Option Investor
Market Wrap

Only one week left until Super Tuesday but the answer is out!

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       5-09-2000           High     Low     Volume Advance Decline
DOW    10536.80 - 66.80 10684.80 10514.30   898,333k 1,282  1,580
Nasdaq 3,585.01 - 84.37  3708.74  3540.82 1,450,335k 1,365  2,703
S&P-100  757.82 -  5.77   768.49   752.01    Totals  2,647  4,283
S&P-500 1412.14 - 12.03  1430.28  1401.85            38.2%  61.8%
$RUT     490.86 -  9.22   504.07   486.82
$TRAN   2904.16 - 31.71  2958.01  2890.17
VIX       31.71 +  0.59    32.68    30.10
Put/Call Ratio      .50

Only one week left until Super Tuesday but the answer is out!

Are you as tired of listening to and trading this pre-hike hysteria as I am? This is ridiculous. I can't remember a hike that caused this much aggravation in recent history. Give us a break here! Everyone knew there would be a +.25% hike already. Now it is almost a given that it will be a +.50% hike but so what? Fed member Perry today made the comment that a +.50% hike was consistent with a gradual approach to rate hikes as an inflation fighting tool. You heard it, right from the lips of someone that should know. You know the Fed always telegraphs the moves in advance and that was a personal email in my book.

The Fed Funds Futures is now showing a 91% chance of a +.50% hike, up from 66% just last week. Just when you thought is was cast in concrete there were several analysts out this afternoon saying that there was now signs of the economy slowing and a weaker than expected PPI on Friday would hold the Fed to only a +.25% hike. Make up your mind please! Do you really think Greenspan will pass up a free +.50% hike? Actually yes! Confused yet? Remember, although Greenspan would like to shock the economy with a +.50% there are other considerations. Remember the Euro? The lackluster performance of the Euro has put pressure on the Fed to be moderate. Also a +.50% hike would cause a round of similar hikes overseas to prevent a flight of cash to the US. Many of the world economies cannot stand a .50% hike now and it would stunt their fragile economic recoveries.

It is not a simple black and white answer for the Fed team. Did I forget to mention it is an election year? What would soaring interest rates and a crashing stock market do to the Gore election effort? Just another reason for the Fed to be moderate in their moves. In reality the damage has already been done. Just look at the markets. The Nasdaq is down almost -30% off its highs and the Dow is trading at the same level it was in April 1999. Despite all the volatility and the record highs in the middle it has really been trending sideways for a year.

There is good news tonight. The first came in the form of the much anticipated CSCO earnings announcement. Yes, they beat the streets estimates of $.13 with $.14 actual but the real news was a +55% increase in revenue. Nothing shabby about one of the worlds largest companies to post increases like that. The valuation concern of course is still a problem for some. When Barrons did the chop job on them Sunday and they dropped -$7 intraday on Monday, they lost a huge chunk of their market cap. Actually the market cap they lost on Monday almost equaled half of the entire $48bln market cap of GM. Yes that's right. CSCO has 3.42 bln shares and a -$7 drop equates to almost $24 bln in market cap or half of GM. This is what is causing the old timers to curse valuations of the new Internet stocks. Should CSCO have a valuation that is 10 times GM but able to only produce a fraction of the profits? GM earns $8.52 per share but CSCO earns only $.73. GM has a PE of 9 and CSCO has a PE of 189. But I did say it was good news. By beating the street and posting a 55% increase in revenue CSCO shook off the clouds of suspicion from the Barrons article that trashed the tech markets this week. Single handedly CSCO should power the Nasdaq out of the dumps and back into the spotlight on Wednesday.

While I am on the topic, almost, we really need to address the Barrons direction. While I am a fan of free speech the tabloid journalism they have started pouring out recently is atrocious. Remember these recent market killers, Amazon.bomb for instance. Or how about the one from three weeks ago about the Internet companies burning cash? You just felt the impact in your wallet from the CSCO expose. How much did these articles, based on questionable facts and even more questionable journalism take out of your pocket. You would have to be fully invested in bonds not to have felt the pain. Literally hundreds of billions in market value have gone up in smoke. Just let some company like Lucent prewarn that they are going to miss earnings by a penny or two and you would have a herd of class action lawyers frothing at the mouth to file suit. Nobody running after Barrons to the best of my knowledge due to the first amendment. Should they be able to fire at will and trash your retirement dollars without being held accountable? The conspiracy theorists out there are probably wondering if Barrons secretly signed up on the Fed payroll to accomplish the bubble bursting task that Greenspan and company had been unable to bring under control. The market impact from this tabloid is unbelievable. With a paid subscriber base of only 306,000 Barrons is not exactly a leader in the print community. We will send out more newsletters tonight than they have subscribers but we do not try to flame the market to get readers or attention. If you believe their journalistic bent of late is tabloid at best and not befitting of their name or their parent, the Wall Street Journal, then click here and send them an email telling them your feelings. If you agree with them then tell them that also.

The rest of the good news is the amount of money piling up on the sidelines. The volume on the Nasdaq is still anemic. Four of the last five days have been the lightest of the year. The late rebound off the lows this afternoon added about 300 mln to yesterdays light total but still left us at about 65% of normal. I think there is light at the end of the tunnel. On Sunday I suggested the more aggressive players would probably see another buying opportunity this week. You saw it and it was today. The "we have to retest" crowd is still there but the money on the sidelines started to spill over into the playing field this afternoon. While we could still see some choppiness this week before the PPI the odds are getting better that the worst is over. The number of analysts now expecting a weaker PPI is growing. This is of course a worst case scenario if the PPI surprises to the upside with everyone expecting a downside. Still once the gold rush back into the markets starts it is likely to be strong. There is an old adage about "never short dull markets." They are dull because investors are waiting on the sidelines waiting for a directional signal. When the signal comes the moves can be explosive.

The rate increase is already priced into the market even if it is +.50%. No real danger there. A +.50% is widely expected to be a sign of the end of the rate hikes. (wishful thinking) A +.25% now would be looked at almost like a rate cut. There is no severe downside from this point in my opinion. As others make this same judgement then cash will come off the sidelines. Remember the last Fed meeting? The markets rallied over +100 points during the meeting even though we knew there would be a rate increase. We only have three days left this week and traders like you and me as well as fund managers are looking for targets of opportunity. Once those targets start moving the race will be on.

Sure things could be better. I wish the Nasdaq had held 3600 today. It didn't but I think it was fear of a CSCO disaster and tech backlash that created the weakness. We did rally off the low at 3540 to within 15 points of 3600. Close but no cigar. Technicaally we have a lower high and a lower low but I think it was entirely sentiment related to the CSCO article. The Dow has gone exactly sideways the last three days and it performing exactly as it normally does before Fed meetings. On Sunday I suggested 4000 as an entry point for the July earnings run. I am going to lower that to 3800 tonight. If we trade over 3800, closing would be better, then I would go long for July. Just my opinion but I voted with my money today. I bought the dip with half my capital and once I see confirmation tomorrow I may put the other half to work. The VIX was over 32 and the TRIN spiked to 1.35. If it was not an entry point it sure looked like one.

The only notable earnings left this week are AMAT on Wednesday and Dell on Thursday. Lets keep our fingers crossed that they at least hit their numbers.

Trade smart and sell too soon.

Jim Brown
Editor

Current long positions include:

NTAP, VIGN, BRCM, BVSN, CMTN, SEPR
ITWO, JNPR, QCOM, RMBS, SDLI

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