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Market Wrap

February correction?

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         WE 2-11           WE 2-4         WE 1-28          WE 1-20
DOW     10425.21 -538.59 10963.80 +224.93 10738.87 -512.84 -471.20
Nasdaq   4395.45 +151.31  4244.14 +357.07  3887.07 -348.33 +171.13
S&P-100   752.04 - 23.47   775.51 + 37.47   738.04 - 41.74 - 17.74
S&P-500  1387.12 - 37.25  1424.37 + 64.21  1360.16 - 81.20 - 23.79
RUT       537.10 + 11.58   525.52 + 20.90   504.62 - 29.33 + 25.84
TRAN     2436.13 -172.83  2608.96 + 27.21  2581.75 -169.74 -140.14
VIX        26.92 +  3.99    22.93 -  6.16    29.09 +  6.43 +   .53
Put/Call     .59              .45              .60             .47

February correction?

Gosh, who would have thought we would see a correction in February? It is now official. The Dow has fallen -11.4% from the January high and is now officially in correction mode. The benchmark index closed out the week with a -218 point drop and a loss of -538 points for the week. The Dow did not even slow down as it passed through the 10550 milestone signifying a -10% correction. The selling on the Dow finally rubbed off on the Nasdaq as traders decided they would be better off taking profits Friday and sleeping easier over the weekend. The divergence between the Dow and the Nasdaq was becoming critical and market technicians were expressing alarm. Why? Who cares if nobody wants to buy MO, MMM, DD or IP? I think there is a valid reason for the split but it concerned technicians still stuck in historical trend analysis. The good news? Talk of bargain hunting on the Dow began near the close on Friday.

Contrary to conventional wisdom the market fell again Friday after getting a weaker than expected January Retail Sales report. Sales in January only increased +0.3% instead of the +0.6% analysts expected. Normally this would have been positive and would have indicated the pace of consumption is slowing. The number that irritated the markets was the increase in the December number from +1.2% to +1.7% which is excessive in the Feds eyes. Personally I think the answer is obvious. A large number of consumers bought a much larger supply of a broad range of items to prepare for the feared Y2K shutdown. When the catastrophe did not materialize the public did not need to buy as much in January. The Dec/Jan retail sales discrepancy was simply a statistical representation of Y2K hype. The bond market cheered the reduced January number as evidence of a possible cooling of consumer spending. Sorry guys, you are wrong. The rebound in the bond market prompted a drop in yields to 6.25%. Dow financial stocks rallied on the news. AXP +2.06, JPM +2.69, C +1.25 but AXP and JPM both gave up their gains and ended the day negative.

Another challenge to both the Dow and the Nasdaq came from Microsoft. A report published by CNet expressed concerns that the acceptance of Windows 2000 would be less than enthusiastic. Rumors of bugs and lack of computability to some current programs prompted a large number of investors to take profits from the +$15 gain in the last two weeks in anticipation of the Windows 2000 release. MSFT closed down -6.06. MSFT was responsible for more than -30 points of drop in both the Dow and Nasdaq. Ironically the keynote speaker at the Windows 2000 conference, Michael Dell, fired the first shot last night saying Linux was gaining momentum and there was no rush of corporate customers upgrading to Windows 2000. Dell said, "We just don't see a massive immediate acceleration into Windows 2000" Adding fuel to the fire was the technology-consulting firm Gartner Group who said in a report that one in four corporations would run into computability problems with existing software. These are not the kind of comments Microsoft investors want to hear. Warburg Dillion Read analyst Charles Wolf said these comments could hurt Microsoft for some time. Oops! Way to go Michael. I wonder if Bill Gates will invite him to any more group socials in the future?

After a week of terrorist attacks on some of the largest websites by hackers there was another more serious attack on Wall Street. An unidentified male set off a pipe bomb at 4:40 AM at the Barclay building, 75 Wall Street. Nobody was injured but there was concern that the NYSE would shut down if any further devices were found. After a brief period of confusion the blast became just another excuse for the selling Friday. Give me a break! Why would a minor incident several blocks away and totally unrelated to the stock market impact stock prices to the tune of billions of dollars?

The inflation outlook continues to be influenced by rising oil prices. Saudi Arabia, one of the largest OPEC distributors is rumored to be planning even more cuts in production and shipments to U.S. and European customers. Was it something we said? Oil prices hit another nine year high today on the news. Prices have not been this high since the gulf war. Maybe somebody should remind Saudi Arabia who bailed them out in 1991 with 500,000 soldiers and billions of dollars in war expenses.

We got the afternoon sell off I was expecting on the Nasdaq. What I was not expecting was the big drop in the morning as well. Much of that drop was due to the Microsoft and Dell impact on the Nasdaq. Breadth remained terrible all day but what else would you expect during a serious Dow correction? While the Dow still looks sick the Nasdaq drop was not convincing. The volume was weaker than normal and there were still pockets of resistance. Intel for instance was only down -1.75 and many of the recent fast movers only gave back a small percentage of their gains. BEAS only dropped -.50 after gaining +$20 for the week. CSCO only gave back -5.00 after gaining +$35 in February. There were many examples like this but the other extreme was also represented. AMCC gave back -$28 of the +130 it has gained in February and YHOO dropped -22 on the eve of its split. Still out of the hundred or so fast movers on my current watch list only 14 lost more than $5 and only three more than $10. The question now becomes, "is this just another profit taking day like Wednesday and we can expect to be back in record territory on Monday" or is it the start of another "correction/buying opportunity". Sounds like a trick question on the "Who wants to be a Millionaire" show. If we knew the answer to this one it would be worth well more than a million dollars.

The way I read this the Dow is very oversold. There was a bargain hunter bounce on the Dow (+50) at the close but it was not convincing. The Nasdaq also bounced about +40 before turning down again. After seeing the strength in the Nasdaq this week I don't think we can hit -10% again anytime soon. The liquidity coming into the market is enormous. I would look for 4300 to be the near term bottom on the Nasdaq. The Dow however could still have some room to drop in spite of the very oversold condition. Many of the Nasdaq stocks I researched had a rebound spike at the close but almost none of the NYSE stocks showed any life. It is entirely possible we will see another Monday like we had two weeks ago with the Dow and Nasdaq both giving ground at the open and then rebounding by the end of the day. I doubt however they will rebound very far. This is a killer week for economic reports and many analysts are expecting a retest of 10,000. That would be extreme in my book. Possible but extreme. The Dow is still not trading at parity with the broader market. The S&P has yet to close above the last day in 1999 and this has not happened since 1978. Over 20% of the S&P stocks are trading at 52 week lows. There is a bear market in almost everything but tech stocks. Other than the oversold conditions on the Dow there is nothing to make investors want to buy. The earnings news is over and the economic reports this week are giving bond traders nightmares.

Monday is Business Inventories, Tuesday Industrial Production, Wednesday Housing Starts, Import/Export Price Index. But the real problems come on Thursday with the PPI and Friday with the CPI, Real Earnings and Consumer Sentiment. Just in case you have not heard, Greenspan is giving his twice yearly Humphrey Hawkins testimony to the House Banking Committee on Thursday. PPI, CPI, Housing, Jobs, Earnings and Greenspan, all in one week.

Conventional wisdom would expect the market to languish and possibly test new lows before the big reports at the end of the week. Contrarian wisdom would have the markets prejudging the outcome and moving into rally mode on Tuesday. If you doubt the validity of contrarian thinking simply look at the market history the two days prior to the last three Fed meetings. Strong rally each time. Go figure. The market is the best discounter of future events known to man and if the markets decide the PPI/CPI numbers are going to be benign then who are we to complain. The Nasdaq did not even lose all of Thursday's gains and the Russell-2000 only lost -5.11 but has not been able to hold above 540 in a week. This bounce off the previous high is a point of concern but I think it is Dow related.

The bottom line: Please keep your seatbelt fastened and remember the coming week last year was the low for the month. There could still be another dip before this rally roller coaster resumes its upward momentum. Options expire on Friday which normally provide an upward bias for the week. If we get a follow through dip on Monday to under 4300 on the Nasdaq I would buy it once it turns up. For both my readers who play Dow stocks you two are on your own. Seriously, we could see a bear trap rally on the Dow simply as a relief bounce from the severe oversold condition. I would continue to be skeptical of any Dow rally until it closed over 11000 convincingly and that is +600 points up from here. Basic materials stocks did not suddenly jump from 5% growth to 40% growth just because the Dow sold off. Just because GT was $75 and now it is $21 does not mean it is a bargain. It may still be overpriced. Even if it was under valued it still may not be a good trade. This sounds corny but we want to play the winners not try to pick the bottom on the losers. I have people who eamil me every week with I think XYZ is a great buy here and I look at a chart and it has been going down for months. Play the champs not the tramps. Be patient, pick your plays carefully and watch for the rebound. Once past this dip we may not see another for weeks as we head into March and the April earnings. Remember this chart from last year.

Late February and early March would have been good months to go skiing or repaint the house. Many readers would have saved thousands of dollars by doing anything besides fight the market.

Trade smart and sell too soon.

Jim Brown Editor

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