The Option Investor Newsletter Monday 12-20-99 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 ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-20-99 High Low Volume Advance Decline DOW 11144.30 - 113.10 11310.10 11110.90 904,620k 1,292 1,816 Nasdaq 3783.87 + 30.81 3801.93 3747.79 1,317,954k 1,871 2,419 S&P-100 771.29 - 2.64 778.61 767.67 Totals 3,163 4,235 S&P-500 1418.09 - 2.96 1429.16 1411.10 42.7% 57.3% $RUT 467.19 + 0.98 469.84 466.21 $TRAN 2884.47 - 33.95 2940.31 2879.28 VIX 24.66 + 1.65 25.18 22.82 Put/Call Ratio .51 ************************************************************* 'Twas the night before FED gathering. . . And all through the land Investors were wondering What's in Alphonso's hand? The bond rate was spiking At the end of the day Hopefully, he won't change the bias We pray Forgive the adulteration of what is normally a great read for the kids, but we couldn't help exercising some poetic license during the Holiday season. The fact is, that pretty much summarizes the sentiment affecting today's equity markets. For those just catching up on the latest doings on Wall Street, tomorrow the FED holds their last FOMC meeting of year, century, and more importantly the millennium. Even so, facing Y2K, investors are 99.99% certain that the FED will not raise interest rates at this meeting. If for some reason, something goes wrong on Jan. 1, 2000, the FED by its lack of action tomorrow avoids becoming the markets' whipping boy. While there is the possibility of the FED changing the bias from neutral to positive, it will likely be a non-event. We think today's action was just an excuse to take some money off the table. Nonetheless, that didn't stop the bond market from spiking the rates to its highest level in two years, up to 6.43% in anticipation of a February rate hike. Looking ahead, the market has already priced in a .25% increase at the FED's next meeting in February. Of course, increased rates equals increases interest expense, which equals decreased earnings, which equal falling stock prices. Yeah, right. Just tell that to the NASDAQ market, which went on to set another closing record today, but on far less volume ("only" 1.3 bln shares) than usual. Though institutions are stalking their deals carefully and may curtail their trading activity a bit through the new year, that didn't stop the momentum traders from getting in the action. Red Hat (RHAT) announced a 2:1 split, and despite reporting a loss or a penny wider than expected, plus the prospect of a secondary offering (read that, dilution), RHAT tacked on another $15. That wasn't even in the top 10 gainers, which included (among others) Novellus (NVLS, +28.41), InterVu (ITVU +26.88), Liberate Technologies (LBRT +24.25), Sycamore Networks (SCMR, +23.00), Yahoo (YHOO +19.50), and Verisign (VRSN +19.19). While not in the top the top gainers, QCOM set another new high today gaining $11.81 on shareholder approval of a 4:1 split. Volume backed it up, exceeding the ADV by 8%. JDSU moved up $14.69, as it too will split 2:1 on December 30. Among the five generals, CSCO (+3.56, 103.25) announced that they would acquire the optical telecom division of Pirelli, a division engaged in wave division multiplexing (splitting a single light source into multiple channels). This is a good fit for CSCO, and now allows them to offer end to end optical connectivity for their customers, a much more attractive equipment package for telecom companies. Paine Webber too saw the light, and upped its price target to $138 from $125. Dell (DELL, +2.13, 47.69) too got a boost from JP Morgan, who raised their price target to $65 and upped their rating from Market Perform to Buy. Volume was a whopping 55 mln shares, more than twice the ADV. MSFT fell victim to some profit taking, giving up $2.50 on low volume. INTC also ran $1 negative on low volume. The low volume on the latter two is nothing to worry over, and the high volume on the former two indicate funds are buying. Liquidity is alive and well and will remain the salvation of the NASDAQ market. Of course there will be dips, but we should take advantage of it as a buying opportunity. Volumes, as indicated by today's decrease will slack off through the new year, but the volatile movement could give us some good entries to take advantage of all that cash going back to work in January. Support remains really strong at 3500, but we don't expect to see that anytime soon. Though 3750 offers some near term support, it may not hold in the volatility leading up to Y2K. The next levels of support are at 3670, and 3575. Watch these levels for guidance. The DJIA however remains range bound with support around 11,120; after that, try 11,050. Today's 30 point rebound into the close on increasing volume was particularly encouraging, despite an overall loss of 113 points. Honeywell (HON) was the biggest culprit here, losing $7.13 (about -35 DOW points) on news that they would acquire Pittway Corp (PRY) in a $2.2 bln transaction. HON closed down $7.13 at $56.63, while PRY advanced $15.88 to $44.88. For its part, the DJIA has not completely unhooked from rising interest rates the same way NASDAQ has. Here's the meat. The DJIA closed down 113 points at 11,144 on profit taking, using tomorrow's FED meeting as an excuse. Volume was a respectable 905 mln shares, with advancers losing out to decliners roughly 3:2. 306 new lows trampled just 87 new highs. Down volume clearly outpaced up volume 10:7. While these internals look weak (and we don't deny they are), they also have historically portended a near to intermediate term buy signal for the longer term players. Again, don't back up the truck. We still need to pick our entries carefully, but we nonetheless consider the dips to support (11,120 and 11,050) buyable for specific plays. The NASDAQ as mentioned earlier went on to set (what else?) another new record, but on slightly less volume (1.324 bln shares) than to which we are accustomed. With more buyers absent and the remaining traders conserving the cash waiting for dips, this is a target shooter's paradise. Lesser volume will tend to make the trading more volatile, since momentum traders are getting a bit more of the spotlight this week. Decliners once again edged out advancers 24:19, while 195 new highs squeaked ahead of 171 new lows. Not only that, but up volume outpaced down volume 14:11 - you just can't keep a good tech stock down (at least not for long). There you have it. Today's sell-off was nothing to worry about and should be expected in these days of heightened volatility. The closing strength looked positive to us. Use it to your advantage to target shoot positions you'd like to be in come January 3. Splitters have been working well lately, and we have plenty slated for the end of the month. Tomorrow and the rest of the week, needless to say will be choppy, especially ahead of the FED meeting even though we expect no surprises. Still, don't take it as a license to take chances; we need to stick to the discipline of cutting losses when a trade moves against us. As always, trade your plan and sell too soon. Buzz Lynn Research Analyst *********** STOCK NEWS *********** Market Strategists Look Ahead to 2000 By Cindy Christ As 1999 comes to an end, strategists and fund managers are busy making market predictions and updating their investment outlook for the first year of the new millennium. Top U.S. broker Merrill Lynch released its December Gallup Survey of Fund Managers, giving investors a global view of where institutional money managers are placing their bets going into 2000. Survey results show that U.S. managers expect another strong year for the domestic economy, and they predict the Fed will raise interest rates to slow moderately rising inflation. Managers also say they've turned bearish on U.S. Treasuries and have little interest in financial stocks, as record performance by technology issues continues to capture their attention. With a record low cash balance of just 1 percent in their international funds, domestic managers say they're bullish on overseas and emerging market equities and are strong buyers of Continental European and Latin American stocks. Across the pond, 97 percent of European fund managers expect their economy to be stronger on a year's view and are calling for the European Central Bank to raise rates by 60 basis points. Only 38 percent expect inflation to rise there. The average cash level in European funds has fallen to a record low of 3 percent, and managers are sellers of bonds as money is increasingly directed toward equities. Buyers of domestic equities outnumber sellers by a strong 42 percent. Like their American counterparts, European investors are shifting funds away from financials and into growth stocks. In particular, managers like telecoms and electronics issues. In Japan, 88 percent of fund managers expect a stronger domestic economy next year, representing the highest level of optimism since May 1997. Bulls of Japanese equities outnumber bears by 76 percent, near a record high. For the first time since the Fed started to raise rates, Japanese managers have turned bullish on Wall Street. In other key shifts, Asia Pacific fund managers are overweighting Hong Kong equities for the first time, and a record number plan to buy more. In addition, sellers of overseas bonds outnumber buyers by the highest margin since 1994. As economist look into their crystal ball for next year, Standard & Poor's is predicting a 13 percent market rise in 2000 and estimates the benchmark S&P 500 will end at 1,600. According to its "2000 Annual Forecast," next year the top -performing sectors should be broadcasting, technology, health care, banks, semiconductor chipmakers and telecommunications. This compares to 1999, where technology and telecommunications related shares made up 70 percent of top-performing sectors. "The new breed of investor, unburdened by historical baggage, is flocking to these groups," Standard & Poor's said in the report. Tech stocks, especially communications concerns involved in the convergence of voice, Internet and video transmission are projected to perform especially well. An informal poll by Reuters Monday showed that many strategists predict the Nasdaq, which is up a phenomenal 71 percent through Dec. 20, will pull back early in 2000. They also expect the U.S. economic expansion to continue, but say growth will slow and inflation will remain below 3 percent. Longer term, experts predict strong demand for equities to continue for the next 10 to 15 years as baby boomers save for their retirement. "The share of household assets in stocks historically has fairly closely followed the share of population aged 45 to 54. This segment of the population should reach a peak of 18.7 percent in 2007, and then stay close to that level for the next five years," writes PaineWebber chief investment strategist Edward Kerschner in the firm's "Outlook 2000 report," according to Reuters. Although strategists expect consumer confidence and spending to remain upbeat, most are looking for one or two interest rate increases from the Fed next year. And while fund managers anticipate another positive year, technicians are increasingly concerned about a 22-month long deterioration in the market's advance/decline line, which measures the number of stocks scoring new highs versus those making new lows. Just a handful of well known, large-cap stocks like Qualcomm (QCOM) and Cisco Systems (CSCO) have powered the Nasdaq to its best performing year since its 1971 launch. Meanwhile, small- and mid-cap stocks of all stripes have fallen or made little progress. According to research firms Notley Information Service and Investors Intelligence, the advance/decline line is at a 12-month low and breadth has dropped to levels not seen since 1995. Most technicians support the notion that unchecked weakness in breadth leads to bear markets. The idea is based on data showing that the number of advancing issues is closely correlated to the likelihood that the market will continue to rise. Conversely, the number declining is predictive of a market drop. Many are calling for a 10 to 20 percent correction in the overall market and up to 50 percent for the high-flying Nasdaq. Still others like Merrill Lynch chief market analyst Richard McCabe question the measure's utility, noting that both the Dow and Nasdaq have reached all-time highs despite the negative indicator. While technicians were predicting for a correction, tech stocks continued to drive the Nasdaq higher Monday. Shares in database leader Oracle Corp. (ORCL) shot up 8 percent to $98.25 after the company announced a 2-for-1 stock split for shareholders of record Dec. 30. The split takes effect Jan. 18, 2000. Oracle has about 1.43. billion shares of common stock outstanding. This marks the ninth time that its common stock has split since the company's initial public offering in March 1986. No. 2 U.S. computer maker Dell (DELL) advanced 6 percent after J.P. Morgan upgraded the stock to "buy" from "market perform" on expectations for strong sales related to Microsoft's Windows 2000 release. Top Internet retailer Amazon (AMZN) surged 13 percent to trade as high as $106.75 on research showing eTailers were meeting or exceeding record forecasts for holiday sales and news that Time magazine named Jeff Bezos, the company's founder, Man of the Year. **************** PLAY OF THE DAY **************** SONE - S1 Corporation $85.25 +1.25 (+1.25 this week) S1, the pioneer of Internet banking, is today's leading global provider of innovative Internet-based financial services solutions. S1 offers a broad range of applications that empower financial organizations to increase revenue, strengthen customer relationships and gain competitive advantage by meeting the evolving needs of their customers across various lines of business, market segments and delivery channels. Through its professional services organization, S1's applications can be implemented in-house or outsourced to the S1 Data Center. Sunday's Write Up SONE broke out of its consolidation phase on December 2, and hasn't stopped to look back since. Driving the move is renewed interest in the internet and specifically B2B e-commerce. SONE continues to make strategic alliances as they strengthen their market position, (see news below). Since the breakout, shares of the company have only once touched the 5-dma (currently at $76.19). Nothing moves up in a straight line to be sure, but barring a significant correction in the broader markets, we may have to content ourselves with an entry on an intra-day dip. Price swings of $6-10 are common, which should give the alert trader good entry opportunities. SONE has almost doubled in price since the first of the month, so there is a lot of air that could be let out by any negative news or market events. Remember the FED meeting this week; investor concern before the meeting could be just what we need to get a good entry into this high- flyer. In the event of a correction (Oh please!), look for a bounce near $70, which is just above the 10-dma (currently at $68.33). This can be a volatile issue, so confirm direction and continuing strong volume before opening a new position. VerticalOne Corporation, a wholly-owned subsidiary of SONE, announced on December 13 they have been selected to provide their one-stop personal account aggregation service to iVillage.com's vast audience of 7.1 million women visitors. On Wednesday, the company announced a joint venture with Zurich Financial Services to develop a new European-based subsidiary of SONE. Zurich will invest $15 million in exchange for a minority stake in the new venture. BUY CALL JAN-75 QFB-AO OI=474 at $15.88 SL=12.50 BUY CALL JAN-80*QFB-AP OI=267 at $13.00 SL= 9.75 BUY CALL JAN-85 QFB-AQ OI=73 at $10.38 SL= 8.00 Low OI! BUY CALL JAN-90 QFB-AR OI=406 at $ 8.38 SL= 6.75 Low OI! Picked on Dec 18th at $84.00 P/E = N/A Change since picked +1.25 52-week high=$85.00 Analysts Ratings 6-2-0-0-0 52-week low =$13.94 Last earnings 11/99 est=-0.05 actual=-0.03 Next earnings 02-01 est=-0.06 versus=-0.19 Average Daily Volume = 735 K Chart = http://quote.yahoo.com/q?s=SONE&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. Move your trading into the next millineum with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. 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