The Option Investor Newsletter Tuesday 5-4-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Also provided as a service to The Online Investor Advantage Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 5-5-99 High Low Volume Advances Decline DOW 10886.11 -128.58 11035.31 10868.36 931.243k 1,402 1,582 Nasdaq 2485.12 - 50.46 2557.21 2482.49 923,809k 1,728 2,304 S&P-100 673.28 - 11.80 685.39 672.30 Totals 3,130 3,886 S&P-500 1332.00 - 22.63 1354.63 1330.59 44.6% 55.4% $RUT 432.59 - .69 436.56 432.10 $TRAN 3731.88 + 35.29 3776.78 3690.36 VIX 27.19 + 2.44 27.44 25.24 Put/Call Ratio .58 ************************************************************* Turnaround Tuesday, two steps forward, one step backward. In real numbers, it was really +225 on Monday and -128 today. The Nasdaq however has lost -147 points in the last six days with only one positive close last Friday for +14 points. Nobody expected the Dow to continue upward unabated after passing the 11,000 milestone but it would have been nice. The Dow surged upward at the open this morning to an intraday high of 11,035 before succumbing to the profit taking pressure. Some say the late day surge over 11,000 yesterday was orchestrated by buyers at Goldman Sachs as waves of buy programs hit the market in the final moments on Monday. The reason given was Goldman wanted to insure a positive opening for their IPO today and they used their ready cash to give the market an artificial boost. CNBC reported at the close yesterday that there were dozens of "buy on close" orders and all were buys. There were no sells. This alone is suspicious. The official "excuse" for the sell off today was the declining bond market and rising bond yields. The bond closed today at 5.71% on worries that continuing strong economic reports would cause the Fed to raise rates on or before their August meeting. With the market rally continuing to add to the already +19% gains for the year, many investors are becoming more nervous about how much farther it can go without a strong correction. Some are fleeing to the relative safety of bonds at these high levels. Stocks have been looking at bonds for the market lead for several days now. With interest rates rising the financial stocks took a hit today as well. Airlines were a pocket of strength even with the strong oil prices. The reason here was the decision by Continental to drop capacity. With less capacity the passengers are then concentrated into fewer flights producing higher margins. This pushed the Transportation Index to another new high. Eventually this too shall cease. If oil continues to hover around $19 even the diehards will be forced to realize the impact to airline profits. One of our favorite stocks took a serious hit today. EMC was dropped for a loss of -$7.00 to close at strong support at $100. The disk storage maker was hit by news that HWP had signed a contract with Hitachi to market their disk systems. EMC claimed they new this was coming and had staffed up their sales department several months ago to take up the slack. The company said that even though HWP accounted for $700 mln in annual sales that they did not expect this to have any impact on their expected +30% sales goals for the year. EMC closed over +$4 off the low of the day but it remains to be seen if this is a buying opportunity or the first step in a new down trend. The Goldman IPO recipients were hand picked by Goldman as investors that would not flip the stock for a quick profit. Evidently the +25% profit at the start of trading was too much for some to pass up as 32% or 22 mln of 69 mln shares changed hands today. General Motors was a big loser to day, -4.75, and knocked -22 points off the Dow. The carmaker posted a -4.2% drop in sales today. Ford and Chrysler were off over -$2.00 each on the news as well. Internets were strong in the morning and looked for a time like they would hold the Nasdaq up by themselves. It was not to be. As the Dow decline gained speed late in the day the bottom fell out of the Internet stocks. Many that had been up double digits during the day ended up with double digit losses in just the last hour of trading. NITE dropped -$21, RNWK -$11 in the last hour but still finished positive, NTBK -$24, TBFC -$18, VRSN -$10, GNET -$14. Web brokers were also hard hit with AMTD -$9.97, EGRP -$8.50. Is this another buying opportunity for net stocks? I am concerned it is not. There has been some weakness in Internet stocks the last week or so and this may be one of the every other month sell offs that we have been seeing. Nothing goes up forever and when these high flyers start falling you don't want to be holding. They will recover, it is just a matter of time. However, recover to what? No one knows what the true value of an Internet stock will be and as the current values are called into question as Barrons did Amazon this week, the value of the sector will ripple. Barrons said Amazon could be fairly valued at $25 which is a far cry from the $200 of recent. Leg Mason called AOL significantly overvalued today and the reason why they were selling it. Again, wait for the recovery before playing these again. Advancers actually led decliners for most of the day which still bodes well for the broader market. One analyst said he had been receiving many calls for penny stocks lately. That market has not been ignored for the last two years, it has been missing in action. This analyst pointed to the new interest in the very lowest of stocks as sure signs of a speculative bubble in the making. Not that we can't play the bubble but when the bubble does burst it happens very quickly and would make the drops today look like teenies in comparison. The cyclicals sold off today just like the previous leaders and left us with no direction for the rest of the week. The selling was broad at the end of the day with very few pockets of strength. However there was not any panic selling, just more sellers than buyers. I have no doubt there are buyers waiting in the wings but nobody wants to make a habit of buying $1 bills for $1.25. Until they see what they feel is a bargain, they will just wait. Personally, I thought IBM, UTX and COF showed good underlying strength today with only minor losses and could lead the rebound. Full disclosure, I do own all three currently but if the market continues down tomorrow I will be out shortly after the open. On the horizon we have Greenspan speaking on Thursday and the all important non-farm payroll report on Friday. Since the famous "irrational exuberance" speech a year ago the market has gone up over +2000 points so any Greenspan speech will be watched closely for new market bombs. The non-farm payrolls will be the next inflation indicator and the market is sure to react to any negative news. The FOMC meeting is fast approaching and although no one expects a hike this soon it is always possible for a pre-emptive strike by the Fed if the market continues in blowout mode. We are rapidly approaching the summer doldrums for the tech sector. The remaining big names to announce earnings are Dell and CSCO. CSCO on the 11th and Dell on the 18th. After those announcements the tech sector is likely to drift aimlessly without a specific direction. I would be cautious about holding a tech stock after May 18th. Point to ponder: Are you now nursing a losing position like I wrote about on Sunday or are you in cash? Where would you like to be tonight with the benefit of 20/20 hindsight for Mon/Tue? The easiest way to avoid the stress and pain of a losing position in the future is to plan ahead and then stick to your plan. If you are stopped out you can always buy it back later. If you are stopped out, you are not out of the game, you just have more options! 1) Don't try to pick a bottom! 2) Wait for an entry point! 3) Sell too soon! Good Luck Jim Brown Editor Market Posture ************** As of Market Close - Tuesday, May 4, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 9,750 10,000 10,886 Neutral 4.30 SPX S&P 500 1,300 1,350 1,332 Neutral 4.29 OEX S&P 100 660 690 673 Neutral 4.29 RUT Russell 2000 390 435 433 Neutral 4.29 NDX NASD 100 2,075 2,250 2,098 Neutral 4.22 MSH High Tech 1,000 1,100 1,006 Neutral 4.22 XCI Hardware 900 920 867 BEARISH 4.29 CWX Software 600 650 614 Neutral 4.22 SOX Semiconductor 390 420 376 BEARISH 4.29 NWX Networking 450 490 504 BULLISH 4.22 INX Internet 550 700 537 BEARISH 5.04 * BIX Banking 700 720 712 Neutral 4.30 XBD Brokerage 425 540 435 Neutral 4.14 IUX Insurance 630 655 637 Neutral 4.29 RLX Retail 900 970 880 BEARISH 4.29 DRG Drug 390 425 371 BEARISH 4.29 HCX Healthcare 780 850 758 BEARISH 4.29 XAL Airline 170 185 187 BULLISH 5.04 * OIX Oil & Gas 250 260 308 BULLISH 3.30 Posture Alert Weakness in the bond market prompted a broad-based selloff in the stock market. We have, therefore, turned Bearish across select industry sectors after violating short-term moving averages. We have turned Bullish across the airline sector bolstered by a report of a cutback in planned capacity increases at Continental airlines. A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture Market Sentiment By Pinnacle Capital Advisors **************************** Tuesday, May 4, 1999 Interest Rates: One Key Pillar of the Market For several weeks, Pinnacle Capital Advisors has been alerting investors about the recent action within the long bond (30-year) and its potential impact on the stock market. Today, the Treasury yield closed ABOVE 5.70 closed for the first time in more than eight months. It is unlikely that the broad market indices will advance too much higher as long as interest rates climb. Also problematic is the action with the Market Volatility Index (VIX). As shown below, this trusted short-term indicator closed firmly above its 50-day moving average signaling the end of its current Bullish trend. This is one of the reasons why Pinnacle has turned Neutral and Bearish across select industry sectors. See Market Posture link. We have listed where the 50-day moving averages fall across the major market indices to help investors with the likely retracement points. Close 50dma ******************************* INDU 10,878 10,000 SPX 1,343 1,300 OEX 680 660 On a positive note, for those who subscribe to the DOW theory, the Transportation Index (TRN) closed at another 52-week high. This helped propel the Airline sector and possibly confirming the recent breakout of the DOW. BULLISH Signs: Advance/Decline Line: Recovering appears to be holding but beginning to roll over again. Pinnacle Index: Excessive OTM call buying in check as evidence by our low Pinnacle Index BEARISH Signs: Interest Rates: Trading ABOVE 200dma and 5.50 Benchmark. (5.720%) Market Volatility (VIX): After consolidating below its 50-day moving average (25.94), the VIX closed up sharply and closed above its 50-day moving breaking the current bullish trend. Russell 2000: Closed below key 435 level. If small cap sells off from here, the technical move will be viewed by many as negative since the Russell 2000 could not take out its prior high resulting in a "failed rally" OTM Call Analysis As we move through May's expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 680-740 among option speculators. As we have been documenting, excessive out-of-the- money (OTM) call may serve as overhead resistance. April Expiration Cycle OEX OTM Call Analysis (Open Interest Apr 650-700) Date Open Interest Change % Alert ----------------------------------------------------------------- Friday, March 19 35,626 - Friday, March 26 60,266 +69.2% Friday, April 2 70,952 +99.2% Friday, April 9 74,028 +107.8% May Expiration Cycle OEX OTM Call Analysis (Open Interest May 680-740) Date Open Interest Change % Alert ----------------------------------------------------------------- Friday, April 16 30,697 - Friday, April 23 53,887 +75.5% Friday, April 30 65,936 +114.8% Tuesday, May 4 70,112 +128.4% * Market Sentiment at a Glance Friday Tues Thurs Indicator (4/23) (4/27) (4/29) Alert Pinnacle Index (OEX): Overhead Resistance (680-695) 1.6 1.2 Underlying Support (645-660) 2.2 2.3 Put/Call Ratios: CBOE Total P/C Ratio .5 .6 CBOE Equity P/C Ratio .4 .4 OEX P/C Ratio 1.9 2.0 Peak Open Interest (OEX): Puts 650 650 Calls 720 720 P/C Ratio 1.18 1.16 Market Volatility Index (VIX): CBOE VIX 26.07 27.32 * Investors Intelligence: Bullish 56.1% 56.1% * Bearish 30.7% 30.7% * The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index OEX Friday Tues Thurs Benchmark (4/30) (5/4) (5/6) Overhead Resistance (680-695) 1.6 1.2 OEX Close 675.65 673.20 Underlying Support (645-660) 2.2 2.3 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is eroding at the OEX 680/695 level while the underlying support is holding at the OEX 645/660 level. Put/Call Ratio Friday Tues Thurs Strike/Contracts (4/30) (5/4) (5/6) CBOE Total P/C Ratio .53 .58 CBOE Equity P/C Ratio .38 .42 OEX P/C Ratio 1.92 2.02 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (4/30) (5/4) (5/6) Puts 650 / 11,650 650 / 12,935 Calls 720 / 9,915 720 / 11,068 Put/Call Ratio 1.18 1.16 VIX Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 April 30, 1999 26.07 May 4, 1999 27.32 Investors Intelligence Survey Major Percent Percent Date Turning Point Bullish Bearish October 97 Bottom 22.0 48.3 July 20, 1998 Top 52.0 24.0 October 8, 1998 Bottom 38.5 42.7 January 11, 1999 Top 58.3 30.0 March 4, 1999 Bottom 49.1 32.5 January 6, 1999 58.3 30.0 January 13, 1999 60.0 30.0 January 20, 1999 61.7 25.9 January 27, 1999 60.7 28.2 February 3, 1999 60.0 26.7 February 10, 1999 61.7 25.9 February 17, 1999 55.7 28.7 February 24, 1999 54.1 31.5 March 3, 1999 50.9 32.1 March 10, 1999 49.1 32.5 March 17, 1999 52.6 17.6 March 24, 1999 55.9 29.7 March 31, 1999 55.6 31.6 April 7, 1999 56.4 31.6 April 14, 1999 55.9 30.5 April 21, 1999 56.4 30.8 April 28, 1999 56.1 30.7 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Week Dow 10886.11 225.65 -128.58 97.07 Nasdaq 2485.12 -7.27 -50.46 -57.73 $OEX 673.28 9.43 -11.80 -2.37 $SPX 1332.00 19.45 -22.63 -3.18 $RUT 432.59 0.47 -0.69 -0.22 $TRAN 3731.88 49.30 35.29 84.59 $VIX 27.19 -0.68 2.44 1.76 Stock Mon Tue Week QCOM 209.88 18.38 -8.50 9.88 Splits 2:1 May 11th CMVT 68.88 2.88 1.88 4.76 Another new high TMX 78.75 4.25 -1.25 3.00 Momentum continues IBM 212.00 3.06 -0.25 2.81 Leading by example FD 49.06 3.31 -0.94 2.37 Earnings May 12th BRCM 79.00 4.38 -2.50 1.88 Bright future! CTXS 43.19 1.88 -1.19 0.69 Confirm market direction HWP 79.50 1.06 -0.44 0.62 Slammed EMC today FDX 112.88 2.13 -2.00 0.13 Dropped, splits Thursday DELL 40.81 0.88 -1.25 -0.37 Time to move the ball WMT 44.00 0.13 -2.13 -2.00 Holding at $44 again LU 57.88 -0.50 -1.63 -2.13 Don't rush, confirm move SUNW 57.19 -0.25 -2.38 -2.63 Nasdaq loser ANF 92.13 0.81 -3.50 -2.69 Split Candidate MDT 68.94 0.06 -3.06 -3.00 Bottom of channel COF 169.25 -3.69 -0.75 -4.44 Wait for bounce up CSCO 108.63 -0.44 -5.00 -5.44 Earnings are May 11th VISX 121.88 4.75 -11.63 -6.88 Possible bottom? MFNX 76.00 -5.56 -2.69 -8.25 Buy the dip, anyone? EMC 100.00 -1.94 -7.00 -8.94 Dropped, HWP leaving? EGRP 103.00 -4.00 -8.50 -12.50 Online trading is risky? NTBK 173.06 8.38 -24.31 -15.93 Delayed reaction to Monday RNWK 201.56 -21.44 1.50 -19.94 Ouch! Painful entry point? NITE 132.00 0.19 -21.38 -21.19 Volatility hurts Puts MSPG 88.00 -5.69 -3.25 -8.94 Internet weakness NSOL 69.50 -5.63 -2.63 -8.26 Internet weakness SEEK 44.94 -3.24 -2.88 -6.12 New, stock in turmoil FNM 66.25 -1.81 -2.88 -4.69 Moved to call, channel up JNJ 95.00 0.25 -2.75 -2.50 New, weakness+CNTO deal DD 69.69 1.06 -2.06 -1.00 New downgrade LOW 53.25 0.94 -0.44 0.50 Failed to hold rally GIS 73.75 1.38 -0.75 0.63 Competition heating up BMY 67.31 2.38 1.38 3.76 Dropped, back to life ELN 57.94 1.13 5.19 6.32 Dropped, sudden revival ***************** PICKS WE DROPPED ***************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ****** FDX $112.88 -2.00 (-.13) FDX had a nice $2.13 gain yesterday, but gave most of it back today. It also closed right at its low of the day (not good), although volume was very light. FDX is due to split after the bell on Thursday and it has so far failed to give us the split run we expected. It might move up Wednesday and Thursday, but overall market direction could take it either up or down. In any case, we don't recommend holding over the split, and since that will occur before our next letter, we are dropping FDX now. EMC $100 -7.00 (-8.94) EMC took a dive today and lost $7. This came on the news that HWP will be reselling Hitachi storage equipment, a move that could alter its sales partner- ship with EMC. Details were a little sketchy but evidently EMC knew this might have been coming. They have since doubled their sales force over the last 18 months. What makes this confusing is that HWP just recently resigned a 3 year deal to re-sell EMC products. EMC still claims that they will hit over 30% earnings growth this year. More good news is that EMC bounced off it's support at $95 (like we said last week). If you can handle the heat, EMC might pull out of this with a split coming at the end of the month. We would rather not hold on when the handle gets this hot. PUTS: ****** ELN $57.81 +5.06 (+6.18) This week-end we reported ELN may be signaling a reversal and start to climb. Unfortunately, this was the case. The ascent started slowly on Monday. In contrast, ELN went full-speed ahead today and spiked up over 5 points in confirmation of its intent. The play's been successful shedding over 25 points in the past 3 weeks, but now it's time to hang it up. Consider this stock dropped. BMY $67.31 +1.38 (+3.75) Sometimes we are unable to get out of the gates on stocks we like and that was the case with BMY. Initially on Monday the stock opened weak down at $61.62 but it didn't hold as drug issues participated in the record-breaking day. Today BMY made the papers as Investor's Business Daily cited new drugs and joint ventures as positives for the stock. With the rebound, it has broken back above its 50-dma. This may be the beginning of a new rally as it had previously ignored the trend lines with wild spikes above and below key support levels. With the stock less than 2 points from an all-time high, we are dropping it from the put list to avoid being caught in a momentum rally. ****************** PICK NEWS - CALLS ****************** FD $49.06 -0.94 (+2.37) FD shot up +$3.31 in trading on Monday as the market broke 11,000 for the first time ever. As the market fell back on Tuesday, FD followed. But, it gave back only -$0.94. We feel that FD has a good chance of continuing its upward hike on earnings momentum. It will report its numbers before the market opens on May 12th (as confirmed by the company). Retail sales have been strong and retailers are expected to report some nice figures. On Tuesday, DLJ upgraded FD to a "buy." COF $169.25 -0.75 (-4.44) After jumping up +$6.00 last Friday, some pull back was expected. COF lost -$3.69 on Monday even though the market broke 11,000. In our eyes, this is a sign of weakness. COF could consolidate further before making its split run. (The company will split in early June). However, it does seem to have found some support in the past four days of trading at $168. Look for a solid bounce off this level before opening any new positions. There is plenty of time to play this pick. Be patient. In other news, AG Edwards upgraded COF to a "buy." QCOM $209.88 -8.50 (+9.88) QCOM will split its stock 2:1 on May 11th. The company began its run with fireworks on Monday as it added +$18.38 in furious trading. On Tuesday, as expected, the market pulled back to clear its head and QCOM did the same. It lost -$8.50. This dip could provide another entry point. Even though QCOM has the potential to correct quickly, don't try to pick the bottom. Wait for the upward confirmation first. It is better to miss a few points to the upside than to guess wrong and lose $$. TMX $78.75 -1.25 (+3.00) On Monday, TMX announced that it was teaming up with SBC Communications to buy Cellular Communications of Puerto Rico Inc. for $814 million. Telmex will benefit since the agreement will allow it to further expand its presence outside of Mexico. Investors showed their support for the deal by pushing TMX up +$4.25. On Tuesday, TMX went on to announce that it was going to buy out Sprint's stake in their US joint venture called Telmex-Sprint Communications, LLC. TMX fell -$1.25 in trading but we feel that the dip was due more to the markets pulling back after breaking 11,000 on Monday. Wait for resumption of the upward trend before buying any new calls on TMX. WMT $44.00 -2.13 (-2.00) WMT seems to be having trouble breaking out of the doldrums. It has bounced off its support of $44 several times but can't seem to hold onto its gains. After consolidating -$4.94 last week and an additional -$2.00 this week, the earnings run could be short and compact. The company will report on May 11th. Retailers are projected to post nice numbers due to strong sales in the quarter. WMT could top estimates by a penny. Wait for the stock to show a solid green figure in trading before initiating any new plays. The key is to see it bounce off of $44 and hold. HWP $79.59 -.69 (+.71) Up $1.06 yesterday, but down .69 today. This stock is not yet moving much in advance of its earnings, but it still has time. Technically it looks fairly positive and it remains above its 10 dma. In the news, HWP has made plans to resell storage equipment from Hitachi Data Systems, a move that hurt the stock of EMC today. HWP sales of EMC equipment last year made up 20% of EMC's total sales. In other news, following HWP's lead last week, Dell has now also entered the sub-$2000 lap-top market, using the low cost Celeron chip. ANF $92.13 -3.50 (-2.68) ANF traded down on Tuesday, after a positive gain on Monday. Monday saw ANF trade as high as $98.94, but closing as $95.63. We are at a key point for ANF, as it is sitting right at its 30-dma. This has held as nice support on all but one occasion over the last few months. Watch for market direction and play ANF if it trades above $92.50. Remember, we feel ANF will announce a stock split with earnings on May 11th or at it's shareholder meeting on May 20th. ***** Play updates continued in section two ***** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Tuesday 5-4-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. PICK NEWS - CALLS (continued) ***************************** BRCM $79.00 -2.50 (+1.87) Most of the tech sector suffered today, and BRCM was no exception. After rising $4.38 yesterday on huge volume, it gave back $2.50 today on slightly less than average volume. As mentioned in Sunday's letter, BRCM, which already dominates the broadband chip market, is seeking to become the leader in the growing network chip market as well with its purchase of Epigram. Various analysts have made positive comments on the acquisition, including Steve Harmon, who writes for Internet.com. He sees BRCM challenging both Intel and Lucent in the home networking arena. Cable modem is also growing. There are now only about a half million subscribers to cable modems, but 1 1/2 to 2 million are expected by the end of the year. Harmon believes that BRCM could have revenues of over 450 mln. in 1999. It had $135,344 in 1998, so that would represent a tremendous increase, but remember that BRCM's first quarter already showed a 173% increase over last year and it is growing exponentially. Again, expect volatility with this Internet/chip stock. VISX $121.88 -11.63 (-6.88) VISX gained $4.75 yesterday only to drop a whopping $11.63 today. Buyers did show up in the last 10 minutes of trading to take the stock off its lows of the day. Technical indicators are somewhat negative for this stock, but they can change quickly for VISX. VISX is now poised right at its 10 dma, and market direction tomorrow could push it below that level or help it move higher. We are still looking for the split run to continue, but be aware that this stock can experience big moves up and down! No new news. CMVT $68.88 +1.88 (+4.75) CMVT reached another 52 week high on Tuesday, as it traded as high as $69.88. We like the strength CMVT showed, as the NASDAQ tanked at the end of the day. Part of this strength could be the shorts that are covering, which we could continue to see. The latest short ration was 5. CMVT could really go if we see any strength in Technology stocks. Communication stocks did fair better on Tuesday, than the Tech sector in general. RNWK $201.56 +1.50 (-19.94) RWNK took a dive with the other Internet companies on Monday, as it dropped over $20. On Tuesday, RNWK shot out of the gate and reached an intra-day high of $221.50, but faded with the market to close slightly positive. This could be a nice buying opportunity, considering the conference RNWK is having this week. Conferences like this usually provide positive news. RNWK also announced its RealJukebox product. This allows users to download and save CD's off the Internet. MDT $68.94 -3.06 (-3.00) MDT is one of our channeling stocks. It is now at the bottom of the channel, which is an ideal time to buy a call. Make sure of market direction before buying. We want to make sure that MDT is not going to continue down. A good option to buy if MDT works as planned, would be either the May-70 or the June-70. NTBK $173.06 -24.31 (-15.94) NTBK proved to be a little rebel on Monday. The stock went against the market sentiment and held on to $18.38 in gains. Today it peaked at $191 only to finally succumb to the downward pressure. By early afternoon, NTBK was free falling and finally closed right on its 10 dma. The bottom on a high-risk internet stock can rarely be predicted. However, I can report that in the past 9 days NTBK has twice took a dip as low as $162 only to bounce back. This is purely a split-play and very HIGH RISK split-play at that. NTBK is having a powerful 3:1 stock split on May 14th! It's a tough call readers, this drop today could make an awesome entry point. But on the other hand, where's the bottom? Remember, NTBK doesn't necessarily move with the market so it's of the utmost importance to confirm the stock's direction before you begin a new play. And even still, be prepared for anything (not for everybody). LU $57.88 -1.63 (-2.12) LU seems to have found new support around $57-58. It's encouraging that it's holding this tight range in light of the market volatility. But again, a more definitive sign of its direction would be for the stock to stay above the 10 dma at $59 and then to push through its proximate resistance at $62-63. In the news today, Lucent announced an Internet-based venture with Persystant Technologies. BitRoom Collaboration System will take networked users (wired, wireless, laptop, or even multimedia PC) and link them with public Internet or corporate Intranet - quite the leading edge technology. On this play, wait for the confirmation before you open a new position. CSCO $108.63 -5.00 (-5.43) The NASDAQ has been ruthless this week. CSCO gave back the $4.88 it gained on Friday plus a little for measure. We're keeping it on our play list for a couple of reasons. First, earnings are right around the bend on May 11th (after the bell) and there's the possibility of a 3:2 split announcement. And also, since CSCO is one of the big players, there's pretty good odds this stock will be in the forefront when the market rallies. Now not to downplay the dip, it certainly is significant. But dips can make profitable entry points assuming the play goes your way. For instance, this past Thursday CSCO had also dropped down to this level but recovered when the NASDAQ reversed. If you have done your research, this might be an entry point for you. CTXS $43.19 -1.19 (+0.69) If you took a look at the 10 day chart, it's easy to see CTXS has formed a new support around the $42-43 mark. During intraday trading, the stock has been testing resistance on the high end of $44. So look for a decisive move through that point of opposition for positive confirmation. Overall, CTXS has demonstrated its strength. Throughout the ups and downs of the market, consolidation has been mild. And yesterday, the stock advanced +1.88 points for the day. MFNX $76.00 -2.69 (-8.25) Relative strength doesn't help much if the rug is getting pulled out from under your index, in this case the NASDAQ. $78 was former short-term support; now MFNX is noticeably below that. Fortunately, it was on low volume. Therein lies another red flag - low volume has settled into this stock telling us the demand isn't there right now, and that basing could continue. Split and earnings run? Maybe, market willing. The good news is that MFNX will split on May 18 and will likely announce earnings then too. (We'll pass on the exact date when we get it) Investors with higher risk profiles will try to catch the falling knife (target shoot); more conservative types should wait for volume and price to rise again. Confirm market direction before playing. DELL $40.81 -1.25 (-0.38) Remember grade school? This feels like trying to talk your best friend out of taking home his football. You know he wants to play, but he doesn't like the other guys in the game. Dell will be the last of the large tech companies to report this earnings season on May 18, and we are waiting for it to move up into earnings, wherein lots of hopes are pinned. If earnings are stellar, A Dell touchdown could pull the whole NASDAQ team with it. Short-term support is at $40.50; about $36 if things get ugly. Selling volume hit with noticeable force in the last hour of today's trading, making us a bit nervous if the NASDAQ continues down tomorrow. Market willing, we still think Dell can reach $45, but it won't happen if NASDAQ can't get the lead out. With NASDAQ breaking support below 2500, we need to wait and see which direction the market moves before starting a new play. Need we say, "confirm market direction before playing"? SUNW $57.19 -2.38 (-2.62) Where have all the buyers gone? Volume remains unusually low though we aren't seeing sellers out en masse either. The tech and Internet-heavy stocks of the NASDAQ have seen the aging process reverse as the swans turn back into ugly ducklings. Sun is no exception. The failure to pop back above its 30 DMA doesn't look so good. We really need to wait until the stock gets back over short-term resistance of $60.50, with a return to big volume before we take a position again. We note too from Sunday, keep your eyes on the AT&T bid for MediaOne. If it succeeds, SUNW could benefit immensely, as it would out-fox Microsoft as a dominant set-top box for cable broadband use. Now more than ever, confirm market direction (read, "NASDAQ") before starting a play. Barring eyebrow-raising news, the "Sun" isn't coming up without it. EGRP $103.00 -8.50 (-12.50) Well that didn't help. In addition to a general market shunning of the sector, the SEC chairman today admonished day-traders and the on-line brokers for propagating an environment conducive to a new mongrel horde of gamblers. People listening couldn't help but wonder if his next sentence would be a proposal for regulating the industry. While nothing of the sort happened, the sector was tarnished for the day. Even more important, NASDAQ finished below 2500. This is a critical juncture in the market. If we don't see a rise back above 2500, we could see 2350-2400 in a real hurry. This play carries a high degree of risk - watch out! Gun-slingin' action required. Of all times to confirm market direction, this is it. IBM $212.00 -0.25 (+2.81) Whoa! A technology stock went up? Though it gave up a fraction today, after a notable drop in the major market indexes, we see this as good. Technically, the chart shows all indicators still in the positive. We are not surprised given blowout earnings, dividend increase, $3.5 bln. share repurchase and a split due on May 26. Still, we urge caution given the end-of- the-day sell-off in the tech and Internet sector. One stock does not a market make. Tomorrow will be a critical day and we encourage you to definitely confirm the direction of the market before you make a play. NITE $132.00 -21.38 (-21.19) Knight took a break from the all-time highs it had been setting on a daily basis last week. This is to be expected with the kind of gains it has produced in the face of a weak industry. Some of the pullback may be due to Arthur Leavitt, Chairman of the SEC, who spoke today about the revolution of online trading. He has long been critical of day-trading and expressed his concerns about euphoric trading. This is not new and his role is more defined to educating the public to risk. But we view this as just a pullback and an opportunity to open new plays. With 2-for-1 splits around the corner for three major online brokers (NITE, EGRP, SCH), we could be back at new highs in no time. In fact all of the recent data suggest that online trading is up more than 40% in April. Watch for a rebound from the dip that occurred in the final 30 minutes of trading. As always, tighten up the stops to protect yourself due to the high volatility of this play. FNM $66.25 -2.88 (-4.69) FNM has worked just like planned. Even with the big jump in the market on Monday, FNM continued to trend toward the bottom of its channel. On Tuesday, FNM reached the bottom and those playing this as a channeling stock, should be out. We would now suggest a call play up to the $72-73 range. Any near-the-money should work, but the MAY-70s and JUN-70s seem to have the most action. It depends upon your trading profile. Again, don't be greedy and take the quick profit. ***************** PICK NEWS - PUTS ***************** MSPG $88.00 -3.25 (-8.94) MSPG did a beautiful swan dive into an empty pool. It swooped down -$8.94 in trading on Monday and Tuesday. Without a life guard in sight, we see MSPG dipping all the way to its support of $79.50. Since all put plays are risky, we suggest following your plays with stop losses. MSPG could try to fight its way back up since it has been down for 5 consecutive trading days. No stock is immune to cycling. MSPG could possibly rally for 2 days before resuming its descent. NSOL $69.50 -2.62 (-8.25) Network Solutions has started this week like in ended last week with its gradual descent lower. The Internet sector was beaten up yesterday despite the Dow Jones rally and Network Solutions dip was even more pronounced with a drop of $5.62. This came despite a weekend report that Hambrecht and Quist analysts feel that NSOL is one of many companies poised to do well following presentations at their annual technology conference. This could be the case but for right now the chart is still bearish. You can see the pattern on the chart of lower highs with each rally. Volume has been tapering off as investors continue to lose interest in NSOL. This signals a further descent and more gains to be made on this play. Look for the 10-dma to keep pressure on NSOL at the $72 level and for the 200-dma to be the next major support around $58. LOW $53.25 -.44 (+.50) Lowe's has trying to participate in the market rally this week but its performance has been less than stellar. We've seen a slight rebound from a big drop last week but it continues to run into resistance at the 10-dma. The sell-off was triggered by a Prudential Analyst last Thursday who downgraded many of the major retailers including LOW. The lack of any substantial move with the 225-point move in the Dow Jones on Monday reconfirms our the play and provides an entry point. There has been no news to trade on and volume has been light as investors wait for direction. We see the stock drifting lower and sparking a new sell-off when it re-tests last week's low at $52. GIS $73.75 -.75 (+.62) General Mills was unable to move above resistance on Monday as the Dow powered higher. Business outlook is still unclear in the industry as another competitor, Quaker Oats, announced they will raise cereal prices on Monday by about 3%. This follows moves by GIS and others and market share wars are heating up. Investors are leaving the stock as industry P.E.s are still lofty compared to previous years. It hit right on the 200-dma around $74.50 before turning lower. This is the kind of trend we were looking for and confirms the market direction. Watch for the 30-dma and 200-dma to provide strong resistance as they converge near $74. DD $69.69 -2.06 (-1.00) DuPont was unable to gain much ground on Monday and momentum turned against the stock on Tuesday. It was already on its way to negative ground for the week when a late day downgrade pushed the stock down to close right near the day-low. HSBC Securities cut DD to underperform from a hold. Ouch. Its rare to see anything less than a hold if the analyst ever wants contact from the company again. But analyst John Ventusi explained that they feel the shares are currently 15% overvalued. We tend to agree and it bodes well for our play. We should see a continuation of the selling as word of the downgrade only had 15 minutes to publicly spread. This also pushes the stock back under the 50-dma. FNM $66.25 -2.88 (-4.69) FNM has worked just like planned. Even with the big jump in the market on Monday, FNM continued to trend toward the bottom of its channel. On Tuesday, FNM reached the bottom and those playing this as a channeling stock, should be out. We would now suggest a call play up to the $72-73 range. Any near-the-money should work, but the MAY-70s and JUN-70s seem to have the most action. It depends upon your trading profile. Again, don't be greedy and take the quick profit. *************** NEW CALL PLAYS *************** None today ************** NEW PUT PLAYS ************** SEEK - Infoseek Corp. $44.94 -2.88 (-6.12 this wk) Infoseek develops and services Internet software products and services. The company provides Web-based navigational services that helps users access resources on the Internet. They produce the GO network and the Infoseek Service comprehensive gateways. They combine content from search and navigational capabilities, directories of relevant information and content from media leaders. They also produce Internet sites in a joint venture with Disney such as ESPN and ABCNEWS. Infoseek is a stock in turmoil ever since releasing their earnings report for Q2. Their revenues came in well below, not only expectations, but below last years Q2. This triggered downgrades from Volpe and BT Alex Brown not to mention a massive sell-off. Despite comments from the company that Q3 revenue would pick up, the stock has fallen in half. We are recommending the stock based on the failure of the 200-dma to provide much support. Today was the first close underneath that key support point. With Internet issues in general weakening, investors will dump the faltering stocks first and look for the blue chips. Watch for an entry point and use your stops to avoid a relief rally. BUY PUT MAY-45*QI-QI OI=238 at $4.25 SL=2.50 BUY PUT JUN-40 QI-RH OI=203 at $4.13 SL=2.00 Average Daily Volume = 2.33 mln Chart = http://quote.yahoo.com/q?s=SEEK&d=3m ***** JNJ - Johnson & Johnson $95.00 -2.75 (-2.50 for the week) Johnson & Johnson is one of the world's largest and diversified makers of healthcare products. JNJ has three distinct business segments serving the consumer, professional, and pharmaceutical markets. As a consumer you're probably most familiar with their over-the-counter brands like Tylenol, Band-Aids, and "no tears" baby shampoo. But Johnson & Johnson reaches beyond that realm and expands all aspects of its product lines through acquisitions. They are truly a healthcare giant. Rumors started to buzz over the week-end and today there are loud whispers that Johnson & Johnson is in merger talks with Centacor for $3 bln in stock. Neither company was available for comment, but anonymous sources say an agreement could be reached in as early as a week. After peaking at $103 (its new 52-week high) last Tuesday, JNJ started a slow and steady descent. PaineWebber stepped in on Friday and downgraded the stock from "attractive" to "neutral", but had no additional comments to add. Today, the rumors couldn't be ignored and the stock lost -2.75 to put it just a point below its 21 dma. In general it normally pans out like this: if JNJ and CNTO reach an agreement regarding the merger then initially JNJ will suffer. Investors will be concerned about dilution to Johnson & Johnson's earnings because it would be issuing such a huge amount of stock to pay for Centacor. Then after this initial unrest, they'll come to their senses and realize the benefits of the acquisition. In this case, JNJ will have access to a hot-selling heart drug which is very much needed to build up its pharmaceutical business sector (this is a weak link in JNJ's health chain). Another factor which will play into this particular scenario is fierce competitor, Eli Lilly, is the co-marketer of ReoPro and this could break the deal. This put play involves a higher risk level and is obviously is based on the prospect of a $3 bln stock deal. So if you decide to open a new position, please double-check direction and keep those stops tight. In our Age of Technology a news announcement can turn the tables in a matter of seconds. BUY PUT MAY- 90 JNJ-QR OI=1386 at $0.69 SL=0.00 BUY PUT MAY- 95*JNJ-QS OI=1825 at $2.50 SL=1.25 BUY PUT MAY-100 JNJ-QT OI= 609 at $5.75 SL=4.00 Average daily volume = 2.17 mln Chart = http://quote.yahoo.com/q?s=jnj&d=3m ****************** COMBINATION PLAYS ****************** 11,000...Here Today, Gone Tomorrow! Monday, May 3 The Dow closed above 11,000 points for the first time Monday, led by strength in the cyclical stocks after a report on manufacturing helped soften inflation concerns. The DJIA closed up 225 points at 11,014 surpassing last Thursday's record. The Nasdaq index was off just slightly, finishing at 2,535. The Standard & Poor's 500-stock index was up 19 points at 1,354, reflecting the broad market gains and confirming the ongoing signs of a vibrant U.S. economy. Sunday's new plays (positions/prices): The straddle plays were quite active on Monday and any of you that bought positions individually throughout the day would have achieved much better prices than our simultaneous orders. CSX JUN50C/JUN50P $6.25 debit ETH AUG50C/AUG50P $9.12 debit LRW JUN40C/JUN40P $6.12 debit CMNT JUN12C/JUN17C $3.62 debit Portfolio plays: On Monday morning, before the open, CNTO rose almost $4 on a report that the biotechnology company may be acquired by health care giant Johnson & Johnson for more than $3 billion. This is an ideal opportunity to roll up-and-forward, so we closed the May (short) position and plan to sell a new June call as the current rally peaks on the merger news. UMG also announced that it had accepted AT&T's $58 billion cash-and-stock takeover bid leaving Comcast four days to counter-offer. Unless Comcast makes a new bid, the options will deflate rapidly. As we said on Friday, it might make sense to take the the small profit now rather than wait for a chance for a larger gain (or loss), after the bidding war ends. On Monday morning, the play was worth about $1.25 more than we paid for it just last week. Tuesday, May 4 U.S stocks fell on Tuesday as bond interest rates jumped to the highest level in nearly 10 months. The Dow gave back 128 points to 10,886 and the Nasdaq Composite index slid 50 points. In the broader market, declining issues led advances 16-to-14 on heavy volume of 930 million shares on the NYSE. Portfolio plays: AEOS traded at the post-split prices today and managed to finish the day slightly higher, even as the overall market moved lower. Watch for any signs of widespread selling now that the split-run is over. NSM is making a nice rally towards our sold strike (and technical resistance) at $15. We assume the stock will have some difficulty near that previous trading range but also expect it to finish in that area on May expiration. The CNTO calendar spread was rolled forward to June with a credit of $0.12 added to the new position; JUL45C/JUN50C. Good Luck! ********** NEW PLAYS ********** I had some new (Email) interest in Covered-Calls with LEAPS and today was a good opportunity for that type of play in the retail sector as many of those issues gapped to new highs. The volatility of the short-term options will allow us to enter a play at a small discount. Here are two favorable stocks in that sector. One is a bullish play and the other is a stable, range-bound issue that has excellent call-option interest each month. LEAPS - Covered Calls One of the most popular strategies associated with LEAPS is the covered call (or calendar spread) on the LEAP position. The time spread (horizontal spread) involves the sale of one option and the purchase of a more distant option, both with generally the same strike price. The neutral philosophy for using time spreads is that time will erode the value of the near-term option at a faster rate than it will the far-term option. When we open a calendar spread, we try to make sure there is excess premium in the sold call; a small disparity in our favor. Then we generally wait until the last day of the strike period to close out the SHORT position (if necessary). If your sold position is ITM on the last day of the strike, you need to buy it back so that you don't get called-out (or have to exercise the long-term position) because that would defeat the whole purpose of the strategy. Then we sell next month's call (on any rally) to further reduce the cost of our long-term position. That's the whole strategy; selling the time value in the calls and buying them back (if absolutely necessary) when they return to intrinsic value. Occasionally, we may also have to "roll-up" or "roll-down" if the stock price moves very far away from the "sold" option (in a short time) to keep the play profitable. More information on these types of spreads can be found in two of the bibles of floor traders: "Options As A Strategic Investment" by Larry McMillan and "Option Pricing And Volatility" by Sheldon Natenburg. ***** TOM - Tommy Hilfiger Corporation $71.12 Tommy Hilfiger designs, sources and markets sportswear, jeanswear and childrens clothing under the Tommy Hilfiger trademarks. With a range of strategic licensing agreements, the company continues to expand its product lines to offer a broader array of apparel, accessories, footwear, fragrance and home furnishings. Their products can be found in leading department and specialty stores throughout the United States, Canada, Mexico, Central and South America, Europe and the Far East. Americans bought more of everything (including clothes) in the first quarter as the economy showed few signs of economic slowdown. Consumer spending climbed almost 7% in the first quarter, the largest rise in 11 years. A combination of low interest rates, higher consumer confidence, greater demand for durable items and the new highs reached in the stock market has put more money in consumer's pockets. One industry expert recently commented that retail stocks have done well and should continue to perform, because they are now selling more inventory at better prices and less at mark-down prices. This gives companies improved margins on their product sales. Most analysts say this shopping spree should continue well into the summer months. Technically, this stock is in a sideways trading range near $70 but that can often be the best type of pattern to use in a long term calendar spread. PLAY (conservative/calendar spread): BUY CALL JAN00-70 LSD-AN OI=158 A=$12.25 SELL CALL MAY-75 TOM-EO OI=273 B=$1.06 INITIAL NET DEBIT TARGET=$11.00 TARGET ROI=75% Chart = http://quote.yahoo.com/q?s=TOM&d=3m ***** IBI - Intimate Brands $54.00 Intimate Brands is the leading specialty retailer of intimate apparel, beauty and personal care products through the Victoria's Secret and Bath & Body Works brands. Victoria's Secret products are available through a chain of lingerie and beauty stores, and the Victoria's Secret Catalogue is now also online. Bath & Body Works products are available in over 1000 stores. We recommend this company regularly in the main section of the OIN because the retail sector has continued to outperform many of the other 'stable' industry groups in the market. The current strength of the U.S. economy allows consumers to spend more on the products that these companies sell and that translates into higher revenues. The Limited, Inc. owns approximately 85% of Intimate Brands and both of these companies have received numerous upgrades over the past few weeks. Intimate Brands recently reported that net sales continue to increase at the rate of 10% to 15% per quarter and the outlook is more for growth in sales as we approach the summer months. First quarter earnings will be reported on May 12 and the company has reiterated that it expects to report a 19% increase over the previous year, translating to an EPS that is slightly above initial Wall Street estimates. PLAY (conservative/calendar spread): BUY CALL OCT-55 IBI-JK OI=83 A=$5.87 SELL CALL MAY-55 IBI-EK OI=76 B=$1.81 INITIAL NET DEBIT TARGET=$4.00 TARGET ROI=100% Chart = http://quote.yahoo.com/q?s=IBI&d=3m ***** ORCL - Oracle $25.19 *** A Promising Future! *** Oracle Corporation is the world's leading supplier of software for information management, and the world's second largest independent software company. They offer database, tools and other application products, along with related consulting, education and support services in more than 145 countries around the world. A recent report by an industry research company has confirmed ORCL as the leading database vendor in the world. Oracle is number one on NT and number one on Unix and that's why most e-business runs on Oracle databases. Oracle8i(TM) is the top Internet platform for business innovation, used by nearly two-thirds of the Fortune 100, ten out of the top ten consumer E-commerce sites and nine out of the top ten business E-commerce sites. ORCL will soon offer a new pricing model for its database software intended to attract more Internet-based customers. The new plan is based on the size and power of server processors. It is a better way to gauge usage and should help Oracle make more money from Internet customers. The strategy is part of Oracle's new Internet plan. The company has Web-enabled all its products, from the new Oracle8i database to enterprise resource planning applications. They are also acquiring Tinoway Nederland BV to add to its range of software linking laptops & mobile phones to corporate networks. PLAY (long-term/calendar spread): BUY CALL JAN00-25 LRO-AE OI=3332 A=$5.75 SELL CALL MAY-25 ORQ-EE OI=8371 B=$1.50 INITIAL NET DEBIT TARGET=$4.00 TARGET ROI=100% Chart = http://quote.yahoo.com/q?s=ORCL&d=3m ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
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