The Option Investor Newsletter Thursday 05-15-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Confused? Futures Markets: Higher Low Index Trader Wrap: Weak enough to choke a horse. But feed a bull? Market Sentiment: Chiming In Manager Microscope: Hitesh P. (John) Adhia: Adhia Twenty (ADTWX) Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 05-15-2003 High Low Volume Adv/Dcl DJIA 8713.14 + 65.30 8727.78 8643.11 1.81 bln 1993/1237 NASDAQ 1551.38 + 16.50 1552.98 1536.03 1.98 bln 1889/1345 S&P 100 477.68 + 3.70 478.96 473.98 Totals 3982/2582 S&P 500 946.67 + 7.39 948.23 938.79 W5000 9016.32 + 65.00 9026.90 8945.94 RUS 2000 422.05 + 2.61 422.24 419.25 DJ TRANS 2436.79 - 20.80 2459.16 2419.65 VIX 21.67 - 1.09 22.82 21.47 VXN 32.18 - 0.96 35.04 31.56 Total Volume 4,021B Total UpVol 2,670B Total DnVol 1,279M 52wk Highs 574 52wk Lows 25 TRIN 0.75 PUT/CALL 0.64 ************************************************************ Confused? Welcome to the club. Analysts, commentators and bears are clueless but bulls could care less. They are buying every dip regardless of the economic news. A silver lining is found in every cloud and the indexes are pressing ever nearer to new highs. Instead of following the "sell in May and go away" axiom the new standard is "play until May." This means bulls are ignoring all economic reports for the March/April period as irrelevant and buying everything in sight in hopes May reports will show a strong post war spike. Economically it was a potpourri of results with improvement in some areas and 48 year lows in others. By far the biggest report of the day was the PPI which dropped -1.9% and the largest drop ever since the index was instituted in 1945. While severely negative on the surface the major component in dropping prices was the fall in energy prices since the war. The core rate, ignoring things we do not use like food and energy, still dropped – 0.9% and more than analysts expected. Analysts were sharply divided about the PPI proving the deflation scenario. They claim the lower dollar will pressure import prices but those prices are not directly reflected in the PPI. Others say the drop in the core rate is following the decline in spending and manufacturing levels since January and is inline with the current economic trend. Either way the bulls cheered the potential for aggressive Fed stimulus ahead to stop the slide. Industrial Production dropped -0.5% for April for the second consecutive month. Despite the end of the war and positive consumer sentiment the demand has not increased. Weakness in nearly all the components showed the continued slide to be broad based. Production of consumer products fell for the third month. Capacity Utilization fell to 74.4 and the lowest level since 1983. This does not bode well for hiring and could be seen as a potential for further layoffs. The Philadelphia Fed Survey fell more than expected at -4.8% but less than the average of the last two months at -8.4%. This was seen as the potential for a recovery beginning. It could just be a statistical anomaly related to the upturn in consumer sentiment over the last month and we will not know if it will stick until the next report. There were two new questions added to the survey this month. Suppliers were asked if they were seeing any improvement in business conditions since the end of the war. 83% said no. They were also asked if their customers were seeing any improvement in demand since the war. 90% said no. This does not paint a positive picture for the post war bounce. There was a post war bounce in New York as shown by the Empire State Index which rose to 10.6 from last months -20.2 disaster. Every component improved except prices received. Deflation again? Some businesses said they were hiring again, which could be related to the revitalization around ground zero as well as the post war impact. Dead cat bounce from the -20 last month? We will have to wait until next month to see. The homebuilder sector saw the NAHB Housing index rise again from 52 to 56 indicating sales are growing again. With the mortgage rates dropping again there should be another wave or prosperity for this sector. The optimism component rose to 68 and a level not seen since year end. Here comes yet another short squeeze for those short the builders. Business Inventories rose +0.4% and slightly higher than expected. This was a March number and a surprise considering it was pre war. This report would seem to be contradicted by several more current economic reports from different viewpoints. Jobless Claims fell slightly to 413,000 but posted the 13th month over 400K. The continuing claims rose to 3.8 million and with the Challenger Layoff report indicating 138,000 mass layoffs due this month the odds are good it will rise again. Last weeks number was revised up by +5,000. The insured jobless rate rose to 3.0% and the highest level since 9/11. Currently 41% of jobless run out of benefits before finding work. Estimates are for an additional 1.1 million jobless running out of benefits over the next six months due to the declining jobs market. Many workers are simply giving up on the search with the labor force participation rate declining from 67.4% to 66.4%. Switching to the tech sector for guidance we had a very positive earnings report from Dell but CEO Michael Dell refrained from saying much about the health of the economy. He placed the focus back on Dell continuing to take market share from all companies in all geographies in the server market. He continued to stress that capturing market share was driving unit growth and cutting costs to an all time low were helping earnings. Nothing there says the tech sector is growing, only that Dell is performing well, very well. A better snapshot came from Intel CEO Andy Bryant, which was caught on tape saying "I do not see an economic recovery this year and I am just hoping for a better year in 2004." Oops! Intel did affirm their estimates for the quarter but Bryant did express concern for the potential SARS impact. Bryant said he was less optimistic near term but still had hopes for a long term recovery. Following his comments the Semi Book-to-Bill report for April was released, which showed a drop to .86 in April from .91 in March. This was the lowest number since November when the recent rise passed 80 to the upside. This is a three-month moving average, which means the actual numbers are much lower. The three-month average of global bookings fell to $737 million in April. March bookings were revised down from $822 million to $777 million. Book-to-Bill Table For the average to fall to $737 the actual bookings are probably below $675 million for April. They do not release the actual numbers to prevent judgments based on volatility in a specific month. If you calculate backwards it would appear something in the $673 million range should be in the ballpark. It will be hard for the bulls to spin this downward revision for March by -5.4% and then another -5% drop in April numbers. (-13.3% drop in April if you use the actual $673 million) This is not painting a positive picture for the semi sector and shows the reason for caution in Andy Bryant's comments. There are so many things to touch on tonight and Friday brings another set of critical reports. I am not going to go into great detail on everything today because I find myself repeating many of the facts in the longer version of the weekend wrap. Other problems impacting sentiment today were weak showings by FD, TGT and KSS in the retail sector. The war is over but retail is still fighting for survival. TGT missed earnings by a penny and warned that weak demand was depressing the outlook. Part of the boost today was caused by IBM, which hosted an analyst conference yesterday. Again bulls practiced selective hearing and only heard the "tech demand stabilizing" comment and disregarded the "tech spending flat for 2003" and "infrastructure and services businesses facing a tough time". Also helping traders was the news UAL reinstated 160 flights that were cancelled due to lack of demand before the war. They said they were seeing demand pickup slightly. It did not help the transport sector because truckers were on the outs due to falling shipments. ROAD and YELL officers said at the Bear Stearns conference that the economy remains "very flat". The YELL chairman said they had been tracking the economy for some time and there was "no pickup or decline". The transports lost -21 points on the less than exciting comments. The parade of analysts saying the rally has farther to run is slowing and the number of analysts suggesting the opposite is growing. Dick Arms added his name to the list of technicians saying the rally was about to slow with a prediction of a pull back to Dow 8200 and Nasdaq 1400 soon. He said the TRIN was showing very overbought conditions and an oscillation extreme. I have talked with Mr. Arms many times and he has spoken at several of our seminars. His work spans several decades and is normally technically correct. It is based on advancing and declining volume patterns which are a good sign of market internals but fail to take into account external news factors. He is strictly technical and as we know you can be technically right but at the mercy of news and timing. I told readers on the Futures Monitor today that I had no bias. I had recently been economically bearish but moving to bullish as the number of reasons for aggressive Fed action increased and technical resistance on the indexes was broken. The total disconnect to the economic factors this morning took away my bias in both directions. It is ok to be bullish based on a viewpoint that conditions "may" be improving and the Fed "may" act aggressively. However, to be bullish in the face of the worst PPI ever, second worst core PPI ever and a new 45 year high for bonds was simply unjustified. If I did not have so may readers emailing their bearish ideas I would swear every last trader had converted to buy the dip. That alone should convince everyone this rally is overdone. The bullish case today was built on the NY Empire report and a bad Philly Fed Survey. It was just not as bad as last month. With the bad PPI the Fed is even more likely to cut rates in June and that will help stimulate the refinance wave and home buying as well as business in general. Will that be enough to lift the economy over the summer slump? The bulls are betting on it. When I started this wrap I was neutral. Confused but neutral. I literally spend about 16 hours a day studying the markets. I read every scrap of data and analysis I can find. I watch the indexes, trade and read hundreds of emails including other newsletters every day. I am still confused. In my opinion I think the rally has been overdone for the last 500 points. But, and this is important, every major rally in the past has had the same critics saying the same thing all the way up. Bull markets are built over a wall of worry and over the backs of screaming bears. The constant short, cover, short, cover pattern by the disbelieving bears helps fuel the gains to highs otherwise unachievable on simple economic justifications. I have been guilty of overzealous bullishness and bearishness in the past and I am sure my bearish economic have been coming through loud and clear lately. I think the factors this time around have changed ever so subtly week by week since March. Each new spin cycle is good for one more week. First it was the gains in front of the war, the gains when the war started, the gains when it was going well, gains when it was over, gains on technical levels (200DMA) being broken, gains on Fed comments, gains on 65% of companies beating absurdly lowered estimates, etc. Each week it is something new and none of them were realistic. The market went up on a change in sentiment and reality had nothing to do with it. After three years of pain traders wanted to believe. They wanted to hope. That hope has propelled the indexes to new highs for the year. The major indexes are up over 20% on average from their lows. Now what? Like Leigh Stevens said in his Sunday Index Trader Wrap, "If not stocks then what?" I do not see traders plowing boatloads of new money into bonds with yields at 45 year lows. They are still going up but just like stocks in 2000, trees do not touch the sky. Nobody wants to buy at the top of anything, stocks or bonds. Yes, stocks are way overvalued considering an estimated +4% earnings growth for Q2. But are they really considering the alternative? Money markets are going to start charging soon to hold your money. Bonds will eventually collapse on the first really positive piece of economic news. If not stocks then what? Yellow Freight, not a highflying tech company said they could double their earnings with only a 10% increase in business. How much more can Cisco, Dell, IBM, MSFT or any other cut to the bone company increase their profits on any real recovery? The point is not whether we will have a recovery but when. There will not be an alert triggered across your TV screen like a severe storm warning. "Attention, the recovery has started, take shelter in stocks now." Investors are simply looking at the alternatives and saying there is no future in bonds or money markets and we have to be closer to a recovery now than 6, 12, 18 or 24 months ago. They are holding their nose and buying stocks in hopes of riding out the summer and seeing a better second half. Actually I think most are hoping the economics deteriorate over the summer to encourage even more stimulus to even further juice the economy when the rocket finally ignites. What I am really expecting is the mother of all asset allocation programs soon. It may not be tomorrow but it could be soon. Once the Fed or a Fed governor starts making noises that there will be no rate cut it will look like a game of hot potato. Institutions will be dropping bonds faster than Andrew Firestone dropping bachelorettes when the tide turns. They will be racing to reallocate their portfolios and invest their massive profits from the bond boom. The next Fed meeting is not until June 24th and there is a 100% chance the Fed will cut by at least 25 points. There is a growing chance they could cut by 50 points. If you were a fund manager sitting on several billion in bonds you might wait for that meeting on the hopes of a 50 point cut giving your portfolio one more spike before selling. There is a better chance that the hopes for a cut are already priced into the market and we could see some early sellers soon. With bonds yields at 45 year lows how much how much farther can they go? Trying to milk that last few cents by waiting could be disastrous if a couple economic reports showed signs of life. Like the NY Empire Index and the Philly Fed Survey today? If you were sitting on mountains of bonds like Scrooge McDuck in his money bin would those reports make you nervous? Bond yields closed right a triple bottom on Thursday that corresponded with the October-10th, March-12th equity market bottoms. Where are the markets today? At the highs for the year. Confused? Dow/$TNX.x Chart - daily I am going to leave you with this thought. Based on the chart above what do you see happening? There are only two rational alternatives to this totally irrational situation we are in now. One possibility is the market is going to crash and bond yields are heading for a 100-year low. The other possibility is we are about to explode over that down trend resistance at Dow 8725 and bond holders are going to take their profits and run to the potential 6-12 month returns in stocks. Which makes more sense? Bonds going to 100-year highs or stocks breaking out on hopes the economy recovers in the next 12 months? Either way it should happen any day. The ideal situation would be one more dip in the market with bonds making one last climax high. Then traders would feel much better about not having to buy stocks at the highs before summer. But then, ideal scenarios seldom come to pass. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Higher Low Jonathan Levinson Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 DJIA 8758 8703 8673 8618 8588 COMPX 1564 1557 1546 1540 1530 ES03M 955 951 944 940 933 YM03M 8768 8733 8680 8645 8592 NQ03M 1178 1171 1161 1154 1144 Equities gapped up at the open, set their highs of the day and then declined to their lows, spending the remainder of the day in a rangy drift higher. The main difference between today's session and yesterday's was that the decline put in a higher low, and the afternoon range had an upward bias instead of a lower one. Today felt considerably more bullish than yesterday. The US Dollar Index also put in a higher low and then launched, blowing out the 95.00 resistance level that has held since last week. Not surprisingly, commodities got sold, but the CRB declined only .96 to close at 240.63, with strength in wheat, corn, frozen concentrated OJ, live cattle and gold futures. June gold was down 40 cents to 352.10 as of this writing. 15 minute chart of the US Dollar Index I mentioned that today felt bullish. The COMPX bounced at its 5 dma, with the 10,1,5 stochastic turning back up deeper into overbought. It did so on heavier volume as well. Daily Chart of the COMPX The topping trend that we had been watching on the QQQ:QQV ratio chart reversed to the upside as well, giving us a bullish cross on the 10,1,5 stochastic and even setting a slight up-tilt to the MacD fast line. Chart of the QQQ:QQV ratio The implication of this upturn is that relative the QQQ, the QQV became smaller today, which is a bullish development we had not yet seen this week. The stochastic cross tells us that it was a strong move, while the slower MacD has yet to be convinced. 60 minute chart of the NQ3M While the ascending trendline on the The Wedge (it now deserves to be capitalized, given its amazing staying power) has yet to be broken on the daily chart (See the COMPX daily chart above), and the fact that today was very nearly an inside day. The bullish implications of the higher low (seen below on the 2 day 5 minute chart) cannot be ignored, and I've chosen to highlight the bullish ascending triangle formation on for this reason. As seen on the 60 minute NQ chart, the upper horizontal trendline has held back every advance this month. However, the pattern of higher lows is clear, and these triangles tend to break to the upside. The Wedge on the daily timeframe is bearish, but given the pattern of higher lows within it, and the incredible inability of the market to concerned itself with news, no matter how bad, it's entirely possible that we'll witness an upward break. 5 minute chart of the NQ The 5 minute candles on my intraday chart show a bullish tilt to today's trading, but the action at the close drilled the short term oscillators into overbought territory. Some minor downside at the open is therefore to be expected, but a successful break of the upper trendline either cannot be ruled out. 60 minute Chart of the ES Now that I've gotten this bullish bias out of my system, I can focus on the bearish interpretation. We see in the chart of the COMPX above (daily view) and in the 60 minute NQ, ES and YM contracts that the stochastics are becoming toppy across the daily, 60 minute and 5 minute timeframes. This can either signal a trending move (such as if the upper horizontal resistance line finally breaks), or a good setup for a short on a failure at upside resistance. The best short entries are set up when the oscillators across all timeframes are singing their overbought song simultaneously, and the relentless drift higher this afternoon combined with the morning's higher low set the stage for such an entry, * but only on a failure at resistance. * 5 minute chart of the ES Still wearing bearish goggles, we note the slight decline to the upper trendline on the above 2 day 5 minute chart of the ES. It's a small straw at which to grasp, but it's there nonetheless. As with the 5 minute NQ and YM charts, we see the slow stochastic (SST on the above chart) in overbought territory. 60 minute chart of the YM There 's little to add for the YM contract, and more than anything, this illustrates that it remains a scalper's market. As The Wedge and the shorter timeframe triangles grow ever closer to the apexes (apices?), it becomes increasingly risky to put on a longer term position unless you have a sufficient bullish or bearish bias to allow you to do so in confidence. I have never before seen so much frustration amongst bears, and even the bullish noises from the usual suspects are sounding a little tinny. Such is the nature of ascending wedges, particularly as they near their tops. 5 minute chart of the YM Linda did an excellent job last night illustrating the various breadth and sentiment measures that this rally has given us. The QQQ:QQV ratio above is one facet that also shows us what is either a significant top, or the beginning of a major trending move. On a scalp basis, the question is almost moot, as there's enough motion between the Bollinger bands to keep the account growing. On a swing or position basis, I think it's pretty clear where stop losses should go on new short plays. On existing swing and position long plays, the lower ascending trendline is also clear and should serve as a guide for trailing stops. I observed that the put to call ratio never spiked higher today, despite the virtually perfect repeat of yesterday's morning session this morning. Bears everywhere have become confused, frustrated, and insecure, while bulls are becoming trigger-happy. To my mind, this sets up excellent conditions for a serious test of the lower trendlines- significant declines don't happen from areas where everyone is feeling bearish. One item of concern throughout this rally has been the readiness of the put to call ratio to spike on the slightest suggestion of downside. Today, this failed to occur for the first time in weeks. For tomorrow, we can expect more of the same. The full slate of economic reports couldn't shake up the indices, and perhaps this was the effect of opex week "strike pinning" at work. Tomorrow's session will tell the tale. ******************** INDEX TRADER SUMMARY ******************** Weak enough to choke a horse. But feed a bull? Part of my weeklong vacation was spent in western Kansas, and while that may sound as if it's an obscure place to take a vacation, but there was some excitement to be had. Tornado warnings and high winds kept me indoors one afternoon, and when I got back from Kansan, I was wondering if I actually got caught up in never-never-land as today's economic news looked weak enough to choke a horse, but as has been the case in recent weeks, not weak enough to unsettle a bull's appetite for stocks as the major indexes all finished in positive territory. The closing values of the indexes looked to me as if I hadn't missed much, with the major exception being Treasury bond YIELDS, which have continued to fall with the weaker dollar. On the surface, there was little change in the equity indexes, but the market internals continue to strengthen as depicted by the bullish % readings, which have all moved higher. While I didn't see any other Turkey hunters (note the difference between hunters, not getters) on the western plains of Kansas, market volumes have tapered off notably in the past week as if other traders took the week off in a last chance effort to bag a tom turkey before season's close. While volumes have been tapering off from last week's levels, today's plethora of economic reports did have NYSE volume back above the 1.4 billion market a 1.43 billion shares. After two session of breakeven and fractionally negative breadth, advancers outnumbered decliners by a 5 to 3 margin. After Monday's 290 52- week highs, today's 254 new 52-week highs is the second highest total of new highs so far this year, and many months. Only 4 stocks hit new lows on the NYSE. NASDAQ volume came in at 1.95 billion in today's session and after two sessions of unchanged breadth (16:16 and 15:16) advancers outnumbered decliners by a wider 3 to 2 margin in today's trade. New highs/versus new lows were nearly identical to yesterday (205:8) at 200 to 10 by session's end. Weakness in European GDP quarterly data gave a boost to the dollar in today's session with the U.S. Dollar Index (dx00y) 95.31 +0.77% gaining 0.73 points and action here hints that some assets flowed back toward the U.S. on what looked to be thoughts that as weak as the economic data is in the U.S. there has at least been some modest quarterly GDP growth compared to European areas. Today's economic data, which raised concerns regarding "deflation" as prices at the producer level fell got a mixed reaction from bond traders. The shorter-dated June 5-year Treasury Futures contract (fv03m) 115'055 -0.16% fell 6/32 with YIELD ($FVX.X) 2.533% rising 4.3 basis points to 2.533%, while the longer-dated June 30-year Treasury futures contract (us03m) 118'13 did trade a new contract high at 119'05 before edging back into its close, but still finishing up a full point with YIELD ($TYX.X) 4.492% spiking to another multi-year low of 4.43% during today's session and closing out with a 4.492% YIELD. If you're in the market for a refinancing of a mortgage or looking to lock in a rate, now would be a good time to pick up the phone and call your mortgage broker. The benchmark 10-year YIELD ($TNX.X) finished unchanged at 3.537%. In all, today's action had a flattening effect on the YIELD curve, and helped keep stocks in the green for the bulk of today's session. I must admit, for a supply/demand trader, this past week's dollar/bond action has be scratching my head. I received several e-mails while I was out regarding just why the major indexes were not falling apart with such strong buying in the Treasuries and selling in the Dollar. The ONLY explanation from the supply/demand side that I can come up with is that with money market rates now at just over 1%, there has got to be some money coming in from shorter-term cash accounts that is looking to play the momentum that not only bears can't explain, but many longer- term bulls as well as some company's CEO's seem to be having trouble confirming with their own internal business trends. I spent yesterday afternoon trying to get my WEEKLY pivot analysis matrix updated and see just what type of levels had been traded, as well as the prior week's matrix. As noted in previous commentary, it has been several weeks since a WEEKLY S1 has been traded in the equity indexes and that holds true into today's close, with buyers lurking at the WEEKLY pivots (last week and this week). Pivot Analysis Matrix The day before I left on vacation, I profiled and added in my own account another partial position put in the QQQ and continue to hold 1/2 bearish position. I monitored the QQQ today's at its MONTHLY R1 of $28.59 and while the QQQ did trade a low of $28.56 (highlighted in pink) all be darned if you could get a 5-minute bar close below that level as each 5-minute closed on three separate intra-day tests didn't find enough buying to hold the QQQ above that level. As we will note later today, the WEEKLY pivot analysis retracement has a zone of support from $28.62- $28.65 from combination MONTHLY and WEEKLY pivot retracement. I'm also noting that the WEEKLY pivot of $28.36 was tested to the penny on yesterday at its session low. The intra-day chart of the QQQ shows the WEEKLY pivot and WEEKLY R1 definitely in play as support/resistance levels being traded. The S&P 100 Index (OEX.X) 477.68 +0.78% is the only equity index yet to trade its MONTHLY R1 and I perhaps can see a tie with the S&P Banks Index (BIX.X) 296.93 +0.59% not able to trade its MONTHLY R1. I can't say that I see this as being bearish at this point, but make some notes here. If the BIX.X can make the break above 299-300 (correlative resistance in WEEKLY R1 and MONTHLY R1) and tomorrow's DAILY R2, then that action should have a bullish impact on both the SPX and OEX. One thing I made note of last night while I was updating the WEEKLY pivot analysis matrix was the narrow range from S2-R2. I went back to when I first started "saving" these weekly pivots and the equity index ranges are very narrow. I do need to go back and see if this really means anything at this point and after I get done with tonight's wrap, I'm going to go back and put together some WEEKLY pivot levels. With the bullish % charts nearing more "overbought" historical levels, I want to see if there may be a tie with a "tight range" and the higher bullish%, as if computers are starting to "narrow down" some type of range before a reversal lower, which the higher levels of bullish % might be alerting us to some type of "risk management" trade where some type of profit selling would be expected and removal of risk being had in the major indexes. Again.... I need to go back, see if there was a tight range developed, and if so, what "level" (was it a WEEKLY S1 or S2 that was traded) to then perhaps signal a more meaningful pullback. NASDAQ-100 Tracking Stock (QQQ) - 10-minute intervals The NASDAQ-100 Bullish % ($BPNDX) is at 77% and unchanged after today's trade. This is the same level of bullish % as when I took off for vacation, yet the QQQ is up $0.31 from its May 6th close. The 10-minute interval chart allows us to look at the QQQ and see how the WEEKLY range is being "defined" by the WEEKLY pivot of $28.36 and WEEKLY R1 of $28.95. As "awful" as today's economic reports were, the QQQ wouldn't break its MONTHLY R1 (dashed pink). While I'm more "bearish" the QQQ based on the higher level of bullish % and risk runs high for bullish traders, the still forming pattern of higher lows and equal highs at WEEKLY R2 of $28.95 builds some pressure, that an upside break at $29.06 could have further unraveling to the upside with targets of $29.50 and MONTHLY R2 of $29.73. For traders holding a QQQ Sept. $27 or $28 put, I would not be opposed to holding those puts, but creating a bit of a near-term "hedge" and a bullish position in the underlying QQQ itself on a break above $29.06, with the idea of selling the underlying QQQ bullish position up near $29.50-$29.73. With the bullish % at 77%, my thinking is we're closer to a near-term "top" on the QQQ than we are a bottom, but the Q's are susceptible to good short- covering rallies and I think momentum bulls are playing the moves higher and will continue to do so until some type of loss is experienced. S&P 500 Index Chart (SPX.X) - 5-point box A pattern of 3-box reversals (3 O's) after a new relative high has been developing over the last month and after a 15-point pullback, demand (X) has outstripped supply. Just as the narrower and more volatile NASDAQ-100 Bullish $ ($BPNDX) has reached well above the 70% level, the same could be true for the S&P 500 Bullish % ($BPSPX), which today saw the bullish % grow to 67.6% and see a net gain of 1.2% (6 new PnF buy signals). I'd be more tempted to play the SPX bullish on a pullback to 930 as bullish, follow with a stop at 915, which would be a double- bottom sell signal, and with internals still strong and adding new buy signals, look for a new relative high. I would use the higher levels of bullish % to begin limiting new bullish positions to partial and not full positions. S&P 100 Index (OEX.X) Chart - 2.5-point box Today's action saw no net change in the S&P 100 Bullish % ($BPOEX) and this indicator for internal breadth on a PnF basis has been stuck at 65%, since Friday's close. We've noted in the past that the OEX has tended to trade back off of our "bullish resistance" trend (upward trending pink trend). It is somewhat "rare" to see the broader S&P 500 bullish % exceeding the narrower S&P 100 Bullish % ($BPOEX) and this is a sign of near- term caution, but also a point to look for the larger capped OEX to try and play some catch up. A pullback to 470 or 467.50 offers a bull a good risk/reward entry with a stop at 465 on the PnF chart, which would be a double-bottom sell signal, which is also just under this WEEK's S1, which we haven't seen a test of a WEEKLY S1 in several weeks. My thinking right now is if the NASDAQ Composite and NASDAQ-100 Index can trade their December highs, then if the MARKET truly is discounting the weak economic data as a lagging indicator on the "war with Iraq" still working itself off, then the OEX should have a shot at its December highs of 487.94. Dow Industrials (INDU) Chart - Daily Intervals While the Dow Industrials did trade its WEEKLY R2 on Monday, I should note that this WEEKLY R2 is just below the prior WEEK's R2 of 8,781.9, and I'm noting that the WEEKLY R2's have been moving up, then down, then up, then down in recent weeks. I point this out so that I don't get the "false impression" that the Dow is trading stronger within its WEEKLY pivot. Still, the Dow has been able to "eat through" many levels of resistance, including its 19.1% retracement from conventional retracement. In my last Index Trader's wrap before I went on vacation, I discussed the possibility that we might see some type of "rotational benefit" of bullishness toward the Dow Industrials. Well... the QQQ has tacked on an additional 1.27% gain since last Tuesday, but the Diamonds Trust (DIA) $87.32 hasn't done too bad with a 1.59% gain since last Tuesday. My thinking here, based on observation is that new money being put to work, may indeed be playing a bit of risk/reward and looking for some Dow catch up. While I was gone, the Dow Industrials Bullish % ($BPINDU) saw a net gain of 3 stocks to new point and figure buy signals to 66.66% and has been stuck at this level of bullish % for the past 5 sessions (including today). In late November, the Dow Bullish % ($BPINDU) rose to 72% before reversing lower, so here too, we're getting to a higher risk level for new bullish entries. There are less "2003 profits" to roll out of the Dow at this point, compared to the other indexes, and would still be my "preferred" index to trade bullish at this point on thoughts of an economic recovery. Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Chiming In - James Brown At this point bearish traders are probably labeling investor sentiment as delusional. The markets have continued to shrug off bad news and completely focus on any bits of good news it can uncover. Fortunately, today, there were plenty of positive headlines for bulls to latch on to. Last night and this morning there were a number of positive earnings reports that fueled heavy gains in the software sector. The weekly jobless claims, while still too high, were less than expected. The NY business sentiment number rebounded strongly from a -20 to a +10, much higher than the expected -8 reading. Wall Street completely overlooked the weak capacity utilization numbers in favor of positive comments from IBM's CEO that the IT industry appears to have "stabilized". Intel's CEO also chimed in with optimistic comments about the future. This had the GHA hardware index and the SOX index making gains. Even the brokerage sector contributed to the rally with Charles Schwab reporting stronger trading volumes in April and a good showing for May thus far. Market internals were positive with advancing stocks out performing declining stocks almost 18 to 10 on the NYSE and 18 to 12 on the NASDAQ. New 52-week highs crushed new lows 430 to 18. It seems like every time we look at this number the new lows keep getting smaller. Probably the most impressive was how up volume beat down volume 1,214M to 547M on the NYSE and 1,259M to 657M on the NASDAQ. The volatility indices continue to sink but investors don't care, which is exactly why they are falling. Low numbers in the VIX and VXN show a lack of fear and growing complacency. That's usually a recipe for a market top. Professional market watchers all seem to agree that short-term the markets are all overbought and need to pull back but the longer-term bullish camp is counting new recruits almost daily. I'd guess that tomorrow could be another positive Friday if you looked at how so many of the major sector indices closed but the crystal ball is a little muddy if we'll be able to maintain any gains into the close. There are too many stocks that have gone too far and we'd be loath to chase them so trade what you see and keep your stops tight. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10353 52-week Low : 7197 Current : 8713 Moving Averages: (Simple) 10-dma: 8613 50-dma: 8275 200-dma: 8326 S&P 500 ($SPX) 52-week High: 1107 52-week Low : 768 Current : 947 Moving Averages: (Simple) 10-dma: 935 50-dma: 885 200-dma: 883 Nasdaq-100 ($NDX) 52-week High: 1351 52-week Low : 795 Current : 1163 Moving Averages: (Simple) 10-dma: 1145 50-dma: 1071 200-dma: 1004 ----------------------------------------------------------------- Another day, another step lower in the VIX to that looming "20" level where market tops tend to occur. CBOE Market Volatility Index (VIX) = 21.67 -1.09 Nasdaq-100 Volatility Index (VXN) = 32.18 -0.96 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.64 818,442 522,586 Equity Only 0.52 569,227 293,715 OEX 1.04 41,208 43,032 QQQ 0.59 35,210 20,933 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 59.0 + 1 Bull Confirmed NASDAQ-100 77.0 - 2 Bull Confirmed Dow Indust. 66.7 + 0 Bull Confirmed S&P 500 67.6 + 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 0.76 10-Day Arms Index 0.99 21-Day Arms Index 1.05 55-Day Arms Index 1.25 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 1789 1808 Decliners 1064 1252 New Highs 220 215 New Lows 13 7 Up Volume 1215M 1263M Down Vol. 548M 659M Total Vol. 1784M 1951M 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 ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************* WEEKLY MANAGER MICROSCOPE ************************* Hitesh P. (John) Adhia: Adhia Twenty (ADTWX) This week we put Hitesh P. (John) Adhia and the Adhia Twenty Fund (ADTWX) under the manager microscope. John Adhia, a CPA, started his own investment management firm, Adhia Investment Advisors, in 1997 in order to provide investment advisory services for clients of his CPA practice. After a few years of managing individually structured portfolios, the Adhia Twenty Fund (ADTWX) was launched in 1999. The fund is meant for individuals who want to participate in the expertise of the firm, but don't have the minimum investment needed to build a privately managed portfolio. Adhia Twenty Fund utilizes the same investment philosophy and process that the firm uses in the daily management of separate accounts, but requires just $2,000 to open a regular account ($1,000 if you invest through an IRA). According to Morningstar's report, the tiny, $2 million Adhia 20 Fund isn't widely available through fund brokerage networks. It lists Accutrade as the only participating brokerage network. So, if you like this fund, you'll want to explore your fund purchase options with an Adhia Funds representative (their toll free # is 800-627-8172). You should be able to purchase the fund directly through the Adhia Funds if there are no other channels available. Manager Style/Strategy The primary investment objective of the Adhia Twenty Fund is to provide long-term capital appreciation through investment in 15 to 25 stocks. For defensive purposes, the fund may also invest in money market funds to defend capital in periods of declining equity prices. For example, John Adhia had just 60.7% of total assets invested in common stocks at December 31, 2002, with the remainder invested in the Fidelity Cash Reserves Fund. Stock holdings are chosen based on fundamental factors such as book value, price to earnings ratio, price to sales ratio, the cyclic nature of industry involved, management reputation, etc. In addition, John Adhia considers technical indicators such as stock momentum, changes in volume, comparison of current stock price to its 200-day moving average, etc. as secondary factors. Sell decisions are the result of continuous research, they say, with each holding monitored relative to the firm's expectations. A stock may be sold if its fundamentals change, its price nears/ exceeds its valuation limit, or the stock is replaced by another security of greater potential. According to the Adhia Funds website (www.adhiafunds.com), the Adhia Twenty Fund does not intend to purchase stocks for short- term trading purposes. The fund is non-diversified; meaning it may invest a greater percentage of total assets in John Adhia's favorite stocks. At year-end, the fund's top holdings included chemical/industrial giant Du Pont (10.2%), healthcare/drug firm Allergan Inc. (8.7%), and consumer product maker Kimberly Clark (7.2%). Because of its tiny asset base, expenses as a percentage of net assets are higher on the Adhia Twenty Fund than similar, larger funds. At 1.92%, the fund's expense ratio is considerably more than the Morningstar large-blend category average, putting John Adhia at a competitive disadvantage. Hopefully, with the Adhia Twenty Fund doing relatively well in 2003, net assets will grow and the fund's expense ratio will come down; but for now, it is something to keep in mind. Manager Performance In 1999, Adhia Twenty Fund's first full year of operation, John Adhia produced an annual return of 29.8% for investors, ranking the fund in the top 14% of the Morningstar large-blend category. Adhia's performance that year outperformed the S&P 500 index by 8.8% and the large-cap blend category average by 10.1%. In the year 2000, Adhia Twenty Fund lost just 2.1%, compared to annual losses of 9.1% and 5.1%, respectively, by the S&P 500 index and large-blend category average. In years 2001 and 2002, John Adhia continued to outperform both the market (S&P 500 index) and the large-blend category average, doing a good job of preserving capital. Although the fund lost 3.1% and 16.1%, respectively, it ranked in the top decile (10%) of the Morningstar large-cap blend category in both years. The S&P 500 index benchmark lost 11.9% in 2001 and tumbled 22.1% in 2002. This year, Adhia Twenty Fund is up 8.4% on a year-to-date basis through May 14, 2003, ranking in the category's 13th percentile, per Morningstar. Adhia's 8.4% YTD return is 0.6% more than the YTD return of the S&P 500 index benchmark. So, while this fund doesn't have five years of performance history, you can look at what Adhia has done this year and what he did in 1999, two time periods in which stocks advanced; and you can look at how Adhia fared in 2000, 2001 and 2002, three time periods in which stock prices fell. In each year since the fund's inception (1999, 2000, 2001, 2002 and 2003 YTD period), John Adhia has beaten the S&P 500 and the large-blend average. It comes as no surprise then to find that the Adhia Twenty Fund is a "Lipper Leader" for Total return and Preservation (see www.lipperleaders.com). According to Lipper, Adhia has excelled at building wealth and protecting principal over the trailing 3-year period. For the trailing 3-year period through May 14, 2003, the Adhia Twenty Fund generated a negative average annual return of 5.8%. However, that shaved about half off the annualized loss by the S&P 500 index during the period and was good enough to rank the fund in the top 9% of the Morningstar large-cap blend category. Unless the fund trails off significantly in the second half of 2003, it'll likely receive a 5-star rating for trailing 5-year performance. January 1, 2004 will mark the fund's anniversary, so check back then if you prefer to wait until you can compare trailing 5-year returns, rankings and ratings. Conclusion The Adhia Twenty Fund hasn't reached its 5-year anniversary yet, but is making a solid case for itself since it began operations on January 1, 1999. Portfolio manager John Adhia has shown that he can capture returns in rising markets (1999, YTD 2003) and in down markets (2000, 2001 and 2002) can reduce losses relative to category peers and the market as a whole. However, red flags include the fund's tiny assets of $2 million and its relatively high expense ratio, 1.92%. In the future it could be different - assuming fund assets grow - resulting in a lower annual expense ratio. Fund assets have already gone from below $1 million at year-end 2002 to about $2 million today, so there's room to be hopeful, especially if the fund becomes part of a popular no-load NTF network like Charles Schwab OneSource. For more information or to download a fund prospectus, visit the Adhia Funds website at www.adhiafunds.com. Steve Wagner Editor, Mutual Investor ************************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". 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The Option Investor Newsletter Thursday 05-15-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: ADTN Dropped Puts: KSS Daily Results Call Play Updates: AGMN, IBM, KLAC New Calls Plays: none Put Play Updates: AIG, GS, PG New Put Plays: MTG **************** 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: ***** ADTRAN, Inc. - ADTN - close: 43.43 change: -1.69 stop: 45.00 We certainly hope you heeded our advice to harvest gains on ADTN up near the $47 level earlier this week. After failing to follow through to the upside, the stock dropped back a bit more on Wednesday, ending just above our $45 stop. At that point, it could have gone either way and all things being equal, the stock would have likely gotten another bounce today. But all things weren't equal (they seldom are), as news broke that the company's Chairman and CEO had sold 4 million shares of company stock (about a third of his total holdings) and that news did not sit well with investors. They followed suit, driving the stock down as low as $42.50, before the stock rebounded from the ascending trendline to close just above the mid-point of its intraday range. Clearly our $45 stop was violated with the gap down to just above $44 and we've no choice to drop coverage of the play tonight. The moral of the story is, in a market like this, take profits when they are offered! Picked on April 29th at $40.70 Change since picked: +2.73 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 814 K PUTS: ***** Kohl's Corp. - KSS - close: 53.02 change: -0.66 stop: 55.25 This has got to be one of the most volatile successful plays we've featured in quite some time. Each selloff has been met by eager buyers and traders that entered on breakdown's under support really had to take some heat. But in the end, KSS solidly gave up the $54-55 support level and on more than one occasion, provided opportunities to harvest gains in the $51-52 area we originally targeted. But as we've been noting in the recent updates, this party is over. KSS announced earnings (in-line) tonight after the close and as advocated recently, all positions should have been closed before tonight's closing bell. Odds are KSS will find its way back onto the Put list in due time, but now it's time for a breather. Picked on April 27th at $55.02 Change since picked: -2.00 Earnings Date 05/15/03 (confirmed) Average Daily Volume = 4.06 mln *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS LAST Mon Tue Wed Thu Week ADTN 43.43 1.82 -1.08 -0.79 -1.69 DROP, insider selling AMGN 62.63 0.75 -0.49 -0.14 0.78 Looks good IBM 89.90 1.45 0.98 -0.30 1.20 Near 52-week highs KLAC 41.97 1.30 -0.88 -1.06 0.43 One more day MEDI 35.84 1.10 -0.13 0.13 0.89 Long-term, no update PUTS AIG 57.31 0.10 -0.73 0.31 0.85 Untriggered GM 34.88 0.72 -0.39 -0.34 -1.03 Broke $35.00 GS 76.10 0.49 -0.54 -0.05 1.15 Cautious KSS 53.02 2.80 -0.56 -0.81 -0.66 DROP, earnings PG 89.90 -0.37 -0.94 0.11 1.30 Untriggered ------------------------------------------------------------ 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 ******************** Amgen, Inc. - AMGN - close: 62.63 change: +0.78 stop: 59.25*new* Leading the NASDAQ in its relentless climb up the charts, the Biotechnology index (BTK.X) is moving higher by leaps and bounds, scaling the $402 resistance level on Thursday, for the first time in 11 months. As one of the largest components of the BTK, AMGN has been doing its share to help the index advance, although DNA's 4% gain on Thursday certainly didn't hurt. After the rebound from just above the $59 level last week, is persistently climbing higher, after consolidating near the $62 level. The only concern is that volume has been rather light, coming in at only about 60% of the ADV on Thursday despite nearly 2 billion shares changing hands at the NASDAQ. Concrete support seems to be building near the $61 level and an intraday pullback near that level would make for a decent entry point. We're still being cautious in advancing our stop, inching it up to $59.25 tonight, which is just below both the 50-dma ($59.50) and last Thursday's intraday low of $59.35. Picked on May 11th at $61.24 Change since picked: +1.39 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.3 mln --- Intl Business Mach - IBM - cls: 89.90 chg: +1.20 stop: 86.89*new* As Jon likes to say in the OptionInvestor.com MarketMonitor, this Teflon market just won't go down. That's just fine with tech stock bulls. Positive comments from IBM's management at an investor conference today lifted shares of IBM and the hardware sector. IBM's CEO offered some cautiously optimistic comments about the computer industry and shares inched closer to another potential breakout over the $90 level. The stock has been showing some decent relative strength and we're going to raise our stop to $86.89. At this point entries are best considered on a pull back to $87.00 or a breakout over $90.00. Picked on May 4th at $87.37 Change since picked: +2.53 Earnings Date 04/14/03 (confirmed) Average Daily Volume = 8.2 Million --- KLA-Tencor - KLAC - close: 41.97 change: +0.43 stop: 40.95 We're going to hold on to KLAC for one more day to see if it can rebound off the bottom of its short-term channel. The chip sector has been suffering from downgrades and a less than optimistic earnings call from AMAT on Tuesday. Despite this negative pressure the SOX looks ready to breakout above the 360 level and hit new five month highs. KLAC needs to get it in gear and it might if the SOX out performs again. While we are very cautious on the stock (KLAC) right here, it does offer a relatively low-risk entry given our suggested stop loss at $40.95. If we don't see some positive performance tomorrow we'll probably close this play. Picked on May 4th at $42.15 Change since picked: -0.18 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 11.4 Million ************** 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: 57.31 chg: +0.85 stop: $58.00 There's nothing like a little corporate spin to alter the course of a trade. Previously AIG had stated that the SARS outbreak in Asia would dampen sales as its salesmen would not be able to reach clients until the illness was brought under control. AIG earns about 30% of its revenues from the Asian region. The latest spin on the SARS impact on Asia came from Mr. Greenberg, AIG's CEO, who spoke to shareholders on Wednesday. Greenberg was quoted as saying "Longer term, the SARS scare will be the biggest boost to sales of life insurance and related products [in the Asian region] that I can think of..."(Reuters). Shares of AIG have been bouncing between $55.25 and $56.50 for five days before today's 1.5% gain. Shares still have very significant resistance at its 200-dma directly overhead and aggressive bears could enter positions here with a stop at $58.50 but we continue to wait for a move under $55.00. Let me reiterate OptionInvestor.com remains UNTRIGGERED until AIG can trade at or below $54.94. Picked on May Xth at $00.00 Change since picked: -0.00 Earnings Date 04/24/03 (confirmed) Average Daily Volume = 7.2 Million --- Goldman Sachs Grp. - GS - close: 76.10 change: +1.15 stop: 78.25 Regardless of what the fundamental picture is for the Brokerage sector (XBD.X), buyers have been active in this area of the market this week, especially on Thursday. The index vaulted through the $465 resistance level to post a 3.62% advance. This sector strength does not bode well for our bearish play on GS, which caught a mild bounce of its own today, moving back over the $76 level at the close. The rolling lower 20-dma ($76.19) seemed to provide some mild resistance, but the real test will come near the descending trendline from the April highs, which currently sits just above $77. The bears will need to defend this resistance level or this play will be toast. A rejection from that trendline looks like a solid entry point into the play, but keep in mind that a rally right through that trendline will likely have us dropping the play due to a more bullish looking chart. We're maintaining our stop at $78.25 Picked on May 8th at $74.06 Change since picked: +2.04 Earnings Date 06/19/03 (unconfirmed) Average Daily Volume = 4.23 mln --- Procter & Gamble - PG - close: 89.90 change: +1.30 stop: 90.00 Sometimes it is much more evident why we use triggers on some plays and why we don't. Shares of PG had fallen under the $88.00 level on Tuesday, which had been support, but they stopped short of breaking its simple 200-dma. We listed a trigger to open bearish positions at $87.45 just in case dip buyers bought PG at "support" of its 200-dma. Sure enough... PG opened higher on Wednesday, pulled back to the 200-dma again and then rebounded strongly. The rebound continued much more forcibly in Thursday's session and the stock closed just short of its $90.00 level. That's okay. We're a patient bunch. If PG wants to vacillate between $88 and $90 for a couple of more days we'll wait. However, if PG closes above the 91.00 mark we'll close this yet to be opened play. Meanwhile super aggressive bears could attempt to short PG here at $90 (to $91) with a tight stop but we wouldn't recommend it. OptionInvestor.com remains UNTRIGGERED. Picked on May Xth at $00.00 Change since picked: -0.00 Earnings Date 04/28/03 (confirmed) Average Daily Volume = 3.3 Million Chart: ************* NEW PUT PLAYS ************* MGIC Invest. Corp. - MTG - close: 45.21 change: -1.41 stop: 48.50 Company Description: MGIC Investment Corporation is a holding company that, through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), is a provider of private mortgage insurance coverage in the United States to the home mortgage lending industry. Private mortgage insurance covers residential first mortgage loans and expands home ownership opportunities by enabling people to purchase homes with less than 20% down payments. Private mortgage insurance also facilitates the sale of low down payment mortgage loans in the secondary mortgage market, principally to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Why we like it: With all the concerns that have been aired about a potential bubble in the Housing market or in the Mortgage market, investors have apparently scaled that wall of worry and propelled the Dow Jones Home Construction index ($DJUSHB) back to the dizzying heights near $400, also right at the site of the all time highs. Lenders don't seem to be having problems, as their stocks push higher as well. It is no great surprise either, with bond yields charging to their lowest levels in 45 years yesterday. But there is one possible wrinkle in this smooth sea of prosperity. Most mortgages are being initiated with less than the requisite 20% down, meaning that private mortgage insurance is required to protect the lenders. A major player in the field is MTG, and judging by the recent price action, something doesn't smell quite right. The stock has been persistently rejected from the $48.50 resistance level since last October and we just recently saw a double-top just below that level. Bearish Stochastics divergence started showing up on the daily chart in early May, and that early warning seems to have been confirmed today with the breakdown under the 20-dma ($46.06), which had been providing support since the middle of March. The stock did find intraday support today at $44.40, which just happens to coincide with the ascending trendline from the March lows. The real tell was the heavy volume that accompanied today's selloff, more than double the ADV. That seem to indicate the stock could be entering a distribution phase as investors begin to worry about the potential for rising mortgage default rates, with the economy still not showing the strength necessary to support the notion of a healthy recovery. Daily Stochastics are already bearish, MACD is just starting to tip over and MTG is right on the verge of breaking significant support. Momentum traders can wait for a break below the $44 level before entering the play, while more conservative traders will want to look for a failure after today's rebound from the lows. Should that rebound be weak (as we expect it will be) a rollover from the vicinity of $46 looks favorable, although a rejection from as high as $47 would still look attractive. The initial downside target will be $42, which is just below the 50-dma. Should the bears really get serious though, a trip back down to solid support at $40 could be in the cards. Our stop is initially set at $48.50. Suggested Options: Short-term traders will want to focus on the June 45 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the our $40 target will want to utilize the September 45 Put, which provides greater insulation from the spectre of time decay. Note that the open interest is largest on the June 45 strike, so that one will likely provide the best liquidity. BUY PUT JUN-50 MTG-RJ OI= 4 at $5.40 SL=3.50 BUY PUT JUN-45 MTG-RI OI=458 at $2.15 SL=1.00 BUY PUT SEP-45 MTG-UI OI= 80 at $3.90 SL=2.50 Annotated Chart of MTG: Chart: Picked on May 15th at $45.21 Change since picked: +0.00 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 1.02 mln ------------------------------------------------------------ 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 Thursday 05-15-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: IBM Traders Corner: Know When To Hold 'Em -- Know When To Fold 'Em ********************** PLAY OF THE DAY - CALL ********************** Intl Business Mach - IBM - cls: 89.90 chg: +1.20 stop: 86.89*new* -Company Description- Big Blue is being heralded as the world's largest technology company. Considering their massive hardware and software business across the globe it's not surprising. However, IBM's services and consulting business is growing by leaps and bounds and is a major source of revenues. - Most Recent Update (Thursday, May 15, 2003)- As Jon likes to say in the OptionInvestor.com MarketMonitor, this Teflon market just won't go down. That's just fine with tech stock bulls. Positive comments from IBM's management at an investor conference today lifted shares of IBM and the hardware sector. IBM's CEO offered some cautiously optimistic comments about the computer industry and shares inched closer to another potential breakout over the $90 level. The stock has been showing some decent relative strength and we're going to raise our stop to $86.89. At this point entries are best considered on a pull back to $87.00 or a breakout over $90.00. - Play of the Day Comments - We're listing IBM as the play of the day for Friday for two reasons. Should the stock pull back to the $88.00 or $87.00 level and bounce then traders could use the dip as an entry for new positions using a tight stop (as suggested). On the other hand, if IBM breaks out above $90.00, then a move over this very significant resistance could have shorts covering in droves and drive the price higher at an even faster clip. - Suggested Options - We listed mostly 90-strike options but that reflects our expectation of a breakout above the 89-90 level. It would not hurt to use the 85 strikes on dips or if you can afford them. BUY CALL JUN 85 IBM-FQ OI= 8238 at $6.00 SL=3.50 BUY CALL JUN 90 IBM-FR OI=14018 at $2.60 SL=1.50 BUY CALL JUL 90 IBM-GR OI=32927 at $3.90 SL=2.00 BUY CALL OCT 90 IBM-JR OI= 7876 at $6.30 SL=3.50 Annotated Chart of IBM Picked on May 4th at $87.37 Change since picked: +2.53 Earnings Date 04/14/03 (confirmed) Average Daily Volume = 8.2 Million ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** Know When To Hold 'Em -- Know When To Fold 'Em By Mike Parnos, Investing With Attitude The market tends to humble investors. That's why, at the CPTI, we're not investors – we're TRADERS. For the last three years, investors have taken on a different appearance. They have less hair, bottles of ulcer medication, thinner wallets and will have to serve fries well into retirement. What separates traders from investors? In the Navy they call it "Duck & Cover." In certain neighborhoods it's called "hit the road, Jack." In life it's called "filing for divorce." In poker it's called "knowing when to fold 'em." In the markets we call it "cutting your losses." This month, the market isn't cooperating. Are there steps to take? Baby steps? Giant steps? CPTI students are making moves. ____________________________________________________________ Hello Mike, I have been paper trading the CPTI trades every month and last month I decided I was ready to commit real money. I finally reached my breaking point this afternoon and closed out the three trades I had. All three trades (DJX, SMH, MSFT) were flirting with their break-even points early on. Because I'm such a novice, I spent less time on the couch and more time in front of my trading screen giving considerable thought about what to do. My rationale was that there was a lot of time value left on the options. I figured the time value would erode and since the market appeared to be overbought and should pull back I decided to stay in all three trades. Today, I closed out all three trades today and ended up with a $400 gain overall. While I'm not knocking any gain at any time, I'm sure you know I had hoped for better. So, here is my question: Do you get out of the trades when they cross over their break even points, or do you take other factors into consideration as well? Was my rationale for staying in the trades sound or should I have done something different? I gave much thought to hanging onto MSFT and SMH until the bitter end and my reason for closing them today was more emotional than anything else. I figured a bird in the hand (even though it was a very small bird) was better than one in the bush. I'd really like your input. As always, thanks for your help. Response: There's nothing wrong with taking your profits. Ideally, we want to trade without emotion. But, easier said than done. It's true that we're getting down to the short and curlies on these trades. The premium is eroding away. Hopefully, the market will continue on down. It doesn't have to go down too much for the DJX, MSFT and SMH trades to work out. The SPX has a decent chance of success too. If you look at a position you've entered, and you don't like where it is, you may want to make an adjustment. Remember, when we establish these ranges, we're accepting the fact that the underlying is going to bounce around and will hopefully adhere to the resistance and support levels. You can even take advantage of the trading swings by buying back far out of the money short options and freeing up margin dollars for other trades, etc. If you wouldn't enter a new trade in its current state, and you can get out even or at a profit, it might be worth exiting the trade. If you're at breakeven, your chances of profit are now 50- 50. At the CPTI we strive to create scenarios that have a better than even chance of profitability. You might be better off in another position with a better chance of success. There sure are a lot of decisions to make, aren't there? And there are no set answers to those questions. All we can do is to try to keep the odds in our favor as much as possible. Hopefully, we're going to win more than we lose and keep our losses to a minimum. But it's still a gamble and you should be comfortable with the strategy, know how (and when) to make adjustments, and know how (and when) to exit the trades. If you're not comfortable with the risk, and the possibility of losing the money that is at risk, you should not be trading. I'm glad you've been paper-trading. It's a great learning tool. Keep up the good work, the learning, and the paper-trading. Put your toe in the water and feel what it's like to trade real money. Even a small position will be a meaningful experience -- as you've discovered. ______________________________________________________________ Hi Mike Had success this month with both MMM and OEX again this month. I got a little nervous here at the end and bought back out of the positions to protect my profits. My IBM play was profitable with the short straddle, but too nerve wracking. I bought back out of it ahead of earnings for a small profit, probably not worth the effort. Just want to send some appreciation for your column. I have learned a ton from you! Response: Glad you did well -- glad you're learning and profiting from the knowledge. There's nothing wrong with locking in profits. If you're going to put on new positions, you might consider putting them on tomorrow (Friday). If you wait till Monday, premium will erode for two more days. Also, remember that June is a five-week option cycle. It's tough to find neutral trades now. The market is either going to bust through this resistance or tank. Might be time to look at straddles. Take care and keep in touch. _____________________________________________________________ May CPTI Portfolio Positions Position #1 -- SMH Baby Condor. Thursday's Close: $28.31 SMH is the Semiconductor Holder Trust. We feel that semiconductor stocks have moved up a little too far and too fast. We created a baby condor by selling the May SMH $25 puts and $27.50 calls. For protection, we bought the May $22.50 puts and $30 calls. The net credit is $1.05 Our maximum profit range is $25 to $27.50. We're only exposed for the 2 1/2 point difference between the strikes ($25/$22.50 or $27.50/$30) less what we've taken in ($1.05) = $1.45. Maximum potential profit is $1,050. SMH has been bouncing around within the range – but then, that's what it's supposed to do. Our safety range is $23.95 to $28.55. It's still within the range – barely. Tomorrow (Friday), at the open, you may be able to buy back the short call at $.95 and record a $100 profit – or you can roll the dice. Do you like life in the fast lane? ____________________________________________________________ Position #2 – SPX Iron Condor. Thursday's Close: 946.67 We believe the market may be a bit extended so we gave it a big sandbox to play in. We sold the SPX May 825 puts and the May 950 calls. Then we bought the SPX May 800 puts and May 975 calls for protection. The net credit was $2.95. Our exposure is a little more than usual – 25 points less the $2.95 we took in = $22.05. That's why we're only doing five contracts. Our maximum potential profit is $1,475. SPX traded up to 934+ earlier this week. In the last few days the market has come down, but Friday bounced up again. We have a 16.59-point cushion. Isn't this exciting? If you want, the spread can be closed now for about $2.35. That would be an acceptable dime loss. Only a week to go. Option trading is not for the meek. ______________________________________________________________ Position #3 – MSFT Minage-A-Qua – Thursday's Close: $25.79 Microsoft just came out with respectable earnings and unenthusiastic guidance. We believe that MSFT will finish at or around $25. We sold the May MSFT $25 puts and calls for a credit of $1.80. We bought the $27.50 calls and $22.50 puts for protection at a cost of $.45 – yielding a net credit of $1.35. Our maximum profit occurs if MSFT closes right at $25. Our profit range is from $23.65 to $26.35. Our risk is only $1.15 with the potential to make $1.35. Maximum potential profit is $1,350. We're right at our break-even point. When the market opens tomorrow, you can probably buy back the short call for $.85 and lock in about $500 profit – or let it ride! Do you feel lucky? _____________________________________________________________ Position #4 – DJX Minage-A-Qua – Thursday's Close: $87.13 The DJX tracks the DOW. The DOW is in an uptrend with resistance at $86 and support at $82. We sold 10 contracts of the May DJX $84 puts and bought the May DJX $80 puts. Then sold 10 contracts of the May DJX $84 calls and bought the May DJX $88 calls for a credit of $.80 for a total net credit of $2.25. We'll receive our maximum profit if the DOW closes right at 8400. However, we will be profitable if the DOW closes anywhere between 8175 to 8625. That's a 450-point range. The closer it finishes to 8400, the greater the profit. Maximum profit potential: $2,250. The DOW has made chopped liver of the $86 resistance. Oh well, we can't be right all the time. We're taking a little hit on this one. When the DOW dipped into negative territory for about 20 minutes today, I decided that, we'd hang on if it continued down, or we'd bail if it bounced back up. Guess what! We had to buy back the short DJX $84 call for $2.85. That means we took a $600 loss on this position. If we hadn't, we'd have taken an $880 loss as the European style DJX options expired today. ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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