Option Investor
Market Wrap

A Stellar Week!

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        WE 3-08          WE 3-01          WE 2-22          WE 2-15
DOW    10572.49 +203.63 10368.86 +400.71  9968.15 + 65.11  +158.80
Nasdaq  1929.67 +126.93  1802.74 + 78.20  1724.54 - 80.66  - 13.68
S&P-100  589.84 + 13.68   576.16 + 22.12   554.04 -  5.61  +  2.37
S&P-500 1164.31 + 32.53  1131.78 + 41.94  1089.84 - 14.34  +  7.96
W5000  10890.67 +330.66 10560.01 +380.72 10179.29 -136.19  + 66.16
RUT      499.85 + 21.51   478.34 + 13.27   465.07 -  4.18  +  2.58
TRAN    3010.24 +113.11  2897.13 +171.48  2725.65 + 41.42  + 24.29
VIX       21.61 -  0.52    22.13 -  2.76    24.89 +   .80  -  1.38
VXN       41.62 -  0.32    41.94 -  6.63    48.57 +  3.58  -  4.29
TRIN       0.73             0.74             1.33             1.89
TICK       +927            +1029            +1044             -128  
Put/Call    .62              .94              .90              .73   

How can you complain about a week that produced strong gains across all the major indexes? It would be hard to find anything to gripe about unless you feel the bullishness is becoming excessive. The Nasdaq was the star of the show and gained +7% for the week but there were no slouches. The Dow has now posted gains for four weeks in a row totaling +828 points. Everything is coming up green but there may be something wrong with this picture.

Worries impacting the market and keeping it from even higher levels continue to be the accounting concerns. GE was the latest victim. GE was unable to break resistance at $42 for the last two days due to concerns that their annual report filed on Friday could show some funny numbers or excessive off sheet financing. The stock dropped -$1.25 at 2:30 when the report was made public but there appeared to be no smoking gun. The stock rebounded slightly but it will probably be Monday before the real impact is known. The report contained 30% more financial info which will take some time for analysts to sift.

IBM also was still feeling some selling pressure ahead of their SEC filing on Monday. The stock jumped nearly +4 intraday after the positive jobs report but gave back all but $1.38 as traders continued to be concerned about possible accounting surprises.

The big loser of the day was Biogen which dropped -4.75 on news that a competitor (SRA) had received permission to market their MS drug in America. Serono, has the most market share outside the U.S. with a 38% share according to SRA. BGEN said it would review its 2003 earnings outlook in light of the new developments but after the SEPR disaster on Thursday they will probably be very careful how they word any new guidance.

By far the most positive news on Friday was the February Jobs Report. Instead of flat to mildly negative the report showed an increase of 66,000 jobs for February. The unemployment fell to 5.5% instead of rising as expected. Will economic wonders never cease! Do you suppose Greenspan had prior knowledge of this data before he was openly bullish in his testimony this week? I would not bet against it. This data supplied a concrete link between the positive manufacturing reports of the last two weeks and reality. Consumers, which have held up the economy even after the September attack, could become even bigger spenders if the job picture is improving. The positive data again caused a huge sell off in bonds and a skyrocketing of yields.

This bond selling is very bullish for stocks but nothing comes without a price. The rapidly rising yields will put an end to the low mortgage rates and could clamp a lid on the booming housing market. This is a primary reason for the addition of the CTX put play this weekend. Housing has been on a huge run fuelled by low rates and those rates are about to change.

Greenspan was so bullish (for him anyway) in his testimony this week that analysts are now worried about what will happen at the next FOMC meeting. Considering it is coming soon (Mar-19th) this will become even a bigger concern next week. Nobody expects the Fed to raise rates on the 19th but we could easily see a change in the bias to neutral or even to tightening. How quickly the party could be over. With the rebound in the U.S. being mirrored globally the Fed must be very careful about shooting itself in the foot. If the global economy can be allowed to improve as we accelerate then future rate hikes will be less likely to put us back into a recession. It is a thin line and hopefully Greenspan can still walk the walk.

All this bullish news is producing an environment where mutual funds are being scared into the market. Most would rather have waited several more weeks to look for an actual improvement in earnings in the April reporting season but they are worried the train is already pulling away from the station. Many are looking at the +828 Dow points and hoping for another pullback to make their entry. With every positive close those hopes are becoming slimmer. Every broken resistance level is creating an attitude that maybe the rally is for real and there will be no historical April/May sell off.

While the Dow led the charge initially the rest of the troops are gaining speed. The market breadth is improving daily and volume remains strong. On Friday for instance the new high/lows were strongly positive with the NYSE posting 216 new highs to 12 new lows. The Nasdaq posted 159 to 29. This strong imbalance is very bullish for the broader market. Advance/declines are also continuing to be positive with the Nasdaq approaching 2:1 on Friday. The negative implications include a shrinking VIX/VXN and a very low put/call ratio of .62. This would lead investors to believe that the wall of worry markets like to climb has collapsed. To put that in perspective the VIX at 21.54 is at a level not seen since last July. That is not meant to imply coming doom. There have been times when the market was in rally mode that the VIX was stuck under 20 for long periods of time. In August of 2000 the VIX dipped under 20 for two weeks with a low of 18 while the Dow rose over 11,000.

The main point I would stress about the VIX is not that there is a critical level that instantly triggers a sell off but it is an indicator of complacency that signals an impending change in the market. The Nasdaq equivalent VXN is also tracking toward another 52-week low. The current low was 40.69 on March-4th. The TRIN hit an intraday low on Friday of .25 and this was only beaten in recent months by a low of .23 in the first week of December when the Dow spiked +400 points in two days. All of these indicators simply point to a growing complacency in the market. An attitude or mindset that we can only go up from here.

There were many traders commenting this week that it felt like the spring of 1999 all over again. We all know that 1999 had some serious advances but it also had several serious bouts of profit taking that lasted between 30-60 days each. The gain for the year for the Dow was +2316 points. Much of that gain was between March 1st, (Dow 9307) and May-14th (Dow 11106) when the historical spring sell off began. I have mentioned this historical spring selling several times. It normally occurs between April-15th and May-15th as a result of either bad earnings, which triggers the earlier dates, or simply the end of earnings reporting (May-15th) and the beginning of the summer doldrums. Check your charts and you will see what I mean.

Because of the continued failure of the Dow to close over 10600 and the strong resistance for the S&P at 1175 the commercial traders are increasing their short positions every time the markets roll over intraday. They are shorting the rallies just like they did so successfully over the last year. Unfortunately, or fortunately for the bulls, they are getting run over on a daily basis. While the commercial short interest is growing the markets are continuing to rise. Somebody has got to be getting nervous. The positive jobs data and the strong market response on Friday will undoubtedly draw more cash into equities next week. Eventually there could be another short squeeze like we had a week ago and that squeeze could propel us past the current ceilings.

I especially liked the S&P and Nasdaq on Friday. The S&P edged a little closer to 1175 and held its ground. The Nasdaq posted a much stronger gain than the Dow (%) based on the affirmed guidance from INTC and SUNW. If the trend continues next week we should definitely plan on going for the ride. Just remember that after every big gain there is a retracement/consolidation period. Keep your stops in place and trail them upward as any rally continues. I would continue to buy the dips since it is apparent that funds are using this tactic as well. Everyone with a charting system can see that stocks are very overbought but they can get more overbought before the trend fails as shorts are forced to cover. Just don't count on every trend lasting forever.

In the last bull market I got email complaining that XYZ call options went from $2 to $10 and back to $2. (or worse) The common question was "what do I do now?" or "When will this stock recover so I can sell for a profit again?" There is no magic answer. I know people who held stocks bought at $250 until they were $50 before selling for a huge loss. Nobody knows when the current trend will end but it will end. That is the only sure thing. It could be two days or two months but it will end. There is also no guarantee that it will resume before your options expire. The key is to not give back your profits. Buy the dips, set stop losses, sell for a profit, repeat the process. It sounds easy but we all know that there is a world of experience required to do it routinely. As the old adage goes, "Knowing the right decision comes from experience." "Experience comes from making bad decisions." Been there, done that, a lot!

My decision for next week is to stay long the market above Dow 10450, Nasdaq 1865 and 1145 for the S&P. I will close long positions should those levels fail and look to buy any REBOUND from any significant dip below them. Should the Dow fail and the others hold their ground I would stay long. The Dow being a much smaller basket of stocks any two or three can crater it on any given day. Given the big gains in Dow blue chips like HON, BA and others, they are starting to look tired and the Dow could easily lag the Nasdaq at any time. The Nasdaq faces strong resistance at 1950 and the S&P at 1175. Both indexes could test those levels on Monday. Be optimistic but be cautious.

After a long and trying period it is time to switch from "enter patiently, exit aggressively" and go back to my favorite closing comment. Hopefully many of my readers will remember it and act on it!

Sell Too Soon!

Jim Brown
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