Fake Rally? It’s Real If You’re Short!

  • August 24, 2001
  • Jon Najarian

For all of you that thought it was
getting too easy being short, guess what? You were right!  It was too easy
to be short and today a number of “newbie” short sellers are
discovering that hard truth, as the sleeping bulls woke up long enough to stick
it to bears. Whether or not today’s market action signals the long sought
bottom, or another of the death throes of the dying bull, only time will tell.
However, as one trader said moments ago when told that this was only a fake
rally, “Hey pal, it’s real if you’re short!”

   

The catalyst was Cisco’s
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management restructuring and projection that future sales would be better than
expected. That combination was enough to boost shares of the
networking-equipment giant and scores of related technology shares in pre-market
activity and that euphoria has carried over to our regular session as well.

    

The bottom line isn’t whether Cisco’s
focus on 11 technology markets (access, aggregation, Ethernet access, Internet
switching, network management, core routing, optical, storage, voice, wireless
and Cisco’s IOS Technologies Division) is going to revitalize the struggling
company. The bottom line is that it gave the bulls something they haven’t had
for the past four weeks – HOPE. 

   

Hope is also what’s driving shares of Microsoft
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today, as the two-pronged positive of the presentation of the so-called “Gold
Code” of its Windows XP operating system to computer manufacturers and a
return to appeals court is helping boost MSFT share price and putting its option
volume back among the most actively traded classes. 

    

Likewise, EMC Corp.
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surge in option trading volumes, with a significantly dominant call option
volume alerting our computers. And why not? After all, EMC shares are trading up 
$1.28 to $16.98, sending the September 15 calls up 46% from last
night’s closing price of $1.50. 

It’s pretty clear that demand for call options is being met rather easily, as
overall volatility, as measured by the VIX,
is down better than 9% since yesterday afternoon. In other words, the
professional trading community is actively fading this rally, willing to assume
that prices will retrace back down rather than run straight up. The contrarians
have been getting fat off of similar actions all year, so the question is, will
Monday play back into their hands, or will we see what has become more rare than
a politician telling the truth: a sustained follow-through?