The Option Investor Newsletter Monday 3-13-2000 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) ****************************************************************** 3-13-2000 High Low Volume Advance Decline DOW 9947.10 + 18.30 9998.50 9735.50 998,134k 1,158 1,861 Nasdaq 4907.24 - 141.38 5027.73 4839.26 1,684,472k 1,455 2,864 S&P-100 743.00 - 6.50 752.13 732.64 Totals 2,613 4,725 S&P-500 1383.62 - 11.45 1398.39 1364.84 35.6% 64.4% $RUT 590.14 - 13.67 603.81 582.92 $TRAN 2391.94 + 26.65 2401.76 2333.03 VIX 25.36 + 1.56 27.08 23.85 Put/Call Ratio .44 ****************************************************************** BOO! A Scare from the Ghost of Markets Past. The sharp drop this morning in the NYSE and NASDAQ sent scared traders into a mad rush of fresh underwear purchases, though maybe not enough to bring Fruit of the Loom out of bankruptcy. From the sell-off in the overnight markets, we awoke to see the ghost of markets past. Dickens has nothing on a trader's imagination first thing Monday morning with the S&P down 30 points. What had them so spooked? Look no further than across the Pacific to Japan. The Japanese Government announced that their Q4 1999 equivalent of our GDP was a negative 1.4%, when negative 1.0% was expected. Apparently, 0% interest rates were not enough to stimulate the economy back to health. Traders assumed that meant the Japanese economy was in poor health and wouldn't recover as soon as originally thought. The Nikkei closed down 2.8% overnight. Lost in the translation was the fact that capital outlays actually increased 4.7% over the same period, the largest jump in five years. Japanese industry captains have placed their bets on growth. Not to be left out of the game of dominos, Europe followed suit. Associated Press (AP) reports Britain's FT-SE 100 was down 1.5 percent, Germany's Xetra DAX index fell 3.5 percent and France's CAC-40 fell 2.7 percent. Media, telecom and technology stocks were hit the hardest, according to European analysts. From that, you can probably guess which stocks got nailed the hardest over here. Suffice it to say "shoot first and ask questions later" was the sentiment adopted before the open. Both the NYSE's and NASDAQ's immediate move south confirmed the fear, dropping to 9738 (-190) and to 4838 (-209), respectively, in the first 15 minutes. It also helps to explain the Friday price decline phenomenon. Nobody wants to go home with a basket full of issues for fear of what may happen over the weekend. This morning was a painful reminder for those willing to take that risk. Let's take a closer look at the action for the day. The Dow as noted opened down from Friday's close, but quickly found support at 9738. This was the third time in five trading days the Dow had descended south of the 9800 level to test 9740 and recover nicely to close above 9800. Can you say short-term triple bottom? Technically, we may continue to see some strength here as investors pick over the rubble for bargains buried in the last two months slide. Even so, the longer-term trend is still down, and will require a breakout back over 10,000 on a high volume day to convince us the Dow's downtrend is over. For its part today the Dow staged a nice recovery, moving as much as +70 points to 9998. Alas, from failure to pierce and hold over 10,000 on three afternoon tries, the index tail-slid back into negative territory before closing up 18 points at 9947. Volume was under 1 bln shares at 998 mln, but decliners beat advancers by greater than a 3:2 margin. Down volume was 30% greater than up volume. Similarly, new lows are still outpacing new highs 226 to 37, which should be no surprise. By definition, it's pretty hard for individual issues to set new highs when the index is off 15% from the high of 11,700 set in mid-January. No one stock, not even Microsoft (MSFT, 98, -3, equal to 14 Dow points), the largest Dow point loser, is responsible for either supporting or hurting the Dow today. Frankly, we're surprised to see MSFT in the red considering it announced a $1 bln joint venture with Anderson consulting (called Avenade; pronounced av' ah nod) under the premise of opening up more probable adoption for Windows 2000 among Anderson clients. Other tidbits of NYSE news include the following: Northwest and Southwest Airlines didn't join Continental in price hikes over the weekend, while Delta and U.S Air dropped prices to last week's level to rejoin the other two. Next, GM (77.81, unch) took a 20% stake in Italian car maker, Fiat, much to the chagrin of Daimler Chrysler (DCX, 61.06, +0.75), who was reported to be a bit ticked about it. Then Tribune Co., publisher of the Chicago Tribune, announced they would acquire Times Mirror, publisher of the L.A Times for $6.3 bln. Finally in late breaking news, Sony (SNE 225.50, -18.25) reconfirmed their announced a 2:1 split, hoping to remind investors that it will eventually happen. This news might help the stock price up slightly following the faulty chip gaff in their new Playstation 2, just released to market. In an unusual role reversal, the NASDAQ didn't fare as well today, finishing down 141 points at 4907, logging the fourth biggest drop in its history. While it showed incredible strength by erasing about 180 of its 200-point deficit by mid-day, the recovery did not last, as profit takers stepped up the selling all afternoon into the close. On paper, it wasn't pretty. Decliners trailed advancers by 2:1 while nearly the same ratio held for down volume over up volume. New highs were one issue shy of dead even - 163 new highs; 164 new lows. While we're used to seeing 1.8 to 2.0 bln shares trade hands, only 1.7 bln traded today, telling us that not everybody was headed for the exits - a scant positive for the day (we knew there was a pony in there somewhere!). Chart of Nasdaq Technically, we've tested 4720 on two occasions since the first of the month. 4838 gave us a hard bounce today, though the recovery didn't last. One could make a case that the lows are getting higher. However, if history is any indicator, 4830 looks to be the closest level of solid support since it coincides with a top on March 2 and a previous floor on March 3. If it can't hold in the turmoil this week, then look for 4720 on your screen - that's only an 8% correction anyway. 10% takes us to 4620. That's a scary thought. And while getting there is possible from a technical standpoint, the 10-dma (currently 4880) has held up well since NASDAQ passed the 4500 level back on February 23. Individual issues in the index held up exceptionally well and bucked the overall trend. Dan Niles of BBRS can't hold up a market, but he sure made Intel (INTC 122.06, +1.94) and Dell (DELL 54.75, +3.50) look good with favorable comments on both today. In particular regarding INTC, he has a new price target of $150 by mid-year. Michael Dell baked his own cake today by noting that the previous problems of the Y2K slowdown and a component squeeze were over. Thus profits should continue to grow at least 30% - not the 50% we used to see, but good enough to get the price to new intraday and record closing highs. Icing came in the form of a new B2B alliance with Ariba (ARBA 298, -7.38) utilizing ARBA software technology by Dell's small and medium sized business customers. In other news, i2 (ITWO 191.19, -16.81) announced they would purchase Aspect Development (ASDV 96.81, +11.81) in what is currently the largest B2B software acquisition. It was also noted today that the venerable Fidelity Magellan fund had moved from 27% technology to 30% technology holdings. Maybe they've single handedly moved the NASDAQ up? We doubt it. There's more to liquidity than just Fidelity, and there's plenty more to go around. Once the market shakes off its current nervousness, tech will again garner the market's attention. Until then we have retail sales figures staring us in the face tomorrow. The consensus is for a 1% increase overall, and a 0.8% increase without the car business. Industrial production and capacity utilization will be out Wednesday. Thursday brings us the PPI, housing starts and Philadelphia Fed comments, followed by the CPI on Friday. There are plenty of landmines to step on here, and we encourage you to tread lightly until the market gives us more clarity on Thursday morning (CPI will be less consequential once we see the PPI). The VIX is of no help right now since its dead center between optimistic (20) and pessimistic (30). We're in choppy waters with no wind. Overall, a weaker than expected Japan and continued huge productivity gains here at home, not to mention OPEC's comment today that here would be no further decrease in oil output tells us that inflation is well in check. The market already expects the Fed to raise rates next week, and we think the fear is a bit overdone. Technology is slightly overbought and could see further correction in anticipation of bad inflation news this week, however earnings season, which will pick up a more frantic pace, begins in April. Protect what you've got with trailing stops and consider any NASDAQ dips to 4700 a gift. As always, sell too soon and keep your sneakers handy in case you need to find new cheese (see January 24 Market Wrap) Buzz Lynn Research analyst *************************Advertisement**************************** Options Traders ! Mr. Stock's new online trading site has been designed for you. Trade spreads, straddles, covered writes, and stocks online. Get real-time market data throughout our site. Advanced options tools include volatility graphs, implied volatilities, and more. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ****************************************************************** *********** STOCK NEWS *********** Analysts Raise Outlook on Dell Computer By Cindy Christ Shares in No. 1 online computer seller Dell (DELL) got a lift Monday from three brokerage upgrades suggesting the former Wall Street darling may be on the road to regaining its former rock-solid earnings record. Despite near-panic selling that punched the Nasdaq down more than 200 points and the Dow nearly 178 just minutes after the open, Dell trudged steadily higher, closing up $3.50, or 6.8 percent, at $54.75, a new all-time high. The initial sell-off in both major indexes was sparked by a government report showing a higher-than-expected decline in Japan's Gross Domestic Product and overnight selling in Europe and Asia, as investors took profits in technology and Internet issues. Heavy institutional buying pushed Dell to the top of the Nasdaq's most-active list, with 76.4 million shares trading hands. "With estimates lower and the current quarter looking solid, Dell looks ready to get back on its solid path of consistently meeting or beating estimates and periodically generating estimate increases," Banc of Securities analyst Kurt King said in a research note. King lifted his investment rating on Dell shares from "buy" to "strong buy," and upped his price target to $72 from $52. In a morning report, Robertson Stephens analyst Dan Niles raised his outlook on Dell from "buy" to "strong buy" and boosted his price target to $65 per share. Niles said that Y2K concerns, which dragged down fourth- quarter results, are over and that Dell is seeing a pickup in demand, especially among corporate buyers in the U.S. and Europe. "Dell's 70 percent revenue exposure to medium and large business is now a benefit versus an albatross in Q4," Niles wrote in the report. "In general, Windows 2000 is going as expected with a slow ramp that is expected to build momentum as we go through the year." Niles also said that sales of multiprocessor systems are becoming more common, a trend that should drive increased revenues, profit margins and prices for computer servers that run Internet sites and large-scale corporate networks. Dell holds the No. 2 position for server sales behind leader Sun Microsystems (SUNW), with a 25 percent market share in the U.S. and 15 percent worldwide, according to Niles. Bear Stearns analyst Andrew Neff also raised his investment rating on Dell to "buy" from "attractive," citing improved component pricing and Dell's strong relationships with corporate customers. Neff increased his price range on Dell to $70 to $80 per share from $55 to $65. In the fourth quarter, Dell matched analysts' lowered profit estimates after warning that component shortages would reduce total sales. Fourth quarter profits hit $436 million, or 15 cents a share, on revenues of $6.8 billion. For first quarter 2001, consensus estimates for Dell are 16 cents a share. Late in the session, Dell also announced a deal with electronic commerce software maker Ariba (ARBA) to create an online marketplace for small- and medium-sized businesses. Shares of other computer sellers also were higher intraday Monday, but rival Gateway Inc. (GTW) backed off to close down $3, or 4.8 percent, at $59.50 amid profit taking. Compaq Computer (CPQ) managed to hold onto its gains, finishing up $0.19, or 0.7 percent, at $28.75. *************** PLAY OF THE DAY *************** CALL **** DELL - Dell Computer $54.75 +3.50 (+3.50 this week) Dell Computer is the world's #1 direct-sale computer vendor and one of the world's top PC makers. Therefore it's understandable that the company designs, develops, manufactures, markets, services, and supports a variety of computer systems including desktops, notebooks, workstations, network servers, and storage products. Dell's clients include the government, corporations, the medical and education industries, as well as the individual consumer. Founder Michael Dell is still the CEO and maintains a 14% stake in the company. Sunday's Write up A strengthening sector, signs that corporate customers are interested in purchasing more PCs, and recent news that Dell will introduce a new line of servers to offset any slowing in overall PC sales and we have the ingredients for a short-term momentum play. By February 9th, DELL plummeted to a low of $35.56 before regaining its present composure. After such a devastating decline, DELL remarkably just set a new 52-week record high on Friday ($54.03) and is poised to move higher. The "bump in the road" as Dell puts it is over and analysts agree. Granted Dell admits it won't be making stellar earnings number like the 50% increases from year earlier quarters, but a 30% goal is very much within their grasp. Ashok Kumar, analyst for USB Piper Jaffray, is confident that Dell "should have no problem exceeding the re- calibrated earnings" and noted he rates DELL as a Strong Buy. Earlier in the week, he upped DELL's price target to $65 from $55. And in regard to PC sales, Trent May, manager of the Invesco Growth Fund, declared that "over the last two weeks, we've seen reports of improving corporate PC demand, which obviously Dell would be the biggest beneficiary of". These comments follow Thursday's press release that Dell Computer became the global market leader in both portable and desktop personal computer shipments to medium and large businesses in the 4Q of 1999 according to the market research firm IDC. This puts rivals Compaq (CPQ) and IBM in the backseat as they struggle to move from largely indirect to direct sales models. Additionally, Dell will introduce "appliance servers", a new line of servers as early as this month aimed at small businesses that use the Internet. These new servers increase power of Web sites and manage Internet traffic, but the kicker is that they are much cheaper and user friendly than conventional servers. On Thursday, the stock's dynamism demonstrated a growing intensity and sprung off the 5-dma (then at $47.24) and didn't look back at the comfortable support zone. The bold move was backed by heavy volume (more than double the ADV) of over 71 mln shares exchanging hands. Friday's performance was also very bullish. Analyst Donald Young of Paine Webber gave DELL a boost with an upgrade to a Buy from an Attractive. He also upped the price target by 56% to $78 from a mere $50. DELL shot up immediately and cleared the path of resistance by first setting a new all- time high at $54.03. The rest of day it held firm trading in a tight range between $53 and $54. A typical late day pullback before the weekend did knock a couple dollars off the share price, but this effectively offered traders entries. A lower level of support is at $47 and $48. Although if there's a severe correction, and the stock returns to $44 and $45 near the 10-dma ($45.72) take out the red flag. At the moment, earnings aren't expected until the beginning of May. Therefore let's keep in mind this play is based on sheer momentum and always, always keep your eyes peeled for the profit mongers. Dell along with IBM and Hewlett-Packard are to be the "chosen ones" to roll out Intel's new 1GHz Pentium III, a chip they claim is faster than anything fierce competitor, Advanced Micro Devices (AMD), has in its inventory. Talking about chips...Dell warned owners of a faulty memory chip in its Latitude and Inspiron computers shipped between February 1 and November 20, 1999. As many as 400 K, or 48% of the notebook computer are likely to contain the defective memory chip. On a more positive note, Dell announced it began online product sales in Hungary. This new online venture marks the first of its kind in central and Eastern Europe according to Glenn Jones, Dell marketing director in Europe, the Middle East and Africa. Comments Seemingly impervious to the market uncertainty, DELL didn't even dip this morning (it seems to have gotten that out of the way last week), staying positive all day and posting volume more than twice the daily average. By 10:30am EST, buyers had pushed through Friday's resistance at $54 and managed to touch $56 before fear of darkness arrived. DELL settled a bit, but closed over $54 (now acting as support), managing to post a new 52-week high in the process. For that we can thank Dan Niles of BBRS for the upgrade, Michael Dell for the positive comments to analysts, and Ariba for the alliance that will help Dell's small and medium sized business users BUY CALL APR-50 DLQ-DJ OI=21495 at $7.25 SL=5.50 BUY CALL APR-55 DLQ-DK OI= 7006 at $4.50 SL=2.75 BUY CALL MAY-50 DLQ-EJ OI=20797 at $8.38 SL=6.50 BUY CALL MAY-55 DLQ-EK OI=20324 at $5.63 SL=3.75 Picked on March 9th at $50.44 P/E = 85 Change since picked +4.31 52 week high=$54.03 Analysts Ratings 14-18-3-0-0 52 week low =$31.38 Last earnings 12/99 est= 0.15 actual= 0.16 Next earnings 05-18 est= 0.16 versus= 0.16 Average daily volume = 32.4 mln /charts/DELL *** PUT *** BVF - Biovail Corp $48.88 -1.38 (-1.38 this week) Biovail is a full-service pharmaceutical company that applies it proprietary drug delivery technologies in developing "oral controlled release products. Biovail applies it proprietary drug delivery technologies to successful drug compounds that are free of patent protection to develop both branded and generic oral controlled-released products. They also engage in the formulation, testing, registration, manufacturing, and direct marketing of these oral controlled-released products. Its branded antihypertensive Tiazac, accounts for most of its sales, but it does have high hopes for its generic version of hypertensive Cardizem CD, which is awaiting regulatory approval. Most Recent Write-up Just when you think you found a winner in the Drug and Biotech sector someone steps in and pulls the plug. For now, that's the case with one of our new put plays. On Monday, Biovail received FDA approval for its novel once daily controlled release formulation of Diltiazem Hcl. Biovail has granted to Forest Laboratories, Biovail's license of Tiazac, an option to acquire the exclusive right to market the product in the United States. Should be good news right? Well it appeared to be as shares of BVF began to bounce off support at the $59 area. The next day Biovail announced it had received consent of a majority of the holders of its 10 7/8% Senior Notes, in connection with a debt tender offer. On the news traders began to dump shares of BVF stock. It only gets worse from here as Wednesday a U.S. District Judge in Florida found that Andrx Pharmaceutical's formulation of a generic version of Tiazac does not infringe on Tiazac's patent. Andrx had claimed that Biovail's patent was invalid, but the court said otherwise. Biovail announced Wednesday it would appeal the District Court decision. It's a mess and will get sorted out through court system in time. Traders didn't spend time worrying about who's right or wrong, they just continued to sell. The only thing that stopped BVF from continuing its decline Friday was the closing bell. Technically BVF is nearing a support area at $48 and could be getting a bit over sold. Oversold or not the volume was picking up at the end of the session on Friday, which would indicate there's more to come. BVF could bounce back up to between $52 and $54 but for now that would appear to provide some tough resistance. Further weakness should be viewed as an opportunity to buy puts. Comments Continuing the decline from last week, and encouraged by the chaos in the broad markets this morning, BVF quickly plunged through the $50 support level. Finally finding help at $46.13, bottom-fishing propped the stock up, allowing it to move back up to $50 (now acting as resistance) before it rolled over and declined for the rest of the day. Icing on the cake? Volume was nearly 1.2 million shares vs. the measly average of 414 k. BUY PUT APR-55 BVF-PK OI=54 at $ 8.38 SL=6.50 BUY PUT APR-50 BVF-PJ OI= 1 at $ 4.88 SL=2.25 Wait for more OI! BUY PUT APR-45 BVF-PI OI=23 at $ 2.38 SL=1.00 Average Daily Volume = 414 K /charts/BVF ************************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 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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