The Option Investor Newsletter Tuesday 12-19-2000 Copyright 2000, All rights reserved. 1 of 2 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/121900_1.asp Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 12-19-2000 High Low Volume Advance/Decline DJIA 10584.40 - 61.00 10784.60 10582.80 1.32 bln 1468/1435 NASDAQ 2511.71 -112.81 2696.61 2509.76 2.31 bln 1339/2658 S&P 100 694.35 - 7.50 709.38 686.48 totals 2807/4093 S&P 500 1322.74 - 17.14 1346.44 1305.20 40.7%/59.3% RUS 2000 463.25 - 4.47 466.91 458.42 DJ TRANS 2777.76 + 38.34 2825.68 2740.61 VIX 30.73 - 0.72 31.79 28.92 Put/Call Ratio 0.76 ************************************************************* Grinchspan fails to lower rates, markets vote for impeachment! It was ugly, very ugly. With the expectation of innocent children on Christmas morning traders begin buying selected stocks this morning in anticipation of a rate cut. Even after being told over and over that the Fed would probably not cut rates in December without an overwhelming reason to do so, there was still the irrational hope that the professionals were wrong. Fed Funds futures indicated only a 35% chance of a cut but investor sentiment was running as high as 75%. Alas, no cut was made and with the shock equivalent to children unwrapping boxes of coal on Christmas morning investors were met with bottomless stock prices after the announcement. The sentiment was so great in anticipating a cut that even a bias change that skipped neutral and went immediately to a recession bias and an indication that the next move would be a cut had no impact. There was the instant volatility associated with a Fed decision which knocked the Dow off its triple digit gains but the markets attempted to rally on the bias change. Unfortunately, the more the news was analyzed, filtered, cussed and discussed, the analyst outlook became negative. In a word, the Fed failed to respond to what many see as an impending recession and crash landing. Now they feel the Fed is behind the curve and with the next meeting not until Jan-30th we are in for yet another month of worsening economic conditions and a sinking market. Merry Christmas to you too, Mr. Grinchspan. As if on cue there was a flood of earnings warnings after the close. As if waiting for a possible rate cut announcement to blunt the expected carnage to their stocks there were several whose worst fears came true. Heading the list was Jabil Circuits which announced earnings after the close and missed street estimates by two cents. The stock dropped from the $28 close to $22 in after hours. Vishay (VSH) warned that slowing orders, delayed delivery dates and cancellations would cause it to miss earnings going forward. MERX warned that a slow down in customer demand would cause it to miss earnings significantly and the stock dropped from $25 to $12 losing half its value. PKE did not warn but after the flood of negative news investors fled the stock before its expected earnings report on Wednesday morning knocking more than -$15 off its $35 stock price. In perhaps the worst news of the day Foundry (FDRY) warned after the close that changes in spending patterns over just the last couple of weeks will cause them to miss estimates substantially. Spending patterns in high performance Internet protocol communications equipment were changing drastically. Why not just say an asteroid will impact Wall Street at 9:31 Wednesday morning? Remember the comments I made last week on CSCO and the impact of a CSCO statement like this? It would be the end of the sector as we know it, probably several sectors. Well the FDRY warning tonight may not be as bad as the same statement from CSCO would be but at the open tomorrow you may not be able to tell the difference. In after hours trading other stocks in this sector were taking serious hits. JNPR -10 to $104, EXTR -12 to $34, RBAK -6 to $49, BRCD -8 to $158, CSCO down from an intraday recovery high of $46 to $40 and a new 52-week low. Even stocks that are not directly related to FDRY are suffering. SUNW, which has had more than its share of problem lately dropped to yet another 52-week low of $26.25 in after hours trading. Even YHOO which has nothing to do with networking dropped over -$1 to a new low of $26.81. FDRY now trading at $16 was $220 in March. The fiber optic sector was also hammered today but not from a forecast of a slow down. Ciena announced it was buying CYRAS for $2 billion in a move that analysts liked but the stock dropped -23 on worries that immediate earnings would suffer. The sector fell after analysts pointed out that this would put CIEN higher up on the food chain and enable it to compete against giants like CSCO across the entire Internet spectrum. Could be buying opportunity here? After trading at $120 last week a $70 CIEN on Wednesday would look like a bargain. After doubling from the previous low of $66 in November, traders may be drooling at the possibility of doing it again. The Dow suffered an early morning dip after SBC, a current put play, warned that it would miss earnings and dropped -7 at the open. After struggling back on the strength of financials and rate cut hopes the Dow was hovering at +130 when the announcement came. Fears of being 45 days closer to a recession before the Fed will take action, ended up knocking -200 points off the high of the day before being saved by the bell. The Nasdaq closed at a new 52-week low of 2511. There were 329 new lows on the Nasdaq and with the post close news we expect even more tomorrow. So far this quarter there have been 395 earnings warnings from Nasdaq stocks which is +78% higher than last year. The Nasdaq has dropped for six sessions straight and has lost an even -500 points since closing at 3014 last Monday. Can you say extremely oversold? Are we there yet? I doubt it. The selling is not limited to the Nasdaq anymore. The S&P-100 and S&P-100 both set new 52-week closing lows which show the broader market is far weaker than the Dow numbers would suggest. Without a rate cut the outlook for the next two weeks is grim. With millions of traders clinging to the hope that a rate cut would provide an explosive rally and power their seriously broken stocks out of the dumps and back into respectability there was a collective groan at 2:15 today. Now faced with more weakness before year end the urge to simply sell the losers and take the tax loss rather than endure the brain damage of waking up every day to yet another low will be very strong. Tax selling could begin in earnest tomorrow. With only seven trading days left in this year and two of those with very light volume the urge to hurry may come over night. There is a bright side to this story. Cash is still piling up on the sidelines as stocks get cheaper and once the tax selling is over the temperature of cash in your pocket increases about +100 degrees per day. Once free of the black holes in their portfolios investors should start to look for the stocks that will recover quickest in January when funds are forced to apply the retirement cash. While the markets may be very rocky the next day or two there is light at the end of our tunnel. You have to go back to August-10th of 1999 a lower close at 2490 and June-15th before that. We have given back the entire 100% gain since the fall of 1999. What would you have given in March of this year to have a time travel buying opportunity to go back to March-1999? For those of us with cash the future is bright. Once this storm of tax selling is over there is only upside to consider. A sub 2500 Nasdaq is a bargain. SUNW 26, YHOO 27, CMGI 6, DELL 17, ORCL 30, MSFT 44, INTC 33, CSCO 40, JDSU 50, CIEN 70, BRCM 90. As investors we should be ecstatic! Is the tech revolution over? Did the Internet go the way of the CB radio? Have electrons developed a distaste for copper? Not hardly! There is a bottom here somewhere and the markets WILL start betting on the eventual Fed rate cut. It is just a matter of time. If you were long today then lick your wounds, clean off your desk and start your after Christmas shopping now. Shopping, not buying. Start planning your plays based on a longer term perspective and get ready to reap some huge profits when this bear market finally goes into hibernation. The general public is shivering in the severe cold now gripping the U.S. Their focus is on staying warm today. Very few are thinking about spring only a few short weeks ahead. Investors are more forward thinking than the general public. They buy stocks based on returns months and years in advance. We should be doing the same thing as option traders. We KNOW that we will have a change in rates by April earnings. Stocks will be higher, possibly much higher. My point here is to urge you to shake off the negativity of the talking heads and plan ahead. This is the ultimate Survivor game. Your challenge is to Outwit, Outplay and Outlast the common investor. Your job is to succeed were other fail. When common investors drop out and run back to mutual funds or money market funds you will win the rewards that others only dream of. Ok, enough of the pep talks. You know the facts, now profit from it! I will leave you with a piece of good news. Historically the days around major holidays are bullish. The two days before and three days after Christmas are normally up. Granted, a continued flood of bad news may limit any historical repeat but something about the joy of the holidays, not to mention the Christmas bonuses, tend to fuel optimism in the markets. The next two days may provide the best opportunity for entry points for the rest of the year. Got your checkbook out? 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=1126 ************************************************************** **************** MARKET SENTIMENT **************** Sometimes It's Easy By Austin Passamonte Successful trading can be a very challenging venture over time. Darn good thing we occasionally get to enjoy days like these! Whether the Fed should or shouldn't have lowered interest rates is beyond our individual control and therefore concern; WHAT they choose to do means everything in the world to small traders. The results are something we do have direct control over, and thank heavens for that. Also, who actually thought odds were above 50/50 that we would see any cut? Fed-Funds futures didn't forecast that and historical behavior of the Fed as noted on CNBC all day tipped the scales firmly in favor of "no-reduction". Like it or not, this is the unemotional conclusion based on evidence and facts known to us beforehand There was a time in our recent past when the Fed would raise interest rates and NASDAQ would rally on the news. Remember those? Buying calls just before or after worked like a charm. It was almost like taking money from the unsuspecting. There will be a time in the future when the Fed cuts interest rates and buying calls just before or after will work like a charm. Not today. Today we knew one thing with high-odds probability: a rate cut should sustain a rally while no cut could create a decline. Simple as that. We had five hours of live market action to choose our favorite target, pick a level of support below current prices to enter long puts and a level of resistance above current prices to enter long calls. Simple as that. When 2:30 comes, we buy calls above resistance or puts below support. Purest form of trading that exists. Those who did so and bought puts are sitting flush with profits now. That is what conservative traders did. Aggressive traders bought puts on everything with a symbol at 2:17pm when news confirmed that no rate cuts had been issued. Those who did this are sitting on doubles by the close. Did anyone actually do this? Our email "inbox" is filled with dozens and dozens of examples and they continue to arrive. Money flowed strongly on Wall Street today and astute traders captured their share. It doesn't get any easier than that. We all knew the markets would move big and had hours to prepare for this event. Sometimes the trading gods do smile on us, although chance always favors a prepared mind! Where to from here? The path of least resistance still lies below us. The markets need a reason to rally. Buyers need a reason to buy CSCO at $40 when it no longer looks so cheap. Part-time traders who turned on tonight's news or read the paper might be shocked to see where prices now rest. Sell-on-open and margin-call orders could line up at the open. NASDAQ markets are nearing critical support and after the last few weeks, how couldn't they be? Our chart signals still show more downside could lie ahead before a turn. The Dow has more space to fall than techs, with 10,300 offering fairly firm support. Below that would be a retest of 10,000 or lower. Keep in mind that we've not seen the NDX and Dow at or near extreme lows together, as cash rotation has always fled one to another. Should each of them hit lows together, final capitulation could happen right away. Keep in mind that the pulse of all equity markets remains the S&P 500. The NASDAQ Comp was a brief measure but that time has passed and may be awhile ahead as well. The SPX has managed to hold above 1300 up to this point and needs to do so. A break below could end up bouncing from 1250 or lower and would take all others with it. The VIX under 31 on a day like this is surprising. We expected it to shoot straight out of its daily-chart upper Bollinger band at 33+. Not even close tells us levels of fear haven't sunk in yet. A VIX at 35+ would have us eyeing distant-month calls and searching for bullish chart signals everywhere. Still we wait. Doom & gloom? Nope, just another powerful rally south. There are incredible buy & hold bargains all around us for investors with time on their side. As Jim so eloquently stated in his Saturday Wrap, option traders seldom have the luxury of time. This is the price we pay for ability to play the downside and Market Sentiment will take that exchange every day for life! A firm market bottom should be ahead and discovered within the next six weeks. Don't hurry the process; there will be plenty of time for call-LEAPs soon. Trade the daily trend until then and prosper! ***** VIX Tuesday 12/19 close: 30.73 30-yr Bonds Tuesday 12/19 close: 5.48% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (12/19/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 725 - 710 4,923 3,671 1.34 705 - 690 3,581 5,182 .69 OEX close: 686.77 Support: 680 - 665 120 8,514 70.95*** 660 - 640 21 11,267 536.52*** Maximum calls: 730/3,594 Maximum puts : 640/7,452 Moving Averages 10 DMA 711 20 DMA 710 50 DMA 722 200 DMA 772 NASDAQ 100 Index (NDX/QQQ) Resistance: 68 - 66 45,733 10,398 4.40 65 - 63 27,277 30,797 .89 62 - 60 9,858 36,823 .27 QQQ(NDX)close: 59.125 Support: 58 - 56 878 7,986 9.10 55 - 53 921 9,812 10.65 52 - 50 4,071 6,971 1.71 Maximum calls: 70/59,734 Maximum puts : 60/18,129 Moving Averages 10 DMA 66 20 DMA 66 50 DMA 73 200 DMA 89 S&P 500 (SPX) Resistance: 1375 8,658 10,930 .79 1350 31,217 36,468 .86 1325 2,837 5,228 .54 SPX close: 1305.60 Support: 1275 286 9,491 33.19*** 1250 1,009 10,663 10.57*** 1225 72 13,227 183.71*** Maximum calls: 1350/31,217 Maximum puts : 1350/36,468 Moving Averages 10 DMA 1345 20 DMA 1341 50 DMA 1367 200 DMA 1436 ***** CBOT Commitment Of Traders Report: Friday 12/15 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials DJIA futures (Current) (Previous) (Current) (Previous) Open Interest Net Value +179 -283 -2089 -770 Total Open Interest % (+2.24%) (-3.13%) (-5.50%) (-2.64%) net-long net-short net-short net-short NASDAQ 100 Open Interest Net Value -1438 -3324 +1316 +2120 Total Open Interest % (-4.45%) (-13.52%) (+2.11%) (+3.23%) net-short net-short net-long net-long S&P 500 Open Interest Net Value +80633 +76502 -90398 -86468 Total Open Interest % (+29.41%) (+42.45%) (-11.61%) (-12.36) net-long net-long net-short net-short What COT Data Tells Us: The disparity remains between the Commercial positions and Small Specs on the S&P 500. Commercials have increased their net-short positions on the DOW while the Small specs have turned net-long. Data compiled as of Tuesday 12/12 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://members.OptionInvestor.com/marketposture/121900_1.asp *********** OPTIONS 101 *********** Increasing The Odds By David Popper "Every gambler knows that the secret to survival is knowing what to throw away and knowing what to keep. Because every hand's a winner and every hand's a loser..." Boy, is any song more true this year. Two traders could have traded the exact same stocks all year and the results would have been vastly different depending on their timing. If there was ever a year which highlighted the need for understanding basic fundamental and technical analysis, this was it. Basic fundamental analysis compels you to only trade quality, no matter how good the charts look. Remember, the dot coms looked technically sound for much of the year, but many of their prices are now under $10. Just last year, these same stocks moved that much in an hour. The fundamental problem for these companies is that they had no earnings. Earnings drive the stock price over the long run. Their eventual doom was sealed because their business model did not work. Yes, a lot of people made plenty of money on these stocks, but like the game of hot potato, the person who holds the potato at the end of the game loses. How could you avoid this situation? Only trade stocks that have solid earnings and are in sectors which will grow over the next several years. When you buy these solid companies, you protect yourself because if you do pick a bad entry point and quickly go underwater, there is a decent chance that the quality will come back. The easiest place to check out a company's earnings compared to other companies in its sector is the Investor's Business Daily. This paper also ranks and charts industry sectors. Basic technical analysis is extremely helpful for getting into a stock at a good price. At a minimum, a trader should recognize when a stock is in an uptrend, downtrend, or basing pattern and how to trade in these three different scenarios. In uncertain times, a trader should not commit a large amount of money by using just a six month chart. The bull market of the 1990's has conceded to the downtrending market of the past eight months. Therefore, before committing a high percentage of your funds consider reviewing the two year, three year and four year charts. These charts each tell a different story and a few of them are scary. Don't misunderstand me, there is money to be made in short term trading and a lot of it. On the other side of the coin, many of our favorites are priced at their 52-week low, but on a multi-year chart, it is clear that they could go lower. When playing hot potato, make sure that you will not be hurt if you are left holding the multi-year downturn bag. In an uncertain market environment, a prudent trader would become no more fully invested, or worse yet, margined out than a professional gambler risking his winnings on the hard numbers on a craps table. It just does not make sense. Speaking of gambling, in the course of my job, I had to take the deposition of a black jack dealer. I asked him if there were consistent winners at his table. He said that there were a few and their secret was to leave the table after winning a predetermined reasonable amount. He said that those players who stayed all night always gave back their winnings and much more. He said the persons that he really could not understand were the people who spent more than they planned, convinced that there losses would be reversed with just one more roll. They always lost. Sounds a lot like this year in the market. By March, most people I know made a fortune. By November these same people were negative for the year. Again, I am not suggesting that you stay totally on the sidelines, just be careful in this environment and use just a portion of your capital. In short, by trading fundamentally sound companies while using charts can greatly increase your odds of winning. When you trade off charts, you can buy CHKP, BRCM and other high fliers at or near their lows and make short term profits. CHKP has gone from $165 to $89, back to $145 and now to $130 all in the space of three weeks. Some people bought in the $80's or $90's and sold in the $120's, 130's, etc., making a nice profit. Others panicked and sold at the bottom only to repurchase again in the $140's and watch it move down again. Two traders, same stock, different results. The difference is that one guesses while the other plans. A little planning will increase the odds of success. ************** TRADERS CORNER ************** Review of My December Plays By Scott Martindale Crazy day. The markets were eager and expectant, but they were "Greenspanned" yet again. After finding out last week that the Microsoft earnings warning was not already factored in to the market, today we found out that a rate cut was. Either that or else broad fear simply overwhelmed any bullish thoughts of buying the usual initial sell off on the news. The economy needed a jolt of good tidings from the Fed today, but received only a consolation prize in the form of implied intent to cut rates in six weeks. The market trend certainly has been down, and it was confirmed today in the wake of the minimal Fed action, but is it bottoming? It sure looks like capitulation selling in some sectors, like software and even the beloved networkers. Is the Nasdaq bracing for a strong move up by January 30th -- now that the Fed has all but promised a rate cut -- or is it going to crash hard through 2500 with no buyers willing to catch the knife? The market is horribly oversold and ready for a good relief rally, even if only within a longer term bear, but nobody can find a compelling reason to start buying. Certainly Nasdaq prices are looking quite appealing, but we must remember that valuations are still high on a historical basis, and many "spec tech darlings" are still sporting triple- digit P/E's. As for my December plays, I experienced some frustration trading QQQ and OEX. I was getting good entry points, but not always exiting at the most opportune times. You know how it is when you set a target price, and it just approaches the target before falling off. It has still been profitable, such as when I bought Jan 66 Puts for $5.50 when QQQ peaked at mid-day on a Friday (12/1), and then sold when they hit my $7.75 limit order (the high price of the day) on the following Monday (12/4). Sometimes it works out nicely like that, but often it doesn't, such as when I closed my Dec 60 position at the close of Monday (12/4) after it had been eroding in time value while the QQQ gyrated around $63. Things seemed good when I started following the Swing Trade strategies for QQQ and OEX on the Index Skybox (IS). The week before last, I was making small gains on call plays, but I stopped out on put plays a few too many times. My worst day was last Wednesday after the U.S. Supreme Court decision when QQQ rallied at the open, then crashed down through the $71 trigger for Dec puts, and then started rocketing up when the news reported that Gore would address the nation that night, most likely to concede. I had entered the Dec 70 puts at $1.63, but I eschewed the charts and IS advice and tightened my stop to $1.00 for the apparent rally. The stop executed, and then QQQ proceeded to sell-off and then lay moribund until the final sell off that gave IS a nice gain but left me out in the cold. Even worse, while my puts were stopping out, I went with my gut instead of the game plan and also bought Dec calls to celebrate the long-awaited conclusion to the election! Bad decision. Lesson: follow the plan! When you are watching big intraday swings between the support and resistance points that IS earmarks for possible breakouts, it's tempting to trade the bounces. I was making only modest gains after the breakouts when I could have made much larger gains by trading the bounce. The trouble is, you never know if it's a tradable bounce until it's too late to get a good entry. For me, the initial bounce on Wednesday turned out to be a trap. IS kept citing the technical weakness, but I was trying to be the cagey contrarian, thinking for myself by predicting market psychology and positioning for a brief rally that didn't follow through. I've been more disciplined this week, ignoring my gut and trading the technicals. For example, I wanted to buy puts immediately after the Fed announcement, but I held off and waited for confirmation, even though this time I would have profited immensely by getting in early. I'm currently holding Jan puts on QQQ and OEX, but I'll talk about my January plays next month. Hopefully, I'll report phenomenal success from using a more disciplined approach. Outside of dabbling in Index swing trading, I position-traded only lightly. I made some money dabbling in calls on ADBE and PDLI. I sold December naked puts on only one stock, MRVC. With a lot of technical weakness on Nasdaq and after being burned by PRSF last month, I wasn't confident that many of my favorite stocks would hold up in a broad naked put strategy. I chose MRVC because: (1) it is a high-potential company in a high-growth sector, (2) it appeared to be turning up from severely oversold conditions, and (3) the option premiums were huge. I sold Dec 15 puts for $1.50 on 12/1 as the stock closed at $17.50, which turned into a very nice play. I chose not to buy them back because the stock was holding up strong even as others were crumbling around it, and I was not planning to use the margin for anything else at the time. One comment I'd like to make here is that being "severely oversold" does not guarantee that the stock will bounce. Always look for technical indications that a recovery is starting. In my long-term account, I was minding the store a little closer this month. I got out of some high-P/E stocks (like SCMR, GLW and TMWD); sold covered calls to get called out of some others (like MSTR and ABI) and covered calls that I didn't get called out of (like BBH and CMGI); sold my holdings in some tech stocks on technical peaks (like MSFT and TXN); and accumulated a few shares of some blue chips on sell off days (like INTC, SUNW, HD, and HAL) as well as some low-P/E speculatives (like CBR and CATS). I am holding no LEAPS at the moment. I finally stopped waiting for a sustained rally and went ahead and sold covered calls on the first signs of strength. In retrospect, this has been a great market for selling ITM covered calls at technical resistance, such as Nasdaq 3000. Perhaps because the rally attempts have been unsustainably explosive, every apparent start to a rally is met with selling pressure, which is great for raking in juicy ITM covered call premiums. Also, this kind of market has been great for the strategy of using part of the covered call premiums to buy OTM puts on the same stock. For now, I'm continuing to expect more near-term downside, but I doubt investors have given up on this market. Swing traders have been active, but position traders and long-term investors with day jobs might be getting impatient. It's like a group of vultures waiting for the sick animal to take its last feeble breath before rushing in to feed. Try not to be the first vulture to arrive, because as I have experienced, the sick animal might still have enough life to give you a swift kick in the face. ************* READERS WRITE ************* Dear Mr. Brown, I have been planning to send you and your staff a Merry Christmas message and decided to do it early for a change. Not only that but your usual excellent commentary from the Thursday update spurred me into action. What I want to say is, and I'm sure it goes without saying, is please do not change a thing you are doing. I am amazed at some of the e-mails you report knocking you for being bullish or bearish or the ridiculous notion that you and Austin should be on the same page because you were looking for the bull bounce and he's looking to short the world. Personally I don't use your excellent service for option picks, although I do look seriously at what you recommend and sometimes go with them, but I view OIN as my personal team of equity market specialists. This year has been a difficult trading year for me and I had to look deep within myself to see what I was doing wrong. I always thought of myself as a market neutral options trader but found out I was only a call buyer who traded puts as a side line. I'm embarrassed to say that it took me until about September to realize this epiphany but thank goodness I realized it while I still had capital to trade with. I found out that the bull market lulled me into a complacency and that I was trading off the seat of my pants. thanks to your service, and I might add the articles and commentaries were very instrumental in helping me to see this, I found that I was entering my trades when I should have been exiting them consistently. I've also taken a very serious attitude about my trading and I'm now happy to say that I've been realizing some surprising returns. I'm paying strict attention to trend lines, support/resistance, divergences, channels, formations, etc. also, I'm reading Austin Passamonte's Market Sentiment which helps me identify trends and danger areas to avoid. The COT data is invaluable. I have printouts of Market Posture with me constantly to help identify areas to enter/exit trades. (sell to soon!!) along with printouts of your updates. I go through reams of printer paper not to mention my own personal notes and references I concoct.. I'm now more willing to take a small loss when a trade goes against me and on days that I'm not sure, do nothing. Missed money is better than lost money any day of the week. I know from first hand experience. Another rally or sell off will come along, guaranteed. Please continue your midday updates and alerts. I DO pay attention to them and have been learning a great deal from them. I currently think there may be some more downside to this market but exited my QQQ puts this afternoon (almost a double) as I tend to agree with you that there will probably be some nervous shorts come Monday worrying about what Mr Greenspan is going to do about rates and I didn't want to have to worry about an upside gap all weekend. I was certain we were going to test 2500 today but the support at 2600 was surprising to me. I think the late afternoon rally attempt was short covering. in any event, my cash will still be good come Monday and thanks to OIN it is great to be on the right side of the market again. I also think a pretty strong relief rally is coming along as the gloom and doom is getting pretty thick out there. Anyway, just be assured that there is someone out here that appreciates the superb job you do. I utilize as much of what you offer through your service as I can to make my decisions and now when I make them I feel I've made the best trade available with the best information available. I've tried other services and OIN is in a league all its own. keep doing what you're doing. as long as I am a trader I WILL be an OIN subscriber. Oh...and I almost forgot. I wish the happiest Holidays to you Sir and the Option Investor Newsletter staff. Thank you. Sincerely, Keith H. Tornetta ************ Thank you Keith. We receive many letters like this but due to space considerations and trying to avoid the appearance of being self-serving, we seldom print them. This particular one so hit the theme of the week and so echoed the sentiments of the rest that I felt compelled to publish it. When traders finally come to the realization that you do not have to trade every day and your money will still be there every morning until you decide to trade again, that is the day they become successful traders. When you decide that you are in control, do as much research as you need to feel comfortable in your own decisions AND take small losses when those decisions go against you, that is the day you can call yourself a trader. Until then you are a gambler and the market will eventually beat you. Congratulations, Keith! You have won the war. You may lose some battles along the way but you have won the war! Jim *************************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=1160 ************************************************************ PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** CIEN $73.19 -23.19 (-27.53) Announcing a $2.6 billion buyout of Telecom equipment maker Cyras Systems was not what CIEN investors wanted for Christmas. In an environment where earnings growth is paramount, news that the deal will cut sharply into earnings in the current fiscal year was not what traders needed to hear. They responded immediately, pushing the stock below the $90 level at the open, and then it got ugly. News that the Fed would not drop interest rates until sometime next year just exacerbated the selling, and by the close CIEN had lost more than $23, bringing its loss for the week to a whopping 27%. Fortunately, we never got a chance to make an entry on this play as it has been in free fall since we added it this past weekend. With the NASDAQ closing at a new yearly low, Networking stocks weak, and CIEN's severe technical violation, we have no choice but to cut it loose tonight. PUTS: ***** KO $56.75 +1.88 (+3.25) Two days of advancing gains on the DOW and Goldman Sachs' bullish recommendation for KO laid this play to rest before it could begin. In early afternoon trading on Monday, KO saw a 2.6% rise on Goldman Sachs' reiteration of its "recommended for purchase rating" and 12-month target price of $70. The brokerage firm commented that since the stock's nearly 15% drop over the past weeks, it now offers a winning risk/reward profile for investors. They took the bait hook, line and sinker; and thus, a rollover at either the pivotal 200-dma ($55.02) or the 5-dma ($55.99) never transpired. Instead, the Fed's gift-wrapped sentiment set the stage for KO to rally upwards into the vicinity of the $58 level. A strong close above our $56 stop on good volume put the final nail in the coffin. TRW $31.75 -0.25 (+0.50) Despite having its earnings estimates lowered by Goldman Sachs Monday morning, shares of TRW rallied along with the broader market. TRW's strong trading yesterday may indicate that all the bad news has already been discounted into the stock. That said, we're dropping coverage on the play tonight in spite of the fractional losses today. Existing positions can be exited at current levels or on any weakness early tomorrow warning. ************************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=1139 ************************************************************** 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. 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The Option Investor Newsletter Tuesday 12-19-2000 Copyright 2000, All rights reserved. 2 of 2 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/121900_2.asp ************************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=1127 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** SGP $59.13 +0.56 (+1.19) The drug stocks hung on to recent gains as traders digested Greenspan's version of 'The Night Before Christmas.' SGP extended its share price another fractional in its attempt to shatter the $60 resistance, and set another 52- week high at $59.81 along the way. Competitors PFE and MRK also experienced significant upside moves as the DOW struggled to hold 10,600 in today's market. Altogether, the increasing evidence of a slowing economy and a barrage of profit warnings scared many investors out of the technology stocks and into more defensive plays, like SGP. While history proves that the "once bitten and twice shy" attitude eventually fades with a bullish marketplace, the current trading environments lends itself to additional gains for the drug makers over the short-term. Schering-Plough isn't expected to release earnings until the end of January, so don't expect a run into earnings just yet. Accordingly, look for a pure momentum surge to launch SGP through the $60 resistance level. The more cautious traders will wait patiently for a bold upside move before beginning new plays. Lower entries might be found on pullbacks to the 10-dma ($56.61), which trails above our adjusted protective stop, now a point higher at the $56 mark. QCOM $83.44 -2.00 (+3.88) Good news from the company yesterday, positive analyst comments and a convincing bounce off the 50-dma (now at $79.84) was what attracted us to this play yesterday, as QCOM announced that a new breakthrough would allow them to manufacture their products using less parts. This helped QCOM to close up $5.88 or 7.38% while supplier Sawtech headed sharply lower. Today, with Fed news and resistance from the 10-dma (now at $92.41) QCOM closed back below its 5, 10 and 200-dmas (at $85.56, $92.41 and $84.24, respectively). For the day, QCOM closed down 2.34 percent on 110% of ADV. An aggressive entry could be had on a bounce off the 50-dma but make sure the bounce is backed by volume and QCOM closes above our stop price of $78. For a safer play, wait for QCOM to break through its 5-dma to confirm upward momentum before taking a position. Either way, make sure the NASDAQ is on your side when considering an entry. LH $163.25 -0.50 (+6.19) As the NASDAQ continues to trace new yearly lows, Medical stocks are turning into one of the favorite defensive plays. Going along for the ride as the DJIA rallied sharply yesterday in anticipation of today's FOMC meeting, LH gained $6.69 and managed to hang onto most of those gains today. Even the FOMC's failure to cut interest rates wasn't enough to motivate selling in shares of the #2 clinical laboratory service company. If you are looking for relative strength, LH is hard to beat. It has even been performing better than its competitors. While the performance has been impressive, we need a few words of caution. Stochastics have now moved solidly into overbought territory, and stock has been riding the upper Bollinger band so far this week. Some profit taking would make sense, and to minimize the impact of such an event, our stop has been moved up to $158. It was encouraging to see today's fractional loss accompanied by volume only 75% of the ADV. Consider new positions on a bounce from the $158-159 level, but only if accompanied by strong volume. Watch LH's primary competitors, DGX and PPDI, for confirmation of strength in the Medical Testing sector. ******************* PLAY UPDATES - PUTS ******************* IBM $90.13 -0.38 (+2.31) Greenspan spun a tale of good cheer for the New Year, but the predisposition couldn't lift the technology sector out of its recent slump. The market confusion intensified and IBM shares, which had rallied to $94.44 ahead of the Fed Meeting, did an about-face on the news. A swift decline to the underside of our protective stop at $92 kept IBM in play. It's also important to be aware of other vendors in the industry, like DELL and HWP, for an overall picture of sector direction and investor sentiment. More specifically to our play on IBM, the intraday bounces first at $92, and then at $90, brought up previous concerns of these levels developing as support while the market finds its footing. Although the recent trading behavior keeps us on alert, our negative bias remains intact. Today's convincing slide through the 10-dma ($93.02) constituted a sense of confidence in regard to the downtrend line and at the same time, offered aggressive entry opportunities. But without sounding like a broken record, a definitive break through Friday's intraday low of $87.31 would provide better confirmation for the more conservative types. ARBA $59.25 -3.00 (-7.88) Since the break below support at $70 last Friday, this level has served as resistance for the stock as a failed rally above this area in early morning trading on Monday led to further selling. ARBA ended the day down $4.88 or 7.26 percent on average volume. Today, the stock attempted to rally again with expectations of an easing Fed. But resistance at the lower point of $68, and an unfriendly Fed brought in the sellers, who took ARBA down on heavy volume to close down 4.82 percent on over 130% of ADV. In doing so, the stock closed below its recent support level of $60. Look for a failed rally above this point as well as resistance at $65 as a possible aggressive target for entry but, be aware of our stop price at $66. For the risk averse, wait for ARBA to fall below $58 on volume before making a play. In both cases, keep an eye on Merrill Lynch's B2B HOLDR (BHH) as an indicator of sector sympathy. CELG $42.06 -3.06 (-2.69) When we started this play on Sunday, we mentioned that it was likely that CELG would wait for the 5-dma to catch up with the stock price before proceeding lower, and that is exactly what happened. A Biotech bounce helped CELG to close fractionally positive on Monday, with the 5-dma acting as resistance. Today, that moving average continued to exert pressure on the stock, as it closed down 6.79 percent on over 186% of ADV. At this point it appears that further downside is likely, with failed rallies above the 5-dma (now at $45.88) continuing to provide for aggressive entry points, but make sure CELG closes below our stop price, now adjusted to $45. For conservative traders, wait for CELG to break below $40 on volume before taking a position. Before initiating a play, be sure to confirm direction and sentiment with that of the AMEX Biotech Index (BTK) or Merrill Lynch's Biotech HOLDR (BBH). SBC $46.56 -6.75 (-7.13) It's not Friday, but today can be considered payday for those who owned SBC puts. Remember this line from our initial update on SBC..."Warnings have not been uncommon in this group during recent quarters and they had been floating over SBC's head." That came to pass today as the company lowered guidance for fiscal 2001. They said a slowing economy and delays in offering long-distance services will dampen its financial results next year, putting its earnings and revenue growth at the low end of expectations. But despite what they said, revenue growth will actually be at 8 or 9 percent growth when the lowest estimate was 10 percent. That may be splitting hairs, but investors got the general idea and sold the stock. SBC gapped down $6 on the open and never recovered. Volume was heavy as expected. The key now will be to lock in profits and see if we can't get SBC to trade down to the next support level at $44. This may be tricky as investors may perceive the stock as a value play given their typically strong track record. Either way, we are sitting on profits now and will exit on a rebound over $49.00. AMCC $61.56 -3.94 (-5.94) There has been no safe haven for Technology investors lately, with one leading sector/stock after another falling from grace. Fears that a slowdown in corporate IT spending will affect even the strongest players has had an unpleasant effect on shares of AMCC, and this week we got another technical breakdown as the stock failed to hold above the 200-dma ($69). The company has continued to surprise the street over the past few quarters, and revenue growth is currently (as of the October quarter) growing revenues at better than 150% year-over-year. But in a negative economic climate, investors are less willing to assign such high valuations (AMCC's PE ratio is still above 250) to even the most stellar growth stocks. Operating in both the Networking and Semiconductor sectors, both of which have taken a beating lately, AMCC really got moving to the downside again yesterday and confirmed the move with today's penetration of the $65 support level. The lack of an interest rate cut from the FOMC meeting today led to more selling in the four-letter stocks, and AMCC gave up nearly $4 and is now sitting just above the $60 support level. Aggressive players may want to initiate new positions on any failed rally below our stop, now lowered to $68, while more conservative players will wait for selling pressure to drive the price below $60 before playing. The November lows are near $45, and daily stochastics are just exiting overbought territory, leaving plenty of room for our play to fall. EMC $63.00 -2.81 (-5.13) Bullish hope for a rally was dashed this afternoon as the Federal Reserve refused to give the optimists an early Christmas present. Although they moved to a loosening bias, they did not drop rates, and the reaction was immediate. Everything technology related sold off in response, and the tenuous recovery in shares of EMC fell apart in a hurry. After recovering before the announcement to just above $70, it was a quick and painful decline below the $65 level. Closing right at the lows of the day, it looks like the downside is still the favored direction for the enterprise storage leader. Aside from broad market direction and concerns of excessive slowing in the economy there is no specific news to drive EMC ever lower. This continues to be a near-perfect play, as the stock has now given up 30% since we began coverage a little over a week ago. We are leaving our stop at $69, and any relief rally near this level looks attractive for aggressive entry points. Selling volume continues to rise, making a strong case for further declines ahead. More conservative players may want to wait for the $60 support level to fail before initiating new positions. Following the broader market trend will continue to keep you out of trouble; confirm a negative tone on the NASDAQ before initiating new positions. *************************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=1161 ************************************************************ ************** NEW CALL PLAYS ************** LOW VOLATILITY: EMN - Eastman Chemical Company $47.63 +0.81 (+0.94 this week) Eastman Chemical Company is a leading international chemical company with headquarters in Kingsport, Tennessee, producing more than 400 chemicals, fibers and plastics. Founded in 1920 to supply basic photographic chemicals for Eastman Kodak Company, Eastman Chemical Company became an independent publicly traded company in January 1994. Eastman is the world's largest supplier of polyester plastics for packaging; a leading supplier of coatings raw materials, specialty chemicals and plastics; and a major supplier of cellulose acetate fibers and basic chemicals. It appears that the Old Economy is alive and well, as shares of EMN look poised to challenge $50, thanks to news that the company expects earnings to grow going forward, despite a slowing economy. If this is the case, then the possibility of lower interest rates in the future will only help EMN's bottom line. Since bouncing off support at $35 in mid-October, EMN has rallied higher into year's end. Spending November in a trading range between $40 and $45, the stock broke to the upside in December and in doing so, put itself back above all its major moving averages. Connecting the highs and lows since October reveals a strong upward regression channel. Today, despite a highly volatile day in the markets, EMN was solid, gaining 1.74 percent on 157% of ADV. For aggressive entries, look for a bounce off the 5 and 10-dma (now at $46.67 and $46.18 respectively) as well as our stop price of $45 on volume. For an entry on strength, look for a break above $48.50 on volume before making a play. Confirm sector sentiment by watching the movements of competitors such as BF, DD and UK as well as that of the DOW. BUY CALL JAN-40 EMN-AH OI= 0 at $8.25 SL=5.75 Wait for OI!! BUY CALL JAN-45 EMN-AI OI=20 at $3.88 SL=2.50 BUY CALL JAN-50*EMN-AJ OI=14 at $1.00 SL=0.00 BUY CALL FEB-45 EMN-BI OI= 0 at $4.88 SL=3.00 Wait for OI!! BUY CALL FEB-50 EMN-BJ OI=19 at $2.19 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=EMN HRB - H&R Block, Inc. $39.31 +1.31 (+2.31 this week) Founded in 1955, H&R Block Inc. is a diversified company with subsidiaries providing a wide range of financial products and services. H&R Block Tax Services Inc. served 18.9 million taxpayers in more than 10,000 offices located primarily in the United States, Canada, Australia and the United Kingdom in 1999. H&R Block Financial Advisors and Olde Discount Corporation provide consumers with financial planning and investment products. As the dreaded tax season approaches, shares of HRB have been rallying, thanks to a thumbs-up from Oakmark Select Fund's Bill Nygren. This is a value play with a solid up-trend since its summer lows and appears to be on the verge of a breakout through key resistance at $40. The up-trend is supported by a share repurchase plan, announced in March of this year, with as many as 7.2 million shares still to be repurchased. With strong support from the company itself as well as institutional support, a break through $40 is quite likely. Today the stock edged ever higher, gaining 3.45 percent on 143% of ADV, on the heels of a volatile day for the markets. Aggressive entry points could be had on bounces off the 5 and 10-dma, now at $37.70 and $37.42. As well, there is strong support at our stop price of $36. If momentum lifts HRB up above $40, backed by heavy buying volume, this would be the signal for more conservative traders to jump in. In buying a bounce or a breakout, make sure market sentiment is in your favor by keeping an eye on the DOW. BUY CALL JAN-30 HRB-AF OI= 68 at $9.88 SL=7.00 BUY CALL JAN-35 HRB-AG OI=458 at $5.00 SL=3.00 BUY CALL JAN-40*HRB-AH OI=514 at $1.75 SL=1.00 BUY CALL FEB-35 HRB-BG OI= 0 at $5.88 SL=4.00 Wait for OI!! BUY CALL FEB-40 HRB-BH OI= 0 at $2.94 SL=1.50 Wait for OI!! http://www.premierinvestor.net/oi/profile.asp?ticker=HRB CVC - Cablevision Systems Corp. $83.75 +2.19 (-0.56 this week) Cablevision Systems Corporation owns and operates cable television systems and has ownership interest in companies that produce and distribute national and regional entertainment and sports programming services. Its Rainbow Media subsidiary operates cable networks including American Movie Classics (AMC) and Bravo. Rainbow's majority-owned Madison Square Garden properties include the famous sports arena, the New York Nicks (NBA), the New York Rangers (NHL), and Radio City Entertainment (the Music Hall and the Rockettes). Other CVC units are involved in electronics retailing (The Wiz), movie theaters, and competitive telephone service. While it isn't the hot Networking sector, media stocks have been doing fairly well over the past few months. CVC is really leading the charge outperforming competitors CMCSK and ADLAC, and gaining a hefty $20 since the September lows. Since then it has been marching higher, posting a series of higher highs and higher lows, and the most recent uptrend has added more than $11 over the past month. Therein lies the concern; on Friday CVC ran into its upper Bollinger band, and the daily Stochastics are threatening to drop out of the overbought zone, so we only want to enter new positions on renewed strength. Yesterday's sharp drop was likely due to the earnings warning from media giant, Time Warner (TWX), as CVC was able to regain its footing today while TWX added to its losses. Buyers came back today, erasing most of the losses, but CVC is vulnerable to further profit taking, and we need to use appropriate caution in initiating new plays. The bounce came near the $80-81 support level, so we are placing a tight stop, right at $80 to protect against the play succumbing to broad market or sector weakness. A bounce near support is definitely buyable, but make sure it is accompanied by strong buying volume before taking the leap. BUY CALL JAN-80 CVC-AP OI=483 at $6.88 SL=4.75 BUY CALL JAN-85 CVC-AQ OI=893 at $3.63 SL=2.25 BUY CALL JAN-90 CVC-AR OI= 5 at $1.94 SL=1.00 BUY CALL FEB-85 CVC-BQ OI= 0 at $5.13 SL=3.00 Wait for OI!! BUY CALL FEB-90 CVC-BR OI= 0 at $3.13 SL=1.50 Wait for OI!! BUY CALL MAR-85 CVC-CQ OI= 49 at $6.63 SL=4.75 http://www.premierinvestor.net/oi/profile.asp?ticker=CVC ************* NEW PUT PLAYS ************* AGGRESSIVE: PMCS - PMC Sierra $87.50 -8.94 (-19.31 this week) PMC Sierra is enabling the world's broadband communications revolution. The company derives its success by providing broadband semiconductor technology that has become an essential part of the global networking backbone. PMC Sierra is helping to allow network equipment manufacturers meet the requirement for products to break the bandwidth bottleneck, with their standard semiconductor architectural solutions. PMC Sierra was one of the high flying semiconductor stocks earlier this year. However, the stock fell sharply after Cisco's last earnings report, when they announced that they had an excess inventory of certain semiconductor components. Yesterday, the semiconductor sector received another blow when CSFB reported a widespread lack of visibility of demand for the first half of 2001 among all levels of the electronics components chain, with inventory levels of up to 6 to 12 weeks in the PC supply chain. PMC Sierra attempted to rally early Monday morning, but couldn't hold and fell below the critical support level of $96.94. On Tuesday, PMC Sierra held above $100 in the morning, as a hopeful Nasdaq waited for a Christmas present from the Federal Reserve in the form of a rate cut. A close look at the daily chart shows that PMCS fell below $96.94 around 1:30, and after the decision was announced at 2:15 pm the drop was sharp and steep. The message was clear that PMCS and the semiconductor sector needed the rate cut badly. The stock is now deeply below all of its major moving averages, and is not likely to see the 200-dma of $157.26 or the 50-dma of $136.20 anytime soon without help from the Fed. Aggressive traders may wait for a failed attempt to rally past resistance at $90, and stronger resistance at $94.75. PMCS's next level of strong support is at $79.38, which has not been tested since January, and we may very well see it again. Conservative traders can take positions at the current levels, after waiting for weakness in the semiconductor sector (SMH). Set stops at $98, as a close above this level could lead PMCS above the 5-dma of $100.16. BUY PUT JAN-90 SDL-MR OI=1957 at $15.25 SL=11.25 BUY PUT JAN-85*SDL-MQ OI= 172 at $12.87 SL= 9.63 http://www.premierinvestor.net/oi.profile.asp?ticker=PMCS SANM - Sanmina Corp $66.00 -6.13 (-7.09 this week) Sanmina is a leading electronic component manufacturer in the US. They produce printed circuit board assemblies and backplane assemblies as well as multi-layer printed circuit boards and custom cable and wire harness assemblies. The company's market base is diversified and includes original equipment manufacturers (OEMs) in the telecommunications, computer, data communications, industrial, and medical instrumentation industries. The telecommunications market makes up about 50% of Sanmina's sales with DSC Communications and Cisco Systems accounting for nearly one-third of total sales. Many of the electronic manufacturing stocks are trading at depressed levels in spite of strong earnings and solid forecasts. Take SANM, for instance. The company consistently reports solid numbers and last quarter, topped consensus estimates by 20%. Last week Tektronix, the #2 maker of electronics-testing equipment, set a bullish tone for the current quarter with a solid earnings release. And there was Solectron (SLR), the world's biggest contract manufacturer for electronics, who beat 1Q estimates by $0.03 on Monday. With that said, one might expect investors to have a bullish bias towards these particular techs. However, with the exception of Agilent Technologies (A), many are currently trading below their respective 200-dma lines. Last Wednesday, ahead of a 2:1 stock split announcement, SANM experienced a $9.44, or 10% cut. The loss put another knick in the stock's tarnishing armor. The failure of the 200-dma ($83.83) technical to keep SLR afloat foreshadowed future breakdown, although it didn't guarantee devastation. In after-hours trading that evening, SANM traded up on the stock split announcement, but couldn't hold any gains. Today's confirmed weakness below the 5-dma ($72.32) and its failure to resurface above $70.50 did however, prompt us to add SANM to our put list. The increased selling in the late afternoon, which mimicked the NASDAQ's sharp drop, also heralds the good possibility of extended losses. We've set our protective stop at $74 to allow SANM to operate freely during wide intraday swings. The $74 mark may seem a bit high, but it's nevertheless far below the espied 10-dma, which is currently near SANM's former support at $80. Historically speaking, there is some light support at the current price level and more at $60, so be aware of the hazard and the potential for a merciless reversal. A conclusive rollover around the above- mentioned 5-dma or lower at the $70 level provides an enterprising entry for the more risk-oriented. This play is considered HIGH-RISK and certainly not for the cautious types. Mark your calendars, too. Sanmina is planning to execute the stock dividend on or around January 8th, 2001. BUY PUT JAN-70 SQN-MN OI=1215 at $10.88 SL=8.25 BUY PUT JAN-65*SQN-MM OI= 920 at $ 8.13 SL=5.75 BUY PUT JAN-60 SQN-ML OI= 817 at $ 5.88 SL=4.00 http://www.premierinvestor.net/oi.profile.asp?ticker=SANM LOW VOLATILITY: AFCI - Advanced Fibre Comms $15.81 -1.13 (-2.56 this week) AFCI designs and manufactures end-to-end distributed access solutions for the portion of the telecommunications network between the carrier's central office and its subscribers, often referred to as the "local loop". The company's Universal Modular Carrier 1000 is a global product family consisting of a variety of multi-service access platforms with integrated optics and intelligent customer premises equipment. Utilizing a hybrid asynchronous transfer mode/time division multiplexing (ATM/TDM) architecture, the product line provides a variety of loop interfaces for analog and digital services including plain old telephone service, ISDN, DSL, and T1. Telecom and Networking stocks can't seem to catch a break, and the poster child for this decline is CSCO. Despite a lack of bad news, this technology bellwether continues to trace new yearly lows as the NASDAQ does the same. For its own part, AFCI has declined to new yearly lows as well, and now sits at major support near $15. Selling volume has been very heavy over the past 3 weeks, as the stock has fallen through support at $27, $24, and $19. Each of these levels will provide formidable resistance going forward, but in the current market environment, it seems unlikely that even the $19 level will be challenged in the near term. We are looking for AFCI to continue south from current levels, so we have set a tight stop at $17, just above today's high of $16.63. Further weakness looks like it could produce a decline to the $12 support level or even break below $10 to challenge multi-year lows near $7. Look to initiate new positions on a break below today's low of $14.75, or a failed rally in the $16-17 range. In either case, confirm further weakness in the Networking Sector (NWX.X) before playing. BUY PUT JAN-20 AQF-MD OI= 56 at $5.50 SL=3.50 BUY PUT JAN-17.5*AQF-MW OI=106 at $3.63 SL=2.25 BUY PUT JAN-15 AQF-MC OI=379 at $2.06 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=AFCI ********************* PLAY OF THE DAY - PUT ********************* EMC - EMC Corporation $63.00 -2.81 (-5.13 this week) EMC wants to be your storage solution. The company designs, manufactures and markets a wide range of enterprise storage systems, software, networks, and services. The company's products store, retrieve, manage, protect and share information from all major computing environments including mainframe, UNIX, and Windows NT. With offices around the world and a 35% growth rate for the first 9 months of the year, EMC is effectively filling its role as the worldwide storage leader. Most Recent Write-Up Bullish hope for a rally was dashed this afternoon as the Federal Reserve refused to give the optimists an early Christmas present. Although they moved to a loosening bias, they did not drop rates, and the reaction was immediate. Everything technology related sold off in response, and the tenuous recovery in shares of EMC fell apart in a hurry. After recovering before the announcement to just above $70, it was a quick and painful decline below the $65 level. Closing right at the lows of the day, it looks like the downside is still the favored direction for the enterprise storage leader. Aside from broad market direction and concerns of excessive slowing in the economy there is no specific news to drive EMC ever lower. This continues to be a near-perfect play, as the stock has now given up 30% since we began coverage a little over a week ago. We are leaving our stop at $69, and any relief rally near this level looks attractive for aggressive entry points. Selling volume continues to rise, making a strong case for further declines ahead. More conservative players may want to wait for the $60 support level to fail before initiating new positions. Following the broader market trend will continue to keep you out of trouble; confirm a negative tone on the NASDAQ before initiating new positions. Comments EMC accelerated downward into the close, finishing just near its lows of the day. The NASDAQ took out its most recent low of 2523 today and looks technically weak. Look for entry on rollovers from intraday resistance at $65, or stronger resistance at $70. A continued sell-off below $60 would warrant entry as well. BUY PUT JAN-70 EMB-MN OI=13821 at $11.00 SL=8.75 BUY PUT JAN-65*EMB-MM OI= 4095 at $ 7.88 SL=6.25 BUY PUT JAN-60 EMB-ML OI=14770 at $ 5.75 SL=4.00 http://www.premierinvestor.net/oi/profile.asp?ticker=EMC ************************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=1140 ************************************************************** ************************ COMBOS/SPREADS/STRADDLES ************************ FOMC Announcement Falls On Deaf Ears... Technology stocks fell to new lows today as investors showed their disappointment over the Fed's decision to keep interest rates unchanged. Monday, December 18 Industrial stocks rallied today on hopes that the Federal Reserve will move toward an easing bias at its monetary policy meeting on Tuesday. At the same time, the Nasdaq Composite index fell for a fifth consecutive session amid weakness in telecom and networking stocks. The Dow closed up 210 points at 10,645 while the Nasdaq closed down 28 points at 2,624. The S&P 500 index closed up 10 points at 1,322. Volume on the NYSE reached 1.15 billion shares, with advances beating declines 1,894 to 1,085. Trading volume on the Nasdaq hit 2.06 billion shares, with declines beating advances 2,444 to 1,607. In the bond market, the 30-year Treasury was down 8/32, pushing its yield up to 5.43%. Sunday's new plays (positions/opening prices/strategy): Costco COST JAN40C/JAN30P $1.38 credit strangle Pepsi Btg. PBG JAN45C/JAN40P $0.25 credit synthetic AXF Financial AXF APR55C/APR55P $3.62 debit straddle Equity Res. EQR APR55C/APR50P $2.50 debit strangle Bowater BOW JAN60C/JAN55C $1.50 credit bear-call Omnicare OCR JAN15C/JAN17C $2.06 debit bull-call Most of our new positions offered favorable entry opportunities. The Omnicare debit spread was the only play that did not trade near the suggested entry price however, it was available at a reasonable debit for traders who favor the outlook for the issue. Portfolio Plays: Blue chip stocks rallied today as investors awaited a key meeting of the Federal Reserve, which is expected to signal that interest rate cuts may be forthcoming to bolster the slowing economy. The rally was broad, led by interest-rate sensitive financial issues, retail stocks, basic materials companies, energy shares and conglomerates. On the Dow, J.P. Morgan (JPM) topped the gainers and Boeing (BA) and United Technologies (UTX) were also among the frontrunners. Brokerage issues rebounded and oil service shares enjoyed an impressive performance after Salomon Smith Barney said that the oilfield service industry is entering a multiyear growth phase. In contrast, the technology group slumped after an early bounce lost momentum, with investors still worried over dwindling earnings and inflated valuations. The Nasdaq quickly moved lower with Internet, networking and telecom stocks enduring the bulk of the selling pressure. One of the few issues that moved higher in opposition of the trend was Qualcomm (QCOM) and our recent credit spread is again in profitable territory. Another bullish issue, Pharmaceutical Product Development (PPDI) was a big winner today. The stock jumped over $6 to a new high near $47 after the company raised its outlook on fourth quarter earnings and revenues, and said it had licensed a chemical compound that could help treat premature ejaculation. PPD GenuPro, a research and development subsidiary of PPDI, announced it had given an exclusive license to Alza (AZA) to develop and commercialize its unique compound, dapoxetine, that treats problems with genitals and urinary organs. Hanover Compressor (HC) was another surprise, moving up over $3 to $36 on strength in the oil and gas equipment group. Our bullish position at $30 is expected to expire at maximum profit. In the retail sector, Home Depot (HD) rebounded from a recent slump as investors moved back into "Old Economy" companies. Analysts say a slowing economy makes it more likely that we will see further earnings erosion for high-tech companies and that outlook was evident in the weakness of software giant Microsoft (MSFT), which slid below $48. The Dow component and Nasdaq heavyweight slumped in the wake of a recent warning that a global slowdown, lower personal computer sales and less corporate spending will reduce earnings and revenues. Tuesday, December 19 Technology stocks fell to new lows today as investors showed their disappointment over the Fed's decision to keep interest rates unchanged. The Nasdaq closed down 112 points at 2,511 and the Dow was down 61 points to 10,584. The S&P 500 index finished down 17 points at 1,305. Volume on the NYSE hit 1.3 billion shares, with advances edging declines 1,470 to 1,442. Trading activity on the Nasdaq was extreme with 2.31 billion shares exchanged. Technology declines beat advances 2,661 to 1,344. In the bond market, the 30-year Treasury closed down 12/32, pushing its yield up to 5.47%. Portfolio Plays: The stock market retreated in late afternoon trading Tuesday, after the FOMC announced a widely expected decision to keep interest rates steady for now and prepare to cut rates in coming months. The Fed's interest-rate-setting committee warned the economy was slowing so quickly that there was risk of a sharp downturn. The warning was viewed as a signal that the central bank would slash interest rates in the future and that may help offset the affects of a recent barrage of profit warnings that have battered the stock market. Unfortunately, reductions in interest rates take up to a year to filter through the economy and benefit the corporate bottom line, so the prospects for the slumping technology sector, where many stocks are still believed to be too pricey, appears less optimistic. On the bright side, a number of specific stocks performed well today, even in the wake of selling pressure among broader market issues. Our new position in Hanover Compressor (HC) continued to benefit from the energy group's rally. HC moved up another $2 to close near an all-time high and our cost basis is almost $10 in-the-money. Waters Corporation (WAT), which makes analytical instruments used by pharmaceutical companies rebounded $2.62 to $81.56 as investors moved back into defensive issues. Analysts say that even with a slowdown in the economy, people will still spend money on companies in the pharmaceutical industries. Another defensive group is Food and Beverage and Kellogg (K) was a big mover in that sector, up $1.31 to $26.31. Our calendar spread position in Kellogg (MAR30C/JAN30C) has a total debit of $0.25 and almost three months until expiration. Among other mid-cap issues, Safeco (SAFC) and AT&T (T) managed small advances and in the small-cap category, Globo Cabo (GLCBY), Magnetek (MAG), Pennaco Energy (PN), Pactiv (PTV), and Timken (TKR) also moved higher. One of our older debit straddles, Advanced Fibre (AFCI) reached a new maximum profit today. The issue traded as low as $14.75, bringing the total credit for the neutral position to $19, a $6.25 profit on $13.50 invested for less than two months. Questions & comments on spreads/combos to Contact Support ****************************************************************** - SPECULATION PLAYS - One of our readers commented on the recent addition of synthetic positions to the Spreads/Combos section and asked that we offer more of these plays in the future. Here are three speculative positions on issues that have shown new technical strength even as the broader market moved lower. All of these positions offer favorable risk/reward potential but they should also be evaluated for portfolio suitability and reviewed carefully with regard to your strategic approach and trading style. ****************************************************************** CNC - Conseco $10.56 *** Restructuring On Track! *** Conseco is a financial services holding company that conducts its business through two major operating segments: insurance and fee-based operations and finance operations. The company's insurance subsidiaries sell and administer supplemental health insurance, annuity, individual life insurance, individual and group major medical insurance and other insurance products. The insurance segment also includes other asset accumulation products such as mutual funds. Conseco's finance subsidiaries originate, purchase, sell and service consumer and commercial finance loans throughout the United States. Shares of Conseco rallied today as investors responded favorably to a progress report concerning the company's restructuring plan. A memo from CEO Gary C. Wendt was posted on Conseco's web site suggesting that the company is 85% of the way toward its goal of raising $2 billion for debt reduction from the sale of non-core assets of the company. That figure includes the just announced sale of a minority stake in a casino to Argosy Gaming for $260 million. The CEO also stated that earnings before goodwill will be $1.18 to $1.38 a share in 2001 and that the new company will focus on creating shareholder value in two primary businesses; insurance and finance. Investors appear to favor the optimistic outlook for the company and traders who agree with the bullish technical indications can use this position to speculate on the future movement of the issue. PLAY (speculative - bullish/synthetic position): BUY CALL FEB-12.50 CNC-BV OI=1440 A=$0.93 SELL PUT FEB-10.00 CNC-NB OI=824 B=$1.06 INITIAL NET CREDIT TARGET-$0.25-$0.38 TARGET ROI=25% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $390 per contract. ****************************************************************** TEK - Tektronix $31.75 *** Up After Earnings? Hmmm... *** Tektronix is a technology company focused on providing test, measurement, and monitoring solutions to the semiconductor, computer and networking industries to enable them to design, build, deploy and manage next-generation global communications networks and Internet technologies. The company develops and markets a broad range of products in several key categories: Instrumentation, including oscilloscopes, signal sources, accessories and other products; Digital Systems, including logic analyzers; Communications, including protocol analyzers, network monitoring products, transmission test products for optical networks, mobile handset and infrastructure equipment, and mobile call generation systems; and Video Test, including waveform monitors, digital video compression testers of Motion Picture Engineering Group standards, and unique picture quality analysis and monitoring products. In addition, TEK provides support services for its products. Last week, Tektronix reported fiscal second-quarter earnings that surpassed consensus expectations on outstanding sales of equipment for testing next-generation communications networks. The company posted earnings from continuing operations of $36 million, or $0.38 per share for the most recent quarter, up from $8.9 million or $0.09 a share, a year earlier. Tektronix said revenues grew 25% on continued strength in their strategic markets; communications, computing and Internet technologies, with especially strong demand for communications infrastructure development and deployment. Company officials expect quarterly revenues to grow by 15% in the upcoming period and Tektronix also announced that Hughes Electronics (GMH) has just purchased more than $1 million of equipment to test its DIRECTV receivers. The recent technical recovery is now well established and this speculative position offers an excellent way to participate in the future movement of the issue with relatively low risk. We will target a $0.25 credit initially, to allow for a brief consolidation in the upward trend. PLAY (speculative - bullish/synthetic position): BUY CALL JAN-37.50 TEK-AU OI=614 A=$1.12 SELL PUT JAN-27.50 TEK-MY OI=38 B=$0.93 INITIAL NET CREDIT TARGET=$0.12-$0.25 TARGET ROI=20% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $870 per contract. ****************************************************************** NSS - NS Group $8.29 *** Bottom Fishing! *** NS Group conducts business in three industry segments: the energy products segment, the industrial products segment; special bar quality products, and the industrial products segment; adhesives. The energy products segment is a major producer of tubular steel products for the energy industry. Products produced by this segment include welded and seamless tubular goods, primarily used in oil and natural gas drilling and production operations, referred to as oil country tubular goods; and welded and seamless line pipe. OCTG products are produced in numerous sizes, weights, grades and end finishes. The industrial products segment manufactures products for a specialized niche of the SBQ products market at its Koppel facility. The industrial products segment manufactures custom water-borne, solvent-borne and hot-melt adhesives and footwear finishes. Some recent positive comments about the oil service industry has NS Group investors hoping for a brighter future. The company's share value has slumped in recent months after trading near a two-year high in late September, but renewed demand for oil and gas drilling products may be just what NSS needs to get back on track. Since last January, the price of natural gas has quadrupled and some experts predict that new production must increase by 25% to meet increasing demand. The number of rotary rigs operating in the U.S. has more than doubled in the past 18 months, with more than 800 of them in search of natural gas. NSS stands to benefit greatly from the expected industry expansion and traders who have a bullish outlook for the energy products segment can speculate on its movement with this bullish position. PLAY (speculative - bullish/synthetic position): BUY CALL APR-10.00 NSS-DB OI=24 A=$1.40 SELL PUT APR-7.50 NSS-PU OI=30 B=$1.20 INITIAL NET CREDIT TARGET=$0.00-$0.12 TARGET ROI=50% Note: Using options, the position is equivalent to being long on the stock. The collateral requirement for the naked put is approximately $265 per contract. ************************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=1146 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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