Still cautious on technology stocks, advise against buying for now (page 1 of 3)

US Stocks

The index is calculated as follows:

(advances / declines) / (advance volumes / decline volumes)

A ratio of less than 1 indicate a bullish market, whereas a value over 1 indicates a bearish market.

As of the close of 30 August 01, the figure is 2.28 and 2.23 for the NYSE and NASDAQ respectively. The three-month average for NYSE is 1.24 & 1.45 for the NASDAQ.

The flip side is that the volume of sell orders in declining stocks has been unusually high, which is saying there is intense pessimism among investors and that presages a market bottom. In any case, value stocks with good earnings prospects should lead the recovery.

November crude oil rose to $27.16 in short covering and OPEC will start its production cuts on the first of September. Both Exxon (XOM $40.15) and Burlington Resources (BR $38) look interesting at current levels.

Seems like for every positive data that came out, there is a negative one. Last Friday's July Factory Orders was better than expected, but according to the Manufacturers Alliance survey, 75% of US industries showed a pronounced and deepening decline in business activities during the 2Q, the latest figure is down 20% y-o-y. Consumer spending is still holding up, but the latest delinquency rate on credit cards jumped in July for the 8th straight month to 5.06% from 4.44% a year ago.

Thursday's jobless claims and Friday's unemployment rate hopefully will give us some indications as to whether the consumer will continue to spend. If you still believe in the merit of buy and hold, you might consider accumulating value stocks in the months ahead.

US Technology

Cautious on technology stocks. On a week-on-week basis, the NASDAQ Composite Index continued its decline to end the week 5.8% lower at 1805.

Friday's up-tick move on the NASDAQ does not represent a change in depressive near-term sentiment. We believe the bias is firmly towards the downside, with 1756 (-2.7% away) as being the first Index risk level and 1620 (-10.2% from current levels) as the next potential risk-support point. With investors remaining uncommitted towards technology stock investments, we remain cautious towards technology issues and recommend a Hold strategy in the short-term. The technology Bear market is still firmly in place and presently, there is little positive news to stem a further decline for the week ahead.

Given that we expect technology issues to weaken further, what can we do now (other than wait)?

For investors who own the NASDAQ-100 Index tracking stock (QQQ US, $36.17), we suggest exploring an options strategy to capitalise on the near-term distressed environment. Assuming that price on the QQQs is anticipated to decline further in the near-term towards a potential consolidation zone (between $35.00 and $28.30), we suggest aggressive investors to consider riding the continued near-term downtrend move by investing in one of the following options strategies.

Buying short-dated PUT options.
Bloomberg Code:QQQ US 9/01 P36.00
Maturity: 22 September 2001
Strike Price:$36.00
Last Option Price:$1.30
Shares per Option:100 shares
Premium to pay: $130 ($1.30 x 100)
Breakeven price:$34.70

The Buyer of 1 QQQ PUT option contract, upon payment of the premium ($130.00), acquires the right to sell 100 QQQ shares at $36.00 (with the option expiring on 22 September 2001).

Strategy is to hold the option to maturity or look to close out the long PUT option position by selling back 1 QQQ September 36 PUT options when the option price reaches $3.00 to lock-in a total gain of $1.70 ($3.00-$1.30).

The investor is bearish on the underlying option issue (expect price of QQQ to depreciate).

The investor has the risk of losing $130 per option contract if the underlying stock (QQQ) price is above the strike price on maturity.