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Market Wrap

Divergent Markets

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    03-26-2001               High      Low    Volume Advance/Decline
DJIA     9687.50 + 182.70  9724.90  9509.30 1.12 bln   1998/1072	
NASDAQ   1918.49 -  10.19  1960.68  1909.42 1.71 bln   2000/1631
S&P 100   588.45 +   7.74   592.26   580.98   totals   3998/2703
S&P 500  1152.69 +  12.90  1160.02  1140.15           59.7%/40.3%
RUS 2000  447.38 +   4.11   450.59   443.27 
DJ TRANS 2727.87 +  82.53  2728.67  2646.65 
VIX        33.19 -   1.72    34.85    33.03
Put/Call Ratio       0.58

Divergent Markets

An impressive gain in the Dow Jones Industrial Average was subdued by light trading volume and a quiet loss in the Nasdaq Composite. The Dow added 182.8 points, or 1.9%, to close at 9,687.5, while the Nasdaq Composite lost just 10.2 points, or 0.5%, to finish at 1,918.5. Volume decreased again on both exchanges, with 1.1 billion shares trading on the New York Stock Exchange and 1.7 million in the Nasdaq Stock Market. Positive market breadth was displayed as advancers led decliners by 2 to 1 on the NYSE and by 5 to 4 on the Nasdaq. New 52-week price highs totaled 72 versus 27 new lows on the NYSE. Advancing volume comprised 73% of total NYSE trades. The Nasdaq logged 46 new highs and 89 new lows.

You might think that today's rally had legs when you look at the broader market, including Dow Transports (up 3.1%), Dow Utilities (up 4.5%) and S&P Financials (up 1.6%). Smaller cap indices (RUT, up 0.9%, and MID, up 1.1%) also posted healthy gains. But then you remember that the total volume traded was really on the light side. Part of it may have been due to the trading curbs installed on the New York Stock Exchange midday. Curbs prevent program buying into an uptick or selling into a downtick. This limits the ability of big money to maneuver, thereby inhibiting volume. No wonder the volume decreased today. The CBOE Market Volatility Index (VIX) and the Nasdaq Market Volatility Index (VXN) both pulled back today, ending at 33.2 and 69.2, respectively.

Cautions comments from Cisco Systems (NASDAQ:CSCO -0.81) dragged on the Nasdaq. This weekend, Cisco stated that end-market demand is likely to be slack for "at least the next three quarters." Cisco shares hit a new 52-week low at $17.88. Nearly all of the tech sectors lost ground today. Bucking the trend was the Internet Index (DOT), rising 1.9%. Amazon (NASDAQ:AMZN +0.75) added 7.4% to $10.94. Verisign (NASDAQ:VRSN +1.88) added 5.6% to $35.25. Ebay (NASDAQ:BAY +1.25) added 3.4% to $38.44. I notice that Ebay still has a P/E of more than 200, but seems to have found support around $30.

Citing a drop-off in demand and order cancellations, PMC-Sierra Inc. (NASDAQ:PMCS -1.68) slashed expectations for 1Q earnings and revenues. The company will also cut its workforce by more than 13% and close some facilities.

Utilities and airlines showed some of the largest percentage sector gains, with the Utility Index (UTY) up 4.7% and the Airlines Index (XAL) adding 4.1%. The big news in the airline arena was the strike by Comair pilots. President Bush said that he did not have the authority to block this strike, having intervened in a pending strike at Northwest Airlines earlier this month only at the request of Federal mediators. Comair is owned by Delta Airlines (NYSE:DAL +1.73).

Home Depot (NYSE:HD +1.68) was upgraded to Buy before the bell, which pushed shares up 4.2% to $41.35. Salomon Smith Barney also raised its price target on the stock to $52 from $45. Robertson Stephens upped their rating for Wal-Mart Stores (NYSE:WMT +2.03) to Buy, sending shares up 4.3% to $49.60.

The Federal Reserve reported that about half of all banks have tightened their credit standards to their corporate customers in the past two months by increasing the risk premium. This special survey of senior loan officers found that the credit tightening is hitting big companies harder than small companies. About half of the banks report weaker demand for loans, in part because spending on equipment is slowing. Only 7% said that loan demand is rising. By the way, the Fed had has not issued a special loan survey since the financial market crises of late 1998.

New-homes sales fell 2.4% in February. The Commerce Department reported that the decline in sales of new single-family homes followed the larger 10.8% plunge in January, which had been the biggest monthly setback in seven years. Still, new homes were sold at a strong annual rate of 911,000 in February, when adjusted for seasonal variations, which was above the sales total of 903,000 for all of last year. The forecast for new home sales was 912,000. The National Association of Realtors said sales of previously owned homes edged down 0.4% last month to a seasonally adjusted annual rate of 5.18 million homes, slightly more than the forecast 5.04 million. Although the falling stock market and economic slowdown have hurt consumer confidence, analysts believe that declining mortgage rates have helped to shore up home sales.

Reports of the solid housing market had little impact on Treasuries. Two-year notes fell 1/32 to 100-21/32, as their yield, which moves inversely to price, rose to 4.26%. Five-year notes dropped 4/32 to 105-2/32, yielding 4.52%. Benchmark 10-year notes fell 9/32 to 101-5/32, yielding 4.85%, while 30-year bonds fell 21/32 to 100-9/32 to yield 5.36%. Investors are waiting for tomorrow's consumer confidence data and Mr. Greenspan's Speech on "Monetary Policy for a Growing Economy" scheduled for a business economics conference in Washington.

Looking Ahead

Durable Orders forecasts for Tuesday fall in the range of a slight decline to a 0.50% increase. The Consumer Confidence Report, also slated for Tuesday, will likely show a decrease from the prior month's report, reflecting stock market weakness and the rash of job cut announcements. Note that the cut-off date for the March Conference Board survey was March 21, and therefore probably did not reflect last week's rally. ABC/Money Magazine's weekly consumer comfort index posted its largest decline and the lowest level of consumer comfort since October of 1997.

Wednesday brings us the Oil & Gas Inventories report. Thursday's Initial Jobless Claims Report for the week ending March 24 will likely prove to be the eighth consecutive weekly increase in this average. Bear, Stearns and Company forecasts a small increase to 380,000 versus the previous 379,000.

Bear, Stearns and Company reported that of the 350 interviews conducted for preliminary March Michigan Sentiment, only 100 took place in the week ended March 16, when the Nasdaq fell 9.7%. The results of the additional 150 interviews carried out for the final survey due Friday will probably result in slightly lower final sentiment at 90.5. Also reported on Friday, the Chicago Purchasing Managers' Index (PMI) is expected to rise slightly, to 44%, in March.

It is not clear whether the trading today in the broad market was a technical bounce or an indication of long-term optimism. Concerns about the economy and earnings still abound. But one of my red flags is officially up. Too many talking heads are saying that we are seeing a bottom now and that the return to growth is going to happen in the fourth quarter. First Call/Thomson Financial told clients that S&P 500 earnings will be down for at least the first three quarters of 2001. Current estimates call for a 7.2% drop in earnings growth in the first quarter and for a 5.2% decline for the second quarter. However, earnings growth estimates for the first and second quarters have come down about a full percentage point each week since the beginning of March. While I do not want to miss the upward turn any more that you do, I still have that nagging feeling that we just have not seen enough fear yet. Have we exhausted the sellers? Probably not.

The closing tick on the NYSE was positive, at 534. The Nasdaq closing tick of -230 is not a significantly negative value. Generally, a tick that moves above 300 or less than -300 can indicate a developing trend. The Nasdaq could go either way tomorrow, but its downtrend remains intact. Do you need some reasons for volatility in the near term? Another earnings warning period just began for those companies who have not yet confessed. It is also time for end-of-quarter window dressing by mutual funds. I can't wait to see what they will be buying. Trade carefully.

PJ Mitchell
Research Analyst

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