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Market Wrap

Stealth rally? Or Stealth sell-off?

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         7-7-99          High     Low     Volume   Advances Decline
DOW    11187.36 + 52.24 11187.32 11080.35   783,525k  1,277   1,685
Nasdaq  2743.08 +  6.26  2748.82  2724.37 1,099,206k  1,848   2,134
S&P-100  719.75 +  5.47   719.75   713.30    Totals   3,125   3,819
S&P-500 1395.86 +  7.74  1395.86  1384.99             45.0%   55.0%
$RUT     452.69 -  3.86   456.70   451.82
$TRAN   3474.90 -  3.05  3477.95  3443.37
VIX       20.21 -  1.12    21.75    20.12
Put/Call Ratio      .53

Stealth rally? Or Stealth sell-off?

You make the call. Today's action left many traders scratching their heads as they sought rhyme and reason for the new records set on the DOW, S&P and the NASDAQ. Caution was the watchword as the markets got off to a rocky, downward start. A few noteworthy items set the tone before the markets opened.

First, New Era of Networks (NEON) issued an earnings warning late last night that was to propel NEON to the top of investors' 1999 tax loss list. In its warning, NEON stated that earnings would come in at -$0.12 to -$0.22, well below the streets' profit expectation of $0.12. Not only that, revenues will be sequentially down. . .a big no-no for a technology/Net stock. That giant sucking sound you heard was NEON spiraling down the bathtub drain, as its price went from $44 to $20 (-$24) in after hours trading. We would have expected at least a dead cat (Woops! Fuzzy, lifeless house pet for the PC types) bounce following the announcement. It was not to be, as NEON finished down $24.63 at $19.44. (Just a sidenote: today's "lock-up-the- barn-after-the-animals-have-escaped" award goes to CS First Boston who, AFTER the warning, announced they had down-graded NEON from "strong buy" to "buy" and lowered the price target from $70 to $26. Wow. . .daring call!)

Next up was WMI, or Waste Management, the nations largest trash hauler, who issued a warning prior to today's open that they too would not meet analyst expectations for earnings or revenues for the rest of the year. Bad puns about "getting dumped" for $19.58 to close at $33.94 were rampant in today's media commentary.

Third, Alcoa (AA), the first DOW stock to report earnings, actually beat expectations by $0.02 when they reported prior to this morning's open. But that didn't stop investors from sending it back to the mill (another bad pun) for a finish down $2.38 at $61.38.

Of course the other long-awaited event of the day that was foremost in investors' minds was YHOO earnings. YHOO open down $6 this morning and traded in a $9-wide range for most of the day, which kept a lid on other Internet issues. As we've discussed in our write-ups and previous Market Wrap, we never recommend holding through an earnings report. Sometimes, it can even be dangerous to hold sympathy stocks in the same sector. How's that, you ask? Take a look at these: AMZN (-$5), INKT (- $3.25), BCST (to be acquired by YHOO, -$6.06), EBAY (-$2.50), DCLK (-$3.25). If YHOO doesn't do well, then investors universally assume neither will these, nor others. This is the cockroach theory, wherein if you see one, there are likely to be a whole bunch (thanks, Roger). Anyway, erring on the side of caution, investors held enthusiasm in check for Internet issues.

Now the moment we've all been waiting for. . .how did Yahoo! do? In short, they beat the street by $0.03, reporting $0.11 vs. estimates of $0.08. Recall from last night's Wrap that $0.11 was the upper range of the whisper number, but not a blowout. Sentiment-wise, it means that YHOO only met expectations, but didn't exceed them, nor did they announce a split. However, revenue exceeded $115 mln. for the quarter, well ahead of the street's expectation of only $105 mln. Not only that, daily page views rose to 310 mln., a 32% increase, and registered users rose 38% to 65 mln. That's excellent. The conference call was overall, quite positive. That said, if history does indeed repeat itself, YHOO will still fall in the coming days, despite the good news. For the risk junkies (we mean BIG RISK, even for experienced traders), selling calls and shorting price spikes tomorrow, not to mention buying puts at those same inflections, could be very profitable. But we implore you, do this only with your eyes wide open, and with capital you can afford to lose. Just so you know, YHOO traded up as much as $5 on Instinet in after hours trading. As of this writing, it was still up $3 from the close.

Wait, there's more. Broadcast.com (BCST), an Internet broadcaster of streaming media, which will be acquired by YHOO sometime during Q3, also reported strong earnings after the close. While the street had estimates for a loss of $0.09, BCST reported a loss of only $0.05. Even on the good news, expect BCST to trade in sympathy and close to parity with YHOO.

YHOO helped the market dodge a bullet. A good thing. For if they had met estimates or even fell short, market bulls would be sub-zero in a meat locker tomorrow morning. Yes, it's probably safe to get back in the Internet waters. Thanks to YHOO for getting the Internet earnings season off to a good start.

Now, back to the market and outcome of today's investor caution.

The DOW industrials started the morning down, which should be no surprise given the earlier mentioned earnings news. In the first half-hour, the DOW dipped 35 points to 11,100 only to come back about 45 points by 11:00 a.m. Then, another dip. . .this time to 11,080, followed by another gain to about 11,140, then back for a third time to the 11,100 level. By then, bulls had had enough yo-yo action to make Duncan proud, and ran through a barbed-wire fence to close at another new high of 11,187. Volume of 791 mln. shares was decent for a Summer day. However, advancers lost out by a 3:4 margin compared to decliners, even as the market set a new record. Had the DOW not lost a measly 4 points yesterday, today would have been the eighth straight up day. For today's positive number, we need only look to GE and IBM, both of which were up by $4 and almost $2, respectively. Of course, technicians are happy that GE confirmed the move, for it's the largest cap, most diversified issue available today, and is presumed to fairly represent the health of the overall market.

The NASDAQ for its part followed the same yo-yo pattern, using 2725-2730 as support. Like the DOW, the NASDAQ really sprang to life in the last hour and a half, but contrarily lost 5 points in the last 10 minutes. While MSFT and DELL were up $2.75 and $1.31, respectively, INTC and CSCO traded virtually flat, while WCOM actually lost $1.19 despite an addition to Goldman Sachs "recommended list".

QCOM (one of our current picks) lost $2.81 today, despite the early morning news on CNBC (missed by most other pundits) that Lehman Bros. is pounding the table on QCOM, citing 600 K (yes, thousand!) new subscribers in Korea in May (yes, 1 month!), a large contract from Sprint that is likely to be announced in the next 2 weeks, and a new price target of $165! They didn't stop there. They revised earnings up from $0.68 to $0.70. If CNBC is accurate, this looks like a buying opportunity to us.

Anyway, NASDAQ set a new record too, rising just 6 points to 2743. However, volume was back in full swing as over 1 bln. shares changed hands. That little profit taking has occurred speaks well for the bullish tone of the market. Lest your exuberance become irrational, note that decliners beat advancers here too by a 7:6 margin

Frankly, we're surprised at the strength of the market. Three bounces off 11,000 for the DOW and 2725 for the NASDAQ are about the only sell-offs we've seen. If we were due for a correction, we likely would have had it today. We'd like to say that the blue-sky territory, which this market inhabits, is calm. But again, (almost) 8 days in row without significant profit taking is almost unheard of. While our tendency is lean toward an up day tomorrow on sentiment, as trend traders, we know this bullish spurt, which began before Greenspan's announcement last week, must end some day soon to rake off some of the profit - about 700 points since June 28. Investors keep waiting for the big 3-digit sell-off, but are afraid they'll miss another run while they wait. Thus, antsy-ness turns to bullish action at every support level. After all, we're at the beginning of what promises to be a fabulous earnings season. Any sell-off has been met with buying activity, backed with volume, which prompts us to ask too, is this a stealth sell-off or stealth rally? There's a strong case for both.

Don't be greedy. There's plenty of earnings season run-ups to play. Plan your entry. Sell too soon over and over again.

Buzz Lynn
Research Analyst

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