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Dazed Bulls Consider Options

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      10-24-2002           High     Low     Volume Advance/Decline
DJIA     8317.34 -176.90  8558.63  8277.87 2.44 bln   1408/1760
NASDAQ   1298.69 - 21.50  1330.99  1296.54 1.89 bln   1547/1764
S&P 100   447.88 -  6.85   458.24   445.89   Totals   2955/3524 
S&P 500   882.50 - 13.64   902.94   879.00 
RUS 2000  366.02 -  2.93   371.27   365.61 
DJ TRANS 2304.62 - 36.90  2375.08  2300.20   
VIX        39.90 +  0.52    40.24    37.90   
VXN        54.58 +  2.21    55.17    51.65
Total Vol   4,159M
Total UpVol 1,692M
Total DnVol 2,413M
52wk Highs    90
52wk Lows    216
TRIN        1.05
PUT/CALL    0.81

Dazed Bulls Consider Options
By Jim Brown

So near but yet so far. The markets touched almost a two-month high at the open but failed to hold the high ground and ended significantly down for the day. Dow 8558 was the double top high for the week and a number not seen since Sept-12th. The Nasdaq also hit a post September high of 1331 only to close under the 1300 level at the close.

Dow Chart

Nasdaq Chart

Everything started out on a positive note with a smaller than expected Jobless Claims number of 389,000, which was below the consensus of 403,000. This may have been encouraging on the surface but it will take a string of lower numbers for several weeks to make a difference. Continuing claims fell -115,000 from decade high levels but this is just a blip in the data flow. Several big name companies announced more layoffs today, which indicates the bad conditions still exist. However, the number of mass layoffs for September fell to only 1,060 involving 122,277 workers. This is down from the 128,080 in August.

The good jobs news offset a downgrade of Dow component IP by Prudential before the open. PRU downgraded it to a SELL from HOLD. They quoted the drop in GAAP net worth to $2.05 billion and the increase in debt-equivalent liabilities to $16.2 billion. They think IP will need to issue about $2 billion in more stock to raise capital.

Microsoft was down after the LA Times reported that the Justice Dept is investigating allegations that MSFT is still hiding Windows code from rivals in violation of its court settlement. If true it could cause serious problems for MSFT but the company said it was old news and they had nothing to hide. They were also blasting the airwaves with a half-billion dollar attack on AOL with MSN-8. Bill Gates was on CNBC pounding AOL and the benefits of MSN-8. If MSFT is successful in seducing millions of subscribers to switch it would be a real windfall for them. The conversion would help cement future MSFT product loyalty from those subscribers for things like Windows, Windows Media, and any number of add on products. Look out AOL, the gorilla is on the prowl.

After the bell today AMZN said it lost money again, -$35 million, but broke even on a pro forma profit of $400,000. Yes, $400K on $851 million in sales. This was a +33% increase in sales due in part to their free shipping program. Buy for $8, sell for $10, eat $4 in free shipping! I got it! You make it up in volume! Just kidding, I buy something at AMZN a couple times a month but they need to start making a real profit like Ebay soon or the stock will end up in the penny stock arena. AMZN is trading down -$1 in after hours. They did raise estimates for the 4Q.

FLEX also announced earnings after the bell of 8 cents and inline with analysts estimates. They affirmed estimates going forward and said that although market conditions remained tough they were gaining market share. They also traded down about -$1 in after hours. JDSU missed analyst's estimates slightly after the close and said projected revenue could drop -20% for the next quarter.

TQNT also announced inline earnings but guided lower for the current quarter. MSTR also missed estimates by 2 cents and warned about the coming quarter. Cigna lowered guidance to $1.47 for the coming quarter vs estimates of $1.99.

Good news came from ERTS after the close, which posted earnings of 34 cents compared to analyst's estimates of 17 cents. This was the second quarter in a row that it blew away estimates. The stock was trading up +2 in after hours. The company affirmed estimates for the next quarter due to strong game sales. Analysts commented after the announcement that maybe ERTS had come too far too fast and the sales were due to slow with saturation. Another win came from BMC, which beat estimates of 4 cents with an 8 cent gain. They affirmed estimates for the next quarter at the high end of the current range.

The worst big name earnings for today was SBC which missed earnings by 3 cents but admitted they had lost -751,000 retail lines to AT&T and WorldCom. SBC also said it was cutting capital spending to $7.5 billion from earlier targets of $9.2 billion. This is down from $11.2 billion last year. This is bad news for the feeder group like Lucent and NT.

Despite all the bad earnings news this was not really what tanked the markets. The lackluster earnings did nothing to give the bulls confidence that they could muster another charge and after moving sideways most of the day the bulls got nervous. Helping them was rumors that IRAQ was going to kick all the reporters out of the country and that stepped up war fears. Many analysts have said that they expect him to go preemptive and try to strike us first if he feels the walls closing in on him. This was strike one.

The FBI said they had specific and credible evidence that an attack on rail lines, bridges, nuclear power plants, oil refineries and assorted infrastructure targets could come at any time. Great! They said they had discovered pictures of railroad bridges, power plants and other targets in Al Qaeda documents and terrorists in captivity had knowledge of planned attacks. The key here was that the attacks could come at any time based on new intelligence. Strike two for the markets.

The semiconductor sector had been soaring for over a week and was leaping from bad new to bad news with new gains. Investors watched in disbelief as stocks like KLAC gained strongly after warnings. Today everything changed. The SOX had risen from 210 to almost 300 since Oct 10th for a +42% gain in 14 days. Overbought anyone? Well the SOX hit 299.18 at exactly 11:30 today and the selling began. That 300 level was the same level where the SOX had failed on September 12th. Strong resistance and you can see that sellers were waiting for it to be hit. Strike three, batter out.

SOX Chart

Adding to the overhead weight was the economic reports for tomorrow. The Consumer Sentiment report is due out at 9:45 and it has not been kind as of late. Also Durable Goods at 8:30 and Home Sales at 10:00. The fear factor may have come into play as the momentum players became frustrated with the double top failure at 8550. After two attempts to rally through that level in the same week, the positive earnings news dwindling, war fears growing and new terrorist threats the best course of action was to take profits. This profit taking could continue tomorrow on negative economic news.

The real question is what happens next Monday. The mutual fund year comes to an end on Thursday. Tax selling should be over and end of year replacement buying may have dried up. There may be some lingering hang over but we only have five days left. We also have the big gains to digest. Even at today's close we are up +1100 points in fourteen days. During that 14 days funds saw out flows, $4.1 billion in the last week alone. If traders were rushing to buy the new bull market then why have the last two weeks both shown outflows? There are many unanswered questions.

One article I read this week was extolling the fears of lost performance. With mutual funds closing weekly the rest are racing to grab performance at any price. When this year is over and those final fund statements are received there is going to be a massive shift of cash from fund families. Fears of lost fees and jobs is outweighing the fears of more market losses. This grabbing for momentum stocks is increasing the volatility. Some funds are not holding and are trying to trade themselves back into profitability, is a scary thought. What this means is that stocks in fund portfolios may not be in strong hands as many have thought. Strong hands imply no need to sell, plenty of cash on hand and a long term outlook. When considering many funds in the current market they are being forced to raise cash on a daily basis and selling is the only way they can get it. Their outlook is as long as the next dip.

That means Monday is still a tossup. We know where resistance is waiting. Dow 8350, 8400, 8500, 8555. Support is 8300, 8250, 8200 8138 and then 8000. A drop to 8036 would only be a -38% retracement of the gains from the Oct 10th low. First we have to get through Friday and that should depend on the economic reports and the urge by investors to protect profits. Futures are down in after hours despite the earnings being somewhat positive. Plenty of dark before morning but I would be surprised to see another attempt at 8550 on Friday.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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