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Market Wrap

"Fed must be especially alert to react promptly and forcefully..."

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        7-22-99          High     Low     Volume   Advances Decline
DOW    10969.22 - 33.56 11044.26 10880.25  775,748k  1,073   1,811
Nasdaq  2684.44 - 77.33  2749.05  2679.35 1036,000k  1,538   2,373 
S&P-100  700.91 -  9.36   710.27   696.51   Totals   2,611   4,184
S&P-500 1360.97 - 18.32  1379.29  1354.02            38.4%   61.6%
$RUT     451.49 -  3.14   454.63   448.43
$TRAN   3404.50 - 34.09  3455.14  3404.50
VIX       23.66 +  2.05    25.52    22.45
Put/Call Ratio      .68   

"Fed must be especially alert to react promptly and forcefully..."

Greenspan greenspamed the markets again today with hawkish comments about suspected inflation. Greenspan warned that the strong demand and shrinking pool of workers would eventually produce traces of inflation and the Fed would look under every rock for these traces. Should these signs appear, or even signs of signs, the Fed would not hesitate to slap us with another rate increase to prevent an inflationary slide. Gee whiz, thanks Al.

Within minutes the markets reacted strongly and dropped to triple digit lows. The bond market quickly priced in another +.25 increase in August. Instead of a kinder, gentler Greenspan, we saw the balanced, hawkish Fed chief appear. Yes he was balanced if you can call "The business model is not dead, inflation will eventually reappear", balanced. He said the economy was currently perfectly balanced, too perfectly balanced and teetering on the brink of a rapid movement in either direction. Kind of like our current market! Greenspan was more hawkish than most expected and the markets reacted negatively.

However, by mid-afternoon the Dow drop had been completely erased, much to the amazement of many analysts. We all know from repeated experiences that if you want logic you should look some place besides Wall Street. The buy the rumor, sell the news axiom is still alive and well. The sell off early in the week was claimed to be on worry about what Greenspan might say. He said it, it was bad but it was already priced into the market. The Nasdaq closed near the low of the day on interest rate worries and Internet earnings.

Now the market is free to focus on the remainder of second quarter earnings. OOPS! After the Nasdaq focused on yesterdays earnings I don't think the outlook here is good. Amazon posted earnings showing a bigger loss than analysts had hoped for and some fear the Internet model for Amazon is breaking down. Amazon is pouring money into conventional brick and mortar warehouses and preparing to inventory more and more items. The first Amazon model was to order only when sold and keep a minimum on hand. This just in time concept kept space and inventory dollars to a minimum. Now they are starting to look more like a Barnes and Noble, Best Buy and Toys-R-Us combination. Even though they tried to pacify stockholders with a 2:1 split the stock got hammered to the tune of -$18 or a -14% loss.

If the Amazon earnings were not bad enough for the market to digest, AOL turned in spectacular earnings but a weak growth. Analysts had expected better numbers for new subscribers and the news of a new free subscription model in Europe sent shivers through investors. AOL closed down -4.56 on heavy volume.

Is the Internet suffering from ticker shock? Are the valuations for companies that continue to lose money at accelerated rates being reviewed? You bet! Look at the recent slide of almost any Internet stock and this is the middle of the earnings cycle. Things could be changing in the Internet investor psychology.

So if the market has failed to rally on earnings with more than 50% of the S&P already reported, then why should it rally on the stragglers that start thinning out next week? One analyst said the market would now start focusing on the third quarter earnings. That is really scary. The third quarter is not normally a robust quarter and suffers from the result of the summer doldrums. If the third quarter is the focus, and the reporting is in October, only 75 days from Y2K, then we are going to need some rose colored glasses to see anything exciting.

We are watching the futures tonight and at +1.30 and the entire office is amazed. The rationality of why they would be positive going into a summer Friday, an August rate increase and slowing earnings is beyond us. Of course the best reason is probably the most obvious. It is a technical bounce. The futures have been in a vertical drop since their high of 1430 on July 19th. A -62 point drop with almost no relief. Since nothing goes up or down in a straight line you can build a case for s short term technical rally. I stress short term and depending on Asia and Europe tonight it might not materialize at all. I would be cautious of any strong move upward Friday or Monday. If volume is high and the previous leaders fail to recover major ground then the road signs are obvious. With the recovery under way in Asia and the U.S. market very close to recent highs many funds are taking money out of the U.S. market and looking for cheaper stocks overseas. The feeling that the U.S. market may be near a top for the year has many fund managers locking in profits and looking for safe havens.

We will not know for at least a week if the recent downdraft is just a pothole on the rally road or the beginnings of a washout. Either way there will be profits to be made. We just need to be more conservative in guarding profits and limiting losses. When you start thinking about buying the dips, pause for a moment and remember last August.

Good Luck, Sell too soon!

Jim Brown
Editor

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