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Market Wrap

A broad based rally? What changed?

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       4-25-2000           High     Low     Volume Advance Decline
DOW    11124.80 + 218.70 11136.60 10881.00 1,066,935k 2,193    810
Nasdaq 3,711.23 + 228.75  3711.57  3583.92 1,621,448k 2,848  1,316
S&P-100  795.32 -   4.57   795.88   777.77    Totals  5,041  2,126
S&P-500 1477.14 +  27.81  1477.67  1438.42            70.3%  29.7%
$RUT     489.03 +  20.49   489.03   468.54
$TRAN   2914.03 + 108.90  2918.07  2803.04
VIX       27.06 -   3.12    29.11    26.94
Put/Call Ratio       .41

A broad based rally? What changed?

The market today was a different market than we have seen in some time. The broad-based rally today covered both markets and almost all sectors. The rising tide floated almost all boats. Of the 100+ stocks that I personally follow every day only four were negative and included BVSN, AKAM, ADAP, EXDS. The optimism was bubbling over even from the bears. The "retest" phrase was actually slipping from usage among the many "experts" on the various media outlets.

The key may have been Ralph Bloch. Ralph has been on the cutting edge of calling the turning points over the last several weeks and has been very close to perfect in his calls. When the rally appeared to stall around midday Ralph announced that the low on Monday appeared to be a successful retest of the April 17th low of 3227. Monday's low of 3345 may not be an exact technical retest but if Ralph liked it, the market approved. Of course it also helped that Microsoft CEO Steve Ballmer sent an email to employees stating that he was confident that MSFT would not be broken up and they would be vindicated in the end. He repeated his stance later in a telephone interview and was adamant that the company would survive as a single entity. This confidence not only put a bottom under MSFT stock but aided the market as well. MSFT also gave employees 70 mln new stock options with the option price set at the low for Monday. The added incentive appears aimed at keeping key employees as it fights the breakup battle.

Earnings are the fuel and the market was on fire today. Some of the majors included Proctor & Gamble who announced in line with their already reduced expectations and after rising all last week, got killed again today with a -6.25 drop. The outlook for PG was bleak with slowing sales and rising costs. Several analysts also downgraded PG again. But even with the -6.25 drop the Dow rallied as the techs gained back ground. Dow tech stocks roared back to life with IBM +6.00, HWP +7.00, INTC +8.88 and even MSFT regained +2.75 after taking a -$12 beating yesterday.

Another NYSE stock announcing today really set fire to the Nasdaq. Corning, (GLW) easily beat the street with $.64 vs estimates of $.55 and +78% over last years $.36 number. Corning did not do this with glass baking dishes. Corning is a leading supplier of fiber optic cable and the excellent earnings from blowout fiber sales confirmed the tech trends for the entire sector. Nasdaq companies that benefited were JDSU +12.56, CIEN +15.38, SCMR +6.69 and to a lesser extent LU, ORTL, CSCO. Corning was so positive in their outlook that investors were rewarded with a +$28 gain during regular trading.

Other major announcers today included JDSU who beat estimates by a penny and promptly dropped -$7.75 in after hours trading. Got to do better than that guys! AMGN announced in line with estimates and dropped -$3.00. LSI Logic beat estimates by a penny and dropped -$3.88. Compaq announced inline with estimates but there was some confusion about some non-operating earnings and dropped -$1.00 after the close but CPQ was up +$3.00 on the tech rally today. On the winning side was Nortel which beat estimates by +$.05 and added +$6.00 after the close on top of a +13 during regular trading. NT said they expected earnings to grow by +30% to +35% going forward. EBAY announced blowout earnings, doubling estimates, and guided analysts even higher for the next quarter. With auctions exceeding $1 bln for the first time and registered bidders exceeding 12.6 mln or a +230% increase from last year, the auction giant truly controls their own destiny. EBAY also announced a surprise 2:1 split to occur on May-24th.

The Nasdaq gain Tuesday of +229 was the second largest gain ever but when combined with Monday's loss of -161 it only gives us a +88 for the week. The Nasdaq has now recorded the ten biggest gains and the ten biggest losses ever and all occurred this year. Even with the days gains the Nasdaq is still -27% down from the March highs. Even with the rally today the Nasdaq is still technically over sold but few analysts are forecasting a rally yet. The rally today puts the Nasdaq closer to breaking out of the down trending channel, which started on March 24th, than it has been since April 10th. We are currently at the proverbial inflection point. On a historical basis it is still very oversold but this is also historically the time the Nasdaq has trouble as the earnings flood dries to a trickle. The Nasdaq closed over its 200 DMA again and this may be the first step in starting a new up trend.

Advance/declines were very positive today with the NYSE and the Nasdaq both posting better than 2:1 ratios. Up volume was better the 4:1 over down volume. On the surface it would appear the rally has legs but with 73% of the S&P having already announced the earnings parade is drawing to a close. Normally this would be the call to move to the sidelines but since the majority of major players have been standing on the sidelines for several weeks the urge to buy the rally is going to be strong. Nobody wants to miss the train if the Nasdaq is going to start trending up again. Stocks have not been this cheap since December of last year and nobody expects them to remain at this level for long. Now we are likely to see a test of wills as buyers face each other over a banquet table of juicy steaks. All the funds would like to see prices drop a little more but if someone across the table flinches and starts grabbing for the best steaks the resulting feeding frenzy would make a room full of lumberjacks afraid of losing fingers and hands trying to grab a morsel.

It will all boil down to whether the fund managers think the selling is over, or not. If they think this was just another bear trap rally, just like the last two big up days this month, then we will struggle again. If they decide that this is as cheap as stocks are going to get before the June earnings run then the buying will pick up speed and the Nasdaq express will be back on track. In order to confirm the current rally the Nasdaq will need to close over 3800 tomorrow and hold over 3800 the rest of the week. Right now we have a lower high and a higher low formation and only one will eventually prevail. If the market climbs the wall of economic worry we have this week then the rally is for real. Wednesday we have the Durable Goods Orders and Thursday we are expecting the Employment Cost Index and GDP as well as a speech by Greenspan. These reports could set the tone for May. If the reports continue to show inflation creeping up then Greenspan and company will be a larger worry as the FOMC meeting in three weeks edges closer. I think it is a good possibility that we will see some weakness between now and Thursday until the ECI and GDP numbers are known. If those are much higher than expected all eyes will be on the Greenspan speech for a hint of a more aggressive rate policy and that would of course be market negative. Tuesday, Richmond Fed President Alfred Broaddus, a voting member of the Fed's rate policy group, said recent economic data point to a risk of higher inflation and intensifies his concerns about the economy overheating. As I have said before the Fed will telegraph pending rate increases and investors will be listening to the coded words for changing signals.

I would not argue with any rally now but the most likely possibility would be a narrow range until after the FOMC meeting and then a big rally into July earnings. Trade anything the market gives us but keep your stops close!

Did you buy it? On Sunday I suggested using the QQQ to capitalize on any dip and bounce this week. The QQQ had only been under $80 once this year and that was on the 17th. I felt the $80 level was strong support and I suggested buying the QQQ stock or options on the QQQ if it broke $80 this week. On Monday it hit $79.88 and then rebounded. Great play for investors who wanted to capture the market move without having to be right on a particular tech stock at the same time.

Trade smart and sell too soon.

Jim Brown

Current long positions include: VIGN, NTAP

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