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Market Wrap

Nasdaq closes at new 52 week low.

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        11-28-2000          High      Low    Volume Advance/Decline
DJIA    10507.60 - 38.50 10613.90 10489.60 1.03 bln   1148/1687
NASDAQ   2734.98 -145.51  2891.40  2734.46 1.92 bln   1080/2932
S&P 100   708.47 +  3.62   720.28   708.10   totals   2228/4619
S&P 500  1336.09 +  7.20  1358.81  1335.13           32.5%/67.5%
RUS 2000  459.02 - 12.68   471.70   458.63
DJ TRANS 2796.41 - 28.35  2825.06  2781.18 
VIX        30.51 +  1.49    30.68    29.07
Put/Call Ratio      0.68

Nasdaq closes at new 52 week low.

Sorry, if you were in the market you were already painfully aware of that fact. The carnage was widespread but the chip stocks, B2B and networkers bore the brunt of the selling. Actually it appears anything with a double digit PE was targeted again except maybe biotechs. The pessimism is so thick traders simply do not want to take a position. Every rally is met with another wave of selling and with those investors buying the dips getting killed on a daily basis there is no incentive for others to step in. The Semiconductor Index also set a new 52-week low after Dan Niles made negative comments about several chip companies.

It was simply a bad day in the market and the reason is not the election but earnings worries. With 23% of the S&P already warning the outlook is not good. The normally positive fourth quarter outlook is being dampened by a Fed which will not ease up on the interest rates and the lingering effects of the last six hikes. The retail sector that was up on Monday dropped today as worries of lower margins caused widespread selling. Analysts cited sales of as much as -50% off in many stores in a period where they normally post as much as 50% of their annual sales. If they have to discount that much on the first week of the season then what will they have to do as the longer than normal selling season drags on?

One of the major events which was missed or ignored by the talking heads on CNBC was an interview with Waldo Best of MSDW. While he was talking about steel stocks and the topic probably put Bill Griffeth to sleep, he said that Morgan Stanley was now factoring in a 40% chance of a recession within the next twelve months. Am I the only one that is concerned by that comment? Mr. Greenspan are you listening? Morgan Stanley Dean Witter is not a fly by night brokerage company. They are well respected and this public pronouncement of the R word could cause even more market instability going forward.

Dan Niles was personally responsible for a huge chunk of the Nasdaq and SOX drop today. He said PMCS might warn about inventory problems as soon as today. Since ALTR is the only company in the chip sector that has warned he feels there is a lot of undiscovered problems and the major companies could drop -50% to -75% on any earnings miss. He warned that by selling now investors would eliminate that risk. PMCS dropped -6, INTC -2, MU -3.63, NVLS -4.75. Broadcom also lost ground, -12.50, but had the added negativity of another acquisition. They acquired VisonTech Ltd, a leading supplier of MPEG-2 technology for $776 million in stock. This was their 12th acquisition this year and the 19th since 1999. BRCM at $85, can you believe it? Down -140 in the last three weeks! I listened to Henry Nicholas the BRCM CEO today and he was very upbeat about the company. He said they had already issued a press release saying they were comfortable with analyst estimates and the acquisition today would be accretive to earnings in the third quarter. He convinced me but he has a large investor conference on Wednesday and he will have to convince them as well for the slide to stop. With a PE of 227 it is still not cheap but I would be a player when it finally rebounds. After the market close today CHPC, a provider of test and packaging services for the semiconductor makers, warned that higher inventory and slowing demand would seriously impact earnings for the next quarter. CMOS announced earnings that beat analysts estimates by a penny but warned that in the current environment there was concern that orders for chip testing equipment would be pushed out and they said revenue could be down substantially down for next quarter. Looks like some confirmation of the Niles call already.

Another sector that received several warnings today was the PC sector. Several analysts said that all the PC makers had excessive inventory going into the selling season and that inventory levels were even higher than the end of the third quarter. Analysts felt that they would have to take hits in the fourth quarter for this unsold inventory. With PC demand slowing they felt Compaq was the most at risk with a reseller channel stuffed with equipment. Compaq immediately issued a press release saying they were comfortable with channel inventory levels. This is probably the only thing that kept the sector from really selling off. CPQ lost -1.71 (-7%), DELL -2, GTW -1, HWP -1. Those numbers may not seem very large but this sector has already suffered greatly. Dell is only $22 now and CPQ $23.

Brocade, another stock I watch closely, got hammered with the rest of the networkers today but the main cause for the drop (-28) was their earnings which are expected on Wednesday. Investors are just not taking any chances. With stocks losing 50% of their value on an earnings miss it brings a whole new meaning to "never hold over earnings."

The B2B sector also took a big drop but most of the news was positive. There were several upgrades and coverage initiations but the sector dropped mostly on the association with the Internet lepers. Yahoo dropped to a new 2-year low of $37 and the incubators CMGI and ICGE moved even closer to penny stock status. This should not impact B2B companies but this is what the analysts were blaming it on. ARBA -5, ITWO -11, FMKT -4, CMRC -4, VRSN -5.

The Dow was not immune to problems today. JPM as an extension to CMB through the buyout dropped -4.13. Salomon Smith Barney cut earnings estimates on CMB from $.90 to $.70 based on drops in the investment portfolio. Citing the drops in the market and the corresponding stocks in their portfolio they felt a mark to market election would cause them to miss estimates substantially. This was the first in a wave and others are sure to follow.

The economic reports today showed the economy still slowing with the Durable Goods Orders dropping -5.5%. This was the first drop in the last three months. Wednesday we get the revised GDP numbers and something in the +2% range is expected. Much higher and the Fed will hold the line and much less the recession bears will be out in force. 2% should move the Fed into a neutral bias when they meet on Dec-19th. Remember, the other key date is Dec-18th when the Electoral College names the new president. All the hoopla will be over and traders will not be able to use the election results as a whipping post for market woes. If we get a positive result from the Fed as well then maybe this market will turn around. Since we all know the markets move before the events we could expect some firming in the next week or so. FYI, Bear Stearns is estimating that the GDP will be revised down to only +1.7%. This would be the softest quarter since 2Q-1995. Should this come to pass the Fed would almost have to react with a minimum neutral bias on Dec-19th.

The election mess is still weighing on the markets. There was a rumor this afternoon that the Gore press conference would be a concession speech. The Dow moved off its lows about +85 points and the Nasdaq +50 points. Once he started speaking and they saw he was not conceding the market dropped off immediately. I get hate mail for saying the market wants a Bush win but I did not make this up. It is just a fact and the Gore fans will have to live with it. Actually after watching all the different cases in play in Florida I think there is still a real possibility that Gore will be the next president and the market will have to deal with that eventually. In six different cases there are about 2800 votes that could go to Gore depending on the interpretation of the different judges. About +261 votes have a very good chance of being added to Gore in two cases. Any other win in any other case would put him over the top. When/If that happens the markets will probably be unsure of direction. Some sectors will sell off immediately, drugs would be one. On the other hand the market would be thankful to just get the problem behind us and we could rally on the news as well. It is a very interesting time in the market.

Remember last week when I suggested waiting until the Nasdaq broke over 3200 as an entry point for calls? Well that was -500 points ago and another +250 point failed rally. If you followed my advice you saved a lot of money by staying out of the market. Our put players are doing very well but we know that everyone is not comfortable with that strategy. Where is the market going tomorrow? Nobody knows for sure but we are clearly in the over sold column once again. The Nasdaq is now -1100 points under the 200DMA. While some may feel that is severely undersold it may be just PE decompression. Back in March there were hundreds of stocks with huge triple digit PE ratios. Not so any more. We are rapidly approaching more normalized PEs but some stocks, BRCD would be one, are still valued at huge ratios. BRCD with a PE of 515 ranks high on the "overvalued" list but chip stocks with real earnings and PE ratios in the teens are also out of favor. So where is the beef? If AMAT at 18 is not a buy then what does the market want? In short, it wants to know what the future holds. It wants to know who the president will be and when the Fed will release its vice grip on the economy. It wants to know that there will be a soft landing not a crash. The market is the most efficient discounting mechanism of future events known to man. Unfortunately in the current environment the discounters are drawing a blank. The old adage of "when in doubt, sit out" is becoming the golden rule.

New problems are appearing. Margin calls are accelerating but many investors are just covering with cash. This means there is still no real fear of a prolonged down trend. With every support level that is broken by each tech stock there are new waves of selling. Traders that pegged their hopes on every conceivable last ditch support level are now faced with those levels breaking on almost a daily basis. The "it can't go any lower than that" crowd is beginning to see the light. Traders are also saying that instead of there being a "buyers boycott" there are more and more sellers. There has not been a real capitulation event yet with high volume and big drop. Today for instance only posted 1.9 bil shares on the Nasdaq. That capitulation event may still be in our future. 2650 is the next support level if we cannot hold the line here. That support dates back to Aug-Sept of 1999. That would be a -50% haircut from the March highs. Can it get there? Sure! Will it get there? Nobody knows. As an aggressive investor I would back up the truck at any rebound around 2650. As a conservative investor I would recommend waiting until the Nasdaq closed over 3000 again. Yes, that is several hundred points away but it would be a real confirmation of a trend reversal. If you are tired of being ground into hamburger then wait for the trend to change in our favor.

We continue to get email that goes like this: "I have been successful in playing calls for the last two years but the last two months I have given it all back. What am I doing wrong?" Answer: You are trying to play calls in a down market the same way you did in an up market. For the last two years with very little effort you could have made a fortune buying calls on big cap tech stocks. Since Sept-1st we have been in a down market with many stocks losing -50% to -75% of their value. Dip buyers have been getting killed. It takes more than 5-min a day to decide what stock you are going to buy the next day. If you are an investor that only buys calls then you need to wait for the market to turn in your favor. Look at a chart of the Nasdaq. You would not buy a stock that had the same chart patterns. Learn to be patient. It is cheaper and more rewarding.

You have seen me write about John Dessauer, a newsletter editor with a 20-year history. John spoke at our March Expo here in Denver to about 600 attendees. John uses a common sense bottom up method of stock picking and has been very successful. He has asked me to speak at his "Dream Seminar at Sea" in March. The itinerary looks more like a vacation than a seminar with stops in Aruba, Caracas, Grenada, Dominica, St Thomas and San Juan but John will manage to keep us busy. If you have interest in this event visit this link: http://www.cruzproductions.com/dessauer/

On a sad note tonight we morn the passing of Peter Sandek and his family. Peter was the leader of the Atlanta Option Investor Club. Peter flew his plane to the March Expo in Denver and just got his instrument rating this month. His plane crashed on the way home from visiting relatives over Thanksgiving. Our prayers are with them. http://www.accessatlanta.com

Good luck and don't buy too soon.

Jim Brown

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