Option Investor
Market Wrap

Window Dressing That Looks More Like Striptease!

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        03-29-2001        High      Low     Volume Advance/Decline
DJIA     9799.10 + 13.80 9882.800  9687.60 1.24 bln   1486/1563	
NASDAQ   1820.57 - 33.56  1876.74  1802.76 2.07 bln   1471/2137
S&P 100   584.90 -  3.41   592.66   577.75   totals   2957/3700
S&P 500  1147.95 -  5.34  1161.69  1136.26           44.4%/55.6%
RUS 2000  441.53 -  0.67   446.01   439.91 
DJ TRANS 2753.43 - 11.65  2777.59  2749.50 
VIX        33.83 +  0.61    34.51    32.16
Put/Call Ratio      0.91

If this is window dressing then I don't want to be in the markets when the clothes come off. The Dow rambled 100 points on either side of the flat line to end only barely positive. The Nasdaq fought off continued tech warnings to close only 28 points from a new low. This is about as exciting as a root canal! Fund managers are faced with no targets to buy which will make them look good and a flood of companies they need to sell to keep them from looking bad.

This may be a good news bad news joke. Fund managers may be dumping tech stocks to avoid having investors wondering why they were still holding a company that is down -75% for the year. Next week they may be buying those same companies back because they are still the best prospects for profits when the markets recover. While most funds are already done with this end of quarter slight of hand, there is still the fear that Friday could be a flush day.

With the Nasdaq closing near a new low investors that usually dump tech stocks in April and buy them back in October may decide to quit early and avoid the rush. This may not be a factor considering the $3 trillion in cash on the sidelines but still something we need to watch.

The tech warnings from earlier in the week are giving way to a rash of non-tech warnings. Ryder, Delphi, Coca Cola Enterprises, International Paper, Federal Mogul, Ingersoll Rand, to name a few. Everyone knew techs were suffering from the economic slowdown but the non-techs have been fairly quiet. Today's wake up call by IP, IR and CCE shows that everyone is being impacted.

The tech giants are still painting a grim picture. INTC says no improvement for 18 months. CSCO says no improvement for at least three quarters. Others simply say they see no end in sight. Where is the reason to buy? Would you want to buy a company today because it appeared cheap only to have them warn next week that earnings would really be double digit losses? Several have said that this week. Your cheap company suddenly became much cheaper.

First call said tech warnings are already up over +81% for this quarter and the worst period for warning is still ahead of us. Over 210 S&P-500 companies have pre-announced and 150 of them warned of earnings problems. According to First Call this is already the worst quarter on record for warnings.

The economic picture is suddenly looking worse. The fourth quarter GDP came in at a revised +1.0% and the worst number since 1995. Estimates going forward range from a minus -.3% to +.8% and continuing to decline. The good news is simply the bad news cannot get much worse. There are still over valued stocks although not many.

Downside risk is minimal for many stocks. CSCO, ORCL and SUNW at $15 and LU at $9 for example. Even the networkers have finally broken down with CIEN and JNPR the last to fall now trading near $40. When the generals finally fall the end is near. The trouble becomes "who is left to buy them?" The retail investor has become so frustrated that there is little or no interest in the markets. The day trading boom has bust. Ameritrade and E*Trade for instance are heading for penny stock status. This is a glaring example of the mood change for investors.

The good news, those of us still in the market have some really good values to buy right now. When we were buying BRCM, ITWO, CMRC, JNPR, CIEN at $200, a normal day could produce $15-$20 swings. Today CSCO, SUNW and ORCL cost less than the intraday swings we were accustomed to trading. I can't tell you how many options I bought and sold that cost more than the stock for these companies sells for today. If the Nasdaq goes to 1700 or even lower it would be impossible to lose a lot of money on these stocks.

Leaps on the QQQ are very cheap. The Jan-2002 $45 calls are only $5.40 and the upside potential is incredible. The Jan-2003 $50 leaps are only $7.10. Will tech stocks recover? Absolutely! The only question is when. The markets and talking heads are building a wall of worry that the markets must hurdle. Good! That makes longer and stronger rallies. The current administration will get a tax cut passed. They will press for economic relief. The Fed will continue cutting rates. The roadmap is in place and real investors will profit possibly more than in the 1999 rally.

The choices to buy are smaller with many companies heading into oblivion. The quality companies, which can be numbered on both hands, will receive huge amounts of money once the buying begins again. Dot.coms with no game plan and no earnings will be acquired or simply fold. That limits the number of stocks available and forces money into tighter and tighter groups. The broad market rally from 1999 will be a memory and we will see a very narrow rally in 2001 but in my opinion one with very high velocity.

The major problem we still face is timing. Nobody knows when we will turn the corner and start building on the future. It could be next week, next month or even after the summer. The trigger will be the same as it has been for as far back as markets have memory. Evidence of a rising economy and increased earnings. Once investors see even a glimmer of hope in those areas the gold rush for 2001 will be on. Until then we still need to watch and wait. The put/call ratios are rising (.91) and the VIX is climbing again. This would indicate that there may be another dip in our future. Trade the bounces with the emphasis on TRADE. As option investors the only long position I would take with the intention of holding would be 2003 leaps. Everything else is a very short term trade.

Enter passively, exit aggressively!

Jim Brown

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