The Option Investor Newsletter Thursday 07-17-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: KO, CAT, UTX Futures Markets: Opex Earnings Season Tankage Index Trader Wrap: See Note Market Sentiment: Barometer Falling Weekly Manager Microscope: Gary Tanaka & Alberto Vilar: Amerindo Technology Fund D (ATCHX) Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-17-2003 High Low Volume Advance/Decline DJIA 9050.82 - 43.80 9113.57 9017.84 2.01 bln 741/2464 NASDAQ 1698.02 - 50.00 1729.59 1693.47 1.89 bln 704/2522 S&P 100 494.80 - 6.27 501.07 493.10 Totals 1445/4986 S&P 500 981.73 - 12.36 994.00 978.60 W5000 9443.32 -136.00 9579.32 9418.10 RUS 2000 459.93 - 13.75 473.68 459.93 DJ TRANS 2543.34 - 54.20 2596.99 2539.01 VIX 22.82 + 0.53 23.47 22.34 VXN 35.47 + 1.48 36.35 34.74 Total Volume 4,221M Total UpVol 614M Total DnVol 3,565M 52wk Highs 280 52wk Lows 40 TRIN 1.19 PUT/CALL 0.89 ************************************************************ KO, CAT, UTX Nice try against overwhelming odds. Dow components KO +1.85, CAT +4.90 and UTX +1.50 struggled vainly to keep the Dow from crashing after IBM failed to paint a rosy picture with their earnings on Wednesday night. IP and XOM were the only other Dow stocks in positive territory but only fractionally. With 25 of the 30 stocks in the red it was remarkable the Dow only lost -43 points. Dow Chart Nasdaq Chart It was a good day economically but you could not tell from the market direction. The Jobless Claims fell to 412,000 but still extended its string of weeks over 400K to twenty-two. There was an unexpected drop in continuing claims of -117,000 and the prior week was revised down -47,000. Nobody appears to know why but they are not complaining considering last weeks numbers were near records. Analysts keep saying the last two weeks of claims are skewed by auto plants being shut down for the summer retooling and we will see a huge drop in the next couple of weeks. They have no excuse for the prior 20 weeks or at least none that holds water. Still 412,000 was a significant change from the prior week's 441,000. Maybe things are getting better. New residential construction soared to an annualized rate of 1.80 million units but this should not surprise anyone even the analysts. With interest rates at 45 year lows a month ago and expected to go lower it is a sure bet any builder with a lot was starting to turn dirt. Strike while the iron is hot WOULD have been the plan. With rates rocketing the demand for homes could take a sudden downturn before those slabs are even dry. There could be a glut of homes by fall. Look for Greenspan to pull some rabbit out of his hat if rates continue to climb because this would be a severe blow to the sputtering economy. The strongest report came from the Philly Fed Survey which jumped to 8.3 from 4.0 in June. This should have been a huge positive for a market in the dumps but we saw an immediate sell off. Why? The whisper number was over 10.0 and traders were disappointed that conditions were not better. Remember, the current market is priced to perfection and in some cases better than perfection and traders are frustrated when that perfection does not come to pass. There were some negatives with prices paid dropping sharply as well as inventories. Prices received still showed contraction and unfilled orders fell to 3.5 from 7.9. It was a positive report but still had some cracks in the foundation. While the economics were mildly positive the biggest influence on the market was the lackluster guidance from IBM on Wednesday night. According to analysts IBM missed earnings by a penny despite their claims to the contrary. Almost every component of the earnings announcement drew fire from analysts. They derived strong gains from currency conversions and that is not a normally recognized profit center. They continued to lose money in the chip business and services bookings fell. One analyst said IBM actually missed estimates by as much as -12% when all factors were considered. That equates to a clean 85 cents when estimates were for 98 cents. Other analysts view it differently but none viewed it as strongly positive. All would have liked to see a stronger top line. Without the currency gains the growth would be an anemic +3% not 10% as claimed. The real killer was their lack of optimism. CFO John Joyce said demand is good but not robust and he was NOT holding out hope for an economic recovery over the next five months. He also said, "I don't have to remind investors that second-half recoveries were expected in 2001 and again in 2002. We are going to take a more pragmatic view." Turn out the lights the party's over. At least that was the investor sentiment towards IBM on Thursday. The stock lost -3.41 and led the Dow decline. Helping the negative outlook was a warning from Nokia before the open that knocked -3.55 of a $17 stock. There were numerous other warnings as well as several strong reports as dozens of companies announced. The mixed messages only succeeded in convincing many traders that we may be seeing a stabilization of the economy but we are NOT seeing a strong recovery. July is normally when expectations meet reality and it is not a pretty picture. With growth for the economy expected to be 3-5% for the second half earnings are expected to be up significantly. With companies still giving cautious guidance or worse now that they can see order flow for the next quarter it simply drives home the no strong recovery picture. The Manpower CEO said today that they were seeing NO signs of an economic recovery yet. They typically see job requirements 90-120 days in advance and there has not been any pickup in expectations. The travel sector is still in the tank. The transportation sector is losing ground. Boeing announced another 5,000 worker layoff today. According to IDC PC demand in the 2Q was up +7.6% and according to Gartner Group it was up +10.6%. This could actually be bad news. The surge could have been in anticipation of a post war rebound that fizzled. Also, where is the surge in profits from the jump in PC demand? Answer: It is a buyers market and there is no profit. Without a substantial increase in demand that will support higher prices the tech companies could be left to tread water until the 2H of 2004. There it is out, I said it. I expect the term "second half recovery in 2004" to begin to appear more often in the mainstream press over the next couple months. It would be funny if it were not so painful. I deviated from the topic above but the main problem with the markets this week is simply "inline won't cut it." With the great expectations for the 2003 recovery it does not excite investors to hear inline or flat guidance. One trader said today after a disappointing earnings release, "if this keeps up everyone will be long on nothing." Bingo! In a market priced to perfection and facing expectations that look like a ski jump from the bottom it is rapidly becoming clear that those expectations may be impossible to obtain. Not only are the earnings tough to produce but the quality of earnings is being called into question even quicker. IBM was a prime example. Numerous earnings components were seen by analysts as one time events or the product of cost cutting and not repeatable. COF got killed after posting earnings of $1.23 and blowing away estimates of $1.11. Analysts said fears of losses from the growing unemployment and a maturing loan portfolio were to blame for the -$7 loss. COF committed the unforgivable sin of not raising its guidance. Correct, it did not warn but simply said they were comfortable with estimates. They said the effort to attract better credit borrowers would offset gains in other areas. Guilty, of giving accurate guidance, penalty -$7. I am not trying to beat a dead horse here and I am sure you are getting the picture. The economy is stable, maybe recovering but recovering very slowly. It is not recovering at the pace that would justify the recent 50% rally in tech stocks. This does not mean we are not going to see a year end rally. It only means that we should see the normal July adjustment period. As the July earnings reality dawns, investors will continue to readjust their valuations to fit that reality. If that means EBAY needs to trade at $95 instead of $115 then it will eventually settle at $95. If the 3% real growth for IBM is only worth $75 then it will be a long time before it sees $87 again. The Dow closed at 9053 today and over -200 points below the Monday high. No big deal really. A 200 point drop from the high but only -70 points from Friday's close. This is not a material drop, yet. What was holding it up was the hope that earnings would surprise to the upside. The hope that Intel would guide much higher. The hope that IBM was setting the globe on fire. And finally the hope that Microsoft would announce a windfall profit and strong guidance. Intel "no recovery yet, no major upgrade cycle, no pickup in IT spending." IBM "not holding out hope for a recovery over the next five months." And finally Microsoft tonight, "not expecting a marked improvement in the economic environment" and "we may be seeing indications that the spending environment has stabilized but IT budgets remain tight." They missed estimates by a penny and guided lower by a penny for the next quarter. They also said factors that helped profits in the past would disappear this year. Could that be a pre-warning warning for future quarters? MSFT closed the after hours up only +16 cents and S&P futures fell from their post MSFT bounce at 982 to 978.50 as I write this. Friday we get the Michigan Consumer Sentiment and Semiconductor Book-to-Bill report and a handful of earnings before the market opens. Last week we saw a relief rally after a four-day slide. That rally was in anticipation of good news. Now that the news is out I would doubt we get anymore rocket rides and instead we could see some short covering or profit taking as the week draws to a close. I do not expect to see 9250 again any time soon and there is a good chance support at Dow 9000 is about to break. With 70% of the S&P still to report there will still be fireworks but they may have lost their market moving potential. Technicians tell us that market drops on low volume are nothing to worry about. Thursday's volume was above average and decliners beat advancers 3:1. New 52-week lows rose to a level not seen since May-23rd. New highs fell to only 25% of the July-14th level. For those that are watching the internals are changing. Follow the internals. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Opex Earnings Season Tankage Jonathan Levinson There was a sellathon in the Nasdaq futures, with a more orderly decline on the S&P and Dow futures. That notwithstanding, the selling was sufficient to bring the Dow and S&P futures to close below their daily ascending trendlines for the first time since March. Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 997 989 983 974 968 YM03U 9148 9094 9038 8984 8928 NQ03U 1300 1278 1264 1242 1228 10 minute chart of the US Dollar Index They liked the jobs data released this morning, and drove the US Dollar Index vertical, making a lower high below 97.30 and ultimately failing to hold the 97 level. Gold got clocked on the move, but returned to positive territory above 343 support, bringing the XAU and HUI with it and giving a 1.11 boost to the commodities index, the CRB, with natural gas, cocoa and wheat leading higher. Daily chart of August gold The oscillator downphase hasn't managed to take out the lower end of the bull wedge within the bull flag drawn on the daily candle chart. If this is the downphase, I'm looking forward to seeing the up. The Macd looks like it wants to turn higher, but today's move up was insufficient to give us buy signals yet. Daily chart of the ten year note yield Treasuries closed lower today, once again related to the positive employment data released today. The oscillators are very toppy on the ten year note yield, and if Tuesday was the top on this move, we can expect higher prices for the ten year treasury note from here. That said, the action of equities today was disconcerting, particularly for devotees of the liquidity theory of this year's rally. Equities and treasuries rallied together on a flood of money. Their declines should occur in tandem as well. If so, it implies that the pop in treasuries may be temporary. Note that the TNX has plenty of downside support from its recent rally over the past month. Daily NQ candles The selling on the NQ futures accelerated today, giving us sell signals on the daily oscillators. The move never challenged the ascending trendline as the Nasdaq futures rested on the laurels of their impressive gains throughout the tail end of the rally. 30 minute 20 day chart of the NQ On the 30 minute candles, the bear wedge downside break is clear and was confirmed today. All is not perfect in the bears' den, however, because the move bottomed the shorter term oscillators, portending a bounce within that timeframe and within the larger topping cycles on the daily candles above. It could take the form of a sideways move, a weak bounce, or another push higher, but the longer daily cycles are telling us that the top of the rally has likely been seen. Daily ES candles The S&P futures lost their rising trendline on a closing basis for the first time during this rally. The oscillators are on sell signals from lower highs below what I'd conservatively consider to be critical support. 20 day 30 minute chart of the ES Just as with the NQ futures, ES is at the bottom of its downphase on the 30 minute chart oscillators. Imagine different channels of differing widths, with a narrow price channel oscillating within a wider channel. The wider channel, signified by the daily oscillators, has flattened and is just turning down, while the narrower channel is pointed downward but is bumping into the lower band of the wider one. That's what's happening here. A bounce of the 30 minute cycle could take us to the top of the wider daily channel, but the oscillators on that longer timeframe are telling us that it's likely topped. 150-tick chart of ES The ES showed us an orderly decline today on the 150-tick candles, stepping lower in a series of bear wedges and flags. The upphase commenced approaching the cash close, but had not reversed as of this writing. The cycle on the 30 minute chart could take it higher still, but tomorrow will have to tell. Daily YM candles Once again, the YM tells the same story as the ES. 20 day 30 minute chart of the YM On the above interpretation, the oscillators are indicating a short term bounce. This assumes the roughly 75% likelihood (such as I've heard anecdotally) that the they do not simply begin trending lower. As the longer cycles get moving to the downside, they can squash the shorter period cycles into oversold territory and keep them there indefinitely. This is the low-odds outcome, but given how overdone this rally became to the upside, my mind remains open. 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_071703_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 **************** Barometer Falling "On the djx daily candlesticks this looks like 3 black crows a highly reliable bearish pattern. The BP% crossover yesterday is glaring at me. Increasing volume on the declines is also confirming. Better yet the vix is climbing. Looking very bearish." This email came in as I was looking over the daily charts for material tonight. Reader Dan managed to encapsulate exactly what I see. On the daily candles, we have the VIX and VXN crossing above their 20 and 50 day MAs, with the BPSPX (bullish percent) and BPCOMP right at the top, the former leading the latter off their highs. Other breadth indicators, including the McClellan oscillator, are also sending bearish messages for equities. Rather than rehash the data for you, I'll provide what is hopefully some enlightenment on it. As a novice, I used to look at such data and begin planning my bearish trades immediately, waiting for the charts to tank. As a function of the greater lesson of patience, I've learned to read the data in broader terms. Just as we had dips and corrections throughout the rally, we will have spikes, bounces, and upside corrections on the way down. Experienced traders will not expect an immediate plunge or crash, although such cannot be ruled out. Instead, they will note that the breadth, sentiment and volatility data are indicating the beginning of a possible change in trend, with all that such implies. Just as a falling barometer doesn't mean that there's a twister blowing in within the next minute, it does signal the time to begin checking the windows, battening down the hatches, and preparing for foul weather. The various indicators we follow are issuing similar signals for traders. The actual timing and trading signals will have to come from more accurate, minute indicators such as we follow in the intraday Market Monitor and Futures Monitor. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9353 52-week Low : 7197 Current : 9050 Moving Averages: (Simple) 10-dma: 9127 50-dma: 8949 200-dma: 8445 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 981 Moving Averages: (Simple) 10-dma: 996 50-dma: 972 200-dma: 901 Nasdaq-100 ($NDX) 52-week High: 1316 52-week Low : 795 Current : 1255 Moving Averages: (Simple) 10-dma: 1279 50-dma: 1205 200-dma: 1065 ----------------------------------------------------------------- There is little to say here regarding the volatility indices that Jon didn't already cover in the commentary above. We do indeed see both rebounding from their lows but they have yet to make new relative highs above the early June highs. CBOE Market Volatility Index (VIX) = 22.82 +0.53 Nasdaq-100 Volatility Index (VXN) = 35.47 +1.48 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.89 938,695 839,522 Equity Only 0.81 684,346 559,684 OEX 0.73 65,122 48,142 QQQ 3.49 47,057 164,665 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 72.9 + 0 Bull Confirmed NASDAQ-100 81.0 + 0 Bull Confirmed Dow Indust. 83.3 + 0 Bull Confirmed S&P 500 78.8 - 1 Bull Confirmed S&P 100 83.0 + 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 0.99 10-Day Arms Index 1.11 21-Day Arms Index 1.18 55-Day Arms Index 1.14 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 700 617 Decliners 2126 2432 New Highs 54 130 New Lows 25 8 Up Volume 375M 170M Down Vol. 1587M 1694M Total Vol. 1975M 1874M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 07/08/03 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 was little change last week in the large S&P contracts. It appears both big and small traders are waiting to see how the initial burst of Q2 earnings come in and how investors react to them. Commercials Long Short Net % Of OI 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%) 07/08/03 415,053 453,720 (38,667) (4.5%) 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 06/17/03 202,040 184,028 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% 07/08/03 152,239 74,749 77,490 34.2% 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 The same holds true for the commercials here in the e-minis, as they appear to be waiting before making any big commitments. However, we've seen a drastic turnaround in the small traders sentiment going from extremely bullish to know the most bearish in months. Commercials Long Short Net % Of OI 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%) 07/08/03 192,815 224,124 (31,309) ( 7.5%) 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 06/17/03 466,837 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% 07/08/03 56,394 72,090 15,696 12.2% Most bearish reading of the year: 9,810 - 07/01/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 NASDAQ futures remain in a holding pattern. Commercials remain net short and small traders remain net long. Commercials Long Short Net % of OI 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%) 07/08/03 30,489 48,311 (17,822) (22.6%) 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 06/17/03 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% 07/08/03 26,136 9,035 17,101 48.6% 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 Ditto here too. There's almost no change in the commercials' net long position in the Industrial futures and there is a small bump in the small traders net short position. Commercials Long Short Net % of OI 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% 07/08/03 20,752 11,860 8,892 27.3% 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 06/17/03 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%) 07/08/03 5,005 8,093 (3,088) (23.6%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************************* WEEKLY MANAGER MICROSCOPE ************************* Gary Tanaka & Alberto Vilar: Amerindo Technology Fund D (ATCHX) This week we look at Gary Tanaka and Alberto Vilar, co-portfolio managers of the Amerindo Technology Fund, a non-diversified U.S. equity fund that seeks long-term capital growth by investing in common stock of technology companies whose primarily operations are in either the technology or science areas. Morningstar says the fund has huge positions in Internet stocks, making it one of the most volatile funds out there. Indeed, at March 31, 2003, the Amerindo Technology Fund had 20.6% of total holdings invested in Expedia Inc. and 20.1% in Ebay Inc. So it is willing to concentrate assets in Tanaka and Vilar's favorite stocks. Risk-hearty investors have been rewarded so far in 2003. As of July 16, this emerging technology fund is up nearly 77%, ranking in the top 1% of the technology fund category, per Morningstar. The fund's YTD Lipper ranking is an "A" (or 99%), comparable to Morningstar's ranking. Both investment managers are seasoned veterans of the investment industry. Tanaka is a principal portfolio manager with Amerindo Advisors (U.K.) Ltd. and Amerindo Investment Advisors, (Panama), his employer since 1980. Previously, he was a portfolio manager with Crocker Bank in San Francisco and before that, a consultant to Andron Cechettini & Associates. Vilar founded the predecessors of Amerindo Advisors (U.K.) and Amerindo Investment Advisors Panama in 1979, and since then has served as a principal portfolio manager. He has co-managed the Amerindo Technology Fund D since its inception in October 1996. He started with Citibank in 1964, and between 1967 and 1971 was portfolio manager, vice president and manager of the investment management division of Drexel Burnham Lambert. Management Style/Strategy According to Morningstar, Amerindo Technology Fund's equity style is best characterized as mid-cap, growth. A forward P/E of 108.5 helps to explain the fund's high volatility, as does its holdings concentration. The fund's top 10 stock holdings represent 70% of assets per Morningstar's latest report. Expedia and Ebay made up over 40% of total holdings as of March 31. So, when the co-managers' favorite stocks perform well, this fund rockets ahead. But its heavy concentration in technology as well as Internet stocks is not for the weak stomached. When stocks go south, and tech leads to the downside, the co-managers' high-risk strategy can produce big capital losses. According to Morningstar, Amerindo Technology Fund invests mainly in mid-cap growth, tech stocks. Overall, the fund had an average market capitalization of $5.7 billion at year-end, befitting of a mid-cap fund. A closer look at the fund's stock holdings reveals that nearly 40% of portfolio assets are invested in the large-cap range at year-end. Over 25% are invested in small- and micro-cap stocks. So, Tanaka and Vilar invest the fund's assets across the entire capitalization range, not just emerging technology stocks. In terms of value versus growth, this portfolio has consistently landed in the "growth" style box per Morningstar. Average price valuations of its holdings are much higher than both the S&P 500 index and the average technology fund. That means a higher risk (volatility) level relative to similar funds but more risk, more potential return theoretically. Average "earnings growth" rates are also higher than its category peers. Investment Performance A high-risk portfolio such as Amerindo Technology Fund hits home runs, but can also strike out a lot, to use the baseball analogy. In 1997 - the fund's first full year of operation - it lost 18.1% for shareholders, but rebounded in 1998 to post a 84.7% gain that year. In 1999, the fund returned 248.9% for shareholders, but in 2000, it plunged 64.8% falling hard after the Technology/Internet bubble burst. In 2002, Tanaka and Vilar lost 31% for investors, but held losses relative to category peers, ranking in the top decile of the tech category peer group per Morningstar. And, on a YTD basis through July 16, the fund is up 76.8%, ranking in the first percentile of the tech sector. That is 62.8% better than the S&P 500 large-cap index this year. So, if you're looking for a fund that has "high risk" and "high return" potential, Amerindo Technology Fund might be suitable. For the trailing 5-year period through July 16, 2003, Amerindo Technology Fund has a positive annualized total return of 0.2%, per Morningstar, ranking in the 27th percentile of the category peer group for performance. Overall, Morningstar rates the Amerindo Technology Fund D just "2" stars, signifying below average, risk-adjusted performance relative to category peers. Overall, the fund generates above- average returns in relation to its peer group, but higher risk and downside volatility prevents it from earnings high ratings for risk-adjusted relative performance. At 2.25%, the fund's expense ratio is higher than the category average of 1.97%. But when you can return 248% in a year does expense ratio matter? Anyone that invests in this fund should realize that it is a high-risk, high-cost fund that offers the opportunity to generate huge returns in "up-market" conditions and over the long term. Conclusion Tanaka and Vilar's aggressive growth style as applied to science, technology and Internet stocks isn't for everyone, especially not those with low risk tolerances. The fund's best quarterly return over the past five years was 104.2% and its worst quarter decline was 56.5%, indications of its extreme volatility, both positive and negative. If you seek a "pro-growth" portfolio of technology and Internet stocks and are willing to accept the much higher risk involved, then Amerindo Technology Fund may be an appropriate fund option for the aggressive portion of your portfolio. If you could not handle a 56.5% quarterly loss or a 64.8% annual loss, then this portfolio is not right for you. For complete fund information or to download a fund prospectus, go to the www.amerindo.com website. Please read the prospectus carefully before investing, if you decide to do so. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************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 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Thursday 07-17-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: EBAY, HAR Dropped Puts: None Call Play Updates: AGN, GS, LOW, OMC, PCAR New Calls Plays: None Put Play Updates: HD, INTU, LEN New Put Plays: FITB, XL **************** 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: ***** eBay Inc - EBAY - close: 110.18 change: -2.57 stop: 110.99 Every once in a while even the giants stumble. Fortunately, for EBAY investors the stock didn't stumble very far. The wide and sometimes deep profit taking that hit Wall Street today eventually wore through EBAY's near impenetrable defenses and sellers brought the stock back down a couple of points toward the $110 level. There are just a few days left ahead of EBAY's Q2 earnings report and we suspect most traders are sitting on the sidelines waiting for the announcement. What are they waiting for? They want to see if EBAY has any surprises for them. Currently, estimates are for 35 cents a share although many believe they will easily beat that number. Still there are plenty of folks that suspect EBAY will announce a stock split with their earnings report and that's certainly a possibility as their last split was in the $120 neighborhood. The weakness today stopped us out at $110.99 for a $7 move. We would not suggest any new positions except for the true gamblers out there. Lately the trend has been "sell the news" no matter how good the report is. Picked on June 27th at $104.05 Change since picked: +6.13 Earnings Date 07/24/03 (confirmed) Average Daily Volume = 6.76 million Chart link: ---- Harman Intl - HAR - close: 79.35 change: -1.85 stop: 79.49 We hate it when that happens! When a profitable play turns sour and you exit in the red, even though we reduced our risk with the $79.49 stop, is still irritating to say the least. On Wednesday, one of the brokerage firms downgraded HAR on valuation concerns saying it had surpassed their price target of $82. Sure enough, shares of HAR gapped down on Wednesday morning but the selling pressure was not enough to break support at $80.00. What became our undoing was the broad-based selling as investors took money off the table, primarily focusing on their biggest winners. Considering the violent pull back we observed in several stocks we're surprised the selling wasn't steeper in HAR. We're closing the play with a 77-cent loss in the stock but aggressive types may want to monitor it. Shares could rebound back over the $80 level and make another run if the markets don't continue melting. Picked on July 6th at $80.26 Change since picked: -0.91 Earnings Date 08/19/03 (unconfirmed) Average Daily Volume = 321 thousand Chart link: 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: 79.20 change: -1.26 stop: 78.50 Expiration week has not been kind to the bulls and even relatively strong stocks have come under solid selling pressure over the past few days. AGN is one of those that has been dragged lower by the broad market weakness, leaving behind an apparent double top just below $82. After finding support just above $79 on several occasions over the past couple weeks, the stock actually cracked fractionally below that level today, trading within 26 cents of our stop before a feeble final-hour rebound allowed the stock to close just slightly above $79 again. This support level is critical and if AGN breaks today's intraday lows, it could be a quick trip lower to next support in the $76- 77 area. But so long as support is holding, we've got to stick with what has been a bastion of relative strength compared to the rest of the market. A solid rebound from this $79 level can be used for aggressive entries, but the risk is higher than a week ago, with daily oscillators in full bearish roll right now. The more conservative approach will be to wait for the stock to rally back above $80, breaking the descending trendline that has kept the stock under pressure this week, before initiating new positions. Maintain stops at $78.50. Picked on June 26th at $78.74 Change since picked: +0.46 Earnings Date 07/23/03 (confirmed) Average Daily Volume = 1.03 mln Chart = --- Goldman Sachs Grp. - GS - cls: 86.44 chng: -0.82 stop: 85.50 Despite the recent strength in the Brokerage sector (XBD.X), the index really got hit hard on Thursday, giving up more than 3% by the close and ending right at the critical $350 support level. GS has been one of the stronger stocks in the sector lately and it maintained that strength, losing less than one percent and holding onto support at $86. But our bullish play is right at a critical inflection point here, as the XBD falling below today's intraday low of $347 will likely generate enough weakness to cause GS to test the top of its July 7th gap at $85.70. It came really close to that test today with an intraday low of $85.86, but the bulls managed to successfully defend that support with a weak bounce into the close. This weakness may turn out to be a solid entry point, but we're unconvinced with daily Stochastics in a full bearish rollover right now. For those traders tempted to buy the dip, we would caution that in addition to a rebound in the stock, we need to see the XBD rebounding back above the $355 level before adding new positions. Keep those stops in place, just in case the bulls lose their nerve on expiration Friday. Picked on July 1st at $85.85 Change since picked: +0.59 Earnings Date 09/24/03 (unconfirmed) Average Daily Volume = 4.38 mln Chart = --- Lowe's Companies - LOW - cls: 46.64 chng: -0.43 stop: 44.90*new* Given the weakness in Housing related stocks this week, LOW has been a nice pocket of relative strength following last week's breakout over $46.50. Over the past few days, the stock has been testing that broken resistance as newfound support and it is a testament to the stock's strength that it has so far survived those tests. But there are some troubling signs appearing, not the least of which is the daily Stochastics finally dropping out of overbought territory today. That hints that there could very well be some more weakness before we see the rebound that makes for a solid entry point. We'll continue to look for a dip near the $45.50-45.75 area to give us a clear answer as to whether old resistance will now provide support. A solid rebound from this area should be a solid entry, and the 10-dma ($45.60) should reinforce that support. Note that we've raised our stop again to $44.90, which is just below what should be strong support, just below the bottom of last Friday's gap. Picked on July 13th at $46.87 Change since picked: -0.23 Earnings Date 08/18/03 (unconfirmed) Average Daily Volume = 4.86 mln Chart = --- Omnicom - OMC - close: 71.82 change: -0.38 stop: 69.99 As would be expected the general market malaise affected shares of Omnicom as well. We're a little concerned that the media stock has slipped below previous support of its rising 30-dma but bullish traders who like to buy the dip might be looking towards the chance to enter OMC on a bounce from its 50-dma instead. The 50-dma, approaching $70.70, should bolster support at the July 1st slows near $70.70 (what a coincidence). We would not suggest new long positions until we see the bounce. Picked on July 13 at $73.97 Change since picked: -2.15 Earnings Date 07/29/03 (unconfirmed) Average Daily Volume: 1.66 million Chart = --- PACCAR Inc. - PCAR - close: 72.08 change: -0.69 stop: 69.95 We're running out of time on PCAR. There are four trading days left ahead of PCAR's July 24th earnings report and we don't plan on holding over the announcement. This makes gauging new entries tricky and given the bearish market environment this week treacherous may be a better descriptor. Shareholders are probably encouraged that PCAR has managed this market weakness by consolidating above support at the $70 level. We would not suggest new positions and those not wanting to back out completely may want to consider upping their stops towards the $71 level. We're going to leave our s at $69.95. Picked on July 08 at $73.49 Change since picked: -1.41 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.24 million Chart = ************** NEW CALL PLAYS ************** None ************************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 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* The Home Depot - HD - close: 33.10 change: -0.40 stop: 34.75 It appears that we've quite effectively bracketed the Home Improvement group, with a bearish play on HD and a bullish one on LOW. Both have actually held up fairly well this week, and HD has stubbornly held onto the $33 support level, despite the broad market weakness. Despite its refusal to break down (so far), HD is building a nice pattern of lower intraday highs and it looks like the breakdown we're awaiting could arrive any time. Friday's session is unlikely to provide that resolution, as market makers are likely to try to pin the stock near the $32.50 strike for expiration. But if that does in fact occur, it may provide for an aggressive entry point, as a trade below $32.75 would break the trendline connecting the higher lows of the past week. So the strategy remains pretty much the same -- initiate new positions either on a rollover below $34 or a break of the $32.75 level, targeting an initial move to the $30 level. For those entering on a breakdown below the trendline, keep in mind that the 50-dma ($32.11) is still looming as a potential bounce point. Maintain stops at $34.75 until the current consolidation pattern breaks decisively. Picked on July 10th at $32.43 Change since picked: +0.67 Earnings Date 08/19/03 (unconfirmed) Average Daily Volume = 9.47 mln Chart link: --- Intuit Inc - INTU - close: 41.10 change: -1.47 stop: 44.01*new* Undermining any support for software stocks was a heavy decline in the NASDAQ composite of 2.85% and a drop of 3.65% in the GSO software index. The GSO's drop stalled at its rising 50-dma but from its close near the lows of the day it's probably not prudent to bet on a big bounce, especially with all the confusion over MSFT's earnings numbers after the bell. INTU followed the markets and tech sector lower today dropping as far as $40.31 before bouncing back in the last couple of hours. The $40 level is easy psychological support and short-term traders might want to consider taking profits on another test. What to do now? We suspect that any bounce in techs or INTU could have the stock rising back towards the $42.50-42.00 area. A roll over/failed rally here would be a decent place to consider new put positions. Otherwise, traders may need to wait for a close under the $40 level. Our eventual target will be the $37.00-38.00 area. Meanwhile, we're dropping our stop loss to $44.01. Picked on July 8th at $43.35 Change since picked: -2.25 Earnings Date 08/13/03 (unconfirmed) Average Daily Volume = 4.1 million Chart link: --- Lennar Corp. - LEN - close: 69.23 change: -2.56 stop: 73.75*new* Is this breakdown for real? How many times have we asked that question in our attempts to play the downside in the Housing sector in recent weeks? Too many. But LEN's breakdown on Thursday certainly looked good on the surface, with the nice break under the $69.75 level that provided support on July 1st. That was in spite of strong Housing Starts released before the opening bell. Unfortunately (but not unexpectedly), the stock did find closing support above the 50-dma ($68.92) and this support will need to break if the play is to really gain any traction. Until it does, we need to remain on guard for another bounce. That bounce (if it comes) should allow us to gauge whether we've caught some early weakness or another bear trap. Look for a failed rebound at either the $70.50 level (intraday support earlier in the week and the site of the short-term descending trendline), or $72 (resistance on the last failed bounce) to provide the next solid rebound. If that upper level fails to provide resistance, then we'll need to consider the possibility that the bulls haven't given up just yet. Just to be on the safe side, we're lowering our stop tonight to $73.75, which is just above the curling lower 10-dma ($73.30) and 20-dma ($73.61). Picked on July 15th at $71.12 Change since picked: -2.33 Earnings Date 09/09/03 (unconfirmed) Average Daily Volume = 1.62 mln Chart link: ************* NEW PUT PLAYS ************* Fifth Third Bancorp - FITB - cls: 55.26 chg: -0.98 stop: 57.51 Company Description: Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $88 billion in assets, operates 17 affiliates with 943 full-service Banking Centers, including 132 Bank Mart. locations open seven days a week inside select grocery stores and 1,883 Jeanie. ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee and West Virginia. The financial strength of Fifth Third's affiliate banks continues to be recognized by rating agencies with deposit ratings of AA- and Aa1 from Standard & Poor's and Moody's, respectively. Additionally, Fifth Third Bancorp continues to maintain the highest short-term ratings available at A-1+ and Prime-1 and is recognized by Moody's with one of the highest senior debt ratings for any U.S. bank holding company of Aa2. Fifth Third operates four main businesses: Retail, Commercial, Investment Advisors and Fifth Third Processing Solutions. (source: company press release) Why We Like It: Sometimes picking on the under-performer when the markets decide to rollover can be a profitable way to catch the general trends. With the INDU and COMPX suffering set backs and investors selling their winners the banking sector, which has been one of the aforementioned winners (since its March low), is a prime candidate for some serious profit taking. The BKX index has fallen back under the 900 level and looks ready to retest the late June support of 850 (currently at 882). Meanwhile, shares of FITB peaked weeks ago in early June (compared to the BKX which peaked a few days ago) and FITB has been suffering a slow decline ever since. Now that selling pressure appears to be outweighing buying pressure we could see FITB's decline pick up speed. So far this month (July) shares of FITB bounced three times at support near $56.00. That support, which also included the simple 50 & 200-dma's, failed today with the last half hour really going to the bears. The company announced their Q2 earnings two days ago when shares were near $58.00. As you can see the results didn't inspire much faith. According to the press releases, FITB's Q2 saw its profits rise eight percent over last year's bolstered by stronger loan growth. Wall Street had been looking for 74 cents a share and FITB reported 75. While it was a positive surprise the stock has obviously been unable to maintain any strength. We're encouraged by the technical breakdown that is strengthened by the bearish oscillators on both its daily and weekly charts. A trade under the $55 mark would produce a fresh double-bottom sell-signal in FITB's P&F chart. We're going to suggest new positions at current levels (under $56) but more cautious traders may want to wait for a move under $55, which appears to be significant support/resistance on its weekly chart. Our first target will be the $51-50 area. We'll initiate the play with a stop at 57.51 even though the month-long trend of lower highs is suggesting a stop at just above $58.00. Suggested Options: We're going to list August and November strikes with a preference for the $55 and 50 puts with the 50 puts being the riskier bet. BUY PUT AUG 55 FTQ-TK OI=1669 at $1.50 SL=0.75 BUY PUT AUG 50 FTQ-TJ OI=1214 at $0.30 SL= -- BUY PUT NOV 55 FTQ-WK OI= 329 at $3.20 SL=1.60 BUY PUT NOV 50 FTQ-WJ OI=7817 at $1.55 SL=0.80 Annotated Chart: Picked on July 17th at $55.26 Change since picked: -0.00 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 2.4 million Chart link: --- XL Capital Ltd. - XL - close: 79.64 change: -0.59 stop: 83.00 Company Description: XL Capital Ltd. provides insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. Insurance business written includes general liability, other liability, professional and employment practices liability, environmental liability, property, program business, marine and energy, aviation and satellite, as well as other product lines. Reinsurance business written includes treaty and facultative reinsurance to primary insurers of casualty and property risks, as well as life reinsurance, primarily European term assurances, group life, critical illness coverage , immediate annuities in payment and disability income business. Why we like it: While most of the attention has been focused on Housing stocks in the wake of the sharp selloff in Treasuries in recent weeks, another area of the market that likely will encounter problems from rising rates are Insurance companies, particularly those involved in the reinsurance business. Interest-rate sensitive investments are likely to take a hit, cutting into these companies' profits, but that isn't the only rate pressure this group is feeling. They're also under increasing pressure not to raise premiums in an increasingly competitive marketplace, so their profits are going to be squeezed from both ends. Ever since gapping up above the $80 level in late April, shares of XL have been building a broad topping pattern above that level. The final bullish push came in mid-June as the stock printed a double top near $88 and price has been steadily deteriorating ever since. After a brief bounce just above $81 earlier in the week, XL rolled over again, breaking that level yesterday and generating a new PnF Sell signal. That Sell signal gives a tentative bearish price target of $71. Adding to the bearish tone, the stock deteriorated further on Thursday, closing below $80 for the first time since gapping higher in late April and setting the stage for a steeper decline. While the $71 price target from the PnF chart looks tempting, that may be a bit aggressive for our play, as we've only got a couple weeks to play ahead of the company's earnings report on July 31st. Instead, we're going to target a move down to the $73-74 support area, which was prior resistance and then support beginning in early April. Aggressive traders can certainly consider new positions on a drop under $79.50 (just below today's intraday low), but they must be aware of the potential for an oversold rebound from the 200-dma ($78.45). The higher odds strategy right now is to look for a failed rebound, ideally in the $81-82 area, before entering the play. Note that the 10-dma is just now crossing the $82 threshold and it should provide solid resistance to any half-hearted bullish moves. The 20-dma ($82.80) provided a firm lid on the early July rebound attempt, so we're setting our stop initially at $83.00, which also happens to be the bottom of the 7/10 gap. Suggested Options: Aggressive short-term traders will want to focus on the August 80 Put, as it will provide the best return for a short-term play. While we've listed the $75 strike, note that it has just been listed and does not yet have any open interest or a valid quote yet. Aggressive traders looking to use this strike will need to wait for open interest. Traders with a more conservative approach will want to utilize the October contract, as it should not be subject to the same time decay issues as the August contracts over this week's expiration event. BUY PUT AUG-80 XL -TP OI= 476 at $2.85 SL=1.50 BUY PUT AUG-75 XL -TO OI= 0 at $0.00 SL=0.00 BUY PUT OCT-80 XL -VP OI= 590 at $4.70 SL=2.75 Annotated Chart of XL: Picked on July 17th at $79.64 Change since picked: +0.00 Earnings Date 07/31/03 (confirmed) Average Daily Volume = 762 K Chart link: ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Thursday 07-17-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - FITB Traders Corner: A Little Older, A Little Wiser, But Still Not Little Traders Corner: A Change of Pace ********************* PLAY OF THE DAY - PUT ********************* Fifth Third Bancorp - FITB - cls: 55.26 chg: -0.98 stop: 57.51 Company Description: Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $88 billion in assets, operates 17 affiliates with 943 full-service Banking Centers, including 132 Bank Mart. locations open seven days a week inside select grocery stores and 1,883 Jeanie. ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee and West Virginia. The financial strength of Fifth Third's affiliate banks continues to be recognized by rating agencies with deposit ratings of AA- and Aa1 from Standard & Poor's and Moody's, respectively. Additionally, Fifth Third Bancorp continues to maintain the highest short-term ratings available at A-1+ and Prime-1 and is recognized by Moody's with one of the highest senior debt ratings for any U.S. bank holding company of Aa2. Fifth Third operates four main businesses: Retail, Commercial, Investment Advisors and Fifth Third Processing Solutions. (source: company press release) Why We Like It: Sometimes picking on the under-performer when the markets decide to rollover can be a profitable way to catch the general trends. With the INDU and COMPX suffering set backs and investors selling their winners the banking sector, which has been one of the aforementioned winners (since its March low), is a prime candidate for some serious profit taking. The BKX index has fallen back under the 900 level and looks ready to retest the late June support of 850 (currently at 882). Meanwhile, shares of FITB peaked weeks ago in early June (compared to the BKX which peaked a few days ago) and FITB has been suffering a slow decline ever since. Now that selling pressure appears to be outweighing buying pressure we could see FITB's decline pick up speed. So far this month (July) shares of FITB bounced three times at support near $56.00. That support, which also included the simple 50 & 200-dma's, failed today with the last half hour really going to the bears. The company announced their Q2 earnings two days ago when shares were near $58.00. As you can see the results didn't inspire much faith. According to the press releases, FITB's Q2 saw its profits rise eight percent over last year's bolstered by stronger loan growth. Wall Street had been looking for 74 cents a share and FITB reported 75. While it was a positive surprise the stock has obviously been unable to maintain any strength. We're encouraged by the technical breakdown that is strengthened by the bearish oscillators on both its daily and weekly charts. A trade under the $55 mark would produce a fresh double-bottom sell-signal in FITB's P&F chart. We're going to suggest new positions at current levels (under $56) but more cautious traders may want to wait for a move under $55, which appears to be significant support/resistance on its weekly chart. Our first target will be the $51-50 area. We'll initiate the play with a stop at 57.51 even though the month-long trend of lower highs is suggesting a stop at just above $58.00. Suggested Options: We're going to list August and November strikes with a preference for the $55 and 50 puts with the 50 puts being the riskier bet. BUY PUT AUG 55 FTQ-TK OI=1669 at $1.50 SL=0.75 BUY PUT AUG 50 FTQ-TJ OI=1214 at $0.30 SL= -- BUY PUT NOV 55 FTQ-WK OI= 329 at $3.20 SL=1.60 BUY PUT NOV 50 FTQ-WJ OI=7817 at $1.55 SL=0.80 Annotated Chart: Picked on July 17th at $55.26 Change since picked: -0.00 Earnings Date 07/15/03 (unconfirmed) Average Daily Volume = 2.4 million Chart link: ************************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. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ************** TRADERS CORNER ************** A Little Older, A Little Wiser, But Still Not Little By Mike Parnos, Investing With Attitude “Too many people are thinking of security instead of opportunity. They seem more afraid of life than death” -- so sayeth the speculators. Those are the words of traders who bet on a roll of the dice, buying puts and calls and saying a little prayer. Why do most of our CPTI strategies involve "selling" rather than buying? Because we want to be the casino -- NOT the gambler. Why? Because casinos win most of the time. These are some of the things you learn as you get older. Here are a few other things you learn as you get older: a) If God wanted me to touch my toes, he would have put them on my knees. b) If you want to avoid shark attacks this summer, dive with a briefcase. Sharks may mistake you for a market maker and leave you alone out of professional courtesy. c) Never underestimate the power of very stupid people in large groups. d) The perfect lover is one who turns into pizza at 4am. What have you learned over the years? Send me some of your words of wisdom that we can share with our CPTI students. ____________________________________________________________ How did our "quickies" work out this month? Well, the jury is still out, but things look promising. Here's a quick review. 1) SPX Iron Condor with a range of 965 to 1025 – Credit of $2.30 The SPX closed today, it's last day of active trading, at 981.73. We have a nice cushion, but, as we learned last month, it "ain't over till the fat lady sings." And the "fat lady" ain't singin' until all 500 S&P stocks in the index are open tomorrow morning. Then, and only then, will we know the "official" closing figure. Since the SPX is a cash settlement index, your brokerage account will reflect the results on Monday. So, unless they find Sadam Hussein and Osama Bin Laden together in a no-tell motel tonight, I think our SPX play is safe. 2) QQQ Lottery Strangle – Bought the $31 put and $33 call – Cost of $.30 The QQQs closed today at $31.18. The NASDAQ closed down a whopping 50 points. During the day, the $31 puts could have been sold for $.20. They're still at $.15. It looks like the market will open up tomorrow – as a result of positive Microsoft earnings, so that $.15 might disappear pretty quickly. But, again, all kinds of strange things can happen over night – and on expiration Friday. 3) BBH Sell Strangle – with a range of $130 to $135 – Credit of $2.05 BBH closed today at $132.62 – about the middle of our range. Looks good. One day left. _____________________________________________________________ Hi Mike, AFFX @ $21.75 provides an example of two questions I have been wondering about. This is the kind of stock I like for Iron condors, but there is no $27.50 strike available. If a $27.50 call existed, it would probably be $.30 x $.35. I could buy it and sell the $25 call (along with a similar position in the $15 & $17.50 puts) making my Iron Condor's net credit about $.65. Risking $1.85, that's a little under 3:1, with a $7.50 point max profit range, extending 14.9% to the upside and 19.5% to the downside. My safety range would be 17.9% up & 22.5% down. Seems safe. Since there is no $27.50 call available, I see three choices. 1. I could sell the $25 calls naked and sell the put spread. My net credit goes up to 1.00, but my risk to the upside is uncapped. 2. I could buy the $30 call and make a $5.00 strike spread with calls and $2.50 with puts, but that Aug. $30 would only insure me against a rally of 37% or more by august expiration. I don't expect to see that. The naked call would only tie up about $800 more than the call spread (10 contract position). 3. I could blow it off and go to another stock because it doesn't meet my Iron Condor requirements. Also, AFFX announces earnings next Wednesday. Do you generally avoid Iron Condors on stocks with upcoming earnings? Your thoughts??? Scott. Hi Scott, You've thought this through very well. There's another alternative you may want to consider. It's a little riskier, though. You could put on a "sell strangle" – simply selling both the August $17.50 puts and the $25 call. At Thursday's closing prices you'd take in $1.10. I like the $7.50 range and the chart looks pretty good too! You would want to bail out of the trade if it traded at $17.50 or $25. Concerned about earnings? Well, AFFX is a biotech stock. It's not the earnings that concern me as much as some FDA announcement regarding one of its drugs that may be up for approval. You might, before you would put on a trade, venture a phone call to the Investor Relations department at AFFX and ask if any such announcements are anticipated in the near future. ______________________________________________________________ JULY CPTI PORTFOLIO POSITION UPDATE July Position #1 – LLTC Baby Condor – Closed at $34.69 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 in the range and one trading day to go. _____________________________________________________________ July Position #2 – SPX Iron Condor – Closed at $981.73 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've reduced the number of contracts to four to reduce our exposure. Maximum profit is $1,620. The SPX closed comfortably in the range. The trading part is over. All we have left to sweat is tomorrow's opening – we learned that the hard way last month. I like our chances. ______________________________________________________________ July Position #3 – DJX – Bear Call Spread – Plus - 90.51 We're due to experience the summer doldrums – and why shouldn't the DOW participate? We established a bear call spread. 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 If the DOW finishes below 9000 at July expiration, you keep the $1,350. Your exposure would be $1.10 (9200 – 9000) X $1,900. Your maximum profit would be $1,350. The DJX closed at 90.51. The DJX works the same way as the SPX. Therefore, we have to wait until the 30 DOW stocks open Friday morning before we can determine how we did. _____________________________________________________________ Position #4 – Ongoing QQQ ITM Baby Strangle – Currently at $31.18 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 for a 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. We sold the July $28 call for $3.80. We now own the July $30 put at a cost of $.05. If the QQQs move down a few points, we might just make a few bucks. Unless the QQQs take a big dip tomorrow, we'll end up losing a nickel. ______________________________________________________________ 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. ______________________________________________________________ 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 ************** TRADERS CORNER ************** A Change of Pace by Mark Phillips mphillips@OptionInvestor.com For several weeks now, we've been going through the details of the trading approach I've put together for trading the e-mini index futures. It has been a pretty intensive discussion and I still feel there's a lot of good subject material to cover. But this week, I need to step away from it, at least in this forum. There are a couple of reasons for this little diversion -- the first is that I was away from the markets on Monday and Tuesday and didn't see the sort of price action on Wednesday that I want to discuss for our next series of examples. I don't feel it does anyone any good to dissect price action and tell you how you could have traded it, when looking at it in hindsight. Anyone can do that -- in fact, if that was all that was necessary, I could have my wife sit down and write this article and nobody would be the wiser. But that's not the sort of service I try to provide and I hope it isn't what you expect. But there's another reason I've put the futures discussion on hold this week, and that's because I have other things on my mind. If I don't get them out in an organized manner soon, they're likely to just escape into thin air and I'll forget to ever write about them. I'll warn you right now, that this is liable to be a rather disjointed discourse -- my wife would call it a rant. So with my thanks in advance for your indulgence this evening, here goes. The Fed IS Impotent Over the past year, I think I've heard a couple dozen different viewpoints on why the Fed will be able to avoid deflation and counter-arguments about why they won't. Regardless of which side of the argument you come down on, I think the one reality is that Greenspan and company really have no power to control economic growth at the present time. It has been pretty much accepted that the Fed no longer has the ability to drop short-term interest rates, as they are now at 1.00% and it appears unlikely that they will be raised anytime in the near future. Much has been made of the fact that the Fed has a printing press and isn't afraid to use it. In fact, we can see the effects of its use in the mushrooming liquidity in the economy. It is really starting to get out of hand again, and here's a statistic to put a face on it. In just the last 3 weeks, the Fed has increased the M3 Money Supply by more than $100 billion. Doing the math, that comes out to a whopping $1.7 trillion on an annualized basis. That's huge! The problem is that they can't control where it goes or how it gets used. Jonathan has done a great job in recent weeks (and I suspect will touch on the topic again in his Wrap tonight) demonstrating how the incredible surge in liquidity is finding its way everywhere EXCEPT where the Fed wants it, which is into business loan growth. All the new money has been finding its way into consumers' pockets via revolving (credit card) debt and cheap home and auto loans. The excess cash generated from cash-out refinancing has been used to fuel lifestyle expenditures, keeping the economy afloat, even though business has shown no inclination to spend on expansion. The real problem is becoming clear this week though, with the vertical rise in bond yields. In just the past month, the yield on the 10-Year Note is up nearly a full 1.0% and it is really going to spell major problems if this rise continues. Basically bond investors have thumbed their collective noses at Alan Greenspan and given a vote of "No Confidence" that he'll be able maintain low rates AND stimulate economic growth. The selloff in bonds is a vote by the smartest group of investors out there that interest rates are going up, because the spectre of inflation is on the horizon. Normally that wouldn't be a problem, as the Fed can just raise interest rates to slow down inflation. But when interest rates rise, we all know what happens. It puts a damper on business loan generation as well as the willingness of consumers to take on more debt. Well the latter is precisely what has kept the economy from slipping into the abyss over the past year. And if the Fed is priming the money pump in an effort to get business growth going again, the last thing they're going to want to do is anything that would hamper business spending growth. What happens when you kill that 'stimulus' in an economy that is clearly NOT growing and with unemployment continuing to rise? Why you get stagnant or non-existent growth. You see, the Fed has been making noises about the various "unconventional" means that they can use to stimulate the economy. But I beg to differ, as every tool currently at their disposal has the effect of increasing the money supply, devaluing our currency, but without one whit of control as to whether any of that additional "money" creation will provide any direct economic growth. It is the difference between the growth of money and the velocity of money. Just because the money is created out of thin air doesn't have anything to do with whether there is any economic growth taking place. Economic growth occurs when more money is exchanged for goods and services than in a prior period. Unless you can stimulate the demand side of the equation, then all you have is this great sea of liquidity sloshing around, with nowhere productive to go. Put another way, money creation may be high, but the movement of that money may be negligible and that speaks of stagnation to me. So how does the Fed get some stimulus on the demand side of the equation? They can't! The tools at their disposal are lowering interest rates and creating new greenbacks out of thin air. They can probably intervene directly in the Treasury market by buying government bonds too, but in the end that is no different that just printing more dollars. These tools are designed to stimulate business spending to increase production capacity to meet increasing demand. But there's already a glut of capacity in the global economy and companies have ZERO incentive to increase their already excessive capacity. The end result is that the Fed cannot coerce business to spend, and the desired growth never happens. There are some severe excesses that were created in the late 1990s and until they are worked off, there will be no incentive to take on additional debt for new expansion. So let's review. The Fed has been priming the monetary pump for the better part of two years through interest rate cuts -- all to no avail. So they upped the ante back in November and started really running the printing presses to get some stimulus going. As before though, it just keeps flowing into revolving credit creation, auto loans and home loans, with very hardly anything finding its way into the business community. That leaves the consumer the continuing backbone of the economy, and if we falter, then bye-bye economic growth. Things were cruising along alright until the bond crowd started getting nervous and that nervousness hit a crescendo yesterday while Greenspan was speaking and they were literally dumping bonds. With rates rising sharply, I think we can safely conclude that consumers are not going to be fueling their lifestyle through another round of home equity loans and that removes one area of stimulus for the economy. Then if we factor in rising unemployment, we have yet another pocket of weakness to contend with. In short, the economy and the market has been floating on the Fed-induced sea of liquidity, but it has been wholly artificial. The bond crowd poked a big hole in the life raft this week and I believe it was the equivalent of giving Greenspan's Fed a "No Confidence" vote with respect to being able to get the economy growing. So here are the questions that are plaguing me tonight. If the Fed can't stimulate the economy with either money creation or decreasing interest rates, what CAN they do that can have a beneficial impact on economic growth. My best guess/answer is "nothing". The other doozy of a question is where all the money (and there's a lot of it) that is coming out of the bond market is going? It clearly hasn't been flowing into the equity market. Is it being repatriated overseas or is it sitting in a big slush fund waiting the right opportunity to be plunged into equities? I don't have any of these answers, but as you can see, the questions are allowing me to get plenty of mental exercise. Next week, I've got another interesting topic I want to delve into, but I'll keep you in suspense for now. We'll be back on our normal Monday schedule next week. As always, if anyone has any great words of wisdom pertaining to the questions I've raised here tonight, please feel free to send them along. Who know, we may be able to get a lively and productive discussion going and we might just all learn something together. Now that sounds like fun! Have a great week! Mark ************************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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