The Option Investor Newsletter Thursday 9-23-99 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) ************************************************************ 9-23-99 High Low Volume Advances Decline DOW 10318.60 -205.48 10572.50 10302.10 878,659k 892 2,142 Nasdaq 2750.27 -107.89 2880.10 2741.94 1170,629k 1,222 2,622 S&P-100 674.62 - 16.59 694.52 671.99 Totals 2,114 4,764 S&P-500 1280.77 - 29.74 1315.31 1277.30 30.7% 69.3% $RUT 420.21 - 7.32 429.23 420.21 $TRAN 2895.98 - 30.30 2961.35 2888.12 VIX 30.28 + 3.53 30.62 26.09 Put/Call Ratio .61 ************************************************************* Barbecued words anyone? Please pass the ketchup. Famous last words, "I think the market may have put in a near term bottom here at 10550." So much for trading on a gut feeling. I went out on a limb last Tuesday with speculation that the bounce off 10550 and close at 10598 could have been a successful retest of a previous low, in spite of strong market indicators to the contrary. (Only those among you that have NOT broken one of the Ten Rules of Option Trading this week are eligible to send me an "I told you so" Email.) The market tried hard but finally was overwhelmed today by comments from a source you would not expect. The Dow traded between 10500-10600 all day Wednesday but the lack of market breadth was a telling sign. Today we opened a little stronger as the most optimistic buyers rushed into the market at the open. Unfortunately it looked like Custer's last stand as the sellers arrived in waves and the Dow dropped to a level not seen since 6/11. Ah Ha! A buying opportunity for the hardcore bulls. The rush in to pickup tech stocks and some Internets was on. Another ambush was sprung and sellers again triumphed. Once the Dow headed south and once 10500 was breached again the carnage began. Maintenance men at the exchanges needed mops instead of brooms today to clean up from the bleeding tech stocks. Support? What support? 10450, 10400, 10350, guess again, 10300! The Dow bottomed at 10302, a number no one expected to see again until October. Normally after a sharp drop like today, especially after a protracted slump like we have been seeing, you will see a bounce back at the close. Not today! We did see a dead stop and level at just above 10300 but there was NO LIFE SIGNS apparent. Several analysts said they saw some buyers taking small positions in some of the hardest hit big names but NO large buyers. Futures are down -1.80 as of 6:PM. Not a pretty picture developing for tomorrow. So what was the final straw? We have a new applicant for the post of Fed Chief if Alan Greenspan does not get reappointed next year. Steve Ballmer, President of Microsoft, endeared himself to all investors today with some very bearish comments. Saying "There is such an overvaluation of technology stocks, it is absurd." Ballmer was speaking at a technology conference given by the Society of American Business Editors and Writers. He also said that Microsoft could be put in that category. OOPS! In a market living on the edge of a 10,000 point cliff, this was not politically correct. These comments, coming from a multi-billionaire with an inside track, and a lot at stake, seemed to be taken more seriously than dozens of like comments from analysts every month. The Taiwan earthquake caused still more damage today as analysts for the chip sector downgraded earnings estimates for several chip companies. Intel was the hardest hit with one analyst saying that deliveries of Intel motherboards could slide by one to two months. The chip sector and PC sector were crushed by the domino impact of multiple downgrades and decreased expectations. PC makers like DELL -3.06, GTW -5.19, MU -4.56, and AAPL -7.00 which already had chip problems, were hardest hit. Intel gave up -5.31 on volume of 37 mln shares. In reality the PC sector was the target but the entire tech sector took the hit. While the PC sector may take sometime to recover, the rest of the tech sector, including Internets, may have just gone on sale. Many Internets, which had been up strongly this morning, did give up some ground but looked like they were straining against the ropes. YHOO for instance, closed -13 off it's highs but was up from -15 just before the close. In after hours YHOO was up another +1.50 at one time. Stocks like QCOM which had a high of $199 after announcing a new deal with Lucent, fell with the market to $182.88 but rebounded at the close to $186.63, almost +4 from the low of the day. There are buyers but they are going to be VERY selective with October just around the corner. If you have a weak stomach just skip this Nasdaq chart. The -108 point drop today was the fourth largest in Nasdaq history. Chartists would probably be quick to point out that any drop that sharp is just asking for a technical bounce. The Nasdaq is still up +25% for the year. Some very bearish things happened today. Technically the S&P-500 broke it's 200 day moving average. This is not a good sign. Twice before the S&P bounced when this average was hit but today there was no relief in sight. The 200DMA was 1301 and the close today was 1280.77. Strike one. The Dow dipped to only +40 points above it's 200DMA of 10257 and could touch it tomorrow. The real key number here was 10466.93. This was the Dow theory floor and a close below this number could cause a major correction according to Dow theory. Richard Russell of the Dow Theory Letters said a drop as low as 9733 was now possible. The Dow has not been this low since April 9th. Strike two. The transports closed at yet another new low for the year of 2895. Oil prices continue to rise and OPEC appears to be holding the line against new production. The UTIL index has rolled over and broke under 300 for the first time since April. The utility index is closely watched as an indicator for interest rates and the outlook is not good. Strike three. The dollar is still weak against the Yen and Japan is still unconcerned. Bonds were up today but more than likely as a result of investors seeing the writing on the wall for next three months and moving out of stocks. Fund outflows last week were reported today to have exceeded $600 mln as investors moved into money markets. The real Taiwan effect is still not known and analysts are just speculating about real delays. The market breadth, as you can imagine, was very bad. The advance/decline line was plummeting with a 3:7 ratio. The new high/new low indicator is off the scale at 22 new highs to 248 new lows. Top all this off with a Greenspan speech on Monday and Friday is looking worse all the time. And on, and on, and on. Strike ?? So what is the good news? The good news is....all the bad news. Really! The wall of worry that builds strong foundations for future rallies is assuming monumental proportions. The VIX has rocketed to over 30, a number we have not seen since Aug 10th. Take a look at these two charts, the VIX and the Dow for the last six months. Notice the inverse relationship? Where was the Dow when the VIX was high in August? In the tank at 10500. It has been said that the VIX is only important at the extremes but if we are not there now, we are real close. The ideal situation would be another large drop at the open on Friday to clean out the rest of the sellers and weak holders. If that does happen you can bet I will be clicking away, looking for good stocks on sale. My targets would be QCOM, YHOO, EXDS, IBM, VOD, SNE and CMGI. There, I have done it again. Stuck my foot in my mouth and implied that there might be a rebound in the wings. I better quit before I say too much. I still have some words on the grill from last Tuesday. So pass the ketchup and bring on the sellers! You are only beat when you quit and Hell will freeze over before I quit taking advantage of major market moves. Just in case, sell too soon! Jim Brown Editor *************** Market Posture *************** As of Market Close - Thursday, September 23, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,500 11,320 10,319 BEARISH 9.23 * SPX S&P 500 1,350 1,420 1,281 BEARISH 9.16 OEX S&P 100 675 735 675 Neutral 8.13 RUT Russell 2000 440 465 420 BEARISH 9.14 NDX NASD 100 2,320 2,400 2,403 BULLISH 9.03 MSH High Tech 1,120 1,200 1,209 BULLISH 9.03 XCI Hardware 1,035 1,050 1,061 BULLISH 8.24 CWX Software 750 800 864 BULLISH 9.03 SOX Semiconductor 515 520 522 BULLISH 8.24 NWX Networking 555 585 588 BULLISH 9.17 INX Internet 500 580 456 BEARISH 7.20 BIX Banking 690 710 572 BEARISH 7.23 XBD Brokerage 410 440 361 BEARISH 7.23 IUX Insurance 645 660 568 BEARISH 7.23 RLX Retail 915 960 812 BEARISH 7.23 DRG Drug 365 390 350 BEARISH 9.16 HCX Healthcare 745 785 703 BEARISH 9.16 XAL Airline 180 190 135 BEARISH 5.21 OIX Oil & Gas 285 310 295 Neutral 9.16 Posture Alert Steve Ballmer-span really socked it to the market this afternoon. CNBC didn't help either as they made many people panic into the sell-off. The posture board got lit-up light a Christmas tree, with the Semiconductor index leading the way down (-5.51%), followed by Internet (-5.41%), Hardware (-4.51%), and the Nasdaq 100 (-4.41%). With Thursday's action, we have turned BEARISH on the DOW, while several other indexes are getting close to downward revisions as well. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Thursday, September 23, 1999 Did you get Drew Ballmerspaned? On Tuesday, the highlight of the Market Sentiment article was called Breaking Down! We highlighted how several sectors were continuing with their downtrends, and how several others look due for a pullback. Boy, we couldn't have guessed that Steven Ballmer from Microsoft and S.G. Cohen analyst Drew Peck would have caused such a drop. Granted, we know that these two gentlemen are avid readers of our sentiment section, but we cannot believe that they took our article and waited 48 hours to put their own spin on it! Or did Ballmerspan have a side bet with Billy boy that he could knock of a few billion off Gates net worth with a single grasp-of- breath. Was the bet between the Bill & Steve for 1 dollar like Eddie Murphy's movie Trading Places? Or was all of this "noise" a smoke screen for some large institutional investors to clean house? One thing that is going for this market that we haven't seen in months, is a short-term, confident-sentiment in the long bond. The sentiment is that the Fed will do nothing, and interest rates actually dropped slightly today, which is positive. The volatility index closed above 30 today, the first time since the beginning of August (which is where you wish you had margined yourself to the gills in tech stocks). The VIX did hang around 32-33 for a short period back in August, and should this level hold, it might only be a huge buying opportunity, if not, watch out below. Another positive sentiment that we witnessed was the Media. CNBC was touting the downdraft, as was every news radio program we turned on, as well as all the other TV programs. Their sentiment was so bearish, that much of the downfall could have been attributed to them. Here at Pinnacle Capital, we have been cautious on the market, and have had a bearish tone for some time now, but we even view today's action as a little overdone. We would not be surprised to see a bounce tomorrow, that is, unless Gates and Greenspan read our sentiment articles and make their own comments tomorrow. 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. Mixed Signs: Interest Rates: The yield on the 30-yr Treasury is above the 6% benchmark and nearing the 6.272% high. It has shown signs of basing, however, any negative economic indicator can easily knock the long bond into new highs. BEARISH Signs: Miscellaneous Uncertainty: Y2K, inflation, higher interest rates, slowing corporate earnings, earthquakes, are all leading to an abundance of uncertainty for professionals and investors alike. Market Posture: Many sectors have and continue to trend lower. The bullish sectors have now rolled over, and are on the verge of breaking support. 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 these last several weeks, with Apple Computer being the latest casualty. Advance/Decline Line: The A/D line continues to be poor and is getting worse. Volatility Index: The VIX is above the 25 benchmark, which may indicate further weakness. However, should it hit the 30-32 level and hold, it may prove to be a good buying opportunity. 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. 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% Friday, September 10 144,711 +249.9% October Expiration Cycle OEX OTM Call Analysis (Open Interest October 710-800) Date Open Interest Change % Alert Friday, September 17 34,361 - Market Sentiment at a Glance Friday Tues Thurs Indicator (9/17) (9/21) (9/23) Alert Pinnacle Index (OEX): Underlying Support (710-730) 2.4 2.5 4.5 Underlying Support (660-690) 1.6 2.0 2.2 Put/Call Ratios: CBOE Total P/C Ratio .7 .5 .7 CBOE Equity P/C Ratio .6 .4 .6 OEX P/C Ratio 1.2 .9 .8 Peak Open Interest (OEX): Puts 640 640 640 Calls 680 680 700 P/C Ratio 1.02 1.07 0.95 Market Volatility Index (VIX): CBOE VIX 30.45 Investors Intelligence: Bullish 41.50% * Bearish 31.40% * 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 (9/17) (9/21) (9/23) Overhead Resistance (710-730) 2.38 2.52 4.45 OEX Close 704.96 689.82 674.62 Underlying Support (660-690) 1.62 2.01 2.16 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Underlying support is light (660-690) with decent temporary support @ 665. Put/Call Ratio Friday Tues Thurs Strike/Contracts (9/17) (9/21) (9/23) CBOE Total P/C Ratio .69 .52 .67 CBOE Equity P/C Ratio .57 .43 .59 OEX P/C Ratio 1.18 .90 .83 Peak Open Interest Friday Tues Thurs Strike/Contracts (9/17) (9/21) (9/23) Puts 640 / 6,356 640 / 7,952 640 / 7,567 Calls 680 / 6,234 680 / 6,272 700 / 8,581 Put/Call Ratio 1.02 1.07 0.95 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 23, 1999 30.45 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 Sept 1, 1999 42.9 31.9 Sept 8, 1999 44.1 30.5 Sept 15, 1999 41.5 31.4 * Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Wed Thu Week Dow 10318.59 20.27 -225.43-74.40 -205.48 -485.04 Nasdaq 2749.83 16.53 -65.05 37.06 -108.33 -119.79 $OEX 674.62 -0.04 -15.10 1.39 -16.59 -30.34 $SPX 1280.77 0.11 -27.95 2.93 -29.74 -54.65 $RUT 420.21 -1.25 -6.70 1.03 -7.32 -14.24 $TRAN 2895.98 -20.49 -41.66-11.36 -30.30 -103.81 $VIX 30.28 0.11 2.61 -0.19 3.53 6.06 Calls Mon Tue Wed Thu Week VOD 225.00 3.43 4.63 3.44 4.94 16.44 The leader YHOO 173.75 5.25 1.19 9.94 -5.75 10.63 Entry point SNE 152.19 8.19 2.00 -0.50 -4.69 5.00 New SUNW 89.63 5.88 -2.00 0.81 -3.75 0.94 Its poised INKT 131.00 0.50 -2.44 9.06 -7.31 -0.19 Hanging on CKFR 40.88 1.94 -2.19 1.25 -1.75 -0.75 Holding up EMC 69.50 3.63 -2.69 0.56 -3.00 -1.50 Bottomed? CTXS 65.31 -0.50 -0.22 2.72 -3.94 -1.94 Tug of war NT 47.81 -0.75 -0.94 -0.25 0.00 -1.94 Partnering INTU 100.56 1.06 -1.13 0.31 -2.69 -2.44 Dropped NTAP 72.25 2.31 -2.12 0.56 -3.44 -2.69 Crossroads GE 116.75 2.00 -2.75 -0.25 -2.25 -3.25 Supported QCOM 186.63 -1.94 -5.69 7.81 -3.50 -3.31 New BGEN 83.06 0.97 -2.47 0.44 -2.31 -3.38 Dropped CSCO 69.38 -0.31 -2.06 1.13 -2.88 -4.13 Stalling DCLK 111.75 -2.25 -5.50 10.38 -7.13 -4.50 Slumping ADI 55.50 -2.69 -2.19 2.38 -2.44 -4.94 In S&P 500 ETYS 55.66 0.31 1.63 -0.94 -6.84 -5.84 Dropped AMAT 78.88 -1.00 -2.50 2.38 -4.81 -5.94 Dropped TXN 83.00 -1.37 -1.63 -0.25 -3.63 -6.88 Dropped NXTL 67.84 -1.19 -3.94 1.44 -3.66 -7.35 Dropped AAPL 63.31 2.12 -9.81 1.06 -7.00 -13.63 Dropped Puts JNJ 91.13 0.44 -2.50 -0.75 -2.13 -4.94 Go Ballmer WLP 65.00 -0.56 -2.44 -0.19 -0.56 -3.75 Right on! KO 50.94 0.25 -0.50 -1.31 -1.50 -3.06 New LLY 65.06 0.12 -1.50 1.06 -1.63 -1.94 Weakening GPS 31.88 -1.25 0.63 -1.00 -0.13 -1.75 Sell-off ELNK 42.38 -0.62 -0.69 4.69 -1.13 2.25 Dropped COST 70.31 -1.38 0.63 1.69 1.88 2.81 Dropped PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** TXN $83.00 -3.63 (-6.88) Its been a complete turnaround for the semiconductor sector that was riding its high horse just a week ago. TXN has been no exception, the stock has fallen below its 10-dma showing signs of increased weakness. A combination of profit-taking, a weakening dollar and the earthquake in Taiwan has fueled the decline in the stock this week. A Merrill Lynch researcher mentioned that semiconductor firms dependent on Taiwan fabrication plants for output could see two weeks' less production as a result of damage from Tuesday's earthquake. Because of the overall reversal of the market and the recent weakness in the stock we decided to end this play and concentrate our efforts elsewhere. AAPL $63.31 -7.00 (-13.63) Did anyone see today's sell-off coming? Sure market conditions are volatile but was today's reaction really justified? The best way to describe today's activities simply put, it was the domino effect. A continuing weak dollar set the tone for the day, comments from MSFT's Steve Ballmer that techs are overvalued kept it going, and the S&P 500 breaking its 200-dma was the final straw. AAPL was no exception to the rule losing almost 10 percent of its value in today's session. We were expecting a dead cat bounce after Tuesday's sell-off but unfortunately it only lasted for one day due to market conditions. With market conditions weakening and recent troubles with AAPL uncertain, we decided it was time to end this play and look for greener pastures. INTU $100.56 -2.69 (-2.44) If the sell-off on Wall Street was not enough, after the market close today the Chief Executive Bill Harris resigned after the board and the CEO both decided it needed a more seasoned manager to lead the company as revenues for the worlds largest maker of personal finance software approaches $1 billion dollars. In after market trading the shares were selling at $96 after closing the day at $100.56. With today's major sell-off in the market, it is time for us to take our money and position it elsewhere. Yesterday if you had entered the stock at the $103 level you should have been able to execute the intraday strategy for a quick profit when the shares rose to a high for the day of $106. Monday's price action was very similar and if you were able to follow the recommendations from Tuesday's newsletter, you made some money and got out. Going forward we no longer like the price pattern that has formed 5 days away from the payment date of the stock split. ETYS $55.66 -6.84 (-5.84) In a major market sell-off the stocks that have recently hit new highs and recent IPO's will normally get hit the hardest. This was the case today with this relatively new issue. Although Etoys is positioned very well going forward as the leader in the toys e-commerce space, we were unable to get a position going in this market. We were looking to enter the shares after the first hour of trading to give it a chance to settle down from the amateur hour price moves but it never moved forward. Waiting the first hour also gives us an opportunity to determine whether the smart money is buying or selling at the current price levels. The smart money was selling yesterday and today. If you were watching the shares closely you would see that ETYS bounced off of the fore-mentioned support levels, but going forward the risk reward is against us. Avoid fighting the market sentiment at all costs is the wiser play so we are dropping ETYS. NXTL $67.84 -3.66 (-7.35) Sometimes competition stinks. The Bell Atlantic and Vodafone deal is proving too much for NXTL. If we had to go one-on-one with the merger news, we might be all right but, combined with the force of the negative market and negative tech news, we're out for the count. NXTL is a drop. Today we fell significantly below our 10-dma of $72 and are gasping for air. Daniel Akerson has been appointed as the new CEO for NXTL and it appears he'll have his hands full. This was the only news other than the titanic merger deal. AMAT $78.88 -4.81 (-5.94) Today our necks hurt from major market whiplash! Ultimately we got a wrenched neck with a major sell off below support. AMAT pretty much followed suit with a majority of the loss in the last hour of trading and so we must say good bye to AMAT. Some thanks to Steve Fortuna of Merrill Lynch. Expressing doubt that Gateway could keep up sales as expected. This unleashed a tech slide as hardware and chip stocks slid on the news. AMAT was one of those affected. This just after Wednesday's renewed strength in the semiconductor sector from Taiwan's quake disaster. News has come in that some companies may be hindered in production for at least 2 weeks. This is what is causing the sector to roll over. We may see AMAT again as the sector and market turn more positive, For now the risk is to great so we'll move your money elsewhere! ************************* DROPS CONTINUED IN SECTION 2 ************************* 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 9-23-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** DROPS - CONTINUED ***************** BGEN $83.06 -2.31 (-3.38) The reprieve is over and we're dropping BGEN tonight. The sizzle has subsided on this hot biotech stock and we're aren't going against the stock's current inclination. Yesterday while the Nasdaq mounted a positive campaign, BGEN stayed south of its 10-dma ($86.09) and today it slithered down a couple more points. These are not good signs for a call play. And yet, keep in mind BGEN will report strong earnings on October 7th, after the bell, and this leaves a couple weeks for the possibility of another run-up. Then of course there's the potential for a split announcement around that time - BGEN is in split territory above the $80 mark. So for the interim we're cutting BGEN from our list but still keep this one on your radar screen. PUTS: ***** COST $70.31 +1.88 (+2.81) Well, we found out that Tuesday's rise in COST while the rest of the markets were down was no head fake. We were expecting a slight rise in the stock to establish a new lower-high around $67, turning at this point and heading once again to lower ground. Unfortunately the stock paid no attention to this resistance point and blew right by. While the markets were lower this morning, COST showed us that past trading sessions were no fluke by starting the day on the upside and continuing higher throughout the day. Because COST failed to turn lower at $67 and is showing continued strength we decided its time to call it quits and put this play to bed. ELNK $42.38 -1.13 (+2.25) Ok "officially" the news of the definitive merger agreement between EarthLink and MindSpring only hit the press today but remember that cliché "loose lips sink ships"? Well in this case it sunk our ELNK ship swiftly and without remorse. Share prices, of both companies mind you, surged YESTERDAY. ELNK rose $4.69, or 12% and MSPG rose an improbable $6.50, or 25%! Obviously the current has changed direction and we must drop ELNK tonight as likely shares may climb in the near-term as a result of this unexpected merger announcement. For those interested in the logistics of the deal, both companies will merge into a newly formed public company to be named EarthLink (ELNK). Combined they will boast 3+ mln subscribers making them the 2nd largest ISP only behind America Online (AOL). From a geographical stand point, the merger is optimal since MSPG is based in Atlanta, GA and ELNK is from Pasadena, CA. This stock deal still requires regulatory and stockholders approval, but if it goes through MSPG shareholders will receive a 1:1 ratio of shares and ELNK shareholders will receive 1.615:1 ratio of shares of the new company. In today's news, Jeffries & Co started coverage on ELNK with a Buy rating. ******************* TRADERS CORNER ******************* I've Fallen and I Can't Get Up! As long as the writers here at the newsletter are referring to old TV comercials (Where's the Beef?), let me make reference to another annoying commercial from my childhood in which a lady trips and has to summon assistance. With the volatile September option series behind us, and October just ahead, many traders probably feel like this. Let me offer a few words of consolation and advice. First of all, we have all been there in some way. In February, I doubled my financial assets then gave it right back to Mr. Market because of my faith in DELL. I've talked to a lot of traders with similar experiences. There are really two routes to dealing with a significant financial set back. 1. Share The Pain. Talk about it. In my case, I wrote Jim Brown an Email, saying I had broken the 10 rules (see the sidebar at the left), but that the newsletter made good picks. He was encouraging. Now, I am a member of a local Optioninvestor club, and we meet once a month, usually in the week following expiration. Seek out people that you can talk to. Almost everyone has suffered significant trading losses at some point. That is the bad judgment that leads to experience that leads to expertise. Talking to people both in person and electronically is better because you need the real emotional support of another person, but you may also be able to correspond with other traders on the web or by Email during the trading day. 2. Pick Yourself Up. I have two very important rules: A) Take 10 - 25% profits on all your trades for a few weeks, and be very, very careful about trading only when profitable, ie, rising OEX, DOW, NASDAQ; rising ticks & advance/ decline line; rising sector; rising stock. Make sure that when you enter a trade, you have everything going in your direction. Don't worry if you only make one trade a week, or not at all. But MAKE THE TRADE. If you trade 3 contracts, net 15%, and put it back into your "option trading portfolio," good for you. You have started to rebuild your capital and your confidence. B) Trade only what you can afford to lose. Do NOT add... money from a "safe" mutual fund or stock brokerage account... the kid's tuition. I get Emails from people saying that trading is interfering with family life. I must admit that trading sometimes interferes with my personal life. But you need to look at the people you love in your life and realize that you are increasing your wealth to benefit THEM. What have you gained if you destroy the relationship because you've risked too much capital? Here is the 25% rule in action: YHOO Oct 160 Call. Bought at 16 1/4 on Tuesday morning. The market was weak, but YHOO was strong, and I know that earnings are in early Oct. I immediately set a limit sell order at 25% profit for half of my position. I set a limit sell order at 75% profit for the other half of my position. Two hours later, I checked the market, which was still down, but my 25% limit sell had already executed. I am still in the rest of the play. This is what Jim & his staff mean by Cash Flow is King. I equate it to water flowing over a swimmer's body with each stroke, which moves the swimmer forward, and sets him up for the next stroke. I will take those 25%, two- hour profits all day long! Janar Wasito janar@OptionInvestor.com ***************** PICK NEWS - CALLS ***************** CKFR $40.88 -1.75 (-0.75) In an internet sector that sold off late in the day today, CheckFree was able to remain above support levels. Although shares pulled back to as low as $40.63, it held up well relative to the market and the sector overall. Today's weakness was on very low volume, only one-third of the daily average volume. If we have reached a short-term bottom after this major overall sell-off, we should see Checkfree continue to rise higher from these current levels with some overhead resistance at the $44.25 level. Support remains strong at the 10-dma at the $39.50 level. Going forward look for the shares to hold above the current support levels and look for any intraday weakness for a possible entry point. Confirm market and sector direction before entering into any new plays, the current sell-off in the market might not have reached a bottom. ADI $55.50 -2.44 (-4.94) No one can predict earthquakes in Taiwan and no one can predict earthquakes in New York. After today's market action some traders might have felt like we had an earthquake on Wall Street. As for ADI it remained consistent with its normal trading pattern. In a weak market with the PHLX semiconductor Index down -5.5% to close at $521.70, ADI once again was able to hold the major support levels that had been tested last week. Once again it hit a intraday low of $55 before closing at $55.50. The current technical pattern keeps our bullish sentiments intact going forward. Also in after hours news it was reported that ADI would be added to the S&P 500 Electronics (Semi-conductors) industry group. This means that every money manager that manages a S&P 500 Index Fund must add shares of ADI to its portfolio, look for an immediate run up in the shares. If you look towards tomorrow for an entry point, look to take a position on any intraday weakness. This stock should be moving higher on strong volume. GE $116.75 -2.25 (-3.25) As an intricate part of the Dow 30, General Electric was hurt by today's decline but critical support was not broken. This may be a case of "if you liked it yesterday, you'll love it today." GE has been one of the stronger stocks in the Dow. It has shown the ability to out- perform on both rally and declines relative to the Dow. We like GE in a rebounding market which should come tomorrow after an early morning capitulation. One concern though is the negative outlook for the Dow. Some analysts, us included, concede that Dow looks weak over the short-term. This would obviously continue to hinder any upside on GE. So use caution on the declines but look for new entry points on the bounces. There is no stock-moving news to announce during the past two sessions. INKT $131.00 -7.31 (-0.19) Like many of the technology and Internet stocks, today INKT gave back the previous days gains and more. Just when the sector as a whole looked like it was ready to make a move to higher ground, confused investors stepped forward and relinquished their positions once again. Despite INKT being down today, the stock has managed to stay above its 10-dma at $129.50. This is the nearest support level and is our next entry point for new trades. Because of the continuing weakness in the dollar, unknown actions by the Fed in October, and Microsoft's president stating that he feels technology stocks are overvalued, look forward to more volatile markets ahead. Make sure that you confirm the direction of the stock and broader markets before placing these new trades. EMC $69.50 -3.00 (-1.50) Many of you were praying for a pullback to support on EMC and today you got it. EMC felt sorry for the tech sector woes and followed suit. We're now smack dab on our 10-dma support at $69. A possible entry point but (and you knew this was coming), be very careful! Our bottom literally fell out of the market as the Dow dropped below support, and it could be down from here until the Fed meeting. Don't be tempted and jump in this too soon. Wait for the advance/decline ratio, tick, market, sector, and stock to be positive, if you are a conservative investor. The tech retreat was news based and sympathetic, so shortly EMC should rebound as analysts are touting this stock as a "buy and fairly valued". This and the Internet growth will continue to fuel the trend. Our trend is approaching a 45 degree growth, indicating momentum however, the next few sessions will be critical as to whether we will sustain the trend or break it. Do not try to out guess it, the market will win! Nothing exciting to report in the news, other than updates on the pending deal with Data General Corp which is still on. NT $47.81 +0.00 (-1.94) NT was literally saved by the bell today! The market bell. The last 15 minutes saved us from the day low and we finished even. Pretty unusual considering the massive tech selloff we experienced. The market is below support of 10,500 now so we may see continued moves down. Mainly Gateway however, the whole sector was hurt due to sympathy and fear. NT is poised to trend higher in the next seven days based on technical momentum but, only if the market cooperates. At this level it is extremely doubtful that the market will help. Be very cautious! Outlooks for NT continue to improve, as many companies are partnering with Nortel for the new IP telephony trend. It is expected that the switch from conventional LAN systems to the new Internet protocol will grow 138% over the next 5 years! IXC joined with NT to offer new products in this area, along with Spain's Airtel. Airtel's contract alone is $50 million and will provide the world's first wireless/wireline package. Growth is the keyword here! NT has also committed to use IBM's new 550 megahertz chip in their network. The high performance, small platform is characteristic of NT's commitment to new technology and growth. We are just below the stocks 10-dma at $48, so do not start any new positions until we see a sustained break through $48 is confirmed. Use stops to protect your capital in this rocky market we tread. CTXS $65.31 -3.94 (-1.94) Trading volume has continued to be strong irrelevant of which direction the momentum is moving CTXS and this makes for a sporting game of "tug of war" between buyers and sellers. Shares rose sharply during the second half of trading yesterday peaking just a fraction below the record high ($69.94) hit on Monday. Then today the bears came out of hibernation and another powerful sell-off ensued. This volatility has placed CTXS right on the 10-dma ($64.87). Even though this could be considered a prime buying opportunity, be careful. More weakness in the overall market could easily take CTXS down to firm support at $61. In the news on Wednesday, James Felcyn, Jr., the company's CFO, announced that he plans to resign by the end of the year to pursue other interests. Beyond that there was no other company specific news event that would affect the share price. The earnings' date however is confirmed for October 18th, after the bell. SUNW $89.63 -3.75 (+0.94) The bears pumped up some more iron today to once again show the bulls just how strong they can be. Yet technically, even with the recent profit-taking SUNW has still held firm above its 10-dma at $88.26, demonstrating there is no major weakness in the shares. Plus you've got to recognize that the bears have had an unstable market and negative sentiment in their corner today. If the broader markets cooperate, then SUNW is poised to reach higher price levels in the near-term. The earnings' date has been confirmed for October 14th, after the bell, so there is plenty of time for this earnings/split play to regain its momentum. Plus we're betting that split happy investors will give SUNW an extra shot of adrenaline. These pullbacks are providing excellent opportunities to enter new trades but still be cautious of a dissenting market and heads up - the formidable Greenspan speaks on Monday. So pick your entry carefully and pay close attention to your positions. VOD $225.00 +4.94 (+16.44) VOD was one of the few stocks that didn't finish the day in the red on Thursday. After making a high of $234 in the first two hours of trading, VOD began to consolidate. After the broader markets fell apart in the last two hours of trading, shares of VOD held up pretty well closing up $4.94 for the session. Yes it gave away the $9.00 it had gained earlier in the session but it did manage to end the day higher, which is positive going into Friday. The upcoming split has certainly helped drive the price of VOD higher, as shares are in short supply and a few institutions are still wanting to buy. Investors approved of the joint venture with Bel Atlantic announced Tuesday. Several analyst suggested VOD may be poised to make a bid for Germany's Mannesmann, which also helped propel VOD to new highs. Lehman Brothers raised it's rating of VOD today from an Outperform to a Buy. Where do we go from here? Barring any catastrophe's in the broader markets, we would look for VOD to continue higher. Should we get a pullback, there is solid support in the $220 area, and would view a pullback and a bounce as an opportunity to join in on the split run. Remember VOD splits 5:1 on October 4th. DCLK $111.75 -7.13 (-4.50) DCLK had a great two days until the last two hours of trading today. DCLK was named to Merrill Lynch's new security called "Internet Holders", a basket of the largest twenty Internet stocks by market capitalization. Internet Holders, started trading today on the American Stock Exchange under the ticker HHH. Investors showed their approval by driving the price of DCLK to a high of $123.50 in the first fifteen minutes of the session this morning. Profit-taking and consolidation occurred until the broader markets began to fall apart in the last two hours, after Microsoft President Steve Ballmer announced that valuations on technology stocks have reach "absurd" levels. Shortly after shares of the internet advertising company began to slide along with the major indices. DCLK ended the day down $7.13, on volume of 4.6 mln. shares, in what we believe is probably a bump in the road rather than a major change of trend for DCLK. We may still see more selling in the internet stocks but at this point, would look further weakness as an opportunity to buy calls, once the markets shakes off Mr. Ballmer's comments. We would be cautious about entering a new play at this point though. Wait for a positive move in DCLK and the Internet sector supported by strong volume. NTAP $72.25 -3.44 (-2.69) NTAP could be at somewhat of a crossroads as profit-taking continued Wednesday in the opening hour of trading. By the end of the session NTAP had repaired the days losses climbing out of the hole ending up $0.56 for the day. NTAP traded in a narrow range for most of the day today until the broader markets began to slide. NTAP closed down $3.44 for the day but the volume was light at 709K, which suggests the fall was more in sympathy with the broader markets rather than shareholders of NTAP bailing out. If you haven't been stopped out yet, please get you stops tight as their may be more selling ahead. NTAP did close just below its 10-dma at $72.41. We feel at this point NTAP will regain its footing and begin to make its way higher. Support for NTAP is in the $71 area and again near $69. We would suggest letting the market dictate our next move. Wait for a bounce accompanied by solid volume before entering a new play in NTAP. YHOO $173.75 -5.75 (+10.63) Henry Blodget, Merrill Lynch's Internet analyst sang the praises of YHOO yesterday and the crowd went wild, tacking $10 on to YHOO. Today, YHOO again took off strong out of the gate, blasting to over $186 only to be shown the basement (no stairs leading there) along with everything else by day's end. So after falling as much as $15 from its daily high, why's it on the list? Answer: Earnings to be announced after the close on October 6, the day after the FOMC meeting, wherein YHOO is again expected to top analyst estimates of $0.09 by a significant margin. Blodget said it yesterday too and reiterated that YHOO remains one of his core holdings. There's more: BBRS analyst Lowell Singer said he was more bullish than ever on YHOO, citing an increase in advertising rates following a meeting with management. That's why YHOO seemed to go crazy yesterday and this morning. Notice on chart that even with today's setback, YHOO still closed above yesterday's opening on almost twice its ADV. Translation: strong upward sentiment despite market jitters. However, don't let earnings blindness cloud your judgement. When we saw the market head south in a severe way, that trailing stop we all had set (wink, wink) should have taken us out in the low $180's. Strong buying activity in the last 15 minutes of trading sent YHOO up $2.50 from the low, which makes us think that if the market shows any strength tomorrow, YHOO will single-mindedly march up again toward earnings. Support = $171. Resistance = $189. As we noted Tuesday, don't play this one if you suffer from motion sickness. CSCO $69.38 -2.88 (-4.13) Merrily skipping along at $71 support for most of the day, CSCO tripped and bruised its bottom at $68.75 before recovering $0.63 in the final 15 minutes of trade today. Were it not for the final hour of panic, then reconsideration, which sent the volume 5% over the ADV, CSCO would have another very low volume day, while continuing to show good support at $71. If there is any consolation in today's NASDAQ meltdown, it's that MSFT and INTC got hit with most of the damage, sparing CSCO from carnage. Usually when a drastic drop (or gain) occurs, there's a technical recoil or retracement of former ground. Despite the doom and gloom, we think this bit of capitulation is healthy, signaling perhaps a reversal to the upside in the very near future. However, don't bet the ranch. If the market doesn't cooperate, you'll have a big hat but no cattle. Why take a position in the first place? The play first began as a technical one, signaled by new highs and consistent strong bounces off its 10-dma ($71), which made us think it was going higher. Today it made a nice bounce off its 30-dma ($69), but by definition violated its 10-dma. We're now watching with a keen eye to see if CSCO will make a move back up. Wait for the market to give the signal. (don't just wear the hat but preserve the cattle) **************** PICK NEWS - PUTS **************** WLP $65.00 -0.56 (-3.75) Continuing problems in the long-term health care industry has haunted the sector all summer. Not excluded from the problem is our very own WLP. Tack on two more trading sessions in negative territory bringing us to a grand total of nine consecutive sessions in the red. Just as we expected, once WLP broke its support at $70 it has been nothing but down hill. This has not been the fastest moving put for us but it has been a consistent play. WLP continues to trade well below all its moving averages, showing just how technically weak the stock is. The next support level for the stock is $60, which should be obtainable considering recent depressed market conditions. With all the volatility in the broader markets, watch for slight spikes in the stock for new entry points. Just a side note, on Tuesday WLP said that it was unaware of any developments in its business operations that would explain the recent decline in its stock price. LLY $65.06 -1.63 (-1.94) Goldman Sachs put shares of Lilly on the recommended list but that failed to spark a meaningful rally. The news from Goldman occurred on Wednesday as they announced ratings on 8 drug stocks but the effects were short lived. LLY pushed up to resistance at $67 but was quickly repelled and has since drifted lower. We have the makings of range-bound trading between support at $65 and resistance at $67. We mentioned the support at $65 on Tuesday and we still feel that LLY is more likely to head lower before an move to the upside. Especially with the back drop of a weakening market. Any bounce off $67 looks like an entry point if you are expecting a break of $65 but conservative players would want the break to occur first. Next support target is at $62. GPS $31.88 -0.13 (-1.75) Mixed analysts comments = a mixed performance for GPS on Thursday. It started before the open when BancBoston Robertson Stephens reiterated their Buy rating on Gap citing an over-reaction in the recent selloff. They said that despite tough comparisons, GPS will outperform and provide investors the stellar returns of recent years from this level. GPS originally rallied to $33 where it was met by resistance and that is when CSFB came out their rating at about noon ET. They gave GPS the 'kiss of death' Hold rating. This is as low as analysts will go without alienating the company and this is why we saw a midday stall in Gap's stock price. It is hard to judge stocks when the market makes such a volatile move. It is likely that both the markets and GPS will bounce back tomorrow so tighten your stops. JNJ $91.13 -2.13 (-4.94) The timing of Steve Ballmer's comments concerning valuations of technology stocks, couldn't have been better for our put play on JNJ. After making a low of $91.75 early in session today, JNJ seemed to begin a bounce and a possible consolidation. It was shortly after 2:00 EST when Mr. Ballmer suggested that valuations on technology stocks have reached "absurd" levels and even his own company, Microsoft, may be overvalued. The broader markets began to fall apart and took just about everything else with them. By then JNJ had climbed back to $93.38, when it followed the sentiment in the broader markets falling over $2 in the last two hours of the session, finishing the day down $2.13 at $91.13, the low of the day. For those interested, the 200-dma is at 91.24. Technically the chart looks ugly, however there is support in the $89-$90 area. Will the decline continue? At this point there is nothing in the news that would change the short-term outlook for the drug maker or its industry. We would tighten down the stops in case we get a bounce tomorrow but we would look for shares of JNJ to continue to slide at least to their current support levels. We would be cautious when considering a new play in JNJ, unless we saw a bounce followed by further weakness. ************** NEW CALL PLAYS ************** SNE - Sony Corporation $152.19 -4.69 (+5.00 this week) Sony is one of the world leaders providing electronic equipment such as video, televisions, information and communication devices and other electronic components. In fact you can find Sony's signature on almost any type of electronic device you use. Their world growth and market penetration has allowed them to diversify into a true conglomerate, now with interests in software, finance and insurance. Despite Japan's challenges, the company managed to increase revenues by 1% in the fiscal year ending 3/99. As Japans recover continues, SNE is poised to benefit from the turnaround. When the U.S. markets worry about inflation, interest, and Fed decisions here at home, where does all the money go? Well Japan's not looking to bad right now and indications are that the their recovery is well under way. One of the reasons we like SNE as a current play. The stock has pulled back to a very buyable level near support thanks to today's selloff. As Japan continues to recover and the U.S. market bumps along, one can expect Japan based Sony to look attractive to investors. On September 10th the stock broke out of a very narrow range and is forging a new steady trend to the upside. Momentum of this new trend is significant showing 70% greater strength than the average stock. This is confirmation of the interest in Japanese investments. Also, the stock provides us with nice intraday swings. A result of Sony's small float of $406 mln shares in comparison to demand. This offers investors to catch some good profit on upside movement. The sector has also been on a climb, as consumers continue to indulge in new technology. Even though SNE is a Japanese investment, we still need to advise caution, as it is traded on the NYSE. Anticipated further weakness could effect our movement, so confirm positive stock direction before making a play. Sony has news to spare, so we'll highlight the main issues. CD Now is merging with Sony's Columbia House to prevent it's recent stock slide. A positive move to capture more share. Mainstay International equity fund confirms the positive outlook for companies in Europe and Japan, listing SNE as one of the stars. Also, keeping in tune with our opening paragraph, the Walkman is celebrating it's 20th Anniversary. Sony will allow the new Walkman to play music from Internet downloads, as well as traditional. A big move into acceptance of the new technology. BUY CALL OCT-150*SNE-JJ OI=160 at $11.00 SL=8.75 BUY CALL OCT-155 SNE-JK OI= 90 at $ 7.88 SL=5.75 BUY CALL OCT-160 SNE-JL OI= 50 at $ 3.25 SL=1.50 low OI Picked on Sep 23rd at $152.19 P/E = 52 Change since picked +0.00 52 week high=$160.50 Analysts Ratings 0-1-0-0-0 52 week low =$ 60.25 Last earnings 07/99 est= ?? actual= 0.65 Next earnings 10-19 est= ?? versus= ?? Average daily volume = 201 K Chart = http://quote.yahoo.com/q?s=SNE&d=3m **************************** CALLS CONTINUED IN SECTION 3 **************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Thursday 9-23-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ***************** CALLS - CONTINUED ***************** QCOM - Qualcomm Inc $186.63 -3.50 (-3.31 for the week) Qualcomm develops and manufactures communications technologies and products. It's best known for its CDMA (code division multiple access) technology which is the industry standard for mobile communications. This technology and is used in cellular phones, wireless telephone system equipment, and satellite ground stations. QCOM also provides the trucking industry with a monitoring system call OnmiTRACS and is currently in a joint venture to develop a low-earth-orbit satellite communication system call Globalstar. They are also the #2 supplier of digital cell phones following Nokia. This new addition to our list of calls is directed towards the momentum players. QCOM first sprung into new territory on September 14th after the company announced it was proactively seeking a buyer for its mobile phone manufacturing unit. Simultaneously Qualcomm reported that it would meet or beat 4Q estimates - a nice plus! All this news was icing on the cake to shareholders of the best-performing stock in the S&P 500 index this year. Shares of QCOM rose $17.12, or 11% that day alone. Since then the momentum has certainly persevered and also has confirmed the stock's place as a split candidate since it soared above $155 and hasn't looked back. Recently QCOM split 2:1 on May 11th and at this time doesn't have enough shares authorized for another split. There are only 300 mln authorized and about 161 mln issued, but however it'd be easy enough for the Directors to hold a Special Meeting and request shareholders' approval to increase the number of authorized shares. This momentum play could even pick up more speed as it approaches its earnings date expected to report on October 21st (not yet confirmed). The stock's pullback today offers players a solid entry point into this high-flying Internet. But be warned this play is not for everyone. QCOM is a HIGH RISK INTERNET play because of its rapid volatility In other news, Qualcomm and Lucent entered into an alliance to commercialize wireless network equipment using CDMA technology on Lucent's base station equipment. This team effort will create faster speeds and increase capacity on a network. BUY CALL OCT-180 AAO-JP OI=2830 at $15.13 SL=11.75 BUY CALL OCT-185 AAO-JQ OI=1333 at $12.38 SL=10.00 BUY CALL OCT-190*AAO=JR OI=2464 at $ 9.88 SL= 7.50 BUY CALL NOV-185 AAO-KQ OI= 72 at $19.50 SL=15.25 low OI BUY CALL NOV-190 AAO-KR OI= 92 at $17.13 SL=13.25 Picked on Sep 23rd at $186.63 P/E = 98 Change since picked +0.00 52 week high=$199.00 Analysts Ratings 8-8-2-0-0 52 week low =$ 18.87 Last earnings 06/99 est= 0.63 actual= 0.75 surprise +19.1% Next earnings 10-21 est= 0.88 versus= 0.27 Average daily volume = 8.94 mln Chart = http://quote.yahoo.com/q?s=QCOM&d=3m ************* NEW PUT PLAYS ************* KO - Coca Cola, Inc. $50.94 -1.50 (-3.06 this wk) Anybody not know what Coca-Cola is or does? Good. But just in case you've been in a cave for the last 100 years, they are the world's largest manufacturer of soft drinks including Coke, Diet Coke, Cherry Coke, Mr. Pibb and Sprite. They also own the brand name called Birds Eye, who produces that frozen juice concentrate in your freezer. Despite having the world's most popular recipe for carbonated water and sugar, KO's stock price has been sucking canal water lately. It's summed up in this comment in a Reuter's article released today. "Beverage industry analysts said investors were concerned about the Atlanta-based company's earnings potential in 2000 and unit case volume numbers that have failed to bounce back after the contamination episodes. The company saw unit case volume and concentrate volume sales figures slump in the first 2 quarters of 1999 from the effects of the contamination crisis and depressed global economies, as well as increased marketing expense." They use these numbers to anticipate sales, which aren't looking to good right now. Technically, KO fell to a new 52-week low and trades below every daily moving average imaginable, from the 10-dma to the 200-dma. Actually it hasn't closed here since December of 1996, although it touched this level in the October 1997 sell-off. Back on September 9, there was a report published that S&P might lower KO's Aa-minus senior unsecured debt and corporate credit. We haven't seen many downgrades yet either. Though it may get a technical bounce tomorrow, the trend is down; the graph is downright ugly. Confirm the downward direction before taking a position. careful. There's some support at $50, based on open interests. BUY PUT OCT-55*KO-VK OI=5883 at $4.38 SL=2.75 BUY PUT OCT-50 KO-VJ OI=4619 at $1.25 SL=0.00 High Risk! BUY PUT NOV-55 KO-WK OI=6882 at $5.00 SL=3.25 BUY PUT NOV-50 KO-WJ OI=6153 at $2.13 SL=1.00 Picked on Sep 23rd at $50.94 P/E = 41 Change since picked 0.00 52 week high=$75.44 Analysts Ratings 2-7-6-1-0 52 week low =$50.81 Last earnings 07/99 est= 0.39 actual= 0.38 surprise -2.6% Next earnings 10-14 est= 0.32 versus= 0.35 Average daily volume = 3.72 mln Chart = http://quote.yahoo.com/q?s=KO&d=3m ********** PLAY OF THE DAY ********** ADI - Analog Devices Inc. $55.50 -2.44 (-4.94 this week) Analog Devices, Inc. is a semiconductor company that designs, manufactures, and markets high-performance circuits used in analog and digital signal applications. Its normal linear ICs translates pressures, temperatures and sound into digital as well as analog signals. The chips are used in communications equipment and computers. Other arenas where the chips are implemented are in engineering, medical and scientific instruments. Sunday's Write Up Once again ADI had another positive performance, despite it being a Triple witching Friday and the uncertainty during the week in the semiconductor sector. Friday the sector continued the uptrend and the stock was up $3.38 to close at $60.44 on just about average volume. With Friday's gain, ADI has now once again hit a new all-time-high $60.44. The stock continues to look strong technically and is in a sector that has momentum on its side. The PHLX semiconductor Index continued higher and was up strong 13.29 points to close at 565.22. Gauging sector performance once again we see that Texas Instruments, Applied Materials and National Semiconductor were also bullish again on Friday as the NASDAQ took off. ADI once again bounced nicely off of its 10-dma, which has provided the stock with good support. If you are looking to enter this play, it looks as though a short-term bottom has been reached and we could see higher prices from here, including the possibility of a new high. As always, watch the market direction on Monday before picking your entry point. Tight stops are always a good idea at new high levels. Tuesday's Write Up Stocks that continue to hit new highs have to be monitored and tight stops are always a good idea, as we requested in Sunday's update. Such was the case with ADI, we had a nice round of profit-taking in ADI after it had soared to record highs, in a high flying sector. Watching the market direction and sector momentum should have kept you from entering a new position in this high flier on Monday. After the earthquake in Taiwan, there definitely wasn't much for entry points today. This is a good example of why you should have stops. No one can predict earthquakes. The overall sector performance was weak as the high fliers came down to earth. The PHLX semi-conductor Index was down to 543.17 and is down over 20 points in two days. Although the shares were downgraded today by "ABN AMRO" from an Outperform to a Hold, going forward from a technical standpoint at this time we are cautiously bullish on ADI, as well as the semi-conductor sector. Conservative traders should take there profits and park them until all the news is out concerning the earthquake's damage to the plants in Taiwan. As always confirm market direction and momentum before entering a new position and in this case, look for news to drive the sector. Thursday's Write Up No one can predict earthquakes in Taiwan and no one can predict earthquakes in New York. After today's market action some traders might have felt like we had an earthquake on Wall Street. As for ADI it remained consistent with its normal trading pattern. In a weak market with the PHLX semiconductor Index down -5.5% to close at $521.70, ADI once again was able to hold the major support levels that had been tested last week. Once again it hit a intraday low of $55 before closing at $55.50. The current technical pattern keeps our bullish sentiments intact going forward. Also in after hours news it was reported that ADI would be added to the S&P 500 Electronics (Semi- conductors) industry group. This means that every money manager that manages a S&P 500 Index Fund must add shares of ADI to its portfolio, look for an immediate run up in the shares. If you look towards tomorrow for an entry point, look to take a position on any intraday weakness. This stock should be moving higher on strong volume. BUY CALL OCT-55*ADI-JK OI=4362 at $4.13 SL=2.50 BUY CALL OCT-60 ADI-JL OI= 768 at $1.75 SL=0.75 BUY CALL NOV-55 ADI-KK OI= 40 at $6.00 SL=4.25 BUY CALL NOV-60 ADI-KL OI= 80 at $4.75 SL=2.75 Picked on Aug 28th at $51.31 P/E = 61 Change since picked +4.19 52-week high=$60.44 Analyst Ratings 8-6-1-0-0 52-week low =$12.00 Last earnings 08/99 est= 0.29 actual= 0.30 Next earnings 12/02 est= 0.35 versus= 0.16 Average daily volume = 1.08 mln Chart = http://quote.yahoo.com/q?s=ADI&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ Did Somebody Yell Fire? Stocks tumbled on Thursday as big-cap technology issues finally gave way under the growing weight of pessimism in equity markets. Wednesday, September 22 The markets were mixed today as investors considered a plethora of uncertainties, including the dollar's continued weakness, a widening trade gap and the outside chance of another interest rate increase. The Dow Jones industrials continued lower, down 74 points at 10,524, just one day after its biggest drop since late May. The Nasdaq index rebounded 37 points to 2,858 on new strength in technology stocks. In the broader market, declines led advances 1,721 to 1,216 on volume of 808 million shares on the New York Stock Exchange. Tuesday's new plays (positions/opening prices/strategy): Barrick Gold ABX JAN12C/JAN20C $2.50 debit bull-call Newmont Mining NEM DEC17C/DEC22C $1.93 debit bull-call Both positions opened higher and stayed in positive territory for most of the morning. ABX remained in the green for the whole session we did not see any opportunity to open the play for the target debit. The best observed price was $2.50 debit. NEM was slightly more cooperative, falling $0.50 in the afternoon to a low of $19.31. The target entry of $1.93 was available and the position traded as low as $1.88. There was some other activity in Barrick as the January 25 calls included a single trade of 3,000 contracts. Portfolio plays: New concerns on the bearish technicals of the market are now the focus of analyst's discussions. The trade gap, weakness in the dollar, and higher interest rates are all concerns but most experts are concentrating on the key technical support levels. The Dow bottom appears to be near 10400 and the S&P 500 index, which slipped briefly below the 1,300-point level, has support near 1275. Of course, market breadth isn't helping either as decliners continue to lead advancers on a daily basis and one analyst referred to our condition as a "parade of horribles". There were some bright spots today. 3Com Corp (COMS) moved up after the company turned in a positive earnings surprise. For the quarter, the company reported EPS of $0.33, up 38% from the last quarter. Analysts had been expecting $0.24 and the stock took off for a $2.12 rise on the news. The bullish debit spread was closed on the rally near maximum profit. Bell Atlantic (BEL) was higher today as analysts gave the "thumbs up" to its joint venture with Vodaphone Airtouch (VOD). On Tuesday, they agreed to merge operations and create a $70 billion cell-phone giant. Another of our recent slumping issues, Tuts systems (TUTS) was up $2.25. after testing support near $25. Broadcom (BRCM) and Doubleclick (DCLK), our two combination straddles, were also higher, up over $10 each. We are going to close both positions, one at profit and the other at break-even, while the technology issues are at a high. Indications of the Nasdaq rally were also seen in Qualcomm (QCOM), up $6, Electronics for Imaging (EFII), which was $3.50 higher and Microchip (MCHP), up $2.25 to $58. MCHP is an early exit candidate with a $9.50 credit against a cost of $8.31, and should now be closed to protect profits. On the downside, tobacco stocks were in the news as the Justice Department filed its long-expected lawsuit against the cigarette makers. The federal government said it will seek to recover much of the $20 billion it spends every year on smoking-related costs. Shares in the world's largest tobacco company, Philip Morris (MO) fell $1.12 after it said it will mount a vigorous defense to the suit. Thursday, September 23 Stocks tumbled on Thursday as big-cap technology issues finally gave way under the growing weight of pessimism in equity markets. The Dow Jones industrial average fell 205 points to its lowest closing level in more than five months and the Nasdaq suffered one of its biggest losses ever, sliding 108 points to 2,749. The S&P 500 index skidded 30 points to 1280, well below a level many analysts said was a key support area for the stock market. The 30-year treasury rose more than a full point to yield 6.00%. Portfolio plays: Another terrible day in the market as increasing concerns about the weakening dollar, growing trade deficit and higher interest rates have all but brought the house down. Most of the issues in our portfolio moved lower and the majority of the bullish plays are in negative territory. Now is the time when you will have to make some decisions about risk/reward and capital conservation, based on your current outlook for the market. One interesting observation, Sunday's credit-strangles were very active during the first few days of the new expiration period and already, the signs of premium decay are evident. All three of the positions could have been closed this morning for favorable short term returns; Hewlett Packard (HWP) at $0.50, Johnson & Johnson (JNJ) at $0.43 and Merrill Lynch (MER) at $0.38. Philip Morris (MO) rebounded in morning trading and that was a good opportunity to close the long option in the bullish debit spread. The position was bid at $3.25 for most of the first hour and traded as high as $3.38. With the new market outlook and the recent filing from the justice department, it's hard to imagine MO making any kind of a significant rally in the next few weeks. We will discuss this week's adjustments in the Sunday edition. Good Luck! Questions & comments on spreads/combos to ray@OptionInvestor.com *********** NEW PLAYS *********** With today's crash and the uncertain direction of the market, we would prefer to stay comfortably on the sidelines while the new trend or destiny is established. For those of you that still want to participate, we found two (relatively) low risk plays based on disparities from recent speculation in the options market. Please research these plays thoroughly before opening any positions as current sentiment and news will have an effect on the eventual outcome of each issue. FON - Sprint $51.12 *** Still A Takeover Target? *** Sprint Corporation is a holding company. The principal activities of Sprint and its subsidiaries include domestic and international long distance and local telecommunications services. Once again, FON has become the source of new takeover rumors and implied volatility in options increased again, just a day after the stock finished at a recent high near $55. In the afternoon, the issue fell lower with the market sell-off but speculation was still running rampant after the New York Times reported that Sprint had been in talks with German telecommunications giant Deutsche Telekom AG. The volume also remained above average but much of the interest has moved to Put. This follows a recent call option order of over 11,000 contracts in the OCT-$50 series. Back in August, Sprint was also a merger candidate but declined to comment on takeover talk, which has reappeared periodically. The most recent rumors have boosted the stock price 20% over the past two weeks and the bullish trend appears intact even with today's severe market correction. In addition, ABN AMRO said it initiated coverage of Sprint today with an "outperform" rating. The new interest in put options and the high volatility of this issue has produced a very conservative combination position for those of you who like FON in the long-term. PLAY (very conservative - bullish/covered-combo): BUY STOCK - FON A=$51.25 SELL CALL NOV-40 FON-KH OI=651 B=$12.25 SELL PUT NOV-40 FON-WH OI=236 B=$1.12 OVERALL INITIAL NET DEBIT TARGET=$38.88 COMBINED ROI=9%(margin required) Note: The return on this position can be increased through the simultaneous purchase of a bull-call (debit) spread. Our most conservative suggestion would be the NOV40C/NOV45C at a debit of $3.75. Chart = http://quote.yahoo.com/q?s=FON&d=3m **** RNB - Republic National Bank $58.56 Republic New York is holding company whose principal subsidiary is Republic National Bank of New York. The Bank provides a full range of domestic banking services including commercial and consumer installment and mortgage loans to individuals and businesses. The Bank is also active in international banking where it operates principally as a wholesale bank. The Bank trades gold and silver bullion, both for immediate delivery and for delivery in the future, buys and sells options on precious metals and engages in various arbitrage activities in the precious metals markets. This is a very unique issue that requires far more explanation than can possibly be listed in this play summary. In short, the company is currently awaiting the closure of a merger deal in which Britain's HSBC Holdings is expected to pay them $72 for each share. The problem is the company has been plagued with a slew of recent accusations and allegations concerning some of their past banking practices and its securities unit's dealings with U.S. fund manager Princeton Economics International. HSBC Holdings recently said it had not changed its stance on the takeover of Republic New York but most analysts believe they will be able to re-negotiate its bid price to a lower amount. Regardless of all the news, it appears that the merger will eventually occur and it's very unrealistic to think that RNB could be worth less than the cost basis of this combination position. PLAY (conservative - bullish/covered-combo): BUY STOCK - RNB A=$58.75 SELL CALL OCT-50 RNB-JJ OI=0 B=$9.62 SELL PUT OCT-50 RNB-VJ OI=608 B=$1.43 OVERALL INITIAL NET DEBIT TARGET=$48.75 COMBINED ROI=7%(margin required) Note: The return on this position can be increased through the simultaneous purchase of a bull-call (debit) spread. Our most conservative suggestion would be the OCT50C/OCT55C at a debit of $3.50 Chart = http://quote.yahoo.com/q?s=RNB&d=3m **************** STRADDLES **************** A withering market has helped many of the straddle issues move to break-even exits (on the downside) but so far, none of them have become profitable positions. Of course, they are all fairly new plays and the recent market move could be a signal of even bigger fluctuations over the coming weeks. The most favorable candidate for an early profit appears to be Donaldson, Lufkin and Jenrette (DLJ) as the stock is now down $10 from our original pick price and the debit straddle was actually in the black for a short time today. Another issue that we had hopes for was Phelps Dodge (PD) after Monday's announcement that the company raised its hostile bid for merging rivals Asarco and Cyprus Amax Minerals. PD and the other copper stocks rallied on the news but Thursday's drop took the stock right back to the $56-$57 range. Other plays that appear to be moving in the right direction today are Avis (AVI), down $1.50 to $19.50 and Williams Brothers (WMB), down $2.06 and well below recent support near $40. The problem now is that the market may endure some sort of small (oversold) technical rally and that's when we have to decide if we are going to trade against the straddle to avoid losing time value (or potential). As the stocks rebound to previous trading ranges, the potential for future volatility will decrease and that can erode the value of your positions. It's very important to monitor your plays on a daily basis for changes in technical character so you can adjust your exit strategy when necessary to fit the market fluctuations. One of our readers asked about that problem (and many straddle traders face it) in this weeks Email. Here is the narrative on the subject of technical trading with straddles: Trading the trend in straddles can be a profitable technique for directional traders but it involves additional risk and requires knowledge of basic technical analysis. The most common approach to this method is to monitor the underlying issue for a breakout or key reversal through a known support or resistance level. If the new trend has been positively identified, the lower priced options (losing side) are sold along with one-half of the higher priced options (profitable side). The remaining position is held until a reasonable profit target is met and downside protection is maintained with a trailing stop. Advanced traders favor this follow-up technique because it is based on known technical trends and the action generally occurs near the position's break-even points. When one of these points is reached, two simple trades lower the overall cost basis while retaining a high probability of eventual profit. New plays: With the market volatility (and our portfolio to manage), we have been unable to find any truly favorable positions for new straddle plays. If the market cooperates, we hope to offer a new group of candidates this weekend. Good Luck! ************ See Disclaimer in section one ************
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