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Will The Markets Pay For Tomorrow's Employment Cost Index?

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       4-26-2000           High     Low     Volume Advance Decline
DOW    10945.50 - 179.30 11141.90 10902.10   999,650k 1,408  1,530
Nasdaq 3,630.09 -  81.14  3777.08  3629.36 1,592,604k 1,813  2,324
S&P-100  789.07 -   2.24   801.59   786.09    Totals  3,221  3,854
S&P-500 1460.99 -   0.08  1482.94  1456.98            45.5%  54.5%
$RUT     484.24 -   4.79   495.02   483.58
$TRAN   2883.52 -  30.51  2914.33  2881.12
VIX       29.46 +   2.40    30.26    26.83
Put/Call Ratio       .50
  

Will The Markets Pay For Tomorrow's Employment Cost Index?

The action on Wall Street today mirrored that of bulls and bears sleeping, not battling. The bears finally awoke to take control in the final hour, but the word on the street wasn't one of panic or heavy selling (the volume confirms this too). Instead, it was the lack of buyers which have plagued the markets for the past month. The Dow and Nasdaq had been slowly sinking all day before traders gave up in the final hour and watched the markets sink until trading curbs were put in place to quench the sellers. Let's face it, today was one boring, unproductive day for daytraders. But will today's late day sell-off provide the launching pad for a monster rally on Thursday? The key will be the inflation sensitive ECI and GDP reports due out tomorrow morning.

For a closer look at the action on the Nasdaq, you have to start with the 10-dma. It is currently at 3627 and has been acting as resistance for most of the past month. Tuesday was the first day it had a solid close about that mark since late March. A confirmation of that trend reversal would be key to really awake the bulls. After trading higher during the first two hours of trade, the Composite rolled over, but held above the 10-dma all day. It was with only 45 minutes to go that all buyers walked away and let this market slip back below the 10-dma, before bouncing to close 3 points above it. The final tally left the Nasdaq at 3630.09, down 81.14.

Despite the close at the 10-dma, this may not be the heavy anesthesia that knocks the markets cold for an extended period. More like a sleeping pill ahead of the ECI and GDP wake up calls for tomorrow. Keep in mind there is still a big pile of cash building in fund managers pockets and it will eventually need to get put to work. How did Jim put it yesterday..."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." I wouldn't be surprised to see this kind of action soon. Also remember that traders are extremely scared of inflation after the CPI and PPI numbers on the 13th and 14th of this month which caused a market massacre. This is the first major inflation news since then and you can smell the fear on Wall Street.

So let's take the contrarian view and see if the bias lends itself towards upside or downside. The chart below is the view of the Nasdaq for the past week. Note the number of times it has bounced at 3600, disregarding Monday's gap down and retest of last week's low. It is a positive sign to see the Nasdaq test the same support level over and over in a short period of time and not breakdown. You could make an argument that 3600 is the downside to a bad report tomorrow. Now if you can concede that today's move back to the 10-dma was daytraders getting out in the final hour and no one buying ahead of the report, then we are still looking at 3800 as short-term resistance. That puts the upside potential greater than the downside for the short-term. The other factor is that if we do rally on Thursday, that will likely give us our third close over the 10-dma in three days and confidence will build. Perhaps the steak grabbing will begin.

The Dow on the other hand, was less than inspiring. It wanted to go lower all day long and did just that. It finally bounced with ten minutes to go off support at 10,900. Nothing special happening here, just more range-bound trading. Wake me when the DJIA trades over 11,400 for more than 15 minutes. Volume was light at 985 million while the Nasdaq turned in a subtle 1.6 billion. The S&P 500 finished down 16.15 to 1460.99.

AT&T's Wireless Group IPO, launching tomorrow, will be history in the making. Trading under the symbol AWE, this tracking stock will be the largest IPO in U.S. history. After the close on Wednesday, AWE was priced at $29.50, just about in the middle of its anticipated range of $26-$32. The hype and expectations for the tracking stock are immense as the issue is oversubscribed by a 2-1 ratio. This IPO will be a hefty 360 mln shares, brought to market by a 25 firm global underwriting team. Lead underwriters include Goldman Sachs, Merill Lynch, and Citigroup's Salomon Smith Barney unit. There are mixed feelings regarding the wireless tracking stock among analyst and investment professionals. One reason is that the current market frailty has resulted in a less attractive IPO market, with many scheduled IPOs of the past month postponing until better market conditions. The other reason is that tracking stocks typically do not act like company stocks and thus, may have less potential upside. Yet, as one IPO analyst said, "This is an institutional darling." AT&T Wireless has 12 mln customer subscribers and an existing network covering almost 65% of the U.S. population.

In anticipation of its earnings report after the close, AMZN shares ran up $1.06 to $53.50. The report was much in line with expectations as AMZN came in with narrower than expected losses of $0.35 per share vs. $0.36. Revenues, which has become the most scrutinized earnings component, were a strong $574 mln, about 10% better than the expectation of $521 mln. AMZN managed to attract an additional 3.1 mln new customers, on the higher end of analysts' predictions of 2-3 mln. Analysts will further dissect this number and the revenue per customer in order to determine repeat business and incremental costs. An analyst at Paine Webber said that at first glance, these numbers indicate a flat to slight buying bias, yet maintained that the brokerage house has a Neutral rating on the stock. AMZN said that its losses have peaked this quarter and foresee a narrowing throughout the year. Recently, investors and analysts have been frustrated with the company's performance as it continues to spend liberally and remains in the red. AMZN was trading lower in after-hours at $52.

The AOL-TWX merger has heated up some opposition. Today, consumer and media groups asked the Federal Communications Commission(FCC) to block the proposed acquisition. They argue that such a concentration of television and Internet content, along with distribution means, will severely limit consumer choices. A marriage of the two companies would join multimedia forces such as CNN, TNT, Sports Illustrated, Warner Bros., EMI, and MovieFone just to name a few. Also, those groups opposed to the merger argued that AOL has engaged in "monopolistic behavior" with its instant messaging market. Oh, how we hate to hear those words, as does AOL. In response to these complaints, an AOL spokeswoman said that the merger would "deliver tremendous benefits to consumers, bringing people around the world more choice and more convenience, and accelerate the roll out of broadband services." AOL and TWX plans to complete the merger by the end of the year. In trading, AOL was off $1.38 to $59.63 and TWX was down $1.44 to $88.50.

With so many uncertainties in this market, there is one sure bet. Which is the ECI and GDP will be the market movers tomorrow. The ECI is expected to come in up 0.9-1.1%. The GDP will likely run between 6.0-7.0%. The GDP price deflator is expected at 2.7%. These are all big numbers and anything bigger will result in more fear on Wall Street. Of course, anything under may result in a solid rally. The only real fear I see right now is if the numbers are good for Wall Street and we gap higher only to bleed away the gains all day. That would be disheartening to say the least. In that case, look for another retest of the 3300 level. I am optimistic of a rally, but will be prepared for a disaster.

When in doubt, get out.

Ryan Nelson
Asst. Editor

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