The Option Investor Newsletter Tuesday 05-08-2001 Copyright 2001, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/050801_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 05-08-2001 High Low Volume Advance/Decline DJIA 10883.50 - 51.70 10946.80 10819.80 0.99 bln 1609/1446 NASDAQ 2198.66 + 25.09 2210.45 2165.37 1.88 bln 2142/1712 S&P 100 656.36 - 1.10 659.19 650.90 totals 3751/3158 S&P 500 1261.14 - 2.37 1267.01 1253.00 54.3%/45.7% RUS 2000 491.77 + 2.13 492.47 488.16 DJ TRANS 2865.54 + 14.90 2867.68 2837.50 VIX 27.54 - 0.57 28.54 27.01 Put/Call Ratio 0.64 ****************************************************************** Close But No Cigar! 10995, close to 11000 but not quite! Many short sellers jumped the gun on Monday and tried to be the first on their block to short the rally over 11000. The rush to beat the crowd short circuited the Dow and it rolled over as expected but just a little early. The Nasdaq continues to bump its head on 2200 and closed just slightly under once again at 2198. The main focus for today was the CSCO earnings announced after the bell. Hurry up and wait. That was the sentiment on the Nasdaq as everyone held their breath waiting for the CSCO earnings. On the surface they managed to beat the street with a +.03 gain compared with the two cent estimate. Last year their earnings for the same period were .13 cents. The reason they beat the street by a penny was simply a smaller write down of obsolete equipment than previously expected. CSCO CEO, John Chambers, said "We are now in a valley much deeper than any of us anticipated and we believe the basic issues are macro economic and capital spending related." The conference call was not positive and CSCO rolled over in after hours trading after closing up +1.10. AMCC which is a big supplier to CSCO rallied on the announcement but also fell back to $27.50 in after hours after cautious statements by CSCO. The Nasdaq futures spiked to the upside initially but as the call progressed they began to drop and were down over -32 an hour after the close. Near the end of the call they did say they saw a possible bottom forming over the next couple quarters. Way to hedge your bets John! There were several earnings warnings today with National Semi being the worst. NSM announced after the bell that it will post a proforma net loss of -.04 to breakeven, with revenue of approximately $390-$400 million. They said they were cutting -1,100 jobs and expected sales to fall more than -16% sequentially. They said market conditions were continuing to affect orders and shipments. They said lower than expected orders, high inventory and changes in the cell phone market were impacting the visibility going forward. Basically it was a "things are not getting any better any time soon" warning. NSM fell -2 in after hours. Maxim Integrated Products, Nasdaq:MXIM, also announced earnings that were in line with estimates but said bookings going forward were off drastically. Bookings for their next quarter were only $205 million, well below the $332 million for last quarter. In warning they said the steepness of the order drop off was not expected. Economic reports today continued to suggest that things are still not recovering. The Richmond Fed Manufacturing Survey came in at -25.0 and the shipments index at the lowest reading for the eight year history of the survey. This shows that manufacturing in the Richmond region is still contracting at a significant pace. New orders and backlog order indexes were also very weak and showed that future improvements may be slow to development. Prices received for products are also falling and calling into question the profitability of companies caught in this downturn. Productivity fell -0.1% in the first quarter and hourly wages rose +5.2%. Unit labor costs also rose +5.2% and was an increase in the previous pace. The productivity report today showed that there are inflation pressures creeping back into the economy even when new growth is stagnant. The drop in labor productivity was the first time since 1995. Labor productivity has been seen by the Fed as the key factor in keeping inflation under control. Wages can rise but as long as output is rising at a faster rate everybody is happy. Once productivity starts falling any rise in wages will impact the cost of those products causing a rise in prices. Reports remaining this week include the Import- Export Prices on Thursday and PPI and Retail Sales on Friday. Weakness in the financial stocks were a drag on the Dow today after JP Morgan Chase was downgraded to a sell and American Express was downgraded to a neutral. Legg Mason fell -2.63 after saying quarterly profits fell -26% as falling stock markets cut into its brokerage operations. One of the positive developments today was an announcement that Ciena won a $150 million contract from Tycom Ltd, a supplier of fiber optic cable networks. CIEN was up over +6 on the news. The contract covered the purchase of Ciena's MultiWave CoreDirector and CoreStream products which will be used in a network to connect all six inhabited continents. Just can't get a break. That is what investors are feeling after seeing the Dow roll over only five points away from 11000 on Monday. The follow on today was even weaker with a solid top again at 10900. The CSCO earnings were widely credited with putting a halt to trading on the Dow as well as the Nasdaq. Nobody wanted to be caught holding stocks if CSCO warned of a significant further deterioration in the economy. The Nasdaq was still treading water just under 2200 while waiting to be rescued by a positive CSCO conference call. Sorry, it did not happen. The almost two hour conference call was peppered with things like "no visibility" and "significant challenges" and it was not until the end of the call before they closed on an up note. Futures only recovered slightly and all the stocks that do business with CSCO were trending down in after hours. On CNBC three hours after the close, Chambers dodged questions but tried to be positive in spite of the third degree. His performance may have blunted the negative feelings about Cisco's outlook going forward. There were over 171 million shares trading in CSCO on Tuesday. For Wednesday we will be held captive to investor sentiment on the CSCO announcement. The Dow is still struggling just to hold the high ground and the Nasdaq is having the same problem with 2200. As I stated on Sunday, the closer we get to the FOMC meeting next Tuesday the greater the chance of a sell off. The rate cut is already priced in and any inflation signs like we received today could slow their pace. Since we have not broken 11000 yet, each day makes it more unlikely that it will happen before the meeting. With the summer doldrums rapidly approaching investors may be saying wait instead of buy. The volume on Tuesday would confirm that with the NYSE failing to break one billion and the Nasdaq trading only 1.8 billion. Considering almost 10% of that was CSCO the real volume was VERY light. No conviction and more earnings warnings could be spelling trouble going forward. However, every day we spend at 10900 and 2200 builds support for a stronger breakout when/if it finally occurs. This is one of those "inflection points" in the market. I think we should treat it as a "reflection" point instead and review why we would want to be buyers today. There is no clear direction. There is a period of traditional weakness in front of us. The economy is showing the possibility of stagflation for at least two more quarters. The momentum from last week has disappeared. Why buy? There may not be any overriding reason to sell but is there a real reason to buy? I don't see one yet. Should the Dow close over 11000 on strong volume or the Nasdaq close over 2250 on strong volume then I would be a believer. Until then I suggest caution. Beginning today this commentary along with the intraday updates and play updates will be available by phone at 900-378-PICK. If you are away from your computer please feel free to call our hotline to keep in touch with the market and have the information to make those crucial, time critical, investment decisions. Since 900 numbers cannot be dialed from cell phones we will have an 800 number in place next week as well. Enter passively, exit aggressively! Jim Brown Editor **************** MARKET SENTIMENT **************** Usual Suspect By Matt Russ Could it get anymore boring? The market remained stagnant ahead of Cisco's (NASDAQ:CSCO) earnings report, which beat lowered estimates but left something to be desired on the guidance front. As Bill would say, "It sounds like a trough to me." Bill, I hope you're enjoying your extended Cinco de Mayo fiesta in the Baja. While the market isn't hungover from the celebrations, we could sure use a dose of good ol' volatility. The VIX.X is drifting around 27 with the low today right at its 252-dma. It feels like a break is right around the corner...until then, the question remains: are those bullish wedges or rolling tops? NASDAQ & QQQ The Nasdaq ventured into the 2200 territory on the gap open but that was short-lived. Slipping early, the COMPX found bid support at the 2165 area, coincidentally the lows from Monday. Buyers gauged this level as support last Friday as well on the last leg up into the close. The range is narrowing from 102 points on Friday, 49 yesterday, and 45 today. It's important to note that the Nasdaq did not take out yesterday's high of 2215 on an intraday basis. We know we have the bullish wedge pressuring the 2233 - 2250 zone, but everybody seems to be waiting for the other to take it higher. Volume has been light and as conviction wanes, the market doesn't seem as sure of itself. Was it waiting for CSCO? Maybe. CSCO traded lower after-hours, taking the Nasdaq futures with it. But, that doesn't mean anything as we learned after last Friday's Job Report. The series of lower highs on the chart below is beginning to send up red flags. Intraday support sits at the 2165 area, along with 2100. Our overhead resistance remains the same: 2233 - 2250. The QQQs are narrowing as well, with support at $47, and resistance coming down a bit from $49.50 to $48.50. SPX & OEX Resistance is still solid at 1270 and the S&P 500 remains sideways. Please volatility, come back! It's our lifeblood as option traders. Really, nothing has changed in the SPX.X besides another day has gone by. The chart looks good though, maintaining higher lows and still right near resistance at 1270. Buyers showed up twice today at 1253 and the pivotal point is eminent. Quite honestly, this chart makes a trader think that they might come out and buy this market tomorrow regardless of CSCO. It wouldn't surprise me at all, even given the Nasdaq chart. That high volume break of 1270 would create a short-covering panic and 1300 will print before you know it. Tomorrow will be very telling, now that CSCO is out and said nothing disastrous. Watch for buyers at 1250 and 1240 on the SPX. On the OEX, resistance continues to be 660, with support at 650 and 640. DOW 30 Ralph Bloch was on CNBC yesterday and said that he sees a rally through 11,000 setting up. He specifically addressed the increased put buying going on, as it did back in March 1999 when the Dow approached and broke 10,000. To support his general feel is last Friday's COT Report, which revealed that Commercials were Net-Long +25% while Small Specs were Net-Short -57%. Today's action had buyers supporting the Dow 30 at 10813 and rallying steadily into the close at 10882. 10900 will be the next level of resistance and of course, the elusive 11,000 mark. Failure to hold support of 10800 will likely result in a retest of support in the low 10700s. Watch the Bank Index, BKX.X, and its resistance at 900. The support of the Financials will be key to the INDU's breakout. That's it for tonight's Market Sentiment. I'm happy to announce that, back by popular demand, is the COT Report Data. While we are changing the format of this section, we realize the importance to give you, the reader, what you want. We will continue to offer our own interpretations of the data, while printing it for your own analysis. Thanks for working through the changes and for your patience. Trade Smart, Matt Russ ********************** CBOT Commitment Of Traders Report: Friday 05/04 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade(CBOT). Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader's direction. Small Specs Commercials (Current) (Previous) (Current) (Previous) S&P 500 Open Interest Net Value +36513 +57298 -41144 -61741 Total Open Interest % (+14.90%) (+26.22%) (-6.05%) (-8.52%) net-long net-long net-short net-short DJIA Futures Open Interest Net Value -6592 -3478 +7488 +5051 Total Open Interest % (-57.98%) (-20.21%) (+25.09%) (+16.58%) net-short net-short net-long net-long NASDAQ 100 Open Interest Net Value +4288 +2520 -10972 -10299 Total Open Interest % (+22.06%) (+11.28%) (-17.02%) (-16.11%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Dramatic changes this week as Commercials have reduced their net-short positions on the S&P 500 by 2.5 percent. In addition, we see extreme divergence on the DJIA with the Small Specs doubling their short positions while the Commercials increased their long positions by 8.5 percent. From here were are in limbo until %values actually switch to flat or net-long sometime in the future. We could see fluctuation of positions oscillate up and down for weeks or even months to follow. A major market hurdle will be the S&P 500 commercial traders moving to net-long in accumulation stage and that is still undetermined from here. Data compiled as of Tuesday 05/01 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/050801_1.asp *********** OPTIONS 101 *********** Escape To Tehran By David Popper There is an ancient Middle East parable about a rich merchant. Somehow he learned that Death was looking for him. The merchant decided to jump on his horse and escape to Tehran in order to outwit Death. Upon his arrival in Tehran, he ran right into Death. His appointment with Death was scheduled to take place in Tehran. In his panic, the merchant left safety and hurried into the clutches of Death. Just like that merchant, sometimes when the short-term action moves against my trade, I prematurely escape my position for a perceived safer position. Only then, I discover that I would have been better off if I had just held firm. A good example of this took place in January of this year when I decided to make longer term "safer" plays in one account. I bought 1000 QQQ (AMEX:QQQ) at $60 per share and wrote the January 2002 $60 call at $15. This provided a 25% return over the course of the year with the chance to do better if I could repurchase the calls cheaper during a downturn and eventually rewrite the calls. Well, everything went according to plan as the value of those calls eventually shrunk to $2 before eventually recovering. Had I simply held my ground, I would have been able to write the calls twice and achieved another $7,000 in premium. The problem was not the plan, rather it was my nerve. I read too much Barron's and watched too much CNBC, and eventually closed my position at a poor level. Instead of being underwater, I could have been profitable. How hard it is, however, when it seems the whole world is in panic, to remain resolute. How difficult it is to trust your plan when everything seems to be blowing up. Trading is so emotional. It shouldn't be. But eventually, the market will uncover any emotional weakness. This begs the question of whether it is possible to remain resolute in the face of adversity so that a good plan can be executed, even in the face of volatility. The first thing necessary is to understand how you personally handle short-term losses. If losses throw you, it is better to understand the possible downside to a position prior to entering the position. With tech stocks, it is possible that you will have to endure being stopped out or alternatively suffer a large "paper loss" while the play develops. In short, it is critical to understand the downside risk as well as the upside reward. A second idea, which may be helpful, is to consider short-term trades over multiple sectors so that a hit in one sector does not rock your boat. For example, I currently hold positions in Johnson & Johnson (NYSE:JNJ), and Washington Mutual (NYSE:MU) simply because they have announced splits. This factor ought to provide some momentum for the stock through the split date. Additionally, these two securities are in different sectors and provide balance. Of course, these companies are leaders in their field and have charts that indicate that a breakout is due. A third idea is to only trade issues that you wouldn't mind owning in the event that the market went south. If you only trade stocks of companies that have real businesses and real earnings, then an enormous amount of pressure is relieved. It is far easier to hold Cisco (NASDAQ:CSCO) for a loss than it is holding Amazon (NASDAQ:AMZN). Alternatively, trading a basket of stocks such as QQQ provides the same sense of security. Fourth, determine a realistic time frame in which to make the trade. It is not realistic to enter short-term trades using short-term signals if you can't watch the market during the day. Fifth, when you enter a play, use basic technical analysis to make a decent entry. If you are entering a long-term play, use long-term indicators such as the 50- and 200-day moving averages, volume indicators and relative strength tools. Once you have selected a trading strategy over a reasonable time period, select a security that represents a solid business and enter that security at a technically good point. Even then, it is still a good idea to maintain a percentage of cash in order to allow flexibility to take advantage of market downturns. When all of these factors are utilized, you have taken every reasonable precaution that is possible. Knowing that you have thought through a sound plan will give you the fortitude to confront the feeling of panic which happens to most traders at some point. Further if you write down the reasons for the trade and the precautions taken, in times of market downturns, you will be able to revisit your original ideas to determine if they are still valid. In my case, I needed a downturn in order to repurchase the calls for a pittance. When the storm comes, if your ideas are still valid, maybe you can hold the line and prevent an escape to Tehran. ************** TRADERS CORNER ************** Ready to Trade By Scott Martindale Like I was writing last week, all systems appear to be a go. The Fed is cutting rates and injecting cash like never before, market breadth is healthy, many stocks are still oversold, short sellers are sweating, investors are regaining their buying mood, and the return of coastal fog here in Santa Barbara tells me that summertime is almost here. Can it get any better than this? Of course, history tells us that just when it all seems too good, it's time to get cautious. Nevertheless, after scaling back my trading activity for several months while the economy bottoms and the markets consolidate, I'm getting itchy to trade. I was looking for some direction, and I now see about 10% on the downside for the Nasdaq from here, versus about 100% on the upside. So, I've moved a lot of cash back into my trading account, and I'm starting to put it to work. As I've talked about many times in this column, I prefer to sell premium rather than buy it, especially when the volatility is keeping premiums high. I'm looking for strong charts on stocks from my watchlist as well as those listed on OIN's play lists -- both the call list (which sometimes gives naked put alternatives) and the naked put section. This week I wrote OTM positions on intraday weakness in Millennium Pharmaceuticals (NASDAQ: MLNM), Impath (NASDAQ: IMPH) and Avici Systems (NASDAQ: AVCI), as well as ITM positions on Qualcomm (NASDAQ: QCOM) and Calpine (NYSE: CPN). I also have unfilled open orders to write OTM puts on Rosetta Inpharmatics (NASDAQ: RSTA) and Oracle (NASDAQ: ORCL), but my limit prices are pretty aggressive and might not get filled without a hefty sell-off. When I play options on market indices, I prefer the Nasdaq 100 Trust (AMEX: QQQ) and the OEX (maybe I learned this preference from the IndexSkybox). Last Tuesday when the markets ran up near resistance levels of 10,900 on the Dow and 1265 on the SPX, I started thinking short-term pullback. And since I held no short positions but a lot of long positions, I went ahead and bought a few OEX puts just to give myself some profit exposure to a possible pullback. The OEX dipped early the next day but didn't hit my target, and then the markets strengthened, so I closed out half my position for a small loss. I hit my target on the other half on Thursday's weakness. Specifically, I bought the May 640 puts near Tuesday's close for 9.00. I sold half the position on some mid-day weakness on Wednesday for 8.20, and sold the other half at my target of 12.20 on Thursday, for a net gain of 13% on the initial play. Today, with Cisco Systems (NASDAQ: CSCO) due to report after the close, I bought a May 20 straddle just before the close for 2.70, that is, I bought May 20 calls and an equal number of May 20 puts for a total debit of 2.70. Then I anxiously awaited the news....A penny better than reduced estimates, little else to surprise up or down, and the stock price remained mostly flat in afterhours.... Hmmm....Perhaps a better play would have been on one of the more volatile networking plays, like Ciena (NASDAQ: CIEN), Juniper Networks (NASDAQ: JNPR), Redback Networks (NASDAQ: RBAK), Extreme Networks (NASDAQ: EXTR), Applied Micro Circuits (NASDAQ: AMCC), or Broadcom (NASDAQ: BRCM)....Let's pull up their afterhours prices.... Nope, everyone's flat or maybe down a smidge. Well, I'll see what happens tomorrow and then decide how to close out the straddle or let one leg run. As for the current market conditions, the 21-day moving average of the CBOE equity put/call ratio moves inversely to the market, and it is currently around 0.55. This ratio last formed a short-term bottom at 0.52 in early February. The market fell sharply for the next two months. At the big capitulation in early April, the CBOE put/call ratio actually approached 1.0, indicating that almost as many put contracts traded as call contracts. And even after the market strengthened on April 5th, the 21-day moving average peaked at 0.69. Such a high level would usually signal a near-term market bottom, which it certainly was, in retrospect. But a return to February's low put/call ratio might be troublesome for the market. But on the flip side, John Bollinger made his usual Tuesday appearance on CNBC today to express his continued good impressions of the charts, particularly the fact that the markets have been rallying in the face of bad news -- meaning that these announcements already have been priced in. He expects the dollar to be the key to markets later this year, whether up or down. The dollar has been strengthening again lately after showing signs that it might be ready to weaken. Although the VIX has risen to over 30 during the past week, it closed today slightly below 28 -- right where it was last Tuesday. Some analysts say that the stock market has never formed a significant, long-term bottom with sentiment readings this optimistic. However, as I have pontificated before, the good ol' U.S. of A. has never been more peaceful, creative and productive. We Americans have become terminally optimistic about technological and medical advances improving our lives. We have learned that stocks historically offer vastly superior returns over the long term compared with bonds and money funds. The ultra-conservative T-bond investors of old, many of whom sweated through the Great Depression, are being replaced with a modern breed of investor that would rather lose some in a temporary bear market than miss out on the big gains of a major advance. The market veterans will call me naive, but in my view, comparing consumer and investor sentiment readings today with the 1930's or 1970's is simply not valid. PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** RE $63.10 +0.25 (-0.90) RE offered call players some chances for gains over the last week, as a dip to $61.50 last Wednesday recovered to $64 on Friday. However, on Monday and Tuesday, RE has moved in a very narrow range between $62.87 and $64.25. Considering the strength in the insurance sector, RE really should have been able to rally past resistance at $64. Since the stock appears to have lost momentum for the time being, we are dropping it tonight. C $49.80 -0.85 (-0.98) Time decay and volatility are two factors which option investors need to be aware of. While stock traders need only be concerned with the intra-day gyrations of their position, a stock that remains static can have an adverse impact on an option play. With that in mind, shares of leading Citibank have been stuck in a narrow range on low volume. While the stock could break out either way at any moment, this has been the case for the past couple of weeks. In light of this, we are taking our money off the table, to be put to use in plays with more attractive profit potential. FDC $65.52 -0.58 (-0.67) While FDC's up-trend is still intact, and our stop price and strong support at $65 remains unviolated, we are taking pre-emptive steps to protect our capital by dropping coverage on this call play. Over the past few trading sessions, the stock has slipped below support from the 5 and 10-dmas. These two moving averages helped FDC to rally in the month of April. Now converged at just above $66, there is no reason not to expect this area to act as formidable resistance going forward. As well, stochastics have crossed over bearishly, suggesting that the next move for FDC may be lower. As such, we no longer recommend taking on new positions. PUTS: ***** PMCS $44.10 +4.79 (+2.85) Earnings from Tech bellwether Cisco no doubt took center stage in the minds' of traders this week. With the networking giant being one of PMCS' main customers, sentiment surrounding this event likely influenced trading in the communications chipmaker. The stock retreated $1.94 or 4.7 percent in Monday's trading session, with volume clocking in at 60% of the average daily volume, reflecting the uncertainty and nervousness ahead of CSCO's report. Today, traders were a lot more optimistic, as PMCS rallied over 12 percent on 115% of ADV. In doing so, the stock closed above our stop price of $43. True to our sell rules, we are dropping coverage of this play. 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The Option Investor Newsletter Tuesday 05-08-2001 Copyright 2001, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/050801_2.asp ******************** PLAY UPDATES - CALLS ******************** YHOO $19.74 -0.24 (-0.23) Yahoo traded in a tight range as the Internet sector (INX.X) consolidated, and closed near support at 210. CSCO's earnings reports may have a dramatic impact on YHOO Wednesday, so be sure to assess the market's reaction to the report before taking positions. YHOO has been trading between support at the 50-dma of $17.63 and resistance at the 10-dma of $20.26 for the last two weeks, with a pop up to $23.74 last week, which could very well be repeated if the market conditions are favorable. A break and close above $21 could get the ball rolling, and conservative traders might want to wait for this move. Alternatively, a bounce from Tuesday's support level of $19.15 could be an entry level for more aggressive traders. The Nasdaq's pullback to the 2025 level on April 25th brought YHOO to strong support at $17.50, which we are keeping as our closing stop, as a drop below this level could be very bearish. NXTL $18.94 -0.03 (-1.06) NXTL pulled back slightly in a nervous market over the last two days. Tuesday's light volume reflects the environment of uncertainty which plagued the markets before Cisco's earnings release. However, support was strong at $18.35 on Tuesday, and, if the wireless sector can regain momentum, NXTL may be ready to surge past strong resistance at $20. A quarterly release from VSTR, which reported a slightly lower than expected loss was not well received on Monday and Tuesday, and this news could have weighed on the sector. Entry points can be taken at current levels, if other wireless bellwethers like AWE and PCS are strong. Brave traders could try scooping up positions on another pull back to $18.50. We are moving closing stops a notch tighter to $18, so exit positions if NXTL closes below this level. MO $51.00 -1.00 (-1.61) Big tobacco took a breather on Tuesday, after last week's substantial run up in MO, LTR, and RJR. News regarding a stay in a highly publicized lawsuit against three tobacco companies may have dampened investors' enthusiasm for MO, but we feel that this may be temporary, as previous dips over the last six months have resulted in excellent buying opportunities. MO, Lorillard Tobacco Co., and Liggett Corp. struck a deal on Monday with a Florida court guaranteeing them a stay in the Engle case while the verdict is being appealed. This means that MO will put money in an escrow account while the case is in appeals court. While the case may drag on in the courts for months, it seems likely that investors' enthusiasm for the upcoming IPO of Kraft will attract attention to MO after the news of the lawsuit drifts to the back burner. The IPO is slated to bring MO a cash proceed of between $7 and $10 billion, which will make it the second largest IPO in history. Strength in the Dow will likely bode well for MO going forward, so traders may consider taking positions on a move up past the 10-dma of $51.35, particularly if others in the sector are strong. We are setting closing stops at $50, so end positions if MO closes below this level. AOL $51.93 -0.17 (-0.27) This week, AOL's coiling spring tightened another notch. Near-term support elevated to the $51 level and the formidable $52 resistance continued to refuse passage. The sideways activity is frustrating. The assessment is simple. AOL needs to break to the upside of $52 amid heavy volume to generate the volatility needed to create profit opportunities for traders. Be patient for the upside move before beginning new plays. We'll drop coverage if AOL fails to close above our REVISED $51 protective stop. In the news, Computer retailer CompUSA and AOL joined forces to create a marketing alliance. STOR $16.02 +0.20 (+0.62) This week's consolidation, following three days of fantastic gains, isn't unusual. The base-lining at the $16 level demonstrates the stock's strength and indicates another breakout is possible. We've raised our protective stop, yet again, and will now exit on a close below the $15 mark. Look for an unmistakable move through $17 amid active trading to flag the next momentum wave. In the event of a big breakout in an advancing market, err on the side of caution and take profits as STOR approaches the $20 level. MER $66.30 +0.00 (+1.25) A strong show above the $66 support and the bolstering 200-dma line defines MER overall strength as we approach this month's Fed meeting. The fueling speculation that HSBC, a global banking behemoth, could be laying the groundwork to acquire Merrill Lynch may also play a part in the stock's trading over the short-term. As it is now, the less risk-adverse should wait for MER to exhibit strong upside action. A bold move through $68 and into the $70 range provides strong confirmation that MER can indeed rise to the occasion and challenge January's highs. Our closing stop remains set at $65, sandwiched between the 10-dma ($64.76) and the 5-dma ($66.63). An aggressive entry off this level could generate lucrative gains, but beware of the old sideways trading pitfall. LLY $86.04 -0.74 (+0.00) Along with the rest of the market, LLY's recent rally has run out of momentum. Since breaking above its channel just over a week ago, the stock has been consolidating its recent gains between $84-87. While this hasn't been a good environment for position trading, nimble day-traders have had a predictable cash generator for the past week. Let the bears to push the price down to support near $84-85 in the morning, and then grab a fistful of calls as the price stabilizes. Then wait until the end of the day as the stock runs up and take your profits at the end of the day. That simple pattern alone would have been profitable 5 of the last 6 days. How's that for consistency? Even today was a winner, as the stock dropped sharply during amateur hour before bouncing just above $84 and rallying throughout the day, ending just slightly over $86. Aggressive traders can continue to apply this strategy as long as it works, but watch out for a failure of support at $84. If the bears are able to crack this level, then this gravy train will likely be over. More conservative traders will want to wait for LLY to move up through the $87 resistance level on strong volume before taking a position. Remember to keep stops set at $85. Any close below this level will also force us to close out the play. CAT $51.85 +0.34 (+1.30) We started our call play on CAT yesterday based on favorable fundamental forces leading to technical strength. The stock broke out yesterday to a new 52-week high on heavy volume, in spite of a weak to flat day for the NYSE. News that Morgan Stanley Dean Witter raised their price target to $60, to go with their Outperform rating on the stock, was well received. With that, CAT ended Monday trading up almost 2 percent on 1.55 times the average daily volume. Today, the stock continued to push ever higher, posting a fractional gain on stronger than average trading volume. Continued buying pressure leading to a break above today's intra-day high of $52.25 may allow for an entry on strength, but make that sure rivals DE and DOV confirm upward momentum. Aggressive traders may target pullbacks intra-day to horizontal support at $51, $50, and our closing stop price of $49. Additionally, moving average support from the 5 and 10-dma may be found at $50.85 and $50.48 respectively. LAB $40.30 +0.23 (+0.10) Connecting the highs and lows since April, it appears that shares of NYSE Specialist firm LaBranche are continuing its steady climb upward. Volume has been light lately, but acceptable as long as the price action remains positive. Indecision was the name of the game Monday, as bulls and bears played tug-of-war with the stock on low volume. This carried on into Tuesday's session, with the bulls ending the day with a slight edge. If past performance were any indication of future results, then the prospect of another leg higher would be likely indeed. A bullish surge above $41 resistance on volume could allow conservative players to make a play, but only if sector peers NITE and SCH are also moving higher. To protect our profits, we are tightening our stop from $38 to $39. Bounces off horizontal support at $40 and $39 may provide aggressive traders with targets to shoot for. The 5-dma, currently at $39.50 may also serve as a potential entry point, but confirm bounces with buying volume. ******************* PLAY UPDATES - PUTS ******************* AMAT $52.60 +1.86 (-1.07) Did you notice the Semiconductors today? Those pesky bulls actually tried to mount a rally, pushing the Philly Chip index (SOX.X) up to 640 resistance. The real test will come in the next couple days though as the bulls try to push back over the 650 level. As long as the bears are able to prevent this occurrence, AMAT should continue to find more sellers than buyers. Despite a tight range-bound day for the major indices again, AMAT managed to stage a pretty impressive rally, gaining nearly $2 on the day. Of course the volume was less than stellar, coming in at only 60% of the ADV, indicating it shouldn't be long until the selling resumes. Resistance (and our stop) are looming just overhead at $53 and aggressive traders will want to consider new positions on any weakness near current levels as the bears are likely to make another run at the $50 support level. If they can push prices lower than that, conservative traders will want to consider new positions as the $50 level appears to be firm support. This will open the door for a test of lower support levels, first at $48 and $46, followed by $44 and then $42. As always, keep an eye on the SOX.X, because weakness here will be a good indication of what to expect from AMAT. Don't forget that AMAT will announce its earnings on May 15th after the close. HGSI $62.85 +3.40 (+1.08) Defying all our charting prowess from last night, HGSI found support just below $58 this morning and rallied strongly throughout the day. Climbing right through the $61 and $62 resistance levels with hardly a hitch, the stock was looking like it was going to clear the $64 level before the close as the price continued to rise and volume was on the rise too. Fortunately our $64 stop held firm and HGSI retraced a bit at the close, ending the day with a hint that aggressive entry points may materialize in the morning. The Biotechnology index (BTK.X) had a pretty strong day as well, charging right up to the $570 level to end a wild day with a gain. So where do we go from here? The game plan hasn't changed at all, we'll just get a better entry point into the play. Aggressive traders will want to target new entries near the $64 level as bulls run out of momentum and let the bears have the ball. The action in the last hour of trading today would have been a good setup, except for the fact that volume kept increasing right into the close. Look for confirmation of weakness in the morning before playing. More conservative entries will materialize as HGSI falls back through first the $62 and then $61 support levels. JNPR $58.90 +1.82 (-2.23) While the Networking index (NWX.X) did manage to post a slight gain today, it sure wasn't much to write home about. CSCO was upgraded this morning before the open by Morgan Stanley, and CEIN managed to ink a major contract with Tycom, Ltd. Despite the good news, all the NWX could do was gain a measly 1.5% and our JNPR play didn't fare much better, gaining just over 3%. Anticipation of CSCO's earnings tonight after the bell was largely responsible for the gains in recent days, and the news wasn't well received by the market. While CSCO traded flat in the after hours session, stocks like JNPR traded sharply lower, negating all of the gains accrued during the regular session. The downtrend is still in effect and we will want to use any market strength in the morning as an opportunity to enter new positions on a bounce near the $59 resistance level. But judging from the after hours reaction, conservative traders are likely to get the first entry tomorrow morning as JNPR falls through the $55 support level. Keep stops set at $62 and continue watching the NWX for clues to the health of the Networking sector. NVLS $51.95 +2.13 (+1.00) Continuing to be tossed about by the whims of the broader Semiconductor sector, NVLS actually managed to gain some ground today, after confirming the $50 level as support yesterday. Given the quiet action in virtually all sectors, it should come as no surprise that NVLS has been stuck between $50-52 for the past few days. That makes our plan of action pretty simple now, doesn't it? Conservative traders will want to wait for the $50 support level to fail as support before taking positions as the stock moves back down into the range between $40-49. More aggressive traders will want to target shoot new entries on any weakness that begins to show near current levels, looking to profit as the rubber band snaps back. Keep in mind that our stop is sitting at $52 and any close above that level will spell the end of our play. Watch the Semiconductor index (SOX.X) for a measure of strength or weakness in the overall sector. GMST $40.26 +0.43 (+0.46) Even positive analyst comments have failed to ignite investor interest in shares of digital media provider Gemstar. Yesterday, Wit SoundView initiated coverage on the stock with a Buy rating. Despite the good news, the only rally the bulls were able to muster was a gain of 3 pennies on 62% of the average daily volume. Today was more of the same, as GMST managed to squeak by with a gain of just over 1 percent on half the ADV. Moving average resistance overhead is formidable indeed, with the 5, 10 and 100-dma at $40.70, $40.65 and $42.55 respectively. Failed rallies as the stock approaches these levels may allow higher risk players to take a position, provided that GMST remains below our stop price of $41 by the close. For the more risk averse, a break below $40 on selling volume may allow for an entry on weakness. From there, the stock could make a quick trip down to $37 before encountering support from its 50-dma. In both cases, correlate entries with movement in sector sisters SFA and WINK. SGR $55.24 -1.49 (-1.86) It appears that with this put play, our patience has finally been rewarded. While already a profitable play before today's session, SGR had been drifting down slowly and with little conviction. Nonetheless, the weak technicals suggested that at some point we could see more downside. Yesterday SGR retreated fractionally on half the average daily volume, in sympathy with a flat to down day for three-letter Old Economy issues. Today, the sellers finally gained the upper hand, with the stock dropping 2.63 percent on 1.22 times the average daily volume. This came in spite of positive comments from Merrill Lynch analyst Fritz Von Carp, who highlighted SGR as a top pick. Continued weakness leading to a bearish plunge below today's intra-day low of $54.50 may allow conservative traders to take a position. For higher risk players, resistance overhead may be found at $56, the 5-dma at $56.83 and the 10-dma at $57.73. Just be aware that we have lowered our closing stop price, from $58 to $57. In both cases, track sector sentiment by following competitors MLI and KMT. ************** NEW CALL PLAYS ************** AGGRESSIVE: VRSN - Verisign Inc. $58.07 +2.55 (+2.25 this week) VeriSign, Inc. is the leading provider of trusted infrastructure services to Web sites, enterprises, electronic commerce service providers and individuals. The company's domain name, digital certificate and payment services provide the critical web identity, authentication and transaction infrastructure that online businesses need to conduct secure e-commerce and communications. VeriSign's services are available through its websites (www.verisign.com and www.netsol.com) or through its direct sales force and reseller partners around the world. VRSN is one of the few stocks which blew away the analysts' expectations for the first quarter, without having to offer any excuses about deteriorating economic conditions. While the Nasdaq and the software sector have been regaining strength, few stocks have exhibited as much momentum as VRSN during April and May. On April 26th, VRSN reported revenues of $213.4 million for the first quarter, up sharply from the $34 million reported in the year ago quarter. VRSN reported earnings of $48.6 million, which was nearly double the consensus forecast. As icing on the cake, the company announced that the Board of Directors had authorized a share repurchase program for up to $350 million worth of common stock. The stock easily surged past its 50-dma of $42.67 after reporting, and has subsequently positioned itself firmly above the 10-dma of $53.50 and 5-dma of $57.29. Further strength in the software sector (GSO.X), and the Nasdaq could propel VRSN above the $60 level, which has been acting as resistance. In fact, a bullish wedge has been developing since VRSN's earnings report with three higher lows and two failed attempts to clear $60. Aggressive traders could take positions at a pullback to support at $57, if others in the sector like MSFT and VRTS are strong. Alternatively, wait for a strong break above $60 with heavy volume before entering. As always, monitor the sector (GSO.X) for strength. We are setting closing stops at $54, so be prepared to exit if VRSN closes below this level. ***May contracts expire in less than two weeks*** BUY CALL MAY-55*QVR-EK OI=2292 at $5.90 SL=4.00 BUY CALL MAY-60 QVR-EL OI=1330 at $3.30 SL=1.75 BUY CALL JUN-55 QVR-FK OI= 450 at $8.50 SL=6.00 BUY CALL JUN-60 QVR-FL OI= 882 at $6.10 SL=4.00 http://www.premierinvestor.com/oi/profile.asp?ticker=VRSN ************* NEW PUT PLAYS ************* AGGRESSIVE: ENE - Enron Corp $56.11 -1.93 (-3.37 this week) Enron is a global energy and communications company. It engages in all facets of the electricity, natural gas, and communications businesses throughout the world. The Company is also developing an intelligent network platform to facilitate online business, to provide bandwidth management services and deliver high bandwidth applications. May Day ushered in a big sell-off of the heavy weight energy companies. Enron (ENE), Chevron (CHV) and Exxon Mobil (XOM) all saw a significant cut in their respective share prices early last week. The major difference between ENE and its competitors is simple - ENE failed to recover! Not only did ENE trade sideways while CHV and XOM returned to the higher levels, but this week, ENE fell off another ledge. A clean slide through the buoying support at $57.50 gave notice that additional losses may be forthcoming. This technical transgression from grace and the stock's divergence from its sector mates opened the door for a put play. Traders might find downside entries as ENE cracks the $55 base and picks up momentum. Another potential entry might be found on a high-volume rollover from the upper $58 to $59 resistance, near the converge 5, 10 & 30 DMA lines. This approach is more risky, but can be very profitable; especially if you lock in gains quickly. We're keeping a protective stop in place at $59 and will drop coverage if ENE resurfaces above this level on a CLOSE. On the global front, there's trouble in western India. Energy giant, Enron, said last Tuesday that it has no plans to sell its stake in the financially distraught Dabhol plant, but would meet with members of the government panel to re-negotiate the $2.9 bln power project. ***May contracts expire in less than two weeks*** BUY PUT MAY-60 ENE-QL OI=2633 at $4.30 SL=2.75 BUY PUT MAY-55*ENE-QK OI=2687 at $1.20 SL=0.50 BUY PUT JUN-60 ENE-RL OI=2652 at $5.20 SL=3.25 BUY PUT JUN-55 ENE-RK OI=2012 at $2.35 SL=1.00 http://www.premierinvestor.com/oi/profile.asp?ticker=ENE MMM - Minnesota Mining & Mfg. $116.36 -1.54 (-0.60 this week) Minnesota Mining & Manufacturing is engaged in the research, manufacturing and marketing of products related to its technology in coating and bonding for coated abrasives. Characterized by substantial inter-company cooperation, 3M's business has developed upon the research and technology of its original product, coating and bonding. This process consists of applying one material to another, such as abrasive granules to paper or cloth (coated abrasives), adhesives to a backing (pressure-sensitive tapes), ceramic coating to granular mineral (roofing granules), glass beads to plastic backing (reflective sheeting) and low-tack adhesives to paper. In line with the broader markets, the month of April was a bullish one for 3M, as stock got a boost from an easing Fed, along with the prospect that better economic times were just around the corner. In light of this, the stock gained 20 percent last month. Connecting the highs and lows during that time reveals an upward-trending regression channel. Having failed to take out formidable resistance at the $120-122 area, it appears now that 3M may be ready to pull back. The company recently reported first quarter earnings, posting a 7 percent decline in net income and announcing a restructuring plan in which 5000 jobs would be cut over the course of the next 12 months. During the conference call, the CEO stated, "There are no clear signs that the situation is improving anytime soon." Rising energy costs, unfavorable foreign-exchange rates and difficult economic conditions were cited as causes of the decline. With that in mind, these fundamental factors are not only persisting, but arguably, are continuing to deteriorate. This has caused shares of 3M to break below its up-trend line and settle into a consolidation pattern. Now sitting just above support at $115, a break below this level on volume could allow conservative traders to jump in. Just make sure to confirm downward movement with weakness in the NYSE. Aggressive players may target failed rallies as the stock approaches moving average resistance from the 5 and 10-dma, at $117.71 and $117.89 respectively. Horizontal resistance may also be found at $117, $118 and our closing stop price of $119. ***May contracts expire in less than two weeks*** BUY PUT MAY-120*MMM-QD OI= 851 at $5.10 SL=3.00 BUY PUT MAY-115 MMM-QC OI=2021 at $2.25 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=MMM ********************* PLAY OF THE DAY - PUT ********************* AMAT - Applied Materials $52.60 +1.86 (-1.07 this 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. Most Recent Write-Up Did you notice the Semiconductors today? Those pesky bulls actually tried to mount a rally, pushing the Philly Chip index (SOX.X) up to 640 resistance. The real test will come in the next couple days though as the bulls try to push back over the 650 level. As long as the bears are able to prevent this occurrence, AMAT should continue to find more sellers than buyers. Despite a tight range-bound day for the major indices again, AMAT managed to stage a pretty impressive rally, gaining nearly $2 on the day. Of course the volume was less than stellar, coming in at only 60% of the ADV, indicating it shouldn't be long until the selling resumes. Resistance (and our stop) are looming just overhead at $53 and aggressive traders will want to consider new positions on any weakness near current levels as the bears are likely to make another run at the $50 support level. If they can push prices lower than that, conservative traders will want to consider new positions as the $50 level appears to be firm support. This will open the door for a test of lower support levels, first at $48 and $46, followed by $44 and then $42. As always, keep an eye on the SOX.X, because weakness here will be a good indication of what to expect from AMAT. Don't forget that AMAT will announce its earnings on May 15th after the close. Comments Following Cisco's boring, apathetic conference call and National Semi's warning, shares of Applied Materials may be poised to test support at $50, again. While AMAT fell in the after hours session, it is likely to have room to fall near the opening bell Tuesday, assuming the market sells off in the wake of the two aforementioned news events. Of course, a break below $50 - the highly visible support level - will allow for new entries into the play. Monitor the action in the SOX, and look for the semi index to work its way down to the 600 level. ***May contracts expire in less than two weeks*** BUY PUT MAY-55*ANQ-QK OI=7018 at $4.50 SL=2.75 BUY PUT MAY-50 ANQ-QJ OI=6711 at $2.10 SL=1.00 BUY PUT JUN-50 ANQ-RJ OI=1848 at $4.10 SL=2.50 BUY PUT JUN-45 ANQ-RI OI=1140 at $2.40 SL=1.25 http://www.premierinvestor.com/oi/profile.asp?ticker=AMAT ************************ COMBOS/SPREADS/STRADDLES ************************ Cisco Steals The Show! Stocks ended mixed today as technology shares moved higher on strength in the Networking sector while industrial issues faded on weakness in financial issues. Monday, May 7 The stock market traded in a range today, with the major indices ending relatively unchanged in anticipation of new economic data due out of later in the week. The NASDAQ finished down 17 points at 2,173 while the Dow was down 16 points at 10,935. The S&P 500 index ended 3 points lower at 1,263. Trading volume on the NYSE was a light 930 million shares with declines beating advances 16 to 14. On the NASDAQ, activity was light with 1.7 billion shares exchanged and losers outpacing winners 10 to 9. In the U.S. bond market, the 30-year Treasury fell 1/32, pushing its yield to 5.67%. Sunday's new plays (positions/opening prices/strategy): Watson Pha. (NYSE:WPI) MAY50P/45P $2.20 debit bear-put Watson Pha. (NYSE:WPI) JUN45P/45P $1.00 debit calendar Dynegy (NYSE:DYN) MAY65C/60C $0.50 credit bear-call West. Wire (NASDAQ:WWCA) MAY50C/35P $0.95 credit strangle Watchguard (NASDAQ:WGRD) JUN10C/J7P $0.10 credit synthetic The surprise of the day came as drug maker Watson Pharmaceuticals announced its earnings before the open, saying that first quarter operating revenue rose more than 15% on profits from acquisitions and strong sales at its branded divisions, particularly in women's health product lines. The company posted earnings of $43 million, or $0.40 per share, compared with $37 million, or $0.37 per share in the 2000 first quarter, meeting consensus analysts' estimates of $0.40 for the quarter. Since the news came out before the open, there was no opportunity for speculation on the announcement and the premium disparities in the near-term (ATM) options were also much lower. We did not participate in the bearish debit spread, but decided to play the probabilities in the calendar spread with the slightly higher initial debit of $1.00. If the issue remains in a relatively small range over the next week, the play will profit. If the issue rallies back through the resistance area near $50, we may consider rolling into a bullish, put-credit spread to offset any losses. Dynegy, Western Wireless and Watchguard all provided acceptable opening credits in their respective plays. Portfolio Plays: Stocks took a breather in Monday's session as caution ahead of some upcoming economic reports kept analysts on guard and traders on the sidelines. Investors were also concerned about Cisco's (NASDAQ:CSCO) quarterly earnings, due on Tuesday after the market close. CSCO shares slumped even though Lehman Brothers raised its target on the stock to $24. Among other NASDAQ sectors, Internet and networking stocks slid lower and computer hardware shares also retreated amid light volume. Telecom stocks were down in sympathy with 3Com (COMS), which plummeted to $6.50 after saying it would reduce its work force by almost one-third as part of an effort to save $1 billion annually. Select software stocks enjoyed buying pressure after UBS Warburg reiterated its "strong buy" rating on Microsoft (NASDAQ:MSFT), saying the company may be in the process of making a major change to its software licensing policies. On the Dow, J.P. Morgan Chase (NYSE:JPM) slid to $50 after Prudential Securities cut its estimates and lowered its rating on the stock to a rare "sell" recommendation. Prudential said the consensus estimates are too high and that it expects problems with loans to increase in the slowing economy. Leading the blue-chip average on the upside were AT&T (NYSE:T), SBC Communications (NYSE:SBC), Eastman Kodak (NYSE:EK) and Caterpillar (NYSE:CAT). The broader market saw renewed selling in retailers and financials while drug and oil stocks achieved small gains. Looking forward, CS First Boston analyst Tom Galvin commented in a research note, "While this market will never move in a straight line, we are convinced more than ever that the first quarter represented the trough in the economy, profit outlook and stock prices." That's one of the few statements we can all be optimistic about! Despite the lackluster trading activity, the Spreads Portfolio enjoyed a number of favorable moves in today's session. The big surprise was Icos (NASDAQ:ICOS), which rallied to $61 on strength in the drug manufacturing group. The bullish movement provided a $6.25 closing credit in our recent debit straddle; a potential gain of 45% in less than one week. Scios (NASDAQ:SCIO) was another popular issue in that segment and traders who played Friday's dip were rewarded with a favorable "early-exit" profit in the synthetic position. Biochem Pharma (NASDAQ:BCHE) was not as lucky, falling $0.81 to $32.90, and our bearish "call-credit" spread at $35 appears safe for now. Minnesota Mining (NYSE:MMM) was another stock that moved lower (in our favor) and there is little chance it will reach the sold call option at $125 in two weeks. On the downside, Unitedhealth (NYSE:UNH) continued to slump amid weakness in the Healthcare sector and traders in the bullish synthetic position should plan to roll forward and down in the sold Put or expect the possibility of owning the issue. Among other industrial segments, Progressive (NYSE:PGR) was one of the stronger issues, climbing back to a recent high near $118 and our bullish spread at $100 should expire at maximum profit. In the technology group, Cirrus (NASDAQ:CRUS) continued to rally, rising to $24 at midday and the move provided a profitable exit for traders who chose to close the (long) SEP-$30 Call instead of remaining in the speculative time-selling play. Sprint (NYSE:FON) was also an unexpected winner, climbing above $23 on speculation of a possible merger with British entrepreneur Richard Branson's Virgin Mobile. Sources say that Virgin executives are close to signing a deal with Sprint, the #3 U.S. long-distance telephone company, as part of a $1 billion assault on the American telecom market. Our long-term calendar spread in FON has already offered some excellent opportunities and the surprise rally improved the overall position. Tuesday, May 8 Stocks ended mixed today as technology shares moved higher on strength in the Networking sector while industrial issues faded on weakness in financial issues. The NASDAQ closed up 25 points at 2,198 but the Dow was down 51 points at 10,883. The S&P 500 index was relatively unchanged at 1,261. Trading volume on the NYSE was a light 993 million shares with advances beating declines 16 to 14. Activity on the NASDAQ was also thin as volume reached just 1.87 billion shares. Technology winners outpaced losers 21 to 17. In the bond market, the 30-year Treasury fell 24/32, pushing its yield up to 5.72%. Portfolio Plays: Industrial issues retreated again today, pressured for a second consecutive session by financial stocks. Shares of brokerage and banking companies were among the Dow's worst performers after Morgan Stanley Dean Witter lowered its rating on American Express (NYSE:AXP), based on an unfavorable outlook for earnings and its current valuation. Morgan Stanley told clients, "fundamentals in the credit card industry fundamentals continue to deteriorate" and the pessimism quickly spread to other financial issues. J.P. Morgan Chase (NYSE:JPM), which was downgraded on Monday, and Citigroup (NYSE:C) also weighed on the blue-chip average. Among the few bullish components were International Business Machines (NYSE:IBM), Eastman Kodak (NYSE:EK), Caterpillar (NYSE:CAT), and Home Depot (NYSE:HD). The NASDAQ edged higher as investors were cautious ahead of the earnings report from technology bellwether Cisco Systems (NASDAQ:CSCO). An analyst upgrade of Cisco boosted the networking group and buyers also emerged in the semiconductor and Internet sectors. Hardware issues generally retreated with Dell Computer (NASDAQ:DELL) leading the way lower after Monday's announcement that the company will slash 3,000 to 4,000 jobs over the next couple of quarters. On the bright side, Dell also said it will meet first-quarter earnings expectations, due in mid-May. In the broader market, chemical, gold, oil and insurance issues escaped the selling pressure while utility, financial, retail and drug shares consolidated. There was very little excitement in the market today but some of our technology positions improved with the momentum surrounding Cisco (NASDAQ:CSCO), ahead of the company's quarterly earnings report. CSCO moved up $1.12 to $20.37 and our calendar spread at $20 is near the area of maximum profit. Traders who believe CSCO will rally after today's quarterly announcement had a great opportunity to roll up and forward to the JUN-$22.50 option at almost no cost. That would leave the new spread; OCT20C/JUN22C with no upside risk at a basis of $2.50. The more conservative alternative was a transition to the (short) JUN-$20 Call, with a credit of almost $1.00, which would leave the original spread bias intact at a reduced basis of $1.50. Another new position in that category, Network Appliance (NASDAQ:NTAP) also climbed during the session, closing near $27 amid bullish optimism in the networking sector. Our Covered-calls on LEAPS position achieves maximum profit at $30. In the semiconductor group, PMC Sierra (NASDAQ:PMCS) was a big mover, up almost $5 to $44 on comments by a Morgan Stanley Dean Witter analyst, who said that business for networking chip-makers is stabilizing. In the biotechnology segment, Human Genome Sciences (NASDAQ:HGSI) rallied $3.40 to a recent high near $63 as traders returned to the group and Cirrus (NASDAQ:CRUS) continued its recent climb with a move to $24 on strength in companies that produce chips for consumer audio and entertainment systems. Among industrial shares, Progressive (NYSE:PGR) was popular again today and in the small-cap section, Checkpoint Systems (NYSE:CKP) jumped another $0.62 to $12.75. Traders holding the MAY-$10 Calls from our bullish synthetic position can close the play for an excellent profit. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - One of our readers requested some low-cost speculation positions on small-cap technology issues, based on the possibility for a significant recovery in the coming months. Here are some unique candidates with favorable technical histories or trends. All of these plays offer excellent risk/reward potential but they should be evaluated for portfolio suitability and reviewed with regard to current market sentiment and upcoming news or events. ****************************************************************** ADCT - ADC Telecommunications $8.84 *** Earnings Rally? *** ADC Telecommunications (NASDAQ:ADCT) is a global supplier of optical and copper-connectivity systems, broadband access and network equipment, software and integration services designed to improve the speed and performance of broadband, multiservice communications networks. The company offers its products and services through three business groups: Broadband Connectivity; Broadband Access and Transport; and Integrated Solutions. ADCT rallied today along with other stocks in the industry as investors looked to the Telecom Equipment group for issues with future upside potential. The company also announced a major breakthrough in loop electronic solutions; the PG-FlexPlus Field Shelf, a broadband micro-digital loop carrier (DLC) that enables carriers to add incremental voice and data capacity on existing copper plant infrastructure. The PG-FlexPlus Field Shelf, with its environmental hardening, is ideal for carriers looking to satisfy the demand for additional services in areas of copper exhaust without incurring the major time and capital expense of new copper deployment in the distribution plant. This product will allow broadband service suppliers to easily and effectively increase the capacity of their networks and investors applauded the announcement. In addition, ADCT is due to report quarterly earnings later in May and the results will likely determine the outlook for the company's share value in the near future. Strategy Description - Synthetic Positions Here's a good way to capitalize on an anticipated stock movement without investing as much cash as you would when buying the issue outright in the open market. If you buy stock you are considered "long" in the stock, as you own it, and you participate in all the upward movement of the stock. In this case, you buy an (OTM) Call to take advantage of this possible upward movement, and you sell an (OTM) Put to pay for the Call. Selling an OTM Put gives you some additional downside risk but you must be willing to own the stock in the event of a sudden downturn. Of course, you will have a small downside margin under the current stock price; it can stay the same or even drop some and you will not lose money. But, be careful of using other stocks as margin collateral (the whole market can decline at once) and don't be greedy in taking profits if the position moves favorably in the first few weeks after it is initiated. Also, be sure to understand the various outcomes and potential risk, so you can comfortably use this type of strategy. Overview of benefits: 1. The results are similar to being long on the stock. 2. You can use portfolio collateral to finance the short Put. 3. There is a potential for unlimited gain. PLAY (conservative - bullish/synthetic position): BUY CALL AUG-10.00 TLQ-HB OI=3659 A=$1.25 SELL PUT AUG-7.50 TLQ-TU OI=2765 B=$0.90 INITIAL NET DEBIT TARGET=$0.00-$0.10 TARGET PROFIT=0.85-$1.10 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $320 per contract. http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=ADCT ****************************************************************** MCOM - Metricom $5.40 *** Disparity Play! *** Metricom (NASDAQ:MCOM) is a provider of mobile wireless data access to corporate networks and the Internet. Metricom began offering its commercial service, marketed under the Ricochet brand name, in 1995. Ricochet service is now available in San Francisco, in the Seattle and Washington D.C. metropolitan areas; parts of Los Angeles and New York; and in certain airports and corporate and university campuses. Metricom has focused its efforts on designing and developing its new high-speed service has designed its new service to meet the needs of the growing number of business professionals who require access to their corporate networks and the Internet while away from the office. Metricom's service also will appeal to consumers who desire high-speed mobile access to the Internet. Metricom recently introduced a new wireless service that offers high-speed connections to the Internet and corporate intranets, enabling streaming media and allowing access to critical files and applications. Their Ricochet wireless system connects at 128 kbps via a telephone number without the need for a landline, giving users office-like connections from remote locations and the claims the new feature will give corporate professionals an important competitive edge. Indeed, the product is attractive and since being introduced last year, the mobile access system has added roughly 41,000 subscribers and the company has also engaged some new partners including WorldCom and EarthLink. The relative value of Puts versus Calls is in our favor and traders who believe MCOM shares can return to their once lofty valuation may use this position to profit from that outcome. PLAY (speculative - bullish/synthetic position): BUY CALL JUL-5 MQM-GA OI=2401 A=$1.60 SELL PUT JUL-5 MQM-SA OI=2296 B=$1.70 INITIAL NET CREDIT TARGET=$0.20-$0.30 TARGET PROFIT=$0.75-$0.95 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $330 per contract. http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=MCOM ****************************************************************** STLW - Stratos Lightwave $10.96 *** Low-Risk Speculation! *** Stratos Lightwave (NASDAQ:STLW) develops, manufactures and sells optical subsystems and components for high data rate networking, data storage and telecommunication applications. The company's optical subsystems are designed for use in local area networks, storage area networks, metropolitan area networks, and wide area networks and central office networking in telecom markets. The company's optical subsystems are compatible with the transmission protocols used in these networks, including Gigabit Ethernet, Fast Ethernet, Fibre Channel and asynchronous transfer mode. The company also designs, manufactures and sells a range of optical components and cable assemblies for use in these networks. Telecommunications network equipment maker Stratos Lightwave has struggled in recent months due to a slowdown in equipment orders from industry giants such as Nortel Networks, Cisco Systems and Alcatel. The company says it now expects 2001 product sales to be in a range of $125 million to $130 million, an increase of about 75% to 80% from last year. Investors have come to terms with the reduced outlook and although the slowdown is expected to continue for at least a few more quarters, industry analysts say there are signs that spending in telecommunications equipment has almost reached the bottom. Based on the recent technical activity in STLW shares, there is little downside potential from this point and traders who want to speculate on the future performance of the company should consider this position. Target a lower cost basis initially, to allow for any consolidation after Cisco's after-hours earnings announcement. PLAY (conservative - bullish/collar): BUY STOCK STLW ASK=$11.00 SELL CALL JUN-12.50 SZQ-FV OI=470 B=$1.20 BUY PUT JUN-10.00 SZQ-RB OI=149 A=$1.20 INITIAL NET DEBIT TARGET=$10.80-$10.90 PROFIT(max)=14% A collar is an option strategy in which stock is purchased, an out-of-the-money call is sold, and an out-of-the-money put is purchased. The strategy is called a "collar" since both the potential risk and reward are limited. This type of position can be initiated with varying degrees of risk versus reward, depending on which strikes are bought and sold. http://www.OptionInvestor.com/charts/may01/charts.asp?symbol=STLW ****************************************************************** ********** 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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