The Option Investor Newsletter Thursday 03-13-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Unbelievable Futures Markets: Bear Fears Index Trader Wrap: (See Note) Market Sentiment: Persian Engulfed Weekly Manager Microscope: Phillip Toews: Toews S&P 500 Hedged Index Fund (TOSIX) Updated on the site tonight: Swing Trader Game Plan: Picking The Top... Again and Again Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 03-13-2003 High Low Volume Adv/Dcl DJIA 7821.68 +269.60 7824.34 7555.29 2.10 bln 2331/ 949 NASDAQ 1340.78 + 61.50 1340.78 1290.59 1.79 bln 2314/ 938 S&P 100 422.99 + 14.07 423.10 408.92 Totals 4645/1887 S&P 500 831.90 + 27.71 832.02 804.19 W5000 7886.48 +255.40 7887.38 7631.08 RUS 2000 355.44 + 9.50 355.46 345.94 DJ TRANS 2014.34 + 63.70 2014.76 1951.47 VIX 35.93 - 3.06 38.23 35.80 VXN 44.98 - 2.52 47.64 44.31 Total Volume 4,181B Total UpVol 555B Total DnVol 3,573M 52wk Highs 110 52wk Lows 256 TRIN 0.64 PUT/CALL 0.75 ************************************************************ Unbelievable The bulls came stampeding back to the markets today for no particular reason and ignored more bad economic news. Was it the Elizabeth Smart news? Was it the rumor of mass defections of Iraqi generals? Did Osama's great great uncle get arrested for jaywalking somewhere? Nobody knows but the bulls were not taking prisoners and the breadth of the rally was amazing. Dow Chart - daily Nasdaq Chart - Daily The market was definitely not moving up on economic news. The Jobless Claims fell -15,000 from last weeks upwardly revised number of 435,000. Unfortunately that meant we still had 420,000 new claims and the four-week moving average rose to 420,000. This was the highest level since December. This escalating trend shows the economy to be picking up speed as it declines. The Retail Sales fell -1.6% in February and well below the consensus estimates for zero growth. The consumer is not rushing out to hold up the economy and the siege mentality is settling in. Reasons given were blizzards, high gas prices, unemployment, terror alerts and war fears. Import and Export prices both rose primarily due to high oil prices. Friday is chock full of economic reports with Business Inventories, Industrial Production, PPI and Michigan Consumer Sentiment. Plenty of reason for the market to be confused again but I am not sure it is going to matter. The Fed meets on Tuesday and there is a 29% chance of a -25 point rate cut as predicted by the Fed Funds Futures. Not a big chance but the various economic indicators could be weighing more on the Fed than on consumers. There are some thoughts that if the Fed cut rates they would take a bigger cut of 50 points to send a stronger message. A minimal 25 point cut would have no impact and they have only a few bullets left in their gun. Time to react quickly and use that megaphone. This could be what is powering part of the bounce due to retail traders hoping to get a 1990s style market bounce from a rate cut surprise. Don't hold your breath. Odds are much better that they will change the bias to easing and plan on a rate cut at the May 6th meeting. Fed funds futures predict an 82% chance of a cut at that meeting. Earnings warning season arrives with a flourish next week but there were several high profile warnings today. TYC warned that it was slashing profit forecasts for 2003 and had fired a division president for accounting irregularities. The current chairman, Edward Breen, vowed to clean up the "crap" and that heads would roll if any more problems were found inside the company. Schwab warned that current outlooks were too aggressive in light of trading volume that was continuing to fall. They declined to issue an outlook claiming no visibility. They said trades entered had dropped -20% in February to 101,000 a day and so far in March that number had dropped another -5%. International Paper said demand was weak and getting weaker as the quarter progressed. MYG said yesterday that demand began falling off in February and had been decreasing rapidly since. This appears to be the common thread, sharp drops in demand across industries in February with increasing weakness into March. Not a good sign. The main reason given for the gains today was the removal of the war premium from the market. With President Bush turning into a kindler and gentler war planner and the starting date pushed off until at least April 1st it appeared the pressure was off. The resolution, no resolution, heck we may not even take a vote stance seems to have finally hit home that we are only doing the diplomatic dance to help Tony Blair and pass time while we get all our troops repositioned. Thank you Turkey. In reality the strongest rumor given for the rebound was a report overnight that the CIA had already negotiated surrender deals with many Iraqi generals. True or not this potential for a parade into Baghdad instead of house to house fighting had traders celebrating. I can imagine what is going through Saddam's mind today. If his troops are already bailing out without a shot being fired he must feel the walls closing in quickly. Evidently the CIA has been sending emails, calling them on their cell phones and dropping leaflets with phone numbers and how to escape being obliterated. If these efforts are working then Bush can take all the time he wants and end up a hero with minimal military effort. On Wednesday 15% of the S&P set a new 52-week low. Volume was down 2:1 despite the end of day bounce. This was almost bullish compared to the 18:1 down volume on Monday. Today the volume was over 7:1 to the upside with over four billion shares traded. This was the most volume in a single day since Nov-22nd. The Day started out with a gap open and sold off to just above 7600 before charging off to a break over 7800. It was not a raging bull but more of a determined walk by the entire herd. There were numerous strong resistance points broken at 7600, 7650, 7740, 7785 and even 7800. Make no mistake this was a powerful move. Not powerful enough to propel the new highs over the new lows which came in at 110 highs to 256 lows, but strong enough to get the bears attention. Unfortunately most of them were in denial all day and I have to count myself as one of them. Despite my exhortation on Tuesday night that there would probably be a strong rebound soon and our challenge was not to be caught off guard, I was caught off guard. The +100 point gap open on negative economic news and Iraqi surrender rumors had me believing another roll over was in the cards. We did for about an hour but wise bears used that drop to exit shorts. Notice I said wise bears. The rest of us tried to short obvious resistance levels on the way up and helped to feed the rally with our short covering. As one trader put it, "I would do much better if I checked my brain at the door and traded only with my eyes." Ah yes, a wise man. Of course the $64 question is what will happen tomorrow. I got more email than "Dear Abby" after the close today with unsolicited reasons that the market would go up/down tomorrow. Some of them were very creative, others very technical, many very emotional and none of them guaranteed. The next material resistance is Dow 7900-7925 but then material resistance only served to slow the index today. There are significant indications that the large drops over the last month may have created serious deficiencies in market makers option accounts and along with institutional traders they are trying to square these positions by running the markets up. While I think there may be big holes in accounts I doubt this scenario. It may have an impact but you don't get four billion shares from a few market makers. I think there are many more factors at work here. Steve Price pointed out that the Wednesday dip hit his targets for the H&S patterns from the last month. Somebody else pointed out that the oversold conditions created earlier this week were just too severe to be ignored prior to a Fed meeting once the war was postponed for three more weeks. As I pointed out Tuesday night there was likely to be some strong asset allocation moves soon. I think it was the combination of all these factors that stimulated the initial move and short covering did the rest. Take a close look at the Nasdaq chart above and I am sure you will see that very strong resistance at 1350. This is going to be a challenge to the bulls after a +61 point gain on Thursday. I don't think those factors are done. Our gains today should stimulate the Europe/Asian markets to gains and we should see a positive open tomorrow. The futures are up tonight and there was no negative news after the close. The UN vote/no vote has been put off until Monday and the war until April. However, there are still shorts in the market. After being hammered today and seeing the result of the Osama rumors this week they will NOT want to be short over the weekend. This should provide lift to the markets on Friday. Late news at 7:15 tonight. Dow Jones is reporting that Iraq has moved artillery capable of firing chemical or biological warheads to several locations just north of the Kuwait border. US officials said the artillery posed a direct threat to the US troops in the Kuwait staging areas. US officials also said Iraq was positioning surface to surface missiles in far western Iraq in an apparent attempt to use chemical or biological weapons against Israel. NBC reported that the US military was prepared to launch preemptive attacks against the new artillery and missile sites "before the Iraqis have a chance to use them." Futures took a dive on the news. Never a dull life as an investor! This just shows how tentative Friday's rally could be. All bets for Friday are officially off. Trade what you see. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Bear Fears By Vlada Raicevic Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 7821.75 +269.68 7824.34 7555.29 YM 03M 7796 +264 7807 7521 Nas 100 1029.81 + 59.27 1029.84 981.58 NQ 03M 1033.00 + 57 1034.50 973.50 S&P 500 831.90 + 27.71 832.02 806.48 ES 03M 832.25 + 27.75 832.50 803.00 Daily Pivots Contract S2 S1 Pivot R1 R2 YM 03H 7445 7656 7732 7942 8017 NQ 03H 957.63 1002.75 1018.63 1063.75 1079.63 ES 03H 795.44 817.38 825 846.88 854.44 An eye-popping reversal day. For the bulls there was the hope that we reversed from a higher low, not even bothering to test the October lows. For the bears, this same thought causes sweaty palms and nightmares of the run which started last October from those same lows. There was little to cheer the markets today, with poor Retail Sales numbers and U.S. Jobless Claims at a high for the year. Yet the markets made an astounding move upward, with only a small pullback early in the morning after the first 15 minutes, then turned up and never looked back. At times it felt like there was panic buying, but it’s difficult to tell whether this was from people wishing to go long, or from shorts covering in panic. One thing is for certain, a high TRIN, followed by a 90% upside day, is reason enough to put the fear into bulls. On the other hand, if everybody piles on at the beginning of the move, who will be left to push the market up further? So many questions. Let’s take a look at what today did to the daily charts. On the YM, we see the falling wedge has broken to the upside, after having OBV form a bullish divergence. Today’s move caused D+ to move above it’s downtrending slope, but D- hardly fell, showing that a lack of sellers was overwhelmed by the number of buyers. However, the amount of buying didn’t seem to be very high as the OBV did not show much of a gain. On the second chart you can see how RSI broke above its downtrend line, but CCI, Stochastic and MACD did not, although they are threatening to do so with another positive close. Chart of YM: Chart of YM #2: The ES is similar, except that price did not break above the downtrend line. OBV however, is more bullish, and rise quite a bit to test it’s downtrend line. On the second chart, MACD has turned up but not above the downtrend line. RSI moved above previous two highs and above the centerline, and CCI has moved above it’s downtrend line and the centerline, both bullish occurrences. (Note: the charts did not draw the appropriate long candle, but I assure you, it was very much like the one on the YM above). Chart of ES: Chart of ES #2: The NQ’s were extremely strong, outperforming both the ES and YM, however, they did not break above their downtrend line on price, OBV shows nothing special, but we did get a bullish cross on the ADX. RSI had a bullish crossover, stochastic has just crossed over, and MACD is still below the centerline and its trendline. CCI spiked and is already getting fairly high. Chart of NQ: Chart of NQ #2: So, what do these charts tell us? Yes the move was powerful, and in one day it turned a lot of indicators into bullish territory, although not all the indicators are in synch. This leaves us wanting verification. While we gapped above resistance, then pushed through more resistance, the fact remains that the buying needs to continue unabated to push through additional levels of resistance, or the move will stall and pull back. We are on the brink of either a breakout, or the end of another hyperactive, overactive bear rally. One more chart, this time of the Weekly ES, and it is echoed by both YM and NQ: if we do not breakdown tomorrow and move much below today’s close, we are setting up a potential hammer reversal after setting new lows. MACD is at trendline support, and Stochastic is turning up off its lows. It is worth noting. Chart of Weekly ES: ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_031303_1.asp ------------------------------------------------------------ WINNER of Forbes Best of the Web Award • optionsXpress voted Favorite Options Site by Forbes • Easy screens for spreads, collars, or covered calls • Free streaming quotes • Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ **************** MARKET SENTIMENT **************** Persian Engulfed by Steven Price Just how oversold were the markets when we fulfilled our head and shoulders objectives? Just how much bounce will we get if Iraq continues to throw bones to the U.N.? How bullish is a candle that engulfs a week's worth of losses? We got a look at the answers to those questions today when the both the broad markets and techs bounced strongly, continuing the mid-day reversal that began Wednesday. The Dow reached as high as 7824 intraday (settling near its high), while the Nasdaq Composite took off through the 1300 mark that head been previous support and so far did not act as resistance and didn't stop until it approached a test of the next resistance at 1350. It closed at 1340 with an amazing 60-point gain for the day. The gains came in spite of economic data released this morning that came in worse than expectations and signaled more trouble ahead for the economy. The initial jobless claims data for last week showed a drop of 15,000 to 420,000, which sounds positive on the surface. However, it was still higher than the expected 418,000 and the second highest level of the year. The four-week moving average, which most economists use to gauge the health of the job market, rose by almost 10,000 to 419,750. Any number above 400,000 indicates a worsening labor market and the rise this week and since January shows a disturbing trend. That four- week average is up 35,000 in the last five weeks and is at its highest level of the year. The jobless data would also seem to confirm the retail sales decline we saw today. Retail sales were expected to drop 0.5%, but instead more than tripled that expectation with a drop of 1.6%. The drop was the biggest since November 2001 and signals further reluctance to spend in the face job losses and war fears. Some of that loss is made up by the upward revision in January's number from a loss of 0.9% to a gain of 0.3%. Still, the trend does not look promising and most likely will not change as long as the unemployment picture remains negative. The retail sector, however, still participated strongly in the rally, along with the broader markets, jumping 4.7% and just breaking through resistance at 260, with a close of 260.74. Whether the data wasn't as bad as bears were hoping for - leading to a round of short covering, or the group just participated in a huge broad market rally, it managed to engulf the trading range of the last six weeks with a giant bullish candle in spite of the poor numbers. One of the catalysts behind the rally was yet another delay on a U.N. vote authorizing the use of military force in Iraq. The U.S. had set a deadline for a vote this week, but now appears to be waffling as it lacks the vote to pass its latest resolution. White house spokesman Ari Fleischer said, "It may conclude tomorrow. It may continue into next week." The fact that Britain has now offered another set of steps, six in all, that Iraq could take to avert war, suggests that one of the U.S.'s strongest allies is also beginning to look for other solutions to war. British Prime Minister Tony Blair is feeling a tremendous amount of heat in his own country over his previously undaunted support of the U.S. and the latest suggestion implies even he is now fearful for his political future. With China, France, Germany and Russia all seemingly entrenched against action, the possibility that there is no invasion for some time, or at all, seems to be increasing. The U.S. seems set on gaining enough votes to pass a measure and may re-think its strategy if it cannot. While the number of U.S. troops in the region suggest that we are going in regardless of how the U.N. plays out, the markets seem to be pricing in a longer delay at least. If that delay takes us much further, the weather may be prohibitive for a ground attack in chemical suits and theoretically the current situation could drag on until later in the year when the weather in Iraq relents. So far President Bush has shown no signs of retreating so the scenario still favors a U.S. attack, but there is no doubt that the market is having doubts. Maybe all of this talk of how the market will react to war is pointless. After all, as I pointed out in Wednesday's wrap, just looking at the charts could have told us where we were headed, as we fulfilled the head and shoulders objectives in the Dow, OEX and SPX on Wednesday before a big bounce. That action is similar to what we saw in October when the Dow fulfilled its own H&S, although the others did not. With oversold bullish percents across the board and the fulfillment of the pattern after a drop of 1400 Dow points, maybe it is simply time for a big oversold bounce. The specter of war has been with us for almost a year, so trying to figure out how we will react to that threat on an almost daily basis is awfully difficult. The broader picture can be seen in the charts and today they suggested a reversal off the head and shoulders bottom. We may also be seeing a major asset allocation triggered by those H&S completions from bonds back into stocks. The five and ten year notes were hammered today, confirming the move back into equities. We tend to see these shifts at market tops and bottoms and certainly Wednesday and today's shift seemed to indicate institutions were reallocating after the extended equity drop. In fact, the jump in the ten-year yield engulfed the slide of the last eight sessions, keeping with our theme. However, we have heavy resistance at Dow 8000, and any rally will still have to compete with weak economic data, high fuel costs and an uncertain global picture. I think back to last fall, when we also had oversold bullish percents, poor economic data and disappointing earnings. That oversold bounce lasted a while and we could be seeing a repeat here. So far each bounce has eventually failed and deciding when a rally is for real is the trick. We got a confluence of factors, with the H&S objectives and the U.N. vote being pushed back, all coming from oversold conditions. These all led to the reversal of the last two days from Wednesday's lows. I'd likely start buying into the possibility if we trade back over 8000 and certainly over 8160. The Nasdaq Composite has resistance at 1350, but broke through the resistance at 1300 and 1320 today. Bears should also be looking at that 1350 level as a possible white flag scenario. Until we cross those barriers I'm thinking oversold bounce. However, it felt that way in October and December as well, and those bounces lasted a while. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 7821 Moving Averages: (Simple) 10-dma: 7708 50-dma: 8118 200-dma: 8488 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 831 Moving Averages: (Simple) 10-dma: 822 50-dma: 860 200-dma: 898 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1031 Moving Averages: (Simple) 10-dma: 987 50-dma: 1006 200-dma: 997 ----------------------------------------------------------------- The Semiconductor Index (SOX): The semiconductor stocks finally exploded higher today, as the SOX outperformed even the big gain in the Nasdaq with an 8% gain. The resistance at 300 held for the first couple of hours as the market held steady, but once it took out that level, it put on another ten points and outperformed almost every sector index. It ran so far it topped out at the next resistance level of 310, but did so on the rise at the end of the day. 310 acted as resistance in December and the next horizontal level above that is 330. However, the descending 200-dma now sits at 318. It has not broken that 200- dma since falling through on May 21, 2002. The closest it came was on December 2, when the 200-dma sat all the way up at 407 and the index traded 393. If it does break through that 200-dma at 318, expect a run to 330. 52-week High: 393 52-week Low : 214 Current: 310 Moving Averages: (Simple) 21-dma: 286 50-dma: 292 200-dma: 318 ----------------------------------------------------------------- The VIX continued its drop since signaling a market bounce at 40% on Wednesday morning. The massive rally in the OEX of 23 points, along with 400 in the Dow and 43 in the SPX drove the VIX all the way down to 35.93. You know what that means - possible pullback coming as the VIX reaches the 34-35% range. The VIX hasn't closed below 34% since the end of January, and has signaled an equity reversal down each time it has reached that level, although it did drop to 32.98 intraday on the failed March 3 run at Dow 8000. Bulls should look to tighten stops as we approach 34% if the rally continues. CBOE Market Volatility Index (VIX) = 35.93 -3.06 Nasdaq-100 Volatility Index (VXN) = 44.98 -2.52 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.75 802,734 603,981 Equity Only 0.61 607,265 373,093 OEX 1.18 42,031 49,431 QQQ 1.07 107,371 114,835 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 35.4 - 1 Bull Correction NASDAQ-100 33.0 + 2 Bear Confirmed Dow Indust. 10.0 - 0 Bear Confirmed S&P 500 28.4 - 0 Bull Correction S&P 100 23.0 - 0 Bear Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.96 10-Day Arms Index 1.79 21-Day Arms Index 1.47 55-Day Arms Index 1.41 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 2212 675 NASDAQ 2212 852 New Highs New Lows NYSE 54 111 NASDAQ 57 81 Volume (in millions) NYSE 2,067 NASDAQ 1,778 ----------------------------------------------------------------- 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 ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************************* WEEKLY MANAGER MICROSCOPE ************************* Phillip Toews: Toews S&P 500 Hedged Index Fund (TOSIX) This fund is less than two years old, but should appeal to risk- adverse investors seeking long-term growth through investment in U.S. stocks (S&P 500 index) and wanting to hedge out the negative performance of the index. President, CEO, and portfolio manager, Phillip Toews, founded Toews Corporation in 1995. His main goal, to lower the risk of stock market and mutual fund investing. In pursuit of that objective, Toews uses a proprietary quantitative system to detect market declines and invoke hedges against stock losses. Toews launched the S&P 500 Hedged Index Fund (TOSIX) on July 31, 2001 with the goal of achieving reasonable rates of return while reducing the risk of equity investments. Toews' fund tracks the performance of the S&P 500 index of large-cap U.S. companies and has hedges in place in order to lower the risk of loss in market declines. Since the fund was born into a declining stock market, its hedging strategy has thus far paid off for shareholders. It remains to be seen how well the strategy will work in up markets, or over the long haul relative to similar U.S. equity funds. The Toews S&P 500 Hedged Index Fund has a $10,000 minimum initial investment for regular accounts ($2,000 for IRA's). According to Morningstar, the fund's expense ratio is 1.50%, which seems a tad high for the strategy. The expense ratio should come down as the fund's net assets grow. Right now, the fund has only $48 million in assets per Morningstar. For more information on Toews Corp or the Toews S&P 500 Hedged Index Fund, go to the www.toewsfunds.com website. You can download a prospectus and find more information there. Investment Style/Strategy According to the fund prospectus, Toews S&P 500 Hedged Index Fund typically invests at least 80% of net assets in equity securities that make up the S&P 500 Index and derivatives that seek to track the performance of the S&P 500 index (futures and options). This index-based strategy is combined with the tactical ("short-term") use of hedging techniques to seek returns which provide "S&P 500" exposure, while also seeking to provide protection from downturns in the index. Toews is not obligated to invoke hedges at all times, and may opt to use them less or not at all during periods of sustained growth in the market. So, the fund acts like an S&P 500-index fund when the market advances for a sustained period of time and then kicks into protection mode in market downturns, using derivatives in an effort to protect against losses. There is no assurance that the fund's performance will equal or exceed that of the S&P 500 index over time. In managing the S&P 500 Hedged Index Fund, Toews uses a black box (computer-based model) to trigger defensive investments or hedges in the fund. Toews' risk management system looks at negative and positive trends in the market, and then measures those indicators against current conditions to get an idea of the direction of the market. The fund relies on this proprietary, quantitative system to determine the timing and duration of hedging activities. Thus far, the hedging strategy has helped to reduce losses relative to the general U.S. equity fund universe. In the next section, we see how well Toews' fund has performed in relation to similar funds since starting operations in July 2001. Fund Performance In its brief history (under two years), the Toews S&P 500 Hedged Index Fund's best quarter of performance was +0.0% in the second quarter 2002. Its worst quarter of performance thus far was the fourth quarter 2002, when the fund lost 5.6% of its value as the stock market and funds rebounded to end the year. That gives an idea of what this fund might do in upturns if Toews' has "hedges" in place at the time. So, time will tell how much enhanced value Toews' tactical use of derivatives has added. For the period from July 31, 2001 inception through December 31, 2002, the fund produced a negative average annual return of 7.2% before taxes. That compared to an annualized loss of 18.9% from the S&P 500 index, so Toews has been able to mitigate the fund's losses relative to the market (S&P 500 index) by a large margin using hedging techniques. However, if you're interested in this fund for its longer-term appreciation potential, you may like to inquire about the strategy's institutional performance record as that dates back to 1995, and should give a better picture of the fund's ability to equal or exceed the rate of return produced by the U.S. stock market (S&P 500 index) over time. Since December 31, the fund is down just 0.9% compared to a loss of 8.3% for the S&P 500 index. So, Toews is clearly still using derivatives to hedge against market losses. His performance for the 2003 YTD period through March 12, 2003 ranks the fund in the 2nd percentile of the Morningstar large-blend category. That is also where the fund's ranked for its trailing 1-year performance, 2nd percentile. Conclusion So far, the fund's 1.50% expense ratio hasn't hurt its relative performance, but it could hold it back a little bit in a market advance relative to lower operating expense funds. If the fund has hedges in place when the market advances, as it did through the fourth quarter 2002, it could lag the market and funds that don't normally hedge against losses. Still, if your objective is to minimize the risk of significant loss, while achieving a reasonable rate of return above that of inflation, then the Toews S&P 500 Hedged Index Fund may be just what the doctored ordered for this protracted bear market. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. 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The Option Investor Newsletter Thursday 03-13-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: PII, VZ Daily Results Call Play Updates: AMGN, MME, SLAB, ZMH New Calls Plays: ERTS Put Play Updates: BAC, LLY, TIN, UTX, XL New Put Plays: None **************** 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: ***** None PUTS: ***** PII $47.48 +1.76 (+0.75) The oversold rebound that began midday on Wednesday, really got a boost this morning, propelling PII to gap up to its 10-dma at $46.36. After a bit of morning consolidation, the stock plowed higher in the final 2 hours of trade as shorts scrambled to cover. That afternoon melt-up propelled the stock through our stop ($46.75) and the close at the high of the day breaks the downtrend that has been in force since early January. Obviously, PII is a drop tonight. Traders still holding open positions should use any early weakness on Friday to close those positions. --- VZ $34.75 +1.28 (+0.69) We got a nice little run from our VZ play over the past few weeks, as the stock bled down from the $36 level to just above $32 on Tuesday. Then something changed. The bears weren't able to break below that level on Wednesday and with the afternoon short-covering in the broad market, the stock rose into the close, but remained pinned under the key $34 level. The bulls came out feeling frisky this morning though, and despite some midday weakness, managed to push VZ through our $34.25 stop at the close. Any open positions should now be closed, as the downtrend has clearly come to an end for now. *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu Week AMGN 56.98 -0.06 -0.10 0.07 1.84 New highs ERTS 56.74 -0.45 -0.42 0.71 2.99 New, Fast Move Area MME 37.02 -0.73 -0.73 0.22 1.00 Bounce from $36 SLAB 28.50 -0.25 -0.82 -0.13 2.51 Approaching target ZMH 44.65 -0.74 -0.64 0.65 0.65 Holding gains PUTS BAC 67.60 -1.41 -1.21 0.39 1.76 Financials bounce LLY 55.24 -0.84 -2.30 0.33 1.20 Inside day PII 47.48 -1.20 -0.63 1.22 1.76 Drop, stopped TIN 39.05 -0.70 -0.88 -0.01 1.64 Still under $40 UTX 57.36 -0.28 -1.74 -0.76 3.21 Led Dow VZ 34.75 -1.32 -0.34 0.89 1.28 Drop, No breakdown XL 67.79 -2.13 -1.71 -0.60 3.22 Sector rally ------------------------------------------------------------ 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 ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** AMGN $57.00 +1.84 (+1.30) Consistent as the rising sun, AMGN blasted off with the rest of the market today, closing right at another new high of $57. While things certainly looked a bit dicey yesterday morning with the broad market weakness, we thought the dip in AMGN down to the $54 support level looked like a decent entry point into the play, as noted in the Market Monitor. Sure enough, that dip was eagerly bought by the bulls, as the stock rebounded strongly into the close, ending near unchanged. But the real excitement came on Thursday, with the market's gapping higher and propelling AMGN by the middle of the day. With the rampant short-covering throughout the market, our play just continued rising right up to the close. Remember our approach on this play has been to not try to chase the breakouts, waiting for the pullbacks to support instead. Well, that plan seems to be working, so we're going to stick with it. Support seems to be rock solid near yesterday's lows, so we're raising our stop to $54 tonight. Traders still looking for an entry into the play will want to focus on a rebound from the area of this morning's gap up ($55.20-55.50) as the likely support area. Our upside target remains $60, so conservative traders will want to consider harvesting gains as we approach that level. --- MME $37.02 +1.00 (-0.33) In typical bullish fashion, our MME play seems to have finished digesting that strong rally of a week ago. After dipping to test the $35.70 support level one more time this morning, the bulls finally got serious, propelling MME steadily higher to close right at the high of the day. We were looking for a rebound from above the $35.25 level for aggressive entries, confirmed with a rally back through the $36.25 level for more conservative traders. Well, we got both, and have the additional reassurance of the stock pushing back through the $37 level at the close. Of course, the real test will be to see if the bulls can crack the $38 level, which provided firm resistance least week. Late-comers can consider another dip into the $35.75-36.00 area as a solid entry into the play, while aggressive momentum junkies will want to wait for MME to crest the $38 level before adding new positions for a quick run to the next level of resistance at $40. Following yesterday's rebound, it seems safe to raise our stop fractionally to $35.50, just above yesterday's intraday low. --- SLAB $28.50 +2.51 (+0.96 for the week) We were rewarded for our patience on this play, as we hung on during the recent consolidation between $26 and $28. The chip stocks all jumped today as the Semiconductor Index (SOX) rallied an amazing 8%, outperforming even the big gains in the broader markets. SLAB held closing support on Wednesday at its 21-dma and has now bounced from that level as it did in early February. The stock is approaching our target area between $29 and $30 and traders can think about taking profits on another move higher Friday. There is some heavy resistance in that area dating all the way back to April 2002 and the SOX is now facing its 200-dma 8 points above today's close. if the SOX breaks that level it will likely test 330 (currently 310) and the most aggressive traders can hold SLAB for a possible run to that level. However, even if the SOX does run higher, remember that SLAB topped out at $30.40 in December, even when the SOX traded as high as 393. Profit takers around $29-30 will have history on their side, and OI will likely close the play if we find end of day resistance there. With our target so close, we do not recommend new entries at this time. --- ZMH $44.65 +0.65 (-0.56 for the week) ZMH jumped nicely off its 21-dma the past two days, but has been essentially range bound for the past couple of weeks. It failed to follow through after reaching all-time highs, but has not collapsed either, instead entering a period of consolidation. While it did not post a big gain along with the broad market rally today, it also is not one of those beaten down stocks with room to bounce. It has maintained most of its recent gains and outperformed the markets impressively over the past few months. While we are showing only a small gain since adding it to the list, it continues to turn out strong products, with a new knee replacement procedure and a new hip revision liner. We have tightened up the stop to $42.95 and as long as the stock holds gains above that level, we see no change in the current trend. With the stock having topped out at $45.55 and unable to get back above that level so far, traders may want to wait for a move back above those recent highs for entry. The alternative is to go long on another bounce from the 21-dma, now sitting at $43.68. ************** NEW CALL PLAYS ************** ERTS – Electronic Arts $56.74 +2.99 (+2.59 this week) Company Summary: ERTS creates, markets and distributes interactive entertainment software for a variety of hardware platforms, including Sony's PlayStation 2, the PC, Nintendo GameCube and the recently launched Xbox. The company's EA.com business segment is engaged in the creation, marketing and distribution of entertainment software which can be played or sold online, as well as the ongoing management of subscriptions of online games and Website advertising. Why We Like It: At the forefront of home entertainment, video games have pushed into most demographic areas of the populace in recent years. Companies making the hardware and software to power this new consumer addiction have been the beneficiaries of this trend over the past few years. Until recently that is. ERTS had a stellar run from the middle of 2000 through the end of last year, nearly tripling in price before the bottom fell out in December. It seemed the whole analyst community came out bashing the video gaming stocks on fears of slowing growth. ERTS tumbled a low as $47.50, before finding some semblance of support and over the past few weeks, the stock has actually been showing some strength. Perhaps the sellers have exhausted themselves, or maybe the stock is technically ready for a rebound. Whatever the cause, the consolidation pattern below the $55 resistance level broke with a vengeance on Thursday, with buyers piling back into the stock, driving it to a 5.5% gain on the day. Confirming the significance of this price action, the PnF chart generated a new spread triple-top Buy signal, with a bullish price target of $73. We're not going to get that ambitious with the play in the near term though, as there is liable to be some strong resistance near $60, the site of both the 200-dma and the bearish resistance line on the PnF chart. Our ideal entry into the play will be on a retracement of some of Thursday's outsized gains, preferably with a dip and bounce in the vicinity of the $54.00-54.50 area. ERTS may get a boost on Friday morning, following better than expected earnings results tonight from Electronics Boutique (ELBO), a video game retailer. While aggressive momentum traders could chase the stock higher on a continued breakout, that strategy doesn't seem favorable on a risk/reward basis until after a dip to confirm support. We want to give the play some wiggle room over the near term, so we're initially setting our stop at $53, below both the 10-dma and the closing lows from earlier in the week. *** March contracts expire next week *** BUY CALL MAR-55 EZQ-CK OI=10381 at $2.35 SL=1.25 BUY CALL APR-55*EZQ-DK OI= 2362 at $3.70 SL=2.25 BUY CALL APR-60 EZQ-DL OI= 1211 at $1.20 SL=0.50 BUY CALL JUN-60 EZQ-FL OI= 6291 at $3.00 SL=1.50 Average Daily Volume = 4.52 mln ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's • $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees • Easy screens for spreads, collars, or covered calls! • Contingent, Stop Loss, Trailing stop, or OCO • 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* BAC $67.60 +1.76 (-1.39 for the week) A nice start to this put play quickly reversed direction as it followed the big bounce in the broader markets. Shortly after the Dow, OEX and SPX all completed head and shoulders patterns on Wednesday, we saw a reversal that took the Dow up 400 points and gathered the financials in the rising tide. BAC gained $1.46 to finish at $67.60, just $0.40 shy of a point and figure reversal. It is also still below the converging 21-dma and 200-dma at $68.26 and $68.29, respectively. The most aggressive traders can view this level below those moving averages and a PnF reversal as an entry point; however, with the big reversal in the broader markets we would not recommend new entries for anyone other than those most aggressive bears. We are lowering our stop to just above those averages, because any continued bullishness in the broader markets is likely to take the financials with it. Our new stop will be set at $68.55. --- LLY $55.24 +1.20 (-1.74) While it was a bit disheartening to see LLY close back over the $55 level on Thursday, frustrated bears can take some comfort in noting that the stock had to be dragged, kicking and screaming, over that level. The stock was not what one would term a willing participant in today's euphoric rally, not really able to hold in positive territory until after 1pm ET. But the short-covering did finally take hold, lifting the stock very near that major resistance (that used to be support) in the $55.25-56.00 area. Now that such a strong support level has failed, it should act as resistance on this rebound, providing for a solid entry into the play. Just keep in mind the larger picture, which has the broad market strongly rebounding on Thursday, and that rising tide just might lift all boats. That's part of our reasoning for not chasing LLY lower on a breakdown, waiting instead for the next failed rally. In addition to historical resistance, the upside will be further hampered by the 10-dma at $55.83 and the 20-dma at $56.37. Maintain stops at $57.10. --- TIN $39.05 +1.64 (-0.69) When a market gets as oversold as ours has been lately, it is only a matter of time until a powerful short-covering rally arrives. That was the story on Thursday, with the broad markets posting healthy gains. After trading new intraday lows on Wednesday, TIN gapped up this morning and quickly moved back over the $38 level. Showing the strength of the short-covering, the stock then found support near the top of that gap and then powered higher throughout the afternoon, closing at the high of the day, just over $39. That takes our play right back into the gap left behind on Monday, and we need to be careful here. A rollover from below the $40 level looks like the best shot at new entries, but we're going to keep this one on a tight leash, with our stop remaining at $40.25. Not only would a close over that level constitute a breakout over the last Friday's intraday highs, but it would also break the 2-month descending trendline. A continuation of today's short-covering rally will likely bring our TIN play to an end, but we're going to give it one more day to show us its colors. --- UTX $57.36 +3.21 (+0.24 for the week) Wow! This Dow component was the second biggest gainer in today's broad market rally that saw the Dow make up the losses of the past six sessions. UTX made up the losses of the last three and erased a significant portion of the more than $5 gain we were showing at the close of business Wednesday. Of course after the recent bearishness in the stock, it also had quite a bit of ground to make up. Amazingly, UTX still showed red on Wednesday's in spite of the day's big turnaround, but eventually was caught up with today's bounce. By the end of the day, it managed to creep just above the high of the last bounce on March 7, but fell short of our stop loss at $58.00. While this stock has been trending lower with the defense and airline stocks, both beleaguered sectors, even the DFI and XAL got bounces today. If the broad market reversal continues tomorrow, UTX is a candidate to continue higher with it and current put holders may want to close out for what still amounts to a profit of more than $2. We don't recommend new entries at this time. If the market does roll back over, we may yet approach our target near $50, especially given the relative weakness in the DFI and XAL, but after the action of the last two days, a further Dow run would not surprise us. --- XL $67.79 +3.22 (-1.21 for the week) XL Capital was one of the bigger gainers on a day when there quite a few of them. The insurance sector has been beaten up badly in recent sessions and as of Wednesday's close we were up about $4 on this play. Those traders who entered on the failed rebound at $70 suggested in our original write-up had an even bigger score. That is until today. Starting Wednesday afternoon, the Dow began what ended up being a 400-point turnaround from its lows of the day and took many oversold sectors along with it. One of those was the insurance sector, represented by the S&P Insurance Index (IUX). After trending down since the middle of January, along with the broader markets, the IUX erased the losses of the past two days with a gain of more than 5% today. That index has found resistance at its 21-dma throughout the latter part of February and the beginning of March. Not surprisingly, it failed to reach that level once again today. The current reading is 221 and the 21-dma sits at 224.96. XL posted a similar 5% gain and ended the day not far below our entry point. XL has seen resistance at its declining 21-dma as well, which now sits at $69.83. We will leave our stop above that level and allow for another failure there if the market rolls over from the current bounce. The magnitude of that bounce is certainly a big red flag for bears, as it erased the losses of the past six days and any shorts who wanted to exit put plays after an engulfing candle that large in the Dow won't get too strong of an argument from us. However, if the bounce does fail, we expect this sector to give back much of today's gains. We don't recommend new entries at this time, until we see new signs of weakness, but the most aggressive bears may see another entry point if the stock runs out of steam at that descending 21-dma. ************* NEW PUT PLAYS ************* None ------------------------------------------------------------ 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 ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 03-13-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - ERTS Traders Corner: Yes, Mulder & Scully, Aliens Do Exist Traders Corner: Putting It All Together_2 Options 101: Is the War Over? ********************** PLAY OF THE DAY - CALL ********************** ERTS – Electronic Arts $56.74 +2.99 (+2.59 this week) Company Summary: ERTS creates, markets and distributes interactive entertainment software for a variety of hardware platforms, including Sony's PlayStation 2, the PC, Nintendo GameCube and the recently launched Xbox. The company's EA.com business segment is engaged in the creation, marketing and distribution of entertainment software which can be played or sold online, as well as the ongoing management of subscriptions of online games and Website advertising. Why We Like It: At the forefront of home entertainment, video games have pushed into most demographic areas of the populace in recent years. Companies making the hardware and software to power this new consumer addiction have been the beneficiaries of this trend over the past few years. Until recently that is. ERTS had a stellar run from the middle of 2000 through the end of last year, nearly tripling in price before the bottom fell out in December. It seemed the whole analyst community came out bashing the video gaming stocks on fears of slowing growth. ERTS tumbled a low as $47.50, before finding some semblance of support and over the past few weeks, the stock has actually been showing some strength. Perhaps the sellers have exhausted themselves, or maybe the stock is technically ready for a rebound. Whatever the cause, the consolidation pattern below the $55 resistance level broke with a vengeance on Thursday, with buyers piling back into the stock, driving it to a 5.5% gain on the day. Confirming the significance of this price action, the PnF chart generated a new spread triple-top Buy signal, with a bullish price target of $73. We're not going to get that ambitious with the play in the near term though, as there is liable to be some strong resistance near $60, the site of both the 200-dma and the bearish resistance line on the PnF chart. Our ideal entry into the play will be on a retracement of some of Thursday's outsized gains, preferably with a dip and bounce in the vicinity of the $54.00-54.50 area. ERTS may get a boost on Friday morning, following better than expected earnings results tonight from Electronics Boutique (ELBO), a video game retailer. While aggressive momentum traders could chase the stock higher on a continued breakout, that strategy doesn't seem favorable on a risk/reward basis until after a dip to confirm support. We want to give the play some wiggle room over the near term, so we're initially setting our stop at $53, below both the 10-dma and the closing lows from earlier in the week. *** March contracts expire next week *** BUY CALL MAR-55 EZQ-CK OI=10381 at $2.35 SL=1.25 BUY CALL APR-55*EZQ-DK OI= 2362 at $3.70 SL=2.25 BUY CALL APR-60 EZQ-DL OI= 1211 at $1.20 SL=0.50 BUY CALL JUN-60 EZQ-FL OI= 6291 at $3.00 SL=1.50 Average Daily Volume = 4.52 mln ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's • optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's • 8 different online tools for options pricing, strategy, and charting • Access to options specialists via email, phone or live chat online • Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** Yes, Mulder & Scully, Aliens Do Exist By Mike Parnos, Investing With Attitude Attention! There has been a sighting. We now know E.T. is, indeed, not alone. Allow me to introduce E.R. -- a practicing financial advisor (and a CPTI student) living in Melbourne, FL. Hopefully, when he phones home, he will communicate CPTI trading philosophies back to his mother planet. and spread the word. Last Thursday I suggested that quality brokers and financial advisors are like aliens. You hear about them, but nobody’s ever really seen one. In OI’s version of the “X-files,” I was pleased to hear from a financial advisor who apparently cares – enough to take the time to properly advise his clients of common sense alternatives. I’d like to share it with you. _____________________________________________________________ ER: Mike, hats off to you and your column! The CPTI is a great addition to OI. MP: This guy’s off to a good start! ER: I imagine you received some feedback from your article comparing aliens to full-service advisors? MP: That’s an understatement! Investors are upset. They’ve been treated like a herd of sheep on Fire Island, but it’s partially their own fault. ER: (On a tangent, I think it's your ability to successfully weave humorous anecdotes into your commentary that makes your column so refreshing and appealing) After getting a good laugh and sharing it with a few in the office, I wish to comment on the article. MP: You know I just had to include this. I really like this guy. That’s not you, Mom, is it? ER: I'm a financial advisor with a small regional brokerage firm. I help advise on roughly $100 million in client assets, and we have been able to introduce the benefits of options to certain clients. I can certainly substantiate the "stigma" that is associated with options. When I introduce options, I sometimes receive a response such as, "Aren't those risky?" or "I don't want to lose all my money!" Explaining the appropriate strategies is often an uphill battle. MP: When you get clients that have had a bad experience with another advisor, you better be prepared with a crystal ball and a super-duper-pooper-scooper. They’re going to expect you to not only clean up their mess, but to turn it into gold. ER: Relative to the market on the whole--and the $7.6 trillion that has vanished in the last three years--it wasn't all necessarily because of an advisor's lack of advising. Often clients themselves are the challenge. MP: But they sure didn’t help matters. ER: For example, when Tyco started to break down below $42 and what I felt was support in early 2002, I advised several clients, who didn't want to sell the stock outright, to purchase puts. Some clients owned the stock for years and had gains to protect (remember gains?). Others owned it closer to $50 and were looking to hold for the long term. Puts to hedge appeared not only suitable, but logical, in those scenarios. I utilized the homeowner's insurance example, car insurance, etc. Of those that would not sell outright, I was only able to hedge perhaps 20% with puts. The others decided to ride out the storm and, as you know, it hasn't been pretty. Those that bought the $40 puts (even with higher premiums due to the volatility) as insurance were grateful and able to squeak out relatively unscathed. Others were not as fortunate. MP: Bravo! I applaud you. There are always many who will not follow common sense advice – investing or otherwise. You can lead a horse to water, but you can’t make him drink (or think, either). ER: Though rudimentary for us who understand options (and the deeper root concept of risk vs. reward), the general public cannot always compare $50,000 automobiles to $50,000 worth of stock, even after much explanation. Stocks are intangibles, they counter; a car, that's different! MP: Let’s not have unrealistic expectations. Most retail investors are missing a lot of dots from their dominoes. They make a purchase, say a prayer, then bury their heads in the sand where they can’t see, they can’t hear, and important body parts remain exposed. That and $5.00 will buy you a Starbucks cappuccino that will go through you in less than an hour. ER: Many Enron, WorldCom and Insert-Name.com investors see the answer now, of course. The feverish mentality at the time was naturally that any dips were to be met with added investment, not caution or skepticism, since the "long term" investor is always rewarded! MP: I’ll give you 5-to-1 odds that these same people STILL do not insure whatever investments they have left. They’ll have to work till they’re 70 and break into a daily chorus of that number one bestseller, “Why me?” ER: You raised valid points in your column. As in every industry, there are some real losers in the financial industry who have no business doing what they're doing. Others truly dedicate themselves to their job and do their best at it even under adverse conditions. MP: The same common sense investing principles apply to good and bad market conditions. You don’t just buy health insurance during the summer months, do you? I will continue to do my best in explaining options, and their practical uses, all the while attempting to create positive (and hopefully profitable) experiences for my clients and me. I trust you will continue in similar fashion--doing your best for those that count on you. Best regards, Ed Retter. (800-838-4488) MP: I’m always here spreading the knowledge – sometimes I use a knife and sometimes I use a shovel – but you know it will be spread. So, Mulder & Scully, aliens DO exist. When E.R. phones home, hopefully he will encourage other aliens on the mother planet to use our CPTI trading philosophies. Because here on earth, one alien is not enough. We need a full-fledged invasion. When it comes to financial advisors and brokers, we need a close encounter of the “caring” kind. ____________________________________________________________ Things Are Looking Up We expect to see strength in the market very soon. Listen for the announcing that informed sources report the captured Osama Bin Laden’s camel. The CIA is preparing to interrogate him at length – then, at width. They’ll probably just insert a LoJack where the sun don’t shine and monitor his movements - and follow him until he leads us to Osama. Who says G.W. doesn’t have a plan? It’s just on a need-to-know basis. ___________________________________________________________ CPTI Portfolio Update Position #1 – OEX Bull Put Spread – Trading at $422.99. Believing the market is not likely to go down to retest its July and October lows near 400, we sold 10 contracts of the OEX March 400 puts and bought 10 contracts of the OEX March 390 puts for a credit of $1,400. If war breaks out, it might be a quickie. The market may spike up. How high? Who knows? That’s why we didn’t put a bear call spread on top to create an Iron Condor. We may put on the bear call spread at a later date. ______________________________________________________________ Position #2 – XAU Iron Condor – Trading at $64.05. We created an Iron Condor with a 15-point range $65 to $80 for March. We were able to place spread orders and take in $1,400 for our 10-contract position. The objective is for the underlying, at expiration, to finish anywhere within the spread. Looking at the steady descent of XAU (the chart sucked), last Friday XAU broke down through support and we elected to close the position at a cost of $1.00. We still managed at small $400 profit. XAU traded as low as $62.15 a few days ago. _________________________________________________________________ Position #3 -- OIH -- Diagonal Calendar Spread – Trading at $53.86 It seems that there’s about $8-10 of uncertainty built into the price of a barrel of oil. When, and if, the war is resolved, the price of oil should work its way down, along with the price of oil stocks. We bought 10 contracts of the July OIH $55 puts and sold 10 contracts of the March OIH $50 put at a debit of $3.85. With March expiration approaching, and OIH moving down nicely, we’ll have some decisions to make about adjusting our calendar spread. ______________________________________________________________ Sunday Preview We’ll devote Sunday’s column to examining, in detail, the thought process that goes into making the adjustment decisions on OIH. ______________________________________________________________ Position #4 -- QQQ ITM Strangle – Currently trading at $25.62. This is a long-term position we created four months ago. We own the January 2005 $21 LEAPS calls and the January 2005 $29 LEAPS puts. We sold 10 contracts of the QQQ April $28 the QQQ April $22. We moved our short sells in by one point because a lot of premium has disappeared from the QQQs in the last two months. ______________________________________________________________ Position #5 – MMM Iron Condor – Currently trading at $125.43. We created an Iron Condor with a 15-point range $115 to $130 for April. We were able to take in $1,550 for our 10-contract position. The objective is for the underlying, at expiration, to finish anywhere within the spread. ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it's not the cards we're dealt. It's how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor ************** TRADERS CORNER ************** Putting It All Together_2 By Leigh Stevens lstevens@OptionInvestor.com All the patterns and indicators that I have described in my prior Trader's Corner articles, so seemingly EASY to apply (in terms of outcome) to real-life trading situations, are somehow on graduation from Technical Analysis 101 school, quite hard to follow in the heat of deciding a trade. Best I can I want to take you along on the unfolding of a technical "view" at any given time of the market trend. The technical "checklist" we'll work with here can be called up by clicking the LINK below. "Putting It All Together, Part 1, includes the A-Z list of all my prior Trader's Corner articles (a Technical Analysis "book") and is found at - http://www.OptionInvestor.com/traderscorner/tc_022703_2.asp I will work with my library of past trade "setups". Building a technical "view", that approaches the success of highly successful index and stock traders, comes from knowing how to read the combination of patterns and indicators as well as applying skill, experience and intuition. Skill and experience take time to develop. Flexibility in thinking about what is going on in the market is the other strong common trait of great or superior traders that I have known - this trait CAN be possessed by someone with only limited trading time under their belt, for sometimes quite considerable success. The chart below is a (weekly) chart of Intel (INTC) - what stock this is in terms of the particular historical example, is not all that important and was just the particular example picked. The thought process to trace a trend successfully is what is important and provides a reoccurring theme. The chart for this period, by itself, suggests that the stock is in a basic trading range from $16.5-17 to 23-25 and this is the dominant technical information we have for this chart. Of course, all you can know is for the period that you are looking at. Each chart that follows builds a more comprehensive forecast picture by looking at the other technical factors on my mental "checklist" and which is described in Part_1 (click on LINK to this article--2nd paragraph above) of this series on coming out a winner in the real world of competing for profits in the markets. When looking at a timescale (hourly, daily, weekly, etc.) you can either zoom OUT or zoom IN so to speak. That is, you can go out (in time) and look at a longer timeframe OR you can come "in" to smaller time increments; for example, on a daily chart, next look at Intraday charts like hourly, 30M, 15M etc. I usually want to start with the bigger time picture then go to say the hourly chart. If I am looking a 12-15 month price picture like the first chart, I want to look at a period of time that is much more than that such as (in this example) a 5-10 year chart picture timeframe - The first chart viewed in isolation for the 12-15 month prior period could possibly be seen as tracing out a top formation or the reverse - the glass could be half empty or half full. However the longer period now being seen in the chart above now looks more like a first big price move that is followed by trading in a relatively narrow price range. Also, that price range is one that is near the top end of where prices got to on the first rally. This pattern suggests that there could be a big break out move coming that would be a second (up) "leg". Other bullish checklist items: volume for Intel tended to contract on declines and expand or surge on rallies. The RSI indicates upward momentum after that indicator had first reached an oversold reading. The Nasdaq Composite in the chart below is added next as a secondary help in trying to figure where the stock is going next - this is part of the checklist: compare the STOCK to the dominant index that it is part of, the Nasdaq in this example. ALSO - what sub or sector index that the stock might be part of, in this case the Philadelphia Semiconductor Index (SOX). (Intel dominates that index of course, but this would not usually be the case for sector indexes.) Looking at the Nasdaq as a whole during that same period shown for INTC (chart before the one immediately above), we have a third and "confirming" low point established for an up trendline. Also, the weekly chart of the Semiconductor Index (SOX) appears to be breaking out to the upside from a bullish falling "wedge". This is not something you see on the chart of the individual stock itself. LOOKING AT MORE ELEMENTS AND PATTERNS - Retracements - something we always should be looking at also. The stock here did not retrace more than a "minimal" 38% of the '96 - '97 advance and held this area on a second occasion, which was bullish. 38, 50 and 62% represent the typical "fibonacci" retracement levels. There was also an upside breakout above a down trendline – with a minor subsequent pullback to this line, which then "became" ( acted as) support - where buyers surfaced again. This pattern could be said to "confirm" a breakout. And, what else? -- weekly closes in the chart above traced out a descending triangle, with a subsequent breakout to the upside. Per the analysis now of ALL the charts and based on our checklist items, we can make a guess at a next move for the stock as a buy - BUT not only a buy but the stock appears to have been a major buy on its last dip to the $17-18 area and then again on the breakout above $22. OH, AND ANOTHER THING ...... The 3 "component" rallies to a typical bull trend are shown above as the price advances ending at "1", the next labeled as ending at "3" and finally, the one that tops out at the point marked "5" The chart here labels a 5-part wave pattern of 3 component up swings or impulse waves, interspaced by 2 corrective price movements (sideways to lower price swings) or corrective waves in "Elliott wave" terms - locate these article in my Trader's Corner A-Z list on "Wave" patterns by going back to the LINK above. The first move up or the period encompassing a good part of the 1999 period had the necessary 3 parts labeled a-b-c (down-up- down). There is nothing obvious about wave 5 that tells us when it will end. However, the "final" up move (wave 5 in a bull trend) is most often accompanied by bearish DIVERGENCES – in this case it was apparent from the RSI action also shown. Prices worked to higher highs accompanied by lower relative lows in the RSI, making for a classic price/RSI divergence. BUILDING A TECHNICAL PERSPECTIVE - We went from a sort of "ho-hum" picture presented by the first chart, to one where we might end up taking double the number of options that we normally do and are going out to the far-month months while the premiums are not yet inflated given a sizable time to expiration in the option. For a longer-term trade, buying the stock and the deferred calls worked out well in the following 12 months, as the stock more than tripled from the $22 area when prices achieved a bullish upside breakout. Of course, every good fairy tale has its ending and the trend in the stock changed radically later on as quite evident in the next chart below - The above chart shows what TECHNICALLY would have been the tip off for a major shorting opportunity and/or some long-term put insurance - especially if you just couldn't possibly part with the stock after it tripled in value already! Specifically the trend reversal tip off was the break of key moving averages, the downside penetration of the prior low and the price/volume divergence that showed up in the On Balance Volume (OBV) Indicator - prices were going up but the stock was under "distribution" or sustained selling indicated by the fact that the OBV was trending down not up. Believe it! - stocks usually get overvalued at some point and undervalued at others. This can be on a weekly, daily OR hourly chart not just on the longer period used in the above example. Anyone following my daily Index Trader weekly column will see my frequent switching (and analysis) between the daily and hourly chart views. One timeframe is compared to the other to see if the technical picture "confirms" the other or suggests something else ahead. Looking at stocks on a longer-term basis, equities are probably somewhat undervalued again. The question is does anyone care or is poised to take advantage of this? - not so much in a bear market they don't!! *********** OPTIONS 101 *********** Is the War Over? Buzz Lynn buzz@OptionInvestor.com Wait, last I checked, it hadn't even started yet! What on Earth might cause me to think the War (that hadn't yet been declared) was over? Why, the drastic fall today in the price of gold, of course. "Great, Buzz. Connect the dots for us, won't you please?" With pleasure! Two weeks ago, Fundamentals Guy was on a rant about the shallow sound bites (often espoused by media celebrities parading as experts) on why the price of gold was moving up. Their five- second explanation usually contained a variant on the War with Iraq theme - "Investors bid up the price of gold today on stepped- up war jitters. . .", or "Gold gave up ground today as tensions eased in the Middle East. . ." or some other such nonsense. As F.G. noted two weeks ago: "Gold is also presumed to be rising and falling on investors' moods regarding an Iraqi war and the War on Terror. When uncertainty is thought to eventually lead to conflict, common wisdom is that 'fraidy cats and the delusionally paranoid will buy gold, and that that must be the reason we've seen the price rise in recent months. Similarly, common wisdom also states that when war jitters ease, the paranoid leave their mountain huts and revert back to a diet of speculative stocks and 110% equity financing to assimilate with society. Gold is for kooks." So has that relationship changed? Perhaps the ups and downs of War prospects really don't matter much in the price of gold after all? Well, based on today's news of Britain and the U.S.'s frustration with France, China, and Russia's potential veto of any newly proposed resolution giving Iraq their 15th "one last chance" to disarm, which gives the 90-nation coalition in support of the U.S the impetus to do something or get off the pot (do something being the likely outcome), and that gold dropped overnight like it's dense cousin, the proverbial lead balloon, to $332 while still managing a close at just over $334, that relationship seems pretty rickety. Clearly increased war tension has little or no bearing on the price of gold. Were it true, the price of gold should rise when the TV cameras pan to see Blaire, Bush and Saddam Hussein in a loving group hug, an equally preposterous Hallucination in my opinion. In short, the gold price/war relationship doesn't seem to exist. So what happened that would cause gold to hit the skids so hard overnight? Back up two paragraphs. What if the preposterous were to happen in secret? What if the U.S. was actually negotiating a "secret surrender" of some sort with Iraq? Crazy, I know, but play along for a moment. That would put a truce to a war that never officially started, and the world would breath a lot easier as tensions melted. Gold would sell off. Simultaneously, that would cause the Dollar to gain strength against other currencies, as the U.S., Britain, and 88 other countries would not have a big a borrowing requirement to finance said war, and thus, would decrease the size of previously assumed deficits. With that in mind, the U.S. stock market becomes instantly attractive once again, as bonds sell off. Wow! And look what happened today! Are the markets telling us that Iraq is about to surrender? Don't bet on it. However, the rumor of such was actually top-of- mind scuttlebutt in overseas currency markets last night, which was presumed to have Dollar-denominated shorts covering their positions, and thus, driving up the Dollar against the Euro and the Yen. A surge in the Dollar was very likely the culprit for the decline in gold. . .all likely sparked by a "surrender" rumor. Short-covering born of the surrender rumor may very well explain the reason too that we saw amazing gains backed with significant volume in today's U.S. equity market, although the equity move had some technical chart backing too. I can only call today's equity action as significant short covering. Will it continue tomorrow? I can't say. But I believe it will trip bulls back in only to embarrass them again in the near future. Maybe I'll be the one embarrassed. Like I said, I am no guru and I am often led to incorrect conclusions. Be that as it may, rumors can get legs of their own, and right or wrong, can cause some pretty wacky price action in defiance of rational minds. As Keynes (I think it was Keynes) said, "Markets can remain irrational longer than we can remain solvent." The point is that I personally believe the "surrender" is not real and that optimism is misplaced. I also think that we came much closer to a buying opportunity in the price of gold. F. G. wants to stress though that that is only with regard to price. An immediate rebound from this level will likely take some consolidation to allow the 50-dma ($356) to play a bit of catch-up with the 200-dma ($330). There is still a pretty big disparity that I think needs closing before we see another set of significant gains. How long that is, I can't say. After all, I'm not a guru! Aside from some quick price prints into the negative side of $330, I would expect $330 - the 200-dma - to hold as support. But to identify the misplaced optimism noted immediately above, we need only turn to today's economic news in the U.S. Prior to 8:30 ET this morning, markets were expecting a 0.5% DECLINE in retail sales. The actual reported figure was a DECLINE of 1.6%, more than three times the expected decline. I am convinced that the U.S. consumer is in the process of shutting his/her wallet. The declines were broad-based in cars, furniture, building products, appliances, clothing, entertainment, and surprisingly, groceries. What, we've all stopped grocery shopping and gone on a collective weight loss diet? Financially speaking, that isn't so far from the truth, as initial jobless claims also came in at hefty 420,000 claims, well above the gray line of indifference unofficially set at 400,000 claims. There are now 420,000 new savers and belt-tighteners thanks to the proliferation of pink slips. Still, we all have to eat and it is unusual to see groceries taking a hit in sales. Personally, I think it's important to take these figures with a grain of salt. At best, the figures represent a best guess that the Bureau of Labor and Statistics puts forth. At worst, and by their own admission, sometimes they just make them up if they don't know, which goes a long way toward explaining why it's so easy to revise the January retail numbers from the original LOSS of 0.9% to a revised GAIN of 0.3%. Still, it makes me wonder how these current or revised lackluster numbers could be greeted with such enthusiasm today. But back to gold. . .what does F.G. make of today's selloff? In two words, "Buying Opportunity". Maybe not exactly today or tomorrow for the traders among us. But if we are in the gold ownership business as an insurance policy, aka long-term hold, it looks pretty attractive here. Remember, gold is in a bull market until proven otherwise. And even despite a steep drop today, the charts tell a coming bullish story. Take a look. Gold - April Contract chart - GC03J (weekly/daily): First off, "coming bullish" does not equal "buy it now" if we try to time the purchase in any way, shape or form. While I personally think the price is right, I also think timing is a little early for a trade. Those wanting an insurance policy though may consider it anytime. But here is what the charts are saying. Starting with weekly candle support at roughly $330-$332, note that dovetails nicely with support of the 200-dma - also $330 - on the daily chart. I would consider $330 significant support based on those two indicators. But the reason I would not, as a trader, be tempted in to buy it here is two-fold. First, the stochastics on both the weekly and daily charts are still falling - in both the 5 and 10 period lookbacks - and there hasn't been a reversal yet. Oversold, yes, but still room to fall. Second, there is a large disparity that is just now beginning to close with relation to the 200-dma and the 50-dma. This will likely take some time. As this gap begins to close, I believe the entry opportunity becomes better. Hovering around the 200-dma for a week or more until that gap closes seems appropriate, but again the market can do anything. So make your buying decision carefully. Remember that the 200-dma at $330, while not perfect, should provide heavy price gravity on a technical basis to that level. Let me add one more fundamental thing here before signing off. Does everyone recall the Fed Governor, Bernanke speech, where he revealed the Fed's intent to use it's secret weapon - the printing press, capable of creating Dollars out of thin air - in order to prevent deflation from getting a grip on the economy? Today's economic reports on retail sales and joblessness should put another two sturdy nails into the coffin of the U.S. consumer. I look to those as evidence that deflation is taking hold. As the Fed attempts to print its way back to prosperity - with likely limited results - and Dollars become worth substantially less, gold will eventually shine. Conclusion: The fundamental case for gold still stands. The technical picture shows us nearing a buying opportunity for the market timer. The price drop to $334 on a rumor just made it more attractive. One more thing. . .for those desiring to by CEF (AMEX:CEF), the closet thing to gold certificates, and the closest way to getting real metal into our IRAs, I'm waiting for CEF to deflate out some of its premium to net asset value - strictly my opinion. There are those around here, namely Mark Phillips and Jonathan Levinson, who make a good case for ignoring the premium and buying CEF anyway on the premise that it's always traded at a premium (at least it has done so for the last five years), and will likely continue to do so as long as gold is in a bull market. Personal preference here - take your pick and use your own judgment as to how you play it. Until next time, make a great week for yourselves! Buzz ------------------------------------------------------------ We got trailing stops! • Trade online with trailing stops at optionsXpress, at no extra cost • Trailing stops based on the option price or the stock price • Also place Contingent, Stop Loss, and "One Cancels Other" orders • $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. 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