Option Investor
Market Wrap


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        WE 2-2           WE 1-26          WE 1-19          WE 1-13
DOW    10864.10 +204.12 10659.98 + 72.39 10587.59 + 62.21  -136.63
Nasdaq  2660.50 -120.80  2781.30 + 10.92  2770.38 +143.88  +218.85
S&P-100  705.48 -  3.58   709.06 +  3.83   705.23 + 17.35  +  6.17
S&P-500 1349.47 -  5.48  1354.95 + 12.40  1342.55 + 24.00  + 20.20
W5000  12450.10 - 77.20 12527.30 +143.40 12383.90 +202.60  +308.80
RUT      501.50 +  2.82   498.68 + 10.59   488.09 +  2.34  + 22.61
TRAN    3092.76 +136.57  2956.19 +  2.90  2953.29 - 48.69  -112.01
VIX       24.75 -   .39    25.14 -  1.15    26.29 -  1.33  -  4.41
Put/Call    .60              .59              .48              .60

Thursday OIN, "There is no reason for the markets to fall other than a disaster from CSCO or a Jobs Report tomorrow showing several hundred thousand more jobs than the 90,000 expected." OOPS! The Jobs report showed an increase in new jobs of +268,000, substantially more than the expected +90K. Many analysts had whisper numbers that had actually been negative. Surprise, surprise, surprise, as Gomer Pyle would say. The Dow, ready to breakout over resistance at 11,000 was suddenly looking for support much lower. The Nasdaq, held up for a week by the Dow, found no support from the blue chip index and headed south as well.

What a difference a day makes! Just a number or two, a few extra zeros, an extra decimal place and wham! The Fed induced rally is turned instantly into a bear trap and investors everywhere are wondering what hit them. The Dow finished -165 points below its high as investors worried that the aggressive Fed had turned back into teddy bear due to signs of an economic rebound where one was not expected. The huge jump in new jobs over what had been expected was mostly due to the construction area. New home sales are rising and +145,000 of the new jobs were in construction. This was the biggest jump in construction jobs since 1978. Manufacturing is still in a recession showing a loss of -65,000 jobs but the headline number was all that investors could see. The unemployment rate climbed to 4.2% which is the highest rate in sixteen months. The higher unemployment is welcome as it reduces the wage creep but it was not enough to offset the market shock.

The problem is simple. Investors were ready to buy stocks because the Fed was on the rate cut trail not because earnings from stocks were so compelling they just had to buy. With the Fed now assumed to be on the sidelines until the March-20th meeting the reasons to buy just shrunk. The 100 basis point drop in the last month is already priced into the market with the big gains since Jan-3rd. The next cut, if it is a cut at all, is now over six weeks away. If the economy is really rebounding then the Fed may wait instead of possibly overheating the economy again. The premise of a series of rate cuts was instantly eradicated and now we are faced with buying stocks on fundamentals and as we all know the fundamentals look pretty bad.

Just how bad will be tested on Tuesday when Nasdaq:CSCO announces earnings and more importantly gives the equivalent of the state of the union address on the tech sector. Only 3.50 away from its 52-wk low of $32, CSCO is widely expected to warn. When John Chambers was asked last week if January was a little challenging, John said that it was MORE than a little challenging. This brings up the specter that CSCO may actually miss earnings although nobody is actually saying that out loud. Still the guidance going forward is absolutely crucial. With literally every major tech stock already warning and those warnings, ala PMCS, becoming increasingly drastic, the importance of the CSCO guidance becomes even more important.

The NYSE:NSM warning from Thursday took a toll on the chip sector with Nasdaq:RMBS, Nasdaq:INTC, Nasdaq:XLNX, Nasdaq:AMCC and Nasdaq: PMCS all finishing lower. The chip stocks, many of which sell to CSCO are all sliding weakening as investors worry about a negative forecast.

Retail stocks also fell on Friday as investors reacted to the dropping consumer confidence and now a possible halt in the rate cuts. No sector, other than possibly Drugs as a defensive play, appears to be immune to the new negative market sentiment.

The only positive was the low volume on a negative day. The NYSE only managed slightly over one billion shares and the Nasdaq a meager 1.6 billion. The volume on the Nasdaq is not something we can count on. They are switching from a double counting system to a single counting process like the NYSE. Because not every trade on the Nasdaq was double counted the actual impact of the change is very hard to determine. Many analysts claim the impact will only be a ten percent drop but the 1.6 billion today was about a 35% drop from recent days. Was it simply low volume or a change in counting? We may never know and can't use the volume indicator for confirmation of any move for several weeks until new averages are created.

Declines were negative on both indexes but new 52-week highs beat out new lows by 440:55 on all exchanges. This is not a negative trend. So now we are faced with conflicting scenarios. Did the markets really turn over and are about to retest old lows OR did traders simply decide to take profit on some negative economic news?

For the last two days I have been telling you we could have a dip as investors sold the rate cut news. We got the dip. I suggested buying any rebound from under 2700 and we are under 2700 but not yet rebounding. From the looks of the Nasdaq chart at the close on Friday we are not finished dipping yet. The CSCO earnings are looming large in our future. Even if the Jobs Report had not clouded the picture it is unlikely Monday would have been a big up day. Nobody wants to take a position before the CSCO event. Since 2700 only held for about two hours the next support to be tested it about 2575. I could see this happening on Monday.

Other than the CSCO earnings the next week is pretty flat as far as market moving events are concerned. Earnings are slowing and the economic calendar is positively weak. Monday is the NAPM non-manufacturing report which is not a market mover. Wednesday is the Productivity report and Wholesale Inventories on Friday. A pretty bland week.

As traders we need to be conservative. We are faced with a bipolar market. The Nasdaq struggled all week and ended Friday with more apparent weakness ahead. The Dow failed at 11,000 again after a four day rally but showed a little pulse at the close. Our long term outlook is still weighted toward the Fed cutting rates again in March. The recession in manufacturing is not over. We may not get an intra-meeting cut but we should get something in March. This is the underlying foundation for the market. If the market starts crashing again we may see the maestro of money pull another surprise rate cut out of his hat to reinforce that floor. Greenspan does not want to admit it but much of the current budget surplus comes from stock market profits. Kill the market and kill the surplus. Kill the surplus and the tax cut fails as well. A real problem for the king of green.

My previous guidance still holds. Aggressive traders buy any rebound from under 2700. For conservative traders wait for a breakout above 2700 again. (yes I lowered it from 2870) All traders should wait for the CSCO earnings to make sure there is not a hidden market bomb. Don't fret if there appears to be a rally between now and the announcement. If it is real it will still be there after the earnings. According to Austin the commercial traders added to their short positions yet again. This is not encouraging considering this is a lagging indicator. What do they know that we don't? Regardless of what happens over the next couple weeks, if you stick to the strategy listed above your risk will be minimal. It is simple, stay short or flat under 2700 and long over 2700. Got it! Now relax!

In non-trading news I have several great announcements. You may have seen over the last week Renee White has returned to OIN and is writing in the Traders Corner again. She is an old hand here at OIN having written for over two years now. The guys in the crowd are saying "so what?" Well I have another surprise for you. Janar Wasito has also returned to writing for OIN and our sister site IndexSkybox.com starting this Sunday. Renee and Janar are two of the most read writers we have ever had and I am really glad to welcome them back!

It is with even more excitement that I get to announce the preliminary list of guest speakers for the April Expo. You will not believe the heavyweights we have lined up for this event. Get ready to be amazed!

Tom DeMark, author of "Day Trading Options", "New Market Timing Techniques" and "The New Science of Technical Analysis." Tom has been a distinguished authority on stock, option trading and market timing for over 30 years. He manages a $4 billion hedge fund and has been a consultant to George Soros, Morgan Bank, Citibank, Goldman Sachs, etc.

Jon Najarian, "Doctor J" as he is called at the CBOE. Jon started at the CBOE in 1981 where he found his discipline, quick reflexes and competitive nature, developed while a running back for the Chicago Bears, were well suited to the demands of floor trading. DRJ's success in the pit led him to found Mercury Trading in 1989. The firm currently makes markets in more than 90 high-tech and biotech stocks and trades between 25,000 - 40,000 options per day. Jon appears daily on "FOX News in the Morning," serves as the noon anchor on "Webfn.com" and can be heard four times a day on CBS radio.

Mark Leibovit - Chief Market Strategist at VRTrader.com, his technical expertise is in volume analysis, providing short term, high performance stock trades and market timing based on his proprietary "VOLUME REVERSAL" (tm) trading program. Mark is the number one market timer for the last six months as ranked by Timer Digest. He was a market consultant ("Elf") on Louis Rukeyser's Wall Street Week televison program for seven years.

Richard W Arms, Jr., Editor of ArmsInsider.com is a financial consultant to institutional investors and a private portfolio manager based in Albuquerque. He is a noted expert in the field of technical and market analysis, the 1995 winner of the prestigious Market Technicians Award and the author of several best selling books and articles on his ground breaking theories in volume analysis and market forecasting. This key technical tool for understanding market price movement is listed daily in the Wall Street Journal and is flashed once a minute on CNBC.

Mark Skousen, Ph.D, Editor of FORECASTS & STRATEGIES since 1980 is a professional economist with an uncommon knack for turning his understanding of economics into highly valuable investing advice. Since 1980 he has lead hundreds of thousands of subscribers to unique investing opportunities often ignored or overlooked by other investing advisers. Skousen is best-known for his advice to subscribers to "sell all stocks and mutual funds" less than six weeks before the 1987 stock market crash that wiped out billions in investors' wealth. He has consistently been on the right side of major investing trends in his career with F&S and, before that, with Inflation Survival Letter.

Steve Nison - Steve Nison is not only the world's foremost expert on Candlestick Charting techniques, he's the author of the two top selling, definitive books on the topic: Japanese Candlestick Charting Techniques and Beyond Candlesticks. He has trained and lectured investors and investment firms around the world on how to integrate these methods into their investment strategies.


Jim Crimmins - Jim is president of TradersAccounting.com and a noted authority on tax issues for traders. Jim is an expert on gaining Trader Status and puts on seminars on "Tax Free Trading" around the country. If you have been to a money show, you have probably seen Jim with flocks of people around him. Jim is the authority on tax accounting for traders! Jim will be speaking on Trader Status, Mark to Market and IRS do's and don'ts for traders.

Is that a great lineup or what! We are still waiting on confirmations from several other possibles which will help make this the best seminar we have ever produced. In addition to the speakers above the OIN staff you read every day will also be teaching in-depth money making stock and option strategies. Over 20 professionals in one spot dedicated to providing a quality educational experience. Any two of the speakers above would be worth the money and you will learn from over 20. Can you afford not to come?

Click here for more info: https://secure.sungrp.com/workshop/april01/index.asp

Trade smart, enter passively, exit aggressively!

Jim Brown

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