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Market Wrap

Microsoft Double-Whammy Sparks a Tech Sell-off

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       4-24-2000           High     Low     Volume Advance Decline
DOW    10906.10 +  62.10 10910.80 10695.40   873,799k 1,267  1,671
Nasdaq 3,482.48 - 161.40  3496.82  3345.25 1,540,259k 1,247  2,969
S&P-100  772.55 +   5.50   777.12   758.31    Totals  2,514  4,640
S&P-500 1429.86 +   7.07  1434.54  1407.13            35.1%  64.9%
$RUT     468.54 -  13.30   481.84   460.90
$TRAN   2805.13 -  28.12  2834.75  2783.29
VIX       30.18 +   1.87    32.31    29.59
Put/Call Ratio       .51

Microsoft Double-Whammy Sparks a Tech Sell-off

Is a bigger rebound near? As Jim noted in the Sunday Wrap, though reporting Street-beating earnings, MSFT came up short on revenue and forward looking growth prospects. Revenues fell short of estimates by $290 mln while the once 2000-lb. gorilla (now only 1200 lbs. since its value has shrunk 40%) guided analysts' estimated growth rate to the single digits. On top of that, the Wall Street Journal came out with an article noting the Justice Department is leaning toward breaking up Microsoft into three separate divisions, or "Baby Bills". Hmmm. . .that headline has been out for a while and there is nothing new in the story. Nonetheless, it didn't stop media-types from running the story as "new news", passing much of the blame for MSFT's beating to the DOJ's tough talk. Much as we too would like to pass the blame to the Justice Department, the real culprit here is MSFT's revenue and their near-term flagging outlook. Add to that a few pokes in the eye from downgrades by Goldman Sachs and SG Cowan, and you can see why MSFT cratered $12.31 to close at $66.69 in today's trading. Lehman Bros. even reduced its price target from $130 to $85. As goes the king, so goes the kingdom, and the whole tech sector sold off today led by MSFT.

The $64,000 question then becomes, "have we hit a bottom yet?" As usual, there are two sides to the story.

First, volume was exceptionally low on the Dow and the NASDAQ as stock prices have slid backward (874 mln and 1.54 bln, respectively). Remember that the previous sell-offs over the past three weeks have been marked by NASDAQ volume from 1.8 to 2.9 bln shares and Dow volume over 1 bln shares. That's when sellers were of the mind to jump form high buildings just to get out of a losing position. It's different this time. Most that have wanted to sell have sold, but buyers refuse to jump in until the retest of 3227. Buyers have been on strike in a self- fulfilling prophecy, and not willing to put their cash back to work until they see a bottom form. This is actually good for those with patient money.

It appears that investors were still waiting to see the last of the weak sellers get shaken out today. The operative word here is "WERE". Into the final hour of trading, the NASDAQ, including most of its major components made a strong rebound off the lows of the day. That bottom just happened to be at 3345, not far from the 3322 closing bottom tested last week. Volumes in the large cap tech stocks swelled into the close indicating that at least some investors are comfortable getting back in. We looked at the charts of some of the largest market cap issues and discovered that many had dramatic rebounds. In more than half the cases, the closing price exceeded the opening price - a bullish technical indicator. CSCO, INTC, SUNW, DELL, and ORCL all fit that mold. The point is that though the overall volume is still low, the volume swell into the close may be our clue of a successful retest. Another hour would have been telling. We'll have to wait until tomorrow to know for sure, but the wall of worry that had been building since last week may have been scaled by more than a few brave souls this afternoon.

However, don't put your pith helmets on in hopes of crashing through that wall. Weighing in on the opposing side of the $64,000 question, tomorrow may make for a great trading day, but we're not out of the woods yet. We still have the prospect of two 25 basis point rate hikes, or one 50 BP hike in the next three weeks leading up to the May 16th Fed meeting. Key to investors sentiment on the issue will be Alphonso the Great's (Alan Greenspan) speech on Thursday. Investors will be listening carefully (with Greenspeak interpreters) for any clues on his inflation and interest rate stance. That stance will only become clearer by eliminating the uncertainty surrounding the release of the Employment Cost Index, the GDP deflator and Initial Claims earlier that same day (Thursday). Any hiccup in those numbers could spark the Fed Chairman into hawkish comments. Currently, the bond market is pricing in just one 25 BP rate increase. However, if Greenspan has 50 BP up his sleeve, we'll get the warning on Thursday. In a nutshell, it isn't safe to abandon caution while thinking we hit a bottom today.

Need more evidence? Let's take a look at the actual end-of-day numbers from the NASDAQ. Yes, the final 30 minutes were strong. Nonetheless, the NASDAQ finished down 161 points on the day at 3483 on 1.54 mln shares traded. Decliners creamed advancers 2971 to 1249 - better than 2:1. OUCH! And down volume of 1.26 bln shares swamped just 260 mln shares of up volume. MSFT alone traded 157 mln shares. New lows? 153. New highs? Only 23. That qualifies as technically ugly, and thus the reason we need to see some follow through tomorrow of the late rebound today.

Support in the 3350 area was successfully tested, but a steep rebound won't last without some small giveback. With previous support from January in the 3450-3500 range, that could act as mild resistance and help foster the giveback. More importantly, 3500 happens to be the top bar of the descending trading channel and also (gulp!) the 200-dma. Thus, it becomes an even more critical level. If the index can't get back through and hold the 3500 level, view today's last half-hour rally as a head-fake and start looking again to retest the low. We've noted before that we don't expect it to get there, but we didn't expect it previously either. And in this market, anything is possible. The fact is that the descending channel pattern since late March is still intact, and earnings season will be coming to an end shortly, giving investors no reason to bid up prices anytime soon. The scary part is that 3000 is realistic if the trend continues. 3000 is also the point on a three-year trendline that would put the index back in synch with history. On the other hand for us optimists, assuming 3500 is cleared, that could represent a successful breakout of the channel, with the next mild stop at 3600, then 3750. We're not predicting the direction - we just have to play the hand the market deals us, and to be prepared with a list of ready plays for whichever direction the market moves.

For the Dow, better have put on a pot a coffee this morning if you wanted to stay awake today. It was pretty much a snoozer with only 874 mln shares traded. However, void of tech stocks like HWP (-7.19, 132.31) and MSFT (-12.31, 66.63), we'd have witnessed another 100 points on top of today's 62 point gain that had the index closing at 10,906. The fact is that until the tech rebound at day's end, INTC (+0.75, 116.19) and IBM (+2.50, 106.19) too were weighing heavy on the Dow. The internal market damage wasn't as bad on the NYSE compared to the NASDAQ. Four decliners cruised by every three advancers, while up volume was about even with down volume. The NYSE still saw 66 new lows compared to just 21 new highs. Aside from this morning's opening dip to 10,697 (remember MSFT and INTC begin early trading and the rest take a few minutes to open), the Dow traded in roughly a 100 point range between 10,800 and 10,900. 10,800 has provided support in the past and held up well today. The next level to conquer is 11,000, but without continued interest in "old economy" stocks and the looming of uncertain Fed interest rate hikes, that could keep a damper on the financial stocks that make up the Dow (AXP, JPM, C, GE) and also serve to keep overall volume low. Sigh.

Depressed yet? Don't be, there are still bright spots as shown by today's late technology rally. Without it, tomorrow would look really ugly. We just need to wait and see if the follow- through is for real. You'll know it by seeing advancers are beating decliners after amateur hour. However, the single greatest factor will be an increase in volume in the technology issues and in the overall market (as long as prices are rising). That will be a signal that buyers have returned to the trough for a feeding that could get the NASDAQ into breakout mode and scaling that wall of worry. If it comes to pass, we'd be even more convinced if the gains weren't just a money swap out of traditional issues. In other words, it's suspect if the Dow is bouncing south of 11,000 at the same time.

This is still a sideways and choppy market with air pockets of strength and will likely remain so going into Thursday when Greenspan takes the microphone. If you have to play, be prepared to trade either direction and to get out quickly if the trade goes against you. We reiterate that choppy markets can eat at your account a little at a time. Until a clear direction is established, you may want to sit on the sidelines - maybe even until Thursday. We know it's tough and we sometimes violate this rule ourselves only to get our knuckles smacked on a bad trade. But the primary goal of successful traders above all else is to preserve capital. Without it we're dead in the water. As Jim noted Sunday in a suggestion for the wise....have money and don't buy too soon!

Buzz Lynn
Research Analyst

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