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Market Wrap

Pouncing Bears, Hidden Bulls

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        03-12-2001        High      Low     Volume Advance/Decline
DJIA    10208.30 -436.30 10638.60 10166.60 1.23 bln    693/2415
NASDAQ   1923.38 -129.40  2004.09  1922.78 2.15 bln    707/3112
S&P 100   601.51 - 31.89   631.26   598.45   totals   1346/5527
S&P 500  1180.16 - 53.20  1228.88  1176.78           19.6%/80.4%
RUS 2000  458.40 - 15.25   473.65   458.34 
DJ TRANS 2861.19 - 80.98  2939.67  2858.49 
VIX        35.11 +  5.76    35.37    31.38
Put/Call Ratio      0.91

Pouncing Bears, Hidden Bulls

The general Investor's Intelligence sentiment indicators are still bullish. But if today's action is any indication, the bulls seem to be saying one thing, but letting their money do another.

The continued broad based declines have the appearance of a much- anticipated major capitulation. Unfortunately, technical indicators, such as volume and advance/decline numbers do not support the supposition that we have seen the final capitulation.

The NYSE saw only middling volume of 1.06 billion shares. Despite a decline in the Dow Jones Industrials of 436.37 points with a close at 10,208.25, most market pundits believe that if volume had crossed 2.3 billion shares, we probably would have seen the final capitulation.

Decliners were definitely quite strong on the NYSE, beating advancers by a 23 to 8 margin. Again, market pundits are looking for an advance/decline ratio approaching 1 to 9 before becoming confident that we have seen the final capitulation.

The Nasdaq (COMPX) did achieve decent volume of 1.90 billion shares, which accelerated into the close. It is entirely possible that the tech-heavy index is very close to its final capitulation sell-off. To that end, the Nasdaq closed down 129.40 points to 1923.38. Decliners trounced advancers by a ratio of 31 to 7. This number was closer to the desired levels that would indicate a final capitulation.

Today's declines were characterized by a lack of bidding as opposed to intense selling, despite the acceleration of declines into the close. A lack of bids means there are very few market participants who are willing to step up to the plate and attempt to buy a stock. In such an environment, even light selling can cause major point declines as weak bids, characterized by low bid sizes (the amount of stock willing to be bought at the bid price), keep dropping.

Today's excuses for not buying include the continued technology fallout following last week's negative news from Intel (Nasdaq:INTC) and Cisco Systems (Nasdaq:CSCO).

Adding to the market's woes is the further collapse of the Japanese stock market, the NIKKEI, which is trading below levels last seen sixteen years ago. Japanese banks complete their fiscal year at the end of this month. When the balance sheets of these major financial centers become public, it may become evident that Japanese banks have been decimated by declining stock prices. There could be huge negative global economic consequences if several Japanese banks are approaching insolvency.

OK, enough of the doom and gloom. Today marked the first day of triple witching week. If past experience is any guide, we should see the lows for the week by sometime tomorrow afternoon. We could also see a bounce rally start sometime late tomorrow that could follow through until the end of the week. The one technical indicator that supports this theory is the Relative Strength Indicator (RSI), which is showing oversold for both the Nasdaq and the S&P 500 (SPX).

Major gainers were exceedingly hard to find today. One stock that did rally was United Dominion (NYSE:UDI), which gained $2.38 to $21.88 following the Company's agreement to be acquired by SPX Corp. (NYSE:SPW). The deal calls for UDI shareholders to receive 0.2353 shares of SPW for each share of UDI that they own. The deal places a decent premium of 30% on UDI based upon both stocks closing prices on Friday. SPW fell $8.08 to $95.52 in today's trading.

There was some upside trading among top U.S. life insurance companies after it was announced that Britain's Prudential Plc agreed to buy American General Corp (NYSE:AGC) in a $22 billion stock deal. AGC finished the day up $0.55 to $38.80. Lincoln National Corp (NYSE:LNC) picked up $1.03 to $45.01.

There were not any gainers on the Nasdaq's most active list. Cisco Systems (Nasdaq:CSCO) lost another $1.81 to $18.81. Microsoft (Nasdaq:MSFT) dropped $4.75 to $51.94. Ciena (Nasdaq:CIEN) was crushed $11.81 to $53.31.

The broader market indices were all substantially lower. The S&P 500 (SPX.X) dropped 53.25 points to 1180.15. The S&P 100 (OEX) lost 31.88 to 601.52. The Nasdaq 100 (NDX) was particularly ugly as it declined 132 points to 1681. The Russell 2000 (RUT) was unable to avoid the carnage as it dropped 15.25 points to 458.40.

At least some of the cash vacating the stock market found its way into Treasuries. The 10-year Treasury note gained a quarter point and now yields 4.915%. The 30-year government bond picked up 11/32 and now yields 5.30%.

It was practically impossible to find a safe haven among the major industry sectors. The PHLX Semiconductor Index (SOX) began the day in promising fashion but closed down 17.05 points to 576.40. The PHLX Bank Index (BKX) was slammed 43.84 points to 843.68. The Biotechnology Index (BTK) was also crushed with a loss of 51.16 to 479.74. Looking for a winner? Try the PHLX Gold and Silver Index (XAU), which picked up 0.12 points to 55.13.

March 20th never seemed so far away. The bond market has already priced in a rate cut of 50-basis points following next week's FOMC meeting. The way the stock market is behaving it is becoming increasingly clear that a more substantial rate cut may be necessary to resuscitated stock prices.

Our next clue as to whether this will happen is tomorrow when February's Retail Sales numbers will be released. Consensus estimates are calling for an increase of 0.3%. If these numbers come out higher than expected, we could see an ugly opening. If we see numbers worse than expectations we may see the start of the bounce.

The Nasdaq has clearly dropped below the critical support of 2000. The next support level will be the topic of conversation among many investors tonight. There is some evidence that there is support just below 1800. This price level was a swing point during the market's oscillations from February through November 1998. The Nasdaq bottomed in October 1998 at 1357.09 before starting its historic rally to above 5000. It is not out of the question for this next level of support to be eventually tested.

Like I said before, the short term appears to be setting itself up for a bounce. This theory is mostly supported by the Relative Strength Index (RSI), which is showing an incredibly oversold condition that has previously resulted in bounce rallies. If we can close above 2000, then a rally to resistance at 2075 seems possible by the end of the week. Picking bottoms is not for the faint of heart. I also cannot stress enough the necessity of being disciplined with your stops if you see fit to go long this market.

The Dow Jones Industrials (INDU) faked out technical traders last week. A close above the 50-DMA of 10,718 on Thursday should have resulted in a test of the 11,100 resistance. Obviously this did not occur, and the INDU plummeted once it crossed back below the 50-DMA, which closed today at 10,708.

The MACD also issued a false buy signal last week and today's declines caused a sell signal according to this indicator. If 10,000 support does not hold tomorrow, it is quite possible that we could see a test of the support created by last October's slam-dunk to 9571.40.

But maybe I got ahead of myself because the INDU is also oversold according to the RSI. Therefore, a short-term bounce due to triple witching expiration trading, as well as the oversold condition indicated by the RSI, should start tomorrow afternoon or perhaps Wednesday morning. But then again, who really knows in this market.

Good Luck and may all of your trades be winning ones!

Jim Booth
Research Analyst
www.OptionInvestor.com

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