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Daily Newsletter, Monday, 05/14/2001

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The Option Investor Newsletter                   Monday 05-14-2001
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******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
        05-14-2001        High      Low     Volume Advance/Decline
DJIA    10877.30 + 56.00 10878.80 10800.10 0.85 bln   1634/1421 
NASDAQ   2081.92 - 25.51  2105.38  2052.41 1.34 bln   1595/2208
S&P 100   647.47 +  2.04   648.17   642.98   totals   3229/3629
S&P 500  1248.92 +  3.25  1249.68  1241.02           47.1%/52.9%
RUS 2000  486.64 -  0.72   487.19   484.40
DJ TRANS 2874.59 -  4.97  2883.79  2863.83
VIX        27.17 -  0.31    28.04    27.13
Put/Call Ratio      0.63
******************************************************************

The Great Rate Debate

The major market averages were on hold Monday ahead of the Fed's
official announcement on interest rates Tuesday afternoon.  The
tepid volume epitomized the lack of commitment on the part of
traders.  Only 851 million shares traded on the NYSE while a
mere 1.3 billion exchanged on the Nasdaq.

For its part, the Nasdaq Composite (COMPX) drifted lower from
the opening bell, ultimately bouncing from the 2061 level.  A
small, sharp short covering rally near the close of trading
boosted the COMPX from its day lows, but could not overcome the
majority of earlier losses.




The COMPX was led lower by weakness in the Philadelphia
Semiconductor Index (SOX.X).  The selling pressure in chip-
related issues stemmed from bearish comments from Thomas
Weisel Partners' Eric Ross, who lowered estimates on Intel
(NASDAQ:INTC).  Ross noted that Intel's shipments of its new
Pentium 4 chips were coming in lower than previously
anticipated.  In addition, Ross said that Advanced Micro
Devices (NYSE:AMD) is gaining market share from Intel and
is likely to engage in a price war, which will further
pressure Intel's margins.

Shares of Intel pressured the SOX early this morning, and
weakness in others such as Applied Materials (NASDAQ:AMAT),
Xilinx (NASDAQ:XLNX) and KLA - Tencor (NASDAQ:KLAC) combined
to push the chip index below the 600 level intraday.  Although
the SOX bounced from its 50-dma at 593 Monday afternoon,
we'll be monitoring it closely following the Fed's announcement
for insight into the direction of the broader tech sector.




Despite the lingering weakness in the tech sector, the Dow
Jones Industrial Average (INDU) managed to put together a
decent day late Monday.  Powering the INDU higher were shares
of Alcoa (NYSE:AA), Boeing (NYSE:BA), Citigroup (NYSE:C),
DuPont (NYSE:DD), ExxonMobil (NYSE:XOM), General Electric
(NYSE:GE) and J.P. Morgan Chase (NYSE:JPM).  These types of
stocks (cyclical and financial) continue to trade well in the
current market environment, which is why two cyclical
plays are currently on the OI call list: Boeing and Caterpillar
(NYSE:CAT).

The late-day advance in the INDU was likely a result of market
participants placing small, but sure bets ahead of the FOMC's
announcement Tuesday.  Technically, the INDU bounced off the
10,800 level Monday afternoon, and that will be the support
level to monitor in the very short-term.  As for resistance,
the INDU faces congestion just above at 10,900 and, of course,
thereafter at the 11,000 level.  We may soon get the answer to
the question of whether another 50 basis points is enough to
power the INDU above 11,000?



The consensus among economists and the market is for the
Fed to cut interest rates by another 50 basis points to 4.00
percent.  Along with the actual decision on rates, the market
will be listening closely to the guidance given by the FOMC
concerning its future policy on interest rates.  Obviously the
market wants to hear that the Fed will keep cutting rates, but
many expect Greenspan & Co. to ease off the accelerator following
its meeting Tuesday.  What the market will be listening for is
whether the Fed is done cutting in this cycle of benign
monetary policy, or if the Fed will continue to cut, but at a
slower rate (Read: 25 basis points).  The most aggressive of
economists expect the Fed to take its key lending rates down
to 3.5 percent during this cycle, which would be accomplished
with two more 25 basis point cuts, thus appeasing the market.

In short, the guidance given by the Fed Tuesday afternoon may
be more critical than the official announcement on rates,
assuming they cut by 50 basis points.  If the Fed ONLY cuts by
25 basis points, I - along with the majority of traders -
think the market, especially the COMPX, will sell-off and it
might be prudent to hit some bids in four-letter names.

In addition, if the Fed cuts by 50 bps, but states that it is
going to quit cutting, again the COMPX will sell-off as the
market comes to the realization that the Fed is no longer on
"The Team."  If the Fed states that it's done cutting, the
COMPX will be left to its own devices and will have to work
higher on its own merits (Read: Fundamentals).

What we need to hear from the Fed is that it remains vigilant
in its quest to stimulate economic growth through monetary
policy - that's what the market wants!  I think it would be
a mistake for the Fed to stop cutting rates at this point in
the cycle because banks are still too tight with credit, and
the economy needs a loose lending policy in light of the
current environment.  If the Fed does deliver the 50 basis
point cut and guides towards continued easings, I think the
most interest rate sensitive names will work higher over the
short-term.  And those are the Caterpillars, Boeings, Citigroups
and J.P. Morgans of the market.

In addition to the Fed's announcement Tuesday, there are
several high-profile earnings numbers coming from the tech
sector this week.  Following the Fed Tuesday, Applied
Materials will announce its fiscal second-quarter results.
Amat's estimates have been in a severe downtrend for over
three months, with the current consensus calling for the
capital equipment giant to earn 33 cents per share.  It's
pertinent to note that shares of Amat were upgraded last week,
so we'll find out Tuesday evening if that upgrade was warranted.
We'll also be listening closely to the guidance given by Amat.
As I've written in the past, the semiconductor business was
the first turn down last year and is very likely to be the
first to turn higher once business conditions improve.  That
said, the guidance given by Amat Tuesday evening will be
crucial in determining the direction of the SOX over the
short-term along with the COMPX.  We'll be on the conference
call and would like to hear the magic word that was whispered
by Chambers last week: Bottom.

Thursday will bring two more BIG earnings reports.  Dell
Computer (NASDAQ:DELL) will report its fiscal first quarter
number, with consensus estimates calling for 16 cents per
share.  The PC sector was also an early casualty of the bear
market, so again with Dell, we'll be listening for an up-tick
in business.  But, there appears to be a price war in the
making between the PC makers, so the Dell number may be
somewhat muted by that fact.  Nevertheless, Dell still
accounts for roughly 2 percent of the Nasdaq-100 (NDX.X),
and for that reason its number is very pertinent.

Our trifecta of big tech reports this week is rounded out
by CIENA (NASDAQ:CIEN).  The optical equipment maker has
bested estimates during its last several quarters, which
makes this report interesting due to the continued signs
of slowdown in the telecom space.  CIENA is set to report
earnings after the close Thursday, with consensus estimates
calling for 16 cents per share.

Lest we forget that it's expiration week for May options
contracts.  With the slew of tech earnings due this week
in addition to the Fed announcement Tuesday, there's sure
to be an increase in volatility this week.  And the increase
in volatility in conjunction with cheap May contracts will
provide the recipe for big money-making moves this week.
I hope ALL of my readers get in on some of those moves!

Eric Utley
Assistant Editor


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*************
NEW CALL PLAY
*************

JNY - Jones Apparel Group, Inc. $45.59 +0.59 (+0.59 this week)

Jones Apparel Group, Inc. (www.jny.com) is a leading designer and
marketer of branded apparel, footwear and accessories. The
Company's nationally recognized brands include: Jones New York;
Lauren by Ralph Lauren, Ralph by Ralph Lauren, and Polo Jeans
Company, which are licensed from Polo Ralph Lauren Corporation;
Evan-Picone, Rena Rowan, Todd Oldham, Nine West, Easy Spirit,
Enzo Angiolini, Bandolino, Napier and Judith Jack. The Company
markets costume jewelry under the Tommy Hilfiger brand licensed
from Tommy Hilfiger Corporation, and the Givenchy brand licensed
from Givenchy Corporation. Celebrating more than 30 years of
service, the Company has built a reputation for excellence in
product quality and value, and in operational execution.

Of all the major sectors in the market, the retail has been
demonstrating one of the highest levels of technical strength
over the last week.  When viewed on a weekly chart, it is
apparent that RLX.X broke out of its long term downward trend
which began in April of 2000.  In addition, RLX.X made a strong
move above its 10-dma of 898.61 last Thursday, after a retail
sales report came in stronger than expected.  In today's listless
trading, RLX.X held onto the gains of last week, and shares of
JNY managed to add over half a point.  While JNY has a strong
long term chart pattern, and has stayed above its 200-dma for
over six months, investors really seemed to sit up and take
notice after its most recent earnings report.  On May 2nd, JNY
announced record revenues of $1.07 billion and record earnings
of $96 million, which is a 35% increase from the year ago
quarter.  Considering the fact that most companies reported
weak earnings due to deteriorating economic conditions last
quarter, JNY appears to be well positioned to move further
upwards in the momentum which has developed over the last few
weeks.  JNY dipped to support at the $42 level last week before
the retail sales report was released, and subsequently made a
pattern of higher lows at $43.50 and $44.50, before reaching
a new 52-week high and all time high at $45 last Friday.
Tuesday's trading will likely be highly volatile for all sectors,
and traders might want to wait until a trend is established after
the Fed's decision is announced.  A pullback to support at $45
could be a possible entry point if RLX.X is rallying.  Since
$45.59 is a new all time high, there is no overhead stock,
which means JNY will be establishing new resistance levels in
uncharted territory.  Monitor others in the sector like AEOS
and TGT, as well as RLX.X, and set closing stops at $38.

BUY CALL JUN-40 JNY-FH OI= 361 at $6.30 SL=4.50
BUY CALL JUN-45*JNY-FI OI= 582 at $2.70 SL=1.25
BUY CALL AUG-40 JNY-HH OI= 621 at $7.20 SL=5.00
BUY CALL AUG-45 JNY-HI OI=1398 at $4.50 SL=2.75

http://www.premierinvestor.com/oi/profile.asp?ticker=JNY


************
NEW PUT PLAY
************

MERQ - Mercury Interactive $61.05 -0.27 (-0.27 this week)

As a provider of integrated performance management solutions
that enable businesses to test and monitor their Internet
applications, MERQ is looking for growing e-commerce demand to
continue to fuel its business.  The company's products perform
such tasks as analyzing and eliminating Web site performance
bottlenecks and automating quality assurance testing.  MERQ's
client base spans a wide range of industries including
Internet companies such as Amazon.com and America Online,
infrastructure companies Ariba and Oracle, as well as Apple
Computer, Cisco Systems and Ford Motor Company.

Proof that investors aren't giving as much attention to analyst
upgrades, MERQ continued its retreat from its recent high this
morning.  On Friday, UBS Warburg initiated coverage with a Buy
rating, but the sellers remained in control pushing the stock as
low as $58.20 (right at the 38% retracement of the recent rally)
before buyers stepped in late in the day to boost the stock to
the near-unchanged level by the close.  Following the April
rally in Internet and Software stocks, these groups have been
falling back recently.  The big question is whether it is just
profit taking or if the rally was truly overdone.  The outcome
of tomorrow's FOMC meeting will likely solidify the near term
direction, and conservative traders may want to wait for the
market's reception of the Fed's interest rate policy statement
before taking a position.  As is to be expected ahead of such a
major event, volume has been falling off over the past few
sessions with barely half the daily average number of shares
trading hands today.  The late-day bounce today solidified the
$57.50 support level, and a drop through this level will provide
attractive entry points for conservative traders, as it will
open the door for a continuation of the decline and a possible
filling of the April 18th opening gap between $52.50 and $55.
Over the past 2 weeks, MERQ has established a descending
trendline, which currently rests at $65 where we are initially
placing our stop.  More aggressive traders can target a failed
rally near this level for new positions.  Keep an eye on volume;
when it picks up, it will give more emphasis to the resulting
price move.

BUY PUT JUN-65 RQB-RM OI=127 at $9.40 SL=6.50
BUY PUT JUN-60*RQB-RL OI=638 at $6.70 SL=4.75
BUY PUT JUN-55 RQB-RK OI=357 at $4.40 SL=2.75

http://www.premierinvestor.com/oi/profile.asp?ticker=MERQ


*****************
STOP-LOSS UPDATES
*****************

BRCM - put  play
Adjust from $40 down to $38

EMLX - put  play
Adjust from $43 down to $39

HGSI - put  play
Adjust from $61 down to $60

JNPR - put  play
Adjust from $56 down to $55

NVLS - put  play
Adjust from $51 down to $50

RIMM - put  play
Adjust from $32 down to $29


*************
DROPPED CALLS
*************

YHOO $17.10 -0.69 (-0.69) While the markets waited in apparent
suspended animation for the decision from the Federal Reserve
Tuesday, certain key sectors in the Nasdaq exhibited severe
weakness.  The semiconductor sector, SOX.X fell below a very
important support level of 600, and INX.X lost over six percent
for the day.  While day traders could have made quick daily
profits from YHOO over the last week, the stock has closed below
its 50-dma and our stop level of $17.50, and, as such, we are
dropping it tonight.


************
DROPPED PUTS
************

QLGC $41.50 -2.61 (-2.61) Shares of QLGC gapped slightly lower
Monday morning and steadily worked towards the $40 level as
the day wore on, ultimately trading as low as $40.10.  At this
point, we're dropping coverage ahead of the company's earnings
report Tuesday after the bell.  The stock may dip down below the
$40 level early Tuesday, but traders will want to be cognizant
of the Fed's announcement Tuesday afternoon and its impact on
shares of QLGC.

AMAT $49.69 -2.20 (-2.02) Patient investors were rewarded today
as the steady deterioration in Semiconductor stocks continued,
finally pushing AMAT below the critical $50 support level.
Volume was anemic again, but we watched the bears maintain the
upper hand for most of the day, briefly pushing the price below
$49 before a small, final hour rally.  Technically, AMAT looks
like it is about to break down out of its descending wedge, but
with earnings set to be released tomorrow after the close, its
time for us to leave this party.  Playing the range provided by
the bearish wedge has give nimble traders many opportunities
over the past two weeks, and we are pleased to close the play
on a positive note.


**************
TRADERS CORNER
**************

Ponzi Schemes
By Molly Evans

Lately my articles have been based upon historical themes.  Having
scanned the web to read the news of the market this past weekend,
it looks like I'm going to have to indulge your patience again
this week with a bit of historical perspective.

Reed Slatkin, one of the co-founders of EarthLink, (Nasdaq: ELNK)
one of the nation's largest Internet service providers is facing
claims of $600 million or more for investment fraud.  The
allegations are being brought by the heavy hammer of the
Securities Exchange Commission (SEC), which is charging that
Slatkin mishandled at least $230 million belonging to about 500
clients between 1985 and April 2001.  Slatkin told the clients
that he would trade securities on their behalf when he instead
used the money "for improper purposes" such as paying the fees
at two country clubs, credit card bill and pool maintenance
bills.

Dirty deeds escalated this year as Slatkin used at least
$7 million of new investor money to pay returns to existing
investors which included venture capitalists, socialites,
Hollywood producers and EarthLink's two top executives.
Slatkin, an ordained minister in the Church of Scientology,
resigned last month from EarthLink's board of directors and owes
the IRS $6 million.  He is reportedly worth $21 million in
ELNK shares but has filed for Chapter 11 bankruptcy protection
and didn't show up last week for a creditor's meeting.

While this story is just another headline and but a passing
thought to most of us far removed from Hollywood and big money
like that, the interesting thing to note is that Slatkin is
being charged with a Ponzi scheme.  The history pages of the
financial world is replete with stories of swindlers and white
collar crimes perpetuated on an unsuspecting though arguably
greedy public.  The particular crime illuminated here is the
embodiment of the concept "robbing Peter to pay Paul."

The term "Ponzi Scheme" was coined after one Carlos Ponzi, an
ex-vegetable merchant, forger and smuggler with little in his
pocket except for a scheme.  The time was September of 1919
in Boston.  The 42-year-old Ponzi set up his "Old Colony
Foreign Exchange Company" with a simple pitch: money invested
in the exchange would pay 50% interest in 90 days.

Ponzi claimed to have agents in Europe who could purchase
depreciated European currency, convert it into international
postal coupons and then it could be sent to the U.S. to
be redeemed at face value in U.S. money.  The Boston newspapers
caught wind of the story and soon Ponzi was not only famous
but also raking in $1 million a week.  Wherever Ponzi went,
throngs of admirers were there to sing his praises.  In all,
Ponzi roped over 40,000 investors into handing over close to
$15,000,000.  He had talked of opening a string of banks and
brokerage houses and had in fact, bought himself a controlling
interest in the Hanover Trust Company, crowning himself as
its president.

But, where things seem too good to be true, they usually are
and the Boston district attorney began to ask questions.
It was learned that less than $75,000 worth of reply coupons
were printed in most years, and in the year 1919 only $58,560
worth were issued.  Ponzi had taken in millions and had said he
had purchased coupons.  On July 26, 1920 The Boston Post printed
the story so Ponzi had to act fast to avoid a panic.  Indeed he
did manage to make good on all the claims during that run and
was able to convince a good many that they should stay invested,
that he was worth $12 million and their fears were unwarranted.

The Boston Post once again on August 2, 1920 laid claim that
Ponzi was insolvent.  Still, would be investors deluged him
at every turn with applications and checks enclosed to invest
in the great pyramid scheme.  Facing insurmountable evidence
of insolvency, Ponzi surrendered to Federal authorities on
August 12, 1920.  In the following days it was learned that
Ponzi had purchased very few coupons but had in fact, used
most of the money he took in to repay those who presented
their 90-day notes.  He was taking money into one hand and
paying it out with the other.

Ponzi schemes always collapse sooner or later as it takes
greater and greater amounts received to pay off those who
got there first.  Ponzi's company, in the end, had no
assets and liabilities of $5 million.  Ponzi went to
prison until 1934 and then emigrated to Brazil.  Blind and
suffering hemiparesis after a stroke, Ponzi died in a charity
ward of a Rio de Janeiro hospital in 1949 at the age of 67.
A legal agent claimed his body and used the $75 Ponzi had
saved from a government pension to give him a proper burial.

There had been other schemes before and since, but Ponzi's
was the one that gave it a name.  The South Sea Bubble was
an example.  President Ulysses Grant found himself an
unwitting part of a Ponzi scheme before it was even called
a Ponzi scheme in 1884.  And there are others.  In fact,
many say that our own social security system is one grand
Ponzi scheme.  Of course, that one is legal.  I think I'll
just stop right there.  There's a whole other can of worms
sliming around there!

Have a great evening my friends.

MKE





**********************
PLAY OF THE DAY - CALL
**********************

MO - Philip Morris Companies Inc. $50.91 -0.84 (-0.84 this 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.

Most Recent Write-Up

After reaching a new 52-week high of $53.88 on Monday, MO
spent most of the week consolidating between the converged
5-dma and 10-dma of $51.60, and resistance at $52.50, as the
markets await the Federal Reserve's verdict next Tuesday.
Considering the substantial gains MO has made in the last
several weeks, consolidation can be a healthy sign, and the
stock remains firmly positioned above its 50-dma of $48.28.
This week, Moody's and Standard and Poor's reaffirmed that MO's
credit rating will not be impacted by a Florida statute which
required the company to post a bond in an ongoing litigation.
In addition, MO's famous Oreo cookie (which fans claim is their
most addictive product) will have a new chocolate filled
variation launched in June, which is expected to be received
with much fanfare.  While MO consolidates, traders should be able
to carefully pick entry points for the rally which is likely
to occur in anticipation of the upcoming Kraft IPO.  On Friday,
MO announced that they had narrowed the price range of the
offering to $27 to $30 per share, and that an offering at the
high end of the price range could result in an $8.4 billion
IPO.  At this point, the offering is tentatively scheduled
for mid June, depending on market conditions.  A possible
strategy could be to take positions at the current price, if
the broad indexes exhibit a benign reaction to the Fed meeting.
Conservative traders might want to wait for a break and close
above $54 with heavy volume before jumping in.  Continue to
monitor others in the sector like LTR and RJR, and set closing
stops at $50.

Comments

Going into the Fed announcement Tuesday, we'd like to position
in a play that isn't as interest rate sensitive.  MO fits the
bill, and we may get a solid entry into the stock ahead of its
big Kraft IPO.  Look for dips down to the $50.75 area, which has
been attracting buyers recently.  A deeper pullback may bring
MO down to our stop at $50.50, which may prove to be another
solid entry.  Conversely, an advance above $51 would offer
traders entries on strength.

BUY CALL JUN-50*MO-FJ OI=26414 at $2.85 SL=1.50
BUY CALL JUN-55 MO-FK OI=17791 at $0.85 SL=0.25
BUY CALL SEP-50 MO-IJ OI= 9612 at $5.00 SL=3.00
BUY CALL JUN-55 MO-IK OI=12707 at $2.90 SL=1.50

http://www.premierinvestor.com/oi/profile.asp?ticker=MO





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