Option Investor
Market Wrap

OOPS! Reality check...

Printer friendly version
        WE 3-12           WE 3-5          WE 2-26          WE 2-19
DOW     9876.35 +140.27  9736.08 +429.50  9306.58 - 33.37  + 65.06
Nasdaq  2381.53 + 44.42  2337.11 + 49.08  2288.03 +  4.43  - 38.29
S&P-100  648.27 +  9.28   638.99 + 20.57   618.42 -  1.85  +  4.13
S&P-500 1294.59 + 19.12  1275.47 + 37.14  1238.33 -   .86  +  9.06
RUT      398.38 +   .37   398.01 +  5.75   392.26 -   .04  -  6.14
TRAN    3267.51 - 45.28  3312.79 +105.36  3207.43 + 72.92  + 37.62
VIX       25.81            25.12            29.52            30.23
Put/Call    .60              .61              .67              .70

OOPS! Reality check...

Amid all the Dow 10,000 euphoria on Friday we got a big dose of reality. The earnings warnings from Rite Aid, Caterpillar, Oracle, National Semiconductor and Microsoft (a stealth warning) all added up to a splash of cold water on the Dow 10,000 fire. These warnings added to the recent cry of soft PC sales has the Nasdaq on the run and now the addition of CAT may start another broad sector flight from multinational manufacturers. The U.S. investor views the world through rose colored glasses. The greening of our bull market has shaded the true red color of the world economy for many. While we are still the "oasis of prosperity" as described by Mr. Greenspan, we are still impacted by world events. The U.S. investor may be ordering tuxedos and champagne for the Dow 10,000 party but the majority of the world's economies were not invited.

I think the magic 10,000 number is already in the history book, just waiting for the day and hour next week to be penciled in. Actually, www.bigcharts.com shows the Dow high for the year as 10,042.58 occurring last Friday. Check it out! http://www.bigchart.com/intchart/frames/frames.asp?symb=indu

What comes after 10,000 is anybody’s guess. Sure everyone says it is just a number like 9975 or 10050 but I don't hear any party being planned for either of those. The 10,000 milestone is a psychological milestone. After we pass it the next milestone would hopefully be 11,000 as Ralph Acomporaspan has now predicted. Some of course fear it may be 9,000 instead. The problem, once we pass 10,000 is the lack of a near term emotional target. The focus of investors will turn back to the fundamentals of the stocks and the market itself. This could be a scary thought. The advance/decline line is still seriously negative. On Friday the decliners outnumbered advancers 3760 to 3052, or almost 25%. The Russell-2000 was only up $.37 for the entire week! Where is the rally?? The transports of course were negative due to the rising price of oil. In the "you can't have your cake and eat it too" department, I heard two analysts this weekend claiming that the rising price of oil was inflationary and Greenspan would be forced to raise rates if it continued. It was just three weeks ago that analysts were calling the low price of oil as deflationary and a serious problem. While the price of oil has definitely helped the Dow rally this week with XON and CHV soaring, the long term impact will be to the earnings of many sectors that rely on oil in some form to run their business.

If PC sales are declining then it is only a matter of time before we are barraged with another round of earnings warnings. Picture the carnage if Dell warned, or Intel warned. The last date that Intel could have warned, according to some analysts, was Friday so that may not become a reality. Intel has missed numbers in the past without a warning so we could just be kidding ourselves in that regard.

Why all the gloom and doom? Entry point, entry point, entry point! The Dow is up +600 points in the last seven days without a serious bout of profit taking. Anybody else see a potential problem here? That is a 6.5% bounce off the 9200 bottom of our recent trading range. Nothing goes up or down in a straight line. There has to be a pause in either direction to release steam and allow for normal profit taking. Nobody knows for sure but anybody entering the market here could be entering at or near a short term top. If you understand the goal to "buy low and sell high" then buying at the top would be contradictory. Yes, I know, as soon as I say "market top" Murphy's law will take over and propel us non-stop to 10,500. But, I believe in the law of averages and the law of gravity. The law of averages predicts that we will have a pullback soon. I suggest you wait for that pullback before entering any new positions.

At the recent seminar I went into detail about the relationship between the market cycles and stock cycles. It makes no difference how strong a specific stock pick may be, it will still be impacted by major market moves. Look at a 90 day chart of the Dow and any Dow stock, C, GE, MMM, etc. They will be identical. You can actually lay them over each other and they are identical. The concept here is very simple. Wait for the market to cycle down before starting a new play. Wait, wait, I can hear it now..."What if it keeps on going up"? It may or it may not. Nobody knows. However in the history of the market, the number of Dow moves over 600 points, without a pullback, has got to be almost zero. The only thing close in recent history was the run in late December when we were recovering from the dip back to 8700 from the 9450 rally. We had eight days of positive Dow movement. About +700 points. We then had three strong profit taking days (-300 points) before resuming the advance. Would a -300 point Dow drop crimp your option premiums? Would it provide a great entry point? If I could ever convince you of only one thing it would be this, "Never buy options the day after a newsletter". The newsletter is published the same three days every week. It would be impossible for the correct entry points for the market AND each stock listed to fall on the morning after a newsletter. We try to list stocks that have a 75% chance or better of making a strong move within one week. MARKET PERMITTING!! Just because they are listed does not mean you should blindly rush out and take a new position that day. Be market conscious!

I got many emails on CMGI this week. Many people were very happy with the play and VERY happy they did not hold over earnings. With CMGI -18.13 on Friday it is just another confirmation that our policy of "never hold over" is the correct strategy. CMGI went from $122.63 when we picked it on 2/28 to a high of $226. I spoke with several people at the seminar that had made $40 to $50 per share on their options. Obviously this is an exception and we would never recommend you hold for the home run. Our stated policy of +25% to +35% profit and out is the best in 98% of the recommended plays. If you must hold, please use trailing stops to lock in your profit. I also got emails from people saying I bought CMGI at $22 and it went to $45 and now it is $15, what should I do. You know my answer already.... I got several RNWK emails also..$70.13 when picked on 2/28 and a high since of $109.13.. Way to go guys !! The Rite Aid put play was also a big winner, -$16 from the $38.50 pick price to Fridays close at $22.56. Just remember that these are exceptions and not the rule.

The game plan for the week should be wait and watch. You can enjoy the fireworks from the sidelines. Better a missed play than a bad play is our feeling. If we don't get any more warnings or global events over the weekend then Monday or Tuesday should be the 10K day. Plan your trades, execute your plan only when the time is right.

Good Luck, Sell too soon.

Jim Brown Editor

Market Wrap Archives