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Market Wrap

Easter Bunny, Santa Clause, Tooth Fairy

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       2-07-2000           High     Low     Volume Advance Decline
DOW    10905.80 -  58.00 10970.90 10846.20   920,743k 1,229  1,777
Nasdaq  4321.77 +  77.63  4321.96  4244.15 1,609,836k 2,346  1,852
S&P-100  772.89 -   2.62   778.40   768.45    Totals  3,575  3,629
S&P-500 1423.00 -   1.37  1427.15  1413.33            49.6%  50.4%
$RUT     532.39 +   6.87   532.40   525.52
$TRAN   2572.21 -  36.75  2622.43  2569.68
VIX       23.70 +   0.77    25.44    23.36
Put/Call Ratio       .44

Easter Bunny, Santa Clause, Tooth Fairy

NASDAQ 4300? No longer a mythical figure in search of a reason to celebrate, the NASDAQ broke through the resistance barrier today to close for the first time over 4300. First the good news. The gains came steadily throughout the day, as the final 30 minutes of trade showed the benefits of saving the best part for last. That's when the index powered up to close at its high of day at 4321. Volume was a strong 1.6 bln shares. The technical breakout and the strong volume were a positive in our book, but by no means a confirmation that we're moving higher from here. As you might expect, technology stocks, and more recently biotech stocks have been the fuel igniting the run.

Don't look now, but they have also been the source of a lot of volatility. Think way, way back to January 31st (6 trading days ago) when the NASDAQ touched a low of 3748. Since then the NASDAQ has tacked on a staggering 573 points, a 15.3% gain for the week. Remember when that was a great ANNUAL return? Anybody think that can be sustained on a weekly basis for long? Nope, we don't think so either. While on the surface things look good, we just passed stochastically (a measure of overbought or oversold) to the overbought part of the graph. That move coupled with the gain should serve as a counterbalancing red flag to volume-backed breakout above. And so we find ourselves sitting precariously at 4300 just like January 24th, the day the NASDAQ began its nosedive to the 3750 level. We are not saying that is going to happen again - after all, we had "deer in the headlight" fear of the coming FOMC meeting, which prompted traders to take some cash off the table beforehand. However, while we don't face that prospect again until March, earnings season is coming to an end this week, beginning with Cisco tomorrow after the close. MCI/WorldCom reports on Thursday morning, followed by Dell after the close. There are not many events on the horizon that would precipitate big gains until April when earnings get interesting again.

Anyway, In case those last two sentences scooted on past your eyeballs, those three companies, CSCO, WCOM and DELL make up three of the top five market cap stocks on the NASDAQ 100 (the other two being MSFT and INTC, whom have already reported). We all know what generally happens to stock prices shortly before earnings (right, they go up; conversely, they go down after earnings). CSCO was up over $4 today in anticipation of earnings results tomorrow, where they are expected to beat the street by a penny or two. WCOM, up $3.56 and who reports Thursday before the bell was given a boost this morning by a Merrill Lynch analyst noting, "you won't be disappointed". Intel (+$3.13), who just purchased a new plant in Colorado Springs in which they intend to make handset chips for NOK, also got a boost on positive news for semiconductor association. It was learned today that 60% of chip growth is coming from the communications field. Oh, so that explains the big gains in BRCM, SNDK, LSI, ALTR, CNXT, and TXN. Though DELL was off fractionally (they've already warned), INTC, CSCO, and WCOM accounted for 12 points in today's move, giving us another reason to greet the breakout with caution once earnings are over. Everyone remember why we urge you to sell too soon? Right. Prices generally fall following release of the news. As go the Generals, so goes the index. Even with these three excluded, you still have to take your hat off to the semiconductor and biotech stocks for their contribution to the six-day run.

On the other hand, the DJIA was a different story. Rust is apparently not in fashion right now. Just look at the list of former beauty queens standing around with real earnings as institutional money seeks out those smoldering tech stocks offering a lick and a promise. GE, unquestionably representative of the whole market, was handed a loss of $5.06 today. AA lost $2.38. BA sheared off $2.19. MMM gave up $1.44. In all, only six of the Dow 30 were up, one of which was HWP, up over $10. Were it not for Carly Fiorina, HWP's CEO kickin' hiney and taking names (plus positive comments from Lehman Bros.), we'd have seen another 40 points lopped off the DJIA. While only spanked for a loss of 58 points to close at 10,905, the 11,000 support level appears to have turned to resistance today on the theory that what was once support can become resistance if a market (or a stock) is rolling over.

Of course, no Monday would be complete without mergers, and boy was today a bell-ringer. First out of the block was Pfizer (PFE) announcing that they had agreed to buy Warner-Lambert (WLA) for about $90 bln in stock, or 2.75 shares of PFE for every share of WLA. It's estimated that a $1.6 bln savings by 2002 will result along with a steady 25% growth rate over the next three years from the synergy. In the process, AHP was left at the altar upon the news. Don't feel too sorry for AHP though. They get a $1.8 bln breakup fee as a consolation prize. Did shareholders like the "Oh, Henry" ending? You bet. PFE gained $1.25, WLA moved up $2.75, and AHP topped them both for a $2.94 gain.

In other M & A activity, we turn back to the tech front to find another marriage in the optical networking business with Lucent buying Ortel for $2.9 bln. in stock, which equates to about $177 per ORTL share. That was followed closely by Akamai's (AKAM) announcement that they would purchase Intervu (ITVU), a company that transmits audio and video over the Internet for $2.8 bln. Finally, Corel (CORL) is buying Inprise/Borland (INPR) for $1.07 bln in a move that targets the growing market for the Linux operating system.

Increased liquidity anyone?

In the end, here are the scores. The DJIA fell 58 to 10,905 on 932 mln shares traded in a demonstration of technical weakness. Decliners outpaced advancer 17:12. 151 new lows were nearly double the 82 new highs, while down volume was 50% greater than up volume. While it doesn't look good and it's not technically inspiring, it's also not a surefire signal for a selloff. The next level of support is at 10,850 with resistance at 11,000.

The NASDAQ gained 77 to 4321. Volume was impressive at 1.626 mln shares. Advancers beat decliners by a margin of 4:3, while up volume was more than twice down volume. Similarly new highs smoked new lows 321 to 61 - an overall impressive day, but we still need to watch the 4300 level to see if it holds

In summary, here we sit directionless. Not only is there M & A liquidity, there is still plenty of cash on the sidelines, a smidgen of which got put to work today in tech stocks during the final 30 minutes of trading. Thus, we conceivably have a tradable technical breakout on the NASDAQ. Conversely, the DJIA gave us a technical negative today. As Jim noted on Sunday, Monday or Tuesday could be the day to watch, and today wasn't it. We're going to have to wait until tomorrow to see which side these markets fall into. Keep in mind that with earnings season over, there isn't much reason to move up (except that blessed liquidity thing) and historically, now's the time during the earnings cycle when most issues go to sleep. We could be rangebound for a while, in which case, you may want to stand aside until you see the direction emerge. Rangebound trading can eat you alive.

Other indicators? The VIX moved up today to over 23 from a low of 21 on Friday. When it hits 20 on the downside, that's generally a sell sign. However, with a six-point gain on the Russell 2000 today, losing issues are narrow by comparison and could spell r-a-l-l-y for the broader market. It's a coin toss folks. Keep your running shoes handy and be ready to find "new cheese" (see January 24 Market Wrap). Of course, no Wrap would be complete without a reminder to sell too soon.

Buzz Lynn
Research analyst

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