The Option Investor Newsletter Monday 3-27-2000 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) ****************************************************************** 3-27-2000 High Low Volume Advance Decline DOW 11025.80 - 86.90 11170.80 10982.70 884,952k 1,288 1,681 Nasdaq 4,958.56 - 4.47 5022.23 4946.61 1,379,698k 1,887 2,316 S&P-100 830.17 - 2.48 836.11 826.31 Totals 3,175 3,997 S&P-500 1523.86 - 3.60 1534.63 1518.46 44.3% 55.7% $RUT 573.65 - 0.36 577.80 572.64 $TRAN 2667.81 - 20.34 2706.40 2665.41 VIX 26.75 + 0.94 27.39 26.16 Put/Call Ratio .42 ****************************************************************** Spring Break! - Daytraders Hit the Beach? It's either that, or the OIN seminar currently happening here in Denver kept the high volume traders away from their PC's! How else do we explain the glaring lack of volume? All kidding aside, only 885 mln shares traded hands today on the NYSE, while the NASDAQ registered its lowest volume so far this year trading just 1.38 bln shares. What are we to make of this? Probably just a slow day thanks in small part to the OPEC meeting taking place in Vienna, Austria. In case you are wondering, there's no resolution yet among OPEC members as to how much of a production increase is in store. However, there is plenty of conflict as Saudi Arabia and Kuwait have agreed in principle to raise production by 1.5 - 1.7 mln barrels per day while Iran, who has older equipment and higher production costs, wants no increases at all. According to analysts, Iran is already cheating, thus any "above board" production hurts Iran in the wallet. Anyway, it's already a foregone conclusion that there will be production increases, agreed to or not, above board or not. But don't look for reduced prices at the gas pump anytime soon even though oil prices seek to stabilize in the $25 range over the next few months. Suppose oil stocks suffered? Only slightly. 'Nuff said. Microsoft (MSFT -7.63, 104.06) was today's early casualty on news that settlement talks broke down when the DOJ rejected MSFT's latest proposal. It seems that turning over source code to vendors for the purpose of imbedding applications into the operating system isn't enough for the DOJ. That helped the Dow remain in the red along with help from the oil, financial, and drug stocks. Helping to balance things out, IBM (+6.25, 126.88) and Hewlett Packard (HWP +3.81, 146.19) made nice advances, the former on an upgrade from Neutral to Outperform by Morgan Stanley Dean Witter before this mornings open. Not only that but IBM and Quest (QWST +5.50, 52.00) agreed to spend $2.5 bln on each other in a zero cost exchange valued at $5 bln. - neat trick; here's how it works. Q receives $2.5 bln from IBM for 25% of the space in Q's 28 data centers serviced by Q, while IBM receives $2.5 bln from Q to set up and manage the centers - net cost, $0. Morgan Stanley took the opposite view on DLJ (-9.56, 56.75), downgrading it to Neutral from Outperform. While DLJ was a casualty, the whole sector joined in the profit-taking from last month's runup, dragging down American Express (AXP -5.13, 150.50), Goldman Sachs (GS -9.31, 112), and Morgan Stanley (MWD -5.81, 90), plus most of the on-line brokers too. Yes, even NITE, our current call play, lost $2.06 to close at $57, though volume remained low. It just goes to show that even strong stocks can't escape the gravity of a down sector. "These things have been white-hot; they're just hosing them down a little bit, cooling them off," noted a J.P. Morgan analyst. In the "where'd he come from?" department, some of you probably noticed Alan Greenspan live from Capitol Hill. He wasn't on any schedule of economic events and his presence probably caused the mid-afternoon dip. Fortunately, the live testimony dealt with issues of aging related to Social Security and Medicare (which probably explains some weakness in the drug stocks). Though he stuck strictly to the script, the uncertainty of the ensuing Q&A always causes jitters in the market. He did however note that he saw "no significant threat" of inflation (yet) from oil pricing pressures. In the end, it was thankfully a non-event. MSFT, OPEC, Greenspan, and financials should have really moved the market, but all proved to be inconsequential in today's market. For all the headlines, the Dow lost 86 points to close at 11,025 on low volume of 885 mln shares. In short, the Dow remained flat and directionless for most of the day, registering 13 stocks up for every 17 down. 88 new highs bested 49 new lows, but down volume exceeded up volume by 38%. While we can't read much from today's action, it's safe to say that a breather from a 1400 point run in 9 trading days is acceptable. Roughly 11,200 is providing current overhead resistance. We saw a few bounces today around 11,000, which provides current support, but doesn't appear very strong. Tomorrow will be telling. NASDAQ, buoyed by (what else) tech stocks traded in just a 76- point range. We can't swear it's a record, but it probably ranks in the top 5 narrowest of trading ranges this year. The volume on the other hand set a new record low of the year at only 1.38 bln shares. 23 decliners beat out every 19 advancers. However 119 new highs beat out 66 new lows and up volume by 27%. For the lack of volume, support remained at 4950. 4900 is the next level of support. Like the Dow, after nearly a 600 point run in the last five days, a breather is due, and we can't be disappointed in today's lack of action. We don't think it portends a reversal, but we wouldn't be surprised to see another day or two of weakness before picking up again. Remember Jim's prediction of NASDAQ 6000 by April 15? The market has its work cut out for itself. On the positive side, 5000 is acting as overhead resistance while the lows have been getting higher over the last 13 days. Anybody recognize that pattern? It's an ascending pennant, which usually portends a breakout to the upside. But that won't happen on wimpy volume. If it does, start looking for the exit because that will be a clue that bulls are running out of steam. On the other hand, we are moving into the heart of earnings season (April). Last week's liquidity injection of $13 bln into mutual funds won't hurt either along with the end-of-the-month window dressing. Those three are pretty powerful together and may provide the horsepower to send the NASDAQ in search of new highs. There you have it. Economic news will be mostly noise this week with consumer confidence figures tomorrow, new home sales on Wednesday, and GDP and initial job claims on Thursday. Since we are at a critical moment on both the Dow and NASDAQ, you may want to hold off placing any trades until you see a clear direction. You can always make a profit in an up or down market, but sideways will eat into your trading capital. Remember that old Wall Street saying: Never short a dull market. Wait for a direction. Be selective in your plays, and remember to sell too soon. Buzz Lynn Research analyst *********** STOCK NEWS *********** We're Number 1 By S.P. Brown That's the refrain the folks at San Jose, Calif.-based Cisco Systems were hootin' and hollerin' this past Friday. Shares of the networking giant, which recently split 2-for-1, were trading up $1.56 to $79.375 at the close of Friday's normal trading session. On the same day, Microsoft (MSFT) shares closed down $0.19 to $111.69. At these prices, Cisco had a market capitalization of $579.1 billion, edging out Microsoft's $578.2 billion market cap, marking the first time the software giant had lost the top spot since wrestling it away from General Electric (GE) in 1998. Cisco's ascent has been as fast as it has been spectacular. The company went public in February 1990 with 250 employees and a $69 million market cap. Since then, it's been a rocketship straight to the top. In November 1999, the company passed the $300 billion valuation mark. In February 2000, it passed $400 billion. And, of course, last week it passed $575 billion. This changing of the guard has surprised few market watchers. After all, Microsoft shares have languished amid concerns over the government's pending anti-trust case, while Cisco shares have powered ahead unimpeded on the strength of Internet traffic growth. Year-to-date, Microsoft shares have eased 11 percent, while Cisco's shares have climbed 35 percent. But beyond the legal woes lurks a greater threat to Microsoft's franchise and that's the technological shift from all things PC to all things Internet. Yes, Microsoft's Windows operating system runs 90 percent of the personal computers, but the market is moving to more mobile server-based computing devices that don't require Microsoft's clunky memory-hogging software. Unfortunately for Microsoft, it doesn't rule the Internet the way does desktop computing. This is were Cisco shines, for more than 80 percent of all Internet traffic runs across the company's switches and routers. In fact, switches are one of the fastest growing markets for Cisco. These devices route data among networks and account for over 50 percent of the company's revenues. What's more, over the next few quarters, the company expects switch sales to grow to 60 percent of revenues. The demand for these switches is being driven by a need for greater bandwidth by corporate users, a market that Cisco dominates. Cisco's other principal offering, routers, contributes roughly 40 percent to revenues, but an even greater portion of its profits. The company's routers manage and connect local and wide area networks (LANs and WANs). Furthermore, these routers use Cisco's proven software technology, Internetwork Operating System (IOS), which is poised to become the de facto industry standard, much the same Windows has become on the PC. Never one to rest on its laurels, Cisco has recently moved into converged networks, which is a way for every network to communicate with every other network regardless of the underlying technology. An example of this technology in use is Sprint (FON), which has built its own network using Internet protocol (IP) standards over an asynchronous transfer mode (ATM) network. Previously, such a combination was thought to be impossible. If converged prove to be the future of networking, then Cisco will see it's position as the top networking company solidified even further. Thanks to a savvy acquisition strategy, the company already has optical, voice, and data products ready for a market that is just now realizing that it needs them. All of these technology offerings means Cisco can provide the industry with the broadest line of networking products available, which is no small feat. Such a diverse product and service line is critical to the company's success, as customers prefer complete end-to-end networking solutions rather than going out on a hunt to acquire the technology piecemeal. Due to its unique position within the networking market, Cisco has witnesses an acceleration in sales and momentum that has been stronger than most analysts have expected. And there is plenty of room for sales to accelerate at an even faster rate. Mike Volpi, Cisco's senior vice president of business development, recently stated on CNNfn, "We serve a market that's probably $250 billion in size, if you take into account all the telecommunications and data communications systems being built." Because of such strong market demand for its products, Cisco expects to reach $50 billion in sales by 2004, which is nearly triple the roughly $18 billion in sales the company is expected to post for fiscal year 2000 (ending in July). So does Cisco's clear skies mean that Microsoft has permanently abdicated its number one spot? That's hard to say. Microsoft is still a strong generator of corporate profits and cash flows. Moreover, it boasts gross and operating margins that even Cisco would die for. However, Microsoft's growth is declining. While the Internet has boosted demand for the Microsoft's products, Cisco, whose routers carry most of the traffic running over the network, is seen as a bigger beneficiary of the explosion in Internet traffic. To get an idea of just how big a beneficiary Cisco has been, its earnings gains have far outpaced Microsoft in recent quarters. Furthermore, Cisco's earnings are growing at nearly twice the rate of Microsoft's. Given its rate of growth, Cisco is now the odds-on favorite among market handicappers to become the first company to sport a $1 trillion market cap. *************** PLAY OF THE DAY *************** CALL **** AOL - America Online Inc. $74.44 +2.94 (+3.44) Founded in 1985 America Online says they are the world's leader in interactive services, Web brands, Internet technologies and e- commerce services. They operate two worldwide Internet services AOL, with more than 21 million members and CompuServe with more than 2.5 million members. Through its strategic alliance with Sun Microsystems, the company develops and offers business operating in the Net Economy easy to deploy, end-to-end e-commerce and enterprise solutions under the alliance iPlanet brand. Their other leading Internet brands include ICQ, AOL Instant Messenger, Digital City and the Netscape Netcenter. Most Recent Write-up We'd like to thank our editor, our assistant editor, the research staff and everyone else that made this play possible. Our play in AOL may not have been nominated for an Oscar, but it very well could come in as one of the top plays of the month. The folks that should be receiving the accolades are the nearly 2.0 million new members that have signed up with AOL since December. Late Tuesday AOL reinforced the perception that its momentum remains strong by announcing its membership has exceeded 22.0 million, marking a nearly 10% rise since the December. News of the increase in membership drove the price of AOL $4.50 higher on Wednesday. The move was supported by strong volume at 35.5 million shares. Also in line for a pat on the back, is Merrill Lynch analyst, Henry Blodget. Blodget said in a statement released Wednesday, that he was raising his subscriber estimate for the AOL service to 22.1 million, which is up 300,000 from previous estimates. Blodget has earned the respect of investors on Wall Street, so when he speaks people do pay attention. News that company officials from Walt Disney had been lobbying members of the U.S. House and Senate concerning the upcoming merger between AOL and Time Warner didn't seem to derail buyers. An article on Forbes.com correctly termed the Disney move "petty politics" as they are trying to influence Congress regarding the government's approval of the $350 billion merger. In a nutshell, Disney is worried that the AOL-Time Warner merger could stifle diversity on the Internet, thereby blocking all its competitors from access to its online subscribers and the 12.6 million households with Time-Warner. It's simply not going to happen and investors were smart enough realize it, and continued to buy stock in AOL. Technically AOL has good support back near its 100- dma at $69.17, and near $68. AOL has seen about 21% added to the price of its stock in the past two weeks. Next week, we could see more. If we do see a pullback, have your stops in place, as we believe it would only be temporary and would present a chance to enter new plays for less. Comments While volume of 20 mln shares isn't setting AOL on fire compared to the ADV of 27 mln shares, even in today's market, AOL continued to advance all day against the market's desire to trade flat. Today's advance during amateur hour was particularly strong on heavy morning volume. Despite the following pullback to $72.63, AOL found support there on two separate occasions. Considering the strong finish into the close and the positive movement in Time Warner today, we think AOL will continue to advance as investors put their money into the big cap stocks, especially AOL as it moves into its April 18th earnings date. BUY CALL APR-70*AOO-DN OI=48400 at $6.88 SL=4.75 BUY CALL APR-75 AOO-DO OI=56057 at $4.00 SL=2.50 BUY CALL APR-80 AOO-DP OI=32915 at $2.06 SL=1.00 BUY CALL MAY-75 AOO-EO OI= 3323 at $6.25 SL=4.25 BUY CALL MAY-80 AOO-DP OI= 3051 at $4.25 SL=2.50 SELL PUT APR-70 AOO-PN OI=16019 at $1.88 SL=3.50 (See risks of selling puts in play legend) Picked on Mar 19th at $64.38 PE = 173 Change since picked +10.06 52 week high=$95.81 Analysts Ratings 25-13-3-0-0 52 week low =$38.47 Last earnings 01/00 est = 0.08 actual= 0.09 Next earnings 04-18 est = 0.09 versus= 0.05 Average daily volume = 27.2 mln /charts/charts.asp?symbol=AOL ************************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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