The Option Investor Newsletter Tuesday 03-11-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Volume Returns Readers Write: Anatomy of a crash: Equities vs. Gravity Futures Markets: Not Like it Seems Index Trader Wrap: (See Note) Market Sentiment: Fulfillment Weekly Fund Screen: Schwab Select List: International Stock Funds Updated on the site tonight: Swing Trader Game Plan: Are We There Yet? Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 03-11-2003 High Low Volume Advance/Decline DJIA 7524.06 - 44.10 7642.41 7520.63 1.69 bln 1317/1881 NASDAQ 1271.47 - 6.90 1288.99 1269.90 1.24 bln 1453/1773 S&P 100 406.74 - 2.90 413.63 406.70 Totals 2770/3655 S&P 500 800.73 - 6.75 814.25 800.30 W5000 7610.47 - 61.80 7730.09 7605.42 RUS 2000 347.03 - 0.98 350.77 346.44 DJ TRANS 1942.19 - 40.40 1986.34 1941.50 VIX 38.08 + 0.23 38.39 36.87 VXN 47.43 + 0.40 47.98 46.83 Total Volume 3,117M Total UpVol 903M Total DnVol 2,092M 52wk Highs 149 52wk Lows 511 TRIN 1.77 PUT/CALL .81 ************************************************************ Volume Returns Unfortunately it was down volume. Tuesday was not nearly as bad as Monday but still the down volume beat up volume better than 2:1. There was no panic selling. Traders could have best described it as frustration selling. Frustration that the war just keeps getting farther away and economy just keeps getting worse. Dow Chart - Daily http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oimw20030311_01.gif Nasdaq Chart - Daily http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oimw20030311_02.gif Yesterday was the third anniversary of the Nasdaq high of 5132 three years ago and today the Dow, Nasdaq, S&P, OEX, TRAN and RUT all closed at lows for this year. There was no panic selling but the consensus of opinion was "I am an investor, get me out of here". When it appeared the war was going to begin around the 17th investors had arranged their positions to take advantage of any post war rally. They were gulping down antacids as the market continued to drift lower but confident it would all be over soon. Today the shift in the potential starting date to April prompted those same investors started calling it quits. There maximum pain threshold had been reached and they do not want to try and hold on for 3-4 more weeks. Support for the US position continues to erode despite further evidence of lies and weapons from Iraq. Helping investors decide stocks were not appealing in a falling economy was the Wholesale Inventory report. Sales rebounded slightly but inventories fell -0.2% and pushed the inventory to sales ratio back to record lows. Nobody is buying anything on speculation and businesses are keeping expensive inventory to a minimum. Even worse was the report from the Richmond Fed showing the top-line shipments index falling from 18 to zero and new orders falling from 26 to -16. The backlog of orders fell from 46 to 26. This is not a positive report in any fashion. Cost pressures, energy prices, excess capacity and lack of demand is still creating the perfect storm for manufacturers. Chain store sales posted their strongest gain in six weeks but it was still less than 1% and disappointing to analysts. Sales are expected to be flat for all of March compared to only a +0.8% gain for all of February. Consumers are obviously not supporting the economy at retail stores. At least we can count on auto and home sales. Oops! Sorry, those are down too! The Transportation index sank to a new seven year low at 1941. This is due to constant pressure from oil prices and lack of demand for air travel. Shippers are also suffering from lack of traffic and higher costs. UAL requested another six months to complete their reorganization plan and rumors are rampant that they could change it from Chapter 11 to Chapter 7 which is liquidation not reorganization. AMR is looking for post bankruptcy financing and their days until a filing are numbered. Boeing announced that airplane shipments in February dropped -33% and Gulfstream dropped its delivery targets by -9%. Boeing said this will be the slowest year since 1996. Only four Boeing jets were delivered to US carriers. The Air Transport Association said economic fallout from a war could be so severe that "There is serious risk of chaotic industry bankruptcies and liquidations and forced nationalization of airlines was a real possibility." The US markets are not the only markets suffering from war fears and a weakening global economy. The Nikkei fell to another 20-year low at 7862. The FTSE and the German Dax hit a 7-year low. These are just a few. The world markets are bleeding cash and that means the US markets are at risk. If you are a large foreign investor with cash in multiple markets you have a major cash management problem. If your home market is hitting multi year lows then you may need cash to support those positions or add to them if you expect a rebound soon. With the US dollar dropping you are at double risk with your US investments. Market risk and currency risk. It does not take a rocket scientist to realize that drawing cash out of US stocks makes sense. This foreign cash drain is just one leak in our financial dike. The current market technicals in the US stink. That is as blunt as I can make it. With everything but the Nasdaq setting lows for the year and the $TRAN confirming the Dow drop there is little doubt that we could see the October lows soon. Unfortunately there is growing belief that those lows will not hold. If you are an institutional investor realizing that the war could still be a month away and earnings warning season begins in earnest next week and 54% of the S&P has ALREADY warned for the 1Q then suddenly cash as an investment vehicle looks great. The realization is dawning on many investors that it is the economy, not the war that is dragging the market down. Any still hoping for a war rally are becoming increasingly frustrated by the delays and the start date receding in the distance. If it is the war then we have another month to wait. If it is the economy then we are already in deeper trouble than most thought. Every major sector is full of warnings. Today we got ANN, MYG, NOK, BBOX, LECO, TSG, X, FLSH and Volkswagen among others. The warning from NOK was the 5th quarter in a row and cell phones are one of the growth sectors. NOK said volume was up but revenue was down due to strong price cutting to move units. If you don't give them away nobody wants them. Adding to the gloom and doom is the worry in the insurance sector after Warren Buffett warned that a major reinsurer had stopped paying claims that totaled in the billions of dollars. The entire insurance sector is suffering from the potential for hundreds of millions of dollars in write offs if the company fails. AIG and CB have been hit especially hard but the entire sector is weak. Buffett did not identify the company in question. Tbills hit a low not seen since 1958 and bond yields continued lower as cash continues to flow into safe investments despite the low returns. The financial markets are still reeling from multiple warnings of a potential financial meltdown from a bursting housing bubble. After Poole attacked FNM/FRE yesterday there were several follow on comments about the extremely high risk due to inflated housing values from the current bubble. Both stocks rallied after FNM CEO Franklin Raines rebutted Poole's comments but they rolled over again Tuesday afternoon. There were multiple downgrades to the entities based on a perceived tightening of control by the administration or a potential ending of their GSE status. The volume has picked up substantially but cannot be considered panic sales yet. On Monday we saw a 90% downside day where down volume was 18 times up volume. According to market historians this is a real sign of a market bottom in progress. Unfortunately for the last 70 years it has taken an average of six 90% down days to produce a bottom. This usually occurs over a 30-60 day period. One down and five to go if we are in an average bear market. Barton Biggs called the bottom again while saying that fear, pain, despair and capitulation are all present but that the US markets were only "fairly" valued. He feels that massive short covering by hedge funds and market entry by mutual funds could appear at any time if they feel the bottom is near. Barton has been saying that this "bottom building process", which is analyst speak for I am hedging my bets and we could still see lower lows, has been underway since late January. Dow Chart - Weekly http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oimw20030311_03.gif There are as many guesses for the bottom as there are investors and I am not going to pick a number. Everyone thinks Dow 7200 is the magic number because it is the October low and every other "support level" since then has failed. For those counting there has been seven "lower lows" since 1999 for the Dow. October lows have been Oct-99 9976, Oct-00 9656, Sep-01 8062, Oct-02 7197. We will call the Sept-2001 low an October low since we were headed there already before the attack. Why is the Oct-2002 low of 7197 any more of a milestone than any of the other seven lows in this bear market? The only reason is that optimism runs rampant in the bulls. The economy is as bad or worse today than it was at any time over the last three years. I would agree that the 7200 level would and will be key, especially if the economy was showing signs of a recovery. What little signs we saw in Jan/Feb have almost completely evaporated and current analysts have to look at economic reports with a microscope to find any positives. We also have the war and the potential impact on the economy. There is a serious risk of escalated terrorist attacks once the war starts and the risk that tens of thousands of troops come home with chemical/biological injuries or come home in body bags. We have the risk of negative American sentiment if we go to war alone and in defiance of the UN. Unfortunately that appears to be the current outlook. Late news tonight is that President Bush is preparing a final demand to Saddam to disarm within seven to ten days or be attacked and that demand will be delivered on prime time TV on Thursday night. In effect a declaration of war because we know Saddam is not going to disarm. This is to be given after a vote scheduled on Thursday at the UN. Ironically this may provide some hope to the bulls due to the shorter time frame but that hope is misplaced for longer term investors due to the topics discussed above. There are rumors now that the 42,000 British troops already in Kuwait will not now fight. The 60,000 American troops called up last week and currently in route to Kuwait are a replacement for the British troops. This shows that it is going to be an American show and even our staunchest allies are in trouble. After all the negative points above there is a possibility for a market rebound due to purely technical conditions. Stocks have fallen far and bonds are at their highs. This means most fund portfolios with weighted ratios are now out of balance. Eventually they will have to adjust those asset allocations from bonds to stocks while knowing that there is still a rocky road ahead. Philosophically selling bonds at five year highs and buying stocks at five year lows does not take a lot of technical justification. The problem as you can obviously see is timing. If the market is still perceived to be going lower and bonds are continuing to inch slightly higher then they can wait to pull the trigger until the last possible minute. That minute would be Dow 7200 to some but probably the start of the war to others. Either way, regardless of whether 7200 is the bottom the odds are good we will see some asset allocation when we hit that level. It all boils down to long-term risk versus short term risk. It is my opinion that this will power any rebound over the next couple weeks and NOT a belief that stocks are suddenly a good value. Our challenge is to not be caught off guard when this process starts. Typically a sharp dip at the end of several days of drops is the key trigger for the event. Nobody wants to wait until the last minute and nobody wants to be last to board the train. Unfortunately while everybody is looking for the signal it still catches many by surprise as it occurs when the gloom and doom is the strongest. Last October we saw a +1350 point jump in eight days while most traders were still waiting for the next dip. Since very tense and irritable fund managers tend to jump the gun to avoid being late we need to be continually alert to every bounce. It should not be hard to spot. It will be the one with real volume. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor ************ READES WRITE ************ Anatomy of a crash: Equities vs. Gravity The first thing that will make you wrong on the stock market is to make a prediction in which you're sure you're right. This is why we attempt to present both sides of the situation and when we really feel strongly about something, we usually end with the caveat, "of course we could be wrong as well". Those who are more acclimated to the market understand examining both sides of the issue as opposed to those who are newer to the game and want some definite answers. Sooner or later, all who are involved, no matter which stance they take, bull or bear, come to one conclusive agreement: There are no definite answers in the stock market. With that in mind, recently we talked of capitulation and a radical, out of control decline that could possibly occur, which gave those who are long in the market considerably less than a confident feeling about the positions they are currently holding. Let me reassure you that while a crash may very well happen, it won't happen without it telegraphing that its on its way. Crashes just don't happen overnight. At least they haven't yet. (There we go again) Dow Jones Industrials weekly bar chart http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oimw20030311_04.gif From 1982 to 1987 the Dow had risen 255%. As you can see, prior to 1982 it never really rose that far so it didn't really have far to fall. Since it was basically crawling along a floor, no matter how high it got, gravity could only bring it back to earth and no further. The chart ends with the peak of its ascent before the 1987 crash. Dow Jones Industrials weekly bar chart http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oimw20030311_05.gif The Dow hit it's peak during the week of August 28th, 1987. It pulled back and started it's next ascent during the week of September 25th. It rose the next week and then the following week it abruptly fell back to the low it created during the pullback for a rise higher. The next week when it broke below it's most recent low was the time to get out. It was signaling a failed rally. Dow Jones Industrials daily bar chart http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oimw20030311_06.gif We move to a daily chart for a closer look. Once the Dow broke below the most recent low it tried to rally the following day, but when it appeared the reversal was in process it was time for longs to vacate their positions. There was plenty of warning and a person who could read the market would have vacated Monday, when it violated the previous low. Tuesday was a great exit as it rallied above Monday, yet it was also a fake out as to what was on the way. Wednesday was confirmation, Thursday picked up momentum and Friday was the gap lower. The following Monday and Tuesday ("Black Tuesday") were true capitulation days. Monday shook out the weak players and Tuesday brought in the strong ones that took advantage of lows never to be seen again. Notice the sharp spike in volume as one day shakes them out and the even higher volume that follows as the next day brings them in. It settles back over the next several weeks but by the time the new year rolled around it was off to the races. The Dow regained all its lost ground and hit a new high in less than two years. Dow Jones Industrials daily bar chart http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oimw20030311_07.gif As you can see, equities had risen so fast there was no foundation so they just fell over. It was like walking up one side of a ladder with the other side missing. Once we built the other side of the ladder we used it to scale to new heights. In the battle of equities vs. gravity, gravity sooner or later prevails and the higher they go, the further they fall. So in answer to the question of being caught unaware during a market crash, it's highly unlikely. The market had risen 255% in less than five years, which was strike one. The failed rally was strike two and the accelerating rate southward was strike three. It's amazing how once the weak players had struck out, a whole new team of players stepped up to bat. They most likely were the same players that stepped aside when the Dow had risen over 200%, knowing that kind of increase cannot be maintained. Where does this leave us in the scheme of the current market and what can we expect in the battle of equities vs. gravity? Let's take a look at the Nasdaq. Dow Jones Industrials 1929 bear market vs. Nasdaq Composite 2000 bear market http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oimw20030311_08.gif http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oimw20030311_09.gif We've tried to line up the time frames between the bear market of the 1929 Dow and the bear market of the 2000 Nasdaq. The only difference we can see between the two is the Dow appears to go below the prices prior to it's ascent where the Nasdaq has not, at least yet. Its an unfair comparison however as our data only goes back to 1920 so we can't really assess the foundation prior to its rise. If the current bear market mirrors the 1929 bear market, where are we now in the process of recovery? Does the blue circle in the lower chart mimic the first blue circle or the second blue circle in the upper chart? The similarities and timing, if timing is equal, seem to be favoring the circle at the end of the bear market. It appears as gravity has taken its toll, the momentum to the down side has run its course and while we could still see lower prices it appears as it may be starting to work its way up. The hard part about dealing with the market is trying to fill in the blanks and obviously there are a lot of blanks to be filled. But if we apply clues from historical events that mirror current events it may give us an edge towards predicting the future. The fact is, our economy is not recovering as many would like, unemployment is on the increase, bankruptcy and foreclosures are at 30 year highs, debt is climbing and there is talk of debt deflation. Debt deflation occurs when debt levels are unmanageable. Money that could be spent on investment in business is spent on debt instead. Japan in the 1990's suffered debt deflation first, price deflation followed and the Nikkei just closed at a 20 year low. It's interesting that the United States went through the same scenario in the 1930s and currently we have the highest levels of debt relative to GPD since 1933. But look at what happened to the Dow in 1933. Regardless of our immediate circumstances at the time which included a dismal economy and an 89% drop in the stock market which took a tremendous toll psychologically as well as economically, one can assume employment didn't bounce right back and there wasn't a lot of real good feelings about a recovery. Kind of like the feeling there is today. The Nasdaq has lost 78% of its value as opposed to 89% in the crash of 1929. Are we doomed for another 11%? Time frame wise we are at about the same place the Dow was when the recovery started. Again, mixed signals, so which do we pick? We have a volatility index that could go either way so that is mixed as well. The one thing that we do have going for us is that it appears gravity has used up almost all its effect. We have definitely built the other side of that ladder. Whether construction has been completed remains to be seen. If we should have a downside of another 10 to 15 percent, the long term investor is probably looking at that as "Big deal, that's very little downside risk to almost certain tremendous long term potential, so why not jump in now because no one ever times the market perfectly." With that type of attitude maybe they are timing the market perfectly and the rest of us who are waiting for the perfect timing will be the ones to realize that no one ever times the market perfectly and we were the ones who missed it. As always this is just food for thought, but the market is not falling and every time we think it should it keeps finding an underlying bid. Maybe its because while we're thinking the food is pretty bitter a lot of others are taking some fairly big bites. Rick Utt *************** FUTURES MARKETS *************** Not Like it Seems By Vlada Raicevic Daily Settlement Numbers 4:15pm ET http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oifw20030311_01.gif Daily Pivots http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oifw20030311_02.gif The markets opened mixed, but mostly flat, appropriate gaps were filled, and a bullish bias quickly showed up. For a moment it looked like the Wholesale Inventory report would let the steam out of the market with numbers falling below forecasts, but inside the report it showed Durable Goods gains when compared to previous months data. A second push up gathered some momentum, with ES and YM coming up to yesterdays highs, and with NQ exceeding those highs. This pattern followed throughout the day with NQ’s generally outperforming the SPX and Dow based futures, which both made new yearly lows. NQ did not come close to exceeding the Feb 13 lows, although they too closed near the lows of the day. While there is no question that the markets are leaning bearish, we are getting somewhat oversold and nearing some strong support. The 60 minute chart of the YM shows some bullish divergences showing up in the midst of all the selling as we approach these support areas: Chart of the YM 03H contract: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oifw20030311_01.jpg Those divergences that show on the YM are not evident on the ES, although ES is closer to 60 minute support due to the heavier overall selling these past couple of weeks. Chart of the ES 03H contract: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oifw20030311_02.jpg On the 60 minute NQ chart, there is also no positive divergence, nor any hint of turning up from the current selling. For all three of the NQ, ES, YM, it looks like we will need a minimum of 2 hours of reversal in order to turn the current indicators off their bearish stances. Chart of the NQ 03H contract: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oifw20030311_03.jpg Looking at the 270-minute charts, I can see that, although indicators are nearing some fairly oversold areas, there are no extremes, echoing that there really has not been any panic selling. The 270 minute charts follow. The 270-minute chart of the S&P Futures (ES03H): http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oifw20030311_04.jpg The 270-minute chart of the NASDAQ Futures (NQ03H): http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oifw20030311_05.jpg The 270-minute chart of the Dow Futures (YM03H): http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-11/oifw20030311_06.jpg ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_031103_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 **************** Fulfillment by Steven Price The bulls huffed and puffed and snorted a little, following more news on the geo-political front that seemed to favor yet another delay in a U.S. invasion of Iraq. Pakistan's decision to abstain from the U.N. vote and the apparent softening of the U.S. March 17 deadline led to a morning rally right up to intraday resistance from Monday just below Dow 7650. From there it was the bears' turn, as they stepped in and slammed the market for 100 points in the opposite direction. Just when it looked like we were going to take out last July's low of 7532 and head toward a re-test of the October lows around 7200, the bulls stepped back in to defend that July level. For those following the pivot analysis we've been using in our swing trade and index trade models, the support at the daily and weekly S1s also coincided with that July low. The weekly S1 of 7541 was the closest support level to the morning bounce off 7540.73 and suggests a confluence of support factors. Of course the afternoon rollover below those levels is important as well. The weekly S2 sits at 7342. Another of those factors is the head and shoulders pattern that we have seen form across the broader market indices. The Dow in particular is what I am looking at today, as it was the index that behaved most closely according to script over the summer and fall of 2002. Between July and September, the Dow formed a bearish head and shoulders pattern that carried with it a downside objective just below 7200 (7180-7190). When it broke its neckline around 8250 in September, it was pretty much a straight shot down to a low of 7197 on October 10. Once that level was achieved, the next move we saw was a powerful rally all the way up to 9000. It did pause along the way, finding resistance at 8800, but by the end of the rally, we had seen a gain of 1800 points. That resistance at 8800 was important in that it was the beginning of another head and shoulders pattern. The pause at 8800 and then pullback to 8300 formed a new left shoulder, with a subsequent head at 9043. After yet another pullback to 8300, the right shoulder was formed on the subsequent rally to 8869. I can label this a definitive head and shoulders pattern because we then rolled over and broke a neckline at 8200. I've posted this chart in the Swing Trade Wrap for those readers who would like to see it. The key to any useful H&S pattern is targeting the move that results from the neckline break. In this case, the objective of the pattern was right around Dow 7500. Our closing low of 7524 was awfully close to achieving this objective and the bounce from this level, as well as the above referenced S1s ought to be a sign that the bulls are putting up a fight in this region. Also note the point and figure bearish vertical count on the Dow of 7100 is down near the October low. The objective in the OEX is 390. The Dow Diamonds, however, have a bearish count of 75 and that would correlate to a Dow trade of 7500, as well. Back in October, it seemed the sky was falling and there was no real reason to go long. However, we rallied 26% in the Dow and those traders looking to pick a rally top to short along the way took an awful lot of pain. At that time, we also saw similarly extended bullish percents, which had fallen dramatically from August highs. Those bullish percents in the Dow, OEX and SPX are not yet as low as they were in October, however, they are getting close and all have entered oversold territory. The October drop also did not see bullish percents as low as they were in July, although the markets actually dropped further. What's more, the October-November rally came during an earnings period in which we got repeated warnings from the tech sector and companies that consistently missed forecasts. I am not trying to say that any trader should be going long at these levels. However, those traders who can't see any reason not to go short need to be aware of the technical factors that could pose some barriers as the prospect of war grows closer. How does the war figure into all of this? It is really anyone's guess. Many traders are expecting a big rally once the bullets start flying, much like we saw in 1991. However, at that time, the speed of victory was not necessarily known. This time we are expecting a short war and yet the market is still dropping. We may continue that drop right through the H&S objective and with no obvious reasons to buy the current levels, bears may yet get a test of the October lows. However, the snap back rallies have had legs and those traders still getting in short (or maintaining short positions) should be giving extra thought to their risk profiles and where they want to place their stops. We did not get a big turnaround rally off the H&S objective test, like we did in October, but we have not quite achieved that objective, either. Back in October, the SPX and OEX did not achieve their objectives, even though the Dow did. We are in a similar position now, with the Dow very close, but the OEX objective sitting just below 400 and the SPX sitting around 790. That's not to say they aren't close, just not as close as the Dow. Traders will want to put these levels on their radars and tighten their stops as we get close. Some bounce can be expected, so a small one will not necessarily signal a major reversal. However, if that bounce starts to get some legs and we see an upturn in the bullish percents, it may be time to readjust our thinking, just as we should have in October. It is hard to make a case against shorts, with the weakness of today's bounce, in relation to the recent slide. However, I felt that way in July and October, as well. The trend is still down, I am just raising the risk alert for bears from yellow to orange. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 7524 Moving Averages: (Simple) 10-dma: 7741 50-dma: 8144 200-dma: 8512 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 800 Moving Averages: (Simple) 10-dma: 825 50-dma: 862 200-dma: 901 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 959 Moving Averages: (Simple) 10-dma: 984 50-dma: 1006 200-dma: 1000 ----------------------------------------------------------------- S&P Banks Index (BIX): The BIX and BKX have been in free fall mode, taking both regional and international banks down with them. The indices have both broken down below February lows and could see as much as a 10% decline from these levels before testing support at the October lows. It will be hard to get any type of market bounce without the financials participation and right now those financials show little signs of a bounce for some time. Watch this sector closely, as heavyweights BAC, C, JPM, and CMA have all dropped hard and are approaching vacuums of support. The broker dealers, represented by the XBD, are also falling fast, with GS, MWD, LEH, MER and BSC all heading lower. Shorts looking to get involved here can put any of these on their radar and see a similar chart, but some are more broken down than others. Look for those that have already given up February lows as the best short candidates. 52-week High: 331 52-week Low : 236 Current: 258 Moving Averages: (Simple) 21-dma: 271 50-dma: 278 200-dma:287 ----------------------------------------------------------------- The VIX rose only slightly today, and is slowing its ascent as we near 40%. That key level has signaled short-term bounces, with highs between 40 and 41, but never a close above 40%. At least not since October, when we were rebounding from multi-year lows in the Dow/SPX/OEX. If we do manage a close above 41%, it may signal further weakness, as institutions will not have taken advantage of those elevated levels to sell premium and collect time decay. CBOE Market Volatility Index (VIX) = 38.08 +0.23 Nasdaq-100 Volatility Index (VXN) = 47.53 +0.50 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.81 444,918 360,712 Equity Only 0.66 294,904 193,392 OEX 1.00 25,615 25,680 QQQ 1.45 18,759 27,233 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 36.6 - 1 Bull Correction NASDAQ-100 31.0 - 2 Bear Confirmed Dow Indust. 10.0 - 3 Bear Confirmed S&P 500 28.8 - 2 Bull Correction S&P 100 23.0 - 3 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 2.07 10-Day Arms Index 1.86 21-Day Arms Index 1.52 55-Day Arms Index 1.43 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 1115 1720 NASDAQ 1391 1679 New Highs New Lows NYSE 62 215 NASDAQ 36 101 Volume (in millions) NYSE 1,657 NASDAQ 1,212 ----------------------------------------------------------------- Commitments Of Traders Report: 03/04/03 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 We hear about trading volumes falling but now we're seeing it in the institutional futures positions as well. Commercial traders remain net short, expecting the market to go down. Small traders are still net long and actually increased the number of contracts on both sides of the fence. Commercials Long Short Net % Of OI 02/11/03 412,333 472,156 (59,823) (6.8%) 02/18/03 423,871 481,871 (58,000) (6.4%) 02/25/03 424,276 482,476 (58,200) (6.4%) 03/04/03 426,053 472,492 (46,439) (5.2%) 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 02/11/03 161,126 95,618 65,508 25.5% 02/18/03 155,475 91,102 64,373 26.1% 02/25/03 157,790 91,083 66,707 26.8% 03/04/03 164,759 98,636 66,123 25.1% Most bearish reading of the year: 36,513 - 5/01/01 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 The professional traders in the NDX futures are just trading water. There is little difference from the week before. Meanwhile the individual trader has bumped up the number of short contracts but remains net long. Commercials Long Short Net % of OI 02/11/03 39,412 53,818 (14,406) (15.5%) 02/18/03 38,486 50,501 (12,015) (13.5%) 02/25/03 38,787 51,745 (12,958) (14.3%) 03/04/03 39,934 52,978 (13,044) (14.0%) 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 02/11/03 29,667 8,915 20,752 53.8% 02/18/03 25,482 9,425 16,057 46.0% 02/25/03 25,378 7,431 17,947 54.7% 03/04/03 24,240 8,038 16,202 50.2% 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 Looks like interest has been picking up for the DJ futures. Commercials upped both the long and short sides of the contracts but remain net long (expecting the Industrials to go up). The small trader slid a bit more to the bullish camp but remains net short overall. Commercials Long Short Net % of OI 02/11/03 19,826 11,800 8,026 25.4% 02/18/03 18,812 11,939 6,873 22.4% 02/25/03 19,985 11,866 8,119 25.5% 03/04/03 21,326 12,724 8,602 25.3% 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 02/11/03 5,390 9,300 (3,910) (26.6%) 02/18/03 5,561 8,973 (3,412) (23.5%) 02/25/03 4,872 8,723 (3,851) (28.3%) 03/04/03 5,233 8,075 (2,842) (21.4%) 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 FUND SCREEN ****************** Schwab Select List: International Stock Funds Week three of our Schwab Select List fund review takes us to the world of international stock funds, which seek long-term growth by investing in securities markets throughout the world so that if one market is in a slump, profit can still be made in others. There's no guarantee that international stock funds will provide any significant diversification benefit against downside risk in the U.S. stock market, but such funds do offer the "opportunity" to make money when U.S. stocks falter and to surpass U.S. market returns in a rising global market. In addition to being on top of trends in the world markets, fund managers in the international group must also be alert to trends in foreign currencies since local-currency returns are converted into dollar-equivalent terms for NAV calculation purposes. Some managers partially hedge their currency exposures (using futures and options) to protect their portfolio against material adverse swings in currency rates. The more a manager hedges a portfolio back to the dollar, the less potential diversification it offers against downside U.S. risk since its fortunes become more linked to the U.S. economy and market through changes in the dollar. As a general rule, we like managers that selectively hedge their currency exposures to protect the portfolio or to add value, but my experience has shown me that manager decisions are not always right here. Thus, we prefer managers that do not generally make big currency bets and achieve growth through strong research and security selection. We also prefer managers that don't make big regional or country bets in relation to their respective foreign stock index benchmarks. In most cases, that means the MSCI EAFE index of developed foreign markets, which represents the markets of Europe, Australia/New Zealand, and Far East (including Japan). International equity funds generally play a "supporting" role in an investor's long-term financial plan. Investors often make an initial investment in a large-cap U.S. stock fund (week 1 of our Select List review) then add a mid-cap or small-cap fund (week 2) to increase total return potential and attain broader U.S. stock exposure. Investors may also decide to add a foreign stock fund to diversify their U.S. equity exposure and to tap the potential of the world's developed and developing markets. It's common to see the following recommended asset mix to achieve optimal risk- reward for the equity portion of one's long-term financial plan: Percentage of Money Invested (Example): 60% Large-Cap U.S. Stock 20% Mid/Small-Cap U.S. Stock 20% International Stock You may decide on a different equity allocation but that stock allocation is a fairly common one followed. If you decide the 60%/20%/20% allocation is right for you, then you will need to create your own custom index benchmark, such as the following: Custom Index Benchmark (Example): 60% Large-Cap U.S. Stock (S&P 500 Index) 20% Mid/Small-Cap U.S. Stock (Wilshire 4500 Index) 20% International Stock (MSCI EAFE Index) Now you may be wondering, where do I get the index information? That's simple, use Vanguard index funds. For example, you can use the Vanguard 500 Index Fund for the S&P 500 Index, and the Vanguard Extended Market Index Fund for the Wilshire 4500 index. For the MSCI EAFE index, you can use Vanguard Developed Markets Index Fund. So it's easier than you may think to track the U.S. and international markets. Screening/Evaluation Process As in the past two weeks, we began our screening and evaluation process using Schwab's Select List as our starting point. Then, we entered the fund symbols into Morningstar's Fund Compare tool online at www.morningstar.com in order to evaluate these Select List funds based on return, risk and expense, and other factors, such as investment style and manager tenure. There were twelve international stock funds on the Schwab Select List, identified below for your convenience. Schwab Select List: International Stock Funds Julius Baer International Equity A (BJBIX) William Blair International Growth N (WBIGX) Artisan International (ARTIX) Masters' Select International (MSILX) Oakmark International I (OAKIX) Atlas Global Growth A (AGRAX) Schwab International MarketMasters (SWOIX) UMB Scout Worldwide (UMBWX) Dreyfus International Stock Index (DIISX) American Century Global Growth Inv (TWGGX) Longleaf Partners International (LLINX) Oakmark Global I (OAKGX) The Morningstar Fund Compare tool is a valuable asset because it allows you to quickly evaluate funds against one another, to see which have the best returns, highest ratings, and lowest expense ratios, etc. We inputted these 12 fund symbols into the Compare Tool and looked at the Snapshot View, the default screen you see, which shows the fund's Morningstar Category and Star Rating, and its Expense Ratio. Three of the funds on the list, American Century Global Growth A, Atlas Global Growth A and Oakmark Global I are world stock funds, which invest in securities markets throughout the world including the United States. The other nine funds are foreign stock funds, which generally exclude investments in U.S. stocks. World stock funds offer less potential diversification benefit against stock declines in the States, since a significant portion of assets is U.S. holdings. But, they are a little safer than foreign equity funds since they generally stick a little closer to home and cut down some of the additional risks that are associated with stock investments abroad (political risk, currency risk, among others). We eliminated two funds based on their 3-star Morningstar rating, which meant "average" risk-adjusted returns relative to category peers. They were American Century Global Growth and the Dreyfus International Stock Index Fund. While large-cap U.S. funds have a hard time beating the S&P 500 index, international stock funds have a little easier time topping the broad indices because they can manage currencies and other risks and exploit inefficiencies in world markets (where they exist). Four funds currently have Morningstar's "highest" 5-star overall rating, leaving six funds with "above-average" or 4-star ratings. Below is a summary of the 10 remaining funds with their category ratings based on risk-adjusted return performance over different time periods, giving greater importance to long-term performance. Morningstar Overall Ratings: 5 Stars Julius Baer International Equity A (BJBIX) 5 Stars William Blair International Growth N (WBIGX) 4 Stars Artisan International (ARTIX) 4 Stars Masters' Select International (MSILX) 4 Stars Oakmark International I (OAKIX) 4 Stars Atlas Global Growth A (AGRAX) 4 Stars Schwab International MarketMasters (SWOIX) 4 Stars UMB Scout Worldwide (UMBWX) 5 Stars Longleaf Partners International (LLINX) 5 Stars Oakmark Global I (OAKGX) So, overall, a pretty good starting place in your search for an international stock fund. Schwab's International MarketMasters Fund (SWOIX) has a 0.50% expense ratio, the lowest of the group. Longleaf Partners International Fund (LLINX), on the other hand, has the highest expense ratio of 1.82%. Above-average expenses hasn't slowed the Longleaf Partners' fund down, however, as its 5-star Morningstar rating indicates. International stock funds can cost more to operate annually than similar U.S. stock funds, but if returns compensate you for the risk and cost of the fund, then all is good. Morningstar's ratings take both into account. The Snapshot View also gave YTD 2003 return performance, and we looked to see which were holding up better. Four funds were in fact doing a better job of limiting YTD losses than their peers: Julius Baer International (-8.3%), William Blair International (-7.4%), UMB Scout Worldwide (-6.8%), and the American Century Global Growth Fund (-7.9%), which we excluded earlier, but want to reconsider now based on capital preservation. Those numbers compare to a 10.2% YTD loss by the average international equity fund and a 9.3% YTD decline by the average world stock fund per Morningstar. Those four offerings have also been less volatile than similar funds over the past three years, using Morningstar standard deviation values. The two Oakmark funds, on the other hand, had the highest standard deviations among the funds (high relative risk). Next, we looked at the Performance View to see which funds have shown consistent, strong returns compared to their peers. Here, we found that the UMB Scout Worldwide (UMBWX), Oakmark Global I (OAKGX) and Oakmark International I (OAKIX) had perhaps the most consistent and strongest returns over the last three years. The trailing 3-year returns for the Longleaf Partners' International Fund (LLINX) have also been strong, but maybe not as consistent. Looking at trailing 5-year returns, we see that six of the funds on the list produced average annual total returns that ranked in their relative category's top decile (10%). Two more funds were ranked in the second decile within their category, while 3 funds hadn't been around the full five years and had no 5-year rating. Only one fund, Dreyfus International Stock Index Fund, ranked in the lower half of their category, and we had already excluded it. Below is a summary of the eight funds with trailing 5-year annual return information through March 10, 2003 using Morningstar data. Trailing 5-Year Annualized Returns & Rankings: +5.4% Julius Baer Int'l Equity A (BJBIX) 2nd Percentile +4.1% William Blair Int'l Growth N (WBIGX) 3rd Percentile +1.7% Artisan International (ARTIX) 5th Percentile +0.1% Masters' Select International (MSILX) 8th Percentile -0.3% Oakmark International I (OAKIX) 9th Percentile +1.3% Atlas Global Growth A (AGRAX) 7th Percentile -0.8% Schwab Int'l MarketMasters (SWOIX) 11th Percentile -2.0% UMB Scout Worldwide (UMBWX) 16th Percentile The Longleaf Partners International (LLINX) and Oakmark Global I (OAKGX) funds, which are both Morningstar 5-star rated, are less than five years old. The two standouts over the past five years have been Julius Baer International Equity A (BJBIX) and William Blair International Growth N (WBIGX). Both funds have produced decent positive returns on an annualized return basis during the past five years compared with an annualized loss of 6.1% for the Morningstar foreign stock fund average. The average world stock fund lost an average of 5.3% a year over the same period, so all of the above funds have performed relatively well for the recent 5-year period. Next, we went to the Nuts & Bolts View and looked at each fund's minimum initial investment, expense ratio, and management tenure to see if any funds were cost prohibitive; and while we like the Longleaf Partners International Fund, it requires a $10k minimum initial investment for both regular accounts and IRAs. It comes with an above average expense ratio of 1.80% also, so it may not be for everyone. Six of the funds on the list had managers that have served seven years or more as the fund's portfolio manager, as follows: Longest Manager Tenures: 10 Years David Herro, Oakmark International (OAKIX) 10 Years James Moffett, UMB Scout Worldwide (UMBWX) 8 Years Richard Pell, Julius Baer International (BJBIX) 7 Years Mark Yockey, Artisan International (ARTIX) 7 Years William Wilby, Atlas Global Growth A (AGRAX) 7 Years W. George Greig, William Blair Int'l (WBIGX) Lastly, in the Portfolio View, we looked to see where these fund managers had the fund's money invested as of their latest report. Interestingly, most of the funds on the list now shown a "growth" style bias, although some of them have value disciplines when it comes to making investment purchases for the fund. Sometimes, a successful fund moves from Morningstar's value style box into the growth style box as the stocks reach and exceed their fair market or appraisal value. Some of the funds have lower turnover ratios than others. In the conclusion, we tell you which funds we favor the most now. Conclusion There are several funds on this list that we like, but if we had to choose a couple funds for a long-term financial plan, we like the jobs that David Herro (Oakmark International Fund) and James Moffett (UMB Scout Worldwide Fund) have done for the past decade. David Herro's performance in the last 12 months may have slipped, but his long-term record remains strong. For the 10-year period as of February 28, 2003, Herro produced an average annual return of 7.3%, 4.3% more each year on average than the MSCI EAFE index benchmark and ranking in the top decile of Morningstar's foreign stock category. Herro buys stocks that are cheap and overlooked by the market, and then waits until the stock reaches its market or appraised value. The low relative prices of underlying stock holdings help to reduce risk though the fund's buy-hold approach can sometimes result in a bumpy ride. The $1.7 billion fund has been co-managed by Michael Welsh, since November 1995. For more information, go to the www.oakmarkfunds.com website. Moffett, UMB Scout Worldwide Fund will reach the 10-year mark in September 2003. From inception through December 31, 2002, Scout Worldwide Fund (now part of the UMB fund family) has produced an average annual total return of around 7 percent for shareholders. Moffett's favors established companies either located outside of the U.S. or whose primary business is carried on outside the U.S. Accordingly, it would be a good diversifier for a portfolio that consisted mainly of U.S. stocks and funds. For more information, go to www.umbscoutfunds.com website. Steve Wagner Editor, Mutual Investor email@example.com ************************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 *********************** Are We There Yet? We have reached a point where the rubber meets the road once again in the broader markets and we should know soon whether the bears are running into a yield sign or a red light. 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The Option Investor Newsletter Tuesday 03-11-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: BDX, EXPE Dropped Puts: BBOX, MHK Daily Results Call Play Updates: AMGN, MME, SLAB, ZMH New Calls Plays: None Put Play Updates: PII, TIN, UTX, VZ, XL New Put Plays: BAC, LLY **************** 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: ***** BDX $32.28 -0.55 (-1.68 for the week) BDX has begun to rollover form its breakout high two weeks ago and has now set a lower low on Monday and Tuesday's broad market sell-off. Unfortunately the stock has not been strong enough to hold up in the face of the sinking tide, falling below its 21-dma, which now sits at $33.10. The 50-dma at $31.98 was our original stop on the play and traders who would like to give it a little more time to bounce in the case of a broader market rally may want to leave the stop at that level. We are going to let this one go, as the trend we were trying to capture has fallen prey to overall weakness across the board. --- EXPE $33.78 -0.55 (-1.42) Chalk this one up to a poor choice. We were looking for EXPE to hold support and then rebound following the split. We got the pullback over the past couple days, but not even the slightest hint of a rebound, as the stock went out right on our $37.50 stop on Tuesday. In retrospect, it looks like the strength seen in recent days was in large part due to anticipation of the split, and now the impetus to drive the stock higher is gone. Since we wanted to wait for a post-split rebound from support to initiate new positions, there wasn't an opportunity to enter the play, and we're going to drop it tonight in favor of better candidates. PUTS: ***** BBOX $39.14 +0.38 (-0.44) Those stubborn bulls, they just won't let BBOX fall. It was looking like we might finally get a breakdown yesterday, with the stock once again testing the $38.50 level. But there just wasn't any downside conviction on Tuesday, with BBOX tracing its second consecutive inside day. Whether the current pattern of consolidation breaks to the upside or downside, one thing seems clear. The downward momentum has halted at an important level of support. Rather than risk a strong move against us, we're going to close the play tonight for a marginal gain. Use any weakness tomorrow morning to exit open positions. --- MHK $44.93 +0.08 (-1.34) MHK has actually been pretty good to us over the past couple weeks, rolling over right at resistance, and then breaking lower from that neutral wedge a week ago. Since then, the stock ground lower all the way to our $44-45 target zone, where it spent most of the day on Tuesday. While it is certainly possible to see lower levels ahead, it seems prudent to close the play tonight for a healthy gain. Traders still holding open positions should either close out on any weakness tomorrow, or lower stops to no higher than $46.05, just above yesterday's opening high. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week AMGN 55.00 -0.06 -0.10 Holding gains BDX 32.28 -1.07 -0.55 Drop, market weakness EXPE 33.78 -0.20 -0.55 Drop, Never entered MME 35.89 -0.73 -0.73 back to support SLAB 26.18 -0.25 -0.82 Outperforming SOX ZMH 43.77 -0.74 -0.64 Channel bottom PUTS BAC 65.63 -1.41 -1.21 New, new low BBOX 39.14 -0.54 0.38 Drop, sideways LLY 53.70 -0.84 -2.30 New, no support MHK 44.93 -1.15 0.08 Drop, Profits PII 44.37 -1.20 -0.63 slow but sure TIN 37.42 -0.70 -0.88 nice start UTX 54.23 -0.28 -1.74 Exposure everywhere VZ 32.41 -1.32 -0.34 lower low XL 65.17 -2.13 -1.71 sinking fast ************************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 ******************** AMGN $55.00 -0.10 (-0.70) While we wouldn't exactly call AMGN's behavior this week bullish, as the stock pulls back from last week's test of the $56 resistance level, compared to the rest of the market, this Biotechnology giant is still looking awfully good. We knew there was going to be a fair amount of overhead congestion to work through in this play, and that was the primary reason behind our avoiding entries on breakouts. Instead, we've been looking to open new positions on successful rebounds from support, most notably the rising trendline that has now moved up to $53.30. While a dip back to around the $53.50 level would certainly be a gift of an entry point, the way the stock has held up in the face of the weakness both in the broad market and in the BTK index, it seems unlikely that we'll be so fortunate. So for traders still looking for an entry into the play, the most likely area to consider new positions would be on a dip and rebound from the vicinity of the $54 level, which is prior resistance, as well as the site of the 20-dma. Raise stops to $53.25. --- MME $35.89 -0.73 (-1.46) Last Thursday's euphoric ramp job in shares of MME is still unexplained, and Friday's consolidation session actually looked fairly encouraging. But this week isn't off to such a great start, having given back all of last Thursday's gains and slipping back under the $36 level this afternoon. While that doesn't look good, the uptrend in the stock hasn't been broken yet, and we're sticking with it, keeping our stop in place at $35. A rebound from above that level can still be used for entries into the play, as such a bounce would confirm the prior resistance level as new-found support. However, we don't want to try catching a falling knife, if the bounce doesn't materialize. A rebound from above $35.25, (our original trigger for the play) can be used for aggressive entries, while more conservative traders will want to wait for that rebound to clear $36.25, getting above this afternoon's resistance. --- SLAB - $ 26.18 -0.82 (-1.36 for the week) Signs of weakness. SLAB had been one of the few chip stocks really standing out from the crowd by bucking the prevailing trend in both the broader markets and in the chip sector itself. It looks like SLAB's armor is finally starting to crack and shares dropped to the $26 level before bouncing off its lows toward the session close. Intel, the sector leader by market cap, is rolling over and appears headed for a retest of its support at $15.00. Meanwhile, the SOX has closed once again below the 280 mark, which has been very clear short-term support. Should the index follow through on this breakdown tomorrow, then the tech group will likely follow suit and SLAB will probably close under the $26 mark. If the SOX does fall, we would look for its next support level to be the 260 level. Shares of SLAB should have support at $25.00 and again at $24.00 but we have a stop loss at $25.74 - our breakeven point. We would not recommend new plays at this time given the current market environment and SLAB's new display of weakness. --- ZMH $43.77 -0.64 (-1.44 for the week) Zimmer has been fighting a sinking tide the past couple of days, pulling back after finally cracking the $45 barrier on a closing basis. It dropped $0.64 today, but remains solidly within its ascending channel and may simply be providing us with a better entry point. Buying a breakout to new highs in a bearish market is always a risky proposition and getting in on a pullback to a higher low is usually the most profitable strategy. Today's pullback to $43.77 found support at the bottom of a rising regression channel begun in late January and looks to be that higher low. The company began selling its Trilogy Acetabular System Constrained Liner system in the U.S. today. The product recently received FDA approval and the product, which helps prevent dislocation in replaced hips, allows physicians to simply add it to an existing structure in a revision surgery. According to Zimmerman Chairman Ray Elliott, "The revision hip market is one of the fastest growing segments in orthopaedics, with procedure growth of nearly 15%, and this addition gives us a comprehensive offering for acetabular revision." Aggressive traders can play the bounce from the bottom of the channel, while more conservative traders may want to wait for a move above today's high of $44.72 for proof of a bounce. ************** NEW CALL PLAYS ************** None ************************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 ******************* PII $44.37 -0.63 (-2.36) There wasn't much for the bulls to rejoice about on Tuesday, as the broad markets failed in their attempt to retake even a portion of Monday's losses. Every sector of the market ended in the red, so it should come as no surprise that our PII play broke down to close at yet another 52-week low. With the benefit of hindsight, it is now clear that last Friday's short-covering bounce was a gift of an entry into the play, as PII once again stalled at the 10-dma (now at $46.62) and rolled sharply lower. As late as 2 hours before the close on Tuesday, it looked like the bulls might toe the line and hold PII above the $45 level, but then a fresh wave of selling came in. That final push lower took PII through that support and completely filled the October 10th, 2001 gap and it now looks like the stock will fulfill our downside target of $42.50, the next level of historical support. This close to our target, we aren't recommending new positions unless we get a failed rebound below the $46 level. This play is now primarily about managing open positions, by continuing to move that stop lower. We're lowering our stop to $46.75, just above the top of Monday's gap and the 10-dma. Should we get a quick downdraft to the $42.50-43.00 area, that would be a prime opportunity to close open positions and harvest those gains. --- TIN $37.42 -0.88 (-2.32) After nearly 3 weeks of consolidating between $41.50-42.50, shares of TIN started to break down last week and if anything, that breakdown is now really starting to pick up speed. After we began coverage of the play, TIN gave us a rebound back to the $40 level last Friday, making for an ideal entry into the play, before the sharp losses seen so far this week. This morning, TIN broke into the gap left behind on October 15th, and by the end of the day, that gap was nearly filled. The bottom of that gap is at $36.89, so we need to be on the lookout for a bounce, once that gap is filled. But with the heavy volume seen over the past couple days, it looks like our lower target of $35.40 (filling in the October 11th gap) is quite achievable. Any sort of oversold rebound that stalls in the $39.00-39.50 area looks good for new entries. We're lowering our stop tonight to $40.25, just above Friday's intraday high. --- UTX $54.23 -1.74 (-2.89 for the week) UTX has not been able to catch a break. The defense sector has continued to head lower, in spite of the prospect of war with Iraq drawing ever closer. It's not just UTX that hasn't been able to sustain any type of rebound. Most defense contractors have taken it on the chin, with the Defense Index (DFI) heading to new all-time lows almost every day. While the DFI did finally see a bit of a bounce today, UTX caught an arrow from yet another area of exposure, the commercial airline sector. Delta Airlines announced late Monday that it expects negative cash flow for the current quarter, which was a surprise after the airline had said it previously expected slightly positive cash flow. The airline blamed soft traffic and bookings on the geo-political situation and said, "Current geopolitical uncertainties have weakened the already depressed revenue environment more than initially expected." Continued softness in the airline industry is anything but bullish for aircraft engine demand, which directly affects UTX. That appears to be the catalyst for today's drop, in spite of the Dow heading higher for at least parts of the day. UTX never participated in the rally and when the Dow finally gave up its gains, UTX (a Dow component) simply extended losses, finally taking out its next support of $55. While there is some pullback support at $54 from October, the next significant level appears to be just below $50. We'll continue to target $50 on the play and aggressive traders can play the break below $55. -- VZ $32.41 -0.34 (-1.65) It certainly hasn't been a good start to the week for Telecom stocks, but that's good news for us and our VZ play. The North American Telecoms index (XTC.X) decisively broke below the $400 level yesterday and extended that slide today. VZ followed suit, breaking the $33 support level on Monday and extending its slide today, almost touching the $32 level before a bit of short-covering at the close. Clearly, the bearish trend is still intact, as the stock continues to be pressured by the broader market, continuing its pattern of lower highs and lower lows. While we're certainly getting closer to our target of $29-30, risk of a real short-covering bounce is increasing as well. There's certainly nothing wrong with conservative traders harvesting gains near current levels, but we'll just continue ratcheting our stops lower. The 10-dma has now fallen to $34.09, and the descending trendline is now at $34.37, just above the pivotal broken support at $34.25. A failed rebound below the $34.25 level can be used for aggressive entries, but we're focusing more on managing open positions, rather than advocating new entries. Lower stops to $34.25 tonight, and consider using a drop to anywhere below $31 as an opportunity to harvest gains on the play. --- XL $65.17 -1.71 (XL -3.83 for the week) Capital has continued the slide since we picked it at $68.50. We got the failed rally at $70 for entries and it has been an ugly couple of days after some sideways movement. While there has not been company specific news behind the recent drop, the insurance industry as a whole has been getting hit hard. The S&P Insurance Index (IUX), which had been slowly sliding lower since bouncing off of the 220 level in early February, gave up that support in grand fashion on Friday with a 10 point drop. The IUX extended those losses today and headed down to yet another 52-week low after giving up 2.2% and taking XL along for the ride. Other major insurers that are also seeing new relative lows are AIG and CB, with AET getting in on the slide as well. Traders looking for more shorts in the sector may want to stick these stocks on the radar as well. A look at the PnF chart shows the last sell signal in XL coming at $69 and the nearest support at $57. That support is now history and the next level that looks apparent is all the way down at $59, which correlates to the July 2002 lows. Momentum traders can look for entry on a break below $65. With a close of $65.17, we may get a bounce off $65 and the best entries may come on a failed bounce below today's intraday resistance at $66.75. ************* NEW PUT PLAYS ************* BAC - Bank of America - $65.63 -1.21 (-3.38 for the week) Company Summary: One of the world's leading financial services companies, Bank of America is committed to making banking work for customers and clients like it never has before. Through innovative technologies and the ingenuity of its people, Bank of America provides individuals, small businesses and commercial, corporate and institutional clients across the United States and around the world new and better ways to manage their financial lives. The company enables customers to do their banking and investing whenever, wherever and however they choose through the nation's largest financial services network, including approximately 4,400 domestic offices and 13,000 ATMs, as well as 30 international offices serving clients in more than 150 countries, and an Internet Web site that provides online banking access to 4 million active users, more than any other bank. (source: company website) Why We Like It: The financial sector has been leading the broader markets lower, with BAC as one of the bigger torchbearers in recent sessions. The stock actually held up pretty well over the past couple of months, stuck in a range between $66.50 and $70 for most of the first quarter. It's most recent bounce came last Friday, when it eeked out a gain just above its converging 21-dma and 200-dma, but was unable to crack the 50-dma. That rally was short lived, with those converging averages providing a ceiling on Monday. The rollover continued today, as BAC lost $1.21 and traded down to its lowest level since last October, finally falling through the support that has held it since November. The breakdown mirrored many other stocks in the sector, with the sector indices also setting new relative lows. The S&P Banks Index (BIX.X) not only dropped off a cliff on Monday, dropping below multi-month support at 265-270, but also filled a gap from October 15. Instead of filling the gap and then bouncing, however, the index continued the slide, with another breakdown below 260 and appears headed to a test of support 20 points lower. The Kbw Money Center Bank Index (BKX.X) also sank to multi-month lows and has bout 65 points before it finds support down at 610 (closed at 675.79). As a member of both indices, BAC has little to hang its hat on. BAC's corresponding support to those indices - the October lows - is just below $55, which provides for a good risk/reward ratio with a stop just above the 200-dma, which currently sits at $68.64. The point and figure chart for BAC is now showing a spread triple bottom breakdown. It is a reflection of long-term support at $57 that finally has given way. The pattern, according to a study by professor Earl Davis of Purdue University, is good for an average gain of 24.9% over a period of 4.6 months and is profitable 86.5% of the time. While these numbers are an average and not stock specific, they do portend an ugly future for stocks reflecting the pattern. Our time frame is certainly less than 4 months, so this data is aimed at longer-term traders, but it underscores the bearishness we are seeing on the daily charts. The current bearish vertical count for the stock is $61, which coincides with the bullish support line sitting at the same level. We would expect some support there as those relying on the PnF try to play a bounce. Our ultimate target will still remain at $60, as there is no visible horizontal support on the daily chart until then. While the overall market, and the financial indices are looking very bearish, traders will note the oversold conditions of the bullish percents and should manage their risk accordingly. We like momentum entries on a break below $65, however, if we do get a failed bounce in the broader markets, a failed rally in BAC below the 200-dma may provide a more favorable risk reward, since our stop will be located just above that level. The 200-dma currently sits at $68.64 and we will set the stop at $69.25. BUY PUT APR-65* BAC-PM OI=6509 at $2.70 SL=1.35 BUY PUT APR-70 BAC-PN OI=723 at $5.60 SL=2.80 Average Daily Volume = 4.8 MIL --- LLY - Eli Lilly $53.70 +2.30 (-3.28 this week) Company Summary: LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. Why We Like It: Can Prozac fix this stock's problems? The depression that has engulfed most of the market, as well as the Pharmaceutical index (DRG.X) seems incurable, short of a quick resolution to the Iraq situation. After falling out of bed in mid-January, LLY has been consistently working its way lower, taking out all of its moving averages in the process. Throughout September and October of last year, the $55 level provided consistent support for the stock, so it is really no great surprise to see that its descent slowed to a crawl over the past couple weeks, resulting in an apparent stabilization. That came to an end this morning, when a story came out in the Financial Times that a patent protecting Zyprexa, a schizophrenia treatment that is LLY's biggest selling drug, is under greater than expected risk from a court challenge by a generic competitor. That was all the ammunition the bear needed and they solid the stock down through the $55 level, hitting an intraday low of $53.50 on heavy volume. LLY rebounded off the initial low, but by the closing bell, that rebound had almost completely faded, and the stock appears destined to visit significantly lower levels before finding strong support. With the violation of the $55 level, the next tangible level of support is $52, but $49-50 looks like a more reasonable level for strong support to materialize. After acting as strong support for so long, the $55 level should now be formidable resistance on any rebound attempt and a failed rally near that level would make for an ideal entry into the play. Aggressive traders can certainly consider entries on a breakdown below $53.50, keeping in mind the possibility of an oversold rebound from the $52 area. Our stop is initially set at $57.10, just above the closing highs of the past 2 weeks. *** March contracts expire in less than two weeks *** BUY PUT MAR-55 LLY-OK OI=1794 at $2.10 SL=1.00 BUY PUT APR-55*LLY-PK OI=3082 at $3.30 SL=1.75 BUY PUT APR-50 LLY-PJ OI=1916 at $1.30 SL=0.75 Average Daily Volume = 2.73 mln ************************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 Tuesday 03-11-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Put - LLY ********************* PLAY OF THE DAY - PUT ********************* LLY - Eli Lilly $53.70 +2.30 (-3.28 this week) Company Summary: LLY discovers, develops, manufactures and sells Pharmaceutical products targeted at the diagnosis, prevention and treatment of human diseases. The company's best known commercial product is the anti-depressant Prozac, although there are numerous other lesser-known drugs that treat conditions such as Parkinson's disease, diabetes, osteoporosis along with a broad range of antibiotics. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. Why We Like It: Can Prozac fix this stock's problems? The depression that has engulfed most of the market, as well as the Pharmaceutical index (DRG.X) seems incurable, short of a quick resolution to the Iraq situation. After falling out of bed in mid-January, LLY has been consistently working its way lower, taking out all of its moving averages in the process. Throughout September and October of last year, the $55 level provided consistent support for the stock, so it is really no great surprise to see that its descent slowed to a crawl over the past couple weeks, resulting in an apparent stabilization. That came to an end this morning, when a story came out in the Financial Times that a patent protecting Zyprexa, a schizophrenia treatment that is LLY's biggest selling drug, is under greater than expected risk from a court challenge by a generic competitor. That was all the ammunition the bear needed and they solid the stock down through the $55 level, hitting an intraday low of $53.50 on heavy volume. LLY rebounded off the initial low, but by the closing bell, that rebound had almost completely faded, and the stock appears destined to visit significantly lower levels before finding strong support. With the violation of the $55 level, the next tangible level of support is $52, but $49-50 looks like a more reasonable level for strong support to materialize. After acting as strong support for so long, the $55 level should now be formidable resistance on any rebound attempt and a failed rally near that level would make for an ideal entry into the play. Aggressive traders can certainly consider entries on a breakdown below $53.50, keeping in mind the possibility of an oversold rebound from the $52 area. Our stop is initially set at $57.10, just above the closing highs of the past 2 weeks. *** March contracts expire in less than two weeks *** BUY PUT MAR-55 LLY-OK OI=1794 at $2.10 SL=1.00 BUY PUT APR-55*LLY-PK OI=3082 at $3.30 SL=1.75 BUY PUT APR-50 LLY-PJ OI=1916 at $1.30 SL=0.75 Average Daily Volume = 2.73 mln ************************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
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