Option Investor

Daily Newsletter, Monday, 04/03/2000

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The Option Investor Newsletter                Monday  4-3-2000
Copyright 2000, All rights reserved.
Redistribution in any form strictly prohibited.

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MARKET WRAP  (view in courier font for table alignment)
       4-03-2000           High     Low     Volume Advance Decline
DOW    11221.90 + 300.00 11223.80 10863.00 1,026,501k 1,569  1,486
Nasdaq 4,223.68 - 349.15  4572.84  4193.10 1,737,386k 1,138  3,167
S&P-100  820.62 +   5.56   820.62   805.71    Totals  2,707  4,653
S&P-500 1505.97 +   7.39  1507.19  1486.96            36.8%  63.2%
$RUT     516.04 -  23.05   539.02   515.56
$TRAN   2706.10 -  57.14  2765.94  2698.47
VIX       25.66 -   1.55    28.26    24.94
Put/Call Ratio       .48

Tail Wags Dog?  Or Dog Wags Tail?  You Make the Call.

As news that there would be no DOJ settlement with Microsoft hit 
investors like a ton of bricks prior to today's market opening, 
the sharp decline of MSFT on the news (-15.25, 91) was just a 
catalyst for choking the life out of the NASDAQ today.  While it 
would be easy to kick sand in the face of Joel Klein, the lead 
prosecutor for the DOJ, and Judge Thomas Penfield Jackson for 
cratering our tech-heavy trade and IRA accounts, the finger could 
more justifiably be pointed toward the IRS and Treasury Department
as tax payers are now forced to get out the checkbook in front of
April 15th.  While you may not like the outcome that the Judge's 
anticipated decision had on your account, we think the real 
culprit is tax bill driven.  

(As we write this, the condensed version of the Judge's decision 
is that Microsoft violated the Sherman Antitrust Act by 
unlawfully maintaining a monopoly on the browser market.  
Microsoft is expected to appeal.  Neither of these actions is a 
surprise.  However, in the meantime, the DOJ may seek injunctions 
preventing MSFT from continuing its behavior.  Remedy hearings 
won't likely begin for at least six weeks, which will keep MSFT 
under a cloud for a while longer.  As after hours trading neared 
an end, MSFT was trading up $2 at $92.75.  Total shares traded 
today?  131 mln shares or 7.5% of NASDAQ volume.) 

Lest you think we're nuts, follow the logic for a minute.  Almost 
anyone who made money in last year's market has a humongous tax 
bill due on April 15th and the money is still tied up in stocks.  
The original plan was to hang on as long as possible prior to tax 
day, then sell to cover the amount due.  Now that selling has 
knocked the stuffing out of the NASDAQ, the prospect of further 
drops is scaring out yet another level of taxpayers that don't 
want to wait any longer.  Maybe you fit into that category - 
certainly that thought plays out in the Denver office.  Multiply 
that sentiment by some million number of households, and the 
result can be devastating to the issues with the biggest gains so 
far this year.  

Adding gasoline to the fire, maintenance margin calls are 
occurring with regular frequency to investors as positions 
further deteriorate.  If you can't bring in the money, your 
broker has the right to sell or close anything in your account to 
satisfy the requirement -- more downward pressure.  Now, adding 
some nitro so we really feel the burn, we're likely to get 
stopped out as prices continue to fall.  It becomes a vicious 
circle as the once high-flyers caving in on themselves, becoming 
an investor black hole.  Nothing escapes the gravity.  Yes, MSFT 
makes up a big chunk of the NASDAQ 100, but it can't do today's 
damage alone without outside influence.

If you are a buyer in this market, you are likely sitting on the 
sidelines awaiting MSFT's fate while hoping to get another buying 
opportunity tomorrow.  After all, who wants to jump in with both 
feet while the NASDAQ puts in its largest point sell-off in 
history - down 349 at the close.  It also qualifies as the 5th 
worst day percentage loss too at -7.3%.  For contributing 
sectors, we need only look to the following: Internets fell 
8.28%; computers lost 8%; chips were crunched 7.2%, while the B2B 
sector was bombed for an 16% loss. . .kinda conjures up scenes of 
Slim Pickens riding an H-bomb as its dropped from the belly of a 
B-52 in the movie, Dr. Stangelove.  Also adding to the negative 
sentiment, Legato Systems (LGTO, -24.06, 20.56) lobbed its own 
grenade at investors, telling the street that they would have to 
restate sales and earnings because sales representatives of the 
company acted outside their authority.  Parametric Technology 
(PMTC, -9.75, 10.81), a good sized player in the collaborative 
product commerce B2B solutions sector with sales of over $1bln 
annually, also contributed to negative sentiment by warning that 
they would miss revenue projections by 15% - OUCH!

Anyway the good news was only as loud as a whisper and went 
largely unnoticed today.  What good news?  Shhh, lean in a little 
closer so you can hear it. . .Charles Schwab and Co. pre-
announced blowout earnings of $0.31 vs. analysts' estimates of 
$0.26, which should have jumpstarted the whole on-line brokerage 
sector let alone SCH, which eked out only a $0.25 gain for the 
day.  Here's another piece of big news from an influential 
analyst that couldn't escape the surrounding noise. . .DLJ's Tom 
Galvin announced today that he sees the NASDAQ up 20%-30% this 
year from current levels.  Party hats and horns?  A month ago 
when the index reached a new high of 5132, that would have been 
greeted with cheers from the street.  Not even a tip of the hat 

Let's take a moment to examine the carnage.  The NASDAQ closed 
down 349 points at 4222, it's largest point loss ever by a long 
shot.  Decliners pounded advancers 3168 to 1138, while down 
volume was about 7.5 times greater than up volume on a total of 
1.74 bln shares traded.  While volume seems normal, remember 
MSFT, LGTO and PMTC made up about about 200 mln shares, leaving 
just 1.54 bln for the rest of the market.  While on the surface, 
that may appear bullish given the numerical damage, (you know, 
"it has to turn around since the tech issues have been hit so 
hard") it raises skepticism that the sell-off has not yet run its 

The NASDAQ blew clean through points of support at 4550 (gapped 
under at the open), 4500, 4400, 4300, and 4200.  Once under 4400, 
that figure acted as resistance for the next move down to 4300.  
While struggling for support there at mid-day, 4300 finally gave 
way just before the last hour of trade and final descent below 
4200.  We hate to contemplate it folks, but despite a mild 31-
point bounce in the last five minutes, 4192 is the old high that 
offered resistance back on January 3rd, and today offered 
support.  Otherwise, the NASDAQ is in no man's land.  If we can't 
maintain that tomorrow and make a move back up over 4300, better 
start looking for the next level of support around 4000-4050.  
And if the unthinkable happens, look for support at 3750 to 3800.  
While we don't think it will get there, we didn't think it would 
get back to 4300 either.  As of now, the index stands corrected 
18% off its February high.  20%, the standard definition of a 
bear market gets us to 4100, but has no historical basis of 
support.  Even the 50-dma of 4542 isn't going to help now.  While 
we don't like to force a moving average to fit a chart, the 100-
dma could offer support if it's embraced.  Reaching back to 
December of 1998, and May, June, August and October of 1999, 
there has been empirical, support at that level, currently at 

Based on the above, you'd probably think the whole market 
collapsed today.  Nope.  The Dow, S&P and the NYSE held up pretty 
well.  When was the last time you saw the Dow gain 300 points?  
If you weren't looking, it was today!  The last time was on March 
16 with a 491 point move.  Particularly impressive with today's 
Dow gain was the extremely bullish candlestick engulfment of the 
five previous days.  That's when a move from open to close and 
high to low on the candlestick exceeds the movement of the 
previous day or days' trade range.  Engulfing five days is a 
major accomplishment.  While the S&P wasn't nearly so powerful, 
it too closed with a gain -- plus five points to 820, while 
finding support in the 810 range..

The Dow for its part moved up exactly 300 points to finish at 
11,221 on respectable volume of 1.03 mln shares.  Heck, had MSFT 
finished flat for the day instead of down $13, the Dow might have 
gone to +365 for the day.  Advancing issues edged out decliners 
1568 to 1488.  Up volume was nearly twice down volume as 69 new 
highs bested 51 new lows.  Not all technology was bad today, 
especially here -- HWP finished unchanged, while IBM tacked on 
$3.63.  Take that you little NASDAQ pipsqueeks!  Begin to look 
for the next level of resistance at 11,300, then again in 100 
point increments up to 11,700.  Don't be surprised though by a 
little intraday breather to say 11,150 just to consolidate the 

There you have it. . .divergence like we've never seen before.  
Not much on the economic front tomorrow to move things either 
way, though YHOO will report earnings on Wednesday (and they 
better be good, otherwise kiss the Internet sector goodbye).  
However, since jumping into a 12-lane freeway at rush hour isn't 
good for your physical well being, neither too is doing the 
financial equivalent with your trading account.  Remember to 
trade only when it is profitable to do so.  That is, make sure 
the market is moving in your direction, advancers beating 
decliners, and a positive movement of your stock.  Today was a 
rough day for NASDAQ plays and good for Dow/NYSE plays.  That 
could reverse at the drop of a hat since the Dow is exhibiting a 
bullish trend, while the NASDAQ is stochastically oversold and 
due for a turnaround.  Remember, just when your positions are as 
low as they can go, they can still go lower.  It would behoove 
all of us to review the 10 rules of trading, especially #6, #9, 
and #10.  (see Web site, left hand column, reference section, top 
10 rules)  While it won't work in every gap down, a stop loss is 
a must in this market until the damage runs its course.  It's 
never too late to sell too soon

Buzz Lynn
Research analyst


Investing Style
By  S.P. Brown

Momentum or value, which is the better investing style?  That's 
been an easy question to answer over the past two years.  If 
momentum investing is represented by the Nasdaq Composite Index 
(COMPX) and value investing by the Dow Jones Industrial Average 
(INDU), momentum has trumped value by a mile.  During that 
period, the COMPX has increased 150 percent while the INDU has 
increased only 25 percent.  On an annualized compounding basis, 
that translates to an 11.80 percent annual return for the INDU 
and 58.11 percent annual return for COMPX.  

Money managers and investors who have foresaken the momentum 
strategy have paid dearly for their transgression.  In fact, 
some of the biggest names in money management have seen there 
reputations sullied and investment acumen questioned.  

Over the past two years, value investing has caused Warren 
Buffett to suffered his worst investing returns ever.  
Buffett's investment vehicle, Berkshire Hathaway (BRKa), has 
seen its price drop by nearly 25 percent over the past two 

Another value victim is Robert Sanborn, who was removed last 
week as the manager of the Oakmark Fund after the value mutual 
fund plunged 24 percent in a year.   

And, of course, who can forget Julian Robertson's mea culpa 
last week.  Robertson closed his famed Tiger Hedge Fund after 
finding himself in a hole created by two consecutive years of 
double-digit losses.   

It's easy to deride these guys for sticking to their philosophy 
and eschewing momentum-driven stocks like Qualcomm (QCOM) and 
Puma Technology (PUMA), which have been far more enriching than 
the likes of Proctor & Gamble (PG) and General Motors (GM).    

Still, market watchers need to remember that Buffett, Sanborn 
and Robertson had posted an average of 25 percent annual return 
over the past two decade.  To get an idea of what that kind of 
compounding will do to a portfolio, a thousand bucks invested 
20 years ago would be worth nearly $87,000 today.  

But let's face it, we live in a world of "what have you done 
for me lately?"  Admittedly, value investing has done little 
for anybody over the past two years - momentum investing has 
been the successful modus operandi.  The reason momentum 
investing has worked so well is that in a market with a strong 
and stable trend, momentum works best; whereas, in flat or 
volatile market, value investing works best.  

To that end, regardless of what market commentators have said 
about market volatility, over the past two we've had a market 
that has trended up with virtually no correction (today's 349 
point sell-off in the Nasdaq not withstanding).  

The reason momentum works well in a trend market is that it 
literally becomes a self-fulfilling prophesy, for a trend 
market is essentially a "buy high/buy higher" strategy.  If 
equities raise in price, more equities will be bought.  

Value investing, on the other hand, doesn't work nearly as well 
in a trend market, which is why the strategy has performed so 
miserably over the past two years.  Value investing is 
basically a "buy low/sell high" strategy.  As the market rises, 
value investors usually sell at a pre-determined price, so they 
forfeit additional upside gains by selling out too early.

For example, let's say the S&P 500 Index (SPX) is trading at 
600 and sells at a P/E ratio of 10.  A value investor will set 
a target at which to sell.  In this example, well say a price 
of 900, or a P/E of 15, which ever comes first.  Obviously, 
once the S&P 500 reached 900, the value investor would have 
sold, and he would have missed the additional gains that would 
have been realized from the index moving higher to 1,500.  

The momentum investor, however, will ride the market to the 
top.  In this example, let's say the momentum investor started 
buying the S&P 500 in equal increments starting at 700.  If the 
momentum investors bought at 800, 900, 1,000 etc. up to 1,500, 
he would have realized a gain of 1,100 compared to only 300 for 
the value investor.  

Additionally, momentum investing beats value investing when the 
market is in a down trend, too.  Again, referring to the 
example, the momentum investor will start to sell his positions 
as the S&P 500 falls.  As the index goes from 1,500 to 1,400 to 
1,300 etc. the momentum investor will be lightening his 
exposure.  The value investor, though, will be increasing his 
exposure; thereby, incurring a loss in portfolio value because 
his cost basis will likely be below his portfolio value.    

So, when is value investing the preferred strategy?  Believe it 
or not, in a volatile market.  The reason being, when the 
markets are volatile, value investors can buy and sell 
repeatedly, while momentum investors usually find themselves 
buying high but selling low because there isn't enough movement 
for them to profit.   

And now, the times may be a changin' from trend to volatility.  
Over the past three months, the COMPX has appeared to have lost 
some of its upward thrust.  In fact, the index has become 
downright volatile, particularly over the last half of March 
where it bounced up and down over 10 percent twice.  Meanwhile, 
during the same period, the INDU has had a steady 10 percent 

Obviously, hindsight is 20/20, but if we are moving to a more 
volatile market and away from a trend market, we are again 
going to see market divergence, except this time, the 
divergence will likely favor the INDU over the COMPX.

Keep this in mind, though, it should be clear that no single 
strategy is inherently superior to another.  A value-oriented 
buy low/sell high strategy will produce superior results when 
the volatility of the market dominates the market's trend over, 
while a momentum strategy will produce superior results if the 
the trend of the market dominates volatility.  

Finally, if you're unsure which way the market is headed, a 
buy-and-hold strategy offers a compromise.  Buy-and-hold will 
produce average returns between momentum and value regardless 
of market conditions.


BAC - Bank of America, $55.50 +3.06 (+3.06)

Bank of America is one of the largest holding companies in
the U.S. and offers a wide array of banking and financial
services.  They have over 11,500 branches in 47 states and
almost 40 countries.  BAC is the nations first coast-to-coast
bank.  They provide services throughout the Mid-Atlantic, the
Mid-west and the South.  BAC offers consumer, commercial, and
global corporate banking, which include commercial real-estate
investment and brokerage services, insurance and mutual funds.

Most Recent Write-up

Investors began to shop for bargains late Thursday and BAC was on
their shopping list.  At this point it appears as though another
near term bottom may have been put it.  Profit taking during the
week drove shares of BAC down to $50.44.  Why do we think that
level produced a bottom?  Thursday in the last hour of trading,
BAC saw about 1.8 million shares change hands.  As BAC made its
low, almost 700K shares were traded in a 15 minute period.  About
200K would be average for that time frame, depending on the
volatility of the day.  Traders continued nibbling on BAC Friday
morning, and by the end of the day, the holding company had added
another $1.63 to the price of its stock.  So we've bounced off
the $50 area and find BAC heading higher.  The volume on the move
back up has been nothing to write home about, but at this point
we will take what we can get.  The $52 area should be the tell
tale sign, as it provided good support during the session on
Friday.  A break below that level and we could see another trip
south.  A bounce off that level and BAC may be back on track.
Speaking of on track, money manager Elaine Garzarelli, said in
an interview this week, she disagreed a bit with Abby Joseph
Cohen's comments on moving 5% out of stock portfolio's into cash.
Rather raising that kind of cash, Garzarelli said she would be
putting money into beaten-down groups, that are significantly
down from their highs.  Any guesses as to what was included in
her group of picks?  Yep, BAC.  Garzarelli said BAC and several
of the financials are an "extremely good value."  We couldn't
agree more, and that's why we would look for opportunities next
week to buy calls in BAC.

A federal appeals court gave Bank of America a shot in the arm
on Friday.  The court said BAC, Wells Fargo & Co. and other
banks can continue to charge non-customers to use automated
teller machines in San Francisco and Santa Monica, California.
The appeals court upheld a preliminary injunction granted in
November, which temporarily bars cities from enforcing
ordinances banning the fees.


You couldn't ask for a nicer chart than what BAC gave us today.
After a $2 pop in the first 30 minutes of trading, buyers
steadily pushed the price higher.  The only perturbation to
the near-perfect trend was a surge higher in the last 15 minutes
of trading.  Benefiting from a broad-based surge in Financial
stocks, BAC managed to add over $3 on volume 25% over the ADV.
If investors keep their appetite for "old economy" stocks, look
for BAC to remain in favor.

BUY CALL APR-45 BAC-DI OI= 2138 at $10.88 SL=8.25
BUY CALL APR-50*BAC-DJ OI= 4949 at $ 5.88 SL=3.75
BUY CALL APR-55 BAC-DK OI= 5344 at $ 2.25 SL=1.00
BUY CALL MAY-50 BAC-EJ OI=20302 at $ 7.00 SL=5.00
BUY CALL MAY-55 BAC-EK OI=10241 at $ 3.75 SL=2.25

Picked on Mar 23rd at    $54.19    PE = 12
Change since picked       +1.31    52 week high=$76.38
Analysts Ratings    13-11-5-0-0    52 week low =$42.31
Last earnings 01/00   est= 1.24    actual= 1.23
Next earnings 04-17   est= 1.24    versus= 1.08
Average daily volume = 6.54 mln

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