The Option Investor Newsletter Tuesday 11-05-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Bullish Sentiment Elected Futures Markets: Struggling Against Resistance Index Trader Wrap: Beloved biotech bullish before FOMC Market Sentiment: Voting Stock Weekly Fund Screen: Short-Term Treasury/Agency Funds Updated on the site tonight: Swing Trader Game Plan: On Your Mark Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 11-05-2002 High Low Volume Advance/Decline DJIA 8678.27 +106.70 8691.38 8544.42 1.59 bln 1664/1486 NASDAQ 1401.17 + 4.60 1401.37 1379.33 2.06 bln 1634/1692 S&P 100 467.93 + 5.67 468.39 460.84 Totals 3298/3178 S&P 500 915.39 + 7.04 915.83 904.91 RUS 2000 386.07 - 0.90 386.97 382.93 DJ TRANS 2344.46 + 10.60 2346.88 2316.32 VIX 34.28 - 0.19 34.98 33.50 VXN 51.20 + 1.98 52.37 50.39 Total Vol 3,835M Total UpVol 1,949M Total DnVol 1,789M 52wk Highs 108 52wk Lows 96 TRIN 0.83 PUT/CALL 0.77 ************************************************************ Bullish Sentiment Elected It is far too soon to know how the political elections turned out but traders elected to be bullish again today. It is unknown what is powering the sentiment other than the overwhelming assumption that the Fed will cut rates on Wednesday. Early comments from the election reporters seemed to indicate that gridlock would remain and that means no immediate danger to the status quo. It appears bulls are celebrating in advance on both counts. Dow Daily Chart Nasdaq Daily Chart There was good economic news this morning if you call a smaller than expected drop in the ISM service numbers good news. Analysts were expecting a drop to 51.8 for October and the real number came in at 53.1. This was still a drop in the rate or growth but just not as bad as expected. This is just another indicator that the mid-year recovery is continuing to slow but not at the same rapid pace. The recent rally in the market has brought out a flood of analyst downgrades based on valuation. The common theme appears to be that the unexpected bounce in most stocks has propelled them well over what the lowered earnings expectations would support. They were eager to recommend them four weeks ago but are now aggressively cutting them while they are profitable. Some of the stocks downgraded on valuation today were ADP, IBM, AXP, LXK, ADNE, YHOO, NXTL and TLAB. Many stocks have come too far too fast and we are starting to see an undercurrent to the bullishness that wonders how much farther the market can go without some positive economic news. Circuit City added to the negative sentiment on the retail sector for the holidays with a strong warning. The Chain Store Sales Snapshot released today also showed a continued slide in sales and projected a weak number when Retail Sales are announced on Thursday. AMAT was instrumental in knocking the chip sector for a rare loss today with their news of a -1750 job cut and dismal outlook last night. KLIC added to the gloom today by saying they were looking into selling non-core assets to reduce costs and conserve energy until a recovery appears. However, traders bought the dip at 1:45 PM at the low of 307 on the SOX. It appears no amount of bad news can weaken the chip sector before the Fed meeting. After the close today CSC announced earnings after the bell but warned that it was lowering their earnings outlook due to a continuing slowdown in technology spending. It blamed slack demand in the U.S. and Europe for consulting and systems integration for the shortfall. They lowered full year estimates to $2.60 from $2.73 to $2.88 a share. Since IBM and EDS are their primary competitors it would be safe to assume that those companies are having trouble as well. Despite the election today the markets rallied to near Monday's highs with the Dow closing at 8675. Regardless of the election outcome the major hurdle in front of us is the Fed meeting on Wednesday and Cisco earnings after the close. The closer we get to the Fed meeting the more cautious the commentators calling for a 50 point cut are becoming. I have heard a greater number of analysts saying a cut will not matter which is a politically correct way of hedging their previous comments projecting a cut. I have beaten this topic to death but the bottom line is that the Fed has not said a word about the chances of a cut. This is very uncharacteristic of them but it could be due to not wanting to become an election target. The bottom line is what can the Fed do "FOR" the market tomorrow? A 25 point cut is already priced in and would cause a sell the news event as traders captured profits. Since there is already a 65% chance that we will see a 50 point cut by December a 50 point cut tomorrow would mean there was nothing else coming until next year. After an initial pop on the news the markets would likely sell off as traders took profits and moved to the sidelines to see what will happen next. Of course no cut would be the worst option. The bottom line is that the maximum expectation has already been priced in and there is nothing the Fed can do to really juice the market. Of course with investors buying bad news recently it is entirely possible they buy the sell off on any news with an eye that things will get better by the end of 2003. As a postscript to the Fed meeting the Cisco earnings after the close could actually be a bigger factor than the Fed. They have widely been expected to miss the revenue numbers with one analyst suggesting by -$200 million just this morning. Others think that because they did not warn they will hit estimates and raise guidance. Now that would be a surprise. However, a rumor from a company that buys a lot of Cisco products is that they could not get expedited shipments on products for the last month. This implies that they were out of inventory due to better than expected sales. There are other possible scenarios. They could have let their inventory shrink to avoid massive write downs like they have had to take in the past. Make only what you sell and limit exposure to obsolescence. Since most boxes take only a very small amount of time to manufacture it keeps you flexible. Another possibility could have been parts held up by the dock strike. Maybe the company was ordering the newer top of the line products where there is demand while the rest of the line was slipping. You can see it is very dangerous to speculate on market rumors. The only speculation I can see making tonight would be that the market is very overbought and the chances for a rate cut have actually diminished over the last two days. In normal markets this would be the prime setup for a drop regardless of what the Fed did. That would be my outlook for tonight. Expect a possible bounce at the open if the CSC news does not tank IBM and then bleed points until the 2:15 Fed decision. Any bounce will run into strong resistance at 8725. I expect any good news from the Fed to be muted due to the Cisco news after the close. Nobody is going to want to go long with big bets with a Cisco time bomb only two hours later. Thursday all bets are off as it will be tech driven and depend on the Cisco guidance. Even if the stars align and the Fed and Cisco don't disappoint the resistance at 9050 is likely to hold until the economy shows signs of a recovery. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Struggling Against Resistance The S&P futures struggled higher again on Tuesday as the Dow cash led the charge back to near Monday's highs. Intraday the S&P failed twice at 914 but broke out at the close to a 915 high. They appear ready to make another attempt on the 925 high from Monday. I doubt they will be successful and expect 920 to be the turning point. If you want to catch the falling knife you could short 920 with a stop at 925.50 and a target of Tuesday's low at 905, which is also strong support. Below 905 we have support at 900 then lower at 880. The Fed meeting is the wild card and I would look to close any profitable position at 2:10 PM and reenter after the post Fed spike, if any. S&P Futures Chart – Daily S&P Futures Chart – Intraday The NDX held right at resistance of 1055 but news from CSC after the close could make it tough to move up from there. Resistance is 1058 with initial support at 1033. A short opportunity exists with any failure above 1055 or below 1050 with an initial target of 1033. A Fed/Cisco disappointment could see 1000 tested again. NDX Futures Chart – Daily NDX Futures Chart – Intraday The Dow futures closed about 85 points below strong resistance at 8736. With the Dow cash likely to fail at 8725 again on Wednesday I would look to short the futures on any failure of the cash and a drop back below 8700. The initial target would be secondary support at 8520 with caution at interim support of 8600. A drop below the 8520 level could set up a drop to 8300 on any Fed/Cisco disappointment. Dow Futures Chart – Daily Dow Futures Chart – Intraday An aggressive futures trader could have a banner day on Wednesday. With a positive open to set the stage it is hard for me to imagine a scenario where traders don't take profits before the Fed meeting is over. With any rate cut already priced in an after meeting spike could sell off just as quickly in front of the Cisco news. I would be cautious and close any positions before the Fed announcement and the Cisco announcement and look to reenter once the news is out. Jim Brown ******************** INDEX TRADER SUMMARY ******************** Beloved biotech bullish before FOMC Perhaps the bullishness in biotechs as depicted by the Biotechnology Index (BTK.X) 366.50 +2.3%, which grabbed today's sector winner trophy hints that there's still some bullish capital to be put to work, but that hints of a cautious market ahead of tomorrow's decision on interest rates when the FOMC breaks from it's monthly meeting at 02:15 PM EST. The biotech group, arguably the least "economically sensitive" sector in the market posted a 2.3% gain as sector bellwether Amgen (NASDAQ:AMGN) $50.08 +3.55% clawed its way back above the $50.00 after recently testing its trending higher 50-day SMA at $46. Biotech gains helped offset some of the losses found in the Semiconductor Index (SOX.X) 317 -2.59% after another round of cautious comments from brokers. While the SOX oozed an odor of smelly feet into the lunch hour, the sector held above psychological support of 300 and erased half of its early losses. Sector bellwethers had shares of Intel (NASDAQ:INTC) $18.30 -2.4% the second most actively traded NASDAQ stock at 72 million shares, while Applied Materials (NASDAQ:AMAT) $15.81 -3.8% was the fourth most actively traded stock at 43 million shares. Both the Dow Industrials (INDU) 8,678 (+106 points) and S&P 100 Index (OEX.X) 468 (+5.6 points) posted matching percentage gains, bolstered by strong gains in Boeing (NYSE:BA) $31.52 +6.23% and Exxon Mobil (NYSE:XOM) $35.58 +3.85%. Weakness in healtchare sectors, HMO Index (HMO.X) 531 -2.9% and Morg. Stanley Health Provider (RXH.X) 296 -2% had the broader S&P 500 Index (SPX.X) 915 +0.7% posting a more marginal gain, while a mixed session from computer-related technology stocks had the NASDAQ Composite (COMPX) 1,401 +0.3% and NASDAQ-100 Index (NDX.X) 1,050 +0.3% processing fractional gains. Smaller caps as depicted by the Russell-2000 Index (RUT.X) 386 -0.23% never did quite get into positive territory during the session, rallying from the 383 level into close to post a fractional loss. Ahead of tomorrow's decision on interest rates, Treasuries finished the session with fractional price declines, as the longer-dated maturities experience modestly heavier selling. The 30-year December Treasury futures (us02z) 109'140 fell 0.22%, while the benchmark 10-year December futures (ty02z) 113'20 slipped 0.16%, which had its YIELD rising to 4.081%. The December Fed Funds futures (ff02z) settled out at 98.60, which calculates a Fed rate of 1.4% ahead of tomorrows FOMC meeting. The has the MARKET looking for at least a 25-basis point cut from current 1.75% and anything less than that would most likely be seen as a near-term disappointment for equities. From my perspective, a 50-basis point cut would be a surprise and could have stocks popping higher on the news, only to settle back on a reality check that the Fed deems the economy so weak that it would need to try and pump that much liquidity of money into the economy. Dow Industrials Chart - Daily Interval It has been my view that many of the Dow components would be the greatest benefactors of further Fed easing if the economy is to show robust growth from a friendly Fed. Many of the components are more deeply rooted in the economy. Technology components faired relative well consider the number of downgrades from brokers in the semiconductors today. Today's action saw no change take place in the very narrow Dow Industrials Bullish % ($BPINDU) from www.stockcharts.com, with the bullish % still "bull confirmed" at 63.33%. S&P 100 Index Chart - Daily Interval The OEX has looked technically stronger and performed slightly better during periods of strength and weakness. Today's close above 465 looks bullish. Yesterday's trade at 465 had the OEX's point and figure chart ($5 box scale) breaking above longer-term bearish resistance and triggering a spread-triple-top buy signal. Today's ability to close above that 465 level hints demand is strong for the bulk of these 100 stocks. Downward trend on the above chart is from the March 18th relative highs of 595. Today's action saw no net change in the S&P 100 Bullish % ($BPOEX) as 60% of the stocks still show a point and figure "buy signal" associated with their charts. I can still envision the OEX trading 480 before this indicator reaches a more overbought reading of 70% or higher, but tomorrow's FOMC meeting and MARKET response remains key. S&P 500 Index Chart - Daily Interval In the past, we actually "fit" retracement on the SPX and OEX from identical levels. It's fascinating perhaps that the OEX never did trade below its July 24th lows, while the SPX did. Now we are seeing the OEX trade marginally more bullish from a technical perspective on the upside move. Bearish traders will take note of this and most likely select the OEX for their bullish trading, while looking at the broader SPX for their bearish SPX trades. This observation may also hint of a more "narrow" bullish rally taking place where the 100 larges S&P stocks perhaps find more sponsorship compared to a broader market of 500. Traders may also note how the SPX is still just under downward trend from similar anchor points as used in the OEX. While OEX traders can be bullish, they should be looking over their shoulder perhaps to see if the broader 500 are coming along for the ride. Bulls like to see broader bullishness whenever possible. If after tomorrow's FOMC meeting the SPX looks to close above 925, I'd view that as a bullish market response. Today's action saw the S&P 500 Bullish % ($BPSPX) realize a net gain 0.8%, or 4 stocks to point and figure buy signals. This has the bullish % edging higher at 55.6% and still "bull alert" status. It would still take a reading of 60% to get this index into "bull confirmed" status like the narrower OEX Bullish % achieved after Monday's trading. NASDAQ-100 Index Chart - Daily Interval It's my view that the NDX has perhaps benefited most from talk of a 25-basis point and even 50-basis point rate cut by the Fed. If the MARKET is going to show disappointment and I'm going to risk capital in a bearish trade, then the index I feel has the most downside for disappointment is the NASDAQ-100 Index. My bearish target for a QQQ $26 puts is $24.25, which would be just above the 61.8% retracement on the NDX and rising 21-day SMA. My risk is the 90-cents in the option. If I were to have shorted the underlying Q's outright, I would have followed with a stop just above $26.80. However, that didn't make sense if I could buy some time in a QQQ put that also got me some exposure to Cisco Systems (NASDAQ:CSCO) $12.69 +3.08% earnings, scheduled for release Wednesday after the bell. In essence, if I was going to risk 90-cents to a stop on 1,000 shares of QQQ short, might as well limit my risk in a QQQ put and get until November 15th expiration to see how things pan out. Today's action saw the NASDAQ-100 Bullish % ($BPNDX) seeing a net gain of 2 stocks to point and figure buy signals as the bullish % now grows to 68%. Wow! What a turn of events after early October's 14% reading when bears carried the bulk of the risk. The tables have turned and this bullish % now nears the more "overbought" reading of 70%. Still, the NASDAQ-100 is "bull confirmed" and very bullish, but bulls holding some gains should be snugging up stops to protect gains. Please note: Today's bearish profiled trade in the market monitor (10:30:32) is what I considered to be "risk capital" only and I kept bearish position very small and risked minimum capital as it relates to my account and offsetting bullish positions currently held. 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 **************** Voting Stock by Steven Price Whether today's rally was election related, or simply an attempt to jump on the bandwagon ahead of Wednesday's FOMC meeting, it still kept us range bound. Of course, we are now in a higher range than we were for the last two weeks, so it can be viewed as bullish by those looking for a little reassurance that the 1400- point Dow rally has been for real. The Dow struggled to break through 8550 from October 21 until Monday. That level now appears as support, with the next upside test at 8750. Likewise, the SPX has now broken above 900 for the first time since September 11 and has found support there, as well. Don't pinch yourself just yet, however, as the next 24 hours will be long ones. Tomorrow morning will bring the market's reaction to a new political landscape. Of course the market will have only a few hours to digest the election results before Team Greenspan let's us know just how low they'll go. Some financial institutions are calling for a fed funds rate cut of 50 basis points tomorrow afternoon, however that seems very unlikely. With the fed funds futures predicting a cut of 25 basis points, and an already low rate of 1.75%, the FOMC is likely to give us what we are expecting. They may even throw us bone by keeping an easing bias for the near future. There is another FOMC meeting a little more than a month from now, so there will be a chance for another 25 points before the end of the year if needed. With the threat of terrorism still very much existent and the economy growing, albeit at a very slow pace, the Fed is likely be stingy with the few rate cuts it has left. SEC Chairman Harvey Pitt resigned tonight, after pressure mounted surrounding his choice of William Webster to head the SEC's accounting oversight board. Pitt failed to inform the commission or the White House that Webster had been involved in an accounting investigation a few years ago, although Webster had told Pitt of the potential problem. The Semiconductor Index finally gave something back today, after gaining 52% since October 9. At one point it looked like it may test support at 300, but rallied at the end of the day to finish down only 8.47, at 317.55. Last night AMAT said it was cutting 11% of its workforce in an attempt to combat a 2-year slump in chip demand, which got the group rolling downhill this morning. In keeping with the recent trend however, the SOX shook off the bad news to keep its up trend in tact. The index has been following its ascending channel for the last month, and has bounced from the lower trend line on each test, including today. One market that is predicting a big win for the democrats is oil. Crude Oil futures have been dropping like a stone, from a high of almost $31 per barrel, to a close today of $26.01. The threat of an Iraqi invasion is being discounted in the oil market, which would indicate a predicted shift of sentiment in Congress. While most pundits will virtually guarantee an Iraqi regime change, the oil futures are telling us that it may be a while. Donald Rumsfeld indicated yesterday that he "would expect that there would be guard and reserve call-ups in the immediate period ahead," however that does not necessarily mean we will invade before the December oil futures expire. The market internals gave mixed signals today, in spite of the big gain in the Dow. Advancing volume on the NYSE was only favored 1.4:1 over declining volume. In the Nasdaq, which posted a gain of 4.63, declining volume actually outpaced advancing volume by about the same margin. We basically saw a market on hold ahead of election results and the Fed announcement. One important development was that the Nasdaq 100 and S&P 100 bullish percentages both shifted into bull confirmed status today. We now have the NDX, OEX, Dow and NYSE all giving strong bullish point and figure signals. While today may have been a snoozer, tomorrow should be just the opposite. If the republicans gain control of the Senate, we could see a rally in the morning. However, if we get no more than a 25 basis point rate cut, the rally may be short lived. If we get no cut at all, watch out below. If the democrats retain the Senate, we may see a sell-off, or a very quiet open ahead of the FOMC announcement. The Put/Call ratio at the CBOE increased today to .77, however, that level is somewhat neutral, relative to recent ratios. This would indicate that the big players are not betting in either direction. Keep an eye on 8750 Dow to the upside and 8550 to the downside, in order to gauge direction after tomorrow's FOMC announcement. In either case, give it a few minutes to settle in before piling on, as there is usually tremendous volatility immediately following the release. Once we get a directional feel, we'll go for the quick hits, as history has told us that volatility usually lasts a few days. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7286 Current : 8678 Moving Averages: (Simple) 10-dma: 8636 50-dma: 8448 200-dma: 9282 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 915 Moving Averages: (Simple) 10-dma: 912 50-dma: 894 200-dma: 1000 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1050 Moving Averages: (Simple) 10-dma: 1047 50-dma: 999 200-dma: 1158 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX finally began giving back its gain of more than 50% in the last month, after AMAT said last night that it would lay off 11% of its workforce in order to cope with declining demand in the chip industry. While this was a mantra heard often throughout earnings season, it has had little effect on the soaring SOX. Until the index breaks below 300, that level should be viewed as support. Today's low of 306 reinforced that notion. While we are hesitant to play a sector long that is seeing continued weakness, we won't jump in short until there is a decisive support break. Data from the Semiconductor Industry Association indicated that the last quarter saw a 20% increase from the year ago period, but 52-week High: 657 52-week Low : 214 Current : 317 Moving Averages: (Simple) 10-dma: 298 50-dma: 269 200-dma: 426 Market Volatility The VIX is not acting as though the Dow was up over 100 points and has reached a higher support level after breaking through 8550. Most likely that is because there is so much uncertainty swirling around today's elections and tomorrow's FOMC meeting. Normally we would see a big drop in premium levels as the market heads higher, and buy writing commences. However, we will not likely get that drop until the market chooses a direction later in the week, following the FOMC announcement Wednesday afternoon. If that direction is down, we may re-test 40. If it is up, we may crack 30 for the first time since early July CBOE Market Volatility Index (VIX) = 34.28 –0.19 Nasdaq-100 Volatility Index (VXN) = 51.20 +1.98 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.77 581,986 448,606 Equity Only 0.62 485,543 302,506 OEX 0.84 19,423 16,251 QQQ 0.71 113,414 79,985 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 40 + 2 Bull Confirmed NASDAQ-100 68 + 9 Bull Confirmed Dow Indust. 63 + 6 Bull Confirmed S&P 500 56 + 6 Bull Alert S&P 100 60 + 6 Bull 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 0.97 10-Day Arms Index 1.04 21-Day Arms Index 0.90 55-Day Arms Index 1.27 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 1429 1284 NASDAQ 1536 1616 New Highs New Lows NYSE 22 28 NASDAQ 56 39 Volume (in millions) NYSE 1,579 NASDAQ 1,691 ----------------------------------------------------------------- Commitments Of Traders Report: 10/29/02 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 loaded up slightly on both sides of their position, adding 5,000 long and short contracts. Small traders treated their positions similarly, adding 3,000 contracts to both sides. Commercials Long Short Net % Of OI 10/08/02 427,070 445,135 (18,065) (2.1%) 10/15/02 429,448 449,138 (19,690) (2.2%) 10/22/02 432,775 463,827 (31,052) (3.5%) 10/29/02 437,565 468,557 (30,992) (3.4%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 16,472) - 10/01/02 Small Traders Long Short Net % of OI 10/08/02 131,486 81,010 50,476 23.7% 10/15/02 134,507 83,714 50,793 23.3% 10/22/02 134,641 72,681 61,960 29.8% 10/29/02 137,740 75,587 62,153 29.1% 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 left positions virtually the same, with a slight reduction to the long side and a slight increase to the short side. Small traders added less than 1,000 contracts to both sides. Commercials Long Short Net % of OI 10/08/02 45,384 55,504 (10,120) (10.0%) 10/15/02 45,578 51,969 (6,391) ( 6.6%) 10/22/02 48,954 54,088 (5,134) ( 4.9%) 10/29/02 47,837 55,261 (7,324) ( 7.1%) 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 10/08/02 10,735 5,721 5,014 30.4% 10/15/02 10,185 12,478 2,293 10.1% 10/22/02 10,202 8,892 1,310 6.6% 10/29/02 10,584 9,419 1,165 5.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 8,460 - 3/13/02 DOW JONES INDUSTRIAL Commercials kept the status quo here, as well, reducing the net long position by 300 contracts, of 0.4% of open interest. Small traders increased longs by 1,200 and shorts by 2,000. Commercials Long Short Net % of OI 10/08/02 19,550 11,823 7,727 24.6% 10/15/02 20,914 9,630 11,284 36.9% 10/22/02 22,189 13,448 8,741 24.5% 10/29/02 21,800 13,337 8,463 24.1% 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 10/08/02 7,890 9,645 (1,755) (10.0%) 10/15/02 6,040 10,329 (4,289) (26.2%) 10/22/02 4,445 9,270 (4,825) (35.1%) 10/29/02 5,602 11,090 (5,488) (32.9%) 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 ****************** Short-Term Treasury/Agency Funds Last week, we profiled three emerging-market bond funds for the aggressive portion of your income portfolio; this week, we talk about two low-expense Vanguard bond funds that are hard to beat for the conservative portion. One fund is Vanguard Short-Term Treasury Fund (VFISX), and the other is sibling Vanguard Short- Term Federal Fund (VSGBX). Both Vanguard funds are "short-term" in nature and seek current income by investing primarily in Treasury or agency securities. Government agencies such as Federal Home Loan Banks are exempt from SEC registration requirements and are deemed to be of the highest credit quality ("AAA") along with Treasury obligations. Both funds benefit from Vanguard's industry-low expense ratios. Neither Vanguard fund invests much, if any, in corporate debt securities and asset-backed securities, nor do they emphasize mortgage-backed securities. Those sectors of the bond market offer greater return potential, but carry additional risks not associated with Treasury/agency securities. Our aim this week is to identify a couple conservatively managed bond funds with solid track records of performance. Screen Process The screen process was relatively simple to perform. We used Morningstar's Fund Selector tool online (www.morningstar.com), which allows you to quickly identify funds that meet specific criteria, such as average credit quality and average duration. Our search criterion is summarized below. Fund Group = Taxable Bond Minimum Initial Purchase < or = $3,000 Expense Ratio < or = Category Average Morningstar Rating = 4 or 5 Stars or Unrated Average Credit Quality = AAA Average Duration < or = 3 Years This simple but effective screen yielded only 13 fund results, two of which are not yet rated by Morningstar: Pacific Capital Ultra Short Government Fund (PCUAX) and the Vanguard Inflation Protected Securities Fund (VIPSX). The latter fund invests in Treasury inflation-indexed securities ("TIPS"), and would be a solid choice for income investors seeking inflation protection. VIPSX is the cheapest and largest fund of its kind and returns have been great so far, but inflation-indexed securities could underperform conventional Treasuries during an extended stretch of modest inflation Morningstar says in its report. The fund's higher average effective maturity gives it a little more risk in relation to the two other Vanguard short-term funds on the list. Returns have been great so far, with the fund generating a 12.2% total return for the YTD period through November 5, 2002. Next, we reviewed the results list and removed funds that invest primarily in corporate debt securities, asset-backed securities, or mortgage-backed securities. The Ginnie Mae (GNMA) funds that made the list included American Century Ginnie Mae Fund (BGNMX), Fidelity Ginnie Mae Fund (FGMNX), and the USAA GNMA Fund (USGNX). They'd be a good place to start your search, if you were seeking the higher total return potential of mortgage-backed securities. We also ruled out three ultra short-term bond funds on the list, since they fall somewhere between a money market fund and short- term bond fund in terms of risk and reward. They are all higher on a year-to-date basis as of November 4, 2002, but fund returns are less than 3 percent. The two Vanguard short-term funds have YTD total returns of over 6.5%, more than twice the total return of their ultra short-term fund peers. The only other fund on the list was Northern Short-Intermediate U.S. Government (NSIUX), which we like but has a higher expense ratio of 0.90%. The two Vanguard funds we like more have lower expense ratios of near 0.30% of assets per annum, giving them a sizeable cost advantage. Low expenses can permit fund advisors to pursue more conservative strategies and still be competitive when compared to similar funds. Both Vanguard funds profiled this week have been profiled before on this site, but we feel deserve discussing again. They offer conservative income investors a superior return to risk and cost tradeoff. Vanguard Short-Term Treasury Fund (VFISX) The $3.68 billion Vanguard Short-Term Treasury Fund seeks income by investing primarily in direct government obligations, such as U.S. Treasury notes and other securities backed by the full faith and credit of the U.S. government. The fund maintains an average maturity of 1 to 3 years, and has been co-managed by two members of Vanguard's fixed income group, David Glocke and Ian MacKinnon, since February 2001. VFISX has a low total expense ratio of just 0.29%, compared with 0.97% for the short-term government category average, per Morningstar. Vanguard Short-Term Treasury Fund's low expenses have contributed to solid total returns for shareholders with less volatility than its short-term government bond fund peers. Below is a summary of the fund's total returns and category rankings per Morningstar as of November 4, 2002. YTD Total Return: VFISX +6.9% (20th percentile) 1-Year Total Return: VFISX +5.7% (20th percentile) 3-Year Average Return: VFISX +7.8% (18th percentile) 5-Year Average Return: VFISX +6.7% (14th percentile) The fund's trailing 10-year average return as of October 31, 2002 of 6.2% ranked in the first quintile of the short-term government fund category as well, Morningstar's report shows. So, 6 percent a year may be a reasonable total return expectation for the fund, but remember that its solid results were achieved during a period when interest rates generally declined and bond prices advanced. In terms of volatility over the last three years, Vanguard Short- Term Treasury Fund's average standard deviation of 2.3% is right in line with its short-government fund peers, and less than half that of Morningstar's all taxable bond fund average (4.8%). The fund's volatility is approximately one-tenth that of the average U.S. stock fund (21.8%), using Morningstar's volatility numbers. Morningstar says Vanguard Short-Term Treasury Fund's low expense ratio and conservative portfolio mix make it a safe bet, and for those reasons, it should appeal to conservative income investors. Vanguard Short-Term Federal Fund (VSGBX) The $3.38 billion Vanguard Short-Term Federal Fund seeks current income by investing mostly in U.S. government agency securities. Unlike Vanguard Short-Term Treasury Fund, which must have 65% or more of assets invested in Treasuries, this fund invests more so in the agency markets, which provide slightly better yields than Treasuries with nearly the same credit safety as Treasuries. Vanguard veteran John Hollyer has managed the fund since January 1, 1996. Ian MacKinnon joined Hollyer as co-manager in February 2001. Like its sibling, this fund maintains an average maturity of one to three years. Again, Vanguard's cost advantage helps the performance of Short- Term Federal Fund relative to other short-term government funds. Its expense ratio of 0.31% is about a third that of the category average as well. The result is above average to high returns in relation to similar funds according to Morningstar, with average category risk. Below is a summary of Vanguard Short-Term Federal Fund's returns and category rankings through November 4, 2002, per Morningstar. YTD Total Return: VSGBX +6.7% (26th percentile) 1-Year Total Return: VSGBX +5.7% (21st percentile) 3-Year Average Return: VSGBX +8.1% (10th percentile) 5-Year Average Return: VSGBX +6.9% (5th percentile) The fund's trailing 10-year average return as of October 31, 2002 of 6.3% ranked in the first quintile of the short-term government fund category as well (15th percentile). So, again, a 6% average annual return over the past decade for shareholders, albeit under conditions favorable to bond prices. Vanguard Short-Term Federal Fund's average standard deviation of 2.2% is a tiny bit better than its short-government fund sibling. Both Vanguard funds are right in line with the category average, and less than half that of the average taxable bond fund (4.8%). While the fund's trailing 5-year performance earns it an overall rating of 5 stars from Morningstar in the short-term government category, its 10-year average return is just 0.1% a year better than its Vanguard Short-Term Treasury Fund sibling. That tells you that the two funds are very close in terms of their risk and return characteristics. Both funds sport high alphas and Sharpe ratios relative to their peers. Conclusion Both Vanguard Short-Term Treasury Fund and Vanguard Short-Term Federal Fund are hard to beat if you're looking for a well-run, low-expense short-term government fund. The Short-Term Federal Fund is a Morningstar analyst pick, but if you're at all uneasy about investing in government agency bonds and securities, then you may want to consider the Short-Term Treasury Fund. The two products are nearly equal in terms of potential return and risk. Morningstar's other favorites in the short-term government fund group are Montgomery Short Duration Government Bond (MNSGX) and SIT U.S. Government Securities (SNGVX). Both funds have put up solid numbers, but not as strong as Vanguard Short-Term Federal Fund over the past three to five years at least. In the credit markets, where every basis point counts, being the low expense leader has significant value. Income investors seeking a low- risk, low-expense bond fund with a solid track record need not look further than the two Vanguard short-term government funds. For more information or to download a prospectus, you can logon to The Vanguard Group at www.vanguard.com. Follow the links to Personal Investors. Steve Wagner Editor, Mutual Investor email@example.com ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** On Your Mark After two days of patiently waiting for the markets to wear themselves out it appears we are about to enter the race. The strong gain against the odds on Tuesday has set us up for a pre- Fed signal on Wednesday. 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The Option Investor Newsletter Tuesday 11-05-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: TRMS, WPI Dropped Puts: IP, SPW Daily Results Call Play Updates: ERTS, AZO, FCS, FRX, INTU New Calls Plays: SYMC Put Play Updates: RTH, LOW, BAX, LEH New Put Plays: OHP **************** 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: ***** TRMS $56.00 -0.16 (+2.08 for the week) Trimeris has treated us well, as we stuck with it in spite of recent pullbacks on the way up. Although the company will not post a profit until they start marketing their drug, Fuzeon, next year, we are dropping it ahead of earnings on Thursday, as is our policy. We entered the play at $51.50 and will close it for a profit. Readers who wish to remain long TRMS can keep an eye on support at $55 from the last 2 days. We will still respond to questions on the Market Monitor, when possible, but will no longer update the stock in this space. --- WPI $29.04 +1.19 (+0.70 for the week) As we said in our write- up, we will close the play ahead of earnings Wednesday, with a small profit after entering the play at $27.58. We still like the recent run to higher ground, where WPI has found support and begun moving up once again. The recent deal to expand the company's generic drug stable has kept it going and the next resistance level is around $33. Future questions can be directed to the Market Monitor. PUTS: ***** IP $35.77 +0.22 (+0.58 for the week) IP has rebounded with the broader markets. As a Dow stock, it is subject to overall market moves, sometimes in spite of its news and financial results. This has been the case the last couple of days, with IP breaking back above its 50-dma, after filling the gap from October 15. We will drop the play, as a slow moving stock going in the wrong direction is eating up too much premium for our taste. We'll take our "put money" and invest it in other opportunities. --- SPW $44.00 +0.60 (+1.18) While the broad market has continued to march slowly upwards this week, shares of SPW are shrugging off their shackles and reluctantly going along for the ride. While the $45 level still held as resistance yesterday, bears had to be disappointed that there wasn't much follow through to the downside this morning. Rather than weakness, we saw the stock find intraday support near $43.50 the past 2 days, and that hints that perhaps the stock could break out on any positive reception of the Fed's decision on interest rates. We want to take advantage of the quiet trade expected ahead of the announcement to exit the play and remove that risk. Since SPW hasn't shown the weakness we expected when we began coverage last week, we're dropping it tonight before it decides to really move against us. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week AZO 86.43 -3.08 1.16 Still bouncing ERTS 65.21 -0.43 -0.56 Support at 50-dma FCS 13.35 -0.16 -0.99 Filled gap FRX 101.05 0.11 0.08 Staying over $100 INTU 53.80 -2.62 1.80 Rebound from entry SYMC 41.98 0.22 -0.01 New, $43 ahead TRMS 56.00 2.24 -0.16 Drop, Profits/earnings WPI 29.04 -0.65 1.19 Drop, Profits/earnings PUTS BAX 25.15 0.60 0.00 No bounce IP 35.77 -0.15 0.22 Drop, Premium decay LEH 56.95 2.29 0.49 better risk/reward LOW 41.90 -1.00 0.70 downtrend in tact OHP 34.97 0.07 -0.88 New, breakdown under $35 RTH 74.55 -2.20 1.20 Group downgrades SPW 44.00 0.14 0.60 Drop, 4 days up ************************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 ******************** ERTS $65.21 -0.56 (-0.87 for the week) Electronic Arts broke through its 50-dma on October 30, and has been setting higher highs and higher lows on the current rebound. It pulled back today, along with some of the other techs, but found support at that level for the third time in the last four days. The stock has been true to its recent pattern of climbing to new highs and then dipping to its bullish support line on the PnF chart. Four of the last five rebounds have taken it higher than the last. Three of the last four have bounced from the 200-dma, as did the last one. Monday's high of $68 was an increase of $6.70 from the last 200-dma bounce on October 29 and some pullback can be expected after such a bullish run. The fact that the pullback stopped above the 50-dma indicates we may be seeing a new level of consolidation. The stock has a bullish vertical count of $95, and while that may be an eventual target, most likely interrupted by several reversals along the way, we are looking for the stock to repeat its pattern of adding another higher "X" to the previous column. That would take the current run as high as $73, which is our target on the long play. New entries can target a trade above today's high of $66.55 in this volatile stock. We will raise the stop loss to $62.50, just below recent lows in the last week. --- AZO $86.43 +1.16 (-1.47) Still cruising up the charts, AZO continues to find willing buyers on each dip. While the selloff yesterday afternoon generated some concern, the sellers really couldn't press the stock appreciably lower on Tuesday, despite weakness in the broad market. Then when the broad market began to recover, so did AZO, which ended up more than $1 on the day. It is interesting to note that the stock found support today right at the steadily rising 20-dma (currently $84.33). While volume was notably light on Tuesday, this was to be expected ahead of the uncertainty of the Fed's decision on interest rates. Looking at the hourly chart shows a slightly modified trendline that connects the intraday lows for the past 2 months. That trendline currently rests right at $84, which provides a nice confirmation of the 20-dma as support. Look for that level to continue to attract buyers so long as the pattern of higher lows continues. The current behavior of the stock is more favorable to buying the dips right now, and momentum traders looking to buy a breakout will need to be very careful. Each recent assault on the highs near $89 has been followed by a pullback, so the best approach in the near term will be to buy the dips and then harvest gains on any weakness near the $89 resistance level. Keep stops set at $84. --- FCS $13.35 -0.99 (+0.05) With the day before the FOMC meeting sandwiched between a couple of bearish comments on Chip stocks, shares of FCS actually held up pretty well on Tuesday. Before the open, Lehman stated that investors are overlooking weak fundamentals in the semi equipment shares, pointing out that overall shares trade well above historical trough levels. Then shortly after the lunchtime lull, Bear Stearns took a shot at the group, cutting their 2003 industry revenue growth forecast from 17% to 14% on expectations of a weak Q4 that will probably extend through the first half of 2003. Following AMAT announcing plans to slash 11% of their workforce last night after the close, it's a wonder the group didn't go into free fall today. But the bulls stayed in the fight, trimming the SOX losses to a little over 3% by the close. While FCS did give up nearly 6% today, we need to keep in mind the stellar gains already accrued in the past week. The stock dipped to the $13 level by early afternoon and then promptly reversed course after filling yesterday's gap, possibly providing a decent entry point heading into tomorrow. Conditions will likely be noisy tomorrow ahead of the FOMC interest rate announcement, but then we can look for the next entry into the play on a renewed dip and bounce near today's low. Be careful about chasing the stock higher right now, as it is getting close to solid resistance in the $15.00-15.25 area. Recall from yesterday that our stop is now at $12. --- FRX $101.05 +0.08 (+0.87) Reminding us that "slow and steady" wins the race, shares of FRX ignored the noise in the broad market and consolidated its gains from Monday, now finding intraday support above the century mark. As the stock consolidates its recent breakout, the bulls are storing energy for their next breakout attempt. While the past two days have seen intraday support building above the $100 level, there is some solid support just below there at $99, which served as resistance for most of last week. We can use any dip and bounce near these levels as an entry into the play, while momentum traders will have their eye out for an entry as FRX breaks out above $102 to set new highs. The first sign of weakness that we need to be concerned about would be a trade below $97, which would constitute a break of last week's intraday support. Of course, on a sharp post-FOMC drop, a rebound from above $97 could be used for aggressive entries. For now, keep stops set at $96.50. --- INTU $53.80 +1.80 (-0.21) Volatility seems to be INTU's middle name, as can be seen in the last 3 days large-range candles. The stock has been swinging back and forth between $51.50-55.00, as investors jockey for position ahead of the Fed's expected interest rate cut. Demonstrating its lack of dependence on broad market action today, INTU launched higher from the open, quickly reclaiming most of yesterday's loss. But then as the broad market weakened throughout the middle of the day, INTU held its ground, slowly creeping higher through the afternoon, closing just below its intraday high. Trader's that took advantage of the drop yesterday afternoon or early this morning got a solid entry point near the $51.50-52.00 level, which is shaping up as decent support with the help of the 10-dma (currently $51.43). A renewed dip and bounce from this area can be used for new entries, but prudence would suggest waiting until after the Fed releases its verdict on interest rates. Momentum types will want to key off the $55 level. A push through the highs from yesterday morning that sticks, will have the bulls eyeing the $60 level as their next upside target. Given the stock's recent volatile behavior, a push up to that level would make for a good opportunity to harvest some gains. Also due to expected volatility surrounding the FOMC meeting, we're keeping a wide stop at $49.50. ************** NEW CALL PLAYS ************** SYMC - Symantec - $41.98 -0.01 (+1.03 for the week) Company Summary: Symantec, the world leader in Internet security technology, provides a broad range of content and network security software and appliance solutions to individuals, enterprises and service providers. The company is a leading provider of client, gateway and server security solutions for virus protection, firewall and virtual private network, vulnerability management, intrusion detection, Internet content and e-mail filtering, remote management technologies and security services to enterprises and service providers around the world. Symantec's Norton brand of consumer security products is a leader in worldwide retail sales and industry awards. Headquartered in Cupertino, Calif., Symantec has worldwide operations in 38 countries. Why We Like It: SYMC had been in a long-term consolidation pattern from the middle of May until the middle of October. It broke out after smashing earnings estimates on October 16. The company posted a 34% profit gain in the quarter on strong anti-virus sales and raised guidance for the year. The company now expects to earn $1.55 per share, up from forecasts of $1.42. Symantec is a classic example of a company that was in the right place at the right time. The U.S. Government has turned its attention to internet security, with president Bush appointing cyber security czar Richard Clarke to head an initiative to protect the nation's data, as well as citizenry. The administration recently released its National Strategy to Secure Cyberspace and is expected to increase its IT security budget by 60% this year. Symantec has recently purchased two companies, Recourse Technologies and Riptech, to address their lack of competitive network intrusion detection products and a managed security service provider. SYMC is attempting to become a one-stop security stop and seems well positioned to do so. The stock broke out of the consolidation pattern in impressive fashion, heading strongly in the direction of its bullish vertical point and figure count of $67. The recent run has taken it not only through resistance at $35 and $36, but also through resistance at $40 and its bearish resistance line. It is now testing $43, where it topped out in March before the broad market swoon. The fact that the recent run consolidated between $37 and $40, before taking off again, lends credibility to the stock's explosion upward, and gives us a logical stop loss at the bottom of that range. A trade of $39 would indicate that it is testing the bottom part of that consolidation and we would close the trade with a break below that level. We will also look for a trade over $43.10 as our trigger to go long SYMC. While we don't normally set up a play that isn't entered at current levels, we want to make sure not to buy the top, if in fact $43 proves too tough on the current run. *** November contracts expire in less than 2 weeks *** BUY CALL NOV-40 SYQ-KH OI= 4057 at $2.70 SL=1.35 BUY CALL NOV-45 SYQ-KI OI= 883 at $0.35 SL=0.00 BUY CALL DEC-40 SYQ-LH OI= 1075 at $4.10 SL=2.05 BUY CALL DEC-45*SYQ-LH OI= 1633 at $1.50 SL=0.75 Average Daily Volume = 4.31 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 ******************* RTH $74.55 +1.20 (-0.88 for the week) The RTH followed the broader market higher today, but was not able to make up Monday's loss. The sector looks weak, with yesterday's downgrades to Home Depot and Lowe's, which cited "daunting" near-term comparisons for LOW and HD and few organic growth opportunities. In addition to those downgrades, we got a warning from May Department Stores (MAY), which is seeing a same store, and overall, sales decrease from last year. This is disturbing, considering last year most shoppers were still dealing with the 9/11 hangover in October. MAY has now seen six consecutive monthly same store sales declines. This trend should keep a lid on the retail stocks heading into the busiest time of the year, when comparisons will likely continue to suffer. Recent layoffs and decreases is personal spending and Consumer Confidence do not bode well for the sector. The RTH rebound today fell far short of the 50-dma of $76.55 and the downtrend remains in tact. Five of the last six days have set lower intraday lows and we will continue to target $70 initially. If we break through that level, then $65 will be the next target. Conservative traders may want to sit on the sidelines until Thursday, after many retailers report monthly sales. If we get a rebound tomorrow following the FOMC rate announcement, a failed rebound under the 50-dma can serve as an entry point, as well. --- LOW $41.90 +0.70 (-0.20 for the week) Lowe's enjoyed a bit of a bounce today, on a triple digit gainer for the Dow. However, not before dropping before yesterday's close twice during the day. The stock remains in the downtrend it began after failing the $45 level and has been setting a series of lower lows and lower highs. It broke below its 50-dma on October 31 and has now found resistance at that level (currently $42.14) on bounce attempts. CIBC World markets lowered its profit estimates on the stock last week, citing slowing square footage growth and limited opportunities to expand operating profit margin. This was followed by Goldman Sachs rating the hardline retailers (of which LOW is a member) "cautious" due to 'daunting' near-term comparisons for some of the sector's largest-cap companies, and few organic growth opportunities. The seasonal switch from home projects to holiday shopping should take some of the already slim retail business away from Lowe's at this time of the year. Recent economic data showing low Consumer Confidence and decreases in personal spending and durable goods just make matters worse for the home improvement center. We like entries currently underneath the 50-dma of $42.14 or on a failed bounce under the 200-dma $42.94, in case of a broad market rally after Wednesday's FOMC announcement. --- BAX $25.15 unch (+0.93 for the week) Baxter has tried to manage a rebound on the broad market rally the last two days, but has yet to make up Friday's loss. Monday tacked under just under a dollar, and today found the stock unchanged, in spite of a triple digit gain in the Dow. We were looking for entry on either a trade of $24, which would register a triple bottom point and figure breakdown, or a failed rally under $28. We figured with a market rally we might get the failed rally. However, with the stock in a strong downtrend, we may not get that entry point. We also like entry below Friday's high of $25.38, if it is unable to crack that level on Wednesday, following the FOMC announcement, as that will be an additional sign of weakness. BAX has not posted a positive month since March, and after the Dow posted its biggest monthly gain in over a decade in October, leaving BAX behind, it is hard to imagine a catalyst that would change this any time soon. Right now the stock has been plagued by several downgrades, sales warnings and questions about its dialysis machine tubing causing deaths. We will continue to target $20 on the play and leave our stop at $29. --- LEH $56.95 +0.49 (+2.38) Despite all the fundamental problems that still exist in the Brokerage industry, the XBD index has been stubbornly chugging higher this week, going along with the rest of the broad market ahead of the expected interest rate cut tomorrow. While there is some formidable overhead resistance at the $436 level (the convergence of the 200-dma and the 50% retracement of the XBD's range over the past year), that still leaves some upside to be had before the bears are likely to lean heavily on this group again. Which brings us to our LEH play. We got a solid reversal yesterday afternoon from the descending trendline near $57.50, which also happens to be the 50% retracement of this stock's total range for the past year. But the bulls were back at work again this afternoon, serving up another fractional gain, and a close just below $57. Another rally failure below our $58 stop still looks good for new entries, but cautious traders will be well served by waiting until after the Fed's interest rate decision before opening new positions. Should weakness prevail tomorrow, then a trade under $55.50 can be used for initiating momentum-based positions, as this would constitute LEH moving into the gap left behind from yesterday's euphoric gap higher. Confirm sector weakness before playing. ************* NEW PUT PLAYS ************* OHP – Oxford Health Plans, Inc. $34.97 -0.88 (-1.53 this week) Company Summary: Oxford Health Plans is a healthcare company providing health benefit plans primarily in New York, New Jersey and Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan and the Liberty Plan, health maintenance organizations, preferred provider organizations, Medicare+Choice and third-party administration of employer-funded benefit plans. Why We Like It: While the alleged shenanigans at THC's company-owned hospital got the major air time on the news services over the past few days, that incident is only one part of the severe weakness that has been seen in the Health Care Payor's index (HMO.X) so far this week. Yesterday's rally attempt in the sector was promptly rebuffed, and the picture turned gloomy again this morning when HRC missed its earnings target by 11 cents. But that's all background for sector weakness, and our new play, OHP brings its own foibles to the table. While the company beats earnings estimates last Tuesday, that positive headline was soured by the fact that the company announced a $151 million charge to cover lawsuit expenses related to a 1997 charge and profit warning that led to a slew of shareholder lawsuits. Obviously investors didn't like what they heard, as they sold the stock hard that day, and the selling volume has been steadily rising, reaching a peak of more than 5 million shares today (vs. the ADV of just over 1 million) as the stock slid below $35 for the first time since January. OHP actually traded down below $34 this morning and that trade generated a fresh PnF Sell signal. Don't look now, but the vertical count now projects a price target of $22, which just happens to be where the stock bottomed last October before rallying to north of $50. While there is some mild resistance in the $35-36 area now, that resistance becomes downright formidable in the $37-38 area. Look for a failed rally to provide the best entry points, ideally near the $37 level. Should the weakness of the past 2 weeks prevail tomorrow, momentum traders can look to initiate new positions on a decline under the $33.50 level (just below today's intraday low). The HMO index is at a critical level itself, sitting just above major support at $520. Look for it to lose this support level in conjunction with a breakdown in the price of OHP before entering on a breakdown. Place stops initially at $38. *** November contracts expire in less than 2 weeks *** BUY PUT NOV-35 OHP-WG OI=1386 at $1.65 SL=0.75 BUY PUT DEC-35*OHP-XG OI= 507 at $2.85 SL=1.50 Average Daily Volume = 1.03 mln ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 11-05-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - OHP Traders Corner: A Trader’s Checklist ********************* PLAY OF THE DAY - PUT ********************* OHP – Oxford Health Plans, Inc. $34.97 -0.88 (-1.53 this week) Company Summary: Oxford Health Plans is a healthcare company providing health benefit plans primarily in New York, New Jersey and Connecticut. The company's product line includes its point-of-service plans, the Freedom Plan and the Liberty Plan, health maintenance organizations, preferred provider organizations, Medicare+Choice and third-party administration of employer-funded benefit plans. Why We Like It: While the alleged shenanigans at THC's company-owned hospital got the major air time on the news services over the past few days, that incident is only one part of the severe weakness that has been seen in the Health Care Payor's index (HMO.X) so far this week. Yesterday's rally attempt in the sector was promptly rebuffed, and the picture turned gloomy again this morning when HRC missed its earnings target by 11 cents. But that's all background for sector weakness, and our new play, OHP brings its own foibles to the table. While the company beats earnings estimates last Tuesday, that positive headline was soured by the fact that the company announced a $151 million charge to cover lawsuit expenses related to a 1997 charge and profit warning that led to a slew of shareholder lawsuits. Obviously investors didn't like what they heard, as they sold the stock hard that day, and the selling volume has been steadily rising, reaching a peak of more than 5 million shares today (vs. the ADV of just over 1 million) as the stock slid below $35 for the first time since January. OHP actually traded down below $34 this morning and that trade generated a fresh PnF Sell signal. Don't look now, but the vertical count now projects a price target of $22, which just happens to be where the stock bottomed last October before rallying to north of $50. While there is some mild resistance in the $35-36 area now, that resistance becomes downright formidable in the $37-38 area. Look for a failed rally to provide the best entry points, ideally near the $37 level. Should the weakness of the past 2 weeks prevail tomorrow, momentum traders can look to initiate new positions on a decline under the $33.50 level (just below today's intraday low). The HMO index is at a critical level itself, sitting just above major support at $520. Look for it to lose this support level in conjunction with a breakdown in the price of OHP before entering on a breakdown. Place stops initially at $38. *** November contracts expire in less than 2 weeks *** BUY PUT NOV-35 OHP-WG OI=1386 at $1.65 SL=0.75 BUY PUT DEC-35*OHP-XG OI= 507 at $2.85 SL=1.50 Average Daily Volume = 1.03 mln ************************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 ************** A Trader’s Checklist By John Seckinger jseckinger@OptionInvestor.com As a trader, finding correlations that work can make all the difference in the world. Wouldn’t it be nice if the guesswork could be taken out, and the markets tell you exactly what to follow during any particular session? Well, it only takes a few simple questions during the day. 6:20 a.m. The bond market opens at the Chicago Board of Trade, and following the 30-year (ZB02Z), 10-year (ZN02Z), and 5-year note (ZF02Z) can usually foreshadow equity movement when the NYSE opens one hour and ten minutes later. If movement in the equity futures (SP02Z, NQF, YM02Z, and ND02Z) is significant, action in the bond pits will either confirm or refute the likelihood of such an opening. Example: Equity futures are showing significant gains, while the price of the 30-year bond is significantly lower (one full point (32/32) is noteworthy). If that is the case, expect stocks to find a bid and keep it for the first few hours of trading. If, on the other hand, equity futures are pointing to a significant lower opening and bond prices are lower as well, I would become skeptical of a significant sell-off in stocks. Why? Since cash is not “rushing” out of stocks to enter bonds, it makes sense to wait until one can determine exactly where this cash is going. Remember, we are trying to think like a mutual fund manager, and these managers normally cannot hold more than 5% in cash 7:30 a.m. As an option trader, it is usually a wise decision to not initiate a position during the first few minutes of activity; therefore, begin to ask questions instead and increase one’s odds of profitable trading. If equities are rising, are bond prices falling? If equities are rising, is the Utility Index (UTY) rising as well? If yes, do the percentages equal or is one index outperforming the other? What is the Oil Index (XOI.X) doing? Is this index trading instep with equities? If yes, is this index leading, lagging, or acting as a coincident indicator? If equities are rising, is the Dollar (DXOOY) rising as well? If answering these checklists paints a picture of a market going higher with no conflicting signals, look to put on a better-than- average size position. Remember, you can change the words “rising” to “falling” and it should make sense as well. Of course, before we continue, there is still some homework that needs to be done. What are the obvious support and resistance levels in the Dow, Nasdaq, S&P 500, Bonds, UTY, XOI, and dollar? This question has to be asked the night prior to the trading session. If there is/are psychological areas that could become paramount to a trading day (example: Monday when the Dow tested near 9730 and right shoulder of Head & Shoulders formation), these levels should be given a lot of weight. The key then will be determining which support/resistance levels supercede activity in the other indices. Do not get too micro involved with these levels. The word “obvious” in the aforementioned question implies a weekly or daily level that could easily be seen with the naked eye. Ok, so what about retracement analysis, stochastics, RSI, or other technical tools? Of course, use them; however, not yet. Up until 9:30 a.m., try to focus on the macro picture first. Between 9:30 and 10:30 a.m. It is roughly two to three hours after the market is open when I begin to look for pattern recognition, re-enforced by the aforementioned questions. The “amateurs” are done trading the first hour, and the “noise” is somewhat filtered out and real trading is allowed to take place. This is when I use moving averages (22, 50, and 200 – all exponential) and retracement analysis, MACD, etc. to better increase my odds of a profitable trade. I also focus on the opening level in the Dow (how far it is from current levels), as well as predicting whether the market will trade range-bound or run in one direction into the close. Also during this time period, most of the economic reports are greatly factored into the market; allowing for a better assessment of the market psychology. Moreover, foreigners (read: Europe) are finalizing positions before heading home for dinner, and this infusion of liquidity can definitely help matters. A few questions I ask myself are: Is the market at any important retracement levels or on a highly watched moving average? Is RSI or Stochastics reaching relatively oversold/overbought levels due to the first hour of activity? Is a previous day’s high or low being tested, or short-term trend line that market makers would be watching? What does a 60-minute chart look like? Are the markets following or fading the morning’s economic reports? Lunch Hour (around noon) Lunchtime is usually a period that is void of liquidity; however, I actually like this time “if” involved in a winning trade (read: don’t exit a winning trade simply because traders in NY are going to lunch). Just like during the first hour of trading, the “smart money” is most likely passively watching and allowing the amateurs trade. The difference between noon and the first hour is that during noon there is a much better chance of the market behaving rationally and keeping with the trend that was recognized around 10:30 a.m. This then becomes a perfect time to exit trades established just a few hours ago. Example: Dow opens higher by 50, and then is negative around 10:30 a.m. by a few points. Then lunch hits and the Dow is lower by 10 points. I would be comfortable having a short position on at lunchtime, since the “energy” needed to raise valuations really isn’t there. During lunch, the trend is your friend. A few questions I ask are: Does the market have room to run before hitting an important technical level? Is the market close to a new low or new high? Does the question “Never sell a quiet market” ring a bell? Is the volatility Index rising or falling? Is the market in a range that it has been in for the last few hours, waiting for a catalyst? (If yes, look for a trap then) 1:00 p.m. At 1:00 p.m., the bond market closes and the equity markets enter their last hour of trading. A difficult time to trade (read: added volatility), but there are some questions we can ask for a better evaluation of market sentiment: Where did the 30-year (ZF02Z) close? Did it end its session on a pivotal level? Will fixed-income traders rush into equities in order to hedge their position(s)? Would there be a reason for mutual fund managers to enter/exit as the close approaches (read: end of month, quarter, fiscal year, etc.)? How have the correlations between Oil, Utilities, and bonds worked during the session? Is there a really important event taking place the following morning? Is the market under (above) a highly watched support (resistance) level? If so, I normally expect the market to continue trading with that bias and try to make the chart look fantastic (horrible). Where is the 22 PMA exp. on a five-minute chart? As a trader heading into the final hour, stops should be tightened and signs of buying/selling programs have to be taken seriously. I bring up the 22 PMA because it usually acts as a catalyst for “nervous” traders looking for a reason to exit. First and foremost, if the market has been trading inversely with bond prices all session, I will definitely expect the sentiment to remain during the last hour. Moreover, if a correlation between the UTY index and the Dow was strong throughout the session, I do expect that correlation to remain into the close. So, Is this how I really trade? Absolutely. It gets a lot harder if a position is held overnight; however, if all signs point towards exiting a position, fine. Ideally, I would like to avoid the first hour (based on risk tolerance) and then wait until 10:30 before exiting. Another important thing to consider is completely avoiding a particular index on a particular day, week, or month. If the correlation between the Utility Index and stocks diminishes, I look elsewhere. Do I want to? Of course not, but it makes no sense to fit a relationship when one simply does not exist. It will drive you crazy and take money straight out of your account. I get these questions all the time, “John, bonds are lower and stocks are lower, do you think equities will find a bid here?” Based on that information, it is impossible to tell. If mutual fund managers, institutional traders, and hedge funds are not too worried about a particular relationship, then neither will I. Good luck. Questions are welcome. Remember, the Market Monitor is there to help answer these questions on a daily basis and help take your trading to the next level. Please enter the monitor and ask away. jseckinger@OptionInvestor.com ************************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”. 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