The Option Investor Newsletter Wednesday 7-05-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with imbedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/070500_1.html Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 7-05-2000 High Low Volume Advance Decline DOW 10483.60 - 77.10 10572.70 10463.20 1,008,255k 1,492 1,445 Nasdaq 3863.10 - 128.83 3950.19 3859.20 1,338,105k 1,618 2,446 S&P-100 783.37 - 12.66 796.01 782.11 Totals 3,110 3,891 S&P-500 1446.23 - 23.09 1468.63 1442.42 44.4% 55.6% $RUT 518.25 - 5.79 524.02 517.50 $TRAN 2770.13 + 65.30 2780.00 2708.79 VIX 23.63 + 1.30 24.13 23.28 Put/Call Ratio .55 ****************************************************************** Looks Like The Catalyst Is Earnings Warnings, Not Earnings It became very clear today that earnings concerns will be the next focal point. Or should I say nail-biting, hair-pulling stress of the month. Well, I hope that your Independence Day festivities were more relaxing than today's market action, as the hangover for the market was unmistakable. High-profile profit warnings added to a lurking employment report due Friday and we've got ourselves a nervous market. The elusive "summer rally" that many analysts have been predicting continues to be a phantom menace. Everything that the bulls wanted to see after Monday's gains proved to be non-existent. And it's this lack of follow-through which keeps the markets in a shackled range. A trio of culprits came to market today warning the Street of profit shortfalls. That was enough to set the tone for the day. Entrust(ENTU) led the bleeding today when they announced that 2nd quarter would come in closer to 2 cents a share, off 75% from Street estimates of 8 cents. Investors wasted no time in selling the stock as ENTU gapped down almost $37. It just goes to show that in a cranky, nervous market, bad news is not tolerated. The Plano, TX, security software company said that the downfall lies strictly in deal closing delays, not in a loss of business. Timing is everything and traders wasted none as ENTU lost 52%, closing at $36.69, down $40.44. Also dragging down the NASDAQ was BMCS, another software company. Indicative of lagging revenue growth, BMCS warned that fiscal first-quarter profits would be as much as 57% below previous year's results. The blame: weakness in mainframe sales. CEO Max Watson said, "We attribute the shortfall in mainframe license revenues to a lack of a sufficient number of customers committing to enterprise transactions." No sugar-coating there. This is a significant shortfall as BMCS lowered its guidance to $0.18 - $0.21 per share, in comparison to analyst expectations of $0.46. If you cross the Street like that, you will be punished. BMCS lost almost 40%, shedding $14.19 to close at $21.31. The entire software sector fell in sympathy, with the Computer Software Index(CWX.X) off 6.37% for the day. The third spoiler was Computer Associates(CA). Shares of CA plunged 43%, or $22.19, as the company warned that disappointing sales in their mainframe business and overseas revenue problems would severely hurt earnings. CA halved its first-quarter earnings prospects to between $0.26 and $0.31 per share while the Street was looking for $0.55. This growing trend may just be the beginning of a bigger problem that is shaking investors' confidence. IBM, one of the largest mainframe providers, felt the heat as well, falling $5.50 to $104. CA closed today at $28.94, a level not seen since Sept '98. By now, the question is not "was the NASDAQ down?" but rather, "by how much?" It was an ugly day for techs, as buyers were nowhere to be found, except for one fleeting moment. If you look at the NASDAQ 60-min chart below, you will see that buyers did lift the index for one-hour between 11:30 and 12:30 EDT. I would be willing to bet that was a product of the sellers being out to lunch. As you can see, after their sirloin and martini lunch, the NASDAQ went to the floor. There wasn't a lot to be excited about today. We are approaching a key support level of 3850 and will need to see a bounce from there to maintain a pattern of higher lows. If we can get that bounce, a higher high could take the NASDAQ back over 4000. Failure to breakout above 4000 could mean we will be sitting in limbo until September. With increasing earnings fears spreading through markets, Friday's Employment Report may be the saving grace. Or it may be the straw that breaks the NASDAQ's back. The markets are at a very precarious point right now, and it can be seen in their behavior as of late. The NASDAQ gave up 128 points, ending the day at 3863. Another negative for the NASDAQ was Salmon Smith Barney's industry forecast for the Semiconductor Sector. Analyst Jonathan Joseph downgraded the sector, stating that the current supply shortage may be nearing an end and that price wars may result later in the year. Having led the NASDAQ throughout June, the Semis have been coming off their recent highs since June 22nd. The SOX.X lost 9% today on the news. Semiconductor stocks fell across the board as a result: RMBS(-10.19), LSCC(-9.25), AMAT(-9.13), AMD(-9.00), KLAC(-8.25), XLNX(-7.19), and INTC(-5.25). Today's selloff has brought most of these stocks down to support and to the levels at which they started the month of June. This may provide a very good buying opportunity. Both Chase HQ and Deutsche Banc think so as they came out in defense of Semiconductor stocks, saying that Salmon Smith Barney was premature in downgrading the sector. The only sector to buck the trend today was the Biotechs. These high-fliers continue to attract buyers, especially when the Semis lose favor. The Biotech Index(BTK.X) climbed almost 5%, keeping its uptrend intact. Highlighting the sector was: HGSI(+12.19), INCY(+9.31), AMGN(+5.31), and SEPR(+4.75). On the NYSE, techs and oil stocks slid on barely 1 bln shares as the INDU finished down 77 points at 10483. With all eyes on the markets' reaction to the warnings, traders left more to be desired as many blue-chips were sold. In addition to IBM, mentioned above, HWP dropped $4.63. The big news on the floor was the weak oil stocks. With crude near recent highs, one would think that investors are throwing money at oil stocks. Yet, that's not the case. Saudi Arabia's announcement on Monday that they would increase output by 500,000 bpd, effective immediately, put a damper on the buying that oil service stocks have enjoyed over the past month. Concern for the sector revolves around the high valuation of many of these stocks, some of which have had impressive gains recently. Although price relief at the pumps isn't expected until September, initiatives by OPEC nations to ease the exorbitant price of oil are enough to slow down the buyers. Taking hit in the oil sector today were: BPA(-4.44), SLB(-4.31), P(-3.75), CHV(-3.44), and XOM(-2.63). The INDU continues to waver in its trading range, yet it managed to hold its head above the 10300 level. That is the red alert level, DEFCON 5. In the chart below, the INDU is under the force of a strong downtrend. Under the current market nervousness, any breakout move to come will need to be convincing. On the upside, the INDU will have to come up with some heroic efforts to break this dominating trend. To the downside, we will be watching the 10300 support level cautiously. It continues to be the same old story for the INDU and we wish it would just make up its mind. All in all, the market today continued to bring down my bullish spirit. Just when we think we might be getting out of the woods, the follow-through that everyone anticipates does not materialize. Tomorrow's trading will be dominated by the uncertainty of Friday's employment report. The question is will we get some good news on the earnings front tomorrow, or more warnings to rain on our parade? Rangebound trading is difficult and wearing. At this point, a move either way would at least give us something to hang our hats on. After today's selloff, bargain hunters may help with a bounce from support. Yet, I cannot stress enough that when you have profits in front of you, take them, no matter how big. They add up and sure beat holding a loser. Matt Russ Asst. Editor **********************ADVERTISEMENT****************************** FREE! FREE! FREE! FREE! Investor's Business Daily - Free Two Week Trial! No obligation! No invoices! And nothing to cancel! Limited time offer! Click Here! http://ibd.infostreet.com/cgi-bin/freeoffer.cgi?source=ARZOJES ***************************************************************** *************** ASK THE ANALYST *************** I Loved Holidays When I Was A Kid By Eric Utley I don't like them anymore! I've grown cynical in recent years, and the Independence Day celebration reminded me of my distaste for holidays. Now don't get me wrong, my dislike of holidays has nothing to do with the motive for celebration. It has everything to do with the fact that the stock market closes about a dozen times a year in observation of various holidays. I don't like it when the stock market closes during the weekday. Getting through the weekend is hard enough! Ok, I'll admit I have a problem. I eat, breath, and sleep - stocks. Call me a capitalist, but I love the stock market! But enough with my infatuation for finance, let's get serious. The passing of July 4th marks the midway point of the year. Since we are entering into the second- half of the trading year, now may be a good time to revisit your strategies and goals as a trader or investor. Where do you want to be by the end of the year? How much money do you want to make? I've found that if I continually ask myself these types of questions that I stay focused on my long-term goals as a trader and adhere to my strategies. Whether you want to double your account by year's end, or make, say, 5% per week, I strongly urge you to write down your goals on a piece of paper. By doing so, I believe you will approach your trading in a different fashion and view each individual trade as a means to your ultimate goal. It has improved my trading, and I know it can do the same for our OIN readers. All of you savvy OIN readers have been sending in many excellent requests recently. I'm amazed by the broad knowledge that many of you display in your e-mails. Continue to impress me by sending your requests to Contact Support. Please put the symbol in the subject line of the e-mail. ---------------------------- Exicte@Home - ATHM Can somebody there, explain to me or help me understand that if broadband is the next wave of the Internet, why the #1 broadband leader ATHM, is trading AT BOOK VALUE, and so undervalued when the parts: @home, Excite, Matchlogic, @work, and all their international ventures, not to mention the explosive growth rate in subscribers figured properly? Please, Please, Please if you are able, comment on ATHM. Thanks. - Steve Steve, you have obviously done your research on ATHM, I will try to provide you with some intelligent answers to your question. First off, Book Value (net asset value of a company's securities) does not mean much to technology investors. Tech investors want momentum and earnings growth. And, earnings are far-off for ATHM investors. ATHM began tumbling last April after the company said it would move away from profitability and focus on acquiring market share. ATHM was expected to earn about 10 cents per share during fiscal 2000 before the strategy shift last April. Now it doesn't look like ATHM will make money for another year or two. ATHM's shift to going after market share came at a terrible time. More than anything, investor's currently want profits. Also, ATHM paid about $780 mln for Bluemountain.com last year, an online greeting card company. The purchase of Bluemountain turned out to a big mistake for AHTM. The greeting card company has done nothing but lose money. For those two reasons, a shift in strategy with immediate losses, and a poorly timed acquisition, tarnished ATHM's credibility on Wall Street, and the stock has suffered ever since. As for Excite, analysts are having a hard time placing a value on that portion of ATHM. With online advertising expected to decline, I don't see Excite doing much for the share price of ATHM. You're right about the explosive growth of subscribers. ATHM is expected to add about 1.9 mln customers this year to bring the total to about 3 mln users. However, the company is in danger of meeting its 2000 subscriber goals due to a shortage in cable modems. That issue has also plagued the stock. There is something positive to be said about ATHM. Many analysts agree that high-speed Internet access via cable modems will beat out DSL services. And since ATHM is one of the leading cable Internet access providers the stock should do well over the long-term. It gets down to whether or not ATHM can execute well enough over the next several years. The sooner the company achieves profitability, the better. On a personal note, I've been waiting for six months now to sign up for ATHM's high-speed Internet services at my residence. Every time I call ATHM they say it should be available soon. I know of dozens of people in my neighborhood who are waiting for high-speed Internet access to become available. The demand for ATHM's services is there, the company just needs to deliver. With such high demand anxiously awaiting ATHM’s service it’s hard to ignore the potential for the stock. ---------------------------- EMC Corporation - EMC Please give me your short and long term outlook on EMC. Thanks. - Bobbie Please comment on EMC. Do you think it is advisable to buy leaps (Jan 02 Calls at a strike price of 80)? Thanks. - Jackie Last time I checked, EMC was one of the best performing stocks on the NYSE over the last ten years. I think the stock has returned somewhere around 50,000% to shareholders over the last decade. The company provides hardware and software products that enable customers to store electronic information. In English, EMC helps businesses store stuff on the Internet. In essence, EMC is the oldest Internet infrastructure play. Many computer industry executives and analysts believe that the conventional PC will become extinct in the coming years as consumers move to smaller and more versatile electronic computing devices. If that happens, consumers will need more and more space on networks to store data. That means more information is going to be stored on the Internet rather than the big box sitting on top of your desk. If the analysts are right, EMC is positioned better than any other company to take advantage of the shift away from PCs and to the Internet for data storage needs. The company has a tremendous management team that garners Wall Street's approval, and continues to execute with maximum efficiency. Clearly, EMC is the leader in data storage, and with earnings growth north of 30%, the stock warrants the consideration for a long-term investor. I’m sorry Jackie, I can’t give you specific play recommendations, but I can tell you that EMC’s future looks promising. However, the risk with owning EMC is very similar to other leading tech stocks such as CSCO and INTC. And that is, does 30% EPS growth warrant a 150 multiple? That said, the stock is not cheap. And expensive stocks are typically more volatile in treacherous markets such as the current environment. If you don't mind the volatility, EMC is worth considering for a long-term investor. In the near-term, the company's earnings announcement in two weeks could be the catalyst to take the stock higher. EMC has been consolidating its most recent gains over the past two weeks. The stock made a nice run after splitting 2-for-1 in early June, and could be building the base for its next leg up. However, the fact that EMC is a bellwether in the Tech sector requires cooperation from the broader market. ---------------------------- Micron Technology - MU Hello Eric, I loved the fish story as it relates to summer stock trading. Can you give me your advise on MU. I keep following entry points and exit points from OIN and other emails and I STILL GET BURNED. Any advise? I LOVE THE OIN FORMAT AND STYLE! THANKS FOR PROVIDING SUCH GREAT INFO IN SUCH A HUMOROUS FORM! Thanks. - Betty Well Betty, thank you for such encouraging comments. Your accolades mean a great deal to myself and the rest of the OIN staff. After giving such nice comments Betty, I wish I had better news about MU to give you. You probably heard the news Wednesday morning that Salomon Smith Barney analyst Jonathan Joseph downgraded the entire Semiconductor sector to a Neutral rating. Joseph's actions sent a shockwave through the entire sector Wednesday morning after he said he expected the robust demand for chips to slow in the coming six months. However, Jonathan Joseph is only one person, ultimately the market will dictate the direction of the semis. We heard a host of analysts come to the defense of the group Wednesday afternoon, which makes trading the semis all the more difficult. This could be the inflection point that many on Wall Street have been warning about. Or, this could be an incredible buying opportunity if the chip stocks rebound. For obvious reasons, the Semiconductor sector moves in tandem, so watch the group movement closely to game MU. We'll know more in the coming days. In defense of MU, the last I heard from Lehman analyst Dan Niles is that he was still bullish on MU, and he's one analyst that can make you money when you listen to him. MU already reported better-than-expected earnings a week ago, so the catalyst for the stock will be if the other semis deliver excellent profits as the second quarter earnings season commences. But, I would be cautious with MU in light of the bearish comments Wednesday. The next two days will be telling times for the Semiconductor sector and should reveal more answers. To address your problems with entry points Betty, I offer this. Like Jim has mentioned before, OIN providers you with the groundwork for trades, it's up to the individual to manage risk and employ strategies. When picking entry points I suggest that you study what drives your decision making when entering a trade. Study destructive patterns in your trading, and try to eliminate those nuances. If a strategy is not working for you, make slight adjustments until you find something that is comfortable and that works. Above all, don't forget to have fun! Learn to enjoy trading and do the right things consistently, and the profits will follow as an afterthought. ---------------------------- SanDisk - SNDK Could you tell me your opinion on SNDK? It's been taking a beating recently. - Felicia SanDisk commands nearly 30% of the flash-memory market. SNDK manufactures removable memory cards that are used to store data in consumer marketed devices such as digital cameras, cell phones, and MP3 players. Flash-memory is unique because it can store twice the normal data capacity, it's relatively cheap, and easily reprogrammed. SNDK expects the market for flash-memory cards to grow to $10 bln in five years, that's about a 50% annual rate of growth from 2000 sales figures. The beating that you mentioned Felicia stems from concerns over slowed growth in handsets. And, of course, the downgrade from Salomon Smith Barney didn't help SNDK's cause Wednesday. But, the selling may be somewhat overdone in SNDK. Many analysts have been saying for the past week that SNDK does not depend solely upon the cell phone market for sales. The company is more diversified into other market segments. Furthermore, the same analysts expect the demand for flash-memory to pick-up going into the end of the year, despite the bearish comments on the chip stocks made Wednesday. In similar fashion to MU, and rest of the Semi sector for that matter, I would approach SNDK with caution in the near-term. The stock looks a little weak after Wednesday's blood-letting. The bearish analysts comments were particularly harsh on flash-memory makers Wednesday. Silicon Storage (SSTI), a competitor of SNDK, was absolutely hammered Wednesday. It's a little surprising that Salomon Smith Barney was so hard on the flash-memory makers considering that many analysts believe flash-memory chips are far less volatile than other semiconductors. At any rate, SNDK has a tremendous outlook for the next three to five years with the growth of flash-memory applications, being that the company is the market leader, the stock should do quiet well over the long-term. Expect more volatility, and wait for the stock to cool off before jumping in. ---------------------------- DISCLAIMER: This column 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 Ask the Analyst 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 its accuracy. *********** OPTIONS 101 *********** A Victim No Longer By David Popper Two years ago, between May and October, I made absolutely no money. I felt fortunate that I made no money because at least I did not lose money. The market was in a trading range. When it appeared to break to the upside, I jumped in. When the run was over and the stock dipped, I jumped out. In a very real sense, I was buying high and selling low. This is not the action that promotes sterling returns. After two or three rounds of being whipsawed, I became like the proverbial deer in the headlights. That is, I doubted every trade. I also stood in total fear every time an economic report was due, because I was often fully invested and stood to lose with a negative report. I was confused. My whole idea of actively trading was to be in charge of my own account. I believed that passively investing in a mutual fund made you a victim of the whims of the market, and that it made more sense to "make things happen." After a year of trading, I had spent many hours trying to be the captain of my own ship and was still a victim to the whims of the market. I understood that trading takes time and having a busy professional career did not allow me the time to get good quickly. I also realized that short-term trading was a game unto itself and a majority of traders lose. At the same time, the allure of the market beckoned. From a distance, it appears that the market can be tamed and that wonderful profits can be obtained. If only a better approach can be taken. The first thing I did was to analyze how I reacted during a trade. I realized that for me, purchasing more than 300 shares of a stock caused me great delight when the stock went up but also great consternation when the stock went down. In other words, it became emotional. I also learned that I did not like to see my bottom line dip and I tended to look at that bottom line too often. After a lot of struggle, I finally achieved a strategy which was a correct fit for me. My strategy has two components. The first component was discussed in last week’s article. I use one-half of my funds and purchase great stocks (high earnings per share, high relative strength, in a hot sector of the economy) and will sell calls which will expire in four to six months. Typically, I will receive between 20% and 25% premium. This affords me tremendous downside protection and gives me a comfortable return. Think about it. A 20% return earned three times a year is 60%. A 25% return earned twice a year is 50%. Compare this to any bank account, CD or mutual fund. After these calls are in place, I can take whatever action is appropriate with them as time goes on. These actions were described last week. With the other half of my capital, I simply wait for a market extreme that happens from time to time. For example, when the NASDAQ "dipped" 500+ points in April, I took advantage of the situation to sell out-of-the-money puts. Others took advantage of the situation to sell in-the-money puts. They made more profit than I, however, I had more safety than they did. Still others bought the stock on the major dip and rode it ten to thirty points on the rebound. In short, market extremes yield quick profits. When these two strategies are combined, your return may equal between 50% and 100% per year. If that is not enough, you could still position trade a very small amount of stock to earn five to ten point profits on a daily or weekly basis. This, of course, enhances your profit even more. The beauty of this system, however, is that it allows you to make healthy returns with much less risk. It also allows you to take advantage of market volatility, instead of being a victim to that very volatility. It also allows you to day trade for extra profits without a lot of extra risk. In short, I am no longer a victim of volatility. Instead, I welcome it and profit from it. Contact Support ************** TRADERS CORNER ************** COT Report: Uncovering The Clues By Austin Passamonte We left our visit on Monday covering behavior of commercial traders in the financial world. To recap, we suggested that they’re usually on the winning side of market moves but buy and sell too early for us to trade accordingly. Let’s figure out how to use this info for our advantage. First, have you ordered your FREE two-week trial to Investor’s Business Daily from OIN’s link? If not, please do so tonight. For no other purpose, you’ll find free instruction and info inside that I couldn’t imagine trading equities without. Within the IBD pages that cover futures and futures options there should be an offer for yet another free trial; this one for a commodity market charting service. The reason I direct you to IBD is the fact that this free trial is available through them. You’ve got to like the price we’re paying for all of this material so far! Once you receive the chart service via mail or internet, most weekly charts within will graph all trader activity at the bottom. Solid lines, dashed lines and dotted lines each representing a different group will be plotted above and below a horizontal line value of zero. This is our first step in tracking the trader’s footsteps. The biweekly COT report and data are included within and available separately but offer little insight unless graphed and charted for relationship comparison as you’ll soon see. Focus on the lines for commercial and small speculator traders for now, ignoring activity of the large specs. It’s common for commercial positions to remain net long or short over long periods of time, especially on the short side. Small specs will gyrate up and down much more. Remember that we said small traders (the public) are nearly always wrong at the ends of a market move while commercials are usually correct? What if we look for situations where the two groups are diametrically opposed - might that be a deck stacked in our favor? These signals do not come along very often. A few times each year is a lot. However, if you catch the trend change near it’s beginning and ride the move towards the peak, your account can grow several hundred percent. This is not chicken- pick intraday action; it is trend-following major market moves for big wins when opportunity presents itself. We cannot use this info on a daily basis. Watching the action and saying, "Oh boy, the commercials shed a few open short contracts last week, time for me to go long" is futile. That’s not how it works. The best signals come from extreme degrees of short or long percentage from each group. I pay attention every time commercial traders get net long or short the greatest amount within the last twelve months. This tells me that they are accumulating (long) or distributing (short) more than they have in the past year. Something’s up! Once I see this happen, it’s time to watch what small specs are doing. If the time comes where commercial traders are heavily positioned one way while small specs are extreme the opposite, a trend reversal may be in the offing. Contrarian sentiment states to do the opposite of the majority’s opinion to win. The majority happens to be small traders and also market advisors. If these people are extreme while the trend-enders are opposite extreme, something must give. Where would you like to place your bets? As always, I never want you to take my word for this blindly. It is critically important for you to spend 60 minutes once in your life to analyze a handful of charts and draw your own conclusions. You’ll believe your results much more than mine. I do have an inkling of what you will discover, though. Here’s an easy exercise for you to do; pick out any commodity price chart at random that graphs COT positions along the bottom. I don’t care what the market is, could be collard greens for all that matters. Using a highlight marker on paper, locate the commercial activity line and fill in each zone above or below the zero line where they were net long or short to 12 month extremes. Now, find the small spec line and repeat the same thing. It should take you less than five minutes per page to do this. Circle the points where each group was the farthest apart in market sentiment. What happened as they moved back towards the zero line eventually? For those of you who haven’t tried this yet, you’ll see the market usually peaks or bottoms right there and reverses in favor of commercial sentiment as they move to the other side of zero line. Here’s an example. We are tracking soybeans and weekly charts show prices at yearly highs of seven cents. Small spec sentiment is at a 12 month high to the net-long side, but commercial net-short positions are at an opposite extreme. I don’t care what the weather forecast is, how many acres are planted or which biotech firms are using soy extracts to cure disease; when the commercials switch from extreme short back towards the long side, that market is coming down. You see, they already sold their soybean contracts short at prices considered above fair value. Now they need to cover those shorts at lower prices in order to profit. The massive positions they incurred took awhile as distribution occurred. Eventually, it’ll be time once more to accumulate when prices are lower. Who do you think bought soybeans like crazy as prices rose from 6 cents to 7 cents? That’s right, small and large specs. You can be sure the media touted soaring bean prices and the $5,000 per contract increase was justified by every bullish pundit. Still, the commercials quietly sold that rally starting from 6 cents and ceased near 7 cents. They held their contracts until prices stalled at the 7 cent range and slipped back to 6 where the giants quietly began buying from theredown below 5 cents to rake in massive profits. All we had to do was watch the action and jump in when the time was right. We could clearly see when commercial net-short percentage peaked and then began to shrink as the market likewise peaked and failed. The activity line on a weekly futures chart would be nearing that zero mark where they would then switch over to the long side. This is our clue that the market is now coming under commercial accumulation as they expect prices to be lower than when they distributed. Make sense? Using our various short-term technical tools, we fine tune our entry points to the short side and confirm the new direction is now underway. Let’s hitch a ride on the soybean market down as the public sells it off back to commercials. I chose soybeans as our example in hopes you would focus on the concept instead of it’s underlying. DELL or RMBS might have met with some bias, I’d guess. This same concept can be used to track broad markets and individual stocks to a much lesser extent. Bloomberg’s "money flow" shows the sentiment of block trades 10,000 shares or more versus current price action to predict whether a stock is under accumulation or distribution by large specs. Looking at the S&P 500 futures chart today shows commercials net short to a greater degree than they have been in years. At the same time, small specs are wildly long. What might that indicate? Well, the broad market seems to be under commercial distribution in a big way. We can interpret that by saying they are selling this market into someone’s hands while expecting prices to be high. Who’s doing all that buying? Simple...look at the graph to determine what group is greatest net long. Make no mistake, the commercials will eventually switch over from net short to the long side. It could be quite some time as they roll current futures contracts over to distant months while a summer rally pushes the market even higher. Nevertheless, the time will come when they move to cover those shorts, and you can be sure market prices will fall in their favor. Personally, I don’t care what the analysts are touting in the media or how fundamental news bolsters new highs being reached. When this setup completes the cycle, I will be looking to cover longs and buy puts with impunity. It might take awhile and we may all fatten up on a nice summer rally in the interim, but when this reversal indicator triggers, I suggest you at least be aware. Rest assured, we’ll keep you posted at every turn in the Market Sentiment section of OIN. Next Monday, I’ll share with you a simple short-term and long-term trading model we’ve been tinkering with that you may find helpful. Your input will be greatly appreciated to fine-tune this tool to the utmost. Can’t wait to visit with you then! Best Trading Wishes, Contact Support ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ********************** PLAY OF THE DAY - CALL ********************** GLW - Corning Inc. $255.00 -18.50 (-14.88 this week) Corning provides communications technology at light speed. The materials pioneer is one of the world's top makers of fiber-optic cable, which it invented more than 20 years ago. Corning's Telecom unit, which accounts for about 50% of sales, makes optical fiber and cable and photonic components. The company's Advanced Materials unit makes industrial and scientific products, including semiconductor materials. Its Information Display segment makes glass products for TVs, VCRs, and flat-panel displays. Corning operates 40 plants in 10 countries. Most Recent Write-Up The bulls and bears duked it out over GLW Friday. The result was a tie. But, the bulls have definitely been winning the war. And no wonder, considering GLW is the leading provider of optical cable in the blistering hot fiber optic area. GLW has made quite a run so far this year, in fact, the stock is one of the best performing names on the NYSE year-to-date. Analysts feel that the stock has at least $100 more upside potential this year. Which doesn't sound too bad for those of us on the long side of things. Furthermore, with GLW trading at such high levels, many are expecting a split announcement from the fiber optic giant, including us at OIN. Given its high-profile status on Wall Street, a split announcement may have a significant impact on our play. What has attracted investors to GLW so far this year is the company's explosive earnings growth. What's more, GLW's fundamentals rival those of any other company operating in the fiber optic business. The stock trades at a healthy multiple, but relative to the likes of JDSU and SDLI, GLW is fairly cheap. GLW's relatively low P/E explains why analysts expect the stock to continue to climb this year and expand its multiple. There are little, if any, signs of demand slowing for GLW's fiber optic cable. And the robust business GLW is enjoying is the catalyst that can take our play higher. With GLW trading at such high levels the stock is volatile, to say the least. An aggressive trader might look to the intra-day dips for entry points. GLW has support at the $260 level, which may provide an entry if the stock bounces from that level. For our more conservative readers, look for an entry if GLW can clear resistance near its 52-week high at $270. Comments GLW felt the NASDAQ pain today as profit-takers locked in their gains. The trend has been steady for GLW and the stock continues to find support at its 10-dma, currently $256. It closed at $255 in NY trading, yet it is trading up in after-hours at $257.63. With this said, we will be looking for a bounce from the 10-dma. Today's selloff took almost 6% off the share price. A NASDAQ bounce and bargain hunting could help GLW continue its uptrend. BUY CALL JUL-250 GRJ-GJ OI=1354 at $15.00 SL=11.75 BUY CALL JUL-260*GRJ-GZ OI=1035 at $10.00 SL= 7.50 BUY CALL JUL-270 GWD-GN OI=1668 at $ 6.13 SL= 4.25 BUY CALL AUG-260 GRJ-HZ OI= 812 at $21.88 SL=17.00 BUY CALL AUG-270 GWD-HN OI= 355 at $17.38 SL=13.50 Picked on June 6th at $217.25 P/E = 113 Change since picked +37.75 52-week high=$277.88 Analysts Ratings 8-5-0-0-0 52-week low =$ 54.56 Last earnings 04/00 est= 0.55 actual= 0.64 Next earnings 07-24 est= 0.67 versus= 0.49 Average Daily Volume = 2.97 mln ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** From Independence Day celebrations to earnings warnings... The market tumbled today amid weakness in technology stocks and profit-taking in industrial issues. Semiconductor and computer stocks led the Nasdaq lower following a slew of revenue warnings and negative comments from industry analysts. The biotech sector was the only positive group in the composite index. The broad market slumped as oil service shares plunged after a drop in oil prices but airline and transportation stocks rose on the bearish outlook for crude supplies. Advances in cyclical and financial issues helped the Dow retain a portion of Monday's gains with retail, drug, and paper stocks topping the blue-chip average. Abby Cohen, chief investment strategist at Goldman Sachs, made the headlines with a report on the earnings prospects of capital goods companies. Goldman commented that while the rate of profit growth may have peaked in the first quarter, she expects many more periods of moderate revenue gains. Several factors, Cohen said, likely contributed to favorable, but slower profit growth in the sector: higher materials costs, limited pricing flexibility and dollar strength. Her belief is similar to that of many other analysts, who contend that earnings growth overall will continue to be healthy in the coming year. I wish they had made those opinions more conspicuous during today's widespread sell-off. Summary of Previous Picks: Covered Calls: (Margin would double the listed Monthly Return) Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return ENZ JUL 50 46.25 70.19 $3.75 6.7% ABSC JUL 55 50.75 70.03 $4.25 5.8% SDLI JUL 210 193.81 275.31 $16.19 5.8% NEWP JUL 65 60.87 96.13 $4.13 5.6% IWOV JUL 70 66.38 118.31 $3.62 5.5% ISSX JUL 80 76.81 97.00 $3.19 5.5% HGSI JUL 90 83.38 153.50 $6.62 5.5% AETH JUL 180 170.88 189.00 $9.12 5.4% ELON JUL 60 54.69 54.50 -$0.19 0.0% ** ** CA collateral damage? Breaking 150 dma = close? Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return ENZ JUL 45 42.50 70.19 $2.50 14.0% ELON JUL 50 47.75 54.50 $2.25 9.1% TECH JUL 95 92.94 142.50 $2.06 7.9% MERQ JUL 72.5 71.31 94.38 $1.19 7.8% NEWP JUL 55 53.31 96.13 $1.69 7.7% BRCM JUL 145 142.87 221.69 $2.13 7.1% AFFX JUL 140 137.12 171.44 $2.88 7.0% PDLI JUL 105 102.12 163.69 $2.88 6.9% ABSC JUL 45 43.44 70.03 $1.56 6.9% BRCD JUL 105 101.75 178.94 $3.25 6.8% PDLI JUL 125 122.37 163.69 $2.63 6.8% ISSX JUL 70 69.00 97.00 $1.00 6.7% CIEN JUL 130 128.31 164.81 $1.69 6.5% HGSI JUL 75 72.62 153.50 $2.38 6.4% TIBX JUL 80 78.94 109.50 $1.06 6.4% RBAK JUL 77.5 75.12 150.25 $2.38 6.4% IWOV JUL 60 58.81 118.31 $1.19 6.3% SDLI JUL 170 164.87 275.31 $5.13 6.3% AETH JUL 150 147.25 189.00 $2.75 6.2% MLNM JUL 80 77.81 123.50 $2.19 6.0% RBAK JUL 115 113.50 150.25 $1.50 5.9% IDPH JUL 95 93.87 130.25 $1.13 5.6% GLW JUL 200 195.87 257.63 $4.13 5.5% CHKP JUL 145 142.00 210.56 $3.00 5.3% NVDA JUL 55 54.03 54.56 $0.53 2.9% ** ** Adj 2-1 Split - moving towards support and 150 dma? Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return SSTI JUL 125 126.38 83.94 $1.38 10.7% AMCC JUL 140 142.50 100.81 $2.50 9.7% RFMD JUL 150 151.75 83.19 $1.75 7.8% BRCM JUL 220 222.00 221.69 $0.31 0.8% ** ** Buy-to-cover or is it rolling over? New Candidates: This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. *************** BULLISH PLAYS - Covered Calls & Naked Puts *************** AKAM - Akamai Technologies $115.19 *** On The Rebound! *** Akamai Technologies provides a global delivery service for Internet content, streaming media and applications that improves Website speed, quality, reliability and scalability and protects against Website crashes due to demand overloads. Akamai markets its services to large businesses and other businesses with an Internet focus. They deliver Internet content and applications through a global server network. Akamai's services are easy to implement and do not require its customers or their Website visitors to make any hardware or software modifications. Akamai shares rose this week following positive comments from analysts after meeting with company officials. The positive response was attributable to Akamai's intended pursuit of new international opportunities to provide its services, as well as its intention to introduce at least one additional service per quarter. Akamai recently joined with C-SPAN to provide coverage of Democratic and Republican political conventions. Akamai will produce, encode and deliver the streaming audio and video not only to C-SPAN but to other sites syndicating the programming from C-SPAN. AKAM is another industry-leading issue that has begun to stage a recovery from the punishing sell-off in technology stocks earlier this year. Now the company is regaining institutional favor and the block-volume buying has increased in recent sessions. Our outlook for the issue is neutral-to-bullish and any market rally should propel the share value well clear of our cost basis. In the event of further consolidation, this company would certainly be a candidate for any long-term portfolio. AKAM - Akamai Technologies $115.19 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 95 RWU SS 166 1.25 93.75 8.8% *** Sell Put JUL 100 RWU ST 240 2.25 97.75 12.9% Sell Put JUL 105 RWU SA 125 3.63 101.37 17.5% Chart = ****** INCY - Incyte Genomics $95.06 *** Big Rally! *** Incyte Genomics, formerly known as Incyte Pharmaceuticals, is a provider of genomic information-based products and services. These products and services include database products, genomic data management software tools, and related services. Incyte focuses on providing an integrated platform of information technologies designed to assist pharmaceutical and biotechnology companies and academic researchers in the understanding of disease and the discovery and development of new drugs. Incyte and Eli Lilly recently announced an expanded agreement in which the two companies will collaborate on accelerating the development of therapeutic proteins. Under the expanded agreement, Lilly and Incyte will focus on the identification and selection of secreted molecules that are strong candidates for new therapeutic protein development. Lilly will also obtain options to license multiple therapeutic protein patents from Incyte. In the past, Lilly has used Incyte's database in its drug development efforts and this new pact provides evidence of the valuable intellectual property contained in Incyte's growing portfolio of more than 500 issued and allowed patents on full-length genes, including 134 issued patents on therapeutic proteins. The agreement is expected to help INCY increase future therapeutic protein discovery efforts and maintain their leadership position in delivering important therapeutic proteins to the market. Incyte has also entered into a major genomic research partnership with Baylor College of Medicine. Scientists at Texas Children's Cancer Center, a joint program of Baylor and Texas Children's Hospital, will work with Incyte to conduct gene expression studies and determine the role of genes in the prevention, diagnosis, and treatment of cancers commonly affecting children. Technically, the issue appears to be successfully completing a consolidation phase and we expect the share value to benefit significantly from the next market rally. INCY - Incyte Genomics $95.06 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 75 IPQ GO 5 22.00 73.06 5.0% *** Sell Call JUL 80 IPQ GP 430 18.50 76.56 8.5% Sell Put JUL 70 IPQ SN 79 1.19 68.81 11.2% *** Sell Put JUL 75 IPQ SO 70 2.06 72.94 18.6% Sell Put JUL 80 IPQ SP 32 3.25 76.75 23.6% Chart = ****** INSP - InfoSpace $57.13 *** Stage I Base *** InfoSpace is a global Internet information infrastructure services company. InfoSpace provides enabling technologies to Web sites, merchants, and wireless devices. Their affiliates utilize and distribute these services via PCs and a network of wireless and other non-PC devices including cellular phones, pagers, television set-top boxes, and online kiosks. In April, INSP announced its fourth consecutive profitable quarter, with revenues of $19 million, up from $5.3 million. Verizon, Vodaphone, ATT Wireless and all of the regional bells have purchased the INSP wireless platform, contributing to INSP’s profitability. With the recent recovery in Internet Information Providers, investors are speculating on other issues in the group and it appears this stock is in a neutral-to-bullish trend for the near-term. If INSP can capitalize on their many partnerships in the wireless realm, there could be substantial upside potential for the company in the near future. Our position is optimistic with little downside risk and favorable reward. INSP - InfoSpace $57.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 50 OHY GJ 2187 9.00 48.13 7.4% *** Sell Call JUL 52.5 OHY GX 210 7.25 49.88 10.0% Sell Put JUL 47.5 OHY SE 310 1.00 46.50 13.4% *** Sell Put JUL 50 OHY SJ 2963 2.00 48.00 21.5% Sell Put JUL 52.5 OHY SX 135 2.50 50.00 22.9% Chart = ****** IWOV - Interwoven $118.31 *** Split Rally? *** Interwoven is a provider of enterprise-class Internet content management software. The company's flagship product, TeamSite, controls the development, management and deployment of business critical Web sites. Interwoven solutions are based on a unique, inclusive content architecture that empowers all contributors and leverages diverse Web assets including XML, Java, rich html, multimedia and database content. TeamSite is available for both the Sun Solaris operating system and Microsoft Windows platform. In early June, Interwoven announced that its Board of Directors approved a two-for-one stock split, to be effected in the form of a stock dividend to shareholders of record on June 22, 2000. The stock split will occur on-or-about July 14 and it appears that traders are anticipating an upcoming rally. Analysts may have supplemented the recovery as the shares of Interwoven were upgraded in early June by Dain Rauscher Wessels. The brokerage upped the issue to "strong buy-speculative" with a new 12-month target price of $140 a share. Thursday's move above a recent trading-range top near $95 suggests the issue is poised for a continued rally into the low 120's. Our position offers another conservative entry point on a fundamentally sound company with a bullish technical outlook. IWOV - Interwoven $118.31 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JUL 90 IUW SR 42 0.94 89.06 7.3% *** Sell Put JUL 95 IUW SS 22 1.75 93.25 12.9% Sell Put JUL 100 IUW ST 123 2.75 97.25 16.5% Chart = *************** BEARISH PLAYS - Naked Calls *************** AMD - Advanced Micro Devices $75.25 *** Sector Downgrade! *** Advanced Micro Devices is a worldwide semiconductor manufacturer. Their products include a wide variety of industry-standard integrated circuits used in product applications such as data and network communications equipment telecommunications equipment, consumer electronics, personal computers and workstations. Advanced Micro Devices is poised for growth but recently, the stock has come under selling pressure with other semiconductor issues as the group was downgraded after gains earlier in the week. Salomon Smith Barney analyst Jonathan Joseph downgraded the entire semiconductor sector to "neutral" from "outperform" and also downgraded ratings on a number of individual companies after referring in a report to "evidence of a trend reversal in decelerating industry unit shipments." Obviously, the company is fundamentally sound but for now the technical picture is less than outstanding. We will use the current consolidation period to benefit from overpriced option premiums with these relatively conservative, bearish positions. The probability of the share value reaching our sold strikes appears rather low but there is always the possibility of a recovery rally so monitor the issue daily for changes in technical character. AMD - Advanced Micro Devices $75.25 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 90 AMD GR 9921 1.88 91.88 20.7% Sell Call JUL 95 AKD GS 7919 1.19 96.19 13.9% *** Chart = ****** DITC - Ditech Corporation $84.19 *** Technicals Only! *** Ditech designs, develops and markets equipment used in building and expanding telecommunications and cable communications networks. The company's products fall into two categories: echo cancellation equipment and devices that enable and facilitate communications over fiber optic networks. Ditech's echo cancellation products eliminate echo, which is a significant problem in existing and emerging networks. The company's optical communications products enable the implementation of wavelength division multiplexing technology, which is becoming more widely adopted by service providers to address network capacity constraints. The company's optical communications products are designed to function either as stand-alone products or as a complete system known as the Optical Path Solution. The majority of Ditech's revenue is derived from sales of its echo cancellation products. The DITC price trend reflects a pronounced negative divergence from the long-term moving average (200-day) line and the recent downtrend has endured successively lower highs and lower lows, on increasing selling pressure. With today's drop, the issue has again failed to recover after a recent consolidation and for now it appears the stock has little chance of reaching our sold positions. DITC - Ditech Corporation $84.19 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 105 DUI GA 71 1.56 106.56 16.1% Sell Call JUL 110 DUI GB 139 0.94 110.94 10.1% *** Chart = *************** NEUTRAL PLAYS *************** SDLI - SDL Inc. $275.31 *** Jim's Favorite Strategy! *** SDL, Inc. is a provider of solutions for optical communications and related markets. Their products power the transmission of data, voice, and Internet information over fiber optic networks to meet the needs of telecommunication, dense wavelength division multiplexing (DWDM), cable television and metro communications applications. Their solutions enable customers to meet the need for increasing bandwidth by expanding their fiber optic networks more quickly and efficiently than by using conventional electronic and optical technologies. Its revenue comes from two principal markets: fiber optic communications and industrial laser products. This play is simply based on the current price or trading range of the underlying stock and its recent technical history. The probability of profit from these positions is also higher than other plays in the same strategy based on disparities in option pricing. Technically, we favor the issue for a bullish position and have decided to sell premium for credit and use the earned income to offset any losses on the downside, in the event we are required to accept assignment of the stock. If the price of the issue moves through the current resistance area near $310, we will buy the stock to cover our sold options. SDLI - SDL Inc. $275.31 NEUTRAL CREDIT-STRANGLE (sell call - sell put) Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JUL 330 QJV GA 1406 4.25 334.25 13.5% Sell Call JUL 340 OSL GH 106 2.75 342.75 9.0% Sell Call JUL 350 OSL GJ 522 1.63 351.63 5.5% *** Sell Put JUL 215 QZL SC 106 1.50 213.50 5.0% *** Sell Put JUL 220 QZL SD 258 2.06 217.94 6.9% Sell Put JUL 230 QJV SF 359 3.38 226.62 9.4% Chart = *****************************ADVERTISEMENT************************ FFFOOOOUUUUURRRRR!!!!! Golf Digest is the most preferred golf publication. Only $1.48 per issue,63% off the news stand price. Learn how to Cure your slice, and other valuable lessons! http://www.OptionInvestor.com/tracking.asp?co=OIGolfDigest6302000 ****************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. 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