The Option Investor Newsletter Tuesday 10-01-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Unbelievable! Index Trader Wrap: Dow surges 4.5% after dismal September Market Sentiment: Balancing Act Weekly Fund Screen: Low-Risk/Expense Health Funds Updated on the site tonight: Swing Trader Game Plan: I Hate When This Happens Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 10-01-2002 High Low Volume Advance/Decline DJIA 7938.79 +346.90 7940.59 7593.04 2.03 bln 2200/1009 NASDAQ 1213.72 + 41.70 1214.01 1160.71 1.67 bln 1881/1525 S&P 100 425.74 + 18.49 425.74 406.57 Totals 4081/2634 S&P 500 847.91 + 32.63 847.93 812.82 RUS 2000 368.09 + 5.82 368.09 357.15 DJ TRANS 2225.18 + 74.10 2225.18 2138.98 VIX 40.13 - 4.44 45.32 39.77 VXN 57.24 - 1.11 62.01 57.07 Total Vol 3,947M Total UpVol 3,008M Total DnVol 850M 52wk Highs 150 52wk Lows 538 TRIN 0.61 PUT/CALL 0.87 ************************************************************ Unbelievable! The markets started off slow but finished with a bang. The Dow opened marginally positive and traded sideways until 12:15 and then exploded on the Iraq headlines. Actually exploded is the wrong term, it was more like built into a bonfire after being started by a smoldering cigarette. The biggest winners were the big caps as the safest ports in a storm. The overall take is one day does not an October make. Dow Chart Nasdaq Chart Everybody has heard the adage. Toss a frog in boiling water and he will jump out. Put it in a pan of cold water and turn up the heat and it will not jump and be boiled alive. I have never tried this but it is exactly how many investors felt after the close. The markets smoldered with an underlying bid and a slow building of higher lows until about 12:15. Shorts were starting to get uneasy as the Dow moved from 7600 to 7700 but after multiple attempts at that level most expected just another failed attempt and a roll over into an October decline. Just before 1:PM the 7700 gate broke but it did so slowly with a steady move into the close. The move had a couple plateaus about 50 points apart which worked to convince bears that the momentum move was over. Thus stops got nudged again and again and shorts found themselves looking at a +300 point Dow and wondering how the water got so hot. The reasoning given for the bounce was the Iraq news but it was squashed several minutes after the announcement as nothing new. Still with news channels reporting it over and over I could see where some retail traders would decide to bail out or some positions. In reality I believe it was the lack of major earnings warnings that sparked the market. Two days without bad news makes bears weak. We also saw some asset allocation in progress. Add the positive ISM numbers and suddenly the bulls are thinking rally. Did I say "positive" ISM numbers? The headline number fell below expectations for the third consecutive month and fell below 50 to 49.5. This indicates a shrinking economy instead of a growing economy. Had it been a stand alone number we would likely be much lower tonight. Instead there were some signs of progress in the internal numbers. New orders rose to 50.2 from 49.7 last month. Deliveries increased from 53.4 to 55.7. Inventories fell from 45.2 to 43.6. After seven months of growth the economy is falling back into recession but only very slightly as indicated by the internals. The key number dragging down the average was production which fell to 50.9 from 55.9 last month. Despite the small decline in the headline number the last three months have been basically flat with an average of 50.1. Definitely not expanding but bulls are claiming no decline either. More on this later. Chain Store sales fell again -0.8% for the week ended 9/21. Year over year growth fell to only +2.0% from +3.7% in early September. Most chain stores, including the discounters have warned of falling sales and decreasing consumer traffic for the last four weeks. The back to school season was miserable and according to current surveys the holiday season will also be miserable. One survey showed 57% of consumers were planning to spend less money this year than last. When you consider that the periods now being compared against were the weeks immediately after the 9/11 attack when retail was almost zero you can see how bad these numbers really are. There is really an implied decline when you consider that year ago period. We also have the dock strike/lock out on the west coast. The news reporters have been quick to point out multiple times a day that it is costing the U.S. $1 billion a day in lost GDP. Whether it is true or not the 3Q GDP is only estimated to be $29 billion. Take a few billion off here and there and suddenly you have a real recession. I happen to believe the goods on the ships will be delivered in time for the holidays but nobody will be there to buy them anyway. Zero percent is generating zero interest. Auto sales dropped to an annual rate of 16.3 million units from 18.7 million units last month. With zero percent interest for up to five years, added sales incentives and a new model year the pace of sales still slowed. This suggests that those who wanted to buy a car already have and we could be slamming up against the slow holiday season with higher inventories and no buyers. GM sales fell sharply from 5.5 million to 4.1 million units. They had been leading the league in performance and now led in the sales drop. Construction Spending fell -0.4% and posted the fourth consecutive month of decline. Commercial spending fell the hardest at -2.0% with office construction down -4.6%. This puts commercial spending down -18.6% from last years levels. New residential construction is also slowing with single family dropping -0.7% and the third monthly drop. With the commercial and residential construction drop accelerating it is evident that the economy is moving into rougher times. At least evident to me. Good news today came in the slower pace of layoffs for September. The Challenger report showed only -70,057 workers laid off compared to -118,000 in August. While the rate of layoff is decreasing there is still no hiring. Businesses are down to the bare bones staff and would be hard pressed to keep up the layoff pace of -100K a month that was posted in early 2002. However, remember there have been several high profile cuts announced over the last couple weeks for execution in the 4Q. The TV networks announced that they were nearly sold out of advertising space for the 4Q. They said there was a pickup in bookings led by the automobile companies and chain stores and that prices paid were up from the 3Q bookings. I guess you know what that means. Those of us that are not planning to buy cars or low rider jeans will have to sit though thousands of commercials trying to change our minds before the holidays. I am sure Bowflex and FitnessMadeSimple.com will be high on the cable list as well. The market soared +346 points but forecasts collapsed. Abbey Joseph Cohen ranks up at the top of the perma bulls with a 12 month estimate for the S&P of 1300. Tom McManus of BAC cut his 12 month estimates to 1000. Those are the optimistic ones. Merril Lynch lowered their estimates today to a target of 860 for the S&P in 12 months. Richard Bernstein said the valuation had improved on falling interest rates but earnings still ruled and expected returns were still too high. JP Morgan cut S&P estimates to 800 on the same outlook that earnings were going to be weak. They said PE contraction was still likely as the earnings backdrop remained weak and there were few signs of a sustained recovery. Considering the S&P closed Tuesday at 847, three of those four estimates don't project a rosy picture for the next year. After the close Dell raised guidance for the quarter. NOT! It was widely reported that Dell had raised guidance and was highly optimistic about the current quarter. I hate to be the wet blanket but their previous guidance was for $.20 to $.21 cents and analyst's estimates were for $.21 cents. Dell "raised" their guidance to the high end of their range on the basis of increased cost cutting efforts and slightly higher sales. This higher end of the range was $.21 cents and exactly inline with analyst's estimates. They did raise revenue estimates to $9.1 billion from the $8.9 billion that analyst's had expected. They said broad-based momentum across their product line from increased market share was feeding the gains. Dell spun the press release very well and rose more than $1 in after hours. The Nasdaq futures jumped as well but fell back to the flat line after the facts were assimilated. So what happened today? The general consensus was an asset allocation program. If you remember last week I mentioned that we could see some asset allocation programs at the end of the quarter. This happens when the ratio of stocks to bonds becomes lopsided compared to stated goals of mutual funds and pension plans. With bonds at decade highs and stock markets at 4-6 year lows the possibility of a weighting mismatch is almost guaranteed if you don't have an actively managed fund. Periodically funds rebalance their portfolios by reallocating their assets. With the two-year note trading at 1.69% yesterday and below the Fed funds target rate of 1.75% something had to give. The yield on the ten-year note jumped +0.78 today and in bond terms that is a month of movement. There was heavy selling and that money was put to work in stocks. What triggered the selling in the bonds was the announcement by FNM that their duration spread had narrowed from 14 months to 10 and this was without massive buying of 10-year treasuries. It had been widely rumored that they would have to buy up to $100 billion in treasuries to narrow the gap. This was having a strong impact in holding up the treasuries because nobody wanted to sell if they were going to have to close this gap in the open market. The majority of the gains today were in the big caps. The Dow was up +4.56%, the OEX +4.54%, SPX +4.0%. The Russell 2000 only gained +1.60%. Typically after major market bottoms the small caps are the leading index not the big caps. Traders on the floor of the NYSE this morning were expecting only a +50 to +80 point day and then another roll over. This was exactly what I was expecting as well. Obviously there were a lot of traders caught off guard and those traders had to cover in disbelief as the afternoon wore on. I suspect the asset allocation triggered the short squeeze but then the squeeze fed upon itself in the closing minutes. Tomorrow will be interesting. The Dell news after the close spiked the futures to strongly positive and ran the QQQ up to $22.00. After the realization that Dell really was not making that big of a guidance change we could see some of the excitement wane. Normally a big move like we saw on Tuesday is met with profit taking the day after. We are in October and this is a month known for market bottoms. There are no economic reports and the markets will be left to trade on stock news alone. Burlington Northern warned after the close but nothing else of merit. This means there is no evident direction but we could be heavy after today's gains. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ******************** INDEX TRADER SUMMARY ******************** Dow surges 4.5% after dismal September Stocks posted strong gains today as the Dow Industrials (INDU) 7,938 +4.5% surged 346 points while mixed economic data, labor disputes and news out of Iraq gave traders plenty to chew on. Checking the data, the Institute of Supply Management Index slipped below the 50% level to 49.5% in September, which indicates a contraction in the manufacturing sector. The "negativity" from the ISM report was partially offset by outplacement firm Challenger, Gray & Christmas announcing that job cuts fell to a 22-month low in September. Labor disputes between representatives of the International Longshore and Warehouse Union (ILWU) were brought to a crescendo with the Pacific Maritime Association (PMA) after ILWU representatives stormed out of labor discussions due to PMA bodyguards in the meeting room. ILWU President James Spinoza told reporters "There were two gentlemen here with guns." President George W. Bush said earlier today that he hoped the two sides would get back to contract talks, use federal mediation, and re-open West Coast ports idled from a lockout ordered by the PMA. Some economist's predict the shutdown could cost the U.S. economy as much as $1 billion a day, while some believe that $1 billion is a conservative estimate should the lockout drag on as perishables begin to sour and the holiday retail season grows near. A late afternoon surge in stock prices came after United Nations inspectors reached an agreement with the Iraqis in Vienna, Austria on logistics for a new mission to reassess Saddam Hussein's arsenal of weapons of mass destruction. Iraq said it expected an advance party in Baghdad in two weeks. The U.N.'s chief inspector Hans Blix said that "Iraqi representative said that they accept all the rights of inspections that are laid down" in previous U.N. resolutions. Pick then choose A trader or investor could pick any one of the above "headlines" from today and make a very good point for either a bullish or bearish trade. Shares of Gap Inc (NYSE:GPS) $10.11 -6.82%, which has lagged the retailing group in the past 18-months closed at a 52-week low after it was said to have lots of T-shirts, pants and fleece sitting on the water. While the broader retailing group was lower for the bulk of the session, the comeback in the S&P Retail Index (RLX.X) 272.55 +3.02% and Retail HOLDRS (AMEX:RTH) 72.60 +2.22% hinted that even the most bearish of bears were doing some covering on weakness. Reading some "gold" leaves So where do we go from here? I'm thinking the Gold/Silver Index (XAU.X) 67.62 -3.03% may hold the clue. In recent months, this has been the sector that has DIVERGED from the market averages. It wasn't but a week ago I thought market bears wanted to see the group make a bold move above the 76 level for confirmation of further doom and gloom for the market averages. However, as quick as things seem to change, it could be a gold stock decline that hints of a renewed rally for the major market averages. I kid you not. This is a "fitted" retracement that I've had in place on the Gold/Silver Index (XAU.X) for several months. While the major market averages were "hanging on by a thread," it may be gold stocks that are dangling at the end of a rope. Gold/Silver Index Chart - Daily Interval My personal observations from recent trading in some gold stocks is that there are some FORMIDABLE shorts at XAU.X 76. For a couple of days last week, there really appeared to be some willing sellers in Newmont Mining (NEM) $26.88 -2.29% just below $30. Whey are they (the market) selling a "defensive" gold stock with "attack on Iraq" in the wings and gloomy economic data? Maybe the sector was just overbought and needed a little pullback for another leg higher. The XAU.X now comes under my "microscope" as a sector to monitor near-term as a sector that would DIVERGE from the major markets. One thing I think traders need to be careful of are the "traps" that the XAU.X tends to build to suck traders into a move (bearish and bullish). Notice how "little" daily declines to the left of the chart sucked in shorts. If you were an SPX trader using the XAU.X as a DIVERGING index and went BULLISH the SPX on a daily break lower in XAU.X on March 8 (first Trap), chances are, an SPX bull that went bullish on March 8th at SPX 1,160 got trapped that day. Near-term, I want to monitor the XAU.X. My thinking is that tomorrow, we might see the XAU.X create a little spike lower, right below the 50-day MA. A technician would be tempted to short that right? Maybe, but not a large position if he/she looks back to the left of the XAU.X chart and my first labeled "trap" when the XAU.X briefly pierced below its 50-day SMA, when stochastics were "oversold" and MACD was approaching the zero level. Current technicals from the 50-day SMA and oscillator create an almost "identical" setup in the XAU.X. So let's tie in that March 8th date (a Friday) and quick rebound in the XAU.X on March 11th, which built a trap for gold bears, but also perhaps hinted a trap for equity bulls in the SPX. A trader looking for a bearish entry point in the SPX may well have to use the XAU.X near-term to build some conviction for a bearish trade. I personally am not looking for ANY trade in the S&P's currently, but those that are determined to trade, this may be useful. S&P 500 Index Chart - Daily Interval Oooooeeee! It's pretty easy to be thinking... "short a rally back near 856," but when the S&Ps stage a 4% rally, it can test a bear's resolve can't it? While I'll be watching the XAU.X, bond YIELDS and several other "key stock" like MSFT, I think a bearish trader in the SPX might look to short/put near tomorrows close if the XAU.X is down less that 2% and the SPX is up less than 2%. I don't know what stock futures are going to be in the morning, but right now, I consider tomorrow kind of an "observation" day for an SPX trader and not looking for a trade until Thursday. A bear that has been waiting patiently for a rally can look short the SPX, but for right now, I'd have to say you need to take some heat back to the 21-day SMA of 867 and/or 61.8% retracement of 880. If you can't take that kind of heat, then stay out of the kitchen near-term. In anticipation of a question like... Jeff: How do you come up with "if the SPX is trading up marginally (less than 2%) .... then we might revisit last night's Index Trader's wrap and comments regarding the S&P 100 Index Chart (OEX.X) 425 +4.54%. S&P 100 Index Chart - Daily Interval An "oscillator" trader looking at stochastics and MACD is thinking "??????" as in what the heck is going to happen here? Have commercials been right all along (see last night's wrap discussion) and the OEX and SPX are due for a massive rally? Or will commercials be looking for bearish entry points at our 420- 430 range to get short on weaker than expected economic data? I'm rather 50/50 right now and would like to use tomorrow as an observation day. To be truthful, if volatility weren't so high and option premiums high, I'd like a straddle or strangle trade in both the OEX, using the OEX 425 level as my "at the money" strike. When I look at a November 425 straddle (calls/puts) I'm looking at calls=$23.50 + $20.20 puts for a total of $43.70. From 425 I need an OEX move of 43.7 points either side of 425 and just not sure I'd get it at this type of price. Dow Industrials Chart - Daily Interval While the Dow sputtered in the early morning, it did hold onto gains despite some weakness in the NASDAQ. However, bullishness began to build as the session progressed and that bullishness sure seemed to lift the psychological spirits of investors, if not at least move some technology bears into short covering. I just can't get behind a BEARISH trade in the Dow Industrials, because under a bullish rally scenario, I think this is the place that that a bear finds the greatest amount of trouble and least amount of gain for that trouble. I'm also getting more bullish on Dow component Johnson & Johnson (NYSE:JNJ) $56.30 +4.10%. I discussed JNJ briefly in last night's wrap and in today's 01:00 PM intra-day update. Heck... if a bullish equity trader is willing to risk $5 in a JNJ bullish trade with a stop at $51 on the point and figure chart, then a Dow Diamonds (DIA) $80.00 should be willing to risk a stop below Monday's low of $74.60. Heck, better yet, a DIA November $80 call (DAVKB) is $3.80 and that would be LESS RISK than an underlying DIA bullish trade with a stop at $74.50. DON'T GO CRAZY and buy 100 contracts!!!!! Take 1/4 bullish position at first. Then if we begin to see the Dow Industrials Bullish % ($BPINDU) begin to reverse higher and get some confirming bullishness from the SPX and OEX bullish % charts, then a bull can begin rounding out a DIA position. NASDAQ-100 Index Tracking Stock (QQQ) - 60-minute interval Things were actually looking decent for bears in the QQQ this morning, despite some early bullishness in the Dow, SPX and OEX. It wasn't until approximately 01:30 PM EST, that the QQQ hit a shorter-term bearish trader's stop of $21.10. I'm kind of like a horse that will keep going back to the same well for a refreshing drink of water. With a series of lower lows and lower highs and my fundamental thought that technology stocks are so far down the food chain in the scope of seeing any capex spending increases from the bigger cyclicals and more deeper rooted economy stocks, I'm still bearish the QQQ's and looking for rally's back near $22.21 to $22.97 and bearish entry points. True... if you're a disciplined trader and can watch things on an hourly basis, then you can trade the Q's bullish and bearish on the swings. I think the Q's might have some potential back to the $22.85 level, but its going to take some further bullishness from the Dow, SPX and OEX to get them there. If we start seeing bullishness wane near $22.21 and MACD on the 60-minute chart begins to roll, then I like QQQ short once again, stop just above retracement of $22.97 and look for another 52-week low. If you know of any technology stocks that have manufacturing facilities in overseas markets, but derive the bulk of their sales here in the U.S. (and they're still trading over $10) send me an e-mail. If a technology bull thinks he/she has had a tough go of it the past two years, then continued delays in labor talks and west-coast shipping ports being shut down isn't going to make things any easier. 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 **************** Balancing Act by Steven Price Do you believe? Does it matter? The Dow rebounded 346.86 points today to close at 7938.79. Much of the rally was credited to the agreement between Iraq and weapons inspectors on where the inspectors would be allowed in the country. While the specter of war seems to be on hold for the moment, oil futures remained high, due to fears that Hurricane Lili will disrupt oil production in the Gulf of Mexico. December Crude Oil Futures stayed over $30 per barrel, finishing the day at $30.33 (+0.06). The fact that the Dow rally fell short of 8000 still maintains the series of lower highs and lower lows since the index rolled over on August 23 breaking back below 9000. I'll reiterate my earlier point that even a bear market rally can last a few hundred points, after a 1500-point drop. 8000 served as resistance last Thursday, as well, before we hit a new recent intraday low of 7460.78 on Monday. This low was below the intraday low on the morning of July 24 (7532.66), and any rally that does not break the trend can be assumed to be temporary. What would change my mind? A break in the trend. The September 3 low of 8304.44 was the first signal that the Dow's August rally was ending, as it constituted the first lower low since July 24. The rally on September 11, that led to a high of 8726.90, before sinking lower the next few days, constituted a lower high, as well, and confirmed the trend break and the fact that we were heading lower. A close above 8000 would be a break in the current downtrend, and could be the signal that we have finally found a bottom. The other evidence for a bottom is that we have bounced around the 7500 level three times now. Some of the economic news this morning looked negative. The ISM index fell to 49.5, indicating a contraction in manufacturing. Purchasing managers were concerned about energy prices and the possible impact of a war with Iraq. Although the index came in below expectations, some of the internal numbers within the report actually were better than expected. Construction spending also fell 0.4% in August. On the positive side, the pace of layoffs also decreased. Corporate job cuts fell to a 22-month low of 70,057 in September. This was 40% below August's number of 118,067 and 72% lower than September 2001. After the close, Dell gave the market a boost by increasing its third quarter revenue forecast. It now predicts sales of $9.1 billion, a $200 million increase from previous forecasts and 22% ahead of September 2001. It also expects earnings to be at the high end of previous estimates. This may give us the boost we need for the above mentioned trend reversal. The concern from where I'm sitting is that CEO Michael Dell said the company was able to increase forecasts due to growth in products other than PCs, which still remain weak. He cited storage systems and servers. I'd be much more bullish if the increase was due to an upturn in PC demand. Tomorrow should be pivotal, as we get another look at the 8000 mark in the Dow. A failure at this level will be bearish, while a close above the recent highs could lead to a trend reversal. We will still need to see an increase in business spending before a real rally is sustainable, but an intermediate rally may provide some good long opportunities in the short term. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10679 52-week Low : 7532 Current : 7938 Moving Averages: (Simple) 10-dma: 7872 50-dma: 8414 200-dma: 9518 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 847 Moving Averages: (Simple) 10-dma: 839 50-dma: 886 200-dma: 1035 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 843 Current : 870 Moving Averages: (Simple) 10-dma: 863 50-dma: 928 200-dma: 1243 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): If the Nasdaq rally is for real, this group, which reflects both business spending and PC sales, will need to crack 250. It came close today, finishing at 249.90, but the fact that the rally fell short of this number can be seen as significant. After Dell raised guidance after the close, we should see this level broken tomorrow, but just how long it can hold will be the question. Dell attributed its higher revenues to areas outside PC demand, so the market may not react as strongly as it would if that were the case. A close over 260 would break the current series of lower highs and lower lows, so if we break the 250 level, look for similar resistance at 260 to be broken before considering long plays in the group. 52-week High: 657 52-week Low : 236 Current : 249 Moving Averages: (Simple) 10-dma: 247 50-dma: 300 200-dma: 461 ----------------------------------------------------------------- Market Volatility The VIX took a steep dive today, losing almost 10% in one day. However, it remained above 40, which is still a high level, on a day when the Dow rallied over 300 points. The Nasdaq Volatility only gave up a point, as well. The fact that both of these numbers remain high shows that option traders have not yet bought into the rally. This includes institutions that make a habit of selling large amounts of premium when they feel it is overvalued. Look for a VIX in the low 30s to indicate that market participants believe a rally will be long term. CBOE Market Volatility Index (VIX) = 40.13 -4.44 Nasdaq-100 Volatility Index (VXN) = 57.24 –1.11 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.87 520,943 452,989 Equity Only 0.67 134,916 202,761 OEX 1.19 31,137 39,287 QQQ 0.46 39,103 27,308 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 33 + 0 Bull Correction NASDAQ-100 19 - 3 Bear Confirmed Dow Indust. 10 - 7 Bull Correction S&P 500 27 - 3 Bear Confirmed S&P 100 20 - 5 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 1.31 10-Day Arms Index 1.44 21-Day Arms Index 1.48 55-Day Arms Index 1.35 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 1925 834 NASDAQ 1809 1439 New Highs New Lows NYSE 51 112 NASDAQ 34 268 Volume (in millions) NYSE 1,994 NASDAQ 1,696 ----------------------------------------------------------------- Commitments Of Traders Report: 09/24/02 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 long and short positions, however ended up with a net 10,000 fewer short contracts. Small traders reduced both positions, as well, but shortened up their net long positions by 14,000 contracts. Commercials Long Short Net % Of OI 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%) 09/24/02 425,276 442,661 (17,385) (2.0%) 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 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% 09/24/02 124,232 73,506 50,726 25.7% 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 reduced long and short positions, but got decidedly shorter, by a total of 4700 contracts. Small traders also reduced positions, however stayed close to flat overall. Commercials Long Short Net % of OI 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%) 09/24/02 46,637 54,613 (7,976) ( 7.9%) 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 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% 09/24/02 11,163 9,421 1,742 8.5% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials reduced positions dramatically on a percentage basis, but got longer overall, by 3200 contracts. Small traders also reduced positions, but flipped from the long side to short overall. Commercials Long Short Net % of OI 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% 09/24/02 18,951 10,074 8,877 30.6% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 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 1,756 7.0% 09/24/02 7,939 9,453 (1,514) ( 8.7%) 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/Expense Health Funds This week, we screen for health sector funds with below average risk and expenses relative to their category peers. Funds with loads and no-load structures will be included in the screen; so if you're a direct investor, your focus may be on funds with no loads, and if you work with a financial advisor, your focus may be on load funds with different classes. We'll use the Class A shares for comparison purposes since the expense ratios usually are lower on the Class A shares than other classes of the fund. Below-average risk means health sector funds that have produced low volatility (standard deviation) over the trailing 36 months. According to Morningstar, the average health sector fund has an annualized 3-year standard deviation of 31.7%, much higher than the average U.S. diversified stock fund (22.3%). Fund with the lowest volatility in the health sector have standard deviations in the 14% to 18% range, per Morningstar's Quickrank tool. Below-average expenses means health funds with low expenses per annum as reflected by their expense ratios. The average health sector fund has an annual expense ratio of 1.76%. The low cost leader in the category, Vanguard Health Care (VGHCX), boasts an annual expense ratio of 0.31%. Assuming an annual gross return of 10%, Vanguard's fund would produce a "total return" of 9.69% versus the category average of 8.24% (10 percent less the 1.76% in expenses). Funds with high expense deficits to overcome are more likely to take excessive risk than funds with low expenses (which can afford to pursue a lower-risk strategy). In addition to considering a fund's total return, we'll look at how consistent those returns have been and how well the manager has preserved capital in the recent downturn using Lipper data. Morningstar rates funds against their category peer group while Lipper scores funds against all funds in their broad peer group. We'll also consider the fund company, portfolio characteristics, expenses, manager tenure, and other factors. Screening Process We begin with Morningstar's Fund Selector (www.morningstar.com), using the following initial set of criteria: Morningstar Category = Specialty/Health Manager Tenure > or = Category Average Minimum Initial Purchase < or = $3,000 Expense Ratio < or = Category Average Star Rating = 4 Stars or 5 Stars Morningstar Risk = Below Average or Low YTD Return > or = Universe Category 3-Year Average Return > or = Category Average 5-Year Average Return > or = Category Average Only one fund passed this initial screen test, Merrill Lynch Healthcare Fund managed by Jordan Schreiber since April 1983. Surprisingly absent on the list was Vanguard Healthcare Fund managed since May 1984 by Edward Owens, Wellington Management Company. The $15.1 billion Morningstar 5-star rated category giant has followed a well-diversified approach to produce top returns over time, and boasts one of the best risk-and-reward tradeoffs in the category. It also has low expenses and high tax-efficiency. For now, our list consists of two funds. We turned to Lipper's Lipper Leaders screener next, found at www.lipperleaders.com. Due to recent modifications, one can screen funds now on total return, consistency of performance, preservation of capital, tax efficiency and expense. We set Lipper's screener to give us the leaders for preservation and expense, and choose to display fund results by total return. The Lipper screen yields two results, Vanguard Healthcare Fund (VGHCX) and Fidelity Select Health Portfolio (FSPHX). Sibling Fidelity Advisor Health Portfolio is also on the list, but our primary focus is on the retail class shares (FSPHX). Fidelity Management & Research Co., like Wellington Management Co., is known for its research capability, but current manager, Steve Calhoun, has been the fund's manager only since March of 2002. Our list remains at two funds -- Merrill Lynch Healthcare and Vanguard Healthcare. We opt to stop here, rather than drill down further, since the two fund companies have strong reputations in the business and the individuals responsible for managing the fund's assets are seasoned veterans of the healthcare sector. In volatile times, experience counts. Merrill Lynch Healthcare Fund, Class A (MAHCX) Pertinent Statistics: Manager: Jordan Schreiber, MLAM (April 1983) Net Assets = $311 Million Morningstar Rating = 4 Stars Morningstar Risk = Below Average Expense Ratio = 1.27% YTD Return = -22.0% (21st Percentile) 3-Year Average Return: +7.6% (37th Percentile) 3-Year Standard Deviation: 20.7% Lipper Leader = Preservation Merrill Lynch Healthcare Fund seeks long-term capital growth by investing in equities issued by companies producing health-care products and services, domiciled primarily in developed markets. This offering may invest up to 15% of assets in venture-capital investments, and is SEC-registered as "non-diversified" status. Merrill Lynch Healthcare Fund has lost about 22% since December 31 compared to losses of 27.5% for S&P 500 index and 31.9% for the category average per Morningstar. Although negative, fund performance this year ranks in the category's top quartile and over the trailing 5-year period ranks in the top 5% within the health sector fund group. The fund is a Lipper Leader for its ability to preserve capital in down markets. The fund's volatility is below that of the S&P 500 index and is well below that of the category average as measured by standard deviation. At 1.27%, the fund's annual expenses are considered below average for the category. All things considered, Merrill Lynch Healthcare Fund's moderate approach has produced a decent risk-return tradeoff for investors, and is a suitable choice in the health category. Vanguard Healthcare Fund (VGHCX) Pertinent Statistics: Manager: Edward Owens, Wellington Management Co. (May 1984) Net Assets = $15.1 Billion Morningstar Rating = 5 Stars Morningstar Risk = Low Expense Ratio = 0.31% YTD Return = -15.8% (3rd Percentile) 3-Year Average Return: +11.2% (11th Percentile) 3-Year Standard Deviation: 15.1% Lipper Leader = Return, Preservation and Expense Vanguard Healthcare Fund seeks long-term growth of capital by normally investing at least 80% of net assets in the stocks of companies engaged in the development, production or distribution of products and services related to the treatment or prevention of diseases and other medical infirmities. The fund's universe includes pharmaceutical and medical-supply companies as well as firms that operate hospitals and other health facilities. Fund manager Edward Owens (Wellington Management Company) may invest up to 30% of assets in foreign securities. Since December 31, Vanguard Healthcare Fund has lost only 15.8% compared to a 30.9% YTD loss by the average health sector fund, per Morningstar. While negative, manager Edward Owens YTD 2002 performance ranks in the category's top 3%. This offering is a "1" (Lipper Leader) in four categories: total return, consistent return, preservation and expense. Vanguard's fund also sports one of the lowest volatility levels in the category. The fund's trailing 3-year standard deviation of 15.1% is less than half the category average per Morningstar. At 0.31%, the fund's expense ratio is pale in comparison to the average health sector fund (1.76%), offering its shareholders a true cost advantage. Owens performance over the last five and 10 years is unmatched, ranking in the category's top 1% per Morningstar. His trailing 5-year average total return of 13.9% through September 30, 2002 was 15.5% better than the market (S&P 500 index) and 9.7% above the category average (4.2%). The fund's 10-year average return of 18.7% was nine full percentage points better than the market (S&P 500 index) and 6.5% greater than the category average, per Morningstar. Long-term investors seeking broad health sector exposure have a superior "return to risk and expense" choice here. Conclusion The only health sector fund close to matching Vanguard Health Care Fund's 18.6% average total return for the past decade is Eaton Vance Worldwide Health Sciences, Class A (ETHSX), which returned 16.8% a year on average the past ten years. It is a Lipper Leader for total return, and a "2" for preservation of capital (better than average in that regard). Manager Samuel Isaly has managed the Eaton Vance offering since August 1989. Because of the specialized "non-diversified" nature of sector funds, volatility and expenses can be high. We tried in this week's screen to identify top funds with low risk and expense. They should appeal to long-term investors seeking exposure to health/biotech stocks and a more moderate investing approach. For more information or prospectus, please visit the relative fund company's website. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************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 *********************** I Hate When This Happens The markets lulled traders to sleep after the morning volatility and left those still awake too glazed over to see what was happening. Slow gains with plateaus every 50 points kept shorts thinking the end was near when in reality they were just getting led down the path to slaughter. 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. 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The Option Investor Newsletter Tuesday 10-01-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: BSC, FNM, KSS, FDX, SPC Daily Results Call Play Updates: None New Calls Plays: ITMN, GSX Put Play Updates: CI, GM, TECD New Put Plays: QLGC, BAX, FLIR **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** BSC $58.24 +1.84 (+1.78 for the week) Bear Stearns rallied with the rest of the market today. The financials followed the relief rally and put BSC right at the top of its recent range. While we can't see a golden future for any of these financials, the repeated bounce at $55 has convinced us to close BSC and wait for a break below that level to reconsider the short play. The market drop through the month of September is likely to reveal another significant outflow from stock funds and when those numbers are released, look for renewed selling across the sector. --- FNM $65.22 +5.68 (+3.71 for the week) Fannie Mae looked like a great pick on Monday, but leave it to an unexpected pre- announcement to ruin a good play. FNM announced this morning that they had narrowed their duration gap from 14 months in August to 10 months in September. This move helped reduce its interest rate risk, which had increased greatly from July to August, due to the rash of mortgage refinancing. While the company normally releases this information toward the middle of the month, the added press it has gotten in regard to its increased risk convinced FNM to release the figures early. The rebound took us out of our stop at $63.25, and we will watch for future developments in the asset to liability relationship in the future. --- KSS $63.00 +2.19 (-1.09 for the week) Kohl's Corp was originally entered at $64.09 and headed south quickly on Monday. After this morning's drop, we lowered our stop loss on the play, on this morning's Market Monitor (10:47:45), to $61.25. KSS's drop followed bad news from Wal-Mart and Federated, as well as a profit warning from Aeropostale, citing empty malls. However, the rising tide lifted almost all boats this afternoon and took us through our stop. Even with the previous stop, the action of the past two days looks like we may have seen a reversal pattern. For the moment, we will close this play with a small profit, and look for another round of selling as we head into the holiday season. --- FDX $52.43 +2.36 (+1.98) After its sharp reversal at the 200-dma last Friday, FDX looked like a great retracement candidate. While the stock did drop as low as $48 on Monday, it really wasn't a tradable move, as most of the drop came from the opening gap. The late-day rally wiped out most of the day's loss and then the bulls really got serious on Tuesday afternoon, tacking on better than 4.7% by the closing bell. FDX closed above both last Friday's high and the 200-dma. While our $53 stop hasn't been violated yet, FDX is showing too much strength for us to be comfortable with keeping it on the playlist. Use any early weakness on Wednesday to exit open positions. --- SPC $30.03 +1.31 (+1.24) While Monday's rally attempt looked like a great bearish entry point into our SPC play, Tuesday's strong rally proved the fallacy of that conclusion. As the broad market powered higher on the first day of a new quarter, the stock plowed through the $29 resistance level and actually crested $30 at the end of the day. While there is still significant overhead resistance between Tuesday's close and our $31 stop, the tide appears to have shifted. Note how SPC never was able to break down under the $27 level, so it failed to generate a fresh PnF Sell signal. With the strong rebound into the close today, the prudent course of action is to drop the play and look focus on more attractive candidates. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue GSK 40.49 -0.04 2.06 New, Great pipeline ITMN 33.39 0.73 1.17 New, Steady and solid PUTS BAX 29.62 -0.87 -0.93 New, Losing support BSC 58.24 0.35 1.84 Drop, in congestion CI 73.49 -0.75 2.74 still in the trend FDX 52.43 -0.38 2.36 Drop, positive comments FLIR 34.55 -2.77 -0.44 New, weekly drop FNM 65.22 -1.98 5.68 Drop, narrowing the gap GM 40.64 -0.10 1.74 still has problems KSS 63.00 -2.29 2.19 Drop, profits QLGC 25.25 -0.95 -0.79 New, weak relative strength SPC 30.03 0.47 1.31 Drop, broken trend TECD 27.94 -0.81 1.51 dead cat bounce ************************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 ******************** None ************** NEW CALL PLAYS ************** ITMN - InterMune - $33.99 +1.17 (+2.26 for the week) Company Summary: InterMune is a commercially driven biopharmaceutical company focused on the marketing, development and applied research of life-saving therapies for pulmonary disease, infectious disease and cancer. Why We Like It: InterMune has been one of the few biotechs to experience a consistent, daily increase in recent weeks. As the overall market has tanked, and the Biotech Index (BTK.X) has been swinging in both directions, ITMN just keeps adding green candles. One of the reasons for this is the results from a recent study regarding its idiopathic pulmonary fibrosis treatment, Actimmune. The drug did not accomplish its primary goal, of slowing the progression of the disease. The disease is debilitating and fatal and current treatments do not do much to help. However, Actimmune actually prolonged the life of patients with milder forms of the disease, as compared to those taking a placebo. The fact that it did not accomplish its primary goal may have kept the stock from soaring, but prolonging life in patients is what doctors primarily care about. Dr. Robert Strieter, chief of pulmonary and critical care medicine at UCLA Medical Center, said "No drug that we currently use shows any survival advantage or improvement in lung mechanics, so if the Actimmune data holds true, the results will be very profound. We'll be medically obligated to treat all IPF patients with Actimmune." Accredo Health (ACDO), the drug distributor that handles Actimmune, said the demand for the drug is strong and that insurance reimbursement doesn't appear to be a problem. In addition to the Actimmune activity, ITMN and Eli Lilly also reached a settlement on royalty payments relating to future worldwide sales of oritavancin. ITMN has said it is making progress on the drug, and the effectiveness of the skin and soft tissue treatment for infections has been demonstrated in Phase 3 trials. ITMN recently crossed its 200-dma of $30.11, and also registered a point and figure double top breakout buy signal at $32. The fact that the rally at the beginning of September was turned back at the 200-dma, found support and then broke through on the next effort shows increased momentum. Volume has been heavier on the upside breakout, and the stochastic and MACD oscillators are still on a buy signal. Conservative traders can wait for a pullback above the 200-dma and then focus on the $30 strike price. We will initiate a long position at the current level, and set our stop at $29, just below the low of the day on the 200-dma breakout. BUY CALL OCT-30*IQY-JF OI= 3672 at $5.10 SL=2.70 BUY CALL OCT-35 IQY-JG OI= 1539 at $1.80 SL=1.00 BUY CALL NOV-30 IQY-KF OI= 17 at $6.20 SL=3.10 BUY CALL NOV-35 IQY-KG OI= 61 at $3.10 SL=1.60 Average Daily Volume = 1.46 mil --- GSK - GlaxoSmithKline - $40.49 +2.06 (+1.63 for the week) Company Summary: GlaxoSmithKline, with U.S. operations in Philadelphia and Research Triangle Park, NC, is one of the world's leading research-based pharmaceutical and healthcare companies committed to improving the quality of human life by enabling people to do more, feel better and live longer. (source: company release) Why We Like It: GSK has released a series of positive studies in regard to infectious disease treatments. On Friday, it release results of two such studies. The first showed that its once a day antiviral drug Valtrex, reduced transmission of symptomatic genital herpes by 77% in healthy heterosexual monogamous couples. It also reduced acquisition of the virus by 50%. The fact that Valtrex is given only once a day should make it a darling of doctors, who strive to find therapies that require less dosing. Patients are more efficient when they are required to take medication fewer times daily. The company also released findings for its HIV protease inhibitor 908. The study showed that the drug achieved a higher rate of undetectable viral load in patients than Pfizer's Viracept. GSK said 73% of patients treated with the new drug had an undetectable viral load at 24 weeks, compared with 54% of patients taking Viracept. The recent news, along with the rise in the drug sector today, gave GSK a push through a couple of significant levels. The stock blew through both its 50-dma ($38.56) and 100-dma ($40.06), which coincided with round number resistance of $40. One of the keys for this play will be whether BSK can hold above $40. The other key will be how the stock reacts at the $41 level. $41 is the level at which point and figure bearish resistance is located. The has terrific momentum at the moment, having crossed the above mentioned moving averages and showing buy signals on both stochastic and MACD oscillators. Traders should look for support at $40 on a pullback, or a break of $41 if the market continues its upward momentum. Conservative traders should wait for a trade of $42, which will constitute a breakthrough of bearish resistance on the PnF chart. We will place our stop loss at $37, below the 50-dma and lows of the day at the end of last week. BUY CALL OCT-40 *GSK-JH OI= 1115 at $1.95 SL=1.00 BUY CALL OCT-42.50 GSK-JV OI= 441 at $0.80 SL=0.00 BUY CALL NOV-40 GSK-KH OI= 2158 at $2.85 SL=1.40 BUY CALL NOV-42.50 GSK-KV OI= 1134 at $1.65 SL=0.00 Average Daily Volume = 1.15 mil ************************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 ******************* CI $73.49 +2.74 (+1.53) Just when it looked like CI was finally going to break down under the $70 level on Monday, timid buyers came to the rescue, propping the stock higher into the close. Tuesday's afternoon ramp job drove the stock right back up near the highs from late last week. Tuesday's rally had the feel of a continuous short-covering rally, and due to its poor performance the Insurance sector (IUX.X) really got into the act this afternoon, launching higher by nearly 5%. Since CI broke below $75 over a week ago, this level has been acting as formidable resistance. Should this rally attempt fail below $74.50, it should make for another solid entry point into the play. Risk should be very easy to manage with entries near this level, as our stop is set at $74.75, right at the intraday highs from last week. If looking to open new positions on the next failed rally, watch for confirmation from the IUX index failing to push through the $255 resistance level. Traders that only want to take a position after renewed weakness shows itself, will want to see a drop back under the $72 level before playing. --- GM $40.64 +1.74 (+0.85) If there was any question about whether the zero-percent financing incentive was losing its luster, GM's release of September sales data certainly pointed to a significantly weaker auto market. GM announced that its U.S. sales fell a whopping 13%, partially due to a brief pullback in its interest-free financing offer. Now, not only has the incentive been reinstituted, but has been extended to most 2003 vehicles. With the other domestic manufacturers following suit, it is clear that zero-percent financing is a habit that the auto manufacturers can't afford to kick. The question becomes whether this reality will continue to pressure shares of GM. After confirming support just above $38, GM rocketed higher with the rest of the broad market. Up until the final 20 minutes of the day, it looked like the bulls might push through our $41 stop. But a bit of rationality prevailed into the close, keeping our play alive to fight another day. Both the broad market and GM are looking a bit toppy after this strong rally, and a failure of the rally near $41 could make for a great entry point. Just be sure to follow it up with a firm stop, in order to control risk. More cautious traders will want to see a drop back under $40 before opening new positions. --- TECD $27.94 +1.54 (+0.69) After a fairly quiet start to the day, Tuesday's session turned into a serious bullish party, with even the out-of-favor NASDAQ-100 tacking on a healthy 4.5%. We've been playing TECD to the downside ever since it broke important support up at $30, and despite a nearly 6% short-covering rally on Tuesday, the stock remains well below that level. However, we need to be careful right here, as the stock closed out the day just below its high and could be in the process of turning around. We'll need to see if this rally has any more gas in the tank or if it finished its run on Tuesday. DELL's positive comments after the closing bell will likely give the Tech sector another boost at the open, and aggressive traders will want to watch for that rally to fail below resistance. For TECD, resistance is looming overhead at $29 (also the site of the 10-dma) and a rollover below that level can be used for new entries. A push slightly higher before the rollover is also acceptable, as there is strong resistance near $30. More conservative traders will need to see TECD fall back under $27.25 before adding new positions. Keep stops set at $30. ************* NEW PUT PLAYS ************* QLGC - QLogic - $25.25 -0.79 (-1.71 for the week) Company Summary: QLogic Corporation simplifies the process of networking storage for OEMs, resellers and system integrators with the only end-to- end infrastructure in the industry, consisting of controller chips, host bus adapters, network switches and management software to move data from the storage device through the fabric to the server. QLogic designs and produces solutions based on all storage network technologies including SCSI, iSCSI, InfiniBand and Fibre Channel. A member of the S&P 500 Index, QLogic was recently ranked number 25 on Forbes' Best 200 Small Companies and number 20 on Fortune's 100 Fastest Growing Companies. (source: company release) Why We like It: Poor relative strength is just part of the story here. On a day when the Nasdaq screamed higher by 41.66 and the Dow added 346.86, QLogic actually lost -0.79. The Semiconductor Sector Index (SOX.X) had given up 35% of its value since the middle of August, but recently found support. For that reason, we were looking for a rollover in the index before shorting semiconductor related stocks. However, a couple of things developed today that has soured us on QLGC. First, the SOX was stopped below 250, finishing the day at 249.90. The intraday chart shows several attempts to get above 250 turned back solidly during the end of day rally. This indication of sellers at this previous support level shows bearish sentiment still present in the sector and the possibility of a dead cat bounce from the recent low of 230. That will most likely change in the morning after Dell raised its revenue guidance, however, that may simply give us a better entry point on QLGC. QLGC had achieved its point and figure bearish vertical count when it traded $27. We profiled it this weekend in "Ask the Analyst," highlighting support at that level, as well as a bounce from the bottom of its descending channel. A view of the charts can be found with this link http://www.OptionInvestor.com/ask/092902_1.asp. All of the support levels described in that column now appear to have fallen. Today's developments registered two key sell signals. First, we had a new PnF sell signal when the stock traded $26. It then added an additional box at $25. The stock also broke through the bottom of its descending channel, as well as breaking through the $25.00 round number support intraday. The next support level appears to be $20 for QLGC. We will look for a bounce on Dell's news to provide an entry point below the previous support at $27. Conservative investors can wait for a negative reading in the SOX before piling on. If we do not get a bounce on the Dell news in the morning, then prospects for the sector look even weaker, and we would enter the play at the current level. Place stops at $28, which would signal a break back above support and a 3-box PnF reversal. BUY PUT OCT-30*QLC-VF OI= 5166 at $5.40 SL=2.70 BUY PUT NOV-25 QLC-WE OI= 1066 at $3.40 SL=1.70 Average Daily Volume = 13.8 mil --- BAX – Baxter International $29.62 -0.93 (-1.79 this week) Company Summary: Baxter engages in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the healthcare field. BAX's products are used by hospitals, clinical and medical research laboratories, blood and blood dialysis centers, rehabilitation centers, nursing homes, doctor's offices and by patients at home, under physician supervision. The company manufactures products in over 28 countries and sells them in over 100 countries. Why We Like It: Relative strength or weakness is a powerful tool in pinpointing solid trade candidates. With the strong rally in the broad markets on Tuesday, those stocks underperforming the overall market stand out in even greater contrast. The Pharmaceutical index (DRG.X) staged a more than 4% rally on Tuesday after successfully testing the $275 support level. Our new play, BAX demonstrated amazing relative weakness, by shedding more than 3% on heavy volume, breaking below important support at $30 for the first time since early 2000. The stock has been posting a series of lower highs since early April of this year, and today's break below the $30 level looks like the early stage of a breakdown from a bearish triangle. Should the broad market rally fizzle like all the other recent rallies have, renewed selling will likely hammer BAX lower due to its demonstrated relative weakness. Our preference would be to get a failed rally near resistance to before initiating new positions, but we'll clearly have to take what the market offers us. Note that the $33 level appears to be formidable resistance, and this is backed up by the 20-dma ($33.03). A rollover below this level, possibly as low as the $30.75 or $32.25 intraday resistance levels. Should the stock continue to slide without rebounding, momentum entries can be considered on a volume-backed drop below $29, as that would correspond to a fresh PnF Sell signal. Set stops initially at $33.50, just above strong resistance. BUY PUT OCT-30 BAX-VF OI= 496 at $1.80 SL=1.00 BUY PUT NOV-30*BAX-WF OI=1500 at $2.65 SL=1.25 BUY PUT NOV-25 BAX-WE OI=1149 at $1.05 SL=0.50 Average Daily Volume = 4.18 mln --- FLIR – FLIR Systems $34.55 -0.44 (-3.10 this week) Company Summary: FLIR is engaged in the design, manufacture and marketing of thermal imaging and stabilized camera systems for a wide variety of commercial, industrial and government applications. The company's products are divided into two categories, which include the thermography products and imaging products. In the Thermography division, FLIR manufactures products that are sold to commercial, industrial, research and machine vision customers. For industrial customers, FLIR has developed thermography systems that feature accurate temperature measurement, storage and analysis. The Imaging division caters to military, law enforcement, surveillance and security customers. Why We Like It: Along with it being one of the worst months for equity bulls, October also ushers in tax-loss selling season for many funds, as they look to balance gains against losses in their portfolios. Clearly there aren't a lot of stellar winners this year, and even stocks that have failed to rally strongly may be candidates for October sales. FLIR is one such stock due to the fact that it hasn't fallen apart over the past 12 months. While it hasn't fallen apart, neither has it been a strong stock, as it has been trapped under a descending trendline since April of this year, posting one lower high after another. The $35 level has provided consistent support throughout the past year, but today's intraday plunge to just above $33 broke that support and generated a fresh PnF Sell signal. The vertical count is pointing to an eventual target of $29, so clearly the downside appears to be limited. Following the recent breakdown, (despite the intraday rebound), resistance looks firm at $36 and impenetrable in the $38-39 range. Due to the sharp recovery from today's low, we want to be very careful about entering on a breakdown. It is easier to manage risk in this play by fading a failed rally. A rollover near $36 makes sense for initial positions, although a bullish failure near $39 certainly looks attractive. Not only is this the site of significant resistance over the past month, but it is also the location of the long-term descending trendline and the 50-dma. After taking a position, target $29 to the downside and set stops initially at $39. BUY PUT OCT-35*FFQ-VG OI=260 at $2.45 SL=1.25 BUY PUT OCT-30 FFQ-VF OI=121 at $0.75 SL=0.25 Average Daily Volume = 300 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 10-01-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Call - GSK Traders Corner: Forex ********************** PLAY OF THE DAY - CALL ********************** GSK - GlaxoSmithKline - $40.49 +2.06 (+1.63 for the week) Company Summary: GlaxoSmithKline, with U.S. operations in Philadelphia and Research Triangle Park, NC, is one of the world's leading research-based pharmaceutical and healthcare companies committed to improving the quality of human life by enabling people to do more, feel better and live longer. (source: company release) Why We Like It: GSK has released a series of positive studies in regard to infectious disease treatments. On Friday, it release results of two such studies. The first showed that its once a day antiviral drug Valtrex, reduced transmission of symptomatic genital herpes by 77% in healthy heterosexual monogamous couples. It also reduced acquisition of the virus by 50%. The fact that Valtrex is given only once a day should make it a darling of doctors, who strive to find therapies that require less dosing. Patients are more efficient when they are required to take medication fewer times daily. The company also released findings for its HIV protease inhibitor 908. The study showed that the drug achieved a higher rate of undetectable viral load in patients than Pfizer's Viracept. GSK said 73% of patients treated with the new drug had an undetectable viral load at 24 weeks, compared with 54% of patients taking Viracept. The recent news, along with the rise in the drug sector today, gave GSK a push through a couple of significant levels. The stock blew through both its 50-dma ($38.56) and 100-dma ($40.06), which coincided with round number resistance of $40. One of the keys for this play will be whether BSK can hold above $40. The other key will be how the stock reacts at the $41 level. $41 is the level at which point and figure bearish resistance is located. The has terrific momentum at the moment, having crossed the above mentioned moving averages and showing buy signals on both stochastic and MACD oscillators. Traders should look for support at $40 on a pullback, or a break of $41 if the market continues its upward momentum. Conservative traders should wait for a trade of $42, which will constitute a breakthrough of bearish resistance on the PnF chart. We will place our stop loss at $37, below the 50-dma and lows of the day at the end of last week. BUY CALL OCT-40 *GSK-JH OI= 1115 at $1.95 SL=1.00 BUY CALL OCT-42.50 GSK-JV OI= 441 at $0.80 SL=0.00 BUY CALL NOV-40 GSK-KH OI= 2158 at $2.85 SL=1.40 BUY CALL NOV-42.50 GSK-KV OI= 1134 at $1.65 SL=0.00 Average Daily Volume = 1.15 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 ************** Forex By John Seckinger jseckinger@OptionInvestor.com Most traders spend a considerable time analyzing both equity and fixed-income markets; however, now might just be the perfect time to focus on the currency markets. Let us begin with some fundamental questions. What is Forex? Forex, or Foreign Exchange, can best be described as a cash inter-bank or inter-dealer market established in 1971 when floating exchange rates began to become more active (read: more liquidity). The simplest definition of foreign exchange is the changing of one currency to another. In comparison to the daily trading volume averages of $300 billion in the U.S. Treasury Bond market and the less than $10 billion exchange in the U.S. stock markets, the Forex market maintains volume of well over $1 trillion per day. The most active foreign exchange activity is the spot business between the dollar and the four major currencies (British Pound, German Mark, Swiss Frank, Japanese Yen), representing over 64% of activity. The players include central banks, commercial banks, corporate customers, and brokers. Note: Commercial brokers conduct the largest volume of trading. It is important to realize that Forex does not have a centralized location for trading activity, differentiating themselves from currency futures. What is the difference between currency futures and foreign exchange? In currency futures, the contract size is predetermined. Futures traders exercise leverage by utilizing a performance bond or margin to control a futures contract. (Margin is money deposited by both the buyer and the seller to assure the integrity of the contract.) Liquidity is extremely important when trading currencies, and it is a drawback that the futures market does have a set opening and closing time. In contrast to the futures market, the spot Forex market is a 24-hour, continuous currency exchange that never closes. There are dealers in every major time zone, in every major dealing center (i.e., London, New York, Tokyo, Hong Kong, Sydney, etc.) willing to quote two-way markets. What influences exchange rates? The primary factors influencing exchange rates include the balance of payments, the state of the economy, technical analysis, as well as political and psychological factors. Purchasing Power Parity (PPP), capital strength between nations, is the central factor that determines market momentum. Needless to say, the ballooning deficit in the U.S. has taken its toll on the U.S. dollar. In addition, fundamental economic forces such as inflation and interest rates constantly influence currency prices. Governmental strength (“Full faith and credit”) will also impact currency price. If the Government sends money overseas, or changes the interest rates (making it more or less attractive to foreigners), clearly prices will have to reflect such action(s). Getting to the dollar specifically, using 1991 as the benchmark ($1.00), it is impressive how the value has decreased since the 1820’s. 1820-1850 $13.28 1850-1875 $13.14 1875-1900 $14.85 1900-1925 $11.38 1935 $9.91 1945 $7.56 1965 $4.31 1975 $2.35 1985 $1.26 1991 $1.00 With the Dollar maintaining its 1.00 level for some time now, what are some reasons for the dollar’s decline? For one, North- East Asian central banks have turned away from US dollar foreign exchange reserves to buy euros, boosting the euro’s claim to become the world's second reserve currency. Central banks of China, Taiwan, Hong Kong and South Korea accumulated $66 billion (quoted in US Dollars) in foreign reserves in the first six months of this year, but they did not spend those reserves on US dollar assets. Last year, the North- East Asian central banks funded more than 20 per cent of the US current account deficit, but that pattern began to break down in the first quarter of this year. As mentioned previously, money either fled to the euro or elsewhere. China actually became a net seller of US government bonds in April for the first time since August 2000. Moreover, Hong Kong's purchases of US securities have dropped to their lowest levels since March 2000. Taiwan, on the other hand, has traditionally spent close to 100 per cent of its reserves on US securities, but recently has reported net purchases of US securities near zero. On the other hand, the euro has witnessed inflows of up to 11 billion in one month (April 2002). Speaking of the euro, let us back track for a second. On January 1, 1999 the euro came into existence as the single currency of 11 of the 15 member countries of the European Union (Austria, Belgium, Germany, Finland, France, Ireland, Italy, Luxembourg, Spain, Portugal and the Netherlands). Besides the dollar, only the Deutsche mark and the Japanese yen played a significant international role before implementation of the euro. Note: Dollars held outside the United States amount, basically, to an interest-free loan by foreign nations to the United States. It has been estimated that this saves the United States about $15 billion in interest charges annually. Therefore, the introduction of the Euro back in 1999 immediately raised concerns about the potential of losing part of that $15 billion dollars. This may have occurred somewhat (hard to find facts on interest charges saved); however, more importantly for the dollar was the fact that most primary commodities remained priced in dollars. Remember, what pressures the U.S. dollar (weak economic data, current account deficit) also pressures the euro. With Germany basically in a recession and weakness in the UK showing little signs of letting up, the dollar should be able to maintain its world wide dominance for some time. Note: It is interesting that Japan is showing a trade surplus; regardless, banking turmoil clearly is keeping the yen at bay since it is hard to attract capital inflows. Time for some technical analysis. We begin with a chart of the Euro, currently at 0.9830. Following its launch, the euro proceeded to lose 30% after trading for a short nine months. Note: Before 1999, the chart reflects the basket of the 11 aforementioned countries currencies. Chart of the Euro Clearly the 1.00 level is pivotal, and further weakness in the dollar (via a higher euro) could spell deflation in the U.S and send the euro back towards 1.17. Furthermore, this would not be good for equities. Turning to the yen, the current 122.46 reading seems to be keeping the upward trend in tact, portending further weakness out of Japan. Once above 130, rumors about possible BoJ intervention will likely take form. If, on the other hand, the Yen is in the process of forming a right shoulder of a H&S formation, maybe focusing on a move under 115 makes more sense. The objective would be for a test of near 105. This would not be good for the Greenback. Chart of the Japanese Yen Speaking of the Greenback, a monthly chart shows the recent devaluation and current consolidation. Below 108, the current reading remains neutral to slightly bearish. As the chart implies, a move back above its 22 PMA (109) should be the catalyst for an accelerated interest in dollar denominated assets, including equities. On the other hand, a break under 104.50 could spell trouble. Chart of the US Dollar Index, Monthly I hope that you have gotten a general understanding of the Forex market. Remember, in theory, higher dollar means higher stock prices. Good luck. ************************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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