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Inflation, Earnings Worries Weigh On Stocks

Stocks continued to struggle on Wednesday in the wake of strong than expected retail inflation data and worries about a Sun Microsystems meeting with analysts after the close.

The ISDEX http://www.wsrn.com/apps/ISDEX/ was unchanged at 316, and the Nasdaq declined 4 to 2313. The S&P 500 lost 7 to 1271, and the Dow fell 86 to 10,644. Volume rose to 500 million shares on the NYSE, and 910 million on the Nasdaq. Decliners led 16 to 11 on the NYSE, and 22 to 11 on the Nasdaq. For earnings reports, visit our earnings calendar at http://www.wsrn.com/apps/earnings/internet.xpl and reported earnings at http://www.wsrn.com/apps/earnings/ireported.xpl. For after hours quotes and news, visit our after hours trading site at http://www.afterhourstrading.com.

The Consumer Price Index for January rose 0.6%, 0.3% higher than expected, and the core rate of 0.3% came in 0.1% higher than expected. At the same time, news that the Federal Reserve held an emergency meeting yesterday to consider changes to interest rates provided an early boost for stocks, fueling hopes that the Fed may announce another intermeeting rate cut.

Merrill Lynch downgraded Sun , off 2 5/16 to 19 15/16, ahead of the company's analyst meeting tonight. One piece of anecdotal evidence hurting the stock was a report that the market is being flooded with used Sun servers from failed dot-coms.

VA Linux dropped 1 3/4 to 5 1/2 after missing estimates and announcing 25% layoffs. Agilent lost 2.95 to 41.05 after topping estimates but guiding future expectations lower.

Leading Internet stocks rebounded, led by Juniper , up 3 15/16 to 78 7/16, Broadcom , up 3 5/8 to 68, and Ariba , which bounced 2 1/16 to 20 1/16. i2 rose 1 9/16 to 34 3/4 on a CIBC WorldMarkets Strong Buy rating.

CS First Boston defended Openwave , off 5 1/16 to 45 15/16, which continued to fall despite a deal with AT&T Wireless .

E.piphany tacked on 1/8 to 24 1/2 after announcing an agreement to acquire Moss Software and the intellectual property of Radnet. Prudential rated the stock a Strong Buy, but Adams Harkness downgraded it to Market Perform from Buy.

Some technical comments on the market: Note: We are now including charts in the technical market commentary. If you can't get the charts via the e-mail newsletter version, try this link: http://www.afterhourstrading.com/column.html

The Nasdaq has so far held around its early January low of 2251-2300, the point where the Fed first cut interest rates. As we said yesterday, we do not want to see a close below the January 2 closing low of 2291; if that happens, the Nasdaq could be headed for the 2000-2100 level. Breadth is negative and new highs/new lows have continued to deteriorate, both negatives. To the upside, we want to see the Nasdaq get back above its 1990 logarithmic trendline at 2388 (first chart), hopefully by Friday. Above that, the index needs to get back above its September downtrend line (second chart) at about 2450. Not a pretty picture, but it could be enough to get the Fed to cut rates again. The Fed held an emergency meeting yesterday to consider interest rate changes; we suspect the Fed gave Alan Greenspan the green light to cut rates if the market gets really ugly, but that's pure speculation on our part. It's also interesting to note that that meeting came on the same day the Nasdaq broke the 1990 trendline, a line that we suspect the Fed watches.

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