The Option Investor Newsletter Thursday 6-03-99 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) ************************************************************ 6-01-99 High Low Volume Advances Decline DOW 10596.30 + 36.60 10597.50 10409.10 685,304k 1,404 1,558 Nasdaq 2412.03 - 58.49 2470.53 2411.97 743,199k 1,674 2,211 S&P-100 654.21 - 4.45 658.69 647.99 Totals 3,078 3,769 S&P-500 1294.26 - 7.58 1301.74 1281.49 44.9% 55.1% $RUT 437.46 - 1.22 439.05 435.13 $TRAN 3466.60 + 50.90 3474.07 3414.04 VIX 27.60 + 1.22 29.32 27.42 Put/Call Ratio .52 ************************************************************* Amazon bombs Internets and Merrill Lynch scuttles Internet brokers. What a difference a day makes! Friday things were looking up and expectations were high for the Internet stocks and the market in general. Today was a nightmare for most investors as every sector was systematically destroyed with laser guided precision. First, Barrons, not content with their previous slam article on Amazon two weeks ago, featured them in their new cover story as the "Amazon.bomb". Not only did they bomb the price of AMZN stock but all other Internet stocks as well. We all know that as a leader goes so goes the sector. The hatchet job was an in depth rebuttal to the heat they got two weeks ago with their last Amazon article. Seventeen of the twenty three brokers that follow Amazon rate it a strong buy or buy. Barrons had taken some heat dished out by these brokers as each reiterated their recommendations after the last article. Proving the pen is mightier than the recommendations they again clobbered Amazon and Amazon CEO, Jeff Bezos. Calling Amazon grossly overvalued and worth only $10 per share, they indirectly called into question the value of other Internet enterprises. AMZN dropped -13 to lead the entire sector lower. I guess slams like this is why they call the publication "Bear-ons" instead of "Bull-ons". Second, Merrill Lynch, the 800lb gorilla of the brokerage sector, announced they were reversing a previous decision not to enter the Internet broker war. With commissions over $300 for a stock trade, the drop to discount broker status and $29 trades was strongly resisted. With Etrade now boasting over 1 mln accounts, and many of those accounts came from Merrill, and other web brokers doing the same, the handwriting was on the wall. Join the battle or continue with shrinking revenues. Now that the battle is joined the sector rankings are up for grabs. Merrill has vast resources and name recognition not available to the other web brokers. With $29 trades, or a $1500 annual trade all you want fee, they will be a tough competitor. Merrill has research and other services available that other Internet brokers can never hope to match. Merrill dropped -8.75 on downgrades related to revenue worries. Some analysts feared the drop from $300 commissions to $29 trades would put pressure on revenue and I can see why. The cannonball into the Internet broker pond swamped the rest of the brokers as the expected competition could hurt their growth as well. EGRP -5.19, AMTD -9.94, NDB -4.31. On a side note, EGRP announced the purchase of Telebanc (TBFC) today for $1.8 bln to give them a foothold in the Internet banking arena. While this may be a good idea in their mind I question $1.8 bln for a bank with 60,000 customers. Wells Fargo for instance has almost 1 mln online customers and expects to have 3 mln by next year end. BancOne is moving fast to capture this market as well as dozens of others. While analysts feel Etrade will gain 6-9 months over its rivals, it had to give up 13% of its stock in the deal. We were going to drop EGRP tonight but after I read all the press back several weeks I think this may be a real buying opportunity. The Merrill announcement did cloud the water but it is entirely possible that EGRP will rise above the sector backlash simply because of their new acquisition. I would not start a new play on EGRP until it shows some strength but coming off a stock split last week and the Merrill whammy we could be near it's low. EGRP has strong support at $30 but I do not see it going that far if the market in general holds steady. As if the above was not enough the same analyst that torpedoed Dell recently, took aim at Nasdaq heavyweight Intel. BancBoston analyst Niles, said that he feels the product mix is shifting at Intel and is being weighted toward the cheaper, lower margin, products. His estimate of $.53 for Q2 is already the lowest on the street and he is now contemplating something in the $.50 range. He feels Intel will miss their numbers next quarter and may even warn. Intel dropped -3.38 in heavy trading. Banc America analyst, Kurt King, took aim at the tech sector today with downgrades on HWP and SUNW. He cut them to a hold from a buy. His basis was an internal survey of 50 executives in charge of information technology at a "cross-section" of U.S. companies. Half of these executives expected to spend less this year than last in the fourth quarter. His survey showed a fall off in spending for I.T. due to Y2K changes already completed or almost done. He also cut estimates for CPQ and DELL but maintained a "buy" rating on both. But wait, we are not done yet! After the close today American Home Products kicked off the earnings warning cycle with a whopper. They said they would miss 2Q earnings by $.07 to $.11 and the stock took another -$4 dive after hours in addition to the -5.63 regular day trading loss. This warning may ripple the markets for several days as investors are shocked back to reality that real companies must still report real earnings next month to maintain the current rally. Still not done with the bad news. Remember last week when the Chicago Purchasing Managers report showed lower prices paid and the market rallied on the hope that the NAPM (national) report today would also show slowing inflation? April fools became June fools today as the NAPM report showed the first rise in prices for raw materials in 16 months. The prices paid index jumped from 49.9 in April to 52.2 in May and sparked new worries that inflation and interest rate increases were right around the corner. If that was not bad enough two Fed heads spoke today and both alluded to an interest rate hike soon. Several strong rumors raced through the markets that the Fed may move in a pre-emptive strike BEFORE the next FOMC meeting on Jun-29th. The interest rate worries drove the bond yields even closer to the 6% crisis level, closing today at 5.93%. The financial sector was not immune from downgrades today either. JP Morgan was downgraded on Y2K concerns with the analyst citing an expected drop off of business as the year progresses. The sector was rocked for losses across the board. Not every sector suffered. Since we picked several cyclical stocks that had fallen out of favor for puts on Sunday, one enterprising analyst from PaineWebber upgraded Georgia Pacific to a buy and said good things about the sector. Cyclicals soared on the news with GP adding +8.44. Yes, $8.44, and not an Internet stock. The real question now is can they hold it. The cyclicals pulled the DOW back from a -145 loss at midday to a +36 gain at the close. This was not a good day for our new recommendations. Almost every stock we recommended as a new play on Sunday was trashed by an unforeseen downgrade or news event. Fortunately they all happened before the open today and not tomorrow after everyone had a chance to start a new position. If you follow our advice and wait for a positive market with positive advancers and positive sectors then today was a non-event. Your cash should still be burning a whole in your pocket. While we are dropping MWD until the smoke clears, we are maintaining the cyclical puts. We do not feel the cyclical spike from today will hold. Do not start new plays until they actually roll over! The markets in general look weaker today than Friday but I am not running for the hills yet. The Nasdaq got hammered by the Internet reaction to the Amazon.bomb and the Dow got hammered by the HWP downgrade, IBM following suit and the JPM downgrade. The cyclicals held it up to allow us to get over the initial reactions. The outcome tomorrow will be on the quantity of bargain hunters we see come into the market. If the interest rate worries continue then we could see some more weakness as traders wait on the sidelines. Many now think a rate increase at the June meeting is already priced into the market and they wish the Fed would just "do it" and get the uncertainty out of the way. The wildcard is of course the earnings warning from AHP. If this sets the tone for tomorrow then look out below. We still have not hit my 10,300 bottom for the DOW but have now twice brushed the 10,400 level. Since we closed at almost 10,600 today I would hope 10,500 holds as new support and we do not retest below that again. Cash is good right now and I would not rush back into the market until we get confirmation of the rally continuing. Remember, the last two times we got multiple days of 200 points swings back should not have to be repeated over and over to be learned. While the daily chart shows a definite slide the 10 day may be showing a new bottom forming at 10,500. Wait for confirmation above 10,600. The Nasdaq has tested sub 2400 levels twice in the last three months. After closing at 2412 today we are right at the pivot point. If the Internets can recover then it should be up from here but the keyword is "IF". The Internet drop today blunted the three day rally but we are sitting near the bottom of our recent trading range. Definitely, pick your entry points carefully and sell too soon until a new direction is established. Jim Brown Editor ********************************************** HOT NEW Summer Seminar Series for OIN readers ********************************************** Wow, what a response! We knew our readers would like the new seminar series but we were still surprised at the response. Some questions we received we thought deserved an answer here. No, we do not have any seminars scheduled other than those listed here. By strategically placing them around the country we hope you can find one close to you. Yes, if multiple readers sign up at the same time, such as one of the option discussion groups, you can get a discount. We had one group of twenty already inquire. Yes, you can retake the course as many times as you want for FREE! There is a 100% money back guarantee if you are not satisfied. No, this is not the same material we taught at the last seminars. George has integrated the best from OIN into his own options course to provide the best education available. Here are the details again in case you missed it on Sunday. As part of the new alliance with George Fontanills, OptionInvestor.com is presenting a new series of in-depth option training seminars to be taught by George Fontanills. George has two options training books on the Amazon.com top ten list. He has been teaching options trading since 1993 and is the pioneer of the delta neutral approach to trading options. His nationally known Optionetics Course is state of the art. We are very pleased to have George teach our readers how to maximize their returns. Seminar Schedule June 21 & 22 BOSTON /Crown Plaza June 27 & 28 LOS ANGELES / Burbank Airport Hilton July 18 & 19 DALLAS / Airport Marriott July 25 & 26 SAN FRANCISCO / Crown Plaza THE COURSES ARE LIMITED TO 100 PERSONS PER EVENT !!!!! In the past our seminars have filled up quickly and we expect these to be the same. If you are tired fighting the market and are ready to step up to the next level then we strongly suggest you attend. There is a full money back guarantee and we will allow you to retake the seminar for free as many times as you feel necessary to grasp and implement all the techniques taught. People fly from around the world to hear George speak and you can have two full days of personal attention at the OIN seminars. Go here for details We guarantee you will not be disappointed! Jim *************** Market Posture *************** As of Market Close - Tuesday, June 1, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,000 10,596 Neutral 5.28 SPX S&P 500 1,325 1,360 1,294 BEARISH 5.25 OEX S&P 100 660 690 654 BEARISH 5.25 RUT Russell 2000 435 450 437 Neutral 5.28 NDX NASD 100 2,100 2,250 2,026 BEARISH 5.25 MSH High Tech 1,000 1,100 994 Neutral 5.28 XCI Hardware 900 920 847 BEARISH 5.20 CWX Software 600 675 668 BULLISH 5.28 SOX Semiconductor 390 420 376 BEARISH 5.25 NWX Networking 450 490 522 BULLISH 4.22 INX Internet 550 650 470 BEARISH 5.20 BIX Banking 700 720 660 BEARISH 5.18 XBD Brokerage 450 475 412 BEARISH 5.21 IUX Insurance 645 660 636 BEARISH 5.25 RLX Retail 900 970 860 BEARISH 4.29 DRG Drug 390 425 358 BEARISH 4.29 HCX Healthcare 780 850 727 BEARISH 4.29 XAL Airline 180 210 169 BEARISH 5.21 OIX Oil & Gas 285 310 291 Neutral 5.13 Posture Alert Interest rate worries sparked by key economic indicators led to a sharp decline in the High-Tech and Internet sectors while Cyclical stocks led an afternoon rally in the Dow. A detailed description of our Market Posture and its applications can be found at: members.OptionInvestor.com/marketposture Market Sentiment Pinnacle Capital Advisors ************************* Strap on Your Seatbelts After Friday's pre-holiday rally, investors thought it was clear sailing ahead Tuesday, with S&P Futures showing some strength off the open. However, many investors buying off the open were not very happy once the NAPM came out with their figures. Their numbers shook up the bond market, and the feeling is that the Fed will have to raise rates. With the 30-Treasury once again nearing 6.00%, any other negative economic indicators that surface, will likely cause a panic, so buckle up and be prepared. Pinnacle Capital Advisors has been alerting investors about all the bearish signs that this market has been hinting at. The Pinnacle Index has been clocking in at 6.7, which suggests that option speculators are expecting the market to advance higher. When you combine this stat with the fact that interest rates are rising, and optimism is running rampant, you have recipe for disappointment. Pinnacle has been advising its clients to resist the temptations of buying this dip and wait until certain market internals find support levels. The next couple of months are historically quiet for technology companies and if the FED accelerates its interest rate hike which seems more likely than ever, the broad market may come under continued pressure. Mixed Signs: Market Volatility (VIX): Trading at its 50-day moving average (26.35). Next move above or below key benchmark will likely determine market direction over the near-term. Advance/Decline Line: After flattening and rolling over last week, the A/D line is beginning to check up and could prove Bullish if advancers can out pace decliners in the week ahead. Russell 2000: Climbed back above the key 435 benchmark. The small cap stocks are beginning to show strength just above its 50/100 day moving average. BEARISH Signs: Investor Intelligence: As a contrarian indicator, the percent of Bullish investors spiked from a week ago suggesting Bullish sentiment is picking up steam and investors are ignoring the selloff. Interest Rates: Trading ABOVE 200dma and 5.50 Benchmark (5.936%). Pinnacle Index: Overhead resistance (OEX 680-750) clocking in at 6.7 suggesting that option speculators are expecting the market to advance higher. Peak Open Interest: The contraian put-call ratio clocking in at .86 suggesting bullish sentiment picking up steam. OTM Call Analysis As we move through June'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) 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% Friday, May 14 97,861 +218.8% Friday, May 21 115,336 +275.0% June Expiration Cycle OEX OTM Call Analysis (Open Interest June 680-750) Friday, May 28 53,502 - Tuesday, June 1 53,293 -.4% Market Sentiment at a Glance Friday Tues Thurs Indicator (5/28) (6/1) (6/3)Alert ******************************************************************** Pinnacle Index (OEX): (680-750) 6.8 6.7 Overhead Resistance (680-700) 3.7 3.5 Underlying Support (645-660) 1.3 1.2 (510-660) 3.8 3.7 Put/Call Ratios: CBOE Total P/C Ratio .6 .5 CBOE Equity P/C Ratio .5 .4 OEX P/C Ratio .8 1.2 Peak Open Interest (OEX): Puts 650 650 Calls 670 670 P/C Ratio .82 .86 * Market Volatility Index (VIX): CBOE VIX 26.38 27.92 * Investors Intelligence: Bullish 60.9% 60.90% * Bearish 28.7% 28.70% * 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 Benchmark (5/28) (6/1) ************************************************* (680-750) 6.8 6.7 Overhead Resistance (680-700) 3.7 3.5 OEX Close 658.66 654.21 Underlying Support (645-660) 1.3 1.2 (510-660) 3.8 3.7 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 Strike/Contracts (5/28) (6/1) CBOE Total P/C Ratio .63 .54 CBOE Equity P/C Ratio .50 .41 OEX P/C Ratio .83 1.24 Peak Open Interest (OEX) Puts 650 / 10,950 650 / 10,967 Calls 670 / 12,700 670 / 12,750 Put/Call Ratio .82 .86 VIX Market Volatility 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 May 21, 1999 25.36 May 28, 1999 26.38 June 1, 1999 27.92 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 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Tue Week Dow 10596.26 36.52 36.52 Nasdaq 2412.03-58.49 -58.49 $OEX 654.21 -4.45 -4.45 $SPX 1294.26 -7.58 -7.58 $RUT 437.46 -1.22 -1.22 $TRAN 3466.60 50.90 50.90 $VIX 27.92 1.54 1.54 Stock Tue Week SONE 40.38 2.00 2.00 Strong even in a weak market ADPT 31.94 1.06 1.06 Reached a new 52 week high BMCS 49.50 0.06 0.06 Continues to show strength BVSN 51.88 -0.13 -0.13 Less expensive to play the Net FNM 67.31 -0.63 -0.63 Formed a new alliance SLR 54.06 -0.69 -0.69 Earnings on June 14th MEDI 62.88 -0.75 -0.75 Wait for the selling to end BGEN 108.06 -1.06 -1.06 Analyst price target at $146 ABOV 32.13 -1.13 -1.13 Catching the eye of some brokers LXK 134.69 -1.44 -1.44 Splits June 10th LGTO 53.25 -1.50 -1.50 Technical chart still positive PVN 93.50 -2.38 -2.38 Relatively small profit taking CUST 56.25 -3.75 -3.75 Confirm direction and use stops HWP 90.13 -4.19 -4.19 Will begin selling online MWD 91.75 -4.75 -4.75 Dropped, affected by MER's news EGRP 39.31 -5.19 -5.19 Buying opportunity EBAY 166.50-10.69 -10.69 Fell in sympathy to Amazon Puts INTC 50.69 -3.38 -3.38 New, weak due to profit concerns CVC 76.00 -2.88 -2.88 New, dipped below its 50 dma ABF 25.38 -0.50 -0.50 Seventh down day in a row EK 67.13 -0.50 -0.50 Still dropping TBH 83.00 -0.50 -0.50 Continued Brazilian uncertainty UNM 53.88 0.06 0.06 Insurance sector weak again MEA 39.31 1.94 1.94 Paper producers rallied Tuesday IR 65.88 2.19 2.19 Cyclical relief rally? IP 52.75 2.75 2.75 Made a technical bounce CLX 103.88 2.94 2.94 Use caution, pick entry carefully DOW 126.44 4.94 4.94 Cyclicals surprise upgrade **************** 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: ****** MWD $91.75 -4.75 (-4.75) On Tuesday, MWD headed lower from the get go as the financials were hit again in trading. Fears of an interest rate hike continued to haunt the sector. News from Merrill Lynch (MER) also appeared to add fuel to the fire. MER announced that it will offer online trading to its customers. The financial stocks reacted poorly to the news as many investors seem to feel that the increased competition will impact profit margins. Even though MWD could have some strong support around $90-$91 and bounce back up, we have to drop this brokerage for the time being. Merrill's move does not strengthen the position of traditional brokers while it casts a huge shadow of competition on those brokers in the online industry. PUTS: ****** None ***** 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. You may also fax the information to: 303-797-1333 ************************************************************* DISCLAIMER ************************************************************* This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Tuesday 6-1-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ****************** PICK NEWS - CALLS - cont ****************** MEDI $62.88 -.75 (-.75) We told you in Sunday's letter to expect MEDI to pause for a day or 2 following 5 up days in a row. It did. After opening higher today, MEDI slipped to just over $62 and hovered there all day until 2:45. Investors realized they weren't going to get any more of a dip today and a small flurry of buying sent the stock to $65.56 before it dropped in the last few minutes of trading to $62.88 on light volume. Wait for the selling to end before taking a new position. No new news. PVN $94.00 -1.88 (-1.88) After gaining $12.50 in the previous 2 trading sessions on multiple upgrades, a loss of $1.88 today on profit-taking was relatively small. Volume was fairly strong, however, and there were also 2 other reasons for the drop. First, was the heightening of interest rate fears today. Second was an article in the San Francisco Chronicle (picked up by Reuters) quoting several current and former employees of PVN who portrayed the company's business practices in a negative light, even if those practices were not technically illegal. PVN caters to poor credit customers, and has been accused of charging higher than normal fees and duping customers into buying unneeded insurance and other services. PVN says it will refund money to any customers who were not completely satisfied or who felt pressured to buy add-on products they did not want. One analyst suggested that selling today was merely investors who were stung by the recent plunge in stock price grabbing the first opportunity to get out, and that the stock should continue to recover in price. Look for upward momentum on good volume before starting new positions and keep an eye on inflationary pressures with this interest sensitive stock. LGTO $53.25 -1.25 (-1.25) The market and the sector did not go in our favor today, so we should not have started a new play here. Target shooters may have thought differently, and used today's weakness as a buying opportunity. That LGTO's volume was only 60% of average tells us that nobody was running for the exit. The technical chart is still deep in the positive (see Sunday's full write-up for details). Though this looks like a buying opportunity, market and sector weakness, downgrades, or just plain bad news can torpedo this play quickly. Again, confirm market direction before playing. SLR $54.06 -0.69 (-0.69) We noted Sunday that sellers had already done their damage. Further evidence came today as SLR flew under the radar and was missed by sellers trying to down the high-flying (just barely) Internet and Technology issues. At the end of the day, SLR had lost only $0.69 on 56% of normal volume. If the market gives us a break, SLR could start a small earnings run up to its announcement on June 14. Don't chase. . .let SLR come to us. We want to see an up market, sector and stock before we start the play. No news to report today. HWP $90.13 -4.19 (-4.19) With little fanfare, HWP announced that it will begin selling its products online with the expectation that 15% of its business customers will use the site initially. Within a few years, it expects that more than a third of its business and retail sales to come over the Web. A month ago, this would have been greeted with euphoria. Not today. HWP was pounded for (get this!) "concern that customers will cut spending later this year because of the Year 2000 computer glitch" (Bloomberg). Bank of America Securities analysts must have acquired keen powers of logic over the long weekend to come up with this scoop, as they downgraded HWP, along with SUNW, to "hold". Lemmings promptly followed their lead by trading 16% greater than average volume on an otherwise slow day. Technically, today's action (or lack thereof) makes the chart look slightly weak. Dumb as we think this analyst's call is, it is the market we are forced to deal with. It's not right or wrong, it just is. To that end, we must keep a cool head, confirm market direction and use stops to protect ourselves in just such cases. Sometimes the market just doesn't cooperate. BMCS $49.50 +0.06 (+0.06) BMCS continued to show strength in the face of a nasty Tech slide today. The average Software & Services company lost 1.87%. BMCS only traded below its opening price of $49 briefly. The stock reached a high of $50.19. BMCS is at its highest level since early December of 1998. BMCS also has a PE ratio about 40% below the industry average. Though BMCS has held strong, wait for confirmation from the market to initiate new plays. The market is in a state of flux so buying blindly can be very dangerous. Support for BMCS is about $44.00. BMCS did seem to form a small base around $49 intra-day today. FNM $67.31 -0.63 (-0.63) FNM had an interesting day. With the concerns of possible interest rate hikes, FNM sunk to the bottom if its channel. The good news is that this level held once again. By the end of the day, FNM had come back over a $1 from its lows. We get different news every day on things that will effect the Fed.'s decision. We still like FNM going forward as a channeling stock. In the news, Resource Bancshares Mortgage Group, Inc. announced today that it has entered into a strategic alliance with Fannie Mae. Under this alliance, the company will allocate a substantial portion of its conforming conventional production to Fannie Mae over the next two years. LXK $134.69 -1.44 (-1.44) LXK had a bit of a struggle today and closed down, but did come back $1.69 off its lows of the day. LXK seems to have formed a bit of support at the $133- $134 level. Even though LXK has a stock split on June 10th, we still need to be careful about buying new calls. A split usually helps a stock rise, but a split will not override a down turn in the market. LXK is prone to move big when it moves, so wait for confirmation of a new move up. SONE $40.38 +2.00 (+2.00) SONE had a very strong gain today, even with the negative market environment. SONE reached an intra-day high of just under $42 before succumbing to the markets pressure. SONE is a stock that benefits from the move of financial institutions from brick and mortar to the Net. The announcement today of E*Trade's purchase of Telebanc has brought new excitement to the Internet financials. This will bring more buyers to companies that help these on-line banks become established. SONE fits this description. BVSN $51.88 -0.13 (-0.13) BVSN traded virtually flat today, as the stock lost just $.13. This should be considered a positive, since BVSN's sector lost just under 2%. BVSN has a consensus 5-year growth rate of close to 55%. We view this stock as a less expensive way to play the Internet. BVSN's next earnings are estimated at increasing 267%. As always, make sure of market direction. Even a great stock will be hit in a down market. There is slight support at $47.50, but we hope it doesn't come into play. Remember, BVSN was trading at $70 just over a month ago. EBAY $166.50 -10.69 (-10.69) EBAY was hit with many of the E- tailors today. We can blame it on Barron's. Barron's ran an article that pretty much tore into Amazon. The magazine believes that Amazon is way overvalued and has a long ways to drop. The writer obviously didn't like Amazon's business model. CNBC had many analysts disagree with the article, but it still took its toll on Amazon, and in sympathy, EBAY. EBAY did close off of its lows and still could bounce strongly when the market decides to move up. When looking at a chart of EBAY, we see a consolidation taking place. We mentioned many times in the newsletter this weekend that we feel the Internet's are at a bottom. We still feel this way, but we need to be patient and wait for confirmation. EBAY should respond well after the news is played out. ADPT $31.94 +1.06 (+1.06) ADPT had a strong day in a down market. ADPT reached a new 52 week high and is trading higher than it has since late 1997. The stock closed right on its high of the day and technicals are showing some positive buying pressure. ADPT's PE ratio is about 10% lower than its industry, yet it still has a consensus 20% growth rate. Earnings are expected to come in at $.38 compared to $.10 same time last year. We like this stock going forward. There isn't any resistance and support is about $29.50. ABOV $32.13 -1.13 (-1.13) In early trading on Tuesday, ABOV popped up and resumed the uptrend it established last week. Some brokerage comments may have been behind the strength. Lehman Brothers upgraded the stock to a "buy" up from the previous "outperform" rating. Kaufman Bros. initiated coverage of ABOV with a "buy" also. However, the down markets forced ABOV to give back those initial gains almost immediately. After reaching as high as $35.38 in the first hour of trading, ABOV turned and headed back south for the rest of the day. We feel that ABOV still has the potential to head higher if the Internets can rebound. As always, it is extremely important to wait for the proper entry point. The Internets remain as volatile as ever. However, ABOV has been one of the companies to show relative health in light of the fact that the markets and Internet sector remain shaky. EGRP $39.31 -5.19 (-5.19) EGRP announced this morning that they would acquire Telebanc, an Internet bank, in a stock transaction valued at $1.8 bln. "Someday, we'll all bank this way?" If the stock gets beat up like EGRP did today, we hope not. Anyway, the drubbing EGRP took was probably a result of general Internet weakness stemming from a Baron's piece on AMZN, where AMZN was referred to as "Amazon.bomb". Poor sector equals poor stock. Of course, Merrill Lynch's announcement that they would enter on-line trading also had some effect in causing investors to shun EGRP, as some supposed that Merrill, the 800 lb. gorilla might recapture some of the business it had previously lost to Internet brokers. EGRP basically got caught in a 1-2 punch with both AMZN and the MER news. While the selling was a bit overdone, it happened on strong volume, which doesn't look good. So we are putting EGRP on the "probation" list. The probation list is kind of like the injured list. Our player (EGRP) is too beat up to play but too good to throw away. The probation list also means we do not recommend any new option positions on this stock until we have a better clue as to what direction it is headed. From what we can see so far... this looks very oversold and $39 should be the bottom. Only time will tell. ***************** PICK NEWS - PUTS ***************** IP $52.75 +2.75 (+2.75) Today we saw the rally we cautioned about on Sunday. The stock had moved down so quickly last week that it made a technical bounce. There was talk by traders that it was oversold last week. Also weakness in the technology sector helps IP as it is considered a defensive play. The main catalyst though was an upgrade for Georgia Pacific that spurred buying in the entire cyclical group. It will interesting to see if all these factors have worn off by tomorrow since they aren't that substantial. Confirm market direction before playing. IR $65.88 +2.19 (+2.19) Ingersoll-Rand participated in the cyclical relief rally today after the group was beaten down last week. Its hard to say if this is the real deal though after only one day of trading. We are watching to see if the group will pullback tomorrow and confirm the down trend. The NASDAQ played a big role in the rally for IR as money flowed out of technology and into safe haven plays. Also there has been no company specific news to trade on this week. UNM $53.88 +0.06 (+0.06) UNM was able to crawl back near even after being down for most of the session today. The Insurance sector was weak again today and we expect that trend to continue. This has been a reoccurring theme lately. The chart on UNM for the past two weeks has drawn a clear trend line and will help in choosing an entry point. Watch the 50-dma for the next support level at $51.00. TBH $83.00 -0.50 (-0.50) More uncertainty in Brazil and weakness in the U.S. markets caused more selling in TBH today. The trigger was the National Purchasing Managers report that came in stronger than expected and was the catalyst for a sell off in the bond market. The stock traded as low as $81.25 before rebounding with the Dow Jones. We are also watching developments in Brazil for any indication of stability or a bottoming in the Bovespa market. Use the volatility to your advantage in choosing entry and exit points. MEA $39.31 +1.94 (+1.94) Meade is another stock that got a boost from the upgrade to Georgia Pacific from Paine Webber. The paper producers rallied today on that news. It was untimely for our play but may have provided an entry point. We now need to see if this will be the start of a bottoming for the stock or just a knee-jerk to recent losses. The stock was able to rally back to the top of the recent range but again turned lower. This has us thinking that the stock has more downside left. But watch the NASDAQ for weakness which could spark more money flowing out of technology and into cyclicals (need we say, "confirm stock direction") ABF $25.38 -.50 (-.50) Aftershocks from the most recent downgrade on Friday continued today. The stock was unable to spend any time in the positive column. It opened down and drifted lower all day. Even a rally by others in the sector didn't help ABF. Today was the seventh down day in a row so we want to advise that you place your stops if you have opened a new play. Any positive news could spark a relief rally. Overall there is still no reason for buyers to come back in right now. EK $67.13 -.50 (-.50) Still dropping and all technical indicators remain negative. EK has descended about $12 from its May high and has traded lower for 7 days in a row. It is due for an up day or two about now. If you are planning to start a new position in EK, you might look for the inevitable bump, then verify that EK starts down again before jumping in. Nothing in the news suggests a reversal in the general downtrend for EK. DOW $126.44 +4.94 (+4.94) Once again, news out of left field ends the game. NAPM numbers and comments from the New York Federal Reserve Chief, both released today, convinced investors that inflation is here and a Fed rate hike is imminent (we don't think so, at least not yet). Who benefits? Yes, cyclicals. In very un-putlike fashion, tutu-clad DOW delivered a fantastic rendition of "Flight of the Internets" by adding almost $5 today on slightly less than average volume. It was no help that DOW Corning won breast-implant claimant approval of its Chapter 11 reorganization plan. It removes uncertainty that normally keeps a stock down. With Greenspan comments likely to make at least some news tomorrow and employment figures coming out at the end of the week, DOW may remain the proverbial "pig wearing lipstick" until inflation fears are assuaged. Confirm market and sector direction before starting a play. CLX $103.88 +2.94 (+2.94) CLX began trading on Tuesday by heading lower. The stock fell as much as -$3.00 in the first hour and a half of trading. However, CLX decided to make a hair pin turn at $98 and head higher for the rest of the day. Hopefully you weren't too quick to pull the trigger and buy CLX first thing in the morning. That is usually the most volatile time of trading in the day and the worst time to place a trade. Always wait for the initial volatility to subside and then re-evaluate your entry point. If you had done this, you would have missed the torture of buying too soon and watching your investment dwindle. We are now issuing a caution with this play. We had expected to see CLX slowly sink further. Since it spiked down -$3.00 in less than 2 hours of trading and then recovered with pretty convincing strength, we will definitely be keeping our eye on CLX. No new news in particular but the rally today was most likely a reaction to the cyclical upgrade. Confirm stock direction first before initiating any new plays. *************** NEW CALL PLAYS *************** None *************** NEW PUT PLAYS *************** INTC - Intel Corp $50.69 -3.38 (-3.38 for the week) Intel designs, manufactures, and markets microprocessors - its star performer is the Pentium. It has been providing the microcomputer components for IBM-compatible PCs since 1981. With an overwhelming 85% of the market share, Intel is dominant in the industry. Profit margin concerns and negative analyst comments drove INTC down further today. The stock headed south right from the starting gate and never looked back. Trading was heavy at over 28 mln. shares exchanging hands. The profit margin concerns are real. Intel is aggressively cutting prices on its products and also selling more of their lower-priced Celeron chips - something analysts may not have accounted for. Dan Niles, analyst for BBRS, is very negative on INTC. He predicted earlier today that Intel could come in at .51 to .52 EPS which would be .02 shy of 2Q estimates. Also in the news, Intel announced they'd be spending $780 mln. to buy Dialogic in a $44 p/s cash tender offer (this is approximately a 32% premium for Dialogic shares as of Friday's closing price). This is Intel's latest move to diversify and expand into telecommunications. Perhaps good strategy, but it'll certainly cut into the company's revenues. Last week it appeared support was forming around $52-53. Today it broke any support at $52. The only real bottom is the 52-week low at $32.87, but short-term outlook is the question. A conservative player will confirm both market sentiment and stock direction before jumping into a new position. Its 200 dma may prove to be overhead resistance now and closing near the lows of the day does not instill much confidence for a rebound. BUY PUT JUN-45 INQ-RI OI= 2624 at $0.63 SL=0.00 BUY PUT JUN-50*INQ-RJ OI=12898 at $2.13 SL=1.00 BUY PUT JUN-55 INQ-RK OI=13007 at $5.25 SL=3.50 Average daily volume = 19.8 mln. Chart = http://quote.yahoo.com/q?s=INTC&d=3m **** CVC - Cablevision Systems Corp $76.00 -2.88 (-2.88 for the week) CVC owns and operates cable television systems which provide telecommunication and entertainment services. They operate primarily in the northeast areas of New York City, Boston, and Cleveland. Cablevision has over 3 million subscribers in the NY area alone. Through their subsidiary, Rainbow Media, CVC owns 80% of Madison Square Garden, the NY Nicks and Rangers, and cable channels like American Movie Classics and Bravo. CVC had found comfortable support around $86-88 a few weeks ago. The stock even spiked up over 5 points last Wednesday on speculation they were a target for acquisition. But the news events that followed invariably pushed CVC into a downtrend. On Thursday, the "Daily Variety" reported merger talks between MGM and CVC had collapsed earlier in the week. Also analyst Gary Farber of SG Cowen let it be known he disagreed with any takeover speculation regarding Cablevision. His premise is that CVC has enough subscribers and diversity in the industry to make it on its own. The stock then fell $5.75 and has continued to steadily lose ground. Even after a mid-day attempt to rally today, CVC shed almost 3 points and dipped below its 50 dma of $78-79. This is a "bearish" indication. If the descent confirms in the next day or two, CVC could be headed back towards its 200 dma at around $58-59. In this volatile market, please do your homework and confirm direction before initiating a new play. BUY PUT JUN-70 CVC-RN OI=52 at $1.63 SL= 0.75 BUY PUT JUN-75*CVC-RO OI=80 at $3.50 SL=1.75 Average daily volume = 423 K Chart = http://quote.yahoo.com/q?s=CVC&d=3m ****************** COMBINATION PLAYS ****************** Economic Reports Rule The Markets... Tuesday, June 1 U.S. markets were mixed on Tuesday after an economic report that showed new strength caused investors to speculate that inflation may be on the horizon. The Dow finished 36 points higher at 10,596 but the Nasdaq tumbled as technology shares took the brunt of the beating. The index dropped 58 points to 2412. Declining issues outpaced advancers by about 15-to-14 on volume of 685 million shares on the NYSE. Sunday's new plays (positions/prices): ACO DEC15C/DEC15P $2.12 debit (quiet for most of the morning) BEAM JUN25C/JUN15P $0.93 credit (slightly less than our target) PAX SEP15C/JUN15C $1.19 debit (easy entry at the target price) PSFT JAN17C/JUN17C $2.93 debit (JAN-$17.50 call only $3.38) TMK AUG30/35C/40C $1.12 debit (slightly less than our target) PSFT and PAX were both opened at better-than-expected prices and ACO was within reach during the morning session. Prices on the ACO puts went up significantly in the latter half of the day after two contracts of the straddle were opened. BEAM would not have been available at the target entry without some 'legging'. One trader opened the TMK straddle (at market) near 11 AM but the spread was available earlier in the morning for a lower overall debit. Portfolio plays: MER was the big mover today, falling $5 at the open (and closing down almost $9) on news of their venture into online trading. It doesn't have anything to do with the recent merger rumors but you can see why we favor the ATM positions (highest time premium and generally the greatest disparities) on volatility spreads. I am still hopeful that MER will rebound for those of you that chose the bullish play but my success has been much greater in the neutral positions. AMZN was also bombed by an unfavorable article from Barron's. We will continue to watch this one closely for a complete technical failure. Other bullish plays that are falling lower in the market correction include KEY, TWX and PRD. The 'long' positions on KEY and PRD are both above the break-even point and at some point you will have to determine when the remaining value is more important than the possibility of a rebound through the sold strike. Our calendar spreads generally benefit on days like this and CNTO was an excellent performer, climbing back to the sold position in the morning session on news of recent success with their new drug ReoPro in a mixture to help heart attack patients. A favorable credit was available in the position; JUL45C/JUN50C. Our spread on SKYT traded at $0.62 - $0.75 credit most of the day even after the news of WCOM's buyout offer steadied the stock price near $20. We have decided to let the June call expire; expecting the value of the long position; SEP22C to be above our current debit ($0.50) on June 18. On Sunday, you may have read the excellent strategy article on 'diagonal' spreads by Robert Ogilvie (in the 'Brokers Corner'). Here are some candidates that will demonstrate the favorability of that technique. Good Luck! *********** NEW PLAYS *********** CPU - CompUSA Inc. $7.87 *** Merger Candidate *** CompUSA is one of the nation's leading retailers and resellers of personal computers and related products and services. CompUSA currently operates 211 Superstores in 83 cities across the U.S. that serve retail, corporate, government & education customers and include technical service departments and classroom training facilities. CPU now offers its own build-to-order personal computer series; the CompUSA PC, and Windows Magazine editors have selected CPU's first build-to-order notebook computer as the best in its class. The report says that the 7.4 pound portable has a combination of high performance and attractive price that makes it a superior value in a top-of-the-line system. The 366MHz PII 'AmeriNote' offers a 6.4GB hard drive, an LS-120 SuperDisk drive, a 2X DVD- ROM drive, 128MB of SDRAM, an AGP graphics controller with 4MB of SGRAM, a 14.1-inch TFT screen with great image quality, and an integrated V.90 modem. CPU also recently announced the appointment of Iang Jeon as vice president of business development and strategy to enhance their website site development. His experience in developing e-commerce sites that optimize customer convenience, control and comfort is expected to boost the company's image. Implied volatility stayed strong and volume remained fairly high Tuesday in options on CPU as rumors of the Staples (SPLS) buy-out continued to circulate. One of the strategists also said that the recent behavior could reflect a cyclical movement of investors money among the computer retailers. In either case, the technical character of the underlying issue is favorable and we are going to use the small disparity in the front-month options to open a long-term, bullish position. PLAY (conservative/diagonal spread): BUY CALL AUG-7.50 CPU-HU OI=4279 A=$1.87 SELL CALL JUN-10.00 CPU-FB OI=6341 B=$0.25 INITIAL NET DEBIT TARGET=$1.50 TARGET ROI=50% Note: In this type of diagonal spread, we are reducing the net cost of the long-term option with the credit from the sale of the nearer-term option. If the near term call expires worthless, we may decide to hold the long-term position for future profits or sell a July call to further reduce our debit. There are many other ways to exit this type of position and you should review those techniques with your broker prior to entering the play. Chart = http://quote.yahoo.com/q?s=CPU&d=3m **** AHG - Apria Healthcare $21.68 *** Excellent Technicals *** Apria Healthcare is a unit of Apria Healthcare Group, the largest home healthcare company in the United States. The company provides respiratory therapy, home infusion and home medical equipment through 320 branches serving patients in 50 states. The company recently announced that it has received approval from its bank group for an amendment to its current credit agreement. The amendment relieves the company from its obligation to pursue additional funding for debt repayment and permits them to use available cash-on-hand to make a $50 million prepayment on their long term loan. The agreement also allows the company to complete its previously planned acquisitions in 1999. This new arrangement will avoid the need to conduct a rights offering of Convertible Subordinated Debentures to stockholders and reduces the need for any other financing from outside parties. It is viewed as a vote of confidence by the bank group that AHG will continue to improve its financial performance in the future. With the debt properly secured, the company is expected to grow favorably in the coming quarters and the excellent technical trend should also continue without any major correction for some time. PLAY (aggressive/diagonal spread): BUY CALL SEP-20.00 AHG-ID OI=613 A=$3.50 SELL CALL JUN-22.50 AHG-FX OI=10 B=$0.56 INITIAL NET DEBIT TARGET=$2.75 TARGET ROI=60% Chart = http://quote.yahoo.com/q?s=AHG&d=3m **** APCO - Automobile Protection Corp. $11.50 *** More Rumors *** APCO is a leading marketer and administrator of products and services to automobile and recreational vehicle dealers. The company's core business is the marketing and administration of EasyCarea vehicle service contracts. They also administer warranty and service contract products under private labels. APCO recently announced record first quarter earnings and net income with revenues the second highest for any quarter in the company's history. The company experienced solid growth from their core EasyCare service contract business and volumes from third party administrative services also rose significantly over the first quarter of 1998. The company expects the new business to become an important contributor to the bottom line. Most traders are attributing today's upward move to a rumor that Ford (F) is planning to buy the service contract company some time in the next few months. The recent technicals are favorable and the option prices offer us an added benefit in this low-risk speculation play. PLAY (aggressive/diagonal spread): BUY CALL OCT-10.00 QFM-JB OI=204 A=$3.37 SELL CALL JUN-12.50 QFM-FV OI=168 B=$0.62 INITIAL NET DEBIT TARGET=$2.50 TARGET ROI=75% Chart = http://quote.yahoo.com/q?s=APCO&d=3m ******************* 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 $10 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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