Option Investor
Market Wrap

Close, but not close enough.

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   4-11-2000           High     Low     Volume Advance Decline
DOW    11287.10 + 100.50 11361.10 11102.50   977,074k 1,519  1,434
Nasdaq 4,055.90 - 132.30  4182.96  4009.52 1,679,266k 1,215  2,998
S&P-100  816.76 -   4.38   823.04   807.85    Totals  2,734  4,432
S&P-500 1500.59 -  11.89  1512.80  1486.84            38.2%  61.8%
$RUT     510.13 -   8.53   519.24   502.46
$TRAN   2921.81 +  78.68  2921.81  2841.63
VIX       28.95 +   0.94    30.34    28.33
Put/Call Ratio       .51

Close, but not close enough.

The Nasdaq continued to run away from the Dow and started the day with a drop to 4009 or -178. The bargain hunters jumped the starters gun and bought the dip only to bleed to death as the day progressed. If you were lucky enough to buy at the very bottom then you probably finished the day positive. Most who were waiting for a real entry point in front of the PPI/CPI should still be safely on the sidelines. I know it was tempting, I almost bought the dip myself but if you know why you are going to open a position then you are better off than those who simply jump into the melee.

The Dow finally broke out of its trading range and added another +100 points to manage the best close since Jan-20th. The Dow is now only -440 points from a new high and continues to make gains on the back of the old economy stocks. There were only eight Dow stocks that lost ground today and the big losers were the techs, IBM -3.13, HWP -1.44, MSFT -2.19, INTC -.38 with WMT, T, EK and MO rounding out the group. How much farther the Dow rally will go is the million dollar question. The Dow stocks are only expected to post +18% earnings compared to 30% to 40% for the Nasdaq stocks. Once the Dow leaders announce the Dow will start to be top heavy.

With earnings moving into full swing next week we will be faced with the quarterly sell or hold debate. While most new retail investors will hold over earnings most experienced investors will lock in their profits a day or two before and move into something else that will announce several weeks later. This strategy always causes us grief at OIN because there is always some stock that blows out earnings and runs up the next day. Although only about three out of ten stocks go up after earnings and only one goes up strongly the perception is burned into the collective investor consciousness that all stocks explode on positive earnings. Several recent disasters should make you reconsider this hold over strategy.

BGEN announced this week and missed estimates by -.02 and promptly dropped -$11 before the open. This case of simply missed estimates shows the problem with trading the unknown. If all the major analysts miss the results with leading by insiders of BGEN then how can we, the retail investors, do any better in deciding when to hold over?

Motorola announced last night and beat estimates by +.01 but then warned in the conference call that margins were slipping and profits would be down in future quarters. Here is the other scenario of a better than expected earnings event, a warning out of the blue from a sector that is exploding. If you had several sectors to choose from for exploding growth the cell phone sector would have been one you had expected. But exploding growth does not always mean exploding profits for everyone in the sector. If you had held MOT over earnings because of the hot sector you would have been burned at the open this morning to the tune of -$25. Every April call option $130 or above went to almost zero in the blink of an eye. The $130 call dropped -$19.75 to $3.00 and the ATM $150 call dropped -$6.63 to $.38. How much would that have hurt your long term strategy?

Motorola announced last night and beat estimates by +.01 but then warned in the conference call that margins were slipping and profits would be down in future quarters. Here is the other scenario of a better than expected earnings event, a warning out of the blue from a sector that is exploding. If you had several sectors to choose from for exploding growth the cell phone sector would have been one you had expected. But exploding growth does not always mean exploding profits for everyone in the sector. If you had held MOT over earnings because of the hot sector you would have been burned at the open this morning to the tune of -$25. Every April call option $130 or above went to almost zero in the blink of an eye. The $130 call dropped -$19.75 to $3.00 and the ATM $150 call dropped -$6.63 to $.38. How much would that have hurt your long term strategy?

The reason I am repeating this basic strategy tutorial is due to my market outlook for the next two weeks. In reality it does not make any difference whether investors sell before earnings for a profit or after earnings for a loss, the key point here is most "option and stock traders" (as opposed to long term "stock holders") SELL their stock/options around the actual earnings event. Earnings announcements peak in the next two weeks and then taper off as we get closer to May. This means that there will be substantial selling in the next three weeks due to post earnings depression.

Secondly, I still expect some selling pressure from the rapidly approaching tax event. This could be part of the problem we are experiencing with the Nasdaq slippage this week. As traders decide they are not likely to see higher stock prices between now and April-17th they are throwing in the towel and closing positions to pay taxes. This will also stunt any rally as traders sell into strength to gain that last tax dollar.

Thirdly, the contributions to tax deferred plans will dry up by the middle of next week and market liquidity will suffer. The record inflows of cash YTD which have been almost a drug like daily fix to whatever ailed the market will dry up faster than a busted junkie.

Now all of these events coming at the same time would seem like a death sentence to the market but we all know different. These events simply provide a new entry point for traders with cash on hand. Many funds have been holding cash until they see how the flow of tax redemptions and tax contributions will play out before committing this cash to stock positions. Once the paper flow eases they will put this cash to work. Other funds, which plan ahead for the April/May dip, are Hoping for another retest of the lows from last week to Provide another buying opportunity.

Based on the points outlined above you would think I was bearish on the outlook for the rest of the week. However, I am leaning towards bullish. Now that I have totally confused you I will explain my thought process. I think we could see some more selling as these events develop but I think the selling for this week is about over. There is a conflict between my long term view and my short term view. After looking at hundreds of individual stock charts tonight more often than not there appeared to be a bottom forming on these individual issues. Since the market is made up of the individual stocks I think this is a leading indicator for the Nasdaq. There are two groups of stocks that have become readily apparent. There is a group that appeared to have bottomed at about half the drop from last week and there is another group that stopped dead at the same bottom we saw last Tuesday. Either group does not appear to want to drop any further. This "grass roots" support is the first step in forming a market bottom.

Many buying opportunities come from index managers "reweighting" the different indexes or adding and subtracting individual stocks. In the last three weeks the Nasdaq has been reweighted by the retail investor using the well known method of supply and demand. Many stocks that had been beneficiaries of the buy at any price mentality have been destroyed and billions of dollars of market cap have evaporated. MicroStrategy for instance closed under $50 today after trading as high as $333 just weeks ago. Akamai (AKAM) closed at $107, down from $345. PDLI at $87, down from $340, HGSI $80 from $238. I could go on for pages. The point however is the excess has disappeared and hundreds of these stocks are now good buys again. Triple digit PE ratios are now back to double digits. Until greed has been replaced by some other emotion in the human psyche investors of all types will continue to buy stocks when they are perceived to be bargains. Many of these stocks are bargains again.

The Nasdaq is also approaching oversold again. After the rebound rally from the Tuesday drop last week we have now dropped -390 points. This is half of the rebound gain and qualifies as a 50% retracement on an intraday basis. The bottom today at 4009 was the same bottom as last Wednesday after the dip. Analysts are pointing to 4000 as a bottom but I do not see it. I would love to believe it but the real bottom is closer to 3800 in my opinion. If we bounce off 4000 then I will believe it. Before you start wondering if I lost it by saying in one paragraph that individual stocks are bottoming but the Nasdaq is still 200 points away lets look at the facts. Indexes are made up of individual stocks and the top five Nasdaq stocks make up about 20% of the index. SUNW is at strong support and should not contribute to another drop but the other major pillars of the Nasdaq, INTC, MSFT, ORCL, CSCO could still suffer weakness. (SUNW does have earnings Thursday and the price is likely to be volatile.) While individual stocks traded on the Nasdaq exchange like, JDSU, ARBA, CMRC, are showing support the index could still lose ground. Since 85% of an individual stocks movement is related to market movement we are at the proverbial catch-22.

The Greenspan talk today was a non-event and the last several PPI/CPI events have produced relief rallies. With Greenspan not using his podium appearance today to try and talk down the market, even just a little bit, we may be seeing a bit of easing in the Fed rhetoric. All these things provide subtle shifts in sentiment as we go forward.

While I am not claiming to be able to forecast the market direction I do vote with my personal trading account. I am still flat, in cash and waiting. I would love to see another significant drop at the open tomorrow. I would buy it without any hesitation. I would love to see 3800 but I think it is wishful thinking. Anything under 4000 would be buyable in my opinion. But before you charge off and start looking for candidates I would stress that this is probably only a trading rally and I would look for it to last only a couple days depending on the depth of any drop on Wednesday. The deeper the drop the better a chance for a long term bottom. We still have to get past the post earnings, post tax depression period before we will see any long term rally.

While analysts are touting the highest close for the Dow since Jan-20th and the lowest close for the Nasdaq since Feb-1st, I would tell you that the tables are about to turn. most of the Dow stocks have completed a 50% or better retracement of their previous losses and now every dollar will be harder to gain. Profit taking on the Dow will come more frequently and the Nasdaq may get to spend a few days in the limelight. The dive at the close tonight brought us closer to the bottom but just not close enough.

Trade smart and sell too soon.

Jim Brown
Editor

Current positions: None

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