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Market Wrap

Another buying opportunity brought to you by Nortel

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        10-26-2000        High      Low     Volume Advance/Decline
DJIA    10380.10 + 53.60 10454.80 10265.10 1.29 bln   1451/1397
NASDAQ   3272.18 + 42.61  3286.29  3081.36 2.29 bln   1919/1983
S&P 100   720.62 +  1.48   725.32   705.51   totals   3370/3380
S&P 500  1364.44 -  0.46  1372.72  1337.77           49.9%/50.1%
RUS 2000  479.76 +  4.55   479.79   466.56
DJ TRANS 2491.90 + 53.09  2492.67  2436.42
VIX        31.05 +  1.16    34.00    29.13
Put/Call Ratio      0.65

Just like the IBM and Intel prompted market events of the last several weeks the Nortel earnings brought us a surprise Halloween buying opportunity. The Canadian fiber optic vendor said sales had cooled somewhat to only +90% over the prior year. Still the rocketing fiber optic sector which thought fiber would eventually replace steel as the building material of choice took it hard. The market penalized the sector for only an outlook of +100% growth going forward with a -$128 billion drop in sector market cap. This drop today was simply a PE compression event as growth expectations came back to earth. JDSU gave back -$21 billion in market cap before their earnings release tonight. JDSU beat the street by +$.02 cents and had a glowing conference call. Investors who ran for cover and trashed JDSU over the last two days are probably going to have a serious bout of sellers remorse on Friday. After trading as low as $62 today and closing around $74 after the market rebound, JDSU is trading up about +$10 in after hour to $84. Look for momentum to come back into JDSU on Friday and also to SDLI. With JDSU paying almost 4 shares for every 1 of SDLI the change in SDLI will be dramatic. Almost 100 million shares of JDSU traded today.

The market reaction to all the negative news the last two days provided yet another retest of the October lows. The bottom today was 3081 on the Nasdaq and the resounding rebound was huge. From -142 to +42 in about an hour, if you blinked you missed it. Imagine working at nights and sleeping during the day. Going to bed as the market was opening up +60 points in the morning and waking up after the close at +42. Just another boring day in the market for day sleepers. For us who are keenly and painfully aware of the market movements during the day we are clinging to the fact that there are only three days left in October. With most tax selling by funds completed the remaining impact may be light but there is still those three days left for selling into rallies and capturing that last dollar from the losers.

Amgen will undoubtedly be on the list on Friday. After beating estimates today after the close they warned that sales were slowing on several of their drugs and earnings for next year would be lower. After rebounding almost +5 to close at $69 AMGN fell to $59 in after hours trading.

WCOM also got a disconnect from investors today as they posted far less revenue than analysts expected. The telecom sector has now come full circle again. The breakup of AT&T into the baby bells and then the consolidation last year has led into, you guessed it, a breakup again. Both AT&T and WCOM have announced breakup plans to create multiple companies from the newly consolidated group. Seems the lack of profits has put profits into a lockbox (election humor) and the only way to get them out is break up the box. Good luck! With T trading at a 52 week low of $22 and WCOM close to that low as well there may be even lower numbers for the parents in the future. Take value out of a $22 stock and what do you get? I know, I know, you get two or four stocks for the price of one but the parent will be trading in single digits if something does not change soon.

Just when you thought it was safe to go back into Internet stocks after AMZN and EBAY posted better than expected numbers, Lehman Brothers came out with an "avoid" rating on AMZN. After analyzing cash flow for Amazon they feel the amount of cash on hand is not enough to service debt and run the company for the next year. OOPS! Here comes another Amazon.bomb story in Barrons. I can just see that writer frothing at the mouth with anticipation. Last week Barrons slammed CSCO and started the weakness in the Nasdaq. AMZN traded down -$2 from the close in after hours after being up +5 during regular trading.

If you thought investing in tech stocks was volatile and went into consumables instead then the profit warning by Kellogg today was probably disturbing. Of course with K trading at a nine year low of $22 there was not much downside. However the acquisition of Keebler today put a positive spin on the news that maybe the company is finally doing something to turn the business around. Keebler is the number two cookie company and the merger of those two will add distribution outlets to both and the stock actually closed up.

Inktomi however was not so lucky. They announced earnings after the close and warned that next quarter may come in at half of the current estimates. They dropped -$10 in after hours and will probably continue the dive tomorrow. They tripled their revenue but will suffer going forward with acquisition problems.

The economic news today was good. The Employment Cost Index fell again to only a +0.9% increase for the 3Q. 2Q was +1.0% and 1Q +1.4%. With employment cost increases rapidly decreasing the Fed will have a tough time making the case that the tight job market is adding to inflation. This will help keep the Fed on hold. The reverse of this story was the headline SUNW made today saying the only thing wrong with their outlook was the inability to hire almost 7000 workers they currently need do to the tight job market. Only one report can be right and analysts point to things like benefits and stock options not being counted in the ECI numbers. Add in those figures and the employment costs may be skyrocketing. The next major report is the GDP tomorrow. With estimates clocking in at +3.5% growth the markets will be looking for some signal that the soft landing is not turning into a crash. Any number under 3% will be seen as a possible crash and could have negative results. A number over 3.5% will be seen as the light at the end of the tunnel of pessimism but a much larger number could re-ignite the Fed fears. It is a tightrope that must be treaded carefully.

Iraq played its "hole" card today. Iraq threatened to withhold its 2 million plus barrels of oil beginning November 1st if they had to receive payment in American dollars. Dollars is the world standard for oil payments. He wants payment in Euros. This is in retaliation for the U.S. support of Israel and a purely political move. Still 2+ million barrels of the 75 million daily world output is a significant amount. OPEC has said they would make up any shortfall but the news event caused yet another hike in oil prices. Another 500,000 barrels per day are coming to market next week under the OPEC price control policy. In any 20 day period that oil trades over $28 they will bump production to stabilize the price. Production is not the real problem today. Problems at refineries and world shipping capacity running over 95% are both adding to the consumer shortage.

The market event today was purely fiber related. During the dip back to 3081 several mainline Nasdaq big caps were stubbornly positive. Microsoft opened positive and never looked back to close at $64.50 +3.19. Intel opened up, gave back some ground at midday but never went negative and closed up +3.44. Dell gapped up from a sub $26 close yesterday and finished +1.88 at $27.75. CSCO went negative only briefly to touch $50 again but roared back to close near $54. About the only Nasdaq big cap to suffer was SUNW which closed +7 off its low but still -6.63 for the day. SUNW was seen as being susceptible to earnings problems due to business slowdowns. With servers their major product any crash landing would impact server sales. I don't believe it but that is the reason given in the media for the drop. More likely would be a couple mutual funds scrambling to take profits to offset major losers in other areas. If you had any of the Internet or fiber stocks in your fund portfolio and were forced to sell during the recent drops then you might be forced to sell winners to improve your fund performance. It is a dog eat dog world in the fund sector and overall performance is everything. We may never know what is causing the volatility in specific stocks that have not warned but just keep saying to yourself, three more days and October will be over. Then funds will be forced to put that money back to work as well as the massive influx of cash that occurs over the next four months. Good times are ahead, somewhere!

Several traders were blaming the rebound today on yet another short squeeze. Could be but I think a better answer is simply money on the sidelines waiting for October to be over could not believe their luck and jumped at the chance to buy near the bottom again. The three day losing streak on the Nasdaq was snapped in climatic fashion and the low from the 18th was not touched. GE bottomed at $49 and started back up. CSCO bottomed at $50 again. INTC bounced off $42 for the fourth time in the last six days and looks headed for $50 tomorrow. IBM ended a six day slide and appears to have bottomed. Dell ended a four day slide. With the fiber optic sector poised to explode again on Friday and most of the big caps showing signs of successful bottoms I just don't see any major risk from this point. Sure there could still be three days of tax selling but it is a buying opportunity not a crisis. The GDP report will probably come in close to estimates and not be a major factor but that is always a wild card. Advance/declines today finished dead even and volume was good. Considering the decliners were beating advancers 2:1 Thursday morning this was a significant turnaround. Remember the rebound from last Wednesday's drop to near 3000? More importantly remember the Thursday/Friday rally? I think tomorrow will be a repeat as long as we don't get slammed by something out of the blue. Futures are up strong at +8.00 for the S&P and +40 for the Nasdaq. Looks like a good day to sell some naked puts or buy leaps while they are on sale. I plan on bargain hunting in the morning but the likely gap open may take some bargains off the shelf before we even get in the store!

A point of interest, Dick Arms, a market timer, inventor of the TRIN indicator AND a speaker at the Denver Options Workshop this weekend, was quoted numerous times on CNBC today as calling this a successful retest of last weeks bottom. He reported that he was calling his clients all afternoon and telling them to buy based on his research. As a market historian and market technician he is widely respected for his market calls. He has been doing it for 35 years and that is longer than most investors today have been alive. Dick of course called us to get our opinion before making his prediction. (just kidding!) Great planning on our part to get him as a speaker the day after a major market call. I will be looking forward to see if Steve Nison, the Candlestick charting guru, agrees with him. Now don't you wish you had signed up for the seminar? http://www.OptionInvestor.com/workshop

Good luck and sell too soon.

Jim Brown

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