The Option Investor Newsletter Tuesday 11-19-2002 Copyright 2002, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: All Hope, No Action Futures Markets: No Man’s Land Index Trader Wrap: (See Note) Market Sentiment: Patience, Patience Weekly Manager Microscope: Updated on the site tonight: Swing Trader Game Plan: Another Step Closer Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 11-19-2002 High Low Volume Advance/Decline DJIA 8477.73 - 11.65 8546.84 8405.12 1.61 bln 1406/1777 NASDAQ 1374.35 - 19.30 1394.93 1367.76 1.57 bln 1413/1398 S&P 100 457.69 - 1.30 462.34 455.14 Totals 2819/3175 S&P 500 896.79 - 3.61 905.32 893.09 RUS 2000 379.57 - 3.01 383.27 379.16 DJ TRANS 2269.82 - 20.82 2294.14 2266.23 VIX 31.36 + 0.25 32.70 30.73 VXN 45.52 - 2.57 50.28 45.18 TRIN 1.20 PUT/CALL 0.81 ************************************************************ All Hope, No Action The morning market action was worse than watching paint dry. They recovered from the initial drop in very small increments and had to fight for every point. The 12:30 rebound buoyed hopes while Greenspan spoke but once the speech was over sellers ruled the day. Dow Chart – Daily Nasdaq Chart – Daily A warning by Dow component Home Depot set the tone for the day as retailers continue to complain that the consumer is not coming to their rescue. HD said sales were down -2% and could be down another -3% to -5% in the fourth quarter. They missed earnings by a penny and dropped -3.55 on the news. BJ's Wholesale also warned that year end sales were less than expected and was downgraded by one analyst to a "sell". The company said it was going to try and prop up sales revenue by offering more big ticket items like 42-inch plasma monitors. Obviously if consumers can't afford the smaller conventional TVs they will rush out and get a loan to spend thousands on a flat screen. Did I miss something in supply and demand class? The company said it was targeting $1.90 per share for 2004 and analysts were expecting $2.21. Basically they just warned for all of next year in advance to get it out of the way. AG Edwards cut them to a sell from hold. BJ dropped -3.75 on the news. WMT who competes with BJ's with its SAMS Wholesale unit has already said sales would be flat in the fourth quarter. There have been numerous analysts saying that this will be the most heavily discounted selling season in over a decade just to attempt to get rid of excess holiday inventory. Dow component Deere offset some of the HD loss after hitting raised estimates by cutting costs and introducing new products. They affirmed 2003 earnings estimates and gained +1.84 on the news. Amazon bragged about being the retailer for the Segway Personal Transporter but Bear Stearns downgraded them based on valuation and lack of a pressing argument to achieve higher sales. They said the retailer has already entered all the markets it could without significant additional expense and achieving additional market share would be difficult. Amazon was not the only tech stock downgraded on valuation with Microsoft in the same category. Raymond James downgraded MSFT based on a lack of economic recovery. They said the software companies revenue going forward would be directly impacted by a lack of recovery and no IT spending. While there will be an eventual PC replacement cycle nobody sees it coming anytime soon according to Raymond James analyst Rich Scocozza. EMC echoed those views when it's CEO said in Tokyo today that he saw no signs of a pickup in corporate IT spending and was wary of predictions of a rebound in 2003. EMC is the worlds largest data storage company. The Unisys CEO said the same think in a speech on Tuesday. He said that global spending will not improve until profits improve and free cash flow becomes available. It appears everyone is waiting on the recovery to appear but it will not appear until everyone starts spending again. Greenspan echoed the same sentiments in his speech this afternoon. He said "nobody was currently spending anything" but then quickly corrected himself to say "very few" instead. He dwelled on very slow and unsteady current growth but went out of his way to say that the Fed was not running out of stimulus ammo. In an effort to calm fears about a Japanese style Fed with no bullets left he emphasized that they could set/support interest rates on all maturities of treasuries to infuse liquidity into the system. The markets rose as the text of his speech was made available but fell after question and answer session where comments were unscripted. After the bell there were more earnings warnings from retailers and more rumors regarding a coming profit warning from GE. On Thursday GE is expected to warn and announce a restructuring with a $2 billion charge to earnings. Rumors are for a -15 to -20 cent drop in estimates. The stock has sold off significantly over the last several weeks as these rumors have grown. Some traders think a moderate warning could actually produce a bounce since there is so much bad news already in the stock. Others think the reinsurance, airline, capital equipment and financing divisions could be in serious trouble and this could be the final straw for the markets. Either way the bad news will be out on Thursday. The markets struggled to trade higher today and did so on sentiment alone as there was no really positive news to power stocks. The economic news was weak with Chain Store Sales down -1.2% but we already knew there was trouble in the mall from various warnings from retailers. The excuse of the day was a late month Thanksgiving weekend which would cut several days off the holiday season. There are only two post Thanksgiving shopping days this November and there were nine last year. The Bank of Tokyo estimated 2% of sales would be transferred from November to December due to the short calendar. It appears the strong two weeks of fall sales in early November did not continue as analysts had hoped. CPI showed that inflation was trending upward only slightly with energy, medical and housing prices the main reason for the increase. At the 2.2% annual rate inflation is not a factor for the Fed and should not be a concern for traders. Those rising home prices and the NAHB Housing Index today showed that builders are still optimistic about the future. The present conditions index is at the highest point in two years. The 50 point rate cut has builders drooling at the thought of another 90 days of bargain rates to fuel their sales. Despite the enthusiasm it does appear that luxury homes are slowing drastically while average houses are still in demand. DHI said they had $2.8 billion in delivery backlog on signed contracts. Their biggest problem was finding lots to expand with. Even without any further gains in housing 2002 will go out as the strongest year in the last two decades. Wednesday will have further info on this sector with the MBA Mortgage Application Survey and New Residential Construction. Tomorrow could be another struggle. We are slowly putting in a series of lower highs and the Dow is steadily completing a head and shoulders pattern with potentially disastrous results. This week is typically bullish for the markets with the S&P posting gains for nine consecutive years. Considering the last two days it will be starting from a deficit if it is going to stretch this streak to ten. The Nasdaq was the weakest index for two consecutive days and closed today at a four day low after failing at a quadruple top on Monday. The Nasdaq has risk to 1320 and with continuing comments about no IT recovery in sight it could reach it. The Dow dipped to 8400 at the open and rebounded to resistance at 8550 before slipping back to 8450 just before the close. This is decent support but fear of GE and economic risks could continue to weigh on the Dow to near 8300. That would also complete the right shoulder and set up a potential disaster. However, not all H&S patterns collapse and some rebound upon completion. Regardless of the eventual outcome the immediate outlook is not bright. There is significant overhead resistance and every bounce is met with selling. Unless conditions change the risks remain weighted to the downside with no positive stock news to energize investors. The longest bear market in history 1039 days during the great depression. Today was the 1040th day for the current bear market. Because of the +18% Dow gain off the October lows some say this bear market was over then but without some confirmation soon this could eventually go down as the longest in history. Enter Very Passively, Exit Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** No Man’s Land By John Seckinger jseckinger@OptionInvestor.com The ES, NQ, and YM contract have all failed to breakout to the upside; however, there has not been any real technical damage to the downside either. Tuesday, November 19th at 4:15 P.M. Contract Net Change High Low Volume ES02Z 898.00 -1.75 905.75 892.50 553,268 YM02Z 8476.00 -4.00 8541.00 8398.00 19,727 NQ02Z 1033.50 -15.50 1048.00 1019.00 314,317 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. Fundamental News: Bear Stearns downgraded Amazon.com, while Raymond James downgraded Microsoft. Other negatives included Home Depot’s poor outlook, which was responsible for taking shares lower by 12.41% to 25.05. In other news, Goldman Sachs lowered its rating on drug wholesaler stocks; however, Goldman then defended the sector as companies within that sector came under pressure. On the economic front, the CPI numbers (core and non-core) came in as expected (+0.2 and +0.3%, respectively), while the trade deficit numbers came in a bit wider than expectations (38 versus 37.3 billion). Both reports seemed to be ignored by market participants. Technical News: The dollar (DX00Y) traded in a relatively large range on Tuesday (104.71 to 105.88), encompassing the range of the prior four sessions. Closing at 105.62 and currently at its highest level since November 5th, this index should be closely watched going forward. A bid in the dollar could squash speculation of deflation, and at the same time get foreigners involved in the US equity market. Another interesting chart pattern comes from the ZB02F (Dec 30-year) contract, closing higher by 0’22 ticks at 112’07 and setting its third day of higher highs and higher lows. However, prices have still managed to set relatively lower highs and higher lows when looking at the last few weeks. The current range for the contract (based on trend lines from longer-term relative highs and lows) appears to be from 110’05 (upward sloping line) to 113’00 (downward sloping). A close outside of this recent wedge should portend a significant move in stocks. ================================================================= Intermediate Indecisiveness Looking at a 120-minute chart of the Dow, the mid point within the Bollinger Bands coincides almost exactly with the Dow’s settlement on Tuesday. Moreover, the blue chips are still within a wedge pattern (green lines) and nearing its apex at 8531. A close below 8405 or above 8668 should turn sentiment to bearish or bullish readings, respectively. As always, watch for traps. If the Dow closes above 8668, it should not then reverse and close underneath (read: trapping longs). Currently, it feels as though we are in a range-bound market; however, a break through one of these two levels could signal otherwise. Resistance before reaching 8668 is seen at 8547 and 8600 (bearish green trend line). Until the Dow makes a strong move in either direction, it makes sense to look towards selling resistance and buying support. As far as our 8000 long-term objective is concerned, it remains intact. Chart of Dow Jones, 120-minute Turning to a 15-minute chart of the YM02Z contract, stochastics also indicate a possibly oversold market. As with the Dow, the YM is currently on its Bollinger Band mid point and nestled between the 8500 pivot and support at the rising trend line (red). Because stochastics have worked recently and been useful for selling resistance and buying support levels, look to Go SHORT YM02Z contract at 8550 with a target at 8475 and stop at 8580. Moreover, if the market begins to fall, Go LONG at 8434 (first blue horizontal line) with a target at 8500 and stop at 8400. Light volume would work well for these positions. Chart of YM02Z, 15-minute The E-mini Nasdaq 100 also has been recently range bound; failing to test its mid point Bollinger Band on Tuesday (currently at 1048) and bouncing from 1023. The intermediate blue trend line remains intact as well, coming in at 1000. With that said, look to Go LONG NQ02Z contract at 1000 with a target of 1017 and stop at 994. If the market gaps underneath 1000, look to Go LONG at 984 with 1000 as a target and 972 as a stop level. Chart of NQ02Z, 60 minute A 5-minute chart of the NQ02Z reflects a market that is actually overbought, via stochastics and descending trend line (red). The 1017 objective (paragraph above) was based upon this falling red line (see chart below); therefore, adjust exits accordingly if a lot of TIME passes and the red line falls underneath 1017. As the chart also shows, there is an area between 1029 and 1023 that would seem to put the market in a very neutral environment. If prices fail to fall to 1000 but remain around the 1025 level, wait for a move before acting. A bounce from these levels could send the index towards 1050 and 1058, but continue to expect resistance there. The index could move from 1050 to 1058, or 1060 to 1073; however, there is certainly a lot more risk buying a breakout in this environment. The market will now have to prove to me that it makes sense to buy resistance and sell support. Chart of NQ02Z, 5-minute A 120-minute chart of the December S&P 500 contract has two intermediate trend lines hitting prices at almost exactly the 898 close. The MACD is trending lower, but the contract is in the middle of the Bollinger Bands (yes, the pattern continues). There appears to be more risk to the downside, but it is important to wait for the market to confirm such thoughts. A close above 905.50 would be bullish for the contract, but I would instead prefer to see a close above 910.50 before looking towards 927 and getting bullish. Note: Green line is actually 896.50. Chart of December S&P 500, 120-minute Taking things to a more practical level, stochastics on a 5- minute chart shows overbought conditions and the likelihood of a pullback to the 890.25 level. A possible trade could be to Go SHORT ES02Z at 894.75 with a target of 890.25; however, the stop should be placed near 899 and it would make for a bad risk/reward scenario. Therefore, How about going LONG at 890.25 with a target of 900 and stop at 885.25. Only problem with this is that 885.75 is the close on November 13th and still needs to be hit if the recent daily gap is to be closed. This is exactly why I called this wrap “No Man’s Land.” I would look for strong bids at 885.75, and a potential trade would be to go long there with a target of 895 and stop at 880.75. On the upside, look to Go SHORT at 909 with a target of 900 and stop at 914, above good resistance during November 18th. Chart of ES02Z, 5-minute Good Luck. Questions are welcomed, John Seckinger jseckinger@OptionInvestor.com ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/111902_1.asp ************************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 **************** Patience, Patience by Steven Price On a day when the Dow lost fewer than 12 points, there was an awful lot of red on my screen. Of course the Nasdaq lost 19 points, contributing to the crimson tide, but as I see it, the most ominous signs came from outside the tech sector. Home Depot reported earnings that matched expectations, but said same store sales were down 2%, which was a stark contrast to its previous forecast of 2-4% growth. The company also said it is "cautious on the economy into next year." This would seem consistent with The National Association of Home Builders Remodeling Market Index, which was released today, and fell three points to 49.8. Anything below 50 means remodelers view the market as unfavorable and suggests to me that the recent wave of home refinancing may be slowing down, in spite of rates being lowered again earlier this month. One of the biggest sources of consumer spending has been dollars taken from home sales and refinancing. Alan Greenspan's testimony of November 13 stated, "(R)oughly half of equity extractions are allocated to the combination of personal consumption expenditures and outlays on home modernization." If we see a slowdown in that area, then I'm not sure where else we'll get dollars to support current spending levels. While Home Depot is not the traditional retailer that relies on the holiday shopping season for an enormous chunk of its business, we continue to get warnings from retailers that do rely heavily on the season. Wal-Mart and Federated both made cautious statements on Monday about November same store sales being lower than expected and today that sentiment was echoed by BJ's Wholesale Club, which said November sales were below plan and made cautious comments about 2003. A.G. Edwards analyst Robert Buchanan lowered the stock to a sell, saying the company had already thrown in the towel for next year. The Bank of Tokyo's weekly chain store sales report also showed a 1.2% decline last week. As we head into the holiday season, which is already six official shopping days shorter than last year (due to a later Thanksgiving), a reluctance to spend could foreshadow another weak year for consumer spending. Economic data released this morning showed a 0.3% rise in the Consumer Price Index for October, fueled mostly by a 1.9% rise in energy prices. The core rate jumped 0.2%, which was in line with expectations. Prices are up 2% over the last year. The trade deficit also narrowed slightly, dropping $300 million to $38 billion. The small increase in CPI keeps the Fed in the clear, after lowering the overnight rate by 50 basis points on November 6. A jump in CPI would indicate inflationary pressure, which is combated by raising rates. The slight rise was nothing severe and indicates inflation is not currently an issue. The head and shoulders pattern in the Dow and SPX, talked about several times in this space, appears to be taking shape, with the recent high of Dow 8636 and SPX 915 looking like the possible top of a right shoulder. The fact that the Dow is now back under 8500 and the SPX is below support at 900 have me leaning to the bearish side of the market, after donning bulls horns briefly last week. I'm not particularly concerned about what "should" be happening and I am more than happy to change hats as often as the market dictates. Traders need to remember that there should be no loyalty to a direction. We simply jump on for the ride, no matter how short or long it may be. Long-term opinions are for the 401k, not for short-term opportunities. While I am leaning bearish, we must realize that the Nasdaq Composite is still in a pattern of higher lows for the moment. It has not been able to set a higher high above the August top of 1426, but the last two pullbacks stopped at 1279 and 1319. The current pullback to 1374 keeps that trend alive, so look for a break below 1319 as the more decisive breakdown. Part of the reason the Nasdaq has been slightly schizophrenic and difficult to protect is the fact that the chip sector is bouncing around without a defined trend. It pulled back today, dropping 7.40 to 312, but bounced off 310, which had been previous resistance back in September. The group has mirrored the higher low - lower high pattern of the COMP and right now is not giving us much to work with. The news out of the sector has certainly been negative, but it was negative for the last two months, during a 50% gain, as well. Traders can lean short here, but the trend is not terribly strong. A breakdown of the H&S neckline in the Dow between 8350- 8400 would show a stronger downtrend, but until we get that I would be playing with smaller positions than usual. The same goes for the Nasdaq. Sometimes it's frustrating to sit on the sidelines, but we must remember two rules: 1) There will always be opportunities that present themselves and if you must force it, play small; and 2) Always make sure you can come back and play tomorrow. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8474 Moving Averages: (Simple) 10-dma: 8512 50-dma: 8172 200-dma: 9218 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 896 Moving Averages: (Simple) 10-dma: 897 50-dma: 867 200-dma: 989 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1025 Moving Averages: (Simple) 10-dma: 1027 50-dma: 935 200-dma: 1133 ----------------------------------------------------------------- The Retail Index (RLX.X): We are starting to see the cracks in the dike after last week's bullish earnings releases. Wal-Mart started the week by warning that November sales were coming in under target. That was followed by similar warnings from Federated and BJ's Wholesale club, which went so far as to give cautious statements for all of 2003. Even Home Depot got into the act, by giving notice that same store sales for the month were not only not showing the previously forecast 2% growth, but would be down 2-4%. The RLX has sold off the last two days, and may test the recent low of 273 before the week is over. 52-week High: n/a (recalculated in June) 52-week Low : 253 Current : 319 Moving Averages: (Simple) 10-dma: 282 50-dma: 283 200-dma: 317 ----------------------------------------------------------------- Market Volatility The VIX barely broke through its 200-dma at 31.25, before bouncing off 30. It is hovering over that level for the moment, and has not closed under 30 since June 28. If the current sideways movement in the market continues we may actually see the 20s in the near future. However, the head and shoulders pattern that appears to be forming in the Dow and SPX is likely raising a few eyebrows and until we get a decisive move up, we may see the VIX also holding this level. In the case of an H&S breakdown, look for the VIX to trade 35-40. CBOE Market Volatility Index (VIX) = 31.36 +0.25 Nasdaq-100 Volatility Index (VXN) = 45.52 –2.57 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.81 461,795 371,788 Equity Only 0.72 377,520 273,281 OEX 1.04 10,790 11,258 QQQ 1.07 44,696 48,007 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 42 + 2 Bull Confirmed NASDAQ-100 69 + 1 Bull Confirmed Dow Indust. 67 + 0 Bull Confirmed S&P 500 56 + 0 Bull Alert S&P 100 64 - 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 0.85 10-Day Arms Index 1.26 21-Day Arms Index 1.15 55-Day Arms Index 1.20 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 1174 1554 NASDAQ 1316 1820 New Highs New Lows NYSE 21 34 NASDAQ 50 50 Volume (in millions) NYSE 1,619 NASDAQ 1,615 ----------------------------------------------------------------- Commitments Of Traders Report: 11/12/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials increased short positions by 4,000 contracts, while slightly reducing the long side. Small traders increased long positions by 3,000 contracts, while reducing the short side by 6,000. Commercials Long Short Net % Of OI 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%) 11/12/02 437,683 476,540 (38,857) (4.3%) 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 10/22/02 134,641 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% 11/12/02 141,389 70,624 70,765 33.4% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials reduced the long side by 3,500 contracts while leaving the short side virtually unchanged. Small traders, on the other hand, reduced short positions by 4,000 contracts and longs by just 700. Commercials Long Short Net % of OI 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%) 11/12/02 45,647 55,892 (10,245) (10.1%) 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 10/22/02 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% 11/12/02 12,698 8,801 3,897 18.1% 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 left positions relatively unchanged, with a slight reduction in both longs and shorts. Small traders increased the long side slightly and left shorts around the same level. Commercials Long Short Net % of OI 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% 11/12/02 22,283 14,953 7,330 19.6% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 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%) 11/12/02 5,736 8,513 (2,777) (19.5) 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 MANAGER MICROSCOPE ************************* Life Sciences Funds This week, we take a look at stock funds specializing in the life sciences sector and related industries including pharmaceuticals, biotechnology, medical products/supplies and healthcare services. These specialized healthcare funds seek long-term capital growth by investing principally in companies engaged in the business of providing products and services that help promote personal health and wellness. Life sciences funds are suitable for risk-tolerant investors that seek long-term growth of capital, and are interested in the long- term potential of the life sciences sector but don't want to pick their own common stocks. By risk tolerant, we mean investors who can tolerate high share price fluctuations, and are interested in an aggressive, concentrated sector fund. Accordingly, they serve an "explore" role in one's long-term portfolio. The pickings for life sciences funds are slim, so we kept it very simple by reviewing all five fund candidates that we were able to identify. In the next section, we show you how we identified and evaluated them based on various selection criteria. Search Process We began our search this week by using various mutual fund lookup tools online (Bloomberg, Morningstar and MSN Money) to search for funds with the words "life sciences" in the fund name. That gave us four potential fund options for personal investors as follows: American Century Life Sciences (ALSIX) Exeter Life Sciences A (EXLSX) Gartmore Global Life Sciences A (GLSAX) Janus Global Life Sciences (JAGLX) Note that Janus Global Life Sciences (JAGLX) Fund remains closed to new investors at this time. At $1.4 billion in assets, don't look for the group's largest mutual fund to reopen any time soon, but you never know. We next identified related funds, using Bloomberg's fund reports. That effort yielded the following additional fund names: Vanguard Healthcare (VGHCX) ICON Healthcare (ICHCX) Fidelity Select: Medical Delivery (FSHCX) Fidelity Select: Medical Equipment/Systems (FSMEX) Long-term investors seeking exposure to the broad health care sector (rather than just the life sciences industry) will find the Vanguard Healthcare Fund and ICON Healthcare Fund to their liking. Those that want to target medical delivery and medical equipment and systems industries specifically have two Fidelity Select portfolios worth considering. We next took the four life sciences funds, including the closed Janus Global Life Sciences Fund, and the four related funds and put them into Morningstar's Fund Compare tool, available online at www.morningstar.com. That allowed us to compare the results based on their portfolio characteristics and management, return and risk data, and other factors such as cost and expense ratio. Gartmore Global Life Sciences Fund is relatively new, and isn't in Morningstar's system yet. The $159 million American Century Life Sciences Fund (ALSIX) and $119 million Exeter Life Sciences Fund (EXLSX) are in Morningstar's system, but are not rated yet. The only "life sciences" fund with a rating is Janus Global Life Sciences Fund (JAGLX) which is currently closed to new investors and sports only a Morningstar 2-star overall rating. Among the four related funds, three of them currently are 5-star rated by Morningstar for risk-adjusted performance in comparison to their healthcare sector fund peers. The fourth fund holds an average 3-star overall rating. In the next section, we tell you which "life sciences" fund we like the best, and which "related" fund we favor. Exeter Life Sciences A (EXLSX) Exeter Life Sciences Series Fund is an open-end fund that seeks long-term growth by investing primarily in stocks of companies involved in life sciences and related industries. Examples of the areas that management focuses on are drugs/pharmaceuticals, bio-technology, medical products and supplies, and health care services. A recent Reuters article from September 2002 indicates that the fund's portfolio includes a number of major pharmaceuticals and companies that make life sciences research equipment, otherwise known as "life sciences tools." One example is Millipore Corp. (NYSE: MIL), which represented 4.7% of net assets at October 31, 2002. Boston Scientific (NYSE: BSX) is the portfolio's largest holding, representing 9.0% of fund assets at the end of October. Boston Scientific is one of several companies vying for the top spot in the "stent" market (tiny stents are inserted in clogged arteries), a huge and growing billion-dollar market. Exeter Life Sciences Fund is a concentrated portfolio, with 57% of net assets in the fund's top 10 holdings (31 total holdings), per Morningstar's report. Morningstar's style analysis puts it in the mid-cap growth style box though that reflects the fund's average market capitalization of $5.6 billion. Fund assets are spread across all market capitalizations, so the term "all-cap" or "multi-cap" growth would also apply. In 2000, the fund's first full year of operation, it earned an 87.3% total return for investors, ranking in the top 7% of its Morningstar category (specialty-health funds). The Exeter team managed portfolio earned an 11.7% total return in 2001, ranking it in the top 1% of the specialty-health category. So far this year, the Exeter life sciences fund has declined 14.2% on a YTD basis thru November 18, 2002, ranking in the category's top 11%, so it's done a good job this year of limiting losses versus its health sector fund peers. Exeter Life Sciences Fund's ability to capture return and limit depreciation has resulted in one of the best 3-year records now. As of November 18, 2002, the fund had a 3-year annualized total return of 21.6%, ranking in the top 1% of the health fund group, per Morningstar. That compares with an annualized loss of 13.0% by the broad S&P 500 index for the same period. Unfortunately, the Exeter Life Sciences Funds doesn't have wide brokerage availability. Morningstar's latest report lists only one program, Invesmart iDirect under the brokerage availability section. Minimum initial investment in the fund is $2,000, and $0 for an initial IRA investment. The Exeter Fund's 800 number is 800-466-3863. You may be able to purchase the Life Sciences mutual fund product directly. Considering that biotech and drugs have imploded, this fund has done a superior job in its short history compared with category peers of capturing return and limiting the portfolio's downside risk. ICON Healthcare (ICHCX) Investors that don't want to limit their healthcare exposure to the "life sciences" or "medical equipment/systems" areas of the healthcare market may like the more diversified ICON Healthcare Fund (ICHCX). It seeks long-term growth of capital by normally investing at least 65% of net assets in securities of companies primarily engaged in the healthcare industry. Industry baskets include such areas as biotechnology, health care distributors & services, health care equipment, health care facilities; health care supplies, managed health care, and pharmaceuticals (drugs). Meridian Investment Management has served as the fund's adviser since its February 21, 1997 inception, using a "team management" approach that aims to capture changing themes by rotating among industry subsectors as they move from undervalued to overvalued status. ICON Healthcare Fund is not bound to any one style box, and will hold a stock while it may migrate in size from small to large market capitalization (and in style from value to growth). Morningstar puts it in the mid-cap growth style box as a whole. Per the ICON Funds' website (www.iconfunds.com), the Healthcare portfolio's top 10 holdings comprised a third of fund assets as of September 30, 2002. The fund's largest holding was Abbott Labs (NYSE: ABT), which derives about 40% of its revenues from pharmaceuticals. ICON Healthcare Fund, like the Exeter Life Sciences Series funds, has done a good job of capturing returns and minimizing downside risk relative to other specialty-healthcare funds. In the first three years (1996, 1997 and 1998), the fund returned 15.3%, 3.8% and 43.0%, respectively, competitive but not superior versus its category peers. In 2001 and 2002, the ICON Healthcare portfolio has exhibited very little downside volatility, falling just 3.2% in 2001 and giving up just 5.7% since December 31, 2001, ranking it in the top 1% of the healthcare fund category per Morningstar. Over the last three years, ICON Healthcare Fund has generated an average annual return of 12.9% through November 18, 2002, to put it in the category's top decile (6th percentile) for performance. The fund's trailing 5-year average total return of 9.6% was 9.1% better a year on average than the broad S&P 500 index and strong enough to place in the category's top quintile (18th percentile). So, while the fund lagged slightly through the 1996-1998 upswing, it handled the ensuing market correction much better than similar funds, resulting in a Morningstar 5-star (highest) overall rating for relative risk-adjusted return performance. At 1.45%, the fund's expense ratio is below average in comparison to the 1.78% category average, per Morningstar. While that's not cheap, ICON Healthcare Fund has a low minimum initial purchase of $1,000 for regular and IRA accounts and is available on a no-load NTF basis through several fund networks, including Charles Schwab OneSource, adding to its appeal. Long-term, risk-tolerant mutual fund investors seeking healthcare exposure have a suitable option here. For more information or a fund prospectus, call 1-800-764-0442 or logon to the ICON Funds at www.iconfunds.com. Conclusion Vanguard Healthcare Fund (VGHCX) is also Morningstar 5-star rated and also offers exposure to the broad healthcare sector. It also would be an appropriate option for long-term investors who prefer a more broadly diversified portfolio of health-related companies. The other life sciences funds identified this week are either not open to new investors or too young or tiny to be in Morningstar's database, or to be rated. Exeter Life Sciences Series funds have limited network availability but may be purchasable directly from the Exeter Fund Inc (800-466-3863). Call to find out more if you are interested. We showed you ICON Healthcare Fund also as an alternative to life sciences funds. It may be a suitable choice if you don't want to limit your health care investments to stocks of companies engaged principally in life sciences areas and desire broader health care sector exposure. 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 *********************** Another Step Closer The day did not go well for the bulls. The Dow nearly completed a round trip by dropping to 8400 at the open, rebounding to 8550 and sinking back to 8442 just before the close. The day posted another lower high and closed at a four day low. This is not encouraging for the November bulls. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Tuesday 11-19-2002 Copyright 2002, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: BBOX, FFIV Dropped Puts: ABC Daily Results Call Play Updates: CEPH, GNSS, HOV, AIG, FRX New Calls Plays: IMCL Put Play Updates: GE, IDPH, PG, New Put Plays: TRMS **************** 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: ***** BBOX $45.22 -0.68 (-1.60 for the week) Black Box appeared on the verge of an upside breakout when we added it over the weekend, but 1it has pulled back sharply the last couple of days, and rather than looking as though it might bounce on a pullback to $45, it appears as though sellers were still pounding the stock into the close. We highlighted two possible entry points for conservative traders, which would have been a breakout over $48, giving a new PnF buy signal, or a pullback to support at $45. While we certainly didn't get the first, the action in the Nasdaq and the end of day sell-off in BBOX makes the second alternative appear less likely, as well. Rather than hope for an entry point, we'll close the play and look for better momentum elsewhere. --- FFIV $12.23 -0.43 (-0.90) After rallying more than 100% off the October lows, FFIV was overdue for a bit of profit-taking, and it seems that our addition of the stock to our call list was just the catalyst to get that process moving. While this could be just normal profit taking, with the weakness in the broader Technology market, we're concerned that the recent bullish trend has effectively come to an end. Simply put, the risk to reward in the trade is looking less favorable with the 200-dma at $13.60 providing a firm ceiling on the last two rally attempts. If currently in the play, use another intraday rally near resistance to exit those positions. PUTS: ***** ABC $59.00 -4.40 (-6.01) Did you follow our instructions? Over the weekend, we recommended using a decline into the $57-58 area to harvest gains on open positions. This morning's Goldman Sachs downgrade had shares of ABC gapping down to the $56 level, which was an even better result than we had hoped. The stock rebounded off that level pretty quickly and then spent the bulk of the session consolidating in the $58-59 area. At current levels, the play no longer makes sense on a risk/reward basis. If still holding open positions, either set a tight stop at $59.50 or harvest your gains on any weakness near the $58 level. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* AIG 66.57 -1.40 0.07 Relative Strength BBOX 45.22 -1.16 -0.68 Drop, no entry CEPH 55.07 0.71 -1.39 Holding $55 FFIV 12.23 -0.59 -0.43 Drop, no follow through FRX 103.82 -1.56 -0.38 Support at $103.50 GNSS 16.34 0.01 -1.26 No PnF reversal HOV 31.70 -1.35 -0.95 Entry point IMCL 12.59 -0.77 1.15 New, Higher consolidation PUTS ABC 59.00 -1.85 -4.40 Drop, Profits GE 23.90 -0.42 0.30 lower low IDPH 38.25 -1.31 -1.09 Weak under $39 PG 87.10 -1.15 0.95 Only Dow on sell signal TRMS 47.71 -1.97 -0.62 New, Changing lanes ************************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 ******************** CEPH $55.07 -1.39 (-0.64 for the week) Cephalon has been pretty volatile lately, after its recent run from $40 up to $58.67. The stock pulled back after a downgrade a couple of days ago. However, that downgrade was somewhat tenuous, based on the sector having performed well and advice to take profits, as well as future unsuccessful challenges from generic drug makers to CEPH's anti-fatigue drug Provigil. While Provigil has been approved only for narcolepsy to this point, sales have doubled in the last year and it has been discussed for use with sleep apnea and Parkinson's disease, for which the company will be submitting FDA applications. The company has shown a lot of strength lately, based on across the board product sales, and recently raised its earnings guidance after large sales increases. The stock blew through its 200-dma just over $51, after consolidating on a pullback to $50. That consolidation pattern appears to be repeating itself at $55, where the most recent pullback has found support. While traders long at $55.50 could have turned a nice profit on the move just after we picked it, we are sticking with the stock on the pullback. Not many stocks go straight up without some intermediate consolidation and as long as the consolidation takes place at successively higher levels, then the bullish trend is still in tact. As long as CEPH continues to find buyers at $55, we'll hang on for another run at $60. New entries can look for continued intraday support at $55, keeping in mind a failure at that level and then resistance below it is a bearish sign. We'll leave the current stop at $53.00. --- GNSS $16.34 -1.26 (-0.83 for the week) Genesis' recent breakout was a bullish catapult on the point and figure chart, which is a triple top followed by a double top. It's a very bullish formation and is supported by the company's presence in a market that is growing by leaps and bounds. The flat panel monitor business is expected to ship 6.3 million units in 2002, but as many as 97 million in 2005. The projector market, used by consumers and businesses, is projected to grow from just under 700,000 in 2001 to at least 12 million by 2005. Today the company announced that its FLI2310 digital video format converter was chosen by Sharp for its new series of LCD televisions, another growing market. The most recent buy signal came at $16.00. Today's pullback, following an RBC downgrade that said it had reached its price target, found support just above that breakout level. The stock broke through its 200-dma on Monday, trading as high as $18.95, which indicates $19 will be the next hurdle for Genesis. After setting its third higher high, today's retracement and bounce above $16 is the stock's third higher low. New entries can look for a move back over the 200-dma of $17.00, and also today's high of $17.10, as an entry point. We will leave our stop at $13 for the time being, allowing for any continued pullback to still maintain the pattern of higher lows. If we do get a continued pullback, then we will watch for signs of intraday support before recommending new entries. --- HOV $31.70 -0.95 (-2.30 for the week) Hovanian got a bullish point and figure reversal with its trade of $34 on Friday, after which it pulled back on Monday and Tuesday. The pullback stopped short of $31.00, which would have reversed the signal back down again and also remained above its ascending 200-dma. That 200- dma has proven highly resilient; giving the stock a boost the last four times it has been approached. We recommended entry on either the $34 buy signal, which we got, or a pullback above support at $31 in the original play write-up. While we aren't thrilled with the pullback from $34, the current level still looks like an entry point, with even better risk reward. The housing market has been somewhat erratic lately, but its gains still remain strong. There is a large backlog of homes still waiting to be built in 2003 and mortgage rates are once again reaching new lows. The tremendous increases seen in September and October orders bode well for the company's full year earnings, although we are bound to see some seasonal slowdown, as evidenced by last weeks 4.3% drop in mortgage applications (following a 13.3% jump the previous week). We will leave our stop at $30, as that would be the first 200-dma break of the year. --- AIG $66.57 +0.07 (-1.32) With a lack of positive catalyst the broad market has been under pressure this week and we've seen some mild profit taking in the Insurance sector (IUX.X) through Tuesday's close. It was interesting however, to note that the IUX finished Tuesday's session with a slight gain. The mild gyrations in the sector this week have gradually dropped AIG down near the $66 level, where buyers stepped in to provide support at the end of the day. Volume has been light so far this week as the stock has pulled back, and the key will be how AIG behaves in the $65-66 area. This was the formidable resistance that AIG cleared late last week and if that breakout was for real, then we ought to see that former resistance level act as support. An intraday dip in this area that is followed by solid buying can be used to initiate new positions. More aggressive traders can even consider entering a bounce from the vicinity of $64 (which should be stronger support), but keep in mind that a close under our $63.50 stop would be a bad sign and have us dropping the play in short order. Trader's looking to chase AIG higher will need to wait for a push through the $68 level, confirmed by the IUX rallying through the $275 resistance level. --- FRX $103.82 -0.38 (-1.93) Consolidation and mild profit-taking have been the name of the game this week both in the broad markets and our FRX play. After settling at new all-time highs on both Thursday and Friday last week, a bit of profit taking is a welcome development, as it appears to be setting us up for the next solid entry point. After breaking above $100 last month, FRX consolidated for an extended period before staging the breakout move we saw last week. Traders that took advantage of the intraday dips near the $100 level were rewarded with a nice move to above $106 last week. We're looking for a repeat performance from the stock, just at a higher level. That means we aren't interested in chasing the stock higher, but want to look to initiate new positions on a pullback and rebound from support. The key support level now is $103.50, which was the resistance that held FRX back until last week's breakout. While aggressive traders can look for entries on intraday dips as low as $102.50 (just above the 10-dma), they need to be careful about trying to catch a falling knife. If FRX breaks $102, we'll drop the play as it will likely indicate the stock is falling back into its $99-102 consolidation range. ************** NEW CALL PLAYS ************** IMCL – Imclone Systems $12.60 +1.16 (+0.83 this week) Company Summary: Engaged in the research and development of novel cancer treatments, IMCL focuses on growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. The company's lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain tumors depend. Phase I/II clinical trials have been promising. The lead candidate for angiogenesis inhibition, IMC-1C11 is an antibody that binds selectively and with high affinity to KDR, a principal Vascular Endothelial Growth Factor (VEGF) receptor, thus inhibiting angiogenesis. Why We Like It: Beginning with the Enron fiasco, shady corporate dealings have been at the forefront of investors' collective consciousness for much of this year. While the subsequent investigations have brought enough dirty laundry into the light of day to result in numerous bankruptcies, not all of the corporate malfeasance poster children have gone away quietly. IMCL looked like it could do no wrong this time last year as it was trading near the $70 level. Rejection of the company's testing of its promising anti-cancer drug Erbitux along with alleged cover-ups of the holes in that testing led the stock to plunge more than 93% from its December 2001 highs. IMCL has been basing in the $6-10 range for much of the past 5 months, but saw a dramatic surge in buying volume propel it out of that range last week. While an argument can be made that a cessation of the daily news flow about corporate shenanigans by the company's former CEO could be allowing the stock to lift, given the heavy volume that accompanied last week's rebound, there has to be something more to the story. Sure enough, there is. Apparently there is a rumor that has been making the rounds that Bristol-Myers is considering purchasing the 80% of the company that it doesn't already own at a price of $19 a share. Whether there is any truth to the rumor or not, the fact that buying interest was strong again on Tuesday indicates there could very well be further upside. The PnF chart certainly bears that out, as the Buy signal generated last week with the breakout over $10 gives a bullish price target of $30.50. That's way beyond what looks reasonable over the near term, but that doesn't change the fact that we have a strong Buy signal to work with. Once above the $15 resistance level, the bulls will be setting their sights on the $19-20 level, and that is the level we will target for this play. The profit taking yesterday shows that the stock has decent intraday support near $11.50, so another bounce there can be used for new entries. The 200-dma at $12.56 is keeping a lid on the advance right now, but momentum traders can look to enter the play on a push through that level that continues through $13.50 (intraday resistance last Thursday and then again today). This is a high risk play due to the recent volatility, but with our stop placed at $10, the risk to reward ratio looks favorable. BUY CALL DEC-10 QCI-LB OI=2499 at $3.40 SL=1.75 BUY CALL DEC-12*QCI-LV OI=1501 at $1.85 SL=1.00 BUY CALL DEC-15 QCI-LC OI=1219 at $1.00 SL=0.50 BUY CALL JAN-12 QCI-AV OI= 827 at $2.65 SL=1.25 BUY CALL JAN-15 QCI-AC OI=1631 at $1.75 SL=0.75 Average Daily Volume = 1.95 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* GE $23.90 +0.30 (+0.04) Even as the broad market was rallying earlier this month, GE was a notable laggard, continuing to drift lower. Recently adding pressure to the stock was the JP Morgan downgrade last Friday, followed by concerns that the company may announce a large $1-2 billion restructuring charge (which would adversely affect earnings) at its analyst meeting on Thursday. Concerns about the latter issue were enough to pressure the stock down to $23.20 this morning, but the bulls managed to push it back up to post a fractional gain for the day. Note that Tuesday's close just below $24 has the stock beginning to find resistance (rather than the support of last week) at the top of the October 11th gap. This indicates that GE is destined to fill that gap down to the $22.60 level and possibly challenge the October lows near $21.50. Resistance near $25 is getting stronger by the day and failed rallies below this level still look good for new entries. Given the proximity of significant support, we don't advocate chasing the stock lower at this time. Lower stops to $25, as a rally through this level would break the pattern of lower highs. --- IDPH $38.25 -1.09 (-2.11) With the Biotechnology sector (BTK.X) unable to get through the $90 resistance level last week, the price weakness in shares of IDPH got our attention when they fell to the $40 level late last week. That decline solidified the PnF Sell signal, and this week's decline has extended the bearish price target down to $28. We were looking for a drop under $40 to confirm our bearish view on the stock, and the stock cooperatively delivered just that yesterday. While IDPH rebounded mildly from its low yesterday, the bears were back in control today after another failure to get back over the $40 level. Tuesday's early rally attempt gave way shortly after the open, with a steady decline into the close. Subsequent failed rallies below $40 can still be used for initiating new positions, while momentum traders will want to enter on a drop below the $37.50 level (just below Tuesday's intraday low. Watch for the possibility of an oversold rebound from the $35.50-36.00 level (the site of the October lows). Use such a rebound to harvest gains on open positions and look to re-enter at a higher level when that rebound runs into wiling sellers below the $40 level. Lower stops to $42. --- PG $87.10 +0.95 (-0.18) Rangebound has been the name of the game for shares of PG over the past couple weeks, as buyers and sellers jockey for position between resistance at $89 and support at $85. We've been looking for a breakdown under support to get the next leg of the decline moving. But contrary to the action in the broad market, PG actually lifted yesterday afternoon and this morning, rising to just below the $88 level before rolling lower again. That rollover could be just what we're looking for in the way of a bearish entry, although there is one note of concern being telegraphed by the intraday charts. While last week saw PG finding resistance at $87, that level represented support for the stock, once this morning and then again this afternoon. Conservative traders will want to wait for a breakdown under $86.75, confirmed by continued broad market weakness before opening new positions. In order to really get this play moving in our favor, we really need to see a volume-backed breakdown under its recent lows at $84.75, which can be used to initiate new momentum-based positions. Keep stops in place at $89. ************* NEW PUT PLAYS ************* TRMS - Trimeris - $47.71 -0.62 (-2.13 for the week) Company Summary: Trimeris, Inc. is a biopharmaceutical company engaged in the discovery and development of novel therapeutic agents for the treatment of viral disease. The core technology platform of fusion inhibition is based on blocking viral entry into host cells. Trimeris has two anti-HIV drug candidates in clinical development. FUZEON, currently in Phase III clinical trials, is the most advanced compound in development. A New Drug Application (NDA) and Marketing Authorization Application (MAA) have been submitted for FUZEON with the US FDA and EU EMEA, respectively. Trimeris' second fusion inhibitor product candidate, T-1249, has received fast track status from the FDA and is in Phase I/II clinical testing. Trimeris is developing FUZEON and T-1249 in collaboration with F. Hoffmann-La Roche. Why We Like It: Look familiar? Proving there is no loyalty when it comes to playing the market, we are going to trade what we see and flip sides on this previous OI call play. We have been singing the praises of this company in the call section recently. We played it long for a nice gain heading into earnings and closed it a couple of days ahead, in keeping with our policy of not playing earnings. Good thing. We have not changed our outlook as far as demand for the company's new HIV product Fuzeon. It is the first in a new class of AIDS drugs that concentrates on preventing the virus from entering cells and it is widely assumed the company's FDA approval will come in March, at the end of the priority review period the company was granted. Demand for the product is expected to be high, as patient groups and activists have been talking up Fuzeon's effectiveness for patients who have developed resistance to other HIV therapies, which is a major problem for many patients. The drug also has limited side effects, another big problem with current therapies. So what's the problem? Well, on the earnings conference call, the company made comments that indicated the supply process may not be as reliable as analysts have assumed in the past. The drug is produced through a complex manufacturing process and Deutsche Banc analyst Dennis harp wrote," Based on comments made by company management, we believe that initial yields from the validation batches are lower than target levels... Thus, at the time of launch, Trimeris and Roche may have less capacity than our original estimate of 3 metric tons of Fuzeon per year, or 40,000 patients." DB cut its sales estimates for 2003 from $210 million to $106 million and 2004 estimates from $508 million to $431 million. So the problem isn't that the company doesn't have a great product, it's just that they may not be able to produce enough of it for sale to meet previous earnings estimates. Other analysts disputed that this was the meaning of the comments, so we may have a case of dueling analysts. Whoever is right, apparently investors are scared and getting out quickly. The stock has been selling off, breaking down below previous resistance levels that have not acted as support for long, and now looks to be free falling. Each rebound attempt has been met with more selling and the last drop below $50 could see the stock back in the low forties. The point and figure chart is on the verge of a new sell signal at $47, with the next support level down at the bullish support line of $43. The successive lower highs and lower lows on the sell-off indicate that investors still holding stock are using the bounces to dump the holding at higher levels. The stock broke it's 50-dma of $48.16 today and intraday rebound attempts failed that level. The 200- dma is below at $45 and is likely to provide some support on the drop. However, once through that level, the aforementioned bullish support line is the next hurdle, and then a possible re- test of the September low at $40. We like entries on the PnF sell signal at $47, or on a failed rebound underneath $50. After such a dramatic drop, some type of "dead cat bounce" can be expected along the way, like the one that failed over $50. In this case, a failed bounce under $50 would show that the level that once acted as temporary support, is now acting as resistance and would be a good risk/reward entry with a stop at $51. BUY PUT DEC-45 RQM-XI OI= 85 at $2.20 SL=1.10 BUY PUT DEC-50 RQM-XJ OI= 319 at $4.60 SL=2.30 Average Daily Volume = 521 k ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 11-19-2002 Copyright 2002, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL, IMCL Futures Corner: SSF, NQLX, and LIFFE ********************** PLAY OF THE DAY - CALL ********************** IMCL – Imclone Systems $12.60 +1.16 (+0.83 this week) Company Summary: Engaged in the research and development of novel cancer treatments, IMCL focuses on growth factor inhibitors, therapeutic cancer vaccines and angiogenesis inhibitors. The company's lead product candidate, IMC-C225, is a therapeutic monoclonal antibody that inhibits stimulation of a receptor for growth factors upon which certain tumors depend. Phase I/II clinical trials have been promising. The lead candidate for angiogenesis inhibition, IMC-1C11 is an antibody that binds selectively and with high affinity to KDR, a principal Vascular Endothelial Growth Factor (VEGF) receptor, thus inhibiting angiogenesis. Why We Like It: Beginning with the Enron fiasco, shady corporate dealings have been at the forefront of investors' collective consciousness for much of this year. While the subsequent investigations have brought enough dirty laundry into the light of day to result in numerous bankruptcies, not all of the corporate malfeasance poster children have gone away quietly. IMCL looked like it could do no wrong this time last year as it was trading near the $70 level. Rejection of the company's testing of its promising anti-cancer drug Erbitux along with alleged cover-ups of the holes in that testing led the stock to plunge more than 93% from its December 2001 highs. IMCL has been basing in the $6-10 range for much of the past 5 months, but saw a dramatic surge in buying volume propel it out of that range last week. While an argument can be made that a cessation of the daily news flow about corporate shenanigans by the company's former CEO could be allowing the stock to lift, given the heavy volume that accompanied last week's rebound, there has to be something more to the story. Sure enough, there is. Apparently there is a rumor that has been making the rounds that Bristol-Myers is considering purchasing the 80% of the company that it doesn't already own at a price of $19 a share. Whether there is any truth to the rumor or not, the fact that buying interest was strong again on Tuesday indicates there could very well be further upside. The PnF chart certainly bears that out, as the Buy signal generated last week with the breakout over $10 gives a bullish price target of $30.50. That's way beyond what looks reasonable over the near term, but that doesn't change the fact that we have a strong Buy signal to work with. Once above the $15 resistance level, the bulls will be setting their sights on the $19-20 level, and that is the level we will target for this play. The profit taking yesterday shows that the stock has decent intraday support near $11.50, so another bounce there can be used for new entries. The 200-dma at $12.56 is keeping a lid on the advance right now, but momentum traders can look to enter the play on a push through that level that continues through $13.50 (intraday resistance last Thursday and then again today). This is a high risk play due to the recent volatility, but with our stop placed at $10, the risk to reward ratio looks favorable. BUY CALL DEC-10 QCI-LB OI=2499 at $3.40 SL=1.75 BUY CALL DEC-12*QCI-LV OI=1501 at $1.85 SL=1.00 BUY CALL DEC-15 QCI-LC OI=1219 at $1.00 SL=0.50 BUY CALL JAN-12 QCI-AV OI= 827 at $2.65 SL=1.25 BUY CALL JAN-15 QCI-AC OI=1631 at $1.75 SL=0.75 Average Daily Volume = 1.95 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 ************** SSF, NQLX, and LIFFE By John Seckinger jseckinger@OptionInvestor.com All three of these acronyms either define, or are related to, Single Stock Futures. Before we get into Single Stock Futures (SSF), let us go over some basic facts. Roughly 25 percent of the weekly volume on the New York Stock Exchange is generated by program trading related to the index futures and option contracts. Moreover, the futures industry has seen 800% growth in electronically traded contracts over the last five years, according to the National Futures Association (NFA) annual review. Moreover, there are roughly 27 million stock accounts, 5 million option accounts, and 750,000 futures accounts. Let’s do a real quick review of a SSF. A SSF contract is simply a standardized agreement between two parties to buy or sell 100 shares of a particular stock in the future at a price determined today. Futures contracts are bought and sold on federally regulated exchanges, and for SSFs, regulation is by both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Additionally, SSF is a commodity that delivers shares in the underlying company, ridding some traders fear that a railcar full of corn will be suddenly delivered to one’s door. Traders can also redeliver shares after selling a futures contract short and offering up the shares at expiration. It is also important to realize that shares will be able to be exchanged in “Exchange For Physical” (EFP) transactions, giving futures traders another manner of fungibility for the SSF contracts. A major difference between trading shares and SSF is the lack of an up-tick rule on SSF. A trader does not need an up-tick to sell a futures contract short, whether on shares or any other product. A trader can merely sell at the best available bid. Another key related component of this is that the SSF trader does not need to borrow shares to sell short. The short SSF trader has agreed to produce the necessary shares at delivery, assuming the trader does not cover the short and thus offset the obligation before then. Thus, the complicated borrowed share record keeping requirements for brokerage firms are eliminated when a trader chooses to short a SSF rather than the actual shares. The number of potential shorts is not limited to the financial dynamics or physical limitations of borrowing shares, but rather just by any potential regulatory position limits. Remember, SSF’s do not expose traders to the same volatility and time decay risks as options. However, SSF expire at the same time as options and offer the options trader the perfect hedging instrument. The NQLX, or Nasdaq-LIFFE exchange, offers an advanced version of electronic trading. LIFFE stands for International Financial Futures and Options Exchange. This exchange’s “first in first out” matching algorithm allows traders to be a part of trades large and small based on time and price priority. There are no designated market makers with information, speed or priority advantages. Every participating trader is effectively a market maker. On NQLX, SSF contracts are available with expirations for the first five calendar quarters (expiring in March, June, September and December) and in the first two non-quarter calendar months. For example, on July 1st, SSFs would be offered that expire in July, August, September, and December of the current year, and in March, June and September of the next year. By taking a position in a SSF, you can lock in a price today at which you'll buy and sell stocks as much as 15 months from now. Getting to some specifics, the minimum price fluctuation, or "tick" size, of NQLX SSFs is one cent per share, or $1 per contract. For calculating P/L: [Price Sold - Price Paid] x 100 shares x Number of Contracts = Profit or Loss. Moreover, the mechanisms for accounting for gains and losses and for assuring that the parties involved pay for those losses, are different in futures trading than in stock trading. In futures trading, whether you take a long or a short position, you’ll be asked to post some funds with your broker. This, however, is not for the purpose of paying for or receiving payment for the stock; if you have a long position, you haven’t bought anything yet, and if you have a short position, you haven’t sold anything yet. You will be asked to post a sum of money known as "initial margin"-- a good faith deposit that provides assurance that you can meet your obligations if your futures position moves against you. The minimum initial margin level is set by government regulations, but your brokerage firm may ask for more than the minimum if its own risk analysis requires it, or to provide more cushion before a margin call is triggered. Exchanges can and do raise and lower margin levels in response to market conditions. A simple example: Long at $50 and closing out at $55: Initial Margin at $50: [20% x $50] x 100 shares x 5 contracts = $5,000 A lot of traders wonder if SSF is a good way to hedge a position. One question comes to mind: If you want to lock in gains, or fear the company may come under pressure in the intermediate term, then hedging most likely makes sense. Another use of SSF’s can be lowering the Dow 30 to Dow 29. By selling a SSF on a stock in an index to which you don’t want to have exposure, a trader can effectively change the make up of a particular index. The reverse holds water as well. Buying a single stock future on a stock in an index can be used to add additional exposure to that stock. A few notes: Both NQLX and OneChicago have mentioned that they will be including more SSF’s contracts this week. There will also be futures on the popular Diamond (DIA) contract (beginning on Friday, November 22nd), as well as about 20 more other stocks this Friday as well. Furthermore, it is reported that there will be a 1,000 share QQQ contract. The new contracts include: Amgen Inc. (AMGN), AOL Time Warner Inc. (AOL), Applied Materials Inc. (AMAT), Cephalon Inc. (CEPH), ChevronTexaco Corp. (CVX), Cisco Systems Inc. (CSCO), Dupont (DD), eBay Inc. (EBAY), Ford Motor Co. (F), General Motors Corp. (GM), Halliburton Co. (HAL), Honeywell International Inc. (HON), IBM (IBM), Intel Corp. (INTC), Maxim Integrated Products Inc. (MXIM), McDonald’s Corp. (MCD), Micron Technology Inc. (MU), QLogic Corp. (QLGC), SanDisk Corp. (SNDK), Starbucks Corp. (SBUX), Tyco International Ltd. (TYC) and Wal-Mart Stores Inc. (WMT). By going to www.onechicago.com, a trader can also find a list of narrow-based indices (example: Banks, ticker XBNK2C, consist of BAC, ONE, JPM, WB, and WFC). A complete listing of all stocks are found here: http://www.onechicago.com/030000_products/oc_030101.html. Remember to visit later this week to see the new additions. The caveat(s)? Well, lets go over what shares of Microsoft (MSFT1C) did on Monday (remember, multiply by 100 to get shares of common stock). Open Interest of 835 and volume of 312. Oracle (ORCL1C) has an open interest of 43 (as of Monday), and only 13 contracts traded during the first day of the week. It should not be long volume picks up and the contacts becomes even more liquid. Let us break down the Microsoft Contract a little more: The December 02 and January 03 contract split the aforementioned volume of 312 (143 and 164, respectively). The range in Dec was 56.39 to 56.97, while the Jan range was from 56.52 to 56.95. Open Interest in Dec is 409, while the OI in Jan is at 422. I think it will just be a matter of time before this contract takes off. The SSF’s market has only been open since November 8th, and traded 3,000 contracts (300,000 shares of common stock) on its first day. Not bad, and it should definitely only get better. Now that the basics are out of the way, it will not be long before we look at practical trading examples while using SSF’s. Good luck. Questions are welcomed, 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”. 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