Now you know why I urged caution on Sunday!
The expected profit taking/correction on Monday surprised no one. The Internet's were the first to falter sinking in double digits as traders bailed out on profit taking as well as rumors that the margin requirements were going to be changed on Internet stocks. This set off the rush for the exit on all Nasdaq and tech stocks.
The selling was strong and very healthy. This routine setback is like a needed vaccination. Without it we could get very sick.
The good news of course was the successful test of the 9000 level this morning and the strong rebound of the tech sector as well. The low today was over 400 points below the new high of 9374 set last week. (-4%)
Most tech stocks had strong gains today that made up for the huge drops yesterday. IBM +4.75 (-4.88 Monday) Dell +4.00 (-3.00) CSCO +4.38 (-4.63) Anybody buying the dip today made a good trade.
We still have a positive outlook on the market and still expect it to continue up for the next two weeks. The after hours bombshell today was Boeing. They announced another round of Asian induced layoffs and projected earnings to be down -25% from what was previously expected. Being a Dow stock they could have an impact on the market tomorrow. Sometimes investors see restructuring as positive to future profitability. This appears to be the case as the S&P futures are up over +$2.00 tonight which would point to a stronger open on Wednesday.
Some Internet stocks rebounded strongly and others continued sharply downward. This is truly a case of quality verses hype. If you own Yahoo, Amazon or AOL, which have good fundamentals and a huge market share then you can benefit from the positive Internet trend without as much risk. The smaller niche stocks do not have the investor following to maintain the trends when things get rocky. YHOO +14.25, AOL +2.31, AMZN +17.50. (I did not say NO RISK!) Yes these stocks were up strong today but they have not recovered all of the Monday loss. (yet) I have mixed views on the move to increase the margin requirements on Internet stocks. I think it is smoke and mirrors and will have no impact on the movement of the stocks themselves. Some smaller players may have to take smaller positions but I don't think it will be material. Etrade said it constantly reviews its exposure to margin and is not planning any changes. I feel that if your broker puts a squeeze on your account you should change brokers. If they are having trouble making their margin requirements then you need to trade somewhere else.
One of the market sign posts that we watch is the Dow Transports and another is the Russell-2000. The transports have not rallied like they should with oil at $11.00. Previously this level had powered the airlines to new highs due to lower fuel costs. We feel there might be a hidden message here. If you look at the AMR load factors for November, which were announced today, you could make a case that traffic is still increasing. Their load was up +3%. But the Boeing layoff explanation focused on Asia and a forecast of declining passenger traffic in the U.S. If airlines are not putting their money where their mouth is and buy buying new planes then should we really believe that business is good? Investors in the transports seem to be saying they are not sure the economy is well. Dow theory followers know that any significant Dow advance must be confirmed by the transport sector. Tomorrow will tell which direction the sector will go following the digested Boeing and AMR news.
The Russell-2000 gained back less than 25% of what it lost on Monday but the real story was the +7.00 rebound off the low of the day this morning. We feel that this was a very strong indicator that the market will move up from here.
I had several emails on my reference to the possible "traumatic year end" and why am I cautious. Basically I think the general market consensus in layman's terms is "this is great but we got here real quick." Fund managers may be tempted to sell and lock in profits for the year end statements. There is a "perceived" major problem for the coming Y2K crisis. Some institutions and funds WILL move out of stocks and into other investments sometime next year to avoid any Y2K exposure. When this exodus starts is anybody's guess. Once the gate opens there may be a stampede. I have heard many rumors that due to the size of holdings some funds have it would take months to liquidate in an orderly manner. I think it is safe to say that some will start trimming their positions early in the year. They may ride the current market wave until it rolls over but considering the 25% or greater profit they currently have from the lows of October I would not bet they will wait until the last minute.
I may be letting my caution on my personal trading plans for next year creep too much into my current market thinking but I would rather err on the cautious side than the other extreme. Before you start firing off those emails.....I did not say I was not going to trade next year. In fact I am looking forward to the tremendous opportunity the herd paranoia will create for us. The option trading community should double or triple their capital as we play the put side of the coming market turmoil. In the near term we need to stay focused on the shorter time frames of option trading and not let the overall long term market bullish/bearishness to distract us from the short term profits. As option traders we can trade any market trend up or down with equal success. My goal for 1999 is a minimum 1000% increase in my personal trading capital and I have no doubt I can do better than that. Are you ready for the ride?
No plays. Down both Monday and Tuesday with the office move. Probably no trades this week but I will keep you posted.
Our move to larger offices yesterday was accomplished and we did not lose any employees that we know about. We did however experience every crisis imaginable with the exception of lost data. We are now on target for our new format change next Sunday and we think you will be pleased.
Our new info:
** new address ** The Option Investor Newsletter 7061 South University Suite 307 Littleton CO. 80122 ** new phone ** 303-797-0200 ** new fax ** 303-797-1333 (as of Wednesday)