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Market Wrap

When smokestacks burn electrons. . .

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        4-19-99           High     Low    Volume  Advances Decline
DOW    10440.50 - 53.40 10765.70 10404.90 1214,400k  1,925   1,195
Nasdaq  2345.61 -138.43  2501.71  2341.35 1204,400k  1,686   2,451 
S&P-100  652.89 - 15.76   681.95   650.14   Totals   3,611   3,646
S&P-500 1289.48 - 29.52  1340.02  1284.59            49.8%   50.2%
$RUT     412.41 -  9.17   426.12   412.39
$TRAN   3566.71 + 38.01  3679.47  3527.92
VIX       28.56 +  3.08    28.62    23.32
Put/Call Ratio      .54    

When smokestacks burn electrons. . .

Sunday, we made many references to the Dow being up 5 straight days, with a retracement bound to follow soon. We saw some of that today and may be in for a bit more. Painful as it is, it's also healthy. Unbridled rising prices can't go on forever and only make the correctional pain more severe. We want to spend a few moments talking about the Dow and the NASDAQ separately, as the action was quite different for both.

Investors and traders shook their heads in amazement as the Dow headed for a 273 point gain to 10,765 in the morning session, only to sell off to -88 at 10,404 (a 361 point intraday swing) after which it finally closed -53 at 10,440. In the NYSE's second heaviest volume day ever, about 1.2 billion shares changed hands - big volume, big drop, not good. The strangest part of all was the bullishly positive 1926 advancers beating out 1196 decliners, as new highs beat new lows by 166 to 33. This is good though it causes some indecision and confusion in us analytical types who try to reconcile these 2 contrary indicators.

Anyway, all that head shaking must have caused a serious case of whiplash. For starters, Compaq announced that Eckhard Pfeiffer "tendered" (from the base word, "tender" - as in being ferociously kicked in the tail 'til it hurts) his resignation from the leadership position at the company in the wake of lousy earnings. It looked like CPQ found its character and lent some stability to the price, which moved up $2 early in the day. Unfortunately, Compaq tried to throw a party, and this time nobody cared. Second, SBC announced they would acquire a 10% interest in Qwest Communications, a digital age bandwidth provider, for $94.50 per share. The QWST shares jumped $7 at the open but that was not to last either. The real carnage came in the afternoon when last week's news of Fidelity's move out of tech and into cyclical stocks began to sink in. In short folks, monkey-see-monkey-do is happening right in front of us. The institutions are buying into the long- neglected smokestack industries with low p/e's, including oil services/drilling, autos, airlines and financials that stand to gain from the perceived worldwide economic recovery. Confirming this view for many, Citigroup reported earnings of $1.04 per share, and bested analysts' estimates of $0.87 per share by $0.17. Also noteworthy, crude oil is approaching $18 par barrel again. That is significant.

As much as "world recovery" and "undervalued" have been bait for the funds to buy, so too have top values and revenue weakness from Compaq, Intel and Dell been motivators to unload and take profits. In a humungous show of weakness, the NASDAQ closed down 138 points at 2349, its second biggest point drop ever, and only 4 points up from its low of the day. Like the NYSE, about 1.2 billion shares traded hands. . Advancers lost out to decliners 1683 to 2406. Again, big volume, big drop, not good

The other major culprits of the NASDAQ sell-off were the Internet stocks. Bellwethers like AMZN (-31,189), YHOO (- 25, 163), CMGI (-47, 214), AOL (-24, 115, yes an NYSE stock), EBAY (-21,154) and RNWK (-42, 128) were gonged off stage. Some blow this off as no big deal, just back to where we started a month ago, referring to the phenomenon as "going parabolic". We disagree and think there may be a bigger picture. The facts are that the hyped, third tier net stocks just haven't produced the sales (Bluefly, Delia's, Skymall). Sub-par performance exists in tier 2 as well. Finally, though they are hitting their numbers and beating them on cue, maturing revenue stream growth in Amazon, Yahoo and AOL is beginning to take place. These are not the signs of further, grow-to-the-sky price advances. Historically, they are signs of a shakeout. While we're not trying to sound alarmist, the market is telling us that rotation out of this sector is real and not just a short profit taking session. If you want to catch a falling knife, it may be safer to join the circus. Look for some, if not most Internet IPO's to be shelved for now.

More storm clouds on the horizon: remember stock prices generally drop even when companies hit or even beat their earnings estimates. With that in mind, keep your eyes on Microsoft, EMC, E*Trade, Qualcom and Texas Instruments. They are some of the biggies reporting tomorrow. If the street is unimpressed, the carnage may get worse. IBM and Lucent report later this week. Need more scaring? Dell closed at $35.44, slightly below its 200 DMA of $36; AOL closed at its 50 DMA. Wal Mart splits tomorrow and was nonetheless down over $5 today, below its 50 DMA. A move lower for any of these would be received poorly.

Whew! Now that that's over, let's look at the bright side. Sell-offs like today usually precipitate a technical or dead-cat bounce the next day. Dip buyers place their market orders to boost early trading prices, giving today's last minute buyers a small escape hatch. Even better and more significant to the long-term trend is that advancing smokestack industry stock prices have always presaged the beginning of a bull run.

While we don't possess a crystal ball, tomorrow should be a positive opening followed by more selling. The market is still quite unstable as this rotation runs its course. Sometimes it's better to sit aside and let the market give us the direction. Don't become an accidental long-term investor. Sell too soon.

Buzz Lynn
Research Analyst

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