Option Investor
Market Wrap

Pick Your Own Support Level

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      06-11-2002           High     Low     Volume Advance/Decline
DJIA     9517.26 -128.10  9758.80  9508.69 1.37 bln   1086/1896
NASDAQ   1497.18 - 33.50  1547.50  1496.66 1.67 bln   1290/2229
S&P 100   500.70 -  8.33   514.22   500.31   Totals   2376/4125
S&P 500  1013.60 - 17.14  1039.04  1012.94             
RUS 2000  462.78 -  6.51   471.96   462.46
DJ TRANS 2706.57 - 14.60  2750.33  2703.80
VIX        27.46 +  1.31    27.46    25.07
VXN        53.12 +  0.55    53.13    51.56
TRIN        1.62
PUT/CALL    1.02

Regardless of where it is you will have as good a chance of being correct than any of the talking heads on stock TV. The numbers I have been hearing recently are about as random as throwing darts. The commentary of the day was speculation on the "bottom". When will it form, how will you recognize it, where will it be. Depending on who you listened to the Dow bottom was anywhere from 9600, 9500, 9000 and even as low as 8000. It appears bottom theories are like mouths, everybody has one. However very few will profit from their theory.

The morning started off bullish with futures spiking on the news that India and Pakistan could be making up. The opening spike took the Dow up to a triple digit gain and a brush with 9750 again. Bears took the gift and promptly shredded it. The more the day progressed the worse the sentiment became. AMAT, speaking at a Bear Stearns tech conference tried to appear optimistic while being cautious at the same time. They said it could be a stage one bottom, which could lead to more IT spending later. "Later" was the key word. They also said there was still a surplus of capacity on many common chips. Intel reportedly said they were not seeing any IT recovery yet but I could find no hard evidence of that statement.

Techs were already in trouble since CSFB cut their global growth estimates for PC equipment to zero from 5% overnight. Even the PC price war is not bringing buyers off the sidelines for corporate gear. Dell maintains they will profit from the increased competition because of their low cost structure. They still dropped on the day.

After the bell SEBL said the 2Q was shaping up to be as difficult or even more so than the 1Q. This is bad since they were already on record as saying the 1Q was the most difficult since they had been in business. Makes you almost want to run out and buy software stocks! (grin) This is just another blow to techs and the concept of a stealth rally building in chips.

The biotech sector took it on the chin again as more revelations about IDPH were rumored and ABT warned they would miss earnings and take a $140 million charge. Lower sales of its anti-obesity drug and devaluation of the Argentine peso were given as reasons. MRK added to the drug/biotech slide amid news that it would not refile an application for its arthritis drug Arcoxia. New worries over Celebrex and Vioxx safety and generic competition also tanked the sector.

In a word the markets today were bearish. The opening bounce on the relaxed war worries rolled over exactly at resistance (9750) and traders stepped back to avoid being hit by the falling knife. The selling was orderly on light to moderate volume but it was steady all afternoon. Everyone seems convinced that lower lows are ahead and they are resigned to wait. Market internals started off great with advancers beating decliners 3:2 but the deck was stacked against a continued rally. With warning season underway and no economic news on the calendar traders were left to focus on negative stock news or no news at all. With the post 9/11 rebound the best of all possible scenarios was priced into the market. When this scenario failed to come to pass every bit of bad news just kicks the market farther back into time and price. Insider trading is accelerating and stocks making new lows are growing.

Sounds like a bounce around here somewhere. When things look so negative that pundits are forecasting a 50% haircut from here then the bottom should be in sight. This is what is bringing the bottom forecasters out in force. This is why dip buying is actually being revived to some extent. I would be the first to tell you, I don't think we are there yet. I think the market forces in motion won't rest until the September lows have been retested. This does not mean there is not a bounce in our immediate future. Go back to the spring example. The farther you push down a spring the harder it is to push. In just the last two weeks you have three excellent examples of the "rebounding spring" and each led to lower lows.

The internals this morning were pretty good but the fear factor was absent. The VIX dropped back to a neutral 25 at the open and the TRIN was an unbelievable .31 at the open. By days end the TRIN was back up to a moderately bullish 1.78 and the VIX had spiked back up to 27.46. The best indicator of all was the put/call ratio which closed at 1.02 on Tuesday. This is very bullish and a very accurate indicator when it is extreme. This means fear came into the market and investors bought puts at the close.

All of this boring statistical mumbo jumbo is relative tonight because the indexes all stopped at meaningful support levels. (depending on who you listen to) Now, the stage is set. Indicators approaching extremes and indexes stopped on support. Is this a recipe for a rally? Don't hold your breath. Go back and look at the three rallies over the last two weeks. Same conditions, same result. Hopeful bulls bought stocks and averaged down, again, and worried shorts covered "in anticipation of a higher entry point." This is why I could see another bounce at the open on Wednesday. However, how many times can this scenario play out before the shorts just decide not to cover, since there is always a lower low. The bulls will eventually decide than they just don't want any more SUNW, LU, GLW, etc, even at these "attractive" levels. (sarcasm)

As an investor what are YOU going to do? Buy the dip in anticipation of a lower high or short the bounce in anticipation of a lower low? Let me restate that. Since most investors don't short stocks (buy puts) but understand that many others do, what would you do as a long player only? Buy the dip anyway? You could if you are a day trader and expected to just scalp a couple points and quit. If you are not a day trader you would probably see the handwriting on the wall and stay on the sidelines. That is my point. The odds of the majority of long investors simply staying on the sidelines is extremely high. Until the possibility of a real rally based on real earnings emerges we are doomed to continue the current cycle. Bullish traders can continue to ignore the facts and throw money at the market or they can wait for a real entry point later. Dow 9600, Nasdaq 1500, OEX 500, SPX 1000 may be support levels, real or imagined, but there is nearly a 100% chance that the bottom lies below those numbers. Traders, choose sides before 9:30 tomorrow morning or just turn on your TV and watch the game. The choice is yours.

Enter Very Passively, Exit Aggressively!

Jim Brown

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