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Market Wrap

The currency knights prepare for battle with the inflation dragon.

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        5-18-99          High     Low     Volume   Advances Decline
DOW    10836.95 - 16.52 10930.75 10740.80  741,082k  1,364   1,577
Nasdaq  2558.36 -  3.48  2576.43  2543.32  861,731k  1,987   1,977 
S&P-100  673.01 -  2.05   679.68   667.06   Totals   3,351   3,554
S&P-500 1333.32 -  6.17  1345.46  1323.37            48.5%   51.5%
$RUT     442.45 +  1.10   443.99   440.90
$TRAN   3650.16 -   .96  3652.23  3598.29
VIX       28.21 -   .03    31.89    27.80
Put/Call Ratio      .54

The currency knights prepare for battle with the inflation dragon.

The Fed heads shot the bull market in the foot today with the change in bias to a "tightening" stance. The Dow, up +60 at the announcement, quickly dropped -170 points to -108 before recovering to close almost even for the day at -16. The Feds fired the warning shot in the inflation war just to make sure everybody knew they were on watch and to reinforce their harsher rhetoric in the future.

The good news was the quick recovery. After bouncing off support in the 10,750 range three times in the last two weeks the bull does not look ready to go quietly to slaughter.

The Nasdaq dropped -30 points in about three minutes but quickly recovered to also close within 3 points of even.

Again, I was impressed. In the last three weeks Rubin resigned, the CPI was a blowout, the Fed changed their bias to "tighten" and the long bond yield has traded over 5.9% repeatedly. In spite of these market killing news events the market refused to die. Yes, we have had some selling but even today the volume was anemic. If fact the volume would have been really low except for a last hour buying binge that lifted the markets +65 points off the bottom.

Why did the markets behave so badly and then recover so quickly. First, nobody expected the Fed to change their bias on the basis of only one CPI report. Secondly the drop in housing starts this morning was a sign of a possible cooling of the robust economy. When the Fed raised their bias it simply caught the market off guard. The change had already been factored in but the market was in denial that it would really occur. The -170 points from the high was simply a knee jerk reaction to the announcement.

Most Fed watchers will agree that the change in bias was a non-event. News worthy, but the moment of fame has passed. Historians who cared to research it know that the Fed has met 26 times since March of 1996. Fifteen times they raised the bias to "tighten." Only once, in March of 1997 did they actually raise rates after the change.

What is all the noise about? It is just that, noise. Remember the "anatomy of a rate hike" from Sunday? The first step is "talk" the market down, the second is change the bias to warn the market. Then the Fed tries to "talk" the market down again. Third is the actual rate hike and it is normally anticlimactic. Now the noise is like a big clap of thunder that shocked the markets for a few minutes and now can only barely be heard in the distance. Now we will go through another period of reporters beating the dead horse into hamburger until the story loses its attraction.

The real news today was the stunning difference between the Hewlett Packard earnings announcement yesterday and Dell's announcement today. HWP, with 1 bln shares outstanding and an average daily volume of 3.5 mln, traded 14 mln shares today and gained over 7 points after beating estimates by $.08. Dell however, with 2.4 bln shares outstanding and a daily volume of 25 mln shares, only met expectations and missed the whisper number by a mile. Dell dropped -2.69 in after hours trading. The CFO said on the conference call that their revenue increase for next quarter would drop to single digits and then pick up again in the last qtr. With Dell posting record earnings and profits what part of the conference call do you think analysts remember? "Single digits"

This is a clear lesson in why not to hold over earnings. Dell, which is far more profitable and has a stronger business model got beaten badly for only meeting estimates. With 2.4 bln shares Dell needs to sell $343 mln in product in one qtr to add .01 cent in per share profit. To hit the whisper number of $.18 Dell would have to have sold $700 mln more than analysts have expected or +13% more. With Dell producing $5.5 bln in sales last qtr, adding another $700 mln would have been quite a feat. The problem is in the expectation. Because of its past history of rapid growth the standard and expectations for Dell have exceeded Dell's reach. HWP however has disappointed analysts so many times that nobody expected them to beat estimates so badly. This cold, hard analysis of the facts is what has had the fund managers moving out of Dell since last quarter. Here is a comparison you will not hear on the news and have not heard for several years. Dell, at the high of today, was still selling for less than it sold for on the same day in the February earnings period. Yes, Dell actually went down in the last 90 days. Heresy but true. And you can bet it will go down more tomorrow.

For the rest of the week we recommend a watchful stance. I think the market showed remarkable strength today but after sleeping on the bias change traders could come back to the market tomorrow with a little less bullish attitude. Interest sensitive stocks like financials are sure to be soft. Oil stocks are going to be hit again tomorrow after the API report showed much more oil in inventory than expected. Big drugs have been hit hard recently and don't show any life. Techs may drift on the weak Dell numbers after being up on the HWP numbers today. Internets took the interest rate news hard with YHOO -5. CMGI -8.94, EBAY -8.88, AMZN -5.00. I would have to see a real nice uptrend in ANY stock after today before I would start any new plays this week. The market looks strong but it could be the calm before the storm. Remember we are up +1200 points without any significant profit taking. With earnings now over we have no news to drive the market.

Advances are declining again at a rapid rate. Buyer beware!

Do you see the new downward tilt on this chart? Definitely, pick your entry points carefully and sell too soon until a new direction is established.

Jim Brown

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