May 19, 2001 - The Right Line Report – Part 1 of 3
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NOTES FROM THE EDITOR
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Looking back over the last week, it's hard not to be pleased with the
way the markets have been holding up despite the widespread lack of
visibility. Things were pretty dicey there for a couple months, but one
gets the sense the sentiment is certainly turning and traders are
becoming increasingly optimistic. Earnings season, now essentially
consigned to the history books, didn't bring the failure and pain so
many pundits were suggesting was inevitable, and the FOMC continues to
assure the nation that a recession can and WILL be avoided. On balance,
things could be far worse.
After Wednesday's short covering inspired bull run, things settled down
just as we expected, and we've been on cruise control for the last of
couple days. That's likely to extend into next week, as no catalysts
are anywhere in sight . . . no fed, no options expirations, no market-
moving economic reports. Recent gains have been impressive but are
unsupported by the "seasoning" that only time and consolidation can
bring. As a result, many analysts are starting to trumpet the virtues
of "taking positions" now, citing all that money on the sidelines.
Frankly, that money has been there for many, many months, and lacking
catalysts to convince Ma and Pa Investor that the train is leaving the
station RIGHT NOW (!), it's likely to stay there for the time being.
Never forget that an investment house analyst's job has NOTHING to do
with making the right call . . . and it has everything to do with
generating order flow and commissions for the firm. These firms are
looking at a scenario in which investors are ambivalent about jumping
in just yet, and that lack of interest could easily be exacerbated by
the rapidly approaching "summer doldrums."
Furthermore, while it's easy to get lulled into the "everything's gonna
be OK" mindset, a couple warning signals are out there to suggest that
uncertainty levels remain fairly high. Gold, traditionally an inflation
and "instability" hedge, took a sharp spike upward Friday. Energy
remains a serious concern, and oil moved up again to hover around $30
per barrel by the end of the week. We're not out of the woods,
economically or commercially, and it's very important to step back and
realize that it would be a mistake to drop one's guard in reaction to
the uplifting week we just finished.
I'm not suggesting gloom and doom should be the outlook . . . far from
it. This is just a gentle reminder that we must maintain an unbiased,
unemotional view when approaching the art of trading. Be neither a
pessimist nor a cheerleader, both of which call for a value judgment,
and that's where traders get into trouble. Instead, remain neutral,
objectively assess the current situation, and use ruthless logic to
position yourself to profit from what the market gives. The reminder
comes now because the markets are likely to settle into a fairly
uncommitted trading pattern for a while, and forcing a trade in this
anticipated environment is pointless and expensive. Patience is called
for, so keep your powder dry, your intellect engaged, and your emotions
in check. When the real move comes, you'll have your all-important
trading capital intact. You won't be able to trade without it.
Have a great weekend!
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STOCKS COVERED IN THIS ISSUE
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Fri. Fri. Week
Stock Last Change Change Planned Entry
------ ------ ------ ------ -------------------------------------
Technology:
RFMD 34.03 0.79 5.32 Long over 35; long over 37.75
MUSE 46.45 3.69 7.04 Long over 47;
long on bounce near 42.50-43.50;
short below 41.25
AMD 32.49 0.94 4.81 Long on bounce near 30; long over 33.75
VRTS 73.81 4.61 10.91 Long over 75; long on bounce near 64.35
KLAC 55.46 0.73 4.63 Aggressive long over 56.50;
long over 57.25;
long on bounce near 50.59
A 36.00 -2.72 -3.69 Short below 35;
short on bounce down from near 38
NVDA 86.30 -0.70 8.16 Long over 90; long over 95.75;
long on bounce near 81.63
Telecommunication:
QCOM 65.38 -0.97 7.43 Short below 64; long on bounce near 60;
aggressive long over 69
Internet:
VRSN 60.74 2.74 8.20 Long over 61.73;
long on bounce near 51-52
Medical & Biotech:
HGSI 67.93 2.43 10.05 Long over 68.61;
long on bounce near 57-58
IMCL 44.93 -1.58 6.51 Short below 44;
long on bounce near 40-41
IDPH 57.05 1.95 5.05 Long over 59; long on bounce near 50
Energy:
* OSCA 28.55 1.35 3.45 Long over 29
* ACI 37.45 1.60 3.85 Long over 37.75
EOG 49.22 1.13 4.81 Long over 51;
short on bounce down from near 50
* SGY 55.26 0.76 4.51 Long on bounce near 51.10-52.75;
long over 56.25
* VLO 51.59 0.85 1.59 Long over 53.10
Financial:
AFL 32.35 -0.09 1.42 Long on bounce near 30-31;
long over 33.40
* BKH 55.94 1.41 1.79 Long on bounce near 52-54;
long over 56.73
Other:
PWR 36.90 1.24 5.03 Long over 38; long on bounce near 33
* IGT 59.85 2.76 5.74 Long over 60.50;
long on bounce near 55.75-57.75
CHRW 30.99 0.04 2.19 Long over 31.65;
short on bounce down from near 31
* EC 28.59 0.18 1.63 Long on bounce near 26.00-27.75;
long over 30.12
SGR 59.95 1.33 2.36 Long on bounce near 57; long over 60.85
* BZH 61.60 -2.70 -4.95 Long on bounce near 59-61;
long over 65.30
Split Candidates:
MUR 86.45 4.23 9.94 Long over 87.75;
long on bounce near 81-83
ESRX 90.10 0.19 7.05 Long over 91; long on bounce near 87
New Splits Announced:
KKD 63.85 7.45 14.66 Long on bounce near 56;
aggressive long over 65.15
Remember, that the summary section of the Report provides entry points
extracted from our full write-ups and may be taken out of context. Do
not trade a stock solely on this data, make sure you read the
associated narrative. We make the assumption that if you are a very
short-term (day) trader, you know that an entry over the previous day's
high can be made as long as you can nimbly exit the stock should it
reverse on you. We won't note this in the table, but rather say, Long,
Short, Bounce or make a comment if required.
* "Sleepers" are a regular feature in our weekend issues, but you will
frequently find them during the weekday reports, especially when market
conditions are volatile. As a rule of thumb, Sleeper stocks are
currently profitable and have superior earnings velocity going into the
future. These stocks are fundamentally strong and in diversified
industry groups - both features of lower risk. By including Sleepers,
we have expanded our coverage of stocks to include those that can be
traded by longer-term traders, and others that don't always have the
time to watch their stocks throughout the day.
We suggest that you use trailing stops for Sleeper stocks. Stops should
be initially placed 7-10% below your entry level, or as advised in the
write up, then adjusted as necessary. Note that determining stops in
this manner is more effective on less volatile stocks such as Sleepers.
Be sure to check the write-ups for details.
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MARKET NEWS AND CONDITIONS
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Friday On the Week
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Dow +53.16 to 11301.74 +480.43 (+4.4%)
Nasdaq +5.20 to 2198.88 +91.45 (+4.3%)
S&P +3.47 to 1291.96 +46.29 (+3.7%)
Russell +1.52 to 506.28 +18.92 (+3.9%)
NYSE Volume 1.28 billion
NYSE Advancers 1665
NYSE Decliners 1384
Nasdaq Volume 1.73 billion
Nasdaq Advancers 1967
Nasdaq Decliners 1821
New highs/lows data for the week...
Fri Mon Tue Wed Thu Fri
05/11 05/14 05/15 05/16 05/17 05/18
--------------------------------------------
NYSE New Highs 165 120 131 206 287 258
NYSE New Lows 13 16 17 17 21 19
Nasdaq New Highs 125 131 151 223 232 232
Nasdaq New Lows 21 40 40 52 46 45
Friday brought on a little profit taking, but by the end of the session
both the Nasdaq and Dow ended slightly to the upside. Options
expirations didn't shake the markets and there wasn't much in the way
of significant news. Volume was fairly light and breadth positive. Oil
stocks rallied as the price for a barrel of crude jumped to almost $30.
The XAU gold index spiked up 4.1% on speculation that the Bank of
England might reduce or eliminate the sale of its reserves. The 30-year
Treasury bond added 3/32 to yield 5.757%. For the week, the Dow gained
4.4% and the Naz was up 4.3% on strength from the Fed's rate cut.
EARNINGS REPORTS: Monday: CHP; Tuesday: TLB, TGT, NVDA, KSS, and SMTC;
Thursday: CPWM and AEOS; Friday: SKYW. Be sure to check out the
RightLine earnings list by visiting:
rightline.net
SPLIT CANDIDATES WITH TARGETS THIS WEEK: We've targeted KSS and FNM for
Tuesday and ESRX for Wednesday.
SPLITS DUE THIS WEEK:
IVX splits 5-for-4 on Monday.
EVENTS TO WATCH:
May 21: Fed officials speaking at NABE/AEI conference.
May 21-22: Adams Harkness Israel-US Medical Technology Conf., Bear
Stearns Industrial Internet Conf., Friedmand Billings Ramsey Growth
Conference, Lehman Bros Next Generation Wireless Conf., Lehman
Bros/A.M. Best Insurance Conference.
May 21-23: 3G Mobile Networks Conf, CSFB European Tech Conf., eHealth
Europe, In Silico Technologies in Drug Discovery (PHA, AVE, BMY,
RSTA).
May 21-24: GigaWorld IT Forum.
May 22-23: UBS Warburg Specialty Pharmaceuticals Conf.
May 23: Ericsson Strategy and Tech Summit (ERICY), H.C. Wainwright
Select Stock Conf., LVLT Investor Meeting
May 23-24: Merrill Lynch Global Industries Conf.
May 24: Agilent Analyst Day (A), Salomon Smith Barney Imaging/Visual
Media Conf.
May 28th: MEMORIAL DAY, US Market Closed.
ECONOMIC NEWS:
Monday, May 21: Fed Governor Meyer speaks on "Comparative central
banking and the politics of monetary policy."
Tuesday, May 22: Fed Governor Meyer speaks on "The stock market and its
effect on the economy."
Thursday, May 24: Initial Claims, New Home Sales, Fed Chairman
Greenspan speaks on "Economic Developments."
Friday, May 25: Durable Orders, GDP-Preliminary, Chain Deflator-
Preliminary, Existing Home Sales.
It was good to see the indices hold up through the end of the week
after Wednesday's big gain. The Dow's previous resistance near 11000
will most likely be a strong support level now. The Nasdaq continues to
have difficulty getting over the 2200 level, but is holding above
support of its 22 and 50 DMAs. The economy remains on the verge of a
recession, but appears to be gaining a little strength. However, there
are still a number of hurdles to overcome, higher gas prices,
continuing energy problems, a weak manufacturing sector and weak
corporate spending etc…. Take the time to make a good trading plan and
then stick to it.
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TECHNOLOGY TRENDS – MAY 19, 2001
GENETIC-BASED MEDICINE
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"A brave new world of drug treatment will emerge in the next ten years,
based not on patients' complaints but rather on the unique markers in
their DNA. In the early stages, the new technology will be used to
respond to disease once illness emerges, but eventually doctors may be
able to recommend a course of treatment YEARS before the presence of
ANY symptoms. This week I'll take a quick look at the companies leading
the charge into the next generation of medicine."
Ken Biggio
- Right Line Tech Stock Analyst
Subscribers can read the entire article by clicking on the following
Link: rightline.net
Click on Tech Trends
Then select: 05-19-01 Tech Trends – Genetic Medicine
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TECHNOLOGY STOCKS
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Technology turned in a mixed performance to close the week. But then
again, a little profit taking was expected. Chips, chip-making
equipment, storage, and wireless all finished slightly lower, but
networkers, telecom, and servers buoyed the sector with modest gains.
We're anticipating a period of laziness in the tech sector for a while,
as the recent gains must be digested and absorbed into traders'
collective consciousness before the group can climb much higher. The
good news is that the bad news is already out and there's probably not
too much that could take the sector down significantly. The bad news is
that the good news is also out there, leaving very little to propel the
futuristic techs forward. On balance, technology continues to hold the
promise of sizable profits for traders, but at this point, patience is
in order.
RF Micro Devices (RFMD) - RFMD climbed all day Wednesday to provide our
30.75 long entry just before the close, then added a couple more points
to finish at 34.03 Friday to bring paper profits of slightly better
that 10% in less than three days. The company announced a strategic
agreement with Agere Systems Friday that calls for the wireless
equipment provider to invest $58M in a Florida factory owned by Agere
in exchange for access to the plant while the two collaborate to
jointly develop wireless devices. Add shares of RFMD over 35 using
tight stops and pick up a few more on a break over 37.75. Optionable.
Micromuse Inc. (MUSE) - MUSE broke below support and traders entered
short below 42 on May 10th. A low of 35.17 was reached several sessions
later and profits were locked in. The trade was good for 6.83 points or
15%. A bounce ensued, apparently fueled by encouraging comments from
several analysts who attended MUSE's investor conference on Wednesday
and it closed the week at 46.45. If positive sentiment takes the stock
higher, enter long over 47. On a pullback, go long on a bounce near
42.50-43.50. Take a short with a tight stop below 41.25. Optionable.
Advanced Micro Devices (AMD) - Traders who entered AMD long at a gap-
adjusted 32.25 on May 2nd soon exited on weakness. They re-entered long
on a bounce near 27.53 on May 11th near the close. Friday the stock
rose 0.94 to 32.49. Tighten trailing stops to protect profits of up to
18%. Exit if AMD pulls back and re-enter on a bounce near 30. If it
keeps moving higher, add shares over 33.75. Optionable.
Veritas Software (VRTS) - VRTS started off lower but then motored right
up through our 63.75 long entry Wednesday. UBS Warburg had positive
comments on the stock Friday, noting that growth so far this year is
stronger than in ANY month in 2000. Shares continued to power higher on
the comments, finishing the day at 73.81 and breaking above its recent
consolidation range in the process. Traders who entered near 61.85 on
Monday have over 19% in profits sitting on the table, so pull stops up
and plan to add long shares again over 75. If VRTS pulls back first,
take profits and re-enter long on a bounce near the 22 DMA at 64.35.
Optionable.
KLA Tencor (KLAC) - After a series of upside gaps in late April,
traders finally were able to use the gap-open tactic to take a long
position over 54.95 April 30th. Most were forced to take small profits
when the stock collapsed later that afternoon. Shares have since worked
their way higher and are in position for a breakout with Friday's 55.46
close. Aggressive traders can go long over 56.50, while the rest of us
will wait for a push above 57.25 to jump in. If KLAC first pulls back,
enter long on a bounce near the 22 DMA at 50.59. Optionable.
Agilent Technologies (A) - Thursday, after the close, A reported 2nd-
quarter earnings of 0.26, missing estimates by 0.01. Worse, it warned
that it may have a loss of between 0.20 and 0.30 and a sequential
decline in revenues in the 3rd quarter to as low as $2 billion, well
below the current consensus estimate of $2.5 billion. Hoooey! Everybody
started kicking up dust. Salomon Smith Barney cut its 3rd-quarter
estimate from a profit of 0.28 to a loss of 0.21! It also cut its FY01
estimate to 0.72 from 1.53. However, the firm added that the 3rd-
quarter "feels like a bottom, as there are few orders left to cancel."
JP Morgan downgraded the stock from "buy" to "long-term buy" and set a
price target of 45.00. Bear Stearns cut the stock from "attractive" to
"neutral." The firm said that 1) it believes there are too many
concurrent problems that put too high a variability on results in the
near to medium term, 2) it would get more interested in the stock below
30 per share, and 3) it continues to believe that there is little
reason for investors to add to or subtract from current positions. The
company optimistically predicted that as bad as things are, they must
be near the bottom. They said they may see an improvement in orders
later in the 2nd-half and hope to return to modest profitability in the
4th quarter. Morgan Stanley however, upgraded the stock to "strong buy"
from "outperform" and raised its price target to 50.00 from 45.00.
After all of the analysts had spoken, in the end it was traders who
decided which way this stock was gonna go...down. Friday, on huge
volume, (6,660,100 vs its average 2,457,181) the stock fell 2.72 to
close at 36, near its low of the day and below the 22 and 50 DMAs. Plan
to go short below 35 or else on a bounce down from near 38. Optionable.
Nvidia Corporation (NVDA) - Shares of NVDA continued to slide below
78.75 May 11th to serve up our planned short entry, but traders were
forced to cover near even following Monday's late-day rally. They
jumped to the long side over 86.75 Thursday, and are close to even with
Friday's 86.30 close. Nibble long over 90 and add shares over 95.75.
The 22 DMA, now at 81.63, offers a good opportunity for a long bounce
entry. Earnings are due May 22nd, and analysts expect 0.39 per share,
up from 0.23 one year ago. As always, scale back considerably or exit
the trade prior to the earnings announcement. Optionable.
UPDATES:
Novellus Systems (NVLS) - NVLS climbed with strength Wednesday to
provide our long entry over 51. The stock closed at 54.55 Friday, so
add shares over 55.50 and 57.75. A bounce in the 48.50-49.50 range will
be playable long. Optionable.
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