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Market Wrap

The Internets all suffered from circuit failure with investors today

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        1-21-98         High     Low     Volume   Advances Decline
DOW     9264.08 - 71.83 9377.36  9228.55  870,642k  1,127   1,932
Nasdaq  2344.72 - 70.77 2403.52  2335.75 1084,400k  1,598   2,475 
S&P-100  617.08 -  8.93  626.84   615.27   Totals   2,725   4,407
S&P-500 1235.16 - 21.46 1256.94  1232.19            38.2%   61.8%
$RUT     424.05 -  6.57  430.79   422.37
$TRAN   3094.81 - 16.61 3132.70  3088.32
VIX       31.95 +  2.52   33.26    29.73
Put/Call Ratio      .57

The Internets all suffered from circuit failure with investors today

Bearish comments from George Soros and Barton Biggs along with restrictions placed on trading Internet stocks by the brokerages all worked together to slam the prices back to last years levels. Every other news article on CNBC and in my email today was about the bursting of the Internet price bubble. Think for a minute, how much would have heard about the overvalued Internet bubble if it was never reported on CNBC? I doubt it would even be a topic at the dinner table without their daily "extensive" coverage. Don't get me wrong. They do a good job reporting on the market but they have a negative bias toward these stocks.

In any event the leaders all dropped double digit numbers with the exception of AOL. The largest Internet blue chip, AOL, did drop as low as -9.50 but had recovered to -$5.00 until the market drop at the close. It finally settled at -7.50.

AOL has firmly established itself as the favorite of analysts who follow this group. With 23,000 new subscribers every day AOL has power. We view this as a buying opportunity before next weeks earnings.

The real culprit today was profit taking on worries over the global currency problems. Brazil's lower house passed the pension reform law last night but the Bovespa dropped -6% at the open. The Real lost value again on the open market and started putting pressure on other world currencies. The large market drop at midday was caused by a rumor that China or Hong Kong were going to devalue based on losses in Brazil's currency. The rumor was so strong that China made a formal statement that denied it completely. (remember my comment last week about never believing anything from any country under currency attack. They will say anything to protect their options.) After the denial the market recover significantly from the days lows. Fear of the dark manifested itself with global rumors still circulating and profits still on the table. Another rumor that Greenspan was going to leave office also put a scare into the markets. Even though the market holds it's breath every time My G. speaks, they still respect the work he has done in the last few years.

The Nasdaq got hammered. The sixth biggest point loss ever. Down -80 at one time it rebounded in late afternoon to only -38 but when the bottom fell out at the close it sank to -70. Put this in perspective. It had just set another record high yesterday. The Nasdaq was up +215 in the last three weeks. It has been going straight up since the October 8th lows. It was due for a sell off.

Remember in the Wednesday commentary on the website we talked about the Microsoft gap open on earnings. I warned again about holding over earnings and the dire consequences. I advised watching LU, IBM and SUNW today for signs of the gap down effect. The results are in! IBM +2.50 in regular trading, beat the street by +.02, failed to announce a split and traded down -7.50 in after hours. Lucent announced earnings that beat the street by +.04 and issued strong profit forecasts for the next two quarters. They did fail to announce a split and analysts felt the current sales were lacking. Lucent dropped -8.56 today after gapping down -6.00 at the open. SUNW announced after the close and beat the street by +.01 and issued a strong profit forecast AND announced a 2:1 split. SUNW had suffered strong profit taking during the Nasdaq sell off today and was down almost -9.00 at the low of the day. The most active stock on the Nasdaq today with 27 million shares, SUNW closed at 98.63 in after hours trading, gaining +.38 after the close. Because SUN suffered so much today and announced a split they did not suffer after hours but could drop tomorrow. The stock split will help but the timing is in March, a long way off.

The point here is "everybody beat estimates but IBM and LU got killed in afer hours and SUNW will probably suffer tomorrow." It is just not safe to hold over earnings.

The S&P Futures dropped -17 points in the last hour of trading on global worries. Since the close they are only down -.30. If we do not have a negative global currency event overnight then we could get a strong rebound in the morning. The key word here is "could". We could also suffer another round of profit taking in front of the weekend. Many traders will want to get flat before the close so plan your trades accordingly.

Good Luck

Jim Brown

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