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Middle East Explosions Felt On Wall Street

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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

Middle East Explosions Felt On Wall Street

Events around the world took center stage as the markets went from bad to worse. The Dow Industrials had literally no chance today as pre-market news put a damp cloud over trading. Home Depot bombed the Street with a major earnings warning. Israeli helicopter gun ships blasted targets near Yasser Arafat's offices in two Palestinian-ruled cities after an angry mob killed two captive Israeli soldiers. Then word came of the terrorist act against a U.S. Battleship docked in Yemen. This was too much for the equity markets to overcome and the selling was sharp and lasting, culminating in a close near the day low for all major indices. As if October wasn't scary enough with Halloween and a horrifying stock market, tomorrow is Friday the 13th and may live up to its billing.

The Dow Industrials opened fractionally higher only to drop over 300 points in the first hour. After the mediocre attempt to recoup some of the losses, the selling continued and the final result was a 379.21 loss to 10,034.58. This was only eleven points off the day low. Decliners beat advancers 3-1 on volume of 1.37 billion shares. Home Depot easily accounted for over 100 points of the loss due to the earnings warning, but the real story was the lack of bids to support the index. The chart looks horrific and sentiment is just as bad. One point to note is the support the DJIA should find at 9800, the level at which the index bounced in March of this year. And in case you are wondering, today was the fifth biggest decline in DJIA history.

The Nasdaq held up surprisingly well. It spent most of the day resisting the selling pressure and holding above 3100. It was in vain though as the Nasdaq eventually gave up and traded down to close near the day low at 3074.68, down 93.81. Volume was heavy at 2.10 billion shares. This is the second day of volume over 2 billion shares for the first time since last spring. You have to applaud the efforts of the Nasdaq relative to the negative news surrounding the overall markets. So if you left the market in May and took the summer off, then you have officially missed nothing as the Nasdaq has returned to those levels.

There is so much news to digest that one would hardly know where to begin when assessing the market. As option traders, the first stop at this point should be a check of the VIX. As Matt Russ mentioned last night, it is now at the highest point since May. At 34.36 we all know it is screaming for relief, but in April it didn't find relief until it moved over 40. With that said, there is strong historical evidence that the markets are due for a bounce at anytime.

Let's clear up some of the news items for the day so that we can roll up our sleeves and really dissect this market. Home Depot was the earnings warning of the day, before market open. HD said it would miss its earnings targets in the third quarter and 2000 because of a drop in what it charged for lumber and building materials. The Atlanta-based company said Thursday that its per-share earnings for the quarter ending Oct 31st will be about $0.28 cents per share. Wall Street analysts surveyed by First Call had predicted earnings of $0.31 cents. HD closed at $34.88, down $14.06, accounting for the biggest portion of the DJIA decline by one stock.

Oil continued its rally with the developments in the Middle East. November crude gained $2.81 to $36.06 after peaking at $37.00 following news that a U.S. Navy ship was struck and that Israel had launched helicopter attacks on Palestinian leader Yasser Arafat's headquarters. This is not going to help the inflation situation or the supply constraints. "The market has already weathered [an oil] price shock, but a supply shock is another matter. It could result in an economic downturn and government intervention to manage shortages," said William Rhodes, chief investment strategist at Williams Capital Group.

Many companies reported earnings today, most after the close. Fortunately, there were no major bombshells here. Gateway meet expectations and said the fourth quarter also looked good. Juniper almost doubled estimates by reporting $0.17 cents versus expectations of $0.09 as they continued to chip away at Cisco's market share. JNPR was extremely active after hours. Silicon Storage beat the street and is trading higher to $24. Doubleclick's revenues were a little light, but the company did meet estimates at $0.03. General Motors released in the morning and did little to encourage buyers. They reported $1.55 versus the estimate of $1.54, but the future is cloudy. PMC-Sierra is another company that reported after the close and is trading up $6 after-hours.

So did anyone else forget that the PPI and Retail Sales are due out tomorrow morning? What was the biggest news for the week on Monday has now taken a back seat. Now the question is, do they even matter? With such conflict around the world, the Federal Reserve may be forced to ease, not raise. This is similar to the 1998 October where a failing stock market and world crisis forced a series of three rate cuts in a short period of time. While I feel that is unlikely under current circumstances, raising rates is absolutely out of the question, regardless of the numbers tomorrow. As for those numbers, the PPI is expected to rise by 0.5%, with a core gain of 0.1%. Retail Sales are expected to be up by 0.6%, with the ex-auto number of 0.5%. Anything lower than those numbers will be beneficial for the Street.

With solid earnings by Gateway and Juniper after the close, we could see a move higher on the open. The trend I am watching shows resistance at 3200. We may have one last opportunity to play puts back down from this resistance. A move over that could be the beginning of the relief rally. I think many analysts would agree that we are in the process of putting in a bottom in this market. Just remember that downdrafts this swift usually take a few days to put in a solid floor. With the VIX over 35, the process has begun. At such a high level, a rebound is likely. The markets do typically begin to bottom mid-October.

The biggest factor though will be what happens in the Middle East over night. If we awake to more retaliations and bombings then no one in their right minds will want to hold over the weekend. How would you like to come to work on Monday with oil at $50 a barrel or Middle East war? There is just too much risk involved. That may put the markets back underwater again and nearing the crucial 3000 level on the Nasdaq and 9800 level on the DJIA. If anything, October strikes are for aggressive traders only right now. Jim is back in the office today and already preparing weekend commentary. The best bet may be to let the markets work through the breaking news and re-evaluate the situation on the weekend.

One final note, remember this is classic October woes and beginning to dip into LEAPs on some of these oversold stocks is historically a wise decision.

Ryan Nelson
Editor

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