The Option Investor Newsletter Tuesday 5-11-99 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) ************************************************************ 5-11-99 High Low Volume Advances Decline DOW 11026.15 + 18.90 11102.32 10970.59 841,361k 1,709 1,276 Nasdaq 2566.68 + 40.29 2574.37 2542.42 956,217k 2,220 1,803 S&P-100 683.77 + 5.85 687.10 677.92 Totals 3,929 3,079 S&P-500 1355.61 + 15.31 1360.03 1340.30 56.0% 44.0% $RUT 446.81 + 4.96 446.94 441.85 $TRAN 3770.91 + 39.01 3775.06 3733.01 VIX 26.37 - 1.05 27.66 26.10 Put/Call Ratio .51 ************************************************************* Internet turnaround sparks Nasdaq rally again. An upgrade to AOL by Mary Meeker at Morgan Stanley to "strong buy" lit a fire under the Internet sector. Calling the -27% drop from it's recent highs a "buying opportunity" and calling AOL a "must have" helped AOL add +13.13 after large gains on Monday as well. Yahoo! also benefited from strong language from Henry Blodget at Merrill Lynch. He called Yahoo! a great buy with many new features coming up including several acquisitions. Yahoo! announced Yahoo! Radio today in a joint deal with Broadcast.com and Spinner.com. This just shows you what a few well placed words can do to a stock/sector heading south at a rapid rate. On Sunday the Internet sector was crashing and YHOO was leading the slide. On Monday several positive comments and the rumor that the Lycos/USA deal was terminated stopped the sector cold and signs of life appeared. Today the comments by Merrill and Morgan Stanley overcame all the negativity reversed the entire sector. Was YHOO a bad pick as some emails have suggested? Sure it was if we had know in advance about the upgrades. Just like the stocks you choose yourself, what looks good one day can be the worst play possible the next. Some you win, some you lose and you never know in advance which is which. Bonds out of control or in control? The productivity numbers out today were very strong and beat estimates easily. The +4% increase in productivity on top of the +4.3% last qtr is amazing. The wage costs were up only an insignificant +.3%. The reasons were the same Greenspan gave last week. Better technology, more educated workers producing more goods in less time. The bad news, and you knew there was a negative side, is that we continue to be at full employment. 4.3% unemployed is about as low as you can go before you start dragging the bottom of the barrel. The chronically unemployable, the under motivated. The people that you would never hire if given a choice are all that is left. These workers require more training, produce less and tend to change jobs more often. This increases wage costs that have to be added to the price of goods. I know this is stretching some to provide a reason for bond yields going up again in the face of very favorable economic numbers but this is the reason given. There is just a fear in the bond market that Greenspan will raise rates eventually. Bond yields ended the day at 5.83% and several analysts are forecasting a 6% yield soon. This is very bad news for the market. Above 5.5% wary investors tend to start moving cash into the safety of bonds and at 6.0% the trickle could become a flood. The DOW was up over 90 points today until the five year note auction was met with lackluster demand. Reports of the auction results sent the average back to negative territory to trade close to zero the rest of the day. Tomorrow the ten year note auction will determine market direction again. The PPI and CPI reports later this week will also cause traders to hold off buying. The constant search for any sign of inflation is going to be our undoing. Is the glass half full or half empty? Eventually some report when scrutinized under a magnifying glass will show some faint sign of inflation and it will be like yelling fire in a crowded theater. Until then trade the rally! Another Dow record? Not quite! After trading in record territory most of the day the Dow closed just five points under the record. The Nasdaq is making up recent lost ground. The rotation back into techs is slowing the recent cyclical rally. The recent big DOW gainers all gave up some profits today as money rotated out of drugs, paper, metals and back into Nasdaq techs. IBM continues to power forward and lead the NYSE tech charge and added +2.38 to another new record high. The transports set another new record as oil drifted back under $18 a barrel. The biggest gainer today was of course an Internet IPO. TheStreet.com went public at $19 a share after teasing investors with $13, $15, $17 price ranges over the last few weeks. Sorry, Kramer, I did not hold my allotment. I took the opportunity to sell at $61 when the price started sliding from the +$70 price range. IPOs like this make me want to start looking for an investment banker for OIN! Several people questioned the recent claim I made about May and June not being good months for the market (S&P). According to The Stock Traders Almanac, by Yale Hirsch, the following are the results by month since 1950. This book has 190 pages of info like this and is the acknowledged reference book for market statistics. If you would like one I have ten left over from the seminars at $14.95 each. Tomorrow we have the ten year note auction which will drive the market depending on the results. Thursday we have the Producer Price Index (PPI) and Friday the Consumer Price Index (CPI). Next Tuesday is the Fed FOMC meeting and even though nothing negative is expected from any of these events there "should" not be any meaningful buying before they are over. Of course the market has not been acting rationally lately and anything is possible. The DOW has failed to pass 11,100 twice this week only to drop immediately after touching the mark. Whether or not this means anything or will continue remains to be seen but technical traders will read something ominous into every repeated market event. The number of "reputable" analysts now calling this a market top is assuming epidemic proportions. Since the larger market is continuing to post broad advances and the small caps as evidenced by the Russell-2000 are making good progress, it seems like the "toppers" are being used as contrarian indicators and stepping stones to the next level. Even if the toppers are being ignored in public there is still the knowledge lurking in the back of traders minds that they could be right. This will provide a weak bottom as we move forward. Professional traders will insure their fire escapes (stops) are in place and take profits quickly. We should do the same. Trade the rally but lock in profits when available. CSCO announced earnings after the close and beat estimates by .01 with $.38 vs est of $.37 and missed the whisper number of $.39. They did announce a 2:1 split and traded up +4.13 in after hours. The conference call was positive and we could benefit from it at the open tomorrow. Watch for any weakness in the market after the opening bump before making new plays. Wait for an entry point, sell too soon. Jim Brown Editor *************** Market Posture *************** As of Market Close - Tuesday, May 11, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 9,750 11,000 11,026 BULLISH 5.7 SPX S&P 500 1,300 1,360 1,356 Neutral 4.29 OEX S&P 100 660 690 684 Neutral 4.29 RUT Russell 2000 390 435 447 BULLISH 5.7 NDX NASD 100 2,100 2,250 2,176 Neutral 5.7 MSH High Tech 1,000 1,100 1,042 Neutral 5.11 * Key Benchmarks Technology Bearish/Bullish Last Posture/Since Alert **************************************************************** XCI Hardware 900 920 896 BEARISH 4.29 CWX Software 600 650 638 Neutral 4.22 SOX Semiconductor 390 420 395 Neutral 5.11 * NWX Networking 450 490 526 BULLISH 4.22 INX Internet 550 650 575 Neutral 5.11 * Key Benchmarks Financial Bearish/Bullish Last Posture/Since Alert **************************************************************** BIX Banking 700 720 711 Neutral 4.30 XBD Brokerage 425 475 457 Neutral 4.14 IUX Insurance 630 660 666 BULLISH 5.11 * Key Benchmarks Other Bearish/Bullish Last Posture/Since Alert **************************************************************** RLX Retail 900 970 896 BEARISH 4.29 DRG Drug 390 425 372 BEARISH 4.29 HCX Healthcare 780 850 760 BEARISH 4.29 XAL Airline 170 180 185 BULLISH 5.04 OIX Oil & Gas 260 285 302 BULLISH 3.30 Posture Alert An Internet IPO and upgrade sparked a tech-led rally above key benchmark levels. As such we have turned Neutral across select industry sectors. We want to alert investors, however, about potential failed rallies for the S&P 100 and 500. 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 16, 1999 Divergence Between Bond and Equity Market Don't ignore what's happening in the bond market when you form your strategy for the equity market. Despite the favorable news within the technology sector (AOL upgrade, CSCO earnings), Pinnacle believes that the backup in the bond market will cause the equity market to stall in its tracks. What's more, the S&P 100 and 500 is dead centered in the potential failed rally zone and could lead to a precipitous sell-off. Pay close attention to where the market is trading AFTER the opening Wednesday morning (5/12). If the broad market indices is trading BELOW the open, it's a classic news reversal and investors should protect their positions tightly. Highlighted below are our potential failed rallies as outlined in Sunday's (5/9) including Tuesday's close. 52-Week Recent Friday's Potential Tuesday's (5/11) High Low Close Failed Rally Zone close *********************************************************************** SPX 1,372 1,320 1,345 1,346 - 1,354 1,355 OEX 695 670 682 683 - 687 684 The potential failed rally zone is an area defined by a retracement of 50-66% above its previous low. As shown above, the S&P 500 and 100 is currently approaching this zone and investors should pay close attention to what these indices do. If the indices fail within this zone and give a reversal signal, GET OUT. Don't be a hero. You will have another opportunity to get in. The reason for Pinnacle's caution is based, in part, on our other trusted indicators are telling us including our Pinnacle Index and Investor Intelligence survey results. Take a look, for example, at the level of out-of-the-money calls over the past week alone - it jumped 36%. May Expiration Cycle OEX OTM Call Analysis (Open Interest May 680-750) -------------------------------------------------------------------- Date Open Interest Change % -------------------------------------------------------------------- Friday, April 30 65,936 - Friday, May 7 89,736 +36.0% Tuesday, May 11 96,388 +46.2% These indicators suggest that option speculators are betting that the S&P 500 and 100 will follow the DOW into record territory. This could still happen but if it doesn't, savvy investors should be on the right side of the trade. BULLISH Signs: Russell 2000: Breaking out above key 435 level. After consolidating just below the key 435 level, the Russell 2000 index (RUT) is breaking out above 435 indicating that the troops are following the Generals. Advance/Decline Line: Slowing recovering after its long decline. Market Volatility (VIX): After trading above its 50-day moving average (25.72) for the past week, the VIX has evaporated back to its short-term moving average. BEARISH Signs: Interest Rates: Trading ABOVE 200dma and 5.50 Benchmark. (5.837%) Pinnacle Index: Our Pinnacle Index has spiked to 5.5 on the OEX (680-750) suggesting that option speculators are expecting the market to advance higher. Peak Open Interest: A contraian put-call ratio clocking in at .78 a contrarian indicator, the percent of Bullish investor spiked from a week ago suggesting bullish sentiment picking up steam. Investor Intelligence: As a contraian indicator, the percent of Bullish investor spiked from a week ago suggesting bullish sentiment picking up steam. OTM Call Analysis As we move through May's expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 680-750 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 680-750) ----------------------------------------------------------------- Date Open Interest Change % Alert ----------------------------------------------------------------- Friday, April 16 30,697 - Friday, April 23 53,887 +75.5% Friday, April 30 65,936 +114.8% Friday, May 7 89,736 +192.3% Tuesday, May 11 96,388 +213.9% * Market Sentiment at a Glance **************************************************************** Friday Tues Thurs Indicator (5/7) (5/11) (5/13)Alert **************************************************************** Pinnacle Index (OEX): ----------------------------------------------------------------- Overhead Resistance (680-700) 2.3 2.6 Underlying Support (645-660) 2.7 2.9 Put/Call Ratios: ----------------------------------------------------------------- CBOE Total P/C Ratio .5 .6 CBOE Equity P/C Ratio .4 .5 OEX P/C Ratio 1.8 1.6 Peak Open Interest (OEX): ----------------------------------------------------------------- Puts 650 650 Calls 700 700 P/C Ratio .88 .78 Market Volatility Index (VIX): ----------------------------------------------------------------- CBOE VIX 26.72 26.37 Investors Intelligence: ----------------------------------------------------------------- Bullish 58.6% 58.6% * Bearish 27.6% 27.6% * 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 (5/7) (5/11) (5/13) ----------------------------------------------------------------- Overhead Resistance (680-695) 2.1 2.6 OEX Close 674.54 683.70 Underlying Support (645-660) 2.6 2.9 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building 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 (5/7) (5/11) (5/13) ----------------------------------------------------------------- CBOE Total P/C Ratio .54 .60 CBOE Equity P/C Ratio .36 .46 OEX P/C Ratio 1.84 1.56 Peak Open Interest (OEX) ----------------------------------------------------------------- Friday Tues Thurs Strike/Contracts (5/7) (5/11) (5/13) ----------------------------------------------------------------- Puts 650 / 12,841 650 / 15,219 Calls 700 / 15,350 700 / 19,430 Put/Call Ratio .84 .78 Market 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 7, 1999 26.72 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 May 5, 1999 58.1 27.6 * CHANGES THIS WEEK ***************** Please view this in COURIER 10 font for alignment Index Last Mon Tue Week Dow 11026.15 -24.34 18.90 -5.44 Nasdaq 2566.68 22.77 40.29 63.06 $OEX 683.77 -3.82 5.85 2.03 $SPX 1355.61 -4.70 15.31 10.61 $RUT 446.81 5.74 4.96 10.70 $TRAN 3770.91 -10.83 39.01 28.18 $VIX 26.37 0.70 -1.05 -0.35 Stock Mon Tue Week NTBK 184.50 5.50 14.00 19.50 Split run in progress EMC 107.25 3.63 6.31 9.94 Starting its split run NITE 154.50 11.69 -2.44 9.25 Dropped, looking weak before split BRCM 92.69 0.31 8.69 9.00 Taking off MFNX 84.00 2.44 4.50 6.94 Dropped for possible earnings VISX 134.38 0.70 5.19 5.89 Dropped, splits tomorrow EGRP 115.00 9.44 -4.81 4.63 Volatile she goes CTXS 47.00 2.81 1.56 4.37 Reiterated "buy" ratings CMVT 71.38 1.38 2.56 3.94 Strong and steady IBM 221.00 1.38 2.38 3.76 Hard to keep Big blue down ROK 61.88 2.00 1.25 3.25 Leaving BA in the dust COF 172.00 -4.06 6.78 2.72 Starting its split run QWST 92.75 1.38 1.25 2.63 Split run in progress LU 60.13 1.25 1.31 2.56 Looking better than last week DELL 42.63 2.06 0.38 2.44 That is more like it! AET 97.00 4.25 -2.25 2.00 Reaction to the Dow TBH 101.00 4.50 -3.00 1.50 More profit taking EMR 70.94 0.81 0.06 0.87 Confirm direction first HWP 80.56 0.44 0.19 0.63 Is this run ever going to start? PPG 68.63 -0.44 -0.38 -0.82 Necessary profit taking BA 43.44 -1.69 0.63 -1.06 Profit taking ALD 63.56 0.31 -1.38 -1.07 Dow sensitive MCHP 43.00 -2.31 1.00 -1.31 Was that our dip? TMX 86.13 -0.25 -1.75 -2.00 Dropped, merger news dying TV 46.81 -0.38 -1.69 -2.07 Necessary profit taking GT 64.25 -1.19 -1.31 -2.50 Necessary profit taking UNP 63.31 -1.00 -2.69 -3.69 Possible reaction to Dow Puts JNJ 92.81 -2.75 -0.56 -3.31 Dropped for possible web pop up LVLT 88.50 0.19 -0.19 0.00 Top of its channel MSPG 88.50 1.75 -1.25 0.50 Not participating in rally FNM 72.88 0.50 0.25 0.75 Top of its channel TX 68.63 -1.38 2.75 1.37 Dropped, play over SEEK 53.88 1.25 1.50 2.75 Still looks weak BVSN 51.75 3.00 0.75 3.75 Not participating in rally TBFC 99.06 0.88 5.06 5.94 Look for bounce downward SFE 86.75 10.50 4.75 15.25 Did you get the license of that truck? YHOO 174.00 8.25 18.31 26.56 Next time we grill Blodget first! ***************** 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: ****** NITE $154.50 -2.44 (+9.25) Knight was able to push through resistance in the upper $140 range on Monday and triggered a move back to new highs. This is exactly what we talked about over the weekend. But a late day selloff plus comments on CNBC caused the stock to close lower. The CEO for Island ECN, Electronics Communications Network, appeared on the show Power Lunch to talk about the company's growth and future prospects. They announced today a $25 million dollar investment from Waterhouse Securities. This raises questions as to whether Waterhouse will continue to use NITE to clear most of their trades or whether they will send business to ECN. Whether its future business concerns or just profit-taking, we are unimpressed with today's results in such a strong market so we are dropping it for the time being. Remember, don't hold over the split! MFNX $84.00 +4.50 (+6.94) Dear John (Kluge): We like the prospects for your company since you are one of a few great bandwidth developers in the U.S. and Europe. We also remember that you have a 2:1 split planned for May 19 after the close. Unfortunately, your investor relations department says that you will release earnings for MFNX "most likely tomorrow morning (Wednesday) with a remote chance that it could slide to later in the day or Thursday". "Most likely"? Sorry John, as astute option traders, we never recommend holding a position through earnings, so we'll suggest to our readers that they take their profits and run. Of course we will also remind them that if MFNX doesn't suffer any appreciable post-earnings loss, it may be safe to take another position for a split play. In short John, we're leaving you and MFNX (for now anyway). VISX $134.38 +5.19 (+12.63) VISX came through for us with a nice finish to its split run--up almost $13 in 2 days! Actually, it might still climb a little higher tomorrow, as the split occurs after the close. Please note: the stock will split May 12th as we stated in Sunday's letter, but that is Wednesday, not Friday. (Apologies for listing the wrong day.) Plan to be out of your options by tomorrow's close, as most stocks experience some post-split depression. With the split run over, we are dropping VISX as a play. TMX $86.13 -1.75 (-1.75) After hitting a new high yesterday morning, TMX headed down for the rest of the day and today lost a little more ground. Although the $86 intraday bottom today was still comfortably above its 10 dma, we are concerned that the stock may come under some profit-taking pressure if the merger news evaporates, as the "talking heads" on T.V. suggest might happen. (TMX denies that it and SBC, its American partner, are in merger talks with Spain's Telefonica, a suggestion that has driven the stock price up sharply in recent trading.) In addition, TMX was downgraded today at Salomon Smith Barney from "buy" to "outperform". We feel it is best to drop TMX at this time. PUTS: ****** YHOO $174.00 +18.31 (+26.56) Yahoo has regained life this week thanks to the help of Merrill Lynch analyst Henry Blodget. He commented on Tuesday that the recent weakness is nothing more than a buying opportunity. Blodget is one of the more respected Internet analysts and obviously his comments carry some weight. The stock rebounded from an under-performing status last week to a clearly over-performing stock this week. With the renewed interest in the NASDAQ and Internets, we are removing Yahoo from the put list. (if you waited to confirm direction first, we really didn't get a chance to jump in). TX $68.63 +2.75 (+1.38) We've had lots of action this week in trading on Texaco. Today alone produced a more than 5 point move. There are lots of rumors and articles commenting on any possible offer or alliance but as of mid-day Tuesday company officials are still silent. The drop to a day low of $64.50 was encouraging and justified the play but the steady late day rebound has us concerned that speculators will take the stock higher. This was a short term play and it appears the bulls are winning. ***** 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. 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The Option Investor Newsletter Tuesday 5-11-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. PUT DROPS (continued) ********************* JNJ $92.81 -0.56 (-3.32) Since Friday, JNJ has fallen more than 3 points below its newly formed support of $96-97. Now the stock's descent has been on strong volume and this implies a bearish sentiment. Today, the stock finished a point below its 50 dma. So far, it's still hush-hush about the possibility of a $3 bln stock deal with Centacor. Also on the news front, Johnson & Johnson is going "online". News of a commercial JNJ website came out late this afternoon. We don't want anyone to get hammered by an unexpected pop due to any Internet fever. SFE $86.75 +4.75 (+15.25) No explanation necessary. Two consecutive days of such huge gains puts this stock right onto our drop list. There was no press on Monday that could have caused this stock to spike up $10.50. But today two news releases may have had some influence. First, 4anything.com (an alliance of SFE) announced they launched the World's largest network of vertical portals providing quicker and easier access to Internet data. Plus, SFE announced that they filed registration with the SEC for an IPO offering for their Internet Capital Group. This play turned out to be one of those "Thank God for stop losses" kind of plays. PICK NEWS - CALLS ****************** DELL $42.63 +0.38 (+2.44) That's more like it. Dell is just 5 trading days away from announcing earnings (May 18), and we are looking for an earnings run that could easily take DELL to $45, market willing. Dell tacked on over $2 yesterday and followed up with $0.38 today. There is still room for more appreciation as Dell received 2 very welcome upgrades yesterday from BT Alex Brown issuing a "buy" rating and CS First Boston reiterating its "strong buy" rating. CSFB thinks DELL will beat their $0.15 EPS estimate and possibly exceed their 11% operating margin goal (briefing.com). Given Compaq's woes, their assessment may be accurate. Nonetheless, trade smart by first confirming market direction, then use stops to protect profits. EGRP $115.00 -4.81 (+4.62) The technical pennant is still forming. Even though EGRP gave us what appeared to be a breakout yesterday (+9), today, it gave back over half yesterday's gain. The time is still good to scale into a position, as EGRP will split 2:1 after the close May 21. In addition Volpe Brown reiterated its "buy" rating yesterday. Remember, INTERNET = RISK! Big swings are normal. Like we noted Sunday, "More conservative traders will wait for a clean break with volume over $123. Confirm market direction first. IBM $221.00 +2.38 (+3.75) Still at the front of investors minds when looking for tech sector winners, IBM had great earnings, announced a stock repurchase, increased the dividend and received broker upgrades. They also have a 2:1 split planned for May 26, which is what this play is all about. Technically, IBM is well into positive territory, even though volume has been a bit light. It doesn't look like a reversal is coming soon. That said, nothing goes up in a straight line and IBM will see an occasional "taking of the profits" before the split. So keep those trailing stops in place and confirm market direction before jumping in. ROK $61.88 +1.25 (+3.25) Frankly, this is one of the prettiest technical charts we've seen in a while - 10 straight days of sequential gains! That of course should raise a red flag telling us that profit taking could hit any time. Even so, trading volume has been over twice the daily average over the last 2 days, telling us that buying pressure is still strong. Not really any news worth noting except that they've made their web site easier to use, though we doubt this has any effect on the price. Confirm market direction before taking a position and enjoy the ride. You may want to wait for the pullback before making the play, or keep a trailing stop in place if you're already in it. BA $43.44 -0.63 (-2.31) We noted on the ROK write-up Sunday that ROK has been evenly tracking BA. Murphy stepped in to break up that relationship first thing Monday morning and continued into Tuesday. Unfortunately, Boeing took the nosedive of divergence, while Rockwell continued its rise. What investors didn't suspect was that Boeing lost a National Labor Relations Board ruling that now allows 460 engineers to vote on whether to join the SPEEA, a Seattle based engineering union. No big deal by itself, but it could have deeper repercussions, which the news isn't conveying. Keep your eyes open for an entry since BA's fundamental business of aircraft construction is receiving many new orders. Business is still good and the technical chart is still in the positive zone. Confirm market direction before playing. CMVT $71.38 +2.57 (+3.94) CMVT has performed very well this week. The stock is at new all time highs and closed very near its high of the day. Earnings are expected in early June, so an earnings run could help the stock even higher. As always, any weakness in the market could cause some profit taking. It seems that the NASDAQ is ready to make an assault on its highs, which should see CMVT follow. AET $97.00 -2.25 (+2.00) AET made strong gains on Monday, as the stock rose to another 52 week high, just shy of the $100 level. On Tuesday, the stock gave back $2.25 of its $4.25 rise on Monday. AET's new high is at $99.88. There will be resistance at the $100 level, for no other reason then psychologically. The only news on AET is that it is involved with the President's tour to help bring investment to inner city business. One of AET's chief executives is flying along with many other large companies, with the President. GT $64.25 -1.31 (-2.50) GT has suffered some profit taking this week. Not unlikely, considering the strong gains the stock had last week. The best entry point would be a bounce off of $62.75, if the stock drops that low. There is also reports that GT's "run-flat" tires are not bringing in the revenue the company had anticipated. These things aside, GT has made strides in cutting costs and still seems set to make up some room from the drop the stock has taken over the last year. PPG $68.63 -.38 (-.81) PPG has had a bit of profit taking this week, but has seemed to find new support at just above $68. The stock has hit and bounced off this level for the last three days. A little consolidation after nice gains is a good sign for the stock going forward. As we mentioned in the weekend edition, long term charts show PPG having nice runs into the summer almost every year. MCHP $43.00 +1.00 (-1.31) MCHP had a profit taking day on Monday this week, as the stock lost $2.31. On Tuesday, the stock gained $1.00, but stayed in a very narrow range. The stock has support in the $41.50 to $42.00 range. A bounce off these levels would be a nice opportunity to buy. The semi-conductor industry is pushing up against some short term resistance, if it breaks this level, a nice run could occur. TV $46.81 -1.69 (-2.07) TV took a little off its latest gains, as the stock dropped as low as $46.63 and closed just slightly above this mark. Mexican stocks in general declined today, bringing with it, a decline in TV. This was the first drop in over four days. The decline came mainly from retailing stocks, as two of Mexico's biggest retailers had decreasing same store sales. News that the daughter of Emilio Azcarraga, the late CEO of TV, has hired two U.S. law firms to investigate a sale of stock in the company and to find out how much her billionaire father's estate is worth. The Mexican market still seems very strong in the short term. ALD $63.56 -1.38 (-1.07) ALD kept a fractional +0.31 gain in yesterday's mixed market and set another new high - for the third day in a row! The record is now at $65.75. Today the stock did trade above the $65 mark and the volume continues to be strong on this momentum play. Unfortunately, some investors were looking to cash in some profits late this afternoon and ALD closed on the negative. Remember, don't look for a homerun here. Confirm direction, grab a couple points, and get out. CTXS $47.00 +1.56 (+4.37) The stock has performed well since Sunday's newsletter. CTXS broke its proximate resistance at $43-44 on Monday with a $2.81 advance. Even today its low was above yesterday's closing price by half a point. The market momentum is certainly one factor driving this stock and the other is those coveted "buy" ratings. On Monday, Lehman Brothers and Hambrecht & Quist both reiterated their "buy" position on CTXS. Also, Michael Stanek, analyst for Lehman Brothers, set a 12-month target price of $63. Now the only opposition standing in the way is the barrier at $53.75 - its 52-week high. Remember to watch the market direction and CTXS's volume as this is a straight momentum play. LU $60.13 +1.31 (+2.37) This stocks been a trooper the past two days making claims it can go higher. For one thing LU hasn't dipped below its closing price of $57.75 on Friday which is a positive sign. And today it broke through its support range of $57-58 and popped over its 10 dma at $59. LU still faces resistance at $62-63. Yesterday Lucent announced they are the first to develop a single-chip Internet telephone solution. This product will drop Internet phone prices from $250 to the $150 range. Also, Viatel will use Lucent's AllWave Fiber for its intra-city fiber links in Europe. NTBK $184.50 +14.00 (+19.50) There's a renewed interest in the Internet stocks and NTBK is on the top of the list. Yesterday the stock tacked on +5.50 points at the finish and today was even better. NTBK added on another $14 and topped out at a high of $187. The 3:1 stock split is this Friday and you should be out of your positions by then. Remember we never recommend holding over a split date. The rest of the week will likely be very VOLATILE and difficult to time because of the huge intraday swings. Good Luck for a successful play. TBH $101.00 -3.00 (+1.50) This ADR benefited from foreign interests yesterday according to the "Emerging Markets Highlights". The security gained +4.50 points and closed right near its daily high on moderate volume. Today the volume was again only moderate, but it dipped late in the afternoon with the DOW. Time will tell if it's forming new support in this $101 range. This is purely a momentum play and today's dip does offer a solid entry point. However, a conservative player will look for upward confirmation and stronger volume before initiating a new play. UNP $63.31 -2.69 (-3.69) The downgrade yesterday is putting this stock to the test. PaineWebber announced before the opening bell it had cut UNP from an "attractive" rating down to "neutral", yet offered no explanation. Just this Friday, UNP set a new daily high at $67. The trading has been heavy both days and with profit-takers demanding their share. The word on this play is now "caution". Consolidation is reasonable after the recent gains last week, but confirm direction before you open a new position. BRCM $92.69 +8.69 (+9.00) Yesterday BRCM traded almost flat on the day, gaining only $.31, but today it was up a whopping $8.69--over 10%. It sure helped to have analysts talk up Internet stocks like AOL and Yahoo. CSCO came out with decent numbers and a 2:1 stock split after the bell tonight, and that should help Internet-related stocks, too. Tonight BRCM will unveil its new technology that will enable 80% of today's enterprise networks to receive data at ten times the current speed at the NetWorld+ Interop '99 convention. Looks as if the stage is set for a continued rise in this stock. Beware of possible profit-taking after the big move today, however. BRCM is only a few dollars below its all-time high of $95.63, and could see resistance at that level. Above that is breakout territory. HWP $80.56 +.19 (+.62) The rally in HWP yesterday died in the afternoon and the big earnings run we hope to see in HWP remains elusive as HWP continues to tack on only small gains. It is not for lack of news on the company. H-P itself has been bombarding the news wires with a flurry of PR news releases, sometimes a half dozen of them in just a few minutes. They tout products, product awards, business alliances, and new technology developments. H-P is painting itself as less conservative than it has been in the past and ready to move into e-commerce and e-services in a big way. (Analysts agree with this picture.) The latest alliance is a pact between HWP, SAP America (a software company) and QWST (the # 4 long-distance company and another O.I. recommendation). Together these companies will offer SAP's software for accounting, billing, and human resource functions over Qwest's network. HWP will invest $500 mln in server hardware, software, and support services for its part of the deal, and will receive monthly fees in return. HWP also invested $20 mln in the Intel 64 fund--a fund of about $250 mln that will invest in smaller technology companies in an effort to shape the future of enterprise and Internet computing. H-P hopes its investment will pay off in benefits to its e-services plans. HWP reports earnings on Monday, May 17th. QWST $92.75 +1.25 (+2.62) QWST continued its nice move up both Monday and Tuesday. The company has entered a strategic relationship with SAP America and HWP that will make use of Qwest's high-speed network to allow SAP to offer business solutions over the Internet. HWP will be paid monthly to provide $500 mln worth of server technology and services. Qwest also says it has completed over 16,200 miles of its 18,500 mile U.S. network--the first nationwide fiber-optic network designed for Internet-Protocol applications and services. The network will be finished by June 30th. Qwst is riding the wave of the future, and its stock should continue to reflect that. EMR $70.94 +.06 (+.88) EMR motored steadily higher this week. After setting a new high Friday, it set another new high on Monday and then topped that today by reaching $71.94. EMR closed off its high, but its chart still looks beautiful and momentum is with it. Technicals are all positive, indicating a continued climb in price, always watch out for profit-taking in a stock that has moved up this many days in a row. COF $172.00 +6.81 (+6.69) COF finally shot out of the gate today as it began its split run. We recommended patience on this play and on Sunday we said any substantial move above $168 could indicate the beginnings of a split run. Today's low was $165.44 at the open and it traded as high as $174.38, before closing at $172.00. Volume was strong. Looks like this is it! Use trailing stops on this one to prevent losses should the inflation fears rear up again. COF splits 3:1 June 1st. Be sure to confirm both stock and market direction before starting a new play. PICK NEWS - PUTS ***************** BVSN $51.75 +.75 (+3.75) BVSN didn't show much energy today as the NASDAQ and Internet group powered ahead. The stock has struggled to post gains despite positive news and market sentiment. This stems from the technical weakness and the recent descent through the 50-dma. Traders are selling into the gains as they exit BVSN for momentum driven plays. No news this week worth mentioning. We look for the stock to start lower again with any weakness in the sector or NASDAQ. As we mentioned before, there isn't any clearly defined support until the 200-dma around $32. SEEK $53.88 +1.12 (+2.75) A rebound in the Internets has SEEK in the positive for the week. The stock moved up on both Monday and Tuesday as the NASDAQ rallied. But the gains it has posted have been light and one glimpse at the chart will remind you why it's on the put list. What we are seeing now is nothing more than a bounce after along drop. The rally is unconvincing with volume only half of the daily average. And we expect to see another assault on the 200-dma at the $45 level soon. MSPG $88.50 -1.25 (+.50) Mindspring continues to show weakness. After a brief opening rally, the stock turned lower on Tuesday despite the Internet strength. This is encouraging to us since AOL and YHOO are storming higher. Technical indicators are pointing to a continued decline as the stock is still far from any support. There is little news to trade on and the volume is slowing back down as investors are losing interest. Use the market opening rallies we've been seeing as an entry point and keep the stops set in case MSPG decides to participate with the sector. TBFC $99.06 +5.06 (+5.94) After quiet trading early this week, Telebanc made a statement with a mid-day rally on Tuesday. The stock had made little progress this week until it caught fire with the rest of the group today. The rebound took it to the top of the recent trading range but was unable to move higher. We expect resistance to hold near $100 if the current downtrend is to remain. That would mean this is a good entry point for anyone interested in opening a play on TBFC. But with others in the group (COF) at new highs, we urge caution as the industry strength may take TBFC along for the ride. FNM $72.88 +.25 (+.75) FNM is still sitting at the upper range of its channel, as the stock rose Monday, and stayed about even on Tuesday. Tuesday did bring a lot of volatility in FNM, as the stock traded from $71.88 to $73.81. We still feel the stock is within a channel, but don't try to guess the top. Wait for the stock to start a downturn, before buying puts. We don't need to catch the whole move. LVLT $88.50 -0.19 (0.00) Now accepting the stand-still award of the week. . . LVLT! Seriously, volume here (thus buying pressure) is really low. There is simply no investor interest in LVLT right now. It means too there are no sellers itching to get out either. LVLT has been in a rolling pattern between $90 and $83. Technically, we expect a fall back to remain consistent with the cycle. That said, keep your eyes open for a breakout over $90 that would effectively put the kibosh on this play. Wait to see some selling volume once the price rises to $90 (or higher). This is a tricky play but can be a profitable one of we can get a good entry. Confirm the market direction before starting this play. NEW CALL PLAYS *************** EMC - EMC Corp. $107.25 +6.31 (+9.94 This Week) EMC can emcee your memory. EMC is the #1 maker (ahead of IBM) of mainframe computer disk memory hardware and software. The company makes RAID (redundant array of independent disks) memory storage and retrieval systems for larger mainframe computers as well as desktop PCs. EMC markets its memory products under the name Symmetrix. Other products let users manage remote data and share information across networks of different computers. EMC continues to broaden its product portfolio, strengthen alliances, and expand its global presence to create more platform-independent systems. (from Hoovers) We are adding EMC back to the call list. The stock has been very strong this week, and we feel the negative impacts of losing some business with Hewlett Packard is over. The stock has filled a bearish gap created in early May, and we feel the stock will have a nice split run. The split is scheduled for June 1st. EMC is well off its high of $134.94, obtained in early April. With the NASDAQ making a move and a split ahead, EMC should make up a good portion of its recent losses. You may want to look for a dip (may be intraday) before jumping into this one. BUY CALL JUN-105 EMB-FA OI=1015 at $10.13 SL= 7.75 ITM $2.25 BUY CALL JUN-110*EMB-FB OI=1984 at $ 7.75 SL= 5.75 BUY CALL JUN-115 EMB-FC OI= 886 at $ 5.88 SL= 4.25 BUY CALL JUL-110 EMB-GB OI=2466 at $10.88 SL= 8.25 Picked on May 11th at $107.25 PE = 54 Change since picked +$ 0.00 52 week low =$ 40.19 Analysts Ratings 10-5-2-0-0 52 week high=$134.94 Last earnings 04/99 est 0.40 actual 0.41 Next earnings 07-22 est 0.48 versus 0.36 Average daily volume = 4.95 mln Chart = http://quote.yahoo.com/q?s=EMC&d=3m NEW PUT PLAYS ************** NONE TODAY COMBINATION PLAYS ****************** Rise In Bond Rates Plagues The Market... Monday, May 10 U.S stocks were mixed Monday, as the technology sector rebounded on bargain hunting while blue chips fell further on concern over the recent jump in bond interest rates. The Nasdaq index of high tech stocks was up 22 points to 2,526 while the DJIA ended down 24 points at 11,007. In the broader market, advancing issues led declines 17 to 13 on active trading of 767 million shares on the New York Stock Exchange. Sunday's new plays (positions/prices): TX JUN70C/MAY70C $1.50 debit (premium was gone at the open) UCL OCT45C/MAY45C $2.50 debit (easy entry at target price) MACR JUN40C/MAY40C $1.87 debit (slightly less than target) TXN MAY115C/MAY90P $2.25 credit (possibly $2.38 at 9:55 am) KMT SEP30C/SEP30P $6.50 debit (call side was overpriced) Portfolio plays: TX was our big-play candidate but those hopes faded with the option disparity at the open. The stock gapped-up almost $2 but the May-$70C deflated immediately. We were unable to achieve a debit anywhere near the target price and NO PLAY was initiated. However, we will track the play at the higher debit to observe where the stock price finishes. The UCL spread did allow a favorable entry and that position should move similar to TX. AOL jumped almost $10 and AEOS is also trending up; both of these credit spreads appear safe for now. The PZL debit straddle is $1.50 ITM after only two weeks and you may consider taking that profit rather than holding the position for higher, long-term gains. Tuesday, May 11 The Dow closed with only a slight gain Tuesday after a volatile session driven by nervous investors concerned about the rise in bond interest rates. The Blue-chip average was up 18 points at 11,026, erasing a 100 point gain earlier in the day. The Nasdaq rebounded again, moving 40 points higher to 2,566 as Internet stocks continued to resurface from recent lows. In the broader market, advancers led declines 17 to 12 on active trading of 841 million shares on the NYSE. Portfolio plays: BRCM moved $8 higher and the profit for that play is now $3.25. We suggest you consider closing that position for an excellent two-week return. WCII also climbed $6, moving the debit spread to a $1.25 profit. MACR moved through some previous resistance at $45; we are watching that one closely to determine if a roll -up will be necessary. Quantum announced today it would acquire Meridian Data, a network-storage company for approximately $85 million to expand its storage business. The stock price actually moved higher, finishing almost exactly at the sold strike. We will watch this one closely as the merger arrangements unfold. Good Luck! ray@OptionInvestor.com NEW PLAYS ********** The Russell 2000 is showing signs of strength and has started a new upleg with the small-cap stocks outperforming the blue chip cyclicals and the high-profile tech issues. The recent concerns about the market's lofty perch has convinced us to try some plays on lower priced stocks. ********* OMX - Office Max $11.25 *** On The Rebound? *** OfficeMax operates 852 full-size superstores in over 360 markets in the United States, Puerto Rico and the U.S. Virgin Islands. The company also features in-store units CopyMax & FurnitureMax, devoted to print-for-pay services and office furniture. Through joint venture partnerships, OfficeMax currently operates a total of 18 international locations in Japan and Mexico, and expects to launch operations in Brazil this year. In addition, they have 18 delivery centers throughout the United States to serve catalog and direct marketing businesses. OfficeMax.com on the Internet, enables individual consumers and businesses to buy merchandise online. Today the stock priced surged as the company announced that Q1 earnings jumped 27% from the prior year. The improvement may be the result of their focus on enhancing gross profit margin with a better product assortment and the reduction of their computer promotions. The company previously suffered in this low margin business from spending too much money in an attempt to boost PC sales. Their sales increased but profits didn't because computer prices continued to decline. Now they have moved to a new plan, achieving gross profit improvement for the ninth consecutive quarter over the same periods in previous years. The company has the proper merchandise strategies in place to continue growing. They also announced the hiring of a retail consulting firm; Kurt Salmon Associates. OfficeMax hopes to get some new ideas that can improve performance quickly. These initiatives will be in addition to longer-term programs such as the implementation of SAP software and a new supply management system that is already underway. Today's move should help us gain a favorable entry into a long term speculation play with minimal risk. PLAY (conservative/calendar spread): BUY CALL SEP-12.50 OMX-IV OI=624 A=$1.18 SELL CALL MAY-12.50 OMX-EV OI=39 B=$0.25 INITIAL NET DEBIT TARGET=$0.81 TARGET ROI=100% Chart = http://quote.yahoo.com/q?s=OMX&d=3m ***** USWB - USWeb/CKS $26.31 *** A Recent Fall From Glory! *** USWB is a professional services firm that works with companies to define strategies and implement innovative ways to build their businesses by strategically combining Internet technology and marketing communications. USWeb/CKS helps clients differentiate their products and services, strengthen customer relationships, leverage human capital, and improve business efficiency in the new digital economy. USWeb/CKS has helped hundreds of businesses advance their marketing communications programs with everything from brand development and advertising to process automation and e-commerce solutions. One of the biggest upcoming tasks for USWB will be the venture with E*OFFERING to create a dynamic interactive web site for the new online bank's customers. USWeb/CKS is working with E*OFFERING to construct an internet service where investors will be able to conduct market and industry research, and receive alerts on IPO's. USWeb/CKS is developing systems and site features including the technical foundation, user interface and database logic. They are also seamlessly integrating E*OFFERING's site with E*TRADE Group. USWB was selected because of its ability to converge technical, creative and consulting capabilities necessary in building a compelling and engaging commercial web site. The site will be launched in June and that should bring some new attention to the company. Today, Prudential Securities initiated coverage of USWeb with a "Strong Buy" rating. We think this is a good opportunity to enter a low risk position on a great company. PLAY (conservative/debit spread): BUY CALL JUN-22.50 QWB-FX OI=115 A=$5.87 SELL CALL JUN-25.00 QWB-FE OI=417 B=$4.12 INITIAL NET DEBIT TARGET=$1.50 ROI(max)=66% B/E=$24.00 Chart = http://quote.yahoo.com/q?s=USWB&d=3m ***** PRD - Polaroid $23.62 *** A Picture Is Worth... *** Polaroid Corporation is the worldwide leader in instant imaging. They supply instant photographic cameras and films; digital imaging hardware, software and media; secure identification systems; graphics imaging systems; sunglasses and polarizers to markets worldwide. In mid April, Polaroid announced mediocre earnings, meeting the analysts estimates but failing to prove any short-term growth had occured. The first quarter is traditionally the period in which Polaroid's revenues and profits are the lowest. The company was able to reduce its operating loss from the first quarter of 1998 to the first quarter of 1999 largely because of the lower costs resulting from the company's restructuring. They are now focusing on revitalizing core business profitability and increasing revenue growth with new products. In this quarter, worldwide shipments of cameras rose 30%, compared with the first quarter of 1998, led by the instant pocket camera and the JoyCam & Hipparay. Japan is leading the new product drive with nearly four times as many cameras shipped as those of the first quarter of 1998, and film unit shipments there were up in the low double digits compared with the same period a year ago. Today, Polaroid declared a regular quarterly dividend of $0.15 per share on the company's common stock for shareholders of record at the close of business on May 28, 1999. PLAY (conservative/debit spread): BUY CALL JUN-20.00 PRD-FD OI=27 A=$3.50 SELL CALL JUN-22.50 PRD-FX OI=244 B=$1.75 INITIAL NET DEBIT TARGET=$1.50 ROI(max)=66% B/E=$21.50 Chart = http://quote.yahoo.com/q?s=PRD&d=3m ****************************** SEE DISCLAIMER IN SECTION ONE ******************************
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