The Option Investor Newsletter Tuesday 03-25-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Longer and Harder Futures Markets: Underlying Bullishness Index Trader Wrap: Correlations abound for institutional buying Market Sentiment: Buying the Dip Weekly Manager Microscope: Schwab Select List: Balanced Funds Updated on the site tonight: Swing Trader Game Plan: The Cat's Alive! Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 03-25-2003 High Low Volume Advance/Decline DJIA 8280.23 + 65.60 8337.72 8180.72 1.61 bln 2323/ 916 NASDAQ 1391.01 + 21.20 1400.14 1369.32 1.41 bln 2042/1112 S&P 100 444.77 + 5.10 447.56 438.63 Totals 4365/2028 S&P 500 874.74 + 10.51 879.87 862.59 W5000 8279.27 + 98.80 8320.11 8169.61 RUS 2000 371.79 + 4.54 372.22 367.01 DJ TRANS 2202.07 + 18.70 2208.13 2170.38 VIX 32.66 - 2.54 35.14 32.50 VXN 45.00 - 1.36 47.32 43.69 Total Volume 3,313M Total UpVol 2,727M Total DnVol 491M 52wk Highs 149 52wk Lows 120 TRIN 0.55 PUT/CALL 0.94 ************************************************************ Longer and Harder Rumsfeld said the war could be much longer and harder than previously thought and cautioned Americans from expecting a quick resolution. The markets rallied on the news, which showed that severe oversold conditions are more important to traders than heavy resistance slowing the troops. The news of potential popular support against Saddam in Basra rallied the markets but news of a revolt in the US Senate tanked them again. Dow Chart - Daily Nasdaq Chart - Daily The morning started off weak with mixed war news causing volatility in the futures. After moving sideways for an hour the bargain hunters from Monday's crash begin to surface and shorts began to cover. This move was delayed because of the announcement of the Consumer Confidence at 10:AM. The Consumer Confidence fell to a decade low of 62.5 and down from 64.8 in February. The cutoff date for this survey was March 18th so all responses were before the start of the war and the negative news about prisoners and causalities. This would indicate that the next reading could be even worse. The current conditions and future expectations components were both down. The expectations component fell to 62.5 and was the lowest level since January 1991. Does that date sound familiar? This was the first Gulf war. Buying plans for major appliances and autos fell to the lowest levels since 1996. 47% of the respondents thought the stock market would move lower over the next 12 months. Chain Store Sales rose slightly at +0.1% and it was the fourth consecutive weekly rise. Sales are still at or below plan for most stores but rising as milder weather for most of the country brings consumers out of their houses. Existing Home Sales fell to 5.84 million from the January pace of 6.10 million units. The war along with unemployment is offsetting the low interest rates. The housing sales rate fell -4% from January but is still a very robust rate given the conflicting economic and sentiment factors. Since mortgage rates are not likely to go much lower, existing home sales and new home sales are fighting an uphill battle. An end to the war could actually bring higher rates and a steeper hill for sales to climb. The NYSE terminated the access privileges for Al-Jazeera News claiming they were limiting access to the exchange due to security reasons. Unofficially the reasons were thought to have been due to the network's war coverage. The NYSE said the number of accredited TV stations needed to be reduced and they were limiting access to those with responsible coverage of business issues. Early in the day there were reports of an uprising in Basra against Saddam's troops with towns people fighting the Iraq troops for control. The sudden prospect of a rapid takeover of this major city spiked the market off its lows. Late news tonight has the Iraq military shelling Basra civilians with mortars and artillery. There was not much news from the war due to a major sandstorm in the Southern Iraq region. This shut down all low flying air support and gave the US time to perform maintenance on their gear and let supply convoys catch up with the main units. Troops with their vision cut down to mere feet were free to hunker down under cover and catch up on some sleep. This is only a temporary situation. With the lead elements only 60 miles from Baghdad there is going to be even stronger fighting soon. The Republican Guard is between the coalition and Baghdad and there is repeated intelligence that they have been authorized to use chemical weapons when the main fight starts. There are also 25-45,000 Fedayeen hard liners roaming southern Iraq using a hit and run strategy as well as using force to keep regular Iraqi army units from surrendering. The Republican Guard and the Fedayeen are not going to surrender and they are going to fight like junk yard dogs when cornered. Logic and overwhelming force is immaterial as these groups have no place to go when it is over. If Saddam is not in power their protection to rape and plunder will be withdrawn and life could take on a new meaning. This group was formed by Saddam's son after the first Gulf war to keep the civilians in line. They recently beheaded 200 women for infidelity and put their heads on poles around the country as warnings to others. These are going to be wolves nipping at the side of the columns while the Republican Guard will be bringing the heavy weapons to bear on the front. Fortunately air power will eventually eliminate the Republican Guard but the thousands of Fedayeen, which were recruited from jails and radical factions, will not be so easy. There is also news that up to 5,000 Iraqis who had fled Iraq to avoid Saddam's rule are now coming back into Iraq to fight AGAINST the coalition and for Iraq. They don't like Saddam but they feel Iraq should not be ruled by the coalition. Stockpiles of thousands of brand new Iraqi chemical weapons suits have been found and recent positions overrun have been stocked with gas masks. Once a chemical attack begins things are going to get much worse for the war sentiment. The market was struggling at the highs of the day and the opening levels from Monday at Dow 8335 and Nasdaq 1400 when news of a Senate revolt hit the markets. The Senate voted to cut the presidents tax cut package to 50% of the requested amount of $712 billion. The limit of $350 billion was seen as a significant limit to the economic recovery and a hit for the stock market. The package as presented was reported to have the potential for a +15% market bounce if enacted. Does cutting it in half only mean we will get a +7% bounce? If so then the market will eventually discount whatever was already priced in when the House and Senate gave tentative approval last week. That approval was part of the motive force for last weeks rally. The problems for the market are not over. We gained +1100 points in eight days and gave back -242 this week. The Nasdaq rallied back to 1400 and strong resistance again. This was the level that has held for a long time before last Friday's major move. The failure at this resistance again is crucial and shows that sellers are still there. The Nasdaq futures are +3.50 tonight despite RHAT missing estimates by a penny and PLAB cutting its workforce by 10% to 12%. This shows tech bulls are also alive and well. There is strong support at 1370 and strong resistance at 1400. The Dow is more fluid. There is strong resistance at 8330 and strong support at 8130-8175. The bulls appear ready to sit back and nibble when the averages retreat and the bears have no conviction to press the attack. The recent rally has taken the fight out of the bears and the potential for further gains on any unexpected good news remains. They do not want to step in front of the gun even if they think it is empty. This leave us with a stalemate. There is no concrete reason for a continued rally. Economics are terrible. Earnings are terrible. The war is likely to get worse before it gets better but everybody is conditioned to think there is still going to be a rally in our future. Why or when continues to be the question and of course how far. Just getting back to the recent highs at 8500 is going to take a huge effort and there are no shorts left to squeeze. The bears may be getting ready to hibernate after a three year run. However, the bulls are still bloated from their recent feast and are not ready for another romp. The result is a likely stalemate until the end of quarter window dressing begins. That buying could begin at any time. What is it going to be? War jitters, chemical attacks, hundreds more casualties or the wrath of fund holders against funds not fully invested. This is going to be another confusing week governed by news and greed. Sounds like business as usual to me. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Underlying Bullishness Tuesday, March 25, 2003 By Vlada Raicevic Daily Settlement Numbers 4:15pm ET Contract Last Net High Low Dow 8280.23 +65.55 8337.72 8216.85 YM 03M 8252 +62 8312 8122 Nas 100 1066.57 +19.47 1075.43 1047.06 NQ 03M 1065.50 +15.50 1079 1050 S&P 500 874.74 +10.51 879.87 862.59 ES 03M 872.25 +8.75 879.25 856 Daily Pivots Contract S2 S1 Pivot R1 R2 YM 03M 8044 8157 8234 8347 8424 NQ 03M 1036 1051 1065 1080 1094 ES 03M 846 861 870 884 893 As stated yesterday, the selloff was a little extreme on Monday, and a reaction bounce was to be expected today. Since we are keeping an eye on war news these days, the morning did not give us anything to rally the markets: mounting resistance from Iraq, casualties, and the State Department saying that the war hasn't really begun yet, and so on. It was not surprising then, that the markets rallied hard on such downbeat news, since the markets have, except for Monday, been rallying on any news, good or bad. Once again we blew through a couple lines of resistance as if they didn't exist: first through 868, then a slight pause before blowing through 870, and so on, at one point looking like it would go through 879-880 area. However, this is where the run stalled, and we spent several hours moving in a small sideways range with 875.50 holding as support. One more attempt at breaking the highs was met by selling, and we broke below the sideways range to bounce off a rising trendline at 867, when buying again pushed the ES back to the 875 area. The NDX and SPX outperformed the Dow, and even though the SOX was weak, the BTK took up the slack and helped the NDX post a 2% gain. Now we have the setup for getting some answers. We had an extremely strong push up by the markets last week, followed by a strong selloff on Monday, and then today we recovered some of that selloff, but not enough to completely dismiss the selloff as an over reaction. Keep in mind that this week is the end of the first Quarter. Fund managers have a strong interest in having their portfolios remain strong so that all those quarterly statements sent to their customers can make everything seem rosy. If they had their way, we would either continue up, or just move sideways here to hold on to the great gains that stocks have seen in the past couple weeks. However, what the fund managers want could be hard to keep if we get a string of very bad news from the war front. Keeping these things in mind, let's look at the charts. ES Pivot Chart: You can see we did break above the Pivot, but R1 held us back. A break below the Pivot could not hold and we moved back above it to be repelled by the Pivot/R1 Centerline. The big thick red line is a trendline of the S2 Pivot areas, I'm tracking this to see if drawing trendlines along the Pivot chart S2 and R2 areas are a worthwhile task. ES 270 Minute All Sessions Chart: The Macd is well below the centerline, and with todays move to the upside, it has crossed and turned up. How it acts at the centerline and the downtrend line will be key. Short term Stochastic has turned up but is at the centerline, and needs to cross it in order to look for more upside, while the longer term Stochastic has slowed its decline, it hasn't crossed up yet, and is also below the centerline. RSI turned up from the lows, but is still below the recent range. ADX has crossed over bullish after crossing bearish, and has moved above the downtrend line for D+, and while other indicators are still bearish with a slight bullish leaning, D+ is the one true positive note here, showing us that buying continues to come into the market. You can see how 879.50 is resistance, and 857.50, then 852 are support. Centerline of regression channel is currently at 849 area. ES 60 Minute Chart: You can see how the attempt at yesterday's gap fill failed and rolled over to the bottom of the regression blue regression channel where it found support. Macd is neutral, with the attempt to cross the centerline failing, but not rolling over; fast Stochastic is rolling over and slow Stochastic is in bearish territory. RSI is also completely neutral at the centerline, and the CCI moving average has not turned up yet (green line). So, we have a neutral state, which is also shown by the price chart where ES closed roughly halfway between yesterday gap down open, and the lows from yesterday and today. ES Daily Chart: As expected, the rise after yesterday's decline has not done much to change indicators from their continuing bullish character. I drew a new trendline along the tops of the last two peaks, and any additional rise should first stop at this trendline which is currently at 892, but dropping each day. ES Fibonacci: Looking at the fibonacci retrace, we see that the .382 retrace is close to horizontal support at 857, so 852-854 is an area to watch on any additional selling. A break of this area has .500 at 842 with horizontal support at 840. NQ 270 Minute All Sessions Chart: The strong area of support from trendline, regression channel, and horizontal support was broken but price did not close below this area. A bounce took it to horizontal resistance and pulled back. Even though NQ outperformed the ES/YM today, the indicators look quite similar to the ES due to NQ having a harder selloff yesterday, so things look to have evened out. Indicators trying to turn back up into bullish stance, but not there yet. NQ Daily Chart: The NQ 60 minute chart looks much like the ES. The daily chart remains more bearish then the ES, with those lower lows continuing to be printed. Macd has crossed over, but the lines are not diverging yet to show that the downside has momentum. CCI is still above its moving average and slow Stochastic is still pointing up, but is reaching a point where it should turn over with any more selling. NQ Fibonacci: Price bounced near horizontal support which happened to be close to the .382 point. With NQ looking a bit heavier, it looks like any more selling should take it to the actual .382 level which corressponds well with horizontal support, as does the .500 retrace area. A break below that .382 area takes it to 1033 support, then the .500 retrace. ----------------------------------------------------------------- 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 ******************** Correlations abound for institutional buying In Friday evening's market monitor at OptionInvestor.com, we looked at week-to-week pivot matrix comparisons and thought that institutions might have their computers turned toward buying in order to replenish some drawn down inventories of stocks after a bullish run last week. A war effort that didn't appear as close to an end as some had perhaps thought found sharp reversals in the indexes on Monday, but buyers were found today as the major indexes all closed very close to their weekly pivots. After reviewing some of our comments from Friday evening's market monitor, I have the impression that institutions do have the computers turned on and accumulating stock on weakness. Perhaps something an index trader looks to do this week as market internals continue to improve. Here's a quick look at the past two week's pivot matrix, along with this weeks pivot matrix and levels. Correlations that used to be resistance, which were broken to the upside some "overly" bullish trading, now line up as support. For those that believe institutional computer programs are running the pivot analysis formula, then it might make sense (at least I think it does) for the computer switches to be more to the "buy side" and today's action hints that there may indeed be some institutional bulls nipping away at stocks after yesterday's drubbing. Recent 2-weeks Pivot Matrix along with current WEEKLY matrix Friday evening, I wanted to "step back" a bit and look at the WEEKLY pivot levels to see if any of the levels were duplicated in this week's matrix. It "made sense" to me that the powerful move higher last week (3/17-3/21) that took many of the indexes past their WEEKLY R2 would have some institutional computers at least bidding some stocks on a pullback. The "first" level I looked for support was this WEEK's (3/24-3/28) WEEKLY pivots, which correlated closely with last WEEK's R2's. Yesterday's trade did take the major indexes back below this WEEK's pivots, but its today's close in the major indexes and partial recouping of Monday's losses that hints to me there's some institutional buying taking place as if computers are trying to get some inventory squared as bullish inventories were most likely drained after last week's bullish move higher. In this morning's market monitor, I thought it difficult to be establishing new bullish positions this morning, especially for those bulls already holding 1/4 or 1/2 bullish positions. I still like 1/4 or 1/2 bullish positions in an account at this point with 2 or 3 month expiration, but to get me further interested to add to a position, I'd want to see the indexes pull back a little further. Preferably, a bull looking to further leg into some bullish positions would like to see a "gradual" decline, and not the torrid drop like that found on Monday. Let's take a look at tomorrow's DAILY pivot matrix along with the WEEKLY and MONTHLY levels, but suffice it to say, I'm looking for some "formidable" support to be present at the WEEKLY S1, with potential challenges of the WEEKLY R1's. Make no mistake. The markets are moving on just about ever word out of Iraq at this point, with rumor, fact and anything else driving action. Still, there are some very strong "technicals" in play at the WEEKLY S1's where a bull should find some confidence in entry points. Pivot Matrix (DAILY-WEEKLY-MONTHLY) The major indexes show a rather "mixed close" around this WEEK's pivot levels. The NASDAQ-100 Index (NDX.X) 1,066 +1.85% had been the "leadership" index into last week, but as previously noted, began to stall out with the Dow Industrials (INDU) 8,280 +0.79%, S&P 500 (SPX.X) 874 +1.2% and S&P 100 Index (OEX.X) 444 +1.15% playing some "catch up." It's the "violation" of the 1,069-1,070 level on Monday and decline to 1,045 yesterday in the NDX, which has me currently thinking the indexes are vulnerable to a pullback to their WEEKLY R1s at this point, but I'm carrying a bull's torch as the bullish % indicators showed no deterioration after Monday's trade and market internals continue to show sign of improvement. NASDAQ-100 Index (NDX.X) - Daily Interval I view the 1,040 level a good "pullback" bullish entry point, as this is a level that showed up as resistance in week's prior, that now shows up as support in the WEEKLY matrix. It was about three week's ago that the 1,020 level was a level that bears needed to see hold resistance, which didn't, that saw the NDX surge to the recent relative highs. It's "interesting" how the 1,020 level is represented in the WEEKLY retracement and perhaps become a "pivot" on a much larger scale. The NDX found some buyers today and was able to hold above yesterday's low. If not for this weekend's developments in Iraq and a more formidable defense being found by its military, I hadn't ruled out a move to the 1,151 level should the coalition have been able to take Baghdad by the end of this week. However, that doesn't seem to be a reasonable scenario at this point. While I really have no ability to forecast a coalition effort, I would view this week's "MAX gain" as being 1,120 and a "MAX decline" being 1,020. This would have me "comfortable" in holding a 1/2 bullish position at current levels, but the uncertainty of war and current range within the levels would have to have cheaper price levels to get me to further build a position. Today's action saw a net gain of 1 stock to a reversing upward point and figure buy signal in the NASDAQ-100 Bullish % ($BPNDX). This is in addition to Monday's net gain of 1 stock to a reversing upward point and figure buy signal. In my minds eye I can envision several point and figure stocks of charts that probably saw some columns of O develop on Monday, but no "sell signal" being given, with some reversing back up into a column of X today. Current status is "bull alert" at 49% and we'd need to see a reading of 68% to achieve "bull confirmed" status. It was on March 14th that this indicator turned "bull alert" status, which I would benchmark to the 1,020 level. With the bullish % still showing gains, I'm not currently looking for bearish trades and would only trade bearish with a very short-term time horizon at this point. S&P 500 Index (SPX) - 5-point box In our March 18 Index Wrap we tried to look back at history and one thing we noted was a 6% pullback in the OEX (since SPX moves pretty much the same, using it here too) and while history is no guarantee as to being a guide to the future, a 6.06% pullback from 895 on the SPX p/f chart would put risk back near 841, which is a "zone of support" on the p/f chart. While the "time line" discussed as it relates to "Operation Desert Storm" isn't aligning perfectly with the 6% pullback in the OEX/SPX after US-lead troops had amassed at the Kuwait border, we could be seeing the 6% decline RIGHT NOW as coalition forces begin surrounding Baghdad on what could be a "final assault" on Saddam Hussein's government forces. I'm looking for formidable support in the SPX from 855-845. Bulls should trade within their comfort zone to compensate for volatility and war-related news here, but if bulls are comfortable with 1/2 bullish position, then I'd hold tough here. S&P 500 Index Bar Chart - Daily Interval I showed the above chart of the S&P 500 (SPX.X) in this morning's market monitor, but wanted to show it here with both the MONTHLY and WEEKLY retracement overlaid. The p/f chart shows the "triple-top buy signal" at 855, and we can perhaps see how the WEEKLY S1 of 850 comes into play as a past level of resistance that should now serve technical support on a pullback. It is the "uncertainty" of war that only has me one-half bullish positions still so that a bull can "make it through" some volatility and not succumb to emotions. Still... every trader has a comfort level, but as we saw this weekend, a little difficulty or "bad news" on the war front can have some sudden impact on the trade. Today's action saw no net change in the S&P 500 Bullish % ($BPSPX). Despite Monday's declines, the S&P 500 Bullish % actually saw a net gain of 1 stock to a reversing upward p/f buy signal. No big changes from the internals the last two sessions and after reversing up into "bull confirmed" status after last Tuesday's trade at 34.2%, current reading is 41.4% bullish. S&P 100 Index (OEX.X) - Daily Interval Current bullish target for bulls would be the WEEKLY R1 of 468.50 and the 19.1% retracement of 466.75 from our WEEKLY retracement (blue). Current level of trade is right at the WEEKLY pivot and gives me somewhat of a 50/50 feel for new bullish entries and a pullback into the WEEKLY S1 of 432 and MONTHLY 38.2% retracement of 430.8 puts the OEX in a "zone of support," which was the "zone of resistance" that bears didn't want to see broken two weeks ago. Bears that may have been a bit complacent at the 435 level and have seen the recent high should be looking to cover on weakness and that's where I think a good bullish entry point for new positions can be found. Today's action saw no net change in the S&P 100 Bullish % ($BPOEX) and current status remains "bull alert" at 43%, which is the relative high reading for this indicator since achieving 43% after Friday's session. When I look back to this bullish % reaching a recent low of 21% on March 12, when the OEX traded what is now its WEEKLY S2 of 408, I would view a bullish % reading back near 70% (if achieved) to have the OEX capable of 480. Dow Industrials Chart - Daily Interval The Dow Industrials (INDU) recouped about one-third of yesterday's losses when it was trading at its best levels of the session and was a difficult bullish trade for me to make today. I like the Dow Industrials as bullish, but again prefer just 1/2 position at this time. I do like a pullback entry point of 8,050, which would be just above the overlapping WEEKLY S1 of 8,026 and 38.2% retracement from our MONTHLY retracement. At the close of trading Friday, I will recalculate the MONTHLY pivot analysis levels, so that we can try and get some further levels of resistance to correlate with. I've done a "quick" check and pretended that the current month's high and lows are in for the Dow and used today's close to get a feel for things. I further like a 8,050 entry point as a preliminary MONTHLY pivot analysis would have the MONTHLY pivot at 8,072. Today's action saw the very narrow Dow Industrials Bullish % ($BPINDU) unchanged at 40% bullish. Still "bull alert" status here. A stock that Dow Industrials traders may want to keep an eye on as a "key stock" near term is shares of American Express (NYSE:AXP) $35.26 -2.99%. On Friday, this stock traded $37.00 and its point and figure chart generated the "bearish signal reversed" pattern. This pattern is characterized by a series of lower highs and lower lows, which is "quickly" reversed to the upside. The supply/demand pattern is that of a systematic series of lower lows and lower highs, which can create complacency among bears that systematically have been shorting the stock with "predictable" success as they work the stock lower, but the "quick" reversal up can trap complacent bears into a powerful short-covering rally. Dorsey/Wright and Associates classifies this stocks as a "financial," which has this sector bullish % still "bull correction" status at 45.4% bullish and a reading of 48% would have the sector reversing back up into "bull confirmed" status. My reason for mentioning this stock as an observation stock right now is to perhaps try and get a feel for how some bears are trading right now in a stock that is very "consumer-related" as to spending habits. The stock was a Dow laggard today, but I'd monitor the stock for another sharp rebound from today's declines as it pulls back in and tests it trying to flatten out 200-day SMA of $34.95 (today's low was $34.95). As an observation stock for index traders, especially Dow, SPX and OEX, I'd view the holding of the $35.00 level near-term as bullish, or a rebound from today's decline also bullish. A more bearish move would be for the stock to continue to suffer decline after triggering one of the most bullish point and figure chart patterns from Professor Davis' study of probabilities. Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Buying the Dip by Steven Price After the disappointment over some weekend military setbacks wore off, the broader markets made up some of Monday's sell-off and seemed to indicate that the bullish reversal we saw last week might have some staying power. It is hard to rely on the technical indicators in a news-driven environment, but so far they have been reliable. After a Dow gain of 100 points in eight sessions, some pullback was expected, although Monday's 300 point Dow drop certainly raised some flags as to just how much conviction the bulls had. Tuesday's rebound back through some significant barriers that were broken last week indicates that the conviction is still strong. Last week we cleared out bearish resistance on the point and figure charts and today's intraday rally took us back through those former resistance levels, indicating that the bears that might have defended them are no longer trying to pick a top. Part of the reason behind the rally was an uprising by the Shiite majority in Basra against Saddam Hussein's forces. Apparently Hussein's troops are shooting at Iraqi citizens trying to leave the area, according to Donald Rumsfeld. It could be a turning point in the war, as Iraqi citizens take up arms against that country's military and create more problems for Iraqi troops, as well as more evidence that Hussein is losing control of the citizenry. Oil prices spiked again this morning, however fell off on the news of the Basra uprising, mirroring (inversely) the mid- day rally in equities. The May Crude Oil contract finished the day up only 0.42 at $28.42 per barrel, after jumping as high as $29.69. This morning's economic data was better than expected, but not by much. The Conference Board's Consumer Confidence Index fell to yet another 10-year low ahead of the military conflict in Iraq. It dropped from 64.8 in February to 62.5 in March. The cutoff date for the survey was March 18, so it failed to measure the response to the progress of the war and we may have to wait for Friday's University of Michigan Consumer Sentiment release to get a feel for how consumer's feel. The U of M is smaller, but more weighted to consumers than businesses and might give us a feel for how willing consumers are to spend. It is also based on telephone surveys that include results from this week. The weak job market no doubt helped lead to the drop in Confidence and the expectations portion of the report fell to its lowest level since January 1991. The number of respondents saying jobs are hard to get rose from 30% to 32.3% and suggests a correlative unemployment rate of 6.5%. The present situation component fell to its lowest level since December 1993. Still, it was slightly better than expected and helped give the markets a boost. The head of consumer research for the Conference board said a quick victory , "would certainly ease some of the uncertainties facing consumers, (but) it is the economic fundamentals that will determine whether a rebound is sustainable." The Rasmussen economic confidence index, which is separate from the Conference Board's report, showed an impressive increase in confidence in the past week, with an increase from 89.9 to 108.2. Existing home sales have also pulled back from January's pace. While the decline was expected, the sales dropped 4.3% to an adjusted 5.84 million. The February pace was still higher than it was a year ago and slightly better than expectations for a drop to 5.78 million homes. With mortgage rates expected to increase throughout the year, the rate may continue to decline. The report from the National Association of Realtors measures closings, so it is a lagging indicator of sales. The Midwest was the strongest region, with a gain of 4.8%, while sales fell in the Northeast, West and South. Although I have yet to personally hear about anything but a declining market, the national median home price rose to $161,000, which is 8% higher than a year ago. Mortgage payments as a percentage of income also dropped to 17.4% in January - the lowest level in four years. Merrill Lynch cut its investment rating for several homebuilders, saying, "Several economic issues could make things tougher on industry participants over the next year or two." it didn't cut the entire group, but said it was time to start differentiating between homebuilding stocks. Downgraded were Beazer Homes (BZH), and KB Home (KBH). By the end of the day, the rally had faded. Part of that failure was likely due to the Senate's vote to cut the President's tax cut plan in half. Less economic stimulus could mean less spending and also possibly less of a cut to the dividend tax. Looking at support and resistance levels, we pulled back to OEX 438, which is in the neighborhood of the 440 level that has been pivotal in the past on numerous occasions. The 50% retracement of the August high to October low also comes in at 437 and that is exactly where we bounced last week on Wednesday and Thursday. Keep an eye on a break below OEX 437 for an indication that a rollover may have further to fall. However, as long as we remain above that level, it appears that the market's move over the past two weeks has left us at higher ground. Of course, the war events will continue to dictate how we trade from here, but for the moment, that OEX range appears to be the key technical level to watch. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8280 Moving Averages: (Simple) 10-dma: 8114 50-dma: 8049 200-dma: 8427 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 875 Moving Averages: (Simple) 10-dma: 858 50-dma: 852 200-dma: 891 Nasdaq-100 ($NDX) 52-week High: 1734 52-week Low : 795 Current : 1067 Moving Averages: (Simple) 10-dma: 1055 50-dma: 1009 200-dma: 992 ----------------------------------------------------------------- The Semiconductor Index (SOX): The SOX got a small bounce today, coming within three points of support at its simple 200-dma at 312.97 beforehand. More important for traders looking at long plays may be the exponential 200-dma sitting at 337 that capped Friday's rally. A move through either of these averages could signal continuation in whichever direction the break occurs, but the highs on Friday and Monday show that the 200-ema is once again spoiling the party as it did in December, with two failures at that level before a big rollover. The simple 200-dma hadn't been tested closely since last year and apparently the break through it wasn't as significant as the litmus test at the 200- ema. 52-week High: 393 52-week Low : 214 Current: 322 Moving Averages: (Simple) 21-dma: 301 50-dma: 292 200-dma: 312 ----------------------------------------------------------------- The VIX continues to seek out new relative lows, giving us bullish equity confirmation now that we are below the 34% level. There is light support at 29-30% that could signal an equity pullback, but the major support comes in at 26%. If we approach that 26% level, tighten your stops on bullish plays, because the party could end there. CBOE Market Volatility Index (VIX) = 32.66 -2.54 Nasdaq-100 Volatility Index (VXN) = 45.00 -1.36 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.94 528,912 497,710 Equity Only 0.84 422,752 354,817 OEX 0.96 16,071 15,497 QQQ 3.43 19,052 65,328 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 40.4 + 0 Bull Correction NASDAQ-100 49.0 + 1 Bull Alert Dow Indust. 40.0 + 0 Bull Alert S&P 500 41.4 + 0 Bull Confirmed S&P 100 43.0 + 0 Bear Alert 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 1.53 10-Day Arms Index 1.09 21-Day Arms Index 1.44 55-Day Arms Index 1.35 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 2097 763 NASDAQ 1953 1042 New Highs New Lows NYSE 53 39 NASDAQ 66 40 Volume (in millions) NYSE 1,584 NASDAQ 1,401 ----------------------------------------------------------------- Commitments Of Traders Report: 03/18/02 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added 43,000 long contracts, while adding only 5,000 shorts. Small traders took a reverse approach, adding 15,000 longs and 51,000 shorts. Small traders, however, came into the period much longer. Commercials Long Short Net % Of OI 02/25/03 424,276 482,476 (58,200) (6.4%) 03/04/03 426,053 472,492 (46,439) (5.2%) 03/11/03 440,688 485,938 (45,250) (4.9%) 03/18/03 483,224 490,582 ( 7,358) (0.1%) Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: ( 7,358) - 3/21/03 Small Traders Long Short Net % of OI Small Traders Long Short Net % of OI 02/25/03 157,790 91,083 66,707 26.8% 03/04/03 164,759 98,636 66,123 25.1% 03/11/03 169,450 102,631 66,819 24.6% 03/18/03 184,907 153,400 31,507 9.3% Most bearish reading of the year: 31,507 - 3/21/03 Most bullish reading of the year: 114,510 - 3/26/02 NASDAQ-100 Commercials mirrored the action in the S&P, adding 15,000 longs, to only 8,000 shorts. Small traders also emulated their counterparts, adding 10,000 longs, but 17,000 shorts. Commercials Long Short Net % of OI 02/25/03 38,787 51,745 (12,958) (14.3%) 03/04/03 39,934 52,978 (13,044) (14.0%) 03/11/03 43,641 56,020 (12,379) (12.4%) 03/18/03 58,877 64,302 ( 5,425) ( 4.4%) 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 02/25/03 25,378 7,431 17,947 54.7% 03/04/03 24,240 8,038 16,202 50.2% 03/11/03 27,196 9,674 17,522 47.5% 03/18/03 37,097 26,951 10,146 15.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials added 5,000 long contracts and 4,000 shorts, staying relatively unchanged on their net. Small traders added 1,000 long contracts and only 600 shorts. Commercials Long Short Net % of OI 02/25/03 19,985 11,866 8,119 25.5% 03/04/03 21,326 12,724 8,602 25.3% 03/11/03 21,726 14,370 7,356 20.4% 03/18/03 26,880 18,853 8,027 17.6% 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 02/25/03 4,872 8,723 (3,851) (28.3%) 03/04/03 5,233 8,075 (2,842) (21.4%) 03/11/03 5,549 7,727 (2,178) (16.4%) 03/18/03 6,589 8,343 (1,754) (11.7%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ****************** WEEKLY FUND SCREEN ****************** Schwab Select List: Balanced Funds Our last installment of the Schwab Select List fund review takes us to "balanced" funds, which invest in a blend of stocks, bonds and money market instruments in an effort to achieve the highest total return consistent with preservation of capital. Such low- risk strategy funds may be appropriate for "long-term" investors who do not wish to put all their eggs in one basket, meaning the stock market. Generally, a balanced fund will offer a higher yield than a pure stock fund and perform better than a 100% stock fund when stocks are falling (declining market). However, when stocks are rising, a balanced fund won't typically keep pace with pure equity funds. Because they invest in a mix of stocks and bonds, balanced funds usually land somewhere between a pure bond fund and a pure stock fund in terms of risk-reward potential. Many balanced funds follow a "three-part" investment philosophy. First, they believe that investment in high-quality common stock and preferred stock represents the best vehicle for accumulating wealth over the long run. Second, such funds believe that wealth preservation and income objectives are best achieved by balancing common stock and bond investments. Third, balanced funds believe that the cyclical nature of financial markets requires the timely adjustment of the mix of common stock and bond investments. Since the economy expands more often than it contracts over time, and stocks rise more than they fall over time, most balanced fund offerings invest more of the fund's assets in stocks than in bond investments. For example, Vanguard Wellington Fund, the nation's first balanced fund, invests 60% to 70% of assets in common stock and 30% to 40% of assets in bond investments. Other funds within the group are more income-oriented and thus, more conservative in nature. Vanguard Wellesley Income Fund, for example, invests 60% to 65% of its assets in fixed income securities and 35% to 40% of assets in common stock investments. Wellesley Income Fund offers a higher yield than Wellington Fund, but it offers less growth of capital potential over the long term. Some may debate that view. Asset allocation funds are generally more flexible in their asset mix adjustments, while balanced funds tend to be more "static" in their asset mix between stocks and bonds. A common performance benchmark for balanced funds is 60% S&P 500 index and 40% Lehman Brothers Aggregate Bond Index. You can use a different equity index, if you like, or a different bond index. For example, Vanguard Balanced Index Fund seeks a return that is equal to 60% Wilshire 5000 Total Market Index and 40% Lehman Bro. Aggregate Bond Index. Screening/Evaluation Process The Schwab Select List includes ten balanced funds, which have met their stringent criterion. Below is a summary of the funds by name. Morningstar categories all of these funds as domestic hybrid funds for comparison purposes. Schwab Select List: Taxable Bond Funds Oakmark Equity & Income I (OAKBX) Dodge & Cox Balanced (DODBX) Janus Balanced (JABAX) Transamerica Premier Balanced Inv (TBAIX) Eclipse Balanced (EBALX) ABN AMRO/Chicago Capital Balanced N (CHTAX) Gabelli Westwood Balanced AAA (WEBAX) Schwab MarketTrack Conservative Portfolio (SWCGX) Atlantic Whitehall Growth & Income (WHGIX) Schwab MarketTrack Balanced Portfolio (SWBGX) As you can see, two Schwab balanced funds meet their own specific criteria, but the Vanguard Wellington Fund and Vanguard Wellesley Income Fund are absent from the list. So, there's no bias in the Schwab Select List, right? We'll leave the two Vanguard balanced funds off of the list for purposes of this week's report, but you would be well served to give them some consideration. Both funds rank among the group's elite. You'll note the Schwab Select List includes an equity-income fund (Oakmark Equity & Income) and a growth-and-income fund (Whitehall Growth & Income). While these funds' prospectuses may not show a balanced fund objective, they invest in a mix of common stock and preferred stock and bond investments as a balanced fund would, so they are classified as domestic hybrids by Morningstar. It might be helpful to keep that in mind when you look at ratings/rankings since one could argue that they should be compared with same fund objective funds. Like in past weeks, we took the above ticker symbols and put them into Morningstar's system (www.morningstar.com) to obtain current performance information and to compare the funds based on return, risk, expenses, investment style/strategy, management, and other criterion. The Vanguard Wellington and Vanguard Wellesley Income Fund were added to have an additional reference point. Looking first at Morningstar's overall ratings for risk-adjusted return performance within the domestic hybrid group, we saw that two funds are only rated three stars (average) overall: Atlantic Whitehall Growth & Income (WHGIX) and Schwab MarketTrack Balanced Portfolio (SWBGX). Three funds carry Morningstar's highest five- star rating: Dodge & Cox Balanced Fund (DODBX), Gabelli Westwood Balanced AAA (WEBAX), Janus Balanced (JABAX), and Oakmark Equity & Income Fund (OAKBX). Note here that both Vanguard Wellington and Vanguard Wellesley Income are 5-star highest rated by Morningstar. In my opinion, Vanguard Wellington has a superior track record vs. the Schwab MarketTrack Balanced product, as does Vanguard Wellesley Income vs. the Schwab MarketTrack Conservative product. Morningstar's 5-star ratings would appear to support that view. So, although we commented earlier that we would leave the two Vanguard funds off of the list, we feel compelled at this point to add the two Vanguard funds and to drop the two Schwab MarketTrack funds, so keep that in mind going forward. Next, we focused on expenses, identifying those funds that have expense ratios that are higher than the rest of the Select List balanced funds. At 1.39%, Atlantic Whitehall Growth and Income Fund is the most expensive, and may partly explain why the fund is just 3-star rated. It doesn't look as strong overall as some of the other funds on this list. The Dodge & Cox Balanced Fund, by contrast, sports a low 0.50% expense ratio, surpassed only by the two Vanguard funds. Vanguard Wellington has an expense ratio of 0.36% while the expense ratio for Vanguard Wellesley Income is only 0.33%. It is not surprising then that we find the Dodge & Cox Balanced Fund and the two Vanguard funds among the highest performers over the long term. The three funds rank among a handful of balanced funds with trailing 15-year average annual total returns of more than 10 percent. Dodge & Cox Balanced Fund has produced an 11.7% annualized return over the past 15 years. The Vanguard Wellesley Income Fund sports an average total return of 10.6%, with sibling Vanguard Wellington Fund boasting a 10.5% average return over the most recent 15-year period. That includes several ups and downs. The Oakmark Equity & Income Fund, meanwhile, has one of the best performance records on an ITD basis. Since its inception on Nov. 1, 1995, the Oakmark fund has earned an average annual return of 12.9% for shareholders. Janus Balanced Fund is up an average of 11.4% per year since its September 1992 inception date. So many of the funds on the list have achieved the creation/accumulation of wealth objective while at the same time doing a better job of preserving wealth in down markets and over the long term (versus pure stock funds). Because these funds vary in their stock and bond asset allocation and in their investment style/strategy, they offer different risk and reward tradeoffs. If you think that value stocks are the way to go, then you may lean toward the Dodge & Cox Balanced Fund and the two Vanguard offerings. If you believe growth stocks provide greater capital growth potential than value stocks over time then you may like the ABN AMRO Balanced Fund or the Atlantic Whitehall Growth & Income Fund, which both have large-cap growth management styles. Some balanced funds stick to large-cap and others on the list dip down in market capitalization including Eclipse Balanced Fund and Oakmark Equity & Income Fund. Still, if we had to pick one or two for the long term, we'd have to go with either the Dodge and Cox Balanced Fund (DODBX) or the Vanguard Wellington Fund (VWELX). Our Favorite Funds The $7.9 billion Dodge & Cox Balanced Fund (DODBX) seeks regular income, conservation of principal, and the opportunity for long- term growth of principal and income. It invests in a diversified portfolio of common and preferred stocks, and fixed-income (debt) securities. This fund invests no more than 75% of its assets in stocks. In equity selection, Dodge & Cox's management team favors stocks that appear to be temporarily undervalued by the market but have a favorable outlook for long-term growth. Bond holdings include investment-grade securities such as U.S. government obligations, mortgage-backed and asset-backed securities, corporate bonds and notes, collateralized mortgage obligations, and others. The Dodge & Cox Balanced Fund started operations in June of 1931, so it has a long legacy. As it was then and as it still is, the fund represents a simple, low-cost way own a broadly diversified portfolio of equities and fixed-income securities. Low expenses and a true no-load fund structure add to its overall appeal. It may, however, occassionally lag other balanced funds when "value" is temporarily out of favor. But over the long term, it makes a compelling case for itself in the balanced class. The $21.6 billion Vanguard Wellington Fund (VWELX) also sports a fine track record over many, many years. It traces its roots to July 1929 and over the years has helped many investors to create wealth and preserve it. It seeks conservation of principal, and reasonable income and profits without undue risk by investing 60 to 70% of its assets in common stocks and the remainder in bonds of investment-grade quality. Like Dodge & Cox Balanced Fund, it follows a value-conscious approach. While the youngest member of the Dodge & Cox balanced management team has been associated with the fund for more than two decades, the individual who managed the equity allocation of the Vanguard Wellington Fund for many years, Ernest Von Metzsch, retired from Vanguard at the end of 2002. Another seasoned stock manager, Ed Bousa, took over the equity portfolio in January 2003, following a similar approach to Von Metzsch. According to Morningstar, Ed Bousa plans to continue focusing the equity stake on "moderately valued" stocks with good dividend yields. He had a long history of managing with a similar approach at Putnam Investments before joining Wellington Management Company, investment sub-advisor to the Vanguard Wellington Fund. But, turning our focus back to the "long term," below are average annual returns over the trailing 5-year, 10-year and 15-year time periods using data from the Morningstar.com and NYTimes.com sites: Annualized 5-Year Total Return (March 24, 2003): +6.0% Dodge and Cox Balanced Fund (DODBX) 2nd Percentile +2.4% Vanguard Wellington Fund (VWELX) 18th Percentile Annualized 10-Year Total Return (February 28, 2003): +11.1% Dodge and Cox Balanced Fund (DODBX) 2nd Percentile + 9.7% Vanguard Wellington Fund (VWELX) 8th Percentile Annualized 15-Year Total Return (February 28, 2003): +11.7% Dodge and Cox Balanced Fund (DODBX) N/a +10.5% Vanguard Wellington Fund (VWELX) N/a While balanced funds will typically not keep pace with pure stock funds in rising markets, over the long term the better performing balanced funds can in fact generate equity-like returns for their shareholders. These two funds are living proof that well managed balanced funds can weather the financial storms and protect asset growth. As we stated earlier, low operating expenses add to the appeal of both the Dodge & Cox and Vanguard balanced offerings. Since they don't have high cost hurdles to overcome, they can follow a lower risk strategy and still remain very competitive relative to other balanced funds out there. Conclusion Over the past five weeks, we've looked at various types of mutual funds using the Charles Schwab Select List as our starting point. From there, we used various Morningstar screen tools and tools of other online providers, such as Lipper and NYTimes.com to help us further skinny down the list of good funds. Each week, we showed you two or three funds that we liked the most now based on return and risk and expense, as well as other factors such as management style and strategy and tenure. We did this not to provide you with our top picks but to show you how one can go about screening for a particular type of fund, and discuss things to keep in mind as you go along. We hope that our weekly fund screens give you food for thought, and ideas that you can actually use. For more information on the Schwab Select List go the www.schwab.com website. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************Advertisement************************* ”If you haven't traded options online – you haven't really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** *********************** SWING TRADER GAME PLANS *********************** The Cat's Alive! Normally a bounce of 65 Dow points after a 300-point sell-off might be considered a "dead-cat bounce." But when that 300-point sell-off follows an 1100-point gain, it appears that the big drop was just a pullback. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.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. 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The Option Investor Newsletter Tuesday 03-25-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: MME Dropped Puts: None Daily Results Call Play Updates: BCR, BLL, BRL, BVF, MXIM, STN New Calls Plays: UNH Put Play Updates: NOC, OTEX New Put Plays: CB **************** 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: ***** Mid Atlantic Medical - MME - close: 39.50 Gain since picked: +4.70 It has been a rather volatile ride, but our MME play has performed admirably through the alternating waves of euphoria and despair in the broad market. We've been eying the $40 level for some time now, and after 3 days of being unable to break above that level, it seems perhaps that breakout is not in the cards. The play was triggered when MME traded above the $35.25 level on February 28th, and with better than a $4 gain from that point, we're going to close the play as a success while it is still looking strong. Traders that want to give MME some more room to possibly break out over the $40 level are welcome to do so, but should have their stops ratcheted up to no lower than $38.25, just below the intraday lows of the past two days. We're dropping coverage of the play tonight to focus on fresh opportunities. PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue BCR 61.87 -1.19 -0.39 Rolled but held BLL 56.15 -0.08 0.36 Just keeps climbing BRL 55.92 -2.23 2.47 Made it all up BVF 40.35 -0.97 1.57 Back over $40 MME 39.50 -0.44 0.46 Drop, Take Profits MXIM 38.75 -0.89 0.25 Bounce from support STN 21.08 -0.73 0.41 Successful $20 test UNH 90.66 -0.61 1.36 New, Above 200-dma PUTS CB 45.73 -1.56 -1.62 New, Rlative Weakness NOC 83.77 -1.83 -0.66 War reactions OTEX 28.66 -0.78 1.39 Against resistance ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** C. R. Bard, Inc. - BCR - close: 61.87 change: -0.39 stop: 61.40 After the stellar rally last week, we knew our BCR play was due for some profit taking and the reality that the war wouldn't be as quick as some hoped provided the perfect catalyst. By early this morning, the stock had traded an intraday low of $61, from which it got a sharp, albeit short-lived bounce. The remainder of the day was a story of failed bounce attempts, but the bulls did managed to defend support, keeping the price above our $61.40 closing stop. Will the rebound from today's lows prove to be a buying opportunity or have we seen the end of the rally? Obviously we don't know, and it will likely be determined by overseas events. Aggressive traders can target new entries on another rebound from above the $61 level, but must remember that a close below our $61.40 stop will have us dropping the play. Those traders looking for confirmation before playing will want to see BCR propelled back over the $62.50 level before jumping back in. Picked on March 18th at $61.05 Gain since picked: +0.82 Earnings Date 04/16/03 (unconfirmed) Average Daily Volume = 289 K --- Ball Corporation - BLL - close: 56.15 change: +0.36 stop: 53.50 Just looking at the closing statistics for our BLL play doesn't do justice to the strength the stock has been exhibiting this week. After Friday's breakout over the $55 level, the bears have been thrice thwarted in their attempts to knock the stock back. Each morning BLL has been knocked back at the open on the broad market weakness, only to find concerted buying throughout the day, pushing it back near the highs by the close. Those early dips have served to fill in the majority of Friday's gap higher, and given the string of higher lows over the past 3 days, it is looking like that gap will not completely fill in. Adding to the bullish picture, BLL has been eking out higher highs over the past few days as well. That's a nice contrast from the broad market action too. With BLL chalking up new all-time highs, it is difficult to forecast an upside target, except through the use of the PnF chart. The current Buy signal is pointing to an upside target of $69, but that seems awfully optimistic in the current volatile environment. We'll look to harvest partial gains near the $60 level, and then re-evaluate from there. Friday's low near $54.50 now looks like firm support and if the trend of the past few days continues, a dip into the $54.50-55.00 area looks like a solid entry point. Adding further support for the stock is the sharply rising 10-dma ($53.90), which gives us the freedom to raise our stop to $53.50 tonight. Picked on March 21st at $55.87 Gain since picked: +0.28 Earnings Date 04/24/03 (unconfirmed) Average Daily Volume = 404 K --- Barr Labs - BRL - close: 55.92 change: +2.47 stop: 51.75 It didn't take long for BRL to make up for Monday's pullback. It made up the loss and more, establishing a new relative closing high. The stock continues to build on gains following its approval for three new doses of the generic version for Adderall. Barr will have the exclusive rights to the generics for those doses and if past history is any indication, they will make the most of it. Apparently that is what investors are betting on, boosting the stock back above its last area of resistance at $54. The 4.6% gain today outperformed the broader markets, as well as Pharmaceutical Index (DRG +2.2%) and Biotech Index (BTK +2.7%). The DRG bounced off its 200-dma on the Monday pullback, while the BTK bounced from its 50-dma and back through its 200-dma, demonstrating sector strength in both areas. There is little in the way of roadblocks for BRL between the current levels and the $59-$60 range, which remains our target. --- Biovail Corporation - BVF - close: 40.35 change: +1.57 stop: 38.00 Is anyone else wondering if our BVF play is ever going to get moving? Well, today's action is certainly encouraging! While the stock is only up a nickel on the week so far, today's rebound more than made up Monday's loss and it came on robust buying volume (30% above the ADV). While the $39 support level didn't quite hold, there were eager buyers just under that level this morning and BVF rebounded smartly from the $38.75 level to once again close over $40, just fractionally taking out Friday's closing high to post a new 10-month high. On Monday, the broad market weakness dropped the stock to close right on its 10-dma ($38.78) and it rebounded smartly from that level on Tuesday, pushing up to close just below its high of the day on increasing volume. Tuesday's intraday low of $38.50 looks like strong support here and another bounce from that area looks good for new entries. But given today's strength, it looks like a breakout is in the cards and momentum traders can look to enter on a rally through the $40.75 level (just above today's intraday high). Picked on March 14th at $39.06 Gain since picked: +1.29 Earnings Date 04/25/03 (unconfirmed) Average Daily Volume = 1.05 mln --- Maxim Int. Prod. - MXIM - close: 38.75 change: +0.25 stop: 37.50 If there's one constant in this market, it is uncertainty and that leads to volatility. Just as we got a confirmed breakout over the $40 level on our MXIM play, traders got a dose of reality on Monday and sold just about everything. As one would expect, the Semiconductor index (SOX.X) took it on the chin, falling back below the $320 level. But as luck would have it, there were buyers lurking, looking for a lower-risk entry into this momentum sector. At its low this morning, MXIM traded down exactly to our $37.50 stop before staging a mild rebound throughout the remainder of the day. Ending just above the 10-dma ($38.63) is an encouraging sign, but the stock is now back under its longer-term descending trendline (now at $39.10). Bulls will need to stage a strong (read:volume) push in order to get back over that level, and then there will be the resistance presented by Friday's intraday high of $40.66. Aggressive traders can still use a dip near the $38 level for new entries, but only if the SOX is able to hold above the $315 level. Traders that want to see some confirmation before entering the fray will need to see a trade at $41. Of course, the risk of taking that momentum entry is that a move to $41 will fill the December 4th gap, and bring the stock into solid resistance in the $41-43 area. Buying the dips is still the safer way to play. Picked on March 20th at $39.56 Gain since picked: -0.81 Earnings Date 04/30/03 (unconfirmed) Average Daily Volume = 7.80 mln --- Station Casinos - STN - close: 21.08 change: +0.41 stop: 18.75 Most gaming stocks saw a mild pullback in the past couple of days, including MBG, MGG and IGT. Part of the reason the sector was hit is that many of these companies run casinos in travel destinations and most travel related stocks were hit hard after the war did not come to an end over the weekend. The pullback continued briefly this morning, but the sector got a pop and we got a close look at support for call play STN. The stock broke multi-year resistance when it cracked $20 and this morning's pullback ended with a low of $20.00. That's quite a show of support where there was former resistance and it appears we are now trading over a new plateau in the $20s. Our target remains $25 to start, but aggressive traders can target the PnF vertical count up at $30. A prolonged war could once again interfere with destination stocks, but so far STN has not disappointed us. We like new entries in the current range, as long as $20 support holds up. ************** NEW CALL PLAYS ************** United Health - UNH - close: 90.66 change: +1.36 stop: 85.99 Company Description: UnitedHealth Group is a diversified health and well-being enterprise that provides a full spectrum of resources and services to help people achieve improved health and well-being through all stages of life. UnitedHealth Group is organized into five businesses: UnitedHealthcare, Uniprise, Ovations, Specialized Care Services, and Ingenix (source: company press release) Why we like it: UNH has been on our radar for months. We have played it a couple of times, mostly due to its tendency to run once it breaks out through resistance or down through support. We watch listed it over the weekend after last Friday's break above the 200-dma, looking for a pullback to support at that average for possible entries, or even a move back through $90. We got both. The stock bounced off that 200-dma to the penny, then climbed all the way above 90 on Tuesday. It has not broken either of those barriers since November, although it has made several unsuccessful runs at the 200-dma. Prior to the breakout, it consolidated in a $10 rectangle pattern between $80 and $90. The minimum measuring objective of such a pattern is equivalent to the size of the consolidation and would signal a possible run at $100. The point and figure chart shows a breakthrough of bearish resistance and a current bullish vertical count of $114. That count is an eventual target and not necessarily our target for the play, which is closer to $100. It is also based on its current column of "X," which is still being built and can run higher. Longer term players may want to look at options nearer the summer months if they would like to target a run to that level, but must bear in mind that those options also contain more premium and require a greater investment. UNH recently showed up on Forbes' seventh annual list of top performing companies, along with other health care businesses Pfizer and Forest Labs. The ranking was the result of an examination of every S&P 500 stock, based primarily on sales and earnings growth over the most recent 12-month and three-year periods. UNH is joining other HMOs in searching out options for unemployed workers and CEO William McGuire is calling for a privately run universal health care system. he said what is needed is "public consensus on the necessary attributes of a minimum, essential health benefit package made available to all and funded both by the government and private sources." The company boasts solid fundamentals, having beat earnings estimates in January and raising guidance at the same time. UNH's revenue grew 10% over the year ago quarter and its profits jumped 37%. it also projected full-year profit growth of around 22%, implying earnings of $5.19-$5.19 per share. That was well above the consensus of $5.05 per share. We like entries on the move through $90 and the bounce from support at the 200-dma. Our short-term target is $100, based on the rectangle consolidation, but traders should be aware of possible resistance around $93 and again in the $94-$96 range. More conservative traders who are reluctant to chase the recent gains can wait for a possible pullback to the 200-dma if the broader markets see another sell-off. Keep in mind, however, that the last 200-dma test on a day that the Dow was down 300- points was only a brief one and the stock bounced impressively, gaining $1.60 intraday from its low, as the market continued to drop, posting a loss of only $0.60 on Monday. We are setting a wide stop at $85.99 to allow for a test of recent lows just before the breakthrough the 200-dma and still allow for a risk/reward of more than 2:1. However, more conservative traders may want to set a stop at $87.50, just below that average. Suggested Options: Shorter Term: The April 90 Call at $3.10 will offer short-term traders a return on an immediate move, with intermediate premium risk. The April 85 call offers more profit on a move higher, given the smaller amount of extrinsic value, but also offers more downside risk if the stock pulls back, due to it high level of intrinsic premium. Longer Term: Traders looking to capitalize on a move toward the PnF target of $114 might want to look at the June 90 call for $5.50. This provides extra time for the stock to move higher, but traders will risk losing more premium if the stock does not trade higher or pulls back. BUY CALL APR-85 UHB-DQ OI=3998 at $6.80 SL=3.40 BUY CALL APR-90 *UHB-DR OI=3414 at $3.10 SL=1.55 BUY CALL JUN-90 UHB-FR OI=4642 at $5.50 SL=2.75 BUY CALL JUN-95 UHB-FS OI=1465 at $3.00 SL=1.50 Average Daily Volume = 1.98 MIL Chart of UNH http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-25/UNH032503.gif ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Northrup Grumman - NOC - close: 83.77 change: -0.66 stop: 87.50 Like deer caught in headlights, traders seem unsure of which way to jump in the Defense sector. After the sharp selloff in the group late last week as the war got underway, the constant barrage of news showing a more difficult picture for the troops moving on Baghdad has propped up this group. On Monday, NOC bounced back from its sharp selloff, but there wasn't enough buying pressure to challenge Friday's opening high. That pattern was repeated to a lesser degree on Tuesday, with NOC once again trading within the prior day's range. That presents a picture of two consecutive inside days, and the direction of the break will likely prove instructive for the longer-term prospects for the play. A break above the $85.10 level (Friday's intraday high) should have the stock moving up to challenge the descending trendline, currently $87. For traders still looking for a lower-risk entry, a rally failure at that level would be the ticket. A more aggressive approach to entry would be to short a failure near the $85 level. Given that we have support at $83.50, then $81.70 and then just above $80, entering on a breakdown would not be the preferred strategy, especially with our downside price target of $79 (the bearish price target from the PnF chart). Remember, traders that took the breakdown entry last week should have their stops set no higher than $85.50, while our coverage stop remains at $87.50. Picked on March 20th at $84.95 Gain since picked: +1.18 Earnings Date 04/17/03 (unconfirmed) Average Daily Volume = 1.46 mln --- Open Text - OTEX - close: 28.66 change: +1.39 stop: 30.55 OTEX caught a big bounce with the rest of the broader markets and also from its 50-dma. The stock did break down to a new relative low on Thursday and remains squarely below the most recent resistance at $30. While the bounce came from a significant moving average, there are still a number of recent intraday highs in the $29-$30 range that the bounce was unable to break through. OTEX's chart looks similar to that of the GTSI Software Index (GSO), which bounced from its 200-dma, but was unable to get over the 50-dma. Traders looking for an entry in this short play can look for a breakdown in the GSO below that 200-dma at 101.46, along with a move in OTEX below the 50-dma at $27.17. ************* NEW PUT PLAYS ************* Chubb Corporation - CB - close 45.73 change: -1.62 stop: 49.00 Company Description: Chubb Corporation, incorporated in June 1967, is a holding company with subsidiaries principally engaged in the property and casualty insurance business. The Company presently underwrites most forms of property and casualty insurance. The Company's Property and Casualty Insurance Group writes non-participating policies. Several members of the Property and Casualty Insurance Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders. Why we like it: In the market-wide plunge that culminated on March 12th, Insurance stocks got absolutely pummeled. It was bad enough that the fundamentals in the sector were bad, but investors were also faced with the possibility that the war in Iraq could result in more terrorist attacks as reprisal. We all know the impact the Insurance industry felt after the 9/11 attack, and fear of a similar event led to a mass exodus from the sector, driving the Insurance index (IUX.X) to new lows just above the $200 level. While it is no surprise to see that the IUX has rebounded substantially from those lows, the index substantially lagged the rest of the market, topping out last Friday the $248 area, the site of the early February highs. On the way down, we managed to garner a decent play on CB, as the stock continued to Underperform the sector. CB broke down below the $50 level in early February and after finding firm resistance near the $49.50 level, proceeded down to find support first at $45.75. The bounce off that level failed, leading to a plunge to $41.78 on March 12th before the latest oversold bounce. After the short-covering ramp last week, CB topped out just below $49 and fell sharply with the rest of the market (and sector) on Monday. The divergence showed up on Tuesday though. While the broad market advanced, the IUX barely managed to break even on the day, desperately clinging to the 50-dma ($236.57). But CB got pummeled, plunging through both the 10-dma ($46.51) and the 20-dma ($46.37) on its way to a nearly 3.5% loss. So what we have is a stock underperforming its sector, which is in turn underperforming the broad market. Can you say relative weakness? So what was the cause of that weakness, you ask? After the close on Monday, Standard & Poor's cut its senior long-term debt ratings on the company by one notch, saying the company's operating performance and capital strength did not support the former ratings. Ouch! This has been a familiar theme lately, as insurance companies' financial performance has been seen at greater risk due to their reliance on investment gains, which just aren't there. Today's bounce takes us right back to the $45.75 support level from late February, so we have a couple ways to play. A breakdown below that support can be used for momentum entries, with an eye towards a retest of the March 12th lows near $42. More cautious traders will want to wait for an oversold bounce to enter the play though, looking for a bounce failure near the $47 level (the top of today's candle and the site of the 30-dma at $47.06). Depending on the action in the broader market, CB could even bounce as high as $48, but that should be firm resistance, making for an even better entry into the play. Initial stops will be set at $49, just above recent reaction high. Suggested Options: Short-term traders will want to focus on the April option, as it will provide the best return for a short-term play. Those looking for additional staying power to hold through the recent (and expected future) volatility will want to use the May strike. BUY PUT APR-45 CB-PI OI=800 at $1.60 SL=0.75 BUY PUT MAY-45 CB-QI OI= 18 at $2.40 SL=1.25 Annotated Chart of CB: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-25/CB032503.gif Picked on March 25th at $45.73 Gain since picked: +0.00 Earnings Date 04/30/03 (unconfirmed) Average Daily Volume = 1.30 mln ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 03-25-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - UNH ********************** PLAY OF THE DAY - CALL ********************** United Health - UNH - close: 90.66 change: +1.36 stop: 85.99 Company Description: UnitedHealth Group is a diversified health and well-being enterprise that provides a full spectrum of resources and services to help people achieve improved health and well-being through all stages of life. UnitedHealth Group is organized into five businesses: UnitedHealthcare, Uniprise, Ovations, Specialized Care Services, and Ingenix (source: company press release) Why we like it: UNH has been on our radar for months. We have played it a couple of times, mostly due to its tendency to run once it breaks out through resistance or down through support. We watch listed it over the weekend after last Friday's break above the 200-dma, looking for a pullback to support at that average for possible entries, or even a move back through $90. We got both. The stock bounced off that 200-dma to the penny, then climbed all the way above 90 on Tuesday. It has not broken either of those barriers since November, although it has made several unsuccessful runs at the 200-dma. Prior to the breakout, it consolidated in a $10 rectangle pattern between $80 and $90. The minimum measuring objective of such a pattern is equivalent to the size of the consolidation and would signal a possible run at $100. The point and figure chart shows a breakthrough of bearish resistance and a current bullish vertical count of $114. That count is an eventual target and not necessarily our target for the play, which is closer to $100. It is also based on its current column of "X," which is still being built and can run higher. Longer term players may want to look at options nearer the summer months if they would like to target a run to that level, but must bear in mind that those options also contain more premium and require a greater investment. UNH recently showed up on Forbes' seventh annual list of top performing companies, along with other health care businesses Pfizer and Forest Labs. The ranking was the result of an examination of every S&P 500 stock, based primarily on sales and earnings growth over the most recent 12-month and three-year periods. UNH is joining other HMOs in searching out options for unemployed workers and CEO William McGuire is calling for a privately run universal health care system. he said what is needed is "public consensus on the necessary attributes of a minimum, essential health benefit package made available to all and funded both by the government and private sources." The company boasts solid fundamentals, having beat earnings estimates in January and raising guidance at the same time. UNH's revenue grew 10% over the year ago quarter and its profits jumped 37%. it also projected full-year profit growth of around 22%, implying earnings of $5.19-$5.19 per share. That was well above the consensus of $5.05 per share. We like entries on the move through $90 and the bounce from support at the 200-dma. Our short-term target is $100, based on the rectangle consolidation, but traders should be aware of possible resistance around $93 and again in the $94-$96 range. More conservative traders who are reluctant to chase the recent gains can wait for a possible pullback to the 200-dma if the broader markets see another sell-off. Keep in mind, however, that the last 200-dma test on a day that the Dow was down 300- points was only a brief one and the stock bounced impressively, gaining $1.60 intraday from its low, as the market continued to drop, posting a loss of only $0.60 on Monday. We are setting a wide stop at $85.99 to allow for a test of recent lows just before the breakthrough the 200-dma and still allow for a risk/reward of more than 2:1. However, more conservative traders may want to set a stop at $87.50, just below that average. Suggested Options: Shorter Term: The April 90 Call at $3.10 will offer short-term traders a return on an immediate move, with intermediate premium risk. The April 85 call offers more profit on a move higher, given the smaller amount of extrinsic value, but also offers more downside risk if the stock pulls back, due to it high level of intrinsic premium. Longer Term: Traders looking to capitalize on a move toward the PnF target of $114 might want to look at the June 90 call for $5.50. This provides extra time for the stock to move higher, but traders will risk losing more premium if the stock does not trade higher or pulls back. BUY CALL APR-85 UHB-DQ OI=3998 at $6.80 SL=3.40 BUY CALL APR-90 *UHB-DR OI=3414 at $3.10 SL=1.55 BUY CALL JUN-90 UHB-FR OI=4642 at $5.50 SL=2.75 BUY CALL JUN-95 UHB-FS OI=1465 at $3.00 SL=1.50 Average Daily Volume = 1.98 MIL Chart of UNH http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-03-25/UNH032503.gif ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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