Option Investor
Market Wrap

Missed it by six!

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        02-21-2001        High      Low     Volume Advance/Decline
DJIA    10526.60 -204.30 10746.20 10520.30 1.20 bln   1079/2018
NASDAQ   2268.94 - 49.41  2353.51  2257.15 2.01 bln   1146/2608
S&P 100   647.60 - 13.76   663.61   646.27   totals   2225/4626
S&P 500  1255.27 - 23.67  1282.97  1253.16           32.5%/67.5%
RUS 2000  483.51 -  7.63   491.16   482.89
DJ TRANS 2944.47 - 32.99  2977.01  2938.84 
VIX        29.41 +  1.91    29.65    27.11 
Put/Call Ratio      0.72

Can you spell o-v-e-r-s-o-l-d? The Nasdaq has dropped -300 points in the last three trading sessions hitting a two year closing low. The Dow has broken out of the recent bullish wedge and is now in danger of breaking January lows. Support for both indexes has now disappeared and traders are fearful that new lows are in our future. This has caused bargain hunters to wait patiently on the sidelines. The normal end of day bounce, which you would expect after such big drops, failed to appear.

It was a grim day after the CPI report came in at twice the expected number. The headline number was +0.6%, double the +0.3% expected. The core rate was only +0.3% but exceeded the +0.2% estimate. Energy prices were a significant factor but the Fed has not reacted to that component significantly in the past. The big jump was the largest gain since March-2000. The possibility of stagflation appears to be growing and most analysts feel the lack of growth is more dangerous than the risk of inflation. Still traders were not happy and ran for cover yet again.

A major impact to the Nasdaq drop was Nasdaq:SUNW which was hit with a downgrade from Merrill Lynch. Merrill lowered its rating to neutral and dropped its earnings estimates by about a nickel going forward. "Economic softness is accelerating non-economic trends that threaten Sun and raise the likelihood that numbers may need to again be reduced," Merrill said in a research note. "Channel inventories are at a three year high, more used equipment from dead dot.coms is coming, and enterprises have enough CPU capacity from past aggressive purchases," it said. "Storage spending remains strong," Merrill said. "Sun not only misses this revenue but also runs the risk of losing account control as storage vendors gain influence. Poor storage execution appears to be coming home to roost." Just another friendly love note? Nyse:IBM also announced a new line of storage products which will compete with SUNW and Nasdaq:EMC. EMC fell -$6 in regular trading but was still falling in after hours to a low of $39.25 or almost a -$10 drop. SUNW has a quarterly analyst conference call at 4:30PM ET on Thursday where it is expected to warn going forward. SUNW dropped another -$3 today to another 52-week low of $18.75 in after hours.

Intel, Nasdaq:INTC, fell to within 75 cents of its 52-week low of $30 after more negative comments about PC sales in general, the economic outlook and a semiconductor index that rolled over on a +50 point morning gain. Nasdaq:CSCO lost another dollar to another 52-week low of $25 as the comments from their CEO continued to weigh on the networking sector. Nasdaq:JNPR was one of the few networkers to show a gain. Up +$6 intraday but it only managed to eke out a fractional showing at the close.

Brocade, Nasdaq:BRCD, announced earnings after the close and beat the street by a penny but warned that "We are seeing the effect of a softening economy" and guided analysts lower for the future. They implicated Nasdaq:EMLX as part of the problem saying that some of their large customers were delaying orders. Brocade had been quiet on the EMLX warning until today. EMLX fell another -$4 to $28 in after hours trading after BRCD used their name in disgust. EMC was also hit by the BRCD warning as well as NTAP which compete in the storage business.

Retailers Wal-Mart, Nyse:WMT, and Home Depot, Nyse:HD, lost their 15 minutes of fame and both dropped over $3 as the retail sector came under fire today. With sector rotation that used to take weeks, now taking only hours, the retailers were tossed aside as old news.

Coke, Nyse:KO, and Procter & Gamble, Nyse:PG, said today that they were going to create a $4 billion company that would use Coke's global distribution system to spur sales of the companies' juices and snacks. Coke would gain access to new consumer food ideas and PG would gain Coke's 16 million global distribution points. Analysts thought KO gave away too much and investors knocked -3.55 of its stock while PG gained +1.00.

The big news was the massive support failure of both major indexes. The Dow fell to the lowest close since January-12th at 10526. Support at 10700 and 10600 failed to even slow down the index as 22 of the 30 stocks lost ground. The major losers were AXP -2.01, C -2.90, KO -3.55, HD -3.14, IBM -3.90, JPM -2.60, WMT -3.19. The Nasdaq did not fare any better with many of the leaders taking serious hits. ADBE lost -4.19, BEAS -3.94, CHKP -5.44, CIEN -5.69, JDSU -2.63, QCOM -4.25, SUNW -2.63, VTSS -4.63, VSTR -3.38. The Dow had been building a large bullish wedge since the middle of September but the breakout came to the downside instead of the upside. Next support for the Dow is at 10500, only -20 points below today's low. Below 10500 we could free fall to our 12 month support of 10300 with only a brief pause possible at 10400.

The Nasdaq closed within three points of a new two year closing low at 2268. The previous closing low was 2265 on March 3rd 1999. It also came within 6 points of the 12 month intraday low of 2251 from Jan-3rd. The two year intraday low is 2235 on that same March 3rd of 1999. Support at 2300 held until after 12:00 but downgrades on JDSU and SUNW along with the plummeting Dow finally pushed the index to the days low of 2257. There was no end of day bounce and after the Brocade earnings warning and the continued sell off of the generals in after hours, there is likely to be another dip at the open as well. A dip to under 2200 would take us all the way back to 1998 for comparisons. Dec-31 of 1998 had an intraday low of 2165 and the first day of 1999 dipped to 2192. The Nasdaq is now down -55% from the March highs of last year and all the gains from the Internet bubble have evaporated. Almost $4 trillion in market cap has been trimmed from the Nasdaq.

Now, where will it stop? Nobody knows but the general consensus of opinion is very soon. Most professional traders claim they have shorted everything they can short and most institutional traders claim they have sold everything they have to sell. Granted the sources for this information are biased and prone to exaggeration but the sentiments are the same as we hear on the retail side. Today was closer to a capitulation event than yesterday but still not a classic example. Closing on the low of the day would indicate there could be more tomorrow. Also the volume was still lighter than a normal "bottom" day. I believe a strong dip on Thursday could produce the sell reflex that is needed to trigger the expected trading rally. If we can just get the shorts to cover it would be a huge bounce as we have seen before.

I see two scenarios, maybe three. The BRCD warning knocked the Nasdaq futures to -40 in after hours. Every Nasdaq general I looked at had fallen further after the close. This would indicate a drop at the open. Any drop from here would put us under the 2251 prior intraday low and could trigger the "double bottom" buyers. If there is enough of a bounce to trigger short covering then we could easily gain +100 points or more as others see the volume and jump in. Is this wishful thinking? Could be but it is my wish! The other option is enough fear of a recession that traders simply ignore any sub 2251 bounce and stay on the sidelines waiting for the next Fed rate cut or a clear bottom. If the bottom on the opening dip does not hold through Friday then the shorts will load up again and something in the 2000 range would not surprise me.

Now there is a wild card in both of those scenarios. There is an increasing call and even a demand for an intra-meeting rate cut. It would not surprise me to see the Fed come riding in to the rescue like they did on Jan-3rd when the Dow was at 10581 and the Nasdaq 2251. Those numbers take on a entirely different perspective as we revisit them two months later. Every -100 points the market drops just adds to the drop in consumer confidence. Greenspan has said the confidence number must be controlled or it will become a death spiral for the economy. If consumers pull in their horns and start stashing money under their mattress for a rainy day instead of spending it on consumables then a real recession is just around the corner. It is Greenspan's job to bolster that confidence and put a floor under the stock market which is the most visible indicator of economic stability for the common citizen. Every investor who received a 401K statement which looked more like a 201K is seriously considering a different investment strategy for 2001. If these investors move their remaining capital into another vehicle like bonds, money markets, tax free funds or even REITs then the stock market will suffer the loss. Alan has to stem that tide of defections and his time is running out. March 20th is too late. He needs to act now. When he does, that will be the wild card that could turn the market around again. How about it AL? About 10:00 Thursday morning would work just great for me!

Enter passively, exit aggressively!

Jim Brown

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