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Market Wrap

Of Crossroads and Red Flags

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         7-19-99          High     Low     Volume   Advances Decline
DOW    11187.68 - 22.16 11252.27 11159.82  645,266k  1,178   1,728
Nasdaq  2830.38 - 34.19  2874.92  2829.89  950,248k  1,781   2,222
S&P-100  728.04 -  5.75   735.86   726.57   Totals   2,959   3,950
S&P-500 1407.66 - 11.13  1420.14  1404.60            42.8%   57.2%
$RUT     461.36 -  3.89   465.69   460.79
$TRAN   3463.84 + 61.97  3463.84  3399.93
VIX       20.38 -  0.20    21.27    20.00
Put/Call Ratio      .49

Of Crossroads and Red Flags

At a time of many earnings surprises, probably the biggest surprise is that the market isn't rising on the news, while market leaders report terrific results. We are frankly hard- pressed to name top-tier or mid-tier companies that have had disappointing earnings so far, except perhaps Intel (and then it didn't matter, thanks to the forward outlook). Look at some of today's earnings announcers, starting with the financial group: Citigroup - 7 cents ahead of estimates; Bank of America - a penny ahead; Wells Fargo - a penny ahead; J.P. Morgan - 28 cents ahead (!!!). Yet, almost without exception, the reporting company falls in price, taking other members of the sector with it.

Today, airlines seemed to be the only exception. Continental reported earnings 7 cents ahead of estimates. It was up $2.88 for the day. Delta reported 11 cents ahead and rose $3.13. Alaska Air was up $1.38 after it reported earnings 24 cents ahead of estimates. There were others too. You can see the tone here, which helped the transportation index up by 62 points to close at its high of the day, 3463.84. While certainly not a record, DOW theorists will appreciate that the recent slide was halted and a higher low established in today's trading, which in their view, bodes well for the rest of the market. But don't hang your hat on that alone.

Here's a run-down on some of the other companies reporting today.

Priceline.com (PCLN) - 1 cent narrower than expected. Following a +$10 spike at the open, PCLN traded back down to finish with a gain of just $0.25 at $97.66.

E*Trade (EGRP) - 3 cents narrower loss than expected. Revenues were up 128% over last year. EGRP closed down $2.81 at $34.69. We should also add that this whole sector was hit pretty hard today. In the wake of a Barron's article suggesting that on-line brokerage revenues may be slowing, National Discount Brokers, Schwab, Ameritrade and DLJ all suffered losses in sympathy.

Lexmark (LXK) - 6 cents ahead. Down $1.06 to $64.81.

Tellabs (TLAB) - 2 cents ahead. Down $3.13 to $69.75, but up fractionally after hours.

Doubleclick (DCLK) - in line (Uh oh. . .an Internet that didn't beat the numbers). Revenues were up 155% to $44 mln. DCLK traded down $5.31 to $94.81.

Qualcomm (QCOM) - 12 cents ahead (!!!). QCOM couldn't hold a $6 spike in the 2 hrs. before the close and sold off ahead of earnings. It closed up just $0.44 on the day at $158.69. While earnings looked great, looking forward they warned of component shortages, which could hurt future revenue. QCOM got a further $5 haircut in after hours trading, and they did not announce a split. Another case for never holding over earnings.

IBM - 3 cents ahead. Reported revenue of $21.9 bln. for the quarter, up 16%. E-commerce divisions continue to pick up speed, with chip revenues tapering off. Down $1.63 at the close to $134.63.

Microsoft (MSFT) - the one you've been waiting for, reported $0.40, 4 cents ahead of estimates. MSFT reported strong initial sales of Windows 2000 and said they had no immediate plans to issue a tracking stock. They cautioned however, the FY 2000 revenues would slow, thanks to Y2K and a slowdown in PC sales, and predicted they would not see further margin expansion. Forward caution is typical. In a related issue, MSFT will sell MSN Sidewalk.com to Ticketmaster for $240 mln., giving MSFT a 9% interest in Ticketmaster. The stock closed down $1.06 to $98.38, but traded back up fractionally after hours.

Tomorrow, look for earnings to be released from Lucent, Texas Instruments, @home, DLJ, General Motors, R F Micro Devices and Tyco International (not the toy company) among others.

Let's make quick work of a few mergers. It wouldn't be Monday without them. First Global Crossing will acquire Frontier for $11 bln. In related fashion, Qwest Communications will merge with U.S. West in a $35 bln. transaction. What's interesting is that USW still owns 9% of GBLX, which they bought for cash, giving QWST a large interest in GBLX. Other rumblings include Daimler/Chrysler rumored to be wooing Italy's Fiat - "no comment" from either side. Other than that, merger news is light.

Focusing back on the market, the DOW had its third lowest day of trading volume so far this year. You can read into that what you want, but the clear implication that we see is that despite a great earnings season, money mangers and other big volume buyers are on the sidelines waiting for something to give them a signal. And it isn't necessarily Greenspan testimony on Thursday, though that's what the news reports cite. There just isn't any upward pricing pressure. The fact is since the first trading day in July, the market has remained confined in a 150 point trading range. Every day it remains there adds to the equivalent of the market's "blood pressure". One day soon, perhaps when earnings season winds down and the last of the big caps reports, leaving only smaller companies on the docket, there could be an explosion. We don't know which way yet, and neither does anybody else. See the flat trend for yourself.

The NASDAQ, for its part, looks about the same. It has traded in a 100 point trading range, give or take a few points.

As Jim has noted in recent Market Wraps, this introduces us to the possibility of 2 scenarios. First, the market could take a giant nosedive after earnings season is over. The trading pattern of individual stocks seems to be run-up to earnings, report good numbers, sell-off. In short the good news is already in the price in anticipation of good earnings. Those making a run-up are offsetting those falling back, thus the flat charts. When its all over, there will be nothing else to look forward to until the next earnings season, sparking perhaps a hasty exit whereby the market falls.

The second scenario may be that with great earnings, and with prices already reflecting that, the market is forming a base of comfort at this level. Two and a half weeks with numerous tests at the lower side of the scale are building substantial support here. Frankly, as long as there are no major surprises politically or on the inflation front (we think it's hard to make a case for the latter), strong earnings could lend further support at these levels, which would leave us poised for a gradual ascent to 11,500 or better. We're not saying that's going to happen, but it is plausible under current circumstances. We'll need to see more trading volume to pull it off and today was no confidence builder with only 645 mln. shares traded on the NYSE.

With the VIX at its lowest point all year, technicians and contrarians are nervous too, perhaps tilting the consensus expectation to the downside. It's hard to find anyone willing to buck history and proclaim it on the Street that the VIX will go lower yet.

With regard to today's action, there was twice as much down volume as up volume and that was clearly reflected on the A/D line, wherein decliners beat advancers about 3:2. As mentioned volume was just 645 mln. shares, indicating no conviction and lots of caution. For the day, the DOW lost 22 points to close at 11,187.

One big NYSE technology company, HWP, bucked the trend as it became known that Carly Fiorina, formerly of Lucent Technology would become the new CEO at Hewlett Packard. Cheers went up as HWP tacked on $2.25 to close at $116.25

The NASDAQ had a bit more of an unusual day. The 5 generals (all technology stocks, which were generally weak today), MSFT, INTC, CSCO, DELL and WCOM all traded within roughly 1 point of Friday's close. So why the 34 point drop if the big guys barely moved? Answer: Internet stocks. AMZN was down $5.94; CMGI -$7.81; LCOS -$4.44; INKT -$8.06; EBAY - $5.28; MSPG -$3.25. Supply of Internet issues is starting to catch up with demand. Thus, there just isn't the upward pricing pressure that once existed when the sector was in its infancy. Then, investors couldn't get enough. Now there is plenty. There were other issues sporting plenty of red ink too. Decliners beat out advancers by an 11:9 margin on 950 mln. shares traded. In the end, NASDAQ closed down 34 at 2830. Nothing particularly wrong with today. After 3 days of new records, NASDAQ needed a breather.

Caution, overextended, tired, waiting for direction - these are the words most frequently mentioned on the Street. For the rest of the week, we're on pins and needles until the market tells us where to go (NO! Not there!!). It may come from more good earnings, sluggish housing starts, favorable words from Greenspan, or none of the above. Trying to make money while the market is range-bound is tough to do. We suggest sticking to individual stocks on earnings runs and subsequent sell-offs, as they are giving us the most predictable trend right now. This is not the time to roll the dice or assume bigger risks. Not to allude to morbid incidents on the front pages, but like all competent pilots, when the weather gets rough, we have to trust our instruments and reject emotional panic, even if it feels contrary to what the seat of pants is telling us. If a trade moves against you, get out. If you are in panic mode or otherwise in a high emotional state, it's easy to reject what the instruments are telling you and a recovery won't be possible. Plan your trades. Trade your plan, and sell too soon. Perhaps tomorrow will give us a better sense of what's on the horizon.

Buzz Lynn
Research Analyst

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