Blue Chips Rallying, but Market Internals Tell a Different Story

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The

Pagliacci

market has returned.

Just like the famed operatic clown (no, not

Luciano Pavarotti

, the other one), the equity market is laughing on the outside and crying on the inside. The outside is the big-cap, blue-chip

Dow Jones Industrial Average

and the

S&P 500

; the inside, the market's unceasingly weak internals.

Midday finds the Dow up 66 to 8966 around 12:30 p.m. EDT, with the S&P 500 up 5 to 1096. Other major indices have been on the downside throughout the session, however: The tech-cemented

Nasdaq Composite Index

was down 13 to 1766 and the small-cap

Russell 2000

was down 1 to 455.

Those indices better matched the true, downbeat tenor of the session.

New York Stock Exchange

decliners were leading advancers by 1,447 to 1,348 on a modest 253 million shares, and

Nasdaq Stock Market

decliners were whipping advancers by 2,355 to 1,413 on 297 million shares. The NYSE breadth did improve through the morning; early on, decliners were outpacing advancers by an 11-to-6 ratio.

"It's always scary to see a divergence of the Dow and the rest," said Doug Myers, vice president of equity trading at

Interstate/Johnson Lane

in Atlanta. "It puts a question mark in your brain as to which is the real direction. These are the kinds of markets that make traders a tad bit nervous and a tad bit tentative about which way it's going to go. We might be seeing some signs, but we don't know how to read them."

And when in doubt, money managers and the traders who serve them seek aid and comfort in the large-cap sector. Myers noted that $100 invested in September in the S&P 500 would be $120 today, while $100 invested in the

Nasdaq National Market Composite

(an index that excludes the Nasdaq's very smallest and most illiquid issues) would be $110 now. That 10% premium is hard to ignore in an increasingly uncertain environment.

"I think today is a pleasant surprise, to a degree, with the ability to at least hang in there," said Gregory Nie, chief technical analyst at

Everen Securities

in Chicago. "That being said, it's not anything to write home about. It is consistent with a market that has been weakened technically over the last week and a half but is heading for at least a short-term oversold."

Nie said the 10-day trend of advancers versus decliners is at its "best" level -- meaning most indicative of an oversold condition -- since January. And he noted that the January period that saw a big oversold reading included the 222.20-Dow-point selloff Jan. 9; if not for that, the current trend would be the most oversold since October, he said.

Also bullish, Nie said, is the percentage of stocks trading above their 10-week moving averages. The figure has dipped below 30%.

But there's always a but. "Volume is still the key," Nie said. "All but one day since May 1 we've had below-average volume." That one day was Wednesday, which saw 703.6 million shares change hands on the NYSE as the Dow clambered out of a 176-point hole to close down 27.16. "The fact that volume came up on the downside suggests there's more selling pressure still to work out," Nie said.

In the bond market, continuing Asian turmoil and a benign

National Association of Purchasing Management

report are sending yields to their lowest levels in two months. The benchmark 30-year Treasury was up 14/32 to 104 24/32, its yield easing to 5.79%. (For more on the fixed-income market, see today's midday

Key Numbers.)

Monday's Midday Movers

By

Heather Moore
Staff Reporter

In today's popular crowd were

American Home Products

(AHP)

, up 11/16 to 49, and

Monsanto

(MTC) - Get Report

, up 3/16 to 55 9/16, after AHP agreed to buy Monsanto in a stock deal valued at $33 billion. Under the agreement, Monsanto shareholders will receive 1.15 shares in the new company for each share owned. Within three years of closing the deal, the companies expect annual cost savings of $1.25 billion to $1.5 billion. Earnings per share are anticipated to be diluted by up to 15% in the first year after the deal.

Wall Street's excitement didn't spill over much to the other drug stocks:

Pfizer

(PFE) - Get Report

was down 1 3/8 to 103 9/16,

Merck

(MRK) - Get Report

was up 15/16 to 117 15/16,

Eli Lilly

(LLY) - Get Report

was up 1/4 to 61 5/8 and

Warner-Lambert

(WLA)

was up 1 3/8 to 65 3/16.

SmithKline Beecham

(SBH) - Get Report

was up 1 1/4, or 7.8%, to 17 1/2 after saying its

Leuvectin

performed well in Phase I/II clinical trials. The drug was designed to stir an immune response against prostate cancer cells.

Still in that sector,

Sugen

(SUGN)

was up 1, or 6.7%, to 16 after announcing it discovered and determined the function of

Aurora2

, a gene that is overactive in more than 50% of primary colorectal cancer cases.

Intel

(INTC) - Get Report

was down 2 1/2 to 68 7/8 after announcing late

Friday that it's delaying production of its next-generation

Merced

chip by six months. The chip maker also suffered downgrades this morning from

Salomon Smith Barney

,

Cowen

and

Bankers Trust Alex. Brown

.

Dell

(DELL) - Get Report

was down 2 3/8 to 80 on sympathy pains.

@Entertainment

(ATEN) - Get Report

was down 2 7/16, or 14.4%, to 14 3/4 after saying it won't link up with the Polish unit of France's

Canal Plus

.

USWeb

(USWB)

was down 2 7/16, or 11.6%, to 18 5/8 giving back what it earned last week on

news of a partnership with

NBC Interactive

.

SLI

(SLI)

was up 11/16 to 29 3/16 after saying it put its proposed stock offering on hold because of market conditions.

Harnischfeger

(HPH)

was down 3/4 to 30 3/4 after saying that it is considering splitting in two, separating its two principal businesses -- its mining and pulp and paper units.

Bethlehem Steel

(BS)

was up 3/4, or 6.1%, to 13 after Morgan Stanley Dean Witter upped it to outperform from neutral.

Ford

(F) - Get Report

was up 1 3/16 to a high of 53 1/16 after Salomon Smith Barney upgraded it to buy from outperform.

Sun Microsystems

(SUNW) - Get Report

was up 1 3/8 to 41 3/8 after Morgan Stanley Dean Witter raised it to strong buy from outperform.

Earnings movers

Citing low orders in the semiconductor and electronics markets,

Cognex

(CGNX) - Get Report

was down 3 3/8, or 17.8%, to 15 5/8 after saying its 1998 net income and revenue will come in below the 1997 figure by 20%. The 10-analyst

First Call

estimate called for annual earnings of $1.00 per share.

As originally posted, this story contained an error. Please see Corrections and Clarifications

.