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Market Wrap

The Great Humiliator strikes again!

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        12-13-99           High     Low     Volume Advance Decline
DOW    11192.59 - 32.11 11250.39 11162.31   977,610k 1,230   1,847
Nasdaq  3658.41 + 37.93  3668.16  3597.98 1,584,533k 2,038   2,163
S&P-100  763.13 -  0.36   767.21   759.00    Totals  3,268   4,010
S&P-500 1415.22 -  1.82  1421.58  1410.10            44.9%   55.1%
$RUT     470.39 +  3.67   470.39   466.33
$TRAN   2895.98 + 21.04  2912.53  2873.67
VIX       23.60 +  0.71    23.85    22.16
Put/Call Ratio      .40

The Great Humiliator strikes again!

What is The Great Humiliator? It's a nickname for the markets coined by Ken Fisher, one of the longest running columnists in Forbes Magazine, and son of the legendary investor, Phil Fisher. Here it is in his own words from an issue of Forbes Magazine:

"Well, the market's prime goal is always to embarrass as many people as possible. It can probably best do that now by rising smartly for several years, surprising and convincing everyone that we really are in a new era and stocks can never again fall big. For the Great Humiliator to fulfill its goal, it must simply move in ways that surprise. A 1998 bear market won't surprise half the forecasters. A modest rise won't surprise many folks either. But three more years of up market is inconceivable to almost everyone I hear or read. So, to me, it's most likely. Folks forget, and I've used this many times over the years: The stock market simply does not fall in the third year of a President's term. The third year is 1999. The fourth year of a President's term is almost as consistent historically. So, if, as I suspect, 1998 rewards, the Great Humiliator is set for a three-year run that will surprise everyone."

Prescient? You bet, since he penned these words nearly two years ago in the January 12, 1998 issue. Even now, nobody expects this market to go higher. You can't open a trade publication or turn on airwaves without hearing someone say how "overbought" the "inflated" "bubble" is getting. Compared to what?

Briefing.com notes in a recent article that stocks have already gone through three phases. In the first phase from 1760-1960's, we actually bought stock for appreciation based on increasing dividends. In the second phase from the 1960's to the 1990's, we turned to earnings growth as the key to appreciation. From 1995 to October 1999, revenue growth was the key to picking a winner. Now, there appears to be a new "paradigm" (tongue and cheek, of course) that dictates we should buy because the price is rising! Dividends, earnings, and revenue have all been replaced by simply price. Need evidence? Briefing.com also notes, "after all, 289 stocks have doubled in the last four weeks. Nearly half, 128 of them, have negative revenue growth rates! But they have rising stock prices."(!!!)

Lots of investors have hit that wall of amazement too. For the last two months, they (us too) have been waiting for the elusive pullback to bring things back into kilter (relatively speaking). What's the reason for "waiting"? Not to hunker down and wait out the impending gloomy storm to come, but so we can buy into the rally on a dip! Therein lies the key. The waiting pre-supposes we all have cash to put to work; not just us, but the money managers and institutions as well. That is in fact the case. Plenty of money is still looking for a home thanks to the robust economy. This two-month rally is all about liquidity! As long as we keep seeing the "buy the dip" mentality, upward progress should continue in the indices, especially the tech heavy NASDAQ.

Now don't take this the wrong way. We are not saying to mortgage the estate, back up the truck, and buy all you can. There will be corrections along the way since nothing goes up (or down) in a straight line. The market internals certainly tell a negative story. While a rising tide may float all boats, some recent floaters were taking on lots of water. Here's a list of today's big point losers. Red Hat (-26.56); Whittman Hart (on merger news with USWB, -24.75); VA Linux (-19.06); Andover Net (-15.50); Akamai (-15); Juniper (-14.38); i2 technologies (-13.69); Commerce One (-12.38); JDS Uniphase (-10.19); Brocade (-6.38). Big point gainers were led by none other than Qualcomm (+26.06) on a spectacular breakout with volume (5.9 mln shares)that finally (after three anemic weeks) exceeded the ADV (5.7 mln shares) and Foundry Networks (+26.25). They were closely followed by Broadvision (+22.63), Internet Capital Group (+22.50), E.piphany (+19.88), CMGI (+17.56 - earnings Wednesday), Inktomi (+10.50), and Sycamore Networks (+10.38). You can see, there's a lot of volatility in backing up the truck for high flyers. We must still pick our plays carefully since the rallies are relegated to the top tier in a few select categories, the categories of which are under rotation almost weekly. Based on the above, looks like the Linux crowd moved to Internet backbone issues - a fickle bunch we are.

And so it appears that the humiliation will continue

So what exactly happened today? Lets start with the DJIA. Xerox warned investors after the close last Friday that they would miss $0.67 estimated earnings by 40%, citing product mix, currency exchange loss, Brazilian weakness, and other company specific items. XRX actually closed up today at $21.13 from a low on Friday of $19, but their problems are far from over and will likely continue into the next two quarters. Thankfully, the problems were just company specific and didn't rub off on the rest of the markets. Retailers though came to life on news that last week's sales (brick's and mortar and e-tailers) were substantially ahead of sales at the same time last year. You might have already guessed that Wal-Mart (+4.62, 67.88) and Home Depot (+3.75, 92.75) went on to set new all time highs today. The whole index didn't fare as well. The DJIA closed down 32 points at 11,192. If it weren't for a bunch of "sell on close" orders hitting the floor in the last 7 minutes of trading, the DJIA would have closed in the "plus" column. Pharmaceuticals is one of the sectors losing the most ground today on fears that their pipelines would come up a bit empty. About those negative internals we spoke of earlier? Decliners outpaced advancers 3:2, with 472 new lows stomping on 87 new highs. 551 mln shares traded down, while just 389 mln traded up. Volume was a hefty 977 mln shares, which tells us there was still a whole lotta buyin' goin' on, despite the loss.

All gloom and doom? Cheer up! Even the all encompassing Russell 2000 was up today (+3.67 to 470.39). That indicator represents a composite of 2000 stocks indicating the even some of the small- caps are moving. The good news is that the NASDAQ did even better.

With the NASDAQ 100 undergoing revision on December 20, there will be some new winners added to the index, while others will get the boot. Wouldn't it be great to know who the additions are and maybe plan some plays around them? You are in luck! The following are the new additions: MEDI, DISH, MFNX, PMCS, ADLAC, ITWO, BVSN, NTAP, LGTO, NXLK, SDLI, AMCC, NSOL, and QLGC. Those to be de-listed are ANDW, ADSK, CBRL, CATP, EFII, FAST, FHCC, LNCR, MUEI, RTRSY, RXSD, ROST, STEI, TECO, and WTHG. Before you execute a trade, do your homework. They may not all go up due to their size or further revision to the list. In a strange twist, though not unexpected in a market where only price seems to matter, most of those to be de-listed moved up today.

In addition to the proposed NASDAQ 100 revisions, INTC showed up on the radar today because Prudential downgraded the issue to an Accumulate from a Strong Buy and moved the price target down from $90 to $84. You think Intel got a major haircut on the news? Nope, it was up today by $1.81 and also (fortunately) didn't rub off on the rest of the market. In the continuing saga of "Tale of Two Markets", 11 issues finished up compared to 10 down. New highs beat new lows 301 to 143, while up volume was nearly twice the down volume with almost 1.6 bln shares traded.

What happens for the rest of the week? The CPI figures will be released tomorrow, wherein the expectation is for a .2% rise. Retail sales will also be posted tomorrow. The expectation is for a .5% increase, and only .4% excluding autos. Perhaps the fear of what these numbers will contain drove some into the "sell on close" mode on the NYSE. We think the figures will be benign and a real non-event. Nonetheless, we need to pay attention to them for indications of the market's reaction. One hiccup could be the catalyst for a downdraft. Wednesday, we have the Business Inventories and Industrial Production figures, followed on Thursday by initial jobless claims. Oracle and Best Buy report earnings tomorrow, followed by CMGI (split candidate) on Wednesday. Be aware of sympathy plays in either direction. The big message? Based on previous valuations, the market is itching for a correction. However, based on current liquidity, as long as you choose your plays carefully, the winners should continue to be met with buying activity on any dips. Yes, a reversal will happen sometime, but we don't know when, and intend to take advantage of the opportunity this narrow market has given us. Use volume, coupled with support and resistance as your guide, and remember to sell too soon. (Whew! We got through this without saying "new record for the NASDAQ".)

Buzz Lynn
Research Analyst

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