Option Investor
Market Wrap

Happy Anniversary!

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        WE 10-19         WE 10-12          WE 10-7         WE 9-28
DOW      9204.11 -140.05  9344.16 +224.39  9119.77 +272.56 +611.40
Nasdaq   1671.31 - 32.09  1703.40 + 98.10  1605.30 +106.50 + 75.61
S&P-100   553.80 -  6.98   560.78 + 11.40   549.38 + 16.28 + 41.40
S&P-500  1073.48 - 18.17  1091.65 + 20.27  1071.38 + 30.44 + 75.14
W5000    9894.89 -154.23 10049.12 +212.01  9837.11 +274.18 +662.48
RUT       425.70 -  2.89   428.59 + 13.62   414.97 + 10.10 + 25.98
TRAN     2174.28 - 60.45  2234.73 + 25.31  2209.42 + 15.43 +139.15
VIX        35.84 -   .61    36.45 +  1.79    34.66 -   .53 - 13.08
VXN        69.28 +  3.30    65.98 +  2.63    63.35 -  1.84 - 12.54
TRIN        1.19             1.08             1.14             .73
TICK        +342             +283             +290            +995
Put/Call     .80              .76              .96             .61 

The markets celebrated the 14th anniversary of the October 19th, 1987 crash by ending with a minor gain. The start was rocky with the Dow losing over 80 points but bargain hunting after 1:PM rallied the index +120 points off its lows to finish with a +40 point gain. The Nasdaq followed suit after being down -20 and closing up +18. We did not see earnings magically improve and Bin Laden was not captured but shorts did decide that discretion was the better part of valor and they covered their positions in the last two hours.

That was the last good thing that happened to me all day. I Began writing my Sunday commentary about 1:PM Denver time and on a normal Friday I research and write until around midnight. With time out for cake and a going away party as well as the usual fires to be put out in the office I did not finish until around 1:50 AM. As I was putting the finishing touches on my editor's plays I completed the last spell check and hit save. My computer froze for several seconds, an eerie scream came from the hard drive and the blue screen of death appeared. "Unable to write to C:" "Possible Loss of Data." Those of you who understand computers know what is coming next. The end of the world as I know it.

Not only did I lose the 12+ hours of research and writing but the entire hard drive. Newsletters from the beginning of time. Countless spreadsheets, correspondence, contracts, charts, etc. Four years (5GB) of email archives from and to readers, bookmarks, trading records, workspaces, portfolios, etc, etc, etc. The moral to this story is simple. Murphy is alive and well. The longer you go without a comprehensive backup the more likely you will wish you had one. I do have backups taken routinely for most of the components but if you have had this happen before you know that there are things that will never be recovered. So after playing PC tech for several hours it is 6:30 AM on Saturday and I am starting again. All the editors/writers here hate this with a passion. After spending countless hours on writing, researching, rewriting, editing, spell checking, adding, correcting, arguing and cussing it is a given that several times a year something goes wrong. Just doing it over is not the problem, we love our work. It is just you can never get the same feeling the second time around. You end up leaving something out, wording it differently, following a different train of thought and being more pessimistic and hostile which is human nature after the error.

Enough moaning! You realize those two paragraphs were more for my benefit than yours, kind of a pressure release to keep me from hurting myself I guess.

In the real world there was good news, bad news and no news. The press is beating themselves up for sensationalizing the anthrax problem and for good reason. I suspect that there was some heat coming from the government as well to layoff the headline grabbing bioterror stories. The numbers that kept making the rounds on Friday were the 20,000 people who would die from the flu this year and most of us don't even care enough to get flu shots. In the wildest possible anthrax exposure scenario there is likely to be less than a couple dozen deaths for the year. Yet the press was acting like the end time was at hand.

The reduction in intensity by the press allowed investors to focus on actual earnings for a change. The bombing continued, yawn, and Bush is in China, yawn, and Emulex said they expected business to pickup going forward. WoW!, to heck with Afghanistan, let's buy some stock. (pardon my literary license) Actually it appears some shorts did buy EMLX stock since it gained +4.60 for the day. Don't look now but the news really was not that good.

Microsoft actually gained on the day as well after dropping -$2 from the open. The giant gave so many mixed messages in their earnings announcement that traders did not know whether to buy or sell. Some felt that the launch of Windows XP next week would provide enough positive sentiment that being short was no longer a good idea. Everyone expected them to warn and fall after earnings and when they didn't it surprised the shorts into covering.

Guidant also announced earnings and matched last years performance but they said that the forecast was positive for the 4Q and the year and raised their guidance to $1.93 and a nickel over analyst's estimates. GDT tacked on +3.22 on the news.

Nokia said that sales were down by -7% over last year but market share was increasing and new 3G products were doing excellent. The Nokia competitors, Motorola and Ericsson, are struggling while NOK managed to post profits of .15 euros per share, which was down only slightly from last year. The CEO was pounding the table on their outlook and the stock gained +1.32 on top of a +50% gain over the last few weeks.

Gillette also announced and reported a -16% drop in sales but said market share was increasing with Mach3 and Venus taking top spots in blade sales. I don't have the patience to invest in Gillette but those who do saw a +1.58 gain on the news.

While GDT, NOK and Gillette earnings news may not make you want to rush out and buy stock, I reported on them for a reason. There are bright spots in the market if you look for them. Actually, much brighter than G, GDT and NOK. In doing my research today I looked at over 1000 charts. A process that takes about five hours but it gives me a very good feel for what is actually going on in the market. I took the time on Friday to see if there was any evidence of a pending October crash. There were several hundred stocks with down trends as you would expect. There were however many more with bullish trends. Breakouts, rising bases, wedges and new relative highs. For example, INFY, OSIP, GILD, SEPR, SYMC, CDWC, NVDA, CBRL, PHCC, CTIC, SRNA, ACS, AZO and LH. These are just random sample that I could remember but I mention them for a reason. They encompass chips, software, drugs, biotech, food, computer sales and computer services. A very mixed sample. There are stocks making money if investors will only do their homework.

This was encouraging for me as I tried to get a feel for our immediate future. With eight days to go in October many traders are chomping at the bit to buy something, if only we could get another dip. If you copied the big institutional traders back in September when the market took the dive, you held off backing up the truck because you expected another October crash. With that crash still in hiding and possibly not going to appear you are now sweating the next week. Do I buy something or do I wait for a dip that may never come?

I know a lot of you are thinking that if we can just get to November we will be safe and the long-term rally will begin. Maybe and maybe not! For the last five years the Dow point gain from November 1st to December 31st might surprise you. In 1996 it was +427 points, 1997 +234, 1998 +475, 1999 +849 and in 2000 we lost -113 points. What also might surprise you is that except for 1999 there were significant drops between those dates. It was not a constant rally. While +400 points may seem positive we have gained +952 from the September lows in the last four weeks.

Why am I boring you with these statistics? Simply because I want everyone to realize that there is no sure thing. Just like the October crash may not occur the year end rally could also be a figment of our imagination. With the current economic and political climate it is very possible that this may not be a record breaking year end. Should you buy a gas mask and run hide in a cave. Not unless your name is Osama.

I think the biggest risk we have today is not being in the markets when the eventual rally comes. Almost everyone realizes that the market will eventually rally, the economy will flourish and Greenspan will raise rates again. Growth will be busting out all over and even Corning will have to increase output of fiber optic cable. (Well, maybe not that part about Corning) Dow 15,000 you bet. Just don't go trying to pick a date yet.

As investors we need to be prepared for either direction. There is a good chance we could see a dip before the end of October. There is a better chance that prices will be higher on Nov-1st than they are today. The best scenario the bulls could hope for would be a drop on Monday back to 8500 and a bounce by Tuesday close back to today's levels. Sorry, guys, I doubt they will get their wish. They are praying for that elusive double bottom and second washout that makes good rally starting points. They just can't stand a V bottom rally. It makes them constantly look over their shoulder for the next dip.

For us as option investors we need to be in the market but be careful about how we do it. There are many ways to be in the market today without risking your retirement. Spending all you have on long calls on Monday morning is not it. I will highlight several ways to invest safely in today's editors plays. For those of us that want to be in the market for a rebound but not for a dip that means we need to be patient about our entry points. We need to buy options when the stock dips or the market cycles. We need to take smaller positions and then add to them if the market turns bullish.

The market will rise again but it may be two weeks, six weeks or even twelve weeks or more. But if you look hard enough there are stocks on the move now. Those with a plan can make money in any market if they are patient enough on the entry points and aggressive enough on the exits. My pledge to you is that every Sunday for the rest of the year I will find twenty stocks in addition to the regular plays that we can make money on the following week. I will post them in the editors plays. I can't do it today because my QCharts quote sheets were lost in the crash but you can use the 15 stocks I listed above as a start. We are the survivors and we have a plan. Are your ready?

Definitely, enter passively, exit aggressively!

Jim Brown

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