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Market Wrap

The Thrill of Wednesdays

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       1-12-2000           High     Low      Volume   Advance  Decline
DOW    11551.10 +  40.00 11612.50 11505.20   978,138k  1,356    1,696
Nasdaq  3850.02 -  71.17  3950.98  3834.53 1,519,027k  1,799    2,334
S&P-100  782.73 -   2.52   788.30   780.36    Totals   3,155    4,030
S&P-500 1432.25 -   6.31  1442.60  1427.08             43.9%    56.1%
$RUT     490.04 -   2.57   494.84   487.09
$TRAN   2936.24 -  13.32  2966.68  2931.61
VIX       24.63 +   0.70    25.51    23.33
Put/Call Ratio       .45

The Thrill of Wednesdays

The beauty of writing the Wednesday Market Wrap is that YHOO typically announces on Tuesday and I get to cover the aftermath, which is where I want to start today. The company announced great earnings, strong revenue growth and a gave traders a bonus with a 2:1 stock split. YHOO then began dropping in after-hours trading, down over $20. It is standard procedure for Yahoo to fall after earnings. In truth, the 2:1 split was the only thing stopping us from recommending puts last night (we don't want to fight against another catalyst). So when YHOO opened at $390, it was screaming for put plays. Who is out there bidding this stock back to almost even before the market open?! Not to make this a soapbox issue, but this has been one of the most reliable trends in the market for the past two years. A huge run-up into earnings followed by a short-term decline. So congratulations to all who took advantage of the odd opening in shares of YHOO for a quick $40 profit on the stock's intraday trading today. YHOO ended at $357.56, down almost $40.

But this isn't a Yahoo Wrap so let's get back to markets where a lot of action happened today, in front of what could be a real wild ride tomorrow. Let's take a poll. What is more important to the markets on Thursday? A) The PPI report due out in the morning, B) Retail Sales numbers also due out early, C) INTC's earnings report after the close, or D) the Greenspan speech in the evening. The answer is a trick! It is E) all of the above. Not to mention how the bond will react to this overload of interest rate sensitive data. You would be prudent to keep an eye on the 30-year bond yield before placing your bets. Some analysts are still talking about a run towards a yield of 7.00%. Here are the expectations for the data. The PPI is expected to be up by 0.3%, with the core rate increasing by 0.1%. The Retail Sales figures are forecast to be up 0.9% which is a big jump. In evaluating this number you will have to look at what part new car sales played. They had a great month and may skew the number slightly. Once the bond traders get this sorted out, they will have to worry about what Mr.Greenspan might say that evening. It's not that rising rates have really hurt the high-tech sector over the past couple months, but there is an increasing feeling that a move to 7.00% would bring out the bears.

The Dow ended up 40.02 to 11551.10, helped by Financials, even though the bond was sinking. The Financials won't be able to continue to rise if the bond is sinking so we will consider this to be abnormal. Especially when you consider that 3 out of the last 4 times the PPI and Retail Sales were released on the same day, the bond got hammered. The S$P 500 was down 6.46 today and the Nasdaq was down big, dropping over 71 points. Volume was good, but nothing to write home about. Decliners also ruled the day over advancers. The 30-year bond ended trading with a yield of 6.71%.

The Nasdaq spiked open today up 30 points and if you put your hand in that cookie jar, you got caught. It quickly reversed course and never came close to that level again. It did bounce at 3835, which at the time was an 80 point loss, to come back to even before rolling over again. The Dow faired better by holding in a tight 100 point range all day.

Shares of Microsoft were plagued Wednesday by a report in today's edition of USA Today. The report noted the intentions of federal and state prosecutors to seek a breakup of the colossal software maker. This news helped to bring MSFT down $3.56 for the session. Rumor has it that lawyers are looking to split Microsoft into two or three separate entities according to products. None of the parties involved would comment on the rather speculative report. One spokeswoman from the Justice Department was quoted as saying that the report was "inaccurate in several important respects" and "does not accurately represent our views." But there was news later that MSFT could be broken into 3 separate companies.

Ariba (ARBA) announced earnings on Tuesday, coming in 4 cents better than analysts estimates. Today, Prudential upgraded ARBA from a Hold to a Strong Buy. Ariba shares closed down just over 18 points for the session at $172.88.

Today, Drugstore.com (DSCM) announced plans to acquire Beauty.com. DSCM will issue 1.3 million of its shares for 100% ownership of Beauty.com. This deal is worth an approximate $42 million. The plan is for Beauty to maintain its operations from New York while DSCM will begin providing customer service, operational infrastructure and technology support.

USA Networks (USAI) announced plans to buy Precision Response in a stock swap worth an approximate $608 million. USAI plans to combine Precision's e-commerce customer service with its USA Electronic Commerce and Serviced unit.

Digital communications provider Razorfish (RAZF) shares closed up $5.88 at $87.13 following a 2:1 split announcement which will be effective as of January 27th.

Shares of Rite Aid (RAD) were down $2.75 after the company announced late Tuesday that they would not be reporting end of the year quarterly results until their auditors had completed a review of financial information. Lehman Brothers also downgraded the stock from a Buy to a Neutral citing the company's lack of earnings power as the reason for the downgrade.

Here are my thoughts and they are just that, but use them for what they are worth. Markets cycle, and we are entering the lull period after a healthy boom (to say the least) for the past three months. Traders are selling the rallies and the markets have been generally trending sideways to lower since the start of the year. The bond can no longer be ignored. As it continues to fall, investors will shift money over from high P.E. stocks. Another indicator is the overall bullishness in the Investor Intelligence survey. This is a classic contrarion indicator. It is at a level that is typical of a short-term correction in the markets. The market charts don't look great technically and sideways trading and a little consolidation sounds bad, but would be considered healthy. The Dow is in less jeopardy to sink based on the fact it hasn't really gone far. The Nasdaq on the other hand might be looking at 3700 once again or possibly a break of that support, pushing it down to the 3550 level. The timing is tougher to predict, but it is hard to imagine that we can flush out all of the worries before the Fed meeting on Feb. 2nd.

Not to worry though because an experienced investor can make money in all markets (that makes it sound too easy but its true). Selling calls, buying puts, combos, and straddles aren't always exciting, but produce a decent return. I love a good bull market, but have learned to wait until the time is right before jumping in with both feet to buy calls. LEAPS is another strategy worth a look when the market takes these quick dips, especially when the $VIX jumps over 30 (currently at 24.63).

Don't fight this negative trend. You may end up with a damaged portfolio after stepping into a bear trap.

Ryan Nelson
Asst. Editor

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