Option Investor
Market Wrap

A classic failed rally or fear of the holiday weekend along with a post impeachment dip?

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        WE 2-12          WE 2-5           WE 1-29          WE 1-22
DOW     9274.89 - 29.35  9304.24 - 54.59  9358.83 +238.16  -219.88   
Nasdaq  2321.89 - 51.73  2373.62 -132.27  2505.89 +167.01  -  9.27   
S&P-100  616.14 -  1.53   617.67 - 22.77   640.44 + 30.06  -  6.08   
S&P-500 1230.13 -  9.27  1239.40 - 40.20  1279.64 + 54.45  - 18.07   
RUT      398.44 - 14.28   412.72 - 14.50   427.22 +  4.78  -  4.61   
TRAN    3096.89 -150.77  3247.66 + 45.29  3202.37 +138.57  - 84.73   
VIX       31.35            30.47            26.53            32.85
Put/Call    .85              .64              .47              .54

A classic failed rally or fear of the holiday weekend along with a post impeachment dip?

Whichever the case may be the techs gave back almost all of their big gains from Thursday and the Dow followed right along. The top four stocks in the Nasdaq accounted for a whopping +26% of the gain on Thursday. The same four stocks on Friday accounted for 50% of the drop.

The major culprit of course was Dell. Dell was hit before market opened by two analysts who claimed they were expecting soft sales from Dell this quarter which will be announced on Tuesday. That along with a an analyst setting his target price at $80 sent Dell crashing to a -$12 drop. Dell has always had a habit of pulling back some just before the earnings as traders take their profits before the announcement. Dell has done so well for so long that they are held to a higher standard on earnings day. Dell has gone up +80% in the last six months and you can't blame traders for trying to convert the high stock price back to cash. What has happened may be good in the long run. The severe drop has setup a lowered expectation of what to expect from Dell on Tuesday. If Dell blows out the whisper numbers they could really fly. Just remember that without a stock split announcement, and at $90 we do not expect one, there is nothing to hold up the price after the earnings announcement. If you own Dell currently you should watch for any signs of weakness after earnings and bail accordingly.

The market did not sell off on Friday. It drifted off due to a lack of buyers again. The talk on the floor was that no one wanted to hold over the long weekend with Brazil, Argentina, and Japan all pregnant with the possibility of a currency event. Japan has used our holidays against us before in the currency war and will probably use them again.

Another factor was the end of the impeachment trial. Even though the outcome was know months ago some traders had expected a relief rally after the vote was taken. When the rally did not appear some of the traders who had been holding decided to move back into cash to be ready for the next cycle. A prime example of buy the rumor, sell the fact. The market discounts ever conceivable news event far in advance of the actual event. The bond market for instance is already pricing in the next interest rate change as a +.25% hike. It may be months away but the direction is clear.

The market is still trading in a tight range between 9200-9400 except for brief penetrations to either side. The market could be sitting up for a series of higher lows. We have penetrated 9200 on the downside only four times this year. The last attempt on Feb-10th briefly touched 9100 only to rebound to almost 9400. On Friday we plateaued on the down side at about 9240. Every drop under 9240 was immediately met with a rebound. I think if we can continue to hold 9240 and or least 9200 then we will get a good base built which will protect us from a stronger drop any time soon. There is still no conviction in the market on either the buy or sell side. Does "range bound" ring a bell.

The volatility at this level is tremendous. Last week the Nasdaq, which had just set an all time high on Feb 1st, was breaking records almost every day. On Tuesday the Nasdaq had the third largest drop in history. The previous third worst was the week before. Then on Thursday we had the largest gain in history, followed on Friday by the fourth largest drop in history. Four in the top four in only two weeks. The bright side for me was the strength of some of the secondary Nasdaq stocks. Some only dropped fractionally and many actually posted some small gains on Friday. I think the Dell assassination was the key factor in the Friday drop. If they pull off some strong earnings on Tuesday then the money will move back into techs and we could see another rally. Conversely if Dell trips carrying the hopes of the sector then it is lookout below. Michael, we could sure use another miracle here!

Nasdaq support is at 2300 and we have held even in the face of some serious drops. Should we close way under 2300 the next stop is 2000. I do not want to go there!! It would be a good buying opportunity but that assumes you are not currently invested. The clue to get out would be any close more than a point or two under 2300. Sit on the sidelines then and wait for the next move.

The put/call ratios are climbing into rally territory but are not quite there yet at .82. The VIX spiked to 33.53 intraday on Friday but quickly dropped back to 31.35 at the close. The VIX high for the year is only 36.79 on an intraday basis. This would tend to support a coming rally as well. Remember, when the VIX is high it is time to buy. When the VIX is low it is time to go!

The wild card here is still the Russell-2000. At its current sub 400 level (398.44) it is on the bubble. No significant Dow rally can last without confirmation from the Russell. The RUT has been in free fall since Feb-1st and shows no sign of stopping. There was a momentary sign of life on Thursday but the EKG took a turn for the worst on Friday.

Volume was still light on Friday but advance/declines were very negative. The declines beat the advancers by a more than 2:1 margin. 4736 to 2217. This is not a good sign even with light volume. We are now negative for eight of the last ten days. The only positive straw I can grasp at here is maybe this was a final spasm which normally precedes the end of a correction. Just a straw!

You can see the quandary most analysts are in. There are a lot of both positive and negative signs in the market. We can go either way. The most positive factor is the strength of the economy and lack of reasons for a crash. The only thing the bears can point to is the historically over priced S&P at 27 times earnings. As long as earnings continue to increase then it is not a problem. Some point to an early Y2K cautionary sell off starting. Too early in our book. While we are waiting to see how the next chapter in this market goes, we suggest only taking half of your normal position and using tighter stops. You never know when the next big drop may start and it is better to be safe than sorry. An A.G.Edwards analyst, Stuart Freeman, said again Friday that he thinks the Dow is fairly valued and still sees Dow 10,000 soon. We sure hope so Stuart. The Dow did close well off it's lows of -134 on Friday but we would have liked to see something in -50 range or better.

Our buddy, Tom Kurlack, resigned from Merrill Lynch this week. Seems that many people were angry at him for missing the big semiconductor rally we have seen in the last two months. He is going over to join the team at Tiger Management, a well known hedge fund. Gosh, do you think he wanted to get in one last jab at the market last week when he cut chip stocks again. Do you think he knew he was resigning before his highly publicized Intel attack recently. He has caused more grief for Intel than all the other chip makers combined. Wish I could say we are sorry to see you go Tom, but good luck in your new position anyway. Anybody got any money invested with Tiger?

To summarize the outlook for the week, I wish I could say something positive but the watchword is caution again. I hope we are just passing time basing here but we could also be setting up for the next leg down in a tech correction. Nobody knows and anybody that tells you they do is lying. I have been accused lately of having my objectiveness clouded by excessive optimism. Show me somebody who is not leaning in one direction or another. I do look at the market currently with an optimistic view. I see no reason for the market to move down over the next two months other than profit taking. With the huge inflow of cash coming into the market any profit taking dips should be met with buyers. Granted there is nothing to move the market upward again either, other than liquidity, until the April earnings period. Without direction and conviction we are not likely to see any sustained moves. Just three steps forward, two steps back until the March pre-earnings run starts. I always urge readers to do their own research from various sources and make their own decisions. My decision for this week is wait, watch and try for quick base hits when situations present themselves. The bias should be up because of the February options expiring on Friday.

Good Luck

Jim Brown

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