The Option Investor Newsletter Tuesday 07-29-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Saddam Put Futures Markets: Consumers drop the ball Index Trader Wrap: Market Sentiment: Intermarket signals Weekly Fund Screen: Good Growth Funds in Fidelity FundsNetwork NTF Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-29-2003 High Low Volume Advance/Decline DJIA 9204.46 - 62.10 9289.69 9168.26 1.71 bln 1218/2001 NASDAQ 1731.37 - 4.00 1744.60 1713.21 1.69 bln 1564/1630 S&P 100 497.85 - 3.64 502.92 495.41 Totals 2782/3631 S&P 500 989.28 - 7.24 998.64 984.15 W5000 9542.12 - 54.30 9618.71 9489.23 RUS 2000 473.60 - 0.23 476.04 469.70 DJ TRANS 2618.37 - 4.40 2635.90 2609.36 VIX 20.23 + 0.30 21.07 19.96 VXN 30.16 - 0.24 31.82 29.81 Total Volume 3,683M Total UpVol 1,312M Total DnVol 2,309M 52wk Highs 456 52wk Lows 67 TRIN 1.31 NAZTRIN 1.24 PUT/CALL 1.01 ************************************************************ Saddam Put The Saddam put overruled the Consumer Confidence short this morning and continued to rule all day. The disaster in the economic numbers was ignored once when rumors of a Saddam capture filtered through the markets. I am going to check EBAY tonight and see if I can find a used "rumor mill" of my own. Dow Chart Nasdaq Chart Despite the improved guidance from Wal-Mart this week the Chain Store Sales snapshot fell -0.3% following three weeks of gains. Food, drugs and seasonal goods helped hold the line but apparel weakened. Warmer weather, as in blistering in the southwest, has helped power the seasonal product sales. We are rapidly entering the back to school phase and consumers should be receiving tax credit checks and more take home pay by now. This should help to maintain the consumer sales for the next month. The downside is the drop in refi applications and the drying up of the home equity pipeline. The higher interest rates will not immediately hit Wal-Mart shoppers but major appliances, autos and big ticket goods could be softer soon. The biggest shocker of the day was the dramatic drop in the Consumer Confidence to 76.6 from 83.5. The index hit a plateau at 83.5 for May/June and it appears the bloom is off the rose. The rising interest rates, volatility in the market and higher unemployment continues to drag on optimism. This was the lowest level since March and countered expectations for a small gain. The biggest drop was in the expectations component, which fell -10 points to 86.4 and erased the majority of the gains from May/June. The present situations component dropped for the third month in a row. The current conditions component is at the lowest level since 1994. If the Jobless Claims on Thursday and the Nonfarm Payrolls on Friday show increases in unemployment the confidence numbers could get ugly fast. Everyone is betting on the post war rebound and that rebound is turning into more tortoise than hare. On Wednesday we will get the Fed Beige Book, Chicago Fed National Activity Index, Mortgage Applications and the Consumer Comfort Index. The CFNAI has been negative for nine of the last ten months and it is expected to be negative again tomorrow. The May Beige Book had shown some limited postwar improvement with the main support in the housing market. Despite the pickup the overall tone was somber and the outlook is for more of the same this month. The Comfort Index was trending down for the past two weeks and it will be interesting to see if the trend accelerates or breaks in light of the Consumer Confidence. The mortgage application index has also been trending down since the May-30th number of 1,856 with a 1,284 last week. It is doubtful it has improved much in a week with 30-year mortgages back at 6.0%. Needless to say there may not be much economic excitement on Wednesday but there is the potential for upside surprise. Since the outlook is not exciting any negative news could be covered by the Saddam put and we continue to trade sideways. Our enemy is not Saddam any more but the bond market. The ten-year yield closed at 4.4% and a 52-week high. This bond disaster is going to continue to spiral out of control until something happens to break the trend. The terrible Confidence number today only slowed the selling for a few minutes before it promptly began again in earnest. The good news is that some of the money is finding its way into the stock market. The bad news is that the rapidly rising interest rates could produce a death blow to the barely conscious recovery. The earnings parade continues and as of last night 326 S&P companies have reported earnings. According to First Call 66% beat estimates, 22% were inline and only 12% missed estimates. Earnings are showing around +15% growth and slightly better than the +14% estimates. Those would be very good numbers if they were actually from sales. The majority of earnings gains have been from cost cutting and not repeatable. Another significant source of earnings surprises have been currency gains due to the weak dollar. This is also not repeatable. With warnings for the 3Q running 2:1 over positive guidance it is not a positive picture. Some of those warnings are coming from companies that touch all of the American economy. Jones Apparel warned today that consumer spending was very uncertain and earnings would be down for the quarter and the year. ADP, a nationwide payroll processor, warned that they were seeing very little improvement in the economy. The largest furniture maker in the country, FBN, also warned last week that they were seeing no improvement in the economy. FedEx was cut today based on falling small package deliveries. NVDA missed estimates and said the next quarter will be below estimates. Positive performance came from MCD, DD, ALA and AHC with TYC posting a profit and restating earnings again going back to 1998. Other negative news included a warning from the State Dept that Al-Queda is planning more suicide hijackings of airliners before the end of the summer. Quoting specific and credible information from detainees and corroborated by other intelligence they said the attacks could take the form of flights coming into the U.S. from other countries. They suspect five person teams with weapons hidden in things like cameras and laptops. With the anniversary of 9/11 quickly approaching I would not doubt the threat exists. However, the market ignored the warning due to the Saddam put. Basically most traders believe that Saddam will be caught/killed in the next several days. We are getting constant chatter out of Iraq that the noose is tightening and he is running out of places to hide. Every day more contacts are arrested, today was his personal bodyguard and hundreds of tips are reported received daily since Udai and Qusai were killed. Traders expect the event to produce an instant market rally that could add +300 points and push us over the current 9300 ceiling. With this event expected any day there is no interest on the part of the bears to short aggressively. Bulls are buying the dips on the hope of quick profits on the bounce. Thus, the market has an insurance put in the form of an expected Saddam capture. That expectation was responsible for a vertical +100 point rebound off the Dow bottom today when a brief rumor hit the floor that Saddam had been killed. There was a brief bout of selling when the news turned out to be a new Saddam tape calling his sons martyrs instead but the selling was brief. It showed the put was alive and well and had not expired. The trend was broken today. For the first time in 10 weeks the Nasdaq closed negative on a Tuesday. It was not a major loss, only -4 points. The Dow has closed negative for two consecutive days. That is about the only negative points I can make. The market action is very bullish and the Dow held 9200 with fierce determination at the close. Same with Nasdaq 1725. They refuse to give up the gains from the last couple weeks and the Dow has now traded within arms length of 8300 each of the last four days. It is building a very impressive bullish wedge at 9300 and were it not for the Confidence today we could have easily broken out. I say easily but there is strong resistance at that level which must first be overcome. The more important levels are S&P 1000 and 981. This is the broad market support and resistance which must be overcome before the market can make any major moves. 981 is the 50 DMA on the S&P. S&P Chart With the Saddam put in place any negative economic news on Wednesday is likely to have limited impact. That may not be true on Thr/Fri when the economic reports are critical and plentiful. We will have the GDP, ECI, PMI, Help Wanted Index and Jobless Claims on Thursday. Friday has Nonfarm Payrolls, Michigan Sentiment, ISM, Personal Income/Spending and Construction Spending. It is going to take a lot more specific and credible rumors to protect the bulls if those reports turn negative like Consumer Confidence did today. The markets are poised to move big and the only question is which way. The trading range is slowly narrowing and the breakout in either direction could be sharp and quick. Keep those stops in place regardless of the direction you are expecting. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Consumers drop the ball Jonathan Levinson It was an exciting session, with treasuries setting a year low, equities trading wild swings, and precious metals correcting some of their recent gains. Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 1006 998 990 981 973 YM03U 9332 9261 9200 9129 9068 NQ03U 1305 1289 1273 1257 1241 10 minute chart of the US Dollar Index The US Dollar Index made a spectacular round trip today, with the sellers mobilized by the 10AM Consumer confidence disappointment, followed by a miraculous stick save minutes later. Gold, silver, and US treasuries did not recover, though the CRB managed to add 29 to close at 234.71, led by cocoa, coffee and sugar futures. I expect numerous emails on this easy conceptual top-spin lob :) Daily chart of August gold August gold found sellers today, with the August contract bouncing from a low of 360.80 to close at 361.70 The steep uptrend we've been following was not violated, with 360 seen as support on this move. The metals indices got sold, with HUI down 2.61 to 163.87, XAU –1.62 to 81.44. Weekly chart of the ten year note yield I've included a weekly chart of the ten year note yield to provide some context on today's 11.4 basis point jump to 4.398%. The move in treasuries got attention today as the TNX cleared resistance and hit levels not seen since last summer. Daily chart of the ten year note yield The bullish hammer on the daily chart is no surprise to those following this uptrend for the past month and change. What is more surprising is the inaction of the Fed and its dealers in the face of this rally in yields. Despite $9B in overnight repos today, treasury bonds sold off. Given the immense debt exposure of corporations and consumers in the US, the action from the bond market is disconcerting. Add to this the apparent obliviousness of the equities markets, with the ongoing bullish saturation in breadth, sentiment and low volatility, and the conditions look dangerous for the immediate future. Daily NQ candles Today's print followed as expected on yesterday's shooting star doji. The oscillators depict a hesitant downward bias, which coincides well with the action we saw today, with equities whipping down on the 10AM Consumer Confidence dataq, bottoming gradually, rallying on yet another Saddam rumor, and selling off again to a higher low in the afternoon before drifting upward into the close. 30 minute 20 day chart of the NQ Today's selloff brought the 30 minute Nasdaq futures back into the pennant, and the upside breakaway was deferred for another day. The uptick heading into the cash close gave us a buy signal on the short cycle oscillators. The trouble with rangebound trading is that, after awhile, conflicting chart patterns begin to emerge. The reverse head and shoulders pattern got a lot of attention intraday, but the upper descending trendline managed to contain it. When in doubt, it's safer to make your decisions at the upper and lower trendlines only, set your stops, and watch for the other line. Patience and disciple are most important in such an environment. Daily ES candles The S&P futures failed to regain the rising trendline and are back within the longer cycle oscillator downtrends. We had a lower high and lower low printed today. 20 day 30 minute chart of the ES I found two competing flags in the ES range, and the test of the bear flag within the larger bull flag will come at 982-3. The end-of-day tape painting left ES on a buy signal, with narrowing range resistance at 996. It's obvious that this range won't last forever, and given the numerous upside tests of the descending upper trendline, as well as the tumultuous activity in the treasury and precious metals markets, my guess would be that 982- 983 will fail. Daily YM candles YM traded more bullishly than ES, with the oscillators on the daily candles on buy signals. Nevertheless, this week has shown us a pattern of lower highs. 20 day 30 minute chart of the YM The most bullish thing I can think to say about equities is that they've shown a susceptibility to bounces. I don't consider myself to have particularly sophisticated taste, but the "We got Saddam, again" rumor is wearing very, very thin, particularly given that I've been unable to discern what actual threat he poses to US markets at this point, having been chased into hiding. I freely admit that I may be naove, but the rumor mill is growing increasingly tiresome, and I find it depressing that the best that equities can muster is a repeat rumor with dubious financial pertinence. That said, there are more serious reasons to be wary of equities. The rally in treasuries makes yields more attractive, and, more to the point, will serve to pound the brakes on mortgage and refi activity. Insofar as the origination of these debts is an important component in the liquidity machine, I see rising yields posing a multipronged threat to the fragile US consumer, debt- ridden corporations, local, state and federal governments, as well as to the equity markets directly. The VIX, VXN and QQV remain very low, and bullishness continues to abound. Markets can go up in such an environment, but they don't tend to stay up. On this basis, I continue to be wary of bounces for whatever reason, but am seeking to stay short equities at current levels. At what point the Fed will consider stepping in to make good on Governor Bernanke's comments about "extraordinary measures" is anyone's guess, and this could put a strong bid under treasuries. I'm frankly surprised that the rally in yields has come this far. Whether there will be intervention in equities is another question for which I am answerless. We'll have to let the charts tell us and our stops protect us. ******************** INDEX TRADER SUMMARY ******************** Data points, not surveys The major indexes witnessed another seesaw intra-day session to close lower after the Conference Board's Consumer Confidence Index, which polls 5,000 households, fell in July, as consumers expressed skepticism toward a jobless recovery. An early afternoon rally, spurred by rumors of Saddam Hussein's capture helped lift the major indexes from their lows, but those gains faded quickly when the Pentagon said it had no information to validate the reports. While the economic report, which some traders discarded as "a survey and not hard data" brought a negative reaction from the stock market upon first release, and found some correlative defensive buying in treasuries, by session end the bond market took more of an "its not worth the paper it was written on" approach as Treasuries saw another sharp round of selling by with the longest-dated 30-year YIELD ($TYX.X) jumping 8.4 basis points to close at an 11-month high. The benchmark 10-year YIELD ($TNX.X) rose 10.7 basis points to 4.391%, with its September futures contract (ty03u) 111'195 -0.63% falling 23/32. And while I would agree that Treasuries look vastly oversold compared to much of the economic data on hand, bond bulls are either hesitant to step in front of the recent decline, or the bond market has suddenly become aware of some resurgence in economic growth, which some Fed officials have been hinting toward months ago. Tomorrow's release of the Fed's Beige Book will provide anecdotal economic observations from the Federal Reserve Bank districts, but if traders are truly waiting on some "hard data points," before making any type of meaningful decision toward equities, like bond traders seem to be willing to make toward Treasuries, then I'd look for another "range-bound" session tomorrow until Thursday's pre-market release of weekly jobless claims (consensus 400K), employment cost index (consensus +1%), advanced Q2 gross domestic product (consensus +1.5%), advanced Q2 chain deflator (consensus +1.4%). If that's not enough "hard data" for traders to digest, then the 10:00 AM EST release of the June Help-wanted index (consensus 37) and the July Chicago PMI (consensus 53.8) should have traders pouring a stiff drink after all data is analyzed. I (Jeff Bailey) continue to lean toward the bearish camp, but will admit the strong selling in Treasuries and still rather firming dollar as depicted by the U.S. Dollar Index (dx00y) 95.43 +0.38% have me still hesitant to be overly bearish as cash has to be piling up on the sidelines. Pivot Analysis Matrix - My main observation again tonight is some of the divergence seen between the S&P Banks Index (BIX.X) 308.03 -0.63% and still rising 10-year YIELD ($TNX.X) which we discussed last night regarding a more favorable spread between loans and borrowing costs potentially being negatively offset by fewer loans being generated as a result of higher interest rates for the consumer. Based on the pivot matrix, I'm currently left with the impression that WEEKLY S1 and WEEKLY R1's define the trading range, but with a bearish slant toward things at this point I'm looking to capture bearish gains on a decline to WEEKLY S2's. I've "dashed red" the SPX and OEX at DAILY and WEEKLY pivots for tomorrow, as both indexes traded either side of these levels to only give me the impression that they would serve tentative resistance in tomorrow's trade. While the S&P Banks Index (BIX.X) did trade 310.66 has a session high, there may have been more sellers lined at the WEEKLY pivot and a level an SPX/OEX trader might look to use as a more meaningful level of resistance for tomorrow's trade. Dow Industrials (INDU) Chart - Daily Interval What a perplexing group of stocks the Dow currently holds. McDonalds (NYSE:MCD) $22.15 +4.18% may be the "turnaround" story of the year a as quarterly sales trends look to be improving. Meanwhile, Merck (NYSE:MRK) $55.39 -2.24% extends losses and breaks below its 200-day SMA and Boeing (NYSE:BA) $32.05 -2.19% looks like it wants to test its 200-day at $30.87. Then there's "Mr. T" which jumped above its 200-day SMA yesterday, on speculation that any further discovery of wrongdoing haven taken place by Worldcom may have long-distance carrier closing its doors for good and never coming out of bankruptcy, leaving a large number of customers for a new long-distance service provider. I'm left with the impression that the Dow is range-bound from 9,050 to 9,350 for now, and would look to trade that type of range. Stockcharts.com did make the corrections to their very narrow Dow Industrials Bullish % ($BPINDU) chart, and that is good as it lessens confusion. No change today and still "bull confirmed" at 86.67%. S&P 500 Index ($SPX.X) Chart - 5-point box size Yesterday's trade at 1,000.68 was enough to get a double-top buy signal generated on the SPX, while today's trade at 984.15 sees a 3-box reversal. The trade at 1,000 is bullish enough to have a bear looking to take a profit on a decline back to 970, but bears need to break 975 to get it. I'm still keeping a close eye on the number of 52-week lows among NYSE listed stocks and today's NH/NL ratio was 139:56 (10-day average is 79.4% and lowest since 04/21/03 when it was trending higher). The 56 new lows is the highest number of new lows since late March and still has me leaning more toward the bearish side in the SPX as there is sign among 1, 2 and 3-lettered stocks that there is some softening at the bottom and bullish leadership isn't as strong as the NASDAQ, where today's NH/NL ratio was 227:13 (10-day average is 94.4%, but yet to show needed reversal reading of 92% from 98%). Today's trade saw a net loss of just 1 stock to a point and figure sell signal as the broader S&P 500 Bullish % ($BPSPX) slipped 0.2% to 77.2%. S&P 100 Index (OEX.X) Chart - Daily Intervals For the purposes of the Index Trader Wrap, I'd still consider the trading range of the OEX from 507 to 488, while a tighter range of trade can be found from 495 to 502 and be inside the "wedge." My only "bearish indication" in the OEX right now is that the OEX has found some resistance holding at 502 as Stochastics begin to reach the "overbought" level. Meanwhile, MACD is still advising bullish caution as it has yet to see a bullish crossover with MACD above signal. I would think a bear in the OEX gladly covers some profits on any type of break back near 488 as that most likely finds buyers while MACD is above the zero level and I'd envision Stochastics nearing "oversold" on OEX consolidation there. By no means am I currently "counting" on an OEX decline to 488 as the rising 50-day SMA and my "dashed pink" trend need to be broken first. Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX) and still holds at 84% bullish. NASDAQ-100 Tracking Stock (AMEX:QQQ) Chart - Daily Interval The Q's have been "sloppy" at the various levels of pivot analysis retracement with exception of "extreme" spikes lower. Tomorrow's DAILY R1 of $32.04 does tie in with some recent relative highs of $32.02 found this morning and then on July 24th. If looking for any type of resistance level that has shown some significance near-term, then that would be the level to watch just ahead of tomorrow Beige Book Report for any type of selling into some gains as Stochastics approach "overbought." I'd have to view support at/around WEEKLY S1 of $30.93 to $30.75. Today's trade saw no net change in the narrower NASDAQ-100 Bullish % ($BPNDX) and status still remains "bull confirmed" at 75% for a third-straight session. Jeff Bailey ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ **************** MARKET SENTIMENT **************** Intermarket signals Jonathan Levinson We've been following the "bottomy" volatility indices and "toppy" bullish percents for weeks. We can add intermarket analysis to help supplement the picture. Treasury bonds sold off today, reaching lows not seen since mid- 2002, and while gold and silver corrected today, they are in strong recent up trends and breaking out in bullish chart patterns. Through it all, equities have remained firm at current levels, and fear remains low. As the spring rally in treasuries progressed, I recall hearing talk that falling yields were bullish for stocks, because the growth and yield prospects of stocks increased relative to bonds. I've been hearing none of this as bonds have continued to sell off sharply for over 1 month, and equities have managed to hold relatively firm despite strongly rising yields. Throughout the year, many have speculated that money flows from stocks to bonds and back again, but this hasn't been supported by the trend. In fact, equities and bonds rallied together all through the spring. With treasuries correcting sharply and yields printing year highs day after day, equity bulls have reason to be concerned. The action in the precious metals market is also significant, as gold and silver tend to be viewed as a "put" on the financial system, to quote an author whose name escapes me. While neither of these intermarket relationships will generate specific buy or sell signal on its own, in combination with the low VIX, VXN and QQV, high bullish precents and overall bullish market sentiment, bullish traders should be exercising caution. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9353 52-week Low : 7197 Current : 9204 Moving Averages: (Simple) 10-dma: 9165 50-dma: 9037 200-dma: 8509 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 989 Moving Averages: (Simple) 10-dma: 989 50-dma: 881 200-dma: 908 Nasdaq-100 ($NDX) 52-week High: 1316 52-week Low : 795 Current : 1275 Moving Averages: (Simple) 10-dma: 1266 50-dma: 1224 200-dma: 1083 ----------------------------------------------------------------- Despite the markets weakness in Tuesday's session the volatility indices barely budged and remained near yearly lows. Essentially, they are telling observers that investors are still too bullish. CBOE Market Volatility Index (VIX) = 20.23 +0.30 Nasdaq-100 Volatility Index (VXN) = 30.16 -0.24 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.01 494,015 497,136 Equity Only 0.92 390,495 358,803 OEX 0.75 26,017 19,428 QQQ 6.93 24,971 173,067 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 69.7 + 0 Bull Confirmed NASDAQ-100 75.0 + 0 Bull Confirmed Dow Indust. 86.6 + 7 Bull Confirmed S&P 500 77.2 + 2 Bull Correction S&P 100 84.0 + 2 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.04 10-Day Arms Index 0.96 21-Day Arms Index 1.02 55-Day Arms Index 1.10 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 1150 1505 Decliners 1688 1526 New Highs 109 146 New Lows 32 6 Up Volume 542M 736M Down Vol. 1107M 928M Total Vol. 1676M 1685M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 07/22/03 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 Not much new for us to decipher in the full contracts of the S&P 500 futures. Commercials remain slightly next short and the small traders remains significantly net long, expecting the markets to rise. Commercials Long Short Net % Of OI 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%) 07/22/03 411,206 442,131 (30,925) (3.6%) 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 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% 07/22/03 155,891 76,466 79,425 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 In contrast to the full size S&P contracts above, the E-minis is showing a drastic change. Commercial traders have been moving from net short to net long the last four weeks and the longs have finally out numbered the shorts. Right on cue, the small traders have turned the most bearish they have been in months. Commercials Long Short Net % Of OI 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%) 07/22/03 249,392 249,386 6 0.0% Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 6 - 07/22/03 Small Traders Long Short Net % of OI 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%) 07/22/03 45,945 76,071 (30,126) (24.7%) Most bearish reading of the year: (30,126) - 07/22/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 There is little change in the NDX futures by the commercial traders or small traders. Commercials Long Short Net % of OI 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%) 07/22/03 32,502 48,139 (15,637) (19.4%) 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 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% 07/22/03 27,321 8,844 18,477 51.1% 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 Commercial traders are becoming even more bullish on the Industrials while small traders are slowing increasing their net short positions. Commercials Long Short Net % of OI 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% 07/22/03 22,198 8,176 14,022 46.2% 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 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%) 07/22/03 6,110 10,898 (4,788) (28.2%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ****************** WEEKLY FUND SCREEN ****************** Good Growth Funds in Fidelity FundsNetwork NTF This week, we identify high-rated growth funds that are available on a no-transaction fee ("NTF") basis through the Fidelity Retail FundsNetwork. These long-term growth funds were selected from a universe of more than 1,100 funds in the Fidelity retail network (www.fidelity.com). Each of these funds has passed specific fund performance criteria, has been around for at least five years and has other desirable characteristics. Screening/Evaluation Process To help us narrow the field quickly, we used the fund screener on the Fidelity.com website, called Fund Evaluator. Our fund search criteria is shown below for your convenience. Fund Preferences: Show Only Open Funds (Checked) Show Only NTF Funds (Checked) Fund Performance: YTD Return > 15% 1-Year Return % > 0% 3-Year Annualized Return % > 0% 5-Year Annualized Return % > 0% Investment Objective: Stock Funds = All Domestic Stock Funds Morningstar Rating: 4 Stars (Above Average) or Higher Equity Style Maps: Large-Cap Value: No Large-Cap Blend: Yes Large-Cap Growth: Yes Mid-Cap Value: No Mid-Cap Blend: Yes Mid-Cap Growth: Yes Small-Cap Value: No Small-Cap Blend: Yes Small-Cap Growth: Yes Nuts and Bolts: Expense Ratio < 1.50% Equity Turnover Ratio < 150% Manager Tenure > 5 Years This stringent screen criterion yielded only seven fund results, as follows: Fund Screen Results: Baron Growth (BGRFX), Growth Excelsior Midcap Value (UMVEX), Growth Heartland Value (HRTVX), Small Company Liberty Acorn Z (ACRNX), Small Company Liberty Acorn USA Z (AUSAX), Small Company Matrix Advisers Value (MAVFX), Growth & Income Neuberger Berman Socially Responsible (NBSTX), Growth You can see that our screen yielded three growth objective funds, one growth and income objective product, and three small company stock funds. Each fund is up over 15% in 2003, after holding up relatively well versus similar funds over the past three to five years through the market correction. However, the total returns presented in Fidelity's Fund Evaluator are through June 30, 2003. To continue our evaluation, we entered the seven fund symbols in the "Fund Compare" tool on the Morningstar.com website. That'll let us see performance results through July 28, 2003 and compare the seven funds on other things, such as relative risk, expenses, manager tenure, and portfolio characteristics. The Snapshot View showed us that three funds are currently rated 5 stars by Morningstar, the fund tracker's highest overall grade for "risk-adjusted" return performance relative to fund category peers. Baron Growth Fund and Liberty Acorn Fund, Class Z Shares are both "5-star" rated in the Morningstar small-growth category. Matrix Advisors Value Funds receives 5 stars for its performance in the Morningstar large-blend category. The other funds on the list are "4-star" rated by Morningstar, signifying above average, risk-adjusted returns relative to category peers. In the Performance View, we see that the Heartland Value Fund is up 35.2% as of July 28, 2003, more than double the return of the market as measured by the S&P 500 index. Its 1-year, 3-year and 5-year annualized total returns rank in the top 10% of the small value category, per Morningstar, while at the same time, holding up significantly better through the market downturn of 2000-2002. Because it invests in undervalued stocks, the fund's value style may at times be out of favor with the market. In 1998 and 1999, two pro-growth years, Heartland Value Fund lost 11.5% and gained 25%, respectively. Large cash inflows may have hurt performance in 1998, following two 20-percent return years in 1996 and 1997. Excelsior Midcap Value Fund, the two Liberty Acorn funds and the Matrix Advisors Value Fund are each up over 20 percent this year through July 28. Matrix Advisors Value Fund has produced a 9.9% annualized total return over the past five years, ranking in the top 1% of the Morningstar large-blend category. Still, three of the equity funds on this short list have done better in absolute terms over the trailing 5-year period, including Liberty Acorn Z (+10.4%), Baron Growth (+10.5%) and Heartland Value (+12.4%), so our short list includes some durable performers from both "value" and "growth" camps. In terms of risk and tax data, we saw that Neuberger and Berman's Socially Responsible Investment Trust (NBSTX) had the lowest risk (volatility) of the seven funds over the past three years with an average standard deviation of just 18.1%. The standard deviation percentages for Baron Growth Fund and Liberty Acorn Fund are both just above 20 percent, low-to-below average relative to small-cap funds overall. Funds with above average risk levels versus their category peers include the Excelsior Midcap Value Fund, Heartland Value Fund and Matrix Advisors Value Fund. The Portfolio View showed us that each of the funds has portfolio turnover ratios of less than 100 percent. These funds don't turn the portfolio over as much as some stock mutual funds, helping to control fund costs. Baron Growth Fund's average P/E ratio of 31x is the highest of the seven short-list funds, while Excelsior Mid Cap Value Fund has the lowest average P/E (20x), per Morningstar. The two Liberty Acorn funds sport relatively high 3-year earnings growth rates in the 15%-17% range. Baron Growth, Heartland Value and Liberty Acorn each have more than $1 billion in total assets. Favorite Funds Our favorite funds on this 7-fund short list are the Baron Growth Fund (BGRFX) and Liberty Acorn Fund Z (ACRNX). Both equity funds seek to provide long-term appreciation through investments mainly in small company stocks. Both stock funds are currently included in the Morningstar small-growth category based on their "average" investment style over the past few years. However, Liberty Acorn Fund has sometimes drifted into the small-blend style box or mid- growth style box, per Morningstar. That's not a big deal though, as Baron's style tends to stay toward the lower right-hand corner of the style box. Morningstar says Baron Growth Fund favors small, rapidly growing companies with talented management, and it is not afraid to load up on its favorite stocks. Ronald Baron has managed this growth- driven fund for over eight years, producing a strong performance record in relation to other small capitalization funds. Liberty Acorn Fund's long-time manager, Ralph Wanger is retiring but the fund remains in the capable hands of co-manager, Charles McQuaid (since May 1995). Morningstar.com says the Acorn Fund remains a force to be reckoned with in the small-cap fund group. So far in 2003, the Baron Growth Fund has returned 19.3% to rank in just the 79th percentile of the small-cap growth category per Morningstar. That is still a full five percentage points higher than the S&P 500 large-cap index this year. Baron Growth Fund's trailing 3-year annualized return of +6.7% compares to an annual equivalent loss of 9.8% for the S&P 500 index. And its trailing 10-year average annual return of 10.5% through mid-year compares to an annualized decline of 1.1% for the S&P 500 index benchmark. Liberty Acorn Fund has produced a YTD total return through July 28 of 22.5%, 8.2% better than the market as measured by the S&P 500 index. Like Baron Growth, Liberty Acorn Fund has done well this year, but some "small-growth" funds have generated greater returns for investors in 2003. Still, we appreciate that these two funds are still capturing a fair share of the market return this year, while also sporting a superior long-term performance record. Over the trailing 3-year, 5-year and 10-year periods, Liberty's Acorn Fund, Class Z has generated returns that rank in (or near) the top decile of the Morningstar small-growth category. Its 5- year annualized return through July 28 of 10.4% ranks in the top 14%, while its 10-year annualized return (12.5%) through June 30 ranked in the category's top 12 percent. Since 1996, the fund's annual (year-to-year) returns have ranked in one of the two best quartiles for performance, except for one year 1999, when it was up only 33.4% for the year (66th percentile). Some other growth funds that year produced staggering, but unrealistic returns for shareholders. Conclusion This week we used Fidelity's fund screener/evaluator to identify some strong funds in the Fidelity Retail FundsNetwork. A few of them may also be available on a no-load, no-transaction fee (NTF) basis through other brokerage networks and distribution channels. We discussed two small-cap funds we favor, Baron Growth Fund and Liberty Acorn Fund. Both have participated in the market's rise in 2003 and have held up relatively well compared to some growth funds through the 2000-2002 market downturn, putting them in good stead for the next advance. Long-term, risk-tolerant investors wanting to add some small-cap growth exposure their stock portfolio have two fine choices here. Steve Wagner Editor, Mutual Investor email@example.com ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. 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The Option Investor Newsletter Tuesday 07-29-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: none Dropped Puts: BBBY Call Play Updates: AZO, FDX, GDW, GENZ, LOW New Calls Plays: TTWO Put Play Updates: FITB, FRE, HD, LEH, LEN, PGR, XL New Put Plays: BDK, MRK **************** 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: ***** Bed Bath & Beyond - BBBY cls: 38.83 chng: -0.17 stop: 40.25 Sometimes things just don't work out. When we initiated coverage of BBBY last week, we were looking for a breakdown under $37 and were quite pleased to get it in short order. But the strong rebound from the 200-dma was not in the plan. After that rebound, the stock has spent the past 3 days stubbornly refusing to break back under the $38 level. While BBBY has still failed to close over its aggressive descending trendline from the early June highs, the stock's failure to show any follow through weakness has us getting very cautious. Rather than wait for the trendline break, we're recommending an exit from the play on any weakness on Wednesday. Traders still willing to hold open positions should ratchet stops down to $39.50, as that is just above the trendline, the last two day's intraday highs, as well as the resistive 30-dma. Picked on July 22nd at $37.71 Change since picked: +1.12 Earnings Date 09/17/03 (unconfirmed) Average Daily Volume = 3.36 mln ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** AutoZone, Inc. - AZO - close: 83.75 change: +0.78 stop: 79.75*new* There's nothing like a shot of adrenaline to get a new bullish play off to a great start. Apparently Friday's breakout over $80 and the 50-dma was significant, because the stock charged higher right out of the gate on Monday. Momentum entries were the only way to go, as AZO broke through $81 shortly after the open and never looked back, ending just below $83. That buying spree continued on Tuesday, with the stock hitting an early high ($84.70) just below our initial target of $85. There hasn't been any news to explain the strongly bullish move, as this appears to be simply a rebalancing of supply and demand as the stock successfully pushed through a major resistance level. Today's consolidation after the early bullish move hints that there may be a bit more of a pullback before the next leg higher. That will be our opportunity to enter new positions on a rebound from new support. Aggressive traders can target a rebound from the $83 area, although the better spot to game a bounce appears to be on a rebound from the $81.50-82.00 area. With price extended above the upper Bollinger band now, we have no interest in chasing AZO higher until that requisite pullback. In fact, another push up near $85 and rejection there should be used to harvest some gains and look for a pullback to re-enter the play. Raise stops to $79.75, just below the 50-dma. Picked on July 27th at $80.17 Change since picked: +3.58 Earnings Date 08/26/03 (unconfirmed) Average Daily Volume = 1.30 mln --- Fedex Corp - FDX - close: 64.83 change: -0.33 stop: 62.99 *new* Just as Linda stated in her market wrap on Monday, the markets are set up for a bullish move higher but traders just aren't biting. Or they're missing the cues like the one we're following here with the new relative highs in the Transportation index. The Dow Jones Transportation average has managed to maintain its gains above 2600 but stocks like FDX and UPS can't seem to catch any rally higher. As a matter of fact shares of UPS look like they're about to roll over and are currently perched on their 50- dma. A breakdown in UPS could affect investor sentiment towards FDX. We're not quite willing to pull the plug on FDX yet but we're not suggesting new entries either. To reduce our risk we're raising our stop loss to $62.99, which is under the simple 50-dma for FDX (currently 63.35). Picked on July 20 at $65.32 Change since picked: -0.49 Earnings Date 09/23/03 (unconfirmed) Average Daily Volume: 1.70 million --- Golden West Fincl. - GDW - close: 83.93 chg: -0.84 stop: 80.99 The strong rally in the financial sector last Friday appears to have faded. Following in the footsteps of the BIX and BKX banking indices, shares of GDW have slipped backwards from its recent breakout over $85.00. This may not necessarily be bad news. Traders who prefer to target shoot their bullish entries on dips toward support can look for GDW to slip towards the $83.00 level. A bounce there looks like a tempting entry point. Should GDW slip under the $83 mark then we'll start to turn pretty cautious on the play and suggest traders wait before entering bullish positions. Picked on July 27 at $85.66 Change since picked: -1.73 Earnings Date 07/21/03 (confirmed) Average Daily Volume: 581 thousand --- Genzyme Corp - GENZ - close: 51.94 change: -0.38 stop: 47.49 *new* Bullish movement in the markets may have slowed but not for shares of GENZ. The biotech/drug company is outpacing both the BTK biotech index and the DRG drug index. Last week's move over resistance at $50 was fueled higher by an S&P upgrade of the company's credit rating from BBB- to BBB. That's positive news for GENZ and a stamp of approval to make investors feel better. Today's action saw some profit taking back to the $50 level but dip buyers quickly stepped in. Positions at current levels still look good but take care to place your stop carefully. We're raising ours to $47.49. Picked on July 22 at $49.76 Change since picked: +2.18 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 3.52 million --- Lowe's Companies - LOW - cls: 47.50 chng: -0.84 stop: 46.50*new* Back and forth, LOW has been crossing over the $48 level with increasing frequency over the past week. Traders in this bullish play obviously want to know whether it is going to solidify here and make a run at our $50 target and so do we! We knew this was going to be a solid level of resistance, but we're ready for the stock to get this show on the road. It is encouraging to see support apparently building above $47 and the 10-dma ($47.16) has now risen to help reinforce that support. Traders still looking for new entries can consider rebounds from above the 10-dma as a viable trigger. We're leaning a bit more cautious on the play due to the series of lower intraday highs over the past couple days and today's close right at the $47.50 support level. Also somewhat disconcerting are the large volume spikes on the large sell candle at 10am ET and at the close today. Those two 5- minute bars accounted for a total of nearly 1.7 million shares, 36% of the day's total. So we need to be careful about buying this dip. The more conservative entry strategy would be to wait for a rebound back over the very short-term trend connecting the intraday highs of the past two days and that would come with a trade of $48.30. Note that we're raising our stop to $46.50 tonight, which should be strong support. Picked on July 13th at $46.87 Change since picked: +0.63 Earnings Date 08/18/03 (unconfirmed) Average Daily Volume = 4.81 mln ************** NEW CALL PLAYS ************** Take-Two Interactive - TTWO - close: 26.72 chg: +0.10 stop: 23.90 Company Profile: Take-Two Interactive Software Inc. (TTWO) is an integrated global developer, marketer, distributor and publisher of interactive entertainment software games and accessories for the PC, PlayStation, PlayStation2, Nintendo Game Boy Color, Nintendo GameCube, Nintendo Game Boy Advance and the Xbox. The Company publishes and develops products through various wholly owned subsidiaries including Rockstar Games, Rockstar Studios, Gathering, Joytech, PopTop, Global Star and under the Take-Two brand name. The Company maintains sales and marketing offices in Cincinnati, New York, Toronto, London, Paris, Munich, Vienna, Copenhagen, Milan, Sydney and Auckland. Chart Analysis Chart: Daily TTWO has been in a five-wave basic pattern incline since March. Currently TTWO is undergoing the 4-wave retracement and has yet to complete it. TTWO should complete the 4-wave retracement in a few days when it hits 25 at which point the target will be 34. The Type I setup meets the following criteria: 1. The 4 wave has already retraced about 58% and should retrace about 63% when the 4 wave is complete. 2. The 4 wave segments nicely into a zigzag. 3. The oscillator has peaked at the zenith of the 3 wave and has retraced about 150%. Chart: Weekly The weekly chart of TTWO shows that TTWO has just finished a five wave basic pattern that completed at the end of 2002. TTWO could be in the midst of an A-B-C correction or it could be completing the five wave basic pattern. The oscillator is ambiguous at this point. This pattern is very similar to the one for the 5 wave of the last five wave basic pattern. If that is the case, then the oscillator is going a bit lower as the 4 wave completes and then rise again being almost an exact duplication of the previous five wave basic pattern. Chart Hourly The hourly chart of TTWO shows TTWO to be in the process of a 4- wave retracement of the daily C wave. It is not entirely clear as to whether TTWO will first rise to about 28.60 first or head straight down to 25. In either case, we are going to wait for $25 as an entry point which should occur sometime late in the day on 7/30/2003. Trade Setup TTWO should reach $34 by October. The December options should give us plenty of time to complete the trade. We're going to suggest the December $30.00 strike. When TTWO hits $25, the Ask should be about $1.35. Option Sym Strike Type Bid Ask Delta Vol OI TUOLF 30.00 Call 1.90 2.05 41 12 239 What If We Are Right Chart: Position Analysis For Target On 7/30/03 with TTWO down to $25, the options are worth about $1.35. If TTWO reaches $34 by September expiration, the option will be worth $5.35. We will sell half the position at $2.70 (somewhere are around $29 at August expiration) thus making this a risk free trade. We will let the remaining options ride to $34. What If We Are Wrong If TTWO goes below $23.90 or the oscillator breaches the 161% retracement, then something has gone wrong and we will exit the trade. This will most likely happen within the next month. Chart: Wrong Scenario If TTWO continues to go down to $23.90, then the options will be worth about $0.80 at August expiration. Since we will have purchased them for about $1.35, we will be down about 40%. ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* Fifth Third Bancorp - FITB - cls: 55.23 chg: -0.57 stop: 57.01 It's been ten days and we're right back where we started from. Shares of FITB have failed at overhead resistance again but paused just above the $55 level. The trend of lower highs is good news for the bears and should produce the downside breakout we're looking for. Sometimes the key is patience. The more this stock churns between $55 and its 50-dma the more it looks like a bear flag pattern (which should produce the breakdown we're waiting on). We've mentioned it before, the stall in FITB's descent has some of its oscillators curling up from oversold in a bullish manner. It's going to take a move over $57.00 to convince us the short-term downtrend is over. Aggressive traders can reconsider new bearish positions now. Conservative traders may want to wait for a new relative low (a move under the July low). Picked on July 17th at $55.26 Change since picked: -0.03 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 2.4 million --- Freddie Mac - FRE - close: 49.38 change: -1.23 stop: 52.50*new* It looks like the third time's the charm! After probing below the $50 level on Friday and Monday and rebounding swiftly on both occasions, today's break under that critical level suddenly found insufficient buying interest to propel the stock back up. After a feeble midday rebound attempt, the stock rolled over into the close, ending just above its low of the day. Another strong round of selling in the Treasury market certainly had its effect, and FRE looks to be mid-way through the breakdown we're looking for. Look for continued weakness in the bond market to exert further downside pressure on shares of FRE. With a successful close under the $50 level, resistance should be strong in the $50-51 area and an oversold rebound that rolls over in that area can be used for fresh entries. Momentum traders will want to keep an eye on the $49 level, as that was the site of yesterday's early rebound. A break below there can be used for aggressive entries enroute to challenging the June lows and then working down to strong support near $45. Lower stops to $52.50, just above last Wednesday's intraday high. Picked on July 22nd at $50.33 Change since picked: -0.95 Earnings Date N/A Average Daily Volume = 7.21 mln --- The Home Depot - HD - close: 31.57 change: -0.18 stop: 33.00*new* Is that pesky support ever going to break? From the looks of things, HD is continuing to weaken, and Tuesday's close near the low of the day looks encouraging. The daily chart presents what looks like a "b" distribution pattern over the past couple weeks and with the 10-dma ($32.25)and 20-dma ($32.82) curling lower to provide stronger resistance, the bears seem to have the upper hand. Failed rebounds below the 10-dma have been providing solid entries into the play, and we'll stick with that strategy until either it fails to work or we get the decisive breakdown below $31. Normally, we'd consider a break under the bottom of the recent consolidation ($31.24) as a viable momentum entry, but with our initial profit target at $30, it may not provide enough bang for the buck. Even though our eventual target for the play is $28, more conservative traders may want to consider harvesting partial gains at $30, as that support is likely to provide at least a short-term rebound when hit. Lower stops to $33.00. Picked on July 10th at $32.43 Change since picked: -0.86 Earnings Date 08/19/03 (unconfirmed) Average Daily Volume = 9.59 mln --- Lehman Brothers - LEH - cls: 62.96 chng: -0.32 stop: 64.50*new* It took over a week of grunting and straining to get the job done, but the bears finally managed to post a sub-$63.00 close for LEH. It was only a small fractional loss on the day, but the moral victory hints that perhaps the second leg of the breakdown in this weak Brokerage stock is about to get underway. The stock is continuing to be pressured by its descending trendline ($64.40) and the 10-dma ($64.04) and so far intraday rebounds near the 10-dma have proved to be favorable entry setups. That once again proved true on Tuesday, with the stock swiftly rejected from its attempt to reach the $64 level near midday. Traders that have entered on one of these failed rallies should now tighten stops to $64.50, which is just above that descending trendline from the mid-June highs, as well as the intraday highs over the past week. Traders looking for a momentum entry can consider a break under $62.75 (today's intraday low), but only if we're seeing renewed weakness in the XBD index, preferably breaking below that stubborn $550 support level. Picked on July 20th at $65.18 Change since picked: -2.22 Earnings Date 09/18/03 (unconfirmed) Average Daily Volume = 2.86 mln --- Lennar Corp. - LEN - close: 66.78 change: +0.20 stop: 68.50*new* It is getting very close to make or break time for our LEN play, as the bulls have managed to stubbornly defend the $66 support level, while at the same time, the declining 10-dma ($68.13) is continuing to put ever-lower pressure on each rebound attempt. With rising interest rates due to the continuing selloff in the bond market, we're leaning towards an impending breakdown. But with the way in which the Housing stocks have been so stubbornly strong in recent months, we want to err on the side of caution. Aggressive traders can still use failed rebounds below the 10-dma to enter the play, but be aware that we're getting really stingy with our stop. It moves lower to $68.50 tonight, as a break above that level would indicate an end to the current downtrend and have us moving to the sidelines. The more prudent way to game new entries at this point may be to wait for the breakdown under $65 in conjunction with the $DJUSHB index finally losing the $414 support level. Our eventual profit target is still $62- 63 as that former resistance is likely to provide a solid (even if transitory) floor for a rebound. Picked on July 15th at $71.12 Change since picked: -4.78 Earnings Date 09/09/03 (unconfirmed) Average Daily Volume = 1.68 mln --- Progressive Corp - PGR - close: 65.98 chg: -0.89 stop: 67.26 *new* It's been eight trading days since investors hammered shares of PGR on its earnings news. While we've not yet seen a bounce traders have been unable to spark any more selling. The $65 level remains short-term support but we've also noticed how shares have not traded above $67.20 since July 21st. Given the recent failure near that level again we're going to slip our stop loss down another 25 cents to $67.26. Investors might notice that the IUX insurance index has just produced a three-day bearish reversal pattern near the 280 level. Sector wide selling pressure could help push PGR through $65.00 and towards our target near $60.00. This is a good spot for aggressive traders to consider new entry points but conservative traders may want to wait for a more convincing move under $65.00. Picked on July 23 at $65.22 Change since picked: +0.76 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 941 thousand --- XL Capital Ltd. - XL - close: 78.05 change: -0.85 stop: 79.50*new* We would be really excited about today's rollover in shares of XL if there was more time left to play. Just as expected over the weekend, we were looking for a rollover from last week's oversold rebound in the $79-80 area, and the stock nailed the middle of that range almost perfectly, with an intraday high of $79.45 on Monday before commencing the rollover from the 10-dma ($79.03) this morning. Volume continues to be above average, and XL looks like it is vulnerable to a near-term drop to the $73-74 target area that we highlighted when we began coverage just under 2 weeks ago. The problem is that there just isn't enough time left before the company releases its earnings report on Thursday after the closing bell. That means there are only 2 trading days left to be out of any open positions. Aggressive traders can still consider fading another failed bounce below the 10-dma, but need to realize we need to be less tolerant of any rebound through near resistance with the proximity of earnings. Conservative traders will want to use a decline back into the $76.50-77.00 area to harvest at least partial gains. We're lowering our stop tonight to $79.50, which is just above yesterday's intraday high. One way or the other, we'll be dropping coverage of XL tomorrow night. Picked on July 17th at $79.64 Change since picked: -1.59 Earnings Date 07/31/03 (confirmed) Average Daily Volume = 752 K ************* NEW PUT PLAYS ************* Black & Decker Corp - BDK - cls: 40.50 chg: -0.99 stop: 42.01 Company Description: Black & Decker is a leading global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology-based fastening systems. (source: company press release) Why We Like It: It appears we have a reversal of fortunes here for BDK. The stock, which had been building a series of higher highs from mid- May, has now broken down after their earnings report came out last week. Profits were higher on the quarter but only due to cost cutting as sales declined 5%. Management tried to reduce the bad news with a dividend announcement of 12 cents per share payable in late September but it doesn't appear to be helping. The stock is seeing declines on strong volume. Today's volume was twice the norm as shares dropped another 2.3%. Not only was today's move a breakdown under support of $41.00 but the stock closed below its simple 200-dma. There was an intraday bounce but it rolled over under $41.00 to close near its lows for the session. We suspect there will be some follow through on the breakdown. We're going to use a TRIGGER at $39.99 to open the play for us. If BDK trades at $39.99 or below then we'll be "officially" open. More aggressive traders can evaluate bearish positions now under $41.00. Looking at the weekly chart we see significant support near $35.00. Hence, we'll make that our target. However, the daily chart does show some previous resistance at $38.00 so we can expect that to act as support on the way down. We'll initiate the play with a stop loss at $42.01. Suggested Options: We're going to list the August & September strikes but BDK also has November and Februarys available. Open interest is a little low on the Septembers. Either wait for some interest or only consider lots of 10 or less. BUY PUT AUG 40 BDK-TH OI=342 at $0.80 SL= -- BUY PUT AUG 35 BDK-TG OI=427 at $0.25 SL= -- BUY PUT SEP 40 BDK-UH OI= 20 at $1.45 SL=0.70 BUY PUT SEP 35 BDK-UG OI= 0 at $0.35 SL= -- Annotated Charts: Picked on July 29 at $40.50 Change since picked: -0.00 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 731 thousand --- Merck & Company - MRK - close: 55.39 change: -1.27 stop: 58.25 Company Description: MRK is a global, research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of human and animal health products, directly and through its joint ventures. Additionally, the company provides pharmaceutical benefit services through Merck-Medco Managed Care, LLC. The company's operations are managed principally on a products and services basis and are comprised of two business segments. Merck Pharmaceutical is involved in marketing products, while Merck Pharmaceuticals is focused on therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. The pharmaceutical benefit services provided by Merck-Medco include sales of prescription drugs through managed prescription drug programs as well as services through programs to manage patient health and drug utilization. Why we like it: After topping out in the middle of June, the Pharmaceutical index (DRG.X) has been working lower in a very methodical and steady manner. After breaching the 50-dma a couple weeks ago, the downtrend only intensified and there are it looks like a test of the 200-dma ($308) and the year-long ascending trendline ($303) is in store sooner, rather than later. In the department of relative weakness though, MRK is really making a splash, leading the DRG index lower. Things started to get a bit ugly for the stock on Monday, when the bears managed to press the stock under its year-long trendline, but the bulls managed to save face a bit by pushing MRK up to close fractionally above the 200-dma ($56.60). That victory was short-lived on Tuesday though, with MRK falling more than 2%, solidifying the breakdown under the trendline with a close under the 200-dma. While there haven't been any significant news catalysts this week, the stock is still likely feeling the pain from a disappointing earnings report on July 21st. Obviously there were more than a few traders watching the stock today and they piled on to produce a daily volume tally that nearly doubled the 7.16 million share ADV. While we're looking for significantly more downside in the near- term, there are a couple of obstacles that the bears will need to overcome in the process. First up is the $55 level that managed to prop the stock up on Tuesday, and a quick look at the PnF chart explains why -- it is the site of the bullish support line. Aggressive traders might be tempted to enter the play on a decline under that level, but the more conservative approach might be to wait for a break under the $54 support area, which would also deliver a break of the bullish support line and generate a new PnF Sell signal. That breakdown should clear the way for MRK to work its way down towards our target of $50, which should be firm support. There appears to be solid resistance in the $56.50-57.00 area now, and a failed rebound in that area would make for the lowest-risk entry into the play, with a stop set at $58.25, just above the intraday resistance established last week. Suggested Options: Short-term traders will want to focus on the August 55 Put, as it will provide the best return for a short-term play. Aggressive traders looking for a sustained move down towards our $50 target will want to utilize the September 50 contract, while more conservative long-term traders will want to focus on the September $55 strike. BUY PUT AUG-55 MRK-TK OI= 4384 at $1.10 SL=0.50 BUY PUT SEP-55 MRK-UK OI= 1330 at $2.10 SL=1.00 BUY PUT SEP-50 MRK-UJ OI= 1648 at $0.60 SL=0.25 Annotated Chart of MRK: Picked on July 29th at $55.39 Change since picked: +0.00 Earnings Date 10/20/03 (unconfirmed) Average Daily Volume = 7.16 mln ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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The Option Investor Newsletter Tuesday 07-29-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: BDK ********************* PLAY OF THE DAY - PUT ********************* Black & Decker Corp - BDK - cls: 40.50 chg: -0.99 stop: 42.01 Company Description: Black & Decker is a leading global manufacturer and marketer of power tools and accessories, hardware and home improvement products, and technology-based fastening systems. (source: company press release) Why We Like It: It appears we have a reversal of fortunes here for BDK. The stock, which had been building a series of higher highs from mid- May, has now broken down after their earnings report came out last week. Profits were higher on the quarter but only due to cost cutting as sales declined 5%. Management tried to reduce the bad news with a dividend announcement of 12 cents per share payable in late September but it doesn't appear to be helping. The stock is seeing declines on strong volume. Today's volume was twice the norm as shares dropped another 2.3%. Not only was today's move a breakdown under support of $41.00 but the stock closed below its simple 200-dma. There was an intraday bounce but it rolled over under $41.00 to close near its lows for the session. We suspect there will be some follow through on the breakdown. We're going to use a TRIGGER at $39.99 to open the play for us. If BDK trades at $39.99 or below then we'll be "officially" open. More aggressive traders can evaluate bearish positions now under $41.00. Looking at the weekly chart we see significant support near $35.00. Hence, we'll make that our target. However, the daily chart does show some previous resistance at $38.00 so we can expect that to act as support on the way down. We'll initiate the play with a stop loss at $42.01. Suggested Options: We're going to list the August & September strikes but BDK also has November and Februarys available. Open interest is a little low on the Septembers. Either wait for some interest or only consider lots of 10 or less. BUY PUT AUG 40 BDK-TH OI=342 at $0.80 SL= -- BUY PUT AUG 35 BDK-TG OI=427 at $0.25 SL= -- BUY PUT SEP 40 BDK-UH OI= 20 at $1.45 SL=0.70 BUY PUT SEP 35 BDK-UG OI= 0 at $0.35 SL= -- Annotated Charts: Picked on July 29 at $40.50 Change since picked: -0.00 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 731 thousand ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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