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Volume 6, Issue 6 - $7.95 
Monday, June 2nd, 2003

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June 2003 Issue's Featured Articles:
Stocks to Watch in This New Market	Market’s Leading Groups
Investing For the New Millennium   By: Kenneth J. Gruneisen	A New Beginning - Let's Not Make the Same Mistakes By: Dale I. Glaspie
Are You Afraid Of Investing Your Money? By: Soraya Nasrallah

History Says the Strong Pace for 2003 Could Continue
by Kenneth J. Gruneisen, Registered Investment Advisor, Source Capital Group, Inc. Members NASD/SIPC

Right now the most impressive thing to be said for the market is being said by the S&P 500 Index and Nasdaq Composite.  Their charts are saying a lot!  These are the bellwether indexes that fund managers usually strive in vain to keep pace with, and they are certainly doing their part at setting a strong pace for 2003.   

The S&P 500 Index was able to break above its long-term downward trend line, sooner and more convincingly than a lot of us had imagined possible.  The three major indices are now clearly trading above their rising 200-day lines, a point we noted last month was about how these important long-term moving average lines had flattened out and turned upward.  Readers may also recall how our May issue pointed out that Nasdaq was closing in on its December ’02 high of 1,521.  We said, “There doesn’t appear to be much technical chart resistance for the COMP all the way up to 1,700 once it manages to break out of the present ‘sideways trading range’.”  And it did break out!   

Now, when studying the longer-term chart action, a key target worth looking at might be the Nasdaq Composite’s January 2001 peak, which was just shy of the 2,100 mark.  In discussing whether the market will be able to sustain such a massive rally, we’ll point out that reaching that critical level would mean a rise of almost 90% in the tech-heavy index from its October 2002 low.  I am sure that would seem to many investors like a foolishly giddy forecast, and by the end of the year I would be as stunned as anyone else if it were to happen.  However, serious consideration should be given to the fact that the Dow lost 89.5% from its Sept. 3, 1929 closing peak at 381.17 to its low of 40.56 in 1932.  And when it comes to impressive gains, nothing compares to Mar. 15, 1933 for the largest percentage gain of the DJIA, up 15% or 8.26 points to close at 62.10. But did you realize that the Dow did manage a gain of 147.7% from its 1932 low to its close at the end 1933?  Yes, it did! 

That look into the history books sets a rather interesting precedent for continued market volatility!  And while, thankfully, today we are not looking at people standing in long lines for bread and cheese handouts, making the comparison with the Great Depression Era market and that of the present day is not entirely inappropriate given the Nasdaq’s near 80% drop from its March 2000 peak to October 2002 low.  There have been many references to the similarities of the two, but hopefully having it explained to you in this way can help you see some reasons to be enthused and optimistic about the present circumstances we have to work with. 

Sure, we can talk a lot about the charts, but realize also that substantial money has been flowing back into stock mutual funds at an increasing pace.  That can create a situation wherein the stronger the market gets, the stronger it keeps on getting all over again, which is the opposite of the horrific Bear Market scenario that unfolded, where selling only begets more selling.  I even overheard someone on CNBC television last week saying that many institutional investors don’t want to risk being caught off-guard by the market’s rally, so they have no choice but to be buyers even after the market has risen sharply.   And we won’t forget about the folks who’ve shorted the market, who have in many cases been really getting squeezed.

What Clues Are Insiders Giving Us?

When it comes to watching the insiders, we like to see it when insiders are getting out their personal checkbooks and writing checks to buy stock.  Unfortunately, they’re not showing us many reasons to be very confident right now.   

News from TrimTabs.com shows us that corporate selling has come roaring back to life, with new offerings sucking about $3 billion weekly out of stocks.  Meanwhile, TrimTabs shows us that buying by insiders (top officers and directors who are required to report individual transactions) fell 40% from $118 million in March to $70 million in April, one-third its five-year historical average of $182 million.

Insider selling is something that is known to make investors get nervous, but it isn’t always a cause for alarm.  We would, however, consider cases where there is persistent insider selling in a stock trading near its historic lows to be of greatest concern.  An example of such a case might include Microsoft Corp (MSFT), which is presently trading below its 50-day and 200-day moving averages.

Market’s Leading Groups
We have been seeing stronger leadership and buying conviction in this market, and at this time the following areas are providing some of the most promising action.  For those who are on the lookout for the early leaders, it is important to see confirmation in the group of stocks from which you are making your selections.  Strength from several similar companies can be a very important indication, and watching for this can be very helpful to your successful stock selection.

CANSLIM & Options
by Kenneth J. Gruneisen, Registered Investment Advisor, Source Capital Group, Inc. Members NASD/SIPC

Since last month’s comments were made concerning options trading I have found myself involved in a lot more discussion on this subject.  I think it might be more interesting and educational for everyone interested to simply follow along with the flow of the discussion summarized below.

But first we have help for those of you who have been wondering how to get an "Options Chain" on optionable stocks from the Leaders List, BreakOuts page, Leaders List Screening Tool, and in the daily FREE email BreakOuts Report.

When you simply click on the price of the company in the "Price" column you will get the 20-min delayed Price Information from Yahoo! (it pops up in a new window so you don't lose your place). The table of information you'll see includes Last Trade, Change, Prev Cls, Open, Volume, Day's Range, Bid, Ask, P/E, Mkt Cap, Avg Vol, 52-wk Range and more.  Immediately below this table you will see several links, including "Options" which will list Puts and Calls, Strike Price, Symbol, Last Trade, Change, Bid, Ask, Volume, and Open Interest.

Comments From: Scott  Date: 5/17/03

Does anyone utilize the CANSLIM method but buy the options rather than the stock? Because I execute the CANSLIM method utilizing options, I need to know what stocks may be setting up for "Future" BreakOuts so I can monitor their daily action to buy at the best possible spot.  

I am evaluating another rather expensive service that does just that but does CANSLIM.net provide something along these lines?  Any opinions? 

I try to find breakouts just below a strike price, buy that call, then hold on. I always get rid of the option if it starts to falter at all. 

Right now CANSLIM got me in BSTE 40's, TEVA 40's and MAKT 30's. I've already taken 100% profits out. Any idea on these stocks? 

Comments From: KennyG Date: 5/19/03

Scott, I generally discourage options investing to folks, and we do not know of any premium services that you would find very helpful. What was the service you were considering, if you don't mind me asking?

Since your report of success might be encouragement for others, I feel it necessary to emphasize that with OPTIONS it is very difficult if not impossible to limit your losses at 7-8%. Capital Preservation is Rule #1, and options are not a wise choice for most people reading this. End of story!

O'Neil continually harps on limiting losses at 7-8%, which you can do reasonably well with individual stocks. Most of the time, when I talk with investors who are interested in options, they are trying to hit "home runs". They would almost always do much better with more patience and discipline, and by simply sticking to buying stocks with the CANSLIM approach.

The CANSLIM method is helpful in finding stocks occasionally that double, triple or more. Isn't that worthwhile enough for you?  Good luck!

Comments From: Vinny Date: 5/20/03

Kenny, Please don’t be too quick to dismiss options as an investment vehicle. I agree with you that the kind of options investor you are familiar with, those trying to hit “home runs” use options stupidly. This kind of investor usually does not take into account things like volatility, liquidity, price spread and open interest. All too often they lose all their money.

However, as CANSLIM investors, we can approach this more analytically. Let’s take Boston Scientific as an example. Today (May 20, 2003) BSX closed at $48.01. We could buy 100 shares at that price for a total of $4,801.00, excluding transaction costs. Or we could buy an In-The-Money January 2005 LEAPS Call with a strike price of $40.00 for $14.10 per share or $1,401.00 total, again excluding transaction costs.

What does this do for us?  

1. Our cost to buy the option is only 29% of buying the stock. 2. If we set our stop loss to 8% of the stock we limit our loss to $384.00 3. If we set our stop loss of the option at 27% we limit our loss to $384.00. (We have more flexibility with the option).

If we have timed our purchase correctly and the stock rises 20% to $57.61 we have a good profit on the stock. Our option however, will have risen to $22.00 (approx) in the same period for a far higher percentage of profit while exposing fewer dollars to risk of loss.

What can we do with the extra money? Anything we want! We can buy a different stock using CANSLIM and lower our overall risk, or buy additional LEAPS Calls on leading stocks in leading industries adding to our diversification with NO additional dollars invested.

Kenny, you are right to counsel caution as options can be very dangerous if their risks and rewards are not properly understood. Call buying however, need not be pure speculation, and with LEAPS that is even more true. The two main advantages of options, upside leverage and limited downside dollar risk are intensified with LEAPS options. Practiced sensibly, LEAPS Call buying can be very rewarding. Their major limitation is that LEAPS options are available on only about 450 stocks today.

Regards to all, Vinny

Comments From: KennyG Date: 5/21/03

In your scenario with BSX, take a look at the action from 1/21/03 to 1/30/03, and the action from 3/21/03 to 3/28/03, wherein both cases the stock sold off on heavy volume. If someone owned the common they could realistically have limited their losses, but I am not so sure the loss in the LEAPS would have been as manageable.

LEAPS may not be as volatile/risky as shorter-term options, true! However, the risk is still much more substantial in my opinion, even in these "safer" options. And too often, people look at options that are just a month or two out, since they are low priced and seem to offer a lot of "bang for the buck".

Having seen numerous times where investors I KNOW have multiplied their equity by 5 fold or more in only a few months, and did so simply by concentrating in a few well selected CANSLIM based stock selections, maybe I have a better understanding of the fact that you can hit "home runs" with the stocks alone. Options are not the ONLY way to make big money. In most cases, they are a costly mistake for investors.  

My best case scenario in almost 16 years in the business, was a client that saw his account rise from $130,000 on Nov 1, 1998 to over $9 million in May of 2000. I didn't ever figure THAT percentage gain out, but rest assured, it was achieved without a single options trade. Yeah, we used margin quite heavily at times, but that was it.  

I try not to be closed minded, and I am open to further discussion on the subject here. Especially if we can talk about specific examples.  Best regards to all! 

Comments From: Vinny  Date: 5/22/03

Kenny, What I am suggesting is to use LEAPS Call options as a substitute for the underlying stock under appropriate circumstances. LEAPS should be viewed as another tool in an investor’s inventory. Like any tool, it can be used effectively or misused with disastrous consequences. If some people misuse options that does not mean they should be used by no one. Similarly, I am sure you would not argue that because some folks invest stupidly, there is no such thing as a rational investment strategy. Allow me to outline a LEAPS strategy and the reasons behind it.

STRATEGY: Buy Deep In-The-Money LEAPS Calls as a stock substitute.

WHEN: The stock meets all CANSLIM buying criteria and technical analysis indicates the time is right for purchase.

ADVANTAGE: Good leverage and fewer dollars at risk.

DRAWBACK: Higher percentage of invested dollars at risk.

DEGREE OF RISK: Very similar to outright stock ownership.

All call buying could be viewed as a substitute for the stock, so what distinction are we making here? Deep In-The-Money LEAPS Call buying is intended for a person with a low-risk profile. How does such an investor find an advantage in substituting an In-The-Money LEAPS Call for an outright stock purchase? They do so because it is similar to leveraging up, buying stock on margin instead of cash. For the same dollars, you could buy roughly twice as much stock. In the BSX example the leverage was higher as the LEAPS Call cost only one-third of the stock price.

There are both advantages and disadvantages to this technique. You are investing fewer dollars and will get a movement very similar to the stock itself. You could still lose money on the LEAPS Call, but it would not be for the usual reasons. You might lose because you chose the wrong stock or timed your purchase incorrectly. With CANSLIM, this risk is greatly reduced. Another drawback is you don’t get dividends, attend annual meeting or vote on company issues.

Since you are investing fewer dollars, you can take the money “saved” and invest it somewhere else. You won’t get any margin calls as your risk is limited to the amount of money you paid for the LEAPS Call. You can put a stop loss on the option if you are wrong.

Obviously, this strategy is not a “magic bullet”, but it has significant benefits for investors who understand the risks involved. It allows an investor to participate at a fraction of the stock’s cost allowing leverage, diversification or both.

For those with a bullish expectation and a strong degree of risk aversion, this could be a very attractive strategy. According to the OIC (Options Industry Council), this is the most popular LEAPS strategy.

Kenny, thank you for your views. It is always a pleasure to conduct a dialog with someone who has intelligent, thoughtful contributions to make. 

Comments From: Chris Date: 5/29/03

I'll jump in here. I have been a CANSLIM investor for about 15 years now. During this latest bear market, there has not been a lot of opportunity for CANSLIM investors until recently. By definition, this investing style calls for an upwardly trending market.

I took this time to continue my study of investing and began to focus upon options, something that I had avoided in the past. After having spent a great deal of time and money on this subject, I have become a real fan of options trading. It has not replaced my CANSLIM stock trading, but has supplemented it. I have added additional tools to my toolbox, if you will.

Vinny has discussed one possible approach of using deep ITM LEAPS as a stock substitute, i.e., buy calls. But also consider the use of put options to protect downside risk. A stock can gap down in a volatile market, blowing by a stop loss. It's happened to me more than once. You can employ more sophisticated strategies to protect a position, such as a collar, which protects against the downside at little or no cost.

I'll remind you that at the beginning of this post I stated that I spent a great deal of time and money studying to subject of options trading. This includes thousands of dollars for various seminars, books, videos, and options analysis tools. Options trading can lighten your pockets quickly if you are not disciplined and informed. There is a legitimate and valued place for options, but you would do well to spend a good deal of time studying and learning before incorporating any such strategies into your investing regime.

Comments From: Artie Date: 5/30/03

In your discussion of the purchase of ITM Leaps, you neglect to discuss one factor that will affect your ultimate return: Liquidity of your trade, that is, the spread between bid and ask.  This is one of the downfalls of trading individual stock options, as compared to the more widely traded, and much more liquid, index options. The market maker has you at his mercy when you open your position AND when you close your position.

Closing comments From Ken: 

I find it interesting that the ever-unfair market makers are again said to be the ones making it rough on investors, or particularly so for the options investors.   The fact is, the rapid slippage that often occurs in options prices is almost universally common, and always is exaggerated in cases with thin trading conditions.  Supply and demand factors have great effect across all markets, and liquidity is important to investors large and small.  The fact that Index Options frequently trade in large quantities clearly contributes to the efficiency of the marketplace (for QQQ, SPY, DIA), so the spreads are small and they are liquid.  Individual securities can, of course, vary greatly in terms of how actively traded they are, and thus how liquid they are.  In an obscure stock that is thinly traded, its options (assuming they are even available) are going to usually be thinly traded.  Liquidity problems present a key concern in the risk management area.   Where disciplined CANSLIM oriented investors all should know the basic rule of limiting your losses at 7-8% on any stock.  Strict sell rules such as that should be in your rulebook.  Capital Preservation is the concern that makes this Rule #1. 

You can participate in this discussion and add your comment or questions here.

Our regular CANSLIM.net News readers will notice that we have included more detailed information on the selections highlighted below, since this month we have improved and expanded the format of this Stocks to Watch in This New Market section.  Here we aim to give you insight on the best ideas our experts feel are worthy of a closer look right now. 

In the broader market, there are presently many stocks that are too extended from an ideal base to be considered wise choices.  It is usually best to buy within 5% of the previous high or pivot point, right when a high-ranked stock is breaking out of a base at least 6-weeks in duration.  Stocks trading at highs can be especially vulnerable to sharp waves of profit taking, and the overall market conditions will have a tremendous influence on your ability to make any headway.  Therefore, it is very important for you to be able to distinguish between an ordinary price dip and a high volume failure, and the usual sell discipline should always be applied, limiting all losses at 7-8%.

When you are looking for the most suitable purchase candidates under the guidelines outlined by O'Neil in "How to Make Money in Stocks", always concentrate on high-ranked, fundamentally and technically strong issues. Please note that CANSLIM.net has received no compensation whatsoever from any of the companies featured below, and this report is not to be considered investment advice or a recommendation to buy or sell securities.  These stocks may not be suitable for all investors, and you should always conduct the analysis necessary to make an informed buy and/or sell decision.

Click here to view a 5-year chart from BigCharts.com

Profile: Hutchinson Technology Inc. is a supplier of suspension assemblies for hard disk drives (HDDs) and etched and stamped components used in connection with or related to suspension assemblies holding the recording heads in position above the spinning magnetic disks in the drive.  

For the 26 weeks ended 3/30/03, sales rose 40% to $257.8 million and net income totaled $32.7 million, up from $5.7 million, reflecting higher overall demand and the absence of litigation settlement charges. On Apr 22, 2003 the Company cited higher than expected unit shipments in the second half of the year as the primary reason for it to revise its guidance above analysts' estimates.

What to Look For and Look Out For: A dip back into the $27.50-28 area would not violate the short-term upward trend line.  Expect consolidation, and consider taking advantage of any chances to buy on a normal dip.  Meanwhile, any high-volume failure back into the prior base would be a concern.  One would expect tremendous support in the $27 range, and above previous low closes from 5/19 & 5/20 that kept it trading above $26, while its 50-day moving average is also nearby at $25.68. 

Profile: AMERIGROUP is focused exclusively on the healthcare needs of individuals who receive benefits under the Medicaid, State Children's Health Insurance Program (SCHIP) and FamilyCare programs. It is a multi-state managed healthcare company headquartered in Virginia, operating health plans in Maryland, Texas, New Jersey, Florida, Illinois and the District of Columbia. On May 28, 2003, Chairman and CEO, Jeffrey L. McWaters, was honored to participate with President George W. Bush at the White House signing ceremony, and expressed appreciation and support for inclusion of state aid for Medicaid in the tax bill.

For the three months ended 3/31/03, revenues rose 43% to $391.3 million and net income rose 39% to $13.7 million, reflecting the acquisition of PHP Holdings partially offset by an increase in wages and related costs for additional staff. 

What to Look For and Look Out For: The Medical-HMO group continues to provide great confirming leadership, with pace-setters including CVH and MME, both previously featured CANSLIM.net News.  The stock has been on a 5-week winning streak, and for the short-term could be due for some consolidation.  But a dip into the low $30’s could almost be wishful thinking for prospective buyers, while any high volume weakness is always a reason for caution.  

Are You Afraid Of Investing Your Money?
Article by Soraya Nasrallah, Registered Representative, Source Capital Group, Inc. Members NASD/SIPC
Are You Afraid Of Investing Your Money? By Soraya Nasrallah

Since October of 2002 the major indices have been telling us that this Bear Market might be coming to an end. Sure, as soon as I say that we could suddenly see the market turn around and start heading South. Don’t the short investors (who bet against a rising market) just hope so! Well, since we don’t have a crystal ball, let’s pay attention to the major averages, which seem to be breaking previous resistance points. 

You can’t be afraid to invest your money, and you don’t want to miss out on the possibilities to profit that are out there in the maybe not-so-distant future. Funding your retirement is crucial, and never something that should be put on hold for a long period. The fact that this Bear Market has destroyed the retirement accounts of many investors should give them all the more reason to take charge. I suggest that you do what you can to bring your accounts to the levels you desire. Part of it is within your control, and it is up to each of you to “Fund Your Future”. That is actually the title of Julie Stav’s new book, which I can’t wait to read. See? Even though we might think we are ahead of a lot of people, I believe it is always important to continue our education. The extra effort will pay off when you apply yourself!

I know that investors have the right to feel a bit wary of jumping back into the market. And there is so much information out there that it is sometimes difficult to make a decision! Just recently, my Dad and I were going over some of the basic economy data to assess the situation. Overproduction brings about some deflation, and here are some other quick facts we discussed. Unemployment is still a problem, companies are practically giving away their products (with things like 0% financing) which may not help their bottom line, and we see endless offers for credit cards and “don’t pay till next year” deals. Is this a fad that can last? I wonder what will happen to these companies if consumers can’t pay up. Homebuilders are having a big party, helped by low mortgage rates, while tax cuts are promising to keep bringing money to the table for Americans. 

Our conclusion was that we felt that chances are good that these great deals and tax cuts will help struggling Americans’ esteem, and deplete the overproduction of companies. They will, in turn, need to produce again. 

Believing in our economy and stock market again will not be easy for everyone. But what should you do if you have the money to invest but you are afraid to lose it? There is a mutual fund product we’ve obtained information about that may be of interest to those investors that wish to place some of their money to work in the markets while at the same time have the reassurance that their investment dollars are principally protected. 

The product is relatively new from the Black Diamond Funds, consisting of a series of principally protected funds that are AAAr rated by Standard & Poor’s as to return of principal at maturity.

Here are the basic benefits: 

Their investment approach consists of a bond and equity portfolio. Within the Bond Portfolio they purchase Zero Coupon Treasuries guaranteed by the U.S. Government to provide the monies needed to pay your protected amount at maturity. Protection comes from investing in these treasuries on the investment date, which will mature at a stated par value on or before the Principal Protection Maturity Date. The guarantee applies to the timely payment of principal and interest when these bonds are held to maturity. For example a $10M investment in the fund is principally protected at the end of 7 years. There is a $10M minimum that may be allocated into several funds as long as you meet a $2000 minimum requirement per fund. Within the Equity Portfolio the management will seek to meet or exceed the performance of the index over a seven-year period by investing in options on Exchange Traded Funds and Index Options that relate to the index identified within its investment objective. 

The funds offer four classes of shares that offer reduced expenses depending on the amount of the initial investment.

The final offering period for the Black Diamond Funds is June 20, 2003. Please call us for a prospectus or any questions that you may have and we will do our best to answer them for you. 

With the ups and downs in the markets it is imperative to be cautious, but staying on the sidelines may not help you take advantage of the significant upward movement this market could make in the years to come. Staying focused on the goal of having the amount of money you desire for the future is of most importance!

I would like to add that I am cordially inviting Hispanic individuals to contact me. I am fluent in Spanish and I am more than happy to help out with any of your investment needs. I cater to investors that are looking for peace of mind investing by using AIP’s (Automatic Investment Plans), Mutual Funds, ETF’s (Exchange Traded Funds) and individual stocks based on the renowned CANSLIM system, with the use of “good until cancelled” stop orders to maximize gains or limit losses.