The Option Investor Newsletter Tuesday 08-06-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Spring Forward, Fall Backward Index Trader Wrap: Beat the Street Market Sentiment: Destination Unknown Weekly Fund Screen: Market Outperformers in Last Decade Index Trader Game Plans: THE SECTOR BEAT - 8/6 Swing Trader Game Plans: The Coin Please Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 08-06-2002 High Low Volume Advance/Decline DJIA 8274.09 +230.50 8418.15 8049.03 1.76 bln 2341/ 854 NASDAQ 1259.55 + 53.50 1279.57 1224.80 1.45 bln 2422/1042 S&P 100 431.17 + 12.61 439.84 418.56 Totals 4763/1896 S&P 500 859.57 + 24.97 874.44 834.60 RUS 2000 380.79 + 13.87 380.79 367.12 DJ TRANS 2235.50 +103.20 2256.69 2132.71 VIX 45.73 - 3.58 47.29 44.09 VXN 64.18 - 3.34 67.08 61.94 Total UpVol 2,948M Total DnVol 481M 52wk Highs 58 52wk Lows 371 TRIN 0.61 PUT/CALL .76 ************************************************************* Spring Forward, Fall Backward That may be the key phrase for adjusting changes in daylight savings time but it is also the key phrase for our current market movement. The -269 point loss on Monday was countered by a +230 point gain today. That may be quite a gain but well off the +374 point intraday high. The bounce came on strong short covering on the heels of a -700 point three day drop. Dow Chart Chart of Nasdaq No, stock fundamentals did not change. Corporate accountability issues did not disappear. Cash did not come roaring back into mutual funds. The bounce today came after a huge asset allocation program moved the markets overseas over night. A fund with a stated asset allocation of 70% stocks and 30% bonds for instance, may allow those ratios to slide with the market to 60/40 or even 55/45 before a program is launched to bring them back in line. If you have a fund with billions under management a 15% to 20% change is significant to the market. When your downside ratio threshold is reached a buy program is triggered to sell bonds and buy stocks. This can equate to millions of shares in hundreds of stocks. This is what happened overnight in Germany. A fund was rumored to have increased their stock weighting by $5 billion to as much as $10 billion dollars. Germany (+8%), France, Sweden and the UK, were up strongly overnight. The U.S. dollar was also up strongly against 17 currencies in overnight trading. This was the only spark needed to cause some serious short covering but there was more! Three brokers came out before the open with calls for the Fed to cut interest rates again and quickly. Goldman Sachs, Lehman and Deutsche Bank all said a rate cut was what was needed now to stave off a double dip. Lehman called for a 75 basis point cut by year end. They said it was needed to prevent investor confidence from the falling market to bleed over into consumer spending habits. They also said there was a coming crisis in the credit markets where companies can not borrow money due to very restrictive credit policies. Without loans there would be a continued restraint on capital spending and a slower recovery. This united plea to the Fed prompted shorts to reconsider their positions and attracted many buyers who feel another cut could energize the markets. The Fed fund futures are pointing to an almost zero chance of a rate cut at next weeks meeting but nearly 82% for the September 24th meeting. Traders with an eye on next Tuesday's meeting and hearing the unified call for a cut may have thought a Fed reaction was imminent. Don't hold your breath. The Fed funds rate is 1.75% and the lowest in recent memory (40 years). By making the -75 point cut suggested it puts them very close to zero and for practical purposes below a zero effective rate. Essentially they have used up all their bullets with eleven rate cuts last year and they are very reluctant to pull the trigger on the last three in their clip. What if something really bad happened and they were out of ammo? That is going to be weighing on their minds going forward. Also, for those with a little longer memory, a few brokers calling for rate cuts has never prompted action before. The Fed tends to call their own shots and could actually lean away from a cut to avoid appearing to be influenced by outside sources. Many have said a cut now could have the opposite impact on the market and could be seen as a desperation act by the Fed. The market mover after hours was of course Cisco. They announced earnings that beat the street by two cents at $.14 cents. They missed the revenue estimates of $4.9 billion with $4.8 billion. They attributed much of their gains to cost cutting not sales increases. They said major customers remained cautious but steady but the telecommunications market remained "challenged". They admitted being hit by a slowdown in their enterprise customer base but said the serious problems in telecommunications only impacted 20% of their income. They bumped their stock buyback to $8 billion before Sept-12th, 2003 in an effort to blunt investor criticism that they were hoarding $22 billion in cash. $8 billion in $12 stock may seem like a lot but it is less than one percent of the outstanding shares. Shares traded on both sides of positive after the close before moving higher. During the conference call it was announced that the CFO was going to retire as the rumors had suggested last week. He will not however leave until May-2003 and the current controller will replace him. The stock dropped on the news but almost immediately rebounded to session highs near $13. John Chambers said in an interview that the gross margins were as high (67%) as anytime during the bubble years and this was a result of Cisco taking strong steps to cut back and prepare for the downturn early. I agree and I think he did a good job. They will be very profitable when the recovery appears. However, he also said he was more cautious about the future outlook than he had been in the past. Visibility was tightening and sales in other countries were slipping. He said it was a strong quarter for Cisco and they had done everything possible for this quarter but could not control the economy. (hinting of problems ahead) He said book-to-bill numbers for next quarter could fall below 1.0, and another hint. This means fewer new orders than orders shipped. The Cisco news and related spin will be critical to the open on Wednesday. I think it was positive in a market expecting the worst. It is too early to predict the end result but the lack of a smoking accounting gun or a multipage dumping of balance sheet items should be positive. The market needs some long-term positive. Another brokerage went public with its S&P predictions today. Julias Baer said the S&P would be fully valued at 700 and target 750 for the year end. That is an exciting projection considering the S&P closed today at 860. Martha Stewart has refused to testify about her IMCL stock trades and congressional investigators have demanded her to turn over phone and email records by August 20th. "We are through asking nicely, clearly someone is lying to us and we are going to find them," the committee spokesman said. Merrill Lynch brokerage assistant Douglas Faneuil has testified that Martha's broker ordered him to call her and tell her to sell because the Waksal's were dumping their stock. This contradicts the previous stop loss story and puts Martha in jeopardy. With the Sept-11th anniversary ahead of us the airlines are already making plans to deal with the lack of passenger traffic. Load factors are quoted to be in the 20% range for the week surrounding the 11th. Sprit Airlines announced today that all seats will be free on the 11th to any city they fly. Most other airlines have not announced specific promotions since having a 9/11 sale could be seen negatively. They are all going to fly drastically reduced schedules but cannot afford to just stay grounded. A minimum number of planes must keep circulating to meet contractual and operational requirements. The airlines are already losing money in record fashion and with loads shrinking daily the losses are going to get worse until this anniversary passes. The same thing is happening for hotels, rental cars, theme parks, cruises, etc. The economy is slowing down even more as the fear of an anniversary event grows. In my opinion this is THE EVENT that will cause the Fed to cut rates again. As August economic numbers are reported the Fed may take action to offset the economic impact of the anniversary. The markets tomorrow are up for grabs. The gains today were due to an external event. Very rarely does any fund buy $5-$10 billion in stocks in a single day. As I stated last night the VIX and TRIN were very oversold and primed for a bounce. This buying spree exploded when it hit the oversold U.S. internals. Tonight the TRIN is only .61 and the VIX dropped to 45.73. The pressure has eased. The rate cut hype has faded and we are back to fundamentals again. The Cisco news, while they beat the street, was not overly outstanding. The futures were up +9 at one point and at 7:39 are now up only +1.00. I would love to see the rally continue tomorrow but there is significant resistance above us. The institutional market on close orders were strongly weighted to the sell side and that should tell us something. Continue to maintain tight stops whether you are long or short. Tomorrow could be another exciting day Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** BEAT THE STREET by Leigh Stevens TRADING ACTIVITY AND OUTLOOK - Do you suppose someone knew? Cisco beat the Street - earnings estimates I mean - by 2 cents. This put the stock higher after regular market hours by a few percentage points. So it goes on the Street of Dreams - first they whack it then they stack it back up. These rallies that come out of nowhere for no apparent reason - oh, I know there's talk that a Fed ease may occur and there is the fact that the dollar has gone and started an apparent second up "leg". I knew this was coming - it was "obvious" from the Euro charts, at least in my mind. Lets talk about the less obvious. These sharp rallies on less than stellar volume look, smell and feel a lot like bear market type rallies. Rallies that stem largely from short covering and, at times, from index arbitrage program trading (if the stock index futures jump to inflated values). Why is short-covering buying so big? - because shorting of stocks and the sometimes rush to cover those shorts by buying, is a bigger factor these days, especially due to the ton of money sloshing around in "hedge" funds. Especially so, given that the "public" is largely OUT of the market, which means that a smaller volume of buying moves the market more than it used to. The hedge funds are those private money pools the managers of which can short stocks and buy puts and all the stuff that we maybe wish our "public" mutual funds could do. Hedge funds can do all this "dangerous" stuff that we are "protected" from in public mutual and pension funds, cause they are not registered for unlimited sale to anyone who can cough up a few thousand - instead these investments are sold to a limited number of individuals with individual investment minimums of like a million bucks and more. Get the picture? However, the rich are NOT different than you and I, cause we can do all the same things that the hedge fund managers can do - short stocks, buy puts, etc. You just have to do your homework. Now, I'm going to do mine! S&P 5100 (SPXOEX) Index - Hourly chart: Where to next - I thought it was bye-bye from the line of support that started to be penetrated at the end of the day Monday. The rally blew in from European trade and the currency markets - unusual, but we haven't so many U.S. fundamentals to trade off from this week. Resistance is at 870, 880, then around 885. I suggest selling rallies to the 880 area, risking to just over 885. Downside potential is to 835 - then, if exceeded - to the 820 to 815 price zone. S&P 100 (OEX) Index - Daily/Hourly charts: Not out of the bearish woods by any means - OEX encountered significant selling in the 440 area and reversed sharply near the close. 417 to 413 - call it 415, is the first area of support, but we could be headed for 410. I would play the S&P 100 on the bearish side and think the final hour break demonstrates that rallies lack staying power. I suggest selling rallies back up to the 440 area, on up to 445, which is the next resistance above. Tech may get a bounce, but the S&P and Nasdaq have been going their separate ways to a significant degree. Again, 440 is key to the upside potential and a current "stopper" - at the 21-day moving average which tends to be "the" moving average to watch for trend direction. In terms of the stochastic level, it has been the pattern for market rallies to make the most and sustained headway when the rallies have started from an oversold daily stochastic level. Bucking the trend against this momentum indicator has been rarer than snow in summer in Arizona during the forest fires. DJ Industrial Index (1/100 - $DJX.X) - Daily/Hourly charts: I suggest selling rallies to the 84 area - notice how often the 21-day moving average acts as a deflector, sooner or later. If the DJX can pierce 84.25-84.50, there is potential perhaps to 85.50, at the upper boundary of the hourly downtrend channel but this is the best I see for DJX currently and I would also be a seller in this area. The overall technical picture suggests follow though to the final hour break over a move back up through 84. An initial downside target is to 80 - perhaps back to the prior downswing low in the 79.50 area. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: There is resistance around 23, but if there is Cisco-led follow through to the Nas 100 tomorrow, the Q's could reach the 23.75-24 area, where I suggest shorting and put plays. At some point I look for a move back into the gap area at a minimum, or to 21.50. 21-20.9 is next lower support in my estimation. I lean to buying at the lower trading band (this is set currently at 5.5%, under the 21-hour moving average which is how the envelope line is calculated although the "centered" moving average is not shown on the chart.), when this is ALSO accompanied by an oversold reading on the hourly stochastic. It is hard to equate a specific price level to an oversold reading in the oscillators - it depends on the length of time spent in a decline as well as the depth of a decline. Let the stock break out above this resistance without me. I would rather short the rally at some point or buy the next dip than surrender a profit, at least in this market climate. Or, if I want to stay long I'll buy ORCL or MSFT on a further breakout if I want to play the tech darlings. Support is anticipated in the 23.5-24.0 area; then down around 22 if there is another sharp break. Above 25.5, resistance levels are at the prior highs at 26.5-26.8. 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 **************** Destination Unknown By Steve Price I would love to offer our readers an explanation as to why the market rallied 375 points, before falling back to end the day up 230.46, after a slew of bad economic news the last 4 days. Unfortunately I cannot see into the minds of all those buyers. What I can say is that the mind I do have access to, my own, was not among those buyers. The economy is shrinking, unemployment remains constant, manufacturing is down, services are down, demand for technology products has been cut in half, and yet we had a huge rally. The first reason being talked about is the possibility that the Fed will lower rates at next week's FOMC meeting. While this is a distinct possibility, the bond market has already factored in a 25 basis point move by the end of the year. It is possible there will be a greater move, and this will certainly play a big part in any rally as the year moves forward. There are some technical factors that may figure into this rally, as well. First, the Dow support level of 8000. I'm looking at the recent rally from a low of 7532.66 on July 24th, to the rally peak of 8736.72 on July 31st. While 8000 was not a specific retracement level, it was awfully close to the 61.8% retracement level just below it, at 7992.61. This factor, combined with the even number support level, may have provided a combined effect. If an investor is picking a bottom, there are two support factors here, rather than one. Second, the last couple of times the Market Volatility Index (VIX.X) traded over 50, we experienced large rallies shortly thereafter. On July 23, 2002, the VIX finished at 50.48. The next day we experienced a rally of 488 points. On September 21, the VIX spiked to its recent high of 57.31. The following Monday we experienced a rally of 368.05. Going back to 1998, the connection is not as close, however worth noting. The VIX traded over 50, reaching 52.12, on Friday October 9. The following Wednesday we had a rally of 331 points. Third, the Nasdaq Composite had retraced almost it entire gain from July 24, trading yesterday within 14 points of that intraday low of 1192.42, and hovering above the 1200 mark, which was viewed as significant support. The combination of support from 8000, 61.8% retracement, the 1200 support in the Nasdaq and the high VIX reading may have combined to form their own trampoline. Remember, however, that even though you bounce pretty high off a trampoline, you eventually come back down. Cisco's upcoming earnings, released today after the close, may have also factored into today's rally. However, the fundamentals for the tech sector still look weak, with no upturn in PC sales seen until at least next year. Cisco beat pro forma estimates by 0.02, however revenue missed expectations by about 1%. Also the $0.02 was just the pro forma number, and depending on how you view the release, they could be seen as having missed estimates by the same amount. The company is also expanding its share buy back program. GM announced that they are joining the ranks of companies that will be expensing stock options in the future. The company stated this accounting change will reduce earnings by $0.15 per share in 2003,for a reduction of 2.4%. The other Dow stocks to have made the same announcement are Proctor and Gamble (PG), Coca-Cola (KO), and General Electric (GE). Bear Stearns estimates that expensing options on all S&P 500 companies would reduce earnings by approximately 12% overall. Tech companies usually compensate executives with a higher percentage of options than do other sectors. It is hard to imagine this rally holding up, or continuing, after the slew of bad news in the last week. Keep in mind, however, that the Dow had given up 700 points in the last week, so a bounce is not necessarily a shock to the system. Interest rate speculation can move markets, and if investors are confident there will be a rate drop of more than 25 points next week, we may see the rally hold for a while. The basic fundamentals, however, have not changed. I look for the rally to stall, if not tomorrow, then after whatever rally follows the FOMC announcement next week. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8274 Moving Averages: (Simple) 10-dma: 8390 50-dma: 9045 200-dma: 9759 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 860 Moving Averages: (Simple) 10-dma: 869 50-dma: 858 200-dma: 1081 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 892 Current : 902 Moving Averages: (Simple) 10-dma: 923 50-dma: 1041 200-dma: 1362 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The semiconductor Index made its way back over 300 after dropping o a new low of 283 on Monday. It will take a sustained rally in the tech sector to form a real bottom in this index. The fundamentals, however, have not changed, and a re-test of the new low is a definite possibility. Cisco's numbers are subject to interpretation, and tomorrow's trading will shed light on the company that many investors have been looking to for a rebound in the techs. 52-week High: 657 52-week Low : 283 Current : 301 Moving Averages: (Simple) 10-dma: 319 50-dma: 389 200-dma: 503 ----------------------------------------------------------------- Market Volatility A big day in the broader markets will take points off the VIX like a lawn mower cutting grass. Of course each time we've seen what appears to be a significant rally lately, followed by a drop in the VIX, a subsequent drop in the market has brought the VIX back near 50. So no predictions today. We'd like to see how the market reacts heading into next Tuesday's FOMC meeting, when the Fed will announce its interest rate decision. A continued rally will have the VIX back into the 30s. A pullback, and subsequent fear of a 7500 re-test in the Dow will see it back near 50, or above. CBOE Market Volatility Index (VIX) = 45.73 –3.58 Nasdaq-100 Volatility Index (VXN) = 64.18 –3.34 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.76 633,215 480,564 Equity Only 0.62 486,692 300,630 OEX 0.71 43,004 30,379 QQQ 0.40 98,465 39,809 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 29 - 1 Bull Correction NASDAQ-100 25 - 3 Bull Correction DOW 27 + 7 Bull Alert S&P 500 25 - 1 Bull Alert S&P 100 26 + 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 1.59 10-Day Arms Index 1.27 21-Day Arms Index 1.36 55-Day Arms Index 1.38 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 2331 791 NASDAQ 2346 994 New Highs New Lows NYSE 25 125 NASDAQ 23 163 Volume (in millions) NYSE 1,794 NASDAQ 1,531 ----------------------------------------------------------------- Commitments Of Traders Report: 07/30/02 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 added significantly to their long positions. While contracts were added on both sides, 25,000 were added to the longs, while only 11,000 were added to the short side. Small Traders reduced both positions, however reduced long positions by an additional 6,000 contracts. 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%) 07/30/02 430,833 482,957 (52,124) (5.7%) 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% 07/30/02 153,858 67,451 86,407 39.0% 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 4,000 short contracts to their positions, while adding only 1,000 long contracts. Small Traders reduced short positions by 2,000 contracts, while adding less than 500 to their long contracts, for a 2,000 long contract increase overall. 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%) 07/30/02 38,163 47,343 (9,180) (10.7%) 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% 07/30/02 13,159 9,237 3,922 17.5% 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 kept their long positions approximately the same, while reducing their short positions by almost 2,000 contracts. Small Traders reduced both long and short positions dramatically. They reduced their long position by 2400 contracts and short position by almost 4,000 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% 07/30/02 22,429 12,811 9,618 27.3% 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%) 07/30/02 6,778 8,999 (2,221) (14.1%) 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 FUND SCREEN ****************** Market Outperformers in Last Decade Steve Wagner This week, we identify top-performing funds that have outpaced the 10-year average annual return of the S&P 500 index through July 31, 2002. The majority of large-cap equity funds measure their performance versus the S&P 500 index since it represents over 80% of the total U.S. equity market capitalization. Mid- and small-cap funds may also be compared to the S&P 500 large- cap index to ascertain the return advantage if any of investing in the riskier "extended market." Last week, we limited our universe of candidates to large-blend and large-growth funds. This week, we're focused on funds that have specifically beaten the market (as measured by the S&P 500 index) over the past decade regardless of their specific equity style or strategy. From that pool of candidates, we'll look at their management and operations, plus their relative return and risk using Morningstar's online screen tools and fund database. Per Standard & Poor's website, the S&P 500 Index consists of 500 stocks chosen for 1) market size, 2) liquidity, and 3) industry group representation. The 500 Index is a market value-weighted index (stock price times shares outstanding), with each stock's weight in the 500 Index proportionate to its market value. S&P duly notes on its website that the 500 Index is one of the most widely used benchmarks of U.S. equity performance. According to Morningstar, the S&P 500 index generated an average annual total return of 10.08% over the last ten years as of July 31, 2002. That number is roughly in line with the historic norm for U.S. stocks, so right now is good time we feel to be judging equity funds for their long-term performance over market cycles, including ups and downs. This exercise should also help to show how much outperformance one can realistically expect to get from an investment in an actively managed stock mutual fund over time. It's important to have realistic performance expectations, since you may find you need to contribute more to your plan or account to achieve your long-term investment goal. The 90's bull market gave people the idea that they could average 25% a year in total return, but we know that is a myth. The numbers we'll see today offer a much more realistic expectation of long-term performance. Along that same line, it should also be noted that over the past 10 years, the vast majority of stock mutual funds failed to beat the market as measured by the S&P 500 Index. Morningstar's data shows for example that the Vanguard 500 Index Fund (VFINX) had a 10.01% annual-equivalent return for the trailing 10-year period, ranking it in the top 25% of the large-cap blend category. That means three out of four large-cap blend funds failed to beat the benchmark S&P 500 Index. In our opinion, the principal source of underperformance relative to the market (S&P 500 Index) is simply expenses. A fund with an expense ratio of 2.00% of assets a year has to generate an annual total return that is 2.00% better than the S&P 500 index to match its return. The bottom line is that most actively managed equity funds don't generate enough excess return to overcome their costs and expenses. The fact that the funds we'll look at this week have each beaten the market (S&P 500) should offer some hope that they can repeat the process and do it again over the next ten years. While past performance is no guarantee of future results, ten-year averages may help to ascertain a fund's long-term appreciation potential. Screen Process We performed our search using Morningstar's Fund Selector online tool, choosing the following screen criteria to quickly identify potential candidates: No-Load Only: Yes Minimum Initial Purchase: Less than or equal to $3,000 Expense Ratio: Less than or equal to 2.00% Star Rating: Equal to 4 stars or 5 stars 10-Year Return: Equal to or better than the S&P 500 Index This selection criterion generated 90 fund results, too many to evaluate effectively, so we opted to limit the search to 5-star rated funds. For funds with longer track records, Morningstar rates their 3-year, 5-year and 10-year records and then weights each of these ratings to come up with its overall "star" rating. Only the top 10% of funds in each category based on performance, as adjusted for risk, receive the highest 5-star overall rating. That reduced the number of potential candidates to 32, across a range of Morningstar categories. Below is a summary of results by Morningstar category: Domestic Hybrid: 6 Funds Foreign Stock: 1 Fund Large-Cap Blend: 6 Funds Large-Cap Growth: 2 Funds Large-Cap Value: 4 Funds Long Government: 2 Funds (Actually 1 fund, two classes) Mid-Cap Blend: 1 Fund Mid-Cap Growth: 2 Funds Small-Cap Blend: 2 Funds Small-Cap Growth: 5 Funds Natural Resources: 1 Fund You'll note no small-cap value or mid-cap value funds among the results, which is surprising considering how well the style has performed in recent years. Rather, five small-cap growth funds made the list, going to show that if you base your decisions on what a fund has done lately, it may be a poor predictor of long- term return potential. American Century Target 2010 Maturity Fund (BTTNX and BTFTX) is the long-term government bond fund to make the list. Since the fund specializes in zero-coupon bonds, it's not really the type of diversified bond fund we're looking for. Similarly, we have opted to eliminate Vanguard Energy Fund, the one energy/natural resources fund to make the list, since it specializes in stocks of companies in the natural resources sector. We're seeking to identify the diversified stock funds that have outperformed the market in the past decade and have a strong risk-reward profile. Of the remaining 29 funds on the list, we identified five which are currently closed to new investors: Liberty Acorn Z (ACRNX), Neuberger Berman Genesis (NBGNX), Sequoia (SEQUX), Wasatch Core Growth (WGROX), and Wasatch Small Cap Growth (WAAEX). So we're down to two dozen potential candidates at this point. Rather than try to hone in any further, we have decided to show you all 24 funds that have made it this far, sorted by category so you can pick the investment style/strategy that may be right for you based on your individual situation. Our 24 Screen Winners Each of these funds cleared two difficult hurdles. Each one is rated 5 stars by Morningstar, a distinction limited to only 10% of funds within their relative category. These funds offer the best reward-risk tradeoffs for investors relative to comparable funds. Further, each fund has proven over the past decade that they can outperform the benchmark S&P 500 index, giving hope to the belief that through active management, some funds can truly beat the market net of expenses. The trick is identifying them ahead of time! Domestic Hybrid Funds: Dodge & Cox Balanced (DODBX) YTD -9.9%; 10-Yr Avg +12.1% Gabelli Westwood Bal. (WEBAX) YTD -9.4%; 10-Yr Avg +11.4% Mairs & Power Balanced (MAPOX) YTD -11.4%; 10-Yr Avg +10.7% T. Rowe Price Capital App. (PRWCX) YTD -6.0%; 10-Yr Avg +11.9% Thompson Plumb Balanced (THPBX) YTD -14.6%; 10-Yr Avg +11.1% Vanguard Wellington (VWELX) YTD -11.0%; 10-Yr Avg +10.8% Foreign Stock Fund: Fidelity Diversified Intl (FDIVX) YTD -11.0%; 10-Yr Avg +10.3% Large-Cap Blend Funds: Elfun Trusts (ELFNX) YTD -26.1%; 10-Yr Avg +12.0% Fidelity Growth & Income (FGRIX) YTD -20.5%; 10-Yr Avg +11.3% MSB Fund (MSBFX) YTD -16.6%; 10-Yr Avg +11.8% Mairs & Power Growth (MPGFX) YTD -13.1%; 10-Yr Avg +16.5% Selected American (SLASX) YTD -21.4%; 10-Yr Avg +12.0% Thompson Plumb Growth (THPGX) YTD -30.3%; 10-Yr Avg +14.0% Large-Cap Growth Funds: Janus Growth & Income (JAGIX) YTD -24.9%; 10-Yr Avg +12.8% T. Rowe Price Growth Stock (PRGFX) YTD -28.9%; 10-Yr Avg +10.6% Large-Cap Value Funds: Dodge & Cox Stock (DODGX) YTD -17.7%; 10-Yr Avg +14.7% Oakmark Fund (OAKMX) YTD -16.9%; 10-Yr Avg +14.1% T. Rowe Price Equity Inc. (PRFDX) YTD -18.7%; 10-Yr Avg +11.3% Mid-Cap Blend Fund: Ariel Appreciation (CAAPX) YTD -14.6%; 10-Yr Avg +13.2% Mid-Cap Growth Funds: INVESCO Leisure (FLISX) YTD -22.9%; 10-Yr Avg +15.6% T. Rowe Price Mid-Cap (RPMGX) YTD -27.0%; 10-Yr Avg +14.7% Small-Cap Blend Fund: Third Avenue Value (TAVFX) YTD -16.7%; 10-Yr Avg +13.1% Small-Cap Growth Funds: Meridian Growth (MERDX) YTD -19.0%; 10-Yr Avg +12.6% Neuberger/Fasciano Fund (NBFSX) YTD -12.4%; 10-Yr Avg +10.5% If you have followed our Weekly Fund Screens, many of the names should be familiar to you since we have profiled nearly all of them in the last year or so. You can see that six hybrid funds made the list, as did six large-cap blend funds, lending support to the notion that diversification pays between asset classes as well as between value and growth sectors and securities. Those looking to add mid/small-cap exposure to their portfolio have a few choices to consider here. Summary Because each individual is unique, there's no one-size-fits-all stock mutual fund. Different investment styles, with different management and operations, produce different risks and rewards for investors. This week, we identified equity funds across a variety of sub-asset classes that have delivered net return in excess of the market (using the S&P 500 index as the benchmark) over the last 10 years, while maintaining a superior return-to- risk profile. Because of the difficulty in beating the market (after expenses are deducted), many long-term investors put some money in index funds as the core component of their equity portfolio, and then seek to identify actively managed funds that have the potential to outpace the benchmark index over time. Schwab, for instance, calls this strategy "core and explore," and it's one we believe may be appropriate for long-term investors with accumulation of asset goals such as investing for a secure retirement. For more information or a fund prospectus, please contact the respective mutual fund company. *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 8/6 by Leigh Stevens A wild and crazy, flip-flopping market is reflected in a equal number of 180 degree turns in the sector indices from day to day lately. Today we had all sectors I follow UP on the day, versus all being DOWN yesterday. Price action today was constructive in terms of further upside potential in Biotech (BTK), the NYSE Financials (NF), Defense (DFI), Home Builders (DJUSHB) - making an apparent double bottom, Health care (HMO & RXH), Semiconductors (SOX), Software (GSO), Transportation stocks (TRAN), and Utilities (UTY). I will give wait another day for any suggested plays however - I've grown quite leery of getting "whipsawed". UP on Tuesday - DOWN on Tuesday - CAN YOU BELIEVE IT - NO SECTORS THAT I FOLLOW WERE DOWN ON THE DAY! SECTOR TRADE RECOMMENDATIONS - NEW/OPEN TRADE RECOMMENDATIONS - NONE TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT(S) - Home Construction Index - (Home Builders: $DJUSHB) - Dow Jones STOCKS: BZH; CLPO; CPH; CAV; CTX; CHB; CMH; DHI; DHOM; FRTG; HOV; KBH; WLS; MDC; MHO; MTH; MODT; NHCH; NUR; OH; OHCA; OHCB; OHB; PHHM; PHM; RYL; SKY; SEHI; SPF; TOL; WLT; WCI; WTMK; WLFO The Home Construction index or home builders, has made a double bottom low, which has been unusual among the sectors. At the same time of the second low, at an equal price to the first, the Relative Strength Index (RSI) has made a higher relative low. This bullish divergence also gives technical evidence and support to the idea that this group has bottomed. The play in this sector is with the individual stocks, only a few of which are big cap stocks. UPDATE: 8/6/02 One such stock is Centex (CTX) - see the chart below - and which has an identical pattern in terms of price and RSI divergence, to the index above. Technical support has been established in the $43 area in Centex (CTX). Overhead resistance is suggested in the $52 area, at the intersection of both the 50 and 200-day moving averages - also corresponding approximately to the low end of the trading range of past months. The stock could be bought for a trade, on dips back toward the 43 low, with an upside trading objective to the 51-52 area - and, possibly reachable in the next 2-3 week time frame judging on the last rebound. However, the last rally occurred on a strong week I the overall market and the outlook for a sustained second up leg is not clear relative to the S&P. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com *********************** SWING TRADER GAME PLANS *********************** The Coin Please By Jim Brown Anybody got a coin we can flip to determine Wednesday's market direction? The spin is in! Cisco has spent the last three hours trying to convince investors and analysts that it was a strong quarter and business is good despite narrowing visibility and a negative book-to-bill outlook for this quarter. Were they successful? The stock closed the extended session up about a dollar and the S&P futures were up +9.00. By 8:PM ET they were back to nearly unchanged. With plenty of dark before morning the eventual number is anybody's guess. The European markets should be up on the U.S. bounce but they have their own profit taking to tackle. The +8% bounce in the German Dax yesterday and strong showings in Sweden, France and the U.K. as well will probably be met with some selling. I doubt another fund will ride to their rescue tomorrow. The U.S. markets are now back to trading on fundamentals and we have the Wholesale Inventory report at 10:AM to help cloud the picture. Will they buy the Cisco story or sell the news? The Dow has solid resistance above it at 8400 and not much support below until you near 8000. You can bet that any failure to continue the rally at the open will be met with a horde of hedge funds anxious to win back the money lost today when they closed their shorts in panic. The oversold internals from yesterday have eased and the market is literally free to trade in either direction without much indicator bias. If anything they are back in overbought after just one day. Until proven otherwise my market view is still down. The Tuesday event was simply an aberration and did not change anything fundamentally for the US markets. We have the continued fear of a double dip, the August 14th certifications and now the stories beginning to appear about a 9/11 anniversary slowdown. Market View Chart: My market view, using the OEX as our guide, shows the failure at the top resistance today just below OEX 440. It shows a stop of the afternoon drop at support from last week of OEX 430. If you remember from Monday once 430 was broken the descent to 420 was pretty quick. Below 420 there is still a speed bump at 412-413 and then free fall to the 400 range. Note the oscillators are already turning back to negative, which was prompted by the strong drop at the close. Should another rally breakout the resistance at 440 (Dow 8450) should hold. The next resistance is the longer term down trend at about OEX 450. My initial target is OEX 420 and my secondary target is OEX 400. This is where the retest buyers will start to appear. Game Plan: The Swing Trade model is SHORT the broader market from OEX 434. My most likely scenario is a bounce at the open on the Cisco earnings with a failure at 435 or 440 again. Should that occur anyone not already short should use it as an opportunity to enter the play. Change the stop loss on the current short signal to OEX 441 at the open. OEX 440 held today (Dow 8450) and should hold tomorrow. I know this is a wide stop and you may wish to exit earlier and get back in when the trend reverses. OEX 436 would be my suggestion as it is just over the 5-DMA. The initial target on this signal is OEX 420 with a secondary target at OEX 400-403. I obviously do not think we will get to the secondary target tomorrow but that is my eventual goal. If the morning bounce does not occur, an entry point for a new position would be a break below OEX 429. OEX 430 was support last time through and we want to get under that support before opening a new position. Stop losses will be updated during the trading day on the Market Monitor. 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The Option Investor Newsletter Tuesday 08-06-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Daily Results Call Play Updates: LTR New Calls Plays: CHIR, IDPH Put Play Updates: DD, JPM, KLAC, BBBY, BBOX, CCMP, DHR, JPM, SNE New Put Plays: CB, NUE, QCOM, HD **************** 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: ***** None PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week CHIR 34.19 -0.71 1.57 New Past 50-dma, lookout 200 IDPH 41.63 -1.35 1.28 New, support at $40, rebound LTR 46.19 -0.51 0.89 $45 support holds PUTS BBBY 28.21 -0.96 1.26 Beyond help BBOX 33.96 -0.92 1.67 Avoiding the stop CB 59.36 -1.85 -0.04 New, weak under $60 CCMP 39.16 -1.14 2.16 $40 looks too tough DD 39.76 -0.99 1.66 down, with the economy DHR 57.37 -3.36 1.77 Inside day = consolidation HD 28.03 -0.95 0.55 New, empty aisles JPM 23.65 -1.50 1.30 Dark clouds overhead KLAC 37.18 -1.98 2.13 Customers see no rebound NUE 46.44 -4.05 -1.31 New, tariffs too much QCOM 25.18 -1.51 1.43 New, questionable predictions SNE 42.50 -0.70 0.49 Not much bounce on big day ------------------------------------------------------------ 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 ******************** LTR $46.19 +0.89 (+0.38) In marked contrast to the rest of the market on Monday, Tobacco stocks held up remarkably well, due in large part to the favorable California Supreme Court ruling, that confirmed the liability protections during the 1988-1998 time frame. That enabled our LTR call play to hold above its $45 stop at the close. Then with the favorable market action today, the stock moved solidly higher until the profit taking hit in the final hour. Although the stock gave up a goodly portion of its intraday gains, it still held above near-term support at $46. Use a rebound from the $46 level to initiate new positions or else wait for a strong move through $48 resistance. In either case, look for renewed strength in the broad market and particularly other Tobacco stocks like MO and UST to confirm strength in LTR. Keep stops in place at $45. ************** NEW CALL PLAYS ************** CHIR – Chiron Corporation $34.23 +1.61 (+0.61 last week) Company Summary: Chiron Corporation is a global pharmaceutical company that is focus on developing products for cancer and infectious disease. The company continues to build upon its cancer franchise, which has three dimensions; immune system modulators, monoclonal antibodies and novel anti-cancer agents. In the infectious disease area, the CHIR has a broad range of products. The company commercializes its products through three business units, which include biopharmaceuticals, vaccines and blood testing. The Vaccines unit offers more than 30 vaccines for adults and children. Why We Like It: While the Technology sector has continued to languish in a seemingly vain search for a bottom over the past few weeks, the Biotechnology sector has been quietly building its relative strength. Numerous stocks in the sector that had been mercilessly sold down to new multi-year lows have been posting higher lows and higher highs after putting successful double-bottoms in place in July. CHIR is one such stock, and the recent rally has been particularly impressive. After finishing its double bottom formation near the $26.50 level, the stock has had an impressive rebound over the past 2 weeks, vaulting nearly 30% off its July 24th lows. After the initial surge higher, CHIR needed to consolidate its gains, and after building support near the $32 level over the past week, it looks ready to vault even higher. While there could be a bit more weakness before the stock gets moving, the PnF chart is certainly voting in favor of the bulls, with its recent double-top breakout above the $32 level. The current vertical count is now pointing to an eventual target of $49, so there is plenty of room to run. Of course, before moving to such a lofty level, the bulls will first have to scale the $35 and $37 resistance levels, not to mention the formidable $40-41 area, which is the site of solid historical resistance and the bottom of the late-April gap lower. Because of all the overhead congestion, we don't want to focus on buying a breakout, but would prefer to initiate new positions on a pullback to support in the $32-33 area. A drop below the $31.50 level would break the recent string of higher lows, so that is the site of our stop. *** August contracts expire in less than 2 weeks *** BUY CALL AUG-32 CIQ-HZ OI=416 at $2.35 SL=1.25 BUY CALL AUG-35*CIQ-HG OI=515 at $0.95 SL=0.50 BUY CALL SEP-32 CIQ-IZ OI=142 at $3.80 SL=2.25 BUY CALL SEP-35 CIQ-IG OI=119 at $2.40 SL=1.25 BUY CALL SEP-37 CIQ-IU OI= 43 at $1.45 SL=0.75 Average Daily Volume = 2.71 mln --- IDPH – IDEC Pharmaceuticals $41.63 +1.28 (-0.12 last week) Company Summary: IDEC Pharmaceuticals is a biopharmaceutical company engaged primarily in the research, development and commercialization of targeted therapies for the treatment of cancer, autoimmune and inflammatory diseases. IDPH's first commercial product, Rituxan, and its most advanced product candidate, Zevalin (formerly Y2B8), are for use in the treatment of certain B-cell non-Hodgkin's lymphomas. The company is also developing products for the treatment of various autoimmune diseases such as psoriasis, rheumatoid arthritis and lupus. Why We Like It: In a marked divergence from the rest of the Technology sector, Biotech stocks, as measured by the BTK index, have been in recovery mode now for close to a month. That relative strength shouldn't come as any great surprise, given the heavy, almost oppressive, selling that engulfed the sector beginning in March. Over the past month, the BTK index has posted a series of higher lows and higher highs, beginning to build an ascending channel with its lower boundary near $329 and the upper channel line near $380. A quick sector scan shows that the BTK index has almost single-handedly kept the overall NASDAQ from plunging into the abyss. After posting a double-bottom near the $30 level in early July, IDPH has been building its own series of higher lows and higher highs as well. IDPH's ascending channel is presenting support near the $40 level, with resistance coming in near $48. Apparently, that is just the beginning, as the mid-July buy signal on the PnF chart is forecasting an eventual rise to the $67 level. The recent pullback from near the $46 level comes as no surprise, as that is the site of the bearish resistance line. An ideal entry would come from another dip and rebound from the $40 area in conjunction with another dip and bounce in the BTK index. Alternatively, we can consider momentum-based entries as the stock pushes back through the $42 intraday resistance level. Initial stops are set at $38, as a trade at that level would negate the current PnF buy signal. *** August contracts expire in less than 2 weeks *** BUY CALL AUG-40*IDK-HH OI=6115 at $3.30 SL=1.75 BUY CALL AUG-45 IDK-HI OI=4426 at $0.85 SL=0.25 BUY CALL SEP-40 IDK-IH OI=1206 at $5.20 SL=3.25 BUY CALL SEP-45 IDK-II OI=1487 at $2.70 SL=1.25 BUY CALL OCT-45 IDK-JI OI=3937 at $3.60 SL=1.75 Average Daily Volume = 6.01 mln ------------------------------------------------------------ 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 ******************* DD $39.76 +1.66 (+0.67 for the week) DuPont rallied with the rest of the Dow today. This company has exposure to the overall economy, which has received nothing but bad news in the last week, including Monday's lower than expected ISM. With a shrinking economy affecting most sectors, demand for DD's products should continue to suffer across the board. The failed rally above $40 should provide additional entry for new shorts, IF the overall market experiences a pullback. Because this is a Dow stock, a surge in the Dow will serve as a rising tide that lifts all boats, including DD. Interest rate speculations ahead of next week's FOMC meeting could possibly maintain momentum. Violation of our stop loss of $41.25 would indicate a sustained rally, at least until Tuesday's interest rate announcement. In addition to the overall market news affecting DD, they have reached a tentative settlement agreement on a class action suit, which was filed against the company in Canada. The product liability suit relates to polybutylene plastic plumbing and heating systems, for which DuPont sold raw materials. The settlement agreement provides for DD to fund up to $30 million Canadian for payments to class action members. --- JPM $23.65 +1.30 (-0.20 for the week) JPM experienced the classic rising tide rally today, as the overall market rally lifted 90% of the Dow stocks. It traded as high as $24.63, which would have violated our recently lowered stop with a close above $24.00, however was unable to hold onto its gains. On Monday, Lehman downgraded JPM and Citigroup, citing economic uncertainty, a tough operating environment, and continuing "headline risk." Headline risk is a reference to the continuing stream of bad news that hangs like a dark cloud over these two stocks. On top of more Enron problems, as a result of questionable loans to Enron pipeline subsidiaries, and ongoing concern about billions of dollars in derivatives risk, there is now concern over JPM's exposure to foundering economies in Latin America. In addition, there was a report yesterday from a gold industry watchdog group called GATA (Gold Anti-Trust Action Committee) that JPM may have failed to report $45 billion in gold derivatives to the SEC. This stock's venture over $24 looks like a gift, however, a sustained rally in the Dow could possibly bring JPM along for the ride. Look for new entries only if the overall market weakens. While we feel that JPM will have continuing problems, there is no reason to short a rally before it has run its course. If today's rally holds, we will respect our stop loss of $24.00 and wait for the rally to run its course, which would most likely be until next Tuesday's interest rate announcement. --- KLAC $37.19 +2.13 (+0.10 for the week) KLAC's drop on Monday certainly made more sense to us than today's rally. The Nasdaq Composite approached support of 1200 yesterday, and the subsequent bounce rallied the index over 53 points today, taking KLAC with it. Although the market may be experiencing a bounce after losing over 700 points in the Dow, and almost 140 points in the Nasdaq, the fundamentals have not changed. Demand in the semiconductor sector is down, revenues have been cut in half, and KLAC's customers are lowering guidance not only for 2002, but into 2003 as well. Today's bounce put KLAC just above the center of its recent descending channel, begun in the middle of April. The stock traded through our stop loss intraday, but was unable to hold its gains, falling back below $37.50. New entries should wait for an additional rollover in the stock from this level, as well as a pullback in the Nasdaq. While the fundamentals have not changed, a continued rally ahead of next week's interest rate announcement is a possibility, and we do not want to get caught short in a continuing rally, even if we believe it will eventually fail. --- BBBY $28.25 +1.30 (+0.34) After BBBY broke to a new closing low on Monday, bearish traders were thinking they had another winner in the bag. That was before the broad markets opened strongly positive on Tuesday, sending the shorts running for cover. BBBY ran to just above $29 before the positive momentum had run its course, and the stock drifted lower throughout the afternoon, dropping sharply in the final hour. Aggressive traders may have used that rollover to initiate new positions, but we need to be careful here, as BBBY still closed positive on the day, perhaps indicating that the bottom is in. If the stock is going to head lower, it is first going to have to close today's gap up, and a possible entry strategy will be to ounce as price falls below $27.80, entering that gap. If that level holds as support, then we'll need to wait for another rollover below our $29.50 stop before entering. Note that July Retail sales were weak in July and that should continue to weigh on both the overall Retail sector (RLX.X), as well as our BBBY play. --- BBOX $33.96 +1.67 (+0.76) Tuesday's short-covering rally in the broad markets sent BBOX sharply higher along with the rest of the Networking sector (NWX.X), and had us biting our nails throughout most of the day, wondering whether we were going to be stopped out at the close. Fortunately, investor nervousness won out ahead of the CSCO earnings report and BBOX fell below the $34 level (the site of our stop) at the close. But we're still on thin ice here, with CSCO's earnings apparently well received in the after-hours session, and BBOX sitting a mere 4-cents below our stop. We'll want to honor that stop tomorrow and only consider new positions if the stock rolls back down from its current level. Investors looking for a bit of confirmation before entering will want to wait for a decline back under $33.50 before playing. We won't be solidly back into bear territory until the stock breaks back under $32 on its way to our $30 target, and that breakdown would make for an acceptable entry as well. --- CCMP $39.16 +2.16 (+0.95) The 6% moves in the Semiconductor index (SOX.X) have become a daily occurrence lately, although it was a bit of a switch to see that move to the upside on Tuesday. Shares of CCMP went along with the overall sector again today, gaining about 5.8%, eliminating the losses suffered on Monday. At the close, the stock was resting back over the 20-dma ($38.62), so bears need to be careful here, even with the sharp drop from the highs at the end of the day. While it was good to see the $40 resistance level keep any bullish hopes in check on Tuesday, positive reception of CSCO's earnings could send CCMP back through that level tomorrow. If already in the position, honor the $40 stop, as short-covering could still be significant. However, if CCMP rolls over near the $40 level again, that could make for a solid entry ahead of the stock filling today's gap by dropping near the $37 level. The SOX will be the key here. If it follows its recent trend of giving back short-covering gains on the following day, tomorrow could be just the confirmation we need to initiate new positions. Those looking for some significant weakness before entering will want to see CCMP move back below $38 before playing. --- DHR $57.37 +1.77 (-1.59) With the futures strongly positive this morning, in the wake of yesterday's large decline, it was a foregone conclusion that short-covering would be the theme for the day. Sure enough, DHR followed up its sharp decline yesterday with an equally sharp rebound at the open as shorts rushed to cover. In contrast to the broader market though, the stock wasn't really able to build on its gains throughout the day, finally falling back a bit at the close. It is interesting to note that DHR never crested the $58 level today, keeping the bearish trend intact. In fact, we got a nice inside day setup, which should facilitate entry/exit from the play tomorrow. If looking to initiate new positions, we want to either target a rollover from below the $59 level (Monday's high was $58.96) or a decline under Monday's low of $55.59. Having the inside day setup gives us confirmation related to the level of our stop, currently $59. Should DHR push through this level tomorrow, then it will be a clear signal that it is time to exit the play and move on. On a renewed decline, look, watch out for possible support near $54, the site of the July 24th lows. --- JPM $23.65 +1.30 (-0.20) In the volatile markets we've seen recently, the Bank index (BKX.X) has been one of the most active sectors, and the past 2 days have certainly been no exception. Yesterday's decline sent shares of JPM plunging under near-term support near $23.50, and then that decline was completely reversed today on short covering. The rebound was so strong that until the final-hour decline, we weren't sure if we were going to hold the play or get stopped out. Fortunately, the stock declined back below our $24 stop at the close, but we're not out of the woods yet. While a decline from current levels can be used for initiating new positions, we want to honor our stop and exit the play if the buyers prevail and push the stock back above that level. A better entry strategy at this point will be to wait for JPM to decline back under $23.25 (recent intraday support) before playing. --- SNE $42.50 +0.49 (-0.21) Adding evidence to the theory that the consumer is weakening were two reports out today that July Retail Sales were disappointing in July. The official Retail Sales report will be out on Thursday, but judging by the action in shares of SNE, sales of consumer electronics products don't appear to be strong. Despite the strong short-covering rally on Tuesday, the stock barely managed a gain of 1%, closing near its low of the day. The dominant downtrend line that has been in place since early July is looming near $44, but unless there is some upside surprise waiting in the wings, it is appearing unlikely that level will be challenged over the near term. A failed rally below that level would make for a great entry point, but we may have to settle for a drop to new lows (below $42) as our trigger for initiating new positions. Keep stops set at $44.50. ************* NEW PUT PLAYS ************* CB - Chubb Corporation $59.36 -0.04 (-2.04 this week) Company Summary: Chubb Corporation, incorporated in June 1967, is a holding company with subsidiaries principally engaged in the property and casualty insurance business. The Company presently underwrites most forms of property and casualty insurance. The Company's Property and Casualty Insurance Group writes non-participating policies. Several members of the Property and Casualty Insurance Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders. Why We Like It: Following the rebound off the lows of a couple weeks ago, Insurance stocks rallied sharply, reflecting the degree to which the sector was oversold. But it looks like that move has run its course, as select Insurance stocks are showing pronounced weakness, even in the face of today's sharp rally. A perfect example of this divergence is the action in shares of CB. Although the stock gapped up with the rest of the market, eager sellers barely waited for the echo of the opening bell to fade before leaning on the stock again. Posting its high of the day in the first 30 minutes, CB drifted lower throughout the day, and the decline accelerated into the close, leaving the early buyers shaking their heads in amazement as the stock actually closed the day with a loss. Looking at the big picture, the weakness should come as no surprise, as investors are still smarting from the earnings miss from last Monday. Note that the stock's rally off the recent lows (near $53) came to a screeching halt at $65 last week, right at the 6-week descending trendline that has now fallen to $63.50. Once the gap from last Monday ($60.50-61.50) was filled yesterday, the selling accelerated into the close. So it didn't take much of a leap of faith for the sellers to jump back in when today's rally began to fade. Another failed rally would be a gift at this point, and a rollover near either $61-62 would make for a great downside entry. Alternatively, look to initiate new positions on a drop under the $59 level (just below the intraday lows of the past 2 days). We are initiating coverage with a fairly wide stop at $63.50, the site of solid overhead resistance and the descending trendline. *** August contracts expire in less than 2 weeks *** BUY PUT AUG-60*CB-TL OI=403 at $2.60 SL=1.25 BUY PUT SEP-60 CB-UL OI=360 at $4.40 SL=2.75 BUY PUT SEP-55 CB-UK OI=125 at $2.45 SL=1.25 Average Daily Volume = 1.18 mln --- NUE – Nucor Corporation $46.44 -1.31 (-4.45 this week) Company Summary: Nucor Corporation manufactures and sells steel products, including hot-rolled steel, cold-rolled steel, cold-finished steel, steel joists and joist girders, steel deck and steel fasteners. The company produces its rolled sheet steel to satisfy customer orders, while other products are manufactured in standard sizes and inventories are maintained. While the rolled steel products are sold primarily to steel service centers, fabricators and manufacturers throughout the United States, steel fasteners are sold to distributors and manufacturers. Steel joists , joist girders and steel deck are primarily sold to general contractors and fabricators in the United States. Why We Like It: Although initially deemed favorable to the industry, the Bush administration's move to increase tariffs on steel imports has had some detrimental consequences, not the least of which has been a renewed decline in stock prices of the major steel manufacturers. After its initial move up to new 7-year highs in early June, shares of NUE have gone into a sharp decline, partially due to weakness in the dollar and partially due to the resulting broad market decline. After rebounding off the $50 level 2 weeks ago, the stock ran into firm resistance just below the 20-dma (then at about $59) and reversed sharply with the rest of the market. Bulls hoping for a successful retest of the lows at $50 were sorely disappointed on Monday, as the stock gapped below that level and continued to fall. Even with the broad market sharply positive today, NUE gave up more ground, as investors continued to worry about the detrimental effects of the administration's protectionist policies. While the stock may find some minor support near the $46 level (near today's intraday lows), with the recent triple bottom breakdown on the PnF chart, it is clear that supply is in control. And the $50 level is going to present some formidable overhead resistance. Following the heavy selling volume on Tuesday, an oversold bounce seems rather unlikely, but we won't rule it out. A failed rally below $50 (possibly as low as $48) can be used for initiating new positions, as can a drop under $46 on continued heavy volume. Our initial downside target will be $40, the site of the next level of strong support. Set stops at $50. *** August contracts expire in less than 2 weeks *** BUY PUT AUG-50*NUE-TJ OI=186 at $4.70 SL=2.75 BUY PUT SEP-50*NUE-UJ OI= 30 at $5.90 SL=4.00 BUY PUT SEP-45 NUE-UI OI= 0 at $3.00 SL=1.50 Average Daily Volume = 793 K --- QCOM – Qualcomm $25.18 +1.43 (-0.37 for the week) Company Summary: QUALCOMM Incorporated (www.qualcomm.com) is a leader in developing and delivering innovative digital wireless communications products and services based on the Company's CDMA digital technology. The Company's business areas include CDMA chipsets and system software; technology licensing; the Binary Runtime Environment for Wireless(TM) (BREW(TM)) applications platform; QChat(TM) push-to-talk technology; Eudora® e-mail software; digital cinema systems; and satellite-based systems including portions of the Globalstar(TM) system and wireless fleet management systems, OmniTRACS® and OmniExpress®. QUALCOMM owns patents that are essential to all of the CDMA wireless telecommunications standards that have been adopted or proposed for adoption by standards-setting bodies worldwide. QUALCOMM has licensed its essential CDMA patent portfolio to more than 100 telecommunications equipment manufacturers worldwide. Headquartered in San Diego, Calif., QUALCOMM is included in the S&P 500 Index and traded on The Nasdaq Stock Market® under the ticker symbol QCOM. (source: company release) Why We Like It: Qualcomm has suffered along with the rest of the tech sector. The stock had found support at $25 going back to the beginning of May. Although QCOM finished the day above $25, yesterday's drop through this level is a bearish sign for the stock. This reinforces last Thursday's downgrade by Credit Suisse First Boston (CSFB). The firm cut its rating on QCOM from a "buy" to a "hold." There are very few sell ratings issued, and "hold" is generally considered to be one of the most bearish ratings a stock can receive. CSFB also lowered its price target on the stock a stunning 44%, from $45 to $25. It said it expected slow growth for 2003 lowered its earnings per share estimate to $1, 10% below the current consensus. Qualcomm beat earnings forecasts on July 25, and expects revenue to be at the high end of previous forecasts. Many analysts, however, have expressed doubts about QCOM's sales expectations for its mobile phone chips. The research note from CSFB stated, "We think it will be difficult for (Qualcomm) to show upside in the next few quarters without a rebound in the end market... Until there is better visibility into 3G or significant ramps in new markets like China or India, we think growth will be limited." A look at Qualcomm's point and figure chart shows a triple-bottom breakdown, established with yesterday's trade of $24, before closing at $23.78. QCOM is working on a bearish vertical count of $16, although this may be an aggressive target, as a reversal at some point would be needed to cement this number. However, each trade of a round number below $24 extends this count downward by $2. One note about this chart. A single "O" on a triple bottom breakdown can lead to a "bear trap." A bear trap forms when the last holder of stock finally gives in, and is followed by a quick reversal up afterward. The triple bottom breakdown is still bearish, but shorts may want to put on half a position here and half after the stock forms another "O" at $23. We like this position for short entries under $25, as this will avoid the continuation of today's rally in the Nasdaq and broader markets. QCOM's current downward trendline, begun July 17, provides resistance just over $25, and this entry will avoid violation of this trendline, as well. Our initial target will be $20. BUY PUT AUG-25 AAW-TE OI=12340 at $1.50 SL=0.75 BUY PUT SEP-25*AAW-UE OI= 3080 at $2.60 SL=1.30 Average Daily Volume = 16.5 mil --- HD – Home Depot $28.03 +0.55 (-0.40 this week) Company Summary: Founded in 1978, The Home Depot® is the world's largest home improvement specialty retailer and the second largest retailer in the United States, with fiscal 2001 sales of $53.6 billion. The company employs more than 296,000 associates and has 1,437 stores in 49 states, Puerto Rico, seven Canadian provinces, and Mexico. Its stock is traded on the New York Stock Exchange and is included in the Dow Jones Industrial Average and Standard & Poor's 500 Index. (source: company release) Why We Like It: Home Depot gapped down on July 12, after a downgrade from Merrill Lynch, which lowered the company's rating from "strong buy" to "hold." The stock closed its gap in the middle of July and has not shown much strength since. Although the stock has attempted a rebound it has failed repeatedly and fell through support of $28 in yesterday's session. On a day when the Dow rebounded strongly, HD gained a mere $0.55. The retailers have been fairly volatile, with strong showings by Wal-mart, Sears and Target during the 1200-point rally in the Dow. These stocks gave back much of their gains last week, however Home Depot managed only a token effort during the rally phase and now looks tired from the effort. If it can't find buyers during strong rallies with high volume, its prospects do not look good. A look at the point and figure chart shows this stock on the verge of a triple bottom breakdown. A trade of $27 would be needed for this pattern, however this looks possible in the near term. After watching this stock mired in a narrow range while the other retailers rebounded, a recent trip to the local Home Depot revealed something you don't see on the charts. The manager at the lumber department said not only was the store empty, but daily revenues, which had been $200,000.00 per day, were down to $150,000.00. While we don't hang our hat on the local lumber manager, it only underscored the problems the chain is having. With a shrinking economy and existing home sales in the negative, the customer base for HD appears to be shrinking. The Retail Index (RLX.X) also appears weak, in spite of today's rebound. It has taken out its 260 support level twice, and although some may see this as a double bottom, a one-day rebound on a big day for the overall market does not make a trend. We will use a trade below $28 as a trigger to go short, with a stop-loss of $30. While there is resistance at $32, we want to make sure our risk/reward balance is in tact. Our initial target on this play will be $25, however, after this support level is broken, there appears to be downside to the low 20s. BUY PUT AUG-30 HD-TF OI=7364 at $2.45 SL=1.25 BUY PUT SEP-30*HD-UF OI= 584 at $3.30 SL=1.75 Average Daily Volume = 12.3 mln ------------------------------------------------------------ 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 Tuesday 08-06-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - CHIR ********************** PLAY OF THE DAY - CALL ********************** CHIR – Chiron Corporation $34.23 +1.61 (+0.61 last week) Company Summary: Chiron Corporation is a global pharmaceutical company that is focus on developing products for cancer and infectious disease. The company continues to build upon its cancer franchise, which has three dimensions; immune system modulators, monoclonal antibodies and novel anti-cancer agents. In the infectious disease area, the CHIR has a broad range of products. The company commercializes its products through three business units, which include biopharmaceuticals, vaccines and blood testing. The Vaccines unit offers more than 30 vaccines for adults and children. Why We Like It: While the Technology sector has continued to languish in a seemingly vain search for a bottom over the past few weeks, the Biotechnology sector has been quietly building its relative strength. Numerous stocks in the sector that had been mercilessly sold down to new multi-year lows have been posting higher lows and higher highs after putting successful double-bottoms in place in July. CHIR is one such stock, and the recent rally has been particularly impressive. After finishing its double bottom formation near the $26.50 level, the stock has had an impressive rebound over the past 2 weeks, vaulting nearly 30% off its July 24th lows. After the initial surge higher, CHIR needed to consolidate its gains, and after building support near the $32 level over the past week, it looks ready to vault even higher. While there could be a bit more weakness before the stock gets moving, the PnF chart is certainly voting in favor of the bulls, with its recent double-top breakout above the $32 level. The current vertical count is now pointing to an eventual target of $49, so there is plenty of room to run. Of course, before moving to such a lofty level, the bulls will first have to scale the $35 and $37 resistance levels, not to mention the formidable $40-41 area, which is the site of solid historical resistance and the bottom of the late-April gap lower. Because of all the overhead congestion, we don't want to focus on buying a breakout, but would prefer to initiate new positions on a pullback to support in the $32-33 area. A drop below the $31.50 level would break the recent string of higher lows, so that is the site of our stop. *** August contracts expire in less than 2 weeks *** BUY CALL AUG-32 CIQ-HZ OI=416 at $2.35 SL=1.25 BUY CALL AUG-35*CIQ-HG OI=515 at $0.95 SL=0.50 BUY CALL SEP-32 CIQ-IZ OI=142 at $3.80 SL=2.25 BUY CALL SEP-35 CIQ-IG OI=119 at $2.40 SL=1.25 BUY CALL SEP-37 CIQ-IU OI= 43 at $1.45 SL=0.75 Average Daily Volume = 2.71 mln ------------------------------------------------------------ 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 ------------------------------------------------------------ ********** 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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