Option Investor

Daily Newsletter, Wednesday, 12/08/1999

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The Option Investor Newsletter         Wednesday  12-8-99
Copyright 1998, All rights reserved.	
Redistribution in an/;'y 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
MARKET WRAP  (view in courier font for table alignment)
        12-8-99            High     Low    Volume Advances Decline
DOW    11068.10 -  38.50 11171.80 11068.10   957,040k 1,138  1,937
Nasdaq  3586.08 -   0.84  3625.47  3579.51 1,671,042k 1,929  2,223
S&P-100  754.11 -   1.99   760.29   754.11    Totals  3,067  4,160
S&P-500 1403.88 -   5.29  1415.66  1403.88            42.4%  57.6%
$RUT     468.84 +   3.14   468.84   465.16
$TRAN   2881.67 -   4.49  2937.50  2879.42
VIX       22.62 +   1.24    22.79    21.51
Put/Call Ratio       .51

Euphoria:  An Intense Feeling of Well-Being

That is the definition of euphoria but it could easy be applied 
to many of the tech stocks that have been running wild lately. 
Today was another day in which you would have needed a double-
digit gain to just make the top thirty in Nasdaq gainers.  To 
list in the top 5, you needed a plus +40 move!  Individual 
issues with a positive story to tell are being over-run with 
momentum money and daytraders looking for the quick kill.  
That is where the euphoria is and it isn't necessarily bad 
if you use some degree of caution to protect against yourself.  
Small fortunes are being won in stocks like CMGI, YHOO, ICGE 
and SFE, but others are being lost in LE, VISX, CC and YHOO 
(notice on YHOO it can work both ways).

Right now investors are acting extremely care-free in moving 
back and forth from the momentum plays.  Take a look at some of 
the returns in the largest point movers today.  ISLD +45.31, 
ICGE +43.31, BOBJ +28.38, BFRE +23.00, ASWX +22.75, VERT +22.00, 
EXDS +21.06, SFE +20.00 and JNPR +18.13.  Unfortunately, this 
is typical of the action before the end of the short-term cycle.  
We will get into this more before this article is done, but 
let's get to the markets.

The Dow Industrials were down 38.53 to 11068.12, continuing 
the meltdown since mid-day last Friday.  The S&P 500 turned in 
a loss of 5.29 to close at 1403.88.  The NASDAQ held in positive 
territory for most of the day before dipping just under the 
unchanged line.  It finished at 3586.07, -0.85 for the session.  
The volume was heavy, which is a continuing theme for the past 
two months.  The NYSE recorded 948 million shares and for those 
of you looking for some kind of NASDAQ record, you got it in 
volume.  The NASDAQ did 1.67 billion shares.  The decliners 
beat advancers once again by a 7-to-4 margin.  The one bright 
spot was the Russell 2000 which hit a new 52-week high today 
at 468.84, up 3.14.  But we are still aways from its all-time 
high at 491.

Notice the continuing slow death of the Industrials in the 
chart.  We won't likely hit support until at 11,050, which is 
also the 10-dma, followed by more support at 11,000.  This is 
the level that will need to hold for investor confidence to 
remain in tact heading towards the end of the year.  You may 
also notice the divergence continues between these two major 
averages.  The rally is narrowing!  



Today's economic numbers from the Beige book report were a lot 
like the color of the book...dull.  It showed that relatively 
little had changed in the past six weeks.  Growth remained 
moderate to strong, labor is still tight, a possible slowdown 
in spending and prices that were steady.  This is the same 
scenario we have been facing for months now.  The bond traders 
seemed to agree as the yield held in a tight range.  The bond 
was down 11/32 today, forcing the yield up to 6.23%.

The Dow Jones Utility average fell to a 15-month low today.  
This is just another sign of the euphoria.  This group that 
is typically bought for dividend yield, has suffered from a 
lack of buyers as investors are going after the tech sector.
This is also common at the end of the year as tax loss selling 
takes precedence.  Investors ditch some of there losers to 
offset their gains for tax purposes.  

The Internet group was the place to be once again.  The AMEX 
Internet index rose by 1.3% and featured some of the big winners 
listed above.  EXDS was up $21.06 after bullish comments from 
Merrill Lynch analyst Henry Blodgett.  The big story in the 
news this morning was on ISLD.  The new deal for Digital Island 
brought a smile to the faces of investors.  They announced 
a pact with SUNW and INKT which greatly expands the Digital 
Island server network.  Under the agreement, Digital Island 
will deploy up to 5,000 Sun Microsystems' servers equipped 
with Inktomi's Traffic server platform and content distribution 
suite.  That was all traders need to here as they bid ISLD 
up $45.31 to $114.94 which is a new all-time high. 

The Internet group was the place to be with the exception of 
Yahoo, of course.  The day after an addition to the S&P 500 
can wreak havoc on your stock price.  This is from the big 
moves that happen the day before, as index funds pile into 
the stock.  That is why we dropped YHOO from the call list 
last night after the pronounced move.  The stock opened down 
over $20.  If you weren't aware of the "day after" phenomenon 
(very similar to earnings and stock splits), it is a tough 
lessen for your account to learn but hopefully we all know 
not to buy a stock that is up over $40 on the day.  It all 
comes back to "sell too soon".   

Microsoft and Ericsson announced today that they will form a 
joint company to market and deliver mobile e-mail solutions to 
network operators.  Ericsson will be a majority shareholder in 
the new company.  ERICY added $5.44 to $64.13 and MSFT went 
lower by $1.25 to $91.75.

Circuit City, Best Buy and Tandy got hammered today after CNET 
said they found electronic products to be cheaper online.  The 
survey, released today, compared prices of 24 items such as DVD 
players, portable televisions and digital cameras between online 
retailers such as Amazon.com and MySimon.com, and real-world 
stores like Circuit City and Sears.  Some of the items were 
noticeably cheaper too.  Now we know where to do our Christmas 
shopping.  On the session, CC -13.2%, BBY -6.3% and TAN -5.0%.

So is there more euphoria ahead?  Well, there is a reason you 
won't find the name NASDAQ anywhere in the dictionary under 
the definition for euphoria.  That is because the market cycles.  
How many times over the past 4 years have we seen 2-4 months up, 
only to be followed by 2-4 months sideways to down.  Granted 
the volatility has seemingly increased but this cycling pattern 
is not likely to end anytime soon.  So what is the opposite of 
Euphoria?  Maybe lugubrious, which portends to doleful, mournful, 
and dismal.  All feelings that you will have if you are the one 
left without a chair when the music stops.  With Y2K right 
on the doorstep, look for the volatility to increase even more 
than current levels.   

The trick is to not get sucked in by visions of dollar signs 
dancing in your head.  There are still good solid technical 
and fundamental plays that will produce trends and returns 
that you are used to seeing.  You will have better success by 
trading in an environment in which you are familiar then by 
chasing a stock that is up $20 on the day.  There are still 
plays with catalysts such as an earnings run, stock split or 
analyst upgrade that historically prove more reliable than 
rolling out of bed and seeing what is at the top of the biggest 
point-gainers list.  YHOO was in the $220s when announced 
that they would join the S&P 500.  GMST traded down to $102 
twice in the few days after the stock split announcement 
before closing at $133 today.  It also pulled back to $110 
for a couple days just last week!  The plays are there and 
they carry a nice reward.  Just don't get caught in a stock 
that doesn't belong in your portfolio.  

I know I sound like a scrooge but I am not ready to give back 
any of profits that were earned in this incredible year for 
the NASDAQ.  So make the most of the volatility in the stocks 
that you know and love and, as always, sell too soon.  Especially 
if a stock is up $68 on the day it enters the S&P 500 after 
the close!

Ryan Nelson
Asst. Editor  


The S&P 500 Index Explained
By  S.P. Brown

The S&P 500 Index has garnered a good deal of attention over 
the past few days after the index's sponsor, Standard & 
Poor's, announced on November 30 that Internet portal Yahoo! 
(YHOO) was joining the 500's ranks.  Making room for the 
portal powerhouse was staid business services company Laidlaw, 
Inc. (LDW).

The S&P 500 Index has a long, storied history.  It dates back 
to 1926, and in its present form, with 500 stocks, back to 
1957.	It was designed by its founders to measure performance
of the broad domestic economy through changes in the aggregate 
market value of 500 US-based stocks (and a handful of 
"grandfathered" foreign stocks that have been in the index 
for decades) representing all major industries. 

And unlike another popular market yardstick, the Dow Jones 
Industrial Average, the S&P 500 Index is weighted by market 
capitalization, meaning the larger cap stocks have more 
influence on the index's price movements than the smaller cap 
issues.  In other words, if General Electric (GE) has a one 
point price movement, that will have a greater effect on the 
overall movement of the index than if a smaller cap stock like 
Emerson Electric (EMR) has a one point movement.  

Calculation of the index is relatively straight-forward.  It's 
done by using a base-weighted aggregate methodology, meaning 
the level of the index reflects the total market value of all 
500 component stocks relative to a particular base period, 
which was set at a level of 10 back in the early 1940s.  Total 
market value is determined by multiplying the price of a stock 
by the number of shares outstanding. 

Arguably, the S&P 500 is the most widely quoted index among 
professional investors.  The index is often used as a market 
proxy for the Capital Asset Pricing Model (CAPM) along with 
many proprietary stock valuation algorithms.  It's also a 
universally recognized benchmark that's used by 97 percent 
of US money managers and pension plan sponsors.  And it's a 
difficult benchmark to beat at that.   

How difficult?  A search of Standard & Poor's mutual fund data 
turned up only 14 diversified equity funds that beat the 
index's annual return of 22.98 percent for the past five 

The S&P 500 Index is constantly evolving, too.  This year 
alone 42 companies were removed and 42 companies were added to 
the index.  This constant reshuffling of the deck can lead to 
potentially lucrative arbitrage opportunities for the more 
astute investor.   

The reason for this opportunity is the way the S&P Index 
Committee, the group responsible for the composition of the 
index, goes about adding and deleting member companies.  On 
average, the committee announces the addition of a stock five 
trading days before it actually joins the index.  Following 
the announcement, a rise of 3 to 6 percent in price usually 
occurs over the next few days.  The price rise is fueled by 
index funds buying the stock and by arbitrageurs trying to 
create a market squeeze to profit from it.

These arbitrage profits are even higher, though, for 
technology stocks.  According to Murali Ramaswami, Lehman 
Brothers' (LEH) global head of equity derivatives research, 
returns for technology stocks added to the S&P 500 average 10 

The potential for this extra return from the "index effect" 
has many money mangers and investors working overtime trying 
to figure out which companies will be added to the index in 
the future.  Besides collecting a few bonus points, a correct 
call on an S&P 500 index addition can produce a windfall, as 
witnessed by YHOO's 126 point price rise over the past few 

Unfortunately for the prognosticators, picking a company for 
possible inclusion is no easy feat, for it's often not the 
largest or even the best company around that gets picked. 

The Index Committee usually requires that a stock under 
consideration be easy to trade because investment portfolios 
that mimic the performance of the index must be able to buy 
the shares.  That generally excludes stocks that don't trade 
actively, or stocks that are controlled by small groups.  For 
example, Berkshire Hathaway (BRKA), the largest company that's 
not in the index, is an insurance and holding company that's 
36 percent owned by its chairman and chief executive, Warren 

The Index Committee is also partial to companies with a 
publicly-traded track record and a stable financial history.  
Highly profitable Goldman Sachs (GS) is the fifth biggest US 
securities firm with a market value of $36 billion, yet it has 
only been publicly traded since May, meaning the company would 
likely be excluded from consideration in the index for the 
near future. 

Other companies that probably wouldn't make the grade include 
Internet heavyweights such as Amazon.com (AMZN) and eBay 
(EBAY).  Both have made a big splash in US equity markets, but 
both are relatively new companies with untested business 
models.  An additional pox-mark on AMZN is that it isn't 
making any money. 

The choice of YHOO was something of an anomaly for the Index 
Committee, who previously had chosen only one other Internet 
stock - America Online (AOL) - for the S&P 500.  Many money 
managers and investors are expecting the committee to return 
to character and head for its usual stomping grounds for new 
additions - the S&P MidCap 400 Index. 

This year alone 83 percent of the additions to the S&P 500 
have come from the MidCap 400, up from 52 percent in 1998.  
This has focused investors squarely on the MidCap 400 for the 
next addition, and on one company in particular, Veritas 
Software (VRTS), a maker of data-storage management software.  
VRTS is the largest company in the MidCap index, and with a 
market value of more than $27 billion, it's almost twice the 
size of the next biggest MidCap issue. 

VRTS also is a top pick of the derivatives strategists at LEH.  
LEH looks for industries that are under-exposed in the S&P 500 
relative to their weighting in the Russell 3000 Index, and 
then picks the biggest companies in those industries.  
According to LEH, technology, financial and industrial stocks 
are underexposed, and the biggest stocks in those areas are 
VRTS, online stockbroker E*Trade (EGRP), and Maxim Integrated 
Products (MXIM).

Other possible MidCap 400 members that are rumored to be 
considered for upgrade to the 500 include Harley-Davidson 
(HDI), the largest U.S. motorcycle maker; Telephone & Data 
Systems (TDS), a provider of cellular and local phone 
services; and Biogen (BGEN), one of the world's biggest 
biotechnology companies. 

None of these companies is a sure thing to get bumped up to 
the big leagues because of S&P's strict guidelines for 
membership, especially VRTS, which is over 30 percent owned by 
disk-drive maker Seagate Technology (SEG).  

But the guidelines may loosen in the future as pressure mounts 
for the Index Committee to construct an index that truly is 
representative of today's economy.  After all, which companies 
are more representative of the US economy today, S&P 500 has-
beens Foster Wheeler (FW), Polaroid (PRD), and Bethlehem Steel 
(BS) or AMZN, CMGI, and EBAY?  It doesn't take a stock market 
genius to figure out which three stocks will trump the other 
three going into the next millennium.  

So there it is, the nuts-and-bolts of the S&P 500 Index.  It's 
sometimes shrouded in mystery, often created by frustrated 
money managers who haven't been able to beat the index in 
recent years.  In reality, though, there's really not much to 
it.  And for the sagacious investor, it can be a tool to 
generate additional profits.


USWB - USWeb Corp. $51.75 +1.69 (+5.56 this week)

USWeb seeks to transform businesses in the digital economy 
and create sustainable market leadership for its clients.
As the leading Internet professional services firm, USWeb
has created a new standard for success in the digital 
economy-Time-to-Value.  Time-to-Value means USWeb applies
extensive insight, experience and scale to deliver break
through results quickly.

Tuesday's Write Up

Coverage was initiated by Legg Mason on USWB with an Outperform 
rating on Monday.  This was on the back of Friday's news
that USWB would be offering a new service for customers 
looking to outsource there Internet setup and management 
needs.  Customers will pay a monthly fee from $25,000 to 
$75,000 dollars to have USWB design, host, or operate 
there Internet applications.  This will help company's to
avoid paying the start up cost of building there own system.
The shares of USWB have been on a steady climb this month
reaching a 52-week high today of $50.13 backed by strong 
volume.  Looking ahead, we like the stock at current levels.
The technical picture for the stock is very strong with 
prices, volume, and the moneystream converging in a hot 
sector-Internet software and services.  Look for the uptrend
to remain steady as long as the Nasdaq continues to break 
records.  The volatility in the shares should allow traders 
to target shoot there way in above current levels or on a 
pullback to support levels near $48.

Internet advertising and services firms should be in play, as
Agency.com in the space is due to go public this week.  That 
could put other cyber-advertisers like Razorfish and USWB 
in the spotlight.
BUY CALL DEC-45 QWB-LI OI= 892 at $ 7.50 SL=5.75
BUY CALL DEC-50*QWB-LJ OI=1341 at $ 3.88 SL=1.75
BUY CALL JAN-45 QWB-AI OI= 537 at $10.13 SL=7.50
BUY CALL JAN-50 QWB-AJ OI=1199 at $ 7.25 SL=5.25

Picked on Dec 7th at    $50.06    P/E = N/A
Change since picked      +1.69    52-week high=$52.25
Analyst Ratings     10-6-1-0-0    52-week low =$17.00
Last earnings 11/27 est=  0.13    actual= 0.15
Next earnings 01-24 est=  0.16    versus= 0.07
Average daily volume =2.67 mln 
Chart = http://quote.yahoo.com/q?s=USWB&d=3m

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