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Market Wrap

Monday Malaise

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       9-10-2001           High     Low     Volume Advance/Decline
DJIA     9605.51 -  0.34  9671.80  9493.55 1.46 bln   1140/1973
NASDAQ   1695.38 +  7.68  1702.12  1669.94 1.61 bln   1473/2277
S&P 100   558.58 +  4.69   560.72   546.93   Totals   2613/4250
S&P 500  1092.54 +  6.76  1096.94  1073.15
RUS 2000  440.73 -  4.46   445.19   437.50
DJ TRANS 2676.49 - 36.65  2715.04  2667.97
VIX        33.95 -  0.41    37.35    33.87
VXN        63.84 -  1.61    66.06    63.84
TRIN        0.69 
Put/Call Ratio      0.84

Monday Malaise

As the gravity and severity of the current economic slowdown in the U.S. sinks into investors' collective psyche, fear has been rising (as measured by the VIX) and the great selling machine is feeding on itself. As Joe Kernan pointed out this morning on CNBC, Friday's selloff in New York led to weakness in both the Asian and European markets on Monday. That, in turn pressured our markets sharply lower at the open. It's a dangerous game of follow the leader. Actually it reminds me of the children's activity, "Ring Around the Rosie", which concludes with the phrase, "Ashes, ashes, we all fall down".

At some point, there will be a member of the global economy that will boldly lead us out of the current morass, and odds strongly favor that it will be the U.S. economy. With that being said, it is unlikely that the recovery will be soon (as in this quarter) or that it will be swift. I saw an analyst on CNBC this afternoon who equated the US economy to the locomotive that will pull the global economy out of recession (we're already there, regardless of what the economists or government statistics tell us). The point he made is that when the locomotive begins to move out of the station, it will be a slow move due to the steep grade that needs to be climbed. I couldn't have said it better myself.

Qwest Communications (NYSE:Q) got the markets started to the downside this morning, warning for the second half of the year, stating that they now see 2001 revenues coming in at $8.0 billion vs. estimates of $8.5-8.7 billion. Q also announced reductions in its capex spending plans for both 2001 and 2002, along with 4000 job cuts. The immediate response at the open drove Q to another new yearly low of $16.28, although buyers emerged to propel the stock higher for a $1.76 gain on the day.

Communications stocks weren't nearly so fortunate, with Ciena (NASDAQ:CIEN) losing 5%, Applied Micro Circuits (NASDAQ:AMCC) giving up 4.8% and PMC Sierra (NASDAQ:PMCS) sliding lower by 3.5%. Of the three Telecom Equipment Provider horsemen (CSCO, NT and LU), CSCO was the only one that managed to close in positive territory with a measly 11-cent gain.

In the first hour, we saw all the major indices bleeding red, with the technical damage most disconcerting on the S&P500 (INDEX:SPX.X). The Big Index fell to an intraday low of 1073, its lowest level since October 1998. With weakness still mounting on the DJIA and scant signs of life on the NASDAQ, it is looking more and more likely that the SPX is going to break 1000 before the big bad bear goes back into hibernation. Looking at the monthly chart below, you can see that we've already broken the spring lows and are barely hanging onto the 1070 support level that dates back to the first half of 1998.

The historic market advance that began in late 1994 and clearly ended a year ago paints an instructive picture when a retracement bracket is applied. Up until the end of August, the SPX had managed to find support at the 38% retracement level, but that has clearly given way in the past 5 sessions. While we need to be careful about drawing conclusions from a candle that has not yet finished forming (the current candle won't be cast in stone until the end of September), it looks like the next major support level will be near the 50% retracement level (988), backed up by some solid support from 1997-98 near 940-950.

That's a bit of a scary prospect now, isn't it? While it has been fairly recently that I have come to expect the SPX to break 1000, noted money-manager and Forbes columnist Ken Fisher (son of value-investor Phil Fisher) has been looking for a decline to the 800-850 range since late last year. That kind of makes me look like an optimist, doesn't it?

Now before you go out to buy LEAP Puts on your favorite short candidates, we need to remember that nothing goes down (or up) in a straight line. The markets are deeply oversold and fear is rising at a parabolic rate -- just like it did last October and this past spring. Letting history be our guide, that indicates that we could get a nice tradable rally (although it is likely to be little more than an oversold bounce) in the near future. The VIX is quickly approaching levels seen last fall and this spring, and both times it resulted in a substantial bear-market rally. I don't think we're quite there yet, as I expect the VIX will likely top 40 before we have enough capitulation to usher in the next bullish move.

It looked like we might be seeing the early stages of the long-awaited rebound today after the DJIA recovered all of its early losses and moved solidly into positive territory, but the fact that there was no follow through and the NASDAQ continued to languish, made it clear that it was just another round of short-covering.

We need a series of positive events to propel these markets higher from current levels, and that's going to be a tall order as we once again head into earnings warning season.

One bright spot in the markets today came from Microsoft (NASDAQ:MSFT). Company officials are heading to Washington and it is widely expected that a settlement will be hammered out this week. MSFT shares rose more than $2 on Monday on more than 42 million shares, helping to stem the losses on all the major indices. But that isn't the stuff of which significant multi-day rallies are made. The most likely catalyst for the markets to rise will be multiple first-tier companies in multiple industries stating that they see a recovery in their businesses. But with Consumer Credit coming in at a startling $0.0 Billion today vs. the $4 billion expectation, it seems clear that the almighty consumer is pulling in their horns. The dramatic selloff we have recently seen in the Retail sector confirms that fact and with skyrocketing unemployment, finding the glimmer of hope is hard to do.

The economic calendar this week is quiet until Thursday, when a potential minefield appears, with Initial Jobless Claims and Import/Export Prices on Thursday. Friday is the real hurdle we need to focus on, with PPI, Retail Sales, Industrial Production and Capacity Utilization all being reported before the open. Of course, we can't ignore the preliminary Michigan Sentiment report 15 minutes after the open. The current climate of fear in the markets makes any one of these a possible market mover, not so much because of the actual importance of the report, but because of the psychological impact on already-skittish investors.

Adding to my bearish slant today were the pathetic market internals. Despite the rebound in price, decliners whipped advancers by 20-11 on the NYSE and 11-7 on the NASDAQ, even though up and down volume came in roughly even. The capitulatory event we are all awaiting is going to need to come on heavy volume, and the paltry 1.26 billion shares on the NYSE and 1.59 billion on the NASDAQ aren't even close. When we see up volume swamp down volume, with NYSE volume pushing 2 billion shares and NASDAQ volume in the 3 billion share range, then I'll step off the bearish express train. But until we see that strong bullish move, the high odds trades still lie to the downside. Keep your stops in place to protect against the possibility of a surprise positive event (can you say inter-meeting rate cut?), and fade the near-term rallies. The time for bullish trades will come again, likely sooner than it appears as of this writing, but jumping into them too soon could be disastrous to your account.

Of course, maybe I am the ultimate contrarian indicator - stubbornly bold bulls may take my words tonight as the "all-clear" to buy everything with abandon. But I doubt it.

Remember to trade only when the reward/risk ratio is in your favor.

Mark Phillips
Research Analyst

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