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Market Wrap

Election Time, Have you placed your vote for your favorite tech?

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        11-02-2000        High      Low     Volume Advance/Decline
DJIA    10880.50 - 19.00 10946.50 10869.90 1.17 bln   1766/1111
NASDAQ   3429.02 + 95.63  3433.16  3370.02 2.23 bln   2512/1452
S&P 100   753.52 +  5.13   755.60   747.92   totals   4278/2563
S&P 500  1428.32 +  7.10  1433.27  1421.13           62.5%/37.5%
RUS 2000  506.97 + 11.79   506.98   495.18
DJ TRANS 2789.87 + 37.10  2792.12  2747.17
VIX        26.61 +  0.05    27.66    26.34
Put/Call Ratio      0.50

The Dow, fresh from a +1300 point gain from the October lows has now posted two days of minimal losses as traders take profits in front of Friday's Jobs Report and the Tuesday election. Meanwhile the Nasdaq is gaining strength in a broad based recovery from the pounding we have seen in recent weeks. Life is good, the outlook is positive and a peace has settled over the markets. We all know Murphy's Law is alive and well but where is he and when is it going to appear again? Don't you just hate it when I rain on your parade? Well relax. The only storm clouds on our horizon are very few and far between and I will get to them later. When Intel and Compaq both come out with positive forecasts on the same day it can't be all bad. The Nasdaq chart has been looking more like an EKG than a stock chart for the last four weeks but that is now changing. Like I said, life is good!

Nobody sold the rally today, at least not seriously. There was a brief bout of profit taking around noon but buyers rushed in to buy the dip. Most of this was related to the Oracle rumor and once denied the market recovered quickly. If you did not hear it there was a rumor that Larry Ellison, the second richest man in America and the CEO of Oracle, was going to leave Oracle. That rumor knocked over -$5 off ORCL stock and rocked the markets. Oracle denied the rumor and things recovered quickly. My thought on this was "so what." Even if it was true how far can you get away from a company when you have $300 billion in its stock? Do you think in your wildest dreams that Larry will let someone else take action that could cost him $50 billion or more in one days trading? Not hardly. He could be boating in Japan and you could bet he would be plugged into the Oracle info line even if there was no CEO after his name. 149 million shares traded today.

More important to me was the Intel and Compaq announcements. What better way to cure the tech flu than get injections of antibiotics from tech leaders. Intel said 2001 sales estimates were rising and that the fourth quarter was on track even though the third quarter was less than exciting. Intel gapped open almost $3 but fell back to close +1.81. Compaq said its personal computers sales in Europe to continue at the same pace as the prior quarter despite the falling Euro. The CEO said sales revenue was up +21% in Euro dollars and he was expecting the trend to continue. The positive comments by both firms calmed tech buyers and provided a positive boost to the Nasdaq.

Negative news came from PSIX that surprised investors with a larger than expected loss and a forecast that the fourth quarter would be lower. The President and COO both quit and the stock was hammered with a -56% drop to $2.94. PriceLine also surprised investors with earnings that matched their already lowered forecast but they lowered their estimates going forward. Heidi Miller, the high profile CFO which moved to PCLN from Citigroup in February of this year, quit. The stock had dropped from $57 to $5 since the much publicized move. PCLN also said they expected October, a month which is normally their largest, to drop -20% in sales. Not a good sign. Delta, which had been making noises about selling their stake in PCLN, had their warrants repriced from $57 to the current market price of $5. The possible windfall for Delta only works if PCLN pulls out of the current slump and they could not do it if Delta dropped out of their network. You can't sell cheap tickets if Delta, their largest customer, leaves the network. Delta has been rumored to be joining a new discount network.

In a confusing day for the retail sector JCP and GPS warned of weaker earnings while TLB and LTD said sales were better than expected. Yet they all finished positive as well as recent dogs like WMT and Sears. The losses it appears was from mark downs on goods that did not move last quarter when sales were worse. Going forward the outlook appears to be positive across the down trodden sector.

Oil prices continued to fall on multiple global developments including the possibility of yet another peace initiative in the Middle East. The Transports have rallied on this all week and the possibility of peace, and I use the term loosely, is taking yet another cloud off our future outlook.

Those of you who attended the Denver seminar were introduced to the Jeff Bailey leading indicator system and if you are paying attention you probably got some good trades. YHOO $68, need I say more. For everyone else Jeff Bailey is a staff analyst that produces institutional research to determine which sectors the institutions are buying before the news gets to the retail investor. Jeff showed the attendees this weekend that the institutions were buying transports and Internets when both sectors appeared to be in the tank. On Monday morning he recommended the NOV-260 DTX call at $2.69 based on institutional buying of transports. The option closed today at $19.38. The Internet sector was showing buying by institutions but when we looked at the charts there was no corresponding patterns. The option we were going to buy on Monday at the seminar based on his research was the JAN-60 call on YHOO @ $8.00. Yahoo opened down -$2 with the rest of the Nasdaq on Monday and we did not take the trade. The option traded as low as $6.63 on Monday and closed at $15.38 today. Ok Jeff, we are convinced! Beginning Monday Jeff's commentary will be appearing on OIN. Check the Sunday newsletter for his schedule as well as a ton of new features starting next week.

The economic reports today were mixed with the Productivity report showing gains of only +3.8% down from +6.1% in the prior qtr. This data is not bad but productivity gains were the cornerstone of the Fed's view that the tight job market was still under control. If productivity slows then job costs will rise and inflation will grow. On Friday we will see the real numbers with the Jobs Report and a negative report could bring back Murphy. While I think almost nothing could stop the Fall rally with the amount of cash on the sidelines, it is still a significant event. With an estimated increase in jobs of only +180,000 and a small gain in unemployment to 4.0% we would see confirmation of the slow growth pattern and the Fed would go back to sleep. Much stronger, and it would have to be really strong, and the fear of inflation could come beck to life. With evidence of a slowing economy, even close to a crash, I don't think this will surprise to the upside by enough to do any damage to our rally. Still we will watch anxiously on Friday.

Heard the latest election hoax? There is an Internet hoax making the rounds. The basic concept goes like this. With the presidential race so close the turnout is expected to be much stronger than normal. Polling places are bracing for overflow crowds. To solve this problem, so the hoax goes, the election has been changed to a two day event. Republicans will vote on Tuesday and Democrats on Wednesday. Obviously whoever started this rumor was not a Democrat. Now the bad news, many people actually believed it and were planning accordingly.

We have plenty of chances for Murphy to appear in the next week. Just because everything looks strongly positive for our tech picnic we need to remember to watch for sudden thunderstorms. In order of appearance we have the Jobs Report on Friday, CSCO earnings on Monday, the election on Tuesday and the PPI Report along with Dell earnings on Thursday. Never a dull moment. The worry about CSCO earnings is the projected growth. With more competition the prospects of CSCO maintaining its past growth rates are slim. One analyst said the concept of CSCO increasing sales annually at the currently projected +32% rate is absurd. If CSCO was going to INCREASE sales this year by the current $6 billion estimate they would have to ADD more than TWICE the total sales of EPNY, LBRT, INKT, BRCM, RBAK, JNPR, BRCD, SCMR, CMTN combined. ($2.5bil) Next year they would have to increase by FOUR times their combined sales to maintain the +32% estimates. Don't start firing off those "I love CSCO emails" because it does not make any difference what we think. I am only mentioning this because of the potential for a market moving event on Monday when CSCO announces.

The election on Tuesday is yet another possible market mover. Not especially up or down but sideways. With each candidate there are specific positive and negative results. Institutional traders will probably want to see who wins to decide what to do next. Bush is seen as more favorable to business and after a Gore election more gridlock and government programs which is market favorable also from no major changes. Either way the landscape will be different but the same. Following the election is the PPI which is our next inflation gauge. The same day we get Dell earnings. CSCO is at the same point in time Dell was two years ago. Dell has had the drop off as expectations came back to reality and now Dell is on the move again. I expect the announcement to be a non-event since they already warned they were going to miss the +30% growth targets back in October. However, we all know what the conference calls can do to a stock AND the market when a bigcap has problems. They have already lowered estimates for the fourth quarter and another lowering could be in the cards.

My forecast going forward is bullish but we do have this wall of worry to climb. This is natural and good. It keeps the market on its toes and constantly shuffling shares. The Dow is showing signs of profit taking but it has not cratered from the +1300 point bounce and that is a huge positive. Once the election is over I would expect it to move upward again regardless of the winner. The key point is the money on the sidelines. The major risk all fund managers are now facing is not crashing tech stocks or who wins the election but not being in the market if we get another monster rally like we got last fall. They have to be invested and time is running out. Are you having fun yet? I am!

Good luck and sell too soon.

Jim Brown
Editor

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