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Begin Part 2 of 2

NASDAQ:

Another rally attempt overwhelmed with sellers at lunch as the Nasdaq gave up a 65-point gain and reversed 126.93 points for a solid loss. The waves of sellers into rallies is as constant as the waves on the beach. Volume was lighter, so still not much love or hatred, just wallflowers standing around. Problem is, with this kind of attitude, it just wants to sink lower.

Stats: Down 61.94 points (-2.5%) to close at 2427.
Volume: 1.731 billion shares (-1.03%). Down volume led handily, 1.338 billion to 347 million upside shares. Lower volume, but a weak show of buying.
A/D and Hi/Lo: Declining issues were ahead again, 1.3 to 1. New highs actually rose to 104 (+4) While new lows fell to 44 (-9).

The Chart: http://www.investmenthouse.com/cd/$compq.html

The oversold bounce was overdone by the time Greenspan finished his Q&A portion, and investors had enough and pushed the sell button. That brings the Nasdaq closer to its post-rate cut low of 2299.65 and its 52-week low of 2251.71 (1-3-01). Volume remains rather light on the selling, but there have been distribution days with no accumulation days of late, and that indicates further downside even if not on rising volume: a drift lower unless something triggers sharper selling (stronger economic numbers this week? Now that is weird) or stronger buying (stronger economic numbers this week?). The market has no clue, and that is dangerous. Downside risk is to the lows. As we said, however, there is someone lurking back there who does not want the market to sink the economy (further than he has), and if it does retreat to these lows we feel we will see another emergency rate cut. May not save it, but it won't hurt.

Dow/NYSE: Another bold attempt at a breakout that reversed and sold back on slightly higher NYSE volume. The Dow is running out of time on this move as it continues to fail to muster higher volume for a breakout except for when it sells back after another unsuccessful test. It is still in good shape as it is compressed into somewhat of an ascending wedge, but it is pushing its luck. Good economic news, i.e., continued signs of an improving economy, may just help the Dow.

Stats: Down 43.45 points (-0.4%) to close at 10,903.32 after mounting a 67 point gain on its high.
Volume: NYSE volume edged higher on the selling to 1.067 billion shares (+2.7%). Down volume led up volume on the selling 576 million to 479 million shares.
A/D and Hi/Lo: NYSE advancing issues still topped decliners 1.09 to 1 (1.71 to 1 on Monday). New highs rose again to 223 (+25) while new lows held steady at 15.

The Chart: http://www.investmenthouse.com/cd/$dja.html

The Dow is squeezing in an ascending wedge with a breakout at 11,028. It keeps testing that level and pulling back. Normally that is good, but a rule of thumb on breakout attempts is three strikes. If it does not make it on the fourth, it is going down. The Dow is on number three. If price/volume action was better, piece of cake. It is still in good shape, but it is running out of time.

S&P 500: Monday's decent move (albeit on low volume) gave way to higher volume selling today as the NYSE volume expanded slightly after the S&P also reversed early gains and closed near the session low (1317.51). The big caps are ramming their heads at 1335 right now after bouncing up off of its down trendline now at 1303. The bounce up was nice, but it never got the volume boost to give it the momentum to clear resistance. Looks as if it is going to test this level once again unless investor psychology about the economy or the economic numbers change.

Stats: Down 11.51 points (0.9%) to close at 1318.80.
Volume: NYSE volume increased to 1.067 billion shares (+2.7%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

The only economic news is inventories, and that while not usually a hot button for investors, given all of the talk about inventory buildup, it might spur some good tidings if it comes in lower as expected. Still, this is not the type of number that will be the catalyst for the market unless it shows a major reduction in inventories, but then that would scare investors that something was wrong.

This is a time of extreme frustration calling for extreme patience. Market bounces do not last for a full two sessions and tend to reverse intraday. That makes for tough trading even if you can watch the screen all session long (but who wants to?). Shorting the market is working a bit, but it is still up and down intraday, and these lower volume meanderings can turn on you fast. The best way we have found to play this one is to rely on superior patterns and today we were selling calls on long term holdings again. We do that at the start of a down leg, and try to do it again if it continues. After this much selling we are playing with fire: when we get frustrated after a lot of selling and finally sell calls, that is almost a sure bet things are going to turn back up. Still, as we saw the market start to turn over after Greenspan ended his talk, after we saw the market start to do what we thought, we sold calls. We will try to buy them back fairly quickly if we see things bounce. Selling calls in frustration is not smart.

As we indicated the market is not showing much either way. Selling on slightly higher volume on the Dow and S&P 500, slightly lower on the Nasdaq. It is standing around as it is unable to break resistance and sinks lower. We do know that each rally attempt is met with selling even now, so the bias is lower in the absence of compelling news to break the drought and bring the big money into action. With the big name techs still in a mess, we don't look to them for leadership, but continue to watch the new crop of resilient stocks from technology, retail, finance, construction and other sectors that are showing great patterns, great buying and great money flow. We also take advantage of these rallies that roll over as it did today to sell some calls on long term holdings to bring in more cash to have when things get better. Patience is the key at this point. Don't let frustration make you commit unforced errors. See the move and act; don't anticipate the move.

Support and Resistance Levels

Nasdaq: Closed at 2427.72.
Resistance: 2650. 2890 to 2900 is next before the 3000 level.
Support: 2300.

S&P 500: Closed at 1318.80.
Resistance: Interim at 1335. Then 1360 to 1375.
Support: Down trendline at 1300 to 1305.

Dow: Closed at 10,903.32.
Resistance: 11,020 - 11,028. After that, 11,400.
Support: 10,750. Then 10,650.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

2-13-01
Retail Sales, January (8:30): 0.8% actual versus 0.5% expected and 0.1% prior.
Retail Sales ex-auto, January (8:30): 0.7% actual versus 0.4% expected and 0.0% prior.
Greenspan semi-annual testimony on economy, part 2.

2-14-01
Business Inventories, December (8:30): 0.4% versus 0.5% prior.

2-15-01

Export Prices ex-ag., January (8:30): -0.2% versus -0.2% prior.
Import Prices ex-oil, January (8:30): 0.9% versus 0.9% prior.
Philadelphia Fed, February (10:00): -23.0 versus -36.8 prior.

2-16-01

PPI, January (8:30): 0.2% versus 0.0% prior.
Core PPI, January (8:30): 0.1% versus 0.3% prior.
Housing Starts, January (8:30): 1.550M versus 1.575M prior.
Building Permits, January (8:30): 1.493M versus 1.493M prior.
Capacity Utilization, January (9:15): 80.3% versus 80.6% prior.
Industrial Production, January (9:15): 0.0% versus -0.6% prior.
Preliminary Michigan Sentiment, February (10:00): 94.0 versus 94.7 prior.

SUBSCRIBER QUESTIONS

Q: I have a question about trading tech stocks in general. According to some on CNBC, the Nasdaq is undergoing a structural change in the sense that the days of high multiple stocks are over. I would really appreciate it if you have any thoughts on this issue and if you could share with us.
A: The market goes in cycles. In bull runs multiples don't mean a lot. Only when a bear market or correction occurs do the value players come out and start talking about the 'value' of stocks, referring to P/E ratios as being of primary importance. They look for P/E's below 10 as good values. That is what is going on right now with the Nasdaq bear market. Is this a 'structural' change? For now that is all we hear on the television because growth stocks that trade at high earnings multiples are sold when future earnings expectations are lowered. So in that sense there is a change in the Nasdaq, but it is because the economy has slowed.

Is it permanent? No. When earnings expectations start to rise again based on improving economic conditions, growth stocks with the best earnings, sales, and revenue potential will start back up and will grow as long as earnings expectations for the future continue to rise. Thus, high multiple stocks are accepted in good economic times because investors can build in more expectations of growth.

Don't believe it? A look at the biggest winners in the market year in and year out, those stocks that are leading the economy in the important sectors, start their massive runs with P/E ratios 20% higher than the rest of the market. They already have what some would consider high P/E's before the run starts. When a run is finished, the P/E has usually run from 20 to 30 to 80 or more. 20 may have seemed high, but it is nothing compared to 80. A value investor will never get in on these stocks because the value investor will shy away from a stock with a P/E of 20 or more. Problem is, in a good economy, stocks with P/E's of 10 or so are usually the laggards that don't have superior earnings power or are not leaders in a leading sector that can make a huge run. You are buying mediocrity and will get mediocre returns compared to the better growth stocks.

Right now value investors are in their element, i.e., a weak economy and weak market. They still won't touch tech stocks because even with the beating they have taken they are still 'overvalued.' Well, when this market starts back up and we look back, we will see that the growth stocks that took off and left the 'value' stocks in the dust still had P/E's that value investors would not touch. That is history.

TEAM TRADES

Today was a day we got frustrated with the market action, and when we saw the rally start to fade we felt it was a perfect time to sell calls on some long term positions. We were pretty indiscriminate in choosing our stocks, so we will go over our method as opposed to specific plays. We prepared a bit ahead of time and listed all near term options on our stocks. We picked the ones we liked, looking at in the money in February and March calls. Not a lot of time at all in February, so to get some good premiums we also had to look at March.

We like selling slightly in the money because we can pocket more premium that way as the stock falls. Why? Because the in the money portion of the option is intrinsic value, and as the stock moves down, it shaves that off faster than time value. For example, if we were looking at a stock trading at $53, the $50 calls would be $3 in the money. The $55 calls would be $2 out of the money, i.e., it would have no intrinsic value. The $50 calls sells for $5.50. The $55 call sells for $3.75. When the stock falls, the $50 call loses some intrinsic value and some of the extrinsic value. The $55 call loses only extrinsic value. Based on option pricing models, the further a call is out of the money, the less value it losses as the stock falls. We want to take advantage of the loss of the intrinsic value as that gives us a double dip on the downside.

Good Investing!
Jon Johnson and the Tech Traders Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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