The Option Investor Newsletter Thursday 02-27-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: The Waiting Game Futures Markets: Efficient Index Trader Wrap: (See Note) Market Sentiment: International Market of Mystery Weekly Manager Microscope: Robert Smith: T. Rowe Price Growth Stock Fund (PRGFX) Updated on the site tonight: Swing Trader Game Plan: International Intrigue Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 02-27-2003 High Low Volume Adv/Dcl DJIA 7884.99 + 78.00 7924.62 7789.95 1.54 bln 2117/1050 NASDAQ 1323.94 + 20.30 1331.79 1305.56 1.23 bln 1933/1281 S&P 100 423.50 + 4.78 426.46 418.60 Totals 4050/2331 S&P 500 837.28 + 9.73 842.19 827.55 W5000 7939.72 + 87.30 7979.11 7852.45 RUS 2000 361.43 + 3.46 362.35 357.97 DJ TRANS 2040.41 + 0.70 2063.30 2026.63 VIX 35.18 - 1.84 37.05 34.90 VXN 46.16 - 0.81 48.72 46.00 Total Volume 2,965B Total UpVol 2,146B Total DnVol 746M 52wk Highs 163 52wk Lows 199 TRIN 0.81 PUT/CALL 0.55 ************************************************************ The Waiting Game Thursday's have not been good for economic reports recently but today may have marked a change in that trend. However, the report attracting the most investor attention was the change in the terror alert status back to yellow from orange. That report overcame red in the housing sector and produced some green in the markets. Dow Chart - Daily Nasdaq Chart - Daily Things started out bad before the first share traded with the Jobless Claims soaring to 417,000 with last weeks numbers revised upward to 406,000 an increase of +6,000. Continuing claims were revised up for the prior week by another +127,000. Now which number do you think the talking heads were hyping in the news? Surprise, "continuing claims fell this week by -45,000 which indicates Americans are finding work." No kidding. New claims were the highest in months and the four week moving average hit 400,000 but reporters went out of their way to misreport the event. In reality there were probably some new jobs created but the vast majority of declines in the continuing claims comes from people running out of time and losing benefits from being unemployed too long. The 3.37 million continuing claims understate the real unemployment with an additional 1.5 million workers dropping off the rolls in the last year due to expired benefits. IBM also announced another round of layoffs today in its global services division. The Help Wanted Index rose one point to 40, the same level it has held for most of the last four months and indicates there is still no advertising for new employees. This was only marginally off the cyclical low of 39 last month. Layoffs are increasing and there are no new help wanted ads. Draw your own conclusion. New Home Sales fell to an annual rate of 914,000 compared to already lowered estimates of 1,050,000. This was down from 1,077,000 in December. Analysts had already lowered their estimates due to the cold weather but the severity of the drop surprised everyone. One small problem with blaming the weather for the drop. The northeast, the region with the worst weather, posted the strongest gains while the Midwest and the South posted losses. Other commentators suggested there was a lack of inventory due to the bad weather and the strong sales in December. Wrong again! A quick check of the numbers showed that inventory levels surged to 4.5 months from 3.8 months in December. Prices paid for homes also fell which indicates stronger competition for the fewer buyers. Let's recap, higher jobless claims, no help wanted ads, a -15% drop in new home sales and a Consumer Confidence index at a 13 year low of 64. Yep, definitely a soft patch. There was some good news. The Durable Goods Orders jumped a higher than expected +3.3% compared to estimates of +1.0%. Shipments rose +3.5%. Nondefense capital goods rose +2.1% and it was the second consecutive month over 2%. Computers rose +3.2% and are at the highest pace since June-2001. The bad news to this good news report was another drop in the backlog of orders which fell for the sixth consecutive month and 23 of the last 24 months. Inventories also continued to fall. My take on this is that retailers ordered just enough merchandise to fill obvious holes in their inventory from holiday sales but did not order in depth. Instead of a standard inventory level of a particular item at 20 units they may have only reordered 5-10 to keep stagnant inventory from going obsolete waiting for a recovery to appear. The competing economic reports had the markets headed south at a high rate of speed until the news hit at 10:AM that the terrorist alert level had changed. That came just about the time the Dow broke 7800 again and lately any Dow level that begins with 77 tends to attract buyers. Those buyers ran the average up to resistance at 7925 but then the rumors started flying again. French President Jacques Chirac said that using force against Iraq could not be ruled out. In the context he was speaking it was deemed a weakening of his stance against the US resolution and the war. Opposition to the French plan to stop the war is growing. Many leaders are questioning the repercussions of trying to face off with the US. They are afraid the US will turn a cold shoulder to France and claim the use of a French veto would be "a decision with great ramifications of great gravity". France has not used its veto against the US since 1956. Claude Goasguen, a senior French lawmaker, called a veto "unimaginable". "We are not going to break up the UN and Europe just to save a tyrant." France will not have to use its veto unless the US lines up the needed nine votes required to pass the resolution. Should that happen only Chirac can authorize a veto and it would be the equivalent of putting a gun to his own head claimed one lawmaker. France does several billion dollars of business with Iraq each year and once the US takes control they will not want to be at our mercy for future business deals. The market dropped on these comments since it appeared more likely that opposition to the resolution was getting weaker and war was imminent. Duh! Did somebody think we spent $3 billion to move 250,000 troops to the gulf just to make a show of force? The consensus opinion tonight is that the US is going to war next week regardless of any resolution. This means countries are faced with voting with the US to maintain unity and peaceful relations while knowing a negative vote would not stop the war. Or standing on principal and knowing the US is going to war anyway and vote against them. Boy, that is a tough decision. Either way you cannot stop the war but with one option you can create a serious enemy by stabbing Uncle Moneybags in the back. Make no mistake. The US will make anyone who embarrasses them in public pay a heavy price in the future. Since the Arab nations have joined the team it is highly doubtful anybody else will end up sitting in the stands. The sudden resumption of immediate war fears sent oil prices to $39.99 a barrel intraday. This is a huge number and represents fears that Iraq will blow up its wells. Since Saudi Arabia has already agreed to increase its output by any amount lost from Iraq there is no real risk. It is only perceived risk. There was talk of an oil boycott by Arab countries but now that they have joined the team that is far less likely. Talk of $80 oil "if" the war goes bad is similar to the $100 talk just before the 1991 war. Saddam through a wrench in the war plans once again on Thursday. Just when the support seemed to be falling in line, Iraq said it had decided in "principle" to destroy the missiles. No details were given. If this decision is as conditional as the U2 over flights then I don't expect any explosions on Saturday. That is the day the UN inspectors have set as a deadline for the destruction. This decision helped reverse the market drop after the Chirac news. It would be nice to have some fundamental stock news to move the market instead of competing rumors, half truths and misreported news events about Iraq. Unfortunately that news may be better left unreported. According to First Call 57% of the S&P-500 has warned for the first quarter and only 19% have raised guidance. If the markets did not have a war to worry about I think those kind of numbers would be very harmful to any rally hopes. It may be best that our attention is focused on Iraq and not the economy. I know the Durable Goods Orders was positive on the surface but the internals were still weak. Once the war is over fundamentals are what will provide the motive force. The Dow appears locked in a range between 7950 and 7700 and is hell bent on testing each end of the range on a daily basis. The volume is not strong enough to push out of either side and the last two days that range has shrunk to 7800-7925. The Nasdaq is also hovering in the middle of its recent range between 1295-1330. It appears that anybody who wants to buy or sell before the war has done so already and everybody is simply waiting. I do not know what it would take to produce a major move. Short of a retirement announcement by Saddam there is little potential for positive movement. However, even an earnings warning by IBM, MMM and GE on the same day would have a tough time pushing the market lower. It is a tie with buyers and sellers appearing evenly matched around Dow 7900. Grab an easy chair, a good book on trading, a blanket and thermos of hot chocolate because we may be here awhile. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Efficient By John Seckinger jseckinger@OptionInvestor.com All three futures contracts are at very efficient areas heading into trading on Friday. Could this give us reason to believe Friday will be a directional move from open to close? Thursday, February 27th at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 7884.99 +78.01 7924.62 7789.95 YM03H 7892.00 +82.00 7922.00 7774.00 34,560 Nasdaq-100 994.80 +20.29 1000.98 976.60 NQ03H 996.50 +22.50 1002.50 971.50 244,399 S&P 500 837.28 +9.73 842.19 827.55 ES03H 838.25 +10.50 842.75 825.25 727,383 Contract S2 S1 Pivot R1 R2 Dow Jones 7731.85 7808.42 7866.52 7943.09 8001.19 YM03H 7715.00 7803.00 7863.00 7951.00 8011.00 Nasdaq-100 966.41 980.60 990.79 1004.98 1015.17 NQ03H 959.25 977.75 990.00 1008.75 1021.25 S&P 500 821.03 829.15 835.75 843.75 850.25 ES03H 818.00 828.00 835.50 845.50 853.00 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7748.00 7874.00 7970.00 8096.00 8192.00 NQ03H 967.50 991.00 1006.50 1030.00 1045.50 ES03H 820.00 833.50 843.50 857.00 867.00 Monthly Levels (January's High, Low, and Close) Contract S2 S1 Pivot R1 R2 YM03H 7237.00 7642.00 8253.00 8658.00 9269.00 NQ03H 875.75 930.25 1019.25 1073.75 1162.75 ES03H 775.00 814.75 876.00 915.75 977.00 YM03H = E-mini Dow $5 futures NQ03H = E-mini NDX 100 futures ES03H = E-mini SP500 futures Note: The 03H suffix stands for 2003, March, and will change as the exchanges shift the contract month. The contract months are March, June, September, and December. The volume stats are from Q-charts. Before we begin, let us take a look at Jim Brown's day in the Futures Monitor. Recapping his signals: Short 832.00, exit 834.25, change -2.25 Long 835.00, exit 838.25, change +3.25 Short 837.50, exit 839.75, change -2.25 Short 837.00, exit 839.00, change -2.00 Short 834.75, exit 832.75, change +2.00 Long 833.50, exit 833.00, change -0.50 Total for the day: -1.75 Total for the week: -2.00 Total since inception: +59.00 For information on the Futures Monitor and Jim Brown's posts, please go to the following link and download the current market monitor. If you already have the most recent version, simply go to the Futures Monitor Post on the upper left hand portion of the applet. http://www.OptionInvestor.com/itrader/marketbuzz/download.asp The March E-mini S&P 500 Contract (ES03H) The ES contract once again traded mostly with the range outlined below from 826 to 839.50 (see chart). The daily pivot was at 833.25 and basically right in the middle of this area, making it hard to increase conviction at either end of the spectrum. As the second chart below shows, one way to trade this kind of pattern recognition is via projection analysis. I use it to simply double a "possible" range in the ES to get an objective if there is a breakout higher (or lower). There is an article on this method in tonight's Investors Education section. Also interesting was that the ES failed to test its weekly pivot on Thursday (843.50 versus 842.75), but did manage to close above Friday's calculated pivot. To me, the 838 settlement is more neutral than anything else. I would prefer to see prices stay underneath the 839.50 area and then take out the pivot to the downside, giving shorts an entry near 839.50 and also under the pivot. If prices start to spend time above this 839.50 intermediate level (close on a 120-minute chart), I could see looking for a move first to the weekly pivot and then much higher to 854. The daily R2 comes in at 853. Below the pivot, support is seen from 826 to 828. Chart of ES03H, 120-minute Looking at a 5-minute chart of today's trading, it is interesting that the ES closed just above Tuesday's pivot (838) at 838.25. I can visualize in the chart below a "P" formation from today's low of 825.25 (bear trap, since 826 was taken out) up until the 2:00 p.m. area. This is a short-covering pattern, and it does look like the apex of this pattern is somewhere between 838 and 839.50. Efficient, by definition, but I will be looking for a solid move from this area towards either 854 or 826. If long, be nervous if 838 is taken out. If short, bulls could get interested above 839.50. Chart of ES03H, 5-minute Bullish Percent of SPX: This indicator rose 0.20% to 33.60 on Thursday, which is a little bit less than expected; however, not at least not a divergence seen the last two sessions. This indicator does remain in "Bull Correction" status with a column of O's rising to 15. The last column of "O's" ended at 20 percent. Looking at P&F chart of the SPX, the contact didn't add an "X" on-top of yesterday's new column, and resistance is still solidly higher at 850 and then between the 860-865 area. On a bar chart, closing under 839.50 is slightly bearish. This level is an intermediate pivot level and just above Thursday's settlement. A rise above 839.50 would quickly get us to more neutral levels. The March E-mini Nasdaq 100 Contract (NQ03H) Once again, prices were kept under the highly discussed 1003 area (intra-day high was 1002.50). Moreover, as the chart below shows, the drawn bearish regression line has worked rather well during the last few sessions and could continue to do so. It does portend weakness from current levels, and bears could use a stop just above the 1003 area. If there is immediate weakness, look for a test of the daily pivot at 990 with an objective of at least daily S1 at 977.75. I do feel that we are at a more neutral place than anything else, but traders should be aware that there is a good chance of a directional move on Friday. With that said, bulls could look for a move above 1003 as a catalyst towards the monthly pivotal area of 1019.25. Tight stops should be implemented; just in case above 1003 is a bull trap. I would be more inclined to buy a rally than sell weakness; however, the drawn regression channel would allow for a move all the way down to 961.75 and an intermediate support area. An entry could be under the day's pivot, and then move a trailing stop to 986 once 981 is taken out. Further move the trailing stop to 978 if 970 is cleared. On the upside, once above 1009, move a trailing stop to the 1003 area. Look to exit around the monthly pivot. Chart of NQ03H, 30-minute Bullish Percent for NDX: The bullish percent for the NDX was unchanged at 35% on Thursday, and will stay in "Bear Confirmed" status. It will take a print of 40% to reverse back into a column of X's. The last column of O's ended at a reading of 14%. The NDX, according to P&F charts, will have to get a 1025 print in order to produce a new column of X's, or a 925 print to add to the recent column of O's. Resistance at 1000 and 1025, with support at 925. The March Mini-sized Dow Contract (YM03H) The YM did bid on Thursday, making its way to Tuesday's pivot at 7915; almost the session high. Moreover, 7754 was not tested on the downside; therefore, bulls didn't have to worry about an extended fall. Unfortunately, predicting direction on Friday appears to be rather difficult. Thursday's settlement is neutral in nature, but we can point out that Friday's pivot is just underneath current prices. Friday's objective should be for a move to either 7969 or 7748. If the market opens lower on Friday and under the daily pivot of 7863, I could see a session of extended weakness into the close. If prices open up higher, I could also see putting a stop under the day's pivot (if not to far away) and then look for a move to the range of 7917 to 7934 before pausing. Shorts should look for a possible bounce at the 7800 level, or daily S1. Chart of YM03H, 120-minute Bullish Percent of Dow Jones: Using P&F analysis, the Dow didn't add to its new column of X's set on Wednesday. The bearish objective for the blue chips remains at 7100, and a buy signal will be given at 8200. Resistance is seen at 8150, with support still not seen until 7600. As far as the bullish percent is concerned, this indicator was unchanged at 13.33% but continues to show oversold conditions. Of course, it will take a move to 20% in order to get the index into "Bull Alert" status. The column of O's remains at twenty-three. Note: The last column of O's ended at 10%. Good Luck. Questions are welcomed, John Seckinger ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_022703_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** International Market of Mystery by Steven Price If anyone doubts what is truly moving the markets, all they need to do is study today's intraday chart of any of the major indices. What began as a weak rebound that began to rollover and take out Wednesday's lows suddenly changed directions and headed higher as soon as news hit the wires that Iraq was once again throwing the UN a bone and the U.S. was lowering its terror alert level to yellow. An Egyptian news report surfaced that said Iraq would go ahead and destroy the missiles that the UN weapons inspectors requested it destroy, thus removing an easy excuse for the U.S. to hang its hat on when deciding to move forward with invasion plans. While it remains questionable whether this happen, with Iraq saying it does not know how to destroy the missiles and wants a technical mission to discuss the details, it was enough to get the bears on the sidelines for at least a few hours. We saw a quick 120-point reversal up in the Dow, back to Wednesday's highs, where it struggled to maintain momentum. The fact that the U.S. lowered its terror alert level from orange to yellow also figured into the boost, as the government is apparently a little less worried about a major attack being imminent. While the rally eventually failed and pulled back to 7884, 30 points off the highs of the day, the sudden swing still underscores the sensitivity of the markets to international developments. That bullish sentiment flew in the face of yet another increase in unemployment, reflected by the weekly claims released this morning and not so hot news on the housing front. On the plus side were durable good orders, which increased by more than twice as much as expected. Durable goods orders rose 3.3% in January, led by an increase in demand for cars and communications equipment. Communications orders increased more than 46%, the largest increase since October. Non-defense capital goods grew 2.1%, following a December increase of 2.4%. New orders, excluding transportation, were up 2.5%, while non-defense orders were up 3.6%. An important note is that defense spending, which had been the main support for prior reports, actually decreased. That was about all the good news from the economic front. We may finally be seeing a small whole in the so-called housing bubble, as well. New home sales dropped more than 15% in the past month, to an annualized rate of 914,000. That is the lowest level in a year, since January 2002's rate of 870,000. Some of the drop was blamed on the weather, but anyone who has seen more homes sitting on the market for longer periods of time can attest that the sellers' market we've seen for the past year seems to have topped out. Granted, it is only one month of declines after a torrid pace of increases over the past year, so saying the bubble has popped seems premature. However, it does seem to confirm what I've been seeing in my own neighborhood, as well as what many of our readers have communicated - that we are seeing a slowdown in the housing market. As traders will recall, Alan Greenspan has said that money taken out of homes has generally fueled recent consumer spending, with about half of every dollar heading back into the economy. While this is a new homes report, as opposed to an indication of refinancing, it implies that the low interest rates that have fueled the market may have finally drawn in most of the buyers and most likely those who were going to refinance. That is not good news for consumer spending, which makes up 2/3 of GDP. The Midwest, which had been the strongest region in the last report, dropped 42%. The unemployment picture continues to worsen, as we get further away from the unreliable data of the holiday season. While the end of the year tends to fluctuate due to seasonal patterns, we are getting back into the business year and so far the trend is not encouraging. Initial jobless claims in the past week rose 11,000 to 417,000, which is the highest level in ten weeks. More importantly, the 4-week moving average, which is used to smooth out weekly fluctuations, rose to a seven week high of 399,750. The 400,000 plateau is generally used by economists to measure a worsening labor market and if the recent trend of increases in the weekly numbers aren't enough to throw up a red flag, then the moving average sitting just 250 claims away from an officially worsening picture should make the point. The help wanted index, released by the Conference Board, also increased mildly, moving from 39 to 40, but still sits no higher than it was last fall. Conference Board economist Ken Goldstein said, "The fact that job advertising was no higher in January 2003 than in October 2002 shows how flat the labor market has been. Hiring intentions are not expected to turn more bullish as long as the overall economy remains stuck in neutral." In spite of all the negative economic data, the markets still posted a healthy gain of 78 points in the Dow and 20 points in the COMP. While we can analyze all the data we want, it is apparent that until the situation with Iraq is behind us, we may just be spitting in the wind. What happens on the geo-political front is still driving the major indices and unless a trader has a line to Washington, Iraq and Kofi Annan, he/she will have to be willing to roll with the punches until further notice. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 7884 Moving Averages: (Simple) 10-dma: 7881 50-dma: 8274 200-dma: 8623 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 837 Moving Averages: (Simple) 10-dma: 836 50-dma: 874 200-dma: 912 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 995 Moving Averages: (Simple) 10-dma: 993 50-dma: 1012 200-dma: 1012 ----------------------------------------------------------------- The Dow Jones Home Construction Index (DJUSHB): The home construction index dropped hard today, following new home sales data that showed a 15% decline in the month of January. The previously strong Midwest saw a drop of more than 40%. It was the first time in a while that we did not get an upside surprise and most homebuilders finished the day in the red. There was some recovery toward the end of the day, however, with the DJUSHB climbing back above recent support at 319. The low of the day was 315.22, and it looked like the bubble had finally burst. That 319 level has now provided strong support on a closing basis since the group got a big boost on February 18. Even with the recovery, bulls should be cautious of strong resistance at the 200-dma. It failed there in January and again over the past week. 330 is also a significant resistance level as the failure in October also came at that level when the 200-dma was higher and the index has not been able to crack the 330 barrier since last September. 52-week High: 397 52-week Low : 260 Current: 319 Moving Averages: (Simple) 21-dma: 319 50-dma: 316 200-dma: 325 ----------------------------------------------------------------- The VIX worked like clockwork today, bouncing off the 35% support level just as the Dow/SPX/OEX pulled back from their intraday highs. It traded as low as 34.90, before jumping back to 35.18 on the pullback. It actually sat just on top of 35% for most of the day and the 5-minute chart shows repeated tests of that level. If the rally continues, look for a break below that level, however, it served as strong support today and it will be interesting to see just how much of a rally will be required to break it. It could also be giving us a signal for a continued pullback, as the VIX found premium buyers at that level all day. Institutions don't generally buy premium in a rising market unless they are expecting the rally to fail. CBOE Market Volatility Index (VIX) = 35.18 -1.84 Nasdaq-100 Volatility Index (VXN) = 46.16 -0.81 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.55 469,645 257,587 Equity Only 0.44 359,070 156,749 OEX 1.31 12,608 16,579 QQQ 0.72 29,488 21,271 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 39.4 - 0 Bull Correction NASDAQ-100 34.0 + 1 Bear Confirmed Dow Indust. 13.3 - 0 Bear Confirmed S&P 500 33.6 - 0 Bull Correction S&P 100 28.0 - 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 1.15 10-Day Arms Index 1.12 21-Day Arms Index 1.29 55-Day Arms Index 1.32 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 1924 895 NASDAQ 1888 1228 New Highs New Lows NYSE 60 59 NASDAQ 59 68 Volume (in millions) NYSE 1,561 NASDAQ 1,240 ----------------------------------------------------------------- Commitments Of Traders Report: 02/18/02 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 added 11,000 contracts to the long side and 9,000 to the short side, for a net reduction to the overall short position. Small traders took 5,600 contracts off the long side and 4,000 off the short position. Commercials Long Short Net % Of OI 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%) 02/18/03 423,871 481,871 (58,000) (6.4%) 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 01/28/03 142,734 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% 02/18/03 155,475 91,102 64,373 26.1% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials reduced the long side by 1,000 contracts and the short side by 3,000. Small traders reduced long positions by 4,000 contracts and added 500 contracts to the short side. Commercials Long Short Net % of OI 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%) 02/18/03 38,486 50,501 (12,015) (13.5%) 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 01/28/03 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% 02/18/03 25,482 9,425 16,057 46.0% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials reduced long positions by 1,000 contracts and left the short side close to unchanged. Small traders reduced the net short position by 500 contracts. Commercials Long Short Net % of OI 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% 02/18/03 18,812 11,939 6,873 22.4% 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 01/28/03 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%) 02/18/03 5,561 8,973 (3,412) (23.5%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************* WEEKLY MANAGER MICROSCOPE ************************* Robert Smith: T. Rowe Price Growth Stock Fund (PRGFX) Robert Smith has been a vice president with T. Rowe Price since 1992, and has been the portfolio manager of the $3.8 billion T. Rowe Price Growth Stock Fund since March 1997, generating above average returns with below average risk relative to other large- cap growth funds. Smith follows in the footsteps of the firm's founder, Thomas Rowe Price Jr., who's best known for developing the growth stock style of investing and starting this fund back in 1950. Price felt that investors could earn superior returns by investing primarily in well-managed companies whose earnings and dividends could be expected to "grow faster" than inflation and overall economy. Over the years, T. Rowe Price as an investment firm developed a strong reputation in growth stock investing, but today offers a complete equity fund lineup that includes value-driven, sector- focused, tax-efficient, and quantitative, index-oriented styles. Smith has been an investment manager with T. Rowe Price for the past 11 years. In addition to serving as a vice president with T. Rowe Price, Smith has been a vice president of T. Rowe Price International (formerly Rowe-Price Fleming International) since 1996. Prior to joining T. Rowe Price in 1992, Smith spent five years as an investment analyst for MFS (Massachusetts Financial Services). In terms of academic credentials, Smith received a B.S. degree from the University of Delaware and earned his M.B.A. from the University of Virginia, Darden School of Business. The firm's website (www.troweprice.com) didn't indicate whether Smith has earned the right to be called a C.F.A., or Chartered Financial Analyst. T. Rowe Price's flagship Growth Stock Fund has no front-end or back-end load fees and carries a minimum initial investment of $2,500 for regular accounts ($1,000 for IRA accounts). Annual expenses are low compared with similar funds, giving it a cost advantage and adding to its appeal. The fund may be purchased directly from T. Rowe Price (800-638-5660), or from one of the many brokerage fund networks that offer the fund to the retail marketplace. Investment Style/Strategy According to the fund's prospectus, the primary objective of the Growth Stock Fund is to provide long-term growth of capital. It also seeks increasing dividend income as its secondary objective. In pursuit of these objectives, Smith invests at least 80 percent of portfolio assets in the common stock of a diversified group of established growth companies. Historically, the fund has favored companies with large market capitalizations that have the ability to pay increasing dividends through strong cash flows. According to Morningstar's latest report, Smith had 97% of assets invested in stocks at year-end 2002, with 8.3% of assets invested in foreign stocks. Approximately 90% of net assets were invested giant-cap and large-cap stocks for a median market capitalization of $30.3 billion. Nearly 10% of assets were invested in mid-caps with no exposure to small- or micro-cap stocks. The fund's price valuations are high enough to land it in the growth style box per Morningstar, but are not excessive relative to the S&P 500 target index. Accordingly, the Growth Stock Fund has all the makings of a core growth stock investment. Because Smith looks for growth at reasonable prices, the fund has generally incurred less risk than the average large-growth equity fund. While not overreaching in terms of price, Smith packs this portfolio with companies that have greater long-term earnings and historical earnings than the market (S&P 500) overall, as well as greater sales, cash flow, and book value growth than the S&P 500. The result is a portfolio that at times may fall into the "blend" style box, as it did in 2000, but maintains its "growth" stripes. At year's end, the Growth Stock Fund had a total of 109 holdings with 27.2% of assets invested in the fund's top 10 holdings. At that time the fund's top holdings were Citigroup (4.0%), Freddie Mac (3.3%), United Health Group (3.2%), Pfizer (3.1%), and First Data (3.0%). No other stock holding represented more than 3% of net assets at December 31. Smith also maintained broad industry sector exposure, not too far out of line with the S&P 500 index. The result is a well-diversified portfolio of growth stocks that participates in advancing markets, and holds up better than most pro-growth funds in declining markets. In terms of risk/reward potential, the fund is a suitable choice for investors seeking to build capital or accumulate assets over time that can accept the significant price fluctuations inherent in common stock investments. Accordingly, the Growth Stock Fund is an appropriate choice for both regular (taxable) accounts and tax-deferred accounts, such as IRAs. Fund Returns/Ratings When Robert Smith took over the Growth Stock Fund in March 1997, his conservatism resulted in below average returns when compared to other growth stock managers. Between 1997 and 1999, when the tech-led growth market spiraled upward and other growth managers were willing to pay up for stocks, Smith didn't overreach and it appeared as if he was lagging behind. That's if you call annual returns of 26.6% (1997), 27.4% (1998), and 22.2% (1999) lagging, but that in fact was the case during that crazy period. In '99, Smith's 22.2% return ranked in bottom quartile of the large-cap growth category, per Morningstar. However, and that's why you try to look at a fund's performance over at least one full market cycle, Smith's conservatism would ultimately benefit shareholders greatly. In 2000, Smith had an annual return of +0.3%, compared to an annual loss of 13.9% for the average large-cap growth fund. Smith's performance in 2000 ranked in the top 7% of the category. In 2001, he limited fund losses again relative to other growth stock managers, producing an annual loss of just 9.8%, compared to a loss of 22.3% by the average large-growth fund, per Morningstar. That ranked in the category's top 5%. In 2002 and so far this year, Smith has continued to limit fund losses relative to other growth managers. The result is strong return, risk, and risk-adjusted return ratings from Morningstar. For the trailing 3-year and 5-year periods through Jan. 31, the T. Rowe Price Growth Stock Fund's ratings were as follows: Morningstar (3-Year) Ratings: Return Rating: High Risk Rating: Average Overall Rating: 5 Stars Morningstar (5-Year) Ratings: Return Rating: Above Average Risk Rating: Below Average Overall Rating: 5 Stars The 5-year ratings are equivalent to the fund's overall ratings, so Smith has maintained this fund's superior risk-reward profile through a volatile cycle for growth stocks. To give you a sense of what you might expect over longer time periods, note that the fund sports a trailing 10-year annual average total return as of January 31, 2003 of +9.6%. That was 0.6% a year better than the S&P 500 index, and 3.0% a year more than the Russell 1000 Growth index. It also was strong enough on a relative basis to rank in the top 7% of the Morningstar large-growth category. According to the T. Rowe Price website, the fund has grown at an annual-equivalent rate of 10.8% since inception (April 11, 1950). So, over a 50-year period, this fund has produced "double-digit" percentage annual returns for investors. That's getting the job done. Contributing to the fund's superior long-term performance is also its low operating expenses - a la the Vanguard Group way. At 0.77%, the fund's annual expense ratio is around half that of the average large-cap growth fund, per Morningstar, giving it an appreciable cost advantage which translates into better relative return performance over time. Conclusion There is much to like about Smith's conservative growth stock management style. As time has proved, he will participate in growth rallies but won't overreach (overpay) for stocks. The fund's price consciousness helps to keep it from sinking when growth stocks are out of favor. Individuals looking to build wealth over a long period of time and who accept the risks of growth stock investing have a solid "core" equity option here. For more information or to download a prospectus, go to the to the www.troweprice.com website. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** International Intrigue Picking a direction for the stock market would be much easier if we could just get George Bush, Kofi Annan and Saddam Hussein all in the same room. 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The Option Investor Newsletter Thursday 02-27-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: EMC Dropped Puts: None Daily Results Call Play Updates: ZMH, SLAB, TECD, AMGN, DGX, MME New Calls Plays: BDX Put Play Updates: ATK, CB, MHK, VZ, UTX New Put Plays: BBOX **************** 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: ***** EMC $7.14 -0.37 (-0.90 for the week) We hung on to EMC, which had managed to hold above firm support from the middle of January - until today. While the Nasdaq saw a nice rally, EMC was unable to hold its recent gains and it looks like the breakout has been put on hold for the moment. The stock does still remain above its 200-dma, which is currently sitting at $6.75 and if it finds support above $7, the pullback can still be considered a higher low. The trend we were trying to capture here, however, appears over and we will let it go for now. Those traders who would like to give it some more time may want to set a stop loss just below the 200-dma. We still have the stock sitting on our stock pick list, so we have not lost faith for the long term; however, as an option play, we are choosing to avoid further time decay, as well as shorter-term directional pain. PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week AMGN 54.06 -1.16 0.71 -0.17 0.81 Trending BDX 34.18 -0.75 0.39 -0.13 0.76 New, new high DGX 53.35 -0.55 1.50 0.02 -0.45 new support EMC 7.14 -0.05 -0.14 0.00 -0.37 Drop, trend break MME 34.90 -0.97 1.21 -0.38 0.05 200-dma support SLAB 26.17 0.12 -0.13 -0.71 0.37 aggressive entry TECD 22.08 -0.66 0.30 0.06 0.22 Back over $22 ZMH 44.83 -0.29 1.23 -0.27 0.16 Held recent gain PUTS ATK 49.16 -1.96 1.34 0.25 0.01 Failed at $50 BBOX 39.87 -0.84 -0.25 -0.73 0.47 New, $40 resistance CB 47.47 0.04 -0.96 -1.51 1.72 Oversold bounce UTX 58.64 -1.96 -0.09 -1.76 0.70 Resistance below $60 VZ 34.85 -0.20 0.14 -0.42 -0.13 Back under $35 ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** ZMH $44.83 +0.16 (+0.97 for the week) ZMH has been flirting with the $45 level for the last three days, reaching a high of $45.55 on Wednesday. While it hasn't forged much further ahead, it has managed to hold its recent gains and appears to be experiencing some slight consolidation after the move. A study released on Thursday proved the point we made in the original write-up on the play. That point was that ZMH's new MINI procedure, which is a less invasive knee replacement procedure, will reduce the cost of a knee replacement by reducing hospital stays. The study showed that hospital stays were reduced to an average of less than three days. Dr. Luke Vaughan, who conducted the study, said, " "What we found was that by adapting instruments and technique to a smaller incision, we could shorten the hospital stay, lower blood loss and speed the patient's rehabilitation, all while leaving the patient with a more cosmetically appealing scar." The positives of the new procedure should lead to an increase in its use, which ZMH is betting on with a webcast of the procedure as a training tool for surgeons on March 22, 2003. Since our last report, ZMH added another box on the PnF at $45 and new entries should look for a move above the relative high at $45.55. We are raising our stop on the play to $41.75, just below the rising 21-dma and recent pullback low on Feb 13. --- SLAB $26.17 +0.37 (-0.41 for the week) The Semiconductor stocks have been a bit of an enigma the past few days. Just when they looked as though they had exhausted themselves, with the SOX dropping back to 280 for the third time in as many days, we got a big bounce once again. Both the Semiconductor Index (SOX) and SLAB held ground all morning, made a mid-day run and then went mostly sideways for the afternoon. While it was not a terribly exciting day for the play, it did finish in the green and has held its recent gains with the move back over $26. Bulls will point out the possible formation of a bullish wedge pattern, but it will likely take a move back over $27 to bear that pattern out. There has been no change in the PnF chart, which remains pinned just under its bearish resistance line. That line sits at $29 and the boost to $28.49 on February 20 achieved the last movement on that chart. The pullback to a higher low after the recent rally may be seen by aggressive bulls as an entry point, but they will also note the pattern of lower highs over the past few sessions. More conservative traders may want to wait for a move back over $27, which would break that pattern and also lend credibility to the possibility of a bullish wedge. --- TECD - $ 22.08 +0.22 (-0.24 for the week) Flip between 5-minute charts of today's action in the NASDAQ and TECD, and you'll see almost no similarities. That's pretty rare. While most tech stocks don't follow the Composite tick-for-tick, there definitely tends to be a correlation; especially when it comes to general direction. TECD actually faded the NASDAQ this morning as it pulled back to an intraday low of $21.63. Then, while the rest of the market was experienced a post-lunchtime hangover, Tech Data recovered its losses and moved back into positive territory. The index and stock finally traded in tandem during the final hour, when both posted some rapid gains. This late-day bullishness was enough to push TECD above short-term resistance at $22.00. The fact that shares closed over that level indicates that a test of the relative high ($22.23) could be forthcoming on Friday. A move above that level might give aggressive traders a chance to target new entries. Should TECD experience a pullback, we'd expect to see continued support near $21.60. --- AMGN $54.06 +0.81 (-0.54) As the broad market continues to vacillate in its current range, our AMGN play continues to behave in a methodical and predictable manner. Dips to the ascending trendline (now at $52.40) continue to be bought, as the bulls struggle to finally break convincingly above the $54.50 level. Tuesday's drop to that trendline provided a great entry into the play and the continued rebound in the stock has been dragging the lagging Biotechnology index (BTK.X) along for the ride. There's still no sign of the broad market breaking from its current range, but AMGN is looking like it really wants to break out, as On Balance Volume continues to climb, now at its highest level since December of 2001. Pressure to the upside is starting to build, and it should result in a breakout over last week's high of $54.70. The conservative approach is still to buy on the dips near support, now in the $52.50-53.00 area, supported by the 20-dma ($52.71). Aggressive traders can target new entries on a breakout over $54.75, keeping in mind that there is significant overhead resistance beginning at $55-56, which will likely take some time to work through. Raise stops to $52.25. --- DGX $53.35 -0.45 (+0.54) Yesterday's early push up to the $55 resistance level looked almost too good to be true, and by the end of the day, it was clear that it was. the late day fade in shares of DGX dropped the stock back to give back all its intraday gains and the weakness persisted on Thursday, with the stock falling back to support near $53. But all is not grim, as yesterday's surge was enough to print another X on the PnF chart, giving us that expected Buy signal, with a corresponding bullish price objective of $63. It won't be all clear sailing from here though, as the pullback to near support shows. The first upside obstacle is clearly the $55 level and momentum entries taken on a breakout over that level certainly hold merit. Above there, we have the PnF bearish resistance line at $57, which will probably hold as resistance, at least on the first test. The best entries will still come from a rebound at support in the $52-53 area. Keep stops set at $50.50. --- MME $34.90 +0.05 (+0.10) MME has been struggling the past few days, continually knocking at resistance, but unable to break through. It is for precisely this reason that we initiated the play with a trigger at $34.25. Tuesday's high of $34.24 was as close as we've gotten so far this week, but it is encouraging that the stock is holding up remarkably well, finding support above the 200-dma ($34.43) the past two days. With On Balance Volume continuing to rise, we have the evidence that pressure is building for a breakout. While aggressive traders may want to try to jump the gun and buy the dips near the 200-dma, we're sticking with our plan and waiting for that trade above $35.25 before recommending entry into the play. An entry on that breakout will certainly make sense, as the market has been demonstrating the significance of that level. More conservative traders will want to wait for a subsequent pullback to support after that breakout before entering the play. ************** NEW CALL PLAYS ************** BDX - Becton Dickinson - $34.18 +0.76 (+0.10 for the week) Company Summary: Becton Dickinson is a medical technology company that serves healthcare institutions, life science researchers, clinical laboratories, industry and the general public. BD manufactures and sells a broad range of medical supplies, devices, laboratory equipment and diagnostic products. For the fiscal year ended September 30, 2002, BD reported total revenues of $4.033 billion. (source: company release) Why We Like It: Not many companies have shown immunity to market swings over the past couple of weeks. While this call play slid with the rest of the market at the end of January, it appears to have righted the ship and is flirting with relative highs and possible breakout territory. The company is engaged in the business of medical supplies and devices, such as hypodermic needles, microbiology testing products and diagnostic systems. While none of these get the blood boiling, it is a consistent business model, as health care remains in demand, even in a weak economy. Part of the reason for the recent surge may have to do with Merrill Lynch recently raising its estimates for several medical technology companies, including BDX. The raised guidance was due to favorable currency exchange rates, which could lead to stronger revenue for companies in the group that derive significant sales from outside the U.S. BD was one of these, deriving 47% of its sales from overseas. Merrill's analyst raised his estimates for the BDX's second quarter sales by $12 million to $1.14 billion, which would represent 12% growth. BDX's technicals also appear strong, on both the daily and point and figure charts. The stock had flat-lined around $30 for much of the past several months, until January 23, when it released its earnings. The earnings release was followed by a Goldman Sachs upgrade and then a 10 million share stock buyback announcement. It was enough to get BDX rolling and send it through the 200-dma. It hen pulled back to that moving average where it bounced and again headed to new relative highs. It has been testing the $34 level, reaching a high of $33.84 on 1/28 and $34.17 on 2/21. That trade of $34 put the stock in a precarious position on the point and figure chart. It is now right up against its bearish resistance line, which is drawn on a 45 degree angle down from it previous high. While there is no real horizontal resistance until the $38-$39 area, the bearish resistance line could pose a challenge. However, after consolidating for the better part of six months and then getting a bounce off its 200-dma, the stock is moving into territory it has not seen since last summer. We like long positions on a move above $34.25. Conservative traders may want to wait for a break of that bearish resistance, however, before jumping in. The issue at that point, however, will be a lower risk reward, since we are targeting $39 to start. The last time the stock began to roll over, it bounced off the 21-dma, which now sits at $32.66 and is rising. We'll allow for another test of that average and set our stop at $31.98. BUY CALL MAR-30*BDX-CF OI=268 at $4.30 SL=2.15 BUY CALL MAR-35 BDX-CG OI=268 at $0.55 SL=0.00 BUY CALL APR-30*BDX-DF OI=N/A at $4.40 SL=2.20 BUY CALL MAR-35 BDX-DG OI=N/A at $0.90 SL=0.00 Average Daily Volume = 1.16 mil ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* ATK $49.16 +0.01 (+0.27) What's wrong with ATK, and why won't it break down? Does that question sound familiar? Despite the continued deterioration in the Defense index (DFI.X), ATK has been stubbornly rising since Tuesday's rebound from the $47.50 support level. While the stock did manage to give back all its intraday gains by the closing bell, it seems to be finding support at the $49 level, which provided resistance earlier in the week. The strength certainly isn't coming from the DFI index, which is still sitting very near its all-time lows, even after today's anemic rebound. A relative strength chart of ATK vs. the DFI index provides a clue, as that chart shows an inexorable bullish rise since the stock initially dropped down to the $47.50 level on February 3rd. That makes it clear that this play is an aggressive approach to playing a continued breakdown in the DFI index. Failed rallies below $51 (like we saw today) can be used for aggressive entries into the play, but more conservative traders need to wait for the decisive break below $47.50 before playing. That breakdown should be confirmed by the DFI index breaking below $439. Our stop remains at $51.50. --- CB $47.47 +1.72 (-0.80) If the recent action in our CB play is telling us anything, it is giving us a confirmation that chasing breakdowns lower is not the way to trade this stock. Yesterday's breakdown to new lows had all the earmarks of a move that would continue, as it came on strong volume and the stock ended right at the low of the day. Then miraculously, CB gapped up this morning and traded up throughout the day, ending at the high of the day. Such is the market environment with which we are currently faced. This pattern will likely continue, so the only viable entry strategy is to fade the rallies, opening new positions on rally failures near resistance. And with today's bullish move, CB could deliver that tomorrow morning. The stock is currently just below the descending trendline ($47.75) that has been pressuring the stock since early February, and then there is the 10-dma ($48.05), which has defined a ceiling for the stock since late January. A rollover near the $48 level should be the optimum entry into the play, and we're keeping our stop nice and tight at $48.50. Use the action in the Insurance index (IUX.X) to confirm weakness in CB before entry. The IUX ended the day on Thursday just below its 20-dma, and if it pushes through that level to the upside, the $232 resistance level will be in play. A breakout over that level will more than likely result in CB moving higher, so traders will want to see a rollover in the IUX to confirm that weakness in CB before playing. --- MHK $49.32 +0.66 (+0.49) Volatile trade has been the name of the game in our MHK play this week, as the stock has bounced between support near $47 and resistance at $50. For all the bouncing around, the stock has accomplished very little since we began coverage last Thursday. But it appears to be wedging up for a break in the near future, as the 2-month descending trendline and the 2-week ascending trendline converge to a point next Monday at $49. Resistance looks firm near the $50 level and entries on a failed rally near that level look good. On the downside, while the trendline break will occur with a drop back under $48.50, the better entry is likely to materialize on a break below the $48 support level that propped the stock up earlier this week. The PnF chart still looks exceedingly bearish, with a price target of $34. But to get moving in that direction, we'll first need to take out the recent lows and print $46, generating a fresh PnF Sell signal. The 20-dma at $50.23 should still stop any weak rally attempts, but we're going to give the play a bit more room, leaving our stop in place at $51.10. --- VZ $34.85 -0.13 (-0.79) Is support going to break or not? Since the large drop late last week, VZ has twice tested the $34.50 level, where the bulls have successfully defended it. But there sure hasn't been much upside conviction following those rebounds, as the intraday highs continue to drop, ever so slowly. Every day this week, the stock has tested resistance near $35.70, but each attempt has been turned back and the past three days have seen the stock closing just a bit lower each day. VZ has the look of a stock that wants to break down below that $34.25 level (the low from last Thursday) and it is once again starting to underperform the North American Telecoms index (XTC.X). Failed rallies below the $36 level should offer the best entry into the play, although those looking for confirmation before playing will want to wait for VZ to break below the $34.25 level first. Should the XTC return to its pattern of weakness on Friday, that would be a nice point of confirmation as well. Lower stops to $36.25, just above last Friday's intraday high. --- UTX $58.64 +0.70 (-2.88 for the week) This Dow component bounced strongly today, but still made up only a portion of Wednesday's big drop. It's action mirrored that of the Defense Index, which remains in a strong downtrend and can't seem to get much of a lift, even when the news regarding Iraq remains hawkish. Today, however, the news that Iraq would go ahead and destroy the missiles the weapons inspectors had requested gave the entire market a boost and a rising tide swept along most boats. UTX established a clear PnF bullish support breakdown with Wednesday's box at $58 and the next visible support levels remains in the $56 area. Below $56 it looks like a straight shot to $50. Today's rebound failed at $59.00, indicating new resistance squarely below $60 and conservative traders may want to lower their stop on the play to just above $60. We are going to give it a little more room to fail at the 21-dma, which now sits at $62.01. ************* NEW PUT PLAYS ************* BBOX – Black Box Corporation $39.87 +0.47 (-1.89 this week) Company Summary: As a technical services company, Black Box Corp. designs, builds and maintains network infrastructure systems. The Black Box team serves more than 150,000 clients in 132 countries, providing technical services on the phone, on site and online. Through its catalogs and Website, the company offers more than 90,000 infrastructure and networking products, and designs and builds more than 650,000 custom products each year. Why We Like It: In this increasingly schizophrenic market, it seems the economy and fundamentals are becoming less and less relevant. Each new development on the geopolitical front is the excuse of the day to either buy stocks indiscriminately or else dump them wholesale. But there is an important exception to that rule. Technology stocks that fail to impress investors are being sold off in a very repeatable pattern. One such example is BBOX. After beating earnings estimates in the middle of January, the stock saw a severe selloff the next day. The cause? The company came in a bit light on the revenue for the quarter. Since its pre-earnings level above $50, BBOX has plunged more than 20% and the chart pattern is really starting to look bearish as the once-supportive 200-dma ($41.51) is now acting as resistance, most recently tested late last week. When the stock broke down in January, it left behind a long line of O's on the PnF chart, producing a bearish price target of $24. That's actually below the stock's October low, and it isn't likely to reach that level in the near term. But there's a big gap in the $33-35 area that is just begging to be filled in and that will be our target for the play. The early February low near $38.50 coincides nicely with the top of the October 17th gap, so a breakdown below that level can be used for momentum entries, keeping in mind the potential for a bounce from the bottom of that gap just below $38. The better entry strategy appears to be to target a failed rally below the 200-dma. Looking at the hourly chart, the resistance looks pretty firm in the $40.50-41.00 area. Place stops initially at $41.75, just above the 200-dma. BUY PUT MAR-40*QBX-OH OI=255 at $1.95 SL=1.00 BUY PUT APR-40 QBX-PH OI= 20 at $2.90 SL=1.50 Average Daily Volume = 302 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** 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 02-27-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Put - BBOX Traders Corner: When The Going Gets Tough, Don’t Be A Dead Hero Traders Corner: Putting it all together Futures Corner: How to Project the Future Options 101: Gold Reality vs. Media Myth ********************** PLAY OF THE DAY - PUT ********************** BBOX – Black Box Corporation $39.87 +0.47 (-1.89 this week) Company Summary: As a technical services company, Black Box Corp. designs, builds and maintains network infrastructure systems. The Black Box team serves more than 150,000 clients in 132 countries, providing technical services on the phone, on site and online. Through its catalogs and Website, the company offers more than 90,000 infrastructure and networking products, and designs and builds more than 650,000 custom products each year. Why We Like It: In this increasingly schizophrenic market, it seems the economy and fundamentals are becoming less and less relevant. Each new development on the geopolitical front is the excuse of the day to either buy stocks indiscriminately or else dump them wholesale. But there is an important exception to that rule. Technology stocks that fail to impress investors are being sold off in a very repeatable pattern. One such example is BBOX. After beating earnings estimates in the middle of January, the stock saw a severe selloff the next day. The cause? The company came in a bit light on the revenue for the quarter. Since its pre-earnings level above $50, BBOX has plunged more than 20% and the chart pattern is really starting to look bearish as the once-supportive 200-dma ($41.51) is now acting as resistance, most recently tested late last week. When the stock broke down in January, it left behind a long line of O's on the PnF chart, producing a bearish price target of $24. That's actually below the stock's October low, and it isn't likely to reach that level in the near term. But there's a big gap in the $33-35 area that is just begging to be filled in and that will be our target for the play. The early February low near $38.50 coincides nicely with the top of the October 17th gap, so a breakdown below that level can be used for momentum entries, keeping in mind the potential for a bounce from the bottom of that gap just below $38. The better entry strategy appears to be to target a failed rally below the 200-dma. Looking at the hourly chart, the resistance looks pretty firm in the $40.50-41.00 area. Place stops initially at $41.75, just above the 200-dma. BUY PUT MAR-40*QBX-OH OI=255 at $1.95 SL=1.00 BUY PUT APR-40 QBX-PH OI= 20 at $2.90 SL=1.50 Average Daily Volume = 302 K ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** When The Going Gets Tough, Don’t Be A Dead Hero By Mike Parnos, Investing With Attitude I’m a devout coward and I’m proud of it. It’s my religion. I’ve been in countless battles – gruesome, devastating, life- threatening battles -- and I’ve lived to tell about it. There are those who think you can’t get into too much trouble sitting on a cushy sofa. They have no idea. A few steps to the left of the sofa sits the precious white box that holds life’s nourishments. Only a few steps to the right is our battlefield – flickering with charts, indicators, streaming quotes, bid and ask prices. Front and center is the 36-inch diagonal oasis that helps us cope and brings a measure of joy into our lives – despite the incessant interruptions call commercials. At the Couch Potato Trading Institute, we teach you how to navigate the minefields – and there are many. We help you tiptoe through the tulips so you can come out smelling like a rose (or the odor of your choice). There’s an interesting invention is available to help you navigate through the oasis. It’s called a TV Guide. Don’t you just love high tech? ____________________________________________________________ Mining For Gold Today, we’re encountering one of those mines. XAU, the PHLX Gold & Silver Index is testing a support level. Some CPTI traders strayed from the pack. They established a March Iron Condor with a range of $70 - $85. The March $70 short put is being threatened. Cries of “Help!” can be heard across the country. First, let me reiterate that traders should not venture into a trade unless they have an escape plan. Your position is: Short 10 March $70 puts and long 10 March $65 puts. First, we’re going to unwind the position. We’ll use Thursday’s closing prices. We buy back the March $70 put for $3.20 and sell the March $65 puts for $1.10 for a debit of $2.10. Because XAU is only traded on the PHLX (Philadelphia Exchange), we should be able to shave a minimum of $.20 from the bid/ask spreads – leaving us with a debit of about $1.90. Let’s Roll, Baby! So, how are we going to make up that $2.10? Let’s look at the April option chain. We could sell the April $65 put to take in $2.15 and buy the April $60 put for $1.15 for a credit of $1.00. As above, we should be able to shave $.20 from the bid/ask spreads to arrive at a total of a credit of $1.20. We’ve taken in $1.20, but we spent $1.90 to close the first spread. How are we going to make up the difference? By increasing the number of put spreads. We would need to establish a 16-contract position. What did we accomplish? And At What Price? Basically, we bought ourselves a month and given ourselves an additional five point cushion. The price we’ve paid is that our exposure has increased by an extra six contracts. Plus, there is additional maintenance requirement of about $3,000. This is only one of a number of ways to deal with Iron Condors gone bad. Go back in the OI archives and read my column dated February 9, 2003 to review some other methods. _____________________________________________________________ All Aboard Since there is so much interest in Iron Condors, let’s continue on that track. But remember, you may be on the right track, but if you don’t keep moving you’ll still get run over. There’ll always be another train coming. _____________________________________________________________ Hi Mike, I am very interested in doing Iron Condors. Do you have a rule of thumb about how big a credit you want to receive for an Iron Condor? I am using $2.00 (on $5 wings) as the minimum, but it makes it harder to find trades. I like the 1/1.5 reward/risk ratio though. Also, I'm trying to keep the one standard deviation move range in between the two long strikes. Do you think that is sufficient? Do you have any other ideas about how to make these trades consistently profitable? When primarily selling premium I have always been under the impression that the expiration month should be as close as possible. For example, right now I would only be looking for Iron Condors with a March expiration. Once there is less than two weeks left I would switch to the next expiration month. Response: I don't necessarily have a rule of them. I like 1/1.5 risk/reward ratios too, but I’d also like to be 30 again and spend two weeks with behind closed doors with Carmen Electra and a soft-serve machine. If I recover from those two weeks, I’ll realize that I was dreaming and that a 1/1.5 risk/reward ratio ain’t gonna’ happen. I believe that if you're expecting to receive $2, you will be limited to trades with very narrow range for the stock/index to bounce around in. That trade has too much risk and would require too much babysitting and adjustment. Regarding the “one month” exposure, I agree – if there is sufficient premium to make it worthwhile. If there is not enough premium to be had using a range that would allow for some volatility, you can consider expanding the range and going out another month. Yes, there is more time for things to go wrong, but the additional range can, to a degree, balance out the risk. Consider an Iron Condor trade for BBH -- going out to April. The range is $75 to $95 -- 20 points. The credit was about $1.20. It seems safe and safety my first priority. Also consider a similar IBM 70 - 90 April condor. Roughly same credit. Same safety priority. ____________________________________________________________ CPTI Portfolio Update Position #1 – OEX Bull Put Spread – Trading at $423.50. Believing the market is not likely to go down to retest its July and October lows near 400, we sold 10 contracts of the OEX March 400 puts and bought 10 contracts of the OEX March 390 puts for a credit of $1,400. If war breaks out, it might be a quickie. The market may spike up. How high? Who knows? That’s why we didn’t put a bear call spread on top to create an Iron Condor. We may put on the bear call spread at a later date. ______________________________________________________________ Position #2 – XAU Iron Condor – Trading at $70.28.. An Iron Condor is a credit position consisting of both a bull put spread and a bear call spread. The collected premium will come into your account the very next business day. The objective is for the underlying, at expiration, to finish anywhere within the spread. So we created an Iron Condor with a 15-point range $65 to $80 for March. We were able to place spread orders and increase our credit by $.30 to a total of $1,400 for our 10-contract position. _________________________________________________________________ Position #3 -- OIH -- Diagonal Calendar Spread – Trading at $57.56 It seems that there’s about $8-9 of uncertainty built into the price of a barrel of oil. When, and if, the war is resolved, the price of oil should work its way down, along with the price of oil stocks. We bought 10 contracts of the July OIH $55 puts and sold 10 contracts of the March OIH $50 put at a debit of $3.85. We have five months to sell short-term puts and reduce our cost basis while we’re waiting for oil to fall. ______________________________________________________________ Position #4 -- QQQ ITM Strangle – Currently trading at $24.77. This is a long-term position we created two months ago to generate a monthly cash flow. We own the January 2005 $21 LEAPS call and the January 2005 $29 LEAPS puts. We sold 10 contracts of the QQQ April $28 calls and 10 contracts of the QQQ April $22 puts for a credit of $950. We moved our short sells in by one point because a lot of premium has disappeared from the QQQs in the last two months. Never fear, it will be back. ______________________________________________________________ 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 ************** TRADERS CORNER ************** Putting it all together By Leigh Stevens lstevens@OptionInvestor.com To profitably employ technical analysis in the real world of market action given the emotional or psychological pressures that develop in the financial markets takes time and considerable perseverance. There are many mistakes along the way to profitable and consistent results. You may make a trading decision based on an apparent double bottom or a base a trade on the apparent formation of a bullish flag consolidation, only to see the double bottom give way and the flag pattern fall apart. I get asked a lot what indicators I look at most and what weight should be given to the different technical factors. An example came up recently. Someone asked me how my assessment that a recent consolidation pattern (after a first upswing) was suggesting another rally to come, stacked up against an apparent hourly oscillator/price divergence - there was also an apparent double top on another index. The question is about the relative priority of an apparent "bull flag" pattern versus a price/indicator divergence or one chart pattern versus another. The answer is that divergences "trump" apparent consolidations, as do double tops or bottoms. A double top on intraday charts is a more bearish sign than an apparent consolidation on daily charts. This is why its important to look at different time frames in assessing trend direction – some technical factor will become clear on the hourly or weekly chart, not apparent on the daily. Since, as always, in technical analysis, (chart) pictures are worth thousands of words, here are some charts of the recent price action I describe. So, what was I missing when I relied overly much on this picture above, up to the point where the momentum shifted back to the downside? Namely, this – Then there was another divergence of sorts that shaped up in SPX as one chart pattern (hourly) was suggesting a top and another pattern (daily) was suggesting there might be upside follow through – Taking a closer up view (hourly) resulted in the tip off that there was a lid on the rally off the lower envelope band – Now, you could say that that any bullish expectations for this market were suspect given the political situation with a possible war looming. However, I find that just on a technical basis there is almost ALWAYS also a technical tip off suggesting reversals. Only, what happens is that your attention gets focused just on a bullish or bearish interpretation or one set of factors. My trading mentor was always looking, looking, looking at all chart and indicator aspects. I long ago devised a checklist of all that should be considered in forming a technical outlook and if I ignore going through it, even mentally, I tend to miss clues that would have gotten me in trades quicker. HERE IS ONE SUCH CHECKLIST – followed by a recap of ALL my Trader's Corner articles by alphabetical listing of topics. I call this my big-10 list and these are NOT listed in the order of their PRIORIY: 1. Background information – major averages, bellwethers and the market sector. For indexes, look to see if the indexes are "confirming" each other; e.g., is a rally a "solitary walk of the Dow", or is SPX also in synch. On individual stocks, it can be important to look at the technical picture for the sector chart. Checking bellwether indexes or stocks may be of use here. If a commodities market is involved, bellwethers might include the key futures market in that complex; e.g., for heating oil, the crude oil chart. Here, it would also be appropriate to focus on any obvious wave pattern. 2. Look at all timeframes – hourly (or other intraday), daily, weekly, monthly: Study longer-term charts, volume and indicator patterns before making any decisions based on the daily charts. Look at the daily chart and indicators, if trading on an intraday basis and vice versa. 3. TREND considerations – whether there is a trending or consolidation pattern: Basically, this is always having an eye to whether the market is trending, up or down – or is in a sideways consolidation or trading range. If in a trading range, is it well-defined, wide-ranging or relatively narrow and how long has it gone on – for example, is it's duration as long as the extent of the prior trend in terms of weeks and months. When a consolidation has gone on as long or longer than a prior price swing, be alert for a trend change. 4. Overbought/oversold - long and short-term: As a further technical backdrop, it is recommended to be aware from day to day or week to week, of the relative position of price momentum oscillators like RSI and MACD on an hourly, daily, and weekly basis. Be aware if the index or stock is approaching an overbought or oversold extreme, whether momentum up or down has been strong, or has slowed significantly. If an extreme reading is at hand or if momentum measured by these indicators has stalled, then it's important to follow the price and volume patterns closely for signs of a reversal. A sideways trend may be an event that bears watching too in terms of protecting existing profits if prices are near any expected objectives – it may be time to take profits or raise protective stops. 5. Predictive patterns -- price and volume: The determination of what patterns, if any, are developing such as rectangles, flags, triangles, double bottoms, double tops, etc. with a possible measurement of an associated "minimum" upside objectives. Volume bars (on-balance volume also) is something to look at, along with price, to determine if the volume pattern is "confirming" price action or not. 6. Trendlines and price channels: Constructing any relevant trendlines and price channels is very basic to effective technical analysis and a study of the trend – even if you merely use a straight edge to make more of a mental check of where trendlines are forming or get pierced. While not an everyday occurrence, a return to a previously broken trendline often offers a second opportunity for a trade entry. 7. Retracement calculations: This is making ongoing calculations for any return or rebound of 38, 50 or 62% of a prior price swing is essential – a strong move that retraces more than 62% on up to 2/3rds or 66%, often suggests that momentum will carry back to the prior high or low. 8. Moving averages: Keep track of some of the basic or key moving averages such as 21, 50 and 200-days for stocks – others are useful too and this depends on how you trade, such as how short-term, etc. 9. Oscillators: Another frequent check is of the relative position of at least one of the popular oscillator-type indicators like RSI, (slow) stochastics or MACD on an hourly, daily and weekly basis – even on a monthly chart to remind yourself of the MAJOR trend. I tend to prefer RSI with a length calculation of 14 and sometimes 21 as well. On weekly charts I keep tabs on the MACD usually after the end of the trading week. On hourly charts I like to trade when BOTH the 5 and 21 period Stochastics are at extremes. 10. Last, but NOT least as you see from the start of this discussion are Divergences. One of the great values of the oscillators, and volume indicators as well, is when they diverge from price action such as failing to accompany prices to a new relative high. This type of divergence is much more crucial when the market has been trending for a long period and is, or has for some time previously, registering an extreme; e.g., below 25/30 and above 70/75 on a 14 or 26-day RSI. Such divergences alert you to a possible reversal – this situation should then cause you to check where key trendlines or moving averages would be violated. "Surprise" often is the enemy of quick market action as there is initial disbelief in a reversal – preparedness alone is important. You need never be surprised when a market reverses in such a situation – the reasons "why" or the "news" explaining it, tend to be lagging events. Even when there is a fundamental "surprise", such as an unexpected earnings shortfall, the reaction to this news is usually far more severe when there is an overbought situation and conversely, less so, when the market is oversold. For a quick reference list of Leigh's prior articles, please visit our website. Click here for tonight's Trader's Corner by Leigh http://www.OptionInvestor.com/traderscorner/tc_022703_2.asp ************** FUTURES CORNER ************** How to Project the Future By John Seckinger jseckinger@OptionInvestor.com Projection Analysis can be very helpful when a market appears to be in a range and suddenly breaks out. A few disclaimers: When using the projection tool, I would prefer to have a sizable range for the first five-minutes of trading in the Dow (50 points or greater). Moreover, there has to be that "feeling" of a possible range in the equity markets. This is done by solidly rejecting levels just outside this defined range of this first five-minute period. Example: The range in the Dow during the first five-minutes is from 7800 to 7875, and then we get a spike down to 7775 and then right back into the range from 7800 to 7875. Of course, it would be even better if the daily pivot is inside this possible range bound area. Illustrations will follow to make this point clearer. Getting back to the Hierarchical Elements within my methodology; I first calculate daily, weekly, and monthly pivots. I then do a longer-term retracement studies based off obvious 'waves' (October low to December high) and compare what I have found. These give me my solid levels to work with; however, using projection analysis under certain situations can definitely help with execution and give a trader an idea where prices are going. Thursday was one of those days, since upside projections were not as clear as I would have liked. Looking at a chart of the Dow below, the first five-minutes encompassed the pivot of 7842.23 in the Dow between the 7807 to 7854 area; however, notice how price action stayed within this first period range for the next twenty minutes. In the monitor, I first thought bullish and then 'range bound' as weakness took over shortly after the opening bell. It was then AFTER the bear trap under 7800 when I began thinking "Ok, still range bound and not expecting a breakout." Of course, only 15-minutes had passed and the Dow broke-out higher from this possible range bound range from 7807 to 7789. Objective? Well, we are now above the daily pivot. Daily R1 comes in at 7890, so that was my first thought. That was also weekly S1, so it made sense. However, it is this neat projection tool device that actually can get a little bit better execution. I anchor the bottom of the projection tool to 7789, and then drag the top to the 7854 area and top of the morning's range. It simply DOUBLES the range and gives a projection of 7918 (seen in chart at right hand side). It really is this simple, but also very effective. Contract S2 S1 Pivot R1 R2 Dow Jones 7710.31 7758.65 7842.23 7890.57 7974.15 Chart of Dow Jones, 5-minute Using this projection tool on the ES contract, it was also interesting to see the daily pivot of 832.25 fall within both the "cash" 9:30 open and within the projected range. As the example above has shown, simply double the range and get a projected high of 841. Remember, this tool is used to get BETTER execution, not worse. With that said, since R1 is at 838.75 and the projected high falls at 841; look for an objective of 841 instead. On the other hand, if the projected high was 841 and the daily R1 was seen at 842, I would then use R1 instead. Chart of ES03H, 5-minute If a trader is flat, does it make sense to SELL the contract at the projected high. I believe that it does, since any movement outside of this new range up to 841 is a move with much greater magnitude than expected. Therefore, probabilities in selling the contract and it being profitable definitely is high. The intra-day high was less than two-points above this area; therefore, shorts didn't have to sweat it out that much. What about an objective to the downside? A scalper could use the 838.75 area, while a swing trader might look for a test of the 833.75 area and the top of the projected range. The ES did fall as low as 830.50, and I am sure a trader will ask, "why not use the pivot at 832.50?" The breakout was at 833.75, and getting greedy might work once, but it will be costly in the long run. I know from experience. As a good-rule-of thumb, look to the Dow first when trying to understand if the market "feels" range bound. It takes some experience, but I always try to think "What are the other traders thinking?" If I am looking for resistance at the top of the first five-minutes, I am sure that a lot of other traders are as well. This means a good short squeeze could be in order. What if a trader did sell the top of the first five-minutes when in fact the market rallied strongly? Well, where can we define risk? The pivot is below at 832.75 (versus breakout of 833.75), and reward is either to 832.75 or 826.25 area; therefore, what I would do is look to sell AFTER the market fell under the pivot once more. If long and looking for the breakout, a trader can put a stop just below the pivot. With that said, it really doesn't make sense to sell at 833.75 because risk to the upside it really undefined. First establish levels, then define risk/reward, then execute properly, and then move trailing stops to lock in gains. If short at 833.75, I would be at a loss as to where to put a stop above. Note: The weekly S1 level was at 833.50, putting the 833.75 level just above. Selling just above weekly S1 would be hard to do as well. The market obviously could sell-off dramatically, but I am trying to increase probability of a profitable trade. Ask Away, John *********** OPTIONS 101 *********** Gold Reality vs. Media Myth Buzz Lynn buzz@OptionInvestor.com I live for the day that investors blow up their television in unison having become disgusted with the idiocies uttered in the name of journalism. I will also probably die with that dream unfulfilled. Be that as it may, I'm on a rant today about the completely false premise that Iraqi war jitters are the cause of gold's rise in recent months. Makes me want to revert back to the days when I'd "mute" the volume on CNBC, as I watched parades of analysts talk about compelling values, great buys, market bottoms, and last chances to buy stocks while the train was leaving the station - for the last three years, and so far, this year too. Come to think of it, the train never left the station and thankfully, I still have a "mute" button! Honestly, the War with Iraq has been the explanation de jour for the market's movements either up or down, and I say that for both equities AND gold. There are no shortage of talking heads noting that, "Fears of war sent the market tumbling today", or "Iraq is deciding whether it will dismantle its missiles this weekend, which helped the markets close sharply up today", or some other such flimsy explanation that begins with, "In the war on terrorism today, . . . " Talking Heads, please forgive me for this public service announcement, however, this is a bear market! Equity values decline in general. Bear market rallies always suck in bulls who still want to believe in the magic of Free Money From Greenspan. Undesirable outcomes, often unforeseen, happen. It is the nature of the bear. It is also the nature of humans everywhere to find, right or wrong, an answer to every question we have. Since we are collectively asking, "Why did the market move today?", those "in the know" (who really know no more than any of us in the trenches) are searching for a sound bite answer rather than devoting a segment to education. Today, we dispense with the sound bites, and as Jethro Bodine of Beverly Hillbilly's fame would say, "Let's commence to educatin'!" Please note that I am not infallible, nor am I a guru. The trouble is that gurus are wrong eventually, and I will be wrong on many occasions, as I have been in the past. I hope I never attain the status of guru. For I would know then that my reputation and integrity will soon be destroyed. And that is too valuable to risk. But back to Professor Bodine. . . Myth Gold is also presumed to be rising and falling on investors' moods regarding an Iraqi war and the War on Terror. When uncertainty is thought to eventually lead to conflict, common wisdom is that 'fraidy cats and the delusionally paranoid will buy gold, and that that must be the reason we've seen the price rise in recent months. Similarly, common wisdom also states that when war jitters ease, the paranoid leave their mountain huts and revert back to a diet of speculative stocks and 110% equity financing to assimilate with society. Gold is for kooks. What we often hear in the press are references to "barbarous relic", thing of the past, gold fever, currency of the wacked-out hermits, etc. The presumption is that when the war is won quickly and easily, gold will be recognized as a sideshow, uncertainty will end, and gold will sell off. No longer in need of protection from uncertainty, we are cautioned now about the probable sell-off once the nerves of a nation on the brink are calmed, and terrorists are brought to justice. In short, the thinking is that gold prices are in an Iraqi war/War on Terror bull market, and the bull will die when the war is over. I disagree with both premises. In fact, I would postulate, as have many smarter than me, that gold is in the early stages of a secular bull market and that the prices will continue to rise. Reality How can I say that when, "All the experts are saying otherwise"? The question contains part of the answer. Experts are often wrong. See "guru" above. But contrarianism is a small, empirical phenomenon compared to the mechanical reasons supporting my theory. Let me first start with the timetable. $GOLD weekly (Stockcharts.com) Notice that gold bottomed in early 2001 - eight months before the 9/11 attack and certainly before war with Iraq became a blip on America's and the world's collective psyche. Clearly gold's rise has little to do with war jitters in Iraq. Gold was rising before most knew how to spell Iraq. That alone should tell us that the mainstream media has it all wrong. But for the skeptics, let us continue. Second - and all else stems from this - The Fed, who can print money at "virtually zero cost" per Fed Governor Bernanke, has turned into a giant printing press, both paper and electronic, which is flooding the market with the equivalent of Monopoly money. The Dollar (an every other currency in the world, to be fair) is only valuable because the specific country's central bankers say it is valuable. The only currency that can ever hold its value through the ages is gold. It will not take long before foreigners and those at home realize that a decrease in scarcity of currency, aka increase in supply, is a recipe for inflation and they demand gold in place of a currency with inflated supply. "Inflate or die", has to be the slogan of the century tacitly implied by the Fed. Deflation is worse. Third (we can hit these in nearly bullet point form from here on out, as they flow from #2 above), there is less supply of gold produced every year than is demanded. Demand outstrips supply. Fourth, the U.S. trade deficit is explosive, which puts tremendous pressure on the Dollar to devalue. We have counted on an infusion of over $2 bln per day under the notion of keeping the Dollar strong. Just how long will foreigners want to possess Dollars as they devalue? Europe's Euro value has already risen 8% against the Dollar this year. Fifth, this brings up the idea of deflating currencies. With other nations also teetering on recession, the only way to keep their citizens employed is to make their goods cheaper to produce than the next country's. That is accomplished by devaluation in order to undercut your neighboring country's ability to sell cheaper products compared to yours. Remember Felix Zulauf from the January 30th Options 101? "Other central banks will at some point then try to support the dollar, because if it declines too much, it hurts their exports. They will be forced to adopt the same policy as the U.S. central bank, and you will have the whole world creating more fiat currencies. That's when gold will really run." Zulauf goes on: "How far? In 2000, the ratio of an ounce of gold compared to the Dow stocks was 45 to 1. It took 45 ounces of gold to buy the Dow. Now, the ratio is down to 25 to 1." Sixth, which reminds me, China's Yuan is tied to the Dollar, which makes Chinese goods cheaper to produce as the Dollar declines in value. Few will find it attractive to purchase goods other than those from China. I might add here too that China bought over 1 mln ounces of gold in December. Are they doing this for fun? Not on your life. They will buy on the sly. Remember, China set up a gold exchange less than 18 months ago and is encouraging its citizens to buy it. As a point of historical fact, countries with gold as the standard of currency have become great powers in the world. Those who abandon it have eventually faded from glory. Not that I enjoy the thought, but I'm thinking that our granddaughters may be doing eau paire work in China 30-50 years from now. That ought to get some hate mail! Seventh, security spending will likely produce huge deficits at the Federal level. Last, a mortgage debt bubble promises to slow the U. S. economy as homeowners realize what they have done (borrow up to their eyeballs) and begin to repay loans, thus foregoing the ravenous consumer spending that has fueled the economy for years. My point is that all this goes un-noticed or at least unreported in the dominant financial media. Gold's ascent isn't just about a war with Iraq, contrary to popular belief. It's an investor's reckoning that the Fed printing press will render the Dollar worth much less than it is now, and/or that China will export deflation of goods to every producing nation on Earth. Either way, gold wins - with or without war anywhere. Frankly, this was not a pleasant piece to write today. But all of the above reminded me why I felt compelled to get interested preserving wealth in the first place. And the Fed is certainly not there to HELP us preserve it. That said, I increased my exposure to gold today through the purchase of more CEF, as all the technical and fundamental information available suggests it's a good trade while gold enjoys the early stages of a bull market. I am pleased that few talking heads believe that, which tells me gold has yet to be adopted as a mainstream investment. I'll know it's time to sell when CNBC is high-fiving the headiness of the whole thing and gold becomes the social chatter at cocktail parties in much the same fashion as Dow 11,000 in February, 2000 was. Between now and the time gold brings grins to the majority of everyday investors, I will sleep well knowing my financial ark is watertight and survivable if the economic storm worsens, and others too begin to realize the importance of a financial ark. Until next time, make a great weekend for yourselves! Buzz ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. 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