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Running With the Bulls

SAN FRANCISCO -- You can't stop the market's rally, you can only hope to contain it. And after looking like it might go the distance, today's advance was contained. Major averages each closed definitively higher, but off the session's best levels (and notwithstanding the ugliness of the postclose session).

Once as high as 10,922.58, the

Dow Jones Industrial Average

finished up 0.9% at 10,891.02. The

S&P 500

closed up 0.8% at 1326.61 vs. an intraday best of 1331.29. Similarly, the

Nasdaq Composite

rose 2.5% to 2552.91, after trading as high as 2593.09.

Still, the indices righting themselves after last week's stumble presents an opportune time to check in with Henry "Hank" Cavanna, U.S. equity portfolio manager, at

J.P. Morgan Fleming Asset Management

, a unit of

J.P. Morgan Chase


Wednesday morning, Cavanna wrote, "With so much uncertainty among investors, our focus is on the ability of companies to deliver earnings in line with expectations as well as on companies trading below their true value," recommending



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Sprint PCS









In the technology sector,

JDS Uniphase





"are among those stocks that have perhaps been beaten down too much," he wrote.

That was pretty good timing, particularly for GE, JDS Uniphase and Altera. Today, GE gained 3.7%, JDS rose 9.4% and Altera gained 2.5%.

In an interview today, Cavanna conceded that the moves by JDS and Altera in the past two days have been particularly heady. They remain "core positions" for the $200 million


J.P. Morgan Institutional U.S. Equity fund, but "we're taking advantage of extremes in volatility to add to or take a little off the table when these stocks overreact to the positive or negative." Translation: He sold some into the rally.

The fund fell 6.6% last year, but posted an average total return of over 24% for the five years prior to 2000.

Cavanna believes the market is not only extremely volatile, but "trendless" as well. Value stocks, which have been leaders in the past year, are "no longer so undervalued," the fund manager argued. "The market has corrected the extremes on growth and value," overvaluation in the former and undervaluation in the latter.

Given that, Cavanna's fund has recently been scaling back exposure to energy, utilities and insurance stocks while adding in tech. But that doesn't mean he's plunging headlong into tech. By design, Cavanna runs a "balanced portfolio" with a blend of stocks from various sectors.

"On the margin, we're going to try to put more money in sectors where there's more value, and that has more to do with valuation" than nomenclature, he said. The challenge is that perceived valuation errors get corrected very quickly.

For example, Cavanna's fund was buying



at the beginning of the year when it was trading around $30. "Some of the value I was trying to capture got reflected immediately," he said. eBay traded over $55 intraday in late January. Today, it rose 0.6% to $50.50. Cavanna's fund is still long eBay, but did sell some of its holdings.

The point being that you have to adapt to the current environment. Even for players with long-term horizons, Cavanna said that means having core positions in names with strong fundamentals but staying nimble and booking profits or shedding losers when short-term gyrations dictate.

That may sound simplistic to those who've already abandoned (or never adopted) the "buy and hold" strategy. But those touting the return of tech hegemony after the past two days might need a reminder, particularly given the

news after the bell from




Keep Feeling Decimalization

It's no accident that

Bear Stearns


is planning to buy

Wagner Stott Mercator

for $625 million at a time when the Big Board is getting complaints about specialists

front-running orders.

While it may be "too soon" for readers to have formulated their thoughts on decimalization, as our recent

poll indicated, Wall Street has determined that trading in pennies is a boon for the specialists.

Bear Stearns is following rival securities firms into the business.

Goldman Sachs


Spear, Leeds & Kellogg

last year and announced plans to buy

Benjamin Jacobson & Sons

last month.

FleetBoston Financial


M.J. Meehan

last year.

Merrill Lynch


Herzog Heine Geduld

last summer. Notably,



rose 8.6% today to $50.55, the latest in a recent string of 52-week highs for the publicly traded specialist firm.

Ironically, it wasn't long ago some feared specialists faced obsolescence (or at least smaller profits) due to shrinking spreads plus the growing use of electronic communication networks, or ECNs, and other trading alternatives. Those fears have evaporated with the advent of decimalization.

"The specialist business ain't getting worse," quipped one industry veteran, who (not surprisingly) requested anonymity. "The only problem the specialist system has right now is they're making too much money."

He defended his specialist brethren, suggesting that even with the advantages of decimalization they make very little money compared with the amount they're handling. "You can't have an auction without an auctioneer, and he pays closer attention if he can make a little money."

Still, the source, who

opined here last June about the Merrill-Herzog deal, conceded that "there will be rule changes," suggesting specialists may be prohibited from topping the best posted bid by a penny, unless the same specialists had already been bidding on the stock. (We didn't discuss how this would be monitored or how it would jibe with existing rules that state specialists can only buy on downtick and sell on plus tick.)

But the "special" source does not believe the

New York Stock Exchange

is going to turn back the (digital) clock and trade in nickel increments. (

The Wall Street Journal

reported that such a possibility will be discussed at a meeting tomorrow between Big Board officials and institutional traders. NYSE's press office did not return phone calls about decimalization and the meeting.)

He also does not believe that the NYSE will go to an open order book because "the moment

investors put orders on the book they have lost control." Given the paranoia of many market participants, most will be less likely to place orders knowing they'd immediately be made public.

The veteran market participant also does not fear that institutions will flee the Big Board in favor of ECNs, as some observers predict. The NYSE's system of "open outcry with paid agents" is still the best, most efficient and effective way for institutions to trade, he said.

Yes, the "law of unintended consequence" has plagued the decimalization effort, but the system is like our democracy, he declared: "It's flawed but it's the best we got. Florida was a

mess but we do have a president."

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.