The Option Investor Newsletter Tuesday 11-16-99 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) ****************************************************************** 11-16-99 High Low Volume Advances Decline DOW 10932.30 + 171.50 10937.80 10757.40 942,260k 1,787 1,256 NASDAQ 3293.05 + 73.51 3295.52 3219.54 1,470,038k 2,244 1,810 S&P-100 742.89 + 14.13 743.16 729.23 Totals 4,031 3,066 S&P-500 1420.03 + 25.64 1420.36 1395.62 56.7% 43.3% $RUT 456.88 + 3.91 456.88 452.97 $TRAN 3099.67 + 35.01 3102.47 3063.08 VIX 21.42 - 1.43 23.54 21.16 Put/Call Ratio .50 ************************************************************* Ready, Set, Hike! Just another boring lazy day on Wall Street, until 2:17 PM ET. Yes, the Fed used their "get out of trouble free" card and took advantage of the strongly bullish market to raise both the Fed Funds rate and the Discount rate by +.25% each. The raise was accompanied by some statements that had traders running in circles and the Dow traded in a 175 point range after the announcement. Immediately after the news the Dow spiked up to almost 10900 or +135 points. Then the actual wording of the release was made public and the Dow dropped as low as 10758 or -3 points in less than five minutes. After analyzing the release traders felt that in spite of some frank words, the Fed was probably on hold until next year. The markets started recovering almost immediately and the Dow made an incredible run to close at 10933. This was the first close over 10900 since Sept-14th. The Dow finally broke out of its trading range and pierced the 10800 barrier. Can resistance become support intraday? Sure looks like it here with the afternoon pull back stopping dead on 10800 before the rebound. The NASDAQ also soared to yet another record and closed near the 3300 level at 3295. This NASDAQ run is incredible and it appears as though it will never stop. The NASDAQ is up over well over 50% for the year. The only other year the numbers came even close was 1991 with a +56.8% gain. Traders are becoming very concerned. In reality the NASDAQ is up over 68.9% in the last twelve months. The Dow only +19.9 and the S&P +22%. I think traders are not taking into consideration that the new Internet economy is driven by NASDAQ stocks. Old paradigms do not apply. Eventually this soaring growth will slow but not as long as the Internet is exploding. After making those bullish comments I will point out on the chart below that we are at the top of the regression channel and could see a real pull back at any time. The big news of course was the Fed meeting and the rate hike. It appears the Fed bears have gone back into hibernation for the winter. They did all the damage they could do with the hike on both rates. They did revert the bias back to neutral although this is basically meaningless. The language they used gave some comfort to some traders. Things like "final take back of previous easing" would sound like a posture away from future rate hikes. Today's rate hike, coupled with the two previous hikes, should "markedly diminish" the inflation risk going forward. But the Fed always talks with a forked tongue and finished the release with the following warning. "This expansion of activity continues in excess of the economy's growth potential" and there are "a persistence of risks to sustainable growth" which means they will take steps in the future to slow the growth below the current +5% rate. You know Alan did not want the markets to rocket forward and that verbal anchor was all he had left to use. Most analysts are now looking at March as the next rate hike. In reality the Fed did the best thing for the markets. By raising the rates now it takes out the possibility of a rate hike in December and gives us 3-4 months without a major rate hike problem. The interest rate sensitive stocks soared on the news. This is normally contrary to the event. Rate hikes normally drive down financial stocks but the outlook for no hikes in four months has put a calm over the markets. JPM +3.88, MER +5.13, MWD +6.19, AMTD +4.56. The volume on the NASDAQ was very high again but today will not go down in the record books. About 15 min before the close the NASDAQ experienced a technical break down and about ten minutes of trades were either delayed or lost. Traders were unable to get executions during that period. According to all indicators, the market is now in overbought mode. All the news is good and there is no bad news expected. All the arrows are green. This should worry most traders. When everything is too good too be true, you should start looking over your shoulder. The next challenge is the CPI tomorrow and after raising the rates today the Fed is out of ammo should the CPI come in much higher than expected. The Industrial Production this morning did come in much higher than expected but it was a non-event. Bonds initially soared with yields dropping under 6.0% temporarily but then rising again to 6.6%. Seems they were not convinced. $25 oil is going to continue to impact inflation but it is being ignored. Up volume has been substantially stronger than down volume and the advance decline line is improving. Several Dow stocks soared to new highs or very close to a new high. GE $139.44 +4.13, C $58.19 +2.13, MMM $101.13 +3.69, JNJ $106 +2.63. Stocks were splitting like popcorn today led by some high flying Internets. ARBA 2:1 $215.56 +6.63, JNPR 3:1 $328 +45, BEAS 2:1 $72.50 +1.38, NTAP 2:1 $103.50 +13.56, ATML 2:1 $46.50 +2.44, and NTRS 2:1 $101.25 +2.56. The S&P set a new closing high at 1420.03. The old high was set back on July 19th. So what should we expect now? I am being cautious. The VIX dropped to 21.42 at the close which could indicate an overbought condition and imminent profit taking. I am out of the market except for some OEX puts I bought at the close. With the Dow up +400 points from Friday's low and the NASDAQ up +500 points since Halloween, without a pause to refresh, we are over due for trouble. I am afraid we could have a "buy the rumor, sell the news" event later this week. The CPI report tomorrow could be the trigger for this but in reality I think it would have to be very bad to cause any trouble. The market is in rally mode and is showing no weakness. Until it does we should ride the trend. There is money coming into the market from all directions. A rumor reported on CNBC at the close had one European money management firm buying the S&P to the tune of $1 billion. That is a person I would not want to play poker with. Until we do get another buying opportunity I am going to be very careful about my entry points and get out quickly. It seemed like every stock I looked at today had spiked $8-15 in the last couple of days and those gains have to hold before we buy them. Good Luck, Sell Too Soon. Jim Brown Editor ********** STOCK NEWS ********** Welcome to Our World By S.P. Brown American and Chinese negotiators reached a landmark agreement Monday that will open the economy of China, the world's most populous nation, to foreign competitors and will also make it a full partner in the world's trading system. After nearly a week of intense negotiations, U.S. trade representative, Charlene Barshefsky, and her Chinese counterpart, Shi Guangsheng, signed papers at 3:50 p.m. that marks China's emergence from an economic backwater to a global trading powerhouse. /members/stocknews/111699_1.asp *************** Market Posture *************** As of Market Close - Tuesday, November 16, 1999 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,750 11,320 10,932 Neutral 11.12 SPX S&P 500 1,315 1,385 1,420 BULLISH 11.12 OEX S&P 100 675 725 743 BULLISH 11.12 RUT Russell 2000 425 445 457 BULLISH 11.12 NDX NASD 100 2,320 2,520 2,940 BULLISH 10.28 MSH High Tech 1,120 1,250 1,494 BULLISH 10.28 XCI Hardware 1,000 1,095 1,117 BULLISH 11.11 CWX Software 770 800 1,088 BULLISH 9.03 SOX Semiconductor 475 525 644 BULLISH 10.29 NWX Networking 550 615 762 BULLISH 10.28 INX Internet 495 525 580 BULLISH 11.05 BIX Banking 645 690 686 Neutral 10.28 XBD Brokerage 395 450 485 BULLISH 11.12 IUX Insurance 610 650 647 Neutral 11.09 RLX Retail 875 910 924 BULLISH 11.12 DRG Drug 375 390 395 BULLISH 11.04 HCX Healthcare 750 790 784 Neutral 11.09 XAL Airline 180 190 152 BEARISH 5.21 OIX Oil & Gas 285 305 311 BULLISH 11.16 * Posture Alert The market continues on its tear, even though interest rates were propped up again today. The Nasdaq continues to surge, and even caused a lock-up near the end of trading today on record-breaking volume. The posture board is now becoming predominately Bullish, and with Tuesday's action, we have upped Oil & Gas to join the rest of the party. *************** Market Sentiment *************** Tuesday, November 16, 1999 Buy On Rumor, Buy On News! So once again, the Fabulous Fed raised rates again. Shortly after the news, the market rallied, then sold off, then rallied again and never looked back. The buy-the-rumor, sell-the-news adage was tossed out of the window. The Bulls continue on with their monster- buying spree, scooping up anything and everything in its path, and leaving the bears lying in the dust. Volume continues on its surge, especially on the Nasdaq where Tuesday brought on another top 5 record breaker. Everything that we have mentioned the last several weeks would point for this rally to continue on for the rest of the week. However, here at Pinnacle, we believe the probability of profit taking is due very shortly. At the end of this week we have November options expiration. Currently, there are too many stocks that have come to far, too fast. Speculators are now betting across-the-board that out-of-the-money, November strikes, will be in the money in the next couple of days. This may have been true last week, but those jumping on now seem to be a little late to the party. We are still extremely bullish, but are currently a little more cautious for a pullback in the market. We had mentioned in Sunday's letter that there was a 50% chance of the OEX hitting 745 during the next 10 sessions. Well, it closed near 743 today, which is pretty close to our mark. However, when reviewing the Pinnacle Index numbers for the OEX, it seems that we may be hitting resistance very soon. The PI for the OEX 740-750 is extremely bullish, indicating we may have a short-term sell-off after hitting this range. However, this number can change very quickly, especially if the put buyers come running into the market. But based on today's closing, the chance for profit taking has increased dramatically. And finally, Applied Materials is due out with their numbers Wednesday. Currently, the street is looking for earnings of $.63, with a whisper number of $.67. The Pinnacle Index for AMAT is 1.60, which would indicate low sentiment, and from a contrarian standpoint, may indicate a rally in the stock after numbers. Also, the amount of shares that are currently short on AMAT is roughly 7.5 million, so you can imagine the potential strength of a rally if the shorts get squeezed or run for cover! The only negative is that the whisper number is 4 cents higher that what is published, which raises the expectation bar slightly. Only time will only tell if buy-the-rumor, buy-the-news applies to AMAT as it does to interest rates. BULLISH Signs: Cash Flow: The amount of money being poured into this market is phenomenal. The trading volumes on the exchanges is a good example of this, as well as last weeks 2 IPO's of UPS and CHTR which brought in over $10 billion in new money. Volume: There is an old saying, that volume precedes price, and it couldn't be better exemplified that the last two weeks. Short Interest: Short interest for the Nasdaq is at an all-time high, and increased over 5% from the preceding month. Bears have quick triggers: After being beaten up for many years, bears are quick to run & hide, and will cover short positions in a flash. Earnings: The results are in and the quarter ended up solid! Investor Intelligence: As a contrarian indicator, we may have witnessed the bottom in pessimism, and should this prove right, this market has a lot more upside in the months ahead. Interest Rates: The yield on the 30-yr Treasury is now safely off the 52-wk high, and is getting close to being under the 6% benchmark, which is a key psychological number. Advance/Decline Line: The A/D line is looking significantly better than the past 6 months. Mixed Signs: None. BEARISH Signs: Volatility Index (21.42): The VIX continues to prove that the low 20's have been a good exit point. The low close for the VIX was on July 16, when it closed at 18.13, so should its current level not hold, we could be in for more upside in the market. OTM Call Analysis As we move closer to the November expiration cycle, Pinnacle is tracking the level of call buying (OTM) between 680-780 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% Friday, October 29 75,022 +92.0% Friday, November 05 89,143 +128.1% Friday, November 12 94,610 +142.1% 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 (11/12) (11/16) Overhead Resistance (740-750) N/A 14.56 OEX Close 731.12 742.89 Underlying Support (720-735) N/A 2.25 What the Pinnacle Index is telling us: We have now broken through the upside that we have referred to in the past, and we may see a slight continuation to 745, but resistance is building and profit taking seems more imminent. Put/Call Ratio Friday Tues Strike/Contracts (11/12) (11/16) CBOE Total P/C Ratio .68 .69 CBOE Equity P/C Ratio .51 .36 OEX P/C Ratio 1.53 1.57 Peak Open Interest (OEX) Friday Tues Strike/Contracts (11/12) (11/16) Puts 700 / 12,420 700 / 14,304 Calls 740 / 10,728 740 / 8,814 Put/Call Ratio 1.16 1.62 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 November 16, 1999 21.42 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. 13, 1999 Bottom? 39.2 37.5 November 11, 1999 44.4 35.9 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Week Dow 10932.33 -8.57171.58 163.01 Nasdaq 3293.05 -1.61 73.51 71.90 $OEX 742.89 -2.33 14.13 11.80 $SPX 1420.03 -1.65 25.64 23.99 $RUT 456.88 3.28 3.91 7.19 $TRAN 3099.67 -24.97 35.07 10.10 $VIX 21.42 1.17 -1.43 -0.26 Calls Mon Tue Week YHOO 212.56 8.06 7.56 15.63 New, back above $200 at last VRTS 130.94 4.06 10.81 14.88 You gotta love stock splits SFE 125.25 4.00 8.75 12.75 Our homework has paid off! AOL 159.94 2.94 9.88 11.00 So far, all is golden... CMVT 130.75 1.88 7.63 9.50 Can you feel the excitement SUNW 126.63 0.19 7.13 7.31 You need sunglasses for this SNE 180.94 2.56 1.88 4.44 Sony continues to rock on! NT 76.69 2.44 1.69 4.13 A voracious appetite for NT LVLT 77.88 0.63 3.31 3.94 Pattern remains consistent JPM 142.50 -0.94 4.13 3.19 New, return of financials NOK 125.38 -2.06 5.19 3.13 Nokia answers our call! BVSN 89.19 0.88 -0.19 0.69 Analyst reiterates Strong Buy CNCX 34.38 0.44 0.25 0.69 We remain positive on CNCX AAPL 91.19 -1.19 1.75 0.56 AAPL still has what it takes TMX 99.31 0.19 -0.88 0.31 Consolidating but splitting LSCC 45.13 -1.22 1.34 0.13 Regains positive momentum EMC 82.31 -1.81 2.06 -0.38 Recovers from a stubbed toe LSI 64.00 -1.94 0.44 -1.50 Down week for the Semis SLR 84.75 -2.19 -0.94 -3.13 SLR offers entry points MXIM 84.13 -2.81 -0.44 -3.25 MXIM is at a crucial point QLGC 118.44 -4.00 -4.00 -8.00 Dropped, iffy but gone EMLX 171.50 -8.13 -0.38 -8.50 Dropped, time to harvest $$ Puts NKE 44.31 1.19 -3.00 -1.81 New, seems to have tired feet CSC 62.00 -0.06 -1.56 -1.63 Downgrade sends CSC downtown EL 41.81 -0.75 -0.81 -1.56 New, not looking too pretty RMDY 37.75 2.31 -0.88 1.44 RMDY still below 10-dma TXT 73.56 2.69 1.94 4.63 Dropped, ARGH! turned on us MSTR 93.25 3.13 7.50 10.63 Dropped, recovered 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 11-16-99 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: ***** QLGC $118.44 -4.00 (-8.00) We were looking for an opportunity to buy calls when we selected QLGC to our play list. All of the reasons we added QLGC are still very viable reasons to consider a play in QLGC, except for one. QLGC fell out of bed the past two days. It is still a very real possibility they could announce a stock split. The semiconductor sector has began to consolidate a bit since reaching new highs last Friday. QLGC fell a little further than we expected as the $116 area appeared as though it should provide good support. QLGC dropped like a rock shortly before noon ET to a low of $111.50. The volume on the decline was nearly twice the norm at 1.33 mln., which does not bode well for our play either. It did manage to climb back above the $116 mark to close at $118.44. It is looking somewhat "iffy" at this point. QLGC could continue to rebound and provide some very good buying opportunities, but for now with so many other solid plays available we will drop QLGC from our list. EMLX $171.50 -0.38 (-8.50) Shares this week continued to sell-off, reaching prices as low as $168.88, the stock is beginning to rollover. Profit-taking was inevitable in this stock, a stock that we have seen go up over 50 points. With the shares giving back over 8 points on Monday, and then down again today fractionally, we have chosen to close this one out for now. The market is still waiting for the announcement of the stock split date, that will be announced on Thursday to get some direction. Traders decided to take profits ahead of this announcement. The stock firmed up at our previously mentioned support levels $170-$171, but showed no signs of going through resistance at the $185 level. The risk reward is no longer in our favor near term. We want to take our money off the table for now, but will keep the stock on the radar screen, and assess the stock again on Thursday. We possibly could see a bounce after the split date announcement. PUTS: ***** TXT $73.56 +1.94 (+4.63) ARGH, TXT gave us a head fake last Friday and decided to break above $70 this week. As you know, we were waiting for a roll over off resistance at $70 to confirm our trend. It looked like a good entry on Friday as it started to sink again, breaking below $69 but it didn't last. Instead, it jumped on Monday and went right past our resistance. This is probably the company stepping in to buy back their shares to support the stock. They said this was in the works when TXT management released a statement last Wednesday saying there is nothing materially wrong at the company but who knew they would keep their word. That is usually a hollow threat by companies to try and stop the carnage being inflicted to their stock. Needless to say, we now get the picture and will look elsewhere for put plays. MSTR $93.25 +7.50 (+10.63) Ouch! MicroStrategy gapped up at the open, indicating an end to the recent profit-taking and a return of the positive momentum, which has propelled MSTR up from $14.69 within the last year. Of course, there is still the psychological resistance level looming ahead at $100, but the recent decline may have weeded out enough of the profit- takers responsible for pulling MSTR back when it traded above $100. Merrill Lynch also helped to douse our play on MicroStrategy with an increase of the price target from $90 to $105. Scott and Stringfellow also initiated coverage today with a long-term Buy. ***************** PICK NEWS - CALLS ***************** MXIM $84.00 -0.56 (-3.25) Our play in MXIM is at a crucial point as the stock is beginning to taper off and consolidate. We have the stockholders meeting still scheduled for Thursday and a vote to increase the number of authorized shares from 240M to 480M. Traders bid the price of MXIM stock higher first thing Monday morning only to see it slip back to the $83 support level. Technically, that was the third time MXIM has approached the $87.88 area and fallen back. If we don't see MXIM continue the bounce from today's low of $83.13, and continue solid gains to take out the previous highs, we could begin to see our play deteriorate as the next levels of support on an intraday basis are near the $79-$80 area. As we mentioned at the beginning of our play in MXIM, major support on a daily basis is back at $76. With the FED decision in and the stockholders meeting two days away, we will look for another opportunity to re-establish positions in our play. Aggressive traders could target shoot at these levels, but should keep your stops near today's low. If MXIM continues to slide we would stand aside and wait for any announcement that may come out of the stockholders meeting in reference to a stock split. EMC $82.31 +2.06 (-0.38) The computer hardware index continues its pattern of higher-highs and higher-lows or in other words, it is trending higher very nicely. EMC stubbed its toe a little yesterday, but regained its composure today. We are looking for EMC to continue to trend higher as well. We added EMC Sunday mainly for the momentum that the stock has exhibited recently. We saw shares of EMC slide yesterday and into today until the end of the FOMC meeting when the FED announced their decision. EMC did not participate in the knee-jerk reaction of declining and recovery that we saw in the broader markets. It did slip to a low of $80.06 and began to climb higher into the close, recouping most of Monday's decline. In considering a new play in EMC, we will need to see the strength continue with solid volume supporting it. Volume the past two days has been on the light side. Another area we would look for is at $80. If EMC is going to remain a viable call play we would like to see those levels show strong support on any declines from here. As with any position, consider the potential rewards and risks prior to entering. LSCC $45.06 +1.28 (+0.13) Lattice seems to have regained some positive momentum after stalling for a few days. Monday's session provided some room for entry as LSCC took back just over a dollar. Today, LSCC's higher-lows, good move up over $45 at the end of the day and a close near the high, are good indications heading into tomorrow's session. LSCC also demonstrated good relative strength against its sector companions. $48, the 52-week high, still serves as light resistance and LSCC looks to be trending steadily toward that level. LSCC has held well at $44, which could continue to serve as support. Being that $48 is not providing formidable resistance, we see this current level as a good possible entry point. CMVT $130.75 +7.63 (+9.50) Can't you just feel the excitement as well as the volume returning to CMVT? The volume has been returning to average or better which is what we would expect as CMVT nears its earnings date on Nov 30th. Today was a great day to play CMVT. It had a steady trend going for most of the day, including right through the Fed announcement. We got the breakout of $130 that we were looking for too. That was the old 52-week high set last week but we've seen the higher-lows setting in and CMVT tracking upward with pullbacks to the 10-dma (currently at $120.50) so we felt a break above $130 was coming. From here your guess is as good as ours. We aren't in the business of picking tops but rather finding good entry points and letting the momentum run. Tomorrow will be interesting to see if CMVT wants to bounce at $130 and go for another upside move. If not, we see support at $128 and again at $124. That might take a bit of market weakness to reach down to those prices though. Let's watch the $130 level and see what kind of bounce we get. It could be enough to justify a new play. SNE $180.94 +1.88 (+4.44) Sony rocks on! Sony tagged another new 52-week high of $181.50 while posting some very impressive volume. $180 held Sony throughout the day and as we mentioned in Sunday's write up, will now be serving as psychological support. The only downside to this stellar play is finding an entry point! It is best to wait for any gaps down on weakness overseas as your chance to jump on board. However, should your risk tolerance allow you to do so, you may just want to catch this train now and hang on for the ride since there are so many bullish indicators in regards to SNE's continuing momentum. Sony announced on Tuesday, that they have entered into an agreement with Microsoft to allow interoperability between their products. Sony Portable Players will be able to support Windows Media. As Sony continues to trade up to new highs on a seemingly daily basis, it is imperative that you continue to use your stops to protect your profits. AOL $159.94 +9.88 (+11.00) So far this week, all is golden. Good news is swirling and whispers of an e-commerce alliance with Wal-Mart have been heard. The stock is again climbing ahead of the 2:1 stock split next week tacking on $11.00, or 7.4% in just two days. Yesterday America Online opened its online shopping service, Shop AOL, for the holidays and introduced several new features such as a special tool bar, holiday gift guide, and an "electronic wallet" deemed the AOL Quick Checkout. Today the company launched America Online Brazil as the newest member of its global community in cooperation with Cisneros Group of Companies, one of Latin America's top communication organizations. Rumors of a partnership with Wal-Mart were first sparked by analyst Gary Balter of DLJ. In a memo he stated "we believe that Wal-Mart is having discussions with AOL regarding an agreement along the lines of the MSFT (alliance with) Tandy". All this news and the bullish market today were major factors in the $9.88 advance today. Plus ING Barings started coverage with a Buy rating and issued a 12-month price target of $180-185, which surpasses the stock's 52-week record of $175.50 set last April. Remember, plan to be out of AOL by Friday's close to avoid any post-split depression. AOL splits 2:1 on Monday. AAPL $91.19 +1.75 (+0.56) AAPL barely stayed afloat of its 10-dma ($89.44) yesterday slipping $1.19 in front of the FOMC meeting. The stock fared much better today with a $1.75 bounce, however, the volume remained low at 2.08 mln shares versus its ADV of 6.03 mln. Pumped up trading activity would certainly give us better evidence of a charge toward the so far intangible $100 mark. Support is firmly established at $88 and again, we would be more comfortable if AAPL surged upward to demonstrate that this news-driven momentum play still has what it takes to propel its share price to new heights. Analyst Jonathon Ross from ABN AMRO said today he believes that "no PC maker is better positioned with consumers to take advantage of large opportunities in the emerging device and home networking markets" and started new coverage for AAPL with an Outperform rating and a $115 price target. SLR $84.75 -0.94 (-3.13) Under normal trading activity, SLR has been a victim of profit-taking since Friday. Recall the stock had been steadily setting new 52-weeks highs since it announced it was acquiring two manufacturing units from Ericsson AB to boost its capacity on November 2nd. Therefore this consolidation is not unusual. Last week was filled with positive comments and Buy reiterations so the bullish sentiment is intact. This pullback offers entry points for traders whom choose not to wait for a confirming bounce off this mark. Near-term support is established at $85 just above the 10-dma (now at $83.41) with overhead opposition at $90, which is the latest record high hit last Thursday. TMX $99.31 -0.88 (+0.31) Despite the Fed watch yesterday, TMX powered upward. The ADR price peaked at $100.88 flirting with its overhead resistance at $102.50, the 52-week high hit during last Thursday's opening minutes. Now take a look at a two-month chart and you can see the strong climb originating at the end of October. Take notice of the spike on November 11th which followed the Board of Director's announcement of a proposed 2:1 stock split. This proposal is our main catalyst for this call play and not withholding the renewed interest in Latin American issues - Telmex stock is a bellwether in the Latin telecoms sector. Volume remains moderate as TMX succumbs to profit- taking and consolidates safely above support at its 10-dma ($97.41). Remember a dip below this technical indicator should put you on alert. LVLT $77.88 +3.31 (+3.94) Our trading pattern remained consistent on Monday with our last update when we described the trading volatility. Hopefully you got in and out for a quick trade yesterday or you were brave and held over the interest rate announcement. Both decisions would have fared well. Yesterday and today had the shares trading in a range that was perfect for a quick trade. Monday's low was $73.63 and Monday's high was $77. Tuesday's low is $74.50 and Tuesday's high is at $78. We had mapped out a possible strategy to use if you wanted to trade LVLT and it has worked once again. Also we looked for higher prices above the $74.44 level and we got those price surges, hitting a high today of $78 before settling in to close at $77.88. Going forward look for more of the same and use trailing stops to protect gains, this stock has big pullbacks. Current resistance is at $80 and it should be an easy target from here barring a collapse in the markets. Look for trading support to firm up for a bounce at the $74.25 level if we get a pullback. SUNW $126.63 +7.13 (+7.31) On Fed day, the day we find out the decision on interest rates, the Nasdaq did not disappoint us, hitting another record high. With the Techs shrugging off any jitters and SUNW, significantly outperforming, tacking on over $7 today on strong volume. The news has been the catalyst for this stock and the split run that we were looking for is well on its way. The stock has been showing overbought signs for a few trading days, but traders are not willing to give up the momentum and we continue to hit new highs, today hitting $127.75 as traders and investors seem to be willing to pay any price for the shares. In the news today, SUNW announced a continued commitment and market growth in the High Performance Computing market. SUNW is driving the adoption of HPC. Also a number of new products were introduced today at the Cartes 99 conference, as Sun's Java Card technology extends its industry leadership. Looking forward we have to keep stops tight in this position, but flexible enough to jump back in when the stock bounces back. Short-term support in case of profit-taking would be at the $119.50 level. Protect your gains!!! If prices continue to surge, look to ride the momentum above today's high $127.75 on strong overall market movement. CNCX $34.38 +0.25 (+0.69) We still remain positive on the shares of CNCX, trading this week as high as $35.25, reaching this level both Monday and Tuesday. The minor breakout remains in place and we still look for a better breakout going forward although we might consolidate for a day or so. We need to see the volume catch up with the technical relative strength. It was reported today that CNCX was one of the nations fastest growing technology companies. Looking for higher revenues going forward. This is bullish for the stock. Also SBC Communications agreed today to sell CNCX high speed Internet services around the country. Continue to use any pullbacks above the $32 level as a buying opportunity, only if the stock bounces off of that level. The stock seems to be cruising, with some of the other small cap Internet stocks. Be cautious but bullish at these levels, we could possibly see a pullback, unless the good news continues to be feed the market about the company. Keep trailing stops tight to protect any of the short term gains. Strong volume will be the key going forward. LSI $64.00 +0.44 (-1.50) The shares of LSI have consolidated nicely over the last two days in a semiconductor sector that has consolidated as a group, the semiconductor index closed the day at 643.62 which is down for the week 12.48 points. This sector is always volatile, but the story going forward is positive as we look for worldwide sales to continue to increase, and for prices for "Semiconductor Chips" to continue to be priced up. LSI today announced that it is the first company to achieve Gold ASIC support partnership status for its Direct Rambus ASIC cell. This recognition assures customers that LSI Logic is a proven choice for ASIC solutions. Going forward look for shares to firm up at these levels, with short-term support at the $61.75 level, this is a possible trading buy on a bounce. Wait for a new high to the upside above $65.50 before entering a new position, this will confirm the buying interest at higher prices. BVSN $89.19 -0.19 (+0.69) Hmmm...running out of steam? BVSN has seemed to hit the wall at $92 both yesterday and today, while volume was falling back from lofty levels closer to its ADV of 1.5 mln shares. Technically, this is cause for concern and may signify that it's about time for a breather. That it did not participate in today's rally or show any substantial volume with the rest of the NASDAQ is not inspiring either. Nonetheless, SoundView reiterated its Strong Buy rating following yesterday's announcement of a partnership with Siebel, and today's announcement of an alliance with Novell. While it found support at $86 today, the next level down is at $80. $86 should hold with any flat lining or consolidation throughout the market. However, a strong profit-taking day or 2 (or worse, scary CPI figures tomorrow) will take the loft out of the sails. Wait for the breakout over $92 with volume. Or target shoot between $80-$86 commensurate with your risk tolerance NT $76.69 +1.69 (+4.13) Interest rate hike? What interest rate hike? After gapping open, NT remained flat in trading all day long. Interest rate news had zero effect - just the volume increased, indicating funds still have a voracious appetite for this stuff. While we don't think you should make an entry at any price, as long as volume remains strong, the little price dips intraday are buyable. However, waiting until mid-day will usually yield the best entry. Just confirm the market direction first should it wake up with a hangover from a 14-day binge following the Al's "raise the rate" inspired party. Support is at $76 today and $73 yesterday. Last Friday was $70. If you are going to target shoot, take your pick, but don't count on a fill at $70 unless there is some big damage to the overall market (in which case you may want to sit out anyway). SFE $125.25 +8.75 (+12.75) Finally, the homework pays off. We noted that higher-lows converging with resistance of $120 was setting SFE up for the breakout. Sure enough, we found little bits of support at $114 and $117 on the rebound, only to see SFE bump its head on $120 minutes before the FED's announcement. After the rate hike notice hit, SFE cranked up the volume and powered right through $120 to set a new all-time high. Closing on a high note, the move should continue as long as volume remains intact and the market wants to party. While we've noted them as a possible splitter, the last one to actually occur was back in 1996 (2:1) in the $60 range. SFE has been above $60 for most of the year and still no announcement. If you are holding your breath, you'll want to keep breathing for now. They have 100 mln authorized shares with only 37 mln outstanding, so they have the ability to split 2:1 again, but seem to lack the will. Next earnings date, which would also be a likely split announcement date, is not until February. If the theory that old resistance becomes new support holds water, $120 is the new support level. Blue sky smiling at SFE - nothing but blue sky does it see. Nonetheless, use a trailing stop to protect your profits - today was a big move subject to some back-filling. VRTS $130.94 +10.31 (+14.88) Wow! Gotta love those stock splits, even the 3:2 variety. VRTS splits after the close on Friday, which means split price trading begins on Monday morning. There are still three days left to make the play, though Thursday will be the last opportunity for a write-up (yes, a drop - veterans know we never recommend holding through earnings before an event). VRTS has performed well and set another all-time high today on 25% extra volume, which kicked in immediately after the FED announcement. Support until blast-off was in the $123 range. Support yesterday was $119; $112 last Friday. That's a huge range and subject to profit taking, especially if the overall market leads that march following 14 days of NASDAQ partying. The 10-dma provides good support, but that's a moving target when talking about gains like this. If you play, buy the dips and use trailing stops for any gains. It may get ugly if the market claims "hangover". NOK $125.38 +5.19 (+3.13) "Confirmation of the breakout would be bounce off $119". Remember that from Sunday? Almost like clockwork, NOK tested $119 yesterday and again near the open this morning, where NOK rose to $122 by lunch. After the interest rate hike announcement, volume filled the sails and this ship left the harbor for new highs (all the way to $127). If volume remains and the market cooperates, NOK should continue to rise. The chart looks great with the 10-dma providing support. While not a splitter yet, NOK would be in split announcement territory around $130-$140 (we'll keep an eye on that, but they'll definitely need to authorize more shares). Anyway, support is at $119. Keep a trailing stop set so the grim profit reaper doesn't take it all back. Dips look buyable - just remember to confirm market direction. Other than an equipment supply agreement in Mexico, there is no fresh news. ***************************** SEE DISCLAIMER IN SECTION ONE
The Option Investor Newsletter Tuesday 11-16-99 Copyright 1999, All rights reserved. Redistribution in any form strictly prohibited. **************** PICK NEWS - PUTS **************** RMDY $37.75 -0.88 (+1.44) One of our favorite short-term indicators is the 10-dma and RMDY managed to successfully close below it both days this week despite the small bounce. We will continue to watch the 10-dma on RMDY which is now at $38.75. Any close over this price should signal your stops to take you out of the play. Otherwise, we will continue to use the bounces as entry points. In reality, with the news that RMDY had this week, you would have expected more strength. On Monday, they announced new product solutions for e-Business technology. On Tuesday, RMDY was named to two lists as one of the top 500 fastest growing businesses. But despite all the good press, the trend continues lower. The is resistance is from the 10-dma and support at $36. This $36 level is the one we are hoping to crack to really turn this play profitable. Keep your stops set in case RMDY trades above $40. CSC $62.00 -1.56 (-1.63) A downgrade has sent Computer Sciences downtown. Soundview Tech downgraded CSC from a Strong Buy to a Buy. The expected earnings targets were reduced as well. On Monday, CSC closed just pennies shy of Friday's close indicating some uncertainty amongst investors. The downgrade seemed to be the deciding factor as CSC, which was making a nice move up this morning, made a turn and began heading south mid-day. CSC is rapidly approaching it's next support level of $60 and therefore it may be wise to wait and see if that level is going to hold before entering a new play. As we mentioned in Sunday's write up, the next support will be around $58. On Monday, CSC announced the addition of three new customers, to its list of business to business e-commerce clients. They also announced that they had been awarded a $61 million contract by FEMA for their continuing to support the governments National Flood Insurance Program (NFIP). ************** NEW CALL PLAYS ************** YHOO - Yahoo! Inc $212.56 +7.56 (+15.63 for the week) Yahoo! Inc is a global Internet media company that offers an online guide to web navigation, plus a branded network of comprehensive information, communication services, and shopping access to millions of users daily. Over 32 mln users visit the Web site each month. Yahoo! operates in the black with the bulk of its revenues derived from advertisements commissioned by its list of about 3800 clients. Yes, the Feds raised interest rates by 25 basis points with a neutral bias, but the scare is over and the bulls are charging ahead in what some are calling an overbought market. YHOO didn't even wait for Greenspan to spew his sentiment. Instead it jumped $8.06 yesterday in a straight up climb starting the week off with an e-holiday bang! It seems once the stock broke near-term resistance at $203 (intraday high last Thursday) the investor enthusiasm caught wind and took off. The gains extended into today backed by an even stronger Internet sector. YHOO added another $7.56 to the share price by the close with volume at about 75% of its norm. Be aware too that to this price level YHOO is definitely a split candidate! Yahoo usually announces a stock split when the share price is in the $200 to $220 range and here we are! Earnings are still down the road only expected mid-January; therefore this play is based on recent momentum driven by the prospects of an exciting e-holiday season and the potential of a stock split announcement. Support is at $195 in the proximity of the 10-dma ($194.34). This level is a solid point of entry, although unless we are afforded a volatile slide to this bottom its more realistic to target shoot intraday in the $205 range which likely could evolve as near-term support. In the news today, Yahoo! Internet Life magazine is holding its first annual Online Film Festival this Spring. Their goal is magnify the importance of film via the Internet. Yahoo! has deals with online and offline communities including Amazon.com and Roger Ebert to help promote this event. BUY CALL DEC-200 YHV-LT OI=2645 at $21.50 SL=16.75 BUY CALL DEC-210*YMM-LB OI=2268 at $15.50 SL=12.00 BUY CALL DEC-220 YMM-LD OI=1446 at $11.13 SL= 8.75 BUY CALL JAN-210 YMM-AB OI=4139 at $23.75 SL=18.50 BUY CALL JAN-220 YMM-AD OI=6858 at $19.13 SL=15.00 Picked on Aug 15th at $212.56 P/E = 990 Change since picked +0.00 52 week high=$244.00 Analysts Ratings 13-7-4-0-0 52 week low =$ 9.69 Last earnings 09/99 est= 0.09 actual= 0.14 surprise=+55.6% Next earnings 01-12 est= 0.15 versus= 0.07 Average Daily Volume = 7.98 mln Chart = http://quote.yahoo.com/q?s=YHOO&d=3m **** JPM - J.P. Morgan $142.50 +4.13 (+3.19 this week) The competition in their industry can be fierce. J.P. Morgan goes head to head with some other well known names in the banking and investment business including Deutsche Bank Goldman Sachs and Merrill Lynch. JPM is one of the top international banks in the world. They offer a wide variety of banking and investment services. JPM in the process of reinventing itself by making the transition to investment banking from the traditional commercial bank. More than half of their sales come from outside the United States. In the consumer market JPM hold a 45% stake in American Century Investments, which offers a variety of mutual funds. When you look at the broker ratings, it may not seem too impressive but when you look at the stock, you can see why we added JPM to our list of calls. The Banking Sector has had a tough go of it since early summer with the FED and interest rate worries hanging over the market. Don't look now but JPM is less than $6 from its 52-week high. After reporting better than expected Q3 earnings in the middle of October JPM and many of the major stocks in the Banking sector began to repair the damage done to the price of their stocks. On Oct 15th shares of JPM were trading near the $105 level. JPM has put in a great run closing today at $142.50. With the FED meeting out of the way, and the return to a neutral bias, investors and traders added many of the financial and banking stocks to their portfolio by days end. The thinking is we may not have the FED in the headlines for the near-term and traders may be able to begin to focus on earnings. With the increase in interest rates out of the way, the banking sector picked up almost 2% today and appears to be heading higher. Today's breakout over $140 on strong volume cinched this play for us. In the event of a pullback, support for JPM lies in the $140 area and then again at $136 from the 10-dma. In considering a new play, look for continued momentum in the price of JPM stock and the banking sector. We have the CPI numbers out in the morning so it may a good idea to let the market digest that report before entering a new play. As always consider your risk profile prior placing a new position on the books. In other news, JPM said Tuesday afternoon is raising its prime lending rate to 8.50 percent from 8.25 effective Wednesday morning. JPM also announced that ebookers.com, a U.K. based online discount travel agent, commenced a sponsored American depositary receipt (ADR) program on the Nasdaq ticker(EBKR)in conjunction with it's $70 million IPO. BUY CALL DEC-135 JPM-LG OI=1679 at $10.25 SL=7.50 BUY CALL DEC-140*JPM-LH OI= 838 at $ 7.25 SL=5.50 BUY CALL DEC-145 JPM-LI OI=3211 at $ 5.00 SL=3.25 BUY CALL DEC-150 JPM-LJ OI= 703 at $ 3.06 SL=1.50 Picked on Nov 16th at $142.50 P/E = 17 Change since picked +0.00 52 week high=$147.81 Analysts Ratings 1-3-10-0-1 52 week low =$ 96.56 Last earnings 10/99 est= 2.22 actual= 2.16 surprise=+2.8% Next earnings 01-18 est= 1.93 versus=-0.42 Average daily volume = 1.21 mln Chart = http://quote.yahoo.com/q?s=JPM&d=3m ************* NEW PUT PLAYS ************* NKE - Nike Inc $44.31 -3.00 (-1.81 this week) Nike is the world's leading designer and marketer of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. They are the number one shoe company in the world and control more than 45% of the US athletic shoe market. Nike is headquartered in Beaverton, OR and sells to over 110 countries and online. If you have a teenager, then you probably already know about Nike and their trendy styles of shoes including the famous Air Jordan model. A booming economy and robust sales of goods in the U.S.? Don't tell that to Nike. They have been struggling for the past couple years as kids turn from tennis shoes to more stylish Timberlands and Doc Martens. Not to mention, Michael Jordan retired from pro basketball. He single-handedly put Nike on the map. But these events are older news and not the basis for our put play. The reason we are looking to buy puts is due to sector weakness, slowing retail sales and more analyst downgrades. One of the downgrades came yesterday as FS Van Kasper downgraded NKE from a Strong Buy to a Buy. Why they were ever a Strong Buy is beyond us. This goes along with Goldman Sachs who downgraded NKE earlier this month from the Recommended list to a Market Outperform. They were quoted as saying that evidence has been mounting in recent weeks that the long hoped for turnaround in the athletic products category is less robust than we expected. It is not good when analysts tell you to search for short-term investments elsewhere. The technical picture isn't any better either. The Goldman Sachs downgrade triggered an already weak looking stock to fall out of bed from $54. On Monday, NKE tried to rally only to roll over off resistance at the 10-dma at $47.50. Now that we are under support at $45, we expect smooth sailing to $40. This is where the next support lies. Use the bounces off the 10-dma as a potential entry point. Volume should start picking up as we approach earnings on Dec 12th. Another factor to keep in mind. BUY PUT DEC-50*NKE-XJ OI=599 at $6.13 SL=4.25 BUY PUT DEC-45 NKE-XI OI=278 at $2.25 SL=1.00 Average Daily Volume = 1.08 mln Chart = http://quote.yahoo.com/q?s=NKE&d=3m **** EL - Estee Lauder $41.81 -0.81 (-1.56 this week) The Estée Lauder Companies Inc. is one of the world's leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products. The Company's products are sold in over 100 countries and territories under well- recognized brand names, including Estée Lauder, Aramis, Clinique, Prescriptives, Origins, Bobbi Brown essentials, Tommy Hilfiger, jane, Donna Karan and Aveda. Estée Lauder was founded in 1946 in New York City. Things just aren't looking so pretty as of late for Estee Lauder as today EL sunk to a new six-week low of $41.25. EL has been trending steadily downward since mid-October and aside from a brief rally last Thursday, has been hitting lower lows on a seemingly daily basis. EL is fast approaching it's 52-week low of $35.50, a level EL has not seen since last December. EL broke through it's 10-dma at the beginning of November and has only re-visited it once since. Currently EL is trading over $2 below it's 10-dma. EL has some support at $39 and should it breakthrough this level, EL should be cleared for a fall to the year low, $35.50. EL was held back at $42 for the majority of trading Tuesday and should this resistance continue to hold, a new entry is feasible at this level. Of course, confirm direction before entering. EL has also seen some recent insider selling, another possibly bearish indication to pressure the stock lower. Don't expect any monster moves from this play but planned entries and exits have the makings of a profitable play due to the low premium involved. BUY PUT DEC-45*EL-XI OI=352 at $3.25 SL=1.50 BUY PUT DEC-40 EL-XH OI= 25 at $1.06 SL=0.00 High Risk! Average Daily Volume = 518 K Chart = http://quote.yahoo.com/q?s=EL&d=3m ********************** PLAY OF THE DAY - CALL ********************** LVLT - Level 3 Communications $77.88 +3.31 (+3.94 this week) 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. Sunday's Write Up LVLT's story this week remained consistent with previous patterns from the last two weeks that we have been providing coverage of the stock. Lets review, the charts have told us that volatility is the name of the game, with a tug of war between buyers and sellers, and then buyers and sellers. I repeated buyers and sellers on purpose that wasn't a typo. Each time the prices surge, the stock pulls back to fill the gap, and then starts its way up again to new highs. On 11/9 the shares surged and then pulled back on 11/10, retraced slightly on 11/11, and then 11/12 came all the way back to close at a weekly high at the high end of the trading range. This is a classic stock to trade, a stock we can get in and out of with small tradable gains. Remember past performance is no guarantee of future results, but you get the picture. Wait for the stock to pullback to support or ride the upward momentum when you see developing price surges. Looking ahead, movement above $74.44 should push the stock a lot higher. Possibly to the June highs. Another possible entry point could be on a pullback near the $70 level. In the news, LVLT announced that it launched communications Services in the Miami metropolitan area. They are building the first international network fully optimized for Internet Protocol technology. Tuesday's Write Up Our trading pattern remained consistent on Monday with our last update when we described the trading volatility. Hopefully you got in and out for a quick trade yesterday or you were brave and held over the interest rate announcement. Both decisions would have fared well. Yesterday and today had the shares trading in a range that was perfect for a quick trade. Monday's low was $73.63 and Monday's high was $77. Tuesday's low is $74.50 and Tuesday's high is at $78. We had mapped out a possible strategy to use if you wanted to trade LVLT and it has worked once again. Also we looked for higher prices above the $74.44 level and we got those price surges, hitting a high today of $78 before settling in to close at $77.88. Going forward look for more of the same and use trailing stops to protect gains, this stock has big pullbacks. Current resistance is at $80 and it should be an easy target from here barring a collapse in the markets. Look for trading support to firm up for a bounce at the $74.25 level if we get a pullback. BUY CALL DEC-70*QHN-LN OI=1291 at $10.06 SL=7.50 BUY CALL DEC-75 QHN-LO OI=1451 at $ 7.00 SL=5.25 BUY CALL JAN-70 QHN-AN OI= 593 at $12.13 SL=9.50 BUY CALL JAN-75 QHN-AO OI= 93 at $ 9.31 SL=7.00 low OI Picked on Oct 28th at $68.63 P/E = N/A Change since picked +9.25 52-week high=$100.13 Analyst Ratings 5-3-1-0-0 52-week low =$ 32.75 Last earnings 10/22 est= -0.51 actual= -0.43 Next earnings 02-18 est= -0.65 versus= -0.11 Average daily volume = 1.80 mln Chart = http://quote.yahoo.com/q?s=LVLT&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ Stocks Rally Even As Interest Rates Rise.. Monday, November 15, U.S. markets traded in a small range Monday as investors awaited the Federal Reserve's decision on whether to raise interest rates. The Dow closed down 8 points at 10,760 while the Nasdaq Composite finished relatively unchanged at 3,219. The S&P 500 also finished near its opening numbers at 1,394. Advancing issues led declines 16 to 14 on active volume of more than 793 million shares on the NYSE. The 30-year Treasury bond rose 5/32, lowering the yield to 6.03%. Sunday's new plays (positions/opening prices/strategy): Ameritrade AMTD JAN21C/DEC25C $2.88 debit diagonal Mellon Bank MEL DEC37C/DEC40C $1.38 debit bull-call TD Waterhouse TWE DEC12C/DEC15C $2.12 debit bull-call C.R. Bard BCR DEC60C/NOV60C $1.88 debit calendar Monday was exciting right from the start as shares of Internet stockbrokers T.D. Waterhouse Group and Ameritrade shares rose after Charles Schwab (SCH) said they will combine the companies to form an online investment bank to handle new share offerings. In addition to the three online brokers, who together have access to more than half of all U.S. online customers and assets, three venture capital firms are becoming partners in the bank. Our new plays on these issues were radically changed by the news and the opening prices were far less favorable than originally quoted. Mellon Bank (MEL) did not participate in the brokerage rally and the stock price fell back significantly from Friday's gains. The target price for the (bullish) debit-spread spread was available and this position traded as low as $1.25. C.R. Bard offered the best opportunity of the day, opening $0.75 lower with the price for the neutral calendar spread at $1.88. The discounted entry lasted less than 15 minutes as market-makers adjusted the quotes to remove the disparity. This position will need to be monitored closely as it has the potential to move $3-$5 in either direction on very short notice. Portfolio plays: Traders moved to the sidelines with their recent profits but most remained bullish one day before the Fed's policy-setting meeting on interest rates. Analysts said they were expecting one of two outcomes; rates unchanged with a tightening bias or an increase of 25 basis points and a shift to a neutral monetary bias. Most investors are betting the FOMC will not raise rates, but instead will merely keep its tightening bias to show it's ready to raise in the future. Many economists support this outcome based on the fact that our current economy is being led by technology-driven advances in productivity, which allows for growth without a rise in inflation. Monday's market offered lots of news and activity in our spreads portfolio. Most of the big moves came on earnings and new merger announcements. Financial and business information service company Data Broadcasting (DBCC) announced a merger with Financial Times group, part of global media company Pearson PLC. This gives the Financial Times group a 32% stake in MarketWatch.com. They plan to transfer ownership of FTAM to DBCC in exchange for a 60% stake in the combined business. The value of the shares to be exchanged is more than $800 million. The speculation on DBCC's future ended with the news announcement and we decided to close the play with a small profit ($0.38) from the bullish position. As we commented on Friday, Multex.com (MLTX) was our new issue to watch and stock jumped almost $3 in morning trading after a Piper Jaffray analyst told clients that several key operating metrics suggest now is the time to buy stock in the financial information provider. He also said the pipeline for new service contracts is very strong and it is likely that positive announcements will occur in coming weeks. The new rating (and $31 price target) drove the issue right from the open and the best opportunity to move to a bullish spread was in the first few minutes of trading or at the end of the session. The new position is MAY17C/DEC20C at a debit of $3.00, and we will plan to close the position early (while there is still time value in the short position) in order to prevent early exercise and an upside loss. There were rallies in many of the lower priced stocks, providing favorable exit opportunities. IDT Corporation (IDTC) moved up $3 at midday, allowing our bullish debit spread (DEC17C/DEC22C) to be closed for a $1.12 profit. This previously slumping issue has shown some signs of strength over the past few days and thus our may be premature. Zoltek (ZOLT) continued to rally on the bullish breakout from last week and we opted to adjust our neutral spread into a diagonal position with a move into December (call) options. The ZOLT market is thinly traded and the roll-up was costly, with an additional $2.00 debit to our current position. The new spread position offers no protection from upside losses and there is no guarantee the stock will hold in the current range after earnings are announced. Echelon (ELON), one of our newest positions, moved another $0.75 to finish at $11.00. This is the upper limit of the profit area and appropriate (bullish) adjustments will have to be made if the stock continues higher before the Friday expiration. Another small-cap issue, Coyote Network Systems (CYOE) reported its financial results for the second quarter of fiscal year 2000. The revenue was less than outstanding at $17,923,000 compared to $22,357,000 for the same period last year. The loss for the past six months was $0.25 per share compared with a loss of $0.17 per share last year. Based on the lackluster announcement and the way the company described future plans, we decided to close the play for existing profits. The position traded as high as $1.88 credit during the morning session. Even in the midst of the small-cap rally, some of our issues are failing to perform as expected. It is very important to learn to manage losses correctly and in this arena, we are woefully inept. Our calendar position in Proxymed (PILL) could have been closed for a favorable profit earlier this month but the bearish issue has fallen $2 in the last ten days. The decision to exit now with a small loss or hold (roll-forward) for the possibility of future gains is a difficult one. Those of you that didn't close the play when a profit was available should consider a move to the DEC-$15 options at a credit of $0.25-$0.31, reducing the overall cost of the long position (APR15C) to approximately $1.31; well below the value of the option. Pacific Gateway (PGEX) continues to decline and our bullish January position is falling further into the red. The decision to close for a loss or hold for recovery is upon us. The opportunity to roll-forward, selling the DEC-$20 option, will leave the position (JAN15C/DEC20C) with a debit of $5.50. Again, this maneuver offers no upside protection but the current loss is reduced and you may be able to eventually exit for a profit, if the stock price rebounds gradually into December. The choice is a hard to make but in most cases, waiting for a play to recover is more costly than moving existing capital to a new position. The last of our fading stars is Apollo Group (APOL). Once again, the play could have been closed for a small profit in weeks past but for those of you holding the bullish spread, a "break-even" exit may be your last opportunity to close the play favorably. Today's move to the bottom of a recent range offers little hope that the issue will recover significantly in the next few days. Tuesday, November 16 Markets surged with the Federal Reserve's decision to increase interest rates 25 basis points, giving equities room to rally into the new year. The Dow rocketed 171 points to at 10,932. The Nasdaq composite index jumped 73 points to close at a new record of 3,293 and the S&P 500 index also ended at a new high of 1,420. In the broader market, advancers outpaced declines 17 to 12 with 940 million shares traded on the NYSE. Portfolio plays: U.S. stocks rallied again Tuesday as investors looked beyond the Federal Reserve's interest-rate decision, while technology and brokerage sectors propelled the market to recent highs. Many of our portfolio issues participated in the rally and the small to mid-cap issues continued to dominate the top leader board. Our newest position, Ameritrade, (AMTD) gained $4.31 to $30.50 with the finance sector rally and Netbank (NTBK) wasn't far behind, rising $4.50 to $30.88. Brokerage takeover candidate Multex.com (MCOM) gained another $2.62 to close at a recent high near $24. Other stocks like Aware (AWRE), Global Crossing (GBLX), Nvidia (NVDA), Network Associates (NETA) and Peoplesoft (PSFT) all had significant rallies and each of these technology positions have produced favorable profits. In the large-cap issues, Sun Microsystems (SUNW) continues to dominate the hardware sector, up $7 to a new high near $126. The pre-split rally is in full force and the question is "Where can we enter now?" Our long-term (LEAPS/CC"s) position is (short) at the $105 strike and although it is profitable, we wonder what it would be like to have just owned the calls. Johnson and Johnson (JNJ) and Medtronics (MDT) also made solid gains and Cabletron (CS) is starting to build support for a new rally from the $20 range. Gemstar (GMST), Pixar (PIXR) and Bell Atlantic (BEL) all moved higher and Monsanto (MTC), a recent take-over candidate, climbed $1.62 to finish near the top of a recent trading range near $46.50. Excite@home (ATHM), one of our readers request plays appears to be making a stand near $45 but the time value in the short-term position is eroding quickly. Those of you in the November play should consider closing the long option for a small loss before it expires worthless. The long-term (diagonal) spread has fared much better and the DEC-$50 options are trading near $2.50 bid, bringing the overall price of the position (JAN40C/DEC50C) to $5.50. The long option can also be sold for the current credit, offering a small profit of $0.75 to close the position. There are a few more adjustments to make as we approach Friday's expiration and we will keep you posted on the new positions and prices for December. Currently, the spreads/combos portfolio is enjoying one of the best months since inception (only because we are hopelessly bullish) and a list of the current plays will be posted in next Tuesday's edition. Straddles: Technology and Internet stocks have enjoyed recent bullish moves and one of the Optionetics straddles came bouncing back from last week's lows. Ebay (EBAY) moved up $5.43 today, bringing the call option to a credit near $18. That price offers a much better exit (almost at break-even) for those of you that closed each position on an individual basis; an alternate we suggested two weeks ago. Donaldson, Lufkin and Jenrette (DLJ) moved closer to the upside profit range in Tuesday's session, climbing almost $4 to close at $57. As we said in Sunday's issue, DLJ may be the first straddle to profit on both sides of the position, reaching the upside and downside profit points prior to expiration. Sunday's new plays (positions/opening prices/strategy): Lycos LCOS JAN70C/JAN70P $14.62 debit straddle Our new Internet position was quite active in Monday's session, moving up $2 in the first few minutes. The market-makers didn't wait long to inflate the prices and the target was available for a short period, early in the session. In Tuesday's market rally, the stock price retreated, allowing another entry at (and below) the suggested price. Questions & comments on spreads/combos to ray@OptionInvestor.com ********** NEW PLAYS ********** With the incredible rally over the past few weeks, many analysts would suggest that the market is due for correction. Rather than look for bearish issues in a predominantly bullish trend, it may be preferable to search for the favorable group or sector that will benefit from a rotation out-of the big-cap issues. As communications and wireless data technologies enable a new era of connectivity through the Internet, telecommunications equipment stocks will continue to offer excellent investment opportunities. Small-cap stocks in this group have been on the move recently, particularly companies that provide equipment for networks and wireless enabling technologies. As the demand for terrestrial and wireless infrastructure grows, issues in this industry will prosper. Here are two favorable candidates, one conservative and one aggressive, for your review. **** TUTS - Tut Systems $41.31 *** Copper Wire Masters *** Tut Systems designs, develops & markets advanced communications products which enable high-speed data access over the copper infrastructure of telephone companies, as well as the copper telephone wires in homes, businesses and other buildings. These products incorporate Tut's proprietary FastCopper technology in a cost-effective, scalable and easy to deploy solution that can exploit the underutilized bandwidth of copper telephone wires. Tut Systems reported quarterly results above analyst estimates with increasing customer growth and units per customer. One of the leading industry analysts recently reiterated coverage of TUTS with a "Buy" rating, based on the probability of upside revenues and earnings surprises as the broadband access market expands over the next few years. Robertson Stephens Managing Director and Senior Communications, Networking Analyst Paul Johnson recently reported on the growth in the DSL equipment market, saying the sector is expanding in an exponential manner; up 169% since last year. He believes the access of next generation networks will become the next growth opportunity in the industry and broadband is the remaining piece of the puzzle. TUTS has emerged as one of the leading vendors in multi-tenant, broadband-access using the traditional industry infrastructure and should have the opportunity to fully exploit the market's development. PLAY (very conservative - bullish/debit spread): BUY CALL FEB-20 QSS-BD OI=20 A=$21.88 SELL CALL FEB-25 QSS-BE OI=69 B=$17.38 INITIAL NET DEBIT TARGET=$4.38 ROI(max)=14% B/E=$24.38 - OR - PLAY (very conservative - bullish/debit spread): BUY CALL FEB-17.50 QSS-BW OI=3 A=$24.12 SELL CALL FEB-25.00 QSS-BE OI=69 B=$17.38 INITIAL NET DEBIT TARGET=$6.62 ROI(max)=13% B/E=$24.12 Chart = http://quote.yahoo.com/q?s=TUTS&d=3m **** ABTE - Able Telecom $10.81 *** Speculation Only *** Able Telecom provides specialized communication services and products relating to engineering, installation and maintenance of communication networks, primarily for telecommunications and traffic management systems. Telecommunication service activities the installation and maintenance of centralized office switching equipment, coaxial and fiber optic cable, wireless networks and all facets of plant engineering and construction. Able is growing both in structure and revenues as it acquires new companies in the communication industry. They recently purchased Southern Aluminum & Steel Corporation and Specialty Electronic Systems to supplement the Able Transportation Services division. SASCO and SES are both experts in their fields and new customers use their knowledge early in project development. The strategy is to capitalize on their working relationships, providing a smooth progression from design through engineering and construction to eventual completion. Management expects that these two businesses together will provide revenues in excess of $15 million in the first year of operations. The recent rally has come with little or no news and for that reason, the play is aggressive in the short-term and requires reasonable due-diligence. The spread offers a favorable low-cost opportunity with plenty of time for success and the front-month premium disparity provides a small discount, increasing the probability of a profitable outcome. PLAY (speculative - bullish/calendar spread): BUY CALL MAR-12.50 QZB-CB OI=475 A=$2.62 SELL CALL DEC-12.50 QZB-LB OI=198 B=$1.50 INITIAL NET DEBIT TARGET=$1.00 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=ABTE&d=3m *************** TECHNICALS ONLY *************** These plays are based on the current price or trading range of the underlying issue and the recent technical history or trend. The probability of profit from these positions is also higher than other plays in the same strategy. 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 stock price. **** PSFT - Peoplesoft $17.81 *** Ready To Go! *** Peoplesoft develops, markets and supports client/server-based business application software products, including distribution, financial and human resource management systems. They provide services such as maintenance, training, consulting and support. Customers consist primarily of medium/large sized corporations, higher education institutions and government agencies. The recent bottom near $14 has provided an excellent base for this well-known issue to begin a meaningful rally. A series of positive divergences have formed and the institutional interest is supporting the current move. PSFT has climbed almost 10% in three days and it may be somewhat overbought however, the trend is intact and our cost-basis near $14 is very conservative. PLAY (very conservative - bullish/covered-call): BUY STOCK - PSFT ASK=$17.81 SELL CALL JAN-15 PQA-AC OI=2156 B=$3.75 RETURN CALLED = 14% (margin) COST BASIS = $14.06 To supplement the ROI for this position, we suggest.. PLAY (very conservative - bullish/debit spread): BUY CALL JAN-12.50 PQA-AV OI=883 A=$5.88 SELL CALL JAN-15.00 PQA-AC OI=2156 B=$3.75 INITIAL NET DEBIT TARGET=$2.00 ROI(max)=25% Chart = http://quote.yahoo.com/q?s=PSFT&d=3m **** CYCH - Cybercash Incorporated $11.88 *** Up, Up, And Away! *** CyberCash is a world leader in e-commerce technologies and services, enabling commerce across the entire market spectrum from electronics retailing environments to the Internet. CYCH provides a complete line of software products and services allowing merchants, billers, financial institutions and consumers to conduct secure transactions and other e-commerce functions using the broadest array of popular payment forms. Another of the current Internet rallies that is poised for a move to previous highs. The base and crouch were adequate for a sustained run to the recent consolidation area near $15 and a pause at this price should allow us to parlay the opening position into a successful directional spread (near the middle to end of the December expiration period). PLAY (aggressive - bullish/calendar spread): BUY CALL MAR-15 KBQ-CC OI=175 A=$1.68 SELL CALL DEC-15 KBQ-LC OI=168 B=$0.50 INITIAL NET DEBIT TARGET=$1.00 TARGET ROI=50% Chart = http://quote.yahoo.com/q?s=CYCH&d=3m ************ See Disclaimer in section one ************
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