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Market Wrap

Is the fourth time the charm?

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       2-01-2000           High     Low     Volume Advance Decline
DOW    11041.00 + 100.50 11073.30 10908.00   981,000k 1,680  1,318
Nasdaq  4051.98 + 111.63  4053.16  3911.84 1,409,362k 2,326  1,824
S&P-100  769.09 +  12.63   769.09   751.38    Totals  4,006  3,142
S&P-500 1412.49 +  14.82  1412.49  1384.79            56.0%  44.0%
$RUT     503.75 +   7.52   503.75   492.65
$TRAN   2576.63 +   4.98  2578.38  2553.97
VIX       26.90 +   0.70    26.90    23.97
Put/Call Ratio       .45

Is the fourth time the charm?

On December 31st the Nasdaq closed at 4065. Since then the Nasdaq has been up to 4192 then crashed to 3711 (-481 points). It then rebounded to 4072 (+361) then crashed to 3834 (-238 points). Another rally took it to 4303 (+469) then a correction of -555 points took us back to 3748. Dizzy yet? In two days this week we have now rebounded +303 points to the close today. The volatility swings on the Nasdaq for the 21 trading days of 2000 have been enormous. -481, +361, -238, +469, -555, +230! All but one of these swings have been more than the total point spread from high to low for the entire month of February in 1999. From the Feb-1st high of 2532 to the Feb-18th low of 2224 there was only a -308 point drop. Average daily volume last February was less than half of the average volume for January of 1.6 bln shares. This is not your fathers market! As active traders today we are learning to survive and prosper in the most prosperous period in history and what a market!

The Dow managed back to back triple digit days and the best two day gain since Jan-7th. After teetering on the edge of the correction cliff the Dow squeaked out a close back over 11000 support again. The new market strength is based on the analysis of cooler heads after last Friday's stronger than expected economic numbers. The worry that the Fed would raise more than the traditional +.25% increase has eased since there is no rate noise coming from any of the Fed heads. The Fed has been very good about telegraphing rate hikes in advance and this pre-meeting has actually been fairly quiet. Greenspan watchers almost all agree that he will only raise in small increments. There is more ink and airtime devoted to analysis of this event than almost anything else in the financial sector. By the time we get to this point the actual announcement is anticlimactic. We often get a post announce spike and then a pullback as the "buy the rumor, sell the news" becomes the trading rule. Still the nice rally we had so far this week has taken some of the sting out of the correction.

After a triple digit Tuesday for both the Dow and the Nasdaq should we expect a continued rally if the Fed only raises by +.25%? Ahh! The million dollar question. NYSE stocks have been beaten down for so long that they could rally on the news but nobody cares. Techs are it and the Dow this year will suffer from the flight to the Nasdaq stocks. In reality we only need to be concerned with the NASDAQ's future. Yes, the Dow can and will cause us problems if it starts a downward spiral but as long as the Nasdaq is strongly positive the Dow will not sink completely.

The Nasdaq crossed over the 4000 mark today for the fourth time ever. This level has been weak support several times in the past. Will this fourth time prove to be the one that sticks? Analysts are mixed on whether the two -10% corrections already this year were enough. Considering the gains made on the Nasdaq last year many were expecting a more severe drop, something in the -20% to -25% range. But instead are we moving into a new trading era? The number of active traders increases every day and with them comes increasing volume and competition for available shares. Thousands of investors who have never traded stocks before now plug in every day and experience for the first time the shot of adrenaline that comes from trading stocks instead of investing long term. Up at dawn placing trades and up late at night researching plays for the next day. The worker productivity, which Greenspan tracks, would be much higher without the millions of online trading junkies watching live quotes/charts and reading streaming news to monitor their positions while at work. Times have changed and maybe the trading patterns of even last year are changing also. The current group of traders has never seen a real correction. The term "buy the dip" means any 200 to 300 point drop. With the ability to be in or out of the market in just moments the need for long term planning has been ignored. After all, techs always go up. Right? Margin debt is at the highest on record. The stocks held by this new generation of traders are in historically weak hands. But are they weak if every time the market dips millions of traders simply buy another 100 shares? Institutions have tried to sell off the market and every hundred points we drop has just brought in more retail buyers.

Now the quandary. Cash flow watchers claim $24 billion of new cash came into funds in January. If institutions are sitting on piles of cash waiting for a February sell off that never comes then they will be forced to chase stocks as they continue to move up. When will this decision be made? Wait or chase? I am guessing next week. After the Fed smoke clears and the market direction is determined the funds will decide to buy or wait. Compounding the problem is the close of earnings season. Earnings are the fuel for every stock market rally. With earnings almost over for the fourth quarter period there is no excitement left in the market for February. This is normally the period when institutions regroup, reshuffle and invest for the next cycle. Institutions historically move slowly due to the logistics involved in buying/selling millions of shares in dozens of companies. Without a cooling off period in February they will be forced to throw money at the stocks they want before they get away. This will be similar to a short covering rally and could be strong.

The key to this puzzle will be first the Fed. +.25% or +.50% I don't think it matters. Still we must wait for the dealer to show his hole card before placing future bets. The rally this week has been a combination of relief rally and investors betting against Greenspan acting out of character. Once this Fed event is over the real conviction must come out. Do we believe in the market and are we willing to maintain our convictions or is this simply a trading rally before the next correction cycle begins? We had two bear trap rallies in January, should February be any different? The next market cycle is the April earnings run. This normally begins with traders taking positions beginning around Feb-18th. That gives us two weeks before the market should establish a direction for the next ten weeks. Two weeks without direction. Two weeks of waiting to exhale. Two weeks, long enough for another correction and recovery. Should that happen, it would really be a buyable dip.

Trading the next two weeks could be tricky. The Nasdaq is only 19 points away from the 1999 close. Only 19 points when the average weekly movement has been 400. Since the Nasdaq was up 85% in the last twelve months there should be volatility at this level. Still, unless we can hold over 4000 this week we are doomed to another, possibly more severe correction. It would be welcomed by the institutional community and would be the last major dip in my opinion until May. Although the markets have put together two nice days there is still weakness under the numbers. For instance Nasdaq leaders, CSCO is up $18 in two days, MSFT +$7, INTC +$8, ORCL +$8, QCOM +31. These stocks could see some pullback on profit taking. Some Nasdaq favorites did not participate in the rally. Stocks like YHOO -4.69, VIGN -4.00, JDSU -2, RHAT -2.64, AOL -1.69 all finished lower with the Nasdaq adding +111. The Internet gains were on the back of a select few huge gainers. NSOL +32, EXDS +10, DCLK +9, VRSN +8, BVSN +7. If the rally broadens it should hold. If the regular names don't participate it will fail.

My suggestion would be to trade the rally but keep your eye out for weakness. Look under the surface for confirmation by individual stocks. Beware the possible "buy the rumor, sell the news" drop after the Fed meeting. Monitor your long positions carefully. Keep your stops close. On the surface it looks too good to be true and you know what that means.

Seminar update: Session two is now sold out also. We are taking names for the waiting list in case someone cancels. If you have previously registered and HAVE NOT RECEIVED A CONFIRMATION, please contact us immediately.

We have added another speaker for the second session. A name you have probably never heard before, Howard Ruff. In 1975, Howard Ruff began publishing THE RUFF TIMES, a financial advisory newsletter written for Main Street, not Wall Street, which became the largest-circulation financial advisory newsletter in the world.

Good Luck, Sell too Soon

Jim Brown
Editor

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