The Option Investor Newsletter Monday 03-03-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Iraq vs. The Economy Futures Wrap: Role Reversal Index Trader Wrap: (See Note) Weekly Fund Wrap: Stock Funds Slip, Bond Funds Extend Gains Options 101: Giving Something Back Updated on the site tonight: Swing Trader Game Plan: Upside Dow Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 03-03-2003 High Low Volume Advance/Decl DJIA 7838.86 - 53.22 7981.46 7822.73 1392 mln 500/864 NASDAQ 1320.29 - 17.23 1353.31 1316.85 1216 mln 251/945 S&P 100 422.18 - 3.18 431.39 420.92 totals 751/1809 S&P 500 834.81 - 6.34 852.34 832.74 RUS 2000 359.31 - 1.21 364.63 358.28 DJ TRANS 2066.08 + 17.03 2084.65 2046.51 VIX 34.09 - 0.06 40.89 36.71 VIXN 45.83 + 0.17 46.02 44.62 Put/Call Ratio 1.02 ******************************************************************* Iraq vs. The Economy by Steven Price Is it all still about Iraq? It certainly was about the geo- political picture early on, but some conflicting economic data also proved that the economy is still playing a part in traders' minds. We got a good snapshot today of reactions to both the geo- political landscape, as well as current economic conditions. The economic worries won out today, but it was only one chapter in a very long book. After a Friday afternoon that looked as though we had finally exhausted whatever bullishness was left in the broader indices, we got some news over the weekend that tipped the scales away from an Iraqi invasion. While it remains highly probable that the U.S. will still invade, there were a couple of items that made it a little more difficult. First was the expected destruction of missiles by Iraq. The U.N. weapons inspectors requested destruction of Iraq's Al-Samoud missiles, which they deemed to have a range beyond that allowed by the U.N. resolutions. Iraq agreed to do so last week, but said they did not know how and would require assistance, keeping alive the notion that they may just be wiggling. When the destruction began as planned, it was just one more factor that weighed against a U.S. invasions Iraq continues to throw bones to the U.N. every couple of weeks. The U.N. weapons inspectors also said that they had been allowed to interview more scientists. Iraq destroyed more missiles on Monday, but has said it would cease complying with the inspectors' request if it appears the U.S. will go to war anyway. The second factor, and possibly an even more important one, was the vote by the Turkish parliament on allowing U.S. troops to base in its country. What appeared to be a victory for the U.S. with more members voting for than against the U.S. plan, quickly turned sour when the vote was declared "rejected" by the Prime Minister. The vote fell three votes shy of a majority due to 19 abstentions. Turkey's financial markets fell hard on the news, after they had rallied on the expectations that the country would be receiving U.S. aid that could help ease a $90 billion hole the country is facing and large IMF payments facing it. There has been talk of another vote, but that likely will not come until next week, after parliamentary elections this weekend. The rejection has a big effect on the U.S., which had planned on stationing troops in Turkey for an attack on Iraq from the North. While the U.S. has said the decision would not alter its overall plans, it will require some major re-positioning and could delay any military action. The U.S. has said it would be successful in an action against Iraq with or without Turkey's help. My guess is still that Turkey eventually takes the much needed infusion of aid and allows U.S. troops. However, just a few days before their elections, a topic that does not have popular support there may have simply had too much working against it. There were still more votes cast in favor of the U.S. plan than against it, so there is enough sentiment from those close to the problem to build on. I imagine the 11% decline in their stock market that followed the decision will only help the U.S. case. The arrest of a high-level Al Qaeda operative also gave the markets a boost early on. Al Qaeda operations chief Khalid Shaikh Mohammed was arrested in Pakistan and U.S. officials seized computers, computer disks, paper documents and cell phones, which they will use to try and determine where other operatives might be hiding and what plans might be in the works. The opening euphoria got another boost from a better than expected construction spending report. Construction spending rose 1.7% in January, to record levels, and also reflected an upwardly revised number for December. On the negative side, however, was consumer spending. Analysts were expecting a 0.1% rise in nominal consumer spending and instead got a reduction of 0.1%. Overall, consumers reduced real spending by 0.3%. It was only the second time in the last 14 months that spending has declined. It would also seem to correlate to recent numbers from the housing market, which showed a big drop in new home sales for January. One of the biggest factors in keeping consumer spending alive, and supporting the economy, has been low interest rates. When we start to see a lesser effect in the housing market, it is a red flag for spending in general, as it indicates fewer consumers are taking advantage of those rates to either extract money from current homes or purchase a new one. While it is not a direct correlation, weakness in the housing sector can be used as a red flag for spending in general. The drop in spending also portends more economic troubles for the country, as consumer spending has been one of the only positives we have seen in a climate where businesses have refused to spend. Consumer spending makes up 2/3 of GDP and a decline may have a serious impact on first quarter GDP. Real spending on durable goods dropped 5.4%, following a 7.2% increase in December. That was the largest decline in 13 years and reflected a drop in auto sales. As consumer debt has reached record levels, some of that previous spending is also making it back into savings accounts ahead of war concerns. The personal savings rate grew from 3.9% to 4.3%. Personal consumption was also flat, when excluding energy. One of the reasons for a drop in spending can also be linked to a smaller than expected gain in personal incomes. Personal income grew 0.3%, which was a touch lower than the already anemic 0.4% that was expected. We got reports from several automakers, with GM showing the worst results. GM reported a 19% drop in February sales. Ford reported flat sales and Daimler Chrysler reported a drop of 4.5%. The total industry numbers came in below expectations. The biggest report we were waiting on was the ISM manufacturing report. Last week's release of the Chicago PMI, which reflects manufacturing data in the region, came in better than expected. That was enough to get the bulls geared up for this morning's ISM release and we rallied into the data release. Oops. The ISM came in at 50.5% for February, well below the expectations for 52.0%. The internals of the report showed both employment and new orders down, while prices paid went up. While the 1.5% difference between the expected and actual levels may not seem like a big difference, its proximity to the 50% level is important. Anything over 50% shows expansion in the sector, while anything below that level shows contraction. The trend in both indices is down and now bordering on contraction. While the Chicago PMI was better than expected at 54.9, it was still a downtick from the previous reading of 56.0. The disappointing report led to a quick turnaround in the Dow, which had once again been on its way to testing 8000. It reached as high as 7981, before rolling over and dropping more than 100 points subsequently. The chip stocks have been one of the hotter sectors over the past week. After bottoming around 260, just before we got a bounce in the broader markets from our recent lows, the Semiconductor Index (SOX) ran all the way up to a test of resistance at 300. This 15% gain outstripped the rest of the market and indicated that this sector may be leading us higher. While the SOX is only a sector index, it has a high correlation to the broader markets, as it measures spending and demand for the hard components that businesses invest in (or don't). The SOX finally hit the 300 mark this morning, topping out at 304, but that move apparently brought in the sellers that point to a continued lack of IT business spending. After hitting its morning high, it did a 180- degree turn and fell back to 285. It was the first indication that we might see a turnaround off the bottom a couple of weeks ago when it found support and started creeping higher and if today's rejection is any indication, the recent pop in equities may be running out of steam. The sector was not helped any by a report from UBS Warburg that said the Semiconductor Industry Association results for January were below expectations, despite some good data coming from Asian source around the Chinese New Year. UBS said most categories were down, with the exception of Flash and SRAM, but it expects a mild sequential increase in February. That report was out early and we got a morning rally, anyway, so the reversal is more likely due to valuation than that piece of news. Chart of the SOX While we did get a series of intraday lower highs after the initial morning spike, we also got a higher high in the Dow than we did on Friday. While the bullish percents remain in sinking columns of "O," indicating an uphill battle for any continued rally, we need to note that we have also maintained much of the bounce of recent lows in the broader indices. The Dow touched a relative low of 7628 on February 13, before bouncing 400 points. We have held onto much of those gains and have mostly moved sideways. The 50% mark of those gains is 7852 and that level has served as significant intraday support over the past couple of days. Today's drop through that level near the end of the day also led to a failed bounce just below it, indicating we may now be seeing resistance where we have seen recent support. That would certainly seem bearish. However, we are seeing a low volume market, with no real decisive trend. The point and figure charts continue to reverse from bullish "X" columns to bearish "O" columns every couple of days it seems. I highlighted a flag pattern forming in the Dow PnF chart last week and that pattern has remained as such, indicating indecision in progressively smaller trading ranges. The SPX and OEX had been in bullish columns of "X" and added another upside box this morning. Their subsequent rollovers would have turned them back down into columns of "O" at 835 and 422.50 (2.5 point box) if not for the earlier addition to the upside. If we trade the same lower levels tomorrow, they will reverse down. That can be seen as bearish confirmation, but with all of the sudden reversals, it is getting harder to simply conclude that we are heading in one direction or another. The main reason, of course, is the market sensitivity to world events. 60 min. Chart of the Dow PnF Chart of the SPX What happens if Iraq completes destruction of all of their Al- Samoud missiles? Or if the U.S. and Turley reach a new agreement? Or if Saddam heads into exile? We can certainly guess at the likely outcome, but we have no real idea what the next day will bring. After all, it seemed like a foregone conclusion that Turkey would allow U.S. troops. We also got some contrarian indications today from the broader market movement. The Dow Transports, which had been testing October lows and underperforming even a sinking equity market, got a boost today, most likely from the continued slide in fuel prices. That slide has come as Iraq has begun to comply with U.N. requests and U.S. oil inventories have gotten a break from the passing of bad weather in the East. The Market Volatility Index also finished slightly down on the day, indicating a lack of downside fear. It usually rises on market drops and although it bounced from intraday lows, it still remained in the red at the close. It has tested the 34% level on two recent occasions, before equity drops took it back over 35%. Today it crept just over that level in the afternoon to close at 34.09. It appears that for the moment the trend is down, and I will continue to trade that way. However, without a clear-cut pattern, and the possibility that the tide will change quickly on world events, I am sticking to risk capital and will likely do so until world events are sorted out. ************ FUTURES WRAP ************ Role Reversal By John Seckinger jseckinger@OptionInvestor.com Both the ES and YM contracts saw their weekly and monthly pivots turn into resistance on Monday; however, the NQ is holding onto its long-term pivotal level. It is now time to look deeper. Monday, March 3rd at 4:15 P.M. Contract Last Net Change High Low Volume Dow Jones 7837.86 -53.22 7981.46 7822.73 YM03H 7843.00 -77.00 7980.00 7815.00 26,365 Nasdaq-100 991.07 -18.67 1023.47 988.40 NQ03H 992.50 -18.00 1024.00 998.50 227,159 S&P 500 834.81 -6.34 852.34 832.75 ES03H 835.50 -5.50 853.00 832.00 543,998 Contract S2 S1 Pivot R1 R2 Dow Jones 7721.95 7779.90 7880.68 7938.63 8039.41 YM03H 7714.00 7779.00 7879.00 7944.00 8044.00 Nasdaq-100 965.91 978.49 1000.98 1013.56 1036.05 NQ03H 979.50 986.00 1005.00 1011.50 1030.50 S&P 500 820.38 827.60 839.97 847.19 859.56 ES03H 819.25 827.25 840.25 848.25 861.25 Weekly Levels Contract S2 S1 Pivot R1 R2 YM03H 7554.00 7737.00 7889.00 8072.00 8224.00 NQ03H 947.25 978.75 1000.25 1031.75 1053.25 ES03H 803.00 822.00 836.25 855.25 869.50 Monthly Levels (February's High, Low, and Close) Contract S2 S1 Pivot R1 R2 YM03H 7374.00 7647.00 7890.00 8163.00 8406.00 NQ03H 906.75 958.75 990.25 1042.25 1073.75 ES03H 778.00 809.50 836.75 868.25 895.50 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 850.00, exit 840.75, change +9.25 Short 836.75, exit 837.00, change -0.25 Long 834.25, exit 833.75, change -0.50 Total for the day: +8.50 Total for the week: +8.50 Total since inception: +64.25 For information on the Futures Monitor and Jim Brown's posts, please go to the following link and download the current market monitor. If you already have the most recent version, simply go to the Futures Monitor Post on the upper left hand portion of the applet. http://www.OptionInvestor.com/itrader/marketbuzz/download.asp The March E-mini S&P 500 Contract (ES03H) On Monday, the ES contract first appeared content above both its weekly and monthly pivotal levels (836.25 and 836.75, respectively), and even came close to testing its daily R2 level. It was just last month when I continued to talk about the "Zone of Resistance" from 850 to 854, and bears evidently remembered this area as March began. The key, to me, was that the ES closed underneath both of these aforementioned pivotal level. However, notice that the Bullish Percent in the SPX finished higher. This is a "bullish divergence," and should be kept in the back of a trader's mind. Looking at the chart below, the ES should find support at the 829, 822, and 816 level. Resistance is felt from 836 to 839.50, and then higher at 845, 850, and then 861.25. Does it match up well with any of the daily levels? The daily pivot is just above this zone of resistance up to 839.50; therefore, it should be a solid level to watch on Tuesday. Also notice that the daily R2 is at 861.25, exactly corresponding with the long-term retracement level. Daily S1 and S2 do not match up well with 822 or 816, so their significance should be only slightly diluted. I still feel they will work well for certain hours of the trading session. Chart of ES03H, 120-minute Taking things to a five-minute chart, having the bullish regression channel ahead of time seemed to make a ton of sense. The ES failed to hit its daily R2 level, and then fell underneath the mid-point of the drawn regression channel; signaling a significant change in sentiment. Moreover, it was great that the daily pivot lined up well with the bottom of the channel. Risk/reward was then in a trader's favor. Chart of ES03H, 5-minute Bullish Percent of SPX: This indicator rose 0.60% to 34.40 on Monday, despite the overall weakness in the S&P 500. This is a "Bullish Divergence," and could portend traders looking to buy weakness. Regardless, this indicator remains in "Bull Correction", and a reversal into a Column of X's will not be seen until a print of 40%. Note: The last column of "O's" ended at 20 percent. With that said, this indicator is intermediate term bearish for the SPX. Looking at P&F chart of the SPX, the contact added an "X" as 850 was hit; however, weakness during the remainder of the session took the SPX under 835 and formed a column of O's. The March E-mini Nasdaq 100 Contract (NQ03H) The NQ contract is slightly troubling. Why? The ES and YM are looking weak; however, the NQ held its monthly pivot AND saw a bullish divergence in its bullish percent (NDX). Going forward, a bearish trader can wait until a close under the 990.25 level; however, still expect resistance at the 1000 level. The objective is clearly for a test of 983, and only a move under 980 will look to break the current bullish regression channel. The NQ did find solid resistance once again at its long-term retracement area of 1024.50. That is based off the move from October to December, and will likely not be forgotten soon. 983 and 941.50 are also Long Term retracement levels. Just like the ES, the NQ will have to rally above some important resistance levels before hitting its daily pivot. Last Tuesday's pivot was important all week; maybe the same will hold true this week. Chart of NQ03H, 120-minute Bullish Percent for NDX: The bullish percent for the NDX was unchanged at 35% on Monday, 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 is seen at 1000 and 1025, with support seen far below at 925. The March Mini-sized Dow Contract (YM03H) The YM contract, as shown below, tried and failed to hit the top of a possible wedge pattern; moreover, weakness during the session took the contract underneath its monthly and weekly pivotal levels. Support is seen at 7809 and 7767; however, note that the YM can hit its daily pivot without testing either long term pivotal level. Very interesting, and this could be a nice bull trap during trading on Tuesday. I will not begin to think bullish unless solid support is tested (7767) or the ES contract goes above its daily pivot. Getting back to the YM contract, MACD is also in a wedge pattern, but definitely has room to fall. Least resistance in the YM is still slightly lower; however, there is certainly enough TIME for the contract to continue to gravitate above its long-term pivotal areas and really implode volatility. I will be bearish going into Tuesday, but looking more to sell rallies or buy dips. It 7767 is broken, then I could see a trader selling weakness. Chart of YM03H, 120-minute Bullish Percent of Dow Jones: Using P&F analysis, the Dow stayed between its range from 7950 to 7800, and a possible apex could still form at 7850. The bearish objective for the blue chips remains at 7100, while 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_030303_1.asp ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ **************** WEEKLY FUND WRAP **************** Stock Funds Slip, Bond Funds Extend Gains Stocks bounced back Thursday and Friday, but it was not enough to generate positive weekly returns for stock mutual funds, with the benchmark S&P 500 index off 0.8 percent for the five days through February 28. Mixed economic news and the threat of war with Iraq continue to keep U.S. stock investors on the sidelines. European and Pacific stocks sustained greater losses for the week than the U.S. stock market, so diversifying abroad didn't protect you from losses in the States. The S&P 500 large-cap index has now fallen by 4.1% since December 31. According to Lipper Analytical Services, all stock fund indices were in the red for the most recent weekly period. Science and technology funds, international funds and gold funds were among the week's laggards, with some funds in those groups falling by more than 2 percent for the week. U.S. diversified stock funds generally held their weekly declines to under 1 percent, by way of comparison. Meanwhile, the mixed U.S. economic picture continues to produce bond price gains, and positive results among fixed income funds. Lipper's index update shows that all bond fund categories ended the week higher, with government and corporate bond funds doing well. The 10-year U.S. Treasury Note yield fell 20 basis points to 3.69%. Although stocks finished lower, the high yield market performed well too, with the average high yield fund up 0.9% for the week. U.S. Equity Fund Group Week YTD -0.8% -4.1% Vanguard 500 Index Fund (VFINX) -0.6% -5.3% Vanguard MidCap Index Fund (VIMSX) -1.0% -5.7% Vanguard SmallCap Index Fund (NAESX) -0.7% -4.2% Vanguard Total Stock Market Index Fund (VTSMX) -0.7% -3.9% Lipper Large-Cap Core Equity Fund Average -0.6% -3.4% Lipper Mid-Cap Core Equity Fund Average -0.9% -6.0% Lipper Small-Cap Core Equity Fund Average -0.6% -3.4% Lipper Multi-Cap Core Equity Fund Average -1.4% -0.2% Lipper Science & Technology Fund Average As you can see, tech funds incurred the week's biggest losses and are now in the red on a YTD basis through February 28, along with the other U.S. equity fund categories. Small-cap funds generated the biggest losses among diversified U.S. equity funds, with some funds falling in value by more than 1 percent for the week. Only a few U.S. equity funds lost more than 2 percent for the week and they generally of the specialty-technology variety. Among diversified stock funds with assets of at least $5 billion, the week's laggards included Morgan Stanley Dividend Growth Fund, Class B (1.6%), Harbor Capital Appreciation (-1.6%), and American Funds: New Economy Fund, Class A (-1.5%). A few large-cap growth funds held their own, such as the Janus Fund (+0.1%) and American Funds Growth Fund of America (0.0%). Fidelity Select Electronics Portfolio bucked the downtrend in the tech sector to end the week higher by 1.2 percent. International Equity Fund Group Week YTD -2.5% -6.3% Vanguard Developed Markets Index Fund (VDMIX) -2.0% -3.7% Vanguard Emerging Markets Index Fund (VEIEX) -2.6% -6.1% Vanguard Total International Stock Index (VGTSX) -2.1% -6.5% Lipper International Fund Average -1.6% -2.9% Lipper Emerging Markets Fund Average -2.1% -5.2% Lipper Gold Fund Average With European and Pacific stocks lower, most international funds declined in value by more than 2 percent for the week. Vanguard Developed Markets Index Fund, which mirrors the MSCI EAFE index, lost 2.5% over the 5-day period, while the average international equity fund did only slightly better, losing 2.1% on average for the week, per Lipper. Triggering the European stock decline was a drop in European consumer confidence, which fell to its lowest level in over 6 years in February while business confidence fell for a second month. Generally speaking, weekly declines were in the 2%-3% range with Fidelity Canada Fund the exception. It rose by 1.2% on the week. Harbor International, Fidelity Diversified International and the Tweedy Browne Global Value Fund were among those funds to finish the week with smaller-than-average losses of closer to 1 percent. U.S. Fixed Income Fund Group Week YTD +0.3% +0.9% Vanguard Short-Term Bond Index Fund (VBISX) +1.2% +1.9% Vanguard Intermediate-Term Bond Index Fund (VBIIX) +2.1% +2.8% Vanguard Long-Term Bond Index Fund (VBLTX) +0.8% +1.4% Vanguard Total Bond Market Index Fund (VBMFX) +0.2% +0.8% Lipper Short Investment-Grade Fund Average +0.8% +1.7% Lipper Intermediate Investment-Grade Fund Average +0.8% +1.7% Lipper Corporate A-Rated Debt Fund Average +0.9% +3.6% Lipper High-Yield Fund Average +0.8% +1.2% Lipper U.S. Government Fund Average High-yield bonds and funds extended their recent gains last week, with the average high-yield fund now up 3.6% since December 31st, best in the taxable fixed income group. The Fidelity Capital and Income Fund earned a weekly return of 1.6% to pace the high-yield group. It's up 6.1% on a YTD basis through February 28, 2003. Investment-grade, intermediate-term funds produced similar weekly returns as the 0.8% weekly return for the LB Aggregate index, but fell short of the intermediate-term bond index (+1.2%). For the week, Vanguard Intermediate-Term Bond Index Fund returned 1.2% as its sibling, Vanguard Long-Term Bond Index Fund generated a nifty 2.1% total return. So, while most individuals associate indexing with the stock market, the two Vanguard bond index funds have put up considerably better returns in 2003 than most U.S. investment- grade bond funds. Other long-term bond funds with big gains last week included the Vanguard Long-Term Corporate Bond Fund and its sibling, Vanguard Long-Term U.S. Treasury Fund. Both funds produced a 5-day total return of 2.1% also. However, remember the sword is double-edge here. Long-term bond funds could fall hard if and when the U.S. economy starts to grow appreciably again and investors return to the equity markets. International Fixed Income Fund Group Week YTD +0.6% +2.8% Lipper Global Income Fund Average +0.2% +3.2% Lipper International Income Fund Average Global and international bond funds were higher also, with some funds such as Fidelity Emerging Markets Income Fund producing a solid 1.4% return for the week. Alliance's Americas Government Income Fund, Class A scored a 1.8% weekly return for one of the better returns among international bond funds. Balanced Fund Group Week YTD -0.1% -1.9% Vanguard Balanced Index Fund (VBALX) -0.3% -2.2% Lipper Balanced Fund Average Most balanced funds were able to minimize losses when compared to pure equity funds, demonstrating once again the benefits of asset class diversification in choppy economic times. Those funds that overweight bonds relative to stocks in their portfolio closed the week with net positive returns. For instance, Vanguard Wellesley Income Fund, which generally invests 60% or more of assets in the fixed income markets, posted a positive 0.3% return for the week. Money Market Fund Group Yield 1.09% Vanguard Prime Money Market Fund (VMMXX) 0.77% iMoneyNet.com All Taxable Money Market Fund Average According to iMoneyNet.com, the average taxable MMF yield slipped one basis point to 0.77%. Vanguard Prime MMF, a low-cost leader, sports a 7-day simple yield of 1.09%, down one basis point versus the prior week as well. The top-yielding fund remains the PayPal Money Market Fund (402- 935-7733), at 1.34%. RBB MMP/Sansom Street Class (800-430-9618) is next with a 1.16% current yield. Mutual Fund News In Morningstar fund news, Fidelity has dropped the front-end load charge on the Fidelity Contrafund through June 30 in an effort to attract more investment dollars. It also has eliminated the load fees associated with nine regional funds. Apparently, Fidelity's feeling the pinch, like other fund families, as its revenues fall due to shrinking asset bases. For example, at its peak, Fidelity Contrafund had over $45 billion in net assets. Today, the fund's assets are $26 billion. Contrafund has a strong long-term record of performance, so investors that avoided the fund because it was a "load" stock fund may want to use this window of opportunity to jump on board. The Morningstar.com story went on to discuss Fidelity's financial results for the most recent "full-year" period, in which revenues fell by 9% and profits plunged by 39% to $808 million. Total net assets also declined by 7% to approximately $820 billion. So, it has been a difficult 3-year period for even the 800-pound gorilla in the mutual fund industry. Steve Wagner Editor, Mutual Investor email@example.com *********** OPTIONS 101 *********** Giving Something Back by Mark Phillips mphillips@OptionInvestor.com One of the most rewarding parts of writing about the financial markets in this forum is the variety of other traders I have the opportunity to correspond with. In fact, I have readers that regularly write to me from each of the 6 continents (I'm not yet aware of any readers in Antarctica, but if you're out there, by all means drop me a line!). Some are relatively new to the newsletter and some have been writing to me since I started contributing to OIN back in late 1999. While I love all the variety, by far my favorite group are the new traders. You know who I'm talking about, as we've all been there. There may be some familiarity with trading in general (or even quite a bit of experience), but they're new to the world of option trading. We've all been there, and if you think back on your own learning curve, isn't it amazing how much you've learned since getting started in the world of options? I obviously can't spend much time with every new reader that comes along or I'd never have time to trade or write these articles (GRIN), but every once in awhile, a new reader comes along that shows a genuine interest and willingness to learn how to win at the options trading game. Over the past few weeks, I've been corresponding with a fairly new reader, we'll call Jerry. Jerry's fairly experienced at trading stocks, but brand spanking new to the world of options. Based on the discussions we've had up to this point, Jerry appears to be doing things right in terms of research, proper money management and at the same time trying to fine tune his business plan. I can tell he's working on that business plan by the most recent question he posed. He's had a couple of small losses in his early option trades, and is naturally comparing that performance to what he knows is possible in the world of just trading equities. From that flowed the pivotal question, which gives us our topic for the day. When I do all my calculations on IVolitality.com and consider my strike price and my expiration date and all, and I see that an option is only going to run, say, sixty-four cents for every dollar of movement in the underlying stock, and I know that my option is going to be losing time value every day that the stock doesn't move so I've got to be real good at judging time, I find myself wondering-- what is the advantage of trading options as opposed to just doing the straight-up stock trade. Apart from controlling risk-- like knowing the maximum amount one can lose going in to the trade-- and apart from being able to 'control' more shares for a lot less capital outlay than I would in a straight stock play, what are the advantages to options trading v.s. stock trading? You see, Jerry started out by devouring all the information I could point him at with respect to option pricing and how an option will move relative to the underlying stock -- you know, the Greeks. You see, he's entering a new endeavor and looking to relate what he knows (stocks) to what he's trying to learn (options). Alright, let's leave Jerry's learning curve aside for awhile and just deal with the question at hand. Unless deep in the money, an option will never move dollar-for-dollar with respect to the underlying stock. As I've covered in detail in the past, the amount the option moves with respect to the underlying stock is determined by the Greek, Delta. An ATM option will have a Delta of 50, meaning that for every $1 move in the stock, the option will move $0.50. So we know we're going to need a decent move to make our trade worthwhile. Additionally, the clock is always against us, as buyers of options. Mike Parnos' cadre of CPTI students know this fact all too well and are more than happy to take the other side of the trade, selling premium in well-considered trades. But let's stick with the idea of buying premium. If we're going to do it, we need a target that not only has the capacity for a large movement, but we also need that movement to happen in a short space of time, RELATIVE TO THE EXPIRATION of the option we choose. If I buy an option that expires in two weeks, I need a big move and I need it to happen RIGHT NOW! If however, I purchase a 2-year LEAP, I have the luxury of time on my side. I can wait for the move to take place as the impact of time decay will be very slight over the next year. But we're not just interested in NOT LOSING, we want to MAKE MONEY, right? For that, we need a stock that moves, and will likely do so in a short period of time relative to expiration. The problem with that qualifier is determining when a move is likely to take place and then allowing enough time by selecting the right expiration month. When I first started trading options, I had a pretty simple rule of thumb. I picked trades that I thought had the potential to move at least $2 for every $1 of risk, and that I thought would start their move some time in the next 2 weeks. But the key is that I never bought an option with less than 60 (preferably closer to 90) days until expiration. That gave me time to be right. I've fine-tuned that process over the years, but I still think it is an excellent place to start for new options traders. I actually wrote a couple articles last year that I think are germane to this issue. In case you missed them, I think you'll find them instructive on the twin topics of which strike price should I use (relative to where the stock is currently trading) and how much time should I buy? Which Option Should I Buy? Which Option Should I Buy? -- Part Deux We still have the underlying question that Jerry posed though. What inherent advantage does option trading have over stock trading. Simply put, leverage. You see, it takes a real home-run to net a 100% return on a stock trade. If long, the price of the stock needs to double to provide that return, and if short, the price of the stock needs to go to zero. By contrast, it really doesn't take that large a move in an ATM option to generate a 100% return. Let's look at a quick example to demonstrate the point. In the middle of January, shares of AIG looked like they were going to tip over below the 200-dma, in a continuation of the long string of lower highs that commenced in the fall of 2001. At the time the stock was starting to roll over from the $63 level, with both daily and weekly Stochastics looking weak. The PnF chart was already on a Sell signal, with a bearish price target of $47. That looked pretty favorable at the time, with upside risk limited to the bearish resistance line at $64. So positions entered at say $62, had $2-3 worth of upside risk and $15 of potential reward to the downside. I don't want to spend a lot of time on the technicals of the trade setup, but instead want to focus on the potential for return. Let's assume that we're just trading the stock. If AIG were to fall all the way to the $47 price target (which it did), that would represent a gain of $15 from the $62 entry point. Doing some quick math, that equates to a gain of 24%. Given that the whole move only took 3 weeks, that is really quite a respectable trade, even just trading the shares. But let's compare it to what would have transpired with if we had chosen the March $60 put (AIG-OL) as our trading vehicle. Let's assume our entry into the trade would have taken place on January 17th, which would have given exactly 2 months until expiration. A bit close to the 60-day threshold, but close enough. My chart service doesn't show any trading for that option prior to January 21st, so to err on the side of caution, we'll use the close on that day (when AIG closed at $61.40) as our reference point. On 1/21, AIG-OL closed the day at $2.55. A few short weeks later, as AIG was beginning to recover off its low near $46, this option was fetching a very respectable $11.80 on February 13th! That wasn't the peak price, but performing the same simple division produces a gain of 363%! That is precisely the advantage that option trading holds over stock trading. Certainly this is an extreme example, but I think it clearly demonstrates what we, as options traders are endeavoring to capture. Here are a few examples of recent (over the past few months) moves that set up nicely on the charts and would have delivered handsomely to traders that had a handful of puts: AZO - 1/07 - 1/27 CYMI - 1/14 - 1/28 EXPE - 1/16 - 2/04 LPNT - 12/22 - 1/10 Each of these moves would have produced respectable gains for stock traders, but option traders would have netted fat triple-digit percentage gains. This is at the very core of what option trading can provide, that stock trading can't. I know there are many traders that will trade options on a stock, looking for a move of $3-5 over a relatively short period of time. That's all well and good, but it doesn't fit my style. In my opinion, it doesn't make sense to take the risk on an options trade (time decay, bid/ask spread, volatility changes) for a move of less than $5, and my preferred target is for a move of $8-10. I know what you're thinking -- there haven't been very many of those lately! Bingo! No matter what your trading vehicle, the current market is a perilous place to be. Aside from surprise news events, it is hard to find a stock that has moved more than $5-7 in the past month. Take IBM and MSFT for example. Since 1/21, IBM has been confined to a volatile $76-81 range, with a trend being very elusive. How about MSFT? Since 1/27, this institutional favorite has been confined to an even tighter range, from $23-25. It's tough to make a buck out of that kind of action, unless you have a much longer time horizon. So while options have distinct advantages over stock trading, we must allow sufficient time for the move to take place and the corollary to that statement is that we want to trade options on a stock that is either in the midst of a trend move or we think is ready to get started on one. Determining what are viable targets and when, is at the core of what technical analysis attempts to determine. It is as much art as science, but the pursuit of that Holy Grail will likely persist as long as there are markets to trade. Hopefully this rambling discussion will help you (as well as Jerry) to see where the relative advantages and disadvantages lie between trading stocks and trading options. If so, I'll feel that in my own small way, I am giving something back to the system that has been so good to me. Questions are always welcome. Mark ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ *********************** SWING TRADER GAME PLANS *********************** Upside Dow Another roller coaster day for those trying to find a discernable trend left traders wondering just which was more important - Iraq or the economy. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: advertising@OptionInvestor.com
The Option Investor Newsletter Monday 03-03-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: ATK, UTX Dropped Calls: None Dropped Puts: None Play of the Day: Put - ATK Updated on the site tonight: Market Posture: Disappointing Data Market Watch: Holding On ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity • No hidden fees for limit orders or balances • $1.50 /contract (10+ contracts) or $14.95 minimum. • Zero minimum deposit required to open an account • Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** ATK - put Adjust from $50.50 down to $49.50 UTX - put Adjust from $62 down to $60 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********************* PLAY OF THE DAY - PUT ********************* ATK – Alliant Techsystems, Inc. $46.60 -1.70 (-1.70 this week) Company Summary: Alliant Techsystems is a supplier of aerospace and defense products to the U.S. government, America's allies and major prime contractors. The company also supplies ammunition to federal and local law enforcement agencies and commercial markets. ATK designs, develops and produces solid rocket propulsion systems for a variety of U.S. government and commercial applications. ATK is the sole supplier of the reusable solid rocket motors used on NASA's Civil Manned Space Launch Vehicles. The company also designs, develops and manufactures small-, medium- and large-caliber conventional munitions for the U.S and allied governments as well as for commercial applications. Why We Like It: Regardless of the gyrations in the broad market the Defense index (DFI.X) just continues its relentless southward trek, ending the week at a new all-time low, now below $439. The logic behind this move seems to be that any war in Iraq will be short-lived and is unlikely to have any meaningful impact to the bottom lines of any of the major Defense contractors. In Thursday's update, we expressed concern with our ATK play and its refusal to go along with the sector to the downside. Well, that rally attempt that failed below $50 on Thursday, continued back down towards strong support on Friday, but once again the bulls defended the $47.50 level. The relative strength chart of ATK vs. the DFI index is still in its month-long ascending channel, so bears still need to be careful with this play. That means we don't want to chase the stock lower until ATK can break convincingly (read:volume) below $47.50. Until that breakdown occurs, the best case for new entries is to fade the rally attempts like we saw on Thursday. Momentum traders will need to wait for the breakdown, confirmed by new lows in the DFI index before playing. We're lowering our stop this weekend to $50.50, just above Thursday's intraday high. Why This is our Play of the Day Since we began our bearish coverage of ATK just over a week ago, the stock has stubbornly refused to break below the $47.50 support level, which was the reaction low on February 3rd. That all changed today, as the stock finally broke out of its relative strength channel compared to the Defense index (DFI.X) and then proceeded below support at $47.50. As expected, that breakdown just kept on going, with the next solid support found in the $44-45 area. With the volatile nature of the markets lately, we're expecting a rebound attempt that ought to fail in the $47.50-48.00 area. Since that level was so consistent at providing support, now that it is broken, it should be equally consistent at providing resistance. That failure can be used for new entry points, but we wouldn't recommend chasing the stock lower from here. In fact, conservative traders will want to use a drop to the $44 level to harvest gains on open positions. Lower stops to $49.50. BUY PUT MAR-50*ATK-OJ OI=193 at $3.80 SL=2.25 BUY PUT APR-50 ATK-PJ OI= 1 at $4.60 SL=2.75 Average Daily Volume = 628 K ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** MARKET POSTURE ************** Disappointing Data To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_030303.asp ************ MARKET WATCH ************ Holding On To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_030303.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "subscribe@OptionInvestor.com" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: advertising@OptionInvestor.com
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