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Market Wrap

Are We There Yet?

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        10-11-2000        High      Low     Volume Advance/Decline
DJIA    10413.80 -110.60 10566.60 10350.90 1.39 bln    895/1984
NASDAQ   3168.49 - 72.05  3258.24  3103.53 2.34 bln   1237/2793
S&P 100   724.02 - 13.66   734.73   714.48   totals   2132/4777   
S&P 500  1364.59 - 21.35  1381.97  1349.67           30.9%/69.1%
RUS 2000  474.74 -  6.89   481.63   469.19
DJ TRANS 2445.49 - 51.74  2497.48  2425.83
VIX        30.95 +  3.51    32.64    29.06
Put/Call Ratio       .91

Are We There Yet?

The question of whether we have put in a bottom goes unanswered for another day. It has become frustrating for investors as the markets bounce all over the map, giving head fake after head fake. This bottom seems so close that you can taste it. We are all waiting attentively, but in the meantime, trading has been dizzying. Why couldn't we have just blown through 3100 on the NASDAQ and gone for the gusto with massive capitulation? I wish I had the answer. The continued waning of the market is making me wonder if we will get the capitulation that everyone is talking about. Ever since the Summer, everything that market watchers expected, never really materialized. Remember that post-Labor Day rally?

Not all is gloom and doom on the market front. Today is most likely a precursor to a bottom in some way, shape, or form. There were many developments in today's session that went on behind the scenes that indicates that we are, indeed, getting closer. Most notably, the VIX.X traded above the 30 level for the first time since May 24th. Now what's interesting about this is that May 24th was the capitulatory bottom when the NASDAQ hit 3042. The catch about the May 24th bottom is that it was the last day in a period of about a month when the VIX.X was maintaining a level above 30. During that period from mid-April to mid-May, the NASDAQ actually had several mini-bottoms that resulted in minor rebounds and subsequent bull traps. There was an April 17th low that provide a bounce and looked like a bottom, yet the true bottom would come until May 24th. In relation to the current market trend, this means that we are getting very close, but it may take a series of volatile moves up and down to increase the VIX.X and create the selling panic that is evident in capitulation. Given the month of October, the search for a bottom may not take as long as the one found in May. The VIX.X spiked up to close at 30.95, hitting an intraday high of 32.64.

Another development is the ever-increasing OEX Put-Call Ratio. The more bearish people get, the more puts they buy for downside protection. And as more puts are bought for every call, this contrarian indicator begins to tell us that the panic bearishness will result in bullish conditions. This ratio is continuing to increase each day, pointing toward a bottom in the near future. While we all are wishing for a fast and furious, spike down and back type of capitulation, finding a bottom is far more painful and time-consuming than thought. Did it really seem to linger this long back in the Spring? Probably. It's amazing how quick we forget. The process has commenced. Now, we must wait until all the indicators point in the right direction at the right time.

The action on the NASDAQ certainly was volatile today. The index opened lower today, accounting for the YHOO's post-earnings sell-off in after-hours yesterday and the LU warning. Within the first hours, the NASDAQ ran into resistance at 3200, and then found strong support at 3100 shortly thereafter. This support level kicked off a 150 point rebound, a combination of buying and short covering. Volume today was robust, coming in at 2.3 bln shares, the fourth heaviest day on the NASDAQ. But, the true conviction of this rebound certainly is questionable, especially considering the selling into the close and the failure to close above 3200. With the downtrend still very much intact, a retest of 3100 is almost guaranteed. The question is will we see a rebound like we saw after April 19th, coaxing in a few more bulls before the market capitulates? It is a distinct possibility. We will be watching 3100 on the downside, and a break through to challenge 3042 will be welcomed. While this sounds bearish, it is merely a necessity that we get it out of the way in order to move on with the long term uptrend which we are so accustomed to. On the upside, 3200 and 3250 will pose as resistance, as sellers have appeared at those levels to take the NASDAQ lower. Breadth continues to be a concern on the NASDAQ as Decliners outpaced Advancers 27 to 12. However, the upside of this is that once an extreme is met, a turnaround is imminent.

There was plenty of news today for the markets to digest, even though the focus was on the selling itself. Old favorite MSFT got word that the Court of Appeals has set the schedule for the preceding. MSFT's briefs in the case will be due by November 27th. The oral arguments will begin February 26th, after a series of briefs are exchanged between the government and the software giant. Although this timetable is not as extended as MSFT would have liked, it is by no means the fast-track schedule that the government desired. MSFT spokesman Jim Cullinan was pleased, stating that it "is a fair and reasonable schedule." MSFT bucked the trend today and added $1.19 to $55.75.

Earnings continued to flow in today, with a couple notables being AMD and AMCC, both Semi stocks. AMD posted better-than-expected earnings of $0.64 per share, beating the Street by two cents. This was a great report compared to a loss of $0.36 for last year's 3rd quarter. AMD has been under pressure lately as the concerns over the Semi cycle and growth rates in the sector have been debated by analysts. The stock was up in after-hours, trading at $23.44, up $1.63 from the NY close. Not to be outdone, AMCC reported a 156% jump in year-over-year revenue on its way to beating the Street by three cents with earnings of $0.26 per share. The company said that demand for their high-bandwidth silicon products remains "strong and robust" going forward. In addition, AMCC sweetened the report with a 2-1 split announcement that will be ex-div "on or about October 30th." AMCC was up $10 in after-hours at $176.69. The SOX.X was up 4.2% at one point during the day, but sold off to close unchanged after Tuesday's decimation.

Over on the NYSE, the INDU lost 110 points in a volatile session in part due to GE. GE lost $1.44 to close at $56.63 even though the market bellwether delivered in-line earnings of $0.32. The massive conglomerate's profits rose 20% which can be attributed to double-digit growth in most of its businesses. CEO Jack Welch even said that the company is "comfortable" with projected earnings estimates of $1.27 for fiscal year 2000. GE has earned $0.92 per share in the first three quarters. Yet, investors sold GE, evidence of the turbulent markets. Also dragging down the INDU were HWP(-3.88), IBM(-2.88), AA(-2.44), INTC(-2.19), and C(-1.50), sparing few sectors. You can see from the chart below that the INDU has broken down after failing at 10850. Today's trade found support at 10350, about the same time that the NASDAQ bounced at 3100. However, the INDU rolled over late in the day, managing to hold 10400. We will be watching the 10350 support level established today. Below this, 10250 will be the next major support level, which is the lows from May.

Motorola's(MOT) conference call this morning didn't help the sentiment at the NYSE. They lowered their guidance for the 4th quarter, 2000, and 2001 estimates as the management cited problems in their cell phone business. Their cautious outlook for handset sales paints a gloomy picture for the major cell phone players, namely NOK and ERICY. MOT cut its handset margins going forward to 6.5% from 10%, foreseeing lower demand in 2001. Shares of MOT lost a whopping 18%, or $4.81, to close at $21.44.

Looking ahead, volatility will be the name of the game. Traders will be watching as the contrarian indicators continue to move toward extremes, indicating that the bottom is drawing near. A VIX.X remaining above 30 and increasing will tell the markets that fear is approaching the breaking point. This capitulation may take longer than we think or would like, but given the historically exaggerated moves in October, it may be right around the corner. Tomorrow after the bell, we will hear from JNPR and VRTS on the earnings front. On Friday we have the PPI report. Any sort of news that is perceived as negative could be the catalyst that takes us to that breaking point. All eyes will be on 3100 for the NASDAQ, as it was established as intraday support. The wild swings will continue so stay on top of those trades. Today was a perfect example as I went into a meeting this morning with a short position, only to return and see the NASDAQ near 3250. Ouch. Trade only what you can stomach and keep your eyes open for that anticipated capitulation, whether it's tomorrow or next week. I might be asking next week, are we there yet? Or maybe not. Good luck.

Matt Russ

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