Option Investor
Market Wrap

Would the last Nasdaq investor please turn off the sign!

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         WE 3-2          WE 2-23          WE 2-16           WE 2-9
DOW    10466.31 + 24.41 10441.90 -357.92 10799.82 + 18.37  - 99.10
Nasdaq  2117.63 -144.88  2262.51 -162.87  2425.38 - 45.59  - 91.09
S&P-100  633.89 -  8.75   642.64 - 32.88   675.42 -  6.93  - 11.97
S&P-500 1234.18 - 11.68  1245.86 - 55.67  1301.53 - 13.23  - 17.77
W5000  11374.40 -126.30 11500.70 -528.90 12029.60 - 94.71  -169.65
RUT      476.88 -   .82   477.45 - 21.83   499.28 +  2.23  -  5.84
TRAN    2915.19 - 14.88  2930.07 - 64.71  2994.78 - 18.64  - 11.82
VIX       30.86 +   .52    30.34 +  5.26    25.08 -   .07  +  1.06
Put/Call    .80              .71              .89              .73

The head cheerleader for the Fed went on record again on Friday that the economy could be showing signs of life and investors decided that meant no immediate rate cut and the Nasdaq fell again. Support is still fading and 2050 is widely quoted as the next bounce point. Oracle was the big scapegoat for the day after warning that profits could slip by 10%. Warning season starts next week but who is left? Over 300 companies already warned about the March quarter and every big cap tech I could think of has already confessed. Maybe that is the light at the end of the tunnel. If there is nobody left to warn in the traditional period then is the bad news already priced into the market? The Dow could not decide if it was good news or bad. Down as much as -148 in the morning and up as much as +129 in the afternoon, it finished almost flat as confused investors went flat for the weekend.

The Oracle warning depressed a Nasdaq that had rallied into the close on Thursday. Just when you thought it was safe to go back into the market another heavyweight hits you in the wallet. The high profile Oracle warning brought back into the forefront of investors minds the possibility that even a series of Fed cuts may not restore life to tech profits.

Earlier this week AMCC warned that revenue would suffer but the real news was the admission on CNBC by the CEO that there was "simply no orders" and visibility was very bad. The severity of the CEO comments echoes the comments of dozens of companies over the last several weeks. Zero visibility, no orders and customers canceling existing orders, how much worse can it get?

That could be the key. Greenspan still claims to be ready to cut rates aggressively if the economy shows any signs of getting worse. I don't know how many more companies have to warn before he sees the light but there were some signs today that the "economy is recovering" speech may be cracking. Investors ran up the major averages as the testimony came to a close but after seeing the hit ORCL investors took on their warning there was just no staying power. Chances of a rate cut next week improved slightly today but not enough to make traders want to hold over the weekend.

Is there a bottom in our future? We all know there is but not when or where. The stock market pundits, including me, have been expecting an oversold bounce since the middle of February. The Nasdaq is evidently not listening to us since investors are still aggressively selling into every rally. According to several websites that measure investor sentiment the bullish percentage is rising. The farther we drop the more it rises as investors expect a major rebound. Market strategists have always known that market bottoms are formed when investor sentiment is bearish not bullish. This reversal of sentiment has yet to happen.

There are many chartists that expect a bounce at 2050 but it is becoming more likely that should we venture that far into the past the real bottom is 2000 instead. It may not be a bottom but even thousands tend to be psychological stopping points. The 2000 level was serious resistance back in July and Oct of 1998 and could provide a tough support level to pierce going back down. Thursday's intraday bottom of 2075 is only an intraday dip from 2000. Support levels have been falling faster than contestants on Survivor with 3000, 2500, 2400, 2300, 2200 all failing in succession. I suggested last Sunday that long call investors only go long over 2300. If you heeded that suggestion you were on the edge of your seat on Monday when the Nasdaq bumped against 2300 several times but could not punch through. Not only have support levels been falling but upper resistance is also falling. 2300 was resistance on Monday but 2200 became resistance after Wednesday.

Make no mistake, there is plenty of money available to invest. More than $2 trillion is still parked in money market accounts as well as very high levels of uninvested cash in equity accounts. There is just no burning desire to be in the markets. With the first quarter earnings in April likely to be a disaster investors are simply sitting on the sidelines expecting lower prices ahead. The earnings survivors for the first quarter will be the investor favorites when money goes back to work. We are however rapidly approaching another milestone on the calendar. Historically tech investors have shown a desire to be uninvested between April and October. Summer has typically proven to be listless and uninspiring for tech stocks. The problem with this historical event repeating itself is the severity of the drop already in place. With stocks like CSCO trading in the $20 range and ORCL at $16 how much cheaper are they likely to go? Like one comment I heard today, "buy ORCL and ignore it for five years and you will be very well rewarded." I agree and the difference between $16 today or possibly $12 next week may not be relative in the long term view. I checked, the 2003-$25 leaps are selling for less than $5 with almost a 100% chance of huge returns. Better yet, buy the leaps for $5, sell the 2003-$20 put leap for $7 and you have an incredible combo play and a very minimal risk.

Wayne, where are you? Wayne Angell made news last week with a forecast of a Fed intra-meeting rate cut for this week. The cut never materialized and Greenspan had the last laugh. Wayne may have torched his own chances of getting the cut by going public with the forecast. Greenspan has now proved to the detriment of all tech investors that he is in control not the hoard of analysts predicting his actions. Now that the Angell prediction is history there is a little glimmer of light in the rate cut tunnel. Greenspan said on Friday that inflation does not appear to be a problem which appears to give a green light to the next cut. He also repeated his support for a tax cut as an economic stimulant. With the rate cut window open again there is a slim possibility that Alan could come to our rescue as early as next week. Don't hold your breath however. With only 12 trading days before the next FOMC meeting the most likely prospect will be no cut until the meeting. A cut only two weeks before the meeting would be highly unusual. The economic calendar begins with the non-manufacturing NAPM and closes the week with the Jobs Report. If Greenspan holds off on a cut until after the Jobs Report then all hope fades until the March-20th meeting.

As traders we need to be very careful the next couple weeks. The tale of the tape is down and regardless of how much we want to hope it up, the market will only move when real money starts to flow. Volume on Friday was strong with the Nasdaq trading over 2.3 billion shares on a down day. The NYSE traded almost 1.3 billion shares and finished flat. Until the Nasdaq rallies on strong volume we should not be entering bullish plays. The exception to this would be trading the bounces. If we do succeed in hitting 2000 next week I would risk trading the bounce. Otherwise I would suggest long call investors wait for a close over 2200 on strong volume which is our current ceiling. If it is any consolation the rate of descent on the Nasdaq has slowed. Stock buybacks are increasing. The Nasdaq lost -65 but advancers were beating decliners 18:17 at the close. The bad news is priced in but the bears are still in control. Be patient!

Trade smart, enter passively, exit aggressively!

Jim Brown

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