Option Investor
Market Wrap

What Bad News?

Printer friendly version
      08-29-2002           High     Low     Volume Advance/Decline
DJIA     8669.74 - 23.10  8742.01  8558.02 1.39 bln   1796/1376
NASDAQ   1334.75 + 21.39  1345.37  1295.79 1.38 bln   1914/1416
S&P 100   461.81 -  0.53   465.69   454.89   Totals   3710/2792
S&P 500   917.77 -  0.07   924.59   903.33 
RUS 2000  394.50 +  5.02   396.10   387.23 
DJ TRANS 2246.30 - 67.10  2312.80  2211.57   
VIX        36.32 +  0.09    39.14    35.84   
VXN        55.05 +  1.53    57.63    54.20 
Total Vol   2,975M
Total UpVol 1,874M
Total DnVol 1,032M
52wk Highs   84
52wk Lows   209
TRIN        1.34
PUT/CALL     .93

Multiple tech downgrades, European markets down strongly, GDP lower than expected and higher jobless claims all failed to hold the markets down after a triple digit opening drop. Short covering, index fund markups or bargain hunting were given as reasons for the rebound but the bottom line was a draw as the Dow closed down about as much as the Nasdaq gained closing the markets in a tie.

Chart of the Dow

Chart of the Nasdaq

The morning started out just like any other August day. Multiple downgrades of the chip sector along with a scattering of downgrades on non tech companies. Morgan Stanley cut estimates on Micron, ASML and Triquint Semi. UBS Warburg cut NVLS, LGVN, LRCX, NEWP based on valuation and earnings. Soundview cut KLAC and TER on worries that orders were down more than 10% below estimates. Unbelievably the SOX rallied back to positive territory after gapping down significantly at the open. Traders simply ignored bad news again and bought tech stocks. The Nasdaq was the leader all day but was held back by the broader averages.

Also hurting the markets was another downgrade on the transportation sector. Goldman cut the airlines with downgrades on CAL, DAL, AMR, UAL, ALK, NWAC, LUV and AWA. The said business travel not returned and families were not using the airlines for vacations. Did Goldman just come back from the twilight zone? This has been the wet blanket on the sector for months. Roadway (ROAD) led the shippers down with a warning that the economy was recovering much slower than expected with business slowing even more in July and August. ROAD was seeing more bugs on the windshield than expected with less than full load bookings slowing instead of increasing as fall approached.

Downgrades were flying with even GE being dropped for a loss after Lehman lowered estimates on GE by a nickel. Lehman thought that lowered expectations for pension income and the cost of expensing stock options would cut net income for the giant. Other analysts also commented on the weak aircraft engine business as a possible drag on GE which lost nearly $1 in light trading.

The economic news started with a larger than expected rise in jobless claims to 403,000. The +8,000 gain was the third consecutive week for gains and raised the continuing claims to 3.588 million jobless. The GDP for the second quarter remained unchanged at +1.1% growth, which was substantially down from the +5.0% first quarter rate. Analysts were hoping for an upward revision to show a stronger recovery but were also relieved to not see a downward revision. Business inventories rocketed to +$7.3 billion from only a +$1 billion rate when the number was first reported. Consumer spending fell from +3.1% in Q1 to +1.9% in Q2. Corporate profits were revised down to +1.7% growth from +2.0% earlier forecasted.

In news after the bell SUNW CFO Steven McGowan said earnings would come in at the very low end of guidance probably in the -15% decrease range from last quarter. Instead of gaining ground he said the overall market for business IT spending may be worsening. SUNW guided analysts lower for the current quarter and could be setting the stage for Intel to do the same next Thursday. Following the bad news from SUNW was NVLS who said it would miss earnings estimates for the quarter. The outlook is "very, very murky and the feeling is negative" CEO Richard hill said. They said they were experiencing significant order delay from major customers as capex spending continues to shrink. They said they expected to break even this quarter, down from the +11 cents analysts had expected. Sales were expected to be -10% to -15% less than previously expected. They said they were seeing a very small uptick in business spending but drastic drops in consumer spending was more than offsetting the minor gains in business spending.

Let's review. Roadway says that shipments are down. Morgan Stanley said back to school PC sales have been weak at best and inventories of computers and memory are rising drastically. Initial jobless claims are up three weeks in a row and the GDP was barely positive. SUNW says the economy could be worsening and Novellus said major customers are delaying orders due to capex spending cuts. This same song with different verses has been repeated daily for a month. Does this sound like a recipe for a new bull market? Not to me but considering the markets have been eating bad news for breakfast and rebounding this should be good for a couple hundred points! (grin)

I feel like a bear crying wolf when the market rebounds on news like we had this morning. No less than five different brokerages cutting estimates on more than a dozen chip stocks but the SOX rose from a -10 point opening dip to close positive for the day. Goldman Sachs was the only broker to call chip stocks attractive with a 12-18 month time horizon. I would agree for 18 months from now but why buy before 9/11 and the typical October bottom? The answer of course is that chip stocks at $10 don't offer much risk to a long term trader. Still I continue to stare in disbelief to rallies on bad news.

They get another chance for the breakfast of champions tomorrow with Personal Income/Spending, Chicago PMI and Consumer Sentiment reports. These should not be market movers but who can tell anymore what will provide the spark for the implosion/explosion. Historically this week produces negative results and leads into a Tue/Wed rally after Labor Day. So far this week the Dow is only down -200 points. This is definitely not a major move in this day and age. With expectations of a rally next week I expected traders to close short positions Friday afternoon and start bargain hunting before the weekend. Also, the end of the month is when Mutual Funds try to "mark up" their biggest holdings by using recent cash inflows to aggressively buy those stocks all at once. This raises the stock prices and makes them look better on their month end statements. This used to be a quarter end scenario but with competition among funds at a fever pitch for the few meager deposits available it has broadened to a monthly cycle. The question here is "do they have any cash" and is it worth spending that cash if we are going to see new lows soon?

My two cents for tomorrow looks like this. I would look for a possible drop at the open followed by an afternoon bounce. I would look to close any short positions on the morning drop and look to go flat or long by the close. The problem with going long is the low ceiling overhead. With the Dow likely to top around 9000 again and the Nasdaq around 1400 there is minimum upside potential. As long as you realize what the possibilities are that is still a decent trade. Just don't expect Dow 10,000 anytime soon. After any post Labor Day bounce I still expect the markets to drift back to levels around Dow 8400 or lower before 9/11. The Put/Call ratio closed at .93 which would normally be positive. Volume is expected to be very light tomorrow which means the morning volatility could be extreme.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

Update on the Editors Play from last Sunday:

You should be fully invested on the DJX puts and depending on how you executed the trades you should have an average cost of around $1.40 per contract. The closing price today was $1.95 and the high was $2.40. The initial exit point was profiled at Dow 8100 over the next couple weeks. We are facing the prospect of a bounce on Friday afternoon from a higher level than I expected. I had projected 8400 for Friday with the plan on riding out any post Labor Day bounce and waiting for the lower levels before 9/11.

At this point I would want you to be aware that any bounce from our close at 8669 could put us back near 9000 again and make that eventual drop to 8100 less likely. Two things to consider, the bounce may not occur or it may be less than I expect. I am not suggesting that you close the position but I am suggesting that it may decrease in value before we see the next dip. Should we get a decent drop at the open on Friday it might be prudent to close for a profit and reenter on a failed rally on Tue/Wed. Be proactive as a trader and don't let profits slip away if the markets don't follow the plan.

Did this commentary help you?
Click here to email Jim

Market Wrap Archives