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Market Wrap

A Taste of Volatility

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        09-20-2000        High      Low     Volume Advance/Decline
DJIA    10687.90 -101.40 10824.10 10567.30 1.12 bln   1144/1651
NASDAQ   3897.44 + 31.80  3913.87  3795.08 1.80 bln   1653/2360
S&P 100   782.55 -  5.22   788.58   771.45   totals   2797/4011   
S&P 500  1451.34 -  8.56  1460.49  1430.95           41.1%/58.9%
RUS 2000  521.43 -  1.88   523.55   518.21
DJ TRANS 2591.45 - 14.16  2604.57  2556.21
VIX        22.77 +  0.66    24.34    21.98
Put/Call Ratio       .60

A Taste of Volatility

Those 100 point days are back as the markets anticipate the month of October. Can you believe it? And where did that massive bounce come from? Was there some sort of good news that I missed around 1:30pm EDT? While the bounce wasn't attributable to anything in particular, it certainly was impressive to watch. At best, today's trading session offered confusion and mixed signals for investors. An earnings warning from Sprint(FON) sparked more selling, along with macro-concerns over oil prices and the weak Euro. Yet, even with all of this looming over the market, the indices managed recoveries of heroic proportions.

Well, that was one heck of a bounce on the NASDAQ. Shaking off analyst talk about a retest of the Summer lows, sellers were overcome today after what appeared to be a steady, intraday victory for the shorts. After Tuesday's 139 point gain, we were waiting to see if it was a dead-cat bounce or a reversal of fortunes. In fact, this morning Ralph Bloch called yesterday's action just that, a dead-cat. And up until about 1:30pm EDT, it looked like it. But, something happened, something that we haven't seen for a long, long time. Volatility. Remember that stuff? Right when the NASDAQ broke below 3800 and the shorts appeared to have a strangle hold on it, the index made an about- face and launched from 3795. I mean launched! Within 70 minutes, the NASDAQ was over 3900. So what happened? Obviously, a failed rally, possibly fueled by some short covering. The index found support near the 3800 level, which provided a bounce last week. You can see by the chart below that the NASDAQ is at a point of flux. As the bulls and the bears battle it out, one thing for certain is that volatility is back. Just in time for October.

Could this be a reversal? Will the summer lows go untested? The answer will lie in the next two days of trading. We always talk about how we need to see follow through after a day like Tuesday to confirm the move. Today, initially didn't have that. But, the finish appears to be very bullish. Making an assumption from the close today could be deceptive. We will need to see what tomorrow brings. While the NASDAQ came back from -70 to finish up 31.80 points, the advance-decline line remains concerning. Even with today's positive finish, decliners outpaced advancers 24-17. Volume was decent, coming in at 1.76 bln. It closed just above its 10-dma of 3895, while overcoming its 100-dma at 3842 intraday. Driving the NASDAQ today was more upbeat comments surrounding INTC. After yesterday's somewhat shady upgrade from Banc of America only a week after they downgraded it, Credit Suisse First Boston analyst Charlie Galvin reiterated their Strong Buy on INTC. Intel added $2.69 on over double its ADV.

EBAY was another NASDAQ 100 stock that helped drive the market higher. Investors cheered EBAY after the company set a 5 year revenue goal of $3 bln, implying a revenue growth rate of 50% annually. This projection is in part due to EBAY's effort to expand its reach in the U.S. and overseas, as well as its range of product categories. The stock soared $10.88, almost 17%, and very well may give EBAY the momentum with which it used to be so familiar. Another old Internet stock got a boost today. YHOO received a Buy reiteration from DLJ that drove the stock higher by $1.63. Although these stocks helped the NASDAQ, today's trading session has once again introduced volatility, and also caution. The VIX.X was only up fractionally to 22.70, still very low considering three straight days of triple digit ranges for the tech index. This isn't to say that we shouldn't trade, just be cautious. How can we not trade, especially when our best friend volatility is starting to come around again. There were a handful of stocks that made fantastic moves today: PDLI(+15.31), BRCD(+12.69), GSPN(+11.44), and NTAP(+11.25).

Over on the NYSE, FON warned today that their 3rd quarter earnings will come in around $0.45-$0.47, below the Street estimate of $0.49. The company added that this is due to lower subscriber growth in their wireless business PCS. In an already weak telecom sector, this news absolutely crushed the two stocks, with FON falling almost 4% and PCS, the big winner on our put list, plunging $7.56 to $33.25, an 18% loss on the day! This selling spread throughout the sector: T(-3%), WCOM(-4%), SBC(-2.33%), and VZ(-3.79%).

On top of earning warnings is the growing concern over oil, as the October crude futures closed above $37 a barrel for the first time in a decade. As inventories continue to shrink, the rising price has become the culprit of many earnings' squeezes in some of the old economy stocks. These concerns have create a nervousness amongst traders at the NYSE, and they have been selling the INDU stocks as a result. Not to mention, the Euro hitting another low against the dollar. Just another common culprit being heard at the earnings confessional booth. And the debate rages on about whether it's a strong dollar problem or a weak Euro. Regardless, the fact is that companies are beginning to feel the effects of the Fed's interest rate tightening policy of the past year. FON's warning today won't be the last high profile warning this quarter. The squeeze is on.

As a result of all of these concerns, the INDU has broken down dramatically. I have included below a 60-minute chart of the INDU with the same exact extended lines that I drew on last Wednesday's chart. The 11100 support line that the INDU was holding broke the very next day. Since then, it has been down day after down day. Nine of last ten INDU sessions have been negative. You can see that the drop in the INDU has been dramatic as it accelerated away from the downtrend line that I drew last week. Most technically concerning is today's break of the 100-dma that was the index's last technical support. From here, the Summer lows of 10500 might be next as the global concern over oil and currencies grows. Volatility has also crept back in the INDU, with today's range spanning over 250 points! I caught me off guard to see on CNBC that the curbs were in. We joked at the office that we haven't seen those pop up in ages! Yet, like the NASDAQ, the INDU managed quite a midday recovery to pair its losses, recouping 120 points from the low. Once again, the next two days will be very telling for the INDU. Investors are not finding a lot of reasons to buy given the looming fears in the market. Today we did see some bargain hunting, but as Art Kashin, Director of NYSE Floor Operations for Prudential, said on CNBC, the accelerating volume wasn't there on the bounce so it will take a couple of days before a diagnosis can be made. Leading the index lower was: HWP(-4.13), AA(-2.81), KO(-2.63), and MMM(-2.13), another highlight on the put list.

Looking forward, I repeat, the next two days will be essential for determining where we go next, and how much merit we can put into today's broad market bounce. We need to see confirmation in the NASDAQ in order to call it a reversal. The increase in price volatility for both indices is just a precursor of what's to come for October, historically one of the most volatile months. Yet, where there is volatility, there is opportunity for option traders. Exercise caution and stick with stocks that provide relative stability. Many have been bucking the trend, like QCOM, SEBL, PALM, and EMC to name a few. Initial Jobless Claims will be released tomorrow morning and traders may use the data to move the markets one way or another. Given the state of flux right now, we will be watching the market closely for directional clues. With markets changing direction on a dime and wild intraday swings, trading requires a little extra attention...and some antacid, just in time for October.

Matt Russ

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