The Option Investor Newsletter Tuesday 08-20-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Pause to Reload Index Trader Wrap: CORRECTION TIME Market Sentiment: Majority Rules Weekly Fund Screen: Best Taxable Bond Funds Now Index Trader Gameplans: THE SECTOR BEAT - 8/20 Updated on the site tonight: Swing Trader Game Plan: Orderly Selling Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 08-20-2002 High Low Volume Advance/Decline DJIA 8872.07 -118.70 8986.50 8822.02 1.54 bln 1235/1932 NASDAQ 1376.57 - 18.00 1389.84 1370.98 1.45 bln 1370/2024 S&P 100 474.03 - 6.81 480.84 471.24 Totals 2605/3956 S&P 500 937.43 - 13.27 950.70 931.86 RUS 2000 397.84 - 3.45 401.29 396.95 DJ TRANS 2347.72 - 16.30 2367.10 2332.78 VIX 32.56 + 0.99 34.01 32.05 VXN 47.71 + 0.69 48.96 46.61 Total Vol 3,174M Total UpVol 1,120M Total DnVol 2,000M 52wk Highs 96 52wk Lows 220 TRIN 1.24 PUT/CALL .74 ************************************************************* Pause to Reload The bulls phoned home today for more cash to increase their long positions. Bears took advantage of the buying lull to press the advantage but without conviction. The volume was anemic with barely three billion total shares trading. This was by far not a rush to short or a change in directional trend. It was simply a pause in the buying. The key is whether it is permanent or just temporary. Chart of the Dow Nasdaq Chart The morning began with a blow for tech stocks. Chip equipment maker Kulicke & Soffa (Nasdaq:KLIC) warned during a mid-quarter update that it had hit a pothole on the road to a recovery. The company makes tools to build and test microchips and said the last quarter has been a roller coaster ride. They said companies were deferring orders and recent capital expenditure cutbacks were hampering sales. They also said customers were unwilling to pay for higher performance products and were content to keep their current equipment until demand returns. They are now forecasting a steeper downturn than expected. CSFB dropped estimates for 2002 results to -$1.41 a share and 2003 estimates to a loss of -$.50 a share. KLIC had been expected to be at or above breakeven in 2003. The very negative comments from KLIC tanked AMAT, NVLS, DPMI and most of the semiconductor sector. Dell Computer added to the negativity when they announced a decision to sell unlabeled computers to retailers at a discount. They had previously said they would not sell "white box" computers because it would cut into its own retail market. The current slow down in PC sales has Dell going back on its promise and has them courting dealers they cut off back in the early 1990s to go consumer direct. They are targeting dealers who sell to small businesses with 100 employees or less. Analysts think Dell will be less than successful selling their $499 base system without a monitor because most competitors sell for less than that. They will not pre-make the computers but only build to order and even with their quoted 5-day lead time this means time between customer order and customer delivery could be as much as 10-14 days. When you can go down to CompUsa and get one built today this is a strong disadvantage. The current independent builders offer 24-48 hr turnaround. Many feel Dell has just raised the red flag for the PC sector if they are stooping to this low margin attempt to keep assembly lines running. This may also indicate back to school sales did not appear. Agilent (Nyse:A) said it posted a wider than expected loss today at -$.31 compared to previous estimates of a -$.10 to -$.20 per share loss. They blamed overall market weakness and problems with some software installations. The software was responsible for a nickel of that loss according to Agilent. News after the bell today will weigh on the tech sector as well. The book-to-bill ratio for July dropped to 1.16 from 1.26 and was the lowest number in the last four months. After peaking at 1.27 in May the decline is picking up speed but still showed an apparent expansion in progress. The number indicates the chip industry is receiving $116 in orders for every $100 in product shipped. The challenge, as you can see in the KLIC news above are that the orders are being cancelled and deferred at very high rates. It does not do any good to get a million dollar order if it gets delayed indefinitely or cancelled completely a month later. The BTB number is also a three month moving average so the current number for July is using the high months of May (1.27) and June (1.26) as two components of the current July number of 1.16. Using some quick math and multiplying 1.16 by 3 = 3.48. Subtracting 1.27 and 1.26 leaves you with .95 for July. Suddenly there was a contraction and they really shipped more than they booked for July. This calculation is not precise since the numbers for May and June were also three month averages including the prior months. Since February was .90 and March 1.05 that means May/June actual numbers were higher than the average quoted. This means the actual number for July was even lower than the .95 above. I doubt many media reporters will think this through and the "headline" 1.16 number is what will be reported. Astute investors and our readers will see the truth and be forewarned. Contrary to the published "soft recovery in progress" VLSI Research reported that chip fab utilization rates will drop in August to 81.9% from 86.5% in June. They reported that activity at global chip factories was slowing significantly. This does not bode well for the anticipated 4Q holiday sales. Many analysts are now beginning to predict a slower 2003 in consumer chips, like chips used in DVD players, as well as PC chips. Should be interesting to see how the bulls spin these reports on Wednesday. Consumers have been on a car-buying spree driven by zero interest and high rebates. These discounts cost the auto companies between $3,500 and $7,500 per car. You didn't think the car companies were going to eat this expense did you? Chrysler announced today they were going to raise prices on 2003 models between +4.5% and +12.8% depending on the models. That is about $3,600 for their best selling $28,000 minivan. There is no free lunch! Oil prices continue to rise and topped $30 a barrel today on fears that an Iraq attack will disrupt not only supplies but fragile supply channels as well. If Saudi Arabia suddenly decided to not supply oil to coalition partners then other suppliers would have to take up the slack. Oil would continue to flow but from whom and to whom would be in question. In 1990 oil prices correctly predicted the Iraq invasion of Kuwait as knowledgeable traders read between the lines. Oil rose to $40 a bbl when the conflict started. The same is true today as it becomes increasingly apparent there will be another war. Oil over $30 depresses the stock market and raises prices on manufactured goods. This energy inflation has been seen many times in the past. I had a dozen all electric homes in Texas during the big oil crisis in the 70s. They were fully rented when it began but all vacant within a year when the electric bills exceeded the rent. The creation of the energy surcharge sent renters back to apartments which were not individually metered at the time. An Arab controlled OPEC, angry at an Iraq attack, could cause another crisis like this at any time. OPEC is scheduled to meet on Sept 18th to discuss quotas and production caps. The KLIC event today was also a warning that we are moving into the earnings warning cycle for the third quarter. The mid quarter updates will start hitting the wires in greater frequency as we near the end of August. With the numerous instances of slowing demand it would be silly not to think there will not be a wave of lowered guidance as we get closer to September. This is not a rare cycle. September is not known as the worst month of the year for nothing. It is historically when companies warn of a sluggish summer sales for the 3Q and after nine months of history lower guidance for the year as well. Products for holiday selling have already been manufactured and are being shipped. They have a pretty good handle on what the full year will be by September and that is when they break the bad news. With no major economic reports tomorrow and earnings over for 97% of the S&P companies, there is nothing left for the bulls to feed on. They have not needed much lately with bad news being ignored or spun to their own uses. The bears have plenty of ammo but have been plagued with a rash of misfires. With the bulls needing no good news to buy and bears unable to capitalize on bad news it appears we are at a stalemate. There is not enough volume on either side to win the battle. This makes it more likely we will move sideways until the tug of war is won by the side with the most staying power. The Dow traded in a range between 8800-9000 and stubbornly refused to break 8800. The Nasdaq traded in a very narrow range between 1370-1390. Despite the negative chip news from KLIC and the news from Dell it also stubbornly refused to break the 1370 barrier. This tells me there is still a bid under the market despite the low volume. There is not enough buying pressure to push it higher but it was successful in holding it up on Tuesday. With total market volume only slightly over 3 bil shares it is evident the end of summer vacation session is in full swing. I still see no reason to buy stocks but we have seen that shorting a dull market is not working either. Vacation anyone? Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** CORRECTION TIME By Leigh Stevens [NOTE: I'll be out of the office Wed. My next update will be Thurs.] TRADING ACTIVITY AND OUTLOOK - A correction always come and its only surprising how long this one took. It looks to me like it will be longer than a 1-day affair but it doesn't have to be a steep pullback. We'll look at the levels and possibilities with the charts. Time to take the call profits and RUN! And, short rallies if you must stay indoors trading and not go to the beach. A dose of reality seemed to set in today. Market observers are noticing that there is only light volume coming in after the initial rebound, as both individuals and institutions pause in their exchange of paper with pictures of dead presidents on them for stock certificates. You can see this on the QQQ chart below. I noticed one lead sentence to a market summary that said that Dow dropped "steeply" Tuesday - journalists, if they weren't so dumb you would probably be mad at them. Sure, with the Dow down 1.3% this is a BIG drop after a 17% rise into yesterday in 18 trading days! Well, they have to have something to write about - no story, no job. Me too actually. Losses in semiconductors, oil services and financials were key sectors under the selling pressure. Chip stocks were bogged down by deep losses in Micron Technology following a downgrade. Its always one of those bloody pesky analysts crunching their numbers and finding something not to like. And, they don't all get 32 million dollar severance packages even! Positive earnings news from Dow component Home Depot buoyed the retail sector and buyers did find something to like in Telecoms, Biotech, Airlines (even), Networking and Gold - although absent the 1.25% gain in telecom, none of the others were up more than a fraction of a percent. As the floor sees it, 9000 on the upside is about as far as we go without a "good" news catalyst - oh, an earnings pick up would be nice and Q3 earnings reports are a ways off yet; and how good could they be anyway when they include the summer. I sometimes think the French have a great idea in just taking August off. You know, the whole country - leave Paris to the tourists and flee for wine country and the shore. Also, the talk is starting about the dread September-October ogres that waylay the market so often on a seasonal basis. 9/11 is coming and we're getting more aware of it in the "dog days" of summer. These last two weeks of August often see many key market participants out at the Hamptons or wherever they go in the rest of the big cities where there is a concentration of money managers. S&P 500 Index (SPX) - Hourly chart: Pivotal technical resistance is 960 - as long as SPX doesn't climb above this level, look to short rallies or just come out of calls and wait for the next good buying opportunity and for oversold oscillator readings again. A KEY resistance has not been pierced in the S&P on a daily chart basis - the September low at 945 was exceeded only once on a closing basis. In one way, you could say that the dominant trend of the market is down until the broader market indices can get back above the post 9/11 lows. Only the Dow is well above its September low (at 8064). Near technical support is in the 910 area, where the S&P 500 maintains itself in its uptrend channel. I think this lower trendline will get tested and is a "minimum" downside technical objective. The near-term trend remains up as long as the 876 prior low is not exceeded. I suggested taking call profits on the first day of weakness - not necessarily the first weak opening, but the first day that closes weak this week - the bell rang today. S&P 100 Index (OEX) - Daily/Hourly charts: Since you are all experts on "flag" patterns :- (see my 8/15 Trader's Corner article) you will "naturally" (maybe?) spot the minor bear flag on the OEX hourly chart (even clearer on the DJX hourly chart below), suggesting another downswing ahead. While the OEX has stopped shy of reaching its implied daily chart flag objective up near 500, at least in the near-term, its still possibility if 460 is not exceeded on a pullback here. 460 is the key support on the hourly chart, at the lower channel line. Flag patterns are not as reliable on the index charts as on individual stocks anyway, but they do at least suggest a further up move once the top of the flag type consolidation is pierced. The higher objective based on the "pole" measurement are not as often realized in the indices - or, not until well after the first strong upswing. Jury is still out on the outcome here. Near support is 472, then 462-464. A move under 472 in the OEX is the first indication of a technical breakdown. OEX remains in its uptrend channel as long as it doesn't fall under 462 currently - 462 is also the prior swing high - what was resistance should now be support if the uptrend is going to remain in a strongly bullish pattern. DJ Industrial Index (1/100 of INDU) - $DJX - Daily/Hourly charts: DJX is faltering at the pivotal 50-day moving average and momentum oscillators like stochastics have or are starting to roll over to the downside. 87.6-87.9 is the area to watch for support and a technical break - 89.9-90 is the key near resistance. I estimate we'll see a move into the 87-86 area in DJX, with 86 being hourly up trendline support. Below trendlines, I look at the prior swing low as a possible next target - certainly a pivotal price area to keep watch on - in this case, at 83.7. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: Suggested shorting taking long profits and shorting QQQ at 25.25 or higher - the intraday high was 24.43. On any short positions, where I suggested an initial 26.00 buy stop, I would now move this down to 25.70 - 25.50 is probably enough "leeway", but let's allow for a rally try back up to at or near the 25.6 high of yesterday. Near support is in the 24.5-24.7 area; then, if exceeded, down in the 23.7-23.9 area. If you want to focus on a stock, Nasdaq bellwether Cisco Systems (CSCO) is the one to watch. Right now it may be forming a double top at 15. All the other key Nasdaq stocks look like they are turning down again and correcting. 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 **************** Majority Rules by Steven Price The Dow experienced a triple-digit drop today, losing 118.72 to close at 8872.07. This drop was accompanied by similar drops of 13.27 points in the S&P 500, which finished the day at 937.43, and 17.95 points in the Nasdaq Composite, which finished at 1376.59. The Nasdaq 100 fell 17.93 to close at 1008.02. While it may seem that I'm just reporting numbers, the reason for commenting on all four of these in the sentiment section of the newsletter, is that they all held above significant levels. All four indices crossed their 50 day moving averages yesterday, not entirely a coincidence, as the market tends to rise and fall as a whole. A strong rising tide will lift all boats, however the fact that they all broke a barrier that hadn't been reached since the spring, and all did it on the same day, is significant. While all of the indices gave back some ground today, they have all found support at the 50-dma. If this level continues to hold, we may see a new base from which to begin the next leg up. The Dow had the Great Wall of 9000 staring it in the face, and retreated. However, after a gain of over 1400 points since the morning low of 7532.66 on July 24, we were bound to see the index pause for a breath before getting over this next significant hump. Today's pullback to just above the 50-dmas could be viewed by bulls as evidence of strength on the way up. The bears will focus on the inability to get over 9000. A look at the bullish percentage figures now shows 56% of the Nasdaq 100 stocks giving point and figure buy signals, along with 52.8% of the S&P 500 stocks and 50% of the Dow stocks. While the Dow bullish percentage gave up 2% from yesterday's reading, this amounts to 1 stock out of 30 reversing its buy signal, while the 0.8% gain in the S&P 500 translates to 4 stocks switching from sell signals to buy signals. The Nasdaq 100 remained unchanged. The point is that in spite of today's pullback, a majority of stocks are still giving buy signals in these indices. This majority was established at Monday's close, and has held up. It is hard to view the failure at 9000 as a turning point in the market, as long as a majority of stocks have broken above recent highs. The Dow could give up 700 points from Monday's high and still have only retraced 50% of its recent gains. This is not to say we haven't simply experienced a bear market rally, which is a bump in the road on the way down. However, with many positive signals, and the 50-dmas currently holding, I'm not yet slipping back into hibernation with the rest of the bears. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8872 Moving Averages: (Simple) 10-dma: 8728 50-dma: 8835 200-dma: 9730 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 937 Moving Averages: (Simple) 10-dma: 914 50-dma: 930 200-dma: 1072 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 892 Current : 1008 Moving Averages: (Simple) 10-dma: 963 50-dma: 996 200-dma: 1340 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The Semiconductor Index has enjoyed a meteoric rise the last two weeks. It rebounded from its August 5 close of 283.91 to close yesterday at 363.06, just under its 50-dma. This rise is significant for the bulls, while the fact that it could not hold above the 50-dma is significant for the bears. While the NDX, Dow and S&P 500 all managed to get above their 50-dmas - and hold there in spite of today's pullback, the SOX was turned away and landed just above yesterday's low of the day. What may be significant in terms of support though, is that today's low of 343.24, was approximately the same as yesterday's low of 343.96. This will be the next level to watch for this group. While it was not able to hold the 50-dma, it may have found support just a bit lower. 52-week High: 657 52-week Low : 282 Current : 345 Moving Averages: (Simple) 10-dma: 326 50-dma: 361 200-dma: 497 ----------------------------------------------------------------- Market Volatility The VIX has dropped precipitously in the last two weeks, from a high of just under 50 on August 5, to the low 30s. While this may seem like an enormous show of faith in the health of the overall market, remember that this past spring it was trading around 19. Summer is generally a period of very low volatility, and this year has been the extreme exception, not the rule. If the market can hold these levels, or slowly creep forward, we would normally see a VIX closer to 20 at the end of August. This year, however, with September 11 around the corner, we may not see a reading below 30 before then. CBOE Market Volatility Index (VIX) = 32.56 +0.99 Nasdaq-100 Volatility Index (VXN) = 47.71 +0.69 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.74 509,438 376,768 Equity Only 0.62 420,722 260,655 OEX 0.78 19,942 15,609 QQQ 0.19 30,598 5,805 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 41 + 3 Bull Confirmed NASDAQ-100 56 + 10 Bull Confirmed DOW 50 + 0 Bull Confirmed S&P 500 53 + 5 Bull Alert S&P 100 53 + 2 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 0.80 10-Day Arms Index 1.01 21-Day Arms Index 1.13 55-Day Arms Index 1.31 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 1043 1698 NASDAQ 1299 1955 New Highs New Lows NYSE 35 58 NASDAQ 28 115 Volume (in millions) NYSE 1,539 NASDAQ 1,494 ----------------------------------------------------------------- Commitments Of Traders Report: 08/13/02 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 have reduced positions on both sides of the coin, resulting in a net change of 700 short contracts. Small Traders have reduced long positions by 3700 more contracts than shorts. Commercials Long Short Net % Of OI 07/23/02 405,969 471,704 (65,735) (7.5%) 07/30/02 430,833 482,957 (52,124) (5.7%) 08/06/02 431,590 478,879 (47,289) (5.2%) 08/13/02 427,618 475,536 (47,918) (5.3%) 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 07/23/02 166,713 73,778 92,935 38.6% 07/30/02 153,858 67,451 86,407 39.0% 08/06/02 159,561 67,434 92,127 40.5% 08/13/02 155,040 66,546 88,494 39.9% 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 have added to long positions by 1300 contracts, while short contracts increased slightly. Small traders also added to long contracts, increasing positions by 1200 contracts, while leaving shorts virtually unchanged. Commercials Long Short Net % of OI 07/23/02 37,204 43,601 (6,397) ( 8.0%) 07/30/02 38,163 47,343 (9,180) (10.7%) 08/06/02 41,014 50,025 (9,011) ( 9.9%) 08/13/02 42,303 50,354 (8,051) ( 8.7%) 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 07/23/02 12,756 11,152 1,604 6.7% 07/30/02 13,159 9,237 3,922 17.5% 08/06/02 11,547 8,782 2,765 13.6% 08/13/02 12,797 8,933 3,864 17.8% 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 have maintained the status quo, subtracting 600 contracts from the long side and 400 from their shorts. Small traders got decidedly shorter, dumping almost 3,000 long contracts and only 900 shorts. Commercials Long Short Net % of OI 07/23/02 22,369 14,745 7,624 20.5% 07/30/02 22,429 12,811 9,618 27.3% 08/06/02 23,491 14,290 9,201 24.4% 08/13/02 22,837 13,833 9,004 24.6% 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 07/23/02 9,101 12,604 (3,503) (16.1%) 07/30/02 6,778 8,999 (2,221) (14.1%) 08/06/02 7,981 9,258 (1,277) ( 7.4%) 08/13/02 5,050 8,349 (3,299) (24.6%) 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 FUND SCREEN ****************** Best Taxable Bond Funds Now This week, we use Morningstar's basic fund selector and scoring tool to isolate taxable bond funds that meet our desired levels of total return, risk and cost relative to their category peers. As you will see shortly, our selection criterion is designed to weed out funds that may have excessive risk or cost relative to their relative category. Our criteria also specifies a desired average credit quality and duration level to minimize bond risk. Typically, we limit our screens to funds that are independently rated as the equivalent of 4 stars (above average) or 5 (high). That controls the universe of potential candidates to top-rated funds on a risk-adjusted return basis compared to similar funds. Within that group, we normally look for the funds with the best overall package, considering return, risk and cost of each fund, and other factors, such as management team and investment style. We'll show you the process we go through to screen and evaluate the taxable bond fund group. First, we'll narrow the bond fund universe to 25 candidates using Morningstar's basic fund screen tool. Second, we manipulate the results data further using the Morningstar score tool. Based on the two views, we'll tell you which funds we like for their historical performance, and their future total return potential. Screening and Evaluation Process We have purposely skewed the screen this week to quickly narrow the field of taxable bond funds to potential best bets. We use the following screen criteria to find funds in this broad class: Fund Group = Taxable Bond Manager Tenure > or = Category Average Minimum Initial Purchase < or = $3,000 Expense Ratio < = Category Average Star Rating = 4 Stars or 5 Stars Morningstar Risk > or = Average Average YTD Return > or = Universe Category 1-Year Return > or = Category Average 3-Year Return > or = Category Average Average Credit Quality = A or Higher Average Duration < or = 5 years This screen quickly isolated funds because it is stringent with regard to manager tenure, expense ratio, star rating, risk, and relative performance. To make our fund results, a taxable bond fund had to outperform its category peers on multiple standards, not just one measure. Our stringent criterion quickly identified 25 top bond funds for further consideration. Twenty-four of them have no load charges, with the one exception being FPA New Income (FPNIX), which has a 3.50% front-end load. Morningstar's basic fund selector give you four views of results: a snapshot view, a performance view, a portfolio view, and a nuts and bolts view. In the snapshot view, we observe that 20 results are categorized by Morningstar as intermediate-term government or general bond funds, with the other five categorized as short-term government or general bond funds. Ten of the funds have a 5-star Morningstar overall rating for risk-adjusted returns within their respective category peer group, as follows: Morningstar 5-Star Rated Funds: American Century Ginnie Mae (BGNMX) Intermediate Government CMC Short Term Bond (COTBX) Short-Term Bond Dodge & Cox Income (DODIX) Intermediate-Term Bond Fidelity Advisor Mortgage (FMSFX) Intermediate Government Harbor Bond (HABDX) Intermediate-Term Bond Scudder Fixed Income (MFISX) Intermediate-Term Bond Strong Government Securities (STVSX) Intermediate Government TIAA-CREF Bond Plus (TIPBX) Intermediate-Term Bond Vanguard GNMA (VFIIX) Intermediate Government Vanguard Short-Term Federal (VSGBX) Short Government It came as no surprise to see that many top-rated funds have low expense ratios compared to the average taxable bond fund (1.11%). Seven of the above 5-star funds have expense ratios below 0.60% currently, contributing positively to relative fund performance. In the performance view, we saw that American Century Ginnie Mae (BGNMX) and Fidelity Advisor Mortgage (FMSFX) have "low" risk in comparison to other intermediate-term government bond funds, per Morningstar. Vanguard GNMA (VFIIX) is scored as "below average" risk relative to intermediate government category peers. All of the other Morningstar 5-star rated fund results had an "average" risk level compared to their respective categories. We observed trailing 1-year, 3-year and 5-year average annual returns, which in most cases outperformed the average taxable bond fund by wide margins. The portfolio view showed that all ten 5-star funds had average credit qualities of "AA" or better (high-grade, what we wanted) and had short-to-intermediate average durations of near 2 years to about 4.7 years. If you are concerned that rates might rise in the next year, then you may prefer to have a shorter average duration, since short-term funds are less sensitive to interest rate movements than funds with intermediate/long-term durations. We note that Vanguard GNMA (VFIIX) has the lowest turnover (8%) of the 5-star fund results. Two funds, Harbor Bond (HABDX) and Strong Government Securities (STVSX), have turnover ratios that are in excess of 500% yet their annual expense ratios are below that of the average fund in its category. The "nuts and bolts" view indicates the range of expense ratios. At the low end is Vanguard GNMA (VFIIX) and CMC Short Term Bond (COTBX), both at 0.25%. The highest expense ratio among out list of Morningstar 5-star rated funds is Strong Government Securities (0.90%). Rather than score these results, we opted to see which of them were also top-rated by other independent funds trackers. Data from Lipper Analytical Services indicates that eight of the 10 potential candidates hold Lipper's top preservation score of 1, while four sport Lipper's highest consistent return score of 1. Three funds were "Lipper Leaders" for both measures as follows: Lipper Leaders for Return and Preservation: TIAA-CREF Bond Plus (TIPBX) Vanguard GNMA (VFIIX) Vanguard Short-Term Federal (VSGBX) Strong Government Securities (STVSX) is a Lipper Leader (a "1") for consistent strong returns and carries an above average "2" preservation score. Accordingly, if you seek a bond fund that has excelled at producing strong and consistent returns versus similar funds, these four Lipper Leaders for returns provide a terrific starting place in your search process. Our Favorite Funds At this point, we opt to stop here and provide profiles of the three Morningstar 5-star rated funds that are also Lipper top- rated ("Lipper Leaders") for both consistent strong return and preservation. You may find that another fund better suits you based on your individual situation and preferences. These are three of the best taxable bond funds today for income-oriented investors. The $2.2 billion Vanguard Short-Term Federal Fund (VSGBX) seeks current income consistent with the maintenance of principal and liquidity. It invests primarily in short-term U.S. government- agency securities (high-grade paper) and keeps the fund average weighted maturity between one and three years. The fund's very low expense ratio of 0.31% means portfolio manager John Hollyer doesn't have to take excessive risk with assets to overcome its cost burden. The Vanguard cost advantage is evident in this fund's relative return performance. According to Morningstar, the fund's 7.6% return over the past 12 months ranks in the 15th percentile of the short government category. Trailing 3-year, 5-year and 10- year annualized returns rank in the category's top decile, per Morningstar. Vanguard Short-Term Federal Fund's 6.3% average return for the 10-year period through July 31, 2002, was just 1.0% shy of the Lehman Brothers Aggregate Bond Index (measuring the total U.S. bond market). The fund's consistently "high" returns combined with its "average" risk profile relative to its category peers earns its Morningstar's highest 5-star rating over all periods tracked. Income investors in search of a short-term bond fund with low cost and a fine track record have an excellent choice here. The $18.7 billion Vanguard GNMA Fund (VFIIX) seeks high income consistent with maintenance of principal and liquidity. It'll usually invest 80% or more of assets in intermediate-term GNMA securities, and may invest the balance of assets in other U.S. government debt securities. The fund's ultra low expense ratio (0.25%) means manager Paul Kaplan does not have to incur undue portfolio risk to overcome the fund's cost hurdle. In the last three years, the fund's risk level has been average relative to its intermediate government bond fund peers, higher than its historical "below average" risk rating by Morningstar. Overall, Morningstar rates the fund's risk as below average vs. category peers. Over the past year through August 19, 2002, Vanguard GNMA Fund produced a total return of 8.3%, ranking in the category's top quintile. Like its short government sibling, Vanguard GNMA is top decile ranked over the trailing 3-year, 5-year and 10-year periods per Morningstar. The fund's average 10-year return of 7.2% as of July 31, 2002 matched the return of Lehman Brothers Aggregate Bond Index. Vanguard GNMA Fund may not be flashy but it gets the job done. Investors seeking an intermediate-term government fund with no load charges, low expenses and a below average risk level have another suitable investment option here. The $327 million TIAA-CREF Bond Plus Fund (TIPBX) seeks income consistent with preservation of capital by typically investing more than 80% of assets in bonds, principally investment-grade. To enhance the fund's total return potential, it may invest no more than 25% of assets in high-yielding instruments (of which 15% of assets may be illiquid securities). Compared to other intermediate-term bond funds (ones that invest both in government and corporate bonds), TIAA-CREF Bond Plus has produced "average" risk and "high" return. However, Morningstar ratings reflect only three years of performance since the fund's 5th anniversary is not until September 1, 2002. We expect it'll still be rated 5 stars overall in a few weeks, considering TIAA- CREF's low-cost leader stature, similar to Vanguard's. For the trailing 3-year period through August 19, 2002, the fund returned an average of 8.9% a year, ranking in the top decile of the intermediate-term bond fund category, per Morningstar. That average compares to 9.0% for the Vanguard GNMA Fund and 8.2% for the Vanguard Short-Term Federal Fund. Accordingly, all three of the funds profiled this week have produced returns over the past three years that are in between the historical norm for equities (10%) and the historical norm for bonds (6%) - roughly speaking. Summary While low expenses do not guarantee a bond fund's success, they give the fund a cost advantage that often results in top return performance. Low expenses also permit the fund manager to keep fund risk at bay. Funds with higher operating expenses need to produce more gross return in order to match or beat their index benchmark and category peers. Therefore, higher expense ratios can lead to fund managers incurring more risk to overcome their expense burdens. For more information of the two Vanguard funds, their home page is located at www.vanguard.com. TIAA-CREF fund information may be found at www.tiaa-cref.com. Steve Wagner Editor, Mutual Investor Steve@mutualinvestor.com *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 8/20 by Leigh Stevens [NOTE: I'll be out of the office Wed. My next update will be Thurs.] UP on Tuesday - DOWN on Tuesday - SECTOR NEWS - Telecom stocks (XTC) were higher as Qwest Communications (Q), the Western telecom under financial pressure rallying some 32% after the sale of one of its yellow pages business unit - $7 billion dollars was the sale price! Wow, 7 billion, with a "b" - hard to believe that a monster book that makes such a good doorstop is worth that kind of money! AT&T also rallied after an analyst upgrade. But SBC, BellSouth and Verizon were down following an analyst downgrade - oh those analysts in green eyeshades crunching their numbers - the gnomes of Wall Street. Semiconductor stocks (SOX) were off nearly 5% after a steep decline in Micron Technology (MU) following a downgrade - a "weaker" second half outlook for PX sales was blamed. Earnings, earnings, earnings - nothing else to say. Some networking stocks fell early, but the Networking Index (NWX) closed slightly higher after Nasdaq bellwether Cisco Systems (CSCO) announced the acquisition of storage switching product maker Andiamo in a deal worth $2.5 billion - more competition for networkers like Sonus (SONS), RSTN and TLAB, all down by 4% or more today. CSCO ended up slightly but is having trouble surmounting its prior $15 high and looks like it could be forming a double top. Retail stocks were active, but mixed as the Retail Index (RLX) closed down slightly (-.6%) - Home Depot (HD) ran up $% after reporting Q2 profits of a 50 cents a share, beating consensus estimates by 3 cents. Lowe's (LOW) ran up nearly two & a half percent, adding to its Monday gain on better than expected profits. Guess those booming home sales are having a strong effect! Staples (SPLS) fell nearly 7% after registering a Q2 profit that was above Q2 of a year ago and above Street expectations but they lower guidance for the coming quarter and the rest of the year. B.J's Wholesale Club (BJ) fell some 2% after reporting its Q2 profit - in line with estimates I saw, but some investors sold anyway, perhaps anticipating they would do better than consensus. SECTOR TRADE RECOMMENDATIONS - NEW/OPEN TRADE RECOMMENDATIONS - Bought SMH at 27.90 on a 27.90 buy stop (Semiconductor HOLDR) RAISE Sell stop to 26.90 ** SEE SECTOR HIGHLIGHT BELOW ** TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHT - Semiconductor Sector Index ($SOX.X) STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX I thought that the SOX and the HOLDR's would clear the upper end of the their downtrend channels and make to the next resistance level at their prior highs. And, of course, just after my recommendation to get back into SMH. If the Chip stocks turn further south (lower) tomorrow, I suggest exiting the SMH holding stock, especially if SOX cannot stay above its September low at 344. If this happens, the SOX Index could be headed back down to at least the middle of the well-defined downtrend channel that has defined the bear trend for some months. Downside potential then would be to the 315-320 area, perhaps back to 300 if active selling comes into the sector again. Leigh Stevens Chief Market Strategist lstevens@OptionInvestor.com ************************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 ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Orderly Selling Into every market a little profit taking must fall. All the indexes pulled back on steady selling but many stocks formed a bottom early and tried to rally into the close. It was predominately the ones with the higher relative strength. The big Dow gainers like IBM, MSFT and MO held their ground and did not show the profit taking you would have expected. The bulls are fighting to hold their gains and the light selling today was actually a pretty good showing. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp 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. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Tuesday 08-20-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: NOC, JNJ Dropped Puts: None Daily Results Call Play Updates: IBM, ATK, ADBE, EDS, TEVA New Calls Plays: PII Put Play Updates: BAX, ESRX, GS New Put Plays: POT, MXIM **************** 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: ***** NOC $114.80 -2.45 (-2.35 for the week) NOC - Northrop Grumman has had a wild week, trading as low as 109.60, and as high as $119.12. The stock first saw resistance at the 50-dma, currently $115.45. This level then served as support after the stock broke through to the upside. The stock has now broken below support at that level, and the extreme volatility does not lend itself to a definable trend. We are therefore dropping this play. JNJ $54.90 -1.00 (-0.42 for the week) Johnson and Johnson has established a pattern of higher highs and higher lows. Today's pullback, however, broke back below recent support at $55. While the stock may eventually trade higher once again, it appears to have turned downward from its latest consolidation and may have a fight in front of it to get back above the recent high of $56.49. In addition to this breakdown, we see risk of a continued pullback in the Dow, and feel this would take JNJ with it. We are closing this play, and will put our eggs in another basket. PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon ADBE 20.16 0.79 -0.72 Support at $20 ATK 67.00 0.98 -1.35 Still in rising channel EDS 39.79 1.80 -0.96 Inside day after steady rise IBM 81.27 3.14 -1.22 Consolidation after $10 gain JNJ 54.90 0.38 -1.00 Drop, break in recent support NOC 114.80 -0.35 -2.45 Drop, Volatility breaks trend PII 72.80 1.00 0.85 New, Recreational play TEVA 68.17 0.89 -0.61 Still in range PUTS BAX 34.87 1.19 -0.27 Still in descending channel BCC 27.26 1.05 -0.28 Relative weakness ESRX 44.86 2.02 0.10 Stalled and rolled back GS 80.51 0.97 -0.99 Failed at 200-dma POT 60.03 1.06 -1.95 New, overextended and done MXIM 35.99 0.90 -1.91 New, rolled over from trendline ************************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 ******************** IBM $81.27 –1.22 (+1.92 for the week) has achieved our initial target of $82, trading as high as $82.85 on Monday before giving a little back on Tuesday. After a $10 gain in four days, this consolidation is not unexpected. Big Blue broke out of an $8 wide rectangle and the minimum measuring objective of $8 gave a target of $82. This objective was reached faster than we could have predicted and we recommended on Monday's Market Monitor that conservative traders take at least partial profits at that level. We are maintaining our long position with a new target of $85, which is the PnF bullish vertical count. Today's pullback, with the broader markets, has set up as an inside day, which is a consolidation pattern. The hold above $80 looks as though the stock has established a new level of support, from which to extend its rally. We have raised our stop loss to $79, just below Monday's low, in order to lock in profits if this new support does not hold. Look for a trade back over $82, today's high, to initiate new positions with a target of $85. --- ATK $67.00 -1.35 (-0.37 for the week) ATK gave back some of its recent gains today, however a look at the tightly defined rising channel begun at the end of July shows the stock simply rolling back to the bottom of this channel. The stock experienced consolidation last week, which also put it at the bottom of the channel. The stock received a boost at that time, as it has on each of the 9 occasions it has touched this lower trendline. Talk of an Iraqi invasion continues to flow from the White House, and this should keep investors interested in defense stocks. If there is an invasion, or even a buildup in anticipation of one, ATK should see a revenue boost from demand for its ammunition and parts for rocket propulsion systems. Earlier this week, the U.S. army awarded a $27 million contract to ATK to assist the government of Egypt in production of 120 mm tank training ammunition. While the dollar amount is not significant, the new relationship with Egypt demonstrates the U.S. government's commitment to ATK. Te trade down to $67 did not disrupt the PnF buy signal established on Aug 16, and the bullish vertical count remains $80. While this is an eventual count, it leaves plenty of room to the upside. ADBE $20.16 -0.72 (+0.02) Following its solid breakout over the $18.50 resistance level last week, ADBE was due for a bit of profit taking, and the pullback in the broader markets on Tuesday seemed as good a time as any. The 20-dma at $20.30 pressure the Software stock back near the $20 level, although the decline came on notably light volume of just over half the ADV. At its low of the day, ADBE had retraced just about a third of the recent price rise, so at this juncture, it looks like simple profit taking, and is likely setting us up for a fresh entry into the play. The Software index (GSO.X) pulled back a bit as well in Tuesday's session, but is still holding on to the lion's share of its gains of the past week. Look to initiate new positions on a rebound from the $20 level, or perhaps as low as intraday support at $19.50. Alternatively, entries on renewed strength can be considered on a breakout over the $21 level. Recall that our initial target is the $23.50-24.00 level, the top of the August 1st gap. Keep stops set at $19. --- EDS $39.79 -0.96 (+0.87) Once the Day of Reckoning for Corporate America passed last week, investors have been gobbling up shares of some of the large conglomerate companies. That boost helped to propel shares of EDS as high as $41 yesterday, as all the major indices bested their 50-dmas. After such a strong bullish performance, a bit of give-back was due, and EDS did as was expected, pulling back in a bit of consolidation. Inside Day aficionados will notice that EDS gave us just such a setup on Tuesday, with its narrow-range trading today. Traders still looking to enter the play can use either a rebound from the site of Monday's low (near $38.70) or a breakout over Monday's high ($41.05) to initiate new positions. Should EDS fall below Monday's lows, we'll need to look to the $37 level (the site of the 3-week ascending trendline) for support and a possible entry into the play. Our stop remains at $36.50, as a close below that level would indicate the bulls have lost traction. --- TEVA $68.17 -0.61 (-0.22) Can you say rangebound? Our TEVA play has frustratingly gone nowhere over the past week, as it continues to meander between $67.50-$69.25. In light of the weakness in the Biotechnology sector (BTK.X), the stock's resilience is encouraging, although it was a bit disappointing to see TEVA lose ground on Tuesday, with the BTK actually posting a small gain. Over the past 2 weeks, the stock has been posting a series of higher lows, defining an ascending trendline, that currently rests at $68, just below where the stock went out today. On the upside, the $69.25 level is presenting formidable resistance to the bulls. That gives us a couple of easily definable entry points into the play. Dip-buyers can target a rebound off of the $68 level, while momentum traders will want to see a volume-backed rally through the $69.50 level before taking a position. Of course, in the latter case, we'd prefer to see the BTK index advancing strongly as well, ideally moving north of resistance in the $383-387 area. ************** NEW CALL PLAYS ************** PII – Polaris Industries - $72.80 +0.85 (+1.62 for the week) Company Summary: Polaris designs, engineers, manufactures and markets snowmobiles, all-terrain vehicles, personal watercraft, Victory motorcycles, and the Polaris RANGER for recreational and utility use with annual 2001 sales of $1.5 billion. Polaris is the largest snowmobile manufacturer in the world, and one of the largest U.S. manufacturers of ATVs and personal watercraft. Polaris markets a complete line of Pure Polaris(TM) apparel, accessories, and parts available at Polaris dealerships. Consumers can also purchase apparel and accessories around the clock online at www.purepolaris.com. The Polaris Professional Series, a line of heavy duty Workmobiles(TM) targeted at lawn and landscape companies, equipment rental companies and construction operations, marks Polaris' expansion into the commercial equipment marketplace. Polaris Industries Inc. trades on the New York Stock Exchange and Pacific Stock Exchange under the symbol "PII," and the company is included in the S&P SmallCap 600 stock price index. (source: company release) Why We Like It: Polaris demonstrated good relative strength as the market receded today, after recent gains. PII just kept going on its ascending, uninterrupted path. The stock found resistance just over $70 in late July, but has plowed through that level and continues to add green candles as it closes higher than each day's open. This sign of bullishness in a choppy market is very encouraging. The company recently announced a plethora of new products, which include an environmentally friendly personal water-craft, a new all terrain vehicle line built specifically for racing, the new custom cruiser Victory Motorcycle and a new Professional Series utility vehicle. If one thing in a slow economy is now apparent, it is that people still like their toys. This company released record earnings on July 16th, which reflected a 15% increase from the previous quarter. This was the 17th consecutive quarter with increased earnings. Polaris is one company that did not experience the same recession in 2001 as the rest of the market. July's record earnings were also accompanied by record sales of $362.6 million, a 2% increase from the year ago period. Monday's trade of $72 established a new buy signal on the PnF chart, resulting from a double-top breakout. The new bullish vertical count, which the stock is in the process of building, is $87. Each $1 box advance now adds $3 to this count. The stock had been consolidating in a PnF flag pattern prior to the current breakout. Based on the principle that flags fly half-mast, the breakout to the upside is another bullish indication for the stock. The stock could see some resistance at $75, which is a level of PnF resistance and a possible psychological mark. Once it gets above that level, there does not appear to be any significant roadblocks in its way. OI sees the current level as an opportunity to initiate long positions. BUY CALL SEP-70*PII-IN OI= 86 at $4.80 SL=2.50 BUY CALL SEP-75 PII-IO OI= 151 at $2.25 SL=1.20 BUY CALL OCT-70 PII-JN OI= N/A at $6.40 SL=3.20 BUY CALL OCT-75 PII-JO OI= N/A at $3.70 SL=2.00 Average Daily Volume = 244.8 K ************************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 ******************* BAX $34.87 -0.27 (+0.87) After breaking below the important $35 support level last Friday, shares of BAX rebounded sharply Monday morning with the rest of the market. Rising as high as $36 in the early going, BAX provided an attractive entry into the play, as the stock promptly reversed from that level and headed lower into the close. Although the decline was fairly tepid on Tuesday, the stock continued to slide lower on Tuesday, closing once again under the important $35 level. The big question is whether the stock is trying to build a new base or preparing for another leg down. Given the fact that it is still on our Put list, we're clearly leaning towards a fresh breakdown, due in part to its relative underperformance yesterday afternoon. Note that the descending trendline (now at $35.60) continues to keep a lid on any rally attempts, and another failed rally could present new entry opportunities on the rollover. Alternatively, momentum traders will want to wait for the $33.75 support level (just below Monday's intraday low) to be broken before entering new positions. We are lowering our stop to $36.50, which is just above the recent upswing highs. --- ESRX $44.86 +0.10 (+2.17) After digesting the latest round of bad news, shares of the PBMs (Pharmacy Benefit Managers) such as ESRX have been trying to claw their way back into an uptrend. ESRX's intraday chart presents an interesting picture, showing a series of lower highs over the past week. In fact, Tuesday's continuation of the stock's recovery had our play right on the cusp of being dropped tonight. But the negative pressure of the broad market kept the stock under pressure and it closed under the $45 level (the location of our stop), keeping the play alive. The longer-term trend is more telling with respect to ESRX's near-term direction, as the trendline (currently $45.65) connecting the lower highs over the past 3 weeks seems to have come into play near the close, keeping the bulls at bay. So the action play is easy to lay out tonight. Look to fade a failed rally below that trendline with new positions, so long as our $45 stop isn't violated on a closing basis, or else wait to enter the play until after ESRX violates its shorter-term ascending trendline (currently at $44), which also happens to be the site of intraday support. --- GS $80.51 -0.99 (+0.98) Highlighting our skepticism about the recent rally in the Brokerage sector (XBD.X), we decided to put our money where our mouth is, with a bearish play on shares of GS last weekend, following their meteoric rise off their lows of just a few short weeks ago. Needless to say, we were quite pleased to see the stock continue to rise with the broad market yesterday, as it seemed to be setting us up for a better entry point. Monday's advance came to a halt just below $82, as the bulls deferred to the looming 200-dma at $82.43. Profit taking arrived on Tuesday, with GS promptly falling back to the $80 level, but recovering late in the day to close above that important level. That presents a picture of Tuesday's decline being no more than profit taking. Clearly we'll need more weakness than that if our bearish thesis about GS and the broader Brokerage sector is to prove fruitful. Resistance at $82 is now defined by yesterday's highs and another failed rally below that level can be used for initiating new positions. But those with a more cautious stance will want to wait for a close back under the $80 level, preferably Friday's consolidation zone near $79.50 before jumping into new positions. If trading the breakdown, make sure to confirm sector weakness, looking for the XBD to decline back under the $408 level. We're keeping our stop in place at $82.50 tonight. --- BCC $27.26 -0.28 (+0.79 for the week) Boise Cascade has been in consolidation the past couple of days, in a similar pattern to that of the Forest and Paper Product Index (FPP). However, a look at BCC's relative strength, as compared to the rest of the stocks in the group, looks extremely negative. A negative breakout from consolidation for the group, which has been downgraded numerous times, should be led by BCC. A look at the daily chart shows BCC being turned away once again from a descending trendline begun on July 30, as the rest of the market was rebounding. The stock remains on a double bottom PnF breakdown, with a bearish vertical count of $16. This count is an eventual target, not a short term one, but shows the lack of support below for the stock. BCC is already predicting rising expenses for 2003, and there does not appear to be any impetus for a reversal from the downward trend that both this stock and the FPP have been in. We will maintain our short position in BCC, with an initial target in the low 20s. Conservative traders may want to look for a trade below $26.50, the stock's recent low, to initiate new short positions. We will continue to hold our short position in BCC, as long as the descending trendline remains in tact. ************* NEW PUT PLAYS ************* POT – Potash Corporation $60.03 –1.95 (-0.88 this week) Company Summary: Potash Corporation of Saskatchewan Inc. is the world's largest fertilizer enterprise producing the three primary nutrients and is a leading supplier to three distinct market categories: agriculture, as the world's largest fertilizer producer; animal nutrition, with the world's largest capacity in phosphate feed ingredients; and industrial chemicals, as the world's largest producer of industrial nitrogen products and one of only three North American suppliers of industrial phosphates. Why We like It: Potash has experienced a 20% increase since August 5th. The news that farmers may be using more fertilizer next year, as a result of this year's drought, appears to have brought the buyer's out of the woodwork. This stock looks to have been dramatically overbought, and has failed at its 200-dma on 5 separate occasions. Although it has traded above this level intraday, the sellers have piled on to make sure it was turned back by the close of business. It now looks to have rolled over, and is quickly approaching a support break of $60 and the 50-dma of $59.25 directly below. The company came out with disappointing results earlier in the summer. POT reduced earnings guidance by 60% for the second quarter and 30% for the full year. The stock began a plunge into the deep end shortly thereafter, and has attempted to recover. The recovery, however, has run out of steam. The stock had a weak spring, as it had approximately 1 million fewer corn acres planted than the USDA predicted. There had predictions of an increase in their volumes, but those predictions were reduced. The company's reduced DAP production continues to increase its fixed cost per ton on phosphate products. Any increase in second-half nitrogen products is dependent on low season-ending inventories and higher natural gas costs leading to stronger nitrogen pricing. A look at the point and figure chart shows that the stock attempted to get through bearish resistance of $63, with a trade of $63.02 on August 15th. The buyers, however, could not manage enough strength to get through the barrier, and the stock has now experienced a three-box reversal down to $60. The next level of PnF support could be $56, which served as resistance on the way up. Below $56, $50 is the next solid support level. OI will look for a trade below $60 as our trigger to initiate a short position. More conservative traders may want to wait for the stock to break through the 50-dma of $59.25. We will use a stop loss of $63.25, just above its recent high, to signal renewed strength and a negation of the rollover. BUY PUT SEP-60*POT-UL OI= 902 at $2.20 SL=1.10 BUY PUT OCT-60 POT-VL OI= N/A at $3.10 SL=1.75 Average Daily Volume = 188.5 K --- MXIM – Maxim Integrated Products $36.05 -1.85 (-1.14 this week) Company Summary: MXIM designs, develops, manufactures and markets a broad range of linear and mixed-signal integrated circuits, commonly referred to as analog circuits. The company also provides a range of high-frequency design processes and capabilities that can be used in custom design. MXIM's objective is to develop and market both proprietary and industry-standard analog integrated circuits that meet the increasingly stringent quality standards demanded by customers. Why We Like It: Quick! With the broad markets all advancing through their 50-dmas yesterday, can you name the popular momentum sector that failed to scale its own 50-dma? If you guessed the Semiconductors (SOX.X), you win the prize. Not only did the SOX fail to advance through that level on Monday, but it appeared to find resistance at its 50-dma (currently $361.64) on Tuesday. Dialing up a few daily charts brought MXIM to our attention. Yesterday's continued strength in the SOX propelled shares of MXIM right to the descending trendline ($38) that has been giving the bulls heartburn since April. Turning to the PnF chart, we can see that the stock is on a Buy signal after trading through the $34 level. But it is also bucking up against the bearish resistance line at $39, which has been the site of significant historical resistance. The first test of bearish resistance is usually painful for the bulls, and today's nearly 5% decline certainly bears (pun intended) that out. We're still waiting for the oscillators to turn in favor of the bears, but in the meantime, fading the rallies (so long as they continue to fail below resistance) looks like a good risk-reward proposition. Look to initiate new positions on a rollover either from the $37 intraday resistance or up near $38.50, the site of Monday's high. We can manage risk quite effectively with our stop set at $39. Momentum traders may want to try entries on a breakdown under $35.25 (just below Tuesday's intraday low), but only if the SOX falls under its significant $343 support level. BUY PUT SEP-40 XIQ-UH OI= 655 at $5.00 SL=3.00 BUY PUT SEP-35*XIQ-UG OI=1852 at $2.25 SL=1.00 BUY PUT SEP-30 XIQ-UF OI=2525 at $0.85 SL=0.50 Average Daily Volume = 8.61 mln ************************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 Tuesday 08-20-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Call - PII Traders Corner: Failure to Fortune ********************** PLAY OF THE DAY - CALL ********************** PII – Polaris Industries - $72.80 +0.85 (+1.62 for the week) Company Summary: Polaris designs, engineers, manufactures and markets snowmobiles, all- terrain vehicles, personal watercraft, Victory motorcycles, and the Polaris RANGER for recreational and utility use with annual 2001 sales of $1.5 billion. Polaris is the largest snowmobile manufacturer in the world, and one of the largest U.S. manufacturers of ATVs and personal watercraft. Polaris markets a complete line of Pure Polaris(TM) apparel, accessories, and parts available at Polaris dealerships. Consumers can also purchase apparel and accessories around the clock online at www.purepolaris.com. The Polaris Professional Series, a line of heavy duty Workmobiles(TM) targeted at lawn and landscape companies, equipment rental companies and construction operations, marks Polaris' expansion into the commercial equipment marketplace. Polaris Industries Inc. trades on the New York Stock Exchange and Pacific Stock Exchange under the symbol "PII," and the company is included in the S&P SmallCap 600 stock price index. (source: company release) Why We Like It: Polaris demonstrated good relative strength as the market receded today, after recent gains. PII just kept going on its ascending, uninterrupted path. The stock found resistance just over $70 in late July, but has plowed through that level and continues to add green candles as it closes higher than each day's open. This sign of bullishness in a choppy market is very encouraging. The company recently announced a plethora of new products, which include an environmentally friendly personal water-craft, a new all terrain vehicle line built specifically for racing, the new custom cruiser Victory Motorcycle and a new Professional Series utility vehicle. If one thing in a slow economy is now apparent, it is that people still like their toys. This company released record earnings on July 16th, which reflected a 15% increase from the previous quarter. This was the 17th consecutive quarter with increased earnings. Polaris is one company that did not experience the same recession in 2001 as the rest of the market. July's record earnings were also accompanied by record sales of $362.6 million, a 2% increase from the year ago period. Monday's trade of $72 established a new buy signal on the PnF chart, resulting from a double-top breakout. The new bullish vertical count, which the stock is in the process of building, is $87. Each $1 box advance now adds $3 to this count. The stock had been consolidating in a PnF flag pattern prior to the current breakout. Based on the principle that flags fly half-mast, the breakout to the upside is another bullish indication for the stock. The stock could see some resistance at $75, which is a level of PnF resistance and a possible psychological mark. Once it gets above that level, there does not appear to be any significant roadblocks in its way. OI sees the current level as an opportunity to initiate long positions. BUY CALL SEP-70*PII-IN OI= 86 at $4.80 SL=2.50 BUY CALL SEP-75 PII-IO OI= 151 at $2.25 SL=1.20 BUY CALL OCT-70 PII-JN OI= N/A at $6.40 SL=3.20 BUY CALL OCT-75 PII-JO OI= N/A at $3.70 SL=2.00 Average Daily Volume = 244.8 K ************************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 ************** Failure to Fortune By John Seckinger JSeckinger@OptionInvestor.com Every time I look at a chart, this question comes to mind: Is there a bullish or bearish chart pattern institutional traders want me to see? If I answer “yes”, most likely I will be thinking about putting on the exact opposite strategy. Yes, this article is somewhat cynical in nature; however, it is my opinion that institutional traders force a retail investor to see one thing (example, “screaming buy”), only to use the extra liquidity to do something completely different (sell) and have these retail traders holding the bag. Is there one thing a trader can do to “control possible damage” if caught on the other side of a failed technical pattern? Yes, use stop-loss orders. In fact, the correct strategy is to actually sell the initial long and take a new short position – since smart money is selling and it makes sense to follow the momentum. Remember: Do not force trying to see these patterns; it will simply be a losing proposition. Also, you have to condition yourself to become comfortable “flipping” out and in to another trade extremely fast. Selling the long for a small loss is good, but to make money it really does make sense to ride the trend lower. Most traders, including myself at times, gets “gun shy” and wants to take a breath instead of entering another trade. Do not make that mistake. Believe me, there is no coincidence when a chart pattern is “barely broken.” Market makers love to use a small amount of capital to get out a new low/high, trigger stops, and then take the opposite position as stops are finished being filled. Example: ABC trading 99 with intra-day high at 99.50. A market maker then starts buying up to 100.50 and all-of-a-sudden shares go vertical as stops are triggered and retail investors jump in, afraid to miss the move. Shortly thereafter, the market maker and institutional traders realize all stops are out, demand is relatively weak, and pushes shares back down until these same retail traders bail out, afraid that they bought the high. Of course, this market maker would also know that an extremely bullish chart pattern would be seen in shares of ABC as soon as shares trade 100.5. After seeing this occur at the CBOT many times, I have begun to approach charting with a different slant at times. Ok, time for some illustrations. Chart of American Express Inc, Daily How hard would it be to sell shares of American Express at 44.87? Actually, it wouldn’t make any sense to sell at 44.87; however, shares should not falter one cent since any weakness should be a “red flag” for traders holding a long position. Shares have just completed an outside day higher, set a new high, formed a catapult formation, given a possible “runaway gap” pattern; all signs that point to one thing – higher share prices. So, in all actuality, being long is fine here. But, if the chart pattern fails, it will most likely fail big. Therefore, as noted above, tight stop with the intention of going short as well. Of course, we know that shares peaked on that day and almost went straight to 26.92. Chart of International Business Machines, Daily Shares of IBM formed the “b” long liquidation pattern after setting a key relative low near 66. Interestingly enough, shares formed a relative high, pulled back, and then traded to 75 and gave a false buy signal. Since there was no apex (pivot) yet, most likely all it did was give shorts more ammunition in case the key relative low was ever broken. Then, when shares did in fact gap lower to 65, shorts most likely expected an accelerated move lower and tried to go for the jugular. With shares rallying back to the apex before consolidating and then heading lower, shorts might have been wondering if 65 would be tested again. Once shares of IBM rallied back above the old key relative low, the pattern is then considered failed and thoughts of selling should turn to those of buying opportunities. The weakness near the apex should not waiver thoughts of buying. Also noteworthy is the RSI Bullish Divergence – defined as prices making a new low while the indicator does not. Moreover, the explosiveness just reinforces both short and long traders getting “caught” in a failed technical pattern and realizing going long most likely is the proper action. Chart of Intel Corporation, Daily Shares of INTC is highlighted because of volatility seen in just six trading session, with the third of six giving a false sell signal and most likely trapping bears in the process. Similar to IBM, shares of INTC rose above the first relative high, formed an apex, showed a Bullish Divergence within the RSI Indicator, traded underneath the key relative low, and then rallied strongly as shorts covered and longs took on new positions. Here is a twist. What if INTC is simply forming a bear flag formation and is actually not a failed technical pattern? Well, as any trader can testify, stick with what works and what allows for a solid risk/reward scenario. With INTC, the term “false sell signal” would be given during the following day’s open, since shares were higher than the key relative low set a number of weeks back. Remember, once this key relative low is penetrated, shares should not then go back into the previously defined range. Once back into the range, a long position would have risk back to 16. The reward would be for a move back to where the selling started – roughly current prices at 18.75. If a trader stayed long at current levels, a stop would have to be placed at the apex of 17.50 with an objective of 20 in the near term. Stops would also have to be tightened as shares approached 20. If shares of INTC fall from current levels, aggressive traders could sell shares with a stop near 19. Objective is only 17 in near term, since there is a pattern of higher relative lows. Nevertheless, the point of this chart was to illustrate how “extreme bearishness” can, one day later, be viewed as a buying opportunity. A similar analogy would be shares of ABC spending months trading between 20 and 30, only to close one day at 31 and spark interest from NY to LA. Well, what should a trader do? Buying is fine, as long a stop is put in at 29.25 to exit long positions and actually go short. In fact, if 29.25 is hit, there are good odds 20 comes into view much faster than normal. Once again, traders would blame the “randomness of the market” and the “difficulty of making money when competing against institutions.” Key point: Try to forget all fundamental analysis before and during the trade. In my opinion, all fundamental research should be done prior to trading. ************************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 ************************************************************** ********** 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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