Option Investor
Market Wrap

The Fed giveth and the Fed Chief taketh away.

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         WE 8-27          WE 8-20          WE 8-13           WE 8-6
DOW     11090.17 - 10.44 11100.61 +126.96 10973.65 +259.62  + 58.88
Nasdaq   2758.90 +110.57  2648.33 + 10.52  2637.81 + 89.84  - 90.52
S&P-100   707.97 + 11.38   696.59 +  7.77   688.82 + 14.69  -  9.16
S&P-500  1348.27 + 11.66  1336.61 +  8.93  1327.68 + 27.39  - 28.43
RUT       432.45 -  1.93   434.38 +  0.33   434.05 +  6.01  - 16.73
TRAN     3171.35 + 20.62  3150.73 - 28.34  3179.07 - 40.96  -113.21
VIX        23.21 -  0.85    24.06 +  1.68    22.38 -  4.98    27.36
Put/Call     .73              .69              .72              .72

The Fed giveth and the Fed Chief taketh away.

Just when you thought it was safe to go back into the market Alan Greenspan launched another precision guided talk bomb over the airways. With a kindler, gentler version of his famous "irrational exuberance" speech, Alan spoke out on the over priced market and warned that the Fed was still vigilantly watching for signs of inflation and would not hesitate to raise rates again. He also said the Fed would have to watch the over inflated markets closely as well for signs of speculative bubbles. Oops! What happened to the "no more raises this year" stance that everybody read into the FOMC comments earlier in the week? The same thing that happened to the "neutral bias" stance from the previous increase. The FED fired again last Tuesday while still under the white flag of the "neutral" bias from the last meeting. Most Fed watchers had deciphered that bias change as notice that there would not be another rate increase but the subtle shifts in some of the inflation reports over the last month pushed the Fed back to the brink and they took action anyway.

The strong statements by Alan on Friday quickly rekindled the inflation worries and sent buyers running for cover. The lack of volume the next to last summer Friday only made the impact worse. Friday was the lowest volume day of the year on the NYSE and the Nasdaq only posted 718 mln shares. Note also that the advance decline line set a new 52 week low.

Before I go any further I need to correct a statement made on Thursday night. I quoted Tom Galvin as having set a 10,800 target for the Dow this year. This was a typo. The real target price was 11,800. Thanks to all the readers who pointed out my error. I agree with Tom and do expect the market to climb into the October earnings period. Hopefully it will get to 11,800. After the Greenspan restatement of a previous ambiguity into the present veiled threat, I am not so sure. Bonds, often touted as the best indicator of future Fed policy, dropped a full point at the close and raised yields back to 5.98%, up from 5.86 on Wednesday. With bond yields climbing stocks will have a tougher time.

Don't get me wrong. I think the Greenspan speech was simply a rehash of his previous statements. He has been calling the market over valued since 6500. This was nothing new. Everyone knows where he stands. I think he was frustrated that the market rose unexpectedly +650 points before the rate increase last Tuesday. He is also frustrated that stronger measures by the Fed could also tank the market this close to Y2K more than he wants. He is in a economic quandary and talk is about his only weapon right now.

Next week is looking a little touchy. With the Fed blessing turned into a curse again and the economic calendar stacked against us, we could have a rocky week. The non-farm payroll report on Friday will be the next major Fed milestone. Strong jobs and falling unemployment could ramp up the Fed worry again just in time to squelch the third quarter earnings run. On the flip side the market is still liquid and buyers are still lurking on the sidelines. Even after two days of triple digit losses the Dow is only -240 points away from its Wednesday high. Every century mark we pass on our downward travel creates another level of buying interest. The Dow finished negative for the week by about -10 points and only about +100 points over where it was on Friday two weeks ago. Yes, we dropped -250 from the high but another -250 points would be very tough. Don't look now but the Nasdaq still tacked on another +110 points this week!

We are still looking for any dip to be a buying opportunity but the key is not trying to pick a bottom. Unless you have an inside track to Karnac and know exactly where the bottom will be then your best bet is to watch for the bounce. We expect a post Labor Day rally but we expect some pre-Labor Day bargain hunting to occur. Any bounce from below 11000 would be buyable but a bounce from below 10900 would be even better. If you can hold off until Thr/Fri then your chances of buying on the uptrend will be greater.

Waiting for next week may not be the answer for buyers of AMTD or EGRP. The online brokers were tossed for a loss Friday on a downgrade by Lehman Brothers. Lehman said their $300 per customer acquisition costs and excessive valuations were the reason for the downgrade. Before you start feeling sorry for Ameritrade shareholders at $21, down from $42, you should know the 52 week low was $1.88. Etrade had a high of $44 and a low of $2.50. The flushing of electronic brokers is even more strange since Gomez Advisors recently finished a survey showing that online brokerage accounts are poised to triple in the next year. Assets held by electronic brokers could increase by over $1 trillion. Looks like a buying opportunity for these stocks to me. Again, don't try to pick the bottom. Leaps are cheap on AMTD but could get cheaper by year end.

Some high profile upgrades from Friday include Intel, upgraded by Morgan Stanley to a price target of $95. Also, AAPL by Warburgh Dillon Reed to $75 and NXLK to $125 by JP Morgan. Intuit (INTU) was the winner with multiple upgrades to strong buy and a +8.19 gain.

On the downside Dave and Busters got busted to the tune of -$11, from $24.50 to $13.75 after the company warned of lower than expected earnings and falling same store sales. Multiple brokers dropped them like a hot potato.

AOL looked to be recovering from their recent drop but we think the future is not bright. Based on the news that AltaVista signed up +225,000 new users to their free Internet service in the first two weeks it may be tougher for AOL to maintain its high growth rate. If the wave of companies offering free Internet access continues to climb then AOL revenues may suffer. Dell, Microsoft and many others are viewing Internet access as another hook to snag and hold surfers by creating branded portals and discounting access. The handwriting may be on the wall for AOL as competition heats up. Their PE of 172 will be very hard to maintain should subscriber growth start to suffer.

There is a rumor around that AT&T is going to drop their TDMA approach to wireless and adopt Qualcoms CDMA system. The rumor is that funds are taking large call option positions in front of a possible surprise announcement from QCOM on Sept 7th. Just a rumor but we added QCOM as a play tonight.

If you are going to play calls for the October earnings then you should be lining up your prospects now. I would start by trying to target shoot your favorites next week at about 50% less than current prices. Any significant downdraft could cause intraday dips and get you filled at a good price. Any day with a strong 100+ point or more drop intraday and a quick recovery back to positive ground could mark the end of the current weakness and the start of the rally. Be cautious and market aware and your plays will come out better in the long run.

Pick your entry points carefully. Just because the newsletter comes out on Sunday does not mean all the plays are good for Monday. Pick your targets and then pick YOUR entry points for those plays. Market orders before the open on Monday are NOT an entry point!

Good luck, sell too soon.

Jim Brown
Editor

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