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Market Wrap

Will they or won't they? Only the Fed head knows for sure.

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         WE 6-11           WE 6-4          WE 5-28         WE 5-21 
DOW     10490.50 -309.34 10799.84 +240.10 10559.74 -269.54 - 84.04
Nasdaq   2447.80 - 30.54  2478.34 +  7.82  2470.52 - 49.62 -  7.72
S&P-100   654.87 - 17.55   672.42 + 13.76   658.66 - 13.10 -  1.81
S&P-500  1293.64 - 34.11  1327.75 + 25.91  1301.84 - 28.45 -  7.51
RUT       438.01 -  4.32   442.33 +  3.65   438.68 - 10.46 +  6.01
TRAN     3344.47 -118.26  3462.73 + 47.03  3415.70 -135.56 -115.08
VIX        27.01            23.45            26.38           25.36
Put/Call     .64              .56              .54             .64

Will they or won't they? Only the Fed head knows for sure.

Stocks followed bonds again today and the trip was not pleasant. The bond bears beat the bulls bloody today but not due to the PPI report as expected. The PPI was right on target with a +.2% increase and the core rate was steady at +.1%. So what was the problem? The bond bears, feeling dejected that the PPI failed support their inflation claims, quickly jumped over to the Retail Sales report to claim support for their position. The continued strength in retail sales across the board month after month is causing concern that with demand high, price inflation cannot be far behind.

This week was ugly. Very ugly. After coming within 200 points of the recent all time high of 11,130 on Tuesday, the market has dropped steadily. After rallying briefly this morning to almost 10,700 the Dow closed today at 10,490, -201 points off its high. The good news was the rebound off the lows of the day at previous support of 10,450. After bouncing off the 10,450 level twice in the morning, rumors of a large hedge fund liquidating stock positions in the afternoon caused a brief drop below support. The market quickly recovered as bargain hunters took advantage of the oversold conditions. From the 10,920 on Monday to 10,430 at the low today represented a -500 point drop in four days. We all know, nothing goes up or down in a straight line and the market is now poised for another relief rally. -500 in four days is a major move and many leaders have taken serious hits. Others have held their ground and appear to be forming a bottom at this level. The A/D line is very ugly here as sellers continue to outnumber buyers in numbers but not on heavy volume.

The Nasdaq for instance, attempted to rally several times this week in spite of the Dow drain. Today the index move much below previous support of 2450 and showed no interest in moving lower even though the Internets were getting hammered. I view this as a positive as well. When you consider EBAY dropped -17 after their site was down all day AND the beating CMGI took today, -11.75, after reporting a larger than expected loss on Thursday, the Nasdaq did ok. The CMGI loss is not important. CMGI is not a Quarterly earnings company. The very nature of their business is to buy companies, spend money building up their niche and then sell them for several times their initial investment. The Nasdaq leaders hardly budged with CSCO +.38, INTC -.94, MSFT -1.75, DELL -.31.

With bonds trading over 6% (6.14%) the impact on the market is always drastic. The magic +6% yield entices some stock holders back into bonds for a safe investment in turbulent times. The chances of a Fed rate hike at the June meeting are approaching 100% with odds of a second hike later now approaching 50%. The economy is now growing at a rate almost twice what the Fed considers healthy. Remember the PPI today was only one chapter in the rate story. The other chapters are the CPI next Wed, Greenspan's testimony to the Joint Economic Committee on Thr and the finale, the FOMC meeting on the 29-30th. While the remainder of the story has yet to be played the market is acting on the anticipated result. Many analysts are now saying a SECOND rate hike is already factored into the market. What this means to us is there should not be much downside from here.

Even with earnings warning season in full bloom the possibility of even stronger earnings from the non-warning S&P companies is providing some comfort for traders. Even though the market dropped -500 points from its Monday high it did so on the lightest volume week this year. The NYSE only managed 680 mln shares Friday and the Nasdaq only 734 mln shares. The market dropped due to a lack of buyers not a rush of sellers.

The Dow and the Drug sector both took a hit from the PFE news this week not market malaise. With PFE dropping -20 this week on the news that the Trovan drug was being pulled from marketing in Europe the sector has simply died in sympathy. MRK is a Dow stock and dropped -$5 this week. The biggest drag on the Dow today was HWP, -4.63, after it was announced yesterday that CEO Lewis Platt said he sold 80,000 shares in May and 100,000 shares in April. The sale was described as "routine" and he still owns 1.32mln shares but the market did not take the news well.

The Russell Shuffle is about to begin. The Russell-2000 Small Cap Index is getting ready to shed 26 non-small cap Internet stocks. To qualify for the Russell a stocks market cap must be under $1.4 bln. This puts many Internet stocks like CMGI, EGRP, XCIT, LCOS in the upper decks with valuations in the $10-$20 bln range. After the stocks are dropped the Russell will move from a 7.7% Internet weighting to only 1.3% of Internet stocks. The Russell is up +6% for the year including the current Internets but true small caps are up only +3% without them. The change will take place Jun-30th.

This week sure does not qualify as the "summer doldrums" and after this week and the next two, we will be begging for some doldrums to appear. While I do expect a relief rally on Mon/Tue, I do not expect it to go anywhere. We are most likely trapped in a trading range between 10,300 to 10,700 until after the Fed meeting on the 29-30th. Even if they do announce a rate increase the earnings announcements will begin the next week and will quickly over power any hike jitters. The Feds have already used their Fed speak to drop -700 points of the Dow in anticipation of a hike and it is now fairly priced. The period we have to worry about is the end of July after the majority of earnings have been announced. The closer we get to Y2K the more impact news and events will have on the market. Y2K is also the reason I expect the Feds to leave rates alone after June. They can't afford to crash an already worried market just before the anticipated Y2K dip. The wild card here is a persistent rumor that they could take advantage of the current market strength to announce a .50% hike and kill two meetings at once. Then they would not have to change the rate again later. While this is a remote possibility it is a possibility. There was a rumor in the markets today that the Fed was holding an emergency meeting today to discuss raising rates before Jun-30th. This was just a rumor but it was just another straw for this bull to carry. A relief rally on Mon/Tue would probably be tradable but only if you are prepared to sell quickly when the tide turns south again. While "traders" should be cautious over the next two weeks, I recommend that "holders" stay out of the market. You know which category you fall into and you should take action accordingly. The triple witch Friday would normally give an upward bias to the market but the economics on Wed/Thr are more likely to take precedence.

Definitely pick your entry points and sell too soon!

Jim Brown

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