Option Investor

Daily Newsletter, Saturday, 04/16/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Rate Hike Recession

WE 04-15


WE 04-07

WE 04-01



- 381.00


+ 57.04


- 38.57



-   91.20


+ 14.54


-   6.25

S&P 100


-  14.93


+   4.69


-   0.22

S&P 500


-  38.58


+   8.28


+  1.50



- 387.81


+ 65.86


+  7.05





+   5.73


-    4.66



-  29.97


-    0.80


-    3.71



- 216.92


-  89.91


-  58.06














Rate Hike Recession

The Fed has a habit of raising rates until they create a recession and indicators from multiple sources suggest they have hit that target already. Economic indicators are turning down in rapid succession and stocks are following in hot pursuit. Conflicting earnings and falling sentiment sent traders heading for the exit in droves and the Dow posted the worst three-day drop since Jan-2003.

Dow Chart - Daily

Nasdaq Chart - Daily

Friday's economics turned decidedly worse with the NY Empire State Manufacturing Survey falling to only 3.1 and far below consensus estimates of 19.0 and the 20.2 posted in March. It was an ugly number and one that echoed the economic sentiment being felt among traders. This was the lowest number recorded in over two years. It is a dramatic sign of a slowdown in the New York area and mirrors some other reports showing sharp drops in activity over the last month. New orders fell into negative territory at -0.2, back orders -8.3, inventories -1.6 and the average workweek dropped to -4.4. All indicators of a drop in activity and a forecast that employment could fall sharply soon. Only 27% of the respondents reported an increase in orders. This was down from 38% in March. Another 27% of respondents reported a decline in orders for the period. Prices paid rose sharply to 53.2 from 48.8 in March and suggests inflation is rising through the product chain. Overall the six-month outlook fell from 44.5 to 36.8 and gives us a clue as to what manufacturers expect for the summer. The recent cycle high of 62.1 was posted in Sept-2004.

Consumer Sentiment fell to 88.7 in April from 92.6 in March. This was the fourth consecutive monthly decline from December's cycle high of 97.1 and April was the largest decline for those four months. The expectations component fell to 79.0 from 82.8 and the present conditions component fell to 103.9 from 108.0. Expectations are dropping faster than the current conditions component and suggests consumers are becoming increasingly worried about the future. The price of gasoline and rising heating bills are weighing on consumers as they try to stretch their dwindling dollars as far as possible. Friday's number was the lowest level of sentiment since September-2003. The Consumer Sentiment and Confidence numbers directly relate to how much money consumers are expected to spend over the next six months. Those consumer numbers are also felt in corporate boardrooms as they plan their investment depending on how they feel the economy will do over the coming year. It is a line of dominoes and once that line begins to fall it can have long term consequences.

Industrial Production rose slightly at +0.3% and only +0.1% over last months level. The majority of the gains came from oil wells and mining. The higher oil prices stimulated reactivation of marginal wells and that offset a decline in manufacturing output. There were also some indications that employment may be slipping as manufacturers start taking early measures to avoid over employment during an approaching slump. Higher productivity comes from more output per worker and fewer workers skew that number higher.

The drops in economic news was not as damaging to the market as the IBM earnings comments. IBM surprised investors by releasing earnings two days earlier than expected and it was a nasty surprise. IBM missed earnings estimates by a nickel and revenue fell well below analyst's estimates. IBM said the quarter started strong but weakened significantly as the quarter progressed. They claimed it was tough to close transactions in the final weeks, especially in countries with soft economics. IBM singled out Japan, Germany, Italy and France as very soft economies and on the verge of a recession. IBM said revenue rose +7% in January falling to +5% in February and then dropping to a decline of -0.1% in March. This dramatic drop in sales for a company as large and diverse as IBM sent shockwaves through the tech sector. They also said they would be embarking on a sizeable restructuring program over the next three months to combat the soft patch they are seeing. The IBM earnings miss and economic warning was even worse since they released the news unexpectedly two days early and just before option expiration. I am sure thousands of option holders were cruising calmly into expiration only to be blindsided by the news. Of course those holding puts were extremely pleased with their windfall from the -$7 drop. IBM's drop was responsible for a full 25% of the -191 Dow drop on Friday.

IBM Chart - Weekly

Helping confirm the news from IBM was news from a couple of high profile brokers. SG Cowen said spot checks at several locations showed an abrupt slowing of tech orders over the last 2-3 weeks. They said it was not only IBM but the slowing was widespread. JP Morgan also released a note that said corporate IT spending had slowed over the last several weeks AND it appeared it would continue through Q2. IBM was not the only tech to miss earnings. SUNW announced on Thursday and earnings missed estimates by -2 cents and elected not to provide estimates for the current quarter. Executives did say cost cutting efforts were on track. That is not what investors want to hear. CEO Scott McNealy tried to remain upbeat and expressed hopes they could return to breakeven soon. Gosh, that would be exciting. (grin) After a loss for the same period last year of -23 cents I bet he would be happy getting back to even but it is difficult to calculate a PE when there is no "E".

On the flip side GE reported a +25% rise in profits to 38 cents per share and beat the street by a penny. GE raised full year estimates slightly to $1.78-$1.83 from their prior $1.76-$1.83. I know that minor distinction is lost on most of us but the key point is they did not lower it. Nine of GE's divisions grew by more than 10% in the quarter. Profits were also helped by the sale of Genworth stock in a secondary offering. GE said it was positive about the future but that view was not shared by everyone. S&P reiterated a "hold" on GE stock and told investors not to add to positions at this level. S&P said GE was unlikely to sustain double-digit earnings growth despite Immelt's assurance to the contrary. GE has been trading flat for nearly four months and at the high end of its range. Dead money or a safe port in the storm? Over the 200-day average at $35 it would be a safe port given their announced buyback of $15 billion in shares. Under $35 it would tell us that investors are losing confidence in GE and its forecasts.

In plain English Friday's market was ugly. It was the largest one-day drop on the Dow since March 2003 and the largest three-day drop since January 2003. Volume was huge at 5.56B shares across all markets. It was nearly one billion more than Thursday's volume of 4.7B, which was the strongest volume day since Feb-28th. This sudden surge in volume, mostly down volume, looks very bad. On both days up volume was only 800 million shares. That was 4.5:1 in favor of declining volume on Thursday and 6:1 on Friday. Wednesday was 4:1 in favor of decliners. This is a monster change from our prior lackluster trend. There were numerous reasons for the investor flight including those I mentioned above. Primarily it was blamed on the consumer with a warning from Harley Davidson and slowing sales at Wal-Mart. Energy prices are finally filtering through sales and earnings as consumers retreat to the safety of the family TV rather than wandering the malls. Comcast said there has been a surge of usage in their on-demand movie services. This is causing problems not only for Blockbuster and Hollywood Entertainment but discretionary spending in general. As much as consumer weakness is impacting the economy I don't believe it was a material reason for this weeks weakness.

I believe there were multiple reasons for the drop this week. Many I have been repeating twice a week for a month. However, I believe the current three-day drop was nearly entirely tax related. We had a weak market for the prior three weeks but the charts changed significantly this week. Remember last Friday? We saw a strong bout of selling begin at resistance after the four-day rebound from the 10360 lows on the Dow. That selling was just like what we saw this week, slow but steady volume and mostly to the downside. This was attributed at the time to the coming FOMC minutes. When they were released and the initial press reports saw a calmer Fed with no urgency to the rate hike cycle we saw a huge short covering spike back to 10529. I said at the time it would probably not hold and the drop came as expected but not in the manner expected. Doing some chart forensics the Dow held at those levels until exactly 1:PM on Wednesday. When the clock struck 1:00 a monster sell program hit and the selling never relented for the next two days and accelerated into the close on Friday. Before 1:PM trading was listless with volume evenly split between advancers and decliners.

Dow Chart - 30 min

The key point here is the dramatic change in market internals at exactly 1:PM on Wednesday. I believe a large hedge fund, maybe several large funds or institutions needed to raise cash for tax payments. Everyone had waited for the last three weeks hoping the earnings cycle would generate some excitement and they could recover some of the March losses before selling to pay the taxman. When the calendar began to expire AND with the sudden appearance of negative economics and negative tech guidance, they pulled the exit trigger. While this may have only been a few large hedge funds they significantly impacted the herd sentiment in a negative way. Once the herd turns it tends it tends to stampede with the majority of traders unsure of why.

I heard over and over on Friday comments about "Black Monday" and the potential for a reoccurrence. I would discount any of those comments as emotional and reflecting the sudden switch to extreme pessimism. I don't see the same factors in play as Black Monday but I would not rule out any further selling. The markets always over react in both directions but most notably to the downside. While the hedge funds may have only started the ball rolling they did succeed in changing the balance of power in favor of the shorts. Sell stops were hit, dip buyers were steamrolled over and over and the survivors headed to the safety of the sidelines OR switched sides to trade the trend.

Why was this downdraft so strong? Because the upside rally was so long. Remember, hedge funds have made billions in energy stocks and commodities over the last year. Regular mutual funds have made a killing as well. Literally billions upon billions in profits have been generated. For those who believe as we do that $50 oil is an entry point those same funds were faced with a conundrum. Sell energy or sell stocks? The answer was evidently sell stocks. With the upside for stocks questionable at best in light of the Fed hike cycle there was no future for a long-term hold of stocks over the summer. On the energy side there is a strong possibility we will see another ramp into the fall with oil hitting new highs once again. This was an obvious choice for me. If you have to raise cash you sell the investments with the lowest potential for future returns. Complicating the tax problem was a significant shortfall in cash inflows to funds over the last quarter. AMG Data said stock funds only had inflows for the quarter of $55.8B compared to $88.7B for Q1-2004. For funds counting on last minute retirement contributions to make distributions it was a meager allowance. Funds see large cash flows around tax season as some investors make retirement deposits while other investors withdraw funds to pay taxes. The -37% drop in inflows from last year means funds had to sell stock to make the distributions.

The Dow came to rest at 10080 for a -450 point drop from Wednesday's highs. The Dow transports fell to 3379 for a -7.5% drop from the week's highs. All the major indexes broke their 200-day averages but the combination of the Dow and Dow Transports failing at the same time produces a strong Dow theory sell signal. It does not get much worse than this. Long-term uptrend support was broken and the Dow dropped into free fall below 10375 that could easily take it back to 9800.

The Nasdaq cracked uptrend support dating back to October-2002 and left the critical 200-day average well behind at 1991. The average had provided support for three weeks but once broken becomes a major sell signal for tech funds. The Nasdaq retreated to 1908 at the close and just above decent support at 1900. I have mentioned this number several times as a potential target over the last several weeks.

The S&P may not have cracked as badly as the Dow and Nasdaq but it did fail and in spectacular fashion. What should have been decent support at 1160 was barely a blink as the index plummeted to earth. Like the other indexes the two-year uptrend support failed as well as the 200-day at 1153. Unfortunately the S&P has farther to fall if it is to catch up to the Dow and Nasdaq. The equivalent level would be support at 1100.

S&P Chart - Daily

Crude Oil Chart - Daily

The key for next week is not what happened last week. If the selling was stimulated by tax payments then the selling surge should be over. However, regardless of the reasons that pushed the averages over the cliff we did go over the cliff and like in the Wylie Coyote cartoons it could be a long way to the bottom. Also, like in the cartoons there is normally a rock, anvil or some suitably heavy object always following him down to add additional pain. The severity of our drop, although likely program related, should trigger additional reactive selling on Monday. The potential for dip buyers to rush back into the market is somewhat subdued given the close proximity to 10000/1900. Those levels have likely become targets for buyers and the best scenario would be for a touch sometime Monday morning. That would clear the rest of the margin calls, sell stops and weak holders and give buyers a little more confidence. Bear in mind that the weekend newspapers are going to be filled with stories on how bad the markets are this week and why. This could produce some more reactive selling. Everyone wants to avoid a repeat of the summer of 2004, or worse.

If you look at the oil chart you will see that oil stopped its decline on Wednesday at $50 and a support level I mentioned several times over the last couple weeks. Despite the drop in the equity markets the price of oil remained stable. This confirms my theory that funds were not willing to dump oil at a significant entry level and elected to dump other stocks instead. The 100-day average is currently just over $49 and that is giving additional support to the psychological $50 level. Will it go lower? Yes, no, maybe and who the heck knows. We are only barely into the Q2 demand slump and oil inventories have increased for the last seven weeks. We have all the makings for a continued dip but the lack of a fade over the last three days suggests the speculators are still buying the dips. You can put me in that column as well as I will be entering several oil positions in the Leaps section this weekend. In past commentaries I have suggested entering positions at $50 and adding to those positions should we dip below $50. The most bullish period for oil is the late summer and fall and everyone needs to be positioned well ahead of that strong demand cycle.

For equities in general I would still avoid long positions for other than a trading bounce. We are grossly oversold and unless real underlying sentiment has changed drastically we should get a tradable bounce next week. Personally I would use any bounce as a short entry but realize a bounce could last several days. Old habits die hard and dip buyers learn slowly. The Fed may use any visits to the podium next week to allay fears that they are going to push the economy to its knees. However, I believe that historically 76% of Fed rate hike cycles eventually produce a recession. I have heard numbers over 80% but I think the 76% quote is more realistic. Either percentage does not paint a pleasant picture for our future. Once the Fed embarks on a rate hike cycle it is like stopping a bulldozer. They tend to just keep plodding forward regardless of the economic surroundings until they reach their desired rate level, which in this case appears to be about 3.5% and three hikes away. That sets up the August meeting as the pivot point for a change in Fed action. Coincidentally it is also just before the typical Sept/Oct crash that makes such a good entry point for year-end trades. I believe that the coming summer doldrums will be just that, doldrums. The markets will be range bound and lifeless until fall as they wait to see if the economy recovers from the current soft patch, the Fed moves to the sidelines and where oil is headed in the next up cycle. This is not a good environment for buy and hold investing. It is a great environment for option traders and we will try to quickly determine the range once it is set and profit from the swings.

I have been warning about the impending market decline for several weeks and anyone following my advice would have been flat/short before this weeks decline began. I discussed in these pages that the rebound in early April was likely to fail at resistance and that the short covering spike from the Fed minutes would likely fail as well. I have been warning everyone not to be long for several weeks. I received numerous emails trying to convince me that my viewpoint was wrong. Didn't I know that companies were going to report great earnings and the market was going to new highs? Didn't I realize that the economy was in a stealth rally? Everyone should have their own market view and opinion. This is what makes a market and allows us to generate profits when we are right. The only point I would make is that traders should not be married to their bias or their positions. Do your research, read our commentary and form your own opinions. Just don't keep throwing money at those opinions if they turn out to be wrong. The market can move opposite your bias longer than you can stay solvent. Don't be afraid to switch sides when trades don't go as planned. Anyone following my advice over the last month should have paid for his or her subscription many times over. Now, take that extra money and buy some energy stocks!

SOX Chart - Daily

For next week I would look for a rally attempt and one that could last several days. However, since IBM stunk up the earnings parade so successfully the urge to buy may turn into excessive caution ahead of the heaviest earnings calendar for the current cycle. Do you think investors really want to be caught holding MMM, INTC or any other high profile stocks as they announce? I would bet the urge to gamble on an upside surprise has faded. Remember last Tuesday when I highlighted the chip stocks scheduled to announce as the key to tech direction? With several misses and poor guidance the SOX was already headed south at a high rate of speed by Thursday's close and IBM gave it a huge push. The SOX closed at 382 on Friday and well below the 410 and 400 support levels we had been watching. At 382 it is retesting the January lows and only slightly above lows for the last two years. Should Intel trip on Tuesday we could blow past those lows in a heartbeat. We also have the book-to-bill on Tuesday night so it could be a 1-2 punch for a knockout OR a first and second stage rocket higher if both are positive. Either way chips should go directional on Wednesday and that will be the spark or anchor that determines market direction for techs.

I have run out of space today but I feel like I could ramble for five or six more pages. This is a very critical point in the markets BUT it is not the end of the world regardless of what you hear on TV. Be patient and only take entries that you love and at prices you will be comfortable with even if you did not catch the turning point. There is always another trade as long as you protect your capital. This is not a time to be shooting from the hip but time to be a sniper instead. Pick your targets carefully and well in advance. Plan your trades and execute your plan and most of all enter passively and exit aggressively.


New Plays

New Option Plays

Call Options Plays
Put Options Plays

- Editor's note! -

We are not adding many new plays to the newsletter this weekend and it's not for lack of candidates. In reality the number of bearish candidates is overwhelming. The damage done by the Dow's 420-point drop in three days and the similarly impressive declines in the S&P 500 and the NASDAQ Composite is very widespread. While we do expect more weakness on Monday, and maybe on Tuesday, odds are very good that an oversold bounce will hit this week. Therefore we do not want to add new bearish positions when we could be facing a very sharp oversold bounce in just a couple of days. We would prefer to be patient and wait to see just where the coming bounce fails. Then we can begin to choose what candidates would do well as bearish plays. The opposite holds true for bullish plays. We do not want to add new bullish plays this weekend if we're facing another decline on Monday. We would prefer to wait and see where and when the market bounces before considering new bullish plays. Rest assured that we will be looking for the best entry point on both bullish and bearish plays this week.

New Calls

Patterson Cos. - PDCO - close: 51.68 chg: +0.63 stop: 49.45

Company Description:
Patterson Companies, Inc. is a value-added distributor serving the dental, companion-pet veterinarian and rehabilitation supply markets. (source: company press release)

Why We Like It:
PDCO's relative strength these past few days in the face of a market melt down has been very impressive. Shares have merely consolidated sideways while most of the market sank. This has kept PDCO in its rising bullish trend with technical support at the 50-dma. Shares even managed to tag a new high on Friday before fading into the afternoon. We suspect that the markets will continue lower on Monday when the rest of the investing public gets a chance to react to the weekend headlines of Friday's big market drop. PDCO is not completely immune and we want to see shares of PDCO slip back toward support near the $50.00 level. Our strategy is to buy a dip and then target a move toward the next level of resistance near $55.00. We are suggesting that readers buy a dip in the $51.00-50.00 range. The OI daily newsletter will set an official TRIGGER to buy calls if shares of PDCO trades at $50.75 or lower. We suggest to our readers that the preferred entry point would be to wait for PDCO to dip and then begin to buy the bounce. We'll set the stop loss at $49.45, which is just under the simple 50-dma. We will exit the play before PDCO's May earnings report.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 50.00 DOU-EJ OI=111 current ask $3.20
BUY CALL MAY 55.00 DOU-EK OI=709 current ask $0.85

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/19/05 (unconfirmed)
Average Daily Volume = 789 million

New Puts

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Red Robin Burger - RRGBE - cls: 52.00 chg: +0.25 stop: 49.49

RRGBE continues to show very impressive relative strength. The fact that RRGBE closed higher during Friday's market massacre is very impressive. However, we are still suggesting that more conservative traders exit for a profit. We are not suggesting new bullish entry points at this time. Odds are good that if the markets keep falling RRGBE will pull back toward the $50.00 level again.

Suggested Options:
We are not suggesting new bullish plays at this time.

Picked on March 10 at $ 48.00
Change since picked: + 4.00
Earnings Date 02/14/05 (confirmed)
Average Daily Volume = 199 thousand

Put Updates

Expeditors Intl Was. - EXPD - cls: 48.17 chg: -1.14 stop: 52.51

EXPD is a new put play from the Thursday night newsletter. Shares tried to bounce on Friday but quickly failed at the $50.00 level. The stock is oversold and due for a bounce and traders should still be prepared for an oversold rebound. Yet we believe the trend has changed especially with the big breakdown in the Dow Transportation index. A reprint of the Thursday night play description follows:

Disappointing retail sales have fanned the flames of investors' fears of an economic slow down. The transportation sector is getting hit hard since it is a big target for profit taking after its 2004 rally. The Dow Transports just broke down under its simple and exponential 200-dma on big volume. Meanwhile, EXPD, which had already broken below its 200-dma's a few days ago, is closing under the $50.00 level for the first time in months. The technical picture looks pretty sour and the P&F chart also shows a triple-bottom breakdown sell signal with a $42.00 target. However, it is worth noting that the P&F chart does show EXPD near support. Normally, this would persuade us from not playing the stock but considering the market weakness we are going to add EXPD anyway. Shares are somewhat oversold so be prepared for a possible bounce toward the $52.00 level before EXPD trades lower. We are starting the play with a stop loss at $52.51. Our target is the $46-45 region and we plan to exit before EXPD's earnings report which is only three weeks away.

Suggested Options:
We are suggesting the May puts because we plan to exit before the May earnings report.

BUY PUT MAY 50.00 URP-QJ OI=747 current ask $5.30
BUY PUT MAY 45.00 URP-QI OI=113 current ask $4.80*pricing error?

Picked on April 14 at $ 49.31
Change since picked: - 1.14
Earnings Date 05/04/05 (unconfirmed)
Average Daily Volume = 748 thousand


Ishares Russ 2000 Val - IWN - cls: 175.13 chg: -2.91 stop: 183.51

IWN is a new put play from the Thursday night newsletter. The market sell-off on Friday really helped confirm IWN's technical breakdown below the 200-dma. The drop also pushed its P&F bearish target from 162 to 158. Volume was very heavy on the decline. IWN is short-term oversold and could bounce back toward the 180 level before continuing lower but we can't predict when or if any oversold bounce will occur. More patient traders might want to wait for a bounce and then buy puts on a failed rally attempt. A reprint of the original play description follows:

Now that the major indices are breaking down left and right we wanted a way to play the "market". Unfortunately, the DIA Dow Diamonds and the NASDAQ 100 QQQQs don't seem to move fast enough for short-term directional option plays. That's why we're suggesting readers consider puts on the IWN or the Russell 2000 Value index Ishares. We like the IWM as well but the IWN appears to offer more movement, which is what we want in an option play. Looking at the chart of the IWN we see a technical breakdown below support at the 180 level and its simple and exponential 200-dma's in the 179 region. Volume was heavy on the sell-off today. Technical oscillators are naturally negative. The IWN's P&F chart shows a sell signal with a 162-price target. We are going to target a move to the 170 level over the next six to eight weeks.

Suggested Options:
We are suggesting the May puts. The next month available would be August puts.

BUY PUT MAY 185.00 IWN-QQ OI= 118 current ask $10.80
BUY PUT MAY 180.00 IWN-QP OI=1366 current ask $ 6.90
BUY PUT MAY 175.00 IWN-QO OI= 281 current ask $ 4.00

Picked on April 14 at $178.04
Change since picked: - 2.91
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 324 thousand


Starbucks - SBUX - close: 47.34 chg: +0.47 stop: 51.75

Uh-oh! Bears should be on the alert. SBUX's sudden show of strength on Friday when the rest of the market was falling is not a good sign. Granted shares didn't add much but the relative strength is a concern if you're holding puts. Of course the reason SBUX was positive was an upgrade from Bear Stearns to an "out perform" rating. This short-term pop could easily wear off. We initially added SBUX on its technical breakdown below the $50.00 level, the February lows and its 200-dma's. The P&F chart confirmed the breakdown with a sell signal pointing to a $38 target. Now the decline seems to have lost its momentum and SBUX is trading sideways in a range between 46.50 and 48.50. If the market bounces next week, and we do expect an oversold bounce eventually, look for SBUX to rally back toward the $50.00 level, which should be overhead resistance. More patient traders can wait for SBUX to trade toward $50.00 and then buy puts on a failed rally there. Our target remains the $45.00-44.00 range.

Suggested Options:
We are suggesting the May puts

BUY PUT MAY 50.00 SQX-QJ OI=4788 current ask $3.50
BUY PUT MAY 47.50 SQX-QT OI=3404 current ask $1.90
BUY PUT MAY 45.00 SQZ-QI OI=1475 current ask $0.98

Picked on April 10 at $ 48.62
Change since picked: - 1.28
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 4.3 million

Dropped Calls

Research In Motion - RIMM - cls: 69.70 chg: -1.63 stop: 72.49

It was an ugly, ugly day for tech stocks and RIMM was no exception. Shares lost another 2.2 percent to breakdown below the round-number, psychological $70.00 mark and its exponential 200-dma. This looks more like a bearish entry point than anything else. Since RIMM never traded at or above our entry point to go long at $78.25 we are closing the play unopened.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/05/05 (confirmed)
Average Daily Volume = 10.1 million


Whole Foods - WFMI - close: 98.04 chg: -1.11 stop: 98.99

Bulls didn't have much of a chance on Friday with the market's third day into a sell-off. Yet shares of WFMI tried to bounce Friday before failing at the $100 level. Unfortunately it was too little too late and we have been stopped out at $98.99. We will be keeping an eye on WFMI for a possible rebound if shares hit $95.00 or their 200-dma.

Picked on April 06 at $104.16
Change since picked: - 5.72
Earnings Date 05/03/05 (unconfirmed)
Average Daily Volume = 956 thousand

Dropped Puts

Wynn Resorts - WYNN - cls: 59.82 chg: -2.34 stop: 68.05

Target achieved. The sell-off in WYNN on Friday with its 3.7 percent decline on very big volume was due to two factors. First and foremost was the broader market sell-off. Second was rumors that the company would be forced to delay the opening of its new casino set to launch on April 28th. The drop in WYNN was more than enough to hit our exit/profit target at $60.50 and we are closing the play. Bears still holding positions should be careful. WYNN is oversold and managed to bounce from its exponential 200-dma near $58.00 on Friday.

Picked on April 03 at $ 66.04
Change since picked: - 6.22
Earnings Date 04/29/05 (unconfirmed)
Average Daily Volume = 1.1 million

Trader's Corner

Sweeping Up

Excess cash in your brokerage account may be swept into a money market fund or third-party bank account.  Some brokerages offer a choice to customers.  This reporter's did when a new account was recently opened.  Some don't.  Some may change the way they handle excess cash without requesting new consent forms.  Brokerages often reason that customer agreements allow them to change the cash sweep plan or implement a new one without further consent required from the customer.

The NYSE isn't sure that practice is always fair.  On February 16, 2005, the NYSE published Information Memo 5-11 advising member organizations as to how they might disclose changes to their sweep plans.  The memo expressed concern that some changes might be beyond those the customer reasonably anticipated when customer agreements were originally signed or might be so significant that the prior customer agreement did not seem sufficient notice.

This might be true, for example, if a third-party bank to which funds are swept might offer an interest rate significantly different than that in a money-market account into which the cash was previously swept.  Even if rates are comparable, perhaps the rate offered by the bank might be a short-term or promotional rate.  The member organization's plan might include a lower future rate to customers.  Brokerages are not normally required to seek the highest rate possible for their customers, and may in fact receive money from the bank for the cash swept into that bank.  The bank sometimes compensates by offering a lesser rate.  Brokerages changing plans to sweep into a money market account from a bank may eliminate FDIC coverage of customer cash, and those planning on sweeping into a bank account rather than a money-market account may eliminate SIPC coverage.

Information Memo 5-11 advised that member organizations should submit new plans for review.  Customers should be advised if brokerages receive payment from banks for sweeping funds into those banks, among other potential conflicts of interest.  In a one- or two-page document in plain English, the difference in interest rates in those accounts and those that might be obtained in a money-market account should be revealed to customers.  If the brokerage plans to sweep funds in excess of $100,000 into a single bank, FDIC coverage will be affected on the funds in excess of $100,000.  If the bank accepts customers other than the brokerage's sweep account, prior accounts at that bank may impact insurance coverage, too.  The customer needs to know about all these issues, the NYSE argues.

The exchange asks that member organizations prominently post information about sweep plans on their websites, update that information frequently, and also mail information if they have no websites.  Representatives should be trained to discuss the impact of the various choices made by the brokerage or available to the customer, if choices are offered to the customer.  Failure of the member organizations to adequately follow the suggestions set forth in Information Memo 5-11 can be considered conduct inconsistent with good business practice under various exchange rules. 

Member organizations that had previously made changes to their sweep plans that might have been significant are urged to disclose such changes to their customers as soon as possible, but at least within three months of the publication of Memo 5-11.  Some brokerages could conceivably be just now informing customers of disadvantageous changes in their sweep plans.  If brokerages were rushing to provide that information on their websites, however, it wasn't prominently displayed or readily found on quick searches of major brokerages with websites.

Traders might pay particular attention to those disclosure statements that might arrive in the mail, considering how sweep plans might impact them financially.  Are choices now offered and which might be best?  For traders who need tax-free income, a tax-free money-market fund might offer some advantages.  A trader's financial advisor will be the best person to consult for more information.  If the excess cash will not be needed immediately, options might widen more than for those who need more liquidity.  Having FDIC coverage might be of prime concern to some brokerage customers, and those with more than $100,000 in excess cash would then want to ensure that a brokerage that sweeps cash into third-party banks sweeps into more than one bank or into the same bank in separate capacities.  Interactive Brokers notes that "[C]ustomer securities accounts . . . are protected up to $30 million (including up to $1 million for cash.)" by securities account protection provided by Securities Investor Protection Corporation (SIPC) and Lloyd's of London insurers.

Fast execution, readily available customer support and easy-to-follow trade and account information may be more important to some traders than a difference in interest rates available for swept funds.  However, most traders would want to know if their brokerages were engaging in conflicts of interest.  Traders should check into the methods their brokerages use for sweeping.

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.


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