The Option Investor Newsletter Wednesday 12-13-2000 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/121300_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-13-2000 High Low Volume Advance/Decline DJIA 10794.40 + 26.10 10915.40 10772.50 1.19 bln 1374/1499 NASDAQ 2822.77 -109.00 3001.72 2814.13 2.04 bln 1599/2327 S&P 100 720.59 - 8.32 737.24 719.34 totals 2973/3826 S&P 500 1359.99 - 11.19 1385.82 1358.48 43.7%/56.3% RUS 2000 469.91 - 7.85 480.91 469.29 DJ TRANS 2847.41 - 57.86 2918.81 2842.45 VIX 26.87 - 1.41 27.77 25.90 Put/Call Ratio 0.71 ************************************************************* Not over until it is over! The long awaited Supreme Court decision that provided the final conclusion to the Florida results came after hours on Tuesday. However there was no rush to the microphones by the candidates and tersely worded statements like "we are examining the decision in its entirety" provided a cautious backdrop to Wednesday's trading. Traders ready to buy any good news rushed into the market at the open but with the cautious comments from the pundits about "wiggle room" and "withdraw not concede" the hope for a conclusion is still just that, hope. Until Gore makes it official and hopefully chooses the right words to avoid any further doubt about direction, traders are still waiting to exhale. Rumors of defecting electors and pressure being applied to cause two of them to switch sides has caused yet another day of uncertainty. The specter of even further and more divisive electioneering coupled with yet another round of earnings warnings and downgrades just proved too much for the fragile markets. The Nasdaq gapped up to hit resistance at 3000 for the third time in three days only to sell off on the earnings warnings -179 points to close near the low of the day at 2822. Not a pretty picture! The Dow gapped up +140 points at the open to break 10900 for the second time this month only to fall back on the weak earnings, lingering election uncertainty and repeated mention of "recession" through out the day. The Dow closed just under the stiff 10800 resistance again but maintained the two week up trend with a positive close. The expected Bush bounce was bushwhacked as investors who raced into the market at the open on what they thought was the final conclusion found themselves surrounded by sellers as those who were reacting to the qualifications in the press releases and continued earnings warnings ran for safety. The big rumors today continued to be impending tech warnings, real warnings and chip/ tech stock downgrades. Some of the big caps that analysts feel are left to warn include Dell, IBM, SUNW, VRTS and even CSCO. The continuing confession session may be turning into a recession watch according to many analysts. First Call said today that the long term profit growth for the S&P has been around +7% but the current estimates are now only +6% and under several scenarios the second or third quarter of next year could actually have negative growth. So far this quarter there have been around 310 earnings warnings on the S&P compared with only 204 for the same quarter of last year. Of these around 50 have been tech stocks. If the big caps mentioned above warn then it is very likely the final numbers will be close to 400 warnings for the quarter. This is a major change in direction from last year and even from just last summer. The market had been trying to shake off the flood of warnings as already priced into the market but the sheer numbers of warnings and the breadth of sectors has pushed investors onto the ropes like a punch drunk Rocky Balboa. Beaten but not out but with little signs of any chance of recovery. Investors who had been hoping to hang onto shares of companies decimated by this bear market were encouraged by the last two weeks apparent bottom. Those hopes of a rebound by year end and possibly holding onto the stock instead of settling for a tax loss are fading fast. With every failed Nasdaq rally the possibility of heavier tax selling increases. With every -100 point drop investors already sitting on cash are counting themselves lucky but they are losing confidence in a possible Santa Claus rally. The January effect, which could have been partly responsible for the bounce last week is fading fast. Much of this is complicated by the unknowns of Reg. FD or the Full Disclosure law that was recently enacted. Under this law companies must tell all investors at the same time of any change in the financial picture. Before this they could guide analysts lower privately without the embarrassing public disclosure. Now companies must make all news available to everyone at the same time. Companies appear to be taking this seriously and in the world of increased shareholder lawsuits they are disclosing more info than less and erring on the side of too much caution. The impact of too much information is investors being flooded with even minor changes that appear as warnings. The economy is of course amplifying the problem. The economic reports began in earnest this morning with a Fed friendly drop in Retail Sales. They dropped -.4% for November when analysts were expecting a slight gain of +.1% instead. This was the first drop since April and a key indicator in the state of the economy. The wealth effect is dead. It has now become a negative as consumers bitten by the worst bear market in recent memory nurse their broken and bleeding retirement accounts. Enter stage left the man in the super Santa suit. Superman and Santa Claus all wrapped up in one personality. Greenspan and his herd of Fed reindeer can only paint one picture at their meeting next week. Not a hard landing but a crash in progress. But, remember his speech from last week? Not on my watch, will the economy crash. Especially not with an incoming republican president. (he did not say that but you can bet it is on his mind) With the PPI tomorrow and the CPI on Friday anything short of a miraculous recovery in those numbers will result in at least a change in bias on Tuesday and many now believe even a rate cut. While that may be optimistic and unrealistic without knowing the PPI/CPI it is still a serious possibility. Assuming the election fight does come to a complete and final close tonight when both candidates appear on prime time TV, the market may breathe a new sigh of real relief on Thursday. With that five week problem finally out of the way the market will finally be free to focus entirely on earnings and future growth. In a previous paragraph I mentioned that we could actually have negative growth in 2001 which sounds bad for the market. Actually as everyone knows the market tends to discount future events way before they occur. The 2001 growth estimates are already priced into this market. The Nasdaq dropped -50% from the years highs. Many individual stocks have lost -60%, -70% even -80% in just a period of months. This is the discounting of the 2001 earnings. The only question is when it will stop. I speak with investors constantly and the trend has turned from complaining about how far the market has fallen to a general feeling of "what a great buying opportunity." People who have not been generally interested in the daily market are now quoting stock prices and saying "I can't believe XYZ stock is only $$$." I think I am going to buy some along with ABC, EFG. This same thought process is going through the fund managers minds and they have cash to spend. Once the Fed direction is clear on Tuesday I think we will see a significant change in sentiment. Bad news is priced in but rate cuts are not. A rate cut will turn the market on a dime. The old adage about buying stocks when nobody else wants them could not be truer than today. Nobody wanted tech stocks today. But in reality the market moving earnings warnings today were actually Compaq related from last night. The few that warned today, SEM, ACTL, SCH, WHR, CLE, SING, BBBY, CCDl, ODGC, PZZA and others were not market movers. They just added to the general sentiment. The Compaq warning put pressure on the remaining big cap techs who have not warned and that pushed the techs lower. It was a sentiment decrease based on the lingering election uncertainty and lingering warning uncertainty. The stocks I pointed to last night as only dropping a little got whacked today just like everybody else. Investors threw out the good with the bad. I mentioned that if we could not break 3000 this week we would probably retest 2700 again. The Nasdaq tried valiantly and to rally and hold it but it was not in the cards. Still there was no conviction. Volume failed to break 2 billion shares on the Nasdaq and barely 1.1 billion on the NYSE. New highs beat new lows 2:1 on the NYSE 110:64. That is not a sign of a beaten market. The Nasdaq however was broadly negative on the aforementioned pending warning expectations. The good news that the election is almost history but the credits still have to play AFTER the speeches tonight. Then we can get back to the more important business at hand. I am still bullish but I am not stupid. I said last night I would buy the dip based on a concluding verdict from the court. We got the verdict but the delay in acting on it prevented a bottom from forming pending the wording of the anticipated concession speech. Several times in the middle of the day I wanted to pull the trigger in the 2860 range which was the bottom of the ascending Nasdaq trendline but I saw no strength. When buying a dip you want to buy the rebound not the drop. It never happened. Now tomorrow I get another chance to play again. The options I want are now cheaper (calls) and the puts I want to sell are worth more. This is my kind of Christmas shopping! Several companies announced stock buy backs after the close and that tends to occur around market bottoms. (wishful thinking?) Now that the Nasdaq has failed at 3000 three days in a row and broke the 2860 support line at the close I think we need to be more careful. Yes, I know that is a sentiment change for me from Sunday but we always need to be reactive to what the market gives us instead of trying to force our bias onto the market. I am still an aggressive buyer of any bounce from here. I can also see a possible 2700 retest on more negative earnings news. Does that make me bipolar, or just realistic? This is simply not a stable environment with hourly news that is playing the market like a puppet. Patience is a highly valued attribute that we need to practice until a clear market direction is found. One of the stocks I wanted to play all day was BRCM. After a +$60 gain over the last two weeks it has consolidated for two days and only gave back -2.81 today. Whether you like BRCM or not this is the type of strength you should be looking for when the market finally rallies, and it will finally rally. Stocks that bend less when the market and sectors are going against them are the stocks that rebound the strongest when good times come again. BRCM could get hammered tomorrow just like BRCD and JNPR did today but that would simply be a better entry point in the master game plan. I still think BRCD and JNPR are excellent plays even though they had a tough day. Those with high trading profits (BRCD +$85, JNPR +$66) but weak conviction sell off more on bad days. These can run again when the tide turns but without strong buyers holding them up they are just as likely to fall quicker on the next wave of selling. Just a quick reminder that you want to trade these stocks not marry them. I waited until after the Gore speech before posting this article just to make sure there were no qualifications or word bombs that would change the tone. There were none. I am not a Democrat which should surprise no one who has read my material in the past. The VP did an admirable job and this was one of his best speeches ever. I truly believe the contest is over and even the "I don't agree with the court decision but I accept it" comments were made with graciousness. Even the veiled "I will be back" comments were made in good taste. I salute him for doing the right thing in the best manner possible. I salute him and my impression of him rose several points. Good job, Mr. Gore! Your service to your country is far from over. Gore running again in 2004 is a given. Wish I could buy leaps on that! The futures spiked during the speech. Hopefully they will hold. Now let's go make some money! Good luck and don't buy too soon. Jim Brown Editor ******************** 2001 Renewal Offer!!! Our best offer ever!! ******************** Long time readers know that each December we offer our subscribers an extra value package as a thank you for their support. The package this year contains: 1.) Two of our 2001 Option Expiration Calendar Mousepads (one for home and one for your office) 2.) The expanded 2001 Stock Traders Almanac 3.) A one month subscription to www.IndexSkybox.com 4.) A three month subscription to www.SplitTrader.com 5.) And of course the annual subscription to OptionInvestor.com This package has a retail value of almost $519 which includes $169 of free merchandise in addition to the annual subscription to the Option Investor Newsletter. The total price for this offer is still only $349 which is the regular annual subscription price for the newsletter. The additional $169 of merchandise and subscriptions are free as an added value! Click here for more info: http://secure.sungrp.com/01renewal.asp The terms of the offer are simple. Just renew your OptionInvestor subscription for the annual rate of $349 ($29.08 mo) by Dec-31st and you will get all the free stuff. The supply of mousepads and almanacs is limited so renew now to avoid any delay. You know the newsletter is the best source for option plays, timely market commentary and educational articles. Don't wait until the supplies are gone! Renew now! http://secure.sungrp.com/01renewal.asp ************************************ 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************************* Try Investor's Business Daily today! Click here for 10 FREE issues. No obligation. Nothing to cancel. http://www.sungrp.com/tracking.asp?campaignid=1128 ************************************************************** ************* NEW CALL PLAY ************* SGP - Schering-Plough Corp. $57.88 +2.13 (+2.63 this week) Schering-Plough develops and markets pharmaceutical products and treatment programs worldwide. It operates in three principal product lines: prescription drugs, animal health products, and over-the-counter (OTC) drugs. At the top of the company's pharmaceutical inventory is the world's leading antihistamine, Claritin. Some OTC drugs that you may be familiar with include brand names Afrin, Dr. Scholl's and Coppertone. As a premier developer and marketer of some of the world's principal drugs, Schering-Plough (SGP) maintains a leadership position within the industry along with Merck (MRK) and Pfizer (PFE). Already this week, SGP traced the Dow higher and stretched into new territory. Today's intraday crest at $58.19 marked the second time in three sessions that SGP set a new 52- week record high. Today's election news also fares well for the drug makers, at least for the next four years! Remember that during the Gore campaign, the big drug companies were hounded about out-of-control drug prices and threats of Medicare reform. This is no longer a worry with a Bush administration apparently taking over the White House. Additionally, The company is expected, along with its competitor Merck, to meet financial forecast later next month. Today's news report of Schering- Plough's submission to of New Drug Applications (NDA) to the FDA for two new formulations of its non-sedating antihistamine desloratadine was also well received by the Street. Going forward over the shorter-term, we're looking for SGP to demonstrate continued strength above our $55 protective stop and build more upside momentum as it challenges the $60 level. Our play is based on sector strength, positive news events, and the overall market environment. If your approach is more conservative, then wait in the wings until SGP blasts through $60 on robust volume. A bit more aggressive is to enter this momentum play on strong bounces off the $55 level, which is bolstered by the intersecting 5- and 10-DMAs at $55.78 and $55.20, respectively. BUY CALL JAN-50 SGP-AJ OI=9331 at $8.88 SL=6.25 BUY CALL JAN-55*SGP-AK OI=9110 at $4.88 SL=3.00 BUY CALL JAN-60 SGP-AL OI=6124 at $2.13 SL-1.00 BUY CALL FEB-55 SGP-BK OI=3254 at $5.75 SL=3.75 BUY CALL FEB-60 SGP-BL OI=3305 at $3.00 SL=1.50 BUY CALL FEB-65 SGP-BM OI= 133 at $1.50 SL=0.75 http://www.premierinvestor.com/oi/profile.asp?symbol=SGP **************************** NEW LOW VOLATILITY CALL PLAY **************************** MO - Philip Morris Co. $40.81 +1.94 (+1.19 this week) The Philip Morris family of companies is the world's largest producer and marketer of consumer packaged goods. Philip Morris Companies Inc. has five principal operating companies: Kraft Foods, Inc. (comprising Kraft Foods North America and Kraft Foods International), Miller Brewing Company, Philip Morris International Inc., Philip Morris Incorporated (PM USA) and Philip Morris Capital Corporation. The premise of this Low Volatility call play is quite simple. While the NASDAQ sells off on the news that George W. Bush will be the next President of the United States, MO broke out over its recent resistance of $40. The news that Gore will concede bodes well for tobacco stocks, which are perceived to fare well under a Bush administration. We are looking for MO's momentum to continue as President-elect Bush settles into his new role. Today's gain was a 5% pop for the stock, so don't be surprised to see a slight profit-taking pullback. Look to gain entry on bounces from previous resistance at $40. Below that level, $39 is a strong level of support where the 10-dma lies. MO very well may move higher, so a break above current intraday resistance at $41 may attract buyers and warrant entry. Just be sure that there is volume to back the move. We are setting a stop loss level of $38.50, so if MO closes below this level, we will be out. Option premiums are fairly cheap, constituting the Low Volatility nature of this call play. BUY CALL JAN-35 MO-AG OI=59926 at $6.38 SL=4.75 BUY CALL JAN-40*MO-AH OI=44609 at $2.69 SL=1.25 BUY CALL JAN-45 MO-AI OI=33065 at $0.88 SL=0.00 High Risk! BUY CALL MAR-40 MO-CH OI=16038 at $4.25 SL=2.50 http://www.premierinvestor.com/oi/profile.asp?symbol=MO ************ NEW PUT PLAY ************ IBM - Int'l Business Machines $91.25 -2.63 (-5.75 this week) IBM develops, manufactures, and sells advanced technology processing products. They are the world's top provider of computer hardware including PCs, mainframes, and network servers. IBM is also an industry leader in software and peripherals, second only to Microsoft. The company owns software pioneer Lotus development, maker of Lotus Notes. For the most part, Big Blue's been able to buffer its share price from the negative impact of the earnings' worries that's tormented the hardware sector since Gateway's (GTW) late November warning. Once GTW set the bearish tone for the quarter, Apple (AAPL), Intel (INTC), and Advanced Micro Devices weren't far behind with their own earnings' woes. Although the slew of warnings only added more turmoil and uncertainty, Compaq's warning yesterday appeared to be one of the straws that broke the IBM's back, so to speak. The CEO recently declined to comment on IBM's upcoming earnings' release, which is expected around January 16th, and instead focused on future challenges during a press release. On Tuesday, IBM was already down slightly after investors found the CEO's comments, or lack there of, rather inexplicit. But today's clean break to the underside of the supportive $93 mark and trailing 5-dma ($94.51) piqued our interest. The weakness extended into late afternoon trading and IBM saw $90.69 on the decline. Only during the bleak month of October and way back in November 1999 has the share price dropped to these depressed levels. So on one hand, one could argue that buyer's are destined to step in and generate a powerful run up. But let's take a look at the whole picture: a struggling stock, a struggling sector and a struggling marketplace all lend to more downside action over the short-term. But of course, that's no excuse not to use protective stops during these unwieldy trading times. Our stop is firmly sandwiched between the 5-dma ($94.51) and the 10-dma ($96.02) at $95. A high-volume rollover near these marks offers the enterprising trader viable entries, but watch other vendors like DELL and HWP for a better view of the overall sentiment within the sector. A breakdown under the $90 level would, without doubt, offer additional confirmation that IBM is truly on a course of destruction. BUY PUT JAN-95 IBM-MS OI=10058 at $9.00 SL=6.25 BUY PUT JAN-90*IBM-MR OI=18557 at $6.50 SL=4.50 BUY PUT JAN-85 IBM-MQ OI=14856 at $4.50 SL=2.75 http://www.premierinvestor.com/oi/profile.asp?symbol=IBM ***************** STOP-LOSS UPDATES ***************** BBOX - put play Adjust from $58 down to $53 EMC - put play Adjust from $92 down to $84 ************* DROPPED CALLS ************* BRCD $209.69 -8.06 (-10.06) A second day of pounding took BRCD through critical technical lines and our stop of $210. The 50- dma ($217.69), which buoyed BRCD during yesterday's pullback in the NASDAQ, collapsed at today's opening bell. The last line of technical support before BRCD violated our exit point was at the 5-dma ($214.64). It also failed to keep the share price afloat amid the market's triple digit losses. A bounce off the 30-dma ($206.81) is possible; although, it's also just as likely that BRCD could slide back to the previous resistance level at $200 before resurfacing. The upcoming 2:1 stock split, which is scheduled to go ex-div on December 22nd, is just around the corner. We had a heck of a run with this play and our stop left us with $41.75 winner, so we won't complain. MUSE $122.75 -21.75 (-12.88) This Internet's destruction was fast and furious. The seller's relentless pursuit of profits knocked MUSE down more than a few more notches in today's negative marketplace. Profit mongers dragged the share price down a hefty 15.1% on double the normal volume levels. After a two-week recovery that culminated with an intraday high of $151 and reaped grand profits, we're packing it up. The severe backlash today and resulting transgression below our stop of $128 warrants the drop this evening. NEWP $104.25 -19.19 (-7.38) The instantaneous reversal from this morning's strong opening trades at $128 and $128.44 kept the call traders at bay. Without any buyers stepping to move NEWP upward, the share price quickly succumbed to the selling pressure. Initially it appeared NEWP would hold above $115 and not infringe upon our $114 stop. However, the downward momentum intensified in the last thirty minutes of trading on the Election news. NEWP saw more 10 points slip away as the market sold-off with a vengeance. On the day, NEWP finished down a very bearish $19.19, or 15.6%! That's certainly not a recipe for success and so, we're cutting NEWP from our call list tonight. EXDS $30.50 -4.38 (-0.13) A higher volume sell-off in EXDS today broke on through our stop of $31. Our perceived level of support did not hold up as traders sold the news on the Presidential Election. What was particularly of concern was the higher volume of the sell side as opposed the recent climb of the past three sessions. It appears that without the Presidential whirlwind, the markets are going to go back to concentrating on the health of earnings and the economy. With that goes our call play on EXDS. SUNW $31.75 -2.13 (-7.19) After splitting 2-1 last week, SUNW has deteriorated into the low $30s. Volume has been increasing to the downside. It's hard to believe that SUNW is being taken so low, and our premise was to play an oversold bounce as a Lottery call. Now that the Presidential Election is seemingly over, the focus is once again on earnings and who will be the next to warn. This negative sentiment did not take SUNW through our stop of $30, yet we are dropping coverage of this play based on the related problems in the Hardware Sector, namely IBM and CPQ. QQQ $68.75 -2.94 (+0.75) Well, it's tough to say good bye to such a good performer. The NASDAQ 100 Unit Trust rallied nicely and made us a pretty profit. Unfortunately, with the noise that the Presidential Election created gone, the NASDAQ has sunk back to the 2800 level and will likely begin to consolidate in choppy trading. The relief rally from oversold conditions on the NASDAQ provided us with a great trading opportunity and we can't complain about a 9% gain as we part ways. PALM $47.44 -5.06 (-6.75) Early in the week, PALM showed up to perform. It opened the week and continued its momentum that began on Friday. But PALM ran into resistance at $57.50, which just happened to be its 200-dma. Since then, the stock retreated and with today's broad tech market sell-off, PALM plunged 10%. The stock blew right through our stop of $50 and even closed below the convergence of key technical levels, the 10-, 50-, and 100-dmas near $48. As a result, we are out of this call play. NTAP $72.75 -9.94 (-14.44) Traders showed up today to sell the NASDAQ. Well, which stocks do you think would get hit hardest? That's right, the ones that have made incredible leaps in the last two weeks. A day like today is exactly why we preach keeping tight stops on winning trades to avoid giving back profits. NTAP was one of those stocks. We had our stop at $75 and it looked like buyers were going to hold their ground at that support level. But the selling got worse across the board in the final half hour of trading. The seller overpowered the buyers and $75 gave way. We are dropping this play as a result, but we won't complain with the 35% gain in two weeks. NTIQ $96.00 -13.38 (-8.75) Well, it looked really good technically. But the sellers whacked the NASDAQ today and took big profits from the recent oversold rally. NTIQ was in the wrong place at the wrong time. Volume was heavy as the stock dropped %12. Luckily, the selling began early and the chart never indicated an entry point as NTIQ just slid 16 points in the first hour and a half of trading. This was a clear sign to stay away, especially considering our stop was at $99. ADBE $66.19 -4.50 (-2.19) This was a quick little play that provided great trading opportunity. We picked it up at $67.19 and saw the stock trade as high as $75. But today, ADBE fell victim to profit takers on the NASDAQ. Not even ADBE's earnings announcement due out tomorrow after the close could spark a buying interest in the stock. Therefore, we would exit the play before the earnings announcement. We are also dropping ADBE tonight because it violated our stop at $68. EXTR $78.19 -4.06 (-4.25) This is another NASDAQ favorite that tends to make big moves in both directions and felt the selling heat today. It's the same story as most of the drops on the list tonight: profit taking after an oversold rally and an apparent resolution to the Presidential debate. We set our stop at $79 and EXTR closed just below it. Although we are dropping this play tonight, a sign of strength was the late session buying that lifted EXTR from what appears to be solid support at $75. ************ DROPPED PUTS ************ ABT $51.81 +1.63 (+2.13) Today the company said it plans to make an announcement of Friday involving its pharmaceutical division. About...they wouldn't say. The rumor is that ABT has created a global structure in its pharmaceutical division to streamline its operations and enhance growth. While we will have to wait until Friday to know for sure, ABT rallied today on the speculation. The stock did not violated our stop loss level of $52, but with solid support at $50, we are dropping ABT as it moves higher. ************** TRADERS CORNER ************** Sector Watch By Mary Redmond Nowadays, it is critical to pay attention to the sector we are trading, as well as the movement of the individual stock and the market indexes. As much as 75% of the movement in a stock can be attributed to the movement in the sector. A company could release excellent news about its earnings, but if the sector is not rallying, the stock may not rally either. We need to realize that the Federal Reserve Chairman Alan Greenspan gave a clear indication of a shift in policy directive during his last speech. While the stock market seems somewhat skeptical of the Fed's possible intent to reduce rates, it appears to be priced in to the Fed Funds futures market. The stock market appears to be waiting for further clarification of a reduction in inflation through the inflationary indicators. But many analysts think that the credit crunch alone is enough reason for the Fed to ease up on rates and inject liquidity into the market. When small and medium sized businesses cannot obtain financing for expansion through the debt and equity markets, it has historically been time for the Fed to step in and take action. Chairman Greenspan made a point in his last speech that bankers must be aware of the potential for an excessive slowdown in economic growth, which could occur if the capital markets dry up. We can never be completely certain what effect a potential decrease in interest rates may have. However, the sectors which are most likely to profit from a Fed rate easing are telecom, technology, financials, and small and mid cap stocks. These are the sectors, which outperformed the indexes following the initial Fed easings in 1995, while utilities and basic materials lagged. This gets us back to the sector rule. In order to be highly specific, it is essential to pay attention to a stock's business sector, as well as the market capitalization sector. If the Fed cuts rates, it will be easier for small- and mid-cap companies which are not profitable to find financing for their expansion. For example, some mid-cap telecommunications companies have had to pay very high rates on their corporate debt. This can cut into the companies' profit margins. This sector, as well as the Russell 2000 index, has performed poorly over the last twelve months. However, the sector may do well in the coming months if rate cuts are effective. It is a good idea to check the movement of the sector before buying call or put options. One way to do this is to watch the index shares or HOLDRs shares. For example, the American stock exchange and CBOE both list index shares, which are a convenient way to watch and trades indexes. The American exchange also lists HOLDRs, which are similar to mutual funds which hold stocks in a certain sector. In addition to watching the Dow and the Nasdaq, it can also be useful to watch other indexes. The MDY is the S&P 500 Mid-Cap Index, the IYY is the Dow Jones U.S. Total Market Index, the RUT.X is the Russell 2000 Index, and the IWZ is the Russell 3000 Index. Before buying a call on a stock in the networking index, it can be helpful to see if NWX.X is rising. The HOLDRs which are the most useful are generally Biotech (BBH), Pharmaceutical (PPH), Semiconductor (SMH), and Telecom (TTH). You can also watch the SPDR sector funds, including XLF (financial), and XLE (energy). It is a good idea to make sure the sector is rallying before buying calls, or falling before buying puts. Some stocks tend to move very closely to the index. For example, if you put up a chart of GE over the last 5 years, it is almost identical to a chart of the S&P 500 index. In addition, Cisco moves almost in tandem with Nasdaq. When evaluating the market capitalization of a company, the issue of liquidity becomes important. Micro-cap stocks usually are poor short-term trading candidates. This is because their shares are not as easily purchased and sold, and a limited number of shares trade on an ordinary day. A relatively small increase in share volume can have an enormous impact on the share price. On the other hand, very large companies, like Cisco and GE usually move more slowly since it takes an enormous amount of money flow to move these stocks up a few points. There is another factor to consider when evaluating the market conditions at the present time. Many people expected the market to rally after the Election uncertainty was resolved, particularly with an expectation of one or more rate cuts next year. But the market is the great anticipator. The market may be saying, "Ok, the Fed may cut rates, and then what? What if we have a recession anyway?" There have been a number of prominent analysts on the news lately stating that there is a risk of a recession in 2001. The Federal Reserve has done a superb job over the last decade of maneuvering the U.S. economy through good and bad times. However, the Fed can never be completely certain how much of an impact their actions will have. There is always a risk that excessive rate hikes can crash land the economy, and that rate cuts will not be able to soften the blow. A rate cut is not necessarily a panacea for all the potential ills of the economy. At this point, the first quarter earnings reports may be the fuel for a strong rally. If companies can convince investors that their earnings and profit margins are still growing at acceptable levels, then investors will probably feel more comfortable committing funds. It is also important to consider that earnings warnings have been released earlier than they were in previous quarters due to the Regulation Fair Disclosure of the SEC. The general consensus for earnings growth for 2001 is between 8 and 9%, which is a high level historically. So we have had more warnings this quarter than we have in the past, and considering this fact, the market has responded quite well. But don't forget, keep your eye on the sectors and their overall reaction. *************************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 at IndexSkybox.com: http://www.sungrp.com/tracking.asp?campaignid=1162 ************************************************************ ********************** PLAY OF THE DAY - CALL ********************** A - Agilent Technologies Inc $58.19 +0.94 (-1.25 this week) Agilent is a diversified technology company that provides solutions to high growth markets within the communications, electronics, healthcare and life sciences industries. They're a leading maker of analysis equipment with 51% of sales deriving from its Test and Measurement Unit. Recently Philips Electronics agreed to buy Agilent's Healthcare Solutions for $1.7 bln. Customers include AT&T, Cisco, and Pharmacia. Most Recent Write-Up The stock's recent move above the $57 mark and its attempt to grab the $60 brass ring demonstrates a very bullish sentiment. Since mid-November's recovery from the underside of the $40 level, the upward trendline continues to remain steadfast. The share price is currently consolidating at the higher levels between $57 and $60 on respectable volume. Taking into account the narrow range, we're maintaining our $53 stop loss on this play. In the coming days, the election saga and the Feds will act as volatile catalysts across the broad markets. Keep stops tight. If you're planning an entry, look for A to break to the upside of the formidable resistance ($60) before initiating new plays. If a rally ensues, the next level of contention is at the 200-dma ($69.22) line. Comments In the face of a retreating NASDAQ, A managed to post a gain for the day. Since breaking above $55 last Friday, A has been trading in a narrow $4 range and is building an ascending wedge. This technical development will likely lead to another challenge of $60. Look for entry off bounces from $57 or a breakout above $60 with strong volume. BUY CALL JAN-55 A-AK OI=2336 at $7.25 SL=5.50 BUY CALL JAN-60*A-AL OI=4059 at $4.88 SL=3.00 BUY CALL JAN-65 A-AM OI=2727 at $3.13 SL=1.50 BUY CALL FEB-60 A-BL OI= 875 at $6.88 SL=5.00 BUY CALL FEB-65 A-BM OI= 418 at $5.13 SL=3.25 http://www.OptionInvestor.com/oi/profile.asp?ticker=A ***************************************** BIG CAP COVERED CALLS & NAKED PUT SECTION ***************************************** Chip stocks take a dip... Technology issues slumped today after a slew of bearish analyst comments in the semiconductor equipment sector. Merrill Lynch said a recent trip to Asia revealed that semiconductor capital spending will slow more dramatically than previously expected in 2001. The research note suggested that the macroeconomic conditions resulting in softer semiconductor demand could cause many chip equipment shares to retreat toward 1998 valuations. Prudential also lowered its 2001 semiconductor capital spending estimates due to end-market demand weakness and Salomon Smith Barney slashed its rating on the group, indicating that lower earnings forecasts could drive semiconductor stocks to recent lows. Additional concerns surfaced in the Personal Computer sector as Compaq Computer became the latest in a string of box makers to warn of revenue shortfalls due to sagging PC demand. The company said late Tuesday that it now expects fourth-quarter earnings to be well below consensus estimates and their 2001 guidance is lower than previously forecast, though it expects the second half of the year to be stronger than the first half. Among the Dow's technology components, International Business Machines (IBM), Microsoft (MSFT), Hewlett-Packard (HWP), and Intel (INTC) all moved lower. One of the bright spots in the blue-chip group was cigarette maker Philip Morris (MO), which added $1.93 to end at a 52-week near $41. The move came in the wake of an apparent Bush victory in the protracted Presidential election. After weeks of continuous lawsuits and political maneuvering by both Vice President Al Gore and Governor George Bush, a Supreme Court ruling that reversed Florida's decision to allow hand recounts in the state is seen to have erased Gore's chance of victory. Gore is expected to concede the Presidential election in a nationally televised address Wednesday evening. The market's perception is that the Bush administration would adopt a more pro-business approach, which favored a number of specific sectors in today's session. Inside the broader market, major drug, utility, oil service, chemical and consumer products stocks climbed while financial, gold and retail issues retreated. Among technology shares, all of the major sectors declined, with hardware companies enduring the brunt of the selling pressure. 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 120 113.56 157.69 $6.44 4.7% 2-1 Split 12/18 ADBE DEC 67.5 64.44 66.19 $1.75 2.8% Key Moment Naked Puts: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return BEAS DEC 55 54.50 66.25 $0.50 11.0% FNSR DEC 22.5 21.94 34.88 $0.56 10.7% CHIR DEC 35 34.31 44.44 $0.69 9.6% IDPH DEC 155 153.94 203.38 $1.06 8.8% 3-2 Split 01/18 PWAV DEC 40 39.00 63.13 $1.00 8.3% SAWS DEC 35 34.12 70.88 $0.88 8.0% GENZ DEC 75 74.19 95.56 $0.81 6.9% CMVT DEC 85 83.37 112.13 $1.63 6.7% QCOM DEC 65 63.81 91.31 $1.19 6.7% ADBE DEC 55 54.00 66.19 $1.00 5.9% Key Moment FRX DEC 125 123.69 134.75 $1.31 5.8% PVN DEC 35 34.75 45.63 $0.25 5.0% Adj 2-1 Split SCMR DEC 40 39.31 63.56 $0.69 4.9% CRGN - Position closed. NOK JAN 40 39.25 48.13 $0.75 4.7% Sell Straddles: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return CLFO - Short-put position closed. CFLO DEC 165 172.13 57.25 $7.13 23.2% MANU DEC 32.5 32.16 50.75 $0.35 11.7% Adj 2-1 Split MANU DEC 70 70.25 50.75 $0.25 8.4% Adj 2-1 Split Naked Calls: Stock Strike Strike Cost Current Profit Monthly Symbol Month Price Basis Price (Loss) Return MANU DEC 135 136.75 50.75 $1.75 13.0% 2-1 Split 12/08 CIEN DEC 110 111.00 104.63 $1.00 12.2% Reprieve? Close? EMLX DEC 185 187.19 157.69 $2.19 10.9% 2-1 Split 12/18 IWOV DEC 115 115.50 70.47 $0.50 10.6% EMLX DEC 175 176.06 157.69 $1.06 8.7% 2-1 Split 12/18 CIEN DEC 140 141.25 104.63 $1.25 8.3% Credit Spreads: Stock Pick Last Position Credit C/B G/L Status AFFX $87.25 $69.63 DEC50P/60P $1.12 $58.88 $0.88 Open AGN $90.75 $89.38 DEC70P/75P $0.75 $74.25 $0.75 Open AET $66.06 $68.13 DEC55P/60P $0.56 $59.44 $0.56 Open APA $62.44 $61.75 DEC50P/55P $0.63 $54.43 $0.63 Open BMY $67.94 $70.69 DEC60P/65P $0.88 $64.13 $0.88 Open ELN $53.38 $51.56 DEC47P/50P $0.50 $49.50 $0.50 Alert XL $80.00 $81.00 DEC70P/75P $0.62 $74.38 $0.62 Open Debit Straddles: Stock Pick Last Position Debit G/L Status FITB $55.25 $56.13 DEC55C/55P $3.00 $-1.75 Open* * Closing the Straddle on DEC 6 provided a $0.62 credit - a 20% return in one day. 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 *************** DCTM - Documentum $58.38 *** On The Move! *** Documentum develops, markets and supports an open, scalable, standards-based content management platform and application suite for managing the content organizations rely on for global operations and to bring their businesses online. Documentum's Internet-scale content management solutions facilitate e-business connections with customers, business partners and employees. These solutions enable customers to create, deliver, manage and personalize all content from contributors within and outside the enterprise, for key business process, in a targeted manner. Documentum is "on the move" and the recent rally to new highs near $58 suggests there is further upside potential for the issue. The stock has excellent buying support near our cost basis and the favorable option premiums will allow traders to speculate, in a conservative manner, on the future movement of the company's share value. DCTM - Documentum $58.38 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 40 QDC MH 2 1.06 38.94 6.8% *** Sell Put JAN 43 QDC MV 5016 1.56 40.94 9.7% Sell Put JAN 45 QDC MI 400 2.19 42.81 13.0% ******* EMLX - Emulex $157.69 *** Split Play! *** Emulex is a designer, developer and supplier of a broad line of Fibre Channel host adapters, hubs, application-specific computer chips (ASICs), and software products that provide connectivity solutions for Fibre Channel storage area networks (SANs), network attached storage (NAS), and redundant array of independent disks (RAID) storage. Its products are based on internally developed ASIC technology, and are deployable across a variety of SAN configurations, system buses and operating systems, enhancing data flow between computers and peripherals. Emulex's products offer customers a combination of critical reliability, scalability, and high performance, and can be also customized for mission-critical server and storage system applications. Emulex made some big announcements last week, saying it plans to acquire closely held Giganet for about $645 million in stock and at the same time, the company boosted its earnings and revenue forecasts for fiscal 2001. Emulex officials said they will offer about four million shares of EMLX stock to acquire Giganet, and the purchase price reflects the potential value of Giganet's new technology for the transfer of data stored on computer networks. In addition, Emulex also increased its financial outlook for 2001 and 2002 as a result of strong demand for its products, which include unique circuitry that allows lightning-fast transfer of data between computers. The company now expects revenue for the fiscal year ending in July to total approximately $285 million, up from an estimate of about $250 million. Our opinion is simply that Emulex is an industry leader and may become a dominant player in the Fibre Channel storage and transfer systems group. It's also a technology stock we would love to have in our long-term growth portfolio at a cost basis near $45, after the company's 2-for-1 stock split on December 15. EMLX - Emulex $157.69 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 85 UMQ MQ 147 2.00 83.00 4.9% Sell Put JAN 90 UMQ MR 531 2.63 87.37 6.3% *** Sell Put JAN 95 UMQ MS 208 3.13 91.87 7.4% ******* ESRX - Express Scripts $88.88 *** Healthcare Rally! *** Express Scripts is a Pharmacy Benefit Management (PBM) company in North America and a full-service PBM independent of pharmaceutical manufacturer or drug store ownership in North America. Express Scripts provides a combination of benefit management services, including retail drug card programs, mail pharmacy services, drug formulary management programs and clinical management programs for approximately 9,300 clients that include HMOs, health insurers, third-party administrators, employers and union-sponsored benefit plans. Some of their largest clients include United HealthCare Corporation, Aetna U.S. Healthcare, Oxford Health Plans, Blue Cross Blue Shield of Massachusetts, Blue Shield of California and the State of New York Empire Plan Prescription Drug Program. Companies in the Healthcare Services industry have performed well over the past year and with the increasing potential for a George Bush presidency, the group has enjoyed additional strength in recent sessions. Analysts say Express Scripts has a reputation as one of the best Pharmacy Benefit Management companies and based on their projected earnings, it is an appealing stock at current prices and is also trading at a discount to its peers. Investors appear to agree with that outlook, as the issue is approaching an all-time high near $90 with excellent buying support. Today's rally in the midst of an unsure market suggests the trend will continue and the previous trading-range top near $80 should provide some support for any future corrections. ESRX - Express Scripts $88.88 PLAY (very conservative - bullish/credit spread): BUY PUT JAN-65 XTQ-MM OI=0 A=0.88 SELL PUT JAN-70 XTQ-MN OI=10 B=1.25 INITIAL NET CREDIT TARGET=$0.50 ROI(max)=11% - or - PLAY (aggressive - bullish/credit spread): BUY PUT JAN-75 XTQ-MO OI=100 A=2.18 SELL PUT JAN-80 XTQ-MP OI=74 B=3.38 INITIAL NET CREDIT TARGET=$1.25-$1.38 ROI(max)=33% ******* IVGN - Invitrogen $81.13 *** A Profitable Biotech? *** Invitrogen develops, manufactures, and markets research tools in kit form and provides other research products and services to corporate, academic and government entities. The company's research kits simplify and improve gene cloning, gene expression and gene analysis techniques as well as other molecular biology activities. These techniques and activities are used to study how cells are regulated by genetic material, known as functional genomics, and to search for drugs that can treat diseases. The company currently offers approximately 700 gene-identification, cloning, expression and analysis services. Since the merger with Life Technologies and Dexter Corporation, Invitrogen announced that it intends to reorganize the company into two primary lines of business, a Molecular Biology division and a Cell Culture division. In early November, Invitrogen reported outstanding third quarter results and said it expects earnings and revenues for the fourth quarter and full year to surpass Wall Street estimates. The company announced third-quarter income of $7.8 million, or $0.26 a share, versus $3.1 million, or $0.14 a share, in the year-ago period. Revenues for the quarter rose 102% to $48 million from $23.8 million a year ago. Wall Street analysts on average were expecting the company to post a profit of only $0.19 per share. The CEO added that he expects fourth-quarter earnings to be in the range of $0.30 to $0.33 per share, and revenues are expected to be in the range of $140 million to $145 million. Those are excellent results for any small company, and certainly for one in the volatile Biotech industry. Based on the current price and trading range of the underlying issue and the recent technical history or trend, this position offers favorable speculation for traders who are bullish on the issue. IVGN - Invitrogen $81.13 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Put JAN 60 IUV ML 155 1.50 58.50 7.0% *** Sell Put JAN 65 IUV MM 10 2.50 62.50 10.9% *************** Neutral Plays - STRADDLES & STRANGLES *************** GMST - Gemstar-TV Guide $40.50 *** Technicals Only! *** Gemstar-TV Guide International develops, markets and licenses proprietary technologies and systems that simplify and enhance consumers' interaction with electronics products and other platforms that deliver video, programming information and other data. The company's first proprietary system, VCR Plus+, is currently incorporated into virtually every major brand of VCR sold worldwide. The company has also developed and acquired a large portfolio of technologies and intellectual property to implement interactive program guides (Gemstar Guide Technology), which enable consumers to navigate through, sort, select and record television programming. 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. GMST - Gemstar-TV Guide $40.50 PLAY (conservative - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JAN 65 GST AM 35 0.75 65.75 6.8% *** Sell Put JAN 25 QLF ME 0 0.63 24.37 5.8% *** -or- Sell Call JAN 60 GST AL 104 1.31 61.31 11.2% Sell Put JAN 30 QLF MF 45 1.75 28.25 14.3% ******* IMPH - Impath $52.88 *** Premium Selling! *** Impath specializes in providing patient-specific cancer diagnostic and prognostic information, with an expertise in difficult to diagnose tumors, prognostic profiles in breast and other cancers, and lymphoma/leukemia analysis. The company currently works with more than 7,400 physicians specializing in the treatment of cancer patients, in 1,785 hospitals and 409 oncology practices. Impath's database currently contains more than 550,000 patient profiles. In addition, Impath can link its information with that of its tumor registry business to provide data on the full continuum of care, from diagnosis through treatment and the outcomes on many patients. Impath is working on more than 50 projects with over 20 different pharmaceutical/biotechnology companies including 21 U.S. based and four international clinical trials. Impath is another issue that ended near the top of our list of potential "premium selling" positions. While it is certainly a volatile stock, probability suggests that current option premiums are overpriced and that "out-of-the-money" positions can be sold with a favorable theoretical advantage. Of course, our outlook is based on the current price and/or trading range of the underlying stock and the recent technical history or trend. News and market sentiment will have an effect on the issue so review the position thoroughly and make your own decision about the future outcome of the play. IMPH - Impath $52.88 PLAY (aggressive - neutral/credit strangle): Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JAN 80 QPH AP 33 2.75 82.75 17.0% *** Sell Put JAN 35 QPH MG 8 1.75 33.25 11.7% *** -or- Sell Call JAN 75 QPH AO 27 3.38 78.38 19.9% Sell Put JAN 37.5 QPH MU 9 2.31 35.19 14.7% *************** BEARISH PLAYS - Naked Calls *************** VRTS - Veritas $104.88 *** Sector Slump! *** Veritas Software is an independent supplier of storage management software. The company's products help to improve the levels of centralization, control, automation and manageability in computing environments. In addition, Veritas' products offer protection against data loss and file corruption, allow rapid recovery after disk or computer system failure, enable IT data managers to work efficiently with large numbers of files, and make it possible to manage data distributed on large networks of computer systems without harming productivity or interrupting users. The company's products also provide continuous availability of data in clustered computer systems that share disk resources. They develop and sell products for most popular operating systems, including versions of UNIX and Windows NT, and they also provide a range of services to assist its customers in planning and implementing their storage management solutions. Data storage has been a popular sector in recent months and data management software is the key to making a system work effectively. The fastest-growing independent software company in this group is Veritas and in its most recent quarter, their revenue increased by 73%, far outpacing the competition. Veritas is now positioned to benefit from the shift toward storage, and analysts believe that it can sustain a 50% growth rate over the next three to four years. Unfortunately, while we like this company in the long-term, the overall price trend of Veritas is neutral-bearish and reflects a pronounced negative divergence from an intermediate-period moving average. In addition, today's decline came on increasing selling pressure and a short-term support area (the 25-DMA) was violated. The range near $125-$130 has heavy overhead supply and should also provide resistance for any future rallies. Based on the market and sector outlook, the share value has little chance of reaching our sold positions before the January options expiration. VRTS - Veritas $104.88 Action Month & Option Open Closing Cost Monthly Req'd Strike Symbol Interest Price Basis Return Sell Call JAN 150 VUQ AJ 208 2.56 152.56 8.9% Sell Call JAN 155 VUQ AK 508 2.06 157.06 7.4% Sell Call JAN 160 VUQ AL 684 1.69 161.69 6.1% *** ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=1141 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. 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