Option Investor
Market Wrap

I would like to use my lifeline please!

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       WE 12-8          WE 12-01         WE 11-24         WE 11-17
DOW    10712.91 +339.37 10373.54 - 96.69 10470.23 -159.64  + 26.92
Nasdaq  2917.43 +272.14  2645.29 -259.09  2904.38 -122.81  -  1.80
S&P-100  727.06 + 31.07   695.99 - 15.17   711.16 - 13.93  +  5.98
S&P-500 1369.89 + 54.66  1315.23 - 26.54  1341.77 - 25.95  +  1.74
W5000  12666.50 +629.10 12037.40 -316.20 12353.60 -306.30  - 28.90
RUT      479.07 + 22.23   456.84 - 15.03   471.87 - 10.74  +  1.71
TRAN    2879.95 +116.80  2763.15 - 86.74  2849.89 + 32.59  +113.08
VIX       26.13 -  5.46    31.59 +  2.01    29.58 +  1.73  -  4.65
Put/Call    .59              .61              .59              .89

What a terrible way to end a really good week! Just when everything appeared to be turning up roses for the markets the Florida Supreme court elected not to use their lifeline and, in an opinion from hell, turned our market world upside down again. Why such strong wording? Because the dissenting opinions will almost guarantee another review and remand from the U.S. Supreme Court and three more wasted days. The Florida Supremes appeared to the world like kids in a sandbox fighting over control. The bad news is the market will suffer three more days until the final dust settles. At this point it does not matter who wins the race, other than the market had already factored in a Bush win, but just that the race NEEDS TO BE OVER! The grave words on international news on Friday night will echo worldwide. The terms "constitutional crisis", "cannot be justified under any law" and "kangaroo courts" could start a crisis of confidence among foreign investors. International investors are used to shoddy or rigged elections in most of the world and they invest in the U.S. for safety as well as returns. Several very well placed talking heads like Bill Seidman and Lawrence Kudlow were expressing serious concern over the possible fall out from the election brinkmanship. I personally think the greed motive will prevent this! Sorry, that is enough venting for one day but I, like you are getting tired of trying to invest in this yoyo market for over a month now. I will get off my soapbox now!

Regardless of who you want to win the election the markets voted with an instant rally at 2:30 when Bush was named the winner of the absentee cases. When the news came that the Supreme Court was going to rule the rally on the Nasdaq dropped -70 points from the high of the day. After struggling back to close at 2917 the bottom fell out immediately when the ruling was announced. The only yardstick we have to gauge the reaction is in the futures. The S&P Futures closed at 1393 and dropped to 1350 when they reopened, a -43 point drop. The Nasdaq futures were even worse closing at 2950 and reopening at 2769 for a drop of -181 points. The Dow futures dropped from 10880 to 10600, a -280 point loss! The QQQs dropped from a close over 72 to 67.63 for almost a $5 drop. Like I said, regardless of your choice for candidate the market has a one candidate it prefers over the other. What will happen on Monday after a weekend of head clearing and hundreds of hours of sound bites has yet to be seen. Doubtless there will be those who will view it just another buying opportunity now that the "bottom" appears to have passed and others that will be wringing their hands in agony over the problem.

I never cease to be amazed by the market reaction and lack of reaction to major events. For the last three weeks major and minor stocks have been hammered for even hinting at earnings problems. Thursday after the close investors finally said enough is enough and bought the Intel warning as though they had raised estimates instead of lowered them! A true market bottom appears when investors are not moved by bad news. It is truly factored in when there are no more sellers on bad earnings or soft economy news. That was the message of the markets today and investors expecting another buying opportunity dip at the open were met with a strong gap up and no look back. Now let the short covering begin!

With 646 pre-earnings announcements so far this quarter, 46% have been negative warnings. This is +50% ahead of last year according to First Call. Now unless you live in a cave it would be hard not to already understand that the Goldilocks economy has a serious case of the earnings flu. The Nasdaq has dropped -50% from the year's high as investors learned the bitter earnings decompression lesson the hard way.

Now, finally, the worm has turned. There is light at the end of the Fed tunnel and we have the head cheerleader on our side. What more could we ask for? Today Ed Kelly joined Greenspan in singing the Christmas carol of Fed easing. Ed said the Fed must remain vigilant that they do not allow the economy to fall too far or too fast. Don't you love it when all the elves start singing the same tune? Up until 4:PM the markets had put in a miraculous recovery for the week with the Dow gaining +339 points, the Nasdaq +272 points and the Wilshire-5000 a stunning +629 points. The Santa Claus rally was alive and well! Just when fund managers were actually starting to plan buys for Monday the bottom fell out. Well at least the bottom in after hours trading for Friday.

Now here is where the sentiment changes. Yes, it was bad. The futures dropped very dramatically and scared the heck out of anybody not yet at the malls Christmas shopping. But I think traders are going to wake up Monday morning and say, "what is the big deal?" Gore has been there for eight years, there is gridlock in the houses, nothing is really going to change and WE HAVE A MARKET BOTTOM! Party on! They will get the election resolved eventually. There will be a president. While they sort it out there are stocks to buy and stocks to sell. Why worry, be happy! At least that is one scenario and when you compare the strength of the greed emotion to the emotion of politics, greed will win whenever there is lots of money at stake. It is very easy to be very politically reactionary and take stands on principle if principle is all you have. Put a few hundred thousand dollars in a trading account with retirement looming several years ahead and I will bet on greed every time. There are exceptions to this rule of course. You can be politically active and still invest in the markets. You just have to be smarter about your investments. Gore wins, sell MSFT, tobacco and drugs, buy techs and stocks that will do better in a strong environmentalist economy. Stocks are stocks, buy the ones that will do well based on the future president. So where is the beef?

I think the entire deal has taken on a life of its own and the last month it has helped wring every last dollar out of many of our favorite stocks while we waited for resolution. Now traders are ready to take control of the market again. The Fed is on our side and should the election situation turn even more serious then the Fed may choose to step in the gap and cut rates in December to hold up the markets. This looks like a win-win situation. The market is at or near a value bottom. The risk is minimal. Money is still piling up on the sidelines in record amounts. Last week almost $19 billion in new cash came into money market and equity funds. This is a huge amount compared with the drought we have been seeing the last two months. Investors are not stupid. They saw the bottom forming and saw the election winding down. They were preparing to vote with cash for the Fed induced Santa Claus rally. With cash on the sidelines burning a whole in their accounts and more coming in from year end retirement contributions every day, what do you think is going to happen?

Do you think investors that are still in cash are kicking themselves that they did not buy the dips this week? You bet. Do you think they saw the Nasdaq close at 2918 at 4:PM and then saw the futures fall back to 2769 and they are thinking, please, please let it open at 2700 just one more time on Monday so I can get in? Of course they are. They saw JNPR close at the high of the day up +15 at over $166 only to see it drop back -10 points to $155 and change in after hours. A last buying opportunity? BRCM dropped from $128 +17 back to only $119. BRCD from $223 back to $213. A pure knee jerk reaction and nobody knows when it will stop. The news over the weekend will determine the follow through or lack of it on Monday. Did the U.S. Supreme Court take the case? Did the Florida legislature overrule the court? We will not know the answers until Monday but rest assured capitalism is still alive and well. Earnings warnings will continue. Analysts will continue to downgrade Internets. Fiber optic companies are still leading the way. Networkers and B2B companies are showing promising uptrends again. Oil is falling again. Chip stocks are in rally mode only one day after the biggest chip warns. But best of all the Fed is finally on our side. The employment report was benign and did not show any smoking inflation gun. My bet for next week? Buy the dip and hold on for the ride. Fund managers are just like individual investors.

The next dip makes sense. There is no guarantee of anything in life but the risk at Nasdaq 2700 is very small and after the bounce this week they will be throwing money at any weakness. We could still see a very choppy week but stocks are cheap and everybody knows it. If your bank was having a -50% off sale on $100 bills on Monday would you stay home and watch the election on MSNBC and whine or be the first in line at the bank with hands full of money? That is a no brainer! Get in line, the market will open Monday, ready or not!

If you have been reading OIN all week then you should have been very profitable. We have had some incredible winners this week. By spotting the bottoms on many of the fast movers we were able to reap some serious rewards. Look at these gains from this weeks leaders!

Company        Symbol      Date Picked Price   Friday   Change  Percent
Brocade Comm. (NASDAQ:BRCD) 11/30/00  $167.94  $219.75  $51.81    31%
Juniper Netw. (NASDAQ:JNPR) 11/30/00  $124.63  $166.13  $41.50    33%
Micromuse     (NASDAQ:MUSE) 12/03/00  $ 94.13  $135.63  $41.50    44%
Network Appl. (NASDAQ:NTAP) 12/03/00  $ 53.94  $ 87.19  $33.25    62%
Broadcom      (NASDAQ:BRCM) 11/30/00  $ 97.50  $128.19  $30.69    31%
How much you made depended on which options you played but +$30 to +$50 moves are very profitable.

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Trade smart, don't buy too soon.

Jim Brown

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