The Option Investor Newsletter Monday 2-07-2000 Copyright 1999, 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) ************************************************************ 2-07-2000 High Low Volume Advance Decline DOW 10905.79 - 58.01 10970.94 10846.22 932,190k 1,232 1,774 Nasdaq 4321.77 + 77.63 4321.96 4244.15 1,626,587k 2,336 1,835 S&P-100 772.89 - 2.62 778.40 768.45 Totals 3,568 3,609 S&P-500 1423.00 - 1.37 1427.15 1413.33 49.7% 50.3% $RUT 532.39 + 6.87 532.40 525.52 $TRAN 2572.21 - 36.75 2622.15 2569.68 VIX 23.70 + 0.77 25.44 23.36 Put/Call Ratio .44 ************************************************************* Easter Bunny, Santa Clause, Tooth Fairy NASDAQ 4300? No longer a mythical figure in search of a reason to celebrate, the NASDAQ broke through the resistance barrier today to close for the first time over 4300. First the good news. The gains came steadily throughout the day, as the final 30 minutes of trade showed the benefits of saving the best part for last. That's when the index powered up to close at its high of day at 4321. Volume was a strong 1.6 bln shares. The technical breakout and the strong volume were a positive in our book, but by no means a confirmation that we're moving higher from here. As you might expect, technology stocks, and more recently biotech stocks have been the fuel igniting the run. Don't look now, but they have also been the source of a lot of volatility. Think way, way back to January 31st (6 trading days ago) when the NASDAQ touched a low of 3748. Since then the NASDAQ has tacked on a staggering 573 points, a 15.3% gain for the week. Remember when that was a great ANNUAL return? Anybody think that can be sustained on a weekly basis for long? Nope, we don't think so either. While on the surface things look good, we just passed stochastically (a measure of overbought or oversold) to the overbought part of the graph. That move coupled with the gain should serve as a counterbalancing red flag to volume-backed breakout above. And so we find ourselves sitting precariously at 4300 just like January 24th, the day the NASDAQ began its nosedive to the 3750 level. We are not saying that is going to happen again - after all, we had "deer in the headlight" fear of the coming FOMC meeting, which prompted traders to take some cash off the table beforehand. However, while we don't face that prospect again until March, earnings season is coming to an end this week, beginning with Cisco tomorrow after the close. MCI/WorldCom reports on Thursday morning, followed by Dell after the close. There are not many events on the horizon that would precipitate big gains until April when earnings get interesting again. Anyway, In case those last two sentences scooted on past your eyeballs, those three companies, CSCO, WCOM and DELL make up three of the top five market cap stocks on the NASDAQ 100 (the other two being MSFT and INTC, whom have already reported). We all know what generally happens to stock prices shortly before earnings (right, they go up; conversely, they go down after earnings). CSCO was up over $4 today in anticipation of earnings results tomorrow, where they are expected to beat the street by a penny or two. WCOM, up $3.56 and who reports Thursday before the bell was given a boost this morning by a Merrill Lynch analyst noting, "you won't be disappointed". Intel (+$3.13), who just purchased a new plant in Colorado Springs in which they intend to make handset chips for NOK, also got a boost on positive news for semiconductor association. It was learned today that 60% of chip growth is coming from the communications field. Oh, so that explains the big gains in BRCM, SNDK, LSI, ALTR, CNXT, and TXN. Though DELL was off fractionally (they've already warned), INTC, CSCO, and WCOM accounted for 12 points in today's move, giving us another reason to greet the breakout with caution once earnings are over. Everyone remember why we urge you to sell too soon? Right. Prices generally fall following release of the news. As go the Generals, so goes the index. Even with these three excluded, you still have to take your hat off to the semiconductor and biotech stocks for their contribution to the six-day run. On the other hand, the DJIA was a different story. Rust is apparently not in fashion right now. Just look at the list of former beauty queens standing around with real earnings as institutional money seeks out those smoldering tech stocks offering a lick and a promise. GE, unquestionably representative of the whole market, was handed a loss of $5.06 today. AA lost $2.38. BA sheared off $2.19. MMM gave up $1.44. In all, only six of the Dow 30 were up, one of which was HWP, up over $10. Were it not for Carly Fiorina, HWP's CEO kickin' hiney and taking names (plus positive comments from Lehman Bros.), we'd have seen another 40 points lopped off the DJIA. While only spanked for a loss of 58 points to close at 10,905, the 11,000 support level appears to have turned to resistance today on the theory that what was once support can become resistance if a market (or a stock) is rolling over. Of course, no Monday would be complete without mergers, and boy was today a bell-ringer. First out of the block was Pfizer (PFE) announcing that they had agreed to buy Warner-Lambert (WLA) for about $90 bln in stock, or 2.75 shares of PFE for every share of WLA. It's estimated that a $1.6 bln savings by 2002 will result along with a steady 25% growth rate over the next three years from the synergy. In the process, AHP was left at the altar upon the news. Don't feel too sorry for AHP though. They get a $1.8 bln breakup fee as a consolation prize. Did shareholders like the "Oh, Henry" ending? You bet. PFE gained $1.25, WLA moved up $2.75, and AHP topped them both for a $2.94 gain. In other M & A activity, we turn back to the tech front to find another marriage in the optical networking business with Lucent buying Ortel for $2.9 bln. in stock, which equates to about $177 per ORTL share. That was followed closely by Akamai's (AKAM) announcement that they would purchase Intervu (ITVU), a company that transmits audio and video over the Internet for $2.8 bln. Finally, Corel (CORL) is buying Inprise/Borland (INPR) for $1.07 bln in a move that targets the growing market for the Linux operating system. Increased liquidity anyone? In the end, here are the scores. The DJIA fell 58 to 10,905 on 932 mln shares traded in a demonstration of technical weakness. Decliners outpaced advancer 17:12. 151 new lows were nearly double the 82 new highs, while down volume was 50% greater than up volume. While it doesn't look good and it's not technically inspiring, it's also not a surefire signal for a selloff. The next level of support is at 10,850 with resistance at 11,000. The NASDAQ gained 77 to 4321. Volume was impressive at 1.626 mln shares. Advancers beat decliners by a margin of 4:3, while up volume was more than twice down volume. Similarly new highs smoked new lows 321 to 61 - an overall impressive day, but we still need to watch the 4300 level to see if it holds In summary, here we sit directionless. Not only is there M & A liquidity, there is still plenty of cash on the sidelines, a smidgen of which got put to work today in tech stocks during the final 30 minutes of trading. Thus, we conceivably have a tradable technical breakout on the NASDAQ. Conversely, the DJIA gave us a technical negative today. As Jim noted on Sunday, Monday or Tuesday could be the day to watch, and today wasn't it. We're going to have to wait until tomorrow to see which side these markets fall into. Keep in mind that with earnings season over, there isn't much reason to move up (except that blessed liquidity thing) and historically, now's the time during the earnings cycle when most issues go to sleep. We could be rangebound for a while, in which case, you may want to stand aside until you see the direction emerge. Rangebound trading can eat you alive. Other indicators? The VIX moved up today to over 23 from a low of 21 on Friday. When it hits 20 on the downside, that's generally a sell sign. However, with a six-point gain on the Russell 2000 today, losing issues are narrow by comparison and could spell r-a-l-l-y for the broader market. It's a coin toss folks. Keep your running shoes handy and be ready to find "new cheese" (see January 24 Market Wrap). Of course, no Wrap would be complete without a reminder to sell too soon. Buzz Lynn Research analyst **************** PLAY OF THE DAY **************** UAL (put) With the Dow Jones Transportation average on the skids resulting from higher fuel costs and tight labor markets, not to mention earnings season coming to an end, we think it smarter to play the downside if you feel you must play. United Airlines fits neatly into both categories and has no support south of its current price. UAL - UAL Corp $55.50 -0.50 (-0.50) UAL is a holding company whose principal subsidiary is United Air Lines, the world's largest airline. They engage in the commercial air transportation of people, property, and mail. Notably, UAL is one of the world's largest employee-controlled companies with its employees owning 47% of the stake. The airline sector as a whole has been in a general downtrend since January. The skyrocketing fuel costs have put quite a squeeze on their bottom-line. UAL added insult to injury when it abruptly announced on January 13th its fiscal 200 financial forecast would be well below analyst expectations. The shares stumbled significantly losing 13% in one day. Despite solid 4Q earnings on January 19th, UAL continued its descent. The flight disruptions on January 25th resulting from the east coast blizzard was the straw that finally broke the camel's back. You've got to realize too that consumers have been less than satisfied with airline's customer service. There is a constant stream of complaints about delays and rude treatment. It seems investors have taken this sentiment to heart and are putting their money in other equities. First UAL slipped under firm support at $60, then quickly flirted with $57. Now the $56 support level has been shattered. Currently the 5-dma is at $57.30. Look for a bounce off this indicator if you want an entry into this put play. But still the question remains. Where's the bottom? Honestly at this point it's hard to determine so let's not guess. Be prepared with stops and pay close attention to stock and market direction. In the news this week, UAL announced its January traffic decreased by 2.8% versus a comparable month in 1999. ***February contracts expire in two weeks*** BUY PUT FEB-60*UAL-NL OI= 777 at $6.25 SL=4.25 BUY PUT FEB-55 UAL-NK OI=1037 at $2.31 SL=1.00 Average Daily Volume = 704 K /charts/charts.asp?symbol=UAL ************** STOCK NEWS ************** Kana and Silknet Announce $4.2 Billion Merger By Cindy Christ Shares in e-business application provider Silknet (SILK) soared as much as 41 percent Monday after the company agreed to be acquired by Kana Communications (KANA) in an all-stock deal valued at $4.2 billion. Under terms of the agreement, each outstanding share of Silknet common stock will be exchanged for 0.83 shares of Kana common stock. Kana also will assume all outstanding options and warrants for Silknet stock. The exchange ratio represents a 21 percent premium over Silknet's average closing price for the last 30 days. On Friday, Silknet shares closed at $138.50. Kana will issue about 16.4 million shares to make the purchase, equaling about 33.7 percent of the combined company. "Kana and Silknet share a common vision in building an e-business platform that focuses on the customer," said Jay Wood, Silknet CEO, in a statement. "The combined products will provide the platform for linking business-to-consumer and business-to-business functions within an e-business," he added. Directors, officers and certain affiliates representing about 43 percent of Silknet's voting power and holding around 51 percent of Kana's voting power have agreed to vote shares held by them in favor of the merger and against competing proposals, the companies said in a joint statement. The deal is subject to shareholder approval and is expected to close in second quarter 2000. Redwood City, Calif.-based Kana, which makes customer service software, said the agreement represents one of the largest e-business software mergers to date. The companies will join their technologies to provide e-businesses with software used to answer customers' questions and manage customer communications via e-mail, Web sites, real-time messaging and Internet telephony. By integrating their products, customers can help themselves get information from e-businesses, including support requests, sales quotations and order status, the companies said. The combined company's client list will include 450 e-businesses, including Microsoft, Williams-Sonoma, E-Trade and eBay, among others. Both Kana and Manchester, N.H.-based Silknet went public in 1999 at a $15 per share offering price. In recent months, Kana has been on a buying spree to beef up its product offering, acquiring privately held Connectify, BEI, and NetDialog. Shares in Kana, which split 2-for-1 Jan. 28, declined on the news, trading down $18.38, or 7.1 percent, at $240.50. Silknet finished up $44.81, or 32.4 percent, at $183.31. *************** Semis Fly on Strong Industry Outlook By Cindy Christ An upbeat report citing record sales ignited shares in semiconductor companies, sending the Philadelphia Semiconductor Index up almost 35 points to a new, all-time high. The Semiconductor Industry Association said Monday that worldwide sales surged to $14.7 billion in December and hit a new industry record during 1999. "Today's global sales number represent an 18.9 percent growth rate for the semiconductor industry in 1999," said George Scalise, SIA president, in a news release. "With year-end global sales reaching $149 billion, 1999 broke all predictions and industry sales records and was an exceptional year of record growth and productivity for our industry," he added. Led by strong seasonal demand for communications products and personal computers, microprocessors grew 9.8 percent in 1999, totaling $27.2 billion. "We witnessed across the board growth in all markets and product demand was strong in all regions of the world," said Scalise. "Sales were extremely strong for flash memory, chipsets and DRAM due to demand for Internet infrastructure, e-commerce and wired and wireless communications." The SIA said demand for flash memory chips, which increased 83 percent, showed the strongest gains driven by booming growth in wireless communications. The trade group's forecast calls for semiconductor growth to exceed last year's record level in 2000 and 2001, with sales improving 20 percent per year fueled by expansion in mobile phones and the Internet. Sales of cellular phones are projected to quadruple from more than 200 million units in 1999 to more than a billion by 2003, according to the SIA. The association also said that sales in Asia helped the industry reach record-breaking sales. "We saw a strong rebound in 1999 in the Asia Pacific market and Japan is finally showing signs of recovery from an eight- year recession," said Scalise. Japanese and Asia Pacific markets grew 26.7 and 28.9 percent respectively year over year. If economic recovery continues in the region, Asia Pacific will resume its role this year as the fastest growing market for semiconductors, supported by telecommunications build-out in China. Shares in semiconductor companies moved up across the board on the industry's strong outlook. TriQuint Semiconductor (TQNT), a supplier of high-performance gallium arsenide (GaAs) integrated circuits, rocketed $14.28, or 7 percent, to $219.63. TriQuint shares split 2-for-1 after the close on Feb. 22. Shares in Micron Technology (MU), which designs and manufactures semiconductor memory products and personal computer PC systems, shot up $6.63, or 9.8 percent, to $74. Programmable chipmaker LSI Logic rose $8, or 8.7 percent, to $99.50, an all-time high. Other programmable logic device makers, which make chips that can be programmed to perform specific tasks, were also higher. Altera (ALTR) gained $3.94, or 5.4 percent, to $76.44. Xilinx (XLNX) advanced $1.94, or 3.3 percent, to $60. Lattice Semiconductor (LSCC) jumped $4.46, or 7.6 percent, to $63.22. Broadcom (BRCM), which makes semiconductors for cable TV set- top boxes, hit a new 52-week high, rising $28.31, or 9.1 percent, to $339.31. Intel, the world's No. 1 chipmaker, bucked the trend all day but lit up near the close to finish up $3.19, or 3 percent, at $107.94. FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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