The Option Investor Newsletter Wednesday 10-09-2002 Copyright 2002, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Searching for the Bottom Futures Wrap: Buy the Rumor, Sell the Newsv Index Trader Wrap: Call it "end game" for now Weekly Fund Family Profile: Meridian Investment Management: ICON Funds Traders Corner: Relativity - It's Not Just For Physicists Updated on the site tonight: Swing Trader Game Plan: A reoccurring dream Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 10-09-2002 High Low Volume Advance/Decl DJIA 7286.27 - 215.22 7500.03 7282.39 2130 mln 300/1817 NASDAQ 1114.11 - 15.10 1135.89 1112.08 1748 mln 836/848 S&P 100 392.69 - 10.19 402.88 392.03 totals 1136/2665 S&P 500 776.76 - 21.79 798.55 775.80 RUS 2000 327.04 - 13.28 340.32 326.88 DJ TRANS 2013.02 - 102.33 2114.67 2008.94 VIX 49.48 + 3.02 49.99 47.94 VIXN 62.22 + 1.06 63.80 61.00 Put/Call Ratio 1.04 ******************************************************************* Searching for the Bottom by Steven Price It appears that the Taft-Hartley market fever was a short-lived condition, lasting little more than a few hours. The President gave the bulls an excuse to try some bottom picking, and the bears a slight short-covering scare. However, after the reality of the situation sunk in, the bulls got out of the way and allowed to selling to commence. The reality is that even though the ships are going to be unloaded, there will be a long delay in getting the back log cleared up, and that will lead to a delay in replenishing merchandise. The food that rotted won't be sold and after the 80-day relief window expires, the workers may not be any happier than they are now. Which begs the question of how hard and fast they will be working under forced conditions. If the retailers can't mount a sustained rebound on the news that the ports will be open through the holiday shopping season, then things do not look good. The retailers, as gauged by the S&P Retail Index (RLX.X), still look very weak, with the index once again testing support levels at its July low. Tuesday's news was good for a significant bounce, but only put the index back at its opening level from the day before. The group continued its steep decline, led by Wal- Mart ($50.74 -1.86 ), Target ($26.66 -1.55 ), and Home Depot ($23.66 -1.59 ). If the group breaks 250, it could be a long way down from there. Friday will most likely give them a push in one direction, as we will get a look at retail sales for the month of September and the preliminary university of Michigan Consumer Sentiment report. Many stores already reported poor September numbers, so unless we get a big surprise, that data may not have much of an effect. However, the Sentiment report will give us a snapshot as to consumers' outlook on the economy, and thus their willingness to spend heading into the holiday season. Chart of the Retail Index One sector that has received a lot of attention is the financials. A bank crisis is certainly one way to lead the market much lower than it already is, and the news from this sector has been terrible. There have been a slew of warnings about non-performing assets (bad loans) and today was no exception. This morning Sun Trust Banks (STI) missed earnings by a penny, but more importantly said, "it seems unlikely we will see a meaningful reduction in nonperforming assets in the near future," adding "A strong economy is clearly not what we have, nor does it seem to be in the cards any time soon." J.P. Morgan (JPM) saw its debt downgraded by Moody's from "A1" to "Aa3." The downgrade affects $42 billion worth of debt and will make it more costly for JPM to borrow, as it contemplates additional job cuts in its efforts to trim costs. Moody's said that JPM, " has lagged behind similarly rated peers during this cycle. Moody's is concerned that (JPM's) recent problems may further complicate its ability to execute its capital market strategy, which has so far met with only partial success." The downgrade helped send the entire sector lower. In addition, Piper Jaffray cut estimates on JPM, Bank of America (BAC) and Bank One (ONE). The S&P Banks Index (BIX.X) has been flirting with support around 235, and a move below that level could be ominous for the group. Chart of the S&P Banks Index (BIX.X) The Dow lost 215.22 points, closing at 7286.27. There had been some support at 7500 and again at 7400, going back to late 1997. Now that that support is gone, I'm looking back to a chart I posted several weeks ago. The head and shoulders pattern in the Dow indicated a downside measuring objective around 7180 and the Nasdaq Composite pointed to 1030. I also posted the last few times the same pattern appeared in the Dow, and noted that the downside objectives were reached each time. You can use this link to review those patterns. http://members.OptionInvestor.com/marketwrap/092502_1.asp The significant recent support levels in the Dow (7500), OEX (400) and SPX (800) were broken on Monday. At that time I began looking for those levels as resistance, before assuring myself we were headed even lower. The other nagging doubt I had was that while the Dow and Nasdaq had both broken their July 24 intraday lows, the OEX and SPX had yet to do so. Tuesday's rally actually saw the Dow close just over the 7500 level. The action at the end of the day Tuesday saw a massive rally fade after President Bush's announcement regarding the West Coast lockout, and saw the Dow hold just over 7500, at 7501. This hold had me wondering if 7500 would once again act as support. The OEX and SPX both broke their respective support levels, but just barely. Today made it pretty clear that 7500, and even 7400 for that matter, would not hold up for the Dow. The SPX, however, bounced right at the July 24 intraday low of 775.68, trading down to 775.80, before finishing the day a point higher. The OEX has yet to touch the July intraday low of 384.96. Does this mean that we are in bounce territory? I don't think so, but I'd be a lot more confident in my short positions if the SPX has broken the 775 level, rather than bounced right at it. Chart of the Dow Chart of the SPX Chart of the OEX An unusual development in the breadth area was the advance decline ratios. While the NYSE ratios were consistent with approximately 8:1 decliners to advancers and 6:1 declining to advancing volume, the Nasdaq wasn't quite so clear. The ratio of 3:1 decliners to advancers didn't quite match up to a declining to advancing volume that was nearly equal at 1.01:1. One of the catalysts for today's drop was a downgrade of General Electric (GE). Morgan Stanley lowered 2003 earnings estimates from $1.79 to $1.70, citing concerns over deterioration of its power and aerospace businesses, losses to GE Capital's portfolio and weakness in the company's short-cycle business. The stock gave up $1.35 to close at $22.00. The automakers also took a major hit. Morgan Stanley cut its estimates on Ford (F), General Motors (GM), and DaimlerChrysler (DCX), citing lower production forecasts. Lehman also lowered its outlook for GM's cash flow for 2003-2006, due to the declining value of Hughes Electronics, pension funding worries and the exercise of a put on its stake in Fiat. Ford was hit by concerns about its debt, after its bonds were quoted in junk-bond type pricing methods. Ford is the largest issuer of corporate debt among U.S. companies, with over $60 billion outstanding. GM lost $2.59 to close at $31.01. For those readers holding the OI GM put play, we have closed the play for a $10.51 gain, looking to take profits on direction and increased option premiums. Ford lost 0.60 (8%) to close at $7.15 and DCX lost $2.07 to close at $30.17. Abbott (ABT) reported positive news for shareholders, but not such great news for employees. Its earnings grew 14% in the third quarter, from $0.40 per share to $0.46 per share. It also said it expects earnings of $0.55-0.57 in the fourth quarter. This news was tempered by the announcement that it would be laying off 3% of its workforce, which amounts to 2,000 jobs. Democrats Senate Majority Leader Tom Daschle and House Minority Leader Dick Gephart are calling for the president to replace SEC Chairman Harvey Pitt. Again. The cries to replace him started last summer, citing the corporate accounting scandals and accusing him of being too tight with the accounting industry. These requests mirrored sentiment on the trading floors that the SEC allowed far too many rule changes in favor of the big investment banks, not to mention suspicious activity reports that went nowhere over the years. The latest requests seem to simply be a game of hardball, with regard to who will be appointed as chairman of the new five member public accounting board. The Democrats would like to see John Biggs, former chairman of TIAA- CREF, one of the nation's largest pension funds, representing teachers. The accounting lobbies have started a campaign to stop Pitt from selecting Biggs, a corporate reform advocate and outspoken critic of the accounting industry. After the bell, there was some good news, as Yahoo (YHOO) said quarterly sales grew 50% from a year ago. The company beat estimates by a penny, earning $0.05 per share. This was a welcome change from a loss of - $0.04 a year ago. Quarterly sales grew from $166.1 million a year ago, to $249 million, and beat estimates by $10 million. Chip technology licensor Rambus (RMBS) also beat estimates by a penny. Dell announced that it will be selling printer cartridges to go along with the printers it offers from its new Lexmark (LXK) deal. It will not, however, offer cartridges to match printers made by competitor Hewlett-Packard. It also said it will be reducing IT service fees, in an attempt to grow a portion of its business that has not been a major revenue source. In the current environment, with IT spending on the decline, this should only serve to reduce revenue further at Dell's competitors, who may be forced to reduce prices as well. The Market Volatility Index (VIX.X) has approached 50 once again, but has failed to break through for the third day in a row. The index value is derived from the implied volatility of eight at the money OEX options in the first two months, and it appears that several large premium sellers are coming in selling options each time it gets close to 50. Today's high was 49.99, following highs the last three days over 49. The VIX closed today at 49.48. The last few major market rallies have come after the VIX has spiked into the high 50s, with the exception of the rally following August 5 of this year, when the high was just under 50. However, even that rallied started back in July after a high reading of 56.74 in the VIX. Things certainly look bearish, but with the SPX bouncing at the July lows, we could be in for a bear market rally. While I'm still leaning short, a break of SPX 775 will make me more comfortable in that conviction. I have tightened the stops on my shorts and will get out of the way quickly if we do break back above SPX 800, or Dow 7500. At least until I see a better short entry. Grrrr. ************ FUTURES WRAP ************ Buy the Rumor, Sell the News by Alan Hewko The RUMOR of the West Coast Dock Strike ending on Tuesday was a very large reason for the Shorts to Cover starting in the middle of the day Tuesday Oct 8th (ES [SP 500 Futures] price 777). The NEWS of the West Coast Dock Strike ending came on Tuesday, Oct 8th at 3:00 PM as President Bush spoke on TV formally announcing he was invoking Taft-Hartley Act to send the dock workers back to work. (ES price at that point was 810, and the level an Index Exit Longs and/or Short was suggested). This is a Chart of ES (E-mini SP500 Futures) covering Tuesday, Oct 8th and Wednesday, Oct 9th. You can see the Tuesday bottom at 12 Noon at 777, and the Top on Tuesday at 3:00PM. Chart of S&P 500 E-mini Futures: (chart shows intraday and after hours for Tues. Oct. 8th and intraday for Oct. 9th, 2002) What I haven't shown you before now was a Chart of how Futures trade during the Globex OVERNIGHT SESSION. Futures trade 22.5 hours a day, and you can see by the above chart how ES traded Tue Night going into Wednesday morning (Down by Lots). On Wednesday, Oct 9, ES was at approx. 785 at 9:30 AM. The reasons for the overnight drop were: 1. Japan's Nikkei sold off another 200 points to make yet another 19-year Low on truly serious banking concerns. 2. Japan News: Japan's Mizuho Holdings Inc, the world's biggest banking group by assets, plunged 11.86 percent to a lifetime low of 171,000 yen. Japan Government data released during afternoon trade on Tuesday showed that machinery orders tumbled 13.6 percent in August from July, much worse than expected. 3. HPQ made bearish comments, one could almost call it a Warning. 4. Europe followed the Japan markets lower. 5. GE received a large downgrade ahead of their Friday earnings. 6. Dock Strike: Perhaps the more traders thought just because the Dock Strike may have ended, that didn't mean business as usual would immediately return as it might take weeks to get everything back to normal. It's mid October, the impact on Christmas retail sales, car makers, etc. will be vast, but unknown. In other words, that old Trading Rule of "Buy the Rumor, Sell the News" applies. Wednesday Trading Day --------------------- All of the above set the tone for a rather large Gap Down by Wednesday's market open: ES gap down was approx. 16 points from their Tuesday 4:15 PM close. Dow gap down was approximately 150 points from their Tuesday close. NDX was the least damaged index all day. This is a chart of ES (E-mini SP500 Futures) for Wednesday 9:30 AM to 4:15 PM Close chart: Some comments on Wednesday's Action ----------------------------------- Dow Jones Industrials made a 5 year Low going back to Aug 1997. Dow Utilities Index is at its lowest levels since May 1988. Dow Transports Index is at its lowest levels since Sep 1996. New Lows to New Highs today was a staggering 50 to 1 ratio. SPX (SP500) traded at its July 24th Lows of 775.00 Market was weak from the open, initially falling to 780 (-20) ES points by 10:00 AM before short covering took it up 13 points to 793 at 10:30 AM (793 was a 50% retracement level). 10:30 AM - 12:30 PM Back to the Trend of "Sell Stock". 12:30 PM and 1:30 PM ES 777 holds twice and the market gets some short-lived bounces. ES 777 was spoken about last night at depth, so I won't repeat why ES 775-777 is such a key number. 2:00 PM ES 791 Afternoon rally stops on some more bad news regarding JPM comes to light. The rest of the afternoon has Lower Lows and Lower Highs until the "Magic Number" finally gets traded. SPX and ES (Emini SP Futures) finally trades at the support of 775 twice this afternoon. It does not trade lower that it as shorts tried twice to attack it; however, the day was growing rather late. This SPX/ES level matches their July 24th Low. Short covering takes place near the end of the day sending Futures to close at 4:15 PM EST Closing Futures Numbers: ES 778.25, YM (Dow) 7279, NQ 809 Thoughts for Thursday --------------------- The only reason in my view that ES didn't go under that 775 level on Wednesday was the lateness of the day when it traded there. The earnings news continues to be bad. Japan and Europe stock markets are falling to new multi year lows almost as a daily occurrence. Wednesday had the feeling at times of Mutual Funds selling rather hard. Simply watch that very important ES (E-mini SP Futures) number of 775 for Thursday. If that number firmly loses support, (such as when ES lost 800, or Dow lost 7500), I truly have no idea on how ugly it could get. I would take a stab at next large lower ES support at 753, Dow 7100-7150. I have seen some technical traders show their argument for Dow as low as 6900s. Bottom Line: The trend remains the same. Other than shorts taking profits at various technical levels, we haven't seen much real buying. On the other hand, ES / SPX has retested that 775 Level. Now we shall see if any buyers step up to the plate. But I shall leave you with two thoughts in general: 1. Why be long stock going into what is likely to be non- impressive October earnings? 2. What possible catalyst might the market have to provide to turn the sentiment around from this very bearish tone to one of a bullish tone? Alan Hewko ******************** INDEX TRADER SUMMARY ******************** Call it "end game" for now Wow! The Dow Industrials (INDU) 7,286 -2.86% fell 215 points today and that seems like a lot. But to some bears, the past three session have seen the Dow violate each session's low by no more than 91 points. The last 5 sessions has seen the Dow set a series of lower highs and lower lows, but some market bears feel the Dow has yet to have that "spectacular" and climactic decline to perhaps signify some type of towel throwing by the bulls. Even the S&P 500 Index (SPX.X) 776 -2.72 % shows similar pattern of lower lows and lower highs each session, but for a bear looking for some type of "catastrophic" decline, he's left to wait yet another day. A NASDAQ bear was perhaps found scratching his/her head today as that NASDAQ Composite (COMPX) 1,114 -1.3%, NASDAQ-100 Index (NDX.X) 807.42 -0.49% and NASDAQ-100 Trust Index (AMEX:QQQ) $20.06 -0.49% traded relatively strong versus the other major indexes, which was daily DIVERGENCE from the past several months, weeks and days. While yesterday's bullishness in the financials, specifically the banks, which had the S&Ps showing upside out performance, it was a giveback of those gains by the financial sectors BIX.X -3.98%, BKX.X -4.29%, XBD.X -4.24% and IUX.X -4.82% which weighed on the both the S&P 500 Index (SPX.X) and S&P 100 Index (OEX.X) 393 -2.5%. As the Dow Industrials broke to a new 52-week low and closed there, the S&P 500 Index held above its July 24th low of 775.68 when it traded a session low 776.78 today. The S&P 100 Index didn't come close to its July 24th low of 384.96 when compared to today's low of 392.03. How the heck are these indexes hanging in there? And where's this "capitulation" that everyone's looking for? If you've traded long enough, you've been here before, and more than likely, you've been in similar environments more than once. When the bullish % charts get "oversold" and the Oscillators are also at some lows, the current market environment looks to be what many traders call "end game." A "break" looks eminent, but its not the time for BIG bets. Only small ones where the trader looks to capitalize on the potential break. As a bear holding some indexes short/put, I feel there's got to be the big break coming, but I'm looking over my shoulder at the oversold bullish % and know that time may be running out. If only they'll break and give me the spike lower, I'll gladly take my profits, but I just need that break. There are signs that a climactic break lower can be had in the major indexes. Take today's Utility Index (UTY.X) 206.34 -9.14% downside action. From a supply/demand aspect, this was perhaps a bearish trader's dream and what he/she is looking for in the major indexes. When a stock/sector/market index breaks to a low, there's no telling where that low can reach. Utility Sector Index Chart - Daily Interval True, a sector move is "specific" to a group of stocks, while a major market index has more "diversity" in its components that helps smooth out a sharp move (up or down). However, all a bear is looking for right now is some type of "panic" move from other market participants, but NOT from YOU!!! And that move lower may still depend on the different financial sectors, like the S&P Banks Index (BIX.X) 238.54 -3.98%, which gave back the bulk of yesterday's gains. If something's "wrong" in the banks, then a move lower like was seen in the Utilities (UTY) could be the sector that triggers some "panic" in the broader markets. S&P Banks Index Chart - Daily Interval The S&P Banks Index (BIX.X) reversed most of yesterday's gains, which had the S&Ps rebounding yesterday. This is the sector that I think will dictate broader index trading near-term, especially in the S&Ps. One thing I'll make not of that I noticed tonight as it relates to my "fitted" retracement is the 267 level and September 23rd finding of support. If I correlate that September 23rd date back to the S&P 500 Index (SPX.X), and my "fitted retracement" on the SPX, I can perhaps see how the BIX.X has played "catch up" to the downside, and trades pretty much in "unison" with the S&Ps. If the banks break lower and don't find support until BIX.X 220, then the SPX is vulnerable to our 0% retracement of 763. It also becomes OBVIOUS, that bears need to protect themselves on a rally above BIX.X 253 and SPX 800, OEX 400. Check it out! S&P 500 Index Chart - Daily Interval Special notes are made tonight with correlative resistance at the SPX 19.1% retracement of 800 and BIX 19.1% retracement of 253. A BEAR MUST be concerned only about RISK currently. A BEAR doesn't necessarily have to be overly concerned about reward. When/if a stock/sector/index breaks to a low, a BEAR should only be managing his risk. Again... since I'm filling in for Jim Brown in the Swing Trade section this week. There are 6 different charts of the indexes there at this link . http://members.OptionInvestor.com/itrader/swing/swtgp_1090265.asp I think that tonight's attention on the BIX.X and correlation with the charts in the Swing Trader section show EXCELLENT correlation between the BIX.X and major indexes you're trading. For technology traders, the BIX.X may not seem "like much," but my thinking is this. If the BIX.X is going to get crunched lower, then there may be something "wrong" as it relates to bad loans etc. My thinking is that any "crisis" regarding bad loans is most likely due to loans made to the technology companies to begin with. It's apparent that the indexes are "inching lower" along the lower ends of their regression channels. To get a move going lower there needs to be a "key group" to provide the catalyst for a collapse. In my mind, the BANKS are the sector that traders need to monitor. With the BIX.X at a historic level of support, this is the group to monitor your trades against. 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 ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Meridian Investment Management: ICON Funds The ICON Funds, advised by Meridian Investment Management, is a relatively new family of specialty sector funds offering mutual investors "targeted access" to 123 industries and 31 countries. In doing so, Meridian Investment Management seeks to fill voids left by the mutual fund industry ("traditional" fund products). The Greenwood Village, Colorado based fund family offers access to 123 specific industries through 9 domestic sector funds, and 31 countries through 5 regional funds. The ICON Funds recently introduced four new funds targeting today's volatile market and we'll talk more about them a little later in this report. The ICON Funds' goal is to select certain industries within the larger sector and avoid unattractive industries. The five team members at ICON Funds apply a value methodology that emphasizes industry and country rotation. The company's "dynamic industry allocation" seeks to capture leading market themes. This family uses a flexible tool to implement active management strategies and a unique "active/passive" approach to sector and country investing. Ongoing/dynamic allocations seek to capture performance (growth) opportunities. While the ICON Funds have had their share of losses in the most recent downswing, they have fared better than many other mutual fund companies. Meridian Investment Management has nearly $1.0 billion in net assets under management today, about double last year's level per a recent Rocky Mountain News article. Additional Background The website (www.iconfunds.com) states that the ICON Funds were first introduced in 1997 to financial advisors, to enhance their sector rotation strategies as well as to expand their investment structures. In 1999, the funds were opened to retail investors, to offer them "purity," which ICON's management team defines as giving investors an "extremely concentrated" position of stocks in the sector they have chosen. By grouping stock securities by industry or country, the firm's portfolio management team seeks to identify the degree to which each industry or country is overvalued or undervalued. The team members then buy target baskets of securities in the undervalued industries or countries. This value orientation, the site says, leads to longer holding periods than shorter term, speculative approaches. Industry and country baskets are used to diversify away "random risk" associated with individual securities, with the system designed to capture large market swings as specific industries and nations move in and out of favor with investors. In 2000, the firm changed the names of six ICON sector funds in response to the new Global Industry Classification Standard (or GICS) jointly launched by Standard & Poor's and Morgan Stanley Country Indexes. Later that year, they introduced a "flagship" fund ("The ICON Fund"); a diversified fund tilted to stocks in favored industry sectors and designed to capture market themes. Note that ICON Fund was recently renamed ICON Core Equity Fund, to reflect its position as a "core, all-cap holding." It bases stock selections on the same valuation and quantitative systems used by Meridian Investment Management to manage private client assets. Earlier this year, ICON's Asia Region Fund was renamed ICON Asia-Pacific Region Fund, to reflect its inclusion of such markets as Australia, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, Singapore and Thailand. Excluding the four brand new ICON funds just launched, the ICON family of funds today consists of 9 U.S. sector funds, one U.S. diversified fund, 3 international regional funds, and one short term fixed income fund, with approximately $1 billion in assets under management. Retail investors may purchase ICON Funds via Charles Schwab, E*Trade and other brokers, with no front-end or back-end loads and a $1,000 minimum initial investment for both regular and IRA accounts. Investment Overview If you go to the About Us section of the ICON Funds website, at www.iconfunds.com, you can view a detailed description of their 1) investment philosophy and valuation model, 2) fund managers, and 3) database and selection process. Our aim here is to give you some of the highlights. All ICON Funds share a common philosophy, one of "value-driven" industry and country rotation. ICON Funds also share the view that advances in world capital markets are defined by "themes," which are led by specific industries and countries. They feel that if industries and countries are properly valued, combined and weighted, they will outperform the broad sector benchmarks. The website cites their notion that undervalued industries and countries are generally the leaders when new themes in global markets emerge. The ICON Funds believe the key to identifying these future leaders is through the application of a valuation model, a multi-variable model developed by the company's chief investment officer Craig T. Callahan, PhD over a 20-year span. ICON's valuation model is rooted in the methods and teaching of Benjamin Graham, considered the "Father of Securities Analysis." Callahan's valuation model employs classic valuation criteria to determine the "intrinsic value" of over 1700 domestic stocks and 800 international stocks. All management decisions on the ICON Funds are made by committee (Callahan is the chairman). ICON's committee meets regularly to discuss quantitative information and investment recommendations, with decisions regarding industries and countries agreed upon by committee members. Once an investment decision has been reached, trading instructions are executed by the ICON trading department. Other key members include Derek Rollingson, J.C. Waller III, and Robert Straus, all committee members. They share responsibility for database management, running valuation models and performing financial statement analysis for investment research. They look for companies exhibiting the following favorable characteristics: high growth; healthy balance sheet; pricing flexibility; strong management; liquidity; and operating characteristics which will enable them to compete successfully in their respective markets. ICON's stock selection process uses their proprietary valuation model to analyze various U.S. and international stock universes based on such factors as historical and estimated earnings, long- term earnings growth projections, risk, interest rate conditions and current price. Based on its valuation models and investment research, the team members will from time to time add, delete or replace a company within a basket. In the next section, we take a look at how well the ICON Funds have fared versus their sector fund peers using Morningstar data through October 8, 2002. Investment Performance Twelve ICON funds have been around long enough to sport trailing 5-year annualized returns. Of those twelve, five of them ranked in the top quartile of their relative Morningstar category based on 5-year performance (three of them were top decile performers). However, three ICON funds ranked in the bottom quartile in their category for the 5-year period (two of them ranked in the bottom decile). Below is a distribution of the twelve ICON funds by their 5-year quartile rankings per Morningstar. First Quartile: ICON Financial (ICFSX) ICON Healthcare (ICHCX) ICON Information Technology (ICTEX) ICON Leisure & Consumer Staples (ICLEX) ICON Telecommunications & Utilities (ICTUX) Second Quartile: ICON Asia Region (ICARX) ICON South Europe Region (ICSEX) Third Quartile: ICON Consumer Discretionary (ICCCX) ICON North Europe Region (ICNEX) Fourth Quartile: ICON Industrials (ICTRX) ICON Materials (ICBMX) ICON Short-Term Fixed Income (ICSTX) ICON's specialized sector funds don't always fall neatly into Morningstar's sector fund groups since they emphasize certain industries and countries within the broad sector groups. The ICON Funds may be better compared to their broad sector group benchmarks but that isn't very intuitive either. For example, ICON's U.S. equity funds are compared in the prospectus to the S&P 1500 index, a broad-based, "all-cap" weighted index. To make it simple, below is how each of the 12 ICON funds with trailing 5-year histories have performed relative to the stock market as measured by the S&P 500 large-cap index, the primary benchmark for U.S. stock mutual funds. Returns are annualized through October 8, 2002 per Morningstar and ranked from highest to lowest. 5-Year Average Total Return: ICON Leisure & Consumer Staples (ICLEX) +8.0% ICON Healthcare (ICHCX) +7.5% ICON Information Technology (ICTEX) +4.1% ICON Financial (ICFSX) +3.7% ICON Short-Term Fixed Income (ICSTX) +3.6% ICON Telecommunications & Utilities (ICTUX) +1.6% S&P 500 Index -2.6% ICON Consumer Discretionary (ICCCX) -2.9% ICON South Europe Region (ICSEX) -4.6% ICON North Europe Region (ICNEX) -6.3% ICON Industrials (ICTRX) -6.6% ICON Asia Region (ICARX) -10.8% ICON Materials (ICBMX) -11.6% You can see by this analysis that six ICON funds have beaten the S&P 500 index benchmark over the last five years while producing positive total returns for investors. However, six funds lagged the S&P 500 index benchmark while producing negative returns for shareholders (two of them have generated double-digit percentage losses). So, fund performance of the original set of ICON Funds is mixed over the trailing 5-year annualized period, the longest time period available. ICON Energy Fund (ICENX), a fund with a 3-year track record, has delivered exceptional absolute and relative performance in three years of operation. According to Morningstar, the fund produced an average annual total return of 20.7% for the trailing 3 years ended October 8, 2002, ranking in the top 1% of all energy funds per Morningstar. During that period, the S&P 500 index declined at an annual-equivalent rate of 14.7%. The company's flagship diversified fund, ICON Core Equity Fund (ICNCX) sports a trailing 1-year total return of negative 11.2%. Compared to the S&P 500 index and the Morningstar mid-cap blend category (where the fund is classified in Morningstar's system), performance has been relatively good, beating the S&P 500 index by 12.7% over the trailing 1-year period and ranking in the 27th percentile of the category. Class C shares are available for purchase through registered representatives and broker-dealers. Summary The ICON Funds recently introduced four new funds targeting the volatile market as follows (symbols are for the Class C shares): ICON Covered Call Fund (IOCCX) ICON Long/Short Fund (IOLCX) ICON Equity Income Fund (IOECX) ICON Bond Fund (IOBCX) ICON may be a little late jumping on the fixed income bandwagon, but we favor the potential "reward to risk" offered by the ICON Covered Call and Long/Short products. The covered call strategy invests in stocks and then also sells call options against those stocks, to dampen portfolio risk and provide some option income, while the Long/Short product takes both long and short positions in stocks, hoping to capturing gains both ways. For more information of the new ICON funds and its other mutuals, visit the ICON Funds website at www.iconfunds.com. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************** TRADERS CORNER ************** Relativity - It's Not Just For Physicists by Mark Phillips mphillips@OptionInvestor.com One of the most basic tenets of successful investing/trading is to buy the strong and sell the weak. Sounds like simple advice, but I can remember a time in the not-so-distant past, when I thought, "Duh! Of course that's what you have to do. That makes sense just like Buy Low and Sell High." As most of you probably know, both of those sayings are great advice, but until you have a tool to guide you, putting the advice into practice is a lot harder. Many Mutual Funds make a bit deal of their performance relative to the broader market. While this was the basis for bragging rights when a fund could beat the S&P quarter after quarter in a bull market, it is really an empty boast right now. How happy are you going to be when your fund manager tells you how you should be so happy that he only lost 10% last quarter, when the S&P lost 15%? Not very! But that doesn't mean that relative performance isn't both important and useful. Back in the Dark Ages before all these nifty, feature-rich charting programs came on the market in the late 1990s, determining what was strong and what was weak involved a lot of tedious hand charting and frequently wasted effort. That was a recipe for frustration and eventually quitting with the effort. At least it was for me. It just took too much time. Fortunately, we now have programs like Qcharts, that let us (almost) effortlessly look at the strength of any symbol relative to any other. Want to know how The 30-year bond is trading relative to Gold? No problem. Just type in a quick command and the program paints a chart that we can interpret just like we do with any other. For those of you that use Qcharts and don't know how to create relative strength charts, it is pretty easy. In the symbol field, you enter the first symbol followed by a space, then the "/" character and then the second symbol. For example, if we wanted to see the relative strength of IBM with respect to the Dow Industrials, the symbol entry would look like this: "IBM /index:indu". So let's look at some examples, to see how we can take advantage of the information provided by these relative strength charts. As a side note, I captured all of these charts on Thursday afternoon (10/3) as I won't be able to write this column on its publication date (10/7). I'm going to be out of town for several days for my anniversary, and needless to say, the laptop won't be traveling with me. The Semiconductor index (SOX.X) has clearly been one of the weakest sectors of the market in recent months. With IT demand being decimated and bullish comments in the sector virtually non-existent, this weakness is no great surprise. But a look at the relative strength chart below quantifies that which we all know on an intuitive basis. Relative Strength Chart of SOX vs. NASDAQ Composite Isn't it interesting that the relative strength (actual weakness) chart of the SOX relative to even the weak COMPX has been confined to this descending channel, much like the SOX has been heading down in its own descending channel since April? This is a great confirmation for bearish trades in the SOX. Weak sector within a weak market (COMPX) allows for bearish trades that continue to perform. So how do we know when this trend is coming to an end? The first hint will be a breakout from this descending channel on the RS chart. To get an idea of what this might look like, let's look at a sector that had been weak, but has since reversed course. After breaking down late last year, the Biotechnology sector (BTK.X) led the market rebound following the bottom in late July and decisively broke out of its own descending channel. Relative Strength Chart of BTK vs. NASDAQ Composite Now that was a powerful breakout! The first hint of building strength came in early July, as the BTK diverged from the rest of the Technology market, shown by the rebound from the bottom of the channel on the above Relative Strength chart while the rest of the market was still falling. Particularly interesting is that the RS chart broke out of the channel on July 24th, the day of the lows in the broader market. Since then, the RS chart came back to confirm support (green line) and has been gradually improving. Part of this relative strength can be attributed to the fact that the Fall is historically the best time of the year for Biotechnology stocks, owing to the large number of industry meetings and seminars that are frequently used to announce new breakthroughs or products. Relative strength analysis works on a shorter-term basis as well, as shown on the 120-minute chart of the Banking index (BKX.X) vs. the S&P 500 (SPX.X) below. The breakdown shown here is a direct result of the warnings that have recently come from BK and CMA, which have been prompted due to some staggering loan losses to the Telecom industry. Relative Strength Chart of BKX vs. The S&P 500 After failing to break through resistance, the Relative Strength chart began breaking down in a big way due to the bearish news cited above. Traders that had been watching this relative strength chart would have been in a position to initiate bearish trades on some of the weaker Banking stocks in anticipation that the relatively new weakness would continue. How do you find the weak banking stocks? Easy. Just bring up a Relative Strength chart of stocks like JPM, BAC, C, etc. relative to the BKX index. I haven't shown the charts here, but you should be able to do it pretty easily now, and you'll then be able to make a quantitative analysis of which are the weaker stocks in the sector. What I've done here is try to show how you can evaluate sectors relative to the broader market and find strength or weakness in order to develop a bullish or bearish bias for the group. Then the next step is to simply look at individual stocks within the sector for attractive trade candidates. In a weak sector, you want to find the weakest stocks, while in a bullish sector, you want to find the stronger stocks. Relative strength charts are one of my favorite tools in this endeavor, because they frequently provide a much clearer picture than a simple price chart. If you've already incorporated Relative Strength charts into your research process, then hopefully this provides a confirmation of their utility. Hopefully, I've reached a few of you with new information that you can now use to enhance your trading results. Happy Hunting! Mark ************************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 *********************** A reoccurring dream Do you have a dream/nightmare that seems to reoccur from time to time? Maybe after you've eaten too much spicy food? I do. That dream has me driving down an icy road along a steep mountain with a sheer drop-off on one side of the road. Suddenly I begin to lose control of the vehicle and no matter how hard I press on the brake pedal, I continue to slide toward the edge of the road and fear builds as I near the abyss. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************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 ************************************************************** ******************* 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. 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The Option Investor Newsletter Wednesday 10-09-2002 Copyright 2002, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: BCR, HAR, PHM, WHR Dropped Calls: None Dropped Puts: GM Play of the Day: Call - HAR Spreads, Combinations & Premium-Selling Plays: Capitulation Approaching? Updated on the site tonight: Market Watch Market Posture ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** BCR - put Adjust from $54.50 down to $53.50 HAR - put Adjust from $52 down to $50.75 PHM - put Adjust from $41.50 down to $39.50 WHR - put Adjust from $46.50 down to $44 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ GM $31.01 -2.59 (-5.41) To call GM a successful play would be quite the understatement, as the stock has shed more than $10 since we picked it less than 2 weeks ago. It is becoming increasingly clear that auto sales are already falling off. This morning, Lehman slashed $4.5 billion from its estimates for GM, sending the stock lower by 7.7% at the close on nearly triple the average daily volume. GM is now trading very near major support at $30, and that could provide the impetus for the next short-covering rally. With such large gains already accrued, we're looking to book those gains, rather than leave them at risk in an increasingly volatile market. While we're dropping the play tonight, individual traders may elect to keep partial positions open. If electing to stay in the play, lower stops to no higher than $32.75, just above the bottom of this morning's gap lower. ************************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 OF THE DAY - CALL ********************** HAR - Harman International $46.90 -1.70 (-4.46 this week) Company Summary: Harman International Industries, Incorporated is a leading manufacturer of high-quality, high fidelity audio products and electronic systems for the consumer and professional markets. The Company's stock is traded on the New York Stock Exchange under the symbol: HAR. (source: company release) Why we like it: As layoffs have increased and the economy has shrunk, high-end high fidelity audio products are not at the top of most consumers shopping list. At least not above food and household items. With the retail industry seeing a drop off in sales over the last several months, the holiday shopping season does not look very promising. Everyone from Wal-Mart to Federated (owner of Bloomingdale's and Macy's) has seen sales below previous expectations for the last several months and the port lockout did not help the industry. While the ports have been re-opened through Christmas, one of the main ongoing effects is the delay in getting the ships back overseas to catch up with holiday loads. Even if they manage to overcome that roadblock, the trend in retail sales is still below expectations. HAR has experienced a classic head and shoulders technical pattern, with an added punch. The neckline and 200-dma actually run very close to one another. Today's breakdown broke both of these levels, in addition to the 50-dma, which was looming just below. The neckline break carries with it a downside measuring objective of $42. The point and figure chart also shows a new sell signal on the intraday trade of $48, on a double bottom breakdown, or a descending triple bottom breakdown, depending on how it is viewed. The PnF bearish vertical count of $42 coincides with the downside measuring objective of the head and shoulders. While one technical indicator is always nice, having two indicators point to the same target is even better. There is a bullish support line at $44, which could be a speed bump on the way down, but that will not deter us from using $42 as our initial target. Of course, even if the stock gets held up at $44, it will still be good for a gain of more than $4. Conservative traders can wait for a failed rebound underneath the 200-dma of $49.40 for an ideal entry point, but if we don't get that chance, then a break below today's low of $47.81 would be an alternative. OI sees the current level as acceptable for initiating the play. Place stops at $52, just above Monday's high. Why This is our Play of the Day As of yesterday, HAR was sitting right on pivotal support near $48, a level that had provided support several times in the middle of September. That support gave way big time on Wednesday, with HAR plunging almost to the $45 level before catching a bit of an oversold bounce. That rebound appears to have just about run its course, topping out just below $47 this afternoon. A rollover from current levels can be used for initiating new positions as the stock drops under $46.50. As oversold as the market has become, we need to make room for another upward leg before the next rollover gets going. Strong resistance in the $48-49 area should prove impenetrable, leading to yet another favorable entry into the play. Of course, momentum traders will want to wait for a drop below $45 before adding new positions. Remember, our downside target of $42, as a drop to that level will provide a good level for harvesting gains. Lower stops to $50.75 tonight, just above Monday's intraday highs. *** October contracts expire in less than 2 weeks *** BUY PUT OCT-45 HAR-VI OI=41 at $1.40 SL=0.75 BUY PUT NOV-45*HAR-WI OI=10 at $3.80 SL=2.25 Average Daily Volume = 297 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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Capitulation Approaching? By Ray Cummins Stocks moved lower today as investors continued to lose confidence in the equity markets amid concerns over the flagging economy and diminishing corporate earnings. The Dow Jones Industrial Average surrendered 215 points to 7,286 with General Motors (NYSE:GE), General Electric (NYSE:GE), Merck (NYSE:MRK), Hewlett-Packard (NYSE:HPQ), Caterpillar (NYSE:CAT), and Johnson & Johnson (NYSE:JNJ) among the biggest decliners. The NASDAQ Composite also edged 15 points lower to 1,114, despite an upgrade of Cisco Systems (NASDAQ:CSCO), which renewed investors' interest in the technology segment after five consecutive sessions of declines. In the broader market groups, utility, finance, drug and airline shares were weak while retail stocks showed resilience following news that a federal judge OK'd President Bush's request to order the reopening of West Coast ports and temporarily end the costly lock-out. The Standard & Poor's 500-stock index slumped 21 points to 776. Trading volume was mild at 1.8 billion on the NYSE and at 1.7 billion on the technology exchange. Market breadth was poor with losers ousting winners 7 to 1 on the Big Board and 5 to 2 on the NASDAQ. Government bonds were bullish as fixed-income investors searched for a solution to the declining equity markets. The 10-year Treasury note climbed 12/32 to yield 3.58% while the 30-year government bond gained 26/32 to yield 4.66%. With the recent slump in equities, Goldman Sachs' chief investment strategist Abby Joseph Cohen claims that stocks are "undervalued" based on her dividend discount model. She told clients today that "We think that share prices already reflect ugly scenarios and that the large risk premium embedded in share prices provides a cushion." Cohen also commented that higher investor risk aversion will take longer to dissipate but predicts it will decline within the next 12 to 18 months. That's an optimistic view for sure, and based on the technical outlook for the major equity averages, there is sizable downside potential in the near future. One can only hope that the recent signs of capitulation are evidence the bear market is coming to an end. *************** SUMMARY OF CURRENT POSITIONS *************** (As of 10-08-02) Naked Puts Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mo. Yield AMGN OCT 35 33.15 45.79 $0.85 6.1% CHTT OCT 35 34.50 40.50 $0.50 4.3% CCMP OCT 30 28.90 34.10 $1.10 8.1% INTU OCT 40 38.60 45.44 $1.40 6.9% COF OCT 30 29.30 29.69 $0.39 3.4% EASI OCT 50 49.00 49.60 $0.60 3.1% INVN OCT 25 24.45 29.40 $0.55 6.3% LLL OCT 47 46.65 46.30 ($0.35) 0.0% * MIK OCT 40 39.35 39.83 $0.65 4.6% ROOM OCT 40 39.25 43.38 $0.75 5.1% BSTE OCT 20 19.65 25.90 $0.35 5.6% ESRX OCT 45 44.50 50.97 $0.50 4.0% GD OCT 75 73.65 76.73 $1.35 5.3% INVN OCT 25 24.45 29.40 $0.55 7.8% NOC OCT 110 108.55 114.70 $1.45 4.0% XAU OCT 60 59.25 62.79 $0.75 4.6% AZO OCT 70 69.30 80.19 $0.70 4.0% BSTE OCT 22 22.10 25.90 $0.40 8.3% ESRX OCT 45 44.45 50.97 $0.55 5.6% FRX OCT 70 69.20 91.12 $0.80 4.7% LLL OCT 50 49.45 46.30 ($1.65) 0.0% * ROAD OCT 30 29.65 36.90 $0.35 5.8% SCHL OCT 40 39.55 44.65 $0.45 4.6% AZO OCT 75 74.05 80.19 $0.95 6.7% FRX OCT 80 79.30 91.12 $0.70 4.9% WLP OCT 72 71.80 76.54 $0.70 4.9% Stocks in the defense group were hammered Tuesday as concerns lessened about a potential war with Iraq and we were forced to close our bullish position (at $50) in L-3 Communications for an unfavorable loss. The sold (put) option at $47.50 is in jeopardy as well and traders should also consider closing positions in EASI, GD and NOC. Capital One Finance (NYSE:COF) succumbed to recent selling pressure in the banking group and it is a candidate for early exit. Cognizant Technology Group (NASDAQ:CTSH), although currently positive, has been closed to protect gains and/or limit losses. Naked Calls Stock Strike Strike Cost Current Gain Potential Symbol Month Price Basis Price (Loss) Mon. Yield QLGC OCT 40 41.20 20.73 $1.20 9.7% INTU OCT 50 51.50 45.44 $1.50 6.8% EBAY OCT 65 66.20 52.32 $1.20 5.5% QLGC OCT 45 45.45 20.73 $0.45 4.9% XL OCT 80 81.25 75.30 $1.25 4.6% DIA OCT 86 87.15 75.39 $1.15 4.0% MUR OCT 90 91.75 86.12 $1.75 6.2% BZH OCT 70 70.70 56.09 $0.70 5.5% MUR OCT 90 91.35 86.12 $1.35 6.7% SNPS OCT 40 40.70 33.23 $0.70 14.6% The close above $86 in Murphy Oil (NYSE:MUR) suggests a renewed upward trend, thus traders should monitor the position closely for additional signs of bullish activity. Put-Credit Spreads Stock Gain Symbol Pick Last Month L/P S/P Credit C/B (Loss) Status PDCO 52.63 49.65 OCT 45 50 0.65 49.35 $0.30 Closed MBG 32.46 32.40 OCT 27 30 0.30 29.70 $0.30 Open? APOL 43.48 43.94 OCT 35 40 0.50 39.50 $0.80 Open ETM 48.45 44.38 OCT 40 45 0.65 44.35 $0.03 Open? UNH 89.50 91.71 OCT 80 85 0.65 84.35 $0.65 Open Previously closed positions in Lowe's Companies (NYSE:LOW) and Stryker (NYSE:SYK) remain positive while H&R Block (NYSE:HRB) is slightly negative. Patterson Dent's (NASDAQ:PDCO) close below the sold strike at $50 signaled our departure from the position and ETM is now a potential early-exit candidate on any further downside movement. Call-Credit Spreads Stock Gain Symbol Pick Last Month L/C S/C Credit C/B (Loss) Status JNJ 55.48 58.49 OCT 65 60 0.50 60.50 $0.50 Open MSFT 48.58 44.99 OCT 60 55 0.55 55.55 $0.55 Open PHM 48.46 38.62 OCT 60 55 0.60 55.60 $0.60 Open WFT 39.37 36.14 OCT 50 45 0.60 45.60 $0.60 Open WY 49.78 40.03 OCT 60 55 0.60 55.60 $0.60 Open LEN 55.07 52.82 OCT 65 60 0.70 60.70 $0.70 Open PII 65.02 59.90 OCT 75 70 0.50 70.50 $0.50 Open ATK 69.25 62.00 OCT 80 75 0.45 70.45 $0.45 Open FNM 64.62 63.93 OCT 75 70 0.55 70.55 $0.55 Open Previously closed positions in Apache (NYSE:APA) and Total Fina (NYSE:TOT) remain positive but Johnson & Johnson (NYSE:JNJ) is still testing the top of a recent trading range and should be monitored daily for a potential early-exit signal. Credit Strangles Stock Strike Strike Cost Current Gain Potential Symbol Month &Price Basis Price (Loss) Mon. Yield INTU OCT 50C 51.50 45.44 $1.50 6.8% INTU OCT 40P 38.60 45.44 $1.40 6.9% GILD OCT 35C 36.45 31.86 $1.45 9.8% GILD OCT 30P 28.50 31.86 $1.50 10.4% BBBY OCT 27P 27.05 32.43 $0.45 6.2% BBBY OCT 37C 38.30 32.43 $0.80 7.1% CAI OCT 30P 29.55 34.70 $0.45 5.0% CAI OCT 40C 40.55 34.70 $0.55 5.3% WFMI OCT 40P 39.45 42.65 $0.55 4.2% WFMI OCT 50C 50.50 42.65 $0.50 3.6% CCMP OCT 50C 50.30 34.10 $0.30 4.7% CCMP OCT 30P 29.65 34.10 $0.35 5.5% EBAY OCT 60C 61.00 52.32 $1.00 6.5% EBAY OCT 50P 49.20 52.32 $0.80 6.3% RNR OCT 40C 40.50 38.60 $0.50 7.3% RNR OCT 35P 34.45 38.60 $0.55 8.0% Synthetic Positions: Stock Pick Last Position Credit C/B M/V Status THC 51.55 50.52 NOV55C/46P 0.00 46.62 0.10 Open EXPE 46.06 41.45 NOV35P/55C 0.10 55.10 1.85 Open? Expedia (NASDAQ:EXPE) was the big winner this week, offering a credit of almost $2 in the bearish position after only 4 trading sessions. Questions & comments on spreads/combos to Contact Support *************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any strategy or technique in which you are not completely comfortable with the potential loss, the necessary adjustments and the common entry-exit strategies. (I monitor the positions marked with ***). *************** BULLISH PLAYS - Premium Selling All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. *************** AMGN - Amgen $45.62 *** An Old Favorite *** Amgen (NASDAQ:AMGN) is a biotechnology company that discovers, develops, manufactures and markets human therapeutics based on advances in cellular and molecular biology. The firm makes and markets human therapeutic products, including Epogen, Neupogen, Aranesp, Neulasta and Kineret. Amgen focuses its research and development efforts on therapeutics delivered in the form of proteins, monoclonal antibodies and small molecules in the areas of nephrology, cancer, inflammation and neurology and metabolism. The company has research facilities in the United States, and has clinical development staff in the United States, the European Union, Canada, Australia and Japan. Amgen has acquired Immunex, a biopharmaceutical company dedicated to developing immune system science to protect human health. Immunex successfully developed two products, Enbrel and Leukine, and was marketing four products treating multiple indications, Enbrel, Leukine, Novantrone and Thioplex. AMGN - Amgen $45.62 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 40 AMQ VH 10,141 0.35 39.65 9.1% *** SELL PUT OCT 42.5 AMQ VV 11,567 0.70 41.80 14.9% SELL PUT OCT 45 AMQ VI 10,176 1.40 43.60 24.9% *************** BSX - Boston Scientific $35.43 *** Favorable Legal Judgment *** Boston Scientific (NYSE:BSX) is a worldwide developer, manufacturer and marketer of less-invasive medical devices. The firm's products are offered by two dedicated business groups, Cardiovascular and Endosurgery. The Cardiovascular organization focuses on products and technologies for use in the firm's interventional cardiology, interventional radiology, peripheral vascular and neurovascular procedures. The Endosurgery organization focuses on products and technologies for use in oncology, vascular surgery, endoscopy, urology and gynecology procedures. BSX - Boston Scientific $35.43 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 32.5 BSX VZ 600 0.20 32.30 5.9% *** SELL PUT NOV 30 BSX WF 5,510 0.40 29.60 3.4% "TS" SELL PUT NOV 32.5 BSX WZ 140 0.80 31.70 5.2% *************** FRX - Forest Laboratories $91.48 *** Rally Continues! *** Forest Laboratories (NYSE:FRX) and its many subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products that require a physician's prescription, as well as non-prescription pharmaceutical products sold over-the-counter. Forest's most important United States products consist of branded ethical drug specialties marketed directly, or detailed, to doctors by the firm's Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare and Forest Specialty Sales sales forces. Such products include Celexa, Forest's SSRI for the treatment of depression; the respiratory products Aerobid and Aerochamber; Tiazac, Forest's once daily diltiazem for the treatment of hypertension and angina, and Infasurf, a lung surfactant for the treatment and prevention of respiratory distress syndrome in premature infants. FRX - Forest Laboratories $91.48 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 80 FHA VP 1,939 0.45 79.55 5.9% *** SELL PUT OCT 85 FHA VQ 1,161 0.85 84.15 9.3% SELL PUT NOV 75 FRX WO 1,541 1.05 73.95 3.9% "TS" *************** GILD - Gilead Sciences $32.79 *** 2002 Profits On Track! *** Gilead Sciences (NASDAQ:GILD) is an independent biopharmaceutical company that discovers, develops and commercializes therapeutics to advance the care of patients suffering from life-threatening diseases. The company has five products that are marketed in the United States and in other countries worldwide. These are Viread, a drug for treating HIV infection; AmBisome, a drug for treating and preventing life-threatening fungal infections; Tamiflu, a drug for treating and preventing influenza; Vistide, a drug for treating cytomegalovirus (or CMV) retinitis in AIDS patients, and DaunoXome, a drug for treating AIDS-related Kaposi's sarcoma. GILD - Gilead Sciences $32.79 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 30 GDQ VF 1,292 0.55 29.45 17.1% SELL PUT NOV 22.5 GDQ WX 253 0.40 22.10 4.5% "TS" SELL PUT NOV 25 GDQ WE 3,953 0.65 24.35 7.0% *** *************** TARO - Taro Pharmaceutical $32.42 *** Entry Point? *** Taro Pharmaceutical Industries (NASDAQ:TARO) is a multinational, science-based pharmaceutical company dedicated to meeting the needs of its customers through the discovery, development, manufacturing and marketing of the highest quality healthcare products. The company was founded with the goal of building a pharmaceutical firm in Israel that would provide high quality pharmaceutical products while investing in research to develop an international presence. TARO - Taro Pharmaceutical $32.42 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 30 QTT VF 94 0.20 29.80 6.3% SELL PUT NOV 27.5 QTT WY 0 0.60 26.90 5.4% *** SELL PUT NOV 30 QTT WF 15 1.25 28.75 8.3% *************** UHS - Universal Health Services $52.00 *** Strong Sector! *** Universal Health Services (NYSE:UHS) owns and operates acute care hospitals, behavioral health centers, ambulatory surgery centers, radiation oncology centers and women's centers. The firm currently operates 73 hospitals, consisting of 35 acute care hospitals and 38 behavioral health centers located in Arkansas, California, Delaware, the District of Columbia, Florida, Georgia, Illinois, Indiana, New Jersey, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Nevada, Oklahoma, Pennsylvania, Puerto Rico, Tennessee, South Carolina, Texas, Utah, Washington and also France. Universal Health, as part of its Ambulatory Treatment Centers Division, owns outright or in partnership with physicians, and operates or manages, 23 surgery and radiation oncology centers located in 12 states. UHS - Universal Health Services $52.00 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 50 UHS VJ 125 0.35 49.65 6.2% *** SELL PUT NOV 50 UHS WJ 2,607 1.80 48.20 6.8% *************** WLP - WellPoint Health $77.58 *** Healthcare Rally! *** WellPoint Health Networks (NYSE:WLP) is a managed healthcare firm. As a result of the January 2002 completion of its merger with RightCHOICE Managed Care, the company has over 12 million members. The company offers a broad spectrum of network-based managed care plans, including preferred provider organizations (PPOs) and health maintenance organizations (HMOs), as well as point-of-service (POS) and other hybrid plans and traditional indemnity plans. In addition, the Company offers managed care services, including underwriting, actuarial services, network access, medical cost management and claims processing. The firm also provides an array of specialty and other products, including pharmacy, dental, workers' compensation managed care services, utilization management, life insurance, preventive care, disability insurance, behavioral health, COBRA and flexible benefits account administration. WLP - WellPoint Health $77.58 PLAY (sell naked put): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL PUT OCT 72.5 WLP VV 893 0.35 72.15 4.5% *** SELL PUT OCT 75 WLP VO 1,229 0.75 74.25 8.7% SELL PUT NOV 70 WLP WN 86 1.35 68.65 4.2% "TS" *************** BULLISH PLAYS - Credit Spreads *************** INTU - Intuit $45.90 *** Trading Range *** Intuit (NYSE:INTU) is a provider of business tax preparation and personal finance software products and Web-based services that simplify complex financial tasks for consumers, small businesses and accounting professionals. The company's principal products and services include Quicken, QuickBooks, Quicken TurboTax, ProSeries, Lacerte and Quicken Loans. Intuit offers products and services in five principal business divisions, which include Small Business, Tax, Personal Finance, Quicken Loans and Global Business. INTU - Intuit $45.90 PLAY (conservative - bullish/credit spread): BUY PUT NOV-35.00 IQU-WG OI=165 A=$0.55 SELL PUT NOV-40.00 IQU-WH OI=1433 B=$1.10 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$44.40 *************** MME - Mid Atlantic Medical $38.08 *** Testing 2002 Highs! *** Mid Atlantic Medical Services (NYSE:MME) is a holding company for subsidiary businesses active in managed healthcare and other life and health insurance related activities. Mid Atlantic Medical Services and its primary subsidiaries (MAMSI) offer a broad range of managed healthcare coverage and related ancillary insurance as well as other products and deliver these services through health maintenance organizations, a preferred provider organization, and a life and health insurance company. MAMSI owns a home healthcare company, a pharmaceutical services company and a hospice company. The firm also owns a collections company and maintains a major partnership interest in an outpatient surgery center. MME - Mid Atlantic Medical $38.08 PLAY (moderately aggressive - bullish/credit spread): BUY PUT NOV-30.00 MME-WF OI=0 A=$0.25 SELL PUT NOV-35.00 MME-WG OI=40 B=$0.75 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$34.45 *************** Speculation Plays - Synthetic Positions These stocks have established trends and favorable option premiums. Traders with a directional outlook on the underlying issues may find the risk-reward outlook in these momentum plays attractive. *************** ANSI - Advanced Nueromodulation Sys. $37.38 *** Rally Mode! *** Advanced Nueromodulation Systems (NASDAQ:ANSI) designs, develops, manufactures and markets advanced implantable neuromodulation devices that deliver electrical current or drugs directly to targeted areas of the body to manage chronic pain. The category of Neuromodulation devices include implantable neurostimulation devices, which deliver electric current directly to targeted nerves, and implantable infusion pumps, which deliver small, precisely controlled doses of drugs directly to targeted sites within the body. The company's products include the Renew radio frequency spinal cord stimulation device and the Genesis totally implantable pulse generator spinal cord stimulation device. The company also sells the AccuRx fully implantable constant rate drug infusion pump in international markets, and is conducting clinical trials of AccuRx in the United States. ANSI - Advanced Nueromodulation Systems $37.38 PLAY (aggressive - bullish/synthetic position): BUY CALL NOV-40.00 UAI-KH OI=257 A=$1.20 SELL PUT NOV-35.00 UAI-WG OI=10 B=$1.20 INITIAL NET-CREDIT TARGET=$0.10-$0.25 TARGET PROFIT=$0.75-$1.00 Note: Using options, the position is similar to being long the stock. The initial collateral requirement for the sold (short) put is approximately $1,375 per contract. *************** BEARISH PLAYS - Naked Calls Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. *************** KSS - Kohl's Corporation $54.45 *** Sales Slump! *** Kohl's (NYSE:KSS) operates family-oriented, specialty department stores. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than traditional, full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Since 1992, the company has increased square footage an average of 22% per year, expanding from 79 stores located in the Midwest to a total of 420 stores with a presence in six regions. Of the 420 stores it operates, 116 are take-over locations, which facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. KSS - Kohl's Corporation $54.45 PLAY (moderately aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 60 KSS JL 4,265 0.50 60.50 10.1% SELL CALL NOV 60 KSS KL 2,316 2.15 62.15 9.1% SELL CALL NOV 65 KSS KM 2,193 0.90 65.90 5.8% *** *************** SIAL - Sigma-Aldrich $43.42 *** Premium Selling! *** Sigma-Aldrich (NASDAQ:SIAL) develops, manufactures and distributes a broad range of bio-chemicals, organic chemicals, chromatography products and diagnostic reagents. These chemical products and kits are utilized in scientific and genomic research, biotechnology, pharmaceutical development, the chemical industry and also for the diagnosis of disease. The company operates in 33 countries, offers more than 85,000 chemical products and distributes these products in over 160 countries. Sigma-Aldrich markets its chemical products through its four business units: Scientific Research, Biotechnology, Fine Chemicals and Diagnostics. The company had over 3,500,000 catalogs in the market place in 2001 for the Sigma, Aldrich, Fluka, Riedel-de Haen and Supelco brands with customers and potential customers throughout the world. SIAL - Sigma-Aldrich $43.42 PLAY (moderately aggressive - sell naked call): Action Month & Option Open Closing Cost Target Req'd Strike Symbol Int. Price Basis Mon. Yield SELL CALL OCT 45 IAQ JI 202 1.35 46.35 26.6% SELL CALL NOV 45 IAQ KI 60 2.50 47.50 10.7% SELL CALL NOV 50 IAQ KJ 418 0.75 50.75 5.1% *** *************** BEARISH PLAYS - Credit Spreads All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. *************** AHC - Amerada Hess $62.35 *** Oil Stocks Retreat! *** Amerada Hess (NYSE:AHC) explores for and produces, purchases, transports and sells crude oil and natural gas. These various exploration and production activities take place in the United States, United Kingdom, Norway, Denmark, Gabon, Indonesia, Thailand, Azerbaijan, Algeria, Colombia, Equatorial Guinea, Malaysia and other countries. The company also manufactures, purchases, transports, trades and markets refined petroleum and other energy products. The company owns 50% of a refinery joint venture in the U.S. Virgin Islands and another refining facility, terminals and retail gasoline stations located on the East Coast of the United States. AHC - Amerada Hess $62.35 PLAY (conservative - bearish/credit spread): BUY CALL NOV-75 AHC-KO OI=1449 A=$0.35 SELL CALL NOV-70 AHC-KN OI=846 B=$0.85 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$70.60 *************** HET - Harrah's Entertainment $44.70 *** Sector Sell-Off! *** Founded 65 years ago, Harrah's Entertainment (NYSE:HET) operates 26 casinos in the United States, primarily under the Harrah's brand name. Harrah's also owns and operates Bluegrass Downs, a harness racetrack located in Kentucky, and owns an interest in Turfway Park thoroughbred racetrack, located in Boone County, Kentucky. Harrah's Entertainment is focused on building brand loyalty and value with its target customers through a unique combination of great service, excellent products, unsurpassed distribution, operational excellence and technology leadership. HET - Harrah's Entertainment $44.70 PLAY (very conservative - bearish/credit spread): BUY CALL NOV-55 HET-KK OI=1038 A=$0.20 SELL CALL NOV-50 HET-KJ OI=640 B=$0.60 INITIAL NET-CREDIT TARGET=$0.50-$0.60 POTENTIAL PROFIT(max)=11% B/E=$50.50 *************** HRB - H&R Block $37.45 *** A "Sell" Rating? *** H&R Block (NYSE:HRB) is a diversified company with subsidiaries providing tax services and financial advice, investment and mortgage products and services and business and consulting services. The company's tax subsidiaries and their franchisees serve almost 20 million taxpayers through nearly 10,400 offices located in the United States, Canada, Australia and the United Kingdom. Another 3-4 million clients utilize the tax software program, TaxCut from H&R Block, and the online tax preparation service. Various investment services and securities products are offered through H&R Block Financial Advisors. H&R Block Mortgage Corporation and Option One Mortgage Corporation offer a range of home mortgage products and services. RSM McGladrey, is a national accounting, tax and consulting firm primarily serving mid-sized businesses. PLAY (conservative - bearish/credit spread): BUY CALL NOV-50 HRB-KJ OI=233 A=$0.25 SELL CALL NOV-45 HRB-KI OI=1529 B=$0.80 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$45.60 *************** SEE DISCLAIMER *************** ************** MARKET POSTURE ************** Looking for Confirmation To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_100902.asp ************ MARKET WATCH ************ Tumbling Dice To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_100902.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. 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