The Option Investor Newsletter Thursday 04-10-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Not Over Yet Futures Markets: Floating Duck Index Trader Wrap: (See Note) Market Sentiment: Support Holds Weekly Manager Microscope: David Williams: Excelsior Value & Restructuring (UMBIX) Updated on the site tonight: Swing Trader Game Plan: Predictable Bounce Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 04-10-2003 High Low Volume Adv/Dcl DJIA 8221.33 + 23.40 8225.04 8145.87 1.47 bln 1822/1350 NASDAQ 1365.61 + 8.90 1368.11 1351.10 1.23 bln 1583/1467 S&P 100 441.73 + 2.20 442.89 438.26 Totals 3405/2817 S&P 500 871.58 + 5.59 871.78 862.76 W5000 8254.36 + 44.30 8256.45 8177.85 RUS 2000 372.69 + 0.41 373.68 371.40 DJ TRANS 2192.92 + 6.60 2195.72 2175.83 VIX 28.96 - 1.95 30.77 28.83 VXN 40.33 - 1.12 42.45 40.33 Total Volume 2.899B Total UpVol 1,812B Total DnVol 979M 52wk Highs 162 52wk Lows 91 TRIN 1.26 PUT/CALL 0.93 ************************************************************ Not Over Yet The war is not over and the bulls are not done. The markets pulled back from the brink of disaster one more time despite news from Iraq about new battles and more deaths. The Dow dipped to support at 8150 and then slowly battled back to close positive by +23 points. After Wednesday's thrashing we will be happy with any gains we can get. Dow Chart - 240 min Nasdaq Chart -240 min Saddam is doing his imitation of "where's Waldo" but nobody cares. There was another new wave of jobless added to the rolls last week when their luck ran out while waiting for the war to be over. 405,000 new jobless claims were filed making it the eighth consecutive week over 400,000 claims. The four-week moving average fell slightly to just under 420,000. 802,000 workers filed for extended claims after their initial 26 weeks of benefits expired. This gives them another three months to find a job after being out of work for more than six months already. Those out of work consumers are not rushing to the malls. The Chain Store Sales report showed a drop of -0.2% in March. This was the first decline since March 1995. Wal-Mart managed only a +0.7% increase which was their lowest increase in seven years. Apparel stores fared the worst with FD, JCP and the LTD losing ground. CHS, PSUN beat the trend with large gains as did COST and BJS both wholesale club stores. Shoe stores as a segment did the worst with a -10.7% drop followed by furniture stores at -6.3% and department stores at -5.5%. A late Easter, bad weather, war, unemployment and a decline in equity wealth were given as reasons. Friday the same data will be reported in a different format with the data adjusted for Easter and using only existing store sales. This could show a gain instead of a drop. The MAPI Survey showed some positive sentiment in the manufacturing sector. The overall headline number slipped slightly from 67 to 63 but several key internal components improved. The new orders index rose to 67 from 60 and the order backlog rose to 54 from 52. These might not be soaring but it shows the expectation for future improvement. News Corp acquired control of DirecTV from GM after a multiyear battle to get a satellite network. This is a killer deal for NWS and allows them to compete directly with the other satellite channels. This gives NWS the capability to reach 100 million households around the world. Unfortunately for FOX shareholders the acquisition came with a price. NWS is going to put the new acquisition in its FOX subsidiary along with $4.5 billion in debt that came with the deal. Also they announced creating 74 million new shares to help pay for the deal. FOX dropped from $27 to $22 on the news. The new combination of assets will give NWS a huge jump in the marketplace but shareholders got a nasty surprise. USAI announced it was buying the rest of Hotels.com that it did not already own and would issue another 45.2 million shares to cover the acquisition. ROOM jumped from $53 to $63 on the news. USAI also jumped +6% on the news despite the 45 million new shares. Obviously investors thought this was a good deal. DNA dropped on news that sales of Rituxan were slowing despite a strong +59% jump in earnings reported yesterday. IDPH which co-markets the drug also fell. Also weighing on the biotech sector was the potential delisting of IMCL which dropped -1.09. While these two events were company specific there was weakness across the sector. The supersonic Concorde became the latest casualty of the weakness in the airline industry. British Airways, BAB, announced they would retire the airplanes at a cost of $130 million and Air France said they would write off $65 million. The last Air France flight will be on May 31st. There are 12 existing planes and they have not shown a profit in a long time. They are aging and even when they are 100% full they only operate at breakeven or small loss. With current traffic on these flights running at 20% or less they are burning cash. Boeing says there will not be any supersonic airliners anytime in the near future as there is simply no demand. Boeing also fell on news that the US may want to change the terms of a 767 tanker deal for 100 planes. Rumsfeld said he wanted to review the terms and decide if he wanted to lease or purchase of some combination of the two. Either would be fine for Boeing but anytime the government wants to review anything it sounds like a long delay. The war droned on today with Kirkuk falling to the Kurds without a fight. Iraqi troops in Mosul were also reported to be trying to negotiate a surrender with the coalition troops in the area. The US said that the majority of the top 200 Iraqi leaders have been killed or are missing. There was also a news report on FOX that marines had found weapons grade plutonium in an underground bunker. Marines also captured what appeared to be a mobile bioweapons lab when the driver tried to run a checkpoint. All of these events did appear to put a bottom under the market in late afternoon. When the plutonium story broke there was a quick bounce which continued until the close. The assumption was the discovery of nuclear material justified the entire war and proved the larger threat to the US and the world. Despite the fact the Dow only managed +23 points the internal indicators are showing clear signs of bullishness. The VIX closed at 28.96 and a three month low. While this is a bullish sign of lack of fear in the markets it is also eventually a bearish sign from a contrarian viewpoint. Lack of fear means all the traders are lining up on the same side of the market. Historically the VIX has tended to drop just before earnings as investors enter positions and then go vertical after those earnings disappointed. While the indexes did not show it today the end of day bounce may be setting us up for another retest of the recent highs. With multiple levels of strong resistance above us it will take a strong buying binge to breakout. Traders hope earnings, which are starting to flow in volume, will help convince investors and funds to lighten up on the selling and switch to bullish positions. GE is going to lead the earnings list on Friday and could give the markets a boost. Next week the earnings ratchet up significantly. Next week is a critical week for earnings and more importantly guidance. Monday has IBM, NVLS and RMBS as the tech barometers. Tuesday we face the back to back giants of INTC and MSFT. After IBM on Monday and INTC/MSFT on Tuesday we should know the fate of the tech sector. Tech bulls hoping for a positive surprise could bid up the markets in anticipation of a positive guidance surprise. For Friday the Dow has strong resistance at 8265 and then again at 8330. Support is where we bounced today at 8150. This gives us a narrow trading range while we wait for those tech earnings. The Nasdaq bounced off support at 1350 today and recovered to close at 1365. It was the strongest index this afternoon with either short covering or tech bulls buying the dip. This is a good sign considering the chip stocks are expected to report a -70% drop in earnings over the next couple weeks. Almost all the chip and software stocks have warned so there is the potential for a positive surprise. The worst news possible is already priced into the techs so any positive comments could cause a bounce while negative guidance may have little impact. This could be wishful thinking but that appears to be what is on the mind of tech buyers today. Economic reports on Friday could help or hinder this concept. We have the PPI at 8:30 but that is not expected to move the market. Retail Sales will also be announced at 8:30 but after the Chain Store Sales today it is not likely to be a shock and because of the reporting differences could actually be positive. The big news tomorrow will be the Michigan Consumer Sentiment for April. This is the first look for April and there are some analysts that think it could improve from the 77.6 in March. The positive war news and the appearance of a quick end could have lifted consumer attitudes over the last two weeks. This along with the positive war news tonight could provide an added incentive for anyone still short to cover before the weekend. This should provide for an interesting Friday. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Floating Duck By Vlada Raicevic Daily Settlement Numbers 4:15pm ET > DOW Last: 8221.33 Net: +23.39 High: 8225.04 Low: 8145.87 > YM 03M Last: 8204 Net: +24 High: 8216 Low: 8118 > S&P 500 Last: 871.58 Net: +5.59 High: 871.78 Low: 862.76 > ES 03M Last: 871.50 Net: +4.50 High: 872.50 Low: 861.50 > Nas 100 Last: 1033.14 Net: +9.62 High: 1035.61 Low: 1018.17 > NQ 03M Last: 1038.50 Net: +12 High: 1038.50 Low: 1019.50 DAILY PIVOTS > YM 03M R2: 8283 R1: 8253 Pivot: 8185 S1: 8155 S2: 8087 > ES 03M R2: 880 R1: 877 Pivot: 869 S1: 866 S2: 858 > NQ 03M R2: 1053 R1: 1048 Pivot: 1034 S1: 1029 S2: 1015 I've been sitting here, staring at today's 5 minute chart of the ES. I haven't drawn any lines, or checked any numbers. I'm just staring, and trying to make some sense out of what I saw today. If you have ever watched a duck on a lake, you have noticed just how unsinkable they are. They just bob there, like a rubber ball. Like our markets. Chartists and market commentators will talk about how we came close enough to support, and that traders figured it was enough, and decided to buy back in. I disagree completely. We did not get even a remotely satisfying bottom, one that would be considered worthy of buying. We opened nearly flat and then sold off a little bit, then we went up and pierced the high of the first 5 minute stick, then we sold off again to break yesterday's low. This was bought and we went above the earlier high, but were immediately sold off to new lows. Yes, higher highs and lower lows, that's what bottoms are made of. We kept grinding down to form new lows by one tick. Bursts of buying were met by bursts of selling. The 50ema, which often acts as support and resistance was being crossed every other bar. We rolled over and all indicators said we were selling, only to be met with buying for yet another new high. This too was sold and gave signals that we were rolling over, but this time the 50ema held as support and we bounced again to new highs. At this point price action got downright silly. Explosions of buying was absolutely pounded by sellers, and price just whipsawed back and forth until the sellers finally gave up and we closed near the highs of the day. What did this do to the daily chart? Almost nothing. Yet again. Yesterday it looked like we would finally get a bit of real selling to take us to strong support, to fill a gap, and then to see just what the market had in store for us. How it would handle that retest. We did not get the satisfaction, and it certainly looked like there was a concerted effort to keep the market afloat, and from even testing those support areas. By keeping the selling to a minimum, we did not create any fear, the VIX closed down nearly two points, and options premiums were yet again hammered, just prior to options expiry week. It is quite amazing that a day after strong selling, we would find almost no follow through. Since the daily charts have not changed, let's look at the shorter term charts. On the 270 minute chart, I placed the letter 'x' next to the doji candles. This I did with the near perfect doji's, although there were plenty of imperfect one's scattered around as well. Just look at them all. For two weeks we have been completely unable to decide what to do. Complacency is high, with bulls heavily outnumbering the bears, yet we do not go up. It seems that the good bullish vibes are all about the future. The thinking seems to be, "We will go up. We haven't gone up, but we will." This attitude has become so prevalent that I've been seeing even long term bears buying into this story. This chart shows us going back up to test the broken uptrend line, and at the same time testing the new downtrend line. both of these were near the center of the blue regression channel, and so with so much resistance, price stopped there. Macd did go to the centerline and stopped moving down. Fast stochastic is now bottomed and looks like it may move up. And RSI/CCI both are turning up. ADX avoided crossing bearish. Indicators are saying that we could move up from here, but with so much overhead resistance, it would be tough to do without good volume. On the other hand, if sellers become so incredibly shy that they disappear entirely, it may not take all that much volume to bust through resistance. ES 270 Minute Chart: In last night's wrap I stated that the 60 minute chart looked like it was ready for a bounce. However I thought we would get it either prior to, or after reaching daily support levels. The bounce has come, and with it came a resetting of indicators which now show a potential change in the 60 minute trend. Macd is crossed bullish (but below the centerline). Fast stochastic is moving up quickly, but the slower stochastic is still well below any uptrend signal. Also, RSI/CCI have crossed above their moving averages. Note that Wovo was the first to cross down and go red (arrow), but that it has yet to cross the centerline to go green, also note that while price made a lower low today, fast stochastic and Wovo both made higher lows, showing a bullish divergence which was followed by today's move up. ES 60 Minute Chart: I also want to point out today's 5 minute chart. I've placed an X at places where strong buying pressure was immediately met by strong selling pressure, and placed a Y where strong selling pressure was met by strong buying. In hindsight you can see where there was sustained buying for two small trends up which would have been useful for an intraday trade. These, however, were surrounded by fast whipsaws, and partial rollovers. Note also that the 50ema (purple line) was breached about 10 times today, making it nearly useless as a support/resistance indicator. ES 5 Minute Chart: NQ 270 minute chart clearly shows how the NQs bounced well before 'expected'. There was horizontal support (two thin lines), there was lower regression channel, and two trendlines (red). It must be that bullish euphoria being so high of a bounce expectation, that buyers lined up well before the support was even tested. While that may seem crazy, it worked well for those that bought, because price no only bounced hard, it broke above the recent downtrend line (purple). Wait, you say, didn't we just break an uptrend line to the downside? Indeed we did. All indicators here are still bearish, with none giving any reversal signals. NQ 270 Minute Chart: The NQ 60 minute chart shows more clearly how the NQs cheated the bears who thought to either cover at support, or wait for a potential break. This chart is turning quite bullish after the sustained buying in the NQs today. RSI/CCI above their moving averages, Macd crossed bullish and is aiming for the centerline, and even Wovo looks to cross the centerline if we hold positive for a couple more hours. NQ 60 Minute Chart: If today was the retest of support, then, like the 60 minute charts show, we could be reversing back up. However, we already reversed back up and it failed miserably at the most recent highs. To move back up toward those highs again on a very weak base would almost doom it to failure. The market would be smart to allow some real selling to take place so that support can be hit, and then if the bulls want to buy it up, they can do so, probably with a fair number of bears in tow. However, as it stands, we are again at a point of pondering the indecisiveness of the charts. ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff’s Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_041003_1.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Support Holds by Steven Price The markets finally found some support today, testing previously significant levels. With the war winding down and earnings set to begin flowing over the next few weeks, it appears traders are in a wait and see mode. The Dow traded down to the 8120-8150 range, which has provided both support and resistance in the past few months. The OEX also traded down to the correlative 437-440 range. Both of these indices tested the 50% retracement of the October-December lo-hi range and found buyers when they got there. The Nasdaq Composite also traded down to a previously pivotal support/resistance level at 1350, with a low of 1351 and got a bounce. It filled the gap from April1-2 and also bounced. The ten-year treasury yield has slowed its drop at the 3.9% level, finding support there for the past two days, as treasury buyers apparently have lost some steam and are possibly getting ready to move back into equities. The U.S. Dollar Index (DX00Y) remains the weak link, moving back below 100.0, but has found some support at its 50-dma. The bullish percents in the Dow/SPX/OEX/COMP/NDX/NYSE have all held recent gains, in spite of the recent pullback. Also helping to support stock prices has been a pullback in oil prices. The May Crude Oil futures gave back some of Wednesday's gains that came on the news that U.S. oil reserves had dropped and also the news that OPEC was considering a pullback in production of 2 million barrels per day at its April 24 meeting. The inverse relationship between oil prices and stock prices has been incredibly consistent for the past year. However, today's action saw both lower to start the day. This could mean a couple of things. Either the action in oil tells us that the dip in equities is short lived and we'll see buyers coming back at support, or it is possible that this relationship will not be as reliable as in the recent past with the end of war. The relationship reflected not only business costs, but also geo- political issues and with those issues seemingly finding closure, we may no longer see the consistency that we have in recent months. We'll have to watch this for the next few weeks to see if this is truly a break in trend, or just a one-day anomaly. The semiconductor stocks have also begun to recover from the post RFMD warning drop, finding support at a rising 50-dma in the Semiconductor Index (SOX). This index has flirted with the pivotal 300 level on the last two pullbacks and has found there each time. A number of these stocks report earnings next week and some analysts are expecting a 70% drop in those earnings overall. Some of the bigger stocks to report will be NVLS on April 14, TXN and INTC on 4/15 and KLAC on 4/17. Novellus (NVLS) saw its rating cut from 'neutral' to 'sell' today by Fahnestock, based on expectations for cautious second quarter guidance. The firm said Q2 orders are likely to be down 5-10% and thinks estimates for the second and third quarters are too optimistic. If they are right and the sector starts to warn, then that 50-dma could be a memory and we could test support around the 280 level. This morning's economic data was somewhat encouraging, or at least better than expected. The initial unemployment claims data showed a decrease of 38,000 from the previous week and took the four-week moving average down to its lowest level in a month. However, the decline of 3,750 took the average down to 419,500, which is still above the 400,000 level that is used to gauge a worsening labor picture. The flip side of the report showed that it is taking longer to find work once unemployed. The average number of workers receiving state benefits increased by 10.750 to 3.513 million - the highest reading since last November. These numbers also have to be taken in light of the latest CEO economic survey released by the Business Roundtable. That survey showed 45% of CEOs expect their companies to cut jobs in the next six months, while only 9% expect to increase hiring. They cited consumer uncertainty from the implications of war and terrorism, along with weak consumer demand, as posing the greatest challenges to business. While the data is mixed on a relative basis, it still points to an increasingly troubled economy. That doesn't mean the markets can't bounce if the upcoming earnings reports are better than grim expectations. Today's trading shows us bouncing from a pivotal level and the reports of the next couple of weeks should either reinforce that bounce, or lead us back down through support. If we do lose these levels of support then we could revisit recent lows. However, so far it looks like the bounce is holding. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10673 52-week Low : 7197 Current : 8221 Moving Averages: (Simple) 10-dma: 8203 50-dma: 7997 200-dma: 8350 S&P 500 ($SPX) 52-week High: 1176 52-week Low : 768 Current : 872 Moving Averages: (Simple) 10-dma: 870 50-dma: 848 200-dma: 883 Nasdaq-100 ($NDX) 52-week High: 1573 52-week Low : 795 Current : 1033 Moving Averages: (Simple) 10-dma: 1042 50-dma: 1013 200-dma: 989 ----------------------------------------------------------------- The Dow Jones Home Construction Index (DJUSHB): The DJUSHB has been building on recent gains, in spite of an erratic broader market. While mortgage rates had been creeping up, the bond market has seen buying the past few days, pushing interest rates lower. Even Alan Greenspan has said he expects a drop from 2002's pace in the housing market, but investors are still coming for these stocks. the DJUSHB has blasted above its 200-dma and is now approaching resistance at 346 - a level it hasn't seen since last September. Traders looking to jump on these stocks may want to wait for a break over that level to avoid getting in just before a pullback. The other option might be to play a bounce in the sector on a pullback in the DJUSHB to previous resistance at 330. 52-week High: 397 52-week Low : 260 Current: 344 Moving Averages: (Simple) 21-dma: 327 50-dma: 319 200-dma: 318 ----------------------------------------------------------------- Market Volatility The VIX broke below an important level this afternoon. The 29- 30% level has served as support and indicated that it was time for a market pullback. We tested that level repeatedly last December, with each test holding above 29 and leading to an equity drop. Today, we dropped down to 28.96, just barely breaking below those December lows. The VIX has tended to trade like a stock, with support and resistance giving reliable signals. The break below 29 would indicate a drop to 26% and a market rally in the meantime. It is not a definite measure and is derived from 8 different options in the OEX. The break was also by only 0.04, however, we are getting some bullish signals here for traders to keep an eye on. CBOE Market Volatility Index (VIX) = 28.96 -1.95 Nasdaq-100 Volatility Index (VXN) = 40.33 -1.12 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.93 448,368 415,422 Equity Only 0.89 303,913 269,650 OEX 0.84 26,878 22,596 QQQ 1.98 26,157 51,846 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 43.9 + 0 Bull Confirmed NASDAQ-100 57.0 + 0 Bull Alert Dow Indust. 43.3 + 0 Bull Alert S&P 500 47.2 - 1 Bull Confirmed S&P 100 45.0 - 2 Bull 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 1.29 10-Day Arms Index 1.31 21-Day Arms Index 1.24 55-Day Arms Index 1.37 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 1602 1178 NASDAQ 1510 1413 New Highs New Lows NYSE 62 36 NASDAQ 70 40 Volume (in millions) NYSE 1,442 NASDAQ 1,239 ----------------------------------------------------------------- Commitments Of Traders Report: 04/01/02 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 stayed long for second most bullish reading of the year, just one period after shifting from net short to net long. Small traders reduced their overall net long position by increasing their shorts. Commercials Long Short Net % Of OI 03/11/03 440,688 485,938 (45,250) (4.9%) 03/18/03 483,224 490,582 ( 7,358) (0.1%) 03/25/03 424,781 415,258 9,523 1.1% 04/01/03 417,637 409,332 8,305 1.0% Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: 9,523 - 3/25/03 Small Traders Long Short Net % of OI 03/11/03 169,450 102,631 66,819 24.6% 03/18/03 184,907 153,400 31,507 9.3% 03/25/03 143,402 123,178 20,224 7.6% 04/01/03 143,580 126,594 16,986 6.3% Most bearish reading of the year: 20,224 - 3/25/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 *NEW SECTION DUE TO READER REQUESTS* This is our first report of this data. Commercials currently maintain a net short position, while small traders are net long. Commercials Long Short Net % Of OI 04/01/03 98,460 321,335 (222,875) (53.1%) Most bearish reading of the year: (222,875) - 04/01/03 Most bullish reading of the year: (222,875) - 04/01/03 Small Traders Long Short Net % of OI 04/01/03 2,296 1,146 1,150 33.4% Most bearish reading of the year: 1,150 - 04/01/03 Most bullish reading of the year: 1,150 - 04/01/03 NASDAQ-100 Commercials reduced long positions by just under 10%, while small traders left long positions nearly unchanged, but reduced shorts by about a third. Commercials Long Short Net % of OI 03/11/03 43,641 56,020 (12,379) (12.4%) 03/18/03 58,877 64,302 ( 5,425) ( 4.4%) 03/25/03 44,403 36,436 7,967 9.9% 04/01/03 40,493 36,893 3,600 4.7% 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 03/11/03 27,196 9,674 17,522 47.5% 03/18/03 37,097 26,951 10,146 15.8% 03/25/03 10,313 20,080 ( 9,767) (32.1%) 04/01/03 9,771 13,306 ( 3,535) (15.3%) 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 increased short positions slightly, while leaving the long side alone. Small traders left both sides of the equation unchanged. Commercials Long Short Net % of OI 03/11/03 21,726 14,370 7,356 20.4% 03/18/03 26,880 18,853 8,027 17.6% 03/25/03 19,752 10,212 9,540 31.8% 04/01/03 19,068 12,672 6,396 20.2% 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 03/11/03 5,549 7,727 (2,178) (16.4%) 03/18/03 6,589 8,343 (1,754) (11.7%) 03/25/03 5,076 7,721 (2,645) (20.7%) 04/03/01 5,142 7,459 (2,317) (18.4%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************* WEEKLY MANAGER MICROSCOPE ************************* David Williams: Excelsior Value & Restructuring (UMBIX) This manager seeks long-term growth opportunities among companies that are creating value through restructuring and industries that are consolidating, an approach that may be well suited to today's environment. David Williams is a managing director of U.S. Trust (advisor to the Excelsior Funds) and has managed the $1.6 billion Excelsior Value & Restructuring Fund (UMBIX) since fund inception on December 31, 1992. Assisting Williams today in the portfolio management of the fund is Timothy Evnin, a manager director and senior portfolio manager (like Williams) with U.S. Trust Company. Both professionals have been with U.S. Trust since 1987 and have many years of experience over multiple market cycles. Williams has primary responsibility for the day-to-day management of the fund's portfolio, and sports one of the better 10-year records of performance. The no-load Excelsior Value & Restructuring Fund (UMBIX) requires an initial investment of $500 to open a regular account ($250 for IRAs). You can buy the fund directly from the Excelsior Funds or through any one of several brokerages that offer the fund on a no load, no-transaction fee (NTF) basis. Morningstar's report has a list of all the brokerage fund networks that this fund is offered through. For more information or to download a prospectus, go to the Excelsior Funds website at www.excelsiorfunds.com. Also, you can go to the U.S. Trust Company website www.ustrust.com for more information on them as an investment manager. Management Overview The primary objective of the Excelsior Value & Restructuring Fund is long-term capital appreciation. Williams seeks to achieve the fund's objective by investing in companies that will benefit from their restructuring or redeployment of assets and operations, and as a result, become more competitive and profitable. In security selection, Williams and Evnin invest primarily in common stock of companies they feel are undervalued by the market and whose stock price is expected to benefit from the value created through their restructuring activities or industry consolidation. The fund is an actively managed portfolio; hence its holdings are subject to change. As of year-end 2002, the fund's portfolio had 98% of assets invested in stocks, with only 4% of assets invested in foreign securities. So, Williams fishes primarily in domestic waters. The fund's average market capitalization at the time was $9.4 billion, per Morningstar, landing it in the large-cap growth style box. However, Williams looks for value opportunities among all capital sectors, so maybe "multi-cap value" is a better style description for this fund. At December 31, 2002, the fund assets were invested as follows: Market Capitalization: % of Portfolio 11.0% Giant-Cap 45.4% Large-Cap 34.8% Mid-Cap 8.8% Small-Cap Since 2002 the fund overall has landed in the large-cap style box per Morningstar. But as you can see, the fund's portfolio is all market capitalization in nature. Since it takes a long-term view in managing holdings, this fund may also occassionally drift into the "blend" style box as the value of fund holdings rise to their appraised value, but it still has a value discipline with respect to its buy decisions. Looking at Morningstar's valuations and growth rates for the fund as of year-end 2002, one can see that the fund's price valuations were below that of the average large-cap value fund, while growth rates were above that of the average large-cap value fund. So in relation to other large-cap value managers, Williams likes stocks that are even more undervalued and possess more growth potential. At only 8%, the portfolio's annual turnover is low, making it an appropriate investment for all account types including taxable or regular accounts. The fund consisted of 65 stock holdings at the end of 2002, diversified across many industry sectors, with 28.1% of assets represented by the fund's top ten holdings. Black and Decker, Union Pacific, Kraft Foods and Centex were the fund's top four holdings at that time. No one holding represented more than 4% of portfolio assets. So all in all, a fairly well diversified equity portfolio. Performance Overview Because Williams has served as the lead manager or co-manager for the Excelsior Value & Restructuring Fund since its inception date (December 31, 1992), we want to look first at the fund's long-run performance record over the trailing 10-year period through March 31, 2003. Investors with truly long-term investment horizons may want to focus their attention on the fund's long-term performance history over multiple market cycles. For the trailing 10-year period, Williams produced a 13.6% annual equivalent rate of return, outperforming the S&P 500 index by an average of 5.1% and the Russell 1000 index by an average of 5.2%, to rank in the 1st percentile of the Morningstar large-value fund category. That average annual rate is still also well above the assumed 10% historical annual norm for U.S. stocks, so Williams has done a superb job over the long term of creating wealth for shareholders. But, as the old saying goes, higher returns are often associated with higher risk, and such has been the case here. According to Morningstar, the fund's risk level has been high relative to its large-value category peers over the past decade. Still, returns have been so good that Morningstar still awards the fund 5 stars overall for the trailing 10-year period. In other periods, risk limits the fund's overall star rating to 4 stars (above average). So, the Excelsior Value & Restructuring Fund may also be labeled an "aggressive value" fund. The 1-year chart above gives you a sense of how much the fund's share price can fluctuate within a yearly period. Other value- driven funds may be less volatile than this offering, so if you are not risk tolerant, this fund may not be appropriate for you. f you are risk tolerant, this fund may offer above average/high appreciation potential over the long run. Below is a summary of the fund's returns and category rankings for the trailing 3-year and 5-year periods through April 9, 2003. 3-Year Total Returns/Category Rankings: -10.3% Excelsior Value & Restruct. (UMBIX) 10th Percentile -15.8% S&P 500 Index 5-Year Total Returns/Category Rankings: + 0.9% Excelsior Value & Restruct. (UMBIX) 6th Percentile - 3.5% S&P 500 Index 10-Year Total Returns/Category Rankings (March 31, 2003): +13.6% Excelsior Value & Restruct. (UMBIX) 1st Percentile + 8.5% S&P 500 Index We put the 10-year annualized returns up there again so you can see the "alpha" Williams has generated over longer time periods. In all longer-term trailing periods, Williams has outpaced fund peers and the market as a whole (S&P 500) by significant margins. Conclusion With the economy in the doldrums, most U.S. companies have had to streamline their businesses to stay competitive or to become more competitive. If you seek a portfolio manager that takes a value approach to investing and buys companies that will grow in value because of their restructurings or due to industry consolidation, then the Excelsior Value & Restructuring Fund may be appropriate. Because Williams and Evnin incur higher portfolio risk than their large-value fund peers, the fund may not be well suited to people with low risk tolerances. But those who can accept "significant" fluctuations in NAV share price have been amply rewarded over the long term for the risk incurred by these fund managers. For more information, go to the www.excelsiorfunds.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 *********************** Predictable Bounce The markets tested some important support levels this morning and the bounce was impressive. 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. 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The Option Investor Newsletter Thursday 04-10-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: IGT Dropped Puts: ROOM Daily Results Call Play Updates: BBBY, BLL, MMM, UNH, WFMI New Calls Plays: LXK Put Play Updates: CDWC, LLL, NOC, WHR New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Intl. Game Tech. - IGT - close: 79.00 change: -2.61 stop: 78.50 After a brief moment in the sun on Monday, IGT faded with the rest of the market, settling back into the $81-82 area by the closing bell on Wednesday. While it didn't provide what could be called an entry point, it certainly didn't give a clue as to the carnage that occurred on Thursday. UBS cut their rating on Argosy Gaming due to a proposal in Illinois to raise gaming taxes, and then extended their bearish comments to cover other gaming stocks, including IGT. That proved to be the death knell for our play, as it plunged at the open and never managed to stage any kind of meaningful bounce all day. Finally closing at $79, just off its low of the day, IGT gives us no reason to hold the play hoping for a rebound. We're dropping coverage tonight, chalking this one up as a loser, thankful that we never really got a decent entry point. Picked on April 6th at $82.18 Gain since picked: -3.18 Earnings Date 04/22/03 (confirmed) Average Daily Volume = 1.20 mln PUTS: ***** Hotels.com - ROOM - close 63.50 change: +10.20 stop: 57.25 Ouch! Now that was exceedingly unpleasant! Our ROOM play was proceeding like clockwork right up through the close of trading on Wednesday, finally cracking below the $54 support level and looking like a shoe-in to reach our $50 target. That was before this morning's announcement that USAI would buy the remaining shares of ROOM that it didn't already own, sending the stock soaring through the $60 level (and obviously through our stop) at the open. That proved to be the best opportunity to exit the play (a good advertisement for stops), as ROOM continued to climb throughout the day, coming to rest more than 19% above yesterday's close, turning a nice winning play into a painful loser. Needless to say, we're dropping the play tonight. Picked on March 30th at $58.58 Change since picked: +4.92 Earnings Date 04/24/03 (unconfirmed) Average Daily Volume = 1.15 mln *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS Mon Tue Wed Thu BBBY 37.24 -0.55 0.73 -0.71 0.77 $38 trigger BLL 56.72 -1.04 -0.02 -0.64 0.22 21-dma bounce IGT 79.00 -3.14 0.11 -0.64 -2.61 Drop, Tax Probs LXK 69.02 -2.13 -0.78 0.49 1.39 New, pullback MEDI 32.72 -1.17 0.31 -0.57 0.01 Channeling MMM 132.78 -2.39 0.92 -1.87 1.17 $130 support UNH 91.64 -0.60 1.27 -1.28 -0.78 THC news WFMI 56.80 -1.30 0.39 -0.25 0.59 21-dma bounce PUTS CDWC 40.77 -1.04 -0.59 -0.50 0.40 $40 test LLL 36.48 -0.71 -0.45 -0.37 -0.85 Sliding NOC 81.38 0.99 -0.30 0.20 -2.27 Breakdown ROOM 63.50 -0.99 -0.25 -1.04 10.20 Drop, merger WHR 51.74 -0.63 0.08 -0.57 0.60 200-dma ************************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 ******************** Bed Bath & Beyond - BBBY close: 37.13 change: +0.66 stop: 35.00 Broad market weakness was not what Retail bulls wanted to see on Wednesday and the Retail index (RLX.X) fell back from the $288 resistance level, closing right at the low of the day. Thursday's session was a mirror image, as the index reversed yesterday's loss to close right at resistance again. BBBY mirrored that action, showing a small loss on Wednesday that was almost exactly reversed today. BBBY is right back at the lower edge of that major resistance from $37-38, and the action of the past couple days demonstrates precisely why we initiated coverage with a trigger at $38. It will take some bullish conviction to push both the RLX and BBBY through their respective resistance levels, but once those levels are cleared, it ought to unleash more bullish action. Aggressive traders can enter on the initial breakout over $38, while those with a more conservative approach will want to wait for a subsequent pullback to newfound support in the $37-38 area before entry. Picked on April 8th at $37.18 Gain since picked: -0.05 Earnings Date 07/02/03 (unconfirmed) Average Daily Volume = 3.24 mln --- Ball Corporation - BLL - close: 56.72 change: +0.22 stop: 55.50 It's make or break time for our BLL play, as the stock has been drifting lower all week after Monday's surge above the $59 level. The decline continued this morning all the way down to the $56 level before a relatively solid bounce commenced, lasting right into the closing bell. We've been looking for a decline to this level for new entries into the play and the market certainly delivered today. The big question is whether this rebound is sustainable. Daily Stochastics are still falling, so it is possible that we'll see another test of that level (also the site of the 20-dma ($55.93), and if the bulls step forward to defend it again, it will only reinforce the validity of that support. Momentum entries will be hard to justify until BLL can push back through $57.75, the site of intraday resistance earlier in the week. Maintain tight stops at $55.50. Picked on March 21st at $55.87 Change since picked: +0.85 Earnings Date 04/24/03 (confirmed) Average Daily Volume = 451 K --- 3M Company - MMM - close: 132.78 change: +1.17 stop: 129.75 Steady as she goes, our MMM play has really been impressive in its resilience this week. While well off of its highs from Monday, the stock hasn't really succumbed to the weakness seen in the rest of the market. Instead of filling its 4/02 gap down to just below $131, the stock found willing buyers this morning near $131.50 before a mild advance throughout the day to end just above the top of that gap. It is interesting to note that the 20-dma ($131.46) seemed to provide support for Thursday's bounce. We'll need to keep an eye on this moving average to see if it continues to do so. Intraday dips and rebounds should still provide solid entries near the $131.50 area should still provide the best entries into the play. Traders looking for a momentum entry will need to wait for a breakout over $135, and need to confirm such a move with strong volume. Remember what happened on Monday as that initial breakout failed miserably. That was the second failure by the stock to hold higher ground on a breakout, highlighting the fact that buying the dips is the safer way to play. Our stop remains just below the $130 level until MMM can close over that $135 level. Picked on March 27th at $131.66 Change since picked: +1.12 Earnings Date 04/21/03 (confirmed) Average Daily Volume = 2.37 mln --- Unitedhealth - UNH - close: 91.64 change: -0.78 stop: 89.48 UNH has had a rough couple of days, since testing resistance in the $94-$96 range. A broad market sell-off took it down on Wednesday and bad news for the healthcare sector took a swipe at this call play on Thursday. The news came from Tenet Health Care (THC), which reported a loss of $55 million for the quarter and lowered future guidance for fiscal 2004. One of the reasons it gave for lowering guidance was rules changes to outlier payments, which are collected from Medicare for their sickest patients. Tenet, however, has had problems with these issues since last year, and so far those issues have not effected UNH. Still, the problems were enough to hurt the sector index (HMO), which took down most of the stocks in the sector. UNH continues to find support above the $90 breakout level and we will rely on our stop at $89.48 to dictate weakness. Traders looking for new entries can use the pullbacks above that level to initiate new long plays. Picked on March 25 at $90.66 Change since picked: +0.98 Earnings Date 04/16/03 --- Whole Foods Mkt - WFMI - close: 56.76 change: +0.55 stop: 54.50 It was another tight-range consolidation day in the broad market, and that certainly seemed to apply to our WFMI play as well. Both of the last two days have seen the stock test the ascending trendline ($56.25) from the February lows and to the bulls' credit, they managed to squeak out a close above that level today. Dips below that trendline have been buyable for aggressive traders, and now the daily Stochastics are starting to hook up in bullish fashion without falling into oversold territory. Shallow dips below the $56 level can still be used for entry, but at this point, it looks like WFMI should start making some upward progress towards a retest of resistance at the $58.25 level. Traders looking for confirmation will want to see a volume-backed move over that level before playing. Our stop remains at $54.50 until we can get a close over that resistance. Picked on April 1st at $56.42 Change since picked: +0.34 Earnings Date 05/08/03 (unconfirmed) Average Daily Volume = 908 K ************** NEW CALL PLAYS ************** Lexmark Intl. - LXK - close: 69.02 change: +1.39 stop: 66.00 Company Description: Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. Why we like it: There are very few companies that have managed to carve out a consistently growing profitable niche in the cutthroat computer business. DELL is the standout leader in the computer manufacturing business and MSFT holds the undisputed crown in the PC software arena. Sometimes we forget that with each PC sold, there has to be a printer to go with it. Not only that, but the printing business can be considered one of consumables, as those pesky little printer cartridges keep running out of ink and we have to go out and get more. While it may not have the largest market share, LXK does have an impressive claim to fame over its nearest competitor (HPQ). Not only is LXK continuing to grow its revenue and earnings, but last quarter saw the company reporting record revenues and its best earnings since April of 1999. This solid financial performance in a challenging economy hasn't been lost on investors, as the stock traded to a new multi-year high of $71.50 earlier this week. That high came in the midst of the euphoric broad-market ramp on Monday, so it is no great surprise that the stock pulled back after posting that high. The stock pulled back near $67 and caught a nice bounce from there, showing that former resistance is now acting as newfound support. Adding further support is the combination of the 20-dma ($66.65) and the ascending trendline from the February lows at $66.25. While we could see another dip towards the $67 support level, the fact that daily Stochastics are trying to turn upwards hints that perhaps investors are trying to take advantage of a possible run towards earnings on April 21st. Note that the PnF chart is really showing the stock's strength, as it looks quite bullish, and has a bullish price target of $79. If LXK can get back over it's relative high from Monday, we could actually see a run towards that level ahead of earnings. Just remember that this will be a short-term play, as we'll be dropping it ahead of the earnings release. With the unsettled nature of the broad market, the preferred entry strategy is to buy a dip, but if the bulls are feeling frisky, it wouldn't be out of the question to see a powerful breakout to new highs. Such a breakout will require stronger volume than we've seen over the past few days, with Thursday's tally coming in at about 75% of the ADV. While a dip to $67 would be the ideal scenario for dip buyers, we can see that intraday support looks decent near $68. A dip and rebound in the $67-68 area looks like the best we're likely to get on a pullback. Eager momentum types will need to exercise patience and wait for a volume-backed move over the $71.50 level (Monday's intraday high) as the $71 level has been persistent resistance for the stock since the middle of 2000. We're initially setting our stop at $66, which is below what should be very strong support. Suggested Options: Shorter Term: The April 70 Call will offer short-term traders the best return on an immediate move, with manageable risk. With April expiration looming next week though, this option should only be used by aggressive traders. Longer Term: Traders looking to capitalize on a sustained breakout move over the 2 weeks will want to look to the May 70 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher ahead of earnings without time decay becoming a dominant factor over the short run. BUY CALL APR-65 LXK-DM OI=2888 at $4.50 SL=2.75 BUY CALL APR-70 LXK-DN OI=4106 at $1.00 SL=0.50 BUY CALL MAY-65 LXK-EM OI= 617 at $6.10 SL=4.00 BUY CALL MAY-70 LXK-EN OI= 365 at $2.90 SL=1.50 Annotated Chart of LXK: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-10/LXK041003.gif Picked on April 10th at $69.02 Gain since picked: +0.00 Earnings Date 04/21/03 (confirmed) Average Daily Volume = 1.59 mln ************************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 ******************* CDW Computer - CDWC - close: 40.77 change: +0.40 stop: 43.25 CDWC finally made it back down to the $40 support level we first targeted for the breakdown possibilities. The failed rebound at the 50-dma provided a good entry point for aggressive traders, and although it caught a bounce today, it traded down to its lowest level since the middle of March. We don't see any sea change here and although the stock is once again testing support, it has now rolled over from a lower high and nothing much has changed on a technical basis. There was one report that could have a negative impact on CDWC, which caters to businesses and government agencies. A Business Roundtable survey of CEOs indicated not only that almost half were planning on reducing their workforce in the next six months - therefore reducing the need for PCs and other tech items as support for their staff, but also 27% said they were planning on a reduction in capital spending, versus 18% seeing an increase. Those cap-ex dollars apply directly to items such as the ones purchased from CDWC and the report doesn't seem to indicate much hope for a business spending turnaround in the near future. New entries can target a move below today's low of 39.54, with a trigger of $39.45. Picked on April 1 at $40.00 Change since picked: +0.77 Earnings Date 04/15/03 --- L-3 Comms - LLL - close 36.48 change: -0.85 stop: 38.50*new* Now that's the way it's supposed to work. As it has become more clear that the main part of the Iraq war is over, Defense stocks have continued to slide and despite a mild lift in the broad market on Thursday, there was no joy in the Defense index (DFI.X), which slid another 1.6%, falling back under the $445 support level. Our LLL play is performing nicely as well, losing the $37 level as support and actually trading as low as $36 before seeing a mild bounce into the close. With the $35.50 level being our eventual downside target for the play, we aren't advocating any new entries here. It's just about managing open positions so as to maximize gains. A downward continuation to that target area on Friday should be used to close out open positions for a modest gain. While we're still giving LLL some room to move, with our stop now set at $38.50 (just above the last upswing high), more conservative traders may want to get more aggressive with their stops, using $37.65 as the line in the sand, as this is just above the descending trendline that has been capping each failed rally since the beginning of April. Picked on April 3rd at $38.84 Change since picked: -2.36 Earnings Date 04/22/03 (confirmed) Average Daily Volume = 1.60 mln --- Northrop Grumman - NOC - close: 81.38 change: -2.27 stop: 85.01 NOC finally broke down from its bear pennant formation we highlighted in the original write-up. As the war in Iraq winds down, it seems those investors betting on an extended conflict - and thus the need to replenish military supplies - have begun to exit the sector. The Defense Index (DFI) had been flatlining, but continued to find resistance at its descending 50-dma over the past couple of weeks. Today, the DFI finally broke down, taking a number of defense stocks with it. Losses were seen in LMT, LLL and ATK, along with NOC. A note from Banc of America said a short war may eventually be good for the defense sector, as it would create more praise for the Pentagon and reduce the chances of its budget being cut. While that may be true in the long run, it doesn't appear to have convinced anyone about the short-term business prospects. NOC is still hovering over recent support at $80, with a low of $80.55, so we'll need to see another push down through that support before we have a chance to test the support at $76 from last summer. New entries can look for a trade below $80 to initiate plays, but more conservative traders will note the bounce from $78 on March 12. Picked on April 5 at $83.26 Change since picked: -1.88 Earnings Date 04/29/03 --- Whirlpool - WHR - close: 51.74 change: +0.60 stop: 52.76 Whirlpool continues to drift lower, following the descending 200- dma. While it hasn't given us the big breakdown we were hoping for, it continues to struggle and set a series of lower highs. It appears to be rolling over from a double-top formation, but has also bounced once again from its 21-dma (50.67), which also sits above support at $50. We are not ready to punt on this one yet as it still appears the stock is rolling over, but we wouldn't recommend new entries until we get a break of $50. With the 50-dma sitting at $49.89, it seems worth waiting an extra $0.25 for an entry at $49.75. The strength today in the homebuilding sector may have had something to do with WHR holding up, since the majority of their products count on the housing market for a portion of business. However, with rising mortgage rates and Sir Alan himself indicating he expects a drop-off in the sector this year, we are not terribly concerned about WHR's business benefiting more this year from that market. Picked on March 29 at $49.58 Change since picked: +2.16 Earnings Date 04/16/03 ************* NEW PUT PLAYS ************* None ************************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 Thursday 04-10-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - LXK Traders Corner: It's Dangerous Out There - Unless You're Armed With The CPTI Options 101: The Tax Man Cometh ********************** PLAY OF THE DAY - CALL ********************** Lexmark Intl. - LXK - close: 69.02 change: +1.39 stop: 66.00 Company Description: Wrapping its arms around the entire life-cycle of printers, LXK develops and manufactures a broad range of laser, inkjet and dot matrix printers for the office and home markets. The company is also the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Additionally, LXK provides supplies for IBM printers and offers after-market laser cartridges for the large installed base of a range of laser printers sold by other manufacturers. Why we like it: There are very few companies that have managed to carve out a consistently growing profitable niche in the cutthroat computer business. DELL is the standout leader in the computer manufacturing business and MSFT holds the undisputed crown in the PC software arena. Sometimes we forget that with each PC sold, there has to be a printer to go with it. Not only that, but the printing business can be considered one of consumables, as those pesky little printer cartridges keep running out of ink and we have to go out and get more. While it may not have the largest market share, LXK does have an impressive claim to fame over its nearest competitor (HPQ). Not only is LXK continuing to grow its revenue and earnings, but last quarter saw the company reporting record revenues and its best earnings since April of 1999. This solid financial performance in a challenging economy hasn't been lost on investors, as the stock traded to a new multi-year high of $71.50 earlier this week. That high came in the midst of the euphoric broad-market ramp on Monday, so it is no great surprise that the stock pulled back after posting that high. The stock pulled back near $67 and caught a nice bounce from there, showing that former resistance is now acting as newfound support. Adding further support is the combination of the 20-dma ($66.65) and the ascending trendline from the February lows at $66.25. While we could see another dip towards the $67 support level, the fact that daily Stochastics are trying to turn upwards hints that perhaps investors are trying to take advantage of a possible run towards earnings on April 21st. Note that the PnF chart is really showing the stock's strength, as it looks quite bullish, and has a bullish price target of $79. If LXK can get back over it's relative high from Monday, we could actually see a run towards that level ahead of earnings. Just remember that this will be a short-term play, as we'll be dropping it ahead of the earnings release. With the unsettled nature of the broad market, the preferred entry strategy is to buy a dip, but if the bulls are feeling frisky, it wouldn't be out of the question to see a powerful breakout to new highs. Such a breakout will require stronger volume than we've seen over the past few days, with Thursday's tally coming in at about 75% of the ADV. While a dip to $67 would be the ideal scenario for dip buyers, we can see that intraday support looks decent near $68. A dip and rebound in the $67-68 area looks like the best we're likely to get on a pullback. Eager momentum types will need to exercise patience and wait for a volume-backed move over the $71.50 level (Monday's intraday high) as the $71 level has been persistent resistance for the stock since the middle of 2000. We're initially setting our stop at $66, which is below what should be very strong support. Suggested Options: Shorter Term: The April 70 Call will offer short-term traders the best return on an immediate move, with manageable risk. With April expiration looming next week though, this option should only be used by aggressive traders. Longer Term: Traders looking to capitalize on a sustained breakout move over the 2 weeks will want to look to the May 70 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher ahead of earnings without time decay becoming a dominant factor over the short run. BUY CALL APR-65 LXK-DM OI=2888 at $4.50 SL=2.75 BUY CALL APR-70 LXK-DN OI=4106 at $1.00 SL=0.50 BUY CALL MAY-65 LXK-EM OI= 617 at $6.10 SL=4.00 BUY CALL MAY-70 LXK-EN OI= 365 at $2.90 SL=1.50 Annotated Chart of LXK: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-04-10/LXK041003.gif Picked on April 10th at $69.02 Gain since picked: +0.00 Earnings Date 04/21/03 (confirmed) Average Daily Volume = 1.59 mln ************************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 ************************************************************** ************** TRADERS CORNER ************** It's Dangerous Out There - Unless You're Armed With The CPTI By Mike Parnos, Investing With Attitude Easy Come, Easy Go Once upon a time there was a Couch Potato Trading Institute student. Let's call him George. He said he wanted to learn how to make money. He had been reading our columns and was converting to the CPTI philosophy. For a few months, George made money on iron condors, straddles, and credit spreads. Then, one day, he heard on TV about a small biotech stock that had found a cure for some form of cancer. He fell off the wagon and bought 2,000 shares. The stock moved up a point. George was excited. The next day it moved up another point. George was giddy. Then, another point. He was drunk with profits. Wow! $6,000 in less than a week. He booked a cruise and put it on his credit card. "This stock is going to the moon," said George. News came out. Turns out that the cancer may have been cured, but it gave the patients leukemia. Did George take any profits? What do you think? "It'll bounce back up," said George confidently. Today, the stock is below where George bought it. He's not a happy camper. He shouldn't have gone camping. When you get off the couch, you better be going to the kitchen or the bathroom. Those are the "safe" rooms. When you go camping, there are bears out there. Sometimes you get the bear. Sometimes the bear gets you. It's people like George that give stupid people a bad name. He's the kind of guy who would let Michael Jackson baby-sit his kids. Let me publicly say, "Thank you, George." It's traders like you that make it possible for the small (but growing) army of CPTI traders to make a nice, consistent living – thinking with the little head, and not the big one. I sure hope he can get a refund on that cruise. I hear it's dangerous. _____________________________________________________________ Mike, Sometimes, when I'm looking at the open interest of an option, the volume for the day is higher than the open interest. How can that be? Response: In past columns we've discussed how open interest can often provide a guideline to support and resistance levels. It can also suggest the strike price close to which the market makers would like the stock to finish. It can be a little confusing, though. Sometimes, when there is news on a stock, there is an unusual amount of volume on a particular option. The question -- How can the daily volume of an option be greater than the open interest? It leaves some newer traders confused – even more than usual. Let's see if we can clarify this question. When you read an open interest figure, it represents the total number of outstanding contracts of a particular option at the end of the previous trading day. For instance: XYZ company's December $45 call has open interest of 810 contracts. Essentially, that means that traders have either "bought to open" or "sold to open" a total of 810 contracts during the life of the December $45 call option - and the positions are still "open." Assume some news came out on XYZ and a volume of 1250 contracts were traded on Thursday. The daily option volume is just that - the number of options traded that day. They could have been options "bought to open," "bought to close," "sold to open," or "sold to close." Open interest is calculated at the end of every trading day. On Thursday, every time a contract was "bought or sold - to close," that contract was deducted from the 810 open interest number. By the same token, every contract that was "bought or sold - to open," will be added to the 810 figure. If, out of the 1,250 contracts that were traded on Thursday, 500 were to "close" and 750 were to "open," here's how the new open interest figure would be calculated. Wednesday's Open Interest: 810 Contracts Thursday "to close": (500) Contracts Sub Total: 310 Contracts Thursday "to open": 750 Contracts Total: 1,060 Contracts = New Open Interest When an option is first opened, the volume will almost always exceed the open interest, because it started at zero. If you watch the relationship between open interest and daily volume, it can indicate what kind of trading took place that day. Now that we resolved that problem, during the next commercial we'll review nuclear physics. Mike, I've heard that the volume of options traded in a day can give you an idea of the direction of a stock. Is that true and how do those people know ahead of time what's going on with a stock? Response: Stocks have an average number of contracts that trade during the course of a day. This is the sum of all the puts and calls at all available strikes. Maybe one day the total will be 1,500, 1,800 the next day, then 1,200 the day after that. The average is about 1,500 contracts. Occasionally, there will be an unusual number of contracts traded for a day, maybe two, unaccompanied by any news that would justify that amount of activity. AHA!! Something is likely going on, but we don't know what it is. An impending merger? An earnings warning? An analyst downgrade? An early FDC ruling? Maybe a hooker sighting at the annual meeting? Maybe it's just a fluke, but often there's "something is going to hit the fan." We don't know what's going to happen - but SOMEBODY DOES!! And those opportunists are going to take advantage of it. As we curse them under our breath, many of us secretly wish we were "in the know" so we could, just once, be one of the opportunists and make a quick killing on an unsuspected move in a stock. Although it's not foolproof, it's right often enough to be considered by many a "leading indicator." The tip-off is the unusual (much higher than average) volume of options traded. It's a type of insider trading. These happenings go largely undetected by the SEC. As you know, insider trading is how Martha Steward got her unscheduled spanking. I suspect she enjoys an occasional spanking, but this one was particularly costly. If Martha was a sharp chocolate chip cookie, instead of selling her shares of IMCL, she could have just bought more puts than the amount of stock she owned. Then, her shares would have been covered. It's not foolproof, but, if scrutinized, she was just buying protective puts plus a few more for good measure. But now, Martha's lost a lot of her cookie dough. People will still buy her products at Kmart, but the SEC isn't buying her story at all. She's still making those exciting placemats on TV every day (Yawn!!!). _____________________________________________________________ CPTI Portfolio Update Position #1 – OEX Iron Condor – closed Thursday at $442.73. We created an Iron Condor with a 70-point range of 420 to 490 for April. The objective is for the OEX, at April expiration, to finish anywhere within the spread. The total credit for the Iron Condor position is $2.35. With five trading days left, we're looking real good! Position #2 – BRCM Short Straddle – Trading at $13.12. About three points ago we sold 10 contracts of BRCM April $15 calls and sold 10 contracts of BRCM April $15 puts for a total credit of $2.60. Our safety range is from $12.40 to $17.60. On Monday, we were presented with an opportunity. The market spiked up. BRCM traded as high as $13.90. To buy back the $15 put would have cost $1.60. There is heavy resistance at about $14. We decided that, if BRCM reversed, we would close out our position. When BRCM moved down to $13.80, we bought back the $15 put for $1.65. We had taken in $2.60. Our profit is $950. Celebration may be a bit premature because we're still short the April $15 call. If we can buy it back for $.05 in the next few days, we will. If not, we'll just let it expire worthless. Position #3 – MMM Iron Condor – $132.78. We created an Iron Condor with a 15-point range $115 to $130 for April. We were able to take in $1,550 for our 10-contract position. The objective is for the underlying, to finish anywhere within the spread. The market has gone up too far and much to fast. We have another week for calmer heads to prevail and return MMM, to a more reasonable level (below $130). We'll see if Fibonacci was right. We're still betting on it. Ongoing Position #1 -- QQQ ITM Strangle – $25.77. This is a long-term position we created four months ago. We own the January 2005 $21 LEAPS calls and the January 2005 $29 LEAPS puts. We sold 10 contracts of the QQQ April $28 the QQQ April $22. Our cost basis for the position is $5.30. Since premiums are so low, the chances of making a substantial profit from this position are slim. Plus, it ties up a lot of money. We closed this four-month position with a $400 profit. Ongoing Position #2 – OIH - Diagonal Calendar Spread – $56.30. We felt there was a great deal of uncertainty built into the price of a barrel of oil. When, and if, the war is resolved, the price of oil should work its way down. We bought 10 contracts of the July OIH $55 puts and sold 10 contracts of the March OIH $50 put at a debit of $3.85. According to plan, the March $50 put expired worthless. We then sold the April $50 put for $.70 to bring our cost basis down to $3.15. Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Instructor *********** OPTIONS 101 *********** The Tax Man Cometh Buzz Lynn buzz@OptionInvestor.com It's tax time again! How would you like to save some money and AVOID (not evade) some Uncle Sam outlay this year? Many would. And so it is tonight that I'll ask veteran readers to hang in there for benefit of our new readers. Heck, even veterans can use a refresher course from time to time. But I want to get back into the subject of "Trader Status", which I encourage all to investigate. So do you have trader status with the IRS? "That's almost an insulting question! Of course I have trader status. I'm a trader! Err, well, maybe I qualify. OK, I lost $100,000 last year and quit trading after March, so maybe not. But boy, how I wish I could claim the whole loss suffered in instead of using a measly $3,000 per year over the next 34 years for what seems like eternity." (Either that or plan on making exactly $97,000 trading profits next year so you net out at $0 earned from trading.) Anybody utter these words to themselves over the last three years? We get plenty of reader e-mail from those who have. Invariably, they go on to ask if we know what is/how to get trader status that would allow deductions for substantial losses exceeding the $3,000 annual limit. While we are not accountants (at least none of the folks I know at OIN are) and we don't even play them on TV, we know people who are. So we figured, "what the hey". Not only would this make a great article of immense benefit to fellow readers, it would also give us an excuse to seek out and ask the questions of an expert in the field. Just as we would never entrust our hard-earned dollars to a brick maker for the purpose of buying fine jewelry, so too should we avoid trusting our accounting issues to Fundamentals Guy or any other analyst, market strategist, and trader on our staff. While we know tidbits, we are in no way qualified to talk specifics on the subject of trader status and tax liability. For those issues, we need an expert. And that expert is Jim Crimmons of www.tradersaccounting.com. Here's the reader e-mail that got the ball rolling on this: "Hi, Would you please direct this question to the most appropriate individual at option investor? I realize that you are not accountants but you all do the same thing with options. I have discussed for many years the tax strategies with my accountant and to date have always been an investor and not a trader and have not marked to market. I make over 400 option transactions per year, create a lot of margin debt and had huge losses over the past two [now three since this e-mail was written] years that would have been better offsetting earned income rather than the current $3000 per year until offset by future capital gains. Would some please devote an article to trader Vs investor? My accountant say that the rules are deliberately ambiguous so that most people will end up investors and not risk going into unchartered waters where they are subject to audits, penalties and interest for trying to write off home office expenses, and use mark to market today. He says that one has to get permission from the IRS to go back from market status to investor status after making their first election so that in years where there are huge capital gains one would regret that they no longer can have long-term capital gains. He says that having separate accounts at separate brokerage firms does not allow one to be a trader in one account and an investor in another account as there has been no ruling and that at an audit one would have to pay penalties and interest and then go to tax court to try to win your case without any ruling. Would someone at Option investor please comment on the tax options available to option investors/traders. Thank you" Dear Reader - Your day is here! Rather than try to answer our fellow reader's question with just a paragraph from one of us here, we posed the question to Jim Crimmons, founder of www.tradersaccounting.com. What we got back was detailed enough to answer almost anyone's questions on the entire subject. I'll let Jim do the talking from here. Me: What say you, Jim? Jim: Executive Summary: Tax planning is worthless unless it is put in place. Probably the biggest reason people do not follow through is that the idea is either too complex, or forces them to change their lifestyle in a dramatic fashion. While the following suggestions may sound intimidating and complex initially, their operation is fairly simple and is designed not to make any major changes in your current lifestyle. Remember the idea is to plan ahead to establish your Tax Efficient Trading Plan, which dove tails with your overall Trading Plan. Treat it as a business: Establish an LLC for your trading. Advantages. Since you can treat the LLC as a pass-through entity, you will not be subject to double taxation as you could with a C corporation, but you can run your business deductions through it. This account will be your active trading account and will provide you with liquidity and asset protection. When there is sufficient trading activity, you can adopt the Mark to Market method of accounting, which allows you to ignore both the Wash Sale Rule, as well as the $3,000 cap on Capital Loss Deduction. Because many of the expenses you are now paying out of your own pocket can be expensed out through your trading company, you will be lowering the amount of money you need to live on, and by this means lowering your personal income taxes. Learn to deduct expenses that you cannot fully do personally, like education, meetings, and trading expenses. For example, Healthcare costs - Your company can pay Medical Insurance premiums. Medical Savings Account - If you are funding your own medical insurance, a Medical Savings Account for your family generally saves our clients a lot of money, as well as add to their retirement income. If you are unfamiliar with MSA’s order our free special MSA report by e-mailing us at email@example.com, enter the words MSA in the subject box. [Shameless plug for Jim :-)] Work With Your Tax Advisor Quarterly: As the year progresses, because of the extremely volatile nature of trading, you need to evaluate your tax strategy needs. You cannot wait until this time next year and enact any strategies for this year. A pro-active tax advisor will work with you on a quarterly basis, to ascertain what you need to do to lower your taxes. Traders Education: Learning from others can often be the least costly. As a former dean of Harvard put it: “If you think education is expensive, try ignorance.” Investment seminars and publications present important learning opportunities that are essential to mastering your trading skills. Me: Sounds good so far, Jim, but why should we trade in a business entity? Jim: Some clients have traded as a business, and others have traded in their own name and are considered investors. When we talk with the last group we are always asked, “Why should I trade in a business entity?” It is important that you understand both the pros and cons of trading as a trader and as an investor. Trading as an “investor” limits you in several aspects, the first being taxes. Taxes: Because the IRS treats an investor as a hobbyist, educational expenses and the related expenses of attending seminars such as travel and meals are not deductible. If you are a trader like I am, you realize that from time to time you need to go to an educational workshop to hone your skills. This generally is an on-going process, many of us go to at least one trade show or workshop each year, and the expenses can be pretty substantial. The rub is we bump up against the 2% threshold the IRS imposes for expenses on our personal tax return. What this means is that if our Adjusted Gross Income for the year is $100,000 the first $2,000 of expenses we have cannot be deducted. Let’s look at two examples where our taxpayer has made money: John is an investor trading in his own name without benefit of a business. At the end of the year he finds he has made $40,000 trading. He and his spouse both work; together they have made an additional $100,000. Their trading expenses look like this: Telephones $480 Seminars $3500* Travel & Fees $1200 Entertainment $650* Home Office $1800* Cable $360 Office Equipment $10000* DSL $240 Sub-Total $15950 Margin Interest $6000 Sub-Total $8280 TOTAL $24230 Of this amount, how much could be deducted by John? He can claim only $8,280 in expenses. He cannot claim the items above which are marked with an asterisk, since he is classified an investor, and the hobby rules indicate that he cannot deduct these items. He and his spouse have approx. $140,000 in income for the year, so the first 2% of his expenses are not deductible. This would mean that $2,800 in expenses could not be deducted, leaving John with $5,480 he could deduct, which at a 30% tax bracket would save him $1,644! (Obviously for illustration this example is flawed in its simplicity. Most taxpayers will have other deductions as well as adjustments to their gross earnings.) Susan on the other hand has set up a business entity to trade in. Within the business she has filed for the Mark to Market Accounting Method. Assuming she is in the same exact situation that John is with the same total income and expenses, Susan would be able to deduct the additional $15,950. According to section 162 of the IRS code, a business can deduct "all ordinary and necessary expenses." Susan, also in the 30% tax bracket, is able to deduct the entire $24,230. Susan saves $7,269 in taxes. Lets see: the difference between John and Susan is $5,625 more in Susan’s trading account at the end of the yearthat’s quite a difference! Ok, we have seen that Susan wins out when they both have made $40,000 in trading income, but what happens when they have a losing year. Let’s remain consistent with our expenses, the same as before, but this year each has lost $40,000 with their trading. Now John really gets stiffed because he has the same limitations on his expenses that he had in example one, but since he did not make money trading he cannot deduct his margin expense. (You can only deduct margin interest to the extent that you have made money trading securities or options.) At this point he has $2,280 in deductible expenses. Since he lost money trading, his AGI has dropped to $100,000, which means that the first $2,000 of expenses is not deductible. He is now able to deduct only $280 in expenses this year, and $3,000 of his capital loss for a total of $3,280 of deductions. Assuming he remains at the 30% tax level he will save a whopping $984 in tax saving! Oh yes, in addition to this he has a $37,000 loss carryover, which he can use at $3,000 a year in subsequent years! However, Susan is still able to save the complete $7,269 in taxes, (all ordinary and necessary expenses for the business). Plus, since she is a trader who has taken Mark to Market, she can offset her regular income of $100,000 with her $40,000 loss, bringing her AGI to $60,000, so she saves another $12,000, for a total savings of $19,269 in taxes. The difference this year? $18,285 more for Susan’s Account. So, no matter whether you make or lose money in the market, it makes sense to be trading as a business! Lets summarize: Example John DIFFERENCE Susan 1. $40K gain Tax Savings $1644 $ 5625 $7269 2. $40K loss Tax Saving $ 984 $18825 $19269 Me: Wow! That's quite a difference. It really does seem to pay off if we establish a separate trading entity and run it like a business. Jim: In addition to the huge difference in the tax savings, when you trade as a business there are other issues that we should bring to your attention. Wash Sales When your entity is set up properly and you are trading at a level to validate using Mark to Market Accounting, you no longer have to worry about the Wash Sale Rules, which has been a boon to those active traders who trade the same stock over and over throughout the year. [Note: Wash Sale rules can affect persons who trade the same stock repeatedly throughout the year. An example of one of the rules should suffice to illustrate. You buy Microsoft at $50, it goes to $45; you sell for a loss of $5. If you buy Microsoft again within 30 days, you cannot claim the $5 loss; rather you must increase your basis. In this situation if you buy Microsoft at $30, then your basis would be increased by the amount of the prior loss to $35. See "Beat the Tax Man" from March 19, 2002, Trader's Corner.] Fringe Benefits When you trade as a business, you have the ability to pay for health insurance, set up higher education plans, and provide for retirement plans, child care and other benefits for your employees. Most traders have immediate family members as their only employees, so this can be a huge benefit, lowering your taxes by increasing the legitimate expenses of your trading business. In my opinion there is absolutely no reason you would not want to trade as a business. Whether you use Mark to Market accounting needs to be investigated thoroughly. Don’t wait another day, as you gain nothing doing so, and will probably penalize yourself by losing money each day you wait. Me: Thanks, Jim for that information that could save us traders countless thousands of dollars! As we can see, Jim has a wealth of knowledge on the subject and has barely broken through the surface on the topic. Many of you are probably wondering about "trader status", which is a topic worthy of a full column in and of itself. So we don't have to wait a full week, check out the following links of previous articles for a plethora of tax-saving ideas. http://members.OptionInvestor.com/archive/traderscorner/2002/tc_032702_1.asp http://www.OptionInvestor.com/traderscorner/tc_040402_1.asp http://www.OptionInvestor.com/traderscorner/tc_040902_1.asp http://www.OptionInvestor.com/traderscorner/tc_041102_1.asp http://www.OptionInvestor.com/traderscorner/tc_041602_1.asp Until next time, make a great weekend for yourselves! Buzz ************************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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