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Market Wrap

Summer Doldrums or Summer Rally?

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        6-07-99          High     Low     Volume   Advances Decline
DOW    10909.38 +109.54 10917.30 10782.74  659,169k  1,718   1,233
Nasdaq  2524.21 + 45.87  2528.05  2478.34  878,990k  2,174   1,762
S&P-100  676.15 +  3.73   677.04   671.44   Totals   3,892   2,995
S&P-500 1306.65 - 23.64  1332.96  1303.46            56.5%   43.5%
$RUT     446.65 +  4.32   446.65   442.99
$TRAN   3481.96 + 19.23  3481.96  3410.45
VIX       23.45 -  1.56    26.69    23.41
Put/Call Ratio      .56

Summer Doldrums or Summer Rally?

Rising markets and low trading volume, though tough to utter those words in the same breath, are not mutually exclusive. Nothing says we can't see gains even on weak volume. Most analysts would say there just aren't enough buyers out there to support the gains. But that's only part of the story. The other half is that there are no sellers either. Investors appear to be getting comfortable with their investments at these prices, as that "buy and hold" mentality makes itself known. There is clearly no interest in unloading for a profit by traders, investors, and funds alike, even at these levels. The fact is volume has remained somewhere between lethargic and anemic for the last 3 weeks. Not only that, our collective fear of inflation permeates the air with almost "certain" anticipation that the Fed will raise interest rates by the end of the month, while earnings warnings began popping up, most recently from airlines. . .plenty of fear, right? You bet, and a healthy dose of fear is just what it takes to keep runaway bullish enthusiasm in check. It is often said that stocks reach new highs as they scale a "wall of worry".

As traders relying on market sentiment, we see a new trend forming. Let's pause from our climb and look away from the wall for a second. If we cut through the "worry-focused" noise and market chatter, in the calm we can see the market has traded up almost 500 points from its recent lows near 10,400, despite low volume. Don't look now, but the DOW is back within 200 points of its all-time high. We also want to point out that on the overbought/oversold meter, more commonly referred to as stochastic, our "oversold" condition that we've experienced for the last 3 weeks just popped out of negative territory today! Other technical indicators like MACD and RSI, though not positive yet have turned up following 4 straight days of noteworthy gains. In short it appears to us that a rate hike is already priced into the market and nobody cares!

With that backdrop, let's take a look at today's action. We've already noted that volume was low, but that didn't stop the conviction investor's felt with merger stocks. First, Allied Signal (ALD) announced an agreement to buy Honeywell (HON) for $14 bln. in stock. Since the deal will be accretive to earnings, Wall Street cheered by cranking up the volume 400% on ALD and 1000% on HON, moving the share prices up by $4.44 and $7.00, respectively. The new company will be called Honeywell, but will be headquartered in Allied's facilities. IBM too got into the action, as they announced an $8 bln. technology swap and equipment purchasing agreement with Acer Computers. Acer already builds IBM's Aptiva line of PCs. IBM rose $4.50 to $120.50 on 15% greater than average volume. In the finance end, Zions Bank will be teaming up with First Security. Zions lost $6.79, while FSCO gained over $5.

The mergers on this Monday set the tone for the broader market indexes too. Right from the open the DOW's gains came in orderly fashion - no pushing and shoving, just a steady ascent. While it was looking like we might end the day with the lowest volume this year, the DOW eked out 664 mln. shares compared to 653 mln. shares at its slowest point in 1999. The DOW rose 109 points to close at 10,909, with advancers trumping decliners 17 to 12.

On the other hand, the NASDAQ stair-stepped its way up almost 46 points on lightly moderate volume (879 mln. shares) to close at 2424. Advancers had it over decliners by a 22 to 18 margin. Following IBM's lead, box makers and telecom equipment related companies like Dell (which finally closed back over $35), Gateway, Hewlett Packard, RF Micro Devices, Tellabs, Ciena and Uniphase all made nice gains today, especially Ciena and Uniphase. On 3 times normal volume, Ciena closed up $4 at $33, a new recent high since their merger with Tellabs fell apart last year. Similarly, Uniphase (you know, the Intel of the new millenium?) tacked on $14 to close at $154 on over 2 times normal volume. Keep your eyes on this bandwidth enabling sector folks. It's going to be a big winner in the next 3 to 5 years. We've played them before and we will again.

Want the other list of winners today? Look no further than the Internet group, which is showing signs of a recovery. On-line brokers and financial issues like EGRP, TBFC, NTBK, AMTD, and SCH all left scorched earth behind them on their way up the charts today. AMZN was up almost $9 to $117. Despite gaining as much as $11 at the high point of the day, YHOO closed up $4.44, still a good showing. EBAY rose almost $15 to $187. One of our favorites, CMGI, which represents a broad cross section of different Internet businesses snapped up $13 on twice its normal volume to close over $100 once again, at $107. Therein lies the key for this sector - volume. In short, Internet stocks have a typically low number of shares in float, which puts tremendous pressure on the price every time demand stresses the supply.

Internet aberration? Or is it for real? Only time (and maybe not much at that) will tell. But the Internet damage appears to be done just as it usually is midway between earnings reports. Historically, we begin to get a rise from this point prior to the next earnings period. Second, volume tells us that there appears to be new interest in the sector, not just traders jumping back in. Third, there may be small part related to the Supercomm '99 conference in Atlanta, where the latest and greatest in the bandwidth era is on display to learn about. Fourth, and maybe more importantly, the Oregon court ruling against AT&T made the "cable guys" look temporarily bad (most were down substantially today) while the ISP's and content providers got a break from the news. (By the way, we think Oregon probably overstepped its legal bounds and that AT&T will ultimately prevail.) You won't make money putting a lot of faith in these last two items, but they may have had some short term marginal effect today.

OK, what's in store for later? First the good. We've seen a reversal of the overall market direction. Commodities, including gold and oil are getting cheaper again. The bond index showed firmness today, as the Utility Index squeaked through with another all-time high too, though today's $UTIL index gain reflects a buyout deal of Columbia gas, which gave the index most of its "oomph". Anyway, if investors are "almost certain" the Fed will raise rates, they are behaving as though they don't care or that it's already priced in to the market. Either way, that's positive sentiment to us. There just aren't that many sellers out there at these price levels. The strength in technology and Internets looks good to us too.

The negatives are low volume, indicating a lack of massive conviction wherein investors, including funds, commit their $$$. Furthermore, there may be some renewed inflation fears prior to the release of the PPI on Friday, which could put us in a tailspin for a day or two while we wait for the numbers. It could even mean derailment of the current rally if the numbers are really ugly. We doubt that's the case. Finally, though this doesn't negate the trend, we have had 4 solid days of gains and may get a profit taking day or two along the way.

In short, the trend is your friend and the trend is up. Wait for the buying opportunity and remember to use your stops. We stress again, trade only when it is profitable to do so. Finally, sell too soon!

Buzz Lynn
Research Analyst

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