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Market Wrap

Silver lining with dark clouds? Or vice-versa?

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4-05-99                     High      Low   Volume Advances Decline
DOW    10007.33 +174.82 10023.15  9836.12 699,742k    1,945 1,589
Nasdaq  2560.06 + 66.69  2560.10  2515.70 978,377k    1,908 2,163 
S&P-100  664.86 + 14.94   664.86   649.92 Totals      3,853 3,752
S&P-500 1321.12 + 27.40  1321.12  1293.72             50.6% 49.4%
$RUT     402.29 +  3.55   402.29   398.74
$TRAN   3353.40 + 44.24  3358.46  3305.01
VIX       22.81 -   .53    24.15    22.54
Put/Call Ratio .56

Silver lining with dark clouds? Or vice-versa?

Normally, it's the government that closes down for the holiday and not the private sector, but we got just the opposite Friday when the equity markets closed and the government remained open releasing the unemployment figures. Should we view the results as bad news of an economic slowdown, or good news that inflation is in check? Frankly, as traders, we shouldn't care. We only care how the rest of the market takes the news. To that end, the bond market rallied as a result of inflation fears remaining in check. We then had a basis from which to be bullish in today's trading right from the open. Though Aspect Development, Aspen Technologies, Axent Technology and KOMAG pre-warned, the market quickly blew it off as the DOW gapped up 60+ points within the first 10 minutes. There was no looking back. The DOW (+174, 10,007, below its previous trading high of 10,085), NASDAQ (+66, 2,560) and the S&P 500 (+27, 1,321) all set new closing highs today, putting a sun-lit silver lining on last week's dark clouds and the overall market.

For starters, merger mania was back in the air as GTE announced before the market opened that it would buy 20 wireless properties from Ameritech for $3.27 bln., clearing the way for Bell Atlantic to complete its acquisition of Ameritech. Rumors flew that CBS Corp. (yes, the TV and news people) may be in merger talks with AOL. Coupled with recent announcements by Yahoo! that it would acquire GeoCities and Broadcast.com, Novellus would acquire LAM research, and rumors that RealNetworks, Fore Systems, Advanced Fibre Communications and Nextel are buyout or merger candidates, speculative investors threw M&A fuel on the market fire.

Internet stocks, including Internet bankers, not only caught fire today, but were explosive. When was the last time you saw Yahoo! +$41, AOL +$16, CMGI +$28, eBay +$11, Broadcast.com +$29, Mindspring +$21, TeleBank Financial +$16 and Netbank +$25 all in the same day? On-line brokers were also smokin' hot. Investors needed only a few encouraging words from CS First Boston to send the shares of Schwab up $9, E*Trade +$11.75 and Ameritrade +$29. Double-digit gains were everywhere, as shorts ran for cover. While we don't list them all as picks, there are some great trading opportunities here to take advantage of. Three factors drove the prices: 1) Amazon.com and Wal-Mart announced a settlement in their "employee theft" cross-filed lawsuits, with Amazon avoiding any monetary penalty; 2) Yahoo!, which usually beats earnings by 30%, is expected to do it again when it reports earnings after the close on Wednesday; 3) Netbank added 8,000 new accounts in the first quarter.

Add the PC Sector back to the "what's hot" list, as Michael Dell will speak to a group of analysts on Thursday about Dell's current track and plans for the future. Michael is an expert spokesman and is well known for his ability to speak good news. The Street is speculating that Dell is on target to hit its projected 38% growth rate, and beat earnings again as it announces plans to beef up its sub-$1000 marketing effort. Lookout, Gateway. Dell closed up $2.75 today. Big-cap technology and telecom issues rounded out the gains too as Microsoft added $2.50, IBM +$7 Intel +$6, MCIWorldcom +$3, Lucent following a 2:1 split +$3, Tellabs +$4.75, Uniphase labeled as the "Intel of the next century" +$8 and Cisco +$4.50.

Don't put your umbrella away just yet. Every silver lining has a dark cloud too. There is an old saying on Wall Street that in order to advance, stocks need to climb a wall of worry, and we have some things to worry about.

First, Kosovo remains an issue, but is largely discounted until ground troops are introduced. Politically, this is unpopular and won't be tolerated by our citizenry, at least not yet since the lessons of Vietnam have not been forgotten.

Second, China is beginning to see an economic slowdown, which is causing speculation that they may devalue their currency. While currently popping up on the radar screen, China's desire to join the World Trade Organization will prevent devaluation anytime soon as such would tarnish or even remove their already besmirched halo prior to a vote. Mexico followed the same course and devalued a few years ago, but only after admittance. In short, work your trading plan, but keep your eyes on the developments beginning next week.

Third, bonds didn't sustain their rally today signaling that there are still interest rate fears, especially since the price of oil is again approaching $18 a barrel, a figure that spells S-L-O-W-D-O-W-N.

Most importantly, we can't overlook the advance decline line and reduction of corporate profits. Though advancers outpaced decliners, the margin was too narrow in our book: overall, 3572 advancers to 3433 decliners on a record setting day. On the NASDAQ, though closing at a new record high (and at its high of the day), decliners led advancers 2130 to 1888. This is just not healthy. The generals are advancing while the troops retreat. The big caps cannot forever continue to rise leaving the rest of the market behind. Want evidence? John Mendelson, an analyst at Charles Schwab notes that 88% of all NYSE stock are at least 10% off their 52-week highs; only 12% are making new highs. The Treasury confirms the slowdown in GDP and Fortune Magazine this week released its annual Fortune 500 issue showing the lowest annual corporate profit growth since 1990, measuring only 2% over last year's 8% rate. If a large-cap general misses its earnings, it could drag the rest of the market with it in an overall hasty retreat. This is the time to use those stop loss orders.

Not to get lost in doom and gloom, the next 3 weeks should be up overall in anticipation of earnings reports. Prior to April 15, lots of cash will be moving into funds as folks finance their retirement plans. There are lots of opportunities for us to make nice daily gains by playing the market trend. Don't fight it. Plan your work, work your plan and sell too soon.

Buzz Lynn
Research Analyst

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