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Market Wrap

Technically the Nasdaq has now corrected the required -10%

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        1-6-2000           High     Low     Volume Advance Decline
DOW    11253.30 + 130.70 11313.40 11098.40 1,084,276k 1,963  1,136
Nasdaq  3727.13 - 150.41  3868.76  3715.62 1,594,505k 1,925  2,199
S&P-100  762.64 +   1.12   767.66   756.56    Totals  3,888  3,335
S&P-500 1403.45 +   1.34  1411.90  1392.02            53.8%  46.2%
$RUT     475.34 -   3.49   480.19   474.39
$TRAN   2937.08 +  69.72  2945.36  2843.30
VIX       28.13 -   0.02    29.63    26.54
Put/Call Ratio       .48

Technically the Nasdaq has now corrected the required -10%

Shortly before the close today the Nasdaq touched the magic -10% correction retracement from Monday's closing high of 4131. The Nasdaq rebounded +60 points from that low but the selling was not over yet. Twelve minutes before the close their was a rumor that a big company was going to pre-warn and the bottom fell out of the market again. Lucent stepped up and announced an earnings shortfall from Y2K impact and product mix. This was only minutes after the Dow and Nasdaq were rocked by a rumor from the futures pits that Microsoft was going to miss their numbers. This rumor was refuted quickly and the stock and markets recovered. The Dow had been the leader all day as it moved within slightly more than 200 points from its previous high. The MSFT rumors knocked more than -100 points off the intraday high but the Dow still managed to close +130.61 for the day. This close is over +300 points from the Wednesday low.

Tuesday's Nasdaq chart

This Nasdaq chart from Tuesday (above) showed the Nasdaq setting right on first level support at 3900 with a next stop of 3700-3750 if that level (3900) failed. Don't look now but we stopped dead on that stronger support at 3725. With the second largest point loss ever the Nasdaq has added to this weeks disaster and is now down over -400 points from the last record close on Monday. Counting from the record intraday high on Monday it is now down -14% and actually strongly oversold at this point.

The Dow however is benefiting from sector rotation out of techs and into the dull stocks with real earnings. Stocks like MMM, DOW, DE, PG and AA have all turned in strong performances this week. The trend appears to be dump techs and run to the defensive cyclical sectors. I don't personally believe it. I think there is some rotation occurring but I think the tech buyers are just holding cash and waiting on the sidelines for the correction and the Jobs Report on Friday to be over. Fund managers are seeing cash starting to appear in the mail and they will have to put this retirement money to work. In any scenario techs will still outperform all other sectors once the bottom of this tax deferred selling is over.

Economic reports today were in our favor. New Home Sales actually dropped -7.1% in November and were down from the huge +9% in Oct. This is proof that the higher interest rates are trickling down into the buyers in the economy. The Jobless Claims also jumped to +309,000, a +33,000 increase from last week. This was the largest weekly number in the last year. The next chapter in the economic play book is the Jobs Report Friday morning. Estimates are for an increase in jobs of +250,000 compared with November's +234,000. Unemployment is expected to hold at 4.1%. This number is closely watched by the Fed as an indicator of future price inflation as companies are forced to pay more to get quality help. A weaker increase in jobs and a firm unemployment rate would benefit the markets and possibly stop the tech slide.

Volume was strong on both major markets with 1.6 bln on the Nasdaq and 1 bln on the NYSE. Advances beat the decliners by 822 on the NYSE but lost on the NASDAQ by -283. The NYSE ticks were very bullish at the close at +791. The VIX did break into the 30s yesterday but eased off to the mid 20s today.

With Gateway, Beyond.com and Lucent announcing earnings warnings this week the flight out of stocks that may also warn is fueling the profit taking. Many funds are convinced that they will be able to buy techs cheaper after the Fed meeting Feb-1st and many are closing large portions of their positions in suspect companies. Stocks that announce next week include Intel and YHOO and both are being sold with huge volume. YHOO announces on Tuesday and INTC on Thursday. Nobody wants to get hit with the type of sell off Lucent experienced today. Lucent closed at $69.31 and traded down as low as $51 in after hours. This was a loss in market cap of almost -$48 billion. Cisco took the offensive after the Lucent warning and said they were on track to meet their previous estimates and would not change their guidance. The S&P futures quickly bounced and stabilized around -5.00.

As you can tell by the news we are right in the middle of the earnings warning season. Since this is the reporting period for the fourth quarter, which was most impacted by Y2K freezes, we could see a flood of these over the next couple weeks. Techs are still expected to turn in earnings gains of +25% for this quarter but the forecast dwindles from there. Many feel there was a lot of Y2K spending over the last 12 months and many companies are now fully funded for capital expenditures.

I received several "nice" emails on my Yahoo comments in the Tuesday newsletter. Many attempted to "educate" me on why Yahoo was going to roar back from Tuesdays $443 close and set new highs before earnings next week. They used this "logic" to justify why they were still holding after YHOO dropped -$57 from the high of $500 on Tuesday. Some of the language was quite "colorful". If I lost -$57 a share on an option I was still holding I would probably have come colorful language as well. In case you did not see the close today, I regret to inform you that YHOO did not come roaring back and was trading at $353 in after hours, -$90 from Tuesday's close and -$147 from the Tuesday high. Not all stocks come back and believing in this fairy tale will eventually bankrupt you. You can be right and still lose a lot of money if you are right at the wrong time. 75% of stock movement is market or sector related. This is especially true for the Internets. If the Nasdaq goes down most of the Nasdaq stocks will go down. That does not mean that YHOO will not have blowout earnings and/or announce a split. You can be right, good earnings and a split, but the stock tanks -$147 with the market. Options require strong discipline and good money management skills. Emotion has no place in option trading but at the same time we are not robots either. We are emotional people, especially when it comes to money, and this is a critical problem that needs to be addressed for us to be better traders.

Anyone know a good CEO looking to change jobs? Sony Corp needs one badly. The CEO of SNE said today that any price for their stock over $190 would be a bubble and not justified. I thought a CEO was supposed to make decisions that would help their shareholders and not bankrupt them. SNE dropped -34 to $215 on the news. I am sure he will get a few "polite" emails on this move.

For Friday everything depends on the Jobs Report. With a good report the Nasdaq could see a quick relief rally. With a bad report the race to the exits will continue as traders on the sidelines may elect to stay on the sidelines until after the Fed meeting. The Dow could see some profit taking soon from the strong gains in the last two days. The Nasdaq is technically oversold and sitting on support but the after hours numbers for most of the tech stocks show another $5 to $15 drop due to the Lucent warning. If bargain hunters don't appear in the pre-market trading tomorrow then the Nasdaq open is going to be ugly. Waiting for entry points that are at strong support levels would be a good idea. Remember you do not have to be in the market just because the market is open. You can wait for evidence of a real rebound before going back into the flames.

Good Luck, Sell Too Soon.

Jim Brown

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