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Market Wrap

Ugly Selling Turns to Technical Rebound

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       5-22-2000           High     Low     Volume Advance Decline
DOW    10542.50 -  84.30 10664.50 10369.50   869,030k 1,164  1,775
Nasdaq  3364.21 -  26.19  3390.95  3172.65 1,615,462k 1,227  2,839
S&P-100  748.04 -   4.91   754.29   730.01    Totals  2,391  4,614
S&P-500 1400.72 -   6.23  1410.55  1368.73            34.1%  65.9%
$RUT     471.67 -   8.03   480.59   458.21
$TRAN   2720.16 -  21.84  2761.90  2703.11
VIX       28.83 +   0.06    32.12    28.24
Put/Call Ratio       .60

Ugly Selling Turns to Technical Rebound

For those just tuning in to see the NASDAQ down 26 points and the Dow down 84 points at today's close, you missed the fireworks. Investors continue to exercise caution stemming from the belief that the Fed will act to raise rates again in June, and belief that valuations are still too "high". Just what is "high"? We don't know for sure. But apparently the lows hit today convinced more than a few bargain hunters to step back to the plate for a swing at some of the beaten down former kingpins in the market. In short, after testing new lows, the rebound was impressive. So just what happened?

Let's start with the most dramatic first - the NASDAQ. At the opening bell, the index sat at 3390. Within slightly more than one hour, it fell through technical, psychological and historical support at 3227, its intraday low set on April 17. That was a big deal. It didn't stop there and instead continued south below 3200 all the way to 3172, its low so far this year. Weak attempts to rally back to the 3227 were met with selling pressure, again testing the sub-3200 level. Things did not look good with 3227 failing to hold on three intraday tests. However, with plenty of cash on the sidelines (but still in their pockets) investors waited for deals too good to pass up and couldn't resist the buying opportunities presented. CSCO for instance was down to $50 before springing back on twice the normal volume to close at $55, a gain of almost $2 on the day.

Similar patterns could be found in the top 10 most active issues. ORCL dipped to $62.75, but closed at $67.75 on volume 50% greater than the ADV. SUNW dropped to $70, nailing its 200-dma before moving back to close at $79 on volume 70% greater than the ADV. JDSU rebounded nearly $9 from its low of $76.50 on 50% greater volume than average. QCOM close up $11 from its low of $77.75, also on 50% greater volume. AMAT closed up nearly $8 from its low on twice the ADV. The only laggard was MSFT, whose volume was 20% shy of average. Nonetheless, it too closed up $1.50 from its low of $62.44. Most of these issues are at or near their 200-dma and represent buying opportunities in a bull market. The point of conveying this to you is to show that a perceived bottom was hit on many big issues and many investors were willing to step back into the market with conviction, sensing that those levels were a buying opportunity. Volume confirms that.

However, many analysts believe that the market cannot advance further without the big caps caving in as the final sign of capitulation. While we saw some of that today on the stocks noted above, there are still others which remain far above their 200-dma and may have further to fall before they find a trading bottom. Note that biotechs were missing from the tech recovery.

What's it all mean? Don't dive in the pool yet without first checking the water temperature. Internally, things weren't so hot. Declining issues outpaced advancers by a 7 to 3 margin. 276 new lows (yow!) beat just 19 new highs, while declining volume was nearly twice advancing volume. In the final two hours though, the NASDAQ tacked on 189 points to overcome its 220 point decline, and closed down just 26 at 3364, well above important support at 3227. We like that and look for a trading rally to continue. We've talked a bunch about volume lately. While today's figure of 1.6 bln shares traded is a bigger number than what we've seen of late, it's still well below the 1.8 to 2.0 bln we'd like to see to convince us that the worst is over.

We still think the NASDAQ will remain rangebound between 3300 and 3800, until we get a breakout to the upside over 3800 (and more convincingly, 4000). Nonetheless, we think today's overall action gave us many tradable entries for the week. We would expect to see the rebound continue tomorrow and perhaps through Wednesday afternoon when investors will likely pare back holdings pending the outcome of the GDP deflator figure, initial jobless claims, and existing home sales on Thursday morning. Don't expect the market to rock and roll to new highs; just look for it to snap out of its sourpuss mood for a couple of days before getting grumpy again.

In all the excitement, you probably thought we forgot about the Dow. Nope. But it too mirrored the action of the NASDAQ opening at 10,624 then sinking to 10,369 (an intraday loss of 255 points) before recovering 173 of those lost points to close at 10,542, a loss of just 84 points. However, volume was a dull 871 mln shares. Decliners beat advancers 3 to 2, while down volume exceeded up volume by 80%. 119 new lows beat out just 30 new highs in similar fashion. While starting out negative, by the close, IBM, T, KO, MCD, JPM, C, WMT, INTC, and XOM were the only issues to struggle back into the green, though investors exhibited no tremendous buying pressure on any of them. GM, however, noting that its tender to convert GM shares to GMH shares (the satellite division GM and owner of Dish Network) was oversubscribed, dropped almost $9 to $78 on four times its ADV. In similar fashion, GE lost nearly $2 to close at $50 on twice its ADV. HWP also kicked in for a loss of $3.44 bringing these three up for the ball and chain award today in contributing to 70 of the Dow's 84-point loss.

One more time on the volume - as long it remains consistently under about 900 mln shares, the Dow will likely continue trading within the support and resistance ranges of 10,500 to 10,800. How'd we figure that? We merely drew a line connecting the lower highs and another line connecting the higher lows to get a pennant formation, then estimated the figures if the trend continues to hold. 10,800 is also the 200-dma for the index and has lately provided resistance. Thus, don't look for a positive breakout anytime soon. In case you are interested (don't hang your hat on this either), the convergence of the lines, which would represent the date and level of a breakout is in roughly the last week of June at about the 10,500 level. If you trade 100% technical, you've undoubtedly noted that the pennant is descending, which generally portends a breakout to the downside. While it isn't good news, we think there is still trading opportunity in the bounce off today's low until the Dow gets back to the 10,750 to 10,800 level. Like the NASDAQ, we'd expect the trend to continue until Wednesday afternoon prior to the release of Thursday's economic figures before caution possibly overtakes greed.

Yes, there was news today, but the big story is really today's market rebound. So we'll skip the news tonight and move on to our fearless forecast for Tuesday and possibly beyond. While we think today's rebound is a big plus despite the drubbing both indexes took most of the day, we're going to be watching for further rebounds in the big cap tech issues, which are generally less interest rate sensitive. On the NASDAQ, we'll look for support at 3300 if there is any amateur hour profit taking from today's recovery - about 10,450+/- on the Dow. Then we'll make our move on individual issues as long as the overall market cooperates. We don't want to be a helium balloon stuck in a downward moving elevator, so we'll make sure the market and our stocks are moving up. We'll also be watching for big caps that that have bounced off of or near their 200-dma. Overall, we expect a tradable rally for the next couple of days. Pay particular attention to the sectors. By symbol, we've listed some sector issues to watch (the Merrill Lynch HOLDRS in particular). While most of them are not yet optionable, they can show you strength of various sectors - use them as a tool.

BBH     Biotech
PPH     Pharmaceuticals
TTH     Telecom 
IAH     Internet Architecture
IIH     Internet Infrastructure
BBH     B2B
BDH     Broadband 
SMH     Semiconductors 

If the sector doesn't look good, we suggest staying out in favor of one that does. As always, sell too soon (because this isn't a major change of market direction) and don't buy too soon either. It's a tradable market, but trade where the trading is good.

Buzz Lynn
Research Analyst

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