A Dead-Cat Bounce?

The blue chips rebounded Monday in a lifeless sort of way. In fact, the only thing we can point to in terms of an explanation for the rally is that sellers just ran out of gas after the DOW went too far into oversold territory Friday. Technical oscillators indicated that traders should either buy or dig in for extended losses. In our continuing tale of two markets, just as the DOW is starting to point up, the Nasdaq is on the verge of rolling over. Technical indicators can be blamed for that too.

Traders were looking a little less confidant than usual in the tech stocks Monday. The Nasdaq Composite (COMPX) has been trading sideways ever since hitting hard resistance at 4500. The current sideways channel has a floor at 4350. Today's trading on decreased volume, combined with chart patterns and technical indicators that say we should be taking some profits here are weighing on the COMPX. Outside factors could easily influence the tech stocks in either direction Tuesday, due to a lack of conviction within the market itself. The most likely scenario is a knee-jerk reaction to the DOW.

Can the DOW make it two in a row? Monday's trading opened higher after technical indicators showed that the market was heavily oversold at Friday's close. The rally was not convincing, however, as market internals remain decidedly poor. Volume was only moderately heavy at 928 million shares traded. Decliners edged out advancing issues 1551 to 1453. New highs numbered 52, while there were 240 new lows. The DOW finished the day up 94.63 points to close at 10519.84.

The Nasdaq is showing signs of a weakening market, but did finish the day 23.10 points higher to close at 4418.55. Volume was lower than the recent trend, at 1.6 billion shares traded. Advancing issues beat out decliners 2197 to 2037. There were 287 new highs vs. 113 new lows.

On the broader market, the S&P 500 finished slightly higher, up 0.2%. The Russell 2000 Index gained 0.52%. The Wilshire Small Cap Index did surprisingly well Monday, up 1.27%.

Most industry sectors traded slightly higher Monday with the exception of the banking stocks, which lost 1.84%. Leading sectors again included Technology, but Drug stocks, Retail, Transports and Cyclical stocks also gained some ground. Within the Technology sector, the Biotechs and Semiconductors were once again the leaders.

Over in the bond pits, the 30-yr bond closed higher to yield 6.239%. The ten-year note now sits at a 6.497% yield.

Company News:

Healtheon/WebMD (HLTH +1.62), the missing link between physicians and consumers, announced the acquisition of Medical Manager (MMGR +21.75) and its subsidiary Care Insite (CARI +4.12). HLTH will trade 1.65 shares for each share of MMGR and 1.3 shares for CARI. The deal is valued at $7.6 billion based on current share prices. Shares of all three companies traded higher after analysts said that HLTH has eliminated competition in this niche.

America Online (AOL -1.38) is still on a shopping spree. The Company's stock has yet to recover from the Time Warner (TWX -0.88) merger. This time, AOL is reportedly in talks to buy a controlling share in Net2Phone, (NTOP +12.19), a provider of low-cost long distance calls over the Internet. AOL currently owns 5.4% of NTOP, and is thinking about buying another 48% of the Company from IDT Corp (IDTC +7.19). Also running on takeover rumors by AOL was PurchasePro (PPRO +13.25), a B2B e-commerce provider.

Clarent Corporation (CLRN +15.00) traded sharply higher after reporting that memorandums of understanding have been signed with 5 Taiwanese companies to provide products for local access broadband service for DSL, wireless local loop, ISDN and cable. The stock is already trading strongly on anticipation of a split announcement that may come after the company votes to raise authorized shares at the 2/15 annual meeting.

Corning (GLW +14.25) announced a merger with NetOptix (OPTX +20.00), the deal was valued at $2 billion. The news caused a theme rally for fiber optics issues. Other stocks in the group include Sycamore Networks (SCMR +7.62), Newport Corp (NEWP +23.75) and Ciena (CIEN +2.81).

Systems management software developer Computer Associates (CA -0.81) is expanding into the e-commerce area with an acquisition of Sterling Software Inc. (SSW +1.81). The deal was valued at $39.30 per share for SSW, or approximately $4 billion.

Regional Bells are beginning to give cable companies a run for their money in the broadband ISP space. SBC Communications (SBC +0.81) today announced a rollout of DSL service for $39.95 per month. Although cable companies frequently offer a cheaper service, they have been slow in rolling out the program, enabling the Telco's an opportunity to capture market share. SBC's service comes with a free modem and a free install.

Notable just for the sheer magnitude of the move, Infosys Systems (INFY) declined 127.06 points Monday. It sounds ridiculous, but the correction was warranted; INFY was up $82.50 and $141.66 Thursday and Friday, respectively. The India-based IT services company averages only 80,000 shares traded daily. Just goes to show the volatility of a thinly-traded momentum stock on a split run. The split payable date for INFY was Monday.

Tuesday's Market:

Earnings scheduled for Tuesday include the following companies: NAVI, NXLK, MFNX, AMAT, CMDX, LCOS and NTAP (this is not a complete list, just the standouts). SplitTrader.com has identified NAVI, NXLK, AMAT and CMDX as split candidates.

This week is chock-full of economic news that is likely to affect the markets. Tuesday, the Industrial Production report is due, followed by Housing Starts Wednesday, the PPI Thursday and CPI Friday. To top it all off, Alan Greenspan's semi-annual testimony before Congress is Thursday at 10:00 am. It's no wonder the COMPX is stalling - its waiting for some rising interest rate news to rally on!

Seriously though, we are a little concerned that the COMPX is meeting heavy resistance at 4500 combined with an overhead obstacle formed by drawing a trendline from the October 28th low through the low on 1/24, the pinnacle of the previous rally. An overhead trendline on a 3rd rally that is not easily crossed often indicates a serious challenge to further advances. We will be watching this closely. Keep in mind that the COMPX has already left its advancing channel and is now trading sideways. Today's lower volume indicates a lack of conviction, but on the upside, external action from economic news or from renewed strength on the DOW could put us right back in record territory again.

Another indicator we are watching is the Nasdaq Trin. This indicator measures market sentiment by computing the ratio of advancing/declining issues to advancing/declining volume. Movement under the baseline of "1" indicates a bullish sentiment, movement over 1 indicates a bearish sentiment. An unusual pattern has developed during February, in which the market has rarely recorded a trin over 1. That's good right? Sure, but maybe too much of a good thing. When everyone is bullish, where do the new buyers come from?

What can you say about the down-and-out DOW? Well, we're not convinced that the selling is over just yet. The 10300 level (which we never reached) did appear to be the next stop on the way to support, but the DOW seems to have reversed course purely on contrarian indicators that said it was time to buy. We will be convinced when volume picks up and proves that this is a rally, not just a dead cat bounce.

Good luck and Happy Trading

Steve Pekarek
Asst. Editor