April 28, 2000

Have you ever tried to explain to someone with no knowledge of the stock market that a low unemployment rate is negative?

(That's right, if folks are working, it's not a good thing. We equity people would much rather see folks out of work.) Or have you tried explaining that if workers are making more money, that's not good? Or that stock market players prefer weak retail sales? And what about consumer confidence? Oh no, we don't want to see the consumer feeling good about the economy, do we?

It's perverse that the recipent of your explanation looks at you as if you just dropped in from Mars. But the reality is that all these factors affect interest rates, and interest rates matter.

For a while,

Greenspan and Co. kept raising rates and the

Nasdaq

looked the other way. The general consensus was that higher interest rates didn't matter in the New Economy. Then came that higher-than-expected

Consumer Price Index report on April 14, and the market went into a tailspin: New Economy, Old Economy, it didn't matter, all of a sudden, interest rates and economic data mattered again. Or do they?

Seems to me that it wasn't until

after

that CPI report came out that all the "interest rates matter" comments began floating around. And did you notice that was the day Nasdaq made a low? If this scenario sounds familiar to you, then it's likely because we've seen this story before, last year around this time.

The Internet stock craze was all the rage last year in the first quarter too. Only then, it was business-to-consumer stocks. In early April, it was as if an earthquake hit the market and wham! We fell 10 % in a week. After this year's action, that might seem like child's play, but at that point we were 50% lower on the Nasdaq than we were when this decline began in March.

So, we'd made the Nasdaq high in early April 1999 and declined through the end of May 1999. At the end of May, the April CPI report came out, which really rocked the market with an inflation scare. That's when everyone began talking about how interest rates mattered. Fear was pervasive, with haunting thoughts of the June

FOMC meeting.

And what did the Nasdaq do from that end of May CPI report until the June FOMC meeting? It rallied. Yep, it ignored all the fear and rebounded. And after the rate rise in late June, it kept on going. That is, until mid-July, when suddenly owning stocks was out of favor again and the market came down one more time.

I bring up this scenario because after yesterday's stronger-than-expected

ECI data, investors decided to buy Nasdaq stocks anyway, ignoring the interest rate fears that are out there. I believe the Nasdaq will continue to ignore these fears, at least until we get somewhat closer to the May

FOMC meeting. For now the bias is upward, but last year's scenario tells us we're not out of the woods yet. Fears of higher interest rates will likely be back to haunt us again. That's what will likely give us the ups and downs I continue to expect in this market.

In the meantime, the Nasdaq seems to have found a short-term bottom it likes. As you can see from recent action, it's had trouble going down with conviction this week. It would be nice if the Nasdaq could rally with conviction, but that only happens when we're out of the woods. This rally is more about not going down than going up.

The Nasdaq is not yet overbought, so it's got that angle working for it. Also, the

McClellan Summation Index

has finally halted its slide and hooked under, giving some support there for the short term. The

Dow Jones Utility Average

also turned down sharply yesterday, giving us that indicator to hang a hat on for now.

There are so few bases that have been built in these beaten-down technology stocks that it's hard to imagine this rally sustaining itself for an extended period of time. Bases provide the

support needed to launch a sustainable rally. One of the few technology charts doing its best to build a base (albeit far from complete) is

America Online

(AOL)

. It has been working on this pattern since its fall in January. While it will likely continue to "work" on this base, it has shown an ability to hold at a higher low during this recent decline, which helps make the base bigger. A move through that mid-70s high in March would show that base is complete.

One other base I've come across is an Old Economy stock:

Abbott Labs

(ABT) - Get Report

. It has to do some more work in this upper 30s area, but this stock has seen its low and any pullbacks will just make the base that much bigger and better.

If I had a whole pile of charts with bases like these, I'd think this rally was sustainable. But when these are the best of the bunch, we know there's still more work to be done after this rally.

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she was long America Online, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at

KPMHSM@aol.com.