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Market Wrap

Bears Getting Sleepy?

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       11-13-2001           High     Low    Volume Advance/Decline
DJIA     9750.95 +196.60  9755.80  9551.40  1.3 bln   2220/ 930
NASDAQ   1892.11 + 51.98  1893.92  1867.27  2.1 bln   2346/1261
S&P 100   587.04 + 10.91   587.28   576.13   Totals   4566/2191
S&P 500  1138.90 + 20.76  1139.14  1118.33
RUS 2000  448.34 +  7.86   448.34   440.48
DJ TRANS 2340.94 + 69.02  2342.06  2272.07
VIX        28.63 -  2.63    30.34    28.51
VXN        55.94 -  3.05    58.43    55.91
TRIN        0.46
Put/Call Ratio       .58

It is that time of year when all good bears, fat on profits from the 3Q earnings season, slink off to their dens for a long winters nap. Amazingly the flood of "Nasdaq 700 is coming" emails have fallen off in the last several days and those predicting the demise of the current market have lost few converts. Negative earnings news as well as misquotes from Cisco CEO John Chambers were not able to stop the huge Tuesday gains.

This was the day that Monday should have been! The markets had been setting up for a surprise farewell party for the bears but the American Airlines crash on Monday allowed them one last fling. The dip on fears that terrorists had caused the crash took the Dow all the way back to strong support at 9400 but the rebound was very quick. Without the crash drag on Dow components UTX and GE it probably would have made it back to positive territory. There was a pause just above support at 9525 while bulls held their breath but the news that Kabul had been abandoned and the crash was likely mechanical was all they needed.

Labeled the "Kabul rally" the markets gained strength and shook off bad news to power ahead. The concept that the Taliban may have given up the country's capital city without a fight and was heading to more remote areas to avoid being pounded into dust by the coalition was welcome news. The fierce 40,000 Taliban fighting force was AWOL and it now appears that the noose is tightening around Al Queda. This news sparked buying by those who felt that the war was under control and we would slowly grind down the opposition until they were gone.

The news from New York that the American Airlines flight was in trouble almost from the second the wheels left the ground also brought a concealed sigh of relief from investors. Nobody is ever glad when over 260 people die but the relief was that it was not a terrorist event. The longer we go without a significant terrorist event on our soil, the more investors will forget that the threat exists.

The real news that the market ignored was massive earnings misses, earnings warnings and misquoted CEO statements. Any of which could have cratered the averages just several weeks ago. The first event was a giant earnings miss from Watson Pharmaceutical, (WPI) which announced earnings of $.32 when analysts were expecting $.65. The company cited stiff pricing pressure which was increasing in the generic drug market and a redirection of their efforts. OOPS! Investors don't like surprises and WPI lost -$18.61 to $28.54. This produced a drag on other drug stocks but did not slow the markets.

Oracle CEO, Larry Ellison, warned that ORCL would miss analyst's estimates of $.11 by a penny or two. Ellison blamed a tough environment since 9/11 and said sales would fall on a year over year basis for the first time in ten years. They expect licensing revenue to fall -20% compared to the same quarter last year. ORCL fell -$.88 to $14.51 but normally a warning like this would have knocked several dollars off the stock. This shows that the investor has factored in the impact of 9/11 and is willing to overlook some weakness going forward.

Cisco CEO, John Chambers, was misquoted around 1:PM and CSCO stock lost about -.75 from its intraday highs. He was quoted as saying that he expected another 2-8 quarters of weakness ahead which would have been a change in forecast for him and Cisco. What he actually said was "some economists are forecasting another 2-8 quarters of weakness for the economy, but we really don't know". He said sales were increasing slightly after having plateaued after the first post attack gains. CSCO recovered to close up +.32 for the day after the comments were explained.

The biggest point here is that there were three separate and major news events and none of them tanked the markets. The trend from last week continued. As I mentioned in the Sunday newsletter the materials stocks continued to climb with stocks like Alcoa having banner days. Even MMM tacked on another +2.46 and remember they said this was the worst year in 30 years. Bullishness is breaking out all over.

The retail sales numbers are coming in stronger than expected as most retailers report this week and according to many analysts this means the bottom is behind us. They are now looking for a better holiday season and the good war news is like icing on the cake. Homebuilder stocks (BZH, CTX, PHM) and home materials supply stocks (HD, LOW) are soaring again as cheap interest rates filter down to the buying public. The October Retail Sales report will be announced at 8:30 on Wednesday.

The rally was not concentrated in just a few sectors. The Networking sector was up +5%, Semiconductors +4.25%, Computer Hardware +4% and so on. Volume was good on the NYSE and Nasdaq and the internals were strongly positive at 2:1 for advancers over decliners. The broader S&P-500 has broken out of its May-Nov decline and is now well above resistance at 1100 which worries the bears. The bullish percent on the S&P-500 was only 55% on Monday which indicates that we could have some more bullish days ahead of us.

We are still in a recession and nobody is claiming a magic rebound on that as of yet. This means that earnings will not reflect the optimism of investors for at least a couple quarters. Still this is not an insurmountable problem. The markets have shown a remarkable ability to climb the current mountain of worry as I discussed last week. The bears have tried to put as many obstacles in our path as possible but they were unable to even hold the indexes down below the closest support level at 9525 on Monday much less 9400. Fighting the tape has become a losing proposition for shorts and we are very close to some real breakout possibilities.

The Dow has no real resistance between here and 10,000. Once the Nasdaq clears 1925 it appears almost a given that 2000 will only be a couple days away. The S&P closed over resistance at 1133 and the next major barrier is not until 1185. In short, there appears to be little if no resistance for the next several days and that is really scary. Without a sequence of obstacles, steps to a goal as an example, can the markets survive in this rarified atmosphere? The volatility in the markets is dropping like a rock as everyone lines up on the same side of the debate.

I think the washout at the open on Monday took all the weak holders and stop losses in this area and flushed them. The quickness of the rebound showed we are not oversold and there is money waiting on the sidelines. However, as with any major gain, +196, there will be those who will want to take profits soon. The trend is definitely up but it will not be in a straight line. There are many traders just waiting for their stocks to get back to the price they paid last summer to sell and get out whole. There are several high profile earnings reports on Wednesday including AMAT, HWP, FD and LIZ. They will help portray the health of the tech sector and the retail sector.

We need to practice caution as we move forward and be ready for that next dip. Nothing should be taken for granted. Rejoice for every positive day we get but keep raising your stops to prevent giving it all back. The closer we get to 10,000/1925 the more likely the next round of profit taking becomes. As I have been telling you for the last three weeks, buy the dips. That still stands until we touch those levels above but then we need to be even more cautious and re-evaluate the tactic.

Take profits on weakness and buy the dips!

Jim Brown
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