Option Investor
Market Wrap

Out Of The Frying Pan, Into The Fire!

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        9-6-2001          High      Low     Volume Advance/Decline
DJIA     9840.84 -192.43 10028.35  9826.09 1.34 bln    997/2106 
NASDAQ   1705.64 - 53.37  1753.83  1702.92 1.85 bln   1101/2537
S&P 100   565.51 - 13.38   578.89   564.98   Totals   2098/4643
S&P 500  1106.40 - 25.34  1131.74  1105.83             
RUS 2000  453.39 -  9.12   462.51   452.60
DJ TRANS 2804.84 - 30.33  2834.83  2800.66
VIX        32.42 +  3.46    32.80    30.12 
VXN        62.01 +  3.28    62.01    60.06
TRIN        2.38 
Put/Call Ratio      0.98

The news just after the open this morning, that the Justice Dept had dropped plans to ask for a breakup of Microsoft, provided a momentary bounce for the beaten down indexes but the relief was short lived. The good news, no breakup plans and no intent to pursue the browser bundling question. The bad news, the government wants to impose very strict guidelines and penalties for the charges that have already been judged. Now that breaking up the company is not an option it means that Microsoft will end up with a government oversight committee of some kind that will rule on all future business practices. This means Windows-2004 may not be released until 2010 if every feature has to be approved in advance by the Justice Dept. In 1984 the same thing happened to AT&T after their breakup. They had to ask Judge Harold Greene for permission on every decision it made. The Justice Dept also said late today that they would not seek to delay Windows-XP because the damage had already been done and Windows-DOJ may be the next release you see.

The Labor Day rally is officially over and the gains made since last Thursday's low of 9869 have all disappeared with today's close of 9839. The +313 point bump in the beginning of the week has gone the way of prior weeks rally to 10440. Lower lows and lower highs, not a pretty picture. Welcome to the dog days of September!

The layoffs continue with Motorola warning today that it would cut -2000 more jobs and they would not return to profitability this quarter as they previously predicted. The 3Q is now expected to be flat compared to estimated gains of +5%. The CEO apologized to shareholders for consistently providing poor performance and said again that he thought the sector was near the bottom. He also said Motorola was gaining market share in the handset business but that sales in that sector were still slowing. A bigger piece of a much smaller pie doesn't pay the bills in the case of MOT.

The economic news today was mixed with the NAPM falling another -3.4% to 45.5, the lowest level in eight months. New orders fell -2.7% as the economic contraction continued to deepen. The only bright side was a continued fall in inventories. Traders were cheered by the news that the Fed was a long way from done and could shift into aggressive mood again, but they were also worried that the economy could continue to get worse before it gets better. As a result the stock markets fell as earnings estimates fell yet again.

The Jobless claims previewed a possible problem with the Jobs Report on Friday. Claims fell slightly to 402,000 from a revised 405,000 from last week but continuing claims rose to 3.2 million for the first time since 1992. Workers are finding it hard to get a new job with layoffs continuing across all sectors. The market is scared that jobs are finally getting critical and the unemployment is about to skyrocket as companies in denial of the trend finally capitulate and trim the ranks. Traders will be holding their breath as they watch the Jobs Report on Friday. The other report will be Wholesale Inventories and any real reduction in this number will be welcomed.

Chain Store Sales increased slightly by +3.5% which was mostly credited to consumers spending their tax checks. Discount retailers benefited the most and apparel retailers the least, especially the higher priced retail stores. Tax holidays in several states also fueled the bounce but indicate that there may not be any follow through. The tax checks will probably impact September as well but then retailers will be on their own as of the start of the holiday season. Worst hit was the Gap which reported a sales slump of -17% and a drop in share price of 22% on the news.

The biggest piece of news which had the market teetering on the edge was the Intel mid quarter update after the bell. The bulls were hoping for an affirmation of prior guidance and the bears were afraid they would warn like MOT, AMD and several other chip makers. The results...INTC split the difference and said revenue would be in the middle of the lower end of prior estimates and margins would be slightly higher from reduced expenses. Sounds like nit picking but considering how traders were straining for good news they wanted to be very careful in how they phrased the release. Margins were quoted at 47% but were far less than recent quarters as high as 64%, so how can the margins be higher due to improved expenses? Did I miss something? Intel and the chip sector were up only slightly after the news.

Phraseology is becoming more important as evidenced by a MSFT statement from yesterday. Microsoft CFO, John Connors, was quoted as saying that MSFT was reiterating its company and revenue goals for 2002. Several sources including the WSJ reported it. Today Microsoft issued a statement correcting his comments saying they were NOT reiterating estimates but they were not changing estimates either. So...when is a positive statement not a positive statement? Evidently this one. If they went to the effort to say they were NOT reiterating then the obvious conclusion is a pending drop. Will they warn? It may be too soon to tell but I would not bet against it.

Investors are dropping stocks at record rates. The TrimTabs.com cash flow report today showed that outflows from mutual funds were accelerating. After losing more than $15 billion in all of August the first week of September, including the holiday, accounted for -$10 billion of outflows from stock funds. OUCH! There are also rumors of stock funds being forced to liquidate like the big hedge fund scandal from a couple years ago. Fund liquidation? Now that would be a really big hurdle for the already shaky markets to overcome. We all know that money in funds may go up and down with the markets but suddenly a scare of losses due to liquidations, that would shake ma and pa investor back into CDs and cash in mason jars. These are only rumors but you can bet the boys at the Fed would meet this problem head on and do everything possible to avoid any messy public fund failures.

We don't need any fund failures when we already have a really messy market failure. We are quickly heading below the April lows on some indexes and not far away on others. The S&P-500 low on April 4th was 1103.25 and the close today at 1105.94 was only a hair above it. The Nasdaq 100, not the comp, set a new 52-week low today at 1361 by slipping below the 1370 April low. The Dow has over 800 points to cover before being in danger of the 9106 March low but at the current rate of fall that is only about a week. Other global markets are continuing to fall with the German Dax also setting a new 52-week low today.

Traders can no longer complain that they are waiting for volume to return after Labor Day. The NYSE posted 1.3 billion shares and the Nasdaq a whopping 1.84 billion shares. The internals were very bad with decliners beating advancers 2:1. The put/call ratio rose to almost 1.0 as investors feeling real fear bought puts to protect portfolios. Speaking of fear the VIX has now risen to a five month high of 32.42 after seven straight days of gains. The last time we were at these levels....April. Can we go higher from here? You bet, the VIX spiked over 40 several times in Feb/March of this year. The VXN, the Nasdaq equivalent, hit a four month closing high of 62.01 but well below the April high well over 80. The TRIN also closed at 2.31 with a spike over 4 at the open this morning. What does all this mean?

The market internals and indicators mentioned above show that the market is very oversold again. In fact it is indicating a possible relief rally on Friday. I have said here many times that nothing goes straight up or straight down. We all know that stocks and markets oscillate from overbought to oversold and back again. Sometimes quickly, sometimes slowly. If funds are truly liquidating to raise cash to pay those redemption requests then we could become a lot more oversold before we see any real bounce. When investors call for their money the funds have no choice but to sell anything with value to raise that cash. It makes no difference how good a deal the fund managers think stocks may be at these levels, the investor rules and they have to raise cash. -$35 billion has left stock funds in the last five weeks and with September and October still ahead of us the cash drain may not be over. 17% of the Nasdaq-100 hit new 52-week lows today but investor sentiment still shows over 40% of analysts are still bullish. Until the indexes see a washout of this sentiment we will not see a bottom.

The global economy is still a factor. Japan continues to fall and is only days away from even more serious problems. Intel said tonight that sales in Japan had fallen significantly and the outlook was worsening. Brazil markets hit another 52-week low. As investors we need to be aware of the world around us and not be so introverted that we are fixated on some index number like S&P-1100 or Nasdaq 1638. These numbers would be critical in any normal market as clear turning point signals but in today's environment they may be meaningless.

The forecast for Friday is a good possibility of a relief or short covering rally. Highly profitable shorts may want to clear the table and start over on Monday. However, last Friday, while positive did not really show a rush to cover. Shorts are becoming more confident that the markets have much farther to fall and therefore are less likely to cover. There are no bargain hunters. There will be some investors averaging down but funds will be using any bounce to raise cash and that is not a recipe for a long term rally. Sell the rally is the battle cry and until that strategy fails it will continue to create repeat profits for those who trade the trend instead of their beliefs.

Definitely, enter passively, exit aggressively!

Jim Brown

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