The Option Investor Newsletter Tuesday 10-26-99 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) ************************************************************ 10-26-99 High Low Volume Advances Decline DOW 10302.10 - 47.80 10408.20 10300.90 878,370k 1,159 1,874 Nasdaq 2811.47 - 4.48 2859.92 2811.20 1,060,420k 1,896 2,057 S&P-100 678.67 - 3.71 689.28 678.51 Totals 3,055 3,931 S&P-500 1281.91 - 11.72 1303.44 1281.86 43.7% 56.3% $RUT 415.79 - 1.97 420.22 415.70 $TRAN 2829.20 - 41.39 2879.70 2826.96 VIX 25.06 + 0.64 25.55 23.40 Put/Call Ratio .54 ************************************************************* Big Changes in the Dow Tradition gave way a little today as the Dow Jones Company added two NASDAQ stocks to the Dow Jones Industrial Average. While many believe that the move to put Microsoft and Intel on the Dow is long overdue, the Granddaddy of market indices does not make changes often and when changes are made the new stocks typically come from the NYSE, where most big and well-established companies usually elect to list. The NYSE is probably at least a little disappointed by the change because this new development makes it even less likely that Microsoft and Intel will make the move to the Big Board and assume the M and I trading symbols that had been reserved for them. The big changes did not just include the two tech bellwethers. Four stocks were dropped from the Dow, including Sears, who has been on the index since 1924. Goodyear Tire, Chevron, and Union Carbide are the other blue chips being dropped for younger but bigger companies. Union Carbide is being swallowed by Dow Chemical and needed to be replaced anyway. Chevron was a natural choice to be let go also, since Exxon is also in the Dow and with only 30 stocks, it probably is not necessary to have two large oil companies. Sears and Goodyear are doubtless disappointed about the decision, but not even they could assert that chain store retailing and tire making deserve more representation on the index than computer software and hardware. Technology stocks now make up almost 25% of the Dow, which is probably a better representation of where the economy is headed in this "Information Economy." Notice in the graph above how three of the four losers have significantly underperformed the S&P 500. UK has done better than the SPX only because of a buyout by DOW chemical. In the chart below, you can see that the new additions to the Dow 30 have drastically outperformed the SPX with the exception of SBC. There are still a lot of questions about what effect the changes will have on the Dow. Some believe it will make the index more volatile, and some critics say that it is just a move by the Dow to boost the performance of the index, which has lagged versus the NASDAQ, kind of like a fund manager arranges the fund's portfolio to try to improve performance. Others believe that the change will make Microsoft and Intel even bigger due to the popularity of indexing. These are all questions that will be answered over time but it is unlikely to create any real problems. Both Microsoft and Intel have steady earnings and are very well positioned. At this point of their existence, none of the new Dow stocks are much more volatile than other Dow stocks, and they help to make the index more interesting. Home Depot and the Baby Bell SBC Communications were also added to the Dow, but were overshadowed by Microsoft and Intel. Home Depot is one of the great "American Dream" business stories of the past decade. It started trading in October 1988 at a split-adjusted price of about $1.25. Now it is over 70 and there are Home Depots everywhere. The big announcement gave the market, particularly technology stocks, a big boost in the morning. The NASDAQ shot up about 44 points at one point, but like the other indexes, it had difficulty holding onto those gains. With the exception of a few days last week, today's action has been a recurring theme in the market. Stocks try to rally, but it met by selling because of interest rate fears, the weak dollar, comments by some economist or analyst, or some other worrisome factor. The markets are simply weak and it will take some strong catalyst, either a sharp sell-off followed by a rebound, or a quick drop in bond yields, or some other unforeseen event to get the market back to new highs. The Dow was understandably weak today, due to the beating the stocks being expelled took. Since the changes to the Dow do not take effect until November 1, Goodyear, Sears, and Chevron will not be on anyone's must buy list until then. Goodyear suffered the most, dropping 8.6%, while Sears fell 6.3%, and Chevron fell 2.2%. Those losses along with a 4.8% decline for Wal-Mart made it very difficult for the Dow to generate any upward momentum. Union Carbide was not hurt very badly since their merger deal made their drop from the Dow inevitable. The Dow finished down 47.80, or .46%, at 10,302.13, which is more than 100 points off of the day's high. NASDAQ stocks gave back their early gains and finished lower on the day. After the initial boost from Microsoft and Intel, the NASDAQ spent the rest of the day slipping, closing near the low at 2,811.47, down 4.48, or .17%, after trading as high as 2859. Just as a note, it is usually a bearish sign to gap higher and finish at the low for the day. Microsoft and Intel gave back their early gains and finished near their lows. Microsoft closed down .07 and Intel was up .18. The S&P 500 also lost ground today, finishing at 1,281.91, down 11.72, or .91%. Market internals were again weak, although volume was higher than yesterday. Declining stocks outdid improving stocks 18 to 11 on the NYSE and 16 to 15 on the NASDAQ. Volume on the NYSE came in at 862 million and over a billion traded on the NASDAQ, with over 5% of the NASDAQ's volume coming from Microsoft and Intel. The volume today was about 10% higher than yesterday. In other big news, former Treasury Secretary Robert Rubin decided to join Citigroup as a kind of third chief executive. Rubin vows he will never be CEO, but the current dual CEO situation makes Citigroup one of the most unusual executive situations around. It would be more entertaining if Microsoft and Oracle merged and Bill Gates and Larry Ellison became co-CEOs. Now that would be a lot of fun. But let's get back to Citigroup. Rubin will have no real responsibilities but will undoubtedly generate deals for Citigroup since Rubin has very important contacts all over the world. Shares jumped in anticipation of the announcement, trading over 50, but finished the day at $48.61, up .75. Aside from the volatile precious metals sector, the retailing sector weighed most heavily on the market. With Sears being booted off the Dow a lower than expected Consumer Confidence and retail sales figures, most retailing stocks had a rough day. The CBOE Retailing index fell 4% today. It was the same story with oil stocks and the reaction to the snub of Chevron. The Oil index fell 1.9% today. Drug stocks also suffered with the AMEX Pharmaceutical index falling 2.4% and the Biotech index losing 1.8%. Technology stocks held up better than most stocks today, but finished well of their highs. The PHLX Boxmaker index rose .48% and the CBOE Software index rose 1.1%. Internet and Semiconductor stocks were not as fortunate, with TheStreet.com Internet index dropping 1.2% and the PHLX Semiconductor index shedding .54%. On the earnings front Lucent Technologies announced earnings today, beating estimates by a penny and a 23% increase in revenues. They also announced they would split the company into four divisions in an effort to focus on the high-growth areas of optical networking, wireless communications, semiconductors and e-business. The stock was rewarded with a 5% rise in price. After the closing bell Compaq, Nortel Networks, eBay, and Anheuser Busche all announced earnings. Compaq beat their estimate by 2 cents, but their estimate had been revised downward several times. Nortel beat estimates as did eBay, but both were down in after-hours trading. As this report was being written, eBay was down over $10, which does not bode well for the Internet sector tomorrow. In spite of a slipping Consumer Confidence Index, bonds slipped again, due in part to some somewhat hawkish comments by a few Fed governors. The 30-year Treasury bond dropped 13/32, which pushed the yield up to 6.39% Traders are still pessimistic about the outlook for bonds and nervous about Thursday's economic data. Without some interest rate relief it is hard to imagine a strong rally for stocks in the near future. The weak close at or near the low for the day makes it likely that the market will at least open a little lower tomorrow. Most traders will probably be reticent to take substantial positions ahead of Thursday's data, so most of us are expecting a lackluster trading day. According to First Call's estimates, third quarter earnings to date have exceeded analysts' expectations by 3.2%. There are still quite a few earning announcements over the next few weeks, but certainly we can't be disappointed with the results. The problem is expectation, which is what drives markets. Most analysts expected spectacular earnings, and simply meeting expectations does not usually generate a round of back patting and rewards. It says something about the weakness and temerity of the market when earnings can be over 20% higher than a year ago and it is not enough to lift the market. The Dow remains 5% lower than it was a month ago. Be careful going into Thursday. The indices might be in a trading range but individual issues are even worse off. Recent rallies have been narrow and declines have been broad. This is truly a stock- picker's market and its better to stay on the sideline or cut a loss short than to get into a position that within a week or two forces you to decide to either take a loss or hold a position indefinitely (if you are trading stocks) and to expire worthless if you are trading options. As today demonstrated, times are a - changin' and unless there are working crystal balls around, there are plenty of uncertainties. Good luck and happy trading Chad Poulson Research Analyst ********** STOCK NEWS ********** Tech IPOs Garner "Red Hot" Status By Cindy Christ While the media focused today on new names added to the Dow, IPO investors had their sights trained on Akamai Technologies, a sizzling IPO set to debut Friday on the Nasdaq. Analysts expect brisk demand for shares in the Cambridge, Mass. based company whose proprietary technology speeds up web content delivery and prevents site crashes caused by demand overloads. http://www.OptionInvestor.com/stocknews/102699_1.asp **** Broadband is the Future of Internet Connectivity By S.P. Brown Competition and new technologies are quickly changing the Internet access landscape. The current buzzword among Internet Service Providers (ISPs) is broadband. http://www.OptionInvestor.com/stocknews/102699_2.asp *************** Market Posture *************** As of Market Close - Tuesday, October 26, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,750 11,320 10,302 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,282 BEARISH 9.16 OEX S&P 100 690 725 679 BEARISH 10.15 RUT Russell 2000 440 465 416 BEARISH 9.14 NDX NASD 100 2,320 2,500 2,466 Neutral 10.19 MSH High Tech 1,120 1,250 1,221 Neutral 10.19 XCI Hardware 950 1,050 1,006 Neutral 10.15 CWX Software 750 800 895 BULLISH 9.03 SOX Semiconductor 450 525 504 Neutral 10.19 NWX Networking 525 615 608 Neutral 10.19 INX Internet 450 525 491 Neutral 10.15 BIX Banking 660 690 609 BEARISH 7.23 XBD Brokerage 410 440 377 BEARISH 7.23 IUX Insurance 645 660 543 BEARISH 7.23 RLX Retail 915 960 837 BEARISH 7.23 DRG Drug 365 390 375 Neutral 10.19 HCX Healthcare 720 785 734 Neutral 10.19 XAL Airline 180 190 141 BEARISH 5.21 OIX Oil & Gas 280 315 289 Neutral 10.21 Posture Alert Apart from the Dow going digital, Tuesday's trading activity was very blasÚ. Sector leaders were limited, and include Software and Networking, which posted marginal gains; while downside leaders posted substantial one-day drops. Those included Retail (-4.02%), Healthcare & Drugs (-2.77% & - 2.38%, which have acted more like the internet sector these last several weeks), and Insurance (-2.34%). There are no current changes in posture. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Tuesday, October 26, 1999 Pledge Initiation! So Intel and Microsoft will be added to the Dow Industrials, and joining with other technology bellwethers Hewlett-Packard and IBM. They will become the first two Nasdaq stocks in history to have this honor. Well, the first day of being a pledge wasn't so hot. After gapping up $3 at the open, Intel closed up ONLY +3/16 and Microsoft actually closed down -1/16! The third Dow pledge, Home Depot, didn't fare any better, closing down -1 ╝, four dollars off the highs. The only new pledge to hold was SBC, which has been beaten up so badly these last two months that today's positive close doesn't mean much. You might be asking, with such good news, shouldn't the market have closed on better terms? Actually, the better question you should be asking yourself is; where would the market have closed if this news didn't come out today? Anyway, the market looks poised for more potential downside pressure in the near term. If you take a look at the chart of the OEX, we have highlighted the 690 mark. This level has served as a key benchmark for the last 6 months. As you can see, each time it has broken this mark to the downside, or failed to break this level to the upside, we have been witnesses to significant selling pressure within the next couple of days thereafter. Another reason for the resistance at 690 is the high levels of call activity. Currently, option traders have the highest levels of optimism (as measured by open interest) for November series at the 690 level. This in itself, with its short-term bullish implications, serves as minor resistance. Now we are not stating that we expect any major drops in the market, but we do look for a continuation in the trading range that we all have been experiencing these last several months. With major earnings season coming to a near-end and the yield on the bond breaking new highs, Wall Street will now solely focus on the Fed. However, Thursday does bring out a trump card with the Gross Domestic Product and Employment Cost Index. Should these economic indicators come out favorable and the Treasury finally rallies, then 690 for the OEX will be in our rearview mirror and hell-week for the pledges won't be so bad after all. BULLISH Signs: Pessimism on Earnings: We should see a solid third quarter from many companies, yet their stock prices do not reflect this upside potential. 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: Volatility Index: The VIX is at a key moment, stuck right at the 25 benchmark. The VIX continues to prove that 32-33 is a great buying opportunity, and also shows that the low 20's have been a good exit point. BEARISH Signs: Interest Rates: The yield on the 30-yr Treasury is breaking new highs, and will need to see a nice rally before stocks can advance back to highs. Miscellaneous Uncertainty: Y2K, inflation, higher interest rates, slowing corporate earnings, earthquakes, U.S. Dollar uncertainty, are all leading to an abundance of uncertainty for professionals and investors alike. Advance/Decline Line: The A/D line continues to be poor and is getting worse. X-Factor: Currently, good news is not rewarded very well, while negative news or even rumors will destroy a stock. We have witnessed this these last couple of weeks with issues such as IBM, Lexmark, HI/FN, Abercrombie & Fitch, and Unisys. Russell 2000 & S&P 500: The RUT and SPX are still very weak, with both breaking support levels. OTM Call Analysis As we move closer to the November expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 690-780 among option speculators. As we have been documenting, excessive out-of- the-money (OTM) call may serve as overhead resistance. November Expiration Cycle OEX OTM Call Analysis (Open Interest November 680-780) Date Open Interest Change % Alert Friday, October 15 39,072 - Friday, October 22 61,250 +56.8% 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 Benchmark (10/22) (10/26) Overhead Resistance (685-700) 2.32 2.12 OEX Close 685.63 678.67 Underlying Support (660-680) 1.28 1.52 Underlying Support (630-650) 12.66 11.60 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Based on 10/26, both overhead resistance and underlying support are light, which means we can easily rally 15 points just as easily as fall 15 points. However, should the market drop, we show great support at OEX 630-650. Put/Call Ratio Friday Tues Strike/Contracts (10/22) (10/26) CBOE Total P/C Ratio .69 .68 CBOE Equity P/C Ratio .46 .46 OEX P/C Ratio 1.67 1.18 Peak Open Interest (OEX) Friday Tues Strike/Contracts (10/22) (10/26) Puts 640 / 11,789 670 / 11,184 Calls 690 / 7,562 690 / 7,231 Put/Call Ratio 1.56 1.55 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 October 15, 1999 Bottom? 32.06 October 26, 1999 25.06 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 Oct. 20, 1999 41.0 38.5 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Week Dow 10302.13 -120.32-47.80 -168.12 Nasdaq 2811.47 -0.57 -4.48 -5.05 $OEX 678.67 -3.25 -3.71 -6.96 $SPX 1281.91 -8.02-11.72 -19.74 $RUT 415.79 -0.93 -1.97 -2.90 $TRAN 2829.20 7.44-41.39 -33.95 $VIX 25.06 1.53 0.64 2.17 Calls Mon Tue Week KIDE 78.88 8.88 10.00 18.88 A fantastic playmate! MACR 57.16 5.31 -1.03 4.28 Dropped, end on a positive GMST 86.06 3.13 1.06 4.19 I see caution in the stars CMVT 108.56 -0.75 4.50 3.75 Has all its ducks in a row EMLX 142.00 7.38 -4.63 2.75 Big jumps; little rests AMZN 81.25 4.13 -1.50 2.63 Dropped, earnings Wed. SYMC 44.00 -1.56 2.25 0.69 New, now bigger than NETA PCS 78.69 -0.75 0.56 -0.19 PCS adds GetThere.com DELL 39.56 -0.69 0.38 -0.31 Upcoming earnings 11/11 TFSM 43.13 -1.44 -0.88 -2.31 Dropped, rolling over WMT 53.25 -1.13 -2.69 -3.81 Don't discount Wal-Mart! SEBL 92.56 -2.50 -1.44 -3.94 SEBL simmers for flavor VRTS 89.81 -0.25 -4.13 -4.38 A little two-stepping AMGN 75.94 -1.19 -4.00 -5.19 Stopped out early QCOM 207.75 -4.63 -3.38 -8.00 Entry points for earnings Puts BBY 52.19 -1.63 -5.50 -7.13 Don't let the name fool you GT 41.25 -1.50 -3.94 -5.44 New, kicked out of the Dow JPM 121.38 -5.44 1.19 -4.25 Weakness ahead of new data LTD 38.06 -1.44 -1.69 -3.13 New, retail sales fears LTR 67.19 0.00 -1.69 -1.69 Tobacco jury news pending CI 64.13 -0.50 -0.63 -1.13 Selling pressure dominates ALD 52.38 1.19 -2.06 -0.88 New, breaking down again PBI 46.00 1.00 -1.50 -0.50 Slowly but surely BAC 58.31 -0.50 0.06 -0.44 Financials are weak CMGI 103.56 4.13 -3.69 0.44 Ebay tanking after-hours EFII 40.00 4.00 -1.13 2.88 Dropped, flattened out EXDS 77.13 3.38 0.06 3.44 Watch for profit taking FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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The Option Investor Newsletter Tuesday 10-26-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. 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: ***** AMGN $75.94 -4.00 (-5.19) As the song goes "you gotta know when to hold them, and know when to fold them". Well were are going to fold on this one. We hope you stayed away from the first hour of trading Monday. If so AMGN never gave us a chance to enter. After opening higher and hitting $82.56 in the first twenty minutes of trading AMGN turned south and it has been all down hill since. AMGN stubbed its toe yesterday losing $1.19 and then fell out of bed today losing $4.00 to close at $75.94. The last two days really put a crimp in our split run. AMGN splits 2:1, November 5th. Could it turn around from here? Possibly. But with the decline the past two days we feel the risk isn't worth the potential rewards. The stops got put to work early in this play and for now we will lick our wounds and look elsewhere for opportunities. Bottom line is, we missed on this one. TFSM $43.13 -0.13 (-2.31) We mentioned Sunday we would like to have seen a little better follow-through on Friday from last Thursday's strong move up. Now you know why. The past 2 days shares of TFSM have struggled, losing ground this week. This doesn't necessarily mean that TFSM couldn't continue higher, but at this point the chart is starting to look weak. The rumors concerning a merger between TFSM have died off somewhat. With a speculative play like TFSM rumors are fine, but the market needs to see some kind of conformation or the price of the stock will die as well. Our other interest in TFSM was for a potential earnings run. TFSM releases earnings November 9th, after the close. It certainly isn't too late for an earnings run, and a run in fact may develop. However for now we will stand aside and keep our eye on the advertising company as the recent weakness doesn't bode well for the price of the stock. MACR $57.16 -1.03 (+4.28) It's the moment we have all been waiting for. We finally broke the chains that held our play. Monday's trading session provided MACR with a spark that shot the stock almost 14 percent higher. Investors were doing some last minute shopping before tomorrow's earnings announcement, providing us with some nice gains. Hopefully investors were able to run with their profits before today's profit-taking went into affect. Due to selling which usually follows suit with most earnings announcements, we recommend closing your positions. For this reason, we too are ending this play and concentrating our efforts elsewhere. Unfortunately, it has come to an end, but at least we ended on a good note. AMZN $81.25 -1.50 (+2.63) Despite a rising bond rate, this rate sensitive issue has been swimming upstream on its way to earnings, scheduled for release tomorrow after the close. For those with nimble trading styles, we had an opportunity to catch an almost $6 move since switching from puts to calls last Thursday. Even so, we never recommend holding a position over earnings, lest piranhas eat us after the fact. For that reason, we're sending AMZN down the river tonight. PUTS: ***** EFII $40.00 -$1.13 (+2.88) It looks as though EFII may finally be coming up for air as it has gained nearly $3 so far this week. Though EFII was down today, late day trading flattened out a bit. EFII made a solid bounce at $39.25 and this could very well be an indication of a possible end to the selling. EFII closed on it's way up and we expect the positive momentum to continue into tomorrow. Therefore it is time to end the play on EFII and move on to more profitable put plays. ***************** PICK NEWS - CALLS ***************** CMVT $108.56 +4.50 (+3.75) So long S&P 400 Midcap and hello S&P 500! As you no doubt heard, there were lots of changes in the indices this morning and CMVT is one stock reaping the benefits. They were announced this morning as the company to replace Asarco who is being acquired by Phelps Dodge. Even better, the change occurs after the close of business today, which means the fund managers will have to start buying right away. That means we have another catalyst to drive this stock higher. In total we are looking at an earnings run, a S&P 500 addition and, dare I say, a stock split with earnings on Nov 30th (we will have to wait and see). Talk about having all of your ducks in a row. The volatility in the afternoon on Tuesday will be common as fund managers began to take a position and other investors take profits from a great one week run of $15. Therefore, plan your entry points. We see support at $106 and resistance at $112.50, which was hit today and is a 52-week high. PCS $78.69 +0.56 (-0.19) We noted on Sunday that this play was based on technicals, with a good story to back it up. Too bad the market hasn't cooperated. Even so, the story just got better today as PCS added GetThere.com (travel site) to its budding collection of services available over Sprint's Wireless Web. Technically, MACD is still looking good, while the other indicators are struggling to play catch-up...pretty tough to do when the NASDAQ and DJIA have been down so far this week. The good news is that PC has held support well at $78, despite volume falling to the floor (only one-third of its 1.7 mln share ADV traded today). Apparently, investors are comfortable holding at this level and in no mood to panic out, despite a currently less stable market. Overhead resistance is $79, its all-time high; the first support level is $78; next is $75. We are more inclined to use $78 as a downside exit and $75 as the target if target shooting your entry. Of course, confirm the bounce before making an entry. QCOM $207.75 -3.38 (-8.00) Mild profit-taking continued this week and it isn't surprising since QCOM just hit its latest 52- week high ($225.75) on Friday. The downdraft offered a variety of entry points into this earnings play for those willing to bet on another surge in the upcoming days. QCOM is still positioned well above its near-term support at $190 and $200 however, QCOM is now in close proximity to its 10-dma ($205.27). Remember this play is over in five days. Qualcomm will report its earnings next Tuesday, Nov 2nd after the bell and OIN never recommends holding over an announcement. SEBL $92.56 -1.44 (-3.94) The fire burning under SEBL set off by its powerful earnings' report and 2:1 stock split announcement last Tuesday is on simmer. After hitting a new 52-week high ($99.50) on Friday - for the 3rd consecutive day! - SEBL is experiencing some consolidation. We alerted our readers that after the impressive gains last week the stock would likely pullback and effectively offer entry points into this split play. Importantly, the two-day depression didn't push SEBL below its 10-dma (now at $89.16) or its firm support at $85 which are good indications that SEBL has strength at these higher price levels. The stock will split 2:1 on Nov 12th, after the bell. In the news, Siebel announced its will use configuration technology created by ILOG. The technology will provide existing software with increased intelligence, speed, and flexibility. DELL $39.56 +0.38 (+0.31) Our technical play is still flat- lining. Since Monday, the trading range was tight between $39 and $40.63 on moderate volume. And yes, we're still anticipating a rebound as earnings approach in the upcoming weeks. Dell is expected to report on November 11th. Yesterday Warburg Dillon Read reported that DELL could "post significant upside surprise in revenue growth" referring to preliminary September PC shipment data. This is a great discovery after Dell reported a possible earnings shortfall last week resulting from a 25% rise in chip prices. But the big news this week is that for the first time in history Dell surpassed rival Compaq computers (CPQ) as the leading PC maker in the US! For the 3Q Dell claimed 17.1% of the PC market while CPQ slipped to 15.3%. Analysts note that CPQ does have the edge in the 4Q due to retail exposure however, this holiday season will be a tell-all as more consumers shop online. In the industry, Micron (MU) and Compaq Computers have entered into a five-year, $20 bln supply deal. KIDE $78.88 +10.00 (+18.88) Mo-mentum, mo-mentum, mo-mentum. What a fantastic start to a week! KIDE has gained $18.88 in the last two days of trading and closed close to its high of the day, again with big volume. Hopefully everyone is in and has taken advantage of this spectacular run because at this point, we caution entering any new plays. With the stock making such a big move in the last two days, premiums are just too inflated to make a new entry a logical move. For those that are in, be sure to adjust your stop losses to protect your profits, as there is bound to be some profit-taking in the near future. So what on earth has KIDE stock moving like this? We believe it is a combination of things. Pokemon prepares to make it's big screen debut (which is licensed through 4Kids Entertainment subsidiary, Leisure Concepts Inc.) in time for the holiday movie season. KIDE was also helped along by Topps (NASDAQ:TOPP), the creator and seller of collectible picture products, who announced expected sales of their Pokemon products for the year ending Feb 26th to be between $80 and $100M. And finally, KIDE will be announcing earnings on November 15th (confirmed with the company). GMST $86.06 +1.06 (+4.19) GMST spiked up at the open this morning to hit another new 52-week high and then retreated a bit to trade in a rather tight range throughout the rest of the day. At this point, a new play is cautioned. Should GMST make a breakthrough of $87, it would be a bullish indicator and a good point for the entry of a new play. If you are already in, tighten your stops and prepare to exit the play should GMST drop through $85. One of the probable reasons for GMST's rather flat day was the pending earnings announcement of TV Guide. TV Guide, who recently announced plans to merge with GMST, reported a loss in third quarter profits after the close on Tuesday due to the costs incurred in the merger between TV Guide with United Video Group. WMT $53.25 -2.69 (-3.81) It looked as though Wal-Mart has finally decided to begin the earnings run that we have been expecting. But instead WMT headed down in early trading before making a bounce at $51.50. WMT then began a slow and steady move up, hitting higher lows and gaining momentum throughout the afternoon. This may be time to make an entry to participate in the run however, it will be important to confirm continuing positive momentum before making a new play. After the close of the market today, a very optimistic outlook for the upcoming holiday sales season was released, specifically mentioning WMT. It noted that general retail sales are expected to rise 5-6.5% from last year, citing continuing economic strength and spend-happy consumers as the driving force behind the expected numbers. On Sunday, an article was released pertaining to WMT's European presence. It was stated that Wal-Mart's arrival is sure to incite major food retail pressure and a retail market "shakeout" due to the increased competitive retail conditions. VRTS $89.81 -4.13 (-4.38) It takes one step back to take two steps forward. Veritas was off to a great start but has taken a breather before continuing. When we picked this one on 10/21 it had just broke over resistance and held it for two trading days. Today with the negative sentiment in the over all markets, VRTS decided to pull back from its recent highs. We believe that this is a rest for higher ground and VRTS is holding above the 10-dma at $88.75. No negative news to support today's drop other than market weakness so any rebound will bring VRTS back in a big way as the split approaches. Remember, VRTS will split 3 for 2 on Nov 19th. EMLX $142.00 -4.63 (+2.75) Emulex has a chart that looks like a stair case. Big jumps with little rests. The 10-dma ($133) has been the guide for this winner as it hasn't broken this level in the month of October. Monday EMLX continued it's climb back to last week's high by putting on another +$7.38. Today EMLX opened up and was looking good for more profits but decided to take a breather with the rest of the market and closed down $4.63. The volume was average indicating a little profit-taking from Monday's gains. If there is continued weakness, we might see EMLX test the lows from Friday (around $136) before charging ahead into their shareholder vote on Nov 18th. Stand ready to pick up a great entry price as EMLX will resume its climb on any market strength. **************** PICK NEWS - PUTS **************** CI $64.13 -0.63 (-1.13) There is still no relief for CI from the down trend that has plagued the company in the short-term. So we are keeping the play and searching for new entry points. We've seen strong resistance at $66 and selling pressure that dominates the daily trading. CI hasn't had any fresh news to trade on lately and the volume has been retreating which signals that CI is likely to drift lower. Our original strategy remains in place which is to buy puts on the intraday bounce. You may need to pay attention though because the bounces are short-lived. If CI can confirm the break below $64 that it began this afternoon, we should get a good move to the downside. Next support would be at $60. EXDS $77.13 +0.06 (+3.44) It was a mixed day on the markets as the bears finally took charge to the end of the day. With interest rate fears still within the market, investors are hesitant to buy before Thursday's release of more economic data. GDP and Employment Cost Index figures will be released before market open, which will be the determining factor for investors sentiment. Like most traders, EXDS investors have remained cautious today, closing the stock fractionally higher. Despite the slight run in the stock on Monday, we feel that it's now in stall mode. If the markets turn to the downside, expect EXDS to follow as investors begin taking profits from the recent run in the stock. The nearest support level for EXDS is $72, the stocks 10-dma. When the momentum turns south, watch for a pullback to this level. Investors looking to place new trades should look for slight spikes in the stock, which will be available considering the volatile market conditions. The nearest resistance point is $80, which would be a good entry point. Maybe Ebay's after hour sell-off is what we need to get the ball rolling, let's see. In the news, EXDS announced it was going to team with United Messaging. Ellen Hancock, president and CEO of Exodus said that United Messaging's expertise in the messaging area complements EXDS's in-depth knowledge of network infrastructure technologies. PBI $46.00 -1.50 (-0.50) Pitney Bowes continued to trade at new yearly lows so far this week, dipping down today as low as $45.38 before settling in to close at $46.00. As we suspected there was an oversold bounce in the stock, that had the shares trading as high as $48.63, before the downtrend continued the course. As noted in Sunday's report, the current target resistance level was at $49.00, which has not been violated thus far. Going forward, in current market conditions, and with a number of economic reports to be announced this week that are forecasted to be negative, we expect the selling pressure to remain in place in the shares of PBI. The question of performance going forward for the company still looms over there head, and analyst seem weary about taking big positions in the company going forward. Confirm the downtrend followed by good volume before taking any new positions, seeing that value investors could step to the plate. BAC $58.31 +0.06 (-0.44) The price surges in BAC thus far have ceased this week, although the Moneystream and Volume remain strong, they are beginning to turn over to the downside. As the overall market remains mixed, the majority of stocks gave back any gains that have been made this week. The key negative market issues still remain in place: rising interest rates, corporate earnings, and the millennium Y2K bug. With these factors heavy on the mind of most Wall street traders, and the bond market continuing to trade down, pushing the yield on the 30 year treasury to 6.40%. This does not add up well for most stocks, and especially for U.S. Financials and Money Center banks like BAC. Ahead of the economic data to be announced on Thursday, BAC should continue to drift, and if the report comes in as expected the knife will fall hard and fast - watch your hands. The shares still remain in a ripe position for trading with the resistance still in place at $59.50, and support down at the $55.63 level. Continue to look for the downtrend confirmation, you might have to wait for the tug of war between buyers and sellers to cease. LTR $67.19 -1.69 (-1.69) The carnage in the Tobacco stocks returned as suspected this week ahead of the Nov. 1st jury decision on the class action suit against the industry that could lead to an estimate of $300 billion in punitive damages. In current market conditions, with the current state of the economy in question, there are not many short-term momentum investors rushing into Tobacco stocks like LTR. Some value investors have stepped to the plate in the last few days, but with the uncertainty in the overall market and probable negative news for the industry next week, we believe that LTR should remain under pressure. The downtrend should remain in place below the $71 level. We are currently trading below a good entry point at $68.88, which was the high for the day. The downtrend has and should continue to reassert itself. Look for lower-lows going forward. CMGI $103.56 -3.69 (+0.44) The shares of CMGI remain volatile. Yesterday saw the shares trading up heavily on the back of the news that AltaVista(company owned by CMGI)will spend $120 million in advertising through July. Today with the overall stock market still worried about rising interest rates and other market issues that seem to have paralyzed stocks over this current short term, CMGI remained under pressure. After some early market momentum in the Bellweather Internet stocks, it gave back all of the gains from yesterday and today after profit takers stepped back into the market in a significant manner. Although the volume in the shares were trading lower than average with the shares closing the day just above the lows at $103.56. Ahead of the Economic Data to be announced on Thursday, the shares of CMGI should remain volatile with a bias to the downside. There still has not been enough volume to go along with the intra-day price increases to sustain an upward trend in the shares of CMGI thus far. We remain bearish going forward, but cautious because positive news has been interrupting the downtrend almost daily. If you enter into a new position at this point, keep this one on your radar screen, it should be watched closely for intraday swings in momentum. Keep the stops tight. Today's low $103.50 should be taken out to the downside as trading resumes tomorrow. JPM $121.375 +1.19 (-4.25) The clock is ticking and the primer is set! With the up coming GDP report on Thursday we could see the bomb go off. The Bond yield has been holding the line above 6.3% and even hit 6.4% on Monday. The first time since October 1997! As the next two economic reports come out (Wed. Durable goods, Thurs. Real GDP), the Federal reserve will take a hard long look and at the drop of a hat can, and probably will, raise rates soon or by at least the next FOMC meeting. Banks are starting to break down and JPM is looking weaker and weaker. Monday JPM opened down and closed at its lows. If you entered the trade be patient as our profits will come soon. Today JPM popped up in connection with the news that former U.S. Secretary of the Treasury Robert E. Rubin will be joining forces at Citigroup in a newly created three-person office of the chairman. Even with this news, JPM did not hold onto its highs since it was only a confirmation of a rumor, so no big surprise. JPM hit the top at its 50-dma at $122.50 and is beginning to pull back. If you waited until today to enter then you got a better price but still the profits will come. If the reports are bad then JPM looks ready to test support at $115. If the reports are not bad be ready to exit if JPM rallies above their 50-dma. ************** NEW CALL PLAYS ************** SYMC - Symantec Corp $44.00 +2.25 (+0.69) Symantec is one of the two leading providers of utility software for the security market. Its fierce competitor is Network Associates and the two companies are continually striving to be in the #1 position. Symtanec's software is designed for business and personal computing with three distinct business segments: security and assistance, remote productivity solutions, and Internet tools. The distributor company, Ingram Micro, accounts for 33% of its sales revenue. Vying for the leading position in its industry has finally paid off. Just recently their market cap surpassed that of rival Network Associates. Symantec weighs in at 2.46B against Network's 2.40B. This is the first time that SYMC has passed NETA and it is a direct result of the success the company has encountered. With the Internet revolution in full swing, SYMC is reaping the benefits. They unveiled their Q2 results of fiscal 2000 on October 20th. They beat estimates of $0.42 cents by reporting a $0.45 per share profit, a $0.03 cent upside surprise! This is significant for a company that typically only beats estimates by a penny. The reason for the increasing earnings is demand for new products and strong international sales. Some of their newly added customers during the quarter included Chevron, PeopleSoft, Siemens, and Dayton Hudson. International sales increased by 65% and accounted for 41% of total revenue. Revenue grew the most in the Asia and Japan regions at 92% and 63% respectively. The continuing recovery in these markets should bode well for SYMC in the near-term. SYMC's stock has been climbing steadily since the end of September despite the rocky October market. SYMC began this most recent move at $33 and is now trading comfortably above $40. That is a 25% return in a month that has been brutal to the broad markets. We did see the effects of the market weakness in mid-October as SYMC was stuck at resistance at $40. But the volume lightened up during that period and the stock held its ground. This is definitely a bullish sign. Plus after the strong earnings' report on the 20th, SYMC broke out above resistance on stronger volume. We haven't seen much of a post- earnings meltdown due to the strength of the earnings numbers. We are cautious of the upcoming FOMC meeting where we may get an interest rate hike but it may provide the buying points we are looking for. The $40 support level is our target entry point. The analysts were also impressed with Symantec. On Thursday, Prudential Securities reiterated a Strong Buy and issued a 12 to 18-month target price of $55. AG Edwards upgraded SYMC to a Buy from an Accumulate and also set a target price at $55. Then Volpe, Brown Whelan & Co reiterated a Strong Buy rating and raised their price target to $60 from $45. On Monday, the company announced a consumer version of its Norton Speed Disk 5.0 for Windows NT Workstations, a disk optimization tool. BUY CALL NOV-40*SYQ-KH OI=465 at $5.25 SL=3.50 BUY CALL NOV-45 SYQ-KI OI=292 at $2.38 SL=1.25 BUY CALL DEC-40 SYQ-LH OI= 25 at $6.50 SL=4.75 low OI BUY CALL DEC-45 SYQ-LI OI- 53 at $3.63 SL=2.00 low OI BUY CALL JAN-45 SYQ-AI OI=225 at $4.88 SL=3.25 Picked on Oct 26th at $44.00 P/E = 22 Change since picked +0.00 52-week high=$44.44 Analyst Ratings 6-0-0-0-0 52-week low =$ 8.69 Last earnings 09/99 est= 0.42 actual= 0.45 Next earnings 01-14 est= 0.49 versus= 0.42 Average daily volume = 885 K Chart = http://quote.yahoo.com/q?s=SYMC&d=3m ***************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Tuesday 10-26-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************* NEW PUT PLAYS ************* GT - Goodyear Tire and Rubber Co. $41.25 -$3.94 (-2.44) Goodyear has helped most of us keep our grip at one time or another. After all, they are the world's largest tire maker. They also own the Dunlop and Kelly-Springfield brand. Headquartered in Akron, Ohio, the company manufacturers engineered rubber products and chemicals too in more than 90 facilities in 30 countries. It has marketing operations in almost every country around the world. Goodyear, with the recent addition of its Dunlop tire joint ventures, employs more than 105,000 people worldwide. OK, so earnings weren't so hot when announced last week. Though they earned two pennies more than analysts expected, $0.51 per share fell far short of the $1.17 for the same period last year. Expectations were already low, as the technical chart had been in a nice descent since early October. The issue continued down uninterrupted after the fact, until finding support and some stability yesterday at $44. Technically, GT is really weak. So what could go wrong? How 'bout getting dropped from the Dow Jones Industrial Average calculation in favor of (gasp!) a NASDAQ stock? That's how it went for GT today, as they dropped below support on huge volume. You might be thinking that it looks like a blow-off on the chart and that now's the time to buy it cheap. Don't do it. Every DJIA and "Dogs of the DOW" index fund must now begin the process of selling its GT holdings, then buying its replacements. The point is that the selling has only just begun, and even favorable interest rate news can't help GT grip the ice on this hill. Forget resistance; you have to go back to 1995 to find a lower price. First support is around $35; next is $32. The more bloodthirsty types can try to buy a dead cat bounce at the $43 level, but you might not get filled. We think it's buyable here and should continue heading south. Despite our confidence in this play, Murphy still lives. Be sure to protect yourself with trailing stops. BUY PUT NOV-45*GT-WI OI=841 at $4.50 SL=2.75 BUY PUT NOV-40 GT-WH OI=436 at $1.25 SL=0.00 High Risk! BUY PUT DEC-40 GT-XH OI= 3 at $2.00 SL=1.00 Average Daily Volume = 767 K Chart = http://quote.yahoo.com/q?s=GT&d=3m **** ALD - Allied Signal $52.38 -2.06 (-3.25) AlliedSignal makes a wide variety of products for industries in aerospace, automotive, pharmaceutical, fibers, and plastics. Aerospace products by AlliedSignal include airborne weather- radar systems, wind-shear detection systems, and radar systems for avoiding traffic collisions. Through its performance polymers segment, the company produces specialty fibers and films such as Spectra, used in body armor. Other segments produce aircraft and marine engines, and consumer automotive products such as Fram filters, Autolite spark plugs, and Prestone antifreeze. It's been a down hill battle for our latest put play. ALD had a short-lived run earlier in the month, but the tides have turned and it's been nothing but downhill since. Even a 19% increase in earnings this last quarter wasn't enough to help this crippled stock. ALD reported their good earnings back on October 14, and investors started to take profits immediately after. Along with the profit-taking are problems associated with their upcoming purchase of Honeywell Inc. Whenever there's an acquisition, usually it's the purchasers stock that suffers. ALD's purchase of Honeywell is just another case that fits the profile. Within this pending deal, ALD will purchase the company for $13.7 billion, which should concern it's current shareholders. The transaction also calls for the assumption of $1.5 billion in Honeywell debt. Originally, the purchase was scheduled to be completed sometime in October, however, both companies question whether it will take place that soon. Despite when the acquisition will take place, we feel this downward momentum in the stock will continue in the near-term. The nearest resistance point for the stock is it's 10-dma at $56. This would be a good entry point if the stock spikes to this level. If momentum continues south, go with the flow and buy your positions at the current trading price. The closest support level is $45, which should allow us some easy profits. BUY PUT NOV-50 ALD-WJ OI=765 at $1.38 SL=0.00 High Risk! BUY PUT NOV-55*ALD-WK OI=542 at $4.00 SL=2.50 Average Daily Volume = 1.80 mln Chart = http://quote.yahoo.com/q?s=ALD&d=3m **** LTD - The Limited $38.06 -1.69 (-2.13 this week) The Limited is a distributor of men's, women's and children's clothing. LTD owns and operates an approximate 3,700 stores across the U.S. under the names The Limited, Express, Lerner New York, Lane Bryant, Structure, and Gaylan's Trading Company. The Limited also owns 84% of Intimate Brands which operates Victoria's Secret and Bath and Body Works. LTD shares continued to decline steadily today, as LTD has lost over three dollars so far this week. LTD's chart paints a picture perfect downward trend with nothing to show in the way of rallies other then a brief resistance rendezvous with its 10-dma earlier this month. LTD continues to forcefully break through any existing support levels. The next support is right around $35 and with the selling pressure combined with sector weakness, LTD should have no problem making a move down to test that support in the near future. The reason for this decline seems to be an erosion of consumer confidence and a lackluster October sales outlook as economic concerns continue to plague the market. The retail sector in general has been struggling to gain a foothold and survive into the upcoming holiday season. We will be watching closely for a shift in momentum in case traders try to rally this stock ahead of their earnings report due out on Nov 19th. BUY PUT NOV-45*LTD-WI OI=160 at $7.25 SL=5.50 BUY PUT NOV-40 LTD-WH OI=609 at $2.94 SL=1.50 Average Daily Volume = 807 K Chart = http://quote.yahoo.com/q?s=LTD&d=3m **** BBY - Best Buy Company $52.19 -5.50 (-7.13) The US's #1 consumer electronics specialty retailer, Best Buy sells home office products, consumer electronics, entertainment software and appliances. Ahead of rivals Circuit City and Tandy in sales but not store count, Best Buy has more than 310 stores in about 40 states coast to coast, with heavy concentrations in the Midwest, Texas, California, and Florida. Today it was reported that U.S. consumer confidence fell for the fourth straight month in October, dragged down by the worries over volatile stock market and growing unease about America's economic outlook. Most consumers look for business conditions to worsen over the next six months and job availability to decline, and fewer expect incomes to rise. Best Buy, which has profited greatly from consumer's falling in love with electronic gadgets and surround sound technology, has trained investors to expect sales and earnings to exceed analysts estimates. And investors have rewarded the stock. But as electronic goods become commodities and competitors rush in to offer the lowest possible prices, investors face the possibility that Best Buy's amplified performance will be unplugged by slowing sales growth and profit-margin growth. A Salomon Smith Barney analyst has recently downgraded the stock to a Neutral from a Buy after second-quarter sales failed to live up to his estimates. The concern is that the competitive environment this Christmas could impact the company's ability to achieve sales and earnings that justify current valuations. The stock today received a sell first and ask questions later beating. The economic data was enough for the carnage. The selling pressure looks to be far from over. Today on heavy volume the stock lost $5.50, closing the day at the bottom of the trading range at $52.19. Wall Street is not waiting for Christmas. Another indication of continued momentum to the downside is that Option volume picked up dramatically today with Implied Volatility sky rocketing. Put contracts increased by 2,275 at the CBOE and the AMEX combined. Confirm continued selling pressure before entering a new position. BUY PUT NOV-55 BBY-WK OI=2462 at $4.88 SL=3.38 BUY PUT NOV-60 BBY-WL OI=2210 at $8.50 SL=6.50 BUY PUT DEC-50 BBY-XJ OI=2419 at $3.75 SL=2.38 Average Daily Volume = 2.03 mln Chart= http://quote.yahoo.com/q?s=BBY&d=3m ******************** PLAY OF THE DAY- PUT ******************** CMGI - CMGI Inc $103.56 -3.69 (+0.44 for wk) CMGI is one of the chief architects of the Internet. What began as a direct marketing firm has become a prolific investor in the future of the Internet. CMGI's venture capital are @Ventures, a savvy trend-spotter boasting a portfolio with stakes in more than 40 Internet companies (including Lycos and Raging Bull). It also owns 83% of search engine AltaVista. CMGI's Internet Group includes a string of majority-owned companies (including Engage Technologies, Planet Direct) and offers services such as Web hosting. About 80% of CMGI's revenue comes from fulfillment and mailing list services. Sunday's Write Up The bell-weather Internet stocks like CMGI held up for most of the trading day on Friday with it trading as high as $106.22, but succumbed in the afternoon trading to selling pressure in the sector due the poor earnings report from INKT. CMGI closed the trading day at $103.13, well off the intraday highs and also below a major support level of concern at the $104.25 level. CMGI was also flying high in early morning trading because of their 89% ownership in Navisite which went public on Friday. Navisite is an Internet application service provider that ended the day positively. The interest in the IPO was its connection to CMGI. We cautiously remain in this play, but until strong momentum and strong volume converge to close the shares above current overhead resistance levels near $104.50, we will stick with it. If you have not been stopped out, keep trailing stops tight. Current support still sits at the $103 level. Tuesday's Write Up The shares of CMGI remain volatile. Yesterday saw the shares trading up heavily on the back of the news that AltaVista (company owned by CMGI)will spend $120 million in advertising through July. Today with the overall stock market still worried about rising interest rates and other market issues that seem to have paralyzed stocks overthis current short term, CMGI remained under pressure. After some early market momentum in the Bellweather Internet stocks, it gave back all of the gains from yesterday and today after profit takers stepped back into the market in a significant manner. Although the volume in the shares were trading lower than average with the shares closing the day just above the lows at $103.56. Ahead of the Economic Data to be announced on Thursday, the shares of CMGI should remain volatile with a bias to the downside. There still has not been enough volume to go along with the intra-day price increases to sustain an upward trend in the shares of CMGI thus far. We remain bearish going forward, but cautious because positive news has been interrupting the downtrend almost daily. If you enter into a new position at this point, keep this one on your radar screen, it should be watched closely for intraday swings in momentum. Keep the stops tight. Today's low $103.50 should be taken outto the downside as trading resumes tomorrow. BUY PUT NOV-105*GCB-WA OI= 632 at $6.88 SL=4.75 BUY PUT NOV-100 GCB-WT OI=1498 at $4.50 SL=2.75 Average Daily Volume = 4.9 mln Chart = http://quote.yahoo.com/q?s=CMGI&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ A New Look For The Dow.. Monday, October 25 Blue-chip stocks consolidated Monday as investors took profits from last week's rally and again focused on interest-rates. The Dow fell 120 points to 10,349, dragged down by finance and oil issues. The Nasdaq index managed to avoid the sell-off, closing relatively unchanged. The S&P 500 index ended 8 points lower. In the broader market, declining issues outnumbered advances 18 to 11 on moderate volume of 768 million shares on the NYSE. The 30 year U.S. Treasury bond was down 2/32, with its yield at 6.35%. Sunday's new plays (positions/opening prices/strategy): Electronic Data EDS NOV65C/NOV60C $1.00 debit bear-call Global Telesystem GTSG DEC27C/NOV27C $0.62 debit calendar Aware Inc. AWRE JAN30C/NOV35C $4.25 debit diagonal EDS was the first candidate in Monday's new plays and the stock price opened almost $3 higher on pre-earnings speculation. The spread credit was significantly larger than our target and we adjusted the initial price accordingly. The play was available at $1.00 credit during the first hour of trading. AWRE was our next position and the stock cooperated by falling $1.43 in the first few minutes, allowing a brief period to open the spread at the suggested entry of $4.25 debit. GTSG was also lower at the open but the market-makers adjusted the premium disparity in the options before trading began. The best price in the new volatility spread was well above our recommended entry. We will track the position with an initial debit of $0.62. Portfolio plays: The falling bond market continues to plague equities and new concerns arose today after remarks from the European Central Bank's chief economist. He commented that economic conditions are improving in Europe and there is now an increased risk of inflation there. An increase in foreign interest rates would put additional pressure on the U.S. equity markets. In other economic news, sales of existing homes fell 2.1% last month on rising mortgage rates. Most analysts had expected September's sales to be slightly higher. There was favorable activity in the spreads portfolio today as many of our new small-cap issues outperformed blue-chip stocks. Talk.com (TALK) was the leader of that group after First Union reiterated their STRONG BUY rating (and the $51 target?). The stock moved up quickly at the open and finished $1.50 higher. Anesta (NSTA), Cabletron (CS), MessageMedia (MESG), and Zoltek (ZOLT) also made favorable moves as investors departed big-cap issues in anticipation of rising interest rates. There were a few standouts in the technology sector. CMG Incorporated (CMGI), Gemstar (GMST), JDS Uniphase (JDSU) and Sun Microsystems (SUNW) all climbed higher and they were among the stocks that held up the NASDAQ in the wake of a the market slump. Tuesday, October 26 Blue-chip stocks closed lower Tuesday even as the most-watched index was adjusted to better reflect technology in the economy. The Dow was down 47 points at 10,302 after announcing its newest members; Home Depot (HD), Microsoft (MSFT), SBC Communications (SBC) and Intel (INTC). The Nasdaq composite ended down 4 points at 2,811 while the S&P 500 index closed 11 points lower at 1,281. In the broader market, declining issues outnumbered advances 18 to 11 on moderate volume of 873 million shares on the NYSE. The 30-year U.S. Treasury bond was down 11/32, with the yield up to nearly 6.38%. Portfolio plays: Our spreads portfolio ended mixed today after Federal Reserve officials again warned investors of the possibility of higher inflation. Most analysts already believe that rates will soon be adjusted higher and today's comments by Federal Bank of San Francisco President Robert Parry may have sealed our destiny. In his speech, he asserted that strong domestic spending along with growing demand overseas posed a risk of accelerating U.S. inflation. Investors are now awaiting the U.S. gross domestic product figures due out Thursday, which should give more clues as to what the Federal Reserve's policy setting group will do when they meet on November 16. One of the highlights of today's activity was a gap-up, at the open, by Aware Incorporated (AWRE). The stock moved quickly to $35, offering a $5.00 credit for early exit on our new bullish diagonal spread. The spread was expected to be in place through at least one expiration period but some of you may have chosen to take the quick and easy profit. Another move that took us by surprise was the fall of Visx Incorporated (VISX) to $68.50 in mid-session. Our bearish credit spread was easily closed for a debit of $0.25, a favorable short-term profit with three weeks remaining in the position. Talk.com (TALK) continued to move up as investors decide its real market value and future potential. Both positions in our bullish calendar spread are ITM but the play is still profitable. We plan to focus on the daily buying pressure for signs of consolidation or further upside movement. Be prepared to roll this position out-and-up to protect profits. JDS Uniphase (JDSU) dominated the big-cap technology issues, up $9 to close at $147 as new investors speculated the fiber-optic equipment maker will continue a history of beating expectations when it reports first-quarter results. Our bullish debit spread is now $30 ITM and you may consider an early exit to guarantee profits and move capital to another play. The Limited (LTD) is another debit spread that is now in profitable territory as the stock price fell to recent lows near $38. The problem with this issue is that we are still holding a bullish long-term position in the LEAPS/CC's portfolio. We expect it to get back on track as the Christmas season approaches. Another of our longer-term stocks, Polaroid (PRD) rebounded $1.31 today as bottom-fishing investors moved in on the recently battered company. The stock appears to be oversold in the short-term and may provide a good entry for a new LEAPS/CC's position. Price Communications (PR) was one of today's more disappointing issues, down over $2 after a Warburg Dillon Read analyst cut his rating on the wireless phone company to HOLD from BUY. He said the stock should have a reduced valuation based on an assumption that AT&T Wireless is probably no longer a potential acquirer. We hope the drop was due to short-term speculators exiting the potential merger play. Another position that is under-performing the portfolio is the Reader's Request play on Excite@home (ATHM). The stock price has fallen back below a support level near $40 and now it doesn't appear to have the upside potential of a few weeks ago. We will monitor the issue for any signs of a further slide in value and exit the position if necessary. As you know by now, the OptionInvestor.com is a major sponsor and exhibitor at the San Francisco Money Show this coming week. At the Money Show, we will be hosting a get acquainted session for our readers (on Thursday October 28th at 5:30 PM) that will consist of five breakout sessions on various types of option strategies. I look forward to meeting those of you that attend but unfortunately with this scheduled event, there will be no Spreads/Combos on Thursday. Questions & comments on spreads/combos to ray@OptionInvestor.com ********* NEW PLAYS ********* Today's new positions are low cost conservative plays based on the current price of the underlying issue and recent technical history or trend. The probability of profit from these positions is higher than other plays, based on the small disparities in option pricing. Current news and market sentiment will have an effect on these positions so review each play individually and make your own decision about the future outcome of the issue. TDFX - 3DFX Interactive $8.50 *** Cheap Speculation *** 3Dfx Interactive develops high performance, cost-effective 3D media processors, software and related technology that are designed to enable highly interactive, realistic experiences across electronic entertainment platforms, including personal computers, coin-operated arcade systems and location-based entertainment systems. 3Dfx Interactive products include the Voodoo family of accelerator chipsets, Voodoo Graphics and Voodoo Rush. In 1997, 3Dfx was at the top of the video performance pile and their Voodoo chips enjoyed a large following among PC gamers. Then they made some costly errors in production and things went downhill from there. Recently, the chief executive officer of the company resigned amid mounting financial losses along and failures to land TDFX a reasonable share of design contracts with major PC manufacturers. The resignation appears to have had a positive effect on investors and the company is working hard to regain its previous status in the industry. TDFX just announced an agreement with Cornerstone Peripherals Technology to develop high performance display solutions for business computer users. Cornerstone specializes in hi-tech large screen computer displays and graphics cards along with productivity software. TDFX will supply the core graphics card technology and Cornerstone will use its proprietary software to drive display resolutions to new heights. The partnership will enable business application users to benefit from cutting-edge graphics technology used in the enhanced 3dfx Velocity product. PLAY (conservative - bullish/calendar spread): BUY CALL MAR-10 FQ-CB OI=582 A=$1.38 SELL CALL DEC-10 FQ-LB OI=302 B=$0.56 INITIAL NET DEBIT TARGET=$0.75 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=TDFX&d=3m **** NTBK - Netbank $21.75 *** E-Commerce *** Netbank owns and operates an Internet bank through an FDIC insured federal stock bank in Atlanta. NTBK provides many convenient, cost effective and secure banking services to consumers using the Internet. Customers can access the bank on a seven-day-a-week, 24-hour-a-day basis from any personal computer, wherever located, by means of a secure Web browser or by ATM, telephone or U.S. mail. Internet banking stocks are gaining renewed interest and the business of electronic commerce will grow exponentially in the years ahead. With that kind of future potential, it's no wonder that NTBK traded as high as $250 (pre-split) earlier in the year. NTBK was on the move today, showing signs of a change in character after a three month long base near $20. The stock climbed to a midday high near $25 on heavy volume and now it appears that fund and institutional managers are moving back into the issue. We favor a conservative approach and the strong support near $20 should give this position a very high probability of success. PLAY (very conservative - bullish/diagonal spread): BUY CALL JAN-22.50 NAA-AX OI=331 A=$3.75 SELL CALL DEC-25.00 NQA-LE OI=753 B=$1.56 INITIAL NET DEBIT TARGET=$2.00 TARGET ROI=25% Chart = http://quote.yahoo.com/q?s=NTBK&d=3m **** PIXR - Pixar Animation Studios $40.50 *** A Big Move! *** PIXAR is a digital animation studio with the technical, creative and production capacities to create a new generation of animated feature films, CD-ROM titles and other related products. Their objective is to develop computer animated feature films with a new three-dimensional appearance that will appeal to audiences of all ages. Pixar is the company behind movies such as Toy Story and A Bug's Life. The company runs a computer animation studio and develops proprietary software systems which enable their unique animation to excel. Pixar believes that its proprietary technology, which enables animators to precisely control the motion of characters and sets in each frame, represents a breakthrough in the art of animation and results in a new look and feel, with images of quality, richness and vibrancy that are unique in the industry. PIXR reported better than expected third quarter results after the close of trading Monday and the stock gapped-up over $9 at the open today. The positive earnings results came as a surprise to investors after the company said last quarter that home-video and merchandise sales from their previous productions were below expectations. Now the company is back on track fundamentally and with the recent change in technicals, it should have very little difficulty holding above support at $36. The November 24 release of Toy Story II should also have a positive effect as the film is expected to generate millions of dollars in retail revenues from the sales of soundtracks, CD-ROM's and other merchandise. PLAY (conservative - covered-combo): BUY STOCK - PIXR A=$40.75 SELL CALL DEC-35 PQJ-LG OI=33 B=$8.00 SELL PUT DEC-35 PQJ-XG OI=69 B=$2.00 INITIAL NET DEBIT TARGET=$32.75 COMBINED ROI (MARGIN)=12% Chart = http://quote.yahoo.com/q?s=PIXR&d=3m ********* STRADDLES ********* The earnings onslaught continued Monday and the Dow components remained in the limelight as they reported quarterly results. Most of the announcements were favorable but they still failed to rally the blue-chip sector. Several major oil companies also reported earnings, but even their solid results failed to spark much enthusiasm from investors. One of our short-term straddles was Exxon Corporation (XON), the #1 U.S. oil company. They beat analysts' forecasts with strong earnings but the stock fell $3 to $74. Union Carbide (UK), another Dow component and short-term straddle position saw its share value drop to $59.50 after the chemicals giant said its earnings fell. Hartford Insurance (HIG) was the star performer of the session, climbing to a midday high near $48. Our straddle moved as high as $9.25 credit, a profit of $1.93 for the one-week position. Our new selection of Internet issues were fairly active Monday and the opening prices on American Online and Ebay were subject to extreme volatility. We recorded new positions in AOL but no straddle trades were observed in the EBAY or GNET plays; those prices are based on quotes at various times during the session. Here are Sunday's new straddles (positions/opening prices): American Online AOL DEC120C/D120P $18.75 debit Ebay EBAY JAN145C/J145P $41.00 debit Go2net GNET JAN55C/JAN55P $17.88 debit Note: After the close on Tuesday, EBay's third-quarter profits beat Wall Street expectations by a penny while revenue jumped 169%. The stock price fell sharply in after-hours trading and ended about $10 below its closing price during the day. ************ See Disclaimer in section one ************
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