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Market Wrap

Running Scared!

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        05-03-2001        High      Low     Volume Advance/Decline
DJIA    10796.70 - 80.00 10872.30 10723.60 1.11 bln   1227/1822	
NASDAQ   2146.20 - 74.40  2183.07  2129.07 2.01 bln   1449/2346
S&P 100   647.75 -  9.58   656.19   643.16   totals   2676/4168
S&P 500  1248.58 - 18.85  1264.43  1239.88           39.1%/60.9%
RUS 2000  485.65 -  5.99   490.45   484.45 
DJ TRANS 2835.51 - 32.80  2869.63  2818.52 
VIX        29.50 +  1.73    30.25    29.32
Put/Call Ratio      0.72

Running Scared!

Stocks have been trending up +100% a month, the Dow just broke 12000 and the Nasdaq is nearing 5000 again. DING-DING-DING! Investors were rudely awakened from their dreams by the opening bell today as stocks plummeted on an increasingly grim outlook and a bigger than expected Jobless Claims report. The constant slow rise of the indexes over the last several weeks was interrupted by a dose of reality.

The Initial jobless claims increased to 421,000 and continuing claims (people still out of work) rose to 2,682,000. The continued upward trend was due a surge in layoffs in March and April. The only good news here is an almost certainty that the Fed will continue to cut rates until the labor conditions ease.

Ironically, the Fed has been worrying about the low unemployment rate for two years as fuel for inflation. Lack of skilled workers had bid up the salaries for those willing to change jobs and this increased cost was being passed on to consumers in inflated prices. The surge in unemployment is actually helping to slow inflation as out of work job seekers will take less money as a new hire than a gainfully employed person seeking only to up their salary. While the numbers may point to a continued weakening economy you can bet the Fed is breathing easier. The four week moving average is at the highest level since 1992.

The NAPM services index fell by -3.2% in April to 47.1%. This is a clear indication that the economic slowdown is spreading to more than the manufacturing sector. The consensus estimate was 50.2% and this was significantly below that and the lowest level in years and is seen as a leading indicator to the economy. The combination of the Jobless Claims and the NAPM reports indicate that the Fed still has several cuts in their future to stop the economic fall.

So the economy may still be sliding but tech stocks are always favored by the markets six months before the actual rebound. Not today! Novellus CEO said today that he does not expect a recovery in orders for semiconductors until the fourth quarter of this year, at best. The slowdown could continue into 2002. He added that his own checks have found semiconductor plants working at between 30% and 80% capacity - around the world and across all product lines. Speaking at a Merrill Lynch conference he said he did not expect to see any uptick in orders until the fourth quarter and it would probably take one to two quarters after that before earnings would start to improve.

If you multiply his sentiments across all the chip makers and PC makers then it is possible the market bounce was two quarters premature. To emphasize that point Compaq said today that the second half of the year was going to be very tough. Prudential said today that PC demand was still dropping and these comments were echoed by Compaq. He did say the global markets were stable but said he was starting to get worried about currency volatility.

UBS Warburg downgraded Dell today based on the accelerating price war. With PC demand still slipping, Dell has pledged to be "ruthless" in cost cutting which would be passed on to consumers as well. This price war was expected by UBS Warburg to possibly cut Dell's margins in half. Compaq CEO Capellas said his company was up to the challenge and said they will be much more aggressive in pricing. What is shaping up to be a massive price war is sure to be great for consumers but the manufacturers will eventually be selling computers at breakeven or less just to maintain operating assembly lines and avoid laying off key employees. Not good for profits and if the demand is still dropping we could be a year away from better profits. A funny thing about price wars, once consumers become used to paying much lower prices it is very hard to get them to pay increased prices for those same goods in the future.

Based on their reassessment of the sector JPM and H&Q said today that chip stocks were pricey and had risen too far too fast with the rebound still not in sight. Kiss that sector goodbye! With the chip sector a leading indicator for the Nasdaq all these negative chip stories may have investors rethinking their jump back into tech stocks.

The Nasdaq bumped up against resistance just above 2225 on Wednesday and pulled back -74 on the concern about the aborted chip rebound. The Dow broke the uptrend line in place since April 4th and pulled back to light support at 10750 from Mar-26th. The Dow attempted to rally at the close and recovered almost half of the day's loss. The bargain hunting rally was half hearted at best and the bears were probably slobbering with excitement that maybe there was still a shorting opportunity available. The S&P gave up -20 points of hard fought ground to close at 1248 and significantly under the 1267 resistance from earlier in the week.

The grim news about the lagging tech revival was not unexpected but the severity of the intraday drop caught many traders off guard. I suggested last night that many traders with profits were deciding whether to go flat or hold over the Non-farm Payroll report on Friday. It appears the jobless claims this morning struck fear into those traders and they ran for cover. If not only tech stocks but also fast food companies, service companies, oil companies, health care companies among others are still warning daily then maybe the bounce was premature. With that thought traders ran for the exits and I was surprised to see any bargain hunting bounce at the close.

What happens tomorrow? Regardless of the market drop today the investing sentiment is still bullish. It is very possible that the nonfarm payrolls may be worse than expected but the market may shake off the news assured that the Fed will cut again anyway and we will be back in rally mode. Remember, most mutual funds and retail investors do not make money unless the markets are moving up. The underlying sentiment is always up even when the bears are shorting everything in sight. The last two weeks of rally were a breath of fresh air for investors and they will want to buy anything that does not look like a complete disaster. Buyers that were frustrated by missing the boat on the last bounce have been given another chance to buy a ticket. Now that very human emotion of doubt comes into play. Early this week those investors were begging for a pullback to give them another buying opportunity. Today they got the pullback but now they are thinking, "is it just a pullback or are we going to retest 9100 again?" Their trigger fingers are suddenly paralyzed by doubt and worry. Isn't is amazing how we investing humans are suddenly struck dumb by the very thing we were asking for?

I painted this word picture to make one point. Traders everywhere will be poised over their mouse tomorrow just hoping for some sign that the market is going to rebound again. Just some sign that they can hang their hope on before pressing the buy button. If they get that in the morning then we may be headed back up that yellow brick road once again. If they see weakness they may become frustrated once again and pull back into their shell and wait for the lows to be retested. Let's hope for a vote of confidence by portfolio managers at the open and not a case of bears seeing their shadows again for six more weeks of sell off.

Enter passively, exit aggressively!

Jim Brown

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