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Market Wrap

The countdown continues only this clock won't stop at 007

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       12-30-99            High     Low     Volume Advance Decline
DOW    11452.90 -  31.80 11568.80 11446.70   553,570k 1,766  1,365
Nasdaq  4036.87 -   4.59  4090.61  4026.19 1,100,607k 2,026  2,193
S&P-100  792.14 -   1.50   798.41   790.59    Totals  3,792  3,558
S&P-500 1464.47 +   1.01  1473.10  1462.60            51.5%  48.5%
$RUT     499.27 +   2.26   499.27   498.87
$TRAN   2963.45 +  21.46  2973.69  2934.13
VIX       25.96 +   1.59    25.96    24.39
Put/Call Ratio       .51

The countdown continues only this clock won't stop at 007

By the time some of you read this it will be 2000. Due to the age old application of time zones, at 6:01 AM ET Friday morning it will be 12:01 AM 1/1/2000 in Auckland, New Zealand. (This always makes me laugh when someone claims the world is going to end at 12:01 on a given day. I want to hunt them up and ask them what time zone they are using.) Because of the many readers we have worldwide, in over 100 countries, we are sending the Sunday newsletter on Thursday night. While we have completely tested all 50+ computers in our office network and we are sure you have tested yours, we are not sure about the tens of thousands of servers that our email touches on its way across the Internet to you. Hopefully this will be just another event you will either forget by the end of next week or remember to tell your children later when talking about H.G. Wells War of the Worlds and the great Y2K scare.

In my mind, and it has been very crowded in there lately, I think we should be more worried about the market next week than Y2K tomorrow. The small sell off today was simply traders moving to the sidelines for the holiday and nothing more should be made of it. The Dow and Nasdaq both opened strongly positive and then bled volume all day. The advance decline line was positive on both exchanges most of the day as it was yesterday also. This convinces me that the tax loss selling for 1999 is over and traders are ready to put their money back to work.

Next week is shaping up to be quite a battle. The combination of cash inflows from retirement contributions and Y2K money coming off the sidelines will be pushing the markets higher. However, the Y2000 tax selling will begin in earnest. We will have massive movements of cash coming into the market and leaving at the same time. The positive side of the Y2000 tax deferred sales is that only a portion of the money will be leaving. Cash to pay 1999 taxes and a little spending money to pay off those holiday bills. The balance will either go into different stocks or go to the sidelines to wait for the coming pull back. Portfolio managers have down played the impact of these tax sales of previous big tech winners. The retort is "If we sold them what would we buy?" Trust me, there will be selling and with the Fed likely to be aggressive in 2000, the odds of strong selling before the Feb 1st Fed meeting is very strong. I would bet on a two billion share day on the Nasdaq next week as investors shuffle their holdings.

There was an article on CNBC today about market tops in previous Januarys. I think they claimed that 70% of the time the first week in January was a short term market top. Many years it was the first or second day. Sometimes it was months before the market recovered. In 1999 the market top was the second Monday and the following slide took -200 off the Nasdaq and -600 off the Dow. I feel there is just too much liquidity to hold the market down long but we may see an end to day after day of new market highs. I incorrectly quoted the earnings date for Yahoo on Tuesday as Jan 6th, it should have been Jan-11th after the close. This is normally a turning point for the net stocks and the Nasdaq. The put/call ratio which measures investor sentiment is at the highest levels in memory on the Nasdaq and Dow. This points to a level of extreme pessimism and concern. Normally a high ratio is only achieved after a significant drop and represents a bottom. The existence of these high levels without a previous drop is actually an insurance policy against a severe sell off.

Abbey Joseph Cohen was interviewed again today and if you read between the lines, she was hedging her bets. She said again that 2000 will be a good year but not a great year. The statement that caused me concern was her answer to tech valuations. She said that for most of this decade techs were grossly undervalued. BUT, now she feels that techs are FAIRLY valued and NOT cheap. This is a noted bull. What does she consider a good year for 2000? Her target as stated on CNBC AFTER the market close today was 1525 by year end. Before you start popping champagne corks let me remind you that the S&P closed today at 1464, only 60 points from her 2000 year end target. To be fair she always claims that her targets are low and obtainable. I hope so! It may be of note that the tech stocks in the S&P were up +75% for the year and all the other S&P stocks were only up +4.5%. Does this mean she expects a tech wreck in 2000? Don't forget that the Nasdaq is 44% over its 200DMA, a level historically unsupportable. Also historically the gains by the major indexes in the year after a record year have been terrible. After the previous biggest gain on the Nasdaq of +81% the next year the Nasdaq only gained +15%. The DOW, S&P and Russell all lost ground in the years following their biggest gains. The Nasdaq is up +84% in 1999 for the biggest gain on record.

Name five stocks that are guaranteed to have strong volume on Friday's half day of trading. Here are my picks. HD, WCOM, INKT, GBIX and QCOM. I cheated, all of these stocks split after the close today and will trade at the post split prices on Friday. The biggest volume of course will be QCOM. Now the second quiz. If you have been holding QCOM for more than a week, did you sell at the open Thursday at $740? If not, why? After seeing it drop to 645 at the close, almost -$100, were you reconsidering your decision? More than 10% of the 140M float traded today, more than three times the recent daily volume.

The new price target on QCOM, which caused the spike yesterday, is now $250. (post split) The stock price at the open tomorrow will be in the $161 range depending on after market activity. While a $600 QCOM has been making huge moves it is entirely possible that these big swings are now going to slow with four times the shares available. We have seen it time and time again. As outstanding shares increase the size of the moves decrease. Check out the recent moves on MSFT, INTC or DELL which all have over three billion shares outstanding. Granted the 644 million shares after the split still pale in comparison to the 3 bln for these other heavyweights. My point here is that paper gains are just that, paper profits, until sold. Many of the stockholders for the last couple of years bought this stock for $20-$50 and are now paper millionaires. A $38,750 investment on 1/1/99 (1550 shares) is now worth over $1,000,000. Some may decide they will want to turn paper profits into cash in January. Many funds have share limits for stocks in their portfolio to avoid having huge losses should disaster strike.

Institutions hold 55% of the available shares or 77 mln shares. As of tomorrow, they will own 308 mln shares. If your share limit was one million then you will be three million over as of tomorrow. There is no drop-dead date when they must sell their shares but you can bet they will want to sell before the price drops very far. Remember every -$1 drop is now -$4 with four times the shares. Have you heard that there are several companies that claim they have a better product coming to market next year? Now that I have built a case for a coming drop let me switch sides. The $250 share target price is probably low. Even at these lofty 500+ PE levels the odds of QCOM beating the $250 level this year are 100%. Investors that missed the run will pour into the new $160 shares in record numbers hoping to see the $250 target by February. QCOM also has new products on the horizon. One which has analysts excited is streaming video over your cell phone. Data rates 50 times current modem speeds are expected soon. This will only increase the population of the CDMA technology. Confused? What we have here is simply a difference in time frames. Short term there may be some selling pressure as traders lower their exposure and diversify. Long term it is still a great company and a great stock. Did I mention that they just voted to increase the outstanding shares to 3 bln? There are now only 644 mln outstanding, can you say 4:1 split again soon?

Friday should be exciting depending on the problems or lack of problems as Y2K moves across the face of the planet. Since the new year will be reported with a microscopic focus in each time zone, a lack of problems will likely cause a flood of money into the market before the 1:PM closing bell. Conversely if networks show disaster after disaster then the money may move quickly to the sidelines as well. The focus should be on the length of time expected to correct the problems and the severity.

Next week begins the economic challenges for 2000 with the NAPM on Monday, Construction Spending on Tuesday, Factory Orders on Wednesday, New Home sales on Thursday and the biggie, the December Jobs Report on Friday. Remember, the Fed does not have to wait for the Feb-1st meeting to raise rates. Should a strongly negative report stimulate Greenspan things can turn ugly in a heartbeat.

I will resume my Options 101 articles next Sunday with "How to trade the high risk Internets, without any risk".

Good Luck, and a happy new year to everyone!

Jim Brown

Happy New Year from all of us at OIN.

This is some of the staff from the Denver office at our Christmas party. About 25 were either unable to attend or work in other states and commute by email. Jim is the gray haired man in the center.

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