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Market Wrap

Both the NASDAQ and the DJIA posted nice gains today. . .

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        11-22-99           High     Low    Volume Advances Decline
DOW    11089.50 +  85.60 11112.80 10978.20   873,570k   906  2,189
Nasdaq  3392.56 +  23.31  3400.23  3357.68 1,374,762k 1,935  2,200
S&P-100  754.35 +   5.05   756.04   747.24    Totals  2,841  4,389
S&P-500 1420.94 -   1.06  1425.15  1412.30            39.2%  60.8%
$RUT     460.77 -   0.50   462.40   459.69
$TRAN   2954.90 -  21.60  3020.13  2920.39
VIX       20.28 +   0.65    20.97    19.83
Put/Call Ratio       .43

Both the NASDAQ and the DJIA posted nice gains today. . .

So how come my stocks didn't advance? Look no further than the advance/decline line, where on the NYSE 2190 decliners squashed just 908 advancers - that's better than 2:1 negative, and not conducive to profitable trading. NASDAQ was also negative, however much less so with 2205 decliners beating out just 1938 advancers. Digging deeper, the real answer lies in the performance of specific stocks that make up the indices. For instance the DJIA is comprised of only 30 companies (out of potentially thousands that are traded every day) including the old "stodgy" variety like Phillip Morris, Coca Cola, General Motors, General Electric, even IBM. Most recently, Microsoft and Intel were added to the mix to better reflect the importance of technology in the changing world economy. Is there a theme here? Other than membership in the index, the answer is , "not really". Let's take a look at some of these. Each one had its own reason for a move today which had nothing to do with movement of the others.

First Coca-Cola (KO). KO announced a price increase for its syrup, which it sells to bottlers worldwide. Say hello to a bigger revenue stream. Analysts, Merrill Lynch in particular, upped KO's rating to an Intermediate Buy and named it "a top pick for 2000". With international prices firming, it's assumed the worst is over and that they can make price increases stick. On volume three times the ADV, KO moved up $4.88 to $64.38, its highest level since June.

Second, AT&T (T). Here's a communications company that had yet to join in the market's enthusiasm for these issues. Today, a Paine Weber analyst noted that in an analyst meeting scheduled for December 6th, he believes that T will announce a tracking stock for its wireless properties estimated to be worth $20 per share. Adding in a pro-forma value for the wireless division gives T an estimated current value of over $70 per share. Naturally, volume kicked in at almost 2.5 times the ADV, as T traded up $5.44 to close at $52 on the news.

Third, Microsoft (MSFT). Love 'em or hate 'em, as we noted over the weekend, the appointment of a mediator in hopes that MSFT would ultimately reach a settlement provided some welcome support for this previous non-participant. MSFT closed up $3.81 at $89.81 on 73% greater volume than the ADV.

GM saw an increase of 50% to its ADV, sending it up $3.25 to $73. IBM gained $3.94 to $107.88 on 30% excess volume over the ADV. GE, while negative early in the day, made a move during and after lunch to close up $2.50 to $140.19.

With moves like that, it's clear to see how the DJI could finish up 85 points with just six companies carrying the heavy load. That's a total of six companies adding roughly 110 points to the index. The other 24 traded flat or negative. In short, you could call it luck or coincidence that it finished up. There was no common theme here.

Need confirmation? Take a look at the OEX (S&P 100 index), which was up 5 points today compared to the SPX (S&P 500 index), which actually lost a point. The Russell 2000 remained flat today too. From this we can see the top 100 are carrying the indices up, while the balance of the issues trade flat or down. This is borne out in the terrible advance decline line.

Here's the good news though. Over the last three trading days on five separate occasions, the DJIA found support at 10,975 and kept bumping its head on 11,050. Today, on an afternoon volume increase, the index broke over 11,100, though it fell slightly to 11,089 by the close. Even so, the close over previous resistance of 11,050 (yes, a small breakout) is a positive if you are of the mind that previous resistance becomes new support. Take it with a grain of salt though; the next longer-term resistance is 11,150. The DJIA is up over 5% in the last seven trading days. It too may be due for a breather before moving up.

However, as we've noted in the past, money coming off the sidelines is manifesting itself in volume. Continued volume equals continued gains. No volume equals no gains. That will be the sign that the spigot has been turned off (at least temporarily), wherein money managers will take a wait and see approach, perhaps harvesting some profits before committing more funds to the market. Once they've spent what they've got, they can't buy anymore until they get more funds. Selling something for a profit accomplishes that objective, but also whacks prices. Be sure to keep those stops set, or at least know your exit if your broker won't let you set stops. (We're raving over Preferred Trade's system and suggest you investigate them if you want to trade with stops).

As mentioned earlier, NASDAQ also saw a negative A/D line, (though not as ugly as the NYSE) as it nonetheless marched on to another new record high, closing up 23 points today at 3392. That makes 14 new records in the last 17 trading days, tacking on 640 points with no serious correction. Near as we can tell, this is unprecedented in recent history. The NASDAQ now trades at a 27% premium to its 200-dma. We're not telling you to sell everything right now, but this level is unsustainable. Trading at a 25% premium has occurred only two times so far this year. On both occasions, the correction was swift and lopped an average of 13.5% off the high. Time frame? In both previous instances, the rallies lasted 4-6 weeks. We have just begun week six today. While it's possible that we could continue to see gains so long as volume remains high, we are trading on borrowed time and need to position ourselves, and more importantly, psyche ourselves up to turn on a dime in a southerly direction once we see the reversal.

Anyway, finishing those NASDAQ stats: Volume was a "mere" 1.37 bln shares, which probably no longer qualifies in the top ten, given the last five weeks of trading. The good news is that there were only 63 new lows compared to 214 new highs. Again, as long as the money flows, keeping the volume strong, prices should continue up. Just remember to CYA (cover your assets) for the reversal.

While we're waving the red flags, how about the price of oil? Iraq decided to curtail its production of crude by 2 mln barrels per day. Add to that the already squeezed inventories and the astounding OPEC compliance with their targeted production quota, and you have a recipe for $27 per barrel prices - a high not seen since before the Gulf War. While it is generally believed in oil circles that this is not sustainable (just like lows of $10 per barrel weren't either), it is nonetheless taking its toll on the bond market, which saw the treasury index rise to 6.19% today. This is a problem that won't go away with the wave of a hat. Salomon Smith Barney's chief oil strategist thinks these prices are sustainable for the next 3-5 months, but not for a year. Hmmm. . .just long enough to get us safely on the other side of Y2K? There is the possibility that energy producers are stocking up just in case. But power producers and bulk users alone can't account for OPEC unity. We've said it before that higher oil prices are like carbon monoxide on the Western economy (Eastern too for that matter). It insidiously filtrates through every aspect of production and consumption, acting gradually to raise prices seemingly undetected. We just don't notice the gradualism, much like a lobster starting out in cold water. Before he knows it, he's dinner. Watch the alarm bells go off and headlines ring out when economists start to do the math on the multiplier effect.

The VIX too remains at trading range lows, registering just 20.28 at the close today. "High - time to buy; low - time to go". Technically, the index is registering an extreme overbought position. Investors are just too darn comfortable even though warning signs are showing up all over. The last time we hit a reversal, the VIX was at 19.77 and went all the way to 33.44 in only 5 trading days.

Scared yet? Take heart. Capital is still being invested in this market in record amounts. There's not a fund manager worth his salt that want's to be left behind on this big move. As long as volume remains strong, the market remains tradable. That's our cue that funds are still buying. When they stop buying, the party's temporarily over. There are still some hot sectors that show no signs of letting up yet either. Those would be optical networking (JDSU, HLIT, GLW, FDRY, BRCM PHCM - electronic networking for that matter), and the Internet with its list of usual suspects - AOL (splits tomorrow), YHOO, AMZN, EBAY, and CMGI (new $1 bln B2B fund). Investors are already starting to show the holiday spirit toward the latter group.

Since this is a short trading week, we'll try to be brief in our finish tonight. Negative - short week insures some volatility; VIX at low end of the range; NASDAQ at 27% over 200-dma; negative to downright ugly A/D lines; rising oil prices and bond rates. Positive - volume remains strong (this is a big one) as a result of fund money pouring in; many tech issues remain strong. Translation: trade selectively with a heightened sense of awareness and a shorter time horizon. Harvest profits and cut losses quickly. Adhere to support and resistance. Most of all, watch the volume and sell too soon.

Buzz Lynn
Research Analyst

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