What was that?
Was that a correction? Profit taking? Tax deferred selling? Who cares! The major point to consider was the incredible recovery in the face of major market moving news and events. The Nasdaq corrected -10% and then rebounded with a +155 point gain and the largest single day point gain ever. The Dow dropped from an intraday high on Monday of 11522 to an intraday low on Wednesday of 10938, a drop of almost -600 points, only to close at a new record high on Friday of 11521. Simply incredible! Especially when you consider the earnings warnings from several big name companies and higher than expected employment numbers on Friday.
The market shook off the one-two punch of earnings warnings from Gateway and Lucent and the the larger than expected numbers in the jobs report. Liquidity, liquidity, liquidity! The warning from Lucent, one of the most widely held tech stocks in the world, may have knocked -$20 off Lucent's stock price but the market hardly noticed. Lucent set a one day volume record of 178 million shares for a single stock on the NYSE Friday. The jobs report provided a small jolt with +315,000 new jobs created but on the surface the unemployment rate remained steady at 4.1%. Actually the government changed the way they calculated this number this month. Had they not changed the calculation the number would have been 4.0% and would have caused much more concern in the market.
The tech buyers roared off the sidelines and the buying was fierce. The Nasdaq posted the largest point gain ever with +155 points and the Dow posted +269 points and the fifth largest gain ever. So what happened to all of those gloom and doom market forecasters last week who were calling for a -20% drop in the overall market? They got run over by the cash express. With the tax deferred selling done on Monday and Tuesday and those investors now ready to buy something new and the flood of Y2k and retirement cash coming in from the sidelines, words were just not enough to hold back the buyers. After setting on the sidelines in December and watching the train leave the station they were not going to miss a chance to buy tech stocks at a -10% discount. Even the threat of an interest rate increase in three weeks did not slow them down.
There is a superstition in the markets that the first week of January will set the direction for the rest of the month and how January goes, so goes the year. If that is the case then how will we rate the first week? The Dow only managed a +25 point gain for the week and the Nasdaq actually lost -186 points. Does that mean the techs will go down the rest of the month and year. I doubt it! With the previous three months of gains and the Y2K event I think we were simply due for a pullback and now that it is over we have blue skys ahead. No, I don't think it is a straight line to 12000 on the Dow or 5000 on the Nasdaq. After moving up +580 points in the last three days, the Dow is due to rest soon. With the Nasdaq back on track we could start seeing some new records there again soon. While I am very positive on the market outlook I would like to remind you that next Monday, Jan-10th, last year saw the Dow and Nasdaq set new highs and then tank for several weeks. In reality I think we got this same sell off last week and next week will be highly positive. The Nasdaq is only a little over 200 points from a new high and I would hope we see that instead of a retest of last weeks lows.
The market breadth was good Thursday and Friday with advancers beating decliners by over 1000 issues on both the NYSE and the Nasdaq. The markets closed at the high of the day and strength was increasing.
After saying I thought the market had a better chance to go up next week than down, I have to tell you that the economic calendar is stacked against us. Monday and Tuesday are light with only Wholesale Inventories on Tuesday. Wednesday has Import and Export Prices but Thursday and Friday are murder. Thursday has PPI and Retail Sales and Friday will have CPI, Business Inventories, Industrial Production, Capacity Utilization and Real Earnings. Based on this list I could see Monday and Tuesday with a follow through to this weeks rebound but then a slight pull back is possible towards the end of the week as traders take their profits to the sidelines before the PPI and CPI.
While I feel positive about the internals of the market we still need to remember that we are in earnings warning season. If we get many more big name warnings the mood of the market could turn negative again. Secondly, with an expected rate hike in February and the slowing of earnings there is nothing to keep traders interested in the market. I would stay invested as long as the rally continues but if we start seeing the breadth decline again then I would take that as a sign of coming weakness. The real earnings start this week and run for four weeks. Normally the end of the second week is when the weakness starts. That would be real close to options expiration Friday and a good time to look for some current month close to the money OEX puts. Not now but keep your eyes open. Nothing goes up in a straight line and not all the profit is out of the market yet.
Check out my Options 101 article this week on Risk Free Trading of Internet Stocks.
Sell Too Soon!