Option Investor
Market Wrap

Are we there yet?

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        8-3-99          High     Low     Volume   Advances Decline
DOW    10677.31 + 31.35 10727.97 10613.99  735,004k  1,091   1,882
Nasdaq  2587.99 - 35.64  2649.21  2564.25 1012,000k  1,296   2,689 
S&P-100  681.54 -  0.79   687.44   677.20   Totals   2,387   4,571
S&P-500 1322.18 -  5.87  1336.06  1314.94            34.3%   65.7%
$RUT     436.28 -  6.35   443.75   434.27
$TRAN   3325.80 - 44.47  3387.52  3316.82
VIX       26.68 +  0.56    27.62    25.72
Put/Call Ratio      .71    

Are we there yet?

Parents dread long car trips with young children because of the repeated impatient questions. Trying to be creative with answers to this question contributes to vacation stress. Vacation stress is what some analysts are calling the slippage in the markets. Citing low volume as evidence of lack of traders and lack of interest in the market in general, they are not worried about the recent drops. I am not worried. I am in cash. Amazing how that impacts your view of the carnage. If you are long stocks or options this week then you probably need another Rolaids. If you are long Internet stocks you need a Prilosec.

The Dow struggled back from a midday loss to finish up +31. The Dow appears to have found a temporary bottom at 10615 after testing it four times in the last two days. This could be only temporary but any relief is welcome. Hopefully this brief stop ends up better than the Nasdaq stop last week. After bouncing off 2630 several times last week, the Internet sell off today knocked the bottom out of the Nasdaq. Closing down -35 today, the Nasdaq was only 15 points off the bottom and not looking healthy.

Internet stocks were being pounded into dust and previous high flyers were the down draft leaders today. Qualcom took a nose dive on no news to the tune of -12.50. Yahoo dropped -6.94 after denying any takeover rumors of Excite At Home. Other Internet losers were VRSN -6.75, INKT -7.81. Nextlink dropped -16.56, GNET -5.56, RNWK -7.09.

On the NYSE AOL dropped -4.06. AOL has lost $94 billion in market cap since July 12th. Next support for AOL is in the $78-80 range. AOL broke thru its 200 day moving average which it has not touched since October 12th last year.

Many of the Internets have now lost -50% from their recent highs. The bloodbath may not yet be over. The flood of Internet IPOs is increasing and it appears if you can spell .com you can do an IPO. The end may be in sight after the 1800flowers.com IPO today. FLWS was offered at $21 but dropped to $18.19 at the close. The supply vs demand acquisition formula has simply shifted heavily to more supply than demand. This and no real earnings has investors thinking twice before paying high premiums for new issues and old.

The Dow's tenuous bottom at 10615 could be in trouble with the July jobs report on two days away. The chances of more inflation signs showing up in the critical report are keeping investors from making any bets on future market direction. The bond yields closed at 6.16%, a 21 month high. The higher yields are luring away cash from the weak stock market.

The real news today was the deteriorating advance/decline line. This indicator has taken a strong turn for the worse and decliners beat advancers by over 2:1 today even though the Dow struggled back to positive ground. There is still no reason to buy and most now think the market will go lower. Still there is no real fear in the markets. Just slow orderly selling with no panic. There is a camp that says "don't worry be happy, all will return" and the other camp that says "sell now and avoid the Y2K rush". Even the most bullish analysts are saying things like Dow 12500 but expect a -15%-20% correction at any time. A contradiction of terms? Yes. How else could you stay a noted bull and still be right? Predict both ways and claim victory when each eventually happen.

Another factor dragging on the market is the curse of margin calls. The margin balances of brokers are dropping because of the sell off in Internet stocks. As each stock drops more and more each day, investors who bought on margin are being forced to sell at a loss to relieve the pressure on their accounts. This forced selling is actually good for the market, unless of course you are selling. This takes stocks out of weaker hands and puts them into stronger portfolios more able to withstand the market cycles. This creates a stronger base at each level.

Speaking of online brokers, CS First Boston issued a warning this morning that trading volume is expected to go down in the third quarter (now) and not pick up again until next year after Y2K. What? A major bank warning about Y2K and the impact on the markets? Yes..and the stock of the online brokers tumbled as a result. EGRP -4.31 to $24.69 WOW! AMTD -2.75 to $21.25, NDB -4.96 to $32.12, SCH -4.56 to $37.88, NITE -4.21 to $37.03. Most of these stocks are down -50% from their recent highs.

So lets see...Internets -50% from highs, brokers -50% from highs, how many more sectors have to take a serious hit to qualify as a bear market instead of a "bullish correction"? Basically as long as the Dow and S&P stay above the -10% range, this correction never happened. They are both at the -7% stage right now. Internally there is a serious sector rotation taking place and until the Dow 30 stocks are impacted the real damage is invisible. (tell that to your accountant when he looks at your trades for last month)

Seriously, I don't think we are there yet boys and girls but I can't tell you how much farther we have to go. I would like to think Dow 10,500 would be a floor and Nasdaq 2550 but the mood has not turned ugly yet. Until we get a serious drop and capitulation by the last weak holders then we have to keep suffering. I would like to think the big drops today on no news by companies like Qualcom -12.50 and Nextlink -16.56 would be the start of the healing but there are still some high flyers left and until everybody gets a turn in the woodshed the pain is not over.

Look for more of the same through Friday. Choppy markets with morning rallies meeting heavy selling. Until we see the next chapter in the Fed inflation play book on Friday (non-farm payrolls), nothing good is going to happen.

We have a new section starting tonight that highlights straddles. That is buying a call and a put on the same stock. It only requires the stock to make a big move in either direction to make a profit. This will be a new Sunday section with updates on Tue/Thr. It will be written by our new staff writer and trader Tom Gentile. Tom will be on CNBC Wednesday between 12:00 and 2:PM during the Power Lunch in Atlanta segment. Tom is also an instructor at the OIN/Optionetics seminar series. Check it out!

Please, if you must play, pick your entry points carefully.

Good Luck, Sell too soon.

Jim Brown

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