The Option Investor Newsletter Tuesday 11-12-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Mistaken Guidance Futures Markets: The Test Index Trader Wrap: Tech holds gains despite late fade by Dow Market Sentiment: Out of Breath Weekly Fund Screen: Large Multinational Funds Updated on the site tonight: Swing Trader Game Plan: Back From The Dead Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 11-12-2002 High Low Volume Advance/Decline DJIA 8386.00 + 27.10 8504.67 8356.73 1.63 bln 1919/1272 NASDAQ 1349.56 + 30.40 1367.97 1328.08 1.52 bln 2136/1245 S&P 100 450.50 + 2.87 456.82 447.63 Totals 4055/2517 S&P 500 882.95 + 6.76 894.30 876.19 RUS 2000 374.69 + 5.55 377.61 369.14 DJ TRANS 2280.69 + 9.63 2299.57 2270.07 VIX 35.39 - 0.72 35.71 33.63 VXN 55.25 - 0.46 56.63 53.02 Total Vol 3,353M Total UpVol 2,625M Total DnVol 693M 52wk Highs 74 52wk Lows 108 TRIN 0.79 PUT/CALL 0.85 ************************************************************ Mistaken Guidance Flash! Cisco CEO John Chambers says order backlog is comfortably above $1.4 billion! Quick buy tech stocks was the impression many investors got. The Nasdaq rallied to 1367 and only four Nasdaq 100 stocks were negative for the day. BUT, and you knew there was a but, Salomon Smith Barney says that was a misrepresentation. Dow Chart - Daily Nasdaq Chart – Daily About 2:30PM SSB came out with their "where's the beef" comment and the market burned off nearly all its gains and only short covering and bargain hunting at the close kept the Dow from going negative. SSB said people were taking Chamber's comments out of context about the "improved" backlog. According to SSB the backlog number is useless as quarters are always back-end loaded and the backlog numbers were in the $2 billion range in the past. SSB said the Sept and Oct order patterns were actually below Cisco's targets. Chambers was speaking at the UBS Warburg Global Teleconference in New York and he declined any financial guidance other than to say that customers are remaining cautious. Certainly not anything was said to justify a +50 point gain in the Nasdaq intraday. Yesterday Oracle continued to say that visibility remained poor and they did not see the beginnings of a recovery until the first half of 2003. That implies a minimum gain in the first quarter. ORCL recovered what it lost yesterday on the Cisco comments today. Need proof things are not improving in consumer confidence? Charles Schwab announced today the 4Q job cuts would hit 1,900. They had previously said they would be forced to cut up to -10% of their work force if things did not improve. Phillip Morris went up in smoke today and lost nearly -$6 after saying it could no longer affirm guidance for the current quarter. This is a major hit for a Dow stock and considering only eight Dow stocks were negative, MO lost more than the other seven combined. There were so many conflicting stories in the market today it was ridiculous. Retail sales for JCP were up and WMT said it was back on track to hit same store estimates. Analysts however said it appeared to be due to a sharp burst of winter clothes buying due to a week of early winter weather. They feel this buying will fade and could have actually subtracted from the holiday sales due to limited consumer budgets. Probably the biggest boost to the market today was a flood of Fed heads out pounding the table on the economy. Reports put six of the inner circle out on the social circuit today but only four made official speeches. Ferguson spoke at two different events in Pennsylvania, Olson in Ohio, Bies in Washington and Greenspan in Mexico City. While the general made veiled comments about Brazil his speech was more of a global history lesson. The troops however were upholding the party line of a very accommodative Fed, which had injected massive amounts of stimulus into the economy, and that stimulus was working. They stressed the fact that it is growing steadily and next year the results would be seen. If you remember the past month when Fed speak was zero you can see the major shift in policy and a strong attempt to "talk up" the markets. This brings up the question again of what do they know that we don't? Why the sudden full court press when they were dormant for the prior month. Tomorrow Greenspan will get the hot seat again as he addresses the Joint Economic Committee and you can bet he will try to spin the party line in his favor. The Richmond and Kansas City Fed district both released positive reports showing slight growth in their areas. The Fed head will have his work cut out for him after the Business Roundtable Survey was released today. 60% of the top 150 CEOs surveyed expected more layoffs in 2003. Only 19% expected capital spending to increase in 2003. 65% of the CEOs expect GDP growth less than 2%. 28% expect flat to lower sales. These 150 CEOs represent a workforce of over 10 million and $3.7 trillion in revenues. These are the business men who know what is happening in the real world. Using a general average it would appear that two thirds of the CEOs were looking for a continued weakness of some sort in their business in 2003. The news that the IRAQ parliament had unanimously voted to reject the UN resolution fell on deaf ears since their vote does not count. In a dictatorship like Iraq only one vote counts and that is Saddam. A vote to accept the resolution from a parliament member would have been a vote for personal suicide. Saddam has until Friday to accept/reject the resolution and it should be a given that he will accept in an effort to buy time. IRAQ was caught trying to buy one million anti-nerve gas injections on the open market today. Since it was of a specific type of nerve gas that he is not supposed to posses it is obvious that he has it and is planning on using it or they were simply trying to scare the US into thinking they would. The biggest killer on the markets today was the release of a new Osama Bin Laden tape on Arab TV. Unfortunately the tape has been verified by multiple sources as being genuine and recent. Osama spoke about the Russian theater attack and the attack in Bali and warned the US about attacking Iraq. It called on believers to continue the war. Just like Jason of multiple horror movie fame, Osama came back from the dead and cancelled everything the US government thought about his demise. No longer is he a dead leader with a scattered and decimated gang. He is alive, well and organizing attacks. Do you think he just did not want Saddam getting all the attention? (grin) Wednesday we have an IBM analyst meeting, which could create significant market movement and the AMAT earnings after the close. Add in the Greenspan comments and Osama tape ramifications and the day could be exciting. It is going to be a tug of war between Greenspan and everybody else. We know Greenspan is going to be putting a positive spin on our economic future while the talking heads on the news channels will be cautioning against a much higher risk of terrorist strikes ahead. There is already speculation that the tape was timed to trigger sleeper cells into specific and immediate action. The Dow is poised on the top of strong support between 8200-8350 and it is going to take some specific and credible problems to break through that support. The bulls are expecting an end of year rally and Greenspan is going to try and give it to them. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** The Test By John Seckinger jseckinger@OptionInvestor.com Last week’s low in the Dow was 8498, and the YM02Z traded as high as 8496 on Tuesday before falling back under 8400. A test of bearish conviction, and the bears won. Tuesday, November 12th at 4:00 P.M. Contract Net Change High Low Volume ES02Z 882.25 +4.50 894.50 878.75 594,554 YM02Z 8400.00 +45.00 8496.00 8347.00 19,935 NQ02Z 1004.00 +23.50 1023.00 975.00 231,003 ES02Z = E-mini SP500 futures YM02Z = E-mini Dow $5 futures NQ02Z = E-mini NDX 100 futures Note: The 02Z suffix stands for 2002, December, and will change as the exchanges shift the contract month. The contract months are March, June, September, and December. The volume stats are from Q-charts. Making Headlines: Federal Reserve Vice Chairman Ferguson had upbeat comments about the economic outlook; however, Phillip Morris (MO) poured cold water on the markets after noting that it is “not is the position to confirm its previous projection of 8 to 10% growth” for next year. Other news consisted of Cisco’s CEO Chambers speaking of a rebound in order backlog, as well as positive news regarding Oracle (CFO expects rebound) and Dell (positive comments from JP Morgan). Wednesday’s Potential Catalyst(s): Earnings from Wal-Mart (WMT), as well as a potential move in the bond market. The December 30- year (ZB02Z) fell five ticks to 112’26, but far above support at 113. Resistance to the upside is at 113’29; therefore, traders should look for a significant move in this contract during trading on Wednesday (especially with economic reports on Thursday). Other catalysts include the XAU Index, which fell under its 22, 50, and 200 DMA’s on Tuesday before closing above all three at 67.61. Expect volatility in that index as well. Support is at 66, while resistance is at 68 and 69. Wednesday’s Economic and Earnings Calendar: Earnings include Wal-Mart (WMT), CPB, FD, TOO, PSS, and TIF before the open. After the close, earnings involve ANN, INTU, Kohl’s (KSS), and PKS. There are no economic reports scheduled. ================================================================= Longer Term View The intermediate objective to the downside remains at 8187 and then 8000 for the Dow, which should correlate to 8169 and just under 8000 for the YM02Z contract. Tuesday’s test of 8496 and reversal lower should give bears even more ammunition going forward. Note: Long-term sentiment readings will turn neutral if the YM02Z contract closes above the 22 Weekly Moving Average, which is currently at 8574. Chart of ES02Z, Weekly The major downward regression line should hold precedence over the most recent up trending channel. Even looking at the smaller channel alone, prices are now under the mid-point and should head towards the lower part of the channel (currently at 8280). With the 22 WMA right on the mid-point, intermediate and long-term bears are most likely placing stops above this area. With that said, a potential long-term trade would be to SHORT YM02Z near current prices and look to work with a trailing stop once the 8169 level is reached. The main objective, based on a long-term pattern of long liquidation, is right at 8000. Stops could be put at either 8500 or 8575, depending on risk tolerance. Note: Each point in $5 per contract. Turning to a daily chart of the YM02Z, 8400 seems to have been pivotal during the last few days, and should continue to be pivotal going forward. With that said, a potential trade would be to go SHORT YM02Z contract at 8335 with a target of 8280. Once hit, move trailing stop down from 8375 to 8305. If the market gaps higher, look to go SHORT YM02Z contract at 8450 with an objective of 8400. Stop at 8500 (could go to 8510 to get away from the round number). If market gaps lower, look to Go SHORT YM02Z contract at 8280 with a target of 8167. Stop at 8305. Chart of YM02Z, Daily Turning to the E-mini SP500 futures contract (ES02Z), a 120- minute chart shows prices beginning a downward trend and failing to get above Friday’s consolidation area (red lines). Least resistance is still lower, and the 38.2% retracement level at 865.67 should be an objective for intermediate traders. Note: The MACD ‘looks’ like it might want to cross higher and get back above zero. Since it didn’t happen yet, why change bearish sentiment. Bears confirmed their strength today, and that has to take precedent. For those of you who acted on Monday night’s potential trade (SELL ES02Z at 890 with target of 881 and stop of 895), nice job. Chart of ES02Z, 120-minute Looking at a 5-minute chart of the ES02Z contract, there are a number of trend lines that could possibly stall bearish sentiment during trading on Wednesday. Nevertheless, using the 875.75 support area (found on 30-minute chart) should be a solid barometer going forward. If this level fails to hold, expect a move to 865.67. On the other hand, a move above 887 could spark a short-term rally back to 895 and test the strength of bearish traders once more. Note: There is possible support at the descending blue trend line, currently at 870. Chart of ES02Z, 5-minute Turning to the Nasdaq-100 futures, a 60-minute chart shows prices outperforming most other indices and coming back into the regression channel. However, resistance was seen at 1000, 1007, and most importantly 1020. Nevertheless, going forward, prices will have to fall back outside this regression channel before shorts will most likely take on new positions. With that said, look to Go SHORT the NQ02Z contract at 997.50 with a target of 985. Stop at 1010. If 985 is hit, move trailing stop down to 997.50 and re-evaluate market conditions. Chart of NQ02Z, 60-minute A 5-minute chart of the NQ02Z contract shows how regression channels can be valuable in the future, even if prices have long exited the particular channel. If Tuesday’s high correlates with the regression channel from Friday, then Monday’s regression might foreshadow an area where shorts will cover if prices do in fact weaken. The 985 target is conservative and safe, as this level has proven psychologically important during the last few days. The intermediate target is for a test of the 38.2% retracement level. It seems like there may be a trade from 1010 to 1020, but there is currently a little too much risk. If the market does find strength, this might be a possible intra-day scenario (read: depends on market internals, since trade would go against sentiment). Chart of NQ02Z, 5-minute Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Tech holds gains despite late fade by Dow Technology stocks were bolstered by comments out of networking giant Cisco System's (NASDAQ:CSCO) $12.87 +5.83% CEO John Chambers that the company's backlog remained above September's $1.4 billion level. Cisco edged off its session high of $13.24 when Salomon Smith Barney said that investors were misinterpreting Chamber's comments about the improved outlook for CSCO's backlog. The firm said the backlog number was useless as orders are always back-end loaded, and during the quarter the September-October order patterns were actually below target. However, the Networking Index (NWX.X) 122 +4.68%, Wireless Telecom (YLS.X) 49.63% and Fiber Optic (FOP.X) 39.69 +8.5% held the bulk of their session gains. Misinterpreted or not, the broader NASDAQ Composite (COMPX) 1,349 +2.3%, which traded above yesterday's highs at one point during the session at 1,367 held a close above its rising 21-day SMA of 1,327 after closing right on this shorter-term moving average. Tech gains were also bolstered with reassuring comments from the likes of Oracle (NASDAQ:ORCL) $9.50 +4.97% and Motorola (NYSE:MOT) $8.75 +4.41% providing fodder to technology bulls along with remarks from a handful of Fed officials expressing optimism on the economy's prospects. Fed Chief Alan Greenspan will speak on the U.S. economy before the Joint Economic Committee on tomorrow. Not holding the bulk of today's gains was the Dow Industrials (INDU) 8,386 +0.32%, which managed to finish with a 26 point gain after an earlier session rise of 145 points with a move above the 8,500 level at 8,504. While the Dow was pulled lower into the close with weakness in tobacco products maker Philip Morris (NYSE:MO) $37.03 -13.84%, telecom services provider SBC Communications (NYSE:SBC) $25.01 -4.5% and conglomerate General Electric (NYSE:GE) $23.85 -1.48%, the broader S&P 500 (SPX.X) 882.95 +0.77%, which finished up 6.7 points, traded back into the close from its session highs of 894 on word that new tapes proving Osama Bin Laden had surfaced. If all the above wasn't enough to have a "market sentiment" investor feeling his oats, then worries about a potential war with Iraq will remain at the fore as the Iraq's parliament unanimously recommended rejection of a U.N. resolution on weapons inspections Tuesday. Iraqi President Saddam Hussein will have the final say, with Friday set as the deadline to respond to the resolution. Dow Industrials Chart - Daily Interval Hewlett Packard (HPQ), which was pummeled -10.9% lower yesterday was today's Dow strength, while it was Philip Morris' (MO) turn to get whacked lower on cautious earnings guidance. Today's second consecutive close below the Dow's 21-day SMA and MACD crossover below Signal is defensive and begin to look similar to late August when the Dow was trading near 8,717 and closed below its 21-day SMA for two consecutive sessions when MACD crossed below signal as Stochastics turned "oversold." Bears may well be looking short the Dow and attempting to leverage off 8,550, however, I think the Dow finds near-term support and gets a bounce back near 8,550 on a test of 8,170. General Electric (NYSE:GE) $23.85 -1.48% continues to trade heavy and now suffers a four-session decline from $26.60 ahead of its November 21st meeting with analysts. A meeting in which Lehman Brothers believes may signal a transition where GE will announce it is selling off parts of its businesses, with the emergence of a new GE circa 2004. Stocks I've classified as "leaders" in the Dow have MMM and JNJ holding up well, but unable to break to new relative highs and hints to me that bulls lack confidence to push stocks that have treated them right over the past 4 months much higher. S&P 500 Index Chart - Daily Interval I would have thought the SPX would have gotten more of an intra- day bounce with technology stocks getting a pop out of Cisco's backlog comments, but the SPX wasn't able to muster a move back above 900. With MACD crossing below signal and staying their today, a bears looks to play downward trend and leverage off resistance from 914-925 in a 1/2 position (if bullish % turns lower 3-boxes, then look full). Remember, Thursday is option expiration and 900 could be a "peg level" into Thursday's close. November heavy open interest is Nov. 700 puts (not even close) Nov. 900 calls and Nov. 800 puts. Little info here other than the 900 calls being a peg level. December interest is 900 and 875 on both the call and put side. Today's action saw a slight net decline in the S&P 500 Bullish % ($BPSPX), with a net of 3 stocks generating point and figure sell signals. SPX is still "bull confirmed" at 53.80% and would take a reading of 50% to reversed back lower to "bear confirmed" status. A reading of 60% would have the SPX bullish % reaching "bull confirmed" and most likely would tie in with a trade above 925. S&P 100 Index Chart - Daily Interval There are fewer NASDAQ listed stocks in both the SPX and OEX and this may explain partially why both the SPX and OEX and even the Dow Industrials were not able to trade above yesterday's highs. Market makers are a tricky bunch and stocks tend to whip around a little more with market maker influence. Listed stocks on the NYSE have buyers and sellers coming together through a specialist where supply/demand better monitored and makes for a smoother tape. While NYSE volume picked up by sessions end to 1.3 billion shares (we were below 1 billion at 01:00) the volume came on the downside. This hints ever so slightly that institutions were sitting on their hands for the bulk of the session, but may have been squaring things up a bit ahead of Mr. Greenspan's speech tomorrow. Note: I don't think institutions really care if Osama Bin Laden is dead or alive. I do think they care if we go to war with Iraq as that might impact mutual fund outflows and they care about Mr. Greenspan's views on the economy and reasoning for Fed policy. According to www.stockcharts.com, the S&P 100 Bullish % ($BPOEX) saw a net loss of 1 stock to a point and figure sell signal today, which had the bullish % slipping to 61%. This is just 2% off last week's higher reading of 62%. NASDAQ-100 Index Chart - Daily Interval The NASDAQ-100 (NDX.X) settled out on our 80.9% retracement level. This would be a level where I would think market makers would begin trying to get their inventories more "neutral" to "bearish" based on cash that has been rotating to Treasuries in recent weeks. If you've traded the NDX and QQQ long enough, you know its an index that thrives on momentum (up and down). With the NASDAQ-100 Bullish % ($BPNDX) so near the more "overbought" 70% level, subscribers that have been with us since early October have seen the NDX run from base retracement to current top and same goes for the bullish % from 14% to 69%. Today's action saw a net loss of 1 stock to a point and figure sell signal as the bullish % slipped to 66%, but still reads, "bull confirmed." It would take a reading of 62% bullish to have the bullish % reversing back lower. We can see some of momentum off the bottom starting to wane a bit, while the internals remain rather strong, but stall a bit as the weaker and most likely stocks under $5 just haven't been able to make a meaningful enough move to make a big difference. Don't get me wrong... that 97% gain in Ciena (NASDAQ:CIEN) $3.70 +5.7% from $2.41 to $4.75 was a nice little move, but not nice enough at this point to get the stock's chart back on a point and figure buy signal and negate the bearish vertical count of $0.50 that was generated back in January at $13.50. 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 **************** Out of Breath By Steven Price The bulls tried their best to support a rising Dow, but in the end it was just too heavy. The Dow has shown extreme volatility in the current range. The last time we were between 8200 and 8550, we tested the bounds of the range almost daily and today was no different. A slow growing rally lifted the blue chips throughout most of the day, however 8500 proved too tough and each time the average crossed that mark, the bears came out to play. The Dow eventually finished the day up 27.05, to close at 8386.00, however, it felt more like a down day after giving up 118 points from its high of the day. Philip Morris' (MO) comments that it could not confirm its previous 2003 growth target of 8-10% got the ball rolling downhill in the Dow and the rest of the group quickly followed. The company cited soft tobacco industry volume, blaming counterfeit and lower priced imported brands. MO finished the day down $5.95, and was joined by RJ Reynolds (RJR), which gave up $4.87 and U.S. Tobacco (UST), which lost $2.43. The retail sector started the day on a high note, after J.C. Penney (JCP) beat estimates and raised guidance. However, as the day wore on, so did the euphoria, and the rally in the sector faded by the close. Those investors who dumped the stocks got out ahead of an after the bell warning from Nordstrom (JWN), which lowered its third quarter guidance, blaming record-keeping changes associated with the company's transition to a new inventory management system and increased selling and distribution center expenses. Regardless of the spin, a warning from a major retailer heading into the holiday shopping season is certainly not good news. We will get earnings from Wal-Mart and Federated in the morning, and the sector should live or die, at least for the day, based on those numbers and the accompanying statements. Wal-Mart has already dialed down its monthly sales expectations, so it will be interesting to watch whether we get a rally if they manage to still match estimates. My guess is that they will match, but caution that consumer spending trends may dampen the holiday season. The chip stocks managed a healthy bounce today, ahead of Applied Material's (AMAT) earnings on Wednesday. The sector has sold off after its dramatic October run, and today's bounce still found resistance around 300, trading to a high of 302, before falling back to close at 294.43. It is hard to imagine AMAT saying anything positive, after announcing last week that it would lay off 11% of its workforce. Speaking of layoffs, Eastman Kodak said it would stop making disposable cameras in the U.S., and transfer some of its operations in New York and Mexico, as part of its plan to cut 1,700 jobs. The moves will help the company's cost cutting efforts, which also involve transferring some production of professional film to Europe. In spite of the failed rally in the Dow, the Nasdaq held onto a 30.37-point gain, after trading up over 48 points intraday. Part of the sell-off was due to Salomon Smith Barney's statements late in the day that investors may be misinterpreting Cisco CEO John Chambers' comments about the improved outlook for the company's backlog. SSB said that the backlog number is useless and that September and October order patterns were actually below target. The end of day sell-off would indicate a negative opening tomorrow. However, if Wal-Mart pulls an earnings surprise and indicates consumer spending patterns are improving, then all bets are off. It seems unlikely, but with a Dow that hasn't moved less than 100 points intraday since September 20, no support/resistance levels seem safe. Right now we are back in range between 8200 and 8550, so look for a break across those lines as an indication of directional change. Support above 1360 in the COMP would certainly look bullish as well, with a drop under 1300 an indication that we are looking at the 50-dma of 1266 next. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7286 Current : 8386 Moving Averages: (Simple) 10-dma: 8523 50-dma: 8168 200-dma: 9251 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 775 Current : 882 Moving Averages: (Simple) 10-dma: 898 50-dma: 866 200-dma: 994 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1001 Moving Averages: (Simple) 10-dma: 1016 50-dma: 923 200-dma: 1145 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The chip stocks got a bounce today, after the recent sell-off. However, the rally ended at 302 and fell back to close at 294, indicating we may once again be seeing resistance at the 300 level. Those bears looking to short need to be aware of the AMAT earnings release after the bell on Wednesday. After the company announced layoffs last week, it is unlikely we will get good news, but anything better than expected may give the sector another boost. The point and figure shows a three box reversal up on the latest rebound, and even though 300 appears as a failure on the daily chart, it registered another "X" in the column today. We won't see another buy signal until 332, but anything over the breakdown level of 308 should throw up a red flag for shorts. 52-week High: 657 52-week Low : 214 Current : 294 Moving Averages: (Simple) 10-dma: 306 50-dma: 269 200-dma: 420 Market Volatility The VIX has made its way back over 35 and is holding there for the time being. While the reading is toward the bottom of the recent range, it is on the high end, historically speaking, and will most likely remain high until we begin to see a less schizophrenic market, or consistently improving internals. An OEX put/call ratio over 1.00, which is currently 1.20, virtually guarantees a VIX in at least the mid-30s. CBOE Market Volatility Index (VIX) = 35.17 –0.94 Nasdaq-100 Volatility Index (VXN) = 55.25 –0.46 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.85 544,184 464,772 Equity Only 0.72 395,693 284,899 OEX 1.20 33,903 40,989 QQQ 0.43 51,320 22,282 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 40 - 1 Bull Confirmed NASDAQ-100 66 - 1 Bull Confirmed Dow Indust. 63 + 0 Bull Confirmed S&P 500 53 - 2 Bull Alert S&P 100 61 - 1 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 1.68 10-Day Arms Index 1.32 21-Day Arms Index 1.15 55-Day Arms Index 1.30 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals Advancers Decliners NYSE 1710 1021 NASDAQ 2037 1167 New Highs New Lows NYSE 18 60 NASDAQ 39 58 Volume (in millions) NYSE 1,620 NASDAQ 1,546 ----------------------------------------------------------------- Commitments Of Traders Report: 11/05/02 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 added 4,000 contracts to the short side, while increasing longs by 1,000. Small trader added 1,000 to the long side, while increasing short positions by only 500 contracts. Commercials Long Short Net % Of OI 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%) 11/05/02 438,546 472,384 (33,838) (3.7%) 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 10/15/02 134,507 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% 11/05/02 138,604 76,032 65,572 30.5% 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 added 2,000 long contracts while adding 1,000 to the short side. Small traders added 30%, or 3,000 contracts to the long side, while increasing shorts by a similar amount. Commercials Long Short Net % of OI 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%) 11/05/02 49,128 56,121 (6,993) ( 6.6%) 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 10/15/02 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% 11/05/02 13,355 12,903 452 1.7% 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 added to both sides, increasing longs by 700 and shorts by 2,300. Small traders reduced long positions slightly, but dropped 2,300 from their short side, for a significant reduction in the overall short position. Commercials Long Short Net % of OI 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% 11/05/02 22,533 15,687 6,846 17.9% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 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%) 11/05/02 5,089 8,735 (3,646) (26.4%) 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 ****************** Large Multinational Funds This week, we want to show you a couple of equity funds investing primarily in large multinationals and, accordingly, offering fund shareholders exposure to the international savvy of multinational company management. One reason to consider such a strategy today is the concept that typically in a weak economy and market, it is the strongest players that have the resources to weather the down times, gain market share, and position themselves for the upturn. Further, many large multinational companies with long histories are led by seasoned management teams that have experience in all types of markets and use that vast knowledge to quickly adapt to changing conditions, faster than the competition at least. Because many large multinationals derive a significant portion of their revenue from international operations, funds that emphasize them provide some international exposure. If you invest in these funds, you don't need to invest separately in a foreign or global stock fund to achieve international exposure. The multinational company funds we are looking for only invest in companies that are undervalued or trade at reasonable valuations. With their global exposure and valuation discipline, these equity funds can serve a "core" role in one's long-term financial plan. Search Process The way I got to these two funds didn't involve much screening at all. I used Morningstar's Fund Selector tool available online to narrow the field of large-cap value funds based upon our specific criterion. Our initial screen went like this: Morningstar Category = Large Value Manager Tenure > or = 5 Years Minimum Initial Purchase < or = $3,000 Expense Ratio < or = 2.00% Star Rating > or = 4 Stars (5-Highest) Average Market Cap > or = $10 Billion That simple screen yielded 51 results. I next scored the results using Morningstar's Fund Score tool, giving low weight to average P/E and high weight to average earnings growth rate, to highlight those with "aggressive value" characteristics. Low expense ratio was also given high weight. The highest scoring funds were Parnassus Equity Income (PRBLX) and American Funds: Investment Company of America (AIVSX). It was the second fund that got me thinking about multinationals, since Morningstar's report stated the $51 billion large-value fund bellwether invests in "sprawling" portfolio of about 200 multinationals. It sets the standard by which other funds of this style/strategy are measured. After reviewing Morningstar's report on Investment Company of America, I looked up Papp America-Abroad Fund (PAAFX), another fund investing in large, established multinationals. The fund has a "fewer, bigger, stronger" mentality that has resulted in its recent classification as a large cap growth fund (truly, a mega-cap growth fund) so Papp America-Abroad may be too pricey and mega-cap concentrated for our taste this week. I next searched the Web for "funds investing in multinationals" and came across a couple Business Week articles on the subject, as well as one USNews.com article that talked about U.S. Global Leaders Growth Fund (USGLX) and Fidelity Export & Multinational Fund (FEXPX). The former fund was acquired by the John Hancock Funds in May 2002, and is now known as John Hancock U.S. Global Leaders Growth Fund. Fund subadviser, Yeager, Wood & Marshall, manages the portfolio using a GARP (growth at reasonable prices) approach. While it's a little pricey, it still fits within the desired style/strategy. Fidelity Export & Multinational Fund (FEXPX) is classified as a large-cap blend fund by Morningstar and fits the type of fund we are looking for. However, the fund recently underwent a manager change in February 2002, so you may want to give the new manager Timothy Cohen some time before investing there. Fidelity does a great job of bringing people up the ranks, so I wouldn't bail on this fund if you are an existing shareholder. In the next couple sections, we talk a little bit more about the American Funds: Investment Company of America and John Hancock's U.S. Global Investors Fund. American Funds: Investment Company of America (AIVSX) This Lipper Leader for Total Return, Preservation and Expense is the nation's biggest large-cap value fund, with over $51 billion in total assets today. Morningstar calls it the "quintessential core" holding, and for good reason. The fund divides its assets among 10 managers who favor established companies that provide a steady stream of cash through dividends. Indeed the fund's 2.2% yield is substantially higher than similar equity fund products. The American Funds multiple-manager approach permits each member of the portfolio management team to have a conviction in his/her own picks, while the portfolio overall stays broadly diversified across sectors and individual securities. At September 30, 2002, the fund's two largest holdings were Philip Morris and Eli Lilly at just 3.6% and 2.2%, respectively, of net assets. This almost hybrid fund had just 72.2% of assets invested in stocks, per the latest Morningstar report, with 11.1% in cash and 15.8% in bonds. That more conservative mix has helped the fund weather the storm better than the market as a whole. Since December 31, Investment Company of America has decreased in value by 16.2%, shaving 6.5% off the loss produced by the S&P 500 index and strong enough on a relative basis to rank in the top 12 percent of the large-cap value category using Morningstar's data. The fund has a fine long-term performance record. For the 5-year period ended November 11, 2002, the fund's Class A shares (AIVSX) produced an average annual return of 4.4%, beating the S&P 500 by an average of 4.1% a year and ranking in the top 6% of the large- value category per Morningstar. The fund's 10-year average total return of 10.9% through October 31, 2002 was 1.0% better than the S&P 500 large-cap index and strong enough to land the fund in the category's 15th percentile. While Lipper awards Investment Company of America its highest "1" rating for Preservation, Morningstar rates the fund risk level as below average relative to its large-cap value peers, giving it an overall star rating of 4 stars. Funds with 4-stars have produced above-average returns relative to their category peers on a risk- adjusted basis. With an average P/E of 25.4 (same as S&P 500) and average 3-year earnings growth rate of 10.3 (higher than S&P 500), this product has just enough kick to continue producing top-notch results for investors over time. For more information or a fund prospectus, go to the American Funds website at www.americanfunds.com. John Hancock U.S. Global Leaders Growth Fund (USGLX) The John Hancock U.S. Global Leaders Growth Fund, with more than $286 million in net assets, is a non-diversified fund that seeks long-term capital growth by investing in stocks of "sustainable growth" companies that have a global reach. This multinational company product calls itself "The Nest Egg Fund" to signify its role as a sound "core" investment in a long-term financial plan. George Yeager of Yeager, Wood & Marshall has managed the Global Leaders Growth Fund since its 1995 inception. George Fraise, a portfolio manager with the firm, has served as co-manager since April 2000. These two aren't afraid to concentrate assets in a limited number of holdings. According to Morningstar, the fund had just 21 holdings as of September 30. Nine stocks represent more than 5% of assets, including such names as Wal-Mart Stores, Johnson & Johnson, Home Depot, American Insurance Group ("AIG"), and State Street, to name a few. The fund's average P/E of 27.1 and average earnings growth rate of 9.7% are slightly above that of the S&P 500 index, according to Morningstar, giving it a GARP style tilt. If the Investment Company of America is an aggressive value fund, then the Global Leaders Growth Fund is a conservative growth fund, pricier than the average large-cap blend fund but only slightly. The result is one of the lower risk profiles in the large-growth category. Class A shares (USGLX) of the fund sport Morningstar's highest overall rating of 5 stars. The fund hasn't been around for as long as Investment Company of America has, but in its 5+ years, U.S. Global Leaders Growth Fund has produced high total returns for shareholders with low risk relative to its large-cap growth peers. Standard deviation, a measure of return volatility, was low (15.1%) over the last three years, per Morningstar, in line with more conservative funds, such as the Investment Company of America (13.8%). U.S. Global Leaders Growth Fund lagged in 1999, but since 2000, the fund has generated results ranking in the category's top 3%. For the 5-year period through November 11, 2002, the fund earned an average annual total return of 5.3%, 5.0% better than the S&P 500 index, 8.1% above the Russell 1000 Growth index, and ranking in the top 4% of the large-cap growth category, per Morningstar. Lipper assigns this fund its highest rating in three categories: Total Return, Preservation and Tax-Efficiency. The fund's total returns may not be as consistent as Investment Company of America has been, nor are its expenses as low, but it still makes a solid case for a "core" equity investment. For complete information or prospectus, logon to the John Hancock website at www.jhfunds.com. Conclusion Our search process this week revealed two funds that invest in large, multinational companies and are suitable for the "core" portion of a long-term equity portfolio. One fund, Investment Company of America (AIVSX), has an "aggressive value" style of management and is broadly diversified among sectors and issues. The other fund, John Hancock U.S. Global Leaders Fund (USGLX), has a "conservative growth" style and invests in fewer, bigger and stronger growth companies. Both funds have produced solid risk-adjusted returns for investors over time compared with the S&P 500 index benchmark and their respective category peers. 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 *********************** Back From The Dead It appears that Osama and the Fed have both reappeared from obscurity and are likely to impact our markets on Wednesday. Greenspan will appear before the Joint Economic Committee to discuss our economic futures. 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The Option Investor Newsletter Tuesday 11-12-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: SYK Dropped Puts: OHP, PHM Daily Results Call Play Updates: FRX New Calls Plays: CEPH Put Play Updates ABK, IBM, LEH, RTH, LOW New Put Plays: GE, PG, MBI **************** 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 ^^^^^ SYK $64.58 -0.12 (-1.16 for the week) Stryker reached all time highs on November 7, and we added the play at that time. The company's future growth projections and business model appears solid and we liked the breakout to a new high. At the time we wrote the play we recommended waiting for a pullback to $65 support for long entry, with conservative traders waiting for support over $64, which would be a PnF three box reversal into a column of "O". We never got the support over $65 that we were looking for and the stock reversed into that column of "O" this morning with a trade of $64.00. While it recovered to close at $64.58 by the end of the day, we simply haven't gotten the action we've been looking for and we will close the play, rather than wait any longer. The stock has not yet broken its ascending trend of higher lows, so we will keep in on our radar for a possible future long play. puts ^^^^ OHP $34.00 +1.14 (+1.00) As though we had scripted it, OHP broke down below the $35 level late last week and everything was looking good as selling pressure dominated the Health Care sector. Then, even with the broad market off sharply on Monday, OHP held its ground and proceeded to trade up throughout the day on Tuesday. While this could just be consolidation before the next leg lower, it has the feel of a recovery in process. Rather than risk our small gains, we're going to drop the play tonight to make room for more promising plays. PHM $43.33 -0.18 (-0.18 for the week) Pulte appeared on the verge of a breakdown, along with the rest of the homebuilders several days ago, when it broke down below its 50-dma of $44.66. Since then it has simply gone sideways, as the sell-off in the sector appears exhausted for the moment. This mornings earnings report from fellow builder D.R. Horton (DHI) was impressive, but what made us re-consider the play was DHI's record backlog of $2.8 billion (12,697 homes) waiting to be built in 2003. We are not going to fight that tide without a further drop in mortgage applications, which bounced slightly in the last report. We will close the play and wait for further evidence of weakness, rather than hold puts in a sideways moving stock, with evidence of decent business prospects for the sector into next year. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week FRX 101.12 +0.05 +0.92 Holding over $100 SYK 64.58 -1.04 -0.12 Drop, PnF reversal down CEPH 55.50 +1.65 -0.70 New, Business growing PUTS ABK 57.51 +0.09 -0.11 Under 50-dma IBM 79.15 -0.28 +1.86 Entry point under $80 LEH 54.46 -0.20 +0.16 Failed rally LOW 39.55 -0.75 +0.83 Failed $40 OHP 34.00 -0.14 +1.14 Drop, sector bounce PHM 43.33 -0.00 -0.18 Drop, no breakdown RTH 72.00 -1.35 +0.85 Sector weakness MBI 41.49 -0.33 -0.88 New, breaking down ************************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 ******************** FRX $101.12 +0.92 (+0.97) Stretching its string of consolidation days to 7, FRX held firm again on Tuesday, refusing to fall out of bed with the rest of the broad market this afternoon. While the bulls couldn't push the stock above resistance, they certainly weren't willing to give up any ground either, and that is a sign of relative strength. Over the past week, the daily Stochastics have drifted down to just above oversold territory, while price has remained firm above the $100 level. Taken together, the technicals on FRX look like a stock that is gathering its strength for the next push up the chart. Except for a couple of brief intraday forays, FRX hasn't been below $100 since the 1st of November, so intraday dips to this level are providing solid entries into the play. Traders that want to see a bit of conviction before playing will want to wait for the stock to rally back above the $102 level, (intraday resistance over the past 3 days) before taking a position. We need a breakout over $103.50 before FRX will be in new high territory again, allowing for momentum-based entries. Until we get the next breakout, keep stops set at $97.50. ************** NEW CALL PLAYS ************** CEPH - Cephalon - $55.50 -0.70 (+0.95 for the week) Company Summary: Founded in 1987, Cephalon, Inc. is an international biopharmaceutical company dedicated to the discovery, development and marketing of innovative products to treat sleep and neurological disorders, cancer and pain. Cephalon currently employs approximately 1,200 people in the United States and Europe. U.S. sites include the company's headquarters in West Chester, Pennsylvania, and offices and manufacturing facilities in Salt Lake City, Utah. Cephalon's major European offices are located in Guildford, England, and at Laboratoire L. Lafon in Maisons-Alfort, France. The company currently markets three proprietary products in the United States: PROVIGIL® (modafinil) Tablets [C-IV], GABITRIL® (tiagabine hydrochloride) and ACTIQ® (oral transmucosal fentanyl citrate) [C-II] and more than 20 products internationally. Why We Like It: CEPH has been one of the big biotech winners lately, in spite of the sector index moving mostly sideways and the Dow and Nasdaq pulling back. The company released earnings on November 6, which showed a drop in profits, due to increased costs and flat sales of Privigil, its medication used to fight sleepiness. However, the company raised its forecasts, based on an increase in overall product sales from $74 million in the year ago period, to $122.4 million this year - a stunning 65% revenue increase for the quarter. CEPH raised guidance for the full year, from the previous forecast of $1.08-$1.10 per share, to about $1.20 per share. It also raised sales guidance by about $30 million. CEO Frank Baldino said, "The results and the strong underlying demand we are experiencing for all of our products have allowed us to increase guidance for 2002." The results were followed by an upgrade from Adams Harkness, which raised its rating from "Buy" to "Strong Buy." The stock soared following the earnings news and has put on about 10% in the last week. It blew through its 200-dma of $51.98 on November 7 and has climbed steadily since. CEPH broke through its bearish resistance line back at $43 on the point and figure chart and the bullish vertical count is now an astonishing $106. The breakout came on a triple top breakout, another bullish indication. While we certainly don't expect a run to $100 on the current move, it does underscore our bullishness in the stock. After the recent gains, we would look for an ideal entry on a pullback above the 200-dma, around $52. However, given the recent series of higher highs and higher lows, we may not get a pullback to that extent. More likely is a pullback to recent support of $53.50 after the big gain on Nov. 7. Momentum traders can look for a break above $56, which would take out resistance from the last two days. Expect resistance on the play around $60 and then again at $65. Set stops at $51, below the 200-dma, as a break below that level would indicate an overabundance of sellers taking advantage of the recent run. BUY CALL DEC-50 CQE-LJ OI= 213 at $7.40 SL=3.70 BUY CALL DEC-55*CQE-LK OI= 1894 at $3.80 SL=1.90 BUY CALL JAN-50 CQE-AJ OI= 2002 at $8.60 SL=4.30 BUY CALL JAN-55*CQE-AK OI= 3763 at $3.80 SL=1.90 Average Daily Volume = 2.11 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 ******************* ABK $57.51 -0.11 (-0.02) Following the big slide of the past 2 weeks, we were expecting a bit of an oversold bounce from ABK this week, but if that's all the bulls can muster, than the outlook is not good. The Financial stocks managed a decent rebound on Tuesday, with the Banking index (BKX.X) gaining 1.5% and the Insurance index (IUX.X) rising by a more sedate 0.5%. Poor ABK couldn't find any appreciable buying interest and after a slight lift early in the day, fell back to close fractionally in the red. That is just what we want to see, as the stock demonstrates its weakness relative to its peers. The consolidation of the past 2 days is likely due to the support being provided by the 50-dma ($57.50), but it is worth noting that the stock slid below that level at the close on Tuesday. While intraday resistance came into play today just above the $58 level, we'd really like to see a failed rally up near $59 ($60 would be even better) to give us a better entry. If ABK just breaks down from here, look to enter the play on a drop below $57, just below its most recent intraday support. Keep stops set at $61 for now. IBM $79.15 +1.86 (+1.56) After a slow slide down the charts for the past week, shares of IBM found new life on Tuesday. Charging higher right from the open, the stock gave us the textbook entry we were looking for in the late afternoon, as price reversed from just below the $80 resistance level. Broad market pressure was a big cause for the late afternoon selloff, but the stock's reversal right at major resistance was just what we wanted to see. Certainly, it would have been preferable to see the reversal come with enough selling pressure to close the stock in the red, but we'll take what we can get. Additional failed rallies below $80 still look good for new entries, but what we really want to see now is a breakdown below the 20-dma ($76.63), which provided support for today's bounce. Momentum traders will need to see IBM fall under the $75.50 level before initiating new positions. While we like the action in IBM, we're keeping the play on a short leash with our stop set at $80, just in case the market tells us we're wrong. LEH $54.46 +0.16 (-0.04) It has been a long time coming, but LEH is finally starting to show the weakness we were expecting. After a convincing test of the $58 resistance level last week, the stock promptly fell back to the $54 support level and then put in a mild rebound on Monday. With the broad market in a positive mood this morning, the Brokerage sector (XBD.X) went along for the ride, dragging LEH as high as its 20-dma ($55.48) before the afternoon selloff commenced. LEH sold off much harder than the XBD index, so by the end of the day, the XBD was up 2.3%, while LEH barely managed to stay in the green with a 16 cent gain. The $56 level is shaping up as solid intraday resistance, with even stronger resistance up at $57. Another failed rally in the $56-57 area is likely the best we can hope for in the way of new entries. Traders looking to enter on weakness will really need to see the $52 level give way. That level provided support in mid-October, as well as the first of November. Until the bears achieve a breakdown under this level, the best entries will come from fading the failed rallies. Keep stops set at $58. RTH $72.00 +0.85 (-0.50 for the week) The retailers got a boost this morning after J.C. Penney raised its outlook. However, after the RTH reached a high of $73.40, it fell all the way back to $72.00 by the close. Even its high of the day failed at the recent descending trend line of the last few days. The stock has previously found support at $73, but the failure on the bounce above that level showed a lack of conviction on the part of buyers. The sell off into the close may have been concern over upcoming earnings announcements from Wal-Mart (WMT) and Federated (FD) on Wednesday. The bounce, after RTH's recent drop, fell short of a point and figure reversal, and the stock remains in a column of "O" with bullish support down below at $66. Tomorrow's earnings releases will compete for screen time with this evening's warning from upscale retailer Nordstrom (JWN). The company reduced its third quarter estimates from 0.16-0.20, to 0.13-0.14. The stock was trading down $3.50 after hours. Abercrombie & Fitch also released earnings after hours. The company beat estimates by 0.02, but made cautious statements about the uncertain outlook for consumer spending and the stock fell slightly following the announcement. While conservative traders may want to wait until after this week's retail earnings releases to get in on this play, we like today's failed rally for entry, given the weak bounce on good news from JCP. The news still seems cautious for the group and with 6 fewer official holiday shopping days, due to a later Thanksgiving, and a weak economy, this year's sales totals should continue to disappoint. LOW $39.55 +0.83(+0.08 for the week) Lowe's has been in a convincing downtrend since failing at $45 near the end of October. News from the retailers continues to be mixed, with J.C. Penney beating earnings this morning, while Nordstrom warned after the close that it would miss estimates. Even the companies that have posted decent numbers have expressed concern over the consumer spending environment and the shortened holiday shopping season this year. Goldman Sachs recently downgraded the hard line retailers, such as LOW and Home Depot, due to limited opportunities for organic growth. Lowe's may also suffer from a shift to gift spending as we head into December, and although it certainly offers some gift-type items, the majority of its business relies on home improvement, which is likely be completed by the holidays for those still spending in the area. The stock attempted a bounce with the rest of the retailers early today, following JCP's earnings announcement. However, the rally was short lived and LOW managed a bounce of only 0.83 by the end of the day, after losing almost $6 in the last couple of weeks. The stock traded as high as $40.50 intraday, but was unable to hold over $40, finishing at $39.55. We like the short position and would expect some bounce after dropping 3 straight days and 7 out of the last 10. New entries may want to sit this one out, as the company releases earnings on November 18 and we will close the play ahead of that date. ************* NEW PUT PLAYS ************* GE - General Electric $23.85 -0.36 (-1.25 this week) Company Summary: As one of the largest and most diversified industrial companies in the world, GE's products include major appliances, lighting products, industrial automation equipment, medical diagnostic equipment, electrical distribution and control equipment and power generation and delivery products. Additionally, GE provides commercial and military aircraft jet engines, locomotives and nuclear power support services. Through the National Broadcasting Company (NBC), GE delivers network television services, operates television stations and provides cable, Internet and multimedia programming and distribution services. Why We Like It: Tuesday was starting to look like a solid victory for the bulls, until the final hour selloff that brought everything back near the flatline by the closing bell. While there were some solid gainers in the DOW, there were a couple of notable laggards, that never really found their sea legs. With its hand in virtually every area of the 'economic pie', GE is a great proxy for the health of the economy, and that makes the stock's recent weakness rather disturbing. Management changes have not been well-received by the market of late, and today's announcement of 3 new officers at GE seemed to be the catalyst for more selling in the beleaguered stock. These management changes are part of the company's recently-announced reorganization of its financial services arm, and hint that there may be further changes in store. Back in August, the stock caught our attention when it was unable to scale the $33 resistance level. That failure at resistance eventually led to a breakdown to new 52-week lows last month. We're seeing a similar pattern unfold in the stock right now, albeit at a lower level. GE rose to the $27 level rather quickly following the initial spurt off its early October lows. But we've now seen the stock fail on several occasions to hold that level (much less advance above it), and this week it broke below $25, which had been providing support over the past few weeks. With the breakdown under $25, GE is now sitting right at the top of the gap left behind on October 11th. A breakdown into that gap will bring the October lows into play and that breakdown (below today's low of $23.75) can be used for initiating new momentum entries. Should the top of that gap provide a short-term bounce, we can use the eventual failure of that bounce (ideally at $25, but possibly as high as $26) to enter the play. Initial stops are set at $27, which has proven to be formidable resistance. BUY PUT DEC-25 GE-XE OI=21216 at $2.15 SL=1.00 BUY PUT DEC-22*GE-XX OI=18451 at $1.05 SL=0.50 Average Daily Volume = 28.5 mln PG – Procter & Gamble $85.41 –0.84 (-2.28 this week) Company Summary: Providing a broad range of consumable products, PG manufactures cleaning, paper goods, beauty care, food and health care items that we have likely all been using our entire lives. From toothpaste to facial tissue, laundry detergent to water filters, and cosmetics to coffee, it is difficult to make a trip to the grocery store without buying a handful of PG products. The company has been reorganized around global business units rather than geographic regions and about half of sales come from outside the US. Why We Like It: Consumer staple stocks have been notably absent from the leader board on the rally off the October lows, which many have viewed as a sign that economic growth is likely to be spotty at best. The group was already trading poorly on Tuesday before the negative comments made by Philip Morris, which tanked the Tobacco group right into the closing bell. KO has been consistently heading lower for the past 3 weeks, adding to the negative sentiment for Consumer stocks. The picture is perhaps most clear in the daily chart of our new put play, PG. Since bottoming near $74 in late July, the stock topped out twice at $93 and then posted a lower high at $92.50 in mid-October. That latest peak seems to have really brought out the bears, as PG fell to $85, rebounded to the $89 level and then rolled over after finding firm resistance at the 20-dma (currently $88.71). So far this week, we've seen the stock give up significant ground, with Tuesday's session leaving price just above $85 and at its lowest closing level since late July. There's no hope for the bulls on the PnF chart either, as its late-October breakdown generated a Sell signal that is still in effect. The vertical count is currently projecting a bearish price target of $77. A failed rally in the $86.50-87.00 can be used for new entries, and a pop to $88 would make that entry even better. Should the stock continue its breakdown-in-progress, we can consider new entries on a trade below $84.50 (just below the October 28 intraday low). Initial stops will be set at $89, which is just above both the 20-dma and the site of the past 2 failed rally attempts. BUY PUT DEC-85*PG-XQ OI=3547 at $3.60 SL=1.75 BUY PUT DEC-80 PG-XP OI=3512 at $2.10 SL=1.00 Average Daily Volume = 4.15 mln MBI - MBIA Inc. - $41.49 -0.88 (-1.31 for the week) Company Summary: MBIA Inc., through its subsidiaries, is the world's preeminent financial guarantor and a leading provider of specialized financial services. MBIA provides innovative and cost-effective products and services that meet the credit enhancement, financial and investment needs of its public and private sector clients, domestically and internationally. MBIA Inc.'s principal operating subsidiary, MBIA Insurance Corporation, has a financial strength rating of Triple-A from Moody's Investors Service, Standard & Poor's Ratings Services, Fitch Ratings, and Rating and Investment Information, Inc Why We Like It: MBIA recently released decent earnings but issued cautious statements about its future. It was able to raise premiums enough to offset lower investment earnings, but warned that, "The combination of economic slowdown and capital markets volatility continues to make short-term insurance volume forecasts difficult." The company has expanded its business from insuring municipal bonds to the higher risk area of insuring finance deals involving corporate debt. In the current business environment, financing corporate debt can lead to huge losses, as has been shown by a number of large and regional banks, which have taken large losses from loans to troubled industries. The stock has been struggling recently, since topping out just over $45 on November 4. It has rolled over, following its descending 50-dma lower, and now appears to have given in below recent lows with today's drop under $41.50. The stock closed on its low of the day, indicating that there were still sellers unable to get out of long positions. Possible exposure to student loan defaults involving Student Finance Corp., whose bonds are insured by MBIA, may have been behind the sell-off. Each time the stock has bounced since July, it has reached a lower high on the point and figure chart. It has recently rolled over from the high of $45 on that chart, as well, and has established a three-box reversal into a column of "O." The next level of PnF support is down at $35 and that will be our target. The bearish vertical count is all the way down at $24, but that is unlikely on this move, without a reversal back up at some point. The stock has opened just under the 50-dma, currently $42.44, the last two days and another open just below that level may give us additional profit potential for the short play. Momentum traders can look for another PnF box at $41.00, however, we will enter at the current level. Place stops at $45, which would indicate renewed strength and an ability to finally get through resistance. BUY PUT DEC-45 MBI-XI OI= 415 at $5.40 SL=2.70 BUY PUT DEC-40 MBI-XH OI= 774 at $2.85 SL=1.50 Average Daily Volume = 1.06 MIL ************************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 11-12-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - PG Futures Corner: Back to the Future ********************* PLAY OF THE DAY - PUT ********************* PG – Procter & Gamble $85.41 –0.84 (-2.28 this week) Company Summary: Providing a broad range of consumable products, PG manufactures cleaning, paper goods, beauty care, food and health care items that we have likely all been using our entire lives. From toothpaste to facial tissue, laundry detergent to water filters, and cosmetics to coffee, it is difficult to make a trip to the grocery store without buying a handful of PG products. The company has been reorganized around global business units rather than geographic regions and about half of sales come from outside the US. Why We Like It: Consumer staple stocks have been notably absent from the leader board on the rally off the October lows, which many have viewed as a sign that economic growth is likely to be spotty at best. The group was already trading poorly on Tuesday before the negative comments made by Philip Morris, which tanked the Tobacco group right into the closing bell. KO has been consistently heading lower for the past 3 weeks, adding to the negative sentiment for Consumer stocks. The picture is perhaps most clear in the daily chart of our new put play, PG. Since bottoming near $74 in late July, the stock topped out twice at $93 and then posted a lower high at $92.50 in mid-October. That latest peak seems to have really brought out the bears, as PG fell to $85, rebounded to the $89 level and then rolled over after finding firm resistance at the 20-dma (currently $88.71). So far this week, we've seen the stock give up significant ground, with Tuesday's session leaving price just above $85 and at its lowest closing level since late July. There's no hope for the bulls on the PnF chart either, as its late-October breakdown generated a Sell signal that is still in effect. The vertical count is currently projecting a bearish price target of $77. A failed rally in the $86.50-87.00 can be used for new entries, and a pop to $88 would make that entry even better. Should the stock continue its breakdown-in-progress, we can consider new entries on a trade below $84.50 (just below the October 28 intraday low). Initial stops will be set at $89, which is just above both the 20-dma and the site of the past 2 failed rally attempts. BUY PUT DEC-85*PG-XQ OI=3547 at $3.60 SL=1.75 BUY PUT DEC-80 PG-XP OI=3512 at $2.10 SL=1.00 Average Daily Volume = 4.15 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 ************************************************************** ************** FUTURES CORNER ************** Back to the Future By John Seckinger jseckinger@OptionInvestor.com The appealing nature of equity index futures is obvious; a leveraged instrument with sufficient liquidity. However, what should a trader know before jumping into the world of futures? Before we begin, let us cover the basics. The E-mini S&P 500 Contract Ticker Symbol: ES. We are currently in December (Z), and the year is 2002. Therefore, the appropriate ticker for the front month contract would be ES02Z. Contract Size: $50 times E-mini S&P 500 futures price Minimum Price Fluctuation (Tick): .25 index points = $12.50 per contract (Futures calendar spreads: .10 index points = $5 per contract) Contract Months: Mar, Jun, Sep, Dec Regular Trading Hours (Central Time): 5:30 p.m. on Sunday to 3:15 p.m. Friday Last Trading Day: Trading can occur up to 8:30 a.m. (Chicago Time) on the third Friday of the contract month Final Settlement Date: The third Friday of the contract month. Initial Margin: $3,563 Maintenance Margin: $2,850 Volume: Over 17 million in the month of October Open Interest: 397,909 Commitment of Traders (as of 11/05): Non-Commercial: Long: 95,808 Short: 77,612 Commercial: Long: 232,821 Short: 283,767 Time for a Quiz. Look at the first chart and speculate if prices will rise, fall, or remain near current levels. Chart of ES02Z, 5-minute Before I give you the answer, I need to preface with a few things: It is my opinion that emotions within the futures pit runs a little stronger than seen in the NYSE. Therefore, expect price action to go extend the ‘envelope’ even more than when stops are triggered while trading equities. Another thing important to remember as far as entry and exit fills: Slippage will happen, and all traders deal with it. At the Chicago Board of Trade (CBOT), the letter “F” (meaning ‘fast market’) would flash on the screen and let everyone know that fills are not guaranteed (read: even limit orders can be missed). Example: I call the floor and say “Sell one ES02Z contract at the market.” Before I can say ‘market,’ a company such as MSFT unexpectedly warns. The Dow immediately tanks. Regardless of who is standing in that pit, no one will buy the ES just to make me happy. All hands drop in the pit, and the only noise going on is sellers trying to execute orders. With all sellers and relatively no buyers (none in the pit, maybe some online), the market is basically non-tradable. Of course, I frantically wonder if I am filled, and, as is usually the case, a few big buyers step in, make a relative low, and all sellers (including myself) gets filled much lower than expected. Ok, time to look at the answer. Did you pass? Chart of ES02Z, 5-minute Let us cover the other two futures contracts and go over some basics. The E-mini NDX 100 Contract Ticker Symbol: NQ Contract Size: $20 times E-mini Nasdaq-100 futures price Minimum Price Fluctuation (Tick): .50 index points = $10 per contract (Futures calendar spreads: .25 index points = $5 per contract) Contract Months: Mar, Jun, Sep, Dec Regular Trading Hours (Central Time): 5:30 p.m. on Sunday to 3:15 p.m. Friday Last Trading Day: Trading can occur up to 8:30 a.m. (Chicago Time) on the third Friday of the contract month Final Settlement Date: The third Friday of the contract month Initial Margin: $2,250 Maintenance Margin: $1,800 Volume: Over 6 million contracts for October Open Interest: 150,283 Commitment of Traders (as of 11/05): Non-Commercial: Long: 38,326 Short: 55,365 Commercial: Long: 80,053 Short: 84,709 ================================================================= The CBOT mini-sized Dow Futures $5 multiplier Futures Ticker Symbol: YM Contract Size: Five ($5.00) times the Dow Jones Industrial AverageSM Index Minimum Price Fluctuation (Tick): Minimum price fluctuation is one point ($5.00 per contract) Contract Months: March, June, September, and December. Four months listed at all times. For reference, here is a list of the months and letters: Jan = F Feb = G Mar = H Apr = J May = K Jun = M Jul = N Aug = Q Sep = U Oct = V Nov = X Dec = Z Regular Trading Hours (Central Time): Electronic Trading – 8:15 p.m. to 4:00 p.m., Chicago time, Sunday – Friday. Last Trading Day: Trading in expiring contracts closes at 3:15 p.m. Chicago time on the last trading day. Final Settlement Date: The third Friday of the contract month Initial Margin: $2,700 Maintenance Margin: $2,000 Volume: Roughly 18,000 contracts per session Open Interest: 15,978 Commitment of Traders (as of 11/05): Non-Commercial: Long: 4,875 Short: 3,868 Commercial: Long: 7,838 Short: 8,552 Both respective exchanges offer free charts and information on their respective products. www.cbot.com for the YM contract, and www.cme.com for both the ES and NQ. I currently use Q-charts. ================================================================= Dealing with leverage for a moment and using the YM Dow $5 as example; If the Dow is at 8500, the contract value is $42,500 (5 x 8500). That is, using $2700 to buy 1 YM Dow future contract, you are controlling an asset worth $42,500 or approx. 16 to one leverage. Not bad. So, how will you know if you are ready to trade? The key is to learn as much as you can before making a commitment. One investment concept that is difficult to teach beginners is that a trader can sell a futures contract without previously owning it. In this case, the trader will buy it back at a later date, hopefully at a lower and hence, profitable price. Should a trader paper trade first? Maybe for a few days, but I would recommend only looking at a five-minute chart and giving yourself a worse fill than you expect. Make it hard on yourself, and try not to trade right before an economic report, since you might not get filled in the real world. As far as technical analysis is concerned, it is my opinion that Regression Analysis with futures works very well from a five- minute to a weekly chart. As far as patterns are concerned, traders do tend to defend breakout areas more in futures markets. Example: ES02Z consolidates from 860 to 870 and then opens at 871 and climbs to 880. When the market comes back to test the 870 level, relatively high volume enters and that market will do all it can to keep that level intact. Why? Even institutional traders can’t afford for this level to give if long, since the leverage is great and most likely stops are right below this breakout level. A few notes on “Futures Premium,” which is simply the difference between the Cash and Futures prices. Example: SPX Cash is 900, SP Futures are 901, the Premium is + 1.00. There are Program Buy and Sell orders that are frequently pegged to the SP 500 premium as it relates to the perceived notion of the Cash market currently being overbought or oversold. On average, the SP Premium is +1.50 to - 1.50; the NDX Premium (difference of NDX Cash to NDX Futures) is usually 3-6 points; the Dow Premium is usually +/- 5 to 20 points. With that said, I will try to use the spread between cash and futures for execution purposes; however, only extreme moves will be followed. Micro-managing a trade due to a miniscule arbitrage situation is too similar to scalping and is not representative of my trading style. The governing body of futures trading is the Commodity Futures Trading Commission, or CFTC. Their site, found at www.cftc.gov, should answer technical questions that relate to customer protection, laws and regulations, and market oversight. There are a few articles I did in the last few months that should relate nicely to the futures market: Learning Curve http://www.OptionInvestor.com/traderscorner/091502_3.asp It’s all in your head http://www.OptionInvestor.com/traderscorner/090502_1.asp Failure to Fortune http://www.OptionInvestor.com/traderscorner/082002_1.asp Exponential Improvements http://www.OptionInvestor.com/traderscorner/091902_3.asp Open to Close http://www.OptionInvestor.com/traderscorner/100802_2.asp Most importantly, tell me what your expectations are regarding this futures section? What would you like to learn? What kind of trader do you want to become? Going forward, I plan on turning my attention to outlining proper trade set-ups and where exit and entry levels should be set. Moreover, how to find the right regression line during market hours and remembering that patience is the key. Leave the emotions at the door. Ask away, John Seckinger 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 . Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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