The Option Investor Newsletter Thursday 02-20-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Economy Stupid or Stupid Economy? Futures Markets: (See Note) Index Trader Wrap: (See Note) Market Sentiment: It's the Economy Weekly Manager Microscope: Robert Scharar: Commonwealth Australia/New Zealand Fund (CNZLX) Updated on the site tonight: Swing Trader Game Plan: Picnic Basket for Yogi Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-20-2003 High Low Volume Adv/Dcl DJIA 7914.96 - 85.60 8027.35 7893.74 1.39 bln 1478/1723 NASDAQ 1331.23 - 3.10 1344.29 1329.09 1.29 bln 1635/1598 S&P 100 424.29 - 4.51 430.63 423.70 Totals 3113/3321 S&P 500 837.10 - 8.03 849.37 836.56 W5000 7931.61 - 64.10 8032.12 7928.01 RUS 2000 359.74 - 0.54 360.94 359.07 DJ TRANS 2084.91 - 20.50 2114.07 2082.63 VIX 35.67 + 0.45 36.77 35.38 VXN 48.56 + 0.93 49.18 47.68 Total Volume 2,834B Total UpVol 1,098B Total DnVol 1,660M 52wk Highs 115 52wk Lows 193 TRIN 1.68 PUT/CALL 0.86 ************************************************************ Economy Stupid or Stupid Economy? Economists were run over by the economic bus this morning but the markets barely reacted. The markets shook off the bad news as just more evidence that the stupid economy is still wandering aimlessly in the soft patch. President Bush took to the stage today to warn that the economy could get worse if his stimulus package was not passed soon. Based on the volume nobody believed him. Dow Chart - 10 min Nasdaq Chart - 10 min There was a flood of economic reports today and none of them were positive. The Trade Deficit hit a record low in December at -$44.2 billion and over 10% deeper than the prior month. This shows that world markets are still in decline and will probably remain weak through the first quarter. It appears that weak global demand is slowing manufacturing around the world. Global sentiment is falling and with it global markets. The deficit is going to be a drag on the 1Q-GDP and more analysts are now worried that it could be negative. The Jobless Claims rebounded over 400,000 and layoffs appear to be growing again. Continuing claims rose to 3.44 million from 3.29 million. This number is nearing the 2001 high of 3.5 million. Without job growth any recovery is still months away. Any initial recovery will be seen in signs of increased productivity as manufacturers produce more with existing workers until physical limits are reached. As demand picks up we will see slowing jobless claims before we see an increase in jobs. To date this has not happened. The four-week moving average also rose to 395,000 and very close to the critical 400K level. The MBA mortgage application index was flat for the week due to a decline in refinancing applications being offset by a slight rise in new purchase activity. Refis represented 72.5% of applications and will be the hardest hit by any rate increase. The current 30yr mortgage is 5.69% and with the PPI exploding today that number is at risk. The Philly Fed Survey surprised analysts considerably at 2.3 compared to estimates of 10 to 12 and inline with Dec/Jan numbers of 11.2. The numbers showed weakening demand and slowing shipments. Shipments fell to 0.0 from 21.3 in January. This is very bearish. Inventories are continuing to fall and prices paid rose sharply from 11.6 to 16.2. Prices paid are rising, prices received are falling and demand is evaporating. Does not paint a very pretty picture. The Conference Board Leading Indicators came in a -0.1% after being revised intraday. This dip ended a three-month string of gains with November the highest at 0.5%. The decline is increasing and only four of the ten components made any improvement in the last six months. This shows there is no recovery expected any time soon. The biggest economic problem for the day was the PPI report which came in at +1.6% compared to estimates of +0.4%. The majority of the gain came from increases in energy/oil prices but even without food/energy, the "core" rate still rose more than twice the estimates at +0.9%. This shows that producer prices rose on all levels and there is suddenly real fear that the inflation monster is returning. Like a preview of a Godzilla movie with the monster quietly swimming under the ocean toward some distant shore, the ripples on the surface are growing while unsuspected civilians go about their lives. When he arrives at the shore and suddenly stands up to his full height it is too late for action and something is going up in flames. That something for us is prices and interest rates. Neither of which will help the economy. The Fed is busy shoveling money into the system by the truckload to prop up the economy and ward off deflation but with inflation suddenly appearing they will have to rethink their plan. Yesterday there was a 24% chance of another rate cut at the FOMC meeting on March 18th but with numbers like these those odds may shrink significantly. Most feel that this number is a statistical error which will be corrected next month. Others feel that it is indicating rising demand pushing up prices. I fail to see that demand in any other report. The PPI number was the largest jump in 13 years. About the only good news today came from Merrill Lynch which upgraded the chip sector based on oversold conditions and low inventory levels. They raised the sector from negative to slightly positive. They feel that without another significant drop in demand the sector is reasonably valued. The research note suggested there could be a +10% increase in demand in 2003 but they were not basing the recommendation on that possibility. They said the very low inventory levels could prompt a reasonable bounce if there was any demand increase. The SOX has rebounded from 260 to near 300 in the last four days and has been instrumental in holding up the Nasdaq. GE CEO Jeffery Immelt, was interviewed and said the US economy was still very challenging but if the consumer keeps spending we should not slip back into recession. That is a very big "IF" based on currently falling consumer sentiment and rising unemployment. In a rare break with consensus many of the CEOs at the summit in Florida said that even IF the war was avoided the economy would still be in trouble. The FNM CEO offered a competing view that most companies were not holding up on spending. Hello, Franklin Raines, anybody home? After the close FNM reaffirmed that it would earn "about" what it earned in the 4Q or $1.66. According to First Call the consensus was for $1.74. Since FNM does not issue specific guidance it cannot be seen as a warning but it was clearly an indication that they were not going to meet the consensus numbers. FNM also said they saw the housing market slowing by 2-3% this year. The stock was down in after hours. BEAS announced earnings after the close that beat the street but then gave guidance that was seen as negative. Revenue estimates for the 1Q were less than expected and they declined to give estimates for the full year and used the Iraq ate my earnings outlook excuse. BEAS was down slightly in after hours. With earnings about over for the 4Q the outlook for the year has dropped significantly with S&P full year earnings now expected to grow only in the 8-9% range depending on who is adding up the numbers. 40% of the S&P companies have warned for the 1Q with only 23% giving positive guidance. These percentages are based on already seriously revised earnings estimates. The earnings hurdle is so low it is painted on the asphalt instead of rising above it and they are still cutting estimates. With the geopolitical concerns not likely to ease for at least another month I think it is safe to say the 1Q is already a loser. After a substantial short covering rally which ended on Tuesday afternoon the Dow has resumed its previous down trend. There was a sharp spike at the close on Wednesday but that evaporated just as quickly at the open on Thursday. The Dow drop came to a halt at 7900 on Thursday and it resisted every effort to push it lower. The final tally was a -86 point close but considering the overwhelming negativity of the economic reports it could have been much worse. The Nasdaq is the star of the show and is being held up by the semiconductor sector. The Nasdaq held onto 1330 support all day and is still positive for the week. With the SOX near strong resistance at 300 the odds of continued support are slim. With the Dow having completely retraced its gap up on Tuesday and poised to break 7800 again there is real fear that last weeks low of 7629 could be broken. The problem is not a flood of sellers but lack of buyers. The volume is nearing record low levels for the year and barely over one billion each for the NYSE/Nasdaq. The Etrade CEO said in an interview that even small investors are moving to the sidelines and trading activity is slowing to a crawl. If there was any concentrated selling event we could be in serious trouble. We are drifting down due to lack of interest rather than the results of massive dumping. Mutual fund cash is nearing record levels and institutional traders have simply stopped trading. The geopolitical concerns along with economic concerns have made trading about as profitable as a moonlight walk through a minefield. They don't know if the next new alert will be the one that sets off the panic drop. They are afraid to be in the market and afraid to not be in the market. This is why there is no selling. They are maintaining current hedged positions but are not committing any new funds to the market. Huge blocks of puts are trading on the indexes and I-shares as new money is being put to work as insurance instead of investment. In a nutshell traders are adopting a bunker mentality and while they are not selling they are not buying either. The positive side of the equation is the lack of selling. Bears appear to be as reluctant to short as bulls are to buy. After the huge +450 point Dow romp from last weeks lows the bears are afraid to go short again in volume. They are nibbling but on a diet. With a Saddam retirement announcement a 450 point gain could be just the opening gap. The risk reward in this environment is just not conducive to big positions. One reader who has been trying to short several stocks this week related that there was no stock available to short in the semi sector or in the Dow diamonds (DIA). I researched the diamonds and there was only three days of volume short as of Jan-31. That means a heck of a lot more people have shorted them since OR they have taken the shares out of circulation to prevent them from being shorted and putting pressure on the market. The reader tried to short them in accounts at Brown, InteractiveBrokers and CyberTrader with zero results. I would lean more to the "removed from inventory" thesis instead of all available shares shorted. The idea would be to not voluntarily give your last box of bullets to somebody that wanted to shoot back at you. Friday is a tossup again. With the Dow five points above last Friday's close anything is possible. We could see buyers appear who missed last weeks rally. We could see sellers appear confident that the bulls could not hold the line and looking for 7500 next week. Tomorrow we have the CPI or Consumer Price Index. With the lack of attention the PPI got today the CPI should also be ignored if negative. Either way there is likely to be an afternoon bounce as everyone still trading goes flat for the weekend. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Check the Site Later Tonight For John’s Futures Market Article http://members.OptionInvestor.com/futureswrap/fw_022003_1.asp ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_022003_1.asp ------------------------------------------------------------ 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 ------------------------------------------------------------ **************** MARKET SENTIMENT **************** It's the Economy by Steven Price It appears that without any major developments in the geo- political arena, traders were left to focus only on the economic data released this morning. That data showed an economy that is far from improving. In fact, it is hard to find a silver lining in any of the data and the markets certainly reacted that way for the most part. The initial jobless claims for last week came in at 402,000, breaking the barrier of 400,00 that economists use to judge whether the employment picture is getting worse. It was the third straight rise in claims and came in above the consensus for 390,000. During the holiday season, this number is subject to wide fluctuations, but as we get further away from that time of the year, the trend is definitely moving in favor of a worsening picture. It was the highest level in seven weeks and pushed the four-week moving average to 394,750, which is the highest level in six weeks for that average. The U.S. trade deficit grew by a record $44.2 billion in December. That resulted in a record $435.2 billion for the year and registered an increase of $76.9 billion from 2001. The previous record was $378.7 billion, set in 2000. The higher deficit is partially a reflection of the U.S. economy showing less weakness than that of the rest of the world. While U.S. policymakers can give themselves a weak pat on the back, a worsening world economy does not mean good things to anyone. December exports fell by 2.5%, while imports rose 1.7%. For the full year, exports fell $35.6 billion, which was the second largest year-over-year decline. For those unemployed souls looking for the unemployment picture to reverse the recent trend, a survey released by the Business Council unfortunately does not bode well. It CEO survey said that only 9% of those responding said they were planning on increasing hiring above last year's levels. 46% said they planned no change in hiring practices (disappointing in and of itself). The worst part of the survey came in the form of the 45% that said they planned on reducing their hiring pace of 2002. The Conference Board's Leading Economic Index fell 0.1% in January, contrary to an inaccurate release that showed it unchanged. It was revised and re-released after including revisions to its vendor performance category. Not sure how it was left out, since there are only ten indicators, but I suppose if a Bear Stearns clerk can accidentally purchase almost a billion dollars of stock (as happened last year), anything is possible. The indicators showed a 4:6 increase/decrease ratio. The positive contributors to the index, from largest to smallest, were average weekly initial claims for unemployment insurance real money supply, manufacturers’ new orders for consumer goods and materials, and interest rate spread. With the recent increases in initial claims, the most positive indicator appears in danger. The negative contributors, from the largest to smallest, were index of consumer expectations, building permits, average weekly manufacturing hours, manufacturers’ new orders for non-defense capital goods and stock prices. The coincident index turned up and for the six-month period through January has risen 0.2%. The Conference Board interprets the results to point to a more robust pace of economic activity in the coming months. The Philly Fed survey came in far below expectations, with a reading of 2.3, versus a consensus of 11.7, which would have been a slight gain. The shipments index fell to zero from 21.3 and new orders dropped from 17.3 to 14.1. Employment increased, from the previous reading of negative 6.1, but still stayed negative at -0.9. The producer price index reflected the worst wholesale inflation in 13 years. It was mostly due to an increase in energy costs, which jumped 4.8%. Prices also jumped elsewhere, as the core inflation rate rose 0.9%. Most of the core rate increase, which excludes food and energy, came from a 3.5% increase in new car prices. That rise was partially due to the end of special promotions. With the rollover from Tuesday's high of Dow 8075 we have now given up 170 points from the high after a 400+ point rally from last Thursday's low of 7628. With each move lower, the sinking bullish percent's indication that we were just seeing an oversold bounce appears more accurate. We took out 7900 on an intraday basis, but rallied back above that level after the bond market closed. We have seen a late day rally following the close of the bond market the last two days, which suggests bears lose a little confidence when they are not getting confirmation. The late day rally did run out of steam, failing just below the daily S1 level of 7942 noted in the Index Trader Wrap, for those traders following the daily pivots. The drop has also led us to another point and figure reversal down and taken us back to the previous triple bottom breakdown level of Dow 7900. We got a similar reversal in the OEX, but have yet to get one in the SPX, which stopped just shy of the required 835 trade, bouncing at 836.56. Bulls can make an argument that a 170-point pullback after a 400- point gain is just a dip buying opportunity. However, the bears can suggest that a 400-point rally after a 1200-point drop is more convincing as a short entry opportunity. As long as the bullish percents are still dropping and each bounce falls short of a new buy signal, I am going to side with the bears. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 7914 Moving Averages: (Simple) 10-dma: 7887 50-dma: 8341 200-dma: 8674 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 837 Moving Averages: (Simple) 10-dma: 834 50-dma: 880 200-dma: 917 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1001 Moving Averages: (Simple) 10-dma: 978 50-dma: 1015 200-dma: 1018 ----------------------------------------------------------------- The Semiconductor Index (SOX.X): The SOX continues to give warning signs for bears. I mentioned that it began to form support before the major indices last week, foreshadowing a possible bounce. It hovered at 260 before it bounced along with the broader markets and has now held its gains in spite of a rollover in the Dow and Nasdaq. The sector has received upgrades the past two days, as well. Morgan Stanley raised its rating on the chip stocks on Wednesday from in-line to attractive (and no, not after a few beers). It said the reward to risk parameters had become more attractive over the past few months and expects the group to outperform the overall market in the next 12-18 months. On Thursday, Merrill Lynch shifted its stance on the semis to slightly positive. While that does not sound like an overwhelming vote of support, it said it believes that valuation is reasonable, if not highly attractive. It also said that low inventory levels and low capital spending would increase the industry's sensitivity to an increase in demand. The SOX closed above its last bounce high of 292.07, but still has stiff resistance just above at 300. While the comments are positive - sort of - I'd wait for a move over 300 before initiating long plays in the sector. 52-week High: 641 52-week Low : 209 Current: 292 Moving Averages: (Simple) 21-dma: 277 50-dma: 298 200-dma: 335 ----------------------------------------------------------------- The VIX behaved as expected, with an increase on today's pullback, but it didn't show a very big fear factor. The gain of 0.45 was mild, as it held above support at 35%, but didn't really jump. The premium calculation moved to March-April options at the beginning of the week, so expiration is not really a factor in the reluctance. If we do get rolling downhill, however, there is plenty of room until it hits resistance at 40% again. If it drops below 35% and the markets head higher, then we may be getting a clue that what we've seen the past two days were just a pullback on the way up in equities, as opposed to an oversold bounce on the way down. CBOE Market Volatility Index (VIX) = 35.67 +0.45 Nasdaq-100 Volatility Index (VXN) = 48.56 +0.93 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.86 367,753 291,620 Equity Only 0.86 592,988 509,333 OEX 1.05 33,666 35,426 QQQ 1.52 22,072 33,620 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 40.3 + 0 Bull Correction NASDAQ-100 34.0 + 1 Bear Confirmed Dow Indust. 16.7 + 0 Bear Confirmed S&P 500 34.8 - 0 Bull Correction S&P 100 29.0 + 0 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 1.09 10-Day Arms Index 1.24 21-Day Arms Index 1.33 55-Day Arms Index 1.36 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 1286 1536 NASDAQ 1541 1519 New Highs New Lows NYSE 36 61 NASDAQ 69 72 Volume (in millions) NYSE 1,392 NASDAQ 1,297 ----------------------------------------------------------------- Commitments Of Traders Report: 02/11/02 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 slightly decreased long positions, while increasing shorts by a more significant amount. The net result was an increase of 8700 on the short side. Small traders increased longs by 10,000 and shorts by 2,000. Commercials Long Short Net % Of OI 01/21/03 415,028 456,885 (41,857) (4.8%) 01/28/03 422,232 468,586 (46,354) (5.2%) 02/04/03 414,543 465,678 (51,135) (5.8%) 02/11/03 412,333 472,156 (59,823) (6.8%) 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 01/23/03 148,227 95,356 52,871 21.7% 01/28/03 142,734 85,567 57,167 25.0% 02/04/03 151,174 93,439 57,735 23.5% 02/11/03 161,126 95,618 65,508 25.5% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials reduced longs by 1,500 and increased shorts by 3,000, for a 6% increase in overall short position. Small traders increased the long side by 4,000 contracts, while leaving shorts close to unchanged. Commercials Long Short Net % of OI 01/23/03 37,174 49,789 (12,615) (14.5%) 01/28/03 37,955 49,321 (11,366) (13.0%) 02/04/03 40,934 50,992 (10,058) (10.9%) 02/11/03 39,412 53,818 (14,406) (15.5%) 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 01/23/03 25,852 6,764 19,088 58.5% 01/28/03 25,814 7,576 18,238 54.6% 02/04/03 25,573 8,648 16,925 49.5% 02/11/03 29,667 8,915 20,752 53.8% 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 increased long positions by 2,000 contracts and shorts by 600. Small traders took a similar approach with an increase of 800 to the long side and a small decrease to shorts. Commercials Long Short Net % of OI 01/23/03 16,901 11,031 5,870 21.0% 01/28/03 16,013 11,574 4,439 16.1% 02/04/03 17,596 11,232 6,364 22.1% 02/11/03 19,826 11,800 8,026 25.4% 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 01/23/03 5,120 8,282 (3,162) (23.6%) 01/28/03 4,838 7,836 (2,998) (23.7%) 02/04/03 4,583 9,424 (4,841) (34.6%) 02/11/03 5,390 9,300 (3,910) (26.6%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ 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. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************************* WEEKLY MANAGER MICROSCOPE ************************* Robert Scharar: Commonwealth Australia/New Zealand Fund (CNZLX) Robert Scharar is the founder and president of FCA Corporation, which has served as the investment advisor to the Commonwealth Funds: Australia/New Zealand Fund (CNZLX), a Morningstar 5-star rated Pacific/Asia ex-Japan fund, since fund inception in 1991. Scharar co-founded First Commonwealth Associates in 1975; then, established FCA Corporation in 1983. Scharar's background is rather unique. Before getting into the investment management profession, he was an accounting professor at Bentley and Nichols Colleges, an officer of the United States Trust Company, and a tax specialist with Coopers & Lybrand. Mr. Scharar is member of the bar associations in two states, Florida and Massachusetts. He is also a Certified Public Accountant, so quite a list of accomplishments to his credit. Being an accounting and tax specialist, you'd assume that Scharar has excellent bottom-up research skills, analyzing company income statements and balance sheets. He's also a lawyer, so that helps to understanding potential risks of the company that might have a material adverse effect on earnings today or in the future. Take nearly 20 years of investment management experience along with an expertise in accounting, tax and legal matters, and you have good ingredients for portfolio management success. The $16 million Australia/New Zealand Fund (CNZLX) is a member of the Commonwealth Funds (www.commonwealthfunds.com), which invests in the other 50 percent of the world equity market capitalization outside the United States. It's one of three international funds comprising The Commonwealth International Series Trust. The firm also provides the Japan Fund (CNJFX) and Commonwealth Global Fund (CNGLX). According to the website, the Commonwealth Funds seek investment opportunities in countries, which are strong participants in the "global arena." Japan and the lower Pacific Rim, they say, are often referred to as the bookends of the Pacific Rim due to their strategic Asian locations. Scharar's firm brought to market the New Zealand fund in 1991, and later expanded the fund's focus to include the Australian marketplace (hence its current fund name). FCA took over the Commonwealth Japan Fund in 1997. Our primary focus herein is on the Australia/New Zealand fund and its superior risk-adjusted performance relative to its peer group (Pacific/Asia ex-Japan funds) over time. With over 50 percent of the world's population concentrated in the Pacific Rim, Australia and New Zealand companies are uniquely positioned to capture this regional growth. This international fund may be appropriate for long-term investors seeking the investment opportunities offered by the region or looking to diversify into international markets, reducing their exposure to any one region of the world. Investment Style/Strategy Robert Scharar seeks to achieve the Australia/New Zealand Fund's long-term growth of capital and income objective by investing in common stock, securities convertible into common stock, and debt securities traded in the Australian and New Zealand markets. In security selection, Scharar emphasizes companies with "dominant" market positions, "reliable" earnings, and exposure to "exports." According to the Commonwealth Funds' website, Australia is known for its natural resources, and is a major exporter of many types of products including metals and minerals, fossil fuels, as well as agricultural products. As new technologies emerge there, the economy is becoming more service-oriented, providing new capital growth opportunities. New Zealand is a "natural gateway" to the southern Pacific Rim, the website says and an efficient producer and exporter of agricultural products. The New Zealand economy remains strongly trade-oriented and today includes energy-based industries, forestry, mining, horticulture, technology, tourism, etc. Pervasive through all of the Commonwealth Funds is the desire to research and invest in long-term, quality companies that possess good fundamentals and attractive valuations. Portfolios such as the Australia/New Zealand Fund are managed by experienced equity managers who make numerous investment trips across the region as part of the regular due diligence process. The ultimate goal of all Commonwealth mutuals is above average, risk-adjusted returns over time. According to Morningstar's latest fund report, Scharar had 95.7% of the fund's assets invested in stocks, with 91.1% of assets in foreign stocks. Virtually all of the fund's assets are invested in Australia and New Zealand, with just 1.2% in Switzerland. So, these markets provide U.S. stock investors a unique international diversification opportunity. Scharar's value consciousness means that the portfolio tends to land in the Morningstar "value" style box. It also maintains a small-cap bias overall, with large- and mid-cap stocks comprising just around 15% of assets. Scharar also maintains a more concentrated portfolio than similar U.S. stock funds. The total number of stock holdings at May 2001 was 35, with over 60% of assets represented by the fund's top ten holdings. The fund's top ten holdings are all New Zealand-based. Morningstar's portfolio information is dated, but considering the fund's long-term approach and low annual turnover (28%), the fund portfolio probably hasn't changed much since then. Fund Performance/Ratings Because of the relatively low price valuations of stock holdings, Scharar has succeeded in keeping the fund's risk level down when compared with other Pacific/Asia ex-Japan funds for a Morningstar "low" risk rating. The fund risk has elevated to "below average" over the last three years, according to Morningstar, but over the long run, the fund has maintained a low-risk profile, producing a strong return-to-risk tradeoff for investors. Below is a summary of Scharar's performance with the Commonwealth Australia and New Zealand Fund using Morningstar's return figures through February 19, 2003. Returns in excess of 1 year are shown on an annualized total return basis. Trailing 10-year returns as of January 31, 2003. 1-Year Total Return: +21.4% Australia/New Zealand Fund (CNZLX) 1st Percentile -13.3% Average Pacific/Asia ex-Japan Fund 3-Year Annualized Return: + 8.4% Australia/New Zealand Fund (CNZLX) 2nd Percentile -16.1% Average Pacific/Asia ex-Japan Fund 5-Year Annualized Return: + 3.8% Australia/New Zealand Fund (CNZLX) 7th Percentile - 1.4% Average Pacific/Asia ex-Japan Fund 10-Year Annualized Return: + 2.7% Australia/New Zealand Fund (CNZLX) 12th Percentile - 0.3% Average Pacific/Asia ex-Japan Fund Note that in addition to performing well relative to its category peers, the Commonwealth Australia/New Zealand Fund has managed to produce positive returns for investors while the market was lower and similar funds depreciated in value. Of the nine mutual funds in the category that have been around 10 years, only one sports a better trailing 10-year average return of 2.9%, DFA's Pacific Rim Small Company Fund (DFRSX). The DFA fund also maintains a small- cap value style. It is to imagine that you could ask much more from this fund, and its portfolio manager, yet if annual operating expenses were less than they are now, return performance would even be stronger. At 5.74%, the Australia/New Zealand Fund's expense ratio is about as high as I have seen in a mutual fund. Blame part of that on this fund's low asset base, so expenses as a percentage of assets will most likely come down if/when assets grow. Still, if you want to invest in the continent, the choices are limited. Conclusion While the 5.74% expense ratio is high, Scharar has done a lot to overcome the fund's cost hurdle. He has excelled in several key areas relative to similar funds. He's earned strong, consistent returns for investors while also excelling at preserving capital. The fund's low turnover makes it fairly tax-efficient, adding to its appeal and making it a suitable choice for investors seeking long-term exposure to the land down under. For more information, log on to the Commonwealth Funds website at www.commonwealthfunds.com. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ------------------------------------------------------------ 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. 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The Option Investor Newsletter Thursday 02-20-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: NPSP Dropped Puts: HIG Daily Results Call Play Updates: EMC, TECD, SLAB, AMGN, TRMS New Calls Plays: None Put Play Updates: CB, OSI New Put Plays: MHK, VZ **************** 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: ***** NPSP $18.27 -6.07 (-5.41) Speculation about a merger between NPSP and ENZN was confirmed this morning, and investors didn't like the deal one little bit. NPSP agreed to acquire ENZN in an all-stock deal and the stock has been hammered throughout the session, giving up nearly 25% of its value in the process. With our stop up near $21, there's no question about dropping the play tonight. As mentioned in the Market Monitor, the intraday bounce off the morning lows was the best shot at getting out of open positions, and with the stock closing near its low of the day, it doesn't look good for the bulls. If still holding open positions, take the loss and move on. PUTS: ***** HIG $37.37 +0.26 (+0.37) With the broad markets weak again on Thursday, we saw a bit more weakness creep into the Insurance sector, with the IUX posting a slight loss on the day. But HIG bucked that trend, spending the whole day in the green. Despite the fact that the stock ended near its low of the day, it looks like the downtrend may have run its course. Rather than keep waiting for HIG to break lower, we're dropping the play tonight in favor of other plays that are showing more movement. For traders holding open positions, we would recommend closing out on any weakness on Friday or at the very least lowering stops to $38.25, just above today's intraday high. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week AMGN 53.99 0.00 1.02 1.39 0.01 Still heading higher EMC 8.25 0.00 0.59 -0.22 0.07 Holding gains NPSP 18.27 0.00 0.39 -0.29 -6.07 Drop, merger SLAB 26.65 0.00 1.02 -0.16 1.31 Relative strength TECD 22.08 0.00 0.44 0.02 0.20 Higher in gap TRMS 42.74 0.00 0.68 0.55 0.29 Pushing $43 PUTS CB 47.99 0.00 0.70 -0.32 -0.90 Close under $48 HIG 37.37 0.00 0.40 -0.64 0.26 Drop, sideways MHK 49.27 0.00 0.52 -1.36 -0.62 New, lower high OSI 30.16 0.00 -0.62 0.00 -0.29 Waiting for $30 VZ 34.76 0.00 0.55 -0.80 -1.84 New, Relative low ------------------------------------------------------------ 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 ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** EMC $8.25 +0.07 (+0.34 for the week) After breaking out above $8 resistance and then setting a new relative high, EMC has gone into consolidation mode. It has been forming what looks like a bull flag on the daily chart, while maintaining the bullish signal on the point and figure charts. The buy signal on the PnF came at $8.00 and the stock added another box at $8.50. While it hasn't added to the upside, it has held its gains above resistance in spite of a sinking market around it. This show of relative strength is encouraging, considering previous resistance has acted as support over the past two sessions, with daily lows of $8.15 and $8.13. With no company specific news to drive the stock in either direction we are left to decipher the charts and so far there has been no indication that the recent bullish action has been anything but genuine. --- TECD $ 22.08 +0.20 (+0.57 for the week) Try as they might, the bears just can't seem to make any headway with TECD. Over the past week the stock has found eager buyers during intraday pullbacks. Shares responded well to the recent broader market rally, and they've continued to move higher over the past two sessions while the NASDAQ lost its upward momentum. On Thursday TECD popped above what had been short-term resistance at $22.00. Shares finished solidly in the green after setting a new relative high of $22.21. A move above this level on Friday might provide another bullish entry point. Should the stock pull back, we'll be looking for buyers to move in at the $21.90-$22.00 region, near the short-term ascending trend of higher lows. For the time being we'll keep our stop set at $20.49. More conservative traders can use a stop slightly below $21.50 or $21.00. --- SLAB $ 26.65 +1.31 (+2.05 for the week) Positive comments from Morgan Stanley's semiconductor analyst and an upgrade of several stocks within the chip sector did not lead to any gains for the SOX.X on Wednesday. Shares of SLAB mirrored the flat action in the index and traded an Inside Day. This morning saw another brokerage upgrade in the semiconductor group - this time from Merrill Lynch, who said that its outlook for the industry had turned to "slightly positive" from "negative." These comments set the stage for an early-session rally in both the SOX.X and SLAB. The stock performed especially well, breaking out of the Inside Day formation before topping out slightly below $27.00. (Your charting service may show an intraday high of $28.49. This was a bad tick - the high for the session was actually $26.95.) Our long play was activated at $25.74. With no company-specific news to explain today's powerful 5.1% rally, it looks like shareholders were simply the beneficiaries of a strong short squeeze. The bears just weren't able to justify holding on short positions as SLAB broke to new highs. This move came on the strongest volume in over two weeks, which is exactly what we like to see when these types of breakouts occur. Given this technical strength, we think chances are good that SLAB will eventually be able to move up to the December highs near $30.00. Traders who are still looking to get long can watch for a move above $27.00. Our stop is currently located at $23.24. Those with a more conservative risk management strategy could use a stop slightly below $25.00. --- AMGN $53.99 +0.01 (+1.39) Inching ever closer to that breakout over resistance, AMGN bucked the bearish trend in the Biotechnology sector again on Thursday. The BTK index has fallen back from the $327-330 resistance level over the past 2 days, coming to rest today right at that important $320 level. In contrast, AMGN has continued to work higher, posting another intraday high over the $54 level. The way the stock is bucking the trend of its sector hints that a breakout is indeed just around the corner. Traders looking for a new entry into the play will want to wait for a decisive move over resistance, and a viable trigger would be a trade over $54.25. Should we get another intraday pullback before that move, we can target a rebound from the $52.50-53.00 area, which once again provided intraday support this morning. Until AMGN completes that breakout, we're maintaining our stop at $51. --- TRMS $42.74 +0.29 (+1.62) Our TRMS play has had a hard time getting moving this week, but the picture depicted on the daily chart is becoming more encouraging. After another successful bounce from the $40 level, the stock has worked its way right back up to the $43 level that provided resistance on the last rally attempt. In addition to the historical resistance, the 20-dma ($42.66) and the 50-dma ($42.82) have been providing resistance. But with the late day surge of volume that pushed the stock back over the $42.50 level, it looks like the bulls are getting ready to take out that resistance. Intraday dips to support can still be used to enter the play (perhaps in the $41.50-42.00 area), but traders looking for some confirmation first will want to wait for a decisive move over $43 before playing. Once clear of that hurdle, the bulls are likely to focus on the $45 level as a near term target and that might make for a decent level to harvest some gains, with the 200-dma looming at $45.47. Raise stops to $40 tonight and we'll trail them up to $41 if TRMS can break through the $43 level on a closing basis. ************** 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 ******************* CB $47.99 -0.90 (-0.70) One of the key sources of weakness in the Insurance sector (IUX.X) on Thursday was our CB play, after the stock was downgraded by Wachovia from Market Perform to Underperform. In addition to lowering their rating on the stock, the firm also cut its earnings estimates for 2003 from $4.64 to $4.10, and cited a fair valuation target of $39-41. While the stock traded down on the news, losing 1.8% on the day, the bears didn't seem particularly intent on pressing their advantage, as they couldn't break last week's intraday low of $47.60. Nevertheless, the stock did close at a new multi-year low and with the Stochastics just starting to tip bearish, new entries look favorable on a break below the $47.50 level. Take note of how the 10-dma (currently $49.02) has persistently pressured shares of CB over the past few days. Another failed rebound below this average before the expected breakdown can also be used as a new entry into the play. Lower stops to $50, which is just above Tuesday's intraday high. --- OSI $30.16 -0.29 (-1.29) In an impressive show of stubborn resolve, our OSI play has so far refused to break down below our $30 trigger, but late-day weakness on Thursday has that threshold getting closer to being breached. After popping a bit higher this morning, OSI turned south as soon as it finished filling yesterday's gap down and the stock then proceeded to trade lower throughout the day, ending at its low. Aggressive traders will still want to target entries into the play on a break below the $30 level, while more conservative traders will prefer to wait for a failed rally below the $30 level after that breakdown. Keep in mind that we're targeting a fairly small move in shares of OSI, looking to take a piece of the ongoing slide on its way to our initial target of $28. Should things really get moving in our favor, we could see a drop to the $26 level, and that would be the ideal point to harvest gains. Until the play is triggered though, we remain on the sidelines, waiting for confirmation with our stop set at $32.75. ************* NEW PUT PLAYS ************* MHK – Mohawk Industries, Inc. $49.27 -0.62 (-0.81 this week) Company Summary: Mohawk Industries and its subsidiaries, are producers of floorcovering products for residential and commercial applications in the United States. The company is the second largest carpet and rug manufacturer, and a manufacturer, marketer and distributor of ceramic tile and natural stone. Through its carpet and rug business, MHK designs, manufactures and markets carpet and rugs in a broad range of colors, textures and patterns and is a producer of woven and tufted broadloom carpet and rugs, principally for residential applications. Why We Like It: While the jury is still out as to whether the housing market is in a bubble, there is little question that the consumer has been getting much more cautious about spending money. Despite continued strong reports out of the Housing industry, there have been a number of cautionary signs in recent months. One of the most significant came from MHK with their latest earnings report 2 weeks ago. The company handily beat earnings estimates, but cautioned that earnings results for the next quarter would be well shy of analyst estimates due to weak consumer confidence and the looming war with Iraq. This ties into the housing picture, as MHK's business is directly linked to demand for housing. If MHK sees slackening demand for its products, this could be an early warning of things starting to deteriorate in the overall housing market. The price action in MHK certainly hasn't been encouraging to the bulls over the past few months, as it has been a series of lower highs and lower lows since the stock stalled out near the $63 level in early December. The price slide really started to pick up steam about a month ago when the stock broke under the 200-dma, and as of a week ago, MHK was within $3 of its October low. The oversold rebound throughout the market lifted the stock up to the declining 20-dma (currently $51.12), which is right at broken support (now resistance) from late January. Judging by the picture on the PnF chart, there is still some substantial risk to the downside, as the bearish price target is now $34. The recent bounce seems to have relieved the oversold condition and with daily Stochastics just starting to tip bearish, it looks like we're just in time for the next downward leg in this trend. A failed bounce below the $51 level looks like the best case for new entries, although more cautious traders may want to wait for a break under $48.50 before playing. We're starting the play with a fairly tight stop at $51.75, which is just above the 20-dma and the intraday highs from earlier in the week. Because of the company's tight connection to the Housing sector, we can watch for confirmation of weakness in the Dow Jones Home Construction index ($DJUSHB). BUY PUT MAR-50*MHK-OJ OI=29 at $2.60 SL=1.25 BUY PUT MAR-45 MHK-OI OI=20 at $0.85 SL=0.40 Average Daily Volume = 462 K --- VZ – Verizon Communications $34.76 -1.84 (-2.58 this week) Company Summary: Formed by the merger of Bell Atlantic and GTE, VZ is one of the world's leading providers of communications services. As the largest provider of wireline and wireless communications in the United States, VZ has 95 million access lines and 26 million wireless customers. Outside the United States, Verizon affiliates serve 6 million wireless customers and operate 4 million access lines in 40 countries throughout the Americas, Europe, Asia and the Pacific. Why We Like It: In what is turning out to be a rather contentious showdown at the FCC, the agencies Chairman, Michael Powell is facing a significant setback in his deregulation attempt of the Telecommunications industry. Mr. Powell had promised to sweep away rules forcing the dominant Bell telephone companies to share some of their local connections with smaller competitors such as SBC, BLS and VZ. This morning, the WSJ reported that the FCC is expected to vote in favor of a rival plan that would give states more power to maintain the current rules. Responding to this ongoing conflict, Lehman downgraded SBC this morning, citing the risks to the entire industry from a fractured FCC, which creates regulatory uncertainty. While SBC was the target of Lehman's downgrade this morning, it doesn't take a great leap of logic to see that VZ will similarly be affected by the same uncertain regulatory environment. Even before this development, shares of VZ were looking unhealthy, having topped out at another lower high on Tuesday. Today's news was good for a 5% loss in the stock, as it broke below the late-January lows. Looking at the PnF chart, we can see that this play does carry more risk, as the stock is resting just above its bullish support line at $34. So we have to be on the lookout for a possible bounce attempt from the $33-34 area. But with the vertical count pointing to the $25 level, VZ below its 200-dma ($36.60) again and the North American Telecoms index (XTC.X) back under its own 200-dma ($425), the odds certainly seem to favor significantly more downside ahead. Since we have the potential for a rebound from the $33-34 area (both from the bullish support line and broken resistance from the August-October timeframe) only aggressive traders should consider entering the play on a breakdown below Thursday's intraday low. The safer approach will be to wait for a failure of that bounce, preferably near the $36 level, to open new positions. Now that the 200-dma has been broken again, if this is the beginning of a significant move, the bulls shouldn't be able to push the stock back over that average. So we're setting our stop at $36.75, just above the 200-dma. BUY PUT MAR-35*VZ-OG OI=2771 at $2.00 SL=1.00 BUY PUT MAR-32 VZ-OZ OI=2683 at $1.05 SL=0.50 Average Daily Volume = 7.12 mln ------------------------------------------------------------ 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 ------------------------------------------------------------ ********** 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 Thursday 02-20-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Put - VZ Traders Corner: What Are Those Little Voices Telling You? You’re Off Your Meds! Futures Corner: When NOT to use S1 Options 101: Gold Vehicles, Part II (Not the Chariot Type) ********************* PLAY OF THE DAY - PUT ********************* VZ – Verizon Communications $34.76 -1.84 (-2.58 this week) Company Summary: Formed by the merger of Bell Atlantic and GTE, VZ is one of the world's leading providers of communications services. As the largest provider of wireline and wireless communications in the United States, VZ has 95 million access lines and 26 million wireless customers. Outside the United States, Verizon affiliates serve 6 million wireless customers and operate 4 million access lines in 40 countries throughout the Americas, Europe, Asia and the Pacific. Why We Like It: In what is turning out to be a rather contentious showdown at the FCC, the agencies Chairman, Michael Powell is facing a significant setback in his deregulation attempt of the Telecommunications industry. Mr. Powell had promised to sweep away rules forcing the dominant Bell telephone companies to share some of their local connections with smaller competitors such as SBC, BLS and VZ. This morning, the WSJ reported that the FCC is expected to vote in favor of a rival plan that would give states more power to maintain the current rules. Responding to this ongoing conflict, Lehman downgraded SBC this morning, citing the risks to the entire industry from a fractured FCC, which creates regulatory uncertainty. While SBC was the target of Lehman's downgrade this morning, it doesn't take a great leap of logic to see that VZ will similarly be affected by the same uncertain regulatory environment. Even before this development, shares of VZ were looking unhealthy, having topped out at another lower high on Tuesday. Today's news was good for a 5% loss in the stock, as it broke below the late-January lows. Looking at the PnF chart, we can see that this play does carry more risk, as the stock is resting just above its bullish support line at $34. So we have to be on the lookout for a possible bounce attempt from the $33-34 area. But with the vertical count pointing to the $25 level, VZ below its 200-dma ($36.60) again and the North American Telecoms index (XTC.X) back under its own 200-dma ($425), the odds certainly seem to favor significantly more downside ahead. Since we have the potential for a rebound from the $33-34 area (both from the bullish support line and broken resistance from the August-October timeframe) only aggressive traders should consider entering the play on a breakdown below Thursday's intraday low. The safer approach will be to wait for a failure of that bounce, preferably near the $36 level, to open new positions. Now that the 200-dma has been broken again, if this is the beginning of a significant move, the bulls shouldn't be able to push the stock back over that average. So we're setting our stop at $36.75, just above the 200-dma. BUY PUT MAR-35*VZ-OG OI=2771 at $2.00 SL=1.00 BUY PUT MAR-32 VZ-OZ OI=2683 at $1.05 SL=0.50 Average Daily Volume = 7.12 mln ------------------------------------------------------------ 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. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** What Are Those Little Voices Telling You? You’re Off Your Meds! By Mike Parnos, Investing With Attitude One of the greatest attributes of a CPTI successful trader is patience. The real art of trading is not only to make the right move at the right time, but also to leave the wrong things untouched at the most tempting moments. Temptation is a worthy adversary and is difficult to defeat. A few positive days in the market and the trading adrenaline starts to percolate. Oh oh! You’re off your meds again. The bullish voice on says, “Quick, buy a call! The bear market is over. The bearish voice answers, “It’s just a bounce. Buy a put.” The voice of reason, the CPTI student says, “Come on, guys, relax. Let’s put on a video and order Chinese.” If you’re not nibbling on fortune cookies and counting your profits, you’re probably going to lose. With the market looking like it may bounce up, a word of caution. Be careful. Get your prescription refilled. Here’s a story that may help you put market bullishness and irrational exuberance into perspective. Definition of a Bull Perhaps you’ve heard the story of the boy who lived in a small glass house. A man would pass by this house every day and would see this boy inside house shoveling manure all day. Finally, curiosity got the best of the man. He knocked on the glass door. When the little boy answered the door, the man asked, “Every day I walk past your house and every day you’re shoveling st all day long. Why?” The boy responded, “With all this st, there’s got to be a pony in here somewhere.” _____________________________________________________________ Mike, With only four days left until expiration, there is a very good chance that the in-the-money spread that I played on the QQQ's will end up worthless. I am curious though, do you ever buy back the calls or puts at say a $.05 in order to jump in on something with more time value so you could make more money? Or do you wait out the ones you purchased and then go and buy your spread? This email sounds confusing to even me. If you get the gist of my question, would you please shed some light? Thanks. Response: You can certainly buy both the short Feb. QQQ $21 puts and the Feb. QQQ $29 calls back for a total of $.10 plus a few commissions. You have to weigh whether or not the two short options you will be rolling out to will lose $.10 (plus two commissions) in time value over the next six days (four trading days plus the weekend). The answer is that it probably would be a good idea to buy back the February short options and roll out to sell the April $28 calls and April $22 puts for about $1.20. We're cheating a little by selling the $22 & $28 rather than the $21 and $29. The QQQs have been trading in a pretty narrow range lately. It seems a lot of volatility (premium) had come out of the QQQs. So, in order to generate some decent premium, we have to bring in the strikes of the short options just a bit. Also, be aware that there may be a large movement related to the war. Just be on your toes. _____________________________________________________________ Mike, Exactly what is the difference between an Iron Condor and just a condor? I love your comments and attitude toward investing. Were you a stand up comic in your past life??? Thanks Response: Thanks for the kind words. I'm glad you enjoy the column. I love to teach and make people smile. I was never a stand-up comic, but I learned a long time ago not to take life too seriously. There's humor everywhere and in every situation -- if you look for it. Unfortunately, much of the world is paranoid. They look for grief and find it. It's a self-fulfilling prophecy. Regarding Iron Condors vs. Condors. The Iron Condor uses both puts and calls and is a credit strategy -- you receive the potential profits the next business day after you establish the position. If everything works out well, all options will expire worthless and you’ll keep the credit received. The basic condor uses only calls OR puts and is a debit strategy. To make money you will have to sell a long position and incur additional commission expenses. _____________________________________________________________ CPTI PORTFOLIO POSITION UPDATE Position #1: BBB Iron Condor – Closed Thursday at $87.70. An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The objective is for the BBH to finish anywhere within the $85-$95 range. BBH has a $2.70 cushion that should get it through tomorrow. Position #2: MMM Iron Condor – Closed Thursday at $124.85. The support at $120 once again seems strong, as does the resistance at $130. That should give MMM enough room (10 points). We’re one trading day away from recording another profitable trade. Position #3: SMH Straddle – Closed Thursday at $23,00. We bought the SMH May $22.50 puts and calls and spent $5,850 on 10 contracts. But, since we’re going to stay in this position only for the February option cycle (5 weeks), we’ll only be risking about $.85 ($850). We’re looking for a big move for the semiconductors and we don’t care which way. The market has been trading in a range and some volatility has come out of the premiums. This trade did not work out and we have lost $1,000 ($1.00 x 10 contracts). Position #4: QQQ ITM Strangle – Closed Thursday at $24.98. This is a long-term position to generate a monthly cash flow. We own the January 2005 $21 LEAPS call and the January 2005 $29 LEAPS puts. We’ve sold the February $29 calls and February $21 puts. In this position, the QQQs have stayed in a range. It will make life easier when the short options expire (or you closed them out early – see question above in column text) and we prepare to sell a new set of short options. There is less premium this time around because of the flat trading over the past month. Position #5A: XAU Condor – Closed Thursday at $74.03. This is a longer term trade expiring in March. There is a $20- point range and we took in a credit of $1.40. We want XAU to finish anywhere between $70 and $90. Patience, patience and patience. XAU moved below $71, but it has bounced back nicely over $74. We’ll still keep an eye on this one. Time is working in our favor. Position #6A: MMM Condor – closed Thursday at $124.85. This is a longer term more conservative trade expiring in March. There is a $20-point range and we took in a credit of $1.20. We want MMM to finish anywhere between $115 and $135. Position $7A: QQQ 2-Month Baby ITM Strangle – closed Thursday at $24.98. Bought March QQQ $26 puts & Buy March QQQ $24 calls for total debit of $4.20. There is $2 of intrinsic value and only $2.20 of risk. We’re looking for a 3-4 point move in the QQQs. After the move, we want the successful long option to pay for both options. Then we’re left with a “free” long option and waiting for the market to reverse. As time goes by . . . we’re ready for action. ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor ************** FUTURES CORNER ************** When NOT to use S1 By John Seckinger jseckinger@OptionInvestor.com When a market is falling, many traders simply look for support at the calculated pivot, Support 1 (S1), and Support 2 (S2). This may not be the best method to use, however. First the disclaimers: The MONTHLY and WEEKLY levels are given more weight than the daily calculations, and can be used as a stand-alone objective. With that said, traders could simply look for support at a weekly or monthly pivot, S1, or S2. This article has to do with the Daily S1 level. There is one retracement that has more weight than both the weekly or monthly, and that is a retracement taken from a particular significant relative low and high (example: low in October to high in December). As I have said before, trading a "zone" makes a lot more sense than simply trading daily S1 or R1 levels; therefore, it really pays to have a weekly, monthly, and daily retracements from R2 to S2 on your chart before the session even begins. See chart below. There are certainly a lot of retracement levels inside the following chart, however, when one turns to a five-minute chart, it is amazing how close some get to each other. These "zones" that are created allows a trader to increase confidence in execution, as well as being able to define risk (read stop placement) just on the other side of the zone. Chart of Dow Jones, Daily As the more micro chart below shows, "zones" created from all the retracement levels above can actually be quite helpful during a trading day. The Dow opened above the pivot, and then soon afterwards reversed course and sold-off. Underneath the pivot, would a short look to cover at S1 at 7942? Maybe, but notice that the zone from 7025-27 is only two-points wide; therefore, I would expect much better support to be found there. This "zone" is created from a daily and weekly retracement from R2 to S2, and this obviously is more powerful than just a simple daily S1. Also notice that the 7902 level is a different retracement color, which is because it is based on the move from October to December and should have strong significance by itself. Chart of Dow Jones, 5-minute As the day progressed, the low ended up being slightly under 7902 (7893), while one rallied failed exactly at 7927. Note: R1 for the Dow was higher at 8050 and only about four-points from the range above. I would personally use the range from 8054 to 8062 instead, but a trader could easily look to sell say the ES market with the Dow at 8050 and look to cover if the Dow trades above the 8062 level. Of course, make sure that the ES contract is near a significant area as well. I am a huge believer that a trader needs to understand "zones" and the hierarchy of stand-alone levels. If a trader did decide to use a "resistance zone" from 8050 to 8062, once the Dow rises above 8050, I consider this being in a "trading zone". Above 8062, a trader can go long with a stop under 8050; back below 8050, a trader can go short with a stop above 8062. Since I also believe it is important to follow Bullish Percent Charts, I know that the Dow is in "Bear Confirmed" status and has not reversed back into "Bull Alert" territory (since under 30%, this is possible). Therefore, I have a bearish bias and would rather sell under 8050 than buy above 8062. Traders always ask me, "Should I sell S1 or buy S1; Sell R1 or Buy R1?" Knowing bullish percent charts can generally answer that question. The only time bullish percents will not work is when we have an obvious "Open Drive" scenario noticed fairly early in the session. An example would be a large gap higher or lower in the Dow, easily taking out the pivot as if it wasn't there. This move usually holds precedence. Not shown in the chart above are the halfway points from one long-term retracement area to another (Retracements from October low to December high). This can be done and added to the lines above. I would give them the same significance as a weekly level (all purple color, for instance). Let us look at the ES chart heading into Thursday's session. Here, S1 lined up with a retracement level of 839.50 that was compiled from the move beginning in October and ending in December. Therefore, the significance is solid. Moreover, R1 on Thursday was at 853.25 and within the "zone" from 850-854. Conviction increased as well. In this chart, I should have titled the article "When not to use S2," since the 831.25 area should not have as great of significance as the weekly pivot of 828. It is all relative. The retracement on the far right beginning with 865.75 is the WEEKLY R2 to S2 retracement, and if one of these levels lined up with the S2 level, THEN I could see adding to its significance. It didn't, therefore the daily S2 was simply a stand-alone level. It cannot compare with a weekly stand-alone level. What about the 837 level? Well, I like support from 839 to 839.50; however, a trader could use the range from 837 to 839.50. I don't see the usefulness, since 839.50 is from the October to December move and holds serious relevance on its own. To back test this theory, I like to subtract 5-points from the bottom of this area (839 minus 5 is 834). If the low in the ES was under 834 but not under 832 (837 minus 5), then I could see how a trader going long closer to 837 makes sense. To explain, I think most traders use 5-point stops, and if the ES doesn't go more than five-points under "good support," then this level is still "good support." If the ES went more than five-points under 839, but not more than five-points under 837, then there is a flaw in my aforementioned thinking. Chart of ES03H, 30-minutes A few more disclaimers worth noting: When the ADX Directional Movement Oscillator is above 20 (as it is now), I will not worry about either MACD or stochastics on a daily chart. During the day, I still like MACD; however, this ADX momentum indicator is telling a trader that it makes more sense to follow moving averages (22, 50, and 200 exponential averages). I agree. The nearest daily average (22 EMA) in the Dow is above at 8051, so not extremely relevant at this time. I just thought I would throw this piece of advice in (grin). Ask Away, John Seckinger *********** OPTIONS 101 *********** Gold Vehicles, Part II (Not the Chariot Type) Buzz Lynn buzz@OptionInvestor.com At the incomplete conclusion of last week's gold vehicle article, we promised a follow-up to include the purchase of gold in the form of coins, bars, and the closet thing to gold certificates we can own - AMEX:CEF. However, if you are looking for the hottest issue of Doubloons, a gold Spanish coin from the 17th century usually relegated to buried pirates' loot, or the bottom of the ocean in old, shipwrecks, you won't find it here. But if you are unable to resist the curiosity, if you've romanticized the pirate's life, or possess the inklings of a Parrot Head (Jimmy Buffet fan), then the following link is for you. http://webster.directhit.com/webster/search.aspx?qry=doubloon For the rest, including the traders and investors among us, let's start with CEF before we get to the actual metal. I can't tell you how many times up until a few months ago that I wondered how to actually get the metal into my IRA. While there are companies - actually trustees - out there that provide this service for a handsome fee, most of us won't want to afford it. Strike one. So what is the solution? The trick would be to find a currency backed by gold, but there isn't one on the face of the Earth today that I'm aware of. Strike two. The next best thing then would be to own an interest in a reserve of precious metals. That comes in the form of a certificate - a sort of "gold certificate" - that is actually a share of stock in a publicly traded company designed for the purpose of holding gold in a vault for the benefit of its investors. While the stock certificate isn't spendable cash, it can be bought, sold, and held in a brokerage account, including an IRA! That stock is traded on the AMEX under the symbol, CEF, which stands for Central Fund of Canada. It was formed in 1961 in Calgary, Canada, and is still run by its founders. Straight from Yahoo! Finance: "Central Fund of Canada Limited is a specialized investment holding company whose investment objective is to hold the vast majority of its net assets in gold and silver bullions, primarily in bar form. Its policy is to invest primarily in long-term holdings of gold and silver bullion and not to actively speculate with regard to short-term changes in gold and silver prices. Central Fund's investment policies require it to hold at least 90% of its net assets in gold and silver bullions, primarily in bar form. On a physical basis, 50 ounces of silver are held for each ounce of gold held." For the truly, and, in my opinion, unduly paranoid, this may not be sufficient since while the holdings are insured against theft, loss, or destruction, there is also a standard war risk exclusion. Translation: holdings are safe from financial loss unless vaporized in an act of war. But I think it's pretty safe. Disclosure: I own some. But since I'm building an ark, gold coins are really the bulk of my investment in gold. By the way, when I've referred to "gold" in either this or my previous article, I am also tacitly inviting silver along for the ride. I like silver too, as it is also a store of value, like gold. However, it is also an industrial metal and can fluctuate in price more like a commodity in the cost of production than a precious metal. So if industry one day finds a cheaper substitute for silver in the normal course of producing widgets, then supply and demand would suggest that silver prices would fall while gold could be in a speculative frenzy. Silver does not necessarily track in the same financial footsteps as gold. However, they will likely remain closely related, so you can apply the same trading or investment techniques to silver as you would to gold. Except for the Hunt Brothers in the late 1970's when they tried to corner the silver market, nobody ever went broke having a bit of silver in the portfolio in addition to gold. Silver is readily available in coin form too at your local coin dealer and can be had in the simple form of pre-1964 U.S quarters. Yes, quarters used to be silver and dealers keep a bunch around for people like us who may not want or be able to afford gold. OK, back to gold coins. There are many to choose from, but the most common in the U.S. are U.S. Gold Eagles, Canadian Maple Leafs, or South African Krugerrands (most of which come in various denominations of 1, 1/2, 1/4th, 1/10th, or 1/20th of a troy ounce. Why coins in the first place rather than the bars commonly seen in gangster movies? Simple - bars are not as liquid. They need to be assayed, which is a fancy word for weighed and assessed, to insure that the bars are, in fact, real, and not a freshly minted piece of lead with gold spray paint. Anyone trading or investing in gold has to be sure that they are getting what they pay for, and with bars, that is harder to ascertain without having a certified professional look at them first. It adds an extra step, causes undue extra time, and thus makes the bars less liquid and harder to trade. I stay away from these, as do most investors and traders. But bars are available in size if you should want them. My personal favorite though is the Krugerrand, which I like better than the U.S. or Canadian coins. Keep in mind that these coins - the Eagle, Maple Leaf and Krugerrand - all have a different total weight. However, their common characteristic is that they all possess a troy ounce of gold. That never varies, except in the obvious case of a smaller denomination of any of the above. They all contain the same ounce of gold despite their slight size difference. My interest is in buying the cheapest ounce of gold available while still maintaining liquidity among dealers, and "spendability" should the Dollar vaporize overnight. That distinction belongs to the Krugerrand. That's not to say that Maple Leafs and Eagles are a bad deal. Frankly, both are a better-looking coin than the Krugerrand and are, at the margin, minutely more liquid (not a concern of mine since, if the worst happens, they'll all be equally spendable with an equal ounce of gold). And therein lies the reason they cost slightly more than the Krugerrand. So if beauty counts as a part of your investment strategy, by all means, go for the Eagles or Maple Leafs. How much of a premium do these command? Hard to say for sure, as each dealer is different. But within reason, we'll probably end up paying 1%-2% more for those over the Krugerrand. With that in mind, let's stick to Krugerrands for the buying process. First we have to find a dealer. This is harder than it seems. A dealer is just like a market maker. Some are better than others. Some do more volume than others. All of them live and die by the spread between bid and ask. Most coin prices fluctuate around the spot market price of gold. Find this at www.kitco.com, along with everything else you wanted to know about currency and gold. Just like a stock, there is going to be a bid and ask price that fluctuates closely with the spot price. Say that the spot price is $350 per ounce. A coin dealer may be willing to buy our Krugerrands at spot prices or slightly lower, say at $345 per ounce. However, if we wish to buy Krugerrands, our charge may be $360. The point is that we are going to be looking at two things in tandem when we buy or sell. We want as narrow a spread as possible and we want to buy at the least price possible or sell at the greatest price possible. The narrower the spread, the better the deal for us in either the buying or selling case. For that reason, we will want to shop around. What makes a good dealer? I don't have a definitive answer. But I know what makes a hazardous dealer! Personally, I won't buy coins on e-Bay though I trust it for about anything else - too easy for the seller to take my money and run. It isn't practical to chase down a criminal half way across the country, or worse, in another continent if we don't ultimately get what we pay for. The second issue is that even if we find a reputable dealer on the Internet, we are going to incur shipping and insurance costs if we are not able to take physical delivery from the purchaser, which adds significantly to the total price. If we find a $10 spread from a dealer on the Net, and a $12 spread at the neighborhood coin dealer, adding shipping costs of roughly $5 per coin will make the neighborhood store the better deal. For both of the above reasons, I shop for the best deal in my own hometown, or at a location in which I will cheerfully drive if they have the deal. I will not have coins shipped or buy them sight unseen - ever. Just prudent business practice, I think. So what constitutes a reasonable price? I buy my Krugerrands from one store because he always seems to have the tightest spread. In the $350 spot price example, he may be buying at $348 and selling at $359. $11 is pretty tight. Probably we would see elsewhere at that moment a bid of $340 and ask of $360 - $20 spread. Sometimes even more. Again, we look for the tightest spread by calling around our own locality. Keep in mind that sometimes great deals can be had on accident by swerving into a busy dealer who has just bought say, $100,000 worth of coins from a seller. The seller likely had to come down on his price in order to induce the dealer to come up with that huge amount of cash. The dealer may have made a great deal. But he's also carrying big inventory that he may want to move quickly in order to get back to cash again. In such an instance, he may drop his ask to within a Dollar or two of bid, effectively giving us the opportunity to buy at the spot price and make a great deal for ourselves. Lucky, yes, but it happens. And if we develop a relationship with a dealer who knows our objectives (and knows we have a stash of cash, in the case of the big buyer), just like a floor trader of stock, we'll get that phone call from him offering us "the deal" two minutes after he's made his big score. He buys in bulk at $345, and we buy his bulk at $347 - less than spot - as long as we've got that relationship. Anyway, once we decide where to buy, we take cash in our pocket, briefcase, whatever and "do the deal". Sounds clandestine, but it's the most effective way to transact business. Yes, checks and credit cards will work, but make prior arrangements, as failure to do so may cost us more on the purchase. There, now we all know the basics and can simply go buy the stuff or buy shares of ownership interest in a reserve. We can take our pick or do both. I must admit, I had fun doing this series on gold, but there's a lot more to it than what I've written here. Questions on specifics are always welcome and I will do my best to answer them completely. With enough interest, I'll be glad to do another article. Until next time, make a great weekend for yourselves! Buzz ------------------------------------------------------------ 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. 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