THE ROAD LESS TRAVELLED

"Two roads diverged in a wood, and I - I took the one less traveled by, and that has made all the difference." In 1916, Robert Frost wrote "The Road Not Taken", from which the above caption was taken. People then and now have interpreted those words of inspiration in different ways. For some, it is a call to individuality; the mantra of those who refuse to follow the crowd and who are willing to stand for their beliefs. Yet others see this as recognition of the fact that few are willing to walk the road of challenge; to make the sacrifices that are necessary to excel and rise to the top. In either case, most who read the verse are inspired. Unfortunately for the NYSE, Mr. Frost isn't around to whip up something inspiring that would restore the faith and confidence of investors in that institution.

In fact, when it comes to the markets in general, investors seem to have placed new meaning on that famous verse. The road less traveled now leads to Wall Street, in particular the NYSE. This used to be "the place" for investors to place their money. A position of status was bestowed on any company worthy enough to earn a spot on the big board. When the Nasdaq came along, investors and the NYSE alike treated it like a stepchild. Even the best of companies listed there were highly speculative and not to be trusted. It is fair to say at this point in time that the investor who was willing to forsake that widely held opinion is now the one who feels as if his or her decision has indeed "made all the difference".

How things have changed! The road previously less traveled now looks like an LA freeway at noontime. Meanwhile, the traffic out of downtown NYC isn't just leaving for the 3-day holiday; it appears headed for the onramp to the Nasdaq express. It's not only investors heading out of town either. In days of old, a company never left the exchange unless they failed to meet the listing standards, in which case they were relegated back to the minor leagues. Being sent back for listing on the Nasdaq was the corporate equivalent of a trip to the woodshed. Not after this week. For the first time ever, a company voluntarily left the exchange for the greener pastures over on the Nasdaq.

This on the heels of last year's inclusion of two Nasdaq issues on the venerable Dow. Previous to Microsoft and Intel being added to the index, the Dow and the NYSE were almost synonymous to the average investor. They were nothing more than interchangeable symbols representing the place where people with the means to do so invested their money. It was not welcomed news at the exchange to hear that "their" index had been infiltrated by those heathens from the Nasdaq. The old boys club was being forced to take on new membership and they didn't like it. There was a hint of change in the air for the first time in ages for the age-old institution.

The most troubling aspect of all the recent setbacks for the powers that be at the NYSE is one involving the nature of change. They recognize that change is uncontrollable once it begins. Not so long ago, they controlled the most revered institution in the world. They were bed-partners with the Dow and both investors and companies alike clamored down the one-way street to their doorsteps. That street is now a two-way road and unfortunately for the NYSE, the traffic is beginning to flow both ways.

Speaking of roads, it looks like the Dow is on a one-way road leading to 10,000. The blue chip index fell -295.05 points to finish at 10,219.52. Despite the fact that both the CPI and CPI Core came in inline with expectations indicating that inflation remains in check, the S&P futures closed down in the morning. This provided investors with an early indication of a modestly down open for the Dow. The indication was correct and held out for the day, although modest is anything but what the loss turned into. Late in the day, the Dow traded down to just under 10,200, a loss of over 300 points. From there it recovered slightly at the close. The loss marked the third straight down session for the index.

In regards to breadth, it was bad, finishing in favor of decliners 23 to 7. Volume was heavy at over a billion shares. As has been the case for some time now, the number of companies setting new 52-week lows was high at 268. As would be expected on such a down day, selling was rampant and grew stronger into the close. Bargain hunters were nowhere to be found. The selling volume outstripped that of purchasing volume by a 9 to 1 margin. Had it not been for the placement of trading curbs later in the day, the amount of selling volume and overall loss would have been greater.

The only sector to show any strength for big board issues was gold. The April gold contract increased $3.50 to $307.30. Losers were not hard to find as every other sector came under pressure in all the indices, the most notables being banks, oil services, utilities, drugs, Internets, computer software, networking and semiconductors. Among the components hit hardest were AXP -9.69, GE -5.88, IBM -4.25, INTC -4.63, MSFT -4.25, XOM -2.88, JPM -3.50 and IP -1.94. It should be mentioned that in the case of AXP and IBM, Friday's action represents a close under their respective 200-dma's. As for MSFT and GE, they both finished just above their 200-dma's. JPM and IP have been trading for some time below their 200-dma's and XOM would be now if it had been trading long enough as the new entity. We highlight this point because the 200-dma is a very important barometer for a company. Many institutions are precluded from buying or for that matter owning a stock trading under its 200- dma. When the stock of a company crosses under its 200-dma, it very often comes under additional selling pressure as institutions sell the holding out of their portfolios. This is often an ominous event for shareholders of such issues. In this case, you are talking about Dow component issues, which may very well paint a more ominous picture for the index as a whole going forward from here.

Three of the thirty Dow component companies did manage gains for the day. This may be seen as the light at the end of the tunnel or a sign of how bad things are, depending on your perspective. Shares of EK (+0.5), Mo (+0.13) and HWP (+1) all managed to finish in positive territory. In the case of HWP, they were helped by the release of Q-1 earnings by the company they recently spun out, Agilent. In addition, the Company hosts a shareholders meeting on the 23rd (Wednesday), at which time many investors anticipate a possible stock split announcement.

In terms of where the Dow stands now, Friday's loss marks the 5th such negative close on succeeding Friday's. This points to a lack of desire on the part of investors to hold these issues over a weekend. For the week, the index lost over 200 points or 2%. Year to date the index is down over 1277 points or 11.1% as compared to the 25% gain in 1999. More ominous than any of those numbers is the fact that the index has violated every single line of support. We have been warning that a failure to maintain closes over its 200-dma would cause a test of the 10,700 level, and a failure to hold that level would probably lead to a 10,500 test. We also indicated that a test of that level might indicate a breakdown sufficient enough to ensure a test of the 4-digit Dow. Well folks, had it not been for the circuit breakers being instituted Friday afternoon, we might very well be talking about the test of the 10,000 level already. Luckily, 10,200 held, but few investors ended the day encouraged that this would hold up upon the resumption of trading Tuesday. At this point, a test of 10,000 seems as likely as another rate hike. The positive, should such a scenario play out, is that many investors and traders alike will probably look at the retrace to such a significant level as an opportunity and signal to buy. If so, we may very well see a significant bounce from that level. Failure to hold that level in the event of a test would do serious damage to the index and further highlight the negative image that blue chips and the NYSE have recently taken on.

On the Nasdaq, the day actually started off to the upside. Once again, investors abandoned the blue chips to seek out gains among the small cap and biotech stocks. Despite the positive start, the drag of the Dow managed to sour the sentiment, which prompted investors across the board to take profits. A signal that things were not well occurred when a computer problem interrupted the exchange's ability to update the aggregate change to the index (Compx). When the problem first occurred, the index was barely under water, but by the time the problem was corrected, the index was down almost 100 points. For the day, the Compx finished down -136.97 at 4411.95. Trading was heavy at 1.9 billion shares. Decliners beat out advancers 26 to 16 and the up/down volume finished favoring the sellers at 12 to 7. Somewhat surprisingly, there were over 320 new 52-week highs set as opposed to 136 new 52-week lows.

The five most heavily traded issues for the day were all Nasdaq stocks, including DELL (-0.63), GBLX (-7.88), ORCL (-2.63), MSFT and INTC. Several other notables included CSCO (-4.69), which is down over 11 points from the record it set on Feb 10th, AMAT (- 10.63) coming off Thursday's all time high and YHOO (-5.44), which is now trading almost 100 points below the record it set in early January.

At its low point late in the day, the Compx had declined over 145 points to test the 4400 level, bouncing at 4404. The close represented a 3% loss for the day and the seventh largest point drop for the index. Prior to Friday's action, the Nasdaq had been up almost 12%, fueled by techs, small caps and biotechs. On Thursday alone, the biotechs (BTK.X) gained over 7%. After the action Friday, the Nasdaq finished up over 16 points for the week. Year to date, the index is up over 340 points or 8.4%.

Unlike the Dow, the Nasdaq appears to remain strong. Although Friday's close knocked the index below its 5 and 10-dma's (barely), the fact that it held the 4400 level is impressive. With the recent parabolic gains, the index needed to pull back and consolidate some. The fact of the matter is that the index continues to maintain several long and short-term positive trends, either sitting above or on the trend support lines. Holding 4400 solidifies that level as support. In addition, the Compx has strong support back at 4350 and again at 4300, a level from which the index bounced up strongly before going on to close above 4500 for the first time ever on Thursday. Although Friday's selling action might continue Tuesday morning, which would put support at those levels to a test, it is probably a safe bet that many traders and investors will view such action as an opportunity. If so, their buying might very well forestall any continued slide in the index.

To be expected considering the selloff in the overall market, the major indices experienced losses as well. The Dow transports gave up 39.56, while the utilities lost 5.13. The S&P 500 gave up 42.18, finishing the week down over 40 points or 2.9%. The SOX took a much-needed rest, closing down over 42 points or 4.4%. The S&P 400 mid-cap and Russell 2000 both took hits as well, losing 11.78 and 12.77 points respectively. Prior to the loss of over 2% for the Russell 2000 on Friday, that index had been up over 10% year to date.

In the bond pit, traders liked what they heard regarding the CPI and CPI Core (stripped of food and energy) report, as both sets of numbers indicated a rise of only 0.2%, inline with expectations. Further good news was provided in the form of the December Trade Imbalance report, which indicated that the nation's trade imbalance had actually shrunk 5.7% from $27.1 billion in November to $25.55 billion. This helped the bond early on, but the overall enthusiasm generated by the reports was somewhat dampened by the still lingering words of Greenspan regarding the certain need for further rate hikes. The high price of crude (traded over $30 earlier this week) and heating oil is the other negative element bond traders are focused on currently. Despite this, the 30-yr treasury still managed to gain +29/32's to finish with a yield of a 6.15%.

For the coming week, traders have little in the way of economic news to dwell on other than the fourth quarter revised GDP, Durable Goods and initial jobless claims numbers all due out at the end of the week. In terms of the GDP number, everyone expects it to come in high, so it's unlikely to have much of an impact on the bond or the market. The Durable Goods number could affect the bond, but isn't likely to do much to the broader market. The lack of news is probably a good thing for bond traders as they carry the weight of the world on a daily basis as it is.

In terms of news that affected trading on Friday, Global Crossing (GBLX) topped the list by announcing Q-4 numbers that missed analyst expectations by $0.2. In response, the stock was punished to the tune of a loss over 8% for the day. Another big name company suffering from an earnings release was Novell (NOVL). In their case, they met expectations and grew revenues by more than 10% over the yr-ago quarter. Analysts focused instead on the fact that their first quarter revenues declined by over 8% from the previous quarter. In the end, the stock got hammered, giving up 8.5 points to finish at $34.56. Also heading south in response to the release of first quarter numbers was Agilent Technologies (A). The Company beat the street estimate of $0.22 by $0.6, reporting for the first time since their spin- off from HWP. In response, Lehman Bros. raised their price target on the stock from $90 to $115. Despite the positive news, shares of the Company closed down -3.25 to $93.75.

On the flip side, Ciena (CIEN) met expectations for their first quarter and announced that they had received a substantial purchase order for their long distance optical transport equipment. The stock closed up 1.75 at $115.31.

Two companies benefiting from the announcement of stock splits after the market on Thursday were Brocade Communications (BRCD, 2:1 split) and Immunex (IMNX, 3:1 split). In addition to announcing their split, Brocade announced earnings that beat expectations by a nickel. For the day, BRCD finished up big, gaining +32.25 to close at $275.88. Meanwhile, IMNX tacked on $0.81 to close at $195 - not much of a gain, but considering the market… .

On the earnings front, the calendar remains heavy despite the fact that earning's season is considered more or less over. At this point, over 90% of the S&P 500 companies have reported. Year over year, earnings for the quarter have increased by approximately 22% for those companies. As we have done in the recent past, we would advise that you consult an earnings calendar to check for the earnings dates for companies you are following (even those of industry partners or competitors) to avoid getting caught off guard. In terms of important conferences or events for the week ahead, Greenspan gives his Humphrey-Hawkins presentation to the US Senate over the 23rd - 24th and Legg Mason hosts their Telecom Conference on the 25th.

As for the week ahead, Monday is a market holiday commemorating President's Day. Tuesday morning promises to be rowdy with the likelihood of continued selloff from Friday's session. As we stated earlier, the Dow looks to be on a collision course with a test of the 10,000-level. A failure to hold that crucial level would point to things even more ominous than they are now for the Dow and blue chips in general. If that occurs, it could bring the entire market down with it! Before you jump out the window, keep in mind that money continues to flow at ever increasing rates into the market in the form of 401K contributions. That money has to go somewhere and there are many old-school money managers that might view a retrace to the 10,000-level as a godsend. If enough of these guys, as well as the long forgotten value investors, line up to buy what are now considered by many to be vastly underrated and undervalued blue chips, watch out! The 10,000 bounce could be the start of a strong rally talked about for years to come. One thing to keep in mind regarding the current situation is the fact that the volatility index (VIX) that we've spoken about many times in the past is indicating an oversold reading. The VIX climbed by over 13% on Friday, a substantial increase. It is now sitting up near 29 and we rarely see the reading get much higher than 30-32. Keep in mind that markets rarely stay oversold for very long anymore. This strengthens the aforementioned theory of a 10,000 bounce.

As for the Nasdaq, it will probably also experience a continuation of Friday's selloff as we start the day Tuesday. That's likely to be the only similarity between the two indices. The Nasdaq composite looks poised to continue its rally. At this point, it looks as if it will take a complete meltdown in the Dow to pull this thing down with it. Anything short of that would seem unlikely to shake investors, as they have time and again refused to get out in this very volatile market climate. We have talked extensively about the changing fundamentals and environment in the market today and this seems to be another evolving aspect of those changes. Investors seem more and more afraid of missing out on the next rally and potential profit than they do of deteriorating market internals and fundamentals. The road nobody would take previously is getting more and more crowded. The irony of all this is the fact that these "new investors" are taking the road less traveled in the sense that they refuse to be dictated to or scared out of the market by the old boys club and their rules. How things have changed! Makes you wonder which road Frost would take today?

Louis Horkan -Chief Editor