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Market Wrap

Microsoft giveth and IBM taketh away!

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       10-21-99           High     Low     Volume Advances Decline
DOW    10297.70 -  94.70 10390.70 10177.40 1,012,540k 1,145  1,876
Nasdaq  2801.95 +  13.82  2805.07  2724.74 1,123,221k 1,718  2,209
S&P-100  676.67 -   2.57   679.24   665.55    Totals  2,863  4,085
S&P-500 1283.61 -   5.82  1289.43  1265.61            41.2%  58.8%
$RUT     414.27 +   0.33   414.27   409.29
$TRAN   2812.09 +   3.65  2816.58  2778.56
VIX       24.77 -   0.44    28.21    24.71
Put/Call Ratio       .61

Microsoft giveth and IBM taketh away!

I hope you had your seatbelt fastened on you trading chair the last two days. The strong +189 Dow and +99 Nasdaq on Wednesday was just the warm-up act for the IBM blues today. The Dow plunged -213 points at the open with IBM accounting for over -100 points of the drop. After trading in a narrow 60 point range almost all day the Dow made another try at a sell off and again touched the -213 mark at 10177 but quickly rallied back to close right on our previous resistance at 10300. Just another normal day in the October markets.

The good news, and it was very good in my book, was that the Nasdaq held the +99 gain made yesterday and even added some more today. This was a very good sign when the tech sector was laboring under the IBM load. This is really a positive event. The range for the Nasdaq was almost 80 points and the low of the day was -64.

Also impressive was the performance by the Dow. With IBM dropping -$21 from yesterdays close, the impact to the Dow was well over -110 points. The news that a jury could decide damages in a trial against Phillip Morris also impacted the Dow to the tune of almost -20 points. With a -130 point impact from just two stocks you would think we would have seen a major -200 to -300 point finish. Didn't happen and the -95 finish was a +45 point gain for the rest of the index. I am impressed!

The bounce off the 10000 bottom for the Dow on Fri/Mon and the failure to penetrate 10200 significantly on three tries this week, has reawakened the bull mentality. You can just feel the psychology changing again. Last week the gloom and doom was everywhere and today the analysts are absolutely bubbling with optimism. (could be a bad sign) Still I am thinking about converting to a bullish bias again. When you look at the hits the market has weathered in the last week, it is amazing we are not trading in the high 9000 area.

Xerox warned, Lexmark warned, Dell warned, IBM warned, INTC missed estimates, the PPI was terrible and there is a 100% chance the Fed will raise rates on Nov-16th. Still the market is showing increasing strength in the face of the Y2K hype.

As I write this, yet another big name has warned of a bad fourth quarter. Gillette added it's name to the list of losers for the quarter. Gillette dropped -4.50 in after hours.

The volume on the NYSE and the Nasdaq broke one billion shares each but IBM and MO accounted for over 136 million shares by themselves. IBM dropped over $40 bln in market cap and MO is down -$86 bln from its recent high. For the price of a carton of cigarettes today, you could have bought 1.5 shares of MO stock. MO traded as low as $21.94 today, a low not seen since 1995. IBM dropped from the number six spot on the S&P to the number nine spot in terms of market cap.

The gains in the markets have been on the backs of the S&P earnings. As of today 283 S&P-500 companies have reported and earnings have come in at an outstanding +24.8% increase over last year. The buying is also being fueled by a flood of cash pouring into mutual funds. For the week ended 10/20 funds received +$5.3 bln bringing the total for the month to over $13 bln. In a month that normally has traders moving to the sidelines, the flood of cash could be to take advantage of any buying opportunities. This is a far cry from the "run for the hills" Y2K mentality that the bears are promoting. The "buy the dip" mentality is winning the war and traders are hoping for a big dip instead of worrying about one.

The European Central Bank did not raise rates today as some had expected and that was a market positive. Bonds are feeling the impact of the flight of funds back to stocks after the "big" sell off did not occur. Yields today closed at 6.36% and the next milestone at 6.40% could be hit any day. The market appears to be ignoring the drop in bonds and is disconnecting from the bond/stock historical lock step.

While I said above that I am considering a bias change back to bullish, I am still not convinced and I would urge you to be very careful about buying this rally 100%. The Nasdaq did return to positive territory and the Dow would have been positive except for IBM and MO, BUT... the advance/decline line was still negative 4:3 and the new highs at 149, were swamped by new lows at 888. Market internals are still bad and the big caps are continuing to disguise the event. We were severely oversold and it is possible that we move up from here but is also very possible that this is just a bear trap rally and we could trade in a range between 10000 and 10500 for some time. Obviously that would be a great trading range but also traumatic for buy and hold investors. A close over 10400 would be very positive and could mean the start of a new uptrend. A close under 10200 would be very negative and could signify the start of another down trend.

There are some great stocks making some strong moves and we added more calls than normal tonight to attempt to position ourselves to take advantage of any rally. Please, remember that although we listed calls tonight, we only recommend playing them if the market is positive after amateur hour tomorrow. Watch the ticks, advance/declines, Dow, Nasdaq and other stocks in the same sector to get a feel for the true direction before opening a new position. You may end up buying in a little higher by waiting but that is better than making an impulse buy and then watching it roll over 30 minutes later.

With all the new plays tonight space is going to be a problem so I am going to cut it short. Buy too late, sell too soon. There are no stop losses on cash.

Jim Brown

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