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 minimal. 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 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 ******************** 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 open. 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 lows. 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 entries. 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 ************************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 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 $55 billion cash hoard. Overall today's internals were very bearish. Decliners outnumbered advancing issues 19 to 8 on the NYSE and 23 to 7 on the NASDAQ. Down volume was about four times up volume on both exchanges. Bulls will be disturbed to see the Industrials close under its simple 200-dma today while the NASDAQ composite has completely fallen through the bottom of its trading range and potential support at 1950. Look for the S&P 500 index to test support at 1100 and its simple 200-dma soon. Maybe then we can see an oversold bounce. Looking ahead to tomorrow Wall Street will be focused on General Electric's (GE) pre-morning earnings report and guidance for the third quarter. Estimates are set at 37 cents a share. ----------------------------------------------------------------- Market Averages DJIA ($INDU) 52-week High: 10753 52-week Low : 8996 Current : 10171 Moving Averages: (Simple) 10-dma: 10311 50-dma: 10235 200-dma: 10178 S&P 500 ($SPX) 52-week High: 1163 52-week Low : 960 Current : 1109 Moving Averages: (Simple) 10-dma: 1128 50-dma: 1118 200-dma: 1100 Nasdaq-100 ($NDX) 52-week High: 1559 52-week Low : 1204 Current : 1431 Moving Averages: (Simple) 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 points. ----------------------------------------------------------------- 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 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 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 **************** 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: ***** 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 = PUTS: ***** 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 = ************************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 ******************** 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 = ************** NEW CALL PLAYS ************** 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 = ************************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: 26.26 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 = ************* NEW PUT PLAYS ************* None ************************Advertisement************************* No time to follow the Market Monitor? 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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 ********** WATCH LIST ********** 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 levels. Chart= --- 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. Chart= --- 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. Chart= --- 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. Chart= ----------------------------------- 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. ************************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 ************************************************************** ************************ 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 spread? 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. _______________________________________________________________ JULY POSITIONS 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 necessary. 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 $12,500. 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. ONGOING POSITIONS 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 $800. 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 investment. 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 strategies. ************** TRADERS CORNER ************** 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 sentiment. 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 lows. 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 science. 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! Mark ************************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. 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