Violent Swings!

Trust busters are talking of breaking up Microsoft. Yahoo led the Internet stocks lower. These were big stories but neither drove the market today. Market patterns established since the first week of January drove Wednesday's trading. Cyclical stocks, utilities, autos and banking stocks continue to advance. Although individual investors remain focused on the technology issues, the blue chips are attracting institutional money at the expense of the tech stocks. In addition to valuation worries in the tech sector, the DOW has a better track record during the first quarter than does the Nasdaq Composite. The DOW industrials have posted solid gains during both January and February every year since 1995. The Nasdaq has only two years of consecutive strong first quarters. Concern that the Nasdaq Composite is still in a corrective phase haunt the tech sector, making volatility extreme. Wednesday marked the eighth consecutive day that the composite traded in a 100 plus point range. We are in the midst of a convergence of two factors that create market volatility - earnings season and a rising interest rate environment. Until we pass through earnings, expect more of the same - a flight to safety in the DOW and momentum driven swings in the tech stocks.

The DOW continues to trade higher, led by banking stocks and utilities. The industrials gained 40 points to close at 11551. Volume on the NYSE was heavy at 974 million shares. Decliners led advancers 17 to 14. There were 50 new highs to 84 new lows Wednesday. Leaders in the DOW 30 included GM +3.44, T +2.81, HWP +3.81, JPM +2.06, and INTC +1.56. Losers included EK -1.81, MSFT -3.63, SBC -2.12 and DIS -2.75. On the broader market, AOL and TWX continue lower after their merger announcement, down 4.12 and 6.38 points, respectively. Other notable losers were in the biotech industry, retracing for a second day after four straight days of huge gains. Biotech losses were led by PEB -15.81 and DNA -14.19.

Nasdaq composite stocks continued another day of 100-point price swings as the market seeks direction. YHOO led the Internet stocks as the biggest losers on the day. Also declining sharply were software stocks and the biotechs. The semiconductor companies continued their advance. The composite gave back 71 points to close at 3850. Volume was heavy at 1.5 billion shares traded. Decliners led advancers 23 to 18. Notable leaders were in the chip stocks, including BRCM + 16.5, RBAK +10.06, NVLS +7.63 and AMAT +6.06. Big losers were once again the high flying Internet companies, including YHOO -39.81, CMRC -27.44, KANA -26.00, AKAM -24.44, FMKT -20.12.

The broader markets finished marginally lower as individual sectors traded mixed. The S&P 500 finished off 0.52% and the Russell 2000 index lost 0.43%. Advancing sectors were led by the Philadelphia Semiconductor Index +3.4% and the KBW Bank Sector Index +2.0%. Losing groups included the CBOE Internet Index -5.18% and the Amex Biotechnology Index -4.36%.

The bond yield is now nearing the 6.75% threshold with today's close at 6.71%. Go back to August 1997 to find levels this high. The bond yield continues to increase due to interest rate worries and a huge supply of corporate debt offerings competing for money flows. The equity market continues its disconnect from current rates, for now.

Following tradition, YHOO sold off with impunity after earnings were released at Tuesday's close. Even a 2:1 split announcement was not enough to prevent the stock's traditional post-earnings selloff as the company warned of revenue growth rates that are not sustainable. Today's trading was exaggerated by selling that began in Tuesday's market. Traders were additionally disappointed that the $0.19 EPS did not beat the whisper number and many had hoped for a 3:1 split. Despite the selloff, analysts rushed to raise their price targets, most of which are now placed at $450 to $550. A notable exception was CSFB analyst Lise Buyer who stated "We are still challenged trying to apply fundamental analysis to this valuation". Yahoo lost 39.81 points to close at $357.56. Additionally, YHOO continues to deny reports that they are shopping for merger opportunities in the wake of the AOL/TWX merger.

A published report in USA today sent Microsoft shares lower. According to unnamed Justice Department sources, the report said federal prosecutors in the antitrust case have reached a consensus that MSFT should be split into two to three separate entities. The most likely scenario, according to the article, was a split along product lines, with one company producing the operating system and the remaining products to be controlled separately. Justice Department officials denied the rumors, but the stock sold off anyway, down $3.63 to close at $105.81.

Broadband stocks continue to rise on the heels of the AOL/Time Warner merger news. The deal signals a belief that the next generation of Internet connectivity will be through cable broadband. BRCM gained $16.50 on the day. Recent analyst upgrades from Prudential, SG Cowen and C.E. Unterberg Towbin sent shares of ADAP $8.62 higher to close at $93.19 Wednesday.

AMAT announced the acquisition of ETEC after the close Wednesday. The purchase will combine the world's largest semiconductor equipment company with the leading manufacturer of mask pattern generation for the semiconductor and electronics industries. Both companies traded higher before the announcement. AMAT gained 6.25 points, closing at $127.06. ETEC gained 7.31 points to close at $49.88. In after market trading, ETEC was up another 25 points.

Earnings reports for Thursday include a number of big names capable of moving the market. Set to release before the market is chip equipment maker KLAC. Scheduled after the close Thursday are chip leader INTC, software maker SILK, networking stock ZOOX and biotech company BGEN. As mentioned earlier, INTC traded up strong today, helping to lead the entire semiconductor sector higher. In large part this is due to the normal run-up the stock sees going into earnings. There is a consensus belief that they will meet and maybe beat expectations this time around, which is a departure from the last two quarters. Despite this, there is also a fear that even a good number is priced in and that traders will sell the stock in front of the afternoon announcement, which in turn might drive all the semi's down.

Lined up both Thursday and Friday are significant events, likely to keep the wild price swings in place. Initial trading activity will focus on the PPI numbers, to be released Thursday morning before the market opens. Earnings reports from several market leaders are due Thursday after the close of trading, followed by an Alan Greenspan speech Thursday evening. If that weren't enough, on Friday morning the CPI numbers will be released just as analysts are deciphering what Uncle Al said the night before. There is a great likelihood that anything short of decisive reports will be followed by additional market volatility. Lets face it, the markets are looking for direction right now, thus the violent price swings. Even bad news (in the form of a PPI and / or CPI number's release pointing to inflation) would be welcomed in the sense that it provided traders with some sort of bias and market direction. Overly positive numbers would be more welcomed and might in fact offer the possibility of a "relief rally". That scenario is a bit of a stretch at this point. Even if it occurs, it would probably not happen until after the CPI is released on Friday. If we get numbers that "leave us hanging", the violent swings are likely to continue as traders try to determine whether to make the move back to the high tech stocks they seem to really want to own, or instead continue to rotate into the cyclicals for some safe harbor. It goes without saying at this point, but we do want to urge you to use discretion in initiating positions over the next couple days until the markets provide some sort of overall direction. Otherwise, if the violent swings continue, use those stops!

Steve Pekarek
-Research Analyst