The Option Investor Newsletter Thursday 07-31-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Futures Markets: Round tripped Index Trader Wrap: See Note Market Sentiment: Reversal day on good news Weekly Manager Microscope: Barbara Walchli, CFA: Aquila Rocky Mountain Equity Fund (ROCYX) Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-31-2003 High Low Volume Advance/Decline DJIA 9233.80 + 33.80 9361.40 9199.28 1.92 bln 1531/1708 NASDAQ 1735.02 + 14.10 1757.37 1728.34 1.79 bln 1869/1362 S&P 100 499.27 + 1.98 506.65 497.29 Totals 3400/3070 S&P 500 990.31 + 2.82 1004.59 987.49 W5000 9555.05 + 28.50 9673.12 9526.57 RUS 2000 476.02 + 3.22 478.80 472.80 DJ TRANS 2623.92 + 17.70 2653.23 2606.31 VIX 21.24 + 0.52 21.44 20.40 VXN 31.22 + 0.36 31.67 30.23 Total Volume 3,999M Total UpVol 2,628M Total DnVol 1,321M 52wk Highs 553 52wk Lows 73 TRIN 0.62 PUT/CALL 0.68 ************************************************************ Oops The bulls were partying hard with a +160 point Dow gain and a new 52-week high when somebody tripped. Tripped a breaker, tripped over bags of money or tripped on a banana peel the results were the same. The lights went out and the party was quickly over. As if somebody yelled fire in a crowded theater the rush for the exits was fast and furious. When the smoke cleared the +160 point gain had turned into only +33 and the tone of the market was significantly different. Dow Chart Nasdaq Chart S&P Chart How we went from 100% bullish at the open to the crash at the close has probably got more than a few bulls scratching their heads tonight. The morning began with another drop in Jobless Claims to 388,000 and the second consecutive week under 400K. A trend, a trend, (visions of Tatu pointing to the plane on Fantasy Island) the bulls were shouting. Granted the first number started with a 3 instead of a 4 but not by much. Still the futures were spiking. The fact that the numbers were still adjusted for the cyclical auto layoffs was lost on everyone. Continuing claims increased to 3.65 million indicating that jobs are still hard to find regardless of the adjustments. The slam-dunk came in the form of the GDP at +2.4% for the 2Q. This was a full +1.0% over the estimates and the crowd went wild. Personal consumption rose +3.3% and non residential investment rose +6.9%. Yee-Haw! Bulls began to party and shorts began running for cover. The buying was sharp and quick and futures were quickly +8 and climbing. Bulls pointed to this report as signs of a real recovery in progress. Let's not forget that this was for the 2Q which began with a war. Remember the expected post war bounce in the economy? For about six weeks we saw a light spurt in buying in anticipation of a quick recovery. That recovery never came and we ended the quarter with an unbroken string of Jobless Claims over 400K for the entire quarter. Corporate earnings have already told us there was a bounce in April that slowly died into June. This is the evidence of that bounce. Much of the jump was due to a +7.5% increase in government spending. One of the best components was a decrease in inventories by $17.9 billion which should indicate a bounce in manufacturing soon. This assumes of course the goods were made in America and not imported. The Employment Cost Index came in slightly less than expected at +0.9% and provided yet another warm fuzzy feeling for traders. Costs are not rising and there is no inflation in wages. With nearly 9 million workers currently unemployed it would be tough to command a premium wage and signing bonuses are a thing of the past. Wage growth actually slowed in the 2Q which is detrimental to future consumer spending. The Help Wanted Index rose to 38 in June from 35 in May and was possibly the most bullish sign of an economic upturn. Ads for workers rose in all regions except East South Central. This was the first real improvement in months. 73% of the 51 newspapers surveyed showed ad traffic rising. While this is a positive turn the headline number of 38 is still an indication of a declining job market. The most bullish report of the day was the PMI report which came in at 55.9 compared to estimates of 53 and actual of 52.5 in June. While the GDP is seen as a lagging indicator the PMI is seen as a current trend and an acceleration of three consecutive positive months. May was the first positive month at 52.2 and June barely squeaked higher at 52.5. The huge jump in economic terms to nearly 56 was very positive. The market immediately rocketed to higher levels. New orders jumped to 61.7 from 54.8, backlog rose to 49.4 from 45.8 and employment rose to 46.0 from 43.8. Inventories showed a significant drop to 39.4 from 48.8 indicating a replenishment cycle in our future. The news orders at 61.7 was the highest reading since November 2002. This is the report for the Chicago region and traders hope the National ISM report on Friday follows suit. That hope suffered a setback with the NY-NAPM, which came in at 224.9 and the sixth consecutive monthly decline. The manufacturing conditions component dropped to 64.8 from 92.8 in June. This whopping decrease took the excitement out of the previous reports and cast a shadow over the ISM for Friday. Traders were left wondering if the ISM would follow the Chicago PMI or the NY-NAPM. Since the ISM is actually the old NAPM on a national basis it was a credible concern. Part of the strong selling at the close had to be due to the strong economic calendar for Friday. The previously mentioned ISM plus Nonfarm Payrolls, Construction Spending, Personal Income and Spending, Consumer Sentiment, Semiconductor Billings and July Auto sales. It will be a busy day. The ISM has been in negative territory since February and it is expected to jump +2 full points from 49.8 to 51.9. Plenty of opportunity for disappointment here. The Nonfarm Payrolls are expected to show a jump of +13,000 jobs with a whisper number of +25,000 jobs. Again, plenty of room for disappointment. Consumer Sentiment is expected to rise to 90.8. Worries are that it could follow the confidence earlier this week with a drop instead. The market drop today on a full deck of strongly bullish economic reports could be due to many reasons. Worry over the reports on Friday may have helped but were not likely the total reason. The best guess is interest rates. The 10-year yield reached 4.56% today after being only 3.07% just six weeks ago. This is a disaster in the bond market the likes of which have not been seen since 1994. Back then the bounce was not as bad but it had dire repercussions. Several major investment houses folded and Orange County California went bankrupt due to over leverage in the bond market. The rumor making the rounds today is that there are one or more big investment companies, maybe even FNM or FRE, in serious trouble. Major insurers announced this week they were canceling bankruptcy insurance for Merrill, Schwab and dozens of other institutions. The insurance policies, which protect investors over the $500K federal protection limit, have become too risky according to Travelers, AIG and Radian Group. Sign of the future? The rising rates, regardless of economic news, stock market movement or Fed commentary has everybody baffled. Bonds just keep going down and seldom pause for more than a few minutes during the day. Confounding the constant selling is a lack of money flowing into the stock market. Normally when bonds sell off a large portion of the money moves into stocks. It is not happening. Even given the large economic bounce at the open today the volume was still only average and the market breadth was terrible. On the NYSE decliners beat advancers by nearly +200 issues. New 52-week lows rose to levels not seen in months. Not only are the interest rates a problem for the market the 30-year fixed mortgage hit 6.14% today. Refinance applications have dropped -50% in the last four weeks. This is a major blow to the consumer supported economy. Like financial junkies we have been living off our equity for years and that equity just dried up faster than a busted drug dealer. The shock to the system will be strong and the tax cut/credit may not be able to take up the slack. This shock to the economy has traders talking of asset allocation programs again ONLY from stocks to bonds. Boy, talk about full circle. There were several rumors on the floor today about major institutions, fearing for the future and dumping stocks. It was not hard to find believers if you look at the major hits to the averages on a blowout bullish day. The Dow dropped -50 points on a sell program just after the open with bullish news floating all boats. It fell -60 points on another sell program right after the PMI was announced with a huge bullish jump. Clearly the programs were keyed in and waiting for the bullish news to break so they could sell into the heavy volume. The Dow dropped -70 points at 2:25 on a very strong sell program from the highs of the day. The last one came at 3:20 and knocked a full -100 points off the Dow in a very short period of time. Think about this a minute. On the most economically bullish day I can remember this year four monster sell programs knocked -280 points off the Dow for no apparent reason. There were plenty of buy programs as well but those were to be expected. Why are the big guys selling? What do they know that we don't? Did they find out Saddam has a dozen clones? Another factor, which should be considered, is the August record. In the last 15 years August has been the worst performing month for the Dow and S&P, period. With the big gains in stocks and the sell off in bonds I could see where institutions may want to asset allocate. They did it constantly on the way down when bonds were growing to the sky and with them in the cellar and August in front of us it would only be prudent to revise the ratios again. Personally I think the major reversal in the market today on the most bullish news in months is very negative. It could completely reverse again tomorrow and set another new high on good ISM and Jobs data but tonight I am skeptical. I was ready to join the bulls and party till January when the Dow hit a new high today but the breadth kept bothering me. The sell programs at the open bothered me. The rumors of a major fund collapse worry me the most. I remember losing money on the Russia default, the Brazil default, the Thailand default, Long Term Capital and a dozen smaller financial events over the last ten years. They all tend to appear just as the market is about to hit new highs. It must be a karma thing or the worlds biggest repeating coincidence. Either way Friday should be exciting and I am sure we can expect some serious volatility at the open. After that it is a coin toss on a summer Friday. Volume is likely to die by noon as traders head for the beach or the mountains to escape the heat. Look at the bright side. We have the three most volatile months of the year beginning tomorrow. If you can't make money trading over the next three months you should find another hobby. I get excited just thinking about it and I hope you do too. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Round tripped Jonathan Levinson Yesterday's inside day in equities played out as expected, with wild upside and downside swings, but above yesterday's lows. An upside breakout printed, but not the breakaway that many would have expected, followed by two sharp drops that flattened the S&P and Nasdaq to the levels of their cash open at 9:30AM. Treasuries, however, printed new year lows in a strong selloff following upside surprises in the abundant economic data released this morning. Daily Pivots (generated with a pivot algorithm and unverified): Figures rounded to the nearest point: R2 R1 Pivot S1 S2 ES03U 1011 1000 993 981 974 YM03U 9415 9313 9240 9138 9065 NQ03U 1318 1299 1282 1263 1246 10 minute chart of the US Dollar Index The US Dollar Index paused after gaining through the night, and then rallied on the 8:30 GDP and initial claims data, both of which surprised to the upside and constitute very good news. 97 resistance was the target, and as of this writing had not been penetrated. The action took over 1% of the September euro futures, and had August gold testing its 354 support, which held. Daily chart of August gold Gold had a tumultuous session but managed to hold support at 354, closing at 356.30, up .10, but printing a lower low and lower high, and edging the oscillators closer to sell signals. The HUI added 1.94 to 164.04 and the XAU was up .48 to 81.12. Daily chart of the ten year note yield Bonds got sold to new lows today. I have no desire to add my voice to the chorus of confusion surrounding the rally in treasury yields we've been following for over 1 month now. Both bulls and bears try to co-opt such moves, and I have no such agenda. It is important to note, however, that liquidity-wise if the stock market is a lake, the bond market is an ocean, and the move in treasuries has been huge. What does it mean? If treasuries represent the safest debt, and the yield on that debt is rallying, then the price of borrowing for even the safest borrower is rising. Whether one takes this to be bearish or bullish for equities now is a matter of opinion, but if the yields on treasuries are rising, then other, riskier borrowers must offer a greater yield to compensate for the additional risk. If corporate finance costs are rising to keep pace with treasury yields, then this cost must take a bite out of companies' profitability, just as the drop in treasuries slammed the brakes on home mortgage and refi activity in the latest week. It is my belief that equity bulls ignore this at their peril, but that is my opinion only. The counterargument would be that the price and value of risk is increasing, except that equities are so far not making new highs, and precious metals are rallying. I do not subscribe to the theory that assets are being reallocated from bonds to stocks here, as the charts simply don’t support it so far (see charts in last night's market wrap). What should be further considered is that, given the extent of leverage being used, as noted by Greenspan and Buffet over the past months, the huge move in treasuries poses great risk to all markets. It will difficult to see such an event coming before it arrives, but traders need to be aware of the possibility. Traders looking to play a reversal cautiously can wait for a break of the rising trendline under the yield, such as drawn above. As equity bears learned, it's dangerous to pick a top on a security in a rising trend. Daily NQ candles The gavestone doji on the NQ left a lot of bulls shaking their heads. The upward spike following the 10AM data gave us buy signals on the sensitive stochastic, while the MacD merely twitched. If the NQ doesn't bounce from here, the ascending trendline will be in trouble. 30 minute 20 day chart of the NQ The rejection of new highs followed a fakeout above the pennant discussed last night, and sets us up for a potential bear flag failure. The oscillators hit unequivocal sell signals following the afternoon's sharp drop, and 1253 appears as key support on the move, just below the rising trendline on the daily chart above. Daily ES candles ES also got clocked on a gravestone doji print, with the same tentative buy signal printed on the stochastic. Today was a lower high following a buying frenzy on excellent economic data. 20 day 30 minute chart of the ES As noted in the futures monitor, the decline and subsequent bounce sets us up for a potential head and shoulders projecting to 972 support, coincidentally the low on this bear flag. The trendline support favors a bounce at 986, but the oscillators are early in their downphases. 150-tick chart of the ES Daily YM candles Like the ES, the YM also finished just above key support on stochastic and Macd downphases. 20 day 30 minute chart of the YM There's a great deal of economic data due for tomorrow morning, and as the market loves to do, we are left in a position that is ripe for either a strong bounce or a sharp decline. The inability of bulls to hold the expected gains on the blowout reports this morning was certainly disheartening, and the character of the selling, sharp and on very high volume, indicated big players getting out in a hurry. Whether it was isolated or indicative of an institutional desire to "feed the hungry fish", we'll have to see tomorrow. However, with today's session being the last for end-of-month window dressing, bulls will have to hope for positive data tomorrow morning. See you at the bell! ******************** INDEX TRADER SUMMARY ******************** Economy recovering, but rise in yields draws concern The major indexes posted gains, with the bulk of today's action taking place in the first 90-minutes of trade and then the final hour as economic data, hard data, not surveys, showed the U.S. economy growing at a faster pace than some had forecasted. And while a 2.4% annual rate of growth wouldn't be interpreted as strong, the improvement from a 1.4% annual rate of growth from the first quarter gave some vindication to the rise in equities since March. Ahhhh, but for every silver lining that reveals itself on the economy, there will always be the cloud that surrounds the good news as the continued selling in Treasuries, which would come from a strengthening economy is looked upon as being negative. We've discussed two potentially negative impacts that would be created by the sharp rise in Treasury YIELDS, specifically the 10-year YIELD ($TNX.X) which jumped another 15.9 basis points to 4.474% and longest-dated 30-year YIELD ($TYX.X) surging 17.3 basis points to 5.410%. Rising mortgage rates are one negative implication that could create near-term negativity for an economy that looks to be improving. Despite some positive economic data today, the Dow Jones Home Construction Index (DJUSHB) 416.14 -2.34% showed little sign of bullishness during the peak of today's broader market rally, but participated in some late afternoon selling, which saw the S&P 500 Index (SPX.X) 990.31 +0.28% give back 14- points from its session high to show a more fractional 2.8-point gain by session's end. Banks may also be another group that best represents the silver lining of improved lending spreads being offset by the cloud of rising consumer loan rates, whether it be mortgages or automotive loans also on the rise, which can then find a narrower base of consumers to lend money too at higher rates of interest. If I were to put the rise of Treasury yields into perspective, its that the bond market sees good things ahead for the economy longer-term, say six to nine months out, but the sharp rise in rates now begins to draw concern that a still weak labor market, has many consumers unconfident that their job prospects will improve, and less likely to borrow money for big ticket items in the near-term at the higher rate of borrowing costs. Yet some of the signs of economic growth we see from the second- quarter GDP data, may indeed be starting to be reflected in the labor markets. For a second-straight week, weekly jobless claims came in below the 400,000 level. While not yet a longer-term trend, as the 4-week average is still above the 400,000 level where many economists benchmark an improving labor market, the rate of layoffs looks to be abating for a second week. While the weekly jobless claims addresses layoffs and not building demand for workers, today's release of the June Help Wanted Index showed some improvement from the demand side of the equation, with a pick up in job postings by employers. One stock that is "jobs related" that we've discussed here at OptionInvestor.com in recent sessions has been Monster Worldwide (NASDAQ:MNST) $26.55 +13.3%. While the stock has been quite volatile in recent weeks, today's close above last Thursday's close of $25.36 may give some indication that market participants are beginning to bet on a labor market recovery. I keep hearing that the labor market is a lagging indicator and is usually the last economic indicator to show improvement and I'd have to say that that has been a very accurate observation as many economists continue to label the recovery as a jobless recovery. Does anyone remember a couple of years ago all of the attention given to the very tight labor markets, when it was good news to see the unemployment rates rise, which at the time would cool fears of wage inflation? Kids coming out of college with a 4-year degree and no prior business experience could easily pull down a $50k per year salary. If you were an engineer, you could slap another $25K on top of that. And I think that's where we're at right now. Is the economy surging, with a 2.4% annual growth rate? No, but its better than 1.4% forecasted and will probably send some economists back to the drawing board and calculator to figure out what happened. I'm guessing there was some kind of seasonality that took place in the second quarter of 2003, that usually doesn't show up on a historical basis to account for the "error." I think you and I are rite on with the thought that it was the war in Iraq that gave the boost. Still... a dollar banked, is a dollar banked and if it has created stability in the job market, then that counts too. And while I say there appears to be concern regarding the sharp rise in Treasury YIELDS, I do think it was present again today. Again, the Dow Jones Home Construction Index (DJUSHB) 416.14 -2.34% fell on the session, while both the S&P Banks Index (BIX.X) 306.29 -0.47% and money center banks depicted by the KBW Bank Index (BKX.X) 888.41 -0.55% appeared to lag the move higher today, if not the S&P Banks Index (BIX.X) finding resistance at the 310 level in today's session. When the S&P Banks Index (BIX.X) and KBW Bank Index (BKX.X) both turned lower in the session, I did some investigating. Deutsche Bank (NYSE:DB) $64.61 -3.56% was a leading percentage loser among the money center banks. Deutsche Bank, as you might guess, is based out of Germany. The only news I could find that would have this bank declining more than other was that fellow German-based banker HVB Group, said it lost 67 million euro ($76 million) in the recent quarter due to bad loans. As I think I've mentioned before, the U.S. economy, while not robust, has been much stronger than many of the European economies. The thought I take away from the news out of Germany is that focus now turns back to the consumer. To get continued build for economic growth, the consumer is still important. I'd argue that if the economy were growing at a 5% clip, then a 6% mortgage would be overlooked and be moved to the back page of newspapers, but with a still anemic jobs market and recent decline in consumer confidence (July consumer confidence fell to 76.6 from June's 83.5) this sharp rise in Treasury YIELDS will not get front page headlines. Here's our updated pivot matrix with new MONTHLY levels now established after today's trade. The new MONTHLY levels are not that far off from July's and gives me further impression that we may well be set in a trading range through the remainder of the summer, with the consumer and employment data getting the bulk of the attention. Pivot Analysis Matrix The scenario of higher Treasury YIELDS now looking to "hurt" banks may be starting to show up when we simply look at the WEEKLY pivot analysis and what has been taking place between the BIX.X and $TNX.X, this opposite poles type of trade where the BIX.X has traded WEEKLY S1 while the $TNX.X has traded WEEKLY R2 gives the observation that higher YIELDS are having greater negative impact as it relates to banks benefiting from a lending spread, which is being negated by few loans being generated. At least, this is what the MARKET seems to be trading. We have perhaps noted a slight drag in the SPX and OEX, which is best explained by the higher weighting of financials that these two indexes have in relation to the Dow Industrials and NASDAQ-100, which has zero, zip, zilch banking exposure. While not in the pivot matrix, observations made a couple of weeks ago regarding the home builders and the very early observation of weakening adds to the thought that a higher YIELD is becoming a concern, and would continue to be a concern until more improvement is seen on the labor front. I do not disagree that a 6% 30-year mortgage rate isn't still very attractive, but if your pool of borrowers is limited by incomes or their confidence to borrow at some higher rates, then the net effect will be negative. Let's quickly take a look at the 10-year YIELD ($TNX.X) chart and make some assumptions as it relates to potential impact on the economy. 10-year YIELD ($TNX.X) Chart - Daily Intervals We've looked at the major equity indexes long enough with MONTHLY pivot analysis retrenchments overlaid, and we haven't seen this type of wide range on any of them. Jaws are dropping among bond traders and Wall Street followers at the rate of increase in YIELDS, caused by selling in just the past month. Fed Chairman Alan Greenspan expressed concern more than a month ago that the Fed didn't see rising YIELDS being harmful if YIELD rose at a gradual pace. He was concerned about the housing sector and potential negative implications if rates rose sharply. At this point, it would be my analysis that for yield rate fears to subside, then we might pick the MONTHLY pivot as a starting point. If YIELDS progress higher still, then impact could be negative near-term and have the economy beginning to weaken, which stocks might then move in advance of. On that type of scenario, then the rush back into bonds, could come as quickly as the money has come out, and if YIELD were to fall back below 3.904%, it becomes sign of trouble and defensive move from the bond market. When you read the above, think of a cycle, where you almost think... "here we go again." I will say right now, that I think it a very SMALL likelihood that the 10-year YIELD goes back below the 3.898% level in the next 10-years. I'm not much for repeating rumors, but I've seen some postings in today's Market Monitor and have heard similar rumors outside of the OptionInvestor.com network that there may be a large bank that is very sideways in bond position. I will say, the fractional weakness, but "lagging" that I was in the banks today, and we've been noticing a bit in recent sessions is what had me looking at some of the larger banking stocks, where my attention was drawn to Deutsche Bank (DB) and its weakness relative to other large banks. I'm not saying that the rumor has any credibility, but point and figure chartists will have made some notes that a trade at $63 in DB would be a triple-bottom sell signal and there looks to be some air to a past triple-top buy signal at $57 and its longer-term bullish support trend of $50. S&P 500 Index Chart - Daily Interval "Bear-ly" alive is my thinking when the SPX broke free from its WEEKLY pivot this morning, in what seemed like a delayed reaction after the 10:00 economic data. As noted in today's intra-day commentary, the SPX didn't break free and make the move higher until 10:35. All be darned if our "old" trend didn't come into play and hold as resistance, keeping the SPX from testing or breaking above the upper end of our zone. Is it coincidence where this index settled at the close? Right smack dab in-between the MONTHLY and WEEKLY pivot? The SPX still has that neutral look to it as the wedge still defines the range. Daily Stochastics are working well, which Stochastics tend to do in a range-bound type of trade. The way I look to close out the previously profiled bearish trade from SPX 983 is this. If I get the break below 975, then I'm going to guard the gain with a stop just above 977. Then.... if that break does come, and Treasury YIELDS are just holding steady, I'd look for support at/near the 968 level, and then look to trade a partial bullish position back higher to 996. Let's also keep an eye on the BIX.X as it was the only observation I could make today to keep me from telling traders to just stop out of the SPX, on thought that the SPX was eventually going to work its way above trend and WEEKLY R1. Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a net gain of 3 stocks to point and figure buy signals. This has the bullish % edging up to 77.8% after a recent low reading of 76.00%. Dow Industrials Chart - Daily Interval I think it will be difficult near-term to get a Dow break back under the WEEKLY S1 of 9,120. While we will get new weekly pivots at the conclusion of tomorrow's trade, current trade would most likely have the weekly Pivot retracement moving modestly higher. The sharp move higher and break of my gradual bearish trend at the 9,300 level gives hint that there is/was a great amount of pressure built up that got released today and has the INDU looking almost exactly like the SPX did back on July 14th, when it matched a relative high, then pulled back into its WEEKLY S1 by July 21st. Here's a link to that Index Trader Wrap of July 21st http://members.OptionInvestor.com/Itrader/marketwrap/iw_072103_1.ASP and why I think in a range bound market, how Stochastics on the Dow Industrials has me thinking a more likely level of support is WEEKLY S1, with a 9,505 max downside on any type of panic move lower near-term. It is also notable how the SPX bounced from a rising 50-day SMA, and the Dow's 50-day SMA is rising at 9,066. As I write this evening wrap, I really get the feeling that it may have to be weakness in banks, that leads to weakness in the SPX/OEX, that then lends to weakness in the Dow and NDX. Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and status remains "bull confirmed" at 83.33%. I made note yesterday that IBM (NYSE:IBM) $81.25 gave a double bottom sell signal at $81.00 yesterday, which had this bullish % slipping back 3.33% from 86.66%. NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily interval Last night I place a trend at Tuesday's high to try and depict a bearish wedge, and it would have held by the close. Instead of having that trend on the chart, I'm placing a more "reasonable" trend at today's high, where the QQQ did find some sellers just below WEEKLY R1, and with an "old" downward trend in place, that looks to have found support back near $30.68, we might get the impression of a bearish channel starting to form. I'll believe it when I see it and perhaps get a "bear confirmed" reading in the NASDAQ-100 Bullish % ($BPNDX) which holds unchanged again today at 75% bullish, or at least find the QQQ breaking below its still bullish channel. There's another round of economic data due out tomorrow, and once again... I'm expecting a high degree of volatility. I run way late when I have to adjust the MONTHLY pivot retracement during the week, but I'll have an OEX chart in tomorrow morning's updated. The OEX Bullish % ($BPOEX) remained unchanged at 83% bullish. Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** MARKET SENTIMENT **************** Reversal day on good news Jonathan Levinson Equities looked set to launch today, buoyed by excellent economic data before and immediately following the cash open. The indices were coiled within pennants, having printed inside days, and exploded higher as might have been expected. The TRIN and TRIN.NQ were buried at extreme low levels, and bulls were targeting the highs. What followed was a valuable lesson for traders. Price traded sideways along the top of a narrow range near the highs of the day, finding support close underneath. After a number of successful tests, the price broke south, bounced, and then dived sharply. My news ticker was still running stories about stocks rallying on positive economic data as the price plunged. The price of stocks, and stock indices, is determined by supply and demand. Outside influences, such as news stories or economic data, may impact the demand for that paper, but supply is another story. Those with the greatest quantity of that paper cannot sell to a thin market without collapsing the price, and so it's precisely during buying frenzies such as we saw today that the biggest sellers will be selling. As an older broker once told me, "When the fish are biting, feed them." Just as the markets rallied through the spring on abysmal economic and corporate data, it's possible that they will fall on positive data. Or, they may rally. Whether Joe Granville's "News is for suckers" line is true or not, I obey the charts and the indicators in attempting to suss out where the big players are seeking to go. Be it rumors, economic or earnings reports, let the charts and indicators guide your trades. This year has taught us that news is noise, and that supply and demand for the securities we trade is the final arbiter. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9353 52-week Low : 7197 Current : 9233 Moving Averages: (Simple) 10-dma: 9194 50-dma: 9066 200-dma: 8523 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 990 Moving Averages: (Simple) 10-dma: 989 50-dma: 983 200-dma: 910 Nasdaq-100 ($NDX) 52-week High: 1316 52-week Low : 795 Current : 1277 Moving Averages: (Simple) 10-dma: 1266 50-dma: 1230 200-dma: 1087 ----------------------------------------------------------------- After all the fuss earlier this week about the VIX finally hitting and closing under 20, we're still not seeing much movement in the markets. As we've always said, the VIX is more art than science and traders should acknowledge the signals when they occur and include them in their overall market evaluation. CBOE Market Volatility Index (VIX) = 21.24 +0.52 Nasdaq-100 Volatility Index (VXN) = 31.22 +0.36 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.68 646,507 437,626 Equity Only 0.55 476,800 263,649 OEX 0.98 38,368 37,903 QQQ 1.50 28,645 42,940 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 69.9 + 0 Bull Confirmed NASDAQ-100 75.0 + 0 Bull Confirmed Dow Indust. 83.3 - 3 Bull Confirmed S&P 500 77.8 + 0 Bull Correction S&P 100 83.0 - 1 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 0.95 10-Day Arms Index 0.94 21-Day Arms Index 0.97 55-Day Arms Index 1.11 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 1414 1828 Decliners 1443 1256 New Highs 114 165 New Lows 41 6 Up Volume 1087M 1321M Down Vol. 765M 477M Total Vol. 1908M 1816M 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 ************************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 ************************* Barbara Walchli, CFA: Aquila Rocky Mountain Equity Fund (ROCYX) This week's investment manager profile looks at Barbara Walchli, CFA, portfolio manager of the Aquila Rocky Mountain Equity Fund, a successful and unique domestic equity fund that seeks capital growth by investing primarily in the common stocks of companies with a significant business presence in the U.S. Rocky Mountain Region. Aquila defines the Rocky Mountain Region as consisting of the following states: Arizona, Colorado, Idaho, Montana, New Mexico, Nevada, Utah and Wyoming. Portfolio holdings generally consist of common stocks, but may include other equity security types. Prior to joining Aquila Management Corporation in 1999, Walchli was a portfolio manager with Banc One Advisors, and before that, she was a senior vice president and director of equity research with First Interstate Capital Management. Her biography states that she also served as vice president and director of research at Valley Capital Management now part of Banc One. Ms. Walchli is a CFA ("Chartered Financial Analyst"), a key designation for investment analysts and managers. Ms. Walchli, an experienced investment professional with almost two decades of analytical investment experience, co-managed the Banc One Investment Advisors Large Company Growth Fund and Banc One Advisors Income Equity Fund prior to coming to Aquila Funds. The two Banc One funds Walchli co-managed had near $1.7 billion in combined assets during her tenure there, per company sources. The Aquila Rocky Mountain Equity Fund website indicates that Ms. Walchli's home base in Arizona enables her to maintain "careful" watch over the fund's portfolio investments. She travels across the region to kick the tires and to check on current/prospective investments. An Arizona resident for over 23 years, Ms. Walchli is a current member of the Association for Investment Management and Research, the Institute of Chartered Financial Analysts and the Arizona Community Foundation Investment Committee. She's a prior president and director of the Phoenix Society of Financial Analysts. The minimum investment to open an account is $1,000 ($50 through automated investment program). Class A shares (ROCAX) date back to July 1994. Class C and Y shares were introduced in 1996, and vary in their cost structure and availability. Our focus herein will be on the class A shares, which have a 4.25% front-end load charge. Ms. Walchli has been the fund's portfolio manager since August 1999. For more information or to D/L a prospectus, go to the Aquila Funds website at www.aquilafunds.com. Investment Style According to the Aquila Funds website, the Rocky Mountain Equity Fund is designed for long-term capital appreciation. In pursuit of the fund's investment objective, Walchli invests primarily in growth oriented companies, which tend to reinvest their earnings in the development of their businesses. Thus, dividend income isn't a primary consideration in the security selection process. At mid-year, Walchli's fund had an average market capitalization of $1.9 billion (mid-cap). However, based on the fund's average style for the past three years, the Aquila Rocky Mountain Equity Fund is categorized by Morningstar as a "small-cap" growth fund. Below is a breakdown of the fund's "cap" ranges at mid-year, per Morningstar. Market Cap Weightings: 2.8% Giant-Cap 20.1% Large-Cap 36.8% Mid-Cap 16.9% Small-Cap 23.4% Micro-Cap So, as you can see, Walchli's investment universe isn't limited to mid-caps or small-caps, and is more representative of an all- cap stock portfolio with a bias to the "extended market" beyond the S&P 500 index. According to Morningstar, the fund's price valuations and earnings growth rates put it in the blend (core) style box in 2000, but since 2001, the fund portfolio has found itself in the mid-cap growth style box. Lipper puts the Aquila equity fund in the mid-cap core category. At mid-year, the fund had an average price/prospective earnings ratio of 19.8x and an average price/book ratio of 2.1x, in line with the average mid-growth fund, per Morningstar. The average long-term earnings rate of 25% for the fund's portfolio is also consistent with the mid-cap growth category average. At end of quarter, Aquila Rocky Mountain Equity Fund was invested in over 50 common stocks with no one holding representing more than 5.0% of the value of total assets. At 2%, the fund's portfolio turnover is very low, adding to its appeal as a taxable or tax-deferred investment option. The low turnover ratio means that the fund may make less annual capital gains distributions. In the next section, we see how well the Aquila Rocky Mountain Equity Fund has performed since Walchli's arrival in August 1999. Investment Performance So far in 2003, Walchli has produced a YTD total return of 20.3%, ranking in the 68th percentile of Morningstar's small-cap growth category. That's a 7.1% return advantage to the S&P 500 large- cap index, but two full percentage points shy of the "extended" market (next 4,500 stocks) using Vanguard Extended Market Index Fund as the benchmark. For the trailing 3-year period through July 30, manager Walchli produced a positive annualized total return 2.3% compared to an annualized loss of 10.1% for the S&P 500 index, per Morningstar. In 2000, she held the fund's annual loss to 0.5 percent, and in 2001, she posted a positive 7.7% annual return for shareholders to rank in the top 16% of the Morningstar small-growth category. While Walchli lost 15.4% for investors in 2002, she constrained the fund's annual losses relative to similar funds. As a result, the Aquila Rocky Mountain Equity Fund ranked in the first decile (7th percentile) of small-cap growth category. Put the last 3-4 years together since Walchli's arrival and you have the makings of an equity portfolio on the right track. In the last three years, returns have been "above average" relative to category peers, with "low" relative risk, using Morningstar's return and risk ratings. Overall, Morningstar awards the Aquila Rocky Mountain Equity Fund four stars, signifying "above-average" risk-adjusted returns relative to its category peer group. Conclusion The Aquila Rocky Mountain Equity Fund's year-to-date return thru July 30 of 20.3% is slightly behind the average small-cap growth fund this year, but still represents a sizeable return advantage over the S&P 500 large-cap index. So, if you are looking for an equity portfolio that employs a growth-at-reasonable-price (GARP) investment approach to Rocky Mountain Region stocks, and has the potential to outperform the market (S&P 500) over time, then you may want to take a closer look at the Aquila Rocky Mountain fund managed by Barbara Walchli. Steve Wagner Editor, Mutual Investor ************************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 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. 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The Option Investor Newsletter Thursday 07-31-2003 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: AZO, FDX, GDW, GENZ, LOW New Calls Plays: PCAR, KSS Put Play Updates: BDK, FITB, FRE, HD, LEN, MRK, PGR New Put Plays: None **************** 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 ------------------------------------------------------------ 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: 83.26 change: -0.32 stop: 80.50*new* Try as it might, AZO just can't seem to push through resistance near the $85 level, but it isn't for a lack of trying. So far this week we've seen two days with a convincing push over $84, but without an ability to sustain that level and daily Stochastics starting to roll bearish, it looks like we may be in store for some profit taking. Our initial profit target on the play was $85 and conservative traders have certainly gotten an opportunity to harvest some gains near that level. We don't want to consider new entries up here, as we need to see the depth of the profit taking that materializes. While there is possible near-term support at $83, a more realistic support level looks to be a pullback near $81.50. While we're inching our stop up to $80.50 tonight (just above break even and the 10-dma at $80.61), individual traders may want to use a tighter stop at $82.75, using a drop below that level to exit the play and look for re- entry at a lower level. Picked on July 27th at $80.17 Change since picked: +3.09 Earnings Date 08/26/03 (unconfirmed) Average Daily Volume = 1.30 mln --- Fedex Corp - FDX - close: 64.39 change: +0.56 stop: 62.99 Strong earnings from rival Airborne (ABF) did little to lift shares of FDX or UPS. Actually, shares of UPS continued to slump and have broken through their simple 50-dma. Any follow through by the bears in UPS could weigh on FDX as well. Fortunately, the Dow Jones Transportation average continues to consolidate above support at the 2600 level. There has been some recent headlines about a 2 1/2 year old dispute concerning the ownership of a rival delivery service called Astar Air. There was legal setback for FDX and UPS who claim Astar is owned by a German company. Currently Federal laws prohibit or limit ownership for domestic ground cargo companies by foreign entities (Dow Jones News). The MACD on shares of FDX have rolled over into a bearish sell signal but the stock's recent P&F buy signal is still holding. We suggest using the simple 50-dma as a litmus test for holding any bullish positions. Picked on July 20 at $65.32 Change since picked: -0.93 Earnings Date 09/23/03 (unconfirmed) Average Daily Volume: 1.70 million Chart = --- Golden West Fincl. - GDW - close: 82.60 chg: -1.00 stop: 80.99 Hmmm.. despite all the movement in the markets looking at the daily chart one can see that the broader markets have essentially gone sideways. The BIX and BKX banking indices have been following although today's decline looks somewhat bearish for investors. Likewise the decline in shares of GDW, while not too concerning, is not good news for bulls. GDW is still out performing the BIX and BKX throughout July and is building on a series of higher lows. However, should it break the simple 50- dma we'd probably not suggest bullish positions. GDW's 50-dma is currently at 81.47. The last four sessions have been a slow ebb lower and the MACD has now crossed into bearish territory again. If we don't see a bounce at $82.00 we might call it quits and cash out. Picked on July 27 at $85.66 Change since picked: -3.06 Earnings Date 07/21/03 (confirmed) Average Daily Volume: 581 thousand Chart = --- Genzyme Corp - GENZ - close: 50.48 change: +0.28 stop: 47.49 This is either a new entry point for bulls or the pause before GENZ's next consolidation. Shares of GENZ have been true out performers throughout the month of July. Meanwhile the BTK biotech index has spent the last three and a half weeks languishing sideways. Should we see a broad market turn lower then GENZ could be singled out by investors for profit taking. Shares have been climbing in a nice channel higher since July 1st and the stock is near the bottom of that channel now. Conservative traders not willing to risk a move to $47.50 could try and circumvent any profit taking with a very tight stop under $50.00. The MACD is hinting that momentum in the rally is fading while the stock's remaining oscillators have all been pinned at overbought and are overdue for a pull back. As we would rather be cautious at this time, we're not suggesting new entries. Picked on July 22 at $49.76 Change since picked: +0.72 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 3.52 million Chart = --- Lowe's Companies - LOW - close: 47.56 change: +0.22 stop: 46.50 Another day and another failed rally near $48. This time, LOW only managed to rise to $48.50 before falling back with the rest of the market in the afternoon, so we have the possibility of a lower high being put in. On the other side of the coin, the stock continues to post higher lows as well, and yesterday's sharp rebound from just above $46.75 is encouraging. The 20-dma has now risen to $46.50 and should reinforce support at that level, so long as LOW is going to fulfill our expectations of a continued rally up to the $50 level. It should be clear that entries taken on apparent breakouts are too risky an approach to use. Only the rebounds from support (like yesterday) appear viable for new entries. One other interesting observation is that the 10-dma has been providing closing support over the past couple weeks, and if that trend breaks, we may have to concede the top is in and close the play. Maintain stops at $46.50. Picked on July 13th at $46.87 Change since picked: +0.69 Earnings Date 08/18/03 (unconfirmed) Average Daily Volume = 4.84 mln ************** NEW CALL PLAYS ************** PACCAR - PCAR - close: 77.24 change: +2.91 stop: 72.99 Company Description: PACCAR is a global technology leader in the design, manufacture and customer support of high-quality light-, medium- and heavy- duty trucks under the Kenworth, Peterbilt, DAF and Foden nameplates. It also provides financial services and distributes truck parts related to its principal business. In addition, the Bellevue, Washington-based company manufactures winches under the Braden, Gearmatic and Carco nameplates. (source: company press release) Why We Like It: We are a little hesitant to be adding new bullish plays in the current sideways/overbought market but it is hard to ignore PCAR's incredible relative strength. The company announced earnings on July 24th and the numbers were positive. Analyst had been expecting 98-cents a share. The company turned in $1.06 (per diluted share). Revenues were 12 percent higher than the same period last year at $2.0 billion. Net income jumped by 68 percent to $124.1 million. Management said things were improving and the industry saw heavy-duty truck orders jump almost 10 percent in North America. We're actually surprised that management didn't announce another stock split. The breakout over the $75 level of resistance is not only a new yearly high but it's a new all-time high. The burst higher was on stronger than average volume and the stock's MACD has now rolled back up into a buy signal. Stochastics, momentum and RSI are also creeping higher. PCAR's P&F chart is also impressive. The move today produced a fresh triple-top buy signal. We realize that shares look over-extended and due for a major pull back, especially on the weekly chart. However, as a short-term options trader we think there is an opportunity to catch a move to the $82.50 maybe the $85.00 level. We're going to try and reduce our risk with a stop loss at 72.99. We're not opposed to new positions at current levels but the best entry point would be on a dip towards the $75.00-75.50 area (previous resistance). Suggested Options: PCAR currently has August, September, November and January options available. We're going to list August and September strikes with a preference for September 75s and 80s. BUY CALL AUG 75 PAQ-HO OI= 489 at $3.40 SL=1.70 BUY CALL AUG 80 PAQ-HP OI= 73 at $0.90 SL= -- BUY CALL SEP 75 PAQ-IO OI= 39 at $4.70 SL=2.75 BUY CALL SEP 80 PAQ-IP OI= 46 at $2.20 SL=1.00 Annotated Chart: Picked on July 31 at $77.24 Change since picked: +0.00 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.15 million Chart = --- Kohl's Corporation - KSS - close: 59.35 change: +0.95 stop: 56.50 Company Description: Kohl's Corporation operates family-oriented, specialty department stores, primarily in the Midwest. The company's stores sell moderately priced apparel, shoes, accessories and home products targeted to middle-income customers shopping for their families and homes. Kohl's stores have fewer departments than full-line department stores, but offer customers assortments of merchandise displayed in complete selections of styles, colors and sizes. Of the 420 stores the company operates, 116 are takeover locations, which have facilitated the entry into several new markets, including Chicago, Illinois; Detroit, Michigan; Ohio; Boston, Massachusetts; Philadelphia, Pennsylvania; St. Louis, Missouri, and the New York region. Why we like it: In complete defiance of a lack of economic growth and flagging consumer confidence, the Retail index (RLX.X) has continued to hold up well in recent weeks. Certainly, it is a bit off of its highs set earlier in the month near $346, but rather than seeing any significant weakness, the index has just drifted sideways in the ascending channel that started back in early April. As of Thursday's close, the RLX is resting right on the bottom of that channel and certainly looks primed for another rebound, especially if we get some positive economic news tomorrow morning. After underperforming the RLX through late June, shares of KSS have had a remarkable turnaround, helped along by a BofA upgrade to Buy on July 10th. Response to that upgrade shot the stock through its near-term descending trendline and the 200-dma all in one fell swoop. The stock then pulled back, found support just above the 200-dma and now looks ready to break out over significant resistance just over $60. KSS has been turned back from this level on several occasions since the beginning of the year, but now that the 200-dma is in a position to provide support rather than resistance, we're looking for a breakout and some solid follow-through. Thursday's trade above $60 reinforced the current bullish picture by creating another Buy signal on the PnF chart and on a breakout over the 4/07 intraday high of $60.55, the stock looks good for a quick rally to the $63 resistance area. That should just be a brief rest area though, and we're looking for bullish continuation up to the $66 area. Note that the PnF bullish price target is currently $74, so there's definitely some room to run. But with the company set to release earnings on August 14th, we probably don't have enough time to contemplate such a lofty target. We're starting the play with a trigger at $60.60, and momentum entries above that level look favorable. More conservative traders may want to wait for a subsequent pullback to confirm new-found support in the $59-60 area before playing. Set initial stops at $56.50, which is just under both the 20-dma ($56.58) and Tuesday's intraday low of $56.52. Suggested Options: Shorter Term: The August 60 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the September 65 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders can use the September 60 Call. BUY CALL AUG-60 KSS-HL OI=7285 at $1.45 SL=0.75 BUY CALL SEP-60 KSS-IL OI= 424 at $2.90 SL=1.50 BUY CALL SEP-65 KSS-IM OI= 312 at $1.10 SL=0.50 Annotated Chart of KSS: Picked on July 31st at $59.35 Change since picked: +0.00 Earnings Date 08/14/03 (unconfirmed) Average Daily Volume = 4.56 mln ------------------------------------------------------------ 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 ******************* Black & Decker Corp - BDK - cls: 40.86 chg: +0.10 stop: 42.01 A small bounce at the psychological level of $40.00 was not unexpected and one of the reasons why we are using a TRIGGER to open the play at $39.99. Until shares of BDK trade at our trigger or lower we're just spectators. However, the stock did failed again at the $41.00 level on Thursday. $41.00 was previous support so it's natural to see it now as resistance. More aggressive traders might want to use today's action to jump in. Volume remains strong. Picked on July 29 at $xx.xx Change since picked: +0.00 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 731 thousand Chart = --- Fifth Third Bancorp - FITB - cls: 55.01 chg: -0.23 stop: 57.01 Will our patience finally be rewarded with a big downside move in FITB? The stock has been churning between overhead resistance at $56.50 and support near $55.00. We get the feeling that today's failed rally, while not much different than the last three or four, might be worth watching. Momentum traders or conservative investors seeking more conviction by sellers can still wait for a move under the relative low at $54.56. Picked on July 17th at $55.26 Change since picked: -0.25 Earnings Date 07/15/03 (confirmed) Average Daily Volume = 2.4 million Chart link: --- Freddie Mac - FRE - close: 48.85 change: -0.30 stop: 51.05*new* While it seemed inevitable that continued rising bond yields would exert further downward pressure on shares of FRE, the extend of the rise in rates has been astounding, with another staggering selloff in the bonds on Thursday. Following the breakdown under $50 earlier in the week, FRE tried to regain that level this morning and the rollover there at the open certainly reinforces our conviction in the play. Note how the 10-dma ($50.52) has been consistently capping the intraday rallies over the past couple weeks. That pattern should continue, making new entries favorable on successive failed rebounds below that moving average. FRE may find some mild support just below $48.50, as well as $47.50-48.00 area, but once below those reaction lows, the stock should be able to work steadily down towards our $45 target. Lower stops to $51.05 tonight, as that is above both the 10-dma and Monday's intraday high. Picked on July 22nd at $50.33 Change since picked: -1.48 Earnings Date N/A Average Daily Volume = 7.28 mln --- The Home Depot - HD - close: 31.20 change: -0.10 stop: 32.50*new* Can this decline possibly go any slower? HD continues to look weak, and shed another dime on Thursday, but the decline is proceeding at a maddeningly slow pace. We're still expecting the $30 support level to be reached enroute to our eventual target of $28. The 10-dma ($31.84) continues to provide intraday resistance and the $32 level is shaping up as fairly strong resistance. All the oscillators are telegraphing weakness, but there just hasn't been the rush to the exits that we expected to see once the stock broke below the 50-dma. Conservative traders should use a dip and rebound from the $30 level to harvest gains ahead of an expected rebound and then look to re-enter on a failure of that rebound. As long as the pattern holds, the best entry strategy will be to open new positions on failed rebounds below the $32 level. We're continuing to tighten the noose on the play as well, lowering our stop to $32.50 tonight. That is near our break even point on the play, and above last Thursday's intraday high. Should HD rebound through that level, we'll know conclusively that this painfully slow decline has come to an end. Picked on July 10th at $32.43 Change since picked: -1.23 Earnings Date 08/19/03 (unconfirmed) Average Daily Volume = 9.66 mln --- Lennar Corp. - LEN - close: 65.19 change: -2.26 stop: 67.30*new* It has been almost 2 weeks now that LEN has been trying our patience, hinting at an imminent breakdown, but unable to do so. Despite the sharp rise in bond yields, the stock had been meandering gradually lower beneath the 10-dma ($67.29). Helping to keep the stock from breaking down was the Dow Jones Home Construction index ($DJUSHB), which steadfastly refused to break significantly from the $425 price magnet. That all changed on Thursday though, with another huge rise in bond yields finally exerting some downward pressure on the $DJUSHB index, which fell as low as $415 before stabilizing at the end of the day. This is very close to key support, as a breach of the 7/22 intraday low of $411.87 should have the index vulnerable to next support near $390. Pressured by the negative sector action, LEN delivered a nice little breakdown of its own...well almost. After holding near the $66.50 level through most of the day, the stock started weakening in the early afternoon and really picked up steam in the final 2 hours, first breaking $66 and then $65 enroute to its intraday low of $64.76. We've been waiting for the break under $65 for what seems forever, and it was a bit disappointing to see the late day pop back over that level. Nevertheless, that break appears significant, especially since it generated a fresh PnF Sell signal. LEN is now looking like it will go down and achieve our profit target of $62-63 and negative economic reports in the morning may be just the catalyst we need. At this point, only aggressive traders should be considering new entries on a break below today's intraday low. We're getting more aggressive with our stop in case the bulls manage to defend $65 and stage a rally from that level. Lower stops to $67.30, which is just above the 10-dma. Picked on July 15th at $71.12 Change since picked: -6.37 Earnings Date 09/09/03 (unconfirmed) Average Daily Volume = 1.69 mln --- Merck & Company - MRK - close: 55.28 change: -0.18 stop: 58.25 We didn't expect MRK to break down without one more bounce first and we certainly weren't disappointed on Thursday. Broad market strength in the morning lent enough of a bid for the stock to charge up to within spitting distance of the 200-dma ($56.67) before the afternoon meltdown commenced, pulling the stock right back to the $55 area where it was when we initiated coverage on Tuesday. Recall that initial writeup where we were looking for a failed rebound in the $56.50-57.00 area to initiate new positions. Talk about getting what we asked for. The next hurdle is of course for the initial break below $55, which can be used as an aggressive momentum entry. Just keep in mind that the really pivotal level is $54, as MRK needs to trade that level to generate a new PnF Sell signal and break its bullish support line. Traders looking for confirmation of weakness before playing will want to use that $54 level as their entry trigger. Maintain stops at $58.25 for now. Once MRK closes under $54 we can start to get more aggressive with our stop, setting our sights on that $50 profit target. Picked on July 29th at $55.39 Change since picked: -0.11 Earnings Date 10/20/03 (unconfirmed) Average Daily Volume = 6.24 mln --- Progressive Corp - PGR - close: 65.94 chg: +0.34 stop: 67.26 Another play testing our patience is PGR. Shares continue to churn sideways between $67.20 and $65.00. Meanwhile the reversal pattern we noticed in the IUX insurance index on Tuesday did not see any follow through. Now bears have another failed rally (today) to evaluate. We're still suggesting that most traders wait for a move under $65.00 before considering or opening positions on PGR. Picked on July 23 at $65.22 Change since picked: +0.72 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 941 thousand Chart = ************* NEW PUT PLAYS ************* None ------------------------------------------------------------ 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 Thursday 07-31-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: Revving the Engines (PCAR) Traders Corner: Life's Tough, Wear A Cup Or Know When To Say "Enough" ********************** PLAY OF THE DAY - CALL ********************** PACCAR - PCAR - close: 77.24 change: +2.91 stop: 72.99 Company Description: PACCAR is a global technology leader in the design, manufacture and customer support of high-quality light-, medium- and heavy- duty trucks under the Kenworth, Peterbilt, DAF and Foden nameplates. It also provides financial services and distributes truck parts related to its principal business. In addition, the Bellevue, Washington-based company manufactures winches under the Braden, Gearmatic and Carco nameplates. (source: company press release) Why We Like It: We are a little hesitant to be adding new bullish plays in the current sideways/overbought market but it is hard to ignore PCAR's incredible relative strength. The company announced earnings on July 24th and the numbers were positive. Analyst had been expecting 98-cents a share. The company turned in $1.06 (per diluted share). Revenues were 12 percent higher than the same period last year at $2.0 billion. Net income jumped by 68 percent to $124.1 million. Management said things were improving and the industry saw heavy-duty truck orders jump almost 10 percent in North America. We're actually surprised that management didn't announce another stock split. The breakout over the $75 level of resistance is not only a new yearly high but it's a new all-time high. The burst higher was on stronger than average volume and the stock's MACD has now rolled back up into a buy signal. Stochastics, momentum and RSI are also creeping higher. PCAR's P&F chart is also impressive. The move today produced a fresh triple-top buy signal. We realize that shares look over-extended and due for a major pull back, especially on the weekly chart. However, as a short-term options trader we think there is an opportunity to catch a move to the $82.50 maybe the $85.00 level. We're going to try and reduce our risk with a stop loss at 72.99. We're not opposed to new positions at current levels but the best entry point would be on a dip towards the $75.00-75.50 area (previous resistance). Suggested Options: PCAR currently has August, September, November and January options available. We're going to list August and September strikes with a preference for September 75s and 80s. BUY CALL AUG 75 PAQ-HO OI= 489 at $3.40 SL=1.70 BUY CALL AUG 80 PAQ-HP OI= 73 at $0.90 SL= -- BUY CALL SEP 75 PAQ-IO OI= 39 at $4.70 SL=2.75 BUY CALL SEP 80 PAQ-IP OI= 46 at $2.20 SL=1.00 Annotated Chart: Picked on July 31 at $77.24 Change since picked: +0.00 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.15 million 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 ************************************************************** ************** TRADERS CORNER ************** Life's Tough, Wear A Cup Or Know When To Say "Enough" By Mike Parnos, Investing With Attitude Why do we sometimes place Iron Condors and, other times, the Sell Straddle? It depends on how much brass you have – and I'm not talking about musical instruments. It's all about risk. It's also about one's ability to monitor your trades during the course of the day. The Iron Condor offers you a defined risk while the Sell Straddle has an unlimited risk. Do you like playing naked options? Are you into discipline? No boots and whips are necessary -- unless it's already part of your lifestyle. You should, however, handcuff yourself (you probably have those, too) to your couch and have your computer close at hand – just in case. Brokerages will permit Iron Condors all day long – as long as you have the assets in your account for the maintenance. However, the Sell Straddle will often require a higher trading approval level – even if you do have the assets for maintenance. They want you to have significant trading experience to justify taking that kind of risk. CPTI (Couch Potato Trading Institute) students are encouraged to "wear a cup" and use Iron Condors – at least until you develop the discipline necessary to streak the market. ______________________________________________________________ Hi Mike, Do you have a rule of thumb about how big a credit you want to receive for an Iron Condor? I am using $2.00 (on $5 wings) as the minimum, but it makes it harder to find trades. I like the 1/1-1/2 reward/risk ratio. When primarily selling premium I have always been under the impression that the expiration month should be as close as possible. For example, right now I would only be looking for Iron Condors with a September expiration. When there is less than two weeks left, I would switch to the next expiration month. Response: I don't necessarily have a rule for them. I like 1/1.5 risk/reward ratios too. But I’d also like to have a higher metabolism, be the towel boy at Hugh Hefner's mansion, and wake up next to Meg Ryan. If I ever come up for air, I’d realize that I was dreaming and that a 1/1.5 risk/reward ratio ain’t gonna’ happen too often. I believe that if you're expecting to receive $2, you will be limited to trades with very narrow range for the stock/index to bounce around in. The sold strikes would be very close to where the stock is trading. That trade has too much risk and would require too much babysitting and adjustment. Our objective is to take in a reasonable amount of money and have a large a cushion as possible. Regarding the “one month” exposure, I agree – if there is sufficient premium to make it worthwhile. If there is not enough premium to be had using a range that would allow for some volatility, you can consider expanding the range and going out another month. Yes, there is more time for things to go wrong, but the additional range can, to a degree, balance out the risk. We currently have a trade on BBH. The $125 - $140 is comfortable for August expiration. However, if you were to put on that same spread today, with two-plus weeks left, you could only take in about $.50. It's not worth it. If you move it out to September, the same $125 - $145 Iron Condor would bring in about $1.35 – a nice premium and a very nice (big) 20-point range. The exposure is about seven weeks (September is a five-week option month). Our old friend, MMM, offers about $1.00 premium for a $130 - $150 range for the seven weeks of exposure to September expiration. _____________________________________________________________ Hi Mike, A question about the LLTC Straddle. I knew that earnings were going to be released soon, so I waited to put on the straddle. The earnings were announced, and the stock is up to $36.15 in after market trading. Would putting on a $37.50 Call/$35 Put strangle seem more practical or safer than the $35 Call/$35 Put straddle? We would get only about $1.35 for it, but there's a $2.50 profit range. Your thoughts and comments about this trade would be welcome. Thanks for the help and keep the money-making trades coming. I like bringing in premium and letting time work for us! Response: Originally, the LLTC August $35 sell straddle was put on for $3.45. LLTC is certainly going to bounce around during a four- week exposure. We're hoping for it to settle back around $35. We will profit from a close anywhere between $31.55 and $38.45. The amount of profit will depend on just how close the $35 LLTC closes. However, the maximum potential profit is $3.45. Remember this, because it will become important. Now, let's say we could have put on a sell strangle selling $37.50 calls and $35 puts and taken in $1.35. Our maximum profit would be $1.35 – if LLTC finished within the $2.50 range between $37.50 and $35. Remember, our "potential" profit was $3.45. The important word here is "potential." With the safety ranges approximately the same, I would rather have the "potential" to make the maximum $3.45 (sell straddle) than a wider range to make a maximum $1.35 (sell strangle). Who knows? Maybe we'll get lucky. Stranger things have happened and you never make any shots you don't take. _________________________________________________________________ AUGUST CPTI PORTFOLIO TRADES August Position #1 – BBH Iron Condor – Closed at $134.97 We sold 10 contracts of BBH August $125 puts @ $1.45 and bought 10 contracts of BBH August $120 puts @ $.80 for a net credit of $.60. We also sold 10 contracts of BBH August $140 calls @ $1.75 and bought 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 $134.97, we're comfortably positioned – right in the middle of the range. August Position #2 – LLTC Sell Straddle – Closed at $36.75 We 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 bailout points are at the parameters of the profit range. At $36.75, we're still in good shape, but there's still a long way to go. August Position #3 – SPX Iron Condor – Closed at 990.31 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 990.31 – comfortably within our range. ______________________________________________________________ More Words Of Wisdom It seems that our CPTI students are full of it – wisdom, of course. Here are some of this week's submissions. Keep 'em coming. 1. Always remember you're unique. Just like everyone else. 2. Give a man a fish and he will eat for a day. Teach him how to fish, and he will sit in a boat and drink beer all day 3. The Universal Law of the Jungle: Everyone you see is someone else's lunch. ______________________________________________________________ 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: ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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