The Option Investor Newsletter Tuesday 06-24-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Before The Storm Futures Markets: Inside chop Index Trader Wrap: See Note Market Sentiment: Nothing Day Weekly Fund Screen: Morningstar 401(k) Funds We Like Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 06-24-2003 High Low Volume Advance/Decline DJIA 9109.85 + 36.90 9140.81 9057.89 1.70 bln 1712/1514 NASDAQ 1605.51 - 5.20 1622.47 1598.25 1.61 bln 1670/1552 S&P 100 496.49 + 0.72 498.94 494.32 Totals 3382/3066 S&P 500 983.44 + 1.80 987.84 979.08 W5000 9387.95 + 17.90 9426.19 9343.61 RUS 2000 440.90 + 1.49 442.40 437.20 DJ TRANS 2389.11 - 5.60 2400.50 2383.70 VIX 22.76 + 0.10 23.03 22.06 VXN 32.43 + 0.63 32.86 31.56 Total Volume 3,555M Total UpVol 1,516M Total DnVol 1,992M 52wk Highs 276 52wk Lows 31 TRIN 1.01 PUT/CALL 0.15 ************************************************************ Before The Storm Finally the big day will dawn tomorrow. The Fed is huddled together to wring their hands, cuss the economy and argue semantics while the market churns in place. Antacid abounds as traders try to decide to buy or sell before the announcement. Pundits have taken up the challenge to verbally joust on every major TV station with views from no cut to major cut and the reasons why each is the right cut. Are we trading stocks or bond futures here? Dow Chart - Daily Nasdaq Chart - Daily You would think the sun will not rise on Thursday if the Fed fails to cut 50 points if you listen to some analysts. Others claim a 50 point cut would shock the market and produce a terror filled sell off on worries about what the Fed knows that we don't. Regardless of your position in this debate the Fed announcement at 2:15 Tuesday afternoon will control your investing fate. More on this later. The morning started off well economically with Chain Store Sales posting a strong +0.6% for the second consecutive week. The strong sales were due to the release of the Harry Potter book and continued rainy weather in the East which prompted shoppers to head into the malls instead of the beach. The bigger report for the day was the Consumer Confidence for June. This report dropped a miniscule -.01 to 83.5 for the month. Estimates were for 82.8 but the whisper number was well over 85. The market rallied on the news for about five minutes then headed for the lows of the day. The problem was the present conditions component which FELL to 64.9 from 67.3. Every major component fell except for the expectations index which rose to 95.9 from 94.5. Everybody has bought the promise that the 4th quarter will be strong. Unfortunately the current conditions are still falling. Consumers planning to buy a home fell to a three year low at only 3.0. Those planning to buy autos fell to 5.9 from 7.7 and major appliances to 28.2 from 31.6. This was not a good report and should give the Fed even more problems to discuss. AMD also shocked the market this morning with a drastic profit warning citing weak sales of computers and mobile phones in Asia due to the SARS outbreak. The stock dropped to a two month low after saying sales would fall to $615 million from the $715 million estimate. "The anticipated global sales improvement in June did not materialize as we had anticipated," said the AMD CFO. AMD would not comment further and would not give future guidance. Banc of America said AMD was also hurt by slowing sales of clone PCs and inventory buildup across the spectrum. We all know AMD is not the market leader here but could this be a leading indicator of other tech earnings coming out in the next couple weeks? FedEx posted earnings that rose +17% but cautioned that June shipments were falling below management's expectations. They said the economy was poised for a recovery but volume trends were disturbing. CNF warned after the close that demand for freight shipments was VERY weak in North America and their earnings were going to suffer. They could drop as much as -47% below the forecast from April. Add the plastics warning from GE last week and there is cause from concern on a broader level. The FedEx, CNF and GE warnings are reflective of business in general not a specific company or a specific sector. Are you listening Mr. Greenspan? The Fed is on center stage, the curtain is about to rise and the spotlights are focused. Not just U.S. traders but the eyes of the world are focused on 2:15 tomorrow. What they do/say will determine if foreign investors pull money out of the U.S. or put it back in. The Fed funds futures are showing a 100% chance of a 25 point cut and a 52% chance of a 50 point cut. That means the Fed cannot afford to not cut at all or a significant drop would occur. They have telegraphed a coming cut for a month and it is clearly priced into the market. The problem for us and the Fed is the 50-point cut potential. They have vowed to "do whatever it takes" to defeat deflation before it starts. 25 points is already a given and a purely psychological move at this point. A 50-point cut would take interest rates below 1.0% and while it could actually help in some areas it could be very bad in others. But would the negative result be worse than deflation? No chance. While it would hurt banks, brokerages, money funds and people that pay interest on deposits it would help insure one more refinance cycle. Last week there were a couple news articles suggesting the Fed could cut 50 points and we actually got some selling instead of excitement. The problem is expectation. The market has been rising on the expectation of an economic recovery that the Fed has been promising for months. If the Fed decides to cut 50 points then they will have to say something in their guidance about why they see the economy as weaker than current expectations. It is the "kings X" statement. We "the Fed" were just kidding about the economy getting stronger. Or, we think the deflation monster is closer than we expected and we are going to bring out the big guns to defeat it. Most analysts expect a 50-point cut to contain a statement about being ready to use alternate means to continue the fight and that will also be seen as negative to the market. Yes, the Fed has a tough decision to make. Do they continue to dribble out reluctant 25 point cuts until they run out of ammo? Or, do they take it on the chin and blast out a 50 point cut and take a strong stance about protecting our future? 12 of the 22 primary treasury dealers expect a 50-point cut. The futures are showing a 52% chance of a 50 point cut. The more than $10 trillion in interest bearing accounts will cuss another rate cut, especially 50 points. Many banks and funds will have to change the way they do business with a 50 point cut. Many could actually cease paying any interest at all on accounts. The dollar would suffer and we could see the flight of foreign money back to countries with much higher rates. It is not just the stock market that will react to the news. Most analysts expect massive selling in the bond market after a 50 point cut if the guidance is not worded so specifically that there is the threat of even lower rates ahead OR at least no change in rates for a very long period of time. Being guaranteed a 3% return for the next couple of years would not be a bad thing for bond junkies. If the Fed reinforces a no hike posture for the next year or more as many expect then the bond market could remain stable. Many expect the Fed to not raise rates until after the election to insure a strong bounce out of this three year recessionary environment. They have seen Japan and the disaster deflation caused and they do not want to go there. They are stuck between a rock and a hard place. 25 points is the political solution. Bonds will not tank because they will expect a potential further cut at the next meeting. The stock market will not tank (as bad) because the economy must be ok or the Fed would have taken stronger action. But, 25 points is only a psychological move now because the market has priced it in for over a month. A move that will have little on no impact on the economy and little or no impact on the next wave of refinancing. Remember, the Consumer Confidence today showed that new home prospects had sunk to a three year low. Another 25 points will not change that. The Fed is stuck. They needed a two-day meeting this month to puzzle their way out of this quandary. I am split on the outcome just like the rest of the world. So, as a trader what do I think will happen to the market? I don't think there is but one outcome. It is not up. 25 points are priced in with hopes by retail traders for a 50 point pop. They do not realize what the 50 point decision could cause. A 25-point cut could produce trader depression and a sell the news drop. Do you really think the market will go up on old news? A 50-point cut would have to contain that negative guidance about the economic outlook and that would tank the market. Oh my gosh, you mean the recovery is not already in progress? Most traders are not stupid. They see the warnings by GE, THC, AMD, EK, CNF and FDX as the hand writing on the wall that may be leading indicators that all is not well. The Fed announcement is simply the focal point and the hoped for cure all. The Dow struggled to hold on to 9100 this afternoon and this is significantly below the 9300 highs. The Nasdaq is struggling to hold 1600 and especially after the AMD warning this morning. The markets have not sold off and I believe it is due to the end of quarter window dressing and inflows of cash from retail traders who think the Fed is going to save the economy this week. TrimTabs said funds saw an inflow of $11 billion in cash over the last three weeks and that was the largest inflow since March 2002. Margin balances among the top brokers increased +7.7% in May and that was the largest increase since March 2000, the beginning of the current bear market. TrimTabs also said corporate and insider selling reached $20 billion in the last three weeks and that was the highest since March 2002. Ponder this thought. If insiders and institutions are normally on the right side of the market and retail traders normally buy the tops and sell the bottoms, there is an alarming trend here. The new retail cash along with huge first half retirement contributions is currently being put into the market and that retirement flood will end after the first week in July. There is also a good chance the window dressing from funds will be stripped back out once the quarter is over. If we look at the March 2002 period where all those conditions existed before we will see the S&P was up over +24% after the bottom in September. Everyone was talking about the new bull market. The coming second half recovery was just over the hill. Instead July earnings came in less than expected and it was all down hill from there. Moving forward to June 2003 we are up between +22 to +31% depending on which bottom you use. Earnings are beginning to smell and the 25 point rate cut is already priced in. The second half recovery is just over the hill. Are we in any better shape than we were in 2002? March 2002 SPX Daily June 2003 SPX - Daily If we move further backwards in time to a point before the bear market we may see a better picture of what July is likely to bring. We can go back to 1998 when we were coming out of a serious dip and had a strong rebound to new highs in July. That rebound was a +38% gain from the prior September lows. Unfortunately July earnings again came in less than expected and the S&P dropped -22% from the mid July top. But, surely 1999 and 2000, the boom years were better, right? Yes they were. 1999 saw a gain of +53% from the prior lows and only sold off -13% from the July highs. Not bad but still -13% sell off in the middle of a vertical market. July 2000 was less pronounced because there was only a +23% gain from the prior lows and the market was moving sideways as the big crash began. Still the July drop accounted for -7% of the S&P before one last gasp in August and the bear market began. July 1998 SPX July 1999 SPX July 2000 SPX The point I want to make tonight is not that we are doomed to hit new lows or the rally has failed. THE ONLY POINT I WANT TO MAKE is that July is not a friendly month. The first week of July is the best week and normally leads to new highs. Once the retirement cash ceases to flow around the 10th the summer doldrums begin. Just look at the charts, boom years and bust years are both the same. Now, if you are a big money manager what would you do? If you have 20% gains in the market from the recent bottom, maybe more and a lot more if you were aggressive and bought the right stocks, would you hold them? Sure some might, some might feel like heroes and bail to lock in gains others are only hoping for. The bigger point traders should ponder is timing. How many years does a trend have to repeat itself before money managers begin front running it? Two? Three? Five? Eventually it becomes a flashing "sell me" sign that is begging to be hit. Will this be the year that the managers begin early AND will the Fed meeting trigger it? Nobody knows but as you can see from the charts above that even in the best of years the 10th-15th of July is a jumping off point. Using the 10th of July as the last target to be out of long positions there are only ten trading days left. With the retirement contributions providing lift in the first week of July there is plenty of incentive for the funds to wait until after the 4th as long as they have not decided to leave early and be safe. Or as long as the Fed does not scare them tomorrow. Or, I might mention that next week has PMI, ISM, NonFarm Payrolls, Factory Orders and ISM Services all packed into a holiday shortened week. The Fed is not the only pothole this week. We still have Durable Goods and Home Sales tomorrow, GDP, Jobless claims and Help Wanted Index on Thursday and Personal Income/Spending and Michigan Sentiment on Friday. Just how far do you think those funds want to stretch their luck before hitting an economic landmine? The wildcard is still the bonds. If the Fed says something that makes bond holders think bonds have seen the highs then that flood of cash could break the July trend. I do not see this happening tomorrow. The Fed is more likely to say they are planning on buying bonds as plan B instead of cutting rates any further. They want the long-term interest rates to be low to support the economy. They have no more real cuts left and they have to avoid a spike in yields to keep the housing market liquid. Whether they actually plan on buying bonds or not they have to play that bluff in hopes of keeping that money in place. Are we having fun yet? Nobody ever said investing would be easy, at least not over the last three years. I should think the game plan is clear. Remain long ONLY if you have stops in place and are prepared to honor them. We are approaching treacherous times over the next three weeks and we need to keep our seatbelts fastened and our eyes on the road. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Inside chop Jonathan Levinson Today gave us an inside day in equity futures, with a lower high and higher low from yesterday, a selloff in gold futures, and a higher high in treasuries. 6 minute ES3U candles Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 992 987 982 977 972 YM03U 9174 9130 9076 9032 8978 NQ03U 1223 1210 1200 1186 1176 3 month daily candles of the ten year t-note yield Today’s closing print left the ten year note yield on support at 3.265%. Note the potential reverse head and shoulders bottom should the ten year note sell off. Without guessing at the fundamental event that could set up such a selloff, the chart is pointing out the potential imbalance in pricing that could lead to a spike in the yield. Given that the Fed has told us that it seeks to avoid a surge in yields, it’s an interesting setup and nothing more for the moment. The neckline to kick off the spike is the fib resistance line at 3.43%. For the day, the five year note yield finished down 5.1 basis points to 2.158%, the TNX was down 5 bps and the TYX down 5 bps as well to 4.344%. 10 minute chart of the US Dollar Index The US Dollar Index had a dramatic day, bouncing off 93.90 support and taking a rocket ride to 94.60 before setting back. It spelled bad news for gold and to a lesser extent, commodities. Daily chart of August gold Support at 345 was not tested today, but the depth of the selloff was surprising. XAU and HUI, the precious metals indices, got sold less than one would have expected with HUI –2.53 to 145.87 and XAU –1.74 to 76.39. Commodities also got off easy, with the CRB finishing down .61 to 232.99. I hate to attribute market moves to intervention but such is a fact of life, and I find it peculiar that gold was sold more heavily than the commodities index and the precious metals indices on day one of the scheduled Fed meeting. While on the subject, the Fed added 3.75B in 2 day repos, with no expiries. This follows yesterday’s large 8.75B worth of repos, and thus it appears that the draining campaign on which the Fed had embarked last week is over for the moment. I find it odd that the US Dollar Index has continued to gain today in light of this. 20 day 30 minute NQ3U candles Fibonacci support at 1190 NQ continues to hold, as does the downward trend as reflected in the price and its oscillators. The break of the uptrend is now a done deal, and it will take serious gumption to get the price back above the ascending trendline, which is now in the neighbourhood of 1230 NQ. 5 day 10 minute chart of the NQ3U The support today was somewhat surprising given the downphase on the oscillators within the descending channel. However, given the much anticipated Fed announcement due tomorrow, it’s actually surprising that we did not see greater volatility today. We can expect to see that tomorrow. 20 day 30 minute ES3U candles The S&P futures showed us good strength within their steeply descending channel, but that strength appears have topped out the oscillators early in their upphase. This small bear flag printed this week has taken a great deal of energy, and this chart looks like an accident waiting to happen. That could just be me, though- a move above the ascending trendline would change my mind in a hurry, just north of 1000 ES. 5 day 10 minute chart of the ES3U The short cycle oscillators have more room to run and imply a retest of the descending channel upper trendline. A failure at or slightly above 984 will imply a plunge to lower lows in the 960 area. 20 day 30 minute YM3U candles We see the same picture on the Dow futures, with hints of more short term upside within the descending channel. 5 day 30 minute YM3U candles The Fed announcement is due tomorrow, as we await further confirmation of the central bank’s ongoing debasement of the currency. The markets appear to be trading more on the basis of money supply and liquidity than the by-now tired promises of a second-half recovery for the third year in a row. It’s actually surprising, given the enormous inflow of liquidity, that we haven’t seen better results, but the employment data tells the story in terms to which all can relate. As leveraged speculators, it is important that we trade the charts, and not our fundamental bias. Over time, fundamentals will bias the charts, but in the short term, they have a nasty tendency to blur our vision. For tomorrow, we have the setup, both news-wise and technically, for a wide ranging day. With last week’s gravestone doji and today’s inside day heading into the Fed announcement, we have the potential for a large move, very possibly to the downside. I’ve learned to follow my stops to limit risk and swing for singles. Tomorrow promises to be exciting. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_062403_1.asp ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Nothing Day - Jon Levinson Today's higher low and lower high did little but set us up for a big move tomorrow. We saw some large put positions taken for a change, with the CBOE total put to call ratio breaking 1.0 early in the session before settling back down to a more moderate readings in the low .70s, and then edging higher into the close. Advancers led decliners slightly on the NYSE and Nasdaq, with declining volume nearly doubling advancing volume on the Naz but actually slightly lower than advancing volume on the NYSE. I hope that this was not merely because I was busy trying to short the S&P futures, but also because of the bad news from AMD in the morning. The tech recovery continues to appear elusive. The bullish percents began to roll yesterday, led by the BPNDX. As many readers already know, the Nasdaq 100 tend to lead the market, followed by the broader Nasdaq. Such was the case with the BPNDX losing 5 points yesterday vs. the BPOEX which was flat. It's a curious phenomenon, but most bears with whom I correspond agree that the markets will not drop when everyone's bearish. Tops get formed when all are bullish, and bottoms occur when everyone is bearish. I've been thinking recently in terms of bullish trades far more than I used to, though I'm only executing bearish trades, guided by the toppy breadth, bullish percent and sentiment data. Nevertheless, it's illustrative of our instinct to follow the herd, even when we think we know better. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9370 52-week Low : 7197 Current : 9110 Moving Averages: (Simple) 10-dma: 9200 50-dma: 8739 200-dma: 8367 S&P 500 ($SPX) 52-week High: 1002 52-week Low : 768 Current : 983 Moving Averages: (Simple) 10-dma: 997 50-dma: 946 200-dma: 891 Nasdaq-100 ($NDX) 52-week High: 1266 52-week Low : 795 Current : 1192 Moving Averages: (Simple) 10-dma: 1223 50-dma: 1156 200-dma: 1037 ----------------------------------------------------------------- There was very little action in the volatility indices today as the markets wait in limbo before the FOMC meeting tomorrow. CBOE Market Volatility Index (VIX) = 22.76 +0.10 Nasdaq-100 Volatility Index (VXN) = 32.43 +0.63 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.85 559,868 476,589 Equity Only 0.76 456,289 347,225 OEX 1.38 10,525 14,596 QQQ 3.78 31,137 117,747 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 71.1 + 0 Bull Confirmed NASDAQ-100 76.0 - 6 Bull Correction Dow Indust. 83.3 + 0 Bull Confirmed S&P 500 79.2 - 2 Bull Confirmed S&P 100 81.0 - 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 1.28 10-Day Arms Index 1.21 21-Day Arms Index 1.24 55-Day Arms Index 1.15 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 1547 1563 Decliners 1305 1475 New Highs 65 56 New Lows 9 4 Up Volume 874M 530M Down Vol. 795M 1032M Total Vol. 1682M 1594M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/17/03 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 The large S&P contracts continue to see more buying as Commercials' long positions have hit highs not seen in a while. Short positions took a significant jump higher as well but big money is expecting strength. Commercials Long Short Net % Of OI 05/27/03 435,195 423,474 11,721 1.4% 06/03/03 438,228 422,722 15,506 1.8% 06/10/03 456,967 455,024 1,943 0.2% 06/17/03 519,887 501,401 18,486 1.8% Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 05/27/03 147,687 149,344 (1,657) (0.6%) 06/03/03 169,650 167,172 2,478 0.7% 06/10/03 199,356 185,403 13,953 3.6% 06/17/03 202,040 184,028 18,012 4.6% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 In contrast to the full S&P contract data above, the S&P e-mini contracts are showing the most bearish reading in a long time, at least from the Commercial traders. We saw significant jumps in both long and short positions but Commercials or "smart money" are exceptionally bearish on the e-minis. Commercials Long Short Net % Of OI 05/27/03 252,655 485,962 (233,307) (31.6%) 06/03/03 267,680 512,648 (244,968) (31.4%) 06/10/03 270,359 543,221 (272,862) (33.5%) 06/17/03 306,279 661,114 (354,835) (36.6%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: (222,875) - 04/01/03 Small Traders Long Short Net % of OI 05/27/03 427,412 66,031 361,381 73.3% 06/03/03 470,655 58,420 412,235 77.9% 06/10/03 498,999 49,689 449,310 81.9% 06/17/03 466,837 70,609 396,228 73.7% Most bearish reading of the year: 283,831 - 04/08/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Again, we're seeing large increases in the number of contracts outstanding for both commercials and small trades but there is no discernable change in investor sentiment here. Commercials Long Short Net % of OI 05/27/03 40,999 41,491 (492) (0.6%) 06/03/03 42,232 43,217 (985) (1.2%) 06/10/03 42,877 45,793 (2,916) (3.3%) 06/17/03 60,964 65,561 (4,597) (3.6%) 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 05/27/03 12,194 13,339 ( 1,145) ( 4.5%) 06/03/03 11,407 9,092 2,315 11.3% 06/10/03 14,759 7,761 6,998 31.1% 06/17/03 29,400 23,232 6,168 11.7% 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 No change in investor sentiment here either, despite increases in the number of contracts outstanding. Commercials Long Short Net % of OI 05/27/03 18,660 15,537 3,123 9.1% 06/03/03 19,480 15,282 4,198 12.1% 06/10/03 17,368 15,263 2,105 6.5% 06/17/03 20,625 18,593 2,032 5.1% 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 05/27/03 8,225 9,316 (1,091) ( 6.2%) 06/03/03 7,948 9,353 (1,405) ( 8.1%) 06/10/03 7,968 8,316 ( 348) ( 2.1%) 06/17/03 9,092 9,398 ( 306) ( 1.6%) 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 FUND SCREEN ****************** Morningstar 401(k) Funds We Like This week, we look at the 17 mutual funds that Morningstar offers to its 401(k) plan employees and tell you which funds we like now based on return, risk, cost and other factors, such as investment style and manager tenure. As a former plan sponsor, I understand the challenges that face plan fiduciaries. How many funds should be offered in the plan? Which fund families and individual funds should be offered? Are they the best managers and funds in their respective asset class or investment style? Do the funds offered in the plan cover all levels of risk and reward? What benchmarks should be used to analyze return and risk performance? When does a fund or manager get replaced? The list goes on and on and when you're a plan fiduciary you have the burden of picking funds on behalf of all employees (and their beneficiaries) that will stand the test of time, something that's not easy to do. In Morningstar's case, their 401(k) plan options receive a lot of attention because of who they are, arguably, the leading independent mutual-funds tracker in the U.S. Many people today are familiar with Morningstar's fund reports, opinions, and analysis. So, having analyzed all mutual funds, you would expect Morningstar's 401(k) plan to provide nothing but the best mutual funds for its plan participants, funds which have performed well in the past and have what it takes to perform well in the future. Mutual Funds Offered in Morningstar's 401(k) Plan: American Funds New World () Emerging Markets Brandywine () Mid-Cap Growth Fidelity Low Priced Stock () Small-Cap Blend Gabelli Asset () Mid-Cap Blend Harbor Capital Appreciation () Large-Cap Growth Morgan Stanley Inst. US Real Estate () Real Estate Oakmark Select I () Mid-Cap Value PIMCO High Yield () High-Yield Bond PIMCO Total Return () Intermediate-Term Bond Selected American () Large-Cap Blend T. Rowe Price Small-Cap Stock () Small-Cap Blend Turner Midcap Growth () Mid-Cap Growth Tweedy, Browne Global Value () Foreign Stock Vanguard 500 Index () Large-Cap Blend Vanguard Calvert Social Index () Large-Cap Blend Vanguard International Growth () Foreign Stock Vanguard LifeStrategy Growth () Large-Cap Blend Above is a list of the 17 mutual funds offered in the Morningstar 401(k) plan. Turner Midcap Growth (TMGFX) recently replaced the Morgan Stanley Institutional Mid Cap Growth Fund. American Funds New World Fund (NEWFX) recently replaced the Templeton Developing Markets Fund. So, in this case, Morningstar made the decision to replace two funds, rather than add two more options. Some of the funds provided in Morningstar's 401(k) plan have more than one share class. Where there are institutional class shares available, we assume that's the share class that Morningstar uses in its plan. However, since you don't have the collective buying power of a 401(k) plan, you will most likely need to consider one of the funds' other share classes, which vary in cost and expense structure. Some of these 17 funds may not look quite so great if their costs and expenses were higher. Screening and Evaluation Process To compare these 17 funds, we entered the ticker symbols for each fund in the Fund Compare tool on the www.morningstar.com website. For multiple-share class funds, we put in all of the fund symbols to see how much cost/expense and performance/ratings varied among the different share classes of the fund. The first thing we did was look to see which funds if any are now closed to new investors. We found one, Oakmark Select I (OAKLX). Oakmark Funds has several very successful fund products and would be worth considering on your own time (www.oakmark.com) but we'll eliminate the Oakmark Select I Fund from further consideration in this report since it's currently closed. In the cases of PIMCO, Morgan Stanley, T. Rowe Price and Vanguard we presume that Morningstar 401(k) plan participants may purchase institutional or administrative class shares of the funds but you would most likely have to consider the A, B, C or D shares of the fund. For example, investors that use financial advisors may buy class A, B or C shares of the fund through their financial broker while direct investors may purchase no-load class D shares, which are offered at Charles Schwab or other no-load NTF fund networks. Of the 17 funds, 12 are U.S. equity funds (11 diversified, 1 non- diversified specialty), three are international equity funds, and two are U.S. fixed income funds. U.S. stock fund choices include two equity index funds, one of which uses a social screen to weed out firms that have unacceptable products, services or practices. So, there are actively managed and passively managed equity funds in the 401(k) lineup, something you may want to consider for your own financial plan. Many experts believe it makes sense to start with an index fund like Vanguard 500, and then add funds that you believe are capable of adding value (outperforming the S&P index) over time. Morningstar's plan offers at least one large-cap fund, one mid- cap fund, and one small-cap fund. In addition, it provides at least one value-driven fund and one growth-oriented fund in its 401(k) lineup. Since capital sectors and equity styles lead or lag at different times, many long-term investors like to invest in funds with different styles and strategies to gain diversity and lower overall portfolio risk. Two of the three international stock funds offered in the 401(k) plan are value-driven in their style/strategy. One focuses more on the developed foreign markets and the other invests primarily in the developing (emerging) foreign markets. The Vanguard fund recently underwent a management change in January 2003 and has a more growth-oriented style today, says Morningstar. Only two bond funds are offered and man, are they superb. PIMCO Total Return, an investment-grade intermediate-term fund, is the nation's largest fixed income fund, with $75.8 billion in assets. PIMCO founder, Bill Gross, is to bond funds what Peter Lynch was to stock funds, a living legend. He's managed the flagship bond fund since its May 11, 1987 start date. PIMCO High Yield Fund's $6.8 billion portfolio has been run by Ray Kennedy since April 1, 2002. In the next section, we tell you which funds we like the most of these 17 funds based on overall return, risk and expense (versus similar funds). Our Favorite Funds If you are looking for a good bond fund, then you have to look no further than the PIMCO Total Return Fund run by bond guru William Gross since 1987. Class D shares of the fund have a 0.75% annual expense ratio versus 1.02% for the average intermediate-term bond fund, and are offered on a no-load no-transaction fee (NTF) basis through leading brokerage fund networks such as Schwab OneSource, Fidelity FundsNetwork, Vanguard NTF, and TD Waterhouse NTF. Over the past five years, PIMCO Total Return Fund, Class D has an annualized return of 8.1%, per Morningstar, ranking in the top 3% of the intermediate-term bond category. The fund's institutional share class sports one of the best long-term track records in the fixed income investment world. For the longest time, the product was not available in a no-load format, but now it is and it comes with a very reasonable 0.75% expense ratio. For more information on the PIMCO Total Return Fund, go to www.pimco.com. In the domestic equity fund group, starting with the Vanguard 500 Index Fund (VFINX) makes a lot of sense to me. Over the past ten years, the nation's largest index fund has produced a 9.9% annual equivalent return, ranking in the top quintile or 18th percentile of Morningstar large-blend category. It can serve well as a core equity investment since it invests in 500 large, established U.S. companies and maintains a blend style of value and growth stocks. Among mid-cap and small-cap U.S. equity funds, we favor Fidelity Low Priced Stock Fund (FLPSX), managed by Joel Tillinghast since December 1989 inception. Tillinghast was Morningstar's domestic equity manager of the year in 2002, and boasts one of the finest long-term records among small-cap funds. Tillinghast curbs risk by diversifying across hundreds of securities and staying on the left side of the equity style box (value-to-blend style overall). Tillinghast has proven through the years that he can produce top returns while adequately managing cash flows. Although the fund has swelled to $15.7 billion in net assets, its trailing 10-year annualized return of 14.7% topped the S&P 500 large-cap index by an average of 4.8% a year over the same time period, ranking the fund in the top 1% of the Morningstar small-blend category. Not bad for a small-cap fund that supposedly should have closed long ago. For more information, go to www.fidelity.com. Turner Midcap Growth Fund (TMGFX) may be a good investment today if you believe we are in the early stages of a recovery and bull market cycle since Turner utilizes a pro-growth investment style, which can lead in a market advance. Indeed, the fund's YTD 2003 return of 19.7% as of June 23, 2003 ranks in the 11th percentile of the Morningstar mid-cap growth category. Its trailing 5-year average annual total return of +5.1% ranks in the category's top 16%. In 1999, the fund returned 125.5%, so it can lead in stock market advances. If you're looking for a great all-in-one stock fund you may want to consider Vanguard LifeStrategy Growth Fund (VASGX). It makes investments in other Vanguard index funds. At the end of March 2003, 50% of assets were invested in Vanguard Total Stock Market Index Fund, 25% in Vanguard Asset Allocation Fund, almost 15% in Vanguard Total International Index Fund, and 10% in the Vanguard Total Bond Market Index Fund. With a portfolio like that, it is less risky than the average large-cap blend fund. You may think of it as an aggressive balanced fund as well, since it maintains a modest fixed income allocation. Conclusion Morningstar's 401(k) plan has a number of top-notch managers and funds in its lineup. The 17 funds at the least would serve as a great starting place in your search for the right mutual fund(s). If you have a long-term investment horizon, you may want to look at some of the funds in Morningstar's 401(k) plan or use them as the standards to which other funds may be measured. Steve Wagner Editor, Mutual Investor ************************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 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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The Option Investor Newsletter Tuesday 06-24-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: MERQ Dropped Puts: None Call Play Updates: AZO, IGT, LH, LXK, MRK, PGR New Calls Plays: AMGN, STJ Put Play Updates: COF, KSS, RYL, WFMI New Put Plays: BRCM, SIVB **************** 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: ***** Mercury Int - MERQ - close: 39.38 change: -0.26 stop: 38.95 Enough is enough! We've given MERQ every opportunity to straighten up and fly right, and all we've gotten for our troubles is a disappointing break of support and two consecutive closes below the bottom of the ascending channel. While the stock did manage to close fractionally above our stop, the intraday drop to the $38.50 area along with the first close under the 30-dma ($39.53) since early April leaves us with no choice but to pull the plug and admit defeat. While a rebound could be just around the corner, there's been enough technical damage done this week that such a rebound should be used to gain a more favorable exit, not consider new entries. Picked on June 10th at $42.62 Change since picked: -3.24 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 4.20 mln PUTS: ***** None ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************** PLAY UPDATES - CALLS ******************** AutoZone, Inc. - AZO - close: 76.07 change: -0.89 stop: 74.95 While there has been no discernable rebound in shares of AZO, neither has there been a breakdown in price either. The stock seems to be biding its time, hugging that 200-dma (now $75.76). Tuesday's action had the stock briefly dipping below our stop, but there were eager buyers lurking just below the $75 level and the AZO recovered to back above $76 after that early dip. This is either the optimum time to be establishing new bullish positions or it is the calm before the breakdown. In either case, the risk- reward setup remains quite favorable. A solid rebound from current levels should see a nice rebound to at least the $80 level, while risk is easy to control with a stop just under $75. Aggressive traders can continue to target entries on rebounds back over the 200-dma, while those with a more conservative approach will want to wait for a rally through $77.35, just above the recent intraday highs, before playing. Picked on June 22nd at $76.65 Change since picked: -0.58 Earnings Date 08/26/03 (unconfirmed) Average Daily Volume = 1.33 mln ---- Intl Game Technology - IGT - cls: 98.40 chg: +0.28 stop: 94.99 Monday was a welcome day for shareholders in IGT. The stock rallied strongly in the face of broad market weakness and ending four sessions of light profit taking. Volume was strong and continued to be strong today. IGT traded as high as $98.90 midday before pulling back only to have dip buyers step in a drive the stock higher again. IGT is quickly approaching our short-term target of $100.00 and traders should re-evaluate their exit plans. We suggest taking some profits off the table as IGT nears the $100 level, which is usually a strong psychological support/resistance level (in this case it is resistance). It is true that IGT still has several days left before its July 2nd, 4- for-1 stock split and shares may continue to climb into the split. That's why traders may want to consider leaving a small position open should momentum stay strong into its split. Yesterday we raised our stop loss to $94.99. More conservative traders can get even tighter to protect their trade. News note, we almost neglected to mention that Standard & Poors has raised their credit rating on IGT from BBB- to BBB. This is in effect an "upgrade" and Wall Street should react to it as such. Picked on June 10th at $91.87 Change since picked: +6.53 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 1.22 million Chart link: --- Laboratory Corp - LH - close: 29.93 change: +0.28 stop: 28.00 Shares of LH may be trading sideways but given the terrible earnings warning from Tenet Healthcare (THC) yesterday, LH is holding up pretty well (not to mention the market selloff on Monday). Of course LH is in a different healthcare sector than THC but these days investors tend to sell first and ask questions later. Given how the market is prone to trade sideways ahead of any Fed meeting, the chop we're seeing in LH is expected. New positions might be considered on bounces from $29.00-29.50 or "breakouts" above $31.00. Our short-term target remains $34-$35 and our stop loss remains at $28.00. Picked on June 17th at $30.10 Change since picked: -0.17 Earnings Date 07/28/03 (unconfirmed) Average Daily Volume = 1.49 million Chart link: --- Lexmark Intl - LXK - close: 74.08 change: +0.44 stop: 71.00 It was somewhat of a disappointing day for LXK. The stock had continued to slip on Monday, which isn't a surprise given the broad market pull back during the session. However, we were encouraged that support above the 50-dma did hold. Tuesday's session started out pretty well and it looked like investors would display a vote of confidence by bidding up LXK ahead of the Fed meeting. Unfortunately, the afternoon took back most of its gains. Aggressive traders can still use these levels just north of the simple 50-dma as an entry point but given the expectation for a "sell the news" event with tomorrow's interest rate decision it may be better to take a wait and see approach. More conservative traders might feel better with a tighter stop at $72.00 or $72.50. We're going to leave ours at $71.00. Picked on June 16th at $74.51 Change since picked: -0.43 Earnings Date 07/21/03 (unconfirmed) Average Daily Volume = 1.78 million Chart link: --- Merck & Company - MRK - close: 62.15 change: +0.04 stop: 59.50 After breaking out above $60 resistance early last week, shares of MRK have been doing an admirable job of defying gravity, stubbornly holding onto the $62 level as support. Traders looking for a decent entry point into this play have had slim pickings indeed, with the stock unable to produce either much of a dip or continuation of the breakout. They likely got a decent opportunity this morning though after news broke about the Justice department joining the Medco lawsuit. The WSJ reported that the Justice Department joined an ongoing lawsuit that alleges the company's pharmacy benefits subsidiary (Medco) used an 'aggressive profits before patients policy'. According to the suit, this particular approach resulted in a 'dangerous' lack of oversight when it comes to filling prescriptions and higher pharma costs for the federal government. That news was enough to produce a dip at the open to just above $61. But the buyers were waiting and eagerly bought the dip, driving MRK back over $62 by midday and kept it there into the close. Dips near the $61 level continue to look like attractive entry points and we're still looking for a breakout over $64.50 to set the stage for a continued advance up towards the $68 area. Support should be very strong just above $60, hence our still-tight stop at $59.50. Picked on June 17th at $62.37 Change since picked: -0.22 Earnings Date 07/21/03 (unconfirmed) Average Daily Volume = 6.28 mln --- Progressive Corp. - PGR - close: 74.72 change: -0.18 stop: 71.00 Astounding! That's about the only word we can find to describe PGR's price action. After rallying strongly since mid-January with hardly a pause for any real profit taking, last week's run to new all time highs just over $76 has only met with enough selling to knock the stock back to just under the $75 level. The ascending channel that has been in effect since late March is still intact and the bottom of that channel is now just over $72. A decline near that area would make for a very nice entry point on a rebound, as it would confirm old resistance as new support. But the way PGR is trading, we may have to content ourselves with entering the play on a rebound from the $74 level, which the bears have been unable to breach over the past few days, even with the broad market weakness. Our approach remains unchanged -- take entries on rebounds from support, (the closer to the bottom of the channel the better) looking for PGR to continue working higher in that channel, the top of which is now just above $78. Maintain stops at $71 for now. Picked on June 15th a $73.27 Change since picked: +1.45 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 958 K ************** NEW CALL PLAYS ************** Amgen, Inc. - AMGN - close: 65.05 change: +0.93 stop: 62.40 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: After a stellar rally off the April lows, the Biotechnology index (BTK.X) finally ran into stiff resistance near $490 and succumbed to a stiff round of profit taking over the past week, falling all the way back to the $430 support area. The index is looking like it is ready for another leg to the rally, although the potential exists for a bit more weakness first. In the universe of Biotechnology stocks, few are exhibiting the strength of sector bellwether AMGN, which is continuing its pattern of higher lows and higher highs. There hasn't been more than a brief intraday violation of the 50-dma (currently $62.66) since December, and the it is encouraging to see that it hasn't really been tested since 5/21, over a month ago. The intraday low on June 9th came in at $62.45, just above the 30-dma and yesterday's dip found willing buyers just above $63, very near that 30-dma again. The pattern of higher lows continues. With daily oscillators trying to turn bullish again, it looks like it just may be time to game AMGN to the upside again, targeting a breakout to new highs and a potential run at the PnF bullish price target of $72. Another dip and rebound from above the $64 level is probably the best we can due for new entries on a dip, while traders looking to enter on continued strength will want to wait for a move back over $66, which would represent a breakout of the past several days' intraday highs. There will doubtless be some resistance found near the $67.50-68.00 area, but if the bulls can push through there, then $70 may be achievable on the next breakout move. Based on the stock's trading pattern of the past several months, it will likely require another rally, pullback and then rally to achieve our final target of $72. The strategy of buying the dips and harvesting gains on the breakouts that we've employed in the recent past should continue to work well with AMGN in the near term. If buying into strength (a lower odds approach than buying the dips), make sure to confirm strength in the BTK first. We're initially placing our stop at $62.40, which is below both the 50-dma and the 6/09 intraday low. Suggested Options: Shorter Term: The July 65 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the August 70 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. More conservative long-term traders should utilize the August 65 call. BUY CALL JUL-60 YAA-GL OI=41206 at $5.60 SL=3.50 BUY CALL JUL-65 YAA-GM OI=31184 at $1.90 SL=1.00 BUY CALL AUG-65 YAA-HM OI= 873 at $3.00 SL=1.50 BUY CALL AUG-70 YAA-HN OI= 162 at $1.05 SL=0.50 Annotated Chart of AMGN: Picked on June 24th at $65.05 Change since picked: +0.00 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 10.5 mln --- St. Jude Medical - STJ - close: 57.62 change: +0.90 stop: 54.95 Company Description: St. Jude Medical, Inc. (www.sjm.com) is dedicated to the design, manufacture and distribution of innovative medical devices of the highest quality, offering physicians, patients and payers unmatched clinical performance and demonstrated economic value. (source: company press release) Why We Like It: Entry point is everything when you're trading options. Right now it looks like STJ is offering bulls a great entry point for its next leg higher. For the last six months this has been a very steady performer for investors and buying on dips to its simple 40-dma (forty) has been a solid strategy. Of course every strategy is not without risks. These last six months have seen a number of upgrades for STJ. Now that the stock is performing so well, we've already witnessed at least one downgrade on valuation concerns and there could be more. A few days ago CIBC world markets felt that the stock might be feeling pressure from competitors MDT and GDT. The stock pulled back from all-time highs on the downgrade. Meanwhile, a competing analyst at J.P. Morgan was suggesting that investors buy the stock on this weakness, believing that STJ would provide strong revenue and earnings growth for the next couple of years. The stock's technical signals are a little mixed. STJ's P&F chart is still on a buy signal but it has certainly pulled back from its highs and a single trade at $55.00 or below would produce a new sell signal. Its MACD is also increasingly bearish while STJ's Stochastics, and momentum indicators have all turned bullish from oversold. We're going to suggest new bullish positions at current levels with a stop just under $55.00. Suggested Options: Given the entry point that STJ is offering we like the July options. The July 60 looks very tempting. August options are brand new and don't have much volume or open interest yet. BUY CALL JUL-55 STJ-GK OI=1701 at $4.00 SL=2.25 BUY CALL JUL-60 STJ-GL OI=2799 at $1.45 SL=0.75 BUY CALL AUG-55 STJ-HK OI= 0 at $4.90 SL=2.50 BUY CALL AUG-60 STJ-HL OI= 40 at $2.35 SL=1.15 BUY CALL OCT-60 STJ-JL OI= 404 at $3.50 SL=1.50 Annotated Chart: Picked on June 24th at $57.62 Change since picked: +0.00 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 1.56 million Chart link: ************************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 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Capital One Financial - COF - close: 49.50 chg: -0.93 stop: 52.51 The markets are in a holding pattern as we wait for the FOMC decision on interest rates. There is no other sector more closely tied to this event than banking. Both the BIX and the BKX banking indices bounced into the green today but the gains were very minor. Shares of COF followed suit with its own bounce. Yet bears can remain somewhat calm that COF did not regain its $50.00 level. A rollover from here would look like a very tempting entry point for new bearish positions. We're leaving our stop at $52.51 but more conservative traders might be able to sneak buy with a tighter stop. Expect some volatility tomorrow directly after the Fed announcement. Picked on June 22 at $49.64 Change since picked: -0.14 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume: 4.3 million Chart = ---- Kohl's Corp. - KSS - close: 50.20 change: +0.33 stop: 52.25 Well, it certainly seems that the battle lines have been drawn on KSS. The bulls are persistently buying the dips below $49 and the bears are stubbornly selling into each rally near the 20-dma (currently $51.46). That moving average is continuing to drop on a daily basis, and that is continuing to put downward pressure on the stock. Something should give way soon, and the outcome of tomorrow's FOMC meeting may just be the catalyst we've been waiting for. The strategy remains quite simple: Target new entries on failed bounces below the 20-dma and look for an eventual drop down to the $46 area, using a stop at $52.25. KSS is one of the weaker stocks in the Retail sector (RLX.X), so any weakness in the RLX should be amplified in shares of KSS. Since intraday support has been coming in near the $48 level, we aren't recommending new positions on a breakdown under this level due to its proximity to support in the $46-47 area. Maintain stops at $52.25. Picked on June 15th at $49.45 Change since picked: +0.75 Earnings Date 08/14/03 (unconfirmed) Average Daily Volume = 4.45 mln --- The Ryland Group - RYL - close: 71.44 change: +1.82 stop: 75.25 Like the Energizer Bunny, the Housing stocks keep going and going. Late last week, the group looked like it had started a process of weakening that we expected to continue through the FOMC meeting and then pick up speed. Contrary to that expectation, the DJUSHB index held its ground on Monday while the rest of the market headed sharply higher and then managed a better than 1% rebound on Tuesday. Going along with the sector, shares of RYL bounced smartly from the $68.50 level (just above the intraday support found in early June) and tacked on 2.6% to close very near the high of the day. Did we get suckered again? Only time will tell, but the price action so far this week is demonstrating precisely why we mentioned the possibility of a pre-FOMC rebound with the possibility of a subsequent sell the news drop. We're getting that rebound and RYL stalled on Tuesday right at that first potential resistance of $71.50. A rollover from there tomorrow may make for a solid, if aggressive entry point. Traders looking for a better entry may be able to take advantage of a failed rally up near the $73.50 area. Clearly, risk-averse traders will need to wait until after the FOMC announcement tomorrow before taking a position and may want to wait for RYL to decline back under $68.50 before playing. Regardless of entry strategy, look for confirmation of weakness from the DJUSHB index breaking below the $440 support. Until we see how the post-FOMC action is going to shake out, we'll continue to work with a wide stop at $75.25. Picked on June 22nd at $69.95 Change since picked: +1.49 Earnings Date 07/23/03 (unconfirmed) Average Daily Volume = 880 K --- Whole Foods Market - WFMI - cls: 48.41 chg: +0.65 stop: 50.00 It should come as no surprise that shares of WFMI are ticking higher today. We've been expecting a bounce and given the general market's state of limbo ahead of the Fed we see WFMI inching higher due to sellers sitting on the sidelines waiting for tomorrow. The oscillators, like the stock price, are very oversold so this pause on the way down has several of them curling closer to a bullish crossover. We've been watching the simple 10-dma as the bears' first line of defense. Shares of WFMI traded above this moving average intraday but they didn't close above it. While we can view this as a minor victory, we would not be surprised to see another day or two of dip buying before the next leg down. This is a good spot to take a wait and see approach before considering new entry points. Picked on June 13 at $49.44 Change since picked: -1.03 Earnings Date 07/30/03 (unconfirmed) Average Daily Volume: 1.6 million Chart = ************* NEW PUT PLAYS ************* Broadcom Corp - BRCM - close: 24.13 chg: -1.40 stop: 26.05 Company Description: Broadcom Corporation is the leading provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies complete system-on-a- chip solutions and related hardware and software applications for every major broadband communications market. Our diverse product portfolio includes solutions for digital cable and satellite set-top boxes; cable and DSL modems and residential gateways; high-speed transmission and switching for local, metropolitan, wide area and storage networking; home and wireless networking; cellular and terrestrial wireless communications; Voice over Internet Protocol (VoIP) gateway and telephony systems; broadband network processors; and SystemI/O(TM) server solutions. These technologies and products support our core mission: Connecting everything.. (source: company press release) Why We Like It: The chip sector has been rather weak lately and contributing to the group's decline today are shares of BRCM, which dropped 5.48 percent. The breakdown under the psychological $25.00 mark and its rising 21-dma certainly look like bearish developments that short-term traders may try to capitalize on. The SOX semiconductor index was the second worst performer among the major sector indices today, dropping 2.06 percent and closing below the 360 level of support. The big catalyst was not BRCM's drop in share price but AMD's earnings warning. AMD slashed its Q2 sales forecasts as improvement in June was a no show. BRCM's rally from $12.50 to $28.00 makes it a prime suspect for profit taking and it looks like it has begun. However, BRCM did manage to stall its decline right on its rising 30-dma and the $24.00 level. Therefore we're going to use a TRIGGER to leg us into this play. Only when shares of BRCM trade at $23.84 or lower will we officially "open" our put play. More aggressive traders may want to look for a failed rally under the $25.00 level. Once we are triggered we'll start with a stop loss at $26.05. More conservative traders may want to add another stipulation and not only wait for BRCM to trade at or below $23.84 but to wait for the SOX to trade below its 50-dma or the 350 level. Suggested Options: This should be a rather quick play as we don't plan on holding over BRCM's mid-July earnings announcement. Thus, July options look the most tempting but we'll list a couple of August strikes too. BUY PUT JUL 25.00 RCQ-SE OI=6703 at $2.25 SL=1.00 BUY PUT JUL 22.50 RCQ-SX OI=3817 at $1.10 SL=0.55 BUY PUT JUL 20.00 RCQ-SD OI=2787 at $0.40 SL=0.00*looks riskier* BUY PUT AUG 25.00 RCQ-TE OI=1764 at $3.00 SL=1.75 BUY PUT AUG 22.50 RCQ-TX OI=1077 at $1.80 SL=0.90 BUY PUT AUG 20.00 RCQ-TD OI=2989 at $1.00 SL=0.50 Annotated Chart: Picked on June 24 at $24.13 Change since picked: -0.00 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume: 14.0 million Chart = --- New Bearish Plays | June 24, 2003 It has been no great surprise to see some profit taking in the Banking stocks leading up to the FOMC meeting that concludes tomorrow. The big question is whether the weakness has run its course, or if this has just been a warm up. NEW PUT PLAY - Lower Rates Not Helping ============ Silicon Valley Bancshares - SIVB - close: 22.82 change: -1.13 stop: 25.25 Company Description: Silicon Valley Bancshares is a bank holding company and a financial holding company. The company's principal subsidiary is Silicon Valley Bank. SIVB serves more than 9500 clients across the country through 27 regional offices. The company has 11 offices throughout California and operates regional offices in Arizona, Colorado, Florida, Georgia, Illinois, Massachusetts, Minnesota, New York, North Carolina, Oregon, Pennsylvania, Texas, Virginia and Washington. The company serves emerging-growth and mature companies in the technology and life sciences markets, as well as wineries. The company is organized along five lines of banking and financial services: commercial banking, investment banking, private banking, merchant banking and other business services. Why we like it: In anticipation of more interest rate cuts from the Federal Reserve tomorrow, Financial stocks have had an impressive run over the past 3 months. But the past week has been less impressive, with both the KBW Banking index (BKX.X) and the S&P Banks index (BIX.X) seeing some concerted profit taking. Obviously the big question is whether the Fed will cut rates again tomorrow and if so, by how much. But even more important to traders is the question of whether a cut will provide fuel for another rally or an excuse for more selling. Regardless of the outcome of those weighty questions, there are some Financial stocks that seem to be showing excessive weakness compared to the rest of the sector. Shares of SIVB are one such example, as the stock has seen increasingly heavy selling over the past four days, with today's 4.7% loss coming on volume that more than tripled the ADV. The stock started weakening near the $26.50 area (forming a nice double top) and crashing through the $24 support level yesterday (confirming the double top) and closing under the 50-dma ($24.46) for the first time in 3 months. After that violation, we might have expected a bit of a rebound today, especially after the close right on the lower Bollinger band. It wasn't to be, as the selling party continued on Tuesday, gapping down and continuing lower throughout the session to close near the low of the day. The stock appears overdue for a bit of a rebound, but with all the technical damage done over the past couple days, that rebound is likely to be short-lived and only set up the bears with another solid entry point. A bounce up into the $24.00-24.50 area looks like a dream of an entry point, as there are likely to be a lot of willing sellers at the top of today's gap ($23.95) and then at the 50-dma. Adding to resistance in this area is broken support near $24.25 from late May, as the breakdown below this level yesterday confirmed the double-top formation. A big part of what has us avoiding entries on further weakness is the degree to which the stock is already stretched below the lower Bollinger band, currently $23.56. Fade the rally and then look for an eventual decline down to the $20 area, which is the bottom of the mid-April gap, the site of solid support (broken resistance), backed up by the 200-dma at $19.55. Initial stops are in place at $25.25, just above intraday resistance from last Friday. Suggested Options: Short-term traders will want to focus on the July 25 Put, as it will provide the best return for a short-term play. Those looking for a larger move down towards the $20 level will want to utilize the July 20 contract or even the August strike, the latter of which provides greater insulation from the spectre of time decay. Note that Open Interest is highest for the August strike, so entry and exit will likely be the easiest with these contracts. BUY PUT JUL-25 SQU-SE OI= 40 at $2.55 SL=1.25 BUY PUT JUL-22 SQU-SX OI= 0 at $0.95 SL=0.50 BUY PUT AUG-22 SQU-TX OI= 81 at $1.35 SL=0.75 Annotated Chart of SIVB: Picked on June 24th at $22.82 Change since picked: +0.00 Earnings Date N/A Average Daily Volume = 633 K ************************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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 06-24-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: 40-dma Entry Point! ********************** PLAY OF THE DAY - CALL ********************** St. Jude Medical - STJ - close: 57.62 change: +0.90 stop: 54.95 Company Description: St. Jude Medical, Inc. (www.sjm.com) is dedicated to the design, manufacture and distribution of innovative medical devices of the highest quality, offering physicians, patients and payers unmatched clinical performance and demonstrated economic value. (source: company press release) Why We Like It: Entry point is everything when you're trading options. Right now it looks like STJ is offering bulls a great entry point for its next leg higher. For the last six months this has been a very steady performer for investors and buying on dips to its simple 40-dma (forty) has been a solid strategy. Of course every strategy is not without risks. These last six months have seen a number of upgrades for STJ. Now that the stock is performing so well, we've already witnessed at least one downgrade on valuation concerns and there could be more. A few days ago CIBC world markets felt that the stock might be feeling pressure from competitors MDT and GDT. The stock pulled back from all-time highs on the downgrade. Meanwhile, a competing analyst at J.P. Morgan was suggesting that investors buy the stock on this weakness, believing that STJ would provide strong revenue and earnings growth for the next couple of years. The stock's technical signals are a little mixed. STJ's P&F chart is still on a buy signal but it has certainly pulled back from its highs and a single trade at $55.00 or below would produce a new sell signal. Its MACD is also increasingly bearish while STJ's Stochastics, and momentum indicators have all turned bullish from oversold. We're going to suggest new bullish positions at current levels with a stop just under $55.00. Suggested Options: Given the entry point that STJ is offering we like the July options. The July 60 looks very tempting. August options are brand new and don't have much volume or open interest yet. BUY CALL JUL-55 STJ-GK OI=1701 at $4.00 SL=2.25 BUY CALL JUL-60 STJ-GL OI=2799 at $1.45 SL=0.75 BUY CALL AUG-55 STJ-HK OI= 0 at $4.90 SL=2.50 BUY CALL AUG-60 STJ-HL OI= 40 at $2.35 SL=1.15 BUY CALL OCT-60 STJ-JL OI= 404 at $3.50 SL=1.50 Annotated Chart: Picked on June 24th at $57.62 Change since picked: +0.00 Earnings Date 07/16/03 (unconfirmed) Average Daily Volume = 1.56 million Chart link: ************************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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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