Option Investor
Market Wrap

Dow 9000 a near miss, Newt neutered.

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        WE 11-08         WE 10-30         WE 10-23        WE 10-16
DOW     8975.46 +383.36  8592.10 +139.81  8452.29 + 35.53  +517.24  
Nasdaq  1856.56 + 85.17  1771.39 + 77.31  1693.86 + 72.91  +128.45  
S&P-100  558.88 + 21.71   536.97 +  9.91   527.78 +  6.83  + 37.31  
S&P-500 1141.01 + 42.17  1098.67 + 28.00  1070.67 + 14.25  + 72.18  
RUT      400.32 + 22.16   378.16 + 11.00   367.05 + 24.18  + 24.47  
TRAN    2968.48 + 76.56  2891.92 +114.91  2777.01 -  3.86  +351.35
VIX       24.62            26.56            30.67            35.84
Put/Call    .61              .69              .64              .61

Dow 9000 a near miss, Newt neutered.

After eight days in a row without a loss the Dow narrowly missed the 9000 mark with a 8990 intraday high on Friday. In the last eight sessions the Dow has added +609 points to the current rally.

This rally has been full of rolling corrections. That means some stocks have fallen back for several days to consolidate while others moved on ahead to boost the averages. This "stealth correction" is good but without a minor blow off soon we could be in for a severe correction later. You have heard the old saying about "the bigger they are the harder they fall." This is true in the markets as well.

The terms "tired", "over bought" and "over extended" are becoming more common in analysts remarks.

It does not take a rocket scientist to run about 50 stock charts at random to see a flattening of the recent spikes. While the OEX, SPX and INDU charts show no signs of weakening the OEX and INDU both peaked at about 1:30 on Friday and were not able to break resistance in the late afternoon run. Several recent market leaders appear to be rolling over.

It is simply a matter of time before we pull back sharply to regroup. Once we do spend a day or two back in rest and test then we can mount a serious charge at the July highs of 9300+. Don't get me wrong! I am still very bullish about the next month in the market. As option traders we need to be aware of the ebb and flow of the market and act accordingly. We suggest using tighter stops after the open on Monday and be faithful about closing your positions with a profit. There will always be another opportunity to buy back in again. See the note on cycle trading below.

An unknown for Monday will be the Newt Gingrich resignation. I have seen mixed signals about the impact. Some say this will help Clinton and therefore be good for the market. Others say it could forge the Republicans together in a stronger group making it harder for the Democrats to get anything done. This is also good for the market. Gridlock means no sweeping changes. No new unknowns.

Tokyo stocks are probably going to trend lower because of the government economic stimulus plan due to be announced on Nov-16th. Last week officials announced that tax cuts were unlikely anytime soon. This should put a damper on the Nikkei all week. The big jump last week when Barton Biggs raised his weighting of Japanese shares in his model portfolio is also subject to further profit taking. Key Japanese analysts also feared the Dow would peak at 9000 as well.

Rate cuts around the globe helped markets last week when the Bank of England, Sweden, Spain and Portugal all cut interest rates. With fewer nations left to cut rates the global markets lacks incentives to move upward.

Positive Asian news came in the form of a partial lifting of sanctions against Pakistan by Clinton. This clears the way for the IMF to resume lending to that country. The IMF team is scheduled to be in Pakistan on Monday to resume talks on the stalled $1.56 billion aid program.

Overall our forecast is up for the week but watch for the eventual pullback. Use it as an opportunity to start new positions when the up trend continues.

Readers keep asking for a list of what options I own. This is a problem in my eyes. Options are much thinner than stocks. If I said I owned Maytag there is a large group that would buy Maytag immediately. I do not want to be in the same class as a noted option seminar promoter who broadcasts what he buys, waits for the herd to follow and then sells his position at a profit and brags about it. You know who I mean. Second, I am a very active day trader. I can be in cash at the open, own 5-7 stocks at lunch and be back in cash at the close. To tell you I have no positions and I am entirely in cash at the end of the day would imply that I knew something about the market that I did not tell you and you should be in cash also. If I told you I was in cash but planned to buy AOL and CMGI at the open the following day could stimulate the readers to do the same. Picture several thousand readers trying to beat me to the recommended contract on CMGI which only trades 200 contracts per day. Many noted analysts will tell you what stocks they own at the bottom of their commentary. That's fine if your talking about Dell (daily volume 20 million) or AOL (12mil). When your talking about daily contract volumes of hundreds not millions the situation is very different. I am planing to bow to the requests of you the readers but if I see reactions in the open interest/volume of the picks I will stop it immediately.

Beginning in December we are planning to move into a new format which will have real time commentary and plays three times a day. Before the bell, Nooner Special and Market Wrap. We have many other changes planned so stay tuned.

Plan your trades, wait for the right time in the market, execute your plan.

Jim Brown

At the time of this writing I am entirely in cash. I closed all my open long positions Friday afternoon. Over the last week I have traded DELL, AOL, CMGI, MER, MSFT, CSCO, $RUT, GTW, DAL. Some several times.

This week I am considering trades on AOL, MER, CSCO, BAC, CMGI, YHOO, AMZN, DAL, CSCO, UTX, NOKA, SWY and $RUT. I play both ways so I will be looking for direction and playing accordingly. I will list the plays as they occur.

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