The Option Investor Newsletter Thursday 4-27-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 4-27-2000 High Low Volume Advance Decline DOW 10888.10 - 57.40 10941.90 10747.30 1,110,416k 1,308 1,592 Nasdaq 3,774.03 + 143.94 3774.11 3513.76 1,548,047k 2,120 1,952 S&P-100 790.70 + 1.63 793.49 774.61 Totals 3,428 3,544 S&P-500 1464.92 + 3.93 1469.21 1434.81 49.2% 50.8% $RUT 494.58 + 10.34 494.58 473.76 $TRAN 2836.84 - 46.68 2882.62 2809.92 VIX 28.18 - 1.28 31.81 28.01 Put/Call Ratio .54 ****************************************************************** Has The Feeding Frenzy Begun? After yesterday's preemptive sell-off in the markets ahead of the ECI and the GDP numbers, the stage was set. The fear was of inflationary economic data. And what did we get? Just that, no surprises. So when I woke up this morning to see the NASDAQ and S&P futures down limit, the bullish sentiment that Ryan mentioned in yesterday's wrap looked even stronger. With interest rate sensitive stocks being sold, where would the proceeds go? To the sectors that have felt the brunt of this recent sell-off, the NASDAQ. In this investment environment, cash doesn't sit idle for too long. And the feeding frenzy began. The NASDAQ gapped down to open at 3519 and didn't look back. Within an hour the index had moved as high as 3665, well above its 10-dma of 3627. As the NASDAQ continued to hold around this level, the outlook for the day continued to improve. By reestablishing itself above the 3600, the NASDAQ confirmed its breakout from the regression channel that I mentioned last Wednesday. Note on the chart how the low of the day came back to test support near the upper limit on the channel. So have professional investors and money managers started to bottom fish? Sideline cash has been growing and growing for the past month as institutional investors built up their treasure chests and drew up their shopping lists. With so many tech bargains out there, once one sees the other begin to feast, a feeding frenzy is bound to occur. Valuations have come in quite a bit from their highs and as investors begin to focus on the May 16th Fed meeting, eyes may be on techs rather than interest rate sensitive issues, a.k.a. "old economy." Look at the strong uptrend today in the above chart. The buying increased as the session moved on and the NASDAQ closed at the high of the day. Closing above 3750 is very encouraging. Now we will be watching for a test of the 3800 resistance level, which the NASDAQ challenged in vain Wednesday, April 19th. Above that is 4000 and then the 100-dma at 4200, but we don't want to get ahead of ourselves. The question remains, how far will the feeding frenzy take us? Many NASDAQ stocks began to round up today and have set their sights on the 50-dma. Leading the index today was the old stalwarts: Semiconductors($SOX +7%) and Internets($IIX +4%). The NASDAQ closed up 143.95 at 3774. As for the DJIA, things are a bit slower. Even as many of the financials and other interest rate sensitive issues came under selling pressure early, they managed a decent recovery. The DOW was down almost 200 points at one point and rallied back to close down 57.40 at 10888, its 100-dma. In general, it looks like the DJIA will be range-bound between 10750 and 11100. Yet, its short term trend appears to be upward. Inflation concerns could be the DJIA catalyst as we near the May 16th Fed meeting. Today's economic data shifted the focus from valuations to interest rates once again. The Employment Cost Index(ECI), which measures labor costs, was up 1.4% for the 1st quarter, higher than consensus estimate of 1.1%. This was the largest increase since the 3rd quarter 1989, yes 1989! The obvious concern here is that higher labor costs will force company's to raise prices on its products. Thus, inflation. All the nervous analysts expected the worst for GDP, some as high as 7%. But 1st quarter GDP came in at 5.4% and upon closer analysis, the number indicated little inflation outside the energy sector, and a strong economy. Many Fed-watchers fear that these numbers raise the risks of a 50 basis point hike. As they very well may raise the risks, do the numbers really warrant a 50 basis point hike? The Fed futures indicate that a 25 basis point hike is expected on May 16th. Yet, the real question is will Greenspan move away from his gradualist trend and jolted the markets with 50 basis points after such a significant and healthy market correction? We will have to wait until the 16th. With that said, now for the best measure of inflation: the GDP deflator. It rose 3.2% in the first quarter-- the highest in nine years. At first glance, it looks bad. But don't judge a book by its cover. Looking deeper into the number, excluding food and energy, it was only up 2.1%. And to go even further, excluding an across-the-board Federal pay hike, considered a government cost, the GDP deflator came in at 1.7%. So I guess it's all in the way you look at it, and Greenspan will give it a good one. The big stock news today was AT&T Wireless Group's IPO. Trading under the symbol AWE, 360 mln shares hit the market and did quite well given the current IPO and market conditions. AWE gained $2.31 to close at $31.81, at the upper end of the initial pre-IPO range. The majority of trading was in block trades, indicating a strong institutional interest in the new issue. After being oversubscribed by 2.5 to 1, institutional investors couldn't get enough. Retail investors were relatively scarce. Being the largest IPO in U.S. history, AT&T raised $10.6 bln from the tracking stock. With wireless being the topic du jour, NOK came out with strong earnings this morning. They beat the Street estimates by two cents with 1st quarter EPS of $0.18. Pretax profit rose by 76% and revenues grew by 69% from the previous year. The biggest cell phone maker in the world just strengthened its position and even stated that they could exceed full year revenue growth previously stated at 30-40%. NOK was up almost 10% today in trading, adding $5.13 to close at $57. In the B2B sector, VerticalNet posted a narrower than expected loss of $0.16 per share vs. consensus estimates of a $0.27 loss. VERT's revenues jumped an astounding 1300% year-over-year. The company attributed this to growth from acquisitions and a rising sponsorship of their business. Strong sequential revenue growth was seen across VERT's network of 56 B2B "trade communities." Quite impressed by the numbers, Chase H&Q reiterated its Buy recommendation and noted that, according to their estimates, VERT is set to breakeven in mid-2001. VERT was rewarded with an 11% gain of $5.44 to close at $51.44. As we look forward to tomorrow's trading session, all eyes will be on the NASDAQ to see if it can sustain this move out of the most recent channel. We are encouraged with the health of the NASDAQ, closing at its high for the day on strong volume late in the day. Follow through is necessary to convince investors that the NASDAQ is back. With interest rate fears creeping up again, techs could be poised to reestablish themselves as the feeding frenzy begins. Matt Russ Research Analyst ************************** ATTENTION COLORADO READERS ************************** OptionInvestor.com will be an exhibitor at the KTLK Financial Fest in Denver on Saturday. We will be available to answer your questions as well as providing eight free mini seminars about stock and option trading. Make plans to visit the Holiday Inn at I-70 and Chambers between 8:30 and 5:30 Saturday April 29th. Many other major companies will also be present including Motley Fool and CNBC. ********** STOCK NEWS ********** Nokia Forecast Strong Revenue Growth By: Cindy Christ Nokia, the world's No. 1 mobile phone maker, posted a better -than-expected rise in first quarter profits amid strong demand for its products and worldwide growth in wireless communications. After Wednesday's close, the Finnish company said pre-tax profits increased 76 percent to 1.33 billion euros, or $1.23 billion, compared to 758 million euros, or $698 million, a year ago. Earnings totaled 0.19 euros, or $0.18 per share, versus last year's 0.11 euros, or $0.12 per share, a 73 percent jump. Analysts polled by I/B/E/S had projected net income of $0.15 per share. The company said overall revenues rose 69 percent to 6.54 billion euros. Revenues for cell phones increased 88 percent. Nokia's overall operating margin also improved to 20.1 percent from 19.8 percent, with margins for handsets reaching a stronger-than-anticipated 24 percent. "Based on current market conditions and our globally strong position, we are confident we can achieve full-year revenue growth at, or higher than, the earlier stated 30 to 40 percent range, combined with continued strong profitability," said Jorma Ollila, Nokia chairman and CEO, in a statement. Wall Street was impressed with the results, especially Nokia's production methods, which support the highest operating margins in the industry. In a conference call with analysts, Nokia said its market share for cell phones is growing. Nokia currently holds 27 percent of the handset market. No. 2 handset maker Motorola (MOT) has a 17 percent market share and No. 3 Ericsson (ERICY) an 11 percent share. The company also told analysts it's not experiencing component shortages like those plaguing Motorola's first-quarter results and that declining prices for mobile phones have slowed. Among analysts who cover the stock, 16 rate Nokia a "strong buy," eight a "moderate buy" and one a "hold," according to Zacks Investment research. "Nokia is the most well positioned maker of cell phones in the world," said Dan Ogden, president of Dock Street Asset Management, in an interview with CNBC financial television. "They have a lock on the market, and there's no reason why it shouldn't continue to grow at its current rate." The American Depositary Receipts of Nokia (NOK) were the Big Board's third most active issue Thursday, closing up $4.62, or 8.9 percent, at $56.50. ************** MARKET POSTURE ************** As of Market Close - Thursday, April 27, 2000 Key Benchmarks Broad Market Bearish/Bullish Last Posture/Since Alert **************************************************************** DOW Industrials 10,825 11,400 10,888 Neutral 4.25 SPX S&P 500 1,500 1,550 1,464 BEARISH 4.14 OEX S&P 100 800 850 791 BEARISH 4.13 RUT Russell 2000 550 600 495 BEARISH 4.14 NDX NASD 100 4,000 4,500 3,693 BEARISH 4.13 MSH High Tech 1,000 1,150 974 BEARISH 4.13 XCI Hardware 1,600 1,700 1,514 BEARISH 4.13 CWX Software 1,500 1,670 1,244 BEARISH 4.04 SOX Semiconductor 1,200 1,300 1,135 BEARISH 4.13 NWX Networking 1,070 1,190 1,020 BEARISH 4.04 INX Internet 800 940 608 BEARISH 4.04 BIX Banking 530 620 554 Neutral 3.16 XBD Brokerage 500 580 476 BEARISH 4.14 IUX Insurance 540 620 583 Neutral 3.16 RLX Retail 900 1,000 937 Neutral 4.13 DRG Drug 355 370 379 BULLISH 4.25 HCX Healthcare 710 760 767 BULLISH 4.25 XAL Airline 130 155 143 Neutral 3.10 OIX Oil & Gas 265 300 291 Neutral 3.16 Posture Alert Corporate earnings continue to support this market even in the face of higher interest rates. The NASDAQ led the rebound today, as the technology index bounced back strong from an early morning sell-off. Leading sectors include Semiconductors (+7.00%), NASDAQ 100 (+5.33%), Software (+4.44%), and Internet (+4.44). Losers on the day were limited to Insurance (-2.82%), Banking (-2.61%), and Retail (-2.41%). **************** MARKET SENTIMENT **************** Thursday, April 27, 2000 FedWatch! Fears that wage inflation are on the rise sparked broad based selling off the open Thursday; however, the NASDAQ led a turnaround and ended the day with a +3.97% gain while the Dow closed with modest losses. Volume continues to be on the decrease, as the NASDAQ traded 1.5 billion while the NYSE traded 1.1 billion. This trend will most likely continue in the near term. The common element that continues to support this market is strong corporate earnings, which have consistently beaten analysts' expectations. This has been a great earnings season; however, the season is now soon over. Sure, there will be some retailers and other technology stragglers that report next month, but for the most part, earnings season is coming to a close. They have been phenomenal, but what will everyone be concentrating on over the next several weeks? That's right. FedWatch. Over the next several weeks, the media will have nothing relevant to talk about, so they will concentrate on interest rates and inflation. The next Fed Meeting is on May 16th, where a 25 basis point hike is already assumed. The next meeting after that is on June 28th, where another 25 basis point hike seems priced into the market. Now the recent question is, do they raise rates by 50 basis points during the May meeting? The sentiment seems to be changing, and we are starting to hear rumblings that the professionals feel 75-100 basis point increase is most likely over the next several months. This is not the scenario that we like to hear. But unfortunately, we will start hearing a lot more of this speak during the next couple of weeks. So get ready for every bear or interest rate guru to speak on CNBC during the next couple of weeks, because that is what we are going to get. BULLISH Signs: Corporate Earnings: Major corporate earnings continue to come out strong and ahead of analyst expectations. General Electric is the latest bellwether to give positive comments regarding earnings. Interest Rates (5.9393): The current yield is in bullish territory. Volatility Index (28.18): The VIX continues to prove that the low 30's are an excellent buying opportunity, and the low 20's continue to be a great selling opportunity. Short Interest (NYSE): Short interest on the NYSE fell 1.33% to 4,055,931,190 shares on April 14; however, this is still a high level and from a contrarian viewpoint, would be considered bullish. Mixed Signs: None BEARISH Signs: Liquidity Crunch: With the fear of inflation, and the most likely scenario of several more rate hikes, liquidity in the marketplace will become a more significant issue and put more pressure on equities. IPO Dilution: With so many IPO's hitting the market, there seems to be dilution occurring where shares of finally freed up to sell by insiders. $58.6 billion of stock was freed up for trading in March, $67.3 billion this month, and $118.3 billion in May. This is too much stock for the system to handle. Energy Prices: With the rapid rise in crude oil, everything from manufacturing to transportation will be affected by higher costs. These higher costs will be felt 1-2 quarters out, and could put pressure on profit margins. Investor Expectations: More and more investors are now expecting high double-digit growth if not triple-digit expansion in their portfolios. This extreme positive sentiment could help fuel a future sell-off in technology shares. ****************************************************************** The Power of Sentiment Analysis It has often been said that the crowd is right during the market trends but wrong at both ends. Measuring and evaluating the sentiment of the crowd, therefore, can give savvy option traders a decided edge. Pinnacle Index ****************************************************************** OEX Thurs Tues Thurs Benchmark (4/20) (4/25) (4/27) ****************************************************************** Overhead Resistance (805-830) 1.65 2.25 2.79 Overhead Resistance (775-800) 1.70 1.82 1.48 OEX Close 777.12 795.32 790.70 Underlying Support (745-770) 1.60 1.84 2.26 Underlying Support (715-740) 5.53 6.45 8.91 What the Pinnacle Index is telling us: Based on the above statistics, overhead and underlying both remain light, indicating we can still go in either direction with relative ease. Resistance will start to be felt at the 800 benchmark. Put/Call Ratio ******************************************************************** Thurs Tues Thurs Strike/Contracts (4/20) (4/25) (4/27) ******************************************************************** CBOE Total P/C Ratio .75 .41 .54 CBOE Equity P/C Ratio .68 .34 .42 OEX P/C Ratio 1.42 1.40 1.57 Peak Open Interest (OEX) ******************************************************************** Thurs Tues Thurs Strike/Contracts (4/20) (4/25) (4/27) ******************************************************************** Puts 680 / 4,808 680 / 5,264 680 / 5,373 Calls 800 / 5,512 800 / 5,376 780 / 6,218 Put/Call Ratio 0.87 0.98 0.86 Market Volatility Index (VIX) ******************************************************************** Major Date Turning Point VIX ******************************************************************** October 97 Bottom 54.60 July 20, 1998 Top 16.88 October 8, 1998 Bottom 60.63 January 11, 1998 Top 26.38 March 4, 1999 Bottom 28.15 May 14, 1999 Top 25.01 July 16, 1999 Top 18.13 August 5, 1999 Bottom 32.12 October 15, 1999 Bottom 32.06 January 28, 2000 Bottom 29.09 April 14, 2000 Bottom? 39.33 April 27, 2000 28.18 ************ WOMANS WORLD ************ The Treasury Giveth as the Fed Taketh Away By: Mary Redmond When the S & P futures were down 34 points this morning and the NASDAQ futures were down over 100 I thought the market opening could have been brutal, but I also thought that the NASDAQ might have recuperated somewhat. The GDP growth of 5.4 percent was actually lower than expected. The fact is, the S & P futures are usually indicative of only the open of the market, and are usually an extreme exaggeration of the pre-opening sentiment. Almost everyone is expecting the Fed to raise rates in May, and the issue of whether it will be a quarter point or half point will probably be talked to death in the media over the next few weeks. The stock market generally responds to the corporate bond rate, as some corporations need to finance their expansion by issuing corporate bonds. If the bond rates are too high the payments can reduce corporate profits and further expansion efforts. The stocks which are not interest rate sensitive are generally the ones which are profitable and have little need for debt. The corporate bond rates vary depending on the credit risk of the corporation, the long and short term interest rates, the existing debt of the corporation and a lot of other factors. Despite the interest rate hikes we have had so far this year, the Treasury's program of starting to buy back 30 billion dollars worth of government bonds has actually reduced the Treasury bond yield to a bullish 5.9% to 6%. If they decide to retire the 30 year bond, then the 10 year will probably become the new bench mark risk free rate, and the bond which will be held in the Social Security trust fund. The 10 year bond yield is still under 6.25% despite the expectation of one or more interest rate hikes. Remember, it was announced in January that the Treasury planned to retire the 30 year bond. At this point, the 30 year rate was fluctuating between 6.5% and 6.75%, and was approaching 7%. If the Fed had raised rates twice since then and the Treasury had not repurchased any bonds, then we could have been looking at a 30 year bond yielding over 7%. This could have pushed up all of the other rates to the extent that the prime rate might have been close to 10%. It is unlikely that we would be seeing the same stock market if that scenario had happened. The market might have corrected and not come back up again. It is fortunate for the market that the Treasury's program seems to have acted as a buffer against the rate hikes. The statistics were released on the mutual fund inflows for the previous week. According to AMG Data, for the week ending April 26, $4.5 billion went into equity funds, with over 79% going into growth funds. This can mean generic growth funds, usually not sector specific as in biotech or financial. The data on flows into tech funds was not available, although for the prior week the flows were approximately 450 million. It is encouraging to see the money coming in consistently, although it does not equal the strongest levels of the year. To really see the NASDAQ rally we want to see at least 2 billion in cash going into tech funds each week, and volume on the NASDAQ of 2 billion or more shares each day. The 10 billion dollar AT&T Wireless IPO may have taken some fund money away from other stocks, as the buyers were primarily institutions. Contact Support ***** Ricky, Can Ethel & I Borrow Some Money? We Want To Go Shopping By: Renee White Pretty soon, our spare time may be consumed trying to decide which option to buy. I can't think beyond a week yet, but it feels like a strong rally lasting a few days is brewing. Be very skeptical and please come to your own conclusions. Yesterday's light volume spoke loudly to me, along with the minimal sell-off after a worsening ECI report this morning. It was especially noticeable since a bad report had potential implications of prompting Greenspan to immediately take action before the next FOMC meeting. The drift downward since Tuesday was expected but the light volume made me feel there were few willing to sell their positions. Low volume on an up day tells me many buyers are indecisive, waiting for others to test the waters first. Low volume on both an up and a down day back to back, tells me something is soon to happen. My chart and indicators help me read which way my bias should turn and I combine that with what I think is happening in the week ahead. By now you've probably read in the market wrap how impressive today's strength was in lieu of the poor economic numbers this morning. That's another sign sellers slept late and the real risk takers decided to go shopping for their bargain stocks. This is the last large economic report to concern us on a big scale for a few weeks. Once the worst was known, many decided to take a test position while others decided to wait for more confirmation. I have to admit, the strength holding the market up with a bad economic report was pretty convincing. Okay, so no interest rate hike today. But, wait! Now Greenspan has more reasons to raise rates by 50 basis points. That's usually bad. Since it was shrugged off, that tells me we were so oversold that no one cared, for today at least. The question now is deciding whether the aftershock will wake sellers up, to the realization that the report REALLY was worse than expected? I wouldn't be surprised. Then the question becomes: When? I don't know, but the Nasdaq chart is looking like a buy. Don't get me wrong, I still think a shaky market remains and soon fear will return to keep things choppy until the FOMC meeting. In the meantime, I will not use a hatchet to kill a fly on a friend's head. If the market wants to breathe and advance a little, so be it. Tomorrow, if it looks like Nasdaq will close above 3793, I'll probably take positions for a possible short-term breakout. If not, I'm still in "shorts". It has been an interesting week playing "shorts". Until today, all plays were very profitable. My bias finally got me this morning when I shorted QQQ after hearing the bad eco report. The Nasdaq rocket blasted off just as I was laying pennies on the launch pad and it torched me badly! I started to buy calls into the close, but then it just didn't feel right yet. I need more than one day up and I still want to see strong volume with a bias towards buying. My thinking is it could occur tomorrow or Monday. Shorting has been profitable this week, but it is much easier to play in a down-trending market. I learned another nasty trading lesson yesterday and today. Expecting the sell-off yesterday, I had a list of stocks I wanted to short. But try as I may, every equity order got rejected one after another. I must have made 10 trade attempts during the day yesterday, all being rejected by my broker. Why? Well, the explanation I was given was: "We couldn't find (borrow) the shares to cover your position". One of the companies was Vertical Net, which traded well over 1 million shares...I guess somebody else "found" their shares! I also wanted to add to my short position in NZRO at 16 5/8 which would have made me 4 3/4 points in 24 hrs on several thousand shares. But, these couldn't be found either. They "lost" more this morning too! It is so frustrating when you read the market correctly but can't execute your plan. How would you feel if you had been sitting on cash waiting for the right entry, then they can't find the shares to let you trade your plan? Grrrrrrr! I see a fly. Where's that hatchet? Ahhh. Life is so much fun. I received this email recently and wanted to share it as an example of one reader's successful trading plan: "Hi Renee: My wife and I have especially enjoyed your work and articles in the newsletter. We thought we would let you know our story, if you can see through the blood stains. We started in Sept 98 with $67K. Even though this was not really money we felt we could LOSE, we never counted it in our future portfolio. With options and outright purchases and all the extra cash we could muster(about $110,000) we worked our plans. We nearly always followed the 10 rules and a couple of our own and paid the price when we didn't. As of March 1, we had made 186 trades, 36 at a loss, growing this piece of our portfolio to $1.2 million. This was from buying the dips and getting out in front of splits and earnings. Wait for the dip again, no matter how small, and get back on with tight trailing stops. The best were your plays of YHOO, QCOM and JDSU a while ago. BUT life sure changed in March, didn't it? The 2 dips with modest volume fooled me, big time. We got too eager, entered more plays and got stuck with sinking stocks because "this can't get worse." It did. Today, this account is down to $450K and we feel like we have been ripped off. How did this really happen? Where are the buyers? More importantly, where is the money now of these buyers. Oh, I know !!!! What's left of it is in $$$$. The $450 we have left is 70% in cash. Guess what, it's going to stay there for now. I'm waiting for serious volume WITH direction. Even after all these screw-ups, we are still up nicely and the drop did include $$ for the Inferno Revenue. We made this account pay all of our 1999 taxes. We keep two (2) lists: 1. A RESEARCH LIST which serves as our filter. 2. An ACTION LIST. The filter list is limited to 40 stocks that have raised general interest from various sources and talking heads. Heck, we even put on the list a couple of tips from buddies. You know, "the can't miss stocks". HA!! We spend about 10 hrs/wk on this list. We never buy off this list. Therefore, we never buy IPO's or hot tips. The second list is our ACTION LIST and it is limited to 12 stocks. Our rules require us to work only these 12. We spend about 10 hrs/wk on this list. All 12 have one thing in common; their 5-dma is above their 30-dma. On Sunday we create a strategy for the week on all 12 issues. Depending on whether we are holding, exiting or entering on the hoped for dip, we create a plan. We try to option only those appearing to be moving up with volume. We have an alert number 8% below the 3 day daily lows that tells us to come to the computer to sell because the issue has moved below our theoretical stop. On these very same issues we have entered a target shooting number ABOVE the 3 day daily high by +/-3% takes us out with a quick profit. This is the most rewarding and quickest money. Now where does the system fail us--when buying the dips turns into a bear trap. It's funny but hunting bear in Michigan was never like this! The dips since March just took more and more each time. Keep up the good work Renee and OIN. The cash is there and technology will return." GG Thanks G. Congratulations on your success and your discipline. I can tell you will be a long-term success story by the way you approach your trading. Obviously, your trades are well planned out. Your systematic approach to studying your plays is something everyone can learn from. Learning to follow "the rules", watching volume, charts and understanding your equities, can really enhance one's trading results. I think the most valuable part of your email is your self-evaluation of mistakes. Buying the dips can be incredibly rewarding, until you load up on the big black hole instead of a dip. Obviously, I've been there too. Waiting for the volume to give us buy signals again, is the right way to play this confusing and dangerous market. Many new traders ignore volume, which can kill them in a sideways market. All traders should have a game plan and spend time researching potential plays before deciding to jump back in. Otherwise, many will decide to keep their old careers. When we learn from our mistakes, we can more easily navigate when the situation presents itself again. Hopefully next time, we will see the signs and profit from it. I wish you the very best of luck and continued success. Contact Support ************** TRADERS CORNER ************** Chill Mode Zulu, Asset Allocation and Other Lessons Learned By: Janar Wasito In a portfolio theory class which I took this past year, one point rings true--asset allocation is the single biggest factor in determining the results of your investing. I am going to discuss my portfolio and asset allocation with the goal of giving traders one example of money management, but by no means the "correct" one. First though, I am going to do something that the Marines call a debrief. The logical place for me to start is Jan 3. On that day, I closed out some very successful trades that I had held over the Y2K divide. I not only closed the trades, but also transferred cash equal to about 66% of my assets from my ST trading account to my LT Stock account. On Jan 4, I was planning on going on a trip for two weeks, but that trip was canceled. I needed that trip to unwind, decompress, and compensate for two months of hard trading through November and December. Is this really relevant? We just want to know how to make great trades and big profits. I would contend that it is more relevant than entry points, stop losses, and a variety of other techniques. Marty Schwartz, and other great traders chronicled in Market Wizards, all note the importance of regularly taking a day or longer off trading, both as a reward for a solid streak of wins, and because a good streak tends to roll over into a bad streak quite frequently. There is also a prominent theme mentioned in The New Market Wizards--successful trading does not necessarily equate to successful living. Know the difference. January was a losing period in my trading. The saving grace is that I was playing small, with less than 3% of my assets. I was testing new techniques such as spreads, naked puts, and short covered strangles. I would enter the occasional directional trade, such as a QQQ Put play, and lose, close it for a loss, and move on. At least I had the good sense to protect the majority of my assets. February was a continuation of the same theme. I studied the advanced techniques--bull put spreads, bear call spreads, etc, etc. I learned a lot, but didn't make a lot of money in that period. The simple truth is that I was burned out, both by trading, and by school and professional commitments. Trading took up more and more of my attention, and I did it less well. Lesson Learned #1: Plan your downtime. My platoon sergeant in the Marines used to come up to me and say, hey, the Marines need some FAT. I'd say, what the heck is that. The experienced staff sergeant would say, "Fooling Around Time." Chill Mode Zulu. Sure enough, after a day or two of just doing nothing--playing volleyball, going out in town--we did whatever we were doing 100% better. Yahoo! has slides and adult playgrounds in their corporate headquarters. That's why they are one of the most successful companies in the world. There's a lesson here for individual traders. You need to plan your downtime first. That is every bit as important as planning trades for any given week. Right now, I am looking at late May, after my exams are done, and before preparation for professional exams begin in earnest. I am thinking about visiting Germany and my family, maybe Ireland. 10 Days. And the point is to completely avoid anything having to do with the market. Several traders in our local Silicon Valley group have done this recently, or are doing it, and I think it is very important. In late February/early March, I visited London and Paris. But I did it with about 5 spreads open. So naturally, between nights out drinking and relaxing, I picked up the Financial Times, or hopped on the web. Overseas and making money, what could be better? One of my travel companions was checking his quotes on a computer, so my affliction was not unusual, and he doesn't even trade options. Another one had a May Nanogen call that paid for his trip(hope he closed it). Another one worked at QCOM, so in effect, he was always long QCOM calls. Funny, we Americans abroad--leveraged financial players to the hilt. It was a great trip, but not really a break from the market. I arrived back on a Thursday, checked the market on Friday, planned my trades over the weekend, and thought I was Soros-esque in my trading ability. In Paris and paying for my last two years of grad school. How cool is that? Well, that was the market top. On Tuesday of the following week, Clinton and Blair rained on the Biotech parade. Tired, recovering from the trip, and behind in my classes, I made bad decisions, which in turn led to more bad decisions. On that Tuesday, I bailed out of my biotech spreads almost exactly at the bottom. I had underestimated the difficulty of closing spreads rapidly, and it chewed up capital. I also bailed out of my other spreads. On Wednesday and Thursday of that week, I tried a strategy which I had rejected as inappropriate for my level of risk--naked puts. I set stops, and the stops worked like a charm, but resulted in losses as the B2B stocks I played crashed down through the stops. On Friday of that week, with the NASDAQ at 4800, I initiated a strategy which I intended to execute for the entire year--calendar spreads. I bought a large number of LEAPs on leading tech stocks, against which I would sell current month calls every month. Somewhere in that week I also sold a bunch of long term stocks that I had been holding since 1998 because I had convinced myself that I had cracked the code of great option trading with a combination of spreads, etc. Big tax mistake, but that is another 11 months away. Lesson Learned #2: Bad decisions lead to more bad decisions. The Marines call this a degenerating decision-making cycle. You want to DO it to your opponent. Lawyers call it rattling their opponents. It happens in every arena where human wills compete, whether the NBA or the options trading pit. Bad Decision #1 was closing all my spreads in a panic. Don't blame Bill Clinton, the biotech bubble was due to pop. Bad Decision #2 was trying those naked puts when I wasn't really prepared to trade them. Again, the key is to personally accept responsibility. Bad Decision #3 was to, overnight, decide on a strategy for a major part of my capital, for the rest of the year. One of the keys to long term success as a trader is to recognize and to interrupt these bad decisions leading to bad decision cycles when they occur. You can overcome one or two bad decisions individually, but if they lead to more bad decisions, that is when you are in trouble. Lesson Learned #3: The Jesuits have a spiritual rule for this: Make important decisions in a state of consolation, not desolation. Consolation is basically when you are feeling good because everything in your life is working. Sleep, diet, exercise, relationships, etc, etc. So, this leads me to the important decision which is the topic of this article--asset allocation. You should make a decision about how much capital to commit to a certain strategy in the context of whatever constitutes full support in your life. On a Sunday afternoon, in consultation with any affected parties, after a good day, etc. Not after 3 days of losing trades. Easier said than done, but important nonetheless. So, here is where I stand: 75% Long Term Options 25% Cash Could be worse, a lot worse. On the upside, the long term options are mostly concentrated in solid companies that have weathered this downturn really well. My saving grace has been to buy Long Term Options on companies that I know from a variety of contexts in Silicon Valley. Revenues are doubling year over year. Revenues are cracking a billion dollars for the first time and accelerating. Markets are huge. Lots of solid products in the pipeline. Even Barron's likes some of my LEAPs picks. Plus, with the volatilities on those positions, selling short term options has been very productive, but this is not an article about calendar spreads. The real question is where do I want to be? And how do I get there? I need to think this over--as I said, in a state of consolation, not in a state of having been whipsawed by the NASDAQ's 300 point daily swings for the last few weeks. But, as a first cut, I think I want to be at: 33% Long Term Options/Calendar Spreads (eventually, even stock from exercised LEAPs) 33% Short Term Trading Option Trading Portfolio (straight calls & puts, and spreads, on stocks, indexes, etc) 33% Cash and/or hard assets such as real estate So, how do I get there? Continue to execute the Calendar Spread trading? After all, the market may have bottomed, or close to it. I have actually executed this strategy very well, its just that my entry point at NASDAQ 4800 instead of NASDAQ 3500 ensured that the first month was a loser despite my best efforts. But I have 20 months on most of my positions to continue to spin off about 11% in cash every month. But, instead of reinvesting all the cash into new LEAPs, I might just save it month after month, thus building up a cash position closer to what I want to end up with. Later this year, I will be closer to rebalanced. I can also sell some LEAP positions when the stocks ramp up near earnings. Lesson Learned #4: Chris V. hit a really important point a few weeks ago, which I am stealing: Have a trading partner. I have several in my local OIN club. But I also have a friend whom I have known for over half of my life, also an option trader. A few months ago, he was saying things like, all these B2B companies are bull because GE makes all the stuff and it is not big feat to put together a web site or a B2B auction algorithm. He was saying that this earnings season, revenues will be dissected with a fine tooth comb. He called this downturn right on the money, and stayed on the sidelines, except for his long term stock holdings. I have a lot of confidence in my ability to trade a situation if I recognize it correctly. I can nail trades day after day for 2 or 3 weeks, up markets and down markets. I traded the techs up in November and December, I traded the OEX down in July and August last year. But, if I don't correctly recognize what is happening, I can blow it, as the last month demonstrates. The key to building any team--sports, relationships, business--is complementary skills and talents. Lesson Learned #5: Have a daily & weekly plan to reduce stress. It is really simple. Swim, bike & lift weights every morning. Eat a balanced diet. Get plenty of sleep. Chill out on the weekends. Simple, but the fact is I have not been doing this, except haphazardly. Add to that school(or work) commitments. A final word about my plan. It is my plan, and it is not a complete plan. I wrote a personal trading checklist a few months ago and posted it here. Had I followed it in early March, I would be much better off, as I would have pulled off onto the sidelines. Now I am going to revise that because it was basically sound, and it was MY plan. But I am 31, a soon to be graduate of a good school, and single. That affects my outlook and risk tolerance. I envision trading up to 66% of my assets in options. I think that may last a few years until I achieve my financial goal. It is sure to be stressful. Is it worth it? Here's another lesson from that portfolio management class. Financial advisors counsel younger clients to take greater risks because they have a longer time horizon to recover their losses. That's one way to look at it. The other way to look at it is that if a young person takes bigger risks now--and wins--that fundamentally changes the person's financial outlook. Make a fair amount now, and then put it in cash, bonds, and stable stocks, and let it compound for a long time. Does this apply more broadly to people in other situations? I think so. Say you are a couple with a few kids, and you can only responsibly put 10% of your assets into an option trading account. Go for it, paper trade it first, pick the right market to start in, and treat it seriously, as a business, not as "house money," and see what you can accomplish. On a regular basis, take some of the profits and put it into stable assets like certain stocks that might offer the ability to compound year over year while protecting your principle. Eventually, that will pay for a bigger house and education for your kids. It varies case by case. One person might decide to trade options with 10 or 20% of available assets. That's probably a reasonable allocation for most. I have probably painted an overly negative picture. On the plus side, I have learned a heck of a lot about different strategies. I stuck to my plan in the downturn(hopefully it is nearly over), and lost 10% as of today, which is a lot better than many traders over the last month. Since the beginning of the year, though, my losses are larger than that. On the downside, I saw this correction coming. But, due to a series of bad decisions which violated my own trading rules, I did not play it successfully, as I had played another downturn in July/August 1999. In the serious business of building my own financial future, I am a survivor, and wiser for it. It's about time for some FAT. Contact Support ***** OEX Questions By: Austin Passamonte Well, looks like we've cracked open Pandora's box! Wendy logged online this morning to check e-mails while I hawked the Bloomberg channel for pre-market reports, praying they'd tank the market early on. What a way to begin the day limit-down futures can send index put holders to elation! As I strolled into the office several minutes later, Wendy was still poised in front of the monitor going over a large number of emails about the OEX. The question & comments inside cover everything under the sun concerning the OEX and Skybox, many of which overlap or repeat. It is flat impossible for me to address each one individually and I hope you understand, but rest assured I read them all. I can understand many people's anxiousness to learn everything tonight in one fell swoop and put it all to work in tomorrow's market. Sadly, I can't do that for you. It may take several days to discuss matters in depth so we can all begin well prepared? The sense of urgency not to miss a single opportunity is great but rest assured, the markets will continue to move when we're done! When I began trading options having traded futures contracts for several years in the past with success was a tremendous help. Believe me, in many ways I find this to be a tougher challenge. After much study I began trading options with a very small account using one or two option contracts at a time just to gain live experience. All of the paper-trading in the world will not prepare you 100% for live fire with real money that's yours. I strongly implore the many new traders who have written me to do the same! Let the first year of live trading be your college course in this game. Think about it; a surgeon will study their profession for more than a decade yet nobody volunteers to be the first patient on the table in front of them. Why then do traders expect to profit wildly from day one while lacking proper training through the natural progression of learning? One can't just toss money out and expect to rake in even more. I am not a member of Pinnacle Advisors nor am I affiliated in any way. There might be some confusion for attendees of the Denver seminar between Austin Tanner and myself. Austin Tanner is part of the Pinnacle Team. Sorry to say, I am the other guy! Please address all future requests to modify the Skybox to someone who has that ability. Keep in mind that Pinnacle is the authority on all issues concerning the Skybox...I'm merely offering my experiences and interpretations in this forum. I am a private trader and free-lance writer for O/I exclusively. Thanks for the offers to write elsewhere, but I'm exclusive here. For the people who inquired about myself managing their accounts for discretionary trading the OEX, here's a hint: even Wendy won't let me manage her money. She prefers to diversify heavily in commodities such as precious metals, rare gemstones and Italian leather durable goods. For those who did last night's homework and are prepared to dive right in tonight I apologize profusely, but it's very important we all begin at the beginning, fair enough? Please do the same exercises tonight and I promise we will apply them together next time. In a series of articles we'll completely cover features including what any brokerage needs to offer for us to be effective. We'll talk about market behavior, patterns and how to use the Skybox as a guideline tool for trading the OEX on a subjective basis. Probably the most vital topic will outline a money-management system for reducing account balance draw down while safely maximizing gains. You won't want to miss that one! Trade the right direction, Open positions: OEX calls ***** LEAPS ***** So You Bought Your First LEAP. Now What? By: Mark Phillips A whole new level of respect has been accorded to LEAPS lately as the markets gyrate wildly, giving indigestion to even the most seasoned option traders. Investors are looking for a way to leverage their accounts without suffering the anxiety of watching the time premium on those front month call options melt away. To many investors, LEAPS look like the perfect solution, so when they see that attractive entry point appear on their favorite stock, they leap (pardon the pun) into LEAPS. The satisfaction they get from the purchase of a long term option at what appears to be an attractive point soon gives way to the nagging question, "Now What?". I would like to believe that seasoned subscribers have now learned that they should never enter a position until they know how they will handle the exit. LEAPS are more forgiving of this lack of forethought, and I know that we're all human; sometimes we leap (there I go again) before we look. Now before you start thinking I am terribly insightful, remember I haven't always been an option trader. At one point I was new, made all the mistakes new option traders make and (thankfully) learned the important lessons in time to be able to keep trading. I have been considering an article on how to manage existing LEAPS positions, and the influx of reader email in the past week has convinced me that the time for such an article is now. Just as with short-term options, there are no hard and fast rules for when to apply what strategy. My intent is to present some basic rules that will allow you to effectively manage your open LEAPS positions, and hopefully get you to think about the best way to play a new LEAP position before initiating it. As with any option (or stock) position, the two primary issues are: 1) When to take your profits 2) When to cut your losses With LEAPS, the long time horizon provides more flexibility, but this benefit can create greater confusion for the unprepared trader. Some of the more common questions that come up are: is there an appropriate profit target, are covered calls a good strategy, how to recover when a position goes bad, where to place stop losses, and the list goes on. Starting with the easy one first, let me say that setting a profit target is a great start. I would qualify it though, to be a profit target within a specific period of time. For instance, I may expect a 20 month LEAP on EMC to increase in value by 20% per month on average. If it increases by 100% in the first 2 months, that means the rate of increase has exceeded by expectations by 250%. At this point I would be happy (and smart) to take the profit, wait for the inevitable pullback and re-enter the position at a higher strike. The other extreme would be if the EMC LEAP moved exactly at my expectations, 20% per month. I would not necessarily take profits at the end of 5 months, just because the return on my investment reached 100%. The rate of increase is right at what I expect and looks entirely sustainable. I would look to hold the position as long as the growth rate remained near this average and the fundamental/technical picture for the play looked solid. An additional incentive for holding LEAP positions beyond 12 months (an eternity in the option trading world), is the fact that the gains become taxable as Long-term Capital Gains rather than Short-term Capital Gains. The result of holding the LEAP over this longer period of time is that a lower rate of return on the LEAP can actually provide a higher rate of return after allowing for taxes. So much for the upside. I know with the recent volatility in the markets, many of you are champing at the bit for me to tell you how to protect against the downside. At the risk of repeating what you have already read many times, let me say the best way to minimize your losses is to initiate the position at a good entry point. That is all well and good, but in recent weeks we have seen many stocks provide what looked like an attractive entry point, followed by a 20% decline. Unless your game plan has been mapped out in advance, it is very difficult to make a rational decision about how to protect your money while the market bleeds away the value of your position. The first and most common way to protect your LEAP position is through stop losses. As with short-term options, good money management techniques dictate that if a position loses 20-30% (I prefer 25%) of its value, exiting the position at a loss is better than watching the entire investment decay to a 50-70% loss (or more). With LEAPS, there is more flexibility than with short-term options due to the slow time decay, meaning that a losing position will have time to bounce back. Even with this advantage, it is more prudent to exit the position at a small loss, wait for a bottom to form and re-enter if the play still looks like a good investment. There is one large wrinkle to LEAPS investing that makes the money management issue more confusing. LEAPS can act as a proxy for the underlying stock due to the long time horizon, allowing us to write Covered Calls against the LEAP. If done properly, writing Covered Calls against an 18 month LEAP can be done in such a way that the cost basis of the LEAP is negative, creating a net credit in your account and making the profit from the LEAP the next best thing to free money out of thin air. Next week, we'll talk about using Covered Calls against LEAPS to repair a losing position. As an added bonus we will also cover how to get paid to buy a LEAP. Stay tuned and keep your powder dry. Contact Support *********** OPTIONS 101 *********** The Big Picture By: David Popper Over the years, I have been a subscriber to many newsletters. Often, you will read that people consistently earn 25% monthly or perhaps even more. While, I have no doubt that many of these claims are absolutely true, I began to believe that I was trading poorly because I only averaged 8% to 10% per month. My competitive spirit prompted me to strive to achieve the "average" 25% that others were earning. Sometimes I did achieve the 25%, often, I did not. After years of striving to "win", I concluded that the 25% people were full-time traders who had the ability to monitor the screen all day. I also concluded that to achieve such results, one would have to adopt risky positions that had to be monitored in order to be successful. Most importantly, I realized that investing is not a race against others. Instead, it is a marathon towards financial security. This security does not have to be achieved in one month. We need to concentrate on the big picture. For me, the big picture is different for each account. I have a cash account, an IRA account, and a college account. Each account has different goals and different time parameters attached to it. In the case of the cash account, my goal is to supplement my income by $8,000 to $10,000 per month. I personally try to achieve this goal by writing OTM calls above resistance and OTM puts below support. Because I have a goal, I do not put any more capital at risk than I need to in order to achieve that goal. I save the remaining capital for occasional buying opportunities on severe dips. I only change my philosophy in this account during those times of steady uptrends such as we saw last February and March. During these times, my philosophy changes from one of cash flow to one of capital accumulation. During these times, I am purchasing stocks and buying calls. This is only a seasonal aberration from my cash flow philosophy, however. In the IRA account, my goal is retirement. Retirement is twenty years away. In this account, I cannot sell naked positions. Therefore, last year when I traded this account continually each month, I found that I made a significant amount of money during uptrends and would have much of it nibbled away during sideways markets. I realized that if I only traded this account during strong uptrends, I could achieve yearly returns of 75% to 100%. Twenty years of such returns would put even a small portfolio into seven figures. Not too bad. In the college account, I have five years to achieve my goal. Since again, I cannot take naked positions, I only trade in significant uptrends. One aberration to this philosophy is that occasionally I will purchase stocks on severe dips only to sell them quickly on the inevitable technical bounce. Again, a 75% to 100% annual return will turn a $10,000 nest egg into enough money for any college and post-graduate school. In short, it is important to establish the purpose for the trading account. It is important not to risk any more capital than is necessary to achieve your purposes. By maintaining this philosophy, you will have cash available to take advantage of severe dips and other great buying opportunities that perhaps you did not have the ability to take advantage of before. Keeping the big picture in mind makes you realize that you are not competing against anybody and it eliminates a great deal of the gambler mentality that can be devastating to an account. Contact Support ************** BROKERS CORNER ************** Look At What The Market Is Doing Not what you want it to be doing! The Nasdaq is in a bear market. The index is 21% below its March 10th high. So what! Don't worry about it, as a trader you must be a realist. Keep focused on the stocks that will make you money on. Keep a close eye on the new highs list. Stocks like Citigroup (C), Disney (DIS), Home Depot (HD), General Motors (GM), Harley Davidson (HDI), Lowe Stores (LOW), are setting new highs. Do you own calls on these? If the answer is no, you should do a self-analysis and ask yourself why didn't I re-allocate into companies like these? The clues have been there, why didn't I acknowledge these clues. The Nasdaq had already declined seven times in heavier volume since early March. Such action is the unmistakable mark of institutional selling, or distribution. When mutual funds unload stock, you don't want to get in the way. Monday's light activity turned out to be a starting point for further weakness, rather than a continuation of last weeks rally. Indeed, Tuesday's volume picked up 16% to 1.68 billion adding another day of distribution to the Nasdaq. The most important thing to watch as a trader are the markets daily price and volume action. When you see the distribution days adding up, look at where the money is going via the "New Highs" list. Start to trade those. So many people get stuck on a sector because they do well a couple of months and marry the sector. Don't do it. Plan what's hot, stay with momentum, make the institutions help you, not hurt you. Robert L. Norman J. Michael-Patrick,LLC 314-725-7275 ************************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 Thursday 4-27-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. ************* DAILY RESULTS ************* Index Last Mon Tue Wed Thu Week Dow 10888.10 62.05 218.72 -179.32 -57.40 44.05 Nasdaq 3774.05 -161.40 228.75 -81.14 143.96 130.17 $OEX 790.70 5.50 -4.57 -2.24 1.63 0.32 $SPX 1464.92 7.07 27.81 -0.08 3.93 38.73 $RUT 494.58 -13.30 20.49 -4.79 10.34 12.74 $TRAN 2836.84 -28.12 108.90 -30.51 -46.68 3.59 $VIX 28.18 1.87 -3.12 2.40 -1.28 -0.13 Calls Mon Tue Wed Thu Week RMBS 211.75 -5.63 24.34 4.84 20.69 44.25 Breakout JNPR 208.94 -11.57 17.94 3.13 13.31 22.81 New BRCM 170.75 -10.63 19.00 -0.31 10.19 18.25 Hot sector MERQ 84.75 -6.63 9.69 4.81 4.50 12.38 Nice move TIBX 79.94 -2.88 14.38 -1.31 1.88 12.06 Basing ADBE 123.44 -7.88 15.25 -5.13 8.56 10.81 Trending ADCT 62.69 -2.63 6.50 -3.37 8.31 8.81 New CMGI 66.19 -5.19 9.44 -3.94 8.19 8.50 New CMVT 88.13 -4.81 4.44 1.19 7.25 8.06 Momentum AMD 85.50 1.88 7.00 -4.63 3.25 7.50 Semi play NOC 73.06 3.44 2.13 -2.75 3.25 7.19 Steady TER 107.94 -3.81 10.88 -1.19 5.75 6.50 New high! DHR 57.00 0.50 1.50 1.00 1.06 4.06 Rock solid ARBA 70.13 -7.00 4.94 1.63 1.56 1.13 Creeping SCMR 65.06 -1.75 6.69 -8.63 4.19 0.50 Entry GE 161.50 3.81 3.94 -2.75 -1.75 -2.44 Splitting CVS 44.25 0.19 2.75 -1.88 -0.63 -2.94 Earnings VSTR 87.56 -14.06 6.13 -10.00 4.56 -13.38 Dropped Puts DIGX 57.00 -24.06 1.06 3.44 1.13 -18.44 Dropped PG 60.88 1.56 -6.25 -3.50 0.13 -8.06 Waffling ADRX 49.00 1.19 -0.13 -3.94 -3.06 -5.94 New AKAM 83.13 -11.06 -2.81 0.44 9.63 -3.81 Dropped MCOM 27.56 -2.25 5.00 -2.75 -0.06 -0.06 Dropped NTPA 37.88 -0.50 3.38 2.94 0.56 6.38 Dropped PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** VSTR $87.56 +4.56 (-13.38) When the momentum is gone, it's time to move on. That is what we are doing with VSTR. It had a nice rally up to $100 for us last week, but gave it all back and then some this week. The real kicker is the poor relative performance it has shown lately. Despite today's late rally with the market, we are leaving this play for better stocks. Everything on the Nasdaq looks in breakout mode and we will turn our attention to the most healthy looking plays. No recent news, just more sellers than buyers. PUTS: ***** AKAM $83.13 +9.63 (-3.81) Fortunately AKAM didn't offer stupendous entry opportunities yesterday. The sharp upward reversal this Internet experienced today killed the play's technical prospective. AKAM crawled back to a comfortable support level in the vicinity of $80 despite promising slides to $67 and $68 at the opening bells, respectively. Volume is typically under one mln shares on an average day, but in the past two sessions we've seen almost double that figure indicating buyers are nibbling. Recall AKAM is well below its 1999 IPO prices and therefore, a prime buying target. There was some news surrounding Akamai. The company announced it entered into an alliance with eBusiness Technologies (INSO), a provider of e-business applications, to jointly promote their respective solutions. Another tidbit hitting the press was Digix (DIGX)'s announcement that it's the first hosting provider to offer Akamai's FreeFlow Streaming service, which expands the companies strategic relationship first established in November of 1999. While these news releases are important to investors it's unlikely they created the upsurge in AKAM's share price today. Instead the Nasdaq's positive sentiment and bargain hunters are the more probable culprits. Needless to say, we're turning away from AKAM tonight in search of more advantageous put plays. DIGX $57.00 +1.13 (-18.44) Akamai Technologies (AKAM) and DIGX announced a strategic partnership Wednesday. The two companies will combine forces to deliver high speed, high reliability, and high quality Web content for their customers. DIGX also announced Wednesday that the company has expanded its relationship with Computer Associates (CA). The new agreement will allow DIGX to expand its increasingly complex server and networking services. The deal stems from the increased demand for DIGX's managed hosting services. While the announcements didn't have a profound effect on the stock price, the deals show that DIGX is continuing to expand its revenue base. With the broad rally in the tech sector Thursday, DIGX managed to edge higher. We feel it would be a good time to step away in case a rising tide lifts this sinking ship. NTPA $37.88 +0.56 (+6.38) Trading in a very narrow range the past 2 days was almost enough to lull us to sleep, but we finally got a wake-up call in the last 30 minutes of trading today. Unfortunately it is in the wrong direction. Resistance had been forming near $37.50 and today's close above that level, combined with the strong volume approaching the close has the appearance of a stock getting ready to break higher. NTPA may not run much higher, but right now the downside looks limited. In light of the wealth of exciting plays out there we'll let NTPA go and move on to greener pastures. MCOM $27.56 -0.06 (+0.06) It wasn't until the last 30 minutes of trade that we decided to drop MCOM. Can you guess why? While seemingly unable to keep up with the rest of the NASDAQ today, MCOM made a 180-degree turn near the close and spiked up $2 on a heavy flood of volume. Though it retraced slightly into the close, it's clear that there are bargain hunters out there ready to snatch up this issue at around $24 support. If you are still in the play, MCOM is still in a descending channel and well below any of its moving averages. By definition, it remains technically ugly. While we're not suggesting you close the play at any cost, we think closing on an intraday dip may be a smart move since today's closing volume may be indicative of institutional investors taking a nibble. The fact is it's shown not great propensity to drop at a faster rate than the market since we picked it and it's probably close to a bottom and time to move on, given the opportunity. ******************** PLAY UPDATES - CALLS ******************** RMBS $211.00 +19.94 (+44.25) Oh the bitter taste of regret! Might not have been the way you would have thought this write-up to start, but we are referring to the fact that this was our Play-of-the-Day runner-up yesterday. Obviously, we can't complain about our actual Play-of-the-Day MERQ since the stock jumped 5%, but we would prefer the 10.5% turned in today by RMBS. So from where did RMBS find its strength? First, the SOX.X continued its momentum from earlier this week as it posted a 7% move today. Second, a technical breakout over $200 on strong volume brought the buyers back. This second factor is a biggie too since RMBS doesn't show much resistance until it hits the 50-dma at $266. Volume will continue to be the key, but we would expect buyers to really start coming back to the Nasdaq if it breaks above 3800. That could be as soon as tomorrow. In all cases, watch this one like a hawk as it is known for big moves in both directions. MERQ $84.75 +4.50 (+12.38) MERQ was our victorious Play-of-the- Day for Thursday adding $4.50 and brining the weekly stock gain to 17%. Hopefully, we are just at the beginning too with MERQ breaking out over resistance at $80 today. Looks like just a hop, skip and a jump to $90 from here. Ultimately, it depend on market sentiment, but we see lots of positive signs for this short-term move to continue for another day or two. There wasn't any fresh news on MERQ today so we have to rely on the technical picture for guidance. A pullback to $80 would be a tempting entry, but may not be likely. If it does, make sure you get the bounce first. Maybe the new rating from Lehman Brothers at a Buy announced on Tuesday is finally taking hold. Watch for news to propel the play, but use the technicals to guide your entry and exit points. AMD $84.25 +2.00 (+5.88) The technology stocks lost their momentum in late trading Wednesday and even the strong Semiconductors weren't immune. There wasn't any shocking news event that rocked the markets. Investors were just plain skittish ahead of the economic data due out this morning. AMD lost $5.50, or 6.25% by the close yesterday, which offered quite nice entry points on the descent. As it turned out the data wasn't the best, but wasn't bad enough either to buckle the Nasdaq. So today AMD took flight once again. It repeatedly bounced off the $84 and $85 marks, which appears to be evolving as a higher near-term support level. In NYC this morning AMD's shareholders' meeting was beginning. Besides the impending vote to increase the number of authorized shares to 7.25 mln, executives will discuss the Thunderbird, Spitfire, Corvette and other Athlon processors coming later this year. Across town rival, Intel, was having its semi-annual analysts' meeting. With AMD currently experiencing financial success and shining brightly in the limelight of analysts and money managers, Intel was presumably on the defensive. So far at press time, we've heard no word of a split announcement from AMD's Board of Directors. We've got our fingers crossed! Apart from that hopeful, look for this sexy semiconductor to nevertheless continue making new highs with Nasdaq advances. CVS $44.25 -0.63 (+0.44) It's nice when a plan starts to come together. CVS was added in Tuesday evening's newsletter as a momentum play with the added gratuity of an earnings' run prospect. We suggested however waiting for possible consolidation to occur before jumping into new positions. Sure enough CVS returned to near-term support at $43 and $44 by today. This level at the 10-dma ($43.88) and 5-dma ($43.88) technicals held up well and further demonstrated this may be the launching point. The volume was moderate to low indicating sellers weren't anxious to get rid of shares. This is another good sign. Therefore look for a solid bounce on the upside along with increased trading levels for confirmation. CVS is only reporting in a couple of weeks so we've got plenty of time to pick entries. The company is releasing their numbers before the bell on May 9th. NOC $73.06 +3.25 (+6.13) NOC announced late Tuesday night that the company was holding discussions with DaimlerChrysler Aerospace on forming an alliance to develop advanced radar and electronic surveillance systems. The agreement marks NOC's second agreement with a European defense firm. The company is also working with Airbus, the European aircraft manufacturer. Consolidation in the defense industry continues to reign supreme. BAE Systems, a British defense firm, said Wednesday that it was interested in buying aerostructures division of Lockheed Martin. What's more, a few weeks ago NOC said it is exploring alternatives for their aerostructures business. The announcement of an alliance with DaimlerChrysler didn't help Wednesday as NOC slid lower throughout the day along with the broader market. After establishing strong support at $69, NOC rebounded sharply and closed back above its 5-dma. The stock has light resistance at $74, watch for a bounce off the 5-day, and look for an entry if NOC breaks through resistance. TER $107.94 +5.75 (+11.63) Semis are hot again! Semiconductor stocks surged Thursday, led by the equipment makers such as TER and AMAT. The Philadelphia Semiconductor Index ($SOX) gained almost 7%. Excitement was provided by Intel and AMD as the two chip makers offered Wall Street analysts insight into future product launches. Intel held an analyst meeting Thursday and AMD announced the name of its new processor family for use in business and home. What's good for the chipmakers is good for the chip equipment manufacturers. Executives of the semi equipment companies told analysts Thursday that orders are booming and the future looks bright for the industry. All of the good news pushed TER to an all-time high of $110.63 on Thursday. The stock continues to roll higher using its 10-dma en route to reaching new highs. From here, we can continue to look for bounces off the 10-day for possible entry points. TER ran into minor resistance Thursday at the $110 level after traders took profits. Watch for the strength to continue in the broader semiconductor group, a move above minor resistance at $110 may provide a good entry point for a new position. ADBE $123.44 +8.56 (+10.81) ADBE held its Annual Shareholders meeting Wednesday. Shareholders approved the proposal to increase authorized shares from 200 mln to 500 mln. However, the company did not announce a stock split. Executives said they may consider a stock split when the NASDAQ stabilizes. Officials went on to say that they do not like the volatility in the stock as it does not reward stockholders and a stock split might add to the fluctuations. The lack of a split announcement combined with sector weakness caused ADBE to stumble Wednesday. But the stock regained lost ground and more on Thursday. After hitting bottom at $107, ADBE reversed and rose steadily Thursday to close the day near its highs. The stock is just below its all-time high of $125. That level is the only resistance preventing ADBE from moving higher. Volume has been impressive as ADBE climbs higher. Watch for a move above $125 on heavy volume as a possible entry point. CMVT $88.13 +7.25 (+8.06) CMVT continues to show impressive relative strength. The stock actually edged higher Wednesday while the broader market languished. The strength Wednesday can be attributed to the strong numbers reported by Nortel. NT crushed estimates, beating analysts' views by about 25%. The company also enjoyed a host of upgrades and increased price targets. The good news from NT spilled over to the rest of the telecom equipment makers and carried CMVT higher. CMVT also benefited from positive remarks from an esteemed money manager. Charles Ghering said, "We expect earnings to grow at 30% over the next three to five years. [CMVT's] revenues have really come on strongly and we expect them to accelerate in the near future." The positive comments and stellar earnings from NT sent CMVT screaming higher Thursday on heavy volume. We've seen heavy buying interest on the up days for CMVT while volume has been lukewarm on down days. This indicates "smart money" has been accumulating CMVT, possibly for an earnings run. If the stock is going to move higher it needs to clear resistance at $95. Watch for the stock to roll higher using its 10-dma as support or wait for CMVT to clear its next level of resistance. Either way, confirm any move higher with strong volume before entering the play. ARBA $70.13 +1.56 (+1.13) Hopefully ARBA is wearing a hardhat. It keeps bumping its head on the $70-71 resistance level and even the strong gain on the NASDAQ was only sufficient to push it up to close at this resistance level today. This morning's opening dip to $62.50 provided a nice entry, confirming support at that level, but the longer ARBA spends wrestling with the $70 level, the harder it will be to break. On the positive side, ARBA is gradually moving higher and today managed another close over the 200-dma ($67.56). Receiving a Sands Brothers upgrade from Buy to Strong Buy yesterday should help motivate buyers as long as the Internet sector can continue its recovery. We are waiting for the conviction that is normally demonstrated by strong volume as ARBA has been trading slightly below the ADV of 5.2 million shares. Support appears to be building between $68-69, with stronger support at $65. Consider entering new positions on a bounce from support, but the more cautious approach will be to wait for a strong move through $71 on increasing volume. DHR $54.94 +1.06 (+4.06) After a slight hiccup yesterday afternoon, DHR was back to its now-familiar pattern today. Continuing to march higher, even in the face of weakness in "old economy" stocks, DHR is looking good. Closing very near the high of the day today, the only point of concern is the fact that volume remains light, posting only two-thirds of the ADV today. Even the weakness seen in the DJIA today had no effect on DHR, as investors continued to bid the share price higher. The light volume is likely due to the lack of trading volume in the market as a whole, rather than any stock-specific factor. Posting gains for each of the past 6 days, DHR may be due for a break, so keep your stops set. Support looks good near $55, so this would be a good level to target shoot new entries in the event of any profit-taking. We have to go back to early September of last year to find historical resistance levels, but look for possible opposition at $59 through $61. SCMR $65.06 +4.19 (-0.50) We debated dropping SCMR this evening since it hadn't shown any signs of life...that is until later in the trading day when it moved off $59 support in a $6 recovery. OK, so we'll keep it one more day to see if it has any legs left given today's 144-point NASDAQ gain. After all, it is still technically oversold and beginning to form a neutral wedge pattern. Of course wedges can break out in either direction, but given the quality of the company and the positive outlook for the optical networking business, our expectation is "up". The point of convergence is roughly $61, so set your Q-chart "alert" there to see which direction it moves. A bounce up over $70 from there backed by volume would be a big confirmation for the more conservative trader to take a new position. A move over $73 with volume would create new support at $70 and hopefully begin the next leg up. A drop under $55 would mean to walk away in favor of another play. No news here, but volume has been ascending to levels well over the ADV of 2.5 mln for the last four days, indicating a renewed interest by investors. This probably represents a bottom if the overall market remains cooperative. Earnings are May 18th - a bit too early for an earnings run yet. TIBX $79.94 +1.88 (+12.06) Yesterday, TIBX was stuck in a narrow trading range reminiscent of an evening star pattern (but not quite) on the candlestick chart, indicating it may be due to roll over. The low decreasing volume had us concerned yesterday and it still has us concerned today - just 58% of the ADV today. No matter, we'll take a gain any way we can get it, especially when it represents a substantial comeback above the opening price of $69.50 and the 5-dma of $71.58. The only problem we still have with TIBX is that it's nearing resistance at $82, and with low volume may be in danger of rolling over. It will be particularly vulnerable if the rest of the market rolls over too. We still like this company and its outlook remains good. However by tomorrow if it hasn't shown a volume increase, it may have outlived its usefulness as a call play. We are inclined to wait for a pullback to support of $70, or $73 (pick your favorite level of comfort), then wait for the bounce (did we mention backed by volume?) before taking a position. Otherwise we think conservative traders will be better served by waiting for a breakout over $83. No news and the next earnings are not until mid-June. BRCM $170.75 +10.19 (+18.25) Wow - is this ever working out well! BRCM is the focus of institutional buying as evidenced by the strong volume - still 60% over the ADV of 3.6 mln shares. As long as volume remains significant, we expect the price to continue a move north until it runs into resistance at $180. There is still room to run. BRCM had been in an ascending wedge pattern with resistance at $160. Once broken, buying the dips at $150 and $155 historical support has been very rewarding. Today's steady comeback from the opening low was particularly impressive. Target shooting at $158 and $160 support, or waiting for a break over mild resistance at $172.50 should yield the best entry. Just be aware that we need to see volume remain strong to keep the play moving. No particular news, but there is no substitute for great earnings and a B of A Securities' Strong Buy reiteration and a price target of $300 from earlier this week. Beware of profit-taking Friday and keep you stops set so profits don't vaporize. GE $161.50 -1.75 (+3.25) Down but not out, GE got whacked $10 to $158 from yesterday's high of $168 only to stage a small rally back over $160 support to $161.66 today, its 5-dma where it now precariously rests. Volume, which has descended all week from 10% over the ADV on Monday to 10% under the ADV today is giving us a sign that this play may be over before it's really had a chance to begin - though we'll forgive today's performance given that the Dow closed down too. Adding to our caution is that the stochastic indicating "overbought" is giving the rollover sign. The bright spot is that the 3:1 split date has finally been determined, and perhaps now GE will begin a split run into its May 8th execution date. The actual split happens after the close on May 5th. That could be just the ticket for a continued move up. Look for the bounce from $158 for the best entry, but GE really needs to hold $160 and break over near-term mild resistance of $162 to confirm that the recent gains are for real and not about to end. ******************* PLAY UPDATES - PUTS ******************* PG $61.06 +0.31 (-7.88) The pain that PG investors began to feel when the company issued their earnings warning in early March got cranked up again on Tuesday when the actual earnings were released. Barely matching the revised estimates didn't sit well with investors. Investors responded to the news by dumping their shares, and PG gave up over $6 on Tuesday followed by a $2.50 loss yesterday, pushing the stock down to close below the 50-dma. Finally slowing its descent, the consumer staples company managed to eke out a $0.31 gain today, but doesn't look good going forward. Buyers tried to push through resistance at $62 today, and were promptly rebuffed, giving back most of their intraday gains amid average trading volume. As an old-line manufacturing company, PG will be susceptible to any market downturn caused by increasing interest rates. With the shift in market sentiment from the NYSE back to the NASDAQ, more interest rate hikes expected, disappointing earnings, and the approach of the summer doldrums just around the corner, look for this week's decline in PG to continue. Use any rallies up to resistance as an opportunity to enter new positions as the stock rolls over. One final item that will likely push PG down further is yesterday's AG Edwards downgrade from Accumulate to Maintain. ************** NEW CALL PLAYS ************** ADCT - ADC Telecommunications $62.69 +8.31 (+8.88 this week) ADC Telecommunications makes systems that crank up the rate at which voice, data, and video signals are transmitted. Cable TV, Internet and telephone access providers use ADC's software and hardware to build high-speed multiservice networks. ADC's products are used deep within networks as well as in "the last mile," between central offices and customers. The company also provides design and installation services. Customers include the regional Bell operating companies. We've got another earnings run on our hands. ADCT is scheduled to report earnings after market close on May 18th. Historically, the stock usually begins running about two weeks before reporting results. Noting the strong reports recently from fellow telecom competitors QCOM and NOK, ADCT is expected to have another estimate beating quarter. Along with the excitement of upcoming earnings, ADCT announced several partnerships Thursday. ADCT said it has partnered with Symmetry Communications to deliver solutions for wireless and wireline networks. ADCT also signed a key agreement with Mpathix for its wireless messaging solutions. The two announcements today show ADCT's continued push into the wireless and Mobile-commerce arenas. Traders applauded the announcements as ADCT broke out of a month long trading range Thursday to close at an all-time high. The stock had been consolidating since late March and has since formed a picture perfect breakout pattern. ADCT has used its 10-dma as support as it has climbed higher in the past week. Volume has been increasingly strong as the stock confirmed the breakout on nearly double its ADV. Watch for a bounce of the 10-day and confirm with heavy volume before entering the play. Any weakness in the market might send ADCT to support at $59, its previous high. A bounce from that level might provide an entry point as well. In analyst actions recently, Wachovia Securities raised ADCT to a Strong Buy rating and maintained its target price at $75 per share. Spencer Clarke reiterated the stock at a Strong Buy with a 12-month price target of $79 per share. BUY CALL MAY-55 TLQ-EK OI=1835 at $9.88 SL=6.75 BUY CALL MAY-60*TLQ-EL OI=2031 at $6.25 SL=4.25 BUY CALL MAY-65 TLQ-EM OI= 0 at $3.38 SL=1.75 Wait for OI! BUY CALL MAY-70 TLQ-EN OI= 0 at $2.00 SL=1.00 Wait for OI! Picked on Apr 27th at $62.69 P/E = 111 Change since picked +0.00 52-week high=$63.00 Analysts Ratings 10-11-1-0-0 52-week low =$17.19 Last earnings 01/00 est=0.33 actual=0.36 Next earnings 05-18 est=0.24 versus=0.16 Average Daily Volume = 3.42 mln /charts/charts.asp?symbol=ADCT CMGI - CMGI Inc. $66.19 +8.19 (+8.50 this week) The original Internet incubator firm, CMGI is one of the chief architects of the Internet. The firm nurtures companies in-house and invests in others through its capital venture arm, @Ventures. CMGI has stuffed its portfolio with stakes in more than 60 Internet companies concentrated in marketing, advertising, content, e-commerce, and technology. Among the more prominent companies in its nest are Lycos, AltaVista and Raging Bull. Fully 80% of the firm's revenue comes from fulfillment and mailing list services. Proof that you can't keep a good stock down, CMGI confirmed on Monday that it had no intention of trading below $50. With volume sitting very near the daily average, investors started coming back earlier this week, helping CMGI to regain its feet and start marching higher. After a nearly continuous, 8-week slide, it is good to see this old favorite start moving in the right direction again. Aided by (or perhaps contributing to) the NASDAQ rally today, CMGI managed to tack on over $8 and looks like it may be ready to run even higher. With the Internet sector appearing to regain its health, CMGI makes a great poster-child for the return of positive sentiment. After posting strong gains on Tuesday and then again today, CMGI is running into resistance at $68 - above that we have resistance at $70 and $75. Particularly encouraging today was way volume ramped up in the afternoon, providing good confirmation of the increase in share price. Support looks good at $60 and even stronger at $55. Any market-induced pullback to these levels is buyable as soon as it is clear that the stock has bounced. Continuing to expand and grow, the latest news on CMGI is that its Alta Vista access server had registered 2.5 million unique users. The seven-month old Alta Vista service is signing up some 10,000 users per day while the access service operates some 4000 dial-up connections. CMGI holds 83% of the Alta Vista service. BUY CALL MAY-65*GCB-EM OI=1109 at $6.63 SL=4.50 BUY CALL MAY-70 GCB-EN OI=1543 at $4.50 SL=2.75 BUY CALL MAY-75 GCB-EO OI=1000 at $3.00 SL=1.50 BUY CALL JUN-70 GCB-FN OI=1133 at $8.50 SL=6.00 BUY CALL JUN-75 GCB-FO OI= 643 at $6.88 SL=4.75 SELL PUT MAY-60 GCB-QL OI=1760 at $2.63 SL=4.00 (See risks of selling puts in play legend) Picked on Apr 27th at $68.38 P/E = 114 Change since picked +0.00 52-week high=$163.50 Analysts Ratings 4-7-0-0-0 52-week low =$ 33.13 Last earnings 03/00 est=-1.28 actual=-0.74 Next earnings 06-08 est=-1.60 versus=-0.14 Average Daily Volume = 7.23 mln /charts/charts.asp?symbol=CMGI JNPR - Juniper Networks Inc $208.94 +13.31 (+22.81 this week) Juniper Networks develops and provides next-generation Internet infrastructure systems that are designed to meet the scalability, performance, density, and compatibility requirements of IP networking systems. The company's M40 and M20 Internet backbone router use JUNOS network traffic management software, ASICs. Its clients include some of the world's leading service providers such as Ericsson and MCIWorldcom. JNPR snapped back with style and determination this week. Rising from the depths of Internet devastation of not long ago, JNPR left recent support at $150 and hoisted itself above stubborn resistance of the 10-dma ($184.43). The last time JNPR saw the upside of this technical indicator was on April 7th, but unfortunately couldn't hold the gains then. The outlook is much better this time around. Other technical achievements today included a definitive move through the $200 mark and a strong close just a fraction from the intraday high of $209. Plus there was significant volume to back the advance. Generally speaking too, analysts and other professionals are positive on the company's future outlook. Juniper Networks posted exceptional 4Q results on April 13th blowing away the estimates by double the consensus. Of the 14 analysts currently tracking JNPR all have Strong Buy or Buy recommendations in place. Many have raised earnings' estimates and JNPR has a price target as high as $330 attached to it. Our play on JNPR is simple. Take a ride on its recovering momentum with the optimistic view that the company's upcoming 2:1 stock split will sustain the climb. You said split? Yes, along with the first class earnings' numbers the BoD announced another stock dividend for this millennium (JNPR split 3:1 in January). Assuming all goes according to plan and the shareholders agree to increase the number of authorized shares from 200 mln to 1 bln at the meeting on May 4th, JNPR will split 2:1 on June 15th. We know this stock is a strong performer in rebounding markets and we're expecting JNPR to power higher in the short-term, but let's also keep an eye out for bumps in the road. Technically old resistance at $200 should now serve as intraday support, but pullbacks to the 10-dma near $180 aren't out of the question either. So while it's understood that it's difficult to use stops with volatile movers such as JNPR, perhaps it'd be a wise choice to at least consider setting a mental one. Be aware of market conditions and investor sentiment while you're playing this high-flying Internet. With earnings' season coming to a close, the focus may once again shift to interest rate worries. In recent news Active Software, a leading provider of eBusiness infrastructure software products announced Juniper Networks has implemented its ActiveWorks Integration System as the platform for its comprehensive e-business processes. BUY CALL MAY-200*JUY-ET OI= 854 at $25.63 SL=20.00 BUY CALL MAY-210 JUY-EB OI= 321 at $21.13 SL=16.50 BUY CALL MAY-220 JUY-ED OI= 366 at $16.88 SL=13.25 BUY CALL MAY-230 JUY-EF OI=1081 at $13.00 SL=10.50 BUY CALL JUN-210 JUY-FB OI= 20 at $25.38 SL=19.75 BUY CALL JUN-220 JUY-FD OI= 20 at $22.38 SL=17.50 BUY CALL JUN-230 JUY-FF OI= 19 at $19.25 SL=15.00 Picked on April 27th at $208.94 P/E = N/A Change since picked +0.00 52-week high=$312.94 Analysts Ratings 10-4-0-0-0 52-week low =$ 30.04 Last earnings 12/99 est= 0.03 actual= 0.06 Next earnings 07-13 est= 0.06 versus=-0.03 Average Daily Volume = 3.23 mln /charts/charts.asp?symbol=JNPR ************* NEW PUT PLAYS ************* ADRX - Andrx Corp $49.00 -3.06 (-5.94 this week) Andrx develops and commercializes time-released pharmaceuticals. It formulates generic versions of such high volume brand-name drugs as Cardizem and Dilacore. Currently they have 17 bioequivalent versions of drug products in the pipeline. While waiting for FDA approval Andrx primarily derives revenues from Anda, its generic drug distributor, and sales from third party manufacturers. Sometimes it just doesn't make sense why a stock moves one way or the other, but our objective is make profits off the current trend no matter what the direction. You've probably heard us preach over and over that we don't recommend holding over a split date or earnings' announcement. The theory is quite rudimentary especially in these crazy markets - you just don't know what a stock is going to do! Although typically, the odds are stacked it'll go down in a post-event depression in the near-term. This is the case with ADRX. After a quick rise to stardom following its 2:1 split on April 4th, the stock skated to bottom support at $50. Take a look at a one month chart and it's déjà vu this week. In anticipation of earnings Tuesday morning, ADRX banged on the door of resistance at $60 but ultimately wasn't allowed in. The stock was quickly kicked back to the curb despite beating estimates by a whopping $0.10 and showing an increase in net income of 136%! Then today we saw the blinking neon sign. ADRX committed a technical snafu and slid under previous support of $50 on strong volume. Thus we have a potential case for further demise. Conservatively, it'd be best to see ADRX move deeper towards the next level of support at $45. However if you're interested in playing the current range, then look for downward bounces off the 10-dma ($54.19). BUY PUT MAY-55 QAX-QK OI=105 at $9.38 SL=7.00 BUY PUT MAY-50*QAX-QJ OI=290 at $6.25 SL=4.50 BUY PUT MAY-45 QAX-QI OI= 21 at $2.44 SL=1.25 Average Daily Volume = 571 K /charts/charts.asp?symbol=ADRX ********************** PLAY OF THE DAY - CALL ********************** ADBE - Adobe Inc. $123.44 +8.56 (+10.81 this week) Adobe Systems is a leader in desktop publishing software, the company's Acrobat Reader is popping up all over the Internet as users clamor to display portable document format (PDF) documents on the Web. Three of Adobe's products, Photoshop, Illustrator, and Page Maker generate about 60% of its sales. The company also markets print technology to OEMs and has stakes in a string of technology firms whose products complement its own offerings. Adobe is hoping a restructuring effort and the introduction of its InDesign publishing package will spur sales and accelerate its product growth track record. Most Recent Write-Up ADBE held its Annual Shareholders meeting Wednesday. Shareholders approved the proposal to increase authorized shares from 200 mln to 500 mln. However, the company did not announce a stock split. Executives said they may consider a stock split when the NASDAQ stabilizes. Officials went on to say that they do not like the volatility in the stock as it does not reward stockholders and a stock split might add to the fluctuations. The lack of a split announcement combined with sector weakness caused ADBE to stumble Wednesday. But the stock regained lost ground and more on Thursday. After hitting bottom at $107, ADBE reversed and rose steadily Thursday to close the day near its highs. The stock is just below its all-time high of $125. That level is the only resistance preventing ADBE from moving higher. Volume has been impressive as ADBE climbs higher. Watch for a move above $125 on heavy volume as a possible entry point. Comments With the Nasdaq finally showing signs of breaking out of this month long funk, the leaders are stepping back to the center stage. ADBE is challenging resistance at the old high of $125 and a move above that level would bullish. Volume was strong end of day on Thursday and, should it continue to pick up, a breakout is likely. Watch the Nasdaq volume as well to make sure the buyers have returned in full force. BUY CALL MAY-115*AXX-EC OI=2066 at $15.63 SL=10.75 BUY CALL MAY-120 AXX-ED OI= 535 at $12.75 SL= 8.75 BUY CALL MAY-125 AXX-EE OI= 282 at $10.25 SL= 7.25 BUY CALL JUN-130 AXX-FF OI= 13 at $14.13 SL=10.00 low OI SELL PUT MAY-115 AEQ-QC OI= 52 at $ 6.38 SL= 9.00 (See risks of selling puts in play legend) Picked on Apr 11th at $119.50 P/E = 60 Change since picked +3.94 52-week high=$125.00 Analysts Ratings 4-7-3-0-0 52-week low =$ 27.50 Last earnings 02/00 est=0.43 actual=0.47 Next earnings 06-15 est=0.47 versus=0.35 Average Daily Volume = 2.41 mln /charts/charts.asp?symbol=ADBE ************************ COMBOS/SPREADS/STRADDLES ************************ Title: Technology Stocks Recover! Wednesday, April 26 Equity markets ended lower Wednesday as concerns over inflation ended the recent rally. The Dow closed down 179 points at 10,945 and the Nasdaq Composite finished 81 points lower at 3630. The S&P 500 Index slid 16 points to 1460 and small cap issues also languished with the Russell 2000 Index down almost 1% to 484. The volume on the Nasdaq hit 1.58 billion shares with declines beating advances 2,325 to 1,815. The broad market activity was moderate with 985.5 million shares traded on the New York Stock Exchange. The 30-year Treasury fell 6/32, bid at 104 3/32, where it yielded 5.94%. Tuesday's new plays (positions/opening prices/strategy): Arrow Electronics ARW MAY30P/MAY35P $0.38 credit bull-put General Electric GE MAY145P/M150P $0.68 credit bull-put Teradyne TER MAY65P/MAY75P $0.93 credit bull-put The market's bearish activity did little to help our new credit spread positions. General Electric was the only issue that moved low enough to offer the target entry price. Arrow rose $3 in early trading and never looked back, closing $1.50 higher for the session. Teradyne traded in a relatively small range and the suggested credit was unavailable on a simultaneous order basis. Portfolio plays: The market retraced Tuesday's gains as investors shifted their attention away from strong earnings to the economic outlook and future interest rates. Key economic reports, the employment cost index and gross domestic product are due Thursday and experts say the data will significantly affect the Federal Reserve's decision to raise rates at its May 16 meeting. The FOMC has increased short-term rates five times since last June in an effort to keep inflation in check. Treasury players were also nervous ahead of the data Thursday but many traders suggest the upcoming data has already been priced into the market. The consensus belief is that regardless of revenues and forecasts, continued signs of inflation in each piece of economic data will eventually start to weigh on equities. The Dow industrials succumbed to selling pressure after two days of strong gains and large-cap technology stocks, which supported the rally Tuesday, were mostly lower during the session. On the S&P 500, biotech, oil drilling and retail stocks advanced, while telecom, chip and household non-durable issues pulled back. Oil, Drug, and Financial stocks also slumped in a broad-based decline. Technology issues weakened despite a few pockets of strength in the computer-chip and Internet sectors and while some analysts suggest the Nasdaq could retest its lows, few traders believe the the index will repeat the record slide of "Black Friday." Most investors simply expect the technology index to find a bottom near the current range and resume its bullish trend in a more cautious manner. Of course the task now is to determine when the market correction becomes a consolidation, signaling a new time to buy. Earnings reports commanded attention in today's trading and many of the issues in our portfolio were affected by the news. The top performer of the technology group was Computer Associates (CA) with a $4 rally to a recent high near $55. The rally occurred in sympathy with BMC software's positive earnings report. Shares of business software maker BMC Software (BMCS) rose 11% on Wednesday, riding a wave of positive analysts' comments a day after reporting stronger-than-expected earnings. BMC announced a profit of $123.2 million, or $0.49 per share, $0.02 above consensus expectations. The performance was led by strong growth in license revenues, as well as maintenance and service revenues. After last Friday's expiration, we have only one position in Computer Associates; a MAY-$50 Covered-call at a cost-basis of $48.56. Andrew Corporation (ANDW) rallied to a mid-day high near $28 and during the afternoon session, officials at the telecom company announced they had placed the first international order for fixed broadband wireless products for the World Wide Wireless (WLGSE) contract in Buenos Aires, Argentina. The initial order is for approximately $700,000 of Hybrid head-end broadband wireless data products for the Buenos Aires site. This is the first step in an expected rollout of fixed broadband wireless installations in eight cities in Argentina. Andrew is the exclusive worldwide systems integrator for World Wide Wireless at fixed broadband wireless sites elsewhere in Latin America and in other parts of the world, including Asia. Our bullish diagonal position appears to be in good shape with a cost basis near $21.50. One company that sold-off today in anticipation of earnings is Kellogs (K) and if tomorrow's report is not outstanding, the new trend may continue. A viable exit alternative may be to sell the (long) May call option and buy another call option with a future expiration date. The new call option will cover the current short position and allow you to profit from a near-term consolidation in a time selling strategy. Of course you will need to assess the technical outlook for Kellogs and make a decision as to the nature of the new position; neutral or bullish. The primary level of technical support is near $22-$24 and that would suggest a more neutral trend for the next few weeks. Another issue that may have failed technically in the recent recovery attempt is Bank of Tokyo (MBK). With the downtrend beginning to gain momentum we decided to close the long; MAY-$12.50 Call option for the current credit of $1.38, a break-even exit. Thursday, April 27 The Nasdaq regained leadership of the equity market today, rising on bullish revenue forecasts from industry-leading corporations. The strength in telecom and technology helped the broad market recover from initial weakness in the wake of government reports on the gross domestic product and the Employment Cost Index. The Nasdaq Composite Index rose 144 points to 3,774 while the Dow Jones Industrial Average fell 57 points to close at 10,888. The 1.1 S&P 500 Index was relatively unchanged at 1,464. The Russell 2000 index of smaller companies rose to 494. Declining issues led advances 11-to-9 margin on the New York Stock Exchange, with 1,618 down, 1,317 up and 502 unchanged. NYSE volume was over 1 billion shares. The 30-year Treasury fell 18/32, bid at 103 19/32, where it yielded 5.98%. Portfolio plays: Small-cap issues continued to rally in Thursday's session and a number of positions in our portfolio benefited from the trend. Network Associates (NETA) rumbled $2.43 higher to close at $25 along with other bullish stocks in the computer software group. Andrew Corporation (ANDW) continued its recent rally, climbing $1.62 to an April high near $29 and Unocal (UCL) prospered from strength in the oil sector, moving up $1.12 to $32. Our bullish debit position achieves maximum profit above $27. A few mid-cap issues also participated in the upside activity and the leaders in that category were Halliburton (HAL), Medtronics (MDT), and Vodaphone (VOD). Halliburton, the world's biggest oilfield services company, was in the news Wednesday. HAL's board of directors has approved plans to sell Dresser Equipment (DEG), which supplies equipment to the energy and chemical industries. Halliburton also said the board has approved plans for a buy-back of up to 44 million shares, about 10% of their outstanding common stock. Obviously, if you haven't taken profits in the position; MAY-$40 Call, now may be the time as today's offered a 50% profit in less than one month in the recent calendar spread. There were also some excellent moves in the Straddles Portfolio today. MasTec (MTZ) jumped over $7 to a recent high near $84, bringing the profit for our new debit straddle to $4.50. Another winning issue, Applex (APLX) fell $0.62 to a new low near $6.31. The bearish move raised the overall credit in the JUL15C/JUL15P to $8.62, a $2.12 return on $6.50 invested. With the extremely small downside potential, it may be time to take profits in this position and move to another favorable play. Questions & comments on spreads/combos to Click here to email Ray Cummins ****************************************************************** - NEW PLAYS - ****************************************************************** TIN - Temple Inland $49.56 *** Merger Speculation! *** Temple-Inland is a holding company with interests in corrugated packaging, bleached paperboard, building products, timber and timberlands, and financial services. The Paper Group consists of the company's corrugated packaging and bleached paperboard operations. Corrugated packaging includes the manufacturing of container-board that is converted into corrugated packaging and point-of-purchase displays. Their bleached paperboard operations produce various grades and weights of coated/uncoated bleached paperboard, bleached linerboard and bleached bristols. Temple's Building Products Group manufactures building products including lumber, plywood, particleboard, gypsum wallboard and fiberboard. The company's Financial Services Group consists of savings bank activities, mortgage banking, real estate development and insurance brokerage. Stocks in the paper industry have gained new attention recently after Champion (CHA) received a $6 billion takeover offer from industry giant International Paper (IP). International Paper is offering to buy Champion for $64 a share, $43 of which would be in cash and $21 in stock. With IP's offer to buy a major company in the industry, investors are now speculating on other issues in the group. Implied volatility in Temple-Inland options has also been on the rise this week and that's unusual considering the company has already reported earnings. Based on the recent resistance at $52 and the neutral technical outlook, this play offers a unique opportunity to benefit from the current merger speculation in the Paper Industry. This position is based on recent increased activity in the stock and underlying options. The play offers favorable risk/reward potential when analyzed with regard to the trading range of the underlying issue and the recent technical history or trend. As with any potential position, it should be evaluated for portfolio suitability and reviewed in relation to your strategic approach and trading style. PLAY (speculative - bearish/credit spread): BUY CALL MAY-60 TIN-EL OI=70 A=$0.56 SELL CALL MAY-55 TIN-EK OI=1160 B=$1.12 INITIAL NET CREDIT TARGET=$0.62-$0.68 ROI(max)=15% B/E=$55.68 Chart = /charts/charts.asp?symbol=TIN ***** CY - Cypress Semiconductor $52.94 *** Break-Out Coming? *** Cypress Semiconductor designs, develops, manufactures and markets a broad line of high performance digital and mixed signal integrated circuits for a range of markets including data communications, telecommunications, computers and instrumentation systems. Cypress' memory products division offers static random access memories and multi-chip modules. The non-memory products include programmable logic products and programming software, data communication products, computer products, including clocks and Universal Serial Bus micro-controllers, and non-volatile memory products. Earlier this month, Cypress became the latest in a group of chip companies to report strong earnings for the quarter. CY topped First Call estimates by a penny with operating profits of $0.41 per share. The company reported record sales of $264 million for the first quarter, up 20% sequentially, and up 66% from the first quarter a year ago. Cypress added that it had record bookings of $322.8 million based strong demand from the communications market and the CEO suggested the company will enjoy another excellent quarter at growth rates well in excess of the industry average. Sounds like a great company to own and the chart supports the fundamental outlook. The current technical assessment is also bullish and this conservative, out-of-the-money credit spread offers a low risk method to achieve a favorable profit. PLAY (conservative - bullish/credit spread): BUY PUT MAY-40 CY-QH OI=1181 A=$0.43 SELL PUT MAY-45 CY-QI OI=461 B=$1.06 INITIAL NET CREDIT TARGET=$$0.68-$0.75 ROI(max)=17% B/E=$44.25 Chart = /charts/charts.asp?symbol=CY ***** ADBE - Adobe Systems $123.44 *** Reader's Request! *** Adobe Systems is a provider of graphic design, publishing, and imaging software for Web and print production. Adobe offers a line of application software products for creating, distributing, and managing information of all types. The company licenses its industry-standard technologies to major hardware manufacturers, software developers, and service providers, and offer integrated software solutions to businesses of all sizes. The company has made its mark in desktop publishing industry with products like Pagemaker, Photoshop and Illustrator and its Acrobat program has become the standard for publishing portable document format (PDF), files on the Internet. The software sector is on the move and Adobe's earnings puts the company in the upper echelon of the group. Adobe's quarterly profits were up 69% and sales grew 22%. Net income was $64.6 million, or $0.51 per share, compared to $0.30 per share in the same period in 1999. The earnings were well ahead of consensus forecasts and the now the company has outperformed expectations for six straight quarters. Adobe also boasts a positive balance sheet and future forecasts are favorable. With customers moving to purchase the updated versions of Adobe's products, top line growth should continue to expand. In fact, during a meeting with analysts, management suggested its estimated earnings growth rate will increase to 25%. In addition, Adobe officials promoted a number of new products scheduled to be unveiled in the coming months. With the recent coverage of Adobe in the main section of the OIN, one of our readers suggested a bullish credit spread on the issue. Here is my choice for the most favorable credit position based on the recent technical trend and historical volatility. PLAY (conservative - bullish/credit spread): BUY PUT MAY-95 AEQ-QZ OI=212 A=$1.50 SELL PUT MAY-100 AEQ-QT OI=283 B=$2.12 INITIAL NET CREDIT TARGET=$$0.68-$0.75 ROI(max)=17% B/E=$99.25 Chart = /charts/charts.asp?symbol=ADBE ************************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 ************************************************************** ************ See Disclaimer in section one ************
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