Option Investor
Market Wrap

Same market. Different day. Good night.

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        8-19-99          High     Low     Volume   Advances Decline
DOW    10963.84 - 27.54 10995.50 10873.29   680,499k  1,370   1,610
Nasdaq  2621.43 - 36.30  2657.74  2612.28   870,697k  1,694   2,141
S&P-100  687.83 -  5.27   693.10   683.97    Totals   3,064   3,751
S&P-500 1323.59 -  9.25  1332.84  1315.37             45.0%   55.0%
$RUT     432.77 -  0.33   433.10   429.88
$TRAN   3166.30 - 20.06  3187.34  3143.71
VIX       25.46 -  0.88    27.00    25.08
Put/Call Ratio      .80

Same market. Different day. Good night.

Actually, the widening trade gap was the first falling domino that sparked a chain reaction culminating in a loss for the DOW and NASDAQ in today's trading. Oh no! Not another economic explanation, you say? Yes, but we'll keep this really simple. Here's how it works.

In short we all awoke to find that our imports far exceeded our exports last month, part of an accelerating trend, where we buy more stuff than we sell to other nations. As a result, it means that the dollar weakens (trust us on this). If the dollar weakens, foreign goods and services become more expensive. That sounds like inflation. Yep. . .sure is. From previous updates, you now know that inflation's handmaiden is the bond rate, which will, of course, rise too. Rising rates equal lower profits, which equal cheaper stocks. There, now wasn't that simple?

That's the domino chain for today. Now everyone is worried about the weakness of the dollar and Greenspan's hypothesized reaction to it. The supposition is that it may mean 1) a greater rate hike on August 24; 2) another rate hike after August 24; 3) a tightening bias to boot; 4) a boost in the federal funds rate AND the discount rate; 5) make up your own "sky is falling" story; 6) all of the above. Frankly, this is making a mountain out of a molehill, and should demonstrate to all of us that there is a significant lack of other financial news that allows anything to fill the information vacuum. Nature abhors it; so does the market.

Don't fall victim to the smokescreen. The fact is all eyes are acutely focused on August 24, Tuesday's FOMC meeting, wherein the market expects a 25 basis point rate hike, period. In front of that meeting, nobody wants to open a new position, but they are not worried sufficiently to sell what they already own. Investors are simply sitting on the sidelines waiting for the Fed's cue. In a nutshell, that is why there is no appreciable volume. There is simply no reason for the market to go up, and yet no selling pressure to bring it down. And so it goes; hurry up and wait.

As for today's market, here goes. . .the DOW took a nosedive to 10,900 during amateur hour in a fearful response to the trade deficit numbers. After bouncing around within 25 points on either side of 10,900 for most of the morning, the DOW took off like a freshly hooked fish toward 11,000 following the lunch hour. Though it made it to 10,995, a reversal ensued bringing it back down to 10,900, where it firmly bounced north again. In the final half-hour, the DOW recovered 63 of its previously lost points to close at 10,963, down 27 points on weak (again) volume of 680 mln. shares. This should come as no surprise since most investors are sidelined waiting for the Fed meeting. Just so you know, the average volume is about 785 mln. shares. While early numbers showed decliners trumping advancers 2:1, the ratio narrowed to 4:3 by days end - a nice comeback, but still a negative day. New lows are becoming fewer, as only 90 issues claimed that dubious distinction today, while new highs remained flat at 42.

Technically speaking, that magical 10,900 number, where the market found lots of support today, just happens to be the DOW's 50-dma. That we had a strong bounce, with a close nearer to its high, is a good sign. The bad news is that 11,150 seems to be the upper end of the trading range. That leaves only 250 points of trading range - a pretty narrow span from which to snag profits. Can you say range-bound? Sure, we knew you could. Again, keeping your powder dry is important. But for those who MUST play in a sideways market (a capital muncher if there ever was one), pay close attention to the trading range. Be prepared to go short (play puts) at the top, and go long (play calls) at the bottom, and exit quickly if a trade moves against you.

The NASDAQ experienced a bit more pain today, as it gapped down about 30 points to 2637 from yesterday's already weak close. Not stopping there, it kept going down to 2612 before it stabilized around 2620. Shortly after lunch, somebody opened the bullpen, as the NASDAQ made a lunge for 2640, which didn't last long. In a continuing display of weakness in what appeared to be orderly profit taking, internets, telecoms, and financials dragged the index back down to close at 2621, off 36 points for the day. Another lackluster volume day here too at only 871 mln. shares traded. NASDAQ won't go anywhere without a substantial volume increase. Decliners kept there lead over advancers about 5:4, while new lows were statistically even with new highs, 55 to 54, respectively.

Though equity and index options expire tomorrow, which would normally prop up the market temporarily, the Nasdaq couldn't hold its 50-dma and closed near its low of the day (not a good sign if you are looking for a strong Friday). If it can't keep above this, then it may test the 2500-2550 range again. With only Greenspan on the horizon for Tuesday, August 24, we expect to remain range-bound between 2550 and 2700. You may want to consider waiting to open a new call position until we get a clean bounce off or strong break over the 50-dma (2650) or, a reversal following a descent to the 2500-2550 range. As we've said before, it's tough to play a range-bound market for a profit.

For those with a bit more tolerance for risk who just aren't comfortable sitting out, it's still a tradable market. You just need to be agile. Still, in front of the Fed meeting Tuesday, you may want to consider opening a hedged OEX position so that you profit on a breakout in either direction. We might suggest playing puts, but there's an old adage on Wall Street that you never short a quiet market. You need other sellers to join in order for that to work, something that isn't likely to happen before Tuesday (and maybe not after, depending on the Fed's comments/actions).

The fact is that volumes are likely to remain low, not just in front of the FOMC meeting, but until after the labor day weekend when traders return from vacation. Until then, volume (necessary for a breakout to the upside) will remain light and we will likely remain range-bound for the next 2 weeks. Now truly is a good time to go on vacation.

Looking into the crystal ball, what do we see? Given that tomorrow is double witching day (index and equity options expire), we expect to see a bit of support tomorrow, just not a barnburner, but still fraught with higher than usual volatility. If you trade over the next 2 days (Friday and Monday), pay close attention to the trading ranges of the market indexes and take positions in particular companies whose movement tends to be similar. September options will be a bit cheaper on Monday. For the real aggressive, you can always sell puts on a breakout tomorrow with the idea that they will expire worthless in something less than 7 hours. Remember to tighten up those stops if you are sitting on profits. You won't want to lose them on ill-timed volatility. In short, trade using support and resistance if you must play, or get hedged for Tuesday. You won't be penalized for waiting either. As always, sell too soon.

Buzz Lynn
Research Analyst

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