The Option Investor Newsletter Tuesday 09-24-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Frustrated Fed Heads Index Trader Wrap: My "only" fear as a bear Market Sentiment: Are We There Yet? Weekly Fund Screen: Low Risk, Cash Heavy Funds Updated on the site tonight: Swing Trader Game Plan: Thank You Micron Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 09-24-2002 High Low Volume Advance/Decline DJIA 7683.13 -189.00 7871.23 7666.00 1.99 bln 966/2238 NASDAQ 1182.28 - 2.70 1200.45 1169.04 1.64 bln 1240/2144 S&P 100 410.87 - 6.51 417.99 409.81 Totals 2206/4382 S&P 500 819.27 - 14.43 833.70 817.38 RUS 2000 356.58 - 2.10 360.43 355.09 DJ TRANS 2097.17 - 37.40 2136.26 2246.87 VIX 45.38 + 0.67 46.77 44.18 VXN 59.40 - 0.45 62.01 58.25 Total Vol 3,872M Total UpVol 1,217M Total DnVol 2,525M 52wk Highs 81 52wk Lows 916 TRIN 1.73 PUT/CALL 0.86 ************************************************************ Frustrated Fed Heads The Fed met, argued and dissented but left rates unchanged again. The markets anguished over their expected decision all day and after it was announced there was still confusion of what to do. Despite "risks weighted to the downside" the Fed said the economy was recovering slowly but they would continue to watch for further signs of weakening. Thanks guys, it is comforting to know you are in control. Or are you? Dow Chart Nasdaq Chart The Fed took the unusual step of listing the names of the two dissenters in the announcement and many feel this was a weak attempt to suggest they could cut rates intra-meeting. There is no meeting in October and the next meeting is Nov 6th. The Fed still said its posture was accommodative and should be sufficient to foster an improving business climate. They did caution about Iraq and the possible impact to the economy. Governor Gramlich and President McTeer voted for a rate cut. The markets were not impressed and after several competing buy/sell programs the indexes headed to the lows of the day. Those lows for the Dow were back to October 1998 levels. The stock news for today was so plentiful and so bad that I hardly know where to start. Cisco CEO John Chambers said last night that the economic recovery appeared to be receding and visibility by their major customers was becoming increasingly difficult. Translated that means fewer orders and more push outs. Intel rose in early trading after Piper Jaffary and Salomon raised estimates for mother boards for September. Ashok Kumar now sees shipments up +13-14% vs prior estimates of +10%. He felt the risk of an Intel earnings miss had decreased. This powered the SOX all day and allowed it to close up +3.39. This was only a day after several brokers lowered their chip estimates for 2002 and 2003. Obviously there are several schools of thought on this topic. NVLS warned last night that orders could be -20% less than expected for the current quarter. Lehman spoiled the pre Fed party early by missing earnings estimates of $.85 cents by -15 cents. Trading profits fell from $637 million to $234 million. They said the market conditions from last quarter were getting worse. Weyerhaeuser warned that economic conditions were going to cause it to miss earnings by -5 to -10 cents per share. ROH, a specialty chemical maker, warned that earnings would miss by four cents. Services company URS said the economic downturn had eroded city and state budgets and they would miss estimates by up to -13 cents. Whirlpool warned that they would miss estimates on supplier problems and the reduction of consumer spending on appliances. They said cars and houses were capturing all the excess money available. I have been saying that for weeks. The two big caps I have been discussing, IBM and GE, were also in the news. JPM cut estimates on GE and said they expected them to warn that double digit earnings in 2003 was unlikely. GE closed the day down -.50 at $25.90. JPM cut GE estimates by six cents. Morgan Stanley warned that IBM had exposure to its pension plan and IBM would suffer earnings hits from higher contributions to bring the plan into compliance and lower income from investments. They also expect IBM's option expense to be 15% of 2001 earnings and growing. There is an increasing belief that IBM will warn within the next week and the stock fell below $60 on the news. Consumer Confidence fell for the fourth straight month to 93.3 in September. Although the decline was less than expected the present situation component fell to 88.5 and the lowest level since 1994. All of this is relative since most of the survey was completed before the majority of the current market drop. The October survey is likely to be significantly lower and could be the impetus that will cause the Fed to act again. People planning to buy homes fell to 3.3% from 4.5% last month. Jobs are seen as increasingly hard to get and business conditions were seen as getting worse. Maybe the Fed did not see this survey before making their decision. Respondents planning on buying a car fell to the lowest level since June-2001. So much for zero financing. The lack of car buying did not help retailers. The Chain Store sales index fell to 2.7 from 3.7 last week. This was the worst reading since April 2002. Were is not for the release of the Monsters Inc DVD/VHS movie the numbers would have been worse. Even the discount stores are seeing red. WMT, TGT and FD all warned on Monday that sales were under plan again. Airlines continued to trend lower on multiple news events about the health of the industry. There were comments about two new bankruptcies on the horizon. Over 70,000 workers have been cut in the last 12 months. 265 planes have been grounded and according to the AMR CEO the industry has had to take on an additional $18 billion in debt to make ends meet. The market loss on airline stocks has caused a $12 billion deficit in airline pension plans alone. The push was on in Washington to borrow money but the representatives appeared ready to let some more companies fail to eliminate competition and pricing pressure for the survivors. Oil rose to $31 a barrel and warnings were flying everywhere about the impact to the consumer and another reduction in retail sales with gas pumps sucking money out of wallets. Chalk up another negative for Consumer Confidence in October. After the bell Micron posted horrible earnings. They missed estimates for a loss of -19 cents with a loss of -97 cents. They blamed slowing PC sales, increasing competition and falling prices for memory chips. They said chip prices had dropped -30% in the last quarter and they took a huge charge for inventory write down to current price levels. TrimTabs.com warned that all signs pointed to a further market drop. They said August saw negative fund outflows and September would also. They track buybacks and takeovers and said buybacks were running $9 billion a week from June to August but had dropped to only $1 billion a week over the last four weeks. This drop in corporate buying indicates that less cash is coming to market, companies are not confident their stocks will not go lower and companies are not creating free cash at the same rate as they did last quarter. All very negative events for the market. They said the last time the market outflows were this bad was Oct-1988. That is a cheerful thought. The Dow closed at a level not seen (on a closing basis) since Oct-1st 1998. Now under 7700 a drop to the July intraday lows of 7532 seems extremely likely. The Dow is on track to post its worst quarter EVER at -15.7% as of today's close. With all this negativity you would think the market internals would be off the scale. Sorry to disappoint you but with the Nasdaq trading in positive territory most of the day the oversold conditions are not serious. The sideways movement for the Dow/S&P today relieved the critical pressure points. The VIX closed up only slightly at 45 and the TRIN was only mildly oversold at 1.73. The Put/Call ratio was actually under 1.0 at .86 for the first time in several days. The internals are not going to stop the drop. However, there are significant support levels below us. With the 7532 intraday July lows only -130 points away we could easily hit that on the open. There will probably be considerable program buying in anticipation of a double bottom in that area. Adding to the close support is the end of quarter window dressing possibilities for the end of the week. Monday is the last day of the quarter and I am torn on the likelihood of funds buying on Thursday or Monday to dress up their statements. This assumes they actually have money to spend. I doubt Friday would be a buying day with event risk over the weekend. This means Thursday could be light as well. Traders who have stock to sell know this pattern and could wait for Monday to dump their load. This brings up the following scenario. With any negative news before the open we could see the bids pulled and the July lows hit in the morning. If double bottom buyers appear then end of quarter buyers may want to jump in as well to try and get stock cheap. This could give us an artificial lift through Monday but after that those same EOQ buyers become BOQ sellers and the October crash should begin. This is just a possible scenario. Another scenario making the rounds has a bump at the open on Wednesday and then a straight dive to levels significantly below 7500 by next week. About the only thing common in all the available outlooks is a belief that 7500 will not hold after Monday. We only have two of the high performance trading systems left. These systems consist of an Intel P4 2.53GHZ PC with 1GB ram, 80GB disk, DVD drive, CDRW drive, V.92 Modem, 10/100 Lan card, 500W Subwoofer w/2 speakers, Firewire card, Dual monitor GE-Force 440x 64MB video card AND two 20-INCH FLAT PANEL NEC monitors. The cost of the system is $3,495 plus shipping. The monitors alone are worth more than that. We advertised ten systems on Sunday and only have two systems left. If you are interested click this link for a complete description. http://www.OptionInvestor.com/systemdeal/ Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** My "only" fear as a bear I'm beginning to think I'm "too bullish" in my Index Trader Wraps as I'm not willing to chase gaps lower. But each day, we continue to see the previous day's low taken out and some 1% or larger declines in the major indexes. You can I both "know" some type of short-covering rally is coming, but it is the "when" that is so perplexing. For those that don't think a short-covering rally is possible, as earnings warnings and broker downgrades abound, the a quick check of my July 31st establishment of the "Beetle's Balanced Benchmark" fund hints that there are some meaningful profits currently found in the bond markets, and with stocks down some 11% since our July 31st benchmarking (after the release of Q2 GDP data) I'm still a cautious bear on new entries. Here's just a quick look at the "Beetles Balanced" fund I put together using some "baskets" of different asset classes in short to longer-term Treasury maturities, a little corporate bonds and then the different stock indexes as depicted by the DIA, SPY and QQQ. It may be "staggering" to some to see the Lehman 20+ Treasury Ishares (AMEX:TLT) $90.68 +0.64% on the day, currently carrying a 9.98% gain from our benchmark data of July 31. Please remember, this is a non-strategic allocation based on a hypothetical $1,000.00 placed in each security as of the July 31st close. I had added the US Dollar Index (dx00y) 107.50 -0.33%, for various reasons. Not necessarily to represent an asset class, but to try and "track" foreign capital in/out flows to US-based assets and also get a feel for any erosion/strength in purchasing power by U.S. consumers for foreign goods and services. Beetle's Balanced Benchmark - From 07/31/02 close Wow! The Lehman 20+ year maturity Ishares (TLT) have gained a whopping 9.87% since their July 31st close. On July 31st, the 30-year Treasury YIELD ($TYX.X) was trading with a 5.30% YIELD and today's closing YIELD was a new multi-year low of 4.635%. Stocks on the other hand, as depicted by the DIA, SPY and QQQ are lower on a fairly evenly distributed basis. With the technicals of bonds looking so bullish and stocks so bearish, my "only concern" as a bearish index trader right now is that there would be some type of "asset allocation" program take place, whereby institutions would re-balance their portfolios, taking some profits in bonds (SHY, IEF, TLT and LQD) and reallocating those gains into stocks (DIA, SPY, QQQ). I point out the above as it relates to tonight's wrap, to instill in traders the need for disciplined stops in new bearish trades. In recent wrap updates in the Dow Industrials (INDU) 7,683.13 -2.4%, S&P 500 Index (SPX.X) 819 -1.7% and S&P 100 Index (OEX.X) 410.87 -1.5%, we've looked at regression channels from the recent August highs. With the Dow Industrials (INDU) beginning to violate the lower end of our shorter-term regression channel, I'm going to now take a step back and begin studying a regression channel from this spring's highs, like we've used with the NASDAQ-100 Index (NDX.X) 843 +0.06% and QQQ $21.03 +0.04%. Dow Industrials Chart - Daily Interval My current thinking becomes ... "I traded my bearish target of 8,045, but have seen the Dow continue to fall. If I keep waiting patiently and a rally doesn't take place, is the Dow going to keep falling lower?" I'm starting to think the Dow is going to have one heck of a time getting back above the 8,045 level near-term and looks further vulnerable to the downside. I priced some DJX puts at both OCT and NOV expiration for at the money $77. With volatility high and premiums jacked up, would only purchase 1/2 position. Then, if Dow continues to fall apart lower, then at least a bear has a position. I would prefer the November expiration currently. This way, if we do see an asset allocation take place and the Dow Industrials rally back near 8,050-8,200 range, can look for consolidation, then break lower from consolidation and "average in" to the November $77 again. I have NO PROBLEM averaging down in 1/4 or 1/2 positions. I DO HAVE A PROBLEM with averaging down in an initial FULL position. S&P 500 Index Chart - Daily Interval I would think a bear that established a bearish position near 900 and closed out that position yesterday at our initial target of 835 might be talked into re-establishing another position with a tight stop back above 835. Just as the Dow had some "problems" all day around the 7,750 level, the SPX didn't see the light of day above 835 today. I actually like the SPX as a short/put play better than I do the Dow Industrials as I can control my risk better with a tighter stop right now. I also like the S&P 500 Bullish % ($BPSPX) and can tie in current levels of bullishness with those found in early July. Remember! Early July is depicted by a "red 7" on the S&P 500 Bullish % Chart. S&P 500 Bullish % Chart - 2% box Last night we looked at the very narrow Dow Industrials Bullish % ($BPINDU) from www.stockcharts.com. Here's the broader S&P 500 Bullish % ($BPSPX). On a QUANTITATIVE basis, we can say that the SPX is just as weak (column of O at 34%) as it was in July (red 7). Using the previous bar chart and regression channel, we see the SPX starting to drift a bit below its mid-regression channel. As long as a bear doesn't OVERLEVERAGE in a bearish trade, I still like the SPX bearish. I also like the same type of trade management with an SPX bearish trade, just in case we were to get an asset allocation shift near-term. If not, the so be it. Now... OEX traders know that the OEX looks "just like" the SPX does as it relates to regression taken from this spring's highs on the daily interval. So lets stick with our shorter-term regression channel, but tonight, lets look at the 60-minute chart. OEX and SPX traders should be monitoring both OEX and SPX charts, even if you're just trading one of the S&P's. As such, lets use the OEX regression channel, which is still shorter-term from the 08/22/02 relative high. If nothing else, it will let an OEX trader understand risk to OVERLEVERAGING in a bearish trade, as weak as the technicals are. S&P 100 Index Chart - 60-minute Intervals The 60-minute bar chart of the OEX (identical to 60-minute SPX) is still hugging the lower end of our short-term regression. Notes can be taken as to how the 21-pd SMA (pink SMA) has served as resistance near the "rally" at 442 and how the 50-pd SMA (blue SMA) seemed to "cut the head off" of the OEX on September 17th's rally near 900. If futures are higher in the morning, then I'd let the MARKET rally the OEX as close to 430 as possible. Heck, I've been waiting for a rally entry point in the markets. Under such a rally condition, I'd like a trade setup short and look for the MACD, which is trying to turn higher on the 60-minute chart to begin flattening out and starting to roll, just below the zero level for MACD. If stochastics reach "overbought" then good bearish entry in OEX of 430, stop 450, target 400. If OEX breaks today's lows, the short/put, stop 422, target 387, which was a level of "monthly support" from Sunday's work we did with the OEX open interest. Kind of interesting... I just looked at the open interest for the October puts. The highest open interest in the OEX puts are at the 440 strike (OXBVH) still (OI= 4,900), while the 400 strike (OXBVT) (OI=4,372 dv=1,366) with last trade at $12.30. Hmmmm.... 400-12.30=387.70. That's still pretty close to the $387.10 monthly support we calculated Sunday in these puts. Good lesson perhaps in why an option trader SHOULD NOT BE BUYING OUT THE MONEY PUTS when VOLATILITY IS HIGH as it is often a losing man's game. Remember, institutions sell out the money and will buy in- the-money to hedge a portfolio/position. In today's 11:00 AM EST Update, I profiled a bearish trade in the QQQ's near the $21.00 level, stop $21.52 and targeted $20.20 on a negative FOMC reaction. Well... the Q's found support all day at the $20.75 level and resistance at our retracement resistance of $21.44. Since today's trading range $20.65-$21.45 is just about identical to Monday's range lets look at the 60-minute chart tonight. NASDAQ-100 Index Tracking Stock (QQQ) - 60-minute Interval The Q's traded tough today, no doubt about it. There was "rumor" circulating that a large institution was buying baskets of technology stocks. However, the QQQ had a tough time getting much above our $21.44 level of retracement. One think I "pick up on" from the 60-minute chart is something I haven't seen from stochastics, which is similar to a bit of a "hick up," where in the past, stoch's have just rolled lower. I'll use this as a "reason" to stick with a stop just above $21.44 level as outlined in today's intra-day update of $21.52 and last night's wrap stop. QQQ traders are perhaps still monitoring Qualcomm (NASDAQ:QCOM) $27.54 +0.25%, which traded a day high of $28.10 and still finds some sellers at $28.00 along with Microsoft (NASDAQ:MSFT) $45.64 +0.9%, which didn't look to me like a "tech buy program" was all that active. Traders that will take a moment and pull up a 60-minute chart of QCOM will see the stock sitting right on its 21-pd SMA of $27.55, so I think a QQQ bear would like to see the stock back below on the 60-minute time frame. MSFT finds resistance at its 21-pd SMA of $46.20. In essence, both stocks together create a near-term "neutral" type observation with the QQQ, but good correlation nonetheless as it relates to the QQQ 60-minute chart interval. QQQ semiconductor components Applied Materials (NASDAQ:AMAT) $11.74 +4.73% traded down 20-cents from their close in after- hours trading, while Intel (NASDAQ:INTC) $14.33 +1.4% edged down 8 cents after Micron Technology (NYSE:MU) $12.95 +1.48% missed estimates by 9 cents, with a loss of $-0.27 per share. Jeff Bailey ************************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 **************** Are We There Yet? by Steven Price This morning's consumer confidence numbers came in slightly better than expected, however showed a fourth straight monthly decline. This number is a measure of consumers' assessment of the present economic situation and bleeds over into their spending and investing habits. The index fell from a revised 94.5 reading in August, to 93.3 in September. When consumers are feeling less confident in the economy, they generally spend less of their disposable income and stay away from the stock market. This is bad news for the market, as there has been little positive data on the economic front and apparently consumers have been paying attention. Contained within the report were several details that shed light on specific areas. The number of consumers that felt jobs were harder to get rose 1.7%, reflecting the increased pace of layoffs. "Weak labor market conditions continue to erode confidence," according to the director of the Conference Board's research center, which issues the report. However, there was improvement in optimism over current business conditions. The report often offers "Alice in Wonderland" type data, such as fewer consumers expecting the business environment to improve in the next six months, but also fewer consumers expecting the business environment to worsen. Also, the percentage of those rating business conditions as "good" increased, but so did the percentage of those rating business conditions as "bad." These responses are combined to form the big number, which in this case, showed a decline. The event most traders were waiting for was the announcement on interest rates. The FOMC left rates unchanged, however, two of the twelve governors voted for a reduction of the Fed Funds rate. This dissention in the ranks already has traders looking to the November 6 meeting for a cut. While some are speculating it could be as much as 50 basis points, there is a lot that can happen between now and November 6. In the explanation for why the FOMC left rates unchanged, the statement reads as follows: "Over time, the current accommodative stance of monetary policy, coupled with still robust underlying growth in productivity, should be sufficient to foster an improving business climate. However, considerable uncertainty persists about the extent and timing of the expected pickup in production and employment owing in part to the emergence of heightened geopolitical risks." However, the committee did leave the easing bias unchanged, stating, "Consequently, the Committee believes that, for the foreseeable future, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness." The Dow has been finding intraday resistance at successively lower levels, and today continued that trend. After fighting 7800 throughout much of the afternoon, the post announcement sell-off cracked support at 7700 and stayed there, closing at 7681.33. We are now below the July 23 closing low of 7702.34. The next test will be the July 24 intraday low of 7532.66. That is less than 150 points away, and could easily be taken out in the first hour of trading. However, if there is going to be a bounce, this would seem like a logical point for it to take place. If we don't see a rebound and actually close below that 7532 level, we could quickly test the downside target of just under 7200, based on the head and shoulders pattern that I outlined in the OI Market Wrap on Monday. Remember that on the morning of July 24, we had just set a new recent low the day before and the Dow started the day out down 170 points. Things looked bleak and the Dow appeared on its way to testing the September 1998 low of 7401. Then we got a 658- point turnaround by the end of the day. This was the beginning of a rally that ended at 9077 on August 22. There was not any significant change in the business environment, and yet we rallied more than 1500 points in less than a month. it didn't make much sense then, but it still happened. While I've been bearish for a while now, I'm starting to get a little nervous about my short positions, as we have now re-tested the July closing low that was our target over the last month. The economic data has been mostly bad and Micron missing earnings estimates by a long shot is certainly more bad news for the techs. The Nasdaq Composite broke its July intraday low of 1192 yesterday, closing at 1184.93, and today's drop of only 2.76 looked as though it might have found a consolidation level, especially considering the 189 point drop in the Dow. We'll see how Micron's news affects the index in the morning, but if the rebound in the Semiconductor Index (SOX.X) is an indication, after all of the semiconductor downgrades over the last week, we may finally be seeing a level of support. I am going to be playing with very tight stops in the morning, in case we get a July 24 repeat. My guess is that by the end of the day on Wednesday, we'll have a good indication where the long-term trend is headed. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7532 Current : 7683 Moving Averages: (Simple) 10-dma: 8151 50-dma: 8457 200-dma: 9570 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 819 Moving Averages: (Simple) 10-dma: 866 50-dma: 889 200-dma: 1043 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 843 Current : 843 Moving Averages: (Simple) 10-dma: 891 50-dma: 941 200-dma: 1263 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): Have we found the bottom? Today's rebound in the SOX followed a week's worth of downgrades that ended the day on Monday with a 35% loss in the index over the last month. Tuesday saw a rebound of 3.39 to close at 239.58. The intraday low was just over 230, and the rally came in spite of the Dow giving up 189 points and the Nasdaq Composite losing only 2.76. The techs have been plummeting and closed below July's lows for the first time on Monday. With today's rebound, we may be seeing signs of a bottom. Micron Technology (MU) missed their earnings estimates after the bell and saw estimates lowered for 2003 and 2004 by CSFB. much of micron's problems stemmed from lower chip prices. RF Micro Devices, however, raised its expectations for earnings and revenue. Many of the other techs were trading up after hours, so we may have found at least a temporary bottom. 52-week High: 657 52-week Low : 236 Current : 239 Moving Averages: (Simple) 10-dma: 263 50-dma: 312 200-dma: 469 ----------------------------------------------------------------- Market Volatility The VIX is creeping upward, and seems to be moving slower than it should after a 189 point drop in the Dow. My guess is that traders are willing to take a chance that we've found a bottom and collect the high premiums from option sales. At these levels, premium decay is high and requires quite a bit of movement to justify the price. The last time we traded at this level in the Dow, however, the VIX was over 50, so we could still see an increase if the market continues to fall. CBOE Market Volatility Index (VIX) = 45.38 +0.67 Nasdaq-100 Volatility Index (VXN) = 59.40 –0.45 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.86 548,103 468,973 Equity Only 0.65 430,482 280,406 OEX 0.97 21,796 21,122 QQQ 0.37 52,178 19,530 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 34 - 4 Bull Correction NASDAQ-100 21 - 7 Bear Confirmed Dow Indust. 20 -13 Bull Correction S&P 500 31 - 8 Bear Confirmed S&P 100 25 -10 Bear Confirmed 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 1.56 10-Day Arms Index 1.63 21-Day Arms Index 1.51 55-Day Arms Index 1.36 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 795 1167 NASDAQ 1949 2061 New Highs New Lows NYSE 32 248 NASDAQ 13 248 Volume (in millions) NYSE 1,971 NASDAQ 1,660 ----------------------------------------------------------------- Commitments Of Traders Report: 09/17/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials Increased long positions by a whopping 50,000 contracts and shorts by 33,000. Small traders followed suit with large increases, but leaned toward short position increases more heavily. Commercials Long Short Net % Of OI 08/27/02 425,982 469,087 (43,105) (4.8%) 09/03/02 431,755 468,529 (36,774) (4.1%) 09/10/02 426,230 470,537 (44,307) (5.0%) 09/17/02 476,224 503,268 (27,044) (2.7%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 36,481) - 10/16/01 Small Traders Long Short Net % of OI 08/27/02 153,152 72,408 80,744 35.8% 09/03/02 158,262 80,130 78,132 32.8% 09/10/02 166,696 85,259 81,437 32.3% 09/17/02 182,243 116,377 64,866 21.7% 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 increased long positions by 35% and shorts by 29%. Small traders increased longs by only 1,000 contracts, but increased short positions by 4,000, or 34% Commercials Long Short Net % of OI 08/27/02 45,354 50,634 (5,280) ( 5.5%) 09/03/02 46,712 53,287 (6,575) ( 6.6%) 09/10/02 53,309 58,745 (5,436) ( 4.9%) 09/17/02 72,522 75,815 (3,293) ( 2.2%) 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 08/27/02 10,156 8,040 2,116 11.6% 09/03/02 11,150 7,720 3,430 18.2% 09/10/02 14,024 10,494 3,530 14.4% 09/17/02 15,288 14,142 1,146 3.9% 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 increased their long positions by 4,000 contracts, while increasing shorts by 7,000. Small traders increased longs by 6,000 contracts, almost doubling the position, while increasing shorts by only 1500, or 15%. Commercials Long Short Net % of OI 08/27/02 21,023 14,328 6,695 18.9% 09/03/02 21,161 13,792 7,369 21.1% 09/10/02 22,946 14,936 8,010 21.1% 09/17/02 26,863 21,187 5,676 11.8% 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 08/27/02 6,825 8,438 (1,613) (10.6%) 09/03/02 6,395 7,966 (1,571) (10.9%) 09/10/02 7,568 10,129 (2,561) (14.5%) 09/17/02 13,393 11,637 1756 7.0% 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 ****************** Low Risk, Cash Heavy Funds This week we search for conservative stock funds with high cash balances as of last month-end, using MSN's deluxe fund screener. Our aim here is to identify diversified equity funds that share two things in common. First, they're rated as being "low" risk relative to their category peers per Morningstar. Second, they have cash allocations in excess of 15% per Morningstar's latest fund report. In most cases, that means August 31, 2002, but in some cases, the portfolio composition information may be older. To screen funds based on this criterion, we will be using MSN's deluxe fund screener found at moneycentral.msn.com. Below is a summary of our initial screen criteria: Percent Stocks > or = 40% Percent Cash = High as Possible Morningstar Risk = Low as Possible Morningstar Return = High as Possible Morningstar Rating = High as Possible In other words, we are looking for partial or full equity funds that have at least 40% of net assets invested in stocks and are also cash heavy. We use Morningstar's ratings to isolate those funds that have low risk, high return, and high overall ratings when compared to their category peer group. One of the nice features of MSN's deluxe fund screener is it'll rank funds based on your criteria, providing you with "best-fit" matches. In the next section, we'll take a closer look at this week's results to see which ones are worth further consideration. Best Fit Matches Using MSN's fund screen results, we isolated the following stock funds with low or below average risk and heavy cash allocations, excluding specialty, market neutral and other funds which invest in derivatives (futures) and thus may look to be cash heavy. Adhia Twenty (ADTWX) 48.8% Cash, 51.2% Stocks Quaker Aggressive Growth A (QUAGX) 44.9% Cash, 53.9% Stocks Hennessy Leveraged Dogs (HDOGX) 35.1% Cash, 62.5% Stocks Franklin DynaTech C (FDYNX) 44.2% Cash, 55.8% Stocks MainStay MAP I (MUBFX) 25.9% Cash, 71.3% Stocks Wisdom Inv (WSDVX) 23.7% Cash, 76.3% Stocks Loomis Sayles Provident Fund (LSCGX) 21.3% Cash, 78.7% Stocks Bear Stearns Balanced (BBACX/BBAYX) 20.6% Cash, 49.1% Stocks Auxier Focus (AUXFX) 20.2% Cash, 62.0% Stocks FBR Small Cap Value A (FBRVX) 19.5% Cash, 80.5% Stocks UMB Scout Worldwide (UMBWX) 19.4% Cash, 76.4% Stocks Royce Special Equity (RYSEX) 18.7% Cash, 81.1% Stocks Bear Stearns Alpha Growth (Mult.) 18.3% Cash, 81.7% Stocks Fidelity Small Cap Stock (FSLCX) 18.3% Cash, 80.7% Stocks Fidelity Growth & Income II (FGRTX) 18.1% Cash, 75.5% Stocks Kayne Anderson Small Mid Cap (PKSFX) 17.3% Cash, 82.7% Stocks First Eagle SoGen Overseas I (SGOIX) 15.3% Cash, 72.4% Stocks Value Line Income (VALIX) 15.1% Cash, 66.9% Stocks Janus Advisor Growth & Income (JADGX) 16.5% Cash, 74.8% Stocks FAM Value (FAMVX) 16.0% Cash, 84.0% Stocks At this point, since our list was starting to get rather large, we opted to make the screen criteria more stringent as follows: Percent Stocks > or = 40% (unchanged) Percent Cash > or = 15% (versus High as Possible) Morningstar Risk = Low (versus Low as Possible) Morningstar Return = High as Possible (unchanged) Morningstar Rating = 5 Stars (versus High as Possible) That narrowed the screen results list in a hurry to 17 choices, including one or two funds that weren't previously isolated as follows (excluding specialty, market neutral, other funds, etc): Auxier Focus (AUXFX) 20.2% Cash, 62.0% Stocks Osterweis Fund (OSTFX) 15.3% Cash, 71.0% Stocks Quaker Aggressive Growth A (QUAGX) 44.9% Cash, 53.9% Stocks First Eagle SoGen Overseas I (SGOIX) 15.3% Cash, 72.4% Stocks Value Line Income (VALIX) 15.1% Cash, 66.9% Stocks FAM Equity Income (FAMEX) 15.0% Cash, 84.4% Stocks FBR Small Cap Value A (FBRVX) 19.5% Cash, 80.5% Stocks Mason Street Growth Stock B (MGSBX) 15.2% Cash, 84.8% Stocks MainStay MAP I (MUBFX) 25.9% Cash, 71.3% Stocks Kayne Anderson Small Mid Cap (PKSFX) 17.3% Cash, 82.7% Stocks UMB Scout Worldwide (UMBWX) 19.4% Cash, 76.4% Stocks We loaded these eleven funds into Morningstar's "Fund Compare" tool, found at www.morningstar.com, to get updated performance information through September 23, 2002 and to compare returns, risk, and costs/expenses. Three funds (Osterweis, First Eagle SoGen Overseas and MainStay MAP) have minimum initial purchase requirements of $100,000 or more. However, First Eagle and MainStay also have retail class shares (A,B,C), so we loaded those symbols into the Morningstar Fund Compare tool as well. We found that the Class A shares of First Eagle SoGen Overseas (SGOVX) was also 5-star rated, so we opted to leave that fund in, but the retail class shares of the MainStay MAP Fund were only 3-star rated, so we have decided to rule them out. Osterweis Fund, because of its high minimum, is also ruled out. We evaluated these remaining funds based on their relative cost structure, management/manager tenure, and 2000 YTD performance, as well as other factors such as long-term performance and risk levels versus category peers. We also checked to see how these cash heavy fund winners are graded in Lipper's system for total return, return consistency and preservation since Lipper grades funds against their broad peer group (all U.S. stock funds, all international stock funds, etc) over the trailing 3-year period. In the next section, we tell you which funds we favor the most. First Eagle SoGen Overseas A (SGOVX) Our favorite fund on the finalist list is the First Eagle SoGen Overseas Fund Class A Shares (SGOVX). This Morningstar highest rated international stock fund has been co-managed by Jean-Marie Eveillard and Charles de Vaulx since its inception (August 1993). These veteran co-managers with Societe Generale Asset Management (Paris) apply a time-honored value discipline to foreign markets that doesn't always capture current market trends but has proven effective over time, reports Morningstar. Their cautious value- driven style, as recent numbers indicate, will sometimes lead to higher-than-average cash balances, when compelling opportunities don't exist in the foreign markets. This "conservatism" has done well for shareholders in 2002, with the fund up 2.1% since December 31, ranking in the top 1% of the Morningstar foreign stock category. That compares to a YTD loss of 21.3% for the benchmark MSCI EAFE index and YTD loss of 20.3% for the average foreign stock fund. SoGen's performance in 2002 shouldn't surprise anyone, since the portfolio co-managers were named Fund Manager of the Year (2001) in the international equity fund group by Morningstar. In 2001, Eveillard and de Vaulx posted a 5.4% annual total return, +26.8% to the benchmark MSCI EAFE index, ranking SoGen Overseas Fund A in the foreign stock fund category's top percentile (top 1%). The fund's trailing 5-year average total return of 7.6% through September 23, 2002 also ranks in the category's top percentile. Over the same period, the benchmark MSCI EAFE index declined by an annual equivalent rate of 5.7%, as the average foreign stock fund lost an average of 4.6% a year. Patient investors seeking a foreign stock fund that finds value in "out of favor" companies abroad should like the fund and its conservative ways. The fund's a Lipper Leader for total return, consistency of return and capital preservation, and a perennial favorite of Morningstar. For more information, go to the First Eagle Funds website at www.firsteaglesogen.com. SoGen Overseas Fund Class A shares have a minimum initial investment of $1,000, a front-end sales charge of 5.0%, and an expense ratio of 1.50%. Auxier Focus (AUXFX) Another value-driven strategy we like is the Auxier Focus Fund (AUXFX) managed by Jeff Auxier since fund inception, July 1999. While it does not have the long-term track record that Societe Generale does, Auxier's relative performance has been superior since 1999 relative to other large-cap value funds, using data per Morningstar. At $20 million, Auxier Focus Fund isn't well known (yet) but over the last three years, it has beaten about 97% of its large-cap value fund peers, using Morningstar data. Since December 31, the fund has lost 11 percent, considerably better than 25.8% YTD decline for the benchmark S&P 500 index, and strong enough on a relative basis to rank it in the top 2% within the Morningstar large-cap value category. The average large-cap value fund has fallen in value by 23.5% so far this year. Auxier's trailing 3-year average total return of 2.2% through September 23, 2002 ranks the fund within the category's top 3%. Over the same period, the S&P 500 index declined by an annual- equivalent rate of 13.1% and the average large-cap value fund lost an average of 6.1% a year. Like SoGen's co-managers, Auxier follows a value-driven style, and will put money in cash when conditions are unfavorable or multiples/valuations don't justify the stock's purchase price. According to Morningstar's report, the fund's largest holding through July 2002 was the Huntington Money Market Fund, which represented 29.4% of assets at July 31, 2002. It's that kind of conservatism that has helped Auxier's Focus Fund to preserve capital far better than its large-value peer group through the market downswing. Also contributing to the fund's good relative performance has been its multi-cap value strategy, with mid-cap value and small-cap value stocks doing better in recent years than large-cap value stocks. Investors looking for a multi-cap value strategy may find this relatively new offering to be appropriate for their investment goal. The fund is a Lipper Leader in four categories: 1) total return, 2) consistency of return, 3) capital preservation and 4) tax efficiency, making it suitable for both taxable and deferred accounts. For more information, go to the Auxier Funds website, located at www.auxierasset.com. Auxier Focus Fund has a minimum investment initially of $2,000 ($500 for IRA accounts), and is offered on a no-load basis. The expense ratio was not shown, so you may want to call 800-862-7283 and speak with a fund representative to get that information. Conclusion We've profiled two value-driven strategies that have done a good job of preserving capital in down markets, and are not afraid to move into cash for defensive purposes or when they can't isolate growth opportunities at reasonable prices. Because of their pro value bias and their high cash balances, these funds may lag the market when growth stocks are in favor and stocks are advancing. However, over time they have the potential to do relatively well. Sometimes, it's not how much you make, but how well you preserve assets in down markets. We showed you the approach we used to identify these "cash heavy" winners and what we did to skinny the list to a select number of funds, which one could then evaluate further. So, if you want a fund that is cash rich, you may want to go back and look at some of the other funds the screener identified as "best match fits." Remember that fund screen results and independent ratings should be used as starting points in your search process. Your process should include a review of the fund's website and the prospectus applicable to the fund in question. After reading over the fund materials, you may want to take time to call the fund family and speak to a representative, to answer any questions that you have. Generally speaking, you should do all that before investing your hard-earned money to make sure that the fund's style/strategy is consistent with your goals, time horizon, and tolerance for risk. Steve Wagner Editor, Mutual Investor email@example.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 *********************** Thank You Micron The news after the bell was ugly for the huge memory chip maker. Prices falling -30% in the quarter, sales down -75% from last year, PC sales slowing. They missed their earnings with a loss five times bigger than expected. 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The Option Investor Newsletter Tuesday 09-24-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Stock Picks: NVDA Dropped Calls: AZO, MMM Dropped Puts: MXIM, BBOX, LTR Daily Results Call Play Updates: ABT New Calls Plays: LLL Put Play Updates: BSC, MAR, AIG, BRL, JCI New Put Plays: FISV, BGEN, CI *********** STOCK PICKS *********** NVDA - NVIDIA Corp. - $8.88 Strategy: Long stock with put insurance It seems like forever since we've seen any concerted bullish action in the Semiconductor sector, with the SOX index tagging new multi-year lows on a nearly daily basis. The environment for IT spending continues to deteriorate and in that environment investors will be rewarded for ferreting out the values still buried in the Technology arena. NVDA was one of the great momentum stock plays last year, as it rocketed as high as $70 per share. Since then, a combination of slowing demand and accounting issues have served to deflate the share price to the point where it looks like a solid value. With $5.40 in cash for each outstanding share, a very low debt-equity ratio and real earnings, NVDA appears poised to benefit from any improvement in the IT spending picture. It appears that we aren't the only ones to notice the value here, as the stock continues to find buying interest every time it nears its $8.50 July lows. So far, we haven't seen the catalyst that will drive the stock substantially higher, but the primary factor that we want to watch for is an increase in PC sales, as that will directly drive demand for NVDA's industry-leading graphics processing technology and products. It is probably a safe bet that NVDA will also need to see some improvement in the overall Semiconductor sector in order to put together any meaningful rally, but its relative strength in recent weeks as the SOX has been posting new lows is certainly encouraging. Due to its relative strength, NVDA should outperform to the upside on any rebound in the broader Technology market. Once that move gets started, NVDA will meet its first challenge near the $11.50-13.00 area. The 50-dma is currently at $11.65 and falling, and then there is recent resistance between $12-13. Once clear of that obstacle, investors will be targeting the $15 level (top of the July gap). If we see improvement in the IT spending environment, then it is entirely conceivable that NVDA could move back up near the $22-24 over the next 12 months. The play is to go long NVDA stock at our target of $8.50-9.00 and go long one contract of the Jan-2003 $7.50 puts UVA-MU at $1.45 for each 100 shares you are long. There is no requirement to go long the put but it does prevent all but a very minimal loss should something unexpected happen to NVDA. Option 1: If NVDA is not above $11.50 by Jan 2nd, close both positions and exit the play. Option 2: If NVDA is below $8 on Jan 2nd then you have the option of closing the put for a slight profit and lowering your basis in the long stock play by the amount of the put premium received or closing both positions and exiting the play. Option 3: If NVDA is above $13.00 by Jan 2nd then close the put position for any remaining premium and set a stop loss on the stock at your entry point of $8.50-9.00 plus any short fall on the put premium. ($10.50 max) **************** 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: ***** AZO $73.05 -1.73 (-2.80 for the week) Autozone has been resilient during the recent market decline. It has actually posted a loss of only 1.8%, as the Dow gave up 7.5%, since we picked it on September 13. As of this morning, the stock had actually posted a gain before this afternoon's sell-off. The stock has not been able to crack the $77 barrier, however, as the weight of the market has held it back. A break above that level could help AZO achieves $83 quickly. The company releases earnings tomorrow, so we are closing the play, as is our policy. While we are taking our call money and investing it elsewhere, this is still a stock to keep an eye on in the future. --- MMM $113.13 -4.36 (-6.33) The bulls stubbornly defended support in MMM throughout the past week, but finally this afternoon lost the battle as the stock fell under the $115 level. That ushered in a fresh wave of selling and MMM ended the day just above the $113 level, as investors began selling the stronger stocks in the market. With our violated stop and the DOW closing at a new multi-year low, it should come as no surprise that we're dropping the play tonight. PUTS: ***** MXIM $24.19 +0.65 (-0.01 for the week) The semiconductors seem to have found a consolidation point, after giving up 35% of their value over the last month. We had originally targeted 250 as a bounce point and when that level failed, we piled on. This morning's low of 231 looks like 230 served as the bounce point. Maxim bounced along with the rest of the group, and for now we'll get out of the way, after playing them short for a while. The sector still looks weak, but any bear market experiences some rallies. If this rally rolls over, we'll look at these stocks again, but for now we'll move to the sidelines. --- BBOX $32.31 +1.66 (+2.31) With the broad markets sharply lower the past two days, the strength in BBOX is a warning to complacent bears. If the strong market-wide selling isn't prompting selling in the stock, then a short-covering rally could really propel BBOX higher. Rather than take this risk, we're dropping the play tonight before our $33 stop is violated. There are plenty of other attractive put candidates and that is where we want to focus. Use any opening weakness tomorrow to exit open positions. --- LTR $44.87 -0.80 (-1.10) After the sharp selloff in shares of LTR last Friday, it looked like the stock was destined to retest its July lows. The price action this week has actually looked bullish in light of the sharp drop in the overall market. The DOW slid to a new multi-year closing low on Tuesday, but LTR only fell to just below the $45 level. While the stock could continue to slide lower, it appears that the risks are now to the upside. Rather than risk giving back our gains on a short-covering rally, we're dropping the play tonight to make room for better put candidates. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* ABT 42.10 -0.11 0.40 Good medicine AZO 73.05 -0.72 -1.73 Drop, earnings LLL 56.79 1.10 0.69 New, reloading MMM 113.13 -0.41 -4.36 Drop, stopped PUTS AIG 53.99 -0.70 -1.26 Still rolling BBOX 32.30 1.19 1.66 Drop, SOX rebound BGEN 29.08 -1.35 -0.31 New, bad medicine BSC 56.18 0.39 -1.21 Sympathetic drop FISV 29.60 -0.62 -0.99 New, support break JCI 73.01 -1.23 -2.51 past support LTR 44.87 0.37 -0.80 Drop, profits MAR 27.55 0.09 -0.70 no visitors MXIM 24.19 -0.49 0.65 Drop, Sox rebound ************************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 ******************** ABT $42.10 +0.40 (+0.30 for the week) Abbott has held steady as the market has given up its gains and fallen through previous levels of support. The recent news that its Vysis PathVysion® fluorescence in situ hybridization (FISH) test was approved as a means for determining whether breast cancer patients will benefit from Herceptin, has no doubt kept investors happy and prevented a sell-off during the broad market decline. The fall is generally the best time of year for drug stocks, as there is a plethora of medical conferences, which give them the opportunity to offer up data in support of their products. The stock has held up ever since its gap up on July 25, which is more than the broader markets can say. Abbott got some recognition today as one of the top users of information technology in its field from Information Week magazine, for the third year in a row. While this probably does not mean much to the bottom line, it at least lets investors know the company is at the leading edge in this area. ABT will also be presenting some new data showing the effectiveness of a new Quinolone (class of antibiotic) against several different microbes this weekend at the ICAAC conference in San Diego. The recent triple top point and figure breakout has held in ABT and in spite of the sag in the Pharmaceutical Index (DRG.X) and Biotech Index (BTK.X), ABT just keeps adding green candles to its chart. The PnF pattern also looks like a bullish flag breakout. More conservative investors may want to wait for a break in the bearish resistance line, which would require a trade of $43, to initiate long entries. However, OI sees the current level as a long entry point and we will keep the long position open on ABT. ************** NEW CALL PLAYS ************** LLL - L-3 Communications Holdings $56.79 +0.69 (+1.84 this week) Company Summary: As a leading supplier of sophisticated secure communication systems and specialized communication products, LLL provides critical elements of virtually all major communication, command and control, intelligence gathering and space systems. The company's high data rate communication, avionics, telemetry and instrumentation systems and components are used to connect a variety of airborne, space, ground-based and sea-based communication systems. Why We Like It: Despite a brief respite last week, war fears ticked upwards again in recent days. An increase in the tensions in Israel got the ball moving over the weekend, and then Britain's Prime Minister added to the rhetoric with his speech on Tuesday, indicating that his country shares the United States' concerns about Iraq's Saddam Hussein. While the overall Defense Industry index (DFI.X) has remained essentially flat this week, that is a sign of underlying strength when compared to the heavy selling that has been seen in the broad market. It was only a couple weeks ago that we successfully played the upside in LLL before profit taking forced us to drop the play. Well, the necessary consolidation appears to have taken place and buyers have been driving the stock higher over the past few days. In fact, it looks like the bulls could try for a breakout over its recent high ($58.45) in the near future. Solid support has been built up in the $53.50-54.00 area, further supported by the 200-dma ($53.22) and the 20-dma ($53.58). Any drop near these levels should provide for attractive entries into the play, although with the heightened war tensions, we may need to be less aggressive and target a rebound from the $55 intraday support level. Momentum traders can consider new positions on a rally through the $57 level or wait for a push through $58.50 before playing. We are initiating coverage of LLL with our stop set at $53.50. BUY CALL OCT-55 LLL-JK OI=2143 at $3.80 SL=2.25 BUY CALL OCT-57*LLL-JY OI=2750 at $2.40 SL=1.25 BUY CALL OCT-60 LLL-JL OI=2170 at $1.30 SL=0.75 BUY CALL NOV-60 LLL-KL OI= 7 at $2.65 SL=1.25 Average Daily Volume = 1.99 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 ******************* BSC $56.18 -1.21 (-1.54 for the week) Bear Stearns rallied this morning on conflicting data from Lehman Brothers and Goldman Sachs. Lehman missed earnings by a wide margin. Goldman actually posted increased profits due to strength in bond- derivative and currency trading, which offset declines in investment banking revenue. This was the exception to the rule, however. August saw a withdrawal of more than $5 billion from mutual funds, the first time in 14 years that funds saw a net decline, in spite of gains in the stock market. Those gains reversed themselves in September and we will most likely see a much greater outflow when this month's numbers are reported. Things still look shaky for the brokerage stocks, as Lehman said its quarterly profit fell sharply as underwriting and trading revenue fell off amid a weak environment for stocks and bonds. Consumer sentiment declined for the fourth straight month, and although the number was higher than expected, the trend is still down. As consumers lose confidence in the economy, investment in the stock market usually remains low. BSC rallied with the rest of the market after the confidence number was released, and on Goldman's news, but that rallied was short lived. The stock rolled over as investors digested the comments from Lehman and the fact that confidence is still waning. BSC finished down 1.21 on the day, and we have lowered our stop loss to $59.00. Until the economy sees some reassurance from stocks, rather than a steady stream of warnings, it is not likely that trading revenues will pick up any time soon. --- MAR $27.55 -0.70 (-1.05 for the week) Marriott has been in a slow decline since breaking below $30. Slow is fine, as long as we head in the right direction fast enough to justify the option premium. The stock has had each intraday rebound stopped at successively lower levels. Monday found resistance at $28.50 and Tuesday found resistance at $28.00. With hotel revenues down, and the airlines seeking additional aid from Congress because of fewer passengers (as well as other expenses), the immediate future for the hotel industry looks weak. Marriott's spread triple bottom breakdown on the point and figure chart coincides with the breakdown from a 5-week consolidation pattern. The initial target of $25 continues to be a likely short-term target with the bearish vertical count of $26 looming below, as well. We expect hotel revenues to take another dive this month, after the 9/11 anniversary hit travel hard, as evidenced by the airlines complaints. The slowdown in business spending also affects business travel as more companies are keeping their workers home. This may have been on the minds of analysts at J.P. Morgan, who recently lowered their rating on the stock from a long-term buy to a market perform. Our stop loss on MAR will be lowered to $30.50, just above the high of the day on September 19, when it broke down. --- AIG $53.99 -1.26 (-2.36) As the broad markets have continued to grind lower, AIG has followed suit amidst concerns about both earnings and the potential impact of another terrorist-type incident. Monday's weakness send the stock down to the $55 level, which is the 62% retracement of the rally off the July lows. Buyers stepped in at that technical level this morning, pushing the stock up near the $56.50 level, but there was no follow-through. Following the Fed's decision to leave interest rates unchanged, the sellers piled back on, pushing the stock down to $54 by the closing bell. The next possible level of support is down near $52.50 before AIG takes aim on the July intraday low near $47.60. Like most of the broad market, AIG is now deeply oversold and we need to see a failed rally to give us a prudent entry point. Resistance is firming up near the $57.50 level, and a failed rally near that level would make for a great entry point. Given the unrelenting weakness in the broad market though, we may have to settle for entries on a rollover in the vicinity of today's intraday highs ($56.50) or even as low as today's broken support at $55. Lower stops to $58. --- BRL $61.07 -0.76 (-2.58) Our BRL play has been the story of a series of breakdowns, as first the $66 and $65 levels gave way, followed by the 50-dma on Monday. While the trend is clearly still down, we're starting to see a slight change in investors' behavior. The gap down opens of the past 2 days have been met with buying interest, indicating that we could be faced with an oversold bounce in the near future. Judging by the $51 bearish price target on the PnF chart, that bounce will likely be short-lived and will provide our next high-odds entry point. The intraday highs have defined overhead resistance just below $62. A failed rally near $61.75 would make for a solid entry ahead of the stock breaking below the $60 level. Due to the way the stock has been bouncing back from its morning lows of late, we want to be very careful about trying to enter on a breakdown below support. If you prefer to enter on a breakdown below $60, make sure the breakdown comes on heavy selling volume. To protect gains in open positions, lower stops to $62 tonight. --- JCI $73.01 -2.51 (-4.03) If there was any doubt that the rush of auto sales has slowed significantly, then the huge breakdown in shares of GM on Tuesday should have removed that doubt. While the company's announced SUV recall may have played a part in the more than 8% decline in price, the heavy selling in shares of F and DCX confirm that it is an industry-wide problem. And that is a big part of what is going on with our JCI put play. The company is dependent on the Automotive industry to keep buying parts for new cars. If those cars aren't selling, then JCI is going to have a hard time regaining its footing. Apparently investors have already figured this out, as the stock is continuing to see heavy selling. Buyers managed to hold the stock above $75 yesterday, but with the persistent weakness in the broad market as well as the price weakness from the likes of DCX and GM, JCI plunged below more important support at $74 on Tuesday. The July lows near $72 are the only thing standing between the current price and a breakdown below the $70 level. The PnF chart is growing uglier by the day, with the vertical count now pointing to an eventual price target of $49. Target new positions on a failed rally below $75 (the new location of our stop) or on a breakdown below the July lows. ************* NEW PUT PLAYS ************* FISV - Fiserv, Inc. - $29.60 -0.99 (-1.90 for the week) Company Summary: Fiserv, Inc. is an independent, full-service provider of integrated data processing and information management systems to the financial industry. As a leading technology resource, Fiserv serves more than 13,000 financial service providers worldwide, including banks, broker-dealers, credit unions, financial planners/investment advisers, insurance companies and agents, mortgage banks and savings institutions. (source: company release) Why We Like It: Firserv has seen it shares fall as the fortunes of the financial industry have fallen. The company provides information services to broker-dealers, banks, financial planners, etc. Many brokerage firms are cutting back on staff and expenditures as trading and investment banking revenues have dried up. Financial planners are seeing a drop off in business as investors have pulled money out of the stock market in record numbers. Over $50 billion was withdrawn from stock funds in July and that was followed by withdrawal of $5 billion in August. August was the first time in 14 years that stock funds saw net redemptions in a month in which the stock market showed a gain. That trend should worsen once again in September as the market has tanked. As FSIV's clients find themselves out of work, or with fewer clients themselves, the need for FISV's services has declined. While the company also provides mortgage software, the demand in that market has not been great enough to spare the company from a sell-off. The stock found support just over $30 in July, but has now broken that level. A look at the intraday chart suggests that $30 could now serve as resistance to the upside, as attempts to hold over that price were made throughout the day and were overwhelmed by selling pressure each time. The stock established a new sell signal on the point and figure chart with the trade of $30. FISV tested PnF support at $32 and $31 numerous times in the last two years, before today's breakdown and a trade of $29.00 would break $30 support from early 2001. The current bearish vertical count is $22, but the count is being calculated from the current column of "O"s and could be extended with each additional box to the downside. The daily chart shows some support just over $25 and again at $22.50, but we have to look back to April and May 2000 to find that support. Our initial target on the play will be $25, however a break in this level could lead to $23 in a hurry. Our stop loss will be $32.50, which will give us some bounce room underneath the 10-dma and coincide with a level just above Friday's high. More conservative traders can look for entry on a bounce and failure below $30, or a trade of $29, which will break the current level of PnF support. BUY PUT OCT-30*FQV-VF OI= 105 at $2.10 SL=1.20 BUY PUT NOV-30 FQV-WF OI= N/A at $2.80 SL=1.40 Average Daily Volume = 2.05 mil --- BGEN - Biogen - $29.08 -0.31 (-1.86 for the week) Company Summary: Biogen, Inc., winner of the U.S. National Medal of Technology, is a biotechnology company principally engaged in discovering and developing drugs for human healthcare through genetic engineering. Headquartered in Cambridge, MA, the Company's revenues are generated from worldwide sales of AVONEX® (interferon beta-1a) for treatment of relapsing forms of multiple sclerosis and from the sales by licensees of a number of products. Biogen's research and development activities are focused on novel products to treat inflammatory and autoimmune diseases, neurological diseases, cancer, fibrosis and congestive heart failure. (source: company release). Why We Like It: Biogen recently announced that U.S. regulators would review its experimental psoriasis drug, Amevive, within the next six months. That time frame was longer than analysts were expecting. The problem with the extension of the time to approval is that rival Amgen currently has a drug called Enbrel, which is approved for psoriatic arthritis, a disorder that combines the symptoms of both psoriasis and rheumatoid arthritis. Doctors have wide discretion to prescribe a drug once it has been approved for a similar use. Right now, Amgen does not have the production capacity to supply the demand for Enbrel, but that should change by the end of the year. Once a doctor begins prescribing a medication for a patient that has success, there is no reason to switch. Therefore, the delay in bringing Amevive to market could have much longer lasting effects on its sales. Coverage was initiated on the stock today by Lehman Brothers, as an Equal- weight, and by CSFB as an Underperform, neither of which are positive ratings. Biogen has had a rough ride since failing at its 50-dma ($34.95 at the time) on September 11 & 12. The stock found support at $31 in July and again in September. It had no such luck on the recent break. With support at that level gone and round number support at $30 also non-existent, the next landing looks like $25. However, the support at that level is back in 1998 and holders from that period may have sold out long ago. The current bearish vertical count on the point and figure chart is $20, and this would serve as a secondary target on the play. The stock gave a fresh sell signal at $30 and the trade of $29 only reinforced that signal by an additional box. The failed rebound under $30 looks like a good short entry point, as the current column of "O"s was somewhat extended and a bounce was likely at some point. BUY PUT OCT-30 BGQ-VF OI= 41448 at $3.00 SL=1.50 BUY PUT NOV-30*BGQ-WF OI= 21 at $3.80 SL=1.90 Average Daily Volume = 3.67 mil --- CI - CIGNA Corporation $71.55 -2.03 (-1.22 this week) Company Summary: CIGNA is an employee benefits organization in the United States. The company and its subsidiaries are major providers of employee benefits offered through the workplace, including healthcare products and services, group life, accident and disability insurance, retirement products and services and investment management. Why We Like It: Insurance stocks were already under significant pressure before last week's downgrade from Fitch. The ratings agency lowered its outlook on a basket of Life Insurance stocks last Thursday, unleashing a fresh round of selling. Before that downgrade, shares of CI had looked to be firming near the $76 level, but after falling below that level, the stock has continued its slide. Not only that, but the selling volume is on the rise. The bears handed the stock a 2.75% decline on Tuesday, bringing it to rest right at the level of its closing low from last September. While this level could provide the impetus for a mild bounce, the PnF chart tells a different story, with its vertical count now pointing to the $62 level as an eventual resting point. Intraday resistance is now looming overhead at the $74 level and a rollover near that level could provide for an attractive entry into the play. But with the broad market deeply oversold, we want to leave room for a bit more of a bounce. A rally to and failure near the $76 level (the site of the recent breakdown) could provide an even better entry into the play. Should the $70 level fail to provide support, then momentum entries would be in order in anticipation of a rapid drop to the next level of support near $64. Set stops initially at $76, as any short-covering rally should be unable to crest this level. BUY PUT OCT-75 CI-VO OI=331 at $5.30 SL=3.25 BUY PUT OCT-70*CI-VN OI=565 at $2.80 SL=1.50 Average Daily Volume = 978 K ************************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 09-24-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. http://www.OptionInvestor.com/htmlemail/x24c_3.asp In Section Three: Play of the Day: PUT - CI Traders Corner: Yield Curve ********************* PLAY OF THE DAY - PUT ********************* CI - CIGNA Corporation $71.55 -2.03 (-1.22 this week) Company Summary: CIGNA is an employee benefits organization in the United States. The company and its subsidiaries are major providers of employee benefits offered through the workplace, including healthcare products and services, group life, accident and disability insurance, retirement products and services and investment management. Why We Like It: Insurance stocks were already under significant pressure before last week's downgrade from Fitch. The ratings agency lowered its outlook on a basket of Life Insurance stocks last Thursday, unleashing a fresh round of selling. Before that downgrade, shares of CI had looked to be firming near the $76 level, but after falling below that level, the stock has continued its slide. Not only that, but the selling volume is on the rise. The bears handed the stock a 2.75% decline on Tuesday, bringing it to rest right at the level of its closing low from last September. While this level could provide the impetus for a mild bounce, the PnF chart tells a different story, with its vertical count now pointing to the $62 level as an eventual resting point. Intraday resistance is now looming overhead at the $74 level and a rollover near that level could provide for an attractive entry into the play. But with the broad market deeply oversold, we want to leave room for a bit more of a bounce. A rally to and failure near the $76 level (the site of the recent breakdown) could provide an even better entry into the play. Should the $70 level fail to provide support, then momentum entries would be in order in anticipation of a rapid drop to the next level of support near $64. Set stops initially at $76, as any short-covering rally should be unable to crest this level. BUY PUT OCT-75 CI-VO OI=331 at $5.30 SL=3.25 BUY PUT OCT-70*CI-VN OI=565 at $2.80 SL=1.50 Average Daily Volume = 978 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 ************** Yield Curve By John Seckinger jseckinger@OptionInvestor.com Ever wonder why the yield curve steepens or flattens following a news event or economic report? Are the words “steepener” or “flattener” part of your nomenclature? Ever wonder what a graph of the yield curve looks like? Soon, all these questions will be answered, and hopefully a new trading tool will be added to your tool belt. Why is the yield curve brought up today? Well, the biggest influence on the yield curve is the Fed, and what better time for a yield curve article than after an FOMC announcement. The yield curve not only changes based on monetary policy, but on market expectations regarding future fed policy as well. When the Fed wants to lower the fed-funds rate, they increase the money supply essentially by buying Treasuries from banks and brokerages (increasing the amount of available cash that banks/brokerages hold). Since the Fed held rates steady on Tuesday and kept the Federal Funds rate at a 40-year low (1.75%), the yield curve can then be used for expectations going forward. By Tuesday’s close, five-year futures were higher by 6 ticks, while the 10-year note was up only 5 ticks. This is called a “steepening” of the yield curve, since yields within five-year notes fell relatively greater than yields within 10-year issues did. Expectations, via yield curve interpretation, are most likely for the Fed to remain concerned about the weakening economy and could possibly lower rates by year’s end. As far as long-term interest rates are concerned, inflation expectations usually is the primary force behind yield movement. Why? If investors think that the Fed will fight inflation, expectations about inflation is lower and there would only be a small premium in longer term rates over shorter. If the Fed is not responding well to inflationary concerns (as perceived by the market), investors will want to be compensated for their risk and demand a higher interest rate when buying 30-year bonds. What are some other factors that influence the yield curve? One is economic growth, since a struggling economy will have banks loaning less to investors and leaving them with excess capital. What do these banks do with such capital? Usually put it in the bond market, particularly shorter maturities. This will steepen the yield curve. If the economy is strong, investors will seek more risk and stay away from short-term bonds; flattening the curve. Taking things to a global perspective, the possibility of a country going bankrupt will have investors seeking safety in shorter-maturity bonds; thus steepening the curve as yields fall faster in the five-year sector than 10 or 30-year bonds. A country in trouble (large budget deficit) can also steepen the curve from the long end. Why? There is more risk in holding 30- year bonds than 5-year notes, and countries generally issue more long-term bonds (increasing supply, price falls, yields rise) than shorter-term bonds. Another factor that influences the yield curve is the U.S. Dollar. Foreign investment in the U.S. still remains relatively high (owning a significant number of U.S. Treasuries), and foreign central banks that must sell their own currency to buy dollars (in order to buy bonds) certainly looks at currency fluctuations as a variable in owning or selling fixed-income securities. If foreigners stop buying bonds (or if that expectation increases), yields on longer-dated bonds will rise faster than shorter-term issues; thus steepening the curve. How about corporations in trouble? Using Enron as an example, investors head towards shorter-dated maturities and try to minimize exposure to risk. This, of course, steepens the yield curve. The reverse is true as well. If corporations appear healthy, investors do not mind taking more risk and buying longer-term bonds. The yield curve would then flatten. What about the Treasury buying back over $30 billion of 30-year bonds? Less supply, more demand. More demand, higher prices. Higher prices, lower yield. Lower yields (falling faster than yields on shorter-dated bonds) means a flatter yield curve. In fact, it was not that long ago when the yield curve was inverted, meaning longer-dated yields were below yields of shorter-maturity notes. So, where do we stand now? Well, the word “steepener” does come up quite a bit, and rightfully so. Looking at a chart of the 5/10 year yield curve, the rise (or steepening) has been relatively steady since January 2001. Just like any chart pattern, trends are found and can be used to trade either equities or the curve itself. With the curve steepening on Tuesday, the upward trend which began back in March is holding true. What does this mean to equities? Let’s think of this from a portfolio managers perspective. If a manager is defensive, it makes sense to look for shorter-dated maturities; thus steepening the yield curve. The above chart illustrates this, since equities falling and the yield curve steepening has gone basically hand-in-hand during 2002. How could one trade the yield curve? The chart above is based on the difference in yields in the cash market (found below). Looking at current yields on five and ten-year bonds (2.68 and 3.63, respectively), the current spread is 95 basis points. Note: The 52-week and 5-year high is at 110, while the 5-year low is at -33. Another way to trade the yield curve is via futures market. By just tracking the net change, a trader can effectively put on either a steepener or flattener. How? Example: Once futures account is opened, a call would be made, “Buy 6 December five- year notes and Sell 4 December Ten-year notes, at the market as a spread.” What did this trader just do? This trader just put on a steepener, since more five-year notes were bought and expectations are for yields to fall relatively faster (or rise relatively slower) than 10-year bonds. If a flattener was to be put on, the call would be this, “Sell 6 December five-year notes and Buy 4 December Ten-year notes, at the market as a spread.” Why 6 and 4? This is a way to weight the curve and has been a popular ratio on the floor of the Chicago Board of Trade for many years. For entry and exit levels on a longer-term timeframe, feel free to use the difference in yields within the cash market. In my opinion, the yield curve is a great tool that can forecast both Fed policy and equity movement on a short and long-term basis. Remember, there are only two capital markets: Bonds and Stocks. After reading this article, you are one step closer to completely understanding how the bond market works. And when you do completely understand the fixed-income market, please explain it to me. ************************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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