The Option Investor Newsletter Wednesday 07-09-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Correction Futures Wrap: Higher treasuries, lower equities Index Trader Wrap: Almost like the Three Stooges Weekly Fund Family Profile: Safeco Mutual Funds Traders Corner: A Day In The Life Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 07-09-2003 High Low Volume Advance/Decline DJIA 9156.21 - 66.88 9229.11 9108.24 1.99 bln 974/ 988 NASDAQ 1747.46 + 1.00 1758.18 1735.30 2.17 bln 1385/ 742 S&P 100 503.63 - 2.71 508.25 501.73 Totals 1359/1730 S&P 500 1002.21 - 5.63 1010.43 998.17 RUS 2000 476.99 + 3.02 477.88 470.50 DJ TRANS 2562.41 - 2.71 2575.07 2552.50 VIX 21.03 - 0.37 22.22 20.88 VXN 33.22 - 0.27 34.06 32.60 Total Volume 4,415M Total UpVol 2,436M Total DnVol 1,902M 52wk Highs 872 52wk Lows 19 TRIN 0.88 PUT/CALL 0.72 ******************************************************************* Correction Jonathan Levinson The indices pulled back to their ascending trendlines today in a much anticipated and long-awaited correction. Although there was an "impulsive" feel to the selling, the bounces came on schedule at the lower ascending trendlines. 30 minute 20 day candle chart of the INDU 30 minute 20 day candle chart of the COMPX The Commerce Department announced that US wholesale inventories dropped 0.3% in May, following a decline in the same amount in April. Wholesale sales dropped 0.5%. The inventory-to-sales ratio remained at 1.24, just above its record low of 1.21 posted in March. This negative economic news, a downside surprise against expectations of gains in both inventories and sales, sparked a selloff when it was released at 10AM, but within minutes it was bought on huge volume in the futures pits. The American Petroleum Institute reported a 3.97 million barrel increase in crude inventories for the week just ended, while the Energy Department reported a mere 100,000 barrel gain. The API reported that gasoline inventories fell by 2.5 million barrels, while the Energy Department reported a gain of 500,000 barrels. Nothing like a disagreement on the facts. Crude and heating oil futures both finished higher, with the market apparently ignoring both, judging that in any event, the data was bullish for these commodities. The Mortgage Bankers Association (MBA) announced that seasonally- adjusted demand for mortgage refinancings, the MBA refinancing index, dropped 21.3% for the week ended July 4. Demand for loans with which to buy homes, the Purchase index, dropped 5.5%. The MBA's market index, an overall measure of mortgage activity, dropped 17.7%. The average interest rate for a 30-year fixed rate mortgage rose to 5.37% from 5.23%. Reports cited rising interest rates and a shortened holiday week. For the past several weeks, I have been discussing the impact of money supply on the prices of paper assets. This past week saw a slight downtick in the overall money supply as measured by the MZM money supply, coincident with the downtick in mortgage activity. MZM chart The previous week had seen a downtick in mortgage activity as well. We also saw lower prices in equities and treasury bonds. While these data are coincident, I do not believe that they are coincidences. My premise is that the overall levels of debt are directly correlated to overall levels of liquidity. Debt is liquidity - the more debt, the more liquidity and hence, higher asset prices. The reverse appears to be true as well, as we've seen in the downtick in mortgage activity, money supply, bond and stock prices. Note that the Fed, whose ostensible mission is to promote stability in the financial markets, has been fighting this downtick in liquidity by dramatically increasing its levels of open market operations over the past weeks (see chart below). We track the Fed's daily open market operations in the Market Monitor, and my very first article on this website (in Traders Corner) attempts to explain how open market ops function. Chart of overnight and term repurchase agreements (repos) We have seen that despite the dramatic inflation of the money supply by the Fed, the money (or rather, the debt) has managed to miss commercial and industrial borrowers, flowing into the hands of individual borrowers instead. The data shows that they have used this debt for the purchase of houses (mortgages), automobiles (auto loans and leases), and other consumer products (home equity loans, lines of credit and credit card debt). Chart of Real Estate Loans Chart of Total Consumer Credit Unfortunately, as the ongoing record-breaking current account deficit has been telling us, the bulk of the economic stimulus from the Fed's operations has been in foreign countries, and this is confirmed by the rising unemployment rate at home in the US. Chart of Unemployment Rate Lastly, the selling in treasuries since the Fed's last quarter- point rate cut has caused a spike in yields. In light of the rising number of bankruptcies during the past year and the 45 year low federal funds rate, I believe that the single greatest current danger to the economy is higher interest rates. Given the Fed's strong words about its intention to keep rates down, I do not expect the selloff in treasuries to go much further. 5 year weekly chart of the ten year note yield The President named his remaining top treasury officials today, adding Susan Schwab, former dean of U. of Maryland, as deputy Treasury secretary and Kenneth Leet, former Goldman Sachs executive, to replace outgoing domestic finance undersecretary Peter Fisher. Fisher is best known for having phased out the thirty year bond. The new appointees join John Snow as Treasury secretary, Stephen Friedman as White House economic advisor and Gregory Mankiw as chairman of the council of economic advisors. In corporate news, it was announced that the SEC has launched a formal probe of THC, sending a subpoena requesting documents relating to Medicare payments and other disclosures going back to May 1997. LOGI got clocked today after warning that fiscal Q4 operating income would be between $7 million and $8 million, far below its its goal of $14 million. It cited weak demand and intense competition for decrease. Techs got a lift in the afternoon after it was reported that Gartner Group expects worldwide semiconductor capital spending to grow 7.9% in 2003 after dropping 38% percent in 2002. After the bell, DNA beat estimates, reversing a loss from Q2 2002 and announcing pro forma earnings of $163.5 million, or 31 cents per share excluding special charges. Estimates were for 26 cents per share. The much-anticipated YHOO earnings release was poorly received by the market, cratering QQQ afterhours to below 32 as of this writing and reversing a positive close by over one dollar for YHOO. The company reported that Q2 earnings were $50.8 million, or 8 cents per share, up from $16.48 million, or 3 cents per share, in Q2 2002. It missed its earnings projection of 9 cents per share by a penny. For tomorrow, we have the following economic data due before the bell: Report Briefing Market Prior Expects Expects Jul 10 8:30 AM Export Prices ex-ag. Jun - NA NA -0.1% Jul 10 8:30 AM Import Prices ex-oil Jun - NA NA -0.2% Jul 10 8:30 AM Initial Claims 07/05 - 420K 420K 430K For tomorrow, we can expect further tests of the bullish trendlines on the major indices. I am very far from caring about YHOO's financial well-being one way or the other, but the action following its earnings release is relevant for the broader market as we approach earnings season. Bulls have amassed fat profits this year, and the mighty Nasdaq is sitting near the top of a very steep ascending trendline as we head into earnings season at the start of the summer. We had a small correction today. A profit-taking event would have a distinctly deleterious effect on bull accounts, and for that reason, we should be attentive to the current support levels. Bulls should set appropriate stops and be alert. While the rally can certainly march higher, the risk- reward balance has become lopsided, and it appears to me to favor the downside. ************ FUTURES WRAP ************ Higher treasuries, lower equities Jonathan Levinson Treasuries actually saw some buying today, while equities saw some selling. Neither moves were sufficient to reverse their recent trends, and were by-now expected. 150-tick candle chart of ES3U Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 10167 1009 1002 995 988 YM03U 9266 9203 9142 9079 9018 NQ03U 1320 1308 1298 1286 1275 10 minute chart of the US Dollar Index The US Dollar Index sold off all night, bounced until noon, and fell again to just below support in the 95.60 area. Gold sold off gradually for most of the session, bouncing from just below 343 support in mid-afternoon to close positive by 10 cents at 344.50. Daily chart of August gold The action in gold did little to alter the longer term view as depicted by the daily candles. Despite the action in gold, the precious metals spent the day hovering along both sides of unchanged, closing negative by pennies, -.02 on the XAU and -.23 on the HUI. The CRB added 1.28 to close above 237. Daily chart of the ten year note yield Treasuries saw some buying today for a change, with treasury yields dropping modestly. The five year note yield was lower by 2.6 basis points to 2.568%, the ten by 2.7 bps to 3.706% and the thirty by 1.5 bps to 4.711%. The Fed added a small 1.75B overnight repo, which no doubt contributed. While the pullback broke the recent trend, the uptrend on the daily chart was not challenged by today's action. We saw buying in treasuries and selling in equities today, although the Nasdaq futures were stronger than the other indices. Nevertheless, it's another notch in favor of the "asset allocation" theory that bonds will resume trading inversely to equities. Through the duration of the recent rally, bonds and equities rallied together. Whether selling in bonds will lead to the proceeds pouring into equities is anyone's guess, although I personally don't expect to see it. Daily NQ candles The NQ closed on a near-gravestone doji, with a blowoff spike and close nearer to its low of the day. It remains nevertheless on clear oscillator buy signals, well above its ascending trendline. 30 minute 20 day chart of the NQ Zooming in to the 30 minute candles, we see the first cracks in the NQ's armor, with a spike below the steep rising lower trendline. As of this writing, NQ was trading near its session lows at 1289. A breakdown from a bearish ascending wedge implies a move to the bottom of the formation, if it plays out, which in this case would be 1180. The oscillators are on sell signals here, pointing to lower prices during tomorrow's session. Daily ES candles The S&P futures put in an outside day but refused to pick a direction, whipsawing to the downside and the upside and closing lower on the day. Like the NQ contract, it is still on buy signals and above its ascending trendline, but as discussed in last night's Futures Wrap, it's lagging the NQ considerably. 20 day 30 minute chart of the ES The relative weakness in ES is demonstrated by the weaker angle of the rising wedge. As of this writing, it was trading 998.50, also in breakdown territory. The implied downside target of this formation is 960. Daily YM candles Helped along by MO and GE, the Dow futures were very weak today, and while ES and NQ are on Macd buy signals, this signal appears to be failing to print the daily YM contract. The daily uptrend is still intact, but it continues to lag both the ES and the NQ. 20 day 30 minute chart of the YM Today's action actually put the YM on buy signals based on the recovery up to 3:30PM EST. The move higher failed at the broken lower trendline of a bear wedge, but the trendline was editorially placed in position, and would have fit as the lower end of a bear flag to contain the price instead. As a bear wedge, the downside target is 8840, but as a bearflag, its target will be significantly lower, always assuming that we see a breakdown instead of a bounce. Today's session saw a higher high and higher low on the NQ contract, a lower high and lower low on the YM, and ES gave us a higher high and lower low. All closed in negative territory. GE got croaked again, dropping 1.46% and closing within 2 cents of its day low. The tale of two markets continues, with the Nasdaq leading bullishly higher, and the Dow unable to pull itself together. The reversal in equities off their noon lows coincided with a reversal in the US Dollar Index off its noon high, and was followed 10 minutes later by a flurry of buying in treasuries. This was the signature of the "liquidity rallies" we saw all spring. For tomorrow's session, I expect further downside as implied by the shorter cycle oscillators. I do not expect the bear wedges to break down all at once, but we may be seeing the beginning of a trend reversal to bring us to an eventual test of the rising trendlines on the daily charts. ******************** INDEX TRADER SUMMARY ******************** Almost like the Three Stooges It's not the least bit funny to a Dow bull, but while most comic film aficionados know that there were actually four "stooges" that comprised the wild and crazy "Three Stooges," it was MOe's turn (Altria (NYSE:MO) $44.00 -5.92%)) to trip in what seems to be a continued bungling among certain Dow components that has some hecklers beginning to think there might be 30 stooges that just can't seem to get their act together for a push higher. One trader quipped in an e-mail that tobacco giant Altria (MO) should be given the name "Mad Dog von Altria" as it relates to last night's wrap and impact on today's Dow trade. Renewed concerns were raised by several brokers that an Illinois lower court judge may not have had the authority to change terms of a $12 billion bond (reduced to $6 billion), which the company had been required to secure after Circuit Court Judge Nicholas Byron ruled in March that the company has mislead Illinois smokers into thinking that its "light" cigarettes were somehow safer than its regular smokes. In recent weeks, several brokers issued favorable upgrades on MO and the markets listened on thought that the $6 billion bond ruling lifted some legal concerns, but today's revelation had those same brokers back on the defensive as MO had stated in the past that a $12 billion bond requirement could drive the company into bankruptcy. For me (Jeff Bailey) this now becomes one of those situations where the eventual outcome becomes very unpredictable, and while I've been bullish the stock based on technicals in recent weeks, this now becomes a situation where I rely on the "when in doubt get out" rule of trade and would look elsewhere on an individual stock basis. The major indexes looked to finish today's session stronger than at the mid-point of today's trade, but a late round of selling, which some floor traders said was created by some sell on close trade imbalances, left all but the NASDAQ Composite (COMPX) 1,747.46 +0.05% and the smaller-cap Russell-2000 Index (RUT.X) 476.99 +0.63% finishing in the red. Treasuries found modest buying for the bulk of today's trade and finished with fractional gains, and my only thoughts toward the sell on close trade imbalance might have been due to some fine tuning toward asset allocation. After a YIELD gap lower at the open in the benchmark 10-year YIELD ($TNX.X) to 3.695%, it traded between 3.673% and 3.72% to finish down 3 basis points at 3.703% and right in the middle of its daily range of trade. I looked at 10-minute interval bar chart that shows a potential head/shoulder top formation forming this week, where a break much below the 3.670% YIELD level may have some near-term negative implications for equities, as this YIELD objective on break of neckline at 3.670% would give a lower YIELD objective of 3.58%. This would be a suspicious YIELD target as this 3.58% YIELD level is right where the 10-year YIELD was trading just minutes before it gapped higher on some strong selling on July 3rd, which was Thursday of last week, at the 10:00 AM EST mark. This is right when the June ISM Services Index was released and showed a bullish surge to 60.6, which was well above economist's forecast of 55.0, and showed building optimism from May's 54.5 reading. The S&P Retail Index (RLX.X) 338.85 -1.47% ended the session as today's sector loser after setting a 52-week high yesterday. I do think that today's economic data and May wholesale sales data influenced some profit taking among retailers as May sales fell 0.5% to $233.43 billion, extending a 2.5% decline from April. Still, I tend to think of the May data as now being "older news," and I don't think I'm going out on a limb saying this. I'm not discounting the May sales data, which shows things were still slow at the wholesale level, but the June ISM Services Index, a little more recent, did show more optimism that may be reflected in the June wholesale data. We shall see. Dow Industrials ($INDU) Chart - Daily Interval Dow breadth was negative at 19 to 11 by sessions-end. Take MO's -5.9% decline away and the Dow probably finished with a 20-point loss. Still, that's not the way the game is played is it? We can't just "exclude" one stock's performance or potential bullish/bearish implications one or two of its components can have on things. Does Altria (NYSE:MO) $44.00 -4.92% face potential bankruptcy if it has to post a $12 billion bond? While I'm smart enough to know that a "light cigarette" is no-less harmful than a regular "cancer stick," regardless of what a print ad might suggest, I'm not smart enough to know if company officials are telling the truth about a $12 billion bond having bankruptcy potential for its Philip Morris unit. One thing I did make note of in today's Market Monitor is how close, "but no cigar" the Dow came to trading 9,100. While the 9,100 level isn't really a "key level" that shows up, it would be a 3-box reversal lower in the Dow's point and figure chart, and could see some downside momentum build if traded. The reason I made the note, is that we did set a "finite stopping point" for bulls in the Dow's PnF chart at 8,900, which was traded on July 1st (first lower low we've seen in the Dow since March's reversal higher), and the recent rally back to 9,250, while strong, would be a lower high on a 3-box reversal back lower at 9,100. Per last night's Index Wrap, if there is a "Mad Dog Vachon" in the Dow right now, it may well be Altria (MO) that jumps from under the ring mat and releases the sleeper hold that bulls have had on bears. Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and status remains "bull confirmed" at 86.67%. S&P 500 Index (SPX) Chart - Daily Intervals I'm looking for signs of weakness to present themselves tomorrow in the following fashion. 10-year YIELD ($TNX.X) below 3.670% (buying in Treasuries) and a break of SPX at 996 to get some short-term bearish momentum for a drive back into 981-984.49. However, to get that type of technical scenario together, it is probably going to "depend" on the WEEKLY Initial jobless claims data due out at 08:30 AM EST, with consensus at 420,000 for the week, which would be better than the prior week's 430,000. As such, it may take a 440,000 type of number to get a move lower. Now, I'm not counting on this type of trade at this point, but I think this "bearish" technical setup is in play. Despite some selling in Yahoo! (NASDAQ:YHOO) in after-hours, which "amazingly" even has some semiconductor and other technology stocks lower in after-hours, S&P futures are holding above today's lows and steady at 998. Futures traders don't seem to care that much about YHOO action and they seem to be waiting for tomorrow's employment data before futures bulls throw in the towel on inline numbers from YHOO. The catalyst for an upside move for the indexes is also present in the employment data, which to this point of the impressive rise for equities hasn't shown much improvement at all. A surprise type of reading of 410,000 is going to give the near- term look that the employment picture is improving, and a move above today's highs in the SPX may have the MACD crossing above Signal, creating the "bullish crossover" on this indicator. I've marked on the above chart a very SIMILAR oscillator setup as to that found at the close of May 29th, where on May 30th, the move came to the upside. As it stands tonight, bulls want to see SIMILARITY to the past, while bears look for DIVERGENCE! Internals remain strong, and I will have to think that BEARS are keeping their fingers crossed for a bad employment number to surprise the markets as the S&P 500 Bullish % ($BPSPX) saw a net gain of 2 stocks to new point and figure buy signals and has the bullish % inching up to 79.2%. NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals While Yahoo! Inc. (NASDAQ:YHOO) $35.29 +0.54% gained 19 cents during today's regular session, and would not be among any bullish trader's list of "stooges" this year, its inline quarterly earnings report found the stock falling to $33.25 (- 5.7% from close) in after-hours trade, and gives a somewhat sour look to the NASDAQ-100 Tracking Stock (AMEX:QQQ) $32.20 -0.24% which slipped 8 cent lower in today's session, as the Q's now tick by at $32.00 in the after-hours session, but still holding above today's intra-day low of $31.93 as if there's some bears still looking to get things squared up after another 52-week high today at $32.49. I'm still seeing some individual stocks that look to be finding some eager buyers (shorts covering or momentum bulls) and after a test of upper regression, YHOO's inline earnings and solid guidance finds this stock's after-hours action having negative psychological impact on just about every other type of technology stock. Evidently, after-hours traders (usually retail traders like you and I) just weren't satisfied. One trade I like is a QQQ pullback on weakness near WEEKLY R1, especially if weekly jobless claims aren't more than 10,000 off of economist's forecast. I'm still seeing enough action to the upside in many stocks to have me thinking that there's going to be support on a pullback to $31.44-$31.37 area from sideways bears for a decent trade back to a $32.15 target. Today's trade saw the NASDAQ-100 Bullish % ($BPNDX) see a net gain of 2 stocks to new point and figure buy signals, and this now has the bullish % reversing back up to "bull confirmed" from "bull correction" status at 81% bullish. I still think it VERY important for new bullish entries to be done with partial positions, ESPECIALLY IN THE NASDAQ-100, as the bullish % chart is now set up to read "bear confirmed" should this bullish % fall back to a reading of 72%. Now... here comes the BIGGER test for some of the above and I'm going to start with my bond YIELD comments. I'm just testing this in the matrix, to see if anything makes sense. Pivot Analysis Matrix I started out with an observation of a potential intra-day head/shoulder top formation in the TNX.X with neckline at 3.670% and I do find DAILY S1 of 3.675 as a level tomorrow that might serve YIELD support just above the 3.670% neckline. Thinking is, if jobless data are positive, the shouldn't see bonds trade strong, so YIELD shouldn't go below 3.670%, or 3.675%. Now, if YIELD does break lower, and head/shoulder top and its bearish shorter-term type of objective of 3.58% YIELD does come to fruition, then this may "make sense" as to the WEEKLY Pivot of 3.589%. OK.... if the indexes were to trade in unison with TNX.X WEEKLY Pivot, that has the SPX right back at 980.93, which is where some may still hold previously bearish profiled partial positions in SPX puts, where stop was profiled at SPX new highs, which haven't quite been traded yet. But, this may also have the QQQ/NDX back at their WEEKLY pivots, but as we see in the WEEKLY and MONTHLY trade, its the NDX/QQQ which has been about "1 level" in the pivot stronger on the upside move. This perhaps gives some credence to the thought that WEEKLY R1 in the NDX/QQQ may be a near-term support level, where the other indexes, which have been "weaker in the pivots" find near-term support at their WEEKLY pivots with a 10-year YIELD lower trade. Anyway.... this is something I'll be monitoring against early tomorrow, but we will have the weekly jobless data before the bell! Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************** WEEKLY FUND FAMILY PROFILE ************************** Safeco Mutual Funds The Safeco Mutual Funds is a family of 18 mutual funds investing across all asset classes and offering exposure to both value and growth equity management styles, and both taxable and tax-exempt fixed-income investments. Safeco also has partnerships with two asset management firms that excel in their own equity investment styles. All Safeco Funds seek to deliver consistent returns for investors over time for the risks assumed. Safeco Asset Management, advisor to the Safeco fund family, is a Northwest-based investment firm, which traces its origin back to 1932 with the introduction of the Safeco Equity Fund. Note that effective October 1, the fund's name will change to Safeco Large Cap Core Fund to better reflect its core equity investment style. It seeks long-term capital growth plus reasonable current income by investing in household names such as Pfizer, Citigroup, Wash. Mutual, AIG, and GE. Richard Meagley has managed (or co-managed) the portfolio since January 1995. Key members of the Safeco management staff are: Kevin A. Rowell, president of Safeco Mutual Funds; Ronald L. Spaulding, chairman and chief investment officer of Safeco Asset Management; Darcy S. Maclaren, vice president and director of Safeco equity research since 1994. Darcy Maclaren oversees Safeco's equity department, portfolio managers, analysts and traders. She's now listed as a co-manager of the Safeco Equity Fund (since July 2003). Altogether, there are 10 equity funds, 7 fixed income funds, and one money market fund to select from, giving investors a variety of investment choices. Note, however, that on June 27, 2003, the board of trustees of the Safeco Taxable Bond Trust voted to merge Safeco Intermediate-Term U.S. Treasury Fund with/into Safeco U.S. Government Fund. In addition, Safeco Small Company Growth Fund's prospectus supplement indicates that Safeco Small Company Growth Fund and Safeco U.S. Value Fund will cease operations on or about September 8, 2003 and will not be offered for sale after July 15, 2003. A "no-load" investor share class of the Safeco funds is no longer offered. Retail investors must now purchase Safeco funds through their financial advisor and choose either A, B or C class shares. Class A shares have front-end loads of 5.75% but beyond that have the lowest annual operating expenses of the three "load" classes. For complete information or to download a fund prospectus, go to the Safeco Funds website at www.safecofunds.com. Mutual Fund Overview Excluding the Safeco funds that will merge or cease operations in the near future, investors have 15 Safeco investment products now to choose from across various asset classes and investment styles and strategies. Safeco's most successful stock funds in terms of total assets are Safeco Equity Fund ($705 million) and Safeco Growth Opportunities Fund ($459 million). Safeco Equity Fund falls into the large-cap blend style box per Morningstar while Safeco Growth Opportunities Fund is a small-cap blend fund that seeks capital growth. Based on its average investment style over the past three years, Safeco Growth Opportunities Fund is categorized as a "small-growth" fund by Morningstar. So, Safeco Equity Fund can serve a "core" equity role in one's portfolio, while Safeco Growth Opportunities can be used in an "explore" role. Safeco Dividend Income Fund, a $139 million fund, seeks high and steady income by investing in large-cap "dividend-paying" stocks purchased at attractive valuations. This equity income fund may be suitable for investors seeking a steady income with potential for capital growth over time. Note the fund will change its name to Safeco Large-Cap Value Fund on October 1, 2003. Safeco's most successful fixed income fund based on total assets is the $98 million Safeco California Tax-Free Income Fund. This single-state municipal bond fund seeks to provide a high a level of current income (exempt from federal income tax and California state personal income tax) consistent with relative stability of capital. Stephen C. Bauer has managed or co-managed the CA bond portfolio since October 1983. Safeco High-Yield Bond Fund and Intermediate-Term Muni Bond Fund have less than $50 million in net assets as does Safeco Balanced Fund. In the next section, we look at how well Safeco's class A, B and C shares have performed in relation to their category peer groups. Mutual Fund Performance Note that only one of Safeco's mutual funds is currently rated 4 stars or better by Morningstar for risk-adjusted returns versus category peers, and that is the investor class shares of Safeco California Tax-Free Income Fund (SFCAX). However, Class A and B shares of the fund are only 2-star rated overall by Morningstar, reflecting below average risk-adjusted returns versus comparable funds. Higher operating expenses are the main cause of variance between share class performance ratings. Likewise, the class A and B shares of Safeco Equity Fund are only rated 1-star or 2-stars, respectively, whereas the investor class shares of the fund receive 3 stars (average) currently. So, fund performance has generally been a little weaker on the Safeco load funds relative to the no-load investor share class (due primarily to higher annual operating expenses). Below is a performance summary for the Class A shares of Safeco's mutual funds (unless otherwise noted) using Morningstar's numbers through July 6, 2003. 5-Year Annual Average Return/Category Rank % (Jul-06-03) +1.6% Safeco Balanced A (SABAX) 44th Percentile +5.3% Safeco CA Tax-Free Income A (SCXAX) 34th Percentile -6.0% Safeco Dividend Income A (SFOAX) 99th Percentile -5.0% Safeco Equity A (SAEAX) 89th Percentile -4.9% Safeco Growth Opportunities A (SFGAX) 84th Percentile -2.2% Safeco High-Yield Bond B (SAHAX) 84th Percentile Of these six Safeco funds, none ranked in the top third of their respective Morningstar category for trailing 5-year performance. Two ranked in the "second" third of their respective categories, while four ranked in the "bottom" third of their category group. No wonder then that many Safeco funds have recently experienced management additions or changes (July 2003). It seems Safeco's mutual fund lineup is undergoing some revamping with many funds changing their name effective October 1, 2003 to better reflect their investment styles and strategies. On a YTD 2003 basis, a couple of the Safeco bond funds are doing relatively well. Safeco CA Tax-Free Income A (SCXAX) is up 4.1% on a YTD basis through July 6, ranking in the top 1% of its peer group. Safeco High Yield A (SAHAX) sports a YTD return of 18.1% to rank in the top quartile (15th percentile) of the Morningstar high-yield bond category. The YTD return performance of the Safeco Equity Fund and Safeco Growth Opportunities Fund ranks toward the middle of their fund categories. So, they are at least keeping pace with their peer groups. Safeco Equity A (SAEAX) has risen 12.3% through July 6, while Safeco Growth Opportunities A (SFGAX) is up 18.7% through the 6th of July. Those are respectable numbers. Opinion & Analysis Some no-load fund families have converted from no-load funds to load fund structures in recent years. Safeco Mutual Funds fall into that category. Newer, load class shares haven't performed as well as their (now closed) no-load share peers, largely as a result of higher relative annual operating expenses. While the fund advisor currently caps 12b-1 and other expenses at 0.4% of assets per annum, the annual expense ratios of some Safeco load funds are still up there. Safeco's Class B shares have expense ratios of over 2.00%, according to Morningstar. The result has been less consistent total returns. Investor class shareholders have no reason to jump ship but new investors may want to wait and see if recent management changes produce better relative results. The higher expense associated with the load share classes makes them less appealing for "new" shareholders. Still, two of their bond fund products are doing very well in 2003 and two equity funds are participating in the 2003 stock rally, so there is reason to be hopeful. With the recent fund mergers and liquidations, manager changes, etc. at Safeco, you may want to tread lightly, and wait and see if performance becomes stronger, more consistent. For complete fund information, or to download a prospectus, go to the Safeco Funds website at www.safecofunds.com. Steve Wagner Editor, Mutual Investor email@example.com ************************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 ************************************************************** ************** TRADERS CORNER ************** A Day In The Life by Mark Phillips mphillips@OptionInvestor.com Over the past 2 months, we've been building up to this point in our ongoing discussions on a futures trading plan. We first covered all the "boring" but very important issues of the basic strategy, account management, broker selection and myriad other issues in preparation for dissecting an actual day in the life of a futures trader. What I've been building up to is showing how the system I've developed for my own use came into being and then showing how I apply that in one day of trading. While the cornerstone of my trading approach boils down to intraday oscillators and price patterns, I think you will see that there are numerous nuances covered in today's installment that we haven't yet really covered in great detail. The great challenge in this process is being able to describe what I see during the day and communicate how that translates into trade decisions. As I mentioned last week, the further we go in this discussion, the more critical it becomes that all those just joining us have access to the prior installments in this series so that we're all talking the same language. If you're one of those newcomers, please take the time to catch up using the links below. The Case For Futures http://www.OptionInvestor.com/traderscorner/tc_050503_1.asp Planning For The Future(s) http://www.OptionInvestor.com/traderscorner/tc_051203_1.asp Back To The Future(s) http://www.OptionInvestor.com/traderscorner/tc_060203_1.asp Getting Ready To Launch http://www.OptionInvestor.com/traderscorner/tc_060903_1.asp Painting A Picture http://www.OptionInvestor.com/traderscorner/tc_061603_1.asp Discipline Failure http://www.OptionInvestor.com/traderscorner/tc_063003_1.asp As I mentioned last week, we've really reached the point in this series where pictures (i.e. intraday charts) are really going to provide the lion's share of the communication, as trying to describe things using the printed word will become rather cumbersome. So what I've attempted to do here today is show, with the aid of several intraday charts, how my trading in the ES unfolded today. I start each day with a look at the big picture, to get a feel for what I think ought to be the overall direction for the day. That comes from the daily, hourly and 30-minute charts. Starting with the daily chart, we can see that Tuesday's close at 1007.50 had the ES very close to strong resistance at 1010, and while daily Stochastics were still in bullish ascent, they were already entering overbought territory. That gave me the early bias that unless I saw overwhelming strength at the open, I would be looking to fade a rally failure near that known resistance. Adding to my conviction that this resistance should prove formidable was the R1 level from the pivot levels provided every night in the Futures Wrap, which was set at 1012. ES Daily Chart With the daily view still looking somewhat bullish, but with strong overhead resistance and a toppy-looking oscillator, we next turn to the 60- and 30-minute charts. It is this view that will primarily determine my trade bias going into the first half of the day. ES 60- and 30-Minute Chart Montage Here we can see a still-bullish picture, but with both sets of Stochastics oscillators looking a bit extended in or near overbought territory, my predisposition to short a failed rally near the 1010 level looks like a solid strategy heading into the opening bell. At this point, I am done looking at these longer- term charts for the next few hours. My focus now moves to the more micro view using primarily the 5-minute chart. While I will monitor both the 10-minute and the 2-minute charts, the core of my trading decisions will be made using the 5-minute view. So let's see how things shaped up in that view. Trade Setup #1 This is one of my favorite setups for a trade entry, because I have so many different factors lining up to tell me that a short trade should work quite nicely. Bearish divergence on the 5- minute Stochastics, with Stochastics starting to roll bearish near 10:30am ET is the final piece of the puzzle. Recall that prior to the open, I was looking to short a rally failure near 1010, and isn't it amazing how 1010.00 was the high tick? Aggressive traders may have gotten an exceptional entry by placing a resting order to short 1010. I'm a bit more conservative and would have wanted to see the confirmation from the oscillator rolling bearish, so my entry would come in the 1007-1008 area. Note that I made no mention of what the root cause was of either the early ramp or the failure. Quite honestly, I couldn't care less. All I care about is the technical setup and then the resultant follow- through. The why is not nearly as critical on an intraday basis, which allows me to focus my efforts primarily on what I see on the charts. So let's see how that one played out, shall we? Trade #1 Exit Now that's precisely how these trades are supposed to work out -- nice and quick. The ES melted down right to 1000 before finding any semblance of support. Remember that when I enter a trade, I'm looking for a gain of 8-10 points, taking risk to my initial stop of 3-4 points. Note that my stop was never threatened during the slide lower and given the choppy range of the past couple days, it is a no-brainer to harvest the 7-8 points from the conservative entry point. Confirming that a bounce was imminent was the Stochastics oscillator bottoming out in oversold. It might not bounce, but what we have here is a high-odds profitable exit point and I almost always take those when they're offered. As you'll see in the next chart, I didn't catch the bottom of that move, but after trading the 1000 level, I would have lowered my stop to 1003, which would have just barely gotten clipped on the bounce before ES continued down to the day's low of 996. Trade #2 Setup Here again, we have divergence setting up on the Stochastics oscillator, but this time it is in the bulls' favor. By now, the 30-minute Stochastics (not shown) is nearing oversold territory, so I'm willing to entertain bullish entries. With the strength of the bounce off 996 and bullish divergence setting up, a long off the 998-999 area looks attractive with an initial stop set 3.5 points below entry. As it turns out, that stop was not challenged either and when ES broke above 1002, I was able to trail that stop up to 998.50 (3.5 points below the local high), and I've got a free trade working in my favor -- worst cast on this one will be a gain of 0.5 points, which would cover my transaction costs. Trade #2 Exit That rebound just before 2pm Et from just above 999 gave me the ability to snap a rising trendline from the 996 low and in conjunction with the trend of higher lows on the oscillator, I've got a nice guide for managing this long play as well. It should be clear that this is definitely counter-trend to the dominant trend of the day, and for that reason I wasn't at all surprised to see the up-move proceeding at a more pedestrian rate than the morning's slide. Note how by the time ES traded the 1004 level, I would have trailed my stop to 1000.50, and that just barely held at the trendline just after 2:30pm ET. From there, the bulls once again pushed through resistance and the ES traded its afternoon highs just under 1007 about 40 minutes before the close of the cash session. Referring back to my stated goal of 8-10 points from each trade that I enter, I took advantage of the +8 unrealized gains (1006-998) and exited the trade at that point. But there would be nothing wrong with using either the trailed stop approach or waiting for the trendline break either. One aspect of the trailed stop approach that I don't think I've covered here is that I tend to get more aggressive with my stop the closer I get to my exit target. So on this particular trade, once the ES moved over 1004, I was working with only a 2 point stop. So the notation on the chart above about stopped at 1002.75 refers to the trendline break. If I had still been using a trailing stop to get me out, then the exit would have come at 1004.75, which was 2 points below the local high of 1006.75 I know there are a ton of factors and potential issues that I either didn't discuss here or that weren't relevant to the day's trading. Hopefully by next week, we'll have a different-looking day to dissect and maybe we can pull some of those other factors into the mix. One glaring omission today was that I really didn't use the ADVDECV indicator for any of my trade decisions. Remember I said it was a secondary trade filter, and I use it predominantly to keep me from fighting a strong trend day. We didn't have that on Wednesday, so that indicator just didn't come into play. I hope you found this as useful as I found it fun. Next week, I'll see if I can find another day to dissect, hopefully with a losing trade to balance out today's success. Mark ******************* 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. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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The Option Investor Newsletter Wednesday 07-09-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: None Dropped Calls: None Dropped Puts: None Play of the Day: PUT - BLL Spreads, Combinations & Premium-Selling Plays: Entry Point Or Time To Sell? Watch List: Mix and Match Updated on the site tonight: Market Posture: Testing Trendlines ************************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 ************************************************************** ***************** STOP-LOSS UPDATES ***************** None ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********************* PLAY OF THE DAY - PUT ********************* Ball Corporation - BLL - close: 44.70 change: -0.44 stop: 47.50 - Company Description - Ball Corp. is a manufacturer of metal and plastic packaging, primarily for beverages and foods, and a supplier of aerospace and other technologies and services to commercial and governmental customers. Ball's principal business is the manufacture and sale of rigid packaging products, primarily for beverages and foods. Polyethylene terephthalate packaging is the company's newest product line. The aerospace and technologies segment includes civil space systems, defense operations and commercial space operations. The defense operations business unit includes defense systems, systems engineering services and advanced antenna and video systems, as well as electro-optics and cryogenic systems and components. - Most Recent Update (Tuesday, July 8, 2003)- As hard as it is to find solid bearish plays in a bullish market environment, we think we've got one here. BLL first caught our attention in the middle of May when it broke below support near $55. But we avoided adding it to the playlist due to all the congestion resting in the $52-54 area. Once that was broken, the stock seemed to have a fair amount of support in the $46-48 area, so we passed up another opportunity. Well, over the past month, the bears have chewed through even that level of support and it looks like an imminent breakdown below $45 could be at hand. The P&F chart is totally bearish, with a price target of $34. Realistically, if the $45 support fails, then BLL ought to seek out next strong support in the $39-40 area, with support likely to be found near the $38 bullish support line on the P&F chart. One thing that is particularly appealing about this stock is the way it has found strong resistance just over $46 over the past couple weeks, indicating that this broken support level has left behind a fair amount of supply. Showing the strength of overhead resistance that has now built up, yesterday's strong (volume-backed) rebound to the $46 level was reversed just as sharply (on equally heavy volume) on Tuesday. There are a couple ways to play this one, with the most obvious being to enter on a failed rebound near $46 or even as high as $47, which should now be very strong resistance. That was intermediate support on the way down a month ago, and now the 20-dma ($46.81) and 30-dma ($47.39) are bearing down to reinforce that resistance. Momentum traders will want to enter on a break below $44.25, which is just below the intraday low on July 1st. There may be some mild historical support near $44 and then again at $42, but we're looking for continued weakness to extend down towards the $40 level before any significant buying interest is found. Unfortunately, our BLL play will have to be fairly brief, as the company is scheduled to issue its July earnings report on the 24th, which gives us just over 2 weeks to play. Initial stops should be placed at $47.50, just over the 30-dma. - Play of the Day Comments - BLL continue to be weaker than we expected. The failure to break over the $46 level earlier this week is seeing additional follow through by sellers. The volume has been strong the last three days with today's decline coming 909 thousand shares. Average volume is just 586 thousand. The move back under $45 may be enough to satisfy some traders for an entry point but as we mentioned earlier, momentum traders might want to see the current low near $44.26 broken first. Suggested Options: Short-term traders will want to focus on the July 45 Put, as it will provide the best return for a short-term play. Conservative traders looking for a larger move down towards the $40 level or below will want to utilize the August 45 contract, which provides greater insulation from the specter of time decay. ! WARNING -- July contracts expire next week. -- BUY PUT JUL-45 BLL-SI OI=293 at $1.05 SL=0.55 BUY PUT AUG-45 BLL-TI OI=308 at $2.05 SL=1.10 BUY PUT AUG-40 BLL-TH OI=431 at $0.65 SL=0.30 Annotated Chart of BLL: Picked on July 8th at $45.14 Change since picked: -0.44 Earnings Date 07/24/03 (confirmed) Average Daily Volume = 586 K Chart = ************************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 ************************************************************** ********************************************* SPREADS, COMBINATIONS & PREMIUM-SELLING PLAYS ********************************************* Entry Point Or Time To Sell? By Ray Cummins Stocks ended lower Wednesday as investors remained unconvinced that the recent rally will lead to a long-term bullish cycle. Industrial shares slumped with the Dow Jones Industrial Average dropping 66 points to 9,156 amid losses in Altria Group (NYSE:MO), Alcoa (NYSE:AA) and Home Depot (NYSE:HD). The NASDAQ continued to show strength, closing unchanged at 1,747 as networking companies were buoyed by positive comments from Cisco Systems (NASDAQ:CSCO), which said it sees a rebound in information-technology spending. The S&P 500 slipped 5 points lower to 1,002 as banking, insurance and retail shares slumped while oil service and gold stocks saw limited buying pressure. Decliners outnumbered advancers 6 to 5 on the New York Stock Exchange but the ratio was reversed on the NASDAQ, where winners edged past losers by a very small margin. Trading volume on the Big Board was 1.6 million and 2.1 billion on the technology exchange. In the bond market, Treasurys gained traction as money flowed out of stocks. The 10-year note added 5/32 to yield 3.69%, down slightly from 3.73% on Tuesday. *************** SUMMARY OF CURRENT POSITIONS - AS OF 7/8/03 *************** The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. Naked Puts ********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield BGEN JUL 37 36.90 42.85 $0.60 4.59% 1.63% CVTX JUL 25 24.45 33.28 $0.55 4.93% 2.25% MERQ JUL 40 38.30 43.08 $1.70 7.53% 4.44% NVDA JUL 20 19.60 24.77 $0.40 4.97% 2.04% AMHC JUL 25 24.65 36.75 $0.35 4.99% 1.42% ARTI JUL 20 19.70 24.30 $0.30 5.63% 1.52% AVCT JUL 27 27.05 32.61 $0.45 5.32% 1.66% GILD JUL 42 42.00 58.98 $0.50 4.49% 1.19% MERQ JUL 35 34.50 43.08 $0.50 5.25% 1.45% MVSN JUL 17 17.25 22.74 $0.25 5.11% 1.45% NVDA JUL 20 19.60 24.77 $0.40 7.38% 2.04% OVTI JUL 25 24.45 38.56 $0.55 7.88% 2.25% YHOO JUL 27 24.80 35.10 $0.45 5.32% 1.81% QCOM JUL 32 32.00 39.49 $0.50 4.38% 1.56% ARTI JUL 20 19.75 24.30 $0.25 5.45% 1.27% AVCT JUL 27 26.90 32.61 $0.60 8.19% 2.23% GILD JUL 47 46.90 58.98 $0.60 4.96% 1.28% ICST JUL 25 24.75 32.75 $0.25 4.42% 1.01% IMCLE JUL 25 24.65 33.77 $0.35 6.83% 1.42% JCOM JUL 37 37.05 51.26 $0.45 5.97% 1.21% OVTI JUL 25 24.70 38.56 $0.30 5.93% 1.21% RIMM JUL 20 19.50 23.55 $0.50 9.72% 2.56% SNDK JUL 30 29.65 46.81 $0.35 5.51% 1.18% YHOO JUL 27 27.10 35.10 $0.40 5.82% 1.48% AVCT JUL 27 27.15 32.61 $0.35 7.25% 1.29% AVID JUL 35 34.65 40.68 $0.35 5.86% 1.01% IVGN JUL 40 39.70 47.15 $0.30 4.31% 0.76% JCOM JUL 40 39.60 51.26 $0.40 6.46% 1.01% MATK JUL 40 39.60 46.41 $0.40 5.68% 1.01% MERQ JUL 37 37.05 43.08 $0.45 6.64% 1.21% NFLX JUL 22 22.25 27.43 $0.25 7.36% 1.12% NTE JUL 11 11.56 18.50 $0.30 5.69% 2.60% OSIP JUL 25 24.75 34.14 $0.25 6.94% 1.01% OVTI JUL 30 29.60 38.56 $0.40 7.34% 1.35% Conservative traders should probably have closed the Biogen (NASDAQ:BGEN) position, and possibly a few other suspect issues, during the recent market slump. Naked Calls *********** Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield LLTC JUL 37 38.30 36.14 $0.80 5.98% 2.09% XLNX JUL 32 33.05 28.67 $0.55 5.77% 1.66% IGEN JUL 45 45.90 33.68 $0.40 5.71% 0.87% CNF JUL 30 30.45 27.84 $0.45 5.02% 1.48% TRMS JUL 55 55.75 48.21 $0.75 5.65% 1.35% AFFX JUL 22 22.85 21.64 $0.35 7.97% 1.53% DCTM JUL 22 23.05 17.35 $0.55 12.14% 2.39% HCA JUL 35 35.45 32.10 $0.45 5.89% 1.27% CERN JUL 22 23.00 21.97 $0.50 15.56% 2.17% CUM JUL 40 40.25 38.77 $0.25 3.93% 0.62% GM JUL 37 37.80 36.58 $0.30 4.35% 0.79% Almost all of the bearish plays in our portfolio are on the watch-list, but Affymetrix (NASDAQ:AFFX), Linear Technology (NASDAQ:LLTC), Cerner (NASDAQ:CERN) and General Motors (NYSE:GM) appear to be the most critical positions and those plays should be closed on further upside activity. Put-Credit Spreads ****************** Symbol Pick Last Month L/P S/P Credit C/B G/L Status CMCSA 32.85 32.94 JUL 27 30 0.20 29.80 $0.20 Open IDPH 40.29 37.96 JUL 30 35 0.65 34.35 $0.65 Open IGT 23.59 25.97 JUL 20 21 0.15 20.85 $0.15 Open CCMP 52.60 57.11 JUL 40 45 0.50 44.50 $0.50 Open CECO 69.32 74.60 JUL 55 60 0.50 59.50 $0.50 Open LXK 76.99 76.29 JUL 65 70 0.50 69.50 $0.50 Open BVF 46.00 47.00 JUL 35 40 0.30 39.70 $0.30 No Play IGT 23.59 25.97 JUL 21 22 0.10 21.90 $0.10 Open PRX 49.21 48.90 JUL 40 45 0.50 44.50 $0.50 Open QLGC 50.25 52.66 JUL 45 47 0.25 47.25 $0.25 Open SNDK 42.75 46.81 JUL 35 37 0.25 37.25 $0.25 Open The position in Nike (NYSE:NKE) has previously been closed for a small loss. Call-Credit Spreads ******************* Symbol Pick Last Month L/C S/C Credit C/B G/L Status CEPH 45.33 46.20 JUL 55 50 0.60 50.60 $0.60 Open CI 49.61 48.66 JUL 60 55 0.55 55.55 $0.55 Open MXIM 36.51 38.12 JUL 45 40 0.60 40.60 $0.60 Open ADBE 32.07 34.93 JUL 40 35 0.50 35.50 $0.50 Open CEPH 44.59 46.20 JUL 55 50 0.60 50.60 $0.60 Open HDI 40.19 39.33 JUL 45 42 0.30 42.80 $0.30 Open MDC 46.94 52.21 JUL 55 50 0.50 50.50 ($1.71) Closed TIN 43.56 43.56 JUL 50 45 0.50 45.50 $0.50 Open DNA 73.52 76.49 JUL 85 80 0.45 80.45 $0.45 Open NOC 88.00 86.68 JUL 95 90 0.60 90.60 $0.60 Open As noted last week, MDC Holdings (NYSE:MDC) moved through near term resistance (and our sold call strike) at $50 and the close above that price on heavy volume was our exit signal in the play. Maxim Integrated (NASDAQ:MXIM), Adobe (NASDAQ:ADBE) and Genetech (NYSE:DNA) are on the early-exit "watch" list. Synthetic Positions ******************* No Open Positions Debit Straddles *************** No Open Positions Questions & comments on spreads/combos to Contact Support ************** NEW POSITIONS This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ************** BULLISH PLAYS - NAKED PUTS All of these issues have robust option premiums and relatively favorable technical indications. However, current news and market sentiment will have an effect on these stocks, so review each play thoroughly and make your own decision about its future outcome. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ************** AMLN - Amylin Pharmaceuticals $23.18 *** Diabetes Drugs! *** Amylin Pharmaceuticals (NASDAQ:AMLN) is a biopharmaceutical firm engaged in the discovery, development and commercialization of drug candidates for the treatment of diabetes and other metabolic diseases. The company has two lead drug candidates in late-stage development for the treatment of diabetes, SYMLIN (pramlintide acetate) and exenatide, formerly referred to as AC2993 (synthetic exendin-4). Amylin has received a letter from the FDA indicating that SYMLIN is approvable for marketing in the United States as an adjunctive therapy with insulin, subject to satisfactory results from additional clinical trials. The company's second candidate, exenatide, is in pivotal Phase III clinical trials. AMLN - Amylin Pharmaceuticals $23.18 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 22.5 AQM SX 301 0.45 22.05 16.8% 2.0% SELL PUT AUG 20 AQM TD 36 0.70 19.30 8.5% 3.6% * SELL PUT AUG 22.5 AQM TX 1,010 1.40 21.10 11.5% 6.6% ************** AVCT - Avocent $32.61 *** Another New High! *** Avocent Corporation (NASDAQ:AVCT), together with its wholly owned subsidiaries, designs, manufactures and sells analog and digital KVM (keyboard, video and mouse) switching systems, as well as serial connectivity devices, extension and remote access products and also display products for the computer industry. The firm's switching and connectivity solutions provide information technology managers with access and control of multiple servers and network data centers from any location. AVCT - Avocent $32.61 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 30 QVX SF 991 0.35 29.65 11.0% 1.2% * SELL PUT AUG 25 QVX TE 1,328 0.25 24.75 3.0% 1.0% TS SELL PUT AUG 30 QVX TF 327 1.15 28.85 8.2% 4.0% ************** ELBO - Electronics Boutique $25.20 *** Bullish Retailer! *** Electronics Boutique (NASDAQ:ELBO) is a specialty retailer of electronic games. The company sells video game hardware and software, PC entertainment software and related accessories and products. The company operates stores primarily under the names Electronics Boutique and EB GameWorld, in Australia, Canada, Denmark, Germany, Italy, New Zealand, Norway, South Korea, Sweden and the United States. The company also operates a commercial Website under the URL address, www.ebgames.com. The company carries game titles that are compatible with all major video game hardware systems and PCs. In addition to video game titles and PC entertainment software, it offers a complementary line of PC and video game accessories and peripheral products, including various controllers, joysticks, memory cards, remotes, books and magazines. ELBO - Electronics Boutique $25.20 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 25 LQB SE 91 0.50 24.50 16.3% 2.0% SELL PUT AUG 22.5 LQB TX 15 0.40 22.10 4.2% 1.8% * SELL PUT AUG 25 LQB TE 62 1.10 23.90 8.2% 4.6% ************** IVGN - Invitrogen $46.98 *** Premium Selling! *** Invitrogen (NASDAQ:IVGN) develops, manufactures and sells research tools in kit form and provides other research products, including informatics software to customers engaged in life sciences research and the commercial manufacture of genetically engineered products. The company supplies research kits and reagents that simplify and improve gene cloning, gene expression and gene analysis techniques. In addition, Invitrogen sells sera, cell and tissue culture media and reagents used in life sciences research, as well as in other processes for growing cells in the laboratory and producing major pharmaceuticals and other materials. IVGN - Invitrogen $46.98 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 45 IUV SI 262 0.70 44.30 13.5% 1.6% SELL PUT AUG 40 IUV TH 363 0.55 39.45 3.7% 1.4% TS SELL PUT AUG 45 IUV TI 21 1.80 43.20 8.0% 4.2% ************** JCOM - j2 Global Comm. $51.92 *** All-Time High! *** j2 Global Communications (NASDAQ:JCOM) provides outsourced value added messaging and communications services to individuals and businesses throughout the world. The company offers faxing and voicemail solutions, Web initiated conference calling, document management solutions and unified messaging services. j2 Global markets its services principally under the brand names eFax and jConnect. The company delivers its services through its global telephony/Internet protocol network, which spans more than 600 cities in 18 countries across five continents, including four capital cities in Latin America where j2 Global is in the process of launching its unique service. JCOM - j2 Global Comm. $51.92 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 45 JQF SI 483 0.20 44.80 4.8% 0.4% TS SELL PUT AUG 40 JQF TH 174 0.70 39.30 5.2% 1.8% * SELL PUT AUG 45 JQF TI 172 1.65 43.35 8.8% 3.8% ************** MERQ - Mercury Interactive $43.42 *** Testing Recent Highs! *** Mercury Interactive (NASDAQ:MERQ) is a provider of integrated performance management solutions that enable businesses to test and monitor their Web-based applications. Its software products and hosted services help Global 2000 companies enhance the user experience by improving the performance, availability, reliability and scalability of their Web-based applications. Its many hosted services provide its customers with a cost-effective solution that quickly meets business needs without dedicating significant time and internal resources. Its integrated performance management solutions enable customers to more quickly identify and correct problems before users experience them. The company also provides outsourced load testing and Web performance monitoring services that complement its software products. MERQ - Mercury Interactive $43.42 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 40 RQB SH 4,368 0.45 39.55 10.6% 1.1% * SELL PUT AUG 35 RQB TG 304 0.50 34.50 4.4% 1.4% SELL PUT AUG 37.5 RQB TT 335 0.90 36.60 6.0% 2.5% ************** NFLX - Netflix $27.56 *** Beating-Up On Blockbuster! *** Netflix (NASDAQ:NFLX) is an online entertainment service in the United States that provides more than 600,000 subscribers access to a comprehensive library of more than 11,500 movie, television and other filmed entertainment titles. The company's standard subscription plan allows subscribers to have three titles out at the same time with no due dates, late fees or shipping charges. Subscribers can view as many titles as they want in a month and they select these titles at the firm's Website (www.netflix.com) aided by its proprietary CineMatch technology. They receive them on DVD by first-class mail and return them to the company at their convenience using prepaid mailers. Once a title has been returned, Netflix mails the next available title in a subscriber's queue. NFLX - Netflix $27.56 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 25 QNQ SE 1,681 0.30 24.70 11.6% 1.2% SELL PUT AUG 20 QNQ TD 227 0.35 19.65 4.9% 1.8% * SELL PUT AUG 22.5 QNQ TX 367 0.70 21.80 8.6% 3.2% ************** NVLS - Novellus Systems $38.15 *** A Big Day! *** Novellus Systems (NASDAQ:NVLS) manufactures, sells and services semiconductor processing equipment. The company's products are comprised primarily of advanced systems used to deposit thin conductive and insulating films on semiconductor devices, as well as equipment for preparing the device surface prior to these deposition processes. Novellus is a supplier of high productivity deposition and surface preparation systems used in the fabrication of integrated circuits. Chemical Vapor Deposition systems employ a chemical plasma to deposit all of the dielectric (insulating) layers and certain of the metal (conductive) layers on the surface of a semiconductor wafer. Physical Vapor Deposition systems are used to deposit conductive metal layers by sputtering metallic atoms from the surface of a target source via high DC power. Electrofill systems are used for depositing copper conductive layers in a dual damascene design architecture using an aqueous solution. NVLS - Novellus Systems $38.15 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 35 NLQ SG 9,108 0.30 34.70 8.2% 0.9% * SELL PUT AUG 30 NLQ TF 1,400 0.35 29.65 3.6% 1.2% TS SELL PUT AUG 32.5 NLQ TZ 372 0.70 31.80 5.6% 2.2% ************** OVTI - OmniVision $38.54 *** Multi-Year High! *** OmniVision Technologies (NASDAQ:OVTI) designs, develops and sells high performance, high quality and cost efficient semiconductor imaging devices for computing, telecommunications, industrial, automotive and consumer electronics applications. The company's main product, an image sensing device called a CameraChip, is used to capture an image in cameras and camera-related products in a range of imaging applications such as personal computer cameras, digital still cameras, security and surveillance cameras, personal digital assistant cameras, mobile phone cameras, and cameras for automobiles and toys that incorporate both still picture and live video applications. OVTI - OmniVision $38.54 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 35 UCM SG 1,766 0.35 34.65 9.7% 1.0% * SELL PUT AUG 30 UCM TF 295 0.50 29.50 5.0% 1.7% SELL PUT AUG 35 UCM TG 149 1.70 33.30 10.3% 5.1% ************** POWI - Power Integrations $28.18 *** Break-Out! *** Power Integrations (NASDAQ:POWI) designs, develops, manufactures and markets proprietary, high-voltage, analog integrated circuits for use primarily in alternating current to direct current power conversion. The firm's products address market segments including communications, consumer, computer and industrial electronics. The company's high-voltage power conversion ICs include TOPSwitch, TinySwitch, LinkSwitch and DPA-Switch. Since introducing its TOPSwitch family of products in 1994, the company has shipped into the market approximately 890 million ICs. These ICs achieve a high level of system integration by combining a number of electronic components into a single IC. POWI - Power Integrations $28.18 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 25 QPW SE 220 0.15 24.85 6.2% 0.6% TS SELL PUT AUG 22.5 QPW TX 45 0.30 22.20 4.2% 1.4% * SELL PUT AUG 25 QPW TE 30 0.70 24.30 6.5% 2.9% ************** SNDK - SanDisk $46.45 *** The Rally Continues! *** SanDisk (NASDAQ:SNDK) designs, manufactures, and markets flash memory storage products that are used in a wide variety of electronic systems. The company has designed its flash memory storage solutions for applications in the consumer electronics and industrial/communications markets. The company's products are used in a number of rapidly growing consumer electronics applications, such as digital cameras, PDAs, portable digital music players, digital video recorders and smart phones, as well as in industrial and communications applications. The company's products include removable CompactFlash cards, MultiMediaCards, FlashDisk cards and Secure Digital Cards and embedded FlashDrives and Flash ChipSets with storage capacities ranging from eight megabytes to 1.2 gigabytes. SNDK - Sandisk $46.45 PLAY (sell naked put): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL PUT JUL 40 SWQ SH 1,650 0.30 39.70 8.2% 0.8% * SELL PUT AUG 35 SWQ TG 653 0.45 34.55 3.8% 1.3% SELL PUT AUG 37.5 SWQ TT 817 0.75 36.75 5.9% 2.0% ************** BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. *************** AGN - Allergan $80.83 *** Durable Drug Stock! *** Allergan (NYSE:AGN) is a technology-driven, global healthcare firm that develops and commercializes specialty pharmaceutical products for ophthalmic, neurological, dermatological and other specialty markets, as well as ophthalmic surgical devices and contact lens care solutions. Its worldwide consolidated revenues are primarily generated by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care, neurotoxins, intraocular lenses and other ophthalmic surgical products, and also contact lens care products. The company's products are sold to drug wholesalers, independent and chain drug stores, pharmacies, optical store chains, opticians, mass merchandisers, food stores, hospitals, ambulatory surgery centers and medical practitioners, including neurologists, dermatologists and plastic surgeons. AGN - Allergan $80.83 PLAY (conservative - bullish/credit spread): BUY PUT AUG-70.00 AGN-TN OI=49 ASK=$0.45 SELL PUT AUG-75.00 AGN-TO OI=295 BID=$1.05 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$74.40 ************** CDWC - CDW Computers $50.04 *** On The Rebound! *** CDW Computer Centers (NASDAQ:CDWC) is a direct marketer of various brands of computers and related technology products and services. CDW's extensive offering of products, including hardware, software and accessories, combined with its service offerings, provide comprehensive solutions for its customers' technology needs. The company offers more than 80,000 products, which include a wide range of product types from manufacturers such as Cisco, Compaq, Hewlett-Packard, IBM, Intel, Microsoft, Sony and Toshiba, among others. The company's value-added services include its ability to custom-configure multi-branded solutions for its many customers and offer technical support 24 hours a day, seven days a week. The company has two main operating segments, corporate, which is comprised of business customers, but also includes consumers, and public sector, which is comprised of federal, state and local government and educational institutions who are served by CDW Government, a wholly owned subsidiary. CDWC - CDW Computers $50.04 PLAY (conservative - bullish/credit spread): BUY PUT AUG-40.00 DWQ-TH OI=500 ASK=$0.55 SELL PUT AUG-45.00 DWQ-TI OI=1535 BID=$1.10 INITIAL NET-CREDIT TARGET=$0.60-$0.70 POTENTIAL PROFIT(max)=14% B/E=$44.40 ************** ICST - Integrated Circuit Sys. $34.20 *** New Trading Range? *** Integrated Circuit Systems (NASDAQ:ICST) supplies a broad line of timing products for use in personal computer motherboards and peripheral applications. These silicon timing devices control multiple processes by providing and synchronizing the timing of the computer system, including signals from the video screen, graphics controller, memory, keyboard, microprocessor, drives and communication ports. The company also designs, develops and sells silicon-timing devices for non-PC motherboard applications, such as digital videodisk players, digital set-top boxes, digital cameras, laser printers, flat panel displays and digital TVs. In addition, it offers surface acoustic wave technology to develop high-performance products for optical networking and wireless infrastructure markets. ICST - Integrated Circuit Sys. $34.20 PLAY (conservative - bullish/credit spread): BUY PUT AUG-25.00 IUY-TE OI=20 ASK=$0.25 SELL PUT AUG-30.00 IUY-TF OI=127 BID=$0.65 INITIAL NET-CREDIT TARGET=$0.45-$0.60 POTENTIAL PROFIT(max)=9% B/E=$29.55 ************** BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. *************** KO - Coca-Cola $43.88 *** Sell-Off In Progress! *** The Coca-Cola Company (NYSE:KO) is primarily engaged in the manufacture, distribution and marketing of nonalcoholic beverage concentrates and syrups in markets across the world. The firm manufactures and markets soft drink and noncarbonated beverage concentrates (sometimes referred to as beverage bases) and syrups, including fountain syrups. The firm also manufactures and sells finished beverages, both carbonated and noncarbonated, including certain juice and juice-drink products and water products. In addition, the firm has ownership interests in numerous bottling and canning operations, including Coca-Cola Enterprises, Coca-Cola Hellenic Bottling Company, Coca-Cola Amatil Limited, Panamerican Beverages, and Coca-Cola FEMSA, S.A. de C.V. KO - Coca-Cola $43.88 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUL 45 KO GI 4,715 0.30 45.30 6.1% 0.7% * SELL CALL AUG 45 KO HI 21,265 0.85 45.85 4.0% 1.9% TS ************** MO - Altria Group $44.00 *** Legal Woes! *** Altria Group (NYSE:MO), formerly Philip Morris Companies, is a holding company and the parent company of Philip Companies. The company's wholly owned subsidiaries, Philip Morris USA (PM USA), Philip Morris International (PMI) and its majority-owned (84.2%) subsidiary, Kraft Foods (Kraft), are engaged in the manufacture and sale of various consumer products, including cigarettes, foods and beverages. Philip Morris Capital Corporation (PMCC), another wholly owned subsidiary, is primarily engaged in leasing activities. The company's former wholly owned subsidiary, Miller Brewing Company, was engaged in the manufacture and marketing of various beer products prior to the merger of Miller into South African Breweries plc in 2002. MO - Altria Group $44.00 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUL 45 MO GI 15,647 0.60 45.60 11.8% 1.3% * SELL CALL AUG 47.5 MO HW 5,490 0.65 48.15 3.6% 1.3% TS SELL CALL AUG 45 MO HI 1,741 1.50 46.50 6.8% 3.2% ************** PPD - Pre-Paid Legal $24.38 *** Mediocre Quarterly Results! *** Pre-Paid Legal Services (NYSE:PPD) was one of the first companies in the United States organized solely to design, underwrite and market legal expense plans. The company's legal expense plans (referred to as Memberships) currently provide for a variety of legal services in a manner similar to medical reimbursement plans. Plan benefits are provided through a network of independent law firms, typically one firm per state or province. Members have direct, toll-free access to their Provider law firm rather than having to call for a referral. Legal services include unlimited attorney consultation, traffic violation defense, auto-related criminal charges defense, letter writing/document preparation, will preparation and review and a general trial defense benefit. PPD - Pre-Paid Legal $24.38 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL JUL 25 PPD GE 1,033 0.40 25.40 14.2% 1.6% SELL CALL AUG 27.5 PPD HY 863 0.60 28.10 6.8% 2.1% * SELL CALL AUG 25 PPD HE 876 1.35 26.35 10.6% 5.1% ************** BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ************** ATK - Alliant Techsystems $51.36 *** Trading Range? *** Alliant Techsystems (NYSE:ATK) is a supplier of aerospace and defense products to the U.S. government, America's allies and major prime contractors. ATK also is a supplier of ammunition to federal and local law enforcement agencies and commercial markets. ATK designs, develops and produces rocket propulsion systems for a wide variety of U.S. Government and commercial applications. The firm is also the sole supplier of the reusable solid rocket motors used on NASA's Civil Manned Space Launch Vehicles. ATK designs, develops and manufactures small, medium and large caliber conventional munitions for the U.S. and allied governments as well as for commercial applications. The company manufactures and develops small-caliber ammunition for the U.S. military and its allies, federal and local law enforcement, and commercial markets. ATK - Alliant Techsystems $51.36 PLAY (very conservative - bearish/credit spread): BUY CALL AUG-60.00 ATK-HL OI=665 ASK=$0.20 SELL CALL AUG-55.00 ATK-HK OI=856 BID=$0.60 INITIAL NET-CREDIT TARGET=$0.45-$0.55 POTENTIAL PROFIT(max)=9% B/E=$55.45 ************** LMT - Lockheed Martin $47.89 *** No Offense In Defense Stocks *** Lockheed Martin (NYSE:LMT) is a customer-focused, global enterprise primarily engaged in the research, design, development, manufacture and integration of advanced technology systems, products and services for government and commercial customers. The company's core business areas are systems integration, aeronautics, space and technology services. The company's Systems Integration segment is engaged in the design, development, integration and production of electronic systems for undersea, shipboard, land and airborne applications. Space Systems is engaged in the design, development, engineering and production of commercial and military space systems. Aeronautics designs, researches and develops, produces and supports combat and air mobility aircraft, surveillance, reconnaissance, platform systems integration and advanced development programs. Technology Services provides information management, engineering, scientific and logistic services. LMT - Lockheed Martin $47.89 PLAY (conservative - bearish/credit spread): BUY CALL AUG-55.00 LMT-HK OI=169 ASK=$0.20 SELL CALL AUG-50.00 LMT-HJ OI=1642 BID=$0.75 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$50.60 ************** SEE DISCLAIMER - SECTION 1 ************** ********** Watch List ********** Mix and Match Bank of America - BAC - close: 81.85 change: +0.37 WHAT TO WATCH: BAC has earnings on Monday next week so it will be interesting to watch how shareholders react. The stock has done well since its March lows near $65. The upward trend looks strong but the stock tends to move somewhat slowly for option traders. The recent bounce (today) off previous resistance, now support, of $80.00 might be worthwhile for an interested bull. Chart= --- Mercury Interactive - MERQ - close: 43.31 change: +0.23 WHAT TO WATCH: The GSO software index is nearing recent highs and MERQ is joining the group. Recent resistance has been just over $44.00. A move above $44.25 might be a decent trigger to go long. If shares can pierce the $45 level it would be a fresh triple-top breakout on its P&F chart. Earnings are July 16th. Chart= --- H&R Block - HRB - close: 44.49 change: -0.71 WHAT TO WATCH: The next earnings report for HRB is in September. While this is typically a seasonal play around tax time the stock has fought back to overhead resistance near $45. Actually its $45 to $46 that appears to be the obstacle. Bullish traders can look for a confirming breakout or bears can look for a possible failed rally before evaluating new positions. Chart= --- General Dynamics - GD - close: 75.13 change: -0.27 WHAT TO WATCH: June was a good month for GD. Shares broke out over resistance at $70 and its 200-dma. Wall Street reacted favorably to their merger-acquisition of Veridian (VNX) and shares consolidated slowly back to the $71 level as if shareholders were loathe to part with their stock. Now GD has broken its two-week consolidation pattern and looks ready to mount a new assault to the $80 mark. Unfortunately, the $78 may be tougher resistance than it looks. Chart= --- St. Jude Medical - STJ - close: 53.25 change: -2.28 WHAT TO WATCH: Some negative comments from SG Cowen on STJ's ICD market started the week off on the wrong foot. Both Monday and Wednesday (today) has seen very strong volume declines. Today's decline confirmed the breakdown under the rising 50-dma and broke the $55 level as support. Bears need to watch for support at $52.50 (lots of congestion there from late April-early May) and the $50.00 mark, which was overhead resistance from late March through the first half of April. Earnings are expected on July 16th. Chart= =================================== RADAR SCREEN - more stocks to watch: =================================== VRSN $15.60 - Bullish traders can target a move over $16.16 or a bounce from $15.00 as potential entries for new long positions. KSS $54.00 - Kohl's has rallied right back to the top of its descending channel and overhead resistance at its 200-dma. Bulls can wait for a breakout while aggressive bears can show the failed rally today. 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