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Market Wrap

Summer rally fizzles!

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        6-22-99          High     Low     Volume   Advances Decline
DOW    10721.63 - 94.35 10815.98 10708.65  708,925k  1,283   1,671
Nasdaq  2580.26 - 50.02  2642.36  2580.26  996,196k  1,624   2,255 
S&P-100  680.58 -  6.79   689.57   680.42   Totals   2,907   3,926
S&P-500 1335.88 - 13.12  1351.12  1335.58            42.5%   57.5%
$RUT     447.33 -  2.11   450.79   447.33
$TRAN   3391.63 - 36.59  3428.22  3388.73
VIX       21.96 +   .67    22.58    20.63
Put/Call Ratio      .51      

Summer rally fizzles!

The summer rally turned into a summer rout today as profit taking from last weeks gains slapped traders back into reality. A sell program around 2:PM today snuffed the spark that had brought the Dow back to even for the day and plunged us back into the depths.

The tide actually turned on Monday morning when 10,900 became resistance and it has all been downhill since. The previous bounce off 10,900 came on June 8th and we have been range bound ever since. The bad part of this picture is the bottom of the range is 10,450, almost -300 points below our close today. This bottom has been tested twice and rebounded strongly. I do not expect us to hit it again before earnings but that market does not listen to me.

I think today was just profit taking. The wild card is the feeling that a big fund or maybe several funds are selling into the rally and lightening up on their holdings. Why they would do this before the coming earnings cycle, and higher prices, is beyond me. The sentiment is strong, pre-warnings are lighter than usual and real earnings are expected to be better than last quarter. The only wild card here is still the FOMC meeting next week. Unless somebody is still nervous about a bigger than expected rate hike I do not see a problem here. Yes, the bond yields are up again and will be until after the Fed meeting. Yes, that could be some of the drain on the stock market but I think it is just another excuse.

The sector sell off after 2:PM today was intense. Tech stocks took a serious hit but in reality we only lost a day or two. Some of the stocks had been on a tear for 5-7 days nonstop and were due. MSFT for instance was up $13 in four days. It lost -2.44 today. SUNW was up +$12 in five days and lost -3.38 today. YHOO was up +$50 in six days and only lost -6.38. GNET was up +$56 in six days and lost $14 today. In reality the selling was not bad unless of course you started a position this morning! You know we teach cycle trading. Nothing moves in a straight line, up or down. This is a normal profit taking cycle. Many different reasons will be assigned to the drop by all the different analysts that follow the market. Trust me, the reasons are over analyzed. It is a simple truth that gets overlooked every time. Look at any chart and you will see several days of upward movement followed by several days of flat or downward movement. Don't get worked up about it. Learn to trade it or at least buy it. For those that had stops, tomorrow or whichever day the market starts back up again, represents a new buying opportunity.

Lehman (LEH) announced huge earnings today of $2.09 compared to estimates of $1.68 and blew away the whisper number of $1.72. Do you think they soared after the announcement? Not hardly. LEH lost -$3.81 in post earnings depression. Just another example of the reason we do not recommend holding over an earnings announcement. Had you been playing LEH you could have captured a $8-9.00 run and been out safe before the announcement. Yes, there are exceptions but they are few and far between. How much do you have to make up on a winner to cover 7 or 8 losers in between? More than it is worth to take the risk.

CMGI lost -$8.06 today after it was rumored that they would buy AltaVista from Compaq for $2 billion. Give me a break! $2 billion! It might be the only way Compaq can make a profit this year. On a side note, Dell is requesting permission to raise the outstanding shares to 7 billion from 3.5 billion at their next shareholder meeting. Now we know Michael Dell does not need any more shares and at $38 they are not going to split. Ponder this: Dell has 2.540 bln shares issued @ $36 or a market cap of $91 bln. Compaq has 1.706 bln shares @ $21.75 or a market cap of $37 bln. Do you think Compaq shareholders would like to trade each of their CPQ shares for one Dell share? Do fish swim? Could Michael Dell make Compaq profitable? Is the pope catholic? Could Dell use a worldwide retail reseller channel? Would a Dell/CPQ combination own the PC market world wide? Would pricing pressures ease for Dell? Can you spell Federal Trade Commission? Yes but there is always a deal if you structure it correctly. Ask AT&T. How about it Michael? Please put CPQ out of their misery!

Don't look now but the Nasdaq came within 12 points of the previous record closing high. Kind of puts the sell off in perspective. You can clearly see the sell program at 2:PM.

Lets all look for the silver lining in todays clouds and see what looks good for tomorrow. Wait for the market, advances/declines and the ticks to all be positive before shopping for bargains but I do not feel we will get too many more chances before the earnings begin. The FOMC meeting next week should be the last major hurdle to the earnings rally.

Good Luck, Pick an entry point and sell too soon.

Jim Brown
Editor

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