Option Investor
Market Wrap

Tempting but not convincing!

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       WE 11-24         WE 11-17         WE 11-10         WE 11-03
DOW    10470.23 -159.64 10629.87 + 26.92 10602.95 -215.00  +227.33
Nasdaq  2904.38 -122.81  3027.19 -  1.80  3028.99 -422.59  +173.22
S&P-100  711.16 - 13.93   725.09 +  5.98   719.11 - 32.59  + 25.52
S&P-500 1341.77 - 25.95  1367.72 +  1.74  1365.98 - 60.71  + 47.11
W5000  12353.60 -306.30 12659.90 - 28.90 12688.80 -694.10  +522.30
RUT      471.87 - 10.74   482.61 +  1.71   480.90 - 26.85  + 27.90
TRAN    2849.89 + 32.59  2817.30 +113.08  2704.22 - 57.53  +232.78
VIX       29.58 +  1.73    27.85 -  4.65    32.50 +  6.19  -  3.84
Put/Call    .59              .89              .83              .57

It looked good on paper, the +140 point gain by the Nasdaq on Friday, but I was not convinced. Considering the markets have only been down eleven times in the last 47 years, Friday's performance was not unexpected. The extreme oversold condition going into Thanksgiving only added to the probability. The same statistics also show that the Monday after the holiday has been down 25 times in the last 47 years. You cannot draw any real conclusions from Friday's trading activity since the volume on the Nasdaq was only 792 million and the NYSE just barely broke 400 million shares. The shortened trading day just teased traders that stayed home instead of hitting the malls. It was a positive day with advances beating decliners substantially at better than 2:1 on both major exchanges.

So why am I cautious about the rally? Multiple reasons give me cause for concern. I loved the fact that of the 300 stocks I monitor on a daily basis only 14 were down for the day and only 3 were down more than -$1. Can't complain about that! After looking at the individual charts on all 300 I noticed one thing. Many, and I mean many, had a big spike at the close. What this is telling me is that there were a lot of traders covering their shorts in front of the vote count deadline on Sunday. Anybody short last week did very well but with the possibility of the election reaching a new level of completion and/or complexity over the weekend these same traders decided to run for cover at the close and pocket profits instead of leaving open positions at the mercy of the news.

Still the volume was very weak. This allowed the short covering to artificially inflate the prices showing more strength than we can really find. Another downside to this is the big gains at the close. They will produce instant profit taking if the weekend news is at all negative.

The election news remains at the forefront of the market noise. The short version goes like this. Bush has asked the U.S. Supreme Court to stop the recounts. Gore got slapped with a loss when the Florida Supreme Court said they would not intervene in the Miami-Dade decision to stop counting. Bush went to court to try and force the acceptance of absentee ballots that were rejected for technicalities. The current deadline for vote submissions is still 5:PM ET on Sunday. You can expect the Florida Secretary of State to certify the results as soon as politically possible and at present count Bush would still be the winner. This would set the stage for the next fight which would be the formal "contest" of the vote.

The U.S. Supreme Court agreed to hear the Bush case on allowing the selected recounts on Friday of next week. They took the case based on the possibility that the Florida Supreme Court broke Federal election laws by changing the rules after the election. Federal laws allow much discretion by the states but only if the law is changed before the election. After any election no law can be changed if it impacts the current results. My view of this is Bush can't lose anything else and only stands to gain. If they say the Florida court acted correctly, nothing changes and Bush is still ahead about +970 votes (as of 5:PM Friday). If the court finds the Florida Supremes acted in error and reverses their ruling then Bush still wins and all the pregnant chad counts get aborted.

I get a lot of mail saying "stay out of the election news, just report on stocks and the market." I wish I could but that would be the equivalent of burying our head in the sand. While everyone has different feeling about their candidate and the entire process the point remains that the election has impacted the markets and a resolution of the problem will free the market to focus on the real facts on hand which are earnings and economy. While a Bush win will be more favorable for the broader market a Gore verdict will also put this problem behind us and let us focus on the facts. What will cause more trouble than we would ever want is any type of event that causes this to drag out into a constitutional crisis and prevent the normal dates for completing the election on a national basis from passing. The Electoral College meets on Dec-18th to formalize the election and anything that endangers this date will cause severe instability in the markets. There is a good possibility that traders will have a better idea of the direction the election when the market opens on Monday.

Once the election is resolved or at least appears to be out of reach by either party the markets will go back to the economic facts at hand. This may not be a good thing. 180 companies have already pre-announced earnings for this quarter with the majority of these pre-announcements being warnings. This is not a strong rally point. Another major market mover on Friday was the AT&T announcement that inventory levels were too high for expected sales the rest of this year and they put a halt to deliveries for cable and broadband equipment. They said they do not want to exceed their budget requirements for this quarter. Reading between the lines investors saw slowing sales. ANTC, SFA, HLIT, CTV and CCBL were all down on the news. AT&T accounts for over 40% of ANTC revenue. This is just another example of the slowing economy and the impact on earnings. There was also news today that focused on positive reports about strong retail sales on so called "black Friday." This is good for retailers but bad for Greenspan's inflation fighters. It means the consumers are still charging, literally, and the economy may not be as weak as we thought.

Next week has several key economic reports including Existing Home Sales on Monday, Durable Goods on Tuesday, GDP** on Wednesday and Personal Income/Spending on Thursday. The key report here is the GDP report on Wednesday. The forecast is +2.5% but after the rising trade deficit from last week there is some discussion that it could fall under 2.0% and the Fed would have to react quickly to avoid a recession. The next Fed meeting is Dec-19th and most investors are hoping for a bias change to neutral based on the reports over the next two weeks. This would be very positive for the markets and since the Electoral College meets on the 18th we have the possibility for that to be a strong week.

We have strong prospects for a rally on good election news over the weekend. There is always the possibility that the spike at the close on Friday was not short covering but traders moving into position for expected good news. Notice I said traders not investors. Institutional investors will continue to wait until the winner is named before spending millions on a sector that may get whacked by the wrong victor. As traders we should be exploring the universe of stocks for those we would like to buy when the news is announced, not before. I asked several traders here at OIN for a list of 20 stocks they thought would bounce the most when the recovery began. I will be talking about that list in the "Editor's Plays Section" today. You may be surprised at some of the choices.

I wish I could with good conscience tell you to rush out and buy calls for Christmas on Monday but we do not have a clear trend as of 6:PM on Friday. The weekend news is going to move the markets on Monday, up or down, and we do not know which. As stated above, any resolution in the election is likely to be only temporary and subject to more court decisions. When, and only when, a clear winner is named and a concession by the loser is in place can we rest easy about this problem. With earnings warnings running ahead of normal already we can also expect some more problems in that area as well. I am not advocating that you sit on your hands on the sidelines, I am only saying you should weigh all the facts before buying calls next week. Depending on the recount news we could have a banner week and we want to be able to capitalize on it when it happens. I will not sugar coat it, the technicals are still very bad. Several analysts this weekend went on record as saying it cannot get any worse. I would not agree with that call. It can always get worse. I do feel that most of the bad news is already priced into the market and it would take a really bad turn of events to take the markets down more than another couple hundred points. Still that is just my opinion but I would bet an opinion shared by many traders and investors today. Those people will start buying stocks once the election is resolved. Period! Traders will not buy bonds just because earnings are expected to be down this quarter. I think that is a fallacy perpetrated by the talking heads in the media. Five percent yields cannot hold a candle to the market and short of a recession the market will go up. The only question is when. We have to be vigilant in watching for the bounce, the real bounce on real news. Now go hit those malls and do your part to fuel this economy!

Trade smart, don't buy too soon.

Jim Brown

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