The Option Investor Newsletter Wednesday 12-06-2000 Copyright 2000, All rights reserved. 1 of 1 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/120600_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-06-2000 High Low Volume Advance/Decline DJIA 10664.40 -234.30 10896.10 10620.90 1.37 bln 1219/1669 NASDAQ 2796.50 - 93.30 2916.20 2781.24 2.31 bln 1540/2392 S&P 100 717.25 - 14.84 731.16 714.24 totals 2759/4061 S&P 500 1351.46 - 25.08 1376.01 1346.15 40.5%/59.5% RUS 2000 463.54 - 7.63 474.11 463.15 DJ TRANS 2815.71 - 27.96 2854.28 2810.87 VIX 27.94 + 1.00 28.34 26.49 Put/Call Ratio 0.61 ************************************************************* Greenspan rally hit by falling apple! Supreme Court will hear case. The warning by Apple Computer after the close yesterday was the primary cause of the early morning dip but that was just the beginning of the problems. The warnings list today was led by Banc America and followed with about a dozen lesser companies. The downgrades were flying and stocks were dropping. Just like last week all over again. Four of the Fed head's partners on the FOMC gave speeches today but there was not anything earth shaking like the Greenspan speech. Did you really expect the markets to tack on another couple hundred points today? The Greenspan speech was dissected by dozens of pundits today each with a sharper microscope. What Alan said about positive things ahead was filled with enough caveats to fill a state of the union address. Seems he was preaching to the choir and they heard what they wanted to hear and ignored the things they did not like. Kind of like my children when listening to a list of chores to be completed before going to the movies. Traders heard soft landing, bias change and rate cuts and did not hear the "IF" word used repeatedly. Part of the IF came true this morning with today's economic reports. The Productivity Report showed a revised +3.3% gain in 3Q productivity, revised downward from +3.8%. This is still good news. The bad news was the Labor Costs rose +2.9% which showed that even though employment is still tight but declining the costs are climbing. The Fed has been concerned for quite a while that the climbing productivity would slow and labor costs would rise. Bingo! This report will be overshadowed by the Non- Farm payroll Report on Friday. If the unemployment rate stays in the 3.9% range and hourly wages climb along with a rise in jobs then all the IF clauses in Greenspan's speech will come back to haunt us. The other Fed gremlins have almost all gone on record recently as saying they are still more concerned with inflation and labor markets than recession. Perry is the one exception that comes to mind today. He said he personally felt the economy was dropping faster than necessary. With the Fed not meeting until Dec-19th we still have over a week of verbal warfare before the actual outcome is known. With all the Fed dread sneaking back into the market chatter after only one day of euphoria, the earnings warnings news was even more dramatic. The Apple warnings rippled through out the entire PC sector. INTC, which had reaffirmed its estimates recently was downgraded again by Salomon Smith Barney saying they expect the fourth quarter to be the worst in a decade for Intel. Wow! INTC dropped to another 52-week low of $31.24 making our lottery put on INTC a sure winner without a miraculous recovery. Dell, CPQ, IBM and HWP all suffered similar fates with Dell hitting a new 52-week low to $17.50. Hewlett-Packard had an analyst meeting today and affirmed their estimates but still fell -3 to $32. The PC sector is turning into the Rodney Dangerfield sector and it may be a long time before they garner respect again. The PC has now invaded 60% of U.S. homes on the Internet wave last year. With a 3yr or longer replacement cycle that puts us into late 2001 and 2002 before there is any replacement wave expected to form. The Y2K business upgrades are now approaching two years old and the same replacement cycle puts them into 2002 before there is a major wave. With more and more Internet enabled devices other than the PC there is a large possibility that many of these current PC strongholds will not be replaced but retired. CSFB downgraded almost anything that touches a PC this morning and more are sure to follow. As written here before the worst sector to downgrade is the PC sector since it hits almost every other sector except maybe biotechs. Chips, Internet, Networking, Software, Retailers, etc will all suffer from the falling PC sales and ripples of downgrades. ADBE took a serious hit today since they are linked to Apple for many retail products. We don't see this as a major problem for them since they are receiving much more business from Internet commerce and we added them as a play tonight. Juniper got hit today on not only profit taking but on news that Ericsson had sold 10.4 million shares of JNPR stock for about $1.2 billion that they said they were going to use to fund the third generation cell phone effort. JNPR traded down -$22 in pre-market trading but the key word here was "sold." Ericsson had already sold these shares and there should have been no impact other than sentiment to JNPR stock. JNPR closed down -16 which was only about 2/3 of the gains from yesterday. We view this as an entry point for JNPR ASSUMING the market recovers and moves higher. The big noise in the market today was the BAC warning. Claiming that loan losses would be almost double the 3Q rate the stock dropped almost -$6 from yesterday's high but recovered to close down only -1.19 after the smoke cleared. The damage was to other financial stocks guilty by association. Other high profile warnings today included FSR, another bank, and CC, CEFT, SCNT and HAS to name a few. Circuit City warned that slowing sales would almost quadruple the expected -.08 loss into a possible -.33 loss. CC dropped -25% on the news. The good news CSGS warned to the upside saying that they would probably beat estimates going forward. LSCC said they were taking the low stock price as an opportunity to buy back an additional 5 million shares of stock. Henry Blodget downgraded Yahoo again and sent it back down to $37.50 where it appears to have found support. YHOO announced today they were looking for a new sales executive and I wish them luck. Internet ad sales is very tough now and even though they have clout on their side it is a tough sell. Dow Jones also warned today due to a slowing demand in advertising after the Internet died. Tribune also warned after the close. The election news was mixed with several cliff hangers currently in process that could turn the election 180 degrees in a heartbeat. The win by Gore in the Atlanta court today took another -$3 off the MSFT stock price. This was obviously impacted by the PC sector downgrades as well. The court cases are rapidly approaching a brick wall of noon on Dec-12th. According to the law electors have to be certified by then so there are only five days left for all the fireworks to end. That will be another benchmark for the market and with the election still teetering on the brink and no clear winner everything is still up for grabs. The market does not like this uncertainty as evidenced by the wide swings whenever there is major news of court decisions. This could help keep the lid on until the final gun sounds. Bonds soared today with the prospect of lower interest rates next year and with money flowing out of the bipolar markets. With no follow through from Tuesday's rally the same money that was ready to jump on the next tech train was derailed into bonds. Oil rebounded off $28.20 and rose almost +1.60 from the lows. The three day drop had energized the transport sector but the bounce today brought them back to reality. Did you pop the champagne last night or did you wait like I recommended? Do you feel as confident today as you did last night? There was a lot of rumors in the market today that the majority of the bounce yesterday was short covering by large hedge funds and almost no retail trades. As much as the talking heads tried to fuel the bounce and give it legs it just did not happen. The Nasdaq spiked up to resistance at 2900 and rolled right over to close at the low of the day at 2796. The Dow never had a chance with a strong bounce off resistance at 10900 and then the BAC warning which knocked -$12 off JPM in only about 30 min. The Dow is heavily financially weighted and with AXP, C, JPM and tech weighted now with IBM, MSFT, INTC, UTX, HWP. Either sector could have caused weakness but the combination of the two was the kiss of death. The Dow gave back -234 of the +338 points it gained on Tuesday. Now I would gladly trade those numbers on alternate days forever but I don't think that is in the cards. Even if we had not had the big high profile warnings today there would have been some weakness from simple profit taking. You don't get +250-350 point gains without pull backs. Many analysts are now pointing to the length of time before the Fed meeting, the election uncertainty and the flood of earnings warnings as evidence of yet another retest of 2500 on the Nasdaq and 10400 on the Dow. Maybe, maybe not. The taste of positive sentiment on Tuesday was a powerful drug and as we know today's traders have a very short patience threshold. With the important Payroll Report due out before the open on Friday there is a possibility that traders will want to lighten up Thursday afternoon. Recently we have had the reverse with traders buying in anticipation of a post jobs report rally but the market is very fragile now and traders burned today may want to simply watch. Many analysts are saying that any further dip is a selective buying opportunity but they have been saying that since Nasdaq 3800 which happens to be the 200 DMA, over +1000 points above us. I would be a selective buyer. Simply to take out the naysayers I would like to see another 2500 retest so they would have no excuse going forward. Another retest would also take a lot of the risk out of the market again and us dip buyers could party yet once again. Still I would buy NTAP, JNPR, BRCD, BRCM on any pull back and rebound. After the close today ORCL picked NTAP as their vendor of choice for network storage only one day after EMC announced their NTAP competitive product. Timing is everything! The VIX retreated to only 27.94 and the put/call ratios .61. This is not pointing to a big up trend. While I personally believe 2500 was the bottom, that belief and $3.50 will get you a cup of coffee. What I believe more strongly is that we will jump around a lot until the election is over and the Fed actually does something. There is a strong possibility that they will still do nothing. However, once the election is settled on Dec-12th the bargain hunters and bottom fishers will start loading up before the Dec-19th Fed meeting in hopes of a favorable decision. I believe we should selectively buy the dips on ONLY the strongest stocks. We should also be ready to bail on a moments notice in case our entry points were not the bottom of the dip. This is a traders market and not a market for people who want to buy and hold options until 2001. That time will come but probably not for a week or two. Be patient or be quick. That is our only opportunity at this time. There are a lot of stocks that appear to have put in bottoms but even a helium balloon goes down in a down elevator. Wait for the up elevator! Good luck and don't buy too soon. Jim Brown Editor ************************************ JOHN DESSAUER "Dream Seminar at Sea" ************************************ You have seen me write about John Dessauer, a newsletter editor with a 20-year history. John spoke at our March Expo here in Denver to about 600 attendees. John uses a common sense bottom up method of stock picking and has been very successful. He has asked me to speak at his "Dream Seminar at Sea" in March. The itinerary looks more like a vacation than a seminar with stops in Aruba, Caracas, Grenada, Dominica, St Thomas and San Juan but John will manage to keep us busy. If you have interest in this event visit this link: http://www.cruzproductions.com/dessauer/ *************************ADVERTISEMENT********************* Why put all your risk into one stock when you can play the index instead? Learn how to invest in the OEX, QQQ, and SPX. Get intraday market updates, plays, education and daily commentaries by those who know. Sign up for a two week free trial and see for yourself: http://www.sungrp.com/tracking.asp?campaignid=1092 ************************************************************ ************* NEW CALL PLAY ************* ADBE - Adobe Systems $67.19 -9.50 (-0.13 this week) A long-time leader in desktop publishing software, ADBE provides graphic design, publishing, and imaging software for Web and print production. Offering a line of application software products for creating, distributing, and managing information of all types, the company generates nearly 75% of sales through publishing software products such as Photoshop, Illustrator, and PageMaker. Its Acrobat Reader, which uses portable document format (PDF) is popping up all over the Internet, as businesses shift from print to digital communications. Compared to most stocks on the NASDAQ, ADBE has a pretty good looking chart. Despite the broad-based technology selling that we have seen over the last 8 months, ADBE has continued to march higher, tagging a new 52-week high as recently as early November. Since then the stock has fallen off with the rest of the technology sector. So why are we adding it as a new call play? Quite simply, the solid bounce at the 200-dma a week ago is too good to pass up. That was the first time in over 18 months that the bears were able to drag the price low enough for a test of this level, and the rebound was quite encouraging. Unfortunately the company got caught in the stampede created by APPL's earnings warning, giving up all of its Tuesday gains, to close back down near the 200-dma ($62.69). Anything related to PC sales took a big hit today on the warning news, despite the fact that APPL's problems are not really deemed to be industry related. Rather, they are due to poor management and an inability to achieve growth goals. ADBE couldn't dodge the selling which came with the conviction of volume nearly triple the ADV. The bulls finally reappeared in the final hour, supporting the stock near the $65 support level, gobbling up nearly 2 million shares before the closing bell. If you're looking for another catalyst, think earnings. ADBE will release its results on December 14th after the close, and if recent history is any indication, should handily beat estimates of 29 cents per share. This will be a short-lived play due to the earnings report, but with our stop placed at the 200-dma, it has an attractive risk-reward ratio. Intraday dips to support are buyable, but make sure that the stock bounces before playing. More conservative players will want to see strong buying volume push the stock up through the $70 resistance level before opening new positions. Regardless of your entry strategy, confirm strength on the NASDAQ before initiating a trade. ***December contracts expire next week*** BUY CALL DEC-65 AXX-LM OI= 758 at $ 7.25 SL= 5.25 BUY CALL DEC-70*AXX-LU OI= 492 at $ 4.50 SL= 2.75 BUY CALL JAN-70 AXX-AN OI=6260 at $ 8.13 SL= 5.75 BUY CALL JAN-75 AXX-AO OI=1806 at $ 6.38 SL= 4.25 BUY CALL APR-70 AXX-DN OI= 174 at $13.50 SL=10.00 BUY CALL APR-75 AXX-DO OI= 474 at $11.50 SL= 8.50 SELL PUT DEC-60 AXX-XL OI= 917 at $ 2.63 SL= 4.25 (See risks of selling puts in play legend) http://www.premierinvestor.com/oi/profile.asp?ticker=ADBE ************ NEW PUT PLAY ************ RMBS - Rambus Inc. $47.31 -2.31 (-3.88 this week) Synonymous with high-speed memory, RMBS designs, develops, licenses and markets high-speed chip-to-chip interface technology to enhance the performance and cost-effectiveness of computer and consumer electronics products. The company licenses semiconductor companies to manufacture and sell memory and logic ICs incorporating Rambus interface technology, and markets its solution to systems companies in an effort to encourage them to design Rambus interface technology into their products. There has been no safe haven for stocks even remotely connected to the PC sector over the past month, with earnings warnings from the likes of DELL, GTW and APPL. Add in the fact that the Philly Semiconductor Index (SOX.X) recently tagged a new 52-week low, and you can see the logic behind our new put play on RMBS. RMBS' claim to fame is the new RDRAM that is reputed to greatly increase the performance of the INTC Pentium 4, but the prospects of brisk sales are being called into doubt. Rumors have been flying around fast and furious that INTC will warn about being unable to meet analyst expectations in its upcoming earnings report, and once again traced a new 52-week low today. It's hard for a stock to move up when all of the company's customers are seeing a slowdown in their respective industry. RMBS makes its income through royalties on its intellectual property, and if fewer products are sold, there will be less royalty income, plain and simple. After breaking below the 200-dma again a month ago, RMBS' downtrend has steepened again, and today's rollover at the $52 resistance level completes yet another lower high. We are placing our stop at the $55 resistance level, which sits right on the 30-dma. Conservative traders will look to initiate new positions on a break below support at $45, as the bears increase their selling pressure. Further weakness looks like it could easily challenge the stock's recent lows near $37, before conditions improve. More aggressive entries can be had on a failed rally to resistance, but confirm strong selling volume as well as negative trend on the SOX.X before playing. ***December contracts expire next week*** BUY PUT DEC-50*BYQ-XJ OI= 696 at $ 6.00 SL=6.00 BUY PUT DEC-45 BYQ-XI OI= 423 at $ 3.25 SL=1.50 BUY PUT JAN-50 BYQ-MJ OI=2971 at $10.88 SL=8.00 BUY PUT JAN-45 BYQ-MI OI= 895 at $ 8.00 SL=5.75 http://www.premierinvestor.com/oi/profile.asp?ticker=RMBS ***************************** NEW LOW VOLATILITY CALL PLAYS ***************************** AIG - American International Group $101.25 +1.19 (+3.81 this week) AIG is the largest underwriter of commercial and industrial insurance in the United States. Its member companies write a wide range of commercial and personal insurance products through a variety of distribution channels in approximately 130 countries. AIG's global businesses also include financial services and asset management. Amid the volatility in the broader markets, the insurance sector continues to produce profits. And AIG is no exception. The stock flirted with an all-time high during Wednesday's session while the broader markets spent the day back filling and combating profits takers. For its part, AIG has been rolling higher since last spring, using its 50-dma as support along the way. But, AIG hasn't seen the likes of its 50-dma for quite some time. The stock has managed to post seven consecutive sessions of higher prices - a feat in and of itself. That said, a pullback may be in order in which we'd use as an entry point. If AIG does back fill, watch for a bounce off support at $98, or lower near $96, and wait for the buyers to step in before entering new call positions. Make note that we've set our stop just below AIG's 50-dma at $95 in order to give the stock room to trade. We would drop coverage if AIG closed below $95. The more adventurous traders might consider entering new positions if AIG continues its climb to new highs. Watch for a breakout above the near-term high at $102.56, but make sure to confirm such a move with strong volume. ***December contracts expire next week*** BUY CALL DEC- 95 AIG-LS OI=2201 at $6.75 SL=4.75 BUY CALL DEC-100 AIG-LT OI=2758 at $2.81 SL=1.50 BUY CALL JAN- 95 AIG-AS OI=2703 at $9.25 SL=6.25 BUY CALL JAN-100*AIG-AT OI=4210 at $5.38 SL=3.50 BUY CALL JAN-105 AIG-AA OI=1250 at $2.88 SL=1.50 BUY CALL FEB-105 AIG-BA OI= 891 at $4.38 SL=2.75 http://www.premierinvestor.com/oi/profile.asp?ticker=AIG TERN - Terayon Communications $16.19 +1.75 (+2.69 this week) Terayon Communications provides innovative broadband systems and solutions for the delivery of advanced, carrier-class voice, data and video services, which are deployed by the world's leading cable, telco and satellite network operators and carriers. While certain sectors of technology continue to struggle, the networkers, large and small, are showing signs of life. The rebirth of small-cap networking stocks was evident Wednesday when TERN posted substantial gains in the face of an unfavorable NASDAQ, on strong volume to boot. The stock has spent the past week climbing from its recently traced 52-week low at $11, and has appeared to built a solid base. We're looking for TERN to emerge from its base, with help from the broader networking sector. New positions could be initiated if TERN breaks out above the $17 level on strong volume. But before entering on a breakout, make sure to confirm direction in the NASDAQ and other networkers including CIEN, CMVT, and LVLT. If TERN pulls back, consider entering on a bounce off support at $15 or lower near $14. However, make certain TERN is able to hold above the $13 level, as that is the site of our stop loss. We would drop close positions if TERN settled below $13. ***December contracts expire next week*** BUY CALL DEC-15 TUN-LC OI= 864 at $2.44 SL=1.25 BUY CALL DEC-17 TUN-LM OI= 389 at $1.25 SL=0.50 High Risk! BUY CALL JAN-20*TUN-AD OI= 763 at $2.25 SL=1.00 BUY CALL JAN-22 TUN-AR OI= 175 at $1.56 SL=0.75 BUY CALL APR-20 TUN-DD OI=1432 at $4.38 SL=2.75 http://www.premierinvestor.com/oi/profile.asp?ticker=TERN *************************** NEW LOW VOLATILITY PUT PLAY *************************** CLX - Clorox $38.81 -2.06 (-4.88 this week) Engaged in the production and marketing of non-durable consumer products, CLX sells its products primarily through grocery and other retail stores. The Household Products division includes the company's household cleaning, laundry, home care and water filtration products. The Specialty Products segment makes charcoal, automotive care, cat litter, insecticide, and food storage products. CLX's International segment is primarily focused on the laundry household cleaning, automotive care and food storage categories. Somebody forgot to tell CLX investors that the old economy stocks were in rally mode yesterday, as shares of the household products company accelerated their slide into the basement. In the last 2 weeks, the stock has given up nearly $10 or 20%, and it looks like there is more pain in store for the bulls. After falling below the 50-dma ($42.94) in the midst of yesterday's broad-based market rally, CLX plunged through the 200-dma ($39.63) today. Although shy of yesterday's 1.8 million shares, the bears still managed to push volume 50% above the ADV today, and it looks like they are taking aim on the next level of support, actually congestion, between $35-37. Below that, the possibility of a drop to $33 looks good. The great thing about this play is the dirt-cheap option premiums. The best entry points will likely be found on a failed rally to either the 200-dma or resistance at $41 (also the level at which we have placed our stop). Of course, continued selling below today's close will provide conservative traders with attractive entry points. Just make sure that selling volume remains strong, and tighten your stops as the stock approaches support at $35. ***December contracts expire next week*** BUY PUT DEC-45 CLX-XI OI= 140 at $6.25 SL=4.25 BUY PUT DEC-40 CLX-XH OI=1055 at $1.94 SL=1.00 BUY PUT JAN-40*CLX-MH OI= 356 at $3.25 SL=1.75 BUY PUT JAN-35 CLX-MG OI= 732 at $1.13 SL=0.00 http://www.premierinvestor.com/oi/profile.asp?ticker=CLX ***************** STOP-LOSS UPDATES ***************** INTC - put play Adjust from $39 down to $37 ************* DROPPED CALLS ************* CELG $63.50 -6.00 (+1.50) Presenting at the American Society of Hematology this morning, officials from Celgene announced the company would "aggressively" proceed with late-stage trials of its Thalmomid product. Despite the bold proclamation from company executives, CELG fell victim to the "buy the rumor, sell the news" syndrome. Along with the post-announcement sell-off, CELG had to cope with the broader weakness spanning the biotech sector. Although CELG's recent up-trend is still intact, the stock is having trouble clearing resistance at $70. With the lack of conviction in the way of volume during today's sell-off, CELG may rebound Thursday, which would present an opportunity to exit positions and take profits. On the other hand, if CELG drifts lower, consider cutting losses on a breakdown below $63, our stop. COF $58.31 -0.88 (+1.44) Our recently-added long-term call play in COF was sailing along smoothly Wednesday morning, building upon profits from Tuesday's record rally. But an earnings warning from finance counterpart Bank of America (BAC) ripped through the sector this afternoon and erased all of COF's early morning gains. Although COF may not be afflicted by the same credit problems as BAC, the warning sent a shock through the entire finance sector and may impede the progress of our COF play going forward. But, the finance sector may benefit from a relief rally Thursday, which would provide traders an opportunity to exit positions and lock in profits. If COF does bounce higher, look to exit positions on strength up to the 50-dma around the $59 level. IMCL $48.25 -1.50 (-0.69) Yesterday's stellar technology gains faded to obscurity today, as more earnings warnings and political uncertainty prompted traders to take profits. The Biotech Index (BTK.X) reluctantly participated in Tuesday's rally, and when the broad-based move failed to continue today, the index rolled over right at its 200-dma. For its part, IMCL couldn't clear the $50 resistance level and actually traded all the way down to our stop at $46. While the late-day recovery was encouraging, it looks like the near-term direction will be flat to down; not what we are looking for in a successful call play. Even though IMCL managed to close above our stop, we just can't find a reason to keep the play active when the broader sector is having such a hard time making headway. Use any strength tomorrow as an opportunity to sell into strength and obtain a better exit price. MLNM $52.06 -1.94 (-1.44) Falling victim to the overall Biotech weakness, MLNM gets dropped tonight prior to actually violating its stop at $50. The Biotech Index (BTK.X) rolled over right at the 200-dma, and the resulting weakness dragged our play down for almost a $2 loss on heavy volume today. The sentiment in the broader markets was decidedly negative, motivated by more disappointing earnings news and election uncertainty. Rather than get run over by this bearish train, traders elected to just get off the tracks. We think they have the right idea, especially given the recent history of failed rallies. Stepping aside from the play before it really turns negative will give us the perspective to be on the right side of the next major move in Biotech stocks, whether up or down. ************ DROPPED PUTS ************ FMKT $33.63 +1.50 (+4.83) Bolstered by the news of an agreement extension, shares of FreeMarkets bucked the broader sell-off in the tech sector Wednesday. FreeMarkets announced Wednesday morning that it had extended its existing agreement with Allegheny Technologies (ATI), a leading specialty materials producer, to provide e-business services and solutions. The news induced steady accumulation in FMKT in the early going, and boosted the stock above our protective stop at $34 for a short while. And although FMKT rolled over and slipped into the close of trading, we're dropping the play tonight in light of the stock's impressive relative strength. Use any further dip on weakness early Thursday as an opportunity to exit existing positions. BLDP $77.25 +2.31 (+7.25) As we cautioned last night, BLDP was threatening to break through our stop at $76. Despite weakness in the broader markets, the bulls drove the price through $82 before profit taking set in. The increased selling into the close wasn't enough to bring the stock back under its descending trendline, giving the bulls the victory for the day. The breakout in a down market combined with the improving technicals does not bode well for our put play. Confirming this sentiment is the strong moves seen in competitors FCEL, (+4%) and PLUG, (+11%). Fighting the trend can get you run over in a hurry, so we'll take the prudent approach and move to the sidelines tonight. ************** TRADERS CORNER ************** Watching the Money Flows By Mary Redmond It was refreshing to listen to Chairman Greenspan yesterday, after having been inundated with legal analysts for the last three weeks. I feel as if I have heard enough legal analysis from law professors being interviewed on the news over the last month that I am prepared to pass the bar exam without having attended law school. Most analysts now feel that the Fed has accomplished its task of slowing aggregate demand to a pace which does not exceed aggregate supply, and that one or more rate cuts next year is highly probable. The most likely result of this would be a market rally, or at least a market which stops declining. We may need to realize that we have been in a bear market for so long that it may take a period of adjustment before investors feel comfortable committing cash at previous levels. In addition, many traders and investors who began buying stocks in the 1990s had not previously experienced market crashes as intense and as devastating as the ones we experienced this year. In order to gain perspective on the situation, it is informative to examine some numbers from previous years. The Dow is down 5.2% year to date, the S & P is down 6.31%, and the Nasdaq is down 29%. The Dow has not been down by this high a percentage since 1981. The Nasdaq has not been down by this high a percentage since 1974, and this is the worst year for the S & P since 1990. In addition, the crashes of March and October of this year were as bad in percentages as the market crash of 1987 for the Dow and S & P , and worse for the Nasdaq, which lost 50% of its value from the high levels of the year. We have not had this drastic a change in the rate of growth in the GDP for the last twenty years. The GDP grew at a rate of over 8% last December, and is currently growing at 2.4%, which is a slowdown of over 70%. Considering this fact, it is remarkable that the stock market is not lower than it is now. The Fed may not have wanted to slow the economy by this much, but the Fed can never be completely certain how much of an impact each rate hike will have. At this point, the P/E of the S & P 500 is 22.4X forward earnings, which is down over 20% from March. The consensus for earnings growth for the S & P 500 is 8.7% for next year, which is revised down from 15% several weeks ago. While this P/E may be high by historical standards we need to consider another factor. Twenty years ago, the real return on equity for the S & P 500 was 4.5%. It is currently 20%. Free cash flow has doubled in the last twenty years, and now represents over 25% of earnings. Companies which are earning money but have a low cash flow and low return on equity will never be able to provide real growth to their shareholders. It is the retained earnings of a company in terms of free cash flow which allow a company to increase its shareholders’ equity, and thus provide real gains for the shareholders. Since investors are getting a higher return from stocks in terms of growth in shareholders’ equity they are willing to pay a higher P/E. History has consistently shown us that it is possible for the market to rally while the earnings growth of the S & P is slowing or decreasing, as long as we are in an environment of low or decreasing interest rates and inflation. We really want to see the CPI and the other inflationary indicators decreasing this year. The other important factor is increasing liquidity, and flows of money into the market and equity funds. When you examine a ten year chart of the Nasdaq, you can see that it is possible that the longer term trend line is finally intact, after the high deviation it took earlier this year. Ideally, we would like to see an environment of stabilizing or decreasing interest rates, moderate earnings growth, a high level of cash flows into equity funds, and moderating demand in the IPO market. Since the election turmoil starting Nov 8, we have seen an abnormally low level of cash flow to equity funds of approximately $200 million weekly, compared to the prior level of $2.5 billion weekly. At the same time, money market fund assets have increased dramatically, as investors sought a safe haven. Last week, the Investment Company Institute reported that retail money market funds took in $5.6 billion, and institutional money market funds took in $5.6 billion, bringing the total to $1.8 trillion. Money market funds and CDs have taken in over $100 billion since early October, and once a new up trend is established, at least some of this money is likely to enter the market. Ideally, we would like to see monthly inflows to equity funds of at least $20 billion. We had a real boom and bust cycle of cash flows to technology funds over the last 18 months. Weekly cash flows to technology funds grew from $250 million in March of 1999, to an amazing $2.5 billion in March of 2000, an increase of ten fold, to the current level of approximately $250 million. If the flows to tech funds increase, it is almost certain to rally the Nasdaq. It may have taken a severe crash to create a long term stable upward trend line in the S & P 500. For example, during 1999 and early 2000, we saw a distortion among sector groups in relation to their performance. For example, the Nasdaq 100 increased dramatically, at the expense of many sectors which stayed flat, during the rotation from "old economy" to "new economy" stocks. Stocks like Cisco and Microsoft grew to enormous market capitalizations of over $500 billion, with P/Es in the hundreds, while fund managers were forced to sell non tech companies as if they were garbage. It was great for a while, but this type of trend can’t continue forever. In addition, the fund managers are by necessity selective in terms of the liquidity and market capitalization of the stocks they buy. The larger companies are more liquid, which means that funds can buy and sell millions of dollars of stock at a time without disrupting the stock price. The disproportionate demand for large cap liquid technology stocks caused their P/E ratios to become even more distorted in relation to the earnings growth rate. This was compounded by the Federal Reserve’s cycle of interest rate increases, which dried up the financing available to small company stocks through stock and bond offerings. ************************Advertisement************************* Try Investor's Business Daily today! Click here for 10 FREE issues. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1122 ************************************************************** ********************** PLAY OF THE DAY - CALL ********************** BRCD - Brocade Communications $191.00 +1.19 (+23.13 this week) Brocade Communications Systems is a supplier of open Fibre Channel Fabric solutions that provide the intelligent backbone for Storage Area Networks (SANs). Brocade's family of SilkWorm switches enables a company to manage growth of its data storage requirements, improve the data transfer performance, and increase the size of its SAN. Brocade's products are primarily sold in the US with 70% of sales derived from Compaq, Data General, Dell, McDATA, and Sequent. Most Recent Write-Up BRCD $189.81 +28.00 (+21.96) The leading provider of Storage Area Networking infrastructure, along with the likes of JNPR, BRCM and MUSE, took the NASDAQ by storm today. These heavy- weights led the NASDAQ into its biggest one-day gain ever. Today's monstrous $28, or 17.3%, advance and break through the 200-dma ($177.97) was more than we could have asked from Santa. The literal explosion of its share price, backed by the triple digit gains in the NASDAQ, provide the perfect synergy for BRCD to run into its 2:1 stock split, slated for December 22nd. We're looking for BRCD to rally through the $200 level and return to its more pristine price levels, seen just last month. BRCD's share price should find short-term support at $185, and perhaps lower at $180. But take note, we have raised our stop from $159 to $175 to protect against back-filling in the coming sessions. Consider new entries only if you can handle HIGH-RISK and potentially volatile trading. A move through the $200 level would entice more momentum traders to jump into the upswing. Comments The fact that BRCD finished Wednesday with a gain is rather impressive considering the near triple digit losses sustained in the NASDAQ. If the buyers return to the tech sector Thursday, BRCD's relative strength is likely to return and lead the charge higher. New positions could be entered at current levels early tomorrow if the NASDAQ displays strength. But make certain to confirm direction in the likes of CLS and EMLX before entering new BRCD positions at current levels. A more conservative approach would be to wait for BRCD to build momentum and look to enter new positions on a breakout above the significant $200 level. If the profit taking persists tomorrow, aggressive entries might be found if BRCD bounces off support at $180, but make sure the buyers step in with volume before entering on a pullback. ***December contracts expire in two weeks*** BUY CALL DEC-190 GUF-LR OI= 8291 at $11.13 SL= 8.25 BUY CALL DEC-195*GUF-LS OI= 1059 at $ 8.75 SL= 6.00 BUY CALL DEC-200 GUF-LT OI= 1411 at $ 6.75 SL= 4.75 BUY CALL JAN-200 GUF-AT OI=10681 at $19.25 SL=14.00 BUY CALL JAN-210 GUF-AB OI= 6043 at $15.00 SL=11.00 http://www.premierinvestor.com/oi/profile.asp?ticker=BRCD ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Time for a breather, or one last gasp? A retreat in blue-chip technology issues weighed heavily on the market today and the earnings warning from Apple Computer (AAPL) brought the recovery rally to a halt. Personal computer stocks were hit hard after Apple lowered revenue guidance for the first quarter and warned it will post its first loss in three years. Analysts lowered their ratings on the company's shares and other stocks in the group slumped after the news. Semiconductor issues were also affected by the perceived slowdown in the PC industry and Intel (INTC) was among the biggest losers, falling over $4 to $31 on talk that a major brokerage was poised to release a report saying the chipmaker's current quarter could turn out to be its worst in a decade. The only Nasdaq bright spot came in Internet shares as a few e-commerce issues managed favorable gains. The Dow was also affected by the slide in bellwether computer shares and the big losers in the blue-chip barometer included Microsoft (MSFT), International Business Machine (IBM) and Hewlett-Packard (HWP). Chase Manhattan Bank (CMB), Citigroup (C) and J.P. Morgan (JPM) fell after Banc of America guided earnings estimates lower in the financial group, and DuPont (DD) and McDonalds (MCD) were among the industrial laggards. Home Depot (HD) was among the few bullish issues, rallying to a recent high near $45 on news that Robert Nardelli, CEO of General Electric's power systems segment, will become Home Depot's president and chief executive. Within the broader market, brokerage, retail, drug, healthcare, cyclical and consumer products issues all slumped. Oil service companies also headed south as a bigger-than-expected rise in inventories pushed crude prices to four-month lows. Analysts believe that a strong follow-up rally over the next few days is necessary to end the recent slump and without that catalyst, the market is likely to remain in an extended downtrend until well into the year 2001. 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 EMLX DEC 120 113.56 155.75 $6.44 4.7% 2-1 Split 12/18 ADBE DEC 68 64.44 67.19 $2.75 4.3% Key Moment Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return FNSR DEC 23 21.94 29.06 $0.56 10.7% CHIR DEC 35 34.31 44.63 $0.69 9.6% PWAV DEC 40 39.00 65.25 $1.00 8.3% SAWS DEC 35 34.12 70.00 $0.88 8.0% GENZ DEC 75 74.19 89.50 $0.81 6.9% CMVT DEC 85 83.37 95.50 $1.63 6.7% Early Exit? QCOM DEC 65 63.81 99.38 $1.19 6.7% ADBE DEC 55 54.00 67.19 $1.00 5.9% Key Moment FRX DEC 125 123.69 133.38 $1.31 5.8% PVN DEC 35 34.75 45.38 $0.25 5.0% Adj 2-1 Split SCMR DEC 40 39.31 56.44 $0.69 4.9% Close Call? CRGN - Position closed. Sell Straddles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CFLO DEC 165 172.13 58.94 $7.13 23.2%Straddle 1 CLFO - Short-put position closed. Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MANU DEC 135 136.75 97.75 $1.75 13.0% 2-1 Split 12/8 CIEN DEC 110 111.00 95.38 $1.00 12.2% EMLX DEC 185 187.19 155.75 $2.19 10.9% 2-1 Split 12/18 EMLX DEC 175 176.06 155.75 $1.06 8.7% 2-1 Split 12/18 CIEN DEC 140 141.25 95.38 $1.25 8.3% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status AFFX $87.25 $68.31 DEC50P/60P $1.12 $58.88 $0.88 Open AGN $90.75 $82.19 DEC70P/75P $0.75 $74.25 $0.75 Open AET $66.06 $69.25 DEC55P/60P $0.56 $59.44 $0.56 Open APA $62.44 $57.25 DEC50P/55P $0.63 $54.43 $0.63 Alert BMY $67.94 $66.06 DEC60P/65P $0.88 $64.13 $0.88 Alert ELN $53.38 $53.00 DEC47P/50P $0.50 $49.50 $0.50 Open XL $80.00 $81.00 DEC70P/75P $0.62 $74.38 $0.62 Open 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. (We monitor the positions marked with ***). *************** BULLISH PLAYS - Naked Puts, Combinations *************** AIG - American International $101.31 *** Hot Sector! *** American International Group is a holding company that, through its subsidiaries, is engaged in a broad range of insurance and insurance-related activities and financial services in the United States and abroad. AIG's primary activities include both general and life insurance operations. Significant activities include financial services and asset management. The company's principal insurance subsidiaries are American Home Assurance, National Union Fire Insurance, New Hampshire Insurance, Lexington Insurance, Transatlantic Reinsurance, American International Underwriters, American Life Insurance, American International Assurance, Limited, American International Assurance Limited, Nan Shan Life Insurance, American International Reinsurance, and United Guaranty Residential Insurance. American International Group is widely recognized as a leading provider of life insurance and also many other types of general insurance, including various property and casualty segments, along with lines of personal and commercial insurance. The companies in this industry have performed very well over the past few months and the trend is expected to continue. The technical outlook for AIG is also favorable and our conservative position offers an excellent way to participate in the future movement of the issue with relatively low risk. AIG - American International Group $101.31 PLAY (aggressive - bullish/credit spread): BUY PUT JAN-88.00 ZPW-MS OI=125 A=$0.31 SELL PUT JAN-90.00 AIG-MR OI=3905 B=$1.00 INITIAL NET CREDIT TARGET=$0.68-$0.75 ROI(max)=50% ***** BEAS - Bea Systems $74.13 *** On The Rebound! *** BEA Systems is a provider of e-commerce infrastructure software that helps companies of all sizes build e-commerce systems that extend investments in existing computer systems and provide the foundation for running a successful integrated e-business. The company's products have been adopted in a variety of industries, including commercial and investment banking, securities trading, telecommunications, airlines, retail, manufacturing, package delivery, insurance and government, in many cases using the Internet as a system component. The company's products serve as a platform or integration tool for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading, Web-based banking, Internet sales, supply chain management, scheduling and logistics, and hotel, airline and rental car reservations. There's not much news on BEAS to explain the recent recovery but the technical indications suggest the issue has successfully completed a recent consolidation and is poised for future gains. In addition, the fundamental outlook for the company is excellent and the rebound has been on increasing volume; both factors that lead us to a bullish position in the issue. The favorable option premiums also help provide a low risk cost basis with a reasonable expectation of profit. BEAS - Bea Systems $74.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 55 BUC XK 4140 0.50 54.50 11.0% *** Sell Put DEC 60 BUC XL 2286 1.00 59.00 20.5% ***** IDPH - Idec Pharmaceuticals $198.50 *** On The Move! *** IDEC Pharmaceuticals is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer and autoimmune and inflammatory diseases. The company's first commercial product, Rituxan, and its most advanced product candidate, Zevalin, are for use in the treatment of B-cell non-Hodgkin's lymphomas. The company is also developing products for the treatment of various autoimmune diseases (such as psoriasis, rheumatoid arthritis and lupus). There is general realization that new medicines being made by leading biotechnology companies have the promise of helping control the cost of healthcare by providing better results than current therapies. IDPH is one of the top candidates in this group and the company's stock has been "on the move" after a report that experimental drugs that use cloned antibodies to deliver radiation directly to cancerous lymphoma tumors are effective in patients who do not respond to standard therapies. The results came from clinical trials of non-Hodgkin's lymphoma drugs Zevalin and Bexxar that were presented at a meeting of the American Society of Hematology in San Francisco. The research showed that Zevalin, made by IDEC Pharmaceuticals, was effective in 74% of patients, 15% of whom went into complete remission. That's great news for this unique company and even as biotech stocks faded during the past week, IDPH managed to propel the group higher. Today the issue closed up almost $10 at a recent high near $200, on almost twice its normal volume. That is a good indication of its strength, relative to other companies in the sector and we think the issue has further upside potential. IDPH - Idec Pharmaceuticals $198.50 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put DEC 155 IDK XK 60 1.06 153.94 8.8% *** Sell Put DEC 160 IDK XL 103 1.56 158.44 12.4% Sell Put DEC 165 IDK XM 146 2.13 162.88 15.0% ***** NOK - Nokia $51.38 *** Own This One! *** Nokia is the world's largest mobile phone manufacturer, based on unit sales, and a leading supplier of mobile, fixed and Internet Protocol networks and related services as well as multimedia terminals. The company is also becoming a leading supplier of cellular networks as well as mobile Internet and broadband solutions designed to meet the needs of operator customers and Internet Service Providers. In addition, Nokia Networks also provides service creation, network management, unique systems integration and customer service. Earnings continue to be the key to success in today's market and in late October, Nokia unveiled strong third quarter results, showing a 40% increase in net profit and a 50% increase in net sales. As if that wasn't enough, earlier this week the company extended its targets up to 35% annual revenue growth into 2003 and said its share of the cellular phone market was now more than 30%. Nokia also said the number of mobile phone users worldwide will surpass 1 billion during the first half of 2002, and that the company's growth in its key mobile phones business continues to outpace that of its competitors. Investors were excited about the news and their optimism pushed the stock up over 10% in just one day. We feel the issue has great future potential and the recent technicals suggest our cost basis offers a favorable price to enter a new position. Target a higher premium initially, to allow for consolidation from the recent rally. NOK - Nokia $51.38 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 40 NAY MH 19618 0.75 39.25 4.7% *** Sell Put JAN 42.5 NZY MV 10599 1.00 41.50 5.5% *************** Neutral Plays - STRADDLES & STRANGLES *************** FITB - Fifth Third Bancorp $55.25 *** Probability Play! *** Fifth Third Bancorp is a bank holding company that engages primarily in commercial, retail and trust banking, data processing services, investment advisory services and leasing activities. In addition, the company provides credit life, accident, health and mortgage insurance, discount brokerage services and property management for its properties. They also have 18 wholly-owned subsidiaries. This position meets our criteria for a favorable straddle; cheap option premiums, a history of adequate price movement and future events or activities that may generate volatility in the issue or its industry. This selection process provides the foremost combination of low risk and potentially high reward. As always, review the position with regard to your strategic approach and trading style. FITB - Fifth Third Bancorp $55.25 PLAY (conservative - neutral/debit straddle): BUY CALL DEC-55 FTQ-LK OI=67 A=$1.68 BUY PUT DEC-55 FTQ-XK OI=10 A=$2.38 INITIAL NET DEBIT TARGET=$3.00 TARGET ROI=20% ***** MANU - Manugistics $97.75 *** Technicals Only! *** Manugistics Group is a global provider of intelligent supply chain optimization solutions for enterprises and evolving eBusiness trading networks. Its solutions, which include client assessment, software products, consulting services for implementation and solution support, can be optimized to the supply chain requirements of companies. Their solutions also provide clients with the business intelligence to participate in various forms of trading relationships, from traditional linear supply chains to eBusiness trading networks. Their newest generation of proven solutions help enable businesses to work in concert with their trading partners via the Internet, expanding their supply chains to eBusiness trading networks. The solutions assist customers in anticipating requirements in both fixed and dynamic environments to anticipate and meet the needs of customers, thereby maximizing client satisfaction. This play is based on the current price of the underlying stock and its recent technical history. The probability of profit in these positions is also higher than other plays in the same strategy based on disparities in option pricing. We will use the recent volatility and the overpriced options to initiate a neutral position with a favorable premium. The probability of the share value reaching our sold strikes is rather low, but there is always the possibility of a break-out from the recent trading range, so monitor the position for changes in technical character. MANU - Manugistics $97.75 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call DEC 130 ZIU LF 159 1.06 131.06 17.4% Sell Put DEC 75 ZUQ XO 87 1.75 73.25 27.8% Sell Call DEC 135 ZIU LG 38 0.75 135.75 12.5% Sell Put DEC 70 ZUQ XN 128 1.00 69.00 16.4% Sell Call DEC 140 ZIU LH 30 0.50 140.50 8.4% *** Sell Put DEC 65 ZUQ XM 25 0.69 64.31 11.5% *** *************** BEARISH PLAYS - Naked Calls *************** IWOV - Interwoven $77.00 *** Premium Selling! *** Interwoven is a global provider of enterprise-class Web content management software. The company's flagship product, TeamSite, controls the development, management and deployment of business critical Web sites. Interwoven unique solutions are based on an inclusive content architecture that empowers all of its content 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. Technology investors were outnumbered again today as new selling pressure appeared in the wake of yesterday's rally. The news of Apple Computer's (AAPL) earnings warning weighed heavily on the computer hardware group and the weakness spread to many of the bellwether companies in the software sector. Interwoven is one of the leading companies in the information software industry but their share value has drifted lower with the recent sell-off in Nasdaq issues. Technically, the overall IWOV price trend remains bearish and reflects a pronounced negative divergence from an intermediate-period moving average. In addition, the decline in November came on increasing selling pressure and a major support level near $85 was violated. Now that area becomes "resistance" and it appears the share value has little chance of reaching our sold positions in one week. IWOV - Interwoven $77.00 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call DEC 105 IQG LA 537 1.38 106.38 27.7% Sell Call DEC 110 IQG LB 174 0.88 110.88 18.2% Sell Call DEC 115 IQG LC 191 0.50 115.50 10.6% *** ************************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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