The Option Investor Newsletter Monday 3-6-2000 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) ****************************************************************** 3-06-2000 High Low Volume Advance Decline DOW 10170.50 - 196.70 10383.90 10121.50 1,029,060k 1,116 1,908 Nasdaq 4904.85 - 9.94 4980.15 4887.88 2,015,580k 2,099 2,190 S&P-100 752.96 - 12.99 765.88 748.53 Totals 3,215 4,098 S&P-500 1391.28 - 17.89 1409.74 1384.75 44.0% 56.0% $RUT 601.64 + 3.76 604.01 598.19 $TRAN 2376.09 - 58.36 2436.41 2364.31 VIX 23.15 + 1.86 24.02 21.37 Put/Call Ratio .43 ****************************************************************** Resumption of the Primary Trend That's a phrase heard frequently from floor traders today. What the heck does that mean? In a nutshell, it means DJIA stocks are down while technology is up, and the divergence of the two indices may resume. In fact, it never really went away. NASDAQ is currently focused on getting to 5000. While that has no technical significance given that the index hasn't seen that level before, the psychology of the magic 5000 provides a nice target at which traders can shoot. Since most technology companies sport no debt, they are not as sensitive to interest rate moves, especially now that traders have figured out that the primary way to make money in this market is to play momentum stocks in the hot sectors. Is it any wonder then that the chip, biotech, and optical issues remain on fire? That's where the money is. Skeptical? We were too, but listen to a quote from briefing.com: "Mom and Pop have been pulling their retirement out of the Blue Chips and moving it into aggressive growth funds. Each day more investors being lured into tech funds by the spectacular year-to- date performances of the NASDAQ (+22%), SOX (+75%) and Biotech Index (70%). Professional day traders are picking up on this trend and are directing more of their capital towards quality stocks. What you are left with are huge market-cap companies experiencing 50% moves in one week or one day and price pullbacks that often last no longer than a few hours." On the other hand, the interest rate sensitive DOW stocks (read that non-tech) almost always suffer every time Greenspan gets behind a microphone. No, there wasn't a FED meeting today. However, the Finance 2000 Conference held at Boston College hosted none other that Birthday Boy, Alphonso-the-Great Greenspan, who turns 74 today. While on-air pundits were quick to point out today's declining DJIA was based on resurfacing interest rate fears often pontificated by Alphonso, we think the real reason is that there is no good reason to be in DOW stocks when you sell what's left of your "value" portfolio to buy tech stocks that go up $10 every day (not literally, but that's the mentality). The fact is Greenspan didn't say anything today that he hasn't already scripted before. Want evidence? Half of his speech focused on the bullish potential of the "new economy" and productivity gains beyond belief, while the other half zeroed in about the supply of labor eventually outstripping demand, thus driving wage inflation up. Nothing has changed since Friday, except that investors were sitting on a mighty fine 500 point DJIA profit from last week that looked ripe for the taking. And profit taking they did. While the DJIA did stage a 48 point late-day recovery from its low of 10,122 (shedding about 245 points to get there), the index closed down 196 points at 10,170. 1908 decliners pounded just 1120 advancers. Similarly, down volume exceeded up volume by 69%, while 197 new lows outpaced just 128 new highs. Volume again clocked over 1 bln shares on the NYSE. . .not a record breaker, but enough to remind us that this isn't just another run-of-the-mill down day. It is part of a continuing fundamental change into the age of information and technology, just as we shifted from a system of agriculture to mass production 100 +/- years ago. We believe that DOW rallies will continue to meet with selloffs in the foreseeable future and caution you not to think "it can't go any lower". It can and likely will. Look no further than this chart to see the bigger trend. Notice that after last Friday morning's breakout to the upside over 10,200, then subsequent sprint to 10,443, not even 10,300 could hold at the end of the day. The index picked up this morning right where it had previously left off, but couldn't hold at 10,200. In our sometimes not-so-humble opinion, we think the DJIA is subject to more correction and will test 10,100 again tomorrow. Even that looks pretty weak. If history is any indicator, 9800 isn't out of the question as it would jive nicely with the previous three (since mid-January) 600-point declines from every major point of resistance. . .from 10,400, 9800 makes sense and fits the channel. Add to that a VIX.X (volatility index) that appears to have bounced handily off a 20.90 low reached Friday, plus an S&P 500 index that can't seem to stay over 1400, and you can see the indicators are lining up for continued decline. Even the mightiest of tech stocks can't escape the DJIA vortex of death. Just look at once proud IBM (-4.91,103.06) and MSFT (-5.13, 91.00), not to mention GE (-1.50, 137.44) and WMT (-2.13, 50.50). Only HWP, one of three DJIA issues in the green today, bucked the trend (+7.88, 146.50) thanks to news that its recent spin-off, Agilent (A), unveiled a new fiber-optic technology. So how did the tech heavy NASDAQ fair? Pretty well, given that the DJIA was doing its best to suck the life of it. Digging under the surface, remember that MSFT gave up over $5. If you add in CSCO (-1.31, 136.13), and INTC (-1.88, 117.38), it's a wonder these three didn't drag the index down further. What's that tell us? Outside the five Generals (DELL and WCOM were fractionally up and down, respectively), there's a lot of underlying strength, thanks in no small part to Mom and Pop's liquidity noted above. Look no further than the Russell 2000 for confirmation, as it closed up 3.76 at 601.64, a new closing high. Many of the medium-cap (some soon to be large-cap) chip, biotech and optical companies can be found here, so it should come as no surprise to see this kind of move. Anyway, NADAQ continues to flirt with the 5000 level. Frankly, psychological as it is, it's possible to get there this week with the above three sectors barking for position as the lead dog to pull it through. The bigger question remains though, how much support will it have once it gets there? Good question, and one to which we don't yet have the answer. However, one historically accurate indicator may yield a clue. Much as traders want to take the index over 5000, our old friend, the volatility index (VIX.X) (see above) is tugging in the opposite direction. When it tags the 20-21 range, it often portends a sell-off, just as much as 29-30 portends an overall market bottom. Check your rear view mirror and note that Friday closed with a VIX reading of 20.90. Today, the VIX opened at 21.58 and moved up steadily to close at 23.90. It's become a race to see which can cross the finish line first - N5K or VIX.X. Our best educated guess is that NASDAQ will tag 5000 with little follow through unless the VIX quickly runs another cycle or reverses direction tomorrow. NASDAQ almost hit 5K today, but fell 20 points shy before retreating in the afternoon. Even so, after running over 600 points (700 if it hits 5K) in the last 10 trading days, we need to see some backing, filling, and testing of "old resistance equals new support" theory. Try 4900, followed by 4815, then 4700 and 4650, and solid support at 4500. You may want to give consideration to OEX put buying for a few days if N5K can't hold. While we got a bounce at 4888 today, more importantly for tomorrow, we need to see 4900 hold in the morning. If it can't, look for a test of the next level. No matter how you slice it, with technology/biotech as the preferred issues, any dip, though pronounced it may be, should be met with a quick recovery. After all, earnings are on the horizon again in about three weeks. Heck, CMGI will begin the effort in earnest this Thursday when they report earnings. Of course, we could also see some land mines as some companies may take the next few weeks to pre-warn of any shortfalls. There is bound to be a toe or two lost if you hear that unlucky "click". NASDAQ specifics? Down 9 points to close at 4904 on over 2 bln shares traded; 22 decliners to 21 advancers; 46% more up volume than down volume (cake); 504 new highs, 122 new lows (icing). 504 new highs in 1 day are pretty amazing, but usually indicate a top is near. For the week, we have the Optical Fiber Conference, OFC 2000, in Baltimore that will help keep the light focused on the optical/bandwidth sector. JDUS (current play) announced new products today at the conference and was handed $14 in additional value by day's end to close at $294 and was up $1 in after hours trading. Remember JDSU splits 2:1 this Friday after the close and likely has more juice if NASDAQ holds up. SDLI, another photon flyer, introduced new products too and closed up $21 at $463. Corning (GLW, another current play) will hold its 19th annual media briefing tomorrow too. Don't look for a letup in this sector just yet. Wait there's more. Ray James is holding its Institutional Investor Conference this week; Morgan Stanley Dean Witter's investor conference continues through Wednesday; Computer Telephony 2000 Expo continues until Thursday; QCOM's shareholder meeting is tomorrow - look for news; CSFB holds a Telecom CEO Conference; and YHOO holds its second annual analyst day on Thursday. These tech related events and ensuing news could help us to carry the market for the week. Though Alphonso didn't kill the markets today with his comments, we still have economic news coming this week that traders may interpret negatively. One hiccup on the following could be dangerous for the DJIA and thus rub off on NASDAQ: Productivity and Consumer Credit reports tomorrow; Initial jobless Claims on Thursday, sure to be closely watched; and Wholesale Inventories, also on Thursday. Next week is even bigger with PPI and CPI due out. In short, we think there could be continued pressure on the DOW, and the VIX won't help. Cash continues moving to the NASDAQ and has conference driven news to back it up, but the VIX is a wild card here too. N5K could prove to be a short lived squeeker. Keep your stops set and enjoy tech rally for all its worth. Of course, sell too soon. Buzz Lynn Research Analyst ***************************ADVERTISEMENT************************* Bring the Markets Home! ~ InvestIN.com http://www.investinoptions.com Is your broker limiting your options? Can you enter stop and stop loss orders on options? Options Trading with InvestIN.com is available for all accounts. Ranging from IRA's to Direct-Access accounts. Option Stop loss orders accepted. Streaming real time option quotes available with direct access accounts. InvestIN.com has your OPTIONS. Call Toll Free 1-800-327-1883. http://www.investinoptions.com ***************************************************************** *********** STOCK NEWS *********** Deutsche Telekom Seeks Its Qwest By S.P. Brown Qwest Communications (Q) ended a week of speculation Sunday by acknowledging that it is indeed engaged in merger talks with a "large telecommunications company." Few investors were surprised by the confession. Fewer, still, were surprised to learn the "large telecom" Qwest was referring to was Germany's Deutsche Telekom (DT), Europe's largest phone company. Investors were tipped to the possibility of a Qwest-Deutsche Telekom union last Thursday when USA Today reported that the German telecom giant had offered $80 billion for both Qwest and US West (USW) - two Denver-based companies who happen to be in the midst of their own $45 billion merger. In November, both companies' shareholders agreed to combine operations in a transaction that would give Qwest a 14-state local phone network with 25 million customers. The Deutsche Telekom offer has some analysts scratching their heads. It's no secret that Qwest has its hands full with US West (USW). What was purported to be a merger of "equals" has morphed to a straight purchased of US West by Qwest, with Qwest management running the show. In fact, just last last Monday, US West chairman Sol Trujillo announced he would be leaving once the merger was completed. Despite US West's subservience, there is discontent in the Qwest camp. Chairman Joseph Nacchio has expressed concerns over US West's conflicts with regulators in some of its 14- state territory, where it was ordered to refund $12.77 million to phone customers for service-quality violations. What's more, people close to the Qwest-US West situation are reporting that Qwest officials had been exploring options to strike a trans-Atlantic deal without US West. Supporting that notion is Philip Anschutz, Qwest's principal shareholder, who recently stated that he would support a transaction with a "major telecommunications company." Qwest's interest in exploring avenues sans US West is a sharp contrast from its position last summer, when the company literally pursued the Baby Bell like a lovestruck teenager, and wooed it out of the arms of Bermuda-based telecom Global Crossing (GBLX). After being belle-of-the-ball, it should come as no surprise that US West isn't taking kindly to the prospect of becoming a lonely old maid. The company has threatened to sue if Qwest backs out of the planned merger. A $800 million break-up fee is already due US West if the merger doesn't go through. But if US were to sue and win, Qwest could wind up owing the company billions of dollars. In response, Qwest stated that it won't agree to terms with another company unless US West also reaches an agreement with that company, too. Still, US West is concerned that Deutsche Telekom isn't as interested in it as it is in Qwest. Reputations are also at stake. If the Qwest deal falls through, US West would have two strikes against it and no merger partner, something the company desperately needs to pursue its aggressive Internet strategy and expand the its market presence. But US West and Qwest aren't the only ones under pressure. Deutsche Telekom is beginning to feel some heat. The company is fast developing a reputation for being gun-shy. Last summer Deutsche Telekom CEO Ron Sommer stumbled badly in a failed attempt to acquire Italia Telecom. To make amends Sommer has stated publicly that his company needs to make acquisitions quickly and has named several targets, including Global Crossing and Cable & Wireless (CWP). A Deutsche Telekom-Qwest merger would make sense for the German telecom. The company wants desperately to enter the US market. Qwest would enable it to do so with it's fiber-optic lines and its interest in KPNQwest, an Internet joint venture with Dutch phone company royal KPN. It's obvious investors like a Deutsche Telekom-Qwest combination more than they do a Deutsche Telekom-Qwest-US West amalgamation. Last week, shares of Deutsche Telekom and Qwest soared 12 and 39 percent, respectively, while US West inched ahead only 2 percent. Nevertheless, many analysts believe that US West must be part of the equation. Qwest simply can't afford to get out at this point. Tom Friedberg, telecommunications analyst with Janco Partners, predicts that a Deutsche Telekom offer for Qwest will include a share price for US West somewhere between its $50 to $60 price last July when the merger was announced and the $135 or more it would command under the 1.72 exchange ratio originally agreed upon. "If US West is offered $90 to $105, they have a fiduciary duty to look at that," Friedberg said. Some investors looking at this complicated triumvirate might be wondering if there's still a risk-arbitrage play lurking in there somewhere. The usually way to play these things is to short the acquirer and go long the acquired. At this point, it's difficult to say because there is more risk to Deutsche Telekom stock if it doesn't go through with the purchase than if it does. If Deutsche Telekom doesn't follow through, all three stocks could come falling down. If it does follow, through, there's a chance all three could rise higher. With that said, the significant movement in all three stocks probably took place last week. Given Deutsche Telekom's penchant for bailing at the last minute, there just doesn't seem to be enough reward for the risk investors would be undertaking to play this potential deal. ********************* PLAY OF THE DAY - PUT ********************* DD - DuPont $49.75 -1.00 (-1.00 this week) DuPont is a leader of global industrial companies that produce and engineer products such as pharmaceuticals, chemicals, high performance materials, and agriculturals. Some of their products include Teflon, Dacron and Lycra. The company is mainly focused in the life sciences area and its work includes the finding of treatment for the H.I.V virus. It is the number one chemical firm in the U.S. The company operates globally through some 20 strategic business units. Most Recent Write-Up Friday's mild job report, which helped to alleviate rising interest rate fears, looks to have helped us with our put play on DD. How so? Friday presented us with some great opportunity for possible entry points. DD attempted to participate in Friday's market rally but had it's run cut short by resistance at the $52 (10-dma) level. By midday, DD found itself headed in the all too familiar downward direction and by the close, had taken back half of the day's gain. One day does not a trend make, and we are certainly not convinced that DD is on its way to a trend reversal. Another of the catalysts behind DD's move on Friday, were the kind words spoken by Merrill Lynch analyst John Roberts. He raised his intermediate-term rating on DD to a Buy with a $58 12-month price target. He further commented that "After 5 years of essentially flat EPS (earnings per share), management appears committed to do whatever it takes to achieve 10 percent-plus EPS growth in 2000," Sure, it sounds good, but by the end of Friday's session, it looked as though investors just weren't ready to buy in, and thus the selling resumed. As we mentioned on Thursday, investors seem to be concerned with DD's upper management. In perusing through the message boards, one is bound to encounter such terms as "dead wood" and "starched shirts". It could be that until DD takes action to do a little house cleaning on the upper executive level, the sellers will continue to determine DD's direction. That is just fine by us. As we mentioned, DD found resistance on Friday at it's 10-dma. Watch for this level to continue to hold DD back. This level may serve well for possible entry points as well. Also, watch for DD to trade back through $50 backed by volume as an indication that DD does intend to reclaim its downward trend. Comments DD made a nice bounce back off of it's 10-dma, which is now at $51 and looks to be inching closer to it's 52-week low of $46.88. We are also encouraged the DOW's performance today (or lack there of) and believe there may be more downside to come. ***March contracts expire in 2 weeks*** BUY PUT MAR-55*DD-OK OI= 724 at $5.50 SL=3.75 BUY PUT MAR-50 DD-OJ OI=1717 at $1.69 SL=0.75 Average Daily Volume = 2.95 mln /charts/charts.asp?symbol=DD ************************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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