Option Investor
Market Wrap

The Dow touched 9400 again today and again bounced off the current top of our recent trading range.

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 MARKET WRAP  (view in courier font for table alignment)
        3-02-99         High     Low     Volume   Advances Decline
DOW     9297.61 - 27.17 9421.22  9268.00  748,343k  1,413   1,554
Nasdaq  2259.03 - 36.15 2317.57  2257.07  893,537k  1,711   2,230 
S&P-100  611.39 -  6.67  623.88   609.12   Totals   3,124   3,784
S&P-500 1225.50 - 10.66 1248.31  1221.87            45.2%   54.8%
$RUT     394.43 +   .04  398.30   394.01
$TRAN   3279.06 + 53.20 3301.37  3226.01
VIX       30.58 +  1.74   31.32    28.29
Put/Call Ratio      .55

The Dow touched 9400 again today and again bounced off the current top of our recent trading range.

Another day, another bounce off the limits of the current 9400 top of our range. Just like it was scripted the Dow performed its task just like clockwork. A bottom test yesterday of 9220 and a top test today of 9420. Looks like a vertical ping pong game. The current choppy, directionless market is causing havoc with the buy and hold traders and after the 3Com announcement tonight it looks like it could get worse.

The drop in today's market from a high of +95 for the Dow and +22 on the Nasdaq was prompted on the surface by earnings worries and continued downgrades of tech stocks. Intel was again downgraded on a forecast of slower PC sales, weaker chip market and aggressive competition. This continued pattern of analyst flight from the leading techs will be made worse tomorrow after the 3Com earnings warning tonight. 3Com had been sliding all day as news evidently leaked out to somebody in advance of the official warning. The numbers were bad. 3Com now expects to earn only $.23 instead of the analysts estimates of $.36. The reasons given sound like a grab bag of what the tech bears have been saying for months.

We quote, "An unexpected slowdown in the U.S. and Latin American markets, a weakness in the traditional two-tier distribution channel, and lower than expected OEM PC sales all contributed to weaker results", said Chairman Eric Benhamou.

Lets see, unexpected slowdown, distribution weakness and weak PC sales. Looks like three more nails in the tech coffin for this week. That along with the Intel, CSCO, Dell, CPQ problems may finally vindicate Bill Fleckenstein. Bill is the loudest tech bear and has been calling for an end in the Y2K buying for some time.

I got several emails this week asking when the Y2K buying would start. Don't look now but the END of the buying is in sight. Major companies who make up the majority of these purchases have been buying for some time. They can't afford to wait until three months before Y2K to fix their problems. Several companies I know bought 5,000 to 10,000 PC work stations last year. It takes a long time to configure, test upgrade, etc, that many new boxes. Then you add the software and internal databases and user complexities and you can span a year easily. This process is coming to a conclusion now as everyone is entering into the testing and certification phase. Do you remember back about six months ago when Dell was announcing a new multi million dollar contract almost every day? FTD, Mobil, etc, major companies, tens of thousands of computers. Now that they are all shipped what do they do to fill the void? This is where the rubber meets the road, to use an old expression.

Most analysts thought we would get through the second quarter earnings before the Y2K slowing would be felt. Don't look now but that may be darkness approaching faster than we thought. Even excitement over the HWP restructuring announcement did not help hold the market up. The transportation sector rallied on several upgrades and the Russell-200 also failed to drop. These positive signposts may be lost in the fog if we get another tech sell off tomorrow. There is a bottom but we may not be there yet. The firming yesterday turned out to be just a temporary plateau. Some tech analysts still hold out hope that this is just a buying opportunity and a normal cycle in the boom - bust tech sector. Internet users will still want faster PCs and companies will still be upgrading internal networks to cope with growing business. This could be just a correction in focus. Any tech company with +25-35% growth is still a better play than a manufacturing company with a +12-15% growth. There are tech buyers. They just want to buy at a level that represents value for expected growth. What that growth over the next twelve months will be is yet to be seen.

Futures had been down about -2.50 but are trending up again. At least there is not a stampede to the exits in progress. Just like the CPQ warning last week the 3Com warning may be viewed as competition driven instead of sales driven. 3Com has been having trouble in their sector given the companies expanding into their niche. Only time will tell.

I am in cash due to the current seminar schedule and I must confess it feels good given the current uneasy market. Yes, I was cussing myself for missing the CMGI and RNWK plays this week but there will be others in the future. Profit comes to those that patiently wait. I have received many emails from people who bought the dip on Monday according to the plan and then sold again today at the top end of the range. They are ecstatic about finally understanding the concept of trend trading. While everybody else is moaning about the market they traded the plan and made money. Most are in cash again and will buy any rebound below 9200 and repeat the plan. I also got emails from people still holding options from several weeks ago. Some complain about being profitable every other day but having their positions go negative in between. The question, "What am I doing wrong"? The answer, THIS IS NOT A BUY AND HOLD MARKET. If you are a buy and hold player then you need to close your position the next time it goes positive. WAIT for the market to establish a new direction, THEN PLAY. If you are not a trend trader then STAY OUT. The market is unforgiving and will take your last dollar and not look back. We have the option to trade what the market gives us or wait for the next pitch. (see "Its like baseball" in Options 101) After next weeks seminar I will be waiting for that perfect pitch before I venture back into the market.

Sell too soon!

Jim Brown

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