Option Investor
Market Wrap

Same market, different year

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      1-03-2000           High     Low     Volume Advance Decline
DOW    11357.50 - 139.60 11522.00 11305.70   931,860k 1,078  2,140
Nasdaq  4131.15 +  61.84  4192.19  3989.71 1,506,920k 2,097  2,196
S&P-100  788.79 -   4.04   798.43   778.20    Totals  3,175  4,336
S&P-500 1455.22 -  14.03  1478.00  1438.36            42.2%  57.8%
$RUT     496.42 +   2.26   499.27   498.87
$TRAN   2963.45 +  21.46  2973.69  2934.13
VIX       24.69 -   2.02    28.05    24.58
Put/Call Ratio       .46

Same market, different year

It's January 3, 2000, and the market resumed its natural tendency to humiliate as many investors as possible. With not even an inkling of a Y2K meltdown except for that guy returning his rented video 100 years late (due 1/1/1900) and incurring a $93,000 penalty in the process, technology issues rocked, while financial issues got rolled.

Of course with Y2K mostly out of the way, bond traders and investors in search of something to worry about turned their attention to the FED. In the past Greenspan has made it clear that he would not touch rates until after the New Year. With that hurdle safely cleared, it is now only a matter of time until the first quarter-point increase is announced, and traders fear that it may come at any time before the next FED meeting in February. That set the tone this morning as bond traders sent the 30-year yield up to 6.558% by the equity markets' open, from where the yield continued its upward momentum to close at 6.598%. The first spark of fire came from the NAPM index release this morning showing a 55.5% rating (over 50% is considered bullish) for the month of December. While the expected number was 56.0%, it still signals further strong expansion of the economy.

Making things worse in the middle of the day, Byron Wein of Morgan Stanley Dean Witter essentially said the sky was falling and to expect a full 1-point increase in rates by year end. On the other hand, after the market closed, DLJ's Tom Galvin said that with Y2K over, oil stock piles would show some increase by February, oil prices would begin a descent back to $20 from there, and rates would fall back to the 6% range by year end. Pick your favorite scenario. As believers in the theory that oil prices will determine inflation because it is the main ingredient in the cost of production, we tend to gravitate toward DLJ's theory.

Still, bond analysts now point to a 6.75% rate as the next trigger that will cause a sell-off in equities. Sorry, we don't buy it. That argument has been going on ever since rates started their ascent from 4.9% in December of 1998. Every quarter point increase, the experts warned, would cause a mad rush out of equities by investors clamoring to get a piece of that "juicy" treasury return. All the while equity prices skyrocketed (over 80% on the NASDAQ index) on increased profits borne of increased productivity, thanks to a technology boom that rolls on. Until bonds approach that sort of return, our best educated guess says that money stays in equities. Don't look for exodus en masse from equities anytime soon.

Anyway, all that said, we had a volatile market like none ever seen before, especially on the NASDAQ. It is presumed that there are two opposing forces at work on this market. The first is that those investors with huge profits would be selling today in order to postpone and recognize the gains in 2000. The second was that with all that cash on the sidelines, it would have to be put back to work, sparking a buying frenzy. The correct answer is both, and the interest rate-sensitive DJIA and tech-heavy NASDAQ reflect that.

For its part, the DJIA opened at 11,501, rose 10 points in amateur hour, then sank like a stone to 11,307 by 11:15 ET, as traders painted a big bulls eye on financial issues. Unfortunately, interest rates matter here, unlike with technology issues. AXP was targeted for a $9 loss on the day; JPM was nailed for a $5.19 loss; GE was zapped for -$4.75; and not even the red umbrella could protect C from a $2.69 drenching. These accounted for about 100 points of loss in total despite a strong showing by IBM and HWP (+$8.13 and $3.69, respectively).

On the "old resistance is new support" theory, 11,300 is looking like support for this index, but 11,320 made a decent benchmark intraday too, with 11,375 providing resistance. A breakout back over 11,375 would have made us feel a lot better. However, 50 points up from the low of the day indicate that investors are comfortable (for now) at this level. There don't appear to have been any major sell orders at the close. In the end, the DJIA fell 132 points to close at 11,357 on heavy volume of 930 mln shares. Given the weakness in the bonds, it should be no surprise that NYSE decliners beat out advancers exactly 2:1, and down volume was nearly twice the up volume. Surprisingly, new lows weren't as plentiful today, with only 142 edging past 113 new highs. In short, the NYSE and the DJIA were unimpressive, but not unexpected given the interest rate environment in the bond pits.

Contrarily, NASDAQ did it's same old thing and set another new record, the first one of the year (as if that were a milestone) but not without incredible volatility along the way. At the open, the NASDAQ gapped up to 4192, a 122-point gain from last week's close, but almost immediately began giving it back at a rapid clip. By 11:15 ET, the indexe tagged 3989 (yes, a scary dip below 4000 representing an 80 point loss), which probably scared a lot of us out (if we were not already stopped out) of our positions. That was good for a 203-point intraday swing, and a new volatility record for the index. But the recovery from the low was pronounced and strong with total volume of 1.51 bln shares. By the close at 4131, the NASDAQ had risen 61 points on the day. 21 advancers fell short of every 22 decliners, however 264 new highs again bested just 79 new lows. Liquidity is alive and well in the technology issues and looks to remain that way for now.

Surprisingly, with the exception of INTC (+$4.56) and CSCO (+$0.94), the other 3 generals (MSFT, DELL, WCOM) all suffered losses today and consequently contributed nothing to the cause. What could have caused such a stellar recovery? The answer is "Internet" and "bandwidth". First, despite splitting its stock 2:1 just last week, JDSU announced another 2:1 split before the bell this morning, propelling it $26.69 for the day - incredible until you remember that JDSU is poised to be the Intel of the next 10-20 years. The split is subject to shareholder approval at a special meeting on February 25, and payable on March 10. OCLI, a recent acquisition of JDSU's similarly rose $46.88. From the Internet sector, on a DLJ's announcement that YHOO is on the "Focus List", it too aimed for the stars, gaining $42.31 today (earnings are on January 11 after the bell). CMGI was even more impressive with a $49.75 gain. Volume was big in all these issues tells us that investor interest is running high.

And on the bandwidth subject, how 'bout that Globalstar? It gapped up to almost $53 before falling back to close at $46.75, up $2.75 on 15 mln shares (6 times the ADV). Not only are the day traders taking advantage of the low float, this is one issue that fund managers will want to own since it will be the first fully operational CDMA satellite phone system to be available for the masses. It doesn't hurt that QCOM owns 6% either. Remember, these guys are at break even with just 400K customers, which they expect to sign up by the end of this year. ABN AMRO raised their price target on GSTRF today too from $35 to $60, citing the "first to market" advantage and expected revenues of $239 mln in FY2000. System capacity is just over 7 mln users. For those who missed out on QCOM, while we can't guarantee even 1 thin dime in return (let alone 2300% for QCOM), GSTRF has already risen over 70% since we picked it, and is just starting to get noticed by the institutions that don't already own it (191 institutions own about 75% of the float). Check out the full write-up from last Thursday in the tonight's "Play of the Day" section.

What about tomorrow and the rest of the week? Look for more volatility resulting from cashing in of big 1999 gains, and putting new cash back to work in big cap technology issues. When liquidity reigns, we need to take advantage of it. Just be mindful of support/resistance and market events. For the remainder of the week, we have construction spending tomorrow (est = -0.1%), initial jobless claims (275K last week) and new home sales (est = 925K) on Wednesday, and non-farm payrolls and unemployment on Thursday. In reality, none of these are likely to be a big deal to you and me. However, they could be a huge deal to the bond market, which will then make it a huge deal for equities, which will make it a huge deal for us. Be on your guard for the unexpected. Still, with this first week of trading into the new year coupled with a liquidity buildup, dips are buyable so long as you wait for the bounce. As always, remember to sell too soon. The corollary is "grow your flowers, pull your weeds".

Buzz Lynn
Research Analyst

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