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Market Wrap

Retest Complete?

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        WE 6-21          WE 6-14          WE 6-07          WE 5-31 
DOW     9253.79 -220.42  9474.21 -115.46  9589.67 -335.58  -179.01  
Nasdaq  1440.95 - 63.79  1504.74 - 30.74  1535.48 - 80.25  - 45.76 
S&P-100  489.42 - 12.34   501.76 -  5.56   507.32 - 21.88  - 10.72 
S&P-500  989.13 - 18.14  1007.27 - 20.26  1027.53 - 39.61  - 16.68 
W5000   9389.98 -159.74  9549.72 -202.97  9752.69 -353.80  -144.15 
RUT      461.07 +  2.00   459.07 - 11.44   470.51 - 16.96  -  6.17 
TRAN    2755.64 + 82.50  2673.14 - 13.52  2686.66 - 62.60  +  5.59 
VIX       31.28 +  1.35    29.93 +  3.28    26.65 +  3.75  +  1.64 
VXN       59.30 +  3.63    55.67 +  3.43    52.24 +  6.29  +  3.09
TRIN       2.01             1.34             1.30             1.11
Put/Call   1.27             1.15              .79              .73    

I guess that depends on what retest you are discussing. The markets closed at the lows of the year and that has to be a retest of sorts. The keyword missing from the title is "successful". Successful retests in the recent context (4 yrs) normally involved rocket rebounds when the prior levels were "tested". I think Friday's market action offers yet another clue to future direction.

Chart of the Nasdaq

Chart of the Dow

Friday started with another flurry of downgrades. JP Morgan downgraded the enterprise software sector in view of the increasingly pessimistic IT spending outlook. MSFT, ORCL, SEBL, PSFT, etc, all suffered another drop. Remember the big after hours spike in ORCL to near $10? Well ORCL came really close to hitting $8 on Friday. I bet those shorts are really glad they covered. SEBL is about to hit a new post 9/11 low at $13. Same with PSFT at $16. Microsoft has been the best performer until Wednesday. The company began a slide from over $56 to near $52 at the close today. The worry it seems is that there are rumors beginning to float about an impending earnings warning. Considering the rumors last week were about an impending positive surprise we have come full circle. Microsoft's June low is $49.17.

The networking sector was downgraded by Banc of America on concerns the spending freeze could drag out into 2003. JNPR, LU, CSCO, CIEN, etc, all took another hit. Cisco continued its drop towards $12 with a -.34 loss to $13.73. All the other stocks in the sector are already under $10.

One fish swimming against the current was Salomon (pun) Smith Barney. SSB upgraded Dell to buy from neutral saying PC demand is not as bad as it seems. Interesting call but Dell still struggled to stay positive in the days trading closing up only a nickel at $23.97. SSB said they thought all the slowing component sales were due to excess inventory from the 1Q and not a slowing of demand. They felt demand was stable. Time will tell.

Qualcomm said on Friday that results would meet or exceed the high end of its previous forecast. The sector spiked at the open but closed lower. Qualcomm said sales of phone chips were on track and it was experiencing strong order input for the fourth quarter due to increasing demand for CDMA technology. One of the continuing sector problems was a downgrade of the sector to negative from stable by Moody's on Friday. They warned they might downgrade some of the debt soon.

Dow component Merck hit a four-year low today after it was revealed that they had counted as income money that was not received. It appears their Merck-Medco unit claimed as income the co-payments that people make when buying drugs on insurance. The drugstores keep all or part of the co-payment and the drug companies never see it. Merck-Medco reportedly claimed these payments as a way to boost income. MRK lost -2.22 to $49.99.

Martha Stewarts broker may be making crafts soon and it won't be for recreation. After the close Friday Merrill Lynch announced that new information had come to light regarding trades in IMCL stock by Martha and IMCL CEO Samuel Waksal and the information had been turned over to authorities. The broker, Peter Bacanovic, and an associate, Douglas Faneuil had been placed on leave. Let's see, if it was good news I doubt they would have been sent home. According to Merrill the story just started to unravel in the last 48 hours. Oops! Wonder how good Martha is at teaching crafts in confined places? Nobody has admitted any wrongdoing but anyone can play connect the dots. According to news reports the mystery of the missing stop loss order has been solved. It never existed.

Next week is going to be a challenge economically. Tuesday we get Consumer Confidence again and Existing Home Sales. Wednesday is Durable Goods orders and New Home Sales. Wrap those reports up in a two day FOMC meeting ending Wednesday and top with a GDP report on Thursday and you have a recipe for market worry. The desert on Friday is Personal Income and Spending, Consumer Sentiment and PMI. A very busy week! Just what the market needs.

The market had a bad week to put it mildly. This was the fifth weekly loss in a row for the Dow and the lowest close of the year. The Dow took out last week's intraday low of 9261 with a drop to 9220 but rebounded slightly on minor short covering to close at 9253. The Dow is still well above the post 9/11 numbers of 8062 but appears destined to close that gap. The closest Dow support is in the 9075 area and the close on Friday was below the current down trend channel. The S&P also took out last weeks lows and closed under 1000 again. The Nasdaq took out last weeks lows and closed only 17 points away from the post 9/11 close of 1423. In a word, ugly.

A new pattern has appeared. Sell in the morning and sell again in the afternoon. Simple and efficient. Get the bulls to buy the morning dip and then knock them down again in the afternoon. Monday could see more selling at the open with margin calls picking up (remember those) and total frustration being the order of the day. There was a huge imbalance of sell on close orders that will have to be reconciled at the open on Monday.

Working in our favor is an expected post expiration bounce and extreme oversold conditions. With stocks not restrained by market makers trying to protect expiring positions they will be free to move unrestricted. Unfortunately with the current trend the initial move may not be up. The volume increased on Friday with the NYSE trading 1.725 billion shares. A huge day with 1.23 billion down volume. The Nasdaq volume was less than the NYSE at 1.785B but still the biggest day of the week. The capitulation topic continued to be discussed and while Friday was ugly, it was not capitulation. It is still coming to a market near you soon.

Despite the bearish sentiment the conditions are not bad enough historically. Only 8% of the S&P are at 52 week lows despite the 4:1 down volume over up volume on the S&P. The Nasdaq, despite the carnage, only saw 6% of its stocks at new lows. There were still 81 new Nasdaq highs on Friday. As I mentioned in my Thursday night commentary I think the leading indicator for market direction is the NDX, the top 100 Nasdaq stocks. It is well below the 9/11 lows and still dropping fast. It is at Jan-1998 levels (1035) and after minor support at 1025 it could fall all the way to 950. Multiply that across all the indexes and you can see the possibilities.

For next week there are two conflicting camps of speculators. One camp thinks Monday will be a blow off day and then a rebound on Tuesday/Wednesday. Since that is chock full of economic reports and a FOMC meeting that could say nasty things I am not leaning in that direction. The other camp thinks Monday will rebound after three triple digit down days on the Dow. Tuesday will be flat with the bear market returning for the balance of the week. There are multiple cycle theories that suggest a temporary bottom the end of next week. Of course everybody has a theory. One reader wrote me on Friday and said "If support holds next week the market will go up". No kidding. If it does not hold and goes down, he is right, if it holds and goes up he is right. Not much risk in that market call.

My best guess is the latter of the two camps. A close higher on Monday with possibility of another intraday dip. The bounce will run out of steam on Tuesday and start drifting lower again to coincide with the FOMC announcement on Wednesday. All of this speculation will of course be dependent on the economic reports mentioned above. They could change the direction or accelerate it. Warning season is about to come to a close but we have one more big week left. The major fear is a warning from a big company like MSFT or IBM. While IBM is expected the severity of the warning would be key. Any warning from Microsoft would be like a lightning bolt on a sunny day and the results could be catastrophic. I don't expect a MSFT event and think it is pure speculation. Still there are hundreds of other companies that can warn and like we saw last week any 3-4 on the same day could push us over the brink.

Despite what we like to think we are not on our own. The world markets are sinking with us as the events impact the global economy. On Friday for instance The Nikkei lost -258 points, the Hang Seng -162, Venezuela -280 and Brazil -511. Brazil is the festering sore that is impacting those other markets and it will eventually take us down another notch. Many older traders can remember several Brazil induced crashes in the last decade and the situation is not getting any better. Add in the terrorist threat for the July-4th weekend and you have numerous reasons to not be long stocks over the next couple of weeks.

I don't want you to think we have turned into permabears as one reader said Friday. "All OIN wrote about this week was gloom and doom. Terrorists, earnings, scandals, falling markets, broken support levels and your negative outlook. Can't you write positive things about the market?" We would love to. How about this email I received on Friday:

"Jim, Went heavily into IBM (100 puts) needless to say I was a little nervous when it went up on a downgrade. Just got out for a $50,000 profit-- Did the same with OMC (should be OMG for Oh my God). Think I'm going to Disney World (just kidding) Thank you Thank you Thank you." (Name withheld)

Unfortunately we don't make the markets, we just report on them and suggest ways to profit from whatever trend is present. That trend is down until it changes and we will continue to report that as well. How you choose to react to the information is your business. Have a great weekend!

Seminar update: Confirmed speakers now include:

John Bollinger, Creator of the Bollinger bands Jon Najarian, Dr "J" from the CBOE, President Mercury Trading Robin Dayne, Profiled as "The Traders Coach" on 20/20 and CNBC Steven Price, Options Instructor, Market maker at CBOE Jeffery Verdon, Trading and Tax law specialist Leigh Stevens, Chief Market Strategist, Option Investor Jeff Bailey, Mr Point and Figure himself! Others will be posted as we get closer.

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Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

Editors note:

Are You A Successful Trader and Frustrated Writer?

One part of this job I really like is getting emails from fellow traders with tips, tricks and different insights into the markets. Everybody has a different view of the same market and how to profit from it. I have readers every week who send lengthy comments about particular trade setups or market forecasts. Quite a few are nothing short of amazing. We are going to start next week a "Guest Trader" column. If you have a particular trading technique, market view, trend analysis or just a hot stock tip, we invite you to submit it for publication. We will review it and publish the best ones in the newsletter. They don't need to be pretty or professional, just well thought out with enough documentation to prove your case. If you are a successful trader in this market then others want to know your secrets! Email Click here to email Jim

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