Option Investor
Market Wrap

Not bad for a summer Thursday!

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        08-17-2000        High      Low     Volume Advance/Decline
DJIA    11055.60 + 47.20 11091.50 10984.40  907 mln   1601/1222
NASDAQ   3940.87 + 79.67  3947.05  3857.75 1.44 bln   2143/1824
S&P 100   815.09 +  8.18   817.04   806.55   totals   3744/3046   
S&P 500  1496.07 + 16.22  1499.32  1479.85           55.1%/44.9%
RUS 2000  516.46 +  3.72   516.46   511.79
DJ TRANS 2847.91 - 27.90  2876.34  2835.65
VIX        20.04 -  0.63    21.25    19.81
Put/Call Ratio       .59

Wow! Today proves the old adage about "never short a dull market." After futures ended the morning session negative across the board there was some concern that the market would drop on the "not as good as first thought" HWP earnings. After opening mixed and trading on both sides of positive both the Dow and the Nasdaq moved up strongly and then held their gains into the close. That is the key point in the last sentence. "Held into the close." While neither index closed at the high of the day neither did they suffer serious selling as has been the case recently.

The disaster of the day was Hewlett-Packard. After announcing what appeared to be blow out numbers after the close on Monday HWP was up +8.00 in after hours trading. Talking heads were glowing with praise about the incredible performance. OOPS! Once analysts got a chance to look behind the headline numbers the skeletons began appearing. The $.97 posted number already excluded a one-time gain on the sale of stock but failed to exclude four cents of other non-operating items. During the conference call CFO Robert Wayman finally agreed with hostile analysts that $.93 was closer to the real results. Analysts then subtracted -.04 for a lower than expected tax rate from a global sales mix and you are now left with only $.89 or an inline report for operating earnings. Sales only increased +14.5% and Unix sales only grew by +13% which was more than ten percentage points below analysts estimates and way below the +26% from last quarter. The revelations were met with downgrades and cautious words by analysts. HWP dropped -2.38 to $108.56 which in reality was not bad. The low was $107 and yesterday's high was $112.56. A big range but the feeling that HWP did have its act together going forward as well as a 2:1 stock split announcement helped hold it up.

Other major news last night was Brocade which announced earnings which increased over 1000% and beat analysts estimates by +.02 cents. The earnings energized the infrastructure sector with BRCD adding +15, EXTR +17, SCMR +12, JNPR +6. If you own these there is a good possibility of profit taking on Friday.

The fiber optic sector was also represented by Ciena which beat analyst estimates of $.17 by two cents and soared +16 in heavy trading. With fiber optics, networking and biotech again on the move the gains by the Nasdaq were broad based and strong.

After the close today Agilent posted huge earnings numbers after warning in June that component shortages were going to hinder earnings. Agilent's revenue rose +28% to $2.67 billion. The $.18 to $.22 estimates for the quarter were beaten soundly with a $.33 announcement. The difference was new components coming available which enabled completion of pre- assembled equipment. It was just sitting waiting for a key component and when the parts came Agilent was able to fill a huge backlog of orders in a short period of time. "A" was up +12 during regular trading and rose another +9 in after hours.

Do you see a pattern emerging here? All of a sudden earnings are being met with huge gains where over the last several weeks companies sold off instead. I view this as an expression of several things. One, would be fewer earnings announcements to capture investor attention. Two, fewer IPO releases to soak up the extra cash. Three, a return of investor optimism into the market place. The optimism is quickly replacing the cynicism which was so common recently. Fourth, the "Fed on hold" concept is finally taking hold. The short and simple description of all the above would be, "if the Fed is not going to raise rates next Tuesday then why wait till after Labor Day?"

The Nasdaq closed just below its 200 DMA of 3945, how convenient! Dead on resistance. The Dow managed its first positive close in three days and back over 11000 again. If it was not for the VIX and the Tuesday Fed meeting I would be mortgaging the kids for capital. Heck, even Yahoo almost succeeded in shaking off a day of reckoning by Prudential Securities analyst Mark Rowen. Mark started YHOO with an accumulate and a 12-month target of only $155. He said his accumulate rating was based on a "lofty valuation, slowing growth and shrinking margins." OUCH! This got plenty of air time on CNBC as they calculated what the market cap should be based on earnings, over and over and over. Still YHOO only lost -2.88 on the news. That is a very positive event for the market. It may not be positive for YHOO going forward but the market shook it off and powered onward.

Now, the negative side. The VIX hit 19.81 intraday and closed at 20.04, only .04 above panic mode and only +.58 above the 52 week low of 19.46. Hold that thought. Now everybody knows the Fed is on hold but until the announcement is made at 2:15 Tuesday afternoon it will still be a black cloud over the market. We have had a good run but it is entirely possible that we could see some profit taking between now and the Fed meeting. That leaves Friday and Monday for those without a calendar and I would bet on Friday as traders go flat before the weekend. Semiconductors have been up for five days and helped power the Nasdaq to similar gains. Investor sentiment is soaring. The Nasdaq and Dow were both up decent on the same day. Financials and techs are both setting new 52 week highs. (AXP, JPM, SUNW for example) Advances are beating declines in all markets. I can't, other than a rate increase out of the blue or Iraq launching missiles at Saudia Arabia shutting down oil production, think of a negative event that could trigger a broad market decline. No, that is not a challenge, threat or dare. Just a comment. Here we go with that "too good too be true" scenario again.

I closed all my long positions this afternoon and I will be an observer not a participant on Friday. I can see the possibility of a strong upward spike at the open and I might speculate on some OEX/QQQ puts after that spike but other than that I have been burned by the VIX enough to be very cautious when warning signs are flashing two days before a Fed meeting.

Good luck and sell too soon.

Jim Brown

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