The Option Investor Newsletter Wednesday 12-15-99 Copyright 1998, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Also provided as a service to The Online Investor Advantage Published three times weekly, Sunday, Tuesday, Thursday evenings ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-15-99 High Low Volume Advance Decline DOW 11225.30 + 65.10 11282.20 11130.50 1,033,411k 1,449 1,636 Nasdaq 3621.95 + 50.29 3621.98 3503.70 1,641,944k 1,799 2,399 S&P-100 767.19 + 8.57 769.35 755.51 Totals 3,248 4,035 S&P-500 1413.19 + 10.02 1417.34 1395.93 44.5% 55.5% $RUT 461.32 - 1.43 462.74 455.39 $TRAN 2919.54 + 10.66 2926.14 2890.93 VIX 23.36 - 1.11 26.25 23.01 Put/Call Ratio .50 ************************************************************* Another Day, Another Bounce "Who, me scared? No, I knew it would bounce." If this statement came from you, then you are more brave than I. There is always something unsettling about the Nasdaq breaking its 10-dma that will keep me close to the sell button. I don't want to be the one left holding the bag just in case the Y2K hysteria gets out of hand. Remember, the Nasdaq is up over 65% year-to- date and many investors and traders alike may want to walk away before the Christmas holiday. But if you look just at today's action, with a solid bounce at 3500, it doesn't look that bad. The high-tech index was down as much as 68 points before recovering all of that and then some. OK, so the Nasdaq over shot the 3520 support that has been solid for the past couple weeks. You can justify that in this volatile market environment, plus it was only by 17 points. If you had played 3520 support, you were still handsomely rewarded today. It is amazing how the buyers show up at the 3500 area. This level has held during all pullbacks this month. That is a good sign of continuing interest in the markets and could also be used as sell signal if we drop below that level. It is nice when the support lines have been tested enough to give a more clear indication of sentiment. Now we know if it breaks 3500, and the massive amount of buyers that have lined up there, that it is likely due for a bit of a fall. The leaders today were a blast from the past (if you consider earlier this year a long time ago). Stocks like MSFT, INTC and ORCL were cruising. MSFT was up yesterday on rumors of a deal soon to be forthcoming with the Justice Department. These are largely considered rumors but today they did say that the Windows 2000 product for manufacturing is complete and set to launch in February. INTC was up on news that as soon as next week they would release an even faster Pentium III chip to combat AMD's Athlon chip. ORCL rocked on a great earnings report released after the close on Tuesday. They topped both First Call and the whisper number by posting $0.26 eps. The point is that these larger companies, especially INTC and MSFT, make up a big portion of the indices. Today's gain in the Dow can be directly attributed to INTC and MSFT alone. Without these big winners we may have been down on the day. INTC +6.50, MSFT +9.56, and ORCL +13.44. The Dow Industrials finished up 65.15 to close at 11130.51 on strong volume. In fact, today's volume over 1 billion shares marked the third time in history that we have had back-to-back billion share days on the NYSE. How times have we had three consecutive days over a billion shares? Never. Maybe tomorrow will be the day. What does this all mean? Nothing. It is mostly related to the triple-witching Friday coming up later this week. And the reality is that volume will continue to increase with IPOs, stock splits, etc. We will look back at a billion share day as being light someday in the near future. Decliners beat advancers by 16 to 14 on the NYSE. The other indices did well too. The Nasdaq closed up 50.29 to 3621.95. The volume on the Nasdaq was heavy as well at 1.6 billion. The S&P 500 was up 9.86 to 1413.03. The Transports finished higher, the Utilities were up by 2.99, while the Russell 2000 fell slightly. Notice from the chart below that the Dow 30 is continuing to creep higher. The lows are moving up with each sell-off and the index is bouncing on the 10-dma. It is nice to see the Dow moving up with the Nasdaq as opposed to doing nothing while the tech-heavy indices take off. The reasoning is likely due to the tax loss selling coming to an end. Sectors like Paper, Oil, and Aluminum have begun to show signs of life again. Networking issues were weaker today thanks to CSCO. The giant of the industry was down over concerns about the wording in their 10-Q filing. This is the detailed quarterly report that all companies must file with the SEC. The filing warned of slower sales growth in the future but analysts noted that most companies have similar statements used to warn investors of the potential for a turnaround. In the filing, the company said gross margins decreased to 64.8 percent in Q1 of 2000 from 65.5 percent in the same period last year. The decrease was due primarily to a continued shift in revenue mix towards lower- margin products and the continued pricing pressure seen from competitors in certain product areas. This is likely to be a one-day event as cooler heads amongst the institutions take over and began buying from panicked traders. Other losers included Verity. They were cut in half today after missing both earning and revenue numbers in their Q2 earnings report late yesterday. This brought on multiple downgrades and left shareholders with lighter pockets. VRTY closed down $22.88 to $26.13. To avoid the above disaster, play stocks that will triple their revenue estimates for the quarter. Not possible you say? Well, don't tell CMGI. They released earnings after the close today and posted a top line of $123 million vs. a consensus estimate of $46 mln and a year ago number of $37 mln. Throw in a 2:1 stock split and you have the recipe for a rally tomorrow. The question is, will it open at a reasonable price? From a look at the after-hours action, probably not. It is ticking up by the minute. During the regular session CMGI ended at $199.75, down $6, but in after-hours it was as high as $235. The earnings per share number was also impressive by showing a loss of $1.08 vs. an estimate of $1.76. In looking at the support that we keep mentioning for the Nasdaq at 3500-to-3520, is there a reason for investors to be buying? When you look at both ORCL and CMGI's earnings, the answer is a resounding yes. Remember, earnings season is just a couple weeks away and if these are the kind of numbers we will be seeing then put me down for 10 contracts of anything! But the truth is that I will be more picky heading into the year-end than ever before. I think it is safe to say that Y2K shouldn't have a material impact. But that is not my major concern. My concern is, how will other investors react to a minor pullback in the next two weeks? Will they have their fingers on the sell trigger? How many stop loss orders are already in place that may cause a sudden drop? If so, will others fuel the drop with more selling? It is possible. The potential for some solid entry points heading into the earnings season is there. This whole Y2K episode may be the first and last of its kind and I don't mind taking a couple weeks off to sit back and watch it unfold. After the returns in the market this year, it's likely that you can afford to take a step back and be patient with your entry points. Tomorrow before the market opens, the trade deficit numbers for October will be released. The estimate is for a deficit of $24.5 billion. A better than expected number may help the bond to recover as it ended near the low with the yield at 6.32%. The VIX looks about neutral at 23.33, rebounding from a high this morning over 26. INAP also announced a stock split after the close. A morning rally is likely with the good earnings from CMGI, two stock splits, the Nasdaq rallying into the close and today's elastic market that made for a great bounce. Just remember to sell too soon. You don't want to be left standing when (or if) the music stops. Ryan Nelson Asst. Editor *********** STOCK NEWS *********** Nortel Acquisition Spotlights Optical Networking By Cindy Christ Shares of Nortel Networks (NT) fell more than 3 percent in early trading Wednesday on news it was acquiring privately held Qtera Corp. for up to $3.25 billion in stock. As the Nasdaq reversed course to erase a 68-point loss, stock in the Brampton, Ontario-based company rebounded to finish up $0.56, or 0.64 percent, at $88.63 per share. Based in Boca Raton, Fla., Qtera is a privately held manufacturer of equipment that speeds up Internet performance and lowers the cost of running a fiber optic network. The deal, which the media first reported Dec. 9, came as no surprise to Wall Street. Nortel said the purchase is aimed at extending its lead in the red-hot optical networking arena, which is booming, as telephone carriers and cable TV operators upgrade their systems to meet demand for Internet and data services. "The surge in Internet usage and eBusiness makes the delivery of the high-performance, all-optical Internet essential," said John Roth, Nortel president and chief executive officer. Qtera products operate at 10 Gigabits per second, the speed used by leading Internet networks. "What this does for us is to give us tremendous speed," said Clarence Chandran, president of Notel's optical carrier packet solutions unit, in an interview with CNBC. Qtera has developed technology that can send optical signals as far as 2,500 miles without converting them into electrical energy. Data sent in the form of light through optical networks fade over distance, requiring periodic conversions to electrical form to boost the signal, a process called regeneration. These frequent conversions increase operating costs. The company claims that eliminating regeneration will give Nortel customers faster and better Internet service at a lower price. Canada's Nortel is North America's No. 2 telecommunications equipment maker behind Lucent Technologies (LU) and second largest provider of Internet routers after Cisco Systems (CSCO). According to Nortel, more than 75 percent of North American Internet backbone traffic travels across Nortel Networks systems. A November study by consulting firm Ryan Hankin Kent shows that Nortel controls 32 percent of the global market for optical Internet gear. Slated to close in first quarter 2000, the acquisition is contingent on Qtera meeting certain business objectives and is subject to regulatory approval. Equipment testing will begin in the first quarter and sales should begin in the second half of next year, Nortel said. The acquisition will be neutral to earnings in calendar year 2000 and will add to profits in 2001, after acquisition -related charges are removed. Consensus profit forecasts for Nortel according Zacks is $1.07 per share for 1999 and $1.32 for 2000. Although the company has no sales, Qtera employs 140 workers in Florida and 30 in Richardson, Texas. After the deal closes, Qtera will become a wholly owned subsidiary of Nortel. At a November analysts' conference, Roth said that fiber optic gear sales alone could bring in $10 billion during the next calendar year for Nortel. Roth also said the company might cut up to 1,000 administrative jobs over the same period to improve operating results. For the nine months-ended September, Nortel revenues increased 29 percent to $15.22 billion. Net loss fell 54 percent to $523 million. Revenues reflect continued strong demand for optical networking and high-speed Internet access equipment in the U.S. and Europe. After the announcement, analysts questioned whether Nortel paid too much for Qtera, noting the deal reflects investor frenzy over companies in the optical networking space, such as JDS Uniphase (JDSU) and SDL Inc. (SDLI). Shares of optical component makers JDSU and SDLI advanced after analysts said that Qtera technology and that of its competitors like Corvis and Ciena, will create huge demand for optical components. Earlier Wednesday, JDS Uniphase announced it would acquire Oprel Technologies Inc., a developer of optical amplifiers, test equipment and optoelectronic packaging. The terms of the transaction weren't disclosed. The deal hit a high note with investors, who bid up JDSU shares $8.75, or 4 percent, to $228.63. Competitor SDLI gained $2.06, or 1.28, to $163.50. Corning (GLW), which invented fiber optic technology 20 years ago, declined $7.75, or 6.8 percent, to close at $105.50 after hitting an intraday low of $100.63. Shares declined on fears that Qtera's newer technology will squash demand for Corning regenerators. Some analysts said the worries were groundless and that the change will increase demand for other Corning components like amplifiers, lasers and optical switches. Unlike JDSU, its most popular competitor, Corning also has earnings and a long operating history in optical technology. With shares now more than 14 percent off their 52-week high and a tech correction still in the offing, analysts say Corning may present a good, long-term buying opportunity if shares break below today's $100 support level. **************** PLAY OF THE DAY **************** INKT - Inktomi Corp $166.25 +5.19 (-1.50 this week) Inktomi develops the world's most scalable software for the world's fastest-moving software environment: the Internet. The company's core technology underpins products for the Internet infrastructure that contribute to network performance, scalability and efficiency. Inktomi technology paves the way for emerging opportunities in online commerce, media and communications by enabling the Internet to intelligently accommodate more users and data traffic. Inktomi developed the search engine that runs such popular portals as HotBot, NBC's Snap, Yahoo!, and the Disney Internet Guide. Sunday's Write Up INKT is split-happy. On December 3rd, the Board of Directors announced a 2:1 stock split payable on or about December 30th. The company has 300 mln shares authorized and 50 mln outstanding. Therefore there are plenty of shares available for the split. INKT share prices surged on the news. This week the momentum remained intact as the stock stretched into new territory. On Wednesday, INKT hit $179.88, setting the most recent new high. The profit-taking that followed on the Nasdaq was a blessing as it pulled INKT back into an entry range. Near-term support is established at $160 and an intraday dip to this level would be a solid entry. On Thursday, INKT received vote of confidence with a Strong Buy recommendation from Thomas Weisel Partners. In other news this week, Inktomi and Sun MicroSystems (SUNW) agreed to invest $26 mln in Digital Island, a company that provides high-speed data network services for Internet businesses. This strategic alliance provides leadership in the content distribution industry. Tuesday's Write Up Yikes! A 17+ point downdraft sounds so drastic. Actually INKT has simply returned to the upper spectrum of near-term support ($155-160) effectively providing traders with another solid entry into this split play. Yesterday players saw a $10.75 final advance and all-time highs intraday at $185. The news that Microsoft had reopened its doors to the search provider prompted traders to bid up the shares. Inktomi's award-winning Search Engine will once again be the search provider for all of MSN. INKT 2:1 stock split is expected on or about December 30th. If the market can rebound from today's episode, this could be a blessing of an entry point. BUY CALL JAN-165*KYQ-AM OI=215 at $20.63 SL=16.00 BUY CALL JAN-170 KYQ-AN OI=910 at $18.75 SL=14.50 BUY CALL JAN-175 KYQ-AO OI=256 at $16.75 SL=13.00 BUY CALL JAN-180 KYQ-AP OI=615 at $15.13 SL=11.75 Picked on Dec 9th at $166.94 P/E = N/A Change since picked -0.69 52-week high=$185.00 Analysts Ratings 7-6-3-0-0 52-week low =$ 52.06 Last earnings 10/99 est=-0.10 actual=-0.09 surprise +10.0% Next earnings 01-20 est=-0.08 versus=-0.14 Average Daily Volume = 1.97 mln Chart = http://quote.yahoo.com/q?s=INKT&d=3m ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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