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Market Wrap

It is always darkest before the dawn...

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It is always darkest before the dawn...

Or at least that is how the old saying goes. Today was another record setting trading session as the Nasdaq beat last week's one day dive of 83 points to set a new 3rd biggest point drop today with a loss of 94 points. That is the equivalent of a drop of 470 Dow points. No wonder the tech heavy Nasdaq is blamed for dragging the whole market down. But, the American markets may not be the only ones to blame. World indexes were mostly negative as the Brazil Bovespa fell dropped 1.7% in profit taking after a 4.6% rally Monday. Plus, the European markets were suffering a widespread downturn as earnings season opened and investors worried over potential earnings surprises.

So how bad was the damage over here? The Dow closed down 1.7% to 9133 after fighting all day to hold above 9180. The last hour plummet put the Dow negative for 1999 by 0.5%. The Nasdaq did not fare much better. While it remains positive for the year by almost 5.4%, it still fell to a discouraging 2310 after twice bouncing off the 2345 level. Other U.S. indexes followed their lead and the S&P 500 is down 1.1% for the year while the real loser is the Russell 2000. The RUT is down 4.5% for the year! What happened to the January effect?

I'm sure most quote screens today were painted a bright red. Winners were few and far between. The chip sector did an about face from yesterday and posted a sector wide loss. The software sector was equally weak while the telecoms, the biotechs, and the financials all followed suit. Only 3 of the Dow 30 components posted any type of gain while 6 of the Nasdaq 100 managed to close the day with a gain.

Leading the losers today were the Internet stocks. Almost all of the big name companies posted a loss. ATHM down 7.94, AOL lost 11 points, AMZN dropped 9.13, CMGI fell 14.75, XCIT slipped 8 points, giant YHOO lost 17.88, and NSOL dove 26.13 under news that regulators are looking into creating some competition. The big loser today was LCOS who fell 33 points to 94.25. Evidently, traders were unhappy with the deal between LCOS and USA Networks/Ticketmaster. In a deal worth about $22 bln, the merger will create quite the cyberspace powerhouse. The combined marketing muscle and e-commerce presence between LCOS/Ticketmaster and its citysearch website in addition to USA Networks cable operations (which include the successful Home Shopping network) will be formidable indeed. This merger leaves YHOO as the last remaining (big name) independent Internet portal. What we can say about this sector wide losing streak is that it might be over soon. Many of these Internet stocks have corrected close to 50% from their highs. Once they find a bottom the leaders should start trending positive again. INKT may have already started.

However, if this is to happen, if the Internets are to recover, the market needs to find some form of acceptable valuation. This seems to be the transition many see the market moving to. No longer are investors buying into the momentum stocks but rather they are looking at "value" stocks. Of course if the market continues to dip at this rate many of the stocks previously referred to as momentum will be considered "value" plays as PE(s) start to drop with their stock price.

So when is a sell off not a sell off? When it is not produced on strong volume. Probably the only saving grace here is the fact that volume was light on both exchanges today. The NYSE traded on volume of 713 mln while normal is between 850 and 900 mln and the Nasdaq traded on 910 mln which is below its normal 1.2 bln shares (as of late). What we are seeing is not a rush of sellers but really a lack of buyers. All of the money is sitting on the sidelines waiting for the correction to be over. Guaranteed, when the market finds a bottom they will be rushing in to grab all of the leaders.

So were is this money going in the mean time? Mutual funds are sticking it into money market accounts. Last year at this time managers were sticking 20% of their money into money markets while this year it's over half (about $37 bln) is moving into money market accounts. As soon as they feel this correction is done they will be pulling it out just as fast to play stocks again.

So what can we expect for tomorrow? Probably more selling. As one pundit put it, institutional investors are demonstrating a more disciplined approach and letting the market fall to their predetermined price levels before they buy in. Many of the major indexes are approaching their 50 dma(s). Investors are expecting a bounce, if not, we'd all better practice our put buying. Currently the Dow is at 9133 which is actually below its 50 dma of 9189. The Nasdaq is at 2310 while its 50 dma is 2225. However, support for the Nasdaq is going to be close at 2300 or we could freefall to 2200 (2225) and mental support for the Dow is at 9100.

The good news is Ralph Acompora. Yup, read that again. While we can credit him with any number of negative market occurrences, his predictions for a 5% to 10% correction puts the market bottom between 9100 and 8700. We are awfully close to 9100 now which could put us at the end of this nastiness.

If the market is going to turn itself around we will have to see a redemption of the advance/decline line. Traders continue to worry over its growing erosion. Between the NYSE and the Nasdaq, decliners beat advances by a greater than 2:1 margin (4827 to 2206) and the new lows beat new highs by better than 3:1 (160 to 51). To truly see the market turn around, we are going to need a broad market reversal.

However, things don't always look as bad as they seem. One prudential analyst said he sees this as merely a speed bump in a bull market rally. We definitely like his attitude. Current events that might pull the market up this week is the possible end of President Clinton's trial. The senate met behind closed doors today to deliberate the president's fate. The outcome is expected to be pro-Clinton which would keep him in office and the markets would see this as a positive to keeping the status quo. Another event occurring this week in New York is the Goldman Sachs technology conference. It was kicked off today and continues through to Friday. Over 160 companies will be presenting themselves and it is quite possible that all of the positive press likely to come out of the conference will pick up the beleaguered Nasdaq.

We do expect the correction to end, but whether it occurs tomorrow or next week is unsure. The end of the president's trial, the tech conference, WCOM's earnings Thursday, Dell's earnings next Tuesday, and a host of splits near the end of the month are all positives (assuming the earnings are strong). But momentum is negative and the advance/ decline line shows no signs of improving (soon). We suggest sitting on the sidelines like the fund managers and let the market come to you. As Jim likes to say, avoid emotional trading, make your decisions when the market is closed so you are not clouded by the intraday swings, and if you must trade practice the art of stop losses. Your most important trading resource is at stake. Your capital! Don't fool around with it, there will always be another day.

Good luck and be patient,

Kimo,

assistant editor.

P.S. We are going to have our next broker's chat tomorrow in our chat rooms at 7:00 pm ET. Alan and Andy from Rosenthal Securities will be leading the discussion on money management, stop-loss/profit orders, and asset allocation. The session will last about 90 minutes with the last 45 minutes dedicated to taking questions from the audience. The is a great resource to pick the minds of a couple of successful brokers

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