The Option Investor Newsletter Sunday 05-06-2001 Copyright 2001, All rights reserved. 1 of 5 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/050601_1.asp Entire newsletter best viewed in COURIER 10 font for alignment ****************************************************************** MARKET STATS FOR LAST WEEK AND PRIOR WEEKS ****************************************************************** WE 5-4 WE 4-27 WE 4-20 WE 4-12 DOW 10951.24 +141.19 10810.05 +230.20 10579.85 +452.91 +335.85 Nasdaq 2191.53 +115.85 2075.68 - 87.73 2163.41 +201.98 +241.07 S&P-100 658.74 + 9.63 649.11 + 5.45 643.66 + 35.89 + 30.42 S&P-500 1266.61 + 13.56 1253.05 - 10.07 1242.98 + 60.41 + 54.14 W5000 11687.27 +178.43 11508.84 + 99.07 11409.77 +557.12 +534.25 RUT 492.89 + 8.92 483.97 + 17.26 466.71 + 11.69 + 20.36 TRAN 2869.19 + 6.82 2862.37 + 1.07 2861.30 + 94.71 + 79.56 VIX 27.72 - .05 27.77 - 1.24 29.01 - 1.27 - 6.48 Put/Call .67 .48 .91 .76 ****************************************************************** Job Cuts Equal Rate Cuts, Did You Buy The Dip! It is going to be hard to restrain myself today from being overly bullish but I will try. The dip at the open on the Dow hit 10673 and the Dow closed at 10950, almost +300 points from the low of the day AND over 10900! Sorry, I can't be quite as bullish on the Nasdaq and S&P but they both turned in respectable performances. The Nasdaq added +45 points but still closed under the critical 2200 level. The tech worries are still with us. The S&P closed right back at resistance that has held all week of 1266. Good but no break out. It all came down to the Jobs Report and the report was a disaster. The economy lost -223,000 jobs in April instead of a gain of 25,000 jobs as expected. OOPS! Manufacturing and services each lost more than -100,000 jobs showing that the economic weakness is becoming more broad based. This drop was far more than many analysts had even speculated and was the biggest drop since 1991. The unemployment rate rose to 4.5% and was the highest since 1998. It appears the "turnaround" may not have appeared as many had thought. The manufacturing sector has now lost -373,000 jobs since the beginning of the year and it is accelerating. The race is on between the Fed and a recession. Analysts now wonder if the Fed can cut rates fast enough to avoid a recession. The Jobs Report is a lagging indicator but with the flurry of recent layoffs announced it is by no means over. Inter-meeting cut anyone? Not likely since the FOMC meeting is only six trading days away but a -50 basis point cut is almost a sure thing with yet more cuts in the near future. The White House said it was "entirely possible" that the recent 2% GDP reading will be revised downward. Are you listening Alan? Rambus may be close to its own recession after losing a crucial battle in court Friday. A Federal judge dismissed the remaining patent infringement claims brought by Rambus against Infineon. RMBS fell to under $13 on the news and some analysts say $13 is still too high if this ruling sticks. The key is not the royalties they would have gained from Infineon but the proverbial crack in the dike that this would cause. Rambus has multiple cases in court for this same type of infringement case and once the concept is tossed in one court the odds are very good the other courts will follow suit. The once high flying RMBS may be overrun with suits to toss out previous victories and their royalty income could suffer drastically. The keywords here are "could" and "appeal." RMBS has appealed the decision and feels they will be victorious. Any bets? How many cell phones do you own? Goldman Sachs went bullish on wireless companies on Friday and added AWE, NXTL and PCS to their recommended list. Adam Harkness initiated coverage of Nokia at a buy rating. Nokia CEO, Ollila, said he believed NOK would be the number one 3G equipment provider with a goal of 35% market share. Since Nokia is gaining market share in almost all areas this should not be a difficult task. RFMD was upgraded by JPM based on the demand for cell phone chips, especially the GSM type. He said Nokia would likely choose RFMD for their continued supplier due to their good history in the past. Cell phone carriers have got to get their customer service act together before they progress much farther however. For example I called AT&T Thursday to ask about converting an analog phone I have to a GSM phone which will work in Europe. After spending 15 min wandering through endless recorded menus I finally got a real person. "Do you have a phone that I can use in Europe?" No. "You have service in Europe, right?" No. "Are you sure? Not even on a roaming basis?" No. "What about your World Connect Service?" It works on GSM, not TDMA. "OK, can I get a phone that uses that?" No. Maybe by the end of the year..... I resigned myself to order a Nextel phone for $39.95 a month, good in 75 countries including the U.S., and just cancel my AT&T account. I was telling a co-worker, another AT&T user, about this at lunch Friday and he also thought it was strange that AT&T did not offer a product for this market. He went to an AT&T phone store after lunch and brought me a brochure about their 100 country product called, believe it or not, "World Connect." Duh! No wonder AT&T lost $300+ million last quarter if their wireless customer service reps can't even answer questions correctly. Enough griping...... What did you say? Merrill Lynch economist Bruce Steinberg shed his always optimistic view on Friday and issued a note saying "the economy could be beginning to look recessionary." Fifteen minutes later, he took it back. He acknowledged that two straight months of job losses are almost always associated with a recession but added that the Fed has never cut rates so rapidly. He admitted that there isn't any evidence yet of sharp recessionary cutbacks in consumer spending. Now who do you suppose dialed his number? Using the Dow's performance on Friday as an indicator of next weeks action we could almost find ourselves thinking the markets have returned to 1999. Just consider the indicators. The markets are rallying on bad news. Dip buyers are being rewarded handsomely. Earnings warnings are not an excuse for a -50% haircut. Advancers are beating decliners by large margins. The Dow closed over recent strong resistance. If we could just get the S&P and Nasdaq to do the same, the bears would be in full retreat. Earnings are almost over with 434 of the S&P-500 already reported. Spring is here and the sun is actually shining in some parts of the country. What could possibly be wrong? There is a 74% chance of the Fed cutting rates by 50 basis points once again as evidenced by the Fed fund futures. The only dark cloud on the horizon is the fear of recession. The only two major earnings reports in our future are CSCO and Dell and both have already warned. The Cisco warning barely caused a blip in the markets and Dell is rumored to be close to beating the lowered estimates. (Sure..) So we only need to worry about the recession cloud and the Fed is racing the storm with almost biweekly rate cuts. The only problem now is the fear that the consumer will hear all the negative job news and start withholding their spending. If that happens the recession will appear. The continued drop in jobs is having a negative impact on consumer confidence and those with jobs are wondering if their company will be next with the pink slips. Enter the stock market. As long as Greenspan and crew can keep the markets moving ahead, consumer confidence from those who still have jobs, will improve. The economy is teetering on the brink of disaster but the Fed is making it obvious that they are not going to let it happen. This scenario has energized the markets and as I stated on Thursday the underlying sentiment is seriously bullish. Everybody wants the markets to go up and that desire turned into buying on Friday morning. Make no mistake, the markets are still overbought from the start of the April-4th rally. That does not mean they cannot get even more overbought. The charts are setting up for a breakout and we still have over a week before the Fed meeting. The possibility of a strong pre-meeting rally next week is huge. This is the type of market that drives bears crazy. The Dow is only -50 points from extreme resistance and closed at the high of the day. If you remember my comments from last week I said there is an army of shorts ready to open new positions when we hit 11001. This is exactly what we need. "IF" buyers jump on any dip from over 11000 like they did the open on Friday, then the race is on! The shorts will be forced to cover and buyers, upon seeing a rebound over 11000 again, could pile on like a school yard game of dogpile. Of course this scenario assumes we actually break 11000 next week. Without any negative news over the weekend the first attempt should come on Monday. Remember this level of resistance has failed 11 times since September. The Nasdaq may lag any Dow rally because of the CSCO earnings on Tuesday. We think we know what they will say but until they say it traders may be cautious. There are so many traders waiting for a break over 11000 as the definitive buy signal that once we are over, a chain reaction could occur. There is nothing fundamental to support it since the economy is still falling but that bullish sentiment is ready to run wild. This "trading rally" may also come to a screeching halt as the FOMC meeting gets closer just in case the Fed feels less pressure to cut big. Investors should listen closely to any Fed speak next week. If they are not going to cut big they should be telegraphing their intentions to prevent a market meltdown on the announcement. The market next week will be anything but tame. The bears are nervous that the market may keep going up. Ironically the bulls are also nervous the market may keep going up. They want another dip to continue easing into positions a little at a time. If we get a blowout over 11000 they may be forced to chase stocks and they are worried about that possibility. Has dip buying come back into vogue? Sure looks like it! Selling into rallies has finally become hazardous to your health. Those preceding paragraphs were my bullish side speaking. There are still a lot of bearish things to consider as well and in the interest of balance I want you to hear these thoughts as well. There are some technicians that are pointing to the declining volume as the rally progresses as signs that everyone who wants to buy, has done it already. There are also those that see bearish wedges on the Nasdaq and Dow as well as converging resistance lines. No magic there, I have said this repeatedly. My problem is this. Chartists love to tell you what happened but very few can tell you where we are going. If you have been reading my articles long you know I am a "news and events" player, not a technician. I have technicians send me charts constantly saying XYZ stock is about to breakout and we should recommend it. I ask them when they are going to announce earnings and they say, "why?, I don't know anything about earnings!" Investing is simply not about JUST looking at a chart, it involves news and current events for the company as well as the market and the economy. It also involves cycles in investor sentiment. So back to the point. While I think the market is setting up for a great trading rally next week, I also feel that there will be another dip around the Fed meeting. The current rally is based on the expectations that the Fed will cut 50 basis points. Even if they do, it is already priced in. Secondly, earnings are over. There is no positive event to continue to power the market. The biggest news now is the impending recession possibilities which is not market positive. The current market is running on hope, bullish hope. Volume is slowing which means hope is slowing. The summer season is normally a negative for the markets. Volume goes down, traders go on vacation, kids are out of school which takes the focus off investing for a large portion of the retail traders. It is entirely likely that the current Dow rally which started on April 4th will fail in the next eight days and we will go back to being locked in a trading range until fall. My suggestion, now that I have pointed out both sides of the picture, is trade any rally we get this week but go flat before the FOMC meeting on the 15th. Wait for the smoke to clear and see if the market conditions have changed. Remember, the markets go down over 80% of the time on the two days after a FOMC meeting, even if they cut rates! Buy the rumor, sell the fact. Trade smart, enter passively, exit aggressively! Jim Brown Editor ************** EDITOR'S PLAYS ************** The "Capturing Stock Appreciation With Leap Puts" seminar for this Sunday was rescheduled to Sunday May-20th due to the Mothers Day conflict. We had numerous complaints that we would schedule this without thinking about the family strife it would cause. SORRY GUYS!!! We apologize! Click here for current info: http://www.premierinvestorseminars.com/ If you are interested in attending an online seminar on my strategy of capturing stock appreciation by selling Leap Puts it will be next Sunday, May 20th at 8:PM ET and I will repeat it at 8:PM PT as well. It will last 90-120 minutes and will be interactive. You will be able to ask questions and I will answer your questions in real time with charts and diagrams. You do not need any special software to view the seminar but you must have a 56K Internet connection or faster for best results and a seperate phone line for audio. If you are interested in this seminar please click here for more information. http://www.premierinvestorseminars.com/ Breakouts to New Relative Highs When looking for a stock to play in a market that is moving up broadly you should not just pick any symbol with a couple days gains and jump on board. There are many different thoughts on which stocks to play but one of my favorites is a "new relative high" or a breakout from congestion. The stock may have many higher highs but as it progresses up from the recent bear market sell off every dollar gain is at the expense of traders who wish they had sold the last time it was at the current level. If you had a $80 stock that fell to $40 and then rallied back to $60 before falling even lower, there are thousands of investors who said "if only I had sold it at $60." It may languish below $60 for months but those investors still remember that $60 level as their pain threshold. Under $60 is too painful, I will hold, but when it hits $60 again I am out of here! Once the stock clears these artificial resistance levels it tends to run quickly to the next higher level. Setting buy stops just above the current resistance allows us to wait for that run to begin. To wait for those sellers to be done selling. We don't want to own a stock that others are just waiting to sell. I am going to list some examples today of stocks that I think would be good plays once they break out to a new relative high. We want to set a buy stop right above resistance and try and catch the bounce. QLGC - Resistance at $50.00 SANM - Resistance at $35.00 MSFT - Resistance at $71.25 - $72.50 LLTC - $52.00 As always please protect your positions with stop losses. What looks good on paper (or monitor) does not always work out in real life. Jim **************** MARKET SENTIMENT **************** Caught By Surprise By Bill Kaeiser That is an understatement. Both the bulls and the bears got thrown for loop. First, it was the Non-Farm Payrolls missing the estimate by almost 250,000 jobs. While the expectation was to add 25K, the weakening job market actually lost 223K jobs. Then, after a gap down, the bears got shook out as buyers stepped right up from the open. A nice little squeeze to keep this market looking and feeling strong. Pullbacks are beginning to be seen as opportunity and the sentiment is shifting. Shorts see this too. They are covering quicker, in effect giving more cushion to the downside. However, there's a lot of talk out there about another pullback and how everyone wants to get long at that point. I'm starting to wonder if the market fades the expectations of a pullback and leaves us kicking ourselves for waiting too long. Patience might be the best bet here though. NASDAQ & QQQ The COMPX gapped down to 2100 on the open and briefly dipped below. From that point on, there was very little red on the chart. Look at the green candles all day on the 60 minute chart below. This timeframe shows the range we've been trading between 2000 and 2232. Not real exciting but our recent gains in tech are being digested. Given this range, a breakout above 2243, which was the high on March 7th and the pivot before testing 2000, will probably bring out that panic buying of old. I am more inclined to think that a retest of the lower bound at 2000 will happen first, but we saw what happened on Friday. I'm hoping that my patience pays off on getting a long entry. Further strengthening the "pullback" sentiment crowd is the weekly chart. The downtrend line from all the way back in March 2000 when the Nasdaq traded 5000 is looming right at current levels. Support remains at 2000 with resistance at the 2250 area. On the QQQs, we're looking at $49.50 resistance and $43.50 as support, coinciding roughly with the COMPX levels. SPX & OEX Resistance is solid at the 1267 area. Impenetrable? At least for now. It's beginning to look and feel top-heavy, and like the Nasdaq, may be in for a retest of the lower end of the range. If a we do see weakness in the S&P 500, a break below intraday support at 1240 could lead to a further pullback near 1200. On the flipside, if the SPX.X breaks higher, we could see a very big rally fueled by short covering. As for the OEX.X, resistance is still sitting at 660, with support at 640 and 620, being the 38.2% retracement of April's rally. DOW 30 Forget 10900! Buyers pushed the Dow ($INDU) through previous resistance there, managing to close just 50 points off the 11000 mark. This is our next upside challenge and you know that the sellers will be waiting there. Friday's rally lifted the Dow 30 over May 2nd's high of 10939. After the open, the Dow dropped right down to support at 10700 and once the buying began, it didn't stop. There certainly is conviction to the upside at this support level. We would look for 10900 to now provide support after this breakout. A failure of this would allow shorting opportunities. Until then, it's all about 11000. COT Data This Friday's COT report shows some interesting developments. Commercials have reduced their net-short positions on the S&P 500 by 2.5%, while increasing their net-long positions on the DJIA future by 8.5% to 25%. Here's the biggie: Small Specs have doubled their net-short positions on the DJIA from -26% to -58%! We are going to see a battle on the Dow. On the Nasdaq 100 futures, Commercials remained unchanged, still net-short 17%. Small Specs, however, doubled their net-longs to 22%. This bodes well for the Nasdaq's general health. Now we just hope there's one more pullback to catch that great entry point in tech. Until we meet again, Bill K. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/050601_1.asp *************** ASK THE ANALYST *************** Cisco's Chance By Eric Utley Tuesday will bring Cisco Systems' (NASDAQ:CSCO) fiscal third- quarter earnings report. I recall, in early April, Cisco said it would write-off billions worth of inventory and that its revenue growth would decline by 30 percent sequentially. The report should be telling of the current condition of the networking business and I anxiously await the conference call for guidance from Chambers. In other news, the Colorado Avalanche were defeated by the Los Angeles Kings Friday night in Game 5 of the Western Conference semifinals of the Stanley Cup Playoffs. The Kings edged past the Avs by 1-0. The Avs' inability to net the puck caused me to cover some of my Los Angeles Kings short position, but I'm still very long the Avalanche! While the Avs were unable to score this weekend, my little sister, Stefanie, netted her first goal of the soccer season, extending her team's unprecedented 17-0 record. Stefanie, following your power kick past the goalie, I heard something echoing across the Rockies that sounded like: GOOOAAALLL!!! Way to go, dude! Send your stock requests to Contact Support. Please put the symbol of your requests in the subject line of the e-mail. ---------------------------- Gaming THE Pullback Since I have been sitting with 95% cash in my account and made almost 50% last year I was wondering [if] I missed the opportunity this time or do [you] think there will be a pull back (profit taking). Since several of the stocks I was following are EMLX, BRCD, CHKP and MERQ and all of them are more than 100% gain without pullback, do [you] think there will be possibility of profit taking within next week or so? Please give some hints regarding market's overall direction. Since you were little more bearish I was waiting for pullback and now I am loosing my patience. - Thanks, Mitul Before I address your request, Mitul, I'd like to congratulate you on a stellar performance last year. Well done! I think that Mitul's request concerning a pullback is very pertinent to the current condition of the markets, so let's get on with it! In the space of five short weeks, the Nasdaq Composite (COMPX) advanced 38 percent from its low of 1619 traced on April 4th to a relative high of 2232 traced last Wednesday. Obviously, the magnitude of that move was awesome. But was it just another bear market rally or was it the advance that marked the end of the bear? Like I've written before, I think we've seen the lows across the broader market averages, but I also think that a 38 percent advance, for example, requires digestion. The advances in individual issues, as you alluded to, Mitul, have been even more impressive. Let's take Brocade (NASDAQ:BRCD), for example, whose shares ran up 200 percent recently - 200 percent! Fortunately, Option Investor was in on some of those gains. Now I know that Brocade, along with several other data storage companies such as Emc (NYSE:EMC) and Network Appliance (NASDAQ:NTAP), have recently suggested that demand was beginning to slightly up-tick. But does the mere suggestion of an improvement in business justify a 200 percent advance in price? I'm not smart enough to answer that question and I'm not smart enough to pick tops in stocks, which is why Brocade is still on the Option Investor call list. However, Mitul, I do think that stocks such as Brocade need to pullback and consolidate recent gains, hence our relatively tight stop on the Brocade play. A quick glance over Brocade's chart reveals a V-bottom, which I don't necessarily buy into. And I don't "believe" in V-bottoms relative to the current market because of the massive downside moves that many of these stocks experienced; downside moves need to be consolidated, too! Furthermore, the Nasdaq is trading like it's 1999 again and I don't think the current economic environment is necessarily conducive to these monster moves to the upside. Let me make it clear, however, that I'm by no means bearish on the economy nor the market. The recent advance was just a little too much, too fast - - but that's just my opinion. To directly answer your questions Mitul, yes I think the stocks you mentioned will pullback. And yes, I think the broader market will pullback on profit taking. But, timing is EVERYTHING, so I'm not necessarily recommending shorting. And in the event of a pullback in a stock such as Brocade, I think an appropriate tool to employ would be a retracement bracket in an attempt to gain a good risk to reward entry into the stock. On the Brocade chart below, I've simply laid a retracement bracket over the stock's recent relative highs and lows in an attempt to ascertain levels to monitor for a pullback. Additionally, I've used similar retracement brackets on the reviews to follow to better illustrate this concept. ---------------------------- Emc - EMC Hope the fishing was good [last] weekend. Of course a bad day fishing is better than a good day at work...well maybe. Anyway I was looking at the chart of EMC looks like a cup and handle forming. Can you confirm this? Thanks for the help and great work. - David David, the fishing was great last weekend! Although I've reviewed Emc (NYSE:EMC) quite a bit recently, I think the question concerning the perceived cup-and-handle bottom pattern on its chart is very pertinent. I won't go into any fundamental issues this weekend concerning the data storage market, of which Emc controls roughly 40 percent. I think I've made it clear in past columns that I'm bullish on shares of Emc and the data storage business over the intermediate- and long-term. As David pointed out, shares of Emc have traced a cup-with-handle pattern over the past two months. This pattern is appearing on the charts of many tech stocks following the rebound in the Nasdaq. The only "issue" I have with these bottom patterns is that they formed in a short amount of time. I think the longer a stock bases, the stronger the ensuing rally once it breaks out of its consolidation. For Emc's part, the stock traced the cup portion of its base over eight weeks. Ideally, the stock should spend 12 weeks, or more, forming its base. The handle portion on Emc's chart is clearly defined by the $37 - $46 range. Again, I'd like to see the stock trade sideways for another six to eight weeks - that would give shares of Emc a solid base to rally from. In addition, the stock rallied roughly 80 percent from its relative low at $25, and that type of move to the upside requires consolidation just as Emc's downside move from its relative highs around $100 requires lateral trading. Also worth noting is the declining volume on which shares of Emc are trading as they form the handle. The sideways trading on decreasing volume is indicative of a basing pattern and serves the purpose of weeding out the "weak hands." Those who wish to gain entry into Emc from the long side, at the "right" time, will want to wait and watch for a breakout above the upper-end of its current trading range on volume in excess 30 or 40 million shares. ---------------------------- Wal Mart Stores - WMT WMT was recently on the call list of OIN. A very bullish article was written that the stock is getting ready for a strong earnings run. However within 2 days the stock was dropped from the call list since it traded below 52. However the stock is now trading above 52 and has touched also 53.50. Can you advise your views please if you see this stock making an earnings run and expected to go higher? - Thanks, Sunil Thanks for the question, Sunil! We (Option Investor) picked up Wal Mart (NYSE:WMT) on April 25th after the stock bounced off the $50 level, near its aggressive ascending support line. We liked the technicals on the chart and behavior in price along with the prospects of continued rate cuts following the Fed's surprise move on April 18th. After capturing a few points in the stock, we decided to move our downside protective stop up to the $52 level. And you can see on the chart below that the $52 level marked the 50 percent retracement of Wal Mart's move lower from its relative high of $58.75 on January 3rd to its low of $45.18 on March 23rd. In short, we figured the $52 level was key support and important for Wal Mart to trade above. Unfortunately, we cut the stock loose after it closed below that level. And, as you alluded to, Sunil, Wal Mart subsequently traded up to $53.55 - the site of its 61 percent retracement level. I think that $53.55 is the key resistance level as you can see on the chart below. Wal Mart has been stuck in the range between its 50 and 61 percent retracement levels for six trading days now. In addition, Wal Mart faces resistance at its descending trend line around the $54 level. However, if $54 is cleared, I think that Wal Mart will trade up to its relative high around $57. I don't know if anticipation of the company's earnings report on May 15th will power Wal Mart higher in the short-term. When Wal Mart reported its March sales figures on April 12th, it reduced its first-quarter earnings forecast by one penny to 31 cents per share. The company blamed its shortfall on colder-than-expected weather during March and that warning may keep a lid on shares ahead of the earnings report because market participants may fear an additional warning on May 15th. But, that's just speculation on my part so take it for what it's worth. In addition, we're all aware that the Dow Jones Industrial Average closed less than 50 points from the nearly impenetrable 11,000 level and Wal Mart is a component of the Dow, which makes a breakout above Wal Mart's own resistance all the less likely in the short-term. ---------------------------- DISCLAIMER: This column is an information service only. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The Ask the Analyst picks are not to be considered a recommendation of any stock or option but an information resource to aid the investor in making an informed decision regarding trading in options. It is possible at this or some subsequent date, the editor and staff of The Option Investor Newsletter may own, buy or sell securities presented. All investors should consult a qualified professional before trading in any security. The information provided has been obtained from sources deemed reliable, but is not guaranteed as to its accuracy. ************* COMING EVENTS ************* For the week of May 7th, 2001 Monday ====== Consumer Credit Mar Forecast: $9.8B Previous: $13.5B Tuesday ======= Productivity-Prel Q1 Forecast: 1.10% Previous: 2.20% Wholesale Inventories Mar Forecast: 0.20% Previous: -0.10% Richmond Fed Mfg. Apr Forecast: NA Previous: -9.0 Wednesday ========= Oil & Gas Inventory 4-May Forecast: NA Previous:318.2MB Thursday ======== Initial Claims 5-May Forecast: NA Previous: 421K Export Prices ex-ag. Apr Forecast: NA Previous: -0.10% Import Prices ex-oil Apr Forecast: NA Previous: -0.90% Friday ====== PPI Apr Forecast: 0.30% Previous: -0.10% Core PPI Apr Forecast: 0.10% Previous: 0.10% Retail Sales Apr Forecast: 0.20% Previous: -0.20% Retail Sales ex-auto Apr Forecast: 0.50% Previous: -0.10% ECRI Wkly Leading Idx 4-May Forecast: NA Previous: 122.0 Week of May 14th ================= May 14 Business Inventories May 14 Industrial Production May 14 Capacity Utilization May 16 CPI May 16 Core CPI May 16 Housing Starts May 16 Building Permits May 17 Initial Claims May 17 Philadelphia Fed May 17 Leading Indicators May 18 Trade Balance May 18 Mich Sentiment-Prel. May 18 Treasury Budget 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. We would like to have you as a subscriber. 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The Option Investor Newsletter Sunday 05-06-2001 Sunday 2 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/050601_2.asp ************** TRADERS CORNER ************** The Party Continues and Is Now In Overtime By Renee White The rumor is out. Believers are showing up everywhere. While I am waiting to enter on the next significant pullback, others are jumping in for fear of missing the rebound. Whichever side you are on, there is plenty of evidence to support the argument. That in itself is a bullish sign, or at least a sign that if the bear is not dead, he is darn well drunk and not feeling as strong as in the past. There hasn't been much selling at all. The test of buying on the dip will soon be upon us. We are approaching a typically weak season for the markets, yet few of us feel any signs of weakness. The next sell-off will be important, and the level we bounce at should be well documented in your notes. I do not expect us to reach our previous lows, but one can never be too sure when the markets have been this ill for this long. To be safe, we need proof. On that proof, I will play. For the record: I didn't believe the August 2000 rally and saw no reason for the over zealous bullishness then. I waited and waited to enter, finally jumping in on a day with volume on a good economic report at the end of the month. Naturally, two days later, it reversed. We all know what has happened since. Bummer! Just to keep things in perspective, our charts are looking similar to the rally in January. Although I was bearish then and played that rally with covered calls, I feel much better about this rally. We have more economic data behind us. We have no artificial money strength from end of year 401K & bonus money to artificially surge the markets. No, this strength is real buying, and it is broadening out into many sectors. Heck, want a healthy internet company? Ebay (NASDAQ:EBAY) is above its 50- and 200-dma. From a technical review, money has been stepping up to the plate since the week of April 9th. We are due for a pullback, and we are seeing that. I am being conservative and waiting before entering. I would bet on a pullback this week with the Dow Industrials ($INDU) knocking at 11,000. The index is acting healthy and it may soon take this level out. I would expect it to pull back first. The NASDAQ (COMPX) bounced off of its 50-dma Friday. A very healthy sign. Still, we have come so far and cannot ignore the recent double top formation formed in the last two weeks. Like the January rally, we are dancing around the 50-dma, which has flattened out from its downward slope since early April. Another good sign, if it holds. With so much money ready to enter the markets, how the markets react to pullbacks will tell the whole story. If buying the dips with strong volume begins again, then we can relax our guard a bit. Playing the new leaders will get fun. Be sure to identify those companies you want to either own longer term, or play quick trades with. In tech land, choose those which have rallied the most with this recent surge of money inflow. Some notables on my radar are: EBAY +35%, Verisign (NASDAQ:VRSN) +49%, Brocade (NASDAQ:BRCD) +100%, Siebel Systems (NASDAQ:SEBL) +33%, and Internet Security Systems (NASDAQ:ISSX) +80%. There are many others. I would suggest making your own list. On the next major pullback, identify the ones that sell-off the least, AND if you have a means to identify it, chose those with the heaviest buying volume above the average volume on a bounce. Also, look for the biggest block trade volume on that same day. Some of those could very well be purchases made by big institutional portfolios, buying on the dips. So far, I think my dip-buying theory will hold. We had a lot of opportunities to sell-off last week, but the markets held strong. Amateur hour proved deadly Friday morning, with a fake-out sell-off due to the Employment Report. I did not understand what all the fear was about. This report is a lagging indicator and the next one should be even worse. Be prepared for a lower consumer confidence level also. I was beginning to wonder if my last article was circulated among the media this week. Suddenly, someone announced that the glowing GDP was likely to be revised downward. Like I warned in my article a week ago, this revision could be drastic and plant us right at zero economic growth, not the artificial 2% reading from the estimates. Will the markets hold once the revisions are out? An even bigger shocker for me was hearing an announcement that we now have increased natural gas reserves. What? What happened to the energy crisis? What's this about an inventory build up in natural gas and at a 52-week low? Something doesn't add up here. My electric bill is increasing 30% in our area soon, yet inventory of natural gas is piling up. Could someone please tell me how to play this industry?! Enron (NYSE:ENE) has had lower highs since September, and the AMEX Natural Gas Index (ING.X) shows lower highs since late December, when every analyst was screaming for all to buy. Since the tech correction of 2000 taught me contrarian analyst skills, my gut reaction was to hold off buying at that time. Good thing. ENE was then around $85. It is now hovering around $59 with an ugly technical chart. Calpine (NYSE:CPN), on the other hand, has posted nice gains, trading near its 52-week high, bouncing occasionally off its 50-dma. With the financials acting well along with the techs, we have the potential birthing of the next bull. Still, it is a high-risk environment. Can the Dow make it over 11,000 and hold? Probably not yet, but I bet it will soon. We are witnessing the struggle between a very aggressive Fed and a very large bear weakening to its presence. We may still get mauled, and a mild recession is still a possibility. But as a trader, I feel better knowing he is aging, showing signs of wear and tear, and that his strength may be dissipating even if he still remains active in the markets a while longer. Trade cautiously. ******************** THE PLAYS OF THE DAY ******************** Call Play of the Day: ********************* LAB - LaBranche & Co., Inc. $40.20 (+4.71 last week) See details in sector list Put Play of the Day: ******************** GMST - Gemstar-TV Guide $39.80 (-0.11 last week) See details in sector list ************************** PICKS WE DROPPED THIS WEEK ************************** Remember that historically, when we drop a pick it will go up 10 to 15% the very next week. It is part of Murphy's Law. Just because we drop a stock as a pick does not mean we are advocating a "sell" on any position you have. We are simply dropping our recommendation as a new play. Existing plays can and do continue on and are usually profitable. CALLS AEOS $37.39 (+0.22) AEOS offered call players opportunities for gains over the last week, as the stock surged to a high of $39.96 on Tuesday. However, AEOS has been unable to penetrate strong resistance at $40, despite the strength in the retail sector. In addition, considering the strong action in the broad indexes on Friday, AEOS really should have been able to stage a more impressive performance. AEOS has lost momentum at this point, and we are dropping coverage on the stock this weekend. PUTS IDPH $51.75 (+2.30) IDPH had a wild day on Friday, as it gapped down at the open, and subsequently dropped to a low of $42.90. However, the biotech sector soared later in the day on news that Genentech would not have to pay patent royalties to Glaxo Smith Kline on sales of its breast cancer drug or lymphoma treatment Rituxin. Since DNA shares the revenues from Rituxin with IDPH, both stocks surged on this news, and, and as such, we are dropping the play this weekend. *********** DEFINITIONS *********** SL = Suggested stop loss. Sell if bid breaks this price. OI = Open Interest - the number of open contracts outstanding. ITM = In the money ATM = At the money OTM = Out of the money ADV = Average Daily Volume The options with a "*" by the strike price are our choices from the group. If the stock moves as expected we feel they have the best chance to substantially increase or double in price with the best risk/reward ratio compared to the other options for the same stock. You must determine if they fit your risk profile for time and price. Analysts ratings: 1-2-3-4-5 Analysts who follow each stock rate it and these rating are accumulated and displayed as follows; Position 1 = number of analysts recommending "strong buy" Position 2 = number of analysts recommending "moderate buy" Position 3 = number of analysts recommending "hold" or "neutral" Position 4 = number of analysts recommending "moderate sell" Position 5 = number of analysts recommending "strong sell" Example rating 5-3-1-0-0 would be 5 "strong buys", 3 "moderate buys", 1 "hold" recommendation. RISKS of SELLING PUTS: The risk of selling naked puts is always the possibility of a catastrophic event that drops the stock below the strike price and could result in the stock being PUT to you. Always protect yourself with a "buy to cover" limit order to take you out before this can happen. ************** NEW CALL PLAYS ************** NXTL - Nextel Communications Inc. $19.99 (+2.35 last week) Nextel Communications Inc., based in Reston, Virginia, is the leading provider of fully integrated wireless communications services and has built the largest guaranteed all-digital wireless network in the United States covering thousands of communities across the United States. Nextel and Nextel Partners Inc. currently serve 185 of the top 200 U.S. markets. Through recent market launches, Nextel and Nextel Partners' service is available today in areas of the U.S. where approximately 220 million people live or work. In addition, through Nextel International Inc., Nextel has wireless operations and investments in Canada, Mexico, Argentina, Brazil, Peru, Chile and Japan. Nextel hit a 52-week low of $11.18 on April 4th before making a dramatic V shaped bottom and starting to regain momentum. Over the last month, NXTL has formed a clear pattern of higher lows with increasing volume corresponding to increases in price. The market responded well to NXTL's earnings which were released on May 1st, and several analyst upgrades, as well as strength in the wireless sector have added to the accelerating momentum. On Tuesday, NXTL reported a smaller first quarter loss than expected, and stated that they had added 695,400 new subscribers in the quarter, compared to an expectation of 500,000. NXTL also stated that they would be laying off 5% of their workforce, and said that they expect to add 2 million subscribers this year. The market liked the news, as NXTL moved up over two points with strong volume on Tuesday, easily passing its converged 50 and 10 dmas of $17. Bear Stearns picked up coverage of NXTL with a buy rating, and on Friday, Goldman Sachs initiated coverage of Nextel and several of its wireless peers with a market outperform rating. The market loved Goldman's bullish comments, as strong volume propelled NXTL to a high of $20 during Friday's trading. With continued strength in the Nasdaq and the wireless sector next week, NXTL is likely to clear the $20 level with heavy volume, which would give a green light to conservative traders looking for an entry point. A pullback to $19 would be a more aggressive entry point. Monitor others in the wireless sector such as PCS, VOD and AWE, and set stops at $17.50. We will end the play if NXTL closes below $17.50. ***May contracts expire in two weeks*** BUY CALL MAY-17.50 FQC-ES OI=5948 at $3.20 SL=1.50 BUY CALL MAY-20 *FQC-ED OI=6539 at $1.75 SL=1.00 BUY CALL JUN-17.50 FQC-FS OI= 216 at $4.00 SL=2.50 BUY CALL JUN-20 FQC-FD OI=1357 at $2.65 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=NXTL MER - Merrill Lynch & Co $67.55 (+3.64 last week) Merrill Lynch provides a variety of financial and investment services to individuals and institutions on a global basis. Approximately 25% of its sales derived from overseas' business. Under pressure from industry consolidation, Merrill Lynch, once the undisputed leader in the financial world, now finds itself in a close fight for dominance with fellow retail/wholesale financial supermarket Morgan Stanley Dean Witter. We're initiating coverage on this financial powerhouse on the belief it's poised to rise to the occasion and line traders pockets with gold. Robust volume and an evolving pattern of higher-highs and higher-lows boasts a bullish inclination going into this month's Fed Meeting. However, the takeover scuttlebutt surrounding Merrill Lynch may have also influenced the share price higher on Friday. Rumors resurfaced that London-based HSBC would make an offer for the #1 brokerage firm; although market experts doubted a deal was imminent. Nevertheless, the financial sector climbed alongside the broader maker in despite of the weak employment report. MER rallied $1.55, or 2.3% as fierce rivals Goldman Sachs (GS), Morgan Stanley (MWD) and Bear Stearns (BSC) also tacked on significant gains. A dynamic move through the immediate resistance at $68 followed by MER closing the gap above $70 signals momentum traders to jump on the bandwagon. A big breakout into the $70 range also offers the more conservative a safer approach into this play. Pullbacks to the firm support at the $65 level, which is bolstered by the 5 & 200 DMAS, can also provide enterprising entries into this play; however, be prepared to bail if MER can't maintain a position above $65 on the close. ***May contracts expire in two weeks*** BUY CALL MAY-60 MER-EL OI= 3366 at $8.30 SL=5.75 BUY CALL MAY-65*MER-EM OI=18091 at $4.50 SL=2.75 BUY CALL MAY-70 MER-EN OI= 9316 at $1.70 SL=0.75 BUY CALL JUN-65 MER-FM OI= 4293 at $6.70 SL=4.50 BUY CALL JUN-70 MER-FN OI= 9290 at $4.00 SL=2.50 BUY CALL JUN-75 MER-FO OI= 719 at $2.35 SL=1.25 http://www.premierinvestor.net/oi/profile.asp?ticker=MER ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-06-2001 Sunday 3 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/050601_3.asp ****************** CURRENT CALL PLAYS ****************** MO - Philip Morris Companies Inc. $53.00 (+2.03 last week) With 2000 underlying operating revenues of $80.3 billion, ($88.3 billion assuming Philip Morris owned Nabisco for all of 2000) 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., Miller Brewing Company, Philip Morris International Inc., Philip Morris Incorporated, and Philip Morris Capital Corporation. MO stood for momentum on Friday, as Philip Morris opened higher in a weak market, and spent the rest of the day forming a smooth upward trend with a brief pause at Thursday's 52-week high of $52.35. Several important factors have bolstered the technical strength in the tobacco sector over the last several days, and several of MO's peers also made substantial gains on Friday. Investors have been speculating that the Department of Justice might drop its lawsuit against the tobacco industry, as the Bush administration did not ask Congress for the funds necessary to continue the legal work. In addition, the tobacco companies have won several high profile lawsuits this year which has led some investors to speculate that the companies' legal fees may decrease in the years ahead. Furthermore, several analysts upgraded MO last week, as most analysts agree that a rise in the price of cigarettes would benefit the stocks. However, the really big news is the upcoming IPO of Kraft, which should result in a windfall cash profit to Philip Morris. Now that MO is at a new 52-week high, and positioned well from a technical standpoint, traders might want to take positions at the current level, depending on the strength in the overall indexes. A pullback in the Dow could result in MO possibly retreating to its 5 dma of $51.56, which would also offer an entry point. Keep an eye on others in the sector, like RJR and LTR. We are moving closing stops to $50, as we want to leave MO plenty of room to move, and this is an exceptionally strong chart. ***May contracts expire in two weeks*** BUY CALL MAY-47.5 MO-EW OI= 4231 at $5.90 SL=4.00 BUY CALL MAY-50 *MO-EJ OI=17253 at $3.50 SL=1.75 BUY CALL JUN-47.5 MO-FW OI= 8728 at $6.60 SL=4.50 BUY CALL JUN-50 MO-FJ OI=26889 at $4.70 SL=2.75 http://www.premierinvestor.net/oi/profile.asp?ticker=MO RE - Everest Reinsurance $64.25 (+0.01 last week) Everest Re Group Ltd. is a Bermuda holding company that operates through the following subsidiaries: Everest Reinsurance company provides reinsurance to property and casualty insurers both in Bermuda and the international markets. Everest National Insurance company provides property and casualty insurance to policy holders in the U.S. Everest Indemnity Insurance Company provides excess and surplus lines insurance in the U.S. Southeastern Security Insurance Company provides personal lines insurance in Georgia. Everest Insurance company provides property and casualty insurance to policy holders in Canada. Mt. McKinley Insurance is a run off property and casualty insurer domiciled in Delaware. Patient traders were rewarded by RE on Friday, as an exceptionally strong move in the insurance sector, IUX.X, helped RE climb out of Thursday's slump and poke its head through its 50 dma of $64.15. IUX.X burst through its 200 dma of 747.69 in the first hour of trading, and the momentum carried it to an 11.98% gain for the day. Other financial sectors such as banking also demonstrated strength on the anticipation of more aggressive rate cuts from the Fed. In general, financial stocks have been helped this week by a Re-opening of the capital markets, as several very large debt offerings and IPOs were successfully issued this week. This momentum is likely to continue in anticipation of the upcoming Fed meeting on May 15th, which gives traders plenty of time for this play. While RE has stayed firmly above its 200 dma for the last twelve months, it dipped below the 50 dma several times since January, and recovered each time. RE appears determined to continue its upward stair step pattern, and a good entry point would be the current level, particularly if IUX.X continues to exhibit strength. Alternatively, a surge past $65 could be an entry point for more conservative traders. Continue to monitor others in the sector like BRK A, and CB, and set closing stops at $62. ***May contracts expire in two weeks*** BUY CALL MAY-60 RE-EL OI=137 at $4.70 SL=2.75 BUY CALL MAY-65*RE-EM OI=492 at $1.55 SL=0.75 BUY CALL JUN-60 RE-FL OI= 8 at $5.90 SL=4.00 BUY CALL JUN-65 RE-FM OI=100 at $3.10 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=RE BRCD - Brocade Communications $47.65 (+12.03 last week) Brocade Communications is a provider of Fibre Channel switching solutions for Storage Area Networks (SANs), which apply the benefits of a networked approach to the connection of computer storage systems and servers. The company's family of SilkWorm switches enables companies to cost-effectively manage growth in their storage capacity requirements and improve the performance between their servers and storage systems. This provides the ability of increasing the size and scope of a company's SAN, while allowing them to operate data-intensive applications, such as data backup and restore, and disaster recovery on the SAN. Providing more evidence that market sentiment is changing, the entire market rallied throughout the day on Friday, recovering sharply from its gap down open. Storage stocks went along for the ride, and BRCD was no exception, gaining nearly $5 from its low of the day on average volume. While the employment numbers were responsible for the early drop, investors voted with their wallets, indicating their belief that the economy is on the mend and will continue to heal with the aid of the Fed's tonic of aggressive interest rate cuts. BRCD found support at $43, right at the 3-week ascending trendline, as it closed the gap from Wednesday morning and abruptly returned to rally mode. Investors are clearly focused on the twin catalyst of the Fed's expected 50 basis point rate cut and earnings, both scheduled for May 15th. Although the bias on Friday was definitely skewed towards the bulls, it is important to note that buyers seemed to run out of steam as BRCD neared the $48 resistance level. Conservative investors will want to see the stock move above this level and preferably Wednesday's highs near $50.50 before taking a position. Aggressive traders will want to take advantage of intraday dips next week to gain a better entry, so long as the stock holds above our $45 stop before returning to its uptrend. ***May contracts expire in two weeks*** BUY CALL MAY-45*UBF-EI OI=1358 at $6.30 SL=4.25 BUY CALL MAY-50 UBF-EJ OI=2764 at $3.60 SL=1.75 BUY CALL JUN-45 UBF-FI OI= 347 at $8.70 SL=6.00 BUY CALL JUN-50 UBF-FJ OI= 513 at $6.50 SL=4.50 BUY CALL JUN-55 UBF-FK OI= 241 at $4.70 SL=2.75 SELL PUT MAY-45 UBF-QI OI=1868 at $3.30 SL=5.25 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=BRCD LLY - Eli Lilly $86.04 (+3.24 last week) LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. Starting the week out right, LLY jumped up at the open on Monday, breaking out of its ascending channel and spent the week gradually advancing, using the top of its old channel as support. Helped along by positive news on the development front throughout the week, each dip is being met by eager buyers. On Tuesday, LLY announced positive results on trials of their new impotence drug, Cialis. Wednesday saw more good news, as LLY announced that using Nizatidine in combination with Zyprexa for the treatment of schizophrenia reduced the treatment-emergent weight gain by approximately 50 percent. Finally on Thursday, LLY announced that they are collaborating with bioMerieux-Pierre Fabre to develop a new artherosclerosis treatment. Adding to the bullish bias was the strength in the Pharmaceutical Index (DRG.X) which is making a valiant effort to move through the 397 resistance level as it emerges from the downtrend that engulfed the sector at the beginning of the year. Early weakness on Friday provided another aggressive entry point as LLY fell to test the $84 support level once again before rallying through the $86 level by midday. We are now seeing resistance forming near $86.50, and conservative traders will want to wait for the stock to move through this level before adding new positions. To stack the deck in your favor, make sure the DRG index is pushing through resistance as well. Keep stops set at $84; a close below this level will force us to end the play. ***May contracts expire in two weeks*** BUY CALL MAY-85*LLY-EQ OI=3867 at $2.75 SL=1.25 BUY CALL MAY-90 LLY-ER OI=1208 at $0.85 SL=0.00 Aggressive! BUY CALL JUN-85 LLY-FQ OI= 604 at $4.60 SL=2.75 BUY CALL JUN-90 LLY-FR OI= 832 at $2.35 SL=1.25 BUY CALL JUL-90 LLY-GR OI=4626 at $4.00 SL=2.50 SELL PUT MAY-85 LLY-QQ OI= 957 at $1.95 SL=3.50 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=LLY SEBL - Siebel Systems $47.90 (+2.20 last week) Providing sales automation and customer service software through its main product, Siebel Sales Enterprise, SEBL offers its customers the ability to access client information and decision- making support across a corporation's global computer network. The company's e-commerce applications deliver the first entirely Web-based, enterprise class family of sales, marketing and customer service applications. Among the company's heavyweight clientele are Lucent Technologies, Glaxo Wellcome, and Prudential Insurance. Buying the dips is back in vogue, and all you have to do is look at a daily chart of SEBL to see the proof. Since rebounding from its lows a month ago, the stock has tacked on better than 100%, helped in large part by the fact that it managed to avoid the mistake of missing earnings in the last quarter. Investors have clearly been in a buying mood since the Fed's surprise interest rate cut on April 18th, and are clearly expecting another 50 basis point reduction at the May 15th FOMC meeting. USB Piper Jaffray further motivated investors on Monday when the issued a new Buy rating for SEBL, and it didn't hurt that Rick Sherlund of Goldman Sachs stated on Thursday that Software stocks will be among the first to recover in the beaten up Technology sector. Comments from the company's CEO last week that they have visibility into the second quarter is carrying more weight than the dismal employment numbers released on Friday. Just look at the stock's movement on Friday. After a market-wide selloff at the open, which dragged SEBL as low as $43, buyers jumped back in and pushed the stock right back up to the $48 resistance level by the close. The strong recovery kept the $46 support level intact, and the stock is now poised to move through resistance next week. Aggressive entries can still be taken on intraday dips, so long as SEBL is able to stay above our $46 stop. The strength on Friday lasted throughout the day, and if it continues on Monday, conservative investors will get their entry point as buyers push the stock through the $49 level. Confirm positive sentiment in the sector by watching for positive movement in the GSTI Software index (GSO.X) before playing. ***May contracts expire in two weeks*** BUY CALL MAY-45*SGW-EI OI=16090 at $5.10 SL=3.00 BUY CALL MAY-50 SGW-EJ OI= 9944 at $2.55 SL=1.25 BUY CALL JUN-45 SGW-FI OI= 2266 at $7.60 SL=5.25 BUY CALL JUN-50 SGW-FJ OI= 1709 at $4.80 SL=3.00 BUY CALL JUN-55 SGW-FK OI= 7743 at $3.10 SL=1.50 SELL PUT MAY-45 SGW-QI OI= 4456 at $2.20 SL=3.75 (See risks of selling puts in play legend) http://www.premierinvestor.net/oi/profile.asp?ticker=SEBL C - Citigroup Inc. $50.78 (-0.13 last week) The creation of Citigroup brings together organizations that are extraordinary in their individual capabilities and in the ways they enhance and complement each other. Together, they offer customers a range of quality products and services unmatched in the financial services industry. Citigroup serves a broader spectrum of customers, in more places and by more means of access and delivery, than any other financial organization. With all of Citigroup's divisions working together to provide their customers with the best service and products, they are forming a model for the industry's future. A one-two punch of strengthening fundamentals and the sideways movement this past week may just be the catalyst in helping shares of financial services provider Citibank to move strongly higher. Weaker than expected employment numbers late in the week suggested to traders that the economy may still need help, prompting speculation of another rate cut of 50 basis points as we head into the upcoming FOMC meeting in mid-May. After more than doubling in value during the month of April, the recent consolidation allows a healthy pause to refresh, as profit taking is met with an almost equal amount of buying pressure, with the bulls and bears meeting calmly in an orderly manner on low volume. With support below at $49 and resistance overhead just above $51, this narrow trading range on low volume at some point will resolve itself and when it does, the move could be a significant one. Aggressive traders looking to enter on dips may target support at the 5-dma ($50.38), the 100-dma ($50.16), the psychological $50 mark, the 10-dma at $49.88 and our stop price, set at $49. In doing so, confirm bounces with buying volume and make sure that C continues to close above our stop. Traders who are more risk averse will note that the last line of moving average resistance left to conquer is the 200-dma, looming just overhead at $51.56. A break above this major moving average on heavy trading volume may allow for an entry, provided that AMEX's Banking Index (BIX) confirms bullish sentiment. ***May contracts expire in two weeks*** BUY CALL MAY-45 C-EI OI= 5747 at $6.20 SL=4.25 BUY CALL MAY-50*C-EJ OI=29063 at $2.00 SL=1.00 BUY CALL JUN-50 C-FJ OI=21795 at $3.10 SL=1.50 BUY CALL JUN-55 C-FK OI=19634 at $1.00 SL=0.00 http://www.premierinvestor.net/oi/profile.asp?ticker=C FDC - First Data Corporation $66.19 (-0.21 last week) First Data is the remarkably efficient, often invisible engine powering today's global shift to a cashless economy. They process and safeguard every type of electronic payment method: credit, debit and stored-value cards, electronic checks and cash. They also provide Electronic Funds Transfers to 75 percent of the world and provide card issuer services for 1,400 financial institutions and 396 million consumers worldwide. And, through their visionary Internet Commerce Group, they are developing advanced services and solutions that help financial institutions, merchants, business and consumers access the power and possibilities of the Internet. Consolidation has been the name of the game this past week for shares of electronic transaction processing giant FDC. On Monday the stock made a new all-time closing high. Since then, FDC's share price has drifted lower on light to average trading volume. On the news front, announcements have been few, but positive. The company completed its purchase of financial processing software firm PaySys International. As well, FDC benefited from positive retail news from its check acceptance division Telecheck mid-week. It appears at this point that the recent momentum, driven by the company's stellar earnings report and positive comments from Merrill Lynch, has been factored in, and the bulls are looking for a new reason to take the stock higher. The prospects of further reductions in interest rates could help the NYSE to rally ahead of the upcoming FOMC meeting, taking FDC along with it. A bullish surge back above the 5-dma (now at $66.77) on increased trading volume may be a sign that the stock is ready to resume its advance, allowing cautious traders to take a position. Just make sure that competitors FISV and PAYX are also moving higher. For higher risk players, pullbacks intra-day to support at $66, the 10-dma at $65.80 and our closing stop price and horizontal support at $65, may provide potential entry points. ***May contracts expire in two weeks*** BUY CALL MAY-60 FDC-EL OI=2055 at $6.90 SL=5.00 BUY CALL MAY-65*FDC-EM OI=3212 at $2.80 SL=1.50 BUY CALL JUN-65 FDC-FM OI= 959 at $4.40 SL=2.75 BUY CALL JUN-70 FDC-FN OI= 351 at $2.05 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=FDC LAB - LaBranche & Co., Inc. $40.20 (+4.71 last week) Founded in 1924, LaBranche & Co Inc. operates primarily as a New York Stock Exchange Specialist firm. It is one of the oldest and largest NYSE Specialists, in terms of capital, number of stocks and dollar and share volume traded. As a Specialist, the role of LaBranche is to ensure that the market for each of the stocks it represents remains fair and orderly. LaBranche accomplishes this by connecting buyers to sellers, helping to find the best available bids and offers. In addition, LaBranche adds liquidity, reduces volatility and stabilizes prices by committing capital when buyers or sellers outnumber each other. Since the lows of early April, shares of NYSE specialist firm LaBranche have bounced bullishly in a v-bottom fashion. A number of fundamental factors have contributed to the technical strength of LAB. Uncertainty over the effects of decimalization of the NYSE was a major worry on the part of shareholders. However, the company recently came out with a stellar earnings report. Revenues increased by 24 percent year-over-year and earnings per share rose 8 percent. In the company's conference call, the CEO noted that in light of the weak economic climate at the time, the numbers were solid indeed. News that the NASDAQ exchange will be going public also helped to give market making firms across the board a lift. What's more, the recent pickup in trading activity means more business for LAB. This was a great week for those who were long this stock, as LAB was able to break above all its major moving averages. Connecting the highs and lows since April reveals an upward trending regression channel. With plenty of potential room to the upside, continued buying pressure lifting the stock above $40.50 with conviction may allow for an entry on strength. Support below is strong, especially with the 10, 50 and 100-dma converged at just above $36. To protect this profitable play, we are moving up our closing stop price, from $37 to $38. Pullbacks to support at $40, $39, the 5-dma at $38.37 and $38, may allow higher risk players to make a play, but only if rivals NITE and SCH are also showing strength. ***May contracts expire in two weeks*** BUY CALL MAY-35 LAB-EG OI= 93 at $5.70 SL=3.50 BUY CALL MAY-40*LAB-EH OI=766 at $2.20 SL=1.25 BUY CALL JUN-35 LAB-FG OI= 1 at $6.80 SL=5.00 BUY CALL JUN-40 LAB-FH OI= 5 at $3.80 SL=2.50 http://www.premierinvestor.net/oi/profile.asp?ticker=LAB AOL - AOL Time Warner Inc $52.20 (+2.21 last week) AOL Time Warner is the result of a 2001 gargantuan merger that married the world's largest online company with a media giant. America Online brings its flagship online service, CompuServe, Netscape, and several interactive online services whilst Time Warner's contributions span films and TV, music, cable networks and systems, publishing, and professional sports. AOL Time Warner's brands include Time Warner Cable, Warner Brothers, Warner Music, HBO, Turner, America Online, CNN, New Line Cinema, and Time Inc. The threat of an industry walkout and dismal economic reports couldn't take AOL down for the count last week. The share price maintained its stance at the $50 near-term support level as it fought off the negative sentiment effectively knocking other media stocks like GMST, V, and DIS, to the mat. The nice recoveries off the low end of the trading spectrum, at the 10- dma line, gave traders an opportunity to take entries; although it was prudent to lock in gains as AOL approached the $52 resistance. So while the day traders might have found occasion to add new positions, the conservative were sitting on the sidelines waiting for a visible breakout. The underlying power will be evident in an advancing market where buyers are control and taking the broad sector to new highs. Friday's bullish close, at just a fraction from the intraday high of $52.40, bodes well going into next week, but wait for definitive follow through next week before jumping into the play. We're looking for high-volume momentum to launch AOL into the next resistance zone of $55 and $58. As it's been during the AOL vigil, keep the protective stop in place at the $50 level. Be prepared for OI to drop coverage if the share price falls below this mark on a close. ***May contracts expire in two weeks*** BUY CALL MAY-45 AOE-EI OI=17002 at $7.60 SL=5.25 BUY CALL MAY-50*AOO-EJ OI=26745 at $3.30 SL=1.50 BUY CALL JUN-45 AOE-FI OI= 671 at $8.50 SL=5.00 BUY CALL JUN-50 AOO-FJ OI= 2816 at $4.60 SL=2.75 BUY CALL JUN-55 AOO-FK OI=10741 at $2.10 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=AOL STOR - StorageNetworks Inc $15.40 (+5.46 last week) StorageNetworks is a provider of storage management services and developer of storage management technology. It operates in two distinct business segments: managed storage services and professional services, which assist customers in assessing their data storage needs and designing appropriate data storage systems. Most of StorageNetworks' sales come from monthly fees, as well as consulting and related data storage services. The company is currently expanding its network, which currently includes more than 20 data centers in 11 US metropolitan areas and one in the UK. It was aggressive to jump into this technically driven momentum play yesterday, but the risk-reward ratio reaped lucrative gains for those who took the plunge. We added STOR to our call list on Thursday evening after noticing the inverse head-and- shoulders formation and importantly, the convincing break above the $13.50 neckline. In addition to the technical achievement, a major storage deal with Ford Motors combined with a Buy recommendation by Thomas Weisal Partners was on investors' minds, setting STOR up for a big rally. Well, it came to fruition. STOR stormed out of the gate and ran straight up amid heavy trading. On the session, the share price saw a 19%, or $2.63 gain at its peak, with a strong close above the $15.50 intraday support. But let's not throw caution to the wind. We raised our protective stop from $12.50 to $13.50 in an effort to safeguard gains and capital, going forward. Make no mistake, STOR is an AGGRESSIVE play. If you have a very opportunist nature and the risk profile to match, you might find viable entries near the $13 and $14 levels, which is bolstered by the 5-dma ($12.66) - IF STOR becomes a victim of heavy profit taking and bounces back! However, that approach is pushing the envelope, so to speak. Instead you may fare better looking to catch a ride on an upside wave through the immediate opposition at $17 and lock in gains as STOR charges $20. An advancing NASDAQ certainly casts a better disposition on the success of this play. ***May contracts expire in two weeks*** BUY CALL MAY-10 OSU-EB OI=1111 at $5.90 SL=4.00 BUY CALL MAY-12.5 OSU-EV OI=1051 at $3.50 SL=1.75 BUY CALL MAY-15 *OSU-EC OI=1364 at $2.05 SL=1.00 BUY CALL JUN-12.5 OSU-FV OI= 268 at $4.50 SL=2.75 BUY CALL JUN-15 OSU-FC OI= 232 at $3.30 SL=1.50 BUY CALL JUN-17.5 OSU-FW OI= 109 at $2.25 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=STOR ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-06-2001 Sunday 4 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/050601_4.asp ************* NEW PUT PLAYS ************* NVLS - Novellus Systems $50.95 (-1.93 last week) Providing equipment for advanced Semiconductor manufacturing, NVLS focuses on advanced, high-productivity thin film deposition systems and surface preparation systems used in the fabrication of integrated circuits. Utilizing Chemical Vapor Deposition (CVD), Physical Vapor Deposition, electroplating, photoresist strip and residue removal systems, the company's products provide high film quality while attaining the high levels of productivity required to meet the semiconductor industry's need for high-volume, low-cost wafer production. The flagging strength of semiconductor shares is providing us another attractive put play, this one on NVLS, one of several suppliers of semiconductor manufacturing equipment. As the Semiconductor Index (SOX.X) has run out of upward momentum, NVLS has been unable to penetrate the $57 support level, falling back sharply towards the end of the week. The Tucker Anthony Sutro downgrade to Underperform on Thursday really got the sellers moving, and the stock has now lost 8% in the past 2 days. The company didn't help its own case much on Thursday when it said it doesn't see a recovery in the chip sector until the fourth quarter, at best. The disappointing employment report on Friday produced a drop to the $50 level where the stock saw some buying interest, but the weakness of the rebound gives the impression that NVLS will have a hard time going much higher. Use intraday bounces to gain a better entry point, so long as the $52-53 resistance level remains intact. More conservative traders will want to wait for the stock to fall through the $50 support level before taking a position. Regardless of your approach, keep an eye on the SOX. Weakness in the broader sector is likely to keep equipment stocks like NVLS under pressure. We are starting the play with stops set at $53. ***May contracts expire in two weeks*** BUY PUT MAY-50*NLQ-QJ OI=2062 at $3.10 SL=1.50 BUY PUT MAY-45 NLQ-QI OI=1602 at $1.25 SL=0.50 BUY PUT JUN-50 NLQ-RJ OI= 746 at $5.70 SL=3.75 BUY PUT JUN-45 NLQ-RI OI=2930 at $3.50 SL=1.75 http://www.premierinvestor.net/oi/profile.asp?ticker=NVLS PMCS - PMC-Sierra, Inc. $41.25 (+3.30 last week) PMCS designs, develops, markets and supports high-performance semiconductor networking solutions. The company's products are used in the high-speed transmission and networking systems, which are being used to restructure the global telecommunications and data communications infrastructure. Providing components for equipment based on Asynchronous Transfer Mode, Synchronized Optical Network, Synchronized Digital Hierarchy, High Speed Data Link Control, and Ethernet, the company sells its products to over 100 customers either directly or through its worldwide distribution channels. It's been said that where the Semiconductors lead, the NASDAQ follows. So it's no surprise that the NASDAQ rally last month was in a large part fueled by bullish activity in the Chip sector. With that in mind, shares of communications chipmaker PMCS more than doubled in value in less than three weeks of trading. Since that time, the stock has settled into a period of sideways movement, with support at $35 and resistance at $43. A number of factors are suggesting that the next move for PMCS could be lower. For one, the underlying fundamentals in the Chip sector have only begun to reverse course. Analysts are suggesting that the turnaround could take longer than anticipated and as such, the question of earnings visibility is once again being asked. With the rollover in stochastic levels and a recent series of lower highs, the first signs of what could be a bearish wedge have made themselves visible. A break below $40 could allow for an entry on weakness, if the Philadelphia Semiconductor Index (SOX) is also heading lower. For aggressive traders, failed rallies as PMCS approaches $43 may be a signal to jump in. One event to be aware of that could lead to increased volatility for the stock is Cisco's earnings report, which is set for this coming Tuesday. The market will gauge the health of PMCS' business based on its major customer in Cisco. As a result, Cisco's earnings release most definitely increases the risk profile of this play. Conservative traders may choose to stay on the sideline until this event has passed. Finally, we're setting upside, protective stops at the $44 level. ***May contracts expire in two weeks*** BUY PUT MAY-40*SQL-QH OI=5260 at $3.60 SL=1.75 BUY PUT MAY-35 SQL-QG OI=3603 at $1.80 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=PMCS ***************** CURRENT PUT PLAYS ***************** AMAT - Applied Materials $51.53 (-2.36 last week) Applied Materials develops, manufactures, markets and services semiconductor wafer fabrication equipment and related spare parts for the worldwide semiconductor industry. Many of AMAT's products are single-wafer systems designed with two or more process chambers attached to a base platform. The platform feeds a wafer to each chamber, allowing the simultaneous processing of several wafers to enable high manufacturing productivity and precise control of the process. These platforms support chemical vapor deposition, physical vapor deposition, etch and rapid thermal processing technologies. Although they led the recovery on the NASDAQ in early April, Semiconductor stocks are beginning to show definite signs of weakness. The 6-month descending trendline exerted its influence last week at 690, thwarting yet another attempt by the Philadelphia Semiconductor Index (SOX.X) to break through the 700 resistance level. The subsequent retreat in the SOX hit Semiconductor Equipment stocks the hardest, causing AMAT to roll over near the $56 resistance level. Sure enough, AMAT fell back under the 200-dma (currently at $54.10) on Thursday, and on Friday buyers were turned back right at the 10-dma (currently at $53.08), providing another attractive entry point for aggressive traders. Pushing AMAT lower on Thursday were bearish comments from Tucker Anthony Sutro, accompanied by a downgrade to Underperform. On Friday, AMAT dropped within a fraction of $50 on the heels of the dismal employment numbers before recovering for the rest of the morning. After lunch though, sellers came back with a vengeance, driving the stock back under $52, effectively puncturing this as a support level. While earnings for AMAT are set to be released on May 15th, it appears unlikely that buyers will be aggressively buying the stock ahead of the report, given the returning bearish sentiment. Look for any bounce in the stock to provide a better entry point, with $53 (the high on Friday) likely to provide resistance. More conservative entries will materialize as the $50 support level falls to the bears renewed attacks. Keep stops set at $54. ***May contracts expire in two weeks*** BUY PUT MAY-55 ANQ-QK OI=6780 at $5.60 SL=3.50 BUY PUT MAY-50*ANQ-QJ OI=6385 at $2.95 SL=1.50 BUY PUT JUN-50 ANQ-RJ OI=1744 at $4.90 SL=3.00 BUY PUT JUN-45 ANQ-RI OI= 873 at $3.00 SL=1.50 http://www.premierinvestor.net/oi/profile.asp?ticker=AMAT JNPR - Juniper Networks $61.13 (+6.11 last week) As a provider of Internet infrastructure solutions, JNPR serves Internet service providers and other telecommunications service providers, helping them to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed for service provider networks. The routers provided by the company combine the features of the JUNOS Internet Software, high performance ASIC-based packet forwarding technology and Internet-optimized architecture into a purpose-built solution for service providers. This is clearly an aggressive play, and we may be tilting at windmills here (read: fighting the Fed), but the Networking index (NWX.X) is showing definite signs of weakness. While the NWX managed to move to new recent highs last week, these new highs were not confirmed by a comparable rise in the daily Stochastics oscillator before price action began to weaken. Take a look at the chart, and you can see the bearish divergence setting up. Sure enough, JNPR is running into formidable resistance near $68, and despite its recovery off the lows on Friday, looks vulnerable to more selling next week. The rebound off the lows brought JNPR right up to the $64 resistance level (also the location or our stop), providing a nice entry for aggressive traders before the stock rolled over, ending the day just above the $61 support level. As the stock sold off into the close, selling volume was on the rise, indicating we could see more weakness in the week ahead. Should sellers start to exert their influence on the NASDAQ ahead of the FOMC meeting on May 15th, it is entirely possible that JNPR could test the $50 support level. The pivotal event for next week will likely be the CSCO earnings report, set to be released Tuesday after the closing bell. As a bellwether for the Networking sector, investors will likely be focused on the outlook more than the actual numbers. If visibility is still absent, look for JNPR and other leading Networking stocks to feel the pain of the bears' assault. Aggressive entries can still be considered on an intraday bounce near the $64 level (our stop), while those looking for a more conservative entry will want to wait until JNPR falls below the $60 level before taking a position ***May contracts expire in two weeks*** BUY PUT MAY-60*JUX-QL OI=13713 at $4.70 SL=2.75 BUY PUT MAY-55 JUX-QK OI= 5911 at $3.10 SL=1.50 BUY PUT JUN-60 JUX-RL OI= 682 at $8.00 SL=5.75 BUY PUT JUN-55 JUX-RK OI= 1312 at $5.90 SL=4.00 http://www.premierinvestor.net/oi/profile.asp?ticker=JNPR TBL - Timberland Co. $48.67 (+1.62 last week) Timberland is a global leader in the design, engineering and marketing of premium quality footwear, apparel and accessories for consumers who value the outdoors and their time in it. Timberland products offer quality workmanship and detailing and are built to withstand the elements of nature. The company's products can be found in leading department and specialty stores as well as Timberland retail stores throughout North America, Europe, Asian, Latin America and the Middle East. While TBL moved higher last week, a close examination of the chart pattern reveals an unmistakable monthly and weekly pattern of lower highs at key pivot points. Since early March, TBL has rolled over from $60, $55, and $53.50. This week, TBL rolled over from $49.50 on Monday, and $49 on Wednesday. Friday's action was particularly revealing, as TBL rallied with the broad indexes during the day, but failed to cross strong resistance at $49 toward the close. At this point, TBL is poised precariously below its 50 dma Of $51.21, and its 200 dma of $49.74. A rollover from current levels would most likely bring TBL to the next support level at $47.50. This could be a good entry point, particularly if it is accompanied by a roll over in RLX.X from current levels. A drop below $47.50 would be very bearish, and another possible entry point. If strong support at $46 is broken, TBL could very well experience a quick drop to $42.50, which occurred the third week in April. While RLX.X is still above its major moving averages, it appears to have formed a mini head and shoulders pattern, over the last few weeks. The left shoulder was formed at 904, the head at 912, and the right shoulder formed last week with a rollover from 904. Keep an eye on this formation, as a strong break below 900 in RLX.X could correspond to an entry point in TBL. We are keeping stops at $50, so close the position if TBL closes above this level. ***May contracts expire in two weeks*** BUY PUT MAY-50*TBL-QJ OI= 50 at $3.10 SL=1.50 BUY PUT MAY-45 TBL-QI OI=142 at $1.05 SL=0.50 http://www.premierinvestor.net/oi/profile.asp?ticker=TBL GMST - Gemstar-TV Guide $39.80 (-0.11 last week) 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. Shares of digital media content provider Gemstar have more than doubled in value last month, thanks to a number of positive announcements. Bullish coverage from brokerage houses Gerard Klauer Mattison and UBS Warburg helped to spark investor interest. A major customer win in the form of a 10-year exclusive IPG agreement with Congeco Cable added fuel to the buying frenzy. The company also launched its major Internet initiative, with its online version of TV Guide opening for business last month. High profile customers such as CBS Marketwatch and Rolling Stone Magazine signing up has been seen as a good sign for the site's prospects going forward. A major shuffle in the upper echelon has also been well received, with News Corp. becoming the largest shareholder in GMST stock, with a 17 percent stake. Despite all the recent good news, it's difficult if not impossible for a stock to sustain such a steep up-trend. In the midst of all this, the technicals have been quietly deteriorating, suggesting that GMST may head lower. The 5 and 10-dma, which supported the stock's recent rally, has started to act as resistance. Now sitting at just above its 50-dma ($37.39), stochastics have already crossed over bearishly and appear to be in the process of rolling over. A break below this major moving average on volume may allow conservative traders to make a play, but confirm with volume. For aggressive traders, failed rallies as GMST approaches resistance at $40, the 10-dma at $40.47, $41, the 5-dma at $41.84 and $42, may allow for ideal entry points. Track sector sympathy by following movement in sector sisters SFA and WINK. As well, please note that we are moving our closing stop down from $43 to $42. ***May contracts expire in two weeks*** BUY PUT MAY-40*QLF-QH OI=2071 at $3.60 SL=1.75 BUY PUT MAY-35 QLF-QG OI=3097 at $1.45 SL=0.75 http://www.premierinvestor.net/oi/profile.asp?ticker=GMST SGR - Shaw Group Inc. $57.10 (-0.40 last week) The Shaw Group Inc. is the largest supplier of fabricated piping systems and services in the world, with unparalleled experience and expertise in the global power generation market. Shaw distinguishes itself by offering comprehensive solutions consisting of integrated engineering and design, pipe fabrication, construction and maintenance services and the manufacture of specialty pipe fittings and supports to the power generation, crude oil refining, chemical and petrochemical processing and oil & gas exploration and production industries. Despite a great week for Old Economy stocks, shares of leading energy infrastructure provider SGR have drifted steadily lower in a display of relative weakness. Since the company's stellar earnings report in which SGR grew sales by 95 percent and earnings by 68 percent year-over-year, the stock has been unable to attract investor interest and make a sustained rally. The $3 billion order backlog appears to have been already factored into the stock price, as has the current energy crisis, which has led to a renewed build-out effort of energy infrastructure. There has also been a distinct lack of company-specific news recently to give the buyers a reason to be bullish. While the stock's long-term up-trend going back to late 1998 is still firmly intact, the technicals are slowly and steadily eroding, suggesting that SGR may test the bottom of its upward sloping regression channel, with that support line currently sitting at the $42 level. The 5 and 10-dma (currently at $57.44 and $58.54 respectively) provided support for the stock during its April run, in which the stock managed a gain of 40 percent, has become formidable resistance. Failure to rally above these two levels may give higher risk players an ideal entry point. Just be aware that we are inching down our closing stop price, from $59 to $58. A bearish plunge below support at $56 on strong selling volume could allow conservative traders to take a position. In doing so, make sure that peers MLI and KMT are also moving lower. ***May contracts expire in two weeks*** BUY CALL MAY-60*SGR-QL OI=1035 at $4.60 SL=2.75 BUY CALL MAY-55 SGR-QK OI= 300 at $1.90 SL=1.00 http://www.premierinvestor.net/oi/profile.asp?ticker=SGR ***** LEAPS ***** Whoa! Who Went On The Buying Spree? By Mark Phillips Contact Support Last week when I said "Buy Now, The Recession Is Over", I was only kidding! It seemed to me that the preliminary GDP number coming in at 2% growth was a pretty flimsy argument for economic recovery being upon us. Nonetheless, the talking heads on CNBC ran with it and investors really gobbled up stocks this past week, lifting the DJIA within striking distance of the venerable 11,000 level by the time the closing bell rang on Friday. Economic reports continued to be the driver for our markets last week, and while the reports didn't surprise me, the reaction of the broad markets certainly did. The real shocker was the Employment report on Friday. Job growth was expected to come in at +25,000, and instead we saw -223,000 when the report was released. As expected, the markets sold off before the open on this bad news. The unbelievable part was the rally that ensued. Almost before the echo of the opening bell had dissipated, buyers were lining up to grab their favorite stocks at the perceived discount. The NASDAQ continued to be the weak sister, and is still struggling to penetrate resistance near 2250. It is moving up to be sure, but there is a lot of damage to be repaired and uncertainty is still so thick you can cut it with a knife. The S&P500 is arguably a better measure of broad market strength and it too is banging its head on significant resistance. It spent all last week testing the 1265-1270 barrier, and when it does break through to the upside, it could in fact be an explosive move. That move will likely not be driven by massive short-covering either. It will be new, legitimate buyers. Why do I say that, you ask? Well, I took a peek at the latest Commitments of Traders report Friday afternoon, and it appears the big boys (the Commercials) have been quietly buying back their shorts. As of the end of trading last Tuesday, they had whittled another 20,000+ contracts off of their previously huge net-short position. Remember not so long ago when they were short by more than 110,000 contracts? Well that has dropped to a measly 41,000+ contracts -- still huge by historical standards but well off the recent extremes. And keep in mind that does not include their activity Wednesday through Friday. My bet is their net-short position will drop still further by the time we get next week's report. Check out the Market Sentiment column for a full report. Volatility has been dropping as well, reflecting the improvement in investor sentiment. Refusing to take one more trip into the ozone, the VIX spent almost the entire week below 30. Friday's action was really interesting as the VIX popped up a little at the open following the Employment Report and declined steadily throughout the day, ending the week at 27.72. We're nowhere near the historical danger zone yet (that's around 20), but I'm still expecting one more excursion well above the 30 level before the bears pack up their stuff and go home. Why the bullish behavior? First was the expectation that with employment falling off a cliff, the Fed would have no choice but to continue aggressively cutting interest rates (read: 50 basis points on May 15th). That is being reflected by the Fed Fund futures contract which is currently predicting an almost certainty of 50 points on May 15th. Add to that the chatter on CNBC about employment being a lagging indicator, and investors ignored the employment news and instead focused on the upcoming gift from the Fed. But here's the nagging question that I just can't shake. If consumers have kept this economy afloat by continuing to spend, and control up to 70% of the economy, what effect are massive job losses going to have on this group's spending habits? Up through the first quarter, they continued to gobble up big-ticket items like houses and cars. Where are the new jobless Americans going to get the money to continue this behavior? Next Friday brings us the Retail Sales report, and I would be surprised if speculation of weakness in this area doesn't come to fruition. Accordingly, we are tightening the stops on our Retail plays, Wal-Mart (NYSE:WMT) and Nordstrom (NYSE:JWN). We have seen profits begin to accrue in these as well as several other plays, and part of our active management approach is to guarantee that we don't let our winners turn into losers. Check out the Portfolio for details and update your stops. Although we have been well rewarded for nibbling on new positions in late March and early April, now is not the time to back up the truck for new long-term positions. Many of these positions have had quite a run, and will likely retrace a bit in the weeks ahead. We are still waiting for a pullback to fill some of our Watch List plays, and due to the fact I expect some weakness around the FOMC meeting, I am hesitant to move our entry targets higher. The recovery process is just that, a process. Let's let the current rally run its course and then we'll get our new entries on the pullback. We did a couple of new Watch List plays this week, Adobe Systems (NASDAQ:ADBE) and AOL-Time Warner (NYSE:AOL), but we still are looking for proof of strength as these stocks need to hold above critical levels of support to induce us to enter the plays. We want to be in both of these plays as the markets recover this year, but jumping in too soon could be a painful experience. Let's review. The commercials have been covering their huge net-short positions and there are slight hints of a bottom in the economy. The Fed's stimulative behavior is having an effect, if only on investor psychology. Keep in mind that changes to interest rates take 6-9 months to truly be felt by the economy, meaning that the January 3rd 50 basis point cut still will not be factored into the economy until early June at the earliest. Earnings season is winding down and the warnings have already started...and we've already seen 50% more warnings this quarter than we had at this time last quarter. And last quarter was an all-time record! I may be proven wrong, but I don't think this market is going to run away from us. We don't have the economy firing on all cylinders, and that will keep our precious equity markets from going ballistic any time soon. Patience and discipline are still the watchwords that will keep your nest egg growing. Make no mistake, I firmly believe we have seen the bottom in the markets for this economic cycle. But that doesn't preclude some back-and-filling to solidify support levels. When that profit taking occurs, we will be able to gauge the strength of the markets and use our almighty technical tools to find the low risk/high reward entry points that will keep our Portfolio growing throughout the year. One final note. Those of you that have been with us for awhile have witnessed the recent changes in the LEAPS column. Well, the final installment of that process is upon us this weekend. The Strategy section (see the link at the top of this page) has been completely rewritten to provide a better roadmap on how to utilize the information found herein. Additionally, we have started something that I've been wanting to do for a long time. See the link at the top of this page labeled "Track Record". While far from impressive right now, this will be how we will measure our success over the remainder of the year. Each play that we enter and then exit will show up in this section. Needless to say, I expect the results at year-end will be spectacular. As I said last week, chasing stocks higher at this point could give you the dubious distinction of buying near the highs. Remember to stick to your plan. Mark Phillips Contact Support Current Playlist (Old Format) SYMBOL SINCE LEAPS SYMBOL PICKED CURRENT CHANGE CPN 01/21/01 JAN-2002 $ 40 YLN-AH $10.50 $18.90 80.00% JAN-2003 $ 40 OLB-AH $15.38 $23.90 55.45% LEAPS Portfolio Current Open Plays SYMBOL OPENED LEAPS SYMBOL ENTRY CURRENT CHANGE STOP CLX 03/13/01 '02 $ 35 WUT-AG $ 3.50 $ 3.30 - 5.71% $ 28 '03 $ 35 VUT-AG $ 6.10 $ 5.90 - 3.28% $ 28 GENZ 03/23/01 '02 $ 85 YGZ-AQ $24.50 $31.50 28.57% $ 99 '03 $ 90 OZG-AR $27.75 $39.10 40.90% $ 99 SWS 03/22/01 '02 $ 18 YWF-AT $ 4.10 $ 7.40 80.49% $ 20 '03 $ 20 VWZ-AD $ 5.00 $ 8.10 62.00% $ 20 WM 03/22/01 '02 $ 50 WWI-AJ $ 6.00 $ 6.90 15.00% $ 48 '03 $ 50 VWI-AJ $ 9.20 $10.30 11.96% $ 48 WMT 03/23/01 '02 $ 50 WWT-AJ $ 7.00 $ 9.30 32.86% $ 50 '03 $ 50 VWT-AJ $11.00 $13.80 25.45% $ 50 JWN 03/30/01 '02 $ 20 WNZ-AD $ 1.65 $ 2.40 45.45% $17.50 '03 $ 20 VNZ-AD $ 3.30 $ 3.90 18.18% $17.50 GS 04/05/01 '02 $ 90 WSD-AR $14.00 $21.30 52.14% $ 89 '03 $ 90 VSD-AR $20.50 $30.10 46.83% $ 89 MU 04/05/01 '02 $ 40 WGY-AH $10.60 $11.40 12.26% $ 38 '03 $ 40 VGY-AH $14.80 $16.60 16.22% $ 38 NSM 04/05/01 '02 $ 25 WUN-AE $ 5.50 $ 7.40 34.55% $ 24 '03 $ 30 VSN-AF $ 7.20 $ 9.30 29.17% $ 24 NOK 04/06/01 '02 $ 25 WIK-AE $ 4.70 $11.70 148.94% $ 29 '03 $ 25 VOK-AE $ 7.00 $14.10 101.43% $ 29 FON 04/09/01 '02 $ 25 WO -AE $ 2.80 $ 3.30 17.86% $ 19 '03 $ 25 VN -AE $ 4.40 $ 5.00 13.64% $ 19 QQQ 04/25/01 '02 $ 40 WD -AN $11.10 $13.00 17.12% $ 41 '03 $ 45 VZQ-AS $12.30 $14.20 15.45% $ 41 DELL 04/27/01 '02 $ 25 WDQ-AE $ 6.20 $ 6.00 - 3.23% $ 23 '03 $ 25 VDL-AE $ 9.00 $ 8.90 - 1.11% $ 23 LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CPN 03/18/01 $46-47 JAN-2002 $ 45 YLN-AI JAN-2003 $ 50 OLB-AJ GE 03/25/01 $45-46 JAN-2002 $ 50 WGE-AJ JAN-2003 $ 50 VGE-AJ TXN 03/25/01 $31-32 JAN-2002 $ 35 WTN-AG JAN-2003 $ 35 VXT-AG EMC 04/22/01 $35 JAN-2002 $ 40 WUE-AH JAN-2003 $ 40 VUE-AH SEBL 04/22/01 $38 JAN-2002 $ 40 YDS-AH JAN-2003 $ 40 OIE-AH VRSN 04/29/01 $42-44 JAN-2002 $ 50 YXO-AJ JAN-2003 $ 50 OVX-AJ LRCX 04/29/01 $25 JAN-2002 $ 30 WMJ-AF JAN-2003 $ 30 VPC-AF ADBE 05/06/01 $36-37 JAN-2002 $ 40 WAE-AH JAN-2003 $ 40 VAE-AH AOL 05/06/01 $49-50 JAN-2002 $ 55 WAN-AK JAN-2003 $ 55 VAN-AK New Portfolio Plays None New Watchlist Plays ADBE - Adobe Systems $41.36 While the broad Technology market and the more focused GSTI Software index (GSO.X) didn't find bottom until the first week in April, ADBE found support and began to rebound in mid-March, following the company's earnings release. Handily beating downwardly revised estimates, the stock began to see some buying interest while the rest of the NASDAQ proceeded to trade lower. Since then, the leading supplier of desktop publishing software has been on a tear, building a new uptrend line that currently rests right at the $37 level, which also happens to be the location of historical support. According to Rick Sherlund at Goldman Sachs, Software stocks should be among the first to recover in the depressed Technology sector. Looking at the chart for the GSO.X and ADBE, we must say it doesn't take a rocket scientist to come to that conclusion. Last week saw some weakness, and ADBE traded as low as $39 on Friday before the sharp recovery took hold. We are going to attempt to enter new positions as this current retracement runs its course. Look to establish new positions on a dip into the $36-37 range, and then hold on. Until we have conclusive proof that the economy is on the mend, it could be a bumpy ride. After entry, initial stops will be placed at $30. Just in case there is a little more weakness in store, we don't want to be kicked out of the play prematurely. BUY LEAP JAN-2002 $40.00 WAE-AH BUY LEAP JAN-2003 $40.00 VAE-AH AOL - AOL-Time Warner $52.20 Ever since being stopped out of our AOL play in early April, I've been grinding my teeth in frustration, watching the stock rise and waiting for the 'inevitable' pullback to allow us back into the play. Whether you like the service they provide or not, there is one undeniable fact - the company will be one of the big winners in the battle for dominance among the pure-play Internets. The company sealed that fate when it merged with Time Warner last year to form an online media powerhouse. In my opinion, this is one to hold for the long-term. The problem now is how do we get onboard without subjecting ourselves to an undue amount of risk? Afterall, the stock has risen almost $20 (that's 54%) since we were stopped out on our last attempt. The stock has now solidly broken above the $50 level and investors appear determined in their efforts to defend the stock at those levels. So we are going to place our entry target fairly close to current levels, despite the fact that all our oscillators are buried in overbought territory. They've been there for the past 3 weeks and there is nothing that says they can't remain there for another 6. Target shoot new entries on a pullback to the $49-50 area, but don't jump in until you actually see the bounce. Because the potential exists for a significant pullback, we will manage it with a $46 stop. This should sufficiently protect our capital, while at the same time giving the stock some wiggle room in the event of some volatility around the upcoming FOMC meeting. BUY LEAP JAN-2002 $55.00 WAN-AK BUY LEAP JAN-2003 $55.00 VAN-AK Drops None ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Sunday 05-06-2001 Sunday 5 of 5 To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/050601_5.asp ************* COVERED CALLS ************* Trading Basics: Position Management By Mark Wnetrzak When new traders discuss the subject of money management, they usually refer to techniques for the placement of protective stop orders or the principle of investing a limited portion of one's portfolio in each position to prevent catastrophic losses. There is something to be said for stop-loss orders as they are an efficient method to follow the movement in a stock or other instrument while insuring some profit (or limited loss) if the primary trend changes character. Generally, we recommend taking profits when the position produces the target return and trading stops are an excellent way to remove the emotional or reactive decisions that often occur in the stock/options markets. When the technical outlook for the instrument changes or a correction becomes likely, one may tighten the stop (closer than usual) to guarantee a reasonable profit (if stopped out) and still allow for a greater gains and a possible resumption of the trend. In most cases, a simple STOP order is the best method to limit losses or protect profits. The basic guidelines for establishing protective stops suggest that the initial or opening limit should be placed at a point where important technical support is evident. Most often, this will be a relatively small range reflecting the bottom of a basing pattern or trend-line established prior to entering the position. An important objective of this initial stop-loss limit is to preserve capital if the play goes badly and yet provide every opportunity for the position to achieve its potential. If the primary trend is directional, the placement of the first stop will differ, depending on your overall risk/reward tolerance. One should also take into account the past volatility of the issue when setting the initial loss limit. On a bullish stock you might trail the stop loss slightly below the previous day's low to lock-in profits (or preserve capital) if the trend falters. With highly volatile instruments, this can be difficult as they often fluctuate by large amounts. As the move progresses in your favor, the stop-loss can be advanced more aggressively. To assist in correctly placing these stops, we use generally use trend-lines, minor lows, and support/resistance areas. While these principles work well with the majority of situations, there will always be those cases when even the most common rules do not seem to apply. In particularly fast-moving markets where straight line advances make the placement of protective stops difficult, an arbitrary buy or sell "at the market" might be more advisable. There are also "progressive" stop order systems for traders who wish to fine tune the limit-setting process to allow for brief periods of technical consolidation. Regardless of the manner in which you determine the placement of stops, there is one fundamental rule of protective limits that remains inviolate. After an initial target is achieved, it is critical to avoid placing stops below a point which would eliminate more than half of your profit. In addition, protective stop orders under long positions are never moved down, nor are protective stop orders over short issues ever adjusted higher. Next week, we will discuss portfolio diversity and the efficient use of account equity to maximize profits. Good Luck! SUMMARY OF PREVIOUS CANDIDATES ***** Note: Margin not used in calculations. Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield LMNE 5.22 4.70 MAY 5.00 1.30 $ 0.78 21.6% MFNX 5.25 6.25 MAY 5.00 0.95 *$ 0.70 17.7% MRVC 8.80 8.80 MAY 7.50 2.15 *$ 0.85 13.9% BORL 7.99 10.99 MAY 7.50 1.05 *$ 0.56 8.8% ENMD 20.26 20.60 MAY 17.50 3.70 *$ 0.94 8.2% ASTE 16.05 19.00 MAY 15.00 2.10 *$ 1.05 8.2% SRNA 18.81 21.03 MAY 15.00 4.50 *$ 0.69 7.0% JBL 26.00 32.76 MAY 22.50 5.00 *$ 1.50 6.2% EXAR 30.15 28.15 MAY 25.00 6.50 *$ 1.35 6.2% EXFO 31.95 37.75 MAY 25.00 8.60 *$ 1.65 6.1% SBYN 13.75 14.50 MAY 10.00 4.40 *$ 0.65 6.0% AHAA 21.21 27.20 MAY 17.50 4.80 *$ 1.09 5.8% MU 44.07 41.80 MAY 37.50 8.00 *$ 1.43 5.7% NXCD 11.35 10.06 MAY 10.00 1.85 *$ 0.50 5.7% FDRY 13.35 16.91 MAY 10.00 3.70 *$ 0.35 5.3% ILUM 29.13 31.50 MAY 25.00 5.00 *$ 0.87 5.2% ISIL 31.74 33.10 MAY 25.00 7.60 *$ 0.86 5.2% ZIGO 24.74 38.04 MAY 17.50 8.20 *$ 0.96 5.0% PVTL 24.13 20.95 MAY 20.00 4.80 *$ 0.67 5.0% EMIS 18.20 13.64 MAY 15.00 4.10 $ -0.46 0.0% *$ = Stock price is above the sold striking price. Comments: Almost like old times; the 'Markets' ramping up on "bad" news after an initial drop. Sure seems like a change of character to me, but then I've been fooled before. The challenge is to not become complacent or abandon your strategy and chase higher returns at the expense of protection. It looks like investors were please with Metromedia Fiber Network's (NASDAQ:MFNX) delayed earnings. Luminent (NASDAQ:LMNE) is still having trouble staying above its 50 dma. EntreMed (NASDAQ:ENMD) is nearing a key technical moment as it moves towards its 150 dma. Keep an eye on Exar Corp. (NASDAQ:EXAR) as it has failed to remain above its 150 dma and now a test of support around $25 appears likely. Hopefully, Friday's dip washed out all the week holders in Micron Technology (NYSE:MU). Monitor the position closely as a break of the OCT'00 to APR'01 trend- line would be bearish. The technicals on Nextcard (NASDAQ:NXCD) have begun to weaken and a move lower may be forthcoming. The action in Pivotal (NASDAQ:PVTL) is worrisome and Emisphere Tech (NASDAQ:EMIS) is at a key moment after reporting earnings on Tuesday. Time to take a small loss or break-even exit and move money to more profitable positions? NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield ITWO 23.85 MAY 20.00 JQ ED 4.40 4448 19.45 14 6.1% NFLD 11.55 MAY 10.00 DHQ EB 1.85 401 9.70 14 6.7% PIOS 13.37 MAY 12.50 OQJ EV 1.25 129 12.12 14 6.8% SMTC 31.67 MAY 27.50 QTU ES 4.80 406 26.87 14 5.1% STOR 15.40 MAY 12.50 OSU EV 3.40 1051 12.00 14 9.1% TWAV 17.70 MAY 15.00 TQB EC 3.10 14 14.60 14 6.0% ULCM 28.00 MAY 22.50 UUL EX 6.00 34 22.00 14 4.9% Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield STOR 15.40 MAY 12.50 OSU EV 3.40 1051 12.00 14 9.1% PIOS 13.37 MAY 12.50 OQJ EV 1.25 129 12.12 14 6.8% NFLD 11.55 MAY 10.00 DHQ EB 1.85 401 9.70 14 6.7% ITWO 23.85 MAY 20.00 JQ ED 4.40 4448 19.45 14 6.1% TWAV 17.70 MAY 15.00 TQB EC 3.10 14 14.60 14 6.0% SMTC 31.67 MAY 27.50 QTU ES 4.80 406 26.87 14 5.1% ULCM 28.00 MAY 22.50 UUL EX 6.00 34 22.00 14 4.9% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** ITWO - i2 Technologies $23.85 *** New CEO = Rally Mode! *** i2 Technologies (NASDAQ:ITWO) is a provider of e-business and marketplace software solutions that may be used by enterprises to optimize business processes both internally and among trading partners. Its solutions are designed to help enterprises improve efficiencies, collaborate with suppliers and customers, respond to market demands and engage in dynamic business interactions over the Internet. On Wednesday, i2 announced that Greg Brady has been promoted to chief executive officer, replacing Sanjiv Sidhu who will continue as chairman of the board of directors. The company gave no explanation for the change but investors appear to favor the move as the stock is now up $6 from Tuesday's close. To further stoke the rally fires on Friday, Josephthal & Co. upgraded their rating on i2 to a "strong buy". Reasonable short-term speculation taking advantage of the current bullish momentum and strength in the software sector. MAY 20.00 JQ ED LB=4.40 OI=4448 CB=19.45 DE=14 TY=6.1% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=ITWO ***** NFLD - Northfield Labs $11.55 *** Blood Substitute *** Northfield Laboratories (NASDAQ:NFLD) is engaged in the development of a safe and effective alternative to transfused blood for use in the treatment of acute blood loss. Its PolyHeme blood substitute product is a solution of chemically modified hemoglobin derived from human blood. The company is devoting substantially all of their efforts and resources to the research, development and clinical testing of PolyHeme(TM). We simply see a stock that has traded around $10 for several years and whose price recently moved above a short-term "double bottom" formation. New drug speculation with a favorable cost basis. Do your research! MAY 10.00 DHQ EB LB=1.85 OI=401 CB=9.70 DE=14 TY=6.7% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=NFLD ***** PIOS - Pioneer $13.37 *** Earnings Miss Priced-In? *** Pioneer-Standard Electronics (NASDAQ:PIOS) is one of the world's largest distributors of electronic components and computer systems, with annual revenues of $2.6 billion for the fiscal year ended March 31, 2000. Pioneer, which will be reporting earnings on Tuesday, May 8, warned in early April that 4th-quarter earnings would be around 25 cents to 30 cents a diluted share, below an average estimate of 34 cents, citing an industry-wide slowdown. The company also will take a 4th-quarter charge of $14.2 million, or about 23 cents a diluted share, related to the write-down of information technology assets. The stock tested the DEC'00 low on the news and has since rallied back above its 150 dma. We favor the technical support near our cost basis and the current bullish momentum as Pioneer forges a Stage I base. MAY 12.50 OQJ EV LB=1.25 OI=129 CB=12.12 DE=14 TY=6.8% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=PIOS ***** SMTC - Semtech $31.67 *** Bracing For A Rally! *** Semtech (NASDAQ:SMTC) is a supplier of analog and mixed-signal semiconductors. Semtech designs, manufactures, and markets a range of products for commercial applications, the majority of which are sold to the communications, industrial and computer markets. On April 18, Semtech announced that it expects net sales for the this quarter to be approximately $60 million, up 5% from last year, but down 14% sequentially. Nothing like a FED rate cut (and another cut?) to make investors disregard the near term and concentrate on the future. Semtech is in a lateral consolidation but improving technicals raise the probability of further upside movement. A conservative entry point for those wishing to speculate on SMTC's future. MAY 27.50 QTU ES LB=4.80 OI=406 CB=26.87 DE=14 TY=5.1% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=SMTC ***** STOR - StorageNetworks $15.40 *** Bottom Fishing! *** StorageNetworks (NASDAQ:STOR) is the world's leading provider of data storage management services, and an innovator of storage management software. Their technology, software and services enable enterprises to easily and cost-effectively store rapidly growing volumes of business-critical information. Shares of StorageNetworks shot up nearly 50% this week after the company said Ford Motor Co. (NYSE:F) had signed up for two of its storage packages. At a time where many of its customers are cutting costs and technology spending, StorageNetworks has said it can reduce storage costs for its clients by 25% to 30%. Analysts say the company's services also improve utilization. We simply like the heavy volume breakout above a short-term base with support (the MAR and APR highs) near the sold strike. MAY 12.50 OSU EV LB=3.40 OI=1051 CB=12.00 DE=14 TY=9.1% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=STOR ***** TWAV - Therma-Wave $17.70 *** Litigation Rally *** Therma-Wave (NASDAQ:TWAV) is a worldwide leader in the development, manufacture, marketing and service of process control metrology systems used in the manufacture of semiconductors. TWAV currently offers leading-edge products to the semiconductor industry for the measurement of transparent, semi-transparent and opaque thin films, for the monitoring of ion implantation, and for the integration of metrology into semiconductor processing systems. Investors cheered the news that Therma-Wave and KLA-Tencor (NASDAQ:KLAC) have settled all pending litigation. The stock has rallied strongly off the April low which completed a short-term head-n-shoulders bottom. A post-earnings consolidation appears to be over and the stock now appears ready to move higher. A favorable entry point that offers a reasonable short-term profit potential. MAY 15.00 TQB EC LB=3.10 OI=14 CB=14.60 DE=14 TY=6.0% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=TWAV ***** ULCM - Ulticom $28.00 *** What's Up? *** Ulticom (NASDAQ:ULCM) provides service enabling software for wireless, wireline and Internet communications in Intelligent, Converged and Programmable Networks. Ulticom's products, Signalware (R) for Ultimate Call Control and Nexworx for Ultimate Service Control, are used by the telecommunication industry's leading equipment and service providers worldwide. There is no news to explain the heavy-volume supported rally that started on Wednesday, May 2. The stock has now moved above its 50 dma and the late March high. Reasonable short- term speculation with a favorable cost basis. Remember, the tape doesn't lie; somebody is interested in this stock. MAY 22.50 UUL EX LB=6.00 OI=34 CB=22.00 DE=14 TY=4.9% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=ULCM ***** ***************** SUPPLEMENTAL COVERED CALL CANDIDATES ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield BVSN 7.64 MAY 7.50 QVB EU 0.85 3269 6.79 14 22.7% GSPN 22.20 MAY 20.00 GLQ ED 3.20 284 19.00 14 11.4% BIOM 8.41 JUN 7.50 BSU FU 1.60 212 6.81 42 7.3% SCUR 18.48 MAY 17.50 UQU EW 1.55 0 16.93 14 7.3% MCHM 8.32 JUN 7.50 QQ FU 1.50 326 6.82 42 7.2% WGRD 8.40 JUN 7.50 RUH FU 1.55 0 6.85 42 6.9% PRGN 24.75 MAY 20.00 GQP ED 5.20 515 19.55 14 5.0% CRUS 22.04 JUN 17.50 CUQ FW 5.60 2989 16.44 42 4.7% HYSL 17.20 JUN 15.00 WQE FC 3.10 0 14.10 42 4.6% *********************** CONSERVATIVE NAKED PUTS *********************** Trading Systems: The Correct Attitude And Mentality Is Essential By Ray Cummins Success in trading often depends as much on the psychology and temperament of the individual as the method used to participate in the market. The first rule of trading: You should feel comfortable with any strategy or procedure you utilize. A system that is customized to your personality and particular needs will be easier to obey and administer, eliminating the majority of problems associated with discipline and emotional reactions. To ensure the success of any approach, you must develop tactics that are compatible with your unique character and comfort level. In this manner, decision-making stress is limited and positions are more easily managed for maximum profit while unnecessary risks are avoided. We often forget that humans make decisions based on emotions and then justify them with logic. The assumption that we can easily learn to be rational in the market is regrettably inaccurate and when it comes to trading, it is natural to become illogical. In most cases, we make judgments based on our past experiences and associations or unrealistic desires and perceptions. That's why it is so important to remove these emotional components from our trading methodology. There are other psychological pitfalls you must avoid including complacency and the subjective mental states of Overconfidence and Denial. Complacent traders are those that are too passive in their approach to position management. These nonchalant players initiate a trade and then leave it unattended until a profit is achieved or the play is stopped-out (if they were wise enough to use a loss-limiting order). In contrast, the astute trader will note any abrupt changes that occur in the market and act quickly, changing his (or her) plans as the situation dictates. At that point, the difference between profit and loss may depend more on a timely adjustment or a revised exit strategy, rather than the initial forecast or projection. When trading with stop orders, it is important to adjust the downside loss-limit as the issue moves higher to "lock-in" gains. This rule is often ignored by inexperienced traders because they become comfortable after the initial profit is achieved. In today's volatile markets, prices rise and fall hundreds of points in a matter of minutes and huge gains can become disastrous losses with little or no warning. Overconfidence is a positive attribute in many fields but in the stock market there is little room for vanity and self-esteem. Obviously, a certain amount of conviction is necessary to make decisive judgments but that comes from thorough research and a well-defined plan of action. Traders who fail to employ these concepts usually don't last very long, because their portfolios are quickly wiped out. The most visible indication of egotism in trading is lack of fear and that often occurs after a string of successes. Unfortunately, a common result is that you begin to over-trade, with less preparation and a wider margin for error. The outcome is never favorable and courage is quickly replaced by remorse. Overconfidence can also lead to an affinity with a particular position, thus limiting your ability to be objective. The longer you hold a position, the greater that attachment will become and the result is seldom profitable. There are plenty of opportunities in the market and remaining in a position after it has changed character or turned in the wrong direction will only extend your losses. Denial comes in many forms but the simple definition applies directly to traders: refusal to admit the truth or reality. In markets with long-term primary trends, setbacks have far less affect on an investors' mentality because corrections are seen as new buying opportunities. However that does not mean every position will recover. Eventually, the market reverses course and the price of your issue moves in the direction opposite to the one you originally hoped it would follow. As the value of the position dwindles, common phrases such as, "It can't go any lower," or "It will come back...it always has before" are used to dismiss the need to make a decision. Realizing when a trade as "gone bad" and controlling losses effectively is the key to consistent profits. Indeed, when emotions affect your actions, it is easier to justify why the market is wrong rather than focus on the obvious signals. Remember, winning positions are easy to manage but the manner in which a trader reacts to losing plays will define his success. Experienced traders use a variety of techniques to profit in the market but regardless of their individual approach, everyone agrees with this simple rule: control your emotions and it will be easier to maximize profits and limit losses. Good Luck! *** WARNING!!! *** Occasionally a company will experience catastrophic news causing a severe drop in the stock price. This may cause a devastatingly large loss which may wipe out all of your smaller gains. There is one very important rule; Don't sell naked puts on stocks that you don't want to own! It is also important that you consider using trading STOPS on naked option positions to help limit losses when the stock price drops. Many professional traders suggest closing the position when the stock price falls below the sold strike or using a buy-to-close STOP at a price that is no more than twice the original premium from the sold option. SUMMARY OF PREVIOUS CANDIDATES ***** Stock Price Last Call Strike Price Gain Potential Symbol Picked Price Month Sold Picked /Loss Mon. Yield PPD 20.86 20.40 MAY 15.00 0.45 *$ 0.45 14.1% PPD 17.25 20.40 MAY 10.00 0.50 *$ 0.50 13.8% UCOMA 15.39 16.71 MAY 10.00 0.30 *$ 0.30 12.9% FNSR 16.00 20.97 MAY 10.00 0.40 *$ 0.40 12.1% SNWL 16.60 18.41 MAY 12.50 0.40 *$ 0.40 11.7% MCDT 25.99 35.21 MAY 17.50 0.45 *$ 0.45 11.5% MANU 34.40 34.44 MAY 22.50 0.75 *$ 0.75 10.7% NTAP 23.55 25.17 MAY 15.00 0.50 *$ 0.50 10.4% PSFT 35.87 38.64 MAY 27.50 0.55 *$ 0.55 10.3% EBAY 41.63 52.35 MAY 30.00 1.10 *$ 1.10 10.1% RFMD 17.85 32.42 MAY 12.50 0.45 *$ 0.45 9.7% EMLX 34.96 43.30 MAY 22.50 0.50 *$ 0.50 9.7% SEBL 45.70 47.90 MAY 32.50 0.65 *$ 0.65 9.6% AMD 30.00 30.99 MAY 22.50 0.35 *$ 0.35 8.0% SCI 22.99 27.15 MAY 17.50 0.45 *$ 0.45 7.7% VSEA 39.35 38.25 MAY 30.00 0.70 *$ 0.70 7.1% BRCD 36.78 47.65 MAY 22.50 0.50 *$ 0.50 6.9% MUSE 48.83 45.90 MAY 25.00 0.65 *$ 0.65 6.8% EXFO 31.95 37.75 MAY 17.50 0.45 *$ 0.45 5.7% *$ = Stock price is above the sold striking price. Comments: Let see if I have this straight: Bad news is Good news and Good news could have been bad? The real "bad" news is watching stocks you sold puts on ramp up. Or is it? Maybe the "good" news is that you closed your positions early for $0.10 or $0.15 and locked in a "good" profit in half the time. Ok, I'll stop. Sonicwall (NASDAQ:SNWL) continued to rally higher this week and is comfortably above the sold strike. Peoplesoft (NASDAQ: PSFT) is acting strong and may not fill the gap from last week. Anybody else wishing they had just bought a call with RF Micro Devices (NASDAQ:RFMD)? Varian Semiconductor (NASDAQ:VSEA) is acting worrisome as it approaches a key support area at $35. NEW CANDIDATES ********* Sequenced by Company ***** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AHAA 27.20 MAY 22.50 GAK QX 0.50 82 22.00 14 16.3% AVCI 14.98 MAY 10.00 QYV QB 0.30 5271 9.70 14 19.8% CANI 26.05 MAY 22.50 CDU QX 0.45 22 22.05 14 13.4% CTLM 32.73 MAY 25.00 UUM QE 0.40 151 24.60 14 12.5% GOTO 21.92 MAY 17.50 GUO QW 0.35 156 17.15 14 16.1% ISIL 33.10 MAY 25.00 UFH QE 0.40 378 24.60 14 12.4% SRA 23.60 MAY 20.00 SRA QD 0.45 65 19.55 14 15.5% Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield AVCI 14.98 MAY 10.00 QYV QB 0.30 5271 9.70 14 19.8% AHAA 27.20 MAY 22.50 GAK QX 0.50 82 22.00 14 16.3% GOTO 21.92 MAY 17.50 GUO QW 0.35 156 17.15 14 16.1% SRA 23.60 MAY 20.00 SRA QD 0.45 65 19.55 14 15.5% CANI 26.05 MAY 22.50 CDU QX 0.45 22 22.05 14 13.4% CTLM 32.73 MAY 25.00 UUM QE 0.40 151 24.60 14 12.5% ISIL 33.10 MAY 25.00 UFH QE 0.40 378 24.60 14 12.4% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, TY-Target Yield (monthly basis). ***** AHAA - Alpha Industries $27.20 *** Bracing For A Rally? *** Alpha Industries (NASDAQ:AHAA) designs and manufactures RFICs for wireless handsets, wireless base stations, and several broadband end markets (cable, fiber optic, fixed wireless). The company's technologies enable RF functions, such as tuning, switching, and amplification and its primary product offerings include switches, power amplifiers, discrete semiconductors, and ceramic products. In early March, Alpha cut its 4th-quarter projections, citing the downturn in the economy and continued softness in the wireless handset and infrastructure markets. On May 1, the company said that fiscal 2001 sales grew 46% to $272 million and earnings rose to $0.75 per share from $0.42 per share a year ago. The numbers met revenue and EPS guidance for the quarter despite the economic and global inventory issues. Although the company forecast a net loss for the June quarter, the bad news appears to be "priced-in" to the share value and this position offers a conservative entry point from which to speculate on the recent bullish momentum. MAY 22.50 GAK QX LB=0.50 OI=82 CB=22.00 DE=14 TY=16.3% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=AHAA ***** AVCI - Avici Systems $14.98 *** Technicals Only! *** Avici (NASDAQ:AVCI) develops and sells high-speed data networking equipment that allows communications service providers to transmit high volumes of information across fiber optic networks. Their high-performance solution is being marketed to telecommunications companies and Internet service providers that are creating new optical networks to address the increasing data traffic on the Internet. The Avici Terabit Switch Router product is designed to address the critical needs of carriers by: managing high volumes of network traffic at high speeds; providing the ability to add capacity to the network without disrupting network performance; with high levels of availability and redundancy; prioritizing traffic types for new revenue-generating services, such as video streaming and the transmission of telephone calls over the web; and operating with existing carrier equipment. We simply favor the recent basing pattern and the low-risk cost basis. MAY 10.00 QYV QB LB=0.30 OI=5271 CB=9.70 DE=14 TY=19.8% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=AVCI ***** CANI - Carreker $26.05 *** Strong Sector! *** Carreker (NASDAQ:CANI) is a provider of integrated consulting and software solutions that enable banks to maximize their electronic finance opportunities, increase their revenues and reduce their costs. The company's e-finance offerings are delivered through three primary suites of solutions: ePaymentSolutions, software and consulting services that assist banks in transitioning from paper-based systems to electronics; eCashSolutions, e-finance solutions that enable banks to profit from their non-earning cash assets; and eBusinessSolutions, consulting services that help banks define and realize their full revenue potential from the Internet economy. CANI shares have performed well over the past few weeks, in tandem with the software segment, and we favor the opportunity to own the issue at a discounted price. MAY 22.50 CDU QX LB=0.45 OI=22 CB=22.05 DE=14 TY=13.4% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=CANI ***** CTLM - Centillium Communications $32.73 *** Telecom Play! *** Centillium Communications (NASDAQ:CTLM) designs and markets communications chipset solutions for central office equipment, digital loop carrier line cards, and customer premise equipment for DSL, premise networking and Voice-Over-Packet. Centillium beat estimates in January on revenues of $24.3 million, due to significant sequential growth in product shipments and design wins. The stock rallied strongly that month but consolidated until early April when the company posted favorable earnings results. Centillium said that revenues benefited from strong demand from its Japanese customers and both Credit Suisse First Boston and Robertson Stephens raised their annual estimates on the news. CTLM continues to forge a Stage I base and Friday's move suggests a rally may be forthcoming. This position offers a reasonable cost basis from which to speculate on Centillium's future. MAY 25.00 UUM QE LB=0.40 OI=151 CB=24.60 DE=14 TY=12.5% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=CTLM ***** GOTO - GoTo.com $21.92 *** Can't Catch This One! *** GoTo.com (NASDAQ:GOTO) is an online marketplace that introduces consumers and businesses that search the Internet to advertisers who provide products, services and information. Advertisers using its marketplace include retail merchants, wholesale and service businesses and manufacturers. GoTo facilitates these introductions through its search service that lets advertisers bid in an ongoing auction for priority placement in its search results. Consumers access the GoTo search service through its affiliates, a network of Websites that have integrated GoTo's search service into their sites or that direct consumer traffic to its site. The GOTO rally started after the company reported favorable first-quarter results and predicted higher revenue and smaller losses for the rest of the year. Merrill Lynch upgraded the company's shares and now the stock is testing a 52-week high. Our position provides a conservative way to profit from future upside activity. MAY 17.50 GUO QW LB=0.35 OI=156 CB=17.15 DE=14 TY=16.1% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=GOTO ***** ISIL - Intersil $33.10 *** Earnings Rally! *** Intersil (NASDAQ:ISIL) is a leading supplier of semiconductors, reference designs and software for wireless access and communi- cations analog markets. Intersil applies analog, mixed-signal and radio frequency (RF) expertise to the development of products tailored for high-growth communications markets. On Wednesday, April 25, ISIL reported 1st-quarter net income of $8.1 million, or $0.07 a share, beating the consensus estimate by 2 cents. The company also posted 1st-quarter revenues of $127.8 million. ISIL did "warn" that revenue would be about 5% to 8% lower next quarter with flat margins but investors pushed the stock skyward on heavy volume and after a brief consolidation, the issue is again testing recent highs. We favor the bullish indications but prefer a cost basis closer to technical support. MAY 25.00 UFH QE LB=0.40 OI=378 CB=24.60 DE=14 TY=12.4% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=ISIL ***** SRA - Serono S.A. $23.60 *** Biogen Beater? *** Serono S.A. (NYSE:SRA), headquartered in Geneva, Switzerland, is a global biotechnology company that has four recombinant products on the market: Gonal-F, Rebif, Serostim, and Saizen. In addition to being the world leader in reproductive health, Serono has strong market positions in the therapeutic fields of neurology, metabolism and growth. The company's research programs are focused on these businesses and on establishing new therapeutic areas. SRA shares rallied last week after the company announced Wednesday that it will release data May 8 from a highly anticipated study, comparing its MS drug, Rebiff, to Biogen's drug, Avonex. Data from the head-to-head trial wasn't expected until the third quarter, which leads observers to believe that Serono just can't wait to release good news for its drug. Serono must prove that Rebiff is more effective than Avonex to enter the U.S. market prior to 2003 as Avonex currently enjoys "orphan status," which blocks competition until then. Speculation Only! MAY 20.00 SRA QD LB=0.45 OI=65 CB=19.55 DE=14 TY=15.5% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=SRA ***** ***************** SUPPLEMENTAL NAKED PUT CANDIDATES ***************** The following group of issues is a list of additional 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 and positions are suitable for your experience level, risk-reward tolerance and portfolio outlook. They will not be included in the weekly portfolio summary. Sequenced by Target Yield (monthly basis) ****** Stock Last Call Strike Option Last Open Cost Days Target Symbol Price Mon. Price Symbol Bid Int. Basis Exp. Yield WGRD 8.40 JUN 7.50 RUH RU 0.65 0 6.85 42 15.1% MANU 34.44 MAY 25.00 ZUQ QE 0.50 291 24.50 14 14.7% TSM 23.00 MAY 20.00 TSM QD 0.40 263 19.60 14 13.2% FNSR 20.97 MAY 15.00 FQY QC 0.25 244 14.75 14 12.2% OPWV 39.41 MAY 30.00 UGE QF 0.45 1889 29.55 14 11.7% RETK 31.37 MAY 25.00 QRD QE 0.35 20 24.65 14 11.5% NTIQ 33.95 MAY 25.00 CQT QE 0.35 308 24.65 14 10.7% ************** BROKERS CORNER ************** Going Naked To Own For those of you that are curious enough to click on this article, prepare to be dazzled. Recently I have written on various strategies utilizing naked puts and the margin requirements to do them. As stated before, this is a complex strategy with many variables. That is why I have written so many different articles on the subject. Before I get into the meat and potatoes of the strategy, I want to go over some basics. Many of you may already know that selling naked puts may obligate you, the seller, to be assigned the underlying security. This means that you buy that security at the strike price. I have received questions regarding the possibility of a premature assignment. This does happen. Depending on the brokerage's methods, first in first out or lottery, early assignment may happen to a portion or all of one's position. Options that may be assigned on or before option expiration are American Style. Equity, Ishares, "HOLDRS" ("HOLding company Depositary ReceiptS") and some index options are American style. European style options may only be exercised or assigned on the day of expiration. Broad-based index options are usually European style options. Because of this characteristic, broad-based uncovered options usually have a slightly lower margin requirement. Now that boring stuff is over with, the purpose of the article is to go over an alternative entry method to buy a stock you would be happy owning and/or writing covered calls on it. Although I realize many like the idea of selling the deep in the money puts in order to collect the big premium and get a high delta. However, selling out of the money puts at a strike price that reflects a preferable purchase price on the security is a widely used strategy with great advantages. The first benefit is reducing the cost basis on the purchase of the stock shares. For instance, XYZ is trading at $36. The May 30 puts are selling for 1.50 per contract (this is a volatile stock). Referring to my margin calculations in the Margin Monster article, the initial requirement for 10 contracts is approximately $6,900. This consists of about $5,400 cash requirement plus the current closing premium of 1.50 per contract. Because we are options traders, we have to discuss the leverage. The initial return is great. $1,500 divided by $5400 is about 27%. However, we really can't bank on that. I actually want to buy this stock at $30 per share. That will require a minimum initial margin requirement of $15,000 ($30 x 1000 shares x 50%) to purchase the stock. If assigned, my reduced cost basis is roughly the stock's purchase price less the premium ($28.50 = 30 - 1.50). If assigned the stock at 30, the price is probably below $30. Therefore, it is too early to calculate how much money you have made or lost. If assigned early, which is unlikely, you could sell the May 30 calls. But you will probably have to sell the June calls. Another exit strategy may be to hold onto the stock and wait for the price to move up and sell it at a profit. Because I am selling the puts at or slightly above a support level, I may wish to have an exit strategy in place if either the stock (if already assigned) or the put penetrates that level. It is very important to be disciplined on the entry and exit strategies. Another benefit is the leverage. As described in the above example, I have full intentions of buying up to 1000 shares of XYZ at $30 per share. Many brokerages require a minimum equity to sell naked puts. Ask your broker what their equity requirement is to do naked options. That means I at least have enough money in my money market account to not only satisfy the initial requirement on the naked put but also the requirement to buy the stock if assigned. Although not a great big benefit, I only need to use approximately $5,400 of my cash for the margin requirement on the naked put. This may increase if the stock declines and decrease if the stock advances up. That leaves that money in cash for a few weeks to gather a little interest or be allocated for short-term trades. I know I have to be careful because I may have to use this money to make a purchase. Depending on one's risk tolerance, an investor/trader could swing trade, position trade, sell a deep in the money put on a short-term bullish candidate, trade stock, etc. In short, I have a little flexibility with my left over money for a few weeks because of the leverage. I can choose the amount of risk I want to take. This flexibility could be either profitable or very costly. Be careful. Knowledge can be a powerful weapon. Maybe the best scenario is if the put isn't assigned, and you get to keep the premium. This makes a nice little profit in my example. A person could say they made $1,500 on the put with only having to put up $5,500. That is a good return. But in the real world, you had the cash required to buy the stock hanging out there as the denominator. There are good arguments to either side. Being conservative in your figures provides a little more room for error. This is a risky strategy. As previously addressed, you have the risk of early assignment. Other risks include the security's price declining and risk of losing all of your investment. Some additional risks are increased margin requirements and opportunity costs. I am a full service broker and Registered Options Principle and available for questions regarding this and many other strategies. Robert John Ogilvie Robert.Ogilvie@verizon.net Toll Free 877-925-0880 Neither Cutter & Company, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and /or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. Cutter and Company is a Member of the NASD, MSRB, and SIPC. Please read the OptionInvestor Disclaimer. ************************ SPREADS/STRADDLES/COMBOS ************************ When All The Bad News Is Good... Friday, May 4 Stocks rallied today as investors ignored a rise in unemployment and focused instead on a potential rate cut at the upcoming FOMC meeting. The NASDAQ closed up 45 points at 2,191 while the Dow was up 154 points at 10,951. The S&P 500 index was up 18 points at 1,266. Trading volume on the NYSE reached 1.07 billion shares with advances doubling declines 2 to 1. On the NASDAQ exchange, volume hit 2.04 billion shares with winners outpacing losers 22 to 15. In the U.S. bond market, the 30-year Treasury fell 13/32, pushing its yield up to 5.663%. Thursday's new plays (positions/opening prices/strategy): Merrill (NYSE:MER) MAY55P/60P $0.60 credit bull-put Merrill (NYSE:MER) JUN80C/50P $0.10 debit synthetic Icos (NASDAQ:ICOS) MAY55C/55P $4.60 debit straddle Lincare (NASDAQ:LNCR) MAY60C/50P $1.80 credit strangle The early slump in MER provided an excellent entry opportunity in the bullish combination positions. There was also some fairly aggressive call buying in the issue, due to a rumor that global bank group HSBC Holdings (NYSE:HBC) might purchase the company. The opening price of the ICOS straddle was lower than expected and one trader achieved a debit of $4.40 early in the session. The straddle credit traded as high as $5.10 later in the day as the stock cycled though a $5 range and a number of new positions were apparently closed for small profits. Portfolio Plays: The market staged a broad-based rally today in anticipation of another reduction in interest rates. A Bridge News poll put the chances of a 50 basis-point cut at 83% and most analysts see a further rate reduction at the Fed's next meeting in late June. Investors ignored the fact that non-farm payroll jobs plunged in April while the unemployment rate climbed to 4.5%, the highest since 1998 and above the 4.4% estimate. Apparently, the recent recovery in equities is more important than the anemic economic outlook because even the market bears are worried about missing the bottom. Inside technology trading, networking stocks moved higher and software issues also advanced on continued strength in Microsoft (NASDAQ:MSFT). Merrill Lynch raised its earnings and revenue estimates on the company for the June quarter. J.D. Edwards (NASDAQ:JDEC), another software maker, surged over 30% on heavy volume after the company announced it expects quarterly results to be "significantly better" than a year earlier. The semiconductor sector led the hardware group lower but shares of Dell Computer (NASDAQ:DELL) gained nearly 4% even after a report of a new price war with Compaq (NYSE:CPQ). Rambus (NASDAQ:RMBS) tumbled 20% after a federal court ruled against the chipmaker in a patent-infringement suit with sector rival Infineon (NYSE:IFX). On the Dow, American Express (NYSE:AXP), J.P. Morgan (NYSE:JPM), and Alcoa (NYSE:AA) were among the best performers. The broader market saw gains in oil and oil service, drug, financial, retail and biotechnology shares. Today's rally benefited virtually every bullish position in the portfolio and there was little negative news to report. The big winners in the technology group were Human Genome Sciences (NASDAQ:HGSI), PMC Sierra (NASDAQ:PMCS), Microsoft (NASDAQ:MSFT) and Cirrus (NASDAQ:CRUS), which continued its recent rally after matching analysts' revised profit estimates. The company said revenue jumped 25% to $199.7 million, in line with its March 30 forecast, from $160.2 million in last year's fourth quarter and CRUS officials now expect revenue from the analog and Internet segments to resume 40% growth per year in the September quarter. The move provided an excellent premium for the Jun-$30 Call in our long-term calendar spread as well as a break-even exit for those who believe the bullish trend is short-term in nature. In the industrial group, Lowe's (NYSE:LOW), Providian (NYSE:PVN), Lehman Brothers (NYSE:LEH) and Active Power (NASDAQ:ACPW) moved higher while Unitedhealth Group (NYSE:UNH) continued to slump. Last month's position (May-$7.50 Call) in Data Broadcasting was a popular play as the issue rallied to a 52-week high near $8. Those of you still in the position enjoyed a favorable gain and the stock appears poised for further upside activity. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - ****************************************************************** WPI - Watson Pharmaceuticals $47.09 *** Reader's Request! *** Watson Pharmaceuticals (NYSE:WPI)is primarily engaged in the development, manufacture, marketing and distribution of branded and off-patent pharmaceutical products. Through internal product development and synergistic acquisitions of unique products and businesses, the company has grown into a diversified specialty pharmaceutical provider that markets more than 28 branded lines and over 100 generic pharmaceutical products. The company also develops advanced drug delivery systems designed to enhance the therapeutic benefits of existing drug forms. The company markets patented products as well as a number of trademarked off-patent products directly to healthcare professionals, which are listed as branded pharmaceutical products. Here is an interesting issue that one of our readers submitted for a bearish position, based on the recent technical indications and the company's earnings report, which is due on Monday morning after the opening bell. The near-term Put options have been very active over the past few days and the bias is definitely negative with volume and open interest at institutional levels. There are a number of favorable plays, depending on your personal outlook but these two positions appear to offer a good balance between risk and reward. PLAY (aggressive - bearish/debit spread): BUY PUT MAY-50 WPI-QJ OI=2213 A=$3.90 SELL PUT MAY-45 WPI-QI OI=2426 B=$1.60 INITIAL NET DEBIT TARGET=$2.20-$2.25 PROFIT(max)=120% B/E=$47.75 - or - With favorable disparities in the front-month premiums, this position offers a favorable speculation play for time-selling traders who are bearish on the issue. PLAY (speculative - bearish calendar spread): BUY PUT JUN-45 WPI-RI OI=211 A=$2.40 SELL PUT MAY-45 WPI-QI OI=2426 B=$1.65 INITIAL NET DEBIT TARGET=$0.70-$0.75 TARGET ROI=25% http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=WPI ****************************************************************** DYN - Dynegy $54.44 *** Failed Rally? *** Dynegy (DYN:NYSE) is a provider of energy and communications solutions to customers in North America, the United Kingdom and Continental Europe. The company's expertise extends across the entire convergence value chain, from broadband, power generation and wholesale and direct commercial and industrial marketing and trading of power, natural gas, coal, emission allowances, and weather derivatives to transportation, gathering and processing of natural gas liquids. The company also is involved in the transmission and distribution of electricity and natural gas and provides retail service to electric and gas consumers. Dynegy operates in four segments: Dynegy Marketing and Trade, Dynegy Midstream Services, Transmission and Distribution and Dynegy Global Communications. The California energy crisis is far from over and shares of power plant operators slumped last week on news of additional political, regulatory and legal challenges. Dynegy's production segment has been negatively affected by the recent activity and on Wednesday, Lt. Gov. Cruz Bustamante sued five wholesalers, claiming they conspired to drive up power prices and bilk the state's treasury. The defendants, which includes Dynegy, said they didn't gouge the public and that the lawsuit could hamper attempts to bring new power to the state. Wholesale suppliers are already the targets of investigations by the state attorney general and a state Senate committee, several civil lawsuits, and have been ordered by the Federal Energy Regulatory board to refund $124 million in overcharges to California. Regardless of the outlook for the company, the news definitely isn't favorable and with the uncertainty in the sector, there is little chance the issue will reach our sold strike in two weeks. PLAY (conservative - bearish/credit spread): BUY CALL MAY-65 DYN-EM OI=5351 A=$0.20 SELL CALL MAY-60 DYN-EL OI=5331 B=$0.70 INITIAL NET DEBIT TARGET=$0.55-$0.60 ROI(max)=12% B/E=$60.55 http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=DYN ****************************************************************** WGRD - Watchguard Technologies $8.40 *** Cheap Speculation! *** WatchGuard Technologies (NASDAQ:WGRD) is a provider of Internet security solutions that protect enterprises or telecommuters that useg the Internet for electronic commerce and communications. The company's core market is small- to medium-sized enterprises, and the company has recently expanded its marketing focus to include larger enterprises as well as small offices and home offices, and telecommuters, particularly those using broadband web connections. The company's subscription-based LiveSecurity solution broadcasts threat responses, software updates, information alerts, expert editorials, support flashes and virus alerts over the Internet, enabling enterprises to keep their security systems current with minimal effort. The dynamic nature of the company's solution is made possible through a unique up-datable security appliance that executes software sent from a remote management system receiving the company's LiveSecurity broadcasts. Web security is a priority for every company and individual that uses the Internet and Watchguard is one of the leaders in the industry. The company designed its LiveSecurity System for use by enterprises that want to manage their own Internet security and it allows a business to affordably deploy protection to all sites on its network, while retaining centralized control and administration of the system. The company's recently introduced security appliance for larger enterprises enables the WatchGuard LiveSecurity System to support up to 5,000 simultaneous users and over 50 simultaneously connected virtual private networks. This higher-performance security appliance will allow the company to offer bigger companies integrated solutions to protect the main office, branch offices, and also employees who telecommute. Although the company offers a unique service, its share value has fallen in sympathy with other internet issues and only recently has it shown any potential for recovery. WGRD's quarterly report may have been one catalyst as the company announced net revenues of $17.1 million, an increase of 74% from $9.8 million in the first quarter of 2000. Product sales were $13.3 million for the quarter, an increase of 56% from $8.5 million in the first quarter of 2000 and service subscription revenues were $3.8 million for the quarter, an increase of 192% from $1.3 million for the same period of 2000. Those are respectable numbers for a company in the Software and Services sector and traders who think the trend will improve can speculate on that outcome with this bullish position. PLAY (speculative - bullish/synthetic position): BUY CALL JUL-10.00 RUH-GB OI=18 A=$1.15 SELL PUT JUL-7.50 RUH-SU OI=35 B=$1.00 INITIAL NET CREDIT TARGET=$0.00-$0.10 TARGET PROFIT=$0.90-$1.10 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $346 per contract. http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=WGRD ****************************************************************** - STRADDLES AND STRANGLES - ****************************************************************** WWCA - Western Wireless $44.70 *** Trading Range? *** Western Wireless (NASDAQ:WWCA) provides wireless communications services in the United States principally through the ownership and operation of cellular systems. The company offers cellular operations primarily in rural areas in 19 western states under the Cellular One brand name, serving over 834,000 subscribers. Western Wireless International Corporation, a subsidiary of the company, is a provider of wireless communications services worldwide. WWI has built and launched wireless networks in six countries, and is currently constructing nationwide cellular networks in three additional regions. The company's quarterly earnings are due on May 10, 2001. Stocks in the Wireless Communications group have been active in recent sessions and WWCA is no exception. The volatile activity has produced some excellent option premiums in the near-term and with the relatively well-defined trading range, the issue offers an excellent opportunity for premium selling. As with any stock, news and market sentiment will have an effect on the issue, so review the play individually and make your own decision about the future outcome of the position. PLAY (aggressive - neutral/credit strangle): SELL CALL MAY-50 WRQ-EJ OI=850 B=$0.70 SELL PUT MAY-35 WRQ-QG OI=512 B=$0.40 INITIAL NET CREDIT TARGET=$1.20-$1.25 PROFIT(max)=12% UPSIDE B/E=$51.25 DOWNSIDE B/E=$33.75 http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=WWCA ****************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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