Option Investor
Market Wrap

It is not over until it is over!

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       WE 11-17         WE 11-10         WE 11-03         WE 10-27
DOW    10629.87 + 26.92 10602.95 -215.00 10817.95 +227.33  +364.03
Nasdaq  3027.19 -  1.80  3028.99 -422.59  3451.58 +173.22  -204.78
S&P-100  725.09 +  5.98   719.11 - 32.59   751.70 + 25.52  - 11.98
S&P-500 1367.72 +  1.74  1365.98 - 60.71  1426.69 + 47.11  - 17.35
W5000  12659.90 - 28.90 12688.80 -694.10 13382.90 +522.30  -196.80
RUT      482.61 +  1.71   480.90 - 26.85   507.75 + 27.90  -  7.60
TRAN    2817.30 +113.08  2704.22 - 57.53  2761.75 +232.78  + 59.90
VIX       27.85 -  4.65    32.50 +  6.19    26.31 -  3.84  +  2.73
Put/Call    .89              .83              .57              .59

Another way to put it, "It is not over until the thin lady sings!" In this case it would be the Florida Secretary of State Kathryn Harris who must sing the certification on national TV after receiving permission from the Florida Supreme Court on Monday. Or maybe Tuesday or Wednesday or New Years eve or Valentines Day or when Gore finally gets enough votes to win, whichever comes first. The markets rallied on the news that the election might be over with the counting of the absentee ballots but then sold off quickly when the Gore camp announced yet another round of court battles that would delay the decision. The Nasdaq rallied +100 points on the good news and then dropped -130 points on the Gore news. The Dow soared +140 points only to drop -190 one hour later. The markets are tired of this constant battle and ready for a winner to be named. Ironically, the Dow is down about -450 points from the election but except for the big drop and recovery from Monday the Dow traded even for the week with a +26.92 gain. The Nasdaq closed the week with a -1.80 loss for the week. Looks like a holding pattern to me.

The markets were not kind today to BellSouth after warning yesterday that growth was slowing. BLS lost -$7 today and the race was on by analysts to try and distance the other telecoms from the same type of problem BLS had confessed. AT&T traded down to $20 a low not seen since January of 1991. OUCH! WCOM traded down to $15.50 less than $1 from its lows dating back to April of 1997. Sprint is also trading at 1997 levels as well. If you are looking for beaten up stocks with real value this sector has got to be it but before buying these stocks you need to really check your risk profile. They will probably not go under but it could be a long time before the trend reverses. The only decent telecom is Dow component SBC which lost -2.06 today but is still near a 52 week high.

I spoke Thursday night about the margin call on the PSIX CEO for 11 million shares. It appears he is not the only CEO on the chopping block. Bernie Ebbers, CEO of WCOM, borrowed $61.5 million and got a loan guarantee from WCOM for another $100 million to keep from having to liquidate his stock in WCOM to satisfy margin. The Price Line CEO was forced to sell several million shares in PCLN for $3 that he purchased past year for over $60. Now that is painful. And you thought your trading account was hurting. The moral to this story is take small losses instead of big ones and being a CEO does not protect you from the ravages of the markets. The CEOs mentioned above probably could not have simply sold their stock when it started dropping but most traders reading this newsletter can and should.

Another fun day for Commerce One. After a memo to their sales force was misinterpreted as an indication of weak sales CMRC dropped from near $55 to a low of $43. The company's head of investor relations denied the rumor categorically saying the memo, sent to motivate salespeople, was routine. Shares began to recover after the denial but were still down -$7 near the close. After the close CMRC felt the need to reiterate their earnings guidance for next quarter and the year in order to stop the bleeding. Still the stock was flat after the close. CMRC rival Ariba was also pulled down by the news hitting a low of $72.88 but closing down only -$2. Does this give you some idea how spooky this market really is?

The financial stocks took yet another hit today. The vote of no confidence by the Fed and the continued and increasing fear of a crash landing have investors on the run. Fears of more loan losses yet unannounced like the BAC and FTU revelations this week are also weighing heavily on those stocks. JPM lost -3.88 and was again the leader but FTU, BAC, C and CMB still attended the party.

The colder weather spreading across the country is pushing up the prices of oil and natural gas with the October dip on positive OPEC news now just history. The comments recently that production cuts in the spring would be needed to hold the price up has put reality back into the oil market that we are not going back to $20 oil any time soon. Oil prices was one of the key points in the Fed's continued warning on inflation. With energy prices still moving up it is only a matter of time until those prices filter down into almost everything we buy and use.

The battle of the David and Goliath of the chip sector moves into another chapter on Monday. Intel will start delivering the new Pentium 4 chips with a 1.4 gigahertz and a 1.5 gigahertz model. Kind of makes your 500 mhz desktop look like a 98 pound weakling in comparison. This brings back bragging rights to Intel since the fastest chip AMD is now claiming is the 1.2 ghz model. Don't expect Intel stock to soar instantly although it may add a dollar or two on Monday anyway. The problem is the scale. Intel is likely to only sell 200,000 of the new models compared to over 30 million of the "classic" Pentium 3 models. The new chips will only be available in computers costing well over $2000 and IF you can find one. If you are just dying to be the fastest trader on the block then wait for the price cuts in December and you should be able to find them cheaper and more plentiful. Expect an announcement from AMD soon to try and steal back the bragging rights for fastest chip.

There is a real war going on right now between the bulls and bears. Almost every bullish pundit, led by Abbey Joseph Cohen, is calling for a bottom in this market around 3000, give or take a 100 points, and proclaiming good times ahead. The bears are grinning and shorting with reckless abandon. The bulls are pointing to the next move by the Fed as more than likely a series of rate cuts and an enormous amount of money on the sidelines waiting to be invested. The bulls are literally drooling over the drop in PE for the leading sectors as evidenced by the drop of the Nasdaq Comp PE from 264 to the current 124. While there is a pile of money on the sidelines to be invested in stocks there is also a money crisis building for corporate America with the money supply drying up as the Fed continues to withdraw liquidity out of the market. When the Y2K crisis was looming last year the Fed was literally pouring money into the economy by the hundreds of billions to prevent any crisis from reaching critical mass. Now that the Y2K event is distant memory people forget that the Fed has been pulling that liquidity back out.

There is a real and growing fear that the economy is about to accelerate into a crash landing and the Fed is asleep at the wheel. The market wanted some indication from the Fed last week that they were in control and they would not let that happen. Obviously we did not get it and the institutional money is now scared. The short interest is still at record highs on the S&P and there is no indication it is changing. This holding of the line by the big traders is causing many funds to stand aside as well. The big market gurus like Abbey Cohen are still able to push the market around by going public with a timely "market call" whenever the market is extremely oversold but the "bull call" only held for two days before the negative news pushed the market down again.

Everyone "knows" that the election indecision is causing the current market weakness. What if it is not the only problem? What if we get a resolution in the election this week and the market rallies for a day or two and then rolls over again? Nobody wants to think about it but that is a real possibility and one that we as traders need to consider. There is nobody more bullish than me but note I said "bullish" not "stupid." (No comments from you Austin, thanks) Not wanting to play the down side does not make you a bad trader. Trying to play the upside when the market is going down does. My point here is this. We need to plan for a post election resolution rally (if it is ever resolved) but keep our eyes open just in case it has no legs. There are more and more whispers of the "R" word and if we are headed into a recession then the bull market is likely hamburger. I mentioned on Thursday that the expected earnings for the next two quarters have been cut in half and still falling. Markets run on earnings and you could make a case that earnings are in real danger of dropping into single digits. That is way down from the 29% growth estimates from six weeks ago. Bullish we may be but you can't create much of a rally on single digit earnings and a coming recession. That is the worst case. I would like to think that the worst is over and the end of the election crisis will bring back sanity? to the markets. The days before and after Thanksgiving are normally up days even in a shortened trading week. (hey, we grasp at any straws we can here!) We got out of options expiration Friday alive and now that volatility is behind us for another four weeks.

So here is the concept for next week. With the dueling court cases there is no possibility of forecasting any closure tonight. While I have been writing this on Friday night there has been a new ruling somewhere almost every 20 minutes. With 65 of 67 counties reporting absentee ballots Bush is ahead by only 760 votes. Pundits were claiming he needed over 1,000 to beat the recounts if they are allowed. Regardless of the absentees we are now looking at days of delays as the courts wade through the different cases. It is entirely possible that this could last through Thanksgiving. Sounds like hell week in the markets again. No direction, no decision, short week, low volume, decliners beating advancers, etc. About the only thing in our favor is a very light economic calendar for next week. No news is not good but at least it is not bad news.

I still think 3200 looks like a good benchmark entry point. As the recent high it is now resistance and although you can buy now at -150 points cheaper we could still have another failed rally between here and there. There are many technicians calling for another retest of the 2850 lows from this week on Monday or Tuesday. Maybe, maybe not. After every low there are always traders calling for a retest. We had 6 retests of the last lows and it did us no good. I would however be a buyer on any rebound from under 2900 should we see that again. I was encouraged by the slow climb back up to almost positive at the close on Friday. When you consider all the negative news traders should have been running for cover. Instead they were nibbling at stocks before the weekend. This is bullish but the volume was so anemic that you cannot really reach any significant conclusions from the action. So here we sit. Directionless and decisionless. If the Nasdaq does not turn around next week and head north at a high rate of speed this will be the worst year for the Nasdaq since 1974. Think about that. 1974. Still think this is a bull market? Regardless of what label we put on the current market we need to either play what it gives us OR wait until it gives us what we want to play. For some that may mean looking at both calls and puts this weekend and for others it may mean going Christmas shopping instead of trading before Thanksgiving this year. You may not like this train of thought or me for writing it but everyone needs to reevaluate the circumstances and reconsider their trading strategy from time to time. Take some time this weekend to step back and consider your strategy for the rest of the year. We only have six weeks left in Y2K. Only 28 trading days. Whether you lose or profit in those 28 days will probably depend on the trading plan you put in place over the next two weeks. Are you going to be a gunslinger shooting at everything that moves or an investor that carefully plans each play with an eye on the markets and waits for an entry point?

Trade smart, don't buy too soon.

Jim Brown

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