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Market Wrap

Heavy Volume, Heavy Losses, Is The End In Sight?

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         04-03-2001        High      Low     Volume Advance/Decline
DJIA     9485.70 -292.20  9774.80  9428.10 1.37 bln    737/2356	
NASDAQ   1673.00 -109.90  1759.01  1660.92 2.51 bln    800/3012
S&P 100   562.38 - 22.02   584.41   559.12   totals   1537/5368
S&P 500  1106.46 - 39.41  1145.87  1100.19           22.3%/77.7%
RUS 2000  426.96 - 12.80   439.76   424.82 
DJ TRANS 2680.57 - 64.45  2745.02  2671.08 
VIX        39.33 +  4.58    40.70    36.96
Put/Call Ratio      0.99

The Dow gapped down at the open on worries about Japan, China and the U.S. economy. A small +50 point bounce at the close brought it off its low of 9428. It was not a buying bounce but simply short sellers taking profits in case of a dead cat bounce at Wednesday's open or an unexpected rate cut by the Fed. The Nasdaq tried to rally at mid-day but continued negative news prevented bargain hunters from making any gains.

Window undressing continued in earnest on Tuesday. Fund managers that bought stocks to dress up their quarter end statements were dumping those same stocks this week. How much worse can it get? Don't answer that! The Dow appears destined to retest the 9106 low set on March 22nd and the Nasdaq broke under support as well. The next Nasdaq support level is 1500 with major support at the low for 1998 of 1357. That low from October 4th, 1998 was the low for the year and you have to go back to May 1997 for support after that.

Obviously nobody wants to even consider a Nasdaq below 1500, most of us are in denial that it is trading under 2000! The analysts are now echoing my statements from last week that there is no reason to buy stocks with the historical April drop in front of us. Thanks for reading guys! With the first quarter over the earnings warnings are coming fast. So far this week there have been over 35 with more in the pipeline.

The B2B and Software warnings on Monday set the stage for a weaker Nasdaq as each sector shakeup rattles investors in the corresponding sectors. The Networking sector was hit very hard today with Nasdaq:CIEN losing -6.75 or -20% and Nasdaq:JNPR losing over -$5 or -15%. CSCO set a new 52-week low of 13.56. The software sector was killed with VRTS losing -7.50, CHKP -5.50, ADBE -3 and even MSFT -2.44.

The semiconductor sector I wrote about on Sunday has lost over -10% in the last two days to a new 52-week low of 489. As the "head of the snake" it has helped lead the Nasdaq to new lows. If you took my editors play suggestion of SMH puts on Sunday then you should be very profitable. If you did not read that section on Sunday you should to understand the current market.

The current round of tech warnings has started a new trend. Not only are tech warnings accelerating but each now has a new component, layoffs. RATL warned and cut -10% of their workforce, KEYN warned -13%, OYNX warned -20%, FIRE warned -650, KANA warned after previously announcing layoffs. AGIL warned today after the close as well as SYBS.

We are entering a very perilous time in the markets. Earnings are weighing on stock prices producing a very negative sentiment. Add to this sentiment the crisis over the spy plane in China and the worry about Japan accounting methods changing and this negative sentiment is completely over powering the buyers. Add to these factors the advent of tax selling season for individual investors and you have the perfect storm in the markets. With tax day less than two weeks away investors are watching the prices of stocks they were going to sell to raise cash fall on a daily basis. The impulse to sell now and prevent a further cash loss is great. Also weighing on the street are persistent rumors of a big mutual fund that is in trouble. If investors are withdrawing money from funds to pay taxes or simply bail out of the markets, there is the possibility that a fund that is over leveraged and got caught in the down market could be failing. If that was announced publicly there would be a run on remaining funds like the bank panics in the depression. The Long Term Capital failure shook the markets but not as bad as a retail fund collapse would. LTC was a fat cat fund for very large institutions who knew the risks. A retail fund failure would be catastrophic.

Another factor weighing on the tech sector is the true seriousness of the inventory problem which is slowly coming to light. Cisco is rumored to have as much as $1 billion in excess component inventory which is becoming more obsolete as each day passes. Rumors exist that this could be as much as 18 months of inventory at present sales levels. Even more rumors exist that CSCO is putting pressure on its suppliers to take components back and on wholesalers to take delivery of routers and switches they do not need to get the inventory off Cisco's books and hide the problem. Want to buy from us when the recession is over then take this inventory now, or else! Big guys become bullies when times get tough.

The severity of the recession struck home today with PSIX saying they were on the verge of bankruptcy. If we see a rush by others to join them then we could see an entirely new leg down in the markets. The announcement rippled through the networking sector with major suppliers to PSIX trading lower on the possibility of payment problems. The biggest suppliers to PSIX are CIEN, JNPR, CSCO and NT. See a pattern here?

Margin calls are again becoming a major problem. With each down leg investors averaged down thinking surely stocks like CIEN and JNPR would hold $50 or VRTS, CHKP and ARBA would rebound. When those events fail to occur the investor becomes trapped and each new drop creates a new wave of broker forced margin selling. The big downdrafts like today trigger margin calls which many investors will get tonight. This puts more pressure on the next days session.

29 of the Dow 30 stocks were down today with Home Depot the only survivor with a +.50 gain. Decliners on the NYSE beat advancers more than 3:1 and almost 4:1 on the Nasdaq. The real measure of the market internals was the volume. With 2.5 billion shares traded on the Nasdaq over 2.3 billion was down volume. Up volume accounted for only about 200 million shares. The VIX came very close to its 52-week high of 41.99 with a high today of 40.70. Fear is rampant in the markets as evidenced by the VIX and the put/call ratio which closed the day at .99 which indicates stronger put buying. The missing component with the -292 Dow drop today was the lack of a major bounce like we had on March 22nd. There were just no buyers and that was a concern for professional traders at the close. There were reports of institutional short selling in late afternoon which would mean the big boys are looking for even lower lows.

In our pick meeting today there was a serious gloom. Do we buy puts on stocks down -$20 to -$30 in the last week? The risk/reward ratio for that type of play is slim. Do we try and pick a bottom on some stocks and play calls? Not when every indicator is pointing down. Good stocks are getting beaten almost as badly as the weak ones in this current sell off. The Nasdaq is now down -67% from its high last year and the Dow is down -19%. All the indicators are still pointing down but like in any major market move there should be a bounce soon. The market is very oversold again and there is a lot of money burning a hole in pockets on the sidelines. Dick Arms, (ArmsInsider.com) said on CNBC today that the TRIN index was at levels he had never seen before in the 32 years it has existed. The severely oversold conditions are pointing to a major rally soon in his opinion.

We need a catalyst to make these people want to buy. With earnings, China, Japan, fund problems and taxes as the overriding worries about the only thing that could break this drop is another inter-meeting rate cut. The first three cuts have failed to work but at these levels another aggressive cut could be the right trigger. The Jobs Report on Friday is still my guess for a surprise announcement if one is coming. We know the Fed probably gets the data early so it is also possible on Wed/Thr. I am sure Bush has "suggested" to Greenspan that another rate cut to prop up the markets would be nice. Financials have started moving down again as recession fears create earnings worries for banks. If consumers are starting to feel the heat from the market and can't make car payments, house payments and credit card bills then more trouble is ahead for the banks.

I know this sound very bearish. I want to be bullish but I cannot find anything bullish to write about. The fact that the Dow could be creating a double bottom by re-testing the March 22nd low of 9106 could be bullish. Of course at 9475 that means it could drop another -375 points during that retest. It could also rebound tomorrow but without an answer to the China crisis and good news from Japan it is not likely to happen. We could also take heart from the lack of warnings from any big cap stocks today. Of course big cap has taken on an entirely new meaning lately. CSCO hit $100 billion in market cap today, down from $500 billion in March of last year. So I repeat, nothing goes down in a straight line and I would expect a bounce soon. When and how far is a mystery to everyone. This is one of those days that it feels really good to be 100% in cash. You can watch the markets fall unemotionally and be ready to jump in when the trend changes.

Enter VERY passively, exit VERY aggressively!

Jim Brown
Editor
www.OptionInvestor.com

If you have not reserved your seat at the Spring Trading Expo here in Denver on April 5th-9th then you are missing the best seminar we have ever held. This power packed four-day event is structured to fully educate you not only on advanced option strategies but stock analysis as well. This will make you a better and more profitable trader.

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