11/24/00: Market Monitor-Bernie Schaeffer, Chairman, Schaeffer's Investment Research
PAUL KANGAS: My guest market monitor this week is Bernie Schaeffer, Chairman and CEO of Schaeffer's Investment Research Incorporated, which publishes the popular monthly newsletter "The Option Advisor" and which also sponsors a very popular Web site. And Bernie, welcome. It's great to see you again.
BERRIE SCHAEFFER, CHAIRMAN, SCHAEFFER'S INVESTMENT RESEARCH: Great to be here again, Paul.
KANGAS: Now, you've earned a top notch reputation over the last 10 years as an excellent market timer. If ever we needed someone to tell us where the market's bottom here is, this is it. What do you think?
SCHAEFFER: Well, I mean everybody is looking for it and, you know, that is one of my concerns. I mean we had bottoms of course seasonally at this time of year for a number of years in the latter part of the '90s. The thing that is missing from my perspective, there is a lot of put activity, which is good. From a contrarian sense, you like to see heavy put activity, which is bets on a market decline.
KANGAS: Right.
SCHAEFFER: And our indicator that is based on the put call ratio is flashing a "buy" signal. That's the good news. The bad news is there is a lot of aspects of the world of sentiment that concern me. A lot of bullish investment advisors from the Investors Intelligence Survey, the Wall Street allocation to stocks among the strategists is at its highest level pretty much for the past decade. There really has been no outflow out of equity mutual funds. As a matter of fact, the inflows continue. And my concern is the fact that at bottoms, you look to find evidence that essentially all the sellers have done their thing, so to speak.
KANGAS: Right.
SCHAEFFER: And-
KANGAS: You think sentiment is more important than looking at a chart?
SCHAEFFER: Well, particularly number one, in identifying market tops and market bottoms. Number two, looking at a chart is helpful, particularly if you are a trader and if you trade options. But you really would like to know in addition to how the chart looks, you really want to know whether the sentiment is indicating that either all the buyers have already committed, which is a sign of a top, or all the sellers have already vacated, which is a sign of a bottom. So that's a helpful add on to technical analysis.
KANGAS: So we're at the bottom yet. How much worse do you think it could get?
SCHAEFFER: Well, and I, focusing in on the NASDAQ, I think we could get down to the 2,500 to 2,600 level on the NASDAQ. I think that would actually bring out some of this bearishness and capitulation that I think we're missing so far.
KANGAS: OK. So how are you playing a market like this? What are you doing? What strategies are you employing?
SCHAEFFER: Well, particularly from a trading perspective, from an options perspective you play it from both sides. You look for stocks in sectors that you feel are outperformers and on the long side and you look for sectors to play to play on the short side, as well.
KANGAS: OK, so you're buying call option and being bullish, which means that you have the right for a certain premium to buy stock at a predetermined price over a predetermined time. What are you buying now in the way of calls?
SCHAEFFER: Exactly. OK, in the way of calls I would look to the biotechnology sector, especially Genentech (DNA) and the Biotech Holders Trust, which is an exchange traded fund that trades on the AMEX.
KANGAS: OK.
SCHAEFFER: I like the drug sector, Merck (MRK), Abbot (ABT), Alza (AZA). And the medical sector, United Health Care.
KANGAS: What are the premiums roughly on, let's say, three month options for these stocks?
SCHAEFFER: Well, three month option premiums on the biotech stocks would probably be in the area of about 10 to 15 percent, which is historically at the higher end of the spectrum.
KANGAS: Because they are volatile?
SCHAEFFER: Because they are volatile. And the drugs stocks they'd be down maybe done closer to seven to 10 percent.
KANGAS: Your bearish nature says buy puts on what kind of stock?
SCHAEFFER: Well, I would still look to the technology leaders. I don't think the, I think the party is to the down side is kind of just beginning on some of those stocks that kind of refused to go down until recently like the Ciscos (CSCO) and the Suns (SUNW).
KANGAS: And you are buying puts on a Cisco, for example?
SCHAEFFER: Yes.
KANGAS: Really? Anything else?
SCHAEFFER: Well, in the technology sector, Cisco, Sun, Oracle (ORCL) is another stock that I, that I'm not too thrilled with.
KANGAS: OK.
SCHAEFFER: EMC (EMC), the so-called four horsemen that were leading the NASDAQ up.
KANGAS: OK. All right. One big call option that you like now on, let's say, a blue chip?
SCHAEFFER: I would look at, I would look to Merck. I think Merck is a great blue chip company.
KANGAS: Three month call or six months? How long?
SCHAEFFER: I think three months is a great time horizon for most investors and sell it when it has got about half its time left so if you are not right on the direction you can still preserve some capitol.
KANGAS: OK. All right, so you're playing both sides of the market.
SCHAEFFER: Correct.
KANGAS: But that's what option guys do. Thanks, Bernie. A pleasure to see you.
SCHAEFFER: My pleasure.
KANGAS: My guest, Bernie Schaeffer, Chairman and CEO Of Schaeffers Investment Research. |
