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The Crash Report-----July 16, 2000-----------Issue # 50

Part 1    Introduction
Part 2    The week that was
Part 3    Stocks Crash & the Fed goes Slash
Part 4    Weekly Forecasts
Part 5    Closing
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----Part 1---------------Introduction---------------------
Welcome members.  The Crash Report is for information purposes and should not be regarded as investment advice. What I try to focus on in the report is the current and future psychological and fundamental state of the worlds largest equity markets; the DOW and Nasdaq.  If you wish to support the web site please visit a sponsor.  The new"Stock Alerts" and"CBOE" e-mailed services are excellent.
 
----Part 2----------------The Week That Was----------------------------
The theme for May 16 was  “11,000 Non-farm payrolls”.   I focused on how this number alone helped solidify the weeks rally.

This weeks theme is"Earnings Rally On Schedule"

Tech stocks traded lower until Wednesday morning arrived (the session after Yahoo announced earnings), then the rally was on; over the next three sessions the Nasdaq tacked on 289 points.
The Dow, which benefited from strong Alcoa/International Paper earnings early in the week, managed to post gains in each of the five sessions.  It was JP Morgan and select tech components which provided the fuel to enabled the Dow to chug ahead by less than 30 points on Thursday and Friday.   The Dow appeared weak even as the average was rising, but weak technicals quickly subsided late Friday, which suggests that there may be further upside potential, rather than another exhausted top.

While corporate earnings provided the rally-punch last week, it was the economic-jab in the previous week (jobs report) which stunned bearish investors, and has hopefully kept them on the sidelines.  Just as investors were previously awaiting good news to start buying stocks hand over fist, bearish investors (sellers), last week began to await bad news.

The psychological shift from bear to bull is of key significance, more so than earnings.  All strong earnings do is provide justification for extreme valuations, and possibly higher valuations...with many investors more optimistic about the Feds ability to orchestrate a soft landing, earnings have become more of a focal point.  The rosy bull market was justified last week for many investors.

---Part 3---------------Stocks Crash & The Fed Goes Slash---------------

Can the Fed save the markets this time around?

The Fed doesn't speculate on stock valuations when they cut interest rates to avert a potential crisis. What the Fed does is ensure liquidity in the marketplace. The problem with the Feds stance, (at least from the bulls perspective) is that even if stock prices fell 20% tomorrow, on the whole valuations would still be historically high, and an interest rate cut may not provide much cushion for falling equity prices.   Not because the Fed won't cut interest rates, but because investor confidence is not definitely determined by the Federal funds rate...

-- Do U.S. consumers keep on spending because interest rates are low? (tell that to credit card companies...)
-- Do U.S. investors keep buying stocks because interest rates are low? (the Nasdaq is up 63% since the Fed began tightening 12 months ago).
 
It is a quaint thought to foresee a market crash being thwarted completely by a cut in interests rates.  To those bulls which argue that tech stocks don't fear rising interest rates, and"the new economy will keep rolling without a business cycle recession", remember that if rising rates are to be completely ignored, falling interest rates should not be looked at as a crisis savior.

 ----Part 4-----Weekly Forecast------------

Quick Look:  Last week "I am still slightly bullish leading into this week because I find it extremely difficult to go against the building psychological fortitude of this market." 

This week I am cautiously bullish on the Nasdaq, and neutral but mindful of breakout possibilities on the Dow.

Nasdaq:   Last Week:  “This is a difficult market to read short term, but the Nasdaq has shown signals (volume, rallies) that it wants to hold onto 4,000.".

Weak market breadth signals began to emerge last week, but these tendencies were erased by the closing bell on Friday.   Since momentum has clearly swung, there is no telling how long or far the Nasdaq can rally.  The only absolute is that a violent downturn will arrive quickly and most likely without warning.

-- Key earnings releases from Microsoft and Intel on Tuesday should help guide psychology.   On Wed it will be Qualcomm and AMD (two very important sector stocks!).

The April 10 mark of 4475.20 is within striking distance.

3227.04  (April 17)  -  3825.60 (June 19)  -   3936.75  (July 11)
4,000 (psychological support)
4475.20 (April 10)   -  5,000 (Maniacal Resistance)

DJIA:  Last Week:  “I look for a choppy week on the Dow with a possible rally early (AA, IP bottoms?) and then some serious contemplation over JP Morgans earnings later in the week.".

AA and IP did in fact lead the Dow higher early last week, but it was JP Morgan (which posted surprise earnings to the upside), and the regular tech blue chips which carried the bulk of the Dows rally.
Almost like clockwork, when the Nasdaq rallied strongly, many Dow stocks fell asleep.  This time it was the previously strong major drugs (MRK, JNJ) getting hit from the sector spin into tech.

"I would be more optimistic over a Dow rally if the average was to near 11,000.  The trigger to take the average this high may not be in corporate earnings."

There is a breakout possibility for the Dow.  With a mild CPI report, and continued strength in bonds, the Dow could mount an attack on 11,000 and beyond.  Dow earnings this week from Intel, Microsoft, GM, IBM, Boeing, Philip Morris, Caterpillar, and Honeywell could really make blue chip investors happy in the near term.. this would in all likelihood be a brief elated attack, and not a firm break of this threshold.  The fact that the Dow has steadily been improving, and earnings are coming in above estimates (and should continue to do so), is enough to suggest the Dow could roll higher.  The only question ahead of last week was"how will investors respond to earnings now, if later they are thought to be declining?".  Investors responded well.

-- Any serious rally in the Dow since April has been met with increased selling almost immediately...it may be imprudent to think a new record rally in blue chips will unfold just as the economy is showing signals of slowing and the Feds final interest rate hikes (March, May) have not fully hit the economy yet.

Still a range bound Dow, but improving technicals could increase volatility soon...

Home on the range
Mild Support:  10,367  (May 10 - Close)
Key Support  10,201 (April 14 - Intraday)
----  10604.86 (July 11)
Psychological Resistance:  11,000 (Psychological)
Key Resistance:  11,425 (April 12 - Intraday)

----Part 4-----Closing Comments--------

It is worth"re-iterating" (I feel like a Wall Street analyst using this word,.. please no death threats), that"the Feds final interest rate hikes (March, May) have not fully hit the economy yet.".  This in turn has an eventual destiny, which will either end, or place into question our current equity rally...

"The real issue is whether the Fed will engineer a soft landing for 4Q00 and 2001 earnings. It
 appears highly certain that 2Q00 earnings will be excellent, and likely there is enough momentum to
 support at least good earnings in 3Q00, but beyond that depends on how much recent and future
 Fed actions will hurt earnings."  Chuck Hill, First Call.

The clock is ticking.   As the markets continue to rally, this may be merely a shaky addition to the giant cliff stocks prices are already perched upon.  When the actual earnings disappoint (whether it be doubling revenues for Yahoo not doubling anymore, or strong EPS for JPM stagnating) the results the same... CRASH.

"I'm just sitting here watching the wheels go round and round..."  J. Lennon.

Sincerely,

Brady Willett


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