The Option Investor Newsletter Monday 02-10-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: We Know One Thing Futures Wrap: Fact versus Fiction Index Trader Wrap: (See Note) Weekly Fund Wrap: Equity Funds Fall For Fourth Consecutive Week Traders Corner: Recent Activity by the Fed Traders Corner: Anatomy of a Trade Updated on the site tonight: Swing Trader Game Plan: Geo-Political Poker Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 02-10-2003 High Low Volume Advance/Decl DJIA 7920.11 + 55.88 7933.68 7801.29 1452 mln 942/486 NASDAQ 1296.68 + 14.21 1298.57 1275.19 1186 mln 894/266 S&P 100 422.03 + 3.24 422.91 415.49 totals 1836/752 S&P 500 835.97 + 6.28 837.16 823.53 RUS 2000 362.10 + 3.32 362.10 356.91 DJ TRANS 2144.74 + 4.77 2151.52 2111.75 VIX 37.70 - 1.10 40.48 37.53 VIXN 47.31 - 0.95 49.52 47.22 Put/Call Ratio 0.94 ******************************************************************* We Know One Thing by Steven Price One thing was made clear to us today - anything can happen to the market in a world on the edge of political turmoil. We began the day with the continuation of the downward grind we've witnessed since breaking down below the support level that held us through the end of January and beginning of February. We set yet another relative low and tested the next downside support level, with little more than a dead cat bounce. Things were looking ugly for most of the morning and considering last week's breakdown, the lack of a more significant bounce just fed the bears. Then we got news that Iraq would allow U2 reconnaissance flights. We got a big bounce, taking out several intraday levels of resistance. That reaction simply led us know that we are playing with fire in any position we initiate. Does that mean we shouldn't be trading? Not necessarily. It does mean, however, that traders willing to take on a world of uncertainty should be playing primarily with risk capital. While it is likely that Iraq is simply trying to postpone the inevitable, just four days before the next UN weapons inspectors' report, it was good enough to bring a knee-jerk reaction from the markets. It was likely a quick round of short-covering by panicky bears, but also could have been bulls playing a longer delay before bullets fly or the possibility that Iraq is going to slowly give in. In any case, it was a red flag for both sides. While the downside levels we tested this morning do not appear to be strong support from a past snapshot, the fact that we bounced from them is enough to give them some credibility. The morning low on the Dow was 7801, lending credence to the round number support at 7800. The SPX bottomed at 823 and the OEX at 415. The lows in the COMP and NDX were 1275 and 950, serving as quarter increments that we can now use as focal points. How do we determine just how much of the action we are seeing is due to political concerns and how much is simply due to the strength or weakness of equities? It is impossible to answer that question decisively, but we can begin to look at some signals that tell us where we can expect a change in sentiment if we will get it at all. While we can blame today's bounce on the news, it did come at a curious time, with several other indications that we were reaching support/resistance that could have signaled a turn. First, let's take a look at the bond market. Yields signal the inverse of bond activity. As bonds are sold, yields rise, and can be used to track action in the equities as funds flow between the two markets. A look at today's action in the ten-year yield shows that the yield actually began to find support and turn higher prior to the announcement from Iraq. We approached Friday's low, but did not break it, even as the major equity indices were finding new lows. That was our first signal that the drop had slowed on its own and the flow of money from equities into treasuries was drying up. At that point bears could have begun to protect short positions, even without having any idea what was about to hit the newswires. Chart of the 10-year Yield Chart of the Dow The other indicator that began to signal oversold conditions and was bumping up against both horizontal resistance, as well as a descending trend line, was the Market Volatility Index (VIX). The VIX measures option premium levels in the OEX and can bee seen as an indicator of downside fear, along with the put/call ratio. As the markets fall, the VIX generally increases, as traders become wearier of selling options and covered stock writers sell stock and buy in short options. It generally reaches support and resistance levels at similar times as the equity markets, although in an inverse manner. This morning, as the Dow was testing support at 7800, the VIX was once again testing resistance at 40%. I say once again, because that 40% level has acted as resistance for the last three sessions, as well as on the January 27 drop. Bulls will call this a contra- indicator, telling us when to expect a bounce. However, while we have bounced intraday in conjunction with tests of that resistance level, we have also continued the slow downward slide in the equity markets on subsequent days. That tells me that it can be used as an indication of when we may bounce, but tit doesn't necessarily mean the bounce will hold. That being said, the 40% level also signaled a longer term rally in the equities as it fell away from 40, on its way down from the 50s, in late October. In fact, that drop from 40% was a good indication that we'd be headed higher for a while, as the market continued higher through early December. We are testing it from the opposite direction this time, so the circumstances are different, but it still serves as a pivotal level to keep our eyes on. If we continue to fail to breakthrough that level, we may be looking at a bounce in the broader markets. If we breakthrough decisively, we may be in for another leg down in the equities and another trip into the 50% range in the VIX. Chart of the VIX A couple of other political indicators also showed a belief that the move by Iraq may at the very least stave off the formation of a coalition against it in favor of an invasion. Gold futures continued the sharp reversal from last week's highs ahead of Colin Powell's U.N. presentation. After reaching a high of 388.9, gold futures have sunk down to a low of 363.7 over the past three sessions. Gold is seen as a defensive play that has closely mirrored the action on the geo-political front and can be monitored for signals of just how much fear is built into the stock market as an additional measure of where investors are putting their money. The higher the degree of fear of war, the more money seems to come out of stocks and into gold. Chart of Gold Futures The other indicator of war fears is oil. While the general strike in Venezuela has also played a part in recent swings, oil has moved in concert with gold as geo-political events develop. Oil headed lower today, following the action in the gold market, after the Iraqi announcement. It still remains elevated, with the futures trading over $34 per barrel. On Friday, we cracked the $35 per barrel mark and although we have pulled back, the possibility of war is anything but discounted. The pullback more likely forecasts a delay in the war and thus prices remaining lower for a longer period of time. Chart of Oil Today's bounce was nice, but fell short of a reversal on the point and figure charts that gave us triple (and quad in the case of the Dow and SPX) bottom sell signals last week. Those sell signals were confirmed with additional boxes of "O" in the current column that got us past the technical bear trap. Of course, with political event risk, we have to look at technical indicators with a skewed eye, but they still do a good job of measuring the strength of investors' reactions to the news. After all, regardless of the news, we are most concerned with just how committed traders really are from the bearish or bullish side and technical indicators give us a great picture of that commitment. We can come up with any number of scenarios as to just how the market will react to war. Many pundits are saying to go long when the bullets start flying, because that's what you should have done in 1991. But if the cost of oil skyrockets, won't that be a huge negative for the economy in the short term? What if history does not repeat itself? Remember, in 1991, the market traded at much lower values and the tech revolution had yet to emerge. We were looking at a much different picture, so whose to say that we will see history repeat? If we do achieve point and figure reversals into columns of "X", remember the last four have each led to selling opportunities. Of course, the reversals down, prior to the triple-bottom sell signals, were buying opportunities over the last month and that has not been the case over the past few days. However, that should only serve to underscore the overall bearishness of the market. Another bearish sign came out of the tech sector. The Nasdaq Composite had been holding steady just above the 1300 support level up until last Friday. While the broader indices were setting new relative lows, it was clinging to support at that round number. It had been significant support in the past and the drop through that level seemed to signal that the last domino had fallen. This morning's activity before the announcement seemed to confirm that theory, as we continued to set new relative lows. However, the news led to a rally in almost all equity sectors, including the techs. The COMP, however, topped out at 1298, just below the level that had served as strong support. The general rule is that support, once broken, tends to act as resistance. That certainly appears to be the case here. If bears can take anything from the rally, it seems to be that they can now rely on that resistance slowing any intermediate rallies. So what can we take from today's action that will help us tomorrow or the next day? First of all, we saw that sentiment was still down to open the session. Second, we saw the power of political developments on the market, with a sudden 100-point swing to the upside in the Dow as soon as the news hit the wires that Iraq would be allowing U2 fly-overs. However, before we saw those developments, we saw signals from the VIX and the bond market that a turnaround may be in the cards ahead of time. We also saw confirmation of the politically motivated rally from the oil and gold markets. Essentially, on a day when we saw few technical indicators change by much, we got snapshots from a number of different areas that traders can use to predict future movement and rely on for explanations of why they saw what they saw. ************ FUTURES WRAP ************ Fact versus Fiction By John Seckinger jseckinger@OptionInvestor.com All three futures contracts might 'feel' as though a bid is going to materialize in the near term; however, price action still tells a much different story. Will solid resistance areas actually be tested on Tuesday? Monday, February 10th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 7920.11 +55.88 7933.68 7801.29 YM03H 7909.00 +56.00 7915.00 7780.00 31,976 Nasdaq-100 969.96 +12.91 974.48 950.81 NQ03H 969.00 +9.50 976.00 951.00 240,369 S&P 500 835.97 +6.28 837.16 823.53 ES03H 836.00 +5.50 836.75 822.25 651,025 Contract S2 S1 Pivot R1 R2 Dow Jones 7752.64 7836.38 7885.03 7968.77 8017.42 YM03H 7733.00 7821.00 7868.00 7956.00 8003.00 Nasdaq-100 941.41 955.68 965.08 979.35 988.75 NQ03H 940.25 954.50 965.25 979.75 990.25 S&P 500 818.59 827.28 832.22 840.91 845.85 ES03H 817.25 826.50 831.75 841.00 846.25 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7608.00 7730.00 7932.00 8054.00 8256.00 NQ03H 921.50 940.50 970.50 989.50 1019.50 ES03H 801.25 815.75 840.00 854.50 878.75 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 827.25, exit 824.50, change +2.75 Short 832.00, exit 833.75, change -1.75 Short 833.00, exit 835.25, change -2.25 Short 829.25, exit 832.00, change -2.75 Total for the session: -4.00 Total for the week: -4.00 Total for four weeks and Monday: +37.25 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) The ES contract traded down to the 822.25 level on Monday, testing the half-way mark between a couple of important daily retracement areas (see chart below). Then, following the news that Iraq will "unconditionally" accept U-2 over flights, prices took out the daily pivot of 835 and traded pretty lackluster until the close. Note that not one of the "strong areas" listed on Sunday were tested, especially 839 and the intermediate pivot level. Above 839, look for resistance from 844.50 to 846.50. Then comes strong resistance: 850 to 852.75. With Monday's close above Tuesday's pivot of 831.75, we might actually have our short-covering rally on Tuesday. Note that the MACD is oversold and looks like it will cross higher, while the recent consolidation in the daily stochastics portend the possibility of a bounce as well. Until 839 is cleared, bears will continue to be firmly in control. Chart of ES03H, Daily A 30-minute chart of the ES contract shows prices just above the mid-point of a bearish regression channel, and it does look like we will have our test of 839. I left in the daily retracement levels of 835 and 828 because they MIGHT become significant on Tuesday. If the daily pivot of 831.75 is taken out to the downside, then a trader could look for resistance at 835 instead of waiting for 839 if a bounce does take place. Support can then be found at 828, used primarily if volume is light and it doesn't seem as if 821 will be reached. Note: Daily S1 comes in at 826.50. Chart of ES03H, 30-minute Bullish Percent of SPX: 41.80% and even on the day. The column of O's is still at 11. I still expect a move in the bullish percent to the 30% level. This indicator is currently in "Bull Correction" status. Looking at P&F analysis, the SPX contract is underneath its quadruple bottom at 845 and added to its column of “O’s” with a trade under 825. The column is currently seven deep, and there is a chance we get a three-box reversal as shorts cover. The bearish price objective remains at 750. Support is seen from 805 to 810. The March E-mini Nasdaq 100 Contract (NQ03H) The NQ contract is still underneath both its 50% daily retracement area (983) and the top of a daily bearish regression channel. Notice how half the distance from two daily retracement levels (1024.50 to 983, or 1003) lines up with the mid-point of the daily Bollinger Bands. Therefore, look for even stronger resistance there. Until we get a daily close above 986.50 (revised higher as seen in the second chart), the objective is still 941.50 before I will look for a significant bounce. MACD does 'look' like it will cross higher, but, as traders, it makes sense to follow price action and not trade on what might happen. Chart of NQ03H, Daily Looking at a 90-minute chart of the NQ contract, the "resistance zone" has been widened from 979.75 (daily R1) to 986.50, and this area should hold solid intermediate implications. Once above 986.50, I will not expect weakness until after the daily R1 level is cleared to the downside. If this area does become support, bulls can look for a move towards 1019, re-evaluating positions if 1003 is tested. On the other hand, if the daily pivot at 965.50 fails, expect a fall to the 940-942 area. Taking out the daily pivot at 965.25 should tell bulls once again not to trade on hope and go with least resistance, which is still lower. Chart of NQ03H, 90-minute Bullish Percent for NDX: This indicator remained unchanged at 39%, but continues to portend bears will be selling rallies going forward. The column of "O's" remains at 13. This indicator is in "Bear Confirmed Status". Note: The NDX, according to P&F charts, has a bearish price objective of 825 and just missed adding another "O" on Monday by 0.81-points. The low was 950.81. If 950 is reached before a column of X's is seen, the bearish price objective will fall to 775. Resistance is seen at 1000. The March Mini-sized Dow Contract (YM03H) The YM contract took out Friday's low of 7809, but then trapped bears as the Iraqi news hit the wire soon thereafter. The weekly pivot of 7932 was NOT tested; therefore, there weren't any real technical developments to mention during the rise higher. Going forward, I will look for resistance from 7932 to 7938, and a move above 7938 should propel the contract above 8000. If 8015 is cleared, look for some solid short covering. A daily close above 8015 should change sentiment to more neutral levels, and would indicate that a test of 8145 will take place in the near term. A failure at 8015 will have shorts adding to positions, since this area is really the 'proverbial line in the sand'. If the YM contract falls under 7868 and the daily pivot, traders should look for a fall to 7742. Much stronger support is below from 7608 to 7634. Chart of YM03H, 60-minute Bullish Percent of Dow Jones: A P&F chart missed adding another “O” on Monday by 1.29-points (low of 7801.29); therefore, the bearish price objective of 7500 remains. Support is still seen at 7800. As far as the bullish percent is concerned, it remained unchanged at 20 percent. The column of O's is still at 20. Note: The last column of O's ended at 10%. The next column of X's will put this indicator in "Bull Alert" status. Good Luck. Questions are welcomed, John Seckinger ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_011003_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 ************************************************************** **************** WEEKLY FUND WRAP **************** Equity Funds Fall For Fourth Consecutive Week Uninspiring economic news, disappointing corporate outlooks, the space shuttle tragedy and concern about war with Iraq all helped to produce further losses on Wall Street, with equity funds down for the fourth consecutive week. The S&P 500 index of large-cap stocks fell by three percent, with mid- and small-cap stocks off by more than three percent. Small-cap growth funds were hardest hit, declining by four percent on average over the week. Equity income and large-cap core funds held up a little better than the average diversified fund, losing less than three percent for the week, using Lipper fund indices as of Friday, February 7, 2003. Balanced funds, international and emerging market funds, as well as gold funds lost less than two percent for the week. Balanced funds benefitted from the income and stability provided by their fixed income and cash allocations. Japanese stocks rallied last week, boosting the weekly returns of non-U.S. stock funds, while gold prices fell slightly following Colin Powell's speech to the United Nations (buy the rumor, sell the fact). Gold is behaving like it did before the Persian Gulf war, when gold future prices crossed above $400/ounce. Experts expect gold funds to continue to receive safe-haven flows as long as tension with Iraq is high. Fixed income funds posted positive total returns during the week with the exception of high-yield bond funds, which were flat for the week. The U.S. investment-grade bond market, as measured by the LB Aggregate Bond index, rose by 0.4 percent during the week, with intermediate- and long-term bonds returning 0.6% to 0.8% on average, respectively. Short-term bonds were up 0.3% on average, slightly below the total bond market index. Global/international funds were the best weekly performers, returning over 0.5 percent on average using Lipper's numbers. International bond funds have returned 2.6 percent on average since December 31. U.S. Equity Fund Group Week YTD -3.0% -5.5% Vanguard 500 Index Fund (VFINX) -3.1% -6.0% Vanguard MidCap Index Fund (VIMSX) -3.6% -6.3% Vanguard SmallCap Index Fund (NAESX) -3.1% -5.5% Vanguard Total Stock Market Index Fund (VTSMX) -2.9% -5.5% Lipper Large-Cap Core Equity Fund Average -3.1% -5.0% Lipper Mid-Cap Core Equity Fund Average -3.4% -6.2% Lipper Small-Cap Core Equity Fund Average -3.0% -4.7% Lipper Multi-Cap Core Equity Fund Average -3.4% -4.0% Lipper Science & Technology Fund Average You can see that equity funds lost three percent or more for the week, with a number of Lipper categories now down more than five percent since December 31. The only equity funds to gain ground last week were natural resources funds, which benefitted from an increase in oil and gas prices, and funds that short stocks such as the Rydex Ursa Fund (RYURX). The Rydex Ursa Fund generated a positive weekly return of 3.2 percent. The average equity income fund lost 2.8 percent last week, aided slightly by its dividend income. Stock funds with growth styles generally sustained bigger weekly losses than value-driven funds. The average mid-cap growth fund fell by 3.4 percent according to Lipper, while the average small-cap growth fund lost 4.0 percent. Small-growth funds are now down 6.5 percent on average on a year to date basis through Friday, February 7, 2003. Fidelity Magellan (FMAGX), the nation's largest actively-managed equity fund fell by 3.1 percent last week, comparable to the 3.0 percent weekly decline for the S&P 500 (Vanguard 500 Index Fund). International Equity Fund Group Week YTD -1.3% -5.4% Vanguard Developed Markets Index Fund (VDMIX) -2.2% -2.1% Vanguard Emerging Markets Index Fund (VEIEX) -1.3% -5.1% Vanguard Total International Stock Index (VGTSX) -1.8% -5.4% Lipper International Fund Average -1.5% -2.1% Lipper Emerging Markets Fund Average -1.1% -0.1% Lipper Gold Fund Average For the 5-day period, the MSCI EAFE developed markets stock index lost 1.3 percent, with Europe down 2.1 percent and Pacific stocks up 0.9 percent, carried higher by a stock rally in Japan. As you can see, the average international fund lost 1.3 percent over the week, matching the weekly loss for the Vanguard Developed Markets Index Fund (MSCI EAFE). Some funds within the group fell by less than one percent for the week. Gold mutual funds fell by 1.1 percent on average with gold prices sliding following Powell's presentation of evidence (re: Iraq) to the U.N. Security Council last week. A fast resolution to war is what Wall Street is hoping for, but a slow resolution is expected to continue to keep investors on the sidelines and leaning toward gold as a safe haven. U.S. Fixed Income Fund Group Week YTD +0.3% +0.3% Vanguard Short-Term Bond Index Fund (VBISX) +0.6% +0.1% Vanguard Intermediate-Term Bond Index Fund (VBIIX) +0.8% +0.6% Vanguard Long-Term Bond Index Fund (VBLTX) +0.4% +0.4% Vanguard Total Bond Market Index Fund (VBMFX) +0.2% +0.4% Lipper Short Investment-Grade Fund Average +0.4% +0.7% Lipper Intermediate Investment-Grade Fund Average +0.4% +0.6% Lipper Corporate A-Rated Debt Fund Average -0.0% +2.2% Lipper High Current Yield Fund Average +0.3% +0.2% Lipper U.S. Government Fund Average High-yield funds struggled last week, along with equities, as the threat of war with Iraq overshadowed some new issues in the yield market. Investment-grade bond funds reacted positively to weaker than expected corporate earnings outlooks and economic reports to produce weekly gains. According to Lipper, the average corporate A-rated debt fund returned 0.4 percent for the 5-day period, with the average U.S. government fund rising by 0.3 percent. Domestic fixed income fund returns generally increased the longer the fund's average duration and maturity was. Vanguard Long-Term Corporate Bond Fund (VWETX), for example, rose by 1.0 percent for the week, while Alliance North American Government Income Trust A (ANAGX) was 1.1 percent higher. Real return, inflation-protected bond funds earned strong weekly returns too. Vanguard Inflation- Protected Securities Fund and the PIMCo Real Return Fund returned 1.2 percent and 1.1 percent, respectively, over the 5-day period. International Fixed Income Fund Group Week YTD +0.6% +1.9% Lipper Global Income Fund Average +0.6% +2.6% Lipper International Income Fund Average In addition to long-term and real-return bond funds, global and international bond funds produced solid results again last week. The American Funds: Capital World Bond Fund rose by 0.65 percent last week, commensurate with its global/international peer group. PIMCo Foreign Bond Fund was close behind, returning 0.64 percent, while SEI International Fixed Income Fund picked up 0.61 percent. Those were some of the better performers last week among non-U.S. income funds with $500+ million in assets. International income funds are now up 2.6 percent on average since December 31, 2002. Balanced Fund Group Week YTD -1.6% -3.1% Vanguard Balanced Index Fund (VBALX) -1.8% -3.3% Lipper Balanced Fund Average With bond prices rising last week, balanced fund losses were much lower than their pure-equity fund peers. Within the group, funds with higher fixed income stakes did better than those with higher equity allocations. For example, Vanguard’s Wellington Fund (64% stocks) fell by 1.7 percent last week compared with a 0.4 percent decline for sibling, Vanguard Wellesley Income Fund (36% stocks). The $19.5 billion Income Fund of America A (AMECX) from American Funds lost 0.9 percent last week. Investors benefitted from the fund’s below average equity stake (45% of assets) and its higher than average cash stake (17% of assets). So, most funds in this group did their job of diversifying portfolio risk by allocating assets to different asset classes. Money Market Fund Group Yield 1.13% Vanguard Prime Money Market Fund (VMMXX) 0.81% iMoneyNet.com All Taxable Money Market Fund Average With Federal Reserve policy on hold, expect money market yields to remain near recent lows. The average taxable money fund now has a 7-day (simple) yield of 0.81 percent, per iMoneyNet.com’s weekly MMF survey. The low-cost leader in the group, Vanguard Prime Money Market Fund sports one of the better current yields as well. Only a handful of prime retail funds currently have a higher yield than Vanguard’s 1.13 percent. PayPal Money Market Fund (402-935-7733) remains in the top spot among prime-retail money market funds with a 7-day simple yield of 1.38 percent. Touchstone MMF (800-543-8721) is next with an average 7-day simple yield of 1.22 percent. Mutual Fund News The Associated Press reported last week that mutual fund controls may be tightened under new rules proposed by the SEC, which would possibly result in the creation of a "self-policing" organization in the mutual fund industry (to ensure compliance with securities laws). Shareholder advocates think tighter compliance rules have long been overdue, while those against the new rules claim mutual funds already have the systems, policies, and procedures in place to ensure SEC compliance. The Investment Company Institute (ICI) is not a governing body in the sense of the proposed new rules, but it does represent a body of leading mutual fund families that are organized to promote the best interest of the mutual fund industry and shareholders. They have long stood for promoting fair standards and practices within the industry and in my opinion have done an excellent job serving shareholders’ best interests through the years. The ICI web site is located at www.ici.org if you wish to find out more about them and what they stand for. In Morningstar news, Fidelity Investments said it has laid off 25 support staff and 25 contract workers. According to Morningstar, Fidelity laid off nearly 1,700 employees last year - representing more than 5% of its total staff. Fidelity also made more manager changes in its lineup of sector funds. Driehaus Funds and Nuveen Funds, both Chicago-based companies, announced management changes also. See Morningstar’s Fund Times report at www.morningstar.com for more information, or contact the fund families directly. Turner Midcap Value (CCEVX) will change its name and strategy, to Turner Core Value Fund, effective April 15th. The new core value strategy will allow it to invest not only in mid-cap value stocks but also in small- and large-cap value stocks. So, in this case, the capital sector allocation will be core (multi-cap) with stock selection performed using a value style. A nice compliment might be the Turner Core Fixed Income Fund (TCFIX) a Morningstar 4-star rated bond fund. Turner’s Large Cap Value Fund also has a 4-star overall rating for risk-adjusted performance relative to category peers, so there’s reason to be optimistic here. That’s it for this week’s fund wrap. Have a great week. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************** TRADERS CORNER ************** Recent Activity by the Fed By: Jonathan Levinson Every morning a small but growing number of traders monitors the Federal Reserve Bank of New York's website for its daily open market operations announcement. We've been watching and reporting on these open market ops daily since last summer, and it's become commonplace to see the cryptic "ON/RP" heading, which is the fed's abbreviation for "Overnight Repurchase Agreement", or "repo" as it's come to be known. There are also multi-day repos, but whatever their duration, repos have been the order of the day since I've been following it. For a detailed explanation of the mechanism of the fed's open market ops, see my article of October 27th, 2002 at http://www.OptionInvestor.com/traderscorner/tc_102702_3.asp. In brief, a repo is an agreement by which the fed extends money, usually a few billion dollars' worth, to its network of 22 primary dealers, who then hit the market and invest it. On the stated maturity date, those funds must be returned, and so the 22 primary dealers must exit their positions and return the funds to the fed. The reverse is a matched sale purchase agreement in which money is drawn from the dealers to the fed, who then returns it to them on the maturity date. Since October 2002, we've been seeing the amount of fed money in the markets steadily increase until, unsurprisingly, mid-January, which coincides with the relative peak in equity prices. The simple view of the fed's open market operations was that more money in repos means more liquidity for the markets, which translates into higher equity prices. It was for this reason that I began following the daily announcements closely. Indeed, fed chairman Greenspan has been draining liquidity since the January peak, and equity prices have followed. Last week we saw a reverse repo, which is actually a temporary removal of funds from the market. This replaces the old matched sale purchase agreement (MSP) which requires the return of the drained funds to the 22 primary dealers by the fed. It’s been months since I last saw a reverse repo or MSP. The market sank all through the day. However, to reduce the fed's open market operations to an iffy relationship with equity prices severely understates the true importance of the fed's open market operations, and the depth of Greenspan’s concerns. As we have seen, there are much larger financial currents with which central banks have to contend, and given the relative size of financial markets, equities are mere peanuts. To start at the top, the US Dollar Index is down over 20% since January 2002. As I have noted in the Market Monitor, there are profound repercussions associated with a falling USDX. Foreign investors in some cases need a 20% appreciation in their US investments just to break even on the currency conversion. That translates into a "SELL" for US denominated assets, and generally those assets are the most accessible, widely-held, recognizable investments, such as GE, MSFT, other such blue chips and, of course, US treasury bonds. It's at this point that Greenspan’s plight becomes apparent. While it's no problem for him to reach for the batphone, fire up the cropdusters and dump a few billion dollars into the bucket shops to be thrown at a few select equities and ramp the indices to the moon, the currency markets are not so compliant. More than one trillion dollars' worth of currencies are traded daily, and it's tough to move those markets for any length of time with cash alone. Thus, we see the endless (almost laughable by now) statements from central banks- Japan's are my favorite- of how the central authority will aggressively devalue the yen" or aggressively buy US Dollars. Traders jump on these statements, a short term move is accomplished, and the statements seem to get forgotten. Oh, to have access to the batphone for a few moments... Nevertheless, only the smallest of dents in even the intermediate trend can be made with such antics, and for the fed, the problem remains. If foreigners are getting tanked by holding US Dollars, they will sell their US investments. This is but one of the many reasons why US equities have been swan diving since mid-2000. Treasury paper, however, has been a touchier subject. In case some of you weren't sure, Governor Bernanke and Greenspan himself removed any doubt when they stated that the fed was watching and would continue to watch the thirty year yield closely, and would aggressively prevent the yield from breaking out. Why is that? It's a topic for another article, but the credit/refi/mortgage bubble is one which won't deflate as elegantly as the equity bubble has so far. Unlike stocks which can be dumped for a loss or held or simply ignored as they depreciate, those troublesome statements dumped in a pile of negative feng shui by their addressees, a rise in interest rates will cause serious credit dislocations, and could potentially cause social dislocations. With interest rates at multidecade lows and consumers at all-time record levels of debt, a cascade could be caused by a sudden uptick in interest rates as fixed by treasury yields. A pile personal account statements disappears from view more easily than a notice of mortgage default, for instance. And so, as foreigners, who account for an estimated 30+ percent of the US bond market, continue their exodus from US assets, it's their sales of bonds that are the most likely cause of concern to the fed. I believe that the bear market in equities has helped to offset this yield-uptick because many investors have been fleeing equities for the relative safety of US bonds. But as the bear market matures, the volumes will presumably lighten up until we approach a real low, which I do not believe we have yet seen in equities. This too will be a discussion for another day, but in any event, I believe that most of the fed's open market operations have been destined for bonds, and these interventions, which is what they are, will be most likely to increase. A quick glance at treasury yields confirms the effectiveness of Mr. Greenspan’s stabilization efforts. Reflecting on this last chart for a moment, it’s interesting to note that October 2002 kicked off the fall rally. While yields initially rose as one would expect with a sudden move to equities, they were dramatically sold as we see from the bearish engulfing candles toward the end of October and in December. Equities did not correct to nearly the degree that the thirty year yield did, and this looks very much like the fed’s footprints to me. If I'm correct, what can we expect next? The Federal Reserve will continue to buy treasury paper from foreigners exiting their positions. I don't expect to see the fed spend more than it needs to maintain yields at their current levels. A significant drop in yields would bring about its own problems, because low yields mean yet lower demand for US Dollars with which to purchase bonds. High yields are necessary to bring about an increase in demand for US Dollars, but will also threaten the health of our debtor consumers, corporations, and the credit bubble in general. I expect Mr. Greenspan to attempt to keep yields right where they are until the economy can pick up, unemployment can decrease, companies can become more profitable- until productivity can increase. Until that time, the fed appears to be in a tight box, and it is within this context that I understand fed's daily open market operations and the various installments of fed-speak to which we are privy. For these same reasons and in the current climate, I do not believe that equity prices are or will be of much consequence to the fed. ************** TRADERS CORNER ************** Anatomy of a Trade by Mark Phillips mphillips@OptionInvestor.com Thinking back to my early days as a fledgling trader, I remember that one of the hardest things to learn was how and when to enter and exit a trade. Picking winning trades carries its own challenges, but that can be done effectively while the market is closed and I have time to think. But actually implementing the trade during live market conditions is where the rubber meets the road. I lost count of the number of times in those early days where I would have given my eye teeth to sit on an experienced trader's shoulder and see how they would have executed the trade I was in or had just completed, because I was sure it could have been done better. Such is the type of second-guessing that I think is common to most new traders. In the past, I've written about the merits of getting familiar with a handful of stocks and trading only those stocks in order to take advantage of the understanding that builds when you follow those stocks on a regular basis. Today, we have a fortuitous combination, as one of those stocks that I've been following for several months happens to be both on the OI Put list, as well as one of the stocks I'm currently trading. So I thought it would be useful if I dissected some charts, pointing out what I have believed were solid entry and exit points and why. Sound interesting? Great! Let's go! Let's start out with the longer-term picture to set the stage for my overall bearish bias on the stock. AZO Daily Chart - The Big Picture Starting with the breakdown out of the descending channel (which immediately followed some negative comments in the company's earnings report), it has been all downhill for the stock for the past 2 months. The first big slide south ended when AZO found support (of sorts) at the ascending trendline that began back in early 2001. That was good for a minor rebound, as the bulls desperately tried to defend the stock along that trendline for 3 weeks. But once a channel is broken, it can present formidable resistance, as AZO investors found out in early January. AZO Daily Chart #2 The stock managed to push up to the $73 level on January 2nd, where it met stiff resistance at both the lower channel line (blue) and the top of the December 13th gap. At the same time, daily Stochastics were just starting to roll over (just below overbought) and this was a high odds buy-and-hold put entry. Confirmation wasn't too long in coming either, as the stock plunged through that ascending trendline for the last time, losing more than $15 by the time it finally bottomed near $58. During that long slide, each rally attempt was simply another solid put entry point. AZO Daily Chart #3 Midway through the January plunge, we see the bottom of the December selloff (near $66.50) come into play as resistance before price kissed off one more time enroute to the bottom of the move at $58. Notice, that at no point during this process do I consider buying a breakdown. Not that there is anything wrong with it, but the problem I have with it is risk management. A rollover from the $66.50 resistance level makes risk management easy, with a stop placed at $67. However, if we waited for the breakdown under $63.50 (1/22) before entering the trade, where do we place the stop? That's right, we still end up placing it initially at $67. I don't know about you, but I much prefer taking $0.50-1.00 of risk over $3.50 risk. That is the primary reason, why I prefer to sell into strength when trading to the downside. Up to this point, we've had two hugely profitable trading opportunities in the past couple months. The first was in mid-December, which led to a quick $13 drop. And then the month of January yielded a $15 drop. In both instances, entry risk was very easy to quantify -- First a rollover from the $80 level (stop=82) and then a rollover from $73 (stop=74). Once in the play, it's all about ratcheting the stop down to preserve gains, while attempting to leave enough room for the play to continue to run. By late January, I was starting to get nervous about keeping positions open and was expecting something to pop, but was figuring that this trend had pretty much run its course for the time being. Translation: I wanted to be out of bearish positions by this time. Imagine my surprise and joy when the stock popped up to the $67.50 level on January 30th, following the company's increased Q2 earnings guidance. Then it was all about looking for some sort of resistance pattern to form, so I could define a new entry strategy. AZO - 60 minute chart That didn't take long, as the following day, the stock made another assault on resistance, failing at a lower level and then trading down for the remainder of the day. Connecting the highs of those two days gave me a trendline that -Lo and Behold! - defined the intraday highs on the following two days. I've labeled a couple of entry points on the chart above. The first was aggressive, as the trendline hadn't been formed yet, but the second one was more conservative, as Stochastics were rolling over, while price failed at the descending trendline (magenta) for the fourth time in 5 days. Things started to really get interesting from there, as the slope of the descent increased, as the stock really fell apart late last week, allowing a steeper trendline (red) to be constructed. Trades taken up in the $65-66 area could now have their stops trailed to just above the red trendline, guaranteeing that we couldn't lose, so long as we didn't get a huge gap up on news. In the current market environment, that seems unlikely, don't you think? Monday's action was a perfect opportunity to harvest gains on the play, or at the very least tighten up those stops. The intraday low of $61.75 was only $0.55 above the bottom of the gap, and to me that was a no-brainer of an indication to harvest some gains and then look for an oversold bounce to re-enter the play. We got a rebound in the afternoon session, but it wasn't very convincing to me. Take note of that red descending trendline, which now rests at $63.40. I'll be watching that line tomorrow for a rollover, and would consider that a solid entry back into the play. What would make me even happier though is a sharp gap open that fails up at that magenta trendline, just above $65. If that opening strength failed just as quickly, (as I suspect it would), then it would make for an even better entry point, with risk easy to manage with a tight stop. Take note of the fact that we've lowered the stop on the play to $65.50 -- we didn't arrive at that level by accident. There's one more piece of this puzzle that is absolutely critical to understand if you want to grasp why I have only focused on the downside in AZO these past few months. Looking at the PnF chart, you can see that there has only been one weak PnF Buy signal since the beginning of December (labeled as Bull Trap), as it was only good for one box above the prior column of X before a sharp and strong reversal there at the $73 level. Using the PnF chart is just another way of seeing that the stock is under heavy distribution, and there has been very light buying interest. AZO - Point and Figure Chart The clincher to keep me excited about the trade was the new PnF Sell signal (red O's) that was generated on Monday. Since it exceeded the prior column of O's by 2 boxes, we can be reasonably certain that it isn't a bear trap. And since we haven't had a Buy signal since the January slide, that bearish price target of $44 is still in play. And here's a fun exercise -- look at each of the highlighted SELL signals on the PnF chart and compare them to what was happening on the candle chart. Isn't that a nice correlation? Those PnF breakdowns are the only times I would have considered entering on a break of support, because of the important information yielded by the PnF chart with respect to supply and demand. I haven't taken every entry in this stock that I talked about here today, but I have taken some of them. The point is that this is only one stock. I follow it closely. So many new traders waste a lot of time jumping from one stock to another, to another, without ever really becoming familiar with any of them. AZO is not unique. It just happens to provide a great subject for highlighting the merits of both working with a small group of stocks that you know very well and learning what it means to take a good entry or a good exit from a play. Ask yourself how many stocks like AZO you would need to be trading on a regular basis to meet your goals as defined by your Business Plan, and I think you'll see why I believe this topic is so important. I hope you found this useful. Questions are always welcome! Mark ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Geo-Political Poker That geo-political risk I've been highlighting the past couple of weeks stuck its head out today, taking away some nice profits early this morning. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. 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. You may also fax the information to: 303-797-1333 ********** 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 Monday 02-10-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: AT, AZO, GWW, TSCO Dropped Calls: None Dropped Puts: PNRA Play of the Day: Put - AZO Updated on the site tonight: Market Posture: Which Way Is For Real Market Watch: Still Looking Down ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ***************** STOP-LOSS UPDATES ***************** AT - put Adjust from $47.25 down to $46.50 AZO - put Adjust from $67.10 down to $65.50 GWW - put Adjust from $48.06 down to $46.50 TSCO - put Adjust from $36.55 down to $35.25 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ PNRA $27.10 -0.36 (-0.36) Playing out nearly perfectly in terms of the game plan we laid out a couple weeks ago, PNRA continued its descent this morning, trading a low of $26.52 before lifting with the rest of the market. Our strategy in the weekend update was to use a decline to the $26.50 area as an opportunity to harvest gains and exit the play. While the morning slide fell a couple pennies shy of achieving that goal, we're not going to quibble. We're dropping PNRA tonight as a successful play that reached our desired target. It's time to move on to the next winning play. ************************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 ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* AZO – AutoZone, Inc. $62.99 -1.16 (-1.16 this week) Company Summary: AutoZone is a retailer of automotive parts and accessories, primarily focusing on do-it-yourself customers. Each of its more than 2900 stores in 42 states and Mexico carries an extensive product line for cars, vans and light trucks, including new and re-manufactured automotive hard parts, maintenance items and accessories. Approximately half of its domestic stores also have a commercial sales program, which provides commercial credit and prompt delivery of parts and other products to local repair garages, dealers and service stations. Why We Like It: Much like the rest of the market, AZO spent Friday providing mixed signals, as it vacillated about the critical $64 support level. That level was staunchly defended early in the day before finally giving way, but just fractionally. There were several rebound attempts throughout the day, but each one was met with a fresh round of selling at a lower intraday high. All except for the last one, which appears to have been end-of-week short-covering, bringing the stock up to close fractionally above that $64 level. In the end, it was much ado about nothing, with the only decent entry point all day being the failed rally near $65 in the opening 20 minutes of the day. After that, it was a slow grind lower. Even after trading below our $63.75 trigger in the late afternoon, the buyers stubbornly battled back to close the day with a fractional gain. One interesting point is that the final surge higher came to rest just pennies below the descending trendline that has capped each rally attempt since the intraday highs on Wednesday. While not a stellar move on Friday, the intraday dip below $64 looks to be setting the stage for a continuation of the pattern of lower highs and lower lows. A rollover on Monday should provide additional entry points as AZO breaks below Friday's intraday low ($63.50), preferably on continued broad market weakness. Should we be so fortunate as to get a rebound first, another failed rally near $65 (or even as high as $66) would make for an even better entry point. For now, keep stops set at $67.10. Why This is our Play of the Day Confirming last Friday's breakdown, AZO made one final attempt to hold the top of the late-January gap at $64 this morning, before the sellers made their intentions clear. The stock quickly slid through $63, then $62 before reaching its low of the day at $61.75. With the broad market recovery, AZO began its slow and methodical rebound that took it right back to the $63 level, where it consolidated for most of the afternoon. Now that the stock has clearly fallen into its gap, it seems almost certain that it will completely fill that gap down to $61.20 before being able to sustain any rebound. New entries look particularly favorable on another rollover near the $63.40 level, as this is just below Friday's intraday low and is also the site of the descending trendline that has capped every intraday rally attempt since the stock topped out near $66.30 last Wednesday. Should a serious short-covering rebound take place, the $65 level should provide formidable resistance now, and a rollover up there would make for a good aggressive entry point into the play, as that prior support level was turned to resistance last Friday. With today's breakdown, it seems safe to lower stops to just above that level, so our official stop is now resting at $65.50. For a further dissection of this play, be sure to check out tonight's Trader's Corner article. BUY PUT FEB-65 AZO-NM OI=1377 at $2.70 SL=1.25 BUY PUT MAR-65*AZO-OM OJ=1586 at $4.50 SL=2.75 Average Daily Volume = 1.47 mil ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** MARKET POSTURE ************** Which Way Is For Real To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_021003.asp ************ MARKET WATCH ************ Still Looking Down To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_021003.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. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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