Option Investor

Daily Newsletter, Wednesday, 12/15/1999

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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


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

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

According to Nortel, more than 75 percent of North American
Internet backbone traffic travels across Nortel Networks

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.


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 

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

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