The Option Investor Newsletter Monday 08-18-2003 Copyright 2003, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. In Section One: Wrap: Futures Wrap: Consolidation or Distribution Index Trader Wrap: Power surge has Industrials above 9,400 Weekly Fund Wrap: Wall Street Ends Blackout Week Higher Traders Corner: Elliott Wave Plays Posted online for subscribers at http://www.OptionInvestor.com ******************************************************************* MARKET WRAP (view in courier font for table alignment) ******************************************************************* 08-18-2003 High Low Volume Advance/Decline DJIA 9412.45 + 90.76 9419.38 9320.59 1.40 bln 1052/ 331 NASDAQ 1739.49 + 37.48 1739.59 1706.93 1.48 bln 1273/ 183 S&P 100 502.79 + 4.49 503.39 498.30 Totals 2335/ 514 S&P 500 999.74 + 9.07 1000.35 990.67 RUS 2000 480.92 + 9.00 480.92 471.92 DJ TRANS 2643.83 + 20.17 2643.91 2623.32 VIX 19.28 - 0.92 20.30 19.06 VXN 26.62 - 2.59 28.55 25.94 Total Volume 3,115M Total UpVol 2,515M Total DnVol 548M 52wk Highs 585 52wk Lows 67 TRIN 0.65 PUT/CALL 0.72 ******************************************************************* SOX Soars & Retail Roars by James Brown It was another big day on Wall Street as equity bulls muscled out another win and put another resistance level below them, at least for the Dow Jones Industrials. The $INDU added 90 points to close above the 9400 level, a feat not seen for more than a year. This is a clear breakout of the recent trading range and should have the bears concerned as the bulls appear to be sharpening their horns for an attempted break out above 9500. The NASDAQ Composite out performed the Industrials with a gain of 2.2 percent. This also appears to be a breakout of its bull flag consolidation pattern. Meanwhile the S&P 500 index added nine points to close just a quarter point away from the 1000 mark. Contributing to the moves in the U.S. markets were strong performances by their overseas counterparts. The Asian stock markets were mostly higher with the NIKKEI putting in a strong session adding 169 points or 1.72 percent to close at 10,032. The Hang Seng added more than 100 points to close at 10,525. European stocks also cast a positive glow as the FTSE 100 added nearly 25 points to close at 4272 and the DAX 30 jumped 1.84 percent to close at 3507. It's hard not to miss all the psychological resistance levels falling under the hooves of this late summer bovine buying spree. There was plenty of speculation on what sparked the rally today. Was it a positive sigh of relief that last week's blackout was not a terrorist event? Or maybe it was a delayed reaction to last week's positive economic reports. There were some comments that it was money that moved out of bonds last week being put to work in equities this week. Except we did see bond yields dip today indicating some buying pressure there. Whatever case you make for starting the rally it quickly spread to become a broad-based run across most sectors. Advancing stocks beat declining stocks 19 to 9 on the NYSE and 21 to 9 on the NASDAQ. New highs swamped new lows 406 to 23. Up volume was better than 3 to 1 over down volume on the NYSE and more than 7 to 1 on the NASDAQ. Total volume was actually slightly better than in recent sessions but we are still seeing very low volume numbers, which is to be expected this time of the year. Chart of the Dow Jones Industrials: Chart of the NASDAQ Composite: Hitting a new 52-week high was the S&P Retail Index (RLX), up 1.95 percent to 357. Lifting the sector higher was a host of earnings news. However, probably the most significant news bit came from Wal-Mart (WMT) who did not report earnings but did report that its weekly August same-store sales numbers were looking very good. According to WMT management sales are "tracking" in near the high-end of previous guidance of 3 to 5 percent, which has been fueled by the annual back-to-school season. This pushed shares of WMT to a new 52-week high just under $59. Shares of Lowes Companies (LOW) also hit a new 52-week high as the stock gapped higher above major resistance at $50 to close up 6.25 percent. The home improvement retailer announced earnings this morning and the results blew away consensus estimates. LOW turned in net income of 75 cents a share, up 28 percent. Analysts had been expecting 69 cents. Revenues came in at $8.77 billion, beating estimates of just $8.5 billion. The company guided higher for the third quarter and raised their full year guidance to $2.24 to $2.27 a share. These positive announcements from major retailers like WMT and LOW have many raising expectations for another round of strong consumer spending throughout the rest of the third quarter and into the fourth. It will be interesting to hear from LOW's bigger rival Home Depot (HD), also a Dow component, who announces earnings tomorrow morning before the bell. Current estimates for HD are 54 cents a share. Plus we have the delayed Michigan Sentiment report that comes out tomorrow morning about 9:45 AM ET. As one of our commentators in the MarketMonitor mentioned today, this could be a market mover. Traditionally, stronger consumer sentiment is translated into stronger consumer spending. The SOX pitched a no-hitter against the bears today as all 18 components in the semiconductor index closed in the green. Igniting today's tech rally were strong comments from the market research firm Gartner, Wall Street broker/analyst Smith Barney and an optimistic article in Barron's over the weekend. Gartner believes that environment for the chip sector has vastly improved. This was echoed by Smith Barney who claims that stronger PC demand and improving order trends overall could be forecasting a stronger recovery for the industry. Meanwhile an article in Barron's gave Advanced Micro Devices (AMD) a big push. The column claims that AMD's new chips set to launch next month could significantly increase its market share. AMD's stock gapped up and traded higher throughout the day to close at $8.91, up 14 percent, the largest gainer in the S&P 500 for the session. AMD's rival and Dow component Intel (INTC) also added 4.5 percent, which contributed to the SOX's 5.15 percent rally. The SOX closed at a new 52-week high above resistance at 400 and 410. Many analysts believe that it is the chip sector that tends to lead the NASDAQ higher (or lower) so this is a positive development for tech. Bulls might be looking for some follow through tomorrow with tonight's positive news from Broadcom (BRCM). BRCM raised their guidance for the current quarter claiming a new digital tuner would help push revenues higher by 10 percent. The stock is up more than a dollar in after hours trading. The bulls may be looking gleefully for some positive follow through on today's technical developments but we must caution traders that it's still a dangerous world out there. You've heard us cautioning traders that the VIX and VXN, both of which hit new lows today, have been flashing a warning sign for the bulls. Thus far the markets have ignored them both. However, today's drop in the VIX put it below the 20 level, which is a strong historical indicator of market tops. Now this is not an exact science as the VIX can remain low (as we've already witnessed) for some time and the market tops can be days away from actually forming. The chart below is a monthly chart of the Dow Jones Industrials and the VIX. I've drawn a pink line for every time the VIX fell significantly below 20 and each time there is a near perfect correlation of a top in the Industrials. Chart of the VIX I'm not suggesting the market can't go higher from here. From all indications is looks like it can and will. The question is how long can the market sustain these gains without a steep correction phase. Trade carefully. Watch those stop losses. James ************ FUTURES WRAP ************ Consolidation or Distribution Jonathan Levinson It was a very surprising session. The US Dollar Index was up strongly, gold and the miners corrected downward, treasury note yields fell back below their rising trendline, the Nasdaq futures rallied over 2.5%, the Dow futures over 1%, and the ES by just under 1%. Volume was very light, and the Nasdaq volatility index, VXN closed at an alltime low of 26.62, down 2.59 on the day, with the QQV down 1.77 to 22,.80. The VIX made downside waves as well, but not to the same eye-popping extent, -.92 to 19.28. 150-tick chart of the ES Daily Pivots (generated with a pivot algorithm and unverified): 10 minute chart of the US Dollar Index The US Dollar Index continued its bull run, breaking 97 with authority and marching to an intraday high just north of 97.50 before pulling back. The action was bearish for gold, but could not keep a lid on commodities which saw overall gains on the CRB led by the agriculturals. The CRB closed higher by 90 cents at 236.57. Daily chart of December gold December gold was sold to an intraday spike low of 358 before rebounding back above 360, which held for the duration of the session with the contract closing at 359.80. Support is at 354, followed by the lower trendline, currently just above 349. The HUI lost 4.36 to close at 177.86, while the XAU lost 1.19 to 86.39. Daily chart of the ten year note yield The ten year note yield (TNX) broke below the trendline after trading both sides of it on Friday, closing lower today by 4.9 basis points to 4.479%. As of this writing, ten year treasury futures were higher by .38%. Without indulging in a discussion of the fundamentals on treasury notes, we can observe that the steep ascent on the TNX has begun to flatten somewhat. Regardless of whether a ten year bond yielding 4.479% is attractive on its own merits, technical traders can either play the trendline, going long with stops on each downside break of the trendline by the TNX, or, alternatively, can try the more dangerous game of picking a top in the yield/bottom in treasury notes. Bulls will not want to see new highs made by then TNX on its next bounce, and a failure from a lower high would be the desired entry for countertrend knife-catchers. Daily NQ candles Just to remove any doubt amongst the chartists, the NQ broke above the upper trendline on the bull flag we've been following for over one month, closing at 1287 on a 2.59% rally today. The oscillators finally broke into full buy signals, and NQ seems ready to try for a retest of the failed daily ascending trendline. The rally drove the Nasdaq volatility index to an alltime closing low of 26.62, and while we expected some surprises from the unwinding of options expiration week, this move was still a shocker. Whether options will become cheaper still, or whether today was a blowoff spike, we will have to see tomorrow. Generally, downside extremes in the volatility indices tend to precede downside moves on the underlying index, in this case the Nasdaq. 30 minute 20 day chart of the NQ The integrity bear flag on the 30 minute candles is getting tested with the NQ's close right at the upper trendline. An upside breakout would be a bear flag failure, which is the less- likely outcome, but today's close came very close. The oscillators are very toppy but not on sell signals yet, and nothing prevents them from becoming pinned in overbought as the market trends higher. This, again, is the less likely outcome. The NQ is overbought and should pull back, but so far there has been no sign of its occurring. Daily ES candles The ES also gave us a bull flag breakout on the daily candles, on firm oscillator buy signals. The outlook is bullish on this timeframe, with the sole proviso that we've seen trendline fakeouts with increasing frequency this year. As appears from the short cycle 150-tick chart at the top of this page, the ES had all afternoon to carry through on its breakout but could not break 1000 for longer than a few seconds at a time. 20 day 30 minute chart of the ES The move on the 30 minute ES was far less bullish than that of the NQ, with no challenge to the bear flag whatsoever. The air became very thin above 1000, and the oscillators are on the cusp of sell signals. A correction is to be expected, and it will be the quality of the bounce from the lower trendline that will tell the story. In light of the toppy oscillators, the brick wall today at 1000.25, the bottomy VIX, and the narrow, listless trading range all afternoon, I'm thinking that the ES is more likely to pull back from here. Daily YM candles The YM regained its failed ascending trendline and closing above it. Despite trailing the NQ today, the YM's chart continues to appear to be the more bullish of the three equity contracts. It extended its oscillator buy signals today, posting a new year high. 20 day 30 minute chart of the YM The YM actually posted sell signals on the 30 minute chart, but no pullback was evident today. We'll have to see how it does at tomorrow's open. Today gave us a higher dollar, lower gold, higher equities and higher treasuries. As Jeff Bailey correctly noted, the intermarket relationships smacked of genuine foreign buying today. Note that the Fed drained a net 8B, with a 12B 3-day repo against 20B expiring from Friday. For tomorrow, I expect to see some sort of correction. In addition to the overdone breadth and volatility indicators today, volume was again very light. We have economic reports due, including July housing starts and building permits scheduled for release before the cash open, and the delayed Michigan preliminary sentiment data. These reports could well get the market moving out of this afternoon's Tedious range. ******************** INDEX TRADER SUMMARY ******************** Power surge has Industrials above 9,400 While there were no circuit breakers needed in today's session, traders returned from a 3-day weekend, in part due to Thursday evenings blackout which had many traders taking Friday off, to push the Dow Industrials above 9,350 resistance and to a new 52- week closing high as chip-giant Intel (NASDAQ:INTC) $26.19 +4.55% lead the Dow component gainers list, which had the Philadelphia Semiconductor Index (SOX.X) 414.85 +5.15% also closing at new 52- week highs. While volume levels doubled from Friday's 620 million share rate at the NYSE and NASDAQ's 630 million shares, which were the lightest volumes of the year due to remaining power outages, there were few sellers to be found in today's session, with only the AMEX Gold Bugs Index ($HUI.X) 177.86 -2.39%, Utility Index (UTY.X) 272.13 -0.6% and Pharmaceutical Index (DRG.X) 310.32 -0.06% posting losses. Optimism in Japan toward a recovering U.S. economy boosted the Nikke-225 above the 10,000 on a closing basis for the first time in over a year and helped give lift to broader technology here in the U.S. with the Semiconductor Index (SOX.X) 414.85 +5.15% leading gains, Disk Drive Index (DDX.X) 117.37 +3.84%, Networking Index (NWX.X) 192.23 +3.49% and CBOE Internet Index (INX.X) 141.32 all higher by more than 3%. Today's gains were not just among technology sectors as the Morgan Stanley Cyclical Index (CYC.X) 555.98 +1.63%, which has set 3 consecutive 52-week highs did so again today, with Dow components General Motors (NYSE:GM) $38.05 +2.56% and DuPont (NYSE:DD) $44.75 +2.56% matching each other's percentage gains with some analysts mentioning both stocks as more stable ways for investors to play a longer-term trend in alternative power and fuel cell technologies. More speculative names like Ivanhoe Energy (NASDAQ:IVAN) $1.70 +68%, which provides technology to convert natural gas to liquid form, along with Beacon Power (NASDAQ:BCON) $0.92 +142%, which develops and provides power for communication networks, computers and commercial facilities exploded on heavy volume with Ivanhoe trading 43.6 million shares, just under one-half its public float of 99.4 million shares, while Beacon Power challenged Intel (INTC) and Lucent (NYSE:LU) $1.88 +1.62% for today's most active with 49.4 million shares traded, enough to have that stock's public float of 42.4 million shares and total shares outstanding of 42.8 million trading hands in a single session! The consumer-sensitive S&P Retailing Index (RLX.X) 357.07 +1.95% rose to another 52-week high and closes in on the 365 level, which this sector hasn't seen since March of 2002. Retailing giant and Dow components Wal-Mart (NYSE:WMT) $58.92 +1.41% gained 82 cents, moving to a 52-week high after saying a strong back-to- school shopping season may have its same-store-sales for August showing the biggest gain in 14-months, and while last week's blackouts across Northeastern parts of the U.S. and Canada had 200 of its stores closing at the height of the power failure, those closures would not hurt its sales or profit results. Rival Target (NYSE:TGT) $38.72 +2.37% also said same store sales at its discount stores were tracking above its August plan for a gain of 4% to 5%. Tomorrow's University of Michigan sentiment survey for August will be scrutinized when it is released at 09:45 AM EST tomorrow morning. Investors and economists hopes it will add to a picture of improving economic fundamentals. The survey was originally due last Friday, but was delayed due to the blackout that affected parts of the United States last Thursday. Economists are forecasting a reading of 91.5, which would be above July's final reading of 90.9. Other economic data scheduled before tomorrow's opening bell comes in the form of July Housing Starts (1.790 million annual rate forecast) and July Building Permits (1.803 million annual rate forecast). Then at 02:00 PM EST, the Treasury budget is expected to show a deficit of $53 billion in July, with outlays rising 9% from a year ago due to increased defense and unemployment spending, while receipts are forecasted to fall 7% versus year-ago levels given tax cuts and reduced payroll withholdings. Despite expectations for a growing deficit, the U.S. dollar was strong against major foreign currencies with the U.S. Dollar Index (dx00y) 97.36 +0.73% looking to challenge its summer highs of 97.55. The September euro futures contract (eu03u) 1.1138 - 0.92% fell to its lowest level since mid-July, while September yen futures (jy03u) 0.008374 -0.23% slipped more fractional as Japanese investors look less willing to relinquish Japanese assets on thoughts of an improving economy in the U.S. Treasuries also found buying with the shorter-dated 5-year YIELD ($FVX.X) falling 3.9 basis points to 3.359%, with its September futures contract (fv03u) 111'215 +0.16% gaining 6/32. The benchmark 10-year YIELD ($TNX.X) fell 5.1 basis points to 4.477%, with its September futures contract (ty03u) 111'030 +0.33% gaining 12/32, while the longest-dated 30-year YIELD ($TYX.X) slipped lower by 4.3 basis points to 5.361% as its September futures contract (us03u) 105'24 +0.62% gained 21/32. Pivot Analysis Matrix Many of the Dow Industrials (INDU) 9,412.45 +0.97% old economy, or deeply rooted cyclical stocks trudged higher in today's session, and has the Dow Industrials breaking out of its recent 2-month range. In my opinion, this will have investor optimism also breaking out of a range and at 52-week highs. As it would relate to any of the levels in the pivot matrix, in pink I've highlighted all of our MONTHLY R1 pivots in the various equity indices as being in play. The S&P Banks Index (BIX.X) 305.16 +0.13% traded a 52-week high of 317.94 on July 14th. The only sign of bullish caution I saw today was that financial sectors lagged today's move higher, with more notable weekly lagging among the two banking indices. However, just as we've seen the NASDAQ-100 Index (NDX.X) 1,284.81 +2.48% and its Tracking Stock (AMEX:QQQ) $31.97 +2.56% rebound strong from last week's relative lows, giving some power surge to the SPX/OEX and Dow Industrials, a break above BIX.X 307.60 might be a shock that bears can't withstand, even if market volumes are light. I currently consider the S&P Banks Index (BIX.X) 305.16 +0.13% as having support at the 297-298 area, with resistance at MONTHLY Pivot of 307.60 and WEEKLY R1 of 306.75. Dow Industrials (INDU) Chart - Daily Interval While the stronger dollar would tend to hurt some of the Dow Industrials that have been benefiting from the weaker dollar in recent months, its would certainly appear its this very index and stocks within it, especially the deeper cyclicals that may be attracting the bulk of foreign capital that has been coming back into the U.S. markets. It would be evident by today's trade and break to new highs that higher Treasury YIELDS have had little negative impact on investors hunger for many of the Dow components and while light volumes give hint there's little interest in stocks at current levels, the price action unfolding gives me the observation that any disinterest is among sellers. Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still holding "bull correction" status at 80.00%. S&P 500 Index (SPX.X) Chart - Daily Interval The SPX challenged the psychological 1,000 level all afternoon and if not for some lagging in the financial sectors, most likely would have closed the 1,004 level. At the end of this weekend's "Ask the Analyst" column I posted some data I had gathered from the Mortgage Bankers Association and weekly mortgage survey statistics http://www.OptionInvestor.com/ask/ask_081703_1.asp . Now, I would think that the data shown in July, and slight drop-off in mortgage applications, but still strong purchase index reading for the MBA's July 16 and 23 reports may already have been factored into tomorrow's releases of July new home starts and for any type of indication of a NEGATIVE response to that data, the SPX would have to fall back under the WEEKLY Pivot of 989. Today's trade saw a net gain of 1 stock to a point and figure buy signal in the broader S&P 500 Bullish % ($BPSPX) as it inches higher at 74.8%. Still bull correction, but edging up from its recent relative low reading of 73.4% set on August 7th and 8th. S&P 100 Index (OEX.X) Chart - Daily Interval Today's close above a downward trend we've been using for several weeks gives a bullish look to the OEX. The last time the OEX was able to close above the 502.63 level came on July 25, when the OEX faltered back to 497, made a spike move higher to 506.65, just above our new WEEKLY R2, then got hit back lower to the recent lows near MONTHLY S1 of 485.34. With this past trade action, I would now have to deem the WEEKLY R2 of 506.08 as a rather critical near-term level of resistance for bears, if not my recent thoughts that the SPX/OEX are to show a 1.5 step back for every step forward. Today's trade in the Dow Industrials already has me questioning this type of move lower as many of the deeply rooted economic sectors continue to power higher. Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX). Status remains "bull confirmed" at 82% for a third- straight session, and would still take a reading of 78% to slip lower into "bull correction" status. NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Interval I was much more amicable to a bullish trade in the QQQ from the $30 level in "bear alert" status with the thinking the Q's were near-term oversold and that some strength in the INDU/SPX/OEX might have the QQQ getting a bounce back near $31.00, but $31.97!? No way! I checked NASDAQ to see if I could get an up- to-date reading on short interest, which had been building to this year's high of 250 million shares. While very hesitant to trade the Q's bullish here, an aggressive bull looking for some short-squeeze potential, with the Dow Industrials (INDU) breaking to new highs would look for further bullishness in the Dow to lend to positive market psychology, play the QQQ long above $32.15, but follow with a trader's stop at $31.55, which would be snug below this week's R1 of $31.63, where I was looking for FIRM resistance. Bears looking for renewed weakness would also be looking for bearish entry back at $31.55, with a stop just above $32.15. In after-hours trade, the QQQ has been creeping higher, with last tick at $32.05. Today's trade saw a net gain of 2 stocks to point and figure buy signals in the narrower NASDAQ-100 Bullish % ($BPNDX). Still "bear confirmed" at 67%, but off its recent August low readings of 64%. It would currently take a reading of 70% to reverse up into "bear correction" status. Jeff Bailey ------------------------------------------------------------ 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: ------------------------------------------------------------ **************** WEEKLY FUND WRAP **************** Wall Street Ends Blackout Week Higher Reports of modest inflation and strong industrial output in July fueled gains on Wall Street last week in spite of thinned volume resulting from the worst blackout in U.S. history. For the week ended August 15, the S&P 500 large-cap index rose 1.3 percent in price, while the Russell 2000 small-cap index posted a 4 percent gain. All of Lipper's equity indices were in the black over the 5-day period, led by technology sector funds, which returned 4.5 percent on average. A surge in Pacific-region stocks pushed the MSCI EAFE developed foreign market index higher by 2.8 percent last week, twice the weekly total return of the S&P 500 index. International equity funds followed suit, returning 2.9 percent on average last week using Lipper's numbers. With money flowing back into the stock market, bonds closed the week lower. For the week, the LB Aggregate Bond index lost 1.1 percent, with losses increasing as you moved longer in maturity. Vanguard's Long-Term Bond Index Fund, for example, declined 1.9 percent for the 5-day period through August 15. The high-yield bond market was also lower. Short-term interest rates remain at "50-year" lows following the Fed's decision last week not to lower rates again. Money market fund yields remain below 1.00%, per iMoneyNet.com. Equity Funds Below are selected Lipper equity fund indices for the 1-week and year-to-date periods through August 15, 2003, per Lipperweb.com. Week YTD Selected Lipper Equity Indices +0.7% +9.4% Balanced Fund Average +1.1% +11.1% Equity Income Fund Average +1.4% +12.1% U.S. Large-Cap (Core) Fund Average +1.8% +15.5% U.S. Mid-Cap (Core) Fund Average +3.2% +20.2% U.S. Small-Cap (Core) Fund Average +1.8% +15.5% U.S. Multi-Cap (Core) Fund Average +4.5% +28.4% Science & Technology Fund Average +2.9% +14.6% International Fund Average Stock mutual funds were generally higher last week and consistent with what you'd typically see in the early stages of the economic recovery, with returns increasing as you move down the market cap range. As you can see, small-cap funds averaged 3.2 percent over the 5-day period, best among U.S. diversified equity funds, while technology-driven funds were 4.5 percent higher to lead all stock fund categories. In terms of style, growth-oriented funds bested their value-driven fund peers. The week's top individual fund performers included three ProFunds funds. ProFunds UltraJapan, Semiconductor UltraSector and Ultra- Small-Cap funds each returned more than 10 percent for the weekly period. Funds that leverage off of the Nasdaq 100, such as Rydex Velocity 100 Fund and ProFunds UltraOTC, returned upwards of 8.0% for the week. Among popular funds with over $500 million in assets, three funds returned over five percent last week. Firsthand Technology Value Fund led the way with a 1-week total return of 6.5 percent. Next was Fidelity's Select Electronics Portfolio, up 5.8 percent. The class A shares of Franklin Small-Cap Growth Fund II picked up 5.1 percent for the week. Another 20 or so funds, mainly tech-driven and small-cap funds, returned between 4-5 percent over the weekly period. According to Lipper, five equity indices averaged over 3 percent: emerging markets (+3.2%), mid-cap growth (+3.1%), small-cap value (+3.3%), small-cap core (+3.2%) and small-cap growth (+3.8%). So a pretty good week overall for stock mutual funds and the markets in which they invest. Fixed Income Funds Below are selected Lipper fixed income indices for the 1-week and year-to-date periods through August 15, 2003. Week YTD Selected Lipper Fixed Income Indices -0.9% -0.7% GNMA Fund Average -1.1% -1.3% U.S. Government Bond Fund Average -0.3% +1.2% Short Investment-Grade Fund Average -1.0% +1.3% Intermediate Investment-Grade Fund Average -1.0% +1.0% Corporate A-Rated Debt Fund Average -0.4% +13.1% High Yield Fund Average -1.0% +4.9% Global Fixed Income Fund Average -1.0% +6.1% International Fixed Income Fund Average With investors apparently becoming more optimistic about the U.S. economic recovery, bond prices fell hard last week with the total investment-grade bond market (LB Aggregate) off 1.1 percent. The average intermediate-term, investment-grade bond fund lost around one percent, per Lipper. Long-term bond funds experienced larger weekly losses overall; short-term funds minimized losses relative to other bond fund types. The $22 billion Vanguard GNMA Fund, the largest fund of its kind, tumbled 1.4 percent for the week to lead its category lower. The Fidelity GNMA Fund, on the other hand, lost only 0.6 percent over the 5-day period, holding up better than its GNMA category peers. America's largest fixed income fund, PIMCO Total Return, finished the week 1.1 percent in the red. Global and international fixed income funds didn't perform better overall, losing around one percent on average for the week, using Lipper's numbers. So, all in all a tough week for most bond fund investors. Money Market Funds Yield Selected iMoneyNet Money Market Indices 0.51% All Taxable MMF Average 0.33% All Tax-Free MMF Average The iMoneyNet.com all-taxable money market fund average slid two basis points to 0.51% last week. Any lower, and you may as well stuff your money under the mattress. PayPal's Money Market Fund (402-935-7733) continues to offer the highest 7-day simple yield (1.02%). The $57.6 billion Fidelity Cash Reserves Fund and $47.4 billion Vanguard Prime Money Market Fund have 7-day simple yields of 0.80% and 0.78%, respectively. According to the iMoneyNet.com website, the money market industry is witnessing its first casualty of the low rate environment with the liquidation of the Munder U.S. Treasury Fund (A, K and Y fund class shares). The SEC filing states that this fund is currently yielding just 0.01% (ouch). Fund News, Etc. In Morningstar.com fund news, Buffalo Small-Cap Fund has lost one of its co-managers, Tom Laming, who will start his own investment firm. That departure prompted Morningstar to drop this small-cap fund from its Fund Analyst picks. Laming, who co-managed Buffalo Small-Cap Fund (BUFSX) from its April 1998 inception, was one of the architects of Buffalo's "theme-based" investment approach and valuation models, Morningstar cited. James McBride, one of three equity analysts, left also to team up with Mr. Laming. Laming's departure affects other funds as well, including Buffalo Science & Technology Fund, which he managed since April 2003, and five AFBA fund clones. Morningstar noted that Laming's departure isn't reason enough to caution investors to sell the fund. In other news, The World Funds is launching a new "market-timing" bond fund named Lara U.S. Treasury Fund. Under normal conditions this fund will invest at least 90% of its assets in U.S. Treasury securities, Morningstar reports. The World Funds is also home to other innovative funds including the Genomics Fund (GENEX), Third Millennium Russia Fund (TMRFX) and New Market Fund (AVMIX). Steve Wagner Editor, Mutual Investor Matadors Mangled On Wall Street ************** TRADERS CORNER ************** Elliott Wave Plays By Steve Gould Company Profile Watson Pharmaceuticals Inc. (WPI) is engaged in the development, manufacture, marketing, sale and distribution of branded and off- patent (generic) pharmaceutical products. The Company also develops advanced drug delivery systems designed to enhance the therapeutic benefits of existing drug forms. Watson operates manufacturing, distribution, research and development and administrative facilities primarily in the United States. It operates and manages its business as two segments: branded and generic pharmaceutical products. The Company started operations as a manufacturer and marketer of off-patent pharmaceuticals. Through internal product development and synergistic acquisitions of products and businesses, Watson has grown into a diversified specialty pharmaceutical company. As of December 31, 2002, the Company marketed more than 30 branded pharmaceutical products and approximately 130 generic pharmaceutical products. Chart Analysis Chart: Daily WPI started a five wave basic pattern in March 2003 and is currently in the process of completing the 4 wave. The 4 wave looks to be a flat correction. The criteria for a flat are 1. The A-B-C waves segment into a 3 wave, a 3 wave and a 5 wave. So far the A wave is a 3 wave, the B wave is a 3 wave and the C wave is an incomplete 5 wave. The hourly chart below shows where WPI should bottom out. 2. The A wave and B wave are the same height (plus/minus 25%). Right now the B wave is 78% of the A wave. 3. The A wave and C wave are the same height (plus/minus 25%). At the anticipated pivot point the C wave will be 1.25 X A wave. Chart Hourly The hourly chart of WPI shows that WPI will decline to about 36.65 in the next few days as it completes the five wave basic pattern of the C wave. WPI should then reverse course back up. At 36.50 the C wave will be equal to 1.25 X A wave. Chart Weekly The weekly chart shows that WPI is completing the 4 wave of a 3 year long five wave basic pattern. However a case could be made that the monthly chart supports a longer term up trend. If WPI pierces 48.13 then the current labeling needs to be modified as WPI is now in a five wave basic pattern up that started in mid 2002. In either case, WPI has more upward potential ahead. It is just a matter of how much. Trade Setup Wait until WPI reaches 36.65 before entering this play. We will buy straight calls with our target at 46 by 11/24/2003. Purchase the February 04 40 call to give a three months buffer. Option Sym Strike Type Bid Ask Delta Vol OI WPIBH 40 Call 2.70 2.95 49 4 134 When WPI reaches $36.50 in the next few days, the option will be valued at about 2.05. This will decrease the risk and increase the profit potential. What If We Are Right Chart: Position Analysis For The First Target If WPI reaches 46 by 11/24/2003 the option will be worth 6.75. Assuming we can purchase the option for 2.05 as WPI declines, we will sell half the position when the value of the option reaches 4.10. What If We Are Wrong Chart: Wrong Scenario At 34.43, the A wave x 1.62 will equal the C wave. If WPI extends past that, something has gone wrong and we need to exit the trade. If that happens within the next 2 months, the options will be worth 0.85. ************** TRADERS CORNER ************** Elliott Wave Play Updates By Steve Gould TTWO Chart: TTWO daily update 8/18/2003 TTWO went down to $25 just as predicted. A few days later, it declined just a bit more. The important thing is that we purchased the option at $25 when the options were valued at about 1.35. TTWO is right on track and headed to about $35. Hold. Option The original option values on 8/4/2003 were TTWO – $25.00 Option Pos Qty Sym Strike Type Bid Ask Delta IV Buy 10 TUOLF Dec 03 30 Call 1.20 1.35 31 45 Current values on 8/18/2003 are TTWO – $26.73 Pos Qty Sym Strike Type Bid Ask Delta IV Buy 10 TUOLF Dec 03 30 Call 1.50 1.70 38 44 ------------------------------------------------------------ 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: ------------------------------------------------------------ ******************* 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 08-18-2003 Copyright 2003, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. In Section Two: Stop Loss Updates: EBAY, HIG, LLL, PCAR, SPW Dropped Calls: None Dropped Puts: BDK, IBM Play of the Day: Call - PCAR Watch List: A Few High Dollar Stocks Updated on the site tonight: Market Posture: Matadors Mangled On Wall Street ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! Go to http://www.optionsxpress.com/marketing.asp?source=oetics23 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ***************** STOP-LOSS UPDATES ***************** EBAY - call Adjust from $99.50 up to $103.50 HIG - call Adjust from $51.00 up to $51.75 LLL - call Adjust from $47.25 up to $48.00 PCAR - call Adjust from $78.00 up to $80.00 SPW - call Adjust from $44.00 up to $45.00 ************* DROPPED CALLS ************* None ************ DROPPED PUTS ************ Black & Decker - BDK - cls: 41.11 chg: +0.34 stop: 41.01 After taunting us for over a week, our BDK play finally brought our suffering to an end on Monday by pushing higher with the rest of the market to close over $41 for the first time since breaking below that level in late July. Last Friday's close over the 200- dma was a warning of this possibility and we've been cooling on this play for several days now. Even in the absence of any strong volume, the stock has moved through several strong resistance levels in the past few days and there's no way to paint the price action in a bearish light. With the strong upside earnings surprise from home improvement retailer LOW this morning, the bears never had a chance. Any open positions should have been stopped out on the opening surge, as we have no choice but to move to the sidelines. Picked on August 4th at $39.99 Change since picked: +0.61 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 718 K --- Intl Business Mach - IBM - cls: 83.52 chg: +1.73 stop: 82.51 Positive comments in Barrons over the weekend related to AMD seemed to light a fire in the Semiconductor sector on Monday and that strength spilled over into Technology stocks in general. IBM rode the wave higher right from the opening bell. After tripping our $82.51 stop in the first 30 minutes of trade, the stock consolidated and then pushed higher right into the closing bell. While only a 2% move on the day, the fact that Big Blue managed to push through both its 200-dma and 50-dma on solid volume bodes well for the bulls. Needless to say, this play is a drop, following our stop being violated and any open positions should have been stopped out early in the day. Traders still holding open positions should look at any early weakness on Tuesday as a gift and exit the play. Picked on August 5th at $79.85 Change since picked: +3.67 Earnings Date 07/16/03 (confirmed) Average Daily Volume: 6.93 mln ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ********************** PLAY OF THE DAY - CALL ********************** PACCAR - PCAR - close: 84.15 change: +2.51 stop: 80.00*new* 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: Consistent as the sunrise, PCAR defied the odds on Friday and charted to yet another new high and closed at its high of the day. It is notable that although volume was on the light side (608K vs. the 1.16 mln ADV), that still represented stronger volume than what was seen in many other stocks and on the major exchanges. The stock has been channeling higher between the upper Bollinger band ($82.28) and the 10-dma ($78.76) for 8 days now and with daily Stochastics stretched into overbought, we can't help but feel that this trend is due for an adjustment and probably early next week. The trend is still strong, but conservative traders should be taking advantage of further strength to harvest gains and then look for another entry opportunity on the next pullback to support. With PCAR now $4.40 above our picked price, we feel it is time to start getting a bit more aggressive with our stop, so we're raising it to $78.00 this weekend. Any mild pullback should be halted by the 10-dma, so a trade at $78 would indicate a potential end (even if just temporary) to this bullish trend. Traders still looking for an entry will want to use the 10-dma as their guide. A dip and rebound above this average is a viable entry setup, but only if the rebound is accompanied by rising volume. Why This is our Play of the Day Normally, our Play of the Day is chosen from the current play list as the play we like best for either new entries or for its prospects over the next day or two. Today, we're going to do something different. PCAR has been on the Call list for more than two weeks, as we've waited for this bullish move to unfold. Needless to say, the past 3 days have been truly exciting, as the stock broke out over $80 and has continued to power higher. Today's close just over $84 has the stock up more than $7 since the latest round of profit taking, and we think it is due for a rest. That said, with the bullishness that engulfed the broad market on Monday, we're not quite ready to pull the plug either. Consider this a warning to snug up those stops and protect the gains that have accrued in the past week. Conservative traders would be well served to close any open positions and harvest those gains. Traders willing to take a bit of risk for the potential of another bullish day should consider raising stops to just below today's intraday low of $81.61 (we're raising the official stop to $80.00, the site of last week's breakout) and should look to exit the play on strength if the bulls can power the stock into the $85-86 area. Suggested Options: We are not recommending new positions at this time. For those of you that have enjoyed this bullish move over the past 2 weeks, it is time to take the money and run! Annotated Chart of PCAR: Picked on July 31 at $77.24 Change since picked: +6.91 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.16 mln ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: ------------------------------------------------------------ ********** Watch List ********** A Few High Dollar Stocks Northrop Gruman - NOC - close: 95.23 change: +2.25 WHAT TO WATCH: Building on its bounce from new support at $90.00 shares of NOC are leading the DFI defense sector to new highs. The close over $95 for NOC has formed a fresh bullish-catapult breakout on its P&F chart. Bullish traders might want to keep an eye on this one for an entry or evaluate short-term moves toward next resistance at $100 now. Chart= --- Procter & Gamble - PG - close: 88.40 change: -0.72 WHAT TO WATCH: PG has been a constant source of irritation for bearish traders as it tends to catch short traders with a bear trap. However, we're seeing a steady trend of failed rallies under its simple 50-dma and today's performance was not very inspiring. The stock's P&F chart is bearish but still has support near $85.00. Aggressive traders could try and play a move to $85 while patient traders just might want to keep an eye on it. The $88 mark and its 200-dma are still technically support. Chart= --- AutoZone Inc - AZO - close: 87.05 change: +0.22 WHAT TO WATCH: AZO has been a frequent candidate on the OI play list and watch list. This time we are noting its strong rally has stalled right at previous resistance near $87.50 to $88.00. We thought it interesting that today's comments from Raymond James, who raised their price target on AZO from $96 to $105, was not enough to pierce resistance. AZO may need to consolidate back to the $82.50-85.00 levels before building up enough steam to hit new highs. Definitely one to watch. Chart= --- Omnicom Group - OMC - close: 75.83 change: +0.83 WHAT TO WATCH: Shares of OMC have formed a new "closing" 52-week high (its intraday high is in mid-June). The stock looks ready to breakout to the upside from its recent trading range of $70 to $75-76. Another move higher and short-term traders could try and scalp the move to $80, its next natural resistance level. Most of the stock's technical oscillators are bullish and its P&F chart also shows the sideways consolidation that can now become a new base to build on. Chart= ************** MARKET POSTURE ************** Matadors Mangled On Wall Street To Read The Rest of The OptionInvestor.com Market Watch Click Here http://www.OptionInvestor.com/marketposture/mp_081803.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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