Option Investor
Market Wrap

Are you still on the teeter-totter?

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        5-24-99          High     Low     Volume   Advances Decline
DOW    10654.57 -174.61 10856.42 10626.65  740,658k    945   2,036
Nasdaq  2453.64 - 66.48  2529.30  2444.89  924,661k  1,374   2,651
S&P-100  658.39 - 13.37   673.31   655.99   Totals   2,319   4,687
S&P-500 1306.65 - 23.64  1332.96  1303.46            33.1%   66.9%
$RUT     440.39 -  8.75   450.19   440.24
$TRAN   3473.80 - 77.46  3555.13  3465.22
VIX       28.65 +  3.29    29.15    25.51
Put/Call Ratio      .64 

Are you still on the teeter-totter?

Well, that wasn't very much fun, and not the kind of Monday that inspires confidence in the rest of the week. For the most part, The DOW stumbled fresh out of the starting block this morning and fell below its previous support of 10800, then 10750, then below 10700 just after 12:00, when some bullish buyers (apparently not hungry for lunch) stepped in for a 40 point recovery that proved short-lived. The market was narrowly confined in the 10700-10740 range for the next 3 hours, until the last hour of trading, wherein the DOW dropped another 75 points to 10626, its lowest level of the day before finishing at 10654, down 174 points. Advancer started out beating decliners by a slim margin, but that score quickly reversed as decliners turned it around. By the end of the day, they had pounded advancers into submission by more than 2:1. Down volume whizzed by up volume by more than 3:1. We know what you are thinking (uh oh!). But wait, there's more. . .

The NASDAQ followed a similar path, as it fell through 2500 support almost immediately and never looked back. By the end of the day, barring some intra-day trading in the 2460- 2470 range, the index pointed toward Earth again to hit a low of 2444 (-75 points!), just minutes before the close. In the end, it popped back up 9 points to finish the day at 2453, a level not seen since closing just above 2400 on April 19. Again, advancers had it over decliners 2:1, as down volume trounced up volume by slightly less than 3:1.

Anybody scared? Think things look awful? If so shake it off. Now is the time to remember that the market isn't good or bad. It just is. We are relegated to playing the hand we're dealt. That means remaining market neutral by playing the OEX, or playing puts if it fits within your risk profile. Now is a good time to go back and review the 10 rules of trading, especially #7, #9, and #10. (On the Web site in the left-hand column, find it under the "Reference" heading at the bottom of the page, or use the link.)


If you are reading the e-mail version, here they are for your review:

7. Never bet against the market/sector. The trend is your friend. It does not matter why the market/sector is going down you will still lose your money. 85% of stock movement is due to market/sector movement not stock fundamentals.

Added bonus from Rule #8: Remember, double or nothing will eventually get you nothing. (This is not a time to double up or average down. It rarely, if ever, is.)

9. Emotion is your enemy; logic is your friend. Never trade on emotion. There is no such thing as "it has to go up" or "it can't go down". The market does not care what you think or hope. It is ruthless and makes its own rules. You should say this 50 times a day, "past performance is not a guarantee of future results".

10. Never buy on impulse. If you just heard the news, it is already too late. Plan your buys during non-market hours. Once the bell rings your mind is clouded, emotion takes over. Plan your strategy; execute your plan. When in doubt, stay out.

We can't emphasize enough, "when in doubt, stay out". Our #1 job is to protect our capital. We live under the broad axiom that says to trade only when it is profitable to do so. That means sitting on our hands until all the signs are there. It's pretty tough as traders to sit on our hands waiting for all the right signs in a sideways market like we're in now. Nonetheless, "missed money" from sitting aside until the smoke clears is better than "lost money" from lack of trading discipline. Perhaps you are now asking "what are those signs?" We have an answer, but even they are not foolproof:

Ideally, we want a positive market, a positive sector, and a positive stock direction, coupled with strong volume and a 2:1 advance/decline line. There, that sounds simple doesn't it? Honestly waiting for all 5 to show up at the same time may take a while and our tendency is to fudge the last 2, which brings us back to "volume" again.

Let's get back to some of today's action to see what's really happening. At first glance from reading the opening market commentary, or watching the market today, you might think the sky is falling. Not so in our opinion. Today's selling was orderly and without panic. More importantly, it came on the seventh straight day of LOW VOLUME. Investors are telegraphing that they are not ready to bail out of this market, despite all the technical violations on today's descent. Without volume, it carries significantly less weight. The same would be true if we were setting new highs too. Volume is the driver causing big market movements in both directions.

Yes, there was some news today that influenced the market, but volume is the key indicator of each individual investor's vote on the potential of a given profit-driven concern. Some days, even good news is completely ignored, like today. Did you know that Hewlett Packard announced a $2 bln. stock repurchase plan today, or that the Utility Index finished at yet another new high, or that the yield on the 30 year bond has been trending back down from the 6% we were once "sure to get" prior to the Fed tightening its bias?. Some news just gets ignored. Instead, the market chose to focus on, what to us, appears to be much ado about nothing. For instance, a relatively unknown analyst, Michael Mayo of CS First Boston cut Citigroup, Chase, J.P. Morgan, and Bank One to a "sell" rating. On an average day, this might have gone unnoticed. Not today. The market pounded these 4 financials on heavy volume. Why?. . . .on interest rate fears? No. Y2K fears!!! Come on! Like we didn't know this might be a problem 2 years ago?

Technology, especially Internet stocks got hit hard today too. Any news? Nope. Just general fear that Internets are in for a big correction. The fact is even the first tier Internets like AMZN, AOL, and YHOO historically take a 40%-50% hit in value mid-quarter after earnings. If the cycle repeats itself, this may prove to be a heck of a buying opportunity. That said, don't abandon discipline here at the mere suggestion. We still need to confirm market direction.

That hasn't stopped Internet IPO's though. Barnes and Noble on-line goes public tomorrow and hopes to raise about $425 mln. Of course, the offering price has moved up from investor demand. DLJ Direct will issue a separately trading tracking stock tomorrow, raising over $100 mln. The smallest this week will be Star Media hoping to raise about $70 mln. No lack of liquidity here! Perhaps causing some fear (among AMZN investors anyway) is Barnes and Noble's offering, which is somehow suppose to make them more competitive with Amazon. Sorry folks. Still looks like cashing in on the Internet craze to us, and no cause for concern with AMZN.

One more thing we couldn't let pass: Ralph Acampamora made another appearance on CNBC today to let us know that the market "needs to drop another few hundred points or so" and that "there may be 15% upside from our lows here". So which is it? He didn't say. What he did say was that today's market is "starting to show signs of portfolio adjustment". Portfolio Adjustment? Starting to show? Sounds like sector rotation that started in early April to us. Anyway, welcome to the party, Ralph.

Just a reminder, commodity prices are falling, gold is at its lowest level in 20 years, oil is trending back down from $19 per barrel, the long bond rate has fallen from 5.9% to 5.76% since the Fed announced a tightening bias, and the Utility index is at a new high. We shout it again from the rooftops, NO INFLATION IN SIGHT. It may take a few more days or even weeks for the market to catch on. Perhaps, we'll be surprised by an immediate reversal in these trends now that we've brought it up (Murphy and his law are alive and well), but the leading indicators are that inflation is in remission.

Not much in the way of market events for the rest of the week either, save the following: INTU and NOVL report earnings tomorrow and Durable orders reported Wednesday at 8:30 a.m. NAPM and Employment report are the next "biggies", but are not reported until next week.

In short, don't let the big picture get away from you. At the same time, be disciplined and protect your capital. That means stand aside if it fits your risk profile. We may be in for more turbulent air on a technical basis, but the sky is generally blue. Profits have not gone away. As always, keep your stops set, wait for a good entry and sell too soon.

Buzz Lynn
Research Analyst

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