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Profit taking slows Dow string of ten gains in eleven days!

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        08-15-2000        High      Low     Volume Advance/Decline
DJIA    11067.00 -109.10 11175.00 11046.10  900 mln   1164/1690
NASDAQ   3851.66 +  1.97  3888.92  3831.96 1.35 bln   1890/2136
S&P 100   811.81 -  4.53   816.47   810.31   totals   3054/3826   
S&P 500  1484.43 -  7.13  1493.12  1482.74           44.4%/55.6%
RUS 2000  509.93 -  4.55   514.75   509.93
DJ TRANS 2884.41 - 36.80  2920.32  2884.41
VIX        20.97 +  0.62    21.33    20.63
Put/Call Ratio       .55

Profit taking slows Dow string of ten gains in eleven days!

No problem here! We will gladly take ten up days for every two days down. Please keep it up! Nothing goes up in a straight line although the Dow has been testing that rule recently. Most of the loss was on the heels of a downgrade on Home Depot which announced earnings inline with estimates. HD lost -5.38 in regular trading. The Nasdaq struggled in light of the very negative Dow but tried valiantly to break out twice with runs into the mid 3880s. Each time it slipped back but the trend was still up. Dell recovered some lost ground with a +1.38 gain.

The Home Depot downgrade was joined by problems with other retail stocks as well. DLJ downgraded HD, WalMart and Costco. Target announced earnings inline with estimates and then warned that next quarter could be less than expected. JCPenny announced earnings inline with estimates but substantially less than last year. The retail sector, which had been enjoying a bounce since the Retail Sales numbers last week came in stronger than expected, now appears down for the count.

Chips Ahoy! The rising tide in the chip sector floated all the chip stocks after Morgan Stanley restated their outlook that the death of the chip rally was premature. The analyst there said he felt there was at least 18-24 months of growth remaining. Add to that the blowout ADI earnings after the bell of $.43 vs estimates of $.37 and the three day rally may still have room to run.

The drug patent problem reared its ugly head again and IVX dropped another -12.88 after news of another possible patent problem made headlines. Bristol Myers Squibb announced a new patent possibility on Taxol that may delay the generic drug from Ivax. BMY gained +2.25 on the news. The IVX CEO claimed this was hocus pocus legal maneuvering and predicted a quick resolution of the conflict.

The Dow losers, led by HD at -5.38, included Boeing -2.25, which may have been influenced by the grounding of all the Concordes. The second largest loser was Hewlett Packard which announces earnings on Wednesday. HWP lost -4.50 as worries of another Dell like report sent traders to the sidelines. Down from $136 last month analysts are mixed as to their success against IBM, SUNW and LXK. SunMicro announced today that their demand was running ahead of estimates and they saw continued strong demand ahead. If this is not at the expense of HWP Unix servers and HWP can take market share from Lexmark then the HWP revival may only just be beginning. If the news after the close tomorrow is negative then expect them to lose supporters quickly.

In the long running antitrust case against Microsoft the Justice Dept today urged the Supreme Court to hear the case quickly instead of sending it back down to the lower appeal courts. MSFT has had favorable rulings in the appeals court in the past and the eventual penalty phase will undoubtedly be handled in a lower court. By urging the high court to hear the case the Justice Dept is showing their cards that they are afraid the case will be overturned if heard by the lower court. MSFT only dropped $.56 on the news. Should the Supreme Court send it back down we are likely to see a pretty good pop in the stock price in anticipation of a favorable outcome.

The Dow profit taking was expected and the sectors that had been doing the best recently were the ones suffering the most today. One only needs to look at the bank and brokerage sectors for confirmation. LEH -6.63, MER -2.69, JPM -1.25, GS -2.56, MWD -2.56. Other than Lehman Brothers the other stocks only lost a token amount of their strong August gains.

We will gladly take five up days for every one down day and that is the recent trend. The Dow broke the late May intraday high of 11140 late Monday and then retreated. I spoke about this level (11150) as a resistance point on Sunday and I was very pleased to see the Monday close. Nothing has changed economically although the Industrial Production numbers this morning caused a little ripple of uneasiness. The next big report is on Wednesday with the CPI expected to post only a +0.1% headline number and a +0.2% core rate. The core rate has been stable for the last 12 months and short of a very bad blowout the Fed will be on hold next Tuesday. The productivity is soaring and costs are not rising. The high tech output is up +50% year over year and this will keep the productivity/price model intact. The drop in the Dow today was on light volume and strictly profit taking in front of the CPI report.

The Nasdaq is looking good and the 3888 high today was +200 points from Friday's low. The three day up trend is still intact and more importantly it was positive (barely) when the Dow was down triple digits. The ADI earnings tonight should help as well as the stock split by CIEN. Just give us a benign CPI and we should be ready to rock. The VIX rebounded only slightly, from the low of almost 20 on Monday, to close at 21 today. Still very low volatility which could signify significant complacency in the market. This is a negative indicator but about the only one we can find.

With a +650 point 11 day Dow gain we can't complain about a -109 drop especially when the Nasdaq held its ground. Hopefully we will get a good CPI number and move up again from here. Any gains we can manage between now and Labor Day or even between now and the Fed meeting next Tuesday will be icing on the cake since most portfolio managers are on vacation. We still have the dog days of summer ahead of us for two more weeks. The bright side this week is the options expiration on Friday. Expiration week is normally a bullish week and options for the aggressive speculator are cheap. For example, BRCD has earnings this Wednesday and a good earnings report and a good demand forecast could power the related sectors. Brocade is involved in Internet Infrastructure and manufactures switches to support the masses of storage required by the Internet. Exodus (EXDS), is not directly related but as a major Internet hosting service it tends to react with the Infrastructure sector. A strong demand forecast by BRCD could be seen as good continued business for Exodus. EXDS $60 calls were trading at the close for $.94 with the stock at $57.25 after dropping from a high of $60.50 with the Nasdaq just before the close. I picked up some of these as a lottery play on Brocade earnings. If nothing happens I lose $.94 but with any positive news at all or a Nasdaq rally on a good CPI then EXDS could easily be $65 for a windfall profit. I love expiration week!

Good luck and sell too soon.

Jim Brown
Editor

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