The Option Investor Newsletter Tuesday 08-27-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Point by Point Index Trader Wrap: ECONOMIC MANIA Market Sentiment: And So It Begins Weekly Fund Screen: The New York Times' Fund Finder Index Trader Game Plans: THE SECTOR BEAT - 8/27 Updated on the site tonight: Swing Trader Game Plan: Fighting For Every Point Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 08-27-2002 High Low Volume Advance/Decline DJIA 8824.41 - 94.60 9017.02 8782.03 1,48 bln 1276/1909 NASDAQ 1347.78 - 44.00 1396.40 1346.21 1,45 bln 1096/2303 S&P 100 471.15 - 6.44 482.13 468.56 Totals 2372/4212 S&P 500 934.82 - 13.13 955.82 930.36 RUS 2000 397.45 - 10.28 408.88 397.45 DJ TRANS 2383.36 - 41.20 2446.83 2378.11 VIX 32.73 + 0.44 33.35 31.58 VXN 50.01 + 1.59 51.50 50.65 Total Vol 3,127M Total UpVol 840M Total DnVol 2,258M 52wk Highs 91 52wk Lows 133 TRIN 1.57 PUT/CALL .84 ************************************************************ Point by Point The bipolar markets reacted to economic news with triple digit swings in both directions. The August slide was postponed until afternoon despite several strong selling attempts. The bulls are fighting for every point and every support level becomes a new battleground. Despite the Intel bombshell the markets reacted well and with no major economic reports on Wednesday it will be interesting to see which way the tide will turn. Dow Chart Nasdaq Chart The morning began with Intel CEO Craig Barrett, speaking at a tech conference in Malaysia, saying that Intel only sees modest growth in the third quarter. Barrett said not to count on the typical fourth quarter rebound because companies were still not spending money on computer equipment. The 4Q is typically the best quarter for tech sales. He went even farther to describe the slowdown in the US economy, the European continent and Asia. He seemed to be building a case for a future announcement. Intel will host its mid quarter update conference call next Thursday. This could have been a preliminary warning that they are going to lower guidance at that meeting. MSFT and IBM closed down on the news but the HPQ earnings tonight were also a negative factor. HPQ announced earnings in line with estimates after the close but the CFO said in the conference call that the slowdown in the last quarter was worse than expected. He said everyone in his industry were now seeing "new" signs of weakness. He also said they were seeing some risks around the world other than just in the US. They missed the revenue numbers slightly and they affirmed estimates for the current quarter. This ought to be good for at least one earnings warning going forward. If you are seeing new weakness AND global risks, then affirming estimates based on the expected year end rebound might seem to some like a contradiction of terms. I think it was more politically correct to affirm now in your first high profile combined earnings report and then guide down later. You warn now and your $14 stock becomes $10. Warn later after a post 9/11 rally and maybe your $18 stock becomes only $14 again. Who knows, maybe the recovery will suddenly appear and you will not have to warn as much. HPQ profit margins come in at -4.6% meaning they sold their products for 4.6% less than the cost. No problem, they will make it up in volume! The good news today came from the Durable Goods report. The headline number came in at +8.7% growth for August. This was the largest number since October 2001. Analysts had only expected +1.5% and suddenly all the bad news for the last three weeks was forgotten. Forgotten also was the volatility of this number. Last September the number dropped to over -6%, followed by +9% in October and followed by a -6% again in November. Average those numbers together and you get a modest +1% gain for three months. Average today's +8.7 over the last three months and you get a very tame +1.4% growth. Last month was revised down to a -4.5% drop. What this shows is the volatility of the numbers and that they cannot be relied upon as a single month indicator. Many analysts thought last months loss would be recovered this month and it appears the pendulum swung too far again. Next month I would expect another negative number to bring everything back to the +1% growth again. For instance it showed that computers had increased +14% from last months -10% drop. Obviously the computer manufacturers and chip makers have not seen this renewed buying so the number to me is very doubtful. The negative economic news came from Consumer Confidence which fell to a nine month low at 93.5. When you consider the stock market was in rally mode most of August you cannot blame the falling confidence on stocks. The present situations and future expectations components both fell for the third month in a row. More consumers said they were planning on buying a house or major appliance but fewer said they were going to buy a car. Compared to the headline numbers only 22% of consumers felt businesses would be better off six months from now. This is a very bearish scenario. The market sold off on the news and ignored the Durable Goods until a couple buy programs bounced it off support around 11:00. Retail stores took another hit after posting another week of less than expected sales. Targets were lowered for this and the fourth quarter based on fewer shopping days, no tax rebate and the 9/11 anniversary, which is expected to keep consumers at home watching TV. The back to school buying wave has not appeared and the consumer has cut back on apparel spending. The consumer appears to be conserving cash and putting off purchases not necessary. Merrill Lynch cut its forecasts on 17 retailers including TGT, WSM, JWN, BJ, TLB, LTD and ANN. Some analysts think the extremely low interest rates are causing consumers to buy houses and cars and saving for those down payments are causing a shrinkage of discretionary spending. Restaurants are also showing a decline in attendance. I can attest to this. I took my daughter to an expensive Chinese restaurant last night and we were one of only TWO tables of customers in the entire building during the entire meal. Yes, there was a football game on but when I questioned the management they said business had been dropping for two months. On another side note, one of my sons works for a nursery service that deals in landscaping in Denver. Last year the owner told me he kept two crews busy full time, 12 hrs a day, seven days a week. He could bid anything he wanted and had to turn down business even at rape and pillage prices. This year he can't keep two people busy and has no jobs at all this week. Why? He said home owners have no money. He still bids the jobs but when they see how much it costs the common refrain is "I will have to wait for the market to go back up." Definitely a sign of the times when people cannot afford to have their bushes and trees trimmed because of the market crash. Another Fed member, William Poole, the St Louis Fed President, said that although continued economic weakness would keep the rates low he felt the next move would be a hike in rates. He said the markets would keep the rates low without additional cutting by the Fed. He saw the economy recovering slowly and in a manner that would not cause Greenspan to waste his remaining bullets. The Fed funds futures dropped to only a 14% chance that there would be a cut by October. This was down from 30% last week. This should not be positive for the markets even though it means the economy is long term positive. The congressional budget office lowered their estimates for the GDP to only +2.2% for this year and to only +3.0% next year. Citigroup announced today that their investment banking arm, Salomon Smith Barney, did give large allotments of hard to get IPO shares to Worldcom officers. Jack Grubman was copied on the emails that outlined how many shares each got. This brought up further accusations that he had something to do with the allocations and that they were used as bribes for lucrative contracts. Still C only dropped -.20 for the day. Corporate earnings estimates are dropping like a rock with the average for the 3Q now only +11.4%, down from 16.6% just last month. Fourth quarter earnings are now estimated at +22.8% and down from 27.6% last month. It is finally sinking in that the economy is not recovering at the rate analysts had expected and the continued earnings decline will eventually result in further stock declines. These earnings reductions result in negative pressure on prices. If a stock trades at a PE of 50 that means the stock price equals 50 x earnings. If earnings are reduced by -5% a quarter then the stock price goes to 50 x reduced earnings or the PE escalates to a new level like 55 or 60. Granted these are estimates of future growth but many stocks are valued on 50 X 2003 earnings or even 2004 earnings today. Cut earnings -5% every quarter and suddenly 2003 earnings are much lower and along with it the stock price. Wednesday is a pivotal day. Don't you just love it when a writer says that? Not another pivotal day! Can't we just go back to normal? I would love to but normal is so long ago and so boring most traders today would give up in disgust. There are no major economic reports on Wednesday. We will be free to trade on stock news and the HPQ earnings report. Remember the one with "seeing new signs of weakness ahead"? The markets closed right on critical numbers. 8000 for the Dow, 930 for the S&P and 1350 for the Nasdaq. These are "make" or "break" numbers and I am betting on break! Should the Dow fail to hold 8750 the next real support is 8400. Could we hit that tomorrow? I doubt it but this is the dog days of August. There has been a bullish bid under the market and unless this bid is pulled we are probably doomed to another day of program trading pong which ends up on the downside. Breaking critical levels like 8750 could accelerate those programs to the sell side. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** ECONOMIC MANIA By Leigh Stevens TRADING ACTIVITY AND OUTLOOK - First we get a record New-Home sales report yesterday - the HIGHEST monthly level on record and the market rallies but sells off some later. Then a huge jump in Durable Goods is reported this morning, a pre-opening slump turns on a dime and the market rallies. Then in a 1-2-3 and you're OUT move, the market dives on the release of the lowest consumer confidence reading in 9 months. Since we know its not BUSINESS spending that is propping up the economy and without the freely spending consumer we would be back in recession, selling developed immediately. It is probably also the case that the indices were struggling with an overbought condition and needed some "excuse" to go down - and, down it went. It was also true that the S&P 500 held at pivotal technical support at 930 and the decline was not a rout. Weakness in the Semiconductor sector also was an influence, especially in the tech heavy Nasdaq, after cautious remarks from Intel's CEO about the company's prospects ahead. Retail stocks took a hit also, after downgrades from Merrill Lynch. The research gnomes of Wall Street have been busy! Some buying in gold, oil and defense was seen however. Not for the reason that gladden investor's hearts however, as the prospects for war with Iraq seemed to be back on the front burner this week. P Overall volume was on the light side - 1.2 and 1.5 billion shares in NYSE and Nasdaq, respectively. No doubt this is causing the market to move more than would otherwise be the case. I noted with interest UBS's Index of Investor Optimism survey - investors' expectations for short-term gains fell to an all-time low of 7.4%, from 9.6 in the previous month. Hard to believe that these numbers were gathered AFTER this recent rally - maybe they weren’t. And, when asked what could improve conditions in the market, 2/3rds said: - improvement in economic conditions; an equal number also said - aggressive enforcement of laws against corporate fraud 63% said a significant improvement in earnings would. Only 37% said a further Fed rate cut would help. I always thought that economic conditions and earnings ruled, but today fraud is in investors minds equally as much. Well, it's all in the mind that's for sure. Perceptions rule! And, this fact makes it understandable that "confidence", a state of mind among consumers, would create a strong effect in the market. S&P 100 Index (OEX) - Daily/Hourly charts: The essential aspect to the index is that the S&P 100 continues to lose upside momentum on balance. When we get into the September period, a further cautionary attitude will probably continue to prevail and the market continue to drift lower. Near resistance is at the prior highs at 481-482, then 487. Pivotal near support is the 468 prior low, which is also the level of the "neckline" of a possible Head & Shoulder's (H&S) top. A break of the neckline suggests a possible fall to the 450- 455 area. The technical picture is suggesting a bearish trading strategy, and to sell rallies, with a stop or exit point above 482. S&P 500 Index (SPX) - Hourly chart: Resistance is at the recent hourly high at 956, then at 965. Unless SPX climbs back above 956, a bearish trading strategy is suggested by the declining momentum and selling rallies is my strategy of choice. The index has now fallen out of its hourly uptrend channel. 930 continues to be the "line" of support I'm keying off from - a break of this level activates the Head & Shoulder's (H&S) top pattern - a decisive downside penetration of 930 suggests potential for a decline to the 900-895 area, which fulfills a "minimum" downside objective for the H&S top. 920-915 is a support area between 930 and 900. DJ Industrial Index (1/100 of INDU) - $DJX - Daily/Hourly charts: DJX's lower trendline which yesterday acted as support, has now been pierced, visually demonstrating that the Dow is losing upside momentum and the trend has shifted to sideways at best. 89.9-90.2, at prior hourly highs is near resistance; 90.8-91.5 is the next and "pivotal" resistance in terms of suggesting DJX was back in an uptrend. Absent a move above 90.2, especially on an hourly closing basis, I suggest a bearish trading strategy and to sell rallies. I would note however, that a final "confirming" bearish move would be DJX also falling under its prior swing low at 87.6 - such a move would confirm still lower prices ahead. Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts: The QQQ, on the backs of the weakness in SOX, has both pierced the lower boundary of its uptrend channel, but also taken out the "neckline" of its Head & Shoulder's top formation, which suggests an eventually "minimum" downside objective to 23.00. The Q's would need to climb back above its trendline at 25, then above the prior swing high at 25.5, to suggest that the stock was back into an uptrend. I suggest selling rallies back up to the 25-25.50 area. QQQ is oversold now on a short-term basis, but it continues to show declining momentum on the daily stochastic model. Near, and pivotal, support is in the 24 area, at the 21-day moving average. A close under this average would be a good indication that an objective to 23 or lower would be achieved. 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 **************** And So It Begins By Steven Price This morning started out with good news on the durable goods front, which are large ticket items, such as cars and machinery. Durable goods orders rose 8.7% in July, the highest jump since October 2001. Combined with record new home sales and increased existing home sales, July appeared to have been a strong economic month, in spite of the market decline. However, later in the morning, Consumer Confidence was released. This showed a sharp decline, to 93.5 in August, from a reading of 97.4 in July. The news chipped away at the recent positive economic numbers, since Consumer Confidence is usually a reflection of consumers' willingness to spend. This data teamed up with a Merrill Lynch downgrade of 16 retail stocks, citing a lack of consumer spending and slow back-to-school sales, to take the wind out of the sails of the recent good news. The downgrades followed forecasts of lower sales by Wal-Mart, Sears, May Department Stores and Target. On top of the disappointing Consumer Confidence number, which had been expected to come in at 97.1, Intel dropped a bomb on the tech sector. CEO Craig Barrett said Intel was expecting modest growth over the third quarter and had not seen much improvement in the computing environment. With a September 5th mid-quarter report around the corner, this sounded an awful lot like a warning. Tech stocks are not the only ones who are looking at a sea of red lately. The Congressional Budget Office projected that this year's deficit will be around $157 billion. This was due to a decline in tax revenues and double digit increase in spending. The CBO does not see a surplus until 2006. An interesting development, which is in contrast to recent activity, is the sell-off in the bond market today. While this could be selling ahead of the upcoming bond auction, it is a change from what we have seen in the recent past. As money has flowed out of equities, it has generally flowed back into bonds. Today, this was not the case, as both markets were hit. This could be viewed as a bullish sign, as the bonds sold off after the durable goods orders were released, suggesting investors' intention to move money back into the equities. It is difficult to keep the broad markets up when the world's largest chipmaker sounds a negative tone. This was most likely the reason for today's sell-off, as the Nasdaq composite shed 3.15% and the NDX shed 4.16%. The semiconductor run appears to be over, as the Semiconductor Index (SOX.X) shed almost 6% and appears headed back below 300, after a rebound to 366. it finished the day down 19.92 to close at 316.87. The Dow and S&P 500 have held above their 50 day moving averages and have not yet broken the upward sloping trend line begun at the end of July. The Nasdaq Composite, however, broke through the 50-dma to the downside for the first time since all four major indices broke above this average on August 19. The same thing happened to the NDX. For the past few years, the techs have led the rest of the market around by the nose. Today's break of this support may foreshadow a sell-off in the other indices, as well. While I have been talking about the support from the 50-dmas recently, I have also talked about a pre- September 11 sell-off. With that anniversary only two weeks away, any economic data that isn't particularly positive will give nervous investors another reason not to remain long heading into the anniversary. We may be seeing the beginning of that sell-off. Preliminary GDP later this week could provide the fulcrum for the market. A growing economy could tip us toward another rally, or at least a holding pattern until after September 11. If the number is disappointing, look out below. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7702 Current : 8824 Moving Averages: (Simple) 10-dma: 8882 50-dma: 8772 200-dma: 9716 S&P 500 ($SPX) 52-week High: 1226 52-week Low : 797 Current : 935 Moving Averages: (Simple) 10-dma: 940 50-dma: 923 200-dma: 1068 Nasdaq-100 ($NDX) 52-week High: 1782 52-week Low : 892 Current : 974 Moving Averages: (Simple) 10-dma: 1006 50-dma: 986 200-dma: 1328 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): Intel dropped a bomb this morning on the sector. Comments from the world's largest chipmaker indicated that there had not been much improvement in the computing sector, and predicted modest third quarter growth. These comments, combined with downgrades to the retail sector, seemed to indicate that not many PCs will be in Santa's sleigh this holiday season. The index has given up almost 60% of its recent gains, since bottoming on August 5. The sector led the NDX and Nasdaq Composite through their 50-dmas to the downside, and may be foreshadowing a broader market sell-off heading into the anniversary of September 11. 52-week High: 657 52-week Low : 282 Current : 316 Moving Averages: (Simple) 10-dma: 341 50-dma: 352 200-dma: 493 INSERT SECTOR SPECIFIC CONTENT HERE ----------------------------------------------------------------- Market Volatility The VIX appears to have a solid floor on it at 30. We will most likely see this level hold until after September 11. Over the next couple of weeks it is likely to creep up toward that anniversary, unless there is some Earth shattering positive economic data. After Intel's negative comments this morning, and a drop in Consumer Confidence, we are not likely to see such numbers. Once we cross that date, if there are no attacks or negative news, expect to see a large one day volatility drop. CBOE Market Volatility Index (VIX) = 32.73 +0.44 Nasdaq-100 Volatility Index (VXN) = 50.01 +1.59 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.84 368,167 310,812 Equity Only 0.69 310,073 213,603 OEX 1.24 19,088 23,738 QQQ 1.61 7,241 11,667 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 45 + 1 Bull Confirmed NASDAQ-100 58 - 2 Bull Confirmed DOW 60 + 0 Bull Confirmed S&P 500 60 + 1 Bull Alert S&P 100 58 + 0 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 1.32 10-Day Arms Index 1.06 21-Day Arms Index 1.22 55-Day Arms Index 1.30 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 they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1076 1686 NASDAQ 1016 2236 New Highs New Lows NYSE 31 16 NASDAQ 22 49 Volume (in millions) NYSE 1,486 NASDAQ 1,483 ----------------------------------------------------------------- Commitments Of Traders Report: 08/20/02 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 reduced both long and short positions by about 6000 contracts, as can be expected during the end of summer, a notoriously slow time for the markets. The got slightly longer, but by only 500 contracts. Small traders added to positions slightly, with a net short increase of 500 contracts. Commercials Long Short Net % Of OI 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%) 08/20/02 422,100 469,556 (47,456) (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 07/30/02 153,858 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% 08/20/02 156,974 69,071 87,903 38.9% 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 reduced both long and short positions slightly, with 500 more reductions on the short side. Small Traders also reduced slightly on both sides, with a net long reduction of 500 contracts. Commercials Long Short Net % of OI 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%) 08/20/02 41,876 49,461 (7,585) ( 8.3%) 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 07/30/02 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% 08/20/02 11,321 7,980 3,341 17.3% 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 reduced long positions by about 1700 contracts, while adding 1500 to the short side. This led to a reduction of over 3000 contracts from their long positions. Small traders added 1200 to the long side, while reducing shorts by only 200 contracts. This led to a net reduction of 1300 short contracts. Commercials Long Short Net % of OI 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% 08/20/02 21,160 15,349 5,811 15.9% 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 07/30/02 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%) 08/20/02 6,216 8,163 (1,947) (13.5%) 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 ****************** The New York Times' Fund Finder The NYTimes.com website features a powerful Fund Finder that lets you isolate the top performers in nine different fund types, over various time periods, and based on net assets. It's a simple yet effective screen tool that individuals can use to sort all mutual funds or a specific fund type. It's powered by data from Lipper, and includes information for trailing 5-year, 10-year and 15-year returns. For this week's screen, we're going to use the Net Assets feature on the NYTimes.com Fund Finder to view only funds with net assets of over $500 million. We want to focus on the most popular funds in the country, but you can run this same screen across all asset ranges if you wish. If you choose to limit the screener to funds with net assets of under $50 million, be careful as some of these funds may possibly have some survival risk - may be liquidated or combined in with another fund. One of the most appealing features of this Fund Finder is the way that funds are categorized. In contrast to Morningstar's 48 fund categories, the NYTimes.com Fund Finder conveniently sorts mutual funds into just nine fund types. U.S. equity funds are sorted by their style (growth, value or core) rather than the capital range in which they invest (large-cap, mid-cap or small-cap). The nine fund types are summarized below: 1. Growth 2. Value 3. Core 4. Mixed 5. Global 6. Sector 7. S&P 500 8. Fixed Income 9. Government Debt Our mission this week is to show you how we would use this Fund Finder to identify the potential strong candidates in each fund type group, with emphasis on 10-year and 15-year performance to provide more realistic long-term return expectations. We might not get to all fund types or all return time periods this week, but we'll at least show you the process we would use to get the most out of this online screener and find the potential winners over the long-haul. Growth Funds Growth funds invest in growth stocks. These companies have had faster-than-average gains in earnings in recent periods and are expected to continue to show high levels of profit growth. Over the long run, growth stocks have the potential to outpace slower growing or stagnant stocks. Growth stocks, however, are riskier investments than average stocks, since they generally have above average price valuations and make little or no dividend payments to shareholders. Below is a summary of the top "growth fund" performers over the trailing 10-year and 15-year periods using the NYTimes.com Fund Finder. Fund Type: Growth Return Time Period: 10 Years Net Assets: Over $500 Million 18.6% Calamos Growth Fund (CVGRX) 16.4% Sequoia Fund (SEQUX) 16.1% Franklin California Growth Fund (FKCGX) 15.7% Smith Barney Aggressive Growth Fund (SHRAX) 15.5% Wasatch Small Cap Growth Fund (WAAEX) Fund Type: Growth Return Time Period: 15 Years Net Assets: Over $500 Million 15.1% Kaufmann Fund (KAUFX) 14.7% Sequoia Fund (SEQUX) 12.7% Wasatch Small Cap Growth Fund (WAAEX) 12.6% Smith Barney Aggressive Growth Fund (SHRAX) 12.3% American Century Ultra Fund (TWCUX) You can see that three funds overlap the top five funds over the two long-term return periods: Sequoia, Wasatch Small Cap Growth, and Smith Barney Aggressive Growth. Each makes a strong case as a long-term growth investment. Calamos Growth Fund was launched in 1990 and does not sport a 15-year track record. Its trailing 5-year and 10-year average total return of 18.6%, however, ranks it atop all other growth funds with net assets over $500 million. What can you say about Kaufmann Fund? Besides the Sequoia Fund, no other growth fund with net assets over $500 million has even come close to matching its 15.1% annualized return over the past 15 years. Lawrence Auriana and Hans Utsch have managed the fund for 17 years and have over 70 years combined investment industry experience. Its more of multi-cap growth fund today, due to its large asset size, but that is alright with me. That should make it a little less volatile than its younger small-cap growth days. Value Funds Value funds invest in undervalued stocks. These are securities that are selling below their "liquidation value" or the "market value" analysts believe they deserve - sometimes referred to as "intrinsic value." A company's stock may be undervalued because its industry is out of favor, because the firm is not well known or has an erratic earnings history, or other reasons. Managers and analysts, using fundamental analysis, try to spot securities that are cheaply priced before they become fully valued in the marketplace. Value-driven funds tend to be less volatile than other fund styles because of the lower average price valuations of their holdings. Below is a summary of the top "value fund" performers over the trailing 10-year and 15-year periods, per the NYTimes.com Fund Finder. Fund Type: Value Return Time Period: 10 Years Net Assets: Over $500 Million 17.7% FPA Capital Fund (FPPTX) 17.6% Berger Small-Cap Value Fund (BSVIX) 17.3% Clipper Fund (CFIMX) 16.9% Mairs & Power Growth Fund (MPGFX) 16.3% Fidelity Low-Priced Stock Fund (FLPSX) Fund Type: Value Return Time Period: 15 Years Net Assets: Over $500 Million 15.0% Clipper Fund (CFIMX) 15.0% FPA Capital Fund (FPPTX) 14.1% Longleaf Partners Fund (LLPFX) 13.9% Mairs & Power Growth Fund (MPGFX) 13.8% Weitz Value Portfolio (WVALX) As with the growth fund group, there were three funds that made both lists. In the value fund group, Clipper Fund, FPA Capital Fund and Mairs & Power Growth Fund were the three funds to rank in the top five funds for the two long-term return periods (net assets over $500 million). Mairs & Power Growth Fund's name is suggestive of a growth style, but it seeks growth through value opportunities. All three make a good case for a long-term value fund investment. Fidelity Low Priced Stock Fund, managed by Joel Tillinghast was launched in 1989 and does not sport a 15-year history. However, its trailing 10-year return of 16.3% ranks in the top five value funds with assets of over $500 million, and its trailing 5-year return of 11.1% ranks in the group's top 20 funds. I like this fund so much, I use it personally in my old company 401(k) plan. Core Funds Core funds have a blend of value and growth characteristics and land somewhere in between the two management styles in terms of risk and reward potential. For our purposes, we have chosen to combine the S&P 500 fund type into this group since index funds that track the large-cap index are in essence "core" in nature. If you've ever logged on to Schwab's website, they offer a fund strategy called core and explore. Essentially what they say is that you may want to consider investing initially in core funds, then branch out or explore into either value or growth or other categories. Since value and growth can outperform at different times in the economic cycle, many long-term investors invest in several funds with different styles, while some opt to stick to the core (blend) funds. Below is a summary of the top "core/blend" performers over the trailing 10-year and 15-year periods, per the NYTimes.com Fund Finder. Fund Type: Core (Blend) Return Time Period: 10 Years Net Assets: Over $500 Million 17.5% Wasatch Core Growth Fund (WGROX) 15.6% Vanguard PRIMECAP Fund (VPMCX) 14.5% Liberty Acorn Fund (ACRNX) 14.1% AIM Mid Cap Equity Fund (GTAGX) 13.7% DFA US Micro Cap Portfolio (DFSCX) Fund Type: Core (Blend) Return Time Period: 15 Years Net Assets: Over $500 Million 13.9% Wasatch Core Growth Fund (WGROX) 13.8% Fidelity Contrafund (FCNTX) 13.0% Fidelity Advisor Equity Growth Fund (EQPGX) 12.9% Liberty Acorn Fund (ACRNX) 12.3% AIM Mid Cap Equity Fund (GTAGX) Three funds again overlapped or made both lists: Wasatch Core Growth Fund, Liberty Acorn Fund, and AIM Mid Cap Equity Fund. When I see the term "core growth" I think of stocks of larger, more established growth companies, but in the case of Wasatch Core Growth Fund, manager Samuel Stewart invests primarily in small-cap and mid-cap growth companies. Liberty Acorn Fund's style is also "small-cap growth" oriented. So, while the P/E ratios of underlying holdings may be in the middle, they have small-cap sector focuses that qualify them more as an explore fund, than a core fund. If you're looking for a core fund with a large-cap blend tilt, you may want to consider Vanguard PRIMECAP Fund (VPMCX), which has been managed by Howard Schow since fund inception in 1984. You'll need $25,000 to invest initially, however. For people with less money to invest, Fidelity Contrafund (FCNTX), which costs $2,500 to invest initially, has a fine long-term record under Bill Danoff's 12-year manager tenure. Over the last 15 years, only one fund has narrowly outperformed the Contrafund, one of Fidelity's crown jewels. Note that all of the aforementioned funds beat the trailing 10- year and 15-year average returns generated by the Vanguard 500 Index Fund (VFINX), which tracks the performance of the market (as measured by the S&P 500 index). Mixed Funds I'm going to do one more mutual fund type, since it's one of my favorites, then let you use the NYTimes.com Fund Finder to spot the top performers in other fund type groups. Mixed equity or partial equity funds have the dual goals of long term growth (from stocks) and current income (from bonds). They seek to obtain the highest total return possible consistent with a low-risk equity strategy. This fund type includes traditional balanced funds (60% stocks/40% bonds) and asset allocation funds. Such funds typically offer a higher yield than a pure stock fund and perform better when stocks are falling. In a rising market, however, mixed equity funds usually will not keep pace with 100% stock funds. Note that the vast majority of pension funds in America follow a balanced approach to investing because of the strong risk-return tradeoff the strategy offers. Because they diversify net assets across more than one asset class, these funds have "all-weather" characteristics and are well suited to conservative stock market investors who want a fund that allows them to sleep at night and they can forget about for many years (and know it'll get the job done for them). Below is a summary of the top "mixed fund" performers over the trailing 10-year and 15-year periods, using the NYTimes.com Fund Finder. Fund Type: Mixed Equity Return Time Period: 10 Years Net Assets: Over $500 Million 13.9% Scudder-Dreman High Return Equity Fund (KDHAX) 12.6% Dodge & Cox Balanced Fund (DODBX) 12.5% Van Kampen Equity Income Fund (ACEIX) 12.0% Fidelity Advisor Equity Income Fund (EQPIX) 11.9% Fidelity Convertible Securities Fund (FCVSX) Fund Type: Mixed Equity Return Time Period: 15 Years Net Assets: Over $500 Million 12.0% Fidelity Convertible Securities Fund (FCVSX) 11.2% American Funds: Capital Income Builder (CAIBX) 11.2% Dodge & Cox Balanced Fund (DODBX) 10.9% T. Rowe Price Equity Income Fund (PRFDX) 10.6% Vanguard Wellesley Income Fund (VWINX) You can see that "equity-income" funds and "convertible-bond" funds are also placed in this fund type, per NYTimes.com and Lipper. In this group, two funds overlapped/made both lists: Dodge & Cox Balanced Fund (DODBX) and the Fidelity Convertible Securities Fund (FCVSX). Dodge & Cox Balanced Fund was one of the first mutual funds in America, dating back to 1931. Long term investors looking for a traditional balanced fund with a value tilt have a superior choice in the Dodge & Cox offering. Its conservative equity style and team management approach has stood the test of time. Long-term investors emphasizing yield over growth may find the Fidelity Convertible Securities Fund to be an interesting fund choice because it invests in preferred stock or bonds that are convertible into common stock. It is well suited to investors who want higher income than is generally available from stocks (equity funds), with greater appreciation potential than bonds (fixed income funds) typically offer. The only caveat here is the fund manager that delivered the fund's superb track record left the fund earlier this year. Fidelity does a great job, I feel, of recruiting and developing analysts into fund managers and having personnel ready to step in to new management roles. Summary This week, I used a new fund screener from the New York Times website (well, new to me) that is powered by Lipper data and allows you to identify the top performing funds, in different fund types, over various long-term return periods. If you're investing for the long run, the funds we identified this week represent some potentially solid candidates for consideration. I didn't get to all the fund types so I may pick this back up next week. The NYTimes.com Fund Finder is accessible online (www.nytimes.com). Click on the link for the Business section and then for the Mutual Funds section. Because this screener only gives one piece of the puzzle (return), it's recommended that you judge funds on other factors as well, such as risks, costs/expenses, and funds management, and weigh those against your individual goals, horizon, and tolerance for risk. Steve Wagner Editor, Mutual Investor email@example.com *********************** INDEX TRADER GAME PLANS *********************** THE SECTOR BEAT - 8/27 by Leigh Stevens NEWS & VIEWS - The notable sector stories today involved the weak getting weaker - Semiconductors (SOX) - and the best performing suffering a recent reversal also - the Biotech group (BTK). Health stocks - Health Providers (RXH) and the Health Payers (HMO) - have been retracing more of their recent recovery rallies. Internet (INX) and tech in general, as well as Airlines (XAL) were also under selling pressure. Some cautious comments from Intel's CEO put the entire sector under pressure - his comments were of an expectation of only "modest sequential earnings growth in the third-quarter" and that he not seen "improvement in the PC environment as companies were still not investing" - hey, exactly nothing new! But when the market is ready to correct, investors always find a reason to do some selling. Intel reports next week. Bear Stearns had some comments: "When Intel gives its mid-quarter update next week, we expect they will come down to the Wall Street consensus range of about $6.6 billion or so [for third- quarter revenue]. We think the stock is close to a bottom. We do not think it will move significantly without a catalyst, but we think it's well positioned," Bear told clients. This is Analyst speak for maybe buy the stock IF the economy picks up. Merrill Lynch issued a cautionary to negative note on Retail, stating that the consumer is being more conservative with their spending than they previously anticipated. Mother Merrill thinks a consumer slowdown is developing. I guess no more "what ME worry!" Anyway, a number of retail stocks got hit on this assessment of how we're going to spend our money or not. Selling ensued in stocks ranging from the high end clothiers like Ann Taylor (ANN) and Nordstrom (JWN), to the lower, like Talbots (TLB); as well as a mixed bag of companies ranging from CostCo (COST), Williams- Sonoma (WSM), to Barnes & Noble (BKS) and Borders (BGP). No time to read anymore or we can go to the library! Meanwhile, resurging war talk boosted the Defense (DFI) sector, although it is only back into a congestion (resistance) area - ditto Oil Services (OSX) and the Gold sector (XAU) shares. The Biotech, and Defense sector charts are highlighted below. UP (or unchanged) on Tuesday - DOWN (or unchanged) on Tuesday - SECTOR TRADE RECOMMENDATIONS - NEW/OPEN TRADE RECOMMENDATIONS - NONE TRADE LIQUIDATIONS - NONE SECTOR HIGHLIGHTS - Biotechnology Index ($BTK.X) STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA; ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM; MYGN; PDLI; TARO; TEVA; VRTX; XOMA Readers of this column will recall these trendlines above - I suggested a last week that the sector was close to breaking its uptrend and it did, might head down to the lower trendlines again at 333 in BTK and to the 76 area in the BBH HOLDR's. This is still my view. What was previous resistance at the trendline, may now act as a line of support. Defense Index; Amex ($DFI.X) STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN; ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC The Defense sector has rebounded but needs to take out resistance in the 575 area to suggest that the group was back into an uptrend. Stocks in the group as shown below, that look promising on a technical basis, if this rally continues, includes: EASI and NOC, both of which are having strong upside breakouts, and LLL. Defense Sector Index (DFI) stocks - 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 *********************** Fighting For Every Point The markets were handed a gift this morning with the Durable Goods orders, which helped stop the August sell off in mid stride. After 30 min of euphoria the Consumer Confidence report spoiled the party and the markets crashed back to reality near the yesterday afternoon lows. Bulls fought back to positive territory again but could not hold it and the selling accelerated slowly into the close. 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** 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 08-27-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: CHIR, EDS, ERTS Dropped Puts: LMT, PIXR Daily Results Call Play Updates: PII New Calls Plays: DRI Put Play Updates: ADI, GS, MXIM, QLGC New Put Plays: KSS, IBM, EBAY, UNH **************** 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: ***** CHIR $39.67 -1.22 (-1.10) The persistent weakness in the Biotechnology index (BTK.X) this week is wearing down the bulls in CHIR, and the stock has now decisively broken its steeply ascending trendline. While the stock is still finding support near the $39 level (the site of our stop), it is somewhat disconcerting to see today's violation of the 10-dma. This is CHIR's first close below the 10-dma in the past month, and likely portends more weakness to follow. CHIR is a drop tonight, so use any rebound in the morning to exit open positions. --- EDS $39.99 -0.91 (-1.46) The bulls gave it there best shot, but in the end, the $44 resistance level proved to be too strong for EDS. The stock has been drifting lower over the past 3 days, and came to rest a penny below our $40 stop. While the ascending trendline hasn't been violated yet, it looks like the bears have gained the upper hand. We want to take advantage of any rebound from the $40 level tomorrow to exit open positions that weren't stopped out today. --- ERTS $64.24 -1.62 (-2.39 for the week) Electronic Arts recently hit new all time highs. It consolidated around $65 and then rallied up to $67.75. We put a stop in place at $65, as this level would indicate a loss of support at the prior consolidation level. Although analysts are eventually predicting good sales numbers with the holiday season around the corner, we are playing for the near term. The stock traded below our stop and we are closing the play. PUTS: ***** LMT $62.22 +1.27 (+2.51 for the week) After lasts week's statements by George Bush indicated that it may be a while before the U.S. invaded Iraq, LMT took one on the chin. That sentiment changed this week, as Dick Cheney made strong comments about the need for action in the near term. This was followed by an encounter in the Iraqi no-fly zone. Although LMT has not exploded with the rest of the sector, we are not going to fight the news, and will drop play in anticipation of more news related items creating too much volatility for a trend play. --- PIXR $49.64 -0.24 (+0.34) We added PIXR to the Put list to take advantage of an expected bout of profit taking after the stock's strong rally out of its base near $44. That pullback did materialize, with the stock trading down to just above the $48 level on Friday, but we've seen a series of higher lows over the past 3 days, with the stock continuing to find willing buyers near the 10-dma. Each selloff has been bought at successively higher levels and it looks like the necessary profit taking has run its course. We're dropping PIXR tonight, as a rebound in the broad markets could lead to a strong rebound in the stock, taking it back through near-term resistance at $50. Use a morning dip to effect a more favorable exit from the play. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue CHIR 39.67 0.09 -1.22 Drop, Biotech pullback DRI 25.40 0.21 0.39 New, Green lights everywhere EDS 39.99 -0.55 -0.91 Drop, back to start ERTS 64.24 -0.75 -1.62 Drop, stopped out PII 74.35 0.71 0.39 Great Relative Strength PUTS ADI 25.84 0.53 -0.52 Rolling with the punches EBAY 57.20 -0.94 -2.04 New, back to Earth GS 79.10 0.90 -0.65 Shaky hold under resistance IBM 77.96 -0.98 -1.46 New, The harder they fall KSS 69.27 -0.05 -2.12 New, Back to the sale rack LMT 62.22 0.90 1.27 Drop, Cheney in charge MXIM 33.88 -0.01 -2.04 Semis back through support PIXR 49.64 0.66 -0.24 Drop, did its thing QLGC 35.91 0.18 -1.31 Back in descending channel UNH 88.25 -0.73 -2.12 New, Room to fall ************************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 ******************** PII $74.35 +0.39 (+1.24 for the week) Talk about relative strength! This stock has proven resilient to each of the recent market pullbacks on Friday, Monday morning and Tuesday. Even Friday's pullback in PII found support at $73. With a stock trading around $74, this was less than a 1% loss on a day when the Dow lost almost 200 points. On Tuesday, the stock was up, in spite of weak consumer confidence number, which shook the rest of the market. This may have been due to the 8.7% rise in durable goods in July, which PII's products border on. A profile on CNBC, which showed demand for PII's products didn't hurt either. A company that can sell expensive toys for adults at an increasing profit over each quarter for more than four years, including a recession, continues to look like a good bet. Today's trade of $75.00 placed another "X" on the PnF chart and continued the breakout from a bullish flag on the chart. The new bullish vertical count is $95.00. A $20 move is above our current target, however is not out of the question as an eventual goal. We remain bullish on PII and are raising our stop to $71.00. ************** NEW CALL PLAYS ************** DRI – Darden Restaurants, Inc. $25.40 +0.39 (+0.60 this week) Company Summary: Darden Restaurants, Inc. is the largest publicly held Casual Dining restaurant company in the United States. The company operates over 1100 restaurants in 49 states, including 629 Red Lobster and 472 Olive Garden restaurants. In addition, DRI operates 37 restaurants in Canada. The company operates all of its North American restaurants, while Red Lobster Japan Partners, a Japanese retailer unaffiliated with Darden, operates 34 Red Lobster restaurants pursuant to an Area Development and Franchise Agreement. DRI is the parent company of GMRI Inc., which along with other Darden subsidiaries, own the operating assets of the restaurants. Why We Like It: Whether consumers have started to curtail their spending or not, they don't seem to have cut back on how often they go out to eat. People may be staying closer to home, but that doesn't mean they don't feel the need to treat themselves to a relaxing meal in a casual setting. That much seems clear by looking at the stock chart of DRI, the largest U.S. casual dining restaurant chain. While earnings aren't scheduled to be released until September 19th, the recent price action in the stock indicates that business is doing quite well, indeed. In the past month, DRI has gained more than 25%, and last Friday's breakout above the 200-dma (how many stock's can stake that claim?) seems to have added more conviction for the bulls' case. Volume is running right at the ADV (which is pretty impressive for a low-volume week), and last week's resistance at the $24 level now looks like solid support. Like everything else in this choppy market, this trend could end at any time, but we don't think so. Investors appear to be bidding the stock higher in anticipation of solid results when the company announces earnings. So long as the stock continues to post higher highs and higher lows, buying the dips should make for a profitable trade. Use an intraday pullback near the $24 level to initiate new positions, using a tight stop at $23.50. Should DRI close below that level, we'll know that the bullish trend has likely come to an end, as it would break the lower boundary of the ascending channel that has been supporting the rally for the past 3 weeks. BUY CALL SEP-25 DRI-IE OI=459 at $1.25 SL=0.50 BUY CALL SEP-27 DRI-IY OI= 0 at $0.40 SL=0.00 BUY CALL OCT-25*DRI-JE OI=419 at $1.90 SL=1.00 BUY CALL OCT-27 DRI-JY OI= 82 at $0.85 SL=0.40 Average Daily Volume = 1.41 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 ******************* ADI $25.84 -0.52 (-0.12 for the week) ADI continued its rollover with the rest of the techs today. After Intel's Chief Executive Officer Craig Barrett rained on hopes of a holiday recovery, citing predictions of only modest growth, the tech sector continued south. ADI's circuits are used in a wide variety of technology products, including computers, peripherals and consumer electronics. Today's comments, which indicated a lack of growth in computer sales, were just the start. Merrill Lynch downgraded a group of retailers, citing a lack of consumer spending, which does not bode well for sales of products that use ADI's internal components. Add to this a very disappointing Consumer Sentiment number of 93.5, versus expectations of 97.1, and holiday shopping season could take an additional chunk out of ADI's stock. On the positive side for ADI, durable goods orders saw an increase in July, which helps its automotive electronics business. Overall, ADI is still a tech company, and its fortunes will be tied to that of the tech sector. Intel will be giving a mid-quarter report on September 5 and today's CEO comments certainly sounded like a warning. We are looking for the sector to continue to give back its recent gains, and ADI to go right along with it. --- GS $79.10 -0.65 (+0.80) It has been a nip and tuck battle between the buyers and sellers in shares of GS over the past week, but it looks like the bears are starting to get the upper hand. The Brokerage sector (XBD.X) caught a bid this morning along with the rest of the market, and that drove shares of GS up to just below the $81 level. But that was all the bulls could muster, and the bears took over from there. By the end of the day, the XBD index had fallen nearly 2%, coming to rest just above the 62% retracement of last fall's rally. For its part, GS held up pretty tough in the early going, but eventually succumbed to the sector-wide pressure (helped along by Salomon Smith Barney's admission of doling out IPO shares to the favored few at Worldcom) and closed back near $79. This level has acted as a price magnet over the past few days, but the real important price level seems to be $80, which is also the 50% retracement of the fall rally. Failed intraday rallies near the $80 level continue to provide the best entry points, due to the underlying bids that seem to be resting just below important support levels. Our initial downside target is still $77, followed by the possibility of a drop as low as $74. Momentum traders will want to see the XBD index drop below its $408 support level before attempting new positions. Should the bulls get a fresh shot of adrenaline, a close above $80 will have us dropping the play. --- MXIM $33.88 -2.04 (-1.65) The Semiconductor index (SOX.X) was dealt another body blow this morning when Intel's CEO made it clear that businesses are still not opening their coffers for new IT spending. That combined with the decline in Consumer Confidence, had the SOX leading the NASDAQ lower throughout the day. By the closing bell, the SOX had shed nearly 6% and appears headed back for a retest of the $300 support level. Shares of MXIM have been attempting to buck the bearish trend in the SOX, but today's sector weakness was just too much. After losing the $35 support level midday, MXIM accelerated into the close, coming to rest just above the 20-dma ($33.57). As has been the case with the SOX, MXIM has found formidable resistance at its 50-dma, currently at $36.36. Accordingly, we are lowering our stop to $36.50, just above both today's high and the 50-dma. Another failed rally attempt below this level would make for a solid entry into the play. With a fair amount of intraday support resting in roughly $1 increments below Tuesday's close, momentum entries carry more risk, due to the possibility of a short-covering rally. --- QLGC $35.91 -1.31 (-0.69) The bulls have been stubbornly defending the $36 support level in QLGC over the past week. But they lost control of that level at the end of the day on Tuesday, as the SOX fell nearly 6%. While QLGC did fall by 3.5% today, the minor violation of support at the end of the day could be the setup for a short covering rally tomorrow if the bulls come back to the SOX. The stock has been consistently turned back at its descending trendline (currently $38) and we would look for any rebound to roll over near that level tomorrow. Note that QLGC continues to be pressured lower by its declining 50-dma ($38.67), giving us confidence in our stop at the $39 level. Note that the stock also took out both its 10-dma and 20-dma in today's slide, placing it below all of its moving averages. Use a failed rally below $38 to initiate new positions. Alternatively, use a decline under the $35 level to initiate momentum-based positions, but only if the SOX continues its decline. Look for the $33.75 level (the bottom of the 8/15 gap) to provide the next support level capable of prompting the next oversold rebound. ************* NEW PUT PLAYS ************* KSS – Kohl's $$69.27 –2.12 (-2.25 this week) Company Summary: Based in Menomonee Falls, Wis., Kohl's is a family-focused, value-oriented specialty department store offering moderately priced national brand apparel, shoes, accessories and home products. The company operates 420 stores in 32 states. (source: company release) Why We Like It: Kohl's had experienced a meteoric run-up during the month of August, as Wal-Mart's predictions for the rest of the year drove the retailers higher. That music has stopped. A slow back to school sales environment has forced many analysts to rethink the retail sector. Wal-Mart warned for the second week in a row about slow apparel sales, accompanied by Federated's third warning in as many weeks. Merrill Lynch downgraded 16 retail stocks this morning, citing slow sales and lack of consumer spending. Merrill Analyst Daniel Barry said, " Sales have deteriorated sharply since early July, almost as if someone turned off a switch." That sentiment was echoed by this morning's Consumer Confidence Index, which came in at 93.5, versus expectations of 97.1. This number usually affects retailers strongly, as a lower number shows consumers are worried about the economy and concerned about spending. The disappointing Consumer Confidence number may indicate we are finally seeing cracks in the consumer spending armour, which has been solid up until now. A look at the Retail Index (RLX.X) shows the group rolling over as a whole. After plummeting from highs near a reading of 350 in June, all the way down to 250 in July, the group had crawled back, just peaking at over 300 last week. What looked like support didn't last long, as the index has rolled over and is showing a current reading of 294.96. KSS's break of $70 support today on the daily chart coincided with a four-box reversal on the point and figure chart. Stochastics have also rolled over and are now giving a sell signal, as well. There may be some mild support around $65 and again at $63, however our ultimate target on the play is $60. Place stops at $72.50, above Friday's high of the day. BUY PUT SEP-70*KSS-UN OI=1106 at $3.20 SL=1.60 BUY PUT OCT-70 KSS-VN OI=1355 at $4.40 SL=2.20 Average Daily Volume = 2.21 mil --- IBM - International Business Machines $77.96 -1.46 (-2.44 for the week) Company Summary: IBM is the world's largest information technology company, with 80 years of leadership in helping businesses to innovate. IBM is a leading provider of e-business solutions and is dedicated to helping customers, IBM Business Partners, and developers leverage the potential of the Internet and network computing across a wide range of businesses and industries. The company offers a host of cross-industry and industry specific solutions designed to meet the needs of growing companies. (source: company press release) Why We Like It: IBM enjoyed quite a breakout after its recent seven-week consolidation. After trading in a range between $66 and $74, forming a rectangle for almost two months, IBM achieved its measuring objective, on the breakout, of $82. We closed our long play on the stock for a profit and are now ready to jump on for the ride back down. Many times a rectangle breakout will result in a similar pattern to the upside, with the stock re-testing the breakout level, in this case $74. While a four dollar drop would be fine with us, we have bigger plans for the downside. Much of IBM's gain was on very little news. A look at the short interest in the stock shows a high relative number, of approximately 28%. After the stock broke a significant resistance level, it appears much of the rally was due to short- covering, as not only the stock, but also the overall market was in rally mode. After the rally, the stock hung over $80, finding a brief period of support. That support is now gone and the stock is heading back down. While the $74 level of previous resistance could serve as support, recent news indicates the tech sector is headed for another downturn and could see IBM back around $70. On Monday, Deutsche Bank Securities cut three IT service stocks, citing high valuations, and growing competition in the market. DBS said it did not expect the business environment for computer services, which is part of IBM's business plan, to improve during the next six months. This just underscores the comments that have been made recently regarding profit goals for the tech sector. Estimates have been lowered for 2002 and 2003, and predictions of a significant recovery are being put off until the second half of next year. This morning's comments from Intel about only expecting modest growth this quarter, came in spite of durable goods orders increasing in July, and sounded like a warning for next week's mid-quarter update. The server computer market is also shrinking. Revenue from all four industry leaders - IBM, HP, SUNW and DELL - shrank from $11.6 billion in the second quarter last year, to $10.1 billion this year. The fact that IBM increased its market share by 1.7% helps, but not enough to make up for a 13% decline in overall revenue. With plenty of room to fall after the recent rise, we view the current level as a point to initiate short entries. Place stops at $81.50, just above Friday's high of the day, as this would signal a possible new round of short covering. BUY PUT SEP-80*IBM-UP OI= 12834 at $4.10 SL=2.00 BUY PUT OCT-80 IBM-VP OI= 32217 at $5.60 SL=2.80 Average Daily Volume = 9.16 mil --- EBAY – eBay, Inc. $57.20 -2.04 (-2.95 this week) Company Summary: After developing a Web-based community in which buyers and sellers are brought together in an efficient format, EBAY has emerged as the dominant online auction site. The eBay dynamic pricing format permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse through listed items. Items listed on eBay include collectibles, automobiles, art objects, jewelry, consumer electronics and a host of practical and miscellaneous items. Although based in the United States, through its subsidiaries, EBAY also operates trading platforms in Germany, the United Kingdom, Australia, Japan, Canada, France, Austria, Italy and South Korea. Why We Like It: There are few Technology stocks that can boast a triple-digit P/E ratio after the incessant selling that has consumed that area of the market over the past 2 years. Those stocks that are still richly valued, tend to lead the NASDAQ, both on the upside and on the downside. That has certainly been the case with EBAY, which made a strong move over the past month, recovering from the $52 level to as high as $62 last week. The stock's initial push through the $60 level looked like a solid breakout move in progress, but with the NASDAQ rolling over, EBAY has been picking up speed to the downside this week. The first real hint of weakness came with yesterday's close back under the critical $60 level and with the NASDAQ-100 shedding more than 3% on Tuesday, a lot of the bids in EBAY seemed to dry up, allowing the stock to fall by 3.4%. Today's decline dropped shares through all of its moving averages, including the important 50-dma ($58.55) and 200-dma ($58.71). So long as the NASDAQ continues to retrace its recent gains, failed intraday rallies in EBAY will likely make for attractive entries, particularly on a rollover near the converged 50- and 200-dmas. The next likely support for the bears to contend with will be between $56 (historical support) and the month-long ascending trendline at $56.50. So traders looking to take new momentum-based positions will want to wait for a drop below $56 before playing. We are initiating coverage with our stop set at $60. BUY PUT SEP-60*QXB-UL OI=4562 at $4.10 SL=2.50 BUY PUT SEP-55 QXB-UK OI=6013 at $1.70 SL=0.75 Average Daily Volume = 8.61 mln --- UNH – UnitedHealth Group $88.25 -2.12 (-1.99 this week) Company Summary: Providing a broad range of resources to help people improve their health through all stages of life, UNH forms and operates markets for the exchange of health and well being services. The company's Health Care Services segment consists of the UnitedHealthcare and Ovations businesses. UnitedHealthcare coordinates network-based health services on behalf of local employers and consumers in six broad regional U.S. markets. Ovations is a business dedicated to advancing the health and well-being goals of Americans over the age of 50. Additionally, the company's Ingenix business operates in the field of health care data and information, analysis and application. Why We Like It: With The Health Care Payor's index (HMO.X) struggling with formidable resistance near the $590 level recently, the negative pronouncement out of Healthsouth (HRC) this morning sent the index tumbling for a 3.5% loss. The company's restructuring plan was not well-received by the market, and led to a Merrill Lynch downgrade, as well as Moody's putting the company on review for a possible downgrade. This looks like the first crack in the bullish facade that has been building in the HMO sector since the July lows. While the HRC news was company-specific, we can't ignore the effect it had on the overall sector. We've been watching shares of UNH recently, and sure enough, the stock rolled over right at the $92 level late last week. This is important, because that was also the site of the 2-month descending trendline. Today's sector-wide selloff knocked UNH back by more than $2, but more importantly it is now back under its 50-dma ($89.38). If the HMO index continues to decline later this week (as we expect it will), UNH should head lower as well. While there is potential support near $85, it appears the stock could be headed back for a retest of its recent lows near $82. The best entries will come on the heels of a failed intraday rally, which should fail in the $90-91 level if our bearish thesis is correct. Alternatively, we can consider momentum entries on a decline under the $87 level, so long as the HMO index continues to slide. Initial stops are set at $91.50. BUY PUT SEP-90 UHB-UR OI=3663 at $3.70 SL=2.25 BUY PUT SEP-85*UHB-UQ OI=3526 at $1.65 SL=0.75 Average Daily Volume = 2.63 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 08-27-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - IBM Traders Corner: The Main Event ********************* PLAY OF THE DAY - PUT ********************* IBM - International Business Machines $77.96 -1.46 (-2.44 for the week) Company Summary: IBM is the world's largest information technology company, with 80 years of leadership in helping businesses to innovate. IBM is a leading provider of e-business solutions and is dedicated to helping customers, IBM Business Partners, and developers leverage the potential of the Internet and network computing across a wide range of businesses and industries. The company offers a host of cross-industry and industry specific solutions designed to meet the needs of growing companies. (source: company press release) Why We Like It: IBM enjoyed quite a breakout after its recent seven-week consolidation. After trading in a range between $66 and $74, forming a rectangle for almost two months, IBM achieved its measuring objective, on the breakout, of $82. We closed our long play on the stock for a profit and are now ready to jump on for the ride back down. Many times a rectangle breakout will result in a similar pattern to the upside, with the stock re-testing the breakout level, in this case $74. While a four dollar drop would be fine with us, we have bigger plans for the downside. Much of IBM's gain was on very little news. A look at the short interest in the stock shows a high relative number, of approximately 28%. After the stock broke a significant resistance level, it appears much of the rally was due to short- covering, as not only the stock, but also the overall market was in rally mode. After the rally, the stock hung over $80, finding a brief period of support. That support is now gone and the stock is heading back down. While the $74 level of previous resistance could serve as support, recent news indicates the tech sector is headed for another downturn and could see IBM back around $70. On Monday, Deutsche Bank Securities cut three IT service stocks, citing high valuations, and growing competition in the market. DBS said it did not expect the business environment for computer services, which is part of IBM's business plan, to improve during the next six months. This just underscores the comments that have been made recently regarding profit goals for the tech sector. Estimates have been lowered for 2002 and 2003, and predictions of a significant recovery are being put off until the second half of next year. This morning's comments from Intel about only expecting modest growth this quarter, came in spite of durable goods orders increasing in July, and sounded like a warning for next week's mid-quarter update. The server computer market is also shrinking. Revenue from all four industry leaders - IBM, HP, SUNW and DELL - shrank from $11.6 billion in the second quarter last year, to $10.1 billion this year. The fact that IBM increased its market share by 1.7% helps, but not enough to make up for a 13% decline in overall revenue. With plenty of room to fall after the recent rise, we view the current level as a point to initiate short entries. Place stops at $81.50, just above Friday's high of the day, as this would signal a possible new round of short covering. BUY PUT SEP-80*IBM-UP OI= 12834 at $4.10 SL=2.00 BUY PUT OCT-80 IBM-VP OI= 32217 at $5.60 SL=2.80 Average Daily Volume = 9.16 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 ************** The Main Event By John Seckinger Event risk refers to the potential loss in value that a trader may suffer through unpredictable events causing large unexpected market price moves. Event risk can be caused by changes in political or economic factors, as well as natural disasters. Even mathematical finance is starting to have a great interest in event risk. The increasing level of global linkages and the growing number of assets at risk has made large-scale event risk management an essential function for the financial markets. Taking things to a practical level, event risk can easily center around Middle East or during the Congressional election season Don't forget Uruguay in South America, a country that has closed its banks for a week after a one day holiday. This crisis occurred in the wake of problems in Argentina and Brazil. So far there is no evidence of this problem extending to Asia, Russia, or any other markets, but I am sure it will. The memory of 1997's and 1998's Asian and Russian crises has not been wiped away from our memories. When those two disasters began, not too many people were thinking that they could expand. Option traders understand event risk as Vega, the term for measuring the relationship between an option's price and volatility. Volatility is a Wall Street word for fluctuation. Vega effects an option's time value and its price. It is the measurement of an option's change in price relative to the change in the price of the underlying asset. Simply put, Vega gives traders a concrete way to define risk in the option as it relates to the asset. Let's us revisit some prior events in the market place; beginning with 1980. The key, of course, is determine which was "actually an event". . The main highlight in the 80's is the crash seen in 1987, followed by the U.S. becoming a debtor nation in 1985 and tax reform enacted one year later. Why do I choose these as highlights? Event risk, to me, is when the market finds a catalyst and decides to mainly ignore technical analysis. If there is significant resistance seen above for a few hundred points and an event takes place, these levels will usually be immediately forgotten. Therefore, in an attempt to recognize the possibility of the marketplace worried about event risk, traders should begin to pay close attention to how support and resistance levels hold up in light of the recent global concerns. This is the most important lesson. The 90's clearly went vertical. Some noteworthy events included the Jobless rate hitting 4.8 percent and the Asian economic crisis beginning with the Thai baht and spreading globally. This event took even took on a new twist as the Malaysian government imposed controls to prevent the outflow of foreign investment funds and angering free market advocates. These events are interesting because they preceded a sharp sell off and went opposite of the general trend. Also preceding the sell off in 1998 was oil prices plunging. However, the Russian default came as the market found a short-term bottom. Was this an event "already priced into the marketplace", similar to Japan confirming their recession in 1998? Instead of answering the question, following price action makes the most sense. Either the event happens or prices begin to "ignore" technical analysis. Of course, technical patterns should supercede all else. If the technical patterns hold, I would choose to ignore the event; regardless of how significant it appears to be. Notable events during this decade included the volatility and eventual price compression as the Presidential Election ended. Also noteworthy was shareholders' reaction following the Appeals court reversing Microsoft's breakup ruling. The next event needs no explanation: September 11th. Lastly, blue-chip investors were forced to digest a number of bankruptcies as the post-September lows cam back into focus. Ok, the events are spelled out and the volatility illustrated. Moreover, we have spelled out that once technical analysis becomes "forgotten" we have either a fundamental occurrence or great threat of an event. Well, how can a trader become profitable before such an event takes place? In the current environment, it is my opinion that: The Dow leads all markets The Dollar is a coincident indicator and could be the first index outside the Dow to point towards a possible event. The Yield Curve is a better indicator than simply following the 30-year, since it takes out the volatility of the 30-year bond and looks at the five and ten-year spread instead. Moreover, most foreign central banks use the five year; therefore, allowing us to possibly predict what they are thinking. Bond yields will become important once more if historical levels become tested. Example: 2-year at 2.00 percent or 30-year at multi-year lows Therefore, it is my hope that readers will begin to look at charts of the dollar, bonds, better understand the yield curve, and of course pay close attention to price action within the Dow. For a review of the Intermarket Relationships, please read this Traders Corner Article: http://www.OptionInvestor.com/traderscorner/082202_3.asp On a more practical level, these are levels in the Dow that should be viewed as technically important and if "ignored" may either confirm an event or point a possible event about to take place: Dow Jones Industrial Average Resistance: Already has been proven 9000 holds weight. 9200 From 9350-9400 (more important than 9200) Support: Near 8740 - already acted as support a few days back Not much until 7532. Remember, we are looking for "events"; which are pretty rare. Dollar Resistance: 108.50 111.00 Support: 106, but doesn't have to hold the next time down 104.50 (much more important) Another point to remember: Since both the dollar and the Dow are in a downward trending channel (long-term view), if the aforementioned resistance levels hold, it makes sense that there is not an "event risk" and that prices (regardless of what is happening globally) should continue their downward trend. Ok, what if do have an "event"? How should we trade it? Depends. If it forecasted by the dollar, then volatility may not be too high in the Dow and buying a straddle makes sense; however, if the Dow begins to skyrocket, traders should then remember to look for a trade opposite of the move. Example: The Dow rises by 1,000 points and, either before or after, an "event" takes place. What to do now? Be patient and look for any weakness to go short. Notice, I did not say "buy puts". Volatility may be too high. How will a trader know to go short on the move just mentioned? Exactly, by using technical analysis. Remember, once technical analysis begins to work again. . use it. ************************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
Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.
Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.
To ensure you continue to receive email from Option Investor please add "firstname.lastname@example.org"
Option Investor Inc