 The ETF Authority for Monday, February 24th, 2003 Volume 2, Issue #8 Published weekly on Sunday evening, The ETF Authority is a short-term swing trading newsletter that can help you profit from some of the most heavily-traded securities on the market -- exchange-traded funds (ETFs). *Please
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MARKET SUMMARY Essentially, the stock market remains on tenterhooks, swayed mostly by every little statement in the current war of words over the future of Iraq. Gains on Friday were largely caused by the Iraqi vice president suggesting that his country was ready to talk to the U.S. as long as they halted their desire for aggression. Equities ignored mostly negative economic data and instead focused on the misguided belief that global protests against war, helped on by the French, will prevent war. War can hopefully be avoided, but only if and when Iraq provides conclusive proof that it has destroyed its chemical and biological stockpiles. If that happens, and you are short, unfortunately, you will rack up a very quick 5-10% loss. I do not see that outcome right now as being particularly likely. ECONOMIC ANALYSIS Last week's housing starts data surprised on the upside. Consensus estimates were for an annual rate of about 1.77M, and I had thought lower was possible. Instead, the final result came in at 1.85M, as low interest rates continued to expand this bubble. When housing bursts, the U.S. economy could be headed for trouble. PPI pretty much acted exactly as I forecast. I warned that the end of auto incentives would result in a core rate higher than consensus. In fact, I was too conservative here, as I thought that much of the incentive changes were going to show up in the CPI (they didn't). Ex-autos and energy, the gain was 0.3% -- certainly stronger than the string of negatives we've seen in the past year, but not inflationary. Please remember that manufacturers have not been able to pass on increased costs to consumers, so increases in non-core components of PPI hurt earnings and ultimately lead to unemployment. This is a deflationary risk and not a sign of impending inflation, as many clueless talking heads in the press and on Wall Street have suggested. I also warned that the Philly Fed index would come in way below consensus. The result was 2.3 from January's 11.7. Consensus was 10.5. Weekly claims rose more than forecast as well, which pressured stocks a bit in the early going last Thursday. The even-worse-than-I-expected PPI result meant that my concern that a stronger CPI was no longer going to be terribly likely, and it wasn't. Consumer prices came in slightly better than expectations, with the core number increasing by 0.1% in January. There are no important data due for release on Monday. At 10AM on Tuesday, we will see existing home sales and Consumer Confidence. Both figures tend to cause quick market blips, but rarely have a lasting effect on prices. Existing home sales stood at 5.86M in January. Consensus expectations are for a fall to -- or slightly below -- a 5.80M annual rate. Consumer confidence is seen slipping to the 77 area from its prior reading at 79.0. I expect a surprise on the upside, as the survey will likely capture the prior week's optimism over war with Iraq being pushed out. The improvement will barely be noticed though, as that optimism should have swung back by the time the report comes out. Seasonals should help keep durable goods orders on an upswing in Thursday morning's main release. Market consensus is for a gain of about 1.2-1.5% versus December's -0.2% fall. With economists typically unable to look past their own noses, and with defense spending way up, I would not be surprised to see the number perk up past 2.0%. However, ex-defense will likely be closer to a 0.5% gain. New home sales, due at 10AM, are really only a tertiary release. The second try on GDP is due out on Friday morning. The advance release for Q4 was a 0.7% gain. The preliminary release is seen improving towards 1.0%. These revisions rarely move the market, as the data are already quite old. Note though that the record trade deficit announced last week probably has some of the consensus forecast dropping back a bit from that 1.0% number. The Chicago Purchasing Manager index (10AM on Friday) is expected to slip towards 54 in February from 56 in January. This is sometimes seen as a leading indicator of the national ISM report, but the relationship is irregular at best. I see little sign of strength here, but anecdotal evidence does not give me reason to fear a huge fall-off either. I am looking for a result in the 52-54 range. WHERE DO WE GO FROM HERE? Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...
TRADE #1: WRITE A DOW DIAMONDS (DIA, $80.24) OUT-OF-THE-MONEY PUT AND USE IT TO FINANCE THE PURCHASE OF AN OUT-OF-THE-MONEY CALL I recommended this trade two weeks ago, but it was not executed. I still think it makes sense. This is a fairly complex strategy. I am essentially betting that the put option will expire worthless and that the call option will increase in value over time. Here's how the trade will look: First, sell a June 2003 56 put on DIA (that is about 30% below current prices). Second, buy a June 2003 88 call on DIA (this Dow-tracking ETF hit $88 in mid-January). As you may recall, I expect new lows shortly, but after that, I am looking for a rally and I forecast the Dow, S&P and Nasdaq to all finish the year in positive territory. When you put on this trade, you MUST complete both transactions (selling the put and buying the call) at the same time. In order to complete the trade effectively in advance, you'll need to be able to tell your broker the price difference you want to put the trade on at. (Alternatively, you can watch the market and wait for the appropriate price points to be reached.) The closes on Friday were $0.50 for the 56 puts and $1.60 for the 88 calls. However, since I expect the market to fall another 10%, I would not put the trade on at a spread of $1.10 ($1.60-$0.50). In fact, you will probably be able to put this trade on near flat, or possibly even for a small credit.
******************************************** ...AND SIMULTANEOUSLY... Buy DIA June 2003 88 Calls when the price of the calls is the same as the price of the puts TARGET: Close position when price of calls moves
to $1.60 above the price of the put.
I recommended this trade last week and I continue to believe that it makes sense.
As you can see, there is a pretty good three-wave fall
that looks to be completed here. I'm looking to buy on a dip for the rest of
wave-4 higher. This trade looks to sell once the corrective rally is over
for the final fifth-wave drop. The sell area will be at the 38% retracement
of the shown wave-3 with a final target at a minimum, to match the recent
nadir, and probably somewhat below there. TARGET: $71.73
RTH is about to complete a five-wave advance off its recent low, set at $63.21 on February 13th. I expect to see a new high set on Monday or Tuesday, then we could see a correction lower. As long as prices exceed last week's highs to complete a five-wave advance (prices must touch at least $67.41), then I would purchase this ETF on a pullback. The long-term count may actually show that a bottom is already in here. However, even if it isn't, there is a decent shot that this beleaguered sector is due for an oversold bounce. The most recent low came in three waves and with momentum divergences. MACD (weekly) is getting set to cross positively and the week before last saw a hammer, which is a bullish Candlestick, especially on a weekly timeframe. Retail stocks have priced in all sorts of bad news at this
juncture, and the earnings season is largely past us. Next week's numbers
will be atrocious from the weekly chain store sales data due to the blizzard
in the northeast, but once that is behind us, numbers will start to look a
bit better. We will have rotten comparisons in March, as Easter is late this
year, but that will be well advertised. As such, I expect investors to look
past those results, so there will be no hard negative news before April,
when Easter rolls around again. Only a terror strike would hit this sector
at this point, in my opinion, and the charts cannot help us there! TARGET: $71.00 If you're currently a Free
Trial subscriber to The ETF Authority, then your subscription
is about to run out! Subscribe
today to ensure that you don't miss a single one of editor Steven Poser's
recommended trades... 4. CONTINUED GUIDANCE ON PREVIOUS TRADES TRADE #1: BUY THE S&P MID-CAP SPDR (MDY, $74.90) ON A PULLBACK MDY never dipped enough to buy. I have now cancelled this trade.
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