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Market Wrap

Tale of the tape, Nasdaq new highs 12, new lows 615

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        11-22-2000        High      Low     Volume Advance/Decline
DJIA    10399.30 - 95.20 10493.30 10371.60  969 mln    939/1831
NASDAQ   2755.37 -116.11  2872.64  2754.14 1.89 bln   1065/2882
S&P 100   700.72 - 12.98   713.75   700.39   totals   2004/4713
S&P 500  1322.36 - 24.99  1346.66  1321.89           29.8%/70.2%
RUS 2000  457.90 -  8.89   466.79   454.26
DJ TRANS 2799.55 - 52.37  2851.92  2788.42 
VIX        31.21 +  2.28    31.68    29.39
Put/Call Ratio      0.83

The markets did not like the Florida Supreme Court decision to allow the recounts to continue and the reaction this morning was swift. The election has been playing out like a daytime soap opera. Just today for instance, the Supreme Court overruled Florida law to allow selective recounts to continue and be counted. Gore made a speech with a completely new tone and stopped just short of a victory speech. The pendulum swung 100% in his direction. Then Cheney is admitted to the hospital with a heart attack. Bush makes a speech which could have been a concession speech and acted as though the election was over because the law had been broken. Then Miami-Dade decided to stop the recount. The pendulum swung back again. Gore is hysterical and now threatening to sue everybody. "We only want the law to be followed." Funny, they did not want the law to be followed the day before. Now the focus is even more on the absentee votes and the new war begins. Wait, the pendulum swings back again, the dimple votes now count! Suddenly Gore is the assumed winner again and the speeches are sugar coated with righteousness and legal superiority. If a play writer had scripted this event for TV it would have been impossible to anticipate all the twists and turns that occurred in this real life drama. The end result of course was yet another serious market sell off as the indecision not only lingers but intensifies. The selling continued after hours after the dimple decision. A sure sign that the markets wanted Bush and not Gore. If the dimple decision stands then Friday could be rocky again.

The tale of the tape was a nightmare not a bedtime story. With advances being beaten significantly by declines on heavier than expected volume for the day before Thanksgiving the outlook is grim. The incredible imbalance of the Nasdaq new highs (12) to the number of new lows (615) is staggering. There was no rally into the close as you would expect. With the day after turkey day up about 87% of the time the trend would be to buy the close and sell on Friday. Even the hardiest of traders skipped that program this year. The Nasdaq closed at the low of the day and the Dow faired only slightly better with a close less than a point under support at 10400. The Nasdaq has now lost -9% in the last three days.

The selling was intensified after several earnings reports on Tuesday carried over into today's trading. Portal Software, PRSF, announced earnings Tuesday and did not please investors. Four analysts downgraded PRSF today on the basis of lackluster revenue. PRSF lost almost -$12 or -64% of its value to close at $6.69. This revenue shortfall hammered the rest of the software stocks as guilty by association. Intuit also added to the selling after warning that lower sales were in their future. NEON fell even farther after the news from Tuesday that they took stock instead of cash in exchange for software. They lost another -2.75 to close at $6.63 after dropping from over $20 on Tuesday. CFLO followed through with Tuesday's after hours drop with a -$39 drop today. Reactions like this are making investors very skittish. There was a rumor today that even GE was going to warn in December and they dropped over -$2. Come on, GE? If they warn it is lights out on any fourth quarter rally. GE strongly denied the rumor and said they were comfortable with estimates. Don't look now but Yahoo took another hit today with another analyst warning that the future may hold an earnings warning. YHOO dropped another -3.50 to $38.19. The rumors are continuing that YHOO will start charging for services soon to replace falling advertising revenue.

The pregnant chad ruling aborted the recent rally by MSFT which dropped around -$1 in after hours trading. As the outcome is more clearly seen as a possible Gore win the MSFT gains have been changing dramatically on a daily basis. With $3 gains and losses on alternating days depending on the news, MSFT has been seen as a proxy for the election outcome. A Bush win has been seen as a kinder gentler Justice Dept and a Gore win as lights out for the software company as we know it.

I am going to cut this short tonight since tomorrow is a holiday and Friday is a short day. My bullish side is broken and bleeding but still optimistic about the rest of the year. Unfortunately the bears are queuing up for yet another round and all the votes are pointing to them as probably the winner of the next round. The S&P-500 closed at a 52-week low dating back to mid-Oct 1999. The Nasdaq hit another 52 week closing low. The Dow closed right on the 10400 support line I drew last night. The intraday Nasdaq held 2750 on three attempts. My bullish bias is trying vainly to hang onto that fact as the possibility of a bottom. Unfortunately bottoms are not formed with 615 new closing lows. I looked at a several hundred charts today and there were only a few, less than 20, that appeared to have bottomed. Most were biotechs. The rest of the charts looked like a very strong PUT candidate list. This was not encouraging.

While the election is given as the primary reason for the market drop it is really the earnings picture that is causing the problem. This will not go away just because a president is chosen. The Fed has raised rates six times in the last year with the last hike in June. It takes 6-9 months for each hike to filter through the economy. This means several hikes have yet to be fully felt. The same is true with rate cuts and with the next cuts now expected in the first or even second quarter of next year the outlook for earnings is shaky. The financials, normally perceived to be a leading indicator of a broad market rally, are heading south at a high rate of speed based on the earnings picture. The market rallied on the news of the Miami-Dade decision to stop the recount but quickly sold off when it was apparent that the final results could now drag out two or three more weeks with legal battles. Earnings warning season starts again in a week and tax selling season for individuals and institutions will start picking up speed in December if the market does not show a pulse soon. The picture I am painting here is one of multiple factors impacting the market negatively. There is no positive news. The market needs positive news to rally.

The only bullish points continue to be the amount of money piling up on the sidelines. We are getting closer daily to the massive amounts of money that pour into funds from retirement contributions at year end. Add this to the hundreds of billions still idle due to the down market for the last several months and you have a real possibility for a strong rally. The question is when. As long as all the major stock charts end on the bottom right hand corner of the page these fund managers will wait. They do not get paid to try and pick bottoms. They get paid for results and they want someone else to get bloody trying to catch those falling knives. When the trend reverses they will invest, not until then. Our task as traders today is to do exactly the same thing. We need to see a bottom and a rebound before committing our funds. Yes, some of you will end up being chad on some trading floor from jumping in before the bottom and some of you will be lucky enough to actually pick the bottom.

Our task as call only players is to wait for a clear direction before starting new plays. We have had enough bear trap trading rallies in the last three months to train everyone to wait for confirmation of a real rally before committing the majority of your funds. Sure you can speculate before then if you want but do it sparingly. Save your major purchases for the real thing. For those of you who can play puts the good news is our put pick list recently has been doing very well. I am sure you have noticed we have been very overweight in Puts lately and for good reason. The highlights this week include VRSN -$28 since picked, NEWP -20, SLR -11, ARBA -10, HAND -8.50. There is money being made daily if you are playing the right side. From surveys I know most of you don't play puts and that is okay. It just means you need to be more patient in waiting for the bounce. We are very oversold and pressure is building. It may not be Friday but there has to be a pressure relief rally soon. Think about it, did you really want to trade on Friday anyway? Eat some turkey, take a nap, make out your Christmas list. Yes, you can put some SDLI, JNPR, PDLI calls on that list but don't rush out and buy them just yet!

Good luck and don't buy too soon.

Jim Brown

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