Option Investor
Market Wrap

Still waiting?

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        5-23-2000           High     Low     Volume Advance Decline
DOW    10422.30 - 120.20 10557.40 10416.80   869,926k 1,336  1,576
Nasdaq  3164.55 - 199.66  3389.60  3163.97 1,328,339k 1,262  2,757
S&P-100  732.55 -  15.49   750.40   732.45    Totals  2,598  4,333
S&P-500 1373.86 -  26.86  1404.04  1373.60            37.5%  62.5%
$RUT     459.01 -  12.66   474.17   459.01
$TRAN   2754.27 +  34.11  2776.41  2715.44
VIX       29.30 +   0.47    29.52    27.86
Put/Call Ratio       .48

Still waiting?

If you took my advice over the last three weeks to wait until the Nasdaq rallied back over 3800 again before opening any new long call positions then you are still sitting comfortably on the sidelines. The rest of us will be attending the next meeting of "Traders Anonymous" as soon as we can scrape up the $2.00 admission fee.

Are we having fun yet? I leave you guys home alone for a week to do to the Vegas money show and I come back to a Nasdaq disaster! My first day back and the Nasdaq closes at the low for the year, down -37% from the March 10th high. If a correction is -10% and a bear market is -20%, what do you call a -37% market? A really ugly buying opportunity? I wish that were all it was but the possibility exists that we should be rethinking the concept of fighting the Fed.

The Nasdaq is breaking support levels daily and the generals like CSCO and INTC are dropping left and right. Even the previous standouts like PMCS and SDLI are losing double digits. What happened to the +200 point rally off the session lows on Monday? It was just a dead cat bounce it appears as traders in denial try to pick the bottoms on every dip.

There are multiple problems confronting the market. First is the never ending Fed rate hike scenario. After the +0.50% hike last week there was no verbiage about it being a last hike leading many to think that there are still some more on the way. Actually the Fed Funds futures have declined a little bit as a few analysts feel we may be nearing an end. Still the hikes over the last year are now having their desired impact as some stock analysts are now lowering their estimates for this years earnings. Cut backs are in the range of -2%, from +14% to only +12%. With stock earnings estimates dropping as a result of higher interest rates the valuations of stocks as a multiple of earnings must be reduced. The time proven adage of "don't fight the Fed" is proving true again. The Fed ALWAYS gets what it wants. It will just keep raising rates until the economy and as a by product, the stock market, slows/drops to an acceptable level.

Another factor in the current market drop is the volume. There is no volume! Institutional buyers are simply waiting on the sidelines. There are actual reports of professional fund managers and traders going on vacation for the first time in years. They are simply not buying even at these prices. They are waiting on the next Fed move and the summer doldrums. The NYSE only managed 866 mln shares today and the Nasdaq 1.3 bln. The market bleeding to death slowly due to lack of interest.

Liquidity is also evaporating. I spoke with a noted tax accountant at the Money Show and he said many of his clients were in deep trouble. Literally hundreds of them made hundreds of thousands of dollars in the +86% Nasdaq rally last year but failed to pay any estimated quarterly taxes. Assuming they would ride out the April earnings run, sell enough stock to pay their taxes and then do it again this year, they were caught off guard by the market correction. Now their stocks are back to last years levels and they have no money to pay their taxes. Not only were they forced to sell devalued stocks to pay taxes on profits they don't have, they now have less in their portfolio than they had this time last year. Their extra "trading capital" is gone and they are nursing their remaining cash and stocks like hoarded gold. No wild, risky bets. No high flying tech stocks. They are moving into defensive stocks like WEN, SWY and BUD. Having been burned by Internets, Biotechs and Tech stocks several times this year already the risk takers are rethinking their game plans.

We were hoping that the April drop had already been factored into the normal May weakness and we would get an earlier start to the July earnings run once the Fed meeting was over. It did not happen and it appears there may still be some weakness left. The put/call ratio is only .48, the VIX is only 29.30 and the TRIN is neutral at 1.20. No daylight here. There is simply no reason to buy. With the Nasdaq setting new lows and the Dow approaching its last line of support at 10300, investors are giving up on buying the dips. After being tripled dipped lately with lower lows after every drop, risk investor capital is shrinking from the losses and with each failed rally. We lose several percentage points of the gambling population with each down turn of the market.

I think the market technicals are terrible. Just looking at the charts would strike fear into any reasonable investor. Now before you go rushing into bonds I should remind you that it is always darkest before the dawn. Just when things look like they can only get worse they normally get better. The Nasdaq has gone from overbought on the pre-Fed rally to over sold in the space of only five days. While I sit here painting a picture of doom and gloom there are also traders, those with money left, who are deciding what bargains they will buy when the market does turn. When it does get better it could do so quickly. Did you see how fast YHOO and EBAY rose on the bounce yesterday? I looked at EBAY up +$3 when the bounce started and thought it was already done. When I looked back a few minutes later to see it up +$18 I was in shock. This could happen to any of the leaders if an unexpected rally breaks out. There is another old adage, "never short a dull market." Once the starters pistol fires the prices tend to rocket as all the cash piled on the sidelines tries to find a stock to buy.

If you are still sitting on the sidelines waiting for 3800, good for you! The rest of us wish we were as smart as you!

If you have not signed up for the Denver 2 day, Technical Analysis, Stock and Option seminar this week (thr/fri) you can still do so. We have several seats left and we guarantee you will not be disappointed. The class size is only 20 so you will get plenty of individual attention from Chris Verhaegh and the staff. It is at the Marriott DTC again and they did a great job for us last month. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. For those in Texas the Houston seminar is next week, June 1st & 2nd. Don't miss it.


Good luck and don't buy too soon.

Jim Brown

Current long positions include: (today was not a fun day!)


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