The Option Investor Newsletter Thursday 05-01-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: ISM Blues Futures Markets: Globex Interruptus Index Trader Wrap: (See Note) Market Sentiment: Hear That In The Background? Weekly Manager Microscope: Robert H. Lyon: ICAP Select Equity Portfolio (ICSLX) Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 05-01-2003 High Low Volume Adv/Dcl DJIA 8454.25 - 25.80 8488.35 8340.23 1.68 bln 1638/1541 NASDAQ 1472.56 + 8.30 1478.85 1451.32 1.43 bln 1747/1443 S&P 100 465.34 - 0.19 467.13 458.33 Totals 3385/2984 S&P 500 916.30 - 0.62 919.68 902.83 W5000 8698.40 - 3.62 8727.83 8577.53 RUS 2000 398.83 + 0.15 399.90 394.19 DJ TRANS 2404.79 - 4.10 2412.52 2374.17 VIX 24.50 + 0.73 25.70 24.01 VXN 32.49 - 0.18 34.08 32.20 Total Volume 3,314B Total UpVol 1,893B Total DnVol 1,373M 52wk Highs 420 52wk Lows 55 TRIN 1.23 PUT/CALL 0.85 ************************************************************ ISM Blues Investor sentiment based on hope may be surging but reality always seems to come back to wake us up from our dream. The ISM disappointed investors this morning and the Jobless Claims just added to the gloom. Friday will be another wake up call when the Nonfarm Payrolls for April are announced at 8:30. Dow Chart - Daily Nasdaq Chart - Daily S&P Chart - Daily Economically nothing has changed. The new Jobless Claims hit 448,000 for the week and last weeks 455,000 was revised upward to 461,000. The four-week moving average hit its highest level in a year at 442,000. This is not good news for the Jobs report on Friday. This was the 11th consecutive week over 400,000 and the third week in the 450,000 range. With the war over there has been no pickup in hiring over the last three weeks. If anything it has gotten worse. Adding to the negativity was the Construction Spending which fell -1.0% compared to estimates for a gain of +0.4%. Private construction dropped -0.2% and residential construction rose a modest +0.1%. The biggest drop came in the public sector which dropped -3.5%. State and local governments have continually fallen short on revenue and they are no longer filling in the gaps from the private sector. Productivity also came in less than expected at only +1.6% and disappointed analysts. A slowing of productivity would indicate a continued slowing of demand and an increase in unused capacity. The big report for the day was the ISM, which was much worse than expected at 45.4 compared to estimates at 47.0. Anything under 50 reflects a contracting economy. One analyst has done a study on the ISM and found that any number under 47 normally meant a negative growth quarter for the GDP. This is the fourth consecutive monthly drop for the ISM after topping out on the rebound at 55.2 for December. The 45.4 is the lowest number since October 2001 at 38.8 and the first full month after the 9/11 attack. Obviously this is not an encouraging signal. New orders fell to 45.2 and the employment index fell to 41.4 and the weakest level since Dec-2001. With the Jobless Claims rising and the employment index falling to disaster lows the outlook for the Jobs Report on Friday is not good. The consensus of opinion is for a loss of -58,000 jobs but I would be very surprised if it is not more. This could be the one-two punch that finally slows the rally. There was some good news from a sector that has been grounded lately. The latest airline traffic survey showed passenger traffic up over prewar levels and a decreasing fear of travel due to SARS. This is a plus for the industry but a far cry from being bullish. It simply means the SARS panic may be easing and the fear of a terrorist attack related to the Iraq war may also have passed. This is far from saying the sector is recovering and may only be an indication the worst has passed. Until business travel picks back up and the travel bans in Asia ease there will still be problems. Soundview cautioned on techs today saying that 1/3 of Intel's revenue comes from Asia. China accounts for 10% of all personal computer sales worldwide. The largest Chinese PC manufacturer, Legend Computer, said sales were only running at 60% of plan. With the panic phase of the SARS scare almost a month old the odds are good that at least another month of sales depression is ahead. Take 60 days out of the quarter at only 60% of plan and the global outlook for the tech sector does not look good. When the mid-quarter updates begin flowing there are likely to be some negative surprises. There was a very unusual event today that impacted trading in ways we will not understand until tomorrow. Trading on the Globex exchange ceased at 10:39 and was not reopened all day. The halt was due to a massive network failure and as of 5:30 tonight it still has not been corrected. Only 276,000 of the normal 750,000 contracts of the Emini S&P futures were traded before the outage. The Dow had crashed to 8340 on the ISM news and the futures to 900 before rebounding slightly on a dead cat bounce. The Dow had rolled over again at 8380 and was heading back down when the outage first occurred. Once it was announced there was an immediate pop in the Dow futures and the large S&P as traders short the Eminis decided to hedge against potential losses and positions they could not close. The buying leveled out while traders waited for news and when Globex announced it could be several hours more traders elected to hedge their bets further. The Dow and S&P rose until just before 3:15 when Globex had announced they would reopen. When there was not a rush of pre-open orders the markets sold off again. At 3:15 Globex announced the problems were continuing and they would not open as expected and would remain closed the rest of the day. As traders became aware of their inability to close positions overnight the Dow again found buyers as traders grabbed the only futures hedges available. This is setting up a major spectacle at the open tomorrow. There is a strong feeling among traders that there was heavy short interest today. We have seen heavy volume on the sell side every time we near 920 and we have had plenty of chances this week. With this heavy short interest on the futures and now offsetting long interest in the Dow futures as a hedge we could see some fireworks at the open. If you are short the S&P and went long the Dow futures as a hedge then a bad Jobs Report tomorrow will confirm your bearish direction and you would sell your Dow futures and add to S&P shorts. (if Globex actually comes back) This would create a double hit to the downside. Conversely if the Jobs Report surprises to the upside they will just sell the Dow futures higher. The wildcard here is the traders that cannot trade overnight due to broker restrictions. They are at the mercy of the Jobs Report which is announced an hour before the market opens. If they bought the dip this morning then they will be praying for an upside surprise and selling on the news an hour later at the cash open. If they are short they will be praying for a downside surprise to stop the bleeding and keep them from losing their shirts before the open. There are so many scenarios for the open I cannot cover them all in the space allowed here. The bottom line for me is the potential for extreme volatility as positions are added to or squared. This was the first time in four days that the Dow did not test the resistance high at 8520. The economics and the repeated failure at that level prompted strong profit taking at the open. Without the Globex problem and the hedging in the Dow futures the result could have been a lot different. The morning dip stopped only 40 points above the 8300 support from the last couple weeks. That stop had all the appearance of a dead cat bounce, which was already failing when the Globex problem appeared. There was a rumor making the rounds this week that the gains early in the week were due to market makers on the NYSE clearing positions, which were weighted to the short side, as the investigation into trading practices accelerated. While I doubt this was reality it would mean no bias by the specialists going into Friday. The Nasdaq was a different story. It rose off the lows, possibly due to hedging in the larger NDX futures contract as well and closed very near its highs for the week. For whatever reason the Nasdaq bounced it was very impressive in the face of bad economic data and those downgrades from Soundview. For Friday we have an opening out of the twilight zone. The last major economic report for April at 8:30 and potentially 500,000 contracts of missing Emini volume to square at the open. The volatility could be huge if the Jobs Report surprises to the upside. If it surprises to the downside the volatility could ease the closer we get to 905 on the S&P Futures. This is where the problem began and would represent no harm/no foul for most traders. With the war in Iraq over there is really no hindrance to holding over the weekend so predicting the closing direction is a tossup. We are up for the week and still near the highs so the educated guess would be profit taking in the afternoon. Either way the fireworks are likely to be at the open and they may be extreme. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Globex Interruptus Jonathan Levinson Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 DJIA 8575 8515 8427 8367 8279 COMPX 1496 1484 1468 1456 1439 SP03M 931 923 912 904 893 YM03M 8541 8485 8401 8345 8261 ND03M 1139 1126 1110 1097 1081 The Globex data feed went down at 11:40 EST and stayed down throughout the session due to "widespread network failure." An announcement was made projecting a reopen at 3:15 EST, but the Globex remained down at the time of this writing. The markets opened on abysmal initial claims and productivity data, but managed to tread water until the ISM data at 10AM when the real selling began. The lows of the day were set within the following half hour, a retest was made, and an aimless drift ensued until buying returned, coinciding roughly with the outage at the Globex, and continued for most of the afternoon before closing higher on the day. The US Dollar Index set a new bear market low at approximately 11:00AM below 96.50, and continues to trade weakly just above that level. Volume was lighter than yesterday on the COMPX and NYSE, with 1.54B COMPX shares and 1.71B NYSE shares changing hands. The VIX closed higher by .73 at 24.50, while the VXN dropped .18 to 32.49 and the QQV -.12 to close at 27.86. Chart of the COMPX Other than the recovery off the lows today, there were few surprises on the COMPX as price continued to respect the boundaries of the bearish ascending wedge. The sell signals on the stochastics have been headfakes so far, while the slower MacD continues to grow toppier. Chart of the INDU Few surprises from the INDU either, although the morning decline nearly took out the lower ascending trendline of what is either a bearish ascending wedge or a bullish ascending triangle. To reflect this ambivalence, I've added the alternate upper trendlines for both formations. Notice the bullish candle on printed today- that long tail indicates a lack of commitment to the downside and a sharp intraday reversal, which is what we got. Whether that reversal was caused by panic hedging of short positions "trapped" on the Globex, or whether it was "genuine" bargain hunting, tomorrow will have to tell. 60 minute chart of the YM The 60 minute candle view depicts the ascending triangle discussed above. I've highlighted the lower highs being printed on the 10(5) stochastics. There is no signal yet on the oscillator, and we saw a similar trend violated today on the ND contract below. Nevertheless, this trend on the YM contract depicts a gradual weakening in the up-phases on this 10 period cycle, and if the trend holds, we should see a failure well before the next challenge of the upper trendline of the triangle. The 200 point range has narrowed to a 175 point range over the course of this week, which is comforting to those of us who are growing tired of the current pattern. Unless the market achieves perfect equilibrium, a meaningful breakout can be expected. 60 minute chart of the SP The break below the ascending trendline this morning proved to be a headfake, and the only comfort for traders is that with the range now just 11 points on the SP contract, a resolution one way or the other can be expected soon. We have the same weakening trend on the 10(5) stochastic as we saw above on the YM, and it too implies a failure below the upper trendline. However, oscillators oscillate, and I have far less confidence in these indicator trends than I do in price trends. Nonetheless, the VIX confirmed the slight decline in price for a change, rather than falling alongside price, and this could also be portentious of further weakness to come. A break below 909 will be the first step, but given the headfake today below that level, we'll want to see a violation of next support at 897 to confirm it. 60 minute chart of the ND The ND was the strongest of the bunch today, actually closing in the green, confirmed by the drops in the VXN and QQV. The range here is at its narrowest, with just 7 points' distance between the upper and lower trendlines of the rising triangle. As usual, the ND should lead the other indices. While the rising triangle is a bullish chart formation, the stochastic is toppy, but nothing prevents it from getting and staying toppier. The violation of the weakening stochastic trend with this morning's reversal is bullish, as is the green close despite today's terrible economic data. A clean break of the upper trendline will be the first sign, but note the tall spike printed on the 29th – you will want to be patient and wait for a successful retest before trusting a breakout move in either direction. For tomorrow, patience will be key. There been several fakeouts during the course of this rally, this morning's being the latest. I would wait for a decisive violation of today's low or of April 29th's high before showing any hint of confidence in the move's sustainability. ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_050103_1.asp ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ **************** MARKET SENTIMENT **************** Hear That In The Background? - James Brown It's subtle but I almost get the feeling that investors are holding their breath. There are so many variables to watch and they're all stuck on pause. The Dow Jones Industrials are coiling ever tighter in their six-week bullish wedge. The NASDAQ Composite and the NDX are at new relative three-month highs but the last week has been more sideways. The S&P 500 is valiantly trying to break the critical 920 level but sell orders over power it ever time it gets close. The Iraqi war is over. President Bush is about to tell us that the combat "phase" is over tonight. The SARS crisis seems to be ebbing. Corporate earnings news is slowing down. For weeks and months we've heard that this conflict in Iraq has clouded businesses' ability to look ahead. We've heard that consumers will start spending again after the war's over. We hear that the economy is going to rebound in the 2nd half now that the war's over. blah, blah, blah... it's all the same. We've heard these excuses about the economy getting better when the war's over. Now the war is over and all eyes are focused on the economy and every minute report. Let me tell you, it's not good. Jim has gone into greater detail in his wrap tonight but the ISM report this morning did not give investors any reason to buy stocks. On top of it the weekly Jobless Claims numbers continue to get worse. The Friday morning nonfarm payrolls report could make or break the recent rally. So what is a trader to do? Tread carefully, my friend. The VIX and the VXN, volatility indices that measure investor fear and complacency, are both at their lows but the descent has slowed. What's that you hear in the background? Is that a stampede of bulls or the long, slow growl of a still hungry bear? If the S&P 500 can breakout above 920 and the Dow Jones can break to the upside from its recent consolidation then the bears may have to let the bulls have their fun. We could see another mighty leg higher. Looking across the different sector indices one does see a lot of bullish trends. However, many of those are butting their heads right against overhead resistance. The risk- reward is in favor of the bears right now, not the bulls. On top of it all you're about to hear market pundits and talking heads on TV parrot the old saying "Sell in May and go away". It's an old Wall Street maxim about selling stocks in May to avoid the "worst" six months of the year. We know it sounds rather odd to a trading crowd like us, but there are plenty of people that do just that. The last fifty years offers plenty of proof that it works. The "best" six months of the year, the end of October through May, has seen the S&P 500 tally up a 50-year gain of 2,806 percent. That's about seven percent a year. Ah, but since it is only six months, it's really fourteen percent, but that's splitting hairs (or years). The "worst" six months of the year, the end of May through early October, has produced a 50-year grand total for the S&P 500 of just 24 percent. This is a whopping 0.48% per year (again, we're actually talking six months). Whether you believe it or not, the numbers don't lie. It's going to be a "stock-pickers market", as they like to say on Wall Street. Meanwhile, we've seen gold prices (June contracts) rally higher the last couple of sessions. This could be traders trying to get in front of any big moves as they anticipate a bearish reversal in the stock market, which would be bullish for gold. You either need to keep your fingers nimble or take a step back so you don't get run over. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10106 52-week Low : 7197 Current : 8454 Moving Averages: (Simple) 10-dma: 8432 50-dma: 8125 200-dma: 8308 S&P 500 ($SPX) 52-week High: 1098 52-week Low : 768 Current : 916 Moving Averages: (Simple) 10-dma: 908 50-dma: 864 200-dma: 879 Nasdaq-100 ($NDX) 52-week High: 1230 52-week Low : 795 Current : 1113 Moving Averages: (Simple) 10-dma: 1099 50-dma: 1041 200-dma: 994 ----------------------------------------------------------------- The rate of descent for the VIX and VXN have slowed. As a matter of fact the VIX actually popped higher by three percent today. Has the tide finally turned for the markets or is this just a bear trap before the major indices breakout above resistance? CBOE Market Volatility Index (VIX) = 24.50 +0.73 Nasdaq-100 Volatility Index (VXN) = 32.49 -0.18 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.85 460,713 392,831 Equity Only 0.72 368,127 263,537 OEX 1.18 20,537 24,211 QQQ 2.24 9,989 22,416 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 52.7 + 1 Bull Confirmed NASDAQ-100 70.0 + 0 Bull Confirmed Dow Indust. 50.0 + 0 Bull Alert S&P 500 57.8 + 1 Bull Confirmed S&P 100 58.0 + 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.14 10-Day Arms Index 1.12 21-Day Arms Index 1.07 55-Day Arms Index 1.29 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 -NYSE- -NASDAQ- Advancers 1425 1633 Decliners 1403 1370 New Highs 118 155 New Lows 20 22 Up Volume 776M 974M Down Vol. 891M 431M Total Vol. 1683M 1430M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 04/22/02 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 We see some shuffling here in the Commercials as both short and long positions rise but new shorts increase by more than 13K contracts. Small traders remain net long but the tide of bears is growing. Commercials Long Short Net % Of OI 04/01/03 417,637 409,332 8,305 1.0% 04/08/03 420,084 407,452 12,632 1.5% 04/15/03 424,219 409,853 14,366 1.7% 04/22/03 430,758 423,295 7,463 0.9% Most bearish reading of the year: (111,956) - 3/6/02 Most bullish reading of the year: 14,366 - 4/15/03 Small Traders Long Short Net % of OI 04/01/03 143,580 126,594 16,986 6.3% 04/08/03 136,173 122,006 14,167 5.5% 04/15/03 148,434 137,680 10,754 3.8% 04/22/03 147,068 140,153 6,915 2.4% Most bearish reading of the year: 10,754 - 4/15/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Meanwhile, on the smaller e-mini contracts a wave of new bearish activity has appeared in the Commercials. This is not good news for the markets as the "smart money" is usually right and we just saw 47,000 new short positions. Retail traders remain excessively long with nearly 30K new long positions and a drop of 3600 short positions. Commercials Long Short Net % Of OI 04/01/03 98,460 321,335 (222,875) (53.1%) 04/08/03 114,210 344,961 (230,751) (50.3%) 04/15/03 119,316 390,555 (271,239) (53.2%) 04/22/03 124,200 437,597 (313,397) (55.7%) Most bearish reading of the year: (313,397) - 04/22/03 Most bullish reading of the year: (222,875) - 04/01/03 Small Traders Long Short Net % of OI 04/08/03 319,460 35,629 283,831 79.9% 04/15/03 365,876 44,137 321,739 78.5% 04/22/03 395,596 40,480 355,116 81.4% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 355,116 - 04/22/03 NASDAQ-100 Interestingly enough, the Commercials remain net long on the NDX with the Nasdaq breaking out to the upside this week and the small traders remain next short (almost 2 to 1). Commercials Long Short Net % of OI 04/01/03 40,493 36,893 3,600 4.7% 04/08/03 44,257 36,711 7,546 9.3% 04/15/03 44,976 37,929 7,047 8.5% 04/22/03 45,647 38,531 7,116 8.5% 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 04/01/03 9,771 13,306 ( 3,535) (15.3%) 04/08/03 11,365 17,790 ( 6,425) (22.0%) 04/15/03 11,182 17,438 ( 6,256) (21.9%) 04/22/03 10,929 20,376 ( 9,447) (30.2%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL There has not been much change in the futures positions for either the commercials or the small traders. The retail trader is pretty much neutral and the big guy is slightly bullish. Commercials Long Short Net % of OI 04/01/03 19,068 12,672 6,396 20.2% 04/08/03 18,566 12,616 5,950 19.1% 04/15/03 17,881 13,124 4,757 15.3% 04/22/03 16,942 14,750 2,192 6.9% 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 04/03/01 5,142 7,459 (2,317) (18.4%) 04/08/03 5,886 7,964 (2,078) (15.0%) 04/15/03 7,748 8,704 ( 956) ( 5.8%) 04/22/03 8,081 8,275 ( 194) ( 1.2%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************************* WEEKLY MANAGER MICROSCOPE ************************* Robert H. Lyon: ICAP Select Equity Portfolio (ICSLX) Robert H. Lyon is the president and chief investment officer of Institutional Capital Corporation ("ICAP"), which has served as investment advisor to the ICAP Select Equity Portfolio since its December 31, 1997 inception. During 1991, Mr. Lyon led a group of senior ICAP professionals in arranging a buyout of the firm's founder. Before joining ICAP in 1988, Lyons spent 7 years as an executive vice president and director of research with Fred Alger Management. Mr. Lyons' bio states that he also worked as a portfolio manager and analyst with Institutional Capital Corporation for 5 years, and as an economist and strategist with First National Bank, Chicago for 2 years. The 28-year industry veteran has a BA in Economics from Northwestern University and an MBA from Wharton School of Finance. Lyons is supported by other senior members of the ICAP investment team, including Gary Maurer (30 years), Donald Niemann, CFA (33 years), Jerrold Senser, CFA (24 years), Thomas Wenzel, CFA (16 years), and Doug Scott, CFA (15 years). Each professional has developed expertise in at least one functional investment area, and is responsible for managing one or more economic sectors so that collectively, the firm has expertise across all industries. The ICAP Select Equity Portfolio is one of four stock funds that are offered by Institutional Capital Corp. The no-load fund has a minimum initial investment of $1,000 for both regular accounts and IRAs. According to Morningstar, the fund's expense ratio is currently 0.80%. For complete information or to download a fund prospectus, go to the www.icapfunds.com website. Manager Style/Strategy According to the ICAP website, the Select Equity Portfolio seeks to provide a superior total return for investors. By "superior" they mean a total return, which exceeds the S&P 500 index return over a full market cycle. It can invest in the common stocks of companies with market caps of $2 million or more, but the fund's average market capitalization of $24 billion as of March 31, per Morningstar, tells you that the fund concentrates its investment in the giant-cap and large-cap ranges. According to Morningstar, mid-caps and small-caps comprised less than 10% of net assets at quarter-end. Under normal conditions, Lyons will invest at least 65% of fund assets in equity securities. He may invest up to 35% of assets in fixed income and money market securities for any purpose and may put the entire portfolio in such instruments as a temporary, defensive measure. As of March 31, 95% of assets were invested in stocks, with a 5% cash position. Foreign stocks made up 15% of assets at quarter-end, per Morningstar. Lyons uses a bottom- up approach, favoring undervalued stocks that are consistently growing their earnings and offer "catalysts" for future growth. Since ICAP Select Equity Fund is registered as "non-diversified" Lyons can invest a larger portion of fund assets in his favorite stocks. At March 31, the portfolio had just 25 stocks with over 53% of assets in the fund's top 10 holdings. The top 3 holdings at were Bank of America (7.1%), Public Service Enterprise Group (PEG), and ConocoPhillips (6.4%). The members of the investment team review and discuss the merits of potential investments and, as a team, make a decision whether to invest in a company or not, the ICAP website states. Once a model portfolio of about 40-45 stocks is chosen, Lyons picks 15- 25 of the most compelling of these stocks to include in the ICAP Select Equity Portfolio. The ICAP Select Equity Portfolio is in Morningstar's large value category based on its average style box location for the past 36 months. The mostly recently available portfolio, however, falls into the large-cap blend style box. At 309%, the fund's average annual portfolio turnover is high, and could potentially lead to poor tax efficiency, something to note if you're considering the fund for a regular (taxable) account investment. Management fees for the ICAP Select Equity Portfolio are 0.80%. Further, ICAP has been paying 100% of the fund's other expenses, resulting in an expense ratio of 0.80%, well below the category average of 1.40% per Morningstar. The prospectus says that the expense cap will terminate on April 30, 2003 unless extended by mutual agreement of the parties. Contact ICAP to find out more. Certainly, if ICAP stops paying all of the fund's other expenses that will materially affect performance, since total returns are calculated net of all fund expenses/costs. Manager Performance In the fund's first two full years of operation, 1998 and 1999, Lyons produced annual returns of 15.3% and 27.2%, respectively. His 15.3% return in '98 ranked the ICAP Select Equity Portfolio in the top 30% of the Morningstar large-cap value category, but his 1999 performance ranked in the category's top 1%. In years 1998-2001, Lyons' performances ranked in one of the two highest quartiles of large-value category. Lyons' focused portfolio struggled in 2002, losing 24.5% on the year and ranking in category's fourth (bottom) quartile. Sears and Tyco stock blowups last year contributed to the fund's loss. In 2003, the ICAP Select Equity Portfolio is back on track. For the year-to-date period through April 30, 2003, Lyons has posted a total return of 8.8% for investors. His 8.8% YTD return ranks the ICAP Select Equity Portfolio in the top 1% once again of the Morningstar large-cap value category. While the fund's trailing 1-year and 3-year annualized returns through April 30, 2003 are closer to middle-of-the-pack in the Morningstar large-value category, Lyons' 5-year average annual return of +2.1% ranks the Select Equity Portfolio in the top 7% of the category. For the same 5-year period, the S&P 500 index benchmark had a negative annualized total return of 2.5%, while the average large-value fund lost 1.8% a year, per Morningstar. The ICAP Select Equity Portfolio is a Morningstar Analyst Pick. In its report, Morningstar notes the impressive record that Mr. Lyons built running sibling, ICAP Equity Portfolio. Since this fund contains Lyons "highest-conviction" stocks, it should beat its more-diversified sibling over time; well, theoretically, at least. That is, of course, if Lyons hits his target more often than he misses which he does in Morningstar's view, referring to Lyons' stock-picking skills as "top-notch." As 2002 shows, with net assets concentrated in a small number of holdings, one or two torpedoes can hurt relative performance but the flip side is true as well. One or two home runs can help to deliver strong relative performance. So, while the fund's large- cap value/blend management style makes it appropriate as a "core" investment, Lyons' rapid trading style and concentrated portfolio can result in poor tax efficiency and make it more susceptible to ups and downs. Conclusion Many argue that too much diversification results in average-type returns. Focused portfolios such as the Select Equity Portfolio offer greater total return potential over the long term, but are almost guaranteed to be associated with higher volatility in the short-term. Therefore, it is most appropriate for investors who can tolerate very significant fluctuations in share price in the pursuit of higher potential appreciation over full market cycles. For more information, go to the www.icapfunds.com website. Note again the fund's "expense cap" agreement terminated on April 30, 2003 (unless extended by mutual agreement of the parties). Your best bet is to contact ICAP Funds directly (888-221-4227) to get the scoop on whether ICAP may continue to pay for some or all of the fund's other operating expenses (beyond the management fees). Steve Wagner Editor, Mutual Investor email@example.com ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. 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The Option Investor Newsletter Thursday 05-01-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Daily Results Call Play Updates: ADTN, AZO, ERTS, IMDC, NXTL New Calls Plays: SLM Put Play Updates: FITB, INTU, KSS New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** None *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS LAST Mon Tue Wed Thu Week ADTN 41.40 0.53 1.20 -0.22 0.92 Finally Triggered AZO 80.34 1.27 1.02 0.47 0.15 Still Looks Great ERTS 59.53 1.33 -1.35 -0.39 -0.18 Still Cautious IMDC 37.05 0.95 -0.15 0.24 1.71 Take Profits! MEDI 35.92 0.81 0.15 -0.47 0.00 Long-Term, no update NXTL 15.30 0.75 0.63 -0.29 0.54 Like Clockwork SLM 112.18 0.18 NEW, Split Coming PUTS FITB 49.58 1.10 -0.16 -0.36 -0.48 Still Untriggered INTU 38.74 -2.17 3.95 0.08 -0.35 Still Under Resistance KSS 57.28 1.67 0.59 -0.48 -1.31 Looks better ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** ADTRAN, Inc. - ADTN - close: 41.40 change: +0.92 stop: 38.50*new* After initiating bullish coverage of ADTN on Tuesday, yesterday's session was a bit of a disappointment, with the stock drifting slightly lower. Today's session was a different affair altogether, as the stock rebounded sharply from its early low near $40, launching through our $41.40 trigger and trading an intraday high of $41.75, before relaxing a bit in the afternoon. It is interesting how ADTN fell back at the close to end the day right on that $41.40 level. A pullback into the $40-41 area should provide a solid opportunity for new entries on the rebound, as any dip should now be strongly supported by the ascending trendline, now at $39.50. Momentum types will want to see a break above today's intraday high ($41.75) before adding new positions. We're ratcheting our stop just a bit higher to $38.50 tonight, as this is just below Monday's intraday low and the 20-dma ($38.91). Picked on April 29th at $40.70 Change since picked: +0.70 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 752 K Chart link: --- AutoZone, Inc. - AZO - close: 80.96 change: +0.15 stop: 77.90 Consistency is a wonderful thing, especially when it is in one of our plays. In the face of the rather interesting trade in the broad market on Thursday, AZO dipped at the open, found support at a higher low and then pushed higher right into the closing bell. Today's close fractionally eclipsed Wednesday's close of $80.81 and it certainly looks like the stock is intent on continuing its way up the chart. On Balance Volume has now pushed to its highest level since mid-December, when the sharp slide lower began. One cautionary note comes from the daily Stochastics though, as they are once again back in overbought territory. Of course, each drop out of overbought over the past month has just resulted in a fresh buying opportunity, not a break of the upward trend. This morning's dip could have been used for aggressive entries into the AZO play, but at this point we need to be careful about new entries. AZO is up more than $10 in the past month, and we have to question how much more upside there is. Conservative traders will want to use a move into the $82-83 area as an opportunity to harvest gains. We're still looking for the stock to trade our upper target zone of $84-85 though and so far things are looking good. For now, we're maintaining our stop at $77.90, but we'll look to raise it on a close above $81.50. Picked on April 13th at $75.24 Change since picked: +5.72 Earnings Date 06/03/03 (unconfirmed) Average Daily Volume = 1.21 mln Chart link: --- Electronic Arts - ERTS - close: 58.95 change: -0.19 stop: 58.00 There's no question that our ERTS play has been disappointing, as it has slowly drifted lower following the failed breakout above the $61 level. But there hasn't been an overabundance of selling pressure, as volume has been light and the stock continues to find support above our $58 stop. However, it did get uncomfortably close to that level on Thursday, with an intraday low of $58.33. Working against our hoped-for bullish outcome, ERTS is now finding resistance at the 20-dma ($59.33) and 200-dma ($59.41), rather than support. With earnings looming next Tuesday, the fuse is growing quite short for ERTS to redeem itself. At this point, only aggressive traders should consider new entries on a rebound from above the $58 level. If the stock can't show us some upside on Friday, we'll likely close the play over the weekend. Picked on April 20th at $60.04 Change since picked: -1.04 Earnings Date 05/06/03 (confirmed) Average Daily Volume = 3.10 mln Chart link: --- Inamed Corp - IMDC - close: 39.00 change: +1.71 stop: 36.00*new* Sigh. The earnings date reporting for some of these smaller companies is NOT very accurate. No one was showing an earnings announcement date of April 30th for IMDC. This is why it is essential to trade with stop losses. Instead of good news, it could have been bad news on IMDC. Lucky or not, traders need to evaluate their position status. Shares of IMDC are up $4.00 from our pick price of $35.00. The stock is very close to the top of its channel and it just $1.00 away from potential resistance at $40.00. Now would be a good time for investors to consider taking some profit off the table, if not close the position entirely. Here are some actions to consider. 1) Take profits and close the play at the open tomorrow. 2) Close half your position and raise the stop on the remainder. 3) Set a good-til-cancel order to exit when IMDC trades at $39.50 or $40.00 (or somewhere in between). Or if you've suddenly become a longer-term investor based on the good earnings news then wait and watch how far the rally might go. Maybe your new target is $45. It is certainly possible that any shorts in this stock have started to cover or will cover soon. As of the latest short-position report, there was about three days worth of volume or more than 600K shares short. The official OptionInvestor.com position will be to close the play on any intraday spike to $40.00. This means we will pass up the opportunity should the stock continue to rally but we have to be a bit more conservative as an end-of-day newsletter. On the other hand, the individual trader can monitor their positions and continue to raise their stops as the stock moves. Maybe we'll get another entry point in a few days time. As far as the recent news, IMDC announced earnings on April 30th. The results of 58-cents a share were two cents above estimates. Net income was $12 million compared with $8.4 million the year earlier. IMDC said sales rose by 19% to $75.5 million for the quarter. Inside IMDC's earnings report was news that the company had received approvals by the FDA and successfully launched its CosmoDerm(tm) and CosmoPlast(tm) products. For the moment, we are raising our stop to $36.00. This is a bit wide consider the profit at risk but we do expect to be stopped out for a profit early Friday morning. New positions are not recommended. Picked on April 17th at $35.00 Change since picked: +4.00 Earnings Date 04/30/03 (confirmed) Average Daily Volume = 215 K Chart link: --- Nextel Communications - NXTL - cls: 15.30 chg: +0.54 stop: 13.90 So far the play on NXTL could not have been scripted better. It has done exactly what we wanted it to do. The breakout over $14.65 was huge but shares looked overextended. We expected a pull back but now we had broken resistance to look to as new support. We listed a range of $14.50 to $15.00 as an entry point. The stock closed at $14.76 on Wednesday and dipped to $14.45 this morning before bouncing higher. Individual traders who target shot their way in are probably in a good position. Our official entry will be the top of the range at $15.00. Currently, our stop is at $13.90 but more conservative traders might be able to get away with $14.45. There really is no overhead resistance until $18.25-20.00 (our target profit range). Assuming the markets don't crash on us, NXTL should do well. Picked on April 30th at $15.00 Change since picked: +0.30 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 21.6 Million Chart link: ************** NEW CALL PLAYS ************** SLM Corporation - SLM - close: 112.18 change: +0.18 stop: 110.00 Company Description: SLM Corporation is engaged in the provision of a broad array of education credit and related services to the education community, including student loan origination, student loan and guarantee servicing and debt management and collection services. The company participates in all phases of the student loan process by holding and servicing the loan from origination and guarantee through ultimate collection, and in some cases, post default collection. SLM manages a large portfolio of student loans under the Federal Family Education Loan Program, serving over seven million borrowers through its ownership and management of $79 billion in student loans. Why we like it: In case you haven't noticed education-related stocks have been a bastion of strength for months now, with many of them surging to new highs on this latest bull run. In addition, the Financials have been one of the key leadership sectors off of the March lows, with the KBW Banking index (BKX.X) threatening to finally break above the critical $800 resistance level. How about a bullish play that can benefit from both trends? We've got just the ticket in SLM, as the company is involved in the business of providing loans to students. As an added bonus, the company announced a 3- for-1 stock split on March 21st and the shareholders are set to vote on it in 2 weeks. SLM has been persistently working higher in its 9-month ascending channel, much to the chagrin of the bears that have been attempting to short into every new high. The latest 52-week high accompanied the company's latest stellar earnings report, which came in a penny ahead of estimates and more than double that posted in the year-ago quarter. Over the past couple weeks, the stock has been drifting lower as investors harvested recent gains, but based on Thursday's sharp intraday reversal, it looks like the stock has found strong support. The $110 level was strong resistance on the way up, and should perform the opposite function now. Not only that, but there is some firm support at the $111 level, reinforced by the 50-dma ($111.11). A quick look at the chart below shows how sharply the stock rebounded today. Turning to the PnF chart, we're presented with a strong bullish chart that hasn't given a Sell signal since launching off the $80 level last July. The current bullish vertical count is $120, which isn't too far above its recent high at $117.35. New entries near current levels look attractive and a slight dip near the 50-dma would look even better for new positions. Daily Stochastics appear to have bottomed in oversold and are attempting to turn up and the $110-111 area should provide strong support for the next leg up to begin. Add in the anticipation of acceptance of the stock split at the shareholder meeting in two weeks and we have strong catalysts on both the sentiment and technical front. If the BKX index can clear the $800 level, then that ought to seal the deal and have SLM charging back towards its recent highs. That will be our initial target on the play, although more aggressive traders may want to hold out for a push all the way to the $120 level. Initial stops will be set at $110, on a closing basis. Suggested Options: Shorter Term: The May 115 Call will offer short-term traders the best return on an immediate move, but this is a higher risk approach with May expiration only 2 weeks away. Traders with less tolerance for risk will want to use the May 110 Call. Longer Term: Traders looking to capitalize on a breakout move toward the $120 bullish price target will want to look to the June 115 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. BUY CALL MAY-110 SLM-EB OI= 191 at $3.40 SL=1.75 BUY CALL MAY-115 SLM-EC OI=1798 at $0.70 SL=0.30 BUY CALL JUN-110 SLM-FB OI= 37 at $4.70 SL=2.75 BUY CALL JUN-115 SLM-FC OI= 146 at $2.05 SL=1.00 Annotated Chart of SLM: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-01/SLM050103.gif Picked on May 1st at $112.18 Change since picked: +0.00 Earnings Date 07/17/03 (unconfirmed) Average Daily Volume = 912 K ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* Fifth Third Bancorp - FITB - cls: 48.70 change: -0.52 stop: 50.25 If you are wondering what is holding our FITB play up, you need look no further than the BKX index, which is stubbornly holding up near the $800 resistance level. So long as this index is unable to crest this persistence, then FITB looks like it could eventually go our way. That said, it was rather disconcerting how the BKX rebounded so smartly from its intraday low to close just off its highs. FITB went along for that bounce after tagging an intraday low of $48. When we initiated this play, we set a trigger of $47, and since that level has not been traded, the play is still dormant. We're looking for a solid break under that level to bring the play to "live" status, at which point momentum traders can consider entering on the breakdown. More conservative traders will then want to look for a failed bounce in the $47-48 area as an entry. Our stop remains just above the recent highs at $50.25. Picked on April 24th at $47.73 Change since picked: +0.97 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 2.68 mln Chart link: --- Intuit Inc. - INTU - close: 38.47 change: +0.35 stop: 40.00 It looks like the strength in the GSO software index may be propping up shares of INTU. Shares produced what looks like a failed rally on Wednesday's intraday spike but a real follow through of declines did not appear in today's session. We're still bearish on the stock and the new lower high yesterday doesn't hurt. Given our stop at $40.00 this isn't a risky place to consider new shorts but we'd like to see just a little bit of momentum to the downside again. Tread carefully. The weekend approaches, maybe we'll see some selling towards the close tomorrow. Picked on April 27th at $37.24 Change since picked: -1.23 Earnings Date 05/15/03 (confirmed) Average Daily Volume = 4.53 mil Chart link: --- Kohl's Corporation - KSS - close: 55.49 change: -1.31 stop: 58.00 Negative comments from Lehman on some of the softline retailers this morning put the entire group under pressure, and gave our KSS play the push off its ledge of support we were looking for. Once below $56.50, the stock quickly sought out the $55 support level, from which it saw a very mild afternoon rebound. Once again, the 50-dma ($55.14) provided support, and we're going to need a decisive break of that level to get KSS moving towards our downside target in the $50-51 area. While in hindsight the rally failure near $58 is looking like a great entry into the play, more conservative traders will want to wait for a break under $55 or even under Monday's intraday low of $54.35 before entry. Daily Stochastics are just tipping bearish again, and that ought to pave the way for lower prices ahead. Picked on April 27th at $55.02 Change since picked: -0.47 Earnings Date 05/15/03 (confirmed) Average Daily Volume = 3.61 mln Chart link: ************* NEW PUT PLAYS ************* None ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 05-01-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/v01g_3.asp In Section Three: Play of the Day: CALL - NXTL Traders Corner: When The "Fear Factor" Kicks In – Don't Worry, Be Happy Options 101: Currency Trading Simplified ********************** PLAY OF THE DAY - CALL ********************** Nextel Communications - NXTL - cls: 15.30 chg: +0.54 stop: 13.90 Company Description: Nextel Communications, a Fortune 300 company based in Reston, Va., is a leading provider of fully integrated wireless communications services and has built the largest guaranteed all- digital wireless network in the country covering thousands of communities across the United States. Nextel and Nextel Partners, Inc., currently serve 197 of the top 200 U.S. markets. Through recent market launches, Nextel and Nextel Partners service is available today in areas of the U.S. where approximately 240 million people live or work. (source: company press release) Why We Like It (Original Write Up, April 29th): It's nice to see some corporate profits again. NXTL recently announced their Q1 results and the numbers were pretty positive. Not only that, it was their fourth consecutive quarterly profit. Earnings came out on April 23rd and the Q1 numbers showed a 21% jump in revenues. Net income was 20 cents a share or $240 million, which is a huge improvement over the same quarter a year ago with an 82-cent loss. Analyst estimates for the latest quarter were just 16 cents. The company said the higher earnings were driven by much better than expected subscriber growth. New customers totaled 480,000 for the quarter. This brought total subscribers to 11.1 million. At an average monthly revenue per subscriber of $67, the new additions really boosted revenues. The company also shared that customer churn, the rate at which customers leave their service, was down to 1.9%. This was the lowest level in four years. Management also said they would meet or exceed their 2003 goals. How's that for guidance? As a matter of fact, the entire "wireless" industry is doing pretty well despite previous slow downs from the go-go days of the late 90's. Verizon Wireless saw a big jump in revenues and AT&T Wireless (AWE) isn't doing so bad either. Some Wall Street pundits are speculating that the bigger telecom companies in the U.S. may actually have to buy NXTL or AWE to have an edge against the competition. HOW TO PLAY IT -- We put that in capital letters because it's essential to plan for the right entry point given NXTL's low stock price. Only truly aggressive traders should try chasing the stock right now. The short-term trend is very strong but shares look overbought from their recent lows at $12. Keep in mind the move today over multi-month resistance near $14.50 is huge and probably has a number of shorts desperately trying to cover. Instead of chasing it, with the call option prices already inflated, we want to catch an entry on a pull back. We are going to USE a TRIGGER to go long NXTL if and when the stock pulls back between $15.00 and $14.50. Essentially, we're target shooting an entry. We provide a range because one never knows when a stock might gap open. If NXTL gaps open below $14.50, then we don't want to play it. The most probable scenario is that NXTL pulls back to somewhere within that range and officially we have to claim an entry price of $15.00. As the reader, you can wait and see how far the pull back goes. Should we get triggered we'll initiate the play with a stop loss at $13.75. Worse case scenario is that NXTL pulls back and just keeps on going down. Should you never see a bounce, then don't go long. Our initial target will be $20. Keep tabs on NXTL's progress in the MarketMonitor. NXTL's next update will be on Thursday unless we get triggered tomorrow. Play-of-the-Day Comments (May 1st, 2003): So far the play on NXTL could not have been scripted better. It has done exactly what we wanted it to do. The breakout over $14.65 was huge but shares looked overextended. We expected a pull back but now we had broken resistance to look to as new support. We listed a range of $14.50 to $15.00 as an entry point. The stock closed at $14.76 on Wednesday and dipped to $14.45 this morning before bouncing higher. Individual traders who target shot their way in are probably in a good position. Our official entry will be the top of the range at $15.00. Currently, our stop is at $13.90 but more conservative traders might be able to get away with $14.45. There really is no overhead resistance until $18.25-20.00 (our target profit range). Assuming the markets don't crash on us, NXTL should do well. Suggested Options: Most of the volume is going to be in the short-term front month options in May. These will also be the least expensive to play. However, if you believe the rebound in wireless and the growth seen by NXTL can keep up, then consider August or Novembers. You don't have to hold them that long and can close the position at any time. BUY CALL MAY 15.00 FQC-EC OI=30154 at $0.90 SL=0.00 BUY CALL MAY 17.50 FQC-ES OI= 7213 at $0.15 SL=0.00*more risky* BUY CALL AUG*15.00 FQC-HC OI=10188 at $1.90 SL=1.00 BUY CALL NOV 17.50 FQC-KS OI= 1838 at $1.65 SL=0.90 Annotated Chart of NXTL: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-01/NXTL050103.gif Picked on April 30th at $15.00 Change since picked: +0.30 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 21.6 Million ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** When The "Fear Factor" Kicks In – Don't Worry, Be Happy By Mike Parnos, Investing With Attitude During the life of a trade, there will be times that the underlying stock or index moves against us. That's enough to piss off anyone. So, what do we do? Many traders simply freeze. They pretend (and pray) it will just go away. Well, in many situations, it's true. If you freeze, a big chunk of YOUR MONEY will go away. At the CPTI, we advocate and preach the maintaining of your composure. Basically, if you're worried, that means you don't have a plan -- unless you're basically paranoid. That means you probably worry about everything -- the sun coming up, the sun going down, SARS, alien abductions, what's in hot dogs, body odor, tooth decay, being too loud, being too quiet, wearing white after Labor Day, long sleeves or short sleeves, your cholesterol level and what you're going to have for lunch three days from now. You fill your gas tank even though it's half full. You worry about the ozone layer, the temperature in your refrigerator, and running out of toilet paper. In other words, you're a mess and shouldn't be allowed by yourself on any street let alone Wall Street. Plans are nice. They provide peace of mind. At the Couch Potato Trading Institute (CPTI) we have contingency plans. We know that we're going to have our share of losses. We try to keep them reasonable. We shouldn't enter trades if we don't know what to do if it goes wrong. That's what paper-trading is for – to learn how to react (or not) to any given situation. In trading, you can't be afraid to go out on a limb, because that's where the fruit is. You just have to choose your limbs carefully and you have to know how high the limb is from the ground. Some of our readers have been experiencing the "fear factor." That well known philosopher "anon" once said, those who fear the future are destined to fumble the present. Ain't it the truth? _____________________________________________________________ Hi Mike, I'm sure you have a plan for your minage a-qua. Care to share it? That spike up this morning on MSFT came really close. Thanks. Response: Patience, my friend. Patience. Remember, we're only exposed for $1.15. During the life of a trading-range position like this, the stock can bounce all over the place -- up and down. There's a reasonably good chance it will end up somewhere near $25. The best part about only risking $1.15 is that you don't have to lose sleep over the trade. Every transgression near, or even beyond, $26.35 or $23.65 does not require an action or an adjustment. The market is just as fickle as people. It can have severe mood swings. Why? Because it's people who are doing the buying and selling. They'll fluctuate from "irrational exuberance" on news of an upgrade to depression if another stock in the same sector has a bowel obstruction. It averages out over time. All we can hope for is that the return to reality happens by option expiration. It's all in the timing . _____________________________________________________________ Mike, A big question we have is about how to combat irrational fear. We often exit perfectly good trades because they near the resistance and support areas of both the trades you suggest and similar trades we make. It's unfortunate because the fear is irrational many times and the trades end up working out 9 times out of 10. Unfortunately we are not in them to take in the profits and most likely we have taken a hit to get out of them because of the spread in bid and ask. One example of irrational fear is the current SPX bear call spread. Earlier this week, one morning the market was running hot and heavy. We really started to feel some irrational fear coming on when the SPX recently hit 924. How do you combat that and keep from pushing that button? Thanks Response: Hide the button. Take a valium. Go to the movies. You're going to drive yourself crazy (or crazier) if you watch the computer screen every minute. Get a life. The whole concept behind this kind of low-risk trading is to enable you to get off the couch and smell the roses. Why stay home and smell the Formula 409? An Opportunity Sometimes an adverse market move will provide an opportunity. When an underlying is trading near the high end of its range in a condor, it's a good time to take a look at the bottom end of the range. In our SPX position, the 825/800 bull-put spread could now be closed for about $.30. What would that accomplish? First, it would remove any obligation you would have to perform if, in the next 2+ weeks, the market had a dramatic reversal and came down to threaten the lower extremities of the condor. Secondly, it would free up all the money that was being held as maintenance for the bull-put spread. This money could be put to use in a variety of ways – generating more money in another position. Finally, explore and see if you are in a position to close out your obligation by buying back only the short put at a reasonable price. If you can do that, you will still own the long protective put (800) that is, at the moment, almost worthless. Look at it as a lottery ticket. If, per chance, the market dramatically reverses (stranger things have happened), that "worthless" long put could have significant value if the market moves far enough and fast enough. _____________________________________________________________ A Story Of "Courage" When I was in college (a zillion years ago), I was a psychology major (among others). In one particular psych class, we studied a multitude of concepts for 13 weeks. Our entire grade was to be based on how we performed on the final exam. The fateful day arrived. We were all armed with bluebooks and a pen. The professor wrote the single question on the blackboard – "What is courage?" As we opened our bluebooks and began to write, one student got up from his chair, walked to the podium, handed the professor his bluebook, and left the room. We all wrote diligently for the two hours until time had elapsed. One after another, we handed in our filled bluebooks, shaking our heads, and hoping for the best. Only one student earned an "A" on the final examination. It was the student who handed in his test and left only moments after the test began. What did he write? The question was, "What is courage?" He wrote, "THIS is courage." __________________________________________________________________ May CPTI Portfolio Positions Position #1 -- SMH Baby Condor. Thursday's Close: $26.48 SMH is the Semiconductor Holder Trust. We feel that semiconductor stocks have moved up a little too far and too fast. We created a baby condor by selling the May SMH $25 puts and $27.50 calls. For protection, we bought the May $22.50 puts and $30 calls. The net credit is $1.05 Our maximum profit range is $25 to $27.50. We're only exposed for the 2 1/2 point difference between the strikes ($25/$22.50 or $27.50/$30) less what we've taken in ($1.05) = $1.45. Maximum potential profit is $1,050. SMH has been bouncing around within the range – but then, that's what it's supposed to do. Actually, it traded as high as $27.78. Our safety range is $23.95 to $28.55. So far, so good. ____________________________________________________________ Position #2 – SPX Iron Condor. Thursday's Close: 916.30 We believe the market may be a bit extended so we gave it a big sandbox to play in. We sold the SPX May 825 puts and the May 950 calls. Then we bought the SPX May 800 puts and May 975 calls for protection. The net credit was $2.95. Our exposure is a little more than usual – 25 points less the $2.95 we took in = $22.05. That's why we're only doing five contracts. Our maximum potential profit is $1,475. SPX traded up to 924.24 a few days ago and put fear into the hearts of a few timid souls. Today it traded back down and almost broke 900. We'll watch it, but we won't obsess over it. ______________________________________________________________ Position #3 – MSFT Minage-A-Qua – Thursday's Close: $25.71 Microsoft just came out with respectable earnings and unenthusiastic guidance. We believe that MSFT will finish at or around $25. We sold the May MSFT $25 puts and calls for a credit of $1.80. We bought the $27.50 calls and $22.50 puts for protection at a cost of $.45 – yielding a net credit of $1.35. Our maximum profit occurs if MSFT closes right at $25. Our profit range is from $23.65 to $26.35. Our risk is only $1.15 with the potential to make $1.35. Maximum potential profit is $1,350. _____________________________________________________________ Position #4 – DJX Minage-A-Qua – Thursday's Close: $84.54 The DJX tracks the DOW. It looks like the DOW is in a minor uptrend with resistance at $85 and support at $82. We sold 10 contracts of the May DJX $84 puts and bought the May DJX $80 puts. Then sold 10 contracts of the May DJX $84 calls and bought the May DJX $88 calls for a credit of $.80 for a total net credit of $2.25. We'll receive our maximum profit if the DOW closes right at 8400. However, we will be profitable if the DOW closes anywhere between 8175 to 8625. That's a 450-point range. The closer it finishes to 8400, the greater the profit. Maximum profit potential: $2,250 ______________________________________________________________ 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 *********** OPTIONS 101 *********** Currency Trading Simplified Buzz Lynn buzz@OptionInvestor.com Welcome to the Cheapskate revolution - the Cheap Decade, actually. The coining of the phrase isn't original. It came from Rich Karlgaard, Publisher of Forbes Magazine. For him, it's a new but recurring theme of his magazine editorial every month. Here's the concept: Extremely cheap goods and services by a factor of 10. Karlgaard's words: "CEO's, listen up. If you are on the wrong side of this revolution, you better rethink your company's mission. Quickly." Most of us are not CEO's, but traders, or perhaps working a "real" job with some trading and investing on the side. The Cheap Revolution is important to us too. Like in the early 1900's when the automobile showed up on the scene, we wouldn't have wanted to be in the buggy whip business. Similarly, we don't want to be mired in a bloated corporate IT department, selling expensive corporate software installations, or working in an America-based calling center. Why not and why pick these examples? Consider that Google, the Web's most popular search engine with 170 mln page views per day runs off 12,000 servers (think of a cheap PC without a monitor) costing $2,000 a piece. When a computer breaks, they don't call in the IT department to labor over a solution or call IBM to perform under a service contract. No, they JUNK the machine and replace it with a new one. It saves 90 cents on the IT Dollar. Think cheap. Here' another example. Siebel's sales have been flat and they are struggling under a sales proposition that has customer relationship management (CRM) software costing the prospect millions. Conversely, salesforce.com has 90% of the same functionality with perhaps 10% of the cost. It's available for as little as $65 per month. Think cheap. Oh, and that call center for customer service or help? It's moved to China or India where those folks offer superb service and are paid $300 per month. I've had personal experience reaching India for McAfee help and the Philippines for Chevron credit card service. Think cheap. How about an example for personal consumption (literally)? Tired shelling out ten to twenty dollars for a decent bottle of Cabernet? Good. Me too. Put them in storage for a while and let them become collector's items, or save them for company. Meanwhile head to your local Trader Joe's and pick out a bottle of Charles Shaw - cabernet, chardonnay, merlot, and sauvignon blanc - for an unbelievable $1.99 per bottle. It's affectionately called "Two-buck Chuck". Garbage? Hardly, the stuff is made from an oversupply of grapes grown all over California and bottled in Napa, the heart of California wine country. It's actually a very good bottle of wine and at $1.99, it's a GREAT bottle of wine. Again, think cheap. Well, that's the trend. For those of you on Paradigm (I hate that word and can't believe I used it) Beach, this is your wave. Think cheap. I realize that falls a long way from trading options. So as long as we're completely off the subject, I'll be glad to relay that we are publishing the first edition - and probably the last - of the Cheapskate Report. Yes, it's a spoof born of an e-mail exchange with one of the cheapest guys I know. Call him Bill. He and his wife probably came up with these over a bottle of Two-buck Chuck. I assume this because he was the one who told me about the stuff four months ago! Some are worth repeating for those interested in adding an element of frugality into their lives. Ready? Here goes. Cut and paste from Bill's own e-mail Be good to the earth and recycle. It pays you very little and often does not pay for the gasoline, but it makes you feel good and gets you into a conservation mode. You'd be surprised how much you eventually save by noticing the waste of some things and the reuse potential of others. Same goes for old clothes. Give them to Good Will or St. Vincent de Paul. You get a tax write off and don't have to garage sale your stuff. Buy big-ticket tools or toys with a friend or couple. The stuff gets used and maintained more often, it costs you at least half or less and gives you a group to do stuff with. Tractor, log splitter, chain saw, motor home. . .use your imagination. Live substantially beneath your means and you will always have money to travel. Or, unless it's an emergency don't ever get a negative amortization loan. It's a fool's game waiting for a correction in real estate. Trash the Airline mileage cards and take the cash back card instead. Frequent flyer seats are harder to come by and are wiped clean by bankruptcies. More and more cards are offering cash back instead. [They are replacing all their cards and of, course, pay them off monthly]. Or only go to Chinese drycleaners. They are the best and you don't have to put up with the nose-ringed attitude crowd. Pizza. Never ever pay retail. There is always a coupon. You can find them even if you stop at a pizza joint on an impulse, often in the free weekly newspapers at the same pizza parlor. Freeze your bread and take out the slices one at a time for toasting. They toast just fine. Make your sandwiches in the morning with frozen bread and your sandwich stays cold until lunch. Benefit. You will never throw away moldy bread again. The bread lasts for 6 months or more in the freezer. Wash your plastic zip lock bags. Throw them away when the seams rip. I've been re-using the same bags for up to a year. Hardly ever buy them. A lot of stuff you buy now comes in them, like salad greens. [OK, Bill, you went to far on this one. Next to sliced bread and ice cubes, zip lock bags are the greatest. But that goes against the first thing mentioned - about conservation rubbing off on the rest of your life.] Put the plastic grocery bags around a paper grocery bag for garbage. It stands up by itself; the paper absorbs any normal liquid on trash and coffee grounds. The plastic bag has handles, which make it easy to tie off, carry to the trashcan and dispose off. Benefit. I have never paid for garbage bag liners, ever. Why pay for trash? Disposable razors are the cheapest way to shave. A slightly smaller size of any given product at Wal-Mart is often cheaper per unit of measure than the "Tribe-size" product. Case in point - Listerine 1.5 liter mouthwash $4.73. Listerine 1.0 liter mouthwash $2.98. $3.15/litre vs. $2.98/litre. Take 2 of the smaller for a better deal. [My contribution to the Cheapskate Report] For non-perishable goods, e-bay frequently has a better deal than many stores. But use it as your last stop, as there are a few shysters out there passing their expensive stuff off as a great deal compared to the stores. Sometimes, it just aint so. [Another contribution born of experience] 0% credit card cash advance deal where you pay down your home loan with the cash to get a "free" home loan for that portion of the mortgage. Buy the faux wood blinds at half the cost of wood, cut to fit at Home Depot. Buy white, which looks clean and doesn't offend the subsequent buyer. Spend $1000 on good landscaping equipment, fire your gardener, and recoup the cost savings of the purchase in less than a year. Landscape maintenance becomes free, excepting your labor and incidental maintenance expenses - gas, oil, sharpening, etc. Shop for cheap long distance on the Internet. I'm currently paying 4.5 cents a minute to anywhere outside my local calling area and it bills monthly to my credit card. Put every recurring bill possible on automatic payment to save time. If you are careful with your credit cards and pay them off every month, use them to pay electronic bills and cash back points toward your next major purchase. Better yet, take cash bonus points to use elsewhere. Always get your shirts done professionally. The cost of the cleaning is offset by increased longevity in your shirts. Net cost, practically zero. BTW. Someone will always do them for $.99. I've paid the same for shirts for the last 10 years. [See Chinese laundry above] Always drive a Japanese car [Brand, not country of manufacture]. They last forever, hardly ever break down and can be sold easily. The best case is to buy a 2-year-old Honda and sell it a year later. Hondas are bought and sold within a $3,000 range. If you study the ads, you can buy and sell for the same price and get a years driving for free or better. Buying low and selling high can even turn this into a profitable side business with additional tax benefits. Men: Buy one blue suit and forget about the rest [only if you really don't need to wear them daily]. People only care that you are dressed appropriately and not in polka dots. They do not remember your clothes. Women: You will need a few ties, ten white shirts, one pair of black shoes, and one pair of burgundy shoes. That's it. You'll be into it for way south of $1,000. Marry a frugal wife. Nothing saves you more money. Nothing. [Clair, Bill's wife came up with this one. Really!] Enjoy nice vacations. It encourages you to not spend your money stupidly because you gauge incidental expenditures on the basis of how much it cost versus a trip. Always max your retirement funds first, then play later. The stress of an un-funded retirement costs too much, as does the extra tax bite of regular income. Dress your infant children in hand-me-downs. Most of them have been worn only a few times because kids grow so fast. You will only use them a couple of times before you give them to the next person. Huge savings. Barring that, shop at used clothing stores for the same items for the same reasons - used little and can be sold back once they're outgrown. Never throw away leftovers. Freeze them, put it in a Tupperware and microwave it for lunch when you are eating alone. OK, there you have it - The Cheapskate Report! Sort of a Hints From Heloise for financial matters. I'm not sure how many like this practical, cheap stuff, or at least find it entertaining. Perhaps you have some of your own to share. Got a favorite cheapskate maneuver? If I get enough, we can actually put together a second Cheapskate Report. Unfortunately, there is no pay (one of the reasons it's the Cheapskate report ), but there is personal notoriety as a consolation prize if you'd like credit for the idea. Otherwise, consider it a contribution for the betterment of financial conditions everywhere, or a source of entertainment in the options trading business! Until next time, make a great weekend for yourselves! And think cheap! Buzz ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. 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