Option Investor
Market Wrap

The Dawn of Decimalization

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        08-28-2000        High      Low     Volume Advance/Decline
DJIA    11252.80 + 60.20 11319.10 11188.90  821 mln   1374/1430
NASDAQ   4070.59 + 27.91  4097.33  4048.01 1.37 bln   2123/1893
S&P 100   829.19 +  5.64   834.94   823.80   totals   3497/3323   
S&P 500  1514.09 +  7.63  1523.93  1506.72           51.3%/48.7%
RUS 2000  526.48 +  1.37   528.83   525.11
DJ TRANS 2786.68 -  3.49  2822.42  2786.68
VIX        18.23 -  0.87    19.34    18.06
Put/Call Ratio       .50

The Dawn of Decimalization

Many market stalwarts climbed to new all-time highs today, penny by penny. Well, maybe not by the penny, but by teenies. Today marked the first day that a handful of selected test stocks, including GTW and FDX, would trade in decimals, with the smallest increment being one cent. Although they still trade in sixteenths, GE(+0.75), INTC(+0.94), C(+1.94), and GLW(+10.00) all made new all-time highs. This proved to help the INDU immensely as it continues climbing its recent trendline. And with the SEC initiatives in place for a full decimalization of the markets by April 2001, we wonder, will this help the average retail investor?

I do want to briefly mention this because I think that it will be very interesting to watch how this development unfolds in our fast-paced, high-flying markets. While at first glance it would appear that us retail customers will benefit in that we will see narrower markets, further thought has raised some concerns. The one major concern is the market-makers/specialists' ability to move the market by only a penny to stay in front of a public bid or ask. By moving the market by only a penny, these market-makers can manipulate the market much easier, and with less financial risk. The reason being that if they want to get out in front of the public under the current fractional system, they must better the market by an eighth or sixteenth, 0.125 or 0.0625 cents. On a larger order, that can result in a significant amount of risk. Many market-watchers believe that this could be a disadvantage to retail customers for this exact reason. Yet, like any other game, if you learn the new rules and adapt, it certainly can be used to your advantage. I can't wait to see it in the option markets! That will greatly help in narrowing the markets, and create more opportunity for the option trader. Anything to cut out the market-maker! At the very least, it may broaden the public interest, and possibly investment, in the stock market since it can be understood easier than 11/16. Should be interesting.

Let the games begin! Today's market action was another day of impressive gains for both major indices, albeit on light volume. No sellers to be found. Well, none with conviction at least. At the NYSE, volume was a measly 727K shares as the INDU managed to tack on 60.21 points. Monday's volume action was the 3rd lightest day of 2000 and brought the INDU well above the 11200 intraday resistance that it experienced toward the end of last week. Yet, the INDU lost some of its steam later in the day as buying interest dried up. After hitting 11319, the index just drifted lower throughout the afternoon. This resistance level coincides with the vicinity of the most recent top on April 11th and 12th, just before the Spring correction.

Financials continue to be a leader in the market with Fed fear on hold; many are at or near all-time highs. As mentioned above, Citigroup(C) managed to do just that, even as it traded ex-div today from a 4-3 split. American Express(AXP) also helped boost the INDU to its highest levels since early April with a $3.31 gain. Another INDU component, GM, appreciated by almost 5%, tacking on $3.31. The index's tech standout IBM has been attracting buyers and closed the day at $131.50, up $2.50, its highest levels in almost a year. CSFB lifted its price target for IBM to $150 from $125, believing the company is on track to meet or beat 3rd quarter estimates. Looking ahead, the 11320 area will be a point of contention as the INDU sets its sights on the all-time high of 11425. Its closest technical support is the 10-dma at 11116, with intraday support near 11200. Keep in mind that while new all-time highs are good to see, they can't continue skyward in a straight line forever.

Economic data released this morning was shrugged off as investors seemed unfazed by the report. Personal Income rose 0.3%, in line with expectations, but Personal Spending increased 0.6% versus estimates of 0.5%. This 0.6% increase is the largest since February, yet analysts attribute the move to higher energy costs for households, in particular, gas prices. The big number that investors will be watching is the Employment Report due on Friday, at least those that aren't on vacation.

While the light volume action in the market has been subdued and lacking real excitement, the NASDAQ is beginning to broaden out as investors seek value in neglected issues. The hot-shot tech favorites continue to climb to astronomical levels such as CIEN(+11.75), SEBL(+9.94), and JNPR(+8.06). The NASDAQ traded as high as 4097 before backing off the 4100 resistance level. Closing today at 4070, the NASDAQ is once again back in the black by one point, after beginning the year at 4069. With volume coming in at 1.34 bln shares, intraday volatility has continued to shrink on lower liquidity. The NASDAQ traded in a 50 point range, which seems unheard of for the high flying tech index. But, light volume or not, the NASDAQ is poised to have its first positive August since 1996. Month-to-date, the NASDAQ is up 8%.

Trader Talk on CNBC is that a rally from current levels might be harder than thought for the NASDAQ given the recent gains and the idea that the NASDAQ is not the same market as 1999. Market internals on the NASDAQ were slightly in favor of advancers by a margin of 21-19. Pretty much a dead heat. What has been encouraging for the NASDAQ during the past month is the participation of "the generals," i.e. SUNW(+3.06), ORCL(+2.13), CIEN(+11.75), and INTC(+0.94). This has helped drive the NDX.X higher. Today, the NASDAQ 100 ran into resistance at the 4000 level, which coincides with the COMPX resistance of 4100 at this time. With this in mind, I will be cautious going forward, given that so many techs have been trading at all-time highs, light volume, and current resistance levels. Acting as a catalyst this week for the Fiber Optics, not that they need it as investors are buying them with abandon, will be the National Fiber Optic Conference in Denver. Any good news out of this hot sector could trigger some analyst comments, resulting in a buying euphoria. We will be watching GLW, JDSU, SDLI and others closely. On a closing note, as we often mention, the VIX.X closed today at 18.23. The last time it was this low was July 16th, 1999, Expiration Friday. We will be watching the markets carefully throughout the week for any clues to the post-Labor Day action. With the markets at key inflection points, we all will be waiting for the next sign to move on. Look for the volume to come back and remember, when in doubt, stay out.

Good luck!

Matt Russ
Asst. Editor

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