Option Investor

Daily Newsletter, Thursday, 07/08/2004

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The Option Investor Newsletter                Thursday 07-08-2004
Copyright 2004, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Day in Court
Index Trader Wrap: Word of terrorist plot flattens enthusiasm
Market Sentiment: Investors On the Defensive

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      07-08-2004           High     Low     Volume   Adv/Dcl
DJIA    10171.56 - 68.70 10263.73 10166.25 1.66 bln 1067/2077
NASDAQ   1935.32 - 30.80  1964.48  1934.57 1.79 bln  700/2366
S&P 100   540.21 -  4.04   545.31   539.92   Totals 1767/4443
S&P 500  1109.10 -  9.23  1119.12  1108.72
W5000   10808.15 -105.80 10913.93 10804.31
SOX       442.95 -  1.10   450.34   441.73
RUS 2000  560.71 - 11.32   572.03   560.54
DJ TRANS 3071.29 - 78.80  3149.37  3069.78
VIX        16.20 +  0.39    16.36    15.50
VXO (VIX-O)16.05 +  0.30    16.29    15.37
VXN        22.68 +  0.42    22.91    22.10
Total Volume 3,748M
Total UpVol    736M
Total DnVol  2,983M
Total Adv  2035
Total Dcl  4957
52wk Highs  130
52wk Lows   168
TRIN       1.96
NAZTRIN    1.27
PUT/CALL   0.91

Day in Court
by Jim Brown

Today was taken over by court TV with Ken Lay's indictment
and press conference taking center stage. Another sideshow
came from the Adelphia trial where the Rigas family head
was found guilty on almost all counts. Stocks? That was
almost an after thought and after traders thought about
the continued earnings warnings they sent the indexes to
new lows across the board.

Dow Chart - Daily

Nasdaq Chart - Daily

The morning economic reports helped pull the markets back
from a very bad Yahoo induced overnight drop. The Jobless
Claims really did correct after the multiple weeks of
high numbers in the 350K range. The drop last week to
310,000 was the lowest level since October 2000. However,
analysts were quick to caution that the sudden drop was
more than likely the result of seasonal adjustments.
Seems we just can't win. At least the Labor Department
came right out with the caution saying there may have
been an inappropriate seasonal adjustment. Since they
made that announcement with the number it seems like
they should have just corrected it and been done. You
don't really think they just realized it at 8:29 this
morning do you? Still we live in a headline world and
the headline 310K number was successful in lifting the
futures well off their lows. Expect next week's numbers
to be higher.

Reversing the warm feelings from the Jobless Claims was
the drop in Retail Sales for June to +2.9% from +5.7%
in May. This was the smallest gain since June-2003 and
well off the +6.0-7.0% range from the first quarter.
Department stores, furniture stores and shoe stores
posted the weakest results. Even the discount stores
barely posted a gain at +1.5%. Drugs and Wholesale Clubs
were the only bright spots that kept the headline number
in positive territory. Personally I am not encouraged
that Drug stores saw the largest gain at +8% since those
are normally forced sales of some sort and not pure
voluntary spending. The same store sales were generally
less than expected across the board with the majors
blaming the slow sales on everything but a plague of
locusts. Weather was the primary excuse but the slowdown
was nationwide and that suggests there was a stronger
factor such as continued high gas prices. July numbers
are not expected to show any increase with back to
school shopping expected to be put off until the last
minute due to lack of money.

Consumer Debt levels are near record highs and they are
limiting the amount of credit available for spending.
Consumer Credit increased by +$8.2 billion in May and
the April numbers were revised from +$3.9B to +$5.3B.
The May jump was the largest increase since January.

The Manufacturers Alliance Survey (MAPI), the index of
future business activity jumping to 80, set a record
for the third consecutive quarter. Shipments and New
Orders surged to 93 from 90 and Back Orders soared to
93 from 85. All components rose and this suggests that
manufacturing activity over the next six months will
continue to increase. This was a very bullish report
and was a new record for the headline number. However,
this report compares activity to the same period last
year and Q2-2003 was not a hotbed of activity. The
comparisons going forward are going to get much more
difficult to show gains. This report is not normally
a market mover as it looks back over the last quarter
and many analysts are now suggesting we hit a peak in
late April early May. This makes other more current
numbers like the ISM a better read on the economy.

The key focus for the day was on the Ken Lay circus
in Houston. He was indicted for his alleged role in
the Enron disaster. He took the unprecedented step of
holding a press conference once he was released from
custody in order to proclaim his innocence. This
highly unusual tactic garnered the television spotlight
for most of the day and stock news took a back seat to
the spectacle. This may have been a very good thing for
the markets as the earnings news has been moving from
bad to worse as the current confession cycle draws to
a close.

Yahoo disappointed Wednesday night and knocked the wind
out of the Internet sector and that rippled through
techs in general. One good thing Yahoo accomplished
was to take the focus off the semiconductor sector
and those stocks actually saw some gains early on but
those gains faded as we neared the close. I am not
going into detail but over the last two days we have
seen over 20 companies warn and I can only remember
one company that guided higher. That was Yellow Roadway
after the close today. According to First Call 1015
companies have issued guidance for Q2 and 51% of those
were positive, 15% inline and 34% were negative. Those
who follow these things claim the warning ratio for
Q2 is only 1.5 and well below the 2.2 average for Q2.
This may well be a statistical anomaly that keeps their
stress level intact but the pace of warnings does not
appear that tame to investors. Maybe it is the rush to
confess over the last week that has changed the landscape.

That landscape changed drastically over the last week
with the Dow breaking below the 10200 support level
today and trading at a six week low. That closing low
at 10171 is under the 200dma at 10175. Close enough to
hang on by its fingernails but still dangerous. The Dow
will be at risk again on Friday as GE reports earnings
before the bell. GE has done a good job in managing
expectations or should I say lowering expectations so
there should not be any earnings surprise. However GE
is the proxy for the economy and as such their guidance
will be viewed as the gospel for the future. Their
revelations will be seen as the roadmap for the rest
of the year. A positive spin could go a long way
towards curing the economic flu and earnings fever
now afflicting traders. Strangely traders have ignored
recent warnings by GE so downside risk may be limited.

The Nasdaq continued its plunge to close at 1935 and
and for once was not led down by the semis. The Internet
Index ($IIX) lost -2.5% on the losses in YHOO -2.52,
EBAY -3.22, AMZN -1.50 among others. The Software Index
($GSO) lost -3.13% on continued warnings in that sector.
With losses like these the Nasdaq never had a chance.
The Nasdaq closed under all its averages 50/100/200
and appears destined to retest 1900 unless a tech
miracle appears very quickly.

Another factor in the Nasdaq decline was a massive
drop in the Russell-2000. The Russell lost -11.32,
-2% and closed at 560, right on critical last ditch
support. The Russell was under pressure all afternoon
with major sell programs late in the day. The close at
560 is critical and a break below this support level
could easily see a sharp drop to 540 and the May lows.
The Russell has fallen -5.2% since July 1st and the
decline does not appear to be slowing. Today's close
is exactly on the 200dma and technical buyers should
appear on Friday but I am not counting on it. There
is simply too much negativity in the market and unless
GE praises the economy and its earnings outlook in
glowing terms tomorrow there may be a concentrated
run to the exits before the day is over.

Russell-2000 Chart

Next week we have over 300 companies reporting earnings
and unless the trend changes quickly each report will
only be another appetizer for the bears before the
summer rampage begins. The parade of bullish analysts
continues on CNBC with each proclaiming the merits of
the undervalued market. Obviously somebody is very
wrong. The bulls have a definite wall of worry ahead
of them and right now they appear to have no interest
in putting on their climbing shoes.

TrimTabs claimed the first three days of July saw
+$2.5 billion inflows to equity funds. According to
TrimTabs this was the largest three-day inflow since
$5B hit the tape in March. Considering June was the
end of the quarter and a trigger for strong retirement
contributions I would have thought the first week
in July would have seen much stronger inflows.
Regardless of the actual cash being put to work the
markets have been in free fall since July 1st.

Helping that free fall was a press conference by Tom
Ridge of Homeland Security warning that a large scale
attack is still being planned for this summer inside
the United States in an effort to disrupt the elections.
Since the democratic convention will begin in slightly
over two weeks on July-26th the countdown clock is
ticking ever louder. Homeland Security claims to have
no specific details of an impending attack but they
do have increasing confirmation that one is imminent.
This should send chills up the back of any investor
with a large portfolio who remembers the 9/11 drop.

With GE not expected to be a market mover tomorrow
we are going to be faced with weekend event risk and
nothing especially cheerful to send the markets higher.
There are no material economic reports and odds are
good we will see some more earnings warnings from
companies hoping to escape investor wrath by warning
on a summer Friday when attention to the market is

With the Dow and the Russell both closing on their
200 day averages there is support for buyers wanting
to buy the dip. How well that support will hold is
still the $64 question. Personally I would not enter
a long position on Friday regardless of the market
behavior. I would only day trade any bounce but
always keeping my eye on the exit. My bias for Friday
is flat to down but I would not rule out an oversold
bounce. We have not seen any market-supporting buy
programs recently and the Dow/Russell 200 day averages
would be a good place to launch one of those rockets.

Fortunately we will get to see some real earnings
from the largest blue chips next week, both techs
and non techs. These earnings will blot out the red
marks left by the dozens of small cap warnings over
the last few days. This will be our chance to reverse
the drop and return to our trading range but the black
cloud on the horizon will remain until the democratic
convention is over. Keep those stops in place because
they could protect you from serious harm.

Enter Passively, Exit Aggressively.

Jim Brown


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Word of terrorist plot flattens enthusiasm

At the mid-point of today's session, it looked as if equity bulls
might have pulled a rabbit out of their hat as the major indices
had managed to trade unchanged, or hold fractional gains where a
sharper than expected decline in weekly jobless claims helped
offset a negative tone after quarterly earnings and forward
guidance from Yahoo! Inc. (NASDAQ:YHOO) $30.08 -7.73% failed to
meet loftier expectations.

The CBOE Internet Index (INX.X) 181.51 -3.61% and another
earnings warning from a software maker, this time Seibel Systems
(NASDAQ:SEBL) $7.94 -13.78%, had the GSTI Software Index (GSO.X)
137.24 -3.13% weighing on broader technology.

The Semiconductor Index (SOX.X) 442.94 -0.24% held gains for the
bulk of the session, but faded at the close to finish down just
more than a point.  Japan's Tokyo Electron said orders for its
equipment to make chips and liquid crystal displays surged 124%
in April-June when compared to last year as global demand for its
chips that are used in digital home electronics remained robust.

Homebuilders as depicted by the Dow Jones Home Construction Index
(DJUSHB) 545.09 -5.08% were today's sector loser on renewed
concerns that a recent rise in mortgage rates would have housing
prices decelerating.

As the major indices battled back to unchanged at the mid-point
of today's trade, investor sentiment turned negative with
Homeland Security Secretary Tom Ridge said credible reports
surfaced that al-Qaeda was set to launch a major terrorist attack
on U.S. shores prior to this November's Presidential Election.

One reason for my analysis is that fears of terrorism halted the
major indices mid-session gains is that an intra-day chart of
August Crude Oil futures (cl04q) $40.30 as I type tonight, had
pulled back from their morning high of $39.75 to trade a session
low of $38.75, where a strong round of buying appeared just after
11:00 AM EDT, and by 12:00 PM when Mr. Ridge was speaking of
heightened terrorism concerns, oil was trading session highs, and
settled at their highs of the session.

While today's API and DOE crude oil inventory reports were mixed,
traders said the initial decline to session lows was due to
trader's reaction to the build in natural gas inventories.

I can't say that I fully understand this logic, but I could only
think that the build in natural gas inventories would be viewed
bearish for oil prices (lower oil prices) from the perspective
that a cooling U.S. economy, at the industrial level, which is a
large user of natural gas, would have been interpreted.

So... the intra-day action of oil rising on the Department of
Homeland security reports, and the mid-session fade in the major
indices has me interpreting today's action as being highly tied
to fears of terrorism.

Market Snapshot / Internals - 07/08/04 Close

Price action for the major indices had been improving from the
opening bell, but A/D lines at both the NYSE and NASDAQ never
really threatened a more bullish underlying sign.

The lack of new highs and building of new lows at both the NYSE
and NASDAQ has the 5-day NH/NL ratios accelerating to the
downside, where today's action now has the NASDAQ's 10-day NH/NL
ration turning back lower to "bear confirmed" at 60.6%.  The
NYSE's NH/NL 10-day average won't be far behind where a reading
of 76% would mark a reversal.

Since these NH/NL indications had been softening into today's
trade, I can't fully blame today's trade on fears of terrorism,
but with bullish leadership lacking near-term, it is going to be
tough for buyers to be stepping up to the plate when threats of
terrorism surface.

U.S. Market Watch - 07/08/04 Close

I wasn't expecting a 5% gain from the Securities Broker/Dealer
Index (XBD.X) 118.90 -1.07% in today's session, but the bullish
side of me didn't see the brokers put up much of a fight from the

While the brokers moved lower, the S&P Banks Index (BIX.X) 345.72
-0.60% tried to show the financials what it means to hang tough
with another test of its WEEKLY Pivot, but sellers showed up just
after lunchtime, and drove the BIX.X to close at its session

Pivot Analysis Matrix - 07/08/04 Close

The most resistive correlation that shows up is at 543-544 in the
OEX, and boy I'd be cognizant of this being an important and
probably formidable level of resistance.  Strength above, but
more bearish near-term below.

My thought here is that today's high, while probably coincidental
was OEX 545 and while it may have, or may not have been The
Homeland Securities talk of heightened reports to al-Qaeda
attacks, today's low close on the OEX after lunchtime trade at
545 and that June 1 "doji" really eats at me.

S&P 100 Index Chart (OEX.X) - Daily Intervals

In today's 03:15 PM EDT update, I showed a chart of the SPX with
conventional retracement anchored from the May 12 low and its
January relative highs, where that conventional retracement did
show some tie with the SPX's historic trade in recent months, but
where this week's WEEKLY S2 and that conventional 38.2%
retracement of 1,109.51, gives near-term significance (in my
opinion to the OEX at WEEKLY S1.  If broken to the downside (keep
you eye on the weaker XBD.X), then a capitulation type of move to
monthly S2 could be in order.

In my notes at the bottom of the OEX chart (If I'm put....) I'm
talking about current MONTHLY S2.  My thought is that back on May
25, when the OEX shot higher from 533.72, that was the day I
thought a "hedge" came off.  Part of that analysis was the amount
of puts traded at/near that level in the SPX.

Here's a quick look at the SPX with WEEKLY/MONTHLY retracement.

S&P 500 Index Chart - Daily Intervals

The SPX has shown a tendency to close at its session lows (at
current levels) and then see a brief pop back to 1,125, then see
an extension of declines.  The first sign of strength for a
repeat of this pattern would be a trade above tomorrow's DAILY
Pivot 1,112.32 and MONTHLY 80.9% retracement.

I do think, based on observation, that bulls were set to defend
and stage an advance in today's session, where early on, despite
a negative reaction to YHOO $30.08 -7.7% guidance and SEBL $7.94
-13.78%, the Market Volatility Index (VIX.X) started slipping
lower.  I quickly posted the most active options for the SPX,
which I interpreted as being put selling (see in chart).

Every technician will be eyeballing the SPX at its rising 200-day
SMA.  Please not in other charts that the SPX in the ONLY major
index (INDU, SPX, OEX, NDX) in our pivot matrix that closes ABOVE
this longer-term simple moving average.

Just as the Broker/Dealer Index (XBD.X) is a sector/index we're
monitoring for weakness to the downside, today's closes have
bearish look with closes below this longer-term SMA.

Things looked good for the bulls, and a strategy of selling at
and out the money July put premiums.  That is.... until The
Department of Homeland Security said it had information that al-
Qaida was moving forward with plans to carry out a large scale
attack in the U.S in an attempt to disrupt this fall's elections.

Dow Industrials (INDU) Chart - Daily Intervals

Similar to the OEX, the INDU closes below its 200-day SMA.
NOTHING new as it relates to the May lows, where I profiled 1/2
position in the DIA July $100 puts.

To be HONEST with you, after watching the DIA move up and now
back lower, the $300 I'm about to lose in that 1/2 bearish
position.... I'd have just as soon shorted 100 shares of DIA.
I'm thinking the same thing on an INDU dip below 10,134, but
instead of looking to buy calls, I'd rather look long the DIA
underlying.  Similar to observations made with the SPX chart, I
don't think bulls need to be QUICK to pull the trigger for new

NASDAQ-100 Tracker (AMEX:QQQ) - Daily Intervals

I've profiled the naked selling of 10 July $35 puts for $0.20 on
Tuesday, and while today's close for those puts was $0.15 bid and
$0.20 offer, I think I did what a lot of naked put sellers are
doing when the QQQ traded a new session low and moved below its
WEEKLY S2 and correlative/overlapping MONTHLY 80.9% support.

I profiled an UNDERLYING QQQ short, with a stop just above that
$36.00 level.  Now.... I have to ask myself... "why did the QQQ
stop at $35.55, seemingly in the middle of nowhere in the Matrix?

NASDAQ-100 Tracker (QQQ) - Daily Intervals

A conventional retracement from a recent low to a recent high may
well explain today's low.  When I profiled the selling of naked
QQQ July $35 puts for $0.20, I though at "worse" the QQQ might be
vulnerable to $35.00.

Jeff Bailey


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Investors On the Defensive
- J. Brown

It looks like investor confidence has finally cracked.  With a
constant parade of earnings warnings and YHOO's failure to hit
investors expectations combined with TV scenes of Tom Ridge, the
Secretary of Homeland Defense, telling us that terrorists are
planning to hit us this summer and/or on or during the election
the flight to safety in the markets was bound to happen.  Right?
It seems so easy to see in hindsight.

The terror threat is nothing new.  We've been talking about the
Democratic and Republican conventions as targets for weeks if not
months.  So why a reaction now is a good question.  The financial
media is blaming the terror warning today for the rally in crude
oil, which happened to close back over the $40.00 a barrel mark.

What is interesting is the market's reaction.  Traders are
rotating money out of tech stocks and into traditional safe
havens like drug stocks, gold stocks, and bonds.  Gold itself
rose $5.50 to close at $408 an ounce while the XAU gold & silver
index witnessed some follow through on yesterday's 4% rally.  The
next test for gold stocks will be to see if the XAU can break
through its simple 100-dma.

Meanwhile it may be all downhill for software stocks.  The SEBL
and BMC warnings today follow recent warnings from VRTS and the
GSO software index dropped another 3% today.  Granted nothing
moves in a straight line and most of the major software stocks
are probably due for an oversold bounce but the new trend seems
to be that corporate America is not spending any money and are
pushing out any big purchases.  That could make next quarter's
numbers pretty depressing.  Plus, I heard some disappointing
conjecture about how MSFT is likely to disappoint investors with
its plans (or lack of) to distribute its $55 billion cash hoard.

Overall today's internals were very bearish.  Decliners
outnumbered advancing issues 19 to 8 on the NYSE and 23 to 7 on
the NASDAQ.  Down volume was about four times up volume on both
exchanges.  Bulls will be disturbed to see the Industrials close
under its simple 200-dma today while the NASDAQ composite has
completely fallen through the bottom of its trading range and
potential support at 1950.  Look for the S&P 500 index to test
support at 1100 and its simple 200-dma soon.  Maybe then we can
see an oversold bounce.

Looking ahead to tomorrow Wall Street will be focused on General
Electric's (GE) pre-morning earnings report and guidance for the
third quarter.  Estimates are set at 37 cents a share.


Market Averages


52-week High: 10753
52-week Low :  8996
Current     : 10171

Moving Averages:

 10-dma: 10311
 50-dma: 10235
200-dma: 10178

S&P 500 ($SPX)

52-week High: 1163
52-week Low :  960
Current     : 1109

Moving Averages:

 10-dma: 1128
 50-dma: 1118
200-dma: 1100

Nasdaq-100 ($NDX)

52-week High: 1559
52-week Low : 1204
Current     : 1431

Moving Averages:

 10-dma: 1480
 50-dma: 1449
200-dma: 1443


CBOE Market Volatility Index (VIX) = 16.20 +0.39
CBOE Mkt Volatility old VIX  (VXO) = 16.11 +0.36
Nasdaq Volatility Index (VXN)      = 22.68 +0.42


          Put/Call Ratio  Call Volume   Put Volume

Total          0.91        731,641       667,630
Equity Only    0.82        580,709       477,272
OEX            0.77         39,779        30,676
QQQ            1.56         45,227        70,513


Bullish Percent Data

           Current   Change   Status
NYSE          66.2    - 1     Bear Confirmed
NASDAQ-100    49.0    - 1     BULL ALERT
Dow Indust.   70.0    + 0     Bear Confirmed
S&P 500       63.2    - 1     Bear CORRECTION
S&P 100       65.0    - 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: 2.19
10-dma: 1.62
21-dma: 1.27
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


Market Internals

            -NYSE-   -NASDAQ-
Advancers     859       690
Decliners    1937      2350

New Highs      65        27
New Lows       51        99

Up Volume    344M      318M
Down Vol.   1327M     1428M

Total Vol.  1679M     1763M
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

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


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


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



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The Option Investor Newsletter                 Thursday 07-08-2004
Copyright 2004, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: AHC, BOL
Dropped Puts: GCI
Call Play Updates: PD, QCOM
New Calls Plays: SUN
Put Play Updates: APPX, DISH, IRF, SLAB
New Put Plays: None


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.


Amerada Hess Corp. - AHC - close: 80.69 change: -1.24 stop: 77.50

Another big day for oil with crude futures gaining 3.24% to close
above $40.00 a barrel helped AHC trade to $82.80 intraday.  We
initiated AHC with a target of the $82-83 range so we feel it has
been successfully reached.  The August 75 calls have risen from
$3.20 to $7.00 and the August 80 calls have climbed from $1.40 to
$3.60.  Traders not willing to exit just yet can keep the play
alive but we would suggest tightening stops.  A rebound from the
$78.00 level might actually be another bullish entry point.

Picked on June 17th at  $74.15
Change since picked:     +6.54
Earnings Date          7/28/04 (unconfirmed)
Average Daily Volume =    1.12 mln
Chart =


Bausch Lomb - BOL - close: 62.45 change: -1.54 stop: 62.99

It would appear that BOL is not done consolidating sideways.  Shares
slipped through their 40 & 50-dma's today and closed under minor
support at the $63.00 level.  Its MACD produced a new sell signal.
Bulls can hope for a bounce from the simple 100-dma, which held as
support two weeks ago but we're going to close this play unopened.

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 =


Gannett Co - GCI - close: 80.41 change: -0.69 stop: 86.05

The technical, high-volume breakdown in GCI continues and shares
dropped to an intraday low of $80.05.  We've been targeting a
move toward the $80.00 level so that's close enough for us.  We
suggested readers be ready to exit and take profits in the
MarketMonitor this morning and this afternoon.  More aggressive
bears might want to leave the play open but keep in mind that GCI
is very short-term oversold now and overdue for a bounce.  We'd
probably lower the stop to its 10-dma near $84.00 and target a
move to $77-76.  Don't forget that GCI is due to report earnings
on July 13th and we would not hold over the report.

Picked on July 01 at $ 83.95
Change since picked:  - 3.54
Earnings Date       07/13/04 (confirmed)
Average Daily Volume:    957 thousand
Chart =


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Phelps Dodge - PD - close: 77.10 chg: -1.65 stop: 75.49

A little pull back in shares of PD after its two-day rebound was
to be expected.  We would use this dip as an entry point for new
bullish positions but more conservative traders may want to look
for a move higher through $77.50 first before initiating any
plays.  Our stop might be too close.  If you can handle the heat
we'd suggest placing the stop under the simple 100-dma or the
$75.00 mark.

Picked on July 07 at $ 78.75
Change since picked:  - 1.65
Earnings Date       07/27/04 (confirmed)
Average Daily Volume:    2.6 million
Chart =


QUALCOMM - QCOM - close: 70.70 change: -0.78 stop: 69.00

We're starting to grow a bit concerned about QCOM.  The stock has
been sinking with a steady trend of lower highs over the last
four sessions and the pattern looks like a bearish triangle or
wedge with support at $70.00.  Granted the market has been
sinking too so we're happy to see support at $70 hold.
Unfortunately, QCOM is suggesting it might break support.  There
were some potentially negative comments about QCOM making the
rounds from a Morgan Stanley analyst but we can't confirm it.  We
would be cautious about initiating new plays here.  In the news
QCOM announced a new relationship with Snap-on diagnostics but
Wall Street obviously wasn't very inspired by the news.

Picked on June 29 at $ 71.55
Change since picked:  - 0.85
Earnings Date       07/21/04 (confirmed)
Average Daily Volume:    8.8 million
Chart =


Sunoco - SUN - close: 66.67 change: -0.62 stop: 62.99

Company Description:
Sunoco, Inc., headquartered in Philadelphia, PA, is a leading
manufacturer and marketer of petroleum and petrochemical
products. With 890,000 barrels per day of refining capacity,
approximately 4,900 retail sites selling gasoline and convenience
items, over 4,500 miles of crude oil and refined product owned
and operated pipelines and 37 product terminals, Sunoco is one of
the largest independent refiner-marketers in the United States.
Sunoco is a significant manufacturer of petrochemicals with
annual sales of approximately five billion pounds, largely
chemical intermediates used to make fibers, plastics, film and
resins. Utilizing a unique, patented technology, Sunoco also
manufactures two million tons annually of high-quality
metallurgical-grade coke for use in the steel industry.
(source: company press release)

Why We Like It:
Today was an exception.  For the most part energy stocks have
been a pocket of strength for the bulls.  The rise in crude back
above the $40.00 barrel has kept oil and energy equities
resistance to profit taking.  We're attracted to SUN for multiple
reasons.  First it is one of the few oil refiners in the U.S. and
demand is so high for refined products that the entire industry
is working near capacity to pump out as much as they can.
Second, we like SUN because it also produced tons of coke for the
steel industry.  The steel sector has been another group of
strength as the U.S. and Chinese economies heat up pushing steel
prices to new highs.  With demand for steel this high companies
ramp up production and that means more demand for SUN's coke.
Third we like SUN for its technical breakout over resistance at
the $65.00 level.  The stock broke out on strong volume.  Today's
dip looks like an entry point for new bullish positions.
Actually, we'd consider any dip above $65.00 as an entry point.
Right now we're going to target a move to the $70-72 range.  Our
initial stop loss will be at $62.99.

Suggested Options:
We're going to suggest the August 65s and August 70s as our
favorite options to play.

BUY CALL AUG 65 SUN-HM OI= 4523 Current Ask $3.50
BUY CALL AUG 70 SUN-HN OI= 1408 Current Ask $1.15

Annotated Chart:

Picked on July 08 at $ 66.67
Change since picked:  + 0.00
Earnings Date       07/22/04 (confirmed)
Average Daily Volume:    973 thousand
Chart =


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American Pharma. - APPX - close: 26.26 chg: -0.22 stop: 29.07

We don't have much new to report on for APPX.  The stock has been
digesting Tuesday's drop by churning sideways in a $1.00 range
between $26.00-$27.00 for the last two sessions.  Conservative
traders might be able to get away with a stop loss above $27.00
but we're going to keep ours at $29.07 for now.  This close to
our initial target of $25.00 we would not suggest new positions.
In the news APPX confirmed its earnings date of July 22nd.

Picked on July 04 at $ 29.07
Change since picked:  - 2.81
Earnings Date       07/22/04 (confirmed)
Average Daily Volume:    910 thousand
Chart =


EchoStar Comm. - DISH - close: 29.25 chg: -0.36 stop: 31.01

DISH is heading in the right direction and we're encouraged by
its new lower highs in the last two days.  Yet so far the stock
has not yet hit our TRIGGER to go short at $28.99.  Fortunately,
from the look of the intraday chart that moment could be soon
with DISH closing at its low for the session.  That hasn't been
any more word on what the SEC wanted regarding DISH's subscriber
count but trouble could be brewing.

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 =


Int'l Rectifier - IRF - close: 35.29 chg: -1.03 stop: 38.25*new*

The semiconductor index has been trying to bounce after its
Friday-through-Tuesday collapse but so far it's been unable to
regain the 450 level.  Meanwhile an analyst at Harris Nesbitt
downgraded the semiconductor sector to "negative" this morning
and sliced IRF to a "neutral".  It was only two days ago that
Stephens downgraded IRF to an "equal weight".  Thus far we're
encouraged by the lack of true bounce in IRF and today's close
represents a breakdown below its trendline of lower lows, which
has acted as support in the past.  Traders might want to consider
new positions on a breakdown below the $35.00 mark.  We're going
to lower our stop loss to $38.25.  We will continue to target the
$31-30 range for now.

Picked on July 6th at $37.00
Change since picked:  - 1.71
Earnings Date        4/29/04 (confirmed)
Average Daily Volume =  1.07 mln
Chart =


Silicon Labs. - SLAB - close: 41.44 chg: -1.23 stop: 45.01*new*

Slowly but surely SLAB continues to melt lower.  It's been a
tough week for semiconductors as the group tried to bounce after
the Friday-Tuesday decline but the brokers keep downgrading the
group.  This morning it was Harris Nesbitt who cut the sector to
"negative".  SLAB is very close to our $40.00 target and if
shares can come within a 25 cents of our target we'll be happy to
exit.  This close to our target and round-number support at
$40.00 we would not suggest new entries.

Picked on June 20th at $44.99
Change since picked:   - 3.55
Earnings Date        07/26/04 (confirmed)
Average Daily Volume =   1.14 mln
Chart =




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The Option Investor Newsletter                  Thursday 07-08-2004
Copyright 2004, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Watch List: Consumer Durables and Homebuilders
Option Spreads: It’s Been Two Years!  Time Flies When You’re
    Making Money
Traders Corner: Mining The Data


Consumer Durables and Homebuilders


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.

Autozone Inc - AZO - close: 77.81 change: -1.12

WHAT TO WATCH: AZO was hit hard several days ago when it reported
slowing sales.  The stock dropped like a rock to round-number,
psychological support at $80.00.  In the last few days we've seen
is slowly slip lower with no dead-cat bounce.  What really
catches our attention is the breakdown through its trendline of
higher lows dating back to its July 2003 low.  Aggressive players
may want to consider buying puts now with a target near $70.00.
Its P&F chart is very bearish with a triple-bottom breakdown sell
signal pointing to a $65 target.  Less aggressive types may want
to wait for a small bounce and failed rally under the $79-80



Best Buy Co - BBY - close: 48.76 change: -1.40

WHAT TO WATCH: We strongly considered adding BBY to the put list
this evening.  We've been watching it for a breakdown under the
$50.00 level for days and the drop on July 1st looked great.  The
subsequent bounce back above $50.00 yesterday and today's roll
over back under $49.00 looks like a great entry point for bearish
positions.  We hesitate because the stock has P&F support at the
$47 level.  More aggressive traders might want to short it hear
with a stop loss at 50.51 and target a move toward $45.00.



Centex Corp - CTX - close: 42.79 change: -2.34

WHAT TO WATCH:  The homebuilders were hammered today after
investors choose to focus on a negative report from one of the
smaller players in the industry.  Overall business is booming for
the larger companies but it feels like investors were looking for
an excuse to sell.  The 5% drop in CTX is a new relative low and
new nine-month low, that breaks support at the $45 and $43
levels.  There could be some support at the $40.00 mark but its
P&F chart is very bearish and points to a $35 target.  Earnings
are not until July 26th.



Whirlpool Corp - WHR - close: 64.49 change: -1.89

WHAT TO WATCH: Ouch!  WHR has been hit with two days of selling
pressure that has pulled the stock under support at the $66 and
$65 levels.  Volume was exceptionally high on today's 2.8% drop
and the stock looks headed toward a test of the $60 level.  A
move under $64 would break P&F support and produce a new P&F sell
signal.  Watch out for earnings on July 21st.


RADAR SCREEN - more stocks to watch

RYL $71.69 -4.56 - Ouch!  This high-volume breakdown looks very
bad for RYL but we'd wait for a break of support at $70.00 and
then target a drop toward $63.00.  Earnings should be 7/21.

HOV $30.62 -2.55 - HOV's decline is worse than RYL's.  This is a
new relative low but we'd wait for the break of round-number
support at $30.00.

BZH $91.45 -6.10 - Same story here.  Look for a breakdown under
support at $89-90 then target a move to $81-80.

MWD $49.82 -0.06 - This looks like a failed rally with the roll
over under $51.00.  Bears might open new positions under $49.00
and target $45.00.

GS $90.00 -0.57 - GS looks like a bearish candidate on a drop
through today's low at $89.83.


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Option Spread Strategies

It’s Been Two Years!  Time Flies When You’re Making Money
By Mike Parnos, Investing With Attitude

Who’d-a-thunk it?  Today’s column marks the two-year anniversary
of my writing for OI.  It’s been a learning experience for all of
us.  We’ve discussed and experimented with a number of strategies.
The result?  We’ve learned how to position ourselves for profit –
month after month after month.  And I’ll put our track record up
against ANYONE’S!

My humor and straightforward approach has offended a few while
entertaining and informing all the rest.  For those I have
offended, I have no patience.  I say simply “Get A Life!”  Two
other words come to mind, but I’m going to take the high road –
today – because I’m in a real good mood.

To the rest of my legion of readers I say “BRAVO!!”  You have
been, and continue to be, great students.  You’ve sent
interesting, poignant, and provocative questions.  You’ve emailed
countless notes about the consistent profits you’ve pocketed using
strategies you have learned in this space.  For all of the above
reasons, I am truly gratified.

This week I received an astute question that applies directly to
our Iron Condor positions – and the flexibility we have when
considering adjustments.  Read on, my friends . . .

Hello Mike,
I'm trying to think ahead.  Thinking ahead helps the planning
process.  On the close out of the July RUT Condor, do you actually
close it?  Then, open another when the time is right for the next
month.  Is that how you "roll out" to the next month?  Or, if the
strikes are not in danger, do you just let them expire?

I have to tell ya! - Since I placed this trade as my only trade, I
have not been glued to the computer watching and reading and
planning trades on specific equities.  I have free time for a life
outside the house.  I still work for a living.  Therefore, my time
is stretched.

I'm trying to explain your process to my buddy.  He's having a
little bit of a hard time understanding the strategy.  He's a
watcher and a worrier.  I tell him this way is much easier and
less stressful.  Thanks for all your help, Mike! -- Pete

Hi Pete,
I'm glad you're feeling comfortable with our trading style.
That's the objective.  It certainly isn't foolproof, but we
certainly seem to be right a lot.  It's a nice feeling.  That’s
why I focus on teaching the non-directional strategies privately
and in all my writings.  The stress you save may be your own – and
the money you make may also be your own.

Regarding your buddy, tell him about the CPTI and OI and what a
great opportunity there is for learning our strategies.  Have him
sign up for a trial membership and let him see for himself what a
wealth of knowledge is available on this site.

Determining whether or not you should close out a position early
depends a great deal on how much you have in your brokerage
account.  It's not necessary to wait until expiration of one
position before you put on another -- IF you have enough to cover
the maintenance for the new position.

If you don't have sufficient funds (or marginable securities),
then you have to calculate a few things.  First, what brokerage
firm do you work with?  Do they hold maintenance on both spreads
of the Iron Condor?  Or, do they hold maintenance on only one

If your broker holds maintenance on both sides, it is in your best
interest to close one, or both sides of the Iron Condor – IF it is
cheap enough and the opportunity presents itself.

For example: A few weeks ago you put on a July five contract SPX
Iron Condor consisting of a 1070/1050 bull put spread and an
1165/1185 bear call spread.  With seven trading days left in the
option cycle, the index is trading at 1155 -- closer to the top of
the range.

Look at the 1070/1050 bull put spread.  You might be able to buy
back the 1070 for $.25 and sell the 1050 for $.10 – thereby
costing you $.15 (plus a few commissions) to close out the spread.
Is this a good idea?   Ask yourself how much do you think the
potential premium available for an August SPX 1090/1070 bull put
spread for the next month would be reduced as a result of time
erosion during the next seven trading days.

With all else being equal, you can be quite certain that amount of
premium that will erode away in those seven days would surpass the
$.15 we spent to close the July position.  In that instance, it’s
better to close out (unwind) the July position and open a new
August position to lock in the additional premium.

If you use a broker that holds maintenance on only one side, you
may be still be able to use the same strategy.   OptionsXpress
will allow you to (per the above example) close out the July bull
put spread and establish an August bull put spread and still only
hold maintenance on one side – even though the bear call spread is
still for the July cycle.  You won’t be able to do this online,
but you will be able to call them, explain what you’re trying to
do, and they will make the appropriate account adjustment to
permit your order placement.  A telephone conversation is a small
price to play for the flexibility that this policy provides.

All of the above is based on the assumption that you have a
limited amount of free capital for using our strategies (which is
true for most of us).   We’re trying to outline the most efficient
way for you to allocate the money you have to work with.

Calculating Premium Decay
Want to figure out how much the August option will decay over the
next few weeks?  Good luck.  You can give it a shot using the
“Theta” – a Greek symbol that represents a calculation the daily
rate of premium decay.  It would be nice if you could simply take
that figure and multiply it by the number of days in question.
However, there are other ingredients – like volatility – that can
affect the degree of decay.  Plus, the Theta supposedly increases
every day as you get closer to expiration.  Don’t drive yourself
crazy (unless you’re anal about these things).  Now that we have
In-Demand cable-TV, there’s no excuse to spend an obsessive amount
of time at the computer.

Position #1 – SPX Iron Condor – 1109.11
We sold 10 July SPX 1170 calls and bought 10 July SPX 1180 calls
for a credit of about: $1.10 ($1,100).  Then we sold 7 July SPX
1075 puts and bought 7 July SPX 1060 puts for a credit of about:
$1.20 ($840).  The total net credit of was $1,940.  Maximum profit
range of 1075 to 1170.  Breakeven points of 1072.23 to 1171.94.
Maintenance: $10,500.  Potential profit: $1,940.

Position #2 – RUT Iron Condor – 560.71
We sold 10 July RUT 600 calls and bought 10 July RUT 610 calls for
a credit of about: $1.00 ($1,000). Then we sold 10 July RUT 530
puts and bought 10 July RUT 520 puts for a credit of $1.30
($1,300).  Our total net credit was $2.30 ($2,300).  Maximum
profit range of 530 to 600.  Breakeven points of 527.70 to 602.30.
Maintenance: $10,000.  Profit potential $2,300.

Position #3 – SPX Credit Spread Boogie – 1109.11 – See Adjustment
We haven’t done this strategy is quite some time.  To review, it
consists of establishing a 25-point credit spread and taking in
$6-7 of premium (as much as possible).  If the trend continues,
you keep the premium.  If the trend reverses, you close the trade
for double the premium amount.  Then, you open a credit spread in
the opposite direction, using enough contracts to replenish what
you spent to close the initial spread.

We sold 3 SPX July 1125 puts and bought 3 SPX July 1100 puts for a
total credit of about: $6.30 ($1,800).

Our profit potential:  $1,800.  Maintenance: $7,500 (initially).
We’ll need to keep a close eye on this one.  We have to be alert –
plus, we have to have a large enough account size to accommodate
trading an increased number of contracts if adjustments become

Position Adjustment:  As the market went down, so did the S&P.  It
was time to dance, and dance we did.  I closed out the 3 contracts
of the July 1125/1100 bull put spread for $12.60 and rolled out to
5 contracts of the August 1125/1150 bear call spread for $8.70.
That put an additional $570 potential profit into our pocket –
making a total of  $2,370 ($1,800 + $570).  Our new maintenance is

Position #4 – SOX (Semi-Conductor Index) – Iron Condor – 442.96
We sold 10 SOX July 490 calls and bought 10 SOX July 500 calls for
a credit of about: $1.10 ($1,100).  Then we sold 10 SOX July 420
puts and bought 10 SOX July 410 puts for a credit of about: $1.30
($1,300).   Our total net credit of: $2.40 ($2,400).  Maximum
profit range: 420 to 490.  Breakeven points: 417.60 & 492.40.
Maintenance: $10,000.  Potential profit: $2,400.

QQQ ITM Strangle – Ongoing Long Term -- $35.70
We bought 10 contracts of the 2005 QQQ $39 puts and 10 contracts
of the 2005 QQQ $29 calls for a total debit of $14,300.   We make
money by selling near term puts and calls every month.  Here’s
what we’ve done so far:  Oct. $33 puts and Oct. $34 calls – credit
of $1,900. Nov. $34 puts and calls – credit of $1,150. Dec. $34
puts and calls – credit of $1,500.  Jan. $34 puts and calls –
credit of $850.  Feb. $34 calls and $36 puts – credit of $750.
Mar. $34 calls and $37 puts – credit of $1,150. Apr. $34 calls and
$37 puts – credit of $750.  May $34 calls and $37 puts – credit of
June $34 calls and $37 puts -- total net credit of $750.  We
rolled out to the July $34 calls ($.20 credit) and $37 puts ($.60
credit) and took in a net credit of $.80 ($800).  Our new total
credit is now $10,400.

This morning (Thursday), I rolled out the July $37 puts to the
August $37 puts and took in $.40.

Note:  We haven’t included the proceeds from this long term QQQ
ITM Strangle in our profit calculations.  It’s a bonus!  And it’s
a great cash flow generating strategy.

ZERO-PLUS Strategy.  OEX – 540.21
In my Feb. 8th column, I outlined a strategy based on an initial
investment of $100,000.  $74,000 was spent on zero coupon bonds
maturing in seven years at a value of $100,000.  The principal
$100,000 investment is guaranteed.  We’re trading the remaining
$26,000 to generate a “risk free” return on the original
Our current position:  We own 3 OEX December 2006 540 calls @ $81
(x 300 = $24,300).  Our cash position as of May expiration was
$4,390 plus unused $1,700 = $6,090.  From the June option cycle,
we are able to officially add $1,175 to our cash position – that
now stands at $6,265 ($4,565 plus unused $1,700).

New July Zero Plus Positions.
July bull put spread 535/525 for credit of $1.30 x 5 contracts =
$650.  Short 570 call for credit of $1.40 x 5 = $700.  If all goes
well, we’ll be able to add $1,350 to our cash position as we wait
for the market to move up.

New To The CPTI?
Are you a new Couch Potato Trading Institute student? Do you have
questions about our educational plays or our strategies? To find
past CPTI (Mike Parnos) articles, first look under "Education" on
the OI home page and click on "Traders Corner." For more recent
columns, you can look under "Strategies" and click on "Spreads &
Combos." They're waiting for you 24/7.

Happy Trading!
Remember the CPTI credo: May our remote batteries and self-
discipline last forever, but mierde happens. Be prepared! In
trading, as in life, it's not the cards we're dealt. It's how we
play them. Your questions and comments are always welcome.
Mike Parnos
CPTI Master Strategist and HCP

Couch Potato Trading Institute Disclaimer
All results reported in this section are hypothetical. While the
numbers represented here may have been achieved or beaten by our
readers, we make no representation that any individual investor
achieved these exact results. The tracking for the plays listed in
this section uses closing prices for the day the newsletter is
published and it is not meant to imply that any reader actually
received those prices or participated in these recommendations.
The portfolio represented here is hypothetical and for investment
education purposes only. It is only an illustration of what type
of gains a knowledgeable investor might receive utilizing these


Mining The Data
By Mark Phillips

Between government reports, industry reports, company financial
reports, bits of data on the ebb and flow of the money supply and
the endless stream of effluent coming from the various Fed
governors, there are enough bits of data floating around to make
the average traders' head spin.  What's important and what's
trivial?  How do I interpret each piece of data?  What does each
piece mean in the big picture?  How can I use the micro and macro
picture to better craft a winning trading strategy?

I've long maintained that for the vast majority of traders, trying
to interpret and analyze the stream of what I would call
fundamental data is a bit like trying to drink from a fire hose.
Not only is it unsatisfying, but it gives you a headache.  The
reason why is not that we don't have the brain capacity to make
sense of all the disparate pieces of data and weave it into a
cogent picture.  Now the real problem comes in when we try to put
it all in the context of what the underlying mood or sentiment of
the investing public is?  Any advisory that provides an
interpretation of the data in the absence of trying to also put it
in that context is wasting your time and money.

Perhaps an example will help.  For month after month, the jobs
data continued to come in well below expectations and then a
couple months back we had a blowout to the upside.  There was an
upside surprise and it exceeded all of the market's expectations.
We would therefore expect a bullish interpretation, just as we
would have from the next month's data, which was also quite
strong.  Ah, but there's the problem, the market as a whole didn't
focus on the good news, but on the potential bad news that
employment growth was SO robust, that the Fed would have to
aggressively raise interest rates.  On that interpretation,
equities fell and bond yields rose.

Fast forward to last Friday.  Employment numbers were expected to
be strong again, yet came in at roughly half the lower end of
estimates.  Simply put, this report was a disaster in terms of
expectations.  But putting on our thinking caps, it should be easy
to rationalize that the bad jobs data would be good for equities
and we ought to see bonds rise, resulting in falling yields.  Well
one out of two isn't bad.  Equities failed to rally, heading south
in moderate fashion ahead of the 3-day weekend.  But a part of
that can be attributed to weekend risk avoidance, right?  The
losses would be erased at the start of this week, assuming no
surprises over the weekend.  But it didn't work out that way, did
it?  Instead, all the major indices took it on the chin on
Tuesday, with Techs leading to the downside.

So what happened with bonds following the news on Friday morning?
They did what they were supposed to do, as the much weaker than
expected jobs data convinced investors that the Fed would be true
to its word, taking a gradual approach to raising interest rates.
In essence, the bond market is in the process of unwinding a
portion of the selloff from the March highs, which has clearly
been an affair of too much, too fast.  Make no mistake, the
intermediate trend for bonds is lower, with yields on the rise.
But the recent rally in bonds is telling us that the action from
the mid-March highs to the mid-May lows effectively priced in a
much more rapid rate of rising interest rates than is now deemed
to be reasonable.

Now this is all very interesting "after the fact" analysis.  I
know you'd much rather hear something ahead of time that you can
use as actionable advice, right?  Well, let's scroll back in time
just a bit.  From my June 27th LEAPS column,

The action in the bonds is what I think is the most interesting.
After breaking out on fears of rising short-term rates, it appears
the bond traders are having second thoughts.  I think this is a
direct reflection of the admission that perhaps bonds have moved
too far, too fast for what is now the perceived rate of rising
rates from the Fed.  Make no mistake, rates are going to be
heading higher and we will see the 10-year Note push through the
4.9% level in the months ahead, but perhaps not until we see a
significant pullback first.

Gee, I think that was right on target.  This is a perfect example
of taking a look at all the disparate data and making a
prognostication as to how the market should react.  To be fair, I
was talking about the reaction to the FOMC meeting, but looking at
what the Fed did on June 30th and combining it with the weaker
than expected Jobs data, we can see that last Friday's report
simply underscored the message sent by the Fed two days earlier.

My intent here is not to blow my own horn, as I think I'm probably
in error more often than I'm on target in trying to interpret all
this fundamental data.  But note that I'm not talking about Retail
Sales reports, Consumer Confidence, Industrial Production, Durable
Goods, or any one of a couple dozen less significant and I would
argue, less reliable reports.  I'm zeroing in on a couple of
significant pieces of data and attempting to get a bead on how it
will impact market action in light of the prevailing investor

If you're starting to follow the basic theme of what I'm trying to
convey, then I think this next example will really drive the point
home.  Let's look at some further commentary from that same LEAPS
column and then see if we can use some of the recent market action
to see how the initial observation might have given us a clue as
to why we should have expected what we've seen recently --
specifically broad market weakness.

But there is one issue that is causing me some concern on the
economic front.  It is the relative action in the CPI and PPI
reports.  Let's deal with the raw numbers, rather than core
numbers, as I think it is silly to remove such things as food,
energy and housing from the equations -- these are obviously
important factors.  Over the past 3 months, we've seen the PPI
rise by +0.5%, +0.7% and most recently +0.8%.  Let's forget about
the implications of projecting that out to an annual rate of
inflation and instead just note that we've seen a total increase
of +1.8% over the past 3 months.  Now let's look at the CPI
reports over the same period of time.  The CPI rose +0.4% in
March, followed by +0.3% in April and most recently +0.6% in May
for a total rise of +1.3% over the past 3 months.

Now let's review what these reports actually represent.  The PPI
is the Producer Price Index, which represents the rise (or fall)
in the cost to producers of finished goods.  The CPI is the
Consumer Price Index, which represents the rise (or fall) in the
price of goods we as consumers pay.  If PPI is up +1.8% in the
past 3 months and CPI is up +1.3%, it doesn't take a genius to
figure out that producers have not been able to pass all their
additional costs on to the consumer.  The bottom line there is
that profits will be squeezed.  That extra 0.5% has to come from
somewhere, doesn't it?  That, in a nutshell is my concern -- why
aren't the costs being passed on to the consumer?  Is competition
that stiff?  The corollary to that question is whether we're
looking at a strong rise in consumer prices in the months ahead,
as producers play catch up?

We all know that consumer expenditures make up roughly 70% of U.S.
GDP.  Could it be that we can't afford to pass all the additional
production costs on to the consumers for fear that it will cause
spending to slow down and thus threaten the strength of the
economic recovery?

In that commentary, I pointed to a view of the PPI/CPI reports
that suggested profits for Corporate America were being squeezed.
Now it could be that this would be a bullish factor or a bearish
one, depending on how it lined up with market expectations.
There's another piece of data that fits into this puzzle and it is
the recent trend of GDP growth.  While everyone knows we're
backing off from a level of growth that was unsustainable, too
much of a reduction from that blistering pace would suggest that
perhaps the economic recovery was in need of a fresh shot of
adrenaline (fiscal and monetary stimulus).  Sure enough, the
latest GDP numbers have raised that issue in investors minds, as
GDP has been falling back faster than expected.

However, prior to last week, the market has looked like it wanted
to go higher, with investors apparently leaning to the side of
optimism.  There just hasn't been much of an urge to sell.  But
that has changed significantly this week.  Why?  We've had a
steady supply of earnings news, and that news has been less than
what the bulls were hoping for.  But we've had numerous instances
in the past year or two where earnings failed to live up to
expectations.  Why is it different this time?

I believe the answer is that the optimism that had buoyed the
market up from its May lows was already starting to lose strength,
in large part due to investors becoming concerned by some of the
fundamental factors we've discussed here.  There wasn't enough
'bad news' to generate any real selling, but we did have the rally
stalling out for over a month, waiting for a couple key pieces of
data -- FOMC and employment data.

With neither of those pieces of information painting a picture of
underlying economic strength and concerns having been raised due
to the disparity between CPI growth and PPI growth, investors were
primed to sell if earnings failed to impress.  Essentially,
earnings needed to come in stronger than expected to put out the
fuse that had already been lit.  The opposite actually came to
pass here in the first real week of earnings reports, with a
combination of less than stellar earnings reports and some notable
warnings as well.

These disappointing earnings-related bits of news have had such a
significant effect because they are diametrically opposed to the
bullish views and optimism that lofted stocks off of their May

Mining for nuggets in all the meaningless drivel that passes for
significant news is not an easy business and it is a big part of
why I tend to focus the bulk of my energy on technical analysis.
It isn't infallible either, but it is easier for my analytical
brain to comprehend.  Technical analysis is based on mathematics,
which is a comfortable and familiar arena to me.  Fundamental data
analysis, on the other hand, is much more dependent on also being
able to read investor sentiment, which is a much less exact

Remember, no matter who you listen to for your analysis and
interpretation of various bits of what I call fundamental data, it
isn't enough simply to have the news reported.  Where the rubber
meets the road is in the interpretation of that data, subsequently
turning it into actionable trading advice.  Hopefully our little
discussion here today has helped give you a mental picture of the
sort of analysis interpretation to look for.  Keep in mind,
there's nothing that can guarantee the veracity of the analysis,
but if you're going to use it for the basis of trading decisions,
then you should at least be able to follow and agree with the way
in which the dots have been connected.

Best Trading Wishes!



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