Looks like a rally, is it a rally?
After what seems like weeks of falling Nasdaq prices, (actually only three days), the Nasdaq finally managed to mount a charge that looks fairly good. But first a little humble pie. Chomp, chomp, chomp. That was me eating my words from Tuesday when I said I did not expect any more serious drops before the Fed meeting. Actually, I would like to thank IBM, INTC, MOT and CSCO for their part in providing an absolute incredible entry point on Wednesday. Of course it was not actually the companies that turned my prediction to toast, it was the analysts that follow them. When IBM and MOT were downgraded before the open on Wednesday and Intel admitted it would spend hundreds of millions of dollars recalling over one milliom faulty motherboards, there was no doubt about what would happen when trading actually began. IBM was down -$9, MOT -$17, INTC -$10 and CSCO -$4 on post earnings depression. The problems for these four major tech leaders just added to the Barrons initiated downdraft. Fortunately after analysts had time to look at the real facts these companies mounted strong rebounds today. MOT +4.75, IBM +1.44 but up +$5 intraday, INTC +$9.50 and CSCO +1.75. With strong earnings by AMAT last night the market was ready to rock and roll at the open this morning. After a brief "sell at the open and hold your breath" period the outcome was never in doubt.
Money started coming in off the sidelines as traders began taking positions ahead of the PPI report on Friday. The last several months traders have moved to the sidelines in the week ahead of the PPI only to sneak back in the day before in anticipation of a relief rally on the announcement. This week was no different and with some analysts looking for a lighter than expected PPI the rush back into Wednesday's oversold market was made on better volume than we have seen recently.
Adding to the desire to get back into the market was the Retail Sales Report this morning. The numbers for April came in at a less than expected -.2%. This sparked a faint hope that the Fed either may not raise +.50% next Tuesday or they may not need to raise again by the June meeting. Economists pointed to the drop in sales and the rise in mortgage interest as indicators that the economy is slowing. Fixed rate mortgage interest is at a five year high and adjustable ARM rates are at a nine year high. This is slowly impacting home sales but has not yet become the major deterrent the Fed would like.
The only major earnings news today was of course Dell which announced $.17 after the close and beat estimates by a penny. There was a brief flurry of excitement when the number was first released at $.19 but that included $.02 of investment income. The stock traded up +$3 in after hours on a volume of two million shares before the number was qualified back to the $.17 operating results. Dell only increased revenue by +31% and not anywhere close to the +55% posted by CSCO. Dell did say PC growth was on track and Windows2000 was heating up as businesses began upgrading after the Y2K hold.
The level of pessimism in the markets prior to today was intense and may have finally provided the retest we needed to rally again. The Nasdaq came within 140 points of the April 17th low and the Dow came with 100 points. Close enough for me! The volume was better but still anemic at 1.3 bln for the Nasdaq and 957 mln for the NYSE. Money is still waiting on the sidelines for the Tuesday Fed meeting and the PPI Friday morning. If the PPI comes in reasonable or even lower than expected we should get some major movement off the sidelines.
The .50% hike is already priced in and there are just enough skeptics still saying .25% to cause uncertainty. Either way it will just be a relief to get it over with. Most analysts are hoping for the .50% at this point to keep this same "paralysis of analysis" from simply shifting to the June FOMC meeting. They feel a .25% hike now will only slow down the process and drag the uncertainty out several more months. Of course that would be okay with the Fed. Slow the markets, keep them guessing, stop any July earnings run in its tracks and make us enter the summer doldrums with a weaker market. Of course this is also an election year. If you were Greenspan which direction would you take. A quick .50% hike and have the markets roar off again creating more wealth effect or the slow and steady, painful but careful .25% hike and have the markets in turmoil for another month. See my point?
I made an investment today that I think everyone should look at as well. DLJ joined the ranks of analysts that after reviewing the MSFT case felt that MSFT will win the case on appeal. They feel the stock is oversold and there is no bad news left. DLJ put a twelve-month price target on MSFT of $140. Microsoft is currently trading for $67 and only $2 off the low set in April on the last negative news. If MSFT wins on appeal the stock will rocket. If MSFT and the DOJ settle between now and then the stock will rocket. If years from now MSFT is actually broken up analysts feel the halves will be greater than the whole. There is no downside from here in my opinion. In order to be insulated from the day to day news hype I bought the Jan-2002-65 leaps for $18.75. Anything over $85 18 months from now is profit. In reality I would be surprised if MSFT was not much higher than that after reaching a settlement of some kind. I plan to sell calls against my leaps and have them paid for within six months. That would make anything over $65 profit. Just my opinion but with Internet companies without earnings going for big bucks the MSFT cash machine that generates billions in profits will attract investors back by the millions once there is a hint of settlement.
I commented on Tuesday that I bought the dip with half of my capital and planned to spend the other half on Wednesday if the market rallied. Thank you IBM, INTC, MOT, CSCO! That was even better than a rally confirmation. I backed up the truck as you will see from the disclosure list below. One strange thing however. I have told many seminar attendees before that I have never been put stock from my deep in the money naked put strategy. I can't say that any more. I sold the Jun-$150 RBAK naked put yesterday for $91.88 with RBAK at $59 and rebounding just before the close. It fell back a little at the close to $57.75. When I logged on this morning somebody had put me 10 contracts of RBAK at $150. It opened at almost $63 and I sold it after the open for slightly over $60 and a $2000 profit. I only relate this because readers always ask me why this does not happen all the time. It does not happen because there is normally time value associated with the option and nobody wants to give up the time value. This is the only time this has ever happened but shows that you must be ready and able to have stock put to you at any time when using this strategy. Proper use of stop losses will prevent this 99.99% of the time.
I did have a reader who got burned on EXDS recently. He sold the April $105 puts. The stock price at the close on expiration day was $107.50 and it appeared they had expired worthless. However EXDS announced earnings after the close and the stock dropped -$17 in after hours trading. On Monday he found the stock put to him at $105 with an opening value of $87. This is a prime example of why you should never let any option expire worthless. If it goes worthless before expiration buy it back for an eighth or sixteenth and save yourself the unexpected. I can't tell you how many times worthless options miraculously regained value at the worst possible moment. It never happens if you are long the options only when you are short. Save yourself the heartbreak and the money by spending a few cents for insurance.
We are going to be in Las Vegas next week for the Money Show and look forward to seeing many of you there again. It is being held at the Paris/Ballys hotel complex Tue/Wed/Thr. Stop by and say hi!
If the PPI is lower than expected on Friday, fasten your seatbelt because it could be a brand new ride!
Trade smart and don't buy too soon.
Current long positions include:
SNE, VIGN, SFE, EXDS, RMBS, GLW, SDLI, DNA, ITWO,