The Option Investor Newsletter Tuesday 05-15-2001 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/051501_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 05-15-2001 High Low Volume Advance/Decline DJIA 10873.00 - 4.300 10922.20 10816.20 1.05 bln 1909/1170 NASDAQ 2085.76 + 3.84 2125.32 2077.50 1.70 bln 2098/1751 S&P 100 646.26 - 1.21 650.40 643.80 totals 4007/2921 S&P 500 1249.44 + 0.52 1257.45 1245.36 57.8%/42.2% RUS 2000 489.63 + 2.99 490.30 486.49 DJ TRANS 2880.24 + 5.65 2880.24 2865.49 VIX 27.34 + 0.17 28.62 26.00 Put/Call Ratio 0.86 ****************************************************************** Greenspan Delivers The Federal Reserve lowered its target for the federal funds rate to 4 percent Tuesday afternoon. And hinted towards continued easings. In conjunction with its decision on rates, the Federal Open Market Committee (FOMC) released the following: "The Committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." From the preceding comment, we can derive that the Fed is still on our team. The Fed's decision Tuesday solidifies, in my mind, that they are doing everything they can to stimulate the economy and the stock market. I think Greenspan and his cohorts will cut by another 25 or 50 basis points in this cycle of benign monetary policy, taking the federal funds rate below 4.00 percent - 4.00 percent is the lowest the fed funds rate has been in seven years. I think it's also worth noting that with the exception of the Great Depression, the U.S. economy AND stock market have rallied EVERY time the Fed has cut rates five consecutive times - Tuesday's cut marks its fifth in this cycle. But, despite the Fed's delivery of a 50 basis point cut and expressing its willingness to continue to cut rates Tuesday, the major market averages didn't respond in bullish fashion. So, what gives? I think the market's reaction to the Fed's official announcement Tuesday is a microcosm for the intermediate-term. While I'm bullish over that time period, especially on cyclical and financial stocks, I think the trading is going to be slow, instead of the volatile moves we've grown accustomed to over the last several years - as traders, we'll need to grow patient! Of course, summer is nearing and this time of year has historically been slow. But, to emphasize my point, we simply need to examine the trading range of the Dow Jones Industrial Average (INDU) Tuesday. The Dow traded in a 100 point range, which is quite tight in light of the Fed's announcement. The Dow did briefly spike over the 10,900 near-term resistance level at the peak of the post-Fed buying spree, but pulled back during the final hour of trading. Going forward, I'll continue to monitor 10,900 as near-term resistance and just below, I'll be watching 10,800 as near-term support. On a quick side note, I received a lot of questions concerning my chart in the Market Wrap column Monday about the Dow pulling back to roughly 10,500 and completing its inverse head-and- shoulders. Although I don't foresee the Dow pulling back to 10,500 in the near-term, I've illustrated on the Daily chart below the implications of such a move. In short, I think a Dow around 10,500 is a gift at this point in the cycle and would provide traders and investors an excellent, low-risk entry into the blue chip stocks within the Dow. Of course, with the Dow, we're all still looking for the old economy index to breakout above 11,000. Two sectors that will need to participate if the Dow is to settle above 11,000 are the banks and cyclicals. Here's where it gets interesting. I've observed that the KBW Bank Sector Index (BKX.X) and the Morgan Stanley Cyclical Index (CYC.X) are on the verge of breaking out BIG TIME. The Bank Sector Index has been biding its time below the 900 level for quite some time, en route to building a bullish wedge and continues to find buyers at its 200-dma, now at 870. Meanwhile, the Cyclical Index has been contained by a descending trend line, which began way back in early 1999. The Cyclical Index is currently testing its descending trend line, now at 550, and an advance above 560 might confirm any breakout attempt. If the Bank Sector and Cyclical Indexes breakout above the aforementioned resistance levels, then I think the Dow will see the upside of the 11,000 level. It may take several days, weeks or even another two months, but I foresee a breakout in all three before too long and feel that the it can be traded. While I am bullish on the cyclical and financial sectors of the market, I'm still a little wary of the broader technology sector, although certain spaces are beginning to improve. For example, Brocade Communications (NASDAQ:BRCD) reported after the bell Tuesday that it was beginning to see an improvement in its business. Brocade is a maker of storage area networking solutions, and is a major player in the data storage market, along with EMC (NYSE:EMC), Veritas (NASDAQ:VRTS) and Network Appliance (NASDAQ:NTAP). Network Appliance also reported earnings Tuesday after the bell and made comments consistent with those from Brocade. Officials from both companies proclaimed that the bottom was in place in their respective business lines. In addition to the reports from Brocade and Network Appliance, Applied Materials (NASDAQ:AMAT) delivered numbers that missed consensus estimates by one penny. Although Applied Materials missed its number, during the conference call its CEO, James Morgan, said, "I believe that we are now in the bottom of this cycle and we are waiting for the tipping point." While the magic word 'Bottom' was whispered, Amat has not yet seen an upturn in business, which epitomizes why I'm still somewhat cautious on technology shares. For its part, the Nasdaq Composite (COMPX) rolled over following the Fed's announcement and closed below the 2100 support level. With the Nasdaq, the best game in town recently has been fading the market. That is, buying near support levels and selling near resistance levels, instead of chasing momentum-based moves that lead to head-fakes and whipsaws. With an increasing number of companies mentioning the bottom word, but not yet raising guidance, it makes sense that the Nasdaq could continue to trade sideways during the summer months or until the tech business improves. (For those traders who monitor the semiconductor sector closely, and particularly its impact on the broader tech sector, it's worth noting that the Philly Semi Index (SOX.X) closed just above key support at the 600 level.) I'd like to reiterate that instead of aggressively pursuing stocks either on breakouts or break downs (momentum trading), I think it may become conducive to fade the prevailing trend. Again, that means buying near support and selling near resistance, especially in the tech sector. With the Fed's meeting out of the way, and not another scheduled until late June, the market will be left with earnings news and guidance in addition to economic news for catalysts. We have several more big earnings reports this week from the likes of Hewlett-Packard (NYSE:HWP), Dell Computer (NASDAQ:DELL) and CIENA (NASDAQ:CIEN), which have the potential to move the markets. For the most part, I'm growing more bullish over the intermediate-term and strongly believe that the markets have the potential to advance substantially in the latter part of the summer and into the fall. In the meantime, I think it makes sense to stick with the blue chip names of the market, which continue to work higher, such as the cyclicals like Boeing (NYSE:BA), Caterpillar (NYSE:CAT) and DuPont (NYSE:DD) - a Jeff Bailey favorite! Eric Utley Assistant Editor ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2174 ************************************************************** **************** MARKET SENTIMENT **************** Fed Speak In Line By Matt Russ The Fed speaks and gives us what we wanted. Delivered in full. So how about the failure into the close? The market was quite whippy around the announcement, but somehow the VIX.X barely moved until it imploded into the close as markets sold off. Going into Expiration Friday, I would expect an increase in volatility, however, it's beginning to feel like the light volume battle between the bulls and bears will keep us rangebound. The short-term seems uncertain and the long-term continues to improve as the Fed redeems itself. NASDAQ & QQQ The Nasdaq sold off yesterday, quickly breaking support at 2089 and finally finding buyers at 2061. A combination of some short covering and traders going long late Monday and into the Fed meeting today propped up the tech index. Intraday support showed up at 2088 prior to the announcement, and after the cut, the Nasdaq made a run to 2125 before sellers really let 'em have it. This just happened to a 38.2% retracement between May 2nd's high and yesterday's low. What a great entry into a short position for a savvy and patient trader! That wasn't me though. I jumped in early after the announcement and managed to stay even. I had QQQ puts: the right directional bias, less-than-optimal entry. Always wanting to pull the trigger. The close was ugly and feels like tomorrow we'll see more selling. Look for support at 2060, 2032 and 2013. Resistance at 2125 and 2145. On the QQQs, support at $45, $44.10, and $43.43; resistance overhead at $46.10 and between $46.42 - $46.75. SPX & OEX Trading in a narrow range on Monday, the SPX.X held the 1240 support line before rallying almost 10 points into the close. Before the Fed meeting, the index hugged the 1248 - 1250 line, only to return by the close after a euphoric spike to 1257. This will be the next level of resistance, 1257 - 1258, and coincides with the previous uptrend line in red. As the SPX.X dove into the close, buyers support it at 1245. Below, 1241 is strong. On the OEX.X, support has been holding at 642 with resistance at 648 and 650. DOW 30 Still waiting on that Cyclical Index (CYC.X) to breakout. But with or without it, the Dow seems to be hanging on. Since Friday's dip to 10774, the $INDU has been making a series of higher lows and higher highs, peaking today at 10922. We saw support at 10800 yesterday, which has been a level we continue to watch. The Dow 30 wants to move higher, yet if you look at a daily chart, it's beginning to look top-heavy and the MACD is heading lower. With the 10-dma now overhead at 10879, supply might be winning over. If a further pullback occurs below the 38.2% retracement at 10784, buyers have been solid at 10700 - 10720. This level would allow long positions to be initiated with low risk. Well, we got exactly what we wanted from the Fed. Kind of a boring day really. Volatility was virtually non-existent except for about 25 minutes, and then the VIX.X settled right back at 27.34. I can't imagine an Expiration Week without a slight explosion in volatility, can you? Earnings from Hewlett (NYSE:HWP) tomorrow and Thursday's Ciena (NASDAQ:CIEN) and Dell (NASDAQ:DELL) reports should give us tradable guidance going forward. Heck, it might even give us a catalyst to trade out of this range, but it's beginning to feel like the summertime lulls. Trade Smart, Matt Russ ********************** CBOT Commitment Of Traders Report: Friday 05/11 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 +47090 +36513 -49689 -41144 Total Open Interest % (+21.09%) (+14.90%) (-7.33%) (-6.05%) net-long net-long net-short net-short DJIA Futures Open Interest Net Value -7572 -6592 +7468 +7488 Total Open Interest % (-62.11%) (-57.98%) (+21.83%) (+25.09%) net-short net-short net-long net-long NASDAQ 100 Open Interest Net Value +2657 +4288 -9986 -10972 Total Open Interest % (+13.59%) (+22.06%) (-17.20%) (-17.02%) net-long net-long net-short net-short What COT Data Tells Us ********************** Indices: Divergence increased on the S&P 500 with the Commercials adding to their net-short positions by 1.28 percent while the Small Specs enhanced their net-longs by 6.19 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 05/08 by the CFTC. ************** MARKET POSTURE ************** Please visit this link for Market Posture: http://www.OptionInvestor.com/marketposture/051501_1.asp *********** OPTIONS 101 *********** Backspreads And Ratio Spreads, Part II By Lee Lowell Let's finish off this session with a discussion of the "ratio spread." As we saw last time with the backspread, the ratio spread also consists of an unequal amount of options. Only this time we'll have more short options than long in our position. The ratio usually occurs in the form of a 1x2 or a 1x3 spread and is executed within the same month. Same as the backspread, the ratio spread could be of a put-type or a call-type. And as I noted last time, I'll show you how to get around the issue of having uncovered short options in the account. The ratio spread is also classified as a type of volatility spread due to the fact that its success relies on a certain type of option skew. If you're initiating a put ratio spread, you'll buy a put which is usually ATM or OTM, (depending on your preference), and sell 2 or more farther OTM puts. With a call ratio spread, you buy an ATM or OTM call and sell 2 or more further OTM calls. Since we are short more options than long, we want to initiate the spread using near-term options that have little time left. We want very little movement or slow movement towards our short strikes. Contrast this to the backspread, where you are hoping for explosive movement to occur very quickly. When initiating a put ratio spread, we are looking for a "reverse" volatility skew. This means that the lower-strike options we sell should be trading at a higher implied volatility than our long higher-strike options. In the case of a call ratio spread, we want a "forward" skew which would give the short higher-strike options a higher IV than the long lower-strike options. This ensures us of putting on the spreads in its most favorable conditions. How do you tell if the skews are correct? You need to have some sort of data vendor that supplies this information or you can run the numbers through an option calculator and solve for IV. The easiest way though is through the data feed. Here's a screen shot of the data feed vendor I'm currently using. This is an option chain for Applied Materials showing the June put contracts. If you look at the last 2 columns on the right which show "Imp Vol(B)" and "Imp Vol(A)", they signify the implied volatility of the options (in percent) based off the actual bid and asked prices respectively. You always want to make sure you see implied volatility numbers based off the bid/ask prices because these are always current. If you look at IV numbers based off the last trade, you may be looking at stale numbers of a trade that could've occurred days ago. AMAT is showing a reverse skew for these June puts. Just look at the IV numbers and you can see how they get larger the lower you go in strikes. AMAT is currently trading at $50/share, so the $50 strike is ATM. If you wanted to initiate a put ratio spread, you could buy the $50 put at $4.50 ask with an ask IV of 78% and sell two of the $45 puts at a bid price of $2.45 with a bid IV of 82%. (Remember, you can always try to execute your trades somewhere in the middle of the bid/ask. I always do.) This would be a correctly formed put ratio spread. ILLUSTRATIVE PURPOSES ONLY! Ideally, you'd want to initiate the position for a credit (just like the backspread) to compensate for the possible large loss due to extra short options. In this example, we'll take in a credit of $.40 per spread. (2 x $2.45 = $4.90 - $4.50 = $.40 Commissions not included). Remember, ratio spreads are for when you think the market is going to sit still or move slowly towards your short strike or totally in the opposite direction. Let's see what this spread looks like graphically. Since the position is a short-term trade, this is what the P/L scenario looks like at expiration. It's exactly the upside down inverse of what the backspread graph looks like. We see that maximum profits occur right at the short strike price of $45 and then losses start to accrue as we pass down through the short put. If AMAT shoots higher, we keep our initial credit. Again, we want AMAT to sit still, move VERY slowly lower, or go higher. If AMAT finishes at $45, we'll make our max profit of $540. So what about the unlimited loss with the naked options? I know most retail traders are not qualified by their brokers to sell uncovered options. In this case, all you need to do is buy a much further OTM put option for very little money which will cover you in a disaster scenario. In this AMAT trade, we could buy the June 30 put for say, $.25, which would still leave us with a small overall credit of $.15 in the position. (Commissions not included). Here's the new graph: The position still loses if AMAT tanks below $40, but that loss will at least be limited as long as we have our $30 put in place. Really, you could pick any strike you to cover the extra short option. What's the point of having the correct skew? Well, IV lets us know how an option is priced. The higher the IV, the higher the option's premium and vice versa. If you're initiating a spread, you want to buy an option with a lower IV than the option you're selling. If in our AMAT example, the $45 put had an IV of say 78%, it would probably be priced somewhere around $2.25 compared to its original $2.45 price, giving us a $0 net for the spread. So the key is to find options which have a favorable skew to the type of spread you're initiating. What's the conclusion of the ratio spread? If you find stocks that have large skews within the same expiration month and you feel we'll be rangebound, then the ratio spread is a great trade. You can make money if the stock sits still, moves slowly towards your short strike, or in the opposite direction of your strikes. Just make sure you initiate the spread for a credit and purchase a deep OTM option in case you are unauthorized for naked short options. Good luck. ************** TRADERS CORNER ************** Those Terrific Takeovers By Scott Martindale Any creative, high-growth company in a high-potential sector can be considered a takeover target. The gorillas often swallow up these upstarts to add to their own expertise or product line rather than trying to develop a competing product. They want fast, cheap entry into hot, innovative product lines. Also, mergers of equals occur to give both companies a stronger market position. And when an offer is made, it usually is at a substantial premium to the current market value of the takeover target. Case in point: Rosetta Inpharmatics (NASDAQ: RSTA). I bring up this little biotech gem because I recently started accumulating RSTA shares in my long-term account, and it gave me a surprise 75% jump on Friday (biggest Nasdaq mover of the day!) when Merck announced a takeover bid. My cost basis was $10.10, and I had an open limit order to sell Jun 10 calls for 2.00. With the +$7 gap at the open, the calls were executed for $7.10. Nice. I only wish it were the May calls, which sold for the same price. In the situation I am in now, I have three main choices. (1) Since the stock probably won't move much between now and June expiration, I could close out the position now to free up the cash by buying back the call and selling the stock, which locks up my 70% gain and puts me back in cash for another trade. (2) I could let the play ride and get called out in June for $10, which gives me the same 70% gain -- but in five weeks rather than today. (3) I could wait to see if the stock sells off a bit, buy back the call, and then look to sell it again. Because the purchase involves a stock swap of 0.2352 shares of MRK for each share of RSTA, which values RSTA at almost $18 today, the value of RSTA will rise and fall with MRK's fluctuations. I bought shares of RSTA primarily because of its prowess in genomics research, but this also made it a takeover target for a drug maker (like MRK) that is looking to speed development of new medicines. By the way, MRK also was been rumored to be considering another offer for Schering Plough (NYSE: SGP), briefly pushing up SGP by 10% intraday. Of the 20 biggest deals of the 1990's, the acquired companies rose an average of 23% from just prior to the announcement to the day of the merger, and the same or better can be expected in small and mip-cap takeovers. The best targets are companies with good products and financials along with a depressed share price. This month, American International Group (NYSE: AIG) acquired American General (NYSE: AGC) for a slight premium. Canadian Imperial Bank (NYSE: BCM) is reported to be in talks to acquire Ameritrade (NASDAQ: AMTD) for up to $10 (a 20% premium. Today, TriQuint Semiconductor (NASDAQ: TQNT) announced it will acquire Sawtek (NASDAQ: SAWS), paying (in TQNT stock) a 16% premium to today's closing price. Other potential targets that experts cite today include diverse names like Knight Trading (NASDAQ: NITE), York International (NYSE: YRK), Priceline.com (NASDAQ: PCLN), Material Sciences (NYSE: MSC), Tupperware (NYSE: TUP), Siebel Systems (NASDAQ: SEBL), Research in Motion (NASDAQ: RIMM), Scientific Atlantic (NYSE: SFA), Ciena (NASDAQ: CIEN), American Water Works (NYSE: AWK), Williams Communications (NYSE: WCG), and Florida Power & Light (OTCBB: FLPLP). Last March, Technology Investor magazine's premier issue listed 11 companies in their "Takeover Candidates Portfolio." Two of them were acquired during 2000: Pairgain by ADC Telecom (NASDAQ: ADCT) and Verio by NTT Communications (NYSE: NTT). As for today's market action, I always get to write immediately following Fed moves since they generally happen on Tuesdays. Today, of course, the Fed did what we all hoped and expected. Trying to prevent a recession without overheating a recovery into severe inflation, they seem to be more willing to err on the side of preventing recession. I never doubted this outcome, despite figures showing rising consumer confidence and falling productivity. The frightening global consequences of a U.S. recession are just too great. In fact, my only short play going into the announcement was the last-minute purchase of Nasdaq 100 Trust (AMEX: QQQ) May 44 Puts as a slight hedge on my bullish positions. I sold them minutes later on the announcement for a small $0.15 loss. Prior to the Fed announcement, I also closed out a couple of bullish plays just to lighten my exposure a bit. I'll discuss them next week in a review of my May trades. As I mentioned last week, I've moved a lot of cash back into my aggressive trading account, and I've slowly started putting it to work. I think today's muted market response was caused by investors waiting for any "sell the news" action to play out before they bring in more funds. I'm looking forward to the time in which the Fed is no longer the driver of the market. An earnings recovery will allow stocks to climb on their own merits. To get to that point, these rate cuts should push large institutional investors to buy lower-rated bonds to achieve their targeted yields. Over the past week or so, we've seen some big telecoms come out with big debt offerings: $3 billion for Verizon (NYSE: VZ), $8 billion for British Telecom (NYSE: BTY), and $12 billion for WorldCom (NASDAQ: WCOM). Can we assume this money will become capital expenditures, finding its way into the income statements of those upstart networking, communications equipment, and semiconductor companies? 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: ***** AOL $50.75 -0.81 (-0.83) It looked like it'd be another day of flat-lining for AOL and the other media stocks, but the late afternoon brought about some erratic trading on the NASDAQ. Initially AOL was towing the mark above our $51 closing stop and all looked bright following the Greenspan overture. However the NASDAQ influence and news of consumer advocates seeking a federal review to see if AOL's choice of carrying High Speed Access Corp over its cable lines meets the federal merger conditions as an unaffiliated ISP sent the share price into a flurry of activity. The solid bounces off $50.50 on the downside was promising and demonstrated AOL's soundness, but unfortunately, the bulls couldn't take the share price back over the top of $51 or the trailing 5 & 10-dmas. While another upside breakout could be on the horizon, we're sticking by our guns and exiting on the premise of AOL's stop violation. PUTS: ***** RIMM $29.87 +1.86 (+1.50) It appears that support at $28 managed to hold after all. While the stock retreated below that level intra-day on Monday, the pullback was on low volume. Some last minute buying at the end of day on very brisk trading was enough to send shares of the portable computer maker back above the $28 level. Today, the stock managed to rebound, gaining 6.64 percent. While volume on the move was light, less than 70 percent of the average daily, this was enough to close RIMM above our stop price of $29. As a result, we no longer recommend taking on any new positions. FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Tuesday 05-15-2001 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/051501_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=2175 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** CAT $53.14 +0.32 (-0.06) Ahead of the Fed meeting, traders in CAT were cautious yesterday, as the stock retreated fractionally on less than 80 percent of the average daily volume. Today's FOMC announcement of a 50 basis point cut was good news for deep cyclical issues, helping shares of the leading earth-moving equipment maker to successfully test its 10-dma, bouncing strongly to end the day higher on heavy volume. Today's move keeps the stock's six week long up-trend intact, setting it up to challenge formidable resistance at $54. A break through this level with conviction could be the signal for conservative traders to jump in, but keep in mind that historical resistance at $55 could also prove to be difficult. However, a break through $55 could mean a clear path to $60. CAT rallied today in spite of news from rival DE, who posed poor earnings. But brokerage houses such as Bear Stearns and UBS Warburg came out to defend CAT, saying that DE's woes were company specific. Aggressive players may target pullbacks to the 5 and 10-dma, at $52.91 and $51.88 for potential entry points, keeping in mind out closing stop price of $51.75. GPS $33.28 +0.37 (+0.08) So far, the strong gap up move last week continues to hold, as the stock has edged gradually higher. Shares of the apparel maker did pull back fractionally yesterday to start off the trading week, but today's gains more than made up for Monday's deficit. Earnings are set for this Thursday, May 17th, after the market close and as always, we will close out this play before ahead of that event. In the meantime, the 50 basis point rate cut from the Fed, along with continued upward momentum in the retail apparel sector, may give GPS one last burst of strength. As the company announced last week that it will surpass Street estimates, the question at this point is by how much. If traders are optimistic, and bid the stock above today's intra-day high of $33.28 on volume, this could allow for an entry on strength. For entries on pullbacks, the 5-dma at $32.12 along with support at $33, $32 and our closing stop price of $31.50 may allow higher risk players to jump in, but only if rivals AEOS and ANF are also moving higher. BA $66.59 -0.15 (+0.59) The defense sector continues to exhibit strength, and BA shines as a star within this sector. A pullback to support at $65.50, just a quarter point above the 10-dma, was a good entry point, as the stock rebounded a full point on the day. A large spike of volume was seen at the close, which should bode well for tomorrow's open. BA management continues to reassure investors, and today the company stated that it does not plan to delay any shipments to China at the present time. It may be possible to enter BA on another pullback, possibly to the 5-dma at $66. A close above $67 could signal more conservative traders that a possible entry point is available. Continue to monitor others in the defense sector, like GD and LMT, and move closing stops to $65. TGT $38.30 -1.40 (-1.40) An upgrade from Lehman Brothers propelled TGT to $40.43 at the market's open, but profit taking ensued in the retail sector, and TGT pulled back to strong support at $37.74. From there, TGT was able to rebound, but only to the current levels. While the action of TGT may seem weak, the stock may have been due for a pullback, and remains in its upward channel which was established in mid April. We would like to see RLX.X demonstrate additional strength by moving above the 900 level, which could signal traders to potential bullish movement in retail stocks. Traders could take positions upon a move up past the converged 5-dma and 10-dma of 39, if RLX.X is also strong. Alternatively, a close above $40.50 could give a green light to more conservative traders. We are keeping stops at $38, so close positions if TGT closes below this level. JNY $46.23 +0.64 (+1.28) JNY has formed a consistent pattern of making new 52-week highs for the last three days, and, if we see a little more strength in RLX.X, we may be able to see JNY move to even higher levels yet. RLX.X sold off slightly today in the overall lackadaisical market action, yet remains close to the psychologically important 900 level. If RLX.X can make a strong move above 900, this could indicate that JNY might be ready to move higher. With all of the bullish action, a little consolidation might be healthy, and traders could consider entering on a pullback to the 5-dma at $44.76. Alternatively, positions could be taken at current levels, if the overall indexes and other apparel retailers like GPS are rallying. We are moving closing stops to $44. GDW $61.56 +0.83 (-0.31) Monday's pullback in the markets gave aggressive traders an excellent entry point for GDW at the 5-dma of $60.50. The rate cut and positive statements from the Fed seem to have provided the catalyst necessary for GDW to proceed on its upward trend. In addition, the bidding war for Wachovia Bank is helping to stimulate interest in the savings and loans, as investors speculate on potential future takeover candidates. Going forward, it would be helpful to see more strength in the banking sector, BKX.X, to add additional momentum to this play. Traders could take positions at current levels, if others like WM and GPT are strong. GDW has encountered heavy resistance at $63, and a strong break above this level could be an entry point for more conservative trades. We are moving closing stops to $60.50 in light of market action. MO $50.92 +0.01 (-0.38) With the spotlight on the Federal Reserve, MO took a back seat over the last two days, as investors struggled to find a clear trend, and interpret the future policy directives. Some disconcerting news was released concerning a possible increase in the cigarette tax, and FDA regulation of cigarettes, as well as new tobacco rules adopted by the European parliament. Despite this news, and a somewhat disappointed market, MO maintained firm support at the $50.50 level. The closer we get to the Kraft IPO, the more attention MO will attract, and it is likely that we could see a strong rally in the shares in the days ahead. Aggressive traders could take positions at the current level, if the overall indexes are exhibiting strength, as well as others in the sector, like LTR and RJR. As an alternative strategy, wait for MO to move above its converged 5-dma and 10-dma of $51.50 on strong volume before entering. We are keeping stops at $50, so close the position if MO closes below this level. ******************* PLAY UPDATES - PUTS ******************* BRCM $37.11 -0.09 (-1.24) Monday's fall of $1.29 or 3.35 percent was certainly a welcome start to our put play on Broadcom. While volume was less than half of its average daily, most of the shares that traded hands were to the downside. Coverage was initiated by Friedman Billings, who started shares of the communications chipmaker at a Market Perform rating. Today, BRCM continued to drift lower, closing down fractionally on low volume. At this point, the stock remains sandwiched between its moving averages. The 5 and 10-dma (currently at $38.28 and $41.33 respectively) both continue to exert downward pressure on the stock, while the 50-dma (just below at $35.16) acts as support. A break below the 50-dma would allow conservative traders to take a position, but confirm with volume. Failed rallies at moving average resistance along with our closing stop price of $38 may allow higher risk players to make a play. Just make sure that Merrill Lynch's Semiconductor HOLDR (SMH) confirms the rollover. EMLX $37.59 +1.18 (-1.21) After being handed the interest rate cut they were hoping for, investors bid technology stocks higher this afternoon, driving EMLX as high as the $41 level before the euphoria began to wear off. Sure enough the stock rolled over sharply in the final half hour, and volume was on the rise too. While EMLX managed to post a gain today, the daily chart shows that the majority of its intraday gains disappeared by the close, indicating a lack of conviction by the bulls. Aggressive traders got a shot at an attractive entry point as the rally fizzled towards the end of the day. Despite the fact that the bulls made a solid push through our $39 stop intraday, the sharp decline that followed prompts us to keep the play alive heading into the end of the week. Support is still holding near $37, and conservative investors will want to see the stock trade below that level before initiating new positions. Factors that could have an effect tomorrow include the earnings reports from QLGC and BRCD, which came in tonight after the close. BRCD met estimates, while QLGC beat the consensus by 4 cents. If investors are pleased with these results tomorrow, the positive effect will likely bleed into trading in EMLX. We are sticking with the play in anticipation that the bulls will be unable to push the stock higher in the wake of the FOMC meeting, but any close above our $39 stop will bring it to an end. HGSI $57.04 -0.02 (-0.84) Along with the rest of the market, Biotech stocks traded flat ahead of the FOMC's interest rate decision, but the resulting upward move gave us a choice entry point on our HGSI play. Enthusiastic bulls pushed the stock right up to our $60 stop before the bears took over control for the final hour, dropping HGSI back to the unchanged level at the close. Volume today seemed to favor the bears as well. Although it was anemic up until the interest rate decision, we saw buying volume pick up immediately after the announcement. Within 30 minutes the upside momentum had slowed as volume tailed off. Then the bears got busy, pushing the price lower as volume increased right into the close, leaving the deck currently stacked in favor of a further decline. The $540 resistance level is still holding the Biotechnology index (BTK.X) back, despite positive earnings results last night from PDLI. Unless the bulls can find some hidden catalyst, the BTK and our HGSI play look like they will be subject to further losses as the week continues. Conservative traders will still want to target new entries on a drop through the $57 support level, while more aggressive entries will materialize on any failed intraday rallies that are turned back below the level of our stop, also the site of the declining 10-dma ($59.80). JNPR $53.15 -0.62 (-1.11) It didn't take long for the interest rate excitement to wear off this afternoon. After the Fed gave investors their expected 50 basis point cut, JNPR managed to rally through $56 level, but their victory was short lived. The bears were lying in wait and pushed the stock below the level of Monday's close in the final hour of trading. The 2-week descending channel is still intact and is increasing the downward pressure on the $52 support level, also the site of the converged 30-dma ($52.12) and 50-dma ($52.34). The broader Networking index (NWX.X) isn't helping matters either, as it continues in its own descending trend, pressuring its $440 support level. Despite the intraday move through our $55 stop, we are sticking with our JNPR play due to the strength of the afternoon retreat. Aggressive traders got a great entry on the rollover this afternoon and can still consider failed intraday rallies near the $55 level as attractive for initiating new positions. More conservative entries will appear as JNPR falls through the $52 support level through the rest of the week. The next likely catalyst for the NWX will be earnings from CIEN on Thursday, before the market open. Keep that in mind when considering new positions. We are keeping our stop at $55, and any daily close above that level will bring our play to an end. MERQ $59.25 -1.80 (-2.07) The interest rate cut got our play on MERQ off to a good start this afternoon, giving aggressive traders an attractive entry point following the announcement. After failing for the fourth time today to hold above the $63 resistance level, the bears piled on in the final hour, slashing more than $3 from the stock's recent gains to produce a loss on the day. Although the daily volume was still only 60% of the ADV due to very light trading up until the FOMC meeting, selling volume ramped up and remained heavy right up to the closing bell, setting the stage for the bears to have another good day tomorrow. With the late-day decline, MERQ is primed to fall through the nest level of support between $58-59. Conservative traders will want to key on this level and initiate new positions as MERQ falls below $58 on its way to testing the next level of support near $55. The 2-week descending trendline (now at $64.50) is still in a dominant position and should continue to pressure the share price lower, as positive catalysts for Technology stocks are rapidly disappearing. Our stop still rests at $65, and aggressive traders can target shoot new entries on a failed intraday rally at this level or today's intraday $63 resistance level. NVLS $48.20 +0.02 (-0.88) Semiconductor stocks have been trying to decide which way to move this week in advance of earnings from bellwether AMAT. Similar to other Semiconductor Equipment stocks, NVLS has been weak, subject to its descending trendline (currently resting at $50), but has refused to breakdown. Tonight after the close, AMAT reporting its earnings, a penny light of consensus estimates, and forecast a poor revenue outlook for the remainder of the year. This is not what the bulls wanted to hear and it is likely to continue to weigh on shares of NVLS as the week progresses. The stock is currently sitting right in the middle of the $48-49 support level, and closed just fractionally below the 30-dma ($48.23). Volume continues to remain light, but we saw a significant increase following the Fed's interest rate announcement. With volume increasing right up to the closing bell, the stock looks primed for further losses throughout the rest of week. Even though our stop was temporarily crested following the FOMC meeting, the fact that the bulls couldn't hold their ground prompts us to keep the play alive and our stop in place at the $50 level. Look for the fallout from the AMAT earnings report to be the primary catalyst for weakness across the Semiconductor sector. Aggressive entries will still materialize on a failed rally near the $50 level, while more conservative players will want to wait for NVLS to fall through the $48 level, preferably on increasing volume. ************** NEW CALL PLAYS ************** AGGRESSIVE: XOM - Exxon Mobil Corporation $89.45 +0.39 (+1.81 this week) Exxon Mobil is the world's largest integrated oil company. Incorporated in 1882, the company is engaged in oil and gas exploration, global production and marketing; electric power generation; and the mining and sale of coal, copper and other minerals. Exxon Mobil operates more than 40,000 service stations in 118 countries under the Exxon, Esso, and Mobil brands, 16,000 of which are in the U.S. Their fiercest global rival is Royal Dutch Petroleum. Can ever-increasing gas prices, increased production, and a shot of adrenaline from the Feds today ignite a fire under XOM over the next few sessions? We're speculating that may very well be the case as XOM's share price hovers at a climacteric point and the broad markets absorb the economic details. Take a look at an XOM chart for the month of May to confirm a double pattern of an inverted head-and-shoulders formation. A high-volume break through $90 would therefore, be of great significance from a technical perspective. If XOM could close that gap, momentum traders would likely to jump on the bandwagon. The 5 & 10 DMAs have also been bolstering the share price in recent weeks; you might find these measurement devices useful as you plan your entry/exit strategies. Solid bounces from $88 and $89 provide feasible entries in an advancing marketplace, assuming the energy stocks continue to demonstrate strength. We're allowing some room for XOM to operate over the near-term and have set our protective stop at $87. OI will exit if XOM fails to close above this mark. Pay attention to the broader energy sector, too. Some stocks to watch include Royal Dutch (RD), Halliburton (HAL), Chevron (CHV), and Phillips Petroleum (P). These rivals are also nearing relative highs as investors pad their portfolios with energy-related issues. If you err more on the side of caution, wait for a visible move through $90. This line of opposition has served as an unyielding force since November of 2000 - a convincing break would be monumental! BUY CALL JUN-85*XOM-FQ OI= 580 at $5.60 SL=3.50 BUY CALL JUN-90 XOM-FR OI= 3051 at $2.30 SL=1.25 BUY CALL JUN-95 XOM-FS OI= 6322 at $0.65 SL=0.00 BUY CALL JUL-90 XOM-GR OI=17241 at $3.60 SL=1.75 BUY CALL JUN-95 XOM-GS OI=10449 at $1.55 SL=0.75 Average Daily Volume = 5.80 mln http://www.premierinvestor.com/oi/profile.asp?ticker=XOM Q - Qwest Communications $37.65 -0.28 (+0.23 this week) As a broadband Internet communications company, Qwest provides advanced communications services, data, multimedia and Internet-based services on a global basis. Additionally, the company provides wireless services, local telecommunications and related services in a 14-state local service area. Q primarily serves large and mid-size business and government customers on a national and global basis, while residential and small business customers account for most of the company's revenues in the local service area. The company also provides network transport services nationally, on a wholesale basis to telecommunications companies and Internet service providers. Caught in a sustained downtrend over the past 10 months, Q has not been particularly rewarding to its investors lately. Relative to the broader Telecom sector however, Q has performed rather well, losing less than 50% of its value between the highs of last July and the recent lows in early July near $30. Helping to keep the stock from suffering the carnage inflicted on other Telecom stocks is the fact that Q continues to meet its earnings estimates, posting revenue and profit growth on a year-over-year basis. How many other companies do you know that can make that claim over the past year? Although the descending trendline (currently $40.50) is still intact and will likely present solid resistance in the near future, the stock has found solid support near $37 over the past month. The daily Stochastics oscillator has recently declined into oversold territory, but the price has not followed suit, holding firm at support. This is a good sign of underlying support, and we are looking for the price to recover nicely as the oscillator emerges from oversold territory. Adding to the strength of this support level are the 30-dma and 50-dma, currently resting at $36.80 and $36.24 respectively. Finally, the North American Telecommunications index (XTC.X) is finding support near the $960 level. A meaningful recovery for the XTC from current levels will help to push Q higher in the days and weeks ahead. Firm support gives us the ability to place a tight stop at $36, as a violation of this level would indicate the bears have regained the upper hand again. Aggressive entries will materialize on an intraday dip and bounce that occurs above the $36 level, especially if it is accompanied by a resurgence in buying volume. More conservative entries will appear as the stock rallies through the $38.50 resistance level on its way back up to test resistance at the descending trendline. BUY CALL JUN-35 Q-FG OI= 25 at $4.20 SL=2.50 BUY CALL JUN-37.5*Q-FU OI=1037 at $2.65 SL=1.25 BUY CALL JUN-40 Q-FH OI= 874 at $1.35 SL=0.50 BUY CALL JUL-40 Q-GH OI=5007 at $2.70 SL=1.25 BUY CALL JUL-42.5 Q-GV OI=3674 at $1.75 SL=1.00 SELL PUT JUN-35 Q-RG OI= 765 at $1.15 SL=2.25 (See risks of selling puts in play legend) Average Daily Volume = 5.59 mln http://www.premierinvestor.com/oi/profile.asp?ticker=Q ************* NEW PUT PLAYS ************* AGGRESSIVE: DOX - Amdocs Limited $60.86 -0.39 (-0.44 this week) Amdocs provides information solutions to the leaders of the communications industry worldwide, offering customer care, billing and order management systems for communications and Internet services providers, and business support systems for directory publishing companies. Their software products make innovative use of technology, helping their customers distinguish themselves in an increasingly crowded and competitive marketplace. Amdocs systems provide the convergence, business flexibility and infrastructure communications companies need to retain existing customers and win new ones. We are initiating an aggressive put play on DOX. Since reporting earnings in late April, in which the company beat Street estimates by a penny, the stock has managed to break above its 50-dma (now at $54.79). However, DOX has since settled into a tight trading range, with support below at $58.50, and resistance overhead at $62.50. Having traded in this narrowing range for almost two and a half weeks now, it appears that the stock is ready to break either way. We have many reasons to believe that the likely direction is down. Stochastics have crossed over bearishly over the past week and appear to be rolling over, signaling the possibility of downward movement in the near future. As well, support from the 10-dma (now at $60.86 and $60.96 respectively) has now been broken, as the stock teeters precariously right on its 5-dma of $60.86. Despite good news such as upgrades and positive analyst coverage, DOX has been unable to make further progress. What's more, formidable major moving average resistance is just overhead, with the 100 and 200-dma (currently at $62 and $63.05 respectively) exerting significant pressure on the stock price. A break below the $60 level on volume could allow conservative traders to enter on weakness. From there, DOX may find support at $58.50, but continued selling pressure could mean a test of its 50-dma line, just below the $55 level. Aggressive traders looking for a lower entry price may target failed rallies as the stock approaches major moving average resistance, along with $61 and our closing stop price of $62.50. In both cases, make sure that movement in rivals CVG and EDS confirm bearish sentiment before making a play. BUY PUT JUN-60*DOX-RL OI=221 at $3.00 SL=1.50 BUY PUT JUN-55 DOX-RK OI=136 at $1.35 SL=0.75 Average Daily Volume = 1.77 mln http://www.premierinvesor.com/oi/profile.asp?ticker=DOX DIGL - Digital Lightwave $42.59 +1.72 (+0.29 this week) Digital Lightwave serves the growing fiber-optic networking industry with products and technology that are used to develop, monitor, maintain, and facilitate the management of high-speed communication networks. The company's product families include Network Information Computers(NIC(TM)), the industry's leading high-speed portable analyzers for fiber-optic network installation and maintenance testing for both domestic and international and Network Access Agents(TM)(NAA(TM)), which provide network-integrated, centralized performance monitoring and analysis for optical networks, including remote multi-channel DWDM. Digital Lightwave also provides customized optical monitoring subsystems for OEM applications. DIGL soared to lofty highs along with its brethren in the networking sector last year, and since then has taken a steep fall. When viewed on a daily chart, it is apparent that DIGL has been forming a pattern of rolling over from lower highs at $70 and $56.50. DIGL looks as if it is positioned to roll over from current levels, thus completing a rounded top pattern. A possible post rate cut pullback in the overall indexes, combined with a post earnings slump might provide the environment to make our put play profitable. On April 17, DIGL reported record revenues of $34.4 million, up 85% from the year ago quarter, as well as record earnings of .27 cents per share, up 237% from the year ago quarter. The stock gapped up from $23 to $30 after reporting, and continued to rally, but could not clear resistance at $45. In addition, the networking sector, NWX.X, rolled over after failing to rally past 500, and fell below its 50-dma of 451 this week. Additional weakness in the networking sector could serve as a catalyst for DIGL to begin a rollover its current level, which could be a possible entry point. A drop below the 10-dma of $42 with heavy volume could be a more conservative entry point. Monitor others in the networking sector, like CSCO and CIEN, and set closing stops at $45. We will end the play if DIGL closes above $45. BUY PUT JUN-45*DGU-RI OI=27 at $6.60 SL=4.50 BUY PUT JUN-40 DGW-RH OI=94 at $3.90 SL=2.50 Average Daily Volume = 1.03 mln http://www.premierinvestor.com/oi/profile.asp?ticker=DIGL ********************* PLAY OF THE DAY - PUT ********************* BRCM - Broadcom Corporation $37.11 -0.09 (-1.24 this week) Broadcom Inc. is the leading provider of highly integrated silicon solutions that enable broadband communication and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs develops and supplies complete system on a chip solutions and related applications for digital cable set top boxes and cable modems, high speed local and metropolitan optical networks, carrier access, satellite, DSL, and network processing. Most Recent Write-Up Monday's fall of $1.29 or 3.35 percent was certainly a welcome start to our put play on Broadcom. While volume was less than half of its average daily, most of the shares that traded hands were to the downside. Coverage was initiated by Friedman Billings, who started shares of the communications chipmaker at a Market Perform rating. Tuesday, BRCM continued to drift lower, closing down fractionally on low volume. At this point, the stock remains sandwiched between its moving averages. The 5 and 10-dmas (currently at $38.28 and $41.33, respectively) both continue to exert downward pressure on the stock, while the 50-dma (just below at $35.16) acts as support. A break below the 50-dma would allow conservative traders to take a position, but confirm with volume. Failed rallies at moving average resistance along with our closing stop price of $38 may allow higher risk players to make a play. Just make sure that Merrill Lynch's Semiconductor HOLDR (SMH) confirms the rollover. Comments The chip sector's massive rollover late Tuesday may extend into Wednesday's trading following Applied Materials' lukewarm earnings report. In addition, the Semiconductor Sector's (SOX.X) bearish close Tuesday may add credence to the idea of chip-related issues sliding in the near-term. Look for the SOX to breakdown below support at the 600 level and for BRCM to fall below its near-term support level at $36.50. If the trade goes in our favor, look to take profits near the $35 level or the $31 level, depending upon risk tolerance. BUY PUT JUN-40*RCQ-RH OI=644 at $6.70 SL=5.00 BUY PUT JUN-35 RCQ-RG OI=537 at $4.10 SL=2.50 http://www.premierinvesor.com/oi/profile.asp?ticker=BRCM ************************ COMBOS/SPREADS/STRADDLES ************************ Rate Cut Fails To Stimulate New Optimism... The stock market finished almost exactly where it started today as investors showed little enthusiasm for the Fed's half-point reduction in interest rates. Monday, May 14 Industrial stocks edged higher today in anticipation of the Fed's interest rate decision, due on Tuesday afternoon. The Dow was up 56 points at 10,877. Technology stocks retreated on weakness in bellwether issues ahead of some key earnings reports. The NASDAQ closed down 25 points at 2,081. The broader market posted small gains with the S&P 500 index closing 3 points higher at 1,248. Trading volume on both the NYSE and the NASDAQ was the lowest in 2002, as investors remained cautious ahead of the Federal Reserve monetary policy meeting Tuesday. Only 851 million shares traded on the NYSE, with advances beating declines 8 to 7. Activity on the NASDAQ was very light at 1.32 billion shares exchanged, with losers beating winners 22 to 15. In the bond market, the 30-year Treasury rose 2/32, pushing its yield down to 5.85%. Portfolio Plays: The stock market traded with little enthusiasm today as investors awaited the decision on interest rates from the Federal Reserve. Most analysts expect the Fed to reduce rates by 50 basis points but there are also concerns that future rate cuts will be smaller and less frequent. In addition, last week's bullish retail sales and consumer sentiment data raised concerns of a less aggressive outlook by the FOMC. On the Dow, Philip Morris (NYSE:MO) and Home Depot (NYSE:HD) led the downward move in industrial stocks while chip giant Intel (INTC:NASDAQ), computer maker Hewlett-Packard (NASDAQ:HWP) and software designer Microsoft (NASDAQ:MSFT) were among the worst performing technology components. On the NASDAQ, Internet, networking and chip shares all declined and computer hardware stocks retreated on concerns that continuing weakness in demand will erode future revenues. In the broader market, select bank stocks were strong after Wachovia (NYSE:WB) made an unsolicited $14 billion offer for SunTrust Banks (NYSE:STI). The stock swap offer comes on the heels of Wachovia's agreement to be bought by First Union (NYSE:FTU), generating speculation that further consolidation will occur in the industry. Retail shares also edged higher amid optimistic analysts comments on the group and oil service issues continued to rally in the wake of rising crude prices. There was little significant activity in the Spreads portfolio due to the limited trading volume in today's session. Brokerage stocks were a popular group and our selections in Merrill Lynch (NYSE:MER) and Lehman Brothers (NYSE:LEH) both profited from the upward movement. Progressive (NYSE:PGR) moved back to the top of a recent range near $118 and our bullish spread in the issue is at maximum profit. Lowe's (NYSE:LOW) drifted higher on new strength in the retail segment and in the telecom sector, Nextel (NASDAQ:NXTL) and Worldcom (NASDAQ:WCOM) rebounded as traders looked for bargains in technology issues. Our position in AT&T (NYSE:T) was also active on news that British Telecom (NYSE:BTY) and AT&T are considering a joint telecommunications venture in the global market. One position we have been watching closely is Shire Pharmaceuticals (NASDAQ:SHPGY), as the company recently completed its acquisition of Biochem Pharma (NASDAQ:BCHE). The transaction included the issuance of 0.7585 Shire ADRs to BCHE shareholders who elected to receive the shares in consideration for the merger. It's interesting to note that today's closing price of SHPGY ($47.22) pushes the exchange value of BCHE below $36 and within a few pennies of our break-even cost basis in the bearish credit spread. Traders who transitioned to the bullish Covered-call at $35 are relatively safe while those who chose to remain in the original position have also seen some viable exit opportunities. Since BCHE shareholders will not receive SHPGY shares for a few days, it will be interesting to see how the issue performs in the sessions prior to expiration Friday. Tuesday, May 15 The stock market finished almost exactly where it started today as investors showed little enthusiasm for the Fed's half-point reduction in interest rates. Traders said the effects of the rate cut were already factored into the current share values and there was no confidence that recent economic weakness will end in the near-term future. The NASDAQ closed 3 points higher at 2,085 while the Dow was down 4 points at 10,872. The S&P 500 index was unchanged at 1,249. Trading volume on the NYSE was moderate with 1.04 billion shares exchanged and winners beating losers 19 to 11. Activity on the NASDAQ was light with only 1.69 billion shares changing hands and advances beating declines 20 to 17. In the U.S. treasury market, the 30-year bond was down 26/32 to a yield of 5.91%. Portfolio Plays: The major equity indices ended mixed today as investors were comforted by the Federal Reserve's decision to lower rates by 50 basis points but hesitated to commit new funds to a market with little upside potential in the near-term . The central bank was expected to lower rates, however recent economic data revealed that the U.S. economy may be regaining some strength, leading to concerns the Fed would not be as aggressive in the future. In the statement accompanying its decision, the FOMC said the reduction in excess inventories appears well advanced and that consumption has held up reasonably well. At the same time, they noted that "The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward." The Fed also stated that "risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future." The news generated some bullish activity initially but the optimism soon faded and by the end of the session, both the Dow and the NASDAQ were in the red. Among industrial issues, Wal-Mart (NYSE:WMT), Merck (NYSE:MRK), Coca-Cola (NYSE:KO) and Boeing (NYSE:BA) were the worst performers. The decline in blue-chip technology issues continued with Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HWP) moving lower. On the NASDAQ, Internet and semiconductor shares were strong and computer software issues also enjoyed limited upside activity. In the broader market, oil and oil service, banking, biotechnology and paper stocks enjoyed small while utility, gold, retail, airline and drug shares generally retreated. Our portfolio experienced limited upside activity during the period after the interest rate announcement. Companies in the retail group were generally lower but our bullish position in Lowe's (NYSE:LOW) profited as the issue rallied to a new high near $66. Financial shares also traded higher and our recent positions in Merrill Lynch (NYSE:MER) and Providian (NYSE:PVN) benefited from today's upward momentum. Progressive (NYSE:PGR) moved closer to a new yearly high near $119 and Unitedhealth (NYSE:UNH) also continued to recover from near-term selling pressure amid strength in select healthcare stocks. Positions in the premium-selling group including Lincare (NASDAQ:LNCR), Chiron (NASDAQ:CHIR) and Veeco (NASDAQ:VECO) also enjoyed new buying support and all of those plays are profitable. Stocks in the semiconductor group performed very well with LSI Logic (NYSE:LSI) and Cirrus (NASDAQ:CRUS) leading that section of the Combos portfolio. Cirrus was bolstered by reports of new cost-reduction activities intended to align company resources and expenses with its desire to become the largest "pure-play" semiconductor company in the consumer-entertainment electronics industry. Among telecom shares, Worldcom (NASDAQ:WCOM) edged higher and Earthlink (NASDAQ:ELNK) topped our Internet segment, climbing $0.50 to $12.75. Traders remaining in the long-term calendar spread at $12.50 should consider rolling forward to June options for a credit of $0.60-$0.75. Questions & comments on spreads/combos to Contact Support ****************************************************************** - NEW PLAYS - Today we received a request for some conservative combination positions in the banking industry, based on the idea that many finance issues will benefit from lowered borrowing costs and increased consumer spending. These candidates have favorable technical trends and reasonable upside potential but as always, the positions should be evaluated for portfolio suitability and reviewed with regard to your personal approach and trading style. ****************************************************************** NCC - National City $28.14 *** Slow But Steady! *** National City (NYSE:NCC) is a unique financial holding company that provides a full range of banking and financial services to individuals and businesses, including commercial and retail banking, consumer finance, asset management, mortgage financing and servicing and item processing. The company's operations are conducted through more than 1,200 banking facilities in Ohio, Pennsylvania, Indiana, Kentucky, Illinois and Michigan, and over 350 mortgage offices located throughout the United States. Stocks in the Financial Services group traded higher today after the Federal Reserve reduced its lending rate to a seven-year low and indicated that more rate cuts may be on the way. The Federal Open Market Committee (FOMC) slashed 50 basis points from the Federal funds rate, marking the fifth half-point reduction this year as the central bank attempts to rekindle the sluggish U.S. economy. The FOMC said it is concerned about declines in capital spending, lower corporate profits, high energy prices and rising unemployment. The forward-looking comments eased concerns that the Fed is at the end of its rate cut cycle and finance issues rallied on the news. In most cases, banks benefit from declining interest rates because of increased borrowing by consumers and corporations, which boosts lending profits. Financial service stocks generally outperform the broader market in periods after multiple interest-rate cuts and traders who want to speculate on that trend can do so with this conservative position. PLAY (very conservative - bullish/calendar spread): BUY CALL OCT-30 NCC-JF OI=1560 A=$1.35 SELL CALL JUN-30 NCC-FF OI=186 B=$0.30 INITIAL NET DEBIT TARGET=$0.95-$1.00 TARGET PROFIT=50% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=NCC ****************************************************************** MEL - Mellon $44.28 *** On The Move! *** Mellon Financial Corporation (NYSE:MEL) is a global financial services company that offers a comprehensive range of products and services in domestic and selected international markets. Through its worldwide subsidiaries, the company provides wealth and global investment management for both institutional and individual investors, global investment services for businesses and institutions and a wide variety of services for individuals and small, mid-size and large businesses and institutions. The company has six core business sectors. They consist of Wealth Management, Global Investment Management, Global Investment Services, Regional Consumer Banking, Specialized Commercial Banking and Large Corporate Banking. Mellon has been "on the move" in recent sessions due in part to the performance of the Regional Banking sector and also on new speculation that it might be a merger target in a consolidating industry. The recent sale of Mellon's U.S Leasing and Dealer- Manufacturing Services to GE Capital helped the company return to a focus on high-growth, high-return services and Mellon is also poised to benefit from declining interest rates and the additional liquidity coming into the financial industry. Today the board of directors of Mellon made a statement about their confidence in the company by authorizing a repurchase program covering 25 million shares of common stock. This new program follows an existing 25 million share repurchase program, which is expected to be completed before the end of the second quarter of this year. With the company committed to buying almost 10% of the outstanding shares, there is little doubt the board of directors believes in the future potential of the issue. Those of you who agree with a bullish outlook for the company can speculate on the future performance of its shares with these combination positions. PLAY (moderately aggressive - bullish/credit spread): BUY PUT JUN-40.00 MEL-RH OI=2738 A=$0.55 SELL PUT JUN-42.50 MEL-RV OI=1394 B=$1.05 INITIAL NET CREDIT TARGET=$0.60 PROFIT(max)=31% - or - PLAY (conservative - bullish/synthetic position): BUY CALL SEP-50 MEL-IJ OI=1386 A=$1.75 SELL PUT SEP-40 MEL-UH OI=813 B=$1.75 INITIAL NET CREDIT TARGET=$0.10-$0.20 TARGET PROFIT=$1.25-$1.50 Note: Using options, the position is similar to being long the stock. The collateral requirement for the sold (short) put is approximately $1,525 per contract. http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=MEL ****************************************************************** STT - State Street $106.26 *** Financial Giant! *** State Street (NYSE:STT), a financial holding company, provides investment services and management through its subsidiary, State Street Bank and Trust Company. The Investment Services business line includes accounting, administration, custody, daily pricing, operations outsourcing, securities lending, foreign exchange, record keeping, deposit and short-term investment facilities, lease financing and information services. Management Services are comprised of a range of investment management strategies, securities lending, specialized investment management advisory services and investment management and other financial services. The company's clients include mutual funds and other collective investment funds, corporate and public pension funds, investment managers and others. STT's services are provided from 31 offices in the United States and numerous other offices internationally. Shares of STT have drifted higher in recent weeks as the company announced a series of new contracts and service arrangements with some of America's leading banks and brokerages. The company has recently contracted to provide additional services for Merrill Lynch and last week, State Street announced it had been appointed by Philips Pension fund to provide a range of global investment services and securities lending services for its customers. The company also announced earlier this week that Eastern Bank, a $3 billion full-service bank based in Boston, has selected State to provide global trade banking services to Eastern. In addition to the excitement over the company's new clients, investors are also interested in the upcoming 2-for-1 stock split at the end of May and today, J.P. Morgan initiated coverage on State Street shares with a "buy" rating. Traders who are interested in learning more about this unique financial services company can view an upcoming investor relations presentation live via the Internet on Tuesday, May 22 at 10:00 a.m. EDT. The presentation will be accessible on State Street's investor relations home page: www.statestreet.com. PLAY (very conservative - bullish/credit spread): BUY PUT JUN-90 STT-RR OI=5 A=$0.65 SELL PUT JUN-95 STT-RS OI=60 B=$1.05 INITIAL NET CREDIT TARGET=$0.50-$0.55 PROFIT(max)=11% http://www.OptionInvestor.com/charts/apr01/charts.asp?symbol=STT ******************************************************************* ********** 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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