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Daily Newsletter, Wednesday, 11/24/1999

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The Option Investor Newsletter         Wednesday  11-24-99
Copyright 1998, All rights reserved.	
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com

Also provided as a service to The Online Investor Advantage

Published three times weekly, Sunday, Tuesday, Thursday evenings
************************************************************

Please be advised that there will be no newsletter sent on 
Thanksgiving, as all employees will be at home with their 
families.  The Sunday newsletter will be delivered as usual.

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MARKET WRAP  (view in courier font for table alignment)
************************************************************
        11-24-99           High     Low    Volume Advances Decline
DOW    11008.20 +  12.60 11044.30 10949.10   739,026k 1,388  1,625
Nasdaq  3420.50 +  77.63  3420.50  3328.03 1,286,527k 2,147  1,860
S&P-100  753.20 +   6.25   755.88   744.18    Totals  3,535  3,485
S&P-500 1417.08 +  12.44  1419.71  1399.17            50.3%  49.7%
$RUT     455.93 +   1.48   456.04   451.22
$TRAN   2923.33 -  56.96  2980.01  2912.25
VIX       20.47 -   0.70    22.39    20.12
Put/Call Ratio       .43
*************************************************************


"Rumors of my death are greatly exaggerated"

Mark Twain, meet Mister Market.  Other than orderly profit taking 
experienced yesterday, the markets simply refuses to die.  Why?  
In front of Thanksgiving, isn't it supposed to be quiet with 
lackluster volume?  Usually yes; but this is an unusual rally 
that when you strip away the smoke, mirrors, lights and noise, it 
comes down to one thing: LIQUIDITY.  There is simply more cash 
out there that needs to be put to work.  The evidence manifests 
itself in volume.  If there is no cash getting put to work, by 
definition, nobody is buying, thus volume is low.  Anybody 
listening today to the financial reporters on CNBC walked away 
thinking the stellar gains were from day traders sitting in front 
of their terminals entertaining themselves because they had the 
day off.  Don't buy it.  Day traders would not be playing in 
MSFT, INTC, CSCO, WCOM and DELL and would certainly not be taking 
NASDAQ to a breakout new high over 3400 - the 15th record high in 
the last 19 trading days.  These companies make up 40% of the 
NASDAQ and saw the biggest price moves and volume today, which by 
definition would have the most influence on the index numbers.  
This is institutions buying with all that cash they'd saved up in 
September and October while waiting for the buying opportunity.  
With 1.3 bln shares trading the day before Thanksgiving, you can 
be sure that Aunt Edna and Uncle Frank didn't pull the motorhome 
over at the closest phone booth to buy 100 shares of Microsoft or 
Cisco.  Institutions move markets, not you and I

Need more proof?  Would daytraders take 1.3 bln shares home with 
them over an extended weekend?  Nope - they want to go home flat 
(no positions), especially since Friday is a half day, making 
today the effective close for the week.  Knowing that, there 
should have been major selling into the close.  But, take a look 
at the chart below.


 

This is a 1-day chart of today's action on the NASDAQ.  See any 
selling at the close?  It's not there.  Institutions with a 
longer time horizon are in the driver seat.  They don't buy at 
these levels to lose money.  

So how 'bout that third quarter GDP revision from 4.8% to 5.5%, 
or the jobless claims showing up at 17K less than expected.  
Isn't that inflationary?  Won't Alphonso the Great want to raise 
rates again?  The answer on any other day after January 1, 2000 
would be yes, and the bond market has started to take notice by 
sending the 30-yr. bond rate up to 6.21%.  However, since the 
last rate increase on November 16, nobody really expects the FED 
to raise rates again in the face of Y2K uncertainty.  
Accordingly, the expectation is that the next rate hike would not 
come until February at the earliest, and more likely, March.  

Why?  Take oil stockpiles as an example.  Distributors report 
that customers, including utilities and gasoline retailers want 
to stock up "just in case".  Everyone wants a full tank of gas 
and heating oil on December 31.  Of course, that stimulates 
current demand as evidenced by the current price of oil hovering 
at $27.  After January 1, 2000 when we wake up to discover that 
everything (with few exceptions) still works, those inventories 
will have to burn off before they get replaced.  By definition, 
lowered immediate demand will fall off, thus stalling replacement 
spending - inherently deflationary.  This same cycle could play 
itself out in most other facets of the economy too.  It would 
therefore not look so smart to raise rates then.  That's why 
March becomes the next FED watch period.  That's an eternity and 
of little concern for those wanting to make money NOW.  And 
that's likely why we see the disconnection of equities from 
interest rates.

Enough economics - back to the market.  Just how well did it do 
today?  Just like JDSU, we must pay homage and glory in its 
splendor (bow your head or do a victory dance - take your pick).  
The NASDAQ closed at yet another new record, up 77 points to 
finish at 3420.  You'd think it would at least stop for breath at 
the 3400 psychological barrier.  Nope.  It just pushed right 
through to close at its high of the day.  In the first half hour, 
decliners were beating up on advancers 4:3.  By noon, the score 
was even.  In the last hour advancers pulled out the stops, 
zipping past decliners for a finish of 7 advancers to 6 
decliners.  Up volume slammed the down volume 837 mln shares to 
366 mln shares, while 129 new highs put the squeeze on just 53 
new lows.  Even the losers are being pulled up in this latest 
rally.  

As we mentioned earlier, the 5 generals went on the march.  MSFT 
added $2.06 to finish at $91.69, it highest level since Judge 
Jackson slapped the big bad bully with the scarlet letter "M" for 
monopolist.  INTC gained $3.19 to $82.19.  CSCO powered ahead 
$3.94 to finish at a new high of $92.44, making it number three 
in market cap behind only Microsoft and GE.  DELL came out 
swinging for another $2.06, closing at $43.31 on volume 15% 
greater than the ADV.  Finally, WCOM advanced $1.69 to $88.75.

Internets too were mostly up, especially Yahoo! who benefited 
strongly from comments from Merrill Lynch following an analyst 
meeting wherein they reiterated their Buy rating.  They are 
expected to have a great holiday season stemming from new 
evidence that banner ads really do work.  Merrill expects them to 
exceed street expectations this quarter and next year.  Software, 
networking and retail were also hot.  We've got to show the love 
for QCOM (+15.06 to 375.31) and JDSU (+18.25 to 258.56) too.

As for the big board, the DJIA thankfully closed up 12 points to 
finish at 11,008, once again above the 11,000 mark where it's 
been consolidating its recent run.  Without MSFT and INTC, it 
wouldn't have been as pretty.  Nonetheless, the gains weren't 
limited to just these two.  Companies like AT&T, HWP, XON, and 
WMT saw gains of more than a point.  Advanced bested decliners 
8:7 with volume clocking in at 739 mln shares - respectable in 
front of Thanksgiving, but not heavy.  41 new highs were handily 
beaten by 127 new lows.

We had thoroughly expected that at some point in the last two 
weeks, the overall market would have corrected some based on 
historical experience.  We still think that is a very real 
possibility.  The indices cannot continue exceeding the their 
200-dma's forever.  But for now, this has been a clear lesson to 
us that liquidity manifested in volume is no match for technical 
history or rationality.  Corrections and pullbacks are not likely 
to be that drastic until the cash dries up, though there will 
continue to be down days.  Nonetheless, a 10-15% correction 
doesn't appear likely until liquidity dries up, given current 
levels of institutional buying volume.  While the hair on the 
back of our collective necks stands on end from fear of heights, 
we can't say when that will happen.  So in the meantime, watch 
the market volume for clues, paying particular attention to 
support and resistance; buy the dips on the rebound; use trailing 
stops on the breakouts; and if all else fails, sell too soon.

We will not be publishing a Thursday update (but will resume a 
regular weekend edition this Sunday) since the market will be 
closed tomorrow for Thanksgiving, and open only half day on 
Friday.  The direction then is up for grabs.  But if CNBC turns 
out that to be right that daytraders on their day off from work 
will be entertaining themselves, the possibility certainly exists 
for sharp moves on low volume.  

For those of you tearing your hair out over whether or not to 
trade on Friday, Janar offers the advice of taking a week off 
from trading every month to clear your mind.  That's excellent 
advice, but if you are not in the position to take off a whole 
week, at least try to remember why you trade in the first place - 
to spend more time enjoying the company of family and friends.  
Friday might be a good day to remember those closest to you 
instead of the market.  We wish all of you a Happy Thanksgiving.

Buzz Lynn
Research Analyst
 


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STOCK NEWS
***********

Pharmaceutical Investment Targets Cancer Research

By Cindy Christ

Called the "sweet spot" of biotech investing by some analysts,
cancer research is where big pharmaceuticals are making some
of their largest bets.

Since small biotechnology companies are leading the charge in
the fight against cancer, big pharmaceuticals are teaming up
with the fledglings to develop and market new cancer-fighting
drugs, according to Peter B. Doyle, co-manager of Kinetics
Asset Management's new Medical Fund, which focuses on
biotechnology companies involved in finding a cancer cure.

Analysts say there are a couple of ways to play this trend that
can help offset volatile price swings inherent in the sector:
Through sector mutual funds, which invest in a basket of
companies, or by investing in large pharmaceutical companies
or biotech leaders.

Brian Stansky, who manages the T. Rowe Price Health Sciences
Fund (PRHSX), thinks individual stocks present the best
opportunity to investors.

Right now his favorite biotech is Genentech (DNA), a company
that uses human genetic information to discover, develop,
manufacture and market human pharmaceuticals for significant
unmet medical needs.

Genentech targets drug development in two areas, heart disease
and cancer, the No. 1 killer and No. 1 fear of American
adults.

San Francisco-based Genentech is majority owned by Roche
Holdings Ltd. of Basel, Switzerland. The company is the No. 2
biotech firm behind industry leader Amgen (AMGN). 

Genentech shares have had a strong run this year in large part
due to its two cancer drugs, Herceptin, for the treatment of
breast cancer, and Rituxin, for the treatment of non-Hodgkin's
lymphoma.

Shares in Genentech were down fractionally for most of
Wednesday's trading session, but near the close advanced
$1.25, or 1.45 percent, to $87.25.

Shares jumped seven percent last Friday on news the company had
settled a 17-year-old patent dispute with the University of
California. Under the settlement, one of the largest ever in a
patent infringement suit, Genentech will pay UC $200 million.
The settlement also avoids any admission of wrongdoing by
Genentech.

During the trial, the university's allegation that a former
Genentech researcher had secretly removed a patented DNA
molecule from one of its laboratories shocked investors and
the scientific community.

"Genentech has decided to put this matter behind us and avoid
the distraction and uncertainty of another jury trial covering
complex patent issues that are based on events that took place
nearly twenty years ago," said Arthur D. Levinson, chairman
and CEO, in a statement.

Like Amgen, Genentech is one of the few biotechs that turn a
profit. 

For the nine months ended Sept. 30, 1999, total revenues
increased 26 percent to $1.06 billion. Net loss totaled $971.6
million versus income of $144.8 million a year ago. The
company said revenues reflected increased sales of Rituxan and
Herceptin.  Net loss resulted from a $1.21 billion charge.

According to the company, sales of Herceptin were $47.9 million
in the third quarter, a 4 percent increase over the previous
quarter. Sales of Rituxin declined 3 percent sequentially, but
at $72.4 million, were up a strong 84 percent from the same
period last year. Prospects also look good for the company's
Anti-VEGF, another cancer drug under development in Phase II
trials.

Genentech's current product pipeline consists of two drugs in
Phase I trials, three in Phase II, seven in Phase III, and two
awaiting regulatory approval, the company says.

Analysts expect Genentech profits to grow at 31.7 percent and
21.6 percent respectively in 1999 and 2000. For the next five
years, earnings growth is estimated to average 28 percent
versus 30 percent for the industry.

In recent quarters, the company has established a record for
surprising on the upside. Over the last five quarters,
Genentech has reported positive earnings surprises of 36
percent, 40 percent, 29 percent, 37.5 percent and 27.5
percent.

Due to valuation concerns, consensus analysts' recommendation
for Genentech is a buy/hold.

Up about 40 percent, the entire sector has vastly outpaced the
broader market this year. In the third quarter alone, biotechs
gained an average 25 percent. 

Longer-term, analysts say there is tremendous growth prospects
for the industry. 

"For the first time in a long while we've had good leadership
from the larger companies. In addition to delivering on sales
and earnings, they are delivering on very full product
pipelines. Top-tier companies Genentech, Amgen and Genzyme
(GENZ) have a number of late stage candidates," said Hambrecht
& Quist biotechnology analyst Margaret Malloy, according to
The Wall Street Transcript.

If the technology bubble ever bursts, Genentech is a good
candidate for investors' "buy" lists. As a leader in cancer
research and heart disease, the company is in an enviable
position to benefit from two major trends: the aging of
America and increased spending to fight what might be the
world's greatest scourge.



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