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Market Wrap

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         01-31-2001        High      Low     Volume Advance/Decline
DJIA    10887.40 +  6.20 10957.50 10832.60 1.26 bln   1769/1371
NASDAQ   2772.73 - 65.62  2872.47  2772.35 2.38 bln   1767/2066
S&P 100   715.20 -  3.26   725.42   714.30   totals   3536/3437
S&P 500  1366.01 -  7.72  1383.37  1364.66           50.7%/49.3%
RUS 2000  508.34 -  3.32   515.22   508.03
DJ TRANS 3107.76 + 48.98  3118.24  3053.68 
VIX        24.29 -  0.91    25.91    24.04
Put/Call Ratio      0.61

The excitement is over. The FOMC meeting is history. The "sell on the news" event happened just as we expected. Now the fun begins! The Dow came within 43 points of hitting 11000 for the first time since the surprise rate cut back on Jan-3rd but rapidly sold off to close back under 10900 yet again. The Dow gave back -70 points in the post Fed sell off but still managed to close slightly positive.

Earnings are still lingering and AOL was the Internet mover today. Nyse:AOL beat analysts estimates by a penny at $.15. Combined earnings from AOL/TWX were $.28 compared with $.24 last quarter. AOL added +2.1 million subscribers to bring their total to 26.7 million members. Growth for the merged company is expected to be in the +18% range and AOL affirmed these estimates.

Nyse:MO missed estimates by a penny and closed down slightly at $44. Philip Morris has been on a run since it was apparent that George Bush was going to become president. NYSE:KO also announced earnings that were inline with estimates and closed flat for the day.

Nasdaq:PSFT dropped -$8 after posting strong earnings on Tuesday. While several analysts were busy upgrading PSFT based on their guidance, Morgan Stanley shot it down with a comment that it was likely to "remain stagnant in the near term." PSFT held to previous estimates and even raised them slightly but investors evidently wanted something higher.

Proving it is all in the call and outlook, Nasdaq:ERTS gained $5.75 to $45.81 after missing estimates but offering encouraging comments going forward. They missed estimates by -10% but still rocketed on the outlook.

ADBE followed through with the drop started after the close on Tuesday with a -$9 loss. Using the "slowing economy" excuse they said sales had slowed in all areas.

Bill Gates decided that he need some spare change and filed to sell another three million shares. This was on top of the ten million shares he has sold in the last three months. That nets him about $795 million after commissions. The street did not take this well and MSFT lost -$2.31 on the news. Don't feel sorry for him, he still has 750 million shares left.

Not all the earnings news today was bad. The stage was set for a possible Nasdaq rebound soon with the following positive results. Nasdaq:STOR beat by estimates by +.08, ARXX +.02, WEBM +.04, CERN +.02, MPPP +.08, CLS +.08 and DIGL led the list beating estimates by a whopping +.14. CLS warned slightly but peppered the warnings with positive comments and jumped +$6 in after hours trading.

Only 50 points?

You would have thought they dropped a dime in our tin cup by the way the market and analysts reacted. Only 50 points? Why you would have thought they expected a full point or more. The Chicago PMI report came in today at only 40.2 its lowest point in eighteen years. As a leading indicator for the NAPM report due out tomorrow it suggests there is serious trouble in the economy. Still the prices paid index rose to 62.9% in January which is the second month in a row. This suggests that inflation is still present with a slowing economy. The double whammy! The GDP report showed the economy grew only +1.4% in the fourth quarter which was below expectations. This was the weakest quarter since Q2-1995 and is the clearest sign that economic growth is decelerating rapidly.

These factors prompted the Fed to cut 50 basis points even when it appears that more was needed. The fear that investors would worry the Fed was out of control kept them from making a stronger cut. The language of the official statement was strong, the economy is slowing at a pace that "requires a rapid and forceful response." The full language suggested this was just another cut in a series of cuts. 22 of 25 primary bond dealers are now factoring in another 50 point cut by the March 20th FOMC meeting. There is a 34% chance of an inter-meeting rate cut in February.

Alice Rivlin, former Fed member and Andrew Brimmer, former Fed governor both said the Fed would cut again soon and could be behind the curve. With the Consumer Confidence erosion that Greenspan specifically mentioned last week the path of the economy is clear, down!

What does all of this mean? We are not on Fed watch any more. We are on "Entry Point" watch. The day after a Fed meeting, cut or hike, is normally down as traders take profits from the pre-Fed hype and run up. With the Fed's path clear to cut rates for the next several months the market is now free to run as well. When the Fed cuts rates the market rallies. We should look at every dip now as a buying opportunity. The key here is to wait for the bounce, not try and catch the falling knife. There is a good possibility we will see a dip on Thursday and maybe even Friday but I would not count on it being a serious one. The funds got the green light today to throw money at the market. Historically this is the perfect scenario for them with a high probability of a big win. Trust me, they will do it. There was a flood of buy orders on the afternoon dip as money came into the market as fast as profit takers wanted out. We should be proactive in buying any bounce. Nasdaq 2700 should be a floor but remember we do not want to try and pick the bottom. Wait for a bounce on strong volume and make your entry. If the Nasdaq falls below 2700 then wait for the rally back over that level before buying. If it fails to dip that far and you want to be sure then wait for a breakout over 2870 which was today's high. To repeat, aggressive traders buy any rebound around 2700, or conservative traders wait for a breakout over 2870. Rate cuts are coming, tax cuts are coming and there is over $600 billion in cash on the sidelines! The only pothole in our immediate future is the non-farm payrolls on Friday but unless several hundred thousand jobs just appeared out of thin air it should be a non-event. Fasten your seatbelts, this ride could be fun!

Enter passively, exit aggressively!

Jim Brown
Editor
www.OptionInvestor.com

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