Option Investor
Market Wrap

Episode one ends with a bang!

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        WE 11-05         WE 10-29         WE 10-22         WE 10-15
DOW     10704.48 - 25.38 10729.86 +259.61 10470.25 +450.54  -630.05 
Nasdaq   3102.29 +135.86  2966.43 +149.88  2816.52 + 84.69  -154.74 
S&P-100   718.80 +  1.77   717.03 + 31.40   685.63 + 33.88  - 46.70 
S&P-500  1370.23 +  7.30  1362.93 + 61.28  1301.65 + 88.12  - 88.61 
RUT       442.41 + 13.77   428.64 + 10.22   418.69 +  3.99  - 13.01 
TRAN     3003.99 - 54.99  3058.98 +195.83  2863.15 +  7.67  -226.13 
VIX        22.06 -  2.50    22.56 -  0.33    22.89 -  8.59  + 10.28 
Put/Call     .51              .51              .55             1.05

Episode one ends with a bang!

The long running soap opera like feud between Microsoft and the Justice Dept ended with a bang on Friday night. Judge Jackson pulled a grandstand play and announced that the ruling in the first phase of the antitrust trial against Microsoft would be available after the market closed at 6:30 PM ET. Planning to avoid giant swings in the after hours trading of the stock, he was out maneuvered by the ECNs as they stayed open long after the normal closing time to allow traders access to the market. MSFT traded down -$4 after the ruling was announced.

General Reno held a press conference to proclaim how proud she was of the legal team, (that spent hundreds of millions of our money) to discover and prove beyond a shadow of a doubt that 86% of all PCs are running Microsoft Windows as their operating system. DUH!!!!! A quick call to IDC could have garnered that fact for the price of a phone call. The line of notables who approached the microphone all touted the party line of a blow for freedom and relief from oppression for the American consumer. Our government system at it's finest. Unfortunately, it is not over and will not be over soon. There are three phases left. Now that the government officially recognizes MSFT as a monopoly the trial now passes into the determination of law phase. The government will try and decide if MSFT broke any laws while exercising it's monopolistic agenda. The third phase is the penalty phase. The court will try and decide what to do with the 8000lb gorilla. The fourth phase will be the appeal of the first three phases. In English it could take well into the next millennium for any action to be taken against Microsoft. The knee jerk reaction after hours to the MSFT stock price AND the possible continuation on Monday will give aggressive investors an opportunity to buy MSFT on the cheap and capitalize on news.

In reality there is no risk for MSFT investors. One of the remedies the government is considering is to force MSFT to distribute Netscape with it's Windows software. Boy, I bet that would really hurt. I am sure Bill would lose probably five minutes of sleep over that option. The second solution is to make MSFT sell Windows to all the PC makers for the same price. What, no sweetheart deals for the hard negotiators? No cut rate volume discounts? Shucks, Mr Fox, please don't through me in the briar patch. Please don't make me sell all my software for the same high price. Is that champagne glasses I hear tinkling in Redmond Washington? The next option would be to breakup MSFT into several smaller companies. Say an Internet company, an office products company, an operating systems company, a venture capital company, a research and development company. All would be extremely profitable and instead of having one monster company to compete with, there would now be five monster companies, all bigger than the competition. With any option stockholders win. With a breakup stockholders win big. Almost all analysts agree that five $20 companies, instead of one $100 company, would rapidly become five $50 companies as the billions of dollars of hidden value in MSFT surfaced. In reality MSFT and the Justice Dept will most likely settle out of court. A killer play here would be the Jan-2002 leaps. Target shoot the $90-100 leaps around $25 on any big sell off and then sell short term calls against them for the next two years. That could easily return $100 for a $25 investment with no risk.

In other news, and yes there was other news, the Nasdaq stretched it's winning streak to six days. Six days, six new record highs. If you are not expecting some profit taking soon then you need to be sure and read the article on entry points tonight. Nothing goes up in a straight line and the rubber band is stretched pretty tight at this point. The gains by the winners on the Nasdaq should go into the Ripley's Believe It or Not record book. QCOM +$75 for the week! Lets get real here. They did not invent air or fire. They simply had some good earnings and a couple of upgrades. PHCM +70, Lucent announced they were going to use some wireless software from PHCM in their devices. They did not say ET was going to phone home on it. CMRC +118, Commerce One announced the availability of their XML developers tool kit. They did not say they would write all the Ecommerce application on the net for free. ICGE +$55, the CMGI wannabe, on no real news other than our investigative report we published on Thursday, http://members.OptionInvestor.com/stocknews/110499_3.asp, and the news that they were opening an European office. How about EMLX, +$40 in three days and a current play! I am sorry guys but there is some real lofty gains here that could evaporate with any hint of bad news or just plain profit taking. Looks like a good prospect list for shorts!

Did you happen to notice that the Dow actually lost ground this week? That's right, -25 on a week that the Nasdaq was setting back to back records. The only real winners were BA, C, KO, GE, IP, JPM, JNJ, MCD. If you don't recognize these symbols then you see why the Dow pretty much stopped dead at 10750. Financials were up on positive economic reports and the drop in interest rates. Consumer favorites KO, JNJ, MCD were up on sector rotation and there was no support from the rest of the Dow stocks. After the positive non-farm payroll data this morning the Dow sprinted to a plus +204 but then bled points all day to finish only +65. What more could you ask for. The Nasdaq is setting back to back record highs. The new jobs came in exactly as expected at 310,000 and the increase in hourly wages a very tame +.1%. The fly in the soup was the unemployment rate. At 4.1% it was the lowest since Oct 1970 but still only -.1% from last month. Could it be the earnings warnings from Disney and Unilever, both of which got clobbered for big losses? Or could it be the dwindling earnings reports and big investors holding their bets until after the PPI and the Fed meeting on Nov 16th?

The floor traders are pointing to the bond yields, 6.03% as evidence of decreased expectations that the Fed will raise rates on the 16th. Others are pointing to the strong economic growth and are expecting the Fed to raise rates to try and get back into a pre-emptive stance instead of a reactive stance. Most agree that whatever the outcome on the 16th there will be no further action this year. The December meeting will be a nonevent and February will be the next trouble spot. While the Fed is still making noises about being "poised" to raise rates, they are still not anxious to become a scapegoat if the market falls in front of Y2K after a November rate hike.

Y2 what? Don't look now but the Y2K hype is rapidly becoming a distant memory. With only 38 trading days before Y2K the probability of a significant market drop is becoming more and more unlikely as each day passes. Every day that we hold these levels and actually gain ground, the prospects for a year end rally appear brighter. Only a couple weeks ago there was a parade of bears on CNBC every hour proclaiming the end of the bull market. Where are they this week? We still have the bulls making appearances, some more cautious than others. On Wednesday for instance, there was the analyst, who shall remain nameless, who was commenting on Nasdaq 3000 and went out on a limb to predict 3100 by year end. On the other end we have Abbey Cohen trying to lure more cash in from the sidelines with her optimistic forecasts. Sorry Abbey, weekly repeats tend to dull the message. Still there is a strongly bullish undercurrent to the market. The Nasdaq has traded over a billion shares for the last nine days. Rallies on strong volume are hard to stop. Advance/decliners are positive again and have been for a week. The new highs have reclaimed the lead from new lows with 291 NH to 146 NL. Large inflows of mutual fund money are powering this liquidity led rally and as long as the trend continues, so should the rally.

The focus for the week will be the PPI on Wednesday and then the Retail Sales and Productivity report on Friday. This sets the stage for the FOMC meeting next Tuesday. Normal market logic would predict a pull back for profit taking Tuesday before the PPI and then range bound until after the Fed meeting. However the market has not been following the play book recently with rallies into the Fed meetings instead of after them. The huge amounts of cash on the sidelines is worried that the train is leaving without them. The expected second leg of the D10K market drop from three weeks ago has failed to materialize and their trigger fingers are getting itchy. If we are going to see a second pullback it should be this week but I would not hold my breath. A +.25% rate hike by the Fed or no hike at all could be the starters gun for a race to January earnings and the money should come pouring in off the sidelines. Aggressive traders will want to take positions on any pull back this week and cautious investors will want to wait for the Fed. Both will not wait past the FOMC decision if the market continues to hold these gains and/or rally. If this sounds like a bullish forecast you should also remember the VIX. It closed on Friday at 22.06, the bottom of it's recent trading range. The VIX at 22 corresponds with the Dows halt at 10750. The VIX has only moved under 22 five times this year and all five times signaled short term tops in the market. My forecast would be another buying opportunity real soon but my forecast and $3.00 will only buy a cup of burned coffee at Starbucks.

The highlights of the week will be Cisco earnings on Tuesday and Dell's earnings on Thursday.

New features from OptionInvestor.com.

Beginning this week we are re-instituting the "Sell Put" recommendation in the call section. If you are bullish enough on the stock to buy calls then selling puts is a natural conclusion. Selling puts requires a margin account and the returns are not as large as winning call plays. The returns however are easier to get. With a straight call play the stock must do two things. Move up and move quickly. If the stock moves up slowly, stays flat or trends down, you will lose money. If you sell puts the stock must only do one thing, not move down quickly. If it goes up, stays flat or moves down slowly, you win. You can use this strategy to cash flow about 12-15% every month with less risk than straight calls. Now, the fun part. If you buy calls and sell puts on the same stock then your cost on the calls is reduced by the price of the puts. For example, if you buy calls for $5 and sell puts for $3 then your net cost on the calls is only $2.00. This gives you an extra margin of safety on the transaction and increases your profits on a winning play. Many times this will change a marginal play or even a losing play into a profitable trade. The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen.

Today we also begin the leap section. Leaps are a great way to rent stock cheap. Leaps are best purchased on opportunity stocks. MSFT would be an opportunity stock next week. IBM at $90 would also be an opportunity. When you own leaps you are renting the stock for up to two years. For instance, IBM is at $90.25. The Jan-2001-100 call leap could probably be bought next week for $12.00. Now IBM has not traded under $80 in over a year and reached $138-139 twice. Everyone expects 2000 to be a record year for techs. What are the chances for IBM to trade in the $135-150 range again before Jan-2001? In my book I rate that as close to 100%. If you bought the $100 leap at $12 and then sold a current month call for $2.00 or more each month then in six months your leap would be free. Aggressive players could sell calls closer to the stock price for more or buy the 2002 leap instead. There are many ways to play leaps but even just betting $12 that IBM will trade over $100 in the next 14 months is a good trade. Look at the history of my two examples. MSFT was trading at $30 (split adjusted) 1/1/98 and IBM $50. Where might these stocks be trading on 1/1/2001 with a continuation of this bull market and no Y2K in the forecast? Another 50% gain is highly probable.

We are also adding our "Ask the Analyst" section where you, the readers, send us a stock you would like for us to dissect. We will post a chart with notations as to patterns and also the results of our research on the company. Send your stock questions to Contact Support

Tonight begins my ten part educational series. I am starting with what I consider the most important lesson in options trading. Entry points. If you pick a good entry point then the rest of the trading decisions become easier. The lesson is too big to email so look for it on the website.

Only 9 seats are left for the last OIN/Optionetics seminar of the year in San Francisco on Nov 14/15th. Don't procrastinate any longer. Lack of education is expensive in the options market. You can pay your dues one trade at a time the hard way or "invest" them up front and turn them into an asset. If you cannot attend this class you can still get the home study course and attend any seminar next year for free. For complete details http://www.OptionInvestor.com/seminar/ There is a 100% money back guarantee and you can take a friend for free. What else could you ask for?

Watch the VIX, sell too soon.

Jim Brown

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