Is The Rally Upon Us? Well, Sort Of...Maybe...
By Mark Phillips
leaps@optioninvestor.com
What a relief it was to see a decent rally on the NASDAQ this
week. Regardless of whether you call it "January effect",
optimism over declining interest rates or an end to tax selling,
the technology index posted its best week since Labor Day.
After launching off of the 2300 support level early in the week,
the NASDAQ rallied as high as 2700 before traders noticed the
looming three day weekend and decided to cash in some of their
gains. Given the recent action in the markets and the sharp
gains this past week, it was rather encouraging to see such mild
selling into the close on Friday. It gives one the impression
that the worst may be behind us.
But lets look at the dominant factors in our market before we
run out to load up on new LEAPS. The Commercials are still
sitting on near-record short positions in the S&P 500, the
economy is definitely slowing as we can see by the rash of
earnings warnings and a weak start to the actual earnings
season. The Fed has begun acting to reduce interest rates, but
keep in mind that rate decreases, just like rate increases, take
6-9 months to filter through the economy and actually show up
in corporate earnings. With that being said, earnings are
likely to be weak for at least the next 1-2 quarters, with the
first signs of true economic recovery starting to show up during
the October earnings season.
Now before you panic and sell all your open positions, remember
that the markets tend to factor in economic developments before
they actually occur. So the stock market recovery will lead the
actual upturn in corporate earnings. The big question is WHEN.
We could be seeing the beginning of the recovery in current
market action, but only an extreme optimist (indistinguishable
from the fool who is soon parted from his money), would expect a
rally straight from current levels back to NASDAQ 5000. There
has been a lot of collateral damage in the markets and it will
take time to repair.
Our job is to find those stocks that appear to already be on the
mend and CAUTIOUSLY step into new plays. Last year, you could
initiate new LEAPS positions on either a bounce from support or
a breakout through resistance. The gradual nature of the
recovery that is ahead of us, makes dip buying the more prudent
approach, but careful attention to technical indicators and
chart patterns is critical.
The VIX has dropped out of the zone above 30 over the past week,
closing the week at 28.66, and removing a fair amount of upward
pressure from stock prices. At the same time, the NASDAQ has
rallied right to the top of its downwardly trending channel, and
is showing mild signs of weakness. It isn't much further to the
top of the Bollinger band, now at 2750, but still heading lower.
Daily stochastics have just entered the overbought zone and we
have plenty of historical resistance between 2650-2850, that
will have to be worked through. Between the technicals and the
string of what are expected to be weak earnings, odds favor a
retracement in the week ahead. What we really need to see to
give the bulls hope is a series of higher lows form on the daily
chart.
Just keep in mind that nothing fundamental has changed in the
market, and the downtrend that began on Labor Day has not been
broken. Sure, new entries can be considered on select plays,
but make sure to look at the whole picture before jumping
blindly. Even in a declining interest rate environment,
Financial stocks have been weak lately and our AXP play is on
the cusp of being ejected from the play list. It was
particularly disconcerting to see the $50 support level give way
over the past week, and unless buyers step in to support the
stock above $45, it could find its way to the drop list in the
near future. It is virtually impossible for the markets to
sustain an extended rally if the Financials refuse to
participate.
Personally, I think the worst may be behind us, but my opinion
and $2.50 will get you a cup of coffee at Starbuck's. The wild
card is the current earnings cycle. The actual numbers are
secondary in this analysis, as the comments in the conference
calls are likely to have a much more pronounced effect. If
companies are guiding estimates further downwards (like GTW
and HWP did last week with their dramatic warnings), we could
see our precious NASDAQ trace new lows before testing the 3000
level again.
The moral of the story is eternal vigilance. Don't take
anything for granted, and keep in mind that taking profits, no
matter how small, is preferable to ignoring the bear tracks in
the snow. Ignoring the warning signs while focusing only on
the positive factors, like expectations for another interest
rate cut, is a sure recipe for a mauling of your trading
account. Regardless of the action of the Fed, the markets are
not going to strap on a set of solid rocket boosters and shoot
right to 5000 before school lets out for the summer.
Once the recovery gets underway, it will do so in a much more
gradual manner, giving prudent investors plenty of opportunities
to step aboard during profit taking dips. And remember that
just because you are buying lots of time with your LEAPS, that
doesn't mean you have to use it. If profits are on the table
and it looks like the bears are coming back to town, take your
profits and wait for another opportunity to play the long side.
Trade smart and prosper!
Current Plays
SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT RETURN
EMC 11/07/99 JAN-2002 $ 45 WUE-AI $ 9.50 $32.25 239.47%
09/17/00 JAN-2003 $100 VUE-AT $32.75 $16.63 -49.24%
CSCO 11/14/99 JAN-2002 $ 45 WIV-AI $11.00 $ 7.75 -29.55%
11/26/00 JAN-2003 $ 60 VYC-AL $16.63 $ 7.50 -54.89%
NT 11/28/99 JAN-2002 $37.5 WNT-AU $15.13 $ 8.38 -44.65%
09/10/00 JAN-2003 $ 75 ODT-AO $27.50 $ 4.38 -84.09%
AOL 03/12/00 JAN-2002 $ 65 WAN-AM $18.63 $ 4.80 -74.24%
08/13/00 JAN-2003 $ 55 VAN-AK $17.50 $12.00 -31.43%
AXP 03/12/00 JAN-2002 $46.6 WXP-AQ $ 9.33 $10.13 8.52%
WM 03/19/00 JAN-2002 $ 30 WWI-AF $ 5.38 $16.63 209.01%
10/22/00 JAN-2003 $ 45 VWI-AI $ 7.88 $10.13 28.57%
NOK 05/21/00 JAN-2002 $ 50 IWX-AJ $17.25 $ 7.75 -55.07%
07/30/00 JAN-2003 $ 50 VOK-AJ $17.75 $11.63 -34.51%
C 06/18/00 JAN-2002 $48.8 YSV-AW $10.31 $12.00 16.39%
10/01/00 JAN-2003 $ 60 VRN-AL $12.25 $10.63 -13.27%
GENZ 07/16/00 JAN-2002 $ 70 YGZ-AN $17.13 $31.25 82.43%
JAN-2003 $ 70 OZG-AN $23.13 $38.88 68.07%
QCOM 09/17/00 JAN-2002 $ 70 WBI-AN $22.50 $24.00 6.67%
JAN-2003 $ 70 VLM-AN $29.63 $32.13 8.42%
TXN 10/22/00 JAN-2002 $ 50 WTN-AJ $13.75 $12.63 - 8.18%
JAN-2003 $ 50 VXT-AJ $18.38 $17.25 - 6.12%
BGEN 11/05/00 JAN-2002 $ 70 WGN-AN $17.25 $ 9.88 -42.75%
JAN-2003 $ 70 VNG-AN $25.00 $16.75 -33.00%
MU 11/26/00 JAN-2002 $ 45 WGY-AI $13.13 $12.63 - 3.81%
JAN-2003 $ 45 VGY-AI $17.25 $17.50 - 1.45%
A 12/03/00 JAN-2002 $ 55 YA -AK $16.88 $17.88 5.93%
JAN-2003 $ 60 OAE-AL $19.88 $21.00 5.66%
ORCL 12/10/00 JAN-2002 $ 35 WOK-AG $ 7.75 $ 8.50 9.68%
JAN-2003 $ 35 VOR-AG $11.13 $12.13 8.94%
QQQ 12/10/00 JAN-2002 $ 70 WNQ-AR $15.13 $11.38 -24.82%
JAN-2003 $ 75 VZQ-AW $19.25 $14.88 -22.73%
WMT 12/24/00 JAN-2002 $ 55 WWT-AK $ 9.63 $ 9.38 - 2.60%
JAN-2003 $ 55 VWT-AK $14.00 $14.00 0.00%
DELL 01/07/01 JAN-2002 $ 20 WDQ-AD $ 5.25 $ 7.25 38.10%
JAN-2003 $ 25 VDL-AE $5.63 $ 7.38 30.99%
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Spotlight Play
ORCL - Oracle Corp. $32.31
Fans of technical analysis got a belated Christmas present on
January 3rd as ORCL bounced solidly from the $25 level before
resuming its recent gradual uptrend. Market pressures had
dragged the stock down the day before, and once the Fed reduced
interest rates, the rally was fast and furious with the stock
gaining nearly $7 or more than 25% in one day. That is quite a
move for ORCL, and the fact that it really hasn't sold off since
then is a good indication that the move likely still has some
legs. Earnings a month ago were solid, and there was no hint of
a negative effect to the company's growth due to a slowing
economy, which is likely adding to the positive outlook. The
company's position in the marketplace is being strengthened by
its move from traditional database products into both the
systems software and business applications software markets.
Support at $28 is strengthening and the $30 level is looking
more likely as the price where bargain hunters will step in to
pick up the stock on profit taking dips. Over the past couple
weeks, buyers have probed and prodded, managing a tenuous
breakout over $32, and the next upside target will be the
$35-36 resistance level, right on the 200-dma, which is
flattening out at $36. The market environment is still
uncertain (but improving), and this makes buying the dips the
most prudent entry strategy. Profit taking dips should stop
at the support levels listed above, and as long as buying volume
remains strong, we would advocate new positions near these
levels.
BUY LEAP JAN-2002 $50.00 WOK-AG at $ 8.50
BUY LEAP JAN-2003 $50.00 VOR-AG at $12.13
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New Plays
WCOM - WorldCom $21.75
Long-time readers will remember that it wasn't too long ago that
we jumped into WCOM thinking the stock had found a bottom near
$25. Alas, we were too early to the party and it quickly became
clear that the bears had not finished having their way with
Telecom stocks. The selling in WCOM continued all the way down
to the $13-14 level before solid buying emerged. The price
action over the past 2 weeks has been very encouraging, as the
stock has cleared the $18 resistance level, turning it into
support as the rally continued this week. Then the bulls
managed to clear the $20 level, and even closed the late October
gap between $20-23. The Fed's move to reduce interest rates
(along with expectations that they will do so again by the end
of the month) has changed the outlook for the Telecom industry
in the long term, and investors, large and small are voting with
their wallets that the worst is behind us. With that being
said, it is unlikely that WCOM will continue its recovery
without suffering bouts of profit taking. The long decline and
subsequent consolidation caused the Bollinger bands to contract,
and the bulls will have to take several runs at the upper band
before it will expand sufficiently to allow the stock to return
to its former glories. This expansion has begun, but a quick
look at the daily chart shows that WCOM has been riding the
upper band for the past few days, and Friday's profit taking
was necessary in order to give the bulls room to take another
run at higher prices. The technology markets are still on shaky
ground and the bears are unlikely to relax their grip after one
short rally. The encouraging thing about the current move is
that the weekly stochastics have actually emerged from the
oversold zone for the first time since early August, confirming
the move on the daily charts. It looks like the long awaited
recovery has begun, but the more prudent approach will be to
buy retracements rather than breakouts. Along those lines, look
for WCOM to pull back to the $20 or even $18 support level and
bounce before initiating new positions. The time it takes for
this to occur will allow for a further expansion of the
Bollinger bands, providing the bulls with an opportunity to
drive prices through the current $23 resistance level.
BUY LEAP JAN-2002 $25.00 WQM-AE at $5.00
BUY LEAP JAN-2003 $25.00 VQM-AE at $7.38
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Drops
None
