PUBLISHED DAILY - STOCK MARKET DIRECTION - © March 2003
STOCK MARKET DIRECTION by Steve Zito Financial Newsletter
Technical Indicator Analysis of the Nasdaq Composite Index
Individual analysis of the eight largest technology stocks.
Redistribution only with permission of the writer Steve Zito.
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STOCK MARKET DIRECTION by Steve Zito Email Newsletter Wednesday, March 12, 2003
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Closing prices from Wednesday, March 12, 2003
Dow Jones Industrial Average
----------------------------------------- 7,552.07 +28.01 (+0.37%)
Nasdaq Composite Index
----------------------------------------- 1,279.24 + 7.77 (+0.61%)
S&P 500 Index
------------------------------------------- 804.19 + 3.46 (+0.43%)
10-Year Note yield
-------------------------------------------- 3.589% +0.003
The Dow has lost 2.4%, Nasdaq 2.0%, and the SP 500 2.9% this week, while U.S. T-notes
continue to advance (falling yield from 3.62% to 3.59%) for the best gain in 45 years.
In Germany, the stock market measured by the German DAX fell to its lowest since 1995.
In Tokyo, Nikkei Dow Jones fell to a 20-year low firmly under the critical 8000 level.
Despite new lows in Europe and Asia where economies are reeling from higher oil prices,
Morgan Stanley's perennial bear has stepped out of hibernation to call a bottom on CNBC.
The only problem is Barton Biggs of Morgan Stanley was followed by four more guests who
all had the same message, "bearishness is so pervasive, it must be a bottom for stocks."
As if a parade of brokerage penguins calling the bottom in the market on the same day
in the same hour on CNBC was not bad enough, CNBC had a rare appearance by Eric Noll,
Director of Philadelphia's Susquehanna Group, a private arbitrageur and hedge fund
which has made billions selling options to the public on the Philadelphia Exchange.
Eric Noll said volatility was very low according to options premiums and that investors
should be buying straddles, which represent a put and a call on the same stock index at
the same strike price with the same expiration. This strategy provides Susquehanna great
opportunity to sell those options to the public, and collect premiums when stocks are
little changed a month or two from now from today's levels. Eric Noll implied investors
do not know which way stocks are going, up or down, but that stocks are about to move a
great distance, one way or the other. This is contradictory to what really happens at
the end of a bear market, when stocks move slowly but surely down so that traders are
lulled into sleep. Eric Noll appeared on CNBC introduced by Michelle Caruso-Cabrera who
said stock market volatility was at the highest levels in 3 years, which is absolutely
not true. I told her so several months ago, when CNBC was telling viewers the VIX Index
measured "fear." In fact, VIX Index gauges option volatility which occurs on the upside
just as much as on the downside. When Nasdaq advanced from 3000 to 5000 in a couple of
months 1999 to 2000, that was volatile, but there certainly was no fear in the market.
One week before March options expire, there is a trend reversal in stocks, and current
trends are down for stock groups, now including oil and oil service. Late Thursday and
early Friday, arbitrageurs and hedge funds will close out upcoming expiring options and
underlying short stock positions, and roll the positions into April and May. This occurs
every month at this time. The next options expiration is a week from this Friday. Today
a rally of 30 points in Nasdaq in the last two hours came after Eric Noll's appearance,
and could very well be arbitrageurs and hedge funds trying to get a start on rollovers.
More people know about this from SEC demands on hedge fund disclosure, so the effect
comes earlier and is less concentrated. Normally the effect is over by Tuesday, which
this time around will be the start of extermination, excuse me, disarmament of Iraq by
Bush. Every rogue nation in the world is timing Bush stalking Saddam and they will use
the opportunity to engage in their own misadventures while the U.S. is bogged down in
the Middle East. North Korea is firing missiles into the Sea of Japan, the Japanese
economy based on exports has come to a standstill. Iran is building nuclear weapons
and laughing at enemies Iraq and Pakistan. While Mr. Bush spends all his time calling
ministers of Angola, Guinea, Cameroon, and Pakistan to thank them for joining coalition
of the willing, ministers of Mexico and Chile are holding out for more free U.S. money
before they give Mr. Bush their U.N. Security Council support. Bush already has Britain
and Spain in his pocket, and if he gets Mexico and Chile, he will have nine U.N. votes
needed for a war mandate. Voters in Britain massed the greatest protest in history to
tell Tony Blair to get out of office, the same is going on in Spain and Italy where the
people are demanding their leaders stop taking the side of Mr. Bush. What of the U.S.?
Mr. Bush's approval rating is 59%, down from 93% the week after September 11. People,
we just had to get to know the man first. By 2005, a Democrat will be U.S. President.
In the past week, for the first time, former Presidents made public talks criticizing
a sitting President. Both Jimmy Carter and Bill Clinton said Bush is making a mistake.
Not since 1776, have former Presidents criticized the policies of men replacing them.
In 1776, George Washington was sharply criticized by King George for Revolutionary War.
Delta Airlines has announced travel bookings have disappeared on fear of retaliation
after invasion of Iraq. Delta is about to become cash flow negative. American Airlines
stock is trading about 2.40, United and U.S. Airways have already declared bankruptcy,
and the airline industry in the U.S. is about to go the way of the old horse and buggy.
Higher oil prices importantly, fear of passengers to fly, fear of dark skinned tourists
to visit U.S. have ruined the travel industry. If resorts are suffering with far less
passengers flying there, then hotels are empty, restaurants are closed, even New York's
Broadway shows reported an 80% drop in attendance last weekend. Today, New York City's
City Council became the 141st U.S. city to pass a resolution telling Mr. Bush that war
should be a last resort. Mr. Bush answered, "my policy is not dictated by focus groups."
With this man in charge, stock markets will never rally more than a few days this year.
Nasdaq closed 1,279.24 +7.77 at 0.9% below an 8-day downtrend. The Nasdaq had rallied
sharply in late afternoon, about 30 points, just like it did last Friday when CNBC was
reporting rumors that Osama Bin Laden or his two sons had been captured. Strange, not
a word about Osama's capture has been reported this week by CNBC, which has wasted the
viewers time with an endless stream of guest brokerage vice presidents calling bottom.
Of course, they are all betting the war starts on Monday, lasts one or two days, and
Alan Greenspan cuts interest rates again March 18. Sounds like a sure thing, doesn't it?
When everyone believes he or she is holding the winning lottery ticket, no one will win.
Nasdaq will have a bounce Thursday to Monday, but it will not last more than a few days.
The global economy is falling apart, and without customers Intel and Microsoft can show
us all the new software for wireless they want. No one but Bill Gates is buying new PC's.
After hitting 0% in the morning smash, Nasdaq stochastics climbed to neutral at 40%/18%.
Expect late Thursday and Friday to Monday, a technical reversal to the upside, up to 5%.
In other words, EXPECT a Nasdaq rally Thursday and Friday to Monday up 5% to about 1343.
Dow Jones Industrials closed 7,552.07 +28.01 at 1.2% below a breakout 16-day downtrend.
Stochastics up from oversold at 30%/10%, but the opening gap to 7420 and dramatic rally
was only an oversold bounce. The Dow is still making new lows this year ahead of Nasdaq.
I had written that multinational stocks in the Dow Jones are more vulnerable to customer
boycotts and substitution than the mostly domestic tech stocks on Nasdaq. American names
like Coca-Cola and McDonalds may be in Warren Buffet's portfolio, but they are trading at
7-year lows on assumptions that foreign consumers will shop elsewhere. Not because they
do not like the products, but because Muslims in S.Asia and peace-lovers in Europe hate
what American products represent, domination of their cultures and cuisines. Today, MCD
reported its first quarterly loss ever, and was trading at 12.20, sales were down 4.7%.
Surprisingly, the weakest stocks in the Dow were IBM which broke a 75 support area that
had held up for many months. Also falling was Exxon (XOM) as oil stocks broke down too.
XOI closed 412.18 -9.40 (-2.23%) at 2.4% below a new downtrend. What happened to them?
The largest oil customers, U.S. airlines, led by Delta, forecasted a tremendous drop in
business in the coming year thanks to possible retaliation for invasion of Iraq scaring
airline passengers out of their seats. If planes are empty, they will not fly, airlines
will not buy jet fuel from oil companies. Same around the world. This forecast by Delta
sent oil stocks to their worst one-day fall in memory, from XOI 422 to 406 before a late
rebound. Violation of XOI 410 is my sell signal for oil stocks. Exit all positions ASAP.
Stochastics are very oversold at 22%/6% but today's action was total technical collapse.
You only have to watch that new Honda commercial on TV where the gas station man changes
his price sign every hour from 1.49 to 1.59 to 1.69 to 1.79 to 1.89 to 1.99 to 2.09.
Exxon XOM closed at 34.06 -0.51 (-1.48%) and BP Amoco closed at 37.25 -1.00 (-2.61%).
As for getting the Iraqi oil fields, Mr. Bush and his team USA are spreading word that
Saddam will blow up his own oil fields. If everyone believes, no one will go near them.
It is more likely Iran will nuke Iraq, after the US invades and becomes an easy target.
OSX closed 81.98 -1.25 (-1.50%) at 3.7% below a new downtrend. Stochastics oversold.
Falling in sympathy to oil stocks whose customers (airlines) are going out of business,
oil service group has not violated my sell point at OSX 80 yet. There is still hope if
Saddam blows up his oil fields, someone has to buy spare parts and build new oil rigs.
Oil service stocks are in the business of expanding existing fields and finding new oil.
Stay long on the OSX March 90 call options. Sell 50% to recover cost if OSX hits 93.
OSX already hit 93 once before and preceding is for those who did not sell 50% then.
Stochastics are very oversold at 11%/2%, and technically should provide a great rally.
The emphasis is on the word should. If Korea strikes Monday while Bush is reaming Iraq,
or Mexico and Chile hold out for more U.S. taxpayer money in exchange for U.N. votes,
all stocks, including oil service could take a beating. Use stochastics as 1 guideline.
XAU closed 63.66 +0.56 (+0.89%) at 3.7% below a major 7-week downtrend at a 3-month low.
XAU has been in a straight line decline since January 24. Stochastics are very oversold,
rising to 18%/8% which forecasts a possible oversold bounce, but only for a few days.
Subscribers are still holding XAU March 70 and XAU May 70 puts, which are in the money.
If you hold, sell 50% of positions to lock up gains while the XAU is trading under 65.
Why are gold stocks down while gold is still trading at 346? Large gold mining companies
sold gold forward a year ago at 330 an ounce, selling their production (except Newmont).
With gold recently hitting 392 an ounce, a firm not mining enough to meet their contract
would have had to go into the spot market and buy at 392 only to sell at 330 by contract.
This hedging loss has yet to be reported but will be in the next quarterly earnings by
large gold mining companies, end of June, early July. The stocks are predicting losses.
BKX closed 674.36 -1.43 (-0.21%) at 2.5% below a new downtrend. Stochastics at 26%/12%.
Bank stocks were hard hit on Monday and Tuesday as they must have been betting on the
Treasury Notes peaking out at 3.75% and have been caught betting the wrong direction as
rates fell to 45 year lows. Not since 1958 have interest rates been so low in the U.S.
They could go lower if Alan Greenspan cuts rates on March 18. I bet that he will do it.
Greenspan is worried the stock market decline and war is going to cause the real estate
bubble to burst, and if that happens, we have the Great Bush Depression of 2003 to 2006.
Most of today's stock market traders do not remember the Great Depression of the 1930's.
That Great Depression led to World War II, and was the result of economic policies like
those that have been initiated in the last 3 years. The difference today is the FDIC.
BTK closed at 312.25 +0.56 (+0.18%) at 0.8% below its 15% downtrend from mid-January.
Since, the Biotech stock index had the most uniform straight line decline of any index.
Stochastics neutral at 31%/30%. Sam Waxsal settled on Imclone insider trading charges.
If you are rich like Waxsal, pay your way out of jail and stay on TV like Martha Stewart.
Martha Stewart was Waxsal's girlfriend (also sold shares just before Imclone collapsed).
SOX closed 287.45 +8.40 (+3.01%) at 0.8% above a sideways trend. Stochastics 85%/30%.
Watch Japan, a major consumer of electronic components for well known brand name goods.
The Japanese stock market hit a 20-year low, forecasting a renewed recession in Japan.
Japan is portrayed by CNBC as incompetent, bumbling, corrupt, closed to foreign goods.
In fact, Japan suffers from low pricing by Chinese competitors which Japan cannot match,
much the same deflationary force which created the U.S. record monthly trade deficits.
Again today, CNBC said Japan suffers from laws preventing banks from failure, from lack
of domestic demand, higher oil prices, and from Korea firing missiles in Sea of Japan.
Japan has no domestic oil fields, so why should they be criticized for importing oil?
Japanese are savers, not shoppers, so why should they be criticized for saving not for
spending? CNBC's mentality is so anti-Japanese it explains why viewer ratings fell 44%.
Japan is the largest foreign consumer of U.S. electronics products, why criticize them?
Intel revealed a new PENTIUM M today to make all Intel PC's wireless "within a year".
If Intel's chip works as good as my PC battery made by the top PC firm, Intel will lead
SOX to new lows. Today's rebound saw investors buying on CNBC hype of new Intel chips.
INTC closed at 16.20 +0.35 (+2.21%) up on the CENTRINO microprocessor product release.
MSFT closed at 23.39 +0.60 (+2.63%) very close to my 21 target level forecasted in Feb.
CSCO closed at 12.69 -0.33 (-2.53%) and should be avoided.
ORCL closed at 11.00 +0.32 (+3.00%) buy at 10.50, the low was 10.65 for the last 3 days.
DELL closed at 26.01 +0.27 (+1.05%) and should be sold short over 29.
SUNW closed for 3.08 -0.13 (-4.05%) and subscribers should buy at 2.89. Down on Intel.
ACN closed for 13.79 -0.38 (-2.68%) and subscribers are holding ACN May 15 puts, up 300%.
Accenture finally went in the money on these puts announcing 1% of workforce laid off.
Accenture has pinned its hopes on China's growth and is laying off U.S. managers, while
hiring 1500 in India for peanuts. Are foreign students in your classes taking your job?
BE closed just 6.10 +0.15 (+2.52%) after subscribers sold short at 16 a year ago.
IBM closed at 75.18 -0.17 (-0.23%) and subscribers are holding the IBM July 90 calls.
NT closed for 2.07 -0.01 (-0.48%) continue to hold. Subscribers bought at 0.48.
LU closed for 1.51 -0.07 (-4.43%) continue to hold. Subscribers bought at 0.75.
ELN closed at 3.40 +0.15 (+4.62%) and subscribers should look for pullback to 2.85.
On Jan. 10, CNBC's Joe Kernen touted the next three as his stock picks with AEP at 29,
FRX at 55, and SLM at 108. You can make money selling short Kernen's favorite buys.
This former Merrill Lynch stock broker is as smart as he looks.
AEP closed at 21.47 +0.05 (+0.23%) cutting its dividend 40% after Kernen recommendation.
FRX closed at 48.99 +1.19 (+2.49%) falling 11%, Kernen liked it at 55 for its 2-1 split.
SLM closed @ 105.50 +1.29 (+1.24%) and I wrote sell it short at 108.50. Cover at 109.
Thanks for reading this edition of Stock Market Direction by Steve Zito.
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