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Market Wrap

Bear Relief?

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         WE 3-30          WE 3-23          WE 3-16           WE 3-9
DOW     9791.09 - 87.69  9878.78 +374.00  9504.78 -318.63  -207.87  
Nasdaq  1720.36 -119.90  1840.26 - 88.42  1928.68 + 37.77  - 49.80 
S&P-100  577.35 - 28.23   605.58 + 24.87   580.71 -  7.28  - 12.72  
S&P-500 1128.43 - 53.74  1182.17 + 42.34  1139.83 - 10.70  - 23.03 
W5000  10318.40 -327.45 10645.85 +170.55 10475.30 - 84.07  -223.31 
RUT      434.66 - 15.87   450.53 +  7.26   443.27 +  1.47  - 10.36  
TRAN    2687.03 - 84.33  2771.36 +126.02  2645.34 + 13.97  - 71.64  
VIX       36.76 +  2.94    33.82 -  1.09    34.91 -   .38  +  2.66  
Put/Call    .91              .76              .52             1.08 

Bear Relief?

After Thursday's DELL induced rally for the major averages, Friday's Jobs Report caught everyone by surprise, sending the NASDAQ lower by 64.70 points and the Dow($INDU) down 126.90. That was enough to get the ball rolling back to the downside from the opening bell. Then, Pacific Gas & Electric, a subsidiary of PG&E (NYSE:PCG), filed for voluntary Chapter 11 bankruptcy as it gave up on a panacea for the California energy crisis. But taking a closer look at Friday's tape, a little profit taking after Thursday's gains shouldn't be entirely unexpected. The Dow was up 400 points the day before!

The big news on Friday was the Jobs Report. The Unemployment Rate came in-line at 4.3% but the Non-Farm Payrolls were lower-than-expected, -86,000 versus -67,000. This was the biggest loss in jobs since November 1991 during the last recession. Simply put, this growing trend of layoffs throughout the economy on all levels, corporate, retail, services, is starting to add up. As a result, fear of a weaker economy and looser job market than previous thought drove investors to do a little selling.

So was this cause for true macroeconomic concern or just an excuse to take profits after the previous day's run-up? I would have to say the latter. It was Friday and the market had been shaky all week; all the more reason to take what you got and go home. More importantly, the Non-Farm Payroll number was for March - a lagging indicator. If anything, the surprise number coincides with the turbulent trading in March, characterized by an increasingly volatile market and corporate warnings. Deeper into the report revealed that construction jobs were actually up, indicating that the housing market remains strong. This weaker report even stirred up chatter about an intermeeting cut again. Hmmmm. Let's not count on that to help the market repair, just look what the past three cuts have done.

The other major event was Pacific Gas & Electric's filing for Chapter 11 bankruptcy. There has been little relief out in Cali with the energy fiasco and a filing of this magnitude carries massive credit risk implications. This is the third largest bankruptcy in U.S. history with $24.18 bln in assets, only behind Texaco in 1987 and Financial Corp. of America in 1988. Stating a "failed" political and regulatory process, CEO Robert Glynn gave up on solvency and decided to let the courts resolve the financial problem, i.e. court-ordered rate hikes. With $9 bln in debt outstanding, the ripple effect to creditors will begin to unravel. Moody's has already lowered its outlook on the State of California's "Aa2" general-obligation debt from "stable" to "negative." Something like bad to worse, but not an all-out ratings downgrade. Parent company PG&E (NYSE:PCG) lost 37%, or $4.18, to $7.19.

Energy stocks were sold with reckless abandon in fear of the implications of such a bankruptcy. Calpine (NYSE:CPN), Enron (NYSE:ENE), and Duke Energy (NYSE:DUK) all sold off quickly but found buyers after the steep declines. But this California crisis will fade into the background as earnings begin this week and next. Later in the week, we'll see how the quarter went for the likes of Yahoo (NASDAQ:YHOO), Juniper Networks (NASDAQ:JNPR), Biogen (NASDAQ:BGEN), and General Electric (NYSE:GE).

The fate of the stock market now lies in Corporate America's hands. It will very well help complete this bottoming process in the NASDAQ. The market won't be listening to the earnings number so much, rather the guidance going forward, visibility, and inventories. With reeling demand and overbuilt inventories, tech companies will need to unload them to begin a fresh slate. Corporate earnings are going to give the market the needed catalyst to finish this painful decline. My thinking goes hand in hand with the CBOE Volatility Index, VIX.X. The increase in volatility, a measure of general market fear, to levels near 40 gives the appearance that it is coiling to spike upward. As I mentioned on Wednesday, these are trying times that we must get through in order to technically recover. A spike up in volatility will coincide with a spike down in the market.

I was discussing the VIX.X with a colleague and we noticed the uncanny resemblance to late 1998, culminating with a massive spike on October 8th to a historic high of 60.63. This was the day that Long Term Capital Hedge Fund collapsed and the Fed cut rates. The VIX.X action prior to that event as it traded in the 40s looks quite a bit like the current chart. A spike toward 50 should be expected in this bottoming process, for good measure. This would allow the bulls to step in with size to the downside and reverse this dominant downtrend.

Looking forward, earnings, earnings, earnings will be in the spotlight. After Friday's rumors that Motorola (NYSE:MOT) is having liquidity problems, the stock tanked to a low of $10.50. The company emphatically denied having any credit problems but the past six months have been a nightmare for MOT, handing out 22,000 pink slips in the process. Their earnings on Tuesday after the bell will be watched very closely as the company will potentially post a loss for the first time in more than 15 years. This will certainly set the tone on the Street. In addition, more economic numbers are slated for release with PPI and Retail Sales on Thursday. These releases will either fuel speculation that the Fed may move intermeeting or quell the idea until the May 15th FOMC meeting.

Right now, it feels like the market is building up to make a move. The VIX.X is poised at high levels and forward guidance is going to be crucial during these earnings reports. Let's be honest, it isn't likely that we are going to hear a great deal of good news from companies. We are in a trough right now and until we see some light, downside risk still remains even though it may be limited. It is widely thought that the NASDAQ has solid support at 1500, which is minimal considering it closed at 1720 on Friday. Remember that we only have a four day trading week, with the markets closed on Good Friday. Volume should lighten as the week goes on. Watch out for that time decay on April options over the three day weekend. Overnight risk increases in earnings season as gaps become more common due to after-hours releases. Trade what the market gives you, not what you hope the market will do.

Just an aside, I want to thank all of you at the Denver Seminar this weekend that took to time to come to my presentation on Option Volatility and for all the great questions in Friday's Chalk Talk. Enjoy the rest of the Seminar and best of luck in 2001.

Trade smart.

Matt Russ

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