Option Investor
Market Wrap

On the eighth day they rested.

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        11-9-99              High     Low   Volume Advances Decline
DOW    10617.30 - 101.50 10765.60 10585.20   854,878k 1,306  1,707
Nasdaq  3125.04 -  18.93  3174.81  3099.22 1,467,758k 1,886  2,115
S&P-100  717.80 -   6.83   728.85   715.33    Totals  3,192  3,822
S&P-500 1365.28 -  11.73  1383.81  1361.45            45.5%  54.5%
$RUT     446.28 +   1.21   447.81   443.79
$TRAN   2989.41 -  41.80  3059.41  2980.15
VIX       23.07 +   1.55    23.54    21.34
Put/Call Ratio       .50

On the eighth day they rested.

If you thought it would last forever you are smoking something besides tobacco. The seven day record high winning streak by the Nasdaq came to a halt and the Dow relaxed in sympathy. After a strong opening with both indexes up at the open, the markets began a slow bleed as profit taking slowly leveled the playing field. The Dow leveled at just above 10600 and traded in a narrow range the rest of the day. If you remember my chart from Sunday, the two different methods of predicting the next critical point both called for something a little over 10600.

Don't look now but we are there, 10617. The market has moved to the exact point where the PPI numbers tomorrow will have the greatest impact. Bad numbers and we will fall out of our recent trading range and possibly by a large number. Good numbers, +.1% or less, should light a fire under the market as fear of another Fed rate hike next Tuesday slowly evaporates.

The Nasdaq just finally caved in under its own weight. Seven days on the high road and +9% gains just proved to be too much baggage to carry forward. But do not despair. The dip buyers were out in force today. Even though the Nasdaq was down at the close that was not the real story. Today was the heaviest volume day in Nasdaq history with 1.448bln shares trading hands. Every leader that dipped on selling by profit takers was met by strong buying on every dip. Most recovered from the early morning sell off by midday but some gave back some of their gains at the close in a final attempt to dodge the PPI bullet. I think you will agree this is not a weak chart!

Without the mandatory day off today we had today, we would have been handicapped on good numbers tomorrow. Now, with the winning streak set back at zero we are free to rock and roll if the PPI is in our favor. The bullish undercurrents are boiling and it "seems" like nothing can stop us.

The driver for tomorrow, other than the PPI, will be the CSCO earnings tonight. There had been rumors for weeks that Cisco would miss earnings and the stock had been flat. Surprise! Cisco beat the street but only by a penny. This was enough for the after hours crowd and it traded up $2 to $3. The strong report will be positive for the market going into Dell's earnings on Thursday.

Part of the high volume on the Nasdaq today was the Charter IPO. Charter is Paul Allen's communication company. It looks like everybody wanted a piece of it but nobody wanted to hold it. Of the 170 mln shares in the IPO, 115 mln changed hands today. Hot potato anyone?

The week would not be complete without Amazon doing a 180 after we picked it as a play on Sunday. The last three times we played Amazon it went exactly the opposite the next day. Either Jeff Bezos is a psychic or just has really good timing. On Monday he released a teaser press release to expect a major announcement on Tuesday morning. The rumors included a buyout/linkup with Beyond.com to capture their software business or a linkup with Home Depot to sell home improvement items on their site. Neither happened. Jeff announced this morning that they were going to sell software, video games and tools?? They would open four new sites and continue the Amazon tradition of losing money faster than anyone ever expects. The tool connection turned out to be with a small company in Idaho. No mega merger equals no sex appeal. Bank America promptly downgraded them and Merrill Lynch laughed about their focus, "maybe they should stick to books and not tools by mail". The stock dropped -7.19 but only gave back half of yesterday's gains. We considered dropping it as a put but the spiked looked like an entry point to us. Since it jumped at the open on Monday it was highly unlikely that anyone bought puts in amateur hour. This is still a high risk play. You be the judge.

The PPI is expected to be only +.1%, very tame, and confirm what the recent economic reports have been saying. The economy is slowing and inflation is fading. The last PPI caused serious grief when it came in much higher than expected. The Fed claims to not put much emphasis on the PPI and considers it to be too narrow an indicator. Lets hope it comes in low just to be on the safe side. The next major events for the week will be the Dell earnings on Thursday and the Retail Sales and Productivity Reports on Friday and FOMC on Tuesday. With the calendar full you would think the market will stay locked in its trading range until at least Tuesday. The advance/decline line turned south again this week with the profit taking and the VIX dipped below 22 on Monday but closed at 23.07 today. With third qtr earnings almost over the attention is being focused on the anticipated fourth quarter earnings. The Y2K quarter results. As of today 124 companies have warned that the fourth quarter will fall short of estimates. Not a flood but enough to make us cautious about our long term outlook. Recently we have seen year end rallies as investors expect the retail boom to be reflected in the January earnings. If companies continue to warn then the Y2K bug may get a last laugh in December.

After receiving all the hate mail on the Steve Brown article on Microsoft this week and the Buzz Lynn market wrap on MSFT last night, I would not want to be at the podium for the MSFT shareholders meeting tomorrow. There are likely to be a lot of pointed questions and angry people. It is not like they just woke up yesterday and saw the newspaper and said "Oh my! What has Bill done?" They knew the case was in process but they did not know it would bite them. Bill is on record as saying many times that "the trial would have no financial impact on MSFT whatever". Of course, everybody believed him. I wonder if he still feels that way? Either way, without a settlement it will be well into 2001 before the case is over. I am a happy camper this week after buying leaps on MSFT on Monday at fire sale prices shortly after the open. I look at it this way. I have at least four more earnings cycles and thirteen months of covered calls to profit from this cash cow BEFORE the Justice Dept can get a single dollar from MSFT. Even if Bill agrees to a breakup eventually the results should be good. Remember the AT&T breakup, or the Standard Oil? Did the baby bells turn profitable? Holding Exxon and Mobil would not have been a bad deal either. Some of the children of these monopolies grew bigger than the parents. From the hate mail there are a lot of readers who hate MSFT with a passion. So be it. Feel free to hate Mr Softee all YOU want, we still plan to profit from the stock! (we did switch to Unix mail servers this week after repeated glitches in the Windows-NT servers. We may be slow, but we are not stupid!)

If the PPI gives us another buying opportunity try not to buy too soon. The Fed is still ahead!

Jim Brown

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