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Market Wrap

Gobble, gobble, gobble, chop!

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11-23-99           High     Low    Volume Advances Decline
DOW    10995.60 -  93.90 11101.80 10976.40   926,190k   901  2,187
Nasdaq  3342.87 -  49.69  3411.23  3320.67 1,430,649k 1,513  2,559
S&P-100  746.95 -   7.40   756.33   745.76    Totals  2,414  4,746
S&P-500 1404.64 -  16.30  1424.10  1402.20            33.7%  66.3%
$RUT     454.45 -   6.32   461.69   454.17
$TRAN   2980.29 +  25.39  3003.15  2939.89
VIX       21.17 +   0.89    22.18    20.51
Put/Call Ratio       .47

Gobble, gobble, gobble, chop!

The Nasdaq turkey, which had grown fat in a feeding frenzy for the last three weeks, paid a visit to the chopping block today in preparation for the Thanksgiving holiday. Trades started taking profits in earnest today as they moved to the sidelines to rest for the next rally. Many market leaders ran for cover at the open as a large sell program attempted to take advantage of the normal pre-Thanksgiving rally. For the last 47 years the markets have been up on the Tuesday/Wednesday before Thanksgiving 76% of the time. The profit taking today broke with tradition but nobody is concerned.

The Dow may have lost -94 points but it held 11000 for the fourth day in a row. The volume was moderate and the advance decline line was severely negative at 21:9 but nobody was worried.

The Nasdaq took a major hit at the open as a large sell program pushed the Nasdaq futures into limit down mode but the sell off was only temporary. The buyers flooded in off the sidelines and the quick drop was history. However the tone for the market was set and the rest of the day was spent in strong rotation mode. Previous leaders sagged on profit taking while stocks, which had lagged recently, were seen as value plays and received lots of attention.

Today was a non-event in market terms after the NASDAQ's record +600 point November gain. The -50 point drop today barely gave back a single days gain from the recent rally. It was just normal profit taking and a buying opportunity for those on the sidelines in cash. As you can see by the charts above, the drop today only put the Nasdaq on the bottom of the regression channel and after the morning drop the Nasdaq had no trouble holding 3340 the rest of the day. While today was a welcome breather in the markets momentum, there is still a lot of profit left on the table and up for grabs.

Analysts have been expecting a -5% to -7% pull back in the Nasdaq before the customary December rallies. The January effect this year appears to be growing in anticipated strength. In December funds take advantage of the tax benefits of losing positions to lessen the taxes on their winning positions. By selling the losers in December they raise cash to reinvest in January. They are also making plans for a huge influx of year end retirement contributions. This lump sum buying in January normally causes a rally. The anticipation of this rally causes investors to take positions in December before the funds begin buying. This causes stock prices to rise in December and has been given the name of the "January Effect."

This impact has been occurring earlier each year as traders start earlier to beat the rush. With Y2K quickly dropping from investor consciousness as a real threat, the money that accumulated on the sidelines in anticipation of a sell off is going to be spent real soon. The 5-7% sell off may never materialize simply because of the billions in cash that have been stockpiled.

Traders on the floor today claim there is no letup in the flow of institutional orders. They claim there are huge orders sitting just under the market hoping for a dip. Look at a chart and see how quickly the dip was bought this morning, AND THIS WAS IN AN EXTREMELY OVER BOUGHT MARKET! Traders also claim the orders are slowly inching up in price as each firm tries to get a sixteenth above everybody else. With cash flowing faster than Iraqi oil the normal dip after Thanksgiving may only be in our imagination.

Has everybody forgotten that the bond yields currently at 6.19% are slowly moving up? Did the -.60 drop in the price of oil today convince economists that the oil bubble had burst? No, on both counts. This market is driven by liquidity and nothing else. It is going up because of the wealth effect caused by the market going up. Huh? Because the market has been going up for the entire time that most online investors have been investing, everyone just assumes that it must continue to go up. Don't get alarmed. I am not building a case for a crash. I am simply pointing out that eventually there will be some profit taking and a return to reality. The Internet driven, new prosperity, is making millionaires out of all tech investors and pushing older companies onto the sidelines. Take U.S. Steel. Formerly a Dow stock, US Steel is now barely a midcap. The valuation models today are so much different than just five years ago. The only other time the Nasdaq had a similar run was in 1991 when the biotech boom was hot. You remember biotechs? The Internet stocks of 1991? Just food for thought. I wonder what the next hot sector will be after the Internet starts making a profit and has to stand on a real valuation model?

At the San Francisco Money Show I was talking to a couple investment bankers about some of the recent deals they had done. Someone made a comment that they were surprised that somebody like Thestreet.com did not make us an offer we could not refuse just so they could become profitable. (We are profitable, they are not) The banker quickly answered that TheStreet would not do that since they did not want to be profitable yet. Once profitable they would lose their vaunted negative valuation based on pie in the sky forecasts and would have to revert to real world economic models. It would be a serious shock to their stock price. I relate this only to prove a point. Less than 20% of all the current Internet companies will ever turn a profit. If 80% of the current speculative Internet bubble will turn to dust in the next 3-5 years then what happens to the bubble? I think we have about eighteen more months on the outside before we need a new investment sector. Until then, we are going to "go long till we are wrong", and that is what is powering this rally.

Wednesday is a toss up. Friday is historically an up day on very light volume. The Personal Income/Spending Report on Friday is the only economic report this week and should not be a problem. There is still a possibility of some profit taking at any time but with the underlying support in the market I think -5% (-167 points) is wishful thinking.

Good Luck, Sell Too Soon.

Jim Brown

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