The Option Investor Newsletter Monday 08-11-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Dog Days Futures Wrap: Shark-Infested Market Index Trader Wrap: Expect modest tone from FOMC Weekly Fund Wrap: Stock Funds End Week Lower, Bond Funds Gain Futures Corner: A Review of The Use of Market Breadth Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 08-11-2003 High Low Volume Advance/Decline DJIA 9217.35 + 26.26 9251.59 9146.62 1.20 bln 1700/1082 NASDAQ 1661.51 + 17.48 1668.06 1646.59 1.19 bln 1927/1139 S&P 100 495.12 + 1.32 497.66 491.93 Totals 3627/2221 S&P 500 980.59 + 3.00 985.46 974.21 RUS 2000 459.27 + 5.33 459.27 453.94 DJ TRANS 2579.03 + 6.79 2597.80 2570.74 VIX 21.42 + 0.13 22.43 21.16 VXN 32.12 + 0.09 33.50 31.36 TRIN 0.62 PUT/CALL 0.93 ******************************************************************* Dog Days by James Brown Wall Street finds itself smack dab in the middle of the Dog Days of Summer and we witnessed the lowest volume day of the year. Of course the FOMC meeting tomorrow may have something to do with the low volume today but we'll get to that in a moment. The Industrials squeaked out another 26 point gain to make the current rally stretch to four days in a row. Much of the afternoon bounce in the $INDU was probably owed to 3M's announcement to split its stock in September. Meanwhile last week's losers were this week's gainers as the tech sector was generally green today. All the major tech averages including the DDX disk drive index, the GHA hardware index, the GSO software index, the INX Internet index, the NWX networking index and the SOX semiconductor index all turned in positive sessions. Leading the way were the storage and chip stocks. Lending their efforts to help boost the U.S. markets were generally positive world indices. Japan begins a traditional weeklong holiday today but that didn't stop the NIKKEI index from adding 1.72% or +160 points to close at 9487. Plus the Hang Seng index rallied 1.49% or +148 points to break back above the 10,000 mark to 10,093. European markets were mostly positive but the gains were rather muted probably an extension of the range trading here domestically before the FOMC meeting tomorrow. Not helping stocks was another drop in the bond market, which drove yields higher again with the 10-year note yielding 4.371% and the 30-year yielding 5.296%. Market internals were actually much more positive than the closing numbers may lead you to believe. On the NYSE advancers beat decliners 17 to 10 and on the NASDAQ gainers trumped losers 19 to 11. Up volume beat down volume by a margin of 2-to-1 on the NYSE and by nearly 4-to-1 on the NASDAQ. Despite it all the Dow Industrials remain below overhead resistance at 9300 and the NASDAQ Composite, which appeared to snap a losing streak, is still below the 1675 and the 1700 levels (not to mention its simple 50-dma). Chart of the Dow Jones Industrials: Chart of the NASDAQ Composite: Most of the newsworthy stocks making headlines today were in the technology sector but stealing the show was conglomerate 3M (NYSE:MMM). Shares of MMM spiked higher with a late afternoon push after the company announced a 2-for-1 stock split. This is the first stock split in nine years for the highest dollar stock in the Dow Industrials. MMM last split 2-for-1 in April of 1994. MMM's strong $1.95 gain on the day was crucial to the Dow's 26- point gain on the session. MMM burst out of a short-term bull flag consolidation pattern and looks ready to breakout above current resistance at $142. Shares are currently overbought but with any shorts still in this high flyer probably looking for the exits it could get even more overbought. The split will take place on September 29th for shareholders on record as of September 22nd. Giving the software sector a boost today was an upgrade for Oracle (NASDAQ:ORCL) from Merrill Lynch. MER's analyst lifted ORCL from a "neutral" to a "buy" citing limited downside risk and plenty of benefit should the economy continue its gradual recovery. Looking at the chart of ORCL it may take some faith to invest new capital as shares have fallen from $14 in mid-June to just above $11 late last week. Of course the timing of the upgrade may not be that bad given the stock was near serious support. Shares bounced more than three percent today but still closed under its simple 200-dma. Believe it or not we still have corporate earnings to contend with. While we may miss the "Dude, you're getting a Dell!" commercials we don't want to miss DELL's earnings report. The PC giant will be announcing earnings after the bell on Thursday. What they have to say about end-user demand, especially during this back to school period, will help set the stage for any future technology moves throughout the third quarter. Current DELL estimates are for 24 cents a share. Additional tech earnings to watch this week are Applied Materials (AMAT) and Maxim Integrated (MXIM) who both announce tomorrow. This is also a heavy week for retail business earnings announcements. The S&P Retail index (RLX) is currently near 52- week highs. The RLX appears to have broken out of a bull flag consolidation pattern but any follow through on the move will depend on corporate results. Tomorrow is a busy day with earnings from May Department stores (MAY), Abercrombie & Fitch (ANF), J.C.Penney (JCP), T.J.Maxx (TJX) and OfficeMax (OMX). The headline announcement to watch will be Wal-Mart's (WMT), which comes out on Wednesday. WMT announced today that they appeared to be "on track" to meet its August same-store sales growth. The news helped spike shares of WMT up to a new 52-week high early in the session before its gains faded into the close. Also announcing on Wednesday will be Ann Taylor (ANN) and Federated Dept Stores (FD). The biggest event this week also hits tomorrow and that is the FOMC meeting. Everyone expects the Fed to leave interest rates unchanged at 1%, a 45-year low. A surprise cut could be seen rather poorly. Everyone would wonder what the Fed saw that scared them enough to cut rates again. The real focus will be on what the Fed has to say about current conditions and where they see the economy headed. The challenge here is that productivity was very high in the second quarter. Strong productivity gains coupled with low utilization capacity does not create a need for businesses to hire new staff. Everyone knows that as we approach this coming election year the number one topic will become job growth. We'll probably hear more comments about how the Fed is ready to be accommodative and their biggest concerns are inflation falling too low. The good news is that we probably have yet to see the bulk of any impact from those child tax credit (refunds) hitting the economy. Although the early signs point to families spending those checks at stores like Wal-Mart, which should be good news for the retail earnings announcements this week. As traders our concern could be another "sell the news" event with the FOMC even though there doesn't appear to be any news to sell just yet. Thus far the traditional late-July to early October market sell-off has not yet occurred. We could be seeing some signs of it in the NASDAQ but investors don't seem worried yet, at least not from what the VIX and VXN are telling us. As Jim pointed out on Sunday, the longer we can trade sideways the better chance we have of building a new base before what is expected to be a ramp up into the fourth quarter. Unfortunately, we're starting to hear more "professionals" calling for a retracement of one third to one half of the March to June gains. Should the Dow/NASDAQ/SPX really breakdown then traders will need to be ready to switch to bearish strategies. Watch those stop losses. James ************ FUTURES WRAP ************ Shark-Infested Market Jonathan Levinson Treasuries got sold, gold rallied, and equities traded both sides of unchanged in treacherous, low volume session kicking off day one of options expiration week. Daily Pivots (generated with a pivot algorithm and unverified): 10 minute chart of the US Dollar Index The US Dollar Index got slammed off its highs at 8AM EST and other than a morning bounce, never looked back until its test of the lows at 95.70. The weakness benefited gold and the precious metals indices, as well as the swiss franc, euro and CDN dollar. The commodities index, the CRB, was up .24 to 237.20 led by sugar, soybeans and platinum futures. Daily chart of December gold December gold had another very bullish day, up 5 to 362.90 and peaking at 363.30, finally generating bullish signals on the oscillators. There were no daily buy signals printed, but the downphases have now truncated with GC3Z approaching upper descending trendline resistance at 367. HUI broke to new 5 year highs, adding 3.04 to 180.16, and XAU was up 1.27 to 87.71. Daily chart of the ten year note yield The rising trendline got tested on a spike but held back the ascent of the ten year note yield, which closed higher by 8.2 basis points to 4.371%. Evidently the one-day post-auction honeymoon for treasuries is over, as most who bought tens at the auction and the next day are now underwater. The average yield on the auctioned tens was 4.370%. The TNX remains on sell signals, however, and until the trendline is breached to the upside, this remains just a retest for the TNX, what I call as "return to the scene of the crime" rally. Tomorrow will be an important session in determining the fate of last week's treasury rally. Daily NQ candles The Nasdaq futures had a good day for a change, bouncing off the lower descending trendline and outperforming both the Dow and S&P futures to the upside. The 50 day EMA (pink line) held as resistance on the move, and bulls are far from out of the woods. However, the countertrend bounce against the oscillator downphases above the 1200 support line was certainly positive for the session. 30 minute 20 day chart of the NQ Today's session was not an easy one to trade, and the 30 minute chart of the NQ does not avail itself readily of obvious patterns. The action today felt like an upside breakout from a small bullish descending wedge, but the failure at the descending resistance line on the broader flag formation held it back. The confluence of this resistance line and Fibonacci resistance makes 1230 a key level for tomorrow's session. Daily ES candles The confusion of the session is reflected in the spinning top doji on the ES daily candles, with ES adding 3.50 to close at 981.50 in a wide ranging, difficult day. The market could not get comfortable at lower or higher levels, testing the descending upper trendline on the bull flag discussed in the weekend Futures Wrap. The oscillators are verging on buy signals, with the 50 day EMA providing downside support. 20 day 30 minute chart of the ES Once again, the 30 minute candles are not particularly clear, but ES appears to be trading a bear flag emerging from a bull wedge, within the broader bull flag on the daily candles. Riiiiight. Nevertheless, the price is going higher, with the oscillators reversing their sell signals early since Thursday. This is not bearish. While I remain bearish on the longer term, the 30 minute chart suggests caution for bears and bulls alike. The cyclical picture is growing very muddy, and with the price distortions implied by op-ex week, I don’t expect tomorrow to be much easier than today. 2 day 150-tick chart of the ES Other than the 10:30AM downdraft, sellers had a very tough time of it today. The intraday downphases tended to end abruptly and early, despite some large volume sell programs. Daily YM candles YM actually managed to kiss the ascending trendline today at its high before settling down to complete its spinning top, just like the ES. The oscillators are hinting at the possibility of buy signals, particularly with the end of day surge, but none have yet printed on the daily candles. 20 day 30 minute chart of the YM On the 30 minute candles, the cycle downphases aborted early as price just passed resistance at 9200, closing at 9203. The current formation appears to be a bear flag, but the bull wedge breakout, if it's indeed the case, projects to a maximum of 9340. With this many crosscurrents, it's easy to see why today brought us so many surprises. ******************** INDEX TRADER SUMMARY ******************** Expect modest tone from FOMC By Jeff Bailey Traders were cautious ahead of tomorrow's FOMC meeting with bond and stock traders listening closely to what the Fed has to say about the future rate of growth for the economy. While many expect the Fed to be modestly upbeat, with no change in the Fed's policy on interest rates, traders will be listening with mixed emotions as to how fast the Fed believes the economy will grow in the months ahead. In recent months, it has been the scenario of good news that has created some bad news from bond bulls as the thought of gross domestic product growing at a 4% to 5% annual rate has had some bond bulls pulling the plug on their Treasury bond holding, making for a rather sharp rise in yields, which has the effect of higher consumer borrowing rates, more notably in mortgage rates, where the consumer has been refinancing existing homes, or purchasing new homes as mortgage rates had plummeted to multi- decade lows. However, the thought of a more vibrant economy, that has yet to show much in the form of job creation has some feeling the consumer is still vulnerable, and an economy that is still in the earlier stages of recovery, may be better off with a steady and more fractional rate of growth, than a robust early surge in growth, that has the cycle of a near-term balloon once again deflating if consumer borrowing rates vastly begin outpacing jobs growth. I think the Fed, while positive on the economy, is going to have to tone things down tomorrow as it relates to bullish comments about the economy. I truly feel, and perhaps the Fed might agree, the biggest threat to economic recovery right now is the back up in Treasury YIELDS. This becomes a number one concern of the Fed, and with that concern, I think they'll keep the tone of comments as "gradual improvement, with a slant toward weakness." These kinds of comments may be focused toward the bond market, to have it holding a bid, and not finding selling, which would put further pressure on YIELDS. This type of comment from the Fed, will undoubtedly be predicated on the thought that this is the best type of commentary for the markets at this time. If the Fed is too positive on the economy, then Treasuries could sell off, potentially harming an economic recovery. Stock traders/investor may think they are doomed either way. And while I use the word "doomed," it is probably too strong of a word, but makes for a lower trade over the next several weeks. Remember. The Feds primary job is to provide a healthy economy. And while on the surface, if the Fed does lie a little about the economy, in order to jawbone a bid into Treasuries to keep YIELDS from rising further, it would be my guess, that this type of Fed jawboning is the lesser of two evils. If the Fed is too positive with its comments, then Treasuries sell off on thought of higher interest rates coming from the Fed anyway, and stocks would most likely suffer as YIELDS move higher. So, given these two potential outcomes, why not try and keep the bond market intact, and stocks, which have had a wonderful run from the March lows, trend back a little (one-and-a-half step back, one step forward) and give time for the job markets to improve. Bond traders did seem a little more edgy than equity traders in today's trade, with some selling in Treasuries finding YIELDS backing up to levels found at last week's auction On Wednesday, the Treasury auctioned off $18 billion of 5-year notes with a yield ($FVX.X) of 3.3%, and today's trade saw selling in this shorter-term bond find yield rising 5.7 basis points to 3.255%, nearing Wednesday's auction price, as if to test price support into tomorrow's FOMC meeting. The benchmark 10-year yield ($TNX.X) rose 8.2 basis points to 4.371%, right at Thursday's auction yield of 4.37%. On a technical basis, both YIELDS are at fairly important levels for traders (stock and bond) to be cognizant of. Should either of these bonds begin to discount from last week's auction prices, both trades could unravel in selling, sending YIELDS higher, which may then weigh more heavily on equities in the near-term. While Treasuries found selling in today's trade, the U.S. Dollar also exhibited weakness ahead of tomorrow's FOMC meeting, with the U.S. Dollar Index (dx00y) 95.85 -0.52% falling 0.51 points, as foreign investors looked to move some capital to other ports around the globe. I wanted to quickly discuss a rather simplistic supply/demand observation as it relates to the dollar and Treasuries. When we review the pivot analysis matrix, the U.S. Dollar Index (dx00y) will show a close back below its monthly pivot, represent some weakness in the Dollar since the end of July. Meanwhile, the 10- year YIELD ($TNX.X) is below its July 31 closing YIELD of 4.474%. One thing, make that... two things that have me more cautious of stocks near-term is that the slight weakness in the dollar hints to me that some money has left the U.S. At the same time, the lower 10-year YIELD has found some buying, but I'm also rather cognizant that the Treasury just auctioned $60 billion in debt. Where did the money come from? While there is always some cash on the sidelines, I'd have to say some of that cash used by investors to take down $60 billion in government debt recently auction, most likely came from equities, which have been range- bound the better part of the last month. This supply/demand theme of quite a bit of cash recently pouring into Treasuries may further have been observed recently in the various declines among the bullish % indicators we've been following on a nightly basis, where we've seen a growing number of supply sell signals growing, and bullish % falling. Let's take a look at the pivot analysis matrix. In this weekend's Ask the Analyst column, I showed this weeks pivot matrix at the end of that article, which was built around quarterly pivot analysis, something I had not performed on the S&P 500 Index (SPX.X) 980.50 +0.3%. Pivot Analysis Matrix I've had intermittent connectivity with the Internet since 01:00 PM EST, and just after the markets closed for trading today, I'm once again without a connection, so tonight's Index Wrap may be a little different than I'm used to writing, as I have no way of showing up-to-the-close charts of the various indexes. My main observations are this, and they would most likely again focus on the YIELD/Bank relationship, where despite a stronger morning session for the S&P Banks Index (BIX.X) 302.05 -0.26%, which had the BIX.X trading a morning high of 303.91, those gains turned into losses and it wasn't long after the 11:00 AM EST update, when the BIX.X turned fractionally lower, that the SPX fell through a raised bullish stop at SPX 979, as a sell program hit the SPX at approximately the 982 level, sending it to a session low of 973.83. I do remember looking at the BIX.X index during the day and seeing its daily bar chart intervals showing Stochastics (5,3,3) reaching the overbought level. It had been an earlier observation last week that the BIX.X Stochastics turned higher from oversold, just as the S&P 500 Index (SPX.X) was reaching what looked like a peak trough on its daily Stochastics. While I can't rule out an SPX trade to 988 target, the reason I wanted to snug a stop at 979, was more in an attempt to NOT take heat back to the 985 area, while also trying to give the trade some room to work higher to a 988 bullish target. Unfortunately, Treasury YIELDS along with the financial sectors didn't cooperate in today's trade. After writing this weekend's Ask the Analyst column, and comparing that exercise in the quarterly pivot analysis, I further felt an SPX bull might be hard pressed to get a trade this week much above the 988 level as the MONTHLY Pivot and WEEKLY S1 also provide a more formidable level of resistance, considering Friday's bullish % reading of 73.4% and "bull correction" status. I was looking for a bounce, and I think bulls got the bulk of it in today's trade. I would not say that there was anything alarming about the bond/banks trade today, but there just wasn't enough boost from the banks and financials a shot at 988. With correlative support at 963 again, but still finding correlative resistance back near 988-989, these two levels, or range of 963-988 isn't all that different that what we were looking at last week. Except that the SPX is at the higher-end of that range. Ideally, I wanted to exit a bullish trade in the SPX on further strength at 988, sit the rest of the day, take in some YIELD/BANK observations to then look for a short/put trade for a pullback into the WEEKLY S1 area. However, not getting that, I do think it fine for a bear to initiate a bearish trader here, but look for some choppy trade over the next day or two around WEEKLY R1 of 988. While I'm writing, I still don't have an Internet connection, but I did post a chart of the S&P 500 Index (SPX.X) late Friday evening in the market monitor with the new WEEKLY pivot analysis levels on it. While this chart does not have the q-charts generated bar for today's trade, I'm going to draw that bar on the chart to simply give us an observation of how the SPX traded with its MONTHLY (red) and WEEKLY (blue) retracement, with focus on near-term resistance back near 988-990. S&P 500 Index Chart - From Friday evening's market monitor. After preparing the SPX chart with new weekly retracement Friday night, then later writing the Ask the Analyst column, I though to myself, "You'd better snug up a stop under an SPX bullish trade if long from 965 and resistance looks formidable back near 989. Trader's will note that this week's S1 of 963.7 takes the place of last week's WEEKLY S2 where we found a nice level of support that tied in with the BIX.X support of 296-297. As I look for the SPX to slowly work lower, I'm not certain that I look for an SPX test of WEEKLY S2 at 950 this week, but am more inclined for the SPX to stall around the 990 level, and work lower from there. I've also placed some past bullish % readings on the SPX at its various inflection points of relative highs and lows to observe internal weakening. The Dow Industrials (INDU) 9,217 +0.28% made a late session move back higher to finish up 27 points after 3M (NYSE:MMM) 141.90 +1.39% announced it would split its stock 2 for 1. For the most part, the Dow Industrials trade mimicked that of both the S&P 500 Index and narrower S&P 100 Index (OEX.X) 495.12 +0.26%. Hey! I just got a connection with the Internet in time to get this screen capture of the Dow Industrials (INDU). So here's an updated chart with today's trade. Dow Industrials (INDU) Chart - Daily Interval Not unlike the SPX and OEX, the Dow just ran out of steam with a slight backup in YIELD, but came close to testing overhead resistance near WEEKLY R1 of 9,268 and retracement levels found from both the WEEKLY (blue) and MONTHLY (red) pivot analysis. With technology stocks trying to firm in today's trade, and still looking to have some bounce in them, I think a Dow trader might tend to view 9,340 as more of a top of the range right now as there isn't quite as much weighting with regional banks and homebuilders as we find in the SPX and OEX, but I'm not looking for much prolonged strength at the point above WEEKLY R1. I will note that the Dow Industrials did close above both its shorter-term 21-day SMA of 9,160 and 50-day SMA of 9,128, the only major equity index, with our pivot analysis to do so, thus the observation that its holding more of its momentum from the March lows at this point and perhaps a beacon of strength for the other major indexes. Today's trade saw not net change in the very narrow Dow Industrials Bullish % ($BPINDU), which remains "bull correction" status at 80% bullish. NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval While the NASDAQ-100 Index (NDX.X) 1,223.14 +1.31% did trade its WEEKLY pivot of 1,229.55 in today's trade with a session high of 1,230.26, the QQQ came a little shy. Often times, it would be the QQQ that might be sloppier above resistance from a more bullish retail base like you and I. However, I don't think that QQQ traders are quite as aggressive as they've been in recent months from the buy side. I did like the QQQ from a bullish perspective on Friday as YIELDS were falling and banks were bidding with a stop under the MONTHLY S1 of $29.81, but I would have liked to have seen more bullishness from the trade today. As such, I'd snug a stop up under Friday's lows of $29.93, and be a willing seller from both the long and short/bearish side of things back near $31.11. Note how the QQQ stochastics are just turning up from "oversold" levels. With Cisco Systems (NASDAQ:CSCO) having recently said it is looking for a more modest 2% to 4% growth in revenue in the coming quarter, it would take an entirely different tone from AMAT to get the QQQ much above the QQQ's WEEKLY R1 of $31.35. I'm not looking for such a surprise out of Applied Materials, where their business prospects would most likely FOLLOW Cisco's. Today's trade saw no net change in the NASDAQ-100 Index Bullish % ($BPNDX) as it remains "bear confirmed" at 64% for a second- straight session. On Friday this bullish % lost 2 stocks new reversing lower point and figure sell signals. Well, it is getting late and my Internet connection is spotty at best. I've only been able to briefly get enough connection at this point to show full session updates on the Dow Industrials (INDU) and NASDAQ-100 Tracker (QQQ), and perhaps not unlike a bull placing a tight stop under an SPX trade, I'm going to try and get this Index Trader Wrap wrapped up so when I get another spot of internet connectivity, I can e-mail it to the HTML department across town so they can upload it. Should I get stable Internet connectivity between now and tomorrow morning, I will try and have updated SPX and OEX charts in the 09:00 Update. I apologize for this evening's inconvenience. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** **************** WEEKLY FUND WRAP **************** Stock Funds End Week Lower, Bond Funds Gain Equity funds posted moderate losses for the week ended August 8, 2003, as the cautious tone on Wall Street continues, while fixed income funds were generally higher, rebounding from a tough week the week before. A profit warning from retailer Costco added to pressure on the Nasdaq Tuesday, which slid over four percent for the week. An increase in reported layoff announcements (highest level in three months) also added to the negative tone. For the week, the S&P 500 large-cap index lost 0.2 percent. Beyond the S&P 500 large-cap index, things were worse, with the Wilshire 4500 index losing about two percent for the week. The tech-heavy NASDAQ declined in price by 4.2 percent for the week. It was a week where conservative equity funds definitely held up better than more aggressive types. For example, large-cap value funds gained 0.1 percent on average last week, per Lipper, while small-cap growth funds fell by 3.2 percent on average. Funds in the tech sector lost 4.4 percent on average last week, while the average gold fund shot up 6.8 percent, reflecting the volatility in the market. Meanwhile, bond mutual funds were generally higher for the week, with the total U.S. investment-grade bond market as measured by the Lehman Brothers Aggregate Bond index up over one percent in the last five days. Several fixed-income fund indices produced average weekly returns of more than one percent. The only bond fund category in the red for the week was high-yield bond funds, which declined 0.7 percent along with stocks. Equity Fund Group Below are selected Lipper equity fund indices for the 1-week and year-to-date periods through August 8, 2003. Balanced funds and equity-income funds are "mixed equity" funds; both funds seek to provide current income as well as long-term growth of income and capital. They were among the equity fund group's leaders on the week, buoyed by their income components. Week YTD Selected Lipper Equity Fund Indices +0.1% +8.6% Balanced Fund Average +0.2% +9.9% Equity Income Fund Average -0.3% +10.6% U.S. Large-Cap (Core) Fund Average -1.4% +14.9% U.S. Mid-Cap (Core) Fund Average -2.0% +16.4% U.S. Small-Cap (Core) Fund Average -0.9% +13.4% U.S. Multi-Cap (Core) Fund Average -4.4% +22.9% Science & Technology Fund Average -0.4% +11.4% International Fund Average The numbers above show that average weekly declines increased as you moved down in market capitalization. But losses also varied based on sector orientation and equity style, with growth-biased funds generally sustaining bigger weekly losses than their value peers last week. Small-cap growth funds lost over three percent for the week, per Lipper, the worst performing diversified stock fund category, while the average technology sector fund sank 4.4 percent. Only a few funds manage to post a weekly gain. The $3.4 billion Dreyfus Appreciation Fund was one of them, rising 0.8 percent in the last five days, while $15.5 billion Fidelity Dividend Growth Fund returned 0.45 percent for the week. Both funds have large- cap blend styles, per Morningstar. Scudder's Dreman High Return Fund, an equity income fund, notched a 0.9 percent weekly return. However, many more funds sustained moderate losses for investors. Vanguard Capital Opportunity Fund, a $4.0 billion multi-cap core fund, lost 3.1 percent over the week, while two popular Fidelity multi-cap growth funds (Growth Company and OTC Portfolio) closed the week down 3.2 percent and 3.4 percent, respectively. In the mid-cap growth and small-cap growth categories, Calamos Growth A Fund lost 3.3 percent, while RS Emerging Growth Fund took a hard fall, losing 4.6 percent for the week. T. Rowe Price Science & Technology Fund, a tech-fund bellwether, lost 3.75 percent for the week, better than a lot of tech funds. For example, Fidelity Select Electronics Portfolio declined 6.2 percent, while Fidelity Select Computer lost 5.4 percent in the last five days. Alliance Technology Fund finished the week 4.6 percent in the red, so tough going in that sector. Not all U.S. sectors lost ground, however. The $1.6 billion Vanguard Energy Fund rose by 2.8 percent on the week as gas prices moved higher. Fixed Income Fund Group Below are selected Lipper fixed income indices for the 1-week and year-to-date periods through August 8, 2003. As you can see, the only category in the red for the week was high-yield fixed income funds, which lost 0.7 percent on average. Investment-grade fixed income funds were generally higher over the 5-day period. Week YTD Selected Lipper Fixed Income Fund Indices +1.1% +0.2% GNMA Fund Average +1.1% -0.2% U.S. Government Bond Fund Average +0.4% +1.5% Short Investment-Grade Fund Average +1.1% +2.3% Intermediate Investment-Grade Fund Average +0.9% +2.0% Corporate A-Rated Debt Fund Average -0.7% +13.5% High Yield Fund Average +1.0% +6.0% Global Fixed Income Fund Average +1.1% +7.1% International Fixed Income Fund Average Other than junk bond funds, most fixed income funds were able to recoup some of their losses from previous weeks. The $22 billion Vanguard GNMA Fund notched a 1-week return of 1.6 percent, one of the better weekly performances among Ginnie Mae funds. The $72.5 billion PIMCO Total Return Fund, meanwhile, notched a 1.5 percent weekly return to outpace its intermediate-term, intermediate-term peers. JP Morgan Bond II Fund gained 1.7 percent last week while Western Asset Management's Core Fund rose nearly two percent over the 5-day period through August 8, 2003. Global and international bond funds gained as well, finishing the week up over one percent on average. T. Rowe Price International Bond Fund, a billion-dollar fund, generated a 1-week total return of 1.4 percent, as did the Alliance Bernstein American Government Income Fund. Money Market Fund Group Yield Selected iMoneyNet Money Market Indices 0.53% All Taxable MMF Average 0.39% All Tax-Free MMF Average The iMoneyNet.com all-taxable money market fund average remained at 0.53 percent for a third consecutive week. The PayPal Money Market Fund (402-935-7733) remains the highest yielding retail money market fund, with a current 7-day (simple) yield of 1.03%. Cash Management Trust of America Class A (800-421-9900) is next with a 0.99% 7-day yield. The country's largest prime-retail fund, Fidelity Cash Reserves sports a current 7-day yield of 0.82%, while the Vanguard Prime Money Market Fund, another popular money market fund, currently shows a 0.75% 7-day yield. Vanguard's prime money fund's yield declined four basis points, or 0.04%, compared to the prior week. Fund News, Etc. Morningstar.com's Fund Times report indicates that Vanguard Group has filed a SEC registration statement for a series of targeted- maturity "funds of funds." These six new Vanguard targeted-date funds are expected to be available in the fourth quarter of 2003. They will comprise up to four Vanguard stock index and bond funds in a range of asset mixes, and will be rebalanced as time goes on to gradually decrease fund risk as the investor's retirement date approaches. Vanguard's targeted-maturity funds are similar to the funds today offered by Fidelity Investments, which shows if you can't beat'em join'em. Vanguard Target Retirement 2045 Fund will invest 90% of its assets in stock funds, 10% in bond funds. The other Vanguard target retirement funds will have the following initial asset mix allocations: Retirement 2035 Fund (80% equity funds; 20% bond funds) Retirement 2025 Fund (60% equity funds; 40% bond funds) Retirement 2015 Fund (50% equity funds; 50% bond funds) Retirement 2005 Fund (35% equity funds; 65% bond funds) Retirement Income Fund (20% equity funds; 75% bond funds) The last one doesn't add up to 100 percent, so there may be a 5% allocation to cash (money market funds). Check with the Vanguard Group if you may be interested. It'll be interestingly to see if Vanguard's index-based fund of funds perform well relative to the successful Fidelity targeted-maturity fund series. Morningstar's report also indicates that the Vanguard Group fired Newell Associates, one of the investment sub-advisers to Vanguard Equity Income Fund (performance reasons). Wellington Management Company will reportedly run half of the fund's portfolio, up from 30 percent. Vanguard's Quantitative Equity Group has also tabbed to run 30 percent of the fund's assets. John A. Levin & Co. will continue to run the other 20 percent of portfolio assets. Please go to the Vanguard website (www.vanguard.com) for further detail. In other Morningstar fund news, Strong Funds will acquire Matrix Advisors Value Fund (MAVFX), an aggressive large-value fund that makes big sector and stock bets, but has tended to hit its marks more than it misses. David A. Katz, the fund's portfolio manager since 1996, will continue to manage the Morningstar 5-star rated large-blend fund. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ************** FUTURES CORNER ************** A Review of The Use of Market Breadth by Mark Phillips mphillips@OptionInvestor.com Due to a plethora of requests, I thought our time together this week would be a good time to revisit the topic of market breadth. I know there are numerous methods of measuring market breadth, from looking at the advance/decline line, to new highs vs. new lows to looking at the ratio of advancing volume to declining volume. The latter is the one that I have settled on, partially due to familiarity, but also due to the way in which it seems to filter out some of the noise that is often seen in other breadth indicators. Clearly, this is a tool that will be most valuable for those who trade the major indices, such as the DOW, the SPX or the NASDAQ. As most of you should now be aware, I've started applying more of my trading focus to the e-mini futures contracts, rather than options, for a long list of reasons that I initially covered in my first article on futures trading back in early May. For those interested in my rationale, feel free to click over and check out that introductory article at the following link. The Case For Futures http://www.OptionInvestor.com/futurescorner/fc_050503_1.asp Our focus today is really vehicle agnostic though, as measures of market breadth should work equally well whether one chooses to trade broad market index funds, index options or index futures. Likewise, our discussion here isn't tied to any one vehicle. Regardless of what instrument you use for trading the major indices, I believe your results can be improved by staying on top of the market internals. Back in January, I wrote an article on the different measures of market breadth that are available for our use within Qcharts. That article was a follow-on to a couple other market-breadth related articles I did in February and March of last year, where I took the time to look at my own favorite breadth indicator, ADVDECV. This indicator is available for either the NYSE or the NASDAQ and in those articles we looked at some examples. The link below will take you to the January article, and has embedded links to the prior two articles for those of you interested enough to go back to the beginning of my journey of discovery. Another Measure of Market Breadth http://www.OptionInvestor.com/traderscorner/tc_011303_1.asp As you can probably determine from that background information, along with some of my Market Monitor comments, I've settled on the use of ADVDECV.NY (for the NYSE) and ADVDECV.NQ (for the NASDAQ) as my primary measures of market internals. The usage is quite simple -- only trade in the direction of the breadth trend. There are some exceptions to that rule, but sticking to that basic approach goes a long ways towards keeping us out of trouble in these volatile markets we've been 'enjoying' these past few months. First a couple ground rules, though. These indicators are not useful for longer-term charts, having questionable utility at anything longer term than a 15 minute chart. My personal choice is for a 5-minute chart. I've played with different timeframes all the way down to a 1-minute chart, but find the 5-minute view strikes the best balance between being quick to show a potential trend change and avoiding so much of the noise that shows up on a 1-minute chart. There's greater detail on that microscopic scale, but unless you are very actively (8-10 swings per day) trading index futures, I think it tends to cloud the view of the overall trend of the day. The other important point to make is that I don't view the ADVDECV indicator as a primary trade indicator. Rather, I use it to keep me from trying to trade against the day's trend. As I'm sure you all know, defining a trend these days can be a Herculean task, with volatile and tight-range choppy markets the standard fare. When I look at the ADVDECV, it is to determine first if there is an established trend for the day and whether that trend looks solid or unsteady. A steady bullish trend on the ADVDECV 2 hours into the day guarantees I won't be considering any bearish trade entries unless/until there is a break of that trend. Simply put, the ADVDECV is a trade filter, not a trade indicator. But let's look at a couple examples and see how this indicator might be of use. For our examples, I'll be focused on the ADVDECV.NY indicator for market breadth and the S&P 500 Cash index (SPX.X) for price action. Let's start by looking at a very clear trend session, Friday August 1st. ADVDECV Chart for the NYSE - Friday, August 1st Almost without a pause, the ADVDECV began at the zero line, quickly moved lower and after reaching a temporary low near 10:30am ET moved into a descending channel. That channel finally failed near 2pm ET, when ADVDECV broke sharply lower, beginning an even steeper descending trend all the way to the closing bell. Obviously from looking at this chart, there was no strength present throughout the session, right? I can hear you now, "Well now, duh! Any idiot can see that!" Quite true, would be my response. But let's take a look at the same chart laid right on top of price action in the SPX. S&P 500 Price Chart vs. ADVDECV - Friday August 1st The trend of the ADVDECV hasn't changed one iota, but how many of you would have tried all afternoon to buy the apparent bottom in the price chart? With the weakness so clearly apparent in the ADVDECV line, it should have waved off any attempts at bottom fishing in the SPX. That isn't to say that midday attempts to short the SPX would have met with great success, but at least those attempts would have been in alignment with the dominant trend of the day and should not have created any unpleasant results. A perfect example is the failed rally near 1pm ET. Price was breaking above resistance that had been in place since 11:15am. The apparent breakout over 983 might have had an eager bull thinking the SPX was heading back up. But a quick look at the unbroken bearish trend of ADVDECV should have put the kibosh on any such notion. In fact, about 20 minutes later was the best setup of the entire day for a continuation short, with (10,5,3) Stochastics (not shown) starting to roll earthwards from their only overbought alignment of the entire session. Can you see how the ADVDECV can help to clear your vision? With a clear bearish trend for the session, we should have abandoned all thoughts of bullish entries (until/unless that trend was broken) and focused only on the downside. That would have had our mind looking for the sort of bearish alignment that materialized just before 1:30pm ET. Alright, that was a nice easy example and I'll be the first to admit there have been all too few of those around here lately. Let's fast forward to today's action, where the waters get a bit muddier and see if we can find any utility from the ADVDECV. ADVDECV Chart for the NYSE - Monday, August 11th Now doesn't this look like the kind of mess we've had more often than not, lately? I apologize for the profusion of annotations on the chart, but I've tried to color code things so that it makes sense. Clearly, the trend off the open was bullish, and ADVDECV moved steadily higher through the end of the first hour and then flattened out. There was nothing to indicate whether there would be a continuation or reversal until the break of the green ascending trendline near 11:10am ET. That was our confirmation that the intraday trend had turned south, and it remained a downtrend until the next trend reversal (break of the red descending trendline) near 12:30pm ET. From there into the close, the trend was up, with the exception of a false trend break near 3pm ET, a time that frequently gets a bit goosey with the closing of the bond market. So let's look at this chart in relation to the SPX price chart and see how things might have lined up. S&P 500 Price Chart vs. ADVDECV - Monday August 11th Like many more conservative traders, I normally eschew taking trade entries right off the opening bell, as I still refer to it as amateur hour. But for traders that might have taken the long entry at the open, the first sign of trouble would have come on the break of the green ascending trendline on the SPX chart at about 10:40am ET. Confirmation of that weakness didn't really materialize until about 30 minutes later when the ADVDECV chart broke below its green ascending trendline near 11:10am ET. That was the green light for bearish entries in agreement with the trend as described by ADVDECV. More aggressive traders might have guessed by 10:45am that the ADVDECV trend was weakening and would break lower and could have acted on the earlier trend break signal on the price chart, but there's no question that would have been putting the cart before the horse. That bearish trend was good for a trip down to the SPX 975-976 area, and the first sign that trend had ended came when price broke its descending (red) trendline near 12:20pm ET, followed about 10 minutes later by the ADVDECV breaking its own descending (red) trendline and confirming another change of trend for the day. For the remainder of the day, the trend remained up, although there could have been a bit of confusion near the 3pm time slot, with the break of the final ascending (green) trendline that turned out to be a false trend break. In my estimation, there were only 3 viable trade entries for SPX (whether trading the SPY, SPX options or SP/ES futures) traders – - long off the open, reversing to short near 11am and then reversing again to long near 12:30pm. That isn't to say that each/any of those trades would have worked out profitably, as there are numerous other factors at play. But can you see how paying attention to this measure of market breadth could have kept you from being on the wrong side of the intraday market trend? Here's a quick test. Don't look at the ADVDECV chart, but look at an intraday chart of the SPX with whatever trade indicators you currently use. How many short signal triggers would your analysis have produced? How many longs? Regardless of the answers, now look at the chart of the ADVDECV at the same time. How many of the losers would the ADVDECV have eliminated? How many of the winners would it have kept you out of? I fully recognize that there are some trade opportunities that will be missed due to using this indicator as a filter and many winning trades will be entered a bit later. But the key benefit is that it tends to eliminate a lot of the bad trade entries where we're trying to pick either a top or bottom in an intraday trend before it is ripe for the picking. Best Trading Wishes! Mark ************************Advertisement************************* Stock Option and Futures Brokerage OneStopOption teams the best trading technology with varying levels of professional assistance at very competitive prices. Commission costs are comparable to discount brokerage and tailored to individual customer needs. The power of one brokerage group with experience and expertise in the Securities* and Futures Markets offers unprecedented convenience for traders. Access To All Futures Markets Toll Free 888-281-9569 Stock Option Principals www.OneStopOption.com ************************************************************** ******************* 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Monday 08-11-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: PCAR, YHOO Dropped Calls: None Dropped Puts: None Play of the Day: Call - STJ Watch List: Speaking of Splits Updated on the site tonight: Market Posture: Dog Days of August ************************Advertisement********************************** Option traders, check what PreferredTrade offers: - true direct access to each option exchange - stop and stop loss online option orders - contingent option orders based on the price of the option or stock - online spread order entry for net debit or credit - fast option executions - rates as low as $1.50 per contract ($14.95 min) PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC *********************************************************************** ***************** STOP-LOSS UPDATES ***************** PCAR - call Adjust from $72.99 up to $74.50 YHOO - put Adjust from $31.50 down to $31.25 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ None ************************Advertisement********************************* Option Traders: Pay Attention Use the online options trading system built by option traders for options traders. Featuring direct access to each option exchange, stop and stop loss option orders, contingent option orders, online spreads, fast executions, and rates as low as $1.50 per contract ($14.95 min.). PreferredTrade, Inc. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ********************** PLAY OF THE DAY - CALL ********************** St. Jude Medical - STJ - close: 55.50 change: +1.27 stop: 52.50 Company Description: St. Jude Medical is engaged in the development, manufacturing and distribution of medical technology products for the cardiac rhythm management, cardiology and vascular access and cardiac surgery markets. The company has two principal business segments, Cardiac Rhythm Management (CRM) and Cardiac Surgery (CS). The CRM division is focused on bradycardia pulse generator and tachycardia implantable cardioverter defibrillator systems, interventional cardiology catheters and vascular closure devices. The CS group provides mechanical and tissue heart valves and valve repair products as well as suture-free devices to facilitate coronary artery bypass operations. Why we like it: After peaking near $64 in the middle of June, shares of STJ were overdue for a bout of profit taking, but investors weren't quite prepared for the staggering 24% slide that took place over the next month. After reaching bottom near the $48 level, the stock rebounded and has been consolidating in the $53-55 area for the past 2 weeks. This sideways consolidation looks like a continuation pattern, and when it breaks to the upside, it should have room to run to the $60 area. Of course, it won't be a cake walk, as there is potential resistance layered at $57 and then again at $59. But before we can start looking for upside objectives, the stock will need to break from its current consolidation pattern. The 50-dma ($55.73) provided solid resistance on Friday, as the stock was quickly turned back from an attempted rally through that level. Looking at the PnF chart, it becomes clear that $56.00 is a formidable obstacle and the stock will need to trade $57.00 to generate a new Buy signal and give us the 'green light' for a bullish play. We're going to sneak our entry trigger a bit below that level though, looking for a break above $56.05 before considering the play live. Momentum traders will want to enter on the initial breakout, looking for a quick move upward. More conservative traders will want to look for a pullback after the initial breakout, looking to buy a dip and rebound in the $54.50-55.00 area. Because of the tight consolidation over the past couple weeks, we can set at tight stop at $52.50, just below the 20-dma, which appears to be bottoming at $52.73. Why This is our Play of the Day We normally don't feature an untriggered play as our Play of the Day, but in this case, it seems warranted to make an exception. Shares of STJ made an earnest attempt at a breakout over the 50- dma last Friday, but couldn't quite hold altitude. Today, the stock gapped upwards and held right near the high of the day right into the closing bell. The stock looks poised to deliver that breakout we mentioned over the weekend, and clearing the 50- dma ($55.72) on a closing basis will be a good start. We're keeping our official trigger at $56.05, as a trade at that level would indicate some conviction on the part of the bulls. Momentum entries on the initial breakout look favorable, although more conservative traders may want to wait for a subsequent test of the $55-56 area as newfound support. Suggested Options: Shorter Term: The September 55 Call will offer short-term traders the best return on an immediate move, as it will be in the money when the play is triggered. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the September 60 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 will want to use the October 60 Call. BUY CALL SEP-55 STJ-IK OI= 241 at $2.60 SL=1.25 BUY CALL SEP-60 STJ-IL OI= 445 at $0.60 SL=0.30 BUY CALL OCT-60 STJ-JL OI= 730 at $1.20 SL=0.60 Annotated Chart of STJ: Picked on August 10th at $54.23 Change since picked: +1.27 Earnings Date 10/15/03 (unconfirmed) Average Daily Volume = 2.19 mln ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ********** Watch List ********** Speaking of Splits 3M - MMM - close: 141.90 change: +1.95 WHAT TO WATCH: After nine long years MMM finally approved another stock split. It's been a long time in coming as the conglomerate has been trading above the $100 mark since late 2000. 3M last split 2:1 in April of 1994. Its $1.95 gain lifted the Dow Industrials and helped its own shares breakout of a short-term bull flag consolidation pattern. The stock looks very overbought but any shorts still in this screamer are probably running for cover, so it could get even more overbought. A move over resistance at $142 could certainly attract more momentum players. The 2-for-1 stock split will be September 29th for shareholders on record as of Sept. 22nd. Chart= --- Advance Auto Parts - AAP - close: 68.10 change: -0.44 WHAT TO WATCH: Still trading near 52-week highs, shares of AAP are holding on to its recent bounce. The stock sold off somewhat after reporting earnings on August 6th where the company beat estimates by 16-cents. Dip buyers quickly stepped in near the $65 level and bulls are trying to push through resistance at $69. Keep an eye on it for a move above $69 or $70, preferably on strong volume. We were unable to discover if AAP had any previous splits but as it continues to climb higher it could certainly be a candidate. Chart= --- Boston Scientific - BSX - close: 65.14 change: +0.91 WHAT TO WATCH: BSX has been on and off the watch list for a couple of weeks now. Shares rocketed higher in late July, which pushed shares out of its bull flag consolidation pattern - a clear buy signal. Unfortunately, bullish momentum traders had been unable to break above the $65.00 level of resistance. The stock has been stuck churning sideways between $62.50 and $65.00 that is until today. BSX turned in a new closing high. Momentum traders might see this as an entry point. The next logical target would be $70. Chart= --- JetBlue Airways - JBLU - close: 48.04 change: +1.22 WHAT TO WATCH: Speaking of splits this transportation stock may be ready for another one. JBLU is seriously out performing its peers in the XAL airline index. The stock just broke to another all time closing high on decent volume. The stock last split 3:2 in December 2002. Shares are already past their previous split level but as a new issue there isn't a lot of history to tell where management likes to split its shares. A pull back to $45 might look like a decent entry point for bulls but from the looks of it there aren't a lot of sellers. Chart= ************** MARKET POSTURE ************** Dog Days of August To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_081103.asp ******************* 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. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. 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