Option Investor
Market Wrap

A Little Giveback in Today's Markets?

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       6-05-2000           High     Low     Volume Advance Decline
DOW    10815.30 +  20.50 10863.00 10752.30   837,241k 1,329  1,628
Nasdaq  3821.76 +   8.38  3875.66  3765.60 1,455,725k 2,235  1,826
S&P-100  790.75 -   1.94   794.76   788.00    Totals  3,564  3,454
S&P-500 1467.63 -   9.63  1477.28  1464.68            50.1%  49.9%
$RUT     513.30 +   0.27   518.03   509.30
$TRAN   2800.34 -  29.02  2825.77  2780.60
VIX       24.90 +   0.79    25.67    24.63
Put/Call Ratio       .48

A Little Giveback in Today's Markets?

Not today. While we expected to see both the NASDAQ and the Dow give back some of their big point gains garnered last week, today's markets were marked by lack of direction and indecision. There are two ways to look at today's results. The first is to be pleased that there wasn't the big pullback that most investors had expected. Sellers did not appear, and those with open positions were content to let them ride. That's a bullish sign demonstrating investors' confidence that prices will not fall much, if at all. Conversely, there is now a growing murmur that the Fed isn't yet finished raising rates despite decreasing housing starts, auto sales, retail sales, and increasing unemployment, all which serve to demonstrate that the economy is slowing, making further rate hikes unnecessary.

Which side of the coin do we favor? The latter. While we disagree with the Fed's analysis that inflation ever was a problem, it's become clear that the Great Alphonso (Greenspan) and company are intent on stealthily controlling the stock market, even if it means killing the proverbial goose that laid the golden egg - that is the U.S. economy. One thing's for sure - the average "buy the dip" mentality has been replaced by the "once bitten, twice shy" mindset. To that end, investors are going to wait before jumping in with both feet again, and that means waiting for the PPI numbers on Friday morning just to make sure the recent rally isn't a bear trap. The ensuing market results are thus going to reflect investor indecision, while this indecision could lead to greater fear as Friday nears. We all know what happens when fear sets in. Right - prices fall until the uncertainty clears. That doesn't mean the NASDAQ will retest 3100. However, there is simply no reason for the market to advance further, and we see any break over 4000 on the NASDAQ as highly unlikely until the next FOMC meeting on June 28th.

Much as we'd love to see the fear subside and the rally continue, the media shows are parading "analysts de jour" (maybe it should be parrot de jour) who insist the Fed is finished hiking rates, but we'd rather listen to the Fed. Here's what the Atlanta Fed President Guynn argued today in an attempt to justify the 50 bp hike in May. "Inflationary pressures are emerging." Wages are rising and benefit costs are up "significantly", he noted. In temperance though, he added that "we may be beginning to see the economy approach a more sustainable level of growth". That isn't enough to convince us that the Fed is finished playing a nice round of "squash the equity" by hiking rates again. The point here is that indecision could remain through the next FOMC meeting on June 28th. So don't look for a move over 4000 on the NASDAQ or 11,000 on the Dow anytime soon.

From a technical standpoint, it's looking dicey too. As 3850 is likely to provide solid resistance, that big gap up on the NASDAQ Friday will likely be backfilled and tested in the 3550-3650 range. It may not all happen in one day, but as uncertainty increases, we are likely to drift downward (not upward), which, as Jim pointed out Sunday, means your option values will drop too. Need more? The Dow too is bumping its head on 10,850 and is looking ready to retest support around 10,400 to 10,500. That's not all (sounds like a GinSu knife commercial, doesn't it?) The OEX has substantial resistance at 795, from which it fell intraday today. And it too has a gap, or island, to fill between 775 and 790. We could go on. But suffice it to say all three indices are technically topping out and still need to blow off steam from last week before developing a new meaningful upward trend out of the current trading range. If you weren't stopped out today, it might be a good idea to keep your stops tight so you don't give back those juicy profits. In corollary, we've written a lot of pages talking about good entries too, and these levels aren't where you want to try to make one.

So what exactly happened? Let's cover some bullet pointed news.

Just when you thought the worst was over, QCOM was hammered for a $5.44 loss on news that China's number two wireless company will NOT adopt the CDMA standard for its new wireless system for now. Nearly 30 mln shares traded today, exceeding the ADV by 50%. QCOM estimates that it will be three years before they eventually make the sale and bring it into the revenue stream. Ouch.

Next, we have perma-short, David Tice questioning the solidity of DELL's earnings in a Baron's article this weekend. That put DELL into a tailspin this morning all the way to $41.94 before investors slowly dismissed it as the ramblings of a pessimist, and allowed DELL to finish down $0.56 at $42.75.

INTC too came under some pressure as AMD announced new Athlon chips that operate in the 750 Mhz to 1 Ghz range. CPQ, GTW, IBM, HWP and Fujitsu-Siemens announced their support and intent to build machines around the platform. INTC was down $1.63 to $132.56, while AMD gained $1.00 to finish at $91.13 on increased volume of 7.3 mln shares.

MSFT too made the news with its announcement that it will offer new software geared toward Web services. While that was good for almost $2 of gain in early trading, MSFT settled for a $0.56 gain on later news that the Justice Department in its filing today wasn't budging on its stance to break up the software giant. Microsoft has until next week to respond. By the way, Oracle founder, Larry Ellison is now a richer man than Bill Gates by $3 bln.

From the rumors department, WCOM is spinning off UUNET? Don't bet on it. Bernie Ebbers, WCOM's chief visionary and good ol' boy said in a shareholders' meeting that's the stupidest thing he's ever heard (his words, not ours). WCOM finished up $0.25 at $40.94.

In more telecom news, AT&T was given the green light by the antitrust department to complete the merger with Media One for $58 bln. But T must first dispose of some other cable properties so it does not exceed 30% market share of the nationwide cable business. T popped up $1.63 at $36.75.

But HWP was the big news of the day, up $9.33 to $120.31 when you take out the A (Agilent) share distribution effective this morning. A was down $2.75 to $79.

What did we miss? Oh yes, A.G. Edwards in a bullish move increased their equity allocation to 60% from 55%, while reducing their cash position to zero from 5%. Bond allocation remains flat at 40%. They believe the economy will slow and that the Fed is done raising rates. That's their position. We're not as optimistic on the "done raising rates" part.

Finally, let's get to the indices before we wrap it up.

The Dow tacked on 20 points today to finish at 10,815 in light trading of 837 mln shares. Of the 30 stocks in the index, only 11 were in the green. HWP (see above) and IBM were the big winners today. As noted above, we are not far from resistance of 10,850. Decliners outpaced advancers 1625 to 1329, while down volume beat out up volume by about 50%. Surprisingly, there were 51 new highs set and just 25 new lows. Despite the gain, this is not cause for euphoria.

Same with the NASDAQ. There is still a major gap to fill around 3600. This is not the time to dive in. However, the NASDAQ did eke out a measly 8-point gain to close at 3821, once again above the 3800 level, on solid volume nearing 1.5 bln shares. Advancers actually beat decliners 2235 to 1830, and up volume outpaced down volume by 36%, while 68 new highs edged past 59 new lows. Frankly, it could have been worse. While we're grateful for any gain we can get, we think today just prolonged an inevitable pullback. Remember, the gain occurred in the overall NASDAQ market. However, the NASDAQ 100 finished down 25 points indicating that the big cap NASDAQ stocks were feeling a bit more pain today. One bright spot was the biotech and the B2B sectors of which many issues finished deep in the green. Watch those sectors for potential profit taking tomorrow.

Speaking of tomorrow, what do we think? As outlined above, there is likely going to be more uneasiness and indecision before the PPI figures are out on Friday as investors try to analyze and anticipate the Fed's next move. To us, that means a pullback soon. We would strongly urge you to consider your current exposure and set stops according to how well you handle downside risk. Fortunately, the market appears to have calmed a bit and that may limit the wild 200 point per day volatility to lesser numbers. Still, for those of you just getting started in this business, it means your options lose value even when prices remain flat. Most of us on the staff are waiting for a retest of support on all indices before taking on new positions. We are not call buyers at these levels.

A final note. Jim reverted back in the weekend wrap to "sell too soon". While that is always good advice, I'm sticking with "don't buy too soon" for a bit longer.

Buzz Lynn
Research Analyst

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