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Does Late Session Buying Break The Boycott?

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      5-03-2000           High     Low     Volume Advance Decline
DOW    10480.10 - 251.00 10732.20 10400.10   991,690k   821  1,290
Nasdaq 3,707.31 -  78.14  3787.43  3592.79 1,479,950k 2,144  2,751
S&P-100  761.18 -  18.07   778.44   751.54    Totals  2,965  4,041
S&P-500 1415.10 -  31.19  1444.21  1398.36            42.3%  57.7%
$RUT     495.56 -   9.79   505.35   487.33
$TRAN   2796.45 -  62.23  2837.98  2784.79
VIX       34.51 +   3.64    35.83    32.03
Put/Call Ratio       .74

Does Late Session Buying Break The Boycott?

As we have been drifting lower on light volume this week, the commonly heard phrase "buyer's boycott" is being thrown around. What does this mean exactly? Well, seeing that volume isn't up to its typical levels, there has been a lack of real conviction on taking the market lower and no conviction on the buy side. That's why it has been a slow slide. But we did see a glimpse of strong buying into the close on both the NASDAQ and the DJIA. Now, as earnings season is winding down, all eyes are on the Fed again. Interest rate fears are the primary market mover this week and will be into the May 16th Fed meeting. Today, echoes of a "50 basis point hike" ring across the Street. Considering that a 25 basis point rate hike has been priced into the market already, are the markets preemptively pricing in 50 points? Maybe that's why the buyers are few and far between. The final 30 minutes, however, gave us signs of life as buyers came in at key support levels.

Concern in the market has been volume. Without strong volume, the market moves are less convincing and indicate that traders just aren't willing to commit money. Volume at the NYSE was only 972 mln and this lack of liquidity usually means that institutions are remaining on the sidelines. The DJIA continued its slide since hitting 11128 on April 25th, where it fell into a downward channel. Note how the DJIA found key support at 10400, just at the bottom of its regression channel. It did manage to recoup 80 points on the bounce to close down 250 points at 10480. Big cap tech stocks took the brunt of the selling today with A(-9.25), NT(-7.06), HWP(-5.56), TXN(-3.81), and IBM(-3.25) all down, though well off their lows. Also taking a hit today were the retail stocks. Goldman Sachs came out today with a major downgrade on the entire sector, attributing their decision to the macroeconomic environment. Given that the U.S. is seeing slowing economic growth after two years of record consumer spending, Goldman removed a handful of retail stock from their recommended list including TIF(-4.44), KSS(-3.81), and ANF(-0.13). They did remain positive on WMT(-4.19) and COST(-2.56).

The only standout today was the food sector. On the heels of news that Unilever is looking to make another acquisition, only a month after the Ben & Jerry's deal, food stocks rallied. Bestfoods Inc. revealed they had received an unsolicited bid from Unilever at $66 a share. That is a deal worth $66 billion. The owner of such well-known consumer brands as Hellmann's mayonnaise and Mazola cooking oil, saw its shares rise 22% to $61.44, up $10.88 today. This gave food for thought to investors who bid up the shares of other food stocks which were definitely the strongest sector of the day. Unilever's stock was down $2.19. Feeling the residual effect, rival food stocks saw heavier than normal gains on the day: OAT(+3.31), CPB(+3.06), HNZ(+3.69), and NA(+0.75). This may be a sign that a continuing consolidation is in store for the food industry.

Turning to the tech index, the NASDAQ once again was in the spotlight as it continued to drift lower throughout the day. We watched the NASDAQ with anticipation as it steadily converged on key support levels. Last week, we mentioned how the NASDAQ was going to remain range bound in the short term between 3600 and 4000. That was exemplified this week as it neared the upper limit on Monday at 3982, only to begin a retreat that finally found a bounce late in today's session at 3592. At that 3600 level, the buyers finally came out and did so with stronger volume. This bounce lifted the NASDAQ to close at 3707, down 78.14. Notice on the chart that support below 3600 can be found at the 200-dma of 3557. Could this be the end of the "buyer's boycott"? It's difficult to say. Volume on the NASDAQ was 1.5 mln shares, decent but far from strong. Strong volume is essential to prove buying conviction. Also, there are a number of factors that have instilled fear in investors. Topping the list are interest rates and the hot economy. The release of the Fed's Beige Book today showed that the U.S. economy did indeed expand during March and April. Worker shortages are evident in all the nation's districts which pushed up wages in the last two months. Yet, on the upside, retail prices remained tame. This economic summary is just a teaser to the economic data scheduled for the rest of the week.

With relatively no good news in the market, traders used this information to sell off semiconductor stocks and biotechs. Both indices made a stellar recovery in the final half hour of trading when the NASDAQ bounced, $SOX(-38.42) was down 3.4% and $BTK(-11.61) fell 2.4%. On flip side, the bad news was bad for selective stocks. From euphoria to disaster, NOVL was the biggest percentage loser in any market today. The Utah-based provider of network software enabled by directory services said Tuesday that the recent quarter would come in below revenue and earnings targets due to weak sales. Dennis Raney, chief financial officer, said "Novell thinks management and organizational issues in sales led to the decline". At least they owned up to it. Nevertheless, the Street punished NOVL for the problems as the stock fell to $10.63, down $6.94 on volume of 92 mln shares, about 15 times its ADV.

Security One was another headache for investors today. The company released Q1 earnings last night that missed the mark and margins were lower than expected. This was due to the acquisition of three companies last year, according to SONE. Pacific Crest was first jump on the stock with a downgrade from Strong Buy to Buy after the news. The First Call estimate was for a loss of $0.23, but it came in at a loss of $0.35. SONE dropped $17.06 to $42.31 it today's trading.

As we look forward to the last two trading days of the week, we have a slew of economic data scheduled for release. Tomorrow, Initial Jobless Claims are forecasted to be 275,000 and first quarter Productivity is expected to be 3.5%. Greenspan will be speaking tomorrow in Chicago on the Financial Industry Structure and Regulation. Fed-watchers will be tuning in to see if they can detect any hints about the upcoming Fed rate hike. But, Friday's Unemployment Rate and Hourly Earnings will take the spotlight. They are forecasted at 4% and 0.3%, respectively. These are two closely watched indicators of inflation and labor cost increases. Also on the agenda is Non-farm Payrolls. The markets will be watching all of these closely, trying to find some direction in this time of increasing uncertainty and volatility. Look for the markets to continue to be range bound and be cautious as interest rate worries drive the indices. When in doubt, stay out.

Matt Russ
Research Analyst

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