After All, Tomorrow Is Another Day Margaret Mitchell

October 12, 2002
Volume V, Issue 77
Email : [email protected]

To OTC Journal Members:

After All, Tomorrow Is Another Day
Margaret Mitchell- Last Line in Gone With The Wind

Ideas For a Bounce

The market rocketed off the bottom over the past two days giving us beaten up Bulls new hope and renewed enthusiasm. The major indexes all closed higher for the week for the first time in seven weeks. Believe it or not, the DOW closed up two days in a row for the first time since early March. 

NASDAQ closed at 1114 on Wednesday, and rebounded all the way to 1210 for a two day gain of 8.6%. The DOW closed Wednesday morning at 7286, and rebounded to a week ending closing level of 7850 for a neat 7.7% gain.

We believe there is a strong chance this rally is sustainable for one to three weeks. The August rally off an extremely oversold condition led to a 20% rebound in the NASDAQ before collapsing to new lows, implying this rally may only be one-third completed.

We also believe this is not a long term trend reversal. Unfortunately, this is probably a Bear Market rally, which could provide a good trading opportunity, but does not signify we have reached the bottom.

We expect the market to pull back early next week as traders take some easy profits, and we then believe the rally can continue. A pullback on Monday and/or Tuesday would be heaven sent for those looking to participate on the long side. We have prepared three trading ideas which we believe all look good if the rally extends. 

One important note:  Stocks have dropped dramatically over the last six weeks partially due to the "War" effect. The market has anticipated war with Iraq, and has repriced accordingly. Recent moves by the Bush administration have many convinced we will not go to war until the United Nations has approved a strongly worded resolution, and inspections are implemented and prove futile. This may delay the inevitable for months, which would allow the market to return to a healthier state. However, if you wake up next week, turn on the news, and learn we are bombing Baghdad, all bets are off. The market will tank, and provide you with the best buying opportunities anyone has seen in many years.

Here are three trading ideas for this potential market rebound:

QLogic Corporation (NASDAQ: QLGC)

QLogic is a storage and network technology company which dropped from $36 to $20 in the last three weeks. The stock was decimated in recent weeks when EMC, the 1200 pound gorilla in the data storage space, made pessimistic predictions about IT spending for the remainder of the year (big surpirse).

The recent gap in the chart, the space from $24.60 down to $20.95, is one reason we chose this company. This gap is like a vacuum, and nature abhors a vacuum. The stock needs to rebound to the $24.60 level to fill the gap and fill the vacuum.

QLogic is announcing earnings on Wednesday, October 16th after the close. Analysts expect the company to announce $.26 per share in earnings on sales of $105 million. This would be up from $.19 per share in earnings the same quarter one year ago. If estimates are accurate, this company's profits are growing in a very hostile climate.

The company has not warned of any expected short fall, so it is reasonable to assume they will hit or moderately exceed this number. If this is the case, and the market climate is still favorable, the stock will probably rebound nicely into the $24.50 range and possibly to the mid point of its recent decline, or about $28.

For those high risk oriented traders who want to gamble with less capital, you might look at the options instead of the common stock. You will pay a fairly high premium for the leverage, but the percentage returns will be much greater if the idea works. The November 20 Calls closed at $3.80 (symbol QLQKD) Friday, and the November 22.50 Calls closed at $2.50 (symbol QLQKX).

Each contract represents an option to own one hundred shares. Therefore, the purchase of 10 contracts represents ownership of 1000 shares. In order to purchase 10 of the November 20 calls based on Friday's closing price, you would have to invest $3800. Over the next several weeks, this option will nearly track the common stock point for point. If the common stock goes up $4, the option will probably go up about $3.50. 

With the stock at $22, a $4 move equates to a 18% gain. However, for the option at $3.50, a $4 move equates to a 115% gain. Hence, the leverage of options. Bear in mind, options are very risky, and you should not invest more than you can afford to lose.

There are many options trading strategies- some highly risky and some conservative, but that's a subject for another newsletter. 

If you decide to invest, please use a stop loss at whatever risk tolerance is. If you feel you can afford to lose 10%, set your mental stop loss accordingly and just sell if it gets there. Be disciplined.

Advanced Micro Devices (NYSE: AMD)

Advanced Micro is another stock with a gap to fill. This stock came down from nearly $11 in late August to Friday's close of $3.76. Despite losses in the first half of 2002, AMD still manages to achieve $3 billion in annual sales. The company has a book value of $10.45 per share, and cash of $3.27 per share (about $1.1 billion).

In a bear market rally it is reasonable to expect the stock to close it's early October gap to about $5.25. A more extended rally might take the stock back to the mid range of the recent sell off, or about $7.25.

A pullback in trading on Monday or Tuesday would provide an excellent entry level. Like QLogic, earnings on AMD are due out after the close this Wednesday. Analysts are expecting the company to announce losses of $.67 per share on about $.5 billion in revenues.

Losses have already been factored into the stock price, so any surprise to the upside might yield an exciting move in the stock. Far more important than the earnings will be the company's forecast for the future. The investment community will be listening carefully for any indication of an improving environment for sales. There have been some recent upside surprises (i.e. Yahoo!), so the environment might not be as ugly as the price of this stock suggests.

Once again, for your trading money a stop loss is essential.

Comverse Technologies (NASDAQ: CMVT)

Comverse Technologies may very well have been the Mohammed Ali of penny stocks- the greatest of all time. The company originally came public through one of the infamous Denver based penny stock firms in the late 80's who was subsequently put out of business by the SEC.

In the late 80's you could have purchased this stock in the $.25 to $.75 range for two years. Over the past 15 years the stock has split 2 for 1 and 3 for 2. Therefore, had you purchased 10,000 shares at $.375 for $3750 and held on, you would have ended up with 30,000 shares. At the high at the end of January in 2001, the stock traded up to $121. If you sold your 30,000 shares at that point, your $3750 investment would have become $3.63 million.  If anyone knows of any penny stocks which have performed better, we would love to hear about.

Comverse was started with technology developed by the Israeli military for monitoring intercepted conversations and transmissions. They applied this technology to develop the first "voice mail" systems. When you get annoyed by the complicated voice mail menus at your bank or insurance company, Comverse may very well be responsible.

The stock has been clobbered along with the entire telecom industry. However, the company has $9.66 per share in cash with about $1 billion in annual sales.

Analysts are expecting losses to come in at about $.15 per share in the current quarter, with decreasing losses forecast for future quarters. They have an unusual fiscal year, which ends at the end of January. Therefore, their current quarter ends at the end of October.

Many are beginning to feel the telecom sector may be a little stronger than the market indicates. Motorola (NYSE: MOT) has given no warning, and Qualcomm (NASDAQ: QCOM) has put in an impressive showing recently, announcing CDMA chip sales are coming in better than previous forecasts.

The stock ran from about $7.50 to $9.50 in the August rebound, suggesting a good target price for Comverse could be about $8.50. The November 5 calls are trading at about $2.5 (symbol CQKVA), and could represent an opportunity to make an 80% return if the stock rebounds a couple of points over the next few weeks.

Once again, a stop loss for your trading money is strongly recommended.

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