The Option Investor Newsletter Wednesday 05-07-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Lower Highs Futures Wrap: Yawn Index Trader Wrap: Is the Demise of the Rising Wedges Upon Us? Weekly Fund Family Profile: Legg Mason Family of Funds Options 101: Further Reflections on MOPO Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 05-07-2003 High Low Volume Advance/Decline DJIA 8569.56 - 27.80 8635.06 8529.04 1.91 bln 1533/1719 NASDAQ 1506.77 - 16.94 1523.91 1503.06 1.87 bln 1372/1767 S&P 100 470.31 - 2.40 474.57 468.91 Totals 2905/3486 S&P 500 929.62 - 4.62 937.13 926.41 RUS 2000 410.23 - 2.52 412.75 409.95 DJ TRANS 2457.26 - 30.47 2488.80 2456.91 VIX 23.76 + 0.50 24.60 23.14 VXN 32.03 - 0.10 33.36 31.73 TRIN 1.32 PUT/CALL 0.92 ******************************************************************* Lower Highs Jonathan Levinson The indices opened lower, drifted and then pushed to their highs of the day, coming close but not touching the highs set yesterday, before sliding throughout the afternoon to their lows of the day and then drifting slightly higher into the close. Volume was lighter across the indices, with the highest spikes at the open and the close. Daily Chart of the INDU The daily chart of the INDU shows the failure at upper resistance today, but with price still respecting the boundaries delimited by the wedge trendlines. I left out the descending trendline from the weekly trend depicted below. Today's candle illustrates the confusion between bulls and bears, with a spinning top, the bulk of the trade between the upper and lower blowoff extremes with a neutral close. Both the stochastic and MacD oscillators are overbought and trying to turn down. Weekly Chart of the INDU The weekly chart shows the two most recent bear wedges and their breakdown zone at the upper descending trendline. Note the toppiness of the 10 week stochastic here. Daily Chart of the COMPX The COMPX printed a bearish shooting star today, closing relatively lower than the INDU and signaling more decisiveness to the downside. The stochastic gave a bearish cross from deep in overbought, though today finished on lower volume. Weekly Chart of the COMPX The weekly view is setting up a potential bullish triangle formation, and illustrates the prime source of concern for bears at current levels. Another wave higher from here would alter the longer term picture considerably. It was a quiet news day. The Commerce Department reported that March wholesale sales rose 1%, outpacing the .5% rise in inventories. The inventory-to-sales ratio fell to a record low 1.21. This low ratio means that a proportionately higher number of retail sales will be reflected as higher factory orders as the buffer of inventories is diminished. Sales of durable goods were up 2.1%, its highest reading in 4 years on motor vehicle sales, as consumers continued to take advantage of unprecedented financing incentives. Sales of non-durable goods increased 0.1%. Inventories of durable goods rose 0.3%, again led by a 1.2% rise in auto inventories. The Energy Department reported that crude oil reserves fell by 800,000 barrels for the week ended May 2, surprising analysts to the downside. Total inventories are now a reported 287.2 million barrels, down 11.6% for the comparable period last year. Gasoline inventories rose by 2.2 million to 207.8 million barrels, bringing total supplies up to a decrease of 4.2% for the comparable period last year. The June crude contract closed at $26.23 per barrel, up 51 cents +2% on the NYMEX. June heating oil closed at 68.93 cents per gallon and June unleaded gasoline closed at 77.96. The Fed reported that consumer credit increased in March by the smallest degree in 4 months, by $930 million or 0.6% to $1.74T. This reading came well below expectations of 3.1B. Revolving credit rose by $2.3B for a 3.9% gain. Non-revolving credit – including car loans and other borrowing -- fell 1.7% or $1.4 billion. Treasury bonds rallied, with yields diving. The five year yield finished near its low of the day, down 12.4 basis points to 2.55%, the ten year down 11.5 bps to 3.693%, and the thirty down 7.2 bps to 4.691%. It was reported that Al Green was likely buying treasuries in the open market "to boost reserves in the banking system in order to combat deflation pressures," per Tony Crescenzi, analyst with Miller Tabak. "This rumor, which has circulated in the markets over the past few weeks, was reinforced by the Fed's policy statement wherein the Fed indicated a concern over the potential for a further decline in the inflation rate," he said. Ben Bernanke's published statements earlier this year about the fed having "a printing press" and being ready to employ unconventional measures such as outright purchases of thirty year treasuries might also have tipped off Mr. Crescenzi. An article on CNNfn observed that, "More abstractly, some traders might worry [that] the Fed's warning [in yesterday's release] of deflation -- despite interest rates at 41-year lows, which should be inflationary -- makes the United States look less like ancient Rome or Queen Victoria's Britain and more like 1990s-era Japan." The fed added $6.25B in repurchase agreements, for a net addition of $1B in liquidity against the expiring $5.25B 2 day repo expiring today. The US Dollar Index had another rough night last, bottoming near 95.10 and meandering as high as 95.80 before pulling back. It was reported that the US Dollar reached at 10 month low against the Yen today. The Canadian dollar had slipped .32% against the USD, and the Euro gained .48% against the USD at the time of this writing. Daily Chart of the US Dollar Index In corporate news, Newmont Mining (NEM) surprised to the upside, reporting Q1 net income of $117.3 million, or 29 cents a share, versus a loss of 3 cents a share in the year-earlier period. Sales for the period jumped 74 percent to $864. 6 million. Expectations had been for 18 cents per share and revenue of $696.6 million. NEM attributed the results to a 59$ per ounce, or 20 percent, higher gold price, coupled with its mostly unhedged gold position. Imagine, increasing profits based on an increase in pricing power of the product a company sells! This has become an almost revolutionary concept in the wake of the tech bust over the past few years. INTC was weak after reporting to the SEC an anticipated gross margin percentage of 50 percent for Q2, below Q1's 52%. The company attributed this decline to higher startup costs and a Q1 benefit from the sale of previously reserved inventory. It went on to state that an uncertain global economy makes it difficult to predict demand. Q2 revenue is expected to decline to $6.4 billion to $7 billion, from Q1 revenues of $6.75 billion. Capex spending is expected to decline to $3.5 billion to $3.9 billion in 2003 from $4.7 billion in 2002. The stock closed at $19.16 per share, down 1.94%. Moody's Investors Services placed AMD on ratings watch for a possible downgrade, citing concerns that its cash burn rate may place AMD in the unenviable position of having to raise another round of capital in the short to intermediate term. AMD's shares traded lower to 7.49, also down 1.96%. Investors were no doubt connecting the dots, taking MSFT down 1.46%. If consumers are not buying CPU's, they're probably not buying operating systems either. MSFT was hurt by news out of the EU setting a fall deadline to resolve an ongoing tax dispute with the US concerning incentives for US corporations, and threatening sanctions in the neighbourhood of $4B. Reports circulated in the morning that a new Saddam audio tape had surfaced, exhorting the Iraqi people to reject the "invaders" and assuring them that "victory is near". The tape could not be authenticated, however, and its impact on the markets were barely discernable. CNN reported that the National Weather Service has issued new tornado warnings in areas still trying to recover from heavy storms in the lower Midwest, Mississippi Valley and Southeast earlier this week. Possible funnel clouds in northeast Louisiana and northwest Mississippi were reported, with Tennessee's Cannon, western DeKalb, southeastern Wilson, northern Marshall, eastern Williamson, northwestern Bedford and Rutherford counties under tornado warnings. Severe storm warnings were issued for these regions as well. It appears that the markets are begin to turn their attention back to economic and corporate data after blissfully ignoring a steady torrent of bad results over the past months. This sets up a potentially dangerous environment for traders, because as the wholesale sales and inventories data showed today, the news isn't necessarily all bad. Whether those data resulted from an ongoing and unsustainable overindulgence in consumer credit spurred by very low interest rates is a matter of speculation. As the charts illustrate, equities are having trouble pushing above their upper trendlines, and it will take a strong round of buying to propel them to the next level. Whether this will come from positive economic or corporate data over the coming sessions remains to be seen, but until a clear resolution of the bearish chart patterns depicted above, traders should be seeking to exercise caution, particularly on the long side. For tomorrow, we await publication of the FOMC minutes for March, and initial jobless claims (prior 448K, expected 440K for the week). ************ FUTURES WRAP ************ Yawn By Jim Brown 05-07-2003 High Low DJIA 8560.63 - 27.73 8635.06 8529.04 NASDAQ 1506.76 - 16.95 1523.91 1503.06 S&P 500 929.62 - 4.77 937.22 926.41 NDX 1135.85 - 16.93 1152.68 1131.37 ES03M 929.50 - 5.25 937.00 925.50 YM03M 8548.00 - 22.00 8612.00 8501.00 NQ03M 1140.00 - 12.50 1159.50 1132.50 Daily Pivots (rounded to nearest point) R2 R1 Pivot S1 S2 DJIA 8681 8621 8575 8515 8469 COMPX 1532 1519 1511 1499 1490 ES03M 942 936 931 924 919 YQ03M 8665 8606 8554 8495 8443 NQ03M 1171 1155 1144 1128 1117 Except for a late morning bounce that lasted about 90 minutes the action in the market was very boring. The Dow only traded in a 40 point range after 1:PM. The ES traded in a 3-point range during this same timeframe. The only material reports out today were the Wholesale Trade report and the Consumer Credit. Wholesale trade inventory to sales ratios dropped to an all time low at 1.21 with inventories rising only +0.5% while sales rose +1.0%. Sales of Durable goods rose +2.2%. It was actually a bullish report but the markets did not react to it because the period covered was March. Old news is no news it appears. The other report was the Consumer Credit, which was much weaker than expected at only +$900 million. That was the smallest gain since November. Unemployment is slowing discretionary spending on credit. The markets did not react to anything, positive or negative today unless you consider the 10:30 bounce a delayed reaction to the Wholesale Trade report. Helping the Dow after the close was news from Wal-Mart that sales were better than expected over the Easter period. Jobless Claims will be announced at 8:30 in the morning and there is a risk of an upside surprise. After being over 400,000 for 11 weeks there could be a statistical anomaly soon with a drop under 400K. Traders would seize on this as bullish and buy again. The Dow struggled after the midday peak at 8635 which was slightly lower than yesterday's high of 8641. The uptrend is still intact but the afternoon trading was lackluster. Initial support is 8500 on this current five day bounce. Critical support is 8350-8400. The chart of the last months uptrend shows five tests of the uptrend resistance top and five tests of the uptrend support. If the current pattern hold we are due to test that lower support again soon. This current bounce is five days old and matches the longest up cycle since April 1st. Any weakness should quickly pull back to the 8400 level where it should find a flood of buyers. Whenever a trend is seen, such as the five-bounce cycle we have now, the retail traders pile on. When this happens the institutional traders take the opportunity to change the trend. The next dip is the critical dip in my opinion. If they can bounce it again now that earnings are almost over and the Fed is worried about deflation then this rally has a chance of sticking. I just do not see a bounce over 8650 without another retest of support first. The lackluster trading today is a warning for me. Dow Chart - Daily Dow Chart - 90 min The Nasdaq failed to hold over the December highs but did manage to hold over the 1500 level for the third consecutive day. The Nasdaq is very extended and could easily dip to 1450 while keeping the uptrend intact. The Cisco earnings produced a drag on the Index and could turn into the Achilles' heel that starts the next cycle. Several earnings announcements including WFMI hit the Nasdaq after the close but it remains to be seen if it carries over to the open. The Asian tech stocks have not been any support to the index this week as SARS fears and sales declines have been holding back those stocks. MOT closed a plant in China due to a SARS infected employee and late rumors on Wednesday were a pending shutdown of an Intel plant. I would look for Nasdaq 1500 to be the key. If we drop below that level tomorrow we could attract some additional profit taking. Nasdaq Chart - Daily The ES held to the previous resistance top of the uptrend channel, which has now turned into support at 927-928. This is a very precarious position. The ES is clinging to this support only by the slimmest of margins. Should this support fail the next uptrend support is 924 followed by a distant 910. The Futures are trading down in after hours and I think we will see a retest of the 924 support at the open tomorrow. ES03M Chart - 60 min The NQ contract is about to test the uptrend support at 1130-1135 and could drop as far as 1100 on serious profit taking. Critical support remains 1080. The uptrend resistance highs at 1163 remain critical resistance. The NQ is very extended and needs to rest but a bounce off the uptrend support could give the bears courage. NQ03M Chart - 120 min The Dow Futures topped at 8600 and are now looking for support at 8500. The uptrend support is around 8450 tomorrow and right in the middle of the expected range. The Dow appears to be losing momentum but the battle is far from over. I would look to be short under 8500 for the initial drop. YM03M Chart - 120 min For Thursday I would look to be short under the ES Pivot of 931 and add to that short on a YM drop under 8500. The bullish case is fading and it may be tough for them to mount another convincing rally this week. Jobless Claims could be a problem for both bulls and bears with a departure from the current 400K+ trend. Jim Brown ******************** INDEX TRADER SUMMARY ******************** Is the Demise of the Rising Wedges Upon Us? As I mentioned in this morning's first update, many global ndices currently claw their way up from recent lows. Many have posted new P&F buy signals, but trade just under or near key resistance, so that their actions mirror those in U.S. indices. Watching them can help us gain insight into the strengths or weaknesses seen in our own. Today, the Nikkei started out with a gap above the 8110-8125 resistance, but soon dipped into negative territory before beginning a tortured climb back toward that resistance. Never making it back to the opening high, the Nikkei closed just below that 8110-8125 resistance, posting a gain of 26.21 points or 32%. Tomorrow should bring the presentation to the government of an emergency economic relief plan hammered out by the three ruling coalition parties. Recent gains in the Nikkei have reflected optimism that the plan will stem the selling of bank- held shares, but any disappointment or delay in the plan could send the fragile Nikkei plummeting. It's reached a new P&F buy signal, but remains just under the P&F bearish resistance line, and the bar chart looks far less optimistic than the P&F chart. Japan's economy is the second largest in the world, so the performance of this index should be of importance to us here in the U.S. Germany, the world's third-largest economy and the Eurozone's largest, struggles with its own government program to avert yet another recession. Germany took a step closer to recession today with unemployment numbers again rising, to 10.7% or 8.9% when adjusted for EU standards. Germany's Chancellor Gerhard Schroeder attempts to enact measures that will ease unemployment and avert another recession. Those plans include cuts in jobless benefits and reduced protections from dismissals in hopes that smaller companies will increase hiring, but the measures face fierce opposition. Germany's DAX struggled to hold onto the psychologically important 3000 level today, ending just above that level at 3005.72, down 61.23 points or 2%. The FTSE 100 lost its battle to maintain 4000, closing down 13.50 points or 34%, at 3992.90; while France's CAC 40 maintained 3000, closing down 33.60 points or 0.41%, at 3023.96. All these indices are on current P&F buy signals, but all struggle to maintain psychologically and historically important levels. With these performances in the foreign markets, the stage was set for an indecisive day on our indices, and that's what we got. As I scan daily charts for the various indices, I see a succession of small-bodied candles that indicate that neither the bulls nor the bears could prevail. Major support held, but so did major resistance. Most U.S. indices opened near the daily pivots, traded down to S1 levels and then stayed somewhere between R1 and S1 during the day. One exception was the NDX, which ended the day just below the daily S1 level of 1137.80, at 1135.85. Jonathan Levinson writes the Market Wrap tonight and does an excellent job covering the Nasdaq-related indices, but I thought it might be instructive to look first at the NDX before turning to other indices. I've included an NDX 30-minute chart because it depicts the H&S pattern that formed on the NDX over the last several days of trading. Today, the NDX briefly violated the 1134 neckline of the H&S formation, but pushed back above that level just before the close. NDX 30-Minute Chart: Today's daily pivot, S1, and R1 levels are labeled on this chart, and the slanting blue lines compose an upward-slanting regression channel that has contained NDX prices since mid-April. Both the 30-minute oscillators shown here and the 60-minute (not shown) indicate very short-term oversold conditions as the NDX approaches the bottom of that regression channel, indicating the possibility that the NDX could attempt a move back up while those oscillators reset themselves. ADX shows something interesting, however, on both the 30-minute and 60-minute charts. For the first time since early May, selling pressure has been increasing (blue line on ADX) and buying pressure has been decreasing, with a bearish cross being made. ADX (pink line) has been slanting down, now just above 20, indicating that the momentum of the rally has been slowing. If selling pressure continues to increase, bears may gain more confidence selling on resistance, and may even gain the confidence to press the NDX below the H&S neckline and out of the regression channel. NDX Daily Chart: Daily stochastics and RSI as depicted on this chart indicate that any upside may be limited, with all indicating bearish divergence (higher prices with equal or lower tops on the oscillators). However, here the ADX shows that the selling pressure has not yet affected the daily ADX indicator. Although there may be a slight flattening of the ADX near 26, it has not yet turned down, showing that bearish traders must tread gingerly when considering selling resistance. If that upward trend is still intact, the oscillator evidence can not be trusted even when showing bearish divergence. A move down through the 1126-1134 congestion zone might convince bulls that the bears mean business however, turning down the daily and weekly oscillators alike. In fact, a sustained move through that 1134 H&S neckline tomorrow predicts a minimum downside target of 1104. A move above the 1160-1180 zone would put fear into the bears, with the 1320 level being the next strong resistance to show up on the weekly chart. However, with daily and weekly oscillators indicating overbought conditions, it seems unlikely the NDX could push that far. Unlike the NDX, the Dow Jones Industrials traded almost all the way back up to today's R1 level after touching the S1 level, then bounced again from the S1 level at 8529 late in the day, almost reaching the daily pivot again. The Dow Jones Industrial's decline might have been much steeper except for the performance of Coca-Cola (KO), gaining a whopping 2.25 points (5.49%) to 43.27 on a Morgan Stanley upgrade to overweight from equal- weight. KO holds a 3.61% weighting in the DJI average. Today's KO gain was made on almost three times average daily volume, at 15,457,000 shares. Like the NDX, however, the 30-minute and 60-minute ADX levels for the DJI have shown a slowing of the recent uptrend as selling increases. Unlike the NDX, that lessening of the upward trend shows up on the daily ADX, too, with the daily ADX level sloping down to 19.12, indicating that we should be seeing range-bound trading on the DJI. That below-20 ADX number shows that it should be time again to sell resistance and buy support. That also means that we should be able to trust the evidence given by the oscillators. The daily DJI chart shows that RSI turns down, showing bearish divergence with equal RSI highs and higher price highs. Daily stochastics are now in territory indicating overbought conditions, but they have not yet turned down. Weekly 5(3)3 stochastics (not shown) are also at levels indicating overbought conditions and have flattened. Dow Daily Chart: Today's S1 level at 8529 (blue horizontal line on the chart above) also lies near historical support and near the midline of the regression channel that contains the Dow's prices. A violation of that level could send the Dow back to test 8400, while a bounce could move the DJI back to the top of the regression channel, currently just above 8700, but rising each day. Those of you who follow my commentary on the Market Monitor know that I follow the OEX more than the other indices, so I'll concentrate on the OEX rather than the SPX. Most characteristics of the two are similar, with both now trading near the apex of a rising wedge seen on the daily charts. Although I've been watching these rising wedges for some time, they have now narrowed so tightly that they're at risk of losing their relevance. If the OEX and SPX do not definitively violate these wedges within a couple of days, prices will instead issue out through the apex of the wedges, negating their relevance. On the chart below, the rising wedge is depicted by the green lines, while the horizontal blue lines depict today's S1, Pivot, and R1. OEX 60-Minute Chart: The 468.80-469.30 zone gained special significance today for the OEX, as it was the location of recent historical S/R, as well as the location (469.30) of today's S1 level. It was also the neckline level of a potential H&S formation for the OEX, a neckline that the OEX refused to violate today. That H&S formation is more easily discerned on a 10-to-30-minute chart than on this 60-minute chart. As the above 60-minute chart shows, the 5(3)3 and 21(3)3 stochastics cycled all the way down toward levels indicating oversold conditions while the OEX tested that S1 and neckline area, with the fast line of the 5(3)3 stochastic already trying to hinge back up. RSI flattened, however and is inconclusive, although recently, the RSI has been making a series of lower highs while the OEX formed that H&S pattern. This shows bearish divergence, but so far, it's bearish divergence that refuses to be confirmed. Here, too, the hourly ADX shows that the recent uptrend has lost strength, at least on a short-term basis, and selling has increased with the line representing selling pressure crossing over the line indicating buying pressure. The ADX level hints that on a short-term basis only, it's possible to buy support and sell resistance on the OEX, with overhead resistance between 475- 476 and nearby support at 469. A sustained move through either level tomorrow would violate the rising wedge seen on the daily chart, however, and might bring more selling or buying, no matter what oscillators and ADX currently predict. One note: I would expect some volatility around such a violation, so you might consider waiting for confirmation before acting on the violation. OEX Daily Chart: The daily chart also shows oscillators in territory indicating overbought conditions, hinting that those in bullish positions should remain prepared to protect profits. RSI and the shorter- term 5(3)3 stochastics have already begun to turn down, but these oscillators do not always deliver reliable signals in strongly trending markets, and the daily ADX still indicates that this is a trending market. Although buying pressure may be decreasing, selling pressure still seems to be decreasing, too. Here, too, though, a strong and sustained move through the rising wedge, either to the upside or the downside, might prevail over anything the indicators have to say. A sustained move tomorrow below 469 confirms the H&S formation and predicts a minimum downside target of 462.80, the support area for the OEX during the late-April consolidation. At that point, it would not be unusual to expect a retest of the rising wedge if one has not yet occurred, while hourly oscillators reset themselves to overbought. A sustained move through 476 tomorrow might bring about a retest of the 487 highs that have marked the upper boundary of the OEX's trading range as seen in the weekly chart below. With daily and weekly oscillators already showing overbought conditions and with hourly oscillators likely to have reset themselves to overbought by that time, I would expect the OEX to have a tough time pushing past that resistance without another pullback to gather strength. OEX Weekly Chart: Those of you who have read my commentary on the Market Monitor have seen this weekly OEX chart on several occasions. The red horizontal lines delineate the 385-487 trading range for the OEX since last July. The rising wedge is shown in green on this chart, too, and the long-term descending trendline is depicted in teal. This is a semi-log chart because these give a better and more realistic depiction of price action when the move has been a big one. This chart shows why there's so much indecision currently on the OEX. A lot depends on the outcome of the next few weeks' trading: a new bull market for the OEX or a return to the trading range with the decision postponed. Jeff's last Index Wrap included weekly and monthly pivot analysis points. I've used Q-charts high, low, and closing figures to calculate the following daily pivot analysis points for tomorrow: SPX: R2 941.80 R1 935.71 Pivot 931.13 S1 925.04 S2 920.46 OEX: R2 476.92 R1 473.62 Pivot 471.26 S1 467.96 S2 465.60 DJI: R2 8680.87 R1 8620.73 Pivot 8574.87 S1 8514.73 S2 8468.87 NDX: R2 1161.28 R1 1148.56 Pivot 1139.97 S1 1127.25 S2 1118.66 COMPX: R2 1532.09 R1 1519.43 Pivot 1511.24 S1 1498.58 S2 1490.39 At the time this article was completed, Stockcharts.com had not yet updated the bullish percent charts, but if you'd like to check them for yourself later tonight, the appropriate symbols are $BPSPX, $BPOEX, $BPINDU (for the Dow Jones Industrials), $BPNDX, and $BPCOMPQ (for the Nasdaq). Linda Piazza ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Legg Mason Family of Funds The Legg Mason Funds based in Baltimore, Maryland is a family of 23 mutual funds designed to meet a range of investment goals and objectives. Like its cross-town competitor, T. Rowe Price & Co., Legg Mason Asset Management has developed a strong reputation on both in the management of separate accounts and its mutual funds. T. Rowe Price, established in 1937, had over $140 billion in net assets under management at year-end 2002. In 1990, Legg Mason's total assets managed were just $9 billion, but since then it has grown its aggregate assets under management to over $192 billion as of March 31, 2003. Legg Mason achieved this incredible asset growth through a combination of internal growth and acquisitions. Today, the firm's institutional investment management affiliates include Western Asset Management Company, Batterymarch Financial Management, Brandywine Asset Management, and Perigee Investment Counsel, as well as Legg Mason Investments, (Legg Mason) Capital Management, and Legg Mason Asia. Legg Mason's corporate goal is to be among the top 25 asset managers in the U.S. and in the top 50 category worldwide. William H. Miller III joined Legg Mason in 1981, and assumed his present position as president of the firm in 1989, after serving as the firm's director of research and then as the firm's senior VP and director of investment management. Before coming to Legg Mason, Miller was a corporate treasurer and pension fund manager with J.E. Baker Company. He has run the $8.6 billion Legg Mason Value Trust since its April 1982 inception and the $1.5 billion Opportunity Trust since its December 1999 inception. Miller III is a Chartered Financial Analyst. Lisa Rapuano, an assistant portfolio manager with Legg Mason, is another billion-dollar fund manager. She joined the firm in '94 and has run the $2.1 billion Legg Mason Special Investment Trust since January 1, 2000. Rapuano is a CFA too. Other key members of the firm's portfolio management team include: Robert Hagstrom, portfolio manager of the Legg Mason Focus Trust since April 1995 inception; Dale Rubiner, fund manager of the Legg Mason Balanced Trust since October 1996 inception; and Jane Trust, fund manager of three Legg Mason tax-free bond funds (over six years). David Nelson and Henry Otto each have manager tenures of five years in their respective Legg Mason funds. Legg Mason's mutual funds are designed to be "affordable" to the individual investor. Nearly all Legg Mason funds are offered on a no-load cost basis and all funds have a low initial investment requirement of $1,000. The class A shares (on two funds) have a front-end load of 4.75%. According to Morningstar, fund expense ratios range from a low of 0.70% on three tax-free bond funds to a high of 2.60% on Legg Mason Europe Fund, Class C. At least 12 Legg Mason funds have what we would consider to be above-average expense ratios, using 1.41% as the Morningstar all-funds average. For complete fund information, or to download a prospectus, go to the Legg Mason Funds website at www.leggmasonfunds.com. For more information on Legg Mason as an investment firm or its investment management affiliates, go to the main site, www.leggmason.com and follow the link to Institutional Asset Management. Fund Overview Below is a summary of Legg Mason's mutual funds grouped by their investment class, along with their Morningstar category for your convenience. Legg Mason Equity Funds/Morningstar Category: American Leading Companies Trust (LMALX), Large-Value Classic Valuation Fund (LMCVX), Large-Value Value Trust (LMVTX), Large-Blend Focus Trust (FOCTX), Large-Blend Special Investment Trust (LMASX), Mid-Blend U.S. Small Capitalization Value (LMSVX), Small-Value Legg Mason Specialty Funds/Morningstar Category: Balanced Trust (LMBTX), Domestic Hybrid Financial Services Fund (LMFNX), N/a Financial Services Fund A Class (LMFAX), N/a Opportunity Trust (LMOPX), Mid-Blend Legg Mason Global Funds/Morningstar Category: Global Income Trust (LMGGX), International Bond Europe Fund (LMEUX), Europe Stock Europe Fund A Class (LMEFX), Europe Stock International Equity Trust (LMGEX), Foreign Stock Emerging Markets Trust (LMEMX), Emerging Markets Legg Mason Taxable Bond Funds/Morningstar Category: U.S. Gov't Interm-Term Portfolio (LGINX), Short-Government Investment Grade Income Portfolio (LMIGX), Interm-Term Bond High Yield Portfolio (LMHYX), High-Yield Bond Legg Mason Tax-Free Bond Funds/Morningstar Category: Tax-Free Interm-Term Income Trust (LTITX), N/a Maryland Tax-Free Income Trust (LMMDX), Muni Single State Pennsylvania Tax-Free Income Trust (LGPAX), Muni Single State The firm's flagship product, the $8.2 Legg Mason Value Trust, run by president, William Miller III for more than two decades, seeks to provide long-term capital appreciation. In this large company stock fund, Miller follows a value discipline, investing in large capitalization stocks trading at large discounts to the manager's assessment of their intrinsic value. Since Miller seeks value in all sectors of the market, including technology, and holds stocks for the long-term, the Value Trust may drift into the Morningstar blend style box. However, purchases are still made using a value approach. Miller's other charge, the $1.5 Legg Mason Opportunity Trust, has a similar value-driven approach as the Value Trust but may invest in companies of all sizes. Like its sibling, the fund's average investment style may drift from the value style box to the blend style box from time to time, but equity purchases are still made by the manager following a value discipline. Though Miller isn't constrained by capital sector, industry sector or security type, this specialty fund is currently categorized by Morningstar as a mid-cap blend fund. The term "multi-cap" may be a better choice of words, with assets spread across the large, mid and small-cap domains. The $2.1 billion Legg Mason Special Investment Trust, managed by Lisa Rapuano since January 2000, seeks to provide capital growth over the long term by investing primarily in small/mid-cap U.S. stocks that appear to be undervalued. It also may invest in the stocks of companies facing special situations. Morningstar puts the fund in the mid-cap blend category along with the Legg Mason Opportunity Trust, having similar portfolio characteristics, but the term "multi-cap" is applicable here also. The two funds are very similar in portfolio characteristics. Each of the Legg Mason funds are designed to deliver "attractive" investment results over the long run without incurring excessive portfolio risk. Since the largest Legg Mason stock funds follow a "value" discipline and investments are made with a "long-term" perspective, they may lag other types of stock funds when "value" stocks and styles are out of favor with the market. Because the funds may pursue value opportunities in traditional growth areas such as technology, however, they can participate in rallies led by growth stocks and styles. In the next section we review fund performance, risk and ratings. Fund Performance First off, let me say that the Legg Mason Value Trust sports one of the best long-term records of performance in the business, up an average of 15.7% a year since 1982 inception through March 31, 2003. All of the fund's inception-to-date return performance is attributable to Bill Miller, who has delivered significant alpha for investors over the long run. Miller's 15-year average total return of 14.0% through March 31, 2003 ranks right up there with the value camp's elite. Only FPA Capital Fund, Longleaf Partners Fund, Clipper Fund, Weitz Value Fund, and Davis New York Venture Fund sport better 15-year annualized returns in the "value" fund group, per Lipper. According to Morningstar, Bill Miller's trailing 1-year, 3-year, 5-year and 10-year returns on the Legg Mason Value Trust rank in the top decile of the large-blend category. Suffice to say, the fund has done an excellent job of capturing returns during stock market advances and then and curbing losses during market slides. Between 1996 and 1999, Miller put up "growth" style numbers, but then between 2000 and 2002 conserved capital like a value-driven fund might. Miller's 3-year average annual loss of just 6.8% as of May 6, 2003 on the Value Trust was 5.2% less than the average annual decline of the S&P 500 index (-12.0%) during this period. So, staying the course is an important ingredient in the formula for success. Miller's value discipline and low turnover results in higher volatility in the short-term, but generally, investors have been amply rewarded over long periods of time for the above- average relative risk and expense incurred by the fund portfolio. Over time, Miller has more than adequately compensated investors, at least as far as the Value Trust is concerned. Miller's other fund, Legg Mason Opportunity Trust, also has high risk relative to its category peer group. However, returns have not been high enough to get this fund up into "4-star" territory for Morningstar overall rating purposes. Still, it is difficult to say anything bad about what Miller has done over the trailing 3-year period through May 6. His positive 0.2% annualized total return over the most recent 3-year period looks great versus the 12% annualized decline by the market (S&P 500 index). Still, it sports only a Morningstar 2-star rating because of its high-risk profile. Four Legg Mason stock funds and one high yield fund are among the YTD 2003 leaders as of May 6, 2003, as follows: YTD Return/Category Rank: +19.3% Legg Mason Focus (FOCPX), 1st Percentile +12.5% Legg Mason High Yield (LMHYX), 33rd Percentile +24.4% Legg Mason Opportunity (LMOPX), 2nd Percentile +13.6% Legg Mason Special Investment (LMASX), 5th Percentile +13.4% Legg Mason Value (LMVTX), 1st Percentile You can see that Miller and the other portfolio managers at Legg Mason are "hitting the mark" in 2003, capturing good returns for shareholders. As we saw yesterday when we looked at the highest 4-week performers, Legg Mason as a whole has performed very well through the most recent market upturn, providing hope that it'll be among the market leaders in the next major advance. Miller's numbers from 1996 through 1999 show that the Value Trust can and will participate in growth-led markets. Conclusion It would be unfair to end this report without saying something on the Legg Mason bond funds. Three of Legg Mason's bond funds have above average "4-star" ratings from Morningstar, so they offer an attractive return-risk tradeoff for bond investors. Another fund is 3-star rated, so all in all, respectable risk-adjusted ratings on the Legg Mason bond mutual funds, worth further consideration. Still, it's hard not to think of William Miller III and the Value Trust when you hear the Legg Mason name. He's been a mainstay at the firm for more than 20 years, providing superior total returns for patient investors over the long haul. Be prepared for higher risk and expense, but Legg Mason over long time periods has shown that it compensates investors well for the additional risks/costs associated with their (retail class) equity funds. Steve Wagner Editor, Mutual Investor *********** OPTIONS 101 *********** Further Reflections on MOPO by Mark Phillips Last week, we spent our time together, discussing the next high- odds shorting opportunity for the broad market, assigning it the affectionate term of MOPO. Well, actually we call it MOPO because I'm too lazy to keep writing out "Mother Of all Put Opportunities". GRIN In the past week, there have been some interesting technical developments and with earnings season winding down to the last few stragglers and the May FOMC meeting behind us, I thought it would be productive to address those changes. Not only that, but in playing around with the charts this afternoon, I made a couple interesting observations that escaped my attention last week. In case you missed our discussion last week, you've got a fair amount of catch up reading to do before today's discussion will make any sense. Fortunately, those articles are conveniently archived on the OI website, and you can access them using the following links. MOPO - Remember That Term? http://www.OptionInvestor.com/traderscorner/tc_042803_1.asp Setting Up For MOPO http://members.OptionInvestor.com/options101/opt_043003_1.asp In full recognition of the fact that we've had an impressive rally over the past couple months and the bulls are still very much in charge, we don't want to be in an excessive hurry to start initiating full bearish positions. Sure the market looks over-extended, but that doesn't mean it can't ratchet a few notches higher before the turn comes. To that end, we've focused our attention on a few of the more consistent earmarks of bearish turning points for the market. The first consideration is always price, and we've taken a pretty detailed look at the S&P 500 (SPX.X)in our past discussions, so let's stick with that venue today. Here's the updated chart. Daily Chart of the SPX Despite the daily Stochastics remaining pinned in overbought territory for over 2 weeks, price just continues climbing higher. This is actually a plus for our MOPO setup, as the market isn't really pausing to catch its breath. We have a clear upside breakout above the top of the multi-year descending channel and it is looking more and more like the bearish ascending wedge is going to result in a pattern failure. We've cracked above the top of that wedge, but no confirmation of that breakout yet. It is still entirely possible for the SPX to break down through the bottom of the wedge (currently right at the key 920 level) and give us a belated, but valid bearish resolution to the pattern. Recall last week that I said a decisive breakout over 920 didn't necessarily negate the potential for a very nice MOPO play, as we have additional resistance in the 935-940 area and then again at 950-960, near the highs from last August. But there's something that's been bothering me since last Friday's breakout over the top of the descending channel. For a technical study that has held so consistently for so long, a breakout above that level should have had some follow through. But we didn't get it, with the last 3 days surging higher, falling back and in the end, leaving us right where we ended the day last Friday. Then I remembered something Linda Piazza taught me awhile back -- that when looking at longer-term patterns, the conclusions we arrive at carry more validity when using a logarithmic scale on the chart. So I converted the SPX chart above to LOG scale and all of the sudden things started to make more sense. Daily Chart of the SPX - LOG Scale You'll notice that the bearish wedge doesn't change at all, because it is a shorter-term pattern, covering only a couple months. But look how much the upper channel line shifts to the upside! That upper channel line now crosses at about 965, falling to about 956-958 by the end of May. What that tells me is that we still have a little bit of ground to cover to the upside before we'll really be in MOPO territory. Next up is our good friend, the CBOE Volatility Index (VIX.X). Contrary to its recent action, where it kept falling in spite of the fact the market couldn't make any headway, the VIX is now holding fairly steady while the market continues to trudge higher. Take a look. Market Volatility Index (VIX) - Daily Chart Compare that VIX chart to the SPX chart and you can see that there has definitely been a change in the inter-relationship over the past couple weeks. The excessive fear has been almost completely drained out of the market, leaving a tiny little wall of worry, represented by the gap between the current value of the VIX (23-24) and the area of dangerous complacency represented by the 19-21 area. This is actual good for our MOPO plan, as scaling that wall of worry and dropping the VIX down into that "complacency zone" should coincide with the SPX trudging its way higher to test that 950-960 area. It could happen by the end of the week (very unlikely), or it could take until the end of the month (or longer), but it does give us a target to keep our eye on. The last major piece of the puzzle in my mind is the Bullish Percents (BP). When we left off our discussion a week ago, the SPX BP was sitting at 56% and we were looking for it to at least move up to the 65% area, as a first test. That's the site of the bearish resistance line on the PnF chart of the SPX BP and likely to provide some resistance. But I've got a sneaking suspicion that the BP reading is actually going to make it higher and actually probe above the 70% (overbought) threshold. How will we know how high is high? It's really a matter of slowing momentum, and I've found the best way to find that turning point is by looking at the Sharp Chart of BP, as described and shown in last Monday's article, "MOPO - Remember That Term?". Our ideal setup is to see the BP push up above 70%, turn down through its 10-dma, with confirmation coming from the CCI oscillator traversing back below the zero line. As you can see, there are still a lot of things that need to fall into place before we're ready to start stepping into this MOPO play, but things are playing out just how we'd like. Keep your powder dry for now, because when everything sets up, we'll want all the ammunition we can get our hands on! Prosperous Trading Wishes to All! Mark ************************Advertisement************************* ”If you haven’t traded options online – you haven’t really traded options,” claims author Larry Spears in his new compact guide book: “7 Steps to Success – Trading Options Online”. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Wednesday 05-07-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: NXTL Play of the Day: No Play of the Day Today Market Watch: Bears Circle The Corral Updated on the site tonight: Market Posture: Bulls Take A Break ************************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 ************************************************************** ************* DROPPED CALLS ************* Nextel Communications - NXTL - cls: 13.82 chg: -0.83 stop: 13.90 Bulls keep trying to call NXTL but all they're getting is a wrong number. Twice shares bounced off previous resistance-now support at $14.65. Twice dip buyers bought the bounce thinking it was a gift before NXTL rallied higher on its strong earnings report. Unfortunately, it has turned into a bad bet. Early today we commented on the MarketMonitor that NXTL's breakdown below the $14.50 level (also discussed last night in the Tuesday update) was bad news. Shares tried to hold on to the $14.00 mark but by the day's end sellers had broken through support. While one could hope that the congestion of moving averages near $13.00 might hold the stock, there's nothing stopping it from returning to the rangebound trading between $12 and $14. We're closing the play with a loss. Picked on April 30th at $15.00 Change since picked: -1.18 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 21.6 Million Chart link: http://www.OptionInvestor.com/oin/images/commentary/newsletter/2003-05-07/NXTL050703.gif ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* 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 ************************************************************** ************ MARKET WATCH ************ Bears Circle The Corral American Intl Group - AIG - close: 56.55 change: -0.95 Wow! Sometimes the correlation between a stock and its sector index or the major market indices is uncanny. Checkout a chart of the IUX insurance sector for the last 9-10 months. Now look at a chart of AIG. They are almost identical. Notice on AIG's daily chart that shares have spent two weeks fighting with its descending 200-dma and it looks like it's about to lose. Now look at AIG's weekly chart. What direction is this stock headed, up or down? Right... this looks like a short with a very clearly defined level of resistance to place your stop above. To make it even sweeter, the daily oscillators are all beginning to roll over from overbought. Grrr.... Chart= --- WebMD - HLTH - close: 8.59 change: -0.30 HLTH was recently a very high-risk lottery-style call play on OptionInvestor.com. We were speculating on their earnings announcement after the bell on Monday. Considering that HLTH was one of the top 20 most shorted stocks, the thought process was that any big earnings surprise to the upside could spark a major short squeeze. Given the recent earnings surprises of EBAY, AMZN and YHOO this didn't sound too outlandish. Shares did rally higher on Monday but the earnings report didn't produce the numbers needed to scare the shorts. The next day the stock was sold in disappointment and a broker reiterated their "neutral" rating and a $5 to $6 price target based on their valuation models. The sell off has continued into Wednesday and the stock is approaching critical support at $8.00. Looking at the daily, weekly and point-and-figure charts one can see that a breakdown at the $8.00 level would indeed be disastrous for the bulls. Should this occur a pull back to the $6 or even $5 range would not be out of the question. Definitely one to watch for the nimble trader. Chart= --- Amgen Inc - AMGN - close: 59.55 change: -1.42 AMGN is the biggest component in the BTK biotech index and the stock's weakness these last three days has weighed heavily on the sector. It looks like investors have taken the last couple of weeks to take profits after the stock popped higher on its earnings news in April. The breakdown below $60 might concern some technicians but the stock's true rising trendline of support is much closer to its simple 50-dma. Right now that's about $58.60. We're going to look for a bounce at the 50-dma and if it rebounds back over the $60 mark then aggressive traders might want to consider a long play. Should it break down then look for a move below $57, which is significant support. A move below $57 might be a trigger to open bearish positions. Chart: --- Black Box Corp - BBOX - close: 37.06 change: +2.46 BBOX has been on the play list more than once this year. Most recently it was a call play but we dropped it due to lack of movement. Unfortunately for us, it rallied into its earnings announcement, which came out today. The company beat by two cents. The stock shot up on the news and hit its 200-dma on an intraday spike. Combine the fact that BBOX's earnings news is out and CSCO's news is out (and not positive going forward) this could be an entry for very aggressive bears with a stop above today's high. Just keep in mind that the $35 and the $33 levels might be support. Chart= --- ----------------------------------- RADAR SCREEN - more stocks to watch ----------------------------------- RMD $36.80 - Moving from the Watch List to our Radar Screen, shares of RMD are pulling back to the $36 level as discussed on Monday. A bounce there with a tight stop might be a profitable entry point. However, should RMD break $36 then a quick retest of long-time resistance of $34 as support would be expected. MGA $60.79 - Here's another one that was on the Monday watch list. Sure enough it has broken out above the $60 level. Wednesday's session offered nimble traders another chance to buy a dip at $60 before bouncing. We believe their earnings report is expected tomorrow. Watch out for more volatility. PIXR $59.41 - Shares of the digital movie studio continue to advance slowly higher. The last several days have been an unsuccessful battle to break over the $60 mark. It looks like a breakout could occur soon. ************** MARKET POSTURE ************** Bulls Take A Break To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_050703.asp ******************* FREE TRIAL READERS ******************* If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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