The Option Investor Newsletter Monday 1-31-2000 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) ****************************************************************** 1-31-2000 High Low Volume Advance Decline DOW 10940.50 + 201.60 10956.70 10701.60 993,800k 1,448 1,620 Nasdaq 3940.35 + 53.28 3940.46 3748.03 1,503,633k 1,591 2,595 S&P-100 754.26 + 16.22 754.35 731.43 Totals 3,039 4,215 S&P-500 1394.46 + 34.30 1394.50 1350.05 41.9% 58.1% $RUT 496.23 - 8.39 504.62 488.53 $TRAN 2571.65 - 10.10 2604.47 2551.02 VIX 26.20 - 2.89 30.06 25.32 Put/Call Ratio .56 ****************************************************************** What a Relief... It was another volatile day on Wall Street for investors on Wall Street. Another day where traders experienced moves of 100 points or more. The Dow headed lower at the open when buyers stepped in focusing on banking, financial, and telecom stocks. The blue-chips just dipped into negative territory, down only -37.00 before the bulls entered the picture. Over at the Nasdaq it was a different story. The tech index found itself in the red, to the tune of -139, before buyers began to test the waters. 3748 was the magic number at the Nasdaq, when shortly before noon, traders began to bid the price of some of some of their recent favorites higher. Keep in mind, the Nasdaq was at a record high, of just over 4300, one week ago today. This morning analysts confirmed the Nasdaq had "officially" shifted into correction mode as it had declined over 10% from the high. Just as the dreaded "C" word was being uttered, in almost every other sentence, by analysts on CNBC, the Nasdaq began its stunning reversal. Whether we like it or not, it is beginning to appear, that the volatility experienced recently may become the norm, at least in the near term. With the kinds of moves seen in 1999, a 10% correction means very little to many investors. At the NYSE one of the biggest loser early in the day, ended the session on top. SBC Communications jumped 9.2% to close at $42.88, while AT&T picked up +3.88 to finish at $52.75. HON gained 6.2% after a favorable article in the Wall Street Journal. JPM finished the day +4.88 at 122.94 as the financial sector turned in a stellar performance, adding about 4%. Citigroup(C) was up +1.25 to $57.38, while Bank of America(BAC) rose +1.75 to $47.50. Today's bounce was welcomed with open arms. As Jim pointed out Sunday, we were due for a relief rally, as Friday's debacle left the Dow stuck deep in oversold territory. The question remains whether or not the major indices can maintain the momentum. A glimpse inside the numbers today shows the rally was a relief rally and not necessarily a change of trend. The volume was light, compared to what we seen since the first of the year, with just 972 million shares changing hands. Today was only the second day in 2000 that the NYSE has not seen at least 1 billion. shares traded. Up-volume did outshine the down-volume at a rate of 2-to-1. Declining stocks edged advancing issues by 16 to 14, with only 22 stock making a new high, while 181 hit a new 52-week low. We aren't complaining, but we will need to see more follow- through before we are ready to jump on that bandwagon. With the FOMC meeting tomorrow and Wednesday and the Non-farm payrolls report on Friday, that could be a tough nut to crack. Stocks at the Nasdaq could no longer resist the blue-chip rally and jumped on board, gaining +53.28 for the day or 1.37 percent. Like we said the after being down -139, to come back and close +53 points to the good, equates to a 192 point run which is definitely impressive. A few of the stars at the Nasdaq were INTC, QCOM, 3Com. INTC ended the day +4.94 higher after a Credit Suisse First Boston note adding the chip-maker to its Focus One List and forecasting the company will beat its earnings estimates. Investors bid the price of QCOM shares up to $127 on reports they may be close to inking a deal with China Unicom, China second largest telephone provider. 3Com rose +4.19, to finish the day at $50.75 after the company reported Palm, a subsidiary that makes the popular hand-held Palm Pilot device, has filed with the SEC for an IPO. SG Cowen jumped its rating from a Neutral to a Buy with a $60 price target. IMNX jumped +14.63, after a panel of experts for the FDA approved the chemotherapy drug, Novantrone, for use in the treatment of MS. BGEN fell $6, over concerns the Novantrone approval could hurt future revenues at the biotech company. The Internet index held the Nasdaq back, dropping 2.1%. Free- Markets(FMKT) fell 16.0%, down -42.81 to $229, although its fourth-quarter loss was less than expected. A peak at the numbers inside the Nasdaq shows declining issues leading advancing stocks by a 25 to 16 margin, on light volume of 1.49 billion shares. Up-volume versus down-volume was even, with 113 stocks making a new low and 71 touching a new high. As we said the 3750 area provided support for the tech index, when buyers decided enough was enough. Note the 3790 area in Sunday's Market Wrap So we've made it through the month of January, with most of the major indices finishing the month lower. The Dow finished down -4.8%, the Nasdaq gave back 3.2% and the S&P 500 lost 5.1% for the month. The one major index that manage to finish the month in the plus column was the Dow Jones Utilities, which added 11.2% for the month. Investors and analysts that follow the January Effect, will say it could be a tough year for equities, with the S&P showing a loss at the end of January. Our question is, was this really a "January Effect" or a "Greenspan Effect". Equity and bond traders paid little attention to this morning's Chicago Purchasing Managers Index numbers as well. The January Chicago PMI came in at 55.6 with the prices paid component at a reading of 67.8. Both numbers were in-line with economists estimates. Bonds did decline a bit today dropping -13/32, with the yield sitting at 6.48%. Tuesday traders will get release of the National Association of Purchasing Managers index. Alan Greenspan and his partners will begin their two day meeting, with most a 25 basis point hike to be announced Wednesday afternoon. Once the Fed decision is out of the way, providing there are no surprises, and we don't anticipate any, we could see a rally continue at least for one day, until the Non-farm payroll report is released Friday. Aggressive traders may choose to target shoot any dips on their favorite plays, while conservative traders may choose to wait for the Fed. Be Patient, Trade smart and be prepared to sell too soon. *********** STOCK NEWS *********** Energy Deregulation 101: How Exactly Does It Work? What is energy deregulation? How does it affect me? Most of us have heard of energy deregulation, but do we really know what it is? Efforts to deregulate the electric utility industry began in the early 1990s with passage of the National Energy Policy Act in 1992, which allowed both utilities and non-utilities to build electric generating plants and provide power to wholesale customers outside their service boundaries. California was the first state to deregulate, in March of 1998. The act left it up to the individual states to determine how to make customer choice available to retail customers. The National Energy Policy Act deregulated only the generating side of the business. The "wires and pipes" side-the part that carries the electricity to your home or business-remained regulated. Traditionally, the same company that generated your electricity also delivered it to your home or business. Now, with deregulation, some people have the chance to choose the supplier that generates their power. If you have this choice, you have many factors to base your selection on. You should consider factors such as where and how the energy is generated, enhanced customer service, any conveniences you can gain, the range of other available products and services offered by the supplier, along with the overall value. As electricity competition has come to many states, companies have spent millions on marketing and public image campaigns. Some utilities have changed their names to sound more appealing, others offered discounts on long-distance telephone service and even spruce seedlings to convince customers that they care about the environment. As enticing as some of the lures have been around the country, electricity deregulation also has ushered in consumer bewilderment, rip-offs and market risks to what has been a staid, monopolistic industry. All 50 states are deregulating their utility companies, hoping to increase competition and reduce rates for their citizens. The trend has great possibilities, and problems. With full disclosure about sources of power, removal of government subsidies and regulatory loopholes, the true costs of power generation will become apparent, opening a gateway for alternative energy suppliers. Many consumers may chose to buy from the least expensive supplier, sending power from a highly polluting plant, which is far away. Without structured deregulation and national standards, a race to the bottom will ensue. We, as consumers will fall victim, as higher pollution would most likely increase as more demand for cheaper energy suppliers prevail. For folks in New Jersey, for example, this is especially harmful: over 33% of their pollution blows in from out of state, largely from coal burning power plants in the Midwest. This poses a grave threat to the people's health. Deregulation could also open up the doors for scam artists who try to prey upon consumer confusion of industry changes. California, for instance, allowed anyone who paid a small fee to market power to homes and businesses. Several hundred power marketers signed up in expectation of big profits under competition, many who know nothing and had no capacity to generate power. After that scandal, California investigators investigated the criminal and financial backgrounds of other electricity marketing companies. Only a few of the original marketers were allowed to continue operating. Stranded costs are something you may have heard of regarding deregulation. Stranded costs are investments made by utilities in order to service customers with the understanding that the investments would be recovered through future electric rates. It is the difference between the utility's investment in its plant, and the market value of the plant after deregulation begins. For electric utilities, the biggest issue is what to do with their high-cost power plants-the older, less efficient generating stations as well as the nuclear plants-once competition begins and other suppliers are able to undercut their costs. The issue is complicated by the fact that many of these costs were incurred with approval from state regulatory commissions. The states are now trying to decide who should pay for those high-cost plants-the utilities' customers or their stockholders-and how the costs will be recovered. The key to understanding deregulation will be to read everything you can about the subject. The possibility of having several different companies handling the components of your energy needs is daunting and confusing. Keep in mind, licensed power marketers and brokers are not required to generate electricity, but they can purchase it from others and pay local utilities for delivery to your home or business. Local utilities will only be required to guarantee delivery, not the supply, of electricity through their local system. Competitive market forces will balance supply and demand introducing a measure of risk not currently part of the service equation. With natural gas supply, you will need to evaluate suppliers to determine the best total value for you in terms of service, reliability, and price. You will need to find an accurate and objective information source about the coming competitive electricity environment in order to compare supplier claims and offers. Do your homework and always be wary of the scams out there. Good luck! ********************** PLAY OF THE DAY - CALL ********************** ICIX - Intermedia Communications $43.00 -2.00 (-2.00) Intermedia Communications is an integrated communications provider with products and services that encompass the broadest range of networking solutions available from any single supplier. These solutions include local and long distance services, frame relay networking, Internet, ATM, and bundled services, which provide both voice and data connectivity on a single access circuit. Intermedia's ViewSPAN offers performance monitoring across numerous platforms, integrating even those networks owned by other carriers. Intermedia's products and services include industry-leading guarantees, customer service, technical support for design, implementation, and operations. Sunday's Write Up Perhaps the most impressive quality for ICIX last week was the relative strength it demonstrated, particularly on Friday. We saw the Nasdaq Telecommunications Index down over 40 points and yet ICIX managed a nice gain of nearly $2. Not to mention that ICIX traded to a new 52-week high of $46.38 and posted volume over two times the daily average. Apparently, there are plenty of investors interested in this stock. ICIX has been trending upward since roughly the beginning of November and has picked up the pace a bit throughout the last two months. January 12th turned out to be a very good day for ICIX. Digex (DIGX), which is a subsidiary of ICIX, announced that it would be working with Compaq and Microsoft (MSFT) to develop application hosting services. It was also announced that CPQ and MSFT would each invest $50 million in DIGX to help with the funding of the service development. It was reported that DIGX had acquired roughly $700 million total in strategic financing from various sources. On the same day, Duff & Phelps Credit Rating Company raised their Rating Outlook for ICIX from Stable to Positive, citing the strategic financing announcement as the reason for the upgrade. On January 13th, ICIX was upgraded by AG Edwards from an Accumulate to a Buy. ICIX gained $1.75 on the 12th and $4 on the 13th. ICIX has some nice support backing it. Its 5 and 10-dmas have converged at $42.25, which could provide some solid support if needed. The $42 level looks to have provided some support several times last week, so this could be a good level for possible entry points on pullbacks. ICIX has additional support at $41, $40 and $37. ICIX did encounter some resistance at $46 on Friday, but could have the momentum to keep climbing through this level next week. We have an unconfirmed date of February 24th for an upcoming earnings announcement. We will be confirming this date with the company next week. Last Wednesday, ICIX announced their strategies for continuing growth and expansion. These initiatives included expanding their DSL service, an enhancement in their ability to offer voice and data communications services, and improvement in the area of global connectivity. They also announced that they had signed on to the Optical Domain Service Interconnect agreement to "collaboratively develop and encourage open interfaces and protocols within the telecommunications industry." BUY CALL FEB-40 QIX-BH OI=1777 at $5.38 SL=3.50 BUY CALL FEB-45 QIX-BI OI=1677 at $2.94 SL=1.50 BUY CALL FEB-50 QIX-BJ OI=1409 at $1.38 SL=0.00 High Risk! BUY CALL MAR-40*QIX-CH OI= 261 at $7.75 SL=6.75 BUY CALL MAR-45 QIX-CI OI=1572 at $5.38 SL=4.75 Picked on Jan 25th at $45.00 P/E = N/A Change since picked -2.00 52-week high=$46.38 Analysts Ratings 6-5-3-0-0 52-week low =$13.06 Last earnings 11/99 est=-2.98 actual=-2.97 Next earnings 02-24 est=-3.08 versus=-2.84 Average Daily Volume = 1.38 mln /charts/charts.asp?symbol=ICIX ************************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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