Option Investor

Daily Newsletter, Monday, 12/20/1999

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The Option Investor Newsletter         Monday  12-20-99
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
MARKET WRAP  (view in courier font for table alignment)
        12-20-99            High     Low     Volume Advance Decline
DOW    11144.30 - 113.10 11310.10 11110.90   904,620k 1,292 1,816
Nasdaq  3783.87 +  30.81  3801.93  3747.79 1,317,954k 1,871 2,419
S&P-100  771.29 -   2.64   778.61   767.67    Totals  3,163 4,235
S&P-500 1418.09 -   2.96  1429.16  1411.10            42.7% 57.3%
$RUT     467.19 +   0.98   469.84   466.21
$TRAN   2884.47 -  33.95  2940.31  2879.28
VIX       24.66 +   1.65    25.18    22.82
Put/Call Ratio       .51

'Twas the night before FED gathering. . .

And all through the land
Investors were wondering
What's in Alphonso's hand?
The bond rate was spiking 
At the end of the day
Hopefully, he won't change the bias
We pray

Forgive the adulteration of what is normally a great read for the 
kids, but we couldn't help exercising some poetic license during 
the Holiday season.  The fact is, that pretty much summarizes the 
sentiment affecting today's equity markets.  For those just 
catching up on the latest doings on Wall Street, tomorrow the FED 
holds their last FOMC meeting of year, century, and more 
importantly the millennium.  Even so, facing Y2K, investors are 
99.99% certain that the FED will not raise interest rates at this 
meeting.  If for some reason, something goes wrong on Jan. 1, 
2000, the FED by its lack of action tomorrow avoids becoming the 
markets' whipping boy.  While there is the possibility of the FED 
changing the bias from neutral to positive, it will likely be a 
non-event.  We think today's action was just an excuse to take 
some money off the table.

Nonetheless, that didn't stop the bond market from spiking the 
rates to its highest level in two years, up to 6.43% in 
anticipation of a February rate hike.  Looking ahead, the market 
has already priced in a .25% increase at the FED's next meeting 
in February.  Of course, increased rates equals increases 
interest expense, which equals decreased earnings, which equal 
falling stock prices.

Yeah, right.  Just tell that to the NASDAQ market, which went on 
to set another closing record today, but on far less volume 
("only" 1.3 bln shares) than usual.  Though institutions are 
stalking their deals carefully and may curtail their trading 
activity a bit through the new year, that didn't stop the 
momentum traders from getting in the action.  Red Hat (RHAT) 
announced a 2:1 split, and despite reporting a loss or a penny 
wider than expected, plus the prospect of a secondary offering 
(read that, dilution), RHAT tacked on another $15.  That wasn't 
even in the top 10 gainers, which included (among others) 
Novellus (NVLS, +28.41), InterVu (ITVU +26.88), Liberate 
Technologies (LBRT +24.25), Sycamore Networks (SCMR, +23.00), 
Yahoo (YHOO +19.50), and Verisign (VRSN +19.19).  

While not in the top the top gainers, QCOM set another new high 
today gaining $11.81 on shareholder approval of a 4:1 split.  
Volume backed it up, exceeding the ADV by 8%.  JDSU moved up 
$14.69, as it too will split 2:1 on December 30.  

Among the five generals, CSCO (+3.56, 103.25) announced that they 
would acquire the optical telecom division of Pirelli, a division 
engaged in wave division multiplexing (splitting a single light 
source into multiple channels).  This is a good fit for CSCO, and 
now allows them to offer end to end optical connectivity for 
their customers, a much more attractive equipment package for 
telecom companies.  Paine Webber too saw the light, and upped its 
price target to $138 from $125.  Dell (DELL, +2.13, 47.69) too 
got a boost from JP Morgan, who raised their price target to $65 
and upped their rating from Market Perform to Buy.  Volume was a 
whopping 55 mln shares, more than twice the ADV.  MSFT fell 
victim to some profit taking, giving up $2.50 on low volume.  
INTC also ran $1 negative on low volume.  The low volume on the 
latter two is nothing to worry over, and the high volume on the 
former two indicate funds are buying.  Liquidity is alive and 
well and will remain the salvation of the NASDAQ market.  

Of course there will be dips, but we should take advantage of it 
as a buying opportunity.  Volumes, as indicated by today's 
decrease will slack off through the new year, but the volatile 
movement could give us some good entries to take advantage of all 
that cash going back to work in January.  Support remains really 
strong at 3500, but we don't expect to see that anytime soon.  
Though 3750 offers some near term support, it may not hold in the 
volatility leading up to Y2K.  The next levels of support are at 
3670, and 3575.  Watch these levels for guidance.

The DJIA however remains range bound with support around 11,120; 
after that, try 11,050.  Today's 30 point rebound into the close 
on increasing volume was particularly encouraging, despite an 
overall loss of 113 points.  Honeywell (HON) was the biggest 
culprit here, losing $7.13 (about -35 DOW points) on news that 
they would acquire Pittway Corp (PRY) in a $2.2 bln transaction.  
HON closed down $7.13 at $56.63, while PRY advanced $15.88 to 
$44.88.  For its part, the DJIA has not completely unhooked from 
rising interest rates the same way NASDAQ has.  

Here's the meat.  The DJIA closed down 113 points at 11,144 on 
profit taking, using tomorrow's FED meeting as an excuse.  Volume 
was a respectable 905 mln shares, with advancers losing out to 
decliners roughly 3:2.  306 new lows trampled just 87 new highs.  
Down volume clearly outpaced up volume 10:7.  While these 
internals look weak (and we don't deny they are), they also have 
historically portended a near to intermediate term buy signal for 
the longer term players.  Again, don't back up the truck.  We 
still need to pick our entries carefully, but we nonetheless 
consider the dips to support (11,120 and 11,050) buyable for 
specific plays.

The NASDAQ as mentioned earlier went on to set (what else?) 
another new record, but on slightly less volume (1.324 bln 
shares) than to which we are accustomed.  With more buyers absent 
and the remaining traders conserving the cash waiting for dips, 
this is a target shooter's paradise.  Lesser volume will tend to 
make the trading more volatile, since momentum traders are 
getting a bit more of the spotlight this week.  Decliners once 
again edged out advancers 24:19, while 195 new highs squeaked 
ahead of 171 new lows.  Not only that, but up volume outpaced 
down volume 14:11 - you just can't keep a good tech stock down 
(at least not for long).  

There you have it.  Today's sell-off was nothing to worry about 
and should be expected in these days of heightened volatility.  
The closing strength looked positive to us.  Use it to your 
advantage to target shoot positions you'd like to be in come 
January 3.  Splitters have been working well lately, and we have 
plenty slated for the end of the month.  Tomorrow and the rest of 
the week, needless to say will be choppy, especially ahead of the 
FED meeting even though we expect no surprises.  Still, don't 
take it as a license to take chances; we need to stick to the 
discipline of cutting losses when a trade moves against us.  As 
always, trade your plan and sell too soon.

Buzz Lynn
Research Analyst


Market Strategists Look Ahead to 2000
By Cindy Christ

As 1999 comes to an end, strategists and fund managers are busy
making market predictions and updating their investment outlook
for the first year of the new millennium.

Top U.S. broker Merrill Lynch released its December Gallup Survey
of Fund Managers, giving investors a global view of where
institutional money managers are placing their bets going into

Survey results show that U.S. managers expect another strong year
for the domestic economy, and they predict the Fed will raise
interest rates to slow moderately rising inflation.

Managers also say they've turned bearish on U.S. Treasuries and
have little interest in financial stocks, as record performance
by technology issues continues to capture their attention.

With a record low cash balance of just 1 percent in their
international funds, domestic managers say they're bullish on
overseas and emerging market equities and are strong buyers of
Continental European and Latin American stocks.

Across the pond, 97 percent of European fund managers expect
their economy to be stronger on a year's view and are calling for
the European Central Bank to raise rates by 60 basis points. Only
38 percent expect inflation to rise there.

The average cash level in European funds has fallen to a record
low of 3 percent, and managers are sellers of bonds as money is
increasingly directed toward equities. Buyers of domestic
equities outnumber sellers by a strong 42 percent.

Like their American counterparts, European investors are shifting
funds away from financials and into growth stocks. In particular,
managers like telecoms and electronics issues.

In Japan, 88 percent of fund managers expect a stronger domestic
economy next year, representing the highest level of optimism
since May 1997. Bulls of Japanese equities outnumber bears by 76
percent, near a record high.

For the first time since the Fed started to raise rates, Japanese
managers have turned bullish on Wall Street.

In other key shifts, Asia Pacific fund managers are overweighting
Hong Kong equities for the first time, and a record number plan
to buy more. In addition, sellers of overseas bonds outnumber
buyers by the highest margin since 1994.

As economist look into their crystal ball for next year, Standard
& Poor's is predicting a 13 percent market rise in 2000 and
estimates the benchmark S&P 500 will end at 1,600.

According to its "2000 Annual Forecast," next year the top
-performing sectors should be broadcasting, technology, health
care, banks, semiconductor chipmakers and telecommunications.
This compares to 1999, where technology and telecommunications
related shares made up 70 percent of top-performing sectors.

"The new breed of investor, unburdened by historical baggage, is
flocking to these groups," Standard & Poor's said in the report.

Tech stocks, especially communications concerns involved in the
convergence of voice, Internet and video transmission are
projected to perform especially well.

An informal poll by Reuters Monday showed that many strategists
predict the Nasdaq, which is up a phenomenal 71 percent through
Dec. 20, will pull back early in 2000.

They also expect the U.S. economic expansion to continue, but say
growth will slow and inflation will remain below 3 percent.

Longer term, experts predict strong demand for equities to
continue for the next 10 to 15 years as baby boomers save for
their retirement.

"The share of household assets in stocks historically has fairly
closely followed the share of population aged 45 to 54. This
segment of the population should reach a peak of 18.7 percent in
2007, and then stay close to that level for the next five years,"
writes PaineWebber chief investment strategist Edward Kerschner
in the firm's "Outlook 2000 report," according to Reuters.

Although strategists expect consumer confidence and spending to
remain upbeat, most are looking for one or two interest rate
increases from the Fed next year.

And while fund managers anticipate another positive year,
technicians are increasingly concerned about a 22-month long
deterioration in the market's advance/decline line, which
measures the number of stocks scoring new highs versus those
making new lows.

Just a handful of well known, large-cap stocks like Qualcomm
(QCOM) and Cisco Systems (CSCO) have powered the Nasdaq to its
best performing year since its 1971 launch. Meanwhile, small- and
mid-cap stocks of all stripes have fallen or made little progress.

According to research firms Notley Information Service and
Investors Intelligence, the advance/decline line is at a 12-month
low and breadth has dropped to levels not seen since 1995.

Most technicians support the notion that unchecked weakness in
breadth leads to bear markets. The idea is based on data showing
that the number of advancing issues is closely correlated to the
likelihood that the market will continue to rise. Conversely, the
number declining is predictive of a market drop.

Many are calling for a 10 to 20 percent correction in the overall
market and up to 50 percent for the high-flying Nasdaq.

Still others like Merrill Lynch chief market analyst Richard
McCabe question the measure's utility, noting that both the Dow
and Nasdaq have reached all-time highs despite the negative

While technicians were predicting for a correction, tech stocks
continued to drive the Nasdaq higher Monday.

Shares in database leader Oracle Corp. (ORCL) shot up 8 percent
to $98.25 after the company announced a 2-for-1 stock split for
shareholders of record Dec. 30. The split takes effect Jan. 18,

Oracle has about 1.43. billion shares of common stock
outstanding. This marks the ninth time that its common stock has
split since the company's initial public offering in March 1986.

No. 2 U.S. computer maker Dell (DELL) advanced 6 percent after
J.P. Morgan upgraded the stock to "buy" from "market perform" on
expectations for strong sales related to Microsoft's Windows 2000

Top Internet retailer Amazon (AMZN) surged 13 percent to trade as
high as $106.75 on research showing eTailers were meeting or
exceeding record forecasts for holiday sales and news that Time
magazine named Jeff Bezos, the company's founder, Man of the


SONE - S1 Corporation $85.25 +1.25 (+1.25 this week)

S1, the pioneer of Internet banking, is today's leading global 
provider of innovative Internet-based financial services 
solutions.  S1 offers a broad range of applications that empower 
financial organizations to increase revenue, strengthen customer 
relationships and gain competitive advantage by meeting the 
evolving needs of their customers across various lines of 
business, market segments and delivery channels.  Through its 
professional services organization, S1's applications can be 
implemented in-house or outsourced to the S1 Data Center. 

Sunday's Write Up

SONE broke out of its consolidation phase on December 2, and 
hasn't stopped to look back since.  Driving the move is renewed
interest in the internet and specifically B2B e-commerce.  SONE
continues to make strategic alliances as they strengthen their
market position, (see news below).  Since the breakout, shares 
of the company have only once touched the 5-dma (currently at 
$76.19).  Nothing moves up in a straight line to be sure, but 
barring a significant correction in the broader markets, we may
have to content ourselves with an entry on an intra-day dip.
Price swings of $6-10 are common, which should give the alert 
trader good entry opportunities.  SONE has almost doubled in 
price since the first of the month, so there is a lot of air that
could be let out by any negative news or market events.  Remember
the FED meeting this week; investor concern before the meeting
could be just what we need to get a good entry into this high-
flyer.  In the event of a correction (Oh please!), look for a 
bounce near $70, which is just above the 10-dma (currently at 
$68.33).  This can be a volatile issue, so confirm direction 
and continuing strong volume before opening a new position.

VerticalOne Corporation, a wholly-owned subsidiary of SONE,
announced on December 13 they have been selected to provide
their one-stop personal account aggregation service to
iVillage.com's vast audience of 7.1 million women visitors.
On Wednesday, the company announced a joint venture with Zurich
Financial Services to develop a new European-based subsidiary 
of SONE.  Zurich will invest $15 million in exchange for a 
minority stake in the new venture.

BUY CALL JAN-75 QFB-AO OI=474 at $15.88 SL=12.50 
BUY CALL JAN-80*QFB-AP OI=267 at $13.00 SL= 9.75 
BUY CALL JAN-85 QFB-AQ OI=73  at $10.38 SL= 8.00 Low OI!
BUY CALL JAN-90 QFB-AR OI=406 at $ 8.38 SL= 6.75 Low OI!

Picked on Dec 18th at  $84.00     P/E = N/A
Change since picked     +1.25     52-week high=$85.00
Analysts Ratings    6-2-0-0-0     52-week low =$13.94
Last earnings 11/99 est=-0.05     actual=-0.03
Next earnings 02-01 est=-0.06     versus=-0.19
Average Daily Volume =  735 K
Chart = http://quote.yahoo.com/q?s=SONE&d=3m

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