Option Investor

Daily Newsletter, Tuesday, 05/28/2002

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The Option Investor Newsletter                 Tuesday 05-28-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      05-28-2002           High     Low     Volume Advance/Decline
DJIA     9981.58 -122.68 10118.51  9961.86 0.96 bln   1392/1775
NASDAQ   1651.86 -  9.32  1671.35  1632.75 1.13 bln   1586/1905
S&P 100   534.32 -  5.60   540.89   532.05   Totals   2978/3680
S&P 500  1074.55 -  9.27  1085.98  1080.31             
RUS 2000  492.41 -  1.23   495.22   487.43
DJ TRANS 2728.13 - 15.50  2749.01  2700.49
VIX        22.43 +  1.27    23.37    21.68
VXN        45.11 +  2.25    46.48    44.45
TRIN        1.72 
PUT/CALL    1.08

Another Day, Another Support Level Broken

The day started off bad and got worse. Sounds like the never 
ending story of late. Before the bell two Dow components were
downgraded and that took all the steam out of investors who
came back from the holiday weekend with a bullish intent. At
10:AM the economic news provided a mixed picture of the recovery
and a monster sell program was triggered that quickly knocked
-100 points off the Dow. 



Intel was downgraded by Merrill Lynch before the open saying 
in a research report that business for the first two months of 
the quarter had been soft. The analyst kept his short term strong
buy on the stock but lowered his profit estimates by a penny. 
The outlook from Merrill was based on flat shipments of 
motherboards from Taiwanese manufacturers. Also, memory prices
are still dropping and microprocessor inventory is growing. Not 
a recipe for a strong economic recovery in chips. Intel also cut
prices over the weekend on its Pentium 4 chips. Typically April
and May represents a very slow period for Intel with the quarter
strongly back end loaded with June orders. INTC dropped 
intraday but recovered some to close down only -.31 cents.

Another Dow component, Home Depot, was down -1.88 after UBS 
Warburg downgraded it from BUY to HOLD saying the retailer
was changing too much too fast. He cited the volume of current
changes as "monumental changes for a complex organization in a 
very short period of time." He also cited the great profitability
of Lowes compared to HD. He said the departure of "key veterans"
could be impacting sales trends.

The economic news was mixed with the Consumer Confidence coming
in lower than March for the second month in a row.  The headline
number of 109.8 was slightly ahead of April's 108.5 but below the 
110.7 in March. There were several weak elements in the index 
including fewer consumers thinking about buying cars, houses and
major appliances. They also expected interest rates to rise soon 
and expected business conditions to worsen. While the numbers were
positive on the surface the underlying tone was one of increasing
caution. While the buying trends weakened the consumers felt
slightly better about the employment situation. 

Personal Income came in as expected with an increase of +0.3%
but was only half of the growth for February. This indicates 
the impact of higher unemployment and the impact on raises and
benefits on existing jobs. Personal Spending remained high with
a +0.5% growth compared with +0.3% in March and +0.8% in Feb.
Spending on services slowed however by only +0.2%.

The biggest plus for the day was the Existing Home Sales which
showed no signs of slowing at 5.79 million units. This beat the
consensus of 5.50 million significantly. This shows the impact 
of the low interest rates and according to analysts is showing
a race by the consumer to lock in the lower rates before the
expected hikes later this year. Once those hikes begin the 
housing market is likely to come to a screeching halt. Greenspan
and company will see this as a big plus for the economy and will
try and hold off on those hikes as long as possible.

After the close today Novellus hosted an analyst call to update
their guidance for the quarter. Piper Jaffray had expected them
to update guidance to between $250 and $275 million. Good call!
NVLS said that orders for Q2 would be in the $275 million range
but the CEO said a resumption of corporate confidence and spending
would be necessary to maintain current growth levels. NVLS also
said they expect to earn 8 cents a share instead of the 6 cents
estimated at the beginning of the quarter. The increased earnings
on only $220 million in revenue was directly related to reduced
costs. As for visibility going forward they would not discuss
guidance for Q3. The good news, bad news joke saw NVLS and the 
chip sector trading lower in after hours. That little tidbit of
information could be the problem tomorrow. If they were doing 
well they would surely want to report it. This means things must 
not be good if they do not want to release the information. They 
are hoping sales will pick up before they are forced to make the
disclosure. NVLS was trading down about $1 in after hours. 

The markets were down today but many people have not yet noticed.
The three-day weekend stretched into five with the Nasdaq posting
the 2nd lowest volume day of the year and the NYSE the third. The
lightest day of the year was Friday. It appears most traders left
early for the holiday and stayed late. What they missed today was
another breakdown of support on all the Dow and S&P. The Dow fell
below the 10100 support level from last week and the psychological
10000 level as well. Once the 10K level broke at 10:51 this morning
the index struggled the rest of the day. Three times it traded 
above 10K briefly only to fall back again as sellers leaned on 
the average. Only three Dow stocks finished positive, EK +.01,
HPQ +.01 and SBC +.31. Those unlikely three stocks are not normally
the leaders of any rally. Should the Dow move down from here the
next support level is 9922 from May-10th followed by 9811 from
early May. Resistance is now 10000 and 10100.

The Nasdaq faired much better than the Dow and managed to close 
back above its closest support level of 1650. Despite the downgrade
to Intel at the open the Nasdaq held its ground bounced off support
at 1632. Considering the weak tech environment this was encouraging.
The big cap Nasdaq winners were an unlikely set of players including
SUNW, ORCL, QCOM and AMGN. Biotechs continued to bounce around 
after the BGEN news last week. The NVLS news tonight could cause
a retest that 1632 support level on Wednesday if the cautious 
comments are met with concern by traders. Support below that
would be 1600 followed by 1565. Overhead resistance is at 1674.

The S&P struggled all afternoon after breaking support at 1080
and 1076. The afternoon trend was marginally up but it traded 
in a very narrow range with zero conviction on the part of traders.
Resistance is now 1080 with support at 1067 followed by 1054.

The trading day on Wednesday could be exciting. With support 
levels just below our close and resistance levels just above,
something has to give. The positive side of the NVLS conference
call could give the bulls a reason to buy when support levels 
are hit. Conversely, the bears claim the news on NVLS
was already priced into the market since Piper started making 
those claims last week. I would not be surprised to see an
oversold bounce with the TRIN at 1.72 and the put/call ratio
at 1.08. Both of these indicators are very bullish. With the
summer doldrums ahead of us this would setup another entry point
for the bears. I doubt there are enough buyers to prompt a
sustained rally so any long positions would only be for short
term traders. 

Enter Very Passively, Exit Aggressively!

Jim Brown


Leigh Stevens will be back in the office on Thursday, May 30th, 2002.

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Uncertainty Rules
By Eric Utley

A slew of seemingly positive data failed to inspire investors
Tuesday, who instead deferred to geopolitical risks and the
uncertainty over corporate profits.  Blue chips and economically
sensitive transport issues fared worse than tech shares, which
was a change from the recent trend.

The sector scorecard was littered with 1 and 2 percent drops in
groups such as the banks, cyclicals, and software shares.  The
lone bright spot in the technology group was the Biotechnology
Index (BTK.X), which gained more than 2 percent for the day on
the back of continued strength in Biogen (NASDAQ:BGEN).

The one sector that really stood out, again, was the Gold and
Silver Index (XAU.X), which ran up to another fresh 52 week
high.  As noted below, the XAU was the best performing index for
the day with its 3.27 percent gain.  June gold (GC02M) traded
as high as $325.8 per ounce Tuesday before pulling back on what
looked like profit taking.

The rate at which the rally in gold is increasing is worrisome,
for both gold investors and the broader market.  For one, the
near parabolic rally in the equities can't last indefinitely;
then again, they said the same thing about tech stocks in the
late 90's, the same ones who missed most of the rally up to
6000.  To digress, there's some excessive upside action in the
gold shares, many of which are trading at very rich premiums,
including the hedged companies who stand to miss out on much of
the rise in bullion through forward sales.  For the broader
market, the rise in gold portends either inflation or a flight
to hard assets, neither of which are particularly good for stocks
in general.  We'll continue to explore this relationship as the
story unfolds.

Meanwhile, it's the week following Memorial Day -- a historically
bullish week for stocks -- but no one seems to care.  Stocks
plunged early on and never really could muster a rally back up to
positive territory.  Rumors circulated early in the day that
President Bush had departed his NATO engagement earlier, which had
some speculating that there was trouble on the domestic front.
That particular rumor was squelched when Bush emerged with the
Pope.  The fact that we even touch upon such silliness reveals
just how jittery the market is.  Moreover, we saw that much in the
rise in the CBOE Market Volatility Index (VIX.X) Tuesday.

The only thing we can do as traders is to define our risk
parameters and stick with what's working.  Be bullish on strong
stocks, and bearish on weak stocks when the risk management lines
up.  As for the broader market, it will remain levered to the
upcoming economic releases and earnings guidance.


Market Averages


52-week High: 11350
52-week Low :  8062
Current     :  9982

Moving Averages:

 10-dma: 10211
 50-dma: 10207
200-dma:  9898

S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1075

Moving Averages:

 10-dma: 1090
 50-dma: 1107
200-dma: 1117

Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1245

Moving Averages:

 10-dma: 1286
 50-dma: 1337
200-dma: 1450

Gold & Silver ($XAU)

The XAU was once again the best performing sector for the day
with its 3.27 percent climb higher to yet another new multi
year high.  The metal traded above $325 per ounce.

Leading individual names to the upside included Meridian Gold
(NYSE:MDG), Anglogold (NYSE:AU), Harmony Gold (NASDAQ:HGMCY),
Newmont Mining (NYSE:NEM), and Freeport McMoran (NYSE:FCX).

52-week High: 89
52-week Low : 49
Current     : 89

Moving Averages:

 10-dma: 82
 50-dma: 74
200-dma: 62

Forest & Paper ($FPP)

The FPP was the worst performing sector for the day with its
1.76 percent drop.  Weak broader market conditions as well as
economic uncertainty were to blame.

Leaders to the downside included Georgia Pacific (NYSE:GP),
Louisiana Pacific (NYSE:LPX), Boise Cascade (NYSE:BCC), and
Abitibi (NYSE:ABY).

52-week High: 382
52-week Low : 270
Current     : 364

Moving Averages:

 10-dma: 372
 50-dma: 364
200-dma: 337


Market Volatility

The VIX spiked higher Tuesday to the tune of more than 5 percent.
I'm starting to see signs of increased fear, reversing the trend
that was in place through early last week.

The same goes for the VXN, which appears to have formed a very
short term base from which it may climb higher this week, in
essence confirming weakness in the Nasdaq-100 (NDX.X).

CBOE Market Volatility Index (VIX) - 22.26 +1.10
Nasdaq-100 Volatility Index  (VXN) - 45.07 +2.21


          Put/Call Ratio  Call Volume   Put Volume
Total          1.08        291,244       313,532
Equity Only    0.84        230,301       193,971
OEX            1.12         11,285        12,645
QQQ            2.41         15,215        36,785


Bullish Percent Data

           Current   Change   Status
NYSE          62      - 1     Bull Confirmed
NASDAQ-100    38      - 2     Bull Correction
DOW           67      + 0     Bear Correction
S&P 500       62      - 1     Bull Confirmed
S&P 100       64      - 2     Bear Correction

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend


 5-Day Arms Index  1.26
10-Day Arms Index  1.07
21-Day Arms Index  1.26
55-Day Arms Index  1.28

Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when the do, they can signal significant market turning 


Market Internals

        Advancers     Decliners
NYSE      1392           1795
NASDAQ    1583           1899

        New Highs      New Lows
NYSE      82             29
NASDAQ    80             63

        Volume (in millions)
NYSE       953
NASDAQ   1,319


Commitments Of Traders Report: 05/21/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

S&P commercials added more longs than shorts last week, resulting
in an decrease in the group's net bearish position.  Small traders
did just the opposite for a net increase in their bullish
positions.  Small traders are less than 2,000 contracts away from
their most bullish reading of the year.

Commercials   Long      Short      Net     % Of OI 
05/07/02      348,019   422,801   (74,782)   (9.7%)
05/14/02      343,941   424,893   (80,952)  (12.1%)
05/21/02      354,039   429,803   (75,764)   (9.7%)

Most bearish reading of the year: (111,956) -   3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
05/07/02      154,664     59,583   95,081     44.4%
05/14/02      163,035     58,587  104,448     49.8%
05/21/02      164,964     58,950  106,014     47.3%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 107,702 - 3/26/02

Nasdaq commercials grew slightly more bullish last week with
a gain of 1,000 contracts to their net bullish position.  Small
traders on the other hand grew more bearish by adding to their
existing chunk of shorts.

Commercials   Long      Short      Net     % of OI 
05/07/02       38,338     39,152     (814)   (1.1%)
05/14/02       40,858     35,761     5,097   (5.5%)
05/21/02       51,448     45,375     6,073   (6.3%)

Most bearish reading of the year: (15,521) -  3/13/01
Most bullish reading of the year:   7,774  - 12/21/01

Small Traders  Long     Short      Net     % of OI
05/07/02       13,229    13,161        68      0.3%
05/14/02       11,920    17,479    (5,559)     8.2% 
05/21/02       12,567    19,899    (7,332)    22.6%

Most bearish reading of the year:  (9,877) - 12/21/01
Most bullish reading of the year:   8,460  -  3/13/01


Dow commercials grew less bullish last week by reducing their
long position and adding to their short position.  Small
traders remained flat in their actions.  

Commercials   Long      Short      Net     % of OI
05/07/02       19,967    14,045    5,922     17.4%
05/14/02       21,080    14,725    6,355     14.4% 
05/21/02       20,173    15,317    4,856     13.7%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
05/07/02        5,124     9,831    (4,707)   (31.5%)
05/14/02        4,930    10,899    (5,969)   (25.2%) 
05/21/02        3,661     9,585    (5,924)   (44.7%)

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01


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Leigh Stevens will be back in the office on Thursday, May 30th, 2002

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The Option Investor Newsletter                  Tuesday 05-28-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


COHU - Cohu Inc. $24.30 +0.30 (+0.30 this week)

Cohu, Inc. is the owner and operator of businesses in the
semiconductor equipment segment, and the television camera segment.
The Company's wholly owned subsidiary Delta Design, Inc., designs,
manufactures and sells semiconductor test handling equipment to
semiconductor manufacturers and semiconductor test subcontractors
throughout the world. The Company's Electronics Division designs,
manufactures and sells closed circuit television cameras and
systems to original equipment manufacturers, contractors and
government agencies.

Most Recent Update 

COHU ever so slightly took out last week's lows at the $23.84
level early this morning with its trade down to the $23.66
level.  After bouncing around just above that level during midday
trading, the stock rebounded into the close on what appeared to
be short covering.  The volume was relatively lighter on the way
back up, and the stock was helped higher by the brief round of
short covering that entered the broader tech sector of the
market.  We're not too upset with the stock's rally today
because further upside from here would offer a better entry point
into put plays near the downward trend that has been in place for
the last several weeks.  A trade up towards the $25 level on
relatively lighter volume would offer a good entry point into
bearish positions with a tight stop just above at the $26 level.
If the stock doesn't get that high, we'll look for a short term
consolidation followed by a breakdown for an entry point into new


COHU gave the bears a little gift with its rally today.  The stock
set up another good entry point into bearish positions.  Look for
a slightly higher advance in tomorrow's session if the Nasdaq opens
up, then watch for the ultimate rollover near the $25 to $26
range.  From there, target another new relative low in the down
trend near the $23 level later in the week.

BUY PUT JUN-25*QCH-RE OI=45 at $1.65 SL=1.00
BUY PUT JUL-25 QCH-SE OI=20 at $2.20 SL=1.50

Average Daily Volume = 160 K

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We’re on hold after today’s lackluster trading.  Look for more 
movement as the week progresses with these two additions.

To Read The Rest of The OptionInvestor.com Market Watch Click Here


A quiet day on the sector front.  But two major averages briefly 
fell below key short term support levels.

To Read The Rest of The OptionInvestor.com Market Posture Click Here


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