STOCK MARKET DIRECTION Financial Market Newsletter for Nov. 7, 2002
Redistribution or repost this only with permission of the writer of this material, Steve Zito.
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Anyone following my picks in March 2000- March 2001 made 3052% in options.
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Nasdaq Composite Index closed at 1376.71 -42.28 (-3.0%) on Thursday, Nov. 7.
Ever see Jim Cramer on CNBC claiming that Dan Niles made him money in hedge funds?
CNBC's Jim Cramer prediction Dow Jones Industrial Average would soar 500 points
if the Federal Reserve cut interest rates was widely forecasted. His rally did not happen.
But then, Jim Cramer told CNBC viewers to buy Cisco when it last traded over 20.
This is typical. Cramer studied law at Harvard, the lawyer hasn't got a clue about stocks.
Most of CNBC's announcers studied subjects other than business. One was once a nurse,
another a former disk jockey. If only we knew when they touted Nasdaq to us at 5000.
Nasdaq gapped down 25 points at Thursday's open to 1394. Traders blamed Cisco
Systems guidance on this quarter's sales, described as "weaker." At last some visibility.
After the gap opening Thursday, there were no buyers waiting, no rallies intra-day.
What was overlooked is that stocks always reverse trend (which has been up since
Oct. 9) one week prior to options expiration. Next expiration is Friday, Nov. 15.
This reversal may have started one day early. It is dependent on large arbitrageurs
who buy stocks and sell call options on those, then reverse positions at this time.
By reversing and closing out the options, the big boys can roll over into next month.
Harvey Pitt resigned. The Federal Reserve cut rates twice as much as expected.
The Republicans whipped Democrats in Tuesday's election, to control the Congress.
The U.N. will vote Nov. 8 on George Bush agenda to terminate Hussein, no surprise.
Military conflict is already discounted by stocks, happened in August and September.
So with all the bad news out, and all the good news coming on lower interest rates,
and now a push to lower taxes (capital gains), how un-American for stocks to fall.
TV news credited Nasdaq's drop to Cisco's guidance. Unlikely that is the cause.
More likely that stocks are only able to react to unexpected news on a daily basis.
Thursday, there was just no good news. Without buyers, prices can only go down.
Despite talk on TV of massive down volume compared to up, the selling was mild.
Volume should be ignored as an indicator of direction. There is no proven connection.
Technical Indicators Analysis on Nasdaq Composite Index, BKX, NDX, OSX, XAU
Bank stocks could be in for a surprise as the spread between what banks pay
for money, the deposit rate, and what they collect from loans, becomes smaller.
The smaller the rate spread, the less profit the domestic banks will earn next year.
Wells Fargo-WFC closed at 47.21, is one of the large banks exposed to possibility.
The BKX, Bank Index (Phila. exch), did take a hit like I wrote in my last update.
Up from 608 in early Oct., the BKX hit 800 on Monday, reversed to close at 776,
lost another 29 points in last 3 days to finish at 747.35, down 3.7% so far this week.
The BKX is now lower than Friday Nov. 1's low, a very negative sign, and behind
this fall is the CNBC spread rumor J.P. Morgan bet the wrong way on gold
last month, and lost $7 billion from trading losses. I could have told JPM that
gold always peaks in the last 2 weeks of September every year. JPM at 20.60.
I wrote about an Oct. Gold seasonality in my Sept. 6 Futures Magazine article.
Monday the Nasdaq gapped at 1399, I wrote Nasdaq 100 NDX Nov. 1050 puts
at 27 ($2700 per contract) with Nasdaq 100 Index at 1049 on the open, trading
to 1070 at noon, closing at 1046.99 (+27.93) and putting NDTWK in the money.
Tuesday, the NDX closed at 1050.39 +3.40, NDTWK finished at 33.50, high 41.
Wednesday, the NDX was 1065, NDTWK finished at 26.60, near contract lows.
Thursday, the NDX closed at 1025.79 -40.07 (-3.76%), NDTWK up 17.40 to 44.
NDTWK has six days to run, before expiration on the third Friday, Nov. 15.
It appears the monthly trend reversal for options is happening on schedule to send
Nasdaq 100 Index and NDX down 10% or 105 NDX points, NDTWK to 105.
If the Oct.-Nov. rally resumes, could lose $2700 trying to make $10,000. 4 to 1.
I rate odds of this bet winning to be 2 to 1 against. That payoff justifies the risk.
The contract range on this NDX put has been from high of 120 to a low of 24.
These high priced options are useful, but way out-of-the-money ones are not.
Nasdaq 100 NDX also peaked near 1050 in mid-August, stochastics now 49%/73%.
Call me a "skeptical bull." Pending war on Muslims does not get me too excited.
HBO is showing a new movie about CNN going into Iraq in the 1991 war, typical.
Not until 1990 and Bush Sr., did TV news coverage of war become a profit center.
War is big business, good for U.S. cities built around defense and weapons plants.
The 10-day moving trend is 1384, the Nasdaq closed 0.5% below it, the 10-day
stochastics finished at 24%/22%, low all day. Daily moves are reaction to news.
This rally does not look like a bull market. It looks like a series of gap openings.
Thursday was no different, only the direction of the gap was down. The previous
gap from Monday still has not been filled for Nasdaq Composite, it has for NDX.
This indicates the selling on Thursday was primarily in the large most liquid stocks.
The NDX represents the 100 largest stocks in the Nasdaq Composite Index list.
Nasdaq is 0.2% above 90-day moving trend support at 1374. The moving trend's
steady upward climb of 19.7% from 1148 (Oct. 9) to Thursday's 1374, compares
to 23.0% actual price gain from Oct. 9 close at Nasdaq 1119 to Thursday's 1376.
I wrote in early summer when the bull market really starts, the first 3 weeks of it
would show average gains of 10%. Close! This 23% rally is now in its 21st day.
Nasdaq's 90-day stochastics falling rapidly from very over-bought to 53%/77%.
Nasdaq is 6% above its 2-year exponential moving trend support at 1296, and
over-bought 2-year Nasdaq stochastics are the highest in two years at 82%/95%.
Stochastics are forecasting that prices cannot advance from here for some time.
Most individuals missed Nasdaq's move from 1119. There will be another chance.
My best recommendation is to buy a favorite now, and then commit 100% Dec. 30.
If a head and shoulders bottom forms, last shoulder could be put in around 1163.
The OSX Oil Service and Exploration Index at 86.20 up 21% since Oct. 9, after
hitting a two month low of 71 then. Long ago, I recommended OSX Jan. 80 and 85
call options when OSX was trading under 75 in mid-September. These OSX calls
have doubled or more since. I also recommended cashing in XAU and gold stock
gains in the first week of October when the OSX was trading from 78 to 72 and
then moving those funds into oil services Schlumberger (SLB) and Transocean (RIG).
Subscribers should be long OSX Jan. 80 or 85 calls (PHLX) and RIGAD or RIGAE.
If you have doubles in OSX Jan calls or better, I advised closing 50% out at OSX 88.
Wednesday, the OSX soared to a 2-month high at 89, before falling back on Thursday.
Stochastics plunged from 100%/90% Wed. to neutral 52%/80% Thursday. Since Oct. 9,
Schlumberger (42.21) up 27%, Transocean (24.35) up 36% before reversing Wednesday.
Transocean rose from 19.60 to 25.60 in the past 8 trading days. RIGAD up 400%.
The XAU Gold and Silver Index is topping again, closing at 69.71 -0.23. Sell XAU.
When the Fed lowered rates, reason Bond market should resume its year long rally.
XAU has limited upside. I wrote in August and September, Gold has a $325 ceiling.
Microprocessor, Software, Network, Database, Personal Computer, Server, Consulting
Intel Corporation, Microprocessors
INTC 18.44 -0.71 (-3.7%) is 1.6% over support at 18.15, stochastics at 58%/78%.
This stock is ready to fall, I recommended Nov. 17.50 puts. Expecting fall to 16.
With fundamental overvaluation on standard measures, I wrote "short it at 18.30."
That 18.30 level is where the Nov. 1 surge took Intel. Since then, nothing was gained.
Downgraded by Merrill Lynch and Dan Niles, it's up 42% since the two downgrades.
At the same time, subscribers could go long on AMD with Jan. 10 calls, AMDAB.
After Thursday's close, AMD released more bad news, a massive layoffs charge.
AMD has more than doubled, closing at 6.82 -0.41 (-5.7%), up from 3.30 Oct. 8.
Why did AMD start up on Oct. 8 before Nasdaq began its big move? Undervalued.
AMD stochastics plummeted from 100%/81% Wednesday to 45%/78% Thursday.
Traders must have sensed bad news coming, or sold on Cisco's gloomy guidance.
Whatever, AMD fell from 10.80 in August to 3.30 in Oct., retraced 47% in the rally.
AMD makes PC microprocessors and graphics chipsets, usually big Christmas sellers.
With New Jersey legislators pulling the plug on violent teenager video games, and
Japan and China teens more interested in cartoon characters than murder and mayhem,
world video game sales will become unexpectedly weak this year. AMD is still cheap
and not dependent on idle video game play by kids and corporate paper pusher dads.
Nvidia on the other hand, is not cheap, closing at 14.55 -1.63 (-10.1%) after NVDA
had more than doubled from 7.20 on Oct. 9 to 16.18 Wednesday. Stochastics 50%/72%.
This stock probably gained 1-day 21% last Friday on the Microsoft settlement, since
MSFT is the best customer of Nvidia, which makes graphics chips for MSFT's X-box.
If I owned Nvidia, I would SELL it. Take the money and wait. X-box sales are slow.
SOX Semiconductor Index closed at 302.61 -27.23 (-8.3%) in what now appears
to be a "key reversal" from Wednesday. After peaking at 336 on Nov. 4, it has slid
10% on Fed rate cuts, Harvey Pitt resigning, Republican election gains, and the decline
is very worrisome. The SOX peaked out this time below the August rally high of 364.
Blame Cisco, since many chip companies make chipsets for telecommunications firms.
SOX puts are very expensive, it was more economical to bet $2700 on the NDX puts.
Microsoft Corporation, Software, Network
MSFT 56.01 -1.02 (-1.8%) is 1.6% above support 55.15, over-bought stochastics
down slightly to 86%/76%. Previously I had recommended MSQAK and MSQDK.
The call options have almost DOUBLED, MSQAK is now 4.50 and MSQDK is 6.60.
Microsoft will be vulnerable for a few days during the monthly options trend reversal.
If you have nice gains, consider taking 50% off the table in the MSFT call options.
Cisco Systems, Hardware, Network
CSCO 12.35 -0.61 (-4.7%) is 1.9% above support 12.12, stochastics at 50%/78%.
If Cisco is so profitable, how come IBM does not compete? Buy IBM, sell CISCO.
CEO Chambers said after earnings, sales for the current quarter will be weaker.
Could cause some acid indigestion for those holding this $12 stock worth only $4.
Much of October's rally was fueled by investor belief in Cisco's invulnerability.
Oracle Corporation, Software, Database
ORCL 10.20 -0.16 (-1.5%) is on support 10.20, it easily has the least variable,
best looking chart of the very largest Nasdaq leaders. Oracle corrected 35%
in September well ahead of the correction maybe coming in its Nasdaq brothers.
Stochastics neutral at 68%/70%, overvalued on price/earnings, price-to-sales.
With Microsoft number one and IBM number two in software, watch this sector.
Best way to compare them is get a chart of the Morgan Stanley Software Index.
If Oracle should start to slide in advance of new products at COMDEX, go long.
Dell Computer, Personal Computers
DELL 29.80 -0.19 (-0.6%) is 1.2% above support at 29.45. Use a 3-year price
chart to analyze it. Dell can't stay over 30, while the rest of Nasdaq is making
two-month highs. Stochastics are falling at 70%/71%. Buy DELL Dec. 25 puts.
But go light on Dell put option positions. CEO often pumps up stock in Nov.
When he gives out charitable gifts of Dell stock, he gets good tax deductions.
"Hey, dude, you're getting a DELL tax deduction on stock that cost nothing."
CNBC praises Dell for giving millions in charity. Millions in his stock cost nothing.
Michael Dell is sitting on a cash hoard of $9 billion. Why not hire jobless Americans?
Sun Microsystems, Networking Servers
SUNW 3.40 -0.17 (-4.8%) is 5.2% above its support at 3.23. Neutral stochastics
at 55%/68% falling from very over-bought, and I expect Goldman to downgrade it.
Every time Sun Micro has made good moves since May 2001, Goldman Sachs
tech analyst Laura Conigliaro quickly downgraded Sun, crushing hopes of traders.
If overweight, overpaid analysts downgrade Sun again, use it as buying opportunity.
Of the seven largest capitalization Nasdaq stocks back in 2000, this declined most.
Sun should not be bought because it is low-priced. It has attractive management.
Accenture, Information Technology Consulting and Outsourcing
ACN 17.50 +0.56 (+3.3%) is 3.0% above support 16.99. Stochastics overbought
at 98%/62%. If you have puts, hold. If you want puts, you should have bought on
the Microsoft gap Monday, Nov. 4. Accenture Ltd. and Microsoft are partners
in E-Business solutions, in other words, finding ways to make money off clients.
Accenture put out a report in the past week that consumers will be spending.
Just in time for the government to report the opposite. Who can you believe?
Personal Spending was reported to have a larger than expected drop last month.
Day Trader Rule Number Five. Expect the unexpected. Everyone you have heard
lately said we're in a bull market, the Fed will boost stocks, the U.S. economy improve.
Heard anyone lately tell you that invasion of Iraq could make a billion Muslims hate
the U.S. and stop doing business with America? The Chinese do not want to buy any
U.S. products. On Nov. 7, Cisco's future guidance on weak sales proved this point.
The U.S. is dependent on sales to the rest of the world, and Mr. Bush is the salesman.
His message is clear, buy from U.S. on his terms, or risk becoming a military enemy.
That is not what Americans hear, but that is the message the rest of the world receives.
What is important is what the buyers of U.S. products perceive as America's message.
This kind of isolationist "my way or the highway" approach caused 1930-36 Depression.
I am a financial writer, technical analysis reports. But anyone can understand what I say.
Thanks for reading Stock Market Direction by Steve Zito.
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Newsletter Dec. 11