Option Investor
Market Wrap

All quiet on the financial front.....

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MARKET STATS FOR LAST WEEK AND PRIOR WEEKS
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  WE 10-9          WE 10-2         WE 9-25          WE 9-18
DOW     7899.52 +114.83  7784.68 -244.08  8028.77 +133.21  +100.16  
Nasdaq  1492.49 -122.47  1614.98 -128.61  1743.59 + 79.85  + 22.12  
S&P-100  483.72 -  2.77   486.49 - 19.78   506.27 + 11.21  +  2.26  
S&P-500  984.32 - 18.25  1002.60 - 42.11  1044.75 + 24.82  + 11.02  
RUT      318.40 - 31.31   349.71 - 19.31   369.02 +  5.76  +  9.64 
VIX       45.69            42.36            35.60
Put/Call    .81              .85              .80
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All quiet on the financial front.....


Quiet as a church on Monday in the news this weekend. Looks like 
the world took off for Columbus day. Aside from the normal dire
forecasts from Japan, the rattling sabers (B52's) around 
Yugoslavia and the ever present talk TV impeachment chatter the
news front is very calm.

Does this mean the market is back to normal? Does anybody remember
what normal was? I doubt it on both counts.

The wind you felt on Friday was the collective exhaling of the many 
traders and analysts who had been holding their breath all week.
The outstanding (and surprising) rally on Friday can be attributed
to several factors. The first of which was a rumor leaked around
noon on Thursday that Greenspan was on a conference call with the
FOMC group and they were going to cut rates again before the Nov
meeting. The free falling market promptly rebounded to close flat
from a -275 point drop. Good job by whoever started that rumor. 
The second cause was the recovery of the financial stocks. We
finally got to the point where everyone had revealed their LTCM
exposure and surprise, there were no surprises! That made companies
like Lehman Brothers very attractive at one third of their recent
highs. Thirdly the capitulation of the Nasdaq big caps had finally
arrived. The heroes of computing, the four horsemen of the Nasdaq, 
the....you know. Dell, Microsoft, Cisco and Intel had finally met
the fate of their brethren. Dell had dropped from $69.50 to $40.75
in one week. Microsoft fell from $114 to $87, Cisco from $67.50 to
$41.13 and Intel from $89 to $75.81. All this carnage brought them
back to reality. The rest of the Nasdaq had already fallen -51% on
average while these four continued to rise and set new highs in 
the case of Dell. The final volume rush was incredible. Dell over
100 mil in one day. 36% of all the outstanding shares have traded
in the last eight days. Over 20% of Cisco shares have traded.

The "value" buyers got dollar signs in their eyes and it turned
into a complete reversal. From million share sell orders in the
morning to multi-million share buy orders in the afternoon. The
buying continued on Friday as the rate cut rumor gained speed
and shorts ran for cover. Actually the chances of a rate cut before
the November FOMC meeting are very slim. Greenspan does not cut
between meetings. Historically he has only done it once and that 
was in April 1994. He much prefers to cut slowly and gradually.
Some fear that an actual between meeting cut could scare the market
and have an adverse reaction that things are worse than we think.
The bright side is the rumor persists and just the rumor is helping
the market. Mr G could just drop enough subtle hints over the next
few weeks and keep the market moving on anticipation alone.
He will have to follow up with action in November or the market
will suffer a massive sell off.

The week ahead should be interesting. With the bond market closed
Monday for Columbus day we may get one more day of rally without
worry over the bond sell off. Friday bonds disconnected from the 
market and lost ground as dollars fled safety and found equities.
Some said Japan was selling dollars and dollar denominated 
investments to repatriate funds back to Japan to inflate their
lagging economy. What ever the reason the bond yield settled at
5.12% up from the mid 4% range recently. Under 5% the equity
market would benefit. Typically any stock investment will yield
over 5% long term so parking money in bonds with under 5% yield 
does not make sense except for very short term.

Several analysts point to the huge swelling of money market funds
as evidence of pent up buying. Currently there is over $759 billion
in money funds where it can be moved on short notice back into
stocks. The very low yield money funds will not look attractive
to investors who have been getting 15-20% in mutuals for many years.
As soon as things look positive again we expect this money to come
back to the market very quickly.

Market breadth was good, not outstanding, on Friday with advances
outpacing declines on the NYSE 1825 to 1247 and Nasdaq 2673 to 1482.
After the beating the broader market has taken analysts would like
to have seen much stronger numbers in light of the extremely heavy
volume for last week. The NYSE traded over 4.6 billion shares for
the second heaviest week in history. The +114 Dow points for the
week should have been much higher considering the volume. 

We still have three weeks to go in October. The month when 5 of the
top 10 worst crashes occurred. It makes you anticipate Halloween with
an entirely different perspective. Happy Halloween should be 
synonymous with TGOO (Thank God Octobers Over). Call it superstitious
but I have heard of several investors who are waiting for November 
to put money back into the market.

Our feeling for the week, global news permitting, is positive. We
have several big earnings announcements this week that could set 
the tone for the rest of the year. 

Intel announces on Tuesday after the close. They have already 
prewarned that they will beat estimates. Of course by prewarning,
the analysts have now bumped their estimates. The outcome now is
anticlimactic. The focus will be on the post earnings conference
call and outlook. If Intel sees heavy buying trends developing 
then the tech sector will rally even more. Should they warn that
holiday buying is not on track we will test new lows again. Also
Novellus, Vitesse and Lattice Semi both announce on Monday as a
precursor to the Intel showdown on Tuesday. Do you think they plan
that?? Duh!

Merrill Lynch announces on Monday and they will act as a lightning
rod for the financial sector. Schwab also announces on Monday and
they prewarned a better than expected quarter but MER will be the
focal point. DLJ announces Tuesday.

Apple Computer and Compaq announce on Wednesday and you can bet
that Dell and Gateway will both respond to their direction.

Another closely watched announcement will be Capital One on Thursday.
The recent demise of several sub-prime lenders has focused the
spotlight on accounting practices and profits for this group.
While COF and Providian (PVN) are expected to show profits in
the 25-40% range, everyone is skeptical until they see proof.
If COF does come through then both COF and PVN are sure to rocket.

Pfizer announces on Thursday and many will be watching to see if
the Viagra results have worn off. If PFE post strong earnings then
the drug sector should continue to climb. This sector has the most
combined profit potential going forward. Warner Lambert for example
could post a +40% increase, the largest in the group. Others, LLY,
SGP, BMY, MRK, etc are expected to maintain 20-25% growth.

Reminder !!  We do not recommend holding over an earnings announcement.
Historically about 75% of companies announcing go down the morning
after. Even if they hit their numbers! We are conducting a survey
during this earnings cycle and we will be able to report to you
exact statistics at the end of October. Use your own judgment, it
is your money.

Watch out for negative global news this week and be prepared to
sell if the market starts to trend down again. We are up +441 on the
Dow from the Thursday low. Believe it or not, we could have some 
profit taking any time now. I think the overall trend will be up as
long as we do not get hit from Japan or Brazil again. Brazil appears
to be under control and the IMF funding bill looks to be a done deal.
The Clinton problem should fade now as evidenced by his strong attacks
on the Republicans. He will be trying to focus attention on anything
but his problem as we move into the election process. The Yugoslav
problem is a non-event financially except we the taxpayer get to 
pay for it.

Volume could be somewhat lighter on Monday which means anything
can happen as order imbalances push the prices around.

This is options expiration week for October and any time premium
left is likely to be small. Any time premium will evaporate quickly
if the direction of the market/stock changes. If you still have
October positions we caution you to close them quickly and move
into a longer position. This week is a daytraders paradise as ITM
and ATM options have very high deltas and very little time premium.
These cheaper, fast moving options, only happen once a month and
provide a real rush in a fast market. This expiration/earnings week
only happens four times a year and provides even more excitement. 

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

Good Luck


Jim


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