Option Investor
Index Wrap

We Are Now Entering the "Dilbert Zone"

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       10-18-2001           High     Low     Volume Advance/Decline
DJIA     9163.22 - 69.75  9233.94  9134.30  1.2 bln   1106/1994
NASDAQ   1652.72 +  6.38  1668.00  1634.72  1.8 bln   1505/2076
S&P 100   551.01 -  3.66   555.69   548.58   Totals   2611/4070
S&P 500  1068.61 -  8.48  1077.94  1064.54
RUS 2000  421.06 -  3.43   424.86   420.55
DJ TRANS 2204.70 - 23.00  2229.04  2194.19
VIX        37.36 +   .13    38.48    36.67
VXN        70.69 +  3.58    72.06    67.58
TRIN        1.39
Put/Call Ratio       .93

We Are Now Entering the "Dilbert Zone"
Contact Support

Actually, we are already in it. Everybody familiar with the syndicated "Dilbert" daily comic strip by Scott Adams? The cynically-edged cartoon pokes fun at the work environment in corporate America, the nature of pointy-headed bosses, and as you might guess the absurdity of financial markets. Today's strip is priceless in my book and I would reprint it here if I thought I could get permission (or escape the wrath of thousands of copyright lawyers). Even so, the words tell a pretty good story.

Imagine watching CNBC (not to hard to do that) and hearing the blended voice of Abbey Joseph Cohen and Joe Battapaglia, both religious in their perma-bull faith, coming from the mouth of a stock market analyst/expert dog with glasses. Now there is a visual! The dog then says to the viewers, "If your core holding is a falling knife, you can dollar cost average through the dead- cat bounce." Scene two: "My secret economic model says you should change your cash allocation from 12.4% to 12.3%"

It finishes off with the stock market expert/analyst dog pitching his new book. "My new book is, 'If you aren't churning, you aren't learning'". A Ron Insana cartoon figure with a dry, un- amused look says, "Don't come back". This is really funny in a comic strip, but not so far-fetched from the truth! No wonder we are not getting rich listening to analysts! However, I'm glad to see these people becoming the target of jokes - a reminder that investors are waking up to reality. But I digress

Turning our attention back to the markets. Does anybody see any reason to be bullish right now? I don't. Reality is that the U.S. (and the world for that matter) is in recession. Business is facing its biggest year over year percentage earnings drop in history. Most stocks pay no dividends and the ones that do pay a low percentage return. Meanwhile the E in P/E ratio is falling faster than the P currently, which means stocks are becoming MORE OVERVALUED. There is more room to fall despite snorts from the pasture.

Oh yeah, forgot to mention that terrorist threats and specific performance are slowing transportation and communication (U.S. mail anyway) in a big way. Plus, the Capitol has become a ghost town as people in bunny suits go looking for anthrax. On the latter, Anthrax is not the real threat, but a mere head cold in the grand scheme of what is possible. All any terrorist is doing with that stuff is testing our response to see how we react, what tests we undertake, and what precautions we take. Then they will try to figure out a way around it just like they did airport security

Presumably since communications have been virtually eliminated in Afghanistan, except for occasional smoke signal, the Taliban can plan their next moves based on what their willing accomplices in the press report over the airwaves. Loose lips really do sink ships and I continue to be amazed at the audacity of press questions.

Market specific though with regard to economics and earnings, SUNW reported a penny above but offered no guidance and no conference call. MSFT "beat" by $0.04 (of course completely disregarding GAAP by way of "excluded", never to occur again, one time only charges) but lowered 2002 guidance. GLW too reported $0.06 ahead of estimates but guided loss estimates from $0.06 to $0.25 - a 400% increase in the loss. Many more like this occurred; yet after hours trading has prices holding steady. Fundamentally, rational people worldwide are shaking their heads in amazement.

Much like forest management techniques that seek to prevent fire, the growth of underbrush and an ounce of carelessness will eventually overcome the pristine wilderness in smoke an ash, and to a much greater degree than if nature had been left to run its course. The same is true with markets. The longer investors refuse to accept the inevitable, the harsher it is when it finally happens.

But it matters not what I think or what fundamentals are saying. This is a market based on cycles of human emotion that have been part or our existence. As long as we know that, we can use it to our advantage to profit from nothing but chart signals that reflect that emotional cycle. Frankly, there is not much action to speak of tonight,

Here is the lineup.

Dow Industrial chart (INDU):

NASDAQ-100 chart (NDX):

S&P 500 chart (SPX):

What we see on all three charts is near-term oversold stochastics just beginning to poke up. Yet the daily chart stochastics have started a clearly defined new downleg. We should get used to that as the weekly candle charts are topping out at resistance with oscillators soon to follow if the downward pressure stays intact. Note that on the broadest index of all, the SPX, bearish divergence is proving itself true.

Short-term though, the 60/30 stochastics suggest that we get one more counter trend bullish play before the mother of all put opportunities exposes itself. Neutral wedges on the NDX suggest a breakout or breakdown is coming, but the direction is unclear. Candle support with oversold stochastics ticking up may signal the last call swing trade, but no guarantees.

Daytraders can take advantage of scalping on expiration day (tomorrow) by trading the 5/10 oscillators in the direction of the 60/30 charts because October time premiums have substantially evaporated. Be sure to use risk capital only and prepare for 100% loss. Remember, tomorrow is OCT expiration day and you don't want to hold those through the weekend. You will be exercised under the terms of your brokerage agreement.

For tomorrow, earnings tonight from SUNW, MSFT, GLW, NT and many others are no reason to crow and will certainly boost share prices on their earnings merit. I believe it is only a matter of time before the market tests and perhaps exceeds its lows again. Even the SPX chart at the 50-dma shows failure over a longer period of time.

SPX 50-dma chart:

That said, Trade 'em hard. Scalp where possible. With the VIX at 37, holding over the weekend only insures time value decay. I personally plan to be flat at the close.

See you at the bell.

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