The Option Investor Newsletter Tuesday 9-9-99 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) ************************************************************ 9-09-99 High Low Volume Advances Decline DOW 11079.40 + 43.06 11095.86 10981.89 771,746k 1,446 1,463 Nasdaq 2852.02 + 43.28 2852.04 2807.95 1029,974k 1,978 1,860 S&P-100 709.81 + 2.15 710.02 701.99 Totals 3,424 3,323 S&P-500 1347.66 + 3.51 1347.66 1333.91 50.7% 49.3% $RUT 437.77 + 1.87 437.77 435.78 $TRAN 3113.27 + 8.83 3118.74 3031.21 VIX 23.40 - 0.78 24.98 23.31 Put/Call Ratio .52 ************************************************************* Late day rally sets tone for PPI tomorrow... Volatility is the one thing in the market that investors can confidently bet on lately. Most were expecting today to be fairly quiet ahead of Friday's PPI numbers, but we did see a somewhat surprising rally in stocks toward the end of the day. The Dow again had a range of over 100 points and even if you spend your days with your eyes glued to a quote terminal, you might miss major moves if you turn to sneeze. But was Thursday a foreshadowing of things to come or one last gasp before things get worse? Right now it is hard to say. Until we see either a breakout to new highs or a breakdown of key support, we should characterize the current market as range-bound. Several aspects of today's market activity seem to defy common economic sense, although one should not read too much into the activity of any one individual day. With persistent interest rate fears, a weakening dollar, skyrocketing fuel prices, and some indications of inflation on the horizon, one would not normally predict a rally for stocks. A rally, however, is exactly what we had toward the end of the trading day. Particularly strong were the technology stocks, which are the undisputed leaders of the markets. Over the past week or so the Nasdaq has looked stronger than the other indices and is now very close to a new record high. We are currently just under 23 points below the record, and up over 30% year-to-date, while the Dow is up about 20% and the S&P is up about 10%. We may be seeing the beginning of an autumn rally in techs, which we have seen the past three years, although the autumn rally usually begins later in the year. Looking closely at the situation we can come up with a few possible explanations for today's rally. First, tomorrow at 8:30 AM we will get PPI figures for August. The consensus calls for a .3% increase with an unchanged core rate, which excludes food and energy prices. The Fed looks closely at both these figures and CPI data to assess levels of inflation. It is possible that some money managers and traders are betting on a lower figure (or a non-inflationary number), which could cause the market to take off tomorrow and next week. Thus, today's late day rally is merely investors trying to get the jump on the rest of the crowd. It is definitely impressive to have a rally going into such an important number and at a time when there is so much uncertainty about interest rates and inflation. Another possibility is that the ship of the world's largest economy (a.k.a. Abby Cohen's supertanker theory) has built enough momentum to propel it through the relatively minor waves we have seen so far. It may be too difficult for a market this large, with over ten years of momentum building, to stop on a dime (we have had only two down years since 1987). Even if inflation is on the horizon, it might take some time before it has a major affect on stocks. Some analysts are attributing the recent tech move to a lack of selling pressure than a sign of major strength. Many of the same analysts look at charts and see a dangerous head and shoulders formation in process, which if correct would indicate at east a short-term top. They are, however, in the minority. If this assessment is correct, we will have increasing upside resistance and more and more bad economic news as the ship turns around. The Fed has not given us much meat to chew on this week, although several Fed members, including Mr. Greenspan, gave public speeches this week. Fed governor Edward Gramlich made some positive comments about inflation and productivity late today and warned against reading too much into comments by FOMC members, which may have been part of the reason the markets rallied. While the Fed has been tight-lipped, most everyone assumes the Fed to be fairly hawkish, ready to raise rates if much of the upcoming economic data smells of inflation. Several things kept the morning fairly light and uneventful. Oil prices are nearing 2 year highs with many analysts predicting $25 a barrel of oil. The dollar dropped to a three- year low against the yen today, and a weak dollar means more expensive imports. The CRB index is high and it was another down day for bonds. These factors kept stock prices moderately lower, but the afternoon attracted much more volume and pushed the major indices up. Some of the downtrodden sectors, financial stocks - worried about interest rates and the weakening dollar, transports - worried about oil prices, and healthcare stocks - worried about being under investigation, weighed on the markets, although rebounds at day's end could indicate some bargain hunters are jumping into the market, believing these sectors are now at attractive levels. The Nasdaq, on the other hand, enjoyed a relatively good day all day, rallying strongly and with good volume toward the close. Speaking of volume, we are seeing a seasonal post-Labor Day rise in volume that could be seen as a positive for the market. The Nasdaq traded over a billion shares today and NYSE volume was up about 83 million shares from last Thursday. For several weeks both the Nasdaq and the NYSE languished with below average volume. The increased volume could help push the averages enough to get to new highs. Money managers have to put that money to work sooner or later. Among individual sectors, Internet and computer stocks were strong with positive comments by analysts and forecasts of strong computer demand both domestically and worldwide. The Interactive Week Internet Index was up 2.36% and AMEX Computer Index was up 1.8%. IBM was up 4 points on the news and HWP gained 4.13 by the end of the day. As mentioned earlier, the energy sectors were strong, with the Oil & Gas Index up 2.41%, while banking and pharmaceuticals were weak. The PHLX KBW Bank Index was down 1.4% on worries over the weak dollar and rising interest rates. The AMEX Pharmaceutical Index was down .4%, with American Home Products under investigation by the government. In perhaps the most surprising development of the day, the airline stocks made a strong rebound near the close. After a miserable stretch with higher oil prices falling stock prices, most airline stocks were up strongly today, even as oil prices rose. The AMEX Airline index rose 4.7%. At least part of the jump can be attributed to an internal report by PaineWebber which pointed out that airline stocks were down about 34%, the third largest non-recessionary decline in decades, making the sector a value play. It may, however, take awhile before airlines can get anywhere close to new highs. The 30-year Treasury bond fell more than 1/4 point, closing with a yield of 6.09%. As the yield inches higher it will put increasing pressure on stock prices as bonds become a more attractive investment. It goes without saying that tomorrow's PPI figures are very important to the market. Because it is the Producer Price Index, any inflationary pressures here are likely to show up later in the CPI or Consumer Price Index. An unexpected result on either side could push the market strongly one way or the other. Overseas markets, interest rate uncertainty and possible inflation make current market conditions somewhat muddled. The best advice for now would be to keep your stops fairly tight and stick with the winners. It might be wise to wait until the market chooses a direction before adding new money to the market. Although a lot of traders are hoping for the PPI tomorrow to point that new direction skyward. One thing we can probably be sure of is a triple digit move in the Dow. We've been trading in a very narrow range (almost 100 points) all week long. Investors are ready and they want to focus on 3rd quarter earnings, not another Fed rate hike in October. Overhead resistance for the Dow is likely to be at 11,300 and support down near 10,800. Of course, if the PPI is favorable we could easily see a new high on the NASDAQ tomorrow. Remember, trying to pick a top or a bottom is risky and listening too closely to analysts can make one dizzy, so choose carefully and sell too soon. Chad Research Analyst Market Posture *************** As of Market Close – Thursday, September 9, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since DOW Industrials 10,500 11,320 11,078 Neutral 7.20 SPX S&P 500 1,320 1,420 1,348 Neutral 8.17 OEX S&P 100 675 735 710 Neutral 8.13 RUT Russell 2000 440 465 438 BEARISH 8.06 NDX NASD 100 2,320 2,400 2,506 BULLISH 9.03 MSH High Tech 1,120 1,200 1,262 BULLISH 9.03 XCI Hardware 1,035 1,050 1,129 BULLISH 8.24 CWX Software 750 800 867 BULLISH 9.03 SOX Semiconductor 515 520 559 BULLISH 8.24 NWX Networking 555 625 602 Neutral 8.13 INX Internet 500 580 463 BEARISH 7.20 BIX Banking 690 710 607 BEARISH 7.23 XBD Brokerage 410 440 384 BEARISH 7.23 IUX Insurance 645 660 593 BEARISH 7.23 RLX Retail 915 960 830 BEARISH 7.23 DRG Drug 360 390 368 Neutral 8.24 HCX Healthcare 740 785 750 Neutral 8.24 XAL Airline 180 190 149 BEARISH 5.21 OIX Oil & Gas 285 310 316 BULLISH 9.09 * Posture Alert Thursday's action brought back some of the losses from the previous two trading days. Oil & Gas was up solid, as the price of crude broke $23 a barrel. That sector was up 2.35%, and as such, was upgraded to BULLISH from Neutral. Friday's PPI can definitely add some fuel to the fire, or put out the flames. Market Sentiment **************** Things Can Change! Last Friday's rally was great for everyone involved, expect short sellers. The sentiment seemed to really change after this day, however, the follow-through to this rally was less than desirable. Most people expected Monday or Tuesday to continue the rally, especially with everyone back from vacation. This didn't happen. Don't forget, Wall Street can turn on a dime and right now there are a lot of people on the fence! To see this market explode in either direction is still a strong possibility. Friday brings us the Producer Price Index, and then on Wednesday we have the Consumer Price Index. If either of these indicators point to inflation, we could be in trouble. Continue to watch the long bond as your guidance counselor, and let the force be with you. Here at Pinnacle Capital, we get many Emails on sentiment, and how/why bearish sentiment can actually be bullish. As of yesterday, the Investors Intelligence Survey showed an uptick in bullishness for the first time in many weeks. This may be a one-week thing, but it may have also signaled a bottom. With sentiment being so bearish, this market can easily rock to new highs, should the inflation picture become clear. Take a look at Apple Computer (AAPL). Apple is actually one stock where bearishness has dominated for a long time. The open interest on Puts is greater than Calls, which is very rare. There are only a small handful of stocks where puts outnumber calls, and usually, there is a very good reason (i.e. bankruptcy, horrible earnings, cyclical sectors, etc.). In the case of Apple, you have seen them turn the company around, to where earnings are increasing, revenues increasing, and where they are beating analyst expectations. The company has performed solidly. This put buying that we have mentioned, has actually given support to the stock, and has helped fuel its uptrend. If you look at the chart, it is up 60+% in the last two months alone, even though the bears dominated the stock. Imagine what the broad market can do in the next several months if the inflation picture remains clear? As a side note, two other fundamentally solid companies where puts outnumber calls are: Texas Instruments (TXN), and Lucent Technologies (LU). Have a good weekend. BULLISH Signs: Investor Intelligence: As a contrarian indicator, the amount of Bullish investors is at a recent low, and bearish investors is at a recent high. Peak Open Interest: The contraian OEX put-call ratio on peak open interest is clocking in at 1.3, suggesting bearish sentiment picking up steam. Market Posture: Several indexes have broken new highs, including the Nasdaq 100, Morgan Stanley High Tech, Software, Hardware, and Semiconductors. Volatility Index: The VIX broke is below the 25 benchmark, after flirting in the danger zone. Mixed Signs: Interest Rates: The yield on the 30-yr Treasury is now above the 6% benchmark, but still below the 6.272% high. Any break below 6% would be positive, while any break into new highs would be extremely negative and take this market significantly lower. Volume: The Dow broke new highs, but on very lackluster volume. To truly break out to the upside, we need better volume to confirm the move. BEARISH Signs: Pinnacle Index: The Pinnacle Index for the OEX (735-780) is now reaching levels of extreme optimism. From a contrarian standpoint, resistance is building in this area, and should the market advance further, this was mark the beginning of overhead resistance. Russell 2000: Even with the strong rally, the RUT is still below the 50 and 200 day moving averages. If this trend continues, this could prove very bearish. Pre-Earnings Season: September is the start of pre-release season. 9 times out of ten, companies usually let Wall Street know some sort of negative news. We have already started to witness the negative pre-announcements this last week. Advance/Decline Line: The A/D line is still looking negative, even with this latest rally. OTM Call Analysis As we move through the September expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 700-800 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 700-800) Date Open Interest Change % Alert Friday, July 16 32,285 - Friday, July 23 62,455 +93.4% Friday, July 30 74,895 +131.9% Friday, Aug. 06 113,258 +250.8% Friday, Aug. 13 117,620 +264.3% September Expiration Cycle OEX OTM Call Analysis (Open Interest September 690-780) Date Open Interest Change % Alert Friday, August 20 41,346 - Friday, August 27 78,026 +88.7% Friday, September 3 104,700 +153.2% Market Sentiment at a Glance Friday Tues Thurs Indicator (9/3) (9/7) (9/9) Alert Pinnacle Index (OEX): Overhead Resistance (735-780) 179.0 179.0 120.0 Underlying Support (710-730) 2.4 2.4 2.4 Underlying Support (630-690) 4.0 4.0 4.3 Put/Call Ratios: CBOE Total P/C Ratio .7 .7 .6 CBOE Equity P/C Ratio .5 .5 .5 OEX P/C Ratio 1.1 1.1 1.5 Peak Open Interest (OEX): Puts 660 660 660 Calls 720 720 720 P/C Ratio 1.33 1.33 1.44 Market Volatility Index (VIX): CBOE VIX 21.39 Investors Intelligence: Bullish 44.10% * Bearish 30.50% * 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 (9/3) (9/7) (9/9) Overhead Resistance (735-780) 179.00 179.00 119.70 Overhead Resistance (710-730) 2.37 2.37 2.43 OEX Close 713.89 711.37 Underlying Support (630-690) 3.99 3.99 4.30 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Overhead sentiment resistance is huge at the OEX 735/780 level but very light at the 710-730 range. Put/Call Ratio Friday Tues Thurs Strike/Contracts (9/3) (9/7) (9/9) CBOE Total P/C Ratio .69 .69 .59 CBOE Equity P/C Ratio .54 .54 .46 OEX P/C Ratio 1.12 1.12 1.46 OEX Peak Open Interest Friday Tues Thurs Strike/Contracts (9/3) (9/7) (9/9) Puts 660 / 13,325 660 / 13,325 660 / 14,099 Calls 720 / 10,042 720 / 10,042 720 / 9,817 Put/Call Ratio 1.33 1.33 1.44 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 5, 1999 Bottom? 32.12 September 3, 1999 21.39 Please view this in COURIER 10 font for alignment ***************************************************** CHANGES THIS WEEK Index Last Tue Wed Thu Week Dow 11079.40 -44.32 2.21 43.06 0.95 Nasdaq 2852.02 -5.85 -28.52 43.28 8.91 $OEX 709.81 -2.52 -3.71 2.15 -4.08 $SPX 1347.66 -6.79 -6.30 3.51 -9.58 $RUT 437.77 2.27 -2.34 1.87 1.80 $TRAN 3113.27 -47.41 -28.34 8.83 -66.92 $VIX 23.40 1.94 0.85 -0.78 2.01 Calls Tue Wed Thu Week HGSI 86.00 12.50 -3.31 -0.31 8.87 Use some caution CHKP 90.69 -1.44 2.50 3.94 5.00 Looking strong BGEN 89.19 -1.00 2.06 3.31 4.38 New, it's a looker CNXT 79.72 1.50 -1.06 2.91 3.34 Found strength ADI 56.00 2.94 -1.38 0.88 3.31 Stellar runner LGTO 48.00 1.13 1.94 0.00 3.06 Hanging on tight VRSN 110.63 4.47 -1.44 -0.25 2.78 Looking to move SFE 70.25 2.63 -1.69 1.19 2.13 Increases income DISH 88.06 2.94 -1.25 0.31 2.00 At the crossroads FLEX 64.50 -0.25 2.19 -0.63 1.31 A relief haven TXN 89.00 3.69 -2.75 0.13 1.06 Joining the rally CMGI 87.38 -0.38 -3.75 5.13 1.00 Going strong SFA 54.25 1.56 -1.44 0.69 0.81 Two steps forward ERTS 75.19 -1.75 -0.38 2.56 0.44 Another new high SUNW 84.19 1.81 -0.88 -1.25 -0.31 Potential success DELL 48.88 -0.06 -1.75 1.25 -0.56 Running again CSCO 69.94 -0.56 -1.50 1.00 -1.06 Top 10 tech list INTC 87.75 -1.69 -1.69 1.81 -1.56 Its rally mode! MSFT 94.06 -1.44 -2.00 1.81 -1.63 Technology rally JDSU 110.44 0.19 -3.31 0.44 -2.69 Dog and pony show BVSN 106.63 2.88 -4.38 -1.44 -2.94 Mercy or menace? MU 75.63 -0.50 -4.13 0.13 -4.50 Broke its high! Puts GPS 35.44 -2.00 -0.75 -0.69 -3.44 New, worst retailer CVS 37.75 -0.88 -0.75 -1.13 -2.75 New, no hope here KO 55.00 -2.75 0.63 -0.25 -2.38 Sitting on a bubble DOW 114.31 -0.63 -0.50 0.06 -1.06 Dropped, too much ONE 38.94 -0.47 -0.25 0.06 -0.66 Sector softening JCP 35.94 -0.25 0.13 -0.25 -0.38 Finding support? HRB 47.00 -0.38 -0.13 1.06 0.56 Drastic measures WLP 76.00 0.19 0.81 1.19 2.19 Dropped, it's gone 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: ****** There are no dropped calls today. PUTS: ****** WLP $76.00 +1.19 (+2.19) It should be apparent to everyone at this point that the great WLP trend we've been playing has finally come to an end. The stock decided against stopping at the 10-dma as it has for the past two months and instead has broken above that key level. If you have been looking for news to explain the rise, you may not find any. In fact, the entire sector has still looked weak which makes us wonder if maybe this is the real deal. Whether or not it is doesn't matter as the risk now heavily outweighs the reward. If you are not stopped out yet, you should quickly find an exit point to avoid any further stock price gains. DOW $114.31 +0.06 (-0.44) As we've said before, the decline in shares of DOW may still come. Waiting for it however has been like watching paint dry. Honestly DOW, seems to have been forming a base in the $113-$114 area. With the right news or announcement, DOW could fall out of bed. In the last two days traders have tried to drive the chemical maker down only to have buyers step in to support the stock. DOW simply isn't going our direction so we will look elsewhere for our opportunities. PICK NEWS - CALLS ***************** INTC $87.75 +1.84 (-1.44) After a few of days of consolidation, INTC headed north again today with a strong tech group, showing us that the stock is still in rally mode. Technical analysis is not always helpful, but Intel is a classic example of when it is. Take a look at a 10 dma chart with Bollinger Bands. You will see that except for a 3 point diversion during the third week of July, Intel has not dropped more than a point below its 10-dma since early June, when the current rally began. Each time it gets much above the upper Bollinger band, it pauses for some consolidation. If it should fail to bounce when it hits its 10-dma (or just below), be ready to bail out. Use this info as a guide for entries and stop loss orders. In the news, INTC made Merrill Lynch's "top ten tech" stocks for "aggressive investors". Merrill's report says the Internet and Intel's entry into the communications chip market will drive future growth. INTC has also entered the router and switch market this week with 3 new products, demonstrating further diversification into those Internet areas where the growth is. DELL $48.94 +1.31 (-0.50) Welcome back volume! It may not look like much at first glance with DELL only trading 19M shares but volume came pouring into the markets in the final hour of trading today. It was this commitment to the markets that took DELL higher to close right at the day-high. Most likely this stems from traders trying to jump the gun on tomorrow's PPI report after last week's strong Friday rally. If we get a favorable report, we should continue higher. We would like to see DELL push above $50 to confirm the recent trend. Look for an entry point intraday if DELL starts to run. In the news on Wednesday, Dell announced they have struck a deal to purchase ConvergeNet Technologies for $340 million. This is part of Dell's long-term strategy to become a leader in storage technology. CHKP $ 90.63 +3.88 (+4.94) Check Point continues to look strong. After hitting a speed bump on Tuesday, we saw on Wednesday and Thursday that CHKP still has a lot of momentum. CHKP closed the day with an impressive rally and broke through to new 52-week high territory. The volume was above average, indicating this rally may have legs. With the lack of news on the stock we continue to use the upward trend as a guide. Breaking to new highs is always positive and with the strength the sector has shown, look for CHKP to maintain its upward movement. CMGI $87.38 +5.13 (+1.13) The Nasdaq's beating yesterday after the Fed Governor's speech and the surprise interest rate hike by the Bank of England resulted in CMGI's descent of $3.63 to finish near its daily low. For those who used this descent as an entry point profited today as CMGI advanced a healthy $5.13 on about 50% volume of its ADV. At first sight this may not seem like much but actually this is an improvement in the stock's recent trading volume levels. Tomorrow will be the big tell-all with PPI numbers coming out. Remember last Friday? Well if we get a repeat explosion in the market CMGI should surge once again as it approaches its earnings' date on September 27th, after the bell. This play is purely based on the expectation of a powerful earnings run. ***** 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 9-9-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** PICK NEWS - CALLS continued ***************** HGSI $86.00 -0.31 (+8.88) Tug of war between the bulls and bears. The market however is helping the bears lately. The tails on the candle stick charts show that this stock still wants to go higher but, market pressure has been too much. Any reprieve we get in the market, should allow the bulls to prevail. For now use extreme caution! We have turned negative in our stochastic and momentum is fading due to market conditions. At these levels we are very overvalued so speculation is moving the stock. Stops are your safety net, so place them accordingly. Support is well below current levels at $75. That's a long way to drop, so keep what you have. Some good news on Biotechs, especially for HGSI. Tim Bepler of the Orbitex Health & Biotechnology fund reported many genetic research companies are getting to the end of their research and as they propose drugs to the FDA, approval should be streamlined, helping recover costs and start early cash flows. BVSN $106.50 -1.56 (-3.00) Mercy or Menace? We could apply this both ways to BVSN. Mercy in that we are approaching support and this could be another buying opportunity. Menace in that we are turning negative on our technicals and the market may be saying $115 is our resistance. Because the market is the overseer of our plays, use it to your advantage and don't try to out guess its moves. Confirm a positive direction in both the market and the stock before re-entering BVSN. Volume has been quite lackluster in this stock the last two days, indicating that the money is still sitting on the side. If we get some market relief, this could again propel us. For now be careful as we have developed two levels of support on BVSN. One resting on our 10-dma today at $104 and a back-up on our 20-dma at $101. For those of you that have been profitable, use this to protect your profits. Buyers could use them as an entry gauge but as always, reconfirm the upward momentum before jumping in. In the news, Broadvision is a part sponsor of an e-services conference hosting 700 of the top executives from across the country. Showing these elite how the Internet can increase revenue streams is definitely of benefit to BVSN's revenue as well. MSFT $94.06 +1.81 (-1.81) Up, down, touch the ground. This children's song pretty much describes Microsoft today. Couldn't quite decide what to do. We are currently close to support at $93, so it appears we are at the markets mercy. With no volume conviction, our 8/17/9 MACD has turned negative. The yellow light is on, as we wait patiently for the market to convince itself we need a tech rally. There is some consolation in the fact that we did recover from our 12:15pm low to finish at the high of the day. Investors may see this as an opportunity to buy. Use caution however and confirm the positive trend in both the stock, the sector, and the market before committing. Two news items worthy of note. The foremost is the interest MSFT has in Globex and their new fibre-optic network in Asia. MSFT will invest $175 mln to help GLBX meet their objectives. Also, MSFT's MSN is gaining ground against Yahoo. IBM reported that traffic to their sites has seen an increase from other search engines among which MSN is at the lead. FLEX $64.50 -0.63 (+1.38) How do you spell relief? Relief from the market woes that is. Amidst all this market direction confusion, FLEX provided investors with that relief haven, as we headed higher yesterday on good volume. Today we retraced somewhat but much of that can be attributed to lower volume. It is worth pointing out that the end of day rally that we saw in the tech stocks today, didn't have FLEX's name on it. In fact FLEX headed lower. This shouldn't be of great concern as investors may be protecting profits ahead of tomorrow's economic report. It does necessitate caution however. Protect Wednesday's gains with stops. Our support sits at $61 so any drop would give us a ways to fall. FLEX should participate well on any good news tomorrow but be patient and confirm a positive direction in both stock and market before playing. VRSN $110.63 -0.25 (+1.38) On Wednesday, VRSN managed to set another 52-week high (for the second consecutive day!) before the battering took place on the Nasdaq. VRSN spiked early morning hitting $117.25 to set the newest record providing a tidy little profit if you took your money and ran. Right now VRSN is just above its 10-dma (now at $108) an indicator that has previously acted a springboard. Besides this mark historically being a solid entry point, there's enough volatility during the stock's intraday trading to target shoot for perhaps even a lower entry price. This momentum play continues to make headway from when it first broke out amidst the sector's recovery and if we get positive results from the PPI data tomorrow VRSN could easily reach higher highs. Once again, be advised VRSN is a very VOLATILE AND HIGH RISK play. Please watch your positions closely as stops can be very difficult to use due to this stock's wild intraday swings. In the news, VeriSign and Xedia Corp, a leading provider of Internet access routers, have entered into an agreement to integrate their products/services to provide extended digital certificates for virtual private networks (VPNs). LGTO $48.00 +0.00 (+2.87) LGTO bucked the Nasdaq's negative pressure on Wednesday and hung onto $1.69 in gains. This is a favorable sign as LGTO renews it upward momentum from its consolidation period last week. While advancing 6.4% this week, the stock has consecutively set new 52-week highs during all three days of trading. The newest record is at $49.25 which was hit during a spike at the open. For the most part LGTO is a steady climber and trades in a fairly close range of $2-4 dollars intraday, so your goal would be to get in on a daily bottom. Still firm support is at $42 but its 10-dma is now at $44. Keep in mind that these reference points are excellent gauges and if you see the stock reversing to these levels put up the red flags. MU $75.63 +0.13 (-4.50) MU slipped $4.13 on Wednesday after announcing that the price increase in its DRAM components will unfortunately not affect its 4Q earnings, but instead be carried over to the following quarter's earnings. Couple this with a negative market sentiment following hints from the Fed Governor of US wage pressures and likely profit-taking and you have potent ingredients for a sell-off. Recall MU just broke its 52-week high of $80.56 (set back in February) and pushed through this long- time opposition on Tuesday. Plus, just before the sell-off began on Wednesday the stock peaked at $82.50 to hit yet another new record. Volume hit an exceptional level of double its ADV at over 11.89 mln shares exchanging hands. Still there was lots of good news for Micron on Wednesday. Crucial Technology, a division of Micron Technology, and Compaq Computers (CPQ) entered into an agreement. Crucial Technology will supply the memory systems for Compaq's Presario 5300 series. And importantly MU received reiterations from 3 different analysts. Paine Webber restated a Buy rating and issued a $105 target price. Their analyst, John Lazlo, also raised fiscal estimates for the years 2000 and 2001. ABN Amro came forward too and reiterated a Buy rating and raised its price target to $100 from $90. Then the bull, Merrill Lynch, reiterated its near-term Buy rating for MU. Again today, volume remained strong while investors continued to rake in profits on the stock. MU held up well managing to close up a fraction. This present level is evolving as September's bottom support for the stock. But you should consider playing conservatively and waiting until the data from the PPI data hits the press before opening any new positions. This is a good entry point, but MU is now perched right on its 10-dma and it'd be better to see it bounce off this mark first. SUNW $84.19 -1.25 (-0.31) The tone in the broader markets is still mixed. The bears came back from lunch yesterday flexing their muscles. After making a new high at $88.00 shares of SUNW began to slide. This appears to be nothing more than profit- taking for the chip maker since beginning its run back on August 10th in the $65.00 area. That's an increase of just under 34% in 30 days. Yesterday SUNW ushered in its "SunRay" a desktop computer unit designed to encourage companies to abandon traditional PC's. Corporate computer buyers and several analysts were hesitant about the potential success for the new bare-bones machine from SUNW. Sun Ray apparently never needs a software upgrade and is far simpler than conventional desktop computers. Time will tell on this one. This morning Merrill Lynch released a report describing its "top ten tech" investments. SUNW made the list with Merrill describing it as "on the verge of becoming a franchise stock given its focus on Internet computing. Stocks included on the brokers list are considered "safe" ways to play the Internet. Bear, Stearns & Co analyst Andrew J. Neff reiterated his Buy rating for SUNW today as well. We do expect shares of SUNW to get back on track. There may be more profit- taking ahead however. Much depends on the PPI numbers that come out in the morning. If you are still in a play on SUNW, move your stops up tight. Before entering a new play confirm tomorrow's PPI numbers and the direction of the broader markets as well as that of SUNW. DISH $88.06 +0.31 (+2.19) DISH is a perfect example of Jim's "sell to soon" advice. DISH kind of spiked in the opening hour Tuesday. If you follow Jim's first hour rule we had an opportunity to buy calls for the balance of the day in the $88-$89 area. Wednesday morning saw another spike up to $96.38 in the first hour again. Depending on your entry point, a $6-$8 move in one day isn't bad. DISH has now fallen back to an intraday support level and we will let the market dictate our next move. We are not suggesting that everyone play the markets this way as many people do want to nor have the ability to be in front of a quote screen all day. We are simply trying to show that if you entered a play in DISH on Tuesday, the market gave you an opportunity to "sell to soon". If you didn't take the money off the table, we are now at crossroads. The fact that DISH closed near the low of the day Wednesday does not bode well near-term. There was almost no follow through selling today which does help our cause somewhat. Now we must wait for the PPI numbers in the morning. If we get a positive move in the broader markets DISH will probably join in. If it is negative get your stops in place. In the news, the launch of the EchoStar V satellite scheduled for tomorrow, will now be Monday(weather-permitting) as adverse weather has delayed the final check-out tests. ADI $56.00 +0.88 ADI had another convincing day, despite the markets dizzying performance. Its obvious ADI has the confidence of investors to perform in a mixed of market volatility. The stock was up most of the trading session, and did finish up $0.88 to close at $56.00. From a technical stand point, today was another stellar performance for ADI as it's still closing well above its 10-dma As a matter of fact, it seemed to be a positive day for most of the semiconductor industry. Leaders such as Intel, Applied Materials and Motorola all made gains today, despite the fact that the looming PPI could place a shadow of interest rate uncertainty over the financial world. There was no impacting news developments today concerning ADI. The only articles published today was the reiteration of the new RF (Radio Frequency) business unit it is forming to meet growing demand for analog RF ICs (integrated circuits). SFE $70.25 +1.19 (+2.38) We made it through this week's Greenspan and company speeches. Now we are facing tomorrow's release of the PPI numbers at 6:30am. We are still looking for SFE to move higher. Since being added to our pick list Tuesday, SFE has really gone sideways. Unfortunately we have been stuck in a market that gets news, makes a move and then sits, afraid of what Mr. Greenspan might think. If he doesn't make a comment, then we just wait for next report and do it all over again. What we are trying to say is it makes for a tough market to trade at times. So we must have patience. If you entered yesterday or today, keep your stops close. If not, wait for the release of the PPI numbers to see how the broader markets (and yes the FED, we can't forget them) interpret the data. Today DocuCorp, which is one of Safeguard Scientifics holdings announced a 42% increase in net income for fiscal year 1999, which ended July 31st. In March Safeguard purchased Xerox Corporation's 9% ownership interest in DocuCorp giving SFE an 18% stake in DocuCorp. SFA $54.25 +0.69 (+0.81) One step back two steps forward, this is the trend for SFA the past week. Yesterday, along with the rest of the interest rate jittered investors, SFA gave up ground due to words spoken by Fed. Governor Meyer. He stated that wage pressures may be building therefore indicating inflation may be on the horizon. Investors took this as a negative sign and reacted accordingly by once again converging on the sidelines. A slight down turn in SFA was expected considering the stock set a 52-week high on Monday. With the technology issues making a late rally to close the day, going into tomorrow SFA is poised to make another run. However, the latest PPI numbers will be released tomorrow morning and may influence our play. Expect another volatile day of trading and place orders accordingly. TXN $89.13 +0.25 (+1.19) If you like roller coasters, you would like this week's trading on the markets, up and down, up and down. The markets are reacting to any individual comments that may influence it, whether it is from individual analysts or a fed governor. Unfortunately, these individuals are taking TXN on the same roller coaster. The stock has fallen off its highs and like many of its counterparts is in stall mode. This stall however may be short-lived seeing that an important economic indicator will be released tomorrow. Considering investors' edginess, look for a broad market movement one way or the other once the numbers are released. Expect TXN to follow the broader markets, hopefully to the upside. As a side note, there was good news released on TXN yesterday. PaineWebber said it is raising its price target on TXN to $110 per share from $85. This news should give the stock a boost once current interest rate fears subside. For tomorrow, confirm market direction before entering new trades, it should be a nice volatile day to end the week. ERTS $75.19 +2.56 (+0.44) ERTS does it again - another new high. ERTS is ramping up production and introducing new interactive electronic games at a record pace. Yesterday they announced the acquisition of Playnation, an online entertainment developer, which should further enhance the growing revenue stream. Following 2 days of losses, ERTS more than made up for it in today's trading. Barring any ill-received PPI news (which at this point, isn't a big stretch), ERTS's volume should continue to confirm money managers' increased buying interest. 95% of ERTS is already institutionally owned, making large blocks extremely hard to come by, unless the new buyer is willing to pay up. When volume dies, that will be the clue to exit the play. All technical indicators are still very much in positive territory. In the meantime, ERTS has touched its 10-dma (about $71 currently) on the downside only once in the last 30 days. You may want to set a stop at this level to protect your profits. If you still want to make the play, long-term support is way back at $67, where it's highly unlikely you'll get filled any time soon, barring catastrophe. We think you'll be better served target shooting at $71 or buying a breakout over $76.50, market willing. CSCO $69.94 +1.00 (-1.00) Technically still in the positive, CSCO gave us a buyable dip yesterday and today, as it swooped down to $68.63 before bouncing back north. This looks like good support to us. Helping CSCO out today was a Merrill Lynch news release stating that CSCO was one of their top 10 "tech list" picks, wherein they cited that CSCO would continue to benefit from the rapid growth of Internet infrastructure. It happened that the news also coincided with another announcement that CSCO signed a strategic development agreement with Cable and Wireless to develop advanced communications services in Hong Kong. Even so, CSCO has sputtered this week following last Friday's breakout to a new high. Support appears regularly at its 10-dma (currently $68). Market willing (by that, we mean cheerful reception of tomorrow's PPI figures), we think it's buyable at this level still, or if you are a bit more conservative, wait for a breakout over $72. Volume has been a bit weak over the last 2 days, indicating that money is remaining on the sidelines. When you see a return of volume over 17 mln shares per day and a rising price, it's probably safer to get back in. "Don't fire 'til you see the whites of their eyes". JDSU $110.44 +0.44 (-2.81) Considering JDSU did a dog and pony show at a presentation for analysts in New York City yesterday that J.J. Cramer reports as standing room only (SRO), our best guess is that JDSU failed to inspire the buyers, as indicated by lack of volume. Let us take a moment to offer some country boy wisdom. Have you ever seen a dog (no matter what the size) fight with a raccoon? The raccoon always wins, especially if the tussle occurs near water. That's because the raccoon tires the dog out by drawing the fight into deeper water, then sits on the dog's head until it gives up or drowns. It seems to us that the market has taken JDSU to deep water and is now content to sit on its head. It's having a hard time getting back over $114, especially without volume to back it up. Though JDSU found support today at about $107, it may still have further to correct, perhaps to $103 or even lower if tomorrow's PPI figures aren't viewed favorably by the Street. This is a volatile play to begin with and you don't want to try to catch the falling knife. Wait until you see a definite bounce backed with increasing volume before you enter the play. Just so you know, Salomon Smith Barney reiterated their Buy rating with a $130 price target. After all, they hosted the analysts' meeting in which JDSU performed their presentation yesterday. CNXT $79.72 +2.91 (+3.34) Though yesterday looked a little bleak, CNXT drove to the hoop today to score another one on the "all time closing high" meter. While this looks really great on the chart, today's volume indicates that seller's just didn't come to the party, which will scare a few technicians. Frankly, we view it as a positive vote by investors that they have no desire to sell at this level, which may have helped CNXT close near its high of the day. In the news, Globespan, a CNXT rival, may be doing a bit more business with Lucent, which could hurt CNXT in the short run but appears to have had no effect on traders' psychology. A note of good news too, Sega will begin shipment of its 128-bit Dreamcast Web gaming machine equipped with CNXT technology, which should be a strong seller this Christmas. Anyway, over the last 30 days, support has been strong at the (gulp!) 7-dma, currently about $76. We think dips to that level are buyable. Just make sure the market has properly digested the PPI numbers tomorrow before starting a new play. Price target is still $100 ************** NEW CALL PLAYS ************** BGEN - Biogen Inc $89.19 +3.31 (+4.38 for the week) Biogen is a biopharmaceutical company that researches, develops, manufactures, and markets drugs for human health care. They develop and test drugs for multiple sclerosis, pulmonary diseases, kidney diseases and disorders, inflammatory afflictions and cardiovascular dysfunction as well as focusing on developmental biology and gene therapy. However, Biogen derives about 55% of its revenues from the sale of AVONEX, a drug used to treat different forms of relapsing multiple sclerosis. They also make money from royalties received on worldwide sales by licensees. Biogen also has research alliances with global pharmaceutical firms such as Creative BioMolecules, CV Therapeutics and Merck. This new call play has quite a lot going for it. First, it's evident from looking at a 10-day chart that BGEN first broke out during the powerful market rally last Friday. It left its firm support level of $77 and $79 and has consecutively stretched itself into new territory by the day. Today the 52-week high record stands at $89.25 and was attained by bullishly climbing straight up from the open. Second, this sector is hot and continuously gaining the respect of investors on the Street. Now with earnings just around the corner expected on October 4th (this date will of course be confirmed ASAP), BGEN is gaining momentum. Plus here's another tidbit that may play into this scenario. BGEN is actually at a price level where it can be considered a split candidate. Granted the stock just split 2:1 on June 25th and with 220 mln shares authorized and only 150 mln shares outstanding there's not quite enough for another one but nevertheless it became a possibility when BGEN reached $80. The last Annual Stockholder's Meeting was on June 11th and thus far, there's no word on a Special Meeting but we'll keep you posted on any new developments. If the stock pulls back to $85 (which could evolve as new support), this would be a solid entry point, if not you'll need to look for an intraday bottom to get in on this earnings run. In the news today, Dain Rauscher Wessels started coverage for BGEN with a new Buy rating and issued a 12-month target price of $112. ***CAUTION: September options expire next week*** ***NOTE: At this time there are no strikes above 90*** BUY CALL SEP-85 BGQ-IQ OI=287 at $5.13 SL=3.50 BUY CALL SEP-90 BGV-IR OI= 95 at $2.00 SL=1.00 BUY CALL OCT-85*BGQ-JQ OI=347 at $7.63 SL=6.00 BUY CALL OCT-90 BGV-JR OI=137 at $4.75 SL=3.00 Picked on Sep 9th at $89.19 P/E = 64 Change since picked +0.00 52 week high=$89.25 Analysts Ratings 9-12-5-0-0 52 week low =$25.18 Last earnings 06/99 est=-0.32 actual= 0.34 surprise +6.25% Next earnings 10-04 est= 0.36 versus=-0.25 Average Daily Volume = 1.89 mln Chart = http://quote.yahoo.com/q?s=BGEN&d=3m **************** PICK NEWS - PUTS **************** KO $55.38 +0.13 (-2.00) Coca-Cola has yet to break through its support at its 52-week low but is still sitting on the bubble. KO failed to sustain much of a rally on Wednesday and has continued to look weak. On Wednesday morning gains evaporated by the end of the day and any upward price movement was met by obvious selling pressure. KO managed to close up a small fraction today, riding the wave of a late-day rally. That move is more easily attributed to a lack of sellers in the market than to strength in the stock. Little news has trickled over the wires about Coke in the last couple of days, and nothing fundamentally changed, so continue to look for further downward pressure. JCP $35.75 -0.44 (-0.56) After a fractional recovery yesterday, JCP turned its tail and once again headed to lower ground. It has been a tough week for the retailer, which only had negative news to report. First, the stock was downgraded by Prudential from accumulate to hold. Second, Banc of America cut J.C. Penney's fiscal year 1999 earnings per share estimates to $2.39 from $2.65. Despite the bad news, the stock has managed to maintain its support at $35 and became a nuisance for our play. The final push to break through this support may be provided by tomorrows PPI numbers that will be released before market open. With investors worried about interest rates, higher than expected PPI numbers will come across negatively, hopefully sending the markets and our play lower. No matter what the outcome, be prepared for a volatile day to end the week so make use of the recommended stop loss orders. HRB $46.94 +1.00 (+0.50) Hard times require drastic measures, which is the process that HRB is undergoing. Recently the company announced it would be buying Olde discount broker which has worried both analysts and investors. With such a large acquisition, questions have risen how this will alter H&R Block's current operations. To help the situation, the company announced yesterday that Mark Ernst was being appointed as president and chief operating officer. Ernst has been a key driver in directing and implementing strategic initiatives in the past. Whether this news is enough to help the depressed stock remains in question. The stock is down over $13 since its high back on August 24 but managed to consolidate around the $46-$47 price range the last few sessions. See if we can break this support with a little help from the broader markets. Tomorrow the PPI numbers will be released, if the results are negative look for many stocks to move lower including HRB. ONE $38.75 -0.06 (-0.66)ONE had another negative day of trading on Thursday after further softness in the banking sector was indicated by Chase Manhatten (CMB). Rumors on the street suggested that Q3 earnings for Chase Manhatten (the nations number 2 bank) might be softer than expected. Chase's stock dropped $4.13 points today to finish at $77.63 on heavy trading. Stephen Biggar, an analyst at S&P Equity Group, stated "There has been some concern about revenue growth for all banks in the third quarter, after the Bank One Corp announcement." ONE stock sank another $0.06 to finally close at $38.75 on moderate trading. If the Chase rumors was not enough, the 30-year bond was on the rise again after Japan's GDP was stronger than expected and expanded by 0.9 percent. A favorable environment for increasing interest rates is not bullish for companies with credit card divisions such as ONE. Currently, this still looks to be a potentially profitable put play but choose your entry points carefully and use stops. ************* NEW PUT PLAYS ************* CVS - Cvs Corporation $37.75 -1.13 (-2.75 for the wk) CVS is a drugstore chain specializing in prescription drugs, over-the-counter drugs, photofinishing services and film, greeting cards, beauty & cosmetics, convenience foods and seasonal merchandise. It operates about 4,200 drugstores in 24 states in the eastern US. Thanks to its acquisitions of Revco and Arbor Drugs, CVS is the #2 drugstore chain in the US in total sales and #1 in store count and prescriptions filled. Nearly 60% of sales come from pharmacies. CVS's purchase of online pharmacy Soma has expanded its market reach to the Internet. If you are looking for a play with a consistent trend, CVS is definitely worth a look. For the last month CVS has been losing ground while undergoing an increase in volume. This is not a good sign, indicating that investors are leaving in droves. The stock is down over $12, or 25%, since the onslaught began back in late July. Hurting the stock during this time period was two different downgrades. The first was on August 4, Merrill Lynch downgraded the stock form Strong Buy to Buy. The second shot came on August 13 when Josephtal and Lyon downgraded CVS from Buy to Accumulate. This started the ball rolling and momentum has kept it going, ending today with a new 52-week low. The stock is trading well below its 50-dma and 200-dma demonstrating its technical weakness. We expect this weakness to continue and see the potential for lower lows, therefore we decided to add CVS as a put play. Even though bearish indicators are predominate, use caution with this play. Any stock that falls this far, this fast has the potential to turn. Choose your entry points carefully and place the recommended stops for protection. ***CAUTION: September options expire next week*** BUY PUTS SEP-40 CVS-UH OI= 55 at $0.69 SL=0.00 BUY PUTS SEP-45*CVS-UI OI=321 at $7.38 SL=5.50 BUY PUTS OCT-40 CVS-VH OI= 94 at $3.75 SL=2.00 Average daily volume = 2.30 mln Chart = http://quote.yahoo.com/q?s=CVS&d=3m ********** Puts are continued in section three Play of the Day, Combos, Straddles are in section three ********** SEE DISCLAIMER IN SECTION ONE **********
The Option Investor Newsletter Thursday 9-9-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************ New Puts - continued ************ GPS - The Gap Inc $35.44 -0.69 (-3.44 this wk) The Gap Inc is a international clothing retailer that operates almost 2,600 clothing stores in the United States, Canada, France, Germany, Japan, and the UK. Its stores offer a tremendous variety of men's and women's casual clothing. The clothing sold at The Gap consist of T-shirts, jeans, and khakis pants. The company's owns other retail chains including Banana Republic, Old Navy Clothing Co, and GapKids. For the first 13 weeks ending in May 1, 1999, net sales increased 32% to $2.28 bln and net income increased 49% to more than $202 mln. GPS is one of the worst performing stocks of the week and that's good enough to qualify it for our recommended put list. The Gap is off 9.26% since last week making it one of the worst retail performers. In fact, the entire sector has declined 4.26% since last week. GPS is a key component of the S&P Retail index but the stock did not contribute to the anemic 3.42 gain the index had on Thursday. GPS was down $0.69 yesterday and finally ended the trading session at $35.44. Volume was heavy with more than 3.66 mln shares changing hands. This is in comparison to a three month daily average of 3.66 mln shares. From a technical view, the stock has been meeting significant resistance at its 10-dma of $38 and has been loosing ground in its price since last Friday. Currently, there does not appear to be any direct news or developments to have any significant bullish impact on the stock. So it's time to ride the momentum wave. We suggest that you hold off on any plays during amateur hour tomorrow as traders will be sorting out the PPI numbers. You will also want to hold off if the numbers are favorable and cause a rally. But if GPS doesn't participate, then it is time to find an entry point to ride the wave. ***CAUTION: September options expire next week*** BUY PUT SEP-35 GPS-UG OI=1116 at $1.06 SL=2.00 BUY PUT SEP-40*GPS-UH OI=4499 at $4.75 SL=3.25 Average daily volume = 2.09 mln Chart = http://quote.yahoo.com/q?s=GPS&d=3m *************** PLAY OF THE DAY *************** CNXT - Conexant $79.72 +2.91 (+3.34)(+5.13) Spun off as the electronic chip division of Rockwell Intl in December 1998, Conexant is a major manufacturer of 56K PC modem chips and is now the largest communications semiconductor manufacturer in world, with estimated 1999 revenues of $1.4 bln. With 56K modems reaching saturation, CNXT has expanded its product line to include chips for personal imaging (fax machines, office peripherals, video systems), wireless communications (cordless phones, global positioning system receivers), digital infotainment (cable modems, set-top boxes) and network access (corporate hubs and multiplexers). Network access is another name for DSL and Wide area network transport. Competitors are Broadcom, Texas Instruments and Intel. Customers include Compaq and Ericsson. Sunday's Write Up What we have here is a great player in a hot sector. As semiconductors, benefiting last week from favorable analyst comments, really lit up investors' radar screens. CNXT has steadily marched up from $56 in early August. While volume remained light last week, CNXT set a new record high of $76.50 on Wednesday and fell just $0.13 short of that during Friday's close. What we found particularly impressive was the $1 price gain in the final 30 minutes of Friday's trading, coupled with increased volume. On the technical chart, MACD and momentum are both positive. Support has been strong in the $72 range. Fundamentally, each of CNXT's 4 divisions is growing revenues at least 35% per year. Internet trafficking semiconductors (WAN products) and DSL chips grew 75% from the previous quarter (!), thanks to a brisk business with local exchange carriers eager to implement DSL for their customers. Look for that to continue. Profitability has caused Morgan Stanley Dean Witter to raise their 1999 estimates from $0.45 to $0.58 per share. We expect trading volume to pick up with the return of money managers and traders from the Labor Day weekend, adding to the sector's momentum. Now, it's on a hot streak so the only caution we can offer is to be on the lookout for profit taking. RSI is looking slightly tired, indicating CNXT may need a day or 2 of rest. Other than that, confirm market direction before jumping in Banc of America Securities earlier this week began coverage with a strong buy rating and a new price target of $100. There isn't any other news that will move the price. Tuesday's Write Up Another new high for the record book! Apparently, CNXT didn't need a rest today and escaped the slight NASDAQ profit-taking. Volume was average at 1.5 mln shares. Pushing the envelope, CNXT traded as high as $80.06 (which will now serve as resistance) and as low as $75.94, before settling midway between the two. There is no news to move CNXT, just good old-fashioned momentum. Though, we don't like to reach for an average this low for support, we can find it at its 7-dma of $75. We don't know how long that will last before it's violated but it's working for now. If there is a violation, support occurs again around $72, a definite target if you want to shoot for it. While you may get filled there if the market gets Greenspooked this week, consider it a gift. We don't think it will remain there for long in light of last week's new price target of $100. Be on the lookout for profit-taking if you're already in the play and confirm market direction before making a new entry. Thursday's Write Up Though yesterday looked a little bleak, CNXT drove to the hoop today to score another one on the "all time closing high" meter. While this looks really great on the chart, today's volume indicates that seller's just didn't come to the party, which will scare a few technicians. Frankly, we view it as a positive vote by investors that they have no desire to sell at this level, which may have helped CNXT close near its high of the day. In the news, Globespan, a CNXT rival, may be doing a bit more business with Lucent, which could hurt CNXT in the short run but appears to have had no effect on traders' psychology. A note of good news too, Sega will begin shipment of its 128-bit Dreamcast Web gaming machine equipped with CNXT technology, which should be a strong seller this Christmas. Anyway, over the last 30 days, support has been strong at the (gulp!) 7-dma, currently about $76. We think dips to that level are buyable. Just make sure the market has properly digested the PPI numbers tomorrow before starting a new play. Price target is still $100 ***2 weeks until September strike expiration*** BUY CALL SEP-70 QXN-IN OI=936 at $10.25 SL=7.50 BUY CALL SEP-75*QXN-IO OI=554 at $ 6.13 SL=4.25 BUY CALL SEP-80 QXN-IP OI=777 at $ 3.00 SL=1.50 BUY CALL OCT-75 QXN-JO OI=158 at $ 9.63 SL=7.50 BUY CALL OCT-80 QXN-JP OI=308 at $ 6.50 SL=4.75 Picked on Sep 5th at $76.38 P/E = N/A Change since picked +3.68 52 week high=$80.06 Analysts Ratings 5-6-0-0-0 52 week low =$13.00 Last earnings 08/99 est= 0.17 actual= 0.24 surprise +41.2% Next earnings 10-20 est= 0.26 versus= N/A Average daily volume = 1.55 mln Chart = http://quote.yahoo.com/q?s=CNXT&d=3m ********* STRADDLES ********* Straddle Update for September 9, 1999 – Its looks as if we survived the 9999 day, without so much as a scratch. Personally I was hoping MTV would crash, giving us one less crappy cable channel in a sea of dozens. So what has Thursday left us with? How about one "double your money" straddle, and quite a few more that are looking really good in our group of open positions. Let's take a look at our open positions, as well as positions that have hit our exit targets. Finally, I also have a bit of bad news to tell you at the end of this update. Straddle Holds HON,Honeywell HONJD,HON Oct 120 Call ,4.875,5.25,4.875 HONVD,HON Oct 120 Put ,4,4.375,4.5 AVY,Avery Dennison Corp AVYJL,AVY Oct 60 Call ,1.0625,1.3125,1.25 AVYVL,AVY Oct 60 Put ,4.5,4.875,4.75 MMM,Minnesota Min'G/Mfg MMMJS,MMM Oct 95 Call ,5.125,5.625,5.375 MMMVS,MMM Oct 95 Put ,1.5625,1.8125,1.625 GCI,Gannett Co GCIJN,GCI Oct 70 Call ,2.375,2.75,2.375 GCIVN,GCI Oct 70 Put ,2.375,2.75,2 BPA,BP Amoco ADS BPAJD,BPA Oct 120 Call ,2.5625,2.8125,2.75 BPAVD,BPA Oct 120 Put ,6.625,7,10 ARC,Atlantic Richfield ARCJS,ARC Oct 95 Call ,2,2.375,1.75 ARCVS,ARC Oct 95 Put ,5.375,5.875,6.5 BAX,Baxter International BAXJN,BAX Oct 70 Call ,1.1875,1.4375,1.25 BAXVN,BAX Oct 70 Put ,3.75,4.125, UAL,UAL Corp UALJM,UAL Oct 65 Call ,3.75,4.125,2.25 UALVM,UAL Oct 65 Put ,2.5,2.75,4.375 The eight options strategies above are exits IF one of the following criteria have been met. 1- We are 30 days to expiration, in which I would exit on the 3rd Friday of September in this case. 2- I get a 50% gain on the entire straddle. MOB,Mobil Corp MOBKA,MOB Nov 105 Call ,4.875,5.25,6 MOBWA,MOB Nov 105 Put ,3.375,3.75,3.375 SEBL,Siebel Systems SGQKO,SEBL Nov 75 Call ,7.625,8,6.875 SGQWO,SEBL Nov 75 Put ,7.375,7.75,8.75 AES,AES Corp AESKL,AES Nov 60 Call ,7.375,7.75,7.375 AESWL,AES Nov 60 Put ,2.125,2.375,2.3125 ETH,Ethan Allen Interiors ETHKF,ETH Nov 30 Call ,1.5625,1.8125,1.9375 ETHWF,ETH Nov 30 Put ,2.375,2.75,2.375 UTR,Unitrode Corp UTRKI,UTR Nov 45 Call ,2.875,3.25,3.625 UTRWI,UTR Nov 45 Put ,3.125,3.5, The five options strategies above are exits IF one of the following criteria have been met. 1- We are 30 days to expiration, in which I would exit on the 3rd Friday of October. 2- Same as above, if I get a 50% gain on the entire straddle. Remember that October accounts for some of the highest options premiums too! DOW,Dow Chemical DOWLF,DOW Dec 130 Call ,1.9375,2.1875,2 DOWXF,DOW Dec 130 Put ,16.75,17.5,11.25 CHV,Chevron Corp CHVLS,CHV Dec 95 Call ,7.125,7.5,7.5 CHVXS,CHV Dec 95 Put ,4.125,4.5,4.125 Looking at these two options strategies, I would exit on the 3rd Friday of November or if I get a 50% gain on the entire straddle. On any of these exit strategies, you are out before time decay sets in too much. Straddle Exits MYG,Maytag Corp MYGJN,MYG Oct 70 Call ,0,0.1875,0.8125 MYGVN,MYG Oct 70 Put ,13.5,13.875,9.125 Well, I cannot do better than Maytag when looking for an exit. During the day today, this $7 straddle hit a high of just over $16! Maytag rallied to the close, but still had puts worth 13.5 – 14. Here is an Email that I received today from a subscriber that puts the icing on the cake for this trade. Henry writes: "Dear Tom: I pulled the trigger on the myg straddle just now for a $2,000 profit held for exactly one month! I was in @ 7 1/8 and out at 9 1/4. 25% profit for the month! Thank you, thank you!" Pat yourself on the back Henry. All the planning in the world does no good if one doesn't act on his or her plans. You did it, buddy! What makes me exit this position today? Look at two things. First, we had a volume spike on MYG. Volume today was over 4 million shares when average volume is less than 1 million. Also look at the rally during the latter part of the trading day. This suggests that the low is in. I have one more bit of educational advice to straddle traders. Just because I enter the order as a spread order, doesn't mean I have to exit the entire straddle as one order too. Look at the calls today. They are 0 bid at .18 offer. Who in the world would want to exit that? Not me... I will save my commissions and just exit the puts. Also, I am holding those free calls as a lottery ticket. Hey, you never know, right? FINAL COMMENTS Yep, you heard it right, this will be my final straddle segment for a while. I will still be adding articles in the Traders Corner section, so click there from time to time for the latest information. While there are many details that I save for the OptionInvestor / Optionetics Seminar Series, remember the three basics. They are as follows: Look for consolidating markets. Consolidating markets act as springboards to new highs and lows. Look for cheap options prices. There is nothing I hate more than to pay too much for options. The other thing I like to look for is impending news announcements. This generally ignites the stock in one direction or another. These three criteria will definitely help you increase profits, while limiting risk on straddle positions. As some of you may know, I have a new addition coming to the family very, very soon. With trading, research, and publishing on my plate, I am a busy man. I have made a family decision to take some time off in a few areas of my schedule to make more time for Mom. If I don't, then I will look worse than an out-of-the- money option expiring worthless. I hope that over the past two months I have educated the OI group to how I trade. If you would like to learn more on Straddle trading, as well as many other great option techniques, then join us this fall for another round of OptionInvestor / Optionetics Seminars. We will be adding new shorter-term segments this fall including trading earnings reports, stock splits, and momentum stock plays. These techniques will be straight from Jim's treasure chest. For more information, go to the OptionInvestor Website. Once again, thank you for your time in reading my trading autobiography, and I hope to see you soon in an upcoming seminar. Tom Gentile Chief Options Strategist (Editors Note: Although we will miss Tom, we do understand the problems with over commitment. Family comes first in our book. Tom will continue to write Traders Corner and educational articles as time permits. Ray Cummins will pick up the straddle slack at OIN and start listing straddles as a regular feature in the Combo section starting Sunday. Jim) ***************** COMBINATION PLAYS ***************** Tech Stocks And Oil Shares Lead The Way.. Stocks closed higher on Thursday with the technology sector up after an Internet sector upgrade and a rise in chip prices. Wednesday, September 8th The markets were mixed Wednesday and most investors remained on the sidelines ahead of the release of producer price data due this Friday. The Dow rose slightly, up 2 points to 11,036, on subdued volume of 779 million shares traded. The Nasdaq index fell 28 points to 2808 while the S&P 500 stock index declined 6 points to 1344. Declines led advances 1,758 to 1,169 and the long Treasury bond rose 3/32, lowering the yield to 6.07%. Tuesday's new plays (positions/opening prices/strategy): Biogen BGEN LJAN90C/SEP90C $16.12 debit LEAPS'CC's Computer As. CA LJAN60C/SEP55C $9.12 debit LEAPS'CC's Motorola MOT LJAN105/SEP105C $17.50 debit LEAPS'CC's All three stocks fell at the open but Motorola was significantly lower; down $1.75 to the $98 range. Our target entry was quickly adjusted to fit the new price and we opened the position at a lower debit than originally expected. Computer Associates was also lower in the first few minutes but started to rebound near 9:50 AM. About ten minutes later, the stock price sagged and the quote for the aggressive LEAP/CC play (our personal choice) was observed at $9.25. The original target may have been available but we will record the opening slightly higher at $9.12. Biogen was our last candidate and luckily, the opening quotes on the long side (LEAP) were lower than our previous day's data. Near 10:00 AM, the stock price dropped $0.50 and a new target of $16.12 should have been easily achieved. Portfolio plays: Another selective day in the market as investors boosted premium issues while ignoring less-attractive ones. One of our positions that is benefitting from this neglect is Cisco (CSCO). The stock has consolidated near $68-$69, allowing us time to decide on the next move; up or down. If we decide to remain in each position, we will probably protect the downside. Solectron (SLR) is also in a sideways trend and our suggestion is to take an early exit on the diagonal position for $3.88 profit. The one stock that we would like to see lower had a nice recovery today. J.P. Morgan (JPM) moved back up to the $130 range but appeared to falter at that point. This weakening issue should remain below our sold strike ($130) through next week. Mid-cap issues and smaller stocks performed well and our leaders in that group were USWeb (USWB), up 1.25 to $26 and now $4 ITM; Microchip (MCHP), up $2 and nearing a recent high - and blue sky territory; and Home Depot (HD), with a nice move to $65 - our sold strike in the long-term calendar spread. Peoplesoft (PSFT) had a sharp move higher, climbing $1.43 on takeover speculation. We will watch this issue over the next few days for a roll-out to October options. Luckily, yesterday's move on Mentor (MNTR) "paid off" as the stock continued its bullish movement today on heavy volume. The long option was sold today for $3.75, a profit of almost $2. Oils had a solid rally and most the drilling & service companies were higher. Chevron (CHV) and Exxon (XON), two larger issues, also participated in the upward movement. Our bullish spread on Chevron is comfortably ITM and should expire at maximum profit. One of our smaller oil issues that appears to be making a move is Occidental (OXY), up almost a $1 and near previous technical resistance. We will watch this one closely over the next few days and plan to protect the upside with a buy-to-close STOP on the sold option. The current ASK (on the SEP-22.50C) is $0.87, so a debit price near $1.25 would be a good place to start. Thursday, September 9 Stocks closed higher on Thursday with the technology sector up after an Internet sector upgrade and a rise in chip prices. Crude prices also soared on reports of decreasing inventories, giving a boost to shares of major oil companies. The Dow Jones industrial average rose 43 points to close at 11,079. The Nasdaq composite index also rose 43 points to 2852. The S&P 500 stock index rose slightly to 1347. The long Treasury bond fell 13/32, pushing the yield higher to 6.10%. Portfolio plays: Another day of mixed activity and the spreads portfolio had some big movers. Intuit (INTU), one of our "readers request" plays, vaulted $8 to the $100 mark and took our bullish debit spread to maximum profit. 3Com Corp. (COMS) hit a midday high near $28 on renewed speculation of a merger with Lucent, Siemens or Nortel. Our debit spread is comfortably ITM but now we have to protect for further upside movement in the January calendar spread. The short position is at $27.50; just below COMS closing price. The speculation on Peoplesoft (PSFT) continued and expectations for a surge in software sales by year-end helped boost the price to a recent high near $18. We decided to start the monthly roll-out of long-term positions with this one; the net credit was $0.75 to remain at the $17.50 strike for October. Another recent mover, Polaroid (PRD) continued its bullish activity today. It was also a candidate for adjustment (to October) and we decided to roll-up on this play to the $30 strike. The technical history suggests a new trading range is in order and downside support appears to be near $27. Biogen (BGEN), one of our new long-term positions rallied today, up over $3 and just short of our sold strike at $90. This move places it in uncharted territory again, so watch it closely. We also had activity in two positions from yesterday. Both of our short-term diagonal spreads on Cisco (CSCO) were closed for favorable profits, taking the safe (early) exit; and the bullish debit spread on UsWeb (USWB) was closed at maximum profit as the stock rallied to $28. J.P. Morgan (JPM) finally relented, down almost $4 to $125 at midday. The stock managed a close at $129, but we still don't think it has the strength to surpass our break-even price of $132. Oils are once again on the move and almost all of our positions were higher. Halliburton led the way with a $3 gain to $51. Our bullish debit position is safely ITM and this is also a great time to roll forward the calendar positions to October (high IV and new interest in call options). If you had any doubt about closing Baker Hughes (BHI), do it now for a $1.25 credit. Other positions that participated in the rally were Chevron (CHV), up $3.12 to a recent high near $98, Diamond Offshore (DO), Unocal (UCL), Noble Drilling (NE) and Exxon (XON). We are planning to use today's bullish move as an excellent opportunity to adjust forward in our other long-term oil positions (UCL and XON). Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com ********** NEW PLAYS ********** Unfortunately, I was required to serve the community today (in Jury service) and I had little time to search for "new plays". Here are some volatility (and speculation) candidates that rose quickly to the top of my pricing and volume list. The Philip Morris (long-term) position is relatively conservative based on the recent technical history of the stock and the two Internet plays should benefit from the sector rebound that is currently underway. ***** MO - Philip Morris $38.68 *** On The Rebound? *** Philip Morris is a holding company whose principal subsidiaries, Philip Morris Inc., Philip Morris International, Kraft Foods, and Miller Brewing Company, are engaged in the manufacture and sale of various consumer products. MO is the largest cigarette company in the US. Kraft Foods is the largest processor and marketer of retail packaged foods in the US. Miller Brewing Company is the second largest brewing company in the US. Philip Morris Capital Corporation, engages in various financing & investment activities. Tobacco issues have recently under-performed the market and MO has participated in the thrashing ever since a lawsuit in November against the tobacco industry ended in a $206 billion settlement. Phillip Morris also lost two other major cases last year and most investors were surprised at the size of the punitive damages that were handed down in those cases. The big news last week was a decision out of the Florida state appeals court that essentially says that new cases will have to be considered one by one; they won't be able to do a lump sum punitive damage award. That is a big positive for the companies; it makes it more difficult to get any kind of large settlement. With the stock on a rebound, options players have been active in recent months. One big investor recently took a post-class-action ruling stand with a major trade in the long-term call options. The AMEX options floor handled the trade, which totaled roughly 10,000 calls each in the 2000 January $37.50 strike price and the 2001 January $35 strike. We will use the new pricing disparities from the recent interest to open a favorable long-term position. PLAY (conservative - bullish/CC's with LEAPS): BUY CALL JAN01-35 ZMO-AG OI=10603 A=$7.70 SELL CALL OCT-40 MO-JH OI=4351 B=$0.93 INITIAL NET DEBIT TARGET=$6.38 TARGET ROI=100% (18 months max) - or - PLAY (conservative - bullish/debit spread): BUY CALL OCT-32.50 MO-JZ OI=102 A=$6.25 SELL CALL OCT-37.50 MO-JU OI=2251 B=$2.06 INITIAL NET DEBIT TARGET=$4.00 ROI(max)=25% B/E=$36.50 Chart = http://quote.yahoo.com/q?s=MO&d=3m ***** UNFY - Unify Corporation $19.88 *** Internet Rally *** Unify Corporation develops, markets & supports Unify VISION, an advanced client/server application development environment for development, deployment and management of high-end scalable applications. It also enhances, markets & supports Unify ACCELL, a family of fourth generation language application development tools and Unify DataServer, a family of database management system products. Unify stock soared $3 Thursday after the electronic commerce company said it's extending its partnership with Red Hat (RHAT) by certifying two Internet programs for use with Red Hat's new Linux operating system. A spokesperson for the company said they were encouraged with the increased interest for Unify products that run on the Linux operating system. By leveraging their partnership with Red Hat, they are able to offer customers complete and comprehensive solutions on Linux for their Internet and e-commerce needs. In May of this year, Unify and Red Hat announced a deal to develop and market software for the Linux system. Today's move was on trading of 14 million shares, more than 58 times its usual daily volume. That should be favorable for the trend over the next few weeks. The option premiums are excellent with extreme implied volatility/volume in the October positions. PLAY (speculative - bullish/debit spread): BUY CALL OCT-12.50 OI=84 A=$7.75 SELL CALL OCT-17.50 OI=0 B=$3.62 INITIAL NET DEBIT TARGET=$3.88 ROI(max)=28% Chart = http://quote.yahoo.com/q?s=UNFY&d=3m ***** BNBN - Barnesandnoble.com $18.00 *** Internet Rally *** Barnesandnoble.com is one of the world's largest Web sites and e-commerce retailers. Focused largely on the sale of books and related products, the company has capitalized on the recognized brand value of the Barnes & Noble name to become one of the fastest growing, online retailers of books. Barnes & Noble just reported a solid second quarter, surpassing analyst estimates. The main reason for the positive earnings surprise was that sales in the company's superstores climbed 6% while total sales increased 9% for the quarter. The company recently completed its BookMaster product, which is an in-store type of card catalogue. The BookMaster systems links by computer all Barnes & Noble stores, as well as all the books and inventory found at its online store, bn.com. This service gives customers access to the same amount of titles as online users. Barnesandnoble.com is also expected to open a new facility next spring in Memphis which will enable them to reduce delivery time. The stock appears cheap to most analysts and the technicals for this position reflect that BNBN has support near $16 and the next up-leg is now beginning. PLAY (aggressive - bullish/debit spread): BUY CALL OCT-15.00 BEU-JC OI=20 A=$3.50 SELL CALL OCT-17.50 BEU-JW OI=80 B=$1.68 INITIAL NET DEBIT TARGET=$1.62 ROI(max)=54% B/E=$16.62 Chart = http://quote.yahoo.com/q?s=BNBN&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. 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