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Market Wrap

"Where's the beef?"

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        9-20-99          High     Low     Volume   Advances Decline
DOW    10823.90 + 20.27 10845.74 10780.84   568,000k  1,157   1,748
Nasdaq  2886.15 + 16.53  2890.72  2858.79   806,890k  1,647   2,155
S&P-100  704.92 -  0.04   706.44   701.77    Totals   2,804   3,903
S&P-500 1335.53 +  0.11  1338.55  1330.62             41.8%   58.2%
$RUT     433.20 -  1.25   434.89   432.81
$TRAN   2979.30 - 20.49  3000.07  2970.82
VIX       24.33 -  0.74    25.22    24.27
Put/Call Ratio      .52

"Where's the beef?"

Remember the Wendy's Old-fashioned Hamburger commercial from the 1980's depicting Clara Peller, the forceful 4' 11" little old lady buying a "brand-x" hamburger with the half-dollar sized patty on an oversized bun? It was her standard line designed to draw attention to the skimpy beef portions purveyed by Wendy's competitors. We'd like to co-opt that line and apply it to today's markets by asking, "Where's the leadership?". Based on today's action, it looks like a half dollar-sized patty, the same kind about which Clara groused - pretty small, but definitely an attention grabber. As long as we're calling leadership to the mat, let's call volume too.

While traders on all exchanges used to say "everyone is on vacation", or "just wait 'til after Labor Day", now we have "it's Yom Kippur". Of course, the previous alibis for lack of volume were strictly conjecture. Yom Kippur, a big Jewish holiday, is real, and a valid explanation for today's lack of volume on the NYSE. Only 568 mln shares traded today, the lowest volume this calendar year. According to CNBC's floor guy-on-the-go, Bob Pisani, we have to go back to December 28, 1998 (Monday of the week between Christmas and New Year) to find the next highest day at 570 mln shares traded. While the lack of volume by itself isn't particularly alarming, the advance/decline (A/D) line remains weak, even as the DJIA and NASDAQ rise. Worse, it seems that on those days where the indices lose 1.5% or more in value, the volume just happens to increase substantially. What that tells us is that investors are taking the cash at the slightest provocation, and are quite reluctant to put it back to work. We can see it every time Alphonso the Great (Greenspan) pontificates, or a major economic indicator is released (PPI, CPI). The market breathes a collective sigh of relief, though it rarely lasts longer than a few hours. Then it's back to worrying, fretting and hand-wringing. The rallies aren't lasting and there's no volume with them.

While you may think we're whining, we actually view this as slightly bullish in a contrarian way. Remember, it's often said that stock prices must climb a wall of worry. It appears as though lots of folks are moving to the bearish side of the equation. The contrarian in us tells that we could be setting up for a positive move once investors and traders decide the sour mood is overdone. As we already noted in Sunday's letter, Thursday looked like a textbook entry for short-term momentum trading. Perhaps it foreshadows better days to come. We'll have to wait and see. Besides that, a day without volume is like a day without conviction! We just can't read too much into it. Remember too that without much economic news this week and earnings starting to trickle in, we're likely to drift along in the same pattern.

Back to that leadership thing. . .there wasn't any today. Drug stocks are out of favor, and interest rate sensitive banking issues have sweat on their foreheads. Brokerages and trading firms are not showing much strength into their earnings. A.G Edwards today reported earnings that beat expectations of $0.81 by 5 cents on nicely growing revenue, yet had no earnings run and average volume for the last week. Goldman Sachs reports tomorrow; Lehman Bros. on Thursday. Morgan Stanley Dean Witter is to report Wednesday, according to Zack's, and is widely expected to show in excess of a 50% earnings increase - no runups here either, as this sector has fallen 30% from its high compared to a 6% gain on the DJIA over the same period.

A former lead dog, the oil sector, gave up some ground today too, as some oil services companies like Baker Hughes have warned of earnings shortfalls, and oil producers have turned on a dime, now thinking that oil prices may have reached a peak in front of an OPEC meeting on Wednesday. . .quite a contrast from last week, where we heard "up to $30 per barrel" before year end.

Even chip makers of all kinds had trouble last week, and again today. TXN, INTC, Cypress Semiconductor, and especially AMD, who got whacked on the news that Intel might soon offer favorable terms on its low end processors to garner market share from AMD, all suffered. To add insult to injury, GTW reported that for the last 2 months, they had stopped using AMD chips in favor of Intel's. Ouch! Also, while we are sorry to hear of the powerful earthquake in Taiwan (read that, a place where semiconductors are made), U.S. manufacturers got a nice price spike off their lows today because of it.

About the only sector showing any leadership was technology. SUNW, IBM, EMC, HWP, YHOO, CMGI, GTW, AAPL and WCOM all had spectacular gains. MOT, VOD and even MSFT participated too. Unfortunately, these are the last ones standing. The computer manufacturers were today's leaders by default.

A couple of news items before we move on, MSFT benefited from news that it would form an alliance with Ford through Carpoint to create an online specialty ordering function so you can get exactly what you want. It actually works by querying existing dealer inventory first. Also MSFT related - both MSFT and the DOJ filed closing arguments in the everlasting business trial of the century. Now it's up to the judge as to MSFT's fate. As we've noted from the beginning, whatever the decision, it will have no material effect on earnings.

Internet related, YHOO received some favorable analyst comments early this morning, and CMGI was up on news that they would acquire AdForce for about $500 mln in stock, or .262 CMGI shares for every ADFC share. The street liked this. However, make a note that there are 26 IPO's scheduled this week, 18 of, which are Internet related. This will soak up more liquidity, making gains in the sector a bit tougher.

That's OK, the computer manufacturers will lead us out of despair. Right? Not so fast. While the sector looks strong, the sector could have its head under water tomorrow bobbing for Apples, the PC variety that is. Unfortunately, after today's strong performance, AAPL issued an earnings warning that essentially said earnings would be 25% below estimates. How could this be if the iMac and laptop iMac are such hot sellers? The answer is that AAPL's new powerful G4 chip can't be produced fast enough to meet the demand, which will retard revenue growth in that part of the company. Recall that just last quarter, Steven Jobs, the CEO was given credit for producing the first string of 5 sequentially more profitable quarters in recent memory. An earnings warning has got to sting a bit, and won't likely go un-noticed in tomorrow's trading, which could rub off on the rest of the sector.

To get market specific, the DJIA finished up 20 points (though 15 points came in the last 5 minutes) at 10,823 on just 568 mln shares. Flat. Flat. Flat. (Blood pressure is pretty low, Doctor. Does it have a pulse?) Decliners again outpaced advancers 1748 to 1157. 188 new lows put only 46 new highs to shame. This doesn't look like the road to a breakout, but keep in mind, the low volume makes it hard to draw ironclad conclusions.

The NASDAQ, lead by the tech sector fared a bit better. 116 new highs bested 70 new lows - a much better score than the NYSE. Volume though was on the light side too at 807 mln shares. In the end, the NASDAQ advanced 16 points to close nearer to a new high at 2886. The trading range was only 32 points. Again, flat, flat, flat. Don't get us wrong. We're all for stretching and ultimately breaking the envelope, but with decliners clearly in charge of advancers by 2156 to 1647, we can see that the advance in the index is not reflective of the rest of the market. After all, the top 5 names, MSFT, INTC, CSCO, WCOM, and DELL make up 40% of the NASDAQ 100. These guys might help to set a new index record, but they aren't yet carrying the rest of the market with them.

Doom and gloom? In a myopic sort of way, yes if you look at today's action in a vacuum. But as we've said before, it is not wise to draw any conclusions on a low volume day. There are a lot of old sayings on Wall Street, and here's another one that fits today's scenario: Don't short a dull market. With no economic news on the horizon this week, we still think the downside is limited, but that doesn't mean to forget about stops. It was pretty tough to enter many of this week's plays in light of narrow trading ranges, excepting some technology issues. In this environment, it pays to NOT force the trade. . .wait for the play to come to you. Frequently, you've seen us note to enter a play "only if it is profitable to do so". What we mean is to wait for the market, sector, and stock to be up, advancers beating decliners (the bigger the margin, the better - hopefully by 2:1), all coupled with strong volume. Don't let the grim profit reaper spirit your capital and your profits off to netherworlds. Guard it carefully and always do your best to keep emotion out of your decision process. It really does help to plan your plays and stick to the discipline before you ever enter a play. As always, sell too soon!

Buzz Lynn
Research Analyst

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