The Option Investor Newsletter Thursday 1-6-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 1-6-2000 High Low Volume Advance Decline DOW 11253.30 + 130.70 11313.40 11098.40 1,084,276k 1,963 1,136 Nasdaq 3727.13 - 150.41 3868.76 3715.62 1,594,505k 1,925 2,199 S&P-100 762.64 + 1.12 767.66 756.56 Totals 3,888 3,335 S&P-500 1403.45 + 1.34 1411.90 1392.02 53.8% 46.2% $RUT 475.34 - 3.49 480.19 474.39 $TRAN 2937.08 + 69.72 2945.36 2843.30 VIX 28.13 - 0.02 29.63 26.54 Put/Call Ratio .48 ************************************************************* Technically the Nasdaq has now corrected the required -10% Shortly before the close today the Nasdaq touched the magic -10% correction retracement from Monday's closing high of 4131. The Nasdaq rebounded +60 points from that low but the selling was not over yet. Twelve minutes before the close their was a rumor that a big company was going to pre-warn and the bottom fell out of the market again. Lucent stepped up and announced an earnings shortfall from Y2K impact and product mix. This was only minutes after the Dow and Nasdaq were rocked by a rumor from the futures pits that Microsoft was going to miss their numbers. This rumor was refuted quickly and the stock and markets recovered. The Dow had been the leader all day as it moved within slightly more than 200 points from its previous high. The MSFT rumors knocked more than -100 points off the intraday high but the Dow still managed to close +130.61 for the day. This close is over +300 points from the Wednesday low. Tuesday's Nasdaq chart This Nasdaq chart from Tuesday (above) showed the Nasdaq setting right on first level support at 3900 with a next stop of 3700-3750 if that level (3900) failed. Don't look now but we stopped dead on that stronger support at 3725. With the second largest point loss ever the Nasdaq has added to this weeks disaster and is now down over -400 points from the last record close on Monday. Counting from the record intraday high on Monday it is now down -14% and actually strongly oversold at this point. The Dow however is benefiting from sector rotation out of techs and into the dull stocks with real earnings. Stocks like MMM, DOW, DE, PG and AA have all turned in strong performances this week. The trend appears to be dump techs and run to the defensive cyclical sectors. I don't personally believe it. I think there is some rotation occurring but I think the tech buyers are just holding cash and waiting on the sidelines for the correction and the Jobs Report on Friday to be over. Fund managers are seeing cash starting to appear in the mail and they will have to put this retirement money to work. In any scenario techs will still outperform all other sectors once the bottom of this tax deferred selling is over. Economic reports today were in our favor. New Home Sales actually dropped -7.1% in November and were down from the huge +9% in Oct. This is proof that the higher interest rates are trickling down into the buyers in the economy. The Jobless Claims also jumped to +309,000, a +33,000 increase from last week. This was the largest weekly number in the last year. The next chapter in the economic play book is the Jobs Report Friday morning. Estimates are for an increase in jobs of +250,000 compared with November's +234,000. Unemployment is expected to hold at 4.1%. This number is closely watched by the Fed as an indicator of future price inflation as companies are forced to pay more to get quality help. A weaker increase in jobs and a firm unemployment rate would benefit the markets and possibly stop the tech slide. Volume was strong on both major markets with 1.6 bln on the Nasdaq and 1 bln on the NYSE. Advances beat the decliners by 822 on the NYSE but lost on the NASDAQ by -283. The NYSE ticks were very bullish at the close at +791. The VIX did break into the 30s yesterday but eased off to the mid 20s today. With Gateway, Beyond.com and Lucent announcing earnings warnings this week the flight out of stocks that may also warn is fueling the profit taking. Many funds are convinced that they will be able to buy techs cheaper after the Fed meeting Feb-1st and many are closing large portions of their positions in suspect companies. Stocks that announce next week include Intel and YHOO and both are being sold with huge volume. YHOO announces on Tuesday and INTC on Thursday. Nobody wants to get hit with the type of sell off Lucent experienced today. Lucent closed at $69.31 and traded down as low as $51 in after hours. This was a loss in market cap of almost -$48 billion. Cisco took the offensive after the Lucent warning and said they were on track to meet their previous estimates and would not change their guidance. The S&P futures quickly bounced and stabilized around -5.00. As you can tell by the news we are right in the middle of the earnings warning season. Since this is the reporting period for the fourth quarter, which was most impacted by Y2K freezes, we could see a flood of these over the next couple weeks. Techs are still expected to turn in earnings gains of +25% for this quarter but the forecast dwindles from there. Many feel there was a lot of Y2K spending over the last 12 months and many companies are now fully funded for capital expenditures. I received several "nice" emails on my Yahoo comments in the Tuesday newsletter. Many attempted to "educate" me on why Yahoo was going to roar back from Tuesdays $443 close and set new highs before earnings next week. They used this "logic" to justify why they were still holding after YHOO dropped -$57 from the high of $500 on Tuesday. Some of the language was quite "colorful". If I lost -$57 a share on an option I was still holding I would probably have come colorful language as well. In case you did not see the close today, I regret to inform you that YHOO did not come roaring back and was trading at $353 in after hours, -$90 from Tuesday's close and -$147 from the Tuesday high. Not all stocks come back and believing in this fairy tale will eventually bankrupt you. You can be right and still lose a lot of money if you are right at the wrong time. 75% of stock movement is market or sector related. This is especially true for the Internets. If the Nasdaq goes down most of the Nasdaq stocks will go down. That does not mean that YHOO will not have blowout earnings and/or announce a split. You can be right, good earnings and a split, but the stock tanks -$147 with the market. Options require strong discipline and good money management skills. Emotion has no place in option trading but at the same time we are not robots either. We are emotional people, especially when it comes to money, and this is a critical problem that needs to be addressed for us to be better traders. Anyone know a good CEO looking to change jobs? Sony Corp needs one badly. The CEO of SNE said today that any price for their stock over $190 would be a bubble and not justified. I thought a CEO was supposed to make decisions that would help their shareholders and not bankrupt them. SNE dropped -34 to $215 on the news. I am sure he will get a few "polite" emails on this move. For Friday everything depends on the Jobs Report. With a good report the Nasdaq could see a quick relief rally. With a bad report the race to the exits will continue as traders on the sidelines may elect to stay on the sidelines until after the Fed meeting. The Dow could see some profit taking soon from the strong gains in the last two days. The Nasdaq is technically oversold and sitting on support but the after hours numbers for most of the tech stocks show another $5 to $15 drop due to the Lucent warning. If bargain hunters don't appear in the pre-market trading tomorrow then the Nasdaq open is going to be ugly. Waiting for entry points that are at strong support levels would be a good idea. Remember you do not have to be in the market just because the market is open. You can wait for evidence of a real rebound before going back into the flames. Good Luck, Sell Too Soon. Jim Brown Editor ********** STOCK NEWS ********** A Virtual Small-Cap Monopoly By S.P. Brown Small-cap investors must have the patience of Job. While the larger cap indices have soared over the past two years, both the Russell 2000 (RUT) and the S&P 400 SmallCap (SML) have basically flat-lined, leaving many small-cap investors scratching their heads and wondering if their stocks will ever come to life. http://members.OptionInvestor.com/stocknews/010600_1.asp ************** Market Posture ************** As of Market Close - Thursday, January 6, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,800 11,550 11,253 Neutral 1.04 SPX S&P 500 1,340 1,400 1,403 BULLISH 12.03 OEX S&P 100 700 750 763 BULLISH 12.03 RUT Russell 2000 430 450 475 BULLISH 11.12 NDX NASD 100 3,200 3,800 3,341 Neutral 1.06 * MSH High Tech 1,650 1,900 1,703 Neutral 1.06 * XCI Hardware 1,250 1,425 1,309 Neutral 1.06 * CWX Software 1,210 1,420 1,193 BEARISH 1.06 * SOX Semiconductor 640 660 669 BULLISH 12.21 NWX Networking 820 900 809 BEARISH 1.06 * INX Internet 665 800 667 Neutral 1.06 * BIX Banking 645 690 537 BEARISH 11.30 XBD Brokerage 410 450 408 Neutral 11.30 IUX Insurance 625 650 577 BEARISH 11.30 RLX Retail 900 935 953 BULLISH 11.23 DRG Drug 380 400 348 BEARISH 12.07 HCX Healthcare 760 790 702 BEARISH 12.07 XAL Airline 180 190 147 BEARISH 5.21 OIX Oil & Gas 280 315 293 Neutral 1.06 * Posture Alert The year 2000 is off to a horrendous start for technology stocks, as the Nasdaq got blistered once again Thursday. Losing issues were led by the Software Index, which posted a -6.46% loss, followed by the Internet (-5.64%) and the Nasdaq 100 (-4.75%). Low P/E stocks finally had a good day, with the Banking sector closing up +4.14%, followed by Healthcare (+2.80%), and Insurance (+2.20%). With this most recent market action, the posture board got turned upside down. Sectors getting downgraded to Bearish include Networking and Software. Sectors getting downgraded to Neutral include Hardware, Internet, Morgan Stanley High Tech and the Nasdaq 100. Finally, Oil & Gas was upgraded to Neutral as that sector bounced on some recent brokerage upgrades. *************** Market Sentiment *************** Thursday, January 6, 2000 Shopping for a higher money market rate? Technology stocks got blistered once again Thursday, and there seems to be no end in sight to the carnage, as many of the leading companies continue to break below key support levels. Gateway Computer and Beyond.com pre-released negative earnings last night which didn't help this market, but the bombshell came today after the close, as Lucent Technology whiffed on their quarter, coming in significantly below expectations. Lucent did state that their earnings were on pace for the fiscal year, but that small bit of positive news didn't seem to help, as the stock got blasted for -17 in after-hours trading. Thanks to Lucent, shares of other telecommunications/networking stocks are weak after-hours, with Cisco Systems, Tellabs, Nortel Networks, Motorolla, Nokia, and Ericsson all trading substantially lower. With Lucent being the most widely held stock in the world, it will be interesting to see how the investors react. Will the millions of Baby-Bell investors start nibbling at the discounted shares, or do we see panic selling instead? Time will tell. With technology becoming an everyday focus in our lives, the speed of information is extremely overwhelming, especially compared to where it was years ago. Along with this change in technology, we have also witnessed the speed at which sentiment in the marketplace can change. The previous mentality of the investors in this market was buy high, sell higher. Valuations just didn't matter. Now, everyone is starting to get worried about valuations and P/E ratios, as evidenced by strength in some of the value sectors this week. If P/E ratios and valuation ever come back into favor, this technology wreck is just the beginning. However, as it stands, corrections are truly healthy for the marketplace. This is how we form a base to work off of, and this is how more bears get sucked in, only to cover short positions months later at a higher price. As it stands, sentiment has changed very quickly on technology shares. When you combine this with the fact that interest rates are breaking new highs, energy prices are breaking new highs, overseas markets look terrible, and the technicals on our leaders look bleak, you will see more selling pressure ahead. We are sure to see a bounce sometime soon, but we believe that any rally will be met with the "I'll sell on the first bounce" mentality. This attitude will only help the bears in the short term. Now technically speaking, with the recent divergence between the Dow and the Nasdaq, the potential of the Dow heading south and catching up with the Nasdaq increases daily. We would then most likely witness some consolidation that may be the type that is multi- month rather than multi-week, so patience in the technology camp is a must. Next support for the Nasdaq is about 3504, which who knows, maybe we'll see tomorrow. Regardless, long term, this is another blip on the bull's radar. Short term, start searching for the next land mine, or at least the highest money market rate, because by the time this earnings season is over, we will definitely see some cheap companies! BULLISH Signs: None Mixed Signs: Cash Flow: The cash on the sidelines is building, however, until it starts getting put to use, we would be a little cautious. Volatility Index (28.13): The VIX sliced through its 50-day moving average last week, and presaged this current market sell-off. In the past however, the VIX has proven that the low 30's to be a good buying opportunity. BEARISH Signs: Pre-Release Season: We are in the pre-release season, in which companies with negative earnings announcements spill the beans. We have witnessed several such as Gateway Computer, Beyond.com, and now Lucent Technology. Interest Rates (6.572%): The yield continues to break new highs, and finally, the market has noticed. Next stop should be 6.75-7.00%. Currently, there is a 20% chance of a 50 basis point increase in February. Valuation: Low price to earnings stocks have been a safe haven so far in 2000, while high P/E stocks have gotten blistered. Is value coming back into play? Advance/Decline Line: The A/D line's continual break does not serve the best interests of the overall market, but recently, we are starting to witness a slight uptick. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. Technicals: Many of the major sectors continue to break key support levels, suggesting further downside, especially in technology. 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. Pinnacle Index OEX Friday Tues Thurs Benchmark (12/31) (1/4) (1/6) Overhead Resistance (785-810) N/A 2.12 3.55 Overhead Resistance (760-780) N/A 0.57 0.98 OEX Close N/A 759.01 762.64 Underlying Support (730-750) N/A 2.44 2.51 Underlying Support (700-725) N/A 2.75 3.10 What the Pinnacle Index is telling us: Based on January 6, direct overhead is light, and underlying support is slightly increasing. Put/Call Ratio Friday Tues Thurs Strike/Contracts (12/31) (1/4) (1/6) CBOE Total P/C Ratio .51 .55 .50 CBOE Equity P/C Ratio .38 .42 .40 OEX P/C Ratio 1.87 1.22 1.20 Peak Open Interest (OEX) Friday Tues Thurs Strike/Contracts (12/31) (1/4) (1/6) Puts 700 / 11,799 700 / 12,174 700 / 12,185 Calls 700 / 6,086 700 / 6,023 800 / 6,904 Put/Call Ratio 1.94 2.02 1.76 Please view this in COURIER 10 font for alignment ************************************************* CHANGES THIS WEEK Daily Results Index Last Mon Tue Wed Thu Week Dow 11253.26 -139.61 -359.58 124.72 130.61 -243.86 Nasdaq 3727.13 61.84 -229.46 -24.15 -150.41 -342.18 $OEX 762.64 -4.04 -29.78 2.51 1.12 -30.19 $SPX 1403.45 -14.03 -55.80 2.69 1.34 -65.80 $RUT 475.34 -8.33 -6.68 0.45 -3.49 -18.05 $TRAN 2937.08 -33.53 -81.50 5.19 69.72 -40.12 $VIX 28.13 -2.02 5.36 -1.49 -0.02 1.83 Calls Mon Tue Wed Thu Week GO 29.00 2.38 1.88 0.81 0.19 5.25 New CMTN 52.13 4.75 -1.50 2.13 -2.00 3.38 Guilt? AMGN 61.13 2.88 -4.81 2.00 1.00 1.06 New HGSI 149.13 5.31 -19.69 7.38 3.50 -3.50 Split! GSTRF 37.69 2.75 1.00 -6.13 -3.94 -6.31 Buyers! TTN 39.63 -0.31 -3.56 -1.13 -2.69 -7.69 Firm VIGN 155.00 25.56 -6.94 -6.19 -20.44 -8.00 Bottom? CMRC 188.38 7.13 14.88 -4.00 -26.13 -8.13 Watching ADI 84.50 -2.81 -4.56 1.25 -2.38 -8.50 Strength NXLK 73.88 -0.06 -6.69 3.56 -6.00 -9.19 Dropped EMC 99.63 5.75 -7.06 -5.00 -2.38 -9.63 Bounced BCE 78.19 0.13 -4.69 -3.19 -4.25 -12.00 Dropped CHKP 183.22 19.75 -19.75 -2.00 -13.53 -15.53 Support AFFX 146.00 -6.69 -13.00 -1.75 -2.25 -23.69 Resilient NT 76.50 -0.06 -7.19 -3.88 -13.38 -24.50 Dropped STM 126.31 3.75 -9.69 -8.13 -11.06 -25.13 Dropped VRTS 114.06 -1.13 -11.69 -3.13 -13.13 -29.06 Dropped PMCS 125.50 -1.56 -9.81 -8.38 -15.06 -34.81 Dropped QCOM 140.06 3.19 -17.25 -5.63 -16.38 -36.06 Holds on NOK 154.00 -4.06 -14.00 0.00 -16.00 -37.06 Sit tight BVSN 129.25 19.38 -19.13 -10.44 -30.63 -40.81 Holding DCLK 199.00 14.94 -30.94 -9.06 -29.00 -54.06 Dropped YHOO 368.19 42.31 -32.00 -32.50 -42.31 -64.50 Dropped Puts SCNT 67.50 -1.31 -9.75 -1.25 -6.63 -18.94 New GTW 59.69 -2.69 -6.56 -5.94 4.69 -12.38 Warning! CIEN 45.88 -1.88 -2.44 -3.44 -3.88 -11.63 Great! WCOM 47.19 -1.13 -2.44 1.75 -4.06 -5.88 New SPLN 49.13 -1.63 -0.56 1.19 -3.00 -4.00 Falling HNZ 38.13 -1.00 -0.88 -0.13 0.31 -1.69 Sloooow JNJ 92.56 -1.06 -3.38 0.94 2.81 -0.69 Defensive ************ WOMANS WORLD ************ DID YOU MAKE ANY MONEY TODAY? (just kidding) Now We Know why Barbara Streisand sang the song "Memories...of the way we were.", with such feeling & passion. For those who thought they missed the last run up, this violent blood bath is giving you another opportunity for a good entry. It can prove to be very profitable, if you took your profits earlier and have any cash left to play it. Our economy is good and earnings on good companies will continue to be good too. Although Amazon pre announced, their sales were strong as were Barnes & Noble. Strong companies with good Christmas sales should do well. The sell off will not last forever. But the Y2K buying frenzy the last 4 weeks caused us to overlook other market adjusting factors, which are now hitting us in the face. The correction occurred sooner than many expected. That is the challenge of learning how to trade. Can you exit your positions quickly if they look to be turning against you? That is the trick and where discipline comes in. As painful as this sell off is, getting it over with now, will give us a cleaner upside potential. Remember, the best medicine always tasted the worst. If unfortunately, you jumped back in prematurely, only to watch a further sell off into the close, the correct method is to always to exit immediately before the close. A pattern such as this tells you the stock has not found its strength yet and may have been an opportunity for many to unload more positions. This is called a bear trap. Even experienced traders get lured into the warm cozy den of the bear, thinking the selling carnage is over and a party is soon to begin. Realizing they have been invited to dinner and NOT as the guest, does not a happy camper make and usually results in blood. The other reason to exit immediately before the close is because the stock will likely gap down on the next mornings open. If re-entry is wanted, waiting will more than likely afford you a better position with a premium that gapped down also. Being sensitive and playing the gaps is one of my favorite things. It can be very rewarding on either the up or down side. For the conservative (call) risk taker, one should wait till the underlying closes above the previous days high, before buying back in. Ultra conservative types will wait even longer, for a new resistance point to be broken & held. Days like today make it hard for some to sell believing that the last two days have been so bloody, that it couldn't get worse. With a fed report due out in the morning, that is a very scary and risky thought. We are officially in a Nasdaq correction with some high flyers like YHOO, down almost 30% from their 52 week high, just a few days ago. If that report is bad, WATCH OUT, more to come!! If it is good, some of that sidelined money may begin showing up. With economic numbers pending in a shaky market, I did not have the stomach to jump in today, although I did get temporarily faked-out yesterday, in the trap. Knowing many are watching YHOO, I want to remind you of AOL last April. It had been a daily leader making day traders a lot of money running into its April earnings. There was a highly anticipated split announcement to come at that time. Many had been talking of a potential internet bubble, which was soon to pop. Sound familiar? AOL sold off swiftly & sharply 10 days before earnings, had a slight recovery for a few days, then no split was announced as anticipated. The following 6 months, AOL lost 50%+. Not to scare you more, but 50% off of YHOO's high is 250! So don't feel it can't get worse. Longer-term options do help but remember, those are real dollars going down the drain. Exiting until the sell off is over and the bounce is real, is the correct play. I wouldn't bet the farm for a 3:1 split on a stock dropping like a rock either. Wait for the stock, sector and market to turn around, before expecting a winning trade. If the sell off continues and YHOO blows through the whisper number again and announces a split, the day after earnings would probably be the time to enter. But when a 3:1 is anticipated and a 2:1 is announced instead or worse, no split is announced at all due to the stock price drop, one would do better preparing to play puts instead. Hopefully by now, all have pocketed their profits made last week. Now would be a good time to do your homework and pick stocks you either want to own or plan to trade. It is also a nice time for leaps. These are the times I begin looking for stocks I want to own using my Blow & Go strategy. Just remember, that play is a strategy to buy stocks cheap in the future, for a long-term hold. Its purpose is to set a buying price for a stock I want to own, expecting a large move up after a correction is over. That is not the same as trading options, rolling out or churning for profits. Perhaps I will be wrong, but I wonder if because of Y2K, this might be our best sell off for the year. The question though, is the sell off over? The doom and gloom is pretty bad out there, so it should be close. Just remember, the markets will still fret over that FOMC meeting in February and that could last the whole month of January. Sideways markets are the hardest for many to profit from. Renee White renee@OptionInvestor.com ************** TRADERS CORNER ************** Trading Decision Game #2 Situation. Date: 1/4/00. You have just closed all of your open positions, including QCOM, JDSU, INKT, MSFT, SUNW, GTW, SCH, and a few others except for one -- GSTRF. You have moved most of your profits from your short term option account to a long term stock account. The DOW is down over 300 points and the NASDAQ is down over 200 points. You are happy with the decisions that you have made and have decided to take a few weeks of rest due to the demands of trading the last two months. However, the newsletter alerts you to a potentially good trading opportunity. The headline of the Market Wrap section is "Get out your checkbook and prepare to back up the truck." You're a trader. You can't resist. From watching the indicators on your qcharts program, you know that the VIX may be reestablishing a range of 20 - 30, which it had for most of 1999 (though in Nov - Dec it stayed pretty much in the 20 - 26 range). Jim Brown highlights 10850 on the DOW and 3800 on the NASDAQ as key support levels. You like the following two stocks to play -- QCOM and YHOO. QCOM has been on a tear, leading up to its 4:1 split, and you know the stock well. After gapping up to 200 on Monday, it is now at 162, almost precisely where it split. YHOO is announcing earnings next week on the 11th and the speculation is that it will also announce a split, perhaps a 3:1, given the number of authorized shares. You punch up the newsletter write ups on YHOO and QCOM and decide to trade the recommended plays -- YHOO Jan 410 Call last traded around 65; QCOM Jan 160 Call last traded around 15. Requirement: BEFORE THE NEXT MARKET OPEN, write up your plan for trading these calls on the next trading day, Wednesday, Jan 5. In your plan describe what you will do if the market opens up, or if the market opens down. If you do get filled on orders, what will your next orders be (eg, stop loss at what %? limit sell at what %?) What indicators will you use to initiate your play (eg, 1 of 3 major indicators -- DOW, NAS, VIX; 2 of 3? 3 of 3?)? Will you "leg in" to the play, buying part of your intended position, or buy the whole position? If you leg in, how many different purchases per contract will you make? What exit strategy will you employ to get out of your position? What market trends lead you to the plan you have formulated? Email your answer to me at janar@OptionInvestor.com. Note: This is actually a decision that I was faced with last Tuesday night. I will share my answer with you next Thursday. Please submit your plan. I know from experience that doing these plans can be a great way to refine and develop your decision making/ planning skills. And, in the final analysis, the trader who faces the market with a plan and the conviction that that plan gives you, will always beat the trader who just wakes up and decides to buy some calls or puts. Right now, I am all in cash, except for GSTRF and some LEAPs. This is not a market that I would want to trade. As a individual investor, you have a huge advantage over the guy who manages Fidelity Magellan or even a manager of a large hedge fund -- you can chose to be completely out of the market when it does not favor you. That is a very, very important advantage. You can take a vacation whenever you want to. Find the highest money market return and put your cash there and wait for the trade winds to blow your way. With the spike up in the VIX, the correct strategy to make money in this market is to sell volatility. That is, sell puts when the market approachs the lower bounds of its range, and sell calls when it approaches the upper bound. Since I have no real experience doing this, I will paper trade selling puts and calls, so that I can be prepared to do so for the Feb cycle. I think we will get some kind of earnings run through mid January, but when that run rolls over, I will also be prepared to buy QQQ puts. Good Luck & Be Careful Out There Janar Joseph Wasito janar@OptionInvestor.com PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** STM $127.63 -9.75 (-23.81) The profit-taking continued across the board today and yesterday. The gap at the open of trading for STM continued, but to the downside. Instead of gapping up, the shares have opened down for the last two trading sessions. STM now sits at $127.63, down $17.87 points as traders have decided to dump semiconductor stocks. The volume increase that we have been looking for in the shares of STM finally showed up, the shares traded almost twice as much as the average, and the stock dropped 9.75 points. So much for the volume increasing to hold up the prices, this volume increase only contributed to STM's down draft. We will choose to move away from STM at this time, because of the uncertainty in the Semiconductors and the tech sector as a whole. The Semiconductor Index is now down 4% for the week and the recent consolidation seems to be settling in too the downside. DCLK $199.00 -29.00 (-54.06) DCLK is now down over 50 points for the week and 29 points for the day on heavy volume. Recent support levels have now completely broken down. The story is simply profit-taking in a major way from the high flying Internet companies such as DCLK. The split run for DCLK has taken a turn for the worst. Any positives being reported for DCLK have recently taken a back seat to this overall market pressure. Risk levels to the downside have now outweighing any life to the upside for the stock. Now that this has been confirmed in the shares of DCLK, it is time to look for better opportunities in the market. Another factor is that DCLK will be splitting their stock 2:1 payable on 1/10, we usually look to be out of positions a day or two before the actual split. NXLK $73.88 -6.00 (-9.19) NXLK has been trading with great volatility the past two days between $72 and $80. With big time selling into the close today, it looks as if NXLK is more likely to break below $72 then it is to trade above $80, especially after the bad news Lucent unleashed on the telecommunications sector. Because of this likelihood that the stock will go lower before going higher, it forces us to drop NXLK. For those of you who wish to continue following the stock, major support does exist at the $65 level. In the news, NXLK received new coverage with a Hold rating from Landenberg Thalman (kind of a strange recommendation but they are probably waiting for some sort of market bottom before issuing a Buy). BCE $78.19 -4.25 (-12.00) The shares of BCE continue to cut through support levels like a hot knife through butter. We know that we introduced BCE as a longer-term play but we can not ignore the technical disintegration. In a continuing theme in tonight's updates, BCE will probably be hurt by Lucent's earnings shortfall announcement. Particularly because of its NT holdings, a major competitor of Lucent's. We will continue to watch BCE and if it can develop support and consolidate then perhaps we will re-enter it as a call play for its fundamental story. VRTS $114.06 -13.13 (-29.06) The software stocks got hammered today and VRTS was no exception. Traders believe the correction in the Nasdaq is here and may now have the momentum to carry the tech heavy index lower. Judging by the selling that came to VRTS, that's already began. VRTS gave back in three days what it took twelve sessions to gain. Shares of VRTS lost $3.13 Wednesday and another $13.13 today. The past two days over 9.6 million shares have changed hands. Considering just over 3 mln is the ADV, it looks like folks are serious about unloading the software company, for now. We will get out of the way and let VRTS regroup. PMCS $125.50 -15.06 (-34.81) What the "tech god's giveth", they can certainly take away. The Semiconductor sector had a tough day, along with most other stocks at the Nasdaq. PMCS fell to the $140 support level yesterday. Today the selling continued, and PMCS finished the day $15.06 under water. The volume picked up, coming in at 2.1 mln. Honestly we thought Tuesday, that PMCS might continue to trade lower, find support and resume it's trend. We believe the selling today was overdone, but the fact is PMCS lost $15, and its time to let this one go for now. The downdraft at the Nasdaq is likely to continue, as some traders and analysts are now admitting we are in the middle of a correction. A good jobs report tomorrow, and CPI numbers next week could change the picture at least temporarily. There are good plays available, but right now, PMCS will have to find a new dance partner. YHOO $368.19 -42.31 (-64.50) Bumpy ride turned out to be an understatement. YHOO is down 23% in 3 sessions, which is a bad sign for a growth company on the verge of announcing what we think will be strong earnings and a split. With only 3 trading days until earnings, and the possibility of tough talk from Alphonso the Great (Greenspan) following the employment figures tomorrow, it may not be enough to pull this formerly high flyer (and hot sector) out of its tailspin. We expected $425, $400, and $380 to act as support - none did. The 10-dma of $420 has been severely violated over the last two days. In short, the technicals have been trashed. Though YHOO still has the possibility of shooting up again into earnings if the market reverses direction, we don't encourage holding a position through earnings and would suggest not initiating new positions until YHOO finds its bottom (hopefully with both hands, just to be sure!). Accordingly, we're dropping it for now but will keep our eye on it for an after earnings play. NT $85.00 -4.88 (-16.00) NT collapsed today and continued to fall well under its 10-dma from where it usually recovers. Volume remains high during the sell-off telling us that there may be more room to fall. But here's the ice (not icing) to put on the cake. Lucent announced after hours that they would not make their numbers citing that they couldn't produce product fast enough and were suffering from under capacity. We might buy that were it not for the fact that revenue is flat over last year - NO GROWTH! That's not what we expect from a market leader in the communications revolution. It could be that NT is really putting the hurt on LU in the optical networking field and further extending its lead as the #1 provider over #2, Lucent. While we suspect NT will ultimately be a beneficiary of LU's misfortune as the real story unfolds (say right around NT earnings date?), most of NT's after hours trading has been in the $76.50-$78.00 range (-$8 from the close) telling us that tomorrow and the near-term will be ugly. NT is still a great company, but the trade has moved against us under general market, and now "sympathy" conditions. How quickly we bring NT back to the call list will depend on how quickly the market recovers and how quickly investors realize they have thrown the baby (NT) out with the bathwater (LU). For now, we're dropping it from the play list. PUTS: ***** No dropped puts tonight. ***************** PICK NEWS - CALLS ***************** BVSN $129.25 -30.63 (-40.81) Yes, we are still hanging on to Broadvision. We first began playing BVSN right around $130 citing the breakthrough at this level as a bullish indication supporting a positive momentum run. Well, here we are again although this time we are looking for $130 to provide support. The jobs report due out before the open tomorrow will most likely provide the determining factor for the future of this play. If we get a positive report, we look for $130 to provide a good level for new entries. If the report is negative we will most likely be dropping BVSN this weekend. BVSN did attempt a bit of a late day bounce just under $130 which was backed by some nice volume, indicating that there are still investors out there interested in owning this stock. QCOM $140.06 -16.38 (-36.06) Despite a sinking market, QCOM has held up pretty well. The $160 support broke early on Wednesday, but the 10-dma at $148 held the stock nicely before QCOM took off Wednesday afternoon. It was a nice short-term play but after today's trading, we are right back underwater. The Nasdaq, down again for the third day, needs the life brought back into it otherwise support may continue to disappear. The next stop on the way down would be $130. Use caution on this play with the Jobs report due out Friday. Helping QCOM, Argus Research Corp. raised the company from a Hold to Buy today. QCOM also announced today it will be calling it's 5 3/4 Trust Convertible Preferred Securities on March 6, 2000. Most holders are expected to convert these into common shares. QCOM said they see no additional dilution to earnings due to the conversions. Investors will come back to QCOM, it's just a question of when. Keep your eyes peeled for signs of a market bottom before opening a new position. AFFX $146.00 -2.25 (-23.69) The shares of AFFX showed a bit of resiliency as the rest of the NASDAQ's former favorites continued their downward spiral today. Yesterday, AFFX did test the support mentioned in Tuesday's write-up providing a possible entry point for brave investors. Today, the stock stayed comfortably above yesterday's low and even traded briefly above yesterday's high. This is pretty good technical action. If we can get any abatement in the overall selling and AFFX can close above $150, then it might be time to buy with the likely scenario that AFFX can resume its uptrend. The Biotechs were strong, as they usually are this time of year, and perhaps they will become the leadership group that leads the NASDAQ out of the abyss. AFFX has good support at the $140 level. TTN $39.63 -2.69 (-7.69) Titan is desperately attempting to keep firm ground against this torrent of selling. After a nice run into the end of the year, the shares of Titan have been trading in a range between $38 and $48. TTN tried to rally today only to get pushed back to major support on the close. Holding support here is critical. If TTN can trade flat to slightly up in what looks to be a bad market for telecom stocks tomorrow, then the prospect of TTN to trade to at least $43-$44 is good. TTN may continue a consolidation process to give it strength to tackle resistance at the old highs. If support fails tomorrow then TTN could easily drop down to $34 or even $31. These would be good levels to go long if the overall market appears to be bottoming. ******************************************** PICK NEWS - CALLS - CONTINUED IN SECTION TWO ******************************************** ************************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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The Option Investor Newsletter Thursday 1-6-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ***************************** PICK NEWS - CALLS - CONTINUED ***************************** ADI $84.50 -2.38 (-8.50) The momentum on this play started to let up on Monday following Friday's all-time high of $94.50. For the past few days consolidation has continued in the vicinity of the support at $84. ADI is showing strength at this present level especially considering market conditions. Support is firmer at $80 and $81 which previously acted as strong resistance, but a return to that level would certainly be bearish. Remember we added this Semiconductor to our call list purely as a momentum run which was given a boost by powerful analyst comments. CMRC $188.38 -26.13 (-8.13) Yikes! The Internet sector continues to take a lashing as interest-rate fears rock the tech boat and heavy profit-taking on the Nasdaq is the name of the game. CMRC certainly got its share of the whip today driving it down under its established support base of $200. However, we believe it's still a bull market and the bargain hunters will start chomping at the bit soon. Remember the interest-rate sensitive stock are always the first to fall yet the first to recover. Yesterday CMRC was the recipient of a Buy reiteration by Dresdner Kleinwort Benson Securities who also set a price target at $333! So let's keep an eye on CMRC and watch for a solid move through the 5-dma ($204.30) before opening any new positions on this momentum play. On the news front, Commerce One entered into a joint venture with Banacci, Mexico's main financial group, and will offer a B2B electronic marketplace to Latin America. The company also announced the formation of its Public Sector Group that is dedicated to providing e-commerce solutions to federal, state, and local governments as well as higher education institutions. CHKP $183.22 -13.53 (-15.53) CHKP, like the rest of the Internet sector has gotten punished this week. Although showing some support at $187 both yesterday and today, the late-day selloff in the NASDAQ was too much. CHKP gave up over $17 today on average volume to close at $183.22. Currently sitting right on support, which is also the location of the 30-dma, CHKP is at a critical point. The main driver for this play is the earnings on January 20th, as well as the split scheduled for the end of the month. The shareholder meeting on January 13th should give us the actual ex-date. We would like to see CHKP recover from here, but it may pull back and test support at $175, depending on how the broader market performs. Look for a bounce, accompanied by a resurgence of buying volume before entering new positions. As this is a volatile issue, evaluate your risk tolerance and use stops. EMC $99.63 -2.38 (-9.63) EMC couldn't dodge the selloff in the tech sector this week, but has actually performed fairly well. Dropping with the NASDAQ at the open yesterday, EMC bounced nicely right at the $98 long-term support level. With a slight recovery towards the end of the day, EMC dropped again today to test support. Overhead resistance is building at $105, which is the bottom of yesterday's gap down at the open as well as the location of the 10-dma. Volume on the drop Wednesday was double the ADV, as investors fled everything technology. Today, volume was average, indicating less selling pressure and a potential bottom forming. Going forward, look for prices to bounce near current levels and trade through today's intra-day resistance at $102 on strong volume. This would make for a good entry, but given the recent market volatility, keep your stops in place. In the news today, Merrill Lynch added EMC to its top 10 technology list. VIGN $155.00 -20.44 (-8.00) VIGN has held up better than the rest of the high-flying Internets. Yesterday, prices fell to support near $165 and bounced twice before closing up from the lows at $175.44. This morning, VIGN tested support again and looked to be forming a bottom. With the afternoon meltdown on the NASDAQ, VIGN couldn't hold back the selling momentum and shed over $20 to close at $155. With volume more than double the daily average yesterday, it was encouraging to see lighter volume today, although we saw it increase as the selling pressure mounted in the afternoon. If the selling continues, look for VIGN to bounce at its next support level near $147. We need to see a bottom form before opening new positions, with the return of buyers creating positive volume. Don't try to catch this falling knife - wait for the NASDAQ to turn around and definitely play this volatile issue with stops. Once the NASDAQ finds its legs, VIGN should recover nicely with earnings on January 19th and positive comments and upgrades from analysts. Greg Vogel of Banc of America maintained his Strong Buy rating and raised his price target from $133 to $265 on Tuesday. Also on Tuesday, Aaron Scott of Advest Inc., increased his rating from Buy to Strong Buy and raised his price target from $130 to $275. HGSI $149.13 +3.50 (-3.50) Wednesday afternoon we received the news we had been waiting for. HGSI announced a 2-for-1 stock split. The ex-date is scheduled for January 28th. HGSI bounced off the $136 are yesterday and managed to gain $3.50 today. We would like to have seen a little better move today, but considering the negative mood at the Nasdaq today we will take what we can get. The volume today was light at 549K. HGSI is well positioned in the gene-mapping industry and we expect the company to gain momentum. HGSI will report earnings in a couple of weeks which could help get this stock back on track as well. HGSI closed at an intraday resistance level. Continued strength would provide a good entry point for this play. The December jobs report comes out in the morning, which could help turn Nasdaq around, or send it to new lows. Confirm the tone of the markets and the direction of HGSI prior to entering a new play. A small float of only 14.6 mln shares will help HGSI as traders start buying in for the split run. CMTN $52.13 -2.00 (+3.38) CMTN had a rough go of it today. The negative tone in at the Nasdaq, and the fact that the Telecom and Internet sectors got kicked around made it tough going for CMTN. CMTN sells its products to telecommunications and Internet service providers. Both of the sectors lost 5% to 7% during today's session. Lucent Technologies (LU) came out with an earnings warning this afternoon. CMTN has strategic partnerships with Lucent, among others. The decline in shares of CMTN was probably more guilt by association, than anything to do directly with the company, although problems with those sectors, could certainly cause problems for CMTN. CMTN closed on an intraday support level. Should we see further weakness the next areas of support are seen at $49.25, followed by $46. CMTN closed right at the 5-dma average which sits at $52.10. As for entering a new play, confirm market direction and movement of the stock itself prior to placing an order. If you entered this play, keep your stops close as we could see a little more weakness before CMTN continues higher. GSTRF $37.69 -3.91 (-6.31) Ignorance and misinformation runs rampant on this company as yet another analyst (at Merrill Lynch) takes to the airwaves via CNBC to cite, (paraphrased) "there is no fundamental reason why this stock should be moving up the way it has in the past 2 weeks." Really? How about that as of January 1, you can buy a Globalstar phone at your local AirTouch store and use it 15 minutes later while walking out the door. The fundamental is that IT WORKS, which is something Iridium, Teledisic, or ICO Global could never claim! GSTRF has pre-sold $25 mln in airtime to distributors at an average cost of $0.47 per minute, and is currently marketed at about $1.50 per minute. The pre-sold time is seen as a validation and acceptance in the marketplace. GSTRF's costs (including operations) are just $0.05 cents per minute at full capacity, and they need just 400K users at current rates to break even. Their cost efficiencies are just 1/10 that of their failed predecessors and they will have data transmission capabilities within 18 months. For the 20% of the population that isn't blanketed by cellular service or can't get a phone line to a remote area, GSTRF is a Godsend. GSTRF is expected to have 400K customers by the end of 2000 with $238 mln in revenues. Now that we've got that off our chest, GSTRF has held up well despite the bashing. In a market that has sold off tremendously over the last 3 days, GSTRF should have fallen back into its old trading range of $20-$30 if there is truly "nothing new". It hasn't. Volume remains strong and buyers continue to take positions. Even today, support remained strong at $37.50, though well below $39.50 where we had expected it to hold. $37, then $35 will be the next levels of support to be tested. While we think very highly of Globalstar, our job is to play what we're given, not pick sides. That said, we still need to see the bounce off $37 support or a break back over $40 with strong volume to consider initiating a new position. Don't try to catch the falling knife. NOK $154.00 -16.00 (-37.06) Actually, NOK closed at $160, but has traded after hours at $154-$156. To remain consistent we go with the reported number. NOK hasn't seen this level since December 15 when it tagged $150 on an intraday dip. That's firm support. That it held at this level amongst the carnage in other sectors is a good sign. Nonetheless, the buying opportunities haven't shown themselves this week. We suggest sitting tight and waiting for the bounce, not just in NOK, but in the market. We still expect an earnings surprise and perhaps a split on February 1st. We are tempted to say this is a buying opportunity, but won't, given the tentativeness and sour mood of the market. Even news that Merrill Lynch has added it to its top 10 picks didn't help today. Could we be nearing a bottom? We hope so, but wait for market conditions to improve (perhaps tomorrow after the employment numbers release? Wishful thinking) before taking a position and watch $150 like a hawk. **************** PICK NEWS - PUTS **************** HNZ $38.13 +0.31 (-1.69) Heinz gapped down nearly a dollar at the open on Wednesday. HNZ traded down to a new 52-week low of $36.63 and found resistance for the day at $38. This morning, it looked as though the $38 level would hold, however, HNZ did manage to break through and traded up to nearly $39. The mini rally was short lived and HNZ quickly turned around and moved back down to rest just pennies above $38 for the night. We believe that this brief and insignificant move up is merely indicative of investors looking for a more defensive position in the market. HNZ has immediate resistance at $38.50 (5-dma) and further resistance at $40. Whether or not the $38 level will back HNZ going forward is yet to be seen, as HNZ has spent some time as of late flirting around this level. Tomorrow's job report is most likely going to determine the short-term direction for HNZ. A negative report may very well send the buyers in the direction of more defensive positions, and could end our put play on HNZ. On Wednesday, Merrill Lynch downgraded HNZ to Intermediate and Long-Term Accumulate from Buy. Merrill downgraded several fellow food-producers citing a "generally negative view of food stocks" as the reason backing the downgrades. SPLN $46.13 -3.00 (-4.00) We did get a close below the 50-dma ($47) however, we are still looking for a close below $45 before we are absolutely convinced that SPLN has the intention of continuing on with its downward trend. Though SPLN did manage a positive day on Wednesday, the sellers ruled the day until just before the close when the buyers moved in to drive the stock up to close just over $49. SPLN made a nice move down today, dropping three points backed with good volume. We do not recommend any new positions until we see a drop below $45. This level has provided solid support throughout the last week. SPLN has been finding consistent resistance right around $49.50 and is backed closely by further resistance in the neighborhood of $50.25. CIEN $45.88 -3.88 (-11.63) Not surprisingly, this put play is working out great due to the overall destruction of anything "Tech" related. CIEN was actually trading a little higher this morning, probably due to a little bottom fishing activity. It did not last and when the stock broke support at $50 late in the day, selling accelerated. You may want to consider taking profits at the $43 level if that support holds. It is hard to tell how the market is going to react to the negative news coming from key competitor Lucent. Is Lucent's earnings shortfall an indication of overall weakness in the sector thus indicating that Ciena's quarter will also be weak? Or is Lucent's quarter weak because it is losing market share to the likes of Ciena? Either way the market will tell us tomorrow. Resistance is at $50 and stopping a put play if CIEN begins rallying past that point would be a good idea. JNJ $92.56 +2.81 (-0.69) The inflation fears today prompted traders to shift some of their money out of the techs and into the consumers. JNJ was an obvious recipient of this sentiment and tacked on a couple of points. Still we decided to keep it on our put list for now, but are rolling out the "caution" sign. From a technical standpoint, JNJ couldn't penetrate the 10-dma ($93.13) indicator today and honestly this was its saving grace. Wait for a move below the historical $90 mark for better confirmation. GTW $59.69 +3.19 (-12.37) While we expected to see GTW go into a slump thanks to Dell's misfortune on Tuesday (they were downgraded before the open), we didn't expect an earnings warning from GTW on Wednesday. They expect earnings to fall $0.07 short of the Street's $0.44 estimate. GTW pointed the finger at Intel saying it was their fault for not delivering all the processor chips necessary to fulfill customer orders in the $1000-$1200 range. The stock cratered in after hours trading to as low as $51 before rebounding to $57.38 at today's open. With the bad news out, a rebound from yesterday's drop, and analysts' reiteration of their Buy rating (one was actually an upgrade from AG Edwards), we may have already found a bottom on GTW. Even so we're going to keep it around for another day. Resistance is at $61. If you see a bounce south from there, you may want to consider taking a position. If you are a bit less daring, consider waiting until GTW falls under $55, and the market and sector are simultaneously moving south too. Look for mild support $59 and strong support at $55. The 10-dma was violated on Monday but hasn't yet caught up to the stock price that keeps running away from it. Tread lightly - we need to see a strong move on high volume to get the play to succeed on a new entry. ************** NEW CALL PLAYS ************** AMGN - Amgen, Inc. $61.13 +1.00 (+0.94 this week) Amgen is one of the elite companies in the biotechnology industry. Amgen develops products to treat cancer, arthritis, blood disorders, Parkinson's, Alzheimer's, other infectious disease and many more. Its current drugs include: Neupogen (used for cancer and AIDS patients), Infergen (for treating hepatitis C), and Epogen (for the production of red blood cells). It has several alliances with other key companies that help Amgen maintain its position as world's largest biotechnology company. Current drugs under development include Stemgen, an early acting blood cell growth factor, and Leptin, the protein produced by the obesity gene used to help regulate the amount of fat stored by the body. During times of investor panic, relative strength becomes one of the most important factors in determining what to buy. When it seems like investors are selling everything that they own, you want to be in the stocks that nobody seems to want to sell. This technical scenario exists for the shares of Amgen. Amgen has a two-fold fundamental story that seems to inspire investors to hold on to their positions in this Biotech leader. Amgen has a very strong drug pipeline, the lifeblood of investor interest in a Biotech. Kinaret, a drug for treating rheumatoid arthritis, is under review at the FDA and NESP, a potential blockbuster drug for treating anemia will be submitted to the FDA. In the meantime, the growing uses for Neupogen, especially for chemotherapy patients, continues to drive profits. On January 20th Amgen will post their earnings. Amgen has a history of posting strong results this time of year. In late December, AMGN had a substantial breakout above $50 which took the stock all the way to $70. Recent profit- taking has established a new support level at $58. This is a potential entry point if we have more weakness in the market. Otherwise, one could enter a position near today's close between $61-$62. Momentum investors will want to go long AMGN if the stock trades above today's high of $61.94. There have been several recent upgrades and price target revisions for Amgen. On Tuesday, Paine Webber raised its price target from $60 to $80. Dennis Harp, the analyst at Deutsche Banc Alex Brown termed the company "a bargain" relative to the earnings multiples of its peers in the industry. BUY CALL JAN-55 YAA-AK OI=2673 at $7.75 SL=5.75 BUY CALL JAN-60*YAA-AL OI=3843 at $4.13 SL=2.50 BUY CALL JAN-65 YAA-AM OI=4528 at $2.00 SL=1.00 BUY CALL FEB-60 YAA-BL OI=1024 at $6.63 SL=4.75 BUY CALL FEB-65 YAA-BM OI=1277 at $4.38 SL=2.50 Picked on Jan 6th at $61.00 P/E = 62 Change since picked +0.00 52-week high=$70.00 Analysts Ratings 14-12-8-0-0 52-week low =$25.69 Last earnings 10/99 est= 0.25 actual= 0.25 Next earnings 01-20 est= 0.25 versus= 0.22 Average Daily Volume = 6.67 mln Chart = http://quote.yahoo.com/q?s=AMGN&d=3m **** GO - GO.com $29.00 +0.19 (+5.25 this week) GO.com is a newly formed Internet company -- the result of a merger between Infoseek and The Walt Disney Co.'s online unit, Buena Vista Internet Group (BVIG). Basically GO is a tracking stock for Disney's Internet venture. They provide Internet services to Disney-related Web sites including the GO.com portal, ABC.com, Disney.com, ESPN.com, NFL.com, NASCAR Online, and Family.com to name a few. The GO Network derives nearly 90% of revenue from advertising and has over 21 mln visitors each month. Whispers could be heard at the end of 1999 that GO was poised to go higher. The company aptly timed its announcement that not only had its ABC.com's Web traffic doubled in the past 12 months, but also that its Internet reach exceeded rival competitor CBS by a significant 85%. Coupled with reports that its suite of e-commerce sites had three times more sales than same time last holiday season and things started to really look rosy. Just like clock work, GO sprung into the year and made a move off its support at $24. It showed strength as it held at $26 before taking that next step and facing overhead opposition at $28.94. Granted GO is a cheaper stock than you may be accustomed to seeing on our call list, however we added it tonight for a couple of reasons. First of all, the stock broke through that tough resistance today hitting an intraday high of $30.38 showing promise it could go higher. Second, the call option volume is picking up momentum which is no doubt a bullish sentiment. Now if all goes well near-term support is likely to form around $28 and if it does this would be a good entry into this news-driven momentum play. More good news came today. According to a Nielsen//NetRatings report, the GO Network was fastest growing Web site from August to November 1999 with a 31% growth spurt easily surpassing its nearest competitor by an 11% margin. Kevin Mayer, executive VP and GM of the GO Network, responded to the positive report saying that "not only are our leading brands, like ABC.com and ESPN.com, continuing to dominate in their categories, but the portal itself is gaining momentum among users". Earlier the company also announced an affiliate program, affiliate.go.com, that allows business or personal Web sites to add certain GO Network content such as Web search, daily weather forecasts, or stock quotes, free of charge. This arrangement affords the GO Network access to more consumers. BUY CALL JAN-25 GO-AE OI=1419 at $4.88 SL=3.25 BUY CALL JAN-30 GO-AF OI=2200 at $1.88 SL=1.00 BUY CALL FEB-30*GO-BF OI= 551 at $3.50 SL=1.75 BUY CALL FEB-35 GO-BG OI= 163 at $1.94 SL=1.00 Picked on Jan 6th at $29.00 P/E = N/A Change since picked +0.00 52-week high=$37.69 Analysts Ratings 1-0-0-0-0 52-week low =$21.50 Last earnings 09/99 est= N/A actual=-0.34 Next earnings 02-03 est=-0.45 versus=-0.39 Average Daily Volume = N/A Chart = http://quote.yahoo.com/q?s=GO&d=3m ************* NEW PUT PLAYS ************* SCNT - Scient Corp $67.50 -6.63 (-18.94 this week) Scient is leading a new category of professional services firms focused solely on building eBusiness systems and capabilities that help companies go to market rapidly and build competitive differentiation. Scient specializes in developing strategic eBusiness solutions for both Fortune 500 companies and electronic start-ups that want to dominate their marketplace. Things were looking pretty rosy for SCNT heading into December, The stock split 2:1 on December 6th and then moved up to tag a new 52-week high of $102.25 on the 13th. The following day, ING Barings initiated coverage of SCNT with a Buy. SCNT closed at $93, down $9.25 from the previous day's high. Unfortunately for SCNT, things have continued downhill ever since. SCNT has lost $34.75 in just over 3 weeks. $80 tried to hold SCNT up for some time, however, SCNT finally broke through on Tuesday and violated its 50-dma the following day. At this point, we may very well be cleared for a healthy fall. SCNT has some weak support just under $65 backed by more solid support at $60. There is plenty of resistance in the road. The 50-dma is providing some at $73.50 backed by the more formidable resistance at $80. For the most part, SCNT's moves down have been backed by good volume, an indication that there are plenty of sellers out there. Investors seem to be looking to the some of the "old school sectors" to cushion their portfolios while the Nasdaq corrects. This is one of the reasons we believe that SCNT has the potential to provide us with a profitable put play. On Wednesday, December 22nd, SCNT filed to offer 2.35 million common shares. 1.5 million of these are being sold by SCNT and stockholders will sell the remaining 850,000. BUY PUT JAN-70 SMQ-MN OI=207 at $6.63 SL=4.75 today's vol=630 BUY PUT JAN-65*SMQ-MM OI=113 at $2.50 SL=1.25 Average Daily Volume = 339 K Chart = http://quote.yahoo.com/q?s=SCNT&d=3m **** WCOM - MCI WorldCom, Inc. $47.19 -4.06 (-5.88 this week) MCI Worldcom is a telecommunications giant, providing consumers and businesses with local, long distance, Internet, data, and international communications services. Included in the company's products and services are switched and dedicated long distance and local products, dedicated and dial-up Internet access, wireless services, 800 services, calling cards, and debit cards. WCOM continues to be under pressure due to concerns related to its upcoming merger with Sprint. The Telecom giant had been consolidating near $53 after its early December slide, until early this week when the NASDAQ added more downside pressure. Sliding through support, WCOM got hammered today, losing over $4 to close below the $51 support level. The action this week has placed WCOM solidly below all of its moving averages. The 10-dma ($51.75) and the 30-dma ($52.75) will create overhead resistance going forward. Today's price action has brought WCOM down very close to its long-term support at $45, a level that hasn't been violated since late December...1998. Today was a tough enough day with the weakness in the tech sector, but WCOM also got hit with bad news when Jack Grubman of Salomon Smith Barney cut his revenue estimates by 3 cents per share. The price moves this week have come on increasing volume, with over 3 times the ADV today. Note that the volatility in the market has produced large price swings, which we can take advantage of. Look for WCOM to bounce south from the $52-53 range with strong selling volume to provide a good entry. BUY PUT JAN-50*LDQ-MJ OI=1184 at $4.13 SL=2.50 BUY PUT JAN-45 LDQ-MI OI= 166 at $1.50 SL=0.75 BUY PUT FEB-45 LDQ-NI OI= 270 at $2.75 SL=1.25 Average Daily Volume = 18.33 mln Chart = http://quote.yahoo.com/q?s=WCOM&d=3m ********************* PLAY OF THE DAY - PUT ********************* CIEN - Ciena Corp. $45.88 -3.88 (-11.63 this week) Ciena Corp designs, manufactures and sells open architecture, dense wavelength division multiplexing systems for fiber optic communications networks, including long-distance and local exchange carriers. Ciena has more than two million optical channel kilometers installed worldwide. Ciena's MultiWave DWDM systems enhance the transmission capacity of a single optical fiber without requiring significant modification or upgrade to transmission equipment. Ciena offers optical transport products for long distance, short distance and ring-based applications, and through its wavewatcher network management system software. Sunday's Write Up Ciena has been one of the big winners of the year. Just over a year ago CIEN was trading in the single digits and nobody wanted to get near this former high-flyer. Then the market fell in love with any company in the fiber optic communications business. Ciena's stock made a comeback for the ages. Funny thing about success. When you do well, everybody wants a piece and the trailblazers sometimes lose their claims to bigger and better financed competition. This seems to be the case with Ciena. Nortel and Lucent have been aggressively moving into Ciena's business. Being bullied about by these behemoths must hurt. To make matters worse, CSCO has entered into the fray with its planned acquisition of the fiber optic division of the Italian company, Pirelli. Ciena is doing everything it can to increase its product and customer base. Will it be enough? Hard to know for sure, but it seems that fear has gripped the minds of Ciena's shareholders and they are doing some selling. Anybody with a memory of Ciena's price history has to be worried that the stock could fall all the way back into the single digits. Ciena probably would not deserve such a beating but emotions drive markets. After a nice drop on Monday morning, CIEN staged a little rally for a couple of days. On Thursday it appears that CIEN might have begun to roll over. Only time will tell of course, but it is a good sign for put holders that CIEN closed in the bottom end of its range after taking out Wednesday's high. $55 seems to be an area of a little support. Look to get into a bearish position if CIEN can trade below that level. You need to be cautious of CIEN trading above $60. That would be indicative of CIEN trying to keep its comeback going. Thursday's Write Up Not surprisingly, this put play is working out great due to the overall destruction of anything "Tech" related. CIEN was actually trading a little higher this morning, probably due to a little bottom fishing activity. It did not last and when the stock broke support at $50 late in the day, selling accelerated. You may want to consider taking profits at the $43 level if that support holds. It is hard to tell how the market is going to react to the negative news coming from key competitor Lucent. Is Lucent's earnings shortfall an indication of overall weakness in the sector thus indicating that Ciena's quarter will also be weak? Or is Lucent's quarter weak because it is losing market share to the likes of Ciena? Either way the market will tell us tomorrow. Resistance is at $50 and stopping a put play if CIEN begins rallying past that point would be a good idea. BUY PUT JAN-55*EUQ-MK OI=1592 at $10.38 SL=7.75 BUY PUT JAN-50 EUQ-MJ OI=1362 at $ 6.25 SL=4.50 Average daily volume = 5.29 mln Chart = http://quote.yahoo.com/q?s=CIEN&d=3m ************************ COMBOS/SPREADS/STRADDLES ************************ Nasdaq Tumbles As Investors Move To Traditional Stocks.. Wednesday, January 5 A volatile session pushed technology stocks to the sidelines as investors shifted money into the blue chips amid nagging worries about rising interest rates. The Dow climbed 124 points to 11,122 recovering a portion of the losses from Tuesday's session. The Nasdaq composite slid 24 points to 3,877 during a roller-coaster day that saw the technology-heavy index swing 180 points. The S&P 500 stock index ended almost unchanged at 1,4021 after falling as much as 28 points earlier in the session. In the broader market, advancing stocks edged out declines 17 to 13 with more than 1.07 billion shares traded on the NYSE. There were 27 stocks at new highs and 125 at new lows. The benchmark 30-year U.S. Treasury bond declined more than a point while the yield rose to 6.62%. Tuesday's new plays (positions/opening prices/strategy): Exodus EXDS JAN70P/JAN72P $0.50 credit bull-put Kushner-Locke KLOC APR7C/JAN7C $0.75 debit calendar Concentric CNCX APR15C/JAN25C $4.62 debit diagonal All of our new plays offered favorable entry opportunities during today's session. KLOC opened relatively close to the quoted debit and each of the positions traded at or below the suggested target. Portfolio plays: The economy is on a roll and with analysts already worried that the Federal Reserve will make aggressive interest rate hikes to slow its growth, November factory orders came in stronger than expected, causing new concerns of future inflation. Bonds have also contributed to the market downfall and investors are once again moving to safety issues. Among the strong sectors were oil, metals, utilities, aerospace and pharmaceuticals while Internets, semiconductors, telecommunications and retailers fell to profit- taking. Some of the technology components of the Dow managed a comeback during the session but blue-chip strength came from the market workhorses and defensive stocks. Oil industry giant Exxon -Mobil (XOM) was up almost $4 to $80.75 bringing our LEAPS/CC's play back into favorable territory near the sold strike at $85. On the downside, Proctor and Gamble (PG) fell $2 to a recent low near $103 and the continued downward trend may prompt a defensive move to February options. The biggest surprise in the long-term portfolio was Computer Associates (CA) with a $7 collapse to $63. The stock plunged after BMC Software (BMCS), a maker of software that monitors computer networks plummeted $30 on news the company will miss its third-quarter earnings expectations. BMC's earnings will be in the range of $0.40 to $0.44 a share, well short of the expected number. Analysts will now be watching for CA's report, which is due in mid-January. Our position achieves maximum profit with the stock at $65 (the sold strike) and with the uncertainty in the upcoming earnings, we are going to roll to February options for downside protection. The new position is LJAN60C/FEB65C at a debit of $2.88. Murphy's Law is alive and well in our Spreads/Combos portfolio with Priceline.com (PCLN). Now that we have closed our play for a small loss, the stock bounced $6 to $60 after the company said it expects fourth-quarter sales of about $168 million, higher than its original forecast. PCLN also added a record 972,000 customers in the fourth quarter and the bullish outlook has attracted new investors to the issue. A few of our smaller stocks were also in the news. Recoton Corporation (RCOT), a top consumer electronic company, announced its entry into the vehicle security/navigation services market through a licensing agreement with Varitek (VATK). The agreement gives RCOT a license to develop, manufacture, market and distribute Varitek technologies under the JensenŽ brand name. The stock rose $2.06 to $10.88 and our bullish play can be closed near maximum profit or rolled up and forward to February options. Talk.com (TALK) announced it has signed a marketing agreement with First USA Bank, the largest issuer of Visa cards in the world. The agreement, Talk.com's largest marketing pact to date, establishes Talk.com as the selected provider of long distance services in a marketing program offered to First USA's cardmembers. TALK will offer its telecom services to cardmembers via online/direct mail promotions. The issue finished $0.81 higher on the announcement. Our recent recovery play on Delta and Pine Land (DLP) appears to be safely profitable now that its former merger partner Monsanto (MTC) has paid the $81 million termination fee and removed the restriction on the cotton seed company's search for new suitors. The move effectively ended the deal and Delta said it would look elsewhere for a partner that would help it compete in a rapidly consolidating industry. The stock moved almost $2 higher on the news, finishing near $17.50 and well above our current cost basis. Thursday, January 6 Blue-chip stocks rallied while technology issues suffered in a classic sector rotation. The Dow Jones Industrial Average rose 130 points to 11,253 on rallying cyclical and financial stocks. The technology-heavy Nasdaq index sank 150 points to 3,727 under pressure from earnings and profit warnings. The broader S&P 500 index closed relatively unchanged at 1,403. Advancing shares beat declines 19 to 11 with more than 1 billion shares traded on the NYSE. There were 46 stocks at new highs and 78 at new lows. The 30-year U.S. Treasury bond moved up 25/32 with the yield down to 6.56%. Portfolio plays: Despite the continued sell-off in technology stocks, we enjoyed a number of winners in the portfolio. PeopleSoft (PSFT) was the leader in the small-cap section, climbing $4 to a recent high near $22 after announcing that its fourth quarter earnings will meet analysts' estimates. The developer of business management software said it expects to report a profit of $0.02 to $0.04 per share. The company also said license revenues in the period are expected to increase sharply over the third quarter both for PeopleSoft enterprise business software and for Vantage customer relationship management software. It expects that fourth-quarter license revenue for the combined company will increase 35%. The move places both of our bullish positions deep in-the-money and they should now expire at maximum profit. Kushner-Locke (KLOC) climbed over a dollar to a midday high near $7.25, offering a favorable early-exit opportunity just one day after the position was opened. The stock is rising on speculation of a possible merger or sale of the company's assets. Another new position, Boston Communications (BCGI) enjoyed a small rally with a $0.75 climb to $7.50. The bullish diagonal position can now be closed for a favorable profit. Geron Corporation (GERN) continued its recent break-out, climbing $0.81 to $15 after the company discussed comments from a recent symposium. The meeting brought together scientific and medical experts in cross-disciplinary research being conducted to develop therapies for regenerative medicine. It was attended by industry, academic and government leaders from around the world in such fields as developmental biology, gene targeting, neurology, immunology, telomere biology, as well as nuclear transfer and reprogramming. Apparently they had some good things to say about the company as it is again on the move. Our recent change to a bullish position appears to be paying dividends. Southwest Bancorp (SWBT) bounced back $0.75 to end near $19 as the financial issues struggled to recover from recent losses. We plan to use any further upside movement to roll the position into February. Our old friend Zoltek (ZOLT) managed a small gain, climbing to the $9 mark after days of consolidation. We expect to sell the $10 strike, lowering our cost basis on the APR-$7.50 call option, at the January expiration. In the long-term portfolio, the big loser was Motorola (MOT). The stock dropped almost $15 to a recent low near $120 as fears of less-than-outstanding earnings hit the market. Many stocks in the high-flying tech sector have perfect earnings already priced in and any imperfection could send tech shares into a down-draft. Our current LEAPS/CC's position is short at $120 and we will monitor the issue for further downside movement. Computer Associates (CA) also fell another $3, ending just below $60. Our roll-out to the February options should prevent losses in this position. Market bellwethers Proctor and Gamble (PG) and Johnson & Johnson (JNJ) were the highlight of the section as investors moved into safety issues. Proctor and Gamble rose almost $5 to close at $108, just short of our sold strike in January. The spread achieves maximum profit at $110 and we will use the rally to move our spread into February. Johnson & Johnson climbed over $3 to end at $93, well short of our target but still profitable in the long-term play. Exxon-Mobil (XOM) was the last of the big winners, up almost $4 as oil prices rebounded on news of steady OPEC cuts. Our neutral position is at maximum profit and now we will have to decide how the stock will perform in the future, based on today's move to a recent high. In the Straddles section, Federal Express (FDX) was a big mover, up almost $5 on heavy volume today, and there was no public news. One analyst said the shipper may have had strong business over the holiday season, and the company has an analysts meeting scheduled for January 19, which could be prompting some speculative interest in the stock. Another news item said a 3% fuel surcharge that FDX recently announced might be helping the issue. Rising fuel prices pressured FDX earnings in the first two quarters of fiscal 2000. Analyst Jeffrey Pittsburg, who offered a buy recommendation on FDX Tuesday said they may benefit from business-to-business electronic commerce, especially now that companies no longer have to focus their technology efforts on preventing Y2K computer problems. Our straddle position climbed to a $14 credit during the session. Questions & comments on spreads/combos to ray@OptionInvestor.com **************** READER'S REQUEST **************** I have received a number of requests for plays on specific issues this week and here are two that have excellent upside potential in the coming months. The first position has been well documented by the OIN researchers in recent call-option plays and now it is offering a new entry point for those of you that are bullish on Satellite-Telecom. The second play is based on a speculative (bullish) outlook in the business/management services industry. **** GSTRF - Globalstar Telecom $37.69 *** Entry Point? *** Globalstar Telecommunications is a general partner of Globalstar L.P. (Globalstar), a development stage limited partnership which is designing, constructing, and will operate a worldwide, low earth orbit satellite based digital telecommunications system. Globalstar has launched almost one half of the 52 satellites that will complete its full constellation. Globalstar intends to offer low-cost, high quality telecommunications services, including voice services, messaging and paging services, remote monitoring, facsimile and other data services, including position location, throughout the world. Loral Space & Communications (LOR) is the managing general partner of Globalstar, with a majority ownership. Lots of recent news and announcements on this issue and in the satellite industry. The coverage in the main section of the OIN should bring you up to date on the current outlook for the stock. Technically, Globalstar ran out of the gate a bit fast and is catching its breath. One would expect the consolidation to reach up to 66% (somewhere around $30) as it works off its overbought condition. The move above the recent six-month trading range on high volume was bullish; the move above the 1998 high was more so; that it was a new all time high is very bullish. We expect support near $34, and then again as you near $30, which would be at the 30 dma. We have had a number of successful plays in this group recently including PanamSat (SPOT) and Loral Space And Communications (LOR) although GSTRF has yet to grace the Spreads/Combos section. The recent consolidation has provided us with an excellent entry opportunity and the small disparity in option premiums will help us open the play at a discount. PLAY (conservative - bullish/diagonal spread): BUY CALL MAR-35 YVQ-CG OI=5926 A=$9.75 SELL CALL FEB-40 YVQ-BH OI=1080 B=$5.88 INITIAL NET DEBIT TARGET=$3.75 TARGET ROI=33% Chart = http://quote.yahoo.com/q?s=GSTRF&d=3m **** MSGI - Marketing Services Group $20.43 *** On The Move! *** MSGI provides direct and database marketing, telemarketing and telefundraising, media planning and buying, online consulting and commerce, automated Internet marketing and design services. The company offers these services to a divers group of over 600 clients located throughout the United States and Canada. These services include customer and market data analysis, database creation and analysis, data warehousing, predictive behavioral modeling, list processing, brokerage/management, data enhancement and other direct marketing information services. The recent merger announcement between MSGI's Mazescape, a B2B solution provider in the Internet recruitment industry, and either Breckenridge Group or Claybrooke Associates caused confusion among investors. Then the company announced they had signed a definitive purchase agreement to acquire up to a 19% equity position in Fusion Networks. Now they have decided to merge their WiredEmpire and Pegasus Internet subsidiaries. The combined subsidiaries will retain the WiredEmpire name and together, will provide clients a full offering of interactive solutions. Officials say that MSGI intends to pursue a strategy of building, investing, acquiring and incubating promising Internet businesses and they certainly achieved their goal this year, with six Internet transactions in the second half of 1999. Regardless of all the acquisitions and mergers, it appears the stock is back in gear technically and the option pricing provides a favorable entry point for aggressive position traders. PLAY (aggressive - bullish/diagonal spread): BUY CALL MAY-12.50 UMS-EV OI=62 A=$9.88 SELL CALL FEB-22.50 UMS-BX OI=479 B=$2.56 INITIAL NET DEBIT TARGET=$7.00-$7.12 TARGET ROI=42% Chart = http://quote.yahoo.com/q?s=MSGI&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 millennium with Preferred Capital Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************ See Disclaimer in section one ************
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