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Market Wrap

Hit the snooze button - there's still time before the sun comes up.

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        8-09-99             High      Low   Volume   Advances Decline
DOW    10707.70 -  6.33 10761.84 10683.32   681,288k  1,190   1,798
Nasdaq  2518.80 - 28.99  2563.72  2517.46   753,037k  1,661   2,214
S&P-100  671.74 -  1.79   677.54   671.09    Totals   2,851   4,012
S&P-500 1297.84 -  2.49  1306.71  1297.80             41.5%   58.5%
$RUT     425.89 -  2.15   428.90   425.81
$TRAN   3220.45 +  0.42  3247.24  3212.59
VIX       27.36 -  0.63    28.41    27.25
Put/Call Ratio      .71

Hit the snooze button - there's still time before the sun comes up.

Days like this put us at a loss for words in trying to tell the same story a different way. In a nutshell, interest rate fears are steering the bond market down into more attractive yields (6.225% today, a 52 week high, a loser for bonds), and the equity market is following the bond's lead. Here's the logic: If the Fed raises interest rates (which everyone is certain it will do when it convenes again August 24), bond values fall in response. Equity owners, smelling a bargain, sell stocks to buy the greater yielding bonds at a reduced price. Similarly, as bond yields rise, the equity market fears that bonds then offer a better return. Couple this with the idea that as rates rise, bigger interest expense reduces corporate profits, and voila' (pronounced wah-LAH. Thanks to a sharp-eyed reader), stock prices fall in self-fulfilled prophecy. After all, stocks values are the just the cumulative discounted present value of all future income streams. It then stands to reason that high priced stocks are also the most interest rate sensitive. The higher the multiple to earnings (or revenue), the greater the detrimental affect of a rate rise. That is partially the reason for the pounding Internet stocks have taken lately. They have little if any earnings now, and may be reduced further if interest expense burden rises.

So why should we care? The obvious reason is that if we can understand the market's current behavior, we can catch a little profitable piece of it by partially anticipating its next move. That's the basis of trend trading. That leads us to 2 axioms that are highly complimentary to the 10 rules of trading.

(We know you've read them before, but do it again. After all, nobody ever learned numbers by watching Sesame Street 1 time. It was constant repetition that made numbers ultimately intuitive. The same is true for trading.)

Ready? First, the market is never right or wrong. It just is.

Second, don't fight the market (This used to mean "don't fight the tape". However, the ticker tape to which it refers has just about gone the way of the dinosaur.)

The point is fear, greed, hope, wishes, arguments, or as George Fontanills calls it, religious investing (that's where you pray it goes up) won't change the market's direction. It's bigger than any individual. When our egos get involved and we try to rationalize ourselves as smarter than the market, our lack of humility will land us in the poor house. Perhaps that's why one of the great portfolio strategists of our time and long-time Forbes contributor, Ken Fisher refers to the market as "The Great Humiliator." So much for psychology. Let's look at today's performance (or lack thereof).

It wouldn't be Monday without a merger. First up, EMC, the data storage giant has agreed to acquire Data General for $1.1 bln. in stock. The theory is that DG gives EMC a better footing in the mid-level storage product. A good fit? The street didn't think so as it handed EMC a loss of $3.00. DGN fared better with a gain of $4.25. Next, CSCO agreed to spend $1.0 bln. for 20% of KPMG Consulting's Internet services businesses, which focus on telecom and enterprise markets. Though CSCO gapped up this morning (did you exit on strength?), it took a $3.50 nosedive in the last 2 hours to close at $59.81, down $2.44 for the day.

Speaking of CSCO, and let's add MSFT while we're at it, these 2 sold off in fine fashion this afternoon, helping the NASDAQ shed 40 points in the final 2 hours. Conversely, the first hour had the index gapping up 12 points, then fell to -8 points before falling into this trading range for most of the day, until it headed south with 2 hours remaining. In the end, the NASDAQ closed down about 29 points at the 2518 level. Volume was low at only 753 mln. shares traded. It's hard to get a rise in prices with that kind of volume. The advance/decline line remained weak at 1661 to 2214. 92 new lows creamed only 45 new highs. With bond rates moving up and money on the sidelines waiting for the August 24 FOMC meeting, volumes will remain low. The rally at 2600 failed Friday and failed again at 2550 today - lower highs. It is our guess that we may test NASDAQ 2400 soon. There is just no reason to buy, while the PPI on Friday and the CPI next Tuesday may upset the apple cart even more.

Today's Junior Lobster-in-the-Pot Award goes to the Internet sector. (This refers to starting lobsters out in cold water before putting the pot on the burner as opposed to tossing them in boiling water. The lobster probably prefers the former to the latter, but gets cooked nonetheless.) As the temperature rises, these guys are becoming "Shorty's" dinner, yet the sell-off is insidious and feels less painful because it happens over a longer period of time - no volume on today's losses reflects that. The sector is down approximately 40% from its high as measured by TheStreet.com's DOT index.

The Lobster in a Pot Grande' Award would have to go to retailers. Did anybody notice that the sector is down 17.5% since its April high? Selling remained strong today as it looked like more money managers unloaded in big volume (the Grande' part). Again, they won't announce this, but volume leaves a strong clue. Wal-Mart hasn't traded this low since the beginning of the year. Got that? - zero gain for DOW component Wal-Mart. DH, HD, LOW, AEOS, GPS, COST, SPLS all suffered losses on heavier than average volume. Who's next? We don't know, but the drug index is down 20%, banking by 15.5%, and automobiles by 14%. Transportation has been hit hard too.

The DOW for its part couldn't even make it back up to 10,800. It failed today at 10,761 on lethargic volume of only 684 mln. shares. Fortunately, it held at 10,700. Talk about a narrow trading range! Straddles anyone? In the end, the DOW silently "misplaced" 6 points to inch downward for a close at 10,707. We may have suggested it in the past, but reversing the "advance/decline line" name to "decline/advance line" may not be a bad idea for the foreseeable future. Today, decliners again beat out advancers by a 3:2 ratio. New 52-week lows pummeled new highs 235 to 59. That's a lot of new lows.

How 'bout the rest of the week? Interest rate fears will keep investors side-lined. Aside from dead cat bounces while testing support, there is no reason to buy until the bond market get another fix of fear (or relief?) on Friday when the PPI figures are released. Making it past that, the CPI is released next Tuesday, then the FOMC meeting August 24. Our best educated guess says we are stuck in a trading range with a downward bias. With the exception of CSCO, who reports earnings tomorrow, plus DELL and HD next week, earnings reports have pretty well wound down. Now's a good time to investigate straddles and spreads, or even puts (which have been working nicely) if you are predisposed that way. Wish we had more to work with, but we have to play the hand we're dealt. Remember to stick to your plan, cut your losses early, use trailing stops to protect profits, and sell too soon.

Buzz Lynn
Research Analyst

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