Option Investor
Market Wrap

I have some good news and some bad news. Actually it is the same news!

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MARKET WRAP
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        10-6-98         High     Low     Volume   Advances Decline
DOW     7742.98 + 16.74 7880.98  7683.51 842,348k  1,308   1,683
Nasdaq  1510.89 - 25.80 1577.06  1501.71 888,981k  1,577   2,489 
S&P-100  480.19 -   .52  491.16   476.46   Totals  2,885   4,172
S&P-500  984.59 -  3.97 1008.77   974.81           40.8%   59.2%
$RUT     332.55 -  4.25  340.85   330.94
VIX       43.91 +  1.55   45.43    40.31
Put/Call Ratio      .99
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I have some good news and some bad news. Actually it is the same news!


After a tremendous open with the Dow jumping +155 points at the open,
in response to the strong showing in overseas markets, it was all down
hill from there. Mid-afternoon the Nasdaq had given up all of its 41
point opening gain and had slipped to -35 for a range of 76 points.
The good news was the successful bounce off 1501, a previous low we
set back on August 31st. This retest appeared successful with an
immediate bounce almost back to positive territory but traders took
the opportunity to sell into the rally again. Prices again dove and
failed to recover, closing at 1510.

The big story today was the call for a Dow 7400 retest again. Over 
and over traders continue to say there is not enough fear in the market.
Small, weak traders have not been driven from the market yet. The
global economy is still sinking and the impact to the S&P-500 earnings
are now down to -2.4%.  It does not look good for the home team.
Any rally before another catastrophic crash to 7400 or below may
be met with strong selling and fail. 

Clinton mad an impassioned plea for the "new deal" at the IMF meeting
but it had no impact on the markets. Brazil only needs to hold out
their hand to get a $30-50 billion loan. The details are not worked out
yet but many officials are on record as saying it is almost a done
deal. Members of Congress said today that a deal was close to provide
$18 billion in funding for the IMF but only after they were assured
of some tough reforms.

Brazil closed up +3.9% today as investors seemed more calm about
the eventual solution to their economic problems.

Two things have to happen to bring about a rally at this point. 
The first is another damn drop to the technical level at 7400 to
satisfy the hard core among us. Probably a strong intraday sell off
and recovery scenario. The Nasdaq is at its benchmark level now.

The second requirement is a large number of positive earnings
surprises over the next two weeks. AMD and Motorola got us started
off on the right track. Without some incentive to buy stocks we
could be range bound until the first of the year.

The wildcard here is a growing expectation of a global rate cut.
Spain cut today, -.50 and some feel that will start the ball rolling.
A coordinated rate cut would be bullish and could power the next
recovery phase.

Boy, do we need a recovery phase. The average NYSE stock is off
-39% from its 52 week high and the average Nasdaq stock is down
over -50%. This qualifies as a definite bear market EXCEPT the
generals who fill the averages, the big blue chips, have not
broken down as bad as the troops. This stealth correction is just
now impacting the blue chip leaders. Most analysts welcome this
as the last leg of the correction. The final massacre.

The Russell 2000 set another 52week closing low today. 

The futures were down -4.80 at 7:pm and this is not a good sign
for tomorrow. Since Asia has started trading they have reversed
to +5.00 but they can change back just as fast. Tokyo's key Nikkei
average climbed more than two percent in early morning trade on
Wednesday, supported by hopes that the government will take new 
steps to revive Japan's economy and expectations that bank
recapitalisation bills will be passed by parliament soon.

I hate to seem like a broken record but we do not suggest any
call positions at this time. There are some real bargains out
there but if we are going to have a possible 7400 retest, you 
will be playing in fast traffic.

IF WE GET A INTRADAY RETEST of something close to 7400 with a
strong bounce, you could take a position when the Dow is still
under 7500 AND MOVING BACK UP. This would be relatively safe but
would still need to be watched closely.

If the markets open up again tomorrow I would be afraid of 
another day like today with traders selling into the rally. 
Be careful. Have patience. These conditions will not last forever.

The best play would be to sell out of the money puts on any 
blue chip stock expected to rebound strongly. With only one 
week until expiration this would be a pretty safe play. Puts 
normally require about 20% of the stock price in your account 
for margin. For example a $20 stock would require $4 for 
margin and the $20 put should sell for about $1.50 for a 37% 
return in less than ten days. Stocks like Dell, PSFT, MSFT, 
CPQ, which should rebound strongly, would be good candidates. 
This way time works with you not against you. Check out the 
hedge section for plays like this as well.

Sometimes the best play is no play at all. This could be one of
those times. We could bounce around at this level for several days
without the retest or it could happen tomorrow. The market rules.
Don't fight the market. 

Wait, watch. Plan your trades and when the time is right,
execute your plan !


Good Luck

Jim


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