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Market Wrap

Grossly Desperate (Bullish) Participants

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       8-29-2001          High      Low     Volume Advance/Decline
DJIA    10090.90 -131.13 10267.70 10075.61    966 K   1427/1690	
NASDAQ   1843.17 - 21.81  1879.76  1833.65 1.44 bln   1525/2060
S&P 100   586.34 -  7.79   597.34   585.63   Totals   2952/3750
S&P 500  1148.56 - 12.95  1166.97  1147.38             
RUS 2000  473.34 -  0.86   475.51   471.25 
DJ TRANS 2827.87 -  3.26  2840.86  2803.82 
VIX        25.73 +  1.71    26.30    24.16 
Put/Call Ratio      0.66

Grossly Desperate (Bullish) Participants

Of course the other meaning of the acronym GDP is gross domestic product. But the former sums up Wednesday's tape pretty well. Although GDP figures came in slightly higher than consensus estimates, the number failed to stabilize the market, let alone lift it. Advanced Micro Devices' (NYSE:AMD) lowering of guidance didn't help. And traders weren't feeling bullish ahead of Sun Micro's (NASDAQ:SUNW) mid-quarter update after the bell. Just another long, hot summer day.

The Nasdaq managed to hold support, no thanks to the Semiconductor (SOX.X), Networking (NWX.X), and Internet (INX.X) sectors. The latter of which fell to a four-year low Wednesday. All three of the aforementioned sectors broke down below key support levels, while only the Biotech (BTK.X) sector managed to hang tough. Despite the weakness across the sectors, the Nasdaq Composite (COMPX) didn't fall below its relative low at 1817. And neither did the Nasdaq-100 (NDX.X), which is near a critical support level at 1485. Insofar as support concerns the COMPX, bids might begin appearing between the 1785 to 1800 range, while sellers should exert force at the 1890 level.

The Dow Jones Industrial Average ($INDU) and the S&P 500 (SPX.X) did, however, take out their relative lows. The Dow should now face resistance during any forthcoming bounce around the 10225 level, which had propped it up for some time. In terms of support, the Dow's next major level is...gasp...10,000. For the S&P, the area between 1155 and 1170 is congested, while the upper-end of that range serves as meaningful resistance. And for support, the S&P has help starting at 1135.

The much-hyped release of revised second-quarter GDP figures Wednesday morning may have been partially responsible for the breakdowns in the S&P and Dow. Although the number came in a tick better than expected, the equity markets were reminded that the economy remains mired in a slowdown. Equity futures rallied after the Commerce Department released its revised figures, but stocks began weakening right after the opening bell, which reinforced the fact that sellers remain in control of this market.

In its revised report, the Commerce Department reinforced that the biggest contribution to the economy was coming from the U.S. consumer and its spending habits during the second-quarter. The biggest change in the revised report came from updated inventory figures, which showed a measurable decline during the second-quarter, which is actually a good thing. But, perhaps the most disconcerting aspect of the report was the revelation that business investment remained extremely weak, specifically investments in equipment and software. (The 0.2 percent annual growth rate, by the way, is the lowest in the last eight years.)

After digesting the report, market participants opted for debt securities for their relative "safety." In other words, the ongoing flight to quality pushed treasury bonds ever-higher Wednesday, which drove the yield in the 30-year Treasury Bond (TYX.X) to a five-month low. As long as this dynamic continues - the high correlation between yields and stock prices - the buying of bonds necessitates raising capital elsewhere (Read: Selling Stocks).

Of course the continued deterioration in corporate earnings isn't helping the demand side of the equation for equities. Advance Micro guided to the low-end of its previous range Wednesday afternoon, which was the main source of the SOX's excessive weakness. During its second-quarter earnings report in early July, Advance Micro warned of continued weakness in its flash memory business and guided to a drop in total revenues by between 10 and 15 percent quarter-over-quarter. Wednesday afternoon, an AMD official essentially reiterated the weakness in the flash memory business and directed investors towards the lower end of its previous guidance of a 15 percent slide in sales. As a result, shares of AMD shed a more than 4 percent.

Those traders who avoided buying Sun Micro ahead of its mid-quarter update Wednesday afternoon were for the better. The company reported that it didn't expect to breakeven during its fiscal first-quarter, while consensus estimates ahead of the meeting were calling for a 2 cent per share profit. In addition, the company did not give further revenue guidance. Apparently, things in Asia/Pacific and Europe have grown worse. Shares shed about 60 cents in the after hours session.

In other after hours news, Altera (NASDAQ:ALTR) reaffirmed its previous guidance, which wasn't very good to begin with and Corning (NYSE:GLW) announced another 1,000 job cuts. The overall tone of the after hours news was negative, with a drop in futures - both NDX and SPX - indicating that much.

With the breakdowns in the Dow and S&P Wednesday, along with the negative after hours news, there's reason to believe that the market will continue sliding into Thursday's session. But consider that the Dow and S&P - through Wednesday's session - have fallen in the past three days. More importantly, the two haven't fallen in four consecutive days since mid-June. By technical measures, neither the S&P nor the Dow is oversold. But three big down days may be enough to induce another round of short covering. So, don't go out with reckless abandon shorting stocks; make sure a plan is in place!

Furthermore, volume, as if it weren't light enough already, is sure to dry up in the coming days as market participants head out for one last summer retreat. The lack of participation is going to create an illiquid environment, which will make gaming price action all the more difficult. So if you must trade ahead of Labor Day, it may be prudent to go with half positions.

Finally, the European Central Bank (ECB) is conveying Thursday. This event may act as a catalyst for the U.S. markets, whether it's a positive or negative catalyst most likely depends upon the ECB's actions. Up until this point, the ECB has been rather stingy with its monetary policy due to concerns over inflation across the Atlantic. And many feel that the ECB has been pursuing the wrong policy in light of the global economic weakness, which was clearly present in Sun's guidance during its conference call. Needless to say, the pressure is on for the ECB to cut rates. If it does, shorts may have a reason to cover their bearish bets. If the ECB doesn't cut rates, which would be a huge disappointment to European and American markets, the recent weakness may be exacerbated to the downside. Either way, those trading Thursday should be aware of the ECB's decision on rates.

For Option Investor readers getting an early start on the Labor Day weekend, have a safe and happy reprieve from this mania we call the market!

Eric Utley
Option Investor

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