The Option Investor Newsletter Monday 6-26-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 6-26-2000 High Low Volume Advance Decline DOW 10543.00 + 138.20 10566.70 10403.70 890,068k 1,479 1,346 Nasdaq 3912.12 + 66.78 3914.51 3852.41 1,316,223k 2,129 1,873 S&P-100 789.21 + 8.14 791.63 781.85 Totals 3,608 3,219 S&P-500 1455.25 + 13.77 1459.66 1443.65 52.8% 47.2% $RUT 516.36 + 5.95 516.37 509.23 $TRAN 2614.55 - 16.16 2638.19 2605.43 VIX 24.72 - 1.17 26.62 24.35 Put/Call Ratio .52 ****************************************************************** The Good, The Bad, and The Ugly Celera announces the completion of human genome sequencing; Philip Morris buys Nabisco; and First Union shutters its Money Store operation. To say this was a big news day would be an understatement. It is also an interesting study in price contradictions. Celera's (CRA) joint announcement with American and British scientist is truly a milestone in human history and will find its place along with other landmark events like landing people on the Moon. In case you missed the news, in a much-anticipated event, Celera announced they had finished mapping the human genome with 3 bln different protein sequences. This data will now be available for commercial use (not for free) and Celera can now begin selling access to its research data base for other commercial applications. Immunex (IMNX) was the first to announce an inked deal with CLA. You'd think that biotech would have been on fire today as a result, and for the most part it was. However, the star of the show, CRA, got a black eye by the investment public, which handed it a $14 loss on volume about 3.5 times the ADV. As we noted last week in the Sector Trader section, this could be a case of buy the rumor, sell the news, and this morning, that's just what it shaped up to be. Note the bounce on both CRA and BBH at their moving averages today. By mid-afternoon, selling the news had run its course and investors hopped back aboard the biotech express. Here's another contradiction in price movement. Philip Morris (MO) emerged victorious in its $19 bln bid for Nabisco Foods (NA). In acquisition cases, it's usually the acquired company whose price rises, while the acquiring company's price sinks. Not so today. MO rose $3.69 to close at $27.25 on almost twice the ADV. NA rose $1.13 to $52.50 while Nabisco Holdings (NGH), a related entity that owns 80% of NA gained $1.19 to $26.75, both on six times the ADV. In the case of MO, investors are generally pleased because there is minimal overlap of products. Better yet, it makes MO more of a food company with great dividends than a tobacco company with huge liability. Antitrust meddlers won't likely get involved with this merger as doing so may interfere with MO's ability to pay any tobacco liability settlements to the government in the future. In the eyes of Uncle Sam, MO just became a more stable creditor. Finally, First Union (FTU +0.06, 27.44) announced this morning that it would take a $2.8 bln restructuring charge and close up shop on the Money Store, a purveyor of second mortgages to high risk borrowers, which they bought in 1998 for about $2.1 bln. They warned that earnings are expected to come in $0.11 to $0.13 under current estimates of $0.85 and cited increased interest rates, soft capital markets for its securities, and weakness in the healthcare markets. They now intend to focus on "businesses such as asset management, brokerage, wealth management, small business banking, e-commerce, and certain areas within capital markets" according to Patrick O'Hare at briefing.com. - probably because in the words of infamous bank robber, Willie Sutton, "that's where the money is". That isn't all. They intend to sell their mortgage servicing and platform division, seek a buyer for their consumer and commercial credit divisions, sell off 90 branches where they are not the market leader, and sell off another $13 bln in investment securities. Talk about cleaning house! But did you catch that intent to sell $13 bln in investment securities? That's a whole lotta cash generation. What if Fidelity or Vanguard announced that? What would that say about their view of the market? Likely, not so hot. While FTU is motivated to dispose of under- performing assets in search of stronger future earnings, it also telegraphs their belief that keeping $13 bln in current asset form won't make them any money. Not that we're predicting economic meltdown, but the big reason for the shakeup in Charlotte (FTU's homebase) is a generally slowing economy. Tuck FTU's intent to sell in the back of your mind as a yellow caution flag thrown at the general market. FTU is not likely to be an isolated warning. Here's something that slipped through investor's radar this morning. Existing home sales for May were up 4.3% over last month. Wait a minute. . .weren't previous interest rate hikes suppose to put on the inflation brakes? Yes, but actually these numbers could be just a reaction from rate hikes earlier this year that spurred buyers to action out of "better get it now before I can't afford it later" fear. You can bet however that Greenspan takes notice and has made the appropriate hash mark on his economic scorecard. All this leads us to the start of tomorrow's FOMC meeting where we investors will finally discover if we get a final rate hike before the November election, or not. The announcement will occur on Wednesday. The general consensus is that Greenspan will leave rates alone, but will further caution that inflation is a real risk to economic prosperity and that they (the Fed) will remain vigilant in controlling the markets (err.inflation). Accordingly, though the expected outcome is largely priced in, there will likely be some upside bias to stock prices mid-week as investors would view "no rate hike" as a turning point in the interest rate cycle. Even so, earnings warnings, oil price hikes, and the coursing of previous interest rate hikes in the nation's economic veins should serve to keep markets from developing another case of severely high blood pressure. Great! But in light of Friday's close and today's recovery, what's next. Ahh, to be in possession of the perfect crystal ball. . .Let's take a look at today's markets for a clue. Let's start with the NASDAQ, which moved up 66 points to close at 3912 on 1.3 bln shares. We'll take it! The good technical news is that 3850 held (actually 3852 during amateur hour) and continued to move up from there. Later in the day as the NASDAQ retested 3855, it held again and moved up nicely in the final hour to close over 3900 at 3912. That also happens to be a recovery right back to the 10-dma of 3911. That's a sign of strength in our book. 2122 advancers beat out 1880 decliners too - more strength! Finally, there was 65% more up volume than down volume. The only eyebrow raiser we can see here is 91 new lows compared to 64 new highs. That's a little steep. We haven't checked, but given the pain in the e-tailing and retail sectors lately, a few are probably on that list (AMZN, GPS). Optical companies remained hot with SDLI back in the saddle and up $26 for the day, while INKT got hammered by a nearly equal amount (- $25) on news that they lost the Yahoo! search engine account. Anyway, look for support and resistance in a really narrow channel in front of the FOMC meeting. Support will likely be found at 3900, then 3850. After that, start looking at 3750. Meanwhile, 3950 and 4000 should cap it on the top. Unless you are already in a position, you may want to wait until a new direction becomes clear, and that may not be until Wednesday. Similar for the Dow, only a nice recovery today off the 10,400 level. The Dow gained 138 points to close at 10,542 on volume of 890 mln shares - about average these days. Once again, the neutral wedge on the chart retained its shape telling us a breakout is coming. We just don't know which way. If the pattern continues to develop, we'll likely see 10,600 or 10,650 offer resistance. Again, the FOMC could be the catalyst for the breakout. But the real prize will be to get back over 10,900. Don't bet on it tomorrow. Support is holding nicely at 10,400 on a longer-term chart, while 10,515 worked well for us intraday. Just to finish off the statistics, 1482 advancers slipped by 1341 decliners while up volume was about even with down volume. 60 new lows (T was one of them) beat out 42 new highs. JNJ, MO, HWP, and IBM saved the day, while UK and T headed the loser list. All that said, the next two days are going to be tricky to trade in front of the FOMC meeting. However, by no means are we saying to stay away from the markets. There are always trading opportunities - we just need to be vigilant in finding them. Remember to use support and resistance in finding your entries and exits, and in defining your stop losses. A breakout is coming. We just aren't sure if the break will be up on a favorable FOMC outcome, or down on renewed worries (after the FOMC announcement) that earnings will slow, thus reducing equity prices. I'm back with Jim this week. . .don't buy too soon. Buzz Lynn Research Analyst *************** SEMINAR RESULTS *************** Technical Analysis, Stock and Option Seminar Three days of indepth education. The next seminar is a two day event in Washington DC on June 27-28th. We guarantee you will not be disappointed. The class size is small so you will get plenty of individual attention from Chris Verhaegh and the staff. At less than the cost of a bad trade you can learn how to analyze stocks and trade options like the pros. Don't wait, do it now. June 27-28 Washington DC 2 day July 13-15 New York 3 day July 21-23 Seattle 3 day July 27-29 Atlanta 3 day Aug 10-12 Orange County 3 day NEW !!!!!!!!!!!!!! Aug 17-19 Orlando 3 day Aug 28-29 Detroit 2 day Australia coming soon! Has the market been beating you up? Did you give back your gains from April? Would you like to understand all the technical indicators our writers use? Does the alphabet soup of technical terms like RSI, DMA, MACD, ROC, Stochastics, Bollinger bands, sound like Greek to you? You can learn from the experts how to interpret all these indicators, read charts, pick stocks and which option strategies to use on those stocks for less than the cost of one bad trade. Reserve your seat now for one of our regional seminars. Click here for more info: http://www.OptionInvestor.com/seminar/seminar.asp ************** TRADERS CORNER ************** Using Stops Wisely By Austin Passamonte Don't you just hate having that sure-thing trade get stopped for a small loss just before the danged market turns to run deep? If this never happens to you perhaps it's best to stop reading right here; I don't want to mess you up! On the other hand if you've felt this pain once or twice, let me share mine with you. The only feeling worse than getting stopped right when everything turns is trading without stop orders as the market steam rolls you while heading to levels unseen before. Trust me, the measure of pain between the two is immeasurable. Therefore, we have to figure out how to use our stops properly in many different situations. I was part of a friend's wedding this weekend who was also in mine. Pretty hard to say no although that was my first inclination. Wendy & I had to leave early Thursday morning to make a four-hour drive and prepare for Friday night's event. We called our hotel and confirmed they had computer/online service. I haven't replaced my laptop yet due to limited need for travel this year vs 1999. Had the hotel lacked access I probably would have picked one up before leaving but that's another saga. My chart signals showed the OEX and QQQs were nearing tops and due for a drop. On Tuesday I bought some QQQ July 90 puts @ 3.50 and decided to risk 1.25 on a stop. They died later that afternoon as the index pushed 99+. I also bought some OEX July 790 puts @ 15 when the market traded near 798 and risked a stop at 12.50. Sure enough, they popped me out as the low price for the week of 12 3/8 was hit. No matter, Thursday was another opportunity to win. My first inkling of dread hit when I saw the place we were staying in. This area is so far back in the country, they still turn the moon every night by hand. The only online access available was an empty plug next to the phone. No computer, no charts, no nothing. Who's fault is that? Mirror, mirror on the wall. You saw the rest. Both markets tumbled without the decency to let me back in. The truth of it is, I should have never been out in the first place. It was mismanagement of stops that caused my loss instead of decent gains! The signals that my system gave were accurate but early. I know this can be the case and should have bought fewer options and backed off my stops far enough to avoid any last-gasp spikes. Instead I loaded up on contracts and had to tighten stops to avoid excessive drawdown. Big mistake. Had I bought half the Qs and OEX puts while backing off my stops to allow for market noise there would have been no small loss. Instead there'd be nice profits added to the ledger. Good entry points into a trade make setting stops effortless while poor entries leave our stops dangling in precarious places. Anything bought right is already half sold. It can be said that entry points are the primary key to setting stops. Before buying anything I have three outcomes in mind; a small loss, small profit or home run. Of course, every trade we click in has the hope & promise of a home run, now doesn't it? Mine do anyways. Reality has taught me that the other two scenarios are more likely to occur, especially in these choppy times. That leaves me with three objectives for managing every trade. Setting the protective stop for a manageable loss if the play breaks down is first. If the trade develops from there and moves into profit I want to move my stop to at least the entry point price, giving me a "free trade". As the move heads deeper into the money I want to trail my stop order close enough to protect most gains but avoid crowding too much and killing the move prematurely. Let's visit each step in order. Once my trade reaches the entry point I've chosen, hopefully it fills and we're in. The very first move is my stop loss order at the point determined BEFORE the trade was entered. It's imperative to have the contingency exit in mind prior to opening any position at all. The mistake I made early this week was not buying the proper number of contracts for my level of risk. I knew the signals could be early yet gambled that my timing on entry was perfect. It wasn't and using too-tight stops bumped me. Had those plays stayed alive the OEX 790 puts would've hit a top value of 22.5 sold on Friday. If I hadn't taken the 7+ points per option off the table so far, my first plan would be to move the protective stop up from below entry price at 12.5 to entry price plus at 15.5 or 16. I would have made that move when the BID price of the 790 calls reached 18. Go ahead and kick me out on a reversal if you wish; I'm locked in for no loss of capital from here. Moving trailing stops is a priority for me whenever a trade heads into the black (or green). How you do this effectively does depend on the method you trade. Be careful not to trail so close that normal market swings will stop out performing trades before they have a chance to evolve. This is very damaging when trading trend-following systems that have few big wins and more small losses. Those big wins are imperative to overall performance and can turn long-term profits to loss. If you trail stop orders using such a method, make sure you are turning some small losses to break-even trades in order to offset a big move cut short. Let's use Skybox system as an example. During tight trading ranges it's common for the OEX to hit a trigger, move several points or more into the money and reverse to take it all back without execution. This has occurred several times over the past few weeks while the market's been mired in the mud. My approach is to always set that protective stop upon fill. When the bid price moves 40% - 50% of the suggested profit range via Skybox I move the stop to entry plus 1 point. This secures that trade at slight gain instead of loss should the move fail. If the play moves 75% or so to suggested sale price I move the stop again to within 2 points below the current BID price. This gives the trade space to oscillate as it moves to execute while securing several points profit should things break down from there. I've noticed lately that once a play moves 50% or more into the money it doesn't come back to point of entry and reverse to rally hard once again. As a matter of fact, I've never seen the OEX run past 50% and return to entry level without continuing to move right through the original stop point below entry. If it has completed such a wild swing from entry to DIM, back to entry and then hit execution price I've yet to witness such. That being said, I want to at least break even or harvest partial gains in the event our move stalls on us prematurely. Proper use of stops is imperative for option traders to succeed. Crowding a play too close can choke off good moves as I proved last week. Trading without stops will eventually demonstrate why that is just fiscal suicide waiting to happen. Practice the art of trailing stops close enough to protect gains while allowing proper space for the trade to finish off the way you hoped it would from the start. Tomorrow I'll ask for your input and we'll have some fun! Trade using your stops wisely. Contact Support ********************** PLAY OF THE DAY - CALL ********************** MERQ - Mercury Interactive $91.69 (-2.88 this week) Mercury makes testing software for enterprise resource planning applications, client/server software, and e-business applications. The company's products perform such tasks as analyzing and eliminating Web site performance bottlenecks, and automating quality assurance testing. Customers include AOL, American Airlines, Citigroup, and ETrade. Mercury is looking for the growing demand for e-commerce to fuel its business. Most Recent Write-Up It turns out that it's pretty easy to make money from the Web. Of course, you have to be in the right business. As the B-2-C companies are proving, it's harder than once thought to turn a profit on the Internet. On the flip side are the companies that provide hardware, and the software and services, such as MERQ. The so-called pick and shovel providers are cashing in on the boom in e-business services. There is a great demand growing for the products and services that MERQ supplies. The company adjusted its business strategy a while back, and the result has been a more consistent stream of revenues and growing profits. Wall Street has welcomed the idea of profits. MERQ has enjoyed a host of analyst praise going into the company's second quarter earnings report. Most recently DB Alex Brown reiterated its Strong Buy rating on MERQ and told clients to expect a healthy profit report in three weeks. Also worth noting, Standard and Poor's said last Wednesday that is was adding MERQ to the S&P 500 at the close of trading on June 28th. MERQ has surpassed earnings estimates in its last three quarters. Investors will be looking for another surprise this quarter, which could drive the stock higher. MERQ has been on a steady climb upward since rebounding from its early April lows. The stock has been tracing a series of higher highs in an attempt to return to its spring highs. Despite the tech meltdown late last week, MERQ is in a strong technical position to extend its rally. The stock found support right at its 10-dma Friday, currently at $91.38. Consider an entry at current levels if the Tech sector rallies Monday. Or, wait for MERQ to move back above the ever-important $100 level for a more conservative entry into the play. Comments This may be the entry point we are waiting for on MERQ. The stock is being added to the S&P 500 after the close Wednesday. It has traded down sharply after the initial gains on the announcement, but found solid support at $90 and now appears to be rounding up. A breakout over $92.50 on volume is good confirmation. This stock could be volatile ahead of the S&P addition so use caution. If support at $90 fails, call upon your stop loss orders to take you out. BUY CALL JUL- 90 RQB-GR OI=588 at $12.38 SL= 9.50 BUY CALL JUL- 95 RBF-GS OI=510 at $10.13 SL= 7.00 BUY CALL JUL-100 RBF-GT OI=486 at $ 7.63 SL= 5.75 BUY CALL AUG- 95*RBF-HS OI= 55 at $12.13 SL= 9.50 BUY CALL OCT-100 RBF-JT OI=278 at $16.13 SL=12.25 Picked on June 25th at $94.56 P/E = 215 Change since picked -2.88 52-week high=$134.50 Analysts Ratings 9-2-1-0-0 52-week low =$ 16.88 Last earnings 03/00 est= 0.10 actual= 0.11 Next earnings 07-13 est= 0.12 versus= 0.09 Average Daily Volume = 1.56 mln /charts/charts.asp?symbol=MERQ *********** IN THE NEWS *********** Sony to Unveil Handheld Tommorow By Matt Paolucci At this year's PC Expo in New York City, taking place this week, the emphasis will not be on the PC, but in the burgeoning area of wireless devices. One company planning to make a big splash with its yet-to-be-named and much-talked- about handheld is Sony Corp. The Company is not giving the public too many details, but here's what's out there. The product will use the Palm operating system (which it licensed late last year), will be available in many different colors, will have some audio/video capabilities, will feature similar calendar and address-book capabilities as the Palm, and will be available this fall in the United States. The first-generation PDA will also feature "digital imaging" capabilities though Sony would not provide further details. But don't expect to find the cost of the device, what type of hardware it can handle, or even what the company plans to call it. The appliance is not expected to have wireless connectivity to the Internet. Although the prototype will utilize the Palm operating system, Sony emphasized that there would be some noticeable differences. The Sony device weighs just 5.3 ounces, is narrower than the Palm V and thinner than the Palm III, and will include a MemoryStick flash memory slot that can increase the machine's capacity for storing information. Additionally, the device has a scrolling and highlighting button, which allows users for easier maneuverability. The PC Expo debut is part of Sony's renewed push into the digital device market, after exiting the U.S. cell-phone business last year. Even though Sony's initial products will be based on Palm's operating system, it has also licensed Symbian's operating system for "smart" cell phones. "By us entering the market with these (current) capabilities, we think we can expand this handheld device market tenfold," said Takashi Sugiyama, general manager of Sony's network- service business center. According to market researcher International Data Corp., 76 percent of the handheld-device hardware market is dominated by Palm. Handspring's Visors, which are cheaper, have about 3 percent of the market. Microsoft's Pocket PC devices, which now feature some multimedia capabilities such as an MP3 player, garner a 10 percent share. Despite today's announcement, the competition doesn't seem too worried. "We thought through the strategic and operational implication of licensing our platform to Sony," says Mark Bercow, Palm's vice president in charge of strategic alliances. "This industry is growing at a tremendously fast rate, so it should allow a lot of players to be successful." Phil Holden, group product manager of mobile devices at Microsoft, said Sony is unlikely to present a big threat. He said the Palm operating system isn't robust enough to support Sony's goal of adding multimedia capabilities to its device. Sony is "playing catch-up," Mr. Holden says. "Today, the Pocket PC is already a multimedia device, and is already setting the standard for next-generation devices. We can't wait to see what Sony comes out with. We love competition." A Handspring spokesman says that the Mountain View, Calif., company also welcomes any entrants that can help the market grow. The handheld-device market is expected to jump from 5.9 million units this year to 17.2 million units world-wide by 2004, an annual growth rate of more than 30.5 percent. "There's a great market demand for these products right now," says Jill House, an IDC analyst. "And Sony is big enough that they could be significant." The company also announced a deal with Sun Microsystems today to create Java-enabled "smart phones" for release in 2001. The most actively-traded shorter-term options on Sony were the July 92.50 and 105 calls. On the Put side, the July 95 and August 85 contracts saw the most action. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. 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