Option Investor

Daily Newsletter, Monday, 06/26/2000

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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

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


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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


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.


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


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

"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

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.

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