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Market Wrap

Oversold?

HAVING TROUBLE PRINTING?
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      07-23-2002           High     Low     Volume Advance/Decline
DJIA     7702.34 - 82.20  7894.41  7682.89 2.85 bln    562/2699
NASDAQ   1229.05 - 53.60  1295.59  1228.88 1.83 bln    818/2783
S&P 100   396.75 - 11.13   411.94   395.63   Totals   1380/5482
S&P 500   797.70 - 22.15   827.69   796.13 
RUS 2000  363.99 - 15.66   380.94   362.99 
DJ TRANS 2160.35 - 81.20  2261.72  2150.04   
VIX        50.48 +  2.25    52.48    47.22   
VXN        66.39 +  3.81    67.29    62.63
Total UpVol   731.1M
Total DnVol 4,220.1M
52wk Highs   37
52wk Lows   1359
TRIN        0.80
PUT/CALL     .85

Do fish swim? Of course we are oversold and have been for what seems like weeks. Oversold is a relative term and nothing ever prevents us from becoming more oversold as this week has already proved. Corporate accounting games came home to roost today on two of the country's biggest banks and Microsoft has lost nearly -20% of its value in only four days for no apparent reason. It appears pessimism is alive and well in the market.

Chart of the Dow

Chart of the Nasdaq

Starting the day off was news that Citigroup and JP Morgan had entered into an elaborate bookkeeping scam to loan money to Enron while keeping the debt off their books. According to Citigroup officials there was nothing wrong with the arrangement but they could not explain why they created offshore shells to hide the transactions. Obviously this is not going to go away even if the congressional committees cannot find something to hang on them. There are shareholders holding $50 billion in Enron stock that are looking for some deep pockets to sue. Guess who just stepped into the line of fire? I can imagine the securities fraud lawyers lining up already. C lost -5.04 and JPM lost -4.44. C traded over 121 million shares with 44 million on JPM. The biggest worry around is who else have they done these deals with and how clean are their own books?

The first August 14th earnings surprise appeared today. Tyco, which is not even required to certify their reports, said today they would NOT certify them until after they finished an internal probe. They are not required to certify because they are not an official U.S. corporation. They maintain a shell office offshore to avoid taxation. They did say earlier that they would voluntarily certify but have now delayed that event. Wonder what they found in their "internal" investigation that changed their mind? TYC dropped another -10% to $10.70. This will be the first of many.

Tripping the Nasdaq this morning was the news from NVLS that 3Q order decline would weaken earnings going forward. The company voiced caution that customers have turned timid as the markets crashed and the IT spending slump continues. The company said the weak market was limiting access to capital for many companies and requiring cutbacks in capital spending. Because of the current stock price the company is expected to eat $880 million in convertibles issued last year. The holders are expected to turn the bonds back in and not exercise their options. Bad news!

It was announced that LNCR would replace WCOM in the Nasdaq 100. LNCR spiked +1.50 on the news and traded over 16 million shares.

After the close today MRK announced they were planning on buying back up to $10 billion of their stock. This would be about 10% of their current market cap if they followed through with the planned buy. This is in addition to the $2.2 billion still outstanding from their last $10 billion buyback in Feb-2000. They also declared a dividend of $.36 cents. This should help the Dow tomorrow as the "buyback" crowd moves into the stock.

Microsoft has fallen into a black hole after their earnings. This amazes me when you consider the two other big techs who announced the same week. IBM has more problems than MRK has pills and they are still trading above pre-earnings support. Down but above support. INTC missed estimates and has lost a total of -$2.00 since the announcement. Microsoft, with $58 billion in cash in the bank, said the market continued to be challenging and lowered revenue estimates by a miniscule amount. They have lost -$10 in the last four days and are trading at a 52-week low. They traded 75 million shares on Tuesday as traders raced to exit before an analyst meeting on Thursday. I give up! If somebody knows anything please let us know! The consensus around here is margin selling and fund liquidations. You can raise a lot more money selling a $50 stock compared to $12 for Cisco for instance.

The mystery of the huge volume at the close was solved. Traders were going crazy trying to find out what was happening to MSFT as it traded over 55 million shares in the 20 min after the close. Other stocks were also going crazy including NTAP, MXIM and NXTL. It appears the Nasdaq was testing a new trading platform and it dumped the entire days trading volume back into the network at the close. They have been working furiously to correct the data.

Amazon announced earnings after the close and fell -$1 in after hours. The online retailer beat the street with a smaller loss then expected and raised its guidance for the next quarter. It also took the unexpected action of saying it would expense its options by 2003. This could cause a substantial change in its earnings going forward but would put them on the bleeding edge of Internet companies in the accounting war. Revenues rose +21% to $806 million for the quarter. This also beat street estimates.

The accounting picture is going to get a little cloudier going forward after First Call and Merrill Lynch said they would start tracking only GAAP earnings for companies they follow. The company can report any pro forma results they want but will be required to post GAAP earnings as well. Look out below! This will start to level the playing field and many "pro forma or EBITDA" companies will suddenly look much worse when their GAAP earnings are used as the yardstick. This is just another blow to stock prices in the short term but a very positive move for investors in the future. Those companies that report other than GAAP are going to be under serious pressure to clean up their act immediately or be regulated to the penny stock market.

The oversold conditions are the worst I have seen in recent memory. For instance the S&P has now posted six days without a single stock making a new 52-week high. On Tuesday 151 S&P stocks (30%) posted new 52-week lows. Down volume beat up volume on the S&P 5:1. Across all markets the decliners beat advancers 6101 to 1539. New 52-week lows were 1360 which exceeded all but four days in Sept of 2001. The VIX "closed" over 50 for the first time in the last five years. It has traded over 50 during three events. One in Oct-1997, the Sept/Oct crash of 1998 and the week after the Sept-2001 attack. Make no mistake this is a high probability event. Normally a print over 50 occurs during high stress events and the index will gap significantly higher at the open only to fall back below 50 before the close. Extreme numbers are generated during market free fall events but pressure equalizes before the close.

While the VIX closing over 50 is a momentous occasion there is no confirmation from the TRIN or the put/call ratio. The TRIN at .80 and the put/call at .85 are not indicating an immediate relief rally. There is still the possibility of a significant decline in our future. Many traders and technical analysts were rushing to predict a bottom before the week is out after the huge oversold readings were posted today. Under normal conditions I would strongly agree. But how do you factor in the Citigroup/JPM problems or the August 14th certification event? How about the change in earnings reporting methods and the expensing of stock options? How do you price the news that analysts are now starting to predict that the recovery may not even occur in 2003? We already know 2002 is in the dumpster but now 2003 is being called into question.

I don't want to sound like a clanging symbol and constantly bombard you with worries about the future. However that is what the market is reacting to and it is ugly. The Dow has lost over -1600 points since the July-8th highs and that is not normal in any context. We need to be aware that any bounce is likely just that, a bounce. It is not a new bull market or the MOCO everyone is waiting for. There are still too many unknowns in our future. Art Cashin said today he expected a tradable bounce this week. When pressed he said +800-1800 points were possible. Now, I would love to see that and I have the highest respect for Art. However I think his 42 years of trading on the NYSE has biased his outlook slightly. He is still thinking in terms of normal. Granted he has seen some terrible times but this crash is eroding because of things not normally factored into the markets. Fraud, terrorism, accounting scams on a monumental scale, the two largest bankruptcies in U.S. history and the biggest market drop since the 1987 crash following the biggest bubble in history. This is not your fathers market as they say!

The Dow tried valiantly to hold the line and rally today but was sunk by huge losses in three stocks. Without those three it would have been up strongly. The Nasdaq was tanked by the semiconductors, which broke to a new low at the close, and by something unknown in Microsoft. These events have pushed us even deeper into oversold territory than anyone would have thought possible. This is setting us up for a bounce, possibly tomorrow. There are no economic reports tomorrow but Thursday is loaded and Friday we get consumer sentiment again. Anybody want to bet on a lower number? This means we can date any bounce but we definitely do not want to marry it. Trading these markets are not for the timid but if you tune into the Market Monitor during the trading day we will attempt to take the mystery out of it. Leigh, Steve, John, Jeff, Jonathan and I provide indepth analysis and trades as the day progresses. Mikey likes it and you will too!

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Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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