Option Investor
Market Wrap

Russell shuffle combines with quarter end window dressing to close the week on an up note.

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          WE 6-30          WE 6-23          WE 6-16          WE 6-9
DOW    10447.89 + 43.14 10404.75 - 44.55 10449.30 -164.76  -180.70
Nasdaq  3966.11 +120.77  3845.34 - 15.22  3860.56 - 14.28  + 61.46
S&P-100  790.25 +  9.18   781.07 -  7.67   788.74 +  9.04  - 12.99
S&P-500 1454.60 + 13.12  1441.48 - 22.98  1464.46 +  7.51  - 20.31
RUT      517.23 +  6.82   510.41 -  3.33   513.74 -  9.32  + 10.03
TRAN    2645.37 + 14.66  2630.71 - 42.48  2673.19 -116.98  - 39.19
VIX       22.26 -  3.63    25.89 +  2.34    23.55 -  1.64  +  1.08
Put/Call    .48              .61              .53              .45

Russell shuffle combines with quarter end window dressing to close the week on an up note.

What a week. The Dow traded in almost a 300 point range but ended the week only +43 points from where it started and all of those points came at the close. The Nasdaq closed the week up +120 points which is +130 points over Thursday's low. To say that Friday was pivotal would be an understatement. The news that moves came in the form of the Russell shuffle and the end of quarter window dressing. The Russell shuffle was a significant portion of the almost 600 million shares that traded in the last 15 minutes of the day. The NYSE traded 400 million in the last ten minutes and the Nasdaq traded well over 200 million in the last 15 minutes.

End of quarter window dressing was obvious as well. Huge "buy-on-close" orders for big cap blue chips while avoiding broader stocks were clearly window dressing. In the last 5 min on the NYSE there were block buy orders for 3 mil of GE, 1 mil of LU, 1 mil of PFE. This was very encouraging. Funds don't place single orders for $153 million of GE stock if they think there is weakness ahead. Similarly $57 million of Lucent and $47 million of Pfizer represents a significant vote of confidence in the market going forward. The Nasdaq was not left out in the buying frenzy. Almost 5 million shares of MSFT traded in the last 15 min as well as 4 million shares of ORCL. The Russell was not the only index juggling the numbers on Friday. The S&P was also reclassed with stocks moving from growth to value or value to growth which causes more Maalox moments for fund managers as they move into and out of their different fund families.

In spite of the lackluster numbers logged by the major indexes I thought the week was bullish. The Nasdaq recovered from a bout of profit taking on Thursday to close near the high of the week. Traders tried to take it down on Thursday but were unable to break below the low set on the previous Friday. They also tried to retest 10300 on the Dow with no luck. 10340 was hit several times on Friday at the open and again near the close but that was as close as they could get. With the Fed out of the way until August there could be a positive surprise ahead.

The inflation numbers were tame this week and signs of life are creeping back into the market. The IPO market has been reborn. A large slate of new stocks hit the market this week and some racked up really impressive numbers. There were some losers but the point I focused on was the number of stocks coming to market, over 15, and the big wins by several, up +200% or better. If the IPO market is showing a pulse then the broader market should not be far behind.

Internet stocks are also showing a pulse. Even AMZN which traded at an 18 month low got some help from Henry Blodget, Internet analyst at Merrill Lynch. Drawing an analogy from AOL in 1996, at $1.56 a share, unloved and called a permanent loser, he felt Amazon will also rise again. He felt a 400% gain over the next couple years would not be unreasonable. Whether it happens or not the point here is some major analysts are coming out of the closet and starting to say positive things about beat up Internet stocks.

When talking about beaten up stocks look at MSFT. After a bounce when the stock moved into the current phase of the trial MSFT consolidated all week. The rally into the close on Friday and the apparent bottom of $77 for two weeks has got investors nibbling on it again. With Windows2000 sales coming in higher than expected, several new products recently announced and trial news several months away, the possibility of an earnings run is gaining strength. That cannot be bad for the Nasdaq going forward.

Oracle is coming close to testing the March high of $90 again, closing at $84. Oracle shareholders are rooting for a breakout to give them a 400% return from the July 1999 price of $19.94. Dell is close to breaking over $50 again after spending much of the last two months in the low $40 range. Even CSCO appears to have bottomed at $61 and is moving up again. INTC is the laggard of the Nasdaq four but after slowly giving back most of the big gains made on June 15th it appears that the back filling is almost complete and with the announcement of the Pentium 4 this week it may be time for INTC to move into a "buy" status.

Since the Nasdaq lives and dies on the fortune of these five stocks the future is actually looking up. Monday will be shakeout and settlement day for the Russell shuffle last week and is a wildcard. Monday is also likely to be the lightest volume trading day of the entire year and as such it is impossible to forecast direction. When we come back from the July-4th holiday the earnings warning season should be about over and the only major dip in the road ahead will be the non-farm payroll numbers on Friday.

Shucks, even stocks that warned were gaining cheerleaders on Friday. Ericsson warned on Thursday that the higher cost of the new high tech phones may crimp sales and tanked the entire sector. Friday Goldman Sachs added ERICY and NOK to their recommended list and Lehman Brothers said the market over reacted and mentioned good things about the sector. The drug sector hit a new all time high as well as the networking index. The advance decline line actually was positive most of the week.

Not all things were rosy. Some analysts point to the new high on the drug index as a defensive move showing that many are looking for a safe harbor during the coming summer months. Morgan Stanley analyst Byron Wiens stopped just short of calling himself a bear in a TV interview. He has been bullish in the recent past. Financials remain weak even after the no-hike announcement from the Fed. Money flowed out of equity funds last week to the tune of -$427 million. Internet funds saw some of their biggest outflows in some time. Part of the blame for the Internet outflows was the high profile failures of Boo.com, Craftshop.com and Toysmart.com as well as the recent negative press on the Ecommerce sector.

Using these negative events like fund outflows as contrairian indicators, the herd is normally wrong on entry and exit points, then now would be the time to buy. While I am feeling positive today and the Nasdaq close over 3900 looks like a possible breakout, I am not ready to fire the starter pistol but it is definitely cocked and locked! The thing holding me back is the descending diamond pattern on the Dow. While it appears 10300 support should hold, the Dow still needs to move above 10700 and hold to confirm a breakout to the upside. There are plenty of stocks available to contribute to the cause. The Dow 30 is littered with flaming wrecks. IBM is dropping like a rock on earnings and currency concerns. GM looks like the wheels came off their marketing campaign as the stock hit an 18 month low. AT&T needs to phone home for help as it too hit an 18 month low. Alcoa is only one dollar from a 52 week low. CAT is trading at a three year low. Dupont is also at a three year low. HON a 12 month low. IP is trading at levels not seen since 1993. Need I go on? If it was not for the tech stocks in the Dow we would be singing a very different tune as to market outlook. If we had a high profile tech warning or two and the tech stocks in the Dow pulled back a little in sympathy we could be in real trouble. 30% of NYSE stocks are already trading at 52 week lows. We all know the Nasdaq does not need the Dow to rally but it will need its help to make a major move. Of course, it is always possible for a Nasdaq rally to pull the Dow out of its slump. (We can hope for miracles!)

All Dow Charts


The key here is the Fed. With no more hikes at least until August this is the first time in since Y2K began that we are free to focus on earnings and not the Fed. With earnings warnings almost over and the bond market poised to rally there is some excitement in the air. Muted, but it is there. The first six months of Y2K are history and the markets are bruised and battered but the fight is not over. Investors are not ready to go into hiding and start hoarding cash under their pillow just yet. Even with stocks like T, PG, XRX, HON trading at -50% off their recent highs there are other stocks that got an early start on the fourth. Looking like bottle rockets, RMBS, SDLI, RBAK and others are bringing back memories of QCOM from last year. Bear markets are in the eyes of the beholders as well as bull markets. T, PG, HON stockholders are losing hundreds of millions of dollars while RMBS shareholders are cheering all the way to the bank. Clearly we are in a stock pickers market. Now that the Fed has gone into hibernation for the summer we can be hopeful that the gains from individual stocks will spread into the broader market. Still we need to be vigilant if we have money invested in anticipation of any summer rally. If money comes off the sidelines into those beaten up Dow stocks above then other investors will feel more confident about spending cash now on the sidelines. The cash is there and ready to go to work. Bear trap rallies, and any rally starting next week will be suspect, are short, sharp and die on low volume. This makes volume the warning flag. After Wednesday we need to watch the volume as the truth or consequences indicator. Strong volume means it is real, low volume signals another run to the sidelines. Get your track shoes ready. The prize in either instance goes to the swiftest.

Now that I have you all pumped up and looking for a rally behind every tick, I am going to throw in my dose of reality. Our friend the VIX is flashing red at 22.26. Those of you who have been readers for some time know that the VIX is a measure of market volatility based on option contract prices on the OEX. VIX values below 22 normally correspond to market tops while values over 30 generally correspond to market bottoms. The VIX is seldom wrong and then only by a day or two. Also the VIX is more of a broader market indicator than a Dow or Nasdaq indicator. Of the stocks in the S&P only 39% are tech stocks. Therefore the Nasdaq can move contrary to the VIX for short periods of time. Still at 22.26 we need to be even more cautious about opening new long positions. Wait for that volume before making a move. Remember, non-farm payrolls are Friday.

Trade smart, don't buy too soon.

Jim Brown

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