The Option Investor Newsletter Monday 4-10-2000 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) ****************************************************************** 4-10-2000 High Low Volume Advance Decline DOW 11186.60 + 75.10 11287.70 11097.20 858,441k 1,376 1,606 Nasdaq 4,188.20 - 258.25 4475.20 4188.17 1,443,763k 1,205 3,047 S&P-100 817.14 + 4.87 828.89 816.57 Totals 2,581 4,653 S&P-500 1504.49 + 3.72 1527.19 1503.35 35.7% 64.3% $RUT 518.67 - 24.32 545.90 518.67 $TRAN 2843.13 + 15.41 2883.82 2827.87 VIX 28.01 + 1.07 28.57 26.48 Put/Call Ratio .37 ****************************************************************** Have Analysts' Comments Changed Technology Stock Sentiment? Earnings season is upon us, which would normally speak well for the future of technology stock prices. However, if today's NASDAQ action is any indication, earnings may not be enough to keep the tech-heavy index advancing. As we've noted in a few market wraps over the last week, it doesn't appear to be getting any better in front of tax day (April 17), while low volume and low liquidity help confirm this. So how do the analysts fit in? It seems that more than just investors were listening when Abbey Joseph Cohen, chief equity strategist for Goldman Sachs, announced two weeks ago that she was lightening up on the tech sector issues. Today, four more brokerages chimed in with similar tunes of their own. Merrill Lynch noted that they felt technology had run its course for now and advised clients to sell into strength on the rebound. Ouch! Not enough? Salomon Smith Barney thinks speculative tech stocks will see further decline all the way to a 38% NASDAQ correction. Next, Warburg called for a volatile NASDAQ index to trade range- bound in the 3650-4450 area for the next two quarters. (Where's Tom Galvin when we need him? He's the DLJ analyst that last week said to look for 20%-30% increases by year end. That was one day before last Tuesday's selloff.) Finally, along came CS First Boston advising clients that they foresee a $2 trillion equity shift (with a "t" - think Bill Gate's net worth x 250) away from technology into new leadership sectors, which includes consumer products and cyclicals. Huh? Aren't those "old economy" stocks? Yes, and once again they have revenue and earnings growth thanks to productivity gains borne of "new economy" companies. No matter, all that set a negative tone right from the open on the NASDAQ. B2B stocks and biotech were hit particularly hard, but more on that in a minute. Let's quickly get to a few other items that may help us clear some of the fog surrounding the crystal ball. Recall that last week's volumes on Wednesday, Thursday, and Friday were particularly weak, registering some of the lowest volume days this year. It doesn't lend much credibility to the strength of the rebound if volume doesn't confirm the gains. The fact is with tax bills coming due next week, there doesn't appear to be a bunch of money waiting around to get put to work either - at least not in technology. Also weighing heavy in the sentiment department is the relatively light put/call ratio, currently at .43, and the Volatility Index (VIX.X) at 28.01. The VIX.X reversed course today after falling from its intraday Tuesday high of 35.43 to 26.04 by Friday. While 30 has historically proven to be a buying opportunity, previous deep corrections have been marked by put/call ratios of .70 or better. A wall of worry is something that we all look to climb over on the way to new highs. Showing how many puts investors are buying compared to how many calls represents the wall of worry. When you strip away the math, it's just an indicator of how many people are scared. The current level says investors, as a whole, aren't sufficiently scared yet. It's tough to imagine that last week's tech crater wasn't considered by some to be a capitulation. However, based on volume, it sure looked like it to us. But the P/C ratio tells a different story. Alan Greenspan still looms in the background too. Today he spoke to the Electronic Systems Payment Association, but made no mention of the markets. All was well, thus largely ignored. He speaks again tomorrow on job skills (no biggie we think), then again Thursday in front of Congress (possibly a biggie), and Friday to the American Enterprise Conference (probably a non- event). So is this end of the technology stock gains forever? The answer is no, however we will qualify that by noting that it will likely be harder to make a buck this week as this market trades range- bound with great volatility. We just don't think it's likely that buying volume will pick up to take technology issues (we include biotech here) back to previous levels with taxes due next week. That specter should keep liquidity low and selling pressure on the previous high-flyers. If you owned B2B or biotech companies today, you are not likely a happy camper - lots of holes in those tents by now. Take a look at some of today's more notable issues. We've listed them with today's change, closing price, and recent high. ARBA (-12.75, 93.75, 183.33); CMRC (-19.50, 121.50, 275.63); CRA (-30.38, 100, 276); ITWO (-28.88, 108.06, 223.50); VIGN (-29.44, 171.50, 302.00); VERT (-7.33, despite completing their $100 mln MSFT cash infusion, 50.88, 148.38); MLNM (-23.75, 149.50, 316.00); EMLX (-16.75, 95.81, 225.50). You get the picture. Biogen (BGEN) isn't going to help at all tomorrow since they missed estimates by $0.02. Though they closed at $65 today, after the announcement, they traded down to $57. Biotech index puts, anyone? In the end, it was no prettier for the NASDAQ index, which finished with its second largest one-day point decline ever, down 258 to 4188, also its low of the day. This is painful following the highest one-day gain ever last Friday. It seems that market cycles have shrunk from 18 months down to 18 hours over the last 15 years. 3051 decliners turned just 1205 advancers into dust, while surprisingly, new lows outpaced new highs by a much narrower margin of 75 to 45. However, down volume of 1.17 bln shares skunked just 231 mln shares of up volume. Technically, after hovering for a bit around 4400 following today's open, the NASDAQ tested 4300, didn't hold, bumped its head trying to retest 4300, then rolled over and died starting two hours before the close. Closing at the low never looks good for forward sentiment. We are in no man's land. The next support is at 4000, then 3850, followed by 3650. We may soon get the retest that analysts were talking about last week. Any silver lining? Just like when the market seems to perfect, it finds a way to humiliate the most people, so too could it humiliate those betting against it now. It is darkest just before the dawn, and as Harrison says, this too shall pass. Just remember, that means volatility and no clear direction yet. Lest you think bears invaded our camp, we're pretty pleased with the way the Dow behaved today, though the volume was darned light at just 855 mln shares. Not even the Dow tech losers (HWP, MSFT, IBM, and INTC) could keep the index down. While it ran into resistance at 11,287, the lows have been getting consistently higher since the mid-March return from 9800, which is a positive in our book. Near term support is at 11,100. 11,000 is more solid, with 10,900 more solid yet. While the Dow was up as much as 175 points in today's trading, it could not completely escape the negative sentiment zapping the NASDAQ. For its part the Dow still managed a respectable 75-point gain to close at 11,186. Motorola may be of some help tomorrow. Not only did they beat the street's earnings estimate of $0.58 by a penny, but better still, clocked in with $8.77 bln. in revenue this quarter compared to expectations of $8.5 bln. Their conference call went well and their picture looks good going forward. Anyway, concerning the index, advancers lost out slightly to decliners 1379 to 1597. Up volume edged out down volume by a mere 14 mln shares, even as the NYSE registered just 30 new lows. We actually have financials and consumer products to thank today for the Dow's performance, a trend that may continue to grow legs if the technology sector remains weak and inflation remains scarce. AXP gained $1.13 to $143.19. C moved up $3.25 to $62.25, while JPM tacked on $4.69 to $134.56. In the consumer product end, PG moved up $2.56 to a new recent high of $65.88 from its shellacking 30 days ago, while JNJ moved up $1.94 to $76.13 from the beating it took in late March. Retailers including Wal-Mart (WMT +2.06, 63.56) and Home Depot (HD +2.56, 66.69) moved up nicely too. So you see, it's not as bleak as it looks. In the meantime, maybe analyst Joe Battapaglia from Gruntal (the lone remaining bull, it seems) will get more TV exposure. He believes that the tech sell-off is overdone and tech earnings are going to come in strong to prove the naysayers wrong. That's one analyst we'd like to have heard from today. In closing, don't let hope, fear or greed cloud your judgement. Trade only when it is profitable to do so, and pick your entries carefully. Jim did an excellent job of describing this in the weekend Market Wrap - check it out! While it's tough to sit on your hands, "when in doubt, stay out" might make a more applicable catch phrase in periods of high volatility. Dust off your put plays too in case the market provides us that opportunity. In case you are still in calls from last Friday, as we noted last Monday night before the Tuesday meltdown, it's never too late to sell too soon. 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 ********** Investors Look to IRAs to Fund Retirement By Cindy Christ The Individual Retirement account, or IRA, is undergoing a renaissance. As more investors than ever approach their 50th birthdays, they're beginning to realize they must rely on personal savings to help fund their golden years. According to a recent poll by Salomon Smith Barney, upper -income Americans are now counting on IRAs as their No. 1 source of income in retirement, slightly ahead of tax-deferred company retirement plans such as popular 401(k) accounts. The poll shows that investors expect IRAs to provide 30 percent of their retirement income versus 25 percent for company retirement plans. Investors expect to receive just 16 percent of their income from Social Security and 7 percent from guaranteed company pensions. "Clearly, investors have gotten the message that if they want to enjoy a secure retirement, they will have to do it themselves and not rely on the government or guaranteed pensions," said Ellen Breslow, director of Individual Retirement Planning services at Salomon Smith Barney. "Along with the creation of the new Roth IRA in 1997, this realization is perhaps the main reason for the comeback of IRAs," Breslow added. The number of new, traditional IRA accounts opened at Salomon in 2000 is up 35 percent over the same period last year, the company said. Although traditional IRAs outnumber newer Roth IRAs by 2-to-1 among investors polled by Salomon, the Roth seems to be the vehicle of choice for future contributions because it allows for tax-free withdrawals. By and large, investors said they won't convert their traditional IRAs to Roths despite the advantages, including greater after-tax retirement income and estate-planning benefits. Investors cited confusion about how to convert and unwillingness to pay upfront taxes as the main reasons they're sticking with their old IRAs. If investors could choose only one retirement option for future contributions, it would be a 401(k) account due to the advantages of employer-matched contributions. Experts estimate that about one-third of all Americans are covered by a 401(k) plan. Overall, more than 40 percent of upper-income Americans, defined as those with annual household income of at least $50,000, hold an IRA. Among college graduates in the Salomon sample, the number jumps to 54 percent. The survey results come at a time when experts say Americans are facing a retirement crisis, especially among women. The National Center for Women & Retirement Research estimates that more than 58 percent of female baby boomers have less than $10,000 saved in a pension or 401(k) plan. In comparison, male boomers have saved three times as much. With median assets of $35,000 in their retirement accounts, most baby boomers say they're worried about paying for retirement, and for good reason. Estimates currently place retirement needs for an average couple at $500,000. Why aren't boomers -- the most affluent and best-educated generation of Americans ever -- doing more to prepare for retirement? "Many boomers and those of the X-Generation either ignore or feel helpless in contemplating their retirement financial needs because it reminds them of the classical Myth of Sisyphus (the impossible task of trying to roll a boulder uphill), and they doubt their ability to do it," writes Christopher Hayes, Ph.D., executive director of the National Center for Women & Retirement Research. Hayes says that in the long run, boomers' low savings rate, excessive use of high-interest credit cards, desire for expensive lifestyles and need for immediate gratification heighten their negative attitudes about retirement funding. If you weren't depressed about retirement funding before, Hayes' comments will take care of that. But is the picture really that bleak? In some cases, yes. To be sure, Americans who don't have the wherewithal to save for retirement and who must rely solely on Social Security will most likely never retire. On the other hand, thanks to an unprecedented economic boom, today's adults are wealthier than any generation before and a record number will inherit family legacies estimated atof dollars. Data show too that women are making huge strides when it comes to accumulating wealth. According to a February study by the Spectrum Group and the U.S. Census, women are getting richer faster than men are. Between 1996 and 1998, the number of affluent women grew by 68 percent, while the number of affluent men increased by 36 percent. Spectrum defines affluent as households with at least $100,000 in annual income and/or $500,000 in net worth. Growth in female affluence is attributed to a number of factors, including more women in the work force and those with graduate degrees, an increased divorce rate, and women's longer life spans. As the population ages, more women are widowed and inherit wealth from spouses or parents. The Internet also contributes to the number of affluent women by bringing more financial information into homes and increasing their confidence as investors. As women have become more self-assured, the number investing online is growing rapidly, and they tend to invest more aggressively, like men do. And as the Salomon Smith Barney poll shows, both genders are beginning to get it when it comes to saving for retirement. Survey results show that respondents are planning to rely on three sources of retirement income, Social Security, employer -sponsored plans, and personal savings, just like the best retirement models recommend. With IRAs on the rise, the once-neglected issue of retirement funding has clearly been revived. *************** PLAY OF THE DAY *************** CALL **** WLA - Warner-Lambert Co. $107.31 +3.38 (+3.38) Warner-Lambert has undergone a dramatic business transformation during the last decade, a transformation marked by dynamic sales and profit growth. The introduction of breakthrough health care and consumer products has helped lead the company's rise in prominence. To foster future growth WLA is expanding its role in medical care by developing innovative pharmaceuticals. They also are striving to further bolster their position as a leader in over-the-counter health care products. WLA finds its top competition coming from Bristol-Myers Squibb, Gillette and Merck. Most Recent Write-up It isn't that we are getting impatient, but since adding WLA, it's been a bit of a struggle. Actually the results could have been worse. Industry news this week could have put a real crimp in our play, but WLA has managed to hold its own. Analysts at Paine Webber downgraded BMY, yet raised their price target for the drug maker, which put a cloud over the whole drug sector on Wednesday. The analyst cited the Presidential campaign, and decreasing chances of a major Medicare benefit this year, as the reason for the downgrade in BMY. WLA fell about 2.7% on the news, however the volume was light. Thursday's obstacle appeared in the form of news from the government. The Medicaid program will revise the drug-pricing system used to reimburse doctors and health-care providers for medicines. A nationwide investigation by state and federal agencies has revealed "a pattern of misrepresentations by some drug manufacturers of the average wholesale prices", according to a letter signed by officials of the national Medicaid fraud-control organization. Analysts say the revision of the Medicaid pricing system could hurt WLA and other drugmakers. WLA finished Thursday's session with a small gain, and tacked on another 1.0% on Friday. As we said, all things considered WLA has held up well. Our play could be at a crossroads, however the damage this week has been minimal and the volume light. Technically, support is found at $101 and at its 10-dma at $99.14. The trend is still our friend, and would look at further advances as an opportunity to buy calls. Friday Shire Pharmaceuticals Group did lend support for WLA and the drug sector. The company announced a new study of its Alzheimer's disease treatment Reminyl, shows the drug can help patients function in daily life by boosting their memories and sense of direction. A five-month study showed patients taking the drug scored "significantly better" in memory, language, orientation and cognitive tests. Comments Some days, a trader just needs to follow the money to find the best trades. With Drug stocks beaten up so badly over the last few months and technology stocks now moving to the whipping post, the drug sector makes a nice port in the storm. Remember that PFE is buying WLA, and WLA shareholders will get 2.75 shares of PFE for every one share of WLA . . .a good reason to play options. While the trend looked great today, we need to see PFE break out of current resistance over $40 on some good volume before starting a new play. Technically, WLA hit a new high today on volume that exceeded the ADV by 10%, which of course looks great. Just make sure the drug sector and PFE are moving in a positive direction. If traders tech boats are dashed on tomorrow's rocks, there could be a continued "float" (not flight - don't want to mix that metaphor) to safety with the consumer products and drug stocks. WLA combines both. ***April contracts expire in two weeks*** BUY CALL APR-100*WLA-DV OI=4931 at $ 8.00 SL=5.75 BUY CALL APR-105 WLA-DA OI=1029 at $ 4.13 SL=2.50 BUY CALL MAY-110 WLA-EB OI= 333 at $ 4.13 SL=2.50 BUY CALL JUL-110 WLA-GB OI= 136 at $ 7.75 SL=5.50 SELL PUT APR-100 WLA-PA OI= 75 at $ 1.44 SL=2.75 (See risks of selling puts in play legend) Picked on Apr 04th at $105.50 PE = 53 Change since picked -1.56 52 week high=$106.75 Analysts Ratings 12-4-8-0-0 52 week low =$ 60.81 Last earnings 01/00 est= 0.52 actual= 0.55 Next earnings 04-19 est= 0.56 versus= 0.45 Average daily volume = 3.73 mln /charts/charts.asp?symbol=WLA ************************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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