Upgrade Carpet Bombing

I was hoping for a nice gap lower
this morning to put an exclamation mark on this sell-off, take the
longs out on the lows, and set the stage for a short-term bottom, but it’s not
going to happen.

It looks as though the Usual Suspects have decided to take
the initiative, and have upgraded the entire planet. Indeed, I am surprised that
the old "upgrade" trick is even working, since, as I noted last night,
analysts have absolutely zero credibility at the present time. However, they
appear to have timed this one well, as the market is short-term oversold and in
the area of key technical support.

Normally I would laugh, count to 10 after the opening, and
buy puts with both hands, but we are a bit oversold in here, volatilities have
spiked up nicely, and we are near several key technical levels that have to be
respected.

The
(
QQQ |
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September-to-December rally yesterday (35.22). The S&Ps
(
$SPX.X |
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not take out the previous day’s low and are holding in the 1080 -1088 area,
which is an overlap zone of both the 38.2% retracement of the
September-to-January rally and the May-to-September ’01 sell-off. The DJI
(Diamonds) remains the strongest of the indices.

The
(
$SOX.X |
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seems to be the focus of today’s prop job —
(
TXN |
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PowerRating),
(
NSM |
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PowerRating) and
(
KLAC |
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(
SMH |
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we could have a real barn burner on our hands…

We are going to kick back here and let the market come to
us. As I mentioned yesterday, I never got a chance to reload the QQQ puts as the
market did not quite reach my zone — 36.47 for me to begin put buying.

We are long quite a few SMH puts in here and will be
looking to add to that position on strength.

This morning should be telling since we seem to be opening
higher to unchanged almost every day, and then get slaughtered. If that happens
today, on a Friday, it could get ugly. If they can make this higher opening
stick, we might be in for two to three days of rally.

Volatility

We’re Not There…Yet!

The VIX traded lower yesterday, while the VXN and QQV
exploded higher. This is some overdue catch-up as the VXN and QQV have been
contained by the lack of volatility in the chip sector — until yesterday.

I would like to point out that the 200-day moving average
of the VIX is 27.32 (it closed at 27.68) and has been penetrated several times
in the last week and a half. Is the VIX overbought? Maybe.

However, the 200-day moving average of the VXN is 55.92
(it closed at 51.11), and it has not even taken out January’s highs yet! The
200-day moving average of the QQV is 47.79 (it closed at 43.54), and it is just
nearing January’s highs now.

This shows the current fragmentation in the market place.
There will be a time and a place to buy the market and sell volatility, but I
don’t think I want to make my stand right here!

Chips

Upgrade Carpet Bombing In This Sector!

We will be watching this sector closely to see if there is
any follow-through from the upgrades, or for rejection. We will be looking to
add to long put positions on strength around the 528-532 area in the SOX.

Updates

Maybe Today For TYC…

As you know, we have been lying in the brush, waiting to
slap a ratio call spread on in Tyco
(
TYC |
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PowerRating), but the stock is not cooperating.
As the stock rallies, implied volatility falls, making the ratio call spread
more expensive, and we don’t want to pay up. Therefore, on a day when the stock
is getting hammered again, and it will, we will have to jump in.

We are focusing on the July 30/40 1:2 ratioed call spread,
and we are looking to buy that spread for as little premium as possible. If the
stock resumes its southbound trend this afternoon, there will be an opportunity
to put this spread on, and I will alert you. I don’t feel compelled to chase the
stock here.

*We had no luck buying the
(
QCOM |
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spread at $3.00 today and will re-enter the spread today. If they suck some
volatility out of the market we should be able to get it done.

Current Recommendations

*Traders may make scale purchases of puts in the QQQs on
strength, taking partial profits on sell-offs. First resistance here is 36.47,
followed by 36.85 and 37.33.

*Traders may purchase the SMH March 42.5 puts on a
scale-down basis for $2.00 or less.

*Buy the QCOM April 40/50 call spread at $3.00 (25%).

*On a large lower opening, sell 50% of all QQQ and SMH
puts.

Rolls/Adjustments

None.

Recap of open trades

Long-term

Reverse Collars

(
DIS |
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News |
PowerRating) — April 25/22.5 reverse collar (long the April
25 calls, short the April 22.5 puts) at $1.15 credit (75%).

Buy-writes

None — volatility too low! Again this is a general
recommendation. Specific opportunities always exist.

Proxy buy-writes

(
BA |
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PowerRating) Jan. ’03 35/May 45 call calendar @ $4.75 (100%).

BA Jan. ’03 40/May 45 call calendar @ $2.75 (100%).

Complex Strategies

(
GILD |
Quote |
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PowerRating) — Long the GILD Feb. 70 straddle at $8.00
(50%).

Short-term

Call Positions

None.

Call Spread Positions

(
DYN |
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PowerRating) — Long the March 30/40 1:2 call ratio spread @
$1.50. Settled at $.55.

(
SLB |
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PowerRating) — Long the May 55/60 call spread at $1.50
(50%).

(
TLAB |
Quote |
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PowerRating) — Long the March 17.5/22.5 call spread at
$.80 credit average (50%). Settled at $.30. Note: This spread is a result
of a reverse collar roll.

Put Positions

(
SMH |
Quote |
Chart |
News |
PowerRating) — Long the March 42.5 puts at $2.00 (25%).

Put Spread Positions

(
AZO |
Quote |
Chart |
News |
PowerRating) — Long the March 55/65 put spread @ 2.125
(100%).

STOPS