The Option Investor Newsletter Thursday 09-25-2003 Copyright 2003, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Rationalize This Futures Markets: Gold Dojis, Treasuries Drift, Equities Sell Index Trader Wrap: See Note Market Sentiment: Bear Sightings on Wall Street. Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 09-25-2003 High Low Volume Advance/Decline DJIA 9343.96 - 81.60 9458.49 9342.98 1.86 bln 1016/2170 NASDAQ 1817.20 - 26.50 1856.22 1817.20 1.98 bln 814/2393 S&P 100 502.62 - 2.84 508.96 502.61 Totals 1830/4563 S&P 500 1003.26 - 6.12 1015.97 1003.26 W5000 9726.36 - 81.30 9848.08 9726.22 RUS 2000 495.05 - 12.81 509.34 495.05 DJ TRANS 2697.12 - 48.80 2749.87 2697.12 VIX 22.26 + 1.04 22.27 21.04 VXN 30.65 + 1.29 30.72 29.16 Total Volume 4,202M Total UpVol 910M Total DnVol 3,202M 52wk Highs 298 52wk Lows 28 TRIN 1.20 NAZTRIN 1.71 PUT/CALL 0.84 ************************************************************ Rationalize This I wrote after the rebound on Tuesday that I was having trouble rationalizing the market rally based on the historical calendar trends but was prepared to tough it out if necessary. Finally, a historical trend returned and we are staring at a serious rationalization problem for the bulls. The shoe is now on the other foot. Dow Chart Nasdaq Chart There was not a flurry but a flood of economic reports today and the general outlook was not exciting. The mixed picture began with a throwaway Jobless Claims report. I say throwaway because the analysts were quick to claim the hurricane wild card as throwing the numbers into doubt. I agree with that analysis. With ten states boarding up windows in advance and cleaning up debris in the aftermath there was no way the new Jobless Claims were going to be relative. This brings into question the high number at 381,000 with more than ten states closing up shop. What would it have been without the storm? The aftermath cleanup and lack of power could keep the numbers down for the next two weeks. If we do see a rebound over 400K next week then we are in trouble because the non-storm numbers would have been even higher. The bulls should have looked at this number as a gift. The Chicago Fed National Activity Index fell below zero once again at -0.28 after peeking only slightly into positive territory last month at +0.05. This was the lowest reading since May at -0.34. The indicator is composed of 85 components and 53 showed below average growth. 49 dropped between July and August and of those that improved 14 still did not show growth. If it were not for the housing market the nation would be sinking in economic quicksand. Employment data continues to pressure the recovery and there is no jobs recovery in sight. This continues to pressure the manufacturing sector and until this broad based sector recovers we will continue to wander. Also pointing to this continuing employment problem was the Help Wanted Index, which fell to 37 and only 2 points away from the current cycle low. If the HWI is a leading indicator for hiring then the jobs picture is not looking up. Companies are continuing to be pressed to cut costs and wages and very high insurance and benefit rates are an easy target for those cuts. Until demand begins to ramp up to the point where the existing staff cannot handle it I do not expect any gains in these numbers. In contrast to the HWI the Mass Layoff numbers for August were significantly improved at 133,839 compared to 226,435 in July. This is a significant improvement but still a large number of layoffs. This is the lowest number since March at 113,026. It could have been impacted by the blackout and by cyclical end of summer vacations as well. The government layoffs were the highest since the program began in 1995. I checked August of 2002 and that was also a multi month low which began to escalate rapidly into the 225,000 peak in Jan-2003. The August-2003 number was also higher than the Aug-2002 level. Based on the historical trend I do not put too much faith in the drop. Proving the weak demand picture was the drop in Durable Goods Orders by -0.9% in August. Shipments fell substantially more at -2.9%. This was the first decrease since April. Were it not for the jump of +2.9% in primary metals the drop would have been even more substantial. Six of the seven components fell with aircraft and motor vehicles falling by -6.6%. Communications fell by -4.8% and computers -2.3%. Does this look like we are rushing into the 4Q recovery? The most positive events of the day were the jump in New Home and Existing Home sales. New Home sales rose to 1.15 million annualized and the second highest number on record. Existing Home sales rose to 6.47 million, which was a new record. The gain in these numbers is purely based on the bounce in rates. As I have said before a bounce in rates after a period of sustained lows always prompts a race to buy houses and lock in the rates before they go higher. Everybody in America understands that rates are going up very soon and they are not going to wait around for 7% or higher to buy. Once the rates really begin to rise the housing market may not die but the rate of sales will slow significantly. The housing market is the main supporter of the economy currently and with consumer spending slowing we will continue to depend on housing to keep it moving. It is up to the Fed to understand this keep rates as low as possible for as long as possible. Friday we will get the final Q2 GDP revision and the consensus is for it to be unchanged at +3.1%. The last revision surprised to the upside from +2.9% to +3.1%. If the final revision goes the other way and breaks back under 3.0% then the estimates of +3.9% for the 3Q will be called into question. Remember, after tax corporate profits fell by -3.4% in the 2Q GDP. Spending rose +3.8% while profits fell. The 3Q GDP is going to be a very important milestone for the markets. The markets are expecting +19% earnings for the S&P in the 3Q according to First Call. For the last few days there has been an increase in the rate of warnings and the market is paying attention. 181 S&P companies have added or raised their dividend since January. The markets have bought the earnings expectations and the dividend increases since March. Just like playing poker, once the last bet is placed it is time to show the cards. It is time to see if the recovery began to gain speed in the 3Q or was it just more cutting costs and laying off workers that produced the earnings. Federal Signal, FSS, cut estimates due to falling spending by governments and private business. AO Smith, AOS, cut its estimates by more than half. Darden Restaurants cut estimates saying recent promotions had failed to attract additional customers. Viacom, VIAb, cut estimates saying growth had slowed and was not likely to reach prior forecasts. Other companies warning today included AZZ, BSG, NEWP, PCIS, PHHM, PSTA and TUP. Not all the news was bad with raised guidance from BBY, CYBE, MKC, MUR and RAD. It was just the ratio of warnings to upgrades that bothered investors. BBY better get all the glory it can with its raised guidance today because Dell went public with the new products announcement. They are planning to offer flat screen TVs, hand held computers and an online music service. They plan on hitting the consumer market before the holidays and with the Dell momentum it is due to be a big push. Dell said it was conceivable that Dell could rise to the number one position in home electronics very quickly. Whoa! Big claims from Michael Dell and I am sure Gateway was paying rapt attention. Still there are some big targets out there that are ripe for the Dell marketing machine. Sony, Mitsubishi and Panasonic are the top three and Michael Dell is walking onto a field full of goliaths. This just happens to be where he is most at home. Dell has slugged it out to Compaq, Hewlett Packard and IBM and came out on top. The market was controlled by these giants when he started just like Sony and the others control the home electronics market today. Dell also took aim at Apple with the entry into the music business with the Dell Digital Jukebox and the Dell Music Store. Going head to head with the Ipod, RNWK and ROXI. Go get them Michael! Electronics retailers BBY and CC closed down for the day but then who didn't? Speaking of category killers Sony announced an entry into the digital recorder business with a competitive product to TIVO. The entry was expected eventually and the impact to Tivo's business could be huge. The market has been restricted to only a couple players in the field and the margins have been high. Fortunately more competition will knock those prices down to a reasonable level. Not just a category killer but a category eliminator the digital camera has knocked Eastman Kodak down for the count. EK announced this morning that they were cutting their dividend to 50 cents from $1.80 and said they were no longer going to try and grow the film business. They conceded that Fuji was winning the film battle and said they were going to focus their energy on the digital revolution after decades of being the leading film producer. Another revolution is taking place at the NYSE. The lead director and head of the compensation committee, Carl McCall, announced his resignation and rumors are flying that there are more resignations in the wings. Unlike the earthquake on the NYSE there was a real 7.8-8.0 magnitude earthquake in northern Japan at 2:50 PM our time today. This is a major quake and Tsunami warnings were in effect for Japan, Russia, Guam, Mariana Islands and Wake Island. Tsunami watches were in effect for Hawaii, Taiwan and the Philippines. The earthquake occurred at 4:50 Japan time and only a few hours before the Nikkei was scheduled to begin trading. After trading down -192 points last night and expected to trade down again on our loss the earthquake could accelerate this drop. The markets today were ugly. They did not start out that way but ended up in a world of pain. The initial dip was a continuation of yesterday's drop but the indexes fought off a strong wave of program selling to rebound back into positive territory at midday. The Dow and Nasdaq both stalled just below a 38% retracement of the big drop and lingered in positive territory just long enough to sucker in any bulls that thought the dip was over. The high of the day was about 12:15 and the bleed began once again. The big drop came at 3:30 when the Dow broke 9400 for the last time. It closed at 9344, Nasdaq 1819 and S&P just barely over the psychological 1000 level at 1003. Some blamed it on the earthquake, others on end of quarter portfolio rebalancing. Wasn't that what they used as a reason for the bounce on Tuesday? Either way it was nasty and the Emini futures closed well under 1000 at 997.75. This does not bode well for Friday. The biggest losers were the tech stocks and the small caps. The very indexes that saw the biggest gains in recent months. The Russell dropped nearly -13 points today and is down -4.8% for the week. The Nasdaq fell -26 but is down -5% for the week. These are not good numbers for the bulls. It represents a definite selling of the winners. The markets have not had two consecutive quarters of gains in several years and some analysts think that funds are willing to forego the 4Q and lock in substantial profits now to protect their year. Most believe the markets will finish higher for the year but not much higher. The general consensus is around 10,000. This creates risk for the funds. With many stocks up +50% to even +100% since the October and March lows the funds are faced with a risk reward scenario of a potential +7% gain for the rest of the year or the potential for a much larger drop if the selling becomes widespread. Techs and small caps have already dropped -5% this week. What does the future hold? OPEC is cutting production on oil to drive prices back up. The economic recovery is starting to show signs of weakness and job growth is nonexistent. The Fed is not likely to cut rates again even though they feel the risks of deflation outweigh the risks of inflation. Japan is tanking and after today its economy could suffer even more depending on the earthquake damage. The dollar/yen battle is continuing and bonds are slowly climbing which indicates doubt about the future. 3Q earnings will begin to appear in seven days and only First Call is really optimistic. Investors are becoming more cautious. The bottom line is more risk than reward for funds which have to perform to please their investors. The competition for dollars is going to be fierce in January as investors unhappy with their returns for 2003 start looking for another place to park money. Those that lock in +30%, 50% or even 60% gains over the next couple weeks could win the bragging rights contest in January if the 4Q fails to move up substantially. That brings us right back to the historical trends scenario once again. Funny, I did not get a single piece of bullish hate mail today. With the Dow down -342 points from Friday's highs there is little to be bullish about. That is only -3.5% for the Dow but it is a chink in the bullish armor. I have no claims to a crystal ball for forecasting the potential lows for October if the decline continues but I can guarantee it will not be straight down. The most likely serious support is 9000-9100 and that is where I expect the eventual battle for control to be fought. It you take traditional market metrics for gains and eventual pullbacks the numbers are scary but even the bears do not expect traditional numbers to repeat. A simple 38% retracement would see a Dow drop to near 8800 where a 25% retracement of the gains from March would stop around 9100. You draw your own conclusions but with -342 points in a week and we are not even in October yet anything is possible. For Friday the GDP and the earthquake will rule. However with the -342 point drop there could be come profit taking from shorts eager to put an X in the win column for a change. Monday marks a new round of economic reports for the week with a new ISM, Factory Orders and Nonfarm Payrolls being closely watched for signs of weakness. That should be a great start for October. Stay tuned. Enter Very Passively, Exit Very Aggressively! Jim Brown Editor *************** FUTURES MARKETS *************** Gold Dojis, Treasuries Drift, Equities Sell Jonathan Levinson Another high volume day on the exchanges brought us solid declines in equities, with ES dropping .94%, NQ 1.35% and YM 1.21%. December gold set a new multiyear high intraday before falling to yesterday’s low, while bonds reversed early losses to close positive on the day. Daily Pivots (generated with a pivot algorithm and unverified): Note regarding pivot matrix: The support, pivot and resistance levels above are derived from the high, low and closing price levels by a simple mathematical formula. They are not intended to be predictive of market turning points or to serve as targets, but rather represent the range retracement levels as generated by the pivot algorithm. Do not think of them as market "calls" or predictions. Like any technically-derived indicator or price level, the pivot matrix values should be regarded as decision points at which to evaluate current market conditions. Visit us in the Futures Monitor for our realtime views of the various markets covered here. 15 minute chart of the US Dollar Index The US Dollar Index got sold to new lows on this move, bottoming at 93.40. The low coincided with a new rally high of 394.80 for December gold, but the bounce took it back and then some, with gold reaching an intraday low of 385.10. The CRB advanced .09 to 242.56 on strength in wheat, cocoa and platinum futures. Daily chart of December gold In honor of the new high and lower close, an outside bearish engulfing doji reversal day, I’ve included the customary daily chart of front-month gold, as well as daily and weekly charts of the Amex Goldbugs Index, the HUI. December gold dropped to a low of 385.10, but the end of day selloff in equities once again drove money toward the metal, with gold down 1.50 at 386.90 on the ACE as of this writing. The day was not bullish, either a consolidation of the recent gains or a doji top. I hesitate to use the word “blowoff”. With CNBC talking about gold, I am a nervous gold bull for the time being. The selling today flattened the oscillators and teased bulls with a failed upside breakout above the bear wedge. 6 year weekly chart of the HUI The HUI gave up 9.3 points to close at 201.20, while the XAU dropped 3.98 points to 93.52. Viewed over a 6 year timeframe, there’s nothing bearish about this chart. Indeed, although I haven’t labeled it here, the 155 level could be seen as the neckline of a nearly 6 year reverse head and shoulders bottom. As subscribers to the Market Monitor and Futures Monitor know, I have been bullish on precious metals and the miners (HUI and XAU) since sprint 2002, and while today’s pullback was impressive, the weekly chart paints a very bullish picture. However, nothing goes straight up or down, which is the context in which today’s correction can be seen. 6 month daily chart of the HUI Today’s 9.3 point drop engulfed this week’s gains and appears to be completing a bearish non-confirmation of September’s gains, with a negative divergence printed on the 10 day stochastic. A closing break below 200 implies a new downphase underway, with strong support in the 155-160 area. However, 175 and 192 should find their share of bids first. Daily chart of the ten year note yield Treasuries opened to light selling which reversed to light buying, with the ten year note yield (TNX) closing lower by 3.3 bps at 4.102%. The apex of the bullish descending wedge on the daily TNX chart was penetrated briefly but not held. If buying in ten year notes/ decline in the yield continues, the break below the bull wedge will complete what is becoming an increasingly common false wedge break. We’ve been seeing these all year with such frequency that I’m beginning to think of them as a separate chart pattern. Nevertheless, the oscillators continue to hint at a bottom forming in the yield, which would cap further gains in ten year treasuries. Until the wedge apex is broken on a closing basis, current levels will continue to look bearish for ten year notes/bullish for the TNX. Daily NQ candles Equities had a bad day today, retracing part of yesterday’s losses and then falling apart heading into the close, going out within 1 point of their low prints of the day and leaving an unequivocal message on the charts. On the daily candles, the downphase is in full swing now, with the 30 minute chart oscillator bounces discussed last night failing today from a lower high and setting the stage for lower price lows. On the daily chart, the drop stopped right on Fibonacci support. However, with the daily and 30 minute chart oscillators fully in gear to the downside, support might not give bulls as many chances as it did today. 30 minute 20 day chart of the NQ The end of day selloff left the NQ right above descending trendline support. The 300 minute stochastic and the Macd are just beginning their downphases here, and so other than a short cycle bounce off lower trendline support, most likely to be expressed as a sideways drift in price, I’m expecting to see more selling tomorrow. Daily ES candles The ES looks just like the NQ. It got smoked today, trapping bulls who tried to play the bounce for anything more than a scalp, failing from a lower high and breaking to a lower low. The combination of rolling weekly (not shown), daily and 30 minute chart oscillators from overbought leaves bulls with little to hope for at current levels, other than to secure their profits. 20 day 30 minute chart of the ES As noted in the discussion of the NQ, the short cycle intraday oscillators (not shown) are, as one might expect, severely oversold and trending under the weight of the longer cycle downphases now playing out. Nevertheless, combined with the descending trendline pictured above, at least some kind of bounce can be expected. With the longer cycles in bear rolls, it looks like “short every rally” is the strategy for now. As always, stops and careful entries are the key. Daily YM candles Nothing to add on the YM. 20 day 30 minute chart of the YM Other than the shakeout in gold and the relatively tame buying in treasuries despite a net 3B addition from the Fed via overnight repos, today played out as could be expected. Dollar weakness hurt equities, which bounced on cue and continued lower. Whether this continues tomorrow will have to be seen, but given the picture on the daily charts, it looks downhill for equities for now. ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. 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Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ **************** MARKET SENTIMENT **************** Bear Sightings on Wall Street. -J Brown Skittish investors ran for cover after a somewhat turbulent session in the markets. Early morning news from Dow component Eastman Kodak (EK) put traders on the defensive. The company said they were slashing their cash dividend from a semiannual payment of 90 cents a share to 25 cents in an effort to use the $1.3 billion in savings for digital technology investments. This was the first cut in its dividend in over 100 years and the stock lost 18% by the close making it the biggest loser in the $Industrials. Bulls tried to battle back midday to push the markets into the green but their bravery faded again. This week has been haunted by concerns that stocks are now too richly valued after such an incredible rally from this year's lows. We warned readers a few weeks ago that valuation downgrades would be the next cycle of headlines to pull stocks backwards and that's what we're witnessing. Not necessarily a valuation call, but on Tuesday Smith Barney cut their outlook on the defense sector and reduced several stocks to neutral or sell. Today we saw a similar performance from Bank of America who cut their forecast on the defense sector and downgrading several related stocks. Morgan Stanley even chimed in with a downgrade of the industry to "neutral". Looking overseas for strength was no help. The dollar may have stalled its flight against the yen but Asian exchanges were lower again today with the NIKKEI leading the way. European stocks were mixed with a small bounce in the German DAX after yesterday's big drop. Looking closer to home we see the Dow Jones Industrials and the NASDAQ composite making new short-term relative lows. The INDU has actually pulled back to its simple 50-dma. The weakness was certainly wide spread and there were several averages breaking support like the RUT, which closed below its 500 level. Market internals were strongly negative with declining stocks out numbering advancers 19 to 8 on the NYSE and 23 to 8 on the NASDAQ. Down volume was more than twice up volume on the NYSE and swamped up volume 4-to-1 on the NASDAQ. This sudden weakness actually smells like the real thing (not just a dip) as the volatility indices have finally spiked higher indicating growing investor fear. Speaking of fear, the news that inspectors found weapons grade uranium in Iran could come back to haunt us. Iran has until October 31st to prove to the Intl Atomic Energy Agency that it does not have a secret nuclear weapons program. Should they fail to do so, the volatile world stage could get even more so. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 9686 52-week Low : 7197 Current : 9343 Moving Averages: (Simple) 10-dma: 9521 50-dma: 9338 200-dma: 8683 S&P 500 ($SPX) 52-week High: 1040 52-week Low : 768 Current : 1003 Moving Averages: (Simple) 10-dma: 1022 50-dma: 1001 200-dma: 930 Nasdaq-100 ($NDX) 52-week High: 1406 52-week Low : 795 Current : 1325 Moving Averages: (Simple) 10-dma: 1367 50-dma: 1304 200-dma: 1142 ----------------------------------------------------------------- Ah.. finally we're starting to see some movement here. With the markets actually feeling some selling pressure the new VIX is up strongly in the last two sessions. The VXN has also responded but both "indices" are under bearish resistance. If the market indices drop through their next level of support then the VIX and VXN could break out higher. CBOE Market Volatility Index (VIX) = 22.26 +1.04 Nasdaq Volatility Index (VXN) = 30.65 +1.29 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 0.84 670,213 565,114 Equity Only 0.69 533,492 372,277 OEX 0.69 32,507 22,478 QQQ 1.35 43,165 58,691 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 72.8 + 0 Bull Confirmed NASDAQ-100 79.0 - 2 Bear Correction Dow Indust. 80.0 - 3 Bull Correction S&P 500 81.0 - 1 Bull Confirmed 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 1.47 10-Day Arms Index 1.21 21-Day Arms Index 1.13 55-Day Arms Index 1.05 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 870 795 Decliners 1945 2307 New Highs 48 86 New Lows 12 3 Up Volume 506M 378M Down Vol. 1318M 1641M Total Vol. 1857M 2031M M = millions ----------------------------------------------------------------- ! The COT Website has NOT updated their data since 09/09/03. 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 ----------------------------------------------------------------- ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! 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The Option Investor Newsletter Thursday 09-25-2003 Copyright 2003, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: AU, ERTS, LUV Dropped Puts: None Call Play Updates: AMZN, AXP, APOL, IBM, LEA, SLB New Calls Plays: None Put Play Updates: CCMP, KKD, GILD New Put Plays: JCI **************** 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: ***** Anglogold Ltd. - AU - close: 38.90 change: -2.18 stop: 39.00 All good things come to an end and Thursday's 4% slide in the Gold and Silver index (XAU.X) spelled the end for our AU play. After nearly 3 weeks of trying to build on the early September breakout over $39, the stock looks like it lost that battle today, with a 5.3% loss on volume that nearly doubled the daily average. Our $39 stop level seems to have been the right spot as it was defended a couple of times throughout the day before the final wave down at the close. Despite the fundamentally bullish case for gold shares, the technicals are in charge here, with investors rushing to harvest gains. With our stop violated at the close, we've no choice but to join the crowd. But we'll keep an eye on this sector for another bullish play in the very near future. Picked on September 2nd at $39.51 Change since picked: -0.61 Earnings Date 10/30/03 (unconfirmed) Average Daily Volume = 870 K Chart = --- Electronic Arts - ERTS - close: 93.62 chg: +0.00 stop: 93.00 We suspected that profit taking might hit ERTS eventually and that's why we raised our stop loss to $93.00 on Tuesday. Unfortunately, the stock continued its slide from Wednesday early on this morning and soon traded below our stop at $93.00. ERTS was quick to bounce back but what may be more disturbing was the later afternoon drop. Volume really began to pick up speed into the close. Now that we're out we can think about our next entry point. If the markets keep dropping then a bounce from the 30- dma near $90.00 might be the next bullish entry point for ERTS; or the next bearish entry point should it break. Picked on August 28 at $89.06 Change since picked: +4.56 Earnings Date 07/23/03 (confirmed) Average Daily Volume: 3.3 million Chart = --- Southwest Airlines - LUV - close: 17.87 change: -0.31 stop: 17.75 Despite a very promising chart breakout back on September 11th, shares of LUV just haven't been able to maintain altitude. The stock did manage to trade as high as $19, before beginning the retracement that is now nearly 2 weeks old. Today's close below $18 turns the picture even less positive and it appears the stock is headed back to test its rising trendline at $17.40. The breakdown of the Airline index (XAL.X) below $61.30 support has bearish implications as well. There's very little in the way of support between today's close and that level, and rather than wait for our stop to be hit, we'll take a pre-emptive exit tonight. If things firm up at a lower level, it may be worth another shot at the bullish side, but for right now, exiting for a small loss makes the most sense. Picked on September 11th at $18.36 Change since picked: -0.49 Earnings Date 10/20/03 (unconfirmed) Average Daily Volume = 2.56 mln Chart = PUTS: ***** None ------------------------------------------------------------ Quit paying fees for limit orders or minimum equity No hidden fees for limit orders or balances $1.50 /contract (10+ contracts) or $14.95 minimum. Zero minimum deposit required to open an account Free streaming quotes Go to http://www.optionsxpress.com/marketing.asp?source=oetics24 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************** PLAY UPDATES - CALLS ******************** Amazon.com - AMZN - close: 50.05 change: +0.44 stop: 46.50 The profit taking in the rest of the market has done little more than cause the bulls to pause in the Internet sector, and our AMZN play has held up amazingly well so far. On the cautious side of the coin though, we note that the stock has failed on three attempts to push outside of the ascending channel, with the $51 level providing firm resistance. With daily Stochastics flattened out in overbought, we may have to endure a bit of weakness before the next leg up. Look for a pullback into the $47.50-48.00 to provide a new entry point on a rebound from the midline of the channel. Chasing the stock higher from here without a mild pullback first is not for the faint of heart and we would counsel patience and caution, especially in light of the weakness throughout the rest of the market. Traders already holding open positions should continue to use a stop at $46.50, which is not only below the midline of the channel, but also the 20-dma ($47.08). Picked on September 18th at $47.89 Change since picked: +2.16 Earnings Date 10/21/03 (unconfirmed) Average Daily Volume = 8.74 mln Chart = --- American Express - AXP - close: 45.61 chg: -0.29 stop: 44.49 Profit taking was widespread on Wall Street today and the financial sectors were no exception. The BKX banking index pulled back to its simple 50-dma and should this technical level fail then another retest of the 850-855 level could be in the cards. This would probably accentuate the selling in high profile names like AXP and we would expect to be stopped out. Given yesterday's drop in shares of AXP and the follow through today we are not suggesting traders take new bullish positions. The $45.60 level held up as support twice today but given the negative close we suspect AXP will probably test its own simple 50-dma near $45 tomorrow. Picked on September 18 at $47.08 Change since picked: - 1.47 Earnings Date 10/27/03 (unconfirmed) Average Daily Volume: 3.9 million Chart = --- Apollo Group - APOL - close: 65.59 chg: -1.10 stop: 64.00 The consolidation in shares of APOL continues. The recent market weakness has brought APOL back to the $65 level, which was previously resistance and should now be support. The rising 21, 30 and 50-dma's should offer some technical help. Under normal circumstances we'd probably see this dip to $65 as a new entry point. However, given the late afternoon decline in both the markets and APOL we would not suggest new plays in APOL until we saw a decent bounce back above the $67 level. More aggressive traders can try and gauge a new entry off any bounce near $65. There is no new news. Picked on September 16 at $68.45 Change since picked: - 2.86 Earnings Date 10/07/03 (confirmed) Average Daily Volume: 1.9 million Chart = --- Intl Business Machines -IBM- cls: 89.41 chg: -0.01 stop: 87.90 Uh-oh...it looks like bad news for Big Blue. The profit taking has brought shares back below the $90 level, which should have been much stronger support. Yesterday's close under $90 was bad enough but today's failed rally back under $90 clearly points to more profit taking. As would be expected all the technical indicators have rolled over and look bearish. We might see a bounce at $88.00 or the 21-dma near $88.19 but that is being hopeful. Our stop loss is at $87.90 and we'd rather not lower it. Should the profit taking follow a 38.2% or 50% retracement of the August-September rally then we can look for IBM to slip towards the $87.80 or $86 respectively. Meanwhile, investors are ignoring positive press from the likes of Standard & Poor's who on Wednesday said that there were signs of growth in the U.S. hardware industry. Solectron reiterated those comments about gradual improvement this afternoon but tech stocks still took the biggest bruises. We are not suggesting new bullish plays at this time and conservative traders may want to get out at the open to save capital before IBM falls any further. There will always be another entry point later. Picked on September 23 at $91.34 Change since picked: - 1.93 Earnings Date 10/15/03 (unconfirmed) Average Daily Volume: 6.7 million Chart = --- Lear Corp - LEA - close: 53.62 change: -0.04 stop: 53.25 The recent bounce in shares of LEA continues to wither under the market's weakness. The pull back in Lear has been somewhat orderly and the stock stalled at the simple 50-dma today. Unfortunately, we fear that if the markets drop again tomorrow we'll quickly be stopped out at the $53.25 stop loss price. We're certainly not suggesting new bullish plays at this time. Picked on September 16 at $54.05 Change since picked: - 0.46 Earnings Date 10/17/03 (confirmed) Average Daily Volume: 694 thousand Chart = --- Schlumberger Ltd. - SLB - close: 49.39 change: -1.54 stop: 47.50 After last week's breakout above the months-long consolidation, we were expecting a pullback to confirm old resistance as new support in SLB. Well, we got that pullback on Thursday, but quite honestly it was a bit steeper than we had bargained for. Losing just over 3% on the day, SLB fell back inside the bullish triangle pattern that it fell out of last week and came to rest just below what should have been support at $49.50. This introduces the very real possibility that the stock will drop to test the rising trendline (now at $48.15) before a resumption of the uptrend. We don't want to get caught trying to catch a falling knife if that breakout proves to be a bull trap, so wait for the rebound before considering new entries. Ideally that rebound should come from above the 30-dma ($48.80), but we must wait to see what the market delivers. Our stop at $47.50 is below both the ascending trendline and the 50-dma ($47.67), so if it is hit, we'll have an unambiguous signal that the bullish move was a trap. Picked on September 21st at $50.99 Change since picked: -1.60 Earnings Date 10/21/03 (unconfirmed) Chart = ************** NEW CALL PLAYS ************** None ------------------------------------------------------------ optionsXpress has "...a lot of bang for the buck."--Barron's $1.50 /contract (10+ contracts) or $14.95 Min. No hidden fees Easy screens for spreads, collars, or covered calls! Contingent, Stop Loss, Trailing stop, or OCO 8 different online tools for options pricing, strategy, and charting Go to http://www.optionsxpress.com/marketing.asp?source=oetics25 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ******************* PLAY UPDATES - PUTS ******************* Cabot Microelect. - CCMP - cls: 56.57 chng: -0.57 stop: 61.25*new* Thursday's slide in the Semiconductor index (SOX.X) was nothing compared to the carnage seen on Wednesday, but the index did manage to slide fractionally lower, keeping pressure on our bearish CCMP play. At this point, the SOX looks vulnerable to the $420 and then $400 levels, and that bodes very well for CCMP reaching our initial target of $55. Following an early rebound this morning, CCMP found resistance just below $59 and rolled sharply lower into the close, ending at its low of the day with volume rising sharply. Currently right at closing support from the month of July, the stock could rebound from here or continue down with a vengeance. Failed rebounds below the $59 level still look good for new entries, with momentum traders best served by waiting for a break under $55 before adding new positions. We want to give the play room to move without giving too much back, so our stop moves down to $61.25, just above the bottom of Monday's gap, as well as the 10-dma ($61.21). Picked on September 23rd at $59.05 Change since picked: -2.48 Earnings Date 10/23/03 (unconfirmed) Average Daily Volume = 769 K Chart = --- Krispy Kreme - KKD - cls: 37.83 chg: -1.02 stop: 40.36 *new* Listen up Krispy Kreme bears... the 2.6 percent drop today has brought us when striking distance of our original exit range of $37.50 to $36.00. It's time to double check those sell orders. While you're at it we're lowering our stop loss to $40.36 should we be surprised with a bounce. Both $37.00 and $37.50 were minor resistance levels in June on the way up and they could be minor support on the way down. We do expect some support at the 200- dma, which is currently near $36.50. This close to our suggested exit we are not recommending new bearish positions. Picked on September 8 at $41.69 Change since picked: - 3.86 Earnings Date 08/21/03 (confirmed) Average Daily Volume: 1.0 million Chart = --- Gilead Sciences - GILD - close: 55.75 chg: -0.43 stop: 60.01*new* The sell-off continues for shares of GILD too. After breaking the $60 level of support five days ago volume has been pretty decent as investors take home some gains. Currently, GILD is at a significant support level. Does the stock bounce from $55 or does it continue lower towards the $50 mark? Shares are obviously oversold at this point but if the markets keep dropping then we're likely to see GILD follow. The stock did bounce near the $55 level intraday but in late afternoon trading $57 appeared to offer new resistance and we actually expect more weakness tomorrow given the last half hour for GILD. Short-term traders can actually consider taking profits here or as it closes with the $55 mark. Looking again at the P&F chart we see support near $53-54, which is something to consider. We are lowering our stop loss to $60.01. Picked on September 16 at $59.40 Change since picked: -3.65 Earnings Date 07/31/03 (confirmed) Average Daily Volume: 3.31 million Chart = ************* NEW PUT PLAYS ************* Johnson Controls - JCI - close: 95.75 change: -0.77 stop: 99.25 Company Description: Johnson Controls, Inc. is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems and batteries. For non-residential facilities, JCI provides building control systems and services, energy management and integrated facility management. Why we like it: The strongly bullish action in the auto-related stocks in recent months has been quite impressive and shares of JCI have gleefully gone along for the ride, rising to new all-time highs above $100. But that party seems to have come to a screeching halt this week, with the stock gapping down below the century mark on Monday and there has been little pause in the subsequent selling. Even blowout earnings from AZO on Tuesday was only enough to pause the slide before it began anew yesterday morning. The break below the 50-dma was one necessary support break and the next milestone will be a trade below $95. Trading that level will put the PnF chart back on a Sell signal, violate significant support from July and August and open the door for a slide below $90. Once that $95 level is traded, the tentative PnF vertical count will be $90, making it a good initial target to shoot for. If the bears really get ambitious, then a decline to the $86.50-87.00 area at the bottom of the mid-July gap looks achievable. Aggressive traders can look to enter ahead of the breakdown on a failed rebound below the 50-dma ($97.53), but need to understand that until $95 is traded, the chart is technically bullish to neutral. More conservative traders will need to see the breakdown before considering an entry. The ideal approach would be to enter on the breakdown under $95 (which also happens to be a breakdown below the ascending trendline from the March lows), while even more patient traders might get a shot at a subsequent failed rebound in the $95-96 area. Regardless of entry strategy, we're initially setting our stop at $99.25, just above the bottom of Monday's gap. Suggested Options: Aggressive short-term traders will want to focus on the October 95 Put, as it will provide the best return for a short-term play. Longer term traders will want to look to the November 90 Put, as it should provide ample time for JCI to move in our favor without time decay becoming a major factor. But take note that these were just listed on Monday and open interest is still very low. BUY PUT OCT-95 JCI-VS OI=402 at $1.75 SL=0.75 BUY PUT OCT-90 JCI-VR OI=192 at $0.55 SL=0.25 BUY PUT NOV-90 JCI-WR OI= 12 at $1.45 SL=0.75 Annotated Chart of JCI: Picked on September 25th at $95.75 Change since picked: +0.00 Earnings Date 10/22/03 (confirmed) Average Daily Volume = 479 K Chart = ------------------------------------------------------------ WINNER of Forbes Best of the Web Award optionsXpress voted Favorite Options Site by Forbes Easy screens for spreads, collars, or covered calls Free streaming quotes Real-time option chains, charts + calculators Go to http://www.optionsxpress.com/marketing.asp?source=oetics21 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ********** 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 Thursday 09-25-2003 Copyright 2003, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Play of the Day: PUT - JCI Traders Corner: When A Straddle Feels Soooo Good! Traders Corner: A New ETF for Trading the S&P Traders Corner: Is Trading Your Business or Your Hobby? The IRS & Your Bank Account Want to Know ********************* PLAY OF THE DAY - PUT ********************* Johnson Controls - JCI - close: 95.75 change: -0.77 stop: 99.25 Company Description: Johnson Controls, Inc. is engaged in automotive systems and facility management and control. In the automotive market, the company is a major supplier of seating and interior systems and batteries. For non-residential facilities, JCI provides building control systems and services, energy management and integrated facility management. Why we like it: The strongly bullish action in the auto-related stocks in recent months has been quite impressive and shares of JCI have gleefully gone along for the ride, rising to new all-time highs above $100. But that party seems to have come to a screeching halt this week, with the stock gapping down below the century mark on Monday and there has been little pause in the subsequent selling. Even blowout earnings from AZO on Tuesday was only enough to pause the slide before it began anew yesterday morning. The break below the 50-dma was one necessary support break and the next milestone will be a trade below $95. Trading that level will put the PnF chart back on a Sell signal, violate significant support from July and August and open the door for a slide below $90. Once that $95 level is traded, the tentative PnF vertical count will be $90, making it a good initial target to shoot for. If the bears really get ambitious, then a decline to the $86.50-87.00 area at the bottom of the mid-July gap looks achievable. Aggressive traders can look to enter ahead of the breakdown on a failed rebound below the 50-dma ($97.53), but need to understand that until $95 is traded, the chart is technically bullish to neutral. More conservative traders will need to see the breakdown before considering an entry. The ideal approach would be to enter on the breakdown under $95 (which also happens to be a breakdown below the ascending trendline from the March lows), while even more patient traders might get a shot at a subsequent failed rebound in the $95-96 area. Regardless of entry strategy, we're initially setting our stop at $99.25, just above the bottom of Monday's gap. Suggested Options: Aggressive short-term traders will want to focus on the October 95 Put, as it will provide the best return for a short-term play. Longer term traders will want to look to the November 90 Put, as it should provide ample time for JCI to move in our favor without time decay becoming a major factor. But take note that these were just listed on Monday and open interest is still very low. BUY PUT OCT-95 JCI-VS OI=402 at $1.75 SL=0.75 BUY PUT OCT-90 JCI-VR OI=192 at $0.55 SL=0.25 BUY PUT NOV-90 JCI-WR OI= 12 at $1.45 SL=0.75 Annotated Chart of JCI: Picked on September 25th at $95.75 Change since picked: +0.00 Earnings Date 10/22/03 (confirmed) Average Daily Volume = 479 K Chart = ------------------------------------------------------------ VOTED one of "Best Online Brokers" (4 stars)--Barron's optionsXpress's "order-entry screens...go far beyond... other online broker sites"--Barron's 8 different online tools for options pricing, strategy, and charting Access to options specialists via email, phone or live chat online Real-Time Buying Power, Account Balances or Cancels Go to http://www.optionsxpress.com/marketing.asp?source=oetics22 Note: Options involve risk. Risk disclosure: http://www.optionsxpress.com/welcome_risk_index.htm ------------------------------------------------------------ ************** TRADERS CORNER ************** When A Straddle Feels Soooo Good! By Mike Parnos, Investing With Attitude POSITION ACTIVITY ALERT – Life is beautiful when things go according to plan. How often does that happen? OK, so it's pretty rare. But it happened Wednesday morning with our APPX straddle position. As anticipated, APPX received positive results on a drug test and the stock ran up to $44.14 at the open – a gain of almost $5. Within a couple of minutes it came back to the $43.50 area. What happened to our straddle? What we had paid $11.20 for on Monday was suddenly worth $12.60 (Calls: $9.80, Puts: $2.80). It was time for CPTI students to GTFO (close the position and take profits). The $1.40 profit represents a 100% return on what we were willing to risk. (See the position detail explained below). The rubles are back safely in our pockets and we chalked up a $1,400 profit. It only took two days instead of a month. Will APPX move higher? Maybe, maybe not. (Actually, at this writing, APPX gave it all back -- and then some.) Gordon Gekko may have lived his "greed is good" mantra. But life has taught me to be part couch potato and part chicken. So, we bid a fond farewell to APPX, wishing it well. We took our pound of flesh. I noticed some volume on the January $36.635 puts and calls on Wednesday morning, so some CPTI students are sitting on their couch wearing nothing but a smile. It felt good for us. Was it good for you? _____________________________________________________________ The Market Giveth – Then Taketh Away BBH – Our "Joined" Iron Condor. Well, the damn thing tanked. Around noon on Wednesday it violated our lower parameter of $133.85. So, because we're responsible traders who adhere to our trading plan, we had to bail out on the position. We bought back our $140 put for $7.30 and we sold our long $130 put shortly thereafter for $1.75. Then, we closed the $140/$150 bear call spread. The total debit for closing the position was $6.45. We took in $6.15, so we reluctantly take our loss of $300. But, at the same time, we pat ourselves on the back for using good money management techniques. We also free up $20,000 in maintenance to potentially use for something else. _____________________________________________________________ SPX Entry Adjustment The letter below that arrived Monday, from a CPTI student, will explain how, and why, we adjusted our entry of this month's SPX Iron Condor. Hi Mike, With the down opening (on Monday), I waited the hour, as per your recent advice. Could you clarify what is the best action, or non- action, to take? What is the CPTI position regarding yesterday's (Sunday's) recommendations on the SPX etc.? I found I could sell the puts at a higher price, but naturally lower on the call side. The credit is now skewed toward the puts, and is still within $.30 to $.40 cents of your prices. Could it still be a good trade? I would appreciate an answer, because I do not want to miss out on this month's trades if they could still be profitable. -- Vanny Hi Vanny, Good question! I'm pleased you avoided "amateur" hour before considering trading. The large gap-down should have prompted traders to adjust the SPX trade. We adjusted our SPX entry point as follows. We were able to take in a similar amount of premium (a total of about $2.30) by using 10 contracts of a 980/970 bull put spread and 10 contracts of the 1065/1075 bear call spread. This accomplishes a number of things. a) It establishes a new range with the SPX comfortably in the middle; b) It allows you to take advantage of lower strikes, thereby allowing you to trade 10 contracts on the bear call spread instead of five, making it simpler; and c) It actually reduces your maintenance requirement on the bear call spread from $12,500 (on the 1075/1100 spread) to an even $10,000 on the new 1065/1075 spread. And lastly, we have one less trading day of exposure. Regarding the QQQ calendar spread -- the QQQ trade could have been entered for the same $1 debit many times during the day (Monday). We are hoping the QQQs go down, so we lose nothing. BBH is actually a small index. While I'd prefer if it stayed closer to $140, it's still a reasonable trade. _____________________________________________________________ OCTOBER POSITIONS October Position #1 – SPX Iron Condor – Trading @ 1003.27 We were going to sell 10 contracts of October SPX 995 puts and then buy 10 contracts of October SPX 985 puts for a credit of $1.20 ($1,200). Then we were going to sell 5 contracts of October SPX 1075 calls and buy 5 contracts of October SPX 1100 calls for a credit of $1.10 ($550). Total credit and potential profit: $2,300. The premium figures were based on Friday's posted closing prices plus an extra $.20 here and there that you should be able to shave off the wide bid/ask spreads. We would have created a maximum profit range of 995 to 1075. Note that we we're only trading five contracts on the calls because we had to limit our risk. Strike prices weren't available for us to have a 10-point exposure, so we had to use a 25-point exposure in the calls. Due to a severe gap-down on Monday, we adjusted the parameters of this SPX condor prior to entry. (See above letter). October Position #2 – BBH Joined Iron Condor - Trading at $131.25 This is sort of a sell straddle with protective wings. In other words, the puts and calls had the same strike prices. We sold 10 contracts of October BBH 140 calls @ $3.90 and also sold 10 contracts of October BBH 140 puts @ $4.50. For protection we bought 10 contracts of October BBH 150 calls @ $.85 and bought 10 contracts of October BBH 130 puts @ $1.40. Our total credit was $6.15 ($6,150) -- which is also our maximum potential profit. We have created a profit range of $133.85 to $146.15. The closer BBH finishes to $140, the more we will make. Our risk is limited to $3.85. The parameters of our profit range were also our bailout points. And damned if we didn't have to bail and take a $300 loss. (See article above) October Position #3 – QQQ – Put Calendar Spread – Trading @ $32.79 Want to risk a buck? Maybe less? Since many folks think the market is due to correct, let's create a cheap play that will let us take advantage of a nice down move. We bought 10 contracts of January 04 QQQ $32 puts and sold 10 contracts of October 03 QQQ $32 puts for a total debit of $1.00 ($1,000). If/when the QQQs make their move down, the January $32 put will increase in value more rapidly than the October $32 put. We'll look for a $500-$750 profit on this position and take the money and run. The risk is small. The percentage profit potential is very appealing. October Position #4 – APPX – Short Term Straddle – Trading @ $34.84 Here's a hit and run trade. APPX was scheduled to have FDA drug test results released this month. These announcements (good or bad) often result in $5+ moves in the stock. If there's a reaction, we want to be in position to take advantage of it – and limit our risk at the same time. We bought 10 contracts of the January AFFX $36.25 calls @ $5.90 and bought 10 contracts of the January AFFX $36.25 puts @ $5.30 for a total debit: $11.20 ($11,200). You may be able to shave a little off of each bid/ask and save $.20-.30. I know $11,200 sounds like a huge risk, but remember that we're only going to be in this trade for 30 days or less. Since these are four-month options, only about 10-15% of the $11.20 might erode during that period. That's about $1.10-$1.50 risk. Regardless of what happens, we're out of this trade in 30 days or less. We'll settle for a $1-2 in profit. We had to be on our toes, because announcement and the spike (up or down) can happen quickly and may not last the entire day. It didn't. (See article above) ______________________________________________________________ QQQ ITM Strangle – Ongoing Long Term -- $32.79. We bought 10 contracts of the 2005 QQQ $39 puts @ $7.00 = $7,000 and also bought 10 contracts of the 2005 QQQ $29 calls @ $7.30 = $7,300 for a total debit of $14,300. Then we sold 10 contracts of the QQQ Oct. 33 puts @ $.85 = $850 and also sold 10 contracts of the QQQ Oct. 34 calls @ $1.05 = $1,050 for a total credit of $1,900. HPQ (Hewlett Packard) Bear Put Spread – HPQ at $19.26. HPQ is weak and may return to the $15 range. So, we bought 10 contracts of the HPQ Feb. 2004 $20 puts @ $2.25 and we sold 10 contracts of the HPQ Feb. 2004 $15 puts @ $.40. Total debit of $1.85. Potential max profit of $3.15. We'd gladly accept a profit of $800-900 and close the position early if the opportunity presents itself. This is a long-term position. OEX – Bearish Calendar Spread – OEX @ $502.62 We bought 8 contracts of OEX November 470 puts @ $10.60 and sold 8 contracts of OEX September 470 puts @ $2.20 for a total debit of $8.40. The Sept. 470 puts obviously expired worthless. We were going to sell the October 490 puts and take in another $2.10. However, with the Monday market gap-down, we were able to take in $3.10 instead. Our new cost basis is $5.30. __________________________________________________________ New To The CPTI? Are you a new Couch Potato Trading Institute student? Do you have questions about our educational plays or our strategies? To find past CPTI (Mike Parnos) articles, look under "Education" on the OI home page 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 ************** A New ETF for Trading the S&P An Exchange Traded Fund (ETF) combines many of the benefits of index mutual funds but with the flexibility of stocks. Like mutual funds, ETFs enable you to invest in a pool of securities in one transaction. And similar to stocks, ETFs are listed on an exchange so you purchase them through a brokerage account. ETFs offer stock-like trading features enabling you to trade throughout the day, purchase on margin, use limit and stop orders and even short-sell. There are a number of different ETFs on the market currently, including QQQs, SPDRs, sector SPDRs, MidCap SPDRs, HOLDRs, iShares, and Diamonds. All of them are passively managed, tracking a wide variety of sector-specific, country- specific, and broad-market indexes. On April 30, 2003 Rydex began offering (symbol RSP) a new ETF based on the S&P Equal Weighted Index, an index composed of the S&P 500 stocks but calculated in a way to give each stock an equal weighting. EFTs are introduced all the time, so why have I taken the time to tell you about this new one? Well I have four reasons: (1) it provides investors with true diversification; (2) is not subject to the fortunes of a handful of stocks with very high market caps; (3) could help technical indicators provide better forecasting results; and (4) has the potential to out-perform the cap-weighted version. Firstly, except for the Dow, which is price-weighted, most major market averages and industry/sector indexes are capitalization- weighted. This means that the daily impact of a stock's price change upon a given market index is weighted by multiplying its price by the number of shares outstanding. The result is that a handful of large-cap stocks will exert the most influence on the index. For example, at the beginning of 2001 the top 25 (5%) of S&P 500 stocks accounted for 40% of the total market cap of the index, and the top 50 (10%) for 57%, and the top 100 (20%) for 72%. So the premise that investing in an S&P 500 index fund will provide diversification is clearly not true. Investing in an equal weighted ETF will give you true diversification. Secondly, if a stock like Microsoft, Intel, Cisco were to give an earnings guidance the market didn't like the whole S&P 500 index would feel the pain, not just the stock, because they have such an overweighed representation in this capitalization-weighted index. Where do you think the saying, "investing in GE is a proxy to investing in the S&P" came from? How GE goes so goes the S&P (insert, MSFT, INTC, etc.) Thirdly and perhaps the best argument for this equal-weighted index is that there is a direct relationship between price performance and the derivative indicators. Virtually all market indicators, like the Advance-Decline Line, are unweighted indicators, i.e each stock in the index carries an equal weight. So using these indicators to analyze a cap-weighted price index is probably not as effective as you think. Once again this is because the movement of the price index is determined by the weight of a just a few stocks, whereas the indicator does not use the same representation. Using the RSP instead of the S&P should make these indicators much more helpful to your analysis. Fourthly, we need to look at performance, an important issue. How does RSP perform relative to the S&P 500 Index? Since RSP is a relatively new security making this comparison will not be easy but I found a website that had the data prior to 4/30/2003 derived from back calculations of the S&P Equal Weight Index. It is an accurate depiction of how RSP would have performed, and it allows us to examine RSP performance over a wide range of market conditions. On the chart below, the top panel is RSP, the second panel the S&P and the bottom panel is a ratio index that divides RSP by the SPX, going back to 1990. When that index is rising, it means RSP is stronger than the SPX. Do you see the period between 1995 and 2000 where the ratio is in a steady decline showing a period when the RSP was underperforming the SPX? This was the timeframe when the large- cap stocks were the darlings of all investors, new and old, and money was flowing into them like molten lava to the sea. This was also the period when small-cap was a dirty word. The divergence reversed, however, after the SPX topped in 2000, caused mainly by the fact that large-cap stocks began to tank. RSP did not begin a serious decline until mid-2002, which is when all stocks, large- cap and smaller-cap, were dirty words. There are some interesting statistics regarding this comparative performance. From the 1990 bear market low to the bull market highs in 2000 (SPX) and 2001 (RSP) the SPX rallied +428% versus +408% for RSP. The bear market decline into the October 2002 low took the SPX down -50% versus only -40% for RSP. Finally, as of 9/16/2003 the rally from the October 2002 low has taken the SPX up only +33% versus +54% for RSP. Not surprisingly, RSP is only - 8% off its all-time high versus -33% for the SPX. The chart below gives us a closer look at a more recent time frame. As you can see the ratio has being rising since October 2000 showing RSP outperforming the S&P since that time. Here is a table comparing the capitalization weighted S&P to the equal weighted RSP. RSP SPX 500 stocks 500 stocks Equally Weighted Capitalization Weighted Balance between value and growth Bias towards large cap Quarterly rebalance No Rebalance More small cap exposure Greater large cap exposure No domination by few stocks 100 largest stocks equal 70% of index Sector exposure driven by index Sector exposure driven by was is hot or was is not Here is a graph showing RSP to be a superior tool for sector diversification also. Notice how equal weighting in the S&P (using the Equal Weight Index) results in equal representation in sectors and prevents the over concentration in the popular sectors like the Information Technology sector domination in 1999 to 2000. I just saw an ad on CNBC, trying to pitch the Spiders (SPY). The ad was going on how if you wanted true diversification and exposure to the whole market you should be buying the SPY to get this exposure and diversification with only one stock. First of all the SPY is only 500 stocks not the whole stock market, secondly the diversification, as we have just seen, is just a little skewed. RSP is the much better vehicle to get diversified over at least 500 stocks. Remember plan your trade and trade your plan. Jane Fox ************** TRADERS CORNER ************** Is Trading Your Business or Your Hobby? The IRS & Your Bank Account Want to Know By: Dave Fleck, CPA If you are a trader who wants to trade part-time, from home, make a more than full-time income, and create lasting financial security, listen up. Last May, I met a very wise man who shared something that is going to help you. He has been a personal coach to hundreds of people, from all walks of life for over twenty years. His students get tremendous results, over and over again. You would recognize some of their names. His style is simple and direct. He asks his students, “What Are You Up To?” Does that seem like a stupid question? Sure, it might seem a bit too simple. It is not stupid though. Far from it. I suggest you ask yourself that same questionthe smart folks reading this already didthe wealthy readers already know the answer. For the rest of you, let me give you some advice. You are what you do. Not what you want to do, plan to do, or hope to do. Or even more precisely: You are what you are. So, are you a trader in the business of trading? Or, are you a trader, who treats it like a hobby? Listen to This Shocking But True Story of Joe the Hobbyist. Joe has been trading full-time since 1999. In his first year of full-time trading he was extremely successful. He made over $250,000 from trading. However, starting in the spring of 2000, Joe’s account started to crater. This probably won’t surprise you, but Joe hadn’t made any quarterly estimated tax payments during 1999. As a result, he couldn’t pay his tax bill, even though he had netted over a quarter million dollars. It gets worse. Over the next two years, Joe managed to lose over $400,000 of his trading capital. Have you heard of the capital loss carryover? That is the provision granted by Our Most Generous IRS that allows Hobbyists like Joe to deduct $3,000 of capital losses every year! So, don’t worry about Joe, he’s good with that deduction for another 130 years. Without going into all of the details, just know that if Joe had been in the business of trading, the tax rules would have been completely different, and his trading losses would have resulted in a refund from the IRS, rather that a foreclosure notice from his bank. The Two Sets of Tax Rules Over my fourteen years in the tax field - working with individuals ranging from the middle class to the very wealthy - I have come to realize that there are two sets of tax rules in the Tax Code. One set of rules is for the individuals that work all of their life as employees for a company. The defining characteristic of these individuals is that they struggle to make ends meet and hope that after they retire their pension or social security will provide an adequate income for them to live on. (Doesn’t that sound like a crappy existence?) The other set of rules benefits the individual who is a business owner. This individual is able to utilize a hidden tax system that is deliberately designed to help business owners create and accumulate great wealth. The High-Paid Corporate Lobbyists Are Working For You What is this hidden tax system? It is the tax system of America that has been largely written by the high-paid lobbyists that represent corporate America. Decades of this intensely self- motivated lobbying have made America the best place to start and run a business in the entire world. These tax rules provide amazing benefits to the business owner. Here are just a few to get you to see why you need to be in the business of trading. Advantage #1. The Business Owner is Given a Blank Check for Deducting Expenses. All ordinary and necessary business expenses come off the top. That is why corporations can make millions if not billions, and not have to pay any taxes. Other than a retirement plan, this is the most profitable way for a trader to slash their taxes. Most traders can find $15,000 to $25,000 of expenses that they can attribute to their trading business every year. Advantage #2. Trading Losses Can Be Applied to Previously Filed Tax Returns! If you select the right accounting method in your trading business, losses can apply to previously filed tax returns. This is one secret to how Joe the Hobbyist could have avoided a large part of his misery. His losses of 2000-2002 could have allowed him to re-file his 1999 return and cancel out his tax bill, if he had been trading as a business. Advantage #3. The Part-Time Trader Can Offset His Personal Taxes with Trading Expenses. The part-time trader can offset his W-2 paychecks with business tax breaks (losses, expenses, start-up costs) from his trading business. This may seem shocking, but the IRS wants to help you start your trading business! You are given the ability to reduce your taxes on your personal income, and divert that money into your trading business! With a trading business, you will be able to convert personal expenditures into business deductions and potentially save thousands of dollars a year in Federal and State income taxes. The main challenge for you is will be to adequately certify that you are indeed operating a trading business, and avoid the limiting Hobbyist designation that devastated our friend Joe. Are You An Employee With a Hobby, or a Business Owner With a Plan? The advantages of being a business owner are tremendous. If you are in business for yourself you will be given the greatest opportunities for building and keeping your wealth. The good news is that you, as a trader, whether you trade full-time or part- time, have the ability to treat your trading as a business. The key is to get proper, timely advice on exactly what to do, and then do it. You will know you are doing it right, when you can be asked, “What are you up to?” and not even have to think before giving your answer. Dave Fleck, CPA is the Tax Director of Traders Accounting. For the Special Report: What the IRS Isn’t Telling You About Trader Taxation, go to: http://www.tradersaccounting.com/a.pl?tax&1026&cut.asp By: Dave Fleck, CPA Traders Accounting ------------------------------------------------------------ We got trailing stops! Trade online with trailing stops at optionsXpress, at no extra cost Trailing stops based on the option price or the stock price Also place Contingent, Stop Loss, and "One Cancels Other" orders $1.50 /contract (10+ contracts) or $14.95 Minimum--NO Hidden Fees! 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