Look out above, the bull is back?
Simply incredible! What am I talking about, the Dow finished down? In my eyes it was a victory of Superbowl proportions. Thursday the Dow was like Rocky Balboa struggling to his feet and pulling every last ounce of energy to win that final round at the close. After taking the beating of his life and spending more time on the mat than on his feet he found the energy to fight back and win. I have to admit that when the Dow was trying so hard to hit that +500 mark in the last few minutes it almost brought tears to my eyes. The market is my life. I live it, eat it, breathe it. I even dream about it. (My wife says I need counseling) Still as exciting as it was to witness history in the making on Thursday, Friday was the Superbowl and we won. There maybe -35 less points left on the Dow scoreboard but it was a sentiment win of epic proportions.
+819 points in two days. The very definition of over bought ran smack up against the definition of profit taking.
(Friday, 'frI-de, noun, A. the last trading day of the week. B. profit taking day. C. Pay day.)
We survived. The sellers came and the buyers never flinched. We held our positions. We watched our charts but there was never a serious attempt to run it back down. Sure there was some give and take and some individual stocks gave back Thursday's gains but the fortress held. They took their best shot and the market did not even flinch. As the afternoon was drawing to a close I was almost as excited as I was at the close on Thursday. This was bigger. A weekend before a Fed meeting with huge profits on the table and traders held overnight and over the weekend! Lookout above! The bull is back and he is ready to rumble.
Before I have you running down to the ATM to transfer money into your brokerage account I should probably qualify my comments on Friday's action. While the Nasdaq was up +80 there was no follow through volume. Only 1.69 bln shares traded. There was no rush to buy and there was no rush to sell. Everyone simply held their breath and hoped it would not crash again. The Dow managed 1.3 bln shares and there was some rotation but calm was the byword for the day. Calm and orderly. Sellers and buyers, buyers and sellers. Everyone kept looking over his or her shoulder expecting to see a wave of selling at any moment but it just did not happen. The Dow moved in a 200 point trading range and had plenty of opportunity to tank but ended the day only 35 points from yesterday's close. This is a major sentiment change and a major victory for the home team. Next you will be expecting floor traders to line up on camera and moon Greenspan.
There was a negative chart pattern on the Dow for Friday. The range for the day was almost 200 points and the Dow closed only 30 points from the low of the day. This finish at the bottom of a wide range is normally negative on its own but taken in context I think we should be grateful for small favors. Given the large gains of the previous two days I think the shooting star pattern is a false indicator.
Another positive was the non-impact from the rebalancing of the S&P on Friday. Many funds were selling stock at the close to adjust their fund weights to the new S&P weight. This wholesale portfolio adjustment was almost invisible. There were exceptions like NT which had a huge imbalance to the buy side and several million shares were bought at the close which added +$9 to the stock price.
Since 1995 there has only been 46 days of heavy volume where the up volume beat the down volume by anything close to the 10:1 ratio we saw on Thursday. Of those 46 days 70% or 32 resulted in significant market gains in the coming week. Where you would expect almost a 100% follow through the actual market statistics only indicated a positive follow through two out of three times. This indecision is what will keep us on our toes next week. No investor wants to jump in at the current price if this was just an oversold bounce and we are going to roll over again next week. With the PE of the major industrial companies in the S&P averaging only 11 there does not appear to be much risk of a further drop. Value investors started showing signs of a pulse again but after being in intensive care for months the recuperation could take some time. These investors will likely ease back into the market one step at a time instead diving blindly into the murky waters.
The CPI on Friday was also a non-event although food and energy prices soared. Other sectors dropped and the net impact was a +0.5% gain for February with the core rate up only +0.2%. The next hurdle in the economic calendar is the FOMC meeting on Tuesday. There is no doubt that the Fed will raise rates and it has already been factored into the market. What investors will be watching is the wording on the releases. Are we going to have one more increase or two, or three? With bond yields now at 6% and productivity increasing at record rates the Fed by their own admission is baffled at what to do. The "stay vigilant" and "react aggressively" rhetoric is falling on deaf ears. The question is at what point does Greenspan get mad and decide to up the ante? The market gains of this week now have many analysts wondering if Greenspan will break out of his incremental mode of the past and fire a real shot across the bow of the economy with a +.50% rate in an attempt to get attention. The real quandary is how the markets will react to any action. A +.25% raise is expected and deemed just another nuisance news event and celebrate the non-event by going on another stock buying binge. A +.50% raise could be seen as affirmative action by the Fed to backup their words with strong action to keep the current economic expansion on track for years to come. Investors could celebrate the strong action as evidence the Fed is in control and go on another stock buying binge. A win-win scenario and one that has got to have Greenspan pondering the wisdom of accepting another term in office. The Fed has withdrawn all the extra funds that they injected for the Y2K crisis and nobody has noticed due to the strength in the economy. As one analyst put it, "the Internet is more important than the Fed and the Fed has not caught on yet."
Even though the FOMC meeting this week is not likely to have any real impact on the markets it will still be the focus of the news until it is over. The 2:15PM announcement may cause a big market move in one direction or the other but the impact will only be temporary without serious negative language in the release. Since the FOMC meeting is the only major economic incident for the week maybe the markets will start focusing on the real story, April earnings. With YHOO, the first major announcer the first week of April and only a little more than two weeks ahead, any April earnings run should start this week. I am hoping the lack of serious profit taking on Friday will prove to be the result of investors taking positions they do not want to sell until after earnings. If trader sentiment has improved as it appeared on Thursday then we could be back near record highs very soon. If we tank again this close to April earnings then the entire market is in trouble. May and June have not been kind to us recently as you can see by these charts. If the market is going to rally into earnings then trade hard and plan to be out in case we are in for a repeat of history.
This is a great time to be an investor and even better to be a trader. The market moves already this year have equaled the moves that used to take years. Just the trading ranges in the Nasdaq from last Fridays high of over 5100 to the low of 4455 this Thursday was the equivalent of the total move for entire years until just recently. The +2500 point move from the Oct low just six months ago equaled the previous 26 year move. Think about it. The total gain of 26 years since the Nasdaq was started in 1971 was doubled in only six months. The previous doubling move took only 12 months from the October 1998 low of 1357 to the Oct 1999 high of 2919. The previous double took three years from 1000 in July-1995 to 2000 in July 1998.
1000-2000 in three years followed by -32% drop in three months. 1357-2919 in twelve months followed by -15% drop in one month. 2630-5132 in six months followed by a -13% drop in four days.
As you can see from the examples above we are moving at an incredible rate of speed. The shear volatility from the magnitude of these moves is very troubling and tough to handle for new investors but very profitable for more experienced traders. Yes, there is a high risk that the market is overvalued and can crash farther at any time based on historical valuations. What investors are betting on today is the strong economy and the technical innovations that are literally changing the way we live on almost a daily basis. Yes, stocks could be overvalued based on the economy of the 60s, 70s, 80s and even the 90s but is it overvalued for the 2000s? Just as the markets are not the same markets your father traded they are not the same markets we all traded just 2-3 years ago either. Traders are not faced with buying an option for $3-$4 and waiting a month for it to move to $6-$7. Today the intraday ranges on even the lower volatility options can be $6-$7 a day. Stop losses are almost worthless with the huge intraday swings and entry points have become the most important part of execution. If you make a good entry then you insulate yourself from many of the other problems traders are experiencing. The second most important trading aspect today is exit points. With many Nasdaq stocks trading in ranges of $20, $30, $50, even $75 points during the week it is important to take profits when they are offered. The stock may continue to run or it could drop again in a heartbeat. The sector rotation which previously took weeks and then days is now occurring in hours. Sectors up double digits in the morning can be down double digits in the afternoon. Traders must be quick or they will be broke.
What prompted this editorial is the constant stream of email that goes something like this: I bought a $19 call option on SDLI. It went up to $37 and last week and this week it is $4. What should I do? The other repeated email goes something like this: I bought a $19 call option on SDLI and I was stopped out at $17. I bought it back again at $22 and was was stopped out at $20. I bought it back at $25 and did not put in a stop order and it is $4. What should I do? There is no magic answer except you should not trade options above your experience level. This is the greatest market in history but it is also the most dangerous to the inexperienced trader. If you have never traded options before then you should start out by learning how with "inexpensive" positions. What would happen to you if you showed up at the Indy 500 as a spectator and they picked you at random from the audience to drive in the race? How long do you think the average person would last after they strapped you into a 200MPH car and the green flag dropped. Most would not make it a lap before ending up against a fence or at the bottom of a pile of flaming debris.
For this same reason you should not jump into a 200MPH option and not expect a financial accident. Until you learn how to trade options you should start with the easy ones. Get the feel of the stock cycles and market cycles. Practice entry and exits. Project reasonable expectations and learn to take profits when you reach 75% of those expectations. Options trading is extremely profitable if done right and will bankrupt your account if done wrong. Just because your brother in law made 1000% last month does not mean you can do that this month. (Did he tell you he lost 90% of his capital the month before?) The best bets this week for low volatility, low risk option plays are DELL, NITE, SEG, INTC, AOL. These are good companies with charts that don't look like the Alps. Learn to walk before you run because it is a long way back from zero.
The market open on Monday will be critical. It is then that we could see any profit taking from the huge gains last week. Traders may be having second thoughts about holding profits over the Fed meeting even when logic dictates that the meeting will have no impact on the markets. Plan for the April earnings run but allow for disaster also. Far too many traders only look at the upside until disaster strikes. Don't be caught looking the other way.
Trade smart, sell too soon.
Editors note: Due to the volume of email I receive it is impossible for me to respond to even a small percentage. If you have questions or comments about OIN please direct them to Contact Support and a someone will respond. Thank you for your cooperation.