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Market Wrap

October Scariness Continues

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        10-18-99           High     Low    Volume Advances Decline
DOW    10116.30 +  96.60 10128.00  9976.00   802,714k 1,094  1,948
Nasdaq  2689.15 -  42.68  2730.49  2632.01   997,349k 1,386  2,670
S&P-100  656.79 +   5.04   656.79   644.37    Totals  2,480  4,618
S&P-500 1254.13 +   6.72  1254.13  1233.66            34.9%  65.1%
$RUT     408.90 -   5.80   414.75   406.33            
$TRAN   2844.07 -  11.51  2869.60  2831.17
VIX       29.44 -   2.04    32.53    29.44
Put/Call Ratio       .59

October Scariness Continues

October continues to be a tough month for stocks. Follow- through selling from Friday's decline and apprehension about tomorrow's CPI numbers pushed market indexes lower for most of the day, especially in the tech-heavy NASDAQ. During the last hour of trading stocks managed to rally well off its intra-day lows with the Dow and the S&P 500 finishing in positive territory, but there is still an abundance of nervousness.

Market technicians have been saying for awhile now that the NASDAQ would need to break down before the market can go substantially higher. So according to that viewpoint the market is behaving basically as it should, even though most would like to see better volume. With the market still looking vulnerable, some discounted the day-end rally as short covering ahead of the CPI. There is not a lot of motivation to take big positions ahead of that data.

It is hard to believe that a week ago today the NASDAQ composite hit a record high at 2923. The index has since dropped almost 8%, closing today down another 42.68 points, or 1.56%, to 2689.15. It could have been worse as it was down about 100 points at the low. Here's an hourly chart for the NASDAQ over the past two weeks, showing the record high and today's lows.

The following chart shows the three major indexes and how they have fared this year, as of Friday.

The Dow held up much better, actually spending most of the day in positive territory, and closing near its high thanks to the late, albeit narrow, rally. The Dow closed at 10,116.28, up 96.57, or .96%. The S&P 500 also finished in positive territory, closing at 1254.13, up 6.72, or .54%. The following chart shows today's activity for the Dow, with what looks like a double bottom.

Market internals continue to be extremely weak, almost laughably weak. Decliners crushed advancers 22 to 10 and 19 to 11 on the NASDAQ and NYSE respectively. Volume was moderate again and the only day of the year that saw more 52-week lows than today was Friday. Can breadth get much worse before it gets better? Time will tell.

International markets appear to be concerned about Wall Street's sharp decline. Most major foreign markets fell in sympathy with U.S. markets. On Monday the Japanese market lost 1.85%, Hong Kong lost 1.5%, the U.K. and France both lost .64% and Germany dropped .54%. Clearly nervousness doesn't end at the East or West Coast.

Computer peripheral makers were hit very hard today because of Lexmark. The high-flying maker of computer printers actually beat analysts' earnings expectations by two cents, but warned that going forward their performance would be at the low end of estimates. That was the wrong thing to say during a downturn in stocks. Lexmark was lambasted by 31.2%. Just because you beat estimates does not mean you won't be beaten up.

Financial stocks had a better day today because of some strong earnings reports. JP Morgan, a Dow component, reported better than expected earnings. The bank was rewarded today, rising 6.9%. Citigroup also posted surprisingly good earnings and rose 3.7%. The PHLX/KBW Bank index rose 2.7%, but has been battered over the past few months.

Another sector having a better than average day was the airline sector. Delta and Continental both beat earnings estimates helping to boost the AMEX Airline index 2.7%.

Ford also announced earnings with record results. The car making giant beat earnings estimates by five cents, marking the fourteenth straight quarter of improved earnings, and reported particularly strong truck sales. GM, who beat estimates last week also benefited from Ford's good news, rising 2.3%. Another carmaker, Nissan, is struggling and will be laying off employees. Ford helped the CBOE Automotive index rise .58%

Some sectors that did not do so well were semiconductors, down 2.6%; computer box makers, down 2.2%; and Internet stocks, also down 2.2%.

The earnings parade marches on tomorrow. Before tomorrow's open Dow component United Tech, Texas Instruments, Freddie Mac, and Southwest and Northwest airlines, among others will announce. After the market tech bellwether Microsoft will give its third quarter results. Sometime during the day two other Dow components, Johnson & Johnson and Phillip Morris will give us their results. That list of earnings coupled with CPI figures will likely make for an eventful day.

Stock traders continue to keep an eye on bond yields, which rose again today. The price on the 30-year Treasury bond dropped 2/32 bringing the yield to 6.31%. Bonds are trying to build some support at current levels but still look anemic. If yields continue their upward climb stocks will have a difficult time putting together a rally. Bond traders will be looking at tomorrow's CPI data at least as closely as stock traders since the recent decline in stocks and rising bond yields have not attracted much bond buying. More bad news could really hurt yields.

The CPI is one of the most important economic figures that the government releases and one of the figures the Fed watches most closely to gauge inflation. Unlike the PPI, which just measures what businesses pay each other for products, the CPI measures the costs of services as well as goods paid for at the retail, not the wholesale, level. The CPI is more comprehensive and probably more indicative of inflation than the PPI. The Street is looking for an increase in September CPI figures of .4%, as compared with a .3% rise in August. The core rate, which excludes food and energy prices is expected to be up .3% for September as opposed to a .1% rise in August. Friday's PPI report has many analysts looking for another upside surprise.

Aside from a handful of sectors that prosper during inflationary periods, inflation (and accompanying tighter profit margins and poorer earnings) is the thing the markets fear most. If numbers come in a lot higher than expected stocks could continue or even accelerate their recent losses. A lot of money managers have been holding money back until the inflation picture becomes clearer. Most are interpreting the lower volume we have seen as a sign that the selling is not over.

When will we hit a bottom? You never know for sure that a bottom is in place until is has been in place for a little while, but there are a few characteristics that accompany bottoms and might help in starting to pick entry points. First, volume becomes very high as selling hits a heightened pitch and people are screaming to get out of their stocks. Usually a piece of bad news serves as a catalyst for the selling climax and prices get low enough that huge numbers of buyers, particularly institutional buyers, jump in. Nothing like that has happened yet so a lot of market watchers see more downside until that does come about. Another sign of a major bottom that would accompany the high volume type of climax would be a day with a horrible open, like a large gap down and huge intra-day losses, but that finishes strong and in positive territory. Last October 8 was a classic bottom and after that climax the market rallied strongly.

One indicator that some traders look at is the volatility index. Very high volatility often accompanies market highs and lows. A volatility level over 30 is considered high. The following chart shows the volatility index compared to the Dow. Notice how extremely high volatility numbers correspond to market lows.

These types of declines are hard on everyone's stomach and cause a lot of investors to check their portfolio five or six times a day. History indicates that if you can weather the October storms you usually do well in the market. The standard market disclaimer about past performance not guaranteeing future results naturally applies, but October has been the low point in many market declines, with a rally following. As the market goes lower it might be a good idea to start looking for entry points in strong stocks.

Happy trading.

Chad
Research analyst

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