Option Investor
Market Wrap

Please let this be capitulation!

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        11-30-2000        High      Low     Volume Advance/Decline
DJIA    10414.50 -214.60 10610.50 10292.40 1.51 bln   1002/1885
NASDAQ   2597.93 -109.00  2641.75  2523.04 2.74 bln   1312/2760
S&P 100   697.28 - 15.19   709.05   684.30   totals   2314/4645
S&P 500  1314.95 - 26.98  1334.55  1294.90           33.3%/66.7%
RUS 2000  445.94 -  8.66   454.60   440.76
DJ TRANS 2751.19 - 48.23  2797.33  2749.65 
VIX        32.92 +  2.72    34.88    32.20
Put/Call Ratio      0.75

Please let this be capitulation!

Is it possible we could be thanking Gateway a week from now for finally creating the environment we needed for a long awaited capitulation event? Maybe so, but this morning Gateway shareholders were not excited. After warning that sales over the holiday weekend were much slower than in past years GTW lost over 1/3 of its value and the news rippled through the markets like a title wave. Altera also warned for the second time and the 1-2 punch sent analysts racing to downgrade the entire PC sector, Chip sector, Retail sector and almost any company that could spell PC. The result was a massive drop with the Dow dropping over -320 points and the Nasdaq -180 points at the low of the day. The Dow bottomed at 10300 and the Nasdaq just above 2500 on heavy volume and the bargain hunters finally arrived. The volume was very heavy with both the Dow and Nasdaq posting the 2nd largest volume days ever.

The sentiment at the open was one rarely seen but also one which has a good history of causing changes in market direction. The multiple downgrades of everything PC had traders running for cover before the open. The negative sentiment finally caused strong selling on heavy volume. This is what is needed to create a market bottom. The small traders and traders with limited capital finally had to close positions or face being hit with even larger losses if the drops continued. This final capitulation is what traders wanted to see and it did not hurt a bit to have it occur exactly at -50% off the highs for the year. Normally these big news events which occur after long periods of directional market movement tend to reverse the market trend even if only for a short time. If this was not the capitulation day they were expecting then we have a really bad day somewhere in our future. For it to qualify now it would need to be below 2500 and involve a point drop of something close to -200 points. Neither of those possibilities thrill me tonight. The possibility still exists that someone bigger than Gateway will warn and cause even a worse reaction. The most discouraging thought I can give you tonight is we are just now approaching earnings warning season. The next four weeks are the real problem for warnings. Not a pretty picture but is there anybody left that does not understand the economy is slowing and earnings are down? The news is out and any future warnings will simply be more of the same. Yes they will impact the market and make headlines but it will take a very big warning to create a worse reaction than today.

The biggest losers from the Gateway warning included GTW -10.50, INTC -4.63, IBM -6.31, HWP -2.19, DELL -2.63. Even non-PC makers fell as MSFT lost -8 on the expectation of weaker software sales following weaker PC sales. CSCO lost -4 and broke the low intraday of 45.25 from October but recovered some at the close. With the inventory channels and retailers shelves full the possibility of a price war now looms large. Retailers posted big losses as expectations of margin cutting and slower sales came closer to reality. BBY and RSH both lost close to $4 on the news. The sales forecast stretched across the Internet sector as well with prospects of fewer logons, fewer subscribers, fewer DSL sales, etc. The AOL rally which started yesterday was promptly hit with a -2.75 loss. The PC/Chip sectors were the only warnings right? Not really but the most visible. Ann Taylor warned of slowing sales and dropped -$8.69 to $21 but was over shadowed by the PC bomb.

The market internals today were bad but not as bad as we have seen on major down days in the past. The new lows on the Nasdaq was near 900 compared to only 41 new highs. At the worst of the day the declines were beating advances by 4:1 but at the close the ratios were back to 2:1 in favor of declines. The 2.69 billion shares traded on the Nasdaq and 1.51 billion on the NYSE was the 2nd largest on both exchanges. Today was painful but there are signs that there may be a change in our future. The rebound from 2500/10300, while not back to even for the day, was encouraging. There were signs if bottom fishing in many tech stocks. ARBA, BRCM, BRCD, JNPR, MUSE, VRTS, BEAS, ITWO, VRSN, EMLX and ORCL all finished with big gains. This is remarkable only because these are the stocks that have been taking the brunt of recent selling. They are also the stocks that appeared to have put in a bottom on Wednesday and investor sentiment has shifted to buy from sell even when the market is moving in the other direction. Another strong indicator was the very strong "buy on close" orders on the NYSE for, are you ready?, LU, Q, HWP, GTW and GE. Hundreds of thousands of shares in tech stocks and the biggest Dow stock GE. GE had almost one million shares to buy at the close or almost 5% of the days volume. Would you bet $50 million on GE if you thought the Dow was going down much farther? Goldman Sachs' chief strategist Abby Cohen told clients today that because valuations have become more appealing, her model portfolio is now overweighted at about 35% in tech and telecom for the first time this year. Thank you Abby!

Other positives included the NVLS announcement after the close. The CEO reaffirmed their estimates going forward and said sales looked strong. The BRCM CEO and the VTSS CEO made the same statements today. Hmmmmm. Three chip stocks with no problems. Also there were some interesting developments in defensive stocks. Stocks like MRK, BMY, CAT, WY, IP and MO which are pockets of safety in times of market drops all fell today. When techs are down they are up and most had been moving up steady in contradiction to the Nasdaq drop. Today that trend changed. Nothing is cast in concrete and this can change again tomorrow. The bounce today could have been caused by short covering before the weekend. With the election likely to take a serious turn one way or another before Monday, investors with big short profits figured that covering today at support of 2500/10300 was a wise move. Also, as the last day of the month we could have seen a last minute wave of portfolio window dressing by fund managers. There are as many reasons for the end of day rally are there are analysts. The -50 point fall in the Nasdaq at the close was in my opinion simply fear of darkness. With the recent rash of bad news after every close, even some of the hardiest investors, took their profits from the bounce so they could sleep safer tonight.

The markets are looking for good news from the Fed soon. Fed funds futures are now factoring in a 32% chance of a rate cut in December and a +90% chance of a cut in January and February. Is the Fed head listening? We will get a chance to see if he has anything to say on next Tuesday when Greenspan speaks at 10:45AM on banking and the economy. St. Louis Fed President William Pool made a comment today that sounded like he would favor a rate cut if the market started impacting the economy. Well don't look now but the wealth effect is now the wealth defect will millions of investors significantly worse off than they were this time last year. Many have tax liabilities from selling shares for a profit earlier in the year but after reinvesting the proceeds in every dip since they have no cash left to pay the bill.

Christmas sale - all Nasdaq stocks -50% off!

At the low of the day today, 2523, the Nasdaq was EXACTLY -50% off the March closing high of 5048. While that alone is amazing, it was also a low not seen since August 8th, 1999. This means the entire 100% gain from last fall has been completely wiped out along with hundreds of thousands, if not millions, of new investors. Experienced investors who understand stop losses and money management are now faced with another opportunity to "buy low, sell high." The markets are one of the true battle grounds where anyone, anywhere with as little as $500 can do battle with the giants in the industry. Unfortunately these novice investors do not have the same education, discipline and money management skills as those who have been doing it for a living for decades. Those refusing to spend the time to learn these skills are doomed to go broke. Without learning and practicing these skills on a limited basis before committing all your funds you have about as much chance of success as being picked out of the crowd to go ten rounds with Mike Tyson. New investors are now feeling cheated, frustrated, beaten and broke. CNBC has been running a series all week about trading as gambling. The patterns are clear. Traders that could just buy the next dip or the daily tech rocket last year and recover any profit from that last busted trade, are finding out that that tactic does not work in a bearish market. Traders who lose on 2 call contracts try to double up on the next trade to 5 contracts to WIN it all back, then 10 contracts when that trade goes wrong. Instead of INVESTING with a sensible game plan they are throwing money at every trade they can find trying to make up for losses with volume. It does not work that way as we all know. As an investor you need to have a trading plan that has capital preservation as your number one goal. The number two goal is to make money. Without capital the other goals are impossible. If you have a losing track record you should be investing less and less and be much more picky about each trade.

When your track record turns around then gradually make bigger trades. If you go into a casino with $500 and the thought when I lose it I will quit, you will lose it. Only on rare occasions will anyone win with that concept. I have stood at tables for years and watched players win hundreds of dollars over an hour or two only to give it all back within minutes when they got too cocky from several big wins. Those with some money left when they bore of the game are likely to bet it all on the last roll and go home broke. If they win that roll, suddenly it was not the last roll and the last hour repeats itself until they do lose it. Since the odds in a casino are ALWAYS in the favor of the house successful gamblers have to practice money management. The same is true in the market only we can always wait until the odds are in our favor. Many traders don't wait and that is why money management is so critical. If you have not been successful recently we strongly suggest you reconsider your trading plan. Sit out and watch for several days. Pick several stocks that you want to trade. Understand how they move intraday? What are the normal trading ranges? Where is support/resistance? If you only had money left for one play where would you want to place your buy? When would you get out? (don't cheat) How does the market cycles impact your stock? This is not a dart board game. It is real life, your life, your future! When you sit down in front of your PC you are playing with real money. Many traders lose sight of that fact. Consider this. How much money is your family going to spend on Christmas? How much could you lose on that next bad trade? Which is the better investment?

Do you feel I am picking on you? I am not. I get letters from time to time when people blow up their accounts asking what they did wrong and I got one today. This person ran their account up to almost $500,000 and back down to $500.00 since April. I know of multiple traders with over $1 million each in options expiring worthless soon. Obviously the concept of entry points, stop losses and money management was lost on them. Hopefully your case is far better than those and I can shock you into rethinking your trading plan while you still have capital to trade. These last three months have been great months for option traders. Not call buyers but option traders. Which are you?

Friday may be an exciting day. We could see a continuation of today's bounce and the futures are pointing in that direction. The Chicago Purchasing Managers Report today showed a huge drop from 48.7 in Oct to 41.7 in November. Below 50 is a contraction and 40 would be nearing recession status. Friday we get the National version and should it mirror the one today it would provide more pressure for the Fed to cut rates. The Personal Income/Spending Report confirmed what we all know. Income dropped by -0.2% and spending rose by +0.2%. The pressure is on to trade more and make up the difference! Any morning bounce on Friday could be pressured by the many court cases racing to conclusion in Florida. Gore only needs to win one to change the outcome significantly. Will it impact the markets? Who knows but the point is that many traders will want to enter the weekend flat. This could cause trouble at the close. Hopefully traders will be smelling a rally after a strong day and be throwing money at the market. Either outcome is a possibility. I am long. I bought BRCM, BRCD and JNPR on the dip. I would be really excited to see a long play last for more than 24 hours but I am ready to jump out if things turn ugly again. Are you? Expect the best but prepare for the worst BEFORE it happens.

Good luck and don't buy too soon. Remember it is "buy low, sell high", not "buy at the lowest, sell at the highest."

Jim Brown
Editor

Would you rather be lucky or good?

The Associated Press told the story today of a man in Boston who thought he had sold his 3,000 shares of EMC in the early 90s, when in fact he had unloaded only 2,000 shares. Since the shares were purchased in 1989, they have split 6 times and appreciated approximately 80,000%. The Forgetful One's windfall from his 1,000 rediscovered shares: $4 million. The lesson for stock investors: Don't panic, time changes things a lot.

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