The Option Investor Newsletter Thursday 08-01-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Watch Out For That Pothole Ahead Index Trader Wrap: TORNADO MARKET Market Sentiment: You Mean Everything's NOT OK? Weekly Manager Microscope: Green/Smith: Merger Fund (MERFX) Index Trader Gameplans: THE SECTOR BEAT - 8/1 Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 08-01-2002 High Low Volume Advance/Decline DJIA 8506.62 -230.00 8734.31 8479.90 1.91 bln 1224/1954 NASDAQ 1280.00 - 48.30 1326.10 1276.88 1.47 bln 1259/2140 S&P 100 444.32 - 14.55 458.87 443.12 Totals 2483/4094 S&P 500 884.66 - 29.96 911.62 882.48 RUS 2000 389.21 - 3.21 394.47 388.00 DJ TRANS 2308.26 - 61.08 2371.74 2307.58 VIX 41.49 + 6.28 41.80 36.70 VXN 60.35 + 2.49 60.93 58.80 Total Vol 3,595.9M Total UpVol 671.2M Total DnVol 2,836.1M 52wk Highs 48 52wk Lows 298 TRIN 2.26 PUT/CALL .76 ************************************************************ Watch Out For That Pothole Ahead The day's economic reports produced more of the same in the form of slowing growth and rising unemployment. The airwaves were full of the arrest of WCOM executives and the promise of more in our future. After the close it was announced that the Tyco CFO and General Counsel were leaving the company. This may be the prelude to the markets as we approach the August 14th certifications. The economy is weakening and employees at risk are fleeing sinking ships. Chart of the Dow Chart of the Nasdaq The big news this morning was the ISM report. This is one of the most watched report cards on the economy and the average grade today was a "D". Analysts were expecting a headline reading of 55.0 and got a 50.5 instead. This was down from 56.2 in June. All the internal numbers went the wrong way. Table of ISM numbers The numbers shaded represent weaker numbers than the month before. New Orders fell from 60.8 to 50.4. Only 0.4 away from shrinking instead of expanding. Order backlog did shrink to a declining number (over 50 expanding, under 50 declining) indicating that new orders have fallen below flat. These are recessionary levels. The only component up for the last six months is the prices paid component and this indicates that inflation is starting to creep into the economy. Analysts were trying to spin this report as "economy still expanding" because the headline number was 0.5 over the flat line. Think about it. With all the warnings about falling sales and orders going forward does anybody really think the August numbers will be anything but negative? The 50.5 was the lowest number since January's 49.9 when we were just coming out of a recession. Construction Spending was also reported on Thursday with a drop of -2.2% which followed last months -2% drop. This was well below the expected +0.3% increase. Nonresidential construction posted its fifth consecutive monthly decline and residential its third monthly decline. This report was seen as very negative as a drag in construction would also be a drag on future GDP. This was the lowest level in six years. Together with the weeks already announced GDP, Beige Book and PMI, all showing declines, it is very hard to put bullish assumptions on the stock market. About the only positive data out this week was the auto sales today which showed a slight increase over last month. This increase in sales came with the resumption of zero percent financing and discounts as high as $7,000 per vehicle. You can sell anything if you give it away. Friday we will get the nonfarm payrolls and any reduction in jobs will be the final nail in the bullish coffin. Analysts are expecting 50,000 new jobs and an unemployment rate nearer 6.0%. A net loss of jobs will be very negative. In stock news ADBE led the way with last nights warning that revenue would be -10% below previous estimates. The company lost -7.13 to 16.83 and took the rest of the software sector with it. They said software spending was still very constrained even for upgrades and sales had weakened in July. After the close today Disney announced estimates that met street estimates but then warned of slowing bookings for the current quarter by -6% and -10% for the fourth quarter. This is a sure sign that the consumer is being more cautious and should be a leading indicator that the hibernation has begun. National Semi (NSM) warned after the close that weaker than expected order rates for personal computer products and related accessories like monitors would impact their estimates. They did say orders for the following quarter were building now that the merged Compaq and HWP were placing orders again. This follows the NVDA warning earlier in the week and could mean problems for Intel before the quarter is out. After the bell Dow Jones reported that Tyco CFO Mark Swartz and General Counsel Irving Gutin are leaving the company. According to many analysts the CFO is the only one besides ex-CEO Dennis Kozlowski who really knew what is happening inside Tyco. Both men said they would remain at their posts until replacements were found. I am going to bet that this scene will be repeated many times in the near future as life in the hot seat becomes unbearable. With new criminal penalties for financial misstatements the running of multidivisional companies with far flung operations and having to certify the accounting for thousands of employees is suddenly not a highly sought after position. With officer salaries ready to plummet in a fresh wave of stockholder unrest, the risk- reward ratio is not what it used to be. There is also the cloud of suspicion for everyone currently running a company until they certify. Tyco has already said it could be months before they can swear to their statements. A rumor that John Chambers, CEO of Cisco, was going to resign rather than certify statements caused CSCO to drop -1.13 on volume of 132 million shares on Thursday. There was also a rumor that the CFO Larry Carter had refused to certify their statements due to closet skeletons. Traders are also worried that CSCO will announce a huge house cleaning with their next earnings to dump some prior problems so they can certify for the next quarter. Cisco has a July 28th year-end so they don't have to certify until October. Cisco said it would not comment on the rumors. It is too early to tell is they will or won't but comments reportedly from the officers indicate they will probably sign. Of the 947 companies required to certify statements only 18 companies have said they would vouch for their books and the starting date is only 12 days away. Tomorrow we will also get mutual fund flows and from the amazing resiliency of the markets this week I would think there was a slow down in withdrawals. Possibly even an small positive inflow. However after the negative economic news this week this is likely to be only a pause in the flood. Retail investors have had the double dip recession picture painted for them in almost every conceivable way and many of those not hopelessly mired in the "buy the dip until broke rut" are going to pull money out next week. The picture is clear. Despite the lowest interest rate in a decade and a Fed that is pumping money into the market by multiple billions every day the economy and the markets are still falling. According to the futures there is nearly a 50% chance of another Fed rate cut at the August meeting. Will this be a desperation cut because the economy is worse than we thought? Definitely! The Fed will try to spin it as an "insurance" cut but not many would be fooled. Is another -25 point cut really going to help now if an entire year of cuts has barely put the economy back onto life support? This is a cyclical thing and everyone has to get used to it. We had the longest bull market and economic expansion in recent history and now we are suffering through the obligatory bear market and recession. Just as our excessive highs were extreme our bottoms will be just as extreme. The current accounting nightmare is just another log on the fire. How much farther can the market drop? Nobody knows. Merrill Lynch cut their 12-month target on the S&P to 960 today. Think about that. The S&P closed at 883 today. Do you think they are planning on a rebound to 1200 over the next 12 months and a return to 960? I don't think so! They are expecting the market to drop to lower levels (not stated) and return to 960 within 12 months. We all know that targets are rarely hit but the thought process that went behind this is critical. They had to analyze a lot of factors relating to the economy, earnings and the impact on stock prices before deciding to go public with another lowered estimate. This impacts the buying habits of tens of thousands of Merrill customers. In effect they are saying more bear market ahead, batten down the hatches. Their previous target was 1050 and they would have gotten considerably less grief by just sticking to that number. Merrill's chief U.S. Strategist Richard Bernstein said his indicators were deep into "sell" territory in a note to clients. He said, "Even though investors are becoming increasingly aware of the problems confronting the stock market they remain far from the psychological state of capitulation that would signal a bottom. Also, stocks are not cheap when considering low interest rates and inflation. Investors are ignoring that the S&P earnings growth is the least predictable and the most variable as anytime in the last 60 years." Do I believe everything I see and hear? Heck no. However if only 25% of what we hear about the economy and current accounting crisis is true then there is a lower low ahead of us. I think these high profile warnings are overly extreme but they should prompt traders to be more cautious about buying this dip. I have wandered too far astray tonight so I am not going to cover specific market levels. Leigh does an excellent job of that in his Index Wrap. (link below) I think the bulls have one last chance to attempt a rally with the nonfarm payrolls tomorrow morning. An upside surprise could cause just enough confusion to get one more bounce before the negative economic news from this week begins to weigh even heavier on the markets as investors withdraw even more money from mutual funds. The question remains, "Why buy", and until it can be answered convincingly our future is not bright. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** TORNADO MARKET by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - IF we are in a bottoming process here at least in the NYSE stocks, its still going to still offer trading opportunities on the sell or put side of the market too - even if a bottom is trying to set up, it will likely be a "rolling" one - like a tornado that touches down, then goes up, touches down, etc. The havoc seems similar too! Adding to the bearish thinking resurfacing from the lower than expected GDP report, the ISM index of manufacturing activity, falling to 50.5% in July from 56.2% in June, was another indicator of slow economic/business growth. Add to that the earnings miss from ExxonMobil and sharply lower guidance from Adobe Systems - it's enough to make a wannabe bull cry for his momma. Technically, the failure of the S&P and Dow indices to hold above their 21-day moving averages suggests that the correction has taken hold and that there will be further downside in NYSE stocks in the near-term. The Nasdaq was the "weak sister" (would "brother" be more politically correct?) on the rally and is in a deeper correction. The S&P and Dow was trending as much sideways as lower - more on that in a moment. Speaking of politics someone mailed me and suggested that I leave the political decisions to the Pres - vis a vis invading Iraq. Well, it is being much talked about lately as an economic issue, not solely as a moral or stopping potential aggression issue. Mark Whistler, on our sister stock site, Premier Investor.com asked readers to chime in on the topic and he'll publish what our "public" is thinking. The S&P pattern on the hourly chart is looking a lot like a "rounding top" pattern - that chart is further on. I was starting to thing "rectangle" - now when does a round shape look like a box? Trying to think outside the "box" - I was looking at the possibility that the recent sideways move in the indexes, was setting up a trading range that COULD be a type of consolidation called a "rectangle". But a rectangle pattern can sometimes be a REVERSAL formation and act as a top. The key is which way it breaks out. The idea that we're seeing a basically SIDEWAYS consolidation, before another push higher, is unlikely unless the S&P and Dow rally on the opening and don’t go any lower that the final hour today. I thought I'd look at the pattern for those interested in these sort of things. When there is a sideways move after a move, where the highs and lows are in a similar price area such that you can then draw horizontal lines across the highs and lows, the shape is a rectangle - the width is always longer than the height (between the tops and bottoms). I'm talking about how the hourly charts on OEX, SPX and DJX were looking - less so with the weakness on the close, but here's the pattern I’m referring to: A move below the lower end of the trading range (885 in SPX, 445 in OEX; 85 in DJX) NEGATES the consolidation/rectangle idea and suggests a near-term TOP instead. The indexes would have to break out above the upper end of the rectangular pattern (87.6 in DJX; 458 in OEX; 912 in SPX) to suggest a breakout and signaling a new up "leg" - this is seeming less likely as bearish forces get more of a grip on the market. S&P 100 (OEX) Index - Daily/Hourly charts: Someone asked me if I had "played" with (drawing) UP trend price channels. NO, because the downtrend channel is still very much intact. Definition of a downtrend - a series of lower highs and lower lows. We have to get above a prior important (up) swing high to suggest that the trend might be reversing. What we have above is not that. More or less we have a "double top" so far in OEX. You'll see in the SPX (S&P 500) hourly chart below that the (downside) reversal was right AT its upper trend channel boundary. Near support still looks like 443-444 and in danger of breaking, with 427-428 as a downside target with a break of 443. Such a move would put OEX back to where it started the rally at the beginning of the week and will be bound to disappoint the bulls - stay tuned! As to buying calls in that area - maybe - I favor buying into oversold markets and you'll note that the daily stochastic is up nearer overbought territory. The low 420 area is a 50% retracement and "normal" for a correction. "When in doubt stay out", is the saying and old trader's truth that I'm feeling. Markets making transitions, if that's what we have here, are tricky and easy to give back hard won profits from when the market trend had a more definite direction. At least the options premiums are more reasonable now. S&P 500 (SPX) Index - Hourly chart: Are we starting the next downward slide? If I look at the trend and the channel, I would have to say YES. At least until SPX can take out its prior high at 912, then 919. I was thinking that near support was 884, which SPX is almost through - next is potential support down in the gap area at 855. No longer so far away! I would look for 855-850 as a next downside target zone. If short, that would be my objective and I would consider an exiting "stop" point at just over the upper trend channel line at 906. Can't say that I would buy in the 850 area, if reached, ahead of watching how the market behaves tomorrow. I always look for some "basing" action before buying and am unsure how this current move will play out. The talk of a double dip recession is making me less bullish each day. The optimism didn't lass long! Dow Index (1/100: $DJX.X) - Daily/Hourly charts: No bust out above DJX resistance yet as you can see. The DJX stopped right at the top of its channel and has put in a double top to boot. What we're not seeing is a sharp down move like we might have expected two weeks ago after a rally "failure" - well, stay tuned - accelerating (downside) momentum may be next. Next estimated support is at 82.8-82.5, the area of DJX's upside chart gap - from Monday morning. If we get back to the Monday opening the week will be complete and they go out where they started. Well that's a bit different than past weeks when the indices went out way under the week's opening. Bullish progress! Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: The only thing I was reasonable "sure" of was that the Nasdaq 100 and QQQ would "fill" their upside chart gaps. So far, a nice downside trade if you were lucky enough to have shorted the top. Actually, luck was not what was needed as much as absolute faith that there would be NO channel break out - or, trading as usual in tech land. These stocks are still too "expensive" relative to the S&P! I am bullish in Nasdaq from about the low end of the channel and an oversold reading to about the high end of the channel and an overbought reading. Now the question becomes do we make a new low in the Q's as per its "usual" bearish pattern. The action in Cisco, Intel, Microsoft, Qualcomm and others in Nasdaq is not encouraging for hanging in around recent lows. bellwether stocks Cisco and Intel look like they could go to new lows. That means the Q's will too. The 22 area will be key - it looks like QQQ tests its prior low (21.6) at a minimum. Stay tuned. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ **************** MARKET SENTIMENT **************** You Mean Everything's NOT OK? by Steven Price The bad news keeps coming. This morning's economic data showed initial jobless claims rose 20,000 to 387,000, which was higher than the forecast of 365,000 to 375,000. The Institute of Supply Management (ISM) report came in at 50.5%, which was lower than the expected 55.3%. Construction spending was down 2.2% versus an expected increase of 0.2%. These numbers, combined with yesterday's disappointing GDP and Chicago PMI data, have given the market a downward push. The Dow was down over 200 points today, however it has found support at 8500 once again. Although we traded as low as 8479.90, the bulls pushed the group back over the 8500 level to hold the close above support. With more data out tomorrow, this level may not hold if the news is bad. We'll be getting the unemployment rate for July and if this morning's initial claims number for last week is any indication, this is bound to disappoint. We will also be seeing non-farm payrolls for July, personal income for June and factory orders for June. We headed into last weekend on a positive note after the market held its levels after an incredible rally. The market has held most of this week's gains, however several factors could combine to send us into this weekend in negative territory. Three straight days of bad news (if Friday's data is no more encouraging than Wednesday's or Thursday's numbers) could speed up weekend profit taking for those investors who have become nervous about hanging on to recent gains. They may look at the recent market surge as a gifted opportunity to dump issues they had been holding on the way down, and today's 200-point drop may put a scare in them. If the Dow breaks back below the 8500 support level we have seen the last couple of days, the decline could speed up as short-coverers move out of the way and longs look to get out. The feeling of heading into the last trading day of the week after a three-digit down day "feels" much different to investors than coming off a 5 point give back after an almost 500 point rally, as we had last week. The technology sector received more bad news last night, as Adobe lowered both earnings and revenue estimates, citing "a difficult global business environment," which led to weaker than expected sales, particularly in Japan and Europe. The stock was downgraded this morning by Goldman Sachs, Merrill Lynch and UBS Warburg, and subsequently hammered by investors, trading down $7.12 to $16.84. There was a bit of good news, as July U.S. sales were up 24% for GM and 1.5% for Ford. These stocks have been hard hit in recent months and can use the boost. Psychologically speaking, this is the only good news investors have seen this week. This morning's arrests of former WorldCom execs Scott Sullivan and Dave Myers, may serve to instill confidence that the government is "doing something" about company executives who are looting the shareholders. However, the looming presence of the August 14 deadline for companies to certify their accounting statements could continue to keep investors on the sidelines until they are sure who is willing to back up the numbers. Overall, the market is feeling awfully heavy, and Friday's trade could bring another pullback. Keep an eye on 8500 in the Dow and 885 in the S&P 500, as these levels have been repeatedly tested the last few days. This level was violated by the S&P, which closed 883.05. The 8500 level in the Dow, however, has proved resilient. If they go south together tomorrow, stay out of the way until new support levels are in place. ---------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8506 Moving Averages: (Simple) 10-dma: 8278 50-dma: 9162 200-dma: 9774 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 884 Moving Averages: (Simple) 10-dma: 859 50-dma: 971 200-dma: 1083 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 896 Current : 938 Moving Averages: (Simple) 10-dma: 938 50-dma: 1064 200-dma: 1369 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): So much for the bottom in the SOX. the index continues to slide to new lows as bad news keeps coming. KLAC Tencor released earnings which showed a 64% reduction in earnings and 38% reduction in revenue. This helped the bears pile on this sector and drive it to new 52-week lows. There is a significant downward trendline pointing this sector toward the 300 level, which it could see as early as tomorrow, if the economic data being released in the morning weighs on the overall markets. 52-week High: 657 52-week Low : 311 Current : 311 Moving Averages: (Simple) 10-dma: 337 50-dma: 402 200-dma: 505 ----------------------------------------------------------------- Market Volatility The VIX spiked back up over 40 today, on a big drop in the overall markets. With unemployment and payroll data out tomorrow, premium remains high. The Dow and S&P 500 are testing recent support levels, and fear of a big drop has led to higher option prices ahead of the economic reports. Look for a drop back into the 30s if the reports are good and the market stabilizes, or goes up. If we have a drop, the VIX may spike higher, but in any case should settle down from intraday highs before the close, as traders try to avoid holding excessive long premium positions over the weekend. CBOE Market Volatility Index (VIX) = 41.49 +6.28 Nasdaq-100 Volatility Index (VXN) = 60.35 +2.49 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.76 552,185 420,798 Equity Only 0.57 417,503 238,647 OEX 1.14 24,437 27,838 QQQ 0.24 64,113 15,532 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 30 + 1 Bull Correction NASDAQ-100 31 + 0 Bull Confirmed DOW 23 + 0 Bull Alert S&P 500 28 + 3 Bull Alert S&P 100 27 + 1 Bull Alert 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 1.17 10-Day Arms Index 1.25 21-Day Arms Index 1.24 55-Day Arms Index 1.36 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 points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1229 1890 NASDAQ 1216 2065 New Highs New Lows NYSE 17 60 NASDAQ 67 135 Volume (in millions) NYSE 1,976 NASDAQ 1,544 ----------------------------------------------------------------- Commitments Of Traders Report: 07/23/02 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 Commercials increased both longs and shorts, however increased long contracts totals by an additional 10,000 contracts more than shorts. Small traders continued to get longer, while adding 2,800 net longs to their position. Commercials Long Short Net % Of OI 07/09/02 396,321 456,164 (59,843) (7.0%) 07/16/02 388,943 464,162 (75,219) (8.8%) 07/23/02 405,969 471,704 (65,735) (7.5%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 07/09/02 145,017 71,402 73,615 34.0% 07/16/02 157,370 67,247 90,123 40.1% 07/23/02 166,713 73,778 92,935 38.6% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials added contracts both long and short to their positions, maintaining approximately the same ratio, however increasing their positions by approximately 8,000 total contracts. Small Traders added to their short positions reducing their net by approximately 400 contracts. Commercials Long Short Net % of OI 07/09/02 31,227 39,592 (8,725) (12.3%) 07/16/02 33,152 39,866 (6,714) ( 9.2%) 07/23/02 37,204 43,601 (6,397) ( 8.0%) Most bearish reading of the year: (15,521) - 3/13/02 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 07/09/02 12,520 8,348 4,175 20.0% 07/16/02 12,816 10,774 2,042 8.7% 07/23/02 12,756 11,152 1,604 6.7% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials added 2,000 contracts to their long position, while adding only 671 to their shorts. Small Traders increased both sides of their position, however added almost 2,000 more short contracts than long contracts. Commercials Long Short Net % of OI 07/09/02 20,761 14,122 6,639 19.0% 07/16/02 20,357 14,074 6,283 18.2% 07/23/02 22,369 14,745 7,624 20.5% 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 07/09/02 6,831 6,623 208 1.50% 07/16/02 8,524 10,133 (1,609) (8.62%) 07/23/02 9,101 12,604 (3,503) (16.1%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************************* WEEKLY MANAGER MICROSCOPE ************************* Green/Smith: Merger Fund (MERFX) Investors seeking a stock fund with a good long-term record and low correlation to the market may want to have a closer look at the style/strategy that Frederick Green and Bonnie Smith use in the Merger Fund (MERFX), a unique equity fund that seeks growth by investing in companies that are involved in announced merger and acquisition activities. "That strategy might sound risky," Morningstar says in its fund opinion, "but it isn't." Morningstar continues by saying, "The fund shoots for a 10% gain a year," adding, "and its volatility is extremely low for a stock fund." In other words, this stock fund aims to produce annual returns near the historical average for stocks with considerably less risk (or volatility) than the market. Indeed, Merger Fund has one of the lowest risk scores over the past three years, a volatile period for the stock market. The fund's 3-year annualized standard deviation figure of 5.91% is pale in comparison to the average hybrid fund (10.87%) and the average domestic stock fund (21.14%), according to Morningstar. Since the co-managers can and do invest a portion of assets in cash or cash equivalents (28.6% of assets as of Dec. 31, 2001), Morningstar classifies the unique offering as a domestic hybrid fund not a domestic stock fund. Lipper calls the Merger Fund a specialty diversified equity fund. The fund prospectus says it is non-diversified (28 stock holdings as of Dec. 31, 2001). So this is one offering that doesn't compare easily to other funds. Merger Fund (MERFX) has current net assets of $936 million, per Morningstar, and requires a $2,000 minimum initial purchase for both regular and IRA accounts. The fund is no-load, and may be purchased on a no-transaction fee (NTF) basis through the major NTF fund networks, such as Schwab's Retail OneSource service or TD Waterhouse NTF. The fund's current expense ratio (1.34%) is average for stock mutual funds, perhaps a little high for mixed equity funds (hybrids) and includes some 12b-1 fees. There are no initial, deferred or redemption charges (loads). Effective October 5, 2001, the Merger Fund was reopened to new investors. The mutual fund has reserved the right to close to new investors at any time. You may receive more information or fund prospectus by calling Merger Fund at 1-800-343-8959. Managers' Background Prior to January 1989, the fund was known as The Risk Portfolio of the Ayco Fund and operated under a different charter. Since January 31, 1989 (listed as the inception date in Morningstar's fund report), the fund's day-to-day portfolio management duties have been handled by Frederick W. Green and Bonnie L. Smith. Frederick Green is President of Westchester Capital Management (since 1980). He also serves as the President and a Trustee of the Merger Fund. Green's bio states that he specializes in merger arbitrage and spent eight years as a portfolio strategist with Goldman Sachs and Kidder Peabody prior to joining Westchester. Green is a member of the Association for Investment Management and Research (AIMR) and the New York Society of Security Analysts. Bonnie Smith has co-managed the fund since January 31, 1989 and is a merger arbitrage specialist. Smith has been Vice President of Westchester Capital Management since 1986, and also serves as the Vice President, Treasurer and Secretary of the Merger Fund. Ms. Smith is also a partner at Grace & Green Associates. Westchester Capital Management, Inc. is based in Valhalla, New York, and has been a registered investment adviser since 1980. The company also manages merger arbitrage programs for other institutional investors, including offshore funds and private limited partnerships. Investment Style/Strategy Per the prospectus, the Merger Fund seeks to achieve growth of capital by engaging in merger arbitrage. Under normal market conditions, the Merger Fund invests at least 80% of its assets principally in the equity securities of companies involved in publicly announced mergers, takeovers, tender offers, leveraged buyouts, spin-offs, liquidations and corporate reorganizations. As stated earlier, depending upon the level of merger activity and other economic and market conditions, the Merger Fund may temporarily invest a substantial portion of its assets in cash equivalent (money market) securities. It may also invest fund assets in corporate debt obligations, as part of its arbitrage strategy or otherwise. Like other merger-arbitrage strategies, Mr. Green and Ms. Smith purchase the stock of the targets of announced acquisitions and occasionally short the acquirer's stock. If the deal is closed, the fund makes money. Before making an investment, the two co- managers research the strategic rationale behind the merger, or acquisition, etc. The Merger Fund prospectus comments that merger arbitrage is a highly specialized investment approach - generally designed to profit from the successful completion of such transactions. As compared with conventional investing, Westchester Capital Mgmt. considers the fund's merger arbitrage investment returns to be less volatile than overall stock prices. The principal risk associated with this fund's merger arbitrage investment strategy, per the prospectus, is that certain of the proposed reorganizations in which the Merger Fund invests may be renegotiated or terminated, in which case losses may result. It is not a "diversified" fund within the meaning of the Investment Company Act of 1940, meaning it may invest assets in a relatively small number of issuers, making it potentially more volatile in the short-term than the average general equity fund, let's say. The Merger Fund prospectus states that the fund is not intended to provide a balanced investment program. Rather, this fund is intended to be an investment vehicle only for the portion of an investor's capital, which can appropriately be exposed to risk. They say that each investor should evaluate an investment in the Merger Fund in terms of their own investment goals. Fund Chart Below is a 6-month chart for the Merger Fund (MERFX) showing a net asset value (NAV) of $13.08 as of July 31, 2002. It would appear from the chart below that Merger Fund is bouncing off a six-month low. In the next section, we discuss the fund's risk and return over various time periods, plus how the independent fund raters such as Morningstar and Lipper grade Green's and Smith's performance on a risk-adjusted relative basis compared to other stock funds. Fund Risk and Performance Again, keep in mind that when we go through this data, that the Merger Fund is classified by Morningstar as a "domestic hybrid" and rated against other hybrids, while Lipper groups the Merger Fund in with other specialty stock funds and grades it relative to the broad equity fund group. Value Line puts Merger Fund in its "growth objective" fund group. Considering risk first, below is how the three independent fund trackers grade the Merger Fund's risk. Morningstar: Low (all trailing periods and overall) Value Line Risk Rank: Low Lipper Preservation Score: 1 (Lipper Leader) You can see that whether compared to mixed or full equity funds, the risk level of the Merger Fund is graded as "low" compared to other stock funds. Earlier, we quantified the fund's volatility ("standard deviation") and showed that its risk was almost half that of the average hybrid fund and significantly lower than the U.S. equity fund average over the trailing 3-year period through July 31, 2002. Morningstar grades the fund's return "high" in all trailing time periods and overall except for the trailing 10-year period. For the trailing 10-year period as of July 31, 2002, the fund gained 8.91% per year on average, ranking in the top quartile (top 25%) of the domestic hybrid group. However, its total return is 1.2% below that of the S&P 500 index and more than a percentage point below its 10% annual return goal. The Merger Fund achieved its goal on a gross return basis over the past decade, but not after the deduction of fund expenses. Overall, Morningstar rates the fund's return as "high" compared with other domestic hybrids. The Merger Fund's trailing 3-year annualized return of 3.84% through July 31, 2002 and its 5-year return of 6.7% score in the category's top decile (top 10%) per Morningstar. Note that the fund's relative rankings on an "after-tax" return basis are slightly lower than on a "pre-tax" basis as reported, but still at or near the cutoff for top decile performance. It is not necessarily designed to be tax-efficient, but due to its strong relative performance, it still ranks among the top funds in the category on an after-tax basis. Summary The Merger Fund is obviously not for everyone but investors who are looking for a unique and largely successful merger arb fund have an appropriate choice here. Between 1995 and 2001, Merger Fund met its 10% annual return goal five out of the seven years. In 1998 and 2001, when it failed to make 10% for investors, the fund co-managers still produced positive returns. So, over the past seven calendar years, the fund has posted positive results for investors. That streak is currently in jeopardy, with the Merger Fund down 11.44% on a YTD basis as of July 31, 2002. While negative, the fund still curbed 8.57% off the S&P 500 index's decline through July 31. Compared with the average stock fund, Frederick Green and Bonnie Smith have excelled at preserving capital during the market downturn, while offering potential for long-term capital growth. Steve Wagner Editor, Mutual Investor email@example.com *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 8/1 by Leigh Stevens Highlighted sectors below are Gold & Silver (XAU), Health Care (HMO) & Oils (OIX). These sectors are either having significant price moves of late or are subject of reader interest. Health care providers (RXH) have also been strong of late. The Oil sector got crushed today after a recent recovery rally. And, hope springs eternal in the hearts of the gold bulls. The Oil Service sector (OSX) was weak also as a giant in the industry, Schlumberger (SLB), fell over 7% following a downgrade from Morgan Stanley to an "underweight" rating. UP on Thursday - DOWN (the most) on Thursday - SECTOR TRADE RECOMMENDATIONS & REVIEW - NEW/OPEN TRADE RECOMMENDATIONS - Long SMH at 27.35 (Semiconductor HOLDR's) Stop at 24.50 TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT(S) - Gold & Silver Sector Index ($XAU.X) STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL The gold stocks are continuing to try to climb out of an oversold condition. "X" marks the spot of an upside target that I have in the 65 area - the sector may get to around 67 where there is small downside gap. 70 is a major resistance overhang currently. Not much upside potential from its 63 close, but I see some. UPDATE: 8/1 Healthcare Index; Morgan Stanley ($HMO.X) STOCKS: AET; AHG; ATH; CAH; CI; FHCC; HUM; MME; OHP; OPTN; PHSY; TGH; THC; UNH; WLP The Healthcare Index has had a steady rebound from its recent low. I could see HMO getting back up to 580, a 50% retracement of the last downswing, or to around 590, resistance implied by its 50-day moving average. However, 590 is the "best" recovery type potential I see currently - its not the start of a new uptrend in my estimation. UPDATE: 8/1 Oil Index; CBOE ($OIX.X) - STOCKS: AHC; BP; CVX; KMG; MRO; OXY; P; RD; SUN; TOT; UCL; XOM. Exxon Mobil (XOM) fell over 8% after its Q2 earnings missed estimates - the company indicated Q2 net income of $2.67 billion (39 cents a share), down over 40% from $4.46 billion (65 cents), in the same period a year ago. XOM's profit came in 7 cents under consensus estimates. XOM set the tone for the Oil (OIX) sector index, which "failed" or reversed at resistance implied by prior lows, before its last downswing. It's possible OIX can retreat all the way back to its recent lows in the 245 area. Whether it retests this area or not - failure at its first key resistance resulted in a continued bearish chart picture. 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The Option Investor Newsletter Thursday 08-01-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: EFX, CHKP, LLY, WMT Dropped Puts: None Daily Results Call Play Updates: ADP, BAX, LTR, MMM, MSFT New Calls Plays: None Put Play Updates: BBOX, DD, JPM New Put Plays: DHR, CCMP, KLAC **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** EFX $21.02 -0.18 (+0.39) Although it was looking good earlier this week, our EFX play seems to have run out of gas. After running up north of $22 on Monday, it has been a slow, but consistent drift lower, and the bulls seem to have lost their enthusiasm. EFX close 2 cents above our $21 stop on Thursday and could bounce tomorrow if the broad market tone is favorable. If so, take advantage of that strength to close open positions at a more favorable level. --- CHKP $15.87 -0.91 (+0.17 for the week) Checkpoint looked poised to break above recent highs above $17.50. The last three days have shown several attempts to break this level, with no success. Once the stock dropped below $17.00, intraday movement showed this as a new ceiling. This new resistance, when combined with yesterday's warning from Adobe regarding the current business environment, has convinced us to close this play. --- LLY $55.00 -3.42 (+1.30 for the week) In our most recent write- up we suggested conservative traders take profits in our target area over $58, as the stock traded as high as $59.24. We raised our stop on this stock, which was originally picked at $53.70, in order to lock in profits on a pull back. A downgrade based on what we consider to be old news, which is the possible delay of drug approvals due to manufacturing problems, pushed the stock down yesterday, only to see it bounce back. However, this action, combined with downward pressure on the broad market, led this stock to our stop loss on today's close. --- WMT $47.40 -1.78 (-0.78 for the week) Wal-Mart looked strong throughout the first part of the week, as it fought off poor consumer confidence and retail sales numbers to forge ahead, trading as high as $49.65 on Monday. Comments from the company regarding sales coming in below expectations last week, and steering future guidance toward the low end of its previously estimated range, eventually combined with weakness in the overall market to turn this stock down from $50. With poor economic data the last two days, this stock appears to have been weakened, and we are closing this play. As a Dow stock, Wal-Mart could continue downward on a market pullback after Friday's unemployment and payroll data is released. Use a market rebound as an opportunity to close positions. PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu EFX 21.02 1.60 -0.57 -0.46 -0.18 Drop, No movement BAX 38.18 2.32 -0.66 1.67 -1.73 Support there ADP 36.31 1.40 0.22 –0.04 -0.98 On track LTR 46.81 2.14 0.45 –0.23 -0.63 Holding up MMM 122.13 5.81 -1.17 0.34 -3.70 Good fundamentals LLY 55.00 3.45 1.10 0.17 -3.42 Drop,Stopped out MSFT 45.70 2.90 -0.15 –0.15 -2.28 Still a leader WMT 47.40 1.35 -0.41 0.06 -1.78 Drop,Weakening CHKP 15.87 0.32 0.68 –0.69 -0.91 Drop, New resistance PUTS BBOX 34.20 -0.02 -2.19 –1.02 0.39 Taking a breath JPM 25.02 1.77 -0.21 0.07 0.06 Still Trouble DD 41.53 1.85 -1.85 –0.14 -0.38 Slow down CCMP 39.86 -2.45 -1.34 –0.60 -2.48 New,Rolling over DHR 60.12 3.07 -0.06 -0.45 -1.93 New,Falling KLAC 37.28 1.06 1.93 0.06 -2.11 New,No Floor ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** ADP $36.31 -0.98 (+0.60) Following the action in the broad market over the past 2 days, shares of ADP ran up to the $38 level at the close on Wednesday, before reversing course this morning on the heels of the disappointing economic news. While the selling was pretty much kept in check throughout the day, the late-day drop pulled ADP back down to test the $36 support level. While this level may make for decent entries into the play, we need to be cognizant of the possibility of a steeper profit-taking drop to major support near $35. Use a drop and volume-backed rebound above that level to initiate new positions, provided the broad market cooperates. We do need to be cautious here though, as the stock's reversal lower came right at the declining 20-dma ($37.55) and with daily Stochastics now rolling down out of overbought territory, ADP may see a more pronounced downward leg before the bulls move back in to propel the stock up towards major resistance at $40. We're keeping our stop in place at $35 to protect against just that sort of development. For those looking to enter on strength, wait for a move above $38 before taking the plunge. --- BAX $38.18 -1.73 (+1.60) Riding along with the rebound in the Pharmaceutical sector (DRG.X), shares of BAX have had quite a ride over the past week, rebounding from the $30 level to just kiss the $40 level at the close yesterday. Not only is that a huge gain in a very short period of time, but the $40 level is formidable overhead resistance. That made the run up to that level an ideal time to harvest some gains and get ready for another dip and bounce to re-enter the play. Sure enough, BAX fell back today, finding support at the $38 support level, which just happens to be the site of the 20-dma. Note that yesterday, we raised our stop to $38, so we're at a critical juncture here. A rebound from this level could make for another attractive entry. On the other hand, if BAX falls below this level on a closing basis, then it will time to let it go. Watch for renewed strength in the DRG index to confirm strength in BAX before playing. --- LTR $46.81 0.63 (+1.73) With the buyers running out of steam in the broader market, over the past 2 days, shares of LTR have naturally pulled back after their strong rally off the $41 support level. But given the sharp decline in the market on Thursday, the stock has held its ground rather well. Intraday support seems to be building above the $46.50 level and a bounce from that level could make for a solid entry, provided the broad market doesn't break down. On a deeper dip, we can look to initiate new positions near the $45 level, as that is the bottom of the stock's range on Monday. Correspondingly, our stop is set at $45, as a close below that level would likely indicate a more substantial retracement. Traders that are looking to enter on strength will want to wait for LTR to clear the $48 level accompanied by renewed strength in the broad market. Note that LTR is set to announce earnings on August 8th, so there is one more week left to play. --- MMM $122.13 -3.70 (+1.28 for the week) 3M is the Dow's most heavily weighted component. As such it has taken a fall with the broader market today. However, the long-term, and most important for this play, short-term, prospects for this stock are still strong. The stock traded up to $127.55 on Tuesday, and a $5 drop from that level is not as much of a concern with a stock priced over $100 as it would be for a lower priced issue. Prudential has raised their price target on 3M to $145 from $122, reflecting their belief that conversion to a digital business model should contribute to a sales growth rate of 5%-6% by the end of 2002, and 8%-10% by 2003, from just over 2% in the 2nd quarter of this year. They also believe the company benefits from its ability to take market share, its solid financial condition and diversified product lines. The stock managed to hold above its Monday lows of $121.61. We have raised our stop-loss to $118.50, just below last Friday's low, as we feel this would represent the point beyond which a bounce is unlikely. This level coincides with MMM's 200-dma, which should provide support. While the stock certainly has exposure to a sliding Dow, it is also a candidate for a significant rebound if tomorrow's economic data is positive, based on its strong fundamentals. --- MSFT $45.70 -2.28 (+0.35 for the week) Microsoft has receded with the rest of the Dow this afternoon, however has maintained itself above our $45 stop loss. With MSFT's 50-dma, 100-dma and 200-dma all above $50, this stock still appears to have room to the upside. Their strong financial condition and coming foray into the CRM arena later this year provide forward stability to which investors can cling. On Wednesday, Microsoft announced an alliance with AT&T Wireless too provide wireless data services to business customers. The two companies have developed and will distribute end-to-end systems laptops, pocket PCs and Smartphones. They plan to launch their first set of devices commercially in the 4th quarter. Today the company also announced the release of the 2003 Money 2003 Deluxe collection of personal finance software, which includes free services such as a credit report and credit monitoring, tax filing, options investment tracking, and a consultation with a financial advisor. In addition, Microsoft's new licensing arrangement goes into effect today, which will provide yearly usage fees for products that previously collected only a one-time fee. We are lowering our stop loss on this play to $44.00, in order to give Microsoft more room to bounce. If there is a rebound in the market, this stock will surely participate. ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* BBOX $34.20 +0.39 (-2.72) In another interesting episode of divergence, shares of BBOX bucked the broader market trend on Thursday, registering just over a 1% gain. That is pretty impressive, given that even the Networking index (NWX.X) lost almost 4% on the day. Despite that positive action, we're sticking with our guns on BBOX, as today's gain looks like nothing more than a bit of short covering after the breakdown under major support at $36. Thursday's early rebound were just what was needed to fill yesterday's gap lower, and a rollover (already begun) below the $35 level may be a decent entry opportunity. We'd feel a bit better about a rebound near the $36 level before opening new positions, but we'll have to take what we can get. Recall that the stock still looks vulnerable to the $30 level, so momentum traders may want to consider entering on a drop under yesterday's low at $33. Keep stops set at $36.50, the site of the bottom of Tuesday's gap. --- DD $41.53 -0.38 (-0.35 for the week) DuPont has rolled over from its high of $44, having been turned away from its 200-dma of $44.25. The stock experienced a run-up with the Dow and a look at its steep graph shows a level that appears unsustainable without continuing support of the overall market. The negative economic data of the last 2 days, including lower than expected GDP, ISM, and Chicago PMI, combined with higher than expected initial unemployment claims, have combined to drive the bulls into hiding. Worse than expected nonfarm payroll and unemployment numbers on Friday, which seem likely based on today's initial claims data, could overwhelm support for the broader markets and spell doom for this Dow component. There is continuing weakness in the semiconductors, which look headed for another 52-week low, as measured by the Semiconductor Sector Index (SOX.X), after attempting a rebound the last two days. This does not reflect well on DuPont's recent purchase of Chemfirst, a company that specializes in chemicals for use in the semiconductor industry. With overhead resistance in place at $42.50 after the last two days of trading, the short-term trend has turned decidedly down in this stock. Stochastics have confirmed this trend with a sell signal as the oscillator turns down from overbought territory. Apparently the company itself is unsure of its near-term possibilities, as Ann Gualtieri, DuPont's Vice President of Investor Relations, used the word "quandary" when asked to describe the company's outlook for the rest of 2002. --- JPM $25.02 +0.06 (+2.77 for the week) J.P. Morgan has been in a holding pattern since its rebound after its executives finished Senate testimony in the Enron investigation. This company still has a great deal of exposure to this investigation, and even a hint of additional bad news can land the stock back below $20. While the bank responded to Senate inquiries last Monday, as requested by the Sen. Levin, the government has yet to exonerate JPM. This company is not out of the woods yet. The stock closed over $25, which has provided resistance, but not by much. A look at the CBOE open interest shows large open interest in JPM puts, which is a good indication that there are still plenty of bears in the aforementioned woods. The stock has reached previous resistance on the PnF chart at $25. A new buy signal would not be achieved until there is a trade of $26, which is our stop loss on this play. If the Dow continues south after tomorrow morning's unemployment and payroll data, this stock may follow it down. The real story here is news related, however, including JPM's exposure to Enron dealings, and any other accounting problems that may present before the August 14 deadline for CEO and CFO certification. There are still many companies out there that have yet to certify, and one of the nation's largest banks may be behind more than one curtain. ************* NEW PUT PLAYS ************* DHR – Danaher Corp. $60.12 -1.93 (+1.17 this week) Company Summary: Danaher Corporation operates in two business areas: Process/ Environmental Controls and Tools and Components. The company's Tools and Components segment produces and distributes general purpose mechanics' hand tools and automotive specialty tools. Among the household names they are responsible for are Sears' Craftsman line, Allen wrenches, and NAPA hand tools. The Process Controls division, led by Veeder-Root, makes leak detection systems for underground storage tanks, as well as sensors, switches, measurement devices, and communications and power protection products. Why We Like It: With evidence mounting that the economy is headed for a double dip, positive guidance from economically sensitive companies is likely to provide attractive some put opportunities. Shares of DHR have gotten an impressive bounce off the lows of last Wednesday, but it looks like they are running into some formidable resistance near the $62-63 level. The stock was turned back at resistance in the middle of the day on Tuesday, and since then has now fallen back under the 20-dma ($60.74). This most recent bout of weakness has pushed the daily Stochastics over and they are now in bearish decline. After drifting down over the past two days, DHR is likely to get a boost in the morning following the company's affirmation of its earnings expectations after the close. We want to take advantage of that boost by entering new put positions when the upward momentum runs out of steam. An ideal place to fade that expected rally is in the area of the $62-63 resistance level listed above. Note that the picture on the PnF chart is still very bearish, with the current price target of $51 looking very achievable. Our near-term target will be a re-test of last week's lows near $55. Place stops initially at $64, just above Tuesday's intraday high. BUY PUT AUG-60*DHR-TL OI=1958 at $2.15 SL=1.00 BUY PUT SEP-55 DHR-TK OI= 346 at $0.75 SL=0.25 Average Daily Volume = 1.07 mln --- CCMP – Cabot Microelectronics $39.86 -2.48 (+1.10 this week) Company Summary: Cabot Microelectronics is a supplier of high performance polishing slurries used in the manufacture of advanced integrated circuit (IC) devices, within a process called chemical mechanical planarization (CMP). CMP is a polishing process used by IC device manufacturers to flatten many of the multiple layers of material that are built upon silicon wafers and necessary in the production of advanced ICs. CMP enables IC device manufacturers to produce smaller, faster and more complex IC devices with fewer defects. Why We Like It: In a glaring contrast from its behavior in other market bottoms, the Semiconductor index (SOX.X) just can't seem to get out of its own way. With reductions in cap-ex spending and earnings disappointments occurring on a seemingly daily basis, it's no wonder that the gains from last Wednesday's lows have all but disappeared. In fact, today's close at a fresh 3-year low certainly doesn't bode well for any hopeful bulls. Many chip stocks are lurking near major support, making for less attractive risk reward ratios. But shares of CCMP are looking much more attractive to the short side, as the stock is more than $8 above last week's intraday lows. Helping to keep the stock off its lows is the strength of its earnings report last Thursday. If the SOX falls apart though, it is likely to drag all the stocks in the sector lower in its wake, and CCMP just has further to fall. The PnF chart is showing the most recent rise as generating a "bull trap" formation, just below the formidable bearish resistance line (currently $45). It is interesting to note that CCMP is now back below the 50-dma ($42.19) and is currently resting just above the 20-dma ($38.88). The best entries will come from a rollover near the 50-dma or a breakdown under the $38.50 level. Keep a sharp eye on the action of the SOX to make sure it is confirming the trading of CCMP. Stops are initially set at $44, just above the recent highs. BUY PUT AUG-40*UKR-TH OI= 742 at $3.20 SL=1.50 BUY PUT SEP-35 UKR-TG OI=1859 at $1.30 SL=0.75 Average Daily Volume = 1.44 mln --- KLAC – KLA-Tencor $37.28 –2.11 (-0.01 for the week) Company Summary: KLA-Tencor is the world leader in yield management and process control solutions for semiconductor manufacturing and related industries. Headquartered in San Jose, Calif., with operations around the world, KLA-Tencor ranked #6 on S&P's 2002 index of the top 500 companies in the U.S. KLA-Tencor is traded on the Nasdaq National Market under the symbol KLAC. (Source: company release) Why We Like It: KLAC has been languishing on OI's watch list for a couple of weeks now. We have recommended put spreads on this stock on the Market Monitor, however have left it off our official play list for a couple of reasons. KLAC had a drop of over $6 in four days, and we didn't want to get caught chasing a rebound. Once it showed continued weakness, its earnings were around the corner, and OI's policy against playing earnings got in our way. The stock made back a little ground leading up to earnings, on speculation that they may surprise the troubled semiconductor sector with decent earnings. Alas, the good news wasn't so good after all. While the company surpassed analysts' expectations, they were unable to "put some lipstick on this pig." Net income was cut to just over a third of last year's number, while revenue fell 38%. The stock's original fall through $40 support signaled weakness, as that level had provided a floor going back to the beginning of July. Its upcoming earnings seemed to halt the slide and gave it a temporary boost. Now that the news is out, however, the bulls have gone back into hiding, and the bears are piling on. The stock has not yet seen its September lows in the $32 range, but this would be a good initial target for this play, as it is the first level of visible support. The stock has been in a long- term descending channel since the beginning of April, and has rolled over just above its centerline, as it seeks out new lows. The bearish vertical count on the point and figure chart is $26, and its earlier break below $40 signaled a triple bottom breakdown. A trade of $36 will constitute a bearish catapult, which is a triple bottom breakdown, followed by a double. As if the news and technical analysis were not enough bad news for this stock, the semiconductor sector is in bad shape. The Semiconductor Index (SOX.X) finished today at a new 52-week closing low, and its long-term downtrend looks even worse than KLAC's. Continued warnings, such as Taiwan Semiconductor (TSM) slashing its budget by more than $500 million for the rest of 2002, continue to flood the sector, as the current spending environment remains poor for these companies. We will place our initial stop-loss at $40, above this stocks previous level of support. BUY PUT AUG-40 KCQ-TH OI=5209 at $4.00 SL=2.00 BUY PUT SEP-40*KCQ-UH OI=3790 at $5.40 SL=3.00 Average Daily Volume = 15.1 mil ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 08-01-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: KLAC - PUT Traders Corner: Oscillators - Part 2: The Relative Strength Index (RSI) Options 101: Bullish or Bearish - Stay hedged, Make Money, Part II ********************* PLAY OF THE DAY - PUT ********************* KLAC – KLA-Tencor $37.28 –2.11 (-0.01 for the week) Company Summary: KLA-Tencor is the world leader in yield management and process control solutions for semiconductor manufacturing and related industries. Headquartered in San Jose, Calif., with operations around the world, KLA-Tencor ranked #6 on S&P's 2002 index of the top 500 companies in the U.S. KLA-Tencor is traded on the Nasdaq National Market under the symbol KLAC. (Source: company release) Why We Like It: KLAC has been languishing on OI's watch list for a couple of weeks now. We have recommended put spreads on this stock on the Market Monitor, however have left it off our official play list for a couple of reasons. KLAC had a drop of over $6 in four days, and we didn't want to get caught chasing a rebound. Once it showed continued weakness, its earnings were around the corner, and OI's policy against playing earnings got in our way. The stock made back a little ground leading up to earnings, on speculation that they may surprise the troubled semiconductor sector with decent earnings. Alas, the good news wasn't so good after all. While the company surpassed analysts' expectations, they were unable to "put some lipstick on this pig." Net income was cut to just over a third of last year's number, while revenue fell 38%. The stock's original fall through $40 support signaled weakness, as that level had provided a floor going back to the beginning of July. Its upcoming earnings seemed to halt the slide and gave it a temporary boost. Now that the news is out, however, the bulls have gone back into hiding, and the bears are piling on. The stock has not yet seen its September lows in the $32 range, but this would be a good initial target for this play, as it is the first level of visible support. The stock has been in a long- term descending channel since the beginning of April, and has rolled over just above its centerline, as it seeks out new lows. The bearish vertical count on the point and figure chart is $26, and its earlier break below $40 signaled a triple bottom breakdown. A trade of $36 will constitute a bearish catapult, which is a triple bottom breakdown, followed by a double. As if the news and technical analysis were not enough bad news for this stock, the semiconductor sector is in bad shape. The Semiconductor Index (SOX.X) finished today at a new 52-week closing low, and its long-term downtrend looks even worse than KLAC's. Continued warnings, such as Taiwan Semiconductor (TSM) slashing its budget by more than $500 million for the rest of 2002, continue to flood the sector, as the current spending environment remains poor for these companies. We will place our initial stop-loss at $40, above this stocks previous level of support. BUY PUT AUG-40 KCQ-TH OI=5209 at $4.00 SL=2.00 BUY PUT SEP-40*KCQ-UH OI=3790 at $5.40 SL=3.00 Average Daily Volume = 15.1 mil ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** Oscillators - Part 2: The Relative Strength Index (RSI) By Leigh Stevens lstevens@OptionInvestor.com The RSI (as is stochastics) is an "oscillator" that is constructed in a way that its numerical scale goes from a fixed point on the low end (0) to a fixed point on the upper (100) end. This is not the case in the Moving Average Convergence Divergence or MACD ("mack-dee"), which will be the subject of the final article in this series on Oscillators. The Relative Strength Index, usually referred to as the “RSI” was developed by a trader and market analyst named Welles Wilder back in the 1970's. A simple way to understand the RSI is that it is a ratio (one number divided by another) that compares an average of up closes to down closes. There is only ONE variable, which is the length or the number of periods (hours, days, weeks, etc.) that the RSI formula works with. The common RSI default (the preset value) for length is usually either 9 or 14. The relative strength index calculations will be based only on the number of closes specified as the length setting. The reason for the widespread use of either 9 or 14 is mostly a matter of convention. Obviously, a setting of 9 or 14- days does not represent an even number of 5-day trading weeks. However, both 9 and 14 are the most common default settings and there is a repository of experience among users of the RSI with these levels and instances of overbought or oversold conditions associated with them. The commonly used default settings are 30 to represent an oversold reading and 70 and above to suggest an overbought condition. The optimum length settings are a function of your time horizons relative to trading or investing. 5 to 9 (or 10) for the RSI length on a daily or hourly chart is appropriate for the minor trend and short-term trading. A length setting of 14 up to 21 for daily charts is good for looking at the longer trend, such as over 2-3 weeks or more. On weekly charts, my preference is an 8- week period for the RSI – 8 represents a 2-month period or 1/6th of a year, which can provide a relevant picture of the secondary trend. RSI is derived by calculating the average number of points gained on up days, during the period selected (e.g., 14), then dividing this result by the average point decline for the same number of bars – this ratio is “RS” in a 14-period formula for RSI or 100 – 100/1+RS. RS = the average of 14-days’ up closes divided by an average of 14-days’ down closes. 9 or 21, or any other number, would be used instead of 14 in this example. Every up close during this period is added and this sum is divided by the number of bars that had up closes to arrive at a simple average. Every down close during the period selected is added, then this sum is divided by the number of bars that had down closes. If 10 of 14 days had up closes, the result of this division is a ratio that rises rapidly. Subtraction from 100 of the result of the division is what makes for a “normalized” scale of 1 – 100. In a period of a rapid and steady advance the RSI will reach levels over 70 rather quickly and RSI can then remain above 70 for some period of time. The reverse is true in a decline, as readings under 30 are seen. Once the RSI retreats from high levels, it can offer an alert that the trend may be reversing. It is also true that relatively brief sideways consolidations or even a minor counter-trend movements will cause the RSI reading to back off from the preset 70/30 “extremes” and get back below 70. The reverse situation would be where a steep decline causes the RSI to fall well under 30 – a brief sideways move or counter- trend rally can put the RSI back above 30. Once a strong trend continues, the RSI can quickly get back into oversold or overbought territory again. In a strong up trend, it is often advisable to both use longer length settings of the RSI – for example, 14 – 21 on daily charts and to define “overbought” as a level above 70; e.g., in the 80- 85 zone. In a strong down trend, changing to a longer RSI length setting is also appropriate – in addition, define oversold only as an RSI level that is at or below 20. You can change your conception of constitutes the overbought and oversold extremes to an area closer to what has been reached already as the highest, and lowest, RSI readings – The above chart is also an excellent example of a bearish RSI "divergence" that set up on the second rally to the highest peak. You'll notice that the RSI did not then ALSO move to a new relative high - a great "sell signal" resulted. A common situation is where there is a strong initial price swing, then a period of consolidation such that the RSI stays within the 30 to 70 levels. While these readings are in this zone, the RSI is of little practical use. More value is gained in using the RSI in a market that develops a well-defined trading range such as in the FIRST chart above. If prices falter in an area of prior highs, accompanied by even 1-day when the 14-day RSI is over 70, this indicator gives an added indication to sell in a prior resistance area. In the area of prior relative lows, accompanied by even 1-day with an oversold reading of the 14-day RSI at or under 30, the RSI provides some technical reinforcement for buying while prices are in a likely support zone. The use of indicators to “confirm” other technical developments relating to prior highs and lows or such things as price reversals at trendlines, is one of their most useful aspects. A rounding or rectangle bottom coupled with an oversold RSI reading would be a good technical validation for purchasing, especially if prices also broke out above a trendline. Trendlines may also be applied to a series of lower RSI highs or higher RSI lows, with the same implications for a breakout above or below the line – this may lead or “confirm” similar price action. OSCILLATOR DIVERGENCES AS BUY OR SELL “SIGNALS” Indicators, besides their usefulness in providing some idea of whether a market is overbought or oversold, will also generate occasional divergent buy or sell “signals”, on either an intraday, daily or weekly chart basis. RSI will normally move to a new low or new high when prices do the same - this is "confirmation" by an indicator. When confirmation does not occur, the resulting divergence is an important alert for the possibility that it’s signaling an upcoming reversal to the current trend. In a sense, divergences are more "important" than indicator confirmations as they can provide either an excellent buy or sell signal. If the signal is one that indicates a possible reversal to a trend that you are participating in, this is a valuable advance warning – one of the chef risks to potential gains being caught in a trend reversal that you did not see coming and were not prepared for. A classic example of a bearish divergence is a higher price peak, accompanied by a lower low in the oscillator reading, compared to its last extreme – this development suggests some likelihood of a downside reversal developing in the near future. A classic example of a bullish divergence would be a higher high in an oscillator relative to what came before, in the same trading period when prices made a lower low – this situation suggests the possibility of an upside reversal. There is a third situation that comes up, which is not considered a “classic” divergence, where the indicator bottoms or tops in the same area – marking a double top or bottom or a line formation – whereas prices go on to make a new high or low. This type of divergence is also valid in terms of suggesting that the market may have topped or bottomed. Such measurements of momentum based on an oscillator formula, suggest that the trend strength could be waning and that the item or financial instrument in question, vulnerable to a reversal. The RSI has a maximum reading of 100 and it has the same tendency to “flatten” in very strong trends which is even more pronounced in the stochastic model – however, the RSI will fall relatively quickly from its most extreme point as soon as a correction develops – when a rally resumes, the RSI will rise again with the advance, but will also give a more clear cut divergent reading by not rising as far as previously if the momentum is not as strong on the next advance. There are often multiple divergences and some will be early and well before the actual occurrence of a trend shift. Instances of multiple divergences create a risk of premature trade entry one or more times if trade entry was based primarily on an oscillator divergence. There are some ways to avoid this situation, as follows: 1. Give more weight to divergences that occur during or after overbought or oversold oscillator extremes that have been adjusted to reflect the strength of the dominant trend – e.g., if in a very strong up or down trend, the appropriate RSI overbought-oversold levels may be 80 and above or 20 and below, rather than 70/30. 2. Look for “confirming” price (chart) patterns that are associated with trend reversals – especially trendline breaks or breakouts. RSI tends to be my oscillator of choice in looking for divergences, although a good strategy is to also look at the other common oscillators like Stochastics and MACD -- sometimes it is a different oscillator, such as the stochastics model, that highlights a particular bullish or bearish divergence. ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********** OPTIONS 101 *********** Bullish or Bearish - Stay hedged, Make Money, Part II Buzz Lynn buzz@OptionInvestor.com The last time we had a chat in this column was on July 18th where I promised I'd get to the "adjustment" phase of the hedged strangle or straddle trade "next week". Woops! I missed a week! And what a great week it was for me personally, as I got to take my eight-year-old daughter to Disneyland for her first visit. She had a blast - liked it better than Disney's Big Red Boat and Disneyworld. Little did we know what lay in store for us at the newest park in the Disney chain, Disney's California Adventure. It was awesome! For those that haven't been to Disneyland for at least two years, or not at all, the California Adventure was built right where the old parking lot used to be. I couldn't recognize the place. Anyway, California Adventure, my daughter and I agreed, was even better than the regular Disneyland, though we still liked the Magic Kingdom a whole bunch too. Why do I bring up this Disneyland stuff (other than to artfully fess up as to why I didn't write last week)? The answer is because I was planning to do a Fundamentals Guy piece upon returning from my vacation as to why Disney (DIS) might or might not make a nice investment in a tumultuous market. Because the service at the parks was first rate, and the parks were populated like I'd never seen before with happy faces freely spending money (What recession? One $8 hamburger please.), I figured Disney must be making a huge amount of cash worthy of my investigation if not my investment. Further research proved me wrong thanks to a bunch of debt and the possibility of drastic travel and entertainment budgets cuts at the family level in coming months if not years. Dividend yield wasn't too hot; neither was the earnings multiple. That would make a boring story. Then I remembered (and was reminded by a few e-mails) that I promised a follow-up to the last column. And that, Dear Reader, just like explaining how to build a clock when asked for the time, is how we arrive at today's topic of adjusting our hedged straddle or strangle. For those that missed the last article, you can get up to speed at the following link: http://members.OptionInvestor.com/options101/071802_1.asp On with the story. Remember that we want to be market agnostics by not thinking "bull or bear". We go where the market tells us, and we let volatility premium decay on the other guy from our short positions. We profit no matter what as long as we remain hedged in the direction of the trade. With that in mind, let's get to the fine points using the QQQ trade we referenced earlier. Recall that we were short the AUG-25 straddle (a put and a call). The following daily chart shows support and resistance as of July 18th. QQQ daily chart: A breakout over $26.50 resistance would be enough to get my attention to go long QQQ shares, which hedges our $25 call position and locks in a $1.50 profit for us as long as QQQ remains above $26.50 by expiration. Similarly, a breakdown under $23.50 is going to get me going short to hedge the $25 put, which also locks in a $1.50 profit as long as QQQ closes under $23.50 at expiration. Here's my logic behind picking $26.50 and $23.50 as pivot points. That's where we find support and resistance. We could just as easily pick $25.25 and $24.75 as pivot or hedge points, but clearly, that will have us in and out, short and long, possibly many time during our hold period to expiration. The other side of the coin is that by picking $27 and $23, we run the risk of wiping out a big part of our collected premium from the short straddle/strangle. By waiting that long to hedge, we let $2 of the $3 collected premium get away before protecting ourselves - not much of a return there, and reversals of the underlying stock back under $27 or over $23 would whittle away at our remaining $1 profit. We must pick a strategy here and stick to it. This may seem trivial like a background explanation, not the main point. But it is the essence of the real dangers of this trade. If you get nothing else from tonight's article, understand this. Profits will be eaten alive and can turn into a loss if the underlying gets stuck trading around a pivot point and we do not ultimately exit the trade while there is till money in our pocket. Note the updated QQQ chart below. Current QQQ chart (daily): Eeeeew. . .that doesn't look so good, does it? Nope, but if we're smart we still come out ahead by evaporating vega and theta (volatility collapse and time decay). But let's follow the course of action here. First we went short when, at the end of the day, we saw a close under $23.50. Three days later (long green candle), QQQ closed at $23.63. So we follow the discipline and buy our short shares back. Bummer - because the next day, we short again when the QQQ falls under $23.50 (next red candle). Two day's later, BAM! Gap up and close over $23.50. So we cover our short shares by purchasing them back. Today (last red candle), back under $23.50 so we are short again. Ideally, every time we stick around a pivot point, commissions will be the most expensive part of the transaction since bid/ask spread on the underlying should be minimal. Spreads will be almost neutralized if we are going short and getting filled, then covering the shorts with stop orders. Simply set a limit order such that when QQQ trades below $23.50, we get short the shares. Hopefully it continues down. NO? Ok, once filled, we then set a stop limit at $23.50 to cover our short shares if the price moves back up. Lather, rinse, repeat. Now all this can get pretty expensive commission-wise even with a small spread on the underlying. If we get tired of the in and out action, we can simply cover the short while simultaneously buying back the short straddle. The bid/ask spread on the options will be much more noticeable here and can slurp off what little profit remains. We might get out with a small profit or loss. But the point is to plan to close the whole trade if it isn't going our way. Don't let a profit turn into a loss from overtrading. Get out of the whole thing and re-evaluate or do a different trade. Just for grins and giggles, suppose we are type A traders that won't leave an ounce of wiggle room on the $25 straddle. With that mentality, a large enough short straddle position, which won't be drastically affected by commissions, and the ability to watch our charts minute by minute, we might have decided to stick to $25 even, as our pivot point. Long above $25; short below $25; no emotion; no second guesses; a pure trading machine; long or short as we hit the $25 number. In that case, we would have been short two weeks ago and never looked back - that $3 premium still in our pocket. Now, are the dangers and rewards apparent? Can we now understand why trading style has everything to do with the profitability of this play and why discipline to sticking with the strategy is so important? That's one of the reasons I was careful two weeks ago to suggest readers NOT make this trade unless we had full understanding of the strategy. Again, short the straddle or strangle to take advantage of expensive volatility premium and time decay. Then let it evaporate on the other guy while we hedge in the direction of the underlying security - short under the strike price, long over the strike price. It's really simple. But as we get more comfortable with this strategy, we can make it even more sophisticated. Here's a great example of one our sharp- brained readers getting it absolutely correct with an edgy twist, edited for brevity. Beginners, don't try this at home without a thorough understanding of what you about to read. . .and for gosh sakes, paper trade it first with pretend money! Reader T.D. (probably stand for touchdown!) writes: Hi Buzz, Waiting with bated breath for the follow up to your 18th July article. Because of the high premiums available I have several short straddles, short strangles and naked puts/calls open on individual stocks. So far the hedges have been simple but there is bound to be a time when I get a dreaded oscillation about a strike. :-( [author's note: see above] Gap openings are another danger of course but I do each of these positions in relatively small size so any single problem should not be too much of a disaster. Perhaps I will already be hedged (in the right direction) when if it happens - I can hope. I view these trades as number of points credit available to cover me against adverse events and I have adjusted them as time goes by in order to add more "points" to the position. e.g. Sold 460/500 strangle for 54. Price fell below 460 - sold underlying @ 459 for the hedge. Price fell a little further. Closed 500 call, sold 460 call for a credit of 7. I now have a 460 straddle with 61 points credit and a short hedge already in place. Price fell further still. Closed 460 call, sold 420 call for a credit of 9. I don't know the technical term for this but I now have a strangle again but with the call price below the put. I also have 70 points credit and a short position in the underlying. Underlying bounces back above 420 Close hedge @ 420 losing 1 point since I did not protect the 460 put until 459. (in fact there was an obvious intraday "bounce" taking place so I closed earlier. This created an extra profit but is not included here since as you pointed out, we do not trade the underlying in these positions. I did; took a risk and it worked. This was an EXTRA decision and nothing to do with the other principles discussed here). The price now is between the 420 and 460 strikes so no underlying position is in place; but sell and buy stops are. I am new to options but not new to trading. It seems to me that the more premium I can take in on any position, the more protection I have and downside protection is always my FIRST consideration. Profit is OK but not losing is even more important. [T.D nails the philosophy exactly right.] The position above is now 69 points up so I can now stand more things going wrong. Also I am now back in a strangle which appears less risky than a straddle since the adjustments may be less frequent with a "free" area to work in. I would be very keen to know when you will be publishing the follow up. I can only hold my breath for so long :-) Thanks a lot. Love the site. T.D. Thanks T.D.! It's great e-mails like this that make our day and convey to us that OIN readers have learned how to fish, not just accept the gift of fish! In an ideal world, this is exactly how a trade is supposed to work out. For the article, in order to keep it simple, I had planned merely to talk about shorting the underlying at [in T.D.'s example] 459 or going long at 501 and let the short options expire. But he already knew to do that and some better by covering and shorting the option on the way down, thus getting vega to work even more in his favor. He swerved into an effective strategy - Nice Job! I know this is a hard strategy to get at first for the uninitiated, but it will sink in, and once understood is very simple. Again, short expensive options so that volatility and time decay works in our favor, and hedge in the direction of the underlying security. It's kind of like a jet getting off the runway. It requires 103% power just to get off the runway, but once airborne, we can climb and fly faster with less power. Questions always welcome. Trade smart and make a great weekend for yourselves! ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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