Option Investor
Market Wrap

Turnaround Tuesday, two steps forward, one step backward.

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        5-4-99          High     Low     Volume   Advances Decline
DOW    10886.11 -128.58 11035.31 10868.36  931.243k  1,402   1,582
Nasdaq  2485.12 - 50.46  2557.21  2482.49  923,809k  1,728   2,304 
S&P-100  673.28 - 11.80   685.39   672.30   Totals   3,130   3,886
S&P-500 1332.00 - 22.63  1354.63  1330.59            44.6%   55.4%
$RUT     432.59 -   .69   436.56   432.10
$TRAN   3731.88 + 35.29  3776.78  3690.36
VIX       27.19 +  2.44    27.44    25.24
Put/Call Ratio      .58  

Turnaround Tuesday, two steps forward, one step backward.

In real numbers, it was really +225 on Monday and -128 today. The Nasdaq however has lost -147 points in the last six days with only one positive close last Friday for +14 points. Nobody expected the Dow to continue upward unabated after passing the 11,000 milestone but it would have been nice. The Dow surged upward at the open this morning to an intraday high of 11,035 before succumbing to the profit taking pressure. Some say the late day surge over 11,000 yesterday was orchestrated by buyers at Goldman Sachs as waves of buy programs hit the market in the final moments on Monday. The reason given was Goldman wanted to insure a positive opening for their IPO today and they used their ready cash to give the market an artificial boost. CNBC reported at the close yesterday that there were dozens of "buy on close" orders and all were buys. There were no sells. This alone is suspicious.

The official "excuse" for the sell off today was the declining bond market and rising bond yields. The bond closed today at 5.71% on worries that continuing strong economic reports would cause the Fed to raise rates on or before their August meeting. With the market rally continuing to add to the already +19% gains for the year, many investors are becoming more nervous about how much farther it can go without a strong correction. Some are fleeing to the relative safety of bonds at these high levels. Stocks have been looking at bonds for the market lead for several days now.

With interest rates rising the financial stocks took a hit today as well. Airlines were a pocket of strength even with the strong oil prices. The reason here was the decision by Continental to drop capacity. With less capacity the passengers are then concentrated into fewer flights producing higher margins. This pushed the Transportation Index to another new high. Eventually this too shall cease. If oil continues to hover around $19 even the diehards will be forced to realize the impact to airline profits.

One of our favorite stocks took a serious hit today. EMC was dropped for a loss of -$7.00 to close at strong support at $100. The disk storage maker was hit by news that HWP had signed a contract with Hitachi to market their disk systems. EMC claimed they new this was coming and had staffed up their sales department several months ago to take up the slack. The company said that even though HWP accounted for $700 mln in annual sales that they did not expect this to have any impact on their expected +30% sales goals for the year. EMC closed over +$4 off the low of the day but it remains to be seen if this is a buying opportunity or the first step in a new down trend.

The Goldman IPO recipients were hand picked by Goldman as investors that would not flip the stock for a quick profit. Evidently the +25% profit at the start of trading was too much for some to pass up as 32% or 22 mln of 69 mln shares changed hands today.

General Motors was a big loser to day, -4.75, and knocked -22 points off the Dow. The carmaker posted a -4.2% drop in sales today. Ford and Chrysler were off over -$2.00 each on the news as well.

Internets were strong in the morning and looked for a time like they would hold the Nasdaq up by themselves. It was not to be. As the Dow decline gained speed late in the day the bottom fell out of the Internet stocks. Many that had been up double digits during the day ended up with double digit losses in just the last hour of trading. NITE dropped -$21, RNWK -$11 in the last hour but still finished positive, NTBK -$24, TBFC -$18, VRSN -$10, GNET -$14.

Web brokers were also hard hit with AMTD -$9.97, EGRP -$8.50. Is this another buying opportunity for net stocks? I am concerned it is not. There has been some weakness in Internet stocks the last week or so and this may be one of the every other month sell offs that we have been seeing. Nothing goes up forever and when these high flyers start falling you don't want to be holding. They will recover, it is just a matter of time. However, recover to what? No one knows what the true value of an Internet stock will be and as the current values are called into question as Barrons did Amazon this week, the value of the sector will ripple. Barrons said Amazon could be fairly valued at $25 which is a far cry from the $200 of recent. Leg Mason called AOL significantly overvalued today and the reason why they were selling it. Again, wait for the recovery before playing these again.

Advancers actually led decliners for most of the day which still bodes well for the broader market. One analyst said he had been receiving many calls for penny stocks lately. That market has not been ignored for the last two years, it has been missing in action. This analyst pointed to the new interest in the very lowest of stocks as sure signs of a speculative bubble in the making. Not that we can't play the bubble but when the bubble does burst it happens very quickly and would make the drops today look like teenies in comparison.

The cyclicals sold off today just like the previous leaders and left us with no direction for the rest of the week. The selling was broad at the end of the day with very few pockets of strength. However there was not any panic selling, just more sellers than buyers. I have no doubt there are buyers waiting in the wings but nobody wants to make a habit of buying $1 bills for $1.25. Until they see what they feel is a bargain, they will just wait. Personally, I thought IBM, UTX and COF showed good underlying strength today with only minor losses and could lead the rebound. Full disclosure, I do own all three currently but if the market continues down tomorrow I will be out shortly after the open.

On the horizon we have Greenspan speaking on Thursday and the all important non-farm payroll report on Friday. Since the famous "irrational exuberance" speech a year ago the market has gone up over +2000 points so any Greenspan speech will be watched closely for new market bombs. The non-farm payrolls will be the next inflation indicator and the market is sure to react to any negative news. The FOMC meeting is fast approaching and although no one expects a hike this soon it is always possible for a pre-emptive strike by the Fed if the market continues in blowout mode.

We are rapidly approaching the summer doldrums for the tech sector. The remaining big names to announce earnings are Dell and CSCO. CSCO on the 11th and Dell on the 18th. After those announcements the tech sector is likely to drift aimlessly without a specific direction. I would be cautious about holding a tech stock after May 18th.

Point to ponder: Are you now nursing a losing position like I wrote about on Sunday or are you in cash? Where would you like to be tonight with the benefit of 20/20 hindsight for Mon/Tue? The easiest way to avoid the stress and pain of a losing position in the future is to plan ahead and then stick to your plan. If you are stopped out you can always buy it back later. If you are stopped out, you are not out of the game, you just have more options!

1) Don't try to pick a bottom!
2) Wait for an entry point!
3) Sell too soon!

Good Luck,

Jim Brown

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