Correction? What correction?
Pain, fear and worry were replaced today by excitement and greed, but it did not come from the usual suspects. The Nasdaq was still hell bent on going back to February lows after gapping open this morning but was dragged back from the brink of disaster by the mother of all short squeezes. According to floor traders at the NYSE there was a large number of fund managers who, faced with a falling Dow and Nasdaq, had shorted the S&P-500 and went long the Nasdaq expecting a Nasdaq bounce. Not expecting the Dow/S&P to recover anytime soon they were caught off guard by traders moving out of the Nasdaq and into S&P stocks. When they realized the rotation was for real and that the options expiration on Friday would put a serious crimp in their accounts, they were forced to buy S&P stocks to cover their shorts. With the Dow and S&P already severely oversold the increased volume supercharged stocks and the race was on. The "I have to cover at any price" mentality drove over 60% of the S&P up over 5% today. Many of these managers thought the combination of PPI/CPI/FOMC meeting would keep prices low until at least next Tuesday and safely out of March options. As you can see, even "experts" are humbled by the markets from time to time.
(There was a massive quote failure on the Internet today and many of the chart services have incomplete data. Hence the intraday chart is the old style.)
If this is a bear trap rally the next drop is going to be a killer. The Dow soared to the largest point gain ever at +499.19 and a giant step over the previous high of +380 on Sept-9, 1998. The advance decline line was not even close with a 7:1 advantage to the advances. The volume at 1.48 bln shares was a new record high. The markets shook off a slightly higher than expected expected PPI and forgot their worries about the CPI on Friday since PPI was not out of line. We all know the Fed is going to raise rates on Tuesday so that is not an unknown. With nothing to hold it back the drastically oversold Dow became extremely overbought in only 48 hrs. Whatever happened to "normal" markets?
The Nasdaq, which gapped open +80 points at the open lost no time heading south again. In a power dive to Late February support and an intraday correction to the -13.2% level, even the soaring Dow could not slow it. But true to Nasdaq form the correction was short and sharp and marked the third -10% drop in three days this year. The intraday volatility was again extreme with a 262 point trading range. It was a tale of three markets. The Dow performing like a herd of stampeding bulls would be the obvious hero but inside the Nasdaq there was a real battle being waged. The leaders were soaring to new highs but there was an equal number of double digit losers as well. Capitulation was the name of the game and those that had already been there, done that, were off to the races and those who had previously resisted were taken out and beaten severely. Stocks like SMCR, MSTR, RBAK were down -$20 to -$40 and stocks like SDLI +33, INSP +29, PMCS +19, EBAY +28, AFFX +29, YHOO +12 were sprinting out ahead of the pack. The winners paid their dues yesterday but most of the big losers intraday today also recouped most of their losses by the close. Many stocks recovered +$15 to $20 once the February support levels were reached.
The tech rally gained steam after Dow component Hewlett-Packard, whose stock price had been battered recently on confusion about the Agilent spin off, announced that earnings were on track and their stock was undervalued. After being down -7 early in the day HWP managed to close +1 for a quick injection of +40 points into the Dow. With the help from HWP and their positive comments, Dell computer shook off some profit taking and rebounded +4 off its lows. The semiconductors were the biggest rebounders on the promise of strong computer sales. Not to be left out the biotechs blasted off again after the Wall Street Journal tried to dispel some of the worries of the Clinton press conference on Tuesday. There was real life in every sector by the close.
Of course you know what is next. The nagging question of can we hold it. Can the Dow overcome the potential for profit taking after the +819 point gain in the last two days? If there was ever a case for profit taking this is it. The biggest single day gain, double day gain, volume, etc, etc. Investor sentiment has gone from "get me out of the market now!" to "I want back in, NOW!" in only two days. The VIX which normally goes from top to bottom over the period of a week or two went from almost 28 (buy) to almost 22 (sell) in only two sessions. Famine to feast to famine again? Strangely enough, even with the massive buying the VIX came off the bottom even with the Dow closing at the High of the day. Not far off the bottom but enough to give us hope that the rally may have legs. Over 60% of the S&P-500 stocks were up over 5% today. Over 16% of these Stocks were up on twice their daily volume. Of the record 1.45 bln shares traded on the NYSE today 1.3 "billion" shares was up volume compared with 113 "million" of down volume.
This was broad based buying, very broad based on huge volume. If this was a bear trap I don't want to find this bear. I simply cannot in good conscience tell you to buy something tomorrow when I am buying OEX puts at the close but I can't make a case for not buying either. Other than overbought, everything just looks too good to be true. (Where have you heard that before?) Even though the obvious suggestion would be to wait for the other shoe to drop. I would also caution you to not let this rally get away from you. Remember the Dow was down almost -2000 points from its January high so we have a lot of ground to make up. Another factor that was evident today was the tremendous liquidity coming off the sidelines. Huge amounts of cash were put to work and by applying historical norms there could be five to seven times that amount still in the wings. Once traders gain confidence that the rally is for real and not the mother of all head fakes, previous record highs could be old news in days instead of weeks. While the CPI is not likely to cause any grief tomorrow after the PPI was benign, there is still a FOMC meeting on Tuesday and Greenspan will not be happy about the record gains.
The suggestion for tomorrow is walk softly, we could be on very thin ice. Because we closed at the highs of the day we could see a follow through at the open but this is a triple witching options expiration Friday and all bets come off the table by the close. Monday after options expiration can be rocky also as traders are exercised and have to shuffle their portfolios.
Trade smart and sell too soon.
Current long positions include;
SNE, SCMR, AMCC, CMRC, HWP, INSP,