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Market Wrap

What a Nasdaq week, down -150, up +260 !

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        WE 4-23          WE 4-16           WE 4-9           WE 4-2
DOW    10689.67 +193.78 10493.89 +320.05 10173.84 +341.33   + 10.27   
Nasdaq  2590.69 +106.65  2484.04 -109.01  2593.05 + 99.68   + 74.20   
S&P-100  687.41 + 18.76   668.65 - 12.69   681.34 + 31.42   +  6.24   
S&P-500 1356.85 + 37.85  1319.00 - 29.35  1348.35 + 54.63   + 10.92   
RUT      431.73 + 10.15   421.58 + 15.72   405.86 +  7.12   +  4.82   
TRAN    3589.68 + 60.98  3528.70 +158.30  3370.40 + 61.24   + 49.05   
VIX       23.96            25.48            22.91            23.34
Put/Call    .59              .63              .54              .62

What a Nasdaq week, down -150, up +260 !

The Nasdaq started the week off with a bang, down -138 points. Only to drop again Tuesday morning to a low around 2330. The rest is history. The bargain hunters on the sidelines started voting for most valuable player with their checkbooks. The Nasdaq rally was on again. The results for the week were an astounding +260 from Tuesday's low and +106 for the week. Who would have thought Monday night that we would close within eight points of a new Nasdaq record on Friday? The highlights of course were the Internet stocks. The gloom and doom from Monday, with Internet bears predicting return to single digit PE for all the high flyers, is over and past. The bears became roadkill as the bulls threw money at anything with a .com attached. How long this will last is anybody's guess. With the weak investors flushed out of the market on Monday the Nasdaq could continue up from here. The only challenge now is a close and hold over 2600 and the slowing of earnings reports in the coming weeks as the earnings cycle draws to a close.

The Nasdaq still has a number of important names which report earnings later than the crowd. Dell is one and it is about this time in the earnings cycle that traders move out of stocks that have already reported and into Dell. The DOW on the other hand as a barometer of the NYSE is rapidly running out of big names to report earnings. The expectation void may finally take its toll on the recent +1,000 point move. The most positive indicator is still the advance/decline line. For the last three weeks this indicator has reversed the downward trend that started in April of last year. As you can see by the two charts below the change in the market exactly follows the A/D directional change on April 5th. The last two weeks has seen several days of advancers beating decliners 2:1.

DOW Advance/Decline chart 3 months:

DOW Advance/Decline chart 2 years:

On the three month chart you can possibly see a slowing of the advances in the last several days. Again, this is due to the earnings expectation excitement dwindling as more companies announce. Earnings move the market. Faced with a lack of earnings news the market tends to focus more on the other less exciting things like anti-trust trials, wars, FED meetings, Y2K, etc. You see where I am going here. The strength of market conviction is going to be tested soon. I got a lot of email this week saying I was putting a bearish tone on my market sentiment. Yes, you are right. I am trying to impart my cautious view to our readers. Time and time again investors are lulled into a false sense of security by a market that never seems to stop only to have the stuffing knocked out of them by a steep sell off. Remember Feburary? I have literally hundreds of emails saying, "I made $xxx,xxx in Dec/Jan only to lose it all in February." A market that seems to go up forever with only a small correction now and then, gives traders the false idea that ANY sell off is just a dip and it will come back next week. This week is a prime example. The Nasdaq dropped -300 points from its high two weeks ago and is now within eight points of a new record. Just a dip to buy, right? This one was but look at the chart above and at dip that started in August of 1998, or August of 1997. If you owned options then, could you have just ridden out the dip?

Even though all the technical indicators are pointing to a continued rally, the common sense indicator is calling for caution. The VIX is below every moving average and nearing lows for the year. The overhead resistance as measured by calls on the OEX is evaporating. The Russell-2000 is within a days move from the high for the year set back in January. So what is wrong with this picture? Nothing! That is part of the problem. When everything looks too good too be true it probably is. The market tends to move contrary to investor sentiment. When there is no fear in the market there is no one left to sell.

To use another analogy, everybody has already voted for the rally with their cash and is now fully invested. If you have $100K in your account and you have $100K invested you cannot buy anything else. Multiply this by 44 million investors and you see the problem. Without buyers there is no buying pressure. Soon lack of upward movement promotes selling pressure as fully invested traders get impatient and start moving back to cash. You know the feeling. You have EMC stock you bought for $100. It went to $120 in a couple weeks but has now drifted back down to $111. You are undecided as to what to do. You wish you had sold at $120. You are still have a profit but every day without upward movement causes more unrest. Sell or hold? Every day you become more impatient. The market has been going up like a rocket while you owned EMC but now it has slowed. What is next? If you are fully invested and EMC announces another 2:1 split can you buy more? No. If they announce a new disk drive that is twice as big for half the cost and double the profit margin can you buy more? No. You say that others will buy more and push the price up for you. What if they are fully invested also? Do you see my point. There is a limit to how much a market can move without a sell off. There has to be rotation. Investors must eventually sell something in order to buy something else. Until investors sell the stocks they held through the recent rally there is no cash in their accounts to buy something else and start the cycle over again.

At the risk of belaboring the point and boring you to death lets take this one step further. If you are like most investors you bought your stock on margin. As the value of your stock went up so did your buying power (more margin) in your account. Like a good consumer you used this additional margin power to buy more as the market went up. Now you are fully margined and any downturn will start causing pressure on your account. Imagine waking up on Tuesday to see the market down two days in a row and a margin call in your mailbox. OOPS! You rush to sell something to cover the call. Multiply this by 44 million investors. Now this selling pressure puts pressure on other investors that were less margined than you. Then other investors see their favorite holding dropping and they rush to sell to protect profits. This is how major market moves sometimes come to an end. Nobody expects it because everyone is bullish. To maintain a steady market rally there must be pauses to consolidate. The last pause we had was in March. Is that a ticking noise I hear?

I am not saying rush out and sell everything. I spent several hours Friday night planning what I am going to buy next week. My trading profile however is not the same as most of our readers. My idea of long term is three days or a drop in price, whichever occurs first. Those that have been readers for sometime know I am a permanent bull. Probably too bullish. I also try to apply common sense to the market and anticipate coming events. I am not predicting DOW 9,000 again or a major sell off in the coming weeks. I am only saying that,

1.) You should always be aware of the market cycles.
2.) You should NEVER assume that a sell off is just a dip.
3.) Take profits whenever they are available.
4.) Be prepared to capitalize on drops that ARE dips.

We are entering the Twilight Zone for option recommendations. This is the part of earnings season we hate. Because of our stated goal to NEVER hold over earnings announcements AND not play stocks that recently announced, the pickings become slim. The recent Nasdaq drop and rebound put some huge spikes on many stocks. We have a hard time recommending stocks with $20-$30 gains in a three day period because of the possibility of profit taking. With the market in rally mode PUT plays are very hard because any stock that drops for more than a day or two starts looking like a "value play" and the bargain hunters start circling. The good news is the number of split announcements recently. As soon as any post-announcement depression is over we have many good splitters to recommend. This is the time each quarter where we are quick to pull the trigger to recommend a play but just as quick to drop it if the market or stock does not cooperate immediately. As investors, this means you need to be quick in and quicker out of each play.

Our recent split candidates that announced this week are:

SCH - Charles Schwab
QCOM - Qualcomm
RNWK - RealNetworks
TLAB - Tellabs
VISX - Visx Inc
Qwst - Qwest Comm.

The Option Clubs/Discussion Groups organizers got their assignments last week and we will be emailing the readers who expressed interest in visiting the email addresses of every organizer in their state on Monday. We have requested that the organizers hold the first meeting on May 1st. When you get the list of organizers in your state please locate one closest to you and contact them immediately so they can determine how many people will be attending and allocate space accordingly. We view these discussion groups as excellent places for novice traders to get pointers from experienced traders and for everyone to share and learn from their recent experiences. If you have not registered and would like to attend a meeting simply send an email to Contact Support WITH YOUR CITY AND STATE.

Want to play Internet stocks and don't know which one today then try our new link on the newsletter page, "Internet Charts". This will display charts of the top 100 Internet charts in order by volume. Great for a quick check or all the top movers at once. Have a great week!

Wait for an entry point! Sell too soon.

Jim Brown
Editor

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