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Market Wrap

Sun(W) Sets on August Trading!

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       8-30-2001          High      Low     Volume Advance/Decline
DJIA     9919.58 -171.32 10117.54  9869.14 1.16 bln   1065/2021 
NASDAQ   1791.68 - 51.49  1833.29  1777.11 1.71 bln   1245/2371
S&P 100   574.38 - 11.96   587.96   572.41   Totals   2310/4392
S&P 500  1129.03 - 19.53  1151.75  1124.87             
RUS 2000  468.06 -  5.28   473.34   465.42
DJ TRANS 2806.84 - 21.03  2844.12  2779.29
VIX        28.08 +  2.35    28.67    25.97 
VXN        52.28 +  3.00    52.68    51.15
TRIN        2.26 
Put/Call Ratio      0.94

The scorched earth warning from SunMicro on Wednesday led the markets down on Thursday as September storm clouds gathered on the horizon. Other big caps also came under fire as volume increased to the downside. There was no joy on the floor as positive comments by key analysts failed to have any impact and negative expectations increased exponentially. Microsoft, Dell, Oracle, Qualcomm, JDSU and Broadcom all gained speed to the downside.

If it is this bad in August how bad can it be in September? The Dow has fallen -502 points this week and closed under 10000 for the first time since April 9th. The Nasdaq gapped down at the open below the 1817 low from last week and never looked back. Advancers were severely beaten by decliners by as much as 3:1 on the Nasdaq. Volume increased substantially to 1.7 billion on the Nasdaq and over 1.1 billion on the NYSE. The lack of buyers from earlier in the week turned into a wave of sellers as down volume beat up volume by 9:2 on the NYSE.

What prompted the new dive? Starting the new worries was the GDP on Wednesday which was barely positive at +0.2% and way down from the prior estimates of 0.7%. With the global economy under attack and many of the European and Asian exchanges hitting new yearly lows there is simply no support for the "economy has bottomed" crowd. The Nikkei broke below 11000, a critical support level and with major banking changes to take effect in September many analysts expect to go much lower. This index has not been this low since Oct 1984.

The SUNW warning that orders from Europe and Asia were slowing dramatically, was simply the last straw for the market bulls. The bulls cannot point to any evidence of a rebound and even the positive Cisco comments from last week have come under increased skepticism. Add to the mix the umpteenth warning from Corning that business was just bad, really bad, and the networking sector appeared headed to penny stock status. SUNW fell -17% to $11.00 and several analysts forecasted a $7 stock price at historical multiples.

Dell took another hit after IBM announced a low cost ($699) server for small business and aimed directly at Dell's market share. With more power and double the storage for less money than Dell it was seen as serious competition. Dell's server share had fallen from 22.4% to 20.7% over the last year and IBM rose to 28.6% according to Gartner Dataquest.

Oracle fell to $12 on Thursday as its quarter came to a close amid fears that it failed to close those critical "end of quarter" sales to make estimates. With the global economy still slowing analysts said decisions were being put on hold and getting contracts signed was next to impossible. The stock is down -21% for the week and -34% for the month. If it warns next week it will set the tone for the September warnings season and convince investors that maybe October is looking more like an entry point every day.

Microsoft was experiencing serious flashbacks on Thursday after the European Commission said MSFT was in violation of anti-competitive laws by bundling components into its operating system. Haven't we been here before? The EC combined two prior complaints on server software and then attacked Microsoft for bundling Media Player with windows. Contrary to the U.S. the EC views on antitrust are focused on unfair competition and not unfair consumer practices. They said Microsoft withheld from vendors of alternative server software, key inter-operability information that they needed to allow their software to talk to other servers. MSFT fell -3.31 to $56.92 and a four month low.

Qualcomm got caught in the negative comments from Ericsson and an analyst downgrade of estimates for the cell phone sector. NOK, ERICY, MOT and QCOM all suffered with QCOM breaking through support at $61 and accelerating to the downside. Cell phone sales rates are slowing globally and the market is flooded with excess handsets. Ironically China approved 19 companies to make cell phones using the QCOM CDMA technology.

The ECB cut rates by a quarter of a point today for the second time this year. They made comments which worried traders that they were not planning on any future cuts. Considering the worsening conditions in the European economy the ECB appears more concerned with inflation instead of growth and this could put further pressure on any European recovery.

After the close on Thursday Novellus issued their mid-quarter report similar to the SUNW call on Wednesday. NVLS restated their 3Q targets but said bookings would come in at the very low end of the target range. They said shipments would fall below initial expectations but they had no major cancellations. Good news? No major cancellations? Does that mean there was a bunch of minor cancellations? NVLS fell on the news and the contagion spread to the other chip equipment makers as well.

Banks and mortgage lenders fell on fears that there would be more bankruptcies and loan defaults due to increasing unemployment and declining economic conditions. Credit card lenders COF, KRB and PVN fell as well as Citibank. Jobless claims fell by -1000 last week but the continuing claims rose to 3,170,000 the highest level in nine years. Last weeks numbers were revised upwards and the four week moving average rose very close to 400,000. This indicates that workers are having a hard time finding new jobs and this will eventually contribute to a fall in the consumer confidence index. The help wanted index for July was 58 again and the lowest level since the 1990 recession. This lack of advertised jobs indicates there has been no pickup in hiring by U.S. companies.

Any anticipated Labor Day rally has suffered a serious setback. While the 50 point bounce off the lows for the Dow gave traders some breathing room, it was still not significant. The close under 10,000 was the first time since mid-April and there was not even a blink as the average fell through the 10K level. No buy programs, zero, zip, zilch. This is troubling given the increased volume to the downside. It appears that there was an increase in sell program volume although there were no obvious culprits. The Nasdaq never had a chance with MSFT, DELL, ORCL, SUNW and QCOM leading the losers list and followed by 95% of the four letter stocks. There were only 42 new highs compared to 190 new lows. This is a complete reversal of the ratios from just a couple weeks ago.

Much had been said about the "stealth bull market" that was underway in the non-techs over the last few weeks but those stealth gains were so hidden that they have now disappeared completely with this weeks losses. Institutions are not the only investors to bail out of the market prior to the September warning season. According to TrimTabs.com over $6 billion left stock funds in the week ended on Wednesday bringing the total for August to over $15 billion in stock outflows. For the seven months ending in July only $48 billion had come into stock funds compared with $231 billion for the same period last year. Take the $15 billion outflow for August and that accounts for almost one third of the total cash that came into the markets prior to August. One third!

Buy low, sell high. We have all heard that since we were old enough to know what stock means but it is very hard to do it. Using that axiom as well as the many others that mean the same thing, now would be the time to buy. However, it appears that almost every trader still in the market thinks we will see a complete retest of the April lows and waiting on the sidelines for that retest is the prudent thing to do. I agree! I have suggested that long call investors stay out of the market until the Nasdaq broke 2100 again since early July. I have taken a lot of heat about this stance but that comes with the job. Obviously that number is much lower now but until the drop stops I will not make that call. I also took heat for suggesting that we could have a trading rally the next four sessions if history repeated itself. The Dow is down over -500 points this week alone. The Nasdaq is down -142 points from the Monday high. Can you spell "oversold"?

The TRIN closed at the high of the week at 2.26 and the put/call ratios are high at .94 but not yet in buy territory. The VIX closed at 28.08 and near a four month high. Can we continue to sell off? You bet! Could there be a relief bounce here somewhere? You bet! Nothing goes up or down in a straight line and it is time for a bounce. The fly in this ointment is the Novellus news tonight. The semiconductor sector was starting to ease up at the close in anticipation of the Labor Day event. The Novellus news has stopped those gains cold and we are back to business as usual, selling. Still the indexes are very oversold and the farther we compress this spring the more likely a trading rebound.

We struggled with adding calls tonight, as I promised on Tuesday, due to the convincing break by the Dow under 10,000. This is a serious psychological level which could persuade traders to stay on the sidelines until October. Traders short on Friday are likely to cover instead of holding over the long weekend. Some of that short covering obviously produced the end of day bounce on today. This would normally produce a Friday bounce as well but with the strong negative sentiment there is also a good chance that traders still long and in denial will want to go flat as well. What this means is the tug of war will continue and we may not have a clear victor for some time. The new calls tonight ADVP, DNA, IBM and LLTC are ONLY to be entered as a trading play if a relief rally appears. Otherwise please play puts or stay flat. The LLTC play was picked and written up before the NVLS news and I would only enter that play if it stabilizes above $38.50 on Friday morning. $100 is a crucial support level for IBM and with the new server announcement IBM could easily regain some of the eight dollars lost this week on any positive sentiment. I repeat however that these are only to be entered in a positive market.

This is a very tough market and unless you have been playing puts instead of calls it is very frustrating. Remember the goal of trading is to produce profits not tax deductions. We may be very oversold and the indicators are approaching extremes but there is nothing to prevent us from seeing yet another leg down before any bounce. When that bounce does occur it may only last a day or two or even just intraday. If Friday morning does not look encouraging then simply sit out and start your holiday weekend early.

Definitely, enter passively, exit aggressively!

Jim Brown
Editor

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