The Option Investor Newsletter Tuesday 07-06-2004 Copyright 2004, All rights reserved. 1 of 3 Redistribution in any form strictly prohibited. In Section One: Wrap: Earnings Surprise Index Trader Wrap: Pre-announcement season begins with a slam Market Sentiment: Investors Turn Wary Posted online for subscribers at http://www.OptionInvestor.com ************************************************************ MARKET WRAP (view in courier font for table alignment) ************************************************************ 07-06-2004 High Low Volume Adv/Dcl DJIA 10219.34 - 63.50 10280.26 10191.40 1.46 bln 1192/1932 NASDAQ 1963.43 - 43.20 1995.40 1958.69 1.89 bln 784/2273 S&P 100 543.33 - 3.84 547.17 541.76 Totals 1976/4205 S&P 500 1116.19 - 9.19 1125.38 1113.21 W5000 10896.09 -101.50 10997.55 10870.11 SOX 439.14 - 18.31 457.31 435.23 RUS 2000 572.41 - 10.31 582.72 571.47 DJ TRANS 3116.49 - 29.70 3146.39 3113.91 VIX 16.25 + 1.17 16.75 16.13 VXO (VIX-O)16.17 + 1.08 16.94 15.55 VXN 22.11 + 2.22 22.38 21.41 Total Volume 3,653M Total UpVol 488M Total DnVol 3,126M Total Adv 2229 Total Dcl 4747 52wk Highs 145 52wk Lows 140 TRIN 2.45 NAZTRIN 3.76 PUT/CALL 1.08 ************************************************************ Earnings Surprise by Jim Brown The market reacted strongly to the continued flurry of earnings warnings and definitely surprised traders. The constant drone of company after company warning that large corporations are not spending money has soured expectations and traders took their wrath out on stocks. Dow Chart - Daily Nasdaq Chart - Daily SOX Chart - Daily The past has come back to haunt us as earnings and economics continue to deteriorate. Both are slipping from their highs from the last couple quarters and are still well above crisis levels but traders always want more. The ISM Services this morning dropped to 59.9 from 65.2 in May and was well under consensus estimates of 63.0. The internal components showed mostly gains with New Orders, Deliveries, Employment and Exports continuing to rise. Imports shrank to 56.5 from 59.5. Problem areas were a +3.5 jump in inventory levels to 57.5 and the highest Prices Paid component since records were started in 1997. The mixed message of a new high in employment and a new high in prices paid was even more confusing with the substantial drop in the headline number. This was the first drop under 60 in six months and at 59 it is still well into expansion territory. Analysts claim the dip is a lag caused by higher energy prices and the argument sounds reasonable to me. Next month will be a critical indicator if the decline from 68.4 in April extends to a third month. The only other economic number was the Challenger Layoff Report and the news was good. Layoffs in June dropped to 64,343 and nearly -10,000 below May. This was the lowest level for the year and compares to June's -59,715 from last year which was also the lowest for 2003. This is a seasonal trend where layoffs decline in late spring, early summer and then rise again in the fall. Do not be surprised if we see this number begin to rise next month. YTD announced layoffs are down -25% compared to 2003 and that is definitely a good sign. Unfortunately planned hiring declined to only 38,377 from May's 55,307. The sudden increase in earnings warnings will put the need to cut expenses right back in the forefront and cutting employees produces strong permanent cost reductions. The mixed economics did nothing to rescue the markets from the pain of continued earnings warnings. With the quarter over companies now know what the final sales numbers were and for many their expectations fell short. The two major names leading the drop this morning were VRTS and CNXT. Since VRTS just affirmed estimates only three weeks ago the warning was definitely a real surprise. VRTS saw $4 billion in market cap erased today and distrust of management soared to a new high only weeks after the company recovered from a prior accounting scandal that cost the CFO his job. According to VRTS sales are normally concentrated in the last part of the quarter and anticipated order flow did not materialize. Multiple companies have said corporations are just not committing to new expenditures because of the uncertainty in the economy. Major software purchases are definitely in that category. CNXT lost -40% of its value after warning of weak sales in the broadband wireless market. CNXT said it would only earn two cents instead of the five cents analysts had expected. Intel, the target of choice lately, was cut by Lehman on fears that PC demand for the back to school season was weak. Lehman also said problems in the Grantsdale chipset would also impact profits. Intel has been the daily target for the last week as each analyst gets his 15 min of fame for his downgrade. Other warnings/downgrades before the open included MUSE, EMBT, KVHI, LSCC, AMCC, BRCM and BOBJ. BRCM lost nearly -$4 on the Lehman downgrade of the sector. After the bell today the warning parade continued with KANA, JDAS, ASCL, SCUR, FILE, TFX, WDHD and NTPA. The damage is not restricted to the chip and software sector but it is definitely concentrated in those areas. The SOX dropped another -4% on the news and closed well under 450 support at 439. This is a major break in the chips and only a week after the Semiconductor Association said billings rose +36.9% compared to the same month last year. The problem appears to be perception that the peak has passed. The analysts are quoting order and backlog surveys that suggest April was the peak in chips and the sector will decline into 2005. Many analysts are now noting that institutional investors are exiting chips in expectations of the end of the cycle. Earnings warnings have been thicker than mosquitoes at a summer picnic. How thick is a cause for discussion and there is no clear consensus. A report on CNBC today quoted 43 of 60 S&P pre-announcements as warnings. They were claiming it was the worst warning series since March of 2003. However, First Call said that though Thursday night there were only 1.4 negative outlooks for every positive outlook. They claim that overall 981 companies had issued guidance, 344 positive, 148 inline and 489 negative. For the S&P they quoted a ratio of 0.8 to 1 negative to positive. First Call said that was the lowest ratio since they began tracking eight years ago. Something does not compute. If warnings are so few then why is the market imploding on every warning? Could it be that hopes were simply too high after the last four quarters of very strong performance? If you answered yes to that question give yourself a gold star. The market was priced to perfection assuming the economy was in breakout mode with good times ahead. We celebrated the monster job gains in April/May and the markets pulled out of the May decline on the assumption that the early signs of cracks in the economics were just superficial. Earnings in Q1 hit +26% and Q1 GDP was +4.4%. No challenge there. Suddenly they are quoting only +19% for Q2 and possibly lower and as little as +5% for Q4. (First Albany) Earnings deceleration is rapidly increasing and those that are warning are some high profile names. It also does not help that almost every analysts has taken it upon himself to downgrade techs in some fashion. Is this smoke or is it real? We really won't know until next week. We do get earnings from AA, DNA, ACN and YHOO tomorrow and GE on Friday but the real parade of blue chips does not start until next week. If the ratio of warnings is really that low then in theory the earnings will surprise to the upside and everyone will breathe easier once again. Of course there is always the chance this will be an inline quarter and you know how well investors react to only inline performance. The challenge is of course the guidance and not really the earnings. Beginning with Q3 the comps to Q3/Q4-2003 become very tough and posting double digit growth will become increasingly harder to accomplish. Thus the very low earnings estimates for the 4Q amid the weakening economics. As if the market did not have enough to worry about today there was a huge amount of news. Sabotage in Iraq and troubles in Norway and Nigeria sent oil prices soaring once again to near the $40 level. The trial in Russia and tax claims against oil giant Yukos has sent ripples through the sector. The Kremlim hit them with a $3.4 billion tax bill and caused a shake up on the board. While nobody expects a slowdown in exports there is always that possibility for a company in turmoil. The sharp jump in oil prices did not help stock market sentiment. Kerry announced John Edwards as his running mate and the anti business complainers came out of the woodwork. On every channel and every medium were talking heads claiming Edwards would be bad for business and the fight was on. In what may have been a good move for Kerry on one front by adding the young, handsome trial lawyer it was a negative on another. The Bush camp was quick to point out that Edwards was the second choice and had repeatedly claimed he would not accept a VP position. But then he is a politician and his lips were moving. Part of the market drop today was the uncertainty principle as the chances of a Kerry win and the impact of a Kerry/Edwards administration were weighed. According to a recent survey 92% of Wall Street analysts wanted to see a Bush win to continue the market rebound. A new study by the Wharton School of Business showed that in general it makes no difference which administration is in power with only the year surrounding the election highly volatile. The survey showed a +3.74 jump in the month after the election if a republican won and only a +1.59% rise for a democrat. However, in the year following the election a democrat win averaged a +7.55% gain compared to a +1.28% gain for republicans. The study went on to show that since 1897 the Dow had gained nearly twice as much under democratic administrations. Since 1945 the S&P had averaged a +10.7% annual return under the democrats and only +7.6% under republicans. Please remember that statistics can be skewed to show anything the researcher wants to portray and this survey did not take into account things like who controlled congress. It is widely known that a divided term with opposing forces in control will produce gridlock and very little damaging legislation can make it through successfully. It also did not take into account things like wars and 9/11. Regardless the markets reacted to the Edwards announcement three weeks before the convention and it may continue to react in the weeks ahead. According to one report today mutual fund cash is nearing record lows. TrimTabs claims inflows to equity funds have increased over the last six weeks with $2.3 billion added to stock funds last week. AMGData claimed +$3.8 billion for the same week ended June 30th with $2.25 billion going into the iShares Russell 2000 Index fund alone. TrimTabs claims +$9 billion inflows for the entire month of June. Most of the money is coming out of bond funds with a highly anticipated rate hike driving investors from bonds to equities. Money market funds lost -$48 billion according to AMGData. Despite all the shuffling of deposits it is rumored that funds are walking a tight rope between being fully invested and retaining cash for disbursements. This suggests a positive bias but it is sure not showing up in the markets. This weeks fund flows will be very telling. The markets are on the verge of some critical technical damage. I said on Sunday the Dow could move to 10150 and the Nasdaq could see 1965 without any material change in status. I did not expect it to happen in only one day. The Dow hit 10191 intraday and the Nasdaq fell to 1959 and closed just above critical at 1967. We have definitely seen a change in the trend and that change was led by techs. The Nasdaq has seen 1962-1964 as support since May 26th and that support has held through three separate tests. As long as this test holds, the range for the last six weeks will be intact. A break here by the Nasdaq could easily take us back to 1900. This is a critical support level that must be defended if the bulls have any hope of a summer rally. The Dow fell to 10200 and barely recovered into the close. This is well below the recent range support at 10300 but it is still within the broader range of 10100-10500. This 10200 level is decent support but a break here could see Dow 10K very quickly. Personally I think the selling is overdone. I think it was a knee jerk reaction to several high profile warnings as well as outside events like oil, the elections and the almost unanimous downgrade of the chip sector. I think all the expectations of upside earnings surprises has been removed from the market and earnings risk has been negated. However we still have three days before real earnings volume will appear and the truth begins to come out. I looked at the internals today and they were terrible. The declining volume across all markets was 6:1 over advancing. Decliners beat advancers 2:1 but compared to the volume figures it was not that bad. Stocks that warned got crushed on heavy volume. (VRTS -9.55, -36%, 81 million shares) but other than chips the rest of the market was passive. The TRIN closed at 2.45 and the Nasdaq TRIN at 3.76. The put call ratio is 1.08. All of these indicators suggest the market is very oversold and a relief bounce could be in our future. Many blue chip stocks have declined to very strong support and they appear to be holding this support. Intel at $26 is at its 200wk average and at strong horizontal support. Can it be knocked lower? Yes but it will take a lot more negativity to push it over the cliff. IBM at $86 has imploded on chances it would warn but $86 is strong support and its warning window has passed. IBM announces earnings Thursday of next week. In short I think the pressure should ease tomorrow. We could always have some new event appear or some new warning from a high profile company but the Intel story is over. The SOX story is over. The software sector has been decimated but the JDAS warning tonight could still produce weakness. Further serious drops from here will require some new event. That event may be just fear of the event risk around the democratic convention or a real earnings miss from some blue chips next week. I doubt YHOO earnings tomorrow night will tank the market since it has already dropped -$4 from its highs of $36.50 last week and $32 is strong support. It can fall more but earnings expectations have already been removed. My thought process for a trading play would be to buy the dip. However, my long-term outlook is still for weakness ahead. I think the summer event risk coupled with investor apathy will continue to give us a range bound market with risk to the downside as the summer progresses. How do you play that market? Very carefully! Until we find out where the next rebound will fail we are in unstable territory. I would be very surprised if it was much over 10300 and a lower high in that range would send a very negative signal to traders. Until we see what those 300+ companies actually say with earnings next week I would be very cautious about any long positions. Enter Passively, Exit Aggressively. Jim Brown Editor ************************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 ************************************************************** ******************** INDEX TRADER SUMMARY ******************** Pre-announcement season begins with a slam Quarterly earnings warnings from software makers set today's negative tone and had the GSTI Software Index (GSO.X) 141.96 -5.04% lead a broad list of sector loser. Rising oil prices also weighed on investor's minds with August Light, Sweet Crude Oil futures (cl04q) $39.51 +2.91% jumping back near the $40.00 mark, where another attack on an Iraqi pipeline cut that country's exports by half. Earlier reports out of Russia were that that country's top oil exporter Yukos Oil may have to cut output due to its tax disputes and pending bankruptcy. Later in the afternoon, oil eased from hits session highs when reports surfaced that Yukos officials said production would not be curtailed. U.S. Market Watch - 07/06/04 Close Energy and financials showed some relative strength in today's session, but that's about the only positive sign a bulls could hold onto in today's session. After surging higher on Friday, Treasuries gave back a fraction of those gains. As is often the case after a three-day weekend, U.S. Dollar Index ($dx00y) intra-day ranges are inaccurate, and intra-day charts for today's trade unavailable. However, the U.S. Dollar Index (dx00y) 88.21 would have shown strength from Friday's closing value of 87.99. Option volatility measures spike higher in today's trade, but after reaching 16.75 and getting pretty close to my historically low 16.78 level, the VIX.X reversed that high to finish more towards its session lows, giving some thought that put sellers were trying to take advantage of a spike in option premiums in the afternoon session. Market Snapshot / Internals - 07/06/04 Close Earnings warnings among technology weighed more heavily on the NASDAQ where decliners outnumbers advancers by a hefty 3 to 1 margin and new lows outnumber advancers for the first time since June 22. The NYSE faired slightly better, but also showed weak internal figures. Today's action has the NASDAQ's 5-day NH/NL average ratio slipping back below its 10-day NH/NL average ratio, following the NYSE's similar move from Thursday. While the 10-day NH/NL average ratios remain in a column of X, the 5-day below 10-day suggests a near-term lack of bullish leadership and is more defensive. GSTI Software Index (GSO.X) - Daily Intervals Not too different from the Semiconductor Index (SOX.X) is the GSO.X's declines after testing downward trend from the January highs last week, where today's earnings warnings from Veritas Software (NASDAQ:VRTS) $17.00 -35.96% and Micromuse (NASDAQ:MUSE) $5.17 -20.09%, which traded as low as $3.97 earlier, were not amusing to bulls. After the close, bulls bid up shares of Quest Software (NASDAQ:QSFT) $11.10 -9.08% to $12.34 said it now sees pro forma earnings per share for the quarter at the high end of previous guidance given to analysts (gain of $0.07-$0.09). NASDAQ-100 Tracker (QQQ) - Daily Intervals With a jump in various volatility measures, I like a naked put sell for the QQQ July $35 puts, which obligates the seller of these puts to buy the QQQ at $35, less the $0.20 per contract received. Now, I profiled a round lot of 10 puts, which would equate to 1,000 shares of a $35 security. With a pattern of higher highs and higher lows, I thought this would bee a good risk/reward play. While I (Jeff Bailey) may not feel overly comfortable being exercised on 1,000 shares of QQQ at $35.00, there's nothing to say a trader that is "naked" the $35.00 puts can hedge that position with an outright QQQ short on a break below today's low. However, I think these puts expire worthless by July expiration. S&P 500 Index (SPX.X) Chart - Daily Intervals I keep going back to the May 25, 2004 Index Trader wrap, and I did so once again today. If you quickly review that wrap, you will the Market Volatility Index VIX.X chart and tonight's reference to the 16.78 level. Today's VIX.X low was 16.13, so the VIX.X traded back up and within that range. In the 05/25/04 Wrap, I also showed an option chain of the SPX.X that day, which I sorted by volume. Note the volume that day in the July 1,100 puts (SPTST). Today, both the July 1,100 (v 6,674 : OI 43,327) and July 1,110 (v 6,288 : OI 13,905) were the two most actively traded contracts. Both strikes are VERY close to WEEKLY S2 and MONTHLY S2 support levels. Dow Industrials (INDU) Charts - Daily Intervals Still "out the money" in the DIA July $100 puts, and time is running out. It's decision time for me, and I'm up against the options market maker. Hmmm... If I were an options market maker, I'd try and influence some buying in the July DIA $102 puts with a move lower at the open. Maybe to DIA $101.50, get some put buyer to buy some premium, then look for a MONTHLY settle back near 10,350 with the Dow/DIA stuck in a range from 10,000 to 10,500. Pivot Analysis Matrix - 07/06/04 Close The INDU, SPX and OEX settled out right near their WEEKLY S1s, where relative strength from the S&P Banks Index (BIX.X) 345.89 -0.36% as well as broader financials, watered down losses among technology, where both the Semiconductor Index (SOX.X) 439.14 -3.97% and tech-heavy NASDAQ-100 (NDX.X) 1,445.71 -2.39% and its Tracking Stock (AMEX:QQQ) $36.03 -2.14% extend losses for a third-straight session. As noted when revisiting the Semiconductor Index (SOX.X) and our reverse head and shoulder chart, should SOX.X give way from MONTHLY S2, the SOX.X looks capable of fulfilling the downside pattern objective of 412, where the NDX/QQQ would most likely be pulled lower to July's MONTHLY S2s. Jeff Bailey ************************Advertisement************************* Live Securities Brokerage Service with Licensed Option Principals OCO Stop & Profit Orders OneStopOption All types of Spreads and Buy Writes 888-281-9569 Auto-Trade Market Monitor Signals Personal Service and Education **Services available for Foreign Traders including Canada** http://www.OneStopOption.com ************************************************************** **************** MARKET SENTIMENT **************** Investors Turn Wary - J. Brown Our week is not off to a good start. The 63-point drop in the Industrials broke support at the simple 50-dma and extended the sell signal in the Dow's MACD. The NASDAQ's 2% decline looks even worse breaking support at the 2000 mark and its simple 200- dma not to mention the rest of its moving averages and a new sell signal on its MACD. The S&P 500 followed suit with a close under its 40 and 50-dma's. The technical damage gets even worse if you look at some of the sector-specific indices. The DDX disk drive index has hit new yearly lows under the 100 level. Hardware stocks in the GHA index lost 3.5% and broke through support at the 200-dma, the 240 mark and produced a new MACD sell signal. Software stocks look even worse with the GSO index falling more than 5% to hit new seven-month lows. The semiconductor SOX index fell almost 4% to break support at the 450 mark. The list goes on but you get the point. Tech stocks lead the way down with an outbreak of new earnings warnings from VRTS, CNXT and MUSE. After the closing bell on Tuesday there were more with ASCL, KANA and SCUR all warning as well. Investor confidence is taking a beating here. Lehman Brothers helped push tech stocks into bearish territory with its pre-market downgrade of the semiconductor sector. A disappointing ISM services number didn't help. Of course the story of the day was John Kerry choosing John Edwards as his running mage, a move the business world was not happy to see. Tomorrow there is hope for a rebound if Dow-component Alcoa (AA) can start the day off with a positive earnings report. If not then YHOO has a chance to inspire courage with its own earnings report after Wednesday's closing bell. Yet there is danger here too since expectations are pretty high for YHOO and if they don't reach them tech stocks could sink again on Thursday. Be careful. Investors aren't finding much reason to buy stocks and the surge in crude oil prices undermines both consumer and business confidence. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8996 Current : 10219 Moving Averages: (Simple) 10-dma: 10358 50-dma: 10245 200-dma: 10172 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 960 Current : 1116 Moving Averages: (Simple) 10-dma: 1133 50-dma: 1119 200-dma: 1099 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1204 Current : 1445 Moving Averages: (Simple) 10-dma: 1488 50-dma: 1451 200-dma: 1443 ----------------------------------------------------------------- CBOE Market Volatility Index (VIX) = 16.25 +1.17 CBOE Mkt Volatility old VIX (VXO) = 16.17 +1.08 Nasdaq Volatility Index (VXN) = 22.11 +2.22 ----------------------------------------------------------------- Put/Call Ratio Call Volume Put Volume Total 1.08 654,782 705,568 Equity Only 1.00 499,103 499,144 OEX 0.93 30,695 28,687 QQQ 6.90 27,412 189,250 ----------------------------------------------------------------- Bullish Percent Data Current Change Status NYSE 66.7 + 0 Bear Confirmed NASDAQ-100 50.0 + 0 BULL ALERT Dow Indust. 70.0 + 0 Bear Confirmed S&P 500 64.2 - 1 Bear CORRECTION S&P 100 66.0 - 1 Bear CORRECTION 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-dma: 1.95 10-dma: 1.44 21-dma: 1.18 55-dma: 1.14 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 1005 763 Decliners 1805 2281 New Highs 63 28 New Lows 29 61 Up Volume 336M 148M Down Vol. 1216M 1747M Total Vol. 1565M 1914M M = millions ----------------------------------------------------------------- Commitments Of Traders Report: 06/29/04 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 It would appear that no one wanted to make any big bets this week with the Iraq handover, the FOMC meeting and the Jobs report. Commercial traders remain slightly bearish and small traders remain bullish. Commercials Long Short Net % Of OI 06/08/04 397,294 452,904 (55,610) (6.5%) 06/15/04 428,905 444,197 (15,292) (1.8%) 06/22/04 407,842 415,462 ( 7,620) (0.9%) 06/29/04 405,273 413,351 ( 8,078) (0.9%) Most bearish reading of the year: (111,956) - 3/06/02 Most bullish reading of the year: 23,977 - 12/09/03 Small Traders Long Short Net % of OI 06/08/04 158,373 92,794 65,579 26.1% 06/15/04 169,595 115,336 54,259 19.0% 06/22/04 124,985 89,934 35,051 16.3% 06/29/04 129,978 94,535 35,443 15.7% 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 have tempered their bearishness a bit but they remain very bearish on the e-minis. Likewise small traders are still very bullish. One group is going to be terribly wrong here and odds are in favor of the big traders. Commercials Long Short Net % Of OI 06/08/04 367,191 409,246 (42,055) (5.4%) 06/15/04 440,867 522,546 (81,679) (8.5%) 06/22/04 229,290 446,974 (217,684) (32.2%) 06/29/04 258,443 447,505 (189,062) (26.7%) 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 06/08/04 140,191 84,649 55,542 24.7% 06/15/04 216,759 147,247 69,512 19.1% 06/22/04 243,444 58,389 185,055 61.3% 06/29/04 236,492 47,780 188,712 66.3% 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 relatively neutral on the NASDAQ-100 with a small bullish bias. Meanwhile small traders have turned a bit more bearish on the group. Commercials Long Short Net % of OI 06/08/04 64,747 41,178 23,569 22.3% 06/15/04 78,542 54,341 24,201 18.2% 06/22/04 40,397 37,413 2,984 3.8% 06/29/04 41,078 37,194 3,884 4.9% Most bearish reading of the year: (21,858) - 08/26/03 Most bullish reading of the year: 25,160 - 06/01/04 Small Traders Long Short Net % of OI 06/08/04 9,716 29,594 (19,878) (50.6%) 06/15/04 15,794 35,880 (20,086) (38.9%) 06/22/04 9,311 9,950 (639) ( 3.3%) 06/29/04 7,437 11,904 (4,467) (23.1%) Most bearish reading of the year: (20,270) - 06/01/04 Most bullish reading of the year: 19,088 - 01/21/02 DOW JONES INDUSTRIAL Not much change for the commercial traders. They remain bullish on the Dow Industrials. Small traders have turned a little more bearish on the index. Commercials Long Short Net % of OI 06/08/04 24,636 25,821 (1,185) (2.3%) 06/15/04 30,438 24,766 5,672 10.3% 06/22/04 26,808 19,752 7,056 15.2% 06/29/04 27,278 20,512 6,766 14.1% 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 06/08/04 8,325 6,431 1,894 12.8% 06/15/04 13,942 20,953 (7,011) (20.1%) 06/22/04 5,626 7,798 (2,172) (16.2%) 06/29/04 4,930 7,682 (2,752) (21.8%) Most bearish reading of the year: (12,106) - 3/09/04 Most bullish reading of the year: 8,523 - 8/26/03 ----------------------------------------------------------------- ************************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. 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The Option Investor Newsletter Tuesday 07-06-2004 Copyright 2004, All rights reserved. 2 of 3 Redistribution in any form strictly prohibited. In Section Two: Dropped Calls: ETN, DHR, INFY Dropped Puts: None Call Play Updates: AHC, BOL, EBAY, QCOM New Calls Plays: None Put Play Updates: APPX, GCI, IRF, NTES, OMC, SLAB New Put Plays: DISH **************** 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: ***** Eaton Corp - ETN - close: 61.54 chg: -0.72 stop: 61.85 The market decline on Tuesday was too much for ETN to endure. Shares were looking a little weak on Friday with the drop through its narrow rising channel and simple 10-dma. We were expecting support at the $62.00 level to hold. Unfortunately, it did not and now $62 looks like resistance. Further complicating matters for the bulls is the new MACD sell signal from overbought status. We'd expect ETN to slip back toward the $60 level soon. Today's drop stopped us out at $61.85. Picked on June 18 at $ 62.05 Change since picked: - 0.51 Earnings Date 07/15/04 (confirmed) Average Daily Volume: 1.0 million Chart = --- Danaher Corp. - DHR - close 49.64 change: -0.63 stop: 50.00 We've been stopped out in DHR at the $50.00 mark with today's 1.25% decline. Shares of DHR had pulled back toward round-number psychological support at $50.00 but today's market-wide decline was too much pressure and DHR cracked. The MACD indicator has produced a new sell signal from overbought status and it doesn't look good. We'd expect DHR to test previous resistance now new support at the $48.00 level. Picked on June 20th at $48.74 Change since picked: + 0.90 Earnings Date 4/22/04 (confirmed) Average Daily Volume = 1.55 mln Chart = --- Infosys Tech. - INFY - close: 93.22 change: -2.27 stop: 90.95 Uh-oh! We have good news and bad news for INFY. The good news is INFY, a software stock, out performed the GSO software sector. The VRTS implosion today sent the GSO index for a 5% loss. INFY managed to escape with a 2.3% loss. Nimble traders could have used the drop towards the $90-91 level as a bullish entry point and it appears someone did with INFY rebounding more than $2.00 from its lows in the last half hour of trading. That's the good news and INFY looks poised to continue its rebound tomorrow. The bad news is we found INFY's next earnings release to be July 13th before the opening bell. While that can be frustrating the real bad news was today's intraday drop to $90.80 was under our stop at $90.95. We were a little to conservative with this volatile stock. Nimble traders may want to give INFY another look and try and ride any bounce from today's low into earnings. Remember, we normally don't suggest holding over any earnings announcement. Picked on July 4th at $95.49 Change since picked: - 2.37 Earnings Date 07/13/04 (confirmed) Average Daily Volume = 292 K Chart = PUTS: ***** None ************************Advertisement************************* Full Service Brokers Man Financial announces the formation of the OneStopOption Brokerage Group, addressing the demand for personalized, experienced service for both securities* and futures trading within the same firm. Licensed Option Principals Andrew Aronson and Alan Knuckman specialize in live assistance of stock*, option* and futures traders. The combination of the proven Man Financial global presence and the convenience of one group for all trading needs provide customers with the tools needed for success. Live Broker and Online Trading Available 888-281-9569 http://www.OneStopOption.com ************************************************************** ******************** PLAY UPDATES - CALLS ******************** Amerada Hess Corp. - AHC - close: 79.86 change: +0.53 stop: 77.50 A $1.26 jump in crude oil to $39.65 a barrel helped push AHC to a new high above the $80.00 level on Tuesday. Unfortunately, the stock couldn't maintain its gains as the broader indices on Wall Street slipped backward. Volume has been pretty light for AHC the last couple of sessions and we'd like to see another rally higher with volume backing it up. We will continue to look for dips toward $78 as potential entry points and the rising simple 10-dma currently at $78 should act as short-term support. No change in our stop loss at $77.50. Remember that our target is the $82-83 level. Picked on June 17th at $74.15 Change since picked: +5.71 Earnings Date 7/28/04 (unconfirmed) Average Daily Volume = 1.12 mln Chart = --- Bausch Lomb - BOL - close: 63.81 change: -1.24 stop: 62.99 We don't have much to report on for BOL today. Shares slipped 1.9% toward the bottom of its recent trading range near $63.50. More aggressive traders might consider bullish positions here above the simple 50-dma but we'd rather wait for BOL to hit our trigger point at $66.01. Until then we'll sit on the sidelines. Picked on July xx at $ xx.xx <-- See TRIGGER Change since picked: + 0.00 Earnings Date 07/29/04 (confirmed) Average Daily Volume: 490 thousand Chart = --- eBay Inc - EBAY - close: 89.84 change: -1.43 stop: 87.50 The weakness in the tech sector on Tuesday was not lost on EBAY or the Internet sector. The INX Internet index slipped 2.5% while EBAY followed with a 1.5% drop of its own. This is the first close under $90.00 for EBAY since June 24th. We're still bullish on the stock and any dips toward the $88.00 level can be used as bullish entry points but traders might feel more comfortable waiting for a move back through the $92.00 mark before committing capital. Tomorrow will be an important day for Internet stocks. Yahoo (YHOO) is set to report after the bell on Wednesday and analysts are expecting 8 cents a share. There have been rumors circulating for a couple of weeks now that YHOO will turn in a very strong quarter (beating estimates). If they can deliver then the Internet sector is likely to rally on Thursday. If YHOO disappoints, well then odds are we could be stopped out on Thursday. Picked on June 27 at $ 90.72 Change since picked: - 0.88 Earnings Date 07/21/04 (confirmed) Average Daily Volume: 8.3 million Chart = --- QUALCOMM - QCOM - close: 70.58 change: -1.69 stop: 69.00 Last week it was Merrill Lynch who reiterated their "buy" rating and raised their target price for QCOM to $90. This week it is Piper Jaffray who reiterates their positive outlook and raised their price target on QCOM to $93. Too bad it didn't do much for the stock's share price today. QCOM still slipped 2.33% in Tuesday's technology-led sell-off. Fortunately, support at the $70.00 mark held. This may be an entry point for new bullish positions but we would look for signs of a bounce before initiation new plays. A move over $71.05 might be a good mental trigger to go long. Picked on June 29 at $ 71.55 Change since picked: - 0.97 Earnings Date 07/21/04 (confirmed) Average Daily Volume: 8.8 million Chart = ************** NEW CALL PLAYS ************** None ************************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 ******************* American Pharma. - APPX - close: 26.54 chg: -2.53 stop: 29.07*new* Wow! We knew APPX looked weak but we didn't expect an 8.7% drop on volume 50% above average right off the bat. The stock's daily MACD indicator has produced a new sell signal and APPX is already within striking distance of our initial target near $25.00. Shares are very short-term oversold so we can expect a bounce. We're going to lower our stop loss to breakeven at $29.07 but more conservative traders might want to put a stop near the $28.00 level. We would not suggest new entries at this time unless APPX did bounce and begin to roll over again. Picked on July 04 at $ 29.07 Change since picked: - 2.53 Earnings Date 07/22/04 (unconfirmed) Average Daily Volume: 910 thousand Chart = --- Gannett Co - GCI - close: 82.95 change: -0.58 stop: 86.05 Shares of GCI etched another "O" in its bearish P&F chart strengthening last week's quadruple-bottom breakdown sell signal. The company said it was doubling the ad space for its elevator ad unit but investors weren't listening. This is a tough spot to consider new plays. The best spot to initiate new bearish plays would be a bounce and failed rally under $84 or $85. We're going to leave our stop loss at $86.05 near the 200-dma. More conservative traders might be able to get away with a stop loss near the 10-dma near $84.85. Remember that we plan to exit near the $80.00 level. Picked on July 01 at $ 83.95 Change since picked: - 1.00 Earnings Date 07/13/04 (confirmed) Average Daily Volume: 957 thousand Chart = --- Int'l Rectifier - IRF - close: 35.90 chg: -1.76 stop: 39.51*new* We didn't have to wait long. IRF was added to the play list on Sunday with a TRIGGER at $37.00. Lehman Brother's Monday morning downgrade of the semiconductor sector and Stephen's downgrade of IRF to "equal weight" sent IRF falling. Shares of IRF opened at $37.53 and then promptly fell through our trigger price. Volume has been very big the last three sessions, all of which were negative. The P&F chart's bearish target has slipped from $31 to $27 with Tuesday's 4.67% drop. Be careful initiating new positions here. IRF is short-term oversold and is right at the descending trendline of support (if you stretch a trendline across the lows from December-March-April-May...). A bounce back toward $38.00 and a failed rally/roll over there might be a good spot to consider new bearish positions but momentum players can look for a drop through today's low. We're going to lower our stop loss from $41.60 to $39.51. Picked on July 6th at $37.00 Change since picked: - 1.10 Earnings Date 4/29/04 (confirmed) Average Daily Volume = 1.07 mln Chart = --- Netease.com - NTES - close: 37.71 chg: -1.15 stop: 41.76*new* A tough day in the Internet sector helped push NTES to another 2.95% loss on Tuesday. The INX Internet index lost 2.5% as investors jumped out of tech stocks after numerous earnings warnings. NTES continues to look great for the bears but we're entering dangerous territory. YHOO is due to report earnings after the bell on Wednesday. If YHOO delivers with above and beyond results the Internet sector is likely to rally on Thursday. We need to be on the look out for a potential bounce back toward the $40.00 level in NTES. A failed rally there and we can initiate new positions. More conservative traders may want to actually place their stop above the $40 level. We're going to lower ours to $41.76. Picked on July 01 at $ 39.38 Change since picked: - 1.67 Earnings Date 07/26/04 (unconfirmed) Average Daily Volume: 1.7 million Chart = --- Omnicom Group - OMC - close: 72.90 change: -0.52 stop: 76.01*new* It was another positive day for the bears in OMC. Shares gapped down and after a brief rebound attempt spent the day trading sideways. We've very close to the $72.00 support level (shares bounced from $72.50 this morning) and we would not suggest new plays at this time. Actually, we'd probably recommend taking some profits with OMC's six-day decline. The stock is looking short-term oversold and due for a bounce. Adding to the odds of a bounce is today's "doji" candlestick, which indicates indecision. We're going to lower our stop loss to $76.01 for now but more conservative traders can lower theirs toward the simple 10-dma near $75.50. Picked on June 20th at $77.14 Change since picked: - 4.24 Earnings Date 4/27/04 (confirmed) Average Daily Volume = 1.09 mln Chart = -- Silicon Labs. - SLAB - close: 42.11 chg: -1.62 stop: 46.01*new* We certainly can't complain about SLAB's 3.7% decline on Tuesday. Lehman Brother's pre-market downgrade of the semiconductor sector was just what the bears wanted to hear. SLAB gapped slightly lower and quickly fell toward the $42 level making a new relative low and a new six-month low. The SOX's 4% drop on Tuesday broke through several support levels but the group looks oversold and due for a bounce. The same can be said for SLAB. A bounce back to $45.00 might be a new entry point but we'd rather focus on an exit. SLAB is within striking distance of our $40 target now; plan accordingly. We're going to lower our stop loss to $46.01. Picked on June 20th at $44.99 Change since picked: - 2.88 Earnings Date 4/26/04 (confirmed) Average Daily Volume = 1.14 mln Chart = ************* NEW PUT PLAYS ************* EchoStar Comm. - DISH - close: 29.62 chg: -0.67 stop: 31.01 Company Description: EchoStar Communications Corporation serves 10 million satellite TV customers through its DISH Network(TM) and is a leading U.S. provider of advanced digital television services. DISH Network's services include hundreds of video and audio channels, Interactive TV, HDTV, sports and international programming, together with professional installation and 24-hour customer service. DISH Network is the leader in the sale of digital video recorders (DVRs). (source: company press release) Why We Like It: We're adding DISH to the put list due to its relative weakness and bearish technical picture but there could be a story brewing too. For months DISH has been stuck in a trend of lower highs as investors use every sign of strength to rotate out of the stock. The developing trend has pushed it back toward support at the $29.00 level and produced a bearish P&F chart with an $18.00 target. Tuesday's 2.2% drop caught our attention due to its strong volume, well above the norm. Rumors and chatter on Tuesday was circulating that DISH has received some sort of letter from the SEC regarding their subscriber count. We couldn't find any details but the story could break soon. We want to be ready should DISH breakdown from its current pattern. We'll start the play with a TRIGGER at $28.99. Until DISH trades at our below our trigger point we'll sit on the sidelines. If we are triggered we'll use an initial stop loss at $31.01 and a target in the $25-24 range. DISH has P&F support near $24. Suggested Options: July options expire soon so we're going to use the August puts. Our favorite is the August 30s. BUY PUT AUG 32.50 UAB-TZ OI= 127 Current Ask $3.30 BUY PUT AUG 30.00 UAB-TF OI= 198 Current Ask $1.60 BUY PUT AUG 27.50 UAB-TY OI= 644 Current Ask $0.65 Annotated Chart: Picked on July xxth at $xx.xx <-- see TRIGGER Change since picked: - 0.00 Earnings Date 08/11/04 (unconfirmed) Average Daily Volume = 2.5 mln Chart = ************************Advertisement************************* No time to follow the Market Monitor? Tired of missing good Trades because you stepped away from your computer? OneStopOption Group can follow the Market Monitor for you. You choose the number of contracts, we take care of the rest!! Trade Stock Options, Stocks and ALL Futures with the same Group. Call us 888 281-9569 to see if you qualify to have us rebate your subscription cost. http://www.OneStopOption.com ************************************************************** ********** DISCLAIMER ********** Please read our disclaimer at: 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 07-06-2004 Copyright 2004, All rights reserved. 3 of 3 Redistribution in any form strictly prohibited. In Section Three: Watch List: Education to Beer and more! Leaps: Anti-Climactic Spreads & Straddles: Buyers Take Extended Holiday... Premium Selling Plays: Naked Puts & Calls Traders Corner: Dow Theory and Technical Analysis: Dous (2) ********** WATCH LIST ********** Education to Beer and more! ___________________________________________________________________ How to use this watch list: Readers can use the candidates below as a springboard for their own research. Many are in the process of breaking support or resistance or in the process of starting new trends or extending old ones. With your own due diligence these could be strong potential plays. ___________________________________________________________________ Apollo Group - APOL - close: 87.12 change: -0.28 WHAT TO WATCH: Keep an eye on APOL. The stock has weathered a dark storm surrounding the education industry but has come out relatively unscathed while its rivals have been hit pretty hard by scandal. Even so APOL looks like a bearish candidate with the rebound and failed rally back toward the $90 level. APOL has been struggling with short-term resistance at its simple 10-dma during the last few sessions and we suspect APOL is vulnerable towards the $82-80 region. What makes us pause is the still bullish P&F chart with a $99 target. Chart= --- Ball Corp - BLL - close: 72.11 change: +1.35 WHAT TO WATCH: BLL might be worth watching. The markets were widely negative on Tuesday but BLL managed a 1.9% rebound from the 70.00 region. The close over the $72 level is bullish. Unfortunately, its MACD indicator looks overbought and currently in a new sell signal. In contrast its P&F chart is bullish and points to a $95 target. Earnings are expected near July 29th. Bulls might want to consider plays on a move past $72.50. Chart= --- Adolph Coors - RKY - close: 72.95 change: +1.00 WHAT TO WATCH: You have to give RKY some credit for its relative strength. The stock bucked the trend today and jumped another 1.38% to hit new 3 1/2 year highs and push through resistance at $72.50. We hesitate to suggest bullish plays because RKY is very overbought with nary a pause in its six-week rally. We think odds are climbing for a "sell the news" event on its July 22nd earnings report. Chart= --- CDWC Corp - CDWC - close: 59.16 change: -1.87 WHAT TO WATCH: Computer and technology mail-order catalog company CDWC is suffering from a sudden drop in share price. The stock has been struggling with resistance at its simple 50-dma over the last three weeks but last week CDWC broke through its simple 200- dma and now shares are breaking support at the $60.00 mark. There is some historical support at $57.50 from last fall but we suspect the stock is headed for the $55 level. Earnings are due around July 20th. 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 ************************************************************** ***** LEAPS ***** Anti-Climactic By Mark Phillips mphillips@OptionInvestor.com The event ridden week that the markets have been waiting for came and went without much to show for it. As has been the case recently, the day of the FOMC meeting was a complete yawner, with the real reaction coming the next day. Equity markets headed south into the end of the week, while bonds soared, causing yields to crack significantly lower. Remember our conversation a couple weeks ago, where I was looking for yields to head lower in the wake of the FOMC decision, even if we got the expected 25 basis point hike. The reason why is due to investors coming to terms with the reality that interest rates would be rising at a "measured pace", far slower than the dramatic rise in yields that we've seen in bonds since March. That expectation was certainly confirmed last week, with the yield on the Ten-Year Note cracking sharply lower below the 4.6% level. With the disappointing jobs data on Friday, I wouldn't be a bit surprised to see the Ten-Year yield work its way back down towards the 4.1-4.2% area over the balance of the summer. We didn't see much excitement from the precious metal sector either. Sure there was a push up near the $405 level, but gold came right back towards the $400 price magnet that has been in play for the past month. Recall our discussions about the constructive PnF Buy signal on the continuous Gold futures contract. That just helps to reinforce my opinion that gold is in the midst of a healthy consolidation, and with the dollar likely to show more weakness in the months ahead, we should see gold and mining stocks making progress towards their highs from earlier in the year. Certainly, there are investors and traders still hoping for a summer rally, and I wouldn't rule it out as a possibility. But it is going to be an upward battle, to say the least. There's significant event risk surrounding the political conventions, the Athens Olympics and then the outcome of the presidential election. Regardless of your political alignment, you can't afford to ignore the reality that a Kerry administration is going to significantly cut back on the stimulus that the Bush administration has supplied to the economy. That will translate directly into making costs for business as a whole higher, which trickles down to reduced profits. At the same time, removing tax incentives to the general population will reduce their disposable income, meaning there is less money by which consumers can stimulate the economy. We already seem to be seeing signs of that effect being priced into key Retail stocks such as WMT and BBY. Of course, the other potential impact of removing some of the stimulus from the Bush administration is that tax incentives for investors will also be curtailed, making many investments -- particularly those that pay dividends -- look significantly less attractive. Every one of these factors point to lower prices for stocks in the event of a Kerry presidency, and fear of that potential outcome could continue to weigh on stock prices throughout the balance of the summer and early fall. Here's another interesting statistic. Lowry's measures of Buying pressure and Selling pressure have been exceptionally low for quite some time now and we're finally starting to see a significant up-tick in the Selling pressure. Could this be the beginning of the resumption of the bear market that has been on hiatus for the past year and change? Obviously, it is far too early to tell, but as the great Richard Russell has pointed out on numerous occasions in recent months, there's obviously something wrong with a market (The S&P 500) that with all of the stimulus seen along with 45-year lows in interest rates, has only been able to reclaim half of its bear market losses. Look at a chart of any major bear market and you'll notice that there are several instances where the market recovers half its losses, only to roll over and then proceed to new lows. I'm not necessarily predicting new lows ahead (although it certainly wouldn't surprise me), but the market isn't doing a very good job of convincing me that it has another upward leg in store. I haven't talked about valuations lately, but this is another gaping problem with the rate of economic growth slowing faster than the 'experts' expected. No matter how you look at it, a P/E ratio north of 20 and a dividend yield south of 2% are not attractive values -- they are clear signs of over-valuation. That doesn't mean the market is coming down in a hurry, but it does create a very stiff head wind for any significant additional gains. Remember, there are three directions any market can take - - up, down or sideways. My bet for the balance of the summer is sideways, with a slight bias to the downside. Speaking of over-valuation, nowhere is this shown more clearly in the housing market. We've discussed this at great length and now have a couple of solid play candidates on the Radar Screen that I expect to be big winners later this year and into 2005. There's another aspect of the dynamics in the pending collapse (my expectation) in the housing sector, and that is the concept of marginal supply/demand. There's a common misconception that it takes a large change of supply or demand in a given market to create a substantial change in the pricing structure. That's simply not true because the things that affect pricing all happen at the margin. This is true of any commodity that operates on finite levels of supply and demand. When supply and demand are balanced -- giving us price equilibrium -- it only takes a very small change in either supply or demand to upset that delicate balance and launch a significant directional price move. Of course, that is predicated on the assumption of a market that is free from manipulative forces, but I don't want to delve into that can of worms today. Back in the days when I traded commodities, I was always astounded how a major cattle report could come out showing actual supply was 0.2% greater or less than expectations and I'd then watch a resulting limit move in the futures market unfold for 2, 3 or even 4 consecutive days. It wasn't that the difference between supply and demand was so large, but that the marginal supply/demand upset the delicate balance that was in place before that report was released. The situation is much the same with the current Housing market. We're looking at a new equilibrium setting itself up based on current expectations and the Fed has been very careful to manage those expectations so as to create a stable equilibrium. The question we all need to be asking ourselves is what change in supply and demand could occur in the future to tip over this delicately balanced apple cart. Now let's turn our attention to our Portfolio of plays and see what transpired in the week just finished. Portfolio: HD - Beginning the latest tentative rollover more than a week ago, HD is giving us a hint of another downward move in the wake of last week's decision on interest rates. If the stock is going to deliver on the downside that we've been looking for, then this move will have to be the one that sticks. While we still have that pesky bullish PnF chart standing in our way, the fresh bearish short-cycle reversal on the weekly Stochastics is encouraging. We'll have to see how the downside plays out over the next couple weeks, but for now it seems reasonable to tighten our stop. If the highs of the past month are taken out, then I'd say it's a safe bet that our downside expectations are not going to be met. Tighten stops to $36.50 CHK - With nary a sign of weakness from either the price of Natural Gas or the Natural Gas index (XNG.X), it should come as no surprise to see our bullish play in the sector pushing to fresh highs again last week. As we've been talking about, the next upside target for CHK should be in the $16.00-16.50 area, where significant weekly resistance comes into play. With close to a 100% gain on the listed LEAPS from the point of play inception, conservative traders should be looking to harvest gains near that targeted resistance. That doesn't mean the stock won't have more upside, but it is simply good portfolio management. I still have a longer-term upside target near $20 for the stock, so after the (expected) pullback from that resistance area, we'll look for a new entry point to take us to that higher target. Note that we're also raising our coverage stop to $13.75 this weekend, just over the 50-dma. LUV - After going out on such a strong note a week ago, LUV was due for some profit taking and we've certainly seen a strong dose of it in the past 5 trading sessions. The stock came very close to testing the $16 support (broken resistance) level on Friday, which also coincides with the 20-dma and 200-dma. With volume light all last week, it is hard to read too much into this pullback, except to view it as a potential re-entry point ahead of a continued rally towards strong resistance in the $19-20 area. Maintain stops at $15 for now. TYC - I must say I'm a bit surprised how well TYC held up last week, as I had expected the stock to continue with the prior week's bout of profit taking. Instead, the stock did an about face early in the week by shooting right back up to test the recent highs just over $33 before heading back to the bottom of the range of the past 2 weeks. A near-term breakdown is still possible, but there's solid support first at $32 and then again near $31.25 before encountering the bottom of the rising channel near $30.50 and then the 50-dma. Of course, the other side of the coin is that the weekly Stochastics are looking a bit toppy here, so we should expect some more weakness/consolidation over the next several weeks. Traders looking for new entries should look for another rebound from the vicinity of the bottom of the channel and the 50-dma for the right setup. As this stock has demonstrated in its slow and plodding rally of the past year, we don't need to be in a hurry. Buy the dips and enjoy the ride up the chart. AIG - The Fed's decision on interest rates certainly didn't provide and clarity on AIG's chart picture. While the short-term decline is still intact, support did come in near $71, keeping price comfortably between support and resistance. The rising trendline from the January lows currently crosses just below $70, so a successful test of that line as support should confirm the potential for an upside move. On the other hand, a solid break below that line would confirm the potential H&S top, with a move below the neckline. While I'm keeping our stop at $68 - the level that would generate a PnF Sell signal - I would view any close below $69.50 as an indication that this bullish play is broken. Conservative traders unwilling to take the risk down to our coverage stop can use that higher trigger as an exit point from the play. Watch List: GM - Last week's poor numbers from GM certainly didn't get a warm reception from investors, with the stock plunging right to the 50/200-dmas on Monday and then continuing that downward trajectory following the FOMC meeting. I take the price action on Thursday as a confirmation that investors are becoming more aware that GM is little more than a finance company that just happens to make cars on the side. It looks to me like the weekly Stochastics are tipping over again and with the 50-dma crossing down through the 200-dma last week, it's time to start getting aggressive in hunting for entries here. We'll target entries on a rebound into the $47-48 area and target a downside move towards the $35 PnF price target. We'll need to watch for potential support in the $40-41 area on the way down. Initial stops will be placed at $50.50, just over the top of the rally peaks from February and April. OMC - Over the past 2 weeks, we've had all the bearish confirmation from OMC that we could have asked for. Unfortunately, we didn't quite get a strong enough bounce up to resistance to give us the entry point we were looking for. With the longer-term H&S pattern confirmed, we have a downside target of $65 to work with, and the PnF chart isn't far behind with it's own price target of $66, which continues to fall. We'll continue to seek an entry into this play on a rebound to test resistance. Lower the entry target to $76-77, which should see firm rejection from the bears. Radar Screen: EK - We got a one-week blip up into the $27 area and then EK rolled right back into the consolidation range that has kept it prisoner these past several months. I'm not quite ready to give up on this one as a potential play, but this is the kind of chop we've endured in our HD play. This does not appear to be a winning setup for a LEAPS play, as the only thing we accomplish in these plays is to let the passage of time erode the time value of our investment. CTX - As you can see from last week's price action, the FOMC meeting turned out to be a non-event in terms of setting a directional play into motion in the Housing sector. The relative strength chart of the $DJUSHB vs. the SPX has retained its bullish position within the rising channel, so we're not yet ready to get aggressive on CTX. I'm still expecting a rally back to test major resistance in the $54-55 area before the scenario we've been discussing over the past several weeks kicks into action. CTX is still a strong contender for inclusion on the Watch List, but I'm going to wait another week before making the move. LEN - As we've noted recently, LEN looks like the weakest link in the Housing chain on a long-term basis, but near-term it looks like it could make a strong upward move. Watch for a breakout over the 200-dma and horizontal resistance near $46.50 to get the upside move in motion. That should set the stage for a serious test of the $50 area, and a rollover there would go a long ways towards confirming the potential H&S top pattern we're looking for. Of course, the real signal of weakness that we need to see is a break under the $41 level, but as we've discussed, that should take a bit longer to unfold. Clearly we're not in a big hurry here and we have time to wait for the right setup. NEM - There's just not a lot to add to what we've discussed over the past couple weeks. The picture for gold is looking more bullish, but we're not yet to an inflection point that we can use as justification for taking a position. Gold continues to hover near the $400 mark and NEM is still struggling with the $40-41 resistance level. The bulls tried to get some action going last Monday with the push above $40, but they couldn't touch the $41 level (needed for a PnF Buy signal) and the stock fell back during the remainder of the week. Once we get that PnF Buy signal, we can give serious consideration to buying the next dip. Until then, we'll let this one move on its own, waiting for it to convince us that the time is right. NOK - With price action that is sneaking up on the $15 level, NOK looks like it just might give us something to work with in the weeks ahead. It isn't there yet, unless you just want to play the weekly Stochastics, which are still looking solidly bullish. The issue at the core of this potential play is whether NOK can recover from its recent stumble and loss of market share to Motorola and Samsung. If it can, then we'll be looking for a rally back towards the $20-22 area later this year and into 2005. If it can't, we'll likely see the stock remain in the mid-teens. By the lack of conviction in the current price action, we can infer that investors are having a hard time making up their minds too. MSFT - As noted last week, MSFT has a pretty healthy longer-term picture, with price testing the top of the multi-year consolidation wedge. The catalyst for a break from this pattern is likely to be the announcement later this month about what the company will do with its cash hoard. I have a hard time getting excited about a breakout play over the $30 level, but that may be what is necessary. In the event that the stock doesn't pull back for a test of support in the $27 area, we may have to consider setting up a breakout entry over $30. Look for more details next week. Closing Thoughts: First off I must apologize for the lateness of this column. I had a battle of wills with my cable modem over the weekend and clearly I lost that battle. Now that I'm back online, I've taken steps to make sure this won't happen again. I really had hoped that the market would provide greater clarity after getting the Iraq handover and FOMC meeting out of the way. Alas, I have to say, the few clues thrown our way in the past week have been meager and ambiguous. I could make a solid case for a rally from here and I could make an equally strong case for a broad market decline. In the absence of strong conviction for either outcome, I'll stick with the premise I've been operating under for the past couple months, that of a range bound sideways market. Some bullish plays will work out great, while at the same time there will be solid bearish candidates. We'll endeavor to benefit from both sides of the coin until the macro picture becomes less murky. Have a great week! Mark LEAPS Portfolio Current Open Plays LEAPS Watchlist Current Possibles SYMBOL SINCE TARGET PRICE TARGETED LEAP SYMBOL CALLS: None PUTS: GM 05/09/04 $47-48 JAN-2005 $ 45 ZGM-MI JAN-2006 $ 45 WGM-MI PC SEP-2004 $ 50 GM -IJ OMC 06/20/04 $76-77 JAN-2006 $ 80 YGS-MP JAN-2007 $ 75 OBG-MO PC SEP-2004 $ 85 OMC-JQ New Portfolio Plays None New Watchlist Plays None Drops None ******************* SPREADS & STRADDLES ******************* Buyers Take Extended Holiday... By Ray Cummins Stocks moved lower again Tuesday amid a glut of earnings warnings in the technology segment and a spike in crude oil prices. The Dow Jones Industrial Average closed down 63 points at 10,219, with all but 6 of the 30 blue-chip components moving lower. The NASDAQ Composite fared worse on a percentage basis, declining 43 points to 1,963, as semiconductor shares plunged. The S&P 500 Index fell 9 points to 1,116 with only energy stocks bucking the downtrend on the back of higher oil prices. Decliners outpaced advancers by a 3 to 2 margin on the New York Stock Exchange, and by a 3 to 1 margin on the NASDAQ. Volume was 1.28 billion on the Big Board and 1.9 billion on the technology exchange. Bonds were lower with the 10-year benchmark note edging down 5/32 while its yield climbed to 4.47%. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 07/05/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. PUT-CREDIT SPREADS Stock Pick Last Month L/P S/P Credit CB G/L Status AMZN 50.95 52.59 JUL 42 45 0.30 44.70 0.30 Open YHOO 31.87 33.94 JUL 25 27 0.30 27.20 0.30 Open CFC 69.15 71.43 JUL 60 63 0.35 63.03 0.35 Open QCOM 69.86 72.27 JUL 60 65 0.45 64.55 0.45 Open SWIR 33.83 36.53 JUL 25 30 0.90 29.10 0.90 Open CTSH 24.25 24.76 JUL 20 22 0.27 22.23 0.27 Open NUE 69.54 73.85 JUL 60 65 0.75 64.25 0.75 Open SII 53.26 56.76 JUL 47 50 0.30 49.70 0.30 Open MXIM 51.62 49.22 JUL 45 50 0.70 49.30 (0.08) Open? RJR 65.90 66.74 JUL 55 60 0.35 59.65 0.35 Open PHTN 34.93 31.40 JUL 30 32 0.30 32.20 (0.80) Closed URBN 60.80 61.64 JUL 50 55 0.40 54.60 0.40 Open AMZN 53.71 52.59 JUL 47 50 0.30 49.70 0.30 Open PLT 42.39 41.88 JUL 35 40 0.50 39.50 0.50 Open L/P = Long Put S/P = Short Put CB = Cost Basis G/L = Gain/Loss The position in Ishares Russell 2000 Index (IWM) was not available at the recommended price. Photon Dynamics (NASDAQ:PHTN) suffered the fate of most semiconductor equipment stocks and conservative traders should close the bullish spread to limit potential losses. Maxim Integrated Products (NASDAQ:MXIM) is also a candidate for early exit. CALL-CREDIT SPREADS Stock Pick Last Month LC SC Credit CB G/L Status APPX 34.03 29.07 JUL 45 40 0.50 40.50 0.50 Open INSP 34.71 36.61 JUL 45 40 0.65 40.65 0.65 Open WMS 28.75 30.30 JUL 35 30 0.65 30.65 0.35 Open? GS 90.21 93.61 JUL 100 95 0.70 95.70 0.70 Open SYMC 42.42 42.94 JUL 50 45 0.65 45.65 0.65 Open FRX 56.32 57.21 JUL 65 60 0.60 60.60 0.60 Open CTX 47.34 46.01 JUL 52 50 0.30 50.30 0.30 Open SINA 35.60 30.80 JUL 45 40 0.45 40.45 0.45 Open CECO 44.45 42.25 JUL 55 50 0.55 50.55 0.55 Open RYL 75.80 78.96 JUL 85 80 0.60 80.60 0.60 Open L/C = Long Call S/C = Short Call CB = Cost Basis G/L = Gain/Loss WMS Industries (NYSE:WMS) has continued to recover this week and is now a candidate for early exit. Ryland Group (NYSE:RYL) and Goldman Sachs (NYSE:GS) are on "watch" list. Positions in Genzyme (NASDAQ:GENZ) and the Oil Service Holdrs (AMEX:OIH) have previously been closed to limit potential losses. DEBIT STRADDLES Stock Pick Last Exp. Long Long Initial Max Play Symbol Price Price Month Call Put Debit Value Status GRMN 32.60 34.41 JUL 35 30 2.15 2.35 Open? SNDK 22.90 20.93 JUL 22 22 3.40 3.60 Open GDT 56.02 55.03 JUL 55 55 4.80 4.50 Open DNA 54.60 55.35 JUL 55 55 4.25 4.10 Open OVTI 15.50 14.68 JUL 15 15 2.70 4.00 Open MDC 64.77 64.39 JUL 65 65 4.00 4.50 Open M.D.C. Holdings (NYSE:MDC) may have been a difficult position to enter (on a simultaneous order basis), due to the volatility on Monday, however that straddle, along with Omnivision (NASDAQ:OVTI) and Sandisk (NASDAQ:SNDK) has offered a small profit. With the market in a trading range, there has been very little noteworthy activity in the debit straddles portfolio. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BULLISH PLAYS - CREDIT SPREADS These candidates are based on the underlying issue's technical history or trend. The probability of profit in these positions may also be higher than other plays in the same strategy, due to small disparities in option pricing however, each play should be evaluated for portfolio suitability and reviewed with regard to your strategic approach and trading style. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ POT - Potash $98.08 *** New All-Time High! *** Potash Corporation of Saskatchewan (NYSE:POT) is an integrated fertilizer and related industrial and feed products company. It is also a producer of nitrogen products worldwide. The firm's phosphate operations include the manufacture and sale of solid and liquid phosphate fertilizers, animal feed supplements and purified phosphoric acid. The company's nitrogen operations involve the production of nitrogen fertilizers and nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate and nitric acid. The company also manufactures, processes and distributes fertilizer and other agricultural supplies. POT - Potash $98.08 PLAY (conservative - bullish/credit spread): BUY PUT AUG-85.00 POT-TQ OI=300 ASK=$0.50 SELL PUT AUG-90.00 POT-TR OI=95 BID=$1.00 INITIAL NET-CREDIT TARGET=$0.55-$0.65 POTENTIAL PROFIT(max)=12% B/E=$89.45 __________________________________________________________________ UOPX - Univ. of Phoenix Online $89.09 ** Volatility = Premium ** University of Phoenix Online (NASDAQ:UOPX) is the computerized, digital delivery system of the University of Phoenix. It is a provider of accessible, accredited educational programs for working adults. It offers programs in business, education, information technology and nursing. A student can participate in University of Phoenix Online's classes through a personal computer, a modem and an Internet service provider. University of Phoenix is part of Apollo Group, which is its parent company. UOPX - Univ. of Phoenix Online $89.09 PLAY (conservative - bullish/credit spread): BUY PUT AUG-75.00 UBY-TO OI=0 ASK=$0.80 SELL PUT AUG-80.00 UBY-TP OI=59 BID=$1.35 INITIAL NET-CREDIT TARGET=$0.60-$0.65 POTENTIAL PROFIT(max)=14% B/E=$79.40 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - CREDIT SPREADS All of these positions are favorable candidates for "bear-call" credit spreads, based on the current price or trading range of the underlying issue and its recent technical history or trend. The probability of profit from these positions may be higher than other plays in the same strategy, due to disparities in option pricing. However, current news and market sentiment will have an effect on these issues, so review each play individually and make your own decision about its future outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ MERQ - Mercury Interactive $46.17 *** Revenge Play! *** Mercury Interactive (NASDAQ:MERQ) is a provider of integrated performance management solutions that enable businesses to test and monitor their Web-based applications. Its software products and hosted services help Global 2004 companies enhance the user experience by improving performance, availability, reliability and scalability in their Web-based applications. Its many hosted services provide its customers with a cost-effective solution that quickly meets business needs without dedicating significant time and internal resources. Its integrated performance management solutions enable customers to more quickly identify and correct problems before users experience them. The company also provides outsourced load testing and Web performance monitoring services that complement its software products. MERQ - Mercury Interactive $46.17 PLAY (conservative - bearish/credit spread): BUY CALL AUG-55.00 RQB-HK OI=814 ASK=$0.25 SELL CALL AUG-50.00 RQB-HJ OI=1803 BID=$0.85 INITIAL NET-CREDIT TARGET=$0.65-$0.70 POTENTIAL PROFIT(max)=15% B/E=$50.65 __________________________________________________________________ SMH - Semiconductor Holdrs Trust $34.58 *** Weak Sector! *** The Semiconductor Holdrs Trust (AMEX:SMH) is a unique instrument that represents an investor’s ownership in the stock of specified companies in the semiconductor sector. HOLDRS allow investors to own a diversified group of stocks in a single investment that is highly transparent, liquid and efficient. Each HOLDR is a fixed basket of 20 stocks (except the Telebras HOLDR, which holds 12 companies). They work operate much like ADRs; American Depositary Receipts, which allow U.S. investors to purchase foreign-owned companies on the U.S. exchanges in dollar denominated amounts. In just the same way, the investor actually owns the shares of each underlying company, receives dividends, proxies, and annual reports from each. The HOLDRs are not managed, and once the companies and amounts have been determined they are fixed, no companies will be substituted. In this way, the HOLDRs differ somewhat from Spiders (SPDRs), or Standard & Poor Depositary Receipts and other exchange traded funds, which will add and delete stocks on a regular basis, usually in conjunction with an index that they are tracking. A complete explanation of this issue, including the companies that make up each HOLDRS' particular industry, sector or group can be found here: http://www.holdrs.com/holdrs/main/index.asp?Action=Definition SMH - Semiconductor Holdrs Trust $34.58 PLAY (conservative - bearish/credit spread): BUY CALL AUG-40.00 SMH-HH OI=19459 ASK=$0.15 SELL CALL AUG-37.50 SMH-HU OI=34464 BID=$0.45 INITIAL NET-CREDIT TARGET=$0.30-$0.35 POTENTIAL PROFIT(max)=14% B/E=$37.80 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ STRADDLES AND STRANGLES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Based on analysis of the historical option pricing and technical background, these positions meet the fundamental criteria for favorable volatility-based plays. __________________________________________________________________ No straddles or strangles today... ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ***************************************** PREMIUM-SELLING PLAYS: NAKED PUTS & CALLS ***************************************** All of these issues have robust option premiums and favorable technical indications. However, current news and events as well as market sentiment, will have an effect on these stocks so review each position thoroughly and make your own decision about its outcome. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF CURRENT POSITIONS - AS OF 07/05/04 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The following summary is a reasonable account of the positions previously offered in this section. However, no representation is being made as to the actual performance of a position and in fact, there are frequently large differences between the summary results and those of our subscribers, due to the variety of ways in which each play can be opened, closed, and/or adjusted. In addition, the summary might not be completely representative of the manner in which the average trader would react to changing conditions in a position and to the options market in general. The editor of this section does not take actual positions in any published plays and the summary comments are simply a service to help new traders understand when positions might be opened and closed. In most cases, actions taken based on the commentary would be far too late to be effective, thus it is not intended as a substitute for personal trade management nor does it in any way replace your duty to diligently monitor and manage the positions in your portfolio. MONTHLY YIELD FOR UNCOVERED OPTIONS: MAXIMUM & SIMPLE The Maximum Yield (listed in the summary and with "naked" option selling plays) is the greatest possible profit available in the position. This amount, expressed as a percentage, is based on the initial margin requirement as determined by the Board of Governors of the Federal Reserve, the U.S. options markets and other self-regulatory organizations. Although increased margin requirements may be imposed either generally or in individual cases by various brokerage firms, our calculations use the widely accepted margin formulas from the Chicago Board Options Exchange. The "Simple Yield" is based on the cost of the underlying issue (in the event of assignment), including the premium from the sold option, thus it reflects the maximum potential loss in the trade. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NAKED PUTS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield CVTX JUL 15 14.60 16.47 0.40 5.63% 2.74% DITC JUL 17 16.80 22.04 0.70 8.40% 4.17% SYNA JUL 17 16.85 17.89 0.65 7.48% 3.86% PTIE JUL 7 7.15 8.02 0.35 9.89% 4.90% BCC JUL 35 34.25 37.26 0.75 5.12% 2.19% JILL JUL 20 19.45 23.61 0.55 6.72% 2.83% LSS JUL 20 19.50 27.97 0.50 6.07% 2.56% OI JUL 15 14.65 16.00 0.35 5.64% 2.39% NVTL JUL 15 14.65 25.52 0.35 7.34% 2.39% PDII JUL 25 24.70 29.98 0.30 3.91% 1.21% RSAS JUL 17 17.05 19.70 0.45 6.22% 2.64% STLD JUL 25 24.45 28.03 0.55 5.33% 2.25% UPL JUL 30 29.55 37.23 0.45 4.14% 1.52% USG JUL 15 14.15 17.31 0.85 13.32% 6.01% ATI JUL 12 12.20 17.49 0.30 7.44% 2.46% BJS JUL 42 41.70 46.00 0.80 4.75% 1.92% LCAV JUL 25 24.35 28.34 0.65 6.85% 2.67% NCRX JUL 27 26.80 31.05 0.70 7.30% 2.61% NVTL JUL 17 17.05 25.52 0.45 8.97% 2.64% SSYS JUL 22 22.20 24.04 0.30 4.41% 1.35% SWIR JUL 30 28.85 36.53 1.15 10.66% 3.99% SYNA JUL 17 16.90 17.89 0.60 8.98% 3.55% YHOO JUL 30 29.20 33.94 0.80 6.80% 2.74% AMHC JUL 22 21.80 27.07 0.70 9.36% 3.21% CTSH JUL 22 22.20 24.76 0.30 4.34% 1.35% CYBX JUL 30 29.25 32.56 0.75 10.31% 2.56% ERES JUL 22 21.85 27.62 0.65 9.03% 2.97% HLEX JUL 15 14.65 16.28 0.35 7.40% 2.39% MINI JUL 20 19.65 27.50 0.35 5.89% 1.78% NFI JUL 30 29.30 39.22 0.70 9.77% 2.39% PTIE JUL 7 7.25 8.02 0.25 11.96% 3.45% RIMM JUL 50 49.15 70.91 0.85 6.57% 1.73% SGTL JUL 22 22.25 26.71 0.25 4.25% 1.12% BRCM JUL 40 39.30 43.15 0.70 6.43% 1.78% CSGP JUL 40 39.60 45.92 0.40 3.49% 1.01% DHB JUL 12 12.20 15.41 0.30 8.97% 2.46% DY JUL 25 24.65 27.60 0.35 4.63% 1.42% ERES JUL 22 22.20 27.62 0.30 4.97% 1.35% FWHT JUL 20 19.60 21.41 0.40 6.89% 2.04% GVHR JUL 22 22.20 26.02 0.30 5.07% 1.35% IMH JUL 20 19.75 22.11 0.25 4.41% 1.27% NVTL JUL 17 16.90 25.52 0.60 15.07% 3.55% PLMO JUL 25 24.55 34.66 0.45 7.28% 1.83% USG JUL 15 14.70 17.31 0.30 7.05% 2.04% BCC JUL 35 34.55 37.26 0.45 5.53% 1.30% CHIC JUL 20 19.65 20.90 0.35 7.68% 1.78% CENX JUL 22 22.00 24.29 0.50 9.64% 2.27% ENDP JUL 22 22.15 23.16 0.35 6.56% 1.58% IFIN JUL 37 37.05 42.98 0.45 5.93% 1.21% STTX JUL 22 22.05 21.17 (0.88) 0.00% 0.00% * TASR JUL 30 29.65 44.30 0.35 6.39% 1.18% USG JUL 15 14.70 17.31 0.30 10.67% 2.04% VSAT JUL 22 22.20 25.05 0.30 5.67% 1.35% AMED JUL 30 29.50 29.24 (0.26) 0.00% 0.00% CIMA JUL 30 29.60 33.78 0.40 6.65% 1.35% ERES JUL 25 24.70 27.62 0.30 6.05% 1.21% ISRG JUL 17 17.25 18.67 0.25 7.04% 1.45% MU JUL 15 14.70 14.68 (0.02) 0.00% 0.00% NFLX JUL 30 29.45 32.31 0.55 9.80% 1.87% NSM JUL 20 19.80 20.31 0.20 4.91% 1.01% NKTR JUL 17 17.15 19.46 0.35 10.49% 2.04% SWIR JUL 30 29.75 36.53 0.25 5.32% 0.84% XMSR JUL 25 24.65 27.83 0.35 6.82% 1.42% Steel Technologies (NASDAQ:STTX) and Amedisys (NASDAQ:AMED) are candidates for "early-exit" and Micron (NYSE:MU) has suffered from the selling pressure in chip stocks. A number of issues are on the "watch" list after the Friday's retreat in technology shares. NAKED CALLS Stock Strike Strike Cost Current Gain Max Simple Symbol Month Price Basis Price (Loss) Yield Yield AMLN JUL 25 25.35 23.05 0.35 5.29% 1.38% ICOS JUL 30 30.45 29.84 0.45 5.26% 1.48% OIIM JUL 17 17.80 15.65 0.30 5.50% 1.69% INSP JUL 40 40.50 36.61 0.50 6.88% 1.23% RHAT JUL 25 25.60 22.18 0.60 9.08% 2.34% XMSR JUL 27 27.75 27.83 (0.08) 0.00% 0.00% * CECO JUL 65 65.90 42.25 0.90 7.19% 1.37% ESI JUL 45 45.50 37.90 0.50 5.47% 1.10% FMT JUL 20 20.40 17.85 0.40 8.75% 1.96% NBIX JUL 55 56.10 50.73 1.10 8.21% 1.96% SLAB JUL 50 50.75 43.73 0.75 6.39% 1.48% AGIX JUL 20 20.45 18.78 0.45 9.16% 2.20% LEND JUL 30 30.55 27.41 0.50 6.63% 1.64% TSS JUL 22 22.90 21.51 0.40 8.67% 1.75% PAYX JUL 35 35.40 33.34 0.40 4.97% 1.13% FEIC JUL 25 25.35 23.32 0.35 6.89% 1.38% WM JUL 40 40.30 38.25 0.30 3.79% 0.74% IPXL JUL 20 20.40 19.12 0.40 10.18% 1.96% PSFT JUL 20 20.25 17.21 0.25 6.99% 1.23% As mentioned on Tuesday, a new stock on the "early-exit" list is XM Satellite Radio (NASDAQ:XMSR), which has reversed course during the last few sessions and appears to be "bullish" in the near-term. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW POSITIONS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This following group of plays is simply a list of candidates to supplement your search for profitable trading positions. As with any new investment, you must decide if the selections meet your criteria for potential plays. Only you can know what strategies are suitable for your personal skill level, risk-reward tolerance and portfolio outlook. In addition, we recommend that you avoid any trading techniques in which you are not completely comfortable with the potential capital loss, the necessary adjustments, and the common entry-exit strategies. The positions with "*" will be included in the weekly summary. Those with "TS" (Target-Shoot) are below our minimum monthly return, but may offer a favorable entry price with a limit order, due to the daily volatility of the underlying issue. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered puts entails considerable financial risk, far more than the initial margin or collateral required to open a position. The maximum financial obligation for the sale of a naked put is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of puts should have the cash or collateral equivalent of the sold strike price in reserve at all times. In addition, there is one very important rule when using this strategy: Don't sell puts on stocks that you don't want to own! Why? Because stocks occasionally experience catastrophic declines, exponentially increasing the margin maintenance and possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock's price falls. Many professional traders suggest closing the position when the underlying share value moves below the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NEW NAKED-PUT CANDIDATES Stock Last Option Option Last Open Cost Days Simple Max Symbol Price Series Symbol Bid Int. Basis Exp. Yield Yield CRDN 38.36 JUL 35.00 AUE SG 0.30 768 34.70 10 2.6% 7.4% SCHN 34.42 AUG 30.00 SNQ TF 1.00 625 29.00 45 2.3% 6.5% NVTL 25.16 AUG 20.00 NVU TD 0.50 11 19.50 45 1.7% 6.1% MGAM 27.58 AUG 25.00 QMG TE 0.75 23 24.25 45 2.1% 5.5% FRO 35.31 AUG 30.00 FRO TF 0.70 68 29.30 45 1.6% 5.0% TASR 44.50 AUG 30.00 QUR TF 0.70 3401 29.30 45 1.6% 4.9% NFI 40.31 AUG 30.00 NFI TF 0.60 808 29.40 45 1.4% 4.7% GIVN 36.21 AUG 30.00 QPG TF 0.55 409 29.45 45 1.3% 4.2% EYET 44.62 AUG 35.00 QUJ TG 0.55 20 34.45 45 1.1% 3.9% Company Descriptions LB-Last Bid price, OI-Open Interest, CB-Cost Basis or break-even point, DE-Days to Expiry, SY-Simple Yield (monthly basis - without margin), MY-Maximum Yield (monthly basis - using margin). __________________________________________________________________ CRDN - Ceradyne $38.36 *** Near All-Time Highs! *** Ceradyne (NASDAQ:CRDN) develops, manufactures and sells advanced technical ceramic products and components for defense, industrial, automotive and commercial applications. The company's primary products include lightweight ceramic armor for soldiers and military helicopters; aesthetic ceramic orthodontic brackets; durable, reduced friction, ceramic diesel engine components; ceramic-impregnated dispenser cathodes for microwave tubes, lasers and cathode ray tubes, and ceramic industrial components for erosion and corrosion resistant applications. CRDN - Ceradyne $38.36 JUL 35.00 AUE SG LB=0.30 OI=768 CB=34.70 DE=10 TY=2.6% MY=7.4% __________________________________________________________________ SCHN - Schnitzer Steel $34.42 *** Rally Mode! *** Schnitzer Steel Industries (NASDAQ:SCHN) collects, processes and recycles metals by operating a metals recycling business in the United States. The company also owns a chain of self-service auto parts stores in the United States, operating under the name of Pick-N-Pull, and is also a maker of finished steel products at its technologically advanced steel mini-mill. As a result of its vertically integrated business, Schnitzer is able to transform obsolete or wrecked auto bodies and other unprocessed metals into finished steel products. In addition, it is a partner in joint ventures that are either in the metals recycling business or are suppliers of unprocessed metals. The company owns interests in five joint ventures that are engaged in buying, processing and selling primarily ferrous metal. Another joint venture is an industrial plant demolition contractor that dismantles industrial plants, performs environmental remediation and sells recovered metals and machinery. SCHN - Schnitzer Steel $34.42 AUG 30.00 SNQ TF LB=1.00 OI=625 CB=29.00 DE=45 TY=2.3% MY=6.5% __________________________________________________________________ NVTL - Novatel Wireless $25.16 *** Entry Point? *** Novatel Wireless (NASDAQ:NVTL) is a provider of wireless data access solutions, including wireless data modems and software, for use with portable personal computers (PCs) and with handheld computing devices. The company delivers comprehensive solutions that help businesses and consumers to access personal, corporate and public information through e-mail, enterprise networks and the Internet. Novatel also offers wireless data modems as well as custom software and hardware engineering services and systems integration services to its customers to facilitate use of its products. NVTL - Novatel Wireless $25.16 AUG 20.00 NVU TD LB=0.50 OI=11 CB=19.50 DE=45 TY=1.7% MY=6.1% __________________________________________________________________ MGAM - Multimedia Games $27.58 *** Next Leg Up? *** Multimedia Games (NASDAQ:MGAM) is the leading supplier of interactive electronic games and player stations to the rapidly growing Native American gaming market. The company's games are delivered through a telecommunications network that links its player stations with one another both within and among gaming facilities. Multimedia Games designs and develops networks, software and content that provide its customers with a range of gaming systems. The company's development and marketing efforts focus on Class II gaming systems and Class III video lottery systems for use by Native American tribes throughout the United States. MGAM - Multimedia Games $27.58 AUG 25.00 QMG TE LB=0.75 OI=23 CB=24.25 DE=45 TY=2.1% MY=5.5% __________________________________________________________________ FRO - Frontline $35.31 *** Hot Sector! *** Frontline (NYSE:FRO) is a Bermuda-based shipping company engaged primarily in the ownership and international operation of oil tankers, including oil/bulk/ore (OBO) carriers. The company operates tankers of two sizes: very-large crude carriers, which are between 200,000 and 320,000 deadweight tons, and Suezmaxes, which are vessels between 120,000 and 170,000 deadweight tons. The company is also involved in the charter, purchase and sale of vessels. FRO - Frontline $35.31 AUG 30.00 FRO TF LB=0.70 OI=68 CB=29.30 DE=45 TY=1.6% MY=5.0% __________________________________________________________________ TASR - TASER International $44.50 *** Premium-Selling! *** TASER International (NASDAQ:TASR) develops and manufactures a range of less-lethal self-defense devices. The firm's primary product lines include the ADVANCED TASER and the TASER X26, a recently introduced weapon system offering a new "shaped pulse" technology, and a smaller form factor. TASR - TASER International $44.50 AUG 30.00 QUR TF LB=0.70 OI=3401 CB=29.30 DE=45 TY=1.6% MY=4.9% __________________________________________________________________ NFI - NovaStar Financial $40.31 *** More Premium-Selling! *** NovaStar Financial (NYSE:NFI) is a specialty finance firm that originates, invests in and services residential nonconforming loans. The company offers a range of mortgage loan products to borrowers (nonconforming borrowers) that usually do not satisfy the credit, collateral, documentation or underwriting standards prescribed by conventional mortgage lenders and loan buyers. NFI - NovaStar Financial $40.31 AUG 30.00 NFI TF LB=0.60 OI=808 CB=29.40 DE=45 TY=1.4% MY=4.7% __________________________________________________________________ GIVN - Given Imaging $36.21 *** Diagnostic Devices *** Given Imaging (NASDAQ:GIVN) is an Israeli company established to develop, produce and market a platform technology for diagnostics and therapy of the gastrointestinal (GI) tract. The company was founded to commercialize a minimally invasive, disposable imaging capsule for diagnosing small intestine disorders and diseases. Given has submitted more than 20 patents worldwide for the tech- nologies employed in the Given Diagnostic Imaging System, and for new capsules to be developed using the basic technological plat- form. Future generations of the Given Diagnostic Imaging System will be developed to capture images of the rest of the upper GI tract and the large intestine. GIVN - Given Imaging $36.21 AUG 30.00 QPG TF LB=0.55 OI=409 CB=29.45 DE=45 TY=1.3% MY=4.2% __________________________________________________________________ EYET - Eyetech Pharmaceuticals $44.62 *** Uptrend Intact! *** Eyetech Pharmaceuticals (NASDAQ:EYET) is a biopharmaceutical firm that specializes in the development and commercialization of novel therapeutics to treat diseases of the eye. Its initial focus is on diseases affecting the back of the eye, particularly the retina. The company's most advanced product candidate is Macugen, which it is developing for wet age-related macular degeneration (AMD) and diabetic macular degeneration (DME). EYET - Eyetech Pharmaceuticals $44.62 AUG 35.00 QUJ TG LB=0.55 OI=20 CB=34.45 DE=45 TY=1.1% MY=3.9% *TS* ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ BEARISH PLAYS - NAKED CALLS Based on analysis of option pricing and the underlying stock's technical background, these positions meet our fundamental criteria for bearish "premium-selling" strategies. Each issue has robust option premiums, a well-defined resistance area and a high probability of remaining below the target strike prices. As with any recommendations, these positions should be carefully evaluated for portfolio suitability and reviewed with regard to your strategic approach and personal trading style. WARNING: THE RISK IN SELLING UNCOVERED OPTIONS IS SUBSTANTIAL! The sale of uncovered calls entails considerable financial risk, far more than the initial margin or collateral required to open the position. The maximum financial obligation for the sale of a naked option is the strike price (of the underlying stock) that is sold. Although this obligation is reduced by the premium from the sale of the option, a writer of options must have the cash or collateral equivalent of the sold strike price in reserve at all times. The simple fact is: stocks often experience large price swings, exponentially increasing the margin maintenance and very possibly causing a devastating shortfall in your portfolio. It is also important that you consider using trading stops on naked option positions to help limit losses when a stock price moves in a volatile manner. Many professional traders suggest closing the position when the underlying share value moves beyond the sold strike, or using a "buy-to-close" stop order at a price that is no more than twice the original premium received from the sold option. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ISIL - Intersil $17.76 *** New 2004 Low! *** Intersil (NASDAQ:ISIL) is a global designer and manufacturer of high-performance analog integrated circuits. The company's products are designed primarily to addresses applications in four end markets: High-End Consumer, Computing, Communications, and Industrial, including Intersil's Elantec line of operational amplifiers, bridge driver power management products, interface and analog switches and multiplexers and other standard analog products. ISIL - Intersil $17.76 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL AUG 20 UFH HD 127 0.45 20.45 5.7% 2.2% __________________________________________________________________ MACR - Macromedia $21.82 *** Trend Reversal? *** Macromedia (NASDAQ:MACR) is an independent software company providing software that empowers designers, developers and business users to create and deliver effective user experiences on the Internet, fixed media and wireless and digital devices. The company's integrated family of technologies enables the development of Internet solutions, including Websites, rich media content and Internet applications across multiple platforms and devices. MACR - Macromedia $21.82 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL AUG 25 MRQ HE 998 0.40 25.40 4.5% 1.6% __________________________________________________________________ MRVL - Marvell Technology Group $23.64 *** Sector Slump! *** Marvell Technology Group (NASDAQ:MRVL) is a global semiconductor provider of high-performance analog, mixed signal and digital signal processing integrated circuits. The company offers its customers a range of integrated circuit solutions using its communications mixed-signal processing (CMSP) and digital signal processing technologies. Marvell applies its analog, mixed signal, digital signal processing and complex digital design technologies in a variety of applications. Its product portfolio consists of storage, switching, transceivers, wireless, personal computers connectivity, gateways, communications controllers and power management products. MRVL - Marvell Technology Group $23.64 PLAY (sell naked call): Action Month & Option Open Last Cost Max. Simple Req'd Strike Symbol Int. Price Basis Yield Yield SELL CALL AUG 27.5 UVM HY 3177 0.35 27.85 4.0% 1.3% ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SEE DISCLAIMER - SECTION 1 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ************** TRADERS CORNER ************** Dow Theory and Technical Analysis: Dous (2) By Leigh Stevens lstevens@OptionInvestor.com I discussed Charles Dow's stock market theory in my last Trader's Corner article as it relates to the averages needing to "confirm" each other. When either the Dow Industrials (INDU) or the Dow Transportation average (TRAN) goes to new closing peak, the other should do likewise within a few weeks to, at most, a few months. Otherwise, the market trend should be watched closely for signs that the major trend could be changing. See – http://www.OptionInvestor.com/traderscorner/tc_062904_2.asp The Dow Transportation average made a new high on 6/30/04 at 3204.3, but the Dow 30 Industrials (INDU) was far from doing the same. According to the way Dow saw it, a bull market is not "confirmed" unless INDU closes above 10,737.7, its prior closing peak made 2/11/04. This does not mean that if a higher closing high fails to happen that this means investors should get out of stock investments or makes this a bear market. I am speaking more about an "alert" here – as in, pay closer attention. At some point the Dow 30 needs to achieve a higher high for a follower of Dow theory to stay bullish on the major trend. I also mentioned in this prior article that there was more that Dow contributed to technical analysis than the above. Charles Dow was also the first to formulate some key principles about how the market behaved and about market psychology. THE MARKET DISCOUNTS EVERYTHING Dow determined which stocks; the ones making up his averages, that best represented the overall market. Every possible fact and factor relating to the price of any individual stock within an average is quickly priced into the current traded price of that stock and into the averages. Without this quality of effectively discounting everything, technical analysis wouldn't make sense or "work". Prices tomorrow, next week and next month would be more random and it would be impossible to project future trends based on present and past market action and patterns. So, as formulated by Dow, a traded price for a stock (and by extension, for an index) reflects all knowledge that exists about a company (or the economy) and its current and future prospects in terms of individual (or overall earnings). Even so-called "insider" information on a particular company will show up in the price and volume patterns that can be seen by astute observers of the trading in that stock – why? Because those who know will buy or sell the stock at a level that tends to cause a rise in average daily volume. As this group acts on that information, that activity will become apparent to an ever- widening group. This principle is even truer today, given the extremely rapid and widespread distribution of information that occurs on the financial channels and on the Internet. CYCLES OF BULL AND BEAR MARKETS HAVE THE SAME REOCCURING PHASES The phases of both bull and bear markets, while different depending on whether it’s a bull market or a bear market, are similar in terms of two factors: - Relative knowledge about the market - Investor "sentiment" (attitude) about the market that ranges from disinterested to indifferent to interested; with varying degrees of intensity within disinterested and interested BULL MARKETS – A bull market comes after a lengthily and substantial decline in stock values that comes about due to a downturn in the economy or a recession. Sound familiar? Major market advances are usually, but not always, divided into 3 phases. These phases are marked by who participates in them and what these market participants are doing in each phase. 1. ACCUMULATION In the first phase, there is "accumulation" or buying over a period of time, during which very knowledgeable investors with good foresight about a coming business upturn, are willing to start buying stocks offered by pessimistic sellers who want out. This group of "savvy" investors will also start to pay higher prices as the willing sellers exit. The economy and business conditions are still often quite negative. Remember the end of 2002/early 2003 – a time of stagnant growth and continuing layoffs and job losses. The "public", and this is mirrored by the financial press, is quite disinterested in the market, to the point of where owning stocks is very unattractive to them and they are out of the market. Investors and traders who got "burned", so to speak, by hanging on in the bear market or kept buying too soon, are acutely disgusted with the market. I'm not talking about holders of index puts but investors holding stocks in their 401k's and in mutual funds. Market activity is modest at best but is picking up a bit on rallies, but this is mostly only noticed, if at all, by professional market participants. 2. A STEADY CLIMB The second phase is one of a fairly steady advance, but one that is not dramatic. There is a pickup in business and encouraging economic reports as an improving economy leads to a pick up in corporate earnings. This phase is also a phase where money can be made relatively safely, as technical indicators turn positive and there tends to be an absence of volatile trading swings. The 2003 Market provides an example of "phase" two – 3. MAIN STREET ADOPTS WALL STREET The third phase, which we have not seen yet – stay tuned as to if and when this market goes on to this phase. This phase of great public participation can both be highly profitable and quite risky, is marked by heavy "public" interest and participation in the market. The economic news is good during this period and suddenly front pages of magazines have articles heralding the new bull market. The new issue market gets going as the public now has an appetite for new companies. We need only remember the late-1990's here. This is the phase where you will hear banter at parties about the market, how well so and so is doing in stocks and where market- related Internet chat rooms are quite active. Price advances can be huge and volume matches. The more speculative stocks continue to advance but it is here that the "blue chip" stocks of the most established big-name companies can start to lag. Some sharp downswings occur among stocks that fall out of favor. Speculation remains intense as seen in increased option activity, the first-day closes of hot new issues and in the level of buying stocks on margin. The end of this phase is always the same, varying degrees of collapse. This can come after a year or two or even after several years have passed from the beginning phase. BEAR MARKETS – The animal analogy is quite apt, as the bear can both be very fierce and unforgiving, or can just go to sleep for a long period. Bear markets can also usually be divided into 3 phases. That this does not always occur is seen in the '87 bear market that was sharp and steep, but with the decline only lasting two months. After that, there was a slow gradual process of advancing prices during which some bearish sentiment built up and people swore off the market. This phase didn’t reach the typical bearish extremes however; as within 7-10 months the Dow had recovered nearly half of its October-November decline. However, a more typical Bear Market is the 3-year period from late-1999/early-2000 to early-2003 – 1. DISTRIBUTION The first phase of a primary bear market tends to be a period of "distribution". This really begins in the final phases of the bull market. It is the phase where selling begins by the type of experienced investors that didn’t get overly swept up in the extremes in emotion and price at the bull market peak – this group are the more investors with more foresight and a more balanced point of view. Many savvy investors sold a lot of stock during 1999 and may have been early in doing do, but they had only light holdings during the major decline that followed – true even more so in the tech-heavy Nasdaq. This knowledgeable group has the knowledge to understand when company profits have probably reached their peak and that the price multiples paid (P/E ratios) for those earnings are at extreme levels. They began to sell or "distribute" stocks to the still eager and willing buyers. Volume of trading begins to slow. The public is still in the market heavily but may be a bit frustrated as the rate of increase slows down and not all stocks participate on rallies. The distribution phase I knew of from before 1999, having been through two earlier such periods – one in a major silver and gold bull market and bubble of the mid to late-70’s and in 1986 when pretty knowledgeable people were net sellers of stocks in the first half. 2. PANIC SELLING Panic is a major characteristic of the second phase of a bear market. Buyers become scarce, bids falls sharply and sellers become desperate to get out. The downward acceleration becomes extreme and a near vertical drop can ensue – at first, after March 2000 in the Nasdaq, the decline was gradually, occurring over weeks and months although there were some sharp down weeks, especially in the beginning. But then in 2002 as you know, it got pretty brutal as the market went into free fall – this became very much the phase of discouragement which we’ll look at next. In the late-summer of ’86 I sold some long call positions on the morning of what was later called "black Monday" – I didn't have the conviction to buy puts or to be short S&P index futures however. My own bullish sentiment died hard and I couldn't believe that the decline was going to be as severe as it was. In short, "excess" is the end result of excess. A decline in the panic selling phase will tend to go on longer when there is very strong conviction about the continuation of the bull market that has ended already– the investing public, in general, does not "believe" the potential severity of the bear market or how they will eventually react to it. The handmaiden to fear, so speak, is hope. There is a reluctance to take a loss in stocks, especially a sizable one. Better to hope for a recovery. This is the phase where people will make a point of telling you that they are "long-term" investors. Investors have become conditioned to stocks going up and will maintain their faith in a market rebound for longer than is warranted by facts. Hope springs eternal as is said. You heard this sentiment expressed a lot on the market media in 1999-2000 as investors interviewed said they were going to hang tight. Two years later most of them were hung all right – with many finally out of stocks! 3. DISCOURAGMENT – After the earlier and severe portions of the decline and often, where prices are not dropping so steeply, will tend to come a point where the economy has stabilized. Here, there can be a gradual market recovery and a rebound in prices of the stocks of the strongest companies. Or, this may be a long period where the market trends sideways. This is the third phase and is marked by discouraged sellers as the market does not bounce back up or gains just don’t hold (which is more typical of bull markets). There are many investors that didn’t sell in the panic atmosphere that had prevailed earlier but "give up" on stocks finally – this is also the so-called "capitulation" phase. Selling in the discouragement phase could also be coming from those investors and traders who bought during and after the steepest declines as they thought stocks looked cheap relative the inflated values of the late bull market stage. What causes this discouraged selling is that the rallies aren’t sustained and prices sink lower. There’s an old analogy about the erosion of a bear market being like a faucet dripping. Such slow steady loss, over time, becomes buckets. Business conditions at this stage may deteriorate further. Certainly there is an absence of good news with corporate earnings as the economy slides further. The stocks that were very speculative, in terms of their potential to make money, may lose most of the rest of the their value in this phase. There were many Nasdaq stocks that lost 80- 90% of what they had gained in the prior bull market, in the 2 years after the March 2000 top. Blue chip type stocks tend to decline more slowly because investors hold on to them the longest. A bear market ends when all the possible bad news has been discounted. And it after it ends there is often even more negative news that keeps coming. Keep in mind that the "discounting" mechanism of stocks is always also an attempt to look ahead, so stock values will reflect the expectations of what earnings could be when business conditions improve – for example, about six months ahead. It also should be noted that no two bear markets are exactly alike. The 1987 bear market was amazingly short in time duration and could be measured in weeks, although the price declines were quite severe. Some bear markets skip the panic stage and others end with it as in 1987. Bear markets go on for quite different time and price durations. The key aspect to knowing how it all works – that however steep the price swings are, such as was seen in spectacular last phase of the tech bull market run up of 1998-2000 – keeping in mind the characteristics of each phase will help you keep a level head. You know what is coming when the "excess" phase you are in ends and you can prepare for it. Keep in mind also, that these descriptions were made over 100 years ago. I have added more up to date examples, but the essential nature of the market phase stems from human nature and this is the constant or what doesn’t change much. This relatively unchanged human nature, ours and others, is what you have to deal with in the stock market and it benefits us greatly when we can see which market phase we are in. ************************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. 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