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        WE 5-24          WE 5-17          WE 5-10           WE 5-3 
DOW    10104.26 -248.82 10353.08 +413.16  9939.92 - 66.68  + 95.88  
Nasdaq  1661.49 - 79.90  1741.39 +140.54  1600.85 - 12.15  - 50.89  
S&P-100  539.92 - 13.38   553.30 + 30.06   523.24 -  7.28  -  1.85  
S&P-500 1083.82 - 22.77  1106.59 + 51.60  1054.99 - 18.44  -  2.89  
W5000  10250.64 -223.54 10474.18 +456.71 10017.47 -184.57  -  5.42  
RUT      493.64 - 15.30   508.94 + 16.21   492.73 - 19.59  + 10.82  
TRAN    2743.67 - 54.69  2798.36 +155.26  2643.10 -100.46  + 20.93  
VIX       21.16 +   .88    20.28 -  4.75    25.03 +  1.80  -  1.41  
VXN       42.86 -   .08    42.94 -  7.79    50.73 +  4.47  +  4.02  
TRIN       1.59             0.78             2.56             1.71     
TICK       +286             +651             +364             +910        
Put/Call    .82              .72              .83              .91      

The +413 point gain for the Dow last week was followed by a -248 loss this week. The +140 Nasdaq gain shrank with a -80 point loss this week. Bears took back the gifts from last week on mixed economic reports, terrorist warnings, downgrades and cautious guidance from tech companies. The bulls tried to circle the wagons several times on Friday but were unable to shake off the urge to go home flat.

Economically the week was mixed. The Durable Goods orders were up strongly but the GDP dropped instead of gaining as expected. New Home Sales rose higher than expected while Retail Sales slipped. Terrorist warnings were issued for buses, trains and even attacks by scuba divers. Scuba divers? The markets did not know which way to turn and simply ended up going in circles instead. The typically bullish pre-holiday week ended with the Dow, Nasdaq and S&P threatening to break critical support levels of 10100/1660/1080.

On Friday the GDP report soured the day with a downward revision to +5.6% growth when analysts had expected an upward revision to +6.0%. A couple months ago traders would have traded their first born for a GDP over +3% but suddenly a measly +5.6% was not good enough. The news it appears was already priced in. The culprits were a downward revision in consumer and business spending. Inventory investment was revised upward meaning sales were not keeping pace with manufacturing. These numbers are for the 1Q, which is ancient history for traders. Analysts are now expecting the 2Q GDP to be more in the +2% to +3% range. While this is decent growth it is not enough to support the gains in the market according to (bearish) analysts. The bullish view of course is that the recovery is underway and yes, we know it is slow but it is growth. Expect this debate to be argued for months to come.

The New Home Sales posted another strong month with 915,000 annualized sales for the month of April. The consensus estimate was only 880,000. High end home sales, over $300,000, were strongest. There was no evidence of any pullback and with the economy still weak the Fed is not likely to raise rates anytime soon. The mortgage rates dropped below 7% again this week.

The big news for the week was a series of downgrades on techs. There were two separate downgrades on the software sector this week prompted by no growth in IT spending. Almost every stock was named in these cautious comments. As if that was not enough Goldman took on the chip equipment sector on Friday with a downgrade on a weaker outlook. They used the AMAT comments of +50% growth in orders this quarter compared to only a +10% to +15% expected growth for 3Q as evidence that the inventory replenishment cycle had run its course. The SOX dropped -7.6% for the week after leading the tech rally last week. Solomon Smith Barney disagreed with the Goldman downgrade saying the book-to-bill was evidence the recovery was gaining speed. Goldman countered saying the saturation of manufacturing capability would hinder profit growth for some time. Stock prices are rich with the AMAT TTM PE over 60 and NVLS over 50.

The lack of business did not keep SUNW from affirming estimates for this quarter but they did it on cost cutting not an increase in sales. They said in the analyst call on Thursday that order flow was not as smooth as the first quarter. (translation = we are having trouble closing sales and things are really tight) Another indicator of the weakness in business spending was the next round of layoffs begun by IBM. IBM said an unspecified number of workers were laid off this week at various computer manufacturing plants. An industry official said over 1000 workers were cut at server plants. Insiders who claim to know what is coming claim IBM is going to cut as many as 9,540 jobs. You can bet that ANY growing strength in business orders would have prevented IBM from cutting thousands of highly skilled workers at this stage in the economic recovery.

Despite the negative news above First Call is claiming that they are seeing many more positive pre-announcements and fewer earnings warnings than they expected. The federal government released an obscure report that said information from nearly five million small business tax returns showed profits to by up +.9%. This was for the same period that the S&P showed a -11.5% drop in earnings. Let's hope the Feds are right and there is a stealth recovery in progress. With all the earnings for the last couple quarters coming from cost cutting any top line growth should go directly to the bottom line. Now that would be a problem traders would like to have.

Planes, trains, buses and scuba divers? I think somebody has gone a little far in this CYA process. In an effort to cover all the bases the government issued yet another warning that terrorists could use scuba equipment to infiltrate our borders and harbors to execute attacks. There are many opportunities to make fun of this warning, but I will leave that up to your imagination. It is a serious matter but scuba divers? What is next? Hot air balloons?

The Pakistan/Indian conflict is heating up again. Pakistan warned everyone that they would be conducting a series of missile tests over the weekend in the Kashmir area. Let's see. You have countries shelling each other on a daily basis and you announce impending missile tests in the area. Does that sound a little strange? Either way the tension is not doing our markets any good. Neither is the peace, or lack thereof, in Israel. Suicide bombings are escalating again despite Arafat's request to stop. The combination of world events has acted to produce a run on gold which hit $320 an ounce this week. The gold bugs must be in heaven and I have heard several comments about $500 gold soon. Right, and oil will be $30 a barrel. Oh, it is almost $30 already? Pass the Krugerands!

The pundits on stock TV were continually commenting that the market drop was immaterial since it came on the lightest volume day and week of the year. I bet that is comforting to know for everyone who bought calls last week. Surely your options did not go down "because the low volume does not count", right? Just joking here but I don't care if it is 100,000 shares or one billion shares a drop is a drop and your money is lost. What they are trying to get across is that there is no conviction to this drop. It is not like there was a flood of sellers, there were just no buyers. Nobody wanted to buy and hold over the long weekend with terrorist warnings in the air and daily broker downgrades.

The battle is underway in the markets. The bulls are becoming a little braver and critical support levels were rallying points on Friday afternoon. Dow 10100, Nasdaq 1660, S&P 1080. The few sellers left on the trading floor in late afternoon tried to break those levels and were unsuccessful. There are buyers out there, just not in sufficient strength to mount a rally. They are bargain hunting on each pullback. The advance/decline ratio was negative most of the day but it struggled to almost neutral in early afternoon even as the markets were falling. The TRIN at 1.69 is in bullish territory and indicating an oversold condition. The VIX is not cooperating however and hit a low of 20.60 during the days drop. The buyers are out there but they are just outnumbered. With the summer doldrums ahead it is likely that we will trade sideways between 9800 and 10300 for sometime. Check out the Index Trader wrap this weekend for a full update of support/resistance areas and the market outlook for next week. Our biggest contrarian indicator, Ralph Acompora, came out of hiding and was a guest on the Rukeyser show Friday night. He was very careful to say he was clueless about the Nasdaq direction and was very vague in his answers. Darn, he must be on a short leash at Prudential these days.

It is with great pleasure that we announce our fall seminar in Denver. It will be October 12th to 15th with an optional boot camp on Friday the 11th for those that would like a better foundation in the basic strategies. We will announce the speaker list in the coming weeks but you know we always have 12-15 well known personalities including your favorite Option Investor writers. What I can tell you is that we will start the event off on Friday night with a casino party with craps, roulette, black jack, etc. This get acquainted event will offer prizes for everyone and provide a relaxed atmosphere to rub shoulders with the speakers and other guests. Ask anybody who has been to one of our seminars. We start at 9:am Saturday morning and run non-stop until the close. We stop only to eat and sleep but we do feed you five times a day! You can save $200 off the registration price if you sign up before July-31st. Don't wait.

Click here: http://www.OptionInvestor.com/seminar/fall2002/

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor

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