Option Investor
Market Wrap

Shorts still shorting!

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        03-21-2001        High      Low     Volume Advance/Decline
DJIA     9487.00 - 233.80  9719.40  9461.50 1.31 bln    861/2205	
NASDAQ   1830.22 -  27.22  1896.21  1820.75 2.10 bln   1242/2483
S&P 100   569.97 -  11.96   586.00   567.95   totals   2103/4688
S&P 500  1122.14 -  20.50  1149.39  1118.74           31.0%/69.0%
RUS 2000  435.74 -   8.74   445.11   434.82 
DJ TRANS 2678.83 +   2.97  2697.75  2661.45 
VIX        36.39 +   1.35    36.91    34.41
Put/Call Ratio       0.86

Still no joy on Wall Street tonight. With the Dow down over -525 points from its high on Tuesday they were still selling into the close. Heavy order flow met with no bids and the end is still not in sight. The Nasdaq tried to rally early but ended the day down another -27 points. No bargain hunters in sight and companies are still cutting estimates. Where will it stop?

The early morning revelation that Carly Fiorina, in a keynote address at the CeBit trades show, said HWP revenue growth will drop to 2% from 15% for the first quarter and not improve for the rest of their fiscal year which ends in October. Even more bearish were the comments about Europe. She said "the slowdown is clearly spreading to other parts of the world" and she had no confidence about Europe's ability to withstand a slowdown. Carly joined the ranks led by CSCO CEO John Chambers in warning that the U.S. problem is worse than expected and spreading faster than the mad cow or the hoof and mouth disease currently in the news. Actually these CEOs are spreading their own form of the "foot in mouth" plague. After repeatedly saying things were fine not long ago each are now eating their words with these new revelations. Is SUNW next? They had previously pointed to Europe as a bright spot on the horizon and yet were caught off guard by the rapid deterioration in the U.S. Is Europe going to be the next warning for SUNW and IBM? Who knows but the large multinationals are starting to crumble on a daily basis as investors see smoke on the horizon.

The shorts are still shorting and show no signs of quitting anytime soon. The CPI this morning was slightly higher than expected and while not showing any real signs of inflation will still make the Fed cautious. The Fed funds futures are now showing at least a +.25% rate cut in April which would be an intra-meeting move. The current feeling is that the Fed will not move for at least two weeks and will wait for the next round of economic reports before making a decision. With the global economy now showing signs of serious weakening the Fed not only has to worry about the U.S. economy but is faced with trying to stop the bleeding elsewhere as well. This is not their stated purpose but our economy does drive the world economy as well. If we fall into a recession then the economies around the globe that depend on us will also fall.

The Dow is only 109 points above bear market territory and we could easily hit that tomorrow. After two days of triple digit losses there is still no sign of buying. The VIX spiked to almost 37 but could still go higher. The market internals are terrible with decliners beating advancers on the NYSE by 3:1 and 2:1 on the Nasdaq. About the only positive indicator is the put/call ratio which spiked up to .86 and is giving a soft buy signal. We are definitely in oversold territory but can still go lower.

The Nasdaq loss today was mostly due to MSFT -2.75 and some biotech leaders. BGEN lost -3.44, AMGN -5.88, MYGN -4, GENZ -6.19, IDPH -7. The other Nasdaq big caps (and I now use the term loosely) managed a positive showing. SUNW +1, CSCO +.25, ORCL +.38, INTC +.94, JDSU +.94. Granted these gains were dwarfed by their previous losses but we are grasping at straws here!!

There are basically four proxies for the market. CSCO, MSFT, GE, AOL. The health of the market can be seen in how these stocks react to current events. MSFT has not been as reliable recently since the antitrust trial has clouded their destiny. MSFT was a drag on the Nasdaq today losing -2.75 as worries continue to surface that they will miss estimates for this quarter. AOL (and previously YHOO) is the proxy for the Internet sector and AOL is on the verge of breaking down to retest recent lows of $32. It only lost just under a dollar today but posted the lowest close since Jan-4th. CSCO is struggling to maintain a bottom at $19 and every rally over $20 is met with heavy selling. With CSCO a proxy for the Internet networking sector any serious break under $19 could mean another leg down for that sector. JNPR a competitor of CSCO is holding over $50 but struggling as well. GE is commonly seen as a proxy for the Dow and is only +.36 over the intraday 52-week low from March 12th. With the manufacturing sector and finance sectors under serious pressure GE could easily fall further putting pressure on the Dow.

Today's close on the Dow was the lowest since March-4th 1999 and only 109 points over the generally recognized bear market -20% drop. The Dow had been locked into a range between 10300-11000 for over two years but the continuing bearish forecasts of zero visibility has knocked more than -1369 points off the index in the last nine days. After trying valiantly to hold 10000 before the Fed meeting on Tuesday, all semblance of restraint has disappeared. The next two weeks include many Fed watched economic reports including Durable Goods, Consumer Confidence, GDP, Personal Income/Spending, Chicago PMI and Michigan Sentiment to name a few. Once into April we have Construction Spending, NAPM, Factory Orders and Non-Farm Payrolls. An educated gambler would probably do well to bet on any intra-meeting rate cut to not occur until after the Payroll Report on Friday April-6th. The Fed is not likely to move before they can tell if the employment is growing, indicating a recovery, or falling indicating a weakening economy.

Unfortunately April-6th is over two weeks away and a lot of pain can still happen between now and then. Rumor has it that mutual fund outflows are running at an all time high. If Fidelity, Vanguard and Janus are forced to sell to cover redemption's then each level down fuels the next drop as more investors decide to move to the safety of money markets or CD type investments. Ironically, this may spell the end of the drop. When the herd heads for the barn the storm is usually over. That is little solace for those still in the market. In the Dessauer Seminar last week there was a lot of pain. I spoke with dozens of investors whose portfolios had fallen by -50% or more. I will have to admit however that this group was dead set against selling at the bottom. John Dessauer was comforting them that the worst was over and they were true believers. For someone that has held Lucent from $60 to $12 or WCOM from $50 to $16 the worst is over. Granted these stocks could trade lower but the risk of another -$5 drop holds a lot less risk for these investors than they have already suffered.

When deciding when the market will bottom it is helpful to look at the market leaders and decide how much farther they can drop. SUNW has been flat and holding for two weeks. ORCL flat in a $2 range for last two weeks. INTC, still slipping and could see $20. MSFT, $50 and slipping on earnings warning fears and could see the December low of $40 again. Dell, actually showing a slight uptrend. WCOM flat between $15-$18. JDSU, still falling slightly above $22 and could easily see the teens. CSCO, struggling but holding $19. QCOM, rising slightly after bottoming at $50. JNPR, flat and holding $50. CIEN, flat and holding $50.

I am actually encouraged about this analysis. The only really serious problems are MSFT, INTC and JDSU. Of the majors there appears to be the beginning of a bottoming process. This could be simply denial of the overall process and the bottoms are simply key points at which investors feel they cannot fall much further and therefore contain little risk. This does not mean that JNPR or CIEN can't break $50 but this appears to be a line on the chart that draws buyers. This is called support! If we can just get a few more charts to show support the rate of descent will at least slow. The fact that the Nasdaq only lost -27 after what was essentially another HWP warning was encouraging as well! Remember the Dow lost -230 but could not drag the Nasdaq lower.

The Dow is close enough to the bear market level of 9377 that we could see technical bounce at any time. These imaginary points provide psychological support and program trading tends to launch buy programs when they are hit. I made a small mistake yesterday when I said the Nasdaq had lost $4 trillion in market cap. It was actually $5 trillion. HOWEVER, there is currently over $1 trillion in institutional cash on the sidelines and $2 trillion in individual investor accounts waiting for the bottom. All investors have not given up on investing. When the fog clears investors will go back into the market and very quickly. Until the bottom is reached they will wait patiently. The last three bear markets lasted from nine months to 24 months. The Nasdaq has been there for some time (since 4100) but the Dow is just now reaching those levels.

The capitulation event or bottom signal has not yet occurred. Any bounce on Thursday should only be treated as a trading bounce and Friday could see renewed selling. With global economies showing signs weakness very few traders will want to be long over the weekend. Be patient and wait for the real bottom.

Enter passively, exit aggressively!

Jim Brown

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