If Friday's trading didn't scare away every bull, then I don't know what will. That's what we're waiting for: Capitulation. With a capital "C." But I'm not going to try and call a bottom in a market that can't see past the current quarter. The fact is that the market is a leading indicator of the economic future. Without visibility, no one really knows when valuations will come back in line or which companies will have predictable revenue streams. Hence, the buyers strike. While put trading has continued to be successful, Tuesday's Fed meeting and the anticipated rate cut might breath some life back into the market, if only for a brief moment. Consumer Sentiment came in strong-than-expected, indicating the consumer's faith is not dead. So, will we get the 50 or 75 basis point cut?
No matter whether we get the 50 or the 75 basis point cut, there will likely be some short covering on Monday and Tuesday ahead of the Fed meeting. Minor relief in tech stocks and financials should be expected. It has been said so many times on the Street lately that the market is in oversold territory. In the same instance, the NASDAQ traces new lows and the Dow(INDU) slips below 10000. Everyday we scan for opportunities on the upside which is a task in itself. One particular sector that appears to have stabilized near support is the Securities Broker/Dealer Index(XBD.X). After the Fitch's downgrade of the credit rating on 19 Japanese bank last Wednesday, this index looks to have settled in at 450. Any short covering in the major B/Ds ahead the Tuesday's Fed meeting would provide an opportunity on the long side. This would be for a quick trade, as the reaction to the Fed is still an unknown. A 50 basis point cut might not satisfy the market, especially with the growing number of pundits expecting a 75 point cut. The bigger cut would give a nice lift for a relief rally going into the end of the week. However, after Friday's stronger-than-expected Consumer Sentiment number, we will probably have to settle for a half point cut. We'll take what we can get. We added Lehman Bros.(NYSE:LEH) as a call play this weekend to give us exposure to this opportunity.
Friday's open on the NASDAQ gave the signal for put plays, as it took out Monday's low of 1923. There was very little heat for put traders while the NASDAQ slid 50 points before buyers showed up at 1877 around 10:45am ET. The stronger Sentiment report at 10am only fueled the downside pressure. With another new 52-week low for the NASDAQ, the short covering rally only lasted until the 1925 level, where previous support turned into resistance. There really isn't a lot to say about the NASDAQ anymore. The bottom has been elusive for 1500 points and remains so until we get a better idea of business sentiment for 2001. We would expect a short covering bounce in tech shares ahead of the Fed meeting, especially if the 75 basis point talk continues on the Street and CNBC. The long side trade would be risky but there are a few tech stocks that aren't in a bloody downtrend. I stress few. Worldcom(NASDAQ:WCOM) and Semtech(NASDAQ:SMTC) have been showing relative strength in the NASDAQ.
Over on the INDU, the chart indeed did not lie and continued its dominant pattern. Friday was the downward forecast after the consolidation stage, as shown in the Thursday Wrap INDU chart. The INDU traded with a very similar intraday pattern as the NASDAQ; no one wanted to be long going into the weekend. It lost 207 points and also found resistance at previous support at 10000. Of the thirty Dow stocks, only five were in the green: Coca-Cola(NYSE:KO), General Motors(NYSE:GM), International Paper (NYSE:IP), Microsoft(NASDAQ:MSFT), and Phillip Morris(NYSE:MO). If Friday's low of 9814 is taken out by sellers, watch for buying at the 9730 level which is where buyers showed up in March 2000. It may provide a bounce, but this is an entirely different year than last.
As option traders, we must look for the immediate opportunity. Seizing the moment. Because of the nature of options, time is of the essence and we must be myopic. Positioning past two days can be disastrous in the current market, unless of course you have been short. Take it one day at a time, and with the Fed changing monetary policy on Tuesday, we can't be sure what a market like this will do. Until we get better visibility with April earnings and the rate cuts begin to take effect, we'll have to take it day to day. No need to catch a falling knife. Any short covering combined with less than a 75 basis point cut will give a very nice put entry. Currently, seven out of 25 bond dealers that trade directly with the Fed expect a 75 basis point rate cut. It seems unlikely, but the Fed has done some strange things in the past, i.e. the 50bp hike last May. Given the bear market, any rally will be short lived. Keep this in mind when setting up trades. Weak tech will continue to be sold after the Fed is out of the way. Trade smart.