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Market Wrap

Confused, frustrated, or just a case of Deja vu?

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        4-28-99          High     Low     Volume   Advances Decline
DOW    10845.45 + 13.74 10935.37 10811.09  947,975k  1,732   1,276
Nasdaq  2550.37 - 52.04  2610.91  2544.90 1003,400k  1,938   2,146 
S&P-100  683.84 -  5.52   692.58   682.23   Totals   3,670   3,422
S&P-500 1350.91 - 11.89  1368.76  1348.38            51.7%   48.3%
$RUT     433.53 -  1.63   436.14   432.96
$TRAN   3631.72 + 34.26  3642.62  3592.53
VIX       25.84 +  1.65    25.97    24.17
Put/Call Ratio      .53       

Confused, frustrated, or just a case of Deja vu?

Schizophrenia - 1: a psychotic disorder characterized by loss of conduct with the environment,...and by disintegration of personality expressed as disorder of feeling, thought, and conduct. 2: the presence of mutually contradictory of antagonistic parts or qualities. (-Webster's Dictionary).

Traders today can pick and choose where the above definition(s) fits best for them. If you are a bear, it may be the Dow's non-stop run through 10,000 or the P/Es tacked on to some of these Internet stocks that investor have as yet decided to ignore. If you are a bull it most fits with the market's recent on again off again flirtation with the cyclical stocks. To better explain, many traders are frustrated trying keep up with which are the leadership stocks of the day. One day it is cyclicals, the next it is techs.

While stock investors have the luxury of just waiting this volatility out, it can be both a boon and a curse to the options trader. Entry point and stop loss disciplines become essential to successful trading and taking the quick (smaller) profit is crucial to survival in such a market.

I thought about just re-running my April 14th market wrap since a lot of trader's suffered a strong case of deja vu today, but I feared that many of you might recognize it. Besides, we actually came within striking distance of Dow 11,000 late this afternoon which is a week early of my tongue in cheek prediction just two weeks ago.

Yet 11,000 is now the new target for market watchers. Question again is if we reach it, will it stick, or will it be the catalyst for the 10% to 15% correction many market pundits are predicting (and have been since Dow 10,000)? As the saying goes, the piper must be paid. It is just a question of when and how much.

How much? is probably what the Internet players were asking today as many of their favorite stocks were thrashed for double digit losses. It was a combination of a one-two punch. One: AOL's huge run up culminated in a great earnings report that beat estimates of $.09 with $.11 and smashed the previous year's quarter of $.04. Analysts were excited about the strong increase in advertising revenues but it wasn't enough to stop the "sell the fact" reaction to the report. With no stock split announcement as AOL investors had come to expect, there was no hype left to lift the stock. Two: AMZN was due to report today after the bell and nervous investors hit the sell button before the close of the day to protect themselves from any disappointment.

Why would apprehension over AMZN's numbers damage the whole sector? Consider the recent change in the investor mindset. Suddenly "value" stocks are where it is at and people are beginning to question if a P/E of 500, 1600, or even 5600 just might be a bit over done. Amazon.com has become a figurehead for the sector. Therefore AMZN's numbers reflect the industry's health as a whole.

"But just one company?", you ask. The answer is yes, at least for the moment. Ecommerce over the Internet is the heart and soul of this new paradigm. As people try to grasp the possibilities, the previous "the sky is the limit" mentality needs to be enforced to justify the current market valuations for most of these companies. The company that bills themselves as the "world's biggest bookstore" and one of the ecommerce pioneers is going to have the market's attention. Especially now; since a normal brick and mortar retailer tends to suffer a seasonal slow down from Q4 to Q1, no matter how good there business is. What analysts were looking for was a sequential growth from Q4 to Q1. If AMZN did not show a growth from Q1 over Q4 then theorists believed that the Internet may not be as huge as we thought is was. Again, let me explain it another way. As traders, everything comes down to perception. What does "the market" perceive this company to be worth? It is imperative that earnings prove we really are in the infancy of the Internet. If the number crunchers begin to see some form of top or maturity in ecommerce then the current market valuations for many of these Internet companies are in for a sudden drop!

As many of you know, AMZN reported their numbers after the bell today. Operating revenues of a loss of $.23 versus the estimates of a loss of $.29. So they beat the estimates by 6 cents. But AMZN told us to ignore the earnings numbers anyway. Everyone wanted to know the revenue numbers (just like they wanted to know for DELL, IBM, and AOL). AMZN turned in almost $253 mln in revenues last quarter. For those of you who closely follow this stock you may have notice how the revenue estimates crept up substantially over the last quarter. Most analysts were only expecting revenues of $255 to $260 mln. However near the end of this quarter those numbers grew from a range of $260 to $290 mln. AMZN managed to report a quarterly revenue of $294 mln. Beating even the highest estimates, but "the street" would not rejoice, as the dreaded whisper number had grown to as high as $300 mln.

Not a good sign no matter how unfair the whisper number had become. Everyone knows investors are far from rational creatures and a cautious (almost negative) conference call did nothing to alleviate the punishing after hours trading session where AMZN fell about $16 to $177. While many traders and analysts only see this as a knee-jerk reaction that has intensified the normal profit taking after an earnings report, it remains to be seen if positive analysts comments about AMZN's performance will stop the bleeding before the market opens tomorrow. At this point, tomorrow does not bode well for the net sector.

Nor does it appear that the Nasdaq is likely to head up tomorrow as well. After a significant drop yesterday, the techs once again took a back seat to the cyclicals. The Nasdaq index quickly fell this morning but managed to hold 2580 for most of the day before crashing late afternoon to its lows and closing near 2550. Aside from the net stocks, almost every other leadership group that traders were use to, were being sold: techs (hardware, networking, peripherals, software), semiconductors, telecom, drugs, brokers. It is baffling that the Dow actually climbed to +104 points at its zenith (reaching within 65 points of Dow 11,000) before falling back in the late day sell off that actually brought it negative before fighting back for a positive close.

It may not be as baffling if you believe in this new resurgence for the cyclical stocks. Many are calling it a "widening" of the bull rally. For too long, analysts had been fearful that the market was running on the backs of only a few of the mega-(big)-cap stocks. However, today, noted bull, Abbey Joseph Cohen again confirmed her belief in the market and its ability to climb higher. She felt that the new broadening of the rally is a sign that investors have a new willingness to buy mid-caps and companies that held worldwide exposure.

This renewed belief that the worldwide economies are improving spelled relief for those economically sensitive companies. More proof was the jump in the March durable goods report which had rebounded from its February slump. Armed with new faith, investors poured money into metal stocks like: Alcoa (+6.63), Reynolds Metal (+3.75) and Phelps Dodge (+4.56), and paper stocks like: Georgia Pacific (+4.06), Bowater (+5.88), Mead (+4.75), or machinery stocks like: Caterpillar (+1.00) and Ingersoll-Rand (+2.56).

The other bright spot for traders today was the oil patch. Oil and oil services were all green today on news from the API (American Petroleum Institute) who had discovered larger than expected declines in crude oil stockpiles. This combined with news from Venezuela, who said that their 3rd and 4th quarter oil production would be below the newly lowered OPEC limit, pushed oil prices higher by $.64 to $18.45 a barrel.

How do we tie it altogether for tomorrow and the rest of the week? Well, as Jim mentioned yesterday, the Employment Cost Index is due out tomorrow which will continue to keep trader's cautious until we hear the numbers. The advance/decline line is showing a little weakness on the Nasdaq, but the NYSE kept it positive 17 to 12. This is still a good sign. The Dow transportation index actually closed positive despite the jump in oil prices (another good sign). Plus, after 2 days of steep declines and a loss of 100 points, the Nasdaq could be in for a bounce. Unfortunately, I don't expect it to. Closing near the lows of the day on another 1 billion shares of volume does not instill a lot of trust. We are still in earnings season and another legion of companies will report tomorrow. WCOM appears to be the only major company traders will be looking to. Current estimates are for $.34 and they'll be reporting before the bell. As one of the big five tech bellwethers, WCOM could help set the tone tomorrow for the Nasdaq with a positive surprise.

There is a large selection of investors/traders/analysts that are very skeptical of this new revival in the cyclicals. It is going to be hard to keep the techs down for long. Unfortunately, as an options trader, time can be the greatest enemy. It is times like these that a good trading discipline is your best weapon. Do your homework on every stock you play. Remember that you don't have to play every day.

Sell too soon!

asst. editor

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