The Option Investor Newsletter Thursday 05-22-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/v22g_1.asp In Section One: Wrap: One Over Par Futures Markets: Upside Break Index Trader Wrap: Oil and water Market Sentiment: Daydream Believer Weekly Manager Microscope: William Oates Jr.: Northeast Investors Growth Fund (NTHFX) Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 05-22-2003 High Low Volume Adv/Dcl DJIA 8594.02 + 77.60 8628.14 8509.22 1.79 bln 2128/1088 NASDAQ 1507.55 + 17.70 1512.80 1489.08 1.74 bln 2000/1255 S&P 100 469.38 + 4.18 471.27 464.88 Totals 4128/2343 S&P 500 931.87 + 8.45 935.30 922.54 W5000 8892.83 + 82.90 8921.00 8802.98 RUS 2000 415.09 + 4.36 415.29 410.46 DJ TRANS 2366.78 + 10.40 2372.02 2354.33 VIX 21.62 - 1.59 23.65 21.59 VXN 30.11 - 0.77 32.07 29.74 Total Volume 3,830B Total UpVol 2,925B Total DnVol 861M 52wk Highs 578 52wk Lows 42 TRIN 0.56 PUT/CALL 1.16 ************************************************************ One Over Par Traders spent the majority of the day more concerned with the golf score of Annika Sorenstam than the direction of the markets. Her score of 71 and one stroke over par was a strong performance by the first women to play in a PGA event in 58 years. However, I think the performance of the markets was much more impressive but I am a trader, not a golfer. The Dow came within six strokes of closing over 8600 once again and the Nasdaq rebounded back over 1500. Chart of the Dow Jones Industrials: Chart of the NASDAQ Composite: Combined chart of the SPX, RUT and the TMW. Thursday was a lackluster day in terms of market news. The only economic report was the Jobless Claims at 428,000 and the 14th week over 400K. The prior week was also revised upward by +4000 to 421,000. Commentators tried to spin the gains for the week as due to tornados wiping out some businesses in some Midwest towns. I am sure there were some job losses due to those storms but what about the other 13 weeks? The four-week average dipped slightly as did continuing claims due to the easing off the 450,000 weekly pace from April. Another factor impacting the growth of claims is the summer worker flight and vacations. Many workers in dull jobs and with kids home for the summer will quit for the summer and look for new employment in September. Other companies facing many workers leaving on vacation will slow terminations until after the season is over. Both of these factors should slow the pace of new claims but we are not really seeing it yet. 41% of the jobless are now running out of claims before finding work. This is the highest level on record. It is estimated that 1.4 million workers currently have no benefits and another 1.1 million will see their benefits expire in the next six months. Could be a tough summer. The biggest event in the market today was the passage of the economic recovery package and the Bush announcement he would sign it. Many traders thought this was already priced into the market but dividend paying stocks found lots of ready buyers as the day progressed. The dividend tax cut was definitely being taken into consideration as a reason to buy stocks. Altria was the big winner once again as the big win in court yesterday opened the gate for dividend investors to buy a high yield stock cheap. With the cloud clearing over the industry MO was on fire gaining +2.75 and running their gains to $8 over three days. That +25% bump has helped pull the Dow out of the dumps almost single handedly. The comments by Greenspan on Wednesday and Mark Olson today helped to fuel the idea that the economy was poised to rise sharply later this year and that another rate cut was likely. Homebuilders roared back to life with BZH +2.67 and HOV +2.78 just a couple of examples. With bond yields still dropping and the multiple comments about more Fed action ahead the prospect of even lower mortgage rates is pushing the builders once again. Technology shares rose on upbeat guidance from SNPS, which gained +8.02 on the news. SNPS beat the street by +10 cents and they said orders and revenue were strong on every count. They said Wi-Fi, automotive and consumer products were strong markets for their customers. They raised estimates +10% on very strong bookings of future orders. The company makes chip design software. Most techs rebounded from their slump with the notable exception of MSFT. The company has been floundering under rumors that one of its eight largest investors was shopping 74 million shares yesterday and today. MSFT is pegged on $24 while the rumors fly. MSFT traded 110 million shares on Wednesday and 93 million today. Average volume is 59 million. While most sectors were benefiting from the return of bullishness there were some exceptions. The increase in the terrorist threat level to orange has caused a substantial drop in vacation bookings. Hotels, airlines and cruises are seeing cancellations just when hopes were returning that the industry would see a post-Iraqi rebound. An analyst for PricewaterhouseCoopers did note that hotel occupancy rates for the Memorial day weekend would be above 2001 and 2002 levels but the post-war bounce is clocking in lower than expected. Shares of Marriott (MAR) were only up 15 cents on the session. At least a few market commentators are starting to fret that the market's bullishness is getting excessive. The bullish percent numbers for the major indices are quickly approaching or already well past overbought. With levels over 70 marking overbought status the Dow Industrials bullish percent is at 73, the NASDAQ 100 is at 78 and the OEX and SPX are at 67. Another more traditional indicator of overbought-oversold, the VIX lost another 6.8% today closing at 21.62. Normally, when the VIX trades near 20 it's a classic sell signal and a market top is not far behind. However, VIX reading is more art than science as the indicator can reach extremes south of 20 before a market reversal occurs. This is a clear and present warning to keep your stops tight. Keeping these indicators in mind it remains tough to ignore the impressive internals that underscore this market's strength. We continue to witness just how broad-based the rally really is with the Russell 2000 and the Wilshire 5000 bouncing higher in perfect step with the Industrials, the NASDAQ and the S&P 500. Today's closing numbers would indicate that traders are set to drive prices higher before Friday's close ahead of the long three-day weekend. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Upside Break Jonathan Levinson Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 DJIA 8696 8645 8577 8526 8458 COMPX 1527 1517 1503 1493 1479 ES03M 943 937 929 923 916 YM03M 8687 8633 8564 8510 8441 NQ03M 1155 1143 1128 1116 1101 As expected, yesterday's inside day gave us a big move today in the form of a flagpole rally, in which the markets shot up from the open and never looked back, running to the day's highs before entering an upwardly drifting range throughout the afternoon. The pullback came in the last 15 minutes of the session. Volume was average on the COMPX and NYSE, with 1.73B COMPX shares and 1.78B NYSE shares changing hands. QQQ:QQV chart Volatility collapsed today, with the VIX dropping 1.59 to 21.62, QQV –1.44 to 25.31 and VXN -.77 to 30.11. Today's action reversed the QQQ:QQV decline we had been watching in confirmation of the anticipated trend change starting with Monday's QQQ decline. 15 minute chart of the US Dollar Index The US Dollar Index had a good session for a change, posting a higher low and finishing above its session lows. Note the potential for a head and shoulders formation if the rise off today's lows reverses. The CRB took a 92 cent hit, driving that index below the 240 pivot we've been watching, and gold got sold as well, driving the June contract down 368.40 as of this writing, a –3.80 change. An astute reader remarked in the Market Monitor that the wedding season in India generally lasts 3 to 4 months, which was a reference to Bob Pisani's comment yesterday attributing the rise in gold prices to the Indian wedding season. I believe that the better correlation is between the US Dollar and the commodity, but disagreement is what makes a market. Daily QQQ candles For the third day this week, QQQ printed a star, closing near the middle of its spiky range. Today's range broke but could not hold above the secondary ascending trendline. Earlier this week, I discussed the possibility of a "return to the scene of the crime" rally, and this revisit to the trendline was just that. QQQ 30 minute candles Today's action actually set up a negative divergence on the stochastic and topped out the MacD oscillator. I've highlighted horizontal resistance lines, as well as the downsloping neckline of what could be a "hunchback" head and shoulders formation. A downside break of that neckline would imply an approximate $1.50 drop in QQQ, being the distance from the h&s head to its neckline. On to the futures: Daily candles NQ3M As on the QQQ daily candles, the NQ contract shows us the potential truncation of the stochastic downphase. Given the rollover on the shorter cycle stochastic (below), it's likely that the longer cycle downphase will continue without giving the bullish cross at which today's chart is hinting. 30 minute 20 day chart of the NQ3M We see the same sell signal on the stochastic, and the MacD is giving a bearish kiss, but has not yet crossed. The same hunchback head and shoulders is suggested, but it will take a downside move from here to complete the right shoulder- for the moment, the formation is only speculation. In any event, the horizontal s/r line at 1140 will act as resistance if it gets challenged. Note that 1136 is the neckline on the small head and shoulders top completed two weeks ago, and so the 4 point range between 1136 and 1140 should be formidable resistance tomorrow. Daily candles ES3M The ES cleared and held 925 resistance, and, like the NQ contract, spiked above the secondary trendline before reversing at the end of the day. The cycle setup suggested by the oscillators is the same as for the NQ, with the stochastic downphase pausing but the shorter cycle (below) implying a resumption of the trend. 20 day 30 minute chart of the ES3M The ES traded weaker than the NQ, as suggested by the bearish cross (admittedly early) on the MacD. The right shoulder of the head and shoulders hunchback may have peaked just after 3:30 in the afternoon, and I note that the entire rise off Tuesday's low appears to be a bear flag. If so, then the horizontal resistance line will be key tomorrow, and a breakdown will imply a downside break below this week's lows. Daily candles YM The YM is more troublesome, due to the relatively lower low posted in March, and its relative weakness compared with the ES and NQ contracts during the ensuing bearish ascending wedge. The break above the 8500 level today was significant, but also constitutes a "return to the scene of the crime" rally. The absence of heavier volume and the failure to break above the trendline looks bearish to me, but tomorrow could change that. 20 day 30 minute chart of the YM There's little to add on the short term YM chart. The prospect of a huge bullish push for tomorrow's session will be slim, in my opinion, because of the long holiday weekend and worries of possible terrorist activity. Volume is the #1 weapon of bulls, and without it, a strong advance through overhead resistance will be difficult. The high put to call ratios throughout today's session may have been bulls hedging instead of outright liquidating their long positions, but tomorrow will have to tell. We'll be following the action in tomorrow's intraday Market Monitor. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** Oil and water Weaker than forecasted jobless data looked to be just enough "bad news" to have the major indexes posting gains in what seems to be some recent duplication of "bad news" finding buyers after a pullback. Just ahead of the three-day weekend (markets are closed on Monday in observance of Labor Day) volumes were steady that the NYSE with just over 1.4 million shares changing hands. Advancers lead decliners by a 2 to 1 margin at the big board, and the number of new 52-week highs grew to yearly highs with 302 stocks making new highs compared to 15 stocks setting new lows. NASDAQ volume was the highest this week and matched Friday's 1.74 billion shares with advancers outnumber decliner by a 19 to 12 margin. New 52-week highs for the NASDAQ rebounded to 143 after holding at an equal 84 the past two sessions, while 13 stocks traded new lows. I think some of today's volume advance in the NASDAQ may certainly have been due to a pickup in short covering, especially by some traders looking to get flat, perhaps looking to take tomorrow off and get a head start on the extended weekend. I would be a bit surprised if we were to see volume levels on either exchange much above the 1.1 billion mark tomorrow. Here's a quick look at some of the volume, advance/decline and new high/new low data for May. Traders have asked to see this data in tabular form, so that some references to potential trends can be made. I've also fielded several e-mail questions from subscribers regarding a point and figure charting technique for charting an indicator often referenced by Dorsey/Wright and Associates regarding the new high/new low indications for both the broad NYSE and NASDAQ composites. Market Internals - Since May 1 In last night's market monitor, I tried to quickly discuss how the new high/new low chart. I've talked before about how the markets tend to move like an "inchworm" or "snake." If he "head" is leading (52-week highs) compared to the tail (52-week lows) then it is thought that the market has leadership and stands a higher probability of advancing. As noted the past couple of sessions, we did see a rather marked drop-off in new 52-week highs in the NASDAQ. In this weekends "Ask the Analyst" column, I'm going to go into further detail on how traders can monitor internals using the point and figure charting system and perhaps better track how the market internals are moving. After a strong move up from the bottom and what appears to have been a "rest" for the indexes earlier in the week, what we will want to monitor for right now in the new high/new low category is leadership. What a BEAR wants to see is a growing number of new lows and a lesser number of new highs to show that bulls are becoming less aggressive. Conversely, BULLS want to see what has been taking place since March. A growing number of new highs vs. new lows. To measure this, we'll build a ratio, then chart that ratio based on a 10- day moving average. I've added my own "twist" to things, and added a 5-day moving average of this ratio. Here's a quick look at this type of market internal analysis. NYSE and NASDAQ new high/new low rations - 5 & 10-day MA's Traders will associate moving averages with momentum. We'll hear floor traders and market analysts discussing "healthy" or "unhealthy" internals as it relates to the number of 52-week highs and 52-week lows. On a day-to-day basis it can be difficult to interpret and should be followed over time. One way to do it is to build a ration where we simply take the number of new highs and divide that number by the total of new highs and new lows. Again.. I'll go into greater detail in this weekend's column, but one thing that has gotten some subscriber attention in recent weeks is the higher "ratios." Similar to the bullish %, the highest the ratio can go is 100% and not unlike the bullish %, and perhaps the VIX.X can be used as a contrarion indicator. I've marked in pink, the dates where the 5-day average would have crossed below the 10-day average. If anything, we would only interpret this type of "cross-over" as a near-term slowing in the pace of momentum. The 10-day average itself for both the NYSE and NASDAQ look to remain constant and still show impressive leadership. Now, this type of technique may help some of us better understand the daily new high/new low readings and bring together the day- to-day data. My interpretation would only be this. Bullish leadership continues to be present in the markets (buyers willing to pay the price for a 52-week high), but a slight waning in momentum is observed. Sector action was broadly positive today, with the Gold/Silver Index (XAU.X) 73.83 -2.31% the only sector to fall more than 1%. Financials lagged the gains found in the major indexes with the S&P Banks Index (BIX.X) 292.79 +0.06% finishing just above unchanged, with the KBW Bank Index (BKX.X) 798.49 -0.04% and Securities Broker/Dealer Index (XBD.X) 461 -0.17% trading fractionally lower. Insurance stocks as depicted by the S&P Insurance Index (IUX.X) 257.49 +0.44% were the better-performers of the financials, but still lagged the 0.9% gains of the S&P 100 and S&P 500. Perhaps I'm looking for reasons to be cautious, but I would have looked for better performance from the financials in today's more bullish session. The Dow Jones US Home Construction Index (DJUSHB) 400.95 +4.57% traded and closed at an all-time high today as lower interest rates spurred by continued buying in Treasuries fall to multi- decade lows. The Biotechnology Index (BTK.X) 422.27 +4.12% added the bullish spice necessary for the NASDAQ-100 Index (NDX.X) 1,131.45 +1.59% and NASDAQ-100 Tracking Stock (AMEX:QQQ) $28.09 +1.44% Dow Industrials Chart - 50-point box Today's trade at 8,600 had me profiling a "bear credit spread" in the Dow Diamonds (AMEX:DIA) $86.04 +0.98%. It's my thought that by June or July expiration, the Dow will close below the 8,600 level due to the higher levels of bullish% and thinking that the market will eventually have some bullish risk being removed. The buying of a June $87 call "hedges" the selling of the $86 call above $87, for 8,700 on the above chart. Dow bulls still holding bullish positions can raise bullish stops to the 8,400 level as today's 3-box reversal up builds a higher low. I had a question as it relates to a potential "triangle" forming in the Dow's chart. While we can perhaps see a triangle type of formation, it takes 5 columns of alternating X's and O's to truly form a "triangle" that a point and figure chartist would then look to trigger either the "bullish" or "bearish" triangle pattern. Since it would be impossible for the Dow PnF chart to set a pattern of lower highs and higher lows and manage to build 5 columns in the process, we aren't really looking for the triangle pattern in the Dow Industrials. The basic premise behind a bear credit spread is to generate "income" for the account, where the traders looks to sell some premium at higher bullish risk levels. This is the market condition I think we're in right now. Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Status remains "bull confirmed" at 73.33% bullish (22 of the 30 stocks currently show a PnF chart buy signal on their chart.) Here is the option montage of the Dow Diamonds. The DIA was trading $85.90 bid at time of screen capture. Dow Diamonds Options Montage - I profiled a conventional "bear credit spread" for June. Another option would have been to establish a calendar spread where a trader might look to sell the July $86 calls ($2.40 credit), but then buy the June $87 calls ($1.30). This strategy would generate a credit of $1.10, but have the trader thinking he/she might want near-term protection under a more bullish market environment, but still looking for the Dow to trade below the $86 level by July expiration. At JUNE expiration, should the Dow be trading above the $86-$87 level, then the entire trade would most likely be closed as June $87 call protection would be lost. S&P 500 Index Chart - Daily Interval Short-term bulls got the rebound they were looking for, despite a weaker than forecasted weekly jobless report. I'm going to STRONGLY suggest that traders raise stops in yesterday's short- term bullish trade to break even and stick with the PLAN of taking profits should the 940 level be traded tomorrow. I do think a bearish trader looking a MINIMUM 3-months expiration out can establish 1/4 bearish position in the SPX, using Tuesday's double-bottom sell signal as reason to be somewhat bearish. I'm profiling only partial positions bearish as I haven't seen much of a slip in the bullish %. Today's trade saw a net gain of 0.2% in the S&P 500 Bullish % ($BPSPX), so a net gain of 1 stock to a new buy signal was seen. This has the bullish % edging up to 67.8%. It was on Friday, May 16th that this indicator reached it highest reading of the current bull cycle at 68.6%, so we can see that right now, there has NOT been any meaningful damage done. The 8.4-point gain in the SPX after a break above an "inside day" still hints to me there are quite a few jittery BEARS that are willing to cover positions on the slightest bit of renewed bullishness. This is what I think SHORT-TERM bulls can try and take advantage of, but with a shorter-term bullish view only. S&P 100 Index Chart - 5-point box Both the SPX and OEX look almost identical. I wanted to show the OEX PnF chart on its conventional 5-point box scale (we usually look at the 2.5 point box). What I think this does is give a slightly "different" look to things and keeps a trader "honest." It would also show that an OEX decline back to 450 (while a significant decline from 475) might be an area where the pattern of higher lows continues to hold. If you're trading the SPX (bullish or bearish) you might get a 50/50 type of feel about things. At least I do, and why I don't think traders can be overly bullish or bearish in their trade management right now. Today's action saw no net change in the narrower S&P 100 Bullish % ($BPOEX) and status remains "bull confirmed" at 67%, which is still the high reading for this bullish cycle. No sign of internal weakness and should keep a bear on their toes/claws! NASDAQ-100 Index Chart - Daily Interval Today's high in the NDX of 1,137.68 was right at the WEEKLY S1 of 1,137. As a bear in the QQQ, I would want to see the NDX/QQQ trade back lower tomorrow, then take out the recent lows for a series of lower lows and now higher highs. Bears are going to be much more jittery with the QQQ/NDX on a move much above today's highs after the strong rebound today. Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and status remains "bull confirmed" at 78%. This is just off the current bullish high reading of 79% and still shows internals holding together, though at a very high level of bullish risk. Jeff Bailey ------------------------------------------------------------ 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 **************** Daydream Believer - James Brown "Oh, what can it mean. To a daydream believer And a homecoming queen." The bulls in this market have got to be daydreaming. Investors continue to buy the dips and nearly every major market index is in rally mode. Bullish percent at overbought levels. Who cares? The VIX and VXN near 20 or at all time lows? Doesn't matter. Gold bullion rallies more than 15% from its April lows? Let's buy stocks! Obviously I'm being facetious. This is a nice change from the last three years of a bear market but the more this market climbs the sharper and more painful the correction is going to be. Am I suggesting everyone go short? Hardly. Trade what you see but keep close tabs on your stops and don't let any one trade become too big a slice of your trading capital. The drop in mortgage rates to all-time lows and reinforcements that the Fed is on guard and will do anything and everything they can to keep the economy moving forward is giving investors renewed faith in the future. Another refinancing boom appears to be underway and the congressional tax-cut package is close to being signed into law. The only thing missing from this recipe for success are growing corporate profits and we already know that over half the S&P 500 has warned for the second quarter and summers are traditionally slow making third quarter reports even worse. Yes, I think Wall Street has lost itself in a daydream. They're fun while they last but sooner or later you have to wake up. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10353 52-week Low : 7197 Current : 8594 Moving Averages: (Simple) 10-dma: 8615 50-dma: 8370 200-dma: 8330 S&P 500 ($SPX) 52-week High: 1107 52-week Low : 768 Current : 932 Moving Averages: (Simple) 10-dma: 935 50-dma: 896 200-dma: 884 Nasdaq-100 ($NDX) 52-week High: 1351 52-week Low : 795 Current : 1131 Moving Averages: (Simple) 10-dma: 1140 50-dma: 1086 200-dma: 1009 ----------------------------------------------------------------- The VIX is still falling closer to the "20" level while the VXN is making new all-time lows. Definitely not any investor fear in the markets right now. CBOE Market Volatility Index (VIX) = 21.62 -1.59 Nasdaq-100 Volatility Index (VXN) = 30.11 -0.77 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.16 446,103 517,904 Equity Only 0.89 378,387 336,451 OEX 1.35 14,694 19,890 QQQ 2.78 21,985 61,045 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 60.4 + 1 Bull Confirmed NASDAQ-100 78.0 - 1 Bull Confirmed Dow Indust. 73.3 + 3 Bull Confirmed S&P 500 67.8 + 0 Bull Confirmed S&P 100 67.0 + 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.41 10-Day Arms Index 1.09 21-Day Arms Index 1.15 55-Day Arms Index 1.23 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 1875 1877 Decliners 983 1181 New Highs 232 112 New Lows 22 6 Up Volume 1378M 1322M Down Vol. 380M 400M Total Vol. 1776M 1743M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 05/13/03 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 Just as the major averages barely moved on the week, we're seeing the same hesitation in the futures positions. No one is shifting any money around as they wait for the next move. Commercials Long Short Net % Of OI 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% 05/16/03 429,028 419,553 9,475 1.1% 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 04/22/03 147,068 140,153 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% 05/16/03 151,883 148,479 3,404 1.1% 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 Again, this is a repeat of what we're seeing with the S&P 500 futures. There is little change in the overall net long or net short positions for either the commercials or the small trader. Commercials Long Short Net % Of OI 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%) 05/16/03 178,679 452,727 (274,048) (43.4%) 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 04/22/03 395,596 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% 05/16/03 421,540 57,483 364,057 75.9% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 409,657 - 04/29/03 NASDAQ-100 Hmmmm.. now we're seeing some movement here. Commercials have lightened up on their bullish positions while small traders have lightened up on their shorts. Is this forecasting a potential trend change in the NDX? Commercials Long Short Net % of OI 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% 05/16/03 43,539 39,046 4,493 5.4% 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 04/22/03 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%) 05/16/03 11,706 16,104 ( 4,398) (33.0%) 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 We're not seeing a lot of change here either. Yes, the commercials added to both long and short positions and the small trader beefed up their shorts but there is nothing to suggest a change in sentiment. Commercials Long Short Net % of OI 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% 05/16/03 18,265 14,396 3,869 11.8% 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 04/22/03 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%) 05/16/03 7,873 9,058 (1,185) ( 6.9%) 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 MANAGER MICROSCOPE ************************* William Oates Jr.: Northeast Investors Growth Fund (NTHFX) William Oates Jr., president of Northeast Management & Research Company Inc., has been primarily responsible for the day-to-day management of the Northeast Investors Growth Fund (NTHFX) since its inception on October 27, 1980. He is also a trustee of the Northeast Investors Growth Fund. Assisting Oates in his duties is Gordon C. Barrett, the fund's chief financial officer. Oates' bio reads that he is also president of the Groton School Board of Trustees and is a trustee and treasurer of The Roxbury Latin School. He is a member of The Harvard Club, The Somerset Club and The Country Club in Massachusetts. Oates holds a B.A. Degree from Colby College and earned his M.B.A. Degree from the Harvard Graduate School of Business Administration. As lead portfolio manager, Oates is responsible for choosing the fund's investments and handling its general business. For these services, Northeast Management and Research charges a management fee. For the fiscal year ended December 31, 2002, the Northeast Investors Growth Fund paid a management fee of 0.57% (of average net assets). That is quite reasonable, but add another 0.74% of other expenses and you get a total expense ratio of 1.31%. That includes 0.21% of interest expense relating to the fund's use of leverage (more on that subject later). The Northeast Investors Growth Fund has no sales charges (loads), redemption fees or exchange fees, and may be purchased for a low minimum initial investment of $1,000 ($500 for IRA's). The fund may be purchased directly from Northeast Investors Group (1-800- 225-6704) or through one of the leading retail fund supermarkets, including Schwab, TD Waterhouse and Fidelity Retail FundsNetwork. For complete fund information or to download a prospectus, go to the www.northeastinvestors.com website. Investment Style/Strategy The Northeast Investors Growth Fund seeks to generate long-term growth of both capital and "future" income for its shareholders. In terms of strategy, Oates follows a flexible investment policy that focuses primarily on the common stock of larger, well-known U.S. companies, but permits him to also invest in foreign stocks (ADR's), fixed income securities and money market instruments as conditions warrant. According to the fund's info sheet, common stocks as a percentage of net assets was 112.4% at April 30, 2003 (meaning leverage as a percentage of assets was 12.4%). Note that investments made with borrowed money can cause net asset value to increase faster in a rising market, but it can also cause net asset value to decrease faster in a falling market. As we've already seen, leverage has a cost. In the case of this fund, interest expense was 0.21% of net assets last year. Without interest expense, the fund's total expense ratio for fiscal 2002 would have been near 1.10%. As of April 30, there were 53 holdings in the Northeast Investors Growth portfolio. Financial services, pharmaceuticals, banks and integrated oil companies comprised the fund's four largest market sectors. More than 50% of the fund's assets at month-end were in these four sectors. The fund's five largest holdings at April 30 were GE (4.1), Microsoft (3.8%), State Street Corp, (3.8%), Exxon Mobil (3.8%), and Citigroup (3.6%). In security selection, Oates targets larger-size companies, which have histories of consistent earnings and long-term appreciation. He favors companies that are well-known, well-established leaders in their relative industries, and continue to offer potential for accelerated earnings and long-term revenue growth. That means he invests primarily in "growth" stocks. However, Oates doesn't pay up for that growth, preferring to buy growth stocks when they are more reasonably priced. Accordingly, the fund lands in the large blend category per Morningstar and in the large core category per Lipper. Currently, the fund's style has drifted into the large-cap growth style box. That could be the result of the fund's winners rising in relative price and/or the addition of more pro-growth holdings in the current portfolio. Accordingly, Oates' blend/growth style can generate more risk than the average large-cap blend fund. In relation to his large-cap blend peers, Oates has indeed generated above average to high risk, for a Morningstar "high" risk rating. In the next section, we see how well Oates has performed compared to the average large-cap blend fund and large-cap growth fund per Morningstar. Investment Performance While this fund's average investment style over the past 3 years suggests a large-cap blend portfolio, this fund is pro-growth in its long-term style and performance history. For example, Oates' annual total returns in years 1996, 1997, 1998 and 1999 ranked in the first quintile of large-blend category. Tech stocks and pro- growth style funds were in favor those years. But when tech and growth fell out of favor, in 2000 and 2001, Oates' annual losses were much greater than the average large-cap blend fund, ranking in the category's bottom decile. Above is a 3-year chart for the Northeast Investors Growth Fund (NTHFX). Oates' trailing 3-year annualized loss through May 21 of 15.4% exceeded the S&P 500 index's annualized loss by 3.5% a year, ranking in the bottom quintile of the large-blend category per Morningstar. Though the fund has clearly been volatile over the past 3 years, Oates still possesses a strong long-term performance record that deserves consideration if you can accept significant share price fluctuations in pursuit of higher long-term appreciation. Oates' 10-year annualized total returns are rated as "above average" by Morningstar in relation to other large-blend funds. The fund is also a Lipper Leader for total return and consistent return over the trailing 10-year period relative to similar funds. Below are trailing 10-year average annual returns as of April 30, 2003 versus various index and fund benchmarks. 10-Year Annualized Return (Versus Blend Benchmarks): +9.3% Northeast Investors Growth (NTHFX) +9.6% Vanguard 500 Index Fund (VFINX) +8.1% Morningstar Large-Cap Blend Fund Average 10-Year Annualized Return (Versus Growth Benchmarks): +9.3% Northeast Investors Growth (NTHFX) +9.9% Vanguard Growth Index Fund (VIGRX) +7.1% Morningstar Large-Cap Growth Fund Average You can see that Oates' trailing 10-year numbers have kept close to the S&P 500 and S&P 500/BARRA Growth indices, while outpacing both the average large-blend fund and average large-growth fund. Over the past 15 years, Oates has generated an annualized return of 11% for long-term shareholders. It's hard to stay the course when the fund takes a dive like it did in 2000-2002 but over the long term, Oates has delivered strong, consistent returns versus similar funds. Like many of Janus' growth-oriented funds, Oates' style is better suited to risk-hearty investors. Conclusion If you're looking for a U.S. equity portfolio that contains blue- chip names, such as Wal-Mart and Microsoft, then you may wish to take a look at the Northeast Investors Growth Fund, managed since 1980 by William Oates, Jr. His aggressive blue-chip portfolio is more risky than the typical large-cap blend fund, and is probably better thought of as a large-cap growth fund. Oates' use of leverage increases annual operating expenses of the fund, but it gives the fund more upside potential assuming we are in an uptrend. If you decide to pursue this fund further, please make sure you read the prospectus carefully and understand/accept the risks and costs associated with leverage. To download a fund prospectus, go to www.northeastinvestors.com. 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. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Thursday 05-22-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/v22g_2.asp In Section Two: Dropped Calls: None Dropped Puts: RYL Daily Results Call Play Updates: AMGN, DISH, OHP New Calls Plays: QLGC Put Play Updates: AIG, GS, JCI, LLL, MTG New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** Ryland Group Inc - RYL - close: 58.60 change: +3.55 stop: 59.01 The entire homebuilding sector produced a huge rally on news that mortgage rates dropped again to all-time lows and that the congressional tax-cut bill was close to being signed. Many analysts now believe that the final make up of the tax cut bill will be very beneficial to homeowners and thus home builders. Plus, there's speculation that home construction stocks might up their dividends with the dividend tax cut as part of the congressional package. This was terrible news for our bearish play and we're going to call it quits before the pain gets any worse. Picked on May 19th at $54.85 Change since picked: +3.75 Earnings Date 04/23/03 (confirmed) Average Daily Volume = 633 thousand Chart link: *********************************************************** DAILY RESULTS *********************************************************** Please view this in COURIER 10 font for alignment ************************************************* CALLS LAST Mon Tue Wed Thu AMGN 61.87 -2.04 0.76 0.53 1.17 Bounce From Support DISH 32.24 -0.65 -0.03 0.51 1.14 Good start MEDI 34.23 -0.48 0.42 -0.93 1.45 long-term, no update OHP 36.70 -0.66 1.32 0.15 0.15 Out of spotlight QLGC 45.13 -1.52 -0.30 0.41 0.26 New, entry point PUTS AIG 55.80 -2.09 -0.44 0.43 0.37 Patience & Caution GM 33.61 -0.80 -0.28 0.20 0.07 long-term, no update GS 76.03 -2.35 0.10 0.70 0.93 Danger zone JCI 81.13 -0.96 -0.13 -0.37 0.80 Wait for Failure LLL 42.55 -0.69 -1.29 0.05 0.66 Could bounce MTG 45.05 -1.01 -0.12 0.41 -0.01 No participation RYL 58.60 -1.00 0.21 -0.02 3.55 DROP, builders rally ------------------------------------------------------------ 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: 61.87 change: +1.17 stop: 59.75*new* Proving that dip buying is still in vogue, the buyers stepped into the breach yesterday, holding the line at the 50-dma (currently $60.09) and keeping AMGN's uptrend intact. With a positive market and a solid 4% advance in the Biotechnology index (BTK.X) today, the stock rebounded smartly, but lagged the overall sector with only a 1.9% gain. The bulls fell short of testing the descending trendline connecting the recent highs (currently $63.00), so we aren't out of the woods just yet. As we've noted before, buying the dips is the way to go with AMGN, not chasing the breakouts. Traders that followed that advice earlier this week appear to have gotten a solid entry into the play, and the next test will be to see whether the stock can confirm the recent bounce with a close over that critical $63 level. With both Stochastics and MACD starting to hinge upwards again, early indications are that AMGN ought to be able to get the job done. Raise stops to $59.75, keeping them just below both the long-term ascending trendline and the 50-dma. Picked on May 11th at $61.24 Change since picked: +0.63 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.6 mln --- EchoStar Communications - DISH - cls: 32.24 chg: +1.14 stop: 29.99 Thursday turned out to be a nice start to our fresh new call play on OI. The stock followed through on Wednesday's bounce at support of $30.00 and its rising 50-dma. A positive market environment didn't hurt. DISH also had some good news as the company came to a voluntary agreement with 13 states regarding customer processing, advertising disclosures and the like. As is typical when dealing with state investigators DISH had the privilege of paying a $5 million settlement for its voluntary compliance but this probably kept them out of a long and expensive court battle. Sounds like a good reason to celebrate. We continue to like the stock at current levels but dips to $31.00 wouldn't be a bad spot to consider new positions either. Picked on May 21st at $31.10 Change since picked: +1.14 Earnings Date 05/06/03 (confirmed) Average Daily Volume = 3.3 million Chart link: --- Oxford Health - OHP - close: 36.70 change: +0.15 stop: 34.00 Stocks like OHP tend to be classified as "safer" stocks so when technology stocks hog the spotlight, stocks like OHP tend to under perform. This happened today as OHP and its sector mates all trade relatively sideways while technology issues charged ahead. The $170 million settlement between Aetna (AET) and doctor's suing the HMO was big news today and we may see additional settlements in the future. Dips to $35.00 for OHP still appear to be the best entry points for new plays. No change in our stop loss. Picked on May 20th at $36.51 Change since picked: +0.20 Earnings Date 05/05/03 (confirmed) Average Daily Volume = 857 thousand Chart link: ************** NEW CALL PLAYS ************** QLogic Corp. - QLGC - close: 45.13 change: +0.26 stop: 43.00 Company Description: Somebody has to make the equipment that lets your computer talk to all its peripheral equipment, and QLGC does it well. A leading designer and supplier of semiconductor and board-level input/output (I/O) management products, QLGC has been providing SCSI-based connectivity solutions to this market sector for over 12 years. QLGC's I/O products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, removable disk drives and RAID (redundant array of independent disks) subsystems. The company is also the market share leader in Fibre Channel host bus adapters, a market segment that is receiving tremendous attention from investors. Why we like it: In a bold display of bullishness, the dip buyers have been in force lately and there are some encouraging chart patterns being built. After surging through its December highs near $45 in early May, QLGC found resistance near $48 and succumbed to profit taking with the rest of the market. But this time things appear to be different. Instead of breaking any meaningful support levels, the latest drop seems to have just been some mild profit taking, and the bulls are back to their old tricks. After falling back near the $44 support level on Monday, QLGC spent a couple days confirming that old resistance was newfound support. The bears took one more shot at the downside yesterday at the open, but after that dip near the $43.50 level, it was a steady upward climb. There are still some overhead congestion areas that need to be cleared, but with daily Stochastics just turning up from oversold and MACD trying to turn bullish from above the zero line, QLGC looks like a good candidate for a solid bullish trade. The first obstacle will be for an advance through the 10-dma at $45.93, and then we'll be targeting a near term move to the $47- 48 level that provided resistance earlier in the month. If QLGC really gets moving, then a trade at $50 looks like a good point to harvest some gains and count this one as a success. The ideal entry at this point would be on a mild pullback into the $4.00- 44.50 area and then a rebound. Traders looking for bullish confirmation first will want to see price move above $46 on increasing volume before playing. Initially, we're placing our stop at $43, which is below yesterday's intraday low and the top of the April 30th gap up. If the stock closes below that level, it will be clear that the apparent new support at $44 has failed. Suggested Options: Shorter Term: The June 45 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Traders looking to capitalize on a rally back to the May highs and above will want to look to the July 47 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. BUY CALL JUN-42 QLC-FV OI=1009 at $3.70 SL=2.00 BUY CALL JUN-45 QLC-FI OI=6607 at $2.05 SL=1.00 BUY CALL JUL-45 QLC-GI OI=3848 at $3.30 SL=1.75 BUY CALL JUL-47 QLC-GW OI=2900 at $2.15 SL=1.00 Annotated Chart of QLGC: Picked on May 22nd at $45.13 Change since picked: +0.00 Earnings Date 07/29/03 (unconfirmed) Average Daily Volume = 6.78 mln ------------------------------------------------------------ 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: 55.80 chg: +0.37 stop: $58.00 While the bullish rally refuses to give up bears need to be patient with the under performance AIG is offering them. Or we could just sit out altogether and wait for a breakdown, which isn't a bad idea. Shares of AIG have been trading mostly sideways since we were triggered on Tuesday. Should the insurance group and AIG spike higher then a failed rally near $58.00 would make an attractive entry point for new bearish positions. In the mean time we're still very cautious. The rising 50-dma may soon become another obstacle for the bears to overcome. However, bearish traders might take some courage at the news yesterday. A U.S. Senator is submitting legislation that would put a $108 billion cap on litigation settlements for all insurance companies' asbestos exposure. The markets hate uncertainty and this would remove any "unknowns" about how big the risks are for asbestos litigation payouts from insurance companies. Naturally, this is a very bullish development (albeit a costly one) for the sector as a whole and shares of AIG failed to respond. Picked on May 20th at $54.94 Change since picked: +0.86 Earnings Date 04/24/03 (confirmed) Average Daily Volume = 7.2 Million Chart link: --- Goldman Sachs - GS - close: 76.03 change: +0.93 stop: 77.00 There certainly hasn't been a lack of volatility in our GS play, with the up and down oscillations in the stock. Tuesday's intraday violation of the $74 support level looked like the breakdown we were waiting for, but those pesky dip-buyers pushed GS back over that level by the close. And they've continued buying over the past two days, raising the likelihood of another test of resistance before the week is out. But the trend of lower highs and lower lows remains intact, keeping us cautiously optimistic that it is going to come out all right in the end. Given the recent trading pattern, it is becoming increasingly clear that the way to play is to take entries on the failed rallies, not chase the breakdowns lower. With that in mind, aggressive traders will have their eye on the descending trendline connecting the recent highs (currently $76.70) on Friday. A reversal from that level looks like the best setup for a new entry, although those with a more cautious approach may want to wait for the reversal to extend price back under the 20- dma (currently $75.74) before taking the entry. We also need to keep a watchful eye on the XBD index, as if it is able to rally through the $465 resistance level again, it will likely provide the impetus for GS to take out our $77 stop as well. Picked on May 8th at $74.06 Change since picked: +1.97 Earnings Date 06/19/03 (unconfirmed) Average Daily Volume = 4.34 mln --- Johnson Controls - JCI - cls: 81.13 change: +0.80 stop: 83.00*new As convincing as Tuesday's intraday break below the $80 level appeared, we're getting a bit concerned with our JCI play. The stock has been recovering after investors digested the bearish brokerage comments on the auto parts sector and decided that a rebound from the 200-dma (currently $80.00) looked like a dip to buy, not a reason to sell. While this rebound could easily fail below the $82 level, it seems prudent to err on the side of caution, especially after seeing today's volume exceed that seen on Wednesday's mild decline. So we're tightening up our stop to $83, which is just above the 20-dma ($82.56). A rollover from below the $82 resistance are can be used for aggressive entries, but we'd prefer to see some volume backing such a move before considering new entries. Should JCI close above $83, it would now imply another run towards the recent highs above $85, and would negate the bearish chart pattern that initially attracted us to the play. Picked on May 18th at $81.61 Change since picked: -0.48 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 629 K --- L-3 Communications -LLL - close: 42.55 change: +0.66 stop: 45.00 As seems to be the recent pattern, dip buyers are showing up just after important support levels are violated. That certainly seems to be the case with our LLL play, as the stock broke down decisively through the $43 support level on Tuesday, found support at the 50-dma (currently $41.53) and actually managed a decent rebound on Thursday. But with the lack of strength from the DFI index (advancing only 0.25%), LLL couldn't get anywhere near resistance in the $43.00-43.50 area. If today's broad market rebound continues, a push up to and rollover near that violated support could make for a nice entry, provided broken support now acts as newfound resistance. Maintain stops at $45, just above the 200-dma. Picked on May 20th at $41.94 Change since picked: +0.61 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.39 mln --- MGIC Invest. Corp. - MTG - close: 45.05 change: -0.01 stop: 47.00 Considering the strength and breadth of the broad market rebound on Thursday, our MTG play certainly seems to be a pocket of relative weakness. With the major indices up nearly 1%, and the Dow Jones Home Builders index ($DJUSHB) surging an astounding 4.7% to end above the $400 level for the first time ever, MTG's 1-cent loss really highlights the lack of buying enthusiasm. While bulls will argue that the recovery to close back over the 200-dma (currently $44.74) on each of the past two sessions is bullish, we're drawn to the ascending trendline from the March lows. That line (now at $45.40) was broken on Tuesday and has served as resistance since then. Even if the bulls can extend the current bounce, there's some solid resistance at $46 (reinforced by the down-sloping 20-dma at $46.03) that ought to present a firm obstacle. Traders looking for an entry into the play will want to watch for the next rally failure, ideally near $45.50, but possibly as high as $46. We're still keeping a rather loose stop up at $47, as we don't want to be stopped out prematurely. Traders looking for a momentum entry will still need to wait for a trade under $44 before playing. Picked on May 15th at $45.21 Change since picked: -0.16 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 1.07 mln Chart link: ************* NEW PUT PLAYS ************* None ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 05-22-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/v22g_3.asp In Section Three: Play of the Day: CALL - AMGN Traders Corner: Does Size Matter? Hell Yes! ********************** PLAY OF THE DAY - CALL ********************** Amgen, Inc. - AMGN - close: 61.87 change: +1.17 stop: 59.75 Company Description: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why we like it: (Sunday's Update) After surging strongly higher for most of the past week, the Biotechnology index (BTK.X) paused for a breather on Friday, slipping back towards the $398-400 support level. Given that it had also been up for most of the week, AMGN decided to relax as well and drifted back to the tune of 0.5%. Neither of these retracements appear to be cause for concern as both the BTK and AMGN remain in their ascending trends. Also, the selling volume on AMGN was paltry at only just over half the ADV. One interesting thing we've noticed lately is that the stock appears to be finding support at the 20-dma, which has now risen to $61.96. So traders looking to enter the play may want to consider new positions on a rebound from the $62 area. Stronger support exists near $61 and entries there look good too. Critical to the stock being able to advance further is going to be the bulls' willingness to push price through the short-term descending trendline connecting the recent highs. Once above that level (currently $63.40), which was just above Friday's intraday high, look for AMGN to gather speed and take another run at the $64 resistance level. While momentum traders could chase the stock higher on such a move, remember the way AMGN trades -- slow and steady with virtually all breakout moves being followed by a pullback to test old resistance for its validity as new support. For that reason, we're still recommending sticking to buying the dips for new entries into the play. Play of the Day Comments: It would appear that AMGN has almost completed its sideways consolidation and with the markets about to rebound from its recent pull back buyers could be ready to push AMGN to new 52- week highs. All the excitement over DNA's cancer drug only brings more attention to the strength shown in the biotech sector. A dip to $60.00 or a move over $62.50 both looks like entry points to go long. Suggested Options: Shorter Term: The June 65 Call will offer short-term traders the best return on an immediate move, but this is a higher risk approach due to AMGN's slow-moving nature. Traders with less tolerance for risk will want to use the June 60 Call. Longer Term: Due to the slow and deliberate price action for which AMGN is known, traders looking to capitalize on a breakout move above $64 will want to look to the July 65 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. BUY CALL JUN-60 YAA-FL OI= 6606 at $2.95 SL=1.50 BUY CALL JUN-65 YAA-FM OI=16887 at $0.60 SL=0.00 BUY CALL JUL-60 YAA-GL OI=42141 at $4.00 SL=2.00 BUY CALL JUL-65 YAA-GM OI=27882 at $1.40 SL=0.70 Annotated Chart of AMGN: Picked on May 11th at $61.24 Change since picked: +0.63 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.5 mln ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** Does Size Matter? Hell Yes! By Mike Parnos, Investing With Attitude Does size matter? Hell yes!! If you don't believe me, just ask my ex-wives, my ex-girlfriends, the Seven Dwarfs and Shaquille O'Neal. Beyond the obvious, in life – and for our purposes – let's focus on the size of your brokerage account. That's what dictates how many contracts you trade and how much risk you allow yourself to take. Within the Couch Potato Trading Institute's massive international student population, we have those who trade 50 contracts per position and those who trade five. Diversification is important. It protects us from ourselves. Though our strategies are conservative, our priority is always to conserve our trading capital. That's why the length and circumference of our trading account matters. Let's examine how we calculate the number of contracts to trade in each position. ______________________________________________________________ Mike, In my older style of trading, I had a system to determine how much to risk on a given trade. However, in my new style, the risk/reward ratio & probability of profit are much different. How does one determine how much to risk (how many contracts) on a given trade. I'd love to hear your thoughts on this. Response: A lot will depend on your account size. For the sake of argument, let's take the hypothetical trades #1-4 (see below) in this month's CPTI portfolio. Now, you'll obviously have to adjust these for your risk tolerance. Basically, let's figure out what we'd have to do to risk a maximum of $5,000 on each of the four trades. 1. The SPX iron condor. The difference between the strikes is $15 in each spread. Only one spread is really at risk, so our exposure per contract is $1,500 less the $290 credit = $1,210. A four-contract position would involve a risk of $4,840. 2. The BBH iron condor. The difference between the strikes is $5 in each spread. Since only one spread is really at risk, our exposure per contract is $500 less the $135 credit = $365. A 12- contract position would involve a risk of $4,380. 3. TOL bear call spread plus. The difference between the strikes is $5.00. Our exposure per contract is $500 less the $140 credit = $360 plus the $15 cost for the 10 additional $30 calls. Total exposure is $375 per contract. A 12-contract position would involve a risk of $4,500. 4. COF iron condor. The difference between the strikes is $2.50 in each spread. Since only one spread is really at risk, our exposure per contract is $250 less the $100 credit = $150. A 30- contract position would involve a risk of $4,500. Your actual risk for the four positions above is actually $18,220. However, to carry those trades, your account size would have to be $37,720. Why? The additional $19,500 would be held as maintenance requirement for the second credit spread in the three condors. SPX ($1,500 x 4 = $6,000), BBH ($500 x 12 = $6,000), COF ($250 x 30 = $7,500). What happens to all this maintenance money during the life of the option? Nothing too exciting other than earning money-market interest. That's assuming the maintenance is in the form of cash. Some brokerages allow maintenance to be in the form of other marginable securities like stocks, bonds, CDs, Treasuries, mutual funds, etc. _____________________________________________________________ Mike. Can you provide the calculations on the ROI of an iron condor, i.e. your June SPX play listed in OI this past Sunday. Thank you. Response: I figure it on a basis of Return on Risk. Other monies that are being held for maintenance purposes are NOT at risk and are still resting comfortably in one's brokerage account earning "money market" interest (however small). In the current SPX iron condor, we took in a credit of $1.35 from the 1010/995 bear call spread and $1.55 of credit from the 895/880 bull put spread for a total credit of $2.90. The difference between the strike prices is $15. We have just taken in $2.90, so our risk is $15 less the $2.90 credit -- $12.10. To figure out our return on risk, we divide our credit of $2.90 by the $12.10 that is at risk. If the trade is successful, the resulting return on our risk is 23.9669%. _____________________________________________________________ The Question Is . . . Why did the Siamese twins go to England? ______________________________________________________________ CPTI JUNE POSITION UPDATE June Position #1 – SPX Iron Condor – Currently at 944.30 We sold 5 contracts of SPX June 995 calls and 5 contracts of SPX June 895 puts. For protection we bought 5 contracts of SPX June 1010 calls and 5 contracts of SPX June 880 puts. Total net credit of $2.90. We're giving the S&P 500 a 100-point range. We'll get our maximum profit of $1,450 if SPX closes within a huge 895 to 995 range. Our exposure is $12.10 ($15 points less the $2.90 credit). If it works, it's about a 24% return on risk. ____________________________________________________________ June Position #2 - BBH Iron Condor – Currently at $104.19 We sold 10 contracts of BBH June $100 puts and BBH June $110 calls. For protection we bought 10 contracts of BBH June $115 calls and BBH June $95 puts. Total credit of $1.35. No Go: What can I tell you? We had to abort entering this position because, Monday morning, BBH gapped to $110 and an entry was no longer practical. In this coming Sunday's column I will dream up another hypothetical CPTI position to replace the BBH position. _____________________________________________________________ June Position #3 – TOL – Bear Call Spread Plus – Currently at $26.84 Sell 10 contracts of June TOL $25 calls @ $1.40 Buy 20 contracts of June TOL $30 calls @ $.15 Net credit of $1.10 We're slightly bearish on the housing market and believe TOL will finish below $25. But, just in case we're wrong, we're buying 10 additional contracts of the $30 calls to protect ourselves. You might even be able to get the $30 calls for $.10 instead of $.15 on Monday. Maximum potential profit is $1,100. ______________________________________________________________ June Position #4 – COF Iron Condor – Currently at $44.84 Sell 10 contracts of June COF $47.50 calls @ $1.55 Buy 10 contracts of June COF $50 calls @ $.95 Net credit of $.60 Sell 10 contracts of June COF $40 puts @ $1.05 Buy 10 contracts of June COF $37.50 puts @ $.65 Net credit of $.40 Total credit of $1.00. We're giving COF a $7.50 range. This is a credit card stock that appears to have topped out and there's support around $40. We'll get our maximum profit of $1,000 if COF closes between $40 and $47.50. The nice part is that our exposure is only $1.25 ($2.50 less our $1.00 credit). If it works, it's an 80% return on risk. ______________________________________________________________ June Position #5 – QQQ ITM Baby Strangle – Currently at $28.70 Buy 10 contracts of the July QQQ $30 puts @ $2.05 Buy 10 contracts of the July QQQ $28 calls @ $1.80 Total debit of $3.85. The QQQs have made a big move up. It's either going to break through resistance or bounce of and head back down. Our objective is for a $3-4 move in the next month. One of our long options will hopefully pay for almost the entire position. That will leave our other long option, which is now practically free, poised for the bounce back as the QQQs reverse. Our exposure is only $1.85 because we have $2.00 of intrinsic value. This worked quite well in the past for us. It will take some time to play out so be a little patient. For those who want to review how this strategy works, go to: http://members.OptionInvestor.com/traderscorner/tc_082502_1.asp ______________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our plays or our strategies? Feel free to email me your questions. An excellent source for new students is the OptionInvestor archives where we've been discussing strategies and answering questions since last July. To find past CPTI (Mike Parnos) articles, look under "Education" and then click "Traders Corner." They're waiting for you 24/7. ______________________________________________________________ The Answer Is . . . Why did the Siamese twins go to England? So the other one could drive. ______________________________________________________________ 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 GO PISTONS!! We need a miracle! ------------------------------------------------------------ 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. 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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