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Daily Newsletter, Monday, 07/03/2000

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The Option Investor Newsletter                   Monday  7-03-2000
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MARKET WRAP  (view in courier font for table alignment)
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       7-03-2000           High     Low     Volume Advance Decline
DOW    10560.67 + 112.78 10565.62 10422.80 448,840k 1,971    803
Nasdaq  3991.71 +  25.82  3995.85  3942.93 588,450k 1,981  1,762
S&P-100  796.03 +   5.78   796.27   787.27   Totals 3,952  2,565
S&P-500 1469.32 +  14.72  1469.58  1450.85          55.1%  44.9%
$RUT     524.04 +   6.81   524.21   517.10
$TRAN   2704.83 +  59.46  2707.90  2700.72
VIX       22.33 +   0.07    23.14    22.11
Put/Call Ratio       .65
******************************************************************

Surprise!  There Was More Action Than Expected Today

Generally speaking, Wall Street seemed forgotten, but there 
were individual stories that helped to set the stage for the 
real week's beginning on Wednesday.  Welcome to the new quarter!  
Perhaps today's gains are indicative of where most Wall Street 
firms expect the markets to head in the second half of the 
year.  Don't forget most analysts have price targets for the 
major indices at levels much higher than Friday's close.  Even 
one of the more bearish firms in recent years spoke out about 
an impending rally today.  Brown Brothers said they see a mild 
summer rally in the works where the S&P 500 may trade up to a 
new high.  Pretty bullish statement from a firm that is now
considering turning Bullish from Neutral, a rating they have 
held for some time.  

That wasn't the biggest news of today's half session though as 
two items stuck out as market-movers.  First, the NAPM was 
released at 10am EST.  The report was favorable, as mentioned 
in detail below, and pulled the DJIA out of the red.  It held 
the momentum from this news and spent the rest of the day in 
positive territory, even rallying into the close to finish 
right near the high.  That late day rally was due to a newswire 
report that hit 25 minutes before the close and quoted the 
Saudi Oil Minister saying that they would increase production 
by 500,000 barrels a day immediately.  This is on top of the 
production increase of two weeks ago and is good news to the 
ailing supply shortage.  When all was said and done, the DJIA 
gained 122.78 to 10560.67 on volume of 450 million.  Although 
this sounds light, it was better than most expected for a 
half-day ahead of the fourth of July and should be considered 
a plus.  Advancers crushed decliners too, by a 20-8 margin.  

The Nasdaq didn't fare as well, mainly to the dampened sentiment 
caused by Oracle (story below).  It opened negative, but did 
find strength to rally at the same points as the DJIA.  In the 
end, it too had gains, finishing up 25.28 to 3991.79.  Yep, just 
a touch below the psychological 4000 level.  Volume was light 
at 592 mln.

In an effort not to rehash the market outlook as Jim's comments 
from Sunday's Market Wrap are still valid, I will refer you back 
to that article for more insight.  But, I have listed some of 
the key Nasdaq charts to show that everything is teetering right 
at a key resistance level.  There is no guarantee that it will 
breakout any time soon, but it is important to note these levels 
in case a move does occur.


 


 


 

One catalyst for today's rally was softer-than-expected economic 
numbers from the National Association of Purchasing Management.  
The reading fell to 51.8 in June from 53.2 percent in May.  This 
was better than the expected 53.2 estimate for June.  A good dose 
of moderate softening in the manufacturing sector will help keep 
the Fed sidelined.  It continues the evidence of "tentative and 
preliminary" signs of moderating growth the Fed mentioned in 
their policy directive with last Wednesday's FOMC conclusion.   
The bond market rallied on the news as the 10-year fell to 5.98%, 
but all eyes will now be on the June employment report due out 
on Friday.  There is always something to worry about, right?

Oracle helped drag the software sector down slightly on Monday, 
thanks to the departure of their COO, Ray Lane.  The announcement 
was actually made late Friday, but the stock reacted to the 
news today.  ORCL gapped down $3 and continued to slide for the 
rest of the session before ending at $80.19, down $3.88.  In a 
statement from Oracle CEO, Larry Ellison, he said "Lane would be 
missed", but failed to give any specific reason for his departure.  
The software index finished down 0.46%.

In acquisition news, May Department Stores will buy David's 
Bridal for $20 a share in a $436 million dollar deal.  DABR 
surged 70% on the news to $19.75, but the Retail index lost 
5.31 points today.

Some big movers in the session included JDSU +8.31, GLW +9.50, 
SDLI +8.69, ISLD +7.88, AKAM +7.15, AMD +7.00 and RMBS +6.69.  
Maybe more important moves came from the likes of Citigroup 
and JP Morgan as the financials began to recover.  C gained 
$2.38 and JPM added $5.63.  Telephonos De Mexico leaped $5.69 
on news of the Mexican Presidential election results and Sprint 
gained ground on word that Duetsche Telekom is in preliminary 
talks with the company.  FON finished $3.44 to $54.44.

So while today's action was far from "fast and furious", it did 
help to set the tone for the rest of the week.  Good NAPM numbers 
and a surprise oil production move will both have positive 
effects.  Wednesday should be interesting.  I will be on the 
sidelines during amateur hour watching the action.  I am curious 
to see if the professionals return to dump on the last two days 
of gains or if they are enticed enough to jump on board.  I have 
two basic thoughts that I have been churning over the weekend.  
One, if so many firms still have lofty price targets for the 
year, will they turn into buyers as we enter the second half?  
If so, it is only a matter of time until the markets begin on 
what is already figured to be a strong fall rally.  Traders may 
have a tough time waiting for that typical October entry.  The 
flip side being those same analysts could start trimming those 
lofty forecasts, but I would consider this unlikely.  

My second thought is more short-term and relative to the Fed.  
We don't have a July FOMC meeting to deal with and with the 
economic numbers cooling with each report, I am beginning to 
see room to rally before the August meeting.  A benign Jobs 
report Friday may seal the deal.  Earnings and splits should 
abound in July and that may be the new focus.  As always, we 
need some sort of confirmation.  I am a bull at heart, but would 
not be willing to really dive in until we had better action, 
say a close over the last rally's peak of 4075 on Nasdaq volume 
closer to 2 billion shares a day.  Otherwise, be wise and stay 
on cautious in your trades.  This is the kind of environment 
that can knockout you out of the game for over-committing. 

That's the story for Monday.  Have a great Fourth of July with 
friends and family.  There will not be a Tuesday newsletter, 
but we will be back on market watch first thing Wednesday 
morning for you.  


Ryan Nelson
OI Editor


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**************
TRADERS CORNER 
**************

COT Report: Follow The Right Herd
By Austin Passamonte

Momma always said we should follow the right crowd. It isn’t
easy to tell just who that is in many cases. This might be 
simpler to do when it comes to predicting those most often 
right in the financial world.

It’s a well-known fact that small traders, i.e. the general
public are usually on the wrong side of performing trades.
It’s said that the public is correct in the midst of a trend
but overwhelmingly wrong on either end of a reversal.

Human nature certainly has much to do with this as emotions
Convert more profits to loss than any single factor we can 
list. When markets are up and rallying no one wants to admit
or believe the bears are knocking on the door. Just the same, 
it’s hard to buy long positions when all around us the prophecy
is doom and gloom. 

However, a majority of reversals short term or long occur when
the public least expect it. Does the term margin call mean
anything to us? In the past a lack of timely information 
was certainly one contributing factor but we now live amidst
the information age. Are possible clues there for those who 
might search?

If only there were a way to increase the odds of identifying 
trend changes in the market with better than even chances. 
Should you’d like to have a chance at that, read on.

One of the most legendary traders in the futures arena has
taught such a concept for years. In a real-time, governed
trading contest using actual money he ran up the beginning 
balance of $10,000 to settle at a contest record $1.1 million
over a twelve-month period. He is the first to say that proper 
money-management was the key to this in addition to over-
aggressive trading. As a matter of fact, just prior to contest 
end his account stood over $2 million before an adverse move 
in the S&P 500 split his balance in half. A lesson in over-
trading for sure. Still the results aren’t bad, wouldn’t you 
agree?

The point is this concept has merit. Most of the money I ever
made in commodities was set up from a few simple but powerful 
indicators I’ll share with you.

There are three participants in the financial world. The first
group is small speculators. They are we, the individual trader. 
We are perceived to be the least accurate and successful of all.
My word, that’s insulting!

Large speculators are generally professional funds of some
sort. Be it the soybeans arena, gold & silver, bonds, currencies
or equities it pretty much remains the same. Professional
investors who gamble on the underlying market. These traders 
are thought to be much more accurate than small specs and they 
should be; their size and time dedication put more resources 
at work for them than individuals have access to. When a news
report is issued by any public company large brokerage houses
and mutual funds are first ears to hear. What do you suppose 
they do with this info? Can we assume they act upon it first 
in the best interest of themselves or clients before sharing 
it with CNBC and WSJ? 

For those of you who understand the term front-running and 
the fact that it’s illegal, if you think that doesn’t happen
more often than not I’ve got some special quarters from the
Tooth Fairy (hey, times were lean) I’ll sell for $100 each
if you act fast.

Wouldn’t it be nice to have the scoop on a market’s overall
expectation before them? Maybe we can.

There is a third group of participants in the market, and
these are listed as commercial traders. For grains that
might be Kellogg and Post. Oscar-Meyer in the meats and
world banks in the foreign currencies. We can assume large
financial institutions here and abroad are commercial traders
in the stock-index futures arena.

In most cases commercial traders actually use the underlying 
commodity for consumption. Grains become cereal, meats become
well, meat (where does that leave chicken nuggets?) and foreign 
currency gets circulated in general commerce.

Financial institutions use equities as instruments for profit
or collateral. Banks make loans and hold stock. They hold 
stock for investment instruments and arbitrage as well. Does 
that seem risky to you? Not for them. A commercial’s primary 
goal is to be fully hedged from downside risk of adverse price
action.

Chris Verhaegh’s excellent articles in OIN are great examples
of hedging. By the time his complex trades are enacted there
is very little margin for risk with high odds for profit. In 
a nutshell that’s the function of commercial traders as well.

Realize that commercial traders aren’t the first to hear news;
they make it. These are not trend-followers - they are trend
enders. Who do you think has the most resources in the world
to track every local and foreign event that could possibly
affect equity market behavior?

We could say that small specs follow the lead of large specs
(funds) but large specs key on what the commercials are 
doing for guidance. Commercials help make the market. That’s
powerful!

I’m guessing your thoughts might be jumping ahead and figure 
all we need to do is trade just like the commercials and we’ll
be rich. Not so fast, Sparky. It’s more complicated than that.

All commercial traders care about is locking in prices to their
favor. They use the futures market to hedge cash positions 
against loss. At first glance it appears commercials start 
buying and selling too early in a trend. Their objective is 
not to hit tops and bottoms but major chunks from the middle
instead. Commercial traders will sell a rally from halfway
up the charts right to the peak and begin buying it back 
halfway down until the very bottom. 

What did that accomplish? Such “scale-trading” into and
out of positions in effect let them buy the bottom half of
a market rally while selling the top half. Who do you
surmise they were buying from and selling to? That’s right,
the public (small specs) and to a lesser extent large specs.

Ever hear of an individual trader going bust? Have we seen
a few equity funds belly up in the recent past? How about
major financial institutions? Other than Barings bank with 
a “rogue” trader given too much control I can’t recall any
banks that failed due to stock market blips. Real-estate
and junk bonds yes, but that doesn’t concern us. The fact
remains that these behemoths are most accurate of all.

Commercial traders have the luxury of time on their side:
option traders do not. Commercial traders accumulate and
distribute huge positions over time, often many weeks or
months. Except for LEAPs we need to narrow things down a
whole lot better than that.

Every two weeks an official report, the Commitment Of Traders
is issued to the public that reveals current positions held 
long, short and net by each of these three groups in every 
futures market, including stock-index futures. There are 
strong clues in this simple report we can glean to see exactly 
who is doing what in the markets. This is not an end to itself 
but can be one vital tool in near-term direction forecast.

Wednesday’s discussion will wrap this topic up as we delve
into details about how to use such info to our advantage.
We’ll cover market behavior and timing, where to find the
data and how to interpret it. For those who enjoy being
spoon-fed the Market Sentiment section of OIN will now
include this data for the DOW, NASDAQ 100 and S&P 500 in
concise, usable form. I’ll explain what that data means
and how we’ll interpret it to help pinpoint market turns
more accurately by allowing you to spy on the big boys. 

Your homework for tonight is to sign up for a two-week
trial period of Investors Business Daily in the banner ad
here in OIN if you don’t subscribe already. It contains 
information needed to receive this COT report data and how
to use it for any markets traded in the futures arena. Very
important as you’ll see.

Enjoy the holiday for those who observe and I look forward
to our visit on Wednesday!

Best Trading Wishes.

austinp@OptionInvestor.com


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**********************
PLAY OF THE DAY - CALL
**********************

JNPR - Juniper Networks Inc $145.56 -0.56 (-0.56 this week)

Juniper Networks develops and provides next-generation Internet 
infrastructure systems that are designed to meet the 
scalability, performance, density, and compatibility 
requirements of IP networking systems.  The company's M40 and 
M20 Internet backbone router use JUNOS network traffic 
management software, ASICs.  Its clients include some of the 
world's leading service providers such as Ericsson and 
MCIWorldCom. 

Most Recent Write-Up

All systems are go for JNPR to fly high and break through the 
clouds.  On Wednesday, JNPR was one of the technologies stocks 
that shot upwards after being included on the Lehman Brothers' 
list of "10 Uncommon Values".  Shares of JNRP rose $10 to 
$136.44 on nearly double the average volume.  The break out 
extended into Thursday despite the earnings woes of the broader 
markets.  The acceleration in gains was a direct reaction to 
the Nortel marketing pact announcement.  Nortel Networks, North 
America's No. 2 phone-equipment maker, agreed to market and sell 
Juniper's Internet backbone routers.  JNPR rose another $11.50, 
or 8.4% for the highest close it's seen in nearly three months.  
The resale deal is important because it gives Juniper access to 
Nortel's customer base, which includes big boys like British 
Telecommunications, Sprint, and WorldCom.  Bottom line - more 
revenue.  There's also an earnings report just around the 
corner.  Juniper is confirmed to announce on July 13th, after 
market, and so far all looks good for a solid report.  Near-term 
support is relatively firm at $138 and $140, with a stronger 
base near the 10-dma ($132.23) level.  If you're partial to 
using DMA technicals as guideline, then the 5-dma (currently at 
$137.14) should serve as decent gauge for entry points on the 
climb.  For the moment, keep in mind that JNPR is a simple 
momentum play powered by news and a technical breakout.  It 
needs your undivided attention.  In other words, playing the 
Internet stocks can be the ultimate adrenaline rush as long as 
you have a parachute packed for an unexpected downdraft.

Comments

Despite the modest retreat on Monday, Juniper looks poised to 
move higher.  The $150 level was obvious resistance after the 
steady gains from the past few weeks, but consolidation may 
be short-lived.  A breakout over $150 is confirmation for 
conservative types.  Otherwise, shoot for entries during 
intraday dips.  For more insight, see the Editor's Plays 
section from Sunday, July 2nd.

BUY CALL JUL-140 JUY-GH OI=1060 at $12.75 SL= 9.75
BUY CALL JUL-145 JUY-GI OI= 721 at $10.25 SL= 7.50
BUY CALL JUL-150*JUY-GJ OI=2470 at $ 7.88 SL= 5.50
BUY CALL JUL-155 JUY-GK OI=1208 at $ 6.13 SL= 4.25
BUY CALL AUG-150 JUY-HJ OI= 313 at $14.50 SL=10.75
BUY CALL AUG-155 JUY-HK OI= 196 at $12.00 SL= 9.00

Picked on July 2nd at   $145.56    P/E = N/A
Change since picked       -0.56    52-week high=$156.47
Analysts Ratings     12-4-1-0-0    52-week low =$ 20.33
Last earnings 03/00   est= 0.03    actual= 0.06
Next earnings 07-13   est= 0.04    versus=-0.02
Average Daily Volume = 4.84 mln




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This newsletter is a publication dedicated to the education 
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