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Daily Newsletter, Monday, 10/30/2000

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The Option Investor Newsletter                   Monday 10-30-2000
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MARKET WRAP  (view in courier font for table alignment)
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        10-30-2000        High      Low     Volume Advance/Decline
DJIA    10835.80 +245.20 10869.50 10578.50 1.17 bln   1870/1012
NASDAQ   3191.40 - 86.96  3279.72  3149.24 1.74 bln   1764/2229
S&P 100   732.77 +  6.59   736.21   722.38   totals   3634/3241
S&P 500  1398.66 + 19.08  1406.36  1376.86           52.9%/47.1%
RUS 2000  482.72 +  2.87   484.08   477.47
DJ TRANS 2686.61 +157.64  2691.80  2525.98
VIX        27.79 -  3.12    30.19    27.25
Put/Call Ratio      0.58
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A Tale Of Two Markets

Rotation out of Tech and into Cyclicals continued to plague the
NASDAQ.  While in blue chips, a broad market rally in almost every
sector (Financial, Utility, Transportation, Retail, Paper, and
Health Care, among others) led the Dow Jones Industrial Average
(INDU) to a very respectable one-day gain.  The increasing
probability of the US economy landing "softly" combined with an
end to third-quarter tax-loss selling induced the strong rally
in the INDU.  While the advances in the beaten down sectors such
as Paper and Retail bode well for the overall health of the
market, the tech-heavy NASDAQ is suffering from such rotation.
Furthermore, negative analyst comments and actions on tech
leaders certainly didn't help the struggling NASDAQ.

Cisco Systems (CSCO) led the NASDAQ lower after Lehman Brothers
lowered its price target on the tech bellwether this morning.
Lehman analyst, Tim Luke, cut his price target on shares of
CSCO from $90 to the $60 - $65 range.  In his research report,
Luke cited lower capital spending among telecom carriers as the
reason for his lowered price target.  According to Luke, 40% of
Cisco's sales come from telecom carriers.  In typical
contradictory fashion, Luke also noted Cisco's near-term
outlook remained good as he expected the company to post strong
quarterly results scheduled to be released on November 6th.  The
consensus is for Cisco to increase earnings by 50%.  The negative
comments weighed heavily on the Networking sector with the likes
of Juniper and Sycamore taking it on the chin.  Shares of Cisco
finished down -$2.63 at $48.06.

Not all sectors were bestowed with bearish comments.  The beaten
down Paper sector received bullish comments from DB Alex Brown
this morning.  The brokerage upgraded its outlook for the entire
Paper sector which sparked a blaze among International Paper (IP),
Georgia Pacific (GP), and Weyerhaeuser (WY).  The less-than sexy
Philadelphia Forest Paper Products Index (FPP.X) gained an
impressive 7.6% on the heels of the upgrade.

The bullishness in the Paper sector spilled over into other
cyclical sectors of the market.  The Chemicals sector, as
measured by the S&P Chemical Index (CEX.X), gained 6.9%,
bolstered by an upbeat profit report from Dow Chemical (DOW).

Powered by the strength in cyclicals, among several other
sectors, the INDU charged past several key resistance levels.
The bullishness in the INDU was broad and far reaching.  A
mere four issues finished in negative territory in the INDU
today, which included shares of IBM, Intel (INTC), Procter &
Gamble (PG), and General Motors (GM).  Where the latter two
finished only slightly lower with fractional losses.  Volume
was somewhat light on the NYSE with 1.16 billion shares
trading hands.  However, the internals of the NYSE were
impressive.  Advancing issues outpaced declining issues by
a margin of almost 2 to 1.




The full-on breakout, which Matt Russ mentioned in Sunday's
Market Wrap, followed through with gusto today.  The INDU
cleared the 10,600 resistance level in the first five minutes
of trading this morning and never looked back.  Subsequent
rallies above the 10,700 and 10,800 levels carried the INDU
to one of its best finishes in recent trading.  Amazingly
enough, the INDU's next major resistance level lies near
11,000.  Before jumping for joy, though, we must realize the
INDU has gained over 450 points in two days.  It's that fact
that prompted Dick Arms, who called the market bottom last
Thursday and spoke at the Denver Seminar Saturday, to caution
of a pullback in the INDU over the next several trading days
during his appearance on CNBC after market close today.
Whether or not the INDU does pullback remains to be seen.
Nonetheless, the recent advance of the INDU has been
encouraging to witness.

Try as it might, the INDU couldn't pull the NASDAQ into
positive territory into the close of trading today.  However,
there was one bright spot in technology found in the form of
the Chip sector.  The Philadelphia Semiconductor (SOX.X) battled
higher and tacked on a relatively impressive 2.5%.  The gains
in the Semi sector didn't come easy, though.  Intel (INTC)
shed -$1.38, and finished right at $45.  Shares of Intel have
rallied in recent sessions and today's losses may prove to be
no more than profit taking.  Nonetheless, shares of Intel
weighed on the NASDAQ Composite as well as the INDU.  Despite
Intel's lagging performance, shares of chip equipment makers
plowed higher amid the tech weakness.  Leading the charge were
shares of Applied Materials (AMAT), which gained 3.1%, and
Novellus (NVLS), which added over 5%.

Despite the strength in the SOX, the Cisco downgrade was
overwhelming.  Declining issues on the NASDAQ outpaced advancing
issues by a margin of 11 to 9.  Volume on the NASDAQ was a bit
more robust as 1.7 billion shares trading hands.  Cisco added to
that volume number as over 112 million shares traded during the
stock's sell-off.  Along with the aforementioned chip equipment
shares, several Tech leaders showed strength on the NASDAQ
despite the broader weakness.  Shares of Microsoft (MSFT) were
actively traded during the stock's continued advance today.
MSFT finished at $69.06, up +$1.38 on the day.  The stock has
gained nearly 40% in the last nine trading days.  Other notable
advancers on the NASDAQ included shares of Dell, WorldCom, Sun
Microsystems, and Palm.




Although the NASDAQ lost 86 points today, the tech-heavy index
managed to close well off its lows for the day and hold its
recent near-term low at 3100, which was established last
Thursday.  If the NASDAQ's pattern of rolling higher while
tracing relatively higher lows continues, the intraday bottom at
3149 traced today needs to hold as the week progresses.  If the
NASDAQ clears resistance at 3225 tomorrow, the index will face
a significant hurdle between the 3230 and 3250 levels.  If the
NASDAQ breaks its near-term downtrend, which was established
last week, it may be ready to start the rebuilding process.

The rebuilding of the NASDAQ may start to accelerate this week as
third-quarter tax-loss selling comes to an end.  October will
finally come to an end tomorrow with the passing of Halloween.
Hopefully the ghost and ghouls, which have plagued the market for
the past two months, will leave investors with a treat.

Moreover, inflows into equity mutual funds may start to turn
positive with the recent strength in the INDU.  Mutual fund
outflows are expected to reach $9.6 billion for the month of
October, according to a recent report issued by fund watcher
Trim Tabs.  If those numbers come to light, October would mark
the worst month this year for fund outflows.  Big surprise!

With an already big stash of cash on hand, money managers will be
searching for places to put money to work as October comes to an
end.  Whether that money makes its way back into the beaten down
tech sector remains to be seen.  But, the capital will make its
way back into the market in one form or another.  And when it
does, it's important to trade with the market, not against it.
Trade smart!

Eric Utley
Assistant Editor


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

LEH - Lehman Brothers $64.44 (+2.44 this week)

Lehman Brothers is a global investment firm that services high-
net-worth institutional investors.  They provide a vast array of
trading and financing services and are the lead underwriter of
global equity and fixed-income securities.  The firm is also
leading the charge into online bond offerings in the US.
They're regionally headquartered in New York, London, and Tokyo.

Most Recent Write-Up

Is that a light shining at the end of the tunnel?  The DOW
cracked the longer term down trend line and closed above 10500!
This technical accomplishment coupled with decent economic data,
which may appease the Feds for another month, should bode well
for LEH.  Recently the company split its stock 2:1 on October
23rd and solid earnings are expected in mid-December.  In this
week's volatile marketplace, LEH didn't show any signs of post-
split depression or weakness.  Instead there was lots of
activity as it firmed a bottom at the $56 level and pushed its
resistance ceiling higher to $64 and $65.  With most of the big
caps showing signs of recovery and the rocky month of October
coming to a close, we're looking for buyers to take this
financial stock back to its previous highs.  The clean break on
Friday through the intersecting 5 and 10 dmas at $60.11 and
$59.82, respectively, is a bullish sign.  It's reasonable to
consider taking entries on pullbacks to this level.  If your
style is not to buy on the dips, but instead to buy into
strength, then consider target shooting as LEH moves through the
upper resistance at $65 and challenges the $70 level.

Comments

LEH charged higher Monday, bolstered by a strong rally in the
Financial sector.  The stock bounced off the $60.56 level in
early trading to finish right on its 50-dma at $64.44.  A
continued rally in the INDU could carry shares of LEH above its
50-dma tomorrow.  Aggressive traders might consider taking
positions at current levels if the Finance sector extends its
recent rally early Tuesday.  A more conservative entry point
might be found if LEH bolts above the $65 level on strong
volume.

BUY CALL NOV-60 LEH-KL OI= 410 at $6.75 SL=4.75
BUY CALL NOV-65*LEH-KM OI=1241 at $4.13 SL=2.50
BUY CALL NOV-70 LEH-KN OI=1570 at $2.00 SL=1.00
BUY CALL DEC-65 LEH-LM OI=  45 at $5.75 SL=4.00
BUY CALL DEC-70 LEH-LN OI= 173 at $3.63 SL=1.75

Picked on Oct 29th at    $62.00     P/E = 10
Change since picked       +2.44     52-week high=$80.50
Analysts Ratings      4-4-1-0-0     52-week low =$30.31
Last earnings 09/00   est= 2.69     actual= 3.37
Next earnings 12-20   est= 1.44     versus= 2.28
Average Daily Volume = 1.69 mln



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