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Market Wrap

It's All About Interest Rates

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  WE 5-19         WE 5-12          WE 5-5          WE 4-28 
DOW    10626.85 + 17.41 10609.37 + 31.51 10577.86 -156.05 -110.14  
Nasdaq  3390.40 -138.65  3529.07 -287.75  3816.82 - 43.84 +216.78 
S&P-100  752.95 -  8.72   761.67 -  8.12   769.79 - 11.63 +  4.30  
S&P-500 1406.95 - 14.01  1420.96 - 11.67  1432.63 - 19.80 + 17.89  
RUT      479.70 - 11.24   490.94 - 21.90   512.84 +  6.59 + 24.41 
TRAN    2742.00 -132.02  2874.02 -  2.09  2876.11 + 26.10 + 16.76  
VIX       28.77 -  1.23    29.95 -  0.44    30.42 +  1.64 +   .37  
Put/Call    .89            .53              .53               .51

It's All About Interest Rates

Investors who thought last week's early trading action was a precursor of good things to come were sorely disappointed. Stocks began the week rising on cautious optimism ahead of the Federal Reserve FOMC meeting. The rally was extended through Tuesday, as stocks finished near their highs for the day after recovering from a brief sell-off when the Fed's interest rate decision hit the wires.

For those traders vacationing on the moon last week, the central bank raised its target short-term interest rate by an expected half of a percentage point to 6.5 percent, the first such increase since 1995 after five 25 basis point increases since June 1999. In a press release that followed, the Fed let it be known in no uncertain terms that more hard hitting rate strikes could be in the cards.

Once everyone had time to ponder the Fed's actions, the mood quickly turned from cautious optimism to outright pessimism.

Taking the interest rate news hard were the once impervious tech issues. From Tuesday's close, the Nasdaq Composite Index (COMPX) fell nearly 300 points, putting it solidly back below its 200-day moving average and within a whisker of its April 14 low of 3,321.29. Things got especially ugly on Friday when the tech-heavy index tumbled 148.31 points, or 4.2 percent, to 3,390.40.

Leading the COMPX's fall from grace were some formerly untouchable big-cap tech issues. Networking equipment king Cisco Systems (CSCO) tumbled $6.50 to $53.44, which followed a nearly eight-point retreat in the prior week. Cisco, once anointed by Wall Street to be the most likely first trillion dollar company, has seen $200 billion of its market value evaporate since reaching its peak of $82.00 per share set back in March.

Cisco wasn't the only big-cap tech issue that got roughed up last week. Sun Microsystems (SUNW) got pinched for $4.25 to $77.25, following a nine-point loss in the prior five sessions. Internet B2B come-lately Oracle (ORCL) closed off $4.00 to $70.00. And Microsoft (MSFT) finished the week down $3.75 to $65.06. What's more, the software giant suffered the indignity of hitting a new 52-week low on Friday.

Bucking the trend was chip maker Intel (INTC), which managed to eke out a gain for the week of $2.88 to $117.88. However, in Friday trading, Intel lost $6.06 after the company said in a filing with the Securities and Exchange Commission that it reduced its fiscal first-quarter earnings by a penny to $0.77 per share after it had to write down inventory and reverse some sales.

Ironically, while many tech stocks, with their pristine balance sheets and "sky-is-the-limit-prospects," were getting routed, many old-economy stocks were holding their ground. For the second straight week, the Dow Jones Industrial Average (INDU) ended slightly higher, reflecting continuing investor rotation into more traditional growth and value sectors. For the week, the INDU added 17 points to 10,626.85, despite getting clocked on Friday with a 150.43 point sell-off.

Strong INDU performers for the week include former pariah Philip Morris (MO), which added $3.25 to close at $27.50. Another big winner was Merck (MRk), which rose $4.25 to $72.44, putting the pharmaceutical giant 20 points above its March low.

The volatile week left the INDU down 9.4 percent from its January 14 high and off 7.6 percent for the year, while the COMPX is down 32.8 percent from its March 10 high - mired in bear-market territory - and off 16.7 percent for the year.

Despite all of the pre-Fed excitement, volume remained extremely light all week, which shows that investors continue to remain non-committal. With that said, on Friday, volume increased 8 percent on the NYSE and 12 percent on the Nasdaq from Thursday's levels, with 853 million shares changing hands on the NYSE and 1.36 billion on the Nasdaq.

Overall, though, the trend has been for investors to watch the action from the sidelines. It has been more than two weeks since the last billion-share day on the NYSE. Over on the Nasdaq, the falloff in volume has been even more pronounced; after several days in excess of 2 billion shares, the average volume lately has been around 1.2 billion.

As for Friday's actions, market breadth was miserable on both major exchanges, with decliners outnumbering advancers by a 19 to 9 margin on the NYSE and by a 29 to 12 margin on the Nasdaq.

Leading the old-economy issues lower were some big-name financials and pseudo-financials. General Electric (GE), whose GE Capital unit is the largest non-bank finance company, fell $1.25 to $51.88. American Express (AXP) slid $1.50 to $50.31 and J.P. Morgan (JPM) tanked $4.25 to $129.31.

As for new-economy issues, there was plenty of blame to go around, with Internet and telecommunication stocks shouldering most of it.

Leading the downdraft was Internet bellwether Yahoo! (YHOO), which got blistered on Friday, closing down $11.69 to $120.31.

Meanwhile, Network Appliance (NTAP) gave back $3.88 to $65.13 after posting fourth-quarter earnings of $0.07 per share late Thursday, which beat the First Call estimate by a penny. On top of that, the company was upgraded by Salomon Smith Barney to a "buy" from an "outperform" rating while A.G. Edwards upped the company to a "buy" from an "accumulate." Que sera sera.

Another stock losing ground despite reporting strong earnings was Autodesk (ADSK), which slipped $3.06 to $35.56. The company posted late Thursday first-quarter earnings of $0.48 per share, beating the First Call estimate of $0.46 per share.

In the telecom sector, Ciena (CIEN) got crushed, falling $20.81 to $116.50. The maker of equipment to boost fiber-optic network capacity cut new-product sales for fiscal year 2000 to $50 million from $100 million.

Shares of WorldCom (WCOM) lost $1.81 to $37.75, extending Thursday's declines, which came on the news that Justice Department investigators are reportedly prepared to recommend against WorldCom's $115 billion purchase of Sprint amid concerns about market concentration in the long-distance and Internet-backbone businesses.

Sycamore Networks (SCMR), a maker of fiber-optic equipment, tumbled $11.31 to $80.94 despite reporting third-quarter earnings after the market close on Thursday that beat the First Call estimate by four pennies.

Falling in sympathy with the aforementioned telecoms were Nortel Networks (NT), which tumbled $4.00 to $52.44, and Lucent Technologies (LU), which lost $0.81 to $55.

To be fair, the news wasn't all bad. There were a few silver linings among the tech black clouds. Kana Communications (KANA) rose $3.75 to $43.25 on news ING Barings upped the company to a "strong buy" rating from a "buy." Portal Software (PRSF) surged $.13 to $47.13. Late Thursday, the company reported quarterly earnings of $0.02 per share compared to the First Call estimate of a loss of a penny per share.

In the credit markets, Treasuries closed modestly higher Friday, benefiting from investor concerns with equities. The losses in the stock market prompted a short flight to safety. Prices turned higher in late afternoon trading Friday. The 10- year Treasury note edged up 9/32 to yield 6.51 percent and the 30-year bond inched ahead 3/32 to yield 6.23 percent.

On the economic front, Friday saw the release of the March trade numbers, which produced yet another record, with Americans importing $30.18 billion more goods and services than they were exporting. Additionally, the February trade deficit numbers were downwardly revised to $28.71 billion from $29.24 billion.

In other news, confirming that the Fed is indeed inflation- phobic, New York Federal Reserve President William McDonough said in a speech in New York on Friday that demand is still too strong and that the increases in interest rates are aimed at restoring a better balance between supply and demand.

Looking ahead, the May consumer confidence numbers are due out Tuesday at 10:00 AM ET. Traders will be looking for a cooling of consumer sentiment that may show that the economy might be starting to slow. Then, on Thursday, the Commerce Department will be reporting revived GDP numbers. Don't look for either data sets to have much of an impact on investor sentiment.

With little economic news to focus on, many analysts believe that the market will continue to fret about the prospect of more interest rate hikes after the Federal Reserve ratcheted up borrowing costs by a half percentage point last Tuesday.

Thus, without a catalyst to give the market the support it needs over the short-term, observers expect a tight trading range to hold over the next week or two, which really isn't all that unusual. Contrary to popular belief, there isn't always a trend to play. Believe it or not, the market trades sideways nearly 70 percent of the time.

On a brighter note, one indicator that may portent an abatement in near-term bearishness is the put/call ratio at the CBOE, which finished at a historically high 0.88. This could mean that the wall of worry is finally sufficiently high enough that some investors may want to take a crack at climbing it.

Another indicator pointing to a possible rally are individual investors, who apparently haven't lost their appetite for equities. An estimated $13.1 billion flowed into U.S. stock funds in the week ended Wednesday, up from $5.2 billion the previous week, according to TrimTabs.

Nevertheless, with the interest rates on the rise and many investors still sitting on their hands, it's going to take a lot of chutzpah to trade this market over the next few weeks.

S.P. Brown
Senior Writer

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