The Option Investor Newsletter Tuesday 09-16-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Unchanged But Changed Futures Markets: Bear Flambi Index Trader Wrap: See Note Market Sentiment: All Aboard! Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 09-16-2003 High Low Volume Advance/Decline DJIA 9567.34 +118.50 9571.13 9449.16 1.72 bln 2312/ 902 NASDAQ 1887.26 + 41.60 1887.87 1848.41 1.80 bln 2186/1067 S&P 100 517.36 + 7.40 517.59 509.96 Totals 4498/1969 S&P 500 1029.32 + 14.51 1029.66 1014.81 W5000 9979.05 +136.10 9980.60 9842.92 RUS 2000 515.66 + 9.02 515.91 507.64 DJ TRANS 2773.38 + 40.40 2775.43 2732.06 VIX 19.31 - 0.94 20.85 19.25 VXN 31.66 - 1.27 33.44 31.24 Total Volume 3,800M Total UpVol 3,145M Total DnVol 582M 52wk Highs 552 52wk Lows 21 TRIN 0.53 NAZTRIN 0.40 PUT/CALL 0.66 ************************************************************ Unchanged But Changed The Fed left rates unchanged today but there was a change in the statement. It was very subtle and just enough to tilt the scales but traders completely ignored it. Tuesday was governed by several large program trades that caught the market by surprise and left many shorts running for cover at the close. Dow Chart Nasdaq Chart The day started off negative with the Retail Sales report and a decline of -0.3%. Wal-Mart and Target held up the sector or it would have been much worse. Back to school sales continued to provide the majority of their gains. The 9/11 anniversary did not really impact sales and life continued as normal. The numbers were also boosted by heavy sales of building supplies on the east coast in preparation for the hurricane. This was the first negative week after three consecutive weeks of gains. The Bank of Tokyo is now projecting gains for September of only +3.5% to +4% which is down from their +5% earlier estimate. It is going to be harder for retail sales to grow over the next month because the tax checks are over and the refinancing boom has bust. Consumers should be in conservation mode for the holiday purchases in December. The NAHB Housing Index fell to 68 in September from 71 in August. This is a minor decline and 68 is still the second highest number since early 2002. The outlook by the builders may be eroding but it is still high. The components showed that buyer traffic dropped to 20 from 55 and single family sales dropped to 73 from 77. The only component that did not drop was the six-month outlook which remained at 78 and the same as the prior month. With the drop in buyer traffic from 55 to 20 I am amazed the headline number did not drop any more. Builders are still hoping the rising economy will offset rising rates and keep the momentum moving. They are shifting their marketing to adjustable rate mortgages in an attempt to diffuse the impact of the rate increase. The Consumer Price Index rose only +0.3% for August and the majority of that increase was due to energy prices. The core rate showed only a +0.1% gain and emphasizes the lack of pricing power for corporations and the potential for an "unwelcome fall in inflation". The lack of inflation will do nothing to prevent the Fed from taking stronger action if needed to fuel the economy. The core rate at only +0.1% was so low that it pushed the 12 month inflation rate down to only +1.3%. This is the lowest rate since 1966. At only +0.1% there is very little room before we start seeing negative numbers and true signs of deflation. The economy needs to put in a floor here, draw line in the sand or make goal line stand. Choose your metaphor. The FOMC meeting ended with no change in interest rates as expected. The statement was a carbon copy of last months statement with one small but important exception. Today's release specifically said labor conditions were weakening instead of labor conditions are mixed. Other than that they repeated the same comments from the last two meetings of risks are basically balanced between inflation and an "unwelcome fall in inflation" but all things considered there is still a minor risk of the latter. They still do not trust us with the "D" word. Still the mere mention, regardless of how minor, of the D phrase kept the bond market to only a minor loss. The key point here is that the Feds are either cautiously optimistic that the economy is still recovering or they are still behind the curve or they just have their heads buried in the sand. They did realize that after seven months of jobs losses and increasing jobless claims that the labor market was weakening instead of mixed. The Fed also issued the coded sentence that there were no rate changes coming any time soon to keep the market from worrying that any economic bounce could jumpstart the rate hike cycle. This is critical considering the real funds rate is already negative and has been for most of the last 2 years. Also, this is one of the longest periods of low rates over the last 50 years. The M2 money supply has expanded more quickly in the last three year period than any other period in history. Many analysts think the "labor market weakening" statement was a clue that the Fed could actually cut rates again if the Oct jobs report was negative. The markets had a mixed reaction to the announcement at first but then rallied strongly into the close on a monster buy program. Conspiracy theorists were flocking to the theory that the Fed was pumping money into the market to make it appear the market was excited about the Feds decision. The Fed announcement was actually preempted by another news event on the west coast. Two of the top three pension funds in California with assets of nearly $300 billion in stocks, called for the resignation of Richard Grasso and a reduction in his announced pay package. They were quickly followed the North Carolina Treasurer, claiming he represented 700,000 pensioners, and the New York State Controller who claimed he represented 960,000 fund holders. This brings to about a dozen the number of major players calling for his resignation and in some cases the resignation of the board. Now that the top players in the country have gone on the offensive and pledged an aggressive fight using all the methods at their disposal, Richard's days are numbered. The reluctance to release details of the pay package until pressed by authorities and then the bits and pieces release already make the board and management look guilty. The pressure is rising and although they did not do anything legally wrong the appearance of abuse and cover up will probably lead to a big announcement soon. Grasso has refused all interview requests since the resignation demands began to increase. Expect this to take center stage on Wednesday right behind the hurricane. After the bell MCHP affirmed a lower range of estimates for earnings. Prior estimates were for sales to increase from +1% to +6% and they narrowed the range to +2% to +5%. Earnings were still expected to be 17 cents. Dell's CFO, Kevin Rollins, was interviewed on CNBC and he was not as upbeat as Michael Dell. He tried to carefully express both caution and confidence without stepping on his boss's toes. He said demand was stable but there was no real growth. He also said they were seeing growth in performance but not in price. The interviewer asked him specifically again if that meant that revenue would not increase and Kevin tried to dodge the bullet by repeating that they were seeing growth in performance and launched a sales pitch for Dell. Interesting interview where they actually discussed the fact that Michael Dell may be more bullish about expectations than facts would allow but it was very carefully worded. I think Michael must hold training classes on how to speak to the media to turn every interview into a sales pitch and how to divert pointed questions. The recall election is not off. At least according to the ninth circuit court. Instead of waiting to see if the parties to the recall suit would appeal the three judge ruling the 9th circuit gave the parties a limited amount of time to file a 15 page position paper from which the court would decide to take the case or pass. The court stayed the order from the lower court halting the election and told everyone to consider the election as back on until they ruled on the appeal. The court can pass and open the door for a supreme court appeal. Spitzer is on the prowl again and they woke up the mutual fund community today by filing not only civil charges but criminal charges against Theodore Sihpol a broker for BAC until he was fired last week. They are claiming that traders "stole" money from fund holders by allowing late trading. He faces up to 25 years in prison. Spitzer and colleagues claim there will be many more charges against dozens if not hundreds of fund personnel. The wake up call has caused some real grief from people expecting a hand slap and a fine. Real jail time on multiple charges with minimum sentencing provisions will cause some sleepless nights tonight. There will be more sleeplessness tonight for those that were caught off guard by the strong rally today. There was a strong move up at the open accompanied by a buy program at 9:50. This produced some short covering that pushed the Dow to strong resistance at 9500 where it traded sideways in a ten point range until the Fed announcement. After the announcement the Dow dropped only to the bottom of that range and another buy program triggered to push the Dow to the 9525 range where it held on strong but declining volume for 30 minutes only to blast off on yet another apparent buy program to 9560. When the 9525 buying began the shorts began covering in earnest and pushed the Dow and the Nasdaq to six day highs. Almost the entire drop for the last six days since the September 8th closing high was recovered in one day on negative news. There are quite a few bears still short and scratching their heads tonight. The S&P Emini came to a dead stop at 1028 with very strong resistance at the 1030 level and the contract high. The Dow closed at 9563 and only a very short 37 points away from very strong resistance at 9600. 9607 was the recent 52-week high. The Nasdaq rallied +41 points and came to rest only one point below the recent 52-week high. This very bullish day completely surprised almost everyone. However, if you look at the candles on the charts above I am sure you will agree it was not normal buying patterns. Let's reconstruct. Retail Sales declined and the Bank of Tokyo lower their estimates for September. The core rate of the CPI rose only +0.1% and could not get any closer to an unwelcome fall in inflation. The NAHB Housing Index showed buyer traffic fell to 20 from 55. The Fed said the labor market was weakening and deflation was still a greater threat than inflation. We are in the most dangerous six weeks of the year. If all of this is bullish then I am missing the boat. So what prompted the markets to retest the current highs? What prompted the strong program buys that triggered the massive short covering? Maybe I should start believing the conspiracy theorists. It was certainly not excitement that Grasso may be on his way out or that Spitzer could file charges against hundreds of traders. Ok, let's assume the economy is in a stealth recovery. We are getting cautious comments from quite a few companies that are affirming estimates but not specifically raising them. Earnings warnings are very low on a historical basis. We have analysts quoting +7% GDP for the 3Q with no evidence to support it. Great, I hope we get it. The problem I see that this is already priced into the market. Literally every major analyst agrees with this concept. Also, almost all analysts agree that a rally over the traditional Sept/Oct period would be strongly bullish. Unfortunately nobody can explain why it would happen. Nobody can explain why we are not seeing any real profit taking. The only scenario that makes sense is the new bull market scenario. Scrap the concept of waiting for valuation because stocks are always over valued at this stage of a market cycle. Forget the normal historical market cycles because they are only serving to produce dips to buy. Stocks are going up because people want to buy them. They want them to go up. After three years of a bear market they are tired of the bearishness. They have bought the recovery scenario lock stock and barrel. 2004 will be a banner year according to the rising six month sentiment expectations. That is the bullish view, buy the dip. The bearish view sees all the negatives I mentioned above and keeps trying to short the resistance. Been there, done that, today. Many are scared of shorting the tops now because of the numerous breakouts. They are waiting for the dips to gain speed and after 2-3 days of a downtrend they finally get suckered back into a short position. Just as they get comfortable with the trend the trend changes but just slow enough to keep them short until the last minute. We had five days of weakness on the Dow totaling about -220 points. No big deal but enough to make traders think that Dow 9000 was possible again. This was especially true when we were trading in the high 9300s last week. Shorts are like that frog in a pan of cold water. Just as they are getting comfortable and adding to their positions the price begins to rise little by little but always with a hint of a continued down trend. These represent the bearish equivalent of buying opportunities or shorting opportunities. After a couple days of sideways movement to lull them to sleep we got the big morning bounce on bad news. Their fear factor rises but surely this is temporary. We always get a sell off just before the Fed announcement. What, no sell off? That is ok we will see a monster sell the news event because the Fed cannot say anything positive for fear of spooking the bond market. The news is out, the market drops slightly and maybe they add to their positions thinking the crash is about to occur. Suddenly a massive buy program kicks the Dow up +60 points and their pain threshold increases exponentially. Short covering begins on heavy volume but the majority are still locked into that final lie. Don't worry the Dow will fail again at 9600, Nasdaq 1890, S&P 1030. That was the prior highs and very strong resistance. Shucks, I am going to average down and add to my positions if we hit that level. Replay that scenario every week for the last six months and just change the economic reports and the prices and you will see why we are threatening to break out again. All the indications for the bear point to a failure in the economy, a failure on price and a failure based on the calendar. None of which has yet to come true. Most retail bulls are oblivious to the complicated forces in the market. They have a winning plan and they are following it carefully. Buy the dip. It worked for years and it is back. Martha, take the funds out of the money market we are going to make it all back. Actually the Fed is supporting this plan. If they can keep talking the market up and not scare anybody with the D word then investors will feel prosperous again and they will spend money and pay taxes with those profits. The only problem with this scenario is that it will only work until it quits and nobody knows when that will be. Eventually institutions will decide they have ridden the bull long enough and start taking profits. Actually, the activity over the last several days had looked an awfully lot like some institutions were taking profits. It looked like we were in a distribution phase. Distribution occurs when institutions want to exit a large position without tanking the market. If they think the market is near a top they will start feeding each bounce with a fraction of their position. Say they wanted to sell 20 million shares of MSFT or GE. Just placing an order for 20 million shares would knock us back to July in a heartbeat and they would end up getting far less than current value. Instead they start dumping smaller blocks of 5, 10, 20, 50,000 shares into the market at a slow enough rate to keep the market from tanking but fast enough to get them out as high as possible. By distributing these multimillion share positions to the retail investors in thousands of smaller chunks they get out quietly. The signs of distribution are heavy volume and no movement. This is exactly what we have been seeing over the last several days. Today especially. There were several periods of huge volume for a prolonged time with no movement. The bulls were buying hard but somebody was feeding them in volume. The bounce in the late afternoon was on very heavy volume and it appeared as though the 9525 and 9550 pause levels were particularly heavy. Of course this is all speculation on my part because nobody knows what it powering the market. We could have just been seeing some asset allocation programs coupled with short covering triggered by those programs. The key to the puzzle is still tomorrow. Regardless of the reasons we did close at or near the highs. If the gains today were based on program trades of some sort then tomorrow could see a reversal. If it was really a flood of new money into the market then tomorrow could see a break to a new high once again. Shorts will be sitting with their finger on the trigger at the open. They are in a very dangerous position this close to a breakout. Let one major buy program hit at the open and it could be off to the races. The economic news tomorrow is light with only Residential Construction and Mortgage Applications and the Semi Book-to-Bill after the close. We are on our own for direction and the futures are perfectly flat at 9:PM. It could be an exciting day if you are on the right side of the market. It could be painful if you are on the wrong side. The Nikkei rose +179 points at the open tonight to break 11,000 for the first time in 14 months. This could be our first clue. Dow 9600 is the key at the open. Once broken the next stop could be 10,000. The key word there is "broken". Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Bear Flambi Jonathan Levinson Treasuries pulled back, with a brief reversal following the FOMC announcement at 2:15. Gold inched lower, miners inched higher, and equities punched through resistance with brief pauses. Daily Pivots (generated with a pivot algorithm and unverified): 150 tick chart of the ES 15 minute chart of the US Dollar Index The chart of the US Dollar Index looks incredibly similar to my chart of the S&P futures, but I'd be shocked if it was merely Yasuo Fukuda and the BOJ behind the buying. The move found resistance in the 96.70 area, but set a higher low on the pullback. The action was bearish for gold and commidities, bearish for bonds, and bullish for equities. The CRB dropped 2.75 to 237.67, with strength in sugar, silver, platinum and gold, weakness in crude oil, cocoa and coffee futures. Daily chart of December gold December gold dropped 1.10 to 374.50, consolidating its failure below the rising wedge trendline while finding support at 372.50, right on the 78.6% Fibonacci line. The daily chart oscillators are on sell signals but have yet to violate their rising uptrends, although the failure looks likely from here. Despite the weakness in the metal, the HUI was up .88 to 196.90, and the XAU gained .48 to 92.43. Dec silver was up .022 to 5.232 as of this writing. Daily chart of the ten year note yield The TNX had a relatively narrow-range day, closing higher by 4.6 basis points to 4.291%, right on the bull wedge descending resistance line on the daily chart. This pullback in ten year notes came on the heels of the FOMC's widely expected announcement. If lower rates is the Fed's goal, then it failed today. The real action was in equities, however, which reversed almost 1 week's worth of weakness in a single bullish engulfing candle. Daily NQ candles There's not much to say about a bearish engulfing daily candle that launches from a higher low. It's a bullish print, within the confines of a bearish ascending wedge formation. The oscillators are on sell signals, and that did not change in today's trading. Volume on the Nasdaq was respectable at 1.78B shares, exceeding yesterday's volume. The bulk of the advance today came following the FOMC meeting, and the sheer velocity of the gain and the absence of more than very shallow pullbacks felt like a short squeeze. Nevertheless, further upside is to be expected. The real test will come at the rally highs at NQ 1392. As discussed in this weekend's newsletter, the longer daily and weekly cycle oscillators appear to have topped out and are in the beginning stages of a fresh downphase. A move to the rally highs does not change that cyclical picture, as the shorter cycles bounce from overbought to oversold and back again, as seen on the 30 minute chart below. A move beyond the rally high and through upper resistance on the bear wedge would cause the daily chart oscillators to begin trending, which is entirely possible but less likely. 30 minute 20 day chart of the NQ The vertical move brought the 300 minute stochastic to the top of its range. After some residual upside tomorrow morning, bulls will be faced with the task of moving this cycle into a trending upphase. As discussed with reference to the daily cycle oscillator, such is entirely possible, but less likely than a reversal. When oscillators of different timeframes are lined up, in this case overbought, the odds of a reversal increase accordingly. Above the highs of the year, shorts will lose their reference range and become defensive, which could result in the kind of vertical launch that we witnessed this afternoon above 1021 ES. A lower low will embolden the bears and discourage the bulls, and fulfill the prophecy of those overbought oscillators. Daily ES candles We have the same picture and the same setup on the ES, both daily and on the 30 minute chart below. The NQ led to the upside today, but the cyclical picture on the ES is identical. Again, it will take a decisive break of the rally highs to reverse the sell signals printed on the daily chart oscillators, with the upper wedge trendline providing a useful boundary to cap a possible stoprunning throwover above it. 20 day 30 minute chart of the ES The ES respected the trend of higher lows on its 30 minute chart oscillators, and appears to be playing out the bear wedge breakout targeting the rally highs. If memory serves, the overnight high on ES was 1035. Keep in mind that the secondary interpretation on the bullish formation was of a bull flag. If this latter is the case, any break above the rally highs could potentially kick off Rally II. Daily YM candles Nothing to add on YM. 9500 was key resistance, and its failure powered what appeared to be the final round of short covering of the afternoon. 20 day 30 minute chart of the YM The Fed's 3B repo drain explains some of the weakness in the bond market, but the strength in equities alongside strength in the US Dollar Index remains puzzling. Unless it was genuine foreign buying of US equities, it's a countertrend coincidence, as the lower dollar/ higher equity relationship was present throughout the spring 2003 rally. In any event, tomorrow is setting up to be an important day, particularly with op-ex uncertainty added into the mix. Bulls need to keep their stops in place, and bears need to keep their wits about them. Use stops whatever your bias, and let them protect your account. A sudden move in either direction would not surprise me at this point, although I favor the downside so long as the previous highs are intact. ************************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 *************************************************************** ******************** INDEX TRADER SUMMARY ******************** Check the Site Later Tonight For Jeff's Index Trader Article http://members.OptionInvestor.com/itrader/marketwrap/iw_091603_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 **************** All Aboard! - J. Brown Investor sentiment is getting pretty simple these days. If it goes up, buy it! If it pulls back, buy it! If it goes sideways, wait for it to go up or pull back. I say this tongue in cheek but any veteran trader knows this can't last for very long but until it changes, enjoy the ride. The FOMC's decision to hold interest rates at 1 percent was no surprise and the markets cheered with a 118-point rally in the DJIA and a 2.2 percent rally in the NASDAQ. Analysts continue to harp on their positive expectations for strong corporate profits the next two quarters and beyond so money keeps flowing into stocks. Market internals were very bullish with advancing stocks punishing losers 20 to 7 on the NYSE and 21 to 9 on the NASDAQ. Up volume was 6 times down volume on the NYSE and almost as strong on the NASDAQ. Volatility indices, which are supposed to measure investor fear fell lower today as the markets rallied. From the looks of it, investors are pretty fearless and again this is a warning signal that veteran traders will recognize as a clue to be careful. Play the trend but don't get caught when the trend changes. Fortunately for the bulls, it feels like the current trend still has some legs underneath it. A couple of items to be aware of tomorrow: The homebuilders have been strong with interest rates still near historical relative low. We're going to see the housing starts and building permit numbers tomorrow before the opening bell. Plus, nearly everyone has jumped on the bullish bandwagon for semiconductors. We're going to see the latest book-to-bill ratio tomorrow night after the bell. Let's hope they're good. Many believe the chips tend to lead the markets either higher or lower. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9609 52-week Low : 7197 Current : 9567 Moving Averages: (Simple) 10-dma: 9512 50-dma: 9291 200-dma: 8660 S&P 500 ($SPX) 52-week High: 1032 52-week Low : 768 Current : 1029 Moving Averages: (Simple) 10-dma: 1022 50-dma: 997 200-dma: 926 Nasdaq-100 ($NDX) 52-week High: 1387 52-week Low : 795 Current : 1382 Moving Averages: (Simple) 10-dma: 1362 50-dma: 1292 200-dma: 1132 ----------------------------------------------------------------- No surprises here. The volatility indices both took a dive with the markets in rally mode. These are suppose to measure investor fear and right now the markets are pretty much fearless. CBOE Market Volatility Index (VIX) = 19.31 -0.94 Nasdaq Volatility Index (VXN) = 31.66 -1.27 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.66 705,925 464,376 Equity Only 0.50 555,642 276,726 OEX 1.20 34,893 41,948 QQQ 0.98 71,870 70,308 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 73.1 + 0 Bull Confirmed NASDAQ-100 78.0 + 0 Bear Correction Dow Indust. 83.3 + 0 Bull Confirmed S&P 500 81.8 + 0 Bull Confirmed S&P 100 88.0 + 0 Bull Confirmed Bullish percent measures the number of stocks in an index currently trading on a buy signal on their point and figure chart. Readings above 70 are considered overbought, and readings below 30 are considered oversold. Bull Confirmed - Aggressively long Bull Alert - Cautiously long Bull Correction - Pause or pullback in upward trend Bear Alert - Take defensive action if long Bear Confirmed - High risk if long, good conditions for shorting Bear Correction - Pause or rebound in downtrend ----------------------------------------------------------------- 5-Day Arms Index 1.19 10-Day Arms Index 1.17 21-Day Arms Index 1.02 55-Day Arms Index 1.02 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 2051 2134 Decliners 779 968 New Highs 180 309 New Lows 10 4 Up Volume 1441M 1476M Down Vol. 240M 250M Total Vol. 1693M 1779M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 09/09/03 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 No change in sentiment for the commercial traders here. Meanwhile small traders forked out a little more cash to increase both their long and short positions. Commercials Long Short Net % Of OI 08/19/03 404,665 455,381 (50,716) (5.9%) 08/26/03 410,378 472,987 (62,609) (7.1%) 09/02/03 417,973 482,392 (64,419) (7.2%) 09/09/03 418,958 486,209 (67,251) (7.4%) 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 08/19/03 162,034 87,064 74,970 30.1% 08/26/03 170,424 76,967 93,457 37.8% 09/02/03 169,030 75,748 93,282 38.1% 09/09/03 176,401 81,444 94,957 36.8% 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 Commercial traders in the e-minis continue to pump up their long positions. The last numbers show the most bullish posture in quote sometime. Meanwhile the small trader has rotated a little bit of money from short back to long. Commercials Long Short Net % Of OI 08/19/03 296,971 235,779 61,192 11.5% 08/26/03 338,766 234,841 103,925 18.1% 09/02/03 347,724 224,011 123,713 21.6% 09/09/03 370,909 237,610 133,299 21.9% Most bearish reading of the year: (354,835) - 06/17/03 Most bullish reading of the year: 133,299 - 09/02/03 Small Traders Long Short Net % of OI 08/19/03 90,428 125,980 (35,552) (16.4%) 08/26/03 52,131 120,853 (68,722) (39.3%) 09/02/03 56,709 134,094 (77,385) (40.6%) 09/09/03 59,692 130,270 (70,578) (37.1%) Most bearish reading of the year: (77,385) - 09/02/03 Most bullish reading of the year: 449,310 - 06/10/03 NASDAQ-100 Commercial traders are increasing their bets on the NDX but they're still beating more heavily on a move lower. Small Traders are also active with larger net positions but they're still beating on the bulls. Commercials Long Short Net % of OI 08/19/03 32,107 53,665 (21,558) (25.1%) 08/26/03 33,991 55,849 (21,858) (24.3%) 09/02/03 37,002 55,379 (18,377) (19.9%) 09/09/03 44,677 62,369 (17,692) (16.5%) Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 9,068 - 06/11/02 Small Traders Long Short Net % of OI 08/19/03 25,607 10,134 15,473 43.3% 08/26/03 26,108 8,864 17,244 49.3% 09/02/03 23,168 10,561 12,607 37.4% 09/09/03 28,788 13,370 15,418 36.6% 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 No change in investor sentiment for the professional traders here. There is little change for the small trader but they have bumped up their long positions a tad. Commercials Long Short Net % of OI 08/19/03 21,088 18,984 2,104 5.3% 08/26/03 24,586 10,386 14,200 40.6% 09/02/03 25,462 10,447 15,015 41.8% 09/09/03 25,807 10,756 15,051 41.2% Most bearish reading of the year: (8,322) - 1/16/01 Most bullish reading of the year: 15,135 - 10/16/01 Small Traders Long Short Net % of OI 08/19/03 15,717 9,143 6,574 26.4% 08/26/03 14,115 5,592 8,523 43.2% 09/02/03 6,629 13,402 (6,773) (33.8%) 09/09/03 7,429 13,796 (6,367) (30.0%) Most bearish reading of the year: (8,777) - 10/12/01 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************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. 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The Option Investor Newsletter Tuesday 09-16-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: GILD Dropped Puts: KSS Call Play Updates: AU, ERTS, GS, LEA, LUV, MERQ, UTX New Calls Plays: AMGN, APOL Put Play Updates: KKD New Put Plays: None **************** PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** Gilead Sciences - GILD - cls: 61.86 chg: -4.15 stop: 64.75 It was a rough day for GILD, losing 6.28 percent on the heels of a downgrade from J.P. Morgan. JPM cut the stock from "overweight" to "neutral" on their belief that GILD will have a tough time meeting revenue forecasts and any price appreciation will be "difficult". The stock gapped down to $63.64 at the open and fell from there towards the $60 level. Volume was huge at 14.2 million shares. Merrill Lynch later tried to defend the stock and reiterated their own "buy" and Focus 1 ratings for GILD. This may have helped lift GILD off the lows for the day but it was too late for our call play. Picked on August 19 at $65.32 Change since picked: -3.46 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 3.31 million Chart = PUTS: ***** Kohl's Corp - KSS - close: 59.91 change: +1.37 stop: 61.01 Okay, now it's time to start waving the white flag. Bears should be VERY cautious. The market just does not want to go down and unless the bearish story is extremely compelling most stocks are going to drift higher. That's what we are seeing in shares of KSS. The big rally today helped KSS add another 2.3 percent and close above its simple 50-dma. Psychological resistance at $60.00 held but we really don't expect it to hold tomorrow. The recent affirmation by Wal-Mart that weekly sales are strong has brought new interest to the retail sector despite the weakness in the U.S. retail sales numbers. We're going to call it quits before we get hurt. It could be we're just chicken but we'd rather preserve our capital and live to play another day. Picked on September 9 at $59.35 Change since picked: + 0.56 Earnings Date 08/14/03 (confirmed) Average Daily Volume: 2.9 million Chart = ************************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 ******************** Anglogold Ltd. - AU - close: 38.78 change: +0.19 stop: 37.50 It hasn't been a very positive week for the Gold sector, with the price of gold continuing its gradual retreat over the past couple days. To its credit though, the Gold & Silver index (XAU.X) has actually held up fairly well and seems to be solidifying above the $90 level. Our AU play is behaving much the same, drifting lower after a failure to hold its breakout over $40, but still above its most recent breakout level ($38.50). With volume declining throughout the drift lower, this looks like nothing more than orderly profit-taking ahead of the next upward leg. We've felt all along that entries on pullbacks were the way to go on this play, and we got a really solid opportunity today, as AU dipped to the 20-dma ($38.22) and rebounded to close fractionally positive. Intraday dips above $38 can still be used for new entries, as we wait for the daily oscillators to turn positive again, signaling returning strength to both the stock and the sector. Maintain stops at $37.50. Picked on September 2nd at $39.51 Change since picked: -0.73 Earnings Date 10/30/03 (unconfirmed) Average Daily Volume = 841 K Chart = --- Electronic Arts - ERTS - close: 93.14 chg: +4.34 stop: 87.44*new* Hi-ho silver! The markets charged ahead after the FOMC confirmed what the markets were expecting and technology stocks led the way. The GSO software index added 2.75%, which fell behind ERTS' 4.8% gain today. Today's move was also boosted by a positive report out showing video game sales in August were 4% higher than last year thanks to ERTS's "Madden NFL" games. ERTS also had some positive news with the launch of their EA SPORTS Nation for Sony PlayStation2 users. We would be careful chasing shares of ERTS right here but the stock did breakout over the $92 mark, which was previous resistance. The lows on Friday-Monday were a nice bounce from the bottom of the rising trend and simple 30- dma. Bulls can also cheer the decent volume of 4.1 million shares. We are going to raise our stop loss to Friday's low near $87.44. Our short-term target of $95 is almost in reach and some traders may want to plan taking some profits off the table. If the markets keep up the positive atmosphere momentum bulls might push ERTS to $100. FYI: point-and-figure chart readers will notice that today's breakout produced a fresh spread-triple-top bullish buy signal for ERTS. Picked on August 28 at $89.06 Change since picked: +4.08 Earnings Date 07/23/03 (confirmed) Average Daily Volume: 3.3 million Chart = --- Goldman Sachs Grp. - GS - close: 90.93 change: +1.73 stop: 88.00 Is anyone else getting tired of this? GS has been churning around in the $89-92 area ever since we initiated coverage on 9/02 and has been unable to sustain either a breakout or a breakdown from that range. The bulls keep propping it up at critical support and the bears keep knocking it back at key resistance, with neither faction able to sustain an advantage. But it looks like that stalemate may be about to break in favor of the bulls, with strength building in the Broker/Dealer index (XBD.X). The index blasted higher with a 2.73% gain on Tuesday, ending at its highest point since February or 2001. We're betting that GS will catch fire and go along for the ride, and soon. As we've been advising, intraday dips into the $89-90 area look favorable for new entries and there have been numerous opportunities for that in the past several days. Traders waiting for a breakout before playing will want to wait for a trade above $92.25, with continued strength in the XBD before playing. Until this range breaks, maintain stops at $88. Picked on September 2nd at $90.45 Change since picked: +0.48 Earnings Date 9/24/03 (unconfirmed) Average Daily Volume = 3.80 mln Chart = --- Lear Corp - LEA - close: 54.83 change: +0.97 stop: 52.49*new* The bulls weren't about to let the rally pass by shares of LEA. The stock tacked on another 1.8 percent and traded through our trigger of $54.05 to open the play for us. This definitely looks like an entry point for new longs but we would have liked to have seen more volume on the move. LEA's technical indicators (stochastics, momentum, and RSI) are all strongly bullish while its MACD should produce a new bullish signal in a couple of days. Short-term traders can aim for the old highs near $57 but we're going to shoot for a move to $60. We're also going to raise our stop loss to $52.49, just under the recent lows near the 50-dma. There was no new news for LEA other than a new executive officer. Picked on September 16 at $54.05 Change since picked: + 0.78 Earnings Date 10/17/03 (confirmed) Average Daily Volume: 694 thousand Chart = --- Southwest Airlines - LUV - cls: 18.72 chng: -0.06 stop: 17.50*new* It was bound to happen eventually and it looks like our LUV play may be stalling out just a bit. After the run its had over the past couple weeks, a bit of profit taking is overdue and with price action beginning to weaken, we should now expect the pullback to confirm that old resistance in the $18.00-18.25 area is new support. Cautious traders may want to consider harvesting some minor gains at current levels and look for a re-entry on a successful test of that support. Our confidence in the play remains strong, especially with the Airline index (XAL.X) closing at another new high today. Another measure of the stock needing to rest a bit is the fact that today was the first close BELOW the upper Bollinger band since last Wednesday. Look to initiate new positions on a successful rebound from above the $18 level, which should now be strong support. Note that we've raised our stop to $17.50, which is still just under the 20-dma ($17.60). Picked on September 11th at $18.36 Change since picked: +0.36 Earnings Date 10/20/03 (unconfirmed) Average Daily Volume = 2.45 mln Chart = --- Mercury Inter. - MERQ - cls: 50.00 chng: +2.01 stop: 45.90*new* Now that's not a bad start for this bullish Software play. Investors didn't seem to know what to do ahead of the FOMC meeting, so they did a lot of nothing on Monday. But once the unknown became known, the bulls made their move and propelled shares of MERQ to a 4.18% advance on Tuesday, with the Software index (GSO.X) tallying up a 2.75% gain. Closing right on the $50 level, the stock is right at the edge of a breakout. While this is a new 2-year closing high for the stock, it is just below the early September intraday high of $50.22. An intraday pullback to the $49 or even $48 levels can be used for a fresh entry, while momentum traders will want to take a position on a breakout over $50.25. If entering on the breakout, look for continued strength from the GSO index, which will soon have to contend with solid resistance in the $145-146 area. Raise stops to $45.90, which is just below the 20-dma ($45.95) that provided support on last week's pullback. Picked on September 14th at $48.26 Change since picked: +1.74 Earnings Date 10/15/03 (unconfirmed) Average Daily Volume = 3.14 mln Chart = --- United Technologies - UTX - cls: 79.84 chg: +1.64 stop: 77.20 The excitement over the improving economy, the Fed's accommodative stance on monetary policy, and the 118-point rally in the DJIA had a lot to do with UTX's breakout today. The 2% gain broke the short-term two-week trend of lower highs for UTX and gave bulls some signs of new hope. More conservative traders may want to wait for UTX to trade above or close above the $80.00-80.50 levels. UTX also has some defense sector exposure and the surge in defense stocks didn't hurt today. There is no significant news. Picked on August 29 at $80.05 Change since picked: -0.21 Earnings Date 07/17/03 (confirmed) Average Daily Volume: 2.1 million Chart = ************** NEW CALL PLAYS ************** Amgen, Inc. - AMGN - close: 69.81 change: +1.31 stop: 66.75 Company Description: The biggest of the Biotech big guns, AMGN makes and markets therapeutic products for hematology, oncology, bone and inflammatory disorders, as well as neuroendocrine and neurodegenerative diseases. Anti-anemia drug Epogen and immune system stimulator Neupogen account for about 95% of sales. Its Infergen has been commercialized as a treatment for hepatitis C, and Stemgen is approved for stem cell therapy in Australia, Canada, and New Zealand. The company has a strong pipeline of new drugs in various stages of development as well as research and marketing alliances with Hoffman-La-Roche and Johnson & Johnson. Why we like it: AMGN appeared to be Teflon-coated throughout the rise from last fall, right through tagging its most recent high near $72 in the middle of July, as nothing seemed able to drag the stock back very far or for very long. Finally, after hitting that $72 level (exactly reaching its PnF bullish price target), AMGN pulled back and has spent the past two months consolidating in a very healthy manner, and in the past few weeks has been finding support at the long-term ascending trendline that was established between late- September and mid-February. That trendline has been gradually lifting AMGN higher and last Friday the bulls pushed it back above its 50-dma ($68.32) and we've seen some nice follow-through already this week. Looking at the PnF chart, we can see that it is right on the verge of giving a new PnF Buy signal and all it needs to do is trade the $70 level. Since AMGN is currently on a mild PnF Sell signal right now (which looks a bit like a bear trap), that allows us to get a new vertical count from this Buy signal if we can get it. Just trading $70 will give us a bullish vertical count of $81 and that's ample upside potential to keep everybody happy. While momentum traders may be content to enter on a trade at $70 and with that new PnF Buy signal, we would advise caution due to the fact that price is pressing right up against the upper Bollinger band, which is currently flat. This likely means a couple tests will be required for AMGN to push and hold above the $70 level. So our preferred strategy would be to wait for the trade at $70 to give the PnF Buy signal and then look to enter on an intraday pullback in the $68-69 area, with the 50-dma serving as key support. Note that the ascending trendline and the 20-dma currently line up in the $67.25-67.50 area and that should be very strong support if this bullish move has any life at all. We're initially placing our stop at $66.75, which is also just under last Wednesday's intraday low. Since AMGN trades so much in sympathy with the overall Biotechnology index (BTK.X) look for confirming strength from the BTK before playing. Suggested Options: Shorter Term: The October 70 Call will offer short-term traders the best return on an immediate move, as it is currently at the money. Longer Term: Aggressive traders looking to capitalize on an extended rally will want to look to the January 75 Call. This option is currently out of the money, but should provide sufficient time for the stock to move higher without time decay becoming a dominant factor over the short run. More conservative long-term traders will want to use the January 70 Call. BUY CALL OCT-65 YAA-JM OI=15944 at $5.60 SL=3.75 BUY CALL OCT-70 YAA-JN OI=34866 at $2.20 SL=1.00 BUY CALL JAN-70 RQB-AN OI=21517 at $4.50 SL=2.50 BUY CALL JAN-75 RQB-AO OI= 9887 at $2.25 SL=1.10 Annotated Chart of AMGN: Picked on September 16th at $69.81 Change since picked: +0.00 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 8.26 mln Chart = --- Apollo Group - APOL - close: 68.45 chg: +2.55 stop: 62.50 Company Description: Apollo Group Inc. has been providing higher education programs to working adults for more than 25 years. Apollo Group Inc. operates through its subsidiaries The University of Phoenix Inc., Institute for Professional Development, The College for Financial Planning Institutes Corp., and Western International University Inc. The consolidated enrollment in its educational programs makes it the largest private institution of higher education in the United States. It offers educational programs and services at 67 campuses and 118 learning centers in 37 states, Puerto Rico and Vancouver, British Columbia. (source: company press release) Why We Like It: One of the major beneficiaries of the economic slow down are the purveyors of higher education. Stocks like EDMC, CECO, COCO and APOL have all done extremely well for investors this year based on higher enrollment numbers. Out work employees have decided to go back to school and make themselves more attractive and marketable to employers when the recovery finally does start hiring again. We like APOL out of the bunch because shares have been consolidating its gains for the last couple of months. The recent breakout to a new all-time high has much stronger legs to stand on than some of the other stocks. The company actually raised its guidance in late August telling Wall Street it expects fiscal 2004 to beat estimates fueled by higher enrollment and new campus openings. APOL forecasts that its University of Phoenix division (with its own tracking stock) should see enrollment grow from 12 to 14 percent just in the first quarter. APOL raised its Q1 revenue numbers to $392 - 395 million compared to estimates of $389 million. The upside breakout today is bolstered by an oversold MACD curving higher into a bullish signal, while all of its daily oscillators are pointing skyward. The move today also produced a fresh double-top breakout on its point-and-figure chart. Volume readers will also notice that volume has been climbing the last few days. Our short-term target is $75 while longer-term traders might hold out for $80. We'll begin the play with a stop at $62.50. More conservative trader might want to consider placing their stop under $65. Suggested Options: Short-term traders should probably look at the November strikes while longer-term traders may want to look over the February strikes. We'll probably see a November 75 issued if APOL trades above $70. BUY CALL NOV 65 OAQ-KM OI=1039 at $6.00 SL=4.00 BUY CALL NOV 70 OAQ-KN OI= 694 at $2.90 SL=1.50 BUY CALL FEB 65 OAQ-BM OI= 390 at $7.90 SL=5.25 BUY CALL FEB 70 OAQ-BN OI= 227 at $5.00 SL=3.25 BUY CALL FEB 75 OAQ-BO OI= 302 at $3.00 SL=1.65 Annotated Chart: Chart = Picked on September 16 at $68.45 Change since picked: + 0.00 Earnings Date 10/07/03 (confirmed) Average Daily Volume: 1.9 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 ******************* Krispy Kreme Doughnut - KKD - cls: 41.96 chg: -0.74 stop: 44.01 Krispy Kreme teases the bears once again with a painfully fast drop at the open towards the $40 level before eventually bouncing back down just 74 cents. What caused the early morning weakness? It was a Wall Street Journal column that suggested things are not as sweet as they seem to be at Krispy Kreme. The WSJ article highlighted that average-store sales were down to about $35K a week, which is significantly less than the $64K they're used to. Not only are average sales down but its biggest franchisee, Great Circle Family Foods LLC, has seen even its wholesale shipments drop 10% and their visitor traffic drop 20%. Great Circle actually put themselves up for sale earlier this year but have not yet announced a buyer. Wall Street knows that KKD is richly valued at 62 times earnings compared to the S&P's average of 28 so any stumble in KKD's execution will likely be paid for by the shareholders. The close under $42 is still encouraging for bears but we're cautious. The big intraday bounce is worrisome on such big volume of 3.75 million shares. Picked on September 8 at $41.69 Change since picked: + 0.27 Earnings Date 08/21/03 (confirmed) Average Daily Volume: 1.0 million Chart = ************* NEW PUT PLAYS ************* None ************************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: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter Tuesday 09-16-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: CALL - APOL Traders Corner: Monthly Reports That Give a Heads Up On Inflation ********************** PLAY OF THE DAY - CALL ********************** Apollo Group - APOL - close: 68.45 chg: +2.55 stop: 62.50 Company Description: Apollo Group Inc. has been providing higher education programs to working adults for more than 25 years. Apollo Group Inc. operates through its subsidiaries The University of Phoenix Inc., Institute for Professional Development, The College for Financial Planning Institutes Corp., and Western International University Inc. The consolidated enrollment in its educational programs makes it the largest private institution of higher education in the United States. It offers educational programs and services at 67 campuses and 118 learning centers in 37 states, Puerto Rico and Vancouver, British Columbia. (source: company press release) Why We Like It: One of the major beneficiaries of the economic slow down are the purveyors of higher education. Stocks like EDMC, CECO, COCO and APOL have all done extremely well for investors this year based on higher enrollment numbers. Out work employees have decided to go back to school and make themselves more attractive and marketable to employers when the recovery finally does start hiring again. We like APOL out of the bunch because shares have been consolidating its gains for the last couple of months. The recent breakout to a new all-time high has much stronger legs to stand on than some of the other stocks. The company actually raised its guidance in late August telling Wall Street it expects fiscal 2004 to beat estimates fueled by higher enrollment and new campus openings. APOL forecasts that its University of Phoenix division (with its own tracking stock) should see enrollment grow from 12 to 14 percent just in the first quarter. APOL raised its Q1 revenue numbers to $392 - 395 million compared to estimates of $389 million. The upside breakout today is bolstered by an oversold MACD curving higher into a bullish signal, while all of its daily oscillators are pointing skyward. The move today also produced a fresh double-top breakout on its point-and-figure chart. Volume readers will also notice that volume has been climbing the last few days. Our short-term target is $75 while longer-term traders might hold out for $80. We'll begin the play with a stop at $62.50. More conservative trader might want to consider placing their stop under $65. Suggested Options: Short-term traders should probably look at the November strikes while longer-term traders may want to look over the February strikes. We'll probably see a November 75 issued if APOL trades above $70. BUY CALL NOV 65 OAQ-KM OI=1039 at $6.00 SL=4.00 BUY CALL NOV 70 OAQ-KN OI= 694 at $2.90 SL=1.50 BUY CALL FEB 65 OAQ-BM OI= 390 at $7.90 SL=5.25 BUY CALL FEB 70 OAQ-BN OI= 227 at $5.00 SL=3.25 BUY CALL FEB 75 OAQ-BO OI= 302 at $3.00 SL=1.65 Annotated Chart: Chart = Picked on September 16 at $68.45 Change since picked: + 0.00 Earnings Date 10/07/03 (confirmed) Average Daily Volume: 1.9 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 ************** Monthly Reports That Give a Heads Up On Inflation Seems like almost every day there is a release of an economic report giving us one more piece of information about the state of the economy. Some reports move the market so much it is foolhardy to be in a position before the release and others give us a big yawn. But there some we should watch a little closer for they can give us a heads up on the state of inflation. We know the Fed is constantly watching inflation so maybe we should be also. Inflation is defined as a sustained increase in the general level of prices for goods and services. We measure it as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. There are three types of inflation - demand-pull, cost-push and wage. Traders who are able to distinguish between the three will have a better understanding of the real message some of the monthly releases reveal. Demand-pull inflation comes with economic booms and too much money chasing too few goods and is readily curable using fiscal or monetary policy to contract the money supply. First lets visit Fiscal and Monetary policy: Fiscal Policy - in a recession consists of either government spending or tax cuts to stimulate the economy. Whereas, in an inflationary economy, fiscal policy consists of reducing government spending or raising taxes. Monetary Policy - expands the money supply and lowers interest rates to stimulate a recessionary economy, or shrinks the money supply and hikes rates to contract an overheated inflationary economy. The best example of this was the overheated economy of 2000 and the number of times the Fed lowered interest rates to cool it down. To maintain current monetary policy the Fed has two main tools. The first is the open market operations where the Fed buys government securities (i.e. Treasury Bills, Notes and bonds) in the open market to expand the money supply and sells government securities to contract it. The second tool, which has emerged as the tool of choice for Alan Greenspan, is the rising or lowering of the discount and Fed funds rate. Now let's visit the Fed Funds Rate and the discount rate: Federal-Funds Rate is the interest rate banks charge each other for overnight loans. The FOMC sets a target level for the federal-funds rate and then guides the rate near that target by its activities in the open market. Discount Rate -- On Jan. 9, 2003, the Federal Reserve adopted a new system for lending directly to banks and other depositary institutions. Three new credit rates are now in place: primary, secondary and seasonal. The central bank often will refer to the primary credit rate as the discount rate, which is available to banks that are in sound financial condition. Cost-Push Inflation - is the result of supply shocks such as oil price hikes or drought induced food-price spikes. Cost-push inflation is more troublesome because supply shocks can create simultaneous inflation and recession called stagflation. Here is how it works. Price of crude oil takes an unexpected jump because OPEC cuts back supply. Initially this move will cause inflation but at the same time energy costs rise for energy dependent businesses and they, in turn, have to raise prices to offset the rising costs of doing business. The consumer ends up paying more for goods, and sometimes services, just as if a tax were levied on him. This is why the Fed is likely to raise interest rates swiftly in demand-pull inflation but is likely to be more cautious in cost- push inflation. The reason for the cost-push inflation can by itself put the recessionary pressures needed and any Fed action may overdo it. Two monthly reports can help us distinguish between demand-pull and cost-push inflation. They are the Department of Labor's Core (excluding food and energy) Consumer Price Index (CPI) and Producer Price Index (PPI). The core numbers are generally the best measures for demand-pull inflation because most of the cost- push inflation supply shocks happen in the food or energy sectors. The Consumer Price Index (CPI) is considered the most widely used measure of inflation and is regarded as an indicator of the effectiveness of government policy. The CPI is a basket of consumer goods (and services) tracked from month to month (excluding taxes). These goods include everything from the price of diapers and milk to funeral expenses. CPI figures are collected in 87 areas throughout the U.S. from over 22,000 retail and service establishments. CPI measures inflation at the retail level with the core CPI the most closely watched major inflation indicators. A rising CPI indicates inflation. The Producer Price Index is not as widely used as the CPI, but it is still considered to be a good indicator of inflation. Formerly known as the "Wholesale Price Index", the PPI is a basket of various indexes covering a wide range of areas affecting domestic producers. The PPI includes industries such as goods manufacturing, fishing, agriculture, and other commodities. PPI measures inflation at the wholesale level, before goods are sold through retailers, therefore can sometimes predict movement in the CPI. Wage Inflation - can be triggered by demand-pull or cost-push inflation pressures late in an expansionary economic cycle when labor markets are tight and union bargaining power is at its peak. Wage inflation signs can be found in the following reports: Average Hourly Earnings (AHE) - is an early indicator of wage growth in the previous month. However, compared to the Employment Cost Index (ECI) the AHE has several weaknesses. First, the AHE is not as broad as the ECI in that it does not include benefits costs (fringe benefits such as medical benefits). Secondly unlike the ECI, AHE increases may be due to transitory increases in wage costs that are not causes of permanent higher wage costs. For example, increased use of overtime will lead to an increase in AHE but not in the ECI. For these reasons, Greenspan gives more weight to the quarterly ECI report rather than the monthly AHE report in deciding whether wage inflation and wage costs are increasing or not. Employment Cost Index (ECI) is reported quarterly and probably the most valuable wage inflation indicator because it counts both wages and fringe benefits and not subject to the same measurement problems as the Average Hourly Earnings. It is considered inflationary when the ECI increases more than expected for a given period, or if the ECI has an increasing trend. This ECI performance causes bond prices to drop, and yields and interest rates to rise. While these indicators directly measure inflation and are very useful to make nascent decisions about inflation, a trader needs to take heed of what the Fed is looking at also. Right now we have no inflation, or no inflation worries, but the Fed is concerned about deflation, a much worse scenario, so any signs of inflation are good. Go figure! Most Fed officials agree inflation is unlikely to rise, but cannot agree on the likelihood of it falling and how much of a problem that would be. Fed governor Ben Bernanke recently said he expected some uptick in inflation later this year for technical reasons, but "disinflation risk will remain a concern for some time." The remarks, along with similar comments from the Federal Reserve Bank of San Francisco's Robert Parry, helped spark a drop in long-term interest rates in recent weeks. But Messrs. Bernanke and Parry are probably the Fed's leading "disinflation hawks," and many of their colleagues aren't as concerned about the risk of inflation going lower. Now you can keep an eye on inflation also. 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. Call 888-889-9178 or Click http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN Member NYSE, Other Principal Exchanges, NFA, MSRB and SIPC ******************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
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