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

Davidson’s View

The market this week was flat to slightly down mostly because of the new worries about no Fed rate reduction and an overbought market. The market didn’t really seem to care that much about the possible hostilities with Iraq. It didn’t work off much of its overbought condition but still showed strength in that it didn’t collapse even with all the negative news. Daily technicals have all turned lower, especially momentum and volume, and are revealing that the market isn’t going to get a lot of help from them.

Once again, timing is going to be important as we’re now coming into the November expiration this week and with the Fed deciding about interest rates, this week is going to be interesting. So far, the market has moved perfectly for us into expiration week. It wasn’t surprising to see the market up a bit today. Even though it closed near its highs it didn’t seem to show a lot of strength. It had remained there for three hours before the close making it appear like it was running out of gas. If the market does continue to move higher into the Federal Reserve meeting on Tuesday or remain flat into the meeting we could see a sell off no matter what the decision is. If the announcement is made that they will do nothing, the market will likely sell off. Traders may be thinking there won’t be anymore rate cuts as the economy has been looking very healthy and wholesale inflation is looking as though it may be starting to turn up. Friday's news that retail sales rose a strong 1% in October made it clear that the economy is picking up steam once again. The past weeks economic indicators have also revealed that the economy isn't falling apart.

When the Fed surprised the financial markets with a ¼ point rate cut on October 16, it specifically cited "unsettled conditions in financial markets" as a reason for the move. The markets are hardly unsettled these days. Looking at a 20% rally in one month seems a little exuberant actually. Just look at the recent surge in the Internet stocks. Neither the global financial crisis nor the stock market's gyrations are causing sleepless nights anymore. No one really knows if the Fed will cut rates and it will be really hard to tell which way the market will go until it happens but one can watch the tape for clues Monday and Tuesday and so I’ll be watching closely. If the Fed doesn’t cut one thing will become very obvious, stocks are richly priced and bonds are cheap and due for a rally.

Tuesday

Growth in productivity, the key to rising living standards, improved in the July-September period after nearly stalling during the previous quarter. The productivity of workers, measured as output per hour of work rose at seasonally adjusted 2.3% annual rate in the third quarter. Productivity was robust during the first three months of the year, rising at a 3.5% rate. Economists consider productivity the key to prosperity. Sizable gains mean companies can pay workers more, hold the line on prices and still earn the kind of profits that keep stock prices rising. After growing at a brisk 2.9% annual rate in the 1960s and early 1970s, productivity slowed to a paltry 1% from 1974 through 1995. Since then, it’s been growing at around 2%. That’s led some economists to speculate that the economy has embarked on a new era of productivity growth, driven by computers and other high-tech innovations. However, within today’s report were signs of the strain imposed on the economy by the world financial turmoil that began in Asia last year and has depressed U.S. export sales. Manufacturing output, which represents 18% of the economy, declined at a 0.6% rate, the first drop since the last recession in 1991. Hours worked at factories fell even further, at a 4.1% rate. So, productivity within the sector remained strong, growing at a 3.7% rate. For all nonfarm businesses, output rose at a moderate 3.5% rate. Growth in hours worked was the smallest in a year, rising at a 1.2% rate. Unit labor costs, a key measure of inflation pressures, rose modestly at a 1.7% rate, after shooting up at a 3.7% rate in the second quarter.

Thursday

The number of newly laid off workers filing for unemployment benefits jumped by 12,000 last week to the highest level since the summer. Initial jobless claims, which gives an early reading on the resilience of the labor market, rose to 321,000 in the week ended Nov. 7 and the highest level since 337,000 in the July 11 week, backing economists' belief that market is softening. The weekly jobs data, which analysts had forecast at 311,000, has crept upward over the last few weeks as current conditions in the labor market deteriorate. Jobless claims are starting to increase, continued claims are moving off their lows, and there is data that says we've turned the corner, not necessarily for the better. The four-week average, viewed as a more accurate indicator of longer-term labor conditions, measured 312,500 in the week ended Nov. 7, up from 311,000 a week earlier.

Friday

Wholesale prices rose slightly more in October than economists had expected. Prices charged by factories, farms and other producers rose 0.2% in October, reflecting rising costs for vegetables and eggs and the first increase in energy prices in five months. The increase in the Producer Price Index for finished goods was slightly more than expected. It wasn’t likely to shake economists’ belief though that inflation is largely being kept in check by lack of demand resulting from a worldwide economic slump. For the first 10 months of this year, producer prices declined at a 0.5% annual rate, compared to a drop of 1.2% for all of 1997. Many analysts believe continued low inflation could give Federal Reserve officials confidence to cut interest rates again at their next meeting on Nov. 17 but they also note a worrisome rise in commodities. In October, seasonally adjusted energy prices rose 1.2%, the first increase since May and the largest in nearly two years. Residential gas and electricity prices also rose in October. Food prices rose 0.4% in October, following a similar increase the month before. Declining meat and seafood prices were more than offset by a 13.5% increase in vegetable prices and rising costs for fruit and dairy products. Core prices, which exclude volatile food and energy costs and are watched most closely by economists, rose a mild 0.1%. They’re up at a 1.5% annual rate from January through October, compared to no change for all of 1997.

In a hopeful sign for holiday sales, people spent briskly on cars and clothing in October, shrugging off the falling stock market at home and economic turmoil overseas. Retail sales, which account for roughly 2/3rds of the nation’s economic activity, rose 1% to a seasonally adjusted $227 billion last month, the Commerce Department said Friday. It was the biggest increase in five months. Though the number was supported by a 2.6% surge in auto purchases, the largest in 15 months, all broad categories of goods managed at least modest gains and most did even better. Excluding autos, sales rose 0.5%. It could be a sign that Christmas sales, which account for half of some stores’ annual receipts, might not be as weak as some analysts feared. Earlier this year, consumers’ responses to survey questions showed their confidence at levels unseen since the high level of the late 1960s. But, as the international economic crisis hit home, roiling financial markets in the late summer and early fall, their exuberance began to wane and some economists worried consumers would severely cut their spending. It hasn’t happened so far. The labor market isn’t quite as strong as it was this spring and the unemployment rate has crept up from 4.3% to 4.6% but, by historical standards, jobs remain plentiful. Also, incomes are rising roughly double the very-low inflation rate and interest rates are low. Low rates reduced the cost of car and other installment loans and allowed many homeowners to refinance their mortgages, cutting their monthly payments and freeing up cash for other purposes. Though credit conditions tightened for many business borrowers in response to the world financial crisis, consumers have still been able to borrow. All that presents a dilemma for Federal Reserve policy-makers. Opting for unchanged rates could send renewed tremors through still shaky financial markets. Cutting rates risks over-stimulating a still strong economy and dampening its exceptional inflation performance.

The University of Michigan's preliminary index for November rose to 102.4 from a reading of 97.4 in the final October index. The current conditions component rose to 116.8 in the preliminary reading for November, from 112.8 in the final reading for October. The consumer expectations index rose to 93.1 versus 87.5 in the final reading for October. The number was much stronger then expected as it doesn’t look like consumers have given up their buying frenzy.

All of the indicators today were strong. The Retail sales number pulled the Globex S&P 500 futures off of its highs and when the University of Michigan’s consumer sentiment number came in stronger than expected the cash market retreated as sentiment was much stronger than expected. This may mean that the Fed will be even more hesitant to lower interest rates on Tuesday.

Next week’s Economic Indicators

On Monday we get Industrial Production. The market may not like the number if it reveals that workers are not being very productive. This is a possibility as consumer sentiment is falling and when people are not happy they are less productive. When a company is less productive it cuts into profits and can create wage pressure because the company still needs to pay workers the same amount.

Tuesday has the Consumer Price Index, Business inventories and most importantly, the Federal Reserve meeting to decide about interest rates. The CPI number is not likely to have much of an effect on the market as inflation has been very low the past few months. Inventories will give an indication of how the trade deficit is and if business is slowing. Indicators today will be ignored for the FOMC meeting as many people are hoping for another rate cut. The market has run up 20% because of the past 2 rate cuts and has discounted the possibility of a third cut so if there is no cut, the market is likely to not react well. On Wednesday we get International trade figures. If we show another record trade deficit figure the market may react negatively. High trade deficits and recessions do not mix well in the market. On Thursday we get Jobless claims, Housing Starts, and the September 29^th FOMC meeting’s minutes. Housing Starts have been slipping the past few months so a strong number may lend support to the market. The FOMC minutes will probably be disregarded since the Fed will have just met on Tuesday.

Indicators this week probably won’t be that signifagant considering the Fed will be deciding about interest rates on Tuesday. It is also an expiration week and the market seems to trade more on technical matters since traders close out their positions over the week.

Technically

Stocks have grudgingly suggested topping action and the market continues to show signs of tiring this week. Momentum, relative strength, and stochastic indicators are starting to weaken. At the beginning of the week the S&P 500 broke down from a rising wedge pattern followed by the S&P 100 breaking a couple days later. Finally, today the Dow broke through the wedge. Rising wedge patterns usually come to an end to the downside and so far this wedge has been the same. Normally, when a rising wedge is broken the market will return to where the rally began but that probably won’t be the case this time. Right now, our biggest concern is just for next week and this breakdown came at a good time. The only thing that could indicate a return to the rally is if the previous highs are taken out in a short amount time.

Investor’s Intelligence reported this week that the lemmings certainly screeched to a halt in their bearish stampede of early October, and are now running toward the bullish cliffs. The latest survey shows that 53.1% of them are currently bullish, right back to the levels reached as the market top was being formed in late July of 1998. Anything over 50 indicates an overbought, bearish market.

The Mclellan Oscillator has returned from being overbought to a neutral position with the market downturn this week but the summation index is just starting to turn lower. This is giving a mixed picture as the Oscillator suggests a bottom but the summation index looks like it has peaked and is turning lower. When you look at the summation index longer term you will see that there are now three lower highs since the top in July. As long as we turn down from here we could say this rally is finished.

The Arms indicators are revealing that the market is oversold on a short-term basis and almost oversold longer term. As the indicator was overbought for some time it could stay oversold for just as long.

Volatility turned up this past week indicating that the market is going to see some more choppiness next week. This is not surprising considering volume has been weak the past few weeks and we’re having the November expiration next Friday.

Mclellan Oscillator: +9 -100 oversold +100 overbought
Summation Index: +2019

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

Bulls: 53.1 previous week 47.8 50% plus overbought/bearish
Bears: 35.4 previous week 38.3 50% plus oversold /bullish
Correction: 11.5 previous week 13.9

Five day Qvix: 27.18 Last week 40.41 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Program Trades

Although the market was basically flat to slightly down this week premiums on our trades fell like a stone. Our trades are still looking pretty good for the coming expiration with the Call Ultra trades holding an 89% probability of success. Our long call trades are showing that they are a little under pressure with only a 76% probability of success and that is a bit worrisome. Usually we get concerned at 75% but 1% away is good reason to be concerned. We may have to close them out but we will send out an ALERT e-mail if needed. Our futures Long trade may also be closed out but we still have an 84% probability of success. Our futures strangle is holding well also at an 88% probability.

Current Trades

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.