The Option Investor Newsletter Monday 4-24-2000 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) ****************************************************************** 4-24-2000 High Low Volume Advance Decline DOW 10906.10 + 62.10 10910.80 10695.40 873,799k 1,267 1,671 Nasdaq 3,482.48 - 161.40 3496.82 3345.25 1,540,259k 1,247 2,969 S&P-100 772.55 + 5.50 777.12 758.31 Totals 2,514 4,640 S&P-500 1429.86 + 7.07 1434.54 1407.13 35.1% 64.9% $RUT 468.54 - 13.30 481.84 460.90 $TRAN 2805.13 - 28.12 2834.75 2783.29 VIX 30.18 + 1.87 32.31 29.59 Put/Call Ratio .51 ****************************************************************** Microsoft Double-Whammy Sparks a Tech Sell-off Is a bigger rebound near? As Jim noted in the Sunday Wrap, though reporting Street-beating earnings, MSFT came up short on revenue and forward looking growth prospects. Revenues fell short of estimates by $290 mln while the once 2000-lb. gorilla (now only 1200 lbs. since its value has shrunk 40%) guided analysts' estimated growth rate to the single digits. On top of that, the Wall Street Journal came out with an article noting the Justice Department is leaning toward breaking up Microsoft into three separate divisions, or "Baby Bills". Hmmm. . .that headline has been out for a while and there is nothing new in the story. Nonetheless, it didn't stop media-types from running the story as "new news", passing much of the blame for MSFT's beating to the DOJ's tough talk. Much as we too would like to pass the blame to the Justice Department, the real culprit here is MSFT's revenue and their near-term flagging outlook. Add to that a few pokes in the eye from downgrades by Goldman Sachs and SG Cowan, and you can see why MSFT cratered $12.31 to close at $66.69 in today's trading. Lehman Bros. even reduced its price target from $130 to $85. As goes the king, so goes the kingdom, and the whole tech sector sold off today led by MSFT. The $64,000 question then becomes, "have we hit a bottom yet?" As usual, there are two sides to the story. First, volume was exceptionally low on the Dow and the NASDAQ as stock prices have slid backward (874 mln and 1.54 bln, respectively). Remember that the previous sell-offs over the past three weeks have been marked by NASDAQ volume from 1.8 to 2.9 bln shares and Dow volume over 1 bln shares. That's when sellers were of the mind to jump form high buildings just to get out of a losing position. It's different this time. Most that have wanted to sell have sold, but buyers refuse to jump in until the retest of 3227. Buyers have been on strike in a self- fulfilling prophecy, and not willing to put their cash back to work until they see a bottom form. This is actually good for those with patient money. It appears that investors were still waiting to see the last of the weak sellers get shaken out today. The operative word here is "WERE". Into the final hour of trading, the NASDAQ, including most of its major components made a strong rebound off the lows of the day. That bottom just happened to be at 3345, not far from the 3322 closing bottom tested last week. Volumes in the large cap tech stocks swelled into the close indicating that at least some investors are comfortable getting back in. We looked at the charts of some of the largest market cap issues and discovered that many had dramatic rebounds. In more than half the cases, the closing price exceeded the opening price - a bullish technical indicator. CSCO, INTC, SUNW, DELL, and ORCL all fit that mold. The point is that though the overall volume is still low, the volume swell into the close may be our clue of a successful retest. Another hour would have been telling. We'll have to wait until tomorrow to know for sure, but the wall of worry that had been building since last week may have been scaled by more than a few brave souls this afternoon. However, don't put your pith helmets on in hopes of crashing through that wall. Weighing in on the opposing side of the $64,000 question, tomorrow may make for a great trading day, but we're not out of the woods yet. We still have the prospect of two 25 basis point rate hikes, or one 50 BP hike in the next three weeks leading up to the May 16th Fed meeting. Key to investors sentiment on the issue will be Alphonso the Great's (Alan Greenspan) speech on Thursday. Investors will be listening carefully (with Greenspeak interpreters) for any clues on his inflation and interest rate stance. That stance will only become clearer by eliminating the uncertainty surrounding the release of the Employment Cost Index, the GDP deflator and Initial Claims earlier that same day (Thursday). Any hiccup in those numbers could spark the Fed Chairman into hawkish comments. Currently, the bond market is pricing in just one 25 BP rate increase. However, if Greenspan has 50 BP up his sleeve, we'll get the warning on Thursday. In a nutshell, it isn't safe to abandon caution while thinking we hit a bottom today. Need more evidence? Let's take a look at the actual end-of-day numbers from the NASDAQ. Yes, the final 30 minutes were strong. Nonetheless, the NASDAQ finished down 161 points on the day at 3483 on 1.54 mln shares traded. Decliners creamed advancers 2971 to 1249 - better than 2:1. OUCH! And down volume of 1.26 bln shares swamped just 260 mln shares of up volume. MSFT alone traded 157 mln shares. New lows? 153. New highs? Only 23. That qualifies as technically ugly, and thus the reason we need to see some follow through tomorrow of the late rebound today. Support in the 3350 area was successfully tested, but a steep rebound won't last without some small giveback. With previous support from January in the 3450-3500 range, that could act as mild resistance and help foster the giveback. More importantly, 3500 happens to be the top bar of the descending trading channel and also (gulp!) the 200-dma. Thus, it becomes an even more critical level. If the index can't get back through and hold the 3500 level, view today's last half-hour rally as a head-fake and start looking again to retest the low. We've noted before that we don't expect it to get there, but we didn't expect it previously either. And in this market, anything is possible. The fact is that the descending channel pattern since late March is still intact, and earnings season will be coming to an end shortly, giving investors no reason to bid up prices anytime soon. The scary part is that 3000 is realistic if the trend continues. 3000 is also the point on a three-year trendline that would put the index back in synch with history. On the other hand for us optimists, assuming 3500 is cleared, that could represent a successful breakout of the channel, with the next mild stop at 3600, then 3750. We're not predicting the direction - we just have to play the hand the market deals us, and to be prepared with a list of ready plays for whichever direction the market moves. For the Dow, better have put on a pot a coffee this morning if you wanted to stay awake today. It was pretty much a snoozer with only 874 mln shares traded. However, void of tech stocks like HWP (-7.19, 132.31) and MSFT (-12.31, 66.63), we'd have witnessed another 100 points on top of today's 62 point gain that had the index closing at 10,906. The fact is that until the tech rebound at day's end, INTC (+0.75, 116.19) and IBM (+2.50, 106.19) too were weighing heavy on the Dow. The internal market damage wasn't as bad on the NYSE compared to the NASDAQ. Four decliners cruised by every three advancers, while up volume was about even with down volume. The NYSE still saw 66 new lows compared to just 21 new highs. Aside from this morning's opening dip to 10,697 (remember MSFT and INTC begin early trading and the rest take a few minutes to open), the Dow traded in roughly a 100 point range between 10,800 and 10,900. 10,800 has provided support in the past and held up well today. The next level to conquer is 11,000, but without continued interest in "old economy" stocks and the looming of uncertain Fed interest rate hikes, that could keep a damper on the financial stocks that make up the Dow (AXP, JPM, C, GE) and also serve to keep overall volume low. Sigh. Depressed yet? Don't be, there are still bright spots as shown by today's late technology rally. Without it, tomorrow would look really ugly. We just need to wait and see if the follow- through is for real. You'll know it by seeing advancers are beating decliners after amateur hour. However, the single greatest factor will be an increase in volume in the technology issues and in the overall market (as long as prices are rising). That will be a signal that buyers have returned to the trough for a feeding that could get the NASDAQ into breakout mode and scaling that wall of worry. If it comes to pass, we'd be even more convinced if the gains weren't just a money swap out of traditional issues. In other words, it's suspect if the Dow is bouncing south of 11,000 at the same time. This is still a sideways and choppy market with air pockets of strength and will likely remain so going into Thursday when Greenspan takes the microphone. If you have to play, be prepared to trade either direction and to get out quickly if the trade goes against you. We reiterate that choppy markets can eat at your account a little at a time. Until a clear direction is established, you may want to sit on the sidelines - maybe even until Thursday. We know it's tough and we sometimes violate this rule ourselves only to get our knuckles smacked on a bad trade. But the primary goal of successful traders above all else is to preserve capital. Without it we're dead in the water. As Jim noted Sunday in a suggestion for the wise....have money and don't buy too soon! Buzz Lynn Research Analyst ********** STOCK NEWS ********** American Express Top 1Q Estimates By Matt Paolucci Financial services giant American Express Co. (AXP) said its first-quarter profits rose 14 percent to a record high, topping forecasts, as the long-running U.S. economic boom encouraged credit card use. The 150-year old company provides travel-related services, financial advisory services and international banking services throughout the world. Its American Express Travel Related Services unit provides global network services, the American Express Card, the Optima Card and other consumer and corporate lending products. AXP also provides corporate and consumer travel products and services, tax preparation and business planning services, magazine publishing and merchant transaction processing. American Express earned $656 million, or $1.44 per diluted share, in the quarter, up from $575 million, or $1.26 a share, in the year-earlier period. Wall Street had expected the Dow component to earn $1.42 a share, according to First Call/Thomson Financial. Revenues rose to $5.3 billion from $4.5 billion, a 17.7 percent increase. Also, the Company said its shareholders approved a previously announced 3 for 1 stock split. No payable date was mentioned. Ameriacn Express is a veritable money machine, with net profit margins of almost 12 percent. Earnings estimates for fiscal 2000 and 2001 are $6.14 and $7.02, respectively. The Company's return on equity was 25.4 percent. American Express shares were up $6.50 at $149.50 in afternoon trading. With the current economic boom, more than nine years old and still running, Americans feel richer than ever before, prompting them to spend more and charge more than ever. Widespread public involvement in investing has also brought prosperity to AMEX's financial advisor business. People charged an average of $1,980 on American Express cards in the first quarter, while the number of cards in circulation rose 12 percent to 47.9 million. Cardholders racked up a total of $68.3 billion in charges in the quarter, as the number of cards and spending both increased, the company said. "It looks like a good number," said Moshe Orenbuch, an analyst at Donaldson, Lufkin & Jenrette. "There was somewhat more growth in new accounts and charge volume than I would have thought. They had 20 percent growth in charge volume." American Express' travel-related services division, which includes its charge card business, earned a record $416 million in the first quarter, up from $363 million a year ago, as card spending rose and the number of retailers accepting American Express cards increased. Outstanding credit card balances also jumped in the quarter, further fueling growth. The Company's investment advisory unit reported record income of $245 million for the first quarter, up from $214 million last year. Rising mutual fund, annuity and insurance sales, as well as higher stock prices, lifted results. *************** PLAY OF THE DAY *************** CALL **** AMD - Advanced Micro Devices $80.00 +1.88 (+1.62) Advanced Micro Devices is a leading semiconductor manufacture. They ranked #2 in the microprocessor market, standing only behind Intel (INTC). Their integrated circuits are primarily used for computers, telecommunications equipment, and data and networking devices. The company has operations in the US, Germany, and throughout Asia. Most Recent Write-up We begin our coverage of AMD in expectation of a split announcement at the shareholders' meeting scheduled for this Thursday April 27th. The company is asking shareholders to increase the number of authorized shares to 7.25 mln. With only 152 mln shares outstanding, that'll give the BoD plenty of room for a 2:1 stock split. And it's about time! The last stock dividend was eons ago in 1983! This month we took note of the bullish signs indicating AMD could power higher in the near- term. First AMD broke through its imaginary ceiling at $60 trading on moderate to strong volume. Then the company rocked the Street with blowout earnings on April 12th. Expectations were as high as $0.57 cents, but AMD reported a whopping $1.15 p/s! The reaction the following day was spectacular. Investors bid up the share price 10.9% to $71.50 and volume was at an impressive 15.1 mln, nearly triple the ADV. However the definitive confirmation came in this Wednesday's session. AMD cracked the recent high of $79.18, edging the opposition a fraction higher at $79.25. Importantly it held these higher levels through the week. Near-term support is now clearly established at $75 and $77. Look for respectable volume of at least six to seven mln shares being exchanged or better at 10+ mln shares, which historically substantiated a solid breakout. Assuming all the ducks are in line, $75 should serve as a solid entry point. Take a look at a 10-day chart and it's easy to see the positive bounces off this mark in the last two trading sessions. As a whole this week the chip sector was sizzling with leaders like TXN, LSCC, VTSS, CY, and INTC all reporting better- than-expected earnings. This obviously created an excellent environment for AMD to stretch higher. However we expect the upcoming shareholders' meeting to sustain the momentum and drive AMD into new territory. Recently Deutche Banc Alex Brown upped its rating for AMD to a Buy from a Market Perform and issued a price target price of $125. Prudential and Wit Soundview also came forward with upgrades lifting the stock to a Strong Buy and Buy, respectively. And as a gentle reminder - please remember it's essential you confirm overall market direction before opening new positions, especially considering the topsy-turvy broad markets. Comments AMD, a tech stock, defied the odds today by gaining $1.88 in a technology headwind that kept other issues in descent mode. That's not so big a gain that it guarantees a fall tomorrow. In fact, despite topping out at $79 on a couple of occasions since early April, today's breakout and retest of $79 is milestone on a day like this. To boot, volume was 25% over the ADV of 5.2 mln shares. With any follow-through of today's finish by the tech sector in tomorrow's trading, AMD has a technical head start. BUY CALL MAY-75 AMD-EO OI=2346 at $ 9.75 SL=6.75 BUY CALL MAY-80*AMD-EP OI=2942 at $ 7.25 SL=5.00 BUY CALL MAY-85 AMD-EQ OI=1491 at $ 5.25 SL=3.25 BUY CALL MAY-90 AMD-ER OI=2252 at $ 3.75 SL=2.25 BUY CALL JUN-85 AMD-FQ OI= 0 at $ 8.63 SL=6.00, new Picked on April 21st at $78.38 P/E = 55 Change since picked +1.63 52-week high=$81.63 Analysts Ratings 7-10-6-0-0 52-week low =$15.63 Last earnings 03/00 est= 0.46 actual= 1.15 Next earnings 07-14 est= 1.09 versus=-1.10 Average Daily Volume = 5.23 mln /charts/charts.asp?symbol=AMD ************************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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 *********** DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
The Option Investor Newsletter Monday 4-24-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ************** TRADERS CORNER ************** BETTER TO BE LUCKY THAN GOOD Blind Pigs, Acorns & Option Traders Austin Passamonte I wasn't thrilled to hold long positions over the extended weekend. These days, who would be? The OEX put play I had open missed stopping out by ¼ point on Friday's close. Truth is I might have been happier for a time if it were but I bought them fairly low, they were in the black and my stop was sitting right at cost. All I dreaded at the open are those big gaps against one. Forget one, I mean against me! Do I place a stop loss before the open Monday and risk a big hit only to have the market rally and fill the gap? Do I play with fire and lay off the stop? Will it be a fast market where my broker cancels stops and none of it really matters? Three days wondering how the MSFT meltdown and Monday's open was going to shape up took their sweet time passing by. The other put play I had were some OTM QQQs that I felt no urgency to dispose of. They don't move nearly as fast & furious as the OEX can at times. Being slightly in the profit already didn't hurt either, although the NASDAQ has been gapping open widely as much or more often than starting out flat for what seems like an eternity. Up at 7:00am today, awake long before that. Let the dog out, fetched the paper (both of us) and turned on Bloomberg to check futures. NASDAQ was limit down with DOW and S&P 500 falling steadily looking good so far and got better as the bell approached. The OEX bungeed from 777 to 760+/- at the open and my position was instantly double it's purchase value. For a moment greed overwhelmed me and I hesitated to enter the sell-limit order for 100% gain but my written plan stated to do so. I have seen a number of smash-down opens where the market spins on a dime and heads back from whence it came with equal speed. I "clicked it in there" and was filled as soon as the status pending screen cleared. Pangs of remorse made a feeble attempt to build but were squelched flat as I was watched the index about face and come steaming back. The NASDAQ was in trouble but the DOW was determined to continue Thursday's party. I then entered a buy order for some OEX calls from my list compiled last night in case this scenario arose. I checked the bid/ask and split the 2 1/8 point spread on a limit buy and filled minutes later in a market hesitation. This wasn't easy to do while watching the NASDAQ tank and DOW struggle to move up but I used 50% of my open balance and committed to long strangle (straddle) the 760 OEX benchmark if required via Skybox instruction. This was all prior to 10:00am, and more adrenaline was flowing freely than I bargained for! I watched the market drift up and down a couple of times until it pushed through 771 and pulled back around 1:00pm. The DOW was showing plenty of spirit and my hopes were high, but I closed the position for a modest gain as the first bit of red began showing on the next candle forming. Gosh, my nerves need a break. The QQQ puts hit the 50% profit from purchase sell-limit order I placed when the NASDAQ broke -240 in the morning. Again, greed and regret reared their twin mugs until this index also reversed and wandered a bit higher mid-day. Now it's 2:00pm, my account is flush with cash and I have no open positions. With my bankroll up slightly over 100% of Friday's balance the sensible thing to do is sit tight and see how the market closes. Problem is I'm an options trader who just went 3 for 3... can you honestly expect me to be sensible? I took 50% of the balance and bought OEX puts as the indexes stair-stepped lower. I spent the next hour lifting weights and gloating to myself over the 2 point per option appreciation by 3:15 pm. "Ahh, this trading is too easy when I'm in tune with the market" I said to myself as the NASDAQ bumped -290 and the Dow -40. "The buyers have hung it up for the day and this market is falling out of bed. Might as well shower, shave and get ready to sell near the close when the screen is bleeding red." Smooth move, Buzzy Schwartz wannabe! I was toweling what's left of my hair (gently) and jiggling the computer mouse to wake up my sleeping screen. "WHAT, the Dow is +50 and the NASDAQ -150! Are you kidding me! Are the clocks correct on my Qcharts? (Guess where that 2-point per option profit I walked away from is now? That's right, we're breathing it.) The buyers came rushing in even as I pondered my fantasy 300% profit day. Serves me right!!! Tomorrow's game plan? Well, these OEX puts were purchased with pure profit from today, so some might see that as a "free play". Not me, I expect to be stopped out on the first rally and sit back a little more cautiously waiting for the next proper entry. I wouldn't mind another gap-down day, but how many acorns can be out there for a certain blind pi, er, I mean option trader to glean? Trade the right direction, Austin Passamonte ************************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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 *********** DISCLAIMER *********** This newsletter is a publication dedicated to the education of options traders. The newsletter is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The newsletter picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. The newsletter staff makes every effort to provide timely information to its subscribers but cannot guarantee specific delivery times due to factors beyond our control.
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