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Was that profit taking I saw this week?

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        12-9-99            High     Low    Volume Advances Decline
DOW    11134.80 +  66.70 11204.20 11054.70 1,116,721k 1,221  1,859
Nasdaq  3594.17 +   8.09  3647.55  3514.91 1,780,217k 1,820  2,349
S&P-100  757.39 +   3.28   762.08   749.17    Totals  3,041  4,208
S&P-500 1408.11 +   4.23  1418.46  1391.50            41.9%  58.1%
$RUT     464.90 -   3.94   471.76   460.52
$TRAN   2824.78 -  56.89  2890.86  2813.77
VIX       22.38 -   0.24    23.95    21.84
Put/Call Ratio       .41

Was that profit taking I saw this week?

You had to look close but if you read between the closes there was a lot of profit taking and it may be all we get. Yesterday's drop of -.84 on the Nasdaq was almost a non-event. The Nasdaq dropped after a surge at the open and recovered to almost close positive but the market breadth was just too strong to overcome. The Nasdaq failure to set another record high and three days of losses by the Dow energized the buyers and the markets gapped open strongly today. The rally was short lived as traders sold into the rally in an attempt to take profits in light of the recent weak internals.

Not everyone was convinced as buyers waiting in the wings came off the bench and rushed to buy stocks that they missed in the last drop a week ago. The Dow finally broke out again after three days of profit taking and rotation out of some Dow stocks with negative stories. After posting three days of -61, -118, -38 losses the Dow managed to add +66 points and close almost +100 points over strong support at 11050. When you consider this was on top of an almost -$5 drop by IBM, it was impressive. An IBM official only confirmed they were on track to meet the lowered estimates given in October. He also gave another Y2K warning that they may see some first quarter impacts from the late 4Q Y2K freeze. They are looking for a banner 2Q next year and they expect all of 2000 to be a very good year.

The Nasdaq set another record high today on the heaviest volume day ever (1.8 bln). The heavy volume on the downside this morning was met by strong buying in the afternoon as traders tried to make up for the previous missed opportunities. Everybody wants to wait for a real correction, something in the neighborhood of -10%, but it is just not happening. Cash is building up in the funds as they try to wait for a new opportunity but the tech market is just not cooperating. In a report out yesterday some funds have cash positions as large as 18% with most around 12%. This is a huge pile of cash across all funds and there are large underlying orders just under the market waiting for any dip.

What is readily apparent is a very simple fact. Nobody is leaving. Nobody is moving to cash to store under their mattress for Y2K. Funds are not selling to lock in profits as many expected. Fund managers questioned about this, point to the huge profits and huge tax consequences. If they only wait until January to sell, they can put off the tax problem for a full year. If the market continues to rally next year then they can pay the taxes with next years earnings. If the year is bad then the losses would offset some of the 1999 gains. It is a win-win situation. Here is the next quandary. They are now faced with putting the excess cash into the market now, with no pullback in sight, or letting it accumulate on the sidelines for a pullback that may never come. If tech stocks soar another 20% in the 60 days and then pull back 10% to correct then waiting was not the correct play. Almost everyone expects the market to soar in January once the Y2K event is over and not being invested now may mean you give up 10%-20% to funds that are fully invested. Some funds take in $10-25 million dollars every day and the heavy end of year contributions will swell this number by 200%-300%. Imagine the fund managers problem. Hundreds of millions of dollars to invest but everything is already at nosebleed heights. It is easy to say wait but if the market train really has left the station then it will be their bonuses for 2000 they will be kissing goodbye instead of their competitors.

On the downside, if there is one, if the PPI is bearish tomorrow then some analysts expect the Fed to change their bias to tighten at the 12/21 FOMC meeting. This would put the brakes on the rampant speculation with a dose of Fed reality. The PPI is expected to show an increase of +0.2% compared with Octobers decrease of -0.1% in prices. High oil prices are expected to have an impact but the increased productivity we saw earlier in the week may mute this factor.

Even with the recovery today by both the major indexes the breadth was still very bad. On the NYSE there were 96 new highs to 279 new lows. Advancers lost to decliners on the NYSE 2:3 and on the Nasdaq 3:4. Closing ticks on the NYSE were slightly bearish at -363. Yes, there was a rebound today but all eyes are on the PPI on Friday. A bad number would have to be very bad to blunt the optimism in the markets but bad numbers do show up when you least expect them.

What to do tomorrow? If the number is positive then wait until after amateur hour and look to open positions for January/February. This should be the last major hurdle for the year. The CPI is next week but with PPI prices down last month it should not be a problem. Retail prices normally follow producer prices.

Money is still flowing into the market but that does not make the market indestructible. Pick your entry points carefully and be prepared to leave quickly if things turn around.

Good Luck, Sell Too Soon.

Jim Brown

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