Option Investor
Market Wrap

Was it? Could it be? Should we dare hope?

HAVING TROUBLE PRINTING?
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        12-20-2000        High      Low     Volume Advance/Decline
DJIA    10318.90 -265.50 10581.00 10318.90 1.43 bln   1010/1933
NASDAQ   2332.78 -178.93  2432.83  2312.51 2.84 bln    828/3292
S&P 100   661.50 - 25.35   686.85   660.62   totals   1838/5225
S&P 500  1264.74 - 40.86  1305.60  1261.16           26.0%/74.0%
RUS 2000  443.80 - 19.45   458.78   442.32
DJ TRANS 2729.77 - 47.99  2775.22  2686.25 
VIX        35.70 +  4.97    36.75    32.85
Put/Call Ratio      0.80

The debris from the Foundry explosion started falling back to earth at the open this morning and continued raining on the markets all day. Merrill Lynch added rocket fuel to the already roaring fire with a downgrade of HWP, IBM and CSCO. These big cap leaders were already under pressure and the additional weight of the high profile downgrade sent them all to new 52-week lows. CSCO dropped -5.25 to $36.50, IBM -4.12 to $86 but HWP recovered to close only -.88 at $30.63 after saying on CNBC that they saw no reason to change their current guidance. How refreshing, a box maker that is comfortable with estimates. Still IBM and CSCO remain the biggest potential problems with worries about impending warnings from each. The Dow gapped down to 10375 at the open, tried weakly to rally and then rolled over to close at almost the low of the day at 10327, a -265 point loss. The Nasdaq faired only slightly better closing only +20 points off the low of 2312 and a drop of -178 points. The total loss for the last seven days is almost -700 points or a -22% drop.

The bad news that drove the markets Wednesday is not over. After the close another flood of bad news hit the wires. AT&T warned that they would miss earnings and cut their dividend for the first time in their over 100 year history. Not that anybody expected AT&T to come roaring back from the brink of disaster after several quarters of problems but it was just confirmation of bad news. RealNetworks warned that weaker than expected Internet related spending would cause them to miss estimates going forward. TRW warned that earnings would fall about -33% on recall charges and payment defaults by customers. Cendant warned earnings would miss as well. SmartDisk, SMDK, warned that earnings would miss based on slowing Apple Computer sales. They said they were working on trying to increase their Windows product sales to compensate for the Apple platform weakness. Not a tech stock but IP warned today as well that slowing sales and increased energy costs would cause reduced earnings. ZRAN warned after the close that slowing worldwide demand in the DVD and PC markets would cause them to miss estimates as well.

After the close Micron announced earnings that missed street estimates by two cents on sales that dropped -30% for the quarter. Citing weak demand as the problem MU dropped -$5 on the news. Several analysts warned against buying MU even at these levels until computer sales growth begins to rise again. The two major tech problems from yesterday FDRY and JBL were taken out and shot with FDRY losing -57% and JBL -24%.

PALM also announced earnings after the close that beat street estimates by a penny but the stock got hammered in after hours trading for -$6. Analysts were concerned about sales growth and margins. RIMM also fell -$5 on the news. Once the hot PDA products run out of steam after the holiday buying season it remains to be seen if corporate IT spending will take up the slack.

The biggest problem other than the warnings and missed earnings was really the downgrade from Merrill Lynch. Citing a survey of IT professionals MER said that in just the last two weeks the number of companies planning new IT expenditures had dropped substantially. Just Dec-4th Merrill had issued a note saying spending was on track and looking good. What a difference two weeks makes and we still have not heard from IBM or CSCO on their possible earnings problems.

The Nasdaq was really ugly today. Really ugly! In many analysts eyes this was a really good day. The complaint for weeks was that there was no capitulation event to signal a real bottom. Sure everyone wanted to put a bottom label on every three day dip in that period of time but the qualification sentence was always there. Today came as close to capitulation as we have had in a very long time. One measure of a "C" event as recognized by most long term analysts is the number of new lows. Normally something in the area of 1000 is a normally accepted threshold. Today there were 921 new lows on the Nasdaq. Another measurement is the advance decline ratios. At the low of the day today the decliners were overpowering advances by over 5:1. This is also a normally accepted capitulation ratio. The volume was also significant. At 2.8 billion shares traded on the Nasdaq there was no shortage of sellers wanting out at any price. The real tell tale sign imbedded within that number was the up volume compared to down volume. At a little after 3:PM, just as the last dip began the Up volume for the day was only 134 MILLION shares compared to over 2 BILLION shares of down volume. That is a 15:1 ratio of down to up. Capitulation anyone?

The Nasdaq is on track to post its worst year ever. Currently down -54% from the high and -42.7% from Jan-1st it is considerably worse than the -35% drop in 1974. The Nasdaq took five years after that 1974 bottom to recover and make a new high. Market analysts comparing that recovery with a recovery from the current levels estimate that it will take three years to return to the 5000 level. (Their estimates not mine.) This assumes a historical +28% compounded growth rate. I can't imagine it would take that long simply based on the current and projected tech advancement but without the Internet driving change we will need a new leadership group or two to fuel faster growth.

It only took one day and the rumors of a rate cut are heating up again. After the market rocking news last night and the significant drop today there is a new cry for an intermeeting rate cut. Pointing to the increasingly intense earnings news analysts are calling for Grinchspan to acknowledge they made a bad call and cut rates immediately. I would not hold my breath if I were you. He can do it but I can't imagine that he would do it before sometime in January. The Fed will want to see the final results from the holiday season as well as gauge any market movements between now and Jan-2nd. Once the Employment numbers are announced in January we could see a change but I doubt before then.

So was it the big "C" today? No one knows. Remember there is a lot of year end tax selling and I doubt everyone has completed it yet. There were a few stocks that rebounded some just before the close but very few. As a technician you would be hard pressed to paint anything but a serious case for a relief rally very soon. -700 points in seven days on huge volume with overwhelming new low advance/decline ratios. The VIX spiked to 36, a number only seen four times this year and each time represented the exact bottom of the current trend. Still it could go higher. The put/call ratio is hovering at .80 and indicates the higher level of caution that is present near market bottoms. Still there is no real conviction just severe turmoil. Last week there was a positive inflow of cash into equity funds and this week the trend reversed with -$9.5 billion flowing out of funds in the last five days. Investors throwing in the towel is also an indicator of market bottoms. The Raging Bull website, a leader in the investor chat room fad, was put up for sale by CMGI. It seems that investors are not as excited with talking about how much money their stocks are losing as they were bragging about their wins in a bull market. A sign of the times that investor sentiment has changed. Again, another indicator that we are near a bottom. History has not changed, just the speed at which we record it.

Was today the bottom, the capitulation event? Will the historical trend of the next five days being bullish hold? We can only hope the answer to both of those questions is yes but until the trend actually changes nobody can say for sure. As traders we do not want to try and catch the falling knife. Either go with the trend or step aside. I loved the Art Cashin analogy today that traders are so paranoid about getting beaten again that are not even trying to catch falling safes. They want to see them hit bottom, crack open and then look at the contents before placing a bid. That pretty much sums up the days trading. With down volume 15:1 over up volume it is clear there were no buyers. Repeat, no buyers. With three more weeks of earnings warnings ahead of us and tax selling in full swing, other than bottom fishing, there is simply no reason for traders to jump into the market. Investors yes, but even they are unsure if CSCO is a buy at $36 or $30. Remember when CMGI, down from $163, was a buy at $40, it is now $5. AKAM, down from $345, a buy at $50, now $24. There is no shortage of value available but until more stocks start trading at ASK than BID we will not know the worst is over. There are still hundreds of billions in cash on the sidelines. Big cap techs will benefit when this cash is put to work but nobody has turned on the spigot yet.

I agonized all afternoon about buying the dip. I wanted it bad but there were no positive signs. Sectors were in flames, stocks were not bouncing. Even those down double digits for several days were still skidding lower. I could not bring myself to buy puts after seven down days and -700 points. Even though IndexSkybox is raking in money on a daily basis I felt I would be buying puts on the bottom. There was several reports of some huge blocks of S&P futures being closed this afternoon. Could this be the institutions finally closing their short positions for huge profits? Let's hope so! The Nasdaq hit the very bottom of the down trend channel at 2312 which could be seen as technical support. Does the term "grasping at straws" come to mind? As we go to press tonight the S&P futures are actually up about +4 and the Nasdaq futures are +8. None of the after hours news events have had any material affect on trading other than on individual issues. Maybe that is a positive sign. Still, until the trend changes, trade in the direction of the trend or stand on the sidelines and wait. Cash is king and patience is a very important virtue.

Good luck and don't buy too soon.

Jim Brown
Editor

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