The Option Investor Newsletter Thursday 07-24-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Surprised? Futures Markets: Sellers return Index Trader Wrap: Given a few more points, bear defended Market Sentiment: Setting your sights Weekly Manager Microscope: Martin Sosnoff: Atalanta/Sosnoff Funds Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-24-2003 High Low Volume Advance/Decline DJIA 9112.51 - 81.70 9281.42 9106.42 1.87 bln 1549/1670 NASDAQ 1701.42 - 17.80 1740.80 1700.29 1.87 bln 1512/1697 S&P 100 493.65 - 4.14 503.12 493.31 Totals 3061/3367 S&P 500 981.60 - 7.01 998.89 981.07 W5000 9457.57 - 57.90 9612.58 9453.27 RUS 2000 465.26 - 0.88 472.51 465.25 DJ TRANS 2592.95 + 20.80 2612.83 2571.09 VIX 20.46 + 0.02 20.66 19.63 VXN 31.45 + 0.67 31.68 30.10 Total Volume 3,989M Total UpVol 1,566M Total DnVol 2,383M 52wk Highs 517 52wk Lows 26 TRIN 1.30 PUT/CALL 0.75 ************************************************************ Surprised? I was. Not that we had a big drop late in the afternoon but that we had the big bounce in the morning. Most bulls I know were scratching their heads at the close today the same way I was scratching my head on Tuesday afternoon. I was in denial all morning today and when the drop did begin it came so fast I immediately became suspicious despite feeling relief. Relief that I was not losing my mind over my July analysis. We are a long way from proving that last statement but significantly closer tonight than we were this morning. Dow Chart Nasdaq Chart S&P Chart The day got off to a flying start with the first Jobless Claims number under 400,000 in 23 weeks. The 386,000 headline number triggered massive short covering as surprised bulls started buying and surprised bears began running for cover. The general consensus was that a real economic recovery had begun. Hold that thought for a minute. If the Jobless Claims were really under 400K would that mean a recovery had begun? No, just that the statistical anomaly of 22 weeks over 400K had finally run its course. It would take a string of weeks under 400K with decreasing weekly numbers to even begin to indicate a jobs recovery had begun. Now the bad news. This was "seasonally adjusted data." The raw number was still over 400K, way over at 423,972. The numbers are adjusted for a normal influx of workers furloughed from automakers in the last two weeks of July while the retooling process takes place. This is historically when this takes place. However, things are a little more fluid this year and the adjustment could be over done. With automakers cutting production earlier and adjusting assembly lines to compensate for the weaker demand we may not have the same worker fluctuation that we have always had in late July. All this boils down to you cannot trust the numbers and they really do not mean anything. It was one week and not a trend. Another jobs report, the Monthly Mass Layoff report, showed that 1,691 new layoffs were announced in June for 157,595 workers. This was only slightly below the 173,784 for May and 161,095 for April. Definitely no change in trend here. The manufacturing sector continued to lose the most workers. Layoffs in California, Pennsylvania, New Jersey, Florida, Texas, and Ohio accounted for 58% of all layoff events and 55% of initial claims for unemployment insurance in June. Granted this is a lagging report as it is layoffs announced in June but the actual layoffs occur over the next 90 days from the announcement. That puts us right in the middle of the layoff period. Despite these reports the market charged off to within 38 points of the high for the last 12-months at 9319. Did the economy suddenly improve overnight? Was there a flood of positive earnings guidance from major companies? Did Saddam Hussein surrender? No to all of those questions. In fact there were several high profile comments to suggest otherwise. International Paper beat the street by two cents but warned that they were seeing no improvement in the economy. They said they were anticipating a very tough environment with demand remaining flat. Sales were less than expected and prices are declining. FBN, Furniture Brands International, the largest residential furniture maker in the U.S. said it sees no signs of an economic rebound and warned for the rest of the year. They said margins were compressing and they were seeing increased promotional pressure. Whirlpool dropped -3.14 after beating the street mostly on gains in their global businesses not the U.S. business. Investors were concerned that the shrinking margins and lack of U.S. gains were a sign for the future. After the close today VRSN posted earnings inline with estimates but said the prolong slump in technology spending was continuing. The CEO said the information technology and telecom recovery has not yet materialized. KLAC said they were not seeing a broad based increase in business activity but some of their customers were reporting an upturn in their business that could produce an upturn in sales in the future. Plenty of qualifiers in that sentence. Borland Software guided flat to down based on seeing no improvement in the economy. FLEX announced results of +0.4% that missed street estimates and warned that revenues would be lower due to weak demand. The FLEX CEO said it was difficult to know if an upturn was under way. Let's see falling sales and lowered guidance might be a clue. CLS also reported a loss of -18 cents when analysts were only expecting -4 cents. The guided lower for the next quarter and said they were going to layoff another 2000 to 3000 workers. CLS and FLEX are two of the biggest electronics manufacturers and if a recovery was underway they would be the first to see it. JDSU, the largest supplier of fiber optic components said sales going forward would be weaker. The JDSU CEO said the market remains tough and we really do not have any visibility from our customers. NT reported a loss on $2.3 billion in sales and said the business conditions remain difficult and their customers were continuing to spend cautiously. The said they remain cautious about the next six months. TQNT warned that 3Q and 4Q revenue and earnings would be below prior estimates. Avaya posted a small profit on sinking sales but did say they were seeing some revenue stabilization and some positive signs that IT is strengthening. Also, very qualified. Other companies that raised guidance included MSCC, PCLN and BNBN. EBAY posted its best earnings ever at 37 cents, raised guidance and announced a 2:1 split. EBAY dropped -$5.00 in after hours. Why? EBAY, like the market was priced to perfection and investors expected EBAY to beat estimates by a wider margin. The company said revenue could reach $2.75 billion, a jump of +$250 million. EBAY is one of the highest priced Internet stocks with a PE over 120. Another problem was a reduction in guidance due to purchase of the Chinese auction site EachNet. That will subtract -2 cents in the 3Q and -1 cent in the 4Q. EBAY has a market cap of $37 billion, about one seventh of Wal-Mart's with revenue that is only 1% of Wal-Mart's. Gateway ended the earnings for the day with another loss of -22 cents on falling revenue. GTW back earlier guidance of -19 cents for the next quarter although those numbers tend to fade around mid quarter. They have lost money 10 of the last 11 quarters. GTW actually said that despite a decline in their PC sales they were seeing signs of life in the market. Considering they are nearly giving away computers to maintain any market share in the battle between Dell and HPQ they are probably finding a few takers on their promotional products. After the smoke cleared today and the charts quit moving it was pretty clear that a couple of buy programs, likely asset allocation from bonds, and some serious short covering pushed the Dow back over 9250 but the plan ran out of steam trying to hold it there. When the S&P failed to hold the 994 level (992 for futures) the bottom fell out in a hurry. Considering it took until 2:15 for that failure to occur it was a pretty spectacular effort. After the morning bounce the war was waged in a very narrow range and the vultures lined up on the sidelines waiting to see up was going to get trampled. The bulls lost. There were multiple rumors helping to torch the rally. One had the terror alert level being raised due to a retaliation plot after the death of Udai and Qusai. Another had a single engine plane zooming in on a presidential motorcade. Still another had the big three brokerages Salomon, Goldman and JP Morgan dumping huge S&P sell programs on the futures market. The last one may have some shred of truth. The fact that the rumors were flying emphasized that some bears were out on a limb. When they are about to go down for a big loss some will resort to anything to try and stimulate the market in their direction. If that was the intent they did a good job as the Nasdaq fell all the way back to 1700 once again and the Dow is poised to break 9100 at the open if the negative futures tonight hold until tomorrow. Helping mix things up will be Durable Goods Orders at 8:30 and Home Sales at 10:am. The real economic problems don't begin until next week when the calendar begins looking like a mine field in Korea. ISM, Confidence, Jobs, Sentiment, GDP, PMI, ECI, Beige Book, Income, Spending. Put on your flack jacket beginning on Monday. This could lead to some more weakness tomorrow. The massive drop at the close that turned a +100 point gain into nearly a -100 point loss has probably given some bulls indigestion. 60% of the S&P have now reported earnings and 70% of the Dow. With the balance of the earnings spread out over the next several weeks there is nothing anyone will learn that they have not already heard. The recovery is limping along at best and the markets have failed at higher levels four times since mid June. If they are going higher they have a tough road ahead and a lot of traders to convince that the July decline is not going to happen this year. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Sellers return Jonathan Levinson The session began with an equities rally on the strength of the initial claims data released at 8:30, followed by an uneasy trading range that lasted near the highs until just after 2PM, at which time they sold off sharply and continued to so for the balance of the session. Gold was sold at the open but recovered quickly to new highs. Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 1005 993 986 973 966 YM03U 9330 9206 9143 9019 8956 NQ03U 1305 1280 1266 1241 1228 10 minute chart of the US Dollar Index The US Dollar Index moved up sharply out of the gate but was rejected at 95.70. Once again, precious metals closed higher, and the commodities index, the CRB, added .96, led by by frozen concentrate OJ futures, cotton and crude oil. Daily chart of August gold The initial hesitation in gold on the strength of the jobs data and the US Dollar didn't last long, and the bull flag breakout resumed with August gold, HUI and the XAU printing new highs. HUI closed strongly near its highs, adding 4.16 to 163.45, the XAU +1.33 to 82.79, and August gold +2.80 to 361.50 with an intraday high of 363.70. Daily chart of the ten year note yield Selling in treasuries resumed today, with the ten year note yield adding 3.8 basis points to close at 4.167%. The Fed drained a whopping 9B in repos today, and judging by the action in equities this afternoon, more of it had been invested there than usual, with the selling in treasuries relatively light by comparison. Daily NQ candles The daily ascending trendline was not challenged by today's sharp selloff, but the closing gravestone doji on sell signals from the longer cycle left the Nasdaq futures on a bearish note. There was a higher high and higher low compared with yesterday, but the rejection of the 1290 level felt very bearish, particularly on the heels of what looked like a bull wedge breakout this week. 30 minute 20 day chart of the NQ Today's early morning rally was strong and convincing, but stopped at the descending trendline off last week's highs. The oscillators are in full bear rolls, with the 1245 level next up for a test of the longer term ascending trendline. The low VIX, QQV and VXN readings should give bulls some concern as to the solidity of that support line, as volatility has actually reached lower levels following the price down. We saw the same action in the spring of 2002 before the sharp decline heading into the summer. Daily ES candles The action on ES was particularly bearish, again the same higher high and higher low, but the rising trendline is history now, with the bearish oscillators sticking to their bearish guns. 20 day 30 minute chart of the ES The bears passed their test at the highs today, with the descending trendline holding back the advance. Tomorrow is setup for the bulls, with the 977 level looming large. The oscillators say lower lows, but the multiweek ascending trendline says different. The overnight action from Europe could decide it, particularly as there's been a distinct lack of 3AM buyers all through the recent upphases. If today's sharp selloff was simply related to the 9B repo drain from the Fed, the damage can easily be undone at the trendline, and another bounce will be in the works. Tomorrow's session is shaping up to be very instructive as to the mid-term direction of the markets. Daily YM candles Same story on the YM. 20 day 30 minute chart of the YM I've labeled the daily print as a doji, but it wasn't quite that. The DOH! Gee.. handwringing 180 degree reversal didn't occur today, and that's what a true doji is for me. There was a slow, gentle, weakening top printed over a span of hours that got subsequently nuked by a series of violent, high volume selling frenzy. Rumors abounded, but rumors don't move markets, they only expose weaknesses in the market. Many bulls will be looking at the rising lower trendlines on the equity futures and seeking to buy the dip. Bullish thoughts are the farthest thing from my mind, as the markets appear hugely overpriced to me. But on a purely "follow the bouncing ball basis", I have to urge caution. Higher highs and higher lows were set on the equity futures, and so it wasn't an outside reversal day as of this writing (4:45 PM EST), but one gets the feeling that they were saved by the bell. In the meantime, precious metals continue to fulfill the bullish chart patterns we've been following day-by-day. Who was it who said that there's always a bull market somewhere? ******************** INDEX TRADER SUMMARY ******************** Given a few more points, bear defended A neck brace and hammer may have been a trader's most used tools in today's session as a jolt higher at the open on better than forecasted weekly jobless claims shook a hesitant bear out of a bearish trade in both the S&P 500 Index (SPX.X) 981.60 -0.7% and Dow Industrials (INDU) 9,112.51 -0.88% in the first hour of trade, but given more room, bears may have shown some sign that they are beginning to try and build a line of defense at SPX 1,000 and Dow 9,300. The bulk of the morning's gains were put in place in the first hour of trade on some economists' rethinking that despite the drop below 400,000 and lowest reading since February 8, 2003, the better than forecasted jobless claims report was due to seasonality. It continues to amaze this technical analyst (Jeff Bailey) how a group of economists can forecast a potential outcome, but then create an excuse that explains the errant forecast on something they "knew" was going to create an opposite result. I'm not being critical of economists, as trying to predict a weekly or quarterly economic number is difficult. However, don't give the MARKET a number, then when you're off, tell the MARKET about certain seasonality patterns that may have created the "surprise" (up or down)." Had I (Jeff Bailey) not "rethought" things from a point and figure chart perspective, I probably wouldn't have been needed a neck brace and spent an hour looking for a hammer when stopped out on the move higher, when a level of recent resistance found willing sellers again today. A rather large sell program at 02:22 PM EST found the SPX breaking lower from the 995.5 WEEKLY pivot, where the SPX had hovered for the better part of the session. From there, it was lower to the close, with the SPX then triggering a bearish profile I re-established in the indexes at SPX 983.00. Here's a quick look at tomorrow's pivot matrix where INDU/DIA WEEKLY R1 came close to being traded, but wasn't, and may have been the most "meaningful" level in play today if bears were going to show a more aggressive stance toward the establishment of a resistance level. Pivot Analysis Matrix There was no further technical damage done today than may have been done in early July, but if we're going to see any type of weakening trend begin, then bears need to break a bull's will and get some type of bearish continuation to the downside. I'll make it short and simple in tonight's point and figure charts. Dow Industrials Chart - Daily Interval The reason I'm a "cautious bear," but still bearish the Dow Industrials at this point is the double-bottom sell signal at 8,900 and inability at this point for the Dow to have set a higher high. My "caution" comes from the higher lows since the July 1st trade at 8,900. What had me lowering a stop in this morning's 09:00 pre-market update was that Treasuries saw a pickup in selling (free up cash) and the U.S. Dollar Index (dx00y) 95.32 -0.12% was rebounding from its overnight lows on the jobless data. I was surprised at the rather steep fall-off in weekly jobless claims, and yes, while there may have been some "summer seasonality" in the numbers. A bar chart of the Dow Industrials shows it closing right on its 21-day SMA (9,108.2) and rising 50-day SMA is currently rising at 9,000.12, which I would tie in with the above PnF chart, where a trade at 9,000.00 would be a second consecutive sell signal. To try and prevent being "shaken" out on the Point and figure chart, I'd suggest bears place a stop at 9,350 to prevent a potential "bull trap" pattern. Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull confirmed" at the bullish cycle high reading of 86.67. 3M (NYSE:MMM) 139.45 +0.43% and Eastman Kodak (NYSE:EK) $26.26 -2.23%. S&P 500 Index ($SPX.X) Chart - Daily Interval Neck brace? Yeah, there was some intra-day volatility, however I was looking for a hammer to take my frustrations out on something when the sell program hit and SPX gave up the 995 level in rather quick fashion into the close. To make sure I wasn't being emotional once the decline was underway, I tried to "make the SPX get me bearish again" and set a bearish entry point back at 983.00, which was triggered at 03:52 PM EST. There's a saying that "the third time is a charm," and while bears met the challenge today and got a push back lower to the close, it will take a third sell signal at 975 to make for a lower low after the recent rebound from 985. If this were baseball, it would be my view that the bulls are still at bat, with the bears pitching. Full count at 3 balls and two strikes, and the pitcher is winding up. I think "strike 3" is about to be called. Today's trade saw no net change in the broader S&P 500 Bullish % ($BPSPX) and stays at "bull correction" at 76.2%. S&P 100 Index ($OEX.X) Chart - Daily Interval "Overlapping" resistance of 502 was violated to the upside by 1.12 points and getting stopped above that level is enough to create frustration if a bear from yesterday was stopped out. Only alternative was to sulk a bit, or get back on the bike and ride if analysis for weakness was still in play. BIG wedge forming and while bears may have defended at 502, bulls may now be tested back at 492 as the convergence of supply and demand builds pressure. Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX). Still "bull confirmed" at the bullish cycle high reading of 84.00%. I wanted to show the OEX bar chart to also make note that the OEX and SPX are the two major indexes at this point, which are closest to their 50-day SMA support, which will draw market technician's attention. Some consider a close above or below this average on a DAILY interval basis as being either bullish or bearish. Some consider a FRIDAY or weekly close above or below as having more weight. I have little input on as to which is more important, but with the bullish % levels at such high levels right now, I'd expect the 50-day, which served support on the recent July 21 and July 22 lows to be a moving average that will draw some attention and a close below that level will undoubtedly draw some negative commentary, if not reaction from technicians. INDU has 50-day SMA at 9,002. SPX's 50-day SMA at 978, NDX 50- day SMA at 1,217 and QQQ 50-day SMA at $30.25. NASDAQ-100 Tracking Stock (QQQ) - Daily Interval I was rather "focused" on the SPX/SPY this morning and missed the action early after the QQQ pulled back to an early morning low of $30.72, which was 2 cents above a pullback entry point I discussed in the 09:00 pre-market commentary. When the SPX moved above the WEEKLY pivot, the QQQ's had come back to a session high. Certainly shorts would cover and push the QQQ to a euphoric move back to $32.40. Stopped from that bullish profile at $31.56. I've added what I consider an "aggressive bearish trend" in the QQQ, which I've attached to today's highs. If bears are determined, this trend should hold resistance. Today's trade saw a net loss of 1 stock to a point and figure sell signal in the narrow NASDAQ-100 Bullish % ($BPNDX) and slips back to 76%. It would take a reading of 74% to reverse back into "bull correction" status and a reading of 72% for "bear confirmed." My thoughts for adding the aggressive bearish trend is if we should see the QQQ turn "bear confirmed" at these high levels of bullish %, then that aggressive trend may indeed be in play. Jeff Bailey ************************Advertisement************************* "If you haven't traded options online – you haven't really traded options," claims author Larry Spears in his new compact guide book: "7 Steps to Success – Trading Options Online". Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Setting your sights Jonathan Levinson The VIX broke below 20 today and stayed there for several hours today, as the price of gold broke 360. In the meantime, the put to call ratio was looking moderate, the oscillators were edging toward possibly higher levels, and the US Dollar Index was rallying off its lows. There was a bullish surprise in the jobs data as well, with initial claims falling below 400,000 for the first time in several months. This last is news to cheer. The markets put in a pattern of higher highs and higher lows this week, with a "senseless" rally on the news of Hussein's sons being killed. Ben Bernanke held out the promise of a fresh assault on the value of the dollar, which would be as bullish for equities as it was the last time he did it during the fall of 2002. It's difficult to know which of our many indicators to follow in divining market direction. Other than by trading mechanically, which many do, one must rely on a healthy dose of intuition in the attempt to "hear" the combined message of the indicators. To practice this art requires not tighter focus, but distance from the screen. Today's selling was "impulsive", insofar as it exceeded the speed and extent of the buying surges during recent sessions. Once again, on a longer term basis, it feels as if the top of the rally is in. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9353 52-week Low : 7197 Current : 9112 Moving Averages: (Simple) 10-dma: 9132 50-dma: 9002 200-dma: 8482 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 981 Moving Averages: (Simple) 10-dma: 990 50-dma: 977 200-dma: 905 Nasdaq-100 ($NDX) 52-week High: 1316 52-week Low : 795 Current : 1253 Moving Averages: (Simple) 10-dma: 1269 50-dma: 1216 200-dma: 1076 ----------------------------------------------------------------- There was much commotion made today over the VIX finally piercing its historical sell signal of 20 today. Typically, when the VIX hits 20 it's a sign that the markets have topped and further weakness is in store. The VIX has been vacillating above 20 for so long that many felt we may never actually see the 20 level hit. Now just because the VIX hit 20 today doesn't mean the markets are going to drop tomorrow. Using the volatility index is not an exact science. We could easily see it trade down to 19 or lower, which usually means investor bullishness is reaching extremes. However, we can't ignore this signal and bullish traders are advised to monitor their stop losses carefully. CBOE Market Volatility Index (VIX) = 20.44 +0.00 Nasdaq-100 Volatility Index (VXN) = 31.45 +0.67 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.75 653,637 488,014 Equity Only 0.64 515,611 332,345 OEX 0.59 33,358 19,567 QQQ 2.03 30,648 62,359 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 69.5 - 2 Bull Confirmed NASDAQ-100 76.0 - 2 Bull Confirmed Dow Indust. 86.6 + 3 Bull Confirmed S&P 500 76.2 + 0 Bull Correction S&P 100 84.0 + 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 0.93 10-Day Arms Index 0.96 21-Day Arms Index 1.11 55-Day Arms Index 1.13 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 1384 1443 Decliners 1463 1594 New Highs 105 185 New Lows 21 11 Up Volume 772M 748M Down Vol. 1066M 1095M Total Vol. 1846M 1858M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 07/15/03 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 Stuck in limbo. The large S&P contracts saw little movement by both the small traders and the large commercial traders. Investors could be waiting to get some sort of reading on trader sentiment after the first week of earnings has been completed. Commercials Long Short Net % Of OI 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%) 07/15/03 414,020 453,033 (39,013) (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 06/24/03 159,405 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% 07/15/03 148,716 70,279 78,437 35.8% 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 The S&P e-mini contracts saw more shuffling than the larger contracts (above) but overall there is little to discern. Except for the slight less bearish bias in the Commercials who bumped up their long positions while scaling back a few of their shorts, which effectively reduced their net short to a meager 4500 contracts. Meanwhile the small traders lightened up on both long and short contracts but remain rather bearish. Commercials Long Short Net % Of OI 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%) 07/15/03 214,274 218,765 ( 4,491) ( 1.0%) Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: ( 4,491) - 07/15/03 Small Traders Long Short Net % of OI 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%) 07/15/03 45,372 54,654 (9,282) (9.3%) Most bearish reading of the year: (15,696) - 07/08/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Much like the larger S&P futures there was little change in the NASDAQ 100 futures. Yet we must note one exception. The shuffling in the commercial long/short positions produced the most bearish reading in months. Close a few long contracts here, add a few short contracts here and we have a new relative high in net short positions. Commercials Long Short Net % of OI 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%) 07/15/03 28,467 49,154 (20,687) (26.7%) Most bearish reading of the year: (20,687) - 07/15/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 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% 07/15/03 26,489 8,004 18,485 53.6% 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 Somewhat interesting behavior by the commercials last week. They scaled down their short positions, which significantly bumped up their net long holdings over all. This is effectively telling us that institutions still think the Industrials well be stronger in the coming weeks. Commercials Long Short Net % of OI 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% 07/15/03 21,607 7,855 13,752 46.7% 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 06/24/03 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%) 07/15/03 5,475 9,717 (4,242) (27.9%) 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 ************************* Martin Sosnoff: Atalanta/Sosnoff Funds Martin Sosnoff is founder, chairman, chief executive officer and chief investment officer of Atalanta/Sosnoff Capital Corporation, as well as portfolio manager of the Atalanta/Sosnoff Fund (ASFGX) and Atalanta/Sosnoff Value Fund (ASVFX). Both Atalanta/Sosnoff funds seek to provide long-term growth of capital over time, but vary in their investment style. The Sosnoff Fund (ASFGX), which started operations in June 1998, employs the firm's "core equity" philosophy. Sosnoff Value Fund (ASVFX), which was launched July 1999, invests in "undervalued" stocks. Before founding the predecessor investment management business to Atalanta/Sosnoff Capital Corp. in 1968, Mr. Sosnoff was director of research with Starwood Corporation, a private investment firm, and a research analyst at E.F. Hutton. He has about 35 years of investment management experience, is the author of two books and currently writes a column for Forbes Magazine. Mr. Sosnoff also recently appeared on Louis Rukeyser's Wall Street Week (February 2003). Both Atalanta/Sosnoff funds require a minimum $5,000 investment to open a regular account. The value fund product has a $2,000 minimum initial investment to open an IRA account, according to Morningstar. The Sosnoff Fund (ASFGX) is available on a no-load NTF basis through Schwab, TD Waterhouse and Bear Stearns, among other online brokers. Sosnoff Value Fund (ASVFX) is less widely available. You can invest with no transaction fees through Bear Stearns and TD Waterhouse's retail NTF networks. Annual expense ratios currently stand at 1.50%, per Morningstar. For more information or to download a fund prospectus, go to the www.atalantasosnoff.com website. Investment Style The Atalanta/Sosnoff Fund (ASFGX) is a large-cap U.S. stock fund that employs the firm's core equity philosophy. It pursues long- term capital appreciation through investments in common stock of companies that are entering into (or in) a period of accelerating earnings momentum. Sosnoff operates this core/blend equity fund with a "growth" tilt. Some call this style "growth at reasonable prices" or GARP for short. It tries to capture the return of the traditional growth-driven fund, with less "price valuation" risk. Atalanta/Sosnoff Value Fund (ASVFX) also invests in a diversified portfolio of established, large-to-mid capitalization stocks, but employs "value" screens in the stock selection process. It has a philosophy of investing in equity securities that are undervalued at time of investment. Its most recent portfolio looks very much like its sibling, Atalanta/Sosnoff Fund. Both portfolios have an average market capitalization of over $32 billion, characteristic of a portfolio of giant-cap and large-cap stocks. Both funds are above the market (S&P 500) based on average P/E ratio and average earnings growth rate, putting them into the Morningstar large-cap growth style box. The Atalanta/Sosnoff website states that the firm's views of the overall financial environment are incorporated in the sector and selection process. In other words, Sosnoff blends macroeconomic forecasts with fundamental analysis. They say they are "growth" managers, adding value by overlaying this discipline with a "top- down," macro-economic point of view. In the next section, we'll see how well the two funds have performed relative to their peer group (i.e. large-cap funds). Investment Performance Per Morningstar's latest fund report, Martin Sosnoff has compiled an excellent record by blending top-down, macroeconomic views and bottom-up, fundamental analysis, giving the Atalanta/Sosnoff Fund its highest "5-star" overall rating for risk-adjusted performance versus category peers. Morningstar says Sosnoff "shifts sectors freely," and maintains a balance between value and growth stocks. Morningstar rates both funds five stars for risk-adjusted returns relative to category peers, with one fund rated against large-cap blend funds and one fund rated against large-cap growth funds due to their average investment style over the past three years. The interesting part is that the Atalanta/Sosnoff Value Fund lands in the large-growth category, while the Atalanta/Sosnoff Fund, which has the slight growth bias, is put into the large-blend category. Since both portfolios have similar portfolio characteristics, you can see how that affects relative risk. In relation to large-cap blend funds, Sosnoff Fund has above-average risk. In relation to its large-growth fund peers, Sosnoff Value Fund has below-average risk. The portfolio characteristics and risk levels have all the makings of a large-cap "core growth" portfolio. Both Atalanta/Sosnoff funds are ahead of the market in 2003 using the S&P 500 index as the market benchmark. Atalanta/Sosnoff Fund has a YTD total return 16.2% while Atalanta/Sosnoff Value Fund is up 15.0% through July 22. That compares to a YTD return of 13.4% for the S&P 500 index per Morningstar. The trailing 1-year total returns of the two funds are also strong, with both funds up over 23 percent, better than most large-cap blend and large-cap growth funds but lagging the S&P 500 index's 26.2% return for the 1-year period. Both funds came through the bear market in better shape than the market (S&P 500 index) and similar funds. Below is a summary of trailing 3-year annualized total returns through July 23, 2003, per Morningstar. 3-Year Average Annual Total Return: - 6.4% Atalanta/Sosnoff (ASFGX) + 3.8% Atalanta/Sosnoff Value (ASVFX) -11.3% S&P 500 Index -11.1% Morningstar Large-Blend Category Average -19.6% Morningstar Large-Growth Category Average You can see that Sosnoff excelled at preserving capital over the past three years relative to similar funds and the S&P 500 index, putting the two funds in good stead for this year. The Atalanta/ Sosnoff Value Fund returned over 34 percent in 2000 then managed not to lose more than 15% in either of the next two years. It's among the minority of large-cap funds to have produced a positive average annual return for the trailing 3-year period through July 22. Atalanta/Sosnoff Fund (ASFGX), which has the longer track record, sports a positive annualized return of 3.1% for the 5-year period through July 22, 2003, ranking in the 7th percentile of the large blend category per Morningstar. Over the same 5-year period, the S&P 500 index lost an average of 1.4 percent a year. In 1999, Sosnoff returned 40 percent for shareholders, showing he can capture returns in an up-market environment. With the market up again this year, the two funds are performing well, generating above-market returns again. Conclusion The Atalanta/Sosnoff funds offer strong return/risk tradeoffs for long-term growth investors. Martin Sosnoff has performed well in both charges, enhancing value in both up and down markets. Long- term investors looking for a "core growth" portfolio have a great choice in the Atalanta/Sosnoff Fund. Those that prefer to invest in undervalued stocks, may want to look at Atalanta/Sosnoff Value Fund. That may be six-of-one, half-dozen of the other at this juncture, with both funds displaying very similar portfolio characteristics per Morningstar's latest reports. We'd tend to favor the Sosnoff Fund over the Sosnoff Value Fund now because its style box better reflects its true investment style and the fund sports the longer track record of performance. But, it's hard to dispute the Value Fund's better trailing 3-year return. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. 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 07-24-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: None Dropped Puts: None Call Play Updates: FDX, GENX, LOW, SNPS New Calls Plays: None Put Play Updates: BBBY, FITB, HD, INTU, LEH, LEN, PGR, XL New Put Plays: FRE **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** None PUTS: ***** 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 ******************** Fedex Corp - FDX - close: 64.55 change: -0.41 stop: 61.99 The wishy-washy market action hasn't done much for our play in FDX. Rival UPS recently announced strong earnings and both UPS and FDX have slipped slightly on the news. Not helping the transports should have been the up tick in crude oil prices the last couple days, which can drive fuel costs higher. Actually, the Dow Jones Transports index rallied early this morning up and over the 2600 level of resistance before slipping back under it in the afternoon market weakness. We've been looking at bounces from the $64.00 level on FDX as an opportunity to enter bullish positions. We saw one yesterday and from the looks of it we might see another tomorrow. This doesn't look like a play that's going to "get away" from us so take your time in evaluating your entry point. No change in our stop loss. Picked on July 20 at $65.32 Change since picked: -0.77 Earnings Date 09/23/03 (unconfirmed) Average Daily Volume: 1.70 million Chart = --- Genzyme Corp - GENZ - close: 49.46 change: -1.28 stop: 46.49 Our recently added call play in GENZ is working out pretty well. Shares rallied strongly on Wednesday moving up and through our trigger to go long at $50.05. With the new strength we raised the stop loss to $46.49. The 2.5% drop today looks like profit taking. Given the market's weakness today we shouldn't be surprised. Keep an eye on the BTK biotech index. It looked rather weak in the last couple of hours in today's session and we would expect some follow through tomorrow. A dip to the 450 level in the BTK might bring a dip to the $48.00 level in GENZ. A bounce there would not be a bad spot to look for a new entry. The upside breakout on Wednesday produced a new double-top breakout buy signal in GENZ's P&F chart. Picked on July 22 at $49.76 Change since picked: -0.30 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 3.52 million Chart = --- Lowe's Companies - LOW - cls: 47.10 chng: -0.40 stop: 45.60*new* On Thursday, LOW once again showed the relative strength that we've been focusing on, rallying to a new recent high of $48.08, just barely eclipsing the 7/15 high of $48.05. After several failed attempts to really break out through that level though, the stock succumbed to the broad market weakness in the afternoon, falling back to close just above $47. Judging by the sharp increase in selling volume this afternoon, the play could be in trouble here. The action witnessed today may be the completion of a double top at known resistance and bulls need to be careful. Another pullback and rebound from above $45.70 can be used for fresh entries, but bear in mind that a break below that level would likely have bears targeting the $45 level at a minimum and quite possibly the 50-dma just below $44. After trading through the $48 level again, that's more risk than we're willing to tolerate and we're tightening our stop to $45.60, which is just below the intraday low seen on Tuesday. We're still expecting the stock to break out above $48 and run up to test the $50 level, but it will likely need broad market strength to pull it off. Picked on July 13th at $46.87 Change since picked: +0.23 Earnings Date 08/18/03 (unconfirmed) Average Daily Volume = 4.83 mln Chart = --- Synopsis, Inc. - SNPS - close: 60.02 change: -0.90 stop: 58.75 Thursday's sharp reversal in shares of SNPS is NOT what we wanted to see. Everything was looking solid in the morning with the stock trading back over $62 and the Semiconductor index (SOX.X) testing resistance near $400. But a major sell program hit in the final couple hours, slamming the SOX back for a more than 2% loss and SNPS just barely managed to hold onto support at $60, logging its own 1.47% loss. While this could just be another entry point setting up, we're turning much more cautious on the stock with the close back under the 50-dma ($60.76). Traders with the intestinal fortitude to buy the dip (not our favorite strategy right now) can look to enter on a rebound from above $59, but must rigidly adhere to a stop just below that double bottom level, at $58.75. After Thursday's sharp reversal, our preference for new entries will be a rally back over the 50-dma. More conservative traders will even want to wait for a breakout over today's $62.25 intraday high before playing. Picked on July 22nd at $61.04 Change since picked: -1.02 Earnings Date 08/20/03 (unconfirmed) Average Daily Volume = 1.52 mln 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 ******************* Bed Bath & Beyond - BBBY close: 38.06 change: +0.96 stop: 40.50 The question of whether BBBY would find support for a bounce from the 200-dma ($36.31) was answered with a resounding "Yes" over the past two day. Acting weak as we had expected, BBBY broke down below both horizontal and H&S Neckline support near $37.50 yesterday, and traded to within a few pennies of the 200-dma before rebounding at the end of the day. That rebound was followed by a sharp upward gap (on no news) today, with the stock extending its early strength to above $39 before the late-day weakness set in. So, was it a reversal of the recent bearish trend or just an oversold bounce from a known support level. Based on the heavy selling volume in the afternoon, we're leaning towards the latter. The stock came to rest just above $38 and 3 cents below the opening price, setting up a potential entry in the morning. Traders that faded today's early rally appear to have gotten a good entry into the play, and the next best opportunity will come on a decline below $37.75, which is just below today's intraday low. That drop would put BBBY into its gap and it should then drop to fill its gap down to the $37 area. With the confirmed neckline break, we're now viewing failed rallies as an opportunity to enter on the rollover, ideally below the 20-dma (currently $38.90). Keep stops set at $40.50 for now, as that is just above the known $40 resistance and the rolling 50-dma ($40.19). Picked on July 22nd at $37.71 Change since picked: +0.35 Earnings Date 09/17/03 (unconfirmed) Average Daily Volume = 3.33 mln Chart = --- Fifth Third Bancorp - FITB - cls: 54.99 chg: -0.86 stop: 57.51 Both banking sector indices rolled over intraday today. While neither are looking exceptionally weak, traders took advantage of the moves to short or sell into the strength of FITB earlier today. This produced another failed rally at FITB's descending trendline of resistance. It's easier to see on the stock's 30- minute chart. Coincidentally, its daily chart shows the top today under its simple 50-dma, another technical level of resistance. The close under $55 is just another minor signal of weakness. We suggested new bearish entries on a failed rally under $57.00 on Tuesday but now traders can look for entries at current levels or on a move under Monday's low. Picked on July 17th at $55.26 Change since picked: -0.27 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 2.4 million Chart link: --- The Home Depot - HD - close: 31.48 change: -0.64 stop: 33.25*new* The key technical event for HD this week appears to have been Monday's breakdown below the 50-dma, currently at $32.35. Following that breakdown, the stock dropped to just above $31, rebounded and then rolled over at the 50-dma, finding resistance at that prior support level. The picture became more bearish on Tuesday with the intraday trade below $31.50, and after a feeble bounce to just above the 50-dma, the stock rolled over sharply at the end of the day, posting its first close below $31.50 since late May. At this point, failed rebound attempts below the 50- dma look like the best strategy for new entries, with a breakdown under $31.40 (Tuesday's intraday low) running a close second. Once that tentative support gives way, we'll be looking at an almost-certain drop to test the $30 level, where we are once again expected a mild oversold bounce before continuing down to our $28 target. Note that our stop has been lowered to $33.25, which is above the 10-, 20- and 30-dmas. Picked on July 10th at $32.43 Change since picked: -0.95 Earnings Date 08/19/03 (unconfirmed) Average Daily Volume = 9.54 mln Chart = --- Intuit Inc - INTU - close: 41.74 change: +0.44 stop: 42.51 *new* Is this another chance to short INTU? The stock bounced from the $40 level as we suspected it might and like clockwork it appears to be running into resistance under $42.50. The stock is certainly "oversold" from its June highs and many of the oscillators are turning up with the three-day bounce but the stock has not yet broken its descending channel. Looking at the intraday chart we suspect more weakness, thus this looks like an entry point for new bearish positions. To reduce our risk on the play we're lowering the stop to $42.51. Momentum traders may still want to wait for a close under the $40 mark. Meanwhile, the initial rally on Wednesday morning (that quickly faded) was sparked by an upgrade from UBS Warburg. UBS is basically betting on historical trends where INTU out performs in the fall quarters ahead of its strong January results. They upgraded INTU from a "neutral" to a "buy". As you can see, investor reaction was not very enthusiastic. INTU also confirmed that they would release their year-end results (through July 31st) on August 19th. Picked on July 8th at $43.35 Change since picked: -1.61 Earnings Date 08/19/03 (confirmed) Average Daily Volume = 4.1 million Chart link: --- Lehman Brothers - LEH - cls: 63.18 chng: -0.52 stop: 66.50*new* The bulls staged another rally attempt in the Broker/Dealer index (XBD.X)on Thursday, but met with stiff resistance just below $570, prior to a sharp decline into the close. Maintaining its pattern of underperformance, LEH failed to gain much of a lift from the rebound in the XBD over the past couple days, finding consistent resistance just above $64. The afternoon selloff dropped LEH under the $63.50 level for its worst close since May 1st. Thursday also delivered the first close below the 50% retracement of the May-June advance and it brings the 62% retracement ($60.40) into play on any continued weakness. Isn't it interesting how that coincides with both the 200-dma ($60.05) and our $60 target? Further weakness below $63 can be used for momentum entries on Friday, as those looking to fade any attempted rally likely took their shot earlier in the week near $65.00-65.50. As the play is starting to move in our direction, we're snugging our stop down just a bit to $66.50 tonight. That level is just above the 20-dma, as well as intraday resistance from the past 6 sessions. Picked on July 20th at $65.18 Change since picked: -2.00 Earnings Date 09/18/03 (unconfirmed) Average Daily Volume = 2.84 mln Chart = --- Lennar Corp. - LEN - close: 67.75 change: -0.33 stop: 71.50 Despite the still-bullish sentiment in the marketplace, the Home Building stocks are really fighting an uphill battle with mortgage rates continuing to rise, driven by bond yields pushing higher again on Thursday. It appears that Ben (printing press) Bernanke did little to stem the exodus of bond investors and as long as rates are rising, Housing stocks should remain weak. Although the $DJUSHB index did manage a fractionally positive close, it looks far less constructive when taken in the context of a close at the low of the day after printing an ugly gravestone doji. LEN caught quite the oversold bounce on Tuesday from just above $65 (as we thought it would) and surged as high as $70 yesterday before the sellers reappeared, knocking the stock sharply lower by the close. An early rally attempt today met with the same fate, albeit from a lower level, and we now see the 50-dma ($69.89) starting to act as resistance. Additional rally failures below $70 still look attractive for new entry points, as we await another test of the $65 level. We still expect an eventual break of that level and when it comes, that will be the next opportunity for momentum investors to jump aboard for the expected ride down to our $59-60 target zone. Picked on July 15th at $71.12 Change since picked: -3.81 Earnings Date 09/09/03 (unconfirmed) Average Daily Volume = 1.68 mln Chart = --- Progressive Corp - PGR - close: 65.30 chg: +0.08 stop: 67.51 Our recently added put play in PGR is still consolidating in a very narrow range above support at $65.00. Shares bounced early this morning but selling pressure held advances to the $66.50 area before the afternoon weakness brought shares back towards $65 again. This is a new lower high in its week-long consolidation and we expect a breakdown under $65.00 soon. We're still suggesting that conservative traders and momentum players wait for a move under the $65.00 mark. Consider using a trigger to leg you into the play. Our initial target is $60.00 and its 200-dma. There is no new news. Picked on July 23 at $65.22 Change since picked: +0.08 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 941 thousand Chart = --- XL Capital Ltd. - XL - close: 76.58 change: -0.51 stop: 80.50*new* It sure was nice of the bulls to bid shares of XL higher after last week's breakdown under $80, wasn't it? The stock surged to just below $82 (right in our targeted entry zone) on Tuesday, rolled over and plunged sharply lower yesterday. The heavy selling volume sliced through the 200-dma ($78.60) like a hot knife through butter and the stock ended at its low of the day. The bulls tried for an oversold rebound today, but it wasn't to be, with resistance being found at the 200-dma, and then an afternoon rollover (on expanding volume) that drove XL to a new multi-month low. While we're inching our stop down to $80.50 tonight (just above the 2-week descending trendline), more conservative traders may want to use a stop at $78.50, just above today's intraday high. Recall that our profit target for the play is in the $73-74 area, so we're reaching the point where new entries don't carry the same bang for the buck they did a few days ago. Not only that, XL is set to release its quarterly earnings report in just one short week, so we're now focusing our attention on maximizing gains, rather than new entries. For late-comers to the party, the best setup for new entries would be on a failed rebound below $78.00. Picked on July 17th at $79.64 Change since picked: -3.06 Earnings Date 07/31/03 (confirmed) Average Daily Volume = 752 K Chart = ************* NEW PUT PLAYS ************* Freddie Mac - FRE - close: 50.33 change: -1.36 stop: 53.00 Company Description: Freddie Mac (Federal Home Loan Mortgage Corporation) is a stockholder-owned corporation tht was established by Congress in 1970 to support home ownership and rental housing. FRE purchases single-family and multi-family residential mortgages and mortgage- related securities, which it finances primarily by issuing mortgage passthrough securities and debt instruments in the capital markets. The company guarantees these securities and mortgage lenders sell their loans to the company and use the proceeds to fund new mortgages, which in turn increases the money supply to homebuyers. Why we like it: There has been a lot of negative press surrounding the government sponsored entities (GSEs) FNM and FRE in recent weeks due to admissions that the company's have been a bit too cavalier in their approach to managing earnings. In early June, FRE cratered down to the $50 level on news of the resignations of both the CEO and CFO, along with the termination of the COO. BofA responded with a downgrade to Neutral and that was quickly followed by news of a formal SEC investigation into the company's accounting and management practices. Needless to say, the month of June was not a pleasant one for FRE shareholders, as the company disclosed that it may restate from $1.5-4.5 billion for 2001-2002. These are retained earnings, which were essentially being kept in reserve to smooth out any rocky spots. While that means past earnings will likely increase, it also means future earnings are likely to be more volatile, particularly if there were to be a major change in the debt markets. Well we've certainly seen a dramatic shift in the bond market in recent weeks, with bonds selling off hard and driving yields sharply higher. Over the past few weeks, that has really put the kibosh on FRE's fledgling rally attempt, driving price right back down to that major $50 support area. Looking at the PnF chart, we can certainly see that the early July rollover from the $55 level made sense, as that was right at the bearish resistance line. FRE isn't yet on a Sell signal, as it will require a trade at $48 to get that job done. But there's no question the stock looks weak and a break below $50 looks like it could garner some bearish follow through. The last two forays below that level saw swift declines to $46.50 and $48.50 respectively, but with the negative factors impacting the stock, we think it has much further to fall, especially if yields continue to rise, which will have a continued negative impact on the company's investment portfolio. Our initial target will be for a drop to the $45 level, which may be substantial support. But we're also looking for a more severe decline to the $40 area, which was strong support in both 1998 and 2000. Use an entry trigger of $50.00 and then target an initial move down to $45. More conservative traders may want to wait for a failed rebound after the initial breakdown before playing. The $52.00-52.50 area is shaping up as strong resistance, reinforced by the 20-dma just above the top of that range at $52.58. That allows us to set our stop at $53, just above known strong resistance. Suggested Options: Short-term traders will want to focus on the August 50 Put, as it will provide the best return for a short-term play. Conservative traders entering on a bounce will want to utilize the September 50 Put, while aggressive traders looking for a longer-term move down towards $45 or below will want to utilize the September $45 contract, due to its greater insulation against time decay. BUY PUT AUG-50 FRE-TJ OI= 4180 at $1.50 SL=0.75 BUY PUT SEP-50 FRE-TU OI= 219 at $2.50 SL=1.25 BUY PUT SEP-45 FRE-UU OI= 361 at $0.95 SL=0.50 Annotated Chart of FRE: Picked on July 22nd at $50.33 Change since picked: +0.00 Earnings Date N/A Average Daily Volume = 7.16 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: 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 07-24-2003 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: Elliott Wave Play Updates Traders Corner: Taking A Cue From The QQQs ********************* PLAY OF THE DAY - PUT ********************* Fifth Third Bancorp - FITB - cls: 54.99 chg: -0.86 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) - Most Recent Update (Sunday, July 13, 2003)- Both banking sector indices rolled over intraday today. While neither are looking exceptionally weak, traders took advantage of the moves to short or sell into the strength of FITB earlier today. This produced another failed rally at FITB's descending trendline of resistance. It's easier to see on the stock's 30- minute chart. Coincidentally, its daily chart shows the top today under its simple 50-dma, another technical level of resistance. The close under $55 is just another minor signal of weakness. We suggested new bearish entries on a failed rally under $57.00 on Tuesday but now traders can look for entries at current levels or on a move under Monday's low. - Play of the Day Comments - The new failed rally at descending resistance and its 50-dma, coupled with the drop back through the 200-dma and close under $55.00 looks like a new entry point. Add the general market weakness today and the probability of more profit taking tomorrow and FITB could be hitting new relative lows soon. Suggested Options: We're going to list August, September and November strikes with a preference for the $55 and 50 puts. The 50 puts being the riskier bet. BUY PUT AUG 55 FTQ-TK OI=2062 at $1.20 SL=0.65 BUY PUT AUG 50 FTQ-TJ OI=1498 at $0.15 SL= -- BUY PUT SEP 55 FTQ-UK OI= 232 at $1.90 SL=0.95 BUY PUT SEP 50 FTQ-UJ OI= 120 at $0.55 SL= -- BUY PUT NOV 55 FTQ-WK OI= 439 at $3.10 SL=1.55 BUY PUT NOV 50 FTQ-WJ OI=7850 at $1.30 SL=0.70 Annotated chart: Picked on July 17th at $55.26 Change since picked: -0.27 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 2.4 million Chart link: ************************Advertisement************************* If you trade options online, then you need an online broker that: offers true direct access to each option exchange offers stop and stop loss online option orders offers contingent option orders based on the price of the option or stock offers online spread order entry for net debit or credit offers fast option executions PreferredTrade offers these online option trading features and more; call 1-888-889-9178 or click for more information. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ************** TRADERS CORNER ************** Elliott Wave Play Updates By Steve Gould T Chart: T update 7/24/2003 Not only did T hit our entry target of 20.20ish, but it blew right through it. T could go as high as 22.39 if the 4 wave is not yet complete. That is a bit of a concern, but since this particular play allows us to make money in either direction, if T continues its move higher, we will be OK. Update the Aug 15 call to September to lower the risk of assignment and increase the number of October calls to purchase to 3. Option T: $20.00 Pos Num Sym Strike Type Bid Ask Delta Vol OI Sell 1 TIC Sep 15 Call 5.00 5.30 100 25 70 Buy 3 TJX Oct 22.5 Call 0.50 0.65 31 368 10285 Credit: $305 Figure: T right If we are right and T does head lower we reach our maximum profit at 15 and below. This gives us some breathing room since the target is 12.00 Figure: T wrong 1 If we are wrong and T goes higher, the upside breakeven point is 22.60 at the August expiration date. Figure: T wrong 2 If T does not move at all, the options will be down $186 come September expiration. ************** TRADERS CORNER ************** Taking A Cue From The QQQs By Mike Parnos, Investing With Attitude Who says that size matters? In one of life's contradictions, the bigger it is, the less interest it generates. We're talking about the difference between strike prices, of course. Taking A Cue from The QQQ When it comes to strike prices, it seems that the trading exchanges have decided to experiment with one-dollar strike prices on a variety of low price stocks. With the advent of Single Stock Future, the exchanges are trying to create a product that will generate more interest, and hence more volume, with option traders. Apparently this happened a few months ago. Okay, so I'm not always on the cutting edge. Sometimes, my edge has been known to be a little dull. That's a byproduct of too much exercise and not enough calories. I'll do my best to remedy the situation. One of the main reasons we like trading the QQQs, the DIAs and DJXs is the flexibility offered by their $1 strike increments. Now we have more toys to play with. If you like playing covered calls, you have a wider choice of calls to sell. If you use married puts, you can choose them close to the money and invest less in your insurance.. We'll try to perhaps come up with new strategies (or at least review some oldies but goodies) to see how we can best take advantage of the narrower strikes. Here is a list of the stocks with $1 strikes that I've unearthed thus far. AOL (America Online), AMD (Advance Micro Devices), AMAT (Applied Materials), THC (Tenet Health Care), CE (Concord EFS), EP (El Paso Energy), SUNW (Sun Microsystems), XRX (Xerox), AMR (AMR Corp.), CPN (Calpine), EMC (EMC Corp.). ______________________________________________________________ Where To Find Index Settlement Prices Since we're destined to trade the SPX and DJX from time to time, I figured we should know where to find those sneaky official settlement prices. The SPX settlement price reflects a calculation of all 500 of the opening prices of an index on the Friday morning following the close of trading on the third Thursday of the month. Why do they do it this way? WTFK. But, if they do it to confuse people, it's working. The same process holds true for the DJX. Since, on Friday morning, it takes a while for all of the stocks within the index to open. And since they're probably using an abacus and a crayon to figure it out, it seems the actual settlement number isn't available until after noon (EST). You can call the friendly, and very helpful, folks at 1-888- OPTIONS. They'll give you the settlement numbers when the numbers become available. Or, you can pull them up on your quote system. For the SPX, they've come up with the symbol SET. For the DJX, the symbol is DJS. Now, depending on your quote system, you may have to use SET.X or possibly $SET. You won't see a bid or an ask price – only the settlement price. ______________________________________________________________ Revisiting CC & Friends Mike, I was looking at your CC and Friends trade and trying to follow it..does this look correct? Thanks for your guidance. KLAC -- Stock cost $51.67. Selling the August $55.00 calls @ $2.25 Cov. call #1: $2.25 Cov. call #2: $2.25 Cov. call #3: $2.25 Total: $6.75 Maximum Range: $56.17 Minimum Range: $44.92 Response: 1) Only one call is covered by the shares of stock. The second and third calls are not covered. They're naked (uncovered). 2) To figure the upside range, you would figure the total of your premium ($6.75). Now, if the stock were to move up over the $55 strike price, you would also have profited from the difference between $51.67 and $55, or an additional $3.33. Now, your total credit thus far is $10.08 ($6.75 + $3.33). Once KLAC moves above $55, you would have two naked $55 calls working against you. Since you have a total of $10.08 in credit, you would then divide the $10.08 by 2 (=$5.04). If you add the $5.04 to the $55 strike price, you now have a topside parameter of $60.04. If KLAC trades near that price, you know it's time to get the hell out of the position. You calculated the bottom parameter correctly. You took the $6.75 premium and subtracted it from the initial $51.67 purchase price. Your GTHO price would be $44.92. On Wednesday During trading on Wednesday, KLAC was trading at $52.40. So, for example, you would buy 100 shares. Then you would sell three Sept. $55 calls at $2.40. You've taken in $7.20. Your downside point is $45.20 ($52.40 less $7.20). To calculate your upside, you would add the additional $2.60 of profit you get if KLAC moves over $55. Now you have $9.80. You'd have 2 naked calls working against you, so, $9.80 divided by 2 = $4.90. Add the $4.90 to your $55 strike price and you have a topside parameter of $59.90. _____________________________________________________________ NEW AUGUST CPTI PORTFOLIO TRADES August Position #1 – BBH Iron Condor – Closed at $132.40 Let's sell 10 contracts of BBH August $125 puts @ $1.45 and buy 10 contracts of BBH August $120 puts @ $.80 for a net credit of $.60. Let's also sell 10 contracts of BBH August $140 calls @ $1.75 and buy 10 contracts of BBH August $145 calls @ $.85. We have a maximum profit range of $125 to $140 with a total credit of $1,550. Our risk is $3,450. At $132.40, we could be better positioned – right in the middle of the range. August Position #2 – LLTC Sell Straddle – Closed at $35.22 We're sold 10 contracts of LLTC August $35 call @ $1.45 and sold 10 contracts of LLTC August $35 put @ $2.40 for a total credit of $3.45. Our maximum profit can be about $3,450 if LLTC finishes at $35. Our profit range is from $31.55 to $38.45. Our bail-out points are at the parameters of the profit range. At $35.22, we couldn't be much better positioned – right in the middle of the range, but still a long way to go. August Position #3 – SPX Iron Condor – Closed at 981.60 This is a slightly more aggressive position than usual. Why? The range is smaller. Also, note the different number of contracts we use for the calls and the puts. We sold 3 contracts of the SPX August 1025 calls and bought 3 contracts of the August 1050 calls for a net credit of $3.70 ($1,110). Then, we'll sold 6 contracts of the August SPX 960 puts and bought 6 contracts of the August SPX 950 puts for a net credit of $2.00 ($1,200). The total credit was $2,310 – and that's our maximum profit. I reduced the number of contracts on the bear call spread because there's a $25 exposure. As of Friday's close, SPX did not have call strike prices between 1025 and 1050. Monday, no additional strikes were opened, so we went with the original plan. Thus far, no additional strikes, between 1025 and 1050 have been opened. The SPX closed at 981.60 – comfortably within the range. ______________________________________________________________ More Words of Wisdom They just keep coming in. "Words of wisdom" can encompass almost anything – so don't be shy. Send in your favorites. Don't worry, I won't reveal you as the source. This is top secret stuff. a) Before you criticize someone, you should walk a mile in his shoes. That way, when you criticize him, you're a mile away and you have his shoes. b) Do not walk behind me, for I may not lead. Do not walk ahead of me, for I may not follow. Do not walk beside me either. Just pretty much leave me alone. c) If you're so damn smart, why aren't you rich? (I get asked that all the time) d) If you lend someone $20 and never see that person again, it was worth it. ______________________________________________________________ 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". 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 ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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