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Market Wrap

Welcome to the Twilight Zone Mr. Folino!

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        WE 8-25          WE 8-18          WE 8-11           WE 8-4
DOW    11192.63 +146.15 11046.48 + 18.68 11027.80 +260.05  +256.58
Nasdaq  4042.68 +112.34  3930.34 +140.87  3789.47 +  2.11  +124.36
S&P-100  823.55 +  9.91   813.64 +  8.89   804.75 +  8.90  + 19.67
S&P-500 1506.46 + 14.74  1491.72 + 19.88  1471.84 +  8.91  + 43.04
W5000  14091.20 +183.80 13907.40 +210.60 13696.80 + 84.90  +359.60
RUT      525.11 +  9.60   515.51 +  5.24   510.27 +  6.64  + 13.41
TRAN    2790.17 - 46.97  2837.14 - 90.36  2927.50 + 40.69  +117.28
VIX       19.10 -   .32    19.42 -  1.77    21.19 -   .35  -  2.76
Put/Call    .50              .57              .41              

The economy is rolling right along neither gaining nor slowing more than expected according to the GDP report on Friday. The economy grew +5.3% in the second quarter meeting economists expectations and only slightly faster than the +4.8% first quarter rate. No big deal in terms of market movement. Existing home sales dropped -9.8% in July, much lower than expected. The Fed is on hold and the reports just keep confirming their decision. The report made public before the market open set the stage for the Nasdaq to finally achieve liftoff at the open. Just as the Nasdaq appeared destined to hit 4200 before the day was out, a severe case of bad news stopped it dead. Just like it hit a brick wall. News that the EMLX CEO had resigned and they would restate earnings showing a loss instead of a profit was such a shock to the market that those traders who were not on vacation quickly started clearing the decks of not only EMLX but QLGC and BRCD, which are in the same sector, on fear that the virus might be catching. After dropping -$67 from $110 to a low of $43 Nasdaq halted trading. A -61% drop, billions in market cap, gone in a heartbeat.

The rest of the story is history. The press release was bogus. CEO Paul Folino showed up at his office around 7:30 and turned on CNBC only to discover on TV that he had resigned and EMLX had lost over half its market cap. Can you hear the twilight zone theme playing in the background? So much for a sleepy, casual Friday. Thousands of investors lost millions of dollars to a hoax. Savings accounts, IRAs, funds, nobody was safe. Whoever did this better hope he can find a deserted island and hide. When the FBI, SEC and friends find this person they will be voted off the planet, not just the island. The most amazing part? The market did not die. Yes, the story pulled the plug on a very promising rally but the market did not die. A Friday in late August is not normally a rip roaring trading day but the possibility of profit taking day was good. But, it still did not happen. Earnings warnings, bogus press releases, vacation Friday, but the market held. A miracle in my book!

If that sounds bullish it is. We dodged a very big bullet on Friday. Even though the announcement was a hoax it could have had serious market consequences. Even CSCO dropped on the news. When news comes out of left field completely unexpected the first reaction is to sell quickly and wait for the smoke to clear and see what the fall out will be. Yes, there was a lot of broad selling but it was quickly stopped even before the real news was clear. The knee jerk reactions were met with strong buying and that was market positive. There is a bottom under this market boys and girls. That is the silver lining in today's cloud. This doesn't mean there will not be any dips in our future but the evidence is pointing to only small ones. Now that I have gone out on the limb is that a chainsaw I hear? The VIX hit another 52 week low intraday at 18.89. I think we have passed the point where anybody cares anymore. Volatility is so low it is off the scale but that does not mean it can't go lower. The low point in 1999 was in July with a 17.70 and the low for 1998 was also in July with 16.73. We are a month late but the patterns are almost identical. Using that as a guide it is entirely possible we can see much lower numbers in the next couple weeks as the market responds to a Fed on hold and traders coming back from vacation. There are no negative market factors other than the coming earnings warning season.

Confessions started trickling in today with Lear Corp (LEA) and Lowes Cineplex (LCP) announcing after the close that earnings will not be up to par. These were in addition to downgrades on several stocks by analysts faced with a slowing economy. Coke (KO) earnings estimates were cut by Salomon Smith Barney after they said volume growth was slowing. Several analysts talked about the shift from carbonated to non-carbonated beverages and the impact on KO and PEP as the major players. It is a strange turn of events when bottled water sells for more than a Coke. For that matter water costs more than gasoline even at the current inflated prices! KO dropped -$2 on the news.

The only two lurking problems which may become major market problems in September are oil prices and slowing earnings. At least these are the only two that traders are willing to talk about. Oil rose +$.40 to settle at $32.03 today and the time to start laying in those supplies of heating oil is fast approaching. At $32 oil is a nuisance, at $35-$38 it starts to be a major problem and over $40 a disaster. Like the VIX, oil is just a smoldering ember which under the right conditions could blossom into a raging fire and consume the current market momentum.

The other problem is about two weeks away. Earnings warning season. It starts officially Sept 11th. Unofficially there is no real date but confessions will start in earnest about 30 days before earnings are announced. Smack dab at the end of Labor Day week. With the economy slowing earnings estimates must drop. Someone will be the leader in every sector and once they confess, estimates for every one else in the sector will drop as well. It is a cascade effect. Add the fact that summers are normally tough on sales and that is why September is typically a rough month. In the last 49 years September is the worst performing month with a total loss of -10.5% based on the S&P-500. Compare that with December which is up +87.6% over the same period.

Mr. Fed himself, Alan Greenspan, gave a speech on Friday in Jackson Hole, Wyoming and made some bullish comments. He said increasing productivity is showing no signs of tapering off but then qualified it by saying that when it did the problems would begin. Come on Alan. Be a sport! Trees grow to the sky, really! http://www.bog.frb.fed.us/boarddocs/speeches/2000/20000825.htm

Even in spite of the economic reports, news hoaxes and speeches the Dow traded in only a 55 point range. 55 points! The Nasdaq only managed two points more with a 57 point range. The Volume was positively anemic with only 676 million shares traded on the NYSE and 1.2 bil on the Nasdaq. This low volume is adding to the lack of volatility but also building the pressure. The major indexes are slowly creeping up and passing previous resistance points without much fanfare. By slowly overcoming resistance points without those wild spurts we have seen in the past it is setting the stage for a blowout soon. Investor confidence is growing by leaps and bounds and traders burned in the spring and summer are starting to come back into the market. Retail volume at brokers is starting to grow and anticipation is building. Stocks which have been pounded this year are slowly breaking out again. Take a look at all the charts for the calls this weekend. This is an incredible group of plays. There are so many good plays it is impossible to pick just one or two. My personal play list for next week is huge. Way more than I could ever play. My personal sentiment indicator, subscriptions, is growing. Stock split announcements are increasing with dozens more due out soon. You would think it was the fall rally already! Somebody pinch me please! There has to be a dip here somewhere!

Enough bullishness! Even the best laid plans fail for unexpected reasons. With the Nasdaq closing over 4000 for three days now it has all the appearances of impending acceleration. Trade it if it comes but consider closing those positions if we break 4000 again. The Nasdaq has been up 9 of 11 days and those two down days were minimal. Low volume could exaggerate any profit taking should the market makers want one more test before Labor Day but Friday would have been a prime opportunity and they passed. Any dip should be considered a buying opportunity. The major economic reports for next week are the Personal Income/Spending on Monday and the Employment Report for August on Friday.

Sectors in which to be most careful would be biotech and semiconductors due to their recent strong gains. The sector to watch for the upside would be the fiber optics. There is a major fiber optic conference this week which could have market moving news. (markets move both ways on this news, not just up) Have fun but always be watchful.

Speaking of watching, watch for the beginning of decimalization on Monday. Decimalization is the changing of the way stock prices are reported from fractions to decimals. No more trying to figure out what 15/32 or 23/64 actually means. This was scheduled for last year but delayed until after the dreaded Y2K event to avoid problems. Now that the date is upon us the SEC is overseeing the change to ensure an orderly transition. Hopefully it will have about as much impact as Y2K. Notice they chose the last week in August to implement the first test? Obviously they can read volume charts too. The SEC has picked 13 NYSE stocks and 3 options for the test. No, they did not pick IBM, T, C or AXP for this test. High volume stocks were avoided. Several of the candidates you probably never heard of. Here is the list in order of Fridays share volume:

Forest City Enterprises A&B (FCE.A, FCE.B), 600 shares
MSC Software (MNS), 10,000
Media General (MEG.A), 10,500
Psychemedics (PMD), 16,000
Regal Beloit (RBC), 17,000
eMagin (EMA), 21,300
Hughes Supply (HUG), 34,800
Global Light (GBT), 137,900
ON2.com (ONT), 159,700
FedEx (FDX), 691,000
Anadarko Petroleum (APC), 1,002,000
Gateway (GTW), 1,663,000

These stocks will begin trading in pennies on Monday instead of the 1/8 or 1/16 increments. Options on FDX, APC and GTW will also be decimalized with options over $3.00 trading in $.10 increments and options under $3.00 will trade in $.05 increments. The test is expected to expand on Sept-25th to include another 50-100 NYSE stocks. The conversion for all stocks and options is expected to begin as early as December but the deadline is April 9th, 2001. Expect that to be beaten once the initial hurdles are overcome.

Bored in Chicago? Have lunch with on us Thursday August-31st. OptionInvestor.com, Preferred Trade and DTN-IQ will hold a FREE seminar on Thursday complete with handouts, freebies, door prizes and over six hours of solid information which can improve your trading results. Lightning trades, real time quotes and the best option strategies and a FREE LUNCH! How can you go wrong? It is free but you have to register so we can order food. http://www.OptionInvestor.com/seminar/dtn

Trade smart, sell too soon.

Jim Brown
Editor


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