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Market Wrap

'Twas the night before FED gathering. . .

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       12-20-99             High     Low     Volume   Advance  Decline
DOW    11144.30 - 113.10 11310.10 11110.90   904,620k  1,292    1,816
Nasdaq  3783.87 +  30.81  3801.93  3747.79 1,317,954k  1,871    2,419
S&P-100  771.29 -   2.64   778.61   767.67    Totals   3,163    4,235
S&P-500 1418.09 -   2.96  1429.16  1411.10             42.7%    57.3%
$RUT     467.19 +   0.98   469.84   466.21  
$TRAN   2884.47 -  33.95  2940.31  2879.28
VIX       24.66 +   1.65    25.18    22.82
Put/Call Ratio       .51

'Twas the night before FED gathering. . .

And all through the land
Investors were wondering
What's in Alphonso's hand?
The bond rate was spiking
At the end of the day
Hopefully, he won't change the bias
We pray

Forgive the adulteration of what is normally a great read for the kids, but we couldn't help exercising some poetic license during the Holiday season. The fact is, that pretty much summarizes the sentiment affecting today's equity markets. For those just catching up on the latest doings on Wall Street, tomorrow the FED holds their last FOMC meeting of year, century, and more importantly the millennium. Even so, facing Y2K, investors are 99.99% certain that the FED will not raise interest rates at this meeting. If for some reason, something goes wrong on Jan. 1, 2000, the FED by its lack of action tomorrow avoids becoming the markets' whipping boy. While there is the possibility of the FED changing the bias from neutral to positive, it will likely be a non-event. We think today's action was just an excuse to take some money off the table.

Nonetheless, that didn't stop the bond market from spiking the rates to its highest level in two years, up to 6.43% in anticipation of a February rate hike. Looking ahead, the market has already priced in a .25% increase at the FED's next meeting in February. Of course, increased rates equals increases interest expense, which equals decreased earnings, which equal falling stock prices.

Yeah, right. Just tell that to the NASDAQ market, which went on to set another closing record today, but on far less volume ("only" 1.3 bln shares) than usual. Though institutions are stalking their deals carefully and may curtail their trading activity a bit through the new year, that didn't stop the momentum traders from getting in the action. Red Hat (RHAT) announced a 2:1 split, and despite reporting a loss or a penny wider than expected, plus the prospect of a secondary offering (read that, dilution), RHAT tacked on another $15. That wasn't even in the top 10 gainers, which included (among others) Novellus (NVLS, +28.41), InterVu (ITVU +26.88), Liberate Technologies (LBRT +24.25), Sycamore Networks (SCMR, +23.00), Yahoo (YHOO +19.50), and Verisign (VRSN +19.19).

While not in the top the top gainers, QCOM set another new high today gaining $11.81 on shareholder approval of a 4:1 split. Volume backed it up, exceeding the ADV by 8%. JDSU moved up $14.69, as it too will split 2:1 on December 30.

Among the five generals, CSCO (+3.56, 103.25) announced that they would acquire the optical telecom division of Pirelli, a division engaged in wave division multiplexing (splitting a single light source into multiple channels). This is a good fit for CSCO, and now allows them to offer end to end optical connectivity for their customers, a much more attractive equipment package for telecom companies. Paine Webber too saw the light, and upped its price target to $138 from $125. Dell (DELL, +2.13, 47.69) too got a boost from JP Morgan, who raised their price target to $65 and upped their rating from Market Perform to Buy. Volume was a whopping 55 mln shares, more than twice the ADV. MSFT fell victim to some profit taking, giving up $2.50 on low volume. INTC also ran $1 negative on low volume. The low volume on the latter two is nothing to worry over, and the high volume on the former two indicate funds are buying. Liquidity is alive and well and will remain the salvation of the NASDAQ market.

Of course there will be dips, but we should take advantage of it as a buying opportunity. Volumes, as indicated by today's decrease will slack off through the new year, but the volatile movement could give us some good entries to take advantage of all that cash going back to work in January. Support remains really strong at 3500, but we don't expect to see that anytime soon. Though 3750 offers some near term support, it may not hold in the volatility leading up to Y2K. The next levels of support are at 3670, and 3575. Watch these levels for guidance.

The DJIA however remains range bound with support around 11,120; after that, try 11,050. Today's 30 point rebound into the close on increasing volume was particularly encouraging, despite an overall loss of 113 points. Honeywell (HON) was the biggest culprit here, losing $7.13 (about -35 DOW points) on news that they would acquire Pittway Corp (PRY) in a $2.2 bln transaction. HON closed down $7.13 at $56.63, while PRY advanced $15.88 to $44.88. For its part, the DJIA has not completely unhooked from rising interest rates the same way NASDAQ has.

Here's the meat. The DJIA closed down 113 points at 11,144 on profit taking, using tomorrow's FED meeting as an excuse. Volume was a respectable 905 mln shares, with advancers losing out to decliners roughly 3:2. 306 new lows trampled just 87 new highs. Down volume clearly outpaced up volume 10:7. While these internals look weak (and we don't deny they are), they also have historically portended a near to intermediate term buy signal for the longer term players. Again, don't back up the truck. We still need to pick our entries carefully, but we nonetheless consider the dips to support (11,120 and 11,050) buyable for specific plays.

The NASDAQ as mentioned earlier went on to set (what else?) another new record, but on slightly less volume (1.324 bln shares) than to which we are accustomed. With more buyers absent and the remaining traders conserving the cash waiting for dips, this is a target shooter's paradise. Lesser volume will tend to make the trading more volatile, since momentum traders are getting a bit more of the spotlight this week. Decliners once again edged out advancers 24:19, while 195 new highs squeaked ahead of 171 new lows. Not only that, but up volume outpaced down volume 14:11 - you just can't keep a good tech stock down (at least not for long).

There you have it. Today's sell-off was nothing to worry about and should be expected in these days of heightened volatility. The closing strength looked positive to us. Use it to your advantage to target shoot positions you'd like to be in come January 3. Splitters have been working well lately, and we have plenty slated for the end of the month. Tomorrow and the rest of the week, needless to say will be choppy, especially ahead of the FED meeting even though we expect no surprises. Still, don't take it as a license to take chances; we need to stick to the discipline of cutting losses when a trade moves against us. As always, trade your plan and sell too soon.

Buzz Lynn
Research Analyst

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