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Weekly Outlook, September 22

By Joel Addison, Optionetics.com | Mon September 23, 2002 6:00AM PT

Another round of losses engulfed the market this past week, with all three major market indices falling sharply. The Dow ($INDU) broke below 8,000 on Thursday and stayed there. For the week, the Dow lost 3.93 percent, leaving this blue chip index just 6 percent from its 52-week low. The S&P 500 ($SPX) declined 4.99 percent to close the week at 845.39. However, the largest losses came from the NASDAQ ($COMPQ), which fell 5.44 percent. The Naz is now just slightly more than two percent from reaching a new low. However, several tech sectors have already reached multiyear lows, including the hardware and chip sectors.

A combination of earnings warnings and weak economic news has kept traders from buying. A likely military campaign in Iraq is also keeping a lid on gains. Even though stocks seem oversold, it isn’t likely that anything more than a mild rally will take place. In fact, most traders are likely to sell on any strength. This week may prove to be quite volatile, with a number of key economic reports on tap. Below is a list of these releases:

Monday: Leading indicators
Tuesday: Consumer confidence, FOMC
Wednesday: Existing homes sales
Thursday: Durable goods orders, Jobless claims, New home sales
Friday: GDP, Consumer sentiment

Obviously, all eyes will be on the FOMC meeting Tuesday for clues on what Chairman Greenspan sees in store for the economy. No one expects a rate cut at this meeting, but mainly feel there could be more cuts by the end of the year. Last week, industrial production and housing starts fell for the first time this year, creating more concerns over the likelihood of an economic recovery in the near term. Earnings season is still a few weeks off, but there are some announcements this week that could move certain sectors. Listed below is a list of some of these companies:

Monday: Palm (PALM)
Tuesday: Goldman Sachs (GS), Intraware (ITRA), Lehman Brothers (LEH), Micron Tech (MU), Rite Aid Corp (RAD)
Wednesday: AutoZone (AZO), Bed Bath & Beyond (BBBY), Corel (CORL)
Thursday: Liberate Tech (LBRT), Manugistics (MANU), Safeway (SWY), Solectron (SLR)
Friday: None

Tuesday is going to be a busy day, for both earnings and economic news. On top of this, no one knows how many companies will announce warnings for the quarter. Already, warnings have been much stronger than expected and this has contributed to lower prices.

Telecom stocks may come under pressure Monday after Qwest (Q) announced Sunday that it would restate $950 million in revenues and costs for swaps of optical-network capacity. Another event scheduled for Tuesday is the start of U.S. House Energy and Commerce Committee hearings. These hearings are set to examine deals among Qwest, Global Crossing, FLAG Telecom and Cable & Wireless.

Tech traders will also be keeping an eye on Micron’s earnings announcement Tuesday. The Philly Semiconductor Index ($SOX) has lost ground for seven straight sessions, taking the index to four-year lows. How Micron views the future could have an impact on trading in other chip stocks. However, with sentiment so negative for this group, we could see a mild bounce unless MU really disappoints.

Speaking of sentiment, the fear indicators are starting to make their way to important highs. The CBOE Market Volatility Index ($VIX) closed at 44.55 on Friday, leaving it just 13 points from its 52-week high and less than 6 points from key resistance at 50. The NASDAQ Volatility Index ($VXN) closed at 59.08, just 11 points from resistance at 70. The VIX and VXN aren’t currently pointing to a market bottom, but they are inching closer. On top of this, the put/call ratio is reaching extreme levels as well. These are things to keep an eye on to let us know when a possible bottom may be reached. Nonetheless, in the near-term, it seems more likely that the major market indices will move lower to test prior lows. However, this may occur after an oversold bounce.

Last week was the end of September options; so many trades may need to be adjusted. However, just because you need to make adjustments doesn’t mean it has to be done Monday morning. For example, if you have call calendar spreads, you may want to wait for a bounce to sell October options. Look at your trades and see what adjustments need to be made, and then analyze the market to see if waiting may be more advantageous. Stocks have become oversold in the short-term, but any buying is likely to be met with selling. This means the major market indices are likely to end with their fifth straight week of declines.

Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site

Recent articles by Joel Addison, Optionetics.com

September 25, 2002  -  MARKET INSIGHT: Beware of Falling Bulls
September 25, 2002  -  REAL-WORLD TRADING: Trading Sideways Markets with a Condor, Part IV
September 24, 2002  -  HOT SHOTS: EDS Takes Another Fall
September 23, 2002  -  NASDAQ NEWS: Naz Falls to Six-Year Low
September 20, 2002  -  VOLATILITY ALERT: Markets Fall for Fourth Straight Week


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