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Market Wrap

Cupid takes aim. . .

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       2-14-2000           High     Low     Volume Advance Decline
DOW    10519.80 +  94.60 10549.00 10430.80   931,588k 1,452  1,549
Nasdaq  4418.55 +  23.10  4435.96  4355.54 1,600,534k 2,196  2,031
S&P-100  756.80 +   4.76   757.99   749.87    Totals  3,648  3,580
S&P-500 1389.94 +   2.82  1394.93  1380.53            50.5%  49.5%
$RUT     539.94 +   2.84   539.94   533.51
$TRAN   2467.28 +  31.15  2472.54  2427.72
VIX       25.79 -   1.13    27.31    25.46
Put/Call Ratio       .57

Cupid takes aim. . .

And misses. While Cupid did a pretty good job of getting some companies hitched over the weekend with new merger announcements this morning, the winged matchmaker soon ran out of arrows. It's not that Cupid is a bad shot. It's just that investors are not in the mood to fall in love and largely dodged his arrows today.

Let's dispense with the mergers first, then we'll get to the issue of "dodging arrows".

First, Corning (GLW +14.25, $180) announced it would acquire NetOptix (OPTX +20, $156) for $2 bln in stock (payable at 9/10 GLW share per share of OPTX) in yet another consolidation in the photonics business. Corning is setting itself up to become a strong competitor of JDSU.

Next came the Healtheon/WebMD's (HLTH +1.63, $56.63) bid to buy both Medical Manager (MMGR +21.75, $86.75) and its subsidiary, CareInsite (CARI +4.13, $72) in a stock swap deal valued at $7.6 bln. While it may seem obvious, a Reuters report noted "Healtheon wants to become a key Web-based link between doctors, patients, drug companies, insurers and other health service companies." (Read that B2B leader in a $1 trillion business).

Then came news that Sterling Software (SSW +1.81, $36.25) would be purchased by computer Associates (CA -0.44, $69.31), the third largest business applications software company behind MSFT and ORCL, for $4 bln in stock.

Finally, Honeywell (HON +0.38, $43.50) and United Technologies (UTX +1.94, $50.31) formed a joint venture with i2 Technologies (ITWO +19.13, 259.88) aimed at aerospace products and services. You'll love the name: MyAircraft.com - really handy for those days when you just don't have time to call around for the best deal on a new jet engine.

From the rumors department, there are rumblings that AOL (-1.25, $55.75) may be negotiating for a controlling interest in Net2Phone (NTOP +12.19, $60.75). Since it's still in the rumor stage, terms have yet to be disclosed.

Well, at least one arrow was pure poison. Though also still a rumor, Infosys, the Indian Internet giant making up 20% of India's most followed market index comprised of 30 stocks, may be seeking to acquire Cambridge Technology (CATP +3, $20.44). While Cambridge shares jumped at just the innuendo, INFY lost (gulp) $127.06 to close at $543 - not a happy Valentine's Day for those shareholders.

As for dodging arrows, sentiment is leaning on the negative side, which kept many investors sitting patiently just watching for a sign of which direction this market will move. The fact is that there was some bargain hunting happening today on beat up issues, which certainly accounts for some of the 94-point gain on the Dow today. Unfortunately, that's a problem. When investors are hunting for bargains, by definition they are signaling that they are not yet ready to get back in the market with both feet. While the VIX.X spiked up to 29 last Friday, today it dropped a bit, into the 25-27 range, while closing at a very "middle of the road" 25.79.

Despite a bounce up following an 11% correction, today's 94-point gain to 10,519 wasn't very convincing. With just 931 mln shares changing hands, slightly short of the 1 bln daily shares we've become accustomed to seeing, there was no broad-based participation that would indicate a definite recovery. 1551 decliners edged past 1453 advancers, while down volume outpaced up volume by 50 mln shares. However, 240 new lows were quite pronounced next to just 55 new highs. This is hardly an enthusiastic recovery. If their was any good news though, it's that the DJIA never fell below 10,450 and remained significantly higher than the 10,379 touched last Friday.

The NASDAQ fared slightly better. With the exception of the amateur hour gap open at 4434, it managed to close up 23 points at its high of the day at 4418. 11 advancers slipped past every 10 decliners, and 287 new highs more than doubled the 113 new lows. Volume too was strong at over 1.6 mln shares. Up volume beat out down volume by a 4:3 ratio. Volume was a respectable 1.6 bln shares. Again, not a bad day, but certainly not a strong recovery. The trading lacked any meaningful volatility by trading in and out of positive territory. It was only a final hour push that got the index back into the positive by the close. Most of the 5 generals (MSFT, CSCO, DELL, WCOM) were off fractionally, excluding INTC, which managed a $4 gain partially on news of its new Itanium, Timna and Willamette chips that will be unveiled at an Intel developer forum in Southern California this week.

The sentiment just isn't enough to call today a recovery from the lows last week. It was more of a relief from an oversold market. With the price of oil hitting a new high of over $30 today, its highest since the Gulf war, and Greenspan to give his Humphrey Hawkins speech to Congress on Thursday (where traders will be looking for any utterance of future interest rate direction), there is fear among traders that the indices may have further to fall. $30 crude is certainly alarming for the long-term trend, but most traders think that is extreme and can't last. Using Ken Fischer's Great Humiliator Theory that states that it's the market's job to humiliate as many people as possible, $30 oil could be a major negative factor a few months down the road.

Thursday is also the day for release of the PPI numbers for January, followed by the CPI on Friday. In short, there is a lot that can go wrong before investors and traders alike think that things will get better.

The good news is that there has been relief in site two days prior to recent "Greenspeakings" and there is still a boatload of liquidity just waiting to buy something if we can get a one-week horizon with few speed bumps. That's the time when we may collectively allow ourselves as traders to be nailed by an arrow or two from Cupid and fall in love with the market again. After all, corporate profitability borne of innovation and productivity gains continues unwavering.

As Jim said over the weekend, keep your seatbelts fastened, it could get bumpy. Watch the VIX.X and remember that when fear is the highest, prices are probably about to head back up. Pick your plays carefully this week, or stand aside until the dust clears. For you cheese seekers out there, keep your sneakers on - some time premiums on volatile issues that have already experienced a pullback (AMCC, EMLX, ISLD) are juicy for the selling (see risks of selling Naked Puts). As always, sell too soon.

Buzz Lynn
Research analyst

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