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Market Wrap

Y2K appears OK but N4K? Not today

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        12-28-99           High     Low      Volume   Advance Decline
DOW    11476.70 +  85.60 11517.40 11382.20   663,910k  1,565   1,521
Nasdaq  3972.11 -   3.27  4022.51  2943.04 1,229,257k  2,097   2,191
S&P-100  794.71 +   0.13   797.81   791.89    Totals   3,662   3,712
S&P-500 1457.66 +   0.57  1462.68  1452.78             49.6%   50.4%
$RUT     488.48 +   4.02   490.33   482.99
$TRAN   2944.51 +  16.83  2947.11  2902.43
VIX       23.69 +   0.09    24.67    23.51
Put/Call Ratio       .57

Y2K appears OK but N4K? Not today

After trading above 4000 for the third day in a row the Nasdaq fell victim to a late day sell off and gave up the millennium mark again. After trading well over 4000 to a high of 4022 for the majority of the day, the stocks that pushed the Nasdaq to 59 record highs this year were also the stocks that pulled it back to earth at the close. Internets were weak again and most of the majors gave in to some heavy profit taking. YHOO, after an incredible run and a miracle 50 point recovery yesterday, gave back -24 today. ARBA dropped almost -30 from its intraday high and JNPR dropped over -40. CMRC the poster child for irrational exuberance dropped almost -80 from its intraday high of $331. QCOM dropped -10.00 after trading in a $50 range only two days before their 4:1 stock split. JDSU dropped -15 the day before its split after trading in a $40 range. Volatility anyone?

The Dow however has taken the lead as it set another record high today at 11486. The intraday high of 11517 was yet another milestone after trading in a range of 10800-11300 for over a month. While the Santa Claus rally is alive and well on the Dow the broader market is still sick. It was not until the last few minutes that the advance/decline line blinked positive for the last time. The market breadth has been negative for so long that analysts are beginning to wonder if it makes any difference any more. Our feeling is the negative breadth has been due to tax loss selling and a few traders moving to the sidelines before Y2K. With both of these events almost over the advancers are increasing and the Dow has come out of hibernation.

The Dow was not the only index to rally today. The Wilshire 5000 broader market index set a new record high of 13,652. The Russell-2000 closed at 488.48 +4.02, its highest close since April 1998. I think this confirms my thoughts that the market breadth is about to turn around and go positive. Investors have finished all their tax selling and should now be concentrating on what to buy for next year. The bullish sentiment is still alive and well as evidenced by the rally in the face of incredible consumer confidence numbers. The numbers posted today were the strongest in over 31 years. Not since Lyndon Johnson was president have consumers been this bullish about the future. Unemployment is at record lows which means they can change jobs at will and probably for more money. Interest rates have been down to levels that many have either bought a new house or refinanced their current one. The existing home sales announced today of +6% for November just confirms this theory. The economy is booming, the stock market is in permanent rally mode and retirement accounts are making record gains. What is there to worry about? If you are a consumer then you should worry about Greenspan and his reaction to all of the positive news above. The Santa Claus rally is alive and well but Greenspan the Grinch is going to ruin Valentines Day. Bond yields are still hovering around 6.50% and stocks have disconnected. But like a boomerang they will come back.

There were as many excuses for the Nasdaq miss today as there are analysts covering the market. Profit taking, light volume, tax selling, year end portfolio adjustments, etc, etc. There was one school of thought that today was the last day to trade and have the trades settle before Y2K. Funds are concerned that trades not settled and cash or stock not firmly credited to their accounts, could be lost during any Y2K event. With that in mind there could be a real slow down of volume over the next two days if all the big guys are in lock down mode. Speaking of lock down, there was a strong rumor for the last couple of months that the major funds were not going to trade during the last two weeks of the year. Given the volume recently I think we can discount that as wishful thinking by many. As I have said before, as long as greed is alive and well there will be trading.

The amount of cash said to be building on the sidelines is enormous. Estimates range from $250 bln to over $1 trillion just waiting for Jan 3rd. Now, I ask you. If you knew in advance that possibly $1 trillion was coming into the market three days from now, what would you do? Right! You would be buying everything in sight that might be on somebody's shopping list. But wait. The Nasdaq went down. Does that worry anybody else? Does it worry anybody that none of the big five, MSFT, INTC, CSCO, DELL, QCOM posted a gain when they are exactly the type of big cap tech stocks that should benefit from this windfall? My theory is this. I think the amount of cash on the sidelines is grossly overstated. Maybe by a factor of 10. Second I think most of the buying has already taken place. The Nasdaq is already up +1000 points since Nov 1st. The Dow is now up +1500 points since the Oct low. We have been seeing list after list of the strong gains for specific stocks this year. 100%, 200%, 500% even 1500% in the last 12 months. Almost every tech stock has a vertical chart for the last 60 days. I think we are going to see some serious selling soon, maybe as soon as next week. The funds are worried about an expected bout of profit taking and are just hoping they can get to next week without a disaster. By waiting they can move their tax event into next year. Monday is next year! Granted there will be a lot of cash coming off the sidelines and a lot of cash from retirement contributions but it does not all have to be invested next week. Common sense would dictate that many will wait to see which direction the market is moving first.

Now the connundrum. Since everyone knows, the Fed will raise rates Feb 2nd and the only question now is +.25% or +.50%, then should I invest now or wait for the drop before the meeting? If I invest now and the market runs up another +15% before the meeting and only drops -10% after then I would still be ahead. But if I invest now and the market tanks before the meeting how long will it take me to get back to where I started? Last January the market rallied the first week but started dropping on the second Monday. The Dow topped at 9600 on Jan-11th then dropped -600 points. It did not trade over 9600 again until Feb-23rd. The Nasdaq hit 2400 on Jan-11th and then dropped -200 points before the week was out. The Nasdaq did recover quicker and was back over 2400 two weeks later.

The whole point to this commentary is simply don't believe all the hype you hear and always keep your stops in place. With the huge gains this year on the Nasdaq there must be some profit taking soon. The Nasdaq closed today almost +1200 points over its 200DMA. Simply incredible! BUT, every time the Nasdaq has exceeded 25% over the 200DMA there has been a 10%-15% correction. I do not expect a serious drop or a prolonged drop. With the advent of the Internet economy the tech sector has taken on a life of its own and is the only place to put your investment dollars. Because of this new paradigm the investors who missed the train the last time around will be racing to buy any dip. Just be ready for the dip. It is on the horizon, we just can't see it yet. If you are prepared and are stopped out early for a profit then you will have a great buying opportunity. If you try to hold over the dip then your premiums will shrink and possibly never recover. Ask anybody who has ever suffered through a disaster. Even though, the stock eventually returned to its previous level, the premiums on the options did not. The expectation evaporated.

With volume expected to be light Wed/Thr, and I emphasize "expected", the volatility is sure to be high. I would expect the Y2K event to be quoted as an excuse for every market dip. We could have some serious "trading" days over the next seven market sessions and then I would tighten up those stops. The Yahoo! earnings event on Jan-6th is normally a market mover and has been a turning point several times. They should report good earnings and a split and that should power the Internets the rest of the week. Go long until the stops take you out with a profit and then don't buy the first dip.

Keep your eyes on the market and don't take the January rally for granted. Sell too soon.

Jim Brown

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