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Market Wrap

Ralph Block, Ralph Acompora, What is it with Ralph?

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        09-14-2000        High      Low     Volume Advance/Decline
DJIA    11087.50 - 94.70 11208.10 11069.30 1.01 bln   1442/1355
NASDAQ   3913.86 + 19.97  3984.33  3897.18 1.70 bln   2222/1725
S&P 100   799.34 -  3.68   806.68   796.74   totals   3664/3080   
S&P 500  1480.87 -  4.04  1491.71  1476.73           54.3%/45.7%
RUS 2000  539.21 +  5.21   540.01   534.00
DJ TRANS 2705.48 - 17.98  2727.73  2693.28
VIX        20.69 -  0.79    22.25    20.29
Put/Call Ratio       .56

Volatility is the result of unexpected bad news from a variety of sources. It is back! Remember the currency problems from the last couple of years? You woke up in the morning to news that some currency you could care less about had devalued and repealed the laws of market physics as we knew them. We are not there yet but the rumblings are clear. Foreign currencies are now going to cause us serious problems again. Add in several noted analysts calling for market highs for 2001 only +100 points from the September highs or calling for a retest of Nasdaq lows and you have a picture of today's trading.

PPI? What PPI? The Dow and Nasdaq gapped open on the favorable PPI news but the euphoria was brief. The PPI headline number slipped -0.2% in August falling well short of analyst's estimates for a +0.2% gain. The core rate was only +0.1% and the markets should have reacted strongly but the good news was overshadowed by earnings warnings. Even positive jobs data showing that employment was slowing could not provide additional lift.

The double whammy of Macdonald's earnings warning yesterday and then the downgrade of Colgate today gave the Dow a serious case of earnings jitters. The MCD and CL problems were pegged to the weakening Euro and the trickle down effect that followed hit all the large multinationals. The weakening Euro causes currency losses when those sales are converted back into dollars. Other companies which fell in anticipation of weak earnings were CLX, PG, JNJ, DD, WY, EL, F, KO and G. Also mentioned was the impact of gas prices on the cash available to the consumer worldwide. In Europe they are just glad to get gas and pump prices reflect the shortage. Macdonald's said currency problems could take as much as -.07 off their results.

After the close today Maytag warned that slowing sales would impact second half results and by doing so joined the swelling ranks of earnings lepers. The trend is accelerating as sectors like consumer products, building materials, chemicals and capital goods companies are faced with failing economic rallies overseas and slowing sales. The old economy stocks are also the stocks of rebuilding economies and when those countries stall the impact is broad.

Tech stocks rallied +91 points on the PPI news and actually weathered the earnings problems most of the day on the hopes that Oracle and Adobe would beat estimates after the close. ORCL did just that with a blowout +.17 actual number which beat estimates of .13 easily. Unfortunately the increase in sales was less than many analysts expected. The year ago quarter was depressed by Y2K concerns and analysts were looking for stronger comparisons. ORCL also announced a 2:1 split. You would have expected ORCL to soar in after hours but as long time readers know, we don't advise holding over earnings reports for this very reason. Earnings are great, sales are great, future revenues are great, per Larry Elison in the conference call, but the street was not happy with the numbers. ORCL dropped over -$2 in after hours trading.

Adobe also beat estimates by a whopping +.09% with a +26% increase in profits. They also announced a 2:1 split. Future growth was also expected to be better than +25% and the stock was up over +$5 in after hours trading. The difference was expectations. Oracle was expected to do better and analysts were disappointed. Another reason for the differences is volume. ORCL traded over 32 million shares today and ADBE only 1.5 million. It takes a huge amount of retail orders to push ORCL on news. Something in the tens of millions of shares. That is a huge number of retail buyers. ADBE however can be pushed around with orders for only several hundred thousand shares. Volume is something every option trader should consider when hoping for large, quick moves. Of course, either stock would crater on bad earnings news so we do not recommend this strategy.

The Nasdaq was doing really well until traders came back from lunch. It was starting to bleed but an interview with Ralph Block from Raymond James on CNBC caused the bleeding to turn into a hemorrhage. Ralph said he could see the Nasdaq test the recent lows soon and investors already unsure ran to the sidelines. Before you assign guru status to Ralph, how much effort do you think it took to predict a retest of the recent lows on the Nasdaq with October only three weeks away? This reminds us of another Ralph, Ralph Acompora, who has been very quiet lately. Jumping in front of almost a sure direction change in the market was good for several sound bites and 30 minutes of fame and Acompora did it well. Block has tried before but has not been as lucky.

I think we dodged a bullet yesterday when Abbey Joseph Cohen called for the 2001 high on the S&P to be only 1650. That is only about +100 points away from our September high. Calling the market fairly valued (again) she is pulling in her bullish horns. She called the market fairly valued several times in the past at much higher levels. This means her valuations are slipping. She repeated much of this on CNBC today. With Cohen turning from bullish to bearish and Ralph Block calling for new Nasdaq lows, which way do you think the market is going? It does not matter if they are right or wrong, it only matters that they are vocal and visible. Investors will move to protect themselves and the market will follow.

The Nasdaq has now formed, according to some, a double top at 4250 and now must retest lows and start over with a new trend. This fear has caused persistent selling in the Nasdaq big caps as institutional investors read the writing on the wall. Intel closed under $60 to hit a four month low. Microsoft fell -2.38 to a four month low at $65.69. This is only $5 away from a 52 week low. Microsoft was hurt as well by a less than exciting release of the WindowsME product. Cisco, which had bounced from a low of $58.50 on Tuesday to $63.31 today, rolled over again and headed back down to possibly retest $60. Dell, another Nasdaq pillar, is at a six month low and only $1 from a 52wk low. WCOM is still holding at $30. JDSU is only a few dollars away from retesting the July low. If you are looking for poor technicals on the Nasdaq you don't have to look far. With the drop in ORCL after hours the Nasdaq is likely to open down on Friday unless we get a CPI bounce.

The bright spot on the Nasdaq was the fiber optic sector. Yes, that was a bottom on Tuesday as I speculated in the commentary. No, I did not play it and I am cussing myself as I write this. CIEN +31 (2 days), GLW +15, SDLI +10. The biotechs continue to inject gains into the Nasdaq as well as some of the hot Internet high flyers. ARBA +10, RBAK +10, BRCD +6.75 and don't look now but EMLX is alive and well (+7.69) and about to break the post hoax high of $108. It appears the damage is over and investors are moving back in again.

Friday could be a record breaking day. It is a triple witching option expiration Friday but that news is old hat and mostly already priced in to the market. We have the CPI report which will be announced before the open but is not expected to be a market mover after the low PPI today. Volume for the last two days has been heavy. The NYSE has traded over 1 billion two days in a row and the Nasdaq posted 1.7 billion today. Friday could be the heaviest day on recent record but not due to anything listed above. There is a major re-weighting of indexes scheduled for Friday. The major indexes re-weight periodically for different reasons but tomorrow is huge. The estimates from some analysts are for something in the range of $30 billion in stock to be traded in addition to the regular volume. Volatility anyone? Many traders will also be moving to the sidelines to avoid the rash of after hours warnings expected on Friday. You know the drill. Warn on Friday and hope investors will forget by Monday. Personally, it is easier for me to forget if I am in cash than stuck in a long position.

Good luck and sell too soon.

Jim Brown

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