The Option Investor Newsletter Thursday 08-21-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Five Year High Futures Markets: The Air up There Index Trader Wrap: See Note Market Sentiment: Bear Market in Fear Weekly Manager Microscope: Tony Maramarco: Babson Shadow Stock (SHSTX) Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 08-21-2003 High Low Volume Advance/Decline DJIA 9423.68 + 26.20 9481.44 9391.89 1.71 bln 2020/1170 NASDAQ 1777.55 + 17.00 1783.64 1762.97 1.71 bln 2060/1191 S&P 100 502.04 + 0.15 505.90 500.57 Totals 4080/2361 S&P 500 1003.27 + 2.97 1009.53 999.33 W5000 8715.26 + 44.00 9757.90 9671.31 RUS 2000 494.82 + 5.36 494.82 489.46 DJ TRANS 2681.65 + 19.80 2685.17 2659.34 VIX 19.53 - 0.18 20.56 19.38 VXN 28.28 + 0.64 29.13 27.33 Total Volume 3,690M Total UpVol 2,577M Total DnVol 1,017M 52wk Highs 815 52wk Lows 56 TRIN 0.81 NAZTRIN 0.67 PUT/CALL 0.69 ************************************************************ Five Year High Believe it or not but it has only been a week since the power went out in the Northeast and the markets set new highs today. Not five year highs but new highs. The Philly Fed was the high stepper that blew away numbers for the last five years but the markets did not match its performance. However, if the economics keep up this rate it will not be long before the markets catch up. Dow Chart Nasdaq Chart Starting the morning off positively was a Jobless Claims number that surprised some traders. There were only 386,000 new claims registered for the week that included the blackout. Does that give you a clue where I am headed? The prior week was revised up to 403,000 but nobody seemed to care about the old news. Nobody seemed to consider the 54 million people without power on Friday who were unable to apply for benefits. Those same people were probably more interested in keeping everything in the freezer from spoiling instead finding the unemployment office. Getting gas to go to downtown was also a challenge. The Labor Dept said that the states with the biggest claims were not in the Northeast and therefore they did not expect a major revision. Ok, while I do not think we will see a major revision over 400,000 for this week I would be concerned that next week could be a shocker. Still we will not begin to see the real picture until the week after Labor day when the real work begins. Vacations will be over, summer help back to school and the last quarter push for holiday money begins. The 4-week moving average fell to 394,250 and the lowest level since Feb. Also providing a boost to the markets was the Leading Indicators for July which came in at +0.4% and the fourth consecutive month of gains. This was inline with estimates. Five of the ten components rose which was slightly less than the 8-of-10 in May. The Conference Board even went so far as to compare the current performance with late 2001 when the index bounced and then failed to hold as the economy fell back again. This was an unusual step for the Board to suggest that there was a downside potential. They stress the index shows an economy poised to rebound but that rebound is far from certain. This less than cheerful outlook was completely ignored once the Philly Fed hit the wires. The Philadelphia Fed Survey exploded past estimates of +10 with a very strong +22.1. This is completely unheard of to see such a bounce in manufacturing conditions in one month. The index jumped to a five year high and internal components were strong. Shipments rose to 16.3 from 9.1, New orders 14.6 from 10.4 and six month outlook to 62 from 56.9. Not rising were the average work week at 4.7 from 5.1 and employees to -8.7 from +0.8. Also surprising was the jump in prices paid to 16.0 from -6.5. Obviously the jump in manufacturing has not been enough to translate into new jobs with capacity utilization at 75%. Inventories remained low at 6.4 and show no confidence in future demand. The bad news bulls did not know how to react to the good news and after the initial spike the markets trended lower the rest of the day. This was surprising when you consider tech stocks got some help from Craig Barrett the CEO of Intel. He said it was too early to call it a recovery but they were seeing some buying "here and there." He qualified specifically with "We're not seeing a big upgrade cycle and we're not seeing IT budgets being raised." Still techs raced higher at the open and closed at a new 52-week high of 1777. The semiconductor sector found the most excitement and raced to a new high at 435 and a +13 point gain. Over the last ten days the SOX has climbed from 366 to 435 and nearly a +19% gain. Helping to power this gain was a report that the capacity of chip factories had risen to 85.9% utilization for the period ending in June. This is a new high since the 64% bottom in the 3Q-2001. This has been the worst slump in the 50-year history and analysts suggest the capex dam could burst next year if the trend continues. Much of the increase in utilization has come from the closing of plants do to the glut. The survivors are now poised to rebound out of the slump and back into boom time. All they need is demand. Considering most chip companies are expecting 3Q demand to be less than previously expected it would appear somebody is wrong. Also providing some sentiment gains before the open was the news that Chemical Ali had been captured in Iraq. He was number five on the most wanted list. He had initially been thought to have died in a bombing of his palace but recent intelligence had brought him back to life and pointed out his location. The continued discovery of Iraqi top-level fugitives due to tips from informers suggests the noose around Saddam is getting tighter on a daily basis. He is said to be moving every four hours and that alone exposes him to many more eyes than hiding in a basement somewhere. Financial instruments were credited with some of the market gains. The dollar rose to a four-month high with a +2% gain over the Euro and some analysts were crediting stock gains to the dollar strength. Did I miss something? I thought the majority of blue chips actually hit earnings estimates last quarter based on the benefits of a falling dollar. Our products are cheaper and the currency translations produced extra profit. AMZN for instance said they made $54 million in currency exchange due to the weak dollar. With the dollar at a four-month high it would seem to me that benefit has expired. Bonds came under pressure today with yields rising on the 10-year note to 4.49% and right back at the key 4.5% level that tends to bleed money from equities. Financial stocks, which had been strong, sold off from the opening high on worries that a bond failure is still lurking in the darkness and we could begin to see some earnings warnings soon from bond losses. Bonds also took a hit after the minutes of the June FOMC were released. There was considerable discussion about using alternative means to provide stimulus if they ran out of rate cuts. However, the general consensus of opinion was no alternative methods were necessary and that took the pressure off bonds. If they feel the Fed is powerless or gutless when it comes to taking future aggressive steps then there is nothing to keep rates low. It was also learned that 3 of the 12 Fed banks wanted to cut rates by 50 points instead of 25. The minutes provided a look at a very confused Fed that was puzzled about the lack of growth and going to do nothing in the foreseeable future to add more stimulus. Parry was eventually the lone dissenter on the vote to cut only 25 points. His recent publicized appearances echoed his comments in the minutes that he has not yet seen any evidence that a recovery is really underway. This is not a bullish picture being painted by the group. Also hitting new highs was gasoline with a +9.5% move and a move not seen in 19 years. With refineries running at over 95% capacity and no reduction in summer demand the prices keep moving higher. This is going to translate into lower profits for shipping companies, airlines and any company that spends a lot of money on transportation. The consumer may also be finding less money in their pocket from that reduced tax withholding with the addition of the price hikes. Commuters are going to be less bullish when the sentiment surveys hit them and I would bet those numbers take another energy hit. Some well-known drug stocks took a hit starting with Pfizer. Their estimates were cut due to generic concerns for two of their well known products Lipitor and Viagra. PFE fell to $29.75 and a new five-month low. SGP warned after the close that 2004 earnings would be less than 2003 and they were cutting 1000 jobs. They also cut their dividend from 17 cents to 5.5 cents. Prior to the cut SGP was in the top 10% of high yielding S&P companies. The stock went out at $16.50 and the announcement was made after trading was closed. The Dow came within 2 points of closing at a new 52-week high but did make a new intraday high at 9481. It was not a boring day for the Dow with the spike to nearly 9500 at the open. About 11:00 AM a large sell order in the S&P futures pushed the Dow to its low of 9391, almost -100 points off the high and were it not for the Philly Fed blowout the results could have been much different. Those numbers calmed the bearish sentiment at the time but never completely cured it. The Nasdaq blasted off to a new 52-week high at 1783 but ran into a dead end and was not able to break 1780 the rest of the day. The Nasdaq run has been amazing and it is up +76 points for the week mostly on the strength of the semi stocks. Despite the indexes finishing off the highs there were 815 new 52-week highs and only 56 new lows. Friday should be a tossup. There is so much bullishness the bears are afraid to short. Those holding stocks with strong profits are afraid to sell. It is a catch-22. Current shorts are trying to cover but nobody holding wants to sell. It is a bullish scenario made in heaven, as long as it lasts. The daily new highs continue to fuel new interest in buying but the low volume is keeping new buyers on the sideline. Traders are holding their collective breath and hoping for a pullback to enter. Professional traders are extremely confused by the lack of a summer sell off. When the market continues to go up when it should be going down all the rules go out the window. Everyone but Abby Joseph Cohen thinks stocks will have a tough time hitting the aggressive earnings estimates in light of the weak demand. Abby raised her estimates for 2003 and 2004 in light of the solid growth in the first half of the year. Abby is definitely reading from a different playbook than many others. The only economic reports on Friday are the ECRI Weekly Leading Indicators and Internet Commerce Sales. Neither has any real market impact. YHOO, EBAY and AMZN could be impacted depending on the Internet Sales numbers but it is not a broad market mover. With large gains and extreme levels for the week it will be interesting to see if we get a bout of profit taking or another round of panic buying by the shorts. We have had some big Fridays in recent months in both directions. Until the actual selling begins on strong volume I would continue to dance until the music stops. Once it does stop the race for sideline chairs could be frantic. If August and September are the two worst months of the year and this is the bad news than I can't wait for the good months that follow. But then we still have September and October in our path. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** The Air up There Jonathan Levinson The NQ and YM printed new highs today, as treasuries and precious metals sold off. Daily Pivots (generated with a pivot algorithm and unverified): 10 minute chart of the US Dollar Index The US Dollar Index rose impressively today, with the buying frenzy commencing with Europe's open and continuing throughout the day, reaching a spike high above 98.80. Gold and the precious metals indices got sold aggressively, while the CRB was strong, breaking and holding above 240 on strength in heating oil, cocoa, crude oil, coffee and natural gas futures. Daily chart of December gold December gold valued in US Dollars got clocked from the get-go, but did better in other currencies as they tumbled relative to the Dollar as well. December gold was down 5 at 362 as of this writing, with the HUI down 6.71 to 183.77 and the XAU –3.15 to 88.03. I've heard it said that the smart money likes gold, but the smarter money likes silver. As discussed in last night's Market Wrap and for the past year, the Fed's inflationary, or, in its words, "anti-dis-inflationary" campaign has served to boost the prices of hard assets, thus the precious metals, real estate and commodities rallies we've been seeing for the past years. Much has been said about Warren Buffet's silver position, the reputedly monumental short interest on silver, and a plethora of other chapters in "the story" that ignites silver bugs. Without getting into a discussion of silver's fundamentals, I've put together some charts to give us a preliminary technical view of the commodity. The following is worth a look. It's not my chart, and I do not know the basis on which the data has been assembled, but I find it fascinating: Multi-century chart of silver and gold:silver ratio courtesy of www.sharelynx.com 40 year chart of silver (log scale) courtesy of www.Sharelynx.com Weekly chart of December silver The 10 week stochastics on December silver are in an upphase on the steep climb off the higher low printed in June. Descending resistance is in place since 1999, and was briefly violated on the July spike high. Daily chart of December silver The steep move off the low in June has formed a pennant, as bulls and bears are forced into an ever-narrowing battlefield. The daily cycles are mixed, trying to put in a higher low on the move off the July high. On a trading basis, this remains a difficult spot in which to scope for entries in silver, and the more prudent strategy is watch how price behaves on the next visit to either the or lower trendlines. Daily chart of the ten year note yield The Fed had 24.5B in expiring repos owed to it today by its 22 primary dealers, and refunded only 11B. 11B is a lot of money, but the net drain of 13.5B wreaked havoc on the bond market today, with treasury yields rallying throughout the session. There was much ado about the bullish initial claims data, which declined amidst no mention of the unofficial holiday last Friday which effectively shut down much of the country during the widespread power outages. Nonetheless, pundits were bulling the initial claims and the Philly Fed blowout at noon, both of which were credited with the impressive selloff in bonds. The selling slowed toward the end of the session, leaving ten year note yield with a bullish morning doji star for the day. The TNX gained 12.6 basis points to close at 4.507%, the FVX gained 22 bps and the TYX 5.5 bps. Daily NQ candles The NQ led to the upside again today, up 1.15% compared with .33% for the ES and .27% for the YM. It broke to a new yearly high at 1321, exceeding the previous high by one point, closing at 1314.50. In the end, it was one positive day added to the now week-long run, but the upside gains were less than yesterday. Regardless, the up-trend is in the process of being regained, absent a pullback tomorrow. 30 minute 20 day chart of the NQ The NQ advanced further within its bear flag on the 30 minute candles, and the oscillators, which looked good for a sell signal following the morning's decline, have reversed back up. They are now trending under the influence of the daily cycle uptrend, making their signals unreliable. On a swing basis, traders will want to watch the upper and lower trendlines for a sign. Until either one is breaking, the oscillators on this timeframe will be unreliable as the longer cycle upphase pins them in overbought territory. Daily ES candles The ES was again weaker than the NQ, and the oscillator buy signals are weaker on the daily chart. This weakness reflects itself in the 30 minute chart below, with the price advancing closer to the lower ascending trendline of its bear flag. 20 day 30 minute chart of the ES What is a clear buy signal on the 30 minute NQ chart is but a twitch in the ongoing downphase of the ES. It appears that if this rally is to break, the ES and YM will be the ones to lead the way to the downside. Daily YM candles Nothing to add on the YM, except that it lagged the ES, and is testing the lower trendline of its bear flag for the second day in a row, despite this morning's break to a new year high. 20 day 30 minute chart of the YM The new highs and positive closes was a clear victory for bulls, while the lack of upside momentum favored the bears. The selloff in treasuries appeared to favor no other participant but the Fed, most likely encouraged by the refunding of its repo money. The US Dollar rally took a bite out of gold's advance, but caused no serious technical damage, with the pullback easily contained by the ongoing pennant formation. Tomorrow should bring the volatility we've come to expect from late summer trading, as the markets debate whether equities are ready to launch the next leg of this year's rally. Both bulls and bears expect some sort of pullback here, as the put to call ratio was steadily higher today than yesterday, and options volatility was modestly higher within its ongoing bear market in premium. Caution remains key. ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_082103_1.asp ************************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 ************************************************************** **************** MARKET SENTIMENT **************** Bear Market in Fear Jonathan Levinson The put to call ratio and the option volatility or "fear" indices advanced slightly today as equities tried for new rally highs, round-tripping on the Dow and S&P while adding 17 on the Nasdaq. Fear remains exceptionally, awe-inspiringly low in the markets. One can only wonder as to why. The NDX volatility index, the QQV collapsed to an all-time low of 20 last week, and has managed to rise 20% to 24.04 as of today's close. To put that in context, the range for 2002 was 30.23 to 64.31, with the 30.23 coinciding with the QQQ's March top. Seeing the QQV trade below the S&P volatility index, the VIX, was a sight to behold last week, but few noticed. Premium on QQQ options remains very low. The amount of premium for which a seller of contracts is willing to settle remains very low. The key appears to be that options are being aggressively sold. If so, then this points to increasing levels of speculation and hedging by option writers, generally thought to be the "smart" money. As a small trader, the message I take from this is that the markets are growing more dangerous, as the increasing amount of leveraged speculation virtually guarantees sudden swings and "corrections" when the derivatives tail wags the underlying dog. Option premiums haven't tended to stay low for long during recent years, and the QQV and VXN have just days ago printed all-time record lows. Whether this action is screaming "buy!" or "sell!" for the equity indices remains an open question. Following the trend of recent years, I'm inclined to err to the "sell" side, and err I have. Either way, the message for bullish and bearish traders is that volatility is low, it hasn't tended to stay that way for long, and caution is warranted on either side of the trade. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9481 52-week Low : 7197 Current : 9424 Moving Averages: (Simple) 10-dma: 9328 50-dma: 9182 200-dma: 8588 S&P 500 ($SPX) 52-week High: 1015 52-week Low : 768 Current : 1003 Moving Averages: (Simple) 10-dma: 989 50-dma: 990 200-dma: 917 Nasdaq-100 ($NDX) 52-week High: 1319 52-week Low : 795 Current : 1315 Moving Averages: (Simple) 10-dma: 1262 50-dma: 1251 200-dma: 1108 ----------------------------------------------------------------- The VIX remains pegged under the 20 level while the VXN could be producing an "oversold" bounce, if that can occur in such an index. CBOE Market Volatility Index (VIX) = 19.53 -0.18 Nasdaq Volatility Index (VXN) = 28.28 +0.64 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.62 509,982 316,318 Equity Only 0.49 450,740 220,436 OEX 1.29 7,903 10,166 QQQ 3.02 12,773 38,539 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 70.0 + 0 Bull Confirmed NASDAQ-100 72.0 + 4 Bear Correction Dow Indust. 80.0 + 0 Bull Correction S&P 500 76.8 + 1 Bull Correction S&P 100 84.0 + 2 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 0.91 10-Day Arms Index 0.89 21-Day Arms Index 1.00 55-Day Arms Index 1.08 Extreme readings above 1.5 are bullish, and readings below .85 are bearish. These signals don't occur often and tend be early, but when they do, they can signal significant market turning points. ----------------------------------------------------------------- Market Internals -NYSE- -NASDAQ- Advancers 1856 2001 Decliners 967 1088 New Highs 228 254 New Lows 17 9 Up Volume 1112M 1259M Down Vol. 533M 402M Total Vol. 1702M 1701M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 08/12/03 Weekly COT report discloses positions held by small specs and commercial traders of index futures contracts at the Chicago Mercantile Exchange and Chicago Board of Trade. COT data can be found at www.cftc.gov. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs tend to be wrong. S&P 500 Commercials added slightly to their long positions in the S&P, whilesmall traders maintained their positions, adding a net 761 contracts for the week. Commercials Long Short Net % Of OI 07/22/03 411,206 442,131 (30,925) (3.6%) 07/29/03 405,429 445,114 (39,685) (4.7%) 08/05/03 395,633 450,988 (55,353) (6.5%) 08/12/03 399,414 456,767 (57,353) (6.7%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 18,486 - 6/17/03 Small Traders Long Short Net % of OI 07/22/03 155,891 76,466 79,425 34.2% 07/29/03 155,216 73,030 82,186 36.0% 08/05/03 159,971 72,951 87,020 37.4% 08/12/03 158,821 71,040 87,781 38.2% Most bearish reading of the year: (1,657)- 5/27/03 Most bullish reading of the year: 114,510 - 3/26/02 E-MINI S&P 500 Commercials added heavily to their long positions in the e-mini, posting their most bullish reading of the year, while small traders added further to their short positions. Commercials Long Short Net % Of OI 07/22/03 249,392 249,386 6 0.0% 07/29/03 272,659 216,166 56,493 11.6% 08/05/03 310,662 249,004 61,658 11.0% 08/12/03 306,014 217,233 88,781 17.0% Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 88,781 - 08/12/03 Small Traders Long Short Net % of OI 07/22/03 45,945 76,071 (30,126) (24.7%) 07/29/03 44,437 93,144 (48,707) (35.4%) 08/05/03 56,663 95,919 (39,256) (25.7%) 08/12/03 62,534 106,403 (43,869) (26.0% Most bearish reading of the year: (48,707) - 07/29/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercials and small traders moved in the same direction on the NDX, as commercials lightened up slightly on their short positions, while small traders added to their longs. Commercials Long Short Net % of OI 07/22/03 32,502 48,139 (15,637) (19.4%) 07/29/03 31,456 50,294 (18,838) (23.0%) 08/05/03 32,813 52,383 (19,570) (23.0%) 08/12/03 34,374 53,015 (18,641) (21.3%) Most bearish reading of the year: (20,687) - 07/15/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 07/22/03 27,321 8,844 18,477 51.1% 07/29/03 25,691 7,810 17,881 53.4% 08/05/03 22,188 7,783 14,405 48.1% 08/12/03 23,957 7,871 16,086 50.5% Most bearish reading of the year: (10,769) - 06/11/02 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Commercials added slightly to their long positions on the Dow, but the move was sufficient to post a new bullish high for the year, close to reaching the October 2001 high of 15,135 contracts. Small traders added more substantially to their shorts. Commercials Long Short Net % of OI 07/22/03 22,198 8,176 14,022 46.2% 07/29/03 23,696 9,572 14,124 42.5% 08/05/03 23,981 9,264 14,717 44.3% 08/12/03 24,942 9,878 15,064 43.3% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 07/22/03 6,110 10,898 (4,788) (28.2%) 07/29/03 5,744 11,601 (5,857) (33.8%) 08/05/03 5,716 10,422 (4,706) (29.2%) 08/12/03 6,933 13,248 (6,315) (31.3%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 1,909 - 1/16/01 ----------------------------------------------------------------- ************************Advertisement************************* OneStopOption.com Trade: Securities, Stock Options, Futures Contracts Service: Experienced Brokers Personal Assistance Convenience of One Brokerage Online and Live Broker Trading Experience... The Difference OneStopOption.com 888-281-9569 *************************************************************** ************************* WEEKLY MANAGER MICROSCOPE ************************* Tony Maramarco: Babson Shadow Stock (SHSTX) Investors seeking high-growth potential and to diversify their equity portfolios may wish to consider the Babson Shadow Stock Fund managed by Tony Maramarco of the Babson Funds Group. The Shadow Stock Fund is one way to invest in a highly diversified portfolio of the smallest U.S. companies and to participate in their above-average growth potential. Tony Maramarco, a senior VP, portfolio manager and analyst with David L. Babson & Company, has managed the micro-cap fund since May 1999. Before joining Babson in 1996, Maramarco was a vice president and analyst with Concert Capital Management from 1993 to 1996. From 1985 to 1993, he was a second vice president and analyst with MassMutual (Massachusetts Mutual Life Insurance). Mr. Maramarco began his investment career in 1981 at Connecticut National Bank as an investment research officer. He has earned the right to be called a Chartered Financial Analyst (CFA). In managing the Babson Shadow Stock Fund, Maramarco relies on both his analyst skills and portfolio management skills because this fund invests in small stocks that are generally not on the radar screens of institutional investors. Investment Style/Strategy The investment objective of the Shadow Stock Fund is high growth potential over time. Maramarco seeks to achieve the fund's goal by investing in stocks of firms with tiny market capitalizations of under $175 million, which have been neglected by institutional investors. By following a value discipline and spreading assets across numerous holdings, Maramarco strives to achieve long-term growth, while providing some protection from market declines and fluctuations. The Babson Funds website (www.babsonfunds.com) indicates the fund is guided by a patient investment philosophy, which seeks maximum growth over time. Mr. Maramarco follows a disciplined investment process that seeks to identify stocks in micro companies with low valuations, which are currently "out of favor" with institutional investors. He keeps the fund's turnover low because it often can take some time these stocks to emerge from the "shadows" into the light of interest by institutional investors or to become targets of a merger or tender offer by another company. Babson Shadow Stock Fund seeks to capitalize on academic studies, which suggest that three characteristics have historically led to above average stock performance: 1) small size, 2) low price/book valuation, and 3) neglected by Wall Street. Maramarco identifies stocks with these characteristics, selecting holdings among those that have also been profitable. Because small stocks generally are riskier than stocks of larger, established companies, Maramarco spreads the fund's assets across a large number of holdings (typically over 200). The result is a more diversified portfolio than many other small-cap funds on the market. That helps to reduce risk relative to the market and its category peers. Looking at Morningstar's latest report on the Babson Shadow Stock Fund, the fund sported an average market cap of just $207 million at May 31, 2003 with approximately 20% of assets in the small-cap range and 80% in the micro-cap range. Because they're so tiny in size and generally neglected by Wall Street, micro-cap stocks can behave differently than other parts of the market, offering extra diversification. But, because of their special risks and general lack of liquidity, the Babson Shadow Stock Fund should be used to round out one's portfolio, not as a core holding. In terms of valuations and growth rates, the report indicates the Babson Shadow Stock Fund had below average price valuations as of May 31, 2003 relative to both the S&P 500 large-cap index and its Morningstar category peers (i.e. small-value funds). At the same time, Maramarco's fund had above average growth rates compared to the S&P 500 index and category peers. So, the fund stays true to its original thinking, favoring low price-to-book stocks that are profitable. Still, Maramarco takes no chances, diversifying fund assets over 270 holdings and avoiding any chance of a big torpedo sinking the fund. The Babson Funds website provides a more current look at holdings as of July 31, repeated below for your convenience. Babson Shadow Stock Fund Top 10 Holdings (July-31): Nam Tai Electronics 1.8% Compucredit Corp 1.7% Stewart Information Services 1.3% Imagistics International Inc 1.3% CSK Auto Corp 1.3% M/I Schottenstein Homes Inc 1.3% Ulticom Inc 1.2% Meritage Corp 1.2% URS Corp 1.2% Finish Line Class A 1.1% Top sectors information at July 31 was unavailable, but according to Morningstar's report, one of the fund's most notable features at May 31, 2003 relative to other small-cap value funds was its relatively low weighting in the healthcare sector. According to Morningstar, most of its category peers carry a very large stake in that sector of the market. Investment Performance Since the Babson Shadow Stock Fund invests in out-of-favor micro- cap stocks and holds on to them, return performance can sometimes lag other types of funds. But over the long run, performance has been competitive given the level of risk it takes on. Because it diversifies assets across hundreds of securities, the fund's risk level is historically been below that of other small-cap funds on the market. Over the trailing 10-year period through July 31 (which Maramarco deserves partial credit), Babson Shadow Stock Fund posted a 11.8% average annual total return for investors. That beat the S&P 500 large-cap index by an average of 1.5% a year over that period, to rank in the second quartile of its category (i.e. small-cap value funds). So, the fund's long-term results have kept pace with its category peers and in doing so, the fund has provided added value ("alpha") over the popular S&P 500 index benchmark. For the trailing 5-year period through August 20 (which Maramarco deserves nearly all of the credit), the fund sports an annualized total return of 10.0%, compared to a 0.3% annualized loss for the S&P 500 index. So, the Babson fund chugged along at a 10.0% clip per year while the market as measured by the S&P 500 index failed to produce a positive net return for investors over the same time period. The fund's trailing 5-year returns beat two out of three small-cap value funds (34th percentile). So far in 2003, the fund is up 28.1% through August 20, ranking in the top quintile (17th percentile) of the Morningstar small- cap value category. That is 13.3% above the return produced by the S&P 500 large-cap index this year. That includes a 3-month total return of 23.3% (8th percentile category ranking). So it is getting the job done for investors. Conclusion This unique offering has a lot to offer investors. Maramarco's conservative, value-driven approach doesn't always produce high returns in the short-term, but over time, it is has produced an average annual return of 10 percent or more for investors, with below average relative risk. Maramarco finds value opportunity in stocks of small companies that are neglected by Wall Street, proving there is more than one way to "skin a cat" so to speak. Patient long-term investors looking to diversify their large-cap holdings may want to have a look at the Babson Shadow Stock Fund managed by Tony Maramarco. Don't be fooled by the fund's 3-star rating. When compared to the broad universe of U.S. stock funds it looks a whole lot better, especially if you view it on a risk adjusted return basis. Maramarco has added significant value in relation to the S&P 500 large-cap index, and looks like a winner in our books. Steve Wagner Editor, Mutual Investor firstname.lastname@example.org ************************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 *********************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is $49.95. The quarterly price is $129.95 which is $20 off the monthly rate. We would like to have you as a subscriber. 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The Option Investor Newsletter Thursday 08-21-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: STJ Dropped Puts: None Call Play Updates: EBAY, GILD, HIG, LLL, OMC, PCAR, SPW New Calls Plays: BSX Put Play Updates: None New Put Plays: XL **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** St. Jude Medical - STJ - close: 54.01 change: +0.47 stop: 53.50 It has been uncanny seeing the way shares of STJ have been pinned to the $54 price level for the past week, after the breakout attempt at $56 failed so completely. We had been hoping to see a rebound from the 20-dma, but that didn't happen, with yesterday's candle finally closing below that average. Today's dip below our stop was the final straw and despite the afternoon rebound, we're pulling the plug. There are plenty of better candidates out there for us to waste our time waiting for STJ to come back to life. Picked on August 10th at $54.23 Change since picked: -0.22 Earnings Date 10/15/03 (unconfirmed) Average Daily Volume = 2.17 mln PUTS: ***** None ************************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 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** eBay, Inc. - EBAY - close: 112.60 change: +2.24 stop: 109.00*new* Wow! We expected to see some bullish action from EBAY leading up to its 2-for-1 split on the 29th, but this 4-day ramp higher has been more than we had expected. Our initial target of $110 was tagged on Tuesday and after some consolidation near that level, the bulls pushed the hammer down and broke solidly above that level today. The stock is now pushing up against the $113-115 resistance area left behind in July and our focus now turns to protecting and maximizing gains. After vaulting higher by more than $10 in the past week, we obviously don't want to be considering new entries up here. Our ideal exit target will be for a retest of the $115 level and if traded would be the ideal opportunity to harvest some stellar gains. Keep a sharp eye on the stock as it reaches the $114 level though, as that is the site of the downward sloping upper Bollinger band on the daily chart, and it is likely to present some near-term resistance. So more conservative traders (that didn't exit near $110) should look to exit a bit earlier if price begins to weaken near $114. We're raising our stop to $109 tonight, just below yesterday's intraday low. Picked on August 12th at $103.43 Change since picked: +9.17 Earnings Date 10/23/03 (unconfirmed) Average Daily Volume = 6.65 mln Chart = --- Gilead Sciences - GILD - cls: 66.47 chg: +1.83 stop: 62.49*new* Our recently added call play is performing well. Shares of GILD have continued their rally and Thursday's close put it above potential resistance of $66. This was only a minor obstacle but a victory nonetheless. Furthermore we're happy to report that the gain was made on better than average volume of 3.84 million shares and that could be an accomplishment in and of itself during these slow days of late summer. Bolstering shares of GILD was a strong day in the BTK biotech index. The BTK has finally climbed back above the 450 level and today's performance put it above its simple 50-dma. This is certainly a bullish move for the group but the BTK has yet to breakout above the descending trendline of lower highs. Should that occur then GILD should have the green light to retest $70. GILD's MACD has grown much closer to producing a new buy signal while its P&F chart has reversed into a "low pole reversal". The stock still looks attractive for new entries and we're raising our stop loss to $62.49. Picked on August 19 at $65.32 Change since picked: +1.15 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 3.31 million Chart = --- Hartford Fin. Svcs - HIG - close: 53.51 change: -0.36 stop: 51.75 Much to our chagrin, the Insurance sector (IUX.X) has been left out of the recent broad market strength and our bullish HIG play is stagnating just below the $54 level. Sitting near the top of the loser list on Thursday, the IUX shed nearly 1.5% as it was once again rejected near the $278 resistance level. HIG looks like it may be starting to roll over, with daily Stochastics now tipping down out of overbought territory and it looks like we're going to find out whether support in the $52.00-52.50 area is as strong as we initially thought. That is the top of the August 7th gap, and should be reinforced by the rising 20-dma (currently $52.37) on this pullback. Aggressive traders can look to buy the dip near that support, but only if the stock rebounds in concert with the IUX index once again finding support above its 50-dma (now at $272). The more conservative approach will be to wait for a breakout over resistance at $54.50. Maintain stops at $51.75 for now. Picked on August 14th at $54.14 Change since picked: -0.63 Earnings Date 11/05/03 (unconfirmed) Average Daily Volume = 2.60 mln Chart = --- L-3 Communications -LLL - cls: 50.08 chng: +0.35 stop: 48.90*new* It's time to tighten the noose on LLL and force this stock to either break out (as we've been expecting) or else stop us out for a minimal loss. The rebound back from the brink has propelled the stock right back to strong resistance near $50, and either the bulls will manage a solid breakout, or we'll likely be faced with a trading range between $47-50. Clearly, if the latter turns out to be the case, then we want to be out of the play sooner, rather than later. So we're aggressively raising our stop to $48.90 tonight, just below the converged 10-dma ($49.14) and 20-dma ($49.00). It was somewhat encouraging to see LLL post a higher intraday high ($50.54) today, but the pullback from that high certainly leaves some doubts. Traders willing to buy dips can consider a rebound from above $49.50, but that is definitely an aggressive approach. Our preference would still be to enter on a breakout to new recent highs, and now we'd suggest waiting for a trade above $50.60. Picked on August 3rd at $49.90 Change since picked: +0.18 Earnings Date 10/22/03 (unconfirmed) Average Daily Volume = 937 K Chart = --- Omnicom Group - OMC - close: 76.75 chg: -0.12 stop: 72.99 The advance continues for shares of OMC as well. The financial media seems happy to harp on the fact that many of the major indices are hitting new 52-week highs. We're happy to note that so is OMC. It hit another new high early this morning before pulling back to bounce near the $76 level. Actually, glancing at the intraday chart the bounce today looks like a move off the bottom of its very short-term rising channel from early August. This could be a new entry point for traders looking to take positions. There is no new news to report. Picked on August 19 at $76.67 Change since picked: +0.08 Earnings Date 07/29/03 (confirmed) Average Daily Volume: 881 thousand Chart = --- PACCAR - PCAR - close: 87.00 change: +1.60 stop: 85.00 *new* Is this a truck manufacturer? Because its share price looks like a rocket. Still defying the laws of gravity, shares of PCAR tack on another couple of points in the last two sessions. We're certainly not complaining. The challenge comes with the old saying of "letting your winners run" and placing a good stop. Of course we also like to adhere to the old "plan to trade and trade your plan". The stock has exceeded our original profit targets so we are being very conservative with our stops and keeping them tight. We HIGHLY suggest that traders with profitable bullish positions TAKE PROFITS now and sell all or part of their position. One look at the weekly chart of PCAR and you're bound to get vertigo. We do NOT suggest new bullish entries on this play and we are raising our INTRADAY STOP LOSS to $85.00. If you like this stock then wait for a decent pull back and bounce, we can always play it again. We are setting an INTRADAY EXIT price of $89.00. If PCAR hits $89.00 intraday before being stopped out we will close the play at $89.00. The odds of another stock split for PCAR are certainly rising. Picked on July 31 at $77.24 Change since picked: +9.76 Earnings Date 07/24/03 (confirmed) Average Daily Volume: 1.15 million Chart = --- SPX Corporation - SPW - cls: 49.57 chng: +0.27 stop: 46.75*new* Bit by bit, our SPW play is inching its way up to that critical $50 resistance, as it continues to bump up against the upper Bollinger band on the daily chart. Daily Stochastics are now buried in overbought territory, and we may be faced with one more pullback to support before the elusive breakout over $50 can be achieved. On a pullback, look for intraday support in the $47.50-48.00 area, which coincides nicely with the 10-dma ($47.69). A rebound from that area is probably the best entry setup we can hope for. Traders looking to enter on strength will need to wait for the trade above $50 before playing, keeping in mind that there is significant resistance from $50 all the way up to our initial $53 target. That resistance makes a strong argument for entering on the pullbacks, if we can get them. Note that we've raised our stop to $46.75, which is just below the 20- dma ($46.82) that began providing support in late July. Picked on August 14th at $48.14 Change since picked: +1.42 Earnings Date 10/27/03 (unconfirmed) Average Daily Volume = 905 K Chart = ************** NEW CALL PLAYS ************** Boston Scientific - BSX - cls: 66.50 chg: +1.95 stop: 61.99 Company Description: Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices. The Company's products are used in a broad range of interventional medical specialties. (source: company press release) Why We Like It: Plenty of good news and a positive outlook have shares of BSX significantly out performing most of the market the last couple of years. Fortunately, the rally does not appear to be over any time soon. As a matter of fact its next leg higher could be just starting. Since mid-June shares of BSX have struggled with overhead resistance in the $65-66 range. As of today, that obstacle has been conquered. Technical and fundamental developments over the last few weeks have lead the way for today's breakout. In late July Goldman Sachs upgraded BSX to "out perform" from "in-line" based on a number of factors and claimed that fair value on the stock was closer to $77. Around the same time BSX announced it would split its stock 2-for-1 contingent on a shareholder vote to approve an increase in authorized shares. The vote is to take place on Oct. 6th and the company expects the stock to split sometime in November. Additional news out this August includes an FDA approval for BSX's brain tumor device as well as the launch of BSX's next generation intravascular ultrasound (IVUS) imaging system. There was some potentially bad news around the 13th of August when a U.S. appeals court reversed a lower court patent case decision against Johnson & Johnson that might leave BSX open to penalties. However, most of Wall Street, including S&P, believe that BSX has resources to handle the $324 million fine placed on it by a lower court. Given the small dip on the news and subsequent bounce in BSX's share price it looks like investors are buying into recent comments from Merrill Lynch that BSX could start taking market share from JNJ in the drug-coated stent market. That's big news for an industry that MER believes will expand 60% to 80% in the 2nd half of this year. Our initial profit target is $70 but we suspect BSX could drive even higher (potentially $75). We're going to initiate the play at current levels with a stop at $62.00. Suggested Options: Bullish traders can choose from September, October and November calls on BSX. Our preference is for the September 65s and 70s or the October 70s (we'd probably lean towards the Octobers). BUY CALL SEP 65 BSX-IM OI=30772 at $4.30 SL=2.25 BUY CALL SEP 70 BSX-IN OI=15293 at $1.90 SL=1.00 BUY CALL OCT 70 BSX-JN OI= 164 at $3.00 SL=1.65 BUY CALL NOV 70 BSX-KN OI= 2231 at $4.20 SL=2.25 Annotated Chart: Picked on August 21 at $66.50 Change since picked: +0.00 Earnings Date 07/22/03 (confirmed) Average Daily Volume: 2.78 million Chart = ************************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 ************************************************************** ******************* PLAY UPDATES - PUTS ******************* None ************* NEW PUT PLAYS ************* XL Capital Ltd. - XL - close: 75.92 change: -0.96 stop: 80.00 Company Description: XL Capital Ltd. provides insurance and reinsurance coverages and financial products and services to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. Insurance business written includes general liability, other liability, professional and employment practices liability, environmental liability, property, program business, marine and energy, aviation and satellite, as well as other product lines. Reinsurance business written includes treaty and facultative reinsurance to primary insurers of casualty and property risks, as well as life reinsurance, primarily European term assurances, group life, critical illness coverage , immediate annuities in payment and disability income business. Why we like it: We played the downside in shares of XL last month, but had to let it go prematurely due to the company's earnings report. There has been a fair amount of volatility in the stock since that announcement, but in the past couple weeks, things have settled down again and the stock has resumed its downtrend. Closing back under $76 on Thursday with volume starting to pick up again, XL looks like it is ready to make another run at significantly lower levels. While there is some mild support at the 8/01 low near $75, the first serious support will likely be found in the $72.50-73.50 area, the site of the early April gap. That may produce a near-term bounce, but we're looking for XL to work its way down to stronger support near $70 as rising bond yields continue to exert downward pressure on the entire Financial sector. Turning to the PnF chart, we can see a very clear picture of weakness, with the July Sell signal giving us a bearish vertical count of $65. Interestingly, that corresponds to the bottom found in March. Another possible target is $67, which happens to be the site of the ascending trendline connecting the July 2002 and March 2003 lows. After two failed attempts to regain the $80 level in the past month, that looks like rock-solid resistance, giving us an a favorable level to place our stop. Looking at the chart below, you can see that the descending trendline from the June highs currently crosses right at $78, and that will be reinforced by the 200-dma (currently $78.53). Aggressive traders can use a failed rally below this resistance area to initiate new positions, targeting an initial drop to the site of that April gap. More conservative traders will want to wait for a break below $75 before playing. Note that the stock has been trying to decisively break its bearish resistance line, which is currently at $75. Once XL breaks below that level, we should be able to safely trail our stop just above that descending trendline. Our initial target will be $70, but we'll keep open the possibility that the bears could get carried away, allowing us to enjoy a ride down to those secondary support levels at $67 and then $65. Suggested Options: Aggressive short-term traders will want to focus on the August 75 Put, as it will provide the best return for a short-term play. Traders with a more conservative approach will want to utilize the October contract, as it should not be as susceptible to time decay issues in the near term. BUY PUT SEP-80 XL -UP OI= 375 at $5.70 SL=3.75 BUY PUT SEP-75 XL -UO OI= 152 at $1.75 SL=0.75 BUY PUT OCT-75 XL -VO OI= 297 at $2.95 SL=1.50 Annotated Chart of XL: Picked on August 21st at $75.92 Change since picked: +0.00 Earnings Date 10/30/03 (unconfirmed) Average Daily Volume = 814 K Chart = ************************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 ************************************************************** ********** 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 Thursday 08-21-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - BSX Traders Corner: And He Said, "Let There Be Light" – Not Bud Lite Traders Corner: More on Market Cycles Than You Ever Wanted to Know. ********************** PLAY OF THE DAY - CALL ********************** Boston Scientific - BSX - cls: 66.50 chg: +1.95 stop: 61.99 Company Description: Boston Scientific is a worldwide developer, manufacturer and marketer of medical devices. The Company's products are used in a broad range of interventional medical specialties. (source: company press release) Why We Like It: Plenty of good news and a positive outlook have shares of BSX significantly out performing most of the market the last couple of years. Fortunately, the rally does not appear to be over any time soon. As a matter of fact its next leg higher could be just starting. Since mid-June shares of BSX have struggled with overhead resistance in the $65-66 range. As of today, that obstacle has been conquered. Technical and fundamental developments over the last few weeks have lead the way for today's breakout. In late July Goldman Sachs upgraded BSX to "out perform" from "in-line" based on a number of factors and claimed that fair value on the stock was closer to $77. Around the same time BSX announced it would split its stock 2-for-1 contingent on a shareholder vote to approve an increase in authorized shares. The vote is to take place on Oct. 6th and the company expects the stock to split sometime in November. Additional news out this August includes an FDA approval for BSX's brain tumor device as well as the launch of BSX's next generation intravascular ultrasound (IVUS) imaging system. There was some potentially bad news around the 13th of August when a U.S. appeals court reversed a lower court patent case decision against Johnson & Johnson that might leave BSX open to penalties. However, most of Wall Street, including S&P, believe that BSX has resources to handle the $324 million fine placed on it by a lower court. Given the small dip on the news and subsequent bounce in BSX's share price it looks like investors are buying into recent comments from Merrill Lynch that BSX could start taking market share from JNJ in the drug-coated stent market. That's big news for an industry that MER believes will expand 60% to 80% in the 2nd half of this year. Our initial profit target is $70 but we suspect BSX could drive even higher (potentially $75). We're going to initiate the play at current levels with a stop at $62.00. Suggested Options: Bullish traders can choose from September, October and November calls on BSX. Our preference is for the September 65s and 70s or the October 70s (we'd probably lean towards the Octobers). BUY CALL SEP 65 BSX-IM OI=30772 at $4.30 SL=2.25 BUY CALL SEP 70 BSX-IN OI=15293 at $1.90 SL=1.00 BUY CALL OCT 70 BSX-JN OI= 164 at $3.00 SL=1.65 BUY CALL NOV 70 BSX-KN OI= 2231 at $4.20 SL=2.25 Annotated Chart: Picked on August 21 at $66.50 Change since picked: +0.00 Earnings Date 07/22/03 (confirmed) Average Daily Volume: 2.78 million Chart = ************************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 *********************************************************************** ************** TRADERS CORNER ************** And He Said, "Let There Be Light" – Not Bud Lite By Mike Parnos, Investing With Attitude I'm still recuperating from the blackout. Nothing serious, mind you. There's is, however, a mourning period for the unsuspecting victims. Four sirloin steaks, five pounds of ground chuck, a half-gallon of milk, and two pounds of artificial crabmeat are no longer with us. They were taken away in a waste management truck – as I shed a tear or two. Oh well, maybe they're in a better place. But then, what better place is there than my tummy? The Market Stock trading didn't seem overly concerned about the blackout. But, they didn't lose $50 of meat. Come to think of it, I've been known to do some of my best work in the dark. Actually, all the charts look pretty good with no electricity. Hell, even I look good with the lights off. Hmmm. I wonder if they have a Braille charting service? Meanwhile, our CPTI (Couch Potato Trading Institute) portfolios often include the use of the Iron Condor strategy. Since this is a favorite strategy, it's the source of many reader questions. Let's see if we can bring a few students out of the dark and into the light. _________________________________________________________________ Mike, Thanks for all the great trade ideas. Of all the top-notch folks at OptionInvestor, you definitely rate at the top from what I can see after reading your articles and trade suggestions over the last year or so!! Regarding my question, I really like doing credit spreads on the OEX, one month out at a time, and have found that rarely does this index cross it's 200 DMA except for normally only once or twice a year. Of course, normally a small profit is obtained because the spread is usually way out of the money when placed below (or above earlier this year) the OEX 200 DMA. The problem I encounter regards that once or twice a year when a crossover occurs (last April I believe was the last time), the loss can easily exceed the small monthly profits from most other months. Do you have an exit strategy, or perhaps have an opinion on how a hedge might be placed to protect against those few months of perhaps substantial loss? Is perhaps picking a stock such as GE and purchasing a leap, a possible alternative?? Your thoughts would be greatly appreciated! Once again thanks for your many valued articles. Response: This is a tough question. Hedging an OEX spread is particularly tough. Their options only go out to December and they're expensive as hell. To protect a bear call spread, you could buy a Dec. 500 call for about $21 and then sell a Dec. 540 call for about $6 and have a debit of $15. If, by Dec., the OEX is over 540, you would have made $25. However, you would have to have a bullish outlook on the OEX. By buying back and reselling the short calls on this calendar spread, you could be making some additional money each month -- meanwhile having your bear call spread hedged. For example, you believe that the markets will ultimately move higher in by the end of this year (the OEX doesn't have LEAPS), and you've sold an OEX near term bear-call spread. As a hedge, you could buy a December OEX 500 call for about $21.00 An Exit Strategy: First, since your OEX credit spreads are generally far out of the money, the market would have to make a dramatic move -- which means it has begun a trend (however short). When your short strike is threatened -- or if the index is rapidly headed in that direction, you could protect yourself by selling credit spreads in the opposite direction. For example, you sold the OEX 460/455 bull-put spread and the OEX begins to drop significantly. With OEX at 470, you could initiate a bear-call spread at 480 or 485 and take in some additional premium. Maybe you'd want to sell two bear-call spreads for every bull put spread. Let's say you originally took in $1.00 with 10 contracts of the 460/455 bull-put spread. Then, you could conceivably sell 20 contracts of the 480/485 bear-call spread and take in $1.00. Should OEX break below support at 460, this premium will provide an extra cushion. You will have taken in $3.00, thereby further reducing your exposure. If the OEX holds its 460 support, then you could have profits at both ends if the OEX finishes between 460 and 480. It's sort of like establishing an Iron Condor, one leg at a time. If the market reverses again, you can sell additional bull-put spreads to take in more premium. Also, a lot depends on when these moves take place -- at what time during the life of the spread. That will determine how much time premium remains, which in turn, will determine where you can sell additional spreads. You will need to be somewhat nimble and pay close attention to potential support and resistance levels -- placing bear call spreads slightly above resistance levels and bull put spreads below support levels. I know this is not always possible, but you'd be surprised how many times it works out. _____________________________________________________________ NEW SEPTEMBER POSITIONS – Remember that September is a five-week option cycle. September Position #1 – SPX Iron Condor – SPX @ 1003.27 S & P 500 Index = SPX Sell 10 contracts of SPX 1040 Sept. calls Buy 10 contracts of SPX 1050 Sept. calls Look for a net credit of $1.30. Sell 10 contracts of the SPX 950 Sept. puts Buy 10 contracts of the SPX Sept. 940 puts Look for a net credit of $1.40 Total credit of $2.70 ($2,700). We have a huge maximum profit range of 950 to 1040. That's peace of mind! More aggressive investors can narrow the range a bit and take in more money. At 1003.27, we're in good shape – for now. September Position #2 – SMH Sell Straddle Semiconductor Holders Trust = SMH As so many astute CPTI students pointed out, the premiums I listed here on Sunday were unrealistic. Well, I checked and, indeed, it was too good to be true. I had grabbed the November premiums instead of the September premiums. Picky, picky, picky. So, the SMH trade became null and void – and not worth pursuing. September Position #3 – COF Sell Straddle – COF @ $51.40 Capitol One Financial = COF Sell 10 contracts of COF Sept. $50 calls @ $2.35 Sell 10 contracts of COT Sept. $50 puts @ $2.50 Total credit of $4.85 ($4,850). We will make some profit if COF finishes anywhere between $45.15 and $54.85. The closer COF finishes to $50, the more money we'll make. Our bailout points are the parameters of our profit range. Maximum potential profit is, again, $4,850. COF moved up a bit, but at $51.40 we're still comfortably in profit territory. September Position #4 – EBAY Iron Condor -- EBAY We were going to sell 10 contracts of the EBAY Sept. $95 puts @ $1.20 and buy 10 contracts of the EBAY Sept. $90 puts @ $.65, taking in a net credit of $.55. Then, we were going to sell 10 contracts of the EBAY Sept. $110 calls @ $1.35 and buy 10 contracts of the EBAY Sept. $115 calls @ $.60 for a net credit of $.75. The total credit would have been $1.30 ($1,300). Exposure of $3.70. Maximum profit range of $35 to $45. Potential maximum profit would have been $1,300. EBAY gapped way up early in Monday's trading session. That changed the scheme of things and it was not prudent to enter the EBAY trade. If EBAY would have retreated back down to the $103 level, we might have entered the trade, but it did not. It was a wise choice since EBAY has continued on up to $112 and we would have been in a precarious position. ______________________________________________________________ Replacement Positions Since the SMH and EBAY positions did not materialize – for one reason or another – we'll try to come up with a replacement position (or two) in Sunday's OI column. ______________________________________________________________ More Words Of Wisdom It seems that our CPTI students are full of it – wisdom, of course. Here are some of this week's submissions. Keep 'em coming. 1. Do not walk behind me, for I may not lead. Do not walk ahead of me, for I may not follow. Do not walk beside me either. Just pretty much leave me alone. 2. If at first you don't succeed, skydiving is not for you. 3. There are two theories to arguing with women. Neither one works. 4. Never, under any circumstances, take a sleeping pill and a laxative on the same night. _____________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our plays or our strategies? Feel free to email me your questions. An excellent source for new students is the OptionInvestor archives where we've been discussing strategies and answering questions since July, 2002. To find past CPTI (Mike Parnos) articles, look under "Education" and click on "Traders Corner." They're waiting for you 24/7 ______________________________________________________________ Happy Trading! Remember the CPTI credo: May our remote batteries and self- discipline last forever, but mierde happens. Be prepared! In trading, as in life, it’s not the cards we’re dealt. It’s how we play them. Your questions and comments are always welcome. Mike Parnos CPTI Master Strategist and HCP ************** TRADERS CORNER ************** More on Market Cycles Than You Ever Wanted to Know. Jane Fox A couple of weeks ago I mentioned in the Market Monitor that I had written an article on Secular and Cyclic markets. Many subscribers requested the article and subsequently asked some excellent questions about market cycles. Rather than answer each and every one I decided to do a more in-depth study of the subject and post it on the OIN website. Secular Markets Mike Alexander, author of Stock Cycles gives a definition of secular markets as: "The secular trend concept holds that the long-term rise in stock prices displays a "stair-step" pattern. During the secular bull markets (corresponding to the riser) stocks move strongly upward, averaging a 13-14% return in real terms. During the secular bear markets (corresponding to the step) stocks move basically sideways, averaging close to no return in real terms. The market spends roughly equal amounts of time, in 10-20 year blocks, in each kind of secular market trend." As a point of reference, the average secular bull market lasts for 14.71 years while the average duration for a secular bear market is 13.57 years. Basic secular market observations: 1. The duration of each secular market can last for 10 - 20 years 2. Secular markets alternate from bullish to bearish and back again. 3. Secular bear markets may take on two possible forms. i. The first is a massive decline followed by a slow recovery. An example of this type of secular bear market would be the 1929-1949 market experienced in U.S. equities. Another example would be the secular bear market currently underway in the Nikkei. The current U.S. equity market has had a massive decline but it remains to be seen if it is followed by a slow recovery. So far, all signals point to this happening in this current secular bear market also. ii. The second secular bear market style falls into the volatile sideways trading range category. The 1966-1982 secular bear market fits this format. (The charts to follow will bear this out) 4. Secular bull markets can be extremely strong and profitable where a passive buy-and-hold strategy may work well. Cyclical Markets A cyclical market refers to a bullish or bearish trend within the major secular trend. These minor or cyclical trends are short to intermediate in time usually lasting from 3 - 34 months. At the conclusion of the cyclical period the directional bias of the longer-term secular phase is reestablished. It is not uncommon for the market to experience sizable cyclical phases counter to the major secular trend. Here is a spreadsheet of the Dow's secular markets since 1929, a 74-year span. I then broke each secular market down into its respective cyclical markets. 1929-1949 Secular Bear Market The first secular bear we have noted in the above chart started in 1929 and lasted for 20 years. Within that time frame there were 7 major cyclical phases from bear to bull and back to bear. The total return in these 20 years was -56.05%, annualized - 4.06%. Lets take a look at the bear/bull cyclical markets on a spreadsheet then look at the chart. 1949-1966 Secular Bull Market The next secular market was a bull that started in June 1949 and lasted until January 1966, 16.5 years. Within that time frame there were 9 major cyclical bull and bear markets. The total return in these 16.5 years was +488%, annualized +11.28%. Lets take a look at the bear/bull cyclical markets on a spreadsheet then look at the chart. Notice how short the cyclical bear markets are in this bull secular market. 1966-1982 Secular Bear Market The next secular bear market started in January 1966 and lasted until July 1982, 16.5 years. Within that time frame there were 9 major cyclical bull and bear markets. The total return in these 16.5 years was -17.08%, annualized -1.18%. Lets take a look at the bear/bull cyclical markets on a spreadsheet then look at the chart. Here is an example of the second type of secular bear market mentioned earlier, the volatile sideways trading range category. 1982-2000 Secular Bull Market The next secular bull market started in July 1982 and lasted until January 2000, 17.50 years. Within that time frame there were 7 major cyclical bull and bear markets. The total return in these 17.50 years was a whopping +1388%, annualized +16.47%. A buy and hold strategy worked well in this secular phase. Lets take a look at the bear/bull cyclical markets on a spreadsheet then look at the chart. Once again notice how short the cyclical bear markets are in this bull secular market. When you compare all the charts you get a picture of how spoiled we were from 1982-2000. The bull markets were ferocious and the bear markets almost none existent. Here is a ranking of the 17 cyclical bear markets that have taken place in the DJIA since 1929. All results are based on month-end data. The recent cyclical bear phase (January 2000 - October 2002) is the fifth largest bear phase since 1929, has an above average peak-to-valley duration in comparison with all bear phases and is still in the midst of a full recovery as of August 2003 (3.5+ years and counting). I fear this full recovery duration could rival the worst bear phase we have seen in the last 74 years, the one from August 1929 to June 1932. Where we stand today Although this secular bear is in the early stages, the Dow has completed one cyclical bear phase losing 34% over a 2.75 years period from January 2000 - October 2002. Since this time the Dow has entered a new cyclical bull phase, which is still under way. History is currently being written, so it will take time to measure the full extent of this secular bear market in terms of both magnitude and duration. Remember plan your trade and trade your plan. Jane Fox ************************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. 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