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Market Wrap

It's getting worse

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              4-12-2000           High     Low     Volume Advance Decline
DOW    11125.10 - 162.00 11425.40 11116.80 1,154,738k 1,495  1,453
Nasdaq 3,769.63 - 286.27  4077.92  3769.17 1,920,444k 1,003  3,337
S&P-100  792.90 -   0.38   821.42   792.27    Totals  2,498  4,790
S&P-500 1467.17 -   3.87  1509.10  1466.15            34.3%  65.7%
$RUT     493.44 -  16.69   513.02   493.44
$TRAN   2952.63 +  30.82  2979.25  2905.58
VIX       31.88 +   2.93    32.44    29.06
Put/Call Ratio       .51

It's getting worse

The NASDAQ continued its losing ways for the third day in a row. After Wednesday's meltdown, the NASDAQ is officially in bear market territory, 20% off its high set just a month ago. The action was pretty ugly from the get-go Wednesday morning as the index fell to 3850, shedding 200 points in the first two hours of trading. Traders stepped in mid-day to carry the NASDAQ back above 3900, only to see those gains erased as the index plunged through support of 3800 in the last hour of trading. Today was the second largest point drop for the NASDAQ, placing the index below 3800 for the first time since January 6th.

The DOW managed to extend its gains from earlier in the week as the divergence between blue chips and the tech sector continued through Wednesday morning. The industrials managed to climb higher throughout the day, reaching an intra-day high of 11,143. The divergence we've come to know ended sharply in the last hour of trading as the DOW sank to 11,125, losing 275 points from its day high. It was a case of traders selling the blue chips to cover any possible margin calls tomorrow induced from the losses in the tech stocks. The DOW was carried lower by four stocks, HWP, IBM, INTC, and MSFT. The four tech components in the DOW accounted for -160 points.

Yesterday it was the Motorola meltdown and today it was the Microsoft debacle. Just what the tech sector didn't need was a negative outlook for the personal computer market. The influential Goldman Sachs analyst, Rick Sherlund, warned clients Wednesday of sluggish growth in PC sales from November through February. He cut his revenue estimates for MSFT for the third quarter ending March from $5.9 bln to $5.7 bln which would translate into 2-cents per share in earnings. However, the 2 cent loss in operations may be offset by gains in MSFT's investment gains. Sherlund's comments caused MSFT to gap down by $2 this morning, positioning it just above its 52-week low of $75.50.

The negative news for MSFT rippled through the tech sector, sending hardware and software makers running. ORCL lost $4.25 and ADBE shed $7.44 as the CBOE Computer Software Index ($CWX) was lower by 7.9%. The hardware makers also suffered from the Microsoft meltdown, INTC, DELL, IBM, HWP, and SUNW all ended the day the sharply lower. SUNW was especially hard hit Wednesday as some analysts were cautious ahead of their earnings announcement on Thursday. Prudential analyst Steve Milanovich warned clients Wednesday of a shortfall in some of SUNW's products. Last month SUNW and IBM engaged in a server price war in hopes to lure e-commerce companies. In light of the cost cutting plans and the apparent weakness in the PC sector, some analysts feel that SUNW may fall short Thursday. While others feel that SUNW will meet or possibly exceed estimates. The uncertainty surrounding SUNW is not isolated, as many of the leading tech names are hovering around key technical levels. SUNW finished the day lower by 9%, closing at $80.

In addition to the Microsoft sell-off, Compuware (CPWR) added to the market's problems with an earnings warning. The company said it expects a profit from operations of 13 to 15 cents per share in the fourth quarter. The revised estimates are well below the First Call estimate of 35 cents per share. CPWR cited revenue weakness from its professional services and products division. Banc of America, Robertson Stephens and J.P. Morgan downgraded CPWR to a market perform from a buy rating. CPWR lost a whopping 40% Wednesday, closing at $11.94.

Jim mentioned Tuesday night that he expected selling pressure to continue in part of the upcoming tax deadline. Rumors circulated trading desks again Wednesday that traders were cashing in positions to pay taxes on last year's gains. So many traders made a ton of money in 1999 and are now selling positions to pay their taxes. This presents a problem for any rally as traders try to squeeze out the last dollar before paying the tax man.

So where do we go from here? NASDAQ closed today just above its next critical support level of 3750, should the index fall below that level we could see 3650, the bottom hit last week during Terrible Tuesday. What is worrying investors today is the lack of fear in the market. While the VIX continues its ascent towards its 52-week high of 35 (currently 31.88), the CBOE put/ call ratio remains modestly low at 0.49. The low put open interest reflects a lack of fear in the market, possibly pointing to further downside. Unlike the recent debacles in the NASDAQ, today the big name tech stocks were hammered. In the past week we saw the high-flying dot coms stumble, but today we saw the likes of MSFT, CSCO, INTC, and DELL have serious problems.

There were a few signs of life today in the broader market. The bank stocks saw heavy buying interest thanks to a positive earnings report from J.P. Morgan. Oil service, utility, and paper stocks were also higher on Wednesday. Remarkably, the market internals for the NYSE remain intact. Advancing issues squeaked past declining issues 1,495 to 1,453. And new highs of 43 far outpaced the new lows of 28 on the Big Board. The internals on the NASDAQ are a mess. Traders continue to find some solace in the old blue chips and avoid the tech sector like the plague.

So what's going to turn this market around? The blowout earnings we have been looking for in the semi's came to light Wednesday evening as AMD and ALTR announced stellar earnings. AMD blew away estimates of 0.58 cents, earning a massive $1.15 per share. ALTR posted 0.36 cents per share vs a 0.34 cent estimate. Also of note, ALTR will be added to the S&P 500, replacing Atlantic Richfield. Both AMD and ALTR were higher in after hours trading. The mecca of economic indicators will be released in the coming days. The PPI will be released Thursday morning, Wall Street's consensus estimate is 0.5%, and the CPI will follow on Friday, also expected to be a 0.5% increase. Combined with the blowout numbers from AMD tonight and any positive surprise in either the PPI or CPI the market could rebound substantially. We also have a host of earnings reports tomorrow coming from CREE, FTU, GTW, GM, KLAC, PMCS, and SUNW among others. We'll be watching closely to see if the earnings selling Jim mentioned yesterday will transpire, or if AMD is a sign of things to come, we could see the tech stocks rebound.

Eventually the NASDAQ is going to make a stand and rally. If the rebound has any clout, we'll see volume substantially increase along with a significant percentage increase. The leading stocks like CSCO, INTC, and SUNW have lost substantial ground. We'll watch for that group of stocks to bottom and emerge before the rest of the NASDAQ follows. Traders should also keep an eye on the put/call ratio as a sign that bearishness has peaked. The market is going to face several hurdles before finding a bottom and moving higher. The IPO list continues to bring more supply to a market with little demand to meet the new issues. Institutions will eventually stop selling and start accumulating the market leaders. There is also a lot of cash sitting on the sidelines, noting the balance of money markets surpassed $1 trln this month. The bottom line, it's impossible to pick the exact bottom in any market, be patient and let the NASDAQ form a base and look for opportunities in the broader market.

I know last night Jim said he was going to buy today's dip, and he did. Fortunately, he was stopped out on the afternoon roll over before any real pain was inflicted. He told me it was painful today, but it was his own fault for not waiting for support on the NASDAQ at 3800. Jim said he is back in cash and ready to take another shot tomorrow morning on the heels of a positive PPI. Jim also said we will probably complete the retest of the recent lows in the morning which could provide a great entry point. But he warned to watch for those falling knives!

Trade smart, and sell too soon!

Eric K. Utley
Research Analyst

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