Email Version, Section 1, Wednesday 05/09/2001
The SplitTrader.com Newsletter Wednesday 05/09/2001 1 of 1
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In This Newsletter:
Market Commentary | The Cisco Skid
Definition of the Day
Wednesday's Split Announcements | None
Thursday's Play-of-the-Day | AYE
The Cisco Skid
According to an old investor aphorism, there are two kinds of
businesses in this world: ones that have trouble and ones that
are going to have trouble. Guess what Cisco Systems investors
(Nasdaq:CSCO)? Your company is mired in the latter category.
As hard as this may be to fathom (particularly for those
investors betting the kids' college education last year that the
company would become the first firm ever to sport a trillion
dollar market cap), Cisco's track record of posting ever-
expanding sales and earnings came to an abrupt halt after an 11-
year run. What's more, it did more than just come to a halt, it
Yesterday Cisco reported it lost $2.69 billion, or $0.37 per
share, for the three months ended April 28, which didn't exactly
compare favorably with earnings of $641 million, or $0.08 per
share, in the same year-ago period. Excluding a number of one-
time items, namely restructuring charges and inventory write-
offs, Cisco earned $0.03 per share.
However, more discouraging to the Cisco faithful was the top-line
growth (there wasn't any). Quarter-to-quarter sales dropped for
the first time in Cisco's history, declining 29 percent, to $4.73
billion from $6.7 billion recorded the same time last year.
To be fair, much of yesterday's bad news was already priced into
Cisco's stock. In fact, investors and traders were anticipating
the poor quarterly performance to the point they pressured the
Internet routing giant's stock to a two-and-a-half year low of
$13.68 last month. Still, that did not stop the market from
getting a few more licks in today, as Cisco closed the session
down $1.29 to $19.09.
Unfortunately for many long-suffering 401k investors, Cisco won't
be hitting $60 again anytime soon. The new complaint among
analysts is that the company lacks visibility, meaning analysts
are unsure how to value Cisco since its CEO, John Chambers,
refused to force feed them his outlook for the coming year.
Sadly, this means many Cisco analysts will need to cut back
their CNBC appearance schedule and start performing actual
analytical work again. (Lord, help us all.)
Cisco's lousy outing weighed heavily on the Nasdaq Composite
Index (COMPX). The tech-laden market barometer gapped down 36
points at the open and then spent the remainder of the day
vacillating between 2,140 and 2,180 before ending the session
down 42.94 points, or 1.95 percent, to 2,155.83.
Not that Cisco was the sole cause of the COMPX's malaise. Also
pressuring the COMPX were tech heavyweights Microsoft
(Nasdaq:MSFT) and Intel (Nasdaq:INTC), which finished the day off
$1.66 and $1.63, respectively.
As for the go-go Old Economy issues, they, too, opted for a
respite. The Dow Jones Industrial Average (INDU) closed the day
down $17.05, or 0.16 percent, to 10,866.46, posting its fifth
loss in six days. Pressuring the INDU (in addition to Microsoft
and Intel) were Home Depot (NYSE:HD), AT&T (NYSE:T) and Walt
Disney (NYSE:DIS). Among the upside movers were Alcoa (NYSE:AA),
Procter & Gamble (NYSE:PG), Merck (NYSE:MRK) and Exxon Mobil
Another notable upside mover was Caterpillar (NYSE:CAT), which
gained $0.15 to $52.00 to set a new 52-week closing high. This
throwback to the Paleolithic age has been on a tear for the past
month, moving higher by 24 percent. Fortunately, more investors
and traders are paying attention to basic-industry stocks like
Caterpillar. Keep in mind, cyclicals are often the first to
rally after the market has hit a bottom.
With that said, most of the major cyclical sectors moved higher
with Caterpillar today, and none more so than the gold sector.
The CBOE Gold Index (GOX) surged ahead 7.5 percent to post a new
52-week high of 40.66.
As for the downside, the networking issues lead the way once
again. In addition to Cisco, Juniper Networks (Nasdaq:JNPR), JDS
Uniphase (Nasdaq:JDSU) and Extreme Networks (Nasdaq:EXTR) all
made for the nether regions today.
Fortunately, the same cannot be said of the Splittrader Current
Play list. Of the eleven stocks gracing our compendium, seven
closed the day in the black. Leading the way was today's Play of
the Day, Cross Timbers Oil (NYSE:XTO), which gained $1.10 to
close at $27.95.
In the Treasury arena, long-dated issues recovered after
stumbling out of the gate. The 10-year Treasury note ascended
1/2 to yield 5.18 percent while the 30-year government bond
gained 26/32 to yield 5.675 percent. On the short end, the two-
year note gained 3/32 to yield 4.06 percent.
On the economic front, there was little worth noting. In fact,
there will be little worth noting tomorrow, too, aside from the
weekly jobless claims report, which, incidentally, is expected to
post above its four-week moving average of 405,000.
The most significant economic news for the week will be released
Friday with the April retail sales report and the Producer Price
Index (PPI). The market consensus is calling for PPI to have
risen 0.3 percent in April, up sharply from a 0.1 decline in
March, while core PPI is expected to have increased 0.1 percent,
unchanged from its March showing. Meanwhile, retail sales for
April are expected to have gained 0.2 percent for the month, up
from a 0.2 decline in March.
Taken in aggregate, the recent slate of economic data is showing
a reemerging economy. To that end, a survey of 27 economists by
the National Association for Business Economics calls for 2
percent growth in 2001 and 3.1 percent growth next year, which
means a recession appears unlikely.
As for trading this market, I don't expect much price action
tomorrow or Friday. Traders are positioning themselves ahead of
the Federal Reserve's FOMC meeting next Tuesday, which is
expected to bring another 50-basis point interest rate cut, at
least according to the fed funds futures market, which is priced
for a 70 percent chance of said event occurring.
Of course, the million dollar question is whether the market has
already priced the half-point interest rate cut into security
prices. At this point, it probably has, so I doubt that either
major market has much upside potential over the next few trading
Another reason the markets lack upside potential is resistance.
On Monday the INDU was again stopped short of 11,000. This has
happened every time the blue-chip average has attempted to close
above this level over the past eight months.
As for the New Economy, the COMPX isn't without it's resistance,
either. Once again, the COMPX is trading below 2,200, which has
proven to be a brick wall for the index over the past three
months. In fact, the COMPX has not closed consistently above
this level since February.
Nevertheless, there are stocks that will move over the coming few
sessions regardless of overall market action, which is why you
need to keep abreast of our Current Play list.
Definition of the Day
This strategy involves the purchase of an options contract as a
form of insurance to protect a position in a portfolio in the
event of a price increase.
For the complete definition, please go to:
Wednesday's Split Announcements
Thursday's Expirations by Payable Date
The PLAY LEGEND:
SplitTrader.com Play Recommendations.
Play-of-the-Day is our number one play recommendation for the
following trading day.
Updates are just that - updates on continuing plays
New plays are brand new for the newsletter.
Closing plays are plays that we feel have lost the advantage.
You will see:
Stock Symbol, Company Name, Closing Price, (change for the week)
Picked at date and Change since picked
BoD = Board of Directors meeting
ADV = Average Daily Volume
dma = daily moving average
At the SplitTrader.com website, we have comprehensive profiles
for each stock that we are playing or have played in the past, as
well as hundreds of others. Please take the time to visit the site
to view the profile of the stock(s) you wish to learn more about.
Wednesday, May 9, 2001
AYE - Allegheny Energy, Inc. $51.84 +0.26 (+0.84)
Allegheny Energy, Inc. sold off slightly on Tuesday after closing
at an all-time high of $52 in the previous session. Shares of AYE
traded in a tight range, hitting an intra-day high of $51.80 and
an intra-day low of $51.15, before closing at $51.58 on volume of
413,000 shares. Volume has stabilized following the secondary
offering on April 27th so AYE may be able to rally as we move
closer to the Annual Meeting on Thursday. We are looking for a
split announcement out of the meeting. Until then, support is the
5-dma at $50.97 with stronger support at $50.50, the 10-dma.
Resistance has moved up to Monday's intra-day high of $52 and
then possibly $53 or $54. Look for a bounce off of $50.97 or a
move above $52 on midday volume of at least 300,000 shares before
opening new positions. Our stops remain at $47.
Shares of AYE marched higher on Wednesday and now lay just $0.16
off its all-time high of $52 set on Monday. The energy company
may now be benefiting from the onslaught of the air conditioning
season in the Northeast. As everyone knows, air conditioners are
energy companies' best friends. Turning to recent news in AYE,
investors got to see the softer side of the company on Tuesday,
as it reported that it is partnering with government agencies to
absorb carbon dioxide from strip-mined areas. This program is
the first of its kind and is part of AYE's ongoing effort to be
at the forefront of environmental issues. Getting back to
Allegheny's chart, we can see that another breakout may soon
occur with a burst above $52 on strong volume. If AYE can get
above this hurdle on at least 560,000 shares, traders could take
this opportunity to initiate new positions. Otherwise, a
pullback to support of $50, with a subsequent bounce might also
mark another lower-risk entry point. We are keeping our stops at
$47.oo to protect against a reversal.
Picked on April 29th @ $50.60
Change since picked +1.24
Stop Loss @ $47.00
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