Microsoft Chisels Epitaph for Options

Editor's note: This column, which reflects market activity from the day before, originally appeared July 9 on RealMoney.com. To sign up for RealMoney, where you can read Bill Fleckenstein's commentary every day, please click here for a free trial.

Buckle up, folks, we've got lots to cover. To dispense with the uneventful first, the overnight markets were a snooze, except for Japan, which was higher. Of course, the big news of the evening was Microsoft's(MSFT Quote) announcement that it would replace stock options with restricted stock, and treat remaining options as an expense (more about that below).

In any case, after our market opened, we kind of flopped around, bolted higher, then commenced a zigzag process. To zero in on the particulars, Cisco(CSCO Quote) was higher on pontificating by pom-pom king John Chambers that "in the coming two to four months, spending by companies on information technology will recover." (Later in the day, a Cisco spokeswoman said that Chambers' remarks were misconstrued, and that he had said that industrywide spending will start rising about two to four months after IT customers begin to see their own businesses turning up, whenever that is.)

Pom-Pom Pooh-Bah: Mr. Chambers has no data to back this up, and he carries with him the reputation as pied piper of the Internet craze, but nevertheless, that vision lit a fire under his stock, and for some reason, Intel(INTC Quote) as well. Meanwhile, folks completely and totally ignored the news from Logitech (LOGI Quote) (more about that below). I took advantage of this morning's frenzy to establish a position in October Cisco puts, and bought some more October Intel puts.

Back to the action, there was a whole lot of motion in the early going, but not much net change. Stocks sported red and green pretty evenly. After the morning's push higher, the market sold off, tried to rally back to a new high, couldn't do it, and sold off in the last half hour to set the prices you see in the box scores. When I put a summation sign under today's action and the action of recent days, when I look at sentiment, end-zone dancing, froth and my hate-mail indicator, this has all the hallmarks of exhaustion.

Of Frenzy and Fermentation: Is it the final exhaustion for this move? I don't know. But when we finally witness exhaustion, it will look like this. (I myself continue not to short until I see some signs of a failed rally. But I have been stepping up my purchase of fall puts, as I think we will see a total collapse before the fall is out.) I cannot believe the frenzy we are seeing on arm-waving, while signs of deteriorating fundamentals are ignored. If tomorrow is a down day, one could construct the argument that the exhaustion has been seen. The bottom line is, even though earnings expectations set by corporate America for this quarter are quite low, expectations on the part of the bulls are extraordinarily high, and that is a recipe for a dislocation.

Index	Close	Change
Dow	9156.21	-66.88
S&P 500	1002.21	-5.63
Nasdaq Composite	1747.46	+1.00
Nasdaq 100	1295.16	-3.21
Russell 2000	476.99	+3.02
Semiconductor Index (SOX)	401.87	+2.96
Bank Index	890.32	+1.54
Amex Gold Bugs Index	151.38	-0.23
Dow Transports	2562.41	-2.71
Dow Utilities	245.31	-2.02
NYSE advance-decline	-257	-681
Nikkei 225	9990.95	+0
10-year Treasury Bond	3.71%	-0.027

I did think it was rather interesting that given all the hoopla surrounding John Chambers' thoughts this morning, and all the chatter about things getting better in the PC arena, comments from Dell(DELL Quote) President Kevin Rollins received very little play. These comments were relayed to me by somebody who had them relayed from a dead-fish house that Rollins was very explicit about there being no signs of recovery in end-user demand. There is no meaningful increase in corporate RFPs (requests for proposals), no uptick in the consumer/government sectors. The only recovery had been in the stock market, not in demand.

Away from stocks, the dollar was weaker vs. the yen, lower vs. the euro, and stronger vs. the Canadian dollar. I have a sneaking suspicion that the yen may be set to appreciate, but we will see if that happens. The precious metals were mixed, with gold down slightly and silver up 2%.

Incubating Lustrous Catalyst: My contacts close to the silver market note that it's "changing" (and they continue to be bullish). Finally, we are seeing the earliest signs of investment demand, something that's been missing from the silver market thus far. Folks have already decided they want to own gold as protection from the Fed's printing presses, and it now appears that a little of the same kind of money is trickling into silver. As a much smaller market than gold, it stands to benefit disproportionately. That said, silver remains very volatile, and the uptick in investment demand is in its infancy, but this glimmer of change strikes me as a big deal.