The Option Investor Newsletter Thursday 08-08-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Fed Poised to Disappoint Bulls Index Trader Wrap: Bull Rock Market Sentiment: Slow and Steady Weekly Manager Microscope: Elizabeth R. Bramwell: Bramwell Funds Index Trader Game Plan: THE SECTOR BEAT - 8/8 Updated On The Site Tonight: Swing Trader Game Plan: Closed on the Highs Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 08-08-2002 High Low Volume Advance/Decline DJIA 8712.02 +255.90 8717.42 8430.33 1.89 bln 2191/ 987 NASDAQ 1316.52 + 35.60 1316.52 1263.31 1.48 bln 2038/1312 S&P 100 457.16 + 15.70 457.52 440.83 Totals 4229/2299 S&P 500 905.46 + 28.69 905.84 875.17 RUS 2000 389.84 + 6.37 390.04 381.09 DJ TRANS 2333.00 + 61.60 2334.81 2255.61 VIX 39.80 - 3.27 43.85 39.71 VXN 59.35 - 9.49 71.16 59.26 Total Vol 3,609M Total UpVol 2,767M Total DnVol 797M 52wk Highs 69 52wk Lows 314 TRIN 0.68 PUT/CALL .75 ************************************************************* Fed Poised to Disappoint Bulls The markets are soaring as though Greenspan had been bribed. The expectations of a Tuesday rate cut are very high although the futures are showing less than a 50% chance. Investors are setting themselves up for a fall but bulls have been turned into mad cows by the possibility. This is a picture of irrational exuberance at its finest. Dow chart Chart of Nasdaq Comp The economic reports this morning were mixed. The PPI came in lower than expected at -0.2% based largely on the drop in price for new cars. Despite the drop in the headline numbers the prices for core goods, a leading indicator for inflation, rose +0.2% and was the sixth monthly increase. The increases have only been minimal. This should not be a reason for the Fed to hold off but it is also no reason to rush into a cut. Jobless claims fell by -15,000 for the week and the four-week moving average fell to a 17-month low. This shows the job market might be improving slightly despite the weak economy. This is another reason the Fed will not need to rush to cut rates. Retail Sales grew at a much weaker rate in July, +2.6%, than the +5.1% rise in June. Apparel stores -3.4% and department stores -3.3% contributed to the decline but shoe stores got hit for a -6.7% loss. Drug stores, discount stores and wholesale clubs showed increases. Furniture stores reported only moderate growth despite the hot home sales. Wal-Mart reported lower than expected sales for last week but raised its earnings guidance. Following this train of thought BBY warned today that they would miss estimates of 30-32 cents with new expectations of 17-21 cents. They cited flat same-store sales in the past four weeks due to declines in consumer confidence. The company said there was a general softening across most of its product categories. Consumers are beginning to hoard cash as we approach September 11th. Several retailers have now reported results below plan, weaker same store sales and decreased customer traffic. Several restaurant chains also announced lower same-store sales on Thursday. Electronics, apparel, furniture and even fast food. There is a message here but it is not one that will make the Fed cut rates next week. This is not something another 25-point cut can cure. In other news TMPW continued dropping after warning that they would be posting up to 1,000 of their own employees resumes as they cut staff drastically. They are not seeing any increase in jobs and don't expect employers to begin hiring anytime soon. Helping power the markets today was news that the IMF had changed its mind and would loan $30 billion to Brazil and boost a loan to Uruguay. This took the heat off US banks in the short term and made that asset allocation play in Germany on Tuesday very profitable. It also represented a change in stance for the US government. Since the IMF loans are funded by major banks all over the world you wonder if Deutsche Bank knew it was in progress and had something to do with that massive program buy in Germany. Conspiracy theorists have been heard speculating that Alan Greenspan blessed it as a way to support the US markets without having to cut rates. Analysts think major US banks have about $30 billion in exposure to Brazil already and had the country gone under would have had serious implications for the US. According to European news sources the Fed made a decision on July 23-24th that "any and all measures" would be taken to keep the US stock markets from melting down before November elections. (That is exactly when bids began appearing under the market.) With insolvency rumors swirling around JPM and Citigroup the Fed decided to do whatever it took to protect the markets. The IMF move in Brazil is seen as one of those steps. With Brazil's debt at $500 billion almost every analyst claims there is no hope to avoid a default and the loan was only a Band-Aid. What you did not hear in most media was that they would only get $6 billion this year and the balance was tied to some very unpopular austerity measures by the new government that have never been agreed to in the past. Say "market and political Band-Aid" three times fast. There is a continued press to expense stock options and hardly a day goes by without another company going on record that they will or will not expense them. MSFT, INTC and CSCO have gone on record against the process. It is no wonder when the results are analyzed. In a study released today it appears overall tech earnings could be reduced by -70% while old line manufacturing and materials companies would only suffer a -7% decline on average. Seventy percent would be a serious hit to tech stock valuations and you can see why the majors are against it. Abbey Joseph Cohen, drawn back into the limelight by a +500 point gain in the last three days, appeared on CNBC to carefully extol the virtues of the undervalued stock market. In a carefully scripted "interview" she was allowed to call the bottom for the umpteenth time. I watch the futures during the interview to see if the contrarian impact would send them plummeting again. If an investigative reporter really wanted to do an expose they could show the scripted questions given to the interviewers ahead of time and show that it is a setup from start to finish. Can you tell I don't like her? All we need now is for Ralph Acompora to come out of his burrow and call a bottom to guarantee six more weeks of drops. Did your hear that the WCOM fraud is up to $6 billion now? Those were some really busy accountants over the last three years and it appears they left no trick untried. Odds are very good that Bernie Ebbers is definitely in trouble. You can't be CEO for three years and not miss $6 billion in revenue and the CFO was supposed to be a good friend. Back to the Fed. The market has all but priced in a 50 point cut and the chances of even 25 points are less than 50%. The Fed may have decided to support the markets at all costs but based on the past weeks move the market is not sick. We are nearly +1200 points off the lows again and selling has nearly evaporated. The economy, if you believe official numbers, is still growing at a very slow pace. By throwing a quarter point at the market next week they risk the "worse than it seems" view and risk more confidence problems. That is trivial to the real reason they probably will not cut. I believe they will want to save all their remaining cuts for the September 24th meeting. If there is a terrorist event on the anniversary they will want to move quickly and strongly to prevent a meltdown. If they spend a cut here when they don't need it then they could be short later. I personally don't think they will let the Fed funds rate go below 1.00% so that only leaves them 75 basis points to move. If they really wanted to make a statement at some point in the future a 75 point cut all at once would be that point. A quarter here, quarter there will not make any difference at this point in the economic cycle. Most of the problems we have cannot be corrected by additional cuts. My opinion is they will continue to say that there are "risks to the economy" but the "economy is expanding" and stand aside. Just my opinion. However this sets investors up for a fall. The fundamentals of the market have not changed, just the sentiment. With the consumer beginning to hoard cash the August numbers are going to be grim. The 4Q will be grim as well because there are no rebate checks to be spent this season. Comparable numbers will be negative. August could still be a challenge because of the CEO/CFO certifications. A "no change" on Tuesday will be seen as "no help" to the current market and the sentiment is likely to change very quickly. The markets closed at the highs of the day and right at the highs from last week. This is where they will fail if they are going to fail. The positive sentiment is strong but I think it is really a lack of sellers. The bears are scared of the Fed meeting and after being cut to ribbons several times recently are content to wait for the announcement. This means we could see another positive day on Friday. My ideal setup would be a large drop on profit taking at the open and then a rally back over current resistance at OEX 458. The Dow needs to break 8750 but after that we could be off to the races, at least until Tuesday. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** BULL ROCK By Leigh Stevens TRADING ACTIVITY AND OUTLOOK - The bull was rocking today. Not on the greatest of volume, nor for the greatest of reasons, if you could find them. But a trend is a trend. Of course, a boost was provided when our GIANT of a neighbor to the south, Brazil, got the money it needed from the IMF to stave off defaults and the uncertainties of an upcoming Presidential election. An election in which by the way, the two leftist candidates are leading in the polls - the one furthest ahead at this point is a bit of a radical. Probably one who may, through spending policies on social services to help the poor - of which there are many - may not be the best choice to maintain spending discipline so beloved by the IMF. Major inflation has been a perennial problem in Brazil and one of the major headaches over the years. Somehow the Brazilians get through this with good cheer, but the people finally had enough a few years ago and elected a President who got on a path of cutting spending and increasing tax revenues. Then the country seemed to falter in this course. Of course, Brazil is tied to economic basket case Argentina - do cry for them - Argentina has huge systemic problems, ironic in a country so "European" and having been once not only the richest country in the region, but one of the richest in the world. Then there is the speculation of a Fed rate cut on Tuesday. What are traders smoking? This is sheer speculation, but hey, it’s a good a rumor as any and has sex appeal. In terms of the Institutional darling, the Dow 30, the average is up 668 points in 2 days! Not bad - don't cry for the blue chips! The Nasdaq also rose about 3%. The Brazilian news was seized upon as bullish tidings - enough to offset poor July same-store sales results from the retailers and reports that WorldCom's fraud could top $6 billion. "Funny" isn't it how the market ignores "bad news" when it suits it. This may be why I am most technical in my approach. When stocks go up, I try not to have a judgment that they shouldn't be - going UP I mean. The market is always "right", for that day or week at least! One thing that you may not think is that big of a deal, but IS out there in institutional money manager land is that the S&P Investment Policy Committee raised its recommended equity exposure to 60% from 55% - it also reduced bond exposure by 5%, from 20 to 15%. Standard & Poor indicated their belief that earnings are likely to improve in the coming quarters and that stocks have a greater upside potential than downside risk. Last night I talked about the "triangle" patterns that shaped up on the S&P and Dow charts and that got me bullish. Someone wrote and said he could not figure out, or find a reference to, what "symmetrical" meant in relationship to a triangle - I didn't realize that I was speaking "greek", but it simply means the down trendline (through the highs) and the up trendline (through) the lows, have the same approximate slope. Neither the upper or lower lines are flat for example, with the other opposite line going up at a 45-degree angle. Oh well, I can SHOW it better than write about it - a picture IS worth a 1000 words in technical analysis. DJ Industrial Index (1/100 of INDU) - $DJX - Hourly chart: The measuring implications of the triangle is to take the vertical side "AB" and add it to the "breakout point"; i.e., on the point where prices pieced the upper trendline, measure up on a straight vertical line, a distance equal to "AB". Now, the other aspect of trendlines is that, on a correction, prices will often come back to the trendline - for example, assuming DJX gets up to 88, it would not be surprising for a fall back to 85, then another rally from there. In more immediate terms, DJX must exceed the prior high at 87.6, especially on a closing basis, to suggest that the downtrend has reversed. A pattern of HIGHER (up) swing highs and (down) swing lows is what defines an up trend - the reverse being true for a downtrend. Quite simple I think - but I said that last night about the "triangle" - wrong on that I suppose, right on the trend. Well, I can always explain further, but WRONG on the trend has depletion dangers for my trading account. Those of you who have read my book, may recall that its subtitle is "tools and techniques to spot market trends" - always figure out the trend (also, possible trend REVERSALS) and then trade! S&P 100 Index (OEX) - Daily Bar chart: ON THE ONE HAND - Today's close achieved a bullish breakout above its downtrend channel and to above the "pivotal" 21-day average, in terms of the daily chart. Also, the daily stochastic model turned back up, indicating renewed upside momentum. ON THE OTHER HAND - There is more than one way to measure technical resistance and basis the hourly line chart (hourly closes), the OEX closed AT resistance. However, I think that the index can get above this, as my guess is that this rally could go another couple of days. A further move up tomorrow (Friday) will pull in more short- covering and some more investment buying on Monday, before the "boom" is lowered again past Monday. Just a hunch, but the psychology would "work" that way - confounding the bears - then the bulls get their turn. Key support is 440 - any dip to and certainly under this level suggests the resistance I am pointing to above rules the day. Also, resistance implied by an "emerging" uptrend channel (not shown above, yet), assuming we take out today's highs tomorrow (Fri.), intersects in the 480 area and this may be an upside objective for OEX - in case we REALLY panic the shorts - who, probably are worried but not panicking. Of course, they are RIGHT according the to "known" current market fundamentals - if the market was strictly logical I would agree with them! Nasdaq 100 Trust Stock (QQQ) hourly chart: "A DIAMOND IN THE ROUGH" - From our Market Monitor today - "Possible diamond pattern forming on 60 minute QQQ chart. Do you see and how would you interpret at this juncture?" RESPONSE: Both "diamond" tops and diamond bottoms tend to act as reversals of the prevailing trend. Since the prevailing trend of the Q's has been down, I assume that a diamond formation here is bullish. This is not a common pattern but it does appear from time and basically traces out a "consolidation" patter, before a new trend gathers momentum. No sooner had I traced out the pattern and posted the chart, but the Q's started rallying and broke out to the upside from the right hand side of the "diamond". Well, you golfers will know that we're not out of the rough yet! QQQ still needs to achieve an upside penetration of the upper trend channel boundary at 23.6, then exceed its prior swing high at 24.7 - if so, it would reverse the patter of ever lower rally highs and ever lower downswing lows. Stay tuned! Anticipated support is now at the resistance points overcome earlier - at 22.6, then 22.3 - finally at 22.00. To get a sustained rally again, we need the individual investor lending some bucks to buy more than Microsoft - acting well, after a bullish WSJ article today - but, also Cisco, Intel and Qualcomm. Oh, and Oracle is doing its part, rebounding to 10, from 9 the other day. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Slow and Steady By Steve Price The Dow has had a very quiet three-digit gainer today. When I say quiet, I mean slow and steady, without the big swings. This has had an effect on the market Volatility Index, which has settled down a little, finishing the day at 39.80 It probably will continue to hover at higher levels, however, as we approach Tuesday's FOMC meeting, when the Fed will reveal its decision on interest rates. With daily calls for the rate to drop from 1.75% to 1%, what once appeared unlikely before the September 24the meeting, now is gaining steam. While the Fed will not drop rates 75 basis points in one meeting, this amount is not entirely out of the question by the end of the year. Adjusted for inflation, a 1% interest rate will essentially make the "real " interest rate zero. So how does this affect the market? It allows large companies to institute share buy-back programs with borrowed money that is much cheaper than in the past. These share buy-backs boost the price of stocks, as they sometimes run into the billions. The other big factor is the effect lower rates eventually have on mortgages and re-financing. Although the bond market affects mortgage rats more directly, the lower overnight rate eventually trickles down. When people continue to buy homes, and lower their current mortgage payments, thus giving them more disposable income to spend on other things, this pumps money directly into the economy. Judging by this week's record mortgage application numbers, it is apparent that low rates continue to have a stimulating effect on this sector. As consumer spending accounts for 2/3 of all dollars spent in the U.S., you can see why the rate cuts can be such a big deal for the market. This morning's economic numbers, showing the core PPI rate down 0.2% for July, was the first year over year decline in prices since 1998. This factor may figure into the Fed's rate decision. If prices are falling, this gives the Fed room to lower rates without worrying about inflation. Productivity numbers tomorrow will also be important. The IMF announced a $30 billion bailout for Brazil, whose struggling economy has weighed heavily on U.S. bank stocks, particularly Citigroup (C) and J.P. Morgan, who both have Latin American exposure. This loan led the bank stocks higher today and was another factor in today's rally. It certainly appears that the rally of the last three days will continue as hope of a rate cut on Tuesday gains steam. The Dow has made up over 600 points in three days, to make up most of the previous three day's loss of over 700 points. Each day seems to cover another significant retracement bracket of that loss, as yesterday ended just below 61.8% and today ended at almost even. The Dow closed up 255.87, to close at 8712.02, within 25 points of last week's high. The Nasdaq Composite also showed an impressive gain. It rallied 35.62 to close over 1300 at 1316.52. This is significant, considering that just a week ago it looked poised to breakdown below support at 1200. The bounce has been just as impressive as that in the Dow, as the index seemed doomed after a slew of earnings and revenue warnings from the semiconductor stocks. There are two factors that could sent the market right back below 8000 next week, however. The deadline for CEOs to certify their companies' accounting numbers is Wednesday. There is a likelihood that any bad news will be released before then, as CEOs don't want to be next in line to sit before Congress, facing criminal charges, and taking the fifth. The other factor is the lack of a rate cut. With so many hopes clinging to this factor, if the Fed fails to act, we could see a rush to the exits. They could relieve some of the panic by stating a tightening bias, which would indicate a cut at the September 24the meeting, however the disappointment would remain. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8712 Moving Averages: (Simple) 10-dma: 8469 50-dma: 8991 200-dma: 9751 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 905 Moving Averages: (Simple) 10-dma: 879 50-dma: 950 200-dma: 1078 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 892 Current : 947 Moving Averages: (Simple) 10-dma: 925 50-dma: 1029 200-dma: 1358 ----------------------------------------------------------------- The Retail Index (RLX.X): The retailers had quite a ride today. Best Buy lost over a third of its value as it pre-released earnings, which were 40% lower than expected. Wal-Mart missed sales expectations, but guided higher. Several of the specialty retailers also posted such impressive July sales numbers that they also raised earnings expectations for the quarter. The index started out higher, took a major dip, and then rallied with the overall market in the afternoon. At one point, support of 260 had been breached, however by the end of the day all appeared well. keep an eye on this index for signs of consumer spending, which makes up 2/3 of GDP. 52-week High: 366 52-week Low : 254 Current : 270 Moving Averages: (Simple) 10-dma: 274 50-dma: 307 200-dma: 331 ----------------------------------------------------------------- Market Volatility The VIX fell below 40 for the first time since the middle of the day last Thursday. Three straight days of solid gains in the Dow and S&P have reduced the level of fear in the market place. The Dow has made up almost all of its 700-point, 3 day loss from Thursday through Monday. While a 600-point increase over a three day period would normally drive the VIX into the 20s, the recent drop, combined with uncertainty over next week's FOMC action on interest rates should combine to keep volatility high at least until the middle of next week. The August 14 deadline for companies to certify financial results also looms overhead, as investors remain cautious over what news may be released before then. CBOE Market Volatility Index (VIX) = 39.80 –3.27 Nasdaq-100 Volatility Index (VXN) = 59.35 –9.49 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.75 651,791 487,497 Equity Only 0.57 498,636 283,458 OEX 1.40 39,390 55,331 QQQ 0.41 59,282 24,286 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 31 + 2 Bull Correction NASDAQ-100 26 + 1 Bull Correction DOW 33 + 6 Bull Alert S&P 500 30 + 5 Bull Alert S&P 100 32 + 6 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 1.21 10-Day Arms Index 1.20 21-Day Arms Index 1.20 55-Day Arms Index 1.37 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 2144 964 NASDAQ 1961 1279 New Highs New Lows NYSE 26 67 NASDAQ 23 86 Volume (in millions) NYSE 1,928 NASDAQ 1,526 ----------------------------------------------------------------- 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 ----------------------------------------------------------------- ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************* WEEKLY MANAGER MICROSCOPE ************************* Elizabeth R. Bramwell: Bramwell Funds Elizabeth R. Bramwell is president and chief investment officer of Bramwell Capital Management, Inc. (BramCap), the company she founded in February 1994, which serves as investment adviser to the Bramwell Funds. Her first mutual fund Bramwell Growth Fund (BRGRX), launched in August 1994, currently holds Morningstar's highest 5-star rating in the large-cap growth category based on "high" return and "low" risk relative other large-growth equity funds. In November 1999, Bramwell introduced a second fund aptly named Bramwell Focus Fund (BRFOX). It's not yet rated by Morningstar but is off to a good start, which should not come as a surprise considering her fine record managing Bramwell Growth Fund since 1994, and prior to that, Gabelli Growth Fund (GABGX). Bramwell spent eight years with the Gabelli Funds as a portfolio manager and director of research, before leaving to start her own firm. While at Gabelli Funds, Bramwell as served as president, chief investment officer and trustee of Gabelli Growth Fund. She was the fund's original portfolio manager, running it between April 1987 and February 1994, when she left the firm and was succeeded by Mario Gabelli. Bramwell employs a similar multi-cap, growth strategy in Bramwell Growth Fund as she did when running Gabelli Growth Fund. Previously, Bramwell spent six years as a limited partner with Kenneth S. Davidson Partners, two years as a vice president with Bankers Trust, and two years as a vice president with William D. Witter. Additional Background Elizabeth Bramwell is primarily responsible for the day-to-day portfolio management of Bramwell Funds. She holds degrees from Bryn Mawr College and the Columbia University School of Business. In addition to holding the Chartered Financial Analyst (CFA) designation, Bramwell is also a Chartered Financial Planner. She's a member of the Women's Financial Association, and a former director of the New York Society of Security Analysts. Bramwell started her career at Morgan Guaranty Trust Company in 1967 and has over 30 years of experience in securities analysis and portfolio management. According to the Bramwell Funds website (www.bramwellfunds.com), the Bramwell Growth Fund was launched in August 1994 to provide investment management to individuals seeking to participate in the financial markets through a pooled investment vehicle under continual supervision by professional management. BramCap also manages monies for private clients and institutional investors. Investment Overview Bramwell's focus is on growth equities, which she views as the investment vehicle of choice for achieving long-term growth of capital (capital appreciation). In other words, Bramwell says that investing in "growth" companies is the best way to create shareholder wealth. Ms. Bramwell directs BramCap's investment research team. They search for investment opportunities with "identifiable" growth characteristics, such as strong sales growth and opportunities for improved profitability. They also look for companies with attractive price valuations relative to their growth prospects (and the market as a whole). Bramwell and team believe there's no substitute for fundamental investment research in making an informed investment decision. Accordingly, they devote a lot of time and effort synthesizing and analyzing information on economic conditions, sectors, and companies within industry sectors. When selecting stock investments for the mutual funds, BramCap utilizes a blended top-down and bottom-up approach. Here, her investment research team performs company-specific analysis in the context a macroeconomic and political framework. The site states that in top-down analysis, the primary focus is on such macroeconomic factors as inflation, interest and tax rates and political climate. In bottom-up analysis the focus is on such company-specific variables as competitive industry dynamics, market leadership, proprietary products/services and management expertise, as well as on such financial characteristics as ROE (return on equity), debt/equity ratios, and earnings and cash flow growth. Per the website, stock positions are reduced or liquidated if fundamentals deteriorate, valuations become excessive or more attractive alternative investments are found. For interested parties, there is a nice schematic on the website showing the variables that go into Bramwell's investment decision process (located in the About Bramwell section). In the next section, we see how well Bramwell Growth Fund and Bramwell Focus Fund have performed relative to their category peers (large-cap growth funds) using Morningstar's data and analysis. We'll also see what other funds trackers such as Lipper and Value Line may have to say/add. Investment Performance Let's begin with the trailing 1-year period as of August 7. Below is a 1-year chart for Bramwell Growth Fund (BRGRX) to graphically depict the fund's net asset value (NAV) change. On a total return basis, Bramwell Growth Fund is down 18.2% over the last 12 months, ranking it in the top 4% of the large-growth category per Morningstar. According to Morningstar, the average large-cap growth fund has lost 31% over the past year. Bramwell has limited downside volatility better than her large-cap growth peers through the market downturn. Bramwell Focus Fund, meanwhile, is down just 14.4% over the past year, ranking it in the top 2% of the large-cap growth category. For something that is supposed to be more concentrated and hence riskier, it limited losses substantially better than the average large-cap growth fund. Bramwell Growth Fund's 3-year annualized loss of 5.3% as of Aug. 7, 2002 was significantly less than the market as a whole, using the S&P 500 index as the proxy, and its large-growth fund peers. For comparative purposes, the S&P 500 index declined by 11.2% on average a year, while the average large-cap growth fund declined by 14.4% on average a year over the trailing 3-year period as of August 7, 2002. The fund's 5-year trailing returns are also top decile, with the fund rising at an annual-equivalent rate of 3.7%. That was 4.0% better than the S&P 500 index, and good enough to rank it in the top 7% of the Morningstar large-growth category. The market as measured by the S&P 500 index lost an average of 0.3% a year in comparison, while the average large-cap growth fund declined by 2.7% on an annualized basis over the past half decade. According to Lipper Analytical Services, Bramwell's Growth Fund is a Lipper Leader ("1") for strength and consistency of return compared to all equity funds it tracks. Lipper grades the fund above average ("2") in terms of its ability to preserve capital in down markets relative to all equity mutual funds. If Lipper scored funds for preservation within their category, Bramwell's Growth Fund would almost assuredly be a Lipper Leader. For the trailing 3-year, 5-year and overall period, Morningstar rates Bramwell Growth Fund's return as "high" and risk as "low" in relation to all large-cap growth funds. Since 1997, she has lagged the Morningstar large-cap category average only once, in 1997 when she produced an annual total return of 25.7%, ranking the fund in the category's 73rd percentile. A summary of year- to-year returns is provided below: 1997: BRGRX +33.7% (11th percentile) 1998: BRGRX +34.5% (42nd percentile) 1999: BRGRX +25.7% (73rd percentile) 2000: BRGRX - 2.4% (10th percentile) 2001: BRGRX -16.2% (25th percentile) 2002: BRGRX -16.9% ( 5th percentile) Bramwell Growth Fund's 2002 loss of 16.9% is through August 7, 2002. You can see here that Bramwell's succeeded in capturing returns in the 1997-1999 bull market and preserving capital in the market downturn of 2000-2002. Her gains were not as great perhaps as other large-cap growth funds during the bull market, but since 2000, she has done a better job of limiting downside volatility versus the market (S&P 500 index) and average large- cap growth fund. Hence, the fund's Morningstar 5-star rating. Summary Long-term growth investors looking to take a little off their swing to keep the ball in the fairway should like the process that Elizabeth Bramwell employs on Bramwell Growth Fund. Her multi-cap growth style offers higher long-term potential than growth funds that invest solely in the large-cap sector, with considerably lower risk than the average fund in the category. She's a thematic investor that blends top-down with bottom-up investment processes to build equity portfolios. Because she looks for stocks that have attractive P/E ratios versus their growth rates, and tends to keep the fund's tech weights below category norm, Bramwell Growth Fund's volatility has been low compared to other large-cap growth funds. All in all, Bramwell Growth Fund makes for a fine core growth holding. For more information or a fund prospectus, call the Bramwell Funds toll-free number (800-272-6227) or visit them online at www.bramwellfunds.com. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 8/8 by Leigh Stevens Brisk buying of bank stocks followed a huge $30 billion bailout package for Brazil and put both widely followed bank indexes (BKX and BIX) substantial higher on the day. BKX gapped higher, reflecting similar moves in Citigroup, JP Morgan Chase, and other big money center bank stocks. However, lackluster retail sales figures caused the Retail index (RLX) to be one of only 3 sectors in the red today. The Biotech index (BTK) broke out to the upside and looks like it could be starting another up "leg". There were also strong rallies in the Cyclicals (CYC), the NYSE Financial Index (NF), Defense (DFI) - the 3rd strong rally day, Forest Products (FPP), Healthcare (HMO), Health Providers (RXH), Pharmaceuticals (DRG), and the Broker-dealers (XBD) Even Semiconductors (SOX) had a strong day. I had a buy rec out on the Chip HOLDR's, but didn't get enough of a price dip to buy at my suggested price. UP on Thursday - DOWN on Thursday - SECTOR TRADE RECOMMENDATIONS - NEW/OPEN TRADE RECOMMENDATIONS - Buy SMH at 23.75 (Semiconductor HOLDR stock) Stop at 22.75 TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT(S) - Bank Index ($BKX.X) STOCKS: BAC; BBT; BK; C; CMA; FBF; FITB; GDW; JPM; KEY; KRB; MEL; NCC; NTRS; ONE; PNC; SOTR; STI; STT; USB; WB; WFC; WM; ZION One thing you may notice in the Bank Index chart is something about "gaps" - an upside gap in this case that formed after the initial rebound. The subsequent correction "filled in" the gap by coming back down to where the gap started - and then some. But it turned out to be a good buying opportunity. Not all gaps get filled in, but they often do. Another upside gap formed today. The strong close - at the high of the day - suggests there could be more upside follow through tomorrow. However, BKX is coming up to resistance implied by its down trendline, at 772. A move above here, especially on a closing basis would be bullish - at that point, next technical resistance is implied by the index's 50-day moving average in the 790 area. Stay tuned! The financials are very key sectors in terms of "leading" the market higher. UPDATE: 8/8 Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com *********************** SWING TRADER GAME PLANS *********************** Closed on the Highs - Jim Brown Bulls can't complain about the market today. Strong gains on light volume and no big triple digit swings to prompt any major profit taking in the immediate future. Could it be that the bottom is really behind us? That is what every investor in America is hoping tonight. To View the Swing Trader Game Plan Page Click Here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. 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The Option Investor Newsletter Thursday 08-08-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: LTR Dropped Puts: KLAC, DD, NUE, CB, DHR Daily Results Call Play Updates: CHIR, IDPH New Calls Plays: JNJ, AMGN Put Play Updates: BBBY, QCOM, SNE, HD New Put Plays: AZO **************** 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: ***** LTR $49.22 +2.45 (+3.41) Sometimes its better to be lucky than smart. We neglected to point out that LTR had earnings out this morning before the open, but fortunately the report was embraced by the bulls. The company beat estimates by 6 cents and investors rewarded the stock with a strong gap up. While some of those gains faded throughout the day, the continued market strength enabled LTR to close in the middle of its intraday range. Now that earnings are out, the positive catalyst has passed and it is time to harvest those gains and move on. PUTS: ***** KLAC $38.10 +1.21 (+1.07 for the week) KLAC has pushed against its stop loss of $37.50 repeatedly this week, without the ability to finish the day on top. After three straight triple digit gains in the Dow and the Semiconductor Index (SOX.X) going along for the ride on hopes of a rate cut on Tuesday, KLAC finally managed to hold its gain, in spite of trading as low as $35.30 intraday. While the low of the day certainly looks bearish in the long term, a continued rally in the overall markets could continue through Tuesday and we will close this play on Friday. --- DD $42.20 +2.57 (+3.11 for the week) In spite of its technical breakdown under $40 last week, DD's membership in the exclusive "Dow Club" helped it out quite a bit. Dupont has caught fire with the rest of the market. As a Dow stock, this company was carried along for the ride, as hopes of a rate cut next Tuesday have driven the market. In addition the Dow got a lift as the IMF announced a bailout of Brazil's economy with a $30 billion loan. This loan lifted the bank stocks, including Citigroup and J.P. Morgan and in turn helped most Dow components as the rising tide lifted most boats. A rate cut on Tuesday could be promising for the economy, and a company like DD, with its hands in many sectors, could benefit from an overall improvement. It has violated our stop-loss of $41.25 and we are closing this play. --- NUE $52.40 +3.39 (+1.51 for the week) An upgrade on Wednesday gave this stock a boost. Merrill Lynch raised its rating from reduce/sell, to near-term neutral. Not exactly a ringing endorsement, but combined with a 600-point gain in the Dow over the last 3 days, it was enough to boost this stock through our stop loss of 50.00. the stock has filled its latest gap and we will close this play and keep an eye out for a rollover from $55. --- CB $62.83 +3.40 (+1.43) That was quick! We jumped on CB to the downside on Tuesday, as it looked like the stock was destined to retest and possibly break its recent lows. Well, we got one brief push down to the $58 level yesterday and then the buyers jumped in with a frenzy. CB closed down on the day, but the verdict was in at the open this morning with the market once again heading off in rally mode. CB posted a nearly 6% advance on solid volume. While there may still be some near-term weakness, it appears we won't see a significant decline. So we're pulling the plug tonight, even though our stop hasn't yet been violated. Use any early weakness in the morning to exit open positions. --- DHR $60.27 +1.39 (+1.31) As a measure of the bullish enthusiasm that seems to be taking hold in the broad markets, our Put plays are dropping (from the playlist) like flies. DHR is the latest play to get caught by short covering, which helped to launch the stock through our $60 stop on Thursday. Following today's gains, we could see a bit of a pullback ahead of the weekend, and we'll want to use that as an opportunity to exit the play at a more favorable price. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu AMGN 47.91 -0.98 1.31 0.59 2.19 New, Leading Biotech CHIR 37.21 -0.71 1.57 1.48 1.57 Still Climbing IDPH 44.85 -1.35 1.28 0.98 2.24 Continuing pattern JNJ 54.57 -2.40 0.18 1.01 2.06 New, Renewed Strength LTR 49.22 -0.51 0.89 0.58 2.45 Drop, Profit taking PUTS AZO 66.40 -1.70 1.47 –0.45 -2.10 New, Poor Strength BBBY 27.73 -0.96 1.26 0.83 -1.30 Tough Environment CB 62.83 -1.85 -0.04 0.07 3.40 Drop, Stopped out DD 42.20 -0.99 1.66 1.38 1.06 Drop, Stopped out DHR 60.27 -3.36 1.77 1.51 1.39 Drop, Stopped out HD 27.14 -0.95 0.55 0.23 -1.12 Poor Retail #s KLAC 38.10 -1.98 2.13 –0.29 1.21 Drop, Stopped out NUE 52.40 -4.05 -1.31 2.57 3.39 Drop, Stopped out QCOM 25.98 -1.51 1.43 –0.17 0.97 Weak gain on big day SNE 44.00 -0.70 0.49 1.35 0.15 Tuned Out! ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** CHIR $37.21 +1.57 (+3.59) Biotechnology stocks were in the driver's seat again on Thursday, with the BTK index continuing its recent winning ways with more than a 5% gain on the day, bringing its 3-day total to more than 12%. Strength in the broad market on Thursday certainly helped, but the real underlying cause is the fact that the BTK has been exhibiting the most consistent strength of any Technology-related sector over the past two weeks. After finding support at the $34 yesterday afternoon, CHIR resumed its bullish trend and posted solid gains the past 2 days. This is where the rubber meets the road, as CHIR is now in the midst of significant price congestion in the $37-39 area. For those that missed yesterday's entry, we want to look towards intraday pullbacks near support (ideally in the $35-36 area) in order to enter the play. With intraday oscillators now overbought, odds favor a near-term pullback, and as long as our $33 stop is not taken out, that next pullback should provide an attractive entry into the play. --- IDPH $44.85 +2.24 (+3.10) It would have been hard to script the beginning or our IDPH play any better. The stock had been exhibiting pretty good strength over the past 2 weeks, along with the overall Biotechnology sector (BTK.X). The fledgling ascending channel provided support near the $41 level on Wednesday, before the final hour ramp in the broader markets drove the stock to end the day with a small gain. But that was nothing compared to the strength on Thursday that propelled the stock right up to the top of its recent range (near $45.50) before pulling back modestly into the close of trading. This pullback is entirely reasonable, as the $45 level is the site of the bearish resistance line on the PnF chart. This is also the level from which the stock reversed lower just over a week ago and the midline of the ascending channel. Ideally, we'll get another pullback to support in the $42-43 area to provide for fresh entries. Of course, with the strong bullish sentiment that prevailed on Thursday, we just might get a breakout tomorrow. In that case, use a volume backed move through the $46 level to enter the play, looking to harvest gains as the stock nears the $49 level, where we'll have more resistance, backed up by the top of the channel. Raise stops to $40 tonight, as that is the site of the intraday lows on Monday. ************** NEW CALL PLAYS ************** JNJ - Johnson & Johnson $54.57 +2.06 (+2.32 for the week) Company Summary: Johnson & Johnson, with approximately 106,100 employees, is the world's most comprehensive and broadly based manufacturer of health care products, as well as a provider of related services, for the consumer, pharmaceutical and medical devices and diagnostics markets. Johnson & Johnson has 197 operating companies in 54 countries around the world, selling products in more than 175 countries. Why We Like It: If there ever was a company that could say "I told you so," this is the one. JNJ took a beating over news last month that it was being investigated over problems at a manufacturing plant. When investors came to their senses and realized the news had little to do with the bottom line, JNJ staged a tremendous comeback. The stock has been a recent participant of both our OI Put Play list (before the drop), and the OI Call Play list(during its rebound). We closed the call play for a healthy profit as it neared resistance at $50. Now we're back on board. This stock forged its way through $50 and consolidated around $52. Today's rally pushed it above the consolidation and the stock appears free of resistance in that range. The stock established a new PnF buy signal with the trade of $54. JNJ's bullish vertical count is now $65. The recent pullback from $53 to support at $50 not only showed renewed support over $50, but also provided the 3-box reversal necessary to cement the vertical count on the PnF chart. There is bearish resistance at $56, so this could be a bump in the road ahead. However, the $50 support is reassuring, considering the strong move the stock had just finished up to $50. Normally we would not want to chase a stock that had experienced a $13 gain in three weeks, but this support, consolidation and breakout has provided a good base for JNJ's next move. JNJ has a number of drugs coming up for approval in the next couple of months, but its most promising product appears to have little chance of rejection. There are already orders piling in for this $25,000.00 wheelchair that climbs stairs, negotiates corners with ease, has 4 wheel drive for rough terrain, balances on 2 wheels and rises vertically to eye level. Since it is not a drug, there is little chance the FDA will have any problem with it. The company expects these to sell like very expensive hotcakes, and revenue may run into the billions. The fact that some of the cost may be deferred by insurance will only help sales. The $54.75 level provided resistance back in the beginning of July, and today's trade of 54.78 broke that mark. More conservative investors may want to wait for a trade over $54.75 once again before getting long, however we feel entry at this point is warranted. BUY CALL AUG-50*JNJ-HJ OI=14500 at $4.90 SL=2.50 BUY CALL AUG-55 JNJ-HK OI= 9630 at $0.80 SL=0.00 BUY CALL SEP-50 JNJ-IJ OI= 5559 at $5.90 SL=3.00 BUY CALL SEP-55 JNJ-IK OI= 7329 at $2.30 SL=1.20 Average Daily Volume = 10.8 mil --- AMGN – Amgen, Inc. $47.91 +2.19 (+4.40 this week) Company Summary: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why We Like It: As Biotechnology stocks continue to flex their muscles, you'll notice their increasing dominance on our Call list. Starting with the market bottom 2 weeks ago, this sector (BTK.X) has been the linchpin that kept the NASDAQ from plunging to fresh lows. One of the strongest stocks in the sector is heavyweight AMGN. While fresh lows were the rule on July 24th, AMGN bucked that trend by refusing to sell off ahead of its earnings report that evening. With results handily beating estimates, the next day saw a dramatic $3.50 gap up, before the bulls proceeded to push it even higher. Usually gaps like this get filled, but even on Monday with pessimism running high in the broad market, AMGN refused to even get close to the top of its post-earnings gap. It is interesting that the 10-dma (currently $44.55) served as support on July 24th and then again on the first three days of this week. The launch higher following the company's earnings report generated a new buy signal on the PnF chart, and the current vertical count points to an eventual rise to the $71 level. Well we don't want to get carried away in the near term, as that would represent a new 52-week high. But it should be clear that the current Buy signal is a strong one. Adding to the bullish picture on Thursday, AMGN gained nearly 5%, blasting through resistance near $46. There is some historical resistance at the $48 level, so a pullback from this level is to be expected. If we get it, then we'll want to look to enter the play on a rebound from support near $46. If the bulls continue to charge as we head into the weekend, then we can take momentum-based entries as AMGN pushes through the $48 level. Firm resistance rests at the $53 level (also the site of the 200-dma), followed by a veritable brick wall between $55-57. Should we get a move that high, it would be very prudent to harvest gains on the first sign of weakness. Note that we've set our stop at $45, as a drop below that level would indicate the likelihood of deeper profit taking ahead. *** August contracts expire next week *** BUY CALL AUG-47*AMQ-HW OI=5404 at $1.60 SL=0.75 BUY CALL AUG-50 AMQ-HJ OI=1572 at $0.50 SL=0.25 BUY CALL SEP-47 AMQ-IW OI=2544 at $3.40 SL=1.75 BUY CALL SEP-50 AMQ-IJ OI=2983 at $2.15 SL=1.00 Average Daily Volume = 17.7 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* BBBY $27.73 -1.30 (-0.18) The picture in the Retail sector (RLX.X) could have been far different on Thursday if not for the huge downside surprise from electronics retailers BBY and ULTE announced before the opening bell. While those 2 stocks took the brunt of investors' wrath, there just wasn't much joy in any of the Retail segment. That's particularly bearish in light of the broad market posting yet another strong gain. BBBY gapped down on the pre-market news and actually traded to a new recent intraday low at $26.70 before recovering with the rest of the market throughout the day. But even with the buoyant effect of the broad market gains, BBBY still suffered nearly a 4.5% loss. Resistance is firming up in the $29 area and a failed rally near this level would make for the next high odds entry point. More aggressive traders might target half positions on a reversal from the $28 level (afternoon resistance), but only if the RLX index is also showing weakness. Barring that, we'll need to wait for a decline under $26 (strong historical support) before entering the play. Keep stops set at $29.50. --- QCOM $25.98 +0.97 (+0.43 for the week) Qualcomm finished up on the day, however it still finished under $26.00 On a day when the Nasdaq composite was up 35 points and the Dow up 255 points, this stock was a slow creeper. Although the close near the high of the day is a bullish indication, the relative strength does not look terribly promising. The long-term trend on this stock remains down. It has produced a series of lower highs and lower lows, and remains on a PnF sell signal with a triple bottom breakdown despite today's rally. A trade of $27 would be needed to reverse this signal, and that trade would violate our stop loss of $26.50. This is a strong candidate for a pullback and with relatively low option premiums, and therefore a low level of time decay, we can afford to give this one some time. We will, of course, respect our stop loss if the stock continues to rally on a broad market surge ahead of next Tuesday's Fed meeting. While the effect of a rate cut may be good for the overall economy, there will be some time lag before a cut takes effect, and we are playing this for its short-term bearish outlook. The series of drops followed by small rebounds goes back to December of 2001, and it appears to be following the same pattern now. --- SNE $44.00 +0.15 (+1.29 for the week) Sony continues to look weak. A round of poor retail numbers today, led by electronics retailer Best Buy, weighed on this stock and prevented it from participating in the overall market rally. Best Buy's reduced earnings guidance does not bode well for retail electronics manufacturers. Cablevision's recently announced that their relationship with Sony, in which Sony provides set-top boxes for Cablevision's customers, will be changing. They will continue to distribute Sony's advanced set-top boxes to customers, but will begin to work with other set-top box makers as well. A look at Sony's chart shows it has been turned away from its 10- dma of $44.25 the last two days, as the broader markets have rallied strongly. This is not a promising sign for this stock. In the event of a market pullback, the crutch will be gone, and this issue will most likely resume its fall. It is currently at the top of a descending channel begun at the tart of July and looks ready to rollover back to the bottom of the channel below $40. While the stock did finish up on the day, the inability to cross a short-term dma on a day when the Dow was up 255 points makes this a candidate for a quick pullback. If the market continues to rally into next Tuesday's interest rate announcement, the rising tide could lift all boats, so we will be watching our stop loss of $44.50 closely. --- HD $27.14 -1.12 (-1.29 for the week) After another triple digit gain for the Dow, component Home Depot showed weakness on a day when some other retailers had a tough time as well. There were mixed same store sales numbers across the retail sector, including Wal-Mart coming in below expectations. While some of the specialty retailers did well, over the sector was down. The Retail Index (RLX.X) opened just about where it closed yesterday and it has been down hill since. The shrinking economy, along with a drop off in existing home sales has continued to hurt this home improvement behemoth. Usually on a day when the Dow is up, during a continuing rally, stocks in the index are lifted that might otherwise not be. In this case, Home Depot has fallen over 5%, and is now below its July 24th low of 427.25. It has retested this low three times in the last week, and bounced. Today's drop below this support level is important and we could now see resistance to the upside from the same level going forward. A look at HD's PnF chart shows the trade of $26 established a triple bottom breakdown, which is very bearish, and confirms the impact of a break in support on the daily chart. We will continue to hold this short position with a target in the low 20s. ************* NEW PUT PLAYS ************* AZO - AutoZone $66.40 -2.10 (-1.56 for the week) Company Summary: AutoZone is a Memphis-based auto parts chain that opened its first store in Forrest City, AR, on July 4, 1979. A public company listed on the New York Stock Exchange (AZO), AutoZone had sales of more than $4.5 billion in fiscal 2000. The nearly 3,000 stores in 42 U.S. states and Mexico are all company-operated - there are no franchises. AutoZone, a Fortune 500 company, is opening more stores per year than any other retail auto parts chain in the nation. Why We Like It: AutoZone has been on and off OI's Watch List for some time now. it has finally graduated to the official play list with its recent poor performance (maybe detention would be a better term than graduation). This stock topped out close to $75 before beginning its recent plunge. The drop was temporarily halted at $65, but a failed rebound below $70 looks bearish. The stock benefited from an announced buy back program of $300 million and then rode the surging overall market the last week in July. Then the music stopped and AZO was left without a chair. The stock's recent trade of $65 produced a new sell signal on the PnF chart, with nearest support at $60. A look at this chart also reveals it is now free of congestion and the failed rebound provides additional room for short entry. AZO is currently working on a bearish vertical count of $60, as well, however each box below $65 subtracts $2 from this level (i.e. a trade of $64 lowers the bearish vertical target to $58). This combination of the vertical count and support establishes our initial target for the play of $60. A look back to October of 2001 shows the next level of support below $60 to be $55. Given the stock's recent volatility, this possibility seems to be within reason. We will re-evaluate our target if the stock is able to break $60. The recent speculation over a drop in interest rates and dealer incentives also affect AutoZone negatively. As rates drop and automobile manufacturers offer attractive financing, new car sales rise, and the need for AutoZone's do it yourself products wanes. The recent announcements by Ford and GM of rising auto sales do not bode well for AutoZone. GM's recent 24% rise in U.S. sales, coupled with Ford's 1.5% increase means more customers stepping up to in-warranty vehicles, instead of keeping old ones alive. We will use a stop loss of $70 on this play, which would signal a break in the trend, and create a PnF buy signal. We will use the current price level as a short entry. BUY PUT AUG-70*AZO-TN OI=501 at $4.50 SL=2.25 BUY PUT SEP-65 AZO-UM OI=622 at $4.00 SL=2.00 Average Daily Volume = 1.29 mil ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** 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 08-08-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Call - JNJ Traders Corner: Oscillators - Part 3: The MACD, Momentum and ROC Oscillators Options 101: Baby Bull Taunts Big Bear ********************** PLAY OF THE DAY - CALL ********************** JNJ - Johnson & Johnson $54.57 +2.06 (+2.32 for the week) Company Summary: Johnson & Johnson, with approximately 106,100 employees, is the world's most comprehensive and broadly based manufacturer of health care products, as well as a provider of related services, for the consumer, pharmaceutical and medical devices and diagnostics markets. Johnson & Johnson has 197 operating companies in 54 countries around the world, selling products in more than 175 countries. Why We Like It: If there ever was a company that could say "I told you so," this is the one. JNJ took a beating over news last month that it was being investigated over problems at a manufacturing plant. When investors came to their senses and realized the news had little to do with the bottom line, JNJ staged a tremendous comeback. The stock has been a recent participant of both our OI Put Play list (before the drop), and the OI Call Play list(during its rebound). We closed the call play for a healthy profit as it neared resistance at $50. Now we're back on board. This stock forged its way through $50 and consolidated around $52. Today's rally pushed it above the consolidation and the stock appears free of resistance in that range. The stock established a new PnF buy signal with the trade of $54. JNJ's bullish vertical count is now $65. The recent pullback from $53 to support at $50 not only showed renewed support over $50, but provided the 3-box reversal necessary to cement the vertical count on the PnF chart. There is bearish resistance at $56, so this could be a bump in the road ahead. However, the $50 support is reassuring, considering the strong move the stock had just finished up to $50. Normally we would not want to chase a stock that had experienced a $13 gain in three weeks, but this support, consolidation and breakout has provided a good base for JNJ's next move. JNJ has a number of drugs coming up for approval in the next couple of months, but its most promising product appears to have little chance of rejection. There are already orders piling in for this $25,000.00 wheelchair that climbs stairs, negotiates corners with ease, has 4 wheel drive for rough terrain, balances on 2 wheels and rises vertically to eye level. Since it is not a drug, there is little chance the FDA will have any problem with it. The company expects these to sell like very expensive hotcakes, and revenue may run into the billions. The fact that some of the cost may be deferred by insurance will only help sales. The $54.75 level provided resistance back in the beginning of July, and today's trade of 54.78 broke that mark. More conservative investors may want to wait for a trade over $54.75 once again before getting long, however we feel entry at this point is warranted. BUY CALL AUG-50*JNJ-HJ OI=14500 at $4.90 SL=2.50 BUY CALL AUG-55 JNJ-HK OI= 9630 at $0.80 SL=0.00 BUY CALL SEP-50 JNJ-IJ OI= 5559 at $5.90 SL=3.00 BUY CALL SEP-55 JNJ-IK OI= 7329 at $2.30 SL=1.20 Average Daily Volume = 10.8 mil ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** Oscillators - Part 3: The MACD, Momentum and ROC Oscillators By Leigh Stevens lstevens@OptionInvestor.com This is the last of my articles on "Oscillators" for our Trader's Corner and I will focus primarily on the last of the "big 3" of this type (along with Stochastics and RSI), the Moving Average Convergence Divergence indicator or "MACD"; pronounced: "mack- dee". However, I will describe the Rate of Change and the similar Momentum oscillators to complete this treatment of oscillators. MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD) The very well known Moving Average Convergence-Divergence indicator, most commonly known as the MACD, is a variation of what are generally called price oscillators. The MACD indicator is calculated by taking the difference between two exponentially smoothed moving averages of closing prices of 12 and 26-day duration – usually these are the only values ever used, although I would just note that Gerald Appel, the market technician who formulated the MACD indicator, suggested that a slightly different set of values ought to be used as a sell "signal". In my opinion, only a “purist” who relies heavily on this indicator need be concerned about using a variation for this purpose – I have not heard or seen antidotal or empirical evidence that constructing the slight variation and applying it only in declining trends adds enough value to make it worth the trouble. The MACD line is the difference between the two averages described, as the longer average (26) is subtracted from the shorter (12). A moving average of 9 periods then is calculated of this differential (the result of the subtraction), which is called the "signal line", resulting in a faster moving MACD line. The exponential smoothing technique weights the most recent prices changes more heavily and is therefore quicker to track the latest price changes. The signal line will be slower because it is a simple moving average of the last 9 values of the differential and is not weighted. There is usually a third line plotted, which is a "histogram" (these are the vertical bars) used to show the difference above and below a midpoint line of the difference between the MACD line and the signal line – this line is included in the "standard" MACD study to better see the points where there is an upside (the bars go above the midpoint) or downside (bars are below the center or zero line) crossovers. I sometimes dispense with the histogram because it "clutters" up the chart when the size of the chart window is small - the zero line can be seen anyway. MACD examples are shown below. The reason to include the histogram is that those bars may present a clearer picture of when the difference of the two moving averages is at the widest and narrowest points – however, often it is difficult to see these details given how much is shown on the MACD indicator, which often occupies a small section below a price chart. It’s common as you gain experience, to use indicators with minor modifications such as I describe, but this is an individual thing and relates to how much practice you have or the way in which you use the indicator – for example if you use the MACD in order to generate a crossover buy or sell "signal" only, then the narrowing or widening of the differential is less important. The use made of MACD is similar to the crossover technique of other moving averages – a buy indication or "signal" is generated when the MACD line crosses above the slower signal line and a sell indication is suggested when the MACD line crosses below the signal line. Use in this fashion is not unlike the trend following usefulness of moving averages – one, or a set of two moving averages – that define and track the dominant trend, either up or down. I suggest MACD use on either daily or weekly charts but tend to favor its use on longer-term weekly charts as a good measure of the momentum of the primary trend. Once there is a weekly chart buy or sell "signal" and I am not in the market in question yet or want to add to my position, I may take the first MACD crossover signal on the daily chart, that is in the same direction as the weekly signal. The foregoing is a use of the MACD as a trend following indictor, but we are focused here on its use as an oscillator and, as such, we want to employ it for buying when the market we are following is oversold and for a possible long exit or shorting, when the MACD suggests an overbought condition. The way this is done is to define "overbought" and "oversold" zones as above or below the zero line respectively. There are times when the two MACD lines are somewhat above the zero line and have crossover "signals" – conversely, there are times that the MACD lines have crossover sell signals below the zero line. However, in general these crossovers not typically the "best" or strongest signals as in the chart below. Some technicians also suggest that when both lines cross above or below the zero line, this is "confirmation" of the oversold buy or overbought sell "signals" described. When the two MACD lines get unusually far above or below the zero lines, this relative position and distance from the midpoint or zero line can in itself be an indication of an overbought or oversold extreme. However, again, there is no preset area or position on the right hand (MACD "reading") scale that suggests that a market is in a definite overbought or oversold zone. The RSI, as you've seen if you read part2 of this Trader's Corner series, has a scale that only goes to 100, with an overbought zone (by convention) that begins at 70 – so, a reading of 90, for example, is very extreme. With "unbounded" indicators like the MACD oscillator that range up or down, "bounded" only by how far one average moves in relation to the other, it’s necessary to look at and rely on past high and low readings of the MACD at prior market tops and bottoms as a guide to the current situation. MOMENTUM AND RATE OF CHANGE (ROC) OSCILLATORS The momentum oscillator is a type of technical indicator that calculates and plots the net change, expressed in points, between the close of any two bars. I’ll note here for all situations where I describe indicator, that although I cite the common use of the closing price only, this is not the only possibility as comparisons for the open, high or low could also be made. It is also necessary to set some number of bars or period being measured such as intraday, daily or weekly, which is the momentum oscillator’s length – for example, the 10-day "momentum" would be today’s close minus the close of 10 days ago – see the chart below. A 10-hour or 10-week momentum could also be established provided the data is available. Measuring current prices versus earlier prices sheds light on the pace of a trend relative to whether its slow or fast – if fast and steep, there is always also the possibility of a trend reversal. Examination of past reversals in that market is useful in identifying levels that represent overbought and oversold conditions, which is when momentum is very strong, either in an up or down direction. The Rate of Change (ROC) oscillator shows virtually the same kind of change as the momentum model, only the scaling is different (it’s a fraction) – the ROC indicator takes a current bar’s price and divides by the price of X number of day’s ago; e.g., 10. The rate of change calculation creates a ratio, rather than a price differential. An example of the ROC indicator is shown, along with the same length momentum oscillator for comparison, below – the same item and time frame is also used for both figures. You’ll note on both types of oscillators, a middle line called the "zero" or "equilibrium" line. The concept of a zero or midpoint line indicates that readings above the line are a positive number, suggesting a bullish advancing rate of change whereas readings below the midpoint line imply a bearish or declining momentum. In an uptrend, the current close will generate a reading above or below the zero line, which is easily seen, but is not always the case on the price chart -- especially in a sideways trend or an area of "congestion"; i.e., where there is a cluster of closes around the same price. When either indicator is above the midpoint line and the line is rising at a steep rate, it provides a visual indication of strong upward momentum. When the rise of the line above the horizontal midpoint (zero) line shows a more moderate slope, the momentum indicated for that item is a more moderate one. When either of these oscillator type indicators have lines that are below the center line, the momentum indicated is more or less strong depending on the slope of the line. Some of the extremes noted on the chart examples above corresponded to tops and bottoms and some did not. The strongest trends will usually have the greatest extremes. As always, combining the analysis of a pullback in an oscillator line from an up or down extreme, with what is going on with volume, prior tops and bottoms, moving averages and trendlines will provide the ancillary or related clues about actual reversals in the trend versus where the item is just registering an extreme reading. Strictly speaking, a momentum or ROC crossover above the line (whether it’s referred to as the midpoint, zero or equilibrium line) is a bullish, or "buy", indication. If a price drop pulls the indicator line below the midpoint line this is a bearish, or "sell", indication. Traders will use these "signals" in various ways, and it may be simply be to look for selling opportunities only when the line is at a high point relative to past weeks and to look for buying opportunities when the line is below the midpoint, indicating downward momentum and probably also at a low point extreme relative to the item’s past history. A shorter length selected for an oscillator, will result in a more sensitive indicator. Shorter time frames on daily charts, like 5 or 9-day periods, will generate both more fluctuations and more indications of overbought or oversold extremes. Shorter lengths are of potential use to (who else!) short-term traders, but even traders that are geared to profit from smaller price swings will find that they can easily get "whipsawed" in their trading efforts – an example of being whipsawed is buying at what appears to be an oversold reading on the oscillator, only to witness a further drop. ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********** OPTIONS 101 *********** Baby Bull Taunts Big Bear Buzz Lynn buzz@OptionInvestor.com Bet you thought it would never happen - Fundamentals Guy writes something bullish, that is. Yep! Don't get me wrong. I'm still building a financial ark. But there's nothing like a little sunshine between fierce storms. So what's it all about? For starters, recall the major differences between secular and cyclical markets. If that sounds like a foreign concept, be sure to check out Mark Phillips excellent article on the subject from July 17th. Find it here: http://www.OptionInvestor.com/traderscorner/071702_1.asp The point in bringing this up is to recognize that cyclical markets occur within secular markets. Clearly the markets have been bearish for nearly 2.5 years, the COMPX has lost 74% of its value; the S&P 500 has lost 42%; the Dow has lost a "mere" 26%. But for overall performance of the broad market, note that the Russell 2000 has lost 37% in value to date since its highs. That qualifies as a bear market in my book. Still, chants of buying for the long haul - buy and hold - persist. After all, it has to get better from here (little voice whispers, "Doesn't it?"). Reminds me of the Black Knight in Monty Python's "Holy Grail", who lost his arms and legs in a sword fight. Ever the optimist, the Knight proclaims, "It's just a flesh wound. Let's call it a draw." Investors shrug off the market losses with equal denial. Anyway, that's the secular part - Big Bear. But this week, we've seen the emergence of a baby bull with a sharp selloff on Monday followed three days of triple-digit gains, which is a tip of the hand to investor euphoria being alive and well. But it does not mean that stocks are fairly priced for their current or future returns. Most readers know where I stand on that - I think equities were overpriced, even on Monday, and are even more so now following the rally. Even so, bullish rallies that last longer than a day can find a good home within the Bear's lair as long as they don't overstay the welcome. Note, however, that this is not the resumption of the bull market of yesteryear, though it will trick many into believing so. In effect, what we can boil it down to is a cyclical bull within a secular bear market - a day of sunshine between storms. Am I moping and complaining because the sun is out, which makes me look like a darn fool for ark building? No way. I'll enjoy the sunshine because I can! In real terms, as a market agnostic, I don't pray for 40 days and 40 night of rain to justify my ark- building. Nor do I pray for sunshine just to avoid the task of building an ark (even if the rest of the world thinks I'm nuts). I just read the weather reports and decide how to spend my time. To me, this is winter and we've been given a sunny day. I'll behave accordingly. So where does that lead me? To the charts of course! Here's a potentially profitable play that I think could be setting up. The play can be made on any of the major indexes, though I'm going to favor the S&P or the Dow. The NASDAQ is still, well, the NASDAQ, and does not have the potential, in my opinion, to spring upward as convincingly as the other two. Technology is still out of favor despite the recent rally. This is what I see as potentially happening that would get me bullish for a few moments in time. But first - let's see - eeny meeny miney mo - the Dow chart (INDU) on a weekly daily and 60 min time scale: Dow Industrial chart -INDU (weekly/daily/60): Looking at the current situation, the weekly chart has regained some composure. I particularly like the 5-period stochastic bursting out of oversold on a very nice launch trajectory. Even the 10-period has managed to move itself upward, though fractionally, out of oversold. That's pretty positive for the cyclical trend. But new highs? "To Infinity and Beyond!" to quote my cousin, Buzz Lightyear? Not yet. But the daily (center) chart is looking good too. I particularly like the higher low on the ascending support line along with the 5 period stochastic, which is no longer a wishy-washy line. It is moving with definite purpose. But note the pending resistance just above current level. I don't want to get too cocky and buy the breakout. This is after all, a bear market. Even if we get the breakout, the 50-dma of 8991 could turn the oscillator south before it ever hits overbought. And overbought is where I want to see the oscillator move once I get into the bullish play. Now look at the 60-min section of the chart (right side) for more detail. We see the same line of resistance just above current levels and a very overbought oscillator. Careful, it can still say pegged up there for while as the candles break out, but I consider that unlikely. Why unlikely? Today's continuation of the 9-candle rally has moved far off its ascending low trendline and very close to resistance. Maintaining that rate of incline in sustained fashion is next to impossible, much like cheering for your favorite sports team for 9 straight hours. You may want the "win", but expressing it with unbridled enthusiasm creates a stamina problem. Just think how 9 hours affects the athletes. And in this trading game, we are the athletes! That's where we are now from what I see on the trading charts. Now let's see where we might be headed and how to potentially profit from that. Extrapolated Dow Industrial chart -INDU (weekly/daily/60): Here's what could potentially happen that I'd like to be part of. The goal I am aiming for, starting with the daily chart if the stars line up, is to have the candles break above resistance at roughly 8725-8750 with a move all the way to the 50-dma of 8991. It likely will not happen in a straight line. That is reflected in the daily chart. So long as the red candle on the daily chart that expect tomorrow or Monday does not engulf today's green candle, I won't worry about that. It will be within tolerable limits. However, my thinking is that after three days of rally leading into tomorrow (Friday), some profits from the 600+ point week are likely to come off the table, especially in front of retail sales figures to be released 5 hours prior to the commencement of a Fed meeting next Tuesday. So how do we get from here to there? Look at the 60-min chart. I personally will not be jumping on the bulls' bandwagon first thing tomorrow. Instead, I'd wait for some of that selling to set in such that the 60-min stochastic cycles down to oversold and the candles cycle down to the 8500 level, give or take 50 points. If that support line can roughly hold above previous lows on the same ascending trend and the stochastic cycles to oversold and then reverses back up over the 20% line, call it an entry (timed with shorter time frames of course). That would be the second higher low and would confirm a more bullish trend that we've not seen since May - a signal that it could actually have some legs that might last weeks, even months, but not forever. Ideally? It clears the 50-dma on the way back up. Thus, bull confirmed. Wouldn't that be great? Given the trend that appears to be emerging, I'll be thinking twice before playing puts on the way down, though for trading, taking a quick bearish swing might be an acceptable risk tomorrow or Monday. Otherwise, the general rule is to not buck the bigger trend, which on the daily chart is bullish. So baby bull wants to taunt the big bear? I say watch for claws and teeth and enjoy the romp in the pasture! ********** 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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