A publication of schaeffer’s investment research Serving option investors worldwide since 1981 Bernie Schaeffer

Senior Editor

April, 2009 Volume 29, Issue 4 www.SchaeffersResearch.com

THE March 26, 2009

MARKET
ARKET Michael Corleone (to Sonny Corleone, after DAILY CHART OF VIX SINCE JANUARY 2008
B e r n ie S c h a e f f e r
proposing the murder of a policeman who wronged
his father): “It’s not personal, Sonny. It’s strictly
business.” (The Godfather, Paramount Pictures, 1972)

The VIX (after refusing to break below 40 on one of the sharpest rallies in
market history): “It’s not sentiment, Sonny. It’s strictly volatility.”
(CBOE Volatility Index - March 2009)

Much is made of the VIX as a “fear gauge” - a rising VIX is alleged to

indicate heightened investor fear and a depressed VIX investor complacency.
S&P 500 INDEX 10-DAY HISTORICAL
The fact that the VIX is a calculation of the implied volatilities of a set of S&P
VOLATILITY SINCE JANUARY 2008
500 options, and that these real world option volatilities are very much
determined with reference to recent realized market volatility, is considered a
footnote at best.
But take a look at the accompanying pair of charts - one shows the daily
action in the VIX since early 2008, and the other the 10-day historical volatility
of the S&P over that same period. Not only is the shape of the 2 charts pretty
much identical, but of even greater interest is what occurred at the 2 major
market bottoms in October and November 2008 and at the plunge to 10-year
lows earlier this month. We all know that the VIX peak near 90 in October was
not matched at the November lows when it peaked at around 80. But as I pointed out in this space last month, note that S&P historical
volatility peaked in November at about 20 points below its October level. In other words, the failure by the VIX to take out its October peak
(Continued on page 6...)
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A Amazon.com ZQNGL 73.69 B July 60C 18.35 19.20 100% 6/2 7.5
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G IntercontinentalExchange ICEIO 80.90 B Sept. 75C 17.60 18.50 100% 6/30 7.5
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E Intuitive Surgical AXQSA 97.32 B July 105P 18.40 19.50 100% 6/2 7.5
S
S Nasdaq OMX Group NQDUE 20.76 B Sept. 25P 6.70 7.25 100% 6/30 7.5
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V Panera Bread Company UPAHJ 58.03 B Aug. 50C 11.90 12.80 100% 6/16 7.5
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Wal-Mart Stores WMTUL 52.76 B Sept. 60P 9.15 9.60 100% 6/30 7.5
Best Buy BBYPG 37.67 S April 35P 1.00 0.90* 15.6% 4/17 5
P Buffalo Wild Wings BQUPG 38.45 S April 35P 0.75 0.65* 13.3% 4/17 5
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T Netflix QNQIZ 41.75 B Sept. 37.50C 8.60 9.40 50.0% 7/14 7.5
S eBay QXBSO 13.10 B July 16P 3.45 3.70 50.0% 7/14 7.5
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L Panera Bread Company UPAHJ 58.03 B Aug. 50C 11.90 12.50 50.0% 8/18 7.5
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McDonald’s MCDUM 56.06 B Sept. 65P 11.10 12.10 50.0% 8/18 7.5

THESE RECOMMENDATIONS WERE MADE AVAILABLE ON THE THURSDAY EVENING PRIOR TO PUBLICATION AND SHOULD BE ENTERED NO LATER THAN
APRIL 3, 2009. CONSULT OUR SUBSCRIBER-ONLY HOTLINE FOR THE LATEST INFORMATION REGARDING CLOSEOUT CHANGES, EXIT INSTRUCTIONS,
AND NEW RECOMMENDATIONS. SEE TABLE ON PAGE 6 FOR COMPLETE HOTLINE INFORMATION.
CURRENT ALLOCATIONS: AGGRESSIVE (43% CASH; 57% OPEN), PUT SELLING (58% CASH; 42% OPEN).

# MAXIMUM STRADDLE/STRANGLE PRICE. *MINIMUM ENTRY PRICE.

 2•

Aggressive PORTFOLIO
AMAZON.COM - EXPECTATIONAL ANALYSIS®: AMZN has been on DAILY CHART OF AMZN SINCE NOVEMBER 2008
fire in 2009. The shares are up more than 41% on a year-to-date basis, versus WITH 10-DAY MOVING AVERAGE
the S&P 500 Index’s (SPX) loss of about 10% for the same period. What’s
more, AMZN has surged more than 110% from its November lows, with its
10-day moving average ushering the shares higher since mid-March, mirroring
its supportive role from November and December 2008. Despite this strong
price action, investors remain heavily bearish on the shares. The International
Securities Exchange (ISE) and Chicago Board Options Exchange’s (CBOE)
50-day put/call volume ratio of 2.05 arrives higher than 98% of those taken in
the past year. Elsewhere, 9.25% of AMZN’s float has been sold short, while
Zacks reports that 15 of the 21 analysts following the shares rate them a “hold”
or worse. As these bears begin to capitulate to AMZN’s uptrend, it could create
additional buying pressure for the equity.
RECOMMENDATION: Buy the July 60 call (ZQNGL).

DAILY CHART OF ICE SINCE MARCH 2009 INTERCONTINENTALEXCHANGE - EXPECTATIONAL ANALYSIS®:

WITH 10-DAY MOVING AVERAGE
Since setting a near-term bottom in early March, ICE has rallied more than
53%, bolstered by support at its 10-day moving average. This technical
strength has helped push the shares past former round-number resistance at the
80 level. ICE has also outperformed the SPX by nearly 20% during the past 20
trading days on a relative-strength basis. Investors are trying to call a top to this
strong price action, however. Short interest jumped by roughly 6% during the
most recent reporting period, and now represents more than 5% of the stock’s
total float. An unwinding of these bearish bets could add fuel to ICE’s rally.
Elsewhere, 10 of the 14 analysts following the equity rate it a “hold” or worse.
Furthermore, the consensus 12-month price target of $76.33 per share represents
a discount of about 6% to the stock’s March 26 close. Any upgrades or price-
target increases could apply additional upside pressure for ICE.
RECOMMENDATION: Buy the September 75 call (ICEIO).

INTUITIVE SURGICAL - EXPECTATIONAL ANALYSIS®: Since WEEKLY CHART OF ISRG SINCE AUGUST 2008
September 2008, ISRG has been pressured steadily lower by resistance from its WITH 10-WEEK MOVING AVERAGE
10-week moving average. During this time frame, the stock tumbled from its
perch above the 300 level, and is now trading below the psychologically
significant 100 mark. Short sellers have jumped on the equity’s slump, with the
number of ISRG shares sold short ballooning by 24% during the most recent
reporting period. If the shorts continue to add to their winning positions, the
resulting selling pressure could force ISRG deeper into double-digit territory.
Downgrades could also speed the security’s slide, as only 1 of the 13 analysts
following the stock rates it a “sell.” Additionally, price-target cuts are likely
during the short term; ISRG’s average 12-month price target of $154 represents
a lofty premium of 58% to the equity’s closing price on March 26. Any
downward revisions to this estimate could drag the shares lower.
RECOMMENDATION: Buy the July 105 put (AXQSA).

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 3•

Aggressive PORTFOLIO
NASDAQ OMX GROUP - EXPECTATIONAL ANALYSIS®: Amid a WEEKLY CHART OF NDAQ SINCE JANUARY 2008
rally in the U.S. equities market, NDAQ stands out as a laggard. During the WITH 10- AND 32-WEEK MOVING AVERAGES
past 20 trading days, the stock has underperformed the SPX by nearly 11%.
In fact, the equity has been guided lower by its 20-week and 32-week
moving averages since January 2008. Wall Street is surprisingly upbeat
toward the shares, as Forbes named NDAQ its “Company of the Year” for
2009. Meanwhile, the stock’s Schaeffer’s put/call open interest ratio (SOIR)
weighs in at a slim 0.52, just 6 percentage points from an annual low. Data
from the ISE indicates that this bullish bias is still palpable. During the past
10 days, traders on this exchange have bought to open an average of 3.14
calls for every put. Elsewhere, Zacks reports that 6 analysts maintain a
“buy” or better rating. As the stock extends its decline, the unwinding of this
bullish sentiment should result in fresh losses for NDAQ.
RECOMMENDATION: Buy the September 25 put (NQDUE).

WEEKLY CHART OF PNRA SINCE JANUARY 2008
PANERA BREAD COMPANY - EXPECTATIONAL ANALYSIS®:
PNRA has been a Street standout lately, rallying roughly 37% since grazing the
43 level in early March. The stock’s technical muscle is nothing new, as the
shares have blazed a path of higher lows since January 2008. However, despite
the café concern’s status as an outperformer, not everyone’s convinced PNRA’s
run higher has legs. According to Zacks, the security harbors only 4 “buy” or
better ratings, compared to 8 tepid “holds.” Plus, Thomson Reuters pegs the
average 12-month price target on the equity at $51.20, representing a discount
of about 12% to PNRA’s recent peak near the 58.50 neighborhood. In addition,
short interest on the stock has surged almost 9% during the past month, and
now represents 35% of the security’s total available float. Should the equity
extend its long-term journey higher, an unwinding of this pessimism could
ignite a fresh wave of buying pressure.
RECOMMENDATION: Buy the August 50 call (UPAHJ).

WAL-MART STORES - EXPECTATIONAL ANALYSIS®: Though retail MONTHLY CHART OF WMT SINCE MARCH 2004
titan WMT has ticked higher during recent trading sessions, the shares are
quickly approaching a potential speed bump in the 55 neighborhood. This
region has played the part of both support and resistance since mid-2004, and
could once again resume its resistant role. A technical pullback could shake
loose the abundance of bulls, as most of the Street is smitten with the
security. Eleven of the 15 analysts following WMT deem it a “buy” or
better, while the consensus 12-month price target rests at $59.47 - a region
the shares haven’t explored since October 2008. Furthermore, the stock’s
SOIR is docked at 0.72, only 1 percentage point from an annual optimistic
peak. A rejection on the charts could spell trouble for the security, as the
lingering bulls capitulate to the bears’ lair. A mass exodus from these
optimists could act as a catalyst lower for WMT.
RECOMMENDATION: Buy the September 60 put (WMTUL).

Get the latest “Schaeffer” take on the market and individual equities all day long in the Blog section
of SchaeffersResearch.com - located right on the homepage. Sharpen your trading edge with
our Daily Market Blog, Daily Contrarian Blog, and Trading Floor Blog.
 4•

Put Selling PORTFOLIO

BEST BUY - EXPECTATIONAL ANALYSIS®: On March 26, BBY MONTHLY CHART OF BBY SINCE APRIL 2005
wowed the Street when its quarterly profit topped the consensus forecast. In WITH 10-MONTH MOVING AVERAGE
addition, the consumer electronics issue projected fiscal-year earnings above
analysts’ expectations. As a result, the shares of BBY skyrocketed higher,
powering through long-term resistance at their 10-month moving average.
This trendline could now act as a foothold for the equity going forward, as it
has acted as support on multiple occasions during the past few years. The
shares could find additional support at the 36 level, which acted as a short-
term backstop for BBY in July 2008. Meanwhile, short interest on the equity
climbed 17% during the past month, despite the stock outperforming the
broad market. A short-covering rally could further support the shares,
keeping this option out of the money.
RECOMMENDATION: Sell the April 35 put (BBYPG).

DAILY CHART OF BWLD SINCE NOV. 2008 BUFFALO WILD WINGS - EXPECTATIONAL ANALYSIS®: Despite
WITH 10-DAY MOVING AVERAGE the stock’s impressive year-to-date gain of nearly 50%, short sellers have
continued to target BWLD. Short interest represents a hefty 34.2% of the
equity’s total float, or 9.3 times its average daily trading volume. These
bearish investors will likely be forced to buy back their pessimistic positions
as BWLD holds steady above the 36 level - an area that has provided reliable
intraday support for the shares since March 20. As BWLD waits for multiple
layers of trendline support to catch up with its breakneck ascent, this region
should continue to provide a backstop. Meanwhile, price-target increases
from analysts could also help the security maintain its positive price action.
Thomson Reuters notes that BWLD’s average 12-month price target is $34, a
discount of 11.6% to the stock’s March 26 close.
RECOMMENDATION: Sell the April 35 put (BQUPG).
NETFLIX AND EBAY - EXPECTATIONAL ANALYSIS®: The shares of WEEKLY CHART OF NFLX SINCE NOV. 2008
NFLX have enjoyed a stellar rally from their November low of $18.23, WITH 10-WEEK MOVING AVERAGE
gaining more than 128% along support at their 10-day trendline. Additional
support is rising into the region in the form of the security’s 10-week
trendline. Meanwhile, pessimism blankets the security, with 40% of NFLX’s
float sold short, and 10 of the 11 analysts awarding it a “hold” or worse. An
unwinding of this pessimism could push the stock higher. On the other hand,
EBAY has been in a strong downtrend from its October 2007 peak, resulting
in a loss of more than 67%. However, optimism still lingers on this laggard,
as just 2 of the 23 analysts following EBAY rate it a “sell.” Downgrades
could pressure the stock lower.
RECOMMENDATION: Buy the Netflix Sept. 37.50 call (QNQIZ) and
the eBay July 16 put (QXBSO).

DAILY CHART OF MCD SINCE JANUARY 2009
PANERA BREAD COMPANY AND MCDONALD’S -
EXPECTATIONAL ANALYSIS®: PNRA has staged a solid rally from its
March low and broken through former resistance in the 58 area. Meanwhile,
investors are skeptical of the stock, as the ISE has reported a 10-day put/call
volume ratio of 2.9, indicating a growing preference for puts. A shift in
sentiment to the bulls’ camp as PNRA continues its rally could create fresh
buying pressure. On the other hand, MCD is encountering resistance in the
56 region, an area that once acted as support and could now serve as a
technical stumbling block. But, hopes are high for the firm, as only 1.2% of
the stock’s float has been sold short. An uptick in pessimism could send the
shares lower.
RECOMMENDATION: Buy the Panera Bread Company Aug. 50 call
(UPAHJ) and McDonald’s Sept. 65 put (MCDUM).
 5•

Those who have been with the Option Advisor or other Schaeffer’s services for a while know that we
place a great deal of importance on accurately measuring investor expectations. Understanding market
sentiment can provide an important trading edge. Why? High expectations create an environment of
vulnerability, while opportunity is associated with low expectations. More specifically, we look to buy
stocks with low expectations and to short those for which expectations are high. We thus consider ourselves
“contrarian,” but not in what might be considered the conventional sense.
There are many analysts and investors who believe themselves to be contrarians Option
Strategies &
CONCEPTS
who would not pass what we call the “Humphrey Neill test.” We consider Neill’s The
Art of Contrary Thinking to be the classic work on the topic, and it is the basis for our
contrarian approach to the stock market. Neill defines contrarianism as simply “a way
of thinking” and he goes on to explain very clearly how a market contrarian should
think. To best illustrate Neill’s approach, let’s focus on 3 investment approaches that
are mistakenly viewed as contrarian.
The first is conventionalism masquerading as contrarianism - stubbornly clinging to a conventional position after it has been
proved wrong by the market. Such an approach not only violates the principles of sound trading, but more importantly, it is
conceived in conventional, crowd-oriented thinking.
The second approach is value investing. A contrarian is not “a value investor in drag.” Value investors generally specialize in
buying beaten-down stocks that they perceive as cheap. But the key to a successful contrarian approach is to buy low expectations,
not low prices. In fact, high expectations often accompany stock prices that are considered cheap, and low expectations often
accompany stock prices that many consider to be expensive. A scenario of skepticism toward the more powerful sectors in the
market is a strong bullish cue for contrarians, as it is an indicator of relatively low expectations and thus high potential.
The third approach is anti-trend following perceived as contrarian. A common view is that contrarians are cantankerous
curmudgeons who automatically adopt the opposite viewpoint from that of the consensus. But this is not our conception of a proper
contrarian approach, nor is it Humphrey Neill’s. Mindless contrarianism is just as dangerous as mindless trend following. Mindless
trend followers get hurt badly at tops, a point at which they are most likely to be fully invested. Mindless contrarians put themselves
in the untenable position of trying to call tops and bottoms, and “stepping in front of the freight train” on stocks and sectors whose
powerful trends - either up or down - continue, despite the strong affirming beliefs of the crowd.
As Neill states, the crowd is “right during the trends but wrong at both ends.” If you always go against the crowd, you’ll be
bloodied during these trends. True contrarianism, according to Neill, is a synthesis of the popular opinion (the “prevailing thesis”)
and the contrary opinion (“antithesis”) to develop a conclusion.
Through a regular thought process, the true contrarian allows for the fact that the crowd is sometimes partially or even totally
right. We believe the crowd is most likely to be right when it is supportive of the current price trend and is most likely to be wrong
when it rejects the current price trend. So it is critical for the contrarian trader to synthesize into his viewpoint the current price
action of the stock or sector under analysis. This approach is evident in our Option Advisor trade commentaries.

Prior
RECOMMENDATIONS CLOSED AGGRESSIVE POSITIONS
Aerovironment - June 30Ca, AT&T - July 30Pf, iShares MSCI Emerging Mkt. - June 28Pe,
Lockheed Martin - June 105Pa.
OPEN AGGRESSIVE POSITIONS
Exxon Mobil - July 80P, Intel - July 14P, JPMorgan Chase - Sept. 15C, Meritage Homes - June 5C,
Netflix - Sept. 30C, O’Reilly Automotive - Aug. 25C, SPDR Gold Trust - Sept. 130C, SPDR S&P Homebuilders - June 14P,
Toyota Motor - Oct. 70P, Visa - Sept. 62.50P.
PUT SELLING
Amazon.com - March 55P , Buffalo Wild Wings - June 25C, Cracker Barrel - June 25P, Fluor - April 60Pc, Granite
d

Construction - March 35Cb, Halliburton - July 22.50P, Microsoft - July 22P, Newmont Mining - June 50P, Palm - May 5C,
Royal Gold - July 35C, Royal Gold - March 35Pd, Western Refining - June 7.50C.
KEY TO COMMENTS
a-Closed per 3/2 hotline b-Closed per 3/6 hotline c-Closed per 3/13 hotline
d-Achieved target profit, expired worthless per 3/20 hotline e-Closed per 3/23 hotline f-Closed per 3/26 hotline
 6•

ON THE MONEY
***Coming Soon!
We’re very excited to announce the launch of Bernie Schaeffer’s SENTIMENT, smart options for today’s investor, a new
quarterly magazine devoted to the subject of options trading. The magazine will arrive on the Web in early April.
SENTIMENT’s inaugural edition includes a cover story by Bernie -- “Are We There Yet?” -- that arms readers with some new
tools for gauging market direction. Every issue of SENTIMENT will include advanced strategy stories to help experienced
traders build their portfolios, along with educational pieces for the relative newcomer.
Keep your browser pointed at www.SchaeffersResearch.com to learn more.

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(Continued from THE MARKET on page 1...)
in November on the lower market lows in November can be explained - not by some mysterious “fear deficit” among investors at
these lower lows - but by the fact that the realized volatility of the market fell short of October’s levels.
But of greatest interest of all is the action on these charts in 2009. Despite the fact that the market took out its November lows by
a large margin earlier this month, the VIX peak on this pullback was at a meager 53, which was in a different zip code from its
October and November peaks. But this moribund VIX peak was perfectly consistent with S&P historical volatility - which has yet
to exceed 50% so far this year - and one could argue that “investor complacency” had little to do with the refusal of the VIX this
year to match its 2008 peaks. In fact, not only did historical volatility react little to market weakness, it also did not decline on the
historic rally off the March bottom. The bottom line is that realized market volatility has flat-lined in 2009 at the low end of its
range for the past 6 months, despite all the gyrations in the market. And this has turned on its head the maxim that declining
markets are accompanied by higher volatility (and elevated investor fear), and that rising markets are characterized by a decline in
volatility.
So, what does the catatonia in market volatility - albeit at elevated levels - imply (if anything) about market direction? I would
first of all suggest that you forego the temptation to view the daily gyrations of the VIX as much of a sentiment indictor, though I
would say that a break by the VIX below the support at 40 that has stubbornly held in recent weeks could be an indicator of
capitulation by the bears that could stoke another market surge. Another level to watch is the declining 80-day moving average of
the S&P - currently at about 830 - which has contained all rallies since mid-2008. A clear break above the 80-day would represent a
significant change of behavior for this market and be indicative of further upside. But another failure at the 80-day would be very
ominous and would argue for a retest of the March lows.
Bernie Schaeffer’s Option Advisor is published monthly (plus Special Bulletins) by Schaeffer’s Investment Research, 5151
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