Option Investor
Market Wrap

I hate it when that happens!

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       WE 12-01         WE 11-24         WE 11-17         WE 11-10
DOW    10373.54 - 96.69 10470.23 -159.64 10629.87 + 26.92  -215.00
Nasdaq  2645.29 -259.09  2904.38 -122.81  3027.19 -  1.80  -422.59
S&P-100  695.99 - 15.17   711.16 - 13.93   725.09 +  5.98  - 32.59
S&P-500 1315.23 - 26.54  1341.77 - 25.95  1367.72 +  1.74  - 60.71
W5000  12037.40 -316.20 12353.60 -306.30 12659.90 - 28.90  -694.10
RUT      456.84 - 15.03   471.87 - 10.74   482.61 +  1.71  - 26.85
TRAN    2763.15 - 86.74  2849.89 + 32.59  2817.30 +113.08  - 57.53
VIX       31.59 +  2.01    29.58 +  1.73    27.85 -  4.65  +  6.19
Put/Call    .61              .59              .89              .83

A promising rally dies a slow death as every talking head over analyzes each falling point. Still the day went just about the way we had choreographed it. The bounce continued at the open and the Nasdaq ran up about +130 points before falling back before the Supreme Court event. Once it was apparent there was no clear victor in court the rally continued once again but the fear of weekend court announcements created a serious desire to go into the weekend flat. It was a struggle and the Dow traded on both sides of positive late in the day before finally succumbing to selling pressure at the close. Bargain hunters that missed out on some of the big gainers from the morning took the opportunity to nibble at the close when most of those stocks came very close to where they opened the day. The end of day bounce was weak but provided a glimmer of hope for those wanting a Monday rebound. The Nasdaq closed positive for the first time this week and that makes two Fridays in a row buyers found oversold conditions too tempting and they broke the down trend.

The day started with the NAPM report which at 47.7 was a decrease of -0.6 from October and the third month in a row under 50 which indicates a contraction in the economy. Only once since Greenspan has been in power (1993) has the Fed failed to reduce rates after the third month. However it does not always take place at the very next meeting but the next change is a cut. The sentiment is building for the meeting on the 19th to at least change the bias to neutral and then follow with a rate cut in January when the political climate has cooled somewhat. Hopefully Greenspan will give us some indication of his thought process, that is of course assuming we could understand it, when he speaks next week on Tuesday. The speech will be televised and watched with rapt attention by most traders.

The rumor mill was very active on Friday. The one that got the most attention was that Tim Koogle was leaving Yahoo. When questioned Yahoo made a statement that went something like, "if he was we would be required to issue a press release and we have not issued one." Say what? Eventually they just came out and denied the rumor but not until YHOO had lost almost -$5 off the intraday high and the rally had been blunted. Good going guys, you just cost your share holders several million more dollars trying to be cute. The next rumor involved a coming earnings warning from Dow component SBC. After dropping almost -$4 intraday on the rumor SBC finally came out and reaffirmed their estimates, although about two cents shy of what the street consensus had been, and the stock firmed some. The most sinister rumor came after a downgrade of Intel by CSFB. The rumor was that Intel was going to warn in the next two weeks and they were waiting for a market bounce before doing the deed. Traders ran for cover and INTC dropped -4 to close at $34.12 which was a new 52-week low. After considering the possibilities I bought some DEC-30 puts for $.94 at the close as a lottery play. We also featured that in the lottery play section of the newsletter this weekend.

There were a couple of strange earnings warnings on Friday. Ford warned that they would miss estimates by a dime and said they were cutting production by 145,000 units yet the stock gained +1.44 on the news. The analysts said the automotive stocks were so beat up that finally knowing the real numbers was almost a relief and the stock was bought as a value play. Daimler Chrysler also said they would cut production by -146,000 units and GM is expected to cut production next week also. Just another sign of the falling economy some analysts saying they could build as many as 2,000,000 more light trucks than needed over the next three years. That is a lot of heavy metal. The other warning was from Transocean (RIG) as they said costs had exceeded estimates. However there was a major upgrade of the oil drillers and service companies today even in the face of Iraq threatening to cut off its oil. The combination of events lifted RIG +$5 from the days low closing it positive. Oil prices dropped -1.80 to close at $32.02 today. The U.S. said it was considering tapping the strategic reserves if needed to cover any Iraq shortfall.

One warning that did not end positive was Raytheon, the number three defense contractor. They said earnings could run -.15 less than expected in 2001 and the stock dropped -$8 at the open but closed only -$5. Lockheed Martin and General Dynamics both lost over -$2 on the news.

Compaq went head to head with the analysts downgrading their stock. Saying their Thanksgiving sales were robust and their main product, servers, was not even a consumer product. They felt the stock was cheap. To emphasize this fact they announced a one billion share buyback. CPQ was up +2.50 intraday but pulled back to close only +1.30.

Xerox better get started making copies of their stock soon because they are going to need it to pay creditors. Moodys downgraded their debt to junk bond status and the stock closed at a new 52-week low of $6.19. Somebody please buy them and put them out of their misery.

The Supreme Court heard the opposing lawyers debate the merits or demerits of the action taken by the Florida Supreme Court and it was clear from the start that they did not want the case and there would not be a quick or clear decision. The court was broken evenly in three camps, those that thought Florida might have strayed, those that thought Florida did no wrong and those that did not care and did not want to be put in the position of having to rule on the complicated case. The ruling, when it comes, will probably be a 5:4 or 6:3 split decision or they could simply decide not to decide and let the current ruling stand. The Florida Supreme Court did make some rulings late Friday and Gore lost on all three counts. Basically they denied another recount on a specific lot of ballots and said the butterfly ballot would stand dismissing two cases in that genre.

The worst November ever for the Nasdaq is now history and December has started a positive trend for the troubled index. Does this mean that blue skies are ahead? We would all like to think so but the facts are building that we are not out of the woods yet. The legal landmines will continue to keep investors cautious and mostly on the sidelines until the final result is known. Fortunately that is only about seven more trading days at the most. On December 12th that problem as we know it will be over one way or another. By then that may be the least of our worries. The flood of earnings warnings has drowned the Nasdaq in bad news but the worst news may be yet to come. What if Intel warned? How about IBM, MSFT, JDSU, a fiber optic stock or two, a B2B stock or two, YHOO? There are some big names that are on the bubble and any of them could cause much more stress in the market than Gateway. Hardly a day goes by that a warning comes from an unexpected source. Take RIG on Friday. How can an oil service company fail to make money when drilling is at a ten year high and oil over $32 a barrel? We are hearing rumblings from Asia about market turmoil. Oil and Euros are still a problem for the big multinationals. Could JNJ or PG be next? Will retailers start complaining about slow holiday sales by next weekend? The point here is there are a lot more possibilities for problems over the next two weeks.

The lack of a fall rally is causing many technical problems. There is a lot of margin selling causing instability across the board. Getting a margin call on SDLI for instance may cause investors to sell other stocks instead. If investors believe strongly in SDLI and they don't want to close their position at $200 if they bought in at $300 then they sell GE or MOT or XYZ which will not cause such a big tax loss and also not as big a real loss. For stock investors it is not a loss until you sell it and true believers always think their favorite tech stock will come back. Still to raise money they must sell something. Multiply this by hundreds of thousands of investors and thousands of favorite stocks and you see the problem.

Another problem is simply the coming tax loss selling. With no rally many investors will choose to sell the current losers to offset the wins from the first quarter. The closer we get to year end the stronger the selling will be if we have no rally to fuel their hopes. Funds are now starting to stock pile cash for redemptions expected when investors start getting their statements showing disappointing losses and even tax bills. Many investors will be pulling money out of the volatile stock market funds and moving into the safety of money markets and bond funds after suffering their biggest loss since becoming investors.

Margin calls, tax selling, earnings warnings are just the main reasons the bloodshed may not be over. The light at the end of the tunnel may not be until the Fed meeting on Dec-19th. The election will be history and warning season will be half over. The big names may be behind us and only the Fed ahead of us. Fed Governor, Edward Gramlich said today that he personally felt the economy was heading for a stronger than expected landing. If this view is typical of the rest of the current Fed then relief should be on the way soon. Abby Cohen was on CNBC late Friday night pounding the table on the undervalued tech stocks and we appreciate her efforts but until she gets out of the carefully scripted formats her message will not carry as much weight as others in the past. Her words are chosen with more care than Alan Greenspan's and at least we can understand her. Come on Abby, loosen up. Make a real market call. Where is Ralph Acompora when we need him? Ralph, a Nasdaq 2000/5000 call could really turn this market around right now!

The bounce from Thursday on strong volume did not carry through on Friday. The volume was decent at 2.3B for the Nasdaq and 1.2B for the NYSE but traders still sold into the rallies. Most big cap stocks rose into their resistance and failed. Traders thought the Thursday bounce was short covering and bargain hunting only and the lack of follow through today was evidence. I disagree somewhat since the urge to be flat over the extremely political weekend is very strong. I was encouraged by the small bump at the end of the day. However, it matters not whether I want a rally or a rout since the market will give us what it wants anyway. It will be our task next week to trade which ever trend appears. If the Nasdaq looks like it wants to run then we should trade in that direction. If we get more warnings and more selling then grab a couple puts and hang on. It is not up to us to try and trade our bias when it conflicts with the market bias. You don't go to play baseball with a tennis racquet and you don't play calls in a down market. You will get the same results and it will not be pretty. When we were picking plays Friday night there were literally dozens of $10-$20 stocks on a vertical descent to zero which anyone who could afford a $2 option could play puts with almost zero risk. There is no reason for anyone to be missing out on the incredible profit opportunities in this market. The only reason is personal choice. If you chose to only play calls then that is your choice. Hey, my name is Jim Brown and I made money shorting the QQQ today! If I can play both sides anyone can!

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