Downside
Target
for Nasdaq: 1300-1350 Area
By Bernie Schaeffer, editor
Option Advisor
I've
been bearish on this market and on the techs in particular. But
if I had to isolate my single biggest area of concern beyond
the continued shameless bullish market shilling by the usual
Wall Street suspects, beyond the deceptions and outright lies
about their businesses being put before investors by the CEOs
of some of the biggest tech firms, beyond the potential for the
recent weakness in the dollar to produce a stampede of foreign
selling of U.S. assets, beyond the fact that the impotence of
the Fed and its rate cut meetings has become a bad Viagra joke,
beyond the fact that with this year's losses and write-offs the
technology industry (a.k.a. "the engine of economic growth")
has not made any money over the past five years, and beyond the
market's horrible technicals it would be the mind-boggling complacency
among option traders.
With the market in
full bear mode and with option premiums at historically low levels,
what is the "strategy du jour" in the options world?
As reported on the August 15 Dow Jones Newswire: "As the
Nasdaq Composite (COMP 1842.9) slipped to a four-month low, many
investors sold options, both to generate income and boost returns
of their flagging portfolios, as well as to help reduce the cost
of buying stocks as they looked for bargains." This is abnormal
behavior in the extreme; perhaps better described as pathological
behavior.
The textbook option
strategy for those long stock in a weak market in which option
premiums are low is to buy puts. By so doing, you protect
yourself fully below the put striking price should the market
continue to weaken. Plus, you get an extra bonus option
premiums are low, so the cost of your "downside insurance"
is modest. But in August 2001, they're selling calls against
the stock they own.
Why does this make
no logical sense? For two reasons. First, selling calls does
almost nothing to protect you from a major market decline. Your
stock will plunge and this plunge will be offset only by the
amount of the call premium you had collected. But it gets worse,
because the current level of call premiums is historically
low. So why, you may ask, are they selling cheap calls against
long stock in a bear market? Because they don't see much additional
downside risk from here! Look up "complacency" in Schaeffer's
dictionary and the definition will consist of the previous two
sentences.
So how low do I feel
the Nasdaq can go? At the recent San Francisco Money Show, I
shocked my fellow technology stock panelists who had just finished
reassuring the large audience (who had paid to see this luncheon
panel at the tech bottom they'll have to pay people to attend
such events) that the Nasdaq bottom was already in place.
My target for a potential
low was (and is) 1300-1350, for two reasons. First, the 1998
low of 1357 should provide some support. And second, I've noted
a phenomenon among many of the big tech names where they find
some support at half of their all-time highs and then crater
by another 50 percent. The Nasdaq found some support this year
at half its 5132 high, but that support is long gone and by analogy
the next target should be yet another 50-percent decline (to
1283, to be precise).
Editor's Note: Bernie Schaeffer is editor of the Option Advisor, 1259 Kemper Meadow Drive, Cincinnati, OH 45240. Monthly, 1 year, $200.
