The Option Investor Newsletter Thursday 07-10-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: No Recovery, No Kidding Futures Markets: Selloff Index Trader Wrap: (See Note) Market Sentiment: Trend change Weekly Manager Microscope: Don & Craig Hodges: Hodges Fund (HDPMX) Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-10-2003 High Low Volume Advance/Decline DJIA 9036.04 -120.20 9154.53 8996.76 1.78 bln 916/2273 NASDAQ 1715.86 - 31.60 1735.13 1707.49 1.72 bln 1090/2132 S&P 100 497.09 - 6.54 503.63 494.38 Totals 2006/4405 S&P 500 988.70 - 13.51 1002.21 983.63 W5000 9523.27 -129.40 9652.71 9480.09 RUS 2000 469.03 - 7.96 476.99 467.61 DJ TRANS 2538.45 - 24.00 2561.94 2529.26 VIX 21.53 + 0.50 22.30 21.34 VXN 33.66 + 0.44 34.55 33.00 Total Volume 3,779M Total UpVol 656M Total DnVol 3,072M 52wk Highs 528 52wk Lows 20 TRIN 1.88 PUT/CALL 0.73 ************************************************************ No Recovery, No Kidding The market lost ground today after economic reports and several corporate executives suggested the recovery may not happen until 2004. Where have I heard that before? Maybe in July 2000, 2001 and 2002. It is the month where expectations meet reality and for the last three years it has been the blind date from hell. Dow Chart - Daily Nasdaq Chart - Daily Bar Nasdaq Chart - Daily Candle The string is unbroken at 21 weeks and it does not look like it will change anytime soon. The Jobless claims soared to 439,000, +14,000 over consensus estimates and last week's number was revised up to 434,000. Continuing claims rose to 3.82 million and a level not seen since the early 1980s. This 20-year high was not received well by Wall Street. The insured jobless rate rose to 3.0%. Analysts trumpeted their seasonality claim for the increase this week. They have been trying to find an excuse for each of the last 21 weeks to no avail as the numbers continue to disappoint each week. This is also setting up another negative number in the Jobs Report for July. The lack of a recovery is being shown in the lack of jobs and the continued layoffs by companies still trying to cut costs from lack of demand. Chain Store Sales showed a slight improvement of +2.4% but the gains were not broad based. WMT sales rose +2.7% but TGT only gained +0.8%, JCP +0.1% and KSS fell -2.4%. Several retailers issued profit warnings today after a lackluster month. The survey showed that most gains came from heavy promotional selling with high discounts which could hurt the bottom line as we saw with the earnings warnings. Additionally much of the sales gains came from the Harry Potter book and several new video releases. Those are one time events, not month to month improvements in general volume. Barnes and Noble said half of their +10.5% sales increase was due to the Potter book. Most retailers said their inventories are above plan which means they have not sold as much as expected and that old inventory will have to be heavily discounted to make way for the fall merchandise. Tax rebate checks and lower tax withholding beginning in July should help retailers get rid of the excess inventory but unemployment is still a problem. Import/Export prices were about the only friendly report today with Import prices rising +0.8% and export prices falling by -0.2%. This is due to falling energy prices and the falling dollar. Considering the May import number was revised down to a drop of -0.8% the gain for June only produced a breakeven. Still the report was seen as evidence that deflation is less of a problem than earlier thought. The MAPI Survey today fell to 60 for the 2Q, down from 63 in Q1 and 67 in Q4. The new orders index fell to 53 from 67. While this still shows growth most would argue that the magnitude of the drop is significant and could be seen as a warning for Q3. 77% of the survey participants reported operating under 85% of manufacturing capacity. The capital-spending component fell to 54 from 62 and indicates the potential for limited spending in the 3Q. While the overall survey still showed limited growth it did show that that growth was continuing to slow. As if these economic reports were not enough we had Greenspan testifying before Congress on energy prices. The bottom line to the speech was don't expect them to improve anytime soon and high energy prices could be detrimental to the potential recovery. The speech was soft peddled by the press but the outlook was clear. There is no light at the end of the energy tunnel and the recovery has one more unexpected obstacle in its path. It was assumed the soaring energy prices would return to lower levels once the war was over and Iraq resumed production. After a brief dip to $25 at the end of the war oil has resumed its rise and closed on Thursday near $31 a barrel. The earnings parade is beginning and already we have some no shows and several predictions of negative events ahead. JP Morgan said the semiconductor sector was "rich" and warned that they were ripe for the traditional summer drop. They fear the guidance from semis for the 3Q could disappoint. Cisco CEO John Chambers said in Europe on Wednesday that he saw a pickup in IT spending 2-4 months AFTER any pickup in the economy. Assuming the economy picked up in the 3Q, not likely since it is traditionally the weakest quarter of the year, then the IT spending would not occur until December or sometime in early 2004. If the recovery does not appear until the 4Q then IT spending would be late Q1-2004 or later. Intel CEO Craig Barrett said today that he expects growth in the semiconductor sector to slow several percentage points. Not a good indication for their earnings guidance next week. The President of UBS said the recovery in the markets exceeded the recovery in the economy and the current rally did not smell like a new bull market. This was not the outlook investors were expecting. After all just a couple weeks ago the number of analysts surveyed by Investors Intelligence was near 80% and at five-year highs. The most current barometers for the tech sector were the earnings by YHOO and JNPR. Both beat the street but both suffered strong losses in heavy trading. Neither warned but the performance and guidance was less than investors expected. JNPR said today that the 3Q would be flat due to seasonal weaknesses. The keywords here were "seasonal weakness". Investors have been expecting a strong 3Q as the economy begins its recovery. Very few companies have actually said they were seeing any recovery. Remember, this is only the first week or earnings and a light week at that. Investors are now seeing the potential for even more serious questions next week and are becoming more cautious. On Friday morning we get GE earnings and while nobody expects them to miss there are plenty of analysts that think GE will try and talk down estimates for 2003 AND 2004. GE is very good at spinning their earnings and I do not expect a major event tomorrow. They typically dribble out negative comments in measured doses throughout the quarter it order to manage expectations. Still most analysts will be using their microscope tomorrow to try and derive the state of the economy from the GE comments. The Dow traded below 9000 once again today and well off the highs from Monday at 9261. The Nasdaq traded down to 1707 and well off its 1758 high from Wednesday. While the selling was anticipated I did not think we would see 9000 until next week. The Dow 9000 support level is strong and it withstood a concentrated attack today. That does not mean it will hold. Remember we traded down to 8871 just a week ago and could easily return to that level or lower as the earnings begin to flow. I am not going to repeat the justifications for my outlook as you will get the expanded and updated version with this weekends newsletter. Suffice to say that there is nothing "surprising" in the earnings for investors to cheer about and the markets are still priced for perfection. The worry today was that history was repeating itself again. Not that we would see a dip in July but that the second half recovery was going to be missing in action for the fourth consecutive year. To investors that thought is worse than any Freddy Kruger movie and could be appropriately named "Nightmare on Wall Street Chapter IV". This week's sneak preview of 2Q earnings was not met with rave reviews and today traders reviewed their investment "Matrix" to decide which positions should be "Terminated". The GE earnings tomorrow will be the last chapter for the week and the potential for a positive surprise ending is close to zero. With the flood of mid year retirement cash slowing to a trickle remember to keep those stops tight if you are long. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Selloff Jonathan Levinson Equity futures sold off overnight, and continued throughout the session until a bounce that began just after 2:30 EST. 150 tick chart of ES3U Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 1006 997 990 981 974 YM03U 9198 9107 9039 8948 8880 NQ03U 1303 1288 1275 1260 1247 10 minute chart of the US Dollar Index The US Dollar Index sold off again at noon, only this time the move was more precipitous than yesterday. The move bottomed at 95.35 before bouncing. The action spared gold what look to be decisive break of its 343 support line, while the CRB sold off more than 2 points to 234.73, with Natural Gas futures leading to the downside. Daily chart of August gold Gold got clocked in early trading today, sinking as low as 340.70 before bouncing to a high of 346 on the August contract, settling at 345.70 as of this writing. Unsurprisingly, its jump coincided with the selloff in the US Dollar Index at noon. HUI closed up 44 to 151.82, XAU +.24 to 77.50. Daily chart of the ten year note yield Treasuries printed a lower high and lower low, still not breaking the uptrend but bringing the oscillators closer to a sell signal after its sharp runup. I believe that we'll see this uptrend violated, and while the pattern is sloppy, it implies a move to the low as a potential downside target. Either way, with the oscillators positioned as they are on the daily candles for the TNX above, long yield plays will not be for the faint of heart. The five year note yield closed lower by 4 basis points to 2.528%, then TNX lower by 2.9 bps to 3.677%, and TYX lower by 0.2 bps after trading in the green for much of the session. Daily NQ candles The afternoon bounce did some excellent patchwork on the Nasdaq futures. The uptrend wasn't even close to being tested, and bullish oscillator configuration confirms it. The only hint of trouble in paradise, other than today's lower high and lower low, is the beginning of a downtick in the Macd histogram above. 30 minute 20 day chart of the NQ The bounce was sufficient to turn the oscillators on the 30 minute candles back into upphases, and while the chart remains open to interpretation pattern-wise, it continues to look like a downside break out of a bear wedge formation as drawn above. If so, the real test will come at the failed trendline above 1300, 27 points north of today's close. Daily ES candles The S&P futures did test the daily ascending trendline, and the bounce was heartening for bulls. However, cyclically, the oscillators look far less assertive to the upside than on the NQ contract, with the MacD looking bearish and the stochastic hesitating midway through its upphase. Today saw a considerably lower low and a lower high. 20 day 30 minute chart of the ES The bearish ascending wedge breakdown is clearer on the ES, and the most bullish scenario would have the current bounce continue to a trendline retest above 1000. The oscillators flipped to buy signals on the end-of-day bounce, portending upside for tomorrow's open, barring any surprises before then. 982 support held as expected at the 38.2% Fibonacci retracement level. Daily YM candles Same picture on the Dow futures as for the ES futures above. 20 day 30 minute chart of the YM Today's session qualifies as a correction within an uptrend for the equity futures, but a failure at ES 982 and YM 8970 would have put that in jeopardy for bulls. The NQ remains in a world of its own due to the spectacular buying it's seen over the past weeks. We saw treasuries trade modestly higher and equities trade lower, giving the asset-allocation theorists another session's worth of confirmation. I noted in the Market Monitor at several points that the thirty year yield was in the green, and it closed lower by a mere 0.2 of a basis point. Given the Fed's repo drain of 3.25B today, I'm not surprised by either the selling in the thirties or the selling in equities. For tomorrow, we'll watch to see how far the bounce predicted by the oscillators on the 30 minute ES, NQ and YM charts takes us. An early failure of the bounce should target a fresh trendline retest for ES and YM. 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_071003_1.asp ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** **************** MARKET SENTIMENT **************** Trend change Jonathan Levinson "Catching the turns" is one of the most valuable, and possibly the most dangerous activities in which traders engage. Trying to "catch a falling knife" is a well-worn and appropriate clichi. Nevertheless, reward rarely comes without risk, and for traders, managing that risk against anticipated rewards is the name of the game. We've been watching countless breadth and price oscillators and indices set records and remain in territory usually associated with market tops, with numerous false signals during the past weeks. Although much of this data based on today's closing values has yet to be released, today's tape felt reminiscent of last summer's, indicating a possible trend change. The short cycle stochastics and MACD had very little price traction to the upside, and price rolled over to new lows for most of the downphases. Without seeing the updated bullish percents and breadth indices, I can tell that today's downside break represented a different trend than that which brought the indices to their highs yesterday, based solely on the action of the oscillators. Despite the bounce off the lows in the late afternoon, the indices all printed lower highs and lower lows. Note further that the Nasdaq futures, which led this leg of the rally to the upside, underperformed both the Dow and S&P futures today. In planning your trades, allow your market bias to follow the trend, and let the data guide your trading style. And when it feels wrong or you feel confused, wait until you're not before jumping in. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9353 52-week Low : 7197 Current : 9036 Moving Averages: (Simple) 10-dma: 9094 50-dma: 8890 200-dma: 8412 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 988 Moving Averages: (Simple) 10-dma: 990 50-dma: 966 200-dma: 897 Nasdaq-100 ($NDX) 52-week High: 1307 52-week Low : 795 Current : 1268 Moving Averages: (Simple) 10-dma: 1246 50-dma: 1190 200-dma: 1055 ----------------------------------------------------------------- While we're finally starting to see some (small) gains in the volatility indices but they continue to remain way too low. Frankly their lack of reaction to the weakness today does not denote much fear in the markets at all. Oddly, the VIX is struggling with overhead resistance at its simple 50-dma but I doubt there is much significance in that observation. CBOE Market Volatility Index (VIX) = 21.53 +0.50 Nasdaq-100 Volatility Index (VXN) = 33.66 +0.44 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.73 626,187 457,730 Equity Only 0.65 478,079 309,311 OEX 0.75 34,660 26,037 QQQ 3.28 25,446 83,353 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 72.6 + 0 Bull Confirmed NASDAQ-100 80.0 + 1 Bull Correction Dow Indust. 86.6 + 0 Bull Confirmed S&P 500 79.0 + 0 Bull Confirmed S&P 100 83.0 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.25 10-Day Arms Index 1.19 21-Day Arms Index 1.20 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 795 1012 Decliners 2035 2055 New Highs 145 267 New Lows 18 8 Up Volume 320M 290M Down Vol. 1438M 1400M Total Vol. 1764M 1714M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 07/01/03 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 There doesn't appear to be much change in the commercial or small traders positioning since the previous week's big move. Big money remains net short while retail traders remain heavily net long. Commercials Long Short Net % Of OI 06/10/03 456,967 455,024 1,943 0.2% 06/17/03 519,887 501,401 18,486 1.8% 06/24/03 405,382 447,526 (42,144) (4.9%) 07/01/03 415,976 453,005 (37,029) (4.3%) 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 06/10/03 199,356 185,403 13,953 3.6% 06/17/03 202,040 184,028 18,012 4.6% 06/24/03 159,405 85,182 74,223 30.3% 07/01/03 150,232 75,937 74,295 32.8% 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 Sometimes it is amazing how the relationship between commercial traders and small traders continue to play out. Traditionally, institutional traders (commercials) are historically on the right side of the trend week in and week out. Despite this success the small trader is generally on the opposite side. This time big money is showing their most bullish reading in quite some time while the small traders is the complete opposite and marking their most bearish reading in many a month. Commercials Long Short Net % Of OI 06/10/03 270,359 543,221 (272,862) (33.5%) 06/17/03 306,279 661,114 (354,835) (36.6%) 06/24/03 150,208 201,724 (51,516) (14.6%) 07/01/03 175,893 216,993 (41,100) (10.5%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: (41,100) - 07/01/03 Small Traders Long Short Net % of OI 06/10/03 498,999 49,689 449,310 81.9% 06/17/03 466,837 70,609 396,228 73.7% 06/24/03 84,081 44,347 39,734 30.9% 07/01/03 57,639 67,449 9,810 7.8% Most bearish reading of the year: 9,810 - 07/01/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 It looks like the commercials have been caught off guard. They are growing increasingly bearish on the NDX, which is hitting new 52-week highs. Either institutions are expecting a reversal soon or this has been a painful bout of denial as tech stocks continue to rally higher. Commercials Long Short Net % of OI 06/10/03 42,877 45,793 (2,916) (3.3%) 06/17/03 60,964 65,561 (4,597) (3.6%) 06/24/03 28,780 47,425 (18,645) (24.4%) 07/01/03 28,662 48,265 (19,603) (25.5%) Most bearish reading of the year: (19,603) - 07/01/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 06/10/03 14,759 7,761 6,998 31.1% 06/17/03 29,400 23,232 6,168 11.7% 06/24/03 24,519 7,064 17,455 55.3% 07/01/03 26,777 8,498 18,279 51.8% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL The action in the INDU futures remains somewhat dull after watching the big moves in the e-minis above. As expected small traders are fading the commercials who are net long. Commercials Long Short Net % of OI 06/10/03 17,368 15,263 2,105 6.5% 06/17/03 20,625 18,593 2,032 5.1% 06/24/03 19,373 11,565 7,808 25.2% 07/01/03 20,504 11,871 8,633 26.7% 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 06/10/03 7,968 8,316 ( 348) ( 2.1%) 06/17/03 9,092 9,398 ( 306) ( 1.6%) 06/24/03 5,950 7,442 (1,492) (11.1%) 07/01/03 5,799 6,822 (1,023) ( 8.1%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************* WEEKLY MANAGER MICROSCOPE ************************* Don & Craig Hodges: Hodges Fund (HDPMX) Donald W. Hodges and Craig D. Hodges are co-portfolio managers of the Hodges Fund, a $24 million "non-diversified" U.S. equity fund that has been performing very well in 2003. Through July 3, 2003 the fund is up 43.4%, ranking in the top 1% of the mid-cap growth category per Morningstar. The fund's 43.4% return this year also leads the S&P 500 index by a healthy margin (+12.7% vs. S&P 500). The fund's YTD return of 43.4% also looks good relative to its Lipper peer group average (in this case, multi-cap core funds). According to Lipper, the fund's YTD return through July 3, 2003 is 13.3% above the peer group average, for a Lipper YTD ranking of A. This non-diversified stock fund isn't limited to one particular area of the market. The Hodges Fund implements a unique equity strategy that balances investments in core-growth companies and contrarian-type stocks as well as momentum-type stocks. Though the Hodges Fund is put in the mid-cap range by Morningstar based on its average market capitalization ($1 billion), the fund's co- managers seek out value and growth opportunities in all "capital" sectors. Don Hodges is president of Hodges Capital Management, Inc., the fund's advisor. Before launching his own asset management firm, he was president of a large regional securities firm. Don's bio says that he has 42 years of investment industry experience, and uses his seasoned judgment to spot true value. He has been lead manager of the Hodges Fund since its October 1992 inception date. According to the Hodges Fund website, Craig Hodges brings a knack for timing. Craig is a senior vice president with Hodges Capital Management. His bio indicates that he has 16 years of experience including management of both retail and institutional investment portfolios. Craig has co-managed the Hodges Fund since April 20, 1999. The Hodges Fund has a low minimum initial investment of $250 for both regular and IRA accounts, and is offered by some of the NTF networks, including Accutrade NTF and E*Trade NTF. For complete fund information or to D/L a prospectus, go to the Hodges website at www.hodgesfund.com. Management Style/Strategy Don and Craig Hodges seek growth of capital over the long run and gear their non-diversified equity fund to the "serious" investor. Stock investments will typically be made in one of four "capital" sectors (large-cap, mid-cap, small-cap, and micro-cap). At March 31, the portfolio had an average market capitalization of roughly $1 billion, landing it in the Morningstar mid-cap range, but fund holdings were actually spread across all cap ranges. At the end of the first quarter, this portfolio had nearly 25% of stock assets invested in giant/large-cap stocks. Another 38% was invested in mid/small-cap stocks, with the remaining 37% of stock assets invested in the micro-cap range. In equity selection, Don and Craig Hodges seek to implement an investment strategy, which balances core growth companies, contrarian type stocks currently out-of-favor, and "momentum" holdings. Momentum companies and industries represent unusual "market interest" and "appreciation potential" they say. Some portfolio holdings are held for an extended period of time, while other investments may be held for only a short-term period. According to Morningstar's report (3/31/03 data), the Hodges Fund had 35 stock holdings and an annual turnover rate of 132%. So it turns over the portfolio roughly every 9-10 months, an indication of a more near-sighted perspective. Top holdings as of March 31, 2003 were Dwyer Group (8.5% of assets), Corrections Corp (6.8% of assets), and Pre-Paid Legal Services (6.7% of assets). Investment Performance According to Morningstar, the Hodges Fund's long-term performance and risk have been "average" relative to its category peer group (mid-cap growth funds). While the fund's trailing 10-year annual average return of 8.7% through June 30, 2003 lagged the S&P large cap index by an average of 1.4% per year, it outpaced the Russell Midcap Growth Index by 0.2% a year over the same period. For the trailing 5-year period thru July 3, 2003, the Hodges Fund produced a negative 0.1% annualized total return for shareholders versus a 1.6% annual-equivalent decline by the S&P 500 index. So it has limited losses relative to the large-cap equity index over the past five years, through a turbulent period for momentum-type stocks. The fund's trailing 3-year annualized loss of 3.6% is much better than the S&P 500's 11.2% average annual decline. And, its 1-year total return of 26.7% through July 3rd tops the S&P 500 by 21.5%, ranking the Hodges Fund in the top 2% of the Morningstar "mid-cap growth" category. A look at year-to-year performance shows that returns have been a little inconsistent. In 1996 and 1997, the fund's annual returns ranked in the mid-growth category's top decile. In 1999 and 2000 however, the Hodges Fund ranked in the bottom decile of the group per Morningstar. The Hodges portfolio bounced back in 2001 for a positive total return of 11.2%, ranking in the category's top 1%. The fund's year-to-date return of 43.4% ranks in the top 1% again within the mid-growth category. Lipper awards the Hodges Fund an "A" YTD ranking relative to multi-cap core funds, its Lipper peer group. Conclusion With portfolio holdings rapidly changing, it is hard to pin this fund down in terms of capitalization ranges and value and growth characteristics. Its non-diversified fund status allows Don and Craig Hodges to invest a higher percentage of assets in favorite stocks. But with a turnover ratio of 132%, you won't likely see the same names in the portfolio a year from now. The fund's focused approach means returns can be hit or miss and the year-to-year returns support that notion. In some years the Hodges Fund is in the top decile of its Morningstar category and in some years the fund ranks in the category's bottom decile for performance. Although Hodges Fund is up 43.4% thus far in 2003, long-term investors may want to focus more on the fund's returns and volatility over the long term. For further information or to download a prospectus, log on to the www.hodgesfund.com website. Steve Wagner Editor, Mutual Investor email@example.com ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. 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The Option Investor Newsletter Thursday 07-10-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: ABC, PGR Dropped Puts: None Call Play Updates: AGN, AMGN, DGX, EBAY, GS, HAR, PCAR, PHM New Calls Plays: None Put Play Updates: BLL, INTU, SIVB, WFMI New Put Plays: BVF, HD **************** 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: ***** AmerisourceBergen - ABC - cls: 69.02 change:-2.04 stop: 69.95 Hindsight being 20/20, it is now perfectly clear that last week's breakout over $70 was a bull trap. Well to be perfectly fair, we won't know that for certain until the stock breaks below strong support near $67.75, but after trading over $73 earlier this week, the sharp slide lower on expanding volume the past few days is very discouraging. Adding insult to injury, the stock broke below its 20-dma ($69.56) this morning and couldn't mount even a feeble bounce off its lows near $69. With daily Stochastics in full bearish roll, support broken and our stop violated, there just isn't much positive to say. A rebound from here should be viewed as an opportunity to exit open positions at a more favorable level, not a justification for new entries. Picked on June 26th at $70.00 Change since picked: -0.98 Earnings Date 07/24/03 (confirmed) Average Daily Volume = 1.45 mln Chart = --- Progressive Corp. - PGR - cls: 73.30 chng: -1.15 stop: 73.25 The relative strength that first drew us to our bullish play on PGR seems to have waned significantly this week, as the stock first put in a lower high just below $76 on Monday and then today broke below the bottom of the channel that has been providing support for more than 3 months. The stock gapped below that lower channel line this morning, then headed straight south, not pausing until hitting its intraday low of $72.60. That was just above the intraday lows seen on the first of July, but this time, the channel support is gone. That makes today's afternoon rebound suspect and despite the close a nickel over our stop, we're going to err on the side of caution, dropping the play before things get worse. Traders still holding open positions should use a rebound to the $74 area as an opportunity to gain a more favorable exit. PGR's relative strength and supporting price pattern have all but disappeared and that should be taken as a big warning to the bulls. Picked on June 15th a $73.27 Change since picked: +0.03 Earnings Date 07/16/03 (confirmed) Average Daily Volume = 902 K Chart = 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 ******************** Allergan, Inc. - AGN - close: 79.76 change: -1.07 stop: 78.50 As strong as AGN was looking on Tuesday with that impressive intraday rebound from the $80 level, the stock just couldn't buck the trend in the broad markets over the past couple sessions. After a second rejection from the $81.50 resistance level and today's close back under $80, traders should be concerned that AGN may have put in a top. But then there's the solid rebound from the day's lows -- that rebound came right at the converged 10-dma and 20-dma just over $79 and it is good to see that former resistance now apparently serving as support. Traders looking for new entries may have gotten just what they were looking for with today's rebound from the $79 level, which is just fractionally above our $78.50 stop. Upward continuation heading into the weekend will confirm that today's rebound was the solid entry point that we think it was. At this point, those looking for a momentum entry will just have to wait for AGN to break out over $81.70, which is just over this week's intraday highs. Above that level, look for next resistance in the $84-85 area, where we would recommend exiting the play. Picked on June 26th at $78.74 Change since picked: +1.02 Earnings Date 07/23/03 (confirmed) Average Daily Volume = 1.08 mln Chart link: --- Amgen, Inc. - AMGN - close: 69.51 change: -0.44 stop: 67.50 Despite our concerns that AMGN's strong breakout through $67.50 resistance and trade above $70 would be followed by a swift bout of profit taking, it just hasn't happened. Even with the Biotechnology index putting in a lower high and starting to weaken again on Thursday, AMGN has been holding tough near its recent highs and showing very little sign of wanting to fill in the range between its breakout level and yesterday's intraday high of $70.40. Be that as it may, we're still expecting more weakness from the stock and as a way to protect ourselves in case that weakness gets carried away, we've gotten more aggressive with our stop, lifting it to $67.50, which is currently right at the 10-dma. We're still not interested in new entries near current levels. If the stock pulls back to give us a bounce from above $68, then that can be used for new entries into the play. With our defined exit target at $72, there just doesn't seem to be enough reward in momentum entries at this point, so we'll leave that strategy alone. We're most of the way to our goal, so clearly the lion's share of our efforts should now be focused on maximizing our gains. Picked on June 24th at $65.05 Change since picked: +4.46 Earnings Date 07/22/03 (confirmed) Average Daily Volume = 9.99 mln Chart link: --- Quest Diagnostics - DGX - cls: 67.65 chng: -0.82 stop: 64.75*new* The past couple days may have inflicted some severe damage in other areas of the market, but select medical-related stocks are actually holding up fairly well. That's certainly been the case with DGX, as the stock built on Monday's strong breakout, stretching briefly above $69 yesterday before falling a bit under the weight of the broad market weakness. That weakness seemed to grip the stock at the open today and the stock fell back to just above $67 early in the day, where it spent the remainder of the day consolidating in a tight range. It certainly wouldn't be surprising to see a bit more weakness, with DGX coming back to confirm new-found support in the $65.50-66.00 area (near the 10- dma at $65.69) before continuing higher. Recall that this was the top of the bullish wedge pattern from which the stock broke on Monday and it would make sense to test that breakout level before continuing the bullish trend that has been building for the past 4 months. Traders still looking for an entry will want to target a dip and rebound from that $65.50-66.00 area, looking for an upside target of $74 after the bulls manage to scale intermediate resistance first at $70 and then $72. Move stops up slightly to $64.75 tonight. Picked on July 1st at $65.78 Change since picked: +1.87 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 905 K Chart link: --- eBay Inc - EBAY - close: 112.08 change: -2.76 stop: 109.00 The reaction to Yahoo's earnings news last night turned out to be a good excuse to take profits across the Internet sector as a whole. YHOO met the estimates of 8 cents with revenues rising more than 42% year over year. Whisper numbers were about 9 cents. The company seemed to give an upbeat conference call for the rest of the year but suddenly everyone seemed to care about YHOO's valuations, when it didn't matter a week ago. Valuation arguments could have been bad news for EBAY (with a P/E of 114), who is in a much stronger position and business model than YHOO's but amazingly enough, shares of EBAY dropped less than 2.5% in today's pull back. The auction giant gapped down and traded to a low of $111.66, remaining above what we see as new psychological support of 110. With the market in pull back mode, bulls might be looking for the right dip to jump on the EBAY train. The challenge, as always, is picking that critical entry point. We would remain cautious as EBAY's earnings are just 12 days away. Conservative traders with winning positions who have not chosen to take profits might do well to consider that idea now. Tighter stops near $110 or even $111 are not bad choices either. Our stop remains at $109. Ebay in the news: You may have heard that Warren Buffet is auctioning a lunch in New York for you and seven of your friends on EBAY. The bidding started at $10,000 and ends in less than 6 hours from now. What is amazing is that in the last 20 minutes we've seen the bidding jump $35K to more than $175,000. Buffet will be donating all proceeds to the GLIDE charity. You can view the auction here: http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&item=2543576557&category=26261 Picked on June 27th at $104.05 Change since picked: +8.03 Earnings Date 07/22/03 (unconfirmed) Average Daily Volume = 6.76 million Chart link: ---- Goldman Sachs Grp. - GS - cls: 86.55 chng: -1.68 stop: 84.50 With the broad market taking another shellacking on Thursday and the Brokerage index (XBD.X) getting hit for a 3% loss, suddenly the 1.9% slide in GS doesn't look so bad. There's no question we would have liked to see the stock just build on its gains above the $88 level heading into the weekend, but that wasn't the hand we were dealt. Today's sharp pullback looks to have Monday's gap in play as the next likely level of support. Depending on the bullish conviction in the rest of the Brokerage sector, that means we'll be wanting to look for the next rebound to occur either from the top of the gap ($85.70) or on a complete gap fill down at $84.88. In either case, if our bullish objective for a return to the $91-92 area that provided resistance in mid-June, we'll need to see GS observe what should be strong support above $84.75. Maintain stops at $84.50 in case that support fails. Picked on July 1st at $85.85 Change since picked: +0.70 Earnings Date 09/24/03 (unconfirmed) Average Daily Volume = 4.38 mln Chart link: --- Harman Intl - HAR - close: 80.60 change: -1.18 stop: 77.75 Essentially shares of HAR continue to demonstrate their strength. Despite a broad-market pull back and news that HAR has acquired another company the share price remained above the $80.00 level. The company announced late this afternoon that Harman would be acquiring Wavemakers, Inc. Wavemakers is a "leading developer of processors and software algorithms which optimize voice quality and speech recognition in automotive environments", according to the press release. There was no comment as to the purchase price or how it would affect HAR's earnings. This pull back to $80 looks like a tempting entry point for new call positions however it may be best to wait and watch the broader markets for new strength. Even the strongest stocks can go south when the markets are falling. Should HAR fall below the $80 mark, we'll be looking for a bounce in the $78.50 to $79 area. Picked on July 6th at $80.26 Change since picked: -0.20 Earnings Date 08/19/03 (unconfirmed) Average Daily Volume = 321 thousand Chart link: --- PACCAR Inc. - PCAR - close: 71.34 change: -0.72 stop: 69.00 Our recently added long play in PCAR is holding up rather well with the NASDAQ down 1.8% and the Industrials down 120 points. PCAR has slipped back towards the $70.00 level and may still slip even closer but doing so only allows us a better entry point for new long plays. We suggested that our preferred entry would be on a dip near the $70 level. The question now is whether or not the markets rebound tomorrow or continue sinking and if they sink will PCAR draw even closer to $70? There is no reason to rush into a play. Traders are better off waiting to see how the market reacts to the PPI data and GE's earnings tomorrow and then gauge an entry in PCAR. Waiting till Monday isn't a bad idea either if you're playing August options as you'll avoid two days worth of time decay. Picked on July 08 at $73.49 Change since picked: -2.15 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.24 million Chart = --- Pulte Homes - PHM - close: 62.26 change: -1.75 stop: 60.50 Danger signs are flashing as we look at the homebuilding group. The DJUSHB home construction index has rolled over from the 460 level and the close under 450 is a psychological breakdown. Pundits are calling Thursday's market decline a round of profit taking. If investors are going to sell their winners to take some money off the table, then the homebuilders are a prime target! Today's break under PHM's simple 50-dma is not a good sign for bulls either. We would not recommend new long positions at this time and conservative traders may want to snug up their stops tighter than our $60.50 stop. We did find it interesting that investors appeared to ignore the news out today that PHM would be awarded $48.7 million from the U.S. in a breach of contract dispute with the government. Maybe it's because PHM was denied its claim for lost profits during the breach of contract. Picked on July 01 at $63.52 Change since picked: -1.26 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 767 thousand Chart = ************** NEW CALL PLAYS ************** None ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ******************* PLAY UPDATES - PUTS ******************* Ball Corp. - BLL - close: 44.10 change: -0.60 stop: 47.00*new* Talk about your fortuitous timing! We added bearish coverage on BLL on Tuesday, based primarily on the stock's extended and consistent downward trend over the past couple months. Well that trend hasn't come to an end just yet, as the broad market weakness over the past couple days has only added more weight for the bulls to bear. Yesterday's opening pop fell short of the $46 resistance and provided a decent opportunity for a fairly low- risk entry. We were hoping for something in the $46-47 area, but clearly that just wasn't offered. Following through to the downside on Thursday, BLL broke to new 11-month lows before finding support just above $43 and bouncing smartly through the afternoon session. Now we know where that support lies and traders looking for another viable entry will do well to target failed rallies below yesterday's opening highs. Looking at an intraday chart, it looks like resistance is likely to be strong in the $45-46 area, so that is the place to focus our efforts on new entries. Momentum traders will likely want to play cautiously after today's rebound from the lower Bollinger band. Selling into the failed rallies is a safer way to go right now. Note that we've slightly lowered our stop to $47, which is right on the 30-dma and just above what should now be very strong resistance. Picked on July 8th at $45.14 Change since picked: -1.04 Earnings Date 07/24/03 (confirmed) Average Daily Volume = 606 K Chart = --- Intuit Inc - INTU - close: 43.16 change: -1.21 stop: 45.55 Under-performing is the kind of action we like to see in a put play. The NASDAQ lost 1.8 percent, the GSO software index lost 2.15 percent and INTU lost 2.7 percent in today's sell-off. Resistance for the stock at $45.50 has held and today marks the first close under the simple 50-dma since late May 2003. All we can say is so far so good. Picked on July 8th at $43.35 Change since picked: -0.19 Earnings Date 08/13/03 (unconfirmed) Average Daily Volume = 4.1 million Chart link: --- Silicon Valley Bancshares - SIVB - close: 23.61 change: -0.92 stop: 24.90 Is it going to be different this time? SIVB has certainly given us more than its fair share of whipsaw moves and the past two days are just the latest example. The stock continued to see fairly strong buying volume as it vaulted yesterday to its highest close since breaking down on June 23rd. That bullish action was then promptly reversed today, with the stock sliding lower by 3.75% to end just above what has been rather solid intraday support near $23.45. Daily oscillators are trying to tip bearish and with the sharp reversal from the site of the 20- dma (currently $24.48), it looks like this may be the bearish move that finally sticks. Aggressive traders got their entry opportunity as the stock rolled back under $24.50 this morning and then next likely place to enter the play will be on a break below $23.45, just below the intraday lows of the past several sessions. There is likely to be some support found again in the $22.50 area, but once below the 6/25 low of $22.30, SIVB will be well on its way to achieving our ultimate target of $20, which would be a fill of the mid-April gap. Picked on June 24th at $22.82 Change since picked: +0.79 Earnings Date 07/17/03 (unconfirmed) Average Daily Volume = 717 K Chart = --- Whole Foods - WFMI - cls: 47.07 chg: -0.24 stop: 48.26 The decline in WFMI, while apparently disconnected from the market's big drop today, is still slow and sure. Shares had rallied back to the $48 level on Wednesday but failed intraday to close off its highs. Today's drop, while rather mild continues to support the bearish trend. There's been little price moving news for WFMI but S&P did recently release some comments on grocers KR, SWY and ABS. KR got an credit upgrade while ABS was downgraded. Meanwhile the slow crawl we're seeing in WFMI is turning us off to adding new positions, especially with support right there at $45.00. If WFMI can reach $45 we'll probably close the play. Picked on June 13 at $49.44 Change since picked: -2.37 Earnings Date 07/30/03 (unconfirmed) Average Daily Volume: 1.6 million Chart = ************* NEW PUT PLAYS ************* Biovail Corp - BVF - close: 44.01 change: -2.07 stop: 46.01 Company Description: Biovail Corporation is an international full-service pharmaceutical company, engaged in the formulation, clinical testing, registration, manufacture, sale and promotion of pharmaceutical products utilizing advanced drug delivery technologies. (source: company press release) Why We Like It: Investors have forgiven BVF after its latest earnings report. Late April the company reported 39 cents a share, a penny ahead of estimates on Q1 revenue of $191 million, which was a 23% improvement. Despite the positive numbers, traders hammered BVF with losses and eventually the stock fell from $42 to $35 in three days time. But this was before the BTK biotech index rallied 20 percent in the month of May. BVF bounced strongly as investors perceived it at a discount and the stock added more than 30 percent during the month. The rally for both continued into early June before the sector saw some profit taking. BVF held up pretty well. But now the stock market is pulling back a little and investors are taking some money off the table. Quarterly winners are being hit first and BVF is on the list. June was a month of consolidation with lower highs and support at $45. That support and its simple 50-dma broke down today on strong volume of 2.8 million shares. We suspect this technical breakdown will afford bears a chance to play a pull back to the $40.00 level of support. Our view is supported by the P&F chart which shows a fresh triple-bottom breakdown sell signal and bullish support at $39. We're going to suggest new positions at current levels with a profit target of $40.00. Our initial stop loss will be $46.01. Keep in mind there is ALWAYS headline risk when trading a drug or biotech stock. BVF has issued its share of press releases and news headlines but the chart is pointing to some short-term weakness. Suggested Options: We're going to list August and October strikes with 45s and 40s as our preference. BUY PUT AUG 45 BVF-TI OI=1959 at $3.50 SL=1.75 BUY PUT AUG 40 BVF-TH OI= 625 at $1.45 SL=0.75 BUY PUT OCT 45 BVF-VI OI= 797 at $4.80 SL=2.50 BUY PUT OCT 40 BVF-VH OI=2778 at $2.75 SL=1.40 Annotated Chart: Picked on July 10 at $44.01 Change since picked: -0.00 Earnings Date 07/29/03 (unconfirmed) Average Daily Volume: 1.95 million Chart = --- The Home Depot - HD - close: 32.43 change: -1.06 stop: 34.75 Company Description: A home improvement retailer, The Home Depot operates more than 1500 stores throughout the United States. The do-it-yourself warehouse retail stores offer building materials, home improvement products and related furnishings. Additionally, the company provides lawn and garden products and an assortment of services to both individual home-owners and independent contractors. Why we like it: While HD has been riding the Housing boom higher throughout the past few months, we've had our eye on the stock for a few weeks now, looking for a solid bearish setup. The early signs of the weakness we wanted to see arrived in late June when the stock broke below the bottom of its multi-month ascending channel near $32.50 at the time. Over the past couple weeks, HD has been working its way higher, right along the underside of that very same channel and on Tuesday the stock broke back inside that channel, ending just fractionally below $35. The intraday high is important, as it was $34.70, just 2-cents below the 6/16 intraday high. Fast forward to today's session and we can see the stock has had a powerful reversal from that double top, and volume has been expanding significantly running 20% above the ADV. To what can we attribute this recent bout of weakness? Perhaps it is as simple as some heavy profit taking, or maybe it is related to the weakness in the Dow Jones Home Construction index ($DJUSHB). But the other possibility is that investors are coming to grips with the reality that there might not be another wave of refinancing activity and that means less money to do home improvements, which translates directly into lower profits for the likes of HD. So much for the second half recovery! After such a strong run over the past few months, we don't expect new lows in HD any time soon. But the picture is starting to turn a bit ominous, with the sharp slide of the past two days putting price right back at major support near $32. This level has been providing support since early June, and if it fails (as we expect), then it could be a quick slide down to the $30 level and then to our eventual $28 target for a gap fill. There are a couple ways to play it at this juncture. A rebound back near the $33 area could provide a better entry point, with the 10-dma ($33.22) and 20-dma ($33.15) likely to present a stiff barrier to any rebound. However, traders looking for some confirmation before playing will want to wait for a break below the 50-dma ($31.64) or even $31.50 (just below the 6/23 low) before playing. Stops should initially be placed at $34.75, which is just above the double top shown on the chart below. Suggested Options: Aggressive short-term traders will want to focus on the July 32 Put, as it will provide the best return for a short-term play. With July contracts expiring next week though, conservative traders will want to utilize the August 32 contract, which provides greater insulation from the spectre of time decay. BUY PUT JUL-32 HD-SZ OI=4202 at $0.65 SL=0.30 BUY PUT AUG-32 HD-TZ OI=4715 at $1.35 SL=0.75 BUY PUT AUG-30 HD-TF OI=4564 at $0.50 SL=0.25 Annotated Chart of HD: Picked on July 10th at $32.43 Change since picked: +0.00 Earnings Date 08/19/03 (unconfirmed) Average Daily Volume = 9.61 mln Chart = ************************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 Thursday 07-10-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - BVF Traders Corner: Tell Mom The Babysitter's Not Dead, Just A Little Pricey ********************* PLAY OF THE DAY - PUT ********************* Biovail Corp - BVF - close: 44.01 change: -2.07 stop: 46.01 Company Description: Biovail Corporation is an international full-service pharmaceutical company, engaged in the formulation, clinical testing, registration, manufacture, sale and promotion of pharmaceutical products utilizing advanced drug delivery technologies. (source: company press release) Why We Like It: Investors have forgiven BVF after its latest earnings report. Late April the company reported 39 cents a share, a penny ahead of estimates on Q1 revenue of $191 million, which was a 23% improvement. Despite the positive numbers, traders hammered BVF with losses and eventually the stock fell from $42 to $35 in three days time. But this was before the BTK biotech index rallied 20 percent in the month of May. BVF bounced strongly as investors perceived it at a discount and the stock added more than 30 percent during the month. The rally for both continued into early June before the sector saw some profit taking. BVF held up pretty well. But now the stock market is pulling back a little and investors are taking some money off the table. Quarterly winners are being hit first and BVF is on the list. June was a month of consolidation with lower highs and support at $45. That support and its simple 50-dma broke down today on strong volume of 2.8 million shares. We suspect this technical breakdown will afford bears a chance to play a pull back to the $40.00 level of support. Our view is supported by the P&F chart which shows a fresh triple-bottom breakdown sell signal and bullish support at $39. We're going to suggest new positions at current levels with a profit target of $40.00. Our initial stop loss will be $46.01. Keep in mind there is ALWAYS headline risk when trading a drug or biotech stock. BVF has issued its share of press releases and news headlines but the chart is pointing to some short-term weakness. Suggested Options: We're going to list August and October strikes with 45s and 40s as our preference. BUY PUT AUG 45 BVF-TI OI=1959 at $3.50 SL=1.75 BUY PUT AUG 40 BVF-TH OI= 625 at $1.45 SL=0.75 BUY PUT OCT 45 BVF-VI OI= 797 at $4.80 SL=2.50 BUY PUT OCT 40 BVF-VH OI=2778 at $2.75 SL=1.40 Annotated Chart: Picked on July 10 at $44.01 Change since picked: -0.00 Earnings Date 07/29/03 (unconfirmed) Average Daily Volume: 1.95 million Chart = ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** Tell Mom The Babysitter's Not Dead, Just A Little Pricey By Mike Parnos, Investing With Attitude I suppose some traders (even CPTI traders) may actually have to work. Not all traders have the luxury of sitting in their Fruit- Of-The-Looms on a cushy sofa in front of their digital TV. I know it's the ultimate goal, but, for the time being, we must persevere. Eureka!! We may have discovered a solution for the "absentee" trader – a "trade-sitter." An Opportunity Is A Terrible Thing To Waste A lot can, and does, happen in the markets during trading hours. There are breakouts and spike downs. Even though CPTI strategies are largely "hands-off" strategies, sometimes there will be intra- day moves or opening gaps that provide entry and exit opportunities. When they're gone, they're gone. In the past, I've preached about using brokers that offer online trading with the capabilities of electronically sending your orders to the exchange with the best bid or ask. Many of these offer commissions of under $20 for a 10-contract position. That's all well and good if you're near your computer, have the knowledge, the awareness, and the discipline to make your trades. If not, you're S.O.L. – or, at least you used to be. Babysitters Don't Come Cheap A few weeks ago I related a story about Joe Krutsinger who offered to charge those in his audience $75 for a system stock trade -- $15 for the actual trade and $60 for the discipline to pull the trigger. There may be an alternative. For those who are not available to monitor your trades or lack the discipline to execute, you might consider OneStopOptions. These are LIVE brokers. At least the one that I talked to, Alan Knuckman, seemed to be alive. He seems like a pretty sharp guy. He assured me that his associate, Andy Aronson, was as well. They both also have a comprehensive knowledge of option trading – including the many strategies we discuss at the CPTI. As a matter of fact, these guys probably have more experience with options than I do. (They're not nearly as funny, though.) Alan Knuckman explained that OneStopOption clients can call him, or Andy Aronson, with specific questions at any time. He also said that OptionInvestor (and, of course, CPTI students) can arrange for him to place their orders. If you choose to place trades discussed in my columns, they have a program called "Autotrade." They're also Licensed Option Principals. I'm not sure what that means. Maybe they wear little tags or something, but it's supposed to be a good thing. You can give them the parameters of your trade and they'll execute stop orders and OCO (one cancels the other) order. They will provide the discipline you may not have along with the account supervision to take advantage of opportunities that present themselves. Keep in mind that a good babysitter doesn't come cheap. Neither does a knowledgeable broker who will do all the work for you – including some teaching. If you want your money supervised by people who care, you'll need to ante up. It's about $5 per contract, but it's worth it, considering the alternatives. Actually, it should also provide you with some peace of mind – knowing that you have a solid resource at your disposal to answer your questions about strategies – especially those "what if" questions. OneStopOptions can be contacted by calling 888-281-9569 or go to their website at (what a surprise) www.OneStopOption.com. Contact them and see if you like what they have to say. You have nothing to lose. _____________________________________________________________ Our Adjustment In case you missed our "Position Adjustment" on Monday, here's a brief recap of what we did with the QQQ Baby Strangle position. On Monday, we got the move we were looking for. The QQQs, along with the rest of the market, took off and never looked back (but it will, hopefully). We sold the July $28 call at $3.80. That means we still own the July $30 put at a cost of only $.05. Now, we still have seven trading days for it to reverse and head back down. Wouldn't it be nice to see the market give back three points? Since the market is going up for no apparent reason, it makes sense that it will come back down for the same lack of reason. It's that "random walk" or "chaos" thing playing itself out. Basically, we have a free trade and seven days to enjoy, and hopefully profit from, it. For those who selected the alternative of hanging onto the July $28 call, the QQQs continued its move up and traded as high as $4.40 before the market started to retreat. That would have been a $.60 profit plus what was leftover in value of the $30 put. _____________________________________________________________ JULY CPTI PORTFOLIO POSITIONS July Position #1 – LLTC Baby Condor – Closed at $35.26 Sell 10 contracts of LLTC July $35 calls @ $1.05 Buy 10 contracts of LLTC July $37.50 calls @ $.45 Net credit is $.60 Sell 10 contracts of LLTC July $30 puts @ $.75 Buy 10 contracts of LLTC July $27.50 puts @ $.40 Net credit is $.35 Total credit of $.95. Risk is $1.55 ($2.50 - $.95) Linear Technology (LLTC) was one of our profitable quickies last month. We now want to try to establish a slightly longer relationship. We've created a maximum profit range of $30 to $35 and a safety range of $29.05 to $35.95. Maximum profit is $950. LLTC is going in the right direction. _____________________________________________________________ July Position #2 – SPX Iron Condor – Closed at $988.67 Sell 4 contracts of SPX July 940 puts Buy 4 contracts of SPX July 925 puts Net credit: $1.50 Sell 4 contracts of SPX July 1025 calls Buy 4 contracts of SPX July 1040 calls Net credit: $2.55 Total credit: $4.05. Risk is $10.95 ($15 - $4.05) Here we go again. The range is 940 to 1025. I'm still anticipating (what do I know?) that pullback we never really got in June. I've reduced the number of contracts to four to reduce our exposure. This still may be a bit aggressive for some of you. Be careful and stay within your risk tolerance. Maximum profit is $1,620. So far, so good. ______________________________________________________________ July Position #3 – DJX – Bear Call Spread – Plus - $90.36 We're due to experience the summer doldrums – and why shouldn't the DOW participate? We're going to establish a bear call spread and use that money to buy some puts. Here we go. Sell 15 contracts of DJX July $90 calls @ $1.90 Buy 15 contracts of DJX July $92 calls @ $1.00 Net credit of $.90 X 15 contracts = $1,350 Now, you can just leave that position alone and, if the DOW finishes below 9000 at July expiration, you keep the $1,350. Your exposure would be $1.10 (9200 – 9000) X $1,500. Your maximum profit would be $1,350. Seems to have reversed and is heading in the right direction – at least for the moment. _____________________________________________________________ Position #4 – Ongoing QQQ ITM Baby Strangle – Currently at $31.60 In May we bought 10 contracts of the July QQQ $30 puts @ $2.05 and bought 10 contracts of the July QQQ $28 calls @ $1.80 Total debit of $3.85. The QQQs have made a big move up. It's either going to break through resistance or bounce off and head back down. Our objective is for a $3-4 move in the next month. One of our long options will hopefully pay for almost the entire position. That will leave our other long option, which is now practically free, poised for the bounce back as the QQQs reverse. Our exposure is only $1.85 because we have $2.00 of intrinsic value. See adjustment information described above. We now own the July $30 put at a cost of $.05. If the QQQs continue this slide, we might just make a few bucks. ______________________________________________________________ July Position #3 – RUT Iron Condor – Aborted. We were going to put on an Iron Condor with a 420/480 range. Either I was drunk when I came up with the numbers, or the premiums changed dramatically on Monday morning. Regardless, with premium gone, the proposed position was aborted. ______________________________________________________________ Did You Notice? Wednesday night on CBS, a show called "Cupid" premiered. It's one of those reality shows. It is produced by Simon Cowell, the Brit who gave us "American Idol." This show involves suitors who are trying to impress a nubile brunette. The point to this nonsense is that two of the male contestants, drooling over the brunette, were identified as "Option Traders." They were obviously looking forward to some new naked options in their future. I think the winner gets $1,000,000 – and, perhaps, the girl. Funny, they never contacted me . . . I could use both. Those pretty boys wouldn't have stood a chance. Oh, well . . _____________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our plays or our strategies? Feel free to email me your questions. An excellent source for new students is the OptionInvestor archives where we've been discussing strategies and answering questions since last July. To find past CPTI (Mike Parnos) articles, look under "Education" and click on "Traders Corner." They're waiting for you 24/7 ______________________________________________________________ Happy trading! Remember the CPTI credo: May our remote batteries and self-discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". 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