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Market Wrap

Who Moved My Cheese?

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       1-24-2000           High     Low     Volume Advance Decline
DOW    11008.20 - 243.50 11366.50 10917.30 1,115,890k 1,028  2,029
Nasdaq  4096.08 - 139.32  4303.15  4095.31 1,980,657k 1,802  2,399
S&P-100  758.74 -  21.04   787.90   754.86    Totals  2,830  4,428
S&P-500 1401.91 -  39.45  1454.09  1395.42            38.9%  61.1%
$RUT     522.95 -  10.99   540.60   522.27
$TRAN   2702.95 -  48.54  2761.45  2700.14
VIX       26.32 +   3.66    27.54    22.50
Put/Call Ratio       .49

Who Moved My Cheese?

No, this isn't a Book-of-the-month club best read. However Yours Truly zipped through this one in about an hour over the weekend. It was written by Spencer Johnson, M.D., co-author of The One- Minute Manager and other One-Minute_____ (fill in the blank) books that fill the bookshelves of entrepreneurs and corporate managers around the world. It uses two mice and two "little people" that live in the same maze to illustrate a good way and an undesirable way we deal with changes in our lives. Their sole purpose of existence was to find and eat plentiful cheese stashes of different types found in various places in the maze. Those of you that may have already read this gem know that the mice are always ready to put on their running shoes and search the maze to find a new stash of cheese the instant they run out of "old cheese". The little people however didn't fare as well once they had consumed their entire cheese stash because they analyzed themselves nearly to death trying to figure out "who moved their cheese", when it was really their own complacency and lack of preparedness for the inevitable. They got so used to eating the same stash because it was plentiful, that they failed to notice a decrease in its quantity and to make a plan for when they ran out. Is this starting to sound like a metaphor for your trading style since the October lows? Were you used to playing profitable tech stocks that you thought would never go down? Maybe you are thinking that the good market (cheese) must be around here somewhere and that you'll just hang around for it to come back. Get your running shoes on folks. It's time to think like a mouse, prepare yourself again for change and be a cheese seeker!

Other editors and contributors have noted that with earnings season ending next week, the FED likely to raise rates on February 1st and 2nd, not to mention over-extended tech stocks that needed some consolidation, it is time to think again of bracing for a top in the markets. I fully support that position, but have been more optimistic and willing to play the volatility figuring that earnings and liquidity would keep us afloat nicely until the end of this week. I knew the day would come, I just didn't know when and was willing to push it to the limit. Today was the limit, as the selloff in both the DJIA and NASDAQ markets accelerated with greater volume.

The DJIA spiked open this morning to 11,366 and began its descent that would carry it through the rest of the day (a great reason not to buy during amateur hour). While finding support in late morning around 11,200 and bouncing to 11,250 over a two-hour lunch, it couldn't hold. The selling intensified and carried the DOW below 11,200 all the way to 10,917 before a 91-point recovery 30 minutes before the bell to close at 11,008. Notice on the 6- month chart the strong support at 11,000 and be thankful for the decent recovery off the low. We can't say for sure if this represents a "V" bottom selloff. It happened a little to late in the day to define a trend. However, in the past with such a steep selloff, it's been a signal of a temporary bottom from which we get a bounce. One thing in particular that plagues the technical wizards is the selloff in GE, which lost $6 today and has been down for each of the last five days. Because it represents such a broad cross section of the market, traders assume that what happens to GE happens to the market. Today, it closed below its 50-dma ($145) for the first time since October of 1999. Ominous, perhaps, but with sentiment negative, contrarians may start to nibble. Liquidity is still there and this could be just a bump in the road.

Internals, though ugly, are something we've seen before. Decliners outpaced advancers by 2:1. Only 95 new highs could stack up to the bigger weight of 163 new lows, with only 38% of the volume trading up and 62% trading down. Yes, it's bad, but we've seen worse. With volume clocking in at 1.2 bln shares on the NYSE, lots of investors were feeling pain, but there was no blood in the streets. Just so you know though, 40% (12) of the DJIA are trading under their 200-dma, while 30% (9) trade below their 50-dma. Only five of the thirty DOW stocks finished the day with a gain - three of those five reported earnings today. DIS finished up $0.56 at $53.31; AXP finished up just $0.31 at $132, despite announcing a stock split; and EK posted a $1.31 gain to $62.06 after beating street estimates by three cents.

Are we scared? Maybe. We'd sure like to see the rebound continue back over 11,000. Otherwise we might soon be staring at 10,850 for support, then 10,600, though we really don't expect to go that low. If there is a consolation prize, it's that the last time 70% of DJIA members traded that far under their averages, we were at a bottom.

Having not helped matters at all during the last week, PG finally admitted they had discussions about acquiring Warner Lambert and American Home Products, but also said they would not pursue that course of action. You'd think investors would show their relief by raising the share price by the 17% they lopped from it last week. Nope, they also disclosed that they had discussions to buy Gillette, which got the street thinking that they maybe PG needed a merger to juice what might be their stagnant revenue growth rate, sending PG down another $6 today. Dang if you do; dang if you don't.

As for the NASDAQ, you'd think from the celebration of market bears that we haven't seen a market this low since last year. Not so. Try last Monday, when with a gain for the day, the index was still lower by 30 points. It's amazing how a few good record-setting days can spoil us. While today was in fact the 10th highest point drop on the NASDAQ, it doesn't even make the top 50 list in percentage terms. Nonetheless, traders took some profits off the table in a big way, though liquidity remains alive and well.

The NASDAQ popped out of the chute reaching just over 4300 in the first few minutes of trading, but plodded along lower until the final two hours of trading. Like lettuce on a hot summer day, it quickly wilted under interest rate fears, oil prices, FED meeting next week with rate increase anticipated, FED meeting with rate increases again in March, earnings winding down (pick your favorite reason) sending, the index down sharply to just under 4100, still above its 10-dma of 4064, its nearest support. For the chart watchers, 4050 is the next level historically. After that, start looking for 3850. The 50-dma is at 3714, but we don't expect the index to reach that far.

In the end, any way you slice, investors saw fit to take some chips off the table. By the looks of the volume at 1.99 bln shares (a new record by a long shot), there was a whole lotta sellin' goin' on. Frankly, we're a bit gratified to see some fear return to the market. Decliners beat advancers 3:2. New highs amazingly outstripped new lows by a whopping 452 to 92 (maybe some faulty data there), while down volume of 1.1 bln shares traded down compared to almost 900 mln trading up.

So let's wrap it up for tomorrow and the rest of the week. The negative - A FED rate increase in February is all but certain and priced in. What isn't certain is that the FED could act to raise rates again in March, which is keeping interest rate pressure on equities. The price of oil isn't helping, but it's a sideshow with fewer on-lookers right now. While earnings reports have been fairly good, the season is coming to an end. Wage cost reports on Thursday are fanning the inflation flames. The positive - There has been a resurgence of fear indicated by selling volume, building a nice wall of worry for investors to scale. We are at near-term support levels too. All math and charts aside, sentiment is pointing to the downside, but you'll have to draw your own conclusion based on tomorrow's action.

The important part is to recognize that the market is changing. As option traders, we need to change with it if need be. You may be better off on the put side. Don't be paralyzed by fear of not finding "new cheese" if your "old cheese" gets moved. Get your running shoes on, hit the maze, and go find the new cheese supply.

As always, sell too soon.

Buzz Lynn
Research Analyst

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