Option Investor
Market Wrap

The beginning or the end?

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        7-20-99          High     Low     Volume   Advances Decline
DOW    10996.13 -191.55 11188.63 10969.54  756,715k    869   2,043
Nasdaq  2732.18 - 98.11  2806.37  2728.81 1080,000k  1,211   2,776 
S&P-100  710.03 - 18.01   728.04   708.27   Totals   2,080   4,819
S&P-500 1377.10 - 30.55  1407.65  1375.18            30.1%   69.9%
$RUT     453.55 -  7.82   461.37   452.75
$TRAN   3434.94 - 28.90  3482.07  3431.29
VIX       22.41 +  2.94    22.81    20.41
Put/Call Ratio      .63    

The beginning or the end?

Did you buy OEX or DJX puts after the spike on Monday like I suggested Sunday? If you did you were able to capture part of the -26 point drop in the OEX or the -3.00 drop in the DJX. It would have been hard not to have managed a winning trade since the sell off has been quick and sharp. You did not have to wonder about direction. It was straight down. The spike on Monday came just like I cautioned with the Dow soaring to a new intraday high of 11252 shortly after the open and then back down to 11175 by 10:30. A classic failed rally entry point.

The Dow did pause at the 11,000 level at the end of the day but the pause was not convincing. There was a small bounce the first time it hit 11000 but the Dow came back at the close to retest it again. After spending several minutes below 11K it pulled back to within 4 points of the previous support. This could just be bargain hunters hoping for a technical rebound or it could be just a pause as sellers quit for the day to regroup for tomorrow.

The Nasdaq seemed to slow its rate of decent as the afternoon progressed and even tried to mount a rally around 3:PM. It was not to be however and we closed only 4 points off the low of the day. DOW and NYSE ticks were positive at the close but the advance decline line was extremely bearish. Decliners beat advancers by 1562 on the Nasdaq and 1172 on the NYSE.

There is no good news. The talking heads on CNBC were scrambling to define what went wrong. "Emotions" were mixed and you know what troubles they can cause. Some analysts were calling this the start of a 10-15% correction. (-1120 to -1680 points) Others were expecting only a 5% (-560 points). Still others were calling for new highs by the end of the week. NOT!

What went wrong? Microsoft beat estimates by +.04, $.40 vs #.36. Lucent beat estimates with a $.26 vs estimates of $.23. IBM posted $.91 with estimates of $.88. Texas Instruments $.92 vs estimates of $.86. The results = MSFT -5.06, IBM -6.38, TXN -8.94, LU -6.89. Looks pretty grim.

One culprit was the conference call on the big guys. Microsoft warned that earnings would be down next year and then mentioned the taboo words, "Y2K was impacting their results". Microsoft also said they had no immediate plans to issue an Internet tracking stock. Lucent easily beat estimates but then warned that Y2K would have an impact on their future results. OOPS! Two in the same day. Add to that the IBM comments that even though business was good they were not comfortable with any estimates over the current level. (talk is cheap) Also add several Internet companies that "failed" to beat estimates. Yes, that is a crime in "no PE" land.

The +15-20% gains that most tech stocks had added in the last two months just went up in smoke as the profit taking/Y2K rush for the exits ensued.

I can't get over the number of analysts that were caught wondering what hit them. Late July is normally when the retirement contributions dry up. Retail investors are taking cash out of their accounts for new homes, vacations, moves and home repairs. When is the logical time? Right after the big summer earnings run of course. It did not hurt any that investors were concerned about a threepeat of the last two years crashes.

Really, earnings are very good and should help hold up the market to some extent. 37% of the S&P-500 have reported and 70% reported better than expected. Only 9% have been below estimates. We are living in the great Greenspan nirvana. The tech led high growth, low prices, steady rates and big earnings, Goldilocks economy.

Sure there will be potholes along this yellow brick road but the key is not to get married to a stock or market. The trick is to read the road signs and slow down for the curves. Hopefully the warnings from my last two commentaries kept you from giving back your profits.

The next pothole in the road is the Greenspan testimony to the House Banking Committee on Thursday. Actually today may have helped us. If Mr. G. was planning to take the market down a couple notches on Thursday with some well placed comments then maybe he is rethinking his position after the carnage today. More important to us could be the AOL, AMZN earnings on Wednesday. Good strong numbers could slow the rapid drop in the Internet sector. Slow the Internet bleeding and the rest of the market should slow as well.

Is this the beginning of a correction or the end of some profit taking? I wish I knew. I would bet the farm. My gut feel is that we will get a technical bounce at the open tomorrow and then some more weakness. We closed at the critical 11000 level and could go either way. Volume was heavy on the Nasdaq but not the NYSE. Remember, earnings are going away soon but Y2K is here to stay. Let several more blame Y2K and we can turn out the lights.

Keep your trigger fingers in your pocket. Leave the PC if you must to avoid trading. There is always another day and as option traders we want to put our money to work ONLY when all the factors line up in our favor. Tomorrow is a toss up, heads I win, tails you lose.

Patience is a virtue gained by experience. Experience is gained by losing money on rash decisions. How much experience can you afford this week?

Good Luck

Jim Brown

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