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Market Wrap

I think I can, I think I can, I think I can

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        3-11-99           High     Low    Volume  Advances Decline
DOW     9897.44 +124.60 9935.46  9769.96  908,586k  1,738   1,257
Nasdaq  2412.25 +  6.25 2437.39  2391.55 1036,400k  1,968   2,025 
S&P-100  649.85 +  5.45  654.97   644.40   Totals   3,706   3,282
S&P-500 1297.68 + 10.84 1306.41  1286.84            53.0%   47.0%
$RUT     401.08 -  0.04  403.37   399.78
$TRAN   3257.65 - 32.30 3297.48  3239.09
VIX       25.52 +   .12   26.82    24.68
Put/Call Ratio      .54

I think I can, I think I can, I think I can

The market that thought it could continues to defy gravity as the assault on Dow 10,000 continues. Despite the drag on the market by the techs today the Dow managed to hit 9935 intraday and close only three points shy of 9900. Traders held their breath around 12:30 as the upward momentum faded and a strong sell program started knocking points of the Dow leaders in rapid succession. The index fell to an afternoon low of 9860 before catching a second breath and adding back +37 points at the close. Catching a second breath may get harder and harder at this altitude as traders will be wanting to protect profits for the eventual down cycle. Nothing goes up in a straight line and we are bound to see another down cycle soon. The chance of an emotional let down drop after we break the psychologically important 10,000 barrier is very strong.

The forces behind the current rally are rapidly increasing earnings, low inflation, strong consumer spending across all sectors and low interest rates. The record consumer confidence levels continue to be reflected in cash flow into the mutual funds. The larger than expected tax refunds which came back sooner than expected this year continue to fuel the market liquidity. The bullishness is starting to reach perilously high levels again.

The rally today in the Dow numbers was also fueled in most part by the surge in oil stocks. The Prime Minister of Saudi Arabia said that they were going to actively pursue strong cuts in production output and these cuts could approach 2.3 million barrels. The OPEC meeting on March 23rd is expected to produce a unique accord to enforce this cutback. Previously announced cutbacks were met with cheating by OPEC nations and non-OPEC nations alike. The damage to the Arab states economies has reached the scale of magnitude not seen in many years. The recent lows of $10 oil were stated in terms of west Texas crude which always enjoys higher prices than mid-east oil. At $10 U.S. crude the mid-east oil sells for $7-8 per bbl. It is definitely in their interest to force compliance with the cutbacks. The rise in current oil prices is a result in cutbacks in capital expenditures from major oil exploration companies and plugging of wells that finally just became not worth the effort at such low prices. The Oil Service Index has risen +30% since March 1st on prospects of higher oil prices. Some analysts feel that a serious agreement could send oil stocks soaring another 25%.

The tech sector has not participated in the recent Dow rally and may have put in a new top here around 2400-2420. The Nasdaq rallied with the Dow at midday but pulled back to negative territory later in the afternoon and only barely finished positive. Tomorrow may be the turning point for the Nasdaq. Oracle announced earnings after the close and analysts were not excited. The database revenues were not as strong as expected and the stock traded down -$6 in after hours trading. MSFT also made news with a the CFO saying they were "comfortable" with the estimates for this quarter. Comfortable is not the term analysts wanted to hear. The fear that slowing PC sales would start to be reflected in the MSFT numbers was causing a rumor of a possible earnings shortfall. MSFT was trying to calm this rumor but may have put more lingering doubt in analysts minds from the weak statements. They did say that "worldwide" PC demand was expected to remain strong but did nothing to convince analysts that U.S. demand was not sagging. MSFT traded down slightly after hours. MSFT said they expected to move $400 mln in earnings to the next quarter to offset some Office97 - Office2000 conversion plans. This amounts to $.08 per share but they said they expected this to be offset by increased "investment income" but they did not elaborate.

CMGI announced blowout earnings after today's close with a +$.30 compared to an expected -$.22. A +$.52 blowout. You know how we feel about holding over earnings....a definite suicide mission normally. Do you think CMGI soared in after hours? NOT!! They traded down, only slightly, but down! After the big run they have had, $150 to $225 in only four days, the odds of profit taking are very strong even if they had blown out with double the earnings. In the terminology we used at the seminar, everybody is already standing on CMGI. There are no voters left on the sidelines.

The sector rotation out of techs and into blue chips is likely to continue tomorrow. In spite of the rotation the market breadth is still very weak. The advances only barely beat decliners today 3,706 to 3,282. When you look at the market momentum, and the strong volume today, this is not a good sign. The market is going higher and higher on fewer and fewer stocks. The decliners actually beat the advancers on the Nasdaq. We continue to urge caution on starting new positions at this market level.

Friday's Producer Price Index will likely show strong productivity which continues to hold down inflation at the wholesale level. This will be just another bullish sign and could provide the spark to break the 10,000 barrier. The market has taken all the bad news you could imagine lately and rallied. Short of a complete turnaround in the PPI numbers, the market should like the news. The strong retail sales today of +.9% in February and the revised +1.0% for January was very strong and we expect the PPI to reflect the same sentiment.

The three market fundamentals, earnings, interest rates and liquidity have changed to speculation, euphoria and liquidity. According to the Federal Reserve the market is now overvalued by 18%. While some traders are throwing caution to the wind there is still a huge amount of cash on the sidelines. Cautious investors are scratching their heads in disbelief over the current divergence between the Dow and the rest of the market. Do you think it is strange that the Dow is closing at new all time highs and the Russell-200 closed negative today? Also, lest we forget, the transports closed negative today as well. The rising price of oil may be good for Dow components CHV and XON but bad for transportation stocks in general.

I feel like a stick in the mud telling you to be cautious and "please" look this gift horse in the mouth, but remember the previous three 1000 marks and the immediate result of their passing. After 9000 we dropped -1500 points. After 8000 we dropped -1000 after 7000 we dropped -700. Whether or not we see the same reaction this time remains to be seen. With earnings just around the corner again the expectations may continue to hold the market at these levels. Remember also what comes before April earnings, March earnings warnings. A major warning could be a serious problem.

Good Luck
Sell too soon!

Jim Brown

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