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Market Wrap

All roses on the market front?

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        9-27-99          High     Low     Volume   Advances Decline
DOW    10303.39 + 24.06 10402.49 10279.33   783,513k  1,751   1,238
Nasdaq  2761.73 + 21.34  2758.96  2794.16   946,123k  2,034   1,809
S&P-100  675.51 +  2.71   682.38   672.80    Totals   3,785   3,047
S&P-500 1283.61 +  5.95  1295.07  1277.36             55.4%   44.6%
$RUT     421.86 -  4.77   423.30   417.09
$TRAN   2862.41 - 16.27  2894.57  2853.19
VIX       27.27 -  0.71    28.35    26.49
Put/Call Ratio      .54

All roses on the market front?

Not!! When Abbey Joseph Cohen, Joe Battapaglia and Alan Greenspan speak, whose voice carries the greatest weight? The answer depends on who gets the most press coverage. Today, the award goes to (envelope please). . .Abbey Joseph Cohen, a perpetual bull from Goldman Sachs. In an interview yesterday, she said again that she believes the market is undervalued and should be moving higher. Though not as widely reported, Gruntal and Co.'s bullish guru, Joe Battapaglia chimed in by reiterating his DJIA target of 12,000 and NASDAQ target of 2900, both by year end. It didn't hurt either that from the G-7 meeting over the weekend, Japan apparently quietly acquiesced to support the Dollar, halting its slide against the Yen. The combination of comments from Abbey and Joe, coupled with the promise of a stronger Dollar caused the market to take off this morning like it was shot out of a cannon.

What about Alan Greenspan, you ask? His comments really had no effect on the markets since they were uttered after the market closed. But for those curious, he spoke at an IMF seminar on "Lesson's from the global crisis", a reference to last year's economic meltdown, which began in Asian banking centers. He noted their over-reliance on banking in their economy, with no other sectors to prop up those economies once banks took a hit. Soundbight of the day, "lack of a spare is of no concern if you don't have a flat tire". By that he meant that since the U.S. had other industries propping up the economy during our banking meltdown almost a decade ago, we did not suffer nearly as much as Asia who had no backup industry once its banks experienced a liquidity crisis. The speech had nothing to do with inflation in the U.S. and should be largely disregarded in tomorrow's session. 'Nuff said.

In addition to Abbey and Joe, there was plenty of other bullish technology news, like IBM and Dell planning to collaborate on another $6 bln pact. This comes over and above the $16 bln pact announced in March. Under today's agreement, Dell will buy more IBM equipment and use more of IBM's field people to service its clients. Chip equipment stocks were hot too, but with Rambus noticeably absent thanks to a "bug" that prevented its technology from properly working on Intel's new Camino chip, which may cause some delay in its release. Rambus suffered 2 downgrades today as a result of the news. By the close, RMBS fell $12 to $59 - ouch! Thanks to some good news too from Taiwan that chip and motherboard production was resuming following the devastating earthquake, chip stocks, including Intel were up.

Of course no day would be complete without news from. . .the gold sector?. . .huh? Yep. Fifteen European banks agreed to restrict their sale of gold reserves on the open market to 400 tones (metric) per year. Gold shot up $13 from Friday to close today at $284 per ounce. That had gold mining issues trading like Internets with 10%-20% gains on the day, in anticipation that mining the precious metal would be more profitable in the future as long as the supply remained scarce. In fact, the gold and silver index (XAU.X) was up 20% today. Only time will tell if this "Au-PEC" will hold to the quota. But with a $13 jump in price, there's likely to be some technical correction, backing and filling. The precious metal isn't likely to get back to $400 per ounce any time soon. Aside from some interesting short-term trades in specific mining stocks, this won't affect the rest of the market all that much.

And how' bout those Internets? It's almost like investor's had been forewarned of great earnings from CMGI, which was up $8 to $93 at the close on volume exceeding its ADV by over 200%. After the close, CMGI did report earnings of $4.24 per diluted share versus the Street's expectation of $4.08. Not only that, CMGI also announced they would spin off Alta Vista in an IPO this coming January, and their CEO expects FY2000 revenues to be up 300% (!!) over FY1999. Any guesses for its value in after hours trading? How about up $5 to $98 on the Island ECN. It will be interesting to see if the euphoria wears off after the opening tomorrow, and CMGI takes the traditional path of "buy the rumor, sell the news".

AOL also put on a good show today, rising $3.63 to over $101 on volume 50% greater than usual. Most likely this was stimulated by investors expressing relief that AOL appeared in no immediate danger of having to cut service rates to compete with "free" Internet service, thanks to MSFT actually raising their rates by $2 instead of cutting them. SEEK, LCOS, CNET, DCLK, NSOL and UBID (kind words by Blodget on UBID) also posted nice gains. Unfortunately, the bigger names like YHOO and AMZN didn't do as well, posting moderate losses. EBAY was worse, down $7.31 to $138.75, though only on average volume. YHOO may yet see more gains this week on its way to earnings, but with the earnings run pattern now firmly known by traders and investors, it could just as easily have already reached its peak and stall at this level in front of earnings October 6. YHOO traded up fractionally in after hours trading.

Other than that, How did the markets fare today? (or other than that Mrs. O'Leary, how is your cow?) Surprisingly, not well, though they were up. As note earlier, the DJIA took off like a shot, rising to its high of 10,402 within the first hour and a half of trading. From there, it found support around 10,350 until late in the afternoon. That's about the time a rumor began floating that had some analyst talking down JPM and IBM earnings, 2 components of the DJIA. We don't know if the rumor is true or not, but it sent a tremor through the range-bound market, causing it to break down to about 10,310. Though it mounted an attempt at recovery in the final 2 hours of trading, in the end, the market managed only a 24-point gain to close at 10,303, about 100 point off its high of the day. Though the breadth was well over 2:1 shortly after amateur hour, that ratio deteriorated slightly into the day to finish with roughly 3 advancers beating every 2 decliners. Volume was fair at 781 mln. shares traded. New lows pounded new highs 271 to 24. While it looked good at the open, today's action is not inspiring and doesn't give us any great hope.

This is where experience and trader intuition can really save your bacon. Though this had all the signs of a "confirm market direction before starting a play", the gains came in the form of a gap up at the open, followed by flat trading. If this were a real reversal, we likely would have seen a flat opening followed by rising prices. By definition, volume would have been causing those prices to rise, indicating real investors bidding up real issues with conviction. The conviction, thus volume was missing. It appears that there may have been some window dressing going on, where money mangers dump the dogs so you don't see them on the roster when you get your mutual fund statement. Of course, the issues that did well in the quarter are bid up slightly so they can show you their fabulous picks that are part of their "astute" investing program. Yes, that's a bit cynical, but that's how it works. At least that explains why there are so many new lows and so few new highs, even though the market was up.

NASDAQ didn't fare any better, as it too followed a similar strong open, range trading, then selling off, followed by attempted recovery and failure into the close. The index finished up 21 points at 2761. But that was 33 points off its high of the day and fractionally above its low. It too began with advancers wildly outpacing decliners, only to see the gap close by the end of the day with 10 advancers for every 9 decliners. New lows over new highs were 121 to 60. Volume? 936 mln shares. No cause for inspiration here either.

Folks, there just isn't any reason to be happy about today's action - not so much due to the final score, which viewed statically is an average acceptable day, but due to the dynamics of its deterioration throughout the trading day. There still looms the threat of the FOMC meeting next Monday, and investors are going to have that as a bigger object on the radar as that day approaches. It's already starting. Michael Moskow, Federal Reserve President of the Chicago region reminded us today that the FED gave us a 75 BP cut earlier in the year in response to world economic crisis and can justifiably take back the remaining 25 basis points so long as there is the specter of perceived wage inflation and increases in raw material prices (read that, "oil"). Jitters still abound, which cause the bonds to trade back over 6% for most of the day.

As Jim noted in BIG BOLD LETTERS over the weekend, we do not recommend starting any new call plays in front of the FOMC meeting next Monday. For having lost 500 DOW points last week, today hardly counts as a recovery. If that's the best technical bounce we get after last week, there's going to have to be a pretty big shift in investor sentiment to turn this market around. It doesn't look like we're there yet. Take these opportunities of strength to sell positions and get back to cash. If you must start a position, remember to sell too soon.

Buzz Lynn
Research Analyst

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