Option Investor
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Daily Newsletter, Monday, 03/12/2001

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The Option Investor Newsletter                   Monday 03-12-2001
Copyright 2001, All rights reserved.                        1 of 1
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        03-12-2001        High      Low     Volume Advance/Decline
DJIA    10208.30 -436.30 10638.60 10166.60 1.23 bln    693/2415
NASDAQ   1923.38 -129.40  2004.09  1922.78 2.15 bln    707/3112
S&P 100   601.51 - 31.89   631.26   598.45   totals   1346/5527
S&P 500  1180.16 - 53.20  1228.88  1176.78           19.6%/80.4%
RUS 2000  458.40 - 15.25   473.65   458.34
DJ TRANS 2861.19 - 80.98  2939.67  2858.49
VIX        35.11 +  5.76    35.37    31.38
Put/Call Ratio      0.91
******************************************************************

Pouncing Bears, Hidden Bulls

The general Investor's Intelligence sentiment indicators are still
bullish.  But if today's action is any indication, the bulls seem
to be saying one thing, but letting their money do another.

The continued broad based declines have the appearance of a much-
anticipated major capitulation.  Unfortunately, technical indicators,
such as volume and advance/decline numbers do not support the
supposition that we have seen the final capitulation.

The NYSE saw only middling volume of 1.06 billion shares.  Despite a
decline in the Dow Jones Industrials of 436.37 points with a close at
10,208.25, most market pundits believe that if volume had crossed 2.3
billion shares, we probably would have seen the final capitulation.

Decliners were definitely quite strong on the NYSE, beating
advancers by a 23 to 8 margin.  Again, market pundits are looking
for an advance/decline ratio approaching 1 to 9 before becoming
confident that we have seen the final capitulation.

The Nasdaq (COMPX) did achieve decent volume of 1.90 billion shares,
which accelerated into the close.  It is entirely possible that the
tech-heavy index is very close to its final capitulation sell-off.
To that end, the Nasdaq closed down 129.40 points to 1923.38.
Decliners trounced advancers by a ratio of 31 to 7.  This number
was closer to the desired levels that would indicate a final
capitulation.

Today's declines were characterized by a lack of bidding as opposed
to intense selling, despite the acceleration of declines into the
close.  A lack of bids means there are very few market participants
who are willing to step up to the plate and attempt to buy a stock.
In such an environment, even light selling can cause major point
declines as weak bids, characterized by low bid sizes (the amount
of stock willing to be bought at the bid price), keep dropping.

Today's excuses for not buying include the continued technology
fallout following last week's negative news from Intel (Nasdaq:INTC)
and Cisco Systems (Nasdaq:CSCO).

Adding to the market's woes is the further collapse of the Japanese
stock market, the NIKKEI, which is trading below levels last seen
sixteen years ago.  Japanese banks complete their fiscal year at
the end of this month.  When the balance sheets of these major
financial centers become public, it may become evident that
Japanese banks have been decimated by declining stock prices.
There could be huge negative global economic consequences if
several Japanese banks are approaching insolvency.

OK, enough of the doom and gloom.  Today marked the first day of
triple witching week.  If past experience is any guide, we should
see the lows for the week by sometime tomorrow afternoon.  We
could also see a bounce rally start sometime late tomorrow that
could follow through until the end of the week.  The one technical
indicator that supports this theory is the Relative Strength
Indicator (RSI), which is showing oversold for both the Nasdaq and
the S&P 500 (SPX).

Major gainers were exceedingly hard to find today.  One stock that
did rally was United Dominion (NYSE:UDI), which gained $2.38 to
$21.88 following the Company's agreement to be acquired by SPX Corp.
(NYSE:SPW).  The deal calls for UDI shareholders to receive 0.2353
shares of SPW for each share of UDI that they own.  The deal places
a decent premium of 30% on UDI based upon both stocks closing prices
on Friday.  SPW fell $8.08 to $95.52 in today's trading.

There was some upside trading among top U.S. life insurance
companies after it was announced that Britain's Prudential Plc
agreed to buy American General Corp (NYSE:AGC) in a $22 billion
stock deal.  AGC finished the day up $0.55 to $38.80.  Lincoln
National Corp (NYSE:LNC) picked up $1.03 to $45.01.

There were not any gainers on the Nasdaq's most active list.
Cisco Systems (Nasdaq:CSCO) lost another $1.81 to $18.81.
Microsoft (Nasdaq:MSFT) dropped $4.75 to $51.94.  Ciena
(Nasdaq:CIEN) was crushed $11.81 to $53.31.

The broader market indices were all substantially lower.  The
S&P 500 (SPX.X) dropped 53.25 points to 1180.15.  The S&P 100 (OEX)
 lost 31.88 to 601.52.  The Nasdaq 100 (NDX) was particularly ugly
as it declined 132 points to 1681.  The Russell 2000 (RUT) was
unable to avoid the carnage as it dropped 15.25 points to 458.40.

At least some of the cash vacating the stock market found its way
into Treasuries.  The 10-year Treasury note gained a quarter point
and now yields 4.915%.  The 30-year government bond picked up 11/32
and now yields 5.30%.

It was practically impossible to find a safe haven among the major
industry sectors.  The PHLX Semiconductor Index (SOX) began the
day in promising fashion but closed down 17.05 points to 576.40.
The PHLX Bank Index (BKX) was slammed 43.84 points to 843.68. The
Biotechnology Index (BTK) was also crushed with a loss of 51.16 to
479.74.  Looking for a winner? Try the PHLX Gold and Silver Index
(XAU), which picked up 0.12 points to 55.13.

March 20th never seemed so far away.  The bond market has already
priced in a rate cut of 50-basis points following next week's FOMC
meeting.  The way the stock market is behaving it is becoming
increasingly clear that a more substantial rate cut may be necessary
to resuscitated stock prices.

Our next clue as to whether this will happen is tomorrow when
February's Retail Sales numbers will be released.  Consensus
estimates are calling for an increase of 0.3%.  If these numbers
come out higher than expected, we could see an ugly opening.  If we
see numbers worse than expectations we may see the start of the
bounce.

The Nasdaq has clearly dropped below the critical support of 2000.
The next support level will be the topic of conversation among many
investors tonight.  There is some evidence that there is support
just below 1800.  This price level was a swing point during the
market's oscillations from February through November 1998.  The
Nasdaq bottomed in October 1998 at 1357.09 before starting its
historic rally to above 5000.  It is not out of the question for
this next level of support to be eventually tested.

Like I said before, the short term appears to be setting itself
up for a bounce.  This theory is mostly supported by the Relative
Strength Index (RSI), which is showing an incredibly oversold
condition that has previously resulted in bounce rallies.  If we
can close above 2000, then a rally to resistance at 2075 seems
possible by the end of the week.  Picking bottoms is not for the
faint of heart.  I also cannot stress enough the necessity of being
disciplined with your stops if you see fit to go long this market.

The Dow Jones Industrials (INDU) faked out technical traders last
week.  A close above the 50-DMA of 10,718 on Thursday should have
resulted in a test of the 11,100 resistance.  Obviously this did
not occur, and the INDU plummeted once it crossed back below the
50-DMA, which closed today at 10,708.

The MACD also issued a false buy signal last week and today's
declines caused a sell signal according to this indicator.  If
10,000 support does not hold tomorrow, it is quite possible that
we could see a test of the support created by last October's
slam-dunk to 9571.40.

But maybe I got ahead of myself because the INDU is also oversold
according to the RSI.  Therefore, a short-term bounce due to triple
witching expiration trading, as well as the oversold condition
indicated by the RSI, should start tomorrow afternoon or perhaps
Wednesday morning.  But then again, who really knows in this market.

Good Luck and may all of your trades be winning ones!

Jim Booth
Research Analyst


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*************
NEW CALL PLAY
*************

LOW VOLATILITY:

MYG - Maytag Corporation $37.01 +0.40 (+0.40 this week)

Selling its products to customers throughout North America and
international markets, MYG is a producer of home and commercial
appliances.  MYG is also the majority owner in a joint venture
in China, Rongshida-Maytag, which produces washing machines and
refrigerators primarily for the Chinese market.  MYG is among
the top three major appliance companies in the North American
market, offering consumers a full line of washers, dryers,
dishwashers, refrigerators and ranges distributed through large
and small retailers across the United States and Canada.  In
floor care, Maytag owns the Hoover brand, which is the market
leader in North America and the brand with the highest consumer
recognition and buying preference in floor care.

With the major indices falling down around our ears, it is
becoming increasingly difficult to find a bullish play with a
positive looking chart.  MYG is starting to look mighty
attractive lately with increasing volume the past few days
pushing the stock through the $36 resistance level, despite the
broad market weakness.  As a matter of fact, the buying activity
today picked up speed with volume coming in at nearly double the
ADV.  Since early March, MYG is up better than 10%, and the
price is now bumping the upper Bollinger band.  This combined
with the fact that daily Stochastics are deep in overbought
territory gives us reason to be cautious, as profit taking could
be lying in wait, just around the corner.  But there is no
arguing with the price chart, and if the bulls can maintain
their upper hand, we could be in a position to enter on a pullback
and ride MYG up to the next major level of resistance near $40.
Aggressive traders will look for some mild profit taking to
provide them with attractive entry points near the $36 support
level, (also the location of our stop).  As long as the bulls can
keep the price from plunging below there on a closing basis, any
bounce looks attractive for a nice low volatility play.  While a
continuation of the current rally is buyable above $37.50, be
cautious due to the barrier presented by the upper Bollinger band.

BUY CALL APR-35*MYG-DG OI= 611 at $3.40 SL=1.75
BUY CALL APR-40 MYG-DH OI=1099 at $0.95 SL=0.00
BUY CALL JUL-35 MYG-GG OI=1002 at $4.80 SL=3.00
BUY CALL JUL-40 MYG-GH OI= 834 at $2.10 SL=1.00

http://www.premierinvestor.net/oi/profile.asp?ticker=MYG


************
NEW PUT PLAY
************

AGGRESIVE:

MWD - Morgan Stanley Dean Witter $56.00 -5.26 (-5.26 this week)

Morgan Stanley Dean Witter & Co. is a global financial services
firm that maintains market positions in each of its three major
business segments:  Securities, Asset Management, and Credit
Services.  MSDW conducts its businesses through several highly
integrated subsidiaries and affiliates.  In addition, MSDW
provides its clients with a broad array of investment and credit
products and services, including retirement plans, annuities, and
defined contribution plan services for businesses.

When viewed on a weekly chart, MWD's stock has formed a major
head and shoulders pattern, and has just broken below a critical
support level at $60, which held since October of 2000.  The
left shoulder formed on March 19th of 2000, with a high of
$97, which failed during the market correction last year.  This
brought the stock to support at $59.50, which held during the
summer.  The head formed last September at $110.72, and most
investors remember the ensuing correction with pain.  When the
stock sold off during the fall, the $60 level held in November.
The right shoulder formed last January at $90, which is
significantly lower than the first shoulder, and a bearish sign.
Unfortunately for the shareholders, the brokerage industry has
been deluged with bad news in the last several weeks, and no
firms were spared from the carnage.  The most important factor
is probably the severely weakened IPO market, which is showing
few signs of recovery.  The major investment banks like Morgan
Stanley and Goldman Sachs make a large percentage of their
profits from initial public offerings, and very few people
anticipated that it would get this bad.  Merrill Lynch, JP
Morgan-Chase, Lehman Brothers, and Salomon Smith Barney all cut
estimates on the brokerage industry over the last few weeks,
citing low trading volumes and a hostile market environment.
As if this wasn't bad enough, MWD received some negative
publicity last week.  MWD and seven other Wall Street firms were
named in a class action lawsuit today, which accuses the firms
of violating antitrust laws in IPO allocations.  The SEC is
investigating this charge.  While things look bad for this stock
in the short-term, remember that we are in an oversold market
which may experience short covering.  Consider taking positions
on a roll over from $56.50 if others in the brokerage sector like
GS and BSC are weak.  A break below $55 on strong volume would be
another excellent entry point.  Also, watch the XBD.X, the
Securities B/D Index for sector action.  We are setting stops at
$59, so exit if MWD closes above $59.

BUY PUT APR-60*MWD-PL OI=5059 at $7.50 SL=5.75
BUY PUT APR-55 MWD-PK OI= 977 at $4.60 SL=2.75
BUY PUT APR-50 MWD-PJ OI=2552 at $2.60 SL=1.25

http://www.premierinvestor.net/oi/profile.asp?ticker=MWD


*****************
STOP-LOSS UPDATES
*****************

BGEN - put play
Adjust from $65 down to $64

NEWP - put play
Adjust from $40 down to $37

AFFX - put play
Adjust from $50 down to $43

SEBL - put play
Adjust from $30 down to $28

BRCM - put play
Adjust from $43 down to $38

VSTR - put play
Adjust from $96.50 down to $92


*************
DROPPED CALLS
*************

UNH $59.66 -1.33 (-1.33)  With the market slumping across almost
all sectors, call plays have been hard to come by.  UNH has provided
some decent trading opportunities but the absence of buyers has left
UNH drifting from the $62 level.  When we saw weakness at that area,
we upped the stop to $60.  Today's broad market sell-off spared none,
and UNH fell through our stop, which coincided with the 10-dma.
This violation may bring more downside risk to the play if UNH
pulls back to its 50- and 100-dmas near $57.50.  As a result, we
must drop this call play.

WM $49.98 -3.37 (-3.37)  Not even a strong trending, stable regional
financial services company could avoid the blanket selling today.
It was ugly on the Street today and WM was no exception.  The stock
slipped quickly off the open this morning, violating our stop at
$52.25 and support just below at $52.  Shortly thereafter, $51 was
by-passed and a final burst of selling pushed WM through key support
at $50.  It is exactly this type of sell-off that we employ stop loss
orders.  While this stock was a Low Volatility call play, it did
offer steady, low risk trades.  Tonight we must cut it loose for
breaking our stop level on a closing basis.

DORL $28.31 -1.38 (-1.38)  A combination of resistance at $30 and
the broad market sell-off caused traders to take profits in this
Low Volatility call play.  Buyers were nowhere to be found this
morning after DORL hit an intraday high of $29.81.  After that,
it was all downhill as the stock sold-off to the $27.50 level.
During that early morning selling, DORL did find support at our
stop loss level of $28.75, if only briefly.  Violation of this
level should have set off alerts.  Even though a buyer stepped in
at the close to nudge the stock higher, we are dropping DORL
tonight for closing below our stop.

HI $58.43 -1.84 (-1.84)  We initially picked this Low Volatility
call play because of its break above previous resistance at $60.
Technically, it looked like a promising move on high volume.  Yet,
since then, the stock has fallen prey to profit taking and buying
interest has been quelled by the broader market's weakness.  HI
obviously did not work out as planned and made for a lousy play.
This is unfortunate, but we implemented a stop loss of $59, which
roughly corresponded with the 10-dma, in order to limit losses in
the event that this occurred.  Therefore, a close below our stop
of $59 requires us to drop the play tonight.


************
DROPPED PUTS
************

ADBE $26.00 -0.94 (-0.94) One always hopes he knows when he has
overstayed his welcome and leaves the party while still a
welcome guest.  We have been riding ADBE downwards and it has
been good to us over the past couple weeks.  However, with the
NASDAQ still heading south at a high rate of speed, we are
seeing diminishing returns from our play, as ADBE continues to
hold above the $26 support level.  Rather than hold on for that
last little bit, we will gladly take our profits and run.  There
is bound to be another party we can attend, and it is likely
just around the corner.


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

Back To Basics Of Investing
By Molly Evans

The Nasdaq's crumbling over the past year has provided many
lessons for serious students of the market and trading.
Probably no better example of "history repeats itself" can be
found outside the environment of mass speculation.  Had investors
been aware of their ancestor's follies in speculative markets in
bygone eras, the recent mania in technology stocks might have
been much less dramatic.  Had investors known that they were
riding the crest of a huge tidal wave, they might have thought
twice about chasing a stocks to daily record highs.

Speculative bubbles have been a part of free markets from the
beginning and the ending is always the same.  Year 2000 is but
another notch in the gun of the market.  At major market peaks,
greed always takes over.  Even the professional investor feels
that this time, he can get away with it.  He realizes it's late
in the trend but the greed causes him to abandon sound investment
principles or at the very least, numbs him to the risk he assumes
in joining and staying on the bandwagon.

There are too many stories of investors losing most of their
portfolios.  After all, that four plus trillion dollars that has
been lost from the markets since the peak last year has to have
come from somewhere.  As the market roared higher and higher, the
public couldn't help but get caught up in the frenzy.  As Justin
Mamis says in The Nature of Risk, "Envy is the operative portion
of greed.  Whereas anxiety paralyzes, envy causes one to act -
'I want some of that too' -- the 'that' being the success others
are having in the market.  Envy in the marketplace - the torture
of knowing that friends and neighbors are making oodles of money
- brings out buy orders at the wrong time because it has taken a
prolonged and increasingly obvious rise before this emotion can
surface in full flower.  The desire to possess in an absolute
way is, in the stock market, called greed."

We all know now that America was caught up in the greed, envy
cycle.  What everyone would give to have not bought Yahoo at
$250/share or JDSU at $175, to have sold their CMGI at $135 and
on and on.  The road to repair is going to be a long one.  This
market is not easy.  It's the likes which most any of us have
never seen in our own trading careers.

And now that the easy trades are gone, it is imperative that
investors and traders alike get back to the basics of sound
investing.  Have people forgotten how to scrutinize a stock's
prospects?  Did they ever know in the first place?  I have to
seriously doubt that even a fraction of investors have any idea
how to manage their own accounts or stock selections.  If Wall
Street's analysts couldn't even figure out how to rate stocks
during and after a mania, how is the average investor going to
know these things without much serious study and attention to
detail?

The saying goes, "No one cares about you more than you do."  The
onus to take responsibility and control of one's own portfolios
is vital to one’s success.  Individual investors and traders have
to approach their investments seriously.  This isn't a game.  And
in the history of the market, it has always taken time to build
wealth.

Increased education, money management, trading plans and
discipline have never been so important to portfolio survival
than they are now.  Traders Corner articles are a forum to share
interesting bits about the market, helpful tactics and rules of
trading.  Personally, I try to gear my writings towards those
subjects that are my own weaknesses in discipline.  I write about
those things which I need to study more or work on in my own
trading.  Writing about or "teaching" those subjects helps to
imprint the good behaviors into my own neural pathways.  We all
want to be great and wildly successful traders.  How we get there
is highly individualistic.

I like to comb through books to learn the history of the markets
and the successful methods of other traders.  As I shouldn't
start in on a long dissertation on a trading topic at this point
of the article, I'd like to just briefly share one book that I
find rather intriguing.

"Sun Tzu's Art of War for Traders and Investors" is an
adaptation of the ancient Chinese teachings from Sun Tzu, a
Chinese general and philosopher in the sixth century B.C. by
Dean Lundell. The concepts and methods of Sun Tzu have been
studied and practiced for centuries in Asia and his work
is required reading at American military academies.  In recent
years, the philosophies have shown up in corporate boardrooms.
Dean Lundell simply adapted Sun Tzu's winning tactics to the
modern art of investing.

Sun Tzu's main concept was that you can win without having to
fight.  Through flexibility and adaptation to ever changing
events and conditions, you can smoothly trade without the
tension and irritability that fighting the market causes.

Here's a poignant example of what you'll find:  Sun Tzu says
that wise generals are versatile.  "The general who can easily
adapt will know how to employ his forces.  The general who does
not, will not be able to take advantage of opportunities."
Lundgren's adaptation of this is to not be a one-way trader.
You should be as willing to sell as your are to buy.  "The
general public is usually unwilling to sell and does so only out
of desperation and fear.  Professional traders, on the other
hand, are usually very willing to sell short, since prices usually
decline much more quickly than they advance."  Lundgren says
that it would be irresponsible to advocate to the average investor
to start selling short but in reality wouldn't that benefit the
average investor to at least be aware of the strategy to recognize
the opportunity as it arises?

Sun Tsu teaches that there are five dangerous faults in generals:
carelessness, timidity, a quick temper, fragility, and over
concern for troops.  Lundgren shows us that these same faults are
found in traders and investors as well.  One should not become
careless and reckless with their trading.  You trade for profits,
not for fun and games.  "Do not be timid; once you have identified
an opportunity, attack.  Act upon it.  Do not get angry over a
losing trade and swear to get even.  You won't.  Do not get down
on yourself for a losing trade, or even a string of losing trades.
Find out what you are doing wrong and correct the problem.  Do
not fall in love with a stock, a bond, or anything else.  You
must learn that this is conflict, and you must be rather mercenary
with your trading and investing."

The book is a quick and easy read, loaded with good "battle-
tested and proven" ideology.  I have it on my highly recommended
list.  Next week we'll look at more hard core trading caveats.
Please do write in your questions or thoughts about what you'd
like to see addressed in the newsletter.  That is so helpful to
us.

Stay alive.  Better days are ahead.  A bear market offers quick
profits and seemingly easy trades but it's difficult to determine
where and when to enter and to take profits as fierce rallies come
out of nowhere and eat those profits.  Sometimes the best position
is no position.

MKE


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

NEWP - Newport Corporation $33.40 -1.73 (-1.73 this week)

The Newport Corporation is a global supplier of precision
components and automated assembly, measurement, and test
equipment for use in the fiber-optic communications,
semiconductor equipment, computer peripherals, and scientific
research markets.  The Company's high precision products enhance
productivity and capabilities of the Fortune 500 corporations,
government agencies, and the other technology clients it serves.
Optical components and devices for vibration and motion control
account for about two-thirds of the company's sales.

Most Recent Write-Up

Shares of fiber optic and semiconductor subsystem manufacturer
Newport failed to make much progress earlier in the week despite
a rising NASDAQ.  After being added to the S&P MidCap 400, the
stock has since fallen under the swoon of post-index addition
syndrome.  Even news from the company that they were revising
their earnings projections to the upside, thanks to their merger
with robotics firm Kensington Laboratories, did little to ignite
investor interest.  Analysts have not been as optimistic about
the company’s prospects going forward.  First Union Securities
trimmed their earnings estimates, as did Robertson Stephens,
citing lack of visibility in the second half of the year along
with continued weakness of capital spending in the Semiconductor
and Networking industries.  UBS Warburg cut their target price
for the stock from $120 down to $60, along with the fiscal
outlook for 2001.  Friday's loss of $4.63 or over 11 percent
resulted in a close just above support at $35.  Further selling
leading to a plunge below this level would allow cautious players
to take a position.  Aggressive traders may find intra-day spikes
to resistance at $36, $37.50, $39 and $40 could provide targets
for entry, but confirm the rollover with volume before making a
play.  To protect our gains, we are moving our stop price down
from $43 to $40.  A close above this level would trigger our
stop, taking NEWP off our put play list.  Make sure that market
sentiment is on your side before initiating a play by tracking
AMEX's Networking Index (NWX) and the Philadelphia Semiconductor
Index (SOX).

Comments

With the market in extremely oversold territory, we will emphasize
caution with this Put Play of the Day.  If the negative sentiment
continues for the broader market, we would look for NEWP to test
the $30 level.  Consider a break below $32.50 as a possible entry
as long as the buyers are not stepping up in the market.  If they
do indeed show up early, look for rollovers from $35 or $37.50 for
entries.  A move over $37.50 and we stay out of this put, especially
if the NASDAQ finds relief.  Keep stops tight to avoid getting
squeezed in a short covering rally.  Our stop level is $37.  The
APR 30 and 35 strikes were just created yesterday, so watch for
volume at these strikes.

BUY PUT APR-40 NZZ-PH OI=315 at $11.00 SL=7.50
BUY PUT APR-35*NZZ-PG OI=  0 at $ 7.60 SL=5.75
BUY PUT APR-30 NZZ-PF OI=  0 at $ 4.80 SL=3.00

http://www.premierinvestor.net/oi/profile.asp?ticker=NEWP


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