The Option Investor Newsletter Thursday 7-15-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Published three times weekly, Sunday, Tuesday, Thursday evenings. ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 7-15-99 High Low Volume Advances Decline DOW 11186.41 + 38.31 11217.76 11149.37 801,756k 1,827 1,053 Nasdaq 2839.37 + 21.24 2840.03 2813.52 1117,000k 2,267 1,715 S&P-100 726.88 + 5.30 727.43 721.58 Totals 4,094 2,768 S&P-500 1409.62 + 11.45 1409.72 1398.17 59.7% 40.3% $RUT 465.80 + 4.34 465.80 461.46 $TRAN 3397.03 - 24.48 3434.51 3386.24 VIX 19.69 - 0.69 20.80 19.09 Put/Call Ratio .60 ************************************************************* Where's the rally? Did I miss something? The CPI number on Wednesday could not have been better. The PPI number today was unchanged overall and only +.01% for the core rate. Flat for the second month in a row. Very market friendly. The retail sales figures were tame and the unemployment numbers showed a +11,000 rise in claims. The bond is trading under 6% at 5.91%. Earnings are coming in mostly higher than expected and the marketshould be rocking. So where is the beef? Terms like "wall of worry" and "dangerously overbought" are making the rounds on CNBC. Abbey Joseph Cohen was very cautious in her wording today as she was interviewed. She likes the "long term" outlook and is still bullish on techs which in her words "are not quite fairly valued". She sees no storm clouds on the horizon and her economic for the third quarter was good. Did she raise her forecast on the Dow? No, nope, nada. Her firm, which has a target of 10,300 for the year, did say they would consider it later in August. Elaine Garzarelli, long a bull, said her internal indicators are nearing the bottom trigger point which would turn her bearish. Not yet but getting closer. She does expect another rate increase by the Fed in August and said there was rumors of rate hikes worldwide which could slow the global recovery. Several of the indicators she watches are creeping up into dangerous territory. The NAPM for instance has shown an increase in prices for four months in a row. Price increases will eventually be seen as bearish signs of inflation. The Columbia survey has shown the economy growing at a +4.5% rate for several monthsand normally precedes the government numbers by several months. These are the things that market technicians are concerned about. The DOW is trading in a very tight range when it should be exploding based on the economic reports. Why? Except for the gap downs on Tue/Wed the Dow has been in a 50 point range for the week. 50 points during an earnings cycle! We appear to be stuck just under 11200. Don't get me wrong. Stuck is better than falling. The longer we stay here bumping our head on 11200 the better chance we have at busting through on a solid base. The downside would be if we run out of earnings news before the breakout. We would then have nothing to keep us going. Granted we did not have much profit taking last week from the +500 point run and we could be undergoing a stealth correction or consolidation. Time will tell. The Nasdaq is still setting records and tech is still where the money is going. Actually we should probably say thanks because I believe the Nasdaq is holding up the Dow. This is a good solid chart. Up three days, rest, up three days, rest, up two days..... Good, obvious cycle that you can trade with the down days to take the pressure off. The Nasdaq closed at the high of the day but the DOW was -32 points from the top. I think we are stuck here because investors are worried. Some point to the Greenspan testimony on the 22nd as the next mile post in the rally. They want Greenspan to bless the economic numbers again. This is an excuse by lazy analysts. The numbers could not be any better. The Fed went back to neutral. His testimony is still a week away. I think investors are scared of history repeating itself. Most retail investors, people like us, have a very short memory. Funds and institutional investors who do this as a business are not as big on risk taking as the troops. Because of this they analyze every conceivable factor. What I think they are worried about is a repeat of the past two years. August 7th 1997 began a sharp drop of -600 points which led to an even bigger drop in October. The market was at 8300, an all time high the day before. July 20th 1998 started a drop of -1900 points from its all time intraday high of 9374 that day. Is there any wonder that investors with a memory longer than three months could be queasy? In both instances there was a strong earnings run the weeks preceding. The market was at an all time high. The DOW had run up almost exactly +2000 points since Jan 1st each year. Investor sentiment was very bullish. Contrast those years with this year. The DOW on Jan 1st was 9183. We closed today at 11186, +2,003 points. Could cautious investors be selling into the earnings rally? It is possible. With $10 bln coming into mutual funds weekly the last couple weeks, why are we not moving up. I think it is caution by the big boys who can read historical charts. They know if they are patient they MAY be able to buy at a significant discount soon. Now throw in the Y2K unknown. I got another newsletter this week advising clients to sell everything over the next six weeks and wait for the buying opportunity of a lifetime at year end. If only 5% of the readers of every newsletter that is recommending this action actually take it then it will be a self fulfilling prophecy. Am I crying wolf? Do I look like chicken little? I hope not! I am only trying to make sense out of the ramblings of hundreds of "experts". My suggestion is not to sell everything and shift into money markets. My suggestion is simply "be aware" of the market tone and look for subtle shifts that could warn of trouble ahead. Maybe a shift like no rally on good earnings AND good economic news. Nobody knows for sure and everybody is just guessing. If you act like an ostrich and hide in the sand you could get caught in a huge downdraft. The two week drop from intraday high to intraday low starting August 7th 1997 was -600 points. The three week drop starting July 20th 1998 was -1000 points. Do you think everyone was expecting those big numbers the day it started? Of course not. This is a perfect case for stop losses. You never know if the next drop is "the big one" or just profit taking. If the market charges off tomorrow to another new high then mark my comments off as the ramblings of a frustrated analyst. It will not have cost you anything. If sometime in the next couple weeks the market turns and you are ready to pull the trigger, then I will have done my job. You be the judge. Have a great weekend! Jim Brown Editor ************** SEMINAR UPDATE ************** On behalf of OptionInvestor and George Fontanills of OPTIONETICS we are declaring the OIN summer seminar series as SOLD-OUT. For all you folks that have already attended the Boston and Los Angeles events thank you for your support and for the lucky people who signed up for the Dallas and San Francisco seminars ..."enjoy". Don't forget you can still take the "OptionInvestor Home Study Course" .. featuring George Fontanills and his OPTIONETICS methodology demonstrating high profit low risk and low stress option trading. The home study package comes in either audio or video format and allows a future attendance at a OIN/Optionetics seminar for FREE. So you get the best of both worlds. Study in the comfort of your own home and then attend a seminar in the Fall for FREE. If you sign up now you can also reserve a place for a companion in the seminar for FREE. As you now know space is limited and you should sign up today to avoid being disappointed for the live seminar." email dana@OptionInvestor.com for details. *************** Market Posture *************** As of Market Close - Thursday, July 15, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,000 11,186 BULLISH 7.01 SPX S&P 500 1,315 1,355 1,410 BULLISH 7.01 OEX S&P 100 660 690 727 BULLISH 6.29 RUT Russell 2000 390 450 466 BULLISH 6.29 NDX NASD 100 2,110 2,220 2,429 BULLISH 6.29 MSH High Tech 1,010 1,080 1,240 BULLISH 6.19 XCI Hardware 900 950 1,067 BULLISH 6.17 CWX Software 675 700 822 BULLSIH 6.17 SOX Semiconductor 410 425 529 BULLISH 6.10 NWX Networking 525 545 618 BULLISH 6.25 INX Internet 500 510 527 BULLISH 7.01 BIX Banking 680 720 701 Neutral 6.29 XBD Brokerage 410 425 432 BULLISH 7.01 IUX Insurance 645 660 648 Neutral 6.29 RLX Retail 900 910 950 BULLISH 6.29 DRG Drug 370 400 376 Neutral 7.01 HCX Healthcare 750 800 777 Neutral 7.01 XAL Airline 180 190 167 BEARISH 5.21 OIX Oil & Gas 285 310 313 Neutral 5.13 Posture Alert Slow and steady. The market continues its uptrend course, with a slew of corporate earnings that have exceeded analyst expectations. The 30-yr bond continues to hold below 6% which can only help this market. The Networking sector led the charge today with a +3% gain, followed by Retail +1.3%, and Oil & Gas +1.1%. No changes to the posture board. A detailed description of our Market Posture and its applications can be found at: /members/marketposture **************** Market Sentiment **************** Thursday, July 15, 1999 The Pinnacle Index Part II! Below is an updated list of equities and our Pinnacle Index for those particular stocks. What we look for are liquid stocks/options that garner a lot of interest from the investment community. Most of the issues are high tech, and are thus more aggressive. We then filter out many of the equities, only to show stocks with excessive optimism or pessimism. From a contrarian standpoint (a high number is a good indication of extreme optimism, and a low number is a good indication of extreme pessimism) you should buy when its low, and sell when its high. For example, below you can see that Microsoft, Lucent, HP, Tellabs, and Motorola, Citrix, and a few others with asterisks next to them. These numbers are extremely high, and based on a contrarian standpoint, we would be willing to sell stock near those levels. During the last letter, we spoke about the Optimism going into Motorola's earnings and the Pessimism going into Intels. Well, from a sentiment standpoint, those stocks acted the next day like we expected (MOT sold off even on better-than-expected numbers, while INTC rallied even though they missed their numbers). Tonight after the close, Gillette reported poor earnings. Even though they dissappointed, based on the sentiment, this was expected. We will be interested to see how the 40 level holds, considering the extremely bearish sentiment at that level. Stock Symbol Strike Price Pinnacle Index Motorola MOT 95 / 100 / 105 3.6 / 8.3 / 23.1 * Intel INTC / 65 / 70 / 1.5 / 13.3 * Altera ALTR 35 / 40 / 45 1.6 / 1.1 / 1.3 Gillette G 40 / 45 / 50 .8 / 1.8 / 1.9 E-Trade EGRP 35 / 40 / 45 .8 / 2.9 / 6.7 Amazon AMZN 130 / 135 / 140 1.9 / 2.1 / 2.3 IBM IBM 130 / 135 / 140 2.6 / 1.9 / 8.6 Gateway GTW 65 / 70 / 75 1.1 / 1.6 / 0.6 Lucent Tech LU 70 / 75 / 80 2.9 / 3.7 / 28.0 * Microsoft MSFT 90 / 95 / 100 3.2 / 6.7 / 52.0 * Sun Micro SUNW 70 / 75 / 80 3.8 / 9.7 / 51.0 * Tellabs TLAB 65 / 70 / 75 1.4 / 2.1 / 19.0 * Schwab SCH 50 / 55 / 60 1.2 / 4.8 / 12.3 * Hewlett P. HWP 110 / 115 / 120 3.2 / 5.1 / 48.0 * AtHome ATHM 45 / 50 / 55 .5 / 1.0 / 2.0 Lycos LCOS 100 / 105 / 110 1.8 / 4.8 / 5.4 Dell Comp. DELL 35 / 40 / 45 .6 / 2.3 / 8.6 Novell NOVL 25 / 30 7.4 / 20.4 * Oracle ORCL 35 / 40 1.7 / 16.7 * MCI-Worldcom WCOM 85 / 90 / 95 .4 / 1.6 / 4.6 Ericcson ERICY 25 / 30 / 35 2.3 / 2.8 / 2.9 Citrix Syst. CTXS 60 / 65 / 70 6.7 / 22 / 55.0 * Cisco Syst. CSCO 65 /67.5/ 70 2.4 /11.8 / 13.4 * Qualcomm QCOM 150 /155 /160 2.8 / 2.9 / 7.3 America Onl. AOL 125/127.5/130 2.3 / 3.8 / 3.9 Compaq Comp. CPQ 25 /27.5/ 35 1.9 / 2.6 / 3.3 AT&T T 50 / 55 / 60 .2 / 1.4 / 9.1 Pfizer PFE 35 /36.6/ 40 1.8 / 2.8 / 7.9 ***Rambus RMBS 85 / 90 / 95 .4 / .7 / 1.2 *If you go back to Tuesday's letter, you will see that Rambus had the most bearish sentiment of any stock that we listed. With a +25 point gain two days later, you can definitely get a better idea of how powerful sentiment analysis can be. The Rambus sentiment above is from Tuesday...for informational purposes only. With it's large gain, it no longer falls into our criteria. Bullish Signs: Interest Rates: The 30-yr Treasury is beginning to retrace back under the key 6% level. Investor Intelligence: As a contrarian indicator, the percent of Bullish investors decreased by over 3% and the percent of Bearish investors increased by 2%. Russell 2000: Trending above both moving average, and also above key 450 benchmark. Mixed Signs: Market Posture: Several indexes are showing signs of a potential rollover, including the Dow, OEX, networking, software, and semiconductors. Advance/Decline Line: After checking up last week, the A/D line is beginning to roll over and could prove Bearish if decliners out pace advancers in the week ahead. BEARISH Signs: Peak Open Interest: The contraian put-call ratio clocking in at .97 suggesting bullish sentiment picking up steam. OTM Call Analysis As we move through July'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. July Expiration Cycle OEX OTM Call Analysis (Open Interest July 680-750) Date Open Interest Change % Alert Friday, June 19 35,225 - Friday, June 25 63,342 +79.8% Friday, July 02 87,833 +149.3% Friday, July 09 99,855 +283.5% Market Sentiment at a Glance Friday Tues Thurs Indicator (7/09) (7/13) (7/15) Alert Pinnacle Index (OEX): Overhead Resistance (720-750) 7.9 6.1 5.9 Underlying Support (685-710) 1.3 1.9 2.0 (650-710) 2.1 2.7 2.8 Put/Call Ratios: CBOE Total P/C Ratio .5 .5 .5 CBOE Equity P/C Ratio .4 .4 .3 OEX P/C Ratio 1.5 1.2 1.2 Peak Open Interest (OEX): Puts 600 680 600 Calls 730 725 750 P/C Ratio 1.01 1.08 .97 Market Volatility Index (VIX): CBOE VIX 19.09 20.46 19.69 Investors Intelligence: Bullish 55.20% * Bearish 26.70% * 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. OEX Pinnacle Index Friday Tues Thurs Benchmark (7/09) (7/13) (7/15) Overhead Resistance (720-750) 7.9 6.1 5.9 OEX Close 722.68 719.79 726.88 Underlying Support (685-710) 1.3 1.9 2.0 (650-710) 2.1 2.7 2.8 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 725/750 level while the underlying support is holding at the OEX 685/710 level. Put/Call Ratio Friday Tues Thurs Strike/Contracts (7/09) (7/13) (7/15) CBOE Total P/C Ratio .54 .55 .49 CBOE Equity P/C Ratio .40 .42 .32 OEX P/C Ratio 1.48 1.15 1.23 Peak Open Interest Friday Tues Thurs Strike/Contracts (7/09) (7/13) (7/15) Puts 600 / 12,089 680 / 12,503 600 / 12,196 Calls 730 / 11,917 725 / 11,571 750 / 12,558 Put/Call Ratio 1.01 1.08 .97 Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 15, 1999 19.69 * Investors Intelligence 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 07, 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 05, 1999 58.1 27.6 May 12, 1999 56.9 31.0 May 19, 1999 60.9 28.7 May 26, 1999 61.6 27.7 June 2, 1999 61.6 27.7 June 10, 1999 58.3 28.7 June 16, 1999 58.8 26.3 June 24, 1999 57.5 26.5 June 30, 1999 55.8 25.7 July 07, 1999 52.6 27.2 July 14, 1999 55.2 26.7 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 11186.41 7.28 -25.96 -26.92 38.31 -7.29 Nasdaq 2839.37 -2.63 -12.21 39.90 21.24 46.30 $OEX 726.88 -1.02 -2.07 1.79 5.30 4.00 $SPX 1409.62 -4.18 -5.54 4.61 11.45 6.34 $RUT 465.80 4.55 -1.19 3.35 4.34 11.05 $TRAN 3397.03 4.57 -26.29 15.91 -24.48 -30.29 $VIX 19.69 0.75 0.39 0.15 -0.69 0.60 Calls Mon Tue Wed Thu Week SNE 126.25 3.13 0.56 2.56 5.63 11.88 What a week VRIO 82.56 0.09 2.16 0.25 5.31 7.81 Up again TXN 153.25 1.19 -1.44 3.69 3.25 6.69 2:1 split SEPR 93.75 -0.19 0.75 2.38 3.63 6.56 New, rising HWP 113.00 0.44 2.19 -0.88 4.56 6.31 Price target LU 77.63 1.63 -0.88 2.31 2.63 5.69 Fund buying NXTL 54.69 1.44 1.38 -0.13 2.00 4.69 More ratings NXLK 97.44 4.72 -5.97 0.56 5.13 4.44 Another 2:1 GTW 72.00 2.13 -1.44 4.94 -1.25 4.38 Hot sector QCOM 152.97 -1.31 -3.06 5.19 3.41 4.23 Strong close EXDS 140.06 3.44 -4.31 10.94 -6.38 3.69 Support $140 VOD 209.75 -0.38 -4.50 4.00 3.50 2.63 Channeling NOK 97.00 -1.50 -0.31 2.38 2.00 2.56 New high MSFT 94.38 0.94 -0.56 1.31 -0.56 1.13 Dropped DELL 43.94 0.81 -1.38 1.25 0.44 1.13 Be patient SUNW 73.75 2.25 -1.69 1.63 -1.38 0.81 Split?? ABOV 43.94 0.25 -0.63 0.88 -0.31 0.19 Dropped BBY 76.19 -0.31 -0.81 -0.31 1.63 0.19 Consolidate SLR 71.94 -1.44 -0.94 2.63 -0.25 0.00 Up and down TMCS 34.88 1.38 -1.00 -1.00 0.63 0.00 Buy rating CSCO 66.56 -1.44 -0.38 0.06 1.25 -0.50 More volume SONE 47.50 -0.38 -1.81 2.31 -0.88 -0.75 Dropped DCLK 101.88 -8.94 2.50 -1.44 6.81 -1.06 Big jump IBM 137.88 0.44 0.06 -0.63 -0.94 -1.06 Earnings?? COST 84.00 -1.38 -0.69 0.19 -0.06 -1.94 Dropped DRIV 32.63 -2.06 -0.63 0.75 -0.69 -2.63 Dropped MSPG 47.00 -2.25 -0.63 1.25 -2.50 -4.13 Dropped RNWK 87.50 -4.88 -0.75 2.00 -1.25 -4.88 Net play BRCM 138.50 0.63 -3.88 -0.75 -1.25 -5.25 Bounce?? AOL 121.00 -5.94 2.81 -2.13 -2.00 -7.25 Yikes! CMGI 112.25 -8.19 1.06 -2.06 0.44 -8.75 Dropped Puts WPI 35.00 -0.75 0.06 -0.88 0.63 -0.94 Looks weak FDX 48.44 0.19 -0.81 1.25 -0.69 -0.06 Oil prices JCP 46.25 0.25 -0.69 0.13 1.13 0.81 Resistance IMNX 125.00 -6.75 3.50 3.50 5.75 6.00 Dropped SAPE 54.00 2.50 0.00 2.25 1.50 6.25 Dropped **************** 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: ****** MSPG $47.00 -2.50 (-4.13) This has been a pretty good week for the NASDAQ as a whole. Unfortunately, about the only thing springing out of MSPG is a thumb and forefinger in the shape of an "L" on its forehead (the "Loser" sign). The bloom is off the rose and investors have turned their attention elsewhere. Since Earthlink reported only a penny above forecast last night, and the merger rumors have died down for this sector, it's time to move on. We're not saying that a merger won't eventually happen. We just don't want to gather dust waiting. Besides, earnings are 1 week away on July 22, and we would have to close the play on July 20 in front of earnings anyway. MSFT $94.38 -0.56 (+1.13) It looks like this play is ending early. Earnings are July 19 (company confirmed), 1 trading day following expiration of July contracts - only 2 trading days left, and they better be good. Otherwise, the MSFT options specialists are going to take all those JUL-95 premiums home in their pockets tomorrow night. Support is still $92, but MSFT needs volume to get over $95, something it likely won't get on a summer Friday. Option expiration day might help things in this case, but don't count on it. Consider exiting this play tomorrow on any strength. Gunslingers only may want to hold through Monday and sell their positions then, but that definitely bucks the odds. You want to be out by the time MSFT announces their earnings. There just isn't that much time left to get a nice run, so we're dropping MSFT tonight. ABOV $43.94 -0.31 (+0.19) We are going to leave ABOV by the wayside for the time being. Earnings are due to come out July 23rd. There still may be time to get in a small earnings run. The reason we are letting ABOV go is not that it went the wrong direction, it's that it really never went anywhere. The $42.00 area may prove to be good support and AboveNet may resume its upward trend prior to the earnings release. The last few days the Internet sector has been somewhat dull and we will look elsewhere for new opportunities. COST $84.00 -0.06 (-1.94) Here's one that just never really went our way. Tuesday and Wednesday COST seemed to find a bottom in the $83.00 area. It may prove to be a bottom. However it MAY NOT. Today it looked as though COST might have found new life as it started to advance on decent volume in the morning. Around lunch time it hit $85.81 and then fell apart with some solid volume behind it. The retail sector was positive today and we still believe there are some great opportunities in this sector. We will look elsewhere in the industry at this time. SONE $47.50 -.88 (-.75) Even though SONE made a nice gain yesterday, the stock couldn't hold on to this momentum as the stock lost just under a dollar today. SONE is another Internet play that just can't break out to the upside and though earnings are coming up, we can't continue to recommend the stock. The $50 level has been strong resistance and until we see SONE break this level, we are dropping it as a play. ***** 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 Thursday 7-15-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Call drops continued: CMGI $112.25 +.44 (-8.75) CMGI finished with a minor gain today after losing a little over $2 on Wednesday. Interest in the stock has been anemic as volume today was 25% of normal. CMGI has not shown any strength this week and even though volume has been light, we don't like the way the stock is looking. With CMGI earnings not until September, it seems there is nothing to push the stock higher, so we will drop the stock until we see some momentum. DRIV $32.63 -.69 (-2.63) DRIV lost ground again today and we don't like the looks of the stock going forward. It seems the Internet sector is having a hard time moving higher and even with earnings in the near future, we feel there are better plays then DRIV. The stock has been trading very light volume and we will watch to see how it reacts in the future before adding it back to our list. Thus, we are driving on to other plays. NXTL $54.69 +2.00 (+4.69) Today Nextel reported a 2Q loss, yet it beat the Street's estimates. NXTL came in at -1.04 ahead of the -1.35 p/s loss expected. They also reported record domestic subscriber growth of 440,000 new additions. Moreover, top-level management was rearranged within the company. Chairman and Chief Executive, Daniel Akerson, will now work with wireless pioneer, Craig McCaw, at his Eagle River Investments. President, Tim Donahue, is being promoted to Chief Executive and Craig McCaw (founder and major investor in Nextel) will serve as the new Chairman. Everyone was happy today and NXTL traded above $56 late afternoon. Analysts came out of the woodwork too. Gerard Klauer Mattison reiterated their "buy" rating and set a target price at $81. Davenport & Co raised their rating to a "buy" from "hold", but set a lower target price from $73 to $78. SoundView also went to the press and reiterated a "strong buy" rating on NXTL. Nonetheless, after hitting its newest high at $56.19, NXTL succumbed to profit-takers and declined for the remainder of the day. We're dropping NXTL at this time because we stick by our recommendation not to hold over an earnings' announcement. There are very few exceptions. Most stocks will decline immediately or very soon after and of course, this is not the environment to begin a new call play. [editor's note: Yes, we are dropping them but on principle only. It is quite possible that with an earnings surprise this strong that NXTL could rally for a few more days. Sorry. - Kimo] PUTS: ****** SAPE $54.00 +1.50 (+6.25) SAPE was able to form a bottom this week and is now bouncing after the huge declines from the past two weeks. We got started on the right foot for our play on Monday when SAPE was initiated by SG Cowen with a neutral rating. Of course what they really mean by that rating is ‘You’d be crazy to buy this stock right now but if I give the stock anything lower than neutral, the company will never speak to me again’. But that was the end of recent bad news and the stock is now bouncing. It’s tough to say exactly how much spring the stock will have since the drop was so far but its current movement is obviously not conducive to put buying in the near-term. IMNX $125.00 +5.75 (+6.00) Just when we were ready to pat ourselves on the back after a $7 drop after the first day, IMNX hit the 100-dma and bounced right back to where it was. On Thursday it even moved back above the 50-dma, where it has spent most of its time the past year. The rally stems from great earnings from Amgen which is one of the first drug companies to report. This is creating positive momentum ahead of next week when most companies will report. Also on Thursday IMNX announced that they have filed with the FDA to expand use for their stellar drug Enbrel. For these reasons we are removing Immunex from the put list. ***************************** Insider Trading - Staff Plays ***************************** Today - Buzz recaps a play from last week. For as much as we traders like to talk high-mindedly about remaining "market neutral" (the ability to trade calls and puts in both up and down markets without emotion), we are for the most part, unashamed bulls. In my own case, I frankly admit that I needed some brushing up on identifying and playing good puts. Usually, my strategy is to plan the picks I want to play on Sunday evening by copying those that look interesting to a new Word document. From there I edit ruthlessly until I have the plays down to about 10 lines each, which specifically include the strikes of the trading range in which I intend to play. By the time I'm done, I have from 4-10 plays which I might like to be in. First thing Monday and for the rest of the week, I pick the play to enter based on what I know to be true at that time. Yes, the plan is fluid and sometimes changes as market conditions change. Even so, most of my plays are calls, covered calls or spreads. I rarely go long on puts. That said, I had YHOO on my mind last week before Monday's opening since I knew that YHOO would report earnings after the close on Wednesday and that whatever happened to YHOO might rub off some sympathy to other Internet plays. I figured earnings would be great because they always are. YHOO always tends to surprise substantially to the upside. But no matter how good earnings had been in the past, YHOO always fell after the announcement even when accompanied by a split. In short the chart was compelling - almost a no-lose guarantee if I could tolerate the risk of typical Internet volatility. Even so, YHOO was not on my plan sheet. Take a peek at the following chart to see the predictability. On this 1-year chart, 3 out of 3 previous times that YHOO released earnings, the stock got pounded. It may have taken a day or 2, but it still got hit. Anyway, I looked at this chart again the night that earnings were released and decided YHOO would become my "back burner" play. Just in case nothing else looked playable that day, maybe YHOO would look good as it blipped across my radar screen. Thursday morning YHOO opened up and continued to rise pretty steadily for the first 2 hours of trading, which to me was kind of unusual considering how much we, myself included, harp on the frequency of declines after earnings reports. The phenomenon seemed especially prevalent this earnings season, with most investors getting out a day or 2 ahead of reports. So needless to say, a rising Internet stock, which had not unexpectedly reported earning at the high end (that is to say, no decimating blow-out), had caught my attention since I thought it was going the wrong way. It should have been going down but it wasn't! So I watched in real time for the next 3 minutes. . .$172. . .$173. . .$174. . .$174.50. Uh oh! It stalled and began heading south more rapidly than when it was going up and the volume was increasing. (Volume is one of my 2 favorite indicators to watch. The other is price.) In elapsed time of about 4 minutes, it had come full circle back to $173 and volume was increasing. On a daily chart broken into 5-minute increments, it looked like it was about to become an upside-down "T", or shooting star. That's where over a particular period of time (in this case, 5 minutes), the little tick marks on the bar, which point left at the beginning at the period (indicating the starting value for the period) and right at the end of period (indicating the finishing value for the period) began and finished at the bottom of the bar corresponding to that 5 minutes. It also looks like that nail sticking straight up in the middle of the road that gave you your last flat tire. Let me tell you, it will take the air out of a stock just as fast. Technicians will tell you that it's a deadly sign and a good time to sell if you are long, or go short. It's also a great time to buy a put! That was my cue. YHOO had just become my front burner play that met my conditions for a good entry. I wasted no time in getting an order set up on the screen to send. I figured with that strong of a signal, YHOO had a long way to fall and my timing was good. So, with the last trade at about $173, the corresponding bid/ask was surprisingly tight at $7.63/$7.88. I didn't want to get too greedy and let the opportunity slip away, so I placed a limit order to buy JUL-170 puts at $7.75 figuring the specialist would fill the order rather than raise the bid price. Besides, this was YHOO after all, a fast mover that trades multiple hundreds, if not thousands of contracts per day in some strike prices. He wasn't going to change the topography of the action just to accommodate my little trade. Whaddaya know? Filled in 1 minute with confirmation. The on-line broker had its act together at that moment. . .go figure. By then the price had fallen into the $172 range. Right about then, YHOO found temporary relief from the selling. Impulsively, (no, emotionally) I second guessed that maybe it was about to head up and that I'd bought at exactly the wrong time. However, in about 4 nanoseconds, I recalled why I made the trade, which reassured me that I'd made a pretty good buy, but I never stopped to figure out where or at what price I would get out of this play. By now, I'd already broken 2 of the 10 trading rules (the first was trading on impulse, since I'd never really planned to enter a put play on YHOO). Immediately I went back to the 5, 10, and 30-day charts, then the 3-month and 1-year charts looking for support and resistance. Actually, the 10 day chart alone probably would have sufficed, as it showed YHOO to have short-term support at about $160-$162. I figured with such a big time premium for a current month option on a volatile stock, delta (the amount of price change in the option compared to price change in the stock) might be lower than the usual +/- 50% for an ATM call. Doing the math, with 10 points to fall in the stock, I figured conservatively that that would be good for something slightly less than $5 of gain, thus a selling price of $12.75. But what if the market runs to another new high (which it did)? YHOO may be carried with it. Naw. . .remember the 1-year chart and the shooting star. Nonetheless, let's not be greedy. I then entered a limit order to sell the whole position if it hit $11. I checked back from time to time over the next few hours, but YHOO had traded flat in the $170- $173 range. You've heard it before - a watched pot never boils. The chart was on my side, but I was getting impatient and a bit nervous that the trade might go against me. So I left the computer until about one half hour before the close. If I didn't limit out then, I'd just set another limit sell order in the morning, knowing that YHOO would eventually trade down. Remember, I'd done the homework. PATIENCE and DISCIPLINE. Stick to the plan. That was going through my head. Upon my return, I was impressed to see that my $7.75 position was now bid (the price at which the specialist was willing to buy) at $10 and had been rising for the previous hour. Remember, since I was playing puts, the more YHOO dropped, the more I made. To get to the point, the bid crossed $11 and made it up to about $11.38 just 15 minutes before the close. Because I had my limit order set, I was limited out at $11 for a profit of $3.25 on a $7.75 investment, or about 42% return for a 1-day play. Yes, YHOO did continue to fall and I could have stayed in for a few more $$$. But I'd decided from bad trading experiences long ago that it's always better to take profits when they are available, especially when they come that quickly. A reversal of fortune is usually just around the corner for me if I get too greedy. I've learned to feel satisfied with the tangible reality of small profits rather than screw up good trading psychology with the hallucination over what might have been. I know I'll never go broke taking a profit. Besides, I've found that seller's remorse negatively interferes with the next trade. Now, they don't all go this way. In fact, it's pretty rare to move that much that fast. But the lesson here is that if you get conviction by knowing a stock's trading pattern or trend and your pre-planned conditions for entry are met, you should have the expectation of a good outcome. I probably wouldn't have entered this play if I were fairly new to trading, since I doubt I would have been able to immediately identify the opportunity when it presented itself. That's where doing your own research and understanding past trends can really pay off. If you can pick just 5 companies in which you in which you learn everything about them - their news events, trading patterns, trends, support and resistance and volume patterns, you too will be extremely successful at this business. It's not hard. It just takes some discipline, which may be the hardest part of trading. Buzz, research analyst ***************** PICK NEWS - CALLS ***************** TXN $153.25 +3.25 (+6.69) Boy, you would think with a $3.25 price spike after the bell that TXN announced great earnings after the close. NOT!! Instead, how 'bout that 2:1 split we'd been referring to? You got it! They announced it after today's close, but will still report earnings on July 20 (company confirmed). Shares will begin trading at their split level on August 16. Their last split (2:1) was in November 1997 at about $100. That they announced the split before earnings is a dead giveaway that they have full confidence of pleasing Wall Street with the earnings number next week [editor's note: I'm not so sure about that. TXN has been very strong and so has the semiconductor industry but that doesn't mean you should hold over earnings - ever. -Kimo]. Usually, this is a sign to back up the truck and load up all you can get, however, we STRONGLY URGE YOU NOT TO DO THAT, as it violates rule #1 of trading, which says not to put all your eggs in 1 basket. The risk of Murphy's law working its magic is just too great. If you violate the rule, use risk capital only. You don't want to be buying at the height of euphoria only to see the price reverse as soon as you take a position. (Also, Efficient Networks, in which TXN owns 13%, launched its IPO today. . .priced at $15, closed at $51.13. . .nice going!) QCOM $152.97 +3.41 (+4.22) QCOM and Lucent Technologies (LU), today announced an agreement to jointly develop and promote standardization of a technology for locating the point of origin of an emergency (911) wireless phone call. That's about the only news today. Yesterday, investors forgot all about that 3% dilution of shares that will result from the sale of 4 mln. shares directly to index funds. It just wasn't that big of a deal. Anyway, earnings are Tuesday, July 20, at approx. 1:30 p.m. PST (company confirmed). Again, we point out that this dilution could be management signaling their confidence in the future. Oh yes, another new high today too. We like the strong close on an uptick with increasing volume, which bodes well for a few more $$$ of profit in the next 2 trading days before earnings. If history is any indication, there is also a strong likelihood of a 2:1 split. Nonetheless, this is a volatile (a.k.a risky) play. Keep your stops set in case of a downdraft. If you enter a quick play before earnings, confirm market direction first. CSCO $66.56 +1.25 (-0.50) While not looking like a winner for much of this week, CSCO has been consolidating, which is OK with us. The longer the base, the stronger the earnings run. It won't report earnings until August 10 (company confirmed), so there is plenty of time to scale into a position. As we noted Tuesday, we need to see volume return, which will be our signal to take a position. We saw a slight increase in volume today, by about 6% - no great shakes, but not bad. CSCO is now back over the $66.50 level, just $2.69 shy of an all-time high. After that, nothing but blue sky. If it clears and holds $67.06, and you see volume that could take CSCO over 16 mln. shares traded, feel free to get in. Just remember to confirm market direction before starting a new play. If you are already in CSCO with a profit, don't let it slip away. You can always buy back in cheaper. DELL $43.94 +0.44 (+1.13) Broken record: "plan your entry and wait to get it. You won't be missing any earnings run, since earnings won't be announced until August 18 (company confirmed). Surprisingly, there isn't much in the news, so let's go to the technicals. Dell's strength has been impressive and there has been an opportunity to play it once or so this week, but you had to be nimble to do it. DELL has been as low as $41.50 intra-day Tuesday, and as high as $45 intra-day today (huge resistance thanks to investor psychology that says, "I'd love to break even on this stuff and sell it if it ever gets to $45 again."), but these were spikes in either direction. It's too early to start an earnings run, but DELL might be playable in the $40-$45 range. You can bet there will be some weakness on which to buy the dip in the next 2 weeks. Conservative types, wait until you find your entry at the low end of the range. DELL will come to us before August 18. Be patient and wait for it. EXDS $140.63 -6.38 (+4.25) EXDS has traded in an $11 range over the last 2 days - $137 to $148, where the action has been quick. Literally, you have needed to watch this one with electricity in your veins to catch the moves. EXDS currently sits at $140 support. Market willing, we'd expect a bounce from here, as earnings are scheduled Wednesday, July 21 after the close (company confirmed). Something to be concerned with though is the close near its low, despite reaching a new all-time intra-day and high of $148.19 today. Even so, the technical chart still looks strong. Their CEO made the airwaves today too and stated that though they were in a quiet period, they were expanding geographic data centers at breakneck speed, thanks to industry migration toward their business model (server farms), and the addition of 2 new major customers per day. Bet on earnings to be good (but still, don't hold a position then). More news, yesterday Banc of America Securities started coverage with a buy rating and a price target of $170. It's not for the conservative investor types. Target shoot your entry for intra-day dips and know our exit before you start a new play. RNWK $87.50 -1.25 (-4.88) RNWK rose $2.00 yesterday, but lost $1.25 today on volume that was less than half the average. In fact, volume has been shrinking each day this week, after investor interest in the Internet waned following the Disney/ Infoseek deal. Today initially looked good, but the stock began slipping in the afternoon. It wound up dropping $3.88 from the day's high of $91.38, and it closed near the low of the day. The only saving grace was the anemic volume. RNWK reports earnings Tuesday, July 20th after the market closes. We are still hopeful for a late earnings run, but we recommend starting new options only on rising stock price and rising volume. In the news: RNWK is joining forces with the Associated Press to offer a new audio and video news service for use on AP's media members' web sites. Real Networks will provide the streaming audio and video over its online network. In addition, IBM announced that it is bundling RealPlayer G2 on its Aptiva and ThinkPad i Series PCs. IBM $136.31 -.94 (-1.07) After setting a new all-time for 6 out of 7 trading sessions in a row through Tuesday, IBM has taken a breather the last 2 days. (Compaq, and Apple also fell today.) This slight pullback to catch its breath may allow IBM to make a final move up before it announces earnings, which will be Monday, July 19th. IBM sometimes makes nice intra-day highs, so watch for one to close out your trade. In a joint promotional deal, AOL's Compuserve will offer rebates for Internet access contracts for customers who purchase Aptiva or ThinkPad I Series computers. Also, IBM will be included in the Dow Jones Indexes' new "Global Titans Index". In other news, Unisys, which offers some of the same computer services that IBM does, reported strong quarterly numbers this afternoon. It earned $.38/share versus $.24 for the same quarter last year. Analysts' estimates were for $.33. These numbers suggest a lot of growth in at least one area of IBM's business and bode well for its own earnings release. NOK $97.00 +2.00 (+2.56) Right on target, Nokia headed higher again following a few days of consolidation. Good numbers out from Motorola set the stage for NOK's move, as it rang up a $2.37 gain yesterday and a $2.00 gain today. The stock also set a new all-time high of $98.00 this afternoon. Stocks don't move up in a straight line. They usually move in cycles of several days up, followed by a day or more down to regroup before they start up again. Nokia is now ready to move up toward its earnings announcement, market permitting. The company reports Thursday, July 28th, BEFORE the opening bell, so plan to close your trades by the close Wednesday night. BBY $76.19 +1.63 (+.19) BBY took off after it was added to the S&P 500 and grabbed $16 of non-stop gains. It needed 5 days to consolidate after that performance. Today, it finally saw a positive day again, as it gained $1.63. A high growth retail stock like BBY will do best in a low inflation environment, when all the great electronic equipment it offers remains affordable. Low interest rates make financing relatively inexpensive, so consumers can keep on buying the latest upgrade or innovation. With benign PPI AND CPI numbers, and a period of consolidation behind it, the stock is now poised to rise again, market permitting. BRCM $138.50 -1.25 (-5.25) After setting a new all-time high on Monday in a very volatile day of trading, BRCM has lost ground the last four days in a row. Volume has been light. It appears that dwindling interest in the Internet stocks this week has applied to BRCM as well. Although it is a semi- conductor stock, it trades with the Internet and communication stocks as much as the semis. Today it failed to bounce off its 10 dma moving average, although we could still see a bounce tomorrow. BRCM will announce earnings Wednesday, July 21st, after the close. Before entering new options on this stock, be sure to confirm upward movement on good volume. BRCM has a consistent record of beating earnings estimates and delivering awesome growth. Investors may yet give this stock the earnings run we are looking for. If they don't, it could take off after earnings, if the company delivers yet again. SNE $126.25 +5.63 (+11.87) What a week! Sony has powered ahead $11.87 in the last four days. Up $5.63 for the day on volume of 447K, the strength of SNE has even amazed us. Sony hit another 52 week high (of $126.88) which is beginning to become an everyday occurrence. It has made a new high for the last six sessions. Technically SNE is starting to look a bit overbought. However, the way it moved today with the volume and strength would certainly suggest there is more room to the upside. The benchmark Nikkei edged higher to end at 18431.86 which is its highest closing price this year. It hit a high of 18,459.51 and was met with strong selling pressure. What we are saying here is make sure you keep moving your stops up on Sony. We would be cautious about entering a new play at this time, as SNE is due for a pullback or a bit of profit taking. If that occurs we would look at Sony to initiate a new position (after the profit taking appears finished). GTW $72.00 -1.25 (+4.37) Gateway started out somewhat flat on Wednesday, but after lunch the buyers came back with their stomachs full and ready to do business. GTW traded in a $2.00 range until after lunch. There was no apparent reason for the sudden interest in PC makers other than Apple (AAPL) beating estimates by a nickel. Dell (DELL) kicked in about the same time yesterday. It may have just taken that long to sink in. Gateway went on to close $4.94 higher yesterday, on better than average volume of 1.8 mln. shares. Today GTW continued moving higher, another $2.50 before running into overhead resistance at $75.75. Profit taking set in and GTW finished the day down $1.25. The $70-$72 area should provide support for GTW. The industry has gained strength this week and we believe today’s action is a point for consolidation before the next move higher. As always keep your stops in place and confirm market strength and direction before entering any new plays. SLR $71.94 -.25 (+0.00) SLR made a new high right out of the box Monday morning. Solectron hit $73.25 in the first three hours of trading Monday. Since that time SLR has been in a drifting mode. It drifted lower to $69.31 on Tuesday. Wednesday the volume was up and so was the price. SLR closed higher by $2.63 on Wednesday. What is interesting to note is the spasmodic volume that accompanies SLR, 1.9 mln. one day and 900K the next. 1.30 mln. is average. We are looking for SLR to continue its winning ways. Technically the upward channel is still in tact. We will need to see some additional strength in SLR if its going to keep our interest. No news at this time that would move SLR. Adjust your stops accordingly. Wait for a positive move and don't forget to check the volume before entering a new position. TMCS $34.88 +.63 (+.00) TMCS gained slightly on Thursday after dropping a dollar on Wednesday. The stock got good and bad news on Wednesday. The good news was the initiation of TMCS by Banc of America as a "buy" with a price target of $55. The bad news was the announcement by Alta Vista to enter the e-commerce hosting business. "It is directly competitive with what Ticketmaster-CitySearch is doing and with what any other local Internet site would be offering local merchants," Bruce Murray, Zip2's vice president of marketing, told CNET News.com in an interview from Chicago, where the new program is to be unveiled. TMCS bounced back today, but it will be interesting to see what effect this news will have over the near term on TMCS. Watch for the stock to stay above $33, as this has become short term support. VOD $209.75 +3.50 (+2.63) We mentioned on Tuesday that VOD had been in a downturn for four days, but the stock tends to channel. As if by design, VOD turned around on Wednesday and has gained over $7 in the last two days. Volume was heavier today, a sign that more investors were buying the rally. We like VOD going into its annual meeting on July 21st. It is expected the company will announce a 4-1 split. Unfortunately, VOD is an ADR, which causes the stock to gap up or down on the open. Do not put in a market order after the close, because there is no way to know what price you will get on the open. VOD was maintained on Goldman Sachs "recommend list" today. Another sign of confidence in the stock. LU $77.63 +2.63 (+5.69) We added LU as the play of the day on Wednesday night and the stock has responded. In the last two trading days, the stock has gained just under $5. Earnings are around the corner on the 21st of July and many feel LU will announce very strong earnings. Fidelity Investments showed today that LU has been one of their top buys over the second quarter and the stock was reiterated "outperform" at Sanford C. Bernstein. LU announced today the purchase of fiber-optics maker SpecTran for $99 million. LU feels this will add additional products and market niches. DCLK $101.88 +6.81 (-1.06) The dip on Monday turned out to be exactly what we need to open new plays. DCLK consolidated earlier this week and is back in rally mode. There was no other recent news to fuel the rally since the announcement of the purchase of NetGravity. We are now hitting right on the 50-dma which DCLK has tried to break through for the past couple weeks. This may be a point to take profits if you were able to get in on Tuesday or Wednesday. Anyone who has yet to open a play or has more of a conservative investment strategy should wait for a break above resistance. Also set your stops to lock in profits at this level. Earnings are on Monday so we will be looking to drop DCLK as play on the Sunday. ***** Play updates continued in section three ***** ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
The Option Investor Newsletter Thursday 7-15-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. Call updates continued: AOL $121.00 -2.00 (-7.25) AOL is at a critical point in our play. We have less than a week before earnings and the stock is sitting right on support at $120. AOL fell on Thursday because of the quarterly report issued by Fidelity Investments. They issue a report on their mutual funds which show the top ten holdings of each fund. Apparently AOL has fallen out of the top ten in many funds. This is fueling rumors that institutions are selling. It could be true so we are encouraging caution on this play. We still expect an upward move over the next couple days in anticipation of earnings but keep your eye on the important $120 mark. SUNW $73.75 -1.38 (+0.81) SUNW traded lower today despite the strong market but it still has held above the 10-dma. This is the trend it has shown for the past couple weeks that has made it an attractive play. We see this pattern continuing ahead of earnings next Thursday. Today can be chalked up as a bit of profit-taking since there wasn’t any major news. Volume was less than average for the last two days but it should pick up on Friday as investors start shopping for stocks with earnings next week. You may want to consider any break of support at the 10-dma as time for your stops to pull you out of the play. VRIO $82.56 +5.31 (+7.81) VRIO shot up over 5 points today on news of a $300 mln. private, preferred stock offering. 6 mln. shares of the 6.75% Series A convertible preferred stock are being offered to institutional investors. These new shares can be converted to common stock at $96.56 (or a 25% premium over VRIO's closing price yesterday at $77.25). The offering will close on July 20th. Verio plans to use the proceeds to fund acquisitions and other company investments. After the recent purchase of digitalNATION for $100 mln. cash and the $42.5 mln. used in March for AOL to provide exclusive Web-page hosting, Verio will certainly welcome the cash. The excitement was evident today with triple the normal trading volume and another new 52-week high at 83.50. This is the 7th consecutive day of gains. Expect a pullback soon. HWP $113.00 +4.56 (+6.31) This split candidate flew upwards today after a short-term downdraft to $107.06. HWP profited gains of over $5 at one point and set its latest 52-week high at $113.50 during the last minutes of trading. Volume was slightly above average. Yesterday, the stock also stepped up into new territory, however after the early morning swell, it settled into a narrow trading range around $108. That same day Merrill Lynch analyst, Steve Milunovich, raised his target price to $122 from $100. He believes HWP is "hitting new highs thanks to the upturn in H-P's business and the rising tide carrying Internet infrastructure vendors." Hewlett Packard was also given highest honors in the 'Channel Champions' survey conducted by Computer Reseller News. This is the 6th consecutive year HWP has had the highest reseller's satisfaction rating in both scanner and laser-printer categories. Earnings are expected on August 16th. NXLK $97.44 +5.13 (+4.44) Surprise, Surprise! Nextlink announced they are having a 2:1 stock split payable on August 27th! The Board of Directors made the announcement today, but stated the split is subject to shareholders' approval of increasing the number of authorized shares. According to information we previously had for NXLK, there's 110.33 mln. shares authorized and only 35.76 mln. issued; therefore plenty of shares available for the proposed 2:1 stock split. OIN has contacted Investor Relations at Nextlink requesting further information regarding this issue. As soon as we get a satisfactory response to our inquiry you'll get the inside information. On the news today, NXTL tested its near resistance (the 52- week high of $98.44 set on Monday) and traded consistently in the $97-98 range. Volume was moderate. Due to the spikes Monday and today it's difficult to determine a relative support level. Looking at a 10-day chart it appears to be around $91 and $93. Earnings are expected at the end of the month on July 30th. **************** PICK NEWS - PUTS **************** FDX $48.44 -.69 (-.06) FedEx gained $1.25 yesterday, following a company report that its Asian cargo growth rate was 20% year over year. Taiwan's express shipping was especially strong. Today however, FDX gave back $.69, as a warning from US Airways helped drag down the transportation sector. In addition, oil futures reached record highs today, suggesting that investors are looking for higher oil prices. High oil prices are bad news for all the airlines. Use caution here. FDX is down in price because it's quarterly earnings did not exceed the market's high expectations. High oil prices and a weak transportation sector will continue to depress the stock. However, FDX is a strong company long term, and it will continue to issue news wires touting any positive news on the company in an effort to stop the price slide. JCP $46.25 +1.13 (+0.81) JCP made its move today but ran into resistance and turned lower. It sounds too simple but that is essentially what happened. All stocks eventually bounce after a decline and JC Penney got their bounce today. But it wasn’t strong enough to push past the 10-dma at $47.25. In fact, as soon as it hit, it came right back down. The stock ended up closing $1 off its intraday high. This is encouraging to see from a technical standpoint. We are urging caution though. Any move above $47.25 should produce a rally up to the $49 level so keep your stops set. WPI $35.00 +0.63 (-0.94) A biotech rally prompted a little interest in WPI but not enough to change momentum in the stock. Sure, Watson gained 0.63 today but that is only a drop in the bucket compared to the $30 its lost this year. Granted we are dealing on a very short timetable but Thursday’s gains weren’t enough to push it back above any moving averages. So it looks like nothing more like a small relief rally but we expect more weakness ahead of the questionable earnings report a couple weeks away on August 12. This should be viewed as a potential entry point but don’t forget your stops just in case. ************** NEW CALL PLAYS ************** SEPR - Sepracor Inc $93.75 +3.63 (+6.50 for the week) Sepracor researches, develops, and commercializes improved compounds of existing pharmaceuticals and biopharmaceuticals. These products are new and patented formulas. They can provide the consumer with fewer side effects, improved safety, new uses, and even refined dosages. For instance, Sepracor made Allegra as an alternative to Seldane, which the FDA had pulled its approval of in 1997. In this drug and biotech industry mergers are becoming the watchword as more companies are consolidating. Last month, Sergio Traversa of Mehta Partners named Sepracor as a top takeover pick; especially by an overseas company searching for more US exposure. Then in a BusinessWire article today, Pharmaceutical & Biotech analyst David Saks of Gruntal & Company stated he foresees the industry's earnings as positive and believes "as more drugs are approved by the FDA the biotech sector should do well". Put all that together and you have the ingredients for a profitable earnings run. SEPR is expected to report in a couple weeks on August 6th. Last week, SEPR broke free and found a new support level at $85 and $87. This put it right on its 10 dma. Yesterday SEPR cracked its nearterm resistance of $88.75 and tested new waters above the $90 mark. Upward direction was further confirmed today as SEPR tacked on another $3.63 on strong volume. You may have to look intraday for an entry point at this new level. Of course, watch out for profit takering and use stop losses. Note: Due to the recent run-up there are no AUG strikes yet available above 90. BUY CALL AUG- 85 ERQ-HQ OI= 68 at $13.13 SL=10.75 BUY CALL AUG- 90*ERQ-HR OI=549 at $ 9.75 SL= 7.25 BUY CALL OCT- 95 ERQ-JS OI= 69 at $12.50 SL=10.00 BUY CALL OCT-100 ERQ-JT OI=272 at $10.50 SL= 8.25 Picked on July 15th at $93.75 PE = N/A Change since picked +0.00 52 week high=$140.87 Analysts Ratings 3-3-5-0-0 52 week low =$ 42.25 Last earnings 03/99 est= -1.10 actual= -.93 surprise=15.45% Next earnings 08-06 est= -1.22 versus= -.63 Average daily volume = 779 K Chart = http://quote.yahoo.com/Q?s=SEPR&d=3m ************* NEW PUT PLAYS ************* none today *************** PLAY OF THE DAY *************** CSCO - Cisco Systems $66.56 +1.25 (-0.50 this week) Sunday's Write up Cisco's the big kid on the network block. The leading supplier of products that link LANs and WANs, Cisco Systems controls about 85% of the global market for routers and switches, which direct information on a network. The company's other products include dial-up access servers and network management software. Cisco is using acquisitions (more than 30 since 1993) to broaden its product line and is licensing products to widen the influence of its Cisco Internetwork Operating System (Cisco IOS) software, hoping to make it an industry standard. Strategic relationships with the industry's biggest players (including Alcatel, Microsoft, Qwest, and U S WEST) are boosting Cisco's influence on the networking industry. Still a great looking technical chart, but no change for the week doesn't make us any money. In fact we lose some thanks to time value erosion of current month strike prices. After a strong run, CSCO just took the week off. However, this is earnings season and the overall market is advancing. CSCO doesn't report earnings until August 10 (company confirmed), so it may take another week of consolidation before it finds its legs. Despite slacking volume on Wednesday, Thursday, and Friday, the lows were getting higher - a good sign. It confirms the consolidation. Friday, support jumped up to $66.50, where buyers propped up the price on 3 occasions - another good sign. For options traders of quality issues, consolidation can be viewed as generally a good thing since it deflates option premiums, creating buying opportunities for the patient investor in anticipation of predictable breakouts. In short, scaling into an August position will likely yield the highest gains in anticipation of earnings. Target shoot your entry in anticipation of a quick NASDAQ correction if your risk profile allows it. Otherwise confirm market direction before starting a new play. Tuesday’s Write up “CSCO doesn't report earnings until August 10 (company confirmed), so it may take another week of consolidation before it finds its legs." Remember that from Sunday? $66.50 support proved to be short-lived too, as CSCO got caught in the market downdraft yesterday and today. If there's any good news, it's that CSCO dug itself out of the sub-$65 hole in last 2 hours of today's trading, though volume was average at about 14.8 mln. shares. Nothing in the news, just a good old-fashioned consolidation, which will most likely affect CSCO until volume returns, which then will be our signal to take a position. Of course, confirm market direction before starting a new play. Thursday’s Write up While not looking like a winner for much of this week, CSCO has been consolidating, which is OK with us. The longer the base, the stronger the earnings run. It won't report earnings until August 10 (company confirmed), so there is plenty of time to scale into a position. As we noted Tuesday, we need to see volume return, which will be our signal to take a position. We saw a slight increase in volume today, by about 6% - no great shakes, but not bad. CSCO is now back over the $66.50 level, just $2.69 shy of an all-time high. After that, nothing but blue sky. If it clears and holds $67.06, and you see volume that could take CSCO over 16 mln. shares traded, feel free to get in. Just remember to confirm market direction before starting a new play. If you are already in CSCO with a profit, don't let it slip away. You can always buy back in cheaper. BUY CALL AUG-60 CYQ-HL OI= 4359 at $8.50 SL=6.50 BUY CALL AUG-65 CYQ-HM OI=11033 at $4.75 SL=3.00 BUY CALL AUG-70*CYQ-HN OI=18058 at $2.38 SL=1.25 we’re brave BUY CALL OCT-70 CYQ-JN OI=11484 at $4.88 SL=3.25 Picked on June 29th at $62.50 PE = 107 Change since picked +4.06 52 week low =$20.56 Analysts Ratings 19-12-0-0-1 52 week high=$69.25 Last earnings 05/99 est 0.37 actual 0.38 surprise = 2.7% Next earnings 08-10 est 0.40 versus 0.32 Average daily volume =14.97 mln. ***************** COMBINATION PLAYS ***************** Positive Inflation Report Eases Wall Street Fears... U.S. stocks made new gains Thursday on the favorable outlook for inflation and corporate earnings. Wednesday, July 14 U.S. markets were mixed Wednesday with blue-chip stocks lower and technology issues higher as investors shifted more funds into computers, communications and Internet stocks. The Dow fell 26 points to close at 11,148 while the technology-driven Nasdaq rose 39 points to a record high of 2,818. The S&P 500 index rose 4 points to close at 1,398. In the broader market, advances outnumbered declines by 1,527 to 1,394 on volume of 745,530,920 shares. The 30-year U.S. Treasury bond fell 7/32, pushing the yield up to 5.92%. Tuesday's new plays (positions/prices): Cisco Systems CSCO OCT55C/AUG65C $9.00 debit Solectron SLR OCT60C/AUG70C $8.38 debit Network Assoc. NETA AUG15C/AUG17C $1.87 debit Network Assoc. NETA SEP20C/JUL20C $2.31 debit Both of the diagonal positions (CSCO and SLR) were opened in the first half-hour of trading and neither was available at the recommended 'net-debit' target. NETA was also on the move in early morning trading. There were a number of players in the bullish spread but I didn't see any simultaneous orders filled at less than $1.87; there were also a few at $2.00. For those in the speculation play (volatility spread), the position was available at slightly less than the suggested entry price near 9:45 am. Portfolio plays: Polaroid (PRD) was hit hard as analysts lowered estimates for the instant photography company's earnings after officials said that the overall strength of the U.S. dollar against European currencies meant it was facing a $10 - $20 million risk in the second half of the year. Whether the news was good or bad, we still aren't in the play, but it is making a useful study in time selling strategies. Believe it or not, if we were to now sell the August $25 call against our original position; October $25 call, the entire cost of the play would be about $0.25. Intel (INTC) rose $2.62 to $68, despite disappointing earnings, because Wall Street liked the chip maker's future prospects. Today's move to August positions, that we spoke of on Tuesday, was worth about $2.25 credit at the $65 strike. Titanium Metals continued yesterday's rally, tacking on another $1.06 to close just above the sold strike at $12.75. It's probably a good time to move the short position forward to next month. Revlon (REV) appears to be back-tracking slightly but both of the call-debit plays are in a positive position; you may consider exiting them to avoid any future loss. Our credit-spread strangle on British Telecom (BTY) moved back to the center of the profit envelope today and the entire position can be closed for a favorable profit. It appeared that some of the recent Corporate Express (CEXP) speculators were exiting their long positions today; the Oct-10 call was trading at $0.18, on the bid side, early this morning. We still aren't sure whether it was a good idea to take the small premium at the open or hold on to an OTM option, hoping that a change to the merger agreement will produce a profit. Today's August adjustments (new positions/prices): Intel Corp. INTC OCT65C/AUG65C $1.75 debit Cisco Systems CSCO OCT57C/AUG65C $4.12 debit Apria Healthcare AHG SEP20C/AUG20C $0.87 debit National Semi NSM NOV15C/AUG20C $4.00 debit Titanium Metals TIE OCT12C/AUG12C $0.12 debit Paxson Comm. PAX SEP15C/AUG15C $0.19 debit Newmont Gold NEM SEP22C/AUG20C $0.12 credit Only the short-term positions (1999) will be listed prior to the monthly summary. Thursday, July 15 U.S. stocks made new gains Thursday on the favorable outlook for inflation and corporate earnings. The Labor Department reported the Consumer Price Index was unchanged in June after showing no change in May. The Dow ended up 38 points, just short of last Friday's record. The Nasdaq composite index rose 21 points to end at 2,839, its second consecutive high this week. The S&P 500 index also set a new high, rising 11 points to 1,409. In the broader market, advancing issues beat declines 1,827 to 1,053 on active volume of 796 million shares on the NYSE. Portfolio plays: Sandisk (SNDK) just continues to amaze! We had previously held an October debit straddle on that unique stock but unloaded it for a $5.50 profit (1 month) in late June. Now the stock is trading at $69 and the position is worth over $40. (OUCH!) Another recent straddle; Ocular Sciences (OCLR), made a nice last minute effort, rising $1.00 to close in the $18 range. Unfortunately, our play was previously closed at a small loss. Motorola (MOT) was again a big mover, climbing almost $5 to finish just short of $100. We were unable to take advantage of the rally as our long-term play has already been rolled forward to August. Home Depot (HD) and Sepracor (SEPR) were also stand-outs in the long-term portfolio but once again, our short options had already been moved forward into August. Network Associates (NETA) came right back to us today; the stock price finished below the sold option in our two month volatility spread. The key is that options volume remained heavy and implied volatility is still at fairly high levels as new takeover rumors continue to circulate. With any kind of small rebound, tomorrow may offer the perfect opportunity to sell the new short (August) position. The goal will be to lock in at least a small profit for the overall play. I had two requests this week for bullish plays on large Internet stocks. One of the readers was interested in favorable synthetic positions; in this case, buy call - sell put, to take advantage of bullish movement with a cheaper position. These types of plays are very difficult to find and the downside risk is fairly large. I did manage to locate a favorable debit spread on his primary candidate, Qualcomm (QCOM), and a couple of low risk positions on AMZN. Because of time constraints, I won't be able to publish the Amazon play in today's section but the most conservative position I was interested in was the AUG105C/AUG120C; at a debit of $12.50. Questions & comments on spreads/combos to firstname.lastname@example.org ****************************************************************** - NEW PLAYS - ****************************************************************** QCOM - Qualcomm Inc. $152.96 *** Reader's Request *** Qualcomm Incorporated is a leader in developing and delivering innovative digital wireless communications products and services based on the Company's CDMA digital technology. Their major business areas include CDMA phones; integrated CDMA chipsets and system software; technology licensing; satellite-based systems including OmniTRACS and portions of the Globalstar) system. QCOM has a positive future now that they have favorably resolved a dispute with Ericsson concerning patents for 'code division multiple access' wireless technology, and sold its unprofitable base station manufacturing operations. Patent royalties are now expected from substantially all CDMA manufacturers and will apply to equipment built for the next generation of the 'global system for mobile telecommunications' (GSM) wireless technology used throughout Europe and elsewhere, starting in about three years. The big news today was an agreement with Lucent to develop and promote standardization of a technology for locating the point of origin of an emergency wireless phone call. This advanced technique is based on QUALCOMM's innovations in CDMA handsets and ASIC chip technology, and networking research from Bell Labs, Lucent's research and development arm. The method combines signals from a constellation of Global Positioning System (GPS) satellites and CDMA standard cellular & Personal Communications networks. It will help establish an industry solution to allow emergency personnel to locate any wireless phone user in distress no matter where they are in a carrier's network. On Tuesday, Standard & Poor's gave QCOM a double-'B' corporate credit rating, double-'B' bank loan rating, and single-'B' preferred stock rating with positive implications. The rating follows the company's filing of an offering to sell 4 million shares stock and based on the recent stock price, the offering could generate over $550 million. The sale is expected to fund their potential $1 billion in finance commitments, its expanding working capital needs, and provide additional financial flexibility to support the company's evolving handset and other businesses. Technically, a bullish chart with support near the cost basis. PLAY (conservative - bullish/debit spread): BUY CALL AUG-125 AAW-HE OI=197 A=$32.00 SELL CALL AUG-140 AAW-HH OI=959 B=$21.00 INITIAL NET DEBIT TARGET=$11.00 ROI(max)=36% B/E=$136.00 Chart = http://quote.yahoo.com/q?s=QCOM&d=3m ****************************************************************** COOL - Cyberian Outpost $13.50 *** New Trend *** Cool has been a leader in global e-commerce since 1995. They have a website, Outpost.com, the Internet superstore for computer products, 24 hours a day, seven days a week. Outpost.com provides consumers and other purchasers of computer products superior selection, quick and easy search capabilities, and product information on over 160,000 hardware, software, and peripheral products. With a safe and secure credit card payment system, fast and direct international shipping, Outpost.com offers exceptional value and service to its customers worldwide. The stock price is making a comeback and today it climbed another $1.62 to finish at $13.50. Some think the new bullish trend might be based the recent buyout of Egghead (EGG) by Onsale (ONSL) but analysts also say it's one of the better priced (second-tier) Internet issues based on the price-to-sales multiple. A positive fundamental assessment with the favorable technical trend make this a low cost, conservative position for those who want to participate in the Internet rally. PLAY (conservative - bullish/covered-combo): BUY STOCK - COOL ASK=$13.62 SELL CALL AUG-12.50 QOO-HV OI=483 B=$2.38 SELL PUT AUG-12.50 QOO-TV OI=121 B=$1.43 INITIAL NET DEBIT/COST BASIS TARGET = $11.12 OVERALL ROI - COMBINED POSITION (margin)=24% Chart = http://quote.yahoo.com/q?s=COOL&d=3m ****************************************************************** INDEX OPTION SPREADS... ****************************************************************** As a trader, you may be familiar with options on individual stocks where you have the right to buy (call option) or the right to sell (put option) a particular stock at some predetermined price within some predetermined time. The buyer has the rights and the seller the obligations. With index options the basic ideas are the same. Index options allow you to make investment decisions on a specific market industry or on the market as a whole. Spread strategies can be made with index options similar to those made with individual stock options. Many professional traders employ index spreads as a hedge strategy. We favor debit positions on the SPX for momentum and longer-term plays and OTM credit spreads on the OEX when the risk/reward is favorable. Low ROI disparity spreads will be listed (when available) for the conservative index trader. ******************************************************************* OEX - S&P 100 Index $726.88 OTM Credit-Spreads The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. OBSERVATIONS: For OTM credit spread trades, we like to use the actively-traded S&P 100 Index options because they contain much more premium than options on individual stocks and provide an underlying instrument less prone to huge, gapping moves. Remember however, that you can always be exercised early so monitor your positions daily. TECHNICALS: While the overall market seems likely to remain on the upside of a wide trading range over the next few weeks, the outlook for the long term is still somewhat unfavorable. The market continues to move ahead and though it is nearing an "overbought" condition, no serious selling pressures are evident but caution is warranted as a lot of profit is on the table. The last hour indicator continues to be very bullish (the NYSE Tick ended +1054) and it was a near term plus that the S&P500 closed above 1405. Current short term technicals remain bullish as we move into the second week of earnings. Review the 'Market Sentiment' section for more specific technical information on the S&P 100 Index. Conservative... PLAY (bearish/low ROI): BUY CALL AUG-765 OEZ-HM OI=0 A=$2.93 SELL CALL AUG-760 OEZ-HL OI=5798 B=$3.50 NET CREDIT TARGET=$0.56 ROI=12% PLAY (bullish/low ROI): BUY PUT AUG-690 OEY-TR OI=1499 A=$5.37 SELL PUT AUG-695 OEY-TS OI=1555 B=$5.87 NET CREDIT TARGET=$0.50 ROI=11% Aggressive... PLAY (Bearish): BUY CALL AUG-745 OEZ-HI OI=332 A=$8.25 SELL CALL AUG-740 OEZ-HH OI=5887 B=$10.00 NET CREDIT TARGET=$1.75 ROI=53% PLAY (Bullish): BUY PUT AUG-700 OEY-TT OI=5004 A=$7.00 SELL PUT AUG-705 OEY-TA OI=1414 B=$7.75 NET CREDIT TARGET=$0.75 ROI=18% CHART= http://quote.yahoo.com/q?s=^oex&d=b ***************************************************************** SPX - S&P 500 Index $1409.62 Debit Spreads Composed of 500 stocks selected by the analysts at Standard & Poor's, this index represents the best stocks, not necessarily the largest, stocks taken from all the exchanges and the NASDAQ. (The NASDAQ is not technically an exchange because it doesn't have a central clearing floor like the NYSE and the AMEX.) This is the best index to follow larger capitalizition stocks. In-The-Money Momentum (or Hedge) Spreads PLAY (bearish/conservative): BUY PUT AUG-1475 SXZ-TO OI=33 A=$67.50 SELL PUT AUG-1450 SXZ-TP OI=951 B=$47.50 NET DEBIT TARGET=$20.00 ROI(max)=25% B/E=$1455.00 PLAY (bullish/conservative): BUY CALL AUG-1350 SXY-HJ OI=8758 A=$75.87 SELL CALL AUG-1370 SXY-HN OI=0 B=$59.25 NET DEBIT TARGET=$16.62 ROI(max)=20% B/E=$1366.62 CHART= http://quote.yahoo.com/q?s=^SPX&d=1y ***************************** SEE DISCLAIMER IN SECTION ONE *****************************
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