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Has The Feeding Frenzy Begun?

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       4-27-2000           High     Low     Volume Advance Decline
DOW    10888.10 -  57.40 10941.90 10747.30 1,110,416k 1,308  1,592
Nasdaq 3,774.03 + 143.94  3774.11  3513.76 1,548,047k 2,120  1,952
S&P-100  790.70 +   1.63   793.49   774.61    Totals  3,428  3,544
S&P-500 1464.92 +   3.93  1469.21  1434.81            49.2%  50.8%
$RUT     494.58 +  10.34   494.58   473.76
$TRAN   2836.84 -  46.68  2882.62  2809.92
VIX       28.18 -   1.28    31.81    28.01
Put/Call Ratio       .54

Has The Feeding Frenzy Begun?

After yesterday's preemptive sell-off in the markets ahead of the ECI and the GDP numbers, the stage was set. The fear was of inflationary economic data. And what did we get? Just that, no surprises. So when I woke up this morning to see the NASDAQ and S&P futures down limit, the bullish sentiment that Ryan mentioned in yesterday's wrap looked even stronger. With interest rate sensitive stocks being sold, where would the proceeds go? To the sectors that have felt the brunt of this recent sell-off, the NASDAQ. In this investment environment, cash doesn't sit idle for too long. And the feeding frenzy began.

The NASDAQ gapped down to open at 3519 and didn't look back. Within an hour the index had moved as high as 3665, well above its 10-dma of 3627. As the NASDAQ continued to hold around this level, the outlook for the day continued to improve. By reestablishing itself above the 3600, the NASDAQ confirmed its breakout from the regression channel that I mentioned last Wednesday. Note on the chart how the low of the day came back to test support near the upper limit on the channel.

So have professional investors and money managers started to bottom fish? Sideline cash has been growing and growing for the past month as institutional investors built up their treasure chests and drew up their shopping lists. With so many tech bargains out there, once one sees the other begin to feast, a feeding frenzy is bound to occur. Valuations have come in quite a bit from their highs and as investors begin to focus on the May 16th Fed meeting, eyes may be on techs rather than interest rate sensitive issues, a.k.a. "old economy." Look at the strong uptrend today in the above chart. The buying increased as the session moved on and the NASDAQ closed at the high of the day. Closing above 3750 is very encouraging. Now we will be watching for a test of the 3800 resistance level, which the NASDAQ challenged in vain Wednesday, April 19th. Above that is 4000 and then the 100-dma at 4200, but we don't want to get ahead of ourselves. The question remains, how far will the feeding frenzy take us? Many NASDAQ stocks began to round up today and have set their sights on the 50-dma. Leading the index today was the old stalwarts: Semiconductors($SOX +7%) and Internets($IIX +4%). The NASDAQ closed up 143.95 at 3774.

As for the DJIA, things are a bit slower. Even as many of the financials and other interest rate sensitive issues came under selling pressure early, they managed a decent recovery. The DOW was down almost 200 points at one point and rallied back to close down 57.40 at 10888, its 100-dma. In general, it looks like the DJIA will be range-bound between 10750 and 11100. Yet, its short term trend appears to be upward. Inflation concerns could be the DJIA catalyst as we near the May 16th Fed meeting.

Today's economic data shifted the focus from valuations to interest rates once again. The Employment Cost Index(ECI), which measures labor costs, was up 1.4% for the 1st quarter, higher than consensus estimate of 1.1%. This was the largest increase since the 3rd quarter 1989, yes 1989! The obvious concern here is that higher labor costs will force company's to raise prices on its products. Thus, inflation. All the nervous analysts expected the worst for GDP, some as high as 7%. But 1st quarter GDP came in at 5.4% and upon closer analysis, the number indicated little inflation outside the energy sector, and a strong economy. Many Fed-watchers fear that these numbers raise the risks of a 50 basis point hike.

As they very well may raise the risks, do the numbers really warrant a 50 basis point hike? The Fed futures indicate that a 25 basis point hike is expected on May 16th. Yet, the real question is will Greenspan move away from his gradualist trend and jolted the markets with 50 basis points after such a significant and healthy market correction? We will have to wait until the 16th. With that said, now for the best measure of inflation: the GDP deflator. It rose 3.2% in the first quarter-- the highest in nine years. At first glance, it looks bad. But don't judge a book by its cover. Looking deeper into the number, excluding food and energy, it was only up 2.1%. And to go even further, excluding an across-the-board Federal pay hike, considered a government cost, the GDP deflator came in at 1.7%. So I guess it's all in the way you look at it, and Greenspan will give it a good one.

The big stock news today was AT&T Wireless Group's IPO. Trading under the symbol AWE, 360 mln shares hit the market and did quite well given the current IPO and market conditions. AWE gained $2.31 to close at $31.81, at the upper end of the initial pre-IPO range. The majority of trading was in block trades, indicating a strong institutional interest in the new issue. After being oversubscribed by 2.5 to 1, institutional investors couldn't get enough. Retail investors were relatively scarce. Being the largest IPO in U.S. history, AT&T raised $10.6 bln from the tracking stock.

With wireless being the topic du jour, NOK came out with strong earnings this morning. They beat the Street estimates by two cents with 1st quarter EPS of $0.18. Pretax profit rose by 76% and revenues grew by 69% from the previous year. The biggest cell phone maker in the world just strengthened its position and even stated that they could exceed full year revenue growth previously stated at 30-40%. NOK was up almost 10% today in trading, adding $5.13 to close at $57.

In the B2B sector, VerticalNet posted a narrower than expected loss of $0.16 per share vs. consensus estimates of a $0.27 loss. VERT's revenues jumped an astounding 1300% year-over-year. The company attributed this to growth from acquisitions and a rising sponsorship of their business. Strong sequential revenue growth was seen across VERT's network of 56 B2B "trade communities." Quite impressed by the numbers, Chase H&Q reiterated its Buy recommendation and noted that, according to their estimates, VERT is set to breakeven in mid-2001. VERT was rewarded with an 11% gain of $5.44 to close at $51.44.

As we look forward to tomorrow's trading session, all eyes will be on the NASDAQ to see if it can sustain this move out of the most recent channel. We are encouraged with the health of the NASDAQ, closing at its high for the day on strong volume late in the day. Follow through is necessary to convince investors that the NASDAQ is back. With interest rate fears creeping up again, techs could be poised to reestablish themselves as the feeding frenzy begins.

Matt Russ
Research Analyst

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