Option Investor
Market Wrap

Gains Gone Again?

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      05-21-2002           High     Low     Volume Advance/Decline
DJIA    10105.71 -123.80 10292.95 10086.55 1.17 bln   1135/2012
NASDAQ   1664.18 - 37.40  1717.93  1660.22 1.44 bln   1273/2254
S&P 100   538.28 -  7.00   549.56   537.81   Totals   2408/4266
S&P 500  1079.88 - 12.00  1099.55  1079.08             
RUS 2000  495.46 -  7.71   504.89   494.27
DJ TRANS 2702.78 - 58.60  2773.05  2699.66
VIX        22.56 +  1.00    23.23    20.62
VXN        44.65 +  1.77    44.96    42.63
TRIN        1.19 
PUT/CALL    0.90

Don't you just hate those words? For most of the indexes the gains from the last week are history. Gone. Kaput! The Dow closed at 10102 and below the close from last Monday of 10107. For the last five trading days the Dow is negative. The S&P is only six points away from giving back all of its gains and the OEX only five. The Nasdaq is only 12 points away. This is very frustrating for the bulls although it is positive technically.

The day started well with Merrill Lynch announcing a settlement with the NY attorney general for $100 million. Not pocket change but significantly lower than previous estimates. The AG took a shot at the other brokers and said "check your records and pay us a visit. Don't make us come to you." While this was a temporary positive for the markets the glee turned to gloom as the news continued to be analyzed. Some analysts think customer lawsuits could turn into a $3 to $4 billion problem for Merrill. Others are not so grim but do agree the future is not bright. Once the thousands of suits start winding their way through the courts there is likely to be a flood of documents coming public that could point to other problems as well. Merrill may be out of the frying pan and into the fire. Did I mention that the SEC said this was not the end of the line for Merrill? They plan on continuing their investigation to see if any investors were harmed. Now that should not be very hard.

If that was not enough to sour the positive sentiment there was another terrorist warning supposedly from Al Queda interrogations currently under way. The targets were the Statue of Liberty and the Brooklyn Bridge with Memorial Day as the time frame. I wonder how hard they had to look to find someone willing to die while blowing up a statue? Still the constant replay of the "nuclear, chemical, biological warning from yesterday in addition to today's specific threat was just more weight for an already heavy market.

Not enough negatives yet? Solomon Smith Barney downgraded a host of software companies including SEBL, PSFT, ARBA, EPNY. They cut estimates all the way out to 2003 on lack of a rebound in business investment. PSFT had already said they saw "no discernable pickup in customer spending." Add to this the negative SEC news on PSFT and CA from Monday and you can kiss that sector goodbye. Microsoft lost -1.82 on news that they would invest $2 billion in the online Xbox project, not the $1 billion as previously thought. The industry game box price war is also weighing on Microsoft. After the price cut last week they could be losing as much as $100 per game console sold. While this will be made up as more software becomes available it could impact earnings in the short term.

Need more? India and Pakistan are reportedly on the verge of war with over one million soldiers on high alert. This border conflict has been brewing for sometime and lest we forget these are nuclear powers. Pakistan claimed more than a dozen people killed as India shelled the village of Chakothi.

Dow component Home Depot got hammered for a -3.60 loss after earnings rose a sharper than expected +35%. The reason for the decline was a lack of raised guidance like their competitor Lowes. Lowes' same store sales rose +23% compared with only +17% at Home Depot. Home Depot only forecast a +2% to +3% rise in sales compared to a +4% to +6% outlook for Lowes. Home Depot also booked a $350 million gain in sales due to a calendar shift. Without the shift their sales would have only gained +14%. As they say, the headlines don't always tell the tale. The HD drop accounted for about -25 Dow points.

Not everything was negative today. QCOM affirmed estimates for the 3Q and the year on expected strong acceptance of their newest mobile phones that allow users to surf the Web, swap pictures and download music. They said they saw revenue rising from +4% to +8% or $.90 to $.95 cents compared to analyst's estimates of $.87 to $.92 cents. QCOM gained +.73 cents on the day but until it breaks $34.50 it is still in a downtrend.

Alan Blinder, former Fed Vice Chairman and principal in the G7 Group, said their proprietary indicators are showing a rise in business spending for the first quarter. This would be the first real signal that businesses might be loosing the purse strings. It runs contrary to many companies, like PSFT and HPQ, that have said in the last week that they see no recovery in business spending.

Perfect Storm Revisited

The challenge for the markets going forward is the markets themselves. The earnings news is about over for the quarter and the summer doldrums are ahead. This is not normally the time when stocks rally. The major rally from last week was met with dire predictions of death and nuclear destruction as well as leading economic indicators that came in twice as bad as expected. The follow through that would have convinced the shorts to bite the bullet was non-existent and it became a race to get out before the next terrorist attack. It is hard to predict major news events in advance and it is clear that the shorts were not afraid on Monday morning with Rumsfeld on their side. The bullish scenario ran into a bear with a sentiment killing story to tell. That story carried into Tuesday and the new threats to New York just added to those bearish feelings.

For tomorrow there are some things that may work in our favor. The Nasdaq has retraced 50% of its jump from the May-7th low of 1560 to the May-15th high of 1760. That number is exactly 1660 and that is EXACTLY where the Nasdaq stopped its drop today. Coincidence? The Dow stopped within five points of the exact retracement of the last five days gains at 10102. Another coincidence? I believe nothing it a coincidence when it concerns the market. Still it does not guarantee market direction the following day. Market technicians hunt for critical points on which to base "their" bias. I am no different and probably you are not also.

I get a handful of emails a day predicting a market crash and giving a dozen reasons why. Some are pretty good and some are really out there. I also get a lot of mail predicting the next rebound. Some of those are so technically literate you would think somebody with a PHD in technical analysis penned them. Others are in the "my brother in law knows a broker who says it will go up tomorrow." Believe it or not they all have the same success rate. 50/50. I bore you with this because everybody has an opinion and the market proves them wrong on a daily basis. You want a lesson in humility? Try publicly predicting market direction on a daily basis. I will be happy to give you a forum.

The only thing anybody knows for sure is that the bell will ring at 9:30 tomorrow morning and stocks will trade. In this current environment we can't even guarantee that! With the Dow/Nasdaq at support levels (give or take a few points) and the OEX/SPX only six points away, the ODDS of another large drop are smaller than chances for a bounce. The put/call ratio closed at .90 which is bullish and indicates a higher than normal level of put buying. This normally occurs just before a bounce. The VIX however at 22.56 is on the bearish side of neutral while the TRIN is on the bullish side of neutral at 1.2. What all this means is that we are "slightly" oversold and conditions favoring a bounce are building. That bounce could be intraday or multi-day and nobody knows.

This market is not for the timid and not for traders that cannot move into and out of positions on a daily basis. The oversold/overbought oscillators are fluctuating on almost a daily basis. This shows that there is no conviction and nobody is "holding" stocks. Until that changes we have not seen the bottom and volatility will continue to rule the day. There is a lingering thought process by long time traders that we have not seen the retest of the September lows and we have not had a capitulation event. Without that capitulation event, where stocks are sold off in volume at any price, institutional traders will still be holding money in reserve. That type of event will cause them to buy the dip and that will be the bottom everyone can claim. Will that happen tomorrow? I strongly doubt it and that means we are doomed to continue bungee trading until it does.

Enter Very Passively, Exit Aggressively!

Jim Brown


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