Option Investor
Market Wrap

No knight in shining armor today!

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        11-15-2000        High      Low     Volume Advance/Decline
DJIA    10707.60 + 26.50 10799.40 10635.90 1.07 bln   1653/1188
NASDAQ   3165.49 + 27.22  3208.95  3104.57 1.70 bln   1839/2069
S&P 100   733.53 +  3.86   738.13   725.19   totals   3492/3257
S&P 500  1390.04 +  7.09  1395.96  1374.75           51.7%/48.3%
RUS 2000  491.79 +  4.88   493.04   485.61
DJ TRANS 2841.01 + 17.93  2842.53  2808.72
VIX        28.77 -  1.47    30.76    28.23
Put/Call Ratio      0.62

Greenspan passed up the opportunity to swoop down from his FOMC meeting on high and appear like a knight in shining armor and save the markets from the election 2000 morass. But instead of a knight he turned into the Thanksgiving turkey and announced no change in policy and the markets ran for cover. The Fed said that business demand was falling but the easing demand was not sufficient to warrant a change in posture. The Fed still sees the inflation monster under the bed even when almost every earnings release this quarter has complained about slowing demand. Could Alan be taking a parting shot at Bill Clinton and his legacy? Did Bill tell him to keep the pressure on until the election was resolved? There must be a conspiracy here somewhere that will turn this slow news day into a tale of mystery and deception. The truth is out there but we may never know it. Where is Mulder when you need him. Back to reality, the Fed nightmare is not over after all. You just thought you woke up. While the Fed did not raise rates again we are still laboring under the impact of the last six hikes. By carrying the inflation worry forward we are still two meetings away from a rate cut. One meeting to change the bias and then cut at the next meeting. This scenario along with the prospect of a real crash landing without preemptive Fed support knocked -217 points off the Dow intraday sending us back down to 10582 or to almost the -100 level at 3:PM.

Fortunately investors shook off the bad news and the Dow and Nasdaq clawed their way back to positive territory just before the close. Investors have grown so accustomed to bad news over the last several weeks that this was just one more event to choke down and then buy the dip. The election crisis deepened again today with more than a dozen suits in progress and seemingly no end in sight. The real deadline for the decision is still the announcement of the tally for the absentee ballots which will probably occur on Saturday. If the results are lopsided by several thousand votes as expected then the multiple recounts to gain a vote or two are likely to cease. Once we have a winner we should be able to go back to business as usual.

Speaking of business as usual Bank of America said today that they could charge off as much as double the amounts from last quarter for loan losses. Are you listening Alan? The financial sector, which had been sliding since the election, took another dip with JPM the leader posting a -5 loss. BAC lost -3.88. With banks increasing their loss reserves the outlook for the next quarter should start dropping. Bankruptcies are expected to increase and tax payments contributing to the surplus are going to decrease also as a result of the bear market. Does this look like an inflation risk Alan or the beginning of a recession?

Network Appliance suffered the fate of negative earnings guidance with a -20 points drop to $76. After warning that gross margins going forward could decrease and citing the law of large numbers as the reason they could not continue to grow over +100% forever Bear Stearns downgraded them to an attractive from buy. They posted revenue of $261 million for last quarter and expect between $285 and $300 million for this quarter. More important is the worry by investors that the new EMC product code-named Chameleon will impact the NTAP product sales. The market may be big enough for both but it will take some time to prove that concept.

Today's earnings leader was Applied Materials which announced earnings of $.77 beating estimates by a penny with revenue of $664 million compared to $303 million last year. Sales rose to $2.92 billion compared to $1.61 billion last year. All in all a banner quarter for a chip stock in a month that chip stocks have been beaten bloody. The AMAT CFO said that the fourth quarter would also be strong but approximately the same pace. The same pace would be less than current estimates but still a good quarter. After spiking several dollars in after hours AMAT pulled back to near the close as the session ended. With a market cap more than the next 13 chip equipment makers combined AMAT needs a lot of buyers to move it but closing today only +3 off the 52 week low means there is a lot of room above and not much risk below. The 52 week high was $115, about $75 higher than today's close.

The biggest market moving news other than the election was simply the Fed announcement. They cited unusually high unemployment and higher energy prices as possible fuel for inflation going forward. They also said that softer spending by businesses and consumers, as well as declines in the stock market, suggest that the economy could expand without causing inflation. Sounds like doublespeak to me. With economic growth down to +2.7% in the July-Sept quarter from the 5.6% growth rate in the second quarter, it is still below the average rate of 4.4%. Looks like a calming to me but Alan may have other things on his mind. Consumer sales have slowed with a big decline in large items such as cars. The Beige book survey showed that 10 of the central bank's 12 regions reported slowing growth. Industrial production fell -0.1% in October as well, only the second decline in this year. With inventory levels growing and spending slowing Alan will have to be ready with the defibrillator on a moments notice as we go forward. Investors are concerned that waiting another 2-3 months before beginning rate cuts will put the Fed behind the curve and chasing the economy into a serious crash landing. Alan is rapidly approaching reaction mode instead of preemption mode and that is what the market is worried about.

Speaking of the market, the fact that we rebounded significantly after the dip and finished positive bodes well for our chances once the election crisis is over. Traders are ready to buy the dip even in the face of the negative election news. This was a good sign. With hundreds of billions of dollars on the sidelines and only six weeks left in this year, mutual funds are starting to sweat. They need to buy something but they would really like to know who is going to be president before deciding what sectors they should buy. A quandary, with verbal barbs from the political parties thicker than mosquitoes in Minnesota and the race still too close to call, there is no clear direction for them. But there were still buyers. Not many with volume on the Nasdaq only 1.7 bil again. The buyers were probably bottom fishers who are hoping to get in ahead of the crowd. Our task is to decide if we should join them or sit on the sidelines and watch. The easiest way to solve this problem is to pick a benchmark and only trade if the index is above that benchmark. The Dow has had a problem with 10800 dating back to June but most of our readers are not playing Dow stocks anyway. The benchmark I would pick for the Nasdaq is 3200. If we can trade and hold over 3200 I would go long. If the market falls back under 3200 I would close those long positions. We bounced off 3208 today so this is not that far away. The relief rally from the Monday dip is over and where we go from here depends on real buyers and sellers not dip traders. Advance declines on the Nasdaq were almost dead even so there is still no conviction. By using the benchmark system you save yourself the brain damage of deciding when to get in and when to get out. I would also caution you to wait until after amateur hour before making your play. Trust me, the election will eventually go away and when it does you want to have money available to invest. Right? Plan your strategy and wait for the right time to execute your plan!

Good luck and don't buy too soon.

Jim Brown

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