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Market Wrap

Pining for Direction

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        8-02-99          High     Low     Volume   Advances Decline
DOW    10645.96 -  9.19 10791.60 10615.25   649,550k  1,215   1,729
Nasdaq  2623.63 - 14.86  2670.81  2617.22   658,027k  1,600   2,326
S&P-100  682.33 -  0.96   692.03   680.83    Totals   2,815   4,055
S&P-500 1328.05 -  0.67  1344.73  1325.18             41.0%   59.0%
$RUT     442.63 -  2.14   445.51   441.57
$TRAN   3370.27 + 37.03  3383.18  3328.05
VIX       26.12 -  0.43    26.71    24.62
Put/Call Ratio      .68

Pining for Direction

Imagine a horse race where participants, after leaving the starting gate at full gallop, stopped racing on the backstretch, lay down for a nap, then reversed their direction and headed back the wrong way toward the starting gate at full speed. If you can picture that, you'll have a trend chart of today's action. To continue the horse analogy, aside from daily exercise on a lunge- line, it's probably better to keep the horses in the barn, while waiting for better track conditions. Translation: Unless you are going to play specific companies off specific news and events, guard your capital closely until the market improves, especially if you are playing calls. As we suggested on Sunday, it is possible that conditions for entering call plays this week may never materialize. Put players and call sellers will fare much better. Also, this is a good time to revisit the 10 rules of trading. We don't mean this to sound like a repeat of Sunday, but today went exactly according to plan, and we expect the downward bias to continue throughout the week.

So what happened today? Another day where both the DOW and the NASDAQ closed near their lows. That's never a good sign. The morning however, began on a positive note with the National Association of Purchasing Mangers (NAPM) Index reporting in at 53.4%, much lower than the anticipated 56%. The bond market took that as 1 less inflationary sign to worry over, and promptly took rates south to 6.10% from 6.18% where it had traded prior to the news. In Domino-like fashion, falling bond yields ignited a short relief rally in the equity markets, snapping the DOW up 137 points and the NASDAQ up 32 points within the first hour and a half of trading. There we rested for a scant few minutes, then drifted downward for the next 3.5 hours until Mr. Market blew off the magic dust. It's as if investors immediately recovered from amnesia in time to remember, "oh yeah, we have an Employment report due out Friday at 8:30 a.m. ET". While we are glad they stopped short of uttering "FIRE!!!", it appears that "The Emperor has no Clothes!" carried some weight, as investors shed 110 points off the DOW and 30 points off the NASDAQ in the final 90 minutes of today's trading.

Specifically, the DOW opened at 10,654, rose to 10,791, then drifted back to 10,755 with 90 minutes left in the day. No more kid gloves for Mr. Market, as the DOW was then socked a 1-2 punch for 110-point loss to close at 10,645. Total damage: -9 points on the day. We want to highlight the particularly weak advance/decline line, wherein decliners outpaced advancers 1729 to 1215. The ratio noticeably favored decliners, even when the market was up 137 point earlier this morning. Volume came in at an anemic 650 mln. shares. Again, there was no investor conviction backed by volume in the price spike. These factors lead us to believe that there is still further to fall. As we suggested Sunday, the next support is at 10,500, with nothing in between. Investors' sentiment is to wait for the Employment numbers Friday before making any commitment to the future.

Today's big NYSE losers were bank, financial and oil, thanks again to interest rate fears. Airlines performed relatively well

The picture on NASDAQ was quite similar, with a notable exception, which we'll get to in a minute. Bolstered by a bullish bond (say that 5 times real fast!), the interest rate- sensitive technology sector took off like a rocket from its open at 2638. It reached orbit at 2671, then began re-entry. While the parachute remained deployed most of the afternoon, providing a steady but controlled descent, astronauts (investors) cut the cords to the chute and the NASDAQ capsule plunged to a soggy splashdown at 2623, down 14 points (leaving some astronauts soaked in the process). Volume here was low too - just 758 mln. shares traded today. 2326 issues declined while only 1600 advanced. Conviction is missing; there are no buyers.

There was 1 notable winner today. Smith Barney reiterated its buy rating on Intel while raising its price target to $95 from $85, and Soundview reiterated its strong buy rating too. You can be pretty sure that what's good for INTC is good for the hardware industry. INTC's volume remains robust, not just in comparison to the rest of the market, but compared to its own average daily volume too. We sound like a broken record, but you can't get solid moves up without volume increases. Despite Intel's strength, it is also stubbornly remaining one of the last holdouts in the market caught in a correction (and thankfully so). For as soon as the volume dissipates, the price level will weaken, and there won't even be Intel to shelter lesser technology issues from the fallout. The usual market leaders, MSFT, CSCO, WCOM and DELL are already on hiatus. While a fine company, INTC can't hold up forever. But while it does, it provides a measure of protection for the rest of the tech market. You will want to keep your eye it.

NASDAQ weakness could be found squarely in the Internet sector. Plenty of those issues are off their highs by 40-55% in the big brands like YHOO, LCOS, CMGI, DCLK, EBAY, and AMZN. AOL, while not NASDAQ-listed, hit a milestone today; unfortunately, not a good one - it closed for the first time below its 200-dma, down $4.28 to $92.88. This is a negative technical development, which doesn't bode well for the rest of the sector. Other Internet issues, like those named above, are sitting precariously at support without much good news on the horizon to prop them up either. New IPO's hit the market every day, driving up the supply of "Internets", while the demand dwindles. We all know what happens when supply increases and demand drops. We're sorry to say it, but look for more damage in the coming weeks. No need to hang your head in despair though. Check out some of our put plays for some ideas on how to currently play this sector. Just because Internets fall doesn't mean we have to suffer. In fact, it's our job as traders to prosper in any market!

One more brief comment on volume. We really need to see volume to confirm a direction. That works both ways. If volume accelerates back to 1.2 bln. shares on a negative point day, the sell-off will likely be severe, but will also signal that we may be nearing a bottom. That's called capitulation, and it occurs when a majority of investors panic and throw in the towel. It also means there aren't many sellers left to do it again the next day, hence a bottom, perhaps. We don't think we'll be that lucky and expect the decline to continue in small amounts on lackluster volume, kind of like losing too much blood from a paper cut.

Likewise, if we can get a couple of up days with volume over 1.2 bln. shares, the correction will be pretty much over. Frankly, this is a case of wishful thinking too, since there is nothing foreseeable on the skyline to cause this.

So, what to do for the rest of the week? Really, this doesn't have to be all doom and gloom. If you must play, stick with those calls that have bucked the trend with volume (INTC, JDSU). Or, we encourage you to at least check out, if not play some of the puts we have listed. Until the employment numbers come out Friday, buyers will stay on the sidelines and sellers will chicken out. This time around, the rate hike fears are real. Some bond traders are fully expecting 2 rate hikes between now and August 24, the next FOMC meeting. Above all else, protect your capital by taking smaller positions or just plain sitting out. Despite the swash-buckling stories that all of our non- trading friends have come to expect, the best story of all will be how we survived the recent downdraft, when others lost it from lack of discipline. Trade smart and sell too soon.

Buzz Lynn
Research Analyst

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