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Market Wrap

Of Oil and IBM

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      04-08-2002          High     Low     Volume Advance/Decline
DJIA    10249.08 - 22.56 10258.91 10120.87  1.10 bln   1834/1342
NASDAQ   1785.87 + 15.84  1786.40  1733.84  1.59 bln   1908/1647
S&P 100   563.95 -  0.07   564.02   557.19   Totals    3746/2989
S&P 500  1125.29 +  2.56  1125.41  1111.79             
RUS 2000  503.01 +  5.25   503.02   493.76
DJ TRANS 2753.30 - 25.11  2776.86  2718.98
VIX        20.92 -  0.19    22.78    20.78
VXN        40.38 -  0.44    42.93    40.38
TRIN        1.16
PUT/CALL    0.91

Of Oil and IBM
By Buzz Lynn
Click here to email Buzz

Overseas, Iraq set the tone for an early morning selloff as it announced it would cease oil shipments to the West for 30 days in support of Palestine. You could see the S&P June futures drop eight points in a matter of six minutes around 6:30 a.m. ET, as the financial markets pondered the implications of restricted supply. While the move would reasonably set traders on edge, the long-term effects will likely be negligible for the U.s. economy. Keep your fingers crossed that suicide bombing don't resume in the Middle East. More of that could further destabilize the region such that oil shipments DO become critical. For now, the oil flows from elsewhere and supply is stable. Russia, who just weeks ago bowed under OPEC pressure to cut production, will be only too happy to fill the void.

Shortly after that announcement, IBM finally confessed its sins (as if we didn't know) that it would miss its already bogus earnings number. So if you were led to believe by analysts who rely on management for a pro-forma number (read that, manufactured from thin air), you were extremely interested to learn that earnings after all the bad stuff had been reduced from an estimated $0.85 to $0.68 in order accurately reflect more bad stuff. Oops! Revenues won't be as high as projected and neither will profits.

If ever there was a moment in time to change your level of confidence in management or analysts, this is it. It once again offers a sterling example of how these folks have no idea any better than ours that the economy is recovering. As Sun's Scott McNealy pointed out two years ago, "If they didn't see the cliff coming, how do they know when they've hit the bottom?" They don't. Otherwise, they would not have had to reduce their numbers so drastically. Interesting that a late '01 recovery became Q1, then Q2, and now stands at H2 recovery for the economy that never had a recession. Interesting new-age semantics too that used to be called by its rightful name, Bull Something. Don't buy into it.

Just by way of example or an exercise in thinking, ask yourself what this might mean to other technology companies like EMC, MSFT, INTX, DELL, SEBL, or ORCL over the next few quarters. Their business will explode like the good old days while IBM gets killed? Not likely. I'd next expect MSFT to offer words of caution as the next earnings season kicks off beginning this week. The next two weeks will be chock full of, "Sorry, we'll do better next quarter." Then again, what's different about that? Thus, don't expect major changes in the market. This won't surprise anybody except a bunch of clueless analysts. And it didn't stop most software makers from staging a nice recovery off the morning lows.

Ooooooh! This just in. . .The New York Attorney General is suing Merrill Lynch for issuing misleading information! Imagine that! Who knew? Brokers misleading the public? NY AG must be kidding - I thought brokers were there to offer us great advice! 'Scuze me while I remove my firmly-planted tongue from my cheek. You can be sure that Henry Blodgett, formerly of Merrill, will be deposed about his "Amazon at $1000" call. Merrill likely is just the tip of the iceberg and a precursor of things to come in the brokerage business. See more news below.

All that said, IBM gave up $9.50 from Friday's close to find support in the $87-$88 range, its September and March lows from last year. And while its volume was huge in comparison to its average, the rest of the market remains very sick volume-wise. It takes much more volume to make markets meaningfully rise, plus the market is entering a traditionally slow season. Were this a one- day event, it would be easy to waive it off and assume that the markets will rise again tomorrow. But the repeated character of a market with slowing or waning overall volume is characteristic of a bear market. Better get used to that if you aren't already. The volume we see is a lack of interest born of reduced expectations from the "buy and hold" folks" - from all investors for that matter.

Personally, I expect we will see a decline in value of stocks or an increase of corporate earnings to bring financial ratios back to where they represent an interest in an on-going concern rather than a speculative piece of paper. Furthermore, I would expect the bearishness to enter an extreme too over the next few years (yes, years - it isn't just me - see Warren Buffet or John Templeton or Bill Gross). Once the investing public has thrown in the collective towel and sold their last share of stock (and as Bill Fleckenstein notes, "Once CNBC is off the air") that will be the bottom. Buy and hold? Not until then.

Very quickly, in other news, Ameritrade is buying privately held Datek for $1.3 bln in stock. If you think lower volume will have an effect on brokerage earnings in coming quarters, here's the first clue. Look for more brokerage mergers as investors curtail business and put the squeeze on those operating in yesteryear's tinted rose shadow.

Also, Prudential reports that Easter week sales were weaker than expected for major retailers, while that didn't stop some retailers from actually posting gains today, we have yet another clue that the economy is not yet in recovery mode as long as the consumer is tightening his/her wallet.

So how about those charts? Any tidbits there?

S&P 500 - SPX chart (weekly/daily/60):

Weekly charts still in decline with stochastics pointing bearish. Daily charts however may have bottomed as the 5-period stochastic has sprouted fledgling horns from oversold. While the SPX still trades under its 50 (magenta) and 200-dma (gray), Bollinger band support at historical support, both at 1120, provided some bullish end of day data. Meanwhile, despite that the 60-min chart fell below its declining wedge support in early hours, it clawed its way back above 1120 to 1125 where it met its declining high trendline. Yet stochastic for the 60-min chart remain bullish for now and might portend a little bullish trade tomorrow morning through that trendline. But, I'd be a call buyer on pullbacks to 1120 based on current charts assuming the 60-min stochastic cycles to oversold along with it.

Dow Industrial - INDU chart (weekly/daily/60):

Similar chart pattern for the Dow except that it already trades above the 50 where it continues to find support. While the weekly chart is bearish, the daily stochastic has turned meekly bullish. And the 60-min chart stochastic is also bullish. If trading the DJX, watch out for resistance at the declining high trendline. 10,275 could provide the catalyst for a pullback along with then overbought stochastics. Pullbacks to 10,150 - 10,200 might present call-buying opportunities as long as the daily stochastic doesn't die in the process and the 60-min stochastic reaches to oversold.

NASDAQ - COMPX chart (weekly/daily/60):

Amazing but true - IBM gets killed, which ought to bring down the whole tech sector (primarily NASDAQ), and it rises nonetheless. I don't yet understand the disconnect, but these are charts, and we could care less why - just that they ARE. Again, similar story - daily/60 coming up bullish while the weekly remains in bearish mode. Nice bounce off former support levels gave way to nice daily/60 min stochastic recovery that may have legs. Pull back to 1770 might make a call buying opportunity if the daily stochastic remains bullish and the 60-min cycles to oversold with the intraday pullback.

As for the VIX, I've been noodling some thoughts on it lately thanks to an Amsterdam Exchange trader who also happens to be a reader. Using VIX as a measure of volatility, by definition, it moves lower the more price-stable the OEX becomes. As the ranges tightens, the VIX falls. If the OEX sinks like a stone or shoots up like a rocket, the VIX will rise. With daily volume scaling back though, drastic market moves become less likely. From that we can conclude that even as the market slowly grinds south, the VIX can remain low. Also, while not as likely in my opinion, a very bullish week could actually spike the VIX a bit. The low VIX is reflective of the idea that investors are pretty confident that the market will keep doing what it's doing. I call this complacency since a consensus of investors are usually wrong. I just can't see positive news jarring the VIX out of its slumber. It is more likely that VIX spikes will happen on down days.

The upshot of all this is that I am not relying as much on the VIX to tell me market direction as I am to tell me that investors have remained complacent and may continue to do so for a long period of time, even as the lobster in our collective pots gets cooked. In short, it doesn't have to spike to convince me we could see further downward action.

So what for tomorrow? Hmmm. . .another $64,000 question in which if I had the answer, we could charge $10,000 per month for this newsletter, and it would be worth every penny. But my best guess is for continued bullish action into tomorrow morning in light of the CPQ news (if you call it that - they announced that they would meet or exceed estimates of $0.01 and the stock reacted well after hours). Maybe they can blow some of that magic market dust around - sort of like the poison poppies in the Wizard of Oz that put Dorothy and friends happily to sleep against their better judgment. No matter - the charts say we have bullish swing trades to take advantage of despite the bearish weekly trend and we have little economic news this week.

See you at the bell

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