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Stocks mixed to lower

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For the most part, the broader market averages are seeing a slight amount of selling as the session progresses. Yesterday we mentioned the Oil Service Index (OSX.X) that all subscribers should be keeping an eye on to get a feel for potential bullishness building and perhaps some confirmation to the thought of economic strengthening and that group is posting gains of 2.5% today, but trading right on a short-term downward trend. A move above the $82 level in the index will be near-term technically bullish for short-term traders, but to see a continued longer- term move higher, I feel a break above the $90 level is needed. One stock I like in the group are shares of BJ Services (NYSE:BJS) near the $30 level. Shares of BJS are still battling with a rolling 200-day moving average and a move above the recent high of $32 or $32.50 would have a bull starting to look good.

The CBOE Internet Index (INX.X) trades lower by 2.7% at $135. After trading briefly above retracement two sessions ago at $145, the market seemed to lose its aggressive bullish attitude and the group has experience selling. The rising 50-day MA and retracement at $123 is where we now look for support. If found, this is a sector to be keeping an eye on to get a pulse for how aggressive longer-term market bulls are. If the market will buy the Internets on a pullback, chances are good that some of the stronger stocks ahead of recent weakness will be good bullish candidates.

Subscribers that will use the point and figure charts along with some trading techniques like the "inside day" will find some good low risk / high potential return trades. Those stocks where relative strength remains strong vs. the SPX will most likely be the best performing stocks for the rebound.

I've seen this recently

Yesterday I was looking at the weekly bar chart of Calpine (NYSE:CPN). A company that is thought to have quite a bit of exposure to troubled Enron (NYSE:ENE). What I saw in that weekly chart with retracement overlaid is starting too look very similar to what we witnessed in the weekly chart of Enron.

Economist talk about "phases" of a cycle in terms of growth, maturity and decline. For Enron, the cycle is/was Yahooeeee, ouch and oh no. If I were a Calpine employee holding more than 15% of my retirement funds in the company stock, I would immediately be taking some type of defensive action. I would call my employee relations department and discontinue further investment in the company stock plan until I get further clarification on just what kind of exposure my employer has to the Enron situation. Two weeks ago, an employee might see that some money came out of their hard earned pay and was placed in the company stock near $20. That investment is now worth $14. The market doesn't like something and I might want to stop investing in this investment near-term until I get more clarification.

This weekend, I must sit down and review my retirement plan. How much money have I put in Calpine stock? Moody's just downgraded some of the company's debt to "junk" and those bondholders have more "rights" than I do as a stockholder. If Moody's thinks a "junk" rating is appropriate, what does that say about the stock risk near-term? Will my retirement picture change drastically if the stock were to trade $10, $5 or $0.63? If not, then I may let her ride. If so, I need to take defensive action (see Bailey's basics on hedging). One "option" might be to buy the April2002 $12.50 puts (CPNPV) at $3.60. This would give me some time to get more information and help hedge some of my retirement holding until things clear up. If everything is OK, then the stock should recover, but this is insurance I'm buying. With the underlying stock in a retirement savings plan, a move back above $16.10 would have me recovering from the cost of the put hedge. A move below $8.90 will most likely have me "glad" that I at least hedged my holdings here. I'm thinking an Enron employee would have done the same had they known about options and hedging.

Jeff Bailey
Senior Market Technician
Option Investor

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