Philly Stink Sandwich

  • January 18, 2001
  • Goran Yordanoff

Got to hand it to the expiration arbs. If you are on the wrong side of their agenda, you are going to get buried. 

The Nasdaq Composite rallied relentlessly again today with only one day left before January options expiration. It is the premise on which this rally is based that completely perplexes me.
We are hearing market players actually welcome weak economic data as it “solidifies the
argument for lower interest rates,” as one TV commentator puts it. Fundamentally, this is absolutely absurd.
he expiration arbs are hypnotizing investors to expect the market to react favorably and even rally sharply when confronted with terrible economic data. With the Philly Fed Survey reporting the most troublesome monthly data since 1968, it seems as though the market is getting what it wants. Or is it?

Historically speaking, interest rate cuts are not the panacea for all economic woes. In the
1990s, the Bank of Japan cut interest rates over and over again and were not able to stem the resultant recessionary tide. The current negative situation in the global economic arena may not be able to be “cured” by a few more rate cuts. Short term, the expectation of more rate cuts makes for one heck of a great reason for the market to rally. Looking a little further out, the problems our major corporations are reporting may still be there when the rate cut party grows older.

At present, the resultant financial shock from the California utility issue is still largely unknown. Most recessions in the U.S. economy were preceded by a major state economy slipping into recession first. The California utility debacle is certainly an event that may thrust the state’s economy into recession quicker than they can say “surf’s up, dude.”

After the bell, software giant
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PowerRating) reported earnings that triggered a positive response in the aftermarket session. SUNW also reported earnings that appeared a little light in the revenue area and is trading slightly down. CMRC reported impressive results for the quarter as well and is bidding up nicely. Watch
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PowerRating) for a potential short squeeze on this report as it is basing near its lows for the year. On a more sobering note, Nortel Networks reported earnings that met the First Call estimates but the CEO made some troubling statements. In the conference call, the CEO said “U.S. equipment spending has slowed.” and that “the U.S. economic situation is deteriorating.” Hey maybe this is good news because it will give the Fed more ammunition to cut rates. 

As far as trading this type of market goes, go with the flow. I am not holding anything long overnight and actually began establishing some short positions today. Just like it is impossible to buy the exact bottom on a stock, it is likewise impossible to short the exact high of its present move. You need to identify your targets and short the areas of their topping action. Although many are publicly stating that the Nasdaq Composite has “no resistance until 3000,” it has yet to break out of its expanding volatility triangle that I have featured here the past few days.

Long Watch: Hmmm, the Nasdaq Composite has rallied 22% from its low of 2251. If you can scalp intraday long, do so on continuation moves. Otherwise, positional longs here in technology seem a little too risky.

Short Watch: Identify technology names which are in downtrends and have rallied back to areas of prior resistance. Stocks like CIEN have rallied 70% over the past few weeks on no fundamental merit. 

Goran