The Option Investor Newsletter Thursday 10-28-99 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) ************************************************************ 10-28-99 High Low Volume Advances Decline DOW 10622.50 + 227.60 10637.70 10397.70 1,135,150k 2,194 883 Nasdaq 2875.22 + 72.70 2875.48 2830.24 1,245,806k 2,363 1,644 S&P-100 704.21 + 20.40 704.26 684.29 Totals 4,557 2,527 S&P-500 1342.44 + 45.73 1342.47 1298.06 64.3% 35.7% $RUT 422.81 + 6.31 422.81 416.76 $TRAN 3013.11 + 94.41 3013.81 2920.39 VIX 22.45 - 3.86 23.53 21.85 Put/Call Ratio .58 ************************************************************* What Was Everyone So Worried About? One look at the closing numbers for the stock market is all it takes to know how this morning's ECI and GDP numbers came in. Traders were waiting for those to reports before deciding what to do and judging by today's very strong upward push they liked what they saw. The much-anticipated results say a lot about the strength of the economy, which is truly impressive. The Gross Domestic Product report showed that for the third quarter the GDP grew at an astounding 4.8% annualized basis, which is much higher than the 3.7% and 1.9% reported in the first and second quarters and higher than the 4.4% expectation. That kind of growth is almost unheard of, particularly when you combine it with the relatively low inflation and interest rate environment. The ECI, or Employer cost index grew 0.8%, down from the 1.1% growth reported during the second quarter and lower than the 0.9% economists had expected. That kind of economic growth combined with low inflation is a very good sign. The weekly jobless claims report also came in today and the readings were the lowest they have been in over a month. While these types of data are just small snapshots of the economy, they basically tell us that productivity and earnings are growing while expenses are growing at a much slower pace. It doesn't take a genius to figure out that is how wealth is built. Numbers, however, don't always tell the whole story and in many cases inflation often does not show up in reports until months after the fact. Those who were trying to make a short-term play on the economic data this morning by putting in buy orders might have been a little disappointed by what they paid. As the market opened it shot up 150 points before options even opened for trading. Many stocks gapped open much higher than they closed so much of the opportunity for getting in the market was gone. After the first hour or so the indexes traded pretty steady for the rest of the day. It is notable that the higher prices did not attract any significant selling any time during the day. The following hourly chart shows how far the Dow has come the last two weeks. The Dow closed at 10,622.53, up a very strong 227.64, or 2.20% and the NASDAQ finished the day at 2875.22, up 72.70, or 2.59%. If you look at the "new" Dow which will begin trading on November 1, the Dow would have been up 273 points. A couple of days like this and the NASDAQ will again be at record levels. In a turnaround the formerly under performing S&P 500 put in the strongest performance of the day. It jumped 45.73 points, which is 3.53%, to close at 1,342.44. I did not want to even go back and find the last time the S&P had a one day move that big. Just a couple of weeks ago the S&P had only risen about 3% on the year. Even more than the actual point changes in the indexes, internal market data tell the story of just how strong today's move was. Volume on the NYSE was the heaviest it's been since June at 1.13 billion shares traded. The NASDAQ hit 1.2 billion and what makes the strong volume interesting is that about 83% of today's volume was focused in rising stocks. Advancers beat decliners about 21 to 9 on the NYSE and about 3:2 on the NASDAQ. The new high/new low data has greatly improved from a couple of weeks ago. New lows still lead on the NYSE, but their lead has narrowed significantly. The tally for today was 122 to 72. A few weeks ago that new high figure was in the single digits and new lows topped 500. It is apparent that most stocks are off of their lows. On the NASDAQ the new highs lead 121 to 116. It would take too much space to list all of the sectors that performed well today, but the clear winners were the financial stocks. The positive economic numbers and the drop in interest rates today put banking stocks in higher demand than Pokemon junk at an elementary school. Big banks such as American Express, JP Morgan and Citigroup all made big moves and closed near 52-week highs. The PHLX/KBW Banking index rose an eye-popping 6.3% and is up about 20% from its recent low 8 trading days ago. Brokers fared even better with the AMEX Broker/Dealer index rising 8.3% in one day. Telecommunications and semiconductor stocks were not far behind, with the PHLX Telecom index rising 5.2% and the SOXX index up 5.9%. The CBOE Software rose 3.9% and retailing stocks bounced back from a rough Tuesday, finishing up 5.2%. The Internet sector lagged a little, with TheStreet.Com Internet index ascending a mere 1.8% (a very good day most of the time). So did anybody (aside from those holding short positions) lose money today? Sort of. The Oil Service index fell about 2.8% and the PHLX Forest and Paper Product index fell .3%. The only sectors that suffered were in commodity arenas, which normally do better in more inflationary environments. Other than that most every sector index is up for the day. Several more important earnings announcements came in today. Proctor and Gamble met estimates at 88 cents per share, meeting expectations. The Street must have liked that, since the stock rose 5.4%. MCIWorldcom announced results that tripled last year's figure, beating estimates by a penny, and CBS beat estimates by a cent, with income of 5 cents per share. As we have mentioned in earlier market comments, earnings this quarter have been spectacular, with only 11% of companies falling short of expectations and about 65% of companies exceeding estimates. Bond prices got a huge boost from the GDP and ECI numbers as well. The yield on the 30-year Treasury bond fell to 6.25%, after hitting 6.4% on Monday, and the price rose over a point to 98 9/32. That kind of action eases the minds of both stock and bond traders, causing some analysts see a possible light at the end of the tunnel. Of course when it's been dark for a long time your eyes can play tricks on you. Time will tell. Most analysts are now expecting the Fed to raise rates another quarter point when the FOMC meet again on November 16. They have already raised rates twice this year and one more would neutralize the three rate cuts the Fed made last year. The good thing about the current situation is that with most everyone expecting a rate hike, that is already priced in and if they surprise us it will only help. It's hard to disappoint someone with low expectations. Going forward the market outlook is much more positive than it was just a week ago. From a technical point of view yesterday's late-day turnaround and today's big spike upward on huge volume makes a better bullish argument than bears would like. It is definitely too early to sell all of your possession and load up on tech stocks, but after October ends the fourth quarter is typically a good one. The S&P 500 broke out to the upside of a trading channel formed in July. While you never know for sure a market bottom is in place until after the fact, support levels have held and today was one of the strongest days in recent memory. At these times it is still good to keep stops tight because there is still downside risk, but the bulls seem to be taking control. Good luck and happy trading Chad Poulson Research Analyst ********** STOCK NEWS ********** It's been a Bad Week for Mr. Softee By S.P. Brown The bluest of the blue-chips, Microsoft Corp. (MSFT), did it again last week. The world's most highly valued company trounced quarterly earnings estimates. http://www.OptionInvestor.com/stocknews/102899_1.asp **** To Be or Not to Be: Will Financials Remain the New Market Leader? By Cindy Christ Despite impressive two-day gains in financial stocks, torrid growth in the U.S. economy left some traders wondering whether the sector can sustain recent gains and put some muscle in the aging bull market. On Thursday analysts were closely monitoring financial issues, which often act as a leading indicator during market turns and head major upward moves. Investors should watch out, they said, for any signs of profit taking, a shift that would undermine the sector's new leadership status. http://www.OptionInvestor.com/stocknews/102899_2.asp *************** Market Posture *************** As of Market Close - Thursday, October 28, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,750 11,320 10,623 BEARISH 9.23 SPX S&P 500 1,350 1,420 1,342 BEARISH 9.16 OEX S&P 100 690 725 704 Neutral 10.28 * RUT Russell 2000 440 465 423 BEARISH 9.14 NDX NASD 100 2,320 2,500 2,540 BULLISH 10.28 * MSH High Tech 1,120 1,250 1,253 BULLISH 10.28 * XCI Hardware 950 1,050 1,015 Neutral 10.15 CWX Software 750 800 925 BULLISH 9.03 SOX Semiconductor 450 525 523 Neutral 10.19 NWX Networking 525 615 622 BULLISH 10.28 * INX Internet 450 525 479 Neutral 10.15 BIX Banking 660 690 678 Neutral 10.28 * XBD Brokerage 410 440 428 Neutral 10.28 * IUX Insurance 645 660 600 BEARISH 7.23 RLX Retail 915 960 872 BEARISH 7.23 DRG Drug 365 390 388 Neutral 10.19 HCX Healthcare 720 785 764 Neutral 10.19 XAL Airline 180 190 150 BEARISH 5.21 OIX Oil & Gas 280 315 293 Neutral 10.21 Posture Alert Thursday's relief rally, sparked by this mornings economic indicators, were of substantial size, with the NYSE trading 1.13 billion shares and the Nasdaq trading 1.25 billion. All sectors were up strong, with Brokerage (+8.31%), Insurance (+6.57%), and Banking (+6.41%) leading the way. With today's action, several sectors technical indicators have vastly improved. As such, the Nasdaq 100, Morgan Stanley High Tech, and Networking sectors were all upped to BULLISH from Neutral, while Banking, Brokerage, and the OEX were upped to Neutral from Bearish. A detailed description of our Market Posture and its applications can be found at: /members/marketposture *************** Market Sentiment *************** Thursday, October 28, 1999 Hunting all Bears! Interest rates were just breaking new highs! The Dow traded at the 10,000 benchmark and even traded below for a brief stint! Inflation is creeping in, Y2K is around the corner, Greenspanisms, Ballmerspammed, and the world is ending! Just when the bears were finally getting comfortable (and confident), the bulls come stampeding in. October of 1999 is really looking (and feeling) like October of 1998. Hopefully, we'll get the same rally over the next two months like we ended '98! On Tuesday, we had a cautious tone for the market, and deservedly so. Microsoft and Intel were just added to the Dow, yet neither could hold any gains. This did not sit well with many people, including us. We did mention, however, that the Trump Card was the Fed and that this Thursday's economic indicators could cause a change in perception. And boy did it ever! The volume on both exchanges surged to over one billion, with the NYSE trading 1.13 billion, and the Nasdaq trading 1.25 billion. Can you smell the fear in the bears now? With sentiment still in bearish territory, and short interest still extremely high, we could see a powerful continuation to today's rally over the next several weeks. However, still be cautious. Several indexes (including the Dow) have yet broken the highs from several weeks ago, and thus, we could see resistance very shortly. However, the bad news bears are quick to run-and- hide, so only time will tell if the hunters are now the hunted! BULLISH Signs: Bears have quick triggers: After being beaten up for the last several years, bears are quick to run & hide, and will cover short positions in a flash. 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. Russell 2000 & S&P 500: The RUT and SPX are still weak, but are showing signs of improvement. Interest Rates: The yield on the 30-yr Treasury is now off the 52 week high, but is still in the danger territory. BEARISH Signs: 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. 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 Thurs Benchmark (10/22) (10/26) (10/28) Overhead Resistance (705-720) N/A N/A 16.80 OEX Close 685.63 678.67 704.21 Underlying Support (685-700) 2.32 2.12 2.11 Average ratings: Resistance levels 2.0 / Support Levels .5 What the Pinnacle Index is telling us: Based on 10/28, overhead resistance is extremely heavy, yet underlying support is light. Put/Call Ratio Friday Tues Thurs Strike/Contracts (10/22) (10/26) (10/28) CBOE Total P/C Ratio .69 .68 .67 CBOE Equity P/C Ratio .46 .46 .45 OEX P/C Ratio 1.67 1.18 1.52 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (10/22) (10/26) (10/28) Puts 640 / 11,789 670 / 11,184 670 / 11,525 Calls 690 / 7,562 690 / 7,231 690 / 8,175 Put/Call Ratio 1.56 1.55 1.41 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 28, 1999 22.63 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 Wed Thu Week Dow 10622.53 -120.32 -47.80 92.76 227.64 152.28 Nasdaq 2875.22 -0.57 -4.48 -8.95 72.67 58.67 $OEX 704.21 -3.25 -3.71 5.14 20.40 18.58 $SPX 1342.44 -8.02 -11.72 14.80 45.73 40.79 $RUT 422.81 -0.93 -1.97 0.98 6.31 4.39 $TRAN 3013.11 7.44 -41.39 89.50 94.41 149.96 $VIX 22.45 1.53 0.64 0.29 -3.86 -1.40 Calls Mon Tue Wed Thu Week KIDE 82.44 8.88 10.00 6.38 -2.81 22.44 Huge returns VRTS 101.13 -0.25 -4.13 3.81 7.50 6.94 Liftoff! LVLT 68.63 2.28 -3.09 1.50 5.56 6.25 New EMLX 143.25 7.38 -4.63 -4.50 5.75 4.00 Charged up SEBL 100.31 -2.50 -1.44 1.31 6.44 3.81 Snapped back GMST 85.38 3.13 1.06 -2.31 1.63 3.50 A favorite CMVT 108.25 -0.75 4.50 -1.75 1.44 3.44 Higher lows PCS 81.56 -0.75 0.56 2.06 0.81 2.69 Breakout QCOM 218.00 -4.63 -3.38 0.38 9.88 2.25 Back again! SYMC 45.44 -1.56 2.25 0.56 0.88 2.13 52-week high WMT 55.75 -1.13 -2.69 -0.25 2.75 -1.31 Comeback kid DELL 38.50 -0.69 0.38 -1.19 0.13 -1.38 Stalling VSTR 85.75 1.63 -5.25 -1.94 2.44 -3.13 New Puts INKT 96.63 3.94 -4.25 -7.13 1.00 -6.50 New BBY 54.06 -1.63 -5.50 -1.44 3.31 -5.25 Lackluster GT 40.13 1.50 -3.94 -0.94 -0.19 -3.56 Doomed PBI 43.50 1.00 -1.50 -2.25 -0.25 -3.00 52-week low LTD 38.75 -1.44 -1.69 -1.56 2.25 -2.44 Stays afloat LTR 68.50 0.00 -1.69 0.81 0.50 -0.38 Carnage! ALD 56.19 -1.19 -2.06 2.13 1.69 0.56 Hit the wall CMGI 104.88 4.13 -3.69 -0.25 1.56 1.76 Dropped BAC 64.00 -0.50 0.06 2.75 2.94 5.25 Dropped JPM 132.06 -5.44 1.19 7.13 3.56 6.44 Dropped CI 72.94 -0.50 -0.63 2.88 5.94 7.69 Dropped EXDS 81.81 3.38 0.06 0.13 4.56 8.13 Dropped 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. 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The Option Investor Newsletter Thursday 10-28-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. ************** TRADERS CORNER ************** Gone Fishing "If you caught a fish every time you put your line in the water, they would call it catching, not fishing." I thought about this quote, from a Jimmy Buffet book titled, A Pirate Looks at 50, several times this week. Last week, I paper traded, with mixed results. This week, I planned to make 2 trades on a total of 3 days. I stuck to the plan, entered a position on Monday, got out on Wednesday. On Wednesday, near the close, I opened and closed my second trade. On the whole, I should have been more patient this week, waiting for the market to confirm good entry points. I was catchin' not fishin'. Contract Symbol Sold Price Bought Price % Gain OEX Nov 680P OEYWP 25-Oct 11.75 10/25/99 14.75 20% OEX Nov 680P OEYWP 27-Oct 13.00 10/25/99 14.38 10% OEX Nov 680C OEYKP 27-Oct 18.25 10/27/99 17.00 54% My first target was a Nov 680 Put which I thought I would enter on Monday, if I saw a failed rally formation. The market sold off at the open, and I entered the position, thinking that this was the start of a major move down, perhaps below DOW 10,000. I bought the first half of the position at the ask, 14.75, and target shot the second half of the position, at 14.375. I decided on a stop loss of -20%, and set it for half of the play at 11.75. I decided on a limit sell of +30% for the other half of the play, and set it accordingly at 18.875. By midafternoon, the market had bounced back, getting some hope from dovish comments by some Fed officials. My edge going into the week was the VIX, which had put in a low at 22 last Friday. It was trading at 24 on Monday, and I thought things were on track for a continued move up. The Fed doves threw off the gameplan, and triggered my stop at the low of the day, which resulted in the sale of half of the position at 11.75. -20%. The lesson is to wait for confirmation, or for the formation that you are looking for. Fish, don't catch. Anyone can buy options. The key to making money is entry & exit. The second half of the play was doing better by the end of the day, Monday, so I elected to hold. On Tuesday, the markets were up on the DOW news. But all they could manage was +50 on this news? I elected to hold my position, even though it was trading as low as 10.5. By the end of the day, the reversal in the indexes made this look like a pretty good decision, as my contract closed near 17, and the DOW was down 50. On Wednesday, the NASDAQ started off weak, but the DOW held support at 10300. After lunch, things started to weaken, and I thought all was well. I made the mistake of watching the market from 2:45 to 3:00 EDT and, seeing a downtrend, left my computer. I came back at 3:30 and the DOW had put on a 75 point move. The VIX had broken back down to 25 or below. The VIX and the advancing v. declining volume indicators which I use were telling me that the market had reversed direction. I fumbled around trying to find out why, but recognized that I had to make a decision. I changed my limit sell on the OEX Nov 680 Puts, and I was filled at 13, down from 16 - 17 just 30 minutes earlier. I also made the decision to enter the OEX Nov 680 Call. I found a report saying that the financials were rallying, lead by AXP & JPM. I confirmed this on my qcharts screen by looking at the leaders in the S&P 100 list. I bought the calls at 17.5, and watched the averages for the last 20 minutes. They continued up, but then stalled. Would the ECI be non-inflationary, lessening interest rate fears, thus benefiting AXP & JPM? I didn't know, so I elected to close the position with a small profit with a limit sell of 18.25. Overall, I cannot be too critical of my performance this week. Though I could have waited for a real failed rally to make the OEX Put play (Tuesday would have been ideal), I saw a move on Monday morning which could have been the start of a large move down; lesson -- don't trade during amateur hour. The exit on the play was not great, and I learned (again) that stops don't really give you security. Good entry points are the only real security. I definitely blew it by not watching the last hour of trading BEFORE a key financial report, which I expected to provide a trading opportunity. Given that I had programmed 3 days of trading, I should have "saved" one day for Thursday, but now I will follow the plan, rest, and get ready for next week. My snap shooting the Call was OK, since my indicators all pointed towards at least a short term reversal. My decision to exit the play ahead of the ECI uncertainty was also OK. 4% profits aren't anything to write home about, but they are better than a loss. Most importantly, I limited my capital in plays this week, so that the loss that I suffered is not very bad in the larger picture; maybe 1.5% of my trading capital. I did get back in the market, got a feel for the game, which no amount of paper trading will give you, and am ready to give it another shot next week. Janar Wasito janar@OptionInvestor.com 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: ***** EXDS $81.81 +4.56 (+8.13) The markets were just too strong for this put play as investors reacted to the good GDP and ECI figures. EXDS investors rallied behind the broader markets, lifting the stock to levels beyond our comfort. We were hoping that last weeks spike would render rewards for put positions this week. Unfortunately, the broader markets didn't help the situation by tacking gains with unquestionable strength. This helped EXDS break through its resistance at $80 and finish the day on a strong note. Because we didn't get the bounce at $80 we have decided to drop this play and concentrate our efforts on those with more potential. PUTS: ***** CI $72.94 +5.94 (+7.69) Ouch, a solid smack from a Goldman Sachs upgrade to CI has left our play with a lump on its head. Unfortunately, it is not the kind that leaves you slightly dazed. It is the kind that had knocked us right out of a play. Goldman raised their rating from a Market Perform to a Trading Buy (whatever that means). If you throw in the market-friendly economic data that we saw on Thursday and it is no surprise that we are stopped out of the play. The trend we had been playing was gone once CI broke out above the 10-dma at $66.50 and we are dropping it from the put list. It looks like the pessimism surrounding the HMO stocks has been somewhat lifted and CI is due to participate in the relief rally. JPM $132.13 +3.56 (+6.50) Who blew out the fuse? With both the GDP and Durable Goods reports coming out benign, JPM got a huge boost with the rest of the financials. Remember when we said that JPM is a big player and they will be out front on any news? Well the last two days are a confirmation on that! From the open on Wednesday JPM was on the move to higher ground and you should of been stopped out in the morning trading session. As the day continued, the stock put on steam and tacked on an impressive $7.13. Today when the GDP report came out investors cheered and rallied the market back over 10600 taking JPM with it for another $3.56. For now it is time to say goodbye any puts on JPM. BAC $64.00 +2.94 (+5.25) After the ECI and GDP data came as a relief to Wall Street, which had worried the Federal Reserve would raise interest rates one or two more times. The price of BAC finally caught up with the Moneystream and Volume which has been strong for the last week or so. The question was, were the fears of rising interest rates, and the Y2K bug going to keep the bond market and the U.S. Financials and Money Center banks under pressure? Well, we got our answer today, and the answer is "NO". The fear, at least for today is not there anymore and the momentum to the upside has now resurfaced for stocks like BAC. At the end of trading on Wednesday, when the rumor was out that the Economic data to be reported would be below expectations, BAC closed the day at the high end of the trading range at $61.06, which completely demolished our resistance point at $59.50. This was our stop, and after the rumor's were made a reality today, we want to cover any short positions. Until current market conditions change. CMGI $104.88 +1.56 (-1.75) On the back of more positive news for CMGI and an overall up day on Wall Street, the shares of CMGI closed the day above and through our resistance point of $104.50. CMGI, with its investments in several advertising companies saw its shares rise up over a point after pulling back from an intraday high of $106.75. It was reported today that Ancestry.com is among the leading subscription based Internet Services. Ancestry.com recently received a second round of Financing, featuring the support of such investors as AOL, Compaq Computer Corporation and CMGI just to name a few. From a technical standpoint the volume still remains weak, but the price increases at this point are more than we can live with. The volatility and the non-stop good news has pushed the risk reward out of our favor and we will choose to close this one out for now. ***************** PICK NEWS - CALLS ***************** PCS $81.56 +0.81 (+2.69) Yesterday we received the breakout we were waiting for. Roaring forward, PCS broke above its resistance level at $79 and managed to establishing a new 52-week high at $81.44. Today, investors' sentiment was on the flat side, which left the stock fractionally higher for the day. Considering the stock set a new high, some consolidation would be expected before moving to higher levels. Since the stock broke $79, the question is how much higher investors are willing to carry the stock. $79 was our previous resistance point but should now act as a new support. This would be a good price for entering new trades, but of course, confirm a bounce before doing so. With the help of today's good economic numbers, lets see if we can maintain this rally in the broader markets and PCS. There was no recent news on the stock that would alter our play at this time. KIDE $82.44 -2.81 (+22.44) After roughly a 33% gain in the first three days of this week, KIDE finally wore itself out and had to take a bit of a nap. KIDE spiked up at the open, setting, you guessed it, another new 52-week high. KIDE then made a downturn, heading as low as $78. We were expecting to see some profit-taking and it looks as though that is just what has happened. Not to worry! The stock has nearly tripled since the beginning of October so KIDE giving back a mere $2.81 is a very small drop in a very big bucket. KIDE made a solid bounce at $78 with a lot of volume, a bullish indication of continuing investor interest. Buyers won out and KIDE began trucking right back up to the close. We do see some continuing resistance forming right around $86. Many of the call option premiums continued to climb today and are inflated at this point, therefore, we re-iterate that a new entry is not in your best interest unless you have a HIGH-RISK profile. WMT $55.75 +2.75 (-1.31) A good GDP report, an upcoming earnings announcement, the biggest shopping day of the year just four weeks away and holidays drawing near... what more do you need? With over 8 million shares traded, WMT has once again broken through $55 and spent the afternoon trading above that level. WMT closed just below the high of the day, which combined with the volume level, is indicative of strong investor interest. WMT has also broken through and is trading above its 10-dma of $54.03. It looks as though support is holding right around $55, which should make a solid entry point for the earnings run. WMT has been making numerous cameo appearances in various company press releases, usually following "will be sold at retail giant...". WMT seems to be a topic of great interest in Britain as well, since their takeover of Britain's Asda in June. A statement was issued by the British government on Wednesday, as many are concerned that WMT has been receiving special treatment as they make their way into the English market. The government "emphatically denied" any relaxation of planning procedures in favor of WMT. And now, a challenge for your day: Say Wal-Mart with a British accent. GMST $85.38 +1.63 (+3.50) Gemstar made a good move in the right direction today and closed just a dollar short the high of the day. This was good news as GMST struggled through trading yesterday, dipping as low as $82.50 (which would have made for an excellent entry) and held support at $83.50. Support held a bit higher today in the neighborhood of $84.50. GMST is trading nearly $6 over its 10-dma, a bullish indicator. We recommend waiting for a breakthrough of the resistance that has formed at $86 to confirm positive momentum before making a new entry. Gemstar was given a nice bump up in intraday trading today, compliments of very kind words spoken by Mark Greenberg, the fund manager of the Invesco Leisure Fund. In an interview on CNBC, Mr. Greenberg said that Gemstar was one of his favorite holdings because of the direct interaction capabilities it grants to customers. CMVT $108.25 +1.44 (+3.44) Wish we had more good news to report on Comverse with the great performance in the markets today but CMVT was rather range-bound all day. We have had a good week on CMVT and, encouragingly, the intraday lows are getting higher as we go, but volume was light today. The main catalysts are still in place for an earnings run, possible anticipation for a split announcement and the addition to the S&P 500. The 10-dma would be a good entry target if we sustain any kind of a pullback. The 10-dma is currently at $102 but gaining rapidly. Resistance is at the old high of $112.50. We would expect a pullback after today's market gains so wait for a good entry. We are likely to see volume pick up more as we approach the earnings date at the end of the month. EMLX $143.25 (+4.00) Ok, the rest is over and its time to start the climb again. EMLX took another breather on Wednesday and held the line of support closing at $137 down $4.50. Today with the broad market rally, EMLX charged ahead and took back $5.75 of the last two days $10 dip. This stock has been holding ground at $137 for the past four days building a nice base of support to launch from. As the market continues to rally, EMLX will start to make its move for its high set last Friday of $161.75. With October over and no major panic selling event, investors will now concentrate on the up coming FOMC meeting and the possible interest rate hike. But it appears that the market may have digested another rate hike so if the Feds follow through it should not effect the markets or EMLX. The move up today was on average volume indicating the sellers are pretty much out and buyers are stepping back in. If the market continues its rally tomorrow make sure EMLX holds $137 before you get on board for the next ride into the November 18th shareholder vote. VRTS $101.25 +7.50 (+6.94) Two leaps forward, now that's more like it! Wednesday VRTS was pretty much flat on the day until the last hour when the market rallied into the close. VRTS put on its hiking boots and started the climb to the top by adding $3.81. Today was a steady pace up and again in the last hour of trading, VRTS really stepped up the pace and lunged to close at the day high. With this strong advance we are only $6 away from a VRTS all-time high of $107.26. Volume was well above average and really picked up into the close indicating investors are confident this stock will keep on going. Watch for profit- takers tomorrow if we get a market pullback. Otherwise look for VRTS to continue it strides into their 3:2 split on Nov 22nd. In the news today, VRTS announced that British Telecom (BT) has selected them as their single strategic backup solution for their entire open systems environment. QCOM $218.00 +9.88 (+2.25) QCOM perked back up today letting us know there's still life left in this momentum/earnings play. The $9.88 advance was impressive! The Buy reiteration by analyst Pete Peterson at Volpe, Brown Whelan & Co was also a welcome gratuity. The big bounce from the proximity of its 10-dma ($207.04) is a promising sign that it will make a solid run into earnings. But new readers beware - time is short! OIN doesn't recommend holding over an earnings' announcement and QCOM is not an exception. The odds are in favor of a stock's general decline and it's just not worth the risk. So be forewarned - next Tuesday, November 2nd after the bell Qualcomm will report its earnings. If they announce a stock split we will look at re-entry later for the split run. SYMC $44.56 +0.88 (+2.13) The intensity of SYMC's momentum is not showing any signs of letting up. Since it first broke out above resistance ($40) following a powerful earnings report on October 20th, SYMC has consecutively hit new 52-week highs! Today the stock shot up to $46 mid-day to set the newest record however, the weak volume was an unfavorable aspect when compared to recent trading activity which sometimes reached levels 2.5 times its ADV of 885 K. If we are afforded a pullback in this momentum play then the stock's firm support level at $40 is a solid entry, otherwise you may have to look for an intraday bottom on the rise. Today Banc of America started coverage with a Buy rating and issued a target price of $60. In the news, Symantec announced that their Mobile Essentials Personal Edition software, used to adjust laptop and notebook setting to different locations, is available free to the public - for a limited time only. The software can be directly downloaded from their Website at www.symantec.com/me DELL $38.50 +0.13 (-1.38) Bullish analysts were encouraged by today's market performance, while our light at the end of the tunnel dwindled regarding DELL. The stock is apparently stuck at this firm support level of $38. DELL has been trapped in a trading range between this mark and near-term resistance of $40 since October 19th. When it does break out the move will be sharp, but WHEN is the million-dollar question. Today's lack of participation was a big disappointment. We decided to give the stock one more chance in the event it's just a late bloomer this time around. Perhaps the downgrade yesterday by Hambrecht & Quist to a Market Perform from a Buy was still fresh in buyers' mind during today's trading. There was lots of news surrounding Dell yesterday. The company announced the completion of its first ever acquisition of privately held ConvergeNet Tech. According to the terms, 6.9 mln shares of Dell common stock were exchanged for all outstanding shares and options of ConvergeNet - the deal is valued at approximately $340 mln. Dell also announced it entered into a strategic alliance with the Edgix Corporation, a privately held Internet content delivery company to speed the delivery of Web content. And according to Dataquest, Dell has taken the #1 position of PC sales in the US educational industry away from Apple computer, capturing 21% of the market share. SEBL $100.31 +6.44 (+3.81) SEBL snapped back with a flair after offering entry points during its recent period of consolidation. The stock is once again sizzling hot! In classic bull form, SEBL climbed straight up from the open setting a new 52-week high by 3pm when it peaked at $101.25. Trading volume backed the strong breakout with over 2.73 mln shares exchanging hands compared to the stock's ADV of 1.66 mln. SEBL has a couple weeks to run before it splits 2:1 on November 12th. Firm support is established at $85, although it's evolving near-term around $93 and $95. So assuming the uptrend stays intact, that near-term range is a good point of entry into the play. In company news yesterday, Siebel Systems announced a Global Strategic Partnership with Unisys Corp (UIS) to provide comprehensive customer relationship management (CRM) and knowledge management solutions. Additionally it hit the press that Siebel Systems is likely to expand its CRM partnership with IBM; strategically position itself against Oracle, an upcoming CRM rival. ***************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Thursday 10-28-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. **************** PICK NEWS - PUTS **************** ALD $56.19 +1.69 (+0.56) After closing on the lows of the day Tuesday, it would appear as though the stock hit a brick wall. On Wednesday shares of the conglomerate opened right where it closed Tuesday and began to reverse. ALD added $2.13 yesterday on volume of 2.28 mln shares. This morning with the broader markets getting new life on the strong economic data ALD jumped another $2.13 to $56.63 in the first 5 minutes of the session. ALD drifted sideways for most of the rest of the session closing at $56.19. We are keeping ALD as a put play for at least one more day. We mentioned Tuesday that we could see a bounce back to the resistance level of $56.00 which we have had. Technically we have a couple of interesting points. ALD did close solidly back over its 10-dma which is at $55.36. On the other side of the coin, ALD came up and just penetrated its 200-dma which sits at $56.50. In order to stay on our put list, ALD will need to rollover and turn south again. At this point ALD has given us no opportunities to buy puts. We are strongly suggesting not entering a new play on ALD until it resumes its downward trend through the $54.50 area with some convincing momentum, as the volume in the move up the past two days has been extremely solid. LTD $38.75 +2.25 (-2.44) With the GDP numbers doing their part to help relax the inflation fears, the market decided to rally today. The Limited decided to participate in today's market rally following a day in which LTD took back another $1.56. In trading on Wednesday, LTD worked steadily downward to flirt with a rather weak support of $36. LTD closed yesterday just pennies above the low of the day, indicating a continuing lack of investor interest. LTD continues to trade nearly $2 below its 10-dma of $40.31. Despite the positive day, there are enough bearish indications to believe that LTD will continue on with its downward trend where it left off yesterday. Though the retail apparel sector in general had a very strong day, we still see continuing weakness and that the holidays are still far enough away that there are sure to be more short-term losses to come. With earnings mid-November, it is a good idea to use stop loss orders. GT $10.13 -0.19 (-3.56) Just as we expected, good economic numbers sent most stocks soaring today, as investor took advantage of the situation. Despite the euphoria, GT wasn't invited to the party. As we mentioned earlier, now that GT has been dropped from the DJIA, fund managers are readjusting their positions by selling the stock. We expect this selling to continue for the near-term, making our put positions even more attractive. When placing new trades, wait for GT to break through $40. Sometimes, even numbers will act as psychological supports. If the stock breaks this level there's no telling how far the stock may fall. The nearest resistance level for GT is $45, which previously acted as a support. In the news, there is plenty of reading on GT concerning the recent shuffle in the DJIA. For additional reading, refer to Yahoo news under the symbol GT. PBI $43.50 -0.25 (-3.00) PBI continues to hit 52-week lows as we suspected, and the downtrend remains in place. Trading as low yesterday as $42.50. Today it bounced nicely off of the lows with the overall market and the announcement that a division of the company would be launching a new internet based newsgroup service. This information and the overall market bouncing back was not enough to buck the downward trend, the shares fought their way back down to close off 1/4 for the day. Looking at the charts we see a technical picture that has remained steady, with the volume strong, but the Moneystream is still supressed. Until this picture changes we are expecting lower prices, but will choose to be cautious after nice gains over the last week. Keep stops tight if you are currently holding a position or if you choose to enter a new position at the current levels. Resistance sits up at the $46.69 level, with support at $43. LTR $68.50 +0.50 (-0.38) U.S. stocks soared today after the Labor Department reported that workers wages and benefits are increasing at a slower than expected pace. The report hopes that inflation is not threatening the economy's health. In other news, the New York state's highest court upheld a lower court's decision to dismiss five class action suits brought against U.S. tobacco companies, in a ruling industry analysts said highlights a trend in pending tobacco cases. This was positive news that had even the tobacco stocks soaring, at least in early trading. Looking at today's chart, it looks like traders bid the shares up for a one day trade, and then at around noon it looks as though the carnage resumed. The stock plummeted in the afternoon from an intra-day high of $71.75, to close at $68.50. We believe that traders took a step back and remembered that there is a jury decision to be announced in Florida on Monday. Going forward the downtrend is still in place below $71. Be cautious ahead of Monday's ruling. BBY $54.06 +3.31 (-5.25) It was announced today along with positive economic data that Best Buy is beginning to offer local shoppers Digital Cable video services from AT&T Cable services for customers seeking expanding TV-viewing options. Best Buy is the first retailer to offer digital cable TV service at its stores. This gave the shares a boost, but nothing that really has changed our bearish position going forward. The shares still look depressed and technically the volume remains average, and the Moneystream at the bottom of the range. The heavy volume and momentum that the financial sector experienced today was enough to change the short-term sentiment. There is a different sentiment for the shares of BBY, which still is under the cloud of doubt about the business conditions going forward. Few analysts on Wall Street expect the income to rise, they believe that it will get worse as we approach the holiday season. Look at this bounce from the recent lows as a possible trading opportunity. The resistance level still remains at $58.13, at these levels we will question the current downtrend, but we expect the selling pressure to resume, going back towards the low of the trading range from Wednesday $52.19 over the short-term. ************** NEW CALL PLAYS ************** VSTR - VoiceStream Wireless $85.75 +2.44 (-3.13) VoiceStream Wireless is a provider of wireless communication services. These services are available in the western United States. VoiceStream has an aggressive marketing plan, boasting more minutes, more features and more service. Jamie Lee Curtis is the always on-the-go spokeswoman for VSTR and her famous "hello" sign off is helping to make VoiceStream a household name. VoiceStream Wireless is a hot stock in a hot sector. VSTR has made some big gains in the last two weeks and continues to roll up. We saw a brief period of consolidation and some profit taking on Tuesday and Wednesday in a week which offered a trading range of nearly $12. On Thursday, VSTR made a bounce off of its 10-dma and looks to be continuing on with the upward portion of the channeling pattern that it has been trading in since roughly the first week of September. The challenge has been finding a good entry point. The recent profit-taking has thankfully provided us with just that. VoiceStream looks to have established support at $84 and this should be an considered for a point of entry on a new play. The next resistance should be at the all time high of $93.50 however, the channeling pattern has consistently yielded higher highs and therefore a breakthrough of this resistance is expected. We expect support from the 10-dma at $81.50 and again at the bottom of the current channel at $80. VSTR has plans to sell $1 billion in senior notes and senior discount notes in a private placement debt offering. The proceeds will most likely be used for possible acquisitions and debt repayment. On Tuesday, Paine Webber raised their price target for VSTR from $80 to $120. VSTR released earnings $0.05 below analysts expectations on Monday (another possible catalyst for Tuesday and Wednesdays sell off) but it included an extra $6.6 million charge. BUY CALL NOV-80 UVT-KP OI=260 at $9.00 SL=6.75 BUY CALL NOV-85*UVT-KQ OI=391 at $6.75 SL=4.75 BUY CALL NOV-90 UVT-KR OI=231 at $4.50 SL=2.75 BUY CALL NOV-95 UVT-KS OI=274 at $3.00 SL=1.50 Picked on Oct 28th at $85.75 P/E = N/A Change since picked +0.00 52-week high=$93.50 Analysts Ratings 13-4-1-0-0 52-week low =$16.38 Last earnings 10/99 est=-0.85 actual 0.90 Next earnings 01/00 est=-1.02 versus-1.03 Average Daily Volume = 1.63 mln Chart = http://quote.yahoo.com/q?s=VSTR&d=3m **** LVLT - Level 3 Communications $68.63 +5.56 (+6.25) Level 3 Communications, Inc. is a communications and Information services company that is building the first upgradeable international network optimized for Internet protocol technology. The Level 3 network combines local, long distance, and undersea networks, connecting customers end-to-end across the U.S. and in Europe and Asia. The company expects to complete its planned network construction in phases beginning in the first quarter of 2001. Level 3 is one of many firms that is building long-haul fiber optic networks nationwide. There is exploding demand for data services and low-cost voice communications that has led to the construction of dozens of new high-speed networks. Level 3 is continuing to build smaller networks in cities and business parks that link to their national networks. The new networks will represent the surface streets that will complement the firms new network superhighway. LVLT is selling there story, and Wall Street is buying. They were noted in a recent article as the "Toast of Wall Street". Since the earnings report the shares have traded up nicely with the volume and moneystream just beginning to pick up. The shares have shot up over ten points in less than a week, currently sitting at $68.63, the close for the day last Thursday was $57.31. We believe we are at the beginning of the convergence between prices and volume, which is bullish for the short-term. The momentum should continue, but make sure you confirm the uptrend followed by strong volume before you take a new position, seeing that it has had a nice run, it might be due for a pullback. A pullback to a major support level at $64.25 would be a good buying opportunity. After Wall Street received the third quarter earnings announcement in a favorable manner on Friday Oct. 22nd, Salomon Smith Barney was one of three firms that raised there near-term rating. And also set a price target of $80 a share. The revision was on a price basis, noting that its share price has declined steadily since its record high of $100.25. BUY CALL NOV-65*QHN-KM OI=1678 at $6.25 SL=4.50 BUY CALL NOV-70 QHN-KN OI=2332 at $3.13 SL=1.38 BUY CALL DEC-65 QHN-LM OI= 983 at $8.38 SL=6.38 BUY CALL DEC-70 QHN-LN OI= 964 at $6.00 SL=4.25 Picked on Oct 28th at $68.63 P/E = N/A Change since picked +0.00 52-week high=$100.13 Analyst Ratings 5-3-1-0-0 52-week low =$ 29.88 Last earnings 10/22 est= -0.51 actual= -0.43 Next earnings 02/18 est= -0.65 versus= -0.11 Average daily volume = 1.78 mln Chart = http://quote.yahoo.com/q?s=LVLT&d=3m ************* NEW PUT PLAYS ************* INKT - Inktomi Corp. $96.56 +0.94 (-6.50 this week) Inktomi Corp. provides fast Web search services, which can be customized. One of the top sites on the Web, Yahoo uses the Inktomi search application. Inktomi's Traffic server is a large scale network caching application licensed to Internet service providers. INKT also makes online shopping software. They have operations in the UK as well as in the United States. Inktomi competes in the market place with Compaq, Excite@Home, and Infoseek. San Mateo, CA is where Inktomi calls home. Up until last Friday shares of INKT had been consolidating between the $112-$122 area. Enter Henry Blodget, Merrill Lynch analyst. Mr. Blodget cut his rating on INKT, and projected wider losses at the company. By the end of the day INKT had lost $17.44 in the value of its stock on volume of about 9.4 mln shares, almost six times its ADV. For those that don't want to do the math that's a loss of about $900 million off Inktomi's market value. All this for a rating cut to Neutral from Accumulate. Blodget who is one of the more noted Internet stock analysts, doubled his loss estimate for the current fiscal year to $24 million. Blodget went on to say that "just meeting or reducing future estimates will normally bring a company's valuation back into play". The first two days of the week INKT bounced back up to the $108 area only to be met by waves of selling, but managing to stay above its 200-dma at $102.13. Yesterday INKT fell out of bed again, taking out its 200-dma loosing over $7 for the session. Today Henry Blodget commented on AMZN writing that analysts and investors are tiring of the "endless postponement of gratification" or profits. His comments made it tough going for many of the stocks in the Internet sector. With strength in the major indices today, INKT was able to pick up only $1 of yesterday's losses leading us to believe there is more room to the downside. The support for INKT is in the $87-88 area. Look for further weakness as an opportunity to buy puts. As always, consider your risk profile prior to entering a new play. BUY PUT NOV-95*QYK-WS OI=1029 at $5.00 SL=3.25 BUY PUT NOV-90 QYK-WR OI= 920 at $3.00 SL=1.50 Average Daily Volume = 2.12 mln Chart = http://quote.yahoo.com/q?s=INKT&d=3m ********************* PLAY OF THE DAY - PUT ********************* LTR - Loews Corporation $68.50 +0.50 (-0.38) Diversified holding company Loews Corporation's main interest is insurance, through publicly traded subsidiary CAN Financial. other holdings include tobacco (the Kent, Newport, and True US cigarette brands, through litigation-addled subsidiary Lorillard Tobacco Company); 15 hotels in the US, Canada, and Monaco (through subsidiary Loews Hotels); watchmaker Bulova; and contract oil-drilling subsidiary Diamond Offshore Drilling, which operates 46 oil rigs. The company also owns a minority stake in fiber optic company Global Crossing. Sunday's Write Up After the carnage of Tobacco stocks this week, they got a little bounce on Friday, along with the rest of the overall market. Bargain and value players stepped in to the tobacco stocks after R.J. Reynolds Tobacco Holdings Co. reported there earnings which beat expectations. We believe that this was a bounce that will not have very much follow through for the stocks like LTR in the tobacco group. It was reported last week that on Nov 1st a jury will decide on the class action suit against the industry that could lead to an estimate $300 billion in punitive damages. Gone are the days when the tobacco companies will be protected from punitive damages in lawsuits. That is negative news and ahead of the ruling we believe the stocks will continue to suffer. From a technical standpoint the shares of LTR did not break any major overhead support levels, which currently sits at the 71 level. If the turnaround is for real these levels will be violated. Going forward we expect the pressure to the downside to resurface, confirm the strong momentum and volume pressure to the downside before entering a new position. The downtrend clearly is still in place. $70.50 is our current resistance point. Tuesday's Write Up 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. Thursday's Write Up U.S. stocks soared today after the Labor Department reported that workers wages and benefits are increasing at a slower than expected pace. The report hopes that inflation is not threatening the economy's health. In other news, the New York state's highest court upheld a lower court's decision to dismiss five class action suits brought against U.S. tobacco companies, in a ruling industry analysts said highlights a trend in pending tobacco cases. This was positive news that had even the tobacco stocks soaring, at least in early trading. Looking at today's chart, it looks like traders bidded the shares up for a one day trade, and then at around noon it looks as though the carnage resumed. The stock plummeted in the afternoon from an intra-day high of $71.75, to close at $68.50. We believe that traders took a step back and remembered that there is a jury decision to be announced in Florida on Monday. Going forward the downtrend is still in place below $71. Be cautious ahead of Monday's ruling. BUY PUT NOV-70*LTR-WN OI=165 at $3.38 SL=1.50 BUY PUT NOV-65 LTR-WM OI=208 at $1.19 SL=0.00 High Risk! Average Daily Volume = 241 K Chart = http://quote.yahoo.com/q?s=LTR&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ Markets Rally On Favorable CPI/GDP Data.. Wednesday, October 27 Equity markets were mixed on Wednesday as financial issues moved higher and technology stocks slumped on profit-taking. The Dow climbed 92 points to close at 10,394, while the Nasdaq finished 8 points lower at 2,802. The broad market was slightly upbeat as the S&P 500 index closed 14 points higher at 1,296. Advancing issues outpaced decliners 1,741 to 1,302 on active volume of 899 million shares. The 30-year U.S. Treasury bond rose 24/32, moving its yield down to 6.32%. Tuesday's new plays (positions/opening prices/strategy): 3Dfx TDFX MAR10C/DEC10C $0.75 debit calendar NetBank NTBK JAN22C/DEC25C $2.00 debit diagonal Pixar PIXR DEC35CC/35NP $32.50 debit covered-combo All of our new positions were available at or near their target prices on Wednesday. PIXR moved lower early in the session and the target was adjusted slightly lower. A cost basis of $32.50 should have been available. We will record the play at the best observed price of $32.50. TDFX was basically unchanged for the first hour of trading and the net-debit target was within $0.06 of the quoted price. NTBK was the most difficult position with no volume on the short side of the spread. The suggested entry should have been available, as the offered price was just $0.12 above our suggested entry. Portfolio plays: The market closed on a positive note as rumors spread that the upcoming labor costs report; due out on Thursday, was expected to relieve analyst concerns about inflation. The Labor Bureau denied the data had been released prematurely but speculators moved into bullish positions ahead of the scheduled report. The positive comments from a Federal Reserve president and a lower bond market also soothed worries about higher interest rates. Analysts say there is a ton of money waiting on the sidelines if Thursday's release of the ECI and GDP data is favorable and investors should have a better indication on what the Federal Reserve plans to do with interest rates at the policy-setting meeting on November 16. Internet stocks were subdued today after eBay Inc (EBAY), the online auctioneer posted a modest profit along with a big jump in expenses. EBay closed $13 lower at $138 and our new straddle will benefit if the stock falls further in the short-term. Most of the performers in our spreads portfolio were smaller stocks as investors moved back into growth and speculative positions. Communication stocks appear to be one of the few groups moving higher on a regular basis and today 3Com Corporation (COMS) was in the news again as one of the world's largest advertising and marketing communications agencies announced it is standardizing a next generation Gigabit Ethernet on 3Com's CoreBuilderŪ 9000 system. The 3Com network will deliver 100 Mbps connections to users in the new state-of-the-art facility. Global Crossing (GBLX) was another positive issue today after posting a smaller-than-expected third quarter loss as revenues increased 7.5%. After they beat the Street estimates the stock price climbed $1.06 to $35. Global Crossing recently acquired Frontier and Global Marine Systems, becoming the fifth largest long-distance company in the United States. Price Communications (PR) was again the loser of the group as the effects of a recent downgrade continued to haunt the issue. In the interest of capital preservation, an exit debit of $0.75 was available during the morning session. Those of you in the February calendar spread have ample time to recover losses but the funds could also be used to earn profits in other positions. Wells Fargo (WFC) continued higher today with the (bullish) bank and financial issues. The technicals of the stock are changing character rapidly with the rallying sector and today's opening gap was a good indication of its short-term strength. The early exit for the January ($42.50 call) position provided a closing credit of $1.68 and there may be another entry opportunity after the FOMC meeting in November. Thursday, October 28 Blue-chips extended their recent gains Thursday after a benign report on labor costs improved the inflation outlook. The Dow Jones Industrial Average jumped up 218 points to 10,613 while the Nasdaq composite index climbed 59 points to 2,861. The S&P 500 stock index was up 40 points at 1,337. Equity trading was heavy with more than 889 million shares exchanged on the NYSE. Advancing issues led declines 2,082 to 945 but there were only 72 stocks at new highs while 121 issues reached new lows. The 30-year U.S. Treasury bond was up 28/32 with the yield falling to 6.26%. Portfolio plays: Today's leaders in the big-cap technology issues were Qualcomm (QCOM) and Broadcom (BRCM), both up $10 on new buying pressure from public and institutional investors. Our recent star JDS Uniphase (JDSU) was also in the hunt with a $7 rally to a new high at $152.50. JDSU exceeded Wall Street's quarterly earnings expectations by $0.04 a share as the fiber-optics maker reaped the benefits of a 104% increase in sales, reflecting growth in the company's component and module businesses. Telecom stocks were also on the move with Global Crossing (GBLX) climbing to recent resistance near $37 and Bell Atlantic's (BEL) $2 rally. The issue is once again at our sold position and this neutral calendar spread has been one of the most profitable plays in the combo's portfolio over the past two months. We expect to double our initial investment in the position by the end of the year. In the long-term portfolio, Sun Microsystems (SUNW) rocketed $6 higher after Deutsche Banc Alex Brown raised its target on the stock to $100 from $93. Our bullish diagonal spread is now $13 ITM and we will have to consider another roll-up to keep the sold option near the stock price. Other issues in that section participated in the rally. Computer Associates (CA) moved up $2.81 to $55 after a recent slump and the technical outlook is improving with new support in the low $50 range. Motorola (MOT) recovered $2.31 to finish at $93, just short of our sold option for November. If the stock price can remain near this range for the next few weeks, the LEAPS/CC"s position will move back into profitable territory. Our Medtronic (MDT) spread is now in the black after the stock made a big $2.31 move to $35. The company announced today that they have signed three agreements in which they will supply spinal and cardiac care products to more than 2,000 health care organizations that purchase supplies through Novation, one of the leading distributors in the industry. Our old favorite Polaroid (PRD) continues to rebound from oversold conditions and it is now trading near the bottom of the recent range near $22. It remains to be seen whether or not the issue will attract any new long-term investors after the devastating profit warning. ********* STRADDLES ********* Today's rally brought the Dow back to where it was earlier in the month but despite the positive move, investors are still worried about the possibility of a sell-off after Fed Chairman Greenspan speaks to a Business Council in Florida this evening. The master of the market is expected to talk about rising inflation and the two-year high in the bond market, which has been a recent source of concern for stock investors. The potential for higher interest rates didn't stop the financial stocks today and insurance issues also continued to rally. There were two straddle positions which benefited from the move. Hartford Insurance Group (HIG) managed a mid-day high near $51 and the credit for the March position moved to $11.50, a suitable price to exit the play. Allstate (ALL) also enjoyed a nice rally, up $2.12 after an upgrade by Keefe Bruyette this morning. The April straddle is now profitable with a $6.00 credit available for the position. Questions & comments on spreads/combos to ray@OptionInvestor.com ************ See Disclaimer in section one ************
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