Option Investor
Market Wrap

Buyers' Strike Continues

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       5-08-2000           High     Low     Volume Advance Decline
DOW    10603.60 +  25.70 10627.80 10522.10   786,188k 1,221  1,717
Nasdaq 3,669.38 - 147.44  3765.22  3669.11 1,142,396k 1,423  2,596
S&P-100  763.59 -   6.20   769.79   759.31    Totals  2,644  4,313
S&P-500 1424.17 -   8.46  1432.63  1417.05            38.0%  62.0%
$RUT     500.08 -  12.76   512.84   499.60
$TRAN   2935.87 +  59.76  2937.89  2874.12
VIX       31.12 +   0.73    32.16    30.93
Put/Call Ratio       .52

Buyers' Strike Continues

Just how many different ways can we say, "Investors' fear of FOMC rate hike keeps volume low and prices range-bound"? Of course, there is slightly more to it than that. For instance Cisco, Barron's front-page sacrifice of the week, lost $4.88 to close at $62.88 and made a big contribution to today's 147-point loss on the NASDAQ. (The weekend publication penned a negative article noting CSCO's dependence on acquisitions to drive revenue growth, "questionable" accounting practices, and huge valuation.) The fact is volume, having put in its lowest day of the year at 1.14 bln shares on the NASDAQ and just 783 mln on the NYSE, is revealing a lack of liquidity in day-trading issues. Most of us are finding it tough to trade our way out of a wet paper bag in this environment of widening spreads and market makers unwilling to take more than 100 shares on the bid.

What do we mean by that? A market maker will charge us more and pay us less to buy and sell a stock, requiring a greater move in the price just for us to break even on the trade. Not only that, where they were once willing to buy 500, 1000, or more shares at a posted bid price, they are now willing to take only 100 shares before adjusting the bid downward. Market makers need to eat too (and put their kids through Harvard, Yale or Stanford), thus they aren't going to buy something if they can't immediately resell it to another buyer. Sellers unwilling to sell + buyers unwilling to buy = low volume and low liquidity. That same market maker psychology applies to options too and makes profitable trading difficult. From a market maker's perspective, why buy it if you can't sell it higher? By definition, spreads widen in order to keep a liquid market. Hopefully, that helps you to understand what we mean when we say it's hard to make money in a sideways market.

Anyway, without a trend established, pros have temporarily taken to the sidelines until some economic news hurdles are cleared - same ones we highlighted before. . .the PPI on Friday and FOMC meeting on Tuesday, May 16th. For the duration of the week, look for more of the same (sideways trading) in the overall market.

Sadly for those of us with itchy trigger fingers, the market should remain in a tug of war with no clear-cut winner. While we don't suggest which side of the fence to trade on (bull or bear - heck, we won't know ourselves until next Tuesday), make a note of the following arguments for each case in order to clarify why the markets are likely remain range-bound and choppy.

In the bear camp, rising interest rates, light volume, high valuations, weak breadth and the Dow still under its 200-dma (10,808) all point to the down side.

In the bullpen, tech stocks have been resilient, sentiment is shifting as indicated by an increasing put/call ratio (contrarian indicator), uncertainty will lessen by May 16th, and this is an election year, all of which tend to support prices.

Now, let's take a peek at today's action. The Dow looked like a cardiac patient with almost no pulse. While today's trading range spanned 105 points, the index spent most of the day in a 50-point range between 10,550 and 10,600, closing at 10,603 on a measly 786 mln shares, the lowest volume this year. The next mild resistance is at 10,700; support at 10,400 from which we appear to be rebounding ever so slightly, but we won't characterize this as a trend based on the low volume. What we have here is a 2-week neutral wedge formation with a technical convergence at about 10,550 to 10,600 on (surprise!) May 16th. It's not a prediction, just an observation. That's about as flat as it gets, and makes for tough trading. While 1700 decliners took it to 1223 advancers, surprisingly up volume outpaced down volume by 30%. 70 new highs squeaked by 65 new lows. Transportation, major regional banks, oil & gas drilling, airlines, tobacco, HMOs, auto parts, and drugs led the advancing sectors, according to briefing.com.

The NASDAQ fared worse shedding 147 points to close at 3669 and failing to break back above 3800, a critical level of resistance. Worse, support at 3700 failed, setting us up for yet another near-term test of 3600. After that, start looking for 3500, then (gulp!) 3350. We've noted before that we don't expect it to get that low only to hear the OOOGA-horn from Q-charts sound the alert. It's still possible. Yes, the lows are getting higher, but the highs are going lower too in (voila') another neutral wedge. Again, not to sound like a broken record, but we won't know the directional breakout until it happens. Unlike the lackluster Dow, the internals here stunk. Decliners smoked advancers in a 13 to 7 ratio, and down volume was over 2.5 times that of up volume. Tech stocks led by CSCO, who reports earnings tomorrow after the bell (-5.00, 62.754.75; see above), INTC (- 5.75, 117.63), SUNW (-5.13, 85.38), ORCL (-4.50, 72.31), and QCOM (-6.75, 103.00) dug today's NASDAQ crater. 73 new lows appeared today compared to just 36 new highs. The lowest volume of the year today (1.14 bln shares) probably kept the selloff from getting worse, as the index remained between 3700 and 3750 before the breakdown at the end of the day. One more time - tough to make money in that environment.

Any good news out there that might provide an air pocket of trading opportunity? Yep.. Look no further than the Chase H&Q tech conference in San Francisco, where over 400 companies will be presenting to over 4000 investors this week. Though today's presenters didn't fare that well (DELL, EMC, GBLX, TXN, and ORCL to name a few), collectively tomorrow's presenters (LU, MOT, JDSU, RMBS, EXDS, GTW, EMLX, LSI to name a few) could lend some support to the market and to individual issues that present a compelling story. We still have earnings from some major companies too. WMT reports before the bell tomorrow. CSCO reports after the bell. (And it better be good. Otherwise, CSCO could lead another wave of tech selling and Barron's is going to gain a lot more credibility following last weekend's story.) AMAT reports Thursday and thankfully has Lehman Bros. pounding the table with a price target of $112. Dell rounds it out on Thursday.

Just remember that the PPI is out Friday and could easily show signs of wholesale level inflation and that Greenspan and Co. will raise interest rates next week. At this point though, it won't be much of a surprise to see a 50 bp increase. Traders have come to expect it - its' almost a certainty - 80% priced in as of the end of last week. You can confirm this in the 28-bp hike of the 30-yr. bond rate to 6.25% today. So what's an option trader to do for the rest of the week? Go to the beach!

Seriously, if there was ever a time to step away from your trading screen to concentrate for a few days on clearing your head of all the noise, this is it. Volume should remain low in a directionless, flat market with a greater probability of falling indexes than rising ones until traders become more certain of the future. If you are going to play it anyway, you'll want to remain vigilant to find those needle-in-a-haystack opportunities, while watching volume for big clues on specific issues. Otherwise, consider sticking to defensive positions like puts, covered calls, or spreads. If you are a buyer of time value in this market (as opposed to a seller of time value), lack of movement and time decay will cook your account into a meal for market-makers like a lobster slowly coming to a boil in a pot. Sell too soon; don't buy too soon, and don't be a lobster!

Buzz Lynn
Research Analyst

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