Option Investor
Market Wrap

Markets shine in spite of Greenspan cloud.

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        07-25-2000        High      Low     Volume Advance/Decline
DJIA    10700.00 + 14.90 10744.50 10680.20   97 mln   1452/1380
NASDAQ   4029.57 + 48.00  4034.80  3955.36 1.47 bln   1841/2143
S&P 100   802.44 +  6.61   803.81   795.83   totals   3293/3523   
S&P 500  1474.47 - 15.90  1476.23  1464.29           48.3%/51.7%
RUS 2000  514.33 +  0.08   517.41   511.11
DJ TRANS 2809.32 - 10.77  2832.51  2795.86
VIX        21.67 -  0.77    22.36    21.49
Put/Call Ratio       .53

Markets shine in spite of Greenspan cloud.

The markets rebounded from an early morning sell off even after Greenspan left the door open for another rate hike in August. Claiming it was too early to tell if the past rate hikes would have been successful in slowing the economy completely he said info out before the August meeting should tell them if they need to hike interest rates again or remain on the sidelines. He did say he felt they were coming closer to having economic growth "in balance" and he felt the unemployment was not yet at "dangerous levels." Even with cautious statements about the August meeting the positive remarks from the Fed head convinced the market the risk was minimal and it slowly pulled out of a nose dive and back into positive territory.

The Nasdaq finally found a bottom at 3955 after dropping -334 points since the intraday high of 4289 last Monday. This bounce off two levels of support could be simply an oversold bounce. The last test of this level came on July 11th. The bullish sentiment is still rampant in spite of slowing earnings.

After the bell today Compaq announced earnings in line with estimates or $.21. CPQ traded up fractionally in after hours to $28. Compaq did post an increase in commercial sales after posting a -$224 mil loss for the same period last year. CPQ did retain its worldwide market share of 13.2% despite Dell capturing the lead in the U.S.

EBAY also announced earnings of +.04 beating estimates of only +.03. Despite beating estimates by 33% EBAY traded down slightly after hours.

The big winner after the bell was Nortel which posted profits of $.18 vs estimates of $.15. Sales for the quarter grew by a whopping $2.5 billion to $7.8 bil from 5.3 bil. The growth was due to a leap in optical sales and NT said they will invest $1.9 billion into its fiber business in the next 18 months. CEO John Roth said he was excited about the results explaining that NT had more sales in the last six months than for whole years just recently. They also felt sales growth going forward would be in the 30-35% range instead of the 20% current market growth rate. NT was up almost $5 in after hours trading.

Losers included LSI Logic which posted results in line with estimates of $.29 but under the whisper number of $.32. LSI dropped -$7 in after hours to $41. Unfortunately this was not the big earnings loser for the day. AFFX posted weaker than expected results of -$.22 instead of the -$.15 analysts expected and the stock and sector got hammered. AFFX lost -$31 to $163.

The number two appliance seller just two years ago announced today that they were dropping out of the appliance business. Circuit City announced the sweeping reorganization today with a profit warning for the future. They stated that the business had changed dramatically in just the last few months with heavy competition from stores like Home Depot. Cutting estimates for the third quarter in half prompted investors to drop the stock for a -$6.88 loss. In the battle of the retailers Kmart also lost another battle to Wal-Mart. Kmart announced they would be closing 72 stores and holding nationwide clearance sales to reduce inventory. KM actually closed up slightly at $7.38 after trading at a 52 wk low of $6.50 earlier this month.

JDSU goes into the S&P 500 at the close on Wednesday and Rite Aid (RAD) comes out. This is not as simple as it seems. RAD has a market cap of only $1.2 bil and JDSU has a cap of 100 times that at $121 billion. Since the S&P is a market cap weighted index fund managers not only have to sell RAD at the close tomorrow but almost every other S&P stock as well to compensate for the huge addition. The JDSU buying is already three times over done with over 158 million shares traded since the announcement and Merrill Lynch estimates that only 58 million shares needed to be bought by S&P funds. This means JDSU would likely go down were it not for the strong earnings by NT on their optical business today. Still there will likely be strong net sales of S&P stocks on Wednesday.

Market analysts are mixed as to market direction in the coming weeks. Even with the bullish sentiment in the foreground there is beginning to be some concern in the ranks. Dick McCabe, market analyst for Merrill Lynch, said today he could see the Dow falling to the high 9000 range in the summer doldrums period ahead. He was cautious about his comments but his tone from just two weeks ago was decidedly different. He also said that historically the markets went up when it was felt the incumbent party would win the presidential race and went down when the incumbent party was seen losing the race. It is not party specific but simply a changing of policy and leadership that could rock the "status quo" boat that moved the market. With Bush choosing Dick Cheney as his running mate today the pressure is now on Gore to match his move.

Even with the -334 point drop on the Nasdaq in the last week I would still caution readers to confirm market direction before making any new long call plays. What looked like a nice bounce off support today could just be a bear trap rally from the oversold condition. Remember most of the big guns have already announced earnings and the reasons to buy stocks are decreasing every day. Investors may be resting easier with calming remarks from Greenspan but they are likely to want to wait until after the August meeting before making any major investments.

With the declines beating advances on decent volume and the VIX still hovering around 21.50 there appears to be a negative undertow to the markets despite the bullish emotions on the surface. This week will be the key. The week after options expiration in July is normally a down week so extreme caution is advised. The Nasdaq edged back to close slightly over 4000 again and the Dow closed dead on the critical 10700 level. We are definitely poised to move but with serious overhead resistance on the S&P, along with anticipated net sales due to the JDSU entry, the move may not be upward. Don't get me wrong, I would love to see a summer rally. By the way, have you heard that term this week? Amazing how quickly sentiment changes! In conclusion, I think the Nasdaq is too close to call for Wednesday, with what appears to be a great bounce off support and a strong intraday chart, we could see a strong effort to post some gains. What is not so clear is how many sellers will use that strength to sell into the rally and lighten up their positions going into August. If you are in this market keep your stops tight and don't expect every dip to bounce.

Don't fight the tape. Trade the trend!

Good luck and sell too soon.

Jim Brown

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