16,000 in December, much smaller than the 60,000 and 61,000 drops seen in November and October, respectively.

On Tuesday we receive Productivity and Costs.   This is always an important number as it reveals if workers are producing enough to cover costs and wages. If costs are rising and productivity falling it is not normally taken well by the market.

Thursday has Jobless Claims and Retail Sales. Neither of these indicators are likely be taken seriously by the market unless jobless claims continue to fall representing even more strength in the economy.

On Friday we get Business Inventories. This number can reveal if companies are stockpiling goods after the Christmas season for a busy summer or are indicating a coming slowdown. The market does not consider these numbers to be very important.  There aren’t any real important indicators out this coming week so we’ll probably see more emphasis on technical trading.

MARKET CLOSES

Program Trades

So far, all of our trades, both cash and futures are looking great. More people got into the OEX call trades this week as the S&P 500 call options are still few and far between. It has been a few years since we have seen so few options being offered. Even with the sell off this week we are still getting about a 95% probability of success for all of the put trades except the Short 1220/1215 put trade which slipped a bit to a 84% probability. That is still high even for a Short trade so we’re not concerned. The 1100 sold puts are now hitting a 98% probability of success.