The Option Investor Newsletter Tuesday 6-08-99 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) ************************************************************ 6-08-99 High Low Volume Advances Decline DOW 10765.64 -143.74 10909.07 10724.17 685,146k 1,131 1,789 Nasdaq 2474.51 - 49.65 2534.48 2472.05 850,934k 1,660 2,251 S&P-100 665.50 - 10.65 676.15 663.02 Totals 2,791 4,040 S&P-500 1317.33 - 17.19 1334.52 1312.93 40.9% 59.1% $RUT 443.77 - 2.89 447.82 443.41 $TRAN 3424.83 - 57.13 3480.85 3417.78 VIX 23.47 + 0.02 24.45 23.20 Put/Call Ratio .56 ************************************************************ Into every pocket, some profit must settle. Straight from last nights Market Wrap, we bring you the following reminder, "though this doesn't negate the trend, we have had 4 solid days of gains and may get a profit taking day or two along the way." To this we add another tidbit from last night's closing comments, "we stress again, trade only when it is profitable to do so." That said, you should have found it difficult to start a new play today (unless it was a put) and stayed firmly planted on the side of the road, out of harm's way. Remember, first and foremost, our job is to protect our trading capital. Missed money is always better than lost money. While we're at it, and probably didn't consciously think of it anytime today, part of Trading Rule #10 applies. Here it is in case you missed it: When in doubt, stay out. That's pretty simple, right? Yes, but it's also difficult to do if you depend on trading for a livelihood, especially in a sideways market. We don't mean to admonish anyone. It's just an important reminder that down days happen and we shouldn't force a play when the trend is not our friend. Now, let's get down to business. To begin with, the market started down from the open on a slightly sour note, as another airline (US Air) issued an earnings warning citing lighter traffic and greater expenses, which followed a similar warning last Friday from United. Not only that, Donaldson, Lufkin, and Jenrette offered negative comments on many of the box makers, including DELL, CPQ, IBM, and HWP citing a corporate IT survey that suggested corporations would prescribe a lockdown on purchasing new equipment in anticipation of Y2K, which will likely affect earnings. Doh! Jeez Marge, why didn't you tell us sooner? Pity the poor Compaq investor who was also slapped in the face by Piper Jaffrey analyst, Ashok Kamur's comments that CPQ could report a loss for the quarter, while most analysts still have earnings estimates pegged at $0.22. He further stated that CPQ had about 8 weeks worth of over-priced, obsolete inventory in the channel, then added that CPQ could fall to the "mid-teens" if they miss estimates. OUCH! Oh, did we mention that a new survey released today puts Dell as the #1 business market share leader ahead of IBM and a now #3 CPQ? Some days, it just doesn't pay to get out of bed. Even in the pessimism, we can all take some solace in that the sector has not seen a slowdown in unit growth (though maybe not revenue growth), especially from Dell, who reports great results so far this quarter. The Internets like AMZN, YHOO, AOL and CMGI all gave back yesterday's gains too, despite that AMZN announced entering the digital music fray, currently led by CDNow. Talking heads on CNBC couldn't help pointing out that "every trader we talk to is expecting a triple bottom" in this sector. That's technical jargon for "we expect another dip before it goes up." While that is certainly one possibility, remember that Internets typically form a bottom at this point in the earnings season anyway. One Internet that finished the day significantly in the green was Infoseek (SEEK, $48.62, +$5.62) on news that Disney would like to buy the 57% of the company it does not already own. A second Internet to finish up nicely today was the IPO, Drkoop.com, a medical advice site. The issue, priced last night at $9, closed up at $16.44 on its first day of trading. If you are interested, that makes the former Surgeon General worth $41 mln. on paper. As if a tech fizzle wasn't enough, along came more inflation comments from yet another illustrious member of the Federal Reserve Board (The Fed). This time, William Poole, St. Louis Fed President (who has no voting power we might add) cautioned that inflation is a greater problem now in our economy than it was 6 months ago and that markets should expect a tighter monetary policy going forward. Bonds then took it in the shorts as the yield dropped to close the day at 5.99%. Equity investors didn't wait around either. Pardon us for this reminder, but hasn't that been the expectation for the last 3 weeks? We don't see any news here. The question of whether we have inflation or not is still debatable. Until we get a clearer picture of the PPI (a reflection of inflation on the producer level) on Friday and the CPI next week, we really won't know the answer. Until then, expect more exhibitions of inflation-induced schizophrenic behavior from investors. It's almost like Pavlov's spontaneously salivating dogs after hearing the sound from a ringing bell. Someone says "inflation" and investors run like roaches under a spotlight. Anyway, suffice it to say another sell-off ensued. The good news, and really the point to taken from the whole day's events was that the markets again moved on low volume - the third lowest volume day of the year so far. There simply is no major conviction from sellers to sell or buyers to buy. Nonetheless, the overall bias still appears to be up. A true scare would have juiced the volume and taken a bigger bite out of the market's hide. So how did we finish the day? The DOW lost 143 points to close at 10,765, 40 points up from its lowest point of the day. Though decliners edged out advancers, advancers remained surprisingly strong given what appeared on the surface to be an otherwise bad day. The margin 3:2 favored decliners. A total of just 686 mln. shares traded hands, again the third lowest volume day this year. NASDAQ followed a similar trajectory by closing down 49 points at 2474, losing most of its ground in the final 2 hours of trading. Decliners slipped past advancers here too by a 3:2 margin on light volume of just 852 mln. shares. Our interpretation of this light volume remains that there is no conviction to sell at these current prices. Also, the Russell 2000 closed off by only 2.89 points today. One thing to notice is that our closing index values today were mostly higher than yesterday's low points. We'd like to keep it a bit short tonight so let's try to pull the sentiment all together. We need to keep these down days in perspective. Not to cover old ground, but with 4 solid days of gains, it's not unusual to see profit taking. Nothing goes up in a straight line. The selling lacks conviction. What else? Our old buddies, Mr. Gold and Mr. Oil, not to mention their other commodity cousins, are drifting lower. Yes, Fed-speak regarding inflation has jawboned bond rates up to just shy of 6%, yet no panic. Indicators are that a rate hike is already a foregone conclusion. Still in our opinion, the case for inflation is overblown, but we won't fight the market on this issue. With a rate hike priced in, we think the general trend is up. Nonetheless, investors will stay on the sidelines temporarily until we get some indication from the PPI and CPI. Thus, expect more choppiness in the near term as long as volume remains low. The coast will be clear once we see green numbers accompanied by a return of larger trading volumes. Until then, trade only when it is profitable to do so, use stops and sell too soon. Buzz Lynn Research Analyst *************** Market Posture *************** Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,000 10,766 Neutral 5.28 SPX S&P 500 1,315 1,355 1,317 Neutral 6.04 OEX S&P 100 660 690 666 Neutral 6.04 RUT Russell 2000 435 450 444 Neutral 5.28 NDX NASD 100 2,100 2,250 2,087 BEARISH 6.08 * MSH High Tech 1,000 1,100 1,038 Neutral 5.28 Key Benchmarks Technology Bearish/Bullish Last Posture/Since Alert **************************************************************** XCI Hardware 900 920 875 BEARISH 5.20 CWX Software 600 675 691 BULLISH 6.04 SOX Semiconductor 390 420 412 Neutral 6.04 NWX Networking 450 490 547 BULLISH 4.22 INX Internet 540 580 483 BEARISH 5.20 Key Benchmarks Financial Bearish/Bullish Last Posture/Since Alert **************************************************************** BIX Banking 700 720 670 BEARISH 5.18 XBD Brokerage 450 475 404 BEARISH 5.21 IUX Insurance 645 660 655 Neutral 6.03 Key Benchmarks Other Bearish/Bullish Last Posture/Since Alert **************************************************************** RLX Retail 900 970 875 BEARISH 4.29 DRG Drug 390 425 363 BEARISH 4.29 HCX Healthcare 780 850 738 BEARISH 4.29 XAL Airline 180 210 167 BEARISH 5.21 OIX Oil & Gas 285 310 296 Neutral 5.13 Posture Alert Inflation Alert! With the 30-YR Treasury nearing 6.00%, the fear of inflation is hanging over this market like a thunderstorm cloud. With today's action, we have turned bearish on the NDX. A detailed description of our Market Posture and its applications can be found at: /members/marketposture ************************* Market Sentiment Pinnacle Capital Advisors ************************* Sell to Soon? Just when you thought Yahoo or CMGI would have a +75 point run like the good old days. Congratulations to those of you smart enough to sell into that 2-day rally. During the last newsletter, we stated about the heavy increase in out-of-the-money OEX call buying. The Pinnacle Index for the OEX (680-750) was at a whopping 12.4. This was so bullish that we were due for a sell-off. We haven't seen this large a number in quite awhile. While the Pinnacle Index did decrease since the last letter, it currently stands at 10.9, which is still severely optimistic. These way out-of-the-oney option traders not only called the upswing, but also predicted the short-term top. Not to be outdone, the Pinnacle ndex on the OEX (645-660) is currently at .20, which is very bearish. What this tells us is that we should have nice support in that range.Until some real news comes out (Fed raises rates, major earnings report
The Option Investor Newsletter Tuesday 6-08-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ****************** PICK NEWS - CALLS ****************** BMCS $48.44 -2.19 (-0.56) BMCS is not down that much for the week, but we are a bit cautious about its immediate course. Looking at a chart of BMCS, we see an ascending channel that the stock has traded in. We currently are right in the middle of it. We are not going to drop BMCS, but wait for one of two things to occur before buying in. Number one: Wait for a bounce off the lower end of the channel at about $46. Number two: Make sure there is market confirmation of a move. The only thing predictable about the market right now is that it is very unpredictable. LXK $142.06 -2.94 (+3.75) We discussed in the weekend letter that LXK has a split coming up after the close on June 10th. We also stated that when LXK moves, it usually does so in large chunks. This is exactly what happened on Monday. LXK started up at the open and continued up for most the day. The stock did close about $4 off its high of the day. On Tuesday, LXK tried to hold on, but the market weight was just to heavy and the stock closed down close to $3. LXK will be taken off our call list on Thursday, but we still like its prospects for Wednesday and Thursday. The stock had its EPS raised by Salomon Smith Barney on Monday from $.98 to $1.01. Salomon also raised its price target from $130 to $160. Watch for a dip to buy on Wednesday and remember the risks of short term plays or of holding over split dates. BVSN $55.13 -1.13 (+2.63) BVSN lost a little over a dollar on Tuesday, but is still positive for the week. We like the fact that BVSN bounced strongly off its 50-dma today and closed a $1.50 off its lows. Technicals still show buying pressure and there isn't much resistance until the $66 range. BVSN and Interwoven, Inc. announced today that BVSN is furthering the company's strategic partnership with Interwoven by becoming a reseller of TeamSite. Interwoven TeamSite is the leading solution for content management for the enterprise Web. Many of BVSN's customers like the combination, including Xerox. ADPT $32.94 -1.94 (-0.50) ADPT, like many techs, had a down day on Tuesday after a nice gain on Monday. The net result: A loss of $.50. We still like ADPT going forward. The stock reached another 52 week high at $35 on Monday. The technicals show many bullish signs and ADPT is in a very explosive sector. There is a lot of publicity about bandwidth and Internet speed. This are things that bring attention to a stock like ADPT. There isn't any recent news, but watch for intraday pullbacks as opportunities to buy. ADPT's support is at $32. GE $102.38 -2.06 (-2.50) We added GE as a post-war rebuilding play, but GE can't be contracted to rebuild Kosovo until the war ends. Signs are that the ending of the war is very close. Even if we don't get news on the cleanup soon, GE does have very strong support at $100. A bounce off this level might be a good risk/reward entry point. GE has been up 5 of the last 7 days, so it's not like we are trying to pick GE at the bottom. This is a newsy play, though we feel when the war does end, GE will stand to make a lot of money on the clean up efforts. CAT $62.13 -1.13 (-0.68) CAT is another stock we are playing as a post-war play. If and when Kosovo needs to be rebuilt, heavy equipment will be needed to move debris and help the rebuilding. CAT stands to be the benefactor of this event. The war has yet to be ended, but signs are it could end very soon. Intelligence shows the preparation of Serb troops to leave Kosovo. CAT has been up 4 of the last 6 days and is near its 52 week high of about $66.50. Again, watch for news to support our theory before jumping in. Even though CAT stands to benefit from the war ending, it doesn't always mean the stock will jump immediately. SLR $56.63 -1.00 (-1.06) On Monday, SLR reached a new all time high of $60.00. However, investors took advantage of the move and sold off for a profit. By the market's close, SLR actually sunk lower by six cents. On Tuesday, SLR continued to fall only this time it seemed to stem from the overall market sell off. The DOW dropped over 143 points and the negative pressure caused SLR to sink -$1.00. SLR's volume was on the light side which may have magnified the move. We suggest waiting for the markets to head higher and for SLR's trade volume to draw closer to its average of 1.36 mln. before opening any new calls. If you are currently playing SLR, set those stop losses tight. You can always get stopped out for a profit and then hop back in once the new uptrend is established. We feel that SLR will once again head higher on an earnings run. The company will report its numbers on June 14th. ORCL $27.13 -1.38 (-1.56) On Sunday, we pointed out that ORCL had posted gains for 5 days in a row and that some profit taking could be around the corner. Hopefully you set your stop losses to protect those gains because ORCL did pause to consolidate in trading this week- just as we had forewarned. But keep in mind that we also said that a pullback could be an entry point. ORCL will report its numbers on June 15th (company confirmed). We feel that this slight dip could be buyable but it is extremely important to confirm that ORCL is back on its way up first. ORCL has also been busy with business. Did you know that 8 out of the top 10 specialty retailers and general merchandisers ranked by Fortune Magazine use Oracle software to run their businesses? In other news, Oracle released a product to help simplify budgeting for mid-sized businesses. With this new automated budgeting process, companies could save time and minimize data entry errors and focus instead on data analysis. ORCL also announced the acquisition of the data mining business from Thinking Machines Corporation in order to help predict customer behavior and buying patterns. SCI $45.00 -0.81 (+0.87) SCI got off to a nice start this week. On Monday, the company added +$1.69 as the market rose over 109 points. On Tuesday, SCI again continued higher. It reached as high as $45.94. However, the market sell off cut short SCI's momentum. The DOW dropped over 143 points and pressured individual stocks to follow. SCI was no exception. It fell back -$0.81 on the day. The pull-back could prove to be an entry point. However, never try to pick the bottom. Look for SCI to head higher again and hold with a gain before opening any new plays. On Monday, SCI announced that they had shipped their 5 millionth satellite TV receiver to EchoStar. SCI has been shipping receivers to DISH from the beginning of its operations. GPS $65.38 -1.94 (-2.37) After making a nice run last week, GPS has temporarily halted its upward hike. On Monday it slipped forty-four cents. On Tuesday, it fell an additional -$1.94 as the market tanked 143 points. This pull-pack could be a bonus. Last week The Gap gained +$5.20 and we were hoping for a buyable dip. If the markets can rebound, they may provide a boost for GPS. The company will split 3:2 on June 22nd. Look for GPS to head back up before trying to open any new positions. GPS has broken down below its 50-dma of just above $66. Wait for a break back above this level. TER $60.75 +0.56 (-0.69) After posting big gains last week that totaled +$8.63 in just 4 trading days, TER decided to take a breather on Monday. No news in particular sparked the -$1.25 sell-off. It appeared to be simple profit taking. On Tuesday, TER was already back and running. It climbed as high as $62 before finishing the day at $60.75. We liked to see TER paddle upstream against the market. TER had the fortitude to head higher even as the market sold off over -143 points. Part of the gains could possibly be attributed to TER's announcement at SUPERCOM '99. TER was chosen by Belgacom, a national telecommunications provider in Belgium, for an order worth over $2 million to install the new Advisor application of the UserLink ™ platform. We feel that TER could continue to head higher especially if the markets can bounce back. Wait for the break above $61 to hold before opening any new positions in TER. UTX $67.25 -1.19 (-0.19) On Monday, UTX added +$1.00 and broke above its 30 dma by using the market's upward momentum. However, just as it had nudged UTX higher, the market also helped UTX head lower. On Tuesday, the market fell over 143 points. UTX followed and sold off to a -$1.19 loss on the day. If the markets can rebound, we feel that UTX should too. However, if the market continues to fall, so could UTX. As we frequently state, never try to pick the bottom! Wait for UTX to head higher again before trying to enter into new plays. Investors may be selling ahead of the PPI report due out on Friday. The markets aren't going anywhere. They will still be there. There is plenty of time to wait for an appropriate entry point. BGEN $111.25 -3.63(+1.69) BGEN saw a nice gain yesterday, but dropped with the overall market today. However, Monday's gain was on strong volume, while today's loss was on very light volume--less than half the average. There just weren't many sellers. (Market volume was light on both days.) Some of BGEN's loss today can be attributed to a generally down market, but it was probably partly a sympathy move with same-sector Immunex (IMNX). Immunex shares dropped sharply when it revealed that undisclosed Q2 charges would cause earnings to be near the lower end of estimates. Although the revelation has nothing to do with BGEN, investors sometimes drop anything in the same sector when they see a big sell-off in a stock. In fact, Piper Jaffray just raised its Q2 estimate for BGEN by $.01 to $.63 and reiterated a "buy" on the stock. Jaffray's price target is $119. MEDI $66.38 -3.69 (-4.87) MEDI set a new all-time high yesterday of $74, but profit-takers moved in quickly to lock in their gains. Volume was fairly strong and the stock wound up losing $1.19. Today it lost a big $3.69, but volume was fairly light. Have all the sellers sold yet? With strong positive volume in the market, MEDI will likely take off again, but please wait for confirmation before starting any new plays. MEDI is just about at its 10 dma, which may provide support. Below that is support in the upper 50's. When the whole market drops, even the strong stocks fall down. Drug stocks in general have struggled so far this week. CREE $64.50 -2.63 (+1.37) CREE tacked on a nice gain yesterday, adding $4 on nearly double its normal volume. Today it set a new high of $69.13 before selling off in the last 45 minutes of trading, as fear crept into the market. Volume was heavy again. A little profit taking isn't a bad thing after such strong gains last week. This stock wants to go higher and it has the momentum to do it, if only rate fears and earnings warnings from other companies don't get in its way. Wait for positive movement again before jumping in. LLY $72.50 +.63 (-2.75) After posting solid gains on strong volume Friday, the drug stocks gave it back Monday. Lilly lost almost exactly what it added on Friday on equally strong volume. Right back to square one. Today, on somewhat more than average volume, LLY managed a $.69 gain. We would like to see a slow and steady climb from here. Big jumps may be met with profit taking from investors who bought in closer to its 52-week high of $97.75. On the bright side, LLY has given guidance that earnings will be in line with expectations and expanded its share buyback program. Investors look down the road, however, to a possible Medicare plan to cover prescriptions for seniors. The plan would likely use pharmacy benefit managers to negotiate a large group discount. For this reason, the drug industry opposes the idea. It is unlikely that Clinton and the Republican congress will be able to agree on a plan, but investors may factor the possibility into the stock price. In the news: A Massachusetts HMO will soon refuse to cover prescriptions of Lilly's expensive anti-depressant Prozac. Wait for a confirmation of positive movement in this stock. MRK $68.63 -.69 (-2.00) On Monday, Merck gave back $1.31 of Friday's gains, but volume was light. Today it lost another $.69, this time on better volume. Obviously, the same Medicare worries mentioned in LLY's write-up apply to MRK as well. The good news for MRK is that doctors wrote 4,797 prescriptions for Vioxx, its new cox-2 inhibitor, in its first 10 days on the market. Rival Celebrex, while very successful in its first 10 days, only had 3,231 prescriptions written. Today MRK announced that Vioxx was approved for use in the U.K. Wait for the drug sector, and MRK in particular to show you that it is truly making a recovery before initiating a new play in this one. EGRP $40.75 -1.13 (+3.06) "Put me back in the game coach!" EGRP soared +4.19 on strong volume yesterday and its mascot, TBFC, advanced a whopping +7.87 points! Awesome gains for the players who jumped into the game. Today the trading range was narrow and steady, then EGRP shed -1.13 at the close. And take note, the trading was light today. On Monday, there was good news hitting the press. E*Offering, an online investment bank backed by E*Trade, announced they will offer E*Trade customers availability to buy IPO's through www.eoffering.com. Everyone knows EGRP has always been recognized, but today, an analyst assumed coverage of the stock. Senior eFinance analyst, Scott Appleby, of BBRS started a "not-rated" (for lack of better terms) rating on EGRP. The important aspect of this coverage is that the stock is being acknowledged along with AMTD and NITE who received "buy" ratings. Remember, this is a LEVERAGE PLAY using TBFC options to gain a better advantage. I wouldn't feel comfortable without reminding you again - INTERNET = HIGH RISK. Keep the stops tight. LGTO $57.63 -1.88 (+1.38) Yesterday LGTO followed Friday's lead and made additional gains. This time it advanced +3.25 with strong volume at over 1 mln. shares being exchanged. After the close of regular trading Monday, Legato Systems reported they had signed a clad agreement to purchase Vinca Corp for $94 mln. in stock and cash. The deal will close in July. The acquisition will enable Legato's customers to access data at a much faster pace. This purchase, plus the recent addition of FullTime Software last October, puts Legato in a very profitable position. They now have a leading-edge advantage for providing the best in data availability software solutions for distributed systems. The news is inspiring, but with the market sentiment being what it was today, LGTO lost some ground. The good news was that the decline was on less than normal volume. Another news event or a negative analyst remark could invariably shoot this stock out of the sky. Always confirm direction with the volume and keep those stops in place. AA $63.06 +2.00 (+1.12) AA stayed perched on its resistance yesterday and traded in a very narrow range not wanting to edge above $61.63. Today was a different story. The stock tacked on 2 points to break its near opposition of $61-62. Then AA exhibited positive determination as it closed just a fraction shy of its daily high. However, this advance was on less than 50% of its normal average daily volume of 2.5 mln. Nonetheless, AA is edging itself closer to its 52-week high of $66.93. In the news, Alcoa signed an agreement with Metal Arts thus giving Alcoa the license to use the MicroSmooth process in chrome plating aluminum auto and truck wheels. AMAT $61.81 +0.00 (+1.00) AMAT opened low at $60.50 on Monday, then an isolated spike in volume proceeded to push the stock to a daily high of $65. A nice spread if your timing was perfect and you hit the bullseye. Overall, the stock traded in a pretty choppy manner for the rest of the day on relatively low volume. AMAT traded consistently around $62-63 today, but with no substantial increase in volume. However, there is good news. Warburg Dillon Read started coverage on AMAT with a coveted "buy" rating and set a $67 target price. Look for stronger trading volume and positive movement to enter a play. Always pay attention to market sentiment to put more odds in your favor for a successful play. XRX $59.94 -0.31 (+0.38) XRX made a great effort Monday morning and rallied to touch its opposition near $63. However, it appears there were profit-takers in the midst, and XRX was only able to manage a fractional gain for the day. Today may have presented a solid point for entry as it traded narrowly within a point on low volume. but it would be better to wait for upward confirmation and more favorable market conditions before you begin a new play. Recall, its 52-week high is only points away at $63.93, but this has been its opposition for quite a while as evident in the 6-month chart. SEPR $74.63 -4.06 (+1.13) Monday offered more profits as SEPR advanced another $5.19 to close at $78.69. Early morning, the stock had even topped $80. As predicted, the stock finally did pullback for a breather. Considering the recent gains and today's market, SEPR did shed some points. Yet, it managed to trade above $77 for most of the morning. Having your stops in place would certainly have protected your profits during this consolidation. At this point, you want to wait for a positive bounce before initiating a new play. JNJ $92.75 -3.19 (-3.94) JNJ lost $.75 on light volume yesterday, but dropped a big $3.19 today on average volume. There was no particular news to drive the stock, but it moved in step with the whole drug sector. Possible Medicare drug coverage, in the news today, sent shivers through all the pharmacy stocks. Although JNJ is much more than just a drug company, that part of its business is growing the fastest and reduced profit margins (implied by the Medicare coverage) will hurt that growth. A Medicare deal will probably not succeed with this administration, but investors are cautious just the same. Wait for confirmation that this sector is really in a recovery before initiating a position. FNM $67.94 -1.06 (-0.87) FNM has stayed within its channel, but has been on a very bumpy road. It seems that every other day we get an inflation scare. When we don't hear rumors, FNM goes up; when we do, it goes down. It could continue like this until we get the CPI numbers on June 16th. The channel bottom is around $66. ***************** PICK NEWS - PUTS ***************** NSOL $56.00 -0.19 (+4.25) NSOL is rebounding this week after the announcement of the first test-bed registrar is up and running this week. Register.com is the first of the newly announced competing firms to be up and running. We would normally expect this kind of announcement to weigh on NSOL's stock price, but with a recent sell off and no new facts to how soon other competitors will be ready to go, investors reacted positively. But, on the plus side, the stock was unable to push back above the critical $60 level. We continue to watch that price closely as the resistance level. Volume was light today which confirms our thinking that this rally will be short lived. PVN $85.00 +5.44 (+6.56) PVN was able to finally put together a rally despite weakness in the financial sector. Granted, the stock is trading based on internal problems and hasn't moved with the sector lately. We expect PVN to continue to trade based on news reports and analyst comments, but we are still cautious on the near-term outlook for the stock. This week's gains are still just a fraction of the recent losses. We see more downside ahead but keep in mind this is going to be a very volatile play. Choose your entry points carefully and let your stops do their job if the stock rallies. There has been no new news this week which is probably the reason for the rally. Wait for more bad news to hit the wire first before opening new plays. TMX $75.38 -0.62 (+0.31) Telmex is still flirting with the 50-dma at $75.00. It was able to hold that level on its first attempt to break through on Friday, but it is now dangerously close to completing the task. The low on Tuesday was at $75.06. We are still cautioning investors to wait until we have a close under the 50-dma to open new plays, but with interest rate worries back in the fore front, we may get a breakdown soon. Without any new news to trade on, expect the stock to move with the Dow Jones. It is also interesting to note that TMX shares have been weaker in Mexico than the ADRs here in the U.S. FDX $50.56 -1.44 (-1.69) Federal Express has traded lower both days this week. It continues to be punished for breaking its 50-dma at $54.00. The stock is in a bad technical pattern. The next support level is around $47. Other than that, it is a long fall to the 200-dma at $39.50. There hasn't been any news worth trading on which has kept the volume light. Use your stops to trail the play and lock in profits. IP $50.31 +0.31 (-0.13) International Paper shares found support today from the volatility in the broad markets. The stock was down under $50 again on Tuesday, but money came flowing in as the market sold off. There are still some concerns with interest rate fears and earnings warnings that have investors holding on to cyclical stocks such as IP. The stock is trying to hang on to the $50 level. If the stock breaks down below this level on a closing basis, the next support target would be at $46. Remember, we are entering earnings warning season so look for any stock in the sector to move the entire group. T $53.44 -0.06 (+0.06) Portland, Oregon's decision on open access is still a hot topic. This past Friday, a court ruling ordered AT&T to allow other ISP's access to their cable networks. The ruling could have wide ranging affects across the US in other large cities. T will most likely appeal the decision. Some analysts, including Henry Blodget of Merrill Lynch and Kristen Koh from Credit Suisse First Boston, think the ruling will be reversed. Morgan Stanley Dean Witter even initiated coverage of T with a neutral rating. Right now, our stance is also neutral. After the initial drop on the news, it remains to be seen if T will continue to head lower. We would like to see T drop below $52.50 before suggesting any new puts on T. The company seems to have some near term price support at this level. EK $69.50 -.69 (+1.50) Until today, Kodak was up 3 days in a row and on good volume too. Although it dropped $.69 today and closed at its low, the whole market was down. If this had been a positive market day, would EK have continued its climb? This may spell the end of the current down cycle, or it could just be that EK needed 3 up days after 8 down days in a row. We will know later in the week. Meanwhile, wait for EK to show us which way it is heading before starting new plays. In the news: EK chairman spoke to the U.S. Ways and Means Committee urging that China be allowed to be a member of the World Trade Organization. China is EK's 3rd largest market. CVC $70.63 +0.13 (-4.87) With strong volume at 1.58 mln. on Monday, CVC twice slid past its near-term resistance of about $70-71 to touch $68. By the finish, CVC had shed $5 in total to close at $70.50. Other cable stocks also fell in reaction to Oregon's Federal Court Ruling regarding the possibility of AT&T having to let Internet companies use their cable lines. This ruling, if upheld, will cost cable companies big dollars. Today, CVC traded flat on average volume never dipping below $70 even though the DOW did a nose-dive. Remember, the stock's momentum is the key to this play. Confirm the stock's direction and look for heavy trading before you open a new position. *************** NEW CALL PLAYS *************** NONE ************* NEW PUT PLAYS ************* NONE ************************ THE PLAY OF THE DAY -PUT ************************ FDX - FDX - Federal Express $50.56 -1.44 (-1.69 this wk)(-2.56) See details in sector list Chart = http://quote.yahoo.com/q?s=FDX&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 $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 ***************************** See Disclaimer in section one *****************************
The Option Investor Newsletter Tuesday 6-08-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** COMBINATION PLAYS ***************** Investors Flee As Bond Rates Rise... Monday, June 7 Stocks rose again on Monday as corporate mergers and new bargains prompted investors to support a market that is again striving for record heights. The Dow climbed over 100 points to close within striking distance of the 11,000 mark. Broad stock indicators also moved higher as the S&P 500 index rose 6 points to 1,334. The Nasdaq composite leaped 45 points to 2,524 as technology leaders and upstart Internet companies posted solid gains. Market breadth was favorable as advancing issues outnumbered decliners by a slim 7-to-5 margin on active volume of 798 million shares on the NYSE. Sunday's new plays (positions/prices): NBR JUL22C/JUN25C $1.75 debit (priced near 9:50 am) XLNX JUN50C/JUN45C $0.56 credit (traded as high as $0.75) MTZ JUL30C/JUN20P $2.00 credit (easy entry at the target) Our play on Honeywell was one day too late as Allied Signal (ALD) confirmed its plan to buy the company before the market opened. The $14 billion stock swap calls for Honeywell shareholders to get 1.875 shares of Allied Signal stock for each share held. The morning trading was interesting but the opportunity for any kind of disparity play was gone by the time options started trading. The credit spread on Office Depot (ODP) was unavailable due to an error in the listed quotes. Portfolio plays: Another great day for some of the recently abused NASDAQ stocks and with this continued rally, we recommend that you close the profitable plays rather than risk a loss in the end. Many of our exit opportunities on Friday were even better today; CD, CS, CNTO, CSCO, FDX, PRTL, SKYT, UK, USWB, and WLA are a few of the short term positions that offer a favorable return. Other good news; AMZN climbed almost $9 with other web giants after a boost by two major Internet conferences. The stock was up almost $9 at the close, leaving our bullish debit spread only $1 from break-even. We have many concerns about the ability of the Internet stocks to sustain this rally, and expect to make a humble exit with most of our trading capital intact. MER & SEPR continued to recover from their recent drubbing and hopefully, both positions will return to profitability soon. On the down side, TWX faltered after we closed the long option on Friday and the short side will be left open in that play as we attempt to limit losses in the overall position (JUN70C/75C). WLP finally gave back some of its recent gains, allowing us to exit the credit strangle; JUN80C/JUN70P, at a loss of $1.00. Tuesday, June 8 U.S. markets were hammered on Tuesday after bond interest rates moved to the highest level in more than a year. The Dow closed down 143 points at 10,765 and the Nasdaq index plunged 49 points to 2,474. In the broader market, declines beat advances 1,789 to 1,132 on moderate volume of 680 million shares on the NYSE. Portfolio Plays: MER continued to rebound during morning trading but the overall market trend was too much to compete against and it fell back to $73 at the close. ARTT made a nice move today on the announcement of a new 100 mbps wireless network in the Silicon Valley and WMB climbed $1 higher after the Lithuanian President, Valdas Adamkus signed amendments allowing the U.S. firm to take a 66% stake in oil concern Mazheikiu Nafta. CIEN consolidated after big gains on Monday; you may consider closing the short-term calendar spread to protect current profits from another rally. Good Luck! ****************************************************************** - NEW PLAYS - Problems with a new computer plagued the spreads/combos section today but these two volatility plays were obvious even without position software.. ****************************************************************** HRC - HealthSouth Corp $14.87 *** Upgrades Galore! *** HealthSouth is a leading provider of outpatient and rehabilitative healthcare services. They offer these services through a national network of outpatient and inpatient rehabilitation facilities, outpatient surgery centers, medical centers and other healthcare facilities. In mid-April, HRC reported a first-quarter profit of $0.26 a share, a penny ahead of the consensus estimate. During the first quarter, they also repurchased 10 million of a planned 70 million shares of common stock. That move reflects their belief that the current trading price of the stock does not reflect the appropriate value for the future strength of the company. HRC recently demonstrated a commitment to growth with a large investment in PlanetRX.com, currently billed as the leading Internet healthcare destination for commerce, content and community. Today, Banc of America said analyst Linda Greub initiated coverage of HealthSouth with a 'buy' rating. That confirms the new bullish rating issued last Friday by Bear Stearns. The favorable option pricing and new technical trend for the stock make this a low risk position with an excellent probability of a reasonable profit. PLAY (conservative/calendar spread): BUY CALL SEP-15 HRC-IC OI=582 A=$1.68 SELL CALL JUN-15 HRC-FC OI=4276 B=$0.43 INITIAL NET DEBIT TARGET=$1.12 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=HRC&d=3m ****************************************************************** BAANF - Baan Company $14.50 *** New Outlook *** Baan company is a leading global provider of enterprise business software. They offer a comprehensive portfolio of best-in-class, component-based applications for front office, corporate office, and back office automation are in use at approximately 12,000 customer sites worldwide. Their products reduce complexity and improve core business processes; are faster to implement and more flexible in adapting to business changes. In short, they optimize the management of information throughout the entire value chain. Last week, shares of Baan rose significantly after they announced orders from phone directory publisher VNU World Directories. The VNU agreement calls for Baan to install front-office software at VNU World Directories operations in the Netherlands, Portugal, and Belgium. Baan also said it received a smaller contract from an aircraft component supplier; Weston Aerospace. Baan has seen its share value drop significantly in the last year but confidence is being restored in the company with new contracts and the quality of its products. In addition, they have recently increased spending on marketing and will begin emphasising their brand name in a bid to boost revenue with a centralised ad program. The Internet commerce boom may also help Bann recover as they have launched a new E-Enterprise series that focuses on the business sector. To make things more interesting, Bann has recently been a source of merger speculation in the enterprise software. The company contends they're going to stay completely independent but implied volatility on front-month options has been higher this past week. We will use that favorable disparity to open a long-term, neutral position. PLAY (conservative/calendar spread): BUY CALL AUG-15 BQF-HC OI=1660 A=$1.38 SELL CALL JUN-15 BQF-FC OI=40 B=$0.38 INITIAL NET DEBIT TARGET=$0.87 TARGET ROI=50% Note: In both of these spreads, 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 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=BAAN&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 $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 ***************************** See Disclaimer in section one *****************************
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