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Miraculous recovery or bear trap rally?

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       1-25-2000           High     Low     Volume Advance Decline
DOW    11029.90 + 21.70 11079.50 10883.40 1,067,416k 1,243  1,773
Nasdaq  4167.41 + 71.33  4303.15  4095.31 1,735,345k 2,010  2,183
S&P-100  767.31 +  8.57   770.06   755.32    Totals  3,253  3,956
S&P-500 1410.03 +  8.12  1414.26  1388.49            45.1%  54.9%
$RUT     521.59 -  1.36   525.27   513.69
$TRAN   2654.69 - 48.26  2717.82  2651.89
VIX       24.34 -  1.98    26.37    23.62
Put/Call Ratio      .53

Miraculous recovery or bear trap rally?

After a week of losses on the Dow, amounting to over -800 points at the intraday low of today, the Dow finally showed signs of a pulse. The rebound off the bottom at -120 came after a breath stopping drop below 10900 which was not a real support level technically but possibly a psychological support level. On Monday the low came within 20 points of 10900 before rebounding. After trading as high as +75 shortly after the open this morning the almost -200 point drop to the low at 2:PM had traders biting their fingernails afraid we were going to repeat the -243 loss from Monday. The Nasdaq tried twice to rally after an almost -85 point drop at the open but followed the Dow down at 2:PM to a low of 4028. The rebound however was outstanding with a +139 point gain from the low.

The general consensus of the analysts had the Dow rebound as simply a relief rally from the six day sell off. The spark for the rally was also the cancellation of the Greenspan testimony today because of a severe snow storm. With traders worried about what he might say the market had been jittery. Take away the photo op and sound bite possibility and add a -800 point drop into oversold and you have a thin excuse for a rally. The Nasdaq has not needed an excuse to rally lately and with any positive Dow momentum behind it could be back in record territory soon. The flaw in this theory of course is still the Employment Cost Index on Thursday and the Fed meeting on Mon/Tue of next week. Everyone believes they will raise rates and anything in the +.25% range is already priced into the market. Still there is that level of uncertainty that will keep the volatility in the markets.

The bonds rallied higher today as money still moved out of stocks. The bonds had been weak early after the Consumer Confidence numbers came in at 144.7, the highest ever in the report's 32 year history. This was revised upward from 141.7 in December. With the economy firing on all cylinders the prospects for a stronger than expected GDP on Friday are good. The prospects for a stronger than expected ECI report on Thursday are also good with record year end bonuses and heavy weightings in energy as well. This strong data in front of the Fed meeting could cause market indigestion.

Stock splits and earnings are still powering the markets with record numbers of each. With 67% of the S&P companies that have reported posting better than expected results, investors should be happy with the returns. As usual many stocks are taking a beating even after announcing results that beat estimates. AMGN +.01 and lost -3.38, QCOM +.01 lost -10.50, AHP +.01 lost -2.00.

Qualcomm (QCOM) on Tuesday posted a fiscal first quarter operating profit that was just ahead of Wall Street's expectations, on revenue that increased 19 percent. Excluding non-recurring charges, the wireless-communications technology provider logged earnings of 25 cents per share, during the period ended Dec-26th. Revenue during the quarter came in at $1.1 billion, up from $941 million during the year-ago period. Analysts had expected QCOM to post a first quarter profit of 24 cents per share, according to First Call.

Compaq Computer (CPQ) reported a 56 percent tumble in fourth- quarter profits on a 4 percent drop in revenue, dragged down by lower sales of business computers as the company struggled to maintain its global leadership in PCs. Compaq did manage to beat Wall Street expectations, but the results were bolstered by a gain of $50 million in its own investment portfolio, separate from growth from its computer business. CPQ earned 19 cents a share, in the final quarter of 1999, off from 43 cents a share, in the year-ago quarter. Sales dipped to $10.48 billion from $10.86 billion. Analysts estimates were for 16 cents per share. In a side note, Dell still has not warned but their quarter does not end until Jan-31st.

Online auction house eBay (EBAY) reported better-than-expected fourth-quarter profits Tuesday, reflecting a surge in registered users. The San Jose, company posted net income of $4.9 million or 4 cents per diluted share. Profits, excluding one-time items, rose to $6.1 million, or 4 cents per diluted share, compared with $3.9 million, or 3 cents per diluted share, in the year-ago period. Analysts expected eBay to earn 2 cents per share. Revenues reached $73.9 million, a 139 percent increase over the $30.9 million reported for the year-ago quarter. Shares of Ebay bucked the post earnings trend and were up sharply in after hours trading.

Internet search site Ask Jeeves Inc. (ASKJ) disclosed it will acquire privately held Direct Hit Technologies Inc., a Web search engine firm, for stock valued at approximately $507 million. Terms call for ASKJ to exchange 5.12 million unregistered shares of common stock for all outstanding shares, warrants and options of Direct Hit. Based on Monday's closing price of 99 for Ask Jeeves shares, the transaction is valued at $507 million. CS First Boston initiated coverage of Ask Jeeves with a "buy" recommendation, and set a year-end price target of 215.

LSI Logic Corp. (LSI) reported 1999 record revenues of $2.09 billion, a 38 percent increase over the $1.52 billion in 1998. During 1999 profits grew at more than twice the rate of revenue growth, and cash more than doubled to $661 million. Net income for 1999, before amortization of goodwill and other special items (EBG), was $1.12 a diluted share, an 85 percent increase over the 65 cents a diluted share reported for 1998. LSI Logic also announced a stock dividend in the form of a 2:1 common stock split, effective February 4, 2000.

Shares of Nortel Networks (NT) moved higher after hours after the networking behemoth topped analysts' estimates and declared a 2:1 split of its shares. Sales at the Canadian company rose 21 percent to $6.99 billion. Nortel earned 55 cents per share, up from 36 cents per share, beating consensus estimates of 45 cents per share. The stock closed at 102.63 and moved to 105 after hours also bucking the trend.

Splits announced today included YWAVE - Yellowwave 2:1, SJR - Shaw Communications 2:1, DS - Dallas Semi 2:1, LSI - LSI Logic 2:1, RNWK - RealNetworks 2:1, NT - Nortel 2:1.

Important earnings to watch for tomorrow will be EMC (Easy Money Corp), JDSU (Just Don't Sell Us) and BVSN (Best Valued Stock in Nasdaq). The aliases of course are ours. With the good earnings performance by EBAY and other Internet companies Nasdaq will be hard pressed to drop very far even if there is a Fed wreck. There is just too much positive investor sentiment. Even with the positive sentiment and the positive close on both indexes today the breadth was still negative with advancers losing to decliners. Actually, the volume was lighter today than normal if you can call 2.8 bln shares on both exchanges light. After the nearly 2 bln share day yesterday the Nasdaq dropped back over -200 mln shares to ONLY 1.7 bln!

We get another chance at Greenspeak tomorrow as Greenspan testifies before the confirmation committee as he tries to keep his current job. The cancelled testimony today is likely to be rescheduled for later in the week and will give traders yet another Maalox moment between now and the Fed meeting. I continue to urge traders to be cautious going into February. The violent drops and wide intraday ranges are symptomatic of a weak market. Traders are afraid the bottom can fall out from under them at any moment and they sell on the slightest indication of weakness. This provides a great traders market but gives the buy and hold investor ulcers. While I am concerned about weakness going into February the Dow is still in oversold territory. Also, the last several Fed meetings has seen an increase in buying the last two days before the event as the more aggressive traders try to take positions in front of a possibly favorable decision. I think the bad news is in the market and today proved there were buyers lurking in then wings. Just be cautious until a new trend becomes apparent.

Good Luck, Sell too Soon

Jim Brown

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