Option Investor
Market Wrap

Are We There Yet?

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        WE 9-7           WE 8-31          WE 8-24          WE 8-17
DOW     9605.85 -343.90  9949.75 -473.42 10423.17 +182.39  -175.47
Nasdaq  1687.70 -117.73  1805.43 -111.37  1916.80 + 49.79  - 89.24
S&P-100  553.89 - 23.51   577.40 - 29.31   606.71 + 12.84  - 17.54
S&P-500 1085.78 - 47.80  1133.58 - 51.35  1184.93 + 22.96  - 28.19
W5000  10066.49 -448.60 10515.09 -433.32 10948.41 +188.32  -234.36
RUT      445.19 - 23.37   468.56 - 12.25   480.81 +  5.16  +   .13
TRAN    2713.14 -100.27  2813.41 - 40.98  2854.39 + 29.74  - 36.12
VIX       34.36 +  6.51    27.85 +  5.56    22.29 -  4.45  +  3.93
VXN       65.45 + 12.59    52.86 +  5.16    47.70 -  4.32  +  3.50
TRIN       1.25              .71              .70             2.67
TICK       -113              -74              351              201
Put/Call    .84              .82              .56             1.07

Surprise, surprise, surprise! You can just hear Earnest T. saying that after glancing at stock TV to see how his favorite stock (TR) was doing on Friday. Gee wiz Vern, this may not be a recession but it feels like it! Actually those comments came from SF Fed President Perry who also said "we should expect more tech weakness before it gets better." Gee thanks, any more insightful news? Perry made those comments along with other market movers like "the Fed is worried about consumer confidence after the jobs numbers today" and "we are still expecting a rebound somewhere in the fourth quarter." Now, let's see...would you buy a used car from this man? The Fed has been wrong for so long you wonder if they just don't get it or maybe they have just been misleading us to prevent an even worse market crash.

The surprise of the day was of course the Jobs Report. The unemployment number soared over estimates of 4.6% with a jump to 4.9%, the worst level in four years. Jobs fell by a total of -113,000, more than twice the consensus estimates. Manufacturers lost -141,000 with retailers also trimming the ranks. August numbers tend to be volatile with the shift from college workers to permanent employees and the September report could see a balancing or smoothing of the numbers. Still the 4.9% headline number had analysts calling for an intermeeting rate cut and rumors abounded that the Fed held an emergency meeting and would announce a 25 point rate cut on Monday or Tuesday. The mainline analysts said don't hold your breath. There are enough indicators that the economy is bottoming that the Fed "should" not rush back into the market and risk scaring traders that things are worse than we know or just simply over cutting as things are starting to turn up.

The consumer sentiment numbers took another blow with a warning from Circuit City. CC said same store sales fell -21% and expected a lost for the first half of its year due to soft computer sales and dropping out of the appliance business. Rival Radio Shack also saw sales decline due to slowing computer sales. Thursday Best Buy said it would exceed estimates but only due to DVD players, televisions and cameras, not computers. A survey out on Friday showed that PC sales could drop twice as much as was previously expected for the year. This is already the first negative growth year since 1987 and sales could drop as much as 15% from last year.

The economy is continuing to impact other than tech sectors with the AMR warning today a prime example. AMR, the parent of American Airlines, said it expects to report significant losses in the third and fourth quarter due to the weak economy, high fuel prices and increased labor prices. They said revenue from business travel was "plunging". They are canceling options to buy new jets and taking older jets out of service earlier to reduce their capacity and expenses. May domestic travel fell -11.8% the biggest decline in two decades which was followed by June and July at -12% each. The drop in travel is producing a price war for the open seats and industry losses are expected to exceed $2.5 billion for 2001.

We just can't seem to get any positive news for the markets. The global markets continue to fall with the Nikkei hitting another 17 year low. The FTSE also hit a 52-week low. Deep cyclicals like Whirlpool, Georgia Pacific, Caterpillar, United Technology and Boeing were weak as well as consumer cyclicals like BBBY, BBY, LOW, HD, S and FD. Auto makers were slammed as investors fled from high ticket sales. Consumers will buy food and clothes in an extended recession but automobiles will be put off until the economy improves and jobs are secure. GM, DCX and Ford all fell.

Nortel, the poster child for earnings warnings in 2001, had their CEO, John Roth, say some bearish things. He said the next 12 months would be a drought and they were racing to downsize fast enough to simply break even. The stock finished slightly positive on rumors that Cisco was going to buy them given their severely depressed stock price of $5.00. Not that CSCO is doing much better at $14.25 but you have to admit it may be the bottom on NT and a good opportunity for Cisco.

Are we there yet? I doubt it but we are getting to the point where you can see the destination just around the corner. The S&P-500 closed at a three year low of 1085 but showed no signs of slowing. The intraday low back on March 22nd was 1081 and that is just a heartbeat away. The consensus of opinion now is we will see a new low number and it could be weeks away. 974 is the October 1998 closing low and that is the first real support in sight. Traders are in denial that the markets can drop this far but without a final washout of the remaining bubble holders the institutional traders will not hurry back into the markets. The broadest market indicator is the Wilshire 5000 Total Market Index (TMW.X) and it is approaching historic lows. In March and April of 2001 the index bottomed at exactly 10,000, this is the TMW not the Dow, from a high of 14991. The index closed on Friday at 10,066, only 66 points away from either a successful retest or a total breakdown.

It is not a simple coincidence that the index stopped EXACTLY on 10,000 twice before. Buy programs will kick in and the strength of the short sellers will be tested. Dow 10,000 was tested last week and failed. For five days the Dow traded back and forth across the 10K level as buyers and sellers fought for control. Sellers won and as evidenced by the lack of a bounce at the close Friday they are firmly in control. True support on the Dow is not until 9389.

The Nasdaq is about to undergo a trial by fire as well. 1638 is the closing low from last April and that is only 47 points away. There will be a bounce at that number as bargain hunters try to buy the dip in expectation of a bounce but without some positive cash flow from investors the bounce will fail. If you remember I reported on Thursday that TrimTabs.com shows a -$10.7 billion cash outflow from stock funds for the week ended on Wednesday. That includes the day off for Labor Day as well. In all the last five weeks have seen -$25 billion in cash outflows. You cannot build a rally on that kind of negative cash flow.

On the bright side the chip and chip equipment makers received several upgrades and buy recommendations on Friday. The Intel news as well as confirmations of estimates by companies like TQNT helped the SOX hold the 500 level for the last three days. There was a slight gain by many chip stocks on Friday but not enough to actually say a rally was forming. We all know that any tech rally must be led by the chip sector and any good news at this point could provide the spark that is needed to hold the Nasdaq at the 1638 level. Still, there are three major tech conferences next week and chip companies, computer and software companies will present and take every opportunity to hype their business. We can only hope that several will strike a bullish cord in the investor sentiment and help build a base at this level.

As much as we want to see a bottom here there has not been any capitulation. Without the capitulation event we cannot build a successful rally. Look at the April capitulation event. From this level on March 21st there was a -500 point drop to the lows on March 22nd and then a rebound of almost 900 points over three days to 9947 on March 27th. This is the picture of a V bottom and what the markets want to see again. A successful repeat would be a huge buy signal and produce a monster short squeeze.

The concept that investors would come back from summer vacation and the Labor Day holiday, flush with cash, and start picking up stocks at bargain basement prices like a blue light special at Kmart turned into a bait and switch. The better than expected NAPM report lifted investor outlooks and the Jobs Report promptly squashed them back into the dirt. Headlines in the Saturday papers will scream "high unemployment returns" and "is a recession in our future". Consumer confidence will evaporate. Instead of buying bargains investors are now considering the benefits of tax loss selling and buying puts on stocks they currently own. Funds are still liquidating and the rumor on Friday was that a big fund was having a cash run and was dumping $10 billion in equities. September is the end of the quarter and decorating balance sheets for the quarterly fund statements will be a challenge. October is typically tax selling season for funds but they may not have any winners left to sell if the current rate continues. Just another reason why this season of the year is called "fall".

The strategy for the week would probably be sell the rally, again. Just like buying the dips worked so well before, selling the rally has been working well this summer. Eventually we will get the rally that sticks but until then, trade the trend! Look for a bounce at 1638 on the Nasdaq, 10000 on the Wilshire 5000, 9389 on the Dow or 975 on the S&P. Each is a critical support level which will trigger buy programs. Falling under those levels will trigger sell programs as nobody wants to be caught holding if those levels fail. This is a great time to be a day trader but unfortunately most of the prior graduates from Bubble University had to get a job! You are an elite group, now go make some money! How about that put play on Boeing this week. +400% gain on a $1.00 option!

Definitely, enter passively, exit aggressively!

Jim Brown

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