"Up can only be seen from down."

-- Christina Nikolov

Name/Ticker: Sun Microsystems (SUNW)

Date: January 2, 2003

Opinion: Bearish

Current Price: $3.38

Target Price(s): $2.34

Commentary:

Over the past three months, Wall Street's prognosticators lowered their 2003 earnings estimates for Sun Microsystems (SUNW) by 38.8%. Regardless, the shares are now 31.5% higher than they were three months ago and currently tout a p/e multiple of 37 based on those fiscal 2003 earnings.

If Sun Microsystems manages to rally in the coming days, we doubt it will muster enough strength to surmount tremendous overhead resistance between $4.30 and $4.55. The significance of this level has been magnified by the 200-day moving average, which almost perfectly coincides with this resistance zone. The last time SUNW confronted the 200-day moving average was January 7, 2002. As chart #2 depicts, that attempt failed miserably and the shares plummeted more than 83% over the next 10 months.

Sentiment among options players is also working against the stock. Based on our most recent tally, call open interest is about five times put open interest. Some specific strike prices are worse than the average, with anywhere from ten to forty times more calls than puts. 

That said, we expect SUNW to eventually retest the October low of $2.34, and possibly even undercut that level.

To profit from a decline, we suggest using rallies to initiate short positions. Of course, if you are determined to trade an option based on this security, we like the July 7.50 put (Symbol: SUQSU) at $4.20. If you wait until after the January options expire, the October 7.50 put would be another alternative. Because we expect SUNW to drop over a several month period, avoid risky short-term options, since the short and long-term options have very little difference in premium.



Chart(s):

#1) Sun Microsystems (SUNW) Nine Month Daily Chart

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#2) Sun Microsystems (SUNW) Thirteen Month Daily Chart

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