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Market Wrap

Blue Chips get a break while Technology hangs tough.

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       2-28-2000           High     Low     Volume Advance Decline
DOW    10038.60 + 176.50 10156.50  9842.60 1,026,550k 1,466  1,493
Nasdaq  4577.85 -  12.65  4626.72  4466.42 1,798,067k 2,079  2,167
S&P-100  727.75 +   7.97   736.44   716.75    Totals  3,545  3,660
S&P-500 1348.05 +  14.69  1360.82  1325.02            49.2%  50.8%
$RUT     557.68 +   0.94   559.69   548.13
$TRAN   2361.78 +  10.52  2375.53  2340.60
VIX       26.90 -   1.98    29.96    25.92
Put/Call Ratio       .45

Blue Chips get a break while Technology hangs tough.

It didn't happen easily, but the beat up, tired, washed out (did we miss one there?) old world, blue chips looked like trophy stocks today, as value investors flocked to their defense. Financial and retail issues really looked good; however drug issues were notably absent. So what happened? A couple of things. For starters, The government released income and spending information this morning that was surprisingly positive. While incomes rose 0.7% (inline with estimates of 0.07%), consumer spending rose only 0.5%. That's the first time since October that we've collectively spent less than we've made. (Hear that Al? We're not out spending our inheritance!). Even better publicized, Abbey Joseph Cohen, Goldman Sach's perennially bullish strategist, noted before the open that the S&P is undervalued and that interest rate fears have already been priced in. Way to go Abbey! Morgan Stanley Dean Witter joined the party too with a bullish view on financial services, while Baron's ran multiple pieces over the weekend noting the relative growth prospects and valuations or retailers compared to other sectors. One little mentioned tidbit that may have helped too was U.S Energy Secretary Richardson's comment that he foresaw oil price stability after OPEC's March 27 meeting. We'll get to technology in a minute. But for now, the question remains, was it real?

The answer is we don't know for sure, but we have a few clues. First, we've been trained like Pavlov's dogs to think that as interest rates rise, financials get clobbered. Bond rates rose today, so shouldn't financials have taken it on the chin? Don't let the relationship fool you. With the 30-yr rate no longer a completely accurate reflection of prevailing interest rates, the correlation gets tougher as the 30-yr becomes less meaningful. Bond rates have been steadily declining with prices steadily rising since the 6.75% peak in late January thanks to the "flight to quality" and the Treasury's desire to retire some of the debt. As buying demand grows, prices rise. Lots of profit was there for the taking. In fact, we think today's bond price drop may have been sellers moving some of their profits into the beaten up blue chips - thus the divergence. Look for true interest rates to be less reflected in the 30-yr yield going forward, which is also to say that there is no need to fret that increasing rates portend another down turn.

Second, and from a technical standpoint, the DJIA's recovery from its low of 9846 was a real boost. While it reached as high as 10,156 in a 310 point trading range, that it closed back over psychological and technical support of 10,000 at 10,038 is a big plus in our book (at least psychologically in deference to positive sentiment).

The fact is that as Kimo alluded to in the Weekend Wrap, GE, Du Pont, J.P Morgan, GM and Ford are the Old World stocks. But those industrial powerhouses were once new at the earlier part of the last century (please no e-mail from the "calendarically correct") in an era when analysts were beginning to think of "agriculture" as Old World. While the DJIA may hold a psychological fondness among investors and traders today, it's still heavily weighted in yesteryear's industrial economy while we transform to an information economy. But we digress.

Third, while volume appears to have been on the increase since the beginning of the year as the sellers have stepped in (and today's 1 bln shares traded did nothing to dispel that), the weekly volume has been declining slightly since January 23. While this may seem insignificant, it tells us that sellers are gradually thinking that the damage has been done, and that in the bigger picture, we may not have much further to go. Call it an intermediate term consolidation. Of course this does not rule out a severely nasty day that has the index plunging in complete capitulation only to rebound by the close of the same business day. But the likelihood of people jumping out of windows is very far removed thanks to an ocean of liquidity and the "time compression" phenomenon talked about early in the year. Liquidity is still there and isn't going away. . .it simply may be buying tech stocks until the predictable returns of old world companies look palatable again. After all, just look what happens to some industrial issues when they announce an alliance with, or development of, a B2B commerce site with the help of one of the new world companies (see Sears on news that Oracle would develop a retail B2B commerce exchange).

In the end, the DJIA closed up 176 points at 10,038 - back over the psychologically significant 10 K barrier. Up volume of 648 mln shares outstripped down volume of 341 mln shares on just over 1 bln shares traded. That was good. However, despite the advance, decliners on the NYSE barely edged out advancers 1492 to 1467. Worse, 217 new lows put a whoopin' on just 68 new highs. That was bad and unfortunately does not send an upward reversal signal that we've hit bottom. But if there is a silver lining, it's that when the ratio gets this lopsided, a reversal is near. We just need to wait and see. If all these conflicting indicators are making you see sick, we strongly suggest standing aside to wait until the market again establishes direction. In our collective guts though, we think a 16% correction is about enough. If you are thinking really long term, Paine Webber's chief analyst is looking for DOW 25,000 by 2010!

Technology, on the other hand (yawn) simply took a breather, but not before putting a scare to us, as the NASDAQ dropped 123 points this morning to 4466. Even so, it was not a broad-based selloff. Lets review a few newsworthy threads that helped turn this day into a market rope.

Big theme, big news. . .more on wireless data transmission and the charge to move the PC off your desk and into your hand held wireless phone. Qualcomm (QCOM, +9.69, 93.25) and Microsoft (MSFT +0.25, 91.56) will form an alliance to build a wireless device that, according to their press release, will be a "pocket personal computer". Meanwhile AOL is teaming up with the largest maker of handsets in the world, Nokia, to develop instant message capable phones. This puts 20 mln AOL users in line to buy a new NOK phone/PC just as soon as they are available. Sprint PCS will also deliver AOL content to its wireless customers. Surprisingly, AOL gained only $1 to close at $60.63, despite positive words from BBRS suggesting that AOL is no longer dead money and should begin another move up. Price target? $115. Ericsson also introduced a series of G3 cellular phones (read that, 3rd generation CDMA - Qualcomm strikes again).

Rumors abounded today - one believable; one not. Believable is that Rupert Murdoch's Newscorp is reported to be in discussions with Yahoo! to allow Yahoo! to take a stake in Newscorp's satellite news business. Newscorp gets content; Yahoo! gets distribution. Hmmm, sounds like the first echo from the AOL/TWX planned merger. Unbelievable, and later confirmed as unbelievable, EBAY was reported to be preparing an offer to buy Sotheby's. Not so, say sources on both sides. Besides, who'd want to buy into the potential liability of BID's price fixing investigation?

While expected to be generally positive for the technology market, BBRS's conference couldn't translate it into a positive close for the NASDAQ. One bright spot is that CSCO announced that they would build an end-end optical network for a 3rd generation ISP. That will allow for a full 1 megabyte of bandwidth to be delivered at a cost of $10 per month instead of the copper dinosaur rate of $1000 per month for a T1 (1.5 megs). If it works well (and it will in short order), telcos could experience copper poisoning. NSM, a current play got a nice boost today too as they noted in their presentation that they would see a sequential revenue gain - a surprise to analysts who were anticipating flat sales this quarter. For those of you who follow George Gilder, NSM is on his ascendant technology list, suggesting that it isn't just a quick momentum play, but a long- term growth prospect (much like TXN was viewed two years ago).

Finally, Oracle, as mentioned above is collaborating with Sears and another French retailer to develop a B2B web site. ORCL was the highest volume issue with over 60 mln shares traded. Unfortunately, ORCL gave up $4 in the final hour to close down $2 for the day at $68.63.

In short, no new records here for the NASDAQ. Despite giving up 124 points in early trading, touching 4466 in the process, the afternoon comeback was tremendous, as the index recovered 160 points. While it didn't hold, it did finish up 111 point from its low to close down 12 points on the day at 4577. Advancers, similar to the NYSE, lost out slightly to decliners 2081 to 2177. Up volume exceeded down volume by 11% on a busy 1.8 bln shares traded. Even better, 278 new highs trounced 145 new lows. Liquidity reigns here too.

What happens tomorrow and for the rest of the week? Big moves in either direction are possible for both indices. While technology sentiment remains intact (good for the NASDAQ) and investor/trader money can find a good home in technology issues, NASDAQ can't go up every day. It will be even more difficult if anticipation of the NAPM figures on Wednesday and payrolls/unemployment rate on Friday keeps inflation fears burning. However, sentiment wise, the VIX.X topping out again today at 29.5 tells contrarians that a healthy dose of fear is about to move us again to the upside. We'd sure feel more comfortable with a solid pop into the low 30's (not wishful thinking, but that would be stellar confirmation of a reversal), However, 29.5 to 30.0 has been tested, and it's holding well. The DJIA is still a bit shaky, kind of like a newborn foal. While it could conceivably stand and run, the interest rate fear, and threat of Alphonso the Great raising rates by 50 basis points in late March may keep it a bit longer from running off. At least NASDAQ has CMGI leading off earnings season March 9, while DJIA may go hungry for a while. It's still a stock pickers market, and technology is still poised to lead all others when a trend does emerge. Do not be flustered or embarrassed to stand aside until it does if it better suits your trading style. When it comes to profit, it's better to have it and not need it than need it and not have it. To that end, sell too soon.

Buzz Lynn
Research analyst

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