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Market Wrap

No Screens of Green Today.

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        8-04-99          High     Low     Volume   Advances Decline
DOW    10674.77 -  2.54 10821.91 10670.03   789,360k  1,006   1,961
Nasdaq  2539.96 - 47.99  2604.11  2538.88   967,775k  1,197   2,746
S&P-100  674.26 -  7.28   688.01   673.91    Totals   2,203   4,707
S&P-500 1328.05 -  0.67  1344.73  1325.18             31.9%   68.1%
$RUT     429.69 -  6.58   436.29   428.53
$TRAN   3280.07 - 45.73  3328.89  3277.82
VIX       28.42 +  1.75    28.42    25.58
Put/Call Ratio      .69

No Screens of Green Today.

On the surface, what started as a positive day for the DOW, had turned negative by the close. To make matters worse, NASDAQ's fall from its July high of 2874 to its close at 2540 today officially qualified as a "correction". While these 2 market indicators appeared to diverge in today's action, the trend remains the same - down. We wish we could say it's over, but with the exception of a morning relief rally or occasional day to catch its breath, the market looks poised to continue its descent.

Let's get right to today's figures. The DOW leaped 75 points to 10,750 in the first 40 minutes of trade, then put on an amazing sprint to 10,830 in the following hour. From there, the daily tug of war between bulls and bears was recorded as a jagged stair-step down, with the close at 10,674, off just 2.54 points. In a different environment, we might think "no big deal". However, 156 points south of the intra-day high is a big negative in our book. 1006 advancers were pounded by 1961 decliners on volume of 789 mln. shares. While we saw just 37 new highs, we were handed 187 new lows. That's an ugly development. Were it not for Dow Chemical's merger with Union Carbide, which launched UK up $10.56 on the news, the DOW index would have closed down 62 points (plus or minus) had UK's price remained unchanged. Again, down 156 points from intra-day high, decliners over advancers 2:1 and 187 new lows on moderate volume. This could get worse before it gets better depending on the non-farm employment figures Friday, especially if money managers view recent developments as indicative of further correction. There is no reason to believe the negative sentiment is over. Keep your eye on 10,650 support level tomorrow.

NASDAQ was even worse. Doing its best submarine imitation, the index went underwater right from the start. After attempting to surface in the second hour of trading, NASDAQ took on more water. While bulls made an effort on several occasions throughout the day to drive prices up, their attempts became weaker and bears' efforts became stronger all the way to the finish. The intra-day chart reflects the lower highs and lower lows. In the end, the NASDAQ gave up 47 points to close at 2539. Remember that support at 2550? Like a hot knife through butter, the index sliced that level. If it can't pop up from here, the chances of NASDAQ 2400 look pretty good, though we don't expect it to move there in a straight line. Decliners trounced advancers 2746 to 1197. 139 new lows outpaced just 40 new highs. Volume, decidedly negative, picked up today with over 967 mln. shares traded. Unfortunately, the big guys, MSFT, CSCO, WCOM, DELL, and (gasp!) INTC haven't really thrown in the towel yet. Perhaps the market may spare the carnage here, but the big selling isn't likely over, based on today's action. NASDAQ is now presumed to have experienced the definition of a "correction" - down 11.6% from its July high of 2874.

That's not all. We want to bring up the subject of institutional volume. EXDS, QCOM, NXLK saw huge volume yesterday, indicating institutional selling. Usually, when institutions sell in volume, this is a cue to exit, as it generally means more institutions will follow in their footsteps; not just in these stocks, but in big cap technology issues, until individual investors catch on and sell their positions too (a.k.a capitulation). With nobody (or very few) left to sell, selling pressure alleviates. Institutions then note the stability and nibble to test the water, then buy in big volume if that activity doesn't flush out more sellers. Whalla. . .a strong reversal with volume signifying that it's time to get back in for the next major assault on the 52 week high. That's the condensed version of a market correction. We're not there yet. This correction has in fact been more insidious. A lobster doesn't know that he's about to become dinner if you start him out in a cold pot, as opposed to the forced entry of boiling water. Perhaps that's why this retreat has been so orderly. We don't recognize that we might be the metaphoric lobsters.

Here are some sectors already in the lobster pot. Each of the following saw an increase in volume (parenthesis indicate percentage over average daily volume) accompanied by sometimes substantial price decreases:

Internets - AOL(+10%), AMZN(+13%), CMGI(+33%), YHOO(13%), LCOS(+45%), INKT(+31%), EBAY(+109%!), and MSPG(+60%).

Drug stocks - MRK, PFE, LLY. . . all down with volume increases of 68%, 24%, and 81% over average, respectively, today.

Other sectors with notable volume increases catalyzing red ink:

Telecom - NT, CIEN, JDSU, NOK, VOD, QWST, GBLX, MFNX.

Retail - HD, LOW, SPLS, COST, GPS (CC bucked the trend and rose with volume).

Brick and mortar drug stores - fear of online prescription fulfillment.

Financial - interest rate fears (this one's pretty obvious).

Online brokers - SCH, AMTD, DLJ, EGRP (trading volume and sequential revenues are down).

Technology - just 1. INTC volume is falling from its high levels this week but still remains far above average. Though miniscule, INTC lost $0.06 today on 23% greater than average volume. We're not trying to be negative here, but INTC has been charging hard and is due for a breather. Keep your eyeballs on this one, as it can dictate the tone of the technology market.

Get the picture? Price decreases on strong volume result from money managers quietly heading for the exits. Too bad they don't announce this stuff, but volume is a big clue. We individual investors don't make as big of a dent, but the damage can be just as great once the average investor figures out that professionals are unloading. Again, more room to fall. It's no wonder analysts are elbowing each other to reiterate "buy" and "strong buy" ratings, while recasting price targets upward. By the way, has anyone seen a downgrade yet on a major Internet stock? When you do, we're probably nearing a bottom.

Honestly folks, there is a lot to talk about tonight, from Merrill Lynch's Henry Blodget comments on the Internet (just a correction given lofty valuations; keep top tier issues but limit them to a small percentage of your portfolio; look for consolidation in the second and lower tiers) to St. Louis Fed President, Poole's comment that one 25 basis point hike is all that's needed (he has no vote). John Elway goes MVP.com. Goldman Sachs will start an Internet fund(!) called Toll Keepers Fund intended to capitalize on companies that gather a piece of the transaction from Net access, infrastructure, content and services - anything with recurring revenues, e-tailers/e-commerce excluded. Just realize that other news happened, although we consider it for honorable mention only.

So what about tomorrow? In essence, we have tug of war. Interest rate fears could keep a lid on things through Friday morning or even August 24, the next FOMC meeting. Plus, the markets are technically weak. Countering this though, we've had 5 declining days in a row, and it wouldn't be unusual to get a 1- day reprieve from the carnage. With every declining day, the probability of a relief becomes more real. Nonetheless, the selling is not likely to end soon. We know it's tough, but sitting on your hands, preserving capital and trading only when it is profitable to do so are the most prudent things to do. Yes, we know some of you just can't sit still that long. Sometimes, neither can we. If you must play, you may want to consider some of the put and spread plays. The action may accelerate tomorrow in front of the job numbers. Selling may dominate the morning, only to recover mid-day if its overdone, followed by some last minute chickening out. Pockets of strength are still being met with selling activity. The point is, tread with extreme caution and sell too soon.

Buzz Lynn
Research Analyst

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