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Daily Newsletter, Monday, 03/06/2000

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The Option Investor Newsletter         Monday  3-6-2000
Copyright 2000, 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)
******************************************************************
       3-06-2000           High     Low     Volume Advance Decline
DOW    10170.50 - 196.70 10383.90 10121.50 1,029,060k 1,116  1,908
Nasdaq  4904.85 -   9.94  4980.15  4887.88 2,015,580k 2,099  2,190
S&P-100  752.96 -  12.99   765.88   748.53    Totals  3,215  4,098
S&P-500 1391.28 -  17.89  1409.74  1384.75            44.0%  56.0%
$RUT     601.64 +   3.76   604.01   598.19
$TRAN   2376.09 -  58.36  2436.41  2364.31
VIX       23.15 +   1.86    24.02    21.37
Put/Call Ratio       .43
******************************************************************

Resumption of the Primary Trend

That's a phrase heard frequently from floor traders today.  What 
the heck does that mean?  In a nutshell, it means DJIA stocks are 
down while technology is up, and the divergence of the two 
indices may resume.  In fact, it never really went away.  NASDAQ 
is currently focused on getting to 5000.  While that has no 
technical significance given that the index hasn't seen that 
level before, the psychology of the magic 5000 provides a nice 
target at which traders can shoot.  Since most technology 
companies sport no debt, they are not as sensitive to interest 
rate moves, especially now that traders have figured out that the 
primary way to make money in this market is to play momentum 
stocks in the hot sectors.  Is it any wonder then that the chip, 
biotech, and optical issues remain on fire?  That's where the 
money is.  

Skeptical?  We were too, but listen to a quote from briefing.com: 
"Mom and Pop have been pulling their retirement out of the Blue 
Chips and moving it into aggressive growth funds.  Each day more 
investors being lured into tech funds by the spectacular year-to-
date performances of the NASDAQ (+22%), SOX (+75%) and Biotech 
Index (70%).  Professional day traders are picking up on this 
trend and are directing more of their capital towards quality 
stocks.  What you are left with are huge market-cap companies 
experiencing 50% moves in one week or one day and price pullbacks 
that often last no longer than a few hours." 

On the other hand, the interest rate sensitive DOW stocks (read 
that non-tech) almost always suffer every time Greenspan gets 
behind a microphone.  No, there wasn't a FED meeting today.  
However, the Finance 2000 Conference held at Boston College 
hosted none other that Birthday Boy, Alphonso-the-Great 
Greenspan, who turns 74 today.  While on-air pundits were quick 
to point out today's declining DJIA was based on resurfacing 
interest rate fears often pontificated by Alphonso, we think the 
real reason is that there is no good reason to be in DOW stocks 
when you sell what's left of your "value" portfolio to buy tech 
stocks that go up $10 every day (not literally, but that's the 
mentality).  The fact is Greenspan didn't say anything today that 
he hasn't already scripted before.  Want evidence?  Half of his 
speech focused on the bullish potential of the "new economy" and 
productivity gains beyond belief, while the other half zeroed in 
about the supply of labor eventually outstripping demand, thus 
driving wage inflation up.  Nothing has changed since Friday, 
except that investors were sitting on a mighty fine 500 point 
DJIA profit from last week that looked ripe for the taking.

And profit taking they did.  While the DJIA did stage a 48 point 
late-day recovery from its low of 10,122 (shedding about 245 
points to get there), the index closed down 196 points at 10,170.  
1908 decliners pounded just 1120 advancers.  Similarly, down 
volume exceeded up volume by 69%, while 197 new lows outpaced 
just 128 new highs.  Volume again clocked over 1 bln shares on 
the NYSE. . .not a record breaker, but enough to remind us that 
this isn't just another run-of-the-mill down day.  It is part of 
a continuing fundamental change into the age of information and 
technology, just as we shifted from a system of agriculture to 
mass production 100 +/- years ago.  We believe that DOW rallies 
will continue to meet with selloffs in the foreseeable future and 
caution you not to think "it can't go any lower".  It can and 
likely will.  Look no further than this chart to see the bigger 
trend.


 

Notice that after last Friday morning's breakout to the upside 
over 10,200, then subsequent sprint to 10,443, not even 10,300 
could hold at the end of the day.  The index picked up this 
morning right where it had previously left off, but couldn't hold 
at 10,200.  In our sometimes not-so-humble opinion, we think the 
DJIA is subject to more correction and will test 10,100 again 
tomorrow.  Even that looks pretty weak.  If history is any 
indicator, 9800 isn't out of the question as it would jive nicely 
with the previous three (since mid-January) 600-point declines 
from every major point of resistance. . .from 10,400, 9800 makes 
sense and fits the channel.  


 


Add to that a VIX.X (volatility index) that appears to have 
bounced handily off a 20.90 low reached Friday, plus an S&P 500 
index that can't seem to stay over 1400, and you can see the 
indicators are lining up for continued decline.  Even the 
mightiest of tech stocks can't escape the DJIA vortex of death.  
Just look at once proud IBM (-4.91,103.06) and MSFT (-5.13, 
91.00), not to mention GE (-1.50, 137.44) and WMT (-2.13, 50.50).  
Only HWP, one of three DJIA issues in the green today, bucked the 
trend (+7.88, 146.50) thanks to news that its recent spin-off, 
Agilent (A), unveiled a new fiber-optic technology.  

So how did the tech heavy NASDAQ fair?  Pretty well, given that 
the DJIA was doing its best to suck the life of it.  Digging 
under the surface, remember that MSFT gave up over $5.  If you 
add in CSCO (-1.31, 136.13), and INTC (-1.88, 117.38), it's a 
wonder these three didn't drag the index down further.  What's 
that tell us?  Outside the five Generals (DELL and WCOM were 
fractionally up and down, respectively), there's a lot of 
underlying strength, thanks in no small part to Mom and Pop's 
liquidity noted above.  Look no further than the Russell 2000 for 
confirmation, as it closed up 3.76 at 601.64, a new closing high.  
Many of the medium-cap (some soon to be large-cap) chip, biotech 
and optical companies can be found here, so it should come as no 
surprise to see this kind of move.

Anyway, NADAQ continues to flirt with the 5000 level.  Frankly, 
psychological as it is, it's possible to get there this week with 
the above three sectors barking for position as the lead dog to 
pull it through.  The bigger question remains though, how much 
support will it have once it gets there?  Good question, and one 
to which we don't yet have the answer.  However, one historically 
accurate indicator may yield a clue.  Much as traders want to 
take the index over 5000, our old friend, the volatility index 
(VIX.X) (see above) is tugging in the opposite direction.  When 
it tags the 20-21 range, it often portends a sell-off, just as 
much as 29-30 portends an overall market bottom.  Check your rear 
view mirror and note that Friday closed with a VIX reading of 
20.90.  Today, the VIX opened at 21.58 and moved up steadily to 
close at 23.90.  It's become a race to see which can cross the 
finish line first - N5K or VIX.X.  

Our best educated guess is that NASDAQ will tag 5000 with little 
follow through unless the VIX quickly runs another cycle or 
reverses direction tomorrow.  NASDAQ almost hit 5K today, but 
fell 20 points shy before retreating in the afternoon.  Even so, 
after running over 600 points (700 if it hits 5K) in the last 10 
trading days, we need to see some backing, filling, and testing 
of "old resistance equals new support" theory.  Try 4900, 
followed by 4815, then 4700 and 4650, and solid support at 4500.  


 


You may want to give consideration to OEX put buying for a few 
days if N5K can't hold.  While we got a bounce at 4888 today, 
more importantly for tomorrow, we need to see 4900 hold in the 
morning.  If it can't, look for a test of the next level.  

No matter how you slice it, with technology/biotech as the 
preferred issues, any dip, though pronounced it may be, should be 
met with a quick recovery.  After all, earnings are on the 
horizon again in about three weeks.  Heck, CMGI will begin the 
effort in earnest this Thursday when they report earnings.  Of 
course, we could also see some land mines as some companies may 
take the next few weeks to pre-warn of any shortfalls.  There is 
bound to be a toe or two lost if you hear that unlucky "click".

NASDAQ specifics?  Down 9 points to close at 4904 on over 2 bln 
shares traded; 22 decliners to 21 advancers; 46% more up volume 
than down volume (cake); 504 new highs, 122 new lows (icing).  
504 new highs in 1 day are pretty amazing, but usually indicate a 
top is near.

For the week, we have the Optical Fiber Conference, OFC 2000, in 
Baltimore that will help keep the light focused on the 
optical/bandwidth sector.  JDUS (current play) announced new 
products today at the conference and was handed $14 in additional 
value by day's end to close at $294 and was up $1 in after hours 
trading.  Remember JDSU splits 2:1 this Friday after the close 
and likely has more juice if NASDAQ holds up.  SDLI, another 
photon flyer, introduced new products too and closed up $21 at 
$463.  Corning (GLW, another current play) will hold its 19th 
annual media briefing tomorrow too.  Don't look for a letup in 
this sector just yet.

Wait there's more.  Ray James is holding its Institutional 
Investor Conference this week; Morgan Stanley Dean Witter's 
investor conference continues through Wednesday; Computer 
Telephony 2000 Expo continues until Thursday; QCOM's shareholder 
meeting is tomorrow - look for news; CSFB holds a Telecom CEO 
Conference; and YHOO holds its second annual analyst day on 
Thursday.  These tech related events and ensuing news could help 
us to carry the market for the week.

Though Alphonso didn't kill the markets today with his comments, 
we still have economic news coming this week that traders may 
interpret negatively.  One hiccup on the following could be 
dangerous for the DJIA and thus rub off on NASDAQ: Productivity 
and Consumer Credit reports tomorrow; Initial jobless Claims on 
Thursday, sure to be closely watched; and Wholesale Inventories, 
also on Thursday.  Next week is even bigger with PPI and CPI due 
out.

In short, we think there could be continued pressure on the DOW, 
and the VIX won't help.  Cash continues moving to the NASDAQ and 
has conference driven news to back it up, but the VIX is a wild 
card here too.  N5K could prove to be a short lived squeeker.  
Keep your stops set and enjoy tech rally for all its worth.  Of 
course, sell too soon.

Buzz Lynn
Research Analyst


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

Deutsche Telekom Seeks Its Qwest
By  S.P. Brown

Qwest Communications (Q) ended a week of speculation Sunday by 
acknowledging that it is indeed engaged in merger talks with a 
"large telecommunications company."  Few  investors were 
surprised by the confession.  Fewer, still, were surprised to 
learn the "large telecom" Qwest was referring to was Germany's 
Deutsche Telekom (DT), Europe's largest phone company.

Investors were tipped to the possibility of a Qwest-Deutsche 
Telekom union last Thursday when USA Today reported that the 
German telecom giant had offered $80 billion for both Qwest and 
US West (USW) - two Denver-based companies who happen to be in 
the midst of their own $45 billion merger.  In November, both 
companies' shareholders agreed to combine operations in a 
transaction that would give Qwest a 14-state local phone 
network with 25 million customers.  

The Deutsche Telekom offer has some analysts scratching their 
heads.  It's no secret that Qwest has its hands full with US 
West (USW).  What was purported to be a merger of "equals" has 
morphed to a straight purchased of US West by Qwest, with Qwest 
management running the show.  In fact, just last last Monday, 
US West chairman Sol Trujillo announced he would be leaving 
once the merger was completed.  

Despite US West's subservience, there is discontent in the 
Qwest camp.  Chairman Joseph Nacchio has expressed concerns 
over US West's conflicts with regulators in some of its 14-
state territory, where it was ordered to refund $12.77 million 
to phone customers for service-quality violations. 

What's more, people close to the Qwest-US West situation are 
reporting that Qwest officials had been exploring options to 
strike a trans-Atlantic deal without US West.  Supporting that 
notion is Philip Anschutz, Qwest's principal shareholder, who 
recently stated that he would support a transaction with a 
"major telecommunications company."

Qwest's interest in exploring avenues sans US West is a sharp  
contrast from its position last summer, when the company 
literally pursued the Baby Bell like a lovestruck teenager, and  
wooed it out of the arms of Bermuda-based telecom Global 
Crossing (GBLX).

After being belle-of-the-ball, it should come as no surprise 
that US West isn't taking kindly to the prospect of becoming a 
lonely old maid.  The company has threatened to sue if Qwest 
backs out of the planned merger.  A $800 million break-up fee 
is already due US West if the merger doesn't go through.  But 
if US were to sue and win, Qwest could wind up owing the 
company billions of dollars.  

In response, Qwest stated that it won't agree to terms with  
another company unless US West also reaches an agreement with 
that company, too.  Still, US West is concerned that Deutsche 
Telekom isn't as interested in it as it is in Qwest.  

Reputations are also at stake.  If the Qwest deal falls 
through, US West would have two strikes against it and no 
merger partner, something the company desperately needs to 
pursue its aggressive Internet strategy and expand the its 
market presence.  

But US West and Qwest aren't the only ones under pressure.  
Deutsche Telekom is beginning to feel some heat.  The 
company is fast developing a reputation for being gun-shy.  
Last summer Deutsche Telekom CEO Ron Sommer stumbled badly in a 
failed attempt to acquire Italia Telecom.  To make amends 
Sommer has stated publicly that his company needs to make 
acquisitions quickly and has named several targets, including 
Global Crossing and Cable & Wireless (CWP). 

A Deutsche Telekom-Qwest merger would make sense for the German 
telecom.  The company wants desperately to enter the US market.   
Qwest would enable it to do so with it's fiber-optic lines and 
its interest in KPNQwest, an Internet joint venture with Dutch 
phone company royal KPN.  

It's obvious investors like a Deutsche Telekom-Qwest 
combination more than they do a Deutsche Telekom-Qwest-US West 
amalgamation.  Last week, shares of Deutsche Telekom and Qwest 
soared 12 and 39 percent, respectively, while US West inched 
ahead only 2 percent.   

Nevertheless, many analysts believe that US West must be part 
of the equation.  Qwest simply can't afford to get out at this 
point.  Tom Friedberg, telecommunications analyst with Janco 
Partners, predicts that a Deutsche Telekom offer for Qwest will 
include a share price for US West somewhere between its $50 to 
$60 price last July when the merger was announced and the $135 
or more it would command under the 1.72 exchange ratio 
originally agreed upon.  "If US West is offered $90 to $105, 
they have a fiduciary duty to look at that," Friedberg said. 

Some investors looking at this complicated triumvirate might be 
wondering if there's still a risk-arbitrage play lurking in 
there somewhere.  The usually way to play these things is to 
short the acquirer and go long the acquired.  At this point, 
it's difficult to say because there is more risk to Deutsche 
Telekom stock if it doesn't go through with the purchase than 
if it does.  If Deutsche Telekom doesn't follow through, all 
three stocks could come falling down.  If it does follow, 
through, there's a chance all three could rise higher.

With that said, the significant movement in all three stocks 
probably took place last week.  Given Deutsche Telekom's 
penchant for bailing at the last minute, there just doesn't 
seem to be enough reward for the risk investors would be 
undertaking to play this potential deal.



*********************
PLAY OF THE DAY - PUT
*********************

DD - DuPont $49.75 -1.00 (-1.00 this week)

DuPont is a leader of global industrial companies that produce
and engineer products such as pharmaceuticals, chemicals, 
high performance materials, and agriculturals.  Some of their
products include Teflon, Dacron and Lycra.  The company is 
mainly focused in the life sciences area and its work includes 
the finding of treatment for the H.I.V virus.  It is the number 
one chemical firm in the U.S.  The company operates globally 
through some 20 strategic business units.

Most Recent Write-Up

Friday's mild job report, which helped to alleviate rising 
interest rate fears, looks to have helped us with our put play 
on DD.  How so?  Friday presented us with some great opportunity 
for possible entry points.  DD attempted to participate in 
Friday's market rally but had it's run cut short by resistance 
at the $52 (10-dma) level.  By midday, DD found itself headed in 
the all too familiar downward direction and by the close, had 
taken back half of the day's gain.  One day does not a trend 
make, and we are certainly not convinced that DD is on its way 
to a trend reversal.  Another of the catalysts behind DD's move 
on Friday, were the kind words spoken by Merrill Lynch analyst 
John Roberts.  He raised his intermediate-term rating on DD to 
a Buy with a $58 12-month price target.  He further commented 
that "After 5 years of essentially flat EPS (earnings per share),
management appears committed to do whatever it takes to achieve 
10 percent-plus EPS growth in 2000,"  Sure, it sounds good, but 
by the end of Friday's session, it looked as though investors 
just weren't ready to buy in, and thus the selling resumed.  As 
we mentioned on Thursday, investors seem to be concerned with 
DD's upper management.  In perusing through the message boards, 
one is bound to encounter such terms as "dead wood" and "starched
shirts".  It could be that until DD takes action to do a little 
house cleaning on the upper executive level, the sellers will 
continue to determine DD's direction.  That is just fine by us. 
As we mentioned, DD found resistance on Friday at it's 10-dma.  
Watch for this level to continue to hold DD back. This level may 
serve well for possible entry points as well.  Also, watch for DD 
to trade back through $50 backed by volume as an indication that 
DD does intend to reclaim its downward trend.  

Comments

DD made a nice bounce back off of it's 10-dma, which is now 
at $51 and looks to be inching closer to it's 52-week low of 
$46.88.  We are also encouraged the DOW's performance today 
(or lack there of) and believe there may be more downside to 
come.  

***March contracts expire in 2 weeks***

BUY PUT MAR-55*DD-OK OI= 724 at $5.50 SL=3.75
BUY PUT MAR-50 DD-OJ OI=1717 at $1.69 SL=0.75

Average Daily Volume = 2.95 mln
/charts/charts.asp?symbol=DD


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