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Market Wrap

To Capitulate Or Not to Capitulate

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        06-26-2002        High      Low     Volume Advance/Decline
DJIA     9120.11 -  6.71  9160.81  8926.57 1990 mln   1362/1904
NASDAQ   1429.33 +  5.34  1436.57  1375.53 2060 mln   1432/2064
S&P 100   482.57 -  0.85   485.08   471.24   totals   2794/3968
S&P 500   973.53 -  2.61   977.43   952.92
RUS 2000  452.97 +  0.52   453.46   441.76
DJ TRANS 2637.70 +  9.78  2643.88  2578.71
VIX        32.33 -  2.94    35.99    32.29
VIXN       64.14 +  0.39    65.32    62.43
Put/Call Ratio      0.98

To Capitulate Or Not to Capitulate

That is the question investors, analysts, fund managers and the rest of the world is asking after the volatile day in the U.S. markets. The word "capitulate" means to surrender, to give up all resistance, to come to terms. So the real question is has the market surrendered? Have the major indices given up all resistance?

The gap down this morning was expected after the WCOM news late Tuesday. What worried investors was how low would it go and would it come back? Was this it? Have bulls finally "surrendered" or thrown in the towel? There was so much focus on this being "the day" or "the event" that the extreme panicked selling everyone was looking for to mark the occasion didn't really appear. Imagine the investing population being so ingrained not to sell "the bottom" and then given the warning that this might be "the bottom" may have defused or reduced some of the selling impact today could have seen. Don't get me wrong. The volume was strong today. The NYSE saw 2.3 billion shares with 1.6B of it as down volume. The NASDAQ saw over 2 billion shares with 1.1B of it as down volume. This was the biggest volume day of the year for the NYSE. Advancing issues lost to declining issues across the major exchanges at a ratio of 29 to 43 (including the AMEX). There were just over 200 new highs yet these were overshadowed by 559 new lows. All of this is definitely negative but capitulation? I'm not so sure.

Have the major indices "given up resistance" or in our case support? The big focus was on the Nasdaq and the S&P 500 and if these two indices would bounce or break the old September 21st lows (this was the bottom, five days after the markets opened after the 9/11 attack closures). The Nasdaq did manage to pierce the old low but the afternoon rally put it back in positive territory. Absolutely amazing!

Chart of the Nasdaq

The S&P 500 (SPX) turned in a similar rebound during Wednesday's volatile session. Although the index did not actually touch its September low of 945, the 953 bottom today may be close enough.

Chart of the S&P 500

Out of the big three indices the Dow Jones Industrials has been significantly stronger and is several hundred points above its September lows. The big question everyone was asking before the market opened this morning was how bad will it be?

Chart of the Dow Jones Industrials

I think it is premature to answer the question if the major indices have capitulated. The Nasdaq Composite and the SPX have essentially hit the September low, which is now our current level of support but the real question is will it hold? If we look at other market and sector specific indices like the NDX, the GSO.X, the BTK.X, DRG.X, IXTCX, XTC.X, and the NWX.X they have all surpassed their September lows and continued to fall. Granted the ones listed are technology, telecom, biotech and drug related, which are not the strongest groups due to the recession in tech spending and the hailstorm of negative drug-related news in recent months, but it's a good example to show that the major averages don't have to stop here.

Analysts have been pointing at the September lows for months. This was supposed to be the big retest that the markets needed for any significant rally to materialize. In essence it was to be the conception of the new bull market. Unfortunately, much like a pregnancy, you usually don't know until a few weeks later that you are pregnant or in our case that the bull market really has begun. Only then can look back and attempt to pinpoint when it began. Part of the challenge for investors is that the incubation period for any real birth to the next bull market could be months. Furthermore, investors need to consider the possibility that just because this MIGHT be a bottom (or close to it) that doesn't mean the market is going to go up from here. The U.S. markets are still suffering from a crisis in investor confidence and a falling dollar which is discouraging foreign investment into our none-to-stable equity markets.

"The best communication services in the world"

If you haven't heard, and I can't imagine how one could avoid it, but WCOM was the news of the day. Last night the ailing telco reported that it had padded the books by $3.8 billion over the last five quarters. Shares of WCOM had fallen under $1.00 to 83 cents in Tuesday's session and the company was crumbling under a huge debt load and a stagnant to falling revenues. Shares of WCOM were halted all session but shares were seen trading between 9 and 23 cents on a few ECNs before the open. The odds for WCOM's bankruptcy appear to be a sure thing but the company and its banking creditors are probably going to see if they can keep the business alive. The speculation growing now is that WCOM's fraudulent ways could reach upwards of $10 billion as the search continues. The company had already been in the SEC spotlight as the government agency looked into potential overstatement of revenues and billing practices. If you thought the Enron bankruptcy was bad, WCOM's will be worse. At $103 billion it will be THE largest corporation bankruptcy in America and the shockwaves will be felt across multiple sectors. The banks that had debt exposure to the company, other telco's and equipment suppliers will be severely hit by WCOM's demise. Shares of TLAB fell 8.9%, GLW dropped 14.7%, NT sunk 8.7%, JNPR skidded 18.4%, FON lost 10.5%, JDSU suffered a 10.5% loss and LU cratered 19.8%. That quote up above about the "best communication services company in the world" was from WCOM's website. I doubt its shareholders and the 17,000 employees it will be laying off soon would agree with that statement.

The Fed Leaves Rates Unchanged.

Lost in the WCOM maelstrom was the FOMC meeting and the vote on interest rates. No one really expected an interest rate hike and some actually feared they might cut but the decision was to leave rates unchanged. At 1.75%, the Federal funds rate remains at 40- year lows and the discount rate will stay at 1.25%. The FOMC's press release stated they felt the risks to the economy were evenly balanced between weakness and inflationary pressures. The Fed statement countered positive observations about increasing economic activity with any degree of strength remains uncertain and growth in final demand appears to have moderated. You can read the short release here: http://www.federalreserve.gov/BoardDocs/Press/monetary/2002/20020626/default.htm

Also lost in the wind was good news in the housing sector, a rise in the durable goods orders and positive earnings statements from GE, CL, GIS, AVP and even COMS, which rose strongly on better- than-expected Q4 numbers.

The U.S. dollar continued to fall despite the Bank of Japan's attempts to strengthen the dollar against the Yen three times overnight. Meanwhile gold ended the day relatively unchanged (down a few cents) despite a positive morning.

Looking Ahead.

Considering the extreme oversold conditions in the market, the VIX hitting 36 and closing near 32, the potential for more short covering now that the Nasdaq and the SPX have "retested" the September lows, and the end of the quarter window dressing... I wouldn't be surprised to see a bounce tomorrow. However, like every other relief rally we've seen in the last few months I don't expect it to last very long. Until the markets can breakout of their current down trend and until Wall Street and figure out how to assuage investor fears we're probably not going to see that next bull market for a while just yet. Makes me want to look and see what Ray and Mark have on their covered call list for the weekend. Volatile weeks like this one can make small consistent gains look pretty darn appealing if you're not comfortable playing puts. By the way, my hat's off to the team on the OI market monitor. They really put a lot of effort that coverage and it's paying off.

James

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