The Option Investor Newsletter Monday 02-24-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: U.S. Hits the Accelerator Futures Wrap: (See Note) Index Trader Wrap: Let Down Weekly Fund Wrap: Tech-Led Advance Lifts Equity Funds Traders Corner: Transport Trouble Updated on the site tonight: Swing Trader Game Plan: Back At You Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 02-24-2003 High Low Volume Advance/Decl DJIA 7858.24 - 159.87 8017.34 7851.11 1455 mln 274/1175 NASDAQ 1322.38 - 26.64 1343.09 1321.44 1197 mln 286/877 S&P 100 421.47 - 8.40 429.87 421.17 totals 560/2052 S&P 500 832.58 - 15.59 848.17 832.16 RUS 2000 358.22 - 6.14 364.36 357.90 DJ TRANS 2017.69 - 78.72 2095.82 2013.01 VIX 36.77 + 2.63 36.78 35.43 VIXN 44.88 - 1.22 46.84 44.58 Put/Call Ratio 0.85 ******************************************************************* U.S. Hits the Accelerator by Steven Price It is getting more and more difficult to decide just how much world events are weighing on the markets and just how much economics are figuring in. Friday's wild intraday swings were no doubt due to international developments. However, today's drop may have been either a look back at Thursday's poor economic numbers or a result of the U.S. apparently setting a timetable on war. Colin Powell said in a speech in Japan on Sunday that the U.S. wants a U.N. Security Council vote after Weapons Inspection Chief Hans Blix gives his report on March 7. On Friday, Blix asked Iraq to destroy Al-Samoud 2 missiles by March 1. The order was the result of the missile's range exceeding limits set by the U.N. in 1991 and 1994 and Iraq said it was studying the order. Blix also said in a Time Magazine interview that the country had yet to account for its stocks of VX nerve agent and Anthrax. The U.S. and Britain introduced a new U.N. resolution on Iraq that is believed to declare the country in "material breach" of resolution 1441 and basically says Iraq blew their last chance. It does not go so far as to authorize military force, but appears to set the tone for such action if/when the U.S. and Britain decide to move in. The resolution is a risky proposition, since there is anything but a consensus on the use of force at this time, but if nothing else the U.S. can say it tried to get a coalition before making its own decision. France, Germany and Russia are submitting their own resolution which will likely call for more inspections. Conspiracy theorists will suggest the U.S. would not be introducing the resolution unless it was fairly sure it would eventually get a favorable vote. Right now, it only has 4 of 13 votes and it will take some pressure to swing the pendulum. It needs 9 votes and no vetoes for it to pass, however, the latest resolution may simply be an attempt at window dressing a decision that has already been made. CNBC reported today that Dan Rather had held an exclusive radio interview with Saddam Hussein, in which Hussein said he would not destroy the missiles, as Blix has requested and he challenged President Bush to a radio debate. While the White House has already responded that the issue with Iraq is about weapons, not debates, I suppose it is possible Hussein is laying the groundwork for a U.S. presidential run in 2004, since it is unlikely he will still be running Iraq at that time (GRIN). Chart of the Dow Turkey is also a step closer to allowing the U.S. to launch strikes against Iraq from within the country. I suggested last week that once it came down to a matter of dollars, at some point it would be worked out. Turkey's stated concerns about the economic impact of war in the region were really just a bargaining chip, but a hollow one since the country would likely suffer those effects whether the U.S. launches attacks from its turf or elsewhere. The Turkish cabinet has already approved the latest U.S. aid package and a Parliament vote could come tomorrow. All of the war talk is not doing much for the aerospace/defense sectors. The Defense Index (DFI.X) continues to set new 52-week lows and is just about the ugliest sector chart I've seen recently. Whether this is due to predictions of a short war not having much impact on these stocks bottom line, or whether it is a reflection that they were overbought on war jitters to begin with, they look anything but bullish. It is hard to imagine anything creating a rally at this point, if they haven't moved higher as we head closer to a deadline for an invasion. The DFI is now down 20% since January 6 and looks like it has fallen off a succession of cliffs. Chart of the DFI The chip stocks actually showed some decent relative strength today. It is hard to say what is holding up the sector, but with a poor book-to-bill already released and a severe warning from AMAT already figured in, apparently the picture wasn't as bad as many institutions were expecting. This morning Cisco announced that its new Compatible Extensions wireless chip technology will be adopted by chipmakers Intel, Texas Instruments and Intersil. CSCO is offering free licenses to include the technology on chips and IBM and Hewlett Packard have already agreed to support the technology. This seems to be the lone impetus for the bullish hold in the sector, but the more important part of today's action is possibly that it has held onto last week's gains, while the rest of the market has been bouncing around the last few days. It did eventually succumb to market wide weakness, but spent much of the day in the green, before losing less than a point on the day. This strength should be a red flag for bears, as the tech indices will likely hold some of the recent gains as long as the chip stocks do. If it does begin to roll over, however, with resistance just above at the 300 level, we may be seeing a short entry point. No sign of weakness yet, however. We did see one vote of non-confidence from J.P. Morgan, which downgraded equipment maker Cymer, saying it saw diminishing prospects for lithography demand acceleration in the second half of 2003. Morgan said the next two to three quarters exhibit above average risk for the company. Those traders following the point and figure charts can note a development that doesn't show up on today's charts. On Friday, the SPX, which had been on a strong reversal higher in a column of "X," rolled over back down into a sell signal. The rollover, however, came on the drop that followed the terrorism scare after the explosion on Staten Island. As soon as that scare was over and it became evident that it was an accident, we quickly reversed direction and headed higher. That reversal called into question the bearish reversal signal we saw, as charts are incapable of taking into account world events. This morning, however, we got some confirmation of that reversal. While we failed to trade as low as we did on Friday in the SPX, we still traded down below that reversal at 835, confirming the bearish signal. Point and Figure Chart of the SPX The Dow reversed lower on the PnF chart last Thursday when it traded down to 7900. The big intraday rally on Friday actually failed to reverse that signal back up into a column of "X" and today's move back below 7900 also seems to confirm that bearishness from these levels. The Dow did set another intraday lower low, ticking a few points below Friday morning's low, but bouncing again off 7850 (low of 7851). The OEX also reversed its bullish column of "X" back into a bearish column of "O" after topping out at 430 on Friday and breaking below the 422.50 level today. We have been watching this index on a 2.5-point box, which more closely mirrors the activity in the Dow and SPX. Those Dow theorists watching the transports for confirmation of the moves we are seeing in the broader markets will not that the TRAN has not only fallen below its February low, but it now also testing its October lows. Dow Theory holds that any move in the Dow must be confirmed by a move in the transports (although it actually started years ago with the Rails Index), before determining a true trend. Higher fuel costs continue to weigh on the transports and led to a downgrade of several trucking stocks. Bear Stearns lowered its ratings on trucking stocks CVTI, HTLD, JBHT, KNGT, SWFT and WERN, saying that the group underperformed at the beginning of the last Gulf War, when oil prices jumped from $23 to $41 per barrel. We are seeing the affect of higher fuel prices across the board, not just on the transports. We have heard from numerous companies that they have had to adjust their earnings expectations due to these costs and both the consumer and producer price indexes released last week showed fuel prices as the highest contributor to inflation. Natural gas prices continue to surge, jumping an amazing 21% in a single day today; heating oil hit an all-time high today; and crude oil futures were on the rise once again, adding almost $1 per barrel on the April contract to close at $36.52 per barrel. Chart of the TRAN Traders will also note the Market Volatility Index (VIX), which bounced back above the 35% level that had served as support in the recent past and had indicated market pullbacks. We closed below that level on Friday, and it appears it was not as reliable as it had been recently. However, it did bounce above the last false breakdown signal (contrarian to stocks), which came on February 3 and also was followed by a drop in equities. The next resistance level and the one that has signaled intraday and daily equity bounces is 40% and with the VIX sitting at 36.77, it appears that we have room to fall before this indicator signals support for the OEX. In contrast, however, the VXN, which measures implied volatility levels of the NDX, actually fell in spite of the drop in stocks and failed to confirm the move higher in the VIX. The retail sector got some mixed news today, as Lowe's (LOW) not only beat earnings expectations, but raised its full-year guidance. The company said the raised guidance was due to its plans to expand into New York and other large cities, many of which are currently dominated by Home Depot (HD). On the negative side, Federated and J.C. Penney both warned on February same store sales results. The companies both blamed bad weather on the east coast for keeping shoppers at home. Federated said its sales would drop 7-8%, approximately double previous estimates. JCP had said its sales would be flat, but now says they will be down 2-3%. Wal-Mart didn't suffer quite as badly, but said its sales would track at the low end of the previous 2- 4% guidance. The RLX reversed Friday's gains, finishing down 2% on the day. With most retail earnings reports just behind us, we will be judging the market based on these weekly and monthly sales results and so far they are not promising. While so far they have been blamed on the weather, which is a valid excuse due to much of the terrible east coast snowstorm, it will be interesting if those sales make up for the loss on the positive side, or if these are simply lost profits. Given the current state of the economy, based on last week's jobs data, I actually believe the increase in job losses may be partly responsible for the drop in sales, as well as the weather, and the losses will be at least partly unrecoverable. Used car prices have now dropped to a five-year low. This is mostly due to a combination of the economy and the deals that have been offered on new cars. While those new cars have been flying off the lots, the pressure on used car prices affects dealers and manufacturers bottom lines on more than one front. First and most obvious is the margins on the used car lots, which often outstrip the profits on new cars. But maybe more significantly, the residual values that are figured into the price of a lease are affected. Dealers figure lease payments partially by what they can sell a car for when the lease is done and if that value drops after the lease is written, it cuts into the expected profits. One of the catalysts for sending most of the techs lower (with the aforementioned exception of the SOX), was a comment from Thomas Weisel regarding Oracle's earnings projections. Oracle CFO Jeff Henley said he expected the February quarter to show slightly positive revenue, although he qualified the projection, saying they'd have to wait and see. This morning, Weisel said its channel checks suggested the February quarter still hinges on the final two weeks of the month and expressed caution in the environment. Today it once again looked like the bounce we saw last week was just a temporary reprieve on the way down. However, it seems that each wrap I write carries a different tone than the day before. The news that the U.S. was pressing the accelerator no doubt had some affect on the market. If we get news that there will be resistance to the U.S. resolution and more favorable treatment for that of Russia, France and Germany, we may see another move higher tomorrow - the theory being that there will be another delay in U.S. action. There is also the thought that multilateral action is better for the markets than unilateral action, as it may prevent foreigners from pulling money out of U.S. assets. It is still very tough to predict the next day's move. The PnF reversals back down indicate the next move is lower, but I am still not willing to bet the house on it. Stick to risk capital only and make sure your stops are set in accordance with a risk profile that makes you comfortable. After all, being able to sleep at night will always hold its value. ************ FUTURES WRAP ************ Check the Site Later Tonight For John's Futures Market Article http://members.OptionInvestor.com/futureswrap/fw_022403_1.asp ******************** INDEX TRADER SUMMARY ******************** Let Down Jonathan Levinson After a weekend of angst, anxiety, sound and fury from nervous bears, the markets gapped lower this morning and spent the rest of the day looking back. Last week’s trading action was obviously influenced by options expiration week, as price was driven inexorably toward option expiry targets like the Millennium Falcon in Darth Vader’s tractor beam. Nevertheless, the action seen during that week had conditioned bulls and bears alike to expect more of the same- the sudden rapid-fire bursts of buying to erase hours of declines in under twenty trading minutes, the end- of-day tape painting and short covering, the "light" upward bias, and the intimidatingly high put to call ratios. Most bulls and bears alike were looking for a launch higher today, and the opening put to call reading at .47 confirmed it. The ratio climbed from there, but never showed anything approaching a bearish bias, spending most of the day in the low .60s. Naturally, the market, whose only job is to humiliate the greatest number of participants at any moment, gapped lower and churned its way to the bottom of last week’s trading range for the remainder of the day. Traders attempted to front run the end of day bounce, but their hopes were dashed as it was announced that Saddam Hussein was refusing to destroy his missiles and challenged the President to a debate. The US Dollar Index fell, spending most of the day below 100.00, as the CRB set a new 52 week high led by natural gas futures which closed the day on a 38% gain. Heating oil futures set a record high, surging 4% to a print of 1.15/gallon, the highest price since the contract commenced trading on the NYMEX in 1978. Volume on the indices was light, with the COMPX trading 1.23B shares and the NYSE 1.5B shares. While the endless debate about the interpretation of volume patterns rages, it remains obvious that low volume declines are a very effective way of destroying well without freeing up any liquidity. Bear markets tend to "recruit" volume on the way down, with the larger volume explosions usually reserved for the bottom of a decline. The equities markets broke ranks for a change, with the COMPX, led by the NDX and the SOX in particular, outperforming the S&P and the INDU by a surprising margin as will be seen in the charts below. The strength in the SOX was reflected in a very low, almost bullish TRINQ reading throughout the day, while the broad selling in the COMPX was reflected in a low, occasionally deep negative TICK.NQ reading. The INDU printed a bearish engulfing candle today, closing down 160 points at 7858. The move caused the stochastics and moving average convergence-divergence (the "MacD") to pause on their runs from oversold territory. Bear in mind that while today's action was certainly not bullish, these oscillators did not issue any sell signals, and the index is still trading on a buy signal. Of course, these signals always lag, but as technicians we do not allow ourselves to anticipate signals. I use the two simple moving averages to generate signals as well, but again, no sell signal was given. Support came in at 7851, and 7850 is a key support. Below that level, I see first support at 7750 and next support at 7630. The SPX dropped 15 points to close at 832.58, with an intraday low of 832.16. This too is a critical level, below which I see support in the 820 area, followed by 808, and then the airball zone to the October lows. The day printed a bearish engulfing here as well, but no sell signals from any of the oscillators I track. I might note that the downslope of the 5 and 13 dma's is certainly not pretty for traders in bullish positions, but I'm reaching here- there are no sell signals yet and the index remains above near support. The COMPX gave up 26 points to close at 1322, with an intraday low of 1321. Like the other indices, it bounced right at support, in this case 1320, with last week's low at 1317. Below 1317, we have support at 1310, 1295, 1280, and 1261 to make it to this month's lows, following which we can target 1225, and then the airball zone below 1200. Once again, the oscillators I track are nowhere near saying "sell", despite the bearish candle printed today. QQQ dropped .42 to close at 22.76, .10 above its low of the day. Below 24.65, we have support at 24.50, 24.30, 24.00, 23.60, and 23.32. QQQ failed to hold above the 200 dma at 25.26, and despite the relative strength of the QQQ (down 1.71%) to the other indices (INDU –1.99%, SPX –1.84%, COMPX –1.97%), there appears to be little for bulls to celebrate today. All eyes will be on the support levels identified above at tomorrow's open. The SOX was off only 0.30%, which accounted for all of the strength in the QQQ relative to the broader COMPX, along with the low TRINQ readings and low TICK.NQ as strong buying eased the slide in those NDX/QQQ components. ------------------------------------------------------------ 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 ------------------------------------------------------------ **************** WEEKLY FUND WRAP **************** Tech-Led Advance Lifts Equity Funds Stocks are lower this morning following last week's market rally, which saw the S&P 500 large-cap and S&P 400 mid-cap indices move higher by 1.6% and 2.7%, respectively, despite the triple threat of war, terrorism and increasing energy prices. Bargain hunters lifted stocks earlier in the week, and then again Friday to post net gains for the week, with the tech sector and growth equities leading the way. Bond prices also moved higher, with the Lehman Brothers Aggregate Bond index up 0.3% for the 5-day period as of Friday, February 21, 2003. With the broad U.S. indices higher, a number of U.S. equity fund categories posted average weekly returns of more than 2.0%, with science and technology funds averaging over 3.0%, using Lipper's numbers. Growth-oriented funds outperformed those with core and value styles by a wide margin. According to Lipper, the average multi-cap growth fund returned 2.8% last week compared to weekly average returns of 1.8% and 1.5%, respectively, for core (blend) funds and value funds. Mid-cap funds outpaced other cap sectors. The developed foreign markets of Europe and Asia/Pacific posted gains too, with the MSCI EAFE index up 0.9% for the week in U.S. dollar terms. Emerging markets, which represent only a portion of the total international stock market capitalization, rose by 2.9% last week. The average international stock fund increased in value by 0.6%, lagging the EAFE benchmark. Emerging-markets stock funds rose by 2.0%, which was good but less than the MSCI emerging market index benchmark's 2.9% weekly return. Bond yields declined as bond prices rose last week, pushing the yield of the 10-year Treasury note down 7 basis points to 3.89%, per Vanguard's weekly economic report. The Conference Board's index of leading economic indicators fell by 0.1% in January to end a 3-month string of gains. Further, the U.S. trade deficit set another monthly record in December - reaching $44.2 billion. For the week, the total investment-grade market, as measured by the LB Aggregate Bond index, rose by 0.3%, with long-term bonds leading the way, up 0.7%. U.S. Equity Fund Group Week YTD +1.6% -3.4% Vanguard 500 Index Fund (VFINX) +2.7% -4.7% Vanguard MidCap Index Fund (VIMSX) +1.6% -4.7% Vanguard SmallCap Index Fund (NAESX) +1.8% -3.5% Vanguard Total Stock Market Index Fund (VTSMX) +1.8% -3.3% Lipper Large-Cap Core Equity Fund Average +2.5% -3.5% Lipper Mid-Cap Core Equity Fund Average +1.7% -5.1% Lipper Small-Cap Core Equity Fund Average +1.8% -2.8% Lipper Multi-Cap Core Equity Fund Average +3.3% +1.2% Lipper Science & Technology Fund Average Among equity funds with over $500 million in assets, the Fidelity Select Electronics Fund (FSELX) was once again the week's highest performer, returning 5.1% for the week, following a 5.5% increase the prior week. Bargain hunters also lifted communication stocks as evidenced by the 4.5% return for Seligman's Communications and Information Fund (SLMDX). Tech funds gained 3.3% on average last week, per Lipper. Diversified U.S. stock funds with heavy exposure to these sectors were among the week's top performers. RS Diversified Growth Fund (RSDGX) picked up 4.2% for the week, for example, while the Janus Venture Fund (JAVTX) produced a 3.8% weekly total return. All of the "growth" categories had average weekly returns of more than 2 percent, according to Lipper, led by mid-cap growth funds (+2.6%) and multi-cap growth funds (+2.8%). International Equity Fund Group Week YTD +0.9% -3.8% Vanguard Developed Markets Index Fund (VDMIX) +2.9% -1.7% Vanguard Emerging Markets Index Fund (VEIEX) +1.2% -3.6% Vanguard Total International Stock Index (VGTSX) +0.6% -4.4% Lipper International Fund Average +2.0% -1.4% Lipper Emerging Markets Fund Average +0.3% -3.1% Lipper Gold Fund Average You can see that, according to Lipper, the average international fund returned just 0.6% last week, lagging the EAFE benchmark as well as comparable U.S. equity funds. The week's top performers came from the emerging markets fund group, which climbed 2.9% on average during the week. Vanguard, Morgan Stanley, and Grantham Mayo Otterloo (GMO) were some of the popular fund families doing well in this area last week. Among diversified international stock funds, strong returns were produced by the Putnam Global Equity Trust (PEQUX), up 1.8%, and Oppenheimer Global Fund (OPPAX), up 1.7%. Janus Overseas (JAOSX) had a 1.6% weekly return as global technology stocks led the way. U.S. Fixed Income Fund Group Week YTD +0.2% +0.6% Vanguard Short-Term Bond Index Fund (VBISX) +0.5% +0.7% Vanguard Intermediate-Term Bond Index Fund (VBIIX) +0.7% +0.7% Vanguard Long-Term Bond Index Fund (VBLTX) +0.3% +0.6% Vanguard Total Bond Market Index Fund (VBMFX) +0.1% +0.5% Lipper Short Investment-Grade Fund Average +0.4% +1.0% Lipper Intermediate Investment-Grade Fund Average +0.4% +0.9% Lipper Corporate A-Rated Debt Fund Average +0.9% +2.7% Lipper High-Yield Fund Average +0.3% +0.4% Lipper U.S. Government Fund Average With equities higher, high-yield bond funds posted strong returns on the week to lead the fixed income group. According to Lipper, the average high-yield fund increased in value by 0.9%, with some funds in the category rising by as much as 2 percent. Fidelity's Capital & Income Fund (FAGIX), for example, had a 5-day return of 2.02%. Its Fidelity Advisor sibling returned 1.9% for investors. With the high-yield sector leading the way, corporate bond funds with above-average allocations to lower quality, higher yielding bonds generally outperformed those without. Among US government funds, the week's highest returns came from inflation-protected securities (real return) funds and long-term funds. For example, the Vanguard Inflation-Protected Securities Fund (VIPSX) and the Vanguard Long-Term Treasury Fund (VUSUX) returned 0.7% last week. International Fixed Income Fund Group Week YTD +0.5% +2.3% Lipper Global Income Fund Average +0.4% +3.0% Lipper International Income Fund Average As you can see, global and international bond funds also did well last week, generating weekly average returns of a half percentage point, using Lipper's numbers. Just as emerging-markets equities were strong, so were emerging-markets debt securities. The Class III shares of the GMO Emerging Country Debt Fund (GMCDX) produced a weekly total return of 1.4%, for example. Its sibling, the GMO Emerging Country Debt Fund IV (GMDFX), produced a 1.3% return for investors. Balanced Fund Group Week YTD +1.2% -1.7% Vanguard Balanced Index Fund (VBALX) +1.2% -2.0% Lipper Balanced Fund Average Balanced funds produced positive total returns last week both the equity and fixed income markets both higher. Generally speaking, the more exposure a balanced fund had to stocks, especially tech stocks, the better it performed relative to other balanced funds. A mixed equity fund such as Oakmark Equity & Income Fund (OAKBX), whose investments include beaten-up growth and technology stocks, was the week's top performer among balanced funds (with assets of $500 million or more). It returned 2.4% for the week. Other popular balanced funds doing relatively well last week were AXP Diversified Equity Income Fund (INDZX), up 2.2%, and Fidelity Equity Income II Fund (FEQTX), up 2.0% over the week. Fidelity's Balanced Fund (FBALX) and Equity Income Fund (FEQIX) rose by 1.8% and 1.7%, respectively. Money Market Fund Group Yield 1.10% Vanguard Prime Money Market Fund (VMMXX) 0.78% iMoneyNet.com All Taxable Money Market Fund Average According to iMoneyNet.com, the average taxable MMF yield (7-day simple) remained at 0.78% for a second straight week, as was the case for Vanguard's Prime Money Market Fund, which held at 1.10%. The top-yielding fund remains the PayPal Money Market Fund (402- 935-7733) at 1.35%, unchanged from the prior week. Seven retail money market funds, including Vanguard Prime MMF, have yields in the 1.10% to 1.18% range as of last week. The iMoneyNet.com MMF average yield (0.78%) remains roughly 50bp below the Fed Funds rate, which has stood at 1.25% since the Fed last lowered short-term rates. Mutual Fund News According to a recent survey conducted by UBS AG and the Gallup Organization, investor optimism in the country is at its lowest level since the survey began 1996 amid concerns about terrorism, war with Iraq, the U.S. economy and stock market. According to Bloomberg.com, the UBS Index of Investor Optimism slid from "36" to just "9" in January, eclipsing the previous low of "29" from October 2002. The survey began in October 1996 with a baseline of 124, the Bloomberg article stated. The Rocky Mountain News wrote an interesting story last week on Denver-based Janus Funds and their continued investment in Tyco International, believing Tyco can recover from its current woes. Janus Capital Corporation, the investment arm of Janus, held 23 million shares of the stock at year-end according to recent SEC filings, valued at roughly $400 million. The article indicates that it was Janus' first SEC filing since announcing they would take over management of their sibling Berger funds as part of a merger with parent Stilwell Financial. Speaking of Janus, Morningstar.com reports that Warren Lammert, portfolio manager of the Janus Mercury Fund (JAMRX), is leaving Janus. David Corkins will become the fund's portfolio manager, having co-managed the fund with Lammert from 1997 and 2001. He also manages the $5.2 billion Janus Growth & Income Fund (JAGIX), Morningstar said. Lammert reportedly will pursue an investment opportunity outside the mutual fund industry (i.e. hedge fund?). That's it for this week's mutual fund wrap. Have a great week. Steve Wagner Editor, Mutual Investor email@example.com ************** TRADERS CORNER ************** Transport Trouble by Mark Phillips mphillips@OptionInvestor.com For followers of Dow Theory, Monday's trading session went a long ways toward confirming that we are still very much in a bear market. I don't claim to be an expert on Dow Theory, but I do tend to keep an eye on what I view as one of the essential tenets of the theory. Namely, that a breakdown/breakout in the Dow Jones Industrials ($INDU) needs to be followed (or preceded) by corresponding breakdowns/breakouts in the other two dominant sectors of the market, the Dow Transports ($TRAN) and Dow Utilities ($DJU). I first introduced the idea (at least in this venue) of following Dow Theory back in October of 2002, shortly after the DOW traded to a new bear market low of 7286, noting that the TRAN had confirmed that breakdown with a new bear market low of 2013. Not only that, but the DJU gave another point of confirmation, with a new bear market low of 167. We had the full confirmation with all three of the indices that are central to Dow Theory breaking to new bear market lows, confirming the ferocity of the nearly 3-year old bear market. Rather than rehash that conversation here, I'll just provide the link to that article, for any who need to catch up. DOW Theory Confirmation? http://www.OptionInvestor.com/traderscorner/tc_102102_1.asp Remember, Dow Theory is not a tool for trading. Rather it is a tool for determining the dominant trend of the market. And as of early October, the theory was telling us that the bear market was extremely robust. What I found interesting though, was that the next day, all three of those indices (and the rest of the broad market) had begun a pretty impressive rally. That rally continued right up through the end of November, and I remember having several discussions during that period of time, where the opinion was offered that Dow Theory just wasn't relevant anymore. Oh Contraire! You see that opinion was offered by those making the mistake of trying to treat the theory as a trading tool. You see, if the October confirmation was to be shown in error, then each of those indices, INDU, TRAN and DJU needed to take out their prior rally peaks, breaking the string of lower highs. It is worth noting that NONE of those indices managed to accomplish that feat before the bears came out to play in early December. The INDU got close, posting a closing high on November 27th of 8931, still more than 100 points below the August closing high of 9053. Turning to the TRAN, it came fairly close as well, but stopped at 244413 vs. the August closing high of 2463. The DJU lagged the worst, topping out at 227 on January 9th, well below the August high of 254. See the theme here? All three indices confirmed the bear market's longevity with the new lows in October and then provided another point of confirmation (at least to my way of thinking) by failing (on all three counts) to trade above a prior high. That brings us to the current situation. At 7858, the INDU is well above its October low of 7286, and the DJU is likewise well above its October low of 167, closing today at 200. But the TRAN really took a severe body blow this morning when Bear Stearns fired a volley at the Trucking stocks. Citing the group's poor performance at the outset of the first Gulf War due to the elevated fuel costs, the firm downgraded a fistful of trucking stocks this morning before the open. Bear Stearns lowered their rating to Peer Perform on CVTI, HTLD, JBHT, KNGT, SWFT, and WERN. The market did not take the news well, with heavy selling in the trucking group knocking the TRAN back to 2016 at the close, a mere 3 points above the October low. As I see it, the market is now at a critical juncture. If the TRAN falls below 2013 (on a closing basis), it will be the first domino to fall in a new bear market confirmation. We'll then be watching for the INDU and DJU to follow suit. In that vein, we can see from the recent market action that the INDU is the next likely candidate to follow suit, as it rolled over again today and looks poised to test its lows of less than 2 weeks ago. If that level (roughly 7750) fails to hold, the October lows will likely be dead-center in the bears' sights, as they look to confirm a TRAN breakdown with a subsequent breakdown in the INDU. Of the 3 indices, the DJU (amazingly looks the most solid) as it bounced from its July lows last week and continued that upward move today, despite the overall down market. Remember, this discussion is not about whether we ought to be long or short the market right now. It is about whether the bear market still has all its claws extended. I believe it does and will continue with that train of thought until I see the INDU, TRAN and DJU each rally above a prior rally peak. There has been a fair amount of discussion in the financial press lately about whether the bear market is finally just about wrung out. I personally think such thoughts are foolish until we get a signal from Dow Theory telling us that is the case through price action in these three important indices. One of the things I love about Dow Theory is that it gives us a solid objective means to gauge the market. If the October lows are violated in each of these indices, then we have another data point that confirms the bear market is still with us. On the other hand, we have concrete price levels to monitor to determine if the bear is losing its grip. Here they are. INDU below 7286, TRAN below 2013 and DJU below 167, and the bear remains in force. INDU above 8931, TRAN above 2421 and DJU above 227 and we can finally consider the bear to be loosening its grip on the market. Everything in between is varying degrees of bullishness or bearishness in the current trading range. Given the depressed levels of bullish percent in the major indices right now, I will frankly be quite surprised to see the INDU, TRAN and DJU trade to new bear market lows in the near-term. But if even 2 of these indices were to hit new lows (TRAN is the most likely, followed by the INDU), I would expect it to be followed soon thereafter by another solid bear-market rally. I'll be more than happy to trade the upside when that rally arrives, but I will keep in the forefront of my mind that until the INDU, TRAN and DJU take out their prior rally highs, it is ONLY a bear market rally. I will not be taking long-term bullish positions in the equity market until we get that bullish confirmation. That may sound strange, coming from the LEAPS editor, especially when all of our current trade candidates are on the bullish side. But I think it is a matter of definition of the term "long-term". While LEAPS are definitely a longer-term trading vehicle, I think you'll agree that it is tough to find a trend in anything in the equity market that has had a trend of more than 3-4 months lately. To my way of thinking, 3-4 months is an appropriate duration for a LEAPS trade in the current market, but long-term investments are those that should be measured in years, not months. So perhaps I should rephrase my prior statement. Until the bear goes back into hibernation, the longest-term bullish trade/investment that I will contemplate will be along the lines of the candidates we feature in the LEAPS column. In the meantime, as we pursue short-term trading gains within the current range, hopefully this discussion on Dow Theory gives you another tool you can add to your arsenal for divining the dominant trend in the broad market. Questions are always welcome! Mark ------------------------------------------------------------ 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 ------------------------------------------------------------ *********************** SWING TRADER GAME PLANS *********************** Back At You How long will it last? At least until tomorrow. That seems to be the overriding sentiment to any market move as each new day brings another volley from the geo-political court. 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The Option Investor Newsletter Monday 02-24-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: Put - ATK Updated on the site tonight: Market Posture: Tipping Over Market Watch: Shift Into Reverse ------------------------------------------------------------ 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 ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ 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 OF THE DAY - PUT ********************* ATK – Alliant Techsystems, Inc. $47.80 -1.09 (-1.09 this week) Company Summary: Alliant Techsystems is a supplier of aerospace and defense products to the U.S. government, America's allies and major prime contractors. The company also supplies ammunition to federal and local law enforcement agencies and commercial markets. ATK designs, develops and produces solid rocket propulsion systems for a variety of U.S. government and commercial applications. ATK is the sole supplier of the reusable solid rocket motors used on NASA's Civil Manned Space Launch Vehicles. The company also designs, develops and manufactures small-, medium- and large-caliber conventional munitions for the U.S and allied governments as well as for commercial applications. Why We Like It: While just over a year old, the action in the Defense Industry index (DFI.X) tells us a lot about what the market thinks about potential war with Iraq. Namely, it isn't going to last very long, and it won't have a significant impact on the bottom lines of the majority of Defense-related stocks. After several tests of the $485 level in the past 6 months, that support finally gave way big time last week and the sellers really piled aboard on Thursday, driving the index below $460. There are a lot of individual Defense stocks that have a similar chart pattern, but few look as bearish as ATK. And the bears have another thing going for them with the impact to the shuttle program from the loss of the Columbia shuttle at the end of January. The stock broke down hard following that tragedy and after a feeble rebound to find resistance at prior support near $52, has reversed course and is very close to dropping to new 52-week lows. The PnF chart will generate another Sell signal with a trade at $47, and that development should really get the stock moving towards its bearish price target of $40. The $50 level is now looking like pretty firm resistance and another failed rebound below that level would provide a great entry into the play. Those with a more cautious approach will want to wait for a breakdown under the $47 level, which is just below the September 2001 low. Initial stops are set at $51.50, just below the steeply descending 20-dma at $51.32. Monitor the DFI index for confirmation of continued sector weakness before playing. Why This is our Play of the Day Despite the continued looming war threat, Defense stocks had another dismal day on Monday, with the DFI index plunging below the $450 level. Several names in the sector, including LLL, GD and LMT plunged to new 52-week lows at the close and our ATK play isn't far behind. Dropping early in the day, the stock once again found support at the $47.50 level, rebounded and then gave back the majority of the rebound by the closing bell. With the proximity of this support level, momentum traders could very well get their wish over the next couple days, with a breakdown under $47.50. Entering on that breakdown looks like a viable strategy, as it will open the door for a fairly quick drop to the next level of solid support near $44. With today's failed rebound at $49, resistance is solidifying and any failed rally in the $49-50 area should still make for a solid entry ahead of the expected breakdown. BUY PUT MAR-50*ATK-OJ OI=106 at $3.50 SL=1.75 BUY PUT MAR-45 ATK-OI OI=149 at $1.15 SL=0.60 Average Daily Volume = 614 K ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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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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