The Option Investor Newsletter Monday 5-01-2000 Copyright 2000, All rights reserved. Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com Also provided as a service to The Online Investor Advantage ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 5-01-2000 High Low Volume Advance Decline DOW 10811.80 + 77.90 10926.30 10724.20 952,514k 1,955 1,042 Nasdaq 3,958.08 + 97.42 3982.38 3899.71 1,500,166k 2,575 1,576 S&P-100 791.12 + 9.70 799.06 784.32 Totals 4,530 2,618 S&P-500 1468.25 + 15.82 1481.51 1456.30 63.4% 36.6% $RUT 518.93 + 12.68 519.63 506.25 $TRAN 2858.68 + 8.67 2868.48 2835.65 VIX 27.32 - 1.54 28.04 26.67 Put/Call Ratio .42 ****************************************************************** Markets Rally, but Resistance Holds Just last Monday, Microsoft took a beating from the Street for coming up short on revenue and forward growth prospects while not even knowing what fate it awaited last Friday at the hands of The Justice Department. One week later, investors are muttering to themselves, "gee, the worst is over - maybe a breakup isn't so bad." No matter what you think of Baron's, a positive article run over the weekend, along with many analysts coming to MSFT's defense, boosted the stock $3.69 to $73.44, back over its 52-wk. low point of $73 set a few days before earnings. It's like investors care nothing at all about what happened to MSFT last week, and today's volume of nearly 54 mln shares (21% over the ADV) proves it. The fact is that MSFT's challenge to the DOJ's breakup proposal will be tied up in an appeals process that could last years. In effect, the downside appears gone (for now), while many analyst's today defended the breakup value of the parts as between $100 and $135. In his own words Goldman Sachs' Rick Sherlund says the value will remain "stuck" or range-bound for quite some time. A boost from $70 to $135 is "stuck"? No matter, with the broad stroke of a Microsoft brush, we got a rally on the Dow and the NASDAQ today. The big question is, can it be sustained? The big answer is "no". But before you rush to unload every position you've opened this week, recognize that it's only because the threat of rate increases on May 16 at the next FOMC meeting is keeping investors from lunging back into the market with their pent up piles of cash. We simply don't know if there will be a 50 basis point increase by then or just a 25 basis point increase, the latter of which is already priced in. Based on the NASDAQ's inability to get through the 4000 mark today, and the 30-year bond rate ticking up to 5.98% resulting from some inflationary signs last week, mild fear seems to be building for the 50 BP hike - just the kind of thing to take prices back down as the May 16 date approaches. Not only that, but recall too that as the market rises, many traders who recently (accidentally) became long-term investors will be looking for a chance to bail out at even money. On the NASDAQ, that happens at about the 4000 level. For the Dow, the magic number is around 11,000. In short, that spells "range-bound" on both indices until May 16. Interestingly, both the new world and old world stocks are participating in the rally and that's good news. It tells us that traders aren't swapping one sector for the other and that the moves are broad based - a short-term positive. So how did those indices do today? Pretty well, thank you. The Dow for its part closed up nearly 78 points at 10,811 (though intraday it was much better, up almost 193 points from Friday's close) on 953 mln NYSE shares traded. Compared to recent memories of 1.3 to 1.5 bln share days, today's volume was not enough to confirm any major change of direction. Internals though were excellent with advancers beating decliners almost 2:1. Up volume was in fact more than twice the down volume, while 80 new highs had the edge over just 35 new lows. 35 new lows are downright nice to see since anything under 35 would be really bullish. But 80 new highs coupled with today's low- average volume, while acceptable, are nothing to write home about (but we'll take it!). The things to notice today are the resistance at 10,925 followed by a 115-point rollover in the afternoon and lower volume. The index isn't sick. It just lacks the enthusiasm of a true winner. The NASDAQ tracked similarly, locking up another 98 points to close near resistance (4000) at 3958, though it too could not break through resistance at 4000 and suffered from unenthusiastic volume of 1.5 mln shares. Thanks to renewed confidence in MSFT, other issues in biotech, Internet, telecom and networking rebounded too. Surprisingly, semiconductors did not participate even with positive comments from the Hardware Heaven conference sponsored by Merrill Lynch. HWP, though not a NASDAQ stock certainly showed the value of the conference, as it rebounded from $1 in the red to over $6 in the green when Carly Fiorina, HWP's CEO wrapped up her presentation. Similar to the SUNW mantra where the network is the processor, Carly pushed the notion that the printer is an interactive appliance. Anyway, advancers beat decliners by a 13 to 8 ratio, while up volume trounced down volume 3 to 1. However new lows actually beat out new highs 60 to 55. While the internals were fairly strong compared to recent weeks, the tests of resistance on merely average volume are telling us that the rally is not likely to lead us to a breakout over 4000 anytime soon. In fact, using the cyclical market theory, with three days up in a row, we would not be surprised to see the NASDAQ take a breather for a day, especially since many "accidental investors" will jump at the chance to break even. Today's move to a high of 3982, then rollover may have been NAS's best attempt and investor's nearest hope of unloading those underwater positions from the recent selloff. Let's cover some news highlights quickly too. First, Warren buffet spoke to his flock at the annual Berkshire Hathaway shareholders meeting held over the weekend. Long reputed to shun tech stocks, the Omaha sage conceded that he finally owned some - about 100 shares each of MSFT and INTC just so could read a copy of the annual report. Nonetheless, he's staying away from them, but still notes that he doesn't see many investing opportunities. Does that mean that the market is still over valued? Heaven help us on the day that Warren thinks there are many deals to be had. Second, TWX pulled the plug on Disney-owned ABC affiliates in the New York, L.A., and a few other major markets across the country. ABC is a high margin cash cow that carries Regis and Kathy Lee in the mornings and the wildly successful "Who wants to be a millionaire?" (makes you wonder why more people don't stand up and yell, "MEEEEEE!!!!" instead of just clapping). The FCC makes it illegal to remove station signals during certain measurement periods like the sweeps that begin this week. Sweeps determine audience reach, which then helps determine advertising rates. No viewers equals reduced revenue. However, the FCC also mandates there be a contractual agreement to carry the signal, and that contract has expired until a new one can be reached. Prolonging the rift hurts both TWX and DIS in the long run, but puts DIS over a barrel in the short run given the importance of ratings. Next from the "lovely parting gift" department, Jill Barad, the former CEO of Mattel who stepped down under threat of termination by the board will receive a golden parachute valued at $40+ mln. it includes some debt forgiveness, $26 mln in cash, a pension worth over $100,000 per month for 10 years, and a full vesting of stock options (two thirds are worthless at today's price of $12.13). While we're sure most of us would like to be fired that way, shareholders have filed numerous lawsuits as this comes at a cost of $0.09 per share to earnings - that's $9 to Jill for every 100 shares an investor owns. No wonder shareholders are hopping mad. Finally in some good news for tobacco companies, the Florida Legislature is contemplating a bill that would put a limit on the amount of any bonds posted under an appeal process if a tobacco company is found to be liable in any of the current Florida tobacco lawsuits. The truth is that governments don't want tobacco companies to go away. The tax revenue they generate is too huge to risk losing. They would be killing the goose laying the golden eggs despite how unappetizing the goose looks. MO closed up $1.69 at $23.44, its highest level since January on the news. OK, back to the markets. . .how do we play the next few days? On both the Dow and NASDAQ, the lack of big volume tells us that there was no conviction to move the indices (thus its components) higher. Greenspan/FOMC/inflation/interest rates loom heavy in the next two weeks and should serve to keep a limit on enthusiasm. With earnings season too coming to an end, there's not much left to move the market up. AT&T reports tomorrow morning; GBLX tomorrow after the close; and DIS reports Wednesday. Other than any surprises there, lack of volume is confirming that range-bound sentiment. Don't get us wrong, we are optimists by nature. However, given the current technical climate where we meet strong resistance at 11,000 on the Dow and 4000 on the NASDAQ, it appears the markets could squeeze in one more downdraft before we see a rally in front of the FOMC meeting. In short, we're at resistance and there's no good reason for the markets to go up before May 16. Consider dusting off some put plays or writing covered calls during the sideways markets. And as always, confirm market direction and sell too soon. As Jim says, don't buy too soon either. Buzz Lynn Research Analyst ********** STOCK NEWS ********** Siemens Buys Shared Medical For $2.1 Billion By: Matt Paolucci German industrial behemoth Siemens AG on Monday agreed to acquire No. 2 healthcare computer services company Shared Medical Systems Corp. (SMS) for $73 a share, or $2.1 billion in cash. SMS supplies information systems and professional services to over 5,000 health enterprises and health providers in North America, Europe, and New Zealand. The Company offers a full range of clinical, financial, and management applications to support health providers across the continuum of care. Shared Medical directors already have approved the acquisition, which Siemens will conduct through its medical- engineering unit. In afternoon trading, shares of Malvern, PA-based Shared Medical were up 70 percent, or $29.19, at $70.63 per share. For Siemens, the deal significantly bolsters its U.S. business, which reported sales of $7.97 billion for the six months ended March 31, a 22 percent increase from the corresponding period a year earlier. Shares of companies specializing in health-care information technology have suffered recently because hospitals have postponed investing in new computer systems because they are waiting for the federal government to adopt standards for electronically transmitting medical records. Shared Medical had been the target in March of a $67-a-share unsolicited bid by smaller rival Eclipsys Corp (ECLP). Later in the month, however, Eclipsys agreed to be sold to Neoforma.com Inc., operator of an online medical marketplace. But once Eclipsys disclosed its bid, Shared Medical became vulnerable to a takeover and retained Goldman Sachs Inc. to explore "strategic alternatives," including a possible sale. A number of bidders, including Siemens, expressed an interest in acquiring Shared Medical, which had 1999 revenues of $1.2 billion. Dr. Erich R. Reinhardt, President, Siemens AG's Medical Engineering Group commented, "Combining Siemens innovative technology and know-how with SMS' advanced information systems will enable us to generate greater efficiencies for healthcare providers around the world." Shares of SMS stock, which traded as high $63 a share a few weeks ago as a result of Eclipsys's bid, has fallen dramatically of late. SMS currently trades for just over $41, giving it a market capitalization of around $1.1 billion. The stock's 52-week high, hit last May, is $73.50 a share. It isn't clear if a rival bidder could still trump Siemens's offer, and officials at Siemens and Shared Medical couldn't be reached for further comment. Today's merger announcement also comes the same day SMS reported less-than-stellar first quarter earnings. First quarter revenues were $240.6 million, down 16 percent from $287.1 million for the same period in 1999. Diluted net income per share for the quarter was $0.10, compared with $0.68 for the same period in 1999. Earnings were negatively impacted by industry-wide weakness in new software sales and a general slow down in demand for large-system implementations. The companies expect the acquisition to close by June 30. ********************** PLAY OF THE DAY - CALL ********************** DHR - Danaher Corp. $58.88 +1.75 (+1.75 this week) Danaher Corporation operates in two business areas: Process/ Environmental Controls and Tools and Components. The company's Tools and Components segment produces and distributes general purpose mechanics' hand tools and automotive specialty tools. Among the household names they are responsible for are Sears' Craftsman line, Allen wrenches, and NAPA hand tools. The Process Controls division, led by Veeder-Root, makes leak detection systems for underground storage tanks, as well as sensors, switches, measurement devices, and communications and power protection products. Most Recent Write-Up With apparent indifference to the travails of the DJIA, DHR continued higher throughout the week. Although appearing to lose a little momentum towards the end of the week, the stock is still being supported by the ascending trendline that began on April 17th. Earnings came in stronger than expected on April 19th and DHR has been moving higher ever since. Of some concern is the fact that volume has been dropping off the past 2 days, barely posting half the ADV on Friday. The stock is running into some resistance between $57-59, and will likely need the extra push of increasing volume to break through. There has been no post-earnings weakness in the past week and a half, but remain vigilant. The recent light volume could be an indication that DHR needs to take a break before heading higher. Technically our play still looks good as DHR is using the 5-dma (currently $55.69) as support, but keep your stops in place to protect those profits. Use dips to support between $55-56 as opportunities to open new positions, but exercise caution until volume picks up. A more conservative approach at this juncture would be to wait for volume to pick up and push DHR through resistance. Comments You just can't stop this stock. Yes, it's a different kind of play based on low premiums and calculated entry and exit points, but the results are the same...profits. The beauty is in the fact that you only need DHR to move a dollar or two in order to be sitting on a tidy profit. Check out the trend for the past two weeks, almost no weakness. Look for it to make that final move up to resistance at $60-$62. It's not far away, but far enough to make for a good trade. BUY CALL MAY-50 DHR-EJ OI= 0 at $7.63 SL=5.25 Wait for OI! BUY CALL MAY-55 DHR-EK OI= 27 at $4.88 SL=2.75 BUY CALL MAY-60 DHR-EL OI= 0 at $1.25 SL=0.00 Wait for OI! BUY CALL*JUN-55 DHR-FK OI=320 at $6.25 SL=4.00 BUY CALL JUN-60 DHR-FL OI= 0 at $2.25 SL=1.00 Wait for OI! Picked on Apr 23rd at $52.94 P/E = 30 Change since picked +5.94 52-week high=$69.00 Analysts Ratings 6-5-1-0-0 52-week low =$36.44 Last earnings 04/00 est= 0.46 actual= 0.49 Next earnings 07-19 est= 0.53 versus= 0.45 Average Daily Volume = 452 K /charts/charts.asp?symbol=DHR ************** TRADERS CORNER ************** The OEX and Your Brokerage: links in the chain By: Austin Passamonte Perhaps the biggest limitations for trading the Skybox system effectively are features most option brokers don't offer yet. Let's explore a few scenarios that explain. Our Skybox instructions today require us to take trades as the market moves through the listed benchmarks if we can buy at our maximum purchase price or better. Let's say the market trades into the 798 bearish trigger. If our brokerage offers a way for us to place a trade when the option price AND the underlying index meet our requirements, execution is simple. We can enter orders with an open to buy stop if the OEX hits 798 and a buy limit order for the option price of 14.50 is met. If your current broker offers these features, you have the ability to enter your order as a limit-buy on the option price once the index triggers the order. Perhaps there are a number of brokers who offer dual contingency open-buy features but one I'm aware of is Preferred Trade listed right here in the O/I website. With Preferred, you can pre-load an open buy order to execute at benchmarks when they trigger your market point if the options can be purchased at or below your limit-buy offer. Other brokers who don't allow buy on market point stops are much tougher to enter trades with. For example, if the index is moving up from today's open at 785 to 796, 797 and finally 798 you could pre-enter your open buy limit order for 790 put options @ $14.50 because those puts are coming down in price as the index advances up. By the same token, if the market was trading from 804 to 803, 802 and your instructions are to buy 810 calls at that point, you could enter an open buy-limit order at $14.50 while the market falls into your long call order as those calls deflate in price. This ensures you will not get filled at a higher price at the intended target than you wish. However, let's say the options were selling for 16.50 at the 804 mark, 16.00 at the 803 mark and 15.50 at the 802 mark (Use the same price scenario in the put example). Now what? If the options are too expensive as your triggers are hit, one of two things can occur. The market will reverse and move away from you without filling your limit bid, no harm done. On the other hand, the market may continue to move into you and the order will eventually execute at your limit price but the index level will be below the target you intended. Using the above example, if the 810 call price was 15.50 when the index was at the 802 benchmark, you will not be filled @ 14.50 there. Agreed? If you leave this buy order open and the index slips to 800 or even 799, the 810 call price will now meet your limit order at the given option's price without regard to where the index itself trades at the time. The result is that you didn't own the calls at the 802 level, you now own them at the 799 level instead. One more down tick to 798 at the index and we need to prepare for buying 790 puts as instructed. When working with discount and online brokers that simply take orders, you can either attempt to cancel the open buy once the price situation is recognized or let the trade ride. Should you happen to buy the 810 call options @ 14.50 near the OEX 799 level instead of 802, simply set the same stop-loss price given in the Skybox and focus on executing the next put position if conditions permit. If the call option trade moves deep into the profit that same day you can execute the sell-limit price given in the Skybox should it be reached. Personally, I would close out this position at any profit or before the end of trading at par. Holding inflated trades into the next day will see premium value slip a little or a lot, depending on today's volatility versus what tomorrow may bring. Several times I've bought "expensive" OEX options, watched them move a few points into profit later that day and then elected to hold them over for the big score tomorrow. It's a disheartening feeling to watch expensive OEX options go from 2 or 3 points in the money down to purchase price or below by the following day's open. In almost every case the index market moved back into a trading range where I could have repurchased yesterday's options for one or two points less than I paid for them yesterday. Had I sold the inflated options for a two-point gain the day before and bought them back today for two points less than I paid y esterday, that is a four-point swing in unrealized profit. Hold five, ten or more OEX contracts in this situation and you're talking about a decent chunk of change missed out on! If there is one caveat I would stress to you it is sell expensive OEX options the same day to capture high volatility value. How will you know when options are expensive? If they are priced above suggested value at the Skybox benchmarks and/or the bid/ask spread is wider that one point you can be sure pricing favors the sellers. Should you own such options for whatever reason on any given day, don't hold them over without risking a loss of unrealized appreciation. Opening positions within the Skybox parameters are extremely difficult with brokerage accounts that require you to personally transact as the index hits your targets. The market will frequently move too fast for you to decide the options are fair priced, process the order and hit that price while the index moves in your favor. If you enter an order and the market moves swiftly against you, it's tough to clear a cancel order from a browser-based service that beats the execution on the CBOE floor (slow as the AMEX is, that might be easier if the OEX traded there!). Resign yourself to the fact that there will be missed trades and slippage while using most discount brokers that don't offer the features of buying on stops of option price limits at specific index (or stock) price points. Another tough challenge faced when placing open-buy orders at the benchmark triggers is the emotional factor. It's easy to calmly map out the day's trading plan prior to the bell going off, but once that baby is struck and the charts start jumping around, best laid plans of mice & traders. well, you know the rest. It can be mentally impossible to take the third trade of a day in late afternoon when the first two were stopped for losses while tech signals on your charts and talking heads on CNBC indicate you should do otherwise. These are times when the OEX will charge off deep into the money, leaving a vapor trail as you sit and stew in frustration over failing to pull the trigger just one more time. The voice of experience speaks once again, and I can promise it is much easier to pre-load orders and let them execute on their own while you sit and watch objectively. To my knowledge there aren't any brokerages that allow traders to use a stop loss and sell-limit stop on a single trade with "one cancels other" or OCO instructions. If and when this becomes the case, we could place an order that reads, "buy May OEX 810 Calls @ 14.50 when the index hits 802. Stop-loss 12.00 and sell-limit at 22.50, GTC". Now we have that pending trade "fenced" with stop order instructions and it's on autopilot. As a matter of fact, we could place pending orders on several benchmarks of trades headed in each direction with total objective execution. The only thing left for us to worry about would be our money- management aspect. Traders who have margin-level clearance to trade naked puts can use dual stops with some brokers, but the trader is responsible to personally cancel the non-performing stop once the first one is triggered. For example, if you purchase OEX 810 calls at the benchmark for the 14.50, you can place a stop loss at 12.00 and a sell-stop at 22.50 but you have now entered two sell orders for one transaction. Any broker I'm aware of currently views one of these two stops as a naked sell. It is possible and highly likely that both can be triggered in a given trading session if not monitored, which could do some nasty things to your account balance left unattended. There are brokers working on offering one-cancels-other stop orders for option traders, and that will take us light years ahead in auto-trading the Skybox. Please don't ask me for technical or specifics on any brokers; you must learn for yourself firsthand from them exactly what they offer. Of course it would be great if we traders were able to drop these instructions off at the broker's every morning and pick up the check by month's end. Seems like easy money but there's the catch. easy money doesn't exist. You really must be able to monitor the market every minute and know precisely what you're doing in order to make it work. For many who ask if the Skybox can be traded verbatim by those who can't watch the market all day, my answer today would have to be no. I am not aware of any brokerage that accepts discretionary power to trade the system, although some may exist. It's been said that Schwab offers a service via its "dedicated options team" in Denver or Philadelphia offices but I have not researched this myself. Feel free to inquire at Schwab if you choose, hearing the information directly from them is paramount. The OEX is far too erratic over the course of a trading day to simply buy at the open and sell at close. Most any 60 minute chart of the index will explain what I mean. There are times when absentee traders can profit from the OEX safely and when they happen you don't want to miss out! I'll outline the specific conditions that set up these trades, and some may be shaping up real soon. The good news is there are several strategies part-time traders can take advantage of offering solid profits for minimal risk, and we'll discuss those soon. Tomorrow we'll finish up trading the Skybox with money-management principals, which I consider to be the most important factor for overall financial success & failure. Keep an eye on the OEX index and we'll tie things up tomorrow! Trade the right direction. ************************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. 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