Option Investor
Market Wrap

Bump, Set, Spike!

HAVING TROUBLE PRINTING?
Printer friendly version
06-12-2002        High      Low     Volume Advance/Decline
DJIA     9617.71 +100.45  9624.77  9449.98 3324 mln   1615/1590
NASDAQ   1519.12 + 21.94  1519.16  1474.56 2055 mln   1559/1922
S&P 100   507.02 +  6.32   507.98   496.57   totals   3174/3512
S&P 500  1020.26 +  6.66  1021.85  1002.58
RUS 2000  462.99 +  0.21   464.03   457.41
DJ TRANS 2706.72 +  0.15  2710.12  2671.58
VIX        27.01 -  0.71    29.34    26.98
VIXN       52.86 -  1.41    54.92    52.86
Put/Call Ratio      0.99

Bump, Set, Spike!

Given that it's summer time, odds are growing that you'll see sun-loving volleyball players setting up nets across this nation's city parks and beaches. Competitive players tend to play doubles or two-man teams but sometimes when it's crowded you'll see five-man teams. Today looked a lot like a volleyball game. On one side of the net we have companies with plenty of negative news playing hard to score the next point for the bears. Today's roster of players for the bears were SEBL, OMC, IMCL, JNPR and SWY. On the sunny side of the net, playing for the bulls, are PG, MYG, MOT, AMD and MSFT.

Now for those of you who aren't volleyball aficionados I promise I won't carry this example too far. Yet given the volatility we saw in today's markets it isn't hard to imagine the bears and bulls volleying the major indices back and forth for dominance. Now let's set the stage.

The game has been going in favor of the bears since mid-May. The COMPX and SPX are near the bottom of their downward regression channels and the $INDU is hovering just below the January 02 lows. It looks like game point in favor of the bears (game point is where the winning team only needs to score one more point to end the game and claim victory) as a serious breakdown from here could facilitate a major drop. The last several weeks have seen the bears score a few points before the bulls can get a side out (a "side out" means they have taken control of the ball from the bears). We've seen this as the indices pause at significant support levels. The bulls mount an offensive to put some points on the board but after a couple of volleys they side out (lose control). We've witnessed this as every relief bounce has met with a sell-the-rally attack, especially near previous support that has now become resistance.

We pick up the game after yesterday's close. Bears have the ball. Siebel Systems (Nasdaq:SEBL) is serving and plans to score an ace with the news that its Q2 is looking as difficult or worse than Q1. This is bad news as their Q1 numbers were dreadful. Individual bears score on Wednesday as SEBL gaps down and closes with a 14% loss on the session. This puts others in the group under pressure and PeopleSoft (PSFT) and BEA Systems (BEAS) are both down more than 5% on the day. The serve is looking strong and the bears believe they have another winner to drag the markets lower.

Fortunately for the bulls, Maytag (NYSE:MYG) had come out last night and issued upside guidance for its not-yet-over 2Q but said earnings will probably come in 10 cents above estimates. The company also raised their 2002 year-end guidance from the Street's estimates of $2.82 to $3.10. MYG's good news bumps the ball back over the net.

Suddenly, jumping high into the air is Omnicom Group (NYSE:OMC). Shares suffered last week as the stock sunk on rumors of a negative Wall Street Journal (WSJ) article would be appearing soon. OMC tried to defend itself on Friday by reaffirming guidance and Merrill Lynch upgraded the stock to a near-term strong buy. With that kind of support, shares of OMC rallied Monday-Tuesday this week but this only provided up ticks for those willing to short the bounce. The WSJ article did appear today and raised concerns about the media company's tactics about accounting and acquisitions. Shares gap down this morning by more than $6 to $71.00 and proceed to trade to a low of $51.51 just after 11:00 a.m. The MYG's ball is blocked sharply by OMC and appears to be headed to the floor. Bears are looking at a victory as the $INDU touches the 9450 level by noon.

I'd like to say that Procter & Gamble saves the day with a massive dig (that's volleyball slang for saving the ball from touching the floor and preventing the opposing team from scoring) by issuing its positive earnings-guidance press release midday but the news actually came out this morning. It may not amount to much (if you were long OMC) but Merrill also upgraded PG to a "strong buy" as well. While I could continue with the volleyball analogy, you get the idea that investors were buffeted with barrage of good news/bad news throughout the day, which produced more than one triple-digit swing in the $INDU.

Some of the bearish highlights were a downgrade of JNPR by Morgan Stanley to an "underweight", which sounds a lot like "sell". The analysts comments mentioned "negative newsflow" and valuation concerns. Not to mention that Juniper recently told reporters that it saw no signs of recovery in the telecom industry. Big surprise there, thank you, Juniper. Also painting Wall Street red was Safeway. The large grocery chain dropped more than 12% after stating that Q2 and full year earnings would miss estimates due to slowdown and tougher competition. In a related note, an active ratings department from Merrill issued a downgrade on fellow grocer Albertsons (NYSE:ABS) and stated that current valuations look too high and Merrill lowered their earnings guidance on the company.

ImClone Systems (IMCL) continued to keep the biotech group in the spotlight after Tuesday's beating. The focus today was on the company's ex-CEO, Samuel Waskal, who was arrested on charges of insider-trading. Despite the news, the stock ended the day with a +3.7% gain. This news also hit shares of Martha Stewart Living (NYSE:MSO) for a 12% drop as it was widely known that Martha and Sam were friends. According to some reports Martha was actually a former girlfriend of Sam's. The circumstantial evidence that hit Martha's stock so hard was news that she sold 3900 shares of IMCL prior to the FDA rejection of IMCL's cancer drug. She claims the stock had merely traded below her pain threshold of $60.

While the arrest put yet another bruise on the investor confidence issue in the markets and the trustworthiness of corporate executives all of it was overcome by a positive turnaround in the chip sector. Believe it or not, after all the doom and gloom lately, Motorola jumped almost 9% after stating that the company would likely meet or beat its Q2 revenue forecasts. This sparked a small fire under the SOX index, which ended the day up 3.5%. Other standouts included AMD, which received an upgrade from Prudential on valuation concerns and shares of Intel rallied 6.7% after bouncing off the $20 level. Positive comments from Bear Stearns, which just held a technology conference yesterday gave investors hope that the chip sector should be very close to a bottom.

This appeared to catch shorts off guard and volume surged higher as many sought to cover positions. The NYSE traded 1.7B and the Nasdaq traded more than 2B shares. The QQQs traded over 150M alone and Jeff Bailey had speculated earlier on a reversal in the Q's if volume reached these levels.

The real side-out for the bulls occurred when rumors that Microsoft (MSFT) would pre-announce a positive quarter began to circulate across the trading floors. This really had the bears running for cover in the last hour and shares of MSFT rallied almost $3 or 5.6% by the close. As a major component in both the Nasdaq, the NDX (Nasdaq-100), the Dow Jones Industrials and the S&P 500 it was the positive catalyst that helped refuel the midday reversal and give it some momentum.

Chart of MSFT

As of yesterday, I remained pretty bearish. This late day reversal on strong volume smells like a real opportunity for a rally. However, I don't think it can last more than two or three days before encountering some serious pressure. The trend is still down. We're still approaching the earnings-warning season and nothing truly fundamental has changed to make investors want to buy stocks. The Fed Beige Book report this morning was positive but the headline came across as uneven growth across the country and sectors. According to the report, retail sales appeared flat from the previous year, commercial real estate was weak while the housing sector chugged ahead at a "robust" pace. Banking was not seeing any improvement in loan activity and automakers reported strong numbers. Semiconductor orders were looking better but no surprise was that telecom remained weak. This didn't tell us or the markets anything we didn't already know. Inflation concerns appear to remain in check and no one expects the FOMC to raise interest rates until the September 24th meeting.

Without a doubt, big money has been defensive and the yield on the 10-year Treasury has sunk to early March lows and its 200- dma.

Chart of the $TNX.X

However, if the bulls can keep the rally alive then traders might have an opportunity to trade the move up to the top of the recent regression channels in some of the major indices. The on going challenge is that the markets need a change in sentiment for investors, not traders, and the investing public is still looking at a long, hot summer vacation to forget about the painful school year they just experienced.

Chart of the Dow Jones

Chart of the Nasdaq

Chart of the S&P 500

Maybe when we retest those September lows that everyone keeps pointing to then we can begin to think about a sizeable rally attempt. Several indices like the $GSO.X, $NWX.X, $MSH.X, IXTCX, $XTC.X, $DRG.X, $BTK.X are all at or below their September lows already and a sharp move up could spark a strong round of short- covering. While this might bode well for any hope of a near-term relief rally in the major indices bullish traders who haven't learned to imitate the bears will need to be extremely careful as we look for the COMPX and SPX to eventually touch 1400 and 950 respectively. Keep your eyes on the Russell 2000. It bounced off its February 2002 support levels intraday today. If it breaks down any further then it will weigh heavily on the entire market.

Thursday and Friday will also bring additional economic reports for investors to watch or ignore. Thursday will deliver the PPI and Retails sales numbers while Friday offers business inventories, industrial production, capacity utilization and the Michigan Sentiment report.

Trade carefully and keep those stops fresh!

James

INDEX TRADER SUMMARY

Market Wrap Archives