Option Investor

Daily Newsletter, Monday, 01/24/2000

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The Option Investor Newsletter         Monday  1-24-2000
Copyright 2000, 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)
       1-24-2000           High     Low     Volume Advance Decline
DOW    11008.20 - 243.50 11366.50 10917.30 1,115,890k 1,028  2,029
Nasdaq  4096.08 - 139.32  4303.15  4095.31 1,980,657k 1,802  2,399
S&P-100  758.74 -  21.04   787.90   754.86    Totals  2,830  4,428
S&P-500 1401.91 -  39.45  1454.09  1395.42            38.9%  61.1%
$RUT     522.95 -  10.99   540.60   522.27
$TRAN   2702.95 -  48.54  2761.45  2700.14
VIX       26.32 +   3.66    27.54    22.50
Put/Call Ratio       .49

Who Moved My Cheese?

No, this isn't a Book-of-the-month club best read.  However Yours 
Truly zipped through this one in about an hour over the weekend.  
It was written by Spencer Johnson, M.D., co-author of The One-
Minute Manager and other One-Minute_____ (fill in the blank) 
books that fill the bookshelves of entrepreneurs and corporate 
managers around the world.  It uses two mice and two "little 
people" that live in the same maze to illustrate a good way and 
an undesirable way we deal with changes in our lives.  Their sole 
purpose of existence was to find and eat plentiful cheese stashes 
of different types found in various places in the maze.  Those of 
you that may have already read this gem know that the mice are 
always ready to put on their running shoes and search the maze to 
find a new stash of cheese the instant they run out of "old 
cheese".  The little people however didn't fare as well once they 
had consumed their entire cheese stash because they analyzed 
themselves nearly to death trying to figure out "who moved their 
cheese", when it was really their own complacency and lack of 
preparedness for the inevitable.  They got so used to eating the 
same stash because it was plentiful, that they failed to notice a 
decrease in its quantity and to make a plan for when they ran 
out.  Is this starting to sound like a metaphor for your trading 
style since the October lows?  Were you used to playing 
profitable tech stocks that you thought would never go down?  
Maybe you are thinking that the good market (cheese) must be 
around here somewhere and that you'll just hang around for it to 
come back.  Get your running shoes on folks.  It's time to think 
like a mouse, prepare yourself again for change and be a cheese 

Other editors and contributors have noted that with earnings 
season ending next week, the FED likely to raise rates on 
February 1st and 2nd, not to mention over-extended tech stocks 
that needed some consolidation, it is time to think again of 
bracing for a top in the markets.  I fully support that position, 
but have been more optimistic and willing to play the volatility 
figuring that earnings and liquidity would keep us afloat nicely 
until the end of this week.  I knew the day would come, I just 
didn't know when and was willing to push it to the limit.  Today 
was the limit, as the selloff in both the DJIA and NASDAQ markets 
accelerated with greater volume.


The DJIA spiked open this morning to 11,366 and began its descent 
that would carry it through the rest of the day (a great reason 
not to buy during amateur hour).  While finding support in late 
morning around 11,200 and bouncing to 11,250 over a two-hour 
lunch, it couldn't hold.  The selling intensified and carried the 
DOW below 11,200 all the way to 10,917 before a 91-point recovery 
30 minutes before the bell to close at 11,008.  Notice on the 6-
month chart the strong support at 11,000 and be thankful for the 
decent recovery off the low. We can't say for sure if this 
represents a "V" bottom selloff.  It happened a little to late in 
the day to define a trend.  However, in the past with such a 
steep selloff, it's been a signal of a temporary bottom from 
which we get a bounce.  One thing in particular that plagues the 
technical wizards is the selloff in GE, which lost $6 today and 
has been down for each of the last five days.  Because it 
represents such a broad cross section of the market, traders 
assume that what happens to GE happens to the market.  Today, it 
closed below its 50-dma ($145) for the first time since October 
of 1999.  Ominous, perhaps, but with sentiment negative, 
contrarians may start to nibble.  Liquidity is still there and 
this could be just a bump in the road.


Internals, though ugly, are something we've seen before.  
Decliners outpaced advancers by 2:1.  Only 95 new highs could 
stack up to the bigger weight of 163 new lows, with only 38% of 
the volume trading up and 62% trading down.  Yes, it's bad, but 
we've seen worse.  With volume clocking in at 1.2 bln shares on 
the NYSE, lots of investors were feeling pain, but there was no 
blood in the streets.  Just so you know though, 40% (12) of the 
DJIA are trading under their 200-dma, while 30% (9) trade below 
their 50-dma.  Only five of the thirty DOW stocks finished the 
day with a gain - three of those five reported earnings today.  
DIS finished up $0.56 at $53.31; AXP finished up just $0.31 at 
$132, despite announcing a stock split; and EK posted a $1.31 
gain to $62.06 after beating street estimates by three cents.  

Are we scared?  Maybe.  We'd sure like to see the rebound 
continue back over 11,000.  Otherwise we might soon be staring at 
10,850 for support, then 10,600, though we really don't expect to 
go that low.  If there is a consolation prize, it's that the last 
time 70% of DJIA members traded that far under their averages, we 
were at a bottom. 

Having not helped matters at all during the last week, PG finally 
admitted they had discussions about acquiring Warner Lambert and 
American Home Products, but also said they would not pursue that 
course of action.  You'd think investors would show their relief 
by raising the share price by the 17% they lopped from it last 
week.  Nope, they also disclosed that they had discussions to buy 
Gillette, which got the street thinking that they maybe PG needed 
a merger to juice what might be their stagnant revenue growth 
rate, sending PG down another $6 today.  Dang if you do; dang if 
you don't.

As for the NASDAQ, you'd think from the celebration of market 
bears that we haven't seen a market this low since last year.  
Not so.  Try last Monday, when with a gain for the day, the index 
was still lower by 30 points.  It's amazing how a few good 
record-setting days can spoil us.  While today was in fact the 
10th highest point drop on the NASDAQ, it doesn't even make the 
top 50 list in percentage terms.  Nonetheless, traders took some 
profits off the table in a big way, though liquidity remains 
alive and well.  

The NASDAQ popped out of the chute reaching just over 4300 in the 
first few minutes of trading, but plodded along lower until the 
final two hours of trading.  Like lettuce on a hot summer day, it 
quickly wilted under interest rate fears, oil prices, FED meeting 
next week with rate increase anticipated, FED meeting with rate 
increases again in March, earnings winding down (pick your 
favorite reason) sending, the index down sharply to just under 
4100, still above its 10-dma of 4064, its nearest support.  For 
the chart watchers, 4050 is the next level historically.  After 
that, start looking for 3850.  The 50-dma is at 3714, but we 
don't expect the index to reach that far.


In the end, any way you slice, investors saw fit to take some 
chips off the table.  By the looks of the volume at 1.99 bln 
shares (a new record by a long shot), there was a whole lotta 
sellin' goin' on.  Frankly, we're a bit gratified to see some 
fear return to the market.  Decliners beat advancers 3:2.  New 
highs amazingly outstripped new lows by a whopping 452 to 92 
(maybe some faulty data there), while down volume of 1.1 bln 
shares traded down compared to almost 900 mln trading up.

So let's wrap it up for tomorrow and the rest of the week.  The 
negative - A FED rate increase in February is all but certain and 
priced in.  What isn't certain is that the FED could act to raise 
rates again in March, which is keeping interest rate pressure on 
equities.  The price of oil isn't helping, but it's a sideshow 
with fewer on-lookers right now.  While earnings reports have 
been fairly good, the season is coming to an end.  Wage cost 
reports on Thursday are fanning the inflation flames.  The 
positive - There has been a resurgence of fear indicated by 
selling volume, building a nice wall of worry for investors to 
scale.  We are at near-term support levels too.  All math and 
charts aside, sentiment is pointing to the downside, but you'll 
have to draw your own conclusion based on tomorrow's action.

The important part is to recognize that the market is changing.  
As option traders, we need to change with it if need be.  You may 
be better off on the put side.  Don't be paralyzed by fear of not 
finding "new cheese" if your "old cheese" gets moved.  Get your 
running shoes on, hit the maze, and go find the new cheese 

As always, sell too soon.

Buzz Lynn
Research Analyst


Don't Blame the Trade Deficit
By  S.P. Brown

In a recent Reuters news article, Japanese Finance Minister 
Kiichi Miyazawa reported that Federal Reserve Chairman Alan 
Greenspan had confided in him that the U.S. lust for imports 
could not go on forever.   According to Miyazawa, Greenspan 
reasoned that money was not being made from producing goods 
and services, but was being made through stock market 
appreciation.  "At this point what's troubling him (Greenspan) 
is that the money is going into imports, and this may be good 
for the people of the world but for the American economy this 
cannot continue for long," Miyazawa said.  

To the uninitiated, the Commerce Department numbers are indeed 
disconcerting (Greenspan, of course, is not among the 
uninitiated).  The trade deficit swelled 3.7 percent in 
November to $26.5 billion from October's deficit of $25.6 
billion, a second straight monthly record.  What's more, over 
the past year, the U.S. trade deficit has increased by 60 

If more folks understood trade and it's concurring benefits, 
the short response to the Commerce Department's report would 
be, big deal.  Fact is, the trade deficit is really much ado 
about nothing. 

Unfortunately, though, trade and trade deficits are two of the 
most misunderstood economic concepts in this country.  The 
majority seems too indifferent to economic theory to bother 
learning trade's importance, making it easy fodder for 
populist politicians. 

One of the most enduring misconceptions of trade is that the 
U.S. is exporting jobs when it incurs a trade deficit.  This 
simply is not the case.  Yes, open competition will cause some 
people to lose their jobs, but in the aggregate, the U.S. 
gains more than it loses.   

In a study undertaken by Daniel Griswold of the Cato 
Institute, during years of expanding trade deficits, the 
unemployment rate has fallen by an average 0.4 percentage 
points.  But during years of improving deficits, the 
unemployment rate has risen on average of 0.4 percentage 

Another popular misconception is that trade is paid for with 
blue-collar jobs.  Griswold has found that in the 
manufacturing sector, the trade deficit proves to be a friend 
not foe.  During years of rising deficits, manufacturing 
output grew an average of 4.5 percent a year.  During years of 
shrinking deficits, the average growth rate of manufacturing 
output was 1.4 percent.  In fact, Griswold found that 
manufacturing jobs increased an average of 13,100 workers a 
year in those years trade deficits grew, while those years of 
shrinking deficits were accompanied by an average annual loss 
of 116,700 manufacturing jobs.

Griswold goes on to report that during years of rising 
deficits, the growth of real gross domestic product averaged 
3.2 percent per year, compared to 2.3 percent during years of 
shrinking deficits.  In other words, the U.S. economy 
typically grows about 40 percent faster in years in which the 
trade deficit grows compared to years in which it shrinks.

Another popular concern is that nations with trade surpluses 
are wealthier than those with deficits.  This concern stems 
from the old mercantilist belief that the larger the trade 
surplus, the wealthier the nation.  This belief originated in 
18th-century England where it was believed that if a country 
exported more than it imported, the national treasury would 
swell with gold, meaning a net exporting country would become 
wealthier than its neighbors.   

This simply isn't the case.  While a country may indeed have 
been accumulating gold, and in our day, paper currency, that 
country was foregoing the consumption of its own goods and 
services, which actually means a country can be made poorer if 
those goods and services are valued more than the currency 
exchanged for them.  

Here's a modern day example to prove this point:  It's no 
secret that the U.S. has been running trade deficits with 
Japan for decades.  Billions more in goods and services flow 
from Japan to the U.S. than vice versa.  But does that mean 
that Japan is better off then the U.S.?  According to the 
mercantilist view, it is.  In reality, though, the answer is 
no.  Just on anecdotal evidence alone, it's easy to discern 
that the U.S. has the higher standard of living. 

Nevertheless, many economists will laud Japan for its high 
savings rates and trade surpluses and chastise the U.S. for 
its low savings rates and deficits.  But the reason savings 
rates are so high in Japan is that there are far fewer goods 
and services to purchase than in the U.S.  What's more, those 
goods and services that are available have been bid up to much 
higher prices than those in the U.S. because of the lack of 
competition that imports would bring.   

Further supporting the notion of trade as a non-issue is the 
fact Americans pay for Japanese goods and services with 
dollars.  Dollars, though, aren't used for barter within 
Japan's borders.  So Japanese firms must do something with 
this currency to realize any utility.  The options are 
limited.  A Japanese firm can trade the dollars for yen in the 
open market, they can invested them in the U.S., or they 
can purchase U.S. goods and services.  Regardless of the 
course of action, the dollars will eventually get recycled 
back to the U.S.   

But since the U.S. is the largest free-market economy in the 
world, many foreigners - the Japanese included - decide just 
to leave their money here.  The Cato Institute reports that 
since 1992, annual foreign investment in plant and equipment 
in the U.S. has risen 81 percent, from $557.9 billion to an 
annual rate of slightly more than $1 trillion in 1999.  For 
the U.S., this means access to capital at lower costs. 

Finally, contrary to popular belief, trade does not occur 
between countries; it occurs between individuals.  And it's 
only because of free trade between individuals that wealth is 
created.  Trade creates wealth by creating surplus value.  For 
example, a seller offers a widget to a prospective buyer.  To 
the buyer, the widget is worth $1.10.  The seller, on the 
other hand, values the widget at $0.90.  The $0.20 difference 
allows for trade and wealth creation.  If the buyer and seller 
agree to a price of $1.00, each is made better off by a dime.  
It's these accumulations of surplus values through the years 
that has created the wealth we see today.  What's more, it 
doesn't matter if the individuals are 12 or 12,000 miles 
apart, the results are the same.  

Compared to the other developed economies, the U.S. economy is 
growing at a faster rate, despite the fact the U.S. 
persistently runs large and growing trade deficits.  So if 
Greenspan believes that a growing trade deficit warrants 
higher interest rates, he's got it all wrong.  Yes, the wealth 
effect may be driving consumer demand, but the trade deficit 
can go on indefinitely producing no ill effects.  If the good 
Chairman wants to raise interest rates, he would be better 
served to leave trade deficits out of the explanation.


SLR - Solectron $77.00 -1.38 (-1.38)

Solectron is a premier global provider of customized 
manufacturing services rendering electronic solutions for 
original equipment manufacturers (OEM's).  They have won the 
Malcolm Baldrige Award twice for their manufacturing excellence.  
Solectron has a wide range of clients including Cisco, Hewlett-
Packard, and Mitsubishi.  

While we don't have anything specifically in the news that would 
explain the negative chart pattern, we do know that investors 
have moved on to the sex appeal of high-flying companies offering 
a lick and a promise.  Having predictable, nonetheless growing, 
earnings seems to be the kiss of death that brings wild price 
gyrations back to earth.  With nothing left to argue about, it's 
pretty tough for an analyst to raise a price target from $350 to 
$600 just because he/she can spin the story.  The fact is SLR is 
an excellent company with excellent (and growing) earnings.  Only 
the stock is in a slump now.  As opportunists, our job is to 
capitalize on the sentiment.  Looking at the technical chart, SLR 
was doing its best imitation of a yo-yo, having encountered 
resistance at $95 only to regain support at $80.  SLR fell 
through support at mid-day and couldn't get back over $79 (new 
resistance?).  The crowning blow was the selling of over 635K 
shares in a block trade at $78 after the bell on Friday.  Ouch!  
That's rough on a stock with 1.6 mln as its ADV.  Needless to 
say, RSI, stochastic and MACD are deep in negative territory.  
The next level of support is around $72 and could easily move to 
that level in an overall southerly market move (not out of the 
question with Fed meetings in the offing).  To be sure the move 
south is for real, look for a mild recovery say to $79, then 
another bounce south on increasing volume.  That will be the key.

News that may account for the recent downtrend is that IBM 
awarded Celestica its server business, and SLR apparently had 
some Q1 inventory issues.  Nonetheless, Lehman Bros. upgraded the 
stock to Outperform from Neutral.  That didn't save SLR.  Not 
even an earnings run will save this stock since they won't 
announce until March 13, according to Zack's

BUY PUT FEB-80 SLR-NP OI=730 at $6.75 SL=5.00
BUY PUT FEB-75 SLR-NO OI=166 at $4.25 SL=2.50

Average Daily Volume = 1.6 mln
Chart = http://quote.yahoo.com/q?s=SLR&d=3m

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