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Economic data upbeat, but stocks defensive

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Today's economic data was rather upbeat with durable goods orders rising 2% and consumer confidence slightly higher than economist's expectations of 96.0 with a reading of 97.3.

It's what may become known as the "Enron effect" that has the broader market a little jittery today. Shares of Tyco International (NYSE:TYC) continue to see selling after last night's disclosure that the industrial giant paid a $10 million fee to one of its directors and another $10 million to a charity he controls, for service rendered in last year's acquisition of CIT Group. Tyco (TYC) said in the filing that Frank E. Walsh "was instrumental" in its $9.2 billion purchase of the commercial lender. The unit, now named Tyco Capital, is slated to be one of the first three initial public offerings (IPOs) that Tyco is planning in a complex restructuring announced last week. There is also speculation that Tyco may just sell some of its divisions outright to buyers instead of spinning off some of its divisions in IPOs.

Cendant accounting ghost returns

It's not just Tyco (TYC) seeing downside today. "Rumor" of accounting issues is taking a toll on shares of Cendant (NYSE:CD) today too as the stock falls 12.3%.

Cendant Corp. Chart - Daily Interval

I've said before that I "hate" rumor an innuendo. Unfortunately, that is one side of the market that can impact stock price. Right now, shares of CD may be a falling knife that we don't want to try and catch. Instead, I'm going to keep an eye on the stock and look for it to consolidate near the $15 level. Cendant (CD) treated many subscribers well in early November of last year near the $15 level and the stock was a strong performer in the latter half of the year. The recent "trouble" near the $20 level may be simply due to the stock having reached a level of technical resistance or there may be some substance to today's rumor of "accounting issues." I will note today's heavy volume on the downward move and indicates that even institutions are sellers in the stock. I won't say this gives "credence" to the accounting rumor, but I'd be patient and lets see if the company responds.

Add WorlCom to the list

I've lost track of the number of rumors that have come out on WorldCom (NASDAQ:WCOM) today. The stock has traded a new 52-week low at $9.76. There's rumor of the company being dropped from the S&P 500, rumor the company's debt will be downgraded to "junk" and rumor that Goldman Sachs would cut its rating on the stock. So far, Goldman has said it was not getting ready to cut its rating on the stock.

Last week

It's very tough to try and trade "rumor." After Enron, the seed has been planted that anything is possible and investor confidence when it comes to accounting is shaky.

As is always the case, trade your plan. If a stock stops you out based on where you had your stop set, then so be it (long or short). Yes, it's frustrating for a rumor to impact a stock you're holding and that is why we must be disciplined with our stops. Once you start removing your stops, you've deviated from your trading plan and most likely will be on the road to severe account risk. Plan your trade and trade your plan. Regardless of rumor. If a "rumor" works in your favor, immediately adjust your stop to benefit. That way, if the rumor is untrue and the stock corrects is recent course, you'll be in a better position to have benefited.

Jeff Bailey
Senior Market Technician
Option Investor

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