The Option Investor Newsletter Thursday 8-5-99 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) ************************************************************ 8-5-99 High Low Volume Advances Decline DOW 10793.82 +119.05 10798.25 10566.18 859,773k 1,193 1,817 Nasdaq 2565.83 + 25.83 2565.83 2474.41 1162,000k 1,667 2,296 S&P-100 681.19 + 6.93 681.26 665.72 Totals 2,860 4,113 S&P-500 1313.71 + 8.38 1313.71 1287.30 41.0% 59.0% $RUT 429.75 + .05 429.79 422.23 $TRAN 3283.16 + 3.09 3284.84 3261.27 VIX 27.87 - .55 32.12 27.64 Put/Call Ratio .66 ************************************************************* Bull breakout or bear trap? Bungee trading anyone? After trending downward for two weeks the markets finally blew off this morning. This was a classic capitulation event. The drop after the open this morning was the event we have been waiting to see. A classic sharp sell off on strong volume with a bounce off the bottom on strong volume. Sometimes called a "tweezer bottom" the formation normally signals a turning point in the markets. While the rebound was classic and has everybody excited there were still two major problems. The advance/decline ratios were still terrible. They did improve from a 3:1 decliners to advancers this morning to a 3:2 this afternoon but the technicians were not convinced. The up volume overwhelmed the down volume in late afternoon as traders rushed to take advantage of the bounce. The weak advance/decline breadth showed that the rally was not broad based and only the leaders were benefiting from the cash. The bad breadth was also seen in the number of new highs and new lows. The new lows swamped the highs 224 to 38. This indicator has been getting worse on a daily basis. One reason for the continued bad breadth is still the non-farm payrolls from July due out in the morning. A really weak number could help the overall market but a really strong number could kill it instantly. Institutional traders were covering their bets with small purchases "just in case" but the heavy money is still sitting on the sidelines. Remember, there is still no reason to buy right now. The rally could simply be a technical bounce but it looks stronger than that. Stocks will have to weather the jobs report tomorrow before any predictions can be made. The market was helped by the bond market today, as rumors of problems overseas sent cash into the U.S. market instead. The yield dropped to 6.05% and that helped slow the cash inflows from the stock market. 6.05% compared to 6.16% may not sound like much but it is the change of direction that is important. The productivity report this morning came in weaker than expected and could be seen as inflationary. If the productivity gains we have been seeing are starting to taper off then wage inflation may not be farther behind in the Fed's eyes. Another factor that impacted the market today was the lower than expected retail sales reports. While most companies posted nominal gains they were not the robust numbers of the past. The Gap for instance posted a +10% gain but it was only one third of what analysts expected. This slowdown in retail sales was a good sign that rampant consumer spending was easing and that was a concern for the Fed. According to analysts the market has already factored in a minimum of a +.25% rate hike for August and a 50% chance for a rate hike at the next meeting as well. With the interest rate burden already priced in, the market has one less reason to hold back. The climax to the recent "correction", the Nasdaq passed the -10% level making it an official correction, came early this morning as the Internet stocks were hit hard, very hard. The capitulation, traders throwing in the towel on losing trades, was dramatic. This happens only once or twice per year and is a very profitable trading opportunity. One broker that works for us said they could always tell when the crash was over. The retail investors would ALL call in the morning and say sell everything, taking big losses in the process. In the afternoon other investors would call in from their yacht or their vacation homes and say "I will take some of this, and some of that, and what else has been hit hard, give me some of that too. Their accounts would typically be all cash. My question here is "which one do you want to be next time"? The shopping was fast and furious. AOL traded as low as $76, down from a recent high of $175. It closed at $84, up +$8 from its lows. It would probably have traded back over $90 except for the rumor that Microsoft was going to enter the ISP business in a big way with free Internet service. Just a rumor folks... What Microsoft did say was "AOL has not set the standard for Internet access and Microsoft is researching their options". A far cry from "free access". In reality AOL is not just an ISP and a bad email service. (sorry but I could not resist) The AOL CEO said on a CNBC interview after the close today that based just on price they are not worried. They raised their price last year to $21.95 and still added more subscribers than any other period in their history. They also bought CompuServe and see that as their "discount" service. CompuServe has also added more subscribers at their $9.95 rate than any other period in their history. So AOL has both entry points as well as a strongly loyal following. With 18 mln users they are not going anywhere. Their ICQ product has over 40 mln users. The 800 LB software gorilla is going to have a fight if it goes head to head with the 800 LB ISP gorilla. By the way, is AOL a buy just because it is cheap at $76, down from $175? Or is it over priced at $84, up from its 52 week low of $17? The Internet pricing argument is in full swing and the action today and the last several weeks is stark evidence of the way the market resolves these questions. It is worth what a willing investor will pay today. Earlier this morning there was a rush for the exits in AOL by a large holder. Forty four trades of 100,000 shares or more were handled in a 45 min period. Bargain hunters snatched up the fire sale merchandise and those sellers are $35 mln poorer than they would have been had they held the stock. Other big swings today were EBAY with a low of $70 and a close +$23 higher for a gain of +$17.13 for the day. AMZN traded as low as $82 and closed up +8.81 at $97.25. A range of $15. INKT traded as low as 87.38 before closing up +11.19 at $103.38. DCLK traded as low as 60.50 before closing up +12.69 at $80.38. YHOO had a low of $110, a far cry from my $170 calls I wrote this month, and closed at $128.38. EXDS had a low of 98.63 before closing at $119.38 for an $11.75 gain. This is the stuff that you wait for all year. Market washouts and great entry points. Of course all will be for nothing if the jobs report blows up in our face tomorrow. I must caution you not to bet the farm either way. There is still two weeks until the Fed meeting and many words will be spoken about the possibilities between now and then. What we will probably see is a small follow through rally and then some more range trading for the next several weeks. I should not have to remind you that there will be some profit taking in the Internet stocks from the big swings of today. Some will hold for a longer term but others will be scared of the dark on Friday afternoon and close their positions for some big gains. The most important thing about today was the trend reversal. We have been seeing traders sell into morning rallies and the markets selling off in the afternoon. Today was reversed. Down strongly early but a continued rise right into the close and a finish right at the highs of the day. The range for the Dow today was 232 points and 91 points for the Nasdaq. Be on the lookout for the "bear trap". This is a technical bounce after a big decline but with no follow through. With the breadth still very negative this is a real concern. Michael Murphy, the tech investing guru, said this was just another chance to sell Internet stocks into strength. Thanks Mike! When in doubt you can still sit out. You cannot lose money from the sidelines. If we get favorable jobs numbers tomorrow I would still want to see how the market reacts and if it carries over past amateur hour on Monday before starting any new positions. If you just can't wait then only buy half as much tomorrow and buy the rest on Monday around noon. This way you can only lose half as much if the rally attracts sellers instead of buyers. We did not drop all the Internet put plays that have been doing so well the last week but we are not advising starting new ones at this time. If the rally holds tomorrow we will drop them on Sunday and overweight calls again. One day does not make a trend. Please, pick your entry points carefully. Good Luck, Sell too soon. Jim Brown Editor *************** Market Posture *************** As of Market Close – Thursday, August 5, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert DOW Industrials 10,500 11,320 10,794 Neutral 7.20 SPX S&P 500 1,330 1,420 1,314 BEARISH 7.30 OEX S&P 100 675 735 681 Neutral 7.20 RUT Russell 2000 430 465 430 Neutral 7.20 NDX NASD 100 2,200 2,468 2,232 Neutral 7.20 MSH High Tech 1,080 1,250 1,117 Neutral 7.20 XCI Hardware 920 1,090 998 Neutral 7.20 CWX Software 700 844 723 Neutral 7.20 SOX Semiconductor 450 535 488 Neutral 7.20 NWX Networking 550 625 548 BEARISH 8.05 INX Internet 500 580 392 BEARISH 7.20 BIX Banking 690 710 639 BEARISH 7.23 XBD Brokerage 410 440 372 BEARISH 7.23 IUX Insurance 645 660 607 BEARISH 7.23 RLX Retail 915 960 822 BEARISH 7.23 DRG Drug 370 400 342 BEARISH 7.20 HCX Healthcare 750 800 703 BEARISH 7.22 XAL Airline 180 190 158 BEARISH 5.21 OIX Oil & Gas 285 310 309 Neutral 5.13 Posture Alert Did you make 15% today? The broad market rebounded strongly after suffering early in the trading session on Thursday. The internet led the way with a 6.19% gain, followed by software (+2.85%), oil & gas (1.78%), and the MSH (1.4%). An interest statistic is that the INX had a 14.5% swing from intra-day low to high. Granted, for an internet stock, this is an everyday event. For a sector, this was a huge swing. With Thursday's action, we have turned BEARISH on networking. A detailed description of our Market Posture and its applications can be found at: /members/marketposture **************** Market Sentiment **************** Thursday, August 05, 1999 We've found a bottom???? When sector rotation occurs, you will witness violent swings in the market and in individual stocks. Last autumn we all witnessed many casualties ranging from communications to semiconductors. This last month we have witnessed most sectors taking a bath (i.e. internet, banking, drugs) while several have held up nicely (Dow, Energy, cyclical stocks, Semi's). Every year there are different sectors and different stocks. In the past, large cap pharmaceuticals were a guaranteed safe haven. These last several months prove otherwise. You can't give a drug stock away right now. Even with nice rally today, the drug stocks still closed down. In the past this would have been the only sector not getting hit, right now, they are dead money. Every year is the same story except with different sectors, different stocks, but the same result. When the bounce occurs, it always happens to stocks with the strongest fundamentals that have gotten absolutely destroyed. The bounce usually occurs 20 points after you have said to yourself, "that they can't go any lower than this. This must be the bottom." And then finally, after it goes down another 10 points from where you thought it could never go, you send that market order to sell out of pure frustration. That is when the first good bounce occurs. This morning I overheard several traders saying this is the end of the world. We even witnessed several throwing in the towel and selling great companies out of their own accounts near the bottom. That was a pretty good indication for a rally. What has happened to the Internet stocks? Before, wall street only cared about pages viewed, hours on the site, web traffic, subscribers, subscriber growth, potential market share, killer apps,etc. etc. Now Wall Street actually wants every Internet Company to be profitable. C'mon. Wall Street is a bunch of sheep going through the pearly gates. Six months from now, everyone is going to wish that they had plenty of cash to buy these stocks on sale. This is just sector rotation, and the Internet sector has to go through this like every other sector has had to in the past. It is no longer the teacher's pet. Now before everyone goes on a buying spree, you must remember that we need to form a base. Today was definitely a positive, however, we are going to have several more (large) down days followed by strength before this is over. Interest rates continue to plague this market, and with more economic figures due out tomorrow, and with Greenspan & Co. a few weeks away, we will probably see more volatile days like this in the near term. 1 day doesn't form a base, but it's a start. Below is a percentage in intraday changes for several sectors from Thursday. This is only shown as a gauge to which sectors you may want to try and trade during future selloffs. It is the percentage between the low and the high. Internet (INX) 14.5% Nasdaq 100 (NDX) 3.9% MS High Tech (MSH) 4.2% Software (CWX) 4.6% Brokerage (BDX) 3.9% Networking (NWX) 3.7% Semi's (SOX) 2.9% BULLISH Signs: None Pinnacle Index: The Pinnacle Index for the OEX (645-680) is now reaching levels of extreme pessimism. From a contrarian standpoint, support is building in this area, and may indicate a short term base. Mixed Signs: None BEARISH Signs: Technicals: Many indexes are below key supports, including Healthcare, Drug, Retail, Brokerage, Banking, Internet, and Insurance sectors. Investor Intelligence: As a contrarian indicator, the percent of Bullish investors decreased 0.5% but Bearish sentiment decreased 3.3%. Russell 2000: Trending below both moving averages, and also below key 450 benchmark. Interest Rates: The 30-yr Treasury is beginning to bump back over the key 6% level, which could prove disastrous for high tech and small caps. Peak Open Interest: The contraian put-call ratio clocking in at .91 suggesting bullish sentiment picking up steam. Market Posture: Several indexes have just rolled over, including the Dow, OEX, networking, software, and semiconductors. Advance/Decline Line: The A/D line has been rolling over, and will continue to prove Bearish if decliners continue to out-pace advancers in the weeks ahead. OTM Call Analysis As we move through the August expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 710-780 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 +183.5% August Expiration Cycle OEX OTM Call Analysis (Open Interest August 710-780) Date Open Interest Change % Alert Friday, July 16 32,285 Friday, July 23 62,455 +93.4% Friday, July 30 74,895 +131.9% Market Sentiment at a Glance Friday Tues Thurs Indicator (7/30) (8/03) (8/05) Alert Pinnacle Index (OEX): Overhead Resistance (720-750) 4.9 6.0 5.9 Overhead Resistance (685-715) 0.9 1.1 1.7 Underlying Support (645-680) 4.7 5.7 5.8 Put/Call Ratios: CBOE Total P/C Ratio .7 .7 .7 CBOE Equity P/C Ratio .5 .5 .6 OEX P/C Ratio 1.5 1.1 1.1 Peak Open Interest (OEX): Puts 620 620 620 Calls 740 700 700 P/C Ratio 1.11 .91 .84 Market Volatility Index (VIX): CBOE VIX 25.83 27.07 27.87 Investors Intelligence: Bullish 52.20% * Bearish 27.80% * 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 (7/30) (8/03) (8/05) Overhead Resistance (720-750) 4.87 6.02 5.92 Overhead Resistance (685-715) 0.94 1.13 1.71 OEX Close 683.29 681.54 681.19 Underlying Support (645-680) 4.74 5.66 5.82 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is building at the OEX 720/750 level while the underlying support is holding at the OEX 645/680 level. Put/Call Ratio Friday Tues Thurs Strike/Contracts (7/30) (8/03) (8/05) CBOE Total P/C Ratio .74 .68 .69 CBOE Equity P/C Ratio .50 .53 .55 OEX P/C Ratio 1.49 1.14 1.13 Peak Open Interest Friday Tues Thurs Strike/Contracts (7/30) (8/03) (8/05) Puts 620 / 9,874 620 / 10,475 620 / 10,413 Calls 740 / 8,862 700 / 11,468 700 / 12,337 Put/Call Ratio 1.11 .91 .84 VIX Volatility Index Major Date Turning Point VIX October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top? 18.13 * August 3, 1999 27.87 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 July 21, 1999 54.1 27.9 July 28, 1999 53.6 24.6 Aug 04, 1999 52.2 27.8 * Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Mon Tue Wed Thu Week Dow 10793.82 -9.19 31.35 -2.54119.05 138.67 Nasdaq 2565.83 -14.86 -35.64-47.99 25.83 -72.66 $OEX 681.19 -0.96 -0.79 -7.28 6.93 -2.10 $SPX 1313.71 -0.67 -5.87-16.85 8.38 -15.01 $RUT 429.75 -2.14 -6.35 -6.58 0.05 -15.02 $TRAN 3283.16 37.03 -44.47 -4.57 3.09 -8.92 $VIX 27.87 2.90 0.56 1.74 -0.55 4.65 Calls Mon Tue Wed Thu Week HWP 114.00 0.06 3.75 1.75 3.75 9.31 New, earnings INTC 71.44 2.31 1.63 -0.13 -1.38 2.44 Pullback AMGN 79.19 1.88 -2.13 0.44 2.13 2.31 Strong day CSCO 61.50 -0.31 -0.69 -0.63 1.00 -0.63 Three days! DELL 38.75 -0.94 -0.50 -0.31 -0.38 -2.13 Entry? CHKP 66.00 1.44 2.13 -7.13 1.13 -2.44 Dropped TXN 139.63 -3.00 0.25 -1.00 -0.63 -4.38 New, split SNE 120.25 -0.19 -1.63 -3.56 0.44 -4.94 Bouncing JDSU 83.19 3.63 -3.56 -5.06 -2.19 -7.19 Bottom? VOD 189.00 -0.63 -0.94 -9.94-10.00 -21.50 Ouch!! Puts AOL 83.94 -4.25 -4.06 -1.38 -3.50 -13.19 Fights on CMGI 79.94 -3.88 -6.44 -5.88 3.94 -12.25 Spiked ELNK 37.06 -3.44 -3.44 -1.06 -3.31 -11.25 Sell off QLGC 73.00 -1.06 -5.75 -7.75 4.13 -10.44 Dropped MSPG 26.00 -2.56 -1.44 -2.81 -0.75 -7.56 Free fall DH 58.69 -0.69 -1.25 -1.63 -2.44 -6.00 New SEPR 67.50 -0.75 -3.13 0.88 -3.00 -6.00 Stomped EBAY 92.88 -6.44 -6.88 -8.63 17.13 -4.81 Volatile AXP 127.13 -1.69 -3.38 -3.19 3.63 -4.63 Caution NKE 48.00 -1.88 -0.88 0.94 -2.19 -4.00 New VRSN 70.13 -2.13 -6.75 -6.31 11.19 -4.00 Bounced MWD 86.69 -1.69 -1.13 -0.75 0.00 -3.56 Strained SCH 41.75 -1.63 -4.69 -0.75 4.75 -2.31 Upgraded NITE 39.94 -0.75 -4.22 0.72 2.19 -2.06 Opportunity MER 66.38 0.63 -1.38 -1.13 0.56 -1.31 Weakness TBH 75.50 -1.75 1.25 -1.13 0.75 -0.88 Inflation? TERN 38.25 -2.75 -1.19 -2.44 5.50 -0.88 Stalled U 34.75 2.88 -1.69 -1.25 -0.81 -0.88 No support DCLK 80.38 -2.88 -3.63 -6.81 12.69 -0.62 U-turn LVLT 52.75 0.19 -1.50 1.25 -0.19 -0.25 Dropped GNET 58.75 -4.06 -5.56 1.63 8.00 0.00 Even-Steven **************** 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: ****** CHKP $66.00 +1.13 (-2.44) Right after setting a new 52- week high ($73.31) during Wednesday's open, this play turned on a dime. The free fall was sharp and swift. CHKP's downward spiral finally stopped with the ringing of the bell for a total loss of $7.12 The steep losses extended into this morning trading. CHKP had a recent pattern of bucking the market trend when we decided to add it to our call list. Unfortunately, after suffering this surprise slaughter, we must drop it tonight. PUTS: ****** LVLT $52.75 -0.19 (-0.25) The rally today may be credited to a rebound in sentiment for the NASDAQ but you can also thank Piper Jaffray for the Strong Buy rating. This morning the news hit the wire that Piper had started coverage of LVLT with a Strong Buy rating and $85 price target. The stock initially traded down to a low of $50.38. We mention this because that is where the stock hit a couple days ago. Technicians may look at this as a double-bottom and possibly as a time to buy so we feel it is time to exit this play. QLGC $73.00 +4.13 (-10.44) A successful investor, when asked how he got so rich said, "I never stayed in too long." This is why we must now drop QLGC. This has been an extremely successful play, dropping almost 20 points from when we picked it to its low today. Hopefully most of you followed our advice in last Tuesday's update, and set your stops tight, because today we got that bounce. The 50 dma was a spring-board, and shot the stock up, as investors jumped in after the heavy morning sell off. QLGC may get some resistance here if the market turns negative; but, we met our objective on this play, and will avoid the risk of QLGC's strong internals. It's a drop for now. ***** 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. 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The Option Investor Newsletter Thursday 8-5-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. PICK NEWS - CALLS ***************** SNE $120.25 +0.44 (-4.94) This week has been a roller coaster ride for the markets but after this morning it looks like the next leg may be up. The market got scary in the first half hour of trading today only to see a surge of volume come in to take stocks higher on the day. This volume is a welcome sight and could be signaling a short-term bottom for the markets. SNE opened lower and sat flat for most of the day right on the 30-dma, hopefully creating a bottom. The final few minutes brought the stock higher to close back above our key $120 level. We like this upward confirmation and see the stock going higher if this was indeed the end of selling for awhile. The market's direction tomorrow will rely on the Non-farm payroll numbers so please confirm before opening new plays. VOD $189.00 -10.00 (-21.50) The ascending triangle pattern we mentioned on Tuesday finally broke. Unfortunately it broke down. VOD opened $2 lower Wednesday morning and fell out of bed. The selling was actually somewhat orderly. By late morning it hit its intraday low of $198.38 and went sideways for the rest of the session, closing down $9.94 for the day. With the momentum in place, the stage was set for a repeat today. Today VOD opened $6.25 lower and continued with a repeat of Wednesday's pattern. It made a low of $186, before finally regaining its composure to close at $189.00, down $10.00 for the day. If you had any positions in VOD, you SHOULD have been stopped out early Wednesday morning. Why are we keeping VOD as a Call play? The term "oversold" comes to mind. There was really no negative news on VOD, in the last two days, actually Lehman Brothers reiterated their "outperform" rating on VOD this morning, which suggests the decline has been over done. The only news we could find that might have sparked the sell-off was the deal between VOD and Bell Atlantic. GTE bought Bell and GTE has decided to split up a large joint venture between VOD and Bell. The split is 50/50 so in reality it should not be a problem. But in today's market, all investors need is a reason, no matter how far fetched, and everyone jumps. VOD has yet to announce the ex-date for the upcoming 5:1 split. The trend may be changing for VOD, but it has fallen over 12% in two days, and we would be looking for a bounce and an opportunity to participate. If we get that bounce, keep your eyes on it. Fortunately, our risk at $189 is less than it was at $212. JDSU $83.19 -2.19 (-7.18) JDSU managed to make its way lower the past two days as well. We are keeping JDSU as a call play. Again you might wonder why? If you were in JDSU, we repeat that you SHOULD have gotten stopped out Wednesday. It has fallen over $15.00 from its high at $96.25 made Tuesday morning, to its low of $81.00 made in the first hour of trading this morning. We are not suggesting that you enter a new play blindly, let the market either consolidate or begin to move back up with some solid buying supporting it. The $81.00 is near the bottom of JDSU's ascending channel and we are looking for JDSU to hold and move back up. This is another stock that has dropped over 15% in two days and is due for a bounce. If we get a bounce, make sure you check the stock's volume and the direction of the NASDAQ, as well as the semiconductor industry before initiating a new play, and keep your stops close. AMGN $79.19 +2.13 (+2.31) Amgen is really trying to make a run at its 52 week high of $81.38. It has had a gain of $2.31 for the week, which is good. Technically the trend is up, this too is good. We aren't complaining but as you know we do like to watch the volume in any move up or down. With the volume having increased in the broad markets today, we would like to have seen more volume supporting today's advance in AMGN. Don't get us wrong, an up day is still an up day, and that is what you take to the bank. But with only 3.6 mln shares exchanging hands today, this also suggests that there just was not that many people participating in the move up. We will go with the trend until AMGN tells us differently. However we would be very cautious about entering any new plays on Amgen, until we are able to see that the move is supported by the masses. Salomon Smith Barney did reiterate its buy rating for AMGN yesterday, with a 12-month target of $112.00 INTC $71.44 -1.37 (+2.44) INTC made a new 52 week high yesterday at $74.31 and then paused to catch its breath, consolidating for the balance of the day. Today INTEL, opened about $1 lower and headed south towards it 10 dma making a low of $69.50, off $3.31 from yesterday's close. INTC seems to have this same pattern a lot lately. It moves higher for a day or two and then stubs its toe. Volume seems to be falling back a little too. It has dropped about 10 mln shares the past two days. The basics haven't really changed for INTC. The semiconductor industry has corrected and found a bit of strength again, and many analysts feel that INTC's stock lagged in the move up as well. Sales of computer chips have gained over 12% this year to 3.65 billion and the demand should remain strong for the balance of the year. Looking at the chart INTC looks somewhat "toppy" here but we will need to let the market tell us when to get out. Keep your stops close with the non-farm payrolls coming out tomorrow. CSCO $61.50 +1.00 (0.63) We're keeping CSCO active for an earnings run in which it has only 3 trading days to go. . .August 10th after the close. With the basing we've experienced at this level, coupled with the potential for a run following the jobs report tomorrow, CSCO is running out of time. If the jobs report tomorrow isn't well received, this play will be over. Otherwise, we still need to make an exit by Tuesday's close. Confirm market direction before playing. DELL $38.75 -0.38 (-2.13) We cautioned on Tuesday about support in the $37-$38 range if the market got ugly. If you were brave enough to buy the dip, while there was carnage all around, then congratulations! We are playing DELL for an earnings run. Earnings are scheduled for release on August 17 after the close. Overhead resistance, as indicated by open interest is strongest at the $45 level, where there are over 74,000 OI. This telegraphs the level at which investors believe DELL will achieve by expiration date, August 20. Thus the play looks pretty good. Of course, if the jobs report isn't what investors want to see, then all bets are off. Otherwise the play looks strong based on today's volume and rally off its intra-day low. PICK NEWS - PUTS **************** SEPR $67.50 -3.00 (-6.00) Wednesday, Sepracor, on lighter than average volume, traded flat most of the day and tried to make a small run to close up 0.88. This hope was short lived only to be stomped today as sellers took the upper hand. The general downturn in pharmaceutical stocks and in particular Sepracor's earnings loss reported on July 23 have continued to hurt the stock price. SEPR is currently down 26.25 points from its high for the month set on July 16 at a price of $93.75. During this time the stock has fallen through both its 50 and 200 dma which is a bad sign for SEPR. The stock does show some support in the lower $60 price range, so use caution with play and make use of a stop loss order just in case it happens to turn. If circumstances continue as they are, SEPR may break though these levels and fall even lower. For tomorrow, watch to see what July payroll numbers are. This is one of the key numbers analysts are watching to determine if the Fed. will decided at the end of the month to raise interest rates. ELNK $37.06 -3.31 (-11.25) How low can they go? This is the question that is on everyone's mind. If Earthlink is any standard of measure for the rest of the sector the outcome looks down right bleak. While the NASDAQ made a nice recovery from the early sell-off this morning, ELNK was not as fortunate. Carnage from last week continued this week as the stock continued to fall further below its 50 and 200 moving day averages. The next support level for the stock is around $37, watch and see if we can break this support level as well. The overall movement of the Internet sector will help determine whether it finds support or not. With internets being such a volatile sector, place the recommended stop loss orders to be on the safe side. Be aware that some important economic data is being released tomorrow that may effect the play. July payroll numbers are one of the key figures the Fed will use to determine if they need to raise rates at the end of the month. Watch for the data and trade accordingly. VRSN $70.13 +11.19 (-4.00) After dropping 6.31 points on Wednesday, investors decided it was time to get back in causing the stock to surge today. Following the path of the NASDAQ, Verisign made a strong move in late morning trading, leveled though the afternoon, and finishing the day on the upside. The stock made a nice run recouping its losses from Monday, however is now approaching a level of resistance at $70, its 50 dma. The stock is still down $4.00 for the week, which isn't bad. Tomorrow, use caution, see how the stock reacts to both the resistance level and the economic data that is going to be released. July payroll numbers will be out and will help the Fed decide whether they will raise interest rates later in the month. If you placed your stop losses ahead of time, today didn't hurt quite so bad. Be sure to use them in the future. TBH $75.50 +0.75 (-0.88) Latin American ADRs tend to take their cue from the U.S. markets, and are greatly swayed by the U.S economy. If you overlay a chart of TBH trades over the last couple of days with a chart of the Dow, you will see that they match almost perfectly. Since there is not a lot of news from day to day on Telebras, look for those factors that will send the Dow up or down to affect TBH as well. A very strong inflationary jobs report would send shivers through the Latin markets just as it would the U.S markets. However, this stock could go up again if the report is benign,. Although it moved up $.75 today, TBH still looks weak technically and remains below its 10 dma. Some caution is advised on this put after TBH made such a strong recovery from its morning low and it closed near its high of the day. SCH $41.75 +4.75 (-2.31) It looks like the momentum in SCH may have finally shifted. The stock had held up fairly well on Wednesday despite the weakening NASDAQ and on Thursday they got an upgrade before the open which put SCH in rally mode. The upgrade came from Warburg Dillon Reed who started SCH at a buy with a $55 price target. This along with the fact that Schwab was right at technical support from the 200-dma has sparked buying interest in the stock. The online broker sector is also doing very well and it has the appearance of a short-term bottom for the sector but we are not fully convinced. This group has fallen sharply and investors that were looking for a bounce in order to get out may do just that tomorrow. So we don't recommend any new plays until after the jobs report tomorrow and we get confirmation that this was in fact a one day event. U $34.75 -0.81 (-0.88) It looks like Monday's announcement from Tiger Management that they would pursue a merger or deal has faded to say the least. The only good that came out of that announcement is the great entry point for some more put contracts. The real news in this play is oil prices which continue to stay upward of $20 a barrel. This is the proverbial knife in USAir's back right now. With all the other internal problems, high fuel costs will weigh heavily on profits. Again, there is no support since we are below all moving averages and hitting 52-week lows almost daily. Hopefully we will get other surprise announcements to provide entry points but make sure you then confirm the downtrend before entering new plays. AOL $83.94 -3.50 (-13.19) The gloves are now off in the fight against Microsoft and MSFT has drawn first blood. Tuesday morning Microsoft announced they will be aggressively attacking the Internet access market by offering either substantial discounts or potentially free Internet access. This would obviously hit AOL right in the heart of their core business. AOL has 17 million Internet subscribers paying $21.95 a month which generates 66% of their revenues. Whether or not MSFT follows through is another story. This could be a tactical move to force AOL to allow compatibility between the Instant Messaging systems, which AOL is now blocking. Either way AOL's stock took it on the chin today. They traded down over $10 before regaining some of those losses. The outlook is still bleak but keep in mind the NASDAQ closed strong today and AOL has been down 6 straight days so watch out for a bounce. EBAY $92.88 +17.13 (-4.81) Dramatic turnaround? Oh yes, the internets once again proved they can move sharply and quickly, i.e. VOLATILITY and HIGH RISK. Yesterday, this put play was right on schedule as it shed another -$8.63 and had a bearish close right near its daily low. But today, the bargain buyers could no longer sit on their hands after quietly watching 5 dissenting sessions. They instituted an Internet rally that sparked the bellwether, EBAY, to double-digit gains (23%) with volume over 3 times its normal level. After such a spike, it's likely there will be a downdraft. If you do decide to open a new position, this play will require your complete attention. Choose your entry point prudently and be prepared if you need to get in and out fast. Remember, the Jobs Report comes out tomorrow morning. Whatever the outcome may be, it's likely to effect the internets strongly. Today was EBAY's contribution to our "play with stop losses" campaign. We're not trying to be funny, but if you didn't have a stop loss set to protect your profits, or you weren't watching this play as we suggested; please learn how to place a stop loss. BE CAREFUL. EBAY = VOLATILITY + HIGH RISK! NITE $39.94 +2.19 (-2.19) Volume continued to be strong the past two days. However, buyers are now in the game and pushing the share price upwards. Yesterday, BBRS reiterated a "buy" rating. Their analyst, Scott Appleby, cited NITE as a "very compelling investment opportunity". It's possible NITE may have reached a bottom at $35 (hit on Tuesday). Remember, if you look at the 6-month chart the stock bounced off $34 back in April. However, the Jobs Report is tomorrow morning; it's possible the outcome could cause the internets to roll over once again. With this information, plan your strategy carefully. MER $66.38 +0.56 (-1.62) MER lost another -$1.44 during trading yesterday closing only a fraction from its daily low. Today the stock continued to show weakness. MER failed to respond to the DOW's 119+ point rally! This is a good sign. Historically, MER has bounced off this proximate level of about $63 and $65 (except when it did a free fall during the bleak market conditions of September 1998). So far the play is going our way. We expect the financial sector to continue to be weak amidst the interest rate concerns and the upcoming FOMC meeting. MWD $86.69 -0.00 (-3.56) Yesterday, MWD fell a fraction below its 200 dma. Today there was no price change but this in itself is a good bearish signal. This is especially true when you consider the market rallied 119+ points and MWD didn't budge. Even the recovery in the bond market didn't help this investment banker. The rising interest rates and future earnings growth pressure are putting a real strain on this sector. It's presumable the tension may continue if you chose to bear in mind the anticipated rate increase at the Greenspan meeting in just a couple of weeks. Nonetheless, always be prepared and consider using stops for some added security. AXP $127.13 +3.62 (-4.62) Today we got a boost in price, as analysts and investors approved of AXP's Internet strategy. Several analysts stated that the stock was a good buy at these levels. It is; however, these short term bumps aren't enough to change the bearish trend we're in. Today's rise in the market was due; but, with the bounce came a lot of negative information re-enforcing inflation and higher interest rates. Because the trend is down, we expect AXP to continue down with it. AXP remained below it's 100 dma, which should create some resistance, as was shown both yesterday and today. Watch your positions closely at this level. A strong run above the 50 & 100 dma will be cause for concern. For now, set your stops and confirm overhead resistance before entering. GNET $58.75 +8.00 (-0.00) Today GNET got the bounce we were anticipating from it's recent sell-off. The gain today was in the wake of the overall market bounce. It doesn't appear to have much conviction however, since a lot of today's strength was due to computer buy programs being triggered, and some relief on the 30 year bond yield of -0.04%. We still have a negative advance/decline ratio, a report of higher labor costs of +3.8%, decreased worker productivity, and more. This is a recipe for higher inflation, and most likely another interest hike from the Fed. We see the trend continuing down. Another important note, is the Internet sector went below the 200 dma today. Mr. John Murphy indicated that this could be cause for a real "breakdown" in the technical sector. GNET will fall as a result of these conditions. Investors may also like the acquisition of Dogpile, LLC which was announced today, allowing GNET ownership of the Internet's largest metasearch services. At this point we see our 10 dma as offering some resistance at $60. Watch the market, and once we start down again, it could be a good time to enter. MSPG $26.00 -0.75 (-7.56) Mindspring continued it's sell off today, reaching a new 26 week low. Despite the bounce in the overall market, ISP's like MSPG didn't like Microsoft's announcement of free Internet access, that they are considering. Talk about potential competition! Also, the Internet sector is at a very critical point, as it dropped below the 200 dma today. If the trend continues below this level, we could see the sell-off resume with force. MSPG was fortunate, as it was buoyed up by the market today, finishing up from it's low of $23; but, as the market continues to deteriorate, as we think it will, there won't be much to hold MSPG up. Be cautious of the jobs report tomorrow. A positive report could continue today's recovery, so be quick to protect profits. If it confirms a reason for inflation, we see $19.00 as our next level for MSPG. DCLK $80.38 +12.69 (-0.62) "If there was ever a time to protect your profits with a trailing stop order, this is it." Remember that from Tuesday? We hope so, as DCLK took a nosedive straight through resistance of $70 all the way to $60 in the first hour of trading today. After that. . .a $20 rebound. This is truly head-snapping, and may portend a bright recovery for the internets. However, we are keeping DCLK on the put list just in case the jobs report tomorrow raises the red flag of inflation, in which case DCLK could resume its trend into the cellar. Keep an eagle eye on that job report if you haven't exited the play. Of course, if the report is ugly, fell free to reenter the play, market willing. CMGI $79.94 +3.94 (-12.25) Once again, we hope you had a trailing stop in place to protect those profits. On heavy selling today, CMGI sank into the mid-$60 range before making a spectacular recovery throughout the remainder of the day, in what pundits were calling an Internet recovery. You may be wondering why we keep it on the put list. Fair question. If the jobs report isn't favorably received tomorrow, the interest rate sensitive Internet sector could resume its tailspin. Of course, if you are not yet out of the play, you may want to keep your finger on the exit trigger to protect last weeks gains (you should have already taken a profit on that too). Let the job report be your guide. TERN $38.25 +5.50 (-0.88) We have been playing TERN on technical merit and had been looking for resistance at $33. Almost to the dollar, TERN began to rise on brisk buying volume (sellers did most of their damage yesterday). Again, the only reason we have TERN still on the put list is for the possibility of a negative job report, which would give us the green light to open another play. If not, the play will be over. Keep a sharp watch on that job report and consider setting a trailing stop to protect your profits (that is if you haven't already harvested them yet). NEW CALL PLAYS ************** HWP - Hewlett Packard $114.00 +3.75 (+9.31 this wk)(-3.06) Hewlett-Packard Company (HP) designs, manufactures, and services products in the computer hardware industry. HWP provides systems for integration, outsourcing, consulting, education, financing, and customer support. HP is currently the #2 (behind IBM) computer hardware provider in the world today. As a global corporation, more than half of HP's total sales revenue comes from outside the US. To further fuel its growth, HP is positioning itself as an Internet hardware specialist, and developing software and support base for its current as well as future clients. Over the last five days HP has withstood a volatile ride in the tech sector. Since last Friday, HP's stock price has been accelerating in anticipation of a strong earnings report due to be released on Aug 16th. Solomon Smith Barney announced on Tuesday that they were raising their price target from $105 to $130. They reported that rumors of a stronger than expected Q3 are substantiated and the near term outlook for the company appears to be positive. These rumors may turn out to be the catalyst for a positive earnings run over the next couple of weeks. The stock on Thursday closed up more than $3.75 on heavy volume (3.69 mln shares traded) to end the day on its high of $114.00. Furthermore, we think that HP should be viewed as a possible split candidate. This is adding to the excitement and optimism among traders. HP has made the news this week on several fronts. First, there was an unusual purchase of $115 call options on Tuesday. It was reported that an anonymous investor purchased 6,200 calls contracts in late morning trading. The total sum of his investment was over $1.3 mln. Second, HP announced on Aug 3rd that it would launch a Windows NT(R)-based personal- workstation. This workstation will be capable of supporting high end 3-D animation and video editing. HP will showcase this new solution at the SIGGRAPH 1999 conference in Los Angeles on Aug 10-12. Finally, HP has an all-color HP OfficeJet T Series that will provide quick, brilliant photo- quality color printing. It will provide stand alone color faxing as well as high-quality color scanning. The OfficeJet T Series will be ideal for customers who want an efficient, productive, full-color home office printer. BUY CALL AUG-110*HWP-HB OI=3216 at $6.75 SL=5.00 BUY CALL AUG-115 HWP-HC OI=8115 at $4.00 SL=2.50 BUY CALL SEP-115 HWP-IC OI= 429 at $6.75 SL=5.00 BUY CALL SEP-120 HWP-ID OI= 491 at $4.75 SL=3.00 Picked on Aug 5 at $114.00 PE = 36 Change since picked 0.00 52 week high=$118.44 Analysts Ratings 7-9-9-0-0 52 week low =$ 47.06 Last earning 04/99 est N/A actual 0.88 Next earning 08-16 est 0.80 versus 0.58 Average Daily Volume = 3.28 mln. Chart = http://quote.yahoo.com/q?s=HWP&d=3m *** TXN - Texas Instruments $139.63 -0.63 (-4.38 this wk)(+2.00) TXN sold its defense electronics and memory chip units almost 2 years ago to focus their digital signal processor (DSP) business. TXN is the world's largest supplier of DSP's, commanding over 45% of the segment. You will find them in over half the world's cell phones, modems, cars, and camcorders to name a few items. In addition, they manufacture microcontrollers, microprocessors, and analog and logic chips. Only one third of its business is in the U.S. 75% of its revenues is derived from semiconductor sales. First allow us set the big caveat for this play. It all depends on investors' reaction to the jobs figures before tomorrow's open. Don't start a play unless the news is favorable. That said, we're adding TXN tonight as a split play with the idea that we can benefit from 1 extra day. You may recall that just prior to earnings, TXN announced a 2:1 split payable on August 16, just 6 trading days away. As a long-term hold, TXN is a fine company. But as a 1 week play, TXN isn't exhibiting typically good attributes. TXN did not participate in today's action and actually lost value all day long until the last hour of trade, where it popped up $3 from buyer activity. Nonetheless, TXN had a loss on the day. Most of its volume (24% greater than average today) resulted from sellers. While this doesn't sound all that appealing, the negative sentiment will disappear quickly tomorrow on favorable job numbers, and TXN will likely join any ensuing rally. Again, this is a split play, but we must see good job numbers first and an overall positive market tone before getting in. Otherwise, barring some other surprise (which is certainly possible from TXN), we'll have to send this one to the drop pile. Call it a contingency split play. (don't forget, we don't advise holding over a split) In the news today Hambrecht and Quist began coverage with a buy rating. Also, TXN received some favorable mention from technology guru, George Gilder in his monthly newsletter. BUY CALL AUG-135*TXN-HG OI=5851 at $8.00 SL=6.25 BUY CALL AUG-140 TXN-HU OI=1416 at $5.38 SL=4.00 BUY CALL AUG-145 TXN-HW OI=1701 at $3.38 SL=1.75 BUY CALL SEP-140 TXN-IU OI= 282 at $9.63 SL=7.25 BUY CALL SEP-145 TXN-IW OI= 247 at $7.50 SL=5.75 Picked on August 5th at $139.63 PE = 62 Change since picked +0.00 52 week low =$ 45.38 Analysts Ratings 11-8-5-0-1 52 week high=$155.38 Last earnings 07/99 est 0.86 actual 0.92 surprise = 6.9% Next earnings 10-20 est 0.85 versus 0.41 Average daily volume = 2.50 mln. Chart = http://quote.yahoo.com/q?s=TXN&d=3m NEW PUT PLAYS ************* DH - Dayton Hudson Corp $58.69 -2.44 (-6.00 for the week) Dayton Hudson is a general merchandise retailer. Presently, they operate 851 Target's, 268 Mervyns, and 63 other department store locations throughout the US. DH also has a catalog unit, Dayton Hudson's Rivertown Trading and an apparel supply unit, Associated Merchandising. However, Target is the force behind the corporation and accounts for over 75% of total sales. The retail sector has reported robust July sales; and it's expected that 2Q earnings will be strong. However, rising interest rates suggest the future may not be very bright for merchants. Consumer spending and retail sales could taper off in the coming months. This forecast unsettles investors. The retail group is now breaking down as the investors sell on fear. Today DH announced a same-store July sales increase of 8.1%, yet shed -$2.44 (a 4% decline) This loss placed the stock below its 200 dma - a bearish indication. If DH can maintain this position, it would provide even better confirmation. The trading volume was also very heavy today. DH sold off on double its ADV. Watch the stock's reaction tomorrow to the jobs report. If the data substantiates another rate increase, DH may continue its descent. The company's earnings' report is expected in a couple weeks on August 17th. BUY PUT AUG-60*DH-TL OI=643 at $2.94 SL=1.50 BUY PUT AUG-55 DH-TK OI=560 at $0.81 SL=0.00 Average Daily Volume = 1.51 mln. Chart = http://quote.yahoo.com/q?s=DH&D=3m Plays Continued in Section Three *********** SEE DISCLAIMER IN SECTION ONE ***********
The Option Investor Newsletter Thursday 8-5-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** New Puts Contd. ***************** NKE - Nike, Inc $48.00 -2.19 (-4.00this week) Located in Beaverton, Oregon, is the shoe company that controls more than 40% of the U.S. athletic shoe market. Nike designs and sells shoes for most any sport you can think of. They also have a line of casual shoes and of athletic wear and equipment. NKE operates NIKETOWN, shoe and sportswear outlets in several cities, including Boston, New York, and Seattle. Their products are marketed in approximately 110 countries around the world. Since the release of their 4th quarter earnings in late June, Nike has really struggled. Their earnings were a penny ahead of street estimates at $0.38 per share and well ahead of the previous year. One thing that apparently bothered investors, was that revenues for NKE were down 5% at $2.18 billion for the same period the previous year. At that time shares of NKE were trading at $63.38. The following morning the stock opened about $2 lower and as they say "the rest is history". NKE paused in the middle of July to try and regain its "footing", climbing back to the $59 area only to resume its decline the following week. Earlier this week GAP Inc., a specialty clothing retailer, sued Nike in a challenge to a non compete agreement that's keeping Nike's chief information officer from starting a new job at the Gap. Technically Nike looks as though there is still more room to the downside. There is support at about $44.00. We would confirm weakness in the stock after waiting for the non-farms payroll report tomorrow. Not much else in the news, Tuesday analyst Faye Landes at Thomas Weisel Partners raised her coverage on NKE from a buy to a Strong Buy, with a 12-month price target of $65.00. Obviously, it didn't do much good. BUY PUT AUG-50*NKE-TJ OI=1427 at $2.88 SL=$1.50 BUY PUT AUG-55 NKE-TK OI= 955 at $7.38 SL=$5.75 Average daily volume 1.16 mln. Chart = http://quote.yahoo.com/q?s=nke&d=3m *************** PLAY OF THE DAY *************** HWP - Hewlett Packard $114.00 +3.75 (+9.31 this wk)(-3.06) Thursday's Write Up Hewlett-Packard Company (HP) designs, manufactures, and services products in the computer hardware industry. HWP provides systems for integration, outsourcing, consulting, education, financing, and customer support. HP is currently the #2 (behind IBM) computer hardware provider in the world today. As a global corporation, more than half of HP's total sales revenue comes from outside the US. To further fuel its growth, HP is positioning itself as an Internet hardware specialist, and developing software and support base for its current as well as future clients. Over the last five days HP has withstood a volatile ride in the tech sector. Since last Friday, HP's stock price has been accelerating in anticipation of a strong earnings report due to be released on Aug 16th. Solomon Smith Barney announced on Tuesday that they were raising their price target from $105 to $130. They reported that rumors of a stronger than expected Q3 are substantiated and the near term outlook for the company appears to be positive. These rumors may turn out to be the catalyst for a positive earnings run over the next couple of weeks. The stock on Thursday closed up more than $3.75 on heavy volume (3.69 mln shares traded) to end the day on its high of $114.00. Furthermore, we think that HP should be viewed as a possible split candidate. This is adding to the excitement and optimism among traders. HP has made the news this week on several fronts. First, there was an unusual purchase of $115 call options on Tuesday. It was reported that an anonymous investor purchased 6,200 calls contracts in late morning trading. The total sum of his investment was over $1.3 mln. Second, HP announced on Aug 3rd that it would launch a Windows NT(R)-based personal- workstation. This workstation will be capable of supporting high end 3-D animation and video editing. HP will showcase this new solution at the SIGGRAPH 1999 conference in Los Angeles on Aug 10-12. Finally, HP has an all-color HP OfficeJet T Series that will provide quick, brilliant photo- quality color printing. It will provide stand alone color faxing as well as high-quality color scanning. The OfficeJet T Series will be ideal for customers who want an efficient, productive, full-color home office printer. Comments We wanted to add this play on Tuesday but held off due to market weakness. After today's potential bottom, HWP looks in great shape to go higher but it will depend on the Jobs report tomorrow. If we don't get a market-friendly number than we could see the selling return. Therefore confirm the market sentiment before playing. BUY CALL AUG-110*HWP-HB OI=3216 at $6.75 SL=5.00 BUY CALL AUG-115 HWP-HC OI=8115 at $4.00 SL=2.50 BUY CALL SEP-115 HWP-IC OI= 429 at $6.75 SL=5.00 BUY CALL SEP-120 HWP-ID OI= 491 at $4.75 SL=3.00 Picked on Aug 5 at $114.00 PE = 36 Change since picked 0.00 52 week high=$118.44 Analysts Ratings 7-9-9-0-0 52 week low =$ 47.06 Last earning 04/99 est N/A actual 0.88 Next earning 08-16 est 0.80 versus 0.58 Average Daily Volume = 3.28 mln. Chart = http://quote.yahoo.com/q?s=HWP&d=3m ***************** COMBINATION PLAYS ***************** A Change In Character Or Just Another Relief Rally? U.S. stocks closed higher on Thursday as blue-chips rallied and investors relented on their recent battering of Internet stocks. Wednesday, August 4 U.S. markets closed lower Wednesday as the blue chips fell in a late afternoon sell-off and the Internet stocks suffered another relentless beating. The Dow finished slightly below the opening numbers at 10,674 after climbing more than 150 points during the day. The technology-heavy Nasdaq composite was down 48 points at 2,539 and now officially in a correction with a loss of 10% from its record high of 2,864.48. In the broader market, declining issues beat advances 2-to-1 on active volume of 784 million shares on the New York Stock Exchange. Tuesday's plays (new positions/opening prices/strategy): BRCM Broadcom NOV135C/140C $1.38 debit bull-call BRCM Broadcom NOV90P/NOV85P $1.38 debit bear-put DCLK DoubleClick OCT90C/OCT97C $2.00 debit bull-call DCLK DoubleClick OCT60P/OCT52P $2.00 debit bear-put ATHM AtHome Corp OCT52C/AUG50C $2.12 debit calendar Broadcom (BRCM) and Doubleclick (DCLK) were both active at the open but returned quickly to their starting points (near 9:40 AM) and the combination straddles should have been achievable at the suggested prices. AtHome (ATHM) moved higher in early trading but soon slumped with the faltering Internet market. The target entry price was available by mid-morning. All of these issues finished the day at significantly lower prices. Portfolio plays: In today's battle of the bears and bulls, the Dow managed a draw but the Internet and technology issues were again pummeled into submission. Emulex (EMLX) and RF Micro Devices (RFMD) were the hardest hit, both losing almost 10% of their value. Safety stocks were not immune and Johnson & Johnson (JNJ) lost $2.19 to finish at $92. Small-cap issues are not faring any better and diversity has offered no real protection with companies like Cendant (CD), Novell (NOVL), National Semiconductor (NSM), Rite-Aid (RAD), and Riggs National (RIGS), all losing ground in the sell-off. On the positive side, Oil stocks were on the move and all four of our bullish positions moved up nicely. Ensco (ESV) and Noble (NE) were both up $1.25 after Bank Of America started coverage of the drilling group and Halliburton (HAL) gained over $1 with Unocal (UCL) not far behind (up $0.81). Retails also performed better than most with The Limited (LTD) leading the group; up $1.12 to $47, after an upgrade from Salomon Smith Barney. The Barr Laboratories (BRL) straddle made another favorable move today as the stock price gapped-up almost $2 to $37.31. The bullish portion of the position; NOV-40C, was sold for $2.25 to close the play at $1.00 profit in only three weeks. The Vulcan Materials (VMC) debit straddle is also trading at $1.37 credit and since the initial movement was to the downside, we will take this opportunity to close the play before a technical rebound reduces our current profit. Once again, those of you in short-term bullish positions should consider using any individual rallies for early exits to lock-in profits and preserve capital. If you have positive returns on any long-term plays, now might be the best opportunity to hedge your profits or roll down on the sold positions. The market will eventually rebound but the distance to the bottom is unknown and there is no reason to risk your hard earned money while the correction runs its course. Thursday, August 5 U.S stocks closed higher on Thursday as blue-chips rallied and investors relented on their recent battering of Internet stocks. The Dow was up 119 points to 10,793 after shaking off a loss of more than 100 points and the Nasdaq composite index, heavy with technology stocks, closed up 25 points at 2,565. In the broader market, declining issues led advances 1,817 to 1,192 on active volume of 854 million shares on the New York Stock Exchange. Portfolio plays: Today's recovery was once again led by the Dow and most blue-chip issues are now seen as a sign of long-term safety in the wake of the recent Internet bashing. The one sore spot in that analogy is General Motors (GM), which has long been used as an broad market indicator, but continues to fall in the wake of economic pressure. Our other general, General Electric (GE), had a comforting rally back to $109 and today's move places the bullish diagonal spread at $5.25 credit; a small but favorable profit should you elect to exit early. The other big blue-chip rally came from recent merger monster Dupont (DD) as it vaulted over $3 (to a high near $75) on an announcement the company recent resolved litigation with Syncor International. Proctor & Gamble also participated in the bullish festivities, up $1.12 to finish at $94. Oil stocks continued to rise and Halliburton (HAL) shined, moving up $2 to a 52 week high near $50. The troops followed in its wake and both Noble (NE) and Ensco (ESV) gained significantly in the sector-wide rally. Another star performer was one of our smaller cap issues, Paxson Communications (PAX). The stock moved up $1 and the SEP-15C traded as high as $0.50; a very small profit but one that conserves capital in this distressed market. Macromedia (MACR) moved back to the sold strike at $35 while AtHome (ATHM) battled hard for a $4 gain to the recent support at $45. Emulex (EMLX) let us breathe again with a $9 rally to close above $100 and the credit spread can be closed at a $0.62 profit. The current abomination seems to be British Telecom (BTY) as it has broken out of its recent trading range and now exists at an interim support level near $158. The cause of this move may be that European investors are worried the U.S. market is on the verge of a long-term down trend rather than temporary correction. One analyst said the British Telecom problem started last week when their earnings didn't meet expectations. He went on to say "These sectors are highly rated, depending on the continued flow of good news. When it turns disappointing there is downside". That appears to be an understatement at best. Questions & comments on spreads/combos to ray@OptionInvestor.com **************************************************************** NEW PLAYS - Oil stocks appear to be one of the current havens for investors and this week's bullish upgrades included coverage from Banc of America Securities on seven oil drilling companies. Earnings of diversified oilfield service firms were expected to hit a low this quarter but improve near the end of the year. The drilling contractors are also expected to report lower quarterly earnings, because the rising oil prices will take longer to affect their bottom line. Eventually, improved commodity prices (oil) will support an increase in exploration and production budgets, which will in turn flow to the service companies and drillers. When Internet and technology sectors suffer, this group performs very well and can hedge your portfolio against further downside moves. All of these plays are based on the performance of the oil services industry and many of the candidates are breaking through recent tops with excellent technical indications. News and market sentiment will affect any position so always review each play individually and make your own decision about the future outcome of the stock price. ***** BHI - Baker Hughes $33.50 *** A Trading Range *** Baker-Hughes, Inc. operates in two industry segments, oilfield products and services and process products and services. In addition to these industry segments, the Company manufactures and sells other products and provides services to industries not related to either the petroleum or process industries. A nice rally with the oil service group today but this stock appears to be consolidating near $32. We expect this issue to continue trading in a range between $30 to $35 and resistance at the sold strike should eliminate any short-term upside risk. PLAY (conservative - bullish/calendar spread): BUY CALL OCT-35 BHI-JG OI=951 A=$2.25 SELL CALL AUG-35 BHI-AG OI=2100 B=$0.56 INITIAL NET DEBIT TARGET=$1.50 TARGET ROI=25% It is generally best to establish this type of spread at least 2 - 3 months before the long option expires, capitalizing on the ability to sell another option against the longer-term position. That is the basic idea in this spread play; selling time value in the options when they are overpriced (high implied volatility) and buying it back (if necessary) when they return to intrinsic value. Ideally, the spreader would like to have the stock finish just below the sold strike when the near-term option expires. If the short options are in-the-money at expiration, he will have to buy them back to preserve the long-term position. Chart = http://quote.yahoo.com/q?s=BHI&d=3m ***** HAL - Halliburton $50.56 *** A New 52 Week High *** Halliburton Company provides energy services and engineering and construction services. The Company is comprised of two business segments. Halliburton Energy Services provides a wide range of services & products to provide integrated solutions to customers in the exploration, development and production of oil and natural gas. Their engineering and construction services include services for both land and marine activities. Geoff Kieburtz of Salomon Smith Barney said that after clearing the hurdle of a weak second quarter, the oil services industry is poised for recovery. The established trading range near $45 (and a new 52 week high and solid bullish indications) along with a fair disparity in the ITM September call options offers us a favorable, low risk position. PLAY (very conservative - bullish/debit spread): BUY CALL SEP-40 HAL-JH OI=2882 A=$11.75 SELL CALL SEP-45 HAL-JI OI=1653 B=$7.62 INITIAL NET DEBIT TARGET=$3.87 ROI(max)=28% B/E=$43.87 Chart = http://quote.yahoo.com/q?s=HAL&d=3m ***** ESV - Ensco $22.50 *** Volatility Play *** Ensco International is an offshore drilling contractor that also provides related oilfield services. Ensco owns 33 offshore rigs, including 23 jack-up and 10 barge rigs. Subsidiary Ensco Marine has a marine transportation operating fleet of 35 oil support vessels, including 6 anchor-handling tugs, 21 supply vessels, and 8 minisupply vessels. We like the long-term chart but some consolidation is expected after the recent rally. The short-time frame and small initial cost offer us a favorable speculation position with low risk. PLAY (conservative - neutral/horizontal spread): BUY CALL SEP-22 ESV-IX OI=1167 A=$1.93 SELL CALL AUG-22 ESV-HX OI=559 B=$1.06 INITIAL NET DEBIT TARGET=$0.75 TARGET ROI=25% Time spreads (horizontal spreads) involve the sale of one option and the purchase of a more distant option, both with the same strike price. The philosophy for using this type of spread is that time will erode the value of the near-term option at a faster rate than it will the far-term option. The spread that is established when the underlying stock is at or near the strike price of the options used is a neutral spread. If the stock price remains relatively unchanged until the near-term option expires, the neutral spread will make a profit. Chart = http://quote.yahoo.com/q?s=ESV&d=3m ***** DO - Diamond Offshore $36.12 *** A Cut Above The Rest *** Diamond Offshore Drilling engages principally in the contract drilling of offshore oil and gas wells. The Company is a leader in deep water drilling with a fleet of multiple offshore rigs, consisting of semi-submersibles, jack-ups, and drill-ships. A bullish chart on one of the industry leaders and the small disparity in the September options will allow us to participate in this low-risk play at a discount. PLAY (conservative - bullish/covered-combo): BUY STOCK - DO A=$36.25 SELL CALL SEP-35 DO-IG OI=2449 B=$3.12 SELL PUT SEP-35 DO-UG OI=105 B=$2.00 INITIAL (OVERALL) NET DEBIT TARGET=$33.00 COMBINED ROI (MARGIN) = 12% Chart = http://quote.yahoo.com/q?s=DO&d=3m ****************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $10 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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