Option Investor

Daily Newsletter, Monday, 03/19/2001

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The Option Investor Newsletter                   Monday 03-19-2001
Copyright 2001, All rights reserved.                        1 of 1
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MARKET WRAP  (view in courier font for table alignment)
        03-19-2001        High      Low     Volume Advance/Decline
DJIA     9959.11 + 135.70 9992.70  9794.10 1.12 bln   1959/1102 
NASDAQ   1951.10 + 60.28  1953.08  1867.58 1.78 bln   2193/1527
S&P 100   597.67 +  9.68   599.81   585.96   totals   4152/2629
S&P 500  1170.81 + 20.30  1173.50  1147.18           61.2%/38.8%
RUS 2000  451.27 +  9.47   451.27   440.59
DJ TRANS 2681.66 + 50.29  2682.70  2623.22
VIX        33.35 -  1.94    35.77    32.93
Put/Call Ratio      0.57

Technology Leads Afternoon Rally

Although a decent afternoon rally pulled the broad
market out of its pre-Fed meeting holding pattern,
trading volume was lighter than usual. The Nasdaq Stock
Market saw 1.77 billion shares trade hands, while the
New York Stock Exchange (NYSE) logged 1.12 billion
shares.  The Dow Jones Industrial Average gained 135.7
points, or 1.4%, to close at 9,959.1, while the Nasdaq
Composite added 61.1 points, or 3.2%, to 1,951.2. Market
breadth was positive as winners outnumbered losers by 19
to 11 on the NYSE and by 22 to 15 on the Nasdaq.  The
NYSE listed more new 52-week highs than the Nasdaq once
again, at 113, versus 94 new lows.  Nasdaq new highs
numbered 32 versus 283 new lows.  Closing ticks on both
exchanges were positive, at 377 on the Nasdaq and 1,026
on the NYSE.

Large cap strength was evident in the 5% rally of the
Nasdaq 100 Index (NDX) to 1,730.5.  The S&P 500 Index
added 1.8% to 1,178.8.  Mid caps (MID) and small caps
(RUT) both tacked on at least 2%.

Chip company shares did their part in the afternoon
rally, as exhibited by the Philadelphia Semiconductor
Index (SOX), up 6.7%.  Networking stocks looked good
too, with the AMEX Networking Index  (NWX) adding 6.4%.
The most active Nasdaq stocks included Cisco Systems
(NASDAQ:CSCO +0.88), up 4.4%, Oracle Corporation
(NASDAQ:ORCL +1.38), up 9.8%, and Intel Corporation
(NASDAQ:INTC -0.81), down 2.9%.  Although Intel rallied
with the best of them in the afternoon, it only served
as a recovery from an 8.5% morning slide after a
cautious note from US Bancorp Piper Jaffray.  Analyst
Ashok Kumar said that even without the economic
downturn, 2001 was shaping up to be a lackluster year
for Intel. "During the past year, Advanced Micro Devices
has slowly made headway against Intel with its powerful
Athlon processor. Athlon caught Intel at a weak point:
the tail end of a product cycle," he said. Kumar
concluded that Intel's problem will get better over the
course of this year but it will be 2002 before the
Pentium 4 really hits its stride.  He inferred that the
stock could retest the lows of 1998 or earlier, possible
under $20.

More sobering than specific comments about Intel were
Kumar's comments about the entire tech sector.  He
believes that technology has entered a global recession,
resulting in the current weakness in IT spending.
Personal computer sales should lead the recovery, but it
will not occur in earnest until the second half of 2002.
"The first half of 2001 will not be a period of economic
recovery but a full-fledged recession, which should
result in negative unit growth for the PC market in 2001
-- a first in its history," Kumar said in a note to

Goldman Sachs analyst Laura Conigliaro cut earnings
estimates for enterprise server and storage companies
for at least the third time in the last few months.  The
list includes Brocade (NASDAQ:BRCD +2.19), EMC
Corporation (NYSE:EMC +1.47), Hewlett-Packard (NYSE:HWP
+2.48), IBM (NYSE:IBM +2.50), Network Appliance
(NASDAQ:NTAP +1.50) and Sun Microsystems (NASDAQ: SUNW
+0.94). "We have gone to the low end of the range of
expectations or below it in some instances, and are well
below consensus forecasts," Conigliaro told clients. The
move was based on continued slowing in the U.S. and her
belief that it will spread to Asia and Europe. Despite
the comments, all issues ended higher.

Hewlett-Packard announced its fastest notebook computer
that will be powered by a 1-gigahertz chip. The company
is also broadening its line of products that feature
wireless networking capabilities. Hewlett-Packard plans
to intensify its partnerships with wireless technology
companies, as well. Shares rose 8.9% to $30.50.

Corning (NYSE:GLW +2.02) cited weakness in the
telecommunications business when it slashed its profit
expectations for 2001 before the bell today. Investors
and analysts had already anticipated a business slowdown
for the company after their reduction in revenue
expectations for its photonic technologies business in
February and their job cuts in March.  After some pre-
market weakness, shares moved strongly upward to gain
8.7% to $25.20.

America Online (NSYE:AOL +0.55) is truly in the
entertainment content business now that it has merger
with Time Warner.  Now we see the name AOL and the words
Box Office in the same business news headline.  AOL Time
Warner's action movie "Exit Wounds," starring Steven
Seagal and rap star DMX, topped the box office results
in the U.S. and Canada last weekend at $19 million.

Verizon Wireless awarded Lucent Technologies (NYSE:LU
+1.98) a major contract to supply network infrastructure
for a new system to deliver third-generation (3G) voice
and data services. Lucent valued the deal at about $5
billion over three years. Verizon Wireless is a U.S.
joint venture of Verizon Communications (NYSE:VZ +1.55)
and Vodafone AirTouch (NYSE:VOD +1.14).  They expect to
begin a phased rollout of 3G services later this year.
Lucent said the deal positions it to become the largest
supplier of equipment for implementing high-end 3G
services on behalf of Verizon Wireless.

If you do not live in California, you may not have
realized how bad their energy problem has become.  For
the first time since January reserves fell to a critical
level prompting the state's power grid operator to
declare a Stage 3 alert and order rolling blackouts.
Shares of PG&E Corporation (NYSE:PCG +0.43) added 3.8%
to $11.85. Edison International (NYSE:EIX +0.14) shares
are up 1.1% to $12.38.

President George W. Bush and Japanese Prime Minister
Yoshiro Mori had a little chat today about their
economies. Bush reiterated comments that he is confident
about the strength of the U.S. economy and its growth
prospects, but said a tax cut is needed to provide a
boost. Mori said he hopes the United States would take
"appropriate macroeconomic policies to deal with a U.S.
economy that is slowing down." Hear! Hear!

After the Bell

Plantronics Inc. (NYSE:PLT +1.00) warned that 4Q
earnings would be between 16 cents and 19 cents,
compared with the company's previous estimate of 34
cents per share. Sales will be in the range of $88 to
$90 million. Analysts had been expecting a profit of 36
cents per share. The company cited slower investment in
telecom equipment and general economic conditions.

Air Products and Chemical Inc. (NYSE:APD +1.86) said 2Q
earnings will be about 53 cents per share, compared with
the consensus estimate of 60 cents. The company cited a
sharper than expected drop in the U.S. manufacturing
demand for chemicals and, to some extent, industrial

Solectron (NYSE:SLR +1.39) reported 2Q net income of 30
cents per share, flat with expectations, on revenue of
$5.4 billion. Also, the company said it would take a
charge of $300 to $400 million in the to cover a
restructuring, which includes the elimination of 8,200
jobs or 10% of the workforce.

Looking Ahead

Elizabeth Mackay and Kurt Walters of Bear, Stearns and
Company believe that last week the market may have
entered its final phase of a broad decline.  They still
expect a high-volume reversal day to mark the bottom,
such as occurred in 1998.  A good catalyst is needed for
that kind of volatility, however.  It could be the
Federal Open Market Committee (FOMC) meeting tomorrow.
While analysts are making a case for the need to cut
interest rates by 75 basis points, the Federal Reserve
will do what they think is best.

Mackay and Walters also noted some examples of good news
that could provide the spark, such as "observations from
a prominent technology company that business has
stabilized (it probably does not even have to improve)."
Lower oil prices after the OPEC meeting would help.
Regulatory developments in Washington, if not a tax cut
package, may be beneficial. Even fewer negative comments
about the economy from elected officials could go along
way in boosting consumer confidence.  From a technical
standpoint, they also noted that both the TRIN (Arms
trading index) and CBOE volatility index (VIX) are
relatively high, indicating that we could be near a
market bottom. There is plenty of cash on the sidelines.
Contrarian indicators, including many magazine covers,
now show more bearishness.  Remember though, today's
rally was most likelyignited by short covering in case
of a 75-basis point cut.  A 50-bpcut is already priced
into the market, so we might see a "sell on thenews"
event on an announcement of a 50-bp rate cut.  It's best
to be flat for the announcement and let the market
settle after the news.

Tomorrow is sure to be exciting.  After that, a true
upturn really cannot occur until investors believe that
an economic recovery is in sight. And I have not heard
anyone say that the market cannot go lower before it
goes higher.  Anecdotally, May is usually a weak month
for the market.  But stay tuned, because things can
change fast.

PJ Mitchell
Research Analyst

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No New Calls


No New Puts


WCOM - call play
Adjust from $15 up to $17


No Dropped Calls


AFFX $41.19 +4.19 (+4.19) Well, the shorts came out today to cover
as the market anticipates the Fed's rate cut decision tomorrow.
No one wants to get caught short in case of a 75 bp rate cut.  In
AFFX, the buyers showed up early and the stock climbed throughout
the session on decent volume.  Support lies at the $36 and
previous resistance at $41 was overtaken today.  Our stop loss of
$40 was as well.  Thus, we must drop it tonight, although the
market could sell-off if the cut is less than 75 bps, since 50 is
already priced into the market.  The BTK.X finished the day right
at resistance of 500.

QLGC $30.38 +3.38 (+3.38)  Short covering in the afternoon launched
QLGC over $3.  In doing so, the stock violated our stop loss of $30
and results in a drop.  This is unfortunate because this boost will
likely be a temporary move if the Fed cuts less than 75 bps.  In
addition, the 10-dma at $31.25 lies overhead and has been a
resistance level since early February.  The market's short covering
rally today could be a great entry point into put plays if the
Fed only cuts by 50 bps, but the slim chance of a 75 bp cut scared
the shorts today, stopping us out along the way.


Keeping Your Wall Intact
By Molly Evans

"The first rule is not to lose.  The second rule is not to forget
the first rule." - Warren Buffet

Sound money management is the most critical element of sustaining
oneself as a trader.  Once the capital is lost, starting over is
tremendously difficult.  If you or someone you know has faced this
daunting reality, you know what I'm talking about.  It takes time
to rebuild the capital to start again.  Successful trading is
developed over time, winning regularly while preserving capital.

Small traders are most susceptible to capital risk by either
overtrading or over positioning.  Losses are inevitable but so
much of one's emotional weaknesses are founded on having too much
at risk.  Smaller positions produce smaller losses which in turn
allows quicker recovery.  When a position is too large, the
emotional attachment to the position is heightened and objective
discipline becomes more difficult to maintain.

A large loss comes from too large of a position.  It's very
defeating to the psyche to have to dig out of a large hole.  Once
the line is crossed and a big loss has been sustained, the trader
has the overwhelming desire to quickly make up for it by once
again, swinging for the fences.  Yet now, the trader is at a
distinct psychological disadvantage that has arisen out of
desperation.  The result is that the risk tolerance is breached
and the one thing the trader can control, himself, is now out
of control and endangering his own security.

Dr. Van K. Tharp presented an enlightening metaphor about
position sizing and money management in his book, "Trade Your
Way to Financial Freedom."  I think you'll find it helpful as

The Snow Fight

Imagine that you are hiding behind a large wall of snow.
Someone is throwing snowballs at your wall, and your objective is
to keep your wall as large as possible for maximum protection.

Obviously, the size of your wall is your starting capital and is
a most significant variable of how to tailor your trading
technique.  If the wall is too small, you can't avoid getting
hit.  If the wall is large, you're going to be a lot better
prepared to absorb "hits."

Imagine that snowballs, both white and black are being thrown
at your wall.  White snowballs are like winning trades.  They
stick to the wall and simply add to its size.  The more white
snowballs you get hit with, the bigger your wall of protection.

Imagine that the black snowballs dissolve snow and make a hole
in the wall equivalent to their size.  Black snowballs are
"antisnow." Thus, if a lot of black snowballs were thrown at
the wall, it would soon disappear or at least have a lot of holes
in it.  Black snowballs are losing trades and they eat away your
wall of security.

Obviously, we would like more white than black snowballs to hit
our wall.  However, what should not be lost on us is the point
Tharp is conveying about the SIZE of the snowballs relative to
one another.  If we have only golf ball sized white snowballs and
basketball sized black snowballs, our wall is going to lose its
stability rather quickly.  We want boulder sized white snowballs
and just golf ball sized black snowballs.

Another variable, the cost of trades, is a little like assuming
that each snowball has a slight destructive effect on the wall --
regardless of whether it is white or black.  Each white snowball
has a slight destructive effect on the wall that is less, we
would hope, than its effect in building up the wall.  Similarly,
the black snowball destroys a little of the wall just by hitting
it, and this simply adds to the normal destructive effect of
black snow upon the wall.

Clearly the size of your commission schedule is an important
factor to consider in your trading plan.

How's your wall holding up?  Getting bigger?  Do you feel safer?

Just one more:

The rate at which snowballs are thrown has a major impact on
the status of the wall.

This is the time factor.  If you have more winning trades than
not, your wall is going to grow but is this wall growing over
days or months?  Not that it matters, but it does figure into
your level of comfort in trading.  You should stick with what
is working or alter what isn't if this is one of the variables
assisting or impeding your progress.

I often think of Tharp's snow metaphor during my own trading.
When I first read this, I think it all came together quite
succinctly for me.  Risk and subsequent losses are inevitable
in trading yet the preservation of the capital is the one
determinant factor of your staying power within the world of
trading.  It's the only thing that can protect you in the war
of the market.  If you will build your wall consistently and
deliberately without inviting boulder sized losses to be hurled
at you, success will be yours to claim.

Best wishes in building those walls this week.


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LEH - Lehman Brothers Holdings $69.28 +2.88 (+2.88 this week)

Through its subsidiaries, LEH constitutes one of the leading
global investment banks, serving institutional, corporate,
government and high-net-worth individuals clients.  The company
is engaged primarily in providing financial services, including
securities writing and direct placements, corporate finance and
strategic advisory services, private equity investments and
securities sales and trading.  Completing its array of banking,
research and trading capabilities, LEH also engages in the
trading of foreign exchange, derivative products and certain

Most Recent Write-Up

After the drubbing the broader markets took last week, it is
tough to find any stocks that posted a gain.  While it wasn't a
stellar move, it was encouraging to see LEH successfully test
the 200-dma (currently $63.75) and close above it on Friday.
To underscore the stock's strength, the DJIA posted a 52-week
closing low, with the NASDAQ and S&P500 setting new 2-year lows.
So, for starters, our new play is looking pretty solid relative
to the alternatives out there.  Add in the possibly buoyant
effect of the Fed meeting on Tuesday and an earnings report set
for the following morning (March 21st), and we have the makings
of a good, albeit speculative, call play.  Aiding the stock in
its reassuring bounce last week was solid support at the $60
level, and barring a disappointment from the Fed on Tuesday, we
don't expect to revisit that level any time soon.  We want to
watch this one closely, and so were are starting with a tight
stop at $64.  Consider intraday dips near the $65 support level
to be attractive entry points, but keep in mind that a close
below $64 will be cause for ejection from the playlist.  With
daily Stochastics just coming out of oversold, more conservative
players may want to enter on strength, initiating new positions
as the stock surges through $67 on solid buying volume.  Watch
the Broker/Dealer index (XBD.X) carefully, as it has been
teetering on the edge of support at $450.  If this support
fails, it will be very difficult for our play to keep its head
above water.  On the other hand, a solid bounce from this level
could be just what LEH needs to really get moving.  Just keep
your eye on the clock.  The Fed meeting is likely to juice the
share price one way or the other, and we will want to be out of
any open positions no later than the close of business Tuesday,
with earnings set to be released the following morning.


We are going with LEH as the Play of the Day tonight.  It is
prefaced by two things: the Fed decision due out tomorrow, and
LEH's earnings on Wednesday before the bell.  LEH received some
buying ahead of both events, finding support at $66 and bumping
into resistance at $70.  We would look for entry into this call
play on a break above $70, or on a pullback to $68 along with
a bounce.  We stress that the Fed decision will affect this
play and you may want to close positions ahead of the announcement.
In addition, with earnings on Wednesday morning, we recommend
closing positions by Tuesday's close.

BUY CALL APR-65 LEH-DM OI=1106 at $ 8.40 SL=6.50
BUY CALL APR-70*LEH-DN OI=1787 at $ 5.40 SL=3.75


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