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Market Wrap

Follow the bouncing market....

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        5-26-99          High      Low     Volume   Advances Decline
DOW    10702.16 +171.07 10721.33 10518.70  874,387k  1,461   1,483
Nasdaq  2427.18 + 46.28  2427.18  2339.12 1099,000k  1,833   2,088 
S&P-100  659.58 + 12.13   659.92   645.08   Totals   3,294   3,571
S&P-500 1304.76 + 20.36  1304.83  1278.53            48.0%   52.0%
$RUT     435.41 +  0.96   436.94   429.71
$TRAN   3453.88 +  0.55  3477.01  3426.21
VIX       28.28 -  1.30    31.75    27.90
Put/Call Ratio      .55  


Follow the bouncing market....

Should I? or shouldn't I? seemed to be the question for market bulls today. After a slow start, trading on the NYSE made an early run only to be stuck in a wide and choppy trading range most of midday. Finally the real afternoon rally began and buyers piled on in earnest.

Not so for the tech laden Nasdaq. After gapping up about 29 points first thing this morning, the index immediately headed South and did not stop until a bounce off of 2340 (2339 really). It was if the traffic light changed and suddenly everyone was in buy mode instead of sell.

But then you knew this would happen, right? It appears that our local prophet of profit (just an affectionate term we use for Jim around here) hit the nail on the head yesterday when he called for a technical bounce in the markets. After four days of selling, it was going to happen sooner of later [remember your market cycles, nothing moves in a straight line!].

Dip was too much.

While many had just expected a minor case of dead cat bounce, what we saw was broad based buying. All of the old favorites were back in style today. Banks, Internets, tech stocks... it was just like old times! You need to realize that the fundamentals for these companies have not changed since last week. It was merely a case of bargain hunters not being able to hold them- selves back.

Using the intraday low today, the Dow had fallen about 5.5% off its 52 week high of 11,130. Not only that, but we were quickly approaching its 50 dma at 10,474 and the low today at 10,518 was pretty close. If you look at the chart, you'll notice that the Dow has not had any significant or sustainable dips below its 50 dma since the market's recovery back in mid-October.

What I am not saying is that we will remain above it, merely that we had some support here and were due for a bounce. After a 298 point sell-off in the last two days you would think we were almost guaranteed a positive close today. Believe it or not, we almost didn't make it (more on that later).

Investor reaction in the Nasdaq was similar. The recent selling had been intense and the low today at 2340 brought us to a 12% "correction" from its recent 52 week high of 2677. Our hope is that the traders today don't suffer a bout of buyer's remorse tomorrow.

Internet Barometer.

Once again, the Internets are doing their best to take center stage. While many technicians may roll their eyes at the mention of Internets as any kind of barometer for the market, for many retail investors that is exactly what they have become.

We hope you took our caution yesterday and didn't rush right out to buy Internet stock puts after our new listings last night. Today's turnaround may be nothing more than a buying opportunity for those bearish plays.

Lead Internet analyst, Mary Meeker from Morgan Stanley, told money managers that the net stocks may still have a 20% correction in their near future. On the conference call this morning, Meeker stated that the sheer number of Internet IPOs was contributing to sector weakness. The number of net stock IPOs has certainly grown quickly. In 1997 there were only 14 IPOs; in 1998 there were 26, and in 1999 there have been 43 with over 60 on the horizon.

Not all Internet analysts agree with Mary's "supply" argument but quite a few are very cautious on the sector. Several analysts believe the selling is not over. If the IPO market is any indication, maybe Mary is right. Both the recent Barnesandnoble.com (BNBN) and the DLJdirect (DIR) IPOs failed to excite the trading public. The new stocks, while posting healthy gains, did not show the expected 100% or more gains on opening day.

Broad based bounce?

Banks helped lead the bounce today as MER surged over 10 points on renewed rumors that Chase might buy them out. However, more important to the sector and our markets, was the improve- ment in Argentina and Brazil. Rumors that Argentina would devalue its currency finally seemed to evaporate after a host of government denials. This helped their biggest trading partner, Brazil, who was recovering from their own local scandal about Brazilian President Cardoso and the recent privatization of TBR.

Tech stocks also enjoyed the rebound but the bounce was not felt by all. Nasdaq heavy weight, Intel, actually fell lower after breaking through support yesterday at $55. Other tech sectors remained mixed.

Tomorrow.

The market rally today has all the ear marks of a recovery on the surface. Both indexes closed near their highs. Volume for both exchanges were strong with 874 mln for the NYSE and over 1 bln for the Nasdaq. The advance appeared to be broad based with both the Russell 2000 and the S&P 500 closing positive (+.96 and +20.36 respectively). Yeah, the market breadth was not so great with declines beating advances by 3571 to 3294; but we are used to that.

So what is the bad news? Part of our rally may have been spurred by the durable goods report that came out today. Durable goods dropped about 2.3% last month. Quite a surprise when analysts had been expecting a 0.8% rise. What this means is orders for big ticket items fell last month. Economists see this as a good sign. Previously everyone had been worried that the economy was over heating and after two excessively strong quarters they were beginning to worry. A small slow down in the economy is just another reason for the Fed not to raise interest rates. Of course, this all sounds well and good, but my real concern was the rise of the Dow today. Our 170 point bounce was carried by about 5 stocks! IBM, in its pre-split excitement, added about 15 points. This equates to about 70 points in the Dow. AXP (+5.06), CHV (+3.06), JPM (+5.81), and JNJ (+2.19) finish up the rest of the rebound leaving us with a Dow finish of about +40 points. Not a real screamer in my book.

Our best bet is for the economic reports tomorrow to come in at expectation. Before the market opens, analysts will be reviewing the latest GDP numbers and the weekly jobless claims for any sign of the "I" word (inflation). For those of you who follow the reports, estimates are for a 4.3% growth rate in the real, or inflation-adjusted, GDP and a jobless claim of about 301,000.

My recipe for Thursday and Friday is take 1 large technical bounce founded on the backs of 5 stocks, throw in a couple of economic reports to even out the blend, spice up the market with war criminal indictment reports for Milosevic, and set the thing to cook by Friday ahead of a long vacation weekend and we are going to end up with a dish that is in dire need of a couple of large spoonfuls of caution.

Let us hope I'm a terrible cook.

Sell too soon.

Kimo
asst. editor

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