Option Investor
Market Wrap

Not pretty but we will take it!

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        08-24-2000        High      Low     Volume Advance/Decline
DJIA    11182.70 + 38.10 11197.80 11120.10  821 mln   1429/1383
NASDAQ   4053.28 + 42.27  4055.44  4004.77 1.53 bln   2200/1772
S&P 100   825.15 +  2.34   826.65   819.90   totals   3629/3155   
S&P 500  1508.31 +  2.34  1511.16  1501.25           53.5%/46.5%
RUS 2000  523.30 +  5.42   523.32   517.64
DJ TRANS 2764.79 + 11.44  2759.65  2731.83
VIX        19.10 -  0.76    20.10    18.97
Put/Call Ratio       .43

Three dips and a bounce would be a good description of the Nasdaq for Thursday. After gapping open the Nasdaq dropped back to 4004 which was the low of the day before sprinting back to 4040 a few minutes later. Sellers tried to take it down again and the Nasdaq dropped back into negative territory one more time. Again, slower this time, it recovered to bounce off resistance at 4040 dropping to 4014. There was a real battle all day as buyers and sellers traded salvoes but buyers finally won the battle. With one last push off the 2:30 lows the Nasdaq closed near the high of the day at 4054. The Dow struggled with the 11160 resistance level all day but also rallied at the close to post another respectable +38 point gain.

For traders used to huge intraday swings of 100, 200 even 300 points back in the spring the current ranges of 50-75 points is like watching paint dry. Not that we are complaining! We will gladly take these lower volatility ranges that hearken back to trading patterns of 3-4 years ago. The concept of putting on trades and feeling comfortable you won't be stopped out 30 minutes later is refreshing. Many new investors are not even familiar with this type of market. Recent new investors grew up thinking 300 point intraday swings were common.

Of course if you owned Next Level Communications today your description of volatility is different than ours. After Lehman Brothers cut them from a buy to neutral the stock dropped -49 from over $90 to a $42 close. The problem here was a reliance on one customer for two-thirds of their sales. US West was the one customer and now that Qwest has bought them they are not as likely to continue in the same direction with NXTV products under Qwest control. Several aggressive funds got killed on the news. Of note the Munder Net Net fund had over one million shares and lost almost $50 million at the open. That could ruin your entire day!

The government plans to relax a ban on federally-funded research using embryonic cells continued to spark a run in biotech stocks. The main players, STEM, GERN, ASTM were joined by the bigger biotechs like AFFX +8, HGSI +21, CRA +11, PDLI +8, ABGX +8. The news plus some upgrades pushed this sector to over +75% gains for the year and revitalized the sector after the patent problems from several weeks ago. If you owned them you are a winner but jumping on stocks up +20% to 30% in two days can be dangerous.

If you would rather invest in calories than biotechs then Krispy Kreme is your ticket. The "donuts to die for" beat analysts Estimates of .18 with a solid $.25 and the stock jumped +24% or +$15 to $78. For investors that gorged themselves today they may find themselves on a diet soon. KREM had languished recently and it remains to be seen if it can hold on to those gains.

Economic reports today confirmed the Fed decision to hold on interest rates with orders for Durable Goods dropping -12.4% in July which was much stronger than the -7.7% decline analysts expected. The biggest ever monthly drop in demand for airplanes and transportation equipment led the way. This was on top of a smaller than expected gain in June. While this was good for the market today the true test will come when companies start posting lower profits from the drop in orders. On the job front new claims for unemployment insurance rose by +4000 to 314,000 last week. Not earth shaking but going in the right direction.

On the political front, and I mention this only because all of us are struggling to build as big an estate as possible for our families before our eventual death, congressional leaders are sending another bill to repeal the death tax to Clinton for signature. He will veto it and set the stage for a September veto override attempt in Congress. The bill would phase out the "death tax" over the next ten years at a cost of $105 billion. There was sizeable Democratic support since nobody wants to give the government a huge chunk of money that could have already been taxed when it was earned.

No commentary of today's events would be complete without at least a mention of the Survivor hoopla. What a bunch of XXXX. The insulting of American collective intelligence is incredible. Any contest where the winner wimped out of the last test and a 45yr SEAL veteran "forgets" to hold onto an idol and the person who kicked butt on all the "challenges" gets booted by a hostile sore loser, and a pick a number between 1 and 10 idiot, is ridiculous. Please no email on this. I am just venting here. Yes, I know Richard was the most scheming contestant taking the "out wit" challenge literally. He played the way I hope I would have played, in war there are no rules. Remember that Rudy? But still appearing on Letterman last night, buck naked, in front of the other 15 contestants for 15 minutes is an insult not only to them but America in general. If you think this was bad, get ready. This fall there will be a program where four guys will be chained to one woman and cameras will record them 24hrs a day. Each week one man will be voted off with the last one being the Eventual winner. It is going to be called something like "chains of love." Now picture yourself chained to four members of the opposite sex (never mind, some guys are probably fantasizing about being chained to four girls, bad analogy) when nature calls at 3:AM. By the time you get everybody awake and into the bathroom it could be too late. But you get my drift. Is this reality TV thing going to far? You want reality TV? Try showing the trading post at NXTV for 30 minutes after the market opened today. That is reality TV!

Back to true reality. The Nasdaq managed to close over 4000 twice now. Not much conviction but still nine positive closes in ten days has got to be swaying some opinions of those still in cash on the sidelines. This is where the rubber hits the road as they say. With many traders planning long weekends this week and next there may still be some hesitation to come off the sidelines. However with the market showing good resilience after that +100 point Nasdaq intraday move on Monday it is looking good! The Nasdaq has come off the opening drop two days in a row and that is exactly opposite from the sell at close pattern of last week. Two days over 4000 is very positive. The confirmation of the up trend and broad market participation is encouraging. Even the Dow is along for the ride. This is investor nirvana. Advances are beating declines, new highs are strongly beating new lows, the Dow and Nasdaq are moving in tandem towards April highs. What could possibly be wrong? Maybe the VIX falling to 18.95 intraday today? Another 52 week Low! Earnings warning season starts next week?

We are entering into a period of expectation that has not been seen for months. Everybody is expecting the market to go up. Nobody is looking for it to go down. The Fed is on hold, the economy is slowing, politicians are telling us we are better off today than eight years ago. What we are setting up for is a major rally unless something comes out of left field and hits the market while we are busy counting our profits. Non-farm payrolls are next Friday and they are the next big economic hurdle. The revised GDP is tomorrow and Personal Income/Spending next Monday but neither is expected to be a problem. Using my 4000 benchmark from Tuesday you should be long in the market. We did not get the drop to 3800 since support at 3900 held but I am not complaining. Simply maintain that 4000 benchmark and consider closing those positions should we violate it for any reason. This is easy trading if you follow the rules. Friday could see some profit taking so expect it. Better to expect it and not get it than get hit when you are not expecting it. Did that make sense? I would definitely be a dip buyer, the deeper the better. Enjoy the ride but keep looking for that pothole ahead.

Good luck and sell too soon.

Jim Brown


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