The Option Investor Newsletter Monday 03-24-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Bulls First to Surrender Futures Wrap: The Other Shoe Index Trader Wrap: Making Predictions Weekly Fund Wrap: Mixed Results for Stocks and Funds Traders Corner: Going Against The Grain Updated on the site tonight: Swing Trader Game Plan: A Sign From Below Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 03-24-2003 High Low Volume Advance/Decl DJIA 8214.68 - 307.29 8514.82 8185.20 1535 mln 80/1447 NASDAQ 1369.78 - 52.06 1392.40 1368.37 1301 mln 109/1181 S&P 100 439.67 - 16.69 456.41 438.83 totals 189/2628 S&P 500 864.23 - 31.67 895.79 862.02 RUS 2000 367.25 - 8.98 376.24 366.51 DJ TRANS 2183.35 - 80.14 2263.24 2170.08 VIX 34.75 + 1.13 36.05 34.13 VIXN 46.36 + 0.58 47.34 45.32 Put/Call Ratio 0.85 ******************************************************************* Bulls First to Surrender by Steven Price The recent rally finally ran out of steam, as the weekend war effort brought roadblocks the market wasn't expecting. What had seemed like a cakewalk, with little Iraqi opposition, turned ugly with captured U.S. soldiers, casualties and some actual resistance on the way to Baghdad. The expectation of a quick finish to a war that seemed on pace to end over the weekend came to a halt - as did the apparent combination of short covering ahead of a possible surrender and the euphoria over the U.S. taking full control of the oil fields - and sent the markets into reverse. After an 1100 point gain in the Dow in the previous eight sessions, we started out the day giving back almost 300 of those points. The Dow fell back below a previous significant level of support that appeared to have been the first possible entry point at which bulls could have stepped in and bought a dip. With the recent rally taking out plenty of resistance levels and this morning's drop taking out previously significant support levels, playing the technical pivot points is becoming that much more difficult in an environment that is news driven and seems to hinge on every advancement, or lack of advancement, by U.S. troops in Iraq. By the end of the day, the Dow had dropped over 300 points and the Nasdaq Composite had given back more than 50 points. We also saw tensions escalate between the U.S. and Russia on U.S. charges that Russia had sold weapons to Iraq in violation of U.S. sanctions. Think there may have been another reason Russia didn't want the U.S. moving into Iraq? Maybe they were afraid of what we'd find. Vladimir Putin said he would investigate the charges. We pulled back into a pivotal 'zone' however, and how we react to that zone may determine whether this is truly a direction changing pullback, or simply a 'buy the dip' opportunity. The Dow found support in the 8200-8300 range during the formation of its head and shoulders patterns during the fall and winter, and the 440 level in the OEX served a similar purpose. Now that we are back around those levels, after soaring through them on Thursday and Friday, a bounce from here would still suggest that the rally is holding. After all, a gain of 1100 points, followed by a pullback of 300, is not necessarily bearish. However, we got a break below OEX 440 on the news of an explosion near U.S. Navy 5th fleet base in Bahrain. That dropped the broader markets through yet another level of intraday consolidation. However, once it was learned that the explosion was caused by a protestor blowing up a propane tank, the OEX quickly jumped back above that 440 level. Bulls can point to that activity as evidence that support around 440 remains solid. However, doesn't that activity show just how driven we are by news, as opposed to technical levels? By the end of the day, we ticked down to OEX 439.83, but 0.17 is not exactly a decisive violation and where we head from here on Tuesday could be crucial for the near future. A break below the 437 level would indicate that the 50% retracement of the August-October high-low range has been violated and would look bearish. We bounced from that retracement on Wednesday and Thursday, so traders can set a bearish alert on a break below OEX 437. Chart of the OEX Chart of the Dow The oil market also reflected the concern that the war may not end as quickly as had been expected. Even though we got continued comments from President Bush that this invasion could take a while, oil futures had dropped 26% since March 12. The May futures fell back into a resistance zone from last fall, when the U.N. debates were still in the early stages. The rise in the price of oil over the past several months reflected both higher costs to businesses and consumers and also served as a barometer of the likelihood of war and victory. The inverse relationship between the price of oil futures and the level of equities has been like placing a mirror between the two charts and that relationship continued today. Oil futures spiked $1.75 per barrel, bouncing from that zone of support and making up 144% of the drop from Friday. Chart of the Crude Oil Futures Further evidence that the developments in Iraq are dominating the market action came from the activity in travel related stocks. The Airlines took a beating, reversing much of Friday's gain in the XAL, with a loss of 9%. Some of the biggest losers in the sector were American (AMR -12%), Continental (CAL -17%) and Delta (DAL -15%). The hotel stocks also headed lower, with Starwood (HOT) losing 10% and Marriott (MAR) dropping 8.6%. Part of this was due to Starwood withdrawing first quarter and full-year guidance, but even that was related to the Iraq situation. The company said there was "significant deterioration in business due to the elongated Iraq negotiations and the related geopolitical conditions that worsened over the quarter and culminated recently in armed conflict." The bleeding continued into the travel reservation stocks, with big losses in Expedia (EXPE -4%), Hotels.com (ROOM -6.7%) and Sabre (TSG -5.3%). Those traders following the bullish percents of the major indices have seen the rally produce the first upturn in those percents since December. That indicates that there has been enough buying interest to not only make up for recent losses, but establish enough point and figure buy signals to change the percent of stocks giving those signals in the Dow from 10% to 40%. It would also indicate we should be looking to buy dips, as those percents are just coming out of oversold territory and are nowhere near overbought at 70%. But there are a couple of concerns here. First is picking a support level as a bottom after a meteoric rise that didn't pause for very long at any particular point. If the previous levels of support and resistance weren't very important on the way up, with the market simply moving on geo- political developments, then they may not be significant on the way back down, either. Which brings us to the second concern - how much do the technical market indicators mean when we are in this environment? If the action from last week is any indication, the market loves a U.S. victory and if traders believe we will eventually be successful, then shouldn't we at least revisit the level we were at before the weekend, when victory seemed imminent? Of course a bear would suggest that the world mostly believes the U.S. will eventually be successful and we still got a big correction today; so maybe last week's action was just short covering to protect positions in case of a victory over the weekend and now those shorts aren't in such a hurry to cover. If that is the case, then we could be looking at a return to the previous downtrend once the war is behind us and traders are left to focus on the economy. Chart of the Dow Bullish Percent Certainly we could have expected the travel related stocks to suffer during war time, as Americans and even worldwide travelers would avoid the dangers of traveling and U.S. citizens also want to avoid the possibility of attacks in foreign countries. But how is the war affecting spending here? Retailers saw a drop of about 3% in sales during the 1991 conflict. This time around analysts have been expecting a drop of only around 1% as a result of war. However, Federated (FD) announced it was seeing a drop of 3-4% since last Wednesday and J.C. Penney said sales were trending below expectations, as well. Wal-Mart, on the other hand, said sales were on target over the weekend. We get Consumer Confidence numbers out on Tuesday, so we should get a snapshot of how the war is affecting consumers' willingness to spend. Of course, with things turning south just over the weekend, we may have to wait for the University of Michigan Consumer Sentiment report on Friday for a clearer picture. The defense sector was one of the few winners today in the equities, with the DFI gaining 0.55. These stocks were sold off hard even as the U.S. moved closer to war. They bounced on the invasion and then sank as the U.S. forces got little opposition in the initial phase. However, today we saw gains from contractors such as Northrop Grumman (NOC +$2.08), Lockheed Martin (LMT +$1.00) and L-3 Communications (+$0.35), following the possibility that a longer war will require more re-stocking of the U.S. arsenal. Traders watching the Semiconductor Index for indications of tech sentiment saw that group turned back from its exponential 200-dma (337), where it ended on Friday, as the selling hit all sectors, with the exception of defense. The SOX, which cracked its simple 200-dma (currently 313) last week, is now sitting between the two averages and the next move through either should give us an indication of which way the techs are headed next. The NYSE ran into some public relations problems on the nomination of Citigroup CEO Sandy Weill to sit on its board. After shaking his head at the effect that putting the CEO of a company that has had some problems with the SEC on the board of the NYSE, New York Attorney General Eliot Spitzer called NYSE chairman Dick Grasso and said he would publicly and vigorously oppose Weill's appointment. Weill eventually withdrew from consideration. We continue to see news driven markets and picking a direction will be extremely tough under these circumstances. As long as OEX 437-440 holds up, traders looking to capitalize on rising bullish percents can try buying the dip. However, as this afternoon's propane explosion highlighted, support/resistance levels may not hold up the way they would in a traditional market scenario and traders relying on them should be trading only high risk capital. ************ FUTURES WRAP ************ The Other Shoe Monday, March 24, 2003 By Vlada Raicevic Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 8214.68 -307.29 8514.82 8185.20 YM 03M 8190 -290 8404 8154 Nas 100 1047.10 -46.02 1068.46 1045.65 NQ 03M 1050 -44.50 1087.50 1047.50 S&P 500 864.23 -31.67 895.79 862.02 ES 03M 863.50 -29.75 885.50 860.50 Daily Pivots Contract S2 S1 Pivot R1 R2 YM 03M 7984 8065 8234 8315 8484 NQ 03M 1019 1030 1059 1070 1099 ES 03M 843 851 868 876 893 That flashing light was the upside explosion of the markets last week. It may have briefly blinded those who tend to remember that there two sides to the market. A strong down day across the board, with the only green on my screen coming from gold stocks. The day started with a large gap down with hardly any attempt to fill that gap. Instead, the initial move down was very strong, forming a large red candle, then, downside momentum virtually ended, and the rest of the day was spent dribbling down in tiny increments. Attempts to move up were barely noticeable, with the exception of one real attempt after three o’clock, but that ended without even breaking minor resistance at 868 area before sellers showed up again. Prices didn’t reach the day lows after that, but the lack of any buying has left the markets rather oversold on shorter term charts. Even though the markets are now a two-wheeled cart pulled by the horse of war news, we will attempt to see what the technicals say. No matter what the news, there will always be some technical levels that are extremely difficult to ignore. Although those can be briefly bypassed when extremely good or bad news hits, it’s something we can’t plan on. ES 270 Minute all Session Chart: Taken a turn to the bearish. Price has not broken below recent support areas (861, 857), so there is hope yet for a bounce from the selloff. Macd has rolled over and is threatening to break the centerline, but still has a chance to bounce off it. Fast stochastic is getting fairly oversold as well, but longer term stochastic has crossed and is starting to roll over. RSI has also broken below it’s recent trendline, lows, and the centerline. This chart shows a POTENTIAL breakdown, but is not yet complete. There is room to turn this around. ES Daily: Quick look shows that the break so far above the upper regression channel is not sustainable for long. Indicators show slight rolling over, but after the strong move up last week, they are not going to tell us much without at least two more days of data. For now, the extreme overbought aspect of the market is being allowed to reset. ES 60 Minute Chart: Shorter term shows all bearish aspect: Macd crosses centerline since it moved above, as has slow stochastic and RSI. ADX has crossed to bearish. Note however, that price is at a support point, and that CCI has pulled far away from it’s 13sma, so we’re overextened on the selling. Remember though, we stayed overextened on the upside for quite some time. Fast Stochastic is also bottomed, and is crossing up, telling us we have the chance for a bounce, but how far is the question. Use the centerline for this fast stoch as a way of seeing whether there is more downside left (if so, it will be repelled by the centerline, or close to it). NQ 270 All Session Chart: This broke today, and more so than the ES/YM, showing that the NDX is showing more relative weakness. Much of the commentary from the ES pertains to this chart as well, only with the breaks biting a little bit deeper. With three areas of support holding price, this has a good chance of bouncing. Note that the ADX did cross bearish, but that the low volume selloff today has that indicator going sideways, along with the RSI. While a bounce should be expected tomorrow, the strength of that bounce should give more insight into this longer term chart. NQ Daily: Today’s close erased four days of range in the NQ. Macd and fast stochastic are just beginning to cross over, RSI and CCI both are looking bad, with CCI looking to cross below its 13sma. It looks like 1034 and then 1020 are next unless the slide is halted. NQ 60 Minute Chart: We are at the bottom of the blue regression channel, which should provide some support. Macd broke the uptrend line and centerline but has stalled its descent. Slow stochastic is still pointing down but getting to a range where two more bars will get it to oversold status. CCI has room to go down more, but has no trend at the moment. In fact that is the undercurrent to this chart: trendless. After a strong move down to put indicators into bearish territory, the momentum just completely stalled out. On all charts, you can see that they tell us the same thing as price, hard selling out of fear or desire to lock in profits, then absolutely nothing. No hint of whether this big down day was a turn in the overall trend, or just some residue fear that was lingering behind the extreme bullishness. For bears, there may be hope the tide has turned, but nothing definite. For bulls, there is fear that the tide has turned. Which is it? From a purely technical view, we needed a strong pullback day to remove the extreme overbought conditions, and we got one. True, it was uglier than expected, and that is the reason we have the right to wonder if this could be a change in trend. Let’s not get ahead of ourselves though. No real test of support has been attempted. If this market weren’t trading on war emotions, we could say tomorrow may be a good day to judge how the market reacts to either additional selling, or a rebound from today’s selling. However, I fear that all we’ll see is the market reacting to whatever happens in Iraq overnight and during the day. ----------------------------------------------------------------- Renko Charts. These will be updated when necessary. Prices are at highs and lows. Daily Renko for ES: Daily Renko for NQ: Daily Renko for YM: This one is a little more difficult. I set the box size to 5 rather than 2, and I don’t display the huge climb from the recent rally (it would take up most of the chart). With the larger box size, the absolute numbers have a slightly larger margin of error. ******************** INDEX TRADER SUMMARY ******************** Making Predictions After a steady stream of discouraging news this weekend, traders woke this morning to higher gold prices and lower dollar values against the euro. European markets were already reacting to weekend developments, having dived 3% as they fell toward levels that would take the European markets down 3-6% by the end of their trading day. A televised address by Saddam Hussein, in which he named cities under attack by coalition forces, proved one catalyst to early market declines. A close examination of the televised address soon showed abrupt camera angle changes, indicating that the address had been taped and edited. Soon Pentagon observers noted that Hussein praised Iraqi commanders who had surrendered last week without offering a fight, leading many to speculate that the address had been taped prior to the war's opening. By the time Pentagon observers were making those remarks, market participants were learning of downed helicopters and increasing casualties in intense fighting near the southern Iraqi city of Nasiriyah. This news drove home the thought that the war might be more protracted than many had hoped. In addition, civil unrest in Nigeria added to worries about crude oil supplies, with Nigeria being the fifth largest supplier to the U.S. These worries propelled crude oil prices off their four-month lows from last week. Higher crude oil prices and a more protracted war led many to question the impact both would have on fragile economies. Market participants will have their first opportunity to study one effect tomorrow: President Bush will unveil his team's estimates of the war costs, speaking from the Pentagon. Current estimates are that the initial request will be for $70-75 billion. Not to be exceeded by European markets, many U.S. markets achieved losses larger than 3%, too, with the Dow Jones Industrials falling 3.60%, the SPX falling 3.52%, and the COMPX falling 3.66%. Volume patterns started out negative and stayed that way throughout the day, with down volume being 19 times up volume on the NYSE and 10.75 times up volume on the Nasdaq. Total volume was 1.26 billion on the NYSE and 1.3 billion on the Nasdaq. While total volume wasn't as strong as that on the rallies last week, many market pundits say that volume confirmation is not as important on declines as it is on rallies. What's next? Last week, a loyal reader wrote with a request that I provide an expected range for the OEX over the next month. I declined to do so last week until I had seen a pullback on the OEX. I wanted to see whether the OEX would touch the next light support and spring up again or whether it would tumble through support as easily as it had cut through resistance. Today proved that the decline would not be a shallow one with a quick bounce, but today's ending level still left some questions to be answered. It may still be too early to give a one-month prediction for the OEX, but let's see what can be determined. The first question to be asked is whether this is a bear-market rally or the beginning of a new bull rally. I wish I knew. Today's action led to a four-box reversal on the OEX P&F chart. While far from giving a new sell signal, this quick reversal does call into question the possibility that the OEX might give a high pole warning. This occurs when a column of "X's" rises above previous column by at least three boxes, which the OEX has done, and then reverses and gives back at least 50% of the rise, which the OEX has not yet done. Until the OEX reverses back into a column of "X's," however, the possibility exists. A similar potential can be discovered on the OEX hourly chart. OEX 60-minute chart: As those who have been reading the Market Monitor know, I've been watching a bearish rising wedge that began forming as the OEX moved off the March 12 low. As Meyers and Pring point out, bear- market rallies often take this shape, and a downside break of the formation usually results in a sharp fall. That break actually came on the 20th, but instead of the expected precipitous fall, the OEX climbed the outside the wedge. The precipitous fall came today. On the hourly chart, notice that the OEX plunge stopped just above the support level marked by the two blue lines and one green one. These lines represent important retracement levels. The top blue line marks the 50% retracement of Friday's move at 438.29. The green line marks the important 50% retracement of the October-to- December move at 437.87. That number is also almost exactly the 50% retracement of the July to August rally, so it has double significance. The lower blue line is the 38.2% retracement of the rally off the March 12 low. From looking at this hourly chart, then, we can conclude that the rising wedge was a bearish formation. We can conclude that today's drop was precipitous, but still the drop stopped just short of those important retracement levels. One theory suggests that since the rally off March 12 lows retraced a large proportion of the previous decline, the subsequent reaction might be shallow. That would suggest a 1/3 to 1/2 retracement of the recent rally before another attempt to rally. So far, then, here's what we've got: a new P&F buy signal, with a reversal down into a column of "O's" that may or may not give a high pole warning; a bearish rising wedge that's typical of bear- market rallies; a breakdown from that wedge and a precipitous drop; and a stop short of important retracement levels. Anyone noting the rise from the March 12 low would observe that the low was a higher low. What if the OEX stopped the current descent at these levels, and then moved above the January 475 high? That would produce both a higher low and a higher high on the daily chart. Would that preclude a continuation of the bear market? Not if the Nikkei is any guide. Jonathan Levinson has often mentioned the ferocity of the Nikkei's bear-market rallies, and I decided to take a look at the recent history of the Nikkei. In November, the Nikkei rallied from 8246.53 to 9251.83 in nine trading sessions. During that sharp rally, it paused once, forming a tweezer top--a bearish candlestick pattern--with prices completely retracing the previous day's large gains, then resumed the rally. The rally began from a slightly higher low and surpassed the previous November peak, creating both a higher low and a higher high. As it climbed toward that new relative high, it gave a new P&F buy signal, predicting a new upside target. It consolidated another couple of days and then fell again, bouncing at 8300 support a few times before falling to a fresh 20-year low in March. Along the way, it gave several new P&F buy signals that also failed to achieve their targets. One of those new signals pushed the Nikkei two boxes above its bearish resistance line before that buy signal failed, too. That November rally, as fierce as it was and with all the attendant bullish signs, did not signal the end of the Nikkei's bear market. If a bear-market rally can accomplish the Nikkei's 13% gain in nine trading sessions, achieving a higher low and a higher high, create a new P&F buy signal, and then fail, only to lead the Nikkei into new multi-year lows, we can't yet discount the possibility that our markets could do the same. So how am I going to provide that range for the loyal reader? Let's turn to two other indices for a hint. In March, the Dow Jones Transports fell to new multi-year lows, but the Dow Jones Industrials did not. What happens when the two averages don't confirm each other? Which is right? On page 39 of TECHNICAL ANALYSIS EXPLAINED, Martin Pring asks the same question when explaining Dow theory. His conclusion is that "[s]ince it is always assumed that a trend is in existence until a reversal is proved, the conclusion should be drawn at this point that the Transportation Average is indicating the correct outcome." When would that conclusion be proved false? When both the Dow Jones Industrials and Transportation Index surpass previous peaks, giving a new Dow theory buy signal. That would require a move over 2425.75 in the Dow Jones Transportation Index along with a confirming move over December and January peaks in the Dow Jones Industrials. Pring cautions that the "movement of one average unsupported by the other can often lead to a false and misleading conclusion." He also cautions that signals can come late. Today, the transports fell more than 90 points, below 2190 support, with a bearish daily candle that hints at downside more than it does of a continued rally. Now we have an hourly chart that offers the possibility that the recent rally was a bear-market rally, but did not fall to levels that confirm that likelihood. In the behavior of the Nikkei, we see that markets can form higher lows, create new P&F buy signals, rise to a higher relative high, and yet still continue a bear market. In the behavior of the transports, we see a lack of confirmation of the higher high shown by the industrials, along with Pring's assertion that until both make new relative highs, the presumption must remain that the transports are right and the bear market continues. A scan of the OEX, SPX, DJI, COMPX, and SOX show all turning down from challenges of their exponential 200-dma's, with oscillators looking toppy or rolling as the failures occur at these important moving averages. Markets that appear to be turning down can turn back up, however, and the oscillators can turn up along with them. Ask anyone who tried to enter bearish trades last week on seeming breakdowns, after which the oscillators promptly redrew themselves and headed up again. We still have no answer for the loyal reader. Let's look next at the OEX weekly chart. I'm using a log chart rather than a linear chart, because many technicians feel that a log chart is preferable when a big movement has been encompassed. OEX Weekly Chart: Note the descending blue line that is the long-term descending trendline. That descending trendline has not yet been crossed, which means we must conclude that the long-term trend is still down. On the linear chart, Friday's rally moved the OEX slightly above the trendline, with today's prices bringing it back below the trendline again. On this weekly chart, note also the horizontal red lines that mark the 385-487 trading range that has marked the OEX's movements in the last months. You've seen this chart before, but within that trading range, I've also marked out a neutral wedge that's forming on the OEX. Either the range or the neutral wedge can be continuation patterns or reversal patterns. Here's the tough part. Until the OEX breaks out of that trading range, we won't know which they are. So, here's my prediction for this month. The neutral wedge is narrowing down toward its apex. With that narrowing, I do believe the OEX will break out of that wedge within the month. This means that the wedge will not likely define a range for the OEX for the next month. A breakout in either direction might send the OEX to test the boundaries of the marked-in-red trading range in quick order, which means that the OEX should see a test of either 385 or 487 within the next month. Which is it going to be? I don't know. Sorry, loyal reader, but the direction is not predictable with consolidation patterns. Since the OEX entered this consolidation pattern while descending, the presumption is that the pattern is a continuation pattern. Therefore, I feel safer suggesting a 487 or even a 475 (January high and location of descending trendline) high for the OEX over the next month than I do suggesting a low. My best guess at this point is that the OEX will break out of the neutral wedge to the downside and then retest the lower end of the trading range. However, we should have better evidence as the week progresses. A move below those retracement levels shown on the OEX 60-minute chart would probably next send the OEX down to test the 50% retracement of the rally off the March low. That retracement would come at 428.30, and a failure there would probably propel the OEX down to test that lower supporting line of the neutral wedge. That may all happen this week. The alternative version--a push up through the neutral wedge and a test of the upper end of the OEX trading range and the descending trendline--is within reach this week, too. Many of the characteristics of the OEX chart are apparent on other index charts today: bearish candlestick formations and toppy- looking oscillators on daily charts. So as not to neglect the other indices or to disappoint readers who look forward to Jeff's updates on pivot analysis, I've included calculations for daily pivots for the major indices. I note that Jeff makes his calculations from Stockcharts.com, which sometimes includes slightly different high, low, or closing figures than does Q- charts. To maintain uniformity, I've made these calculations using Stockcharts.com's information. Please check Jeff's weekend update for weekly and monthly pivots, support, and resistances, as those will not have changed. Consider verifying this information. SPX: S2 840.24 S1 852.24 Pivot 874.01 R1 886 R2 907.78 OEX: S2 427.38 S1 433.52 Pivot 444.98 R1 451.12 R2 462.58 DJI S2 7975.28 S1 8094.98 Pivot 8304.90 R1 8424.60 R2 8634.52 NDX S2 1030.97 S1 1039.03 Pivot 1053.77 R1 1061.83 R2 1076.57 COMPX S2 1352.87 S1 1361.33 Pivot 1376.87 R1 1385.33 R2 1400.87 Please note that other quote services show differing highs for both the OEX and the SPX today. While I've utilized the Stockcharts.com numbers in the above computations, these are the computations that would result from using 890.91 and 453.66 SPX and OEX highs of the day shown by other quote services: SPX S2 843.50 S1 853.86 Pivot 872.39 R1 882.75 R2 901.28 OEX S2 429.22 S1 434.45 Pivot 444.05 R1 449.28 R2 458.88 ************************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 ************************************************************** **************** WEEKLY FUND WRAP **************** Mixed Results for Stocks and Funds U.S. stocks finished the week with their eighth straight session of gains Friday as U.S. troops thrust into Iraq and a "shock and awe" air campaign fueled hopes for a quick end to the war. Over the 5-day period through March 21, stocks as measured by the S&P 500 index, rose by 7.5%, putting the benchmark up 2.2% on a year- to-date basis. Other U.S. indices were also higher, such as the Wilshire 5000 Total Market Index, which climbed 7.2% on the week. European stocks advanced 5.8% in U.S. dollar-equivalent terms as the pacific stock index returned 3.5% for the 5-day period. The returns of the developed market indices weren't as strong as the U.S. market due partly to currency translation (stronger dollar). Emerging market indices were positive, but weaker than developed markets abroad. As traders and investors poured money into stocks, the U.S. bond market took a pounding. For the week, the Lehman Aggregate Bond Index declined 1.3%, while the intermediate- and long-term fixed income indices tumbled even further. Those indices dropped 1.9% and 3.4%, respectively, over the most recent 5-day period. U.S. bond market declines spilled over into the international markets. The Fed opted to leave interest rates unchanged, taking a wait-n- see approach. In all three sectors - U.S. equity, international, and fixed income - mutual funds followed suit. U.S. Equity Fund Group Week YTD +7.5% +2.2% Vanguard 500 Index Fund (VFINX) +6.6% -1.2% Vanguard MidCap Index Fund (VIMSX) +6.2% -1.5% Vanguard SmallCap Index Fund (NAESX) +7.2% +1.8% Vanguard Total Stock Market Index Fund (VTSMX) +7.0% +1.9% Lipper Large-Cap Core Equity Fund Average +5.7% -0.6% Lipper Mid-Cap Core Equity Fund Average +6.1% -2.5% Lipper Small-Cap Core Equity Fund Average +6.6% +1.3% Lipper Multi-Cap Core Equity Fund Average +6.3% +6.5% Lipper Science & Technology Fund Average Don't look back, but technology sector funds are now up 6.5% for the year-to-date period through March 21, including last week's 6.3% average gain. But, the advance last week included all U.S. economic and capital sectors. Several funds posted double-digit percentage returns for the week, led by the ProFunds UltraDow 30 ProFund, up 17.2% and the ProFunds Internet UltraSector Fund, up 17.2% as well. So, from Dow stocks to Internet stocks, the U.S. market was broadly higher. Among U.S. stock funds with assets of $500 million or more, last week's highest performer was Neuberger & Berman's Focus Fund, up 10.7%. Other notables included the "tech-heavy" White Oak Growth Stock Fund (+9.7%), Ariel Appreciation Fund (+9.3%), and the PBHG Clipper Focus Portfolio (+9.1%). Several more funds finished the week in the 8%-9% range. Large-cap growth funds were the top performers in terms of style, averaging a 7.2% weekly gain, per Lipper. At the opposite corner of the Morningstar style box, small-cap value funds, lagged their large-cap growth peers. Small-cap value funds had a 5.9% gain on average for the week. Still no one was complaining, perhaps only those who missed the boat trying to time the market. Last week's surge proved one point, that the market often move quickly to the upside and if you're not on board ("invested in the market"), the ship will leave you behind. As bad as the U.S. market has been this year, last week's advance put the S&P 500 index into the green on a year-to-date basis. As good as the investment-grade bond market has been this year, last week's decline essentially erased all of its YTD price gain. So, what a difference a week can make in terms of the returns you may actually receive. International Equity Fund Group Week YTD +5.2% -4.0% Vanguard Developed Markets Index Fund (VDMIX) +3.6% -1.4% Vanguard Emerging Markets Index Fund (VEIEX) +5.1% -3.8% Vanguard Total International Stock Index (VGTSX) +4.6% -5.0% Lipper International Fund Average +2.4% -3.1% Lipper Emerging Markets Fund Average -4.1% -16.1% Lipper Gold Fund Average Foreign bourses moved higher along with U.S. stocks, but returns in "dollar-equivalent" terms weren't as strong. The U.S. dollar rose against major foreign currencies last week, as oil and gold prices fell. The average international equity fund returned 4.6% for the week, per Lipper. Only a handful of international funds returned more than 10% last week, unlike U.S. equity funds, where weekly returns were as high as 17%. Last week's best performers included ProFunds UltraJapan ProFund, up 12.0%, followed by Rydex Large-Cap Europe Fund, which ended the week 11.4% higher. Dessauer Global Equity Fund notched a 10.4% weekly return for investors. So, foreign returns were up strongly in both Europe and Japan. Gold funds lost 4.1% on average and are now down 16.1% on average since December 31 per Lipper. The group's largest fund, Fidelity Gold Fund, has a negative YTD total return of 18.0%. U.S. Fixed Income Fund Group Week YTD -0.6% +0.3% Vanguard Short-Term Bond Index Fund (VBISX) -1.9% -0.1% Vanguard Intermediate-Term Bond Index Fund (VBIIX) -3.4% -0.7% Vanguard Long-Term Bond Index Fund (VBLTX) -1.3% +0.1% Vanguard Total Bond Market Index Fund (VBMFX) -0.4% +0.4% Lipper Short Investment-Grade Fund Average -1.1% +0.5% Lipper Intermediate Investment-Grade Fund Average -1.4% -0.4% Lipper U.S. Government Fund Average -1.3% +0.3% Lipper Corporate A-Rated Debt Fund Average +0.6% +5.2% Lipper High-Yield Fund Average As traders and investors dove back into stocks, safe-haven bonds posted sharp losses. Vanguard Long-Term U.S. Treasury Fund fell by 3.6% for the week. Other Vanguard long-term bond funds ended the week down more than 3% also. For instance, the $3.8 billion Vanguard Long-Term Corporate Bond Fund posted a 3.2% weekly loss. Real-return ("inflation-indexed") bond funds were also hit hard. PIMCO Real Return Fund lost 2.9% over the week, while Vanguard's Inflation-Protected Securities Fund posted a negative 3% return. Low-quality ("high-yield") bond funds continue to do well versus investment-grade funds. High-yield bond funds rose 0.6% for the week on average, per Lipper, while the average intermediate-term investment-grade bond fund lost 1.1%. The high-yield fund group is now up 5.2% on average this year, Lipper shows. Among bond funds with assets of over $500 million, the week's top performers were Fidelity Adviser High Yield Fund (1.7%), Fidelity Capital & Income Fund (1.6%), and Pioneer High Yield Fund (1.1%). Federated Government Ultrashort Fund was the top performer among U.S. government bond funds. It was essentially flat on the week. International Fixed Income Fund Group Week YTD -1.8% +0.8% Lipper Global Income Fund Average -2.5% +0.1% Lipper International Income Fund Average With the U.S. dollar stronger last week, international bond fund losses were steeper than comparable U.S. bond funds. Per Lipper, the average international bond fund lost 2.5%, pretty much giving back all of its reported year-to-date gains. The group's largest fund offering, the $1.1 billion T. Rowe Price International Bond Fund had a negative 2.7% weekly return to lead the group lower. The American Funds' Capital World Bond Fund was 2.6% lower. Balanced Fund Group Week YTD +3.7% +1.2% Vanguard Balanced Index Fund (VBALX) +4.1% +0.8% Lipper Balanced Fund Average Balanced funds recorded a 4.1% average weekly return, per Lipper, slightly better than the Vanguard Balanced Index Fund, which uses the Wilshire 5000 index for its 60% equity allocation performance benchmark. Many balanced funds invest in large-cap stocks, which as a group, outperformed the other capital sectors of the market. The country's oldest traditional balanced fund, the $18.9 billion Vanguard Wellington Fund, produced a 4.2% weekly return while its more income-oriented sibling, Vanguard Wellesley Income generated just a 1.1% weekly gain. So, the more exposure the balanced fund had to bonds, the more it lagged its peer group. Fidelity, Dodge & Cox, Hartford and T. Rowe Price's balanced funds all had weekly total returns of 4% or better. Money Market Fund Group Yield 1.04% Vanguard Prime Money Market Fund (VMMXX) 0.75% iMoneyNet.com All Taxable Money Market Fund Average The iMoneynet.com all-taxable money market fund average held at 0.75% for a second consecutive week. The highest 7-day (simple) yield among "prime-retail" money market funds remains the PayPal Money Market Fund at 1.28%. Mutual Fund News Earlier, I said what a difference a week makes. And, now I have to say what a difference a day makes. In Friday's session, Wall Street surged higher as investors hoped for a quick end to war in Iraq. However, events over the weekend dashed hopes that the war will end quickly, sending stocks lower in today's (Monday's) Wall Street session. So, today we're seeing a reversal of last week's fortunes with stocks getting pummeled, oil prices moving up over a dollar per barrel, and investors flocking back into safe-haven bonds. According to Morningstar, Putnam Investments' shake-up continues. The struggling Boston-based fund family announced changes to its research personnel on Friday, which Morningstar says will likely bring changes to the way their more-aggressive growth stock funds are managed. The article states that many of Putnam's pro-growth funds have suffered deep losses, causing shareholders to head for the exits. The Vanguard Group announced that Ian MacKinnon will step down as managing director of the company's fixed-income group on June 30, 2003. According to Morningstar, MacKinnon had been in that role for 21 years. Assuming the lead fixed income role will be Robert Auwaerter, who has managed the Vanguard Short-Term Corporate Bond Fund for almost 20 two decades. In addition to this change, the Vanguard Group also appointed index-guru, Gus Sauter as their new Chief Investment Officer. For more information on these and other mutual fund stories go to the Fund Times section of the www.morningstar.com website. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************** TRADERS CORNER ************** Going Against The Grain by Mark Phillips mphillips@OptionInvestor.com Over the past several months, investors have shown their conviction that they expect the Iraq war to be a short-term affair. Additionally, the price action in the Defense sector (DFI.X) has been ugly enough to show that expectations are that regardless of the length of the conflict, any additional spending by the military is unlikely to have a material impact on the bottom lines for the major defense contractors. This reality is shown clearly in the chart of the DFI index, which fell to an all- time low near $410 on March 12th, the day that the broad market bottomed. Weekly Chart of the Defense Index (DFI.X) You see, the market is an efficient mechanism for pricing in future risks and growth potential for companies in any sector of the economy. While the DFI index wasn't created until after the September 11, 2001 terrorist attacks, the price action between its creation and the beginning of this year showed that the $500 level was an important line in the sand. When the index broke down below that level in February, it showed that market participants were "pricing in" the collective belief that no matter what happened in Iraq, it wasn't going to be able to provide the revenue growth necessary to support valuations above that level. Drilling down to the daily chart level, we can see that the DFI index rebounded off its March 12th low with the rest of the market, quickly recovering back near the $465 area. As the war effort got underway, that bounce began to fade last week, showing that investors were still staying away from this area of the market. That tells us the lion's share of that rebound was confined to short covering. Daily Chart of the Defense Index (DFI.X) What I believe has happened in this sector over the past 18 months is the pricing in of significant new business in the wake of the 9/11 attacks. That "new-business" premium has been methodically removed from the group since the DFI index topped out last April. While this argument is hard to justify just from the charts of the DFI index (due to the limited historical data), a quick look through the weekly charts of some of the major Defense contractors would seem to indicate the concept has merit. Lockheed Martin (NYSE:LMT) recently bottomed near $40, and it is interesting how that price level had been firm resistance for the stock for the six months leading up to the 9/11 attacks. After breaking above that level when trading resumed in late September, LMT soared to north of $70. That was the terrorism premium, which now appears to have been completely removed from the stock and it is now trading on its own merits near the $46 level. General Dynamics (NYSE:GD) had broken through the $60 resistance level and was confirming that level as support when 9/11 occurred. The ensuing action in the Defense sector launched the stock on a strong rally that culminated last summer with the stock trading north of $110. Sliding down the razor blade of life, the stock first plummeted to the $80 level on concerns over its Gulfstream jet business and then when the DFI index broke down earlier this year, GD again broke south, satisfying its price target of $50 on March 12th. I covered this stock in some detail in last weekend's LEAPS column, as it is our new LEAPS Call candidate. Further details about the price objective can be found there. Note that by trading below $60, GD has now eliminated any terrorism premium that previously existed in the stock. How about one more? Northup Grumman (NYSE:NOC) is a current put play on the OI playlist. The stock bottomed a couple weeks ago near the $79 level (which just happens to be its PnF bearish price target) and then rebounded right to resistance with the rest of the defense sector. That rebound didn't last long, as the stock plunged again last Friday, hitting an intraday low just above $80. Look at the stock's price action just before the 9/11 terrorist attacks, and you can see it consolidating in the $78-82 area. The ensuing rally that began in the fall of 2001 took NOC all the way up to $135 before the excitement started to fade. Once again, we have a defense-related stock that has made a round-trip from the pre-9/11 lows to euphoric highs and back to where it started that journey. Am I trying to make a case for another stellar rally in this group over the next few weeks as the war progresses? No. What I am noticing though, is that this group of stocks (among others in the sector), are probably very close to fair and reasonable values, at least based on current expectations. Both NOC and GD have recently achieved bearish price targets. Are they likely to rebound strongly over the next couple weeks? I sincerely doubt it. I'm not trying to make a case for a short-term trade here. The PnF charts are still painfully ugly (at least to the bulls) and some significant consolidation/repair needs to take place before a significant price advance will be in the cards. What I am noticing though is that the next several weeks and months could have this group consolidating near its recent lows. There has been a lot of technical damage done in these stocks and it is time for the repair to begin. Patient investors that recognize the value can now start to look for that bottom to solidify and can then take advantage of near-term price weakness to establish long-term positions. I don't like to use the term "reasonable valuation" without some sort of justification. So let's step away from the technical aspect for a few minutes and look at some basic fundamentals. GD - After the recent plunge, GD is trading at a P/E ratio of 11, with a dividend yield of 2.25%. While not super cheap, the stock is looking like a pretty decent value, especially near its recent lows at $50. NOC - The P/E ratio here is a bit higher, but at 14.4, it certainly isn't expensive. Throw in a 1.9% dividend yield and I could make an argument for taking a small position back near the $79-80 level. LMT - Of the 3 stocks we've discussed here today, LMT is by far the least appealing from a fundamental standpoint. With a P/E ratio over 35 and a dividend yield just barely over 1%, I would classify LMT as one of the more expensive stocks in the sector. One other stock that is worth considering is Raytheon (NYSE:RTN), as its valuation is more in line with NOC and GD. The P/E ratio is 15 and the dividend yield is a solid 2.9%. Add in the fact that its price action has been similar to that of the other stocks we've talked about, and it is at least worth a look. RTN just rebounded from the $24 level, which just happens to be the stock's low prior to launching as high as $45 in the wake of the 9/11 attacks. Once again, a round trip. While I think these stocks may prove to be good long-term investments if entered near their recent lows, that's only part of my motivation for today's discussion. You see, while I've really only scratched the surface here, this is a typical starting point for a process of discovery when looking for under-appreciated values. The Defense sector makes a great talking point, as it is so clearly out of favor right now. I expect that to change in the months ahead. But of course, I could be all wet. Maybe we'll come back to this issue a few months down the road and see if there was any merit to the idea. More importantly though, hopefully this gives you a glimpse of the thought process I go through in trying to identify groups of stocks where most of the risk has been taken out. Then it is just a matter of looking for some improving price patterns, new PnF Buy signals and even developing relative strength. This can be done with any area of the market. The Defense sector is just a great example that we can all relate to right now, with the hostilities currently going on in Iraq. Do a little digging and there's no telling what other gems you might come up with. Happy Hunting! Mark ************************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 ************************************************************** *********************** SWING TRADER GAME PLANS *********************** A Sign From Below I wrote last week that we had yet to see signs of weakness in the current rally. That sign came through loud and clear today. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************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 ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Monday 03-24-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: Put - OTEX Updated on the site tonight: Market Posture: You Mean There's Still a Downside Market Watch: Big Stumble ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ 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 OF THE DAY - PUT ********************* OTEX - Open Text Corp $27.27 -0.94 (-0.94 this week) Company Summary: Since 1991, Open Text Corporation has delivered innovative software that brings people together to share knowledge, achieve excellence, deliver innovation, and enhance processes. Its legacy of innovation began with the successful deployment of the world's first search engine technology for the Internet. Today, as the leading global supplier of collaboration and knowledge management software for the enterprise, Open Text supports six million seats across 4,500 corporations in 31 countries and 12 languages throughout the world. As a publicly traded company, Open Text manages and maximizes its resources and relationships to ensure the success of great minds working together. (source: company release) Why We Like It: It was tough to find weakness in today's market, with the Dow gaining almost 3% and the COMP jumping through its 200-ema and adding 1.3%. However, one sector that was noticeably weak was the software sector. The GSO dropped more than 2% after a profit and revenue warning from Intuit (INTU), which was taken to the woodshed with a $12 loss. That warning was ominous, as the company said, "We're disappointed to see a sluggish economy worsening in the past few weeks with a further decrease in customer spending in all our categories. This is not an issue with just one of our businesses -- all our businesses have been affected." This is not good news for software makers that had enjoyed a nice gain last week, but already had begun to show cracks the past few days. OTEX was one of those stocks that seemed to find a top and had already begun to roll over from previous resistance at $30. The stock made its most recent run at $30 in late February, but saw its last bounce end at $29 over the past few days. It has been setting a series of lower highs the last three sessions (today's high at $29.67 was a bad tick) and stochastics have rolled over into a sell signal from overbought territory. The most recent analyst rating came from Fulcrum on February 27. The firm reiterated its sell rating with a $13 price target, citing OTEX's acquisition of Corechange. It said the acquisition was one with a low quality of earnings and unsustainable growth. It also said OTEX trades at a premium to more established companies that won't be impacted by increased competition in the collaboration space, and said that OTEX shares justify a discount to peers because its 2003 estimates are at substantial risk. If INTU was the first domino to fall, then based on that rating, OTEX's future could certainly be tenuous. Our pick is based more on relative weakness in the stock and the sector and the rollover from resistance, than an analyst recommendation, but in a world in which most analysts are pumping stocks that are weak, it's encouraging for bears to see some honesty. We like entries in the play below today's low of $28.15, with a trigger of $27.98; but more conservative traders will want to wait for a break below the 21-dma (currently $27.68), where the stock bounced on Thursday. Our initial target will be a move to $25, where there is strong support from January and the beginning of the march. However, a move below that level could be seen as a head and shoulders breakdown and would likely lead to a test of the 200-dma (currently at $23.18). Our stop will be placed at $30.55, just above recent highs. Why This is our Play of the Day Investors were hit with a dose of reality over the weekend, as it became clear that the war with Iraq would not be as quick or clean as many had hoped. That sent the broad market tumbling at the open and our OTEX play went with it. Satisfying our $27.98 trigger shortly after the open, the stock provided a nice ride for aggressive traders that entered on that breakdown. After taking out last week's lows at the open, there just wasn't any buying interest in the stock, as it drilled lower throughout the day, ending at its low. OTEX is now under its 20-dma ($27.51), and with daily Stochastics now in a full bearish roll, the play is definitely looking good. Traders looking for a more conservative entry will now want to look for a failed rebound below the $28.10 level, the bottom of today's gap. OTEX is now resting just above its 50-dma ($27.11), and a break below that level should have next support at $26 in play, enroute to our $25 target. BUY PUT APR-30*QFT-PF OI=222 at $3.40 SL=1.75 BUY PUT MAY-30 QFT-QF OI= 25 at $3.90 SL=2.50 Average Daily Volume = 306 K ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** MARKET POSTURE ************** You Mean There's Still a Downside To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_032403.asp ************ MARKET WATCH ************ Big Stumble To Read The Rest of The OptionInvestor.com Market Watch Click Here http://members.OptionInvestor.com/watchlist/wl_032403.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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