Fed Sits Tight, Market Takes Flight

Did anybody catch the truck that blindsided the market at about 2:15 p.m. eastern time? Eyewitnesses report that there was a little balding man with glasses at the wheel and all that could be heard echoing from the driver side window was, "Excessive slowing likely, and to all a good night." Indeed, the FOMC acknowledged that the economy is slowing but left the key Federal Funds rate at 6.5% and the discount rate at 6% at their Tuesday meeting. This caused the giant sucking sound this afternoon, as money was drawn out of techs and other battered market segments.

The market had widely expected a shift in the Fed's bias to a more neutral stance and that is exactly what they received out of today's meeting. The Fed is now indicating that inflation is no longer the market's greatest worry but that, "risks are now weighted mainly toward conditions that may generate economic weakness in the near future."

The downdraft in stocks today was due to the market's frustration that the Fed was not more steadfast in its statements about a slowing economy. In addition, although not widely expected, the market was hoping for a rate cut. Some analysts argue that if the economy is indeed headed for a recession, that the time to act is now. As evidenced by how long it took for the rate hikes in 1998 to take hold, any rate cuts enacted today take upwards of a year or more to be fully felt by the U.S. economy.

With the markets, and especially the NASDAQ (COMP.X), feeling the effects of the lack o' rate cut, we will now start to see the so called "wealth effect" work its magic in the opposite direction. Consumers will reign in their buying habits, as once lofty gains in their portfolios have deteriorated into a sea of red numbers. This serves to put a lid on the U.S. GNP figures and of course, a true recession is usually marked by two consecutive quarters of negative GNP growth.

Today's Markets

It wasn't pretty out there folks. The NASDAQ (COMP.X) refreshed its yearly low, closing down 112.81, or a nasty 4.3%, to finish at 2511.71. The NASDAQ had been up on the session, until Greenspan pulled the rug out from under any hopes of a holiday rally. Decliners crushed advancing issues 2657 to 1346. Volume was a robust 2.3 billion shares. To make matters worse, big-cap techs led the decline, with the likes of Sun Microsystems (SUNW) falling another $1.63, or 5.69% to close at $26.94. Cisco (CSCO) didn't fair much better, with the big networking stock rolling over and closing down $1.19, or 2.77%, to $41.75 on volume of 98 million shares.

Tuesday's session was a little kinder on the old-economy stocks within the DOW (INDU). The average lost only 0.57%, or 61.05 points, to finish the day at 10584.37. On the NYSE, despite the decidedly down day, advancing issues actually edged out declining issues 1465 to 1434. SBC Communications (SBC) represented the single largest drag on the average, after its shares plummeted 12.66%, or $6.75 to $46.56 after it announced to investors that it sees its 2001 EPS growth more in line with 11-14% instead of the estimate of 14.5%. Also serving as an anchor within the DOW, was Microsoft (MSFT). Mr. Softee also set new yearly lows by falling $3.00, or 6.27% to $44.81.

Treasuries retraced some of their gains today. After rising for 5 straight sessions, bond prices fell, but recovered somewhat after the Fed announced its "ease" bias. The benchmark 10-year note fell 1/8 to yield 5.19%, while the 30-year bond fell 1/2 to yield 5.47%. On the economic front, the October trade deficit came in a higher than expected $33.18 billion as opposed to estimates of $32.7 billion. Tomorrow brings the November housing starts number. This report should not provide any new news to the Street and especially after today's Fed meeting, should have a muted effect on trading.

Stocks and Sectors on the Move

There were not too many bright points to the market today, but brokerage stocks, as measured by the AMEX Brokerage Index (XBD.X) performed well today on the heels of a Morgan Stanley Dean Witter (MWD) and Goldman Sachs (GS) earnings announcement. Morgan actually disappointed the Street, with EPS of $1.06, instead of analyst expectations of $1.29 a share. The stock was up for most of the day, but fell in the last hour of trading to close down $0.25, or 0.36%, to $69.

Goldman surprised investors with fourth quarter earnings of $1.50 a share, handily beating expectations of $1.38 a share. The company's stock closed up $3.44, or 4%, to $89.38, bucking the heavy down trend on the day.

Although most anything tech related took a drubbing on the day, it was the already fragile internet issues that took it on the chin. The disappointment over the lack of a rate cut was felt immediately following the announcement out of the Fed. Most internet (and B2B) related shares accelerated to the downside and closed on their lows of the day. Ariba (ARBA), one of the popular hopefuls within the recently recovering B2B sector fell 4.82%, or $3.00 to close at $59.25. Amazon (AMZN) continued its slide today, falling $1.63, or 8.18% to close at $18.25.

Retailers also had a tough time of it today, as a rate cut might have had the desired effect of loosening wallets going into next year. Instead, retailers now have to deal with the likelihood of a stingier consumer going all the way into the second half of next year. Retailers are already slashing prices to attract customers, so any further slip in consumer confidence would hit the retailers right in the bottom line. The retail giant Wal- Mart (WMT) fell $2.56, or 5.07% to close at 48. Joining WMT was Home Depot (HD), whose shares dropped by $1.50, or 3.40%, finishing at $42.63.

Looking Forward, Always Forward

With all the bad news and negativity in the market, there are still sectors out there that are at least holding up and in some cases, even marching ahead. The banks, drugs and selected finance areas (like mortgage services and equity REITS) are quietly plodding higher amidst the turmoil. We suggest remaining within these defensive areas that will eventually benefit from a rate cut.

On the subject of rate cuts, while the Fed didn't cut rates today, it all but spelled out that they would be cutting rates at its January 31st meeting. Also, remember that if things get too dicey in the markets, the Fed doesn't have to wait until the January 31st meeting to cut rates. This potential rate cut is a big carrot hanging out there and may serve to give a bit more earnings clarity going into the first quarter of next year. That being said, we may soon hear from companies that were waiting to see what direction Fed Chairman Greenspan would take before announcing earnings warnings.

Turning to the charts, we can see that the NASDAQ broke through it previous closing low for the year. Support for the index should come in around 2,500. Most analysts have said all along that we needed to retest the 2500 level on the NASDAQ before we can leave these depressingly low levels in the dust for good. But if that doesn't hold, don't be surprised if 2,250 is the next level to be challenged.

If you have some long-term money to put to work, this may just be the best buying opportunity in years. If you are a trader, like most of us reading Splittrader.com, now is no time to be a hero. Let's allow the charts to improve and stick to those sectors that may not be giving us a 20% return in 3 days, but that are steadily rising. In the defensive sectors, stick to those stocks that are breaking out of consolidation patterns and that are not too extended from their bases. With these slower moving defensive stocks, you can really test out time-proven charting techniques on a low risk basis.

Happy Trading & Stay Positive

Craig Seidler
Assistant Editor