The Option Investor Newsletter Tuesday 02-04-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Worst Ever Futures Markets: After-Hour Madness Index Trader Wrap: A funny thing happened when the bond market closed Market Sentiment: Moonwalking Weekly Fund Screen: SRI Mutual Funds Updated on the site tonight: Swing Trader Game Plan: Change of Heart Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-04-2003 High Low Volume Advance/Decline DJIA 8013.01 - 96.80 8104.61 7935.12 1.68 bln 1338/1880 NASDAQ 1306.15 - 17.60 1310.48 1292.20 1.34 bln 1257/2005 S&P 100 428.84 - 6.86 435.70 436.14 Totals 2595/3885 S&P 500 848.20 - 12.12 860.32 840.19 W5000 8049.55 -105.30 8154.81 7980.27 RUS 2000 368.72 - 1.53 370.25 364.99 DJ TRANS 2145.38 - 12.10 2160.41 2131.29 VIX 36.70 + 2.72 38.08 36.22 VXN 48.31 + 2.27 48.90 47.55 Total Volume 3,213M Total UpVol 783M Total DnVol 2,368M 52wk Highs 168 52wk Lows 232 TRIN 2.16 PUT/CALL .84 ************************************************************ Worst Ever That was the comment by John Chambers about the current technology environment. The AIG CEO made similar comments about the current state of the liability insurance business when warning this morning about a -$1.8 billion charge. Does this sound like an economic recovery? Dow Chart – Daily Dow Chart - 45 min Nasdaq Chart – Daily We began the day with the Factory Orders report, which posted a +0.4% gain on the headline number, which was above the +0.3% consensus. Unfortunately if you take out defense and aircraft the number actually dropped to -0.33%. The Computer and Electronics orders component rose +3.2%. Order backlog fell again suggesting more layoffs ahead. It was obviously a mixed report and despite the rise in the headline number it did not encourage investors. According to the Challenger Layoff Report the number of layoffs increased +42% from 92,917 in December to 132,222 in January. This was above the 2002 monthly average of 119,200. According to John Challenger there is no evidence that the pace of layoffs has slowed. This is a leading indicator for the Nonfarm Payrolls on Friday and a telling clue to the strength of the fragile recovery. We saw last week that the Help Wanted Index had fallen to a very low level. Fewer jobs and higher layoffs are not indicating an end to the soft patch. Chain Store Sales came in at -0.9% and reversed the gains for the prior two weeks. Some feel the slow sales are a result of lower inventories going into the holiday season leaving lower levels of clearance items to dump in January. Stores would rather not have any sales than have to sell excess holiday inventory for a loss. With confidence/sentiment slipping toward the lows and rising unemployment the odds of a pickup in buying are slim. Impacting the market more than the economic reports was a warning from AIG that they were going to take a $1.8 billion charge to cover spiraling claims. They claimed premium rates have been driven down by fierce competition to levels that did not cover damage awards in today's litigious environment. This knocked -3.63 off the price of AIG and the comment about lower premiums due to fierce competition rippled through the sector and drove prices lower. Another example of tough times was the decision by the Goodyear board to eliminate their 12-cent dividend to save cash. They decided to take the action in light of disappointing results and challenging conditions. GT notified employees in January it may cut -15% of its US workforce. Are they telling us the auto companies are ordering less tires in expectation of slower sales? After the bell Cisco reported earnings that beat the street on the surface at 14 cents a share compared to estimates of 13 cents. That was the good news but that news was tainted. Those results were also based on Cisco's buyback of $1.5 billion in stock in the quarter. That is 100 million shares. Other factors included a revenue number that was on the bottom edge of the consensus. Cisco said that sales could fall -2% to -3% in the current quarter due to the "most challenging environment the information technology industry had ever faced." Not very bullish words from the master of spin himself. He was very positive about Cisco and the potential for profits WHEN the spending in the IT sector returned. I believe him because their gross margins rose to a whopping record 70.4%. While this is great one analyst said he would be more comfortable with 50% so they would have some growth room. Performing at such high profit rates means they could explode on volume in my personal opinion. Still CSCO fell in after hours on the outlook statements. While Cisco may be performing well despite the tough environment and falling sales there are probably few other tech companies who are doing that good. The news of the 70% margin for Cisco is great for Cisco but other companies are fighting to make a profit much less prosper. Cisco may have a decent day on Wednesday but other techs may not do as well based on the tough environment talk. In geopolitical news North Korea took exception to the US statement that they were going to move ships and planes into the region to combat a potential future threat. Iraq claimed again they had no weapons despite another minor find by the inspectors. Regardless of the claims and posturing we will see the evidence the US is willing to release tomorrow when Powell goes before the UN. The coalition is actually growing with a few more countries leaning in the US direction due to strong lobbying by the top players. I have no clue as to the market direction after this speech. If he proves his case and gets more UN support that would be a good thing for the war but a negative for the market? If he does not prove anything and the world realizes the US is going to act by itself wouldn't that be bad for the market? Who knows what is priced in at this point. The markets need help from somewhere. The Dow tested 7950 once again and held but struggled getting back over 8000. The Nasdaq finally gave up the 1320 level and the 1300 level for most of the day but clawed its way back to 1305 on short covering in front of Cisco's earnings. The rising oil, gold and falling dollars is extracting money from the markets in a torrent. Comments like AIG, GT, CSCO today along with the Challenger Layoff report are not building any confidence in a recovery. The Nonfarm payrolls are due out Friday and most bets are for a negative number again. This will be the third consecutive month and fourth out of five months if it happens. I think the bottom line is still a negative outlook despite all attempts to spin it to the contrary. There are pockets of strength like we saw last Friday but the potential war is keeping those areas from expanding. The markets are showing a strong desire to hold at this level but the overall trend is still down. Tomorrow should be one more step toward clearing the war uncertainty and the results of "seeing clearer" could be good or bad. These next 2-3 weeks are going to be tough unless the US says "ok, we are giving up and going home." Anything else will continue to be a drag of some sort. In the S&P Emini futures there was an unusual event this afternoon. They were trading for 847.25 when Cisco earnings were announced. The intraday high was 848.00. When CSCO announced they beat the street they spiked to 948.00. No, that is not a misprint. Somebody entered a trade to buy several hundred contracts but added an extra zero. In literally a couple of heartbeats the price jumped +100 points. Traders were dumbstruck. I had about a dozen charts of the ES03H contract open on my desktop for different intervals and the price literally rolled off the top of the screen within a couple seconds as buy stops were triggered for level after level. Globex eventually busted all the trades above 860 once the error was reported but there were some really unhappy traders for about 20 min. Several really happy ones as well who had shorts parked well above the current ranges. When I first saw the spike I thought Cisco had blown away estimates but could not imagine a win that could produce that type of spike. Immediately I thought Saddam had been eliminated or Osama had been found. That would be the type of reaction I would expect. Just not in 5-10 seconds. Just proves you always need stop losses regardless of how far away you are from the current price. Have you hugged your stops today? Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** After-Hour Madness By John Seckinger jseckinger@OptionInvestor.com Following Cisco's earnings report, futures went straight up and then straight down. When sanity finally set in, sentiment remains at roughly the level as when the week started. This should all change very soon. Tuesday, February 4th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 8013.29 -96.53 8104.61 7934.77 YM03H 8020.00 -57.00 8082.00 7905.00 26,434 Nasdaq-100 971.73 -15.34 974.68 960.01 NQ03H 975.00 -11.00 978.50 959.50 218,273 S&P 500 848.20 -12.12 860.32 840.19 ES03H 849.25 -9.25 860.00 838.25 744,236 Contract S2 S1 Pivot R1 R2 Dow Jones 7847.72 7930.51 8017.56 8100.35 8187.40 YM03H 7825.00 7923.00 8002.00 8100.00 8179.00 Nasdaq-100 954.14 962.94 968.81 977.61 983.48 NQ03H 952.00 963.50 971.00 982.50 990.00 S&P 500 829.44 838.82 849.57 859.00 869.70 ES03H* 827.50 838.25 849.25 860.00 871.00 *Note: The ES03H daily levels will be based on a high of 860. I went through time and sales and saw a ton of trades 'crossed out' above that area. If the 948 level was used (high on cme website), the pivot would be at 878. I find it impossible to believe it traded anywhere near there. Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7719.00 7883.00 8012.00 8176.00 8305.00 NQ03H 930.00 957.25 992.25 1019.25 1054.25 ES03H 821.00 838.00 852.75 869.75 884.50 Monthly Levels (January's High, Low, and Close) Contract S2 S1 Pivot R1 R2 YM03H 7237.00 7642.00 8253.00 8658.00 9269.00 NQ03H 875.75 930.25 1019.25 1073.75 1162.75 ES03H 775.00 814.75 876.00 915.75 977.00 YM03H = E-mini Dow $5 futures NQ03H = E-mini NDX 100 futures ES03H = E-mini SP500 futures Note: The 03H suffix stands for 2003, March, 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. Before we begin, let us take a look at Jim Brown's day in the Futures Monitor. Recapping his signals: Short 842.00, exit 842.50, change -0.50 Long 842.50, exit 840.75, change -1.75 Long 843.00, exit 843.50, change +0.50 Short 840.00, exit 841.50, change -1.50 Short 846.50, exit 843.75, change +2.75 Total for the session: -0.50 Total for the week: +2.50 For information on the Futures Monitor and Jim Brown's posts, please go to the following link and download the current market monitor. If you already have the most recent version, simply go to the Futures Monitor Post on the upper left hand portion of the applet. http://www.OptionInvestor.com/itrader/marketbuzz/download.asp The March E-mini S&P 500 Contract (ES03H) An interesting day to say the least. The ES contract gapped lower and traded down to the “support zone” highlighted on Monday from 837 to 839.25. The 839.25 area was breached, but not 837. Shorts covered, the memorial service took place for the heroic astronauts, and attempted weakness late in the session was matched by shorts squaring ahead of Cisco’s report. That report sent the ES contract threw the roof, and later imploded as revenues were dissected and guidance given. Shares of Cisco fell from 13.20 to 12.30 before recovering to the 13.12 area. The high was 13.38, but the ES contract first appeared to trade significantly higher. In after-hours, the ES contract is at 849.25. After Cisco, how does this affect our intermediate-term outlook? It doesn’t. Prices never hit the December 31st low of 686, and I believe the after-hours high to be underneath the 50% daily retracement area as well (861.25). However, bears failed to get a close under 839 and is now just barely under the half-way mark from the 50% area to the 61.8% retracement level of the move from October to December. The intermediate "zone of resistance" in the ES from 867.75 to 872.50 remains intact. Also, if weakness takes the ES contract under the "zone of support" from 837-839, the downside objective will be for a move to the 829 area. S2 comes in at 827.50. S1 is in the support zone at 838.50. R2 is in the zone of resistance.’ Chart of ES03H, Daily Looking at a 60-minute chart of the ES contract, the daily pivot comes in at 849.25 and can be used as a barometer for aggressive traders. Under 849.25, look for a move to 844. Above the pivot, odds are that the ES contract trades towards 855.75. Prices really are more neutral here than anything else; however, the move should start from near Wednesday’s pivot and take out one of the daily retracement areas without looking back. Chart of ES03H, 60-minute Bullish Percent of SPX: 44.60% and lower by 1.09% on Tuesday. The column of O's remains at 10. There is still a solid chance the bullish percent will move to the 40% level. Note: In order to really look for a bottom, I would like to see a move under 30%, followed by a row of "X's" that takes the indicator back above this 30 area. Looking at P&F analysis, the SPX contract reversed back into a column of 0's on Tuesday, and there is now a triple-bottom at 845. The low was 840.19 on Tuesday,and a print of 840 would have given a strong sell signal. The bearish price objective remains at 750. A move above 870 would give a buy signal. The March E-mini Nasdaq 100 Contract (NQ03H) With the 978.50 to 983 area finally taken out, bearish traders should look for a move to the Weekly S1 level at 957.25. Only a daily close above 983 will shift sentiment, but that is still a solid risk/reward trade. Aggressive longs could take positions above 983 and use a stop back at 978 or slightly underneath. The objective would be for a move to 1000 and then to the 1019-25 area. Conservative traders can look for a move to 962 and half of the daily retracement levels (see chart). More aggressive bears can actually add to positions if the weekly S1 area is cleared, and then look for a move to 941.50. Note: Daily S2 is at 952, so some of these levels could be in play on Wednesday. The daily R1 area is at 982.50, and just under the aforementioned 983 level. This adds to its significance. Chart of NQ03H, Daily Looking at a 90-minute chart of the NQ contract, notice how both R2 and S2 really doesn’t line up well with the aforementioned levels. However, both R1 and S1 lines up very well. With that said, look to put more emphasis the first support and resistance areas. Chart of NQ03H, 90-minute Bullish Percent for NDX: This indicator fell 2% to 44% on Tuesday, and continues to portend bears will be selling rallies going forward. The column of "O's" is now at eleven. Note: The NDX gave a sell signal, according to P&F charts, as the 975 area was penetrated. The bearish objective now stands at 825. The March Mini-sized Dow Contract (YM03H) The YM contract took out the lower retracement area of 7948 on Tuesday; however, prices recovered once again and closed back into the range of 7948 to 8152 area. Looking at the chart below, the futures contract remains inside the bearish regression channel, but direction is not as clear as I would like. Least resistance, on an intermediate-term level, is still bearish. Note: I will be using the range from 8152 to 8176 as the “key resistance” area (8176 being the weekly R1 area). The monthly pivot is at 8253. Chart of YM03H, 90-minute Bullish Percent of Dow Jones: A P&F chart for the Dow fell back into a column of "O's" on Tuesday, and now is showing a triple-bottom at the 7950 area. There is still a bullish price objective of 8600, but that will change once again if 7950 is taken out. As far as the bullish percent is concerned, it fell 3.33% to 26.67, and the column of O's now stands at 16. This is significant relative weakness, but the bullish percent of the NYSE has just turned into a column of "O's". Remember, a close underneath 30% should start to shift risk into the bears' camp. Good Luck. Questions are welcomed, John Seckinger ******************** INDEX TRADER SUMMARY ******************** A funny thing happened when the bond market closed Today's session started out with a "defensive" tone as Treasuries found buying on U.S. dollar weakness. Meanwhile, gold futures bid to contract highs as stocks readied to open lower. As the session progressed and economic data looked to be somewhat ignored, the major indexes found some footing at their WEEKLY S1 levels support and started to mount a rather impressive recovery. With just about an hour left in today's equity trading close, stocks had turned lower as bond bulls looked to finish out their session with a strong round of buying and drove yields back to a session lower. For equities, it looked like a route was on for the bears into the close. Then, suddenly, but with plenty of notice, the bond market closed for trading at 03:00 PM EST (the bond markets always close at 03:00 PM EST on full session days), and the equity indexes made one last push into the close. Get a bond and equity trader in the same room and you'll get different stories from each as to who the better, or should I say "smarter" trader is. A bond trader will tell you that she's got to be smarter as the bond market is twice the size of the equity market and with interest rates and Treasury bond YIELDS at historically low levels, a bond trader has to be very smart when monitoring risk. An equity trader will argue that bonds are a simple instrument to trade as yield is "certain" when the trade is initiated, while equities hold not only greater potential reward, but greater risk with various dynamics or scenarios constantly shifting the hunger or complete distaste for the pieces of paper worth 1-cent par value. Here's a quick look at how the 10-year YIELD ($TNX.X) traded today. Just remember, a bond's YIELD falls as that bond's price rises. Underneath the 10-year YIELD chart, I've place the S&P 100 Index (OEX.X). Both chart's time interval is 5-minutes. My general preface with the 10-year YIELD is that as YIELD moves lower (from buying in the bond) it depicts a market that is more "defensive" and seeking out the safety of bonds. The different retracement levels on the OEX chart are the same levels we looked at in last night's Index Trader Wrap. 10-year YIELD / S&P 100 Comparison - 5-minute intervals In last night's wrap, we thought a weaker dollar and buying in bonds (a lower YIELD as a result) might be a signal for weakness in stocks, and that was what looks to have unfolded today. I do believe, but will never know for sure, if the bond market had remained open longer, that the 10-year YIELD might well have broken its days low and carried the OEX along for the ride, with a close at its session low. However, when the bond market closed, the OEX turned higher about 10-minute later and closed right at our 38.2% retracement from WEEKLY pivot analysis. As it relates to technical analysis, one thing I think traders need to be cognizant of is today's "gap" lower in the 10-year YIELD (I haven't shown extended hours of trade) that may "need" to be technically filled back to the upside. If so, this little area that is void of trading, if filled back higher, could see an "in unison" move back up to the WEEKLY 61.8% retracement level near OEX 436. In times of "uncertainty" like I think the market is in right now, Treasury YIELDS can be a good security to monitor to get a feel for the MARKET's perception of risk as it relates to stocks and bonds. My thoughts as it relates to the above chart comparison between the OEX and 10-year YIELD is this. As long as the 10-year YIELD remains below the 3.988% level (this is pretty close to past commentary regarding stocks being at risk to lower prices should 10-year YIELD fall back below 4.0% or 40.00) I'm view the MARKET's psychology as more defensive, and therefore would be more bearish toward the OEX below 436. I have no clue what Secretary of State Colin Powell is going to say tomorrow, but will be keeping an eye on bond YIELDS to try and get a reading on how the MARKET is perceiving risk. With the U.S. Dollar seeing selling again today, this to me is somewhat of a "lack of confidence" vote from foreign investors in the greenback. Is it the President's Budget that will see rising deficits, or is it a U.S.-lead "war with Iraq" that is causing the dollar weakness? This is a question I can't answer. If it was a "lack of confidence" type of trade, then I would have thought Treasuries would see selling in combination with the selling in the dollar. But this hasn't been happening. I think the weakness in the dollar has quite a bit to do with "Iraq war" concerns, and why we are seeing money go into bonds, and the money going into bonds for the most part is from U.S. citizens, pulling money out of stocks. After all, you and I don't necessarily sell our dollars to go into bonds, but foreign investors will sell their U.S. dollars to take their money back home. The S&P 100 Bullish % ($BPOEX) saw a net loss of 2 stocks to reversing p/f sell signals. This has the S&P 100 Bullish % falling to 41% and still "bear confirmed" status. S&P 500 Index Chart - Daily Interval The SPX has "whipped" back below this week's pivot of 854.50 and correlative 854.66 level from monthly 38.2% retracement level. The inability of the SPX to close above 861.24 now has that level looking like a firm selling point yesterday, with additional selling today. As such, I'd look for FIRM resistance to be building at SPX 854 and WEEKLY "max target" of 826 to be in play by Friday as lower Bollinger Band gives some further downside room after last week's test of the lower range. Stochastics on the daily chart are trending higher and this is thought of as "bullish divergence" (when an oscillator moves the opposite of price) and can signal a quick and sudden rebound for price. However, as we noted last week, we thought we might be on the lookout for stochastics to approach the mid-portion of their overbought/oversold zone like they did in mid-December when the SPX looked to stabilize around the 900 level, before the SPX declined further to 872-877 area and then rebounded STRONG to 935. As such, similar technicals unfolding would most likely have bears rather eager to lock in gains on an SPX decline into the 837-826 zone, with MAX decline of 826 this week being the most I would look for. SPX bears would want to continue to monitor bonds and the dollar and look for bond price strength (lower YIELD) and dollar weakness to have stocks vulnerable. Today's action saw a net loss of 5 stocks to reversing p/f sell signals in the SPX and has the S&P 500 Bullish % ($BPSPX) falling to 45% bullish and still "bull correction" status. Dow Industrials Chart - $50-box size The Dow Industrials (INDU) 8,013 -1.19% traded a session low of 7,934.77 today and didn't quite test its WEEKLY S2 level of support. The Dow has also been finding buyers above the 7,900 level the past 5-sessions and shows a triple-bottom at 7,950. Bears look for a break of 7,900 to lead to WEEKLY S2 of 7,801, which would be just above the lower Bollinger band of 7,750. I'd use the recent double-top buy signal at 8,150 as an alert to strength, but would look for WEEKLY R2 of 8,283 to serve resistance along with the moving lower "Avg," which is the 21-day SMA and middle-portion of the Bollinger Band. Today's action saw a net loss of 1 stock to a reversing p/f sell signal in the Dow, which has the Dow Inustrials Bullish % ($BPINDU) falling to "longer-term oversold" levels of 26.67%. Again, levels above 70% are deemed "overbought" while levels below 30% are deemed "oversold." The more narrow Dow Bullish % has had a tendency to fall to levels of 20%-3.33%, but a lot of risk has been removed since late November's 72% reading (red B on a p/f chart is early November, while red C is early December). NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals Tonight I'm taking one of our "highlighted yellow" bars of resistance from last night's wrap of $26.00 and moving it lower to mark resistance in the QQQ from $24.49-$25.52. In after-hours trading, Cisco Systems' (NASDAQ:CSCO) $13.20 -2.07% earnings provided some rather volatile swings as the company exceeded bottom line estimates by 2-cents, but revenues were slightly below expectations. CEO Tom Chambers was quoted as saying, "most challenging environment the information technology industry has ever faced." With the NASDAQ-100 Bullish % ($BPNDX) seeing 2 more stocks generate reversing point and figure sell signals and bullish % still "bear confirmed" at 44%, I view formidable resistance in the Q's between $25.31 and $25.52, with near-term resistance at $24.50. Weekly "MAX target" for bears would be the strong correlation of support from the pivot matrix at/near $23.20. Here are tomorrow's daily pivot analysis updated levels. Pivot Matrix A "daily" level to monitor for support tomorrow is the OEX daily S1 of 424 and correlative weekly S1 of 425. Today's low in the OEX was 424.44, but in its "darkest minutes" found buyers near this level. Other DAILY S1s and WEEKLY S1s are also quite correlative with each other and bears will most likely need dollar weakness and buying in Treasuries to see these levels broken to have a shot at the WEEKLY S2s. With all of the bullish % indicators showing a growing number of stocks giving reversing p/f sell signals, the market internals continue to depict weakness. The very broad NASDAQ Composite Bullish % ($BPCOMPQ) saw a net loss of 0.46% today and has the bullish % edging lower at 42.16%. It would still take a reading of 42% to have this bullish % reversing back lower into "bull correction" status and following last Thursday's reversal lower of the NYSE Bullish % ($BPNYA). These two very broad bullish % indicators are often the very last to turn up or down in a "cycle" and when they get in unison, act like a "sledge hammer" or large weight in a downward move. 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 **************** Moonwalking by Steve Price Was that a reversal of sentiment we saw today, or simply more range bound trading? So far we have yet to break the range that we have been in for the last week, and until the Iraq situation comes more closely into focus, it is likely to continue. Of course with Cisco earnings out tonight, we may get a push in one direction or the other, but the news is still currently dominated by Iraq. Today's sell-off was enough to turn the point and figure charts in the major indices back into bearish columns of "O" and has us flirting with triple-bottom breakdowns in the Dow and SPX. The OEX is looking at a double-bottom signal just below today's range, or for non-traditional PnF chartists a descending triple- bottom. While the equity percentages for those patterns cannot be translated directly to indices, those breakdowns will still look awfully bearish if they occur. However, they have not yet occurred and until we get them, it is hard to conclude we are anything but range bound. The SPX breakdown would occur at 840 and the index actually rebounded at 840.19, indicating there are possibly institutions playing the bounce from those levels. The morning sell-off followed news from insurance giant AIG that it would take a$1.8 billion charge in the fourth quarter to increase reserves for workers' compensation claims. The company said judgments and settlements reached record high levels of frequency and severity in 2002 and increased across several areas. AIG also is increasing reserves to cover directors' and officers' liability and health care liability, as well. That sent AIG down 6.5% with a loss of $3.63 and sent other financials reeling. Once the financials gave in, the rest of the market followed. It is curious that workers' comp claims reached their highest levels, considering unemployment reach higher levels in 2002, and thus there were fewer workers. However, maybe this is further argument for the President's tort reform agenda. Certainly, with doctors going on strike in New Jersey due to high medical malpractice costs resulting from large jury awards, there are a number of reasons supporting that theory. Workers' Compensation is generally handled in an administrative court, rather than the traditional courtroom, but it is becoming obvious that claims of all types, and the awards that follow, are increasing. One of the other catalysts for this morning's slide was a warning from French telecom giant Alcatel. The equipment maker forecast a drop of 25%-30% in first-quarter sales, following a similar warning from Ericsson on Monday. Sales declines were expected, but not to this degree. Gold futures continued their defensive climb ahead of Colin Powell's speech to the U.N. They raced to multi-year highs, jumping as high as 382, following a close of 370.8 on Monday. That defensive indication was confirmed by moves in oil and bonds. Oil futures got a big bounce after falling on Monday following an increase in Venezuelan output. That pricing pressure didn't last long as war fears took over once again, driving prices back over $33 per barrel for March futures. The Semiconductor Index (SOX) went into a holding pattern ahead of Cisco's earnings release. While Cisco doesn't make chips, the forecast from the company should affect most techs tomorrow and traders seemed weary of taking positions ahead of those earnings. Those earnings beat estimates by two cents, but were accompanied by lower than expected sales and cautious comments. Cisco's CEO called it "the most challenging environment the information technology industry has ever faced." In spite of the earnings beat, the stock sold off slightly after-hours. After a close of $13.20, it was trading $13.12 as of this writing. It did trade as low as $12.63 following its announcement. We did rebound strongly from the day's lows, just above the breakdown levels. The Dow finished the day with a loss of 96.53, giving back part of the gains of the past two days, but still nothing decisive. Traders following the retracement from the August highs to the October lows in the Dow, SPX and OEX will note that we have been stuck between the 50% retracement to the upside and the 38.2% retracement to the downside on a closing basis. Look for a closing print outside of those brackets for an indication the trend will continue in one direction or another. There is still quite a bit of overhead resistance to get through if we do break to the upside, but that will be the first step. If we break to the downside, there is little to prevent us from heading toward first the July lows, and then possibly those set in October. ---------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8013 Moving Averages: (Simple) 10-dma: 8113 50-dma: 8523 200-dma: 8781 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 848 Moving Averages: (Simple) 10-dma: 860 50-dma: 899 200-dma: 931 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 971 Moving Averages: (Simple) 10-dma: 996 50-dma: 1041 200-dma: 1033 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX has gone into a consolidation mode, barely moving since the AMAT warning last week sent it to a bounce off the 260 support level. It has hovered around 270 the last few days, but now registering lower closes for four straight days. The trend remains down, but it the sector has actually out performed the rest of the techs. The COMP and NDX have broken down to new lows, with the COMP taking out support at 1300 intraday. We'll be watching the reaction in the tech sector to the Cisco news (highlighted above) after the bell. If the SOX does break down below 260 on a sell-off, it finds the next level of support at in the 235-245 range. 52-week High: 657 52-week Low : 214 Current : 269 Moving Averages: (Simple) 21-dma: 303 50-dma: 316 200-dma: 349 ----------------------------------------------------------------- Market Volatility The VIX rebounded back over the 35% level that has been so pivotal in recent months. The break below that level on Monday indicated fear had been draining out of the market as we tested resistance toward the upper end of this week's range. Today's test of the lower end of that range woke up traders to the downside possibilities and sent the VIX as high as 38.08 intraday. If we do continue lower in the equities, the next level of resistance in the VIX is 40 (actually 40.89 intraday). A decisive move over 40 would indicate a bigger breakdown in the wings. CBOE Market Volatility Index (VIX) = 36.70 +2.72 Nasdaq-100 Volatility Index (VXN) = 48.31 +2.27 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.84 522,531 439,393 Equity Only 0.78 356,403 277,660 OEX 1.37 22,092 30,331 QQQ 0.79 59,494 47,278 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 45.2 - 0 Bull Correction NASDAQ-100 44.0 - 3 Bear Confirmed Dow Indust. 26.7 - 3 Bear Confirmed S&P 500 45.0 - 1 Bull Correction S&P 100 41.0 - 2 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.42 10-Day Arms Index 1.39 21-Day Arms Index 1.31 55-Day Arms Index 1.29 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 1133 1715 NASDAQ 1175 1920 New Highs New Lows NYSE 71 61 NASDAQ 61 79 Volume (in millions) NYSE 1,668 NASDAQ 1,349 ----------------------------------------------------------------- Commitments Of Traders Report: 01/28/02 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 long and short positions, ending up with a net short increase of 4,500 contracts. Small traders took the opposite approach, reducing both positions, but ending up with a net increase of 4,300 long contracts. Commercials Long Short Net % Of OI 01/07/03 411,542 455,538 (43,996) (5.1%) 01/14/03 411,052 453,164 (42,112) (4.9%) 01/21/03 415,028 456,885 (41,857) (4.8%) 01/28/03 422,232 468,586 (46,354) (5.2%) 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 01/07/03 143,169 83,895 59,274 26.1% 01/14/03 144,182 92,358 51,824 21.9% 01/23/03 148,227 95,356 52,871 21.7% 01/28/03 142,734 85,567 57,167 25.0% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials left positions virtually unchanged, with a net reduction of 1,300 short contracts. Small traders Small traders left the long side unchanged, while reducing shorts by 800 contracts. Commercials Long Short Net % of OI 01/07/03 37,966 48,156 (10,190) (11.8%) 01/14/03 38,057 45,060 ( 7,003) ( 8.4%) 01/23/03 37,174 49,789 (12,615) (14.5%) 01/28/03 37,955 49,321 (11,366) (13.0%) 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 01/07/03 19,708 8,453 11,255 40.1% 01/14/03 20,757 8,320 12,437 42.8% 01/23/03 25,852 6,764 19,088 58.5% 01/28/03 25,814 7,576 18,238 54.6% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials reduced the overall long position by 1,400 contracts, while small traders reduced the net short by 200 contracts. Commercials Long Short Net % of OI 01/07/03 16,210 11,333 4,877 17.7% 01/14/03 17,804 12,427 5,377 17.8% 01/23/03 16,901 11,031 5,870 21.0% 01/28/03 16,013 11,574 4,439 16.1% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 01/07/03 4,963 8,334 (3,371) (25.4%) 01/14/03 4,552 7,697 (3,145) (25.7%) 01/23/03 5,120 8,282 (3,162) (23.6%) 01/28/03 4,838 7,836 (2,998) (23.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* If you 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 ************************************************************** ****************** WEEKLY FUND SCREEN ****************** SRI Mutual Funds This week, we screen a universe of socially responsible investing ("SRI") mutual funds to see which ones have performed the best in relation to similar funds. We get our list of SRI funds from the Social Investment Forum site (www.socialinvest.org), the national trade association for the social investment industry. Their list includes all Social Investment Forum mutual fund members that are at least three years old, and includes only the A shares of funds with multiple share classes. Money market funds aren't included. Why should you consider investing in a socially responsible fund? According to the Social Investment Forum, there are a few reasons to consider SRI mutual funds today. First, the percentage of all socially and environmentally responsible mutual funds earning the two highest marks from either or both Lipper and Morningstar rose slightly in 2002. Of the 51 mutual funds on the SRI list, nearly two out of three (65 percent) hold one of the two highest ratings for performance from Lipper and/or Morningstar. Of the 18 mutual funds on the list with at least $100 million in assets, 13 out of 18 (72 percent) received top performance ratings from one or both of the fund trackers through 2002. The Social Investment Forum also states that assets of SRI mutual funds actually grew on a net basis in calendar 2002 compared with net cash outflows by other equity mutuals. According to Lipper, SRI mutual funds experienced net inflows of $1.5 billion in 2002, while diversified stock funds posted net outflows of nearly $10.5 billion. Some believe the corporate scandals of 2002 had much to do with the net inflows into SRI mutual funds with more investors becoming concerned about the companies in which they invest. So, investors sharing those concerns may wish to consider SRI mutuals for a portion of their long-term financial plan. Screening Process For our purposes this week, we're going to focus on the SRI funds tracked by the Forum that are currently 4-star or 5-star rated by Morningstar for risk-adjusted performance in relation to category peers. According to the Forum website (www.socialinvest.org), 43 percent of the SRI funds they track have 4 or 5 stars compared to 32.5 percent for the general mutual fund universe. We counted 22 SRI funds with Morningstar 4-star or 5-star overall risk-adjusted performance ratings, as follows: SRI Mutual Funds With Morningstar 4-Star Ratings: American Trust Allegiance (ATAFX) Aquinas Growth (AQEGX) Ariel Appreciation A (CAAPX) Bridgeway Ultra Large 35 Index (BRLIX) Calvert New Vision Small Cap A (CNVAX) Calvert Social Investment Enhanced Equity A (CMIFX) Calvert Social Investment Equity A (CSIEX) Citizens Small Cap Core Growth (CSCSX) Neuberger & Berman Socially Responsible Inv (NBSRX) Parnassus Fund (PARNX) Parnassus Income CA Tax-Free (PRCLX) Pax World Balanced (PAXWX) Pax World High Yield (PAXHX) Portfolio 21 (PORTX) Walden Social Balanced (WSBFX) SRI Mutual Funds With Morningstar 5-Star Ratings: Ariel Fund (ARGFX) Bridgeway Aggressive Growth (BRAGX) Bridgeway Ultra Small Company (BRUSX) Bridgeway Ultra Small Company Tax Advantage (BRSIX) Parnassus Equity Income (PRBLX) Walden Social Equity (WSEFX) Women’s Equity Fund (FEMMX) These 22 top-rated SRI mutual funds include all the fund families you would expect to see in the SRI investment world including Pax World, Ariel, Calvert, and Parnassus, to name a few. So, in that regard, the 22 funds make an excellent pool of SRI investments to consider. Some of these funds have been discussed before on this website over the last couple years. We then compared the 22 funds on return, risk, and expense, using Morningstar's Fund Compare tool (www.morningstar.com), and scored the SRI funds based on risk factors such as beta, alpha, standard deviation and Sharpe ratio, as well as their expense ratios. Our customized scoring criteria looked something like this: Morningstar Score Tool Criteria: Low Standard Deviation Low Beta High Sharpe Ratio High Alpha High Yield Long Manager Tenure Low Turnover Low Expense Ratio In other words, we said score these 22 SRI mutual funds using our customized criteria. Based on our customized criteria and giving equal importance to each criterion the Ariel Fund (ARGFX) had the highest score, a 36. Six SRI funds had scores of 30 or better as follows: SRI Funds With Highest Customized Scores: 36 Ariel Fund (ARGFX) 34 Parnassus Income CA Tax-Free (PRCLX) 33 Bridgeway Ultra Small Company (BRUSX) 32 Pax World High Yield (PAXHX) 31 Parnassus Equity Income (PRBLX) 30 Pax World Balanced (PAXWX) Five SRI funds scored less than 20 points - Bridgeway Aggressive Growth, Calvert Social Investment Enhanced Equity, Citizens Small Cap Core Growth, American Trust Allegiance and Portfolio 21. The Portfolio 21 Fund scored only 8 points. We played around with the criteria importance dials, raising the importance of having high alpha, high Sharpe ratio, long manager tenure, low expense ratio, and high yield. The Ariel Fund had a high score of 58 points now. Bridgeway Ultra Small Company Fund and Parnassus Income CA Tax-Free tied for second with a 55 score. Parnassus Equity Income (52) and Pax World High Yield (50) funds were the other two SRI funds to score 50 or more. We returned to the Fund Compare tool to check out costs/expenses, and to make sure that none of the SRI funds are currently closed to new investors. Two Bridgeway funds, Aggressive Growth (BRAGX) and Ultra Small Company (BRUSX) are not open to new investors at this time, so scratch them off the list. We also eliminated the Walden Social Balanced Fund (WSBFX) and the Walden Social Equity Fund (WSEFX) since they require $100,000 to open an account, too high for the average individual investor. Favorite Funds Of the 18 SRI mutual funds left on our list, the one we like the most for long-term investors is the Parnassus Equity Income Fund (PRBLX) managed by Todd Ahlsten since May 1, 2002. Ahlsten seeks to achieve the fund's income and growth objective by investing at least 75 percent of assets in dividend-paying stocks, emphasizing those that pay an equal or better dividend than the average stock in the S&P 500 index. Its social criteria does not allow Ahlsten to invest in companies that produce alcohol, tobacco, weapons, or nuclear energy. Relative to the large-cap value category, Parnassus Equity Income Fund has produced high returns for investors with a below average level of risk, receiving a highest 5-star rating from Morningstar for risk-adjusted performance. This fund also currently receives Lipper's highest grade ("1") for both total return and consistent return performance. The fund's below average risk level shows up also in its Lipper preservation score. Here again, Lipper awards the fund its highest mark of 1 for capital preservation. So, the Parnassus equity income fund has excelled at producing consistent strong returns in good times and preserving capital in bad times. Below is a performance summary as of Monday, February 3, 2003 for the Parnassus Equity Income fund, using Morningstar's numbers and category rankings. YTD 2003 Return: - 0.7% Parnassus Equity Income (PRBLX) 5th Percentile - 2.2% Average Large-Cap Value Fund - 2.2% S&P 500 Large-Cap Index 1-Year Return: - 5.4% Parnassus Equity Income (PRBLX) 1st Percentile -19.3% Average Large-Cap Value Fund -22.1% S&P 500 Large-Cap Index 3-Year Annualized Return: + 2.9% Parnassus Equity Income (PRBLX) 4th Percentile - 5.4% Average Large-Cap Value Fund -14.3% S&P 500 Large-Cap Index 5-Year Annualized Return: + 9.0% Parnassus Equity Income (PRBLX) 1st Percentile - 1.3% Average Large-Cap Value Fund - 1.8% S&P 500 Large-Cap Index While the fund's long-term track record is not fully attributable to the current manager, Todd Ahlsten, he has done a good job with the fund since taking the reins, minimizing stock losses relative to similar funds. The Parnassus Equity Income Fund, accordingly, maintains its superior long-term performance record. You can see that trailing 5-year numbers are still quite strong, producing an average annual rate of return of 9 percent for investors when the average large-blend fund lost 1.3 percent and the market (S&P 500 index) declined by an average rate of 1.8 percent a year. Since arriving, Ahlsten has the fund in familiar turf - the top 5 percent of the Morningstar large-cap value category. So although there has been a manager change here within the last year, mutual fund investors have reason to remain optimistic about this fund's long-term prospects. Note, however, that Ahlsten takes a broader approach to stock investing and has more of multi-cap blend style (versus its historical style average, large-cap blend). That may increase the fund's volatility compared to historical levels, but it may also increase the fund's long-term total return potential. Other funds we like include the Ariel Appreciation Fund A (CAAPX) and the Ariel Fund A (ARGFX). Both funds are run by John Rogers, Jr. using a disciplined approach, which blends "value and growth" into one portfolio. Ariel Appreciation Fund invests primarily in mid-cap and small-cap stocks, while the Ariel Fund invests mostly in the small- and micro-cap sectors. Rogers recently assumed the day-to-day portfolio management reins for Ariel Appreciation Fund and has managed the flagship Ariel Fund for over 16 years. Ariel Funds seek environmentally responsible companies and exclude from investment those issuers primarily involved in the manufacture of weapons systems, nuclear energy, or tobacco. According to Morningstar, Ariel Appreciation Fund is 4-star rated and Ariel Fund is 5-star rated for risk-adjusted returns relative to category peers. In relation to other mid-cap blend funds, the Ariel Appreciation Fund has generated above average returns, with below average risk, over time. In the last three years, the fund has produced high return with average relative risk, receiving an overall 3-year rating of 5 stars. Ariel Fund has generated above average returns over time, with below average risk in relation to other small-cap blend funds. In the last three years, the Ariel Fund has produced high returns, with below average risk relative to other small-cap blend funds. Conclusion Both the Parnassus Equity Income Fund and the two Ariel products have "blend" styles now, according to Morningstar, which we find to be attractive because they combine value and growth qualities. That will help to smooth out returns over time by not tilting to one style or the another - since value and growth can outperform at different times in the market cycle. I also like what the current manager has done with the Parnassus equity income portfolio, diversifying assets not just by "style" but also by "capital sector," combining stocks of giant-, large- and mid-size companies and giving the fund more of a "multi-cap" style overall. Just as value and growth outperform at different times, the large-cap and small-cap sectors outperform at various times too. John W. Rogers has built a fine track record in 16 years running the Ariel Fund. Long-term investors looking for exposure to the small-cap and micro-cap sectors have an excellent choice here in the Ariel Fund. For more information, visit the respective fund family websites. Parnassus Investments is at www.parnassus.com. The Ariel Funds' website is located at www.arielmutualfunds.com. Steve Wagner Editor, Mutual Investor email@example.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 ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Change of Heart Was that a change of heart we saw today? Possibly so, but we still Remain range bound and unable to either breakdown, or breakout of the consolidation we've seen for the past week. 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 02-04-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: FRX Dropped Puts: KO Daily Results Call Play Updates: EBAY, SYMC New Calls Plays: None Put Play Updates: CCMP, AT, CEPH, PNRA New Put Plays: IDPH, PII **************** 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: ***** FRX $ 49.95 -1.07 (-1.80 for the week) Weakness in the major indexes sent FRX immediately lower on Tuesday morning. The violation of support at $50.00 did not sit well with investors. FRX moved sharply lower before buyers finally moved in near the 100-dma ($48.90) shortly after 12:00 EST. Shares trended higher for the remainder of the session, ultimately finishing with a loss of 2.0%. That's a decent intraday rebound, but the bulls will have a tough time holding on to those gains if the broader market continues to sell off. Traders who are still long may want to think about heading for the exits if FRX fills in this morning's gap and rolls over from $51.00. The fundamental strength that was outlined in the original play write-up is still a significant factor, so we'd consider giving FRX another shot if it bounces from the next level of support at $46.00. PUTS: ***** KO $40.33 +0.18 (-0.13 for the week) KO broke down, as we expected, once it took out recent lows below $43. It even under- performed the Dow, sinking to new relative lows as the average was bouncing last week. However, after dropping as low as $39.20, the stock bounced back above $40 and has rested there in spite of yet another big losing day in the broader markets. While we would certainly not be looking at a long position here, the drop appears to have exhausted itself and we would not recommend new entries at this time. The bounce has actually been very minor and the trend remains down. However, rather than watch the stock sit at $40, while premiums decay, we will take a gain and drop the play. Traders holding puts can decide for themselves whether to give the stock more time, watching for a move below $39 to signal a new round of selling. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* For Best Alignment view in Courier Ten Font ******************************************* CALLS Mon Tue Wed Thu Week EBAY 73.10 -1.25 -0.94 Alternate entry FRX 49.95 -0.73 -1.07 Drop, Below $50 SYMC 46.91 -0.68 -0.40 Holding strong PUTS AT 45.96 0.00 -1.04 Finally below $46 CCMP 43.17 -1.27 0.04 Small bounce CEPH 30.71 0.33 -1.70 Testing $46 IDPH 40.33 -0.40 0.18 New, triple bottom KO 46.12 1.04 -1.07 Drop, profits PII 49.51 -0.79 -1.20 New, broke $50 PNRA 28.91 0.08 -0.77 Failed bounce ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** EBAY $ 73.10 -0.94 EBAY is going to have a tough time moving towards its relative highs if the NASDAQ continues to drift lower. The stock pulled back over the past two sessions and retraced last week's gains. Shares never approached our entry trigger at $75.51. A move back to this level will probably be hard to come by if the broader market extends its losses. However, an additional pullback might also present a buying opportunity. We'd specifically be interested in capturing a rebound from the 50-dma near $71.00. This moving average helped EBAY find a bottom in late-December. For the time being we're keeping our upside action point at $75.51. If shares move above this level we'll go long with a stop at $72.59. We're also going to set an alternate entry strategy in an attempt to take advantage of a rebound from the 50-dma. If EBAY bounces from the 50-dma (currently $70.94), our secondary trigger will be placed at $71.26. If shares bounce from the 50-dma and move above $71.25, we'll activate the long play with a stop at $69.94. Our objective for this secondary strategy will be to ride EBAY back to the $75-$76 area. --- SYMC $46.91 -0.40 (+0.23) There's no way to paint Tuesday's session as bullish, unless you were playing the impressive strength in our SYMC play. The stock has been building a pattern lately of dropping at the open with the rest of the market and then recovering that loss just as quickly. That was certainly the case today, as selling drove it down to just above $46, where it rebounded strongly, quickly moving back over $47 again. Unfortunately, there wasn't any supporting strength in the broad market and the stock then spent the rest of the session drifting along just below that level, while finding support at $46.75. You've got to be nimble to catch these early bounces, as the bulk of the move is often over in the first 30 minutes. Nevertheless, the trend of higher lows continues, and buying the dips is still working. Target further bounces from above the $46 level for new entries, as we continue to wait for a push through the January high of $48.30. But based on the lack of upside follow-through on each bounce, we don't want to try buying the breakouts. Stops remain at $45. ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* CCMP $43.17 +0.04 (-0.73 for the week) These days positive news in the semiconductor sector is about as rare as an American flag in Iraq. News that AMD would delay the release of its next line of processors gave the bears additional ammunition on Monday. Today's action saw the SOX.X (semiconductor index) trade in a relatively tight range ahead of the CSCO earnings report. CCMP wavered on either side of break-even before finishing with a fractional gain. Technically, we're encouraged by the fact that shares hit a relative low and also traced another lower high on the daily chart. Tech bulls who were hoping for salvation from CSCO were disappointed by the company's announcement. Shares of the networking giant were trading slightly lower in after-hours action. The lack of a positive reaction to their earnings might provide added pressure to the overall tech sector on Wednesday. Our stop for CCMP loss remains above the 100-dma at $46.93. Traders looking to lower their upside exposure might want to use a stop just above the 200-dma at $45.57. New entries could be targeted on a move under today's low ($42.57), but remember that the stock might find some buyers at the $40.00 level. --- AT $45.96 -1.04 (-0.91) Failed bounces are the rule so far this week, as Monday's afternoon rally failed miserably this morning, sending the broad market back to test the recent lows. AT managed to just barely kiss the 200-dma ($47.29) yesterday and aggressive traders that opened bearish positions on the marginal failure at that level were rewarded today as the stock gapped down and broke the $46 support level. It should come as no surprise that there wasn't much downside follow-through after $46 was broken, as we've got the PnF bullish support line resting there at $45, 50-cents below the intraday low. But there's no question the stock is technically weak, now solidly below that 200-dma. Additional rally failures near the 200-dma can be used to open new positions, although we also need to monitor the Northern Telecom index (XTC.X), which is stubbornly holding above its own 200-dma at $432. Traders looking to enter on additional weakness need to be careful due to that bullish support line, and if trading a breakdown under today's intraday low will want to see the XTC index close below its 200-dma. Lower stops to $47.75, which is just above the recent intraday highs and the declining 10-dma. --- CEPH $46.12 -1.07 (-0.41) The one constant in this market is volatility and CEPH has given us a good dose of it over the past couple days. Charging up the charts at the open yesterday, the stock tapped the $48 level before rolling over slightly in the afternoon. But traders that took advantage of the fading bounce to enter the play got a nice surprise this morning when the whole Biotechnology sector headed south. A big part of Tuesday's weakness can be attributed to the warning from GENZ this morning before the open. While the opening weakness quickly drove shares of CEPH down below $46, there just wasn't any continuation to the move and the stock then spent the rest of the day bouncing around that price level, coming to rest just above it. But the big picture is that we've got another lower high and lower low to deal with as the stock works its way down to the $44 bullish support line. Another failed rebound below the $48 level can be used to initiate new positions, but momentum traders will want to be careful about chasing the stock lower, due to that bullish support line and historical support near $45. Keep stops set at $49.10. --- PNRA $28.91 -0.78 (-0.51) Traders had to be quick on the trigger to get a decent entry into our PNRA play yesterday. The opening spike was reversed almost immediately just below $30.50, and then the stock traded flat for the rest of the session. Tuesday's trading saw the stock continue down after rolling over near $29.50 and then heading steadily down to close just below $29. While the range was rather limited, we did get some constructive technical action, as PNRA closed at a new low, fractionally breaking last Thursday's closing low of $29.06. PNRA's chart looks awfully weak right here, but we don't really want to chase it lower due to the significant support at $28. Instead, traders looking to enter the play will want to watch for another failed rally below our $30.55 stop as their cue. If holding positions entered prior to the breakdown under $30, look to harvest partial gains on a drop to the $28 level. We're still looking for the stock to fall to the $26 level, the site of the PnF bullish support line and strong historical support. ************* NEW PUT PLAYS ************* IDPH - IDEC Pharma. - $30.71 -1.70 (-1.37 FOR THE WEEK) Company Description: IDEC Pharmaceuticals Corporation is a leader in the discovery, development, and commercialization of targeted immunotherapies for the treatment of cancer and autoimmune diseases. IDEC discovered and developed the first monoclonal antibody product (Rituxan.) and the first radioimmunotherapy product (Zevalin.) approved in the United States for the treatment of cancer. IDEC is a San Diego based, integrated biopharmaceutical company with multiple products in clinical stage development and strategic alliances in a variety of research platforms. (source: company press release) Why We Like It: IDEC Pharmaceuticals announced earnings last Thursday that were in-line with consensus expectations. Owing mostly to strong sales of its cancer drug Rituxan (which is co-marketed with Genentech), the company reported a large increase in fourth- quarter profits. This came as no surprise, because IDEC had pre- announced two weeks earlier that it would beat earnings by four cents. The stock got a quick pop in reaction to that news but has since trended lower with the BTK.X biotech index. That sector weakness continues to plague IPDH. On Tuesday the BTK.X underperformed the NASDAQ and moved to new multi-month lows. Shares of IDEC fared even worse, selling off by 5.2% on relatively strong volume. This took the stock out of a narrow range (most readily visible on a 30-minute chart) that dictated trading for more than a week. Bringing up a point-and-figure chart, we can see that today's decline also produced a triple- bottom sell signal. The current bearish vertical count is $24.00. The weekly chart shows no clear support until the $20.00 area. While longer-term traders might want to target a move to that level, we'll be aiming for a decline to the $24-$25 region. However, in order to avoid the possibility of a p-n-f bear trap (and also to ensure that a breakdown has occurred), we won't enter this play until IDPH falls below $30.00. If we're triggered our stop-loss will be placed at $33.25, just above the relative highs. This sets up a risk/reward ratio of roughly 1:2. More aggressive traders can enter the play here, on the triple bottom signal, but we'll wait it out in the current environment. More conservative traders could use a stop slightly above Tuesday's intraday resistance at $31.30. BUY PUT FEB-35*IDK-NG OI=1874 at $4.70 SL=2.35 BUY PUT MAR-35*IDK-OG OI=157 at $5.20 SL=2.60 Average Daily Volume = 4.10 mln --- PII - Polaris Industries, Inc. $49.51 -1.20 (-2.05 this week) Company Summary: Polaris Industries designs, engineers and manufactures all terrain vehicles (ATVs), snowmobiles, motorcycles and personal watercraft(PWC). The company markets them together with related replacement parts, garments and accessories through dealers and distributors, principally located in the United States, Canada and Europe. ATVs are four-wheeled vehicles with balloon style tires designed for off-road use and traversing rough terrain, swamps and marshland. Snowmobiles have been manufactured under the Polaris name since 1954. Why We Like It: There's been a lot of speculation about whether the American consumer is tightening up on their spending. A good measure of whether that is in fact happening is to look at the businesses that make the toys consumers like to have. If the consumer is pulling in their horns, the first place they're going to stop spending is on the discretionary entertainment items. PII site squarely in this area of the market, making the "big boy" toys like snowmobiles, ATVs, motorcycles and personal watercraft. While the company's recent earnings report did come in better than expected, a quick look at the stock chart shows that investors are clearly voting with their wallets, and they aren't expecting any good news on the horizon. After topping out at the 200-dma near $66 last fall, it has been a steady slide downhill, with numerous broken support levels left behind. Most recently, the $54 support level gave way, and after a failure to get back over that level, the decline continued. The carnage has continued over the past week and PII broke down on Tuesday, violating the $50 support level for the first time in over a year. Chasing the stock lower does not look like a winning strategy right here, as there is strong historical support in the $48-49 area. PII is another play where we need to wait for a failed bounce to provide a solid entry. Note the way the stock has been trading recently. Each breakdown is followed by a rebound attempt that fails below the most recently broken support. Right now, the important support-turned-resistance level appears to be $51.50 and a rollover from there will provide a solid entry opportunity. Look for additional resistance to be provided by the declining 10-dma ($52.05), which has been providing consistent resistance since early January. Place stops initially at $53. BUY PUT FEB-50 PII-NJ OI=182 at $2.25 SL=1.00 BUY PUT MAR-50*PII-NI OJ= 34 at $3.60 SL=1.75 Average Daily Volume = 402 K ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** 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 02-04-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - IDPH Futures Corner: Hard Work ********************** PLAY OF THE DAY - CALL ********************** IDPH - IDEC Pharma. - $30.71 -1.70 (-1.37 FOR THE WEEK) Company Description: IDEC Pharmaceuticals Corporation is a leader in the discovery, development, and commercialization of targeted immunotherapies for the treatment of cancer and autoimmune diseases. IDEC discovered and developed the first monoclonal antibody product (Rituxan.) and the first radioimmunotherapy product (Zevalin.) approved in the United States for the treatment of cancer. IDEC is a San Diego based, integrated biopharmaceutical company with multiple products in clinical stage development and strategic alliances in a variety of research platforms. (source: company press release) Why We Like It: IDEC Pharmaceuticals announced earnings last Thursday that were in-line with consensus expectations. Owing mostly to strong sales of its cancer drug Rituxan (which is co-marketed with Genentech), the company reported a large increase in fourth- quarter profits. This came as no surprise, because IDEC had pre- announced two weeks earlier that it would beat earnings by four cents. The stock got a quick pop in reaction to that news but has since trended lower with the BTK.X biotech index. That sector weakness continues to plague IPDH. On Tuesday the BTK.X underperformed the NASDAQ and moved to new multi-month lows. Shares of IDEC fared even worse, selling off by 5.2% on relatively strong volume. This took the stock out of a narrow range (most readily visible on a 30-minute chart) that dictated trading for more than a week. Bringing up a point-and-figure chart, we can see that today's decline also produced a triple- bottom sell signal. The current bearish vertical count is $24.00. The weekly chart shows no clear support until the $20.00 area. While longer-term traders might want to target a move to that level, we'll be aiming for a decline to the $24-$25 region. However, in order to avoid the possibility of a p-n-f bear trap (and also to ensure that a breakdown has occurred), we won't enter this play until IDPH falls below $30.00. If we're triggered our stop-loss will be placed at $33.25, just above the relative highs. This sets up a risk/reward ratio of roughly 1:2. More aggressive traders can enter the play here, on the triple bottom signal, but we'll wait it out in the current environment. More conservative traders could use a stop slightly above Tuesday's intraday resistance at $31.30. BUY PUT FEB-35*IDK-NG OI=1874 at $4.70 SL=2.35 BUY PUT MAR-35*IDK-OG OI=157 at $5.20 SL=2.60 Average Daily Volume = 4.10 mln ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** FUTURES CORNER ************** Hard Work By John Seckinger jseckinger@OptionInvestor.com Trading futures requires split-second decision making, continuous study of technical analysis, and an understanding of human behavior. The nice thing is, these are all transferable assets that can be used in other aspects of trading. My father, who just turned 80 yesterday and continues to teach at the University of Pittsburgh, used to tell me years ago, "John, certain people love the stock market because it is a chance to make money without working." I call this hope, with a spice of greed. In the options and futures market, hard work is synonymous with being successful. This is the one job that you can work all the time, and, if you don't continue to learn, will exit with a negative cash flow. However, if you are successful, you can consider yourself an accomplished professional at something very few people succeed at. Gone are the days of buying anything and then wondering if it will go higher by (a) 20%, or (b) 100%+. I remember when I started buying 25,000 shares of penny stocks, hopeful that this sector of the market would benefit as most technology companies began to pause (July, 2000). Fortunately, I didn't lose any money doing this, and I was thankful that I learned to watch these penny stocks on a minutely basis to try to see if the psychology had shifted towards other assets. Why is this brought up? Leverage, and attention to detail. For a beginning futures trader, nothing is more harmful to an account than being complacent and not willing to put in over 10-hour days following the markets and every minute of trading. As a trader becomes more seasoned, experience will let a futures trader 'relax' and passively watch certain areas of price action; knowing that it either makes sense not to chase a certain move, or cognizant of the fact that the contract is trading within a tight, highly- watched area and is not giving a clear signal. 99% of all the trading books I read (I believe the list is at 40) will not adequately prepare someone for futures trading. Why? Almost all do not cover the psychological aspect of trading, and there is not a book that can replicate what it actually feels like to have on a "real" position. There is normally a learning period where traders will give money to the markets as certain lessons unavoidably take place. One is selling underneath a solid range, only for it to be a trap. The other is buying a 'great' traditional technical breakout move, only for it to be a trap as well. Do not worry about these trades, we all do them, and the real lesson is to learn from them and prepare for the situation the next time it arises (maybe trade only one contract, or wait to see if it is a trap and then trade opposite of initial thought). Can a trader really take a 10 to 25,000 account and be able to earn a living? Possibly, but it a very difficult task. If a trader comes up with a strategy before the session opens and fails to execute properly, chances are one's account will contract rather than expand. I am in the camp that technical analysis supercedes about 95% of all market activity, obviously unable to account for shocks. However, I am able to account for risk via stops if such a shock takes place. Slippage might happen regardless, but the pain should not be as great and precautions were accounted for. If extremely worried about shocks, a trader could put on a spread (either calendar or intermarket). Here comes the hard work, "Every Night, I encourage all futures traders to calculate S2, S1, pivot, R1, R2, as well as all practical daily retracement levels." If your charts do not look similar to mine posted every night in the Futures Wrap section, please send me an email. Being off by less than 0.50 is fine, but having significant differences due to one's uncomfortable ness of performing these tasks is entirely different. The word "uncomfortable" is properly used here, since it is not comfortable to go outside one's trading rhythm. Buying puts, for example, is not comfortable for people who likes to see companies do well. Additionally, playing golf (or hockey) has a variety of uncomfortable movements that eventually become natural to athletes who continue to practice after months or years of teaching. Why do they do this? Because there is a good probability that 'practicing the proper technique' will help in one's success. The same thing applies to trading. We know it doesn’t guarantee anything, but it is a methodology that is used by all professionals. If a trader is uncomfortable buying and selling in a matter of minutes, it might be time to re-think one's goals. Staying up to 10 p.m. looking at charts after an unprofitable session is not fun, but work. Hard work. Tuesday was a good example of watching LEVELS only, and just trading these levels and not worried about economic events. I couldn't believe anyone cared about Factory Orders, especially since it was a December number and the durable goods report should have taken most of the guessing away from this report. This is something that will also be learned form practice. Heading into the session, here is the chart from the Futures Wrap. Chart of ES03H, 120-minute The bias was bearish, and this was a little based on the article I wrote last Thursday in the Investors Education section on the SPX. The article can be accessed here: www.OptionInvestor.com/futurescorner/fc_013003_1.asp Notice in the chart that there was a "support zone" from 837 to The key is for a trader to easily be able to get these levels as well. Simply do a retracement on a daily chart, and then go to a 120-minute chart and perform a retracement of January's decline. Use the following retracement areas: 0%, 19.1, 38.2, 50.0, 61.8, 80.9, and 100%. As the ES contract gapped lower on Tuesday and underneath BOTH 855 and daily S2 at 851, clearly shorts are going to try to go for the jugular. Looking for a move immediately to the support zone makes complete sense. All a trader had to do is execute immediately. Hard to do, but important. It is 'uncomfortable' to have a position on as volatility appears to be at high levels and the session just started. Would you rather wait for the market to get really quiet and never move before putting on a trade? (grin). As I have stated in the past, covering is just as hard. I like to use an area just ABOVE the top of the support zone, say between 839.50 and even 840. The initial drop only got down to 840.25, so it gets hard to wait and see if this support zone will ever be tested. The stop would be placed at 852 and just above S2, and the entry would be near 848 and the low of the first five-minutes. What if 840 was NEVER reached and this support zone failed, with the ES coming back to 852 and stopping a trader out? Yes, it can, and will happen on more than one occasion. If the support zone is never reached, I think using a 22 EMA on a five-minute chart can be a great way to identify where to place a trailing stop (see chart below). Remember, if the bottom of the support zone is cleared, it is time to look for weakness once again and place a stop above the TOP of the zone (short at 836.25 and then stop at 840). This is a wide range for scalpers, so please use what stop level works as it relates to financial management. The reward is for a move to 829, so a risk of 3.75-points is not too great. Use of regression channels (see chart below): Using Tuesday as an example, whenever there is a series of lower highs, I like to get a regression channel during the session as a confirmation that a shift in sentiment or further breakdown might take place. Looking at the chart below, I actually anchored the regression channel at the top of the first five-minutes, but the channel just "fit" below this area as I dragged the mouse to the right. It wasn't even until 10:50 when I thought of a regression channel. Then, a while later, when the 22 EMA was tested, I had a feeling prices would most likely consolidate. Well, they actually rallied a bit. It was then at 13:10 when I put in a bullish regression channel and anchored it from the lows. Disclaimer: Sure, a bull could go long at the top of the support zone and put a stop under 837; however, since the ES was UNDER S2, I really only thought from a bearish point-of-view. With that said, it made sense to wait until the bullish regression channel was broken to the downside. After the ES contract did fall, notice how the 22 EMA acted as a short-term pivot. Most likely a bear looking for a move down to 837 had to cover as the 22 EMA was hit from the downside. If a bear didn’t pull the trigger there, the lack of quick execution certainly became costly. Note: Since S2 was taken out, a trader should have been using fitted retracements. If they did, they would see support at 841.75 and 843.75. The ES fell to 841.25, rallied to 843.75, paused, and then shot higher. As more homework, please try to replicate the chart below and put in the 5-minute fitted retracement based off the first five-minute period. Note to advanced traders, please stick with what works if comfortable. This article was more intended for traders looking for a system to use. Chart of ES03H, 5-minute Please, work hard and good luck, John Seckinger ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. 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