The Option Investor Newsletter Tuesday 05-13-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Call it a Draw Futures Markets: Failed Retest or Rising Triangle Index Trader Wrap: Gasping for Breadth Market Sentiment: One Step Closer Weekly Fund Screen: Single-Country and Regional-Stock Funds Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 05-13-2003 High Low Volume Advance/Decline DJIA 8679.25 - 47.50 8723.29 8647.60 1.71 bln 1485/1731 NASDAQ 1539.68 - 1.70 1548.59 1529.56 1.82 bln 1670/1565 S&P 100 475.41 - 2.55 478.53 473.73 Totals 3155/3296 S&P 500 942.30 - 2.81 947.51 938.91 W5000 8973.54 - 20.50 9018.93 8941.65 RUS 2000 419.23 + 1.03 420.40 415.26 DJ TRANS 2476.90 - 12.60 2489.35 2468.19 VIX 22.03 + 0.61 22.91 21.57 VXN 32.84 + 0.26 33.87 32.28 Total Volume 3,735M Total UpVol 1,951M Total DnVol 1,724M 52wk Highs 545 52wk Lows 26 TRIN 0.96 PUT/CALL 0.67 ************************************************************* Call it a Draw The markets traded on both sides of zero on Tuesday and after the smoke cleared we were very close to where we started. The Nasdaq and S&P closed within a couple points of flat with the Dow the biggest loser at -47. Not even a dent in the bulls armor considering the recent gains. For a few moments today the Wilshire 5000 traded over 9000 again. Can the Dow be far behind? The W5000 broader market index traded within a handful points of the Dows low of 7197 in October and has outperformed the narrower Dow in the rebound. This could be a leading indicator of the future. Dow Chart - 240 min Nasdaq Chart - 240 min Before we get too carried away with bullish enthusiasm let's look at a potential preview of the remaining economic reports for the week. If the W5000 is a leading indicator for the Dow then today's Richmond Fed Manufacturing Survey could be a leading indicator for the flood of economic reports due out Thursday and Friday. The Richmond Fed Survey dropped to -18 and the lowest level since December 2001. This is an April not a March number and is the first of the real post war reports. Shipments fell to -18, new orders to -20, order backlog -36. Need more evidence the economy did not bounce after the war? This was the third consecutive monthly decline from the January high of +18 and a marked decline from only -4 in March. The drop is accelerating in this sector. Granted this is not a true picture of the entire U.S. but when added to the last NY State drop it easily offsets the minor gains in the Kansas City Survey. The Kansas survey rose +4 points to +15 overall but the new order component still fell -5 points. It would be better to say there were pockets of weak growth rather than pockets of recession. We will get the May NY State Survey on Thursday along with the Philly Fed Survey. A key point in the Richmond survey today was 21% more companies reported cutting jobs than adding jobs for the month and the average work week is dropping. That suggests further demand slippage and danger of more job cuts ahead. This survey is done mainly in the last week of the month meaning it had the farthest reporting time from the end of the war. Participants also said they expected prices paid to increase and prices received to continue to shrink. On another front, despite the lower dollar the Trade Deficit rose to its second largest level ever at -$43.5 billion. The largest was the nearly $45 billion in December. Much of this increase was in imported energy prices and the impact of the dollar's change. The internal data is getting worse and the export numbers to Asia are going to drop significantly over the next couple months due to the SARS impact. Chain Store Sales for the week fell -0.2% as the impact of severe weather filtered through the system. This is only a weekly snapshot and we will see the sales for all of April on Wednesday. Wal-Mart reported weak Mother's Day sales and earnings that only met the street estimates and fell -$4 billion short in revenue. They said the weaker dollar and international sales helped them make the target. They guided lower for the current quarter. ANF also met estimates of 26 cents but guided lower due to a growing weakness in the retail sector. They said it was very difficult to predict future revenues due to the very volatile environment. They projected earnings as low as 30 cents with the prior consensus at 34 cents. Despite these events the markets managed to trade up intraday. Not only the equity markets but the bond markets and oil markets. This has confused traders completely. According to TrimTabs.com there is $3 billion in new supply coming to market this week including the IMPT IPO and new offerings from existing companies. This additional supply was expected to depress the markets as old money shifted and new money was put to work. Normally a new offering can depress the price of a current stock as the equity is diluted. Money going into these issues, while encouraging, does nothing to buoy the indexes. Insider selling was also escalating with 70% of insider trades over the last two weeks being sells. This is normally not a positive sign. According to Laszlo Birinyi the market is at record levels of overbought as measured by the 10 day average of the net advances and declines. He said long time traders were perplexed by the bond advance and equity advance in such overbought conditions. Most long time traders use the yield on the ten year treasury as an indication of economic growth as the bond market normally is a better predictor of the economy than stocks. According to Birinyi the falling bond yields are pointing to little or no recovery for the rest of the year. The market did not care what Birinyi had to say or Merrill Lynch or Wal-Mart. It continued to show a bullish bid most of the day. Before the open CSCO was cut to underperform at Bernstein based on valuation. They said the lack of a rebound made the consensus estimates for longer-term growth and profitability unattainable. Brave step there and right in the face of an upgrade on Cisco on Monday. Obviously there are conflicting opinions on our future. Merrill Lynch downgraded several chip stocks including NVDA, SMTC, MXIM, ISIL, APOL and ATYT because the stocks have gotten ahead of the broader market and the analyst does not believe business conditions warrant a continued rise in the chip sector. Merrill Lynch said the SOX near $360 at yesterday's close was 20% over valued and could trade down to 270-280 by summer. They felt the bounce in orders during the first quarter were prompted by a supply chain anomaly rather than new demand. Low inventory levels prompted a replenishment round to replace end of year inventory depletion. After the close today AMAT weighed in on the health of the semi sector and posted earnings that beat the street by a penny. The guidance did not beat and AMAT was trading down in after hours. Q1 Orders of $971 million were weaker than revenue of $1.1 billion. They guided to the lower end of guidance at 3-4 cents for Q2 when consensus was for 4 cents. They said the current environment was lackluster and new orders were still volatile and unstable. This is only one more chapter in the semi book with upcoming highlights being the Intel mid quarter analyst meeting on Thursday along with the semiconductor book-to-build report. Dell also reports after the close on Thursday. Dell said today they closed their Taipei office after a worker developed SARS. 2000 revisited? If you looked at the performance of the Internet stocks today you would think the bubble was alive and well. EBAY, YHOO and AMZN soared on no specific news with each hitting new 52-week highs. EBAY traded six cents shy of $98 and showed no indications of pulling back. The company is well over its normal split range between $75-$90 and could announce any day. For AMZN and YHOO the gains are even more amazing. EBAY at least has strong earnings to support its sky high PE of 98 which is something AMZN cannot yet claim. UBS, the tenth largest bank, went on record today as saying the bear market may be ending. They said the conditions are tough and will likely remain so after posting lower profits for the quarter. The comment that drew attention was "While some further degree of volatility cannot be excluded, we do feel that the downward pressure on the industry - could be easing and the worst declines are behind us." This is far from a new bull market comment but it did prompt an early rally in the financial sector but it did not hold. The UBS comment carried weight early only because of their position in the industry. The comments from Fed Governor Olson continue to make the rounds. Olson is reported to have said the Fed is prepared to take aggressive and unorthodox methods to prevent deflation. Those methods are said to include more rate cuts, strong support of long term bond rates and the potential for buying non-dollar assets. While talk is cheap this table pounding by Olson and Ben (printing press) Bernanke are giving the bulls confidence to buy into an overbought market ahead of its fundamentals. Every time a little weakness appears these comments are repeated on CNBC even though they were initially made some time ago. Traders trying to fan the flames back into the dying embers with a quick call to Bob (trader talk) Pisani? I mentioned last week that the Q1 earnings, after removing windfall energy profits were far below the current market gains. After another week of announcements those Q1 earnings have fallen to only +4.7% after removing energy from the overall +11.5% number. With 55% of the S&P already warning for the 2Q the estimates for S&P earnings ex-energy are only +4.3% and still dropping. This is far below the optimistic estimates of +13% to +15% just a couple weeks ago. The Dow has rebounded +17% from the March lows on hopes for a recovery. The Nasdaq has rebounded +23% in the same period. Bears are scratching their heads and bulls are unconcerned. This disconnection from reality along with the continuing rise in bonds means either stocks or bonds are going to end badly. One of them is wrong. The market shook off the terrorist attacks in Saudi Arabia and the simulated biological/radiological attacks in Chicago and Seattle. There were emails from Al Quaeda claiming the start of a new round of attacks and repeated pictures of bombed buildings overseas. Traders paid no attention. It appears the markets are bomb proof. Traders are imitating the three monkeys, deaf, dumb and blind and continuing to buy the dips. This strategy will be tested again on Thursday. Wednesday has a couple of economic reports, April Retail Sales are expected to be flat and Import/Export prices, not normally a market mover. Thursday is the big day with six major reports. If good news is already priced in then the Richmond Fed Survey this morning should have sown seeds of doubt. Apparently it didn't. It appears traders are continuing to welcome bad news as more evidence the Fed will have to act aggressively in the future. This bad news is good news joke will be tested on Thursday when the PPI is expected to show a drop of -0.7% and Jobless Claims could exceed 450,000. The Dow today failed again at the down trend line from last August at 8725. It did not fail far with a close at 8679 and indicates a continued bullish bid under the market. The Dow has plenty of room to move with real support in the 8500 level. The Nasdaq does not appear to be showing any weakness despite a slight loss at the close. The Nasdaq traded to a new high intraday near 1550 before dropping -10 points before the close. The Dow weakness on losses from WMT, CAT, PG and MMM provided an anchor to the Nasdaq's rally attempt. Yesterday the Dow was the leader and the Nasdaq was the laggard. Wilshire 5000 Chart - Daily Wilshire 5000 - PNF Chart Let me put on my bullish hat for a moment. The Wilshire 5000 charts above has broken both the down trend lines that have been plaguing the Dow. It is also showing a classic triple-top buy signal on a breakout over 9000. Conversely, a failure here would be a clean signal to short. With the underlying bid to the market there are going to be a lot of eyes on this broadest indicator of market breadth. The PNF chart already shows a classic PNF ascending triple top breakout in progress. If 9000 breaks we could be off to the races. We traded 18 points over today but could not hold. The close at 8973 was also not a convincing failure and could be just a step back to get another running start. My gut instinct is that the markets are due for a rest. However, if you look at the internals and the sentiment the markets are telling us they want to go higher. The technicals are grossly overbought although the -47 point Dow loss may have eased that somewhat. You could call this a consolidation day after two days of +100 point gains. Wednesday should be another toss up day. The economic reports are not market movers and the AMAT/NTAP/CSC earnings tonight have not influenced the futures is either direction. We have the potential for another day of gains before the more serious economic reports on Thursday. Investors are hoping for an economic surprise on Thursday and they may get one. With the bad news is good news and good news is better news outlook I am not sure what it would take to slow this rally down. My LONGS are thriving but I keep thinking this cannot last much longer. I have been thinking that for the last 500 points. I will snug up the stops again tomorrow and keep watching for the sharp objects in the road ahead. If this rally blows a tire at this speed it could be spectacular. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Failed Retest or Rising Triangle Jonathan Levinson Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 DJIA 87586 8719 8683 8644 8608 COMPX 1559 1549 1540 1530 1521 ES03M 952 947 943 938 933 YM03M 8742 8706 8665 8629 8588 NQ03M 1176 1165 1157 1147 1139 The markets gapped down, bounced to yesterday's highs, retested the 15 minute candle ascending trendline off the lows, and closed near flat in negative territory. The failure to break out above yesterday's highs was bearish, but the inability to set some new lows was bullish and sets up a potential ascending triangle, as the indices print higher lows toward a horizontal resistance line. Volatility saw some pickup on the COMPX and the SPX, while the QQV closed lower by 0.92 at 27.83. Volume was moderate on the NYSE but heavier than yesterday on the COMPX, with solid volume coming in the afternoon following the failure at yesterday's highs and the bounce just before the lows of the day. The CRB index managed to hold yesterday's gains, closing above the 240 level and finding strength in natural gas futures again (+5.05%), heating oil (+4.91%), crude oil (+4.53%), and even copper (+0.80%). June gold managed to keep it together despite what was to me a clear intervention in the US Dollar Index last night by the Bank of Japan. After awhile, those huge bullish engulfing candles have come to all look the same to me. June gold closed at 350.20, down 1.70, but still above the psychological round number. Daily Chart of the QQQ The Qubes gave us a bearish harami cross, depicting indecision but to the downside. We can see the horizontal resistance capping the advance last week and this week. The higher close will encourage bulls, just as the failure at the highs will encourage bears, setting up the conditions for either a teeth- grinding trading range for this op-ex week, or a violent directional move in the event that either side blinks. Support should come at the 5 dma, with stronger suppot at the 13 dma. We've been staring resistance in the face for the second day this week. There will be no doubt when the break comes to the upside, whereas the different support levels may draw out the decline. Daily chart of the NQ3M We see the ascending wedge, as well as the strengthening trend in the 10(5) stochastic on the daily candles. While the stochastic is trying to turn down, it has that pattern of higher lows coincident with the rising wedge. A break below the 50 line on the stochs will be the first hint that a reversal is occurring. 60 minute chart of the NQ3M The line sand for bulls could not be clearer, and if reached, will coincide with an oversold 10(5) stochastic and support within the daily rising wedge above. The repeated failures just above 1160 sets the line in the sand for bears with equal precision, but this rising triangle against horizontal resistance is generally bullish. Bears will want to see that lower ascending trendline taken out quickly to defeat the bullish setup. Daily chart of the ES I'm as bored with writing about the bearish ascending wedge as you no doubt are with reading about it. Let's not even discuss it from a trading perspective. I've been listening to Elliott Wavers argue about 954, 960, 970, endlessly. What's of greater concern is that all expect the pattern to break to the south. As the great humiliator, it's the market's job to make as many traders wrong as possible. Neverthless, there's a good deal of overhead supply at current levels, and particularly during an opex week with a great deal of call writers so far in losing positions, it will interesting to see whether the bulls can hold this rising pattern until Friday. 60 minute Chart of the ES The hourly chart shows nothing new, beyond that higher low printed today, and a bullish stochastic cross on the 10(5) stochastic for good measure. This should give us an upward bias in the short term, though the after-bell-earnings announcements likely skimmed some of the enthusiasm. Daily Chart of the YM There's little to add on the YM contract, except for a blinding glimpse of the obvious: the current level represents a critical decision point for bulls and bears, with a convergence of daily up and down trends within an ever-narrowing range. When this deadlock resolves, there won't be any doubt. 60 minute chart of the YM Note the relative weakness in the YM contract compared with the ES on the 60 minute view, with the 10(5) stochastic failing to cross upward. Nevertheless, the YM bounced from the middle trendline and like the other contracts, is trading comfortably within its ascending channel. Some readers have been observing that we are witnessing a simultaneous rally in bonds, equities and commodities, with the only real weakness manifesting itself in the US Dollar Index. I don't believe that we are seeing a "breakdown" of our intermarket relationships, but rather the effects of a concerted inflation of the dollar, which liquidity is finding its way into all financial assets, even those which have most often traded inversely to one another. On a short term trading basis, this makes no difference, but seems to coincide well with the apparently bullish but generally unsustainable bearish ascending wedge/ flag formations printed on these charts over the past days and weeks. If you're trading for the longer term and have been trying to anticipate a trend change, I urge caution. I also urge you to check out my OEX:VIX and QQQ:QQV ratio charts in tonight's Index Wrap for a sharper view on these relationships. For tomorrow, bulls and bears are being forced ever closer on a narrowing battlefield. The battle may be delayed by option expiration "pegging" at nearby strike prices. Otherwise, I expect to see a break, and given how long we've been watching this formation set itself up, I expect the break to be dramatic. ******************** INDEX TRADER SUMMARY ******************** Gasping for Breadth Jonathan Levinson Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 DJIA 8758 8719 8683 8644 8608 COMPX 1559 1549 1540 1530 1521 SPX 952 947 943 938 934 OEX 481 478 476 473 471 QQQ 29.18 28.92 28.73 28.47 28.28 In a repeat of yesterday's session, the markets opened on weakness, faded lower, and then pushed to the day highs around noontime, but unlike yesterday, the bulls couldn't hold it together. The fed added a moderate $2.25B in overnight repos with no expiries, and there were clear signs of intervention in support of the US Dollar last night and today, but the indices closed lower than they opened. The US Dollar Index printed a narrowing wedge or neutral pennant on the 15 minute candles today, coiling around the 94.70 level, while June gold futures managed to hold above 350 for most of the session. The CRB traded lightly negative for much of the day, hovering around the 240 level. Volume was lighter than yesterday for most of the session but picked up toward the close, with 1.7B shares traded on the NYSE and 1.8B shares on the Nasdaq. As we discussed in the Market Monitor, the lack of an acceleration of upward volume on the failed retest of this potential swing high is a bearish signal. The bulls pushed but couldn't recruit enough buyers to break through. However, volume analysis pales, in my opinion, in comparison to oscillator and pattern analysis, so let's dive into the charts: Daily chart of the INDU Today's closing candle printed what looks like a hanging man or dragonfly doji, which is bearish in principle, but the lack of followthrough to the downside after an lighter volume failed breakout attempt doesn't have me snarling just yet. As we discussed in the intraday Market Monitor, there is the potential for a bullish ascending triangle setup, as the lows print ever higher toward the horizontal upper resistance. So far, this interminable, insufferable rising bearflag/wedge is continuing, and while the twitching 10,1,5 stochastic is hinting at another downside break, there's a rising trend on that oscillator commensurate with the ascending wedge/flag. Meanwhile, support should come at the 5 dma, at 8612. Weekly chart of the INDU Again, no sell signals here as we zoom out to the weekly candles. The stochastics look like they're getting ready to give us a sell, but anticipating signal is hazardous to trading accounts. Daily Chart of the SPX The SPX tells the same story as the daily INDU, although the upper candle shadow or spike shows a little less commitment to the upside from the broader SPX. The uptrend in the stochastic is not present as it is the narrower INDU, and looks to be putting in a lower high on this run. A break below 934, the 5 dma, will give bears their first sign of confirmation of the weakness they've been seeking. Daily chart of the OEX The OEX looks weaker than the SPX, and as the "leading" portion of its parent index, this relative weakness is bearish. Note that the weakening trend in the stochastic is more pronounced here, as well as the closing candle today being closer to its supportive 5 dma. Make no mistake- this is a chart that is in an uptrend, and a break higher on volume will erase a great deal of short term bearish expectations. However, the overbought condition on the oscillators, combined with the bearish wedge/flag setup is still convincing. In case you missed it last night, I've begun tracking the daily and weekly charts of the OEX:VIX and QQQ:QQV ratio. As we've been seeing with the put to call ratio. My idea is to let the machine and its hyperaccurate oscillators follow the relationships that I normally try to intuit during the session and at day's end. We watch the VIX and QQV plummet to new or relative lows, and try to guess when it will turn around, signaling a trend change for the OEX or QQQ. Instead, I've been looking for that trend change by charting the QQQ relative to the QQV, and OEX relative to the VIX, on a single chart. Here are the results: Daily chart of OEX:VIX As the OEX rises and the VIX decreases, the OEX:VIX ratio increases, and vice versa. Note that on the daily candles, the ratio is far beyond its January peak level. Weekly chart of the OEX:VIX The weekly ratio chart brought us closer to a stochastic cross, but it will take a spike in the VIX or a drop in the OEX to get the ball rolling. Tomorrow will be a telling day in this regard. Daily chart of the COMPX The COMPX printed a bearish candle, no hanging man, with the candle body near the lower end of its day range. Like the other indices, there was no sell signal given, and bulls and bears alike will be watching the 5 dma for a first hint of how this week wants to close. Chart of the QQQ Like the OEX, the QQQ chart looks weaker than that of its parent index. Today printed a bearish harami cross, pure indecision but with a downward bias. The 5 dma is flattening, and a negative close tomorrow could actually turn it down, which we haven't seen in a month. I've included the QQQ:QQV charts below: Daily chart of the QQQ:QQV The downward spike in the QQV reversed the %D line on the stochastic, but the MacD sell signal is intact. Whether Monday's stochastic sell signal on this ratio gets reversed will be decided by tomorrow's print. A higher close for the QQV or a lower close for the QQQ will strengthen what bears are hoping is a trend chart being printed in this chart. Weekly chart of the QQQ:QQV Nothing to add on the weekly ratio chart. The question posed by the current levels on the indices is growing old, and a break would be expected tomorrow. The ascending triangle or the failure at horizontal resistance should be decided, but then, this is options expiration week, a time when prices have a nasty habit of pinning themselves in impossibly narrow ranges near "convenient" strike prices. For this reason, I'm forced to rely on the trite, hackneyed mantra of confused traders: "Anything can happen." If there is a break, however, I expect it to be a big one, as traders hustle to get on the right side of what should be a directional, trending move. Watch the pivot levels and moving averages and trade safe. See you at the bell! ------------------------------------------------------------ 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 **************** One Step Closer - James Brown What can you say? Equity bears are going bug-eyed as bulls refuse to slow down. Q1 corporate earnings are essentially over and over half the S&P 500 has pre-warned that the next quarter looks flat to down. Today's Richmond Fed Manufacturing survey showed Wall Street that the economy has seen no post-war bounce. Both oil and gold continue to climb off their lows and someone's buying bonds like there is no economic recovery in site. As Jim & Linda and the rest of the crew said on the MarketMonitor today, something has to give soon. We noticed that the put-to- call ratios have once again given us a bearish divergence with the equity only pcr at a bullish 0.56 and the index pcr's at a somewhat bearish (not too terribly so) at 1.22 (OEX) and 1.23 (QQQ). This is a "soft" indicator and a contrarian one at that. The bullish percent charts continue to show the market creeping ever higher into extreme overbought conditions. Remember that traditionally 70 and above is overbought and risk favors the bears not the bulls. As of today the Industrials bullish percent is at 66.00, the NASDAQ-100 is at 79.00 and the S&P 500 is at 65.8. Looking at a bullish percent chart and you'll see that the NDX topped out at 82 last time and the S&P 500 is at descending bearish resistance of 65-66. These indicators are not screaming "go long" here. We continue to urge caution and monitor your stops closely. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10353 52-week Low : 7197 Current : 8679 Moving Averages: (Simple) 10-dma: 8570 50-dma: 8238 200-dma: 8326 S&P 500 ($SPX) 52-week High: 1107 52-week Low : 768 Current : 942 Moving Averages: (Simple) 10-dma: 929 50-dma: 880 200-dma: 882 Nasdaq-100 ($NDX) 52-week High: 1351 52-week Low : 795 Current : 1156 Moving Averages: (Simple) 10-dma: 1136 50-dma: 1064 200-dma: 1002 ----------------------------------------------------------------- The VIX and the VXN seem as confused as most bears in this market. The major averages are significantly overbought and in need of some consolidation but sellers have yet to appear in force. How much longer can the market hold up? CBOE Market Volatility Index (VIX) = 22.03 +0.61 Nasdaq-100 Volatility Index (VXN) = 32.84 +0.26 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.67 703,421 468,959 Equity Only 0.56 508,874 283,551 OEX 1.22 30,301 36,851 QQQ 1.23 29,777 36,625 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 58.1 + 2 Bull Confirmed NASDAQ-100 79.0 + 1 Bull Confirmed Dow Indust. 66.7 + 0 Bull Confirmed S&P 500 65.8 + 2 Bull Confirmed S&P 100 65.0 + 0 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 1.17 10-Day Arms Index 1.08 21-Day Arms Index 1.04 55-Day Arms Index 1.27 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 1379 1580 Decliners 1453 1450 New Highs 263 166 New Lows 14 5 Up Volume 827M 1103M Down Vol. 846M 705M Total Vol. 1697M 1824M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/06/03 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 knew it would be a quiet week on Wall Street last week, aside from the FOMC meeting, and we see little change in the Commercial's net-long stance. There has also been little change in the Small Trader's net long stance either. Commercials Long Short Net % Of OI 04/15/03 424,219 409,853 14,366 1.7% 04/22/03 430,758 423,295 7,463 0.9% 04/29/03 432,710 419,245 13,465 1.6% 05/06/03 429,519 419,545 9,974 1.2% 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 04/15/03 148,434 137,680 10,754 3.8% 04/22/03 147,068 140,153 6,915 2.4% 04/29/03 149,616 154,782 5,166 1.7% 05/06/03 150,345 148,681 1,664 0.6% 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 It is the e-mini positions that we are seeing some shifts. The Commercials have bumped up their longs by more than 30K while reducing their shorts by about 25K. Looks like money is shifting sides here. Small Traders have also shown a small reversal with longs decreasing by almost 40K and shorts jumping by more than 10%, but they remain significantly net long while Commercials are exceedingly net short. Commercials Long Short Net % Of OI 04/15/03 119,316 390,555 (271,239) (53.2%) 04/22/03 124,200 437,597 (313,397) (55.7%) 04/29/03 134,751 472,247 (337,496) (55.6%) 05/06/03 169,388 447,330 (277,942) (45.1%) Most bearish reading of the year: (337,496) - 04/29/03 Most bullish reading of the year: (222,875) - 04/01/03 Small Traders Long Short Net % of OI 04/15/03 365,876 44,137 321,739 78.5% 04/22/03 395,596 40,480 355,116 81.4% 04/29/03 459,687 50,030 409,657 80.4% 05/06/03 423,918 55,932 367,986 76.7% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 409,657 - 04/29/03 NASDAQ-100 It's pretty much dead-even on the Commercials positions on the NDX. Meanwhile the Small Trader has increased their position sizes in both longs and shorts. Commercials Long Short Net % of OI 04/15/03 44,976 37,929 7,047 8.5% 04/22/03 45,647 38,531 7,116 8.5% 04/29/03 45,497 37,557 7,940 9.6% 05/06/03 46,327 38,216 8,111 9.6% 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 04/15/03 11,182 17,438 ( 6,256) (21.9%) 04/22/03 10,929 20,376 ( 9,447) (30.2%) 04/29/03 11,219 19,760 ( 8,551) (27.6%) 05/06/03 13,482 21,010 ( 7,528) (21.8%) Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Again we're not seeing any big shifts of money or attitude in the Commercials or the Small Traders. The "smart" money is still net long the Industrials and the small guy is just barely net short. Commercials Long Short Net % of OI 04/15/03 17,881 13,124 4,757 15.3% 04/22/03 16,942 14,750 2,192 6.9% 04/29/03 17,927 14,083 3,844 12.0% 05/06/03 16,772 13,568 3,204 10.6% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 04/15/03 7,748 8,704 ( 956) ( 5.8%) 04/22/03 8,081 8,275 ( 194) ( 1.2%) 04/29/03 7,081 8,604 (1,523) ( 9.7%) 05/06/03 7,829 8,642 ( 813) ( 4.9%) 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 FUND SCREEN ****************** Single-Country and Regional-Stock Funds Single-country funds are a type of international equity fund that provides specific exposure to countries like Japan, Korea, China, Russia and Brazil, while regional-stock funds provide exposure to particular regions of the world such as Latin America, Europe and the Asian tiger nations. These specialty international funds are riskier than diversified foreign equity funds because they hold a higher percentage of assets in just one country or region. With the unification of Europe, some experts question the need to have country specific funds there. However, there are many types of European funds today, including those that invest primarily in Eastern Europe and Russia and those that invest in small-cap Euro stocks. So, if you want to add some octane to your portfolio and seek long-term growth through investments in a particular country (say Brazil) or in a particular region (say Latin America), these funds make it possible to do so. Many of these funds are rallying strongly in 2003. For instance, the $17 million World Funds: Third Millennium Russia Fund (TMRFX) is up 21.4% through May 11. Scudder Latin America Fund S (SLAFX) and T. Rowe Price Latin America Fund (PRLAX) have generated year- to-date total returns of 18.9% and 17.7%, respectively. Driehaus European Opportunity Fund (DREOX) is 14.0% higher so far in 2003. For the last three months, Korean funds have dominated. Matthews Korea Fund (MAKOX) is up 26% over the past three months while the Korean Investment Fund A (AKIAX) has generated a YTD total return of 24.8%. Some European and Latin America stock funds have risen by more than 20% during that time. Which specialty international funds should you consider? We will screen for the best prospects based on return, risk, expense, etc., and tell you which funds we think may be worth considering further. Screening/Evaluation Process To arrive at our short list this week, we started with the basic fund screener on the Morningstar.com website. Here, we asked to see all international stock funds with minimum initial purchases of $10,000 or less, which are either rated 4-stars or 5-stars by Morningstar (or unrated) and which have produced a YTD return of more than the category average, as follows: Initial Morningstar Screen Criteria: Fund Peer Group = International Stock Minimum Initial Purchase = $10,000 or Lower Morningstar Rating = 4 Stars, 5 Stars or Unrated YTD Total Return = Category Average or Higher Morningstar's screen results are conveniently sorted by highest to lowest YTD returns, so we simply reviewed the list and noted which funds have generated the highest returns so far this year, excluding diversified international stock funds. Foreign stock, world stock and diversified emerging markets funds were removed from consideration at this point, so we could focus our efforts on single-country and regional-stock funds. Below is a summary of the international funds so far on our list. Top YTD Returns: Single Country/Regional Stock Funds +21.4% Third Millennium Russia (TMRFX), 4-Stars +18.9% Scudder Latin America S (SLAFX), 5-Stars +17.7% T. Rowe Price Latin America (PRLAX), 4-Stars +14.0% Driehaus European Opportunity (DREOX), 4-Stars +13.6% Fidelity Canada (FICDX), 5-Stars +12.2% Commonwealth Australia/New Zealand (CNZLX), 5-Stars +11.7% Henderson European Focus A (HFEAX), Unrated +11.1% AIM European Small Company A (ESMAX), Unrated +10.3% Liberty European Thematic Equity Z (LSREX), Unrated To make sure we didn't overlook a fund, we switched to the Fund Finder on the marketwatch.nytimes.com website. There, we asked to see all "global" funds and then reviewed the list of highest performing funds over the trailing year-to-date and quarter-to- date periods through May 11, 2003. Because of this, we added a few funds that have performed well over the past 3-month period and are not already on our short list. Top QTD Returns: Single Country/Regional Stock Funds +26.0% Matthews Korea (MAKOX), 5-Stars +24.8% Korean Investment A (AKIAX), 3-Stars +24.4% Fidelity Advisor Korea A (FAKAX), 3-Stars +22.8% ICON North Europe Region (ICNEX), 3-Stars +22.4% Rydex Large-Cap Europe (RYEUX), Unrated +21.8% Merrill Lynch Latin American A (MALTX), 3-Stars +21.6% Oppenheimer Europe A (OEFAX), 1-Star In cases of load funds, we use the Class A shares for comparison purposes. Class A shares have front-end loads, but tend to have the lowest expense ratio among the fund's different class shares. One of the funds, Oppenheimer Europe Fund, Class A receives just a 1-star rating, Morningstar's lowest overall rating, a red flag. Having added some more single country and regional funds, we went back to the Morningstar.com website and then entered all the fund symbols into the Morningstar Fund Compare tool. The tool permits investors to compare funds based on return, risk and expense, and other factors such as investment style and manager tenure. There we were reminded that four of the funds on the list currently are rated 4 stars (above average) or 5 stars (highest) by Morningstar as follows: Funds On List Rated 4-Stars or 5-Stars Overall: Commonwealth Australia/New Zealand (CNZLX), Pac/Asia ex. Japan Fidelity Canada (FICDX), Foreign Stock Matthews Korea (MAKOX), Pac/Asia ex. Japan Scudder Latin America S (SLAFX), Latin America Stock Driehaus European Opportunity (DREOX), Europe Stock T. Rowe Price Latin America (PRLAX), Latin America Stock Third Millennium Russia (TMRFX), Europe Stock These seven funds may be your best bets overall on the list based on risk-adjusted, cost-adjusted return performance versus similar funds, if there are any. We say that because the Fidelity Canada Fund is compared to all diversified foreign stock funds but would be better compared to other Canada stock funds. Third Millennium Russia is compared to all Europe equity funds but would be better compared to other Russia stock funds. The next thing we compared was expense ratios. Most of the funds on the list have current expense ratios in the range of 1.50% and 2.00%, which is what you'd expect from these types of funds since they generally cost more to trade and operate, and have small net asset bases. Because of their relatively good ratings, you might still want to look at Commonwealth Australia/New Zealand Fund and the Third Millennium Russia Fund in spite of their higher expense ratios. At 5.63%, Commonwealth's expense ratio is extremely high but represents one of the only ways to invest exclusively in that continent (Australia/New Zealand). Third Millennium Russia might be rated 5 stars if it weren't for its 2.75% expense ratio but is still maybe your best bet if you seek specific exposure to Russia stocks. Next we looked at average standard deviations over the past three years to get a sense of how volatile returns have been versus the other funds on the list. To put this statistic into perspective, consider that the average of all mutual funds is 13.2%, according to Morningstar. The funds with the least 36-month volatility are as follows: Standard Deviation (%): Single Country/Regional Stock Funds 17.6% ICON North Europe Region (ICNEX) 18.3% Driehaus European Opportunity (DREOX) 18.7% Oppenheimer Europe A (OEFAX) 19.4% Fidelity Canada (FICDX) 20.3% Commonwealth Australia/New Zealand (CNZLX) Matthews Korea Fund has been the most volatile fund over the past three years with a standard deviation of 41.3%. Third Millennium Russia Fund (38.8%), Fidelity Advisor Korea Fund A (38.0%), and Korean Investment Fund A (36.6%) were the next three funds ranked by highest volatility. So these funds may be only be appropriate for individuals who can tolerate very significant fluctuations in share price. If you don't think you can tolerate such volatility then you may want to consider one of the less volatile offerings. Next we compared portfolio characteristics. The closest thing to a large-cap core stock fund is Liberty European Thematic Equity Z (LSREX) which has an average market cap of $30.9 billion, highest by far among the funds on the list. Still, it invests in all-cap ranges, so to call the fund's structure "multi-cap" would not be inappropriate either. The same is true for the Fidelity Advisor Korea Fund A (FAKAX) and the Fidelity Canada Fund (FICDX), which fall into the Morningstar large-cap style box, but invest in the mid-cap and small-cap sectors also. Matthews Korea Fund invests primarily in undervalued Korean stocks of companies with mid-cap and small-cap values. It has an average market cap of just $1.3 billion versus Fidelity Korea Fund's $10.5 billion median market capitalization. At 12 years, Robert Scharar has the longest manager tenure among the funds on the list. Scharar is president of FPA Corp., which has served as investment advisor to the Commonwealth Australia & New Zealand Fund since the fund's inception on November 25, 1991. His trailing total returns for the past 1 year, 3 years, 5 years and 10 years rank no worse than in the top 5% of its Morningstar category (Pacific/Asia ex. Japan funds). While we like the fund and manager, the fund's expense ratio of 5.64% is excessive, and more than twice the 2.32% category average, per Morningstar. In theory, the higher a fund's expenses, the harder it is to remain competitive versus similar funds with lower expense, but Scharar has proven that he can deliver significant alpha above the costs and risks incurred. The following portfolio managers have all spent at least 5 years as the manager or co-manager of their respective fund as follows: Longest Manager Tenures: Single-Country/Regional Stock Funds Commonwealth Australia/New Zealand (CNZLX), Robert Scharar (12) Matthews Korea (MAKOX), G. Paul Matthews (8) Scudder Latin America S (SLAFX), Paul Rogers (7) T. Rowe Price Latin America (PRLAX), Benedict R. F. Thomas (7) Fidelity Canada (FICDX), Robert J. Haber (5) Third Millennium Russia (TMRFX), John Connor (5) None of the other managers listed had more than three years with their respective funds. Since these funds target specific areas of investment, whether it is a country or region, experience can prove very helpful. Accordingly, if you value having "seasoned" judgment associated with a long-tenured equity manager, then one of the above funds may be a suitable choice. In the next section, we tell you which funds we favor most based on the return-risk-expense and other factors. Our Favorite Funds While Korea stock funds have gotten hot lately, they don't rank up there with the highest YTD return performers. Therefore, we would be more inclined to go with either a Europe stock fund or Latin America fund. Fidelity Canada Fund has done well, but it invests in a country that represents only a small percentage of the world's total market capitalization. Many Americans may be mad at Canada for their reported lack of support of the U.S. in the Iraq war, but if you can get past that, this fund may offer high return potential. Fidelity Investments has a strong presence in Canada and knows the Canadian equity markets. Robert Haber, who has managed or co-managed Fidelity Canada Fund since July 1998, seeks capital appreciation over the long-term by normally investing at least 65% of total assets in securities (primarily common stocks) of issuers that have their principal activities in Canada or that are registered in Canadian markets. Maxime LeMieux became the fund's co-manager on November 1, 2002. As you can see, Fidelity Canada Fund is trading well above its 50-day moving average and its 200-day moving average has moved into an upswing. So, from a short-term, technical perspective the fund looks good. The fund is up 13.6% on a YTD basis thru May 11, ranking in the top 3% of the Morningstar foreign stock category. Due to strong showings in 2000, 2001, and 2002, the fund's trailing total returns now rank in the category's top 5 percent. Its trailing 3-year annualized return (1.2%) and its trailing 5-year annualized return (3.8%) rank in the top 5% of the foreign stock category. Another fund we like is the Commonwealth Australia/New Zealand Fund, managed by Robert Scharar with FCA Corporation. We like the fund and manager in spite of its 5.64% expense ratio since they have generated high returns over the short- and long-term with low risk versus other Pacific/Asia ex. Japan equity funds, and represents a strong alternative to Pacific/Asia (including Japan) funds. It seeks long-term capital growth plus current income by investing in equity securities, convertibles and debt securities of issuers in Australia and New Zealand. Originally, the fund was known as the Capstone New Zealand Fund. Commonwealth Australia/New Zealand Fund is up 12.2% in 2003, per Morningstar, ranking in the 1st percentile of the Asia ex. Japan category. The fund's 1-year return of 26.7% and 3-year (average) return of 13.9% also rank in the top 1% of the category. For the trailing 5-year period through May 11, the fund had an annualized total return of 8.4%, ranking in the category's top 5%. Over the trailing 10-year period through April 30, 2003, the fund returned an average of 3.4% a year, ranking in the category's top 1%, once again. You might want to discuss the fund's expense ratio with them, but it's hard to dispute what Scharar has achieved in returns, net of expenses. However, should the fund's style/strategy and holdings fall out of favor, its high expense ratio could really hamper the fund's relative strength. It would seem based on the performance numbers that Scharar has more than adequately compensated for the fund's highest expense. Conclusion If you are afraid of investing in a single country such as Canada or in a single continent such as Australia/New Zealand, you might want to look further at one of the Europe stock funds, which have performed well in 2003. Third Millennium Russia Fund has a 2.75% expense ratio, but is up 21.4% on a YTD return basis as of May 11 and ranks in the top 1% of the Europe stock fund category. Still it may be too volatile for a lot of investors. Other funds we think you may want to look further at include Icon North Europe Region Fund, Driehaus European Opportunity Fund, and Oppenheimer Europe Fund. All three funds have been less volatile than their category peers over the past three years and are among the category performance leaders of 2003. Funds with mid-cap and small-cap growth styles such as AIM's European Small Company Fund and Driehaus European Opportunity Fund have the potential to lead in the next growth-led market advance. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ------------------------------------------------------------ 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 Tuesday 05-13-2003 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, AMGN, IBM, KLAC, MEDI New Calls Plays: None Put Play Updates: AIG, GS, KSS New Put Plays: PG **************** 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 ADTN 45.87 1.82 -1.08 Still strong AMGN 61.50 0.75 -0.49 Watch the $60 level IBM 89.98 1.45 0.98 Hitting new 52-week highs KLAC 42.75 1.30 -0.88 Putting on notice! MEDI 34.87 1.10 -0.13 Did you see the bounce? PUTS AIG 55.62 0.10 -0.73 Still not triggered GM 36.30 0.72 -0.39 Long-term, no update GS 74.95 0.49 -0.54 Looks tempting KSS 54.24 2.80 -0.56 Earnings on Thursday PG 87.81 -0.32 -1.07 NEW, big relative weakness ------------------------------------------------------------ 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: 45.87 change: -1.08 stop: 45.00 After the impressive run from the bounce at $43, ADTN was looking a bit extended as of Monday's close after a brief foray over the $47 level. That was our primary reason for listing the play as our Play of the Day last night, to highlight that the stock was at a good point for harvesting some gains ahead of expected profit taking. Sure enough, that's exactly what transpired on Tuesday. Actually, we were looking for a surge up closer to $48 to provide a better exit point, but that didn't happen, in large part because of the degree to which the stock had become overextended on Monday, ending up above the upper Bollinger band. Despite the broad market weakness on Tuesday, ADTN actually held up alright, giving back just over half of Monday's gains. We got aggressive with our stop Monday night and raised it to $45 and still like that level for an indication of whether we've outstayed our welcome. While aggressive traders can certainly consider new entries on a rebound from above the $45 level, we're more focused on exit strategy on ADTN right now. A rally to or above Monday's high ($47.11) should be considered an opportunity to harvest gains. Picked on April 29th at $40.70 Change since picked: +5.17 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 797 K Chart link: --- Amgen, Inc. - AMGN - close: 61.50 change: -0.49 stop: 58.75*new* Profit taking was the name of the game on Tuesday, and amazingly, it was pretty mild. After rebounding from the $59.35 area last week, AMGN ran as high as $62.47 this afternoon before pulling back under the broad market weakness. While AMGN did close at its low of the day, it did so on rather light volume and the action looks like normal consolidation. Traders that missed an entry early on Monday look to be getting a second chance right here. A further pullback into the $60.50-61.00 support area should afford a solid entry into the play, provided the Biotechnology index (BTK.X) doesn't weaken below the $380 level in the process. Strong support still remains down near the $59 level and that should provide a safety net on any more severe pullback. We're raising our stop just slightly tonight to $58.75, as that is below the 50-dma, the lower Bollinger band and the ascending trendline. Should all three of those support measures give way, we would clearly want to take our leave of AMGN. Picked on May 11th at $61.24 Change since picked: +0.26 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.5 mln Chart link: --- Intl Business Mach - IBM - cls: 89.98 chg: +0.98 stop: 85.95*new* Wow! Big Blue reaches a fresh 52-week high while the Industrials end a two-day winning streak and close down 47 points. What's driving the price of IBM higher? It could be a number of factors. Leading the headlines this week was IBM's much heralded unveiling of its latest mainframe computer, the first new model in three years. Weighing in with a starting price tag of $1 million per machine, the new eServer Z990 replaces the previous Z900 machines. The Z990 has been code named "T-Rex" and is three times more powerful than its predecessor. The Z990 can process 450 million e-business transactions a day, can turn its capacity on and off and can run from one to all 32 of its processors without having to power down. IBM knows full well that customers for the T-Rex are going to be big corporations, most likely in the financial services industry, but the company has sold more than 4,000 of its Z900 machines in the last three years. The name "T-Rex" is a spoof on rival Sun Microsystems (SUNW) who ran ads back in March 2001 calling IBM a dinosaur who belongs in a museum. Potentially giving IBM a boost tomorrow will be IT services rival CSC. The computer services company announced its earnings after the bell this evening and the results were positive. Actually, the headline EPS number was a penny shy of estimates but revenues were up from a year ago so the results were not just cost-cutting. We'd like to raise our stop to $88.00 but the current channel won't allow it just yet. We are going to bump our stop up to $85.95. The $90 level is very significant for IBM as shares have failed to rally past it since the early April gap down in 2002. If IBM can break this level we could see a fill the gap move to $100 assuming the market cooperates. Even a strong stock like IBM will have a hard time climbing if the broader indices are in consolidation mode. Picked on May 4th at $87.37 Change since picked: +2.61 Earnings Date 04/14/03 (confirmed) Average Daily Volume = 8.2 Million Chart link: --- KLA-Tencor - KLAC - close: 42.75 change: -0.88 stop: 40.95*new* Putting a crimp on the chip sector today was a research note from Merrill Lynch's chip analyst Joe Osha. Osha downgrade five semis today on valuation concerns and claims the SOX could see a 20% drop by the end of summer. Those stocks he cut from "buy" to "neutral" today were NVDA, MXIM, ISIL, SMTC, and ATYT. Currently he does not rate any chip stocks a buy. Joe feels that the industry growth isn't moving fast enough and the fabled second half recovery may fail to show up again. Comments in Applied Material's (AMAT) conference call tonight after their earnings report seem to support his claim. AMAT is the largest chip equipment maker on the planet and earnings were a loss over last year's quarter. AMAT said that next quarter would appear to be flat to slightly down. AMAT's CFO did say he expected some improvement but not until early 2004 (they just keep pushing the recovery back don't they?). This news is contrary to recent comments coming from Intel's President who was quoted as saying they do expect a second half recovery THIS year. Speaking of Intel, the stock had its price target raised from $22 to $24 by UBS Warburg who reiterated their "buy" on the stock. Initially the comments from Merrill Lynch weighed on the SOX but the group rebounded like much of the market to close fractionally lower. Shares of KLAC didn't quite bounce as they should have and we're putting this play on notice. Conservative traders may want to raise their stop to $41.50, where we expect shares to bounce next. Officially we're raising our stop to $40.95, which puts our risk at $1.20 in the stock. Given the marginally red closes on a day when the markets should have pulled back we're encouraged but cautious. Picked on May 4th at $42.15 Change since picked: +0.60 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 11.4 Million Chart link: --- --- --- --- LONG-TERM CALL --- --- --- --- MedImmune Inc - MEDI - close: 34.87 change: -0.13 stop: 31.99 MEDI is currently a long-term call play on OI, which is seldom updated unless there is a reason. The most recent update was this weekend's newsletter. Today's note is just to bring to your attention of MEDI's bounce at the simple 50-dma yesterday. Sunday we suggested that more conservative traders consider putting their stop below the 50-dma. Given the expectation for a potential market pull back of significant size this still sounds like a good suggestion. The 50-dma is currently $33.25. Picked on April 3rd at $34.31 Change since picked: +0.56 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 3.9 Million Chart link: ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ 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 ******************* American Intl Group - AIG - cls: 55.62 chg: -0.73 stop: $58.00 We remain untriggered in this potential put play for AIG. However, our instincts are suggesting that we could be triggered soon. The IUX insurance index has been relatively weak versus the broader markets and some of the internal indicators we watch are already suggesting a bearish crossover has occurred for the IUX. Meanwhile shares of AIG have been clear under performers and while shares have not yet pierced the $55.00 level to the downside, neither have they been able to bounce. Our trigger at $54.94 remains in effect and once triggered our suggested stop loss will be $58.00. As previously announced AIG's chairman, Mr. Greenberg, spoke at the Goldman Sachs Financial Services conference today. Yet despite his positive comments that insurance rates have been rising and should continue to rise into 2004 the stock (and the sector) did not react. Picked on May Xth at $00.00 Change since picked: -0.00 Earnings Date 04/24/03 (confirmed) Average Daily Volume = 7.2 Million Chart link: --- Goldman Sachs Grp. - GS - close: 74.95 change: -0.54 stop: 78.25 Despite the fact that the stock has been weak over the past few days, we'd sure like to see GS finally break down below that $74 support level to confirm our bearish bias on the stock. Intraday rallies have been failing at the 10-dma ($75.82), which today crossed down through the 20-dma ($76.19). So while we have the $76 level shaping up as near-term resistance, there hasn't yet been enough pressure to crack that $74 support. Traders looking to fade rallies should do well with entries near the $76 level, while those looking for confirmation of weakness before playing will want to wait for a trade below $74. Our initial target on the downside will be a test of the converged 50-dma ($71.98) and 200-dma ($71.82). Until GS loses its current support, maintain stops at $78.25. The one major fly in the ointment for our GS play is the fact that the Brokerage sector (XBD.X) is not confirming the weakness in GS, as it continues to test the $463- 465 resistance area that served as a top last November. Conservative traders looking to enter the play will want to see the XBD falling back under the $447 level. Picked on May 8th at $74.06 Change since picked: +0.89 Earnings Date 06/19/03 (unconfirmed) Average Daily Volume = 4.23 mln Chart link: --- Kohl's Corp. - KSS - close: 54.24 change: -0.56 stop: 55.25 One thing about our KSS play, it as certainly been a bumpy ride! Throughout all the gyrations though, the stock has continued to trace out a pattern of lower highs and lower lows. Last week's drip near the $51 level was a screaming opportunity to harvest some gains and look to play the downside again. Sure enough, we got the expected bounce, which topped out this morning at $55.11 (a mere 14-cents below our stop) before heading back down to close just above the $54 level. Odds seem good that the stock could head down to test and perhaps break the recent lows over the next week. There's just one problem though. KSS is scheduled to report earnings on Thursday after the closing bell. That means that any open trades will need to be closed out before the end of the day on Thursday. Traders looking to beat the rush may want to exit open positions on a drop back towards $52 on Wednesday, instead of waiting for a pre-earnings drop on Thursday. Due to the proximity of that news event, we aren't advocating new positions at this point. From here on out, it is about managing existing positions to make sure a winner doesn't become a loser. Picked on April 27th at $55.02 Change since picked: -0.78 Earnings Date 05/15/03 (confirmed) Average Daily Volume = 3.98 mln Chart link: ************* NEW PUT PLAYS ************* Procter & Gamble - PG - close: 87.81 change: -1.07 stop: Company Description: Two billion times a day, P&G brands touch the lives of people around the world. Some of the nearly 300 P&G brands consumers know and use with confidence in over 160 countries around the world include: Pampers., Tide., Ariel., Always., Whisper., Pantene., Bounty., Pringles., Folgers., Charmin., Downy., Lenor., Iams., Crest., Actonel., Olay. and Clairol Nice 'n Easy.. The P&G community consists of nearly 102,000 employees working in almost 80 countries worldwide. (source: company press release) Why We Like It: Believe it or not but even a "safe" stock like PG is offering investors a reason not to like it. The company has been getting a lot of bad press lately. Playtex, a rival for PG in the tampon market, just launched its civil case against PG on Monday. Playtex claims that PG used false advertising to lure Playtex customers away. Another court case, this one with Vidal Sassoon is also flaring up. Vidal is suing PG for fraud and breach of fiduciary duty claiming that PG deliberately sabotaged the Sassoon brand and relaunched a competing brand. Considering the fact that Mr. Sassoon gets a percentage of his products sales PG does have a potential motive. Adding more fuel to any investor concerns is news that Wella shareholders, the German haircare group, are asking PG pony up more money for its takeover bid for the company. Granted, all of these issues probably don't amount to enough monetary value to seriously affect a company the size of PG but it does not instill confidence in a still cautious investor. Probably the most revealing clue to PG's weakness is its lack of participation in the market rally these last few weeks. Shares look like they have been forming a top during the month of April. These last two weeks of May have seen a slow and steady series of lower highs. Finally, in today's session the stock broke down below the $88 level, which had been acting as support. Shares stopped at $87.85 on Tuesday, which is just above the convergence of its simple 200-dma and 5-dma's. We are going to use a trigger at $87.45 to launch us into this play. Only if shares of PG trade at or below $87.45 do we suggest short positions. Once triggered we suggest an initial stop loss at $90.00 although more conservative traders can probably get away with something tighter. Suggested Options: Stocks tend to go down faster than they go up so we're going to suggest June and July put options but Octobers are certainly available. BUY PUT JUN 90 PG-RR OI= 1440 at $3.40 SL=1.65 BUY PUT JUN 85 PG-RQ OI= 2787 at $1.20 SL=0.60 BUY PUT JUL 85 PG-SQ OI=10802 at $2.10 SL=1.00 Annotated Chart: Picked on May Xth at $00.00 Change since picked: -0.00 Earnings Date 04/28/03 (confirmed) Average Daily Volume = 3.3 Million Chart link: ------------------------------------------------------------ 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. 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The Option Investor Newsletter Tuesday 05-13-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - PG ********************* PLAY OF THE DAY - PUT ********************* Procter & Gamble - PG - close: 87.81 change: -1.07 stop: Company Description: Two billion times a day, P&G brands touch the lives of people around the world. Some of the nearly 300 P&G brands consumers know and use with confidence in over 160 countries around the world include: Pampers., Tide., Ariel., Always., Whisper., Pantene., Bounty., Pringles., Folgers., Charmin., Downy., Lenor., Iams., Crest., Actonel., Olay. and Clairol Nice 'n Easy.. The P&G community consists of nearly 102,000 employees working in almost 80 countries worldwide. (source: company press release) Why We Like It: Believe it or not but even a "safe" stock like PG is offering investors a reason not to like it. The company has been getting a lot of bad press lately. Playtex, a rival for PG in the tampon market, just launched its civil case against PG on Monday. Playtex claims that PG used false advertising to lure Playtex customers away. Another court case, this one with Vidal Sassoon is also flaring up. Vidal is suing PG for fraud and breach of fiduciary duty claiming that PG deliberately sabotaged the Sassoon brand and relaunched a competing brand. Considering the fact that Mr. Sassoon gets a percentage of his products sales PG does have a potential motive. Adding more fuel to any investor concerns is news that Wella shareholders, the German haircare group, are asking PG pony up more money for its takeover bid for the company. Granted, all of these issues probably don't amount to enough monetary value to seriously affect a company the size of PG but it does not instill confidence in a still cautious investor. Probably the most revealing clue to PG's weakness is its lack of participation in the market rally these last few weeks. Shares look like they have been forming a top during the month of April. These last two weeks of May have seen a slow and steady series of lower highs. Finally, in today's session the stock broke down below the $88 level, which had been acting as support. Shares stopped at $87.85 on Tuesday, which is just above the convergence of its simple 200-dma and 5-dma's. We are going to use a trigger at $87.45 to launch us into this play. Only if shares of PG trade at or below $87.45 do we suggest short positions. Once triggered we suggest an initial stop loss at $90.00 although more conservative traders can probably get away with something tighter. Suggested Options: Stocks tend to go down faster than they go up so we're going to suggest June and July put options but Octobers are certainly available. BUY PUT JUN 90 PG-RR OI= 1440 at $3.40 SL=1.65 BUY PUT JUN 85 PG-RQ OI= 2787 at $1.20 SL=0.60 BUY PUT JUL 85 PG-SQ OI=10802 at $2.10 SL=1.00 Annotated Chart: Picked on May Xth at $00.00 Change since picked: -0.00 Earnings Date 04/28/03 (confirmed) Average Daily Volume = 3.3 Million Chart link: ------------------------------------------------------------ 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 ------------------------------------------------------------ ********** 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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