spending, 117Consumer Discretionary sector, 271,283, 334–335Consumer Price Index (CPI), 144,146Consumer product stocks, 222–223Consumer sentiment, 144Consumer Staples sector, 271, 283,334–335Consumption expenditures, 147Contract-neutral strategies,289–290Contrarian Investment Strategies(Dreman), 195Contrarian strategy, 199–201, 209Contrary indicators, 204Conversion, 272–274Convertible bonds, 245–246Corporate bonds, high-grade,245–246Corporate profits, 29Correction, 39Correlated stocks, 252–254Correlation analysis, 314–315Coupon bonds, 246Covered calls, 53, 82–84, 127, 275,396Covered call writing, 92Covered puts, 104–106, 275, 396Covering, short sales, 35
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408Crash signals, 194–195Credit:bear call spreads and, 80–81risk, 245short puts, 100spreads, 127Crowd, The (Le Bon), 138Crowd psychology, 29, 199–200Crude oil, 150–151Cruz, Bill, 162Customers’ Afternoon Letter, 2Cyclical sectors, 222Cyclical stocks, 223Daily high and low, 154DAX Index, 2Day order, 350Debit trades, 123Decision-making process, 159Declining market, 199Deep in-the-money options, 53, 117,288, 338, 351Deep out-of-the-money options, 53, 80,83, 129Defensive investments, 222–223Dell, 172Delta:butterfly adjustment, 305–307characteristics of, 115–117, 129, 232,292, 339neutral strategies/trades, xii, 117,291, 300, 389risk, 290–293Derivatives, 47–48, 152, 202Diagonal spreads, 84–85, 129–132, 247,400Diamonds, see Dow Jones DiamondsDirectional forecasts, 132Directional long, 289, 301–305Directional risk, 290, 293Discount rate, 149Discounts, 248Discretionary trader, 158–159Distribution phase, 248Divergence:inter-index spread, 338pairs trading, 253–254
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Diversification, 310–311, 314–316,318–319, 325Dividend yield:implications of, 196yield computation, 160Dividends:characteristics of, 4, 140–141defined, 54–55energy-related stocks, 215in valuation, 142Dogs of the Dow Index ($SMUT),159–162, 180, 214Dollar value, 29Double bottoms, 205Double tops, 295Dow, Charles, 4, 6, 249Dow, defined, 3. See also Dow JonesIndustrial AverageDow Jones Buy Write Index ($BXD),337Dow Jones Diamonds (DIA), xi–xii,19–20, 27, 43–44, 94–95, 99–100,104, 203, 284, 288, 329Dow Jones Industrial Average($INDU):chart of, 7confirmation, 6daily readings, 4divisor for, 329–330Dogs of the Dow, 159–162, 180, 214historical perspectives, 2–3implications of, xi–xii, 4–6, 45, 152,201, 249, 277market internals and, 189, 192–193NASDAQ stocks within, 12nonconfirmation, 6relative value, 142seasonal trends/indicators, 211–213sector rotations, 22430 stocks in, 4–5, 12, 19tracking, 20volume, 27, 182–185weekly bar chart, sample, 7Dow Jones Industrial Average VolatilityIndex ($VXD), 277–278Dow Jones Industrial Index ($DJX), 13,278, 288
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Index
Dow Jones Industrials, 34Dow Jones Newswires, 152–153Dow Jones Railroad Average, 2, 8Dow Jones Transportation Average($TRAN):characteristics of, 247–249, 314–315daily line chart, sample, 7historical perspective, 2–3Dow Jones U.S. Financials Index,20Dow Jones Utility Average, 244Dow Jones Utility Index ($DUX),244Dow Jones web site, 6Downtrend, 40–42, 167, 185–186Dow Theory, 6–7, 248Dow 30, 27Downticks, 152Down volume, 183–184Drawdown, maximum, 170Dreman, David, 195Dumb money crowd, 202DuPont (DD), 161Earnings:momentum, 197significance of, 134, 140–143in valuation, 142Eastman Kodak (EK), 4eBay (EBAY), 23Economic conditions, impact of,144–149, 155, 223, 247Economic data releases, 268Economic events, global, 255Economic expansion, 29, 223Economic reports, 354Economic weakness, 6Efficient market theory (EMT),133–136, 140Elder, Alexander, 208Electronic options exchange, 49Employment cost index (ECI), 144–145Employment report, 144–145Energy crises, 243Energy prices, market reactionto, 149–151, 155, 233–238,355
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409Energy sector, 222, 271, 283, 334–335Energy stocks, 47, 221–222, 233–238,271Entry point, significance of, 76Entry rules, xiiEqual-dollar-weighted index, 329, 332Equity indexes, 50Equity markets, 2, 24Equity puts, uncovered, 92European markets, 1European-style options, 58, 64–65, 81,103, 109, 161Eurotop 100 ($EUR), 17, 140Euro 25 Index ($EOR), 17Evaluation, xExchange-traded funds:active investing, 137adjustments to, 287–288bond funds, 26bull call spreads, 103call options, 82characteristics of, xii, 2, 11, 19,27–28, 71, 312–313charts, 37–39collar spreads, 128by country, 251Diamonds, 19–20financial sector, 214going long, 34–35gold, 25–26index options, 49inter-index spread, 337international funds, 24–25iShares, 20iShares Small-Cap 600 (IJR), 33long calls, 74market trends and, 31most active, by share volume, 26–28most active sectors/indexes, 228moving averages, 42oil prices and, 236option chains, 67option trades, 47, 49, 78PowerShares, 197–198premiums, 55–56Qs, 19–20quotes, 37–39
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410Exchange-traded funds (Continued)S&P 600 Small-Cap Index ($SML),33, 141sector analysis, 20–21, 221–222,251–252short sales, 35SPDRs, 19, 21–22stock compared with, 49–50tax benefits, 137tracking, 249utilities, 244volatility and, 271, 275, 284volume, 46, 185–187Exercise/exercising:collar spreads, 128options, 161order, 351put options, 99, 129Exit rules, xiiExit strategies:bear call spread, 81bear put spread, 107bull call spread, 90calendar spread, 87covered calls, 83–84“Dogs of the Dow” strategy,160–161importance of, 319iron butterfly spread, 121long butterfly spread, 123long calls, 74long puts, 95long straddles, 113for options, generally, 76, 88pairs trading, 254put calendar spread, 110ratio backspreads, 125–127short puts, 101simple volume system, 187Expected volatility, 259, 276Expiration/expiration date:diagonal spread, 130Dogs of the Dow Index, 161iron butterfly spread, 120–121long butterfly spreads, 121, 123long straddles, 112put calendar spread, 109
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put options, 95–97, 101–103ratio backspreads, 125significance of, 56, 69–70, 76–81,84–87, 132, 291straddles, 112strangles, 114–115volatility and, 272, 283Exponential moving average (EMA),44, 321, 323Export prices, 145Extraordinary Popular Delusions andthe Madness of Crowds (Mackay),138Extrinsic value, 292–293Exxon Mobil (XOM), 13, 221Factory orders, 147Fair market value, 48Fear:gauge, 48, 157, 282impact of, 138–140, 155, 157,200volatility and, 259Federal funds rate, 148Federal Open Market Committee(FOMC), 148, 151Federal Reserve, 147–149Fidelity Select Sector Funds,24950-day moving average, 42–4452-week high/low, 38Fill or kill order, 350Financial crises, global, 1, 138,199Financial sector, 8–9, 13, 21, 32, 222,226, 241–243, 271–272, 283,334–335Five Year Note Index ($FVX), 17,247Flattening out, 292Ford, 3401(k)s, stock mutual funds in, 30FTSE, 24Full-service brokers, 344, 352Fundamentals/fundamental analysis,xiii, 140, 155, 195, 197, 221,228–233, 254, 366
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Futures contract, 2, 7, 55, 66, 236Futures options, 66Future volatility, 268Gaming industry, 17Gamma:characteristics of, 115–116, 292,305risk, 291–292scalping, 292Gammage, Kennedy, 195Gasoline prices, 236General Electric (GE), 161, 333–334General Motors (GM), 3, 161–162Gentile, Tom, 180Geopolitical events, xiiiGermany/German market:DAX Index, 2international funds, 25Getting started:broker selection, 343–344opening trading account, 344–345order placement, 348–349,351orders, types of, 348–352paper trading, 345–348Ginnie Mae (GNMA) bonds,245–246Global Crossing, 329Global equity market, 1, 138Global markets, 1Going long, 34–37, 65Gold:bullion, 25central bank sales, 238characteristics of, 238–240indexes, 16–17investments, 30mining companies, 25, 63prices, 25–26, 63trends in, 32Goldilocks economy, 144Good till cancelled (GTC) order,350Google (GOOG), 78, 340Government bonds, internationalindexes and, 17–18
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411Government reports, 363–365Government securities, short-term,241Grauer, Robert, 222Greed, 138–140, 155, 157, 200Greeks, xii, 115–117, 262, 290Greenspan, Alan, 147, 149–150Grocery chains, 223Gross domestic product (GDP),146Growth rates, 318Growth stocks, 197, 315GSTI Semiconductor Index ($GSM),17, 227Hakansson, Nils, 222Hammer, 346Haug, E., 260Haugen, Robert, 135Health Care sector, 222, 271–272, 283,334–335Hedge/hedging, 110, 119, 203, 282–285,320–323Hedge funds, 151High-risk trades, 90–91High-yield stocks, 222Hindenburg Omen, 195Historical data, 158Historical volatility, 164, 262–263,266–267Holding company depositary receipts(HOLDRs), 22–24Home Depot (HD), 328Homebuilders index, 17Hong Kong Index ($HKO), 17Hong Kong stocks, 25Horizontal spreads, 84–85Housing market, 144, 146Implied volatility (IV):adjustments and, 294characteristics of, 260–262historical volatility and, 268–270implications of, 1, 48, 276, 284, 300,355inter-index spread and, 338–339strategy selection and, 274–275
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412Import prices, 145In-the-money (ITM) options, 52–55, 58,103–104, 106–107, 119, 122, 217,273, 290–291, 303–304, 346Index(es), generally:benefits of, 32components, number of, 331–332construction and methodology,327–329defined, 2information resources, 159, 332market trends and, 31premiums, 55proxy, 313puts, uncovered, 92trading, compared with tradingstock, xiIndex-based securities, 2Index Effect, 12, 339–341Index funds, 151Index futures, 66Index market:characteristics of, 12–14Index Effect, 12international indexes, 17–18option trades, 78rate indexes, 18sector indexes, 14–17Index traders, success factors, 2Industrial production index, 147Industrial stocks, 223Industrials sector:characteristics of, 334–335volatility and, 271–272, 283Industry groups:analysis of, 229characteristics of, 8–9, 13, 23, 34, 47,222rotation, 225–226Industry sectors, indexes classified by,358–360Inefficient markets, 135Inflation, 144, 147, 221Information resources, 159, 332. Seealso Web sitesInformation Technology sector,271–272, 283, 334–335
Page 412
INDEX
Initial public offerings (IPOs), 30, 78,340Inside information, 134Institute for Supply Management(ISM), 144, 146Institutional investors, 1, 151. See alsoBrokerage firmsIntel Corporation (INTC), 4, 7, 12, 182,232–233, 253–254Interactive Brokers, 49Interest-bearing accounts, 99, 311Interest rate(s):Federal Reserve and, 148impact of, 28, 55market reaction to, 151, 155risk, 245significance of, 143, 355Interest-sensitive stocks, 222–223Inter-index spending, 337–339International indexes, 17–18International Paper (IP), 4International Securities Exchange(ISE):functions of, 16–17, 49, 202, 205,234international indexes, 17–18Oil and Gas Services Index ($OOG),234Semiconductor Index ($BYT),227International Securities SentimentIndex (ISEE), 200, 205–206,282Internet HOLDRs (HHH), 22–24, 89Internet stocks, 89, 138, 233Intrinsic value, 53–54, 292–293Inventory, 145, 150, 230Inverted yield curve, 241, 244Investment banks, 30Investment Company Institute (ICI),30, 209Investment surveys, 207–208Investor(s):psychology, 29sentiment, 29, 31types of, 151Investors Intelligence, 207
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Page 413
413
Index
Iron butterfly spreads, 119–121iShares:Biotechnology Fund (IBB), 20–21,227, 229–230, 328–329Cohen & Steers Realty Majors IndexFund (ICF), 240–241Dow Jones Real Estate Fund (IYR),21Dow Jones U.S. Financial SectorIndex Fund (IYF), 20Dow Jones U.S. Utilities Sector Fund(IDU), 244exchange-traded funds (ETFs),20FTSE/Xinhua China 25 Index Fund(FXI), 24Goldman Sachs SemiconductorFund (IGW), 227Lehman Long-Term Bond Fund(TLT), 247, 288, 315Lehman 1–3 Year Treasury BondFund (SHY), 26, 247Lehman 7–10 Year Bond Fund (IEF),26, 247Lehman 20+ Year Treasury BondFund (TLT), 26, 28, 247Mid Cap Fund (MDY), 20MSCI Japan Fund (EWJ), 24–25Russell Microcap Fund (IWC),21Russell 2000 Small Cap Fund (IWM),20S&P 100 Fund (OEF), 20, 34,337–338Small-Cap 600 (IJR), 33January barometer, 213–215January effect, 214–215Japan:exchange-traded funds, 24, 140Nikkei Index, 2Johnson & Johnson (JNJ), 13JP Morgan Chase (JPM), 13, 161Junk bonds, 245–246Kaeppel, Jay, 249–251, 316“Know your customer” rule, 91
Large-cap stocks, 7, 32, 214, 340Leverage, 52, 75Limited-risk:spreads, 101trades, 292–293Limit orders, 349–350Linearly weighted moving average,45Line charts, DJIA, 7Liquid contracts, significance of, 24Liquidity, significance of, 17, 66, 68,148, 180, 198, 352Long butterfly:characteristics of, 290, 398spreads, 121–123Long calendar, 289–290Long calls, 73–77, 80, 85, 90–92, 98,274–275, 347–348, 390Long condor, 398Long diagonals, 290Long iron butterfly, 119, 121, 399. Seealso Long butterflyLong options, 87, 131Long position, 56–57Long put, 93–97, 101–103, 109–110, 275,391Long shares, 275Long stock, 389Long strangle, 395Long synthetic straddle, 401Long-term equity anticipationsecurities (LEAPS), 48–49, 67, 288,293Long-term moving average, 44Long-term options, 84, 88Losing trades, 174LSI Logic (LSI), 253–254Lynch, Peter, 134Macroeconomics, xiiiMajor trendlines, 42Malkiel, Burton, 134Margin:accounts, 344characteristics of, 95requirements, 119, 274Marked to market, 66
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414Market acronyms, 361–363Market advances, 45Market analysis, 132Market averages:current, 4, 6historical perspective, 2–3successful trading, xiiMarket bottoms, 185, 200, 206Market breadth, 189–190Market capitalization:implications of, 24, 33–34, 340indexes classified by, 357–358Market correction, 94Market crashes, 30Market drawdown, 174Market dynamics, significance of, 299Market entry signal, 169Market environment, influentialfactors, 257Market exit signal, 169Market-if-touched (MIT) order, 351Market manipulation, 216Market neutral hedge funds, 152Market neutral strategy, 252Market orders, 349Market rallies, 236, 238, 304Market reversals, 206Market timing, 214, 222Market to book, 142Market tops, 200Market trends, 248–249Market value, 32, 34, 38Market value–weighted index, 332–333Market Vane, 208Married put, 98Marvell Technology (MRVL), 268–270Maximum adverse excursion percent(MAE%), 175Maximum Pain Theory (MPT), 216–218Medium-size companies, 13Merck (MRK), 13, 161Mergers, 4Merrill Lynch, 22Mexico Index ($MEX), 17Microsoft (MSFT), 4, 7, 12, 50–51, 141,170, 328MidCap SPDRs (MDY), 337–338
Page 414
INDEX
Miekka, Jim, 195Mini-NASDAQ 100 Index ($MNX), 13,100–102, 276Minor trendlines, 42Momentum, 172, 199, 242, 324, 374Monetary policy, 148Money management:example, 320–325significance of, 178Money market funds, 99, 311Moneyness, options, 52–53Money supply, 147Montreal Exchange, 49Morgan Stanley:Capital International (MSCI),24Oil Service Index ($MGO), 234web site, 24Mortgage rates, 241Motor vehicle sales, 144Moving average convergencedivergence (MACD) indicator,377–379Moving averages (MAs), 42–45,192–193, 206, 229–231, 265, 321,323, 375–377Multiple listing, 352Multiplier, 85Murphy, John J., 182–183Mutual funds:cash assets percentage, 210–211characteristics of, 12, 30, 135, 137,312–313flows, 209–210as indicator, 209–211Naked call writing, 90Naked index, 118Naked options:calls, 79, 91characteristics of, 79puts, 99–101, 110, 274–275NASDAQ:characteristics of, 7, 100, 190, 209components of, 7–8historical perspective, 4top stocks of, 8
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Page 415
415
Index
NASDAQ 100 Index ($NDX):Biotechnology Index, 328Buy Write Index ($BXN), 337characteristics of, 13, 79, 82, 183,201, 328, 337, 341Volatility Index, 276–277NASDAQ 100 Index Trust (QQQQ):adjustments, 288characteristics of, ix, xi–xii, 19–20,59, 203options, 49, 51, 77, 82, 104–105paper trade example, 346–348ratio backspreads, 124–126short sales, 35–37trade management example,321–323uptrend chart, 40volatility and, 283