The Option Investor Newsletter Monday 04-17-2000 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) ****************************************************************** 4-17-2000 High Low Volume Advance Decline DOW 10582.50 + 276.70 10583.80 10232.50 1,204,710k 1,280 1,729 Nasdaq 3,539.16 + 217.87 3539.77 3227.04 2,428,074k 1,752 2,614 S&P-100 762.49 - 45.35 762.59 724.53 Totals 3,032 4,343 S&P-500 1401.44 - 83.20 1401.53 1346.50 41.1% 58.9% $RUT 459.26 + 5.54 459.26 441.56 $TRAN 2678.58 - 48.46 2731.23 2678.58 VIX 32.19 - 7.14 39.42 32.19 Put/Call Ratio .78 ****************************************************************** Bulls Get Hard-Earned Satisfaction Following last Friday's meltdown, it looked like this morning's gap down on the NASDAQ might reflect a continuation of the negative sentiment. Thanks to a late day rally in the semiconductor stocks in front of TXN's earnings today and INTC's earnings tomorrow, other tech stocks followed the semiconductors' lead to give the NASDAQ its biggest one-day gain ever -- 217 points! It was also the second largest percentage gain ever at 6.6%. The Dow turned in a respectable +276 points too, though far from a record. Last Monday, we were pining for a Tom Galvin comment to support the market and we got it today. He's the lead DLJ analyst that announced today DLJ had shifted from 80% equities to 90% equities and 10% cash. Way to go Tom! Thanks! Don't break out the party hats and horns just yet. Yes, the huge volume helped confirm the move up. 1.2 bln shares on the NYSE and nearly 2.5 bln shares on the NASDAQ falls on the heavy side. It's a signal that buyers are voting with their $$$ and coming back into the market. When the market is up big on big volume, buyers are in control. (See Women's World article from last Thursday by Renee White titled "Using Volume to Understand Direction, When You Are Begging for a Reversal" and from Sunday, "Memories of the October, 1987 Crash and Using Volume to Decide Upside Breakouts Part II") However, the big gains were limited mostly to the big-cap, high quality, earnings driven stocks that were already doing OK. Not every stock joined the party. In fact, just IBM, HWP and INTC accounted for 156 points of the Dow's +276 point move. Need confirmation that the party was for a select few? Look no further than the advance/decline lines on both exchanges. While both started out in extremely ugly territory and made up for lost time, the NASDAQ finished with 26 decliners swamping every 17 advancers, while on the NYSE, 17 decliners outpaced every 13 advancers. That does not constitute a widespread rally, and despite the volume, leaves the weaker issues susceptible to more damage. In particular, smaller B2C Internets without a shot at profitability (even some bigger ones) are the new dinosaurs bordering on extinction in this market. KTEL, CDNW, BAMM, FOGD, CGLD, etc. are in intensive care and will likely never recover, despite the rising tide lifting other boats. Did you miss Goldman Sachs' Abbey Joseph Cohen conference call today? Good thing. While not devastating, she merely reiterated that there would be no change in her position regarding the expected S&P 500 results by year end -- 1575 by December, 31, 2000 and 1625 by the end of Q1, 2001. She noted too that inflation would "drift up, not gallop" thanks to energy prices and that Greenspan's interest rate increases were already priced into the market thanks to the FOMC's "deliberate and incremental" increases so far this year. No surprise here. If it was on CNBC, we never heard it. Anyway, the selling that marred the opening bell and caused the NASDAQ to gap down 91 points at the open didn't last long as buyers immediately stepped in to spark a 180 point rebound off the low within the next 35 minutes. We were surprised by the market's immediate strength and had expected more maintenance margin selling and foreign market reaction to our market last Friday to spill over into today. If we didn't see it this morning, a new wave of broker selling in the late afternoon to cover those earlier maintenance calls might have ensued. . .glad to be wrong on that one. If buyers were in fact on strike over the last few days, it appeared that they went back to work today. We hope they are soon joined by others that think the current "un-negotiated settlement" is OK. Otherwise, we're bound to see range trading as the "buy the dip crowd does battle with the "sell the rally" crowd. The good news is that individuals appeared to be hanging on for the long run. Last Friday's action, as it turned out, was mostly institutional selling. With volume like we saw today, we'd have to conclude that institutions reversed course and began buying again on selected issues. CSCO was the volume leader at 117 mln shares traded, followed in descending volume order by MSFT, ORCL, INTC, SUNW, JDSU, WCOM, DELL, and QCOM. With the exception of MSFT gaining just $1.75, and WCOM and DELL gaining $2 or less, the other issues experienced double-digit or nearly double-digit gains. If the institutions think it's safe to get in the water, it's probably safe for us too if we stick to the big cap issues moving in unison with the indices. Just remember, these things are not recovering in a straight line and are subject to ups an downs just like before, only bigger. The advantage of being one of the "little guys" is that we have the ability to get out quickly if things go south on us. By now, we've all seen the value of stop loss orders and we encourage you to use them in this time of high volatility. So, you want to know exactly how the indices traded? The NASDAQ as noted above finished up 217 points at 3539 on 2.48 bln shares. 1.37 bln shares traded up, while 1.0 bln shares traded down. But 618 new lows (compared to just 8 new highs) should tell us we're still at the bottom of the barrel. If we haven't hit the bottom yet, we are near it. Silver lining? Though the NASDAQ opened substantially below its 200-dma (3506) at 3227, it rallied above the 200-dma into the close, giving strong support to the formation of a bottom. 3500 also happens to be a support level from December and January. Next resistance is 3650, then 3750. If we can hold this level and see an improvement on the advance/decline line, we would feel more comfortable in the strength of today's rally. For the Dow, it finished up 276 at 10,567 marked by heavy volume of 1.2 bln shares on the NYSE. 702 mln shares traded up while 475 mln traded down. Still, new highs got creamed by new lows, 15 to 152. (Have we mentioned that the gains were narrow?!) What a squeeker technically though! It recovered to just 3 points over its 50-dma of 10,579. It's gotta hold here to keep moving up. Otherwise, we could be staring at 10,300 again. Look for resistance at 10,725. Tonight after the close, TXN reported earnings of $0.55, $0.02 above analysts' expectations of $0.53. Even though it tacked on $10 to close at $149 in today's trading, it still traded up after hours. Now if we could get INTC to do that trick tomorrow after it reports earnings, that could be the catalyst to lead the tech sector gradually higher. Don't get completely fired up about today's rosy picture yet. There are still some landmines, which are by definition invisible. First is that corporate insiders have been selling shares and options like crazy in record amounts. Second is that, despite the carnage last week, margin debt has not subsided much from its record levels -- those bits of information from Charles Biderman of Trimtabs fame. He notes that this looks bad going forward and he has been historically correct. He did temper those comments by noting that despite all the noise about $6 bln in outflows last week, there had been an inflow of $18.5 bln previously. This week in the tax season though is the time that those inflows slow substantially. . .not may contributing to the IRA after today. So what about tomorrow and the rest of the week? Yes, today looks good, but temper that enthusiasm by remembering the bigger picture. That is that a recovery is never clearly visible and that nothing recovers in a straight line. Tomorrow could give us another downdraft as wheat gets further separated from the chaff. You may want to focus your efforts on the larger issues until the secondary issues show signs of support, not just 1-day relief rallies. Remember too to watch the major indices for support and resistance. Your stock going up as the indices going down does not a good entry make. Housing starts are announced tomorrow, followed by Trade Balance on Wednesday and Initial Job Claims on Thursday. There are also earnings releases aplenty this week, starting with EMC, IMNX, TYC FON, and PCS tomorrow morning, then the biggie, INTC tomorrow after the bell. While 70% of those reporting so far have beat the number and only 10% have disappointed, it will pay to watch the leaders for industry clues and be prepared to exit an "unsympathetic" play if the stink rubs off. Conservative types may want to see another week of stability before getting back in, but the hardcore trader can have a field day with the current volatility. Just remember to plan your exit carefully before you enter, and if all else fails, get trigger-happy and sell too soon. Buzz Lynn Research Analyst ********** STOCK NEWS ********** Knight/Trimark To Acquire Easdaq Market Maker By Matt Paolucci A unit of Knight/Trimark Group Inc. (NITE) on Monday bought the professional options execution business and floor brokerage operations of privately held Mesirow Financial Inc. and Mesirow Europe Ltd. Knight Financial Products LLC said the purchase is part of its expansion into the options markets. NITE said it expects to receive Options Clearing Corp. membership approval within the next six weeks. Last November, Knight entered the stock options market when it bought options market maker Arbitrade Holdings for about $460 million in stock. The Mesirow purchase, pending regulatory approval, will shift 68 Mesirow employees to Knight Financial Products, effective by the end of June, the companies said. "Mesirow Financial's Professional Execution business will provide us with global capabilities in the options industry and will enable us to process orders in all listed options in the U.S.," said Kenneth Pasternak, president and CEO of Knight/Trimark Group. Chicago-based Mesirow, a diversified financial services firm, has more than 700 employees in nine U.S. offices and manages more than $3 billion in assets. Financial terms of the deal were not disclosed. Knight/Trimark Group is a market maker in Nasdaq securities and in the Third Market, which is the over-the-counter (OTC) market in exchange-listed equity securities, primarily those listed on the New York Stock Exchange (NYSE) and the American Stock exchange (AMEX). Knight currently employs more than 900 people worldwide. With the increasing number of investors carrying out their own investment decisions online, the number of transactions being processed overall is at record levels. This has translated into big money for online brokers and companies like NITE who facilitate stock transactions. Just last week, both E*Trade (EGRP) and Ameritrade Inc. (AMTD) posted better-than-expected earnings results. Knight/Trimark holds the true dominant position in the stock transaction-processing sector. NITE has held the #1 market share ranking in trading of NYSE-and AMEX-listed securities in the Third Market for over three years. Speaking of earnings, NITE is due to report its first quarter financial status this Thursday. Analysts' estimates are for an 87 cents per-share profit, although whisper numbers go as high as 97 cents. Ranked 9 out of the 24 companies in the Finance and Investment Services sector by Zack's investment Research, NITE has 12 analysts rating the stock either a Strong Buy or Moderate Buy. ********************** PLAY OF THE DAY - CALL ********************** VSTR - VoiceStream Wireless $94.88 +4.88 (+4.88) Based in Bellevue, Wash., VoiceStream Wireless is a leading provider of wireless communications services in the United States. VoiceStream Wireless with Cook Inlet Region Inc., has licenses to provide service to over 193 million people with operating systems from New York to Hawaii. With licenses in 19 of the top 25 markets VoiceStream is one of the major providers of telecommunications services in the country. VoiceStream is the largest provider of personal communications service using the globally dominant GSM technology in the United States. Most Recent Write-up Shareholders of VSTR refused to participate in the Friday's debacle. Why would investors buy shares of a company that just a week earlier reported earnings that were not only in the red, but produced results that were below analysts estimates? Good question, but here's our take on the situation. March 23rd VSTR was approaching its 52 week high and closed at $155. Wednesday's low at $81.75, marked a decline of about 48% in 3 weeks. At that time investors put on the brakes and jumped in with both feet, with over 7.0 million shares changing hands. It's certainly not written in stone that VSTR will continue to hold onto the gains made the past two sessions. However in light of Friday's action, the session was encouraging. The current trend in the telecom industry is towards consolidation. Our new play is an attractive takeover candidate. Rumors have been circulating for some time, on a potential suitor, although there's no confirmation that any discussions are actually taking place. For better or worse these rumors seem to keep VSTR in the limelight. With the company experiencing strong revenue and subscriber growth, analysts have are focusing on the top line rather than the red ink, currently flowing out of the company. Thursday, analysts at Raymond James Financial raised their rating from a Buy to a Strong Buy. Wednesday, Perry Walter at Robinson-Humphrey reiterated a Buy rating on VSTR, with a 12-month price target of $180. For the past three days, VSTR has been forming a nice base between $84 and $88. Going into the final half-hour of trading on Friday, our new play was gaining momentum. Unless the wheels totally fall off next week, we would look for chance to buy calls on further upward moves. A bounce off the $83-$84 are could also provide an attractive entry point. The FCC recently approved the VoiceStream's purchase of Aerial Communications. At that time analysts initiated support for the company as well. The merger with Aerial, suggests VSTR has taken more than its fair share of market growth. As we said above, rather than concentrate on earnings, investors and analysts alike are more concerned with growth and revenues. Comments No, VSTR wasn't the big point gainer of the day, but still had a respectable technical showing by closing back over its 200-dma of $91.57. It had traded below that level for the last three days. While volume wasn't stellar, it was still 14% above the ADV. Besides that, we got a 5% gain just for today confirming that the 200-dma support is for real. We could have chosen something with a bigger point gain, but think it could vanish in a mouseclick if the market heads south tomorrow. We'd rather be safe than sorry in this turbulent time. BUY CALL MAY- 90*UVT-ER OI=146 at $15.13 SL=11.00 BUY CALL MAY- 95 UVT-ES OI= 61 at $13.25 SL=10.00 BUY CALL MAY-100 UVT-ET OI=360 at $10.88 SL= 8.00 BUY CALL AUG-100 UVT-HT OI= 44 at $19.88 SL=14.50 SELL PUT MAY- 80 UVT-QP OI=400 at $ 5.00 SL= 7.00 (See risks of selling puts in play legend) Picked on Apr 16th at $90.00 P/E = N/A Change since picked +4.88 52-week high=$159.38 Analysts Ratings 14-4-4-0-0 52-week low =$ 16.38 Last earnings 03/00 est=-1.21 actual=-1.58 Next earnings 05-08 est=-1.15 versus=-0.81 Average daily volume = 2.15 mln /charts/charts.asp?symbol=VSTR ************************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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