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Market Wrap

Rocky markets confuse analysts?

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        08-01-2000        High      Low     Volume Advance/Decline
DJIA    10607.00 + 85.00 10626.90 10516.80  921 mln   1675/1179
NASDAQ   3685.52 - 81.47  3766.92  3682.45 1.33 bln   1677/2317
S&P 100   784.01 +  1.37   788.08   780.74   totals   3352/3496   
S&P 500  1438.10 +  7.27  1443.54  1428.96           49.0%/51.0%
RUS 2000  497.77 -  2.87   500.68   497.71
DJ TRANS 2875.44 + 17.35  2875.44  2843.72
VIX        22.87 -  0.57    23.90    22.63
Put/Call Ratio       .56

Rocky markets confuse analysts?

Just another fun day in the markets as investors moved out of tech stocks and into defensive issues. With stocks like CSCO, INTC, DELL, SUNW and ORCL all losing over -$2 it is surprising the Nasdaq was not farther down than it was. Clearly investors are moving into a defensive posture with big names like KO +1.69, EK +2.69, PG +2.25, DIS +1.44, MRK +2.44 posting decent gains at the expense of tech stocks. KO? EK? My trading software would not accept those symbols. It would probably lock up and refuse to execute until I had written permission from my doctor.

The economic reports out today were mixed and leaned slightly toward the economic slowdown scenario. Personal Income gained +.4% and Personal Spending +.5%. Married readers will have no problem understanding those ratios. Spending always increases faster than income. The NAPM index came in at 51.8 and basically flat. The prices paid component however moved up again to 61.9 but analysts felt the rise was based on the high oil prices.

Earnings are drawing to a close and there were only a few companies announcing. Most reported as expected and the excitement is quickly fading. Only a few big name companies are still left to report. One of those, CSCO, saw a huge attack on its stock today when someone (according to CNBC) purchased almost 56000 put contracts for a total of almost $6,000,000 in premium. Although this was reported by David Faber on CNBC the total volume for all CSCO put contracts today was only about 25,000 contracts. We may never know if it actually happened or not but the impact of the rumor and an announced purchase of IPmobile for $425 million in stock contributed to the -2.25 for the day.

We all know this does not mean that everyone is expecting CSCO to drop. There could be a large crowd that is selling covered puts expecting CSCO to go up after earnings. Volume alone does not mean anything. The 56000 contracts could have been part of a spread transaction as well. Still, when the transaction was made public there was a ripple through the tech sector with speculation of a possible problem with the coming CSCO earnings. After some of the earnings warnings for this quarter and missed earnings by some techs recently, any rumor can be detrimental to the market. We are definitely not seeing a pre-earnings run on CSCO.

Dell is another company that announces in mid August. With the recent news of possible soft computer sales Dell has fallen from almost $55 to a six month low of $41.56 today. There is no good news in the wings it appears or the stock would have shown more strength in the face of these rumors. Has the Michael Dell magic charm worn off or is it just a reality check by investors? More than likely it is final acceptance that a 50% annual growth rate cannot last forever. The Internet bloom is fading and people are learning they can live with their existing computer model for more than one year. I know many people who surfed daily in the past and now don't even turn on their computers for weeks. Hard for them to justify that new 1000mhz PC.

The bright spot in the market today in my opinion was the biotech sector. Riding the PDLI earnings wave today the gains for many were impressive. ONYX Pharmaceuticals (ONXX) also helped the sector with news of successful tests on their anti-cancer drug. HGSI +8.88, INCY +8.63, PEB +7.01, CRA +5.38, IMCL +4.50, DNA +4.25. Those stocks represented half of the total stocks that finished in the green on my watch list of over 100 stocks. Yes, the NYSE advance/declines were positive with 88 new highs and only 40 new lows but the Nasdaq story was much different. The bottom of my watch list included the semiconductor stocks with the SOX resting on its 200 DMA and threatening to fall off the chart. RMBS -4.25, AMCC -13.19, GSPN, -9.12, BRCM -9.69, PMCS -3.81. The next group was split between Internet networking stocks, Ecommerce and software stocks. The major losers were CMTN -$7, EXTR -6.88, AKAM -7.50, SCMR -6, MUSE -7.50, VIGN -4.50, JNPR -4.01, BRCD -4. It was ugly, very ugly.

I must have looked at over 100 charts and only saw 3 or 4 that were moving up. Most were losing ground at a high rate of speed. The major fear is the last year of rate hikes may be starting to impact earnings for tech companies. The old economy stocks are seen as buying opportunities after being hammered for big losses in the spring. The old economy stocks are also viewed as being less impacted by the rate hikes going forward. Personally I think it is just smoke and when the August correction is over the tables will turn again. Remember when the Nasdaq was up over +100 on Monday? The Dow barely broke even. It is simple rotation and once techs take off again investors will drop those +10% annual growth stocks for hot tech stocks with growth of 50% or better before you can say rally.

All the market activity today was noise with the moves coming on very light volume. The Nasdaq only posted 1.3 billion shares and the NYSE 920 million shares. The lack of follow through on the tech rally on Monday was expected. Actually if you followed my suggestion on Sunday you profited from the early morning spike down to 3615 and the ensuing +150 point rebound to the 3765 close. Remember I said don't buy on the gap open but wait for a decent downward spike before taking a position on the expected relief rally. The trading rally we got was just like we scripted it. The next challenge is the new home sales report on Wednesday and then the nonfarm payrolls on Friday. There is a good possibility we could get another entry point before the Friday payroll report. Recently the market has rallied on the report regardless of the numbers. To trade this event you have to take a position on Thursday afternoon. We view this as a high risk play and should only be attempted with extreme risk capital. A strongly negative number in this interest rate wary environment could be very reactive.

Whatever your outlook on the markets going forward we urge you to be very careful until a new trend is established. The cash drain on the markets is still alive and well with 46 of the 52 scheduled IPO or secondary offerings for this week still not in the market. As these are priced, and only three days are left, investors will be faced with too many targets and not enough cash. This is sure to cause continued volatility in the current market. Without a trend investors tend to jump in and out of stocks if it appears they guessed wrong and they do not want to buy and hold. Until this trading trend changes we will continue to see the market move lower. Many analysts are now calling for numbers as low as 3200 with the next support point being 3515. (right between my 3500-3550 from last Sunday)

My informal sentiment poll consists of the dozens of traders in the office. When they are all in cash and are churning charts trying to find something to play when the market turns I think we are close to a bottom. If I multiply this "money burning a whole in their pocket" syndrome by the millions of investors I believe are in the same position then I can forecast a rally. We are not there yet but the cash is building on the sidelines in the office. It is a clear sign of a future rally. Now, hold that thought and your money!

Over 150 readers attended the free one day seminar in Orlando today and were treated to a full day of information overload by Preferred Trade, DTN/IQ and OptionInvestor. We are having another free seminar day on August 8th in Dallas. Come be our guest for a free breakfast and lunch along with a presentation of the Preferred Trade execution system, the newest features of real time quote systems by DTN/IQ with a Nasdaq level two demonstration. Chris Verhaegh will fill your afternoon with trading strategies that will improve your profitability with both stocks and options. For more information: http://www.OptionInvestor.com/seminar/dtn

Good luck and sell too soon.

Jim Brown

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