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Daily Newsletter, Tuesday, 02/05/2002

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The Option Investor Newsletter                 Tuesday 02-05-2002
Copyright 2001, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
       2-5-2002            High     Low     Volume Advance/Decline
DJIA     9685.43 -  1.66  9773.72  9603.99  1.7 bln   1309/1774
NASDAQ   1838.52 - 17.01  1867.94  1828.67  2.0 bln   1417/2117
S&P 100   552.38 -  1.05   558.13   547.32   Totals   2726/3891
S&P 500  1090.02 -  4.42  1100.96  1082.58
RUS 2000  468.82 -  1.27   470.60   465.70
DJ TRANS 2702.43 -  8.81  2717.13  2684.87
VIX        26.91 +  0.06    27.74    25.68
VXN        46.75 -  0.91    47.87    44.99
TRIN        1.80
Put/Call Ratio       .99
*************************************************************

Lack Of Stimulus Axes Market

The markets struggled to rally twice during the trading day but
both times traders sold the rally with a vengeance. The first
bump came on an oversold bounce around 10:AM but quickly faded.
The second rally began around 1:PM as several positive comments
began to lift individual issues but there was trouble brewing
in Washington. Around 2:30 Senator Daschle said he was pulling 
the stimulus package from consideration and the bids disappeared.



 



 

The list of losers was long and painful and included many of the
big names. Tyco took yet another hit and dropped another -$8
after more allegations were raised and Fitch cut the debt rating 
for Tyco Capital. Yesterday S&P cut the debt rating for Tyco as
well. TYC traded over 174 million shares as investors, fearing 
another Enron, raced for the exits. TYC has now dropped from near 
$60 to close at $23 in slightly over a month. Investors are still 
reeling from the news on Monday that they made over 700 
acquisitions that were never disclosed to the general public. 

Worldcom, (WCOM) took another hit with warnings from several
telecom companies and more downgrades. WCOM hit a new seven-year
closing low of $6.97. CEO Bernie Ebbers has got to be feeling the
heat even more as over 147 million shares traded including over 
1500 block trades. 

Pressuring the telecom sector was warnings from Sprint and Cienna
and claims that Global Crossing may have deceived investors with
their accounting. Sprint (FON) and Sprint PCS (PCS) announced
earnings and cut their outlook for all 2002. Not a pretty picture.
Even worse was warning from CIEN that they would miss estimates
and be forced to cut additional jobs. Nextel added to the woes
by saying it was in default on several loans and does not plan to
make further payments on several loans to its NII subsidiary. WCG
and LVLT have already warned they might default on future debt
payments we well. DB Alex Brown went against the trend and affirmed
their price target of $32 over the next twelve months. $32 from $5?
That would be a major move in the face of serious pessimism.

Tomorrow will tell the tale for the telecom and networking sectors
as Cisco announces earnings and issues guidance. I mentioned last
week that Cisco may be cautious in their guidance after Chambers
was very low key in a recent interview. Should CSCO talk down their
prospects tomorrow this entire sector could go even lower. Sure
CSCO is gaining market share but the market is rapidly imploding.
With only 5% of the 97 million miles of fiber active there is 
plenty of upside but that upside could take decades to build out.

With the imploding telecom/networking sectors and multiple warnings,
everyone even remotely associated with them lost ground today. The
losers included NOK, WCOM, AWE, QCOM, ADCT, ONIS, JNPR, TLAB, GLW,
LU, NT and communication chip stocks AMCC and PMCS for example.
Even BellSouth warned after the bell that they were cutting another
650-700 employees in their call center operations. 

The weakness in telecom/networking stocks tainted those with positive
results as well. MXIM reported profits inline with estimates and
predicted a rise in bookings next quarter and the stock dropped in
after hours. Think warnings are limited to techs? General Mills (GIS)
fell in after hours after saying they saw "unusually" weak volume
in its retail food business. 

About the only bright spot for the day was GE which affirmed its
earnings estimates for the quarter. They said 1Q earnings should
meet or exceed Wall Street estimates and expected full year earnings
to grow by 17-18%. They said revenues for 1Q should grow by 3-5%.
GE finished positive +1.21 at $36.21 after a very volatile day.

Economically the picture became even more mixed again as Factory
Orders rose +1.2% in December. In that report semiconductors led
the gains with a +12.75% increase in orders. However Monday's
Semiconductor Billings showed a -4% drop for December. This means
there is still serious volatility and zero visibility in the tech
sector. The ISM non-mfg numbers out Tuesday showed a slight drop
in January and the new orders component fell below the 50% level
again. These three reports increased worry for investors in the
possibility of a "W" shaped recession instead of the hoped for
"V" recovery.  Only three of the 17 industries covered by the ISM
index reported an increase in business activity while 12 reported
a decrease in January. 

It would appear that the economy and the market still has some 
tough times ahead. However, while the markets look very weak there
are some signs of an oversold bounce in our future. The moving 
average on the TRIN is approaching bullish levels and the put/call
ratio closed Tuesday at .99 which is normally bullish. Both these
indicators are overbought/oversold measurements and simply tell
us that pressure is building. The spring is compressed and will
require more and more pressure to push it lower. Traders are
afraid of the Cisco earnings and new accounting problems. With 
the accounting cloud, even a positive and optimistic Cisco may 
not be able to lift the market. 

The current down cycle may seem like weeks but it has only been
three days. We can still become even more oversold before we see a
bounce but with the economic indicators easing and new financial
disclosures appearing daily I doubt that any eventual bounce will
go far. For the first time in ages the overall new 52-week lows 
beat the 52-week highs 192/173. There is a trend change in play
that has spiked the volatility to near 27 on the VIX. The Nasdaq
closed at a two month low along with the S&P and the S&P appears
destined to retest support at 1080 with the outcome in serious
doubt. When reviewing possible plays this afternoon it was really
depressing. Most put candidates appeared oversold and most call
candidates appeared to be failing at support. While I could build
a technical argument for an oversold bounce there is a much stronger
case for continued bearish sentiment. To put is bluntly, if you 
took my advice to go flat or short at Nasdaq 1900 from Sunday you
would have done so shortly after 9:30 on Monday morning. I still 
think the Nasdaq is the key and the key to the Nasdaq is the CSCO 
earnings on Wednesday night. Positive guidance could give us a chance.
Negative guidance could add to the current tech pressure. A change
in "previously reported accounting practices" could retest the
September lows. Remember, Chambers ducked the accounting question
in a televised interview last week. Why? Enquiring minds want to 
know!

Enter very passively, exit aggressively!

Jim Brown
Editor

Have you tried the Market Monitor yet?

http://www.OptionInvestor.com/itrader/marketbuzz/


********************
INDEX TRADER SUMMARY
********************

Get Shorty
Austin Passamonte

Wasn't that the title of a movie some time ago? Appropriate market 
philosophy right now. Readers may be weary of all this bearish 
talk and after 22 straight months (with plenty more to go) I 
imagine it gets tedious. However, we can either trade the trend 
and make money or lament the "good ol' days" back in 1999 and miss 
out. Simple as that.

(Weekly/Daily Chart: BIX)


 

Anyone looking for help in the financial sector for a new bull to 
be calved won't find it tonight. Price action broke out of an 
ascending channel in its weekly chart (not drawn) to the downside, 
taking out the 50 and 200 WMAs in the process. Price action is in 
freefall and so are stochastic values across all time frame charts 
from weekly on smaller.

An old market saying goes that no lasting rally can be expected 
without financials participating. See anything resembling bullish 
technical analysis in the longer-term picture above? I for one 
sure can't no matter how hard I may squint & try.

(Weekly/Daily Chart: OIX)


 

We'll pass on looking at technology sectors tonight as nothing has 
changed with them except they are weaker now than yesterday. An 
interesting development here in the oil patch shows price action 
coiling up very tightly via wedge formation. This consolidation 
pattern has been building since last fall. Can't say for darn sure 
where price action will head on the break, but stochastic values 
are more bearish than bullish right now.

However, these less liquid indexes aren't as predictable with 
oscillators as the highly liquid symbols. XAU gold is an example 
of one that sometimes throws us a curve. I would consider picking 
thru the oil index sector components to find strong & weak members 
within. If the index breaks higher, get long the strong ones. 
Price action breaks down... short the weaklings! 

(30-Min Chart: SPX)


 

Would you believe I got some mail today about viable call & put 
play entries on the indexes? As we often repeat, this is not a day 
trading service here. I realize on choppy sessions there may be 
numerous possible entries but few of them are actual swing trades 
by definition or design.

Puts and calls at various times today worked, but we had targeted 
a specific possible scenario in last night's Swing Trade Gameplan 
for today. At that time we had price action resting between 
resistance and support with stochastic values buried in oversold 
extreme. Under those conditions I did the best I could to lay out 
things to look for. Possible scenarios would've taken five pages 
of verbiage to cover, so we hit the high notes instead.

Like clockwork all major indexes rallied in relief, price action 
kissed our denoted points of resistance (1100 SPX, 558 OEX) and 
immediately reversed from there. At the time we had stochastic 
values release from oversold, run up to overbought and turn 
bearish as well. On top of that, price action formed clear bear 
flags (pink) in the charts and closed below at the bell to confirm 
continued weakness.

Stochastic values are just beginning their descent from overbought 
extreme in harmony with longer-term charts. We are following the 
trend, long puts at the defined points of action and are now 
safely in the black. Don't know what will happen tomorrow, but we 
can't find swing trade setups any clearer than that. I hope this 
answers the bulk of questions on what took place during volatile 
times today.

Summation
I'm a broken record tonight. Short all rallies that even pretend 
to fail near resistance as were offered up today. The trend is 
still decidedly down and strong. Markets are quite methodical in 
behavior for the most part and whacking the downside right now is 
akin to printing fresh, crisp $100 bills in bundles. Eventually 
we'll do the same thing with extended rallies, but I wouldn't 
expect that to happen very soon. 

Follow the trend and print your C-notes with a bear's portrait on the bill's face!

Best Trading Wishes,
austinp@OptionInvestor.com


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****************
MARKET SENTIMENT
****************

Fear Rising
By Eric Utley

Tuesday's best and worst performing sectors helped to define the
market's current sentiment.  It's one of fear.

Seriously, when was the last time you saw gold -- the commodity --
top $300?  I'll tell you when: September 16.  Gold (GC02M) traded
up to $300 Tuesday, following the Gold and Silver Sector (XAU.X).
The XAU.X was Tuesday's best performing sector with its 3.95
percent pop.  Coming in second was Health Care (HMO.X) with a
2.75 percent gain.  Clearly, market participants are avoiding the
risks associated with stocks in general.

On the other end of the spectrum, one of the riskiest, most
leveraged sectors fell to a new yearly low.  Both the North
American Telecom (XTC.X) and Wireless Services (YLS.X) sectors
hit new multi-year lows in Tuesday's session.  The YLS.X lost
5.86 percent and the XTC.X dropped by 5.38 percent.

The spread between the XAU.X and the YLS.X served as a microcosm
for the recent market psychology.

The put/call ratio across different markets spiked higher,
revealing yet more fear among market participants.  The total
put/call ratio spiked to 0.99.  The fear gauges traded modestly
higher but are by no means at extreme levels.  The Arms Index,
however, is approaching extreme levels.  The very short-term
readings are again revealing an oversold market.  And the
intermediate-term ARMS readings are very near extreme levels.
What's more, the new high/new low index turned negative for
the first time in several months.  In other words, the internals
of the market worsened.  Yep, fear is on the rise and it's
getting worse if you're a bull.

But I'm seeing some of the downside risks in stocks lessening,
specifically in tech stocks.  The Nasdaq-100 Bullish Percent
($BPNDX) is down to 34 percent.  Granted, the indicator hit zero
in late September, which was an anomaly in my opinion.  So keep
that much in perspective.

At 34 percent, a lot of downside risk has been removed from
tech stocks.  That's not to say they can't grow more oversold,
just that risk is lessening.  What I'd like to see is a
capitulation that takes the $BPNDX down to the low 20s.  How
do you spot capitulation?  With a VIX in the mid-30s, gold
above $300, and a free fall in stocks.  You heard it here first.

Keep your head while others are not.  Don't be a tourist.

-----------------------------------------------------------------

Market Averages


DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     :  9685

Moving Averages:
(Simple)

 10-dma:  9781
 50-dma:  9930
200-dma: 10100



S&P 500 ($SPX)

52-week High: 1383
52-week Low :  945
Current     : 1090

Moving Averages:
(Simple)

 10-dma: 1118
 50-dma: 1140
200-dma: 1165



Nasdaq-100 ($NDX)

52-week High: 2771
52-week Low : 1089
Current     : 1463

Moving Averages:
(Simple)

 10-dma: 1532
 50-dma: 1601
200-dma: 1612



Gold and Silver ($XAU)

The $XAU again earned the top spot among sector movers.  The
$XAU advanced to a new 52-week high in Tuesday's session with
its 3.95 percent gain.  The sector has had a substantial move
in the last several weeks and remains one of the strongest in
the market.  The commodity (GC02M) has recently caught up with
the equities, breaking out in Tuesday's session, reaching the
psychological $300 mark.

52-week High: 68
52-week Low : 46
Current     : 68

Moving Averages:
(Simple)

 10-dma: 61
 50-dma: 56
200-dma: 56


Wireless Services ($YLS)

In contrast to the $XAU, the $YLS traced a new 52-week high
in Tuesday's session en route to earning the day's worst
performing sector spot.  Interesting side note: Tuesday's best
performing sector ($XAU) hit a new 52-week high and the worst
performing sector ($YLS) hit a new 52-week low.

The $YLS was pummeled by news from Sprint (NYSE:FON),
specifically guidance on addition of new subscribers.  The
hardest hit components of the $YLS:  NXTL -25%, PCS -20%, LWIN
-16%, TPC -12%, and WWCA -9%.

52-week High: 163
52-week Low :  70
Current     :  70

Moving Averages:
(Simple)

 10-dma: 80
 50-dma: 92
200-dma: 98

-----------------------------------------------------------------

Market Volatility

The VIX edged higher in Monday's and Tuesday's session on the
weakness in stocks.  The VIX kissed its 200-dma at 27.34.  The
200-dma is the level I'm monitoring for insights into the level
of fear in the market.

Compared to the VIX, the VXN is quite a distance from its 200-dma,
which rests overhead at 56.27.  The VXN reveals more complacency
in the technology sector compared to the broader market as
revealed by the VIX.

CBOE Market Volatility Index (VIX) - 26.91 +0.06
Nasdaq-100 Volatility Index  (VXN) - 46.73 +0.89

-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume
Total          0.99        679,948       677,554
Equity Only    0.92        591,080       544,638
OEX            1.01         20,907        21,184
QQQ            2.76         25,267        69,720
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          51      - 1     Bull Alert
NASDAQ-100    34      - 2     Bear Confirmed
DOW           50      + 0     Bull Correction
S&P 500       55      - 1     Bull Correction
S&P 100       54      + 0     Bull Correction

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

-----------------------------------------------------------------

 5-Day Arms Index  1.60
10-Day Arms Index  1.42
21-Day Arms Index  1.45
55-Day Arms Index  1.23

Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when the do, they can signal significant market turning 
points.

-----------------------------------------------------------------

Market Internals

        Advancers     Decliners
NYSE      1309           1774
NASDAQ    1417           2117

        New Highs      New Lows
NYSE       87             77
NASDAQ     55             90

        Volume (in millions)
NYSE     1,769
NASDAQ   2,072

-----------------------------------------------------------------

Commitments Of Traders Report: 01/29/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercial interests added to their net bearish position by more
than 5,000 contracts last week.  % of OI increased by 0.6 percent
in the same period.  Meanwhile, small traders picked up a few
longs and dropped a few shorts for a net increase of more than
5,000 contracts to the group's bullish position.

Commercials   Long      Short      Net     % Of OI 
01/15/02      340,005   397,024   (57,019)   (7.7%)
01/22/02      342,841   394,041   (51,200)   (6.9%)
01/29/02      345,583   401,923   (56,340)   (7.5%)

Most bearish reading of the year: (111,956) -   3/6/01
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
01/15/02      129,987     64,311   65,676     33.8%
01/22/02      125,451     65,423   60,028     31.4%
01/29/02      128,826     63,127   65,699     34.2%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year:  91,122 - 3/06/01
 
NASDAQ-100

Commercial interests' net bearish position dropped last week,
but the % of OI short increased to 11.7 percent.  Small
traders reduced their net bullish position by about 1,500
contracts.

Commercials   Long      Short      Net     % of OI 
01/15/02       32,068     34,859    (2,791)  (4.2%)
01/22/02       30,671     34,103    (3,432)  (5.3%)
01/29/02       31,577     33,651    (2,074)  (3.2%)

Most bearish reading of the year: (15,521) -  3/13/01
Most bullish reading of the year:   7,774  - 12/21/01

Small Traders  Long     Short      Net     % of OI
01/15/02       10,230     9,782       448      2.2%
01/22/02       11,885     8,787     3,098     15.0% 
01/29/02        9,709     8,293     1,416      7.9%

Most bearish reading of the year:  (9,877) - 12/21/01
Most bullish reading of the year:   8,460  -  3/13/01

DOW JONES INDUSTRIAL

Commercial interests' net position remained flat in the prior
week, with an increase in both long and short positions.  Small
traders mirrored the commercial's last week.

Commercials   Long      Short      Net     % of OI
01/15/02       15,866     9,175    6,691     26.7%
01/22/02       18,152    11,013    7,139     24.5% 
01/29/02       19,956    12,171    7,785     24.2%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
01/15/02        4,979     8,747    (3,768)   (27.5%)
01/22/02        5,424     8,969    (3,545)   (24.6%) 
01/29/02        5,872     9,709    (3,837)   (24.6%)

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

-----------------------------------------------------------------


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***********************
INDEX TRADER GAME PLANS
***********************

IS Swing Trade Model: Tuesday 2/05/2002
Rejected At Resistance

News & Notes:
------------
From last night's notes: "With intraday chart signals buried in 
oversold, the next high-odds entry might be put plays on a pop up 
to or possibly above the middle channel line (black) near 558 area 
and downside failure from there." 

"For the SPX, 1100 area has become a short-term price magnet. If 
the index pops to 1100 or higher and falls back thru 1098, I'd 
test the downside from there in a hurry!"

"QQQs are sitting inside their channel as well. A break below 
37.00 would bring its 35 area into play in a hurry."

"Consider using these patterns and levels noted above to enter 
downside plays if resistance is tested and rejects price action 
from there. Focus on channel lines and moving averages depicted 
within: if price action fails up there as stochastic values 
reverse near or within overbought extreme, that would be the ideal 
setup we anticipate."

It was a wild ride today, with plenty of volatile chop offering 
day trade scalps along the way. A break below Monday lows offered 
a nice put play scalp. A subsequent bounce off support offered 
call plays along the way. And a last-hour market plunge when 
session highs kissed right off resistance like we drew it up gave 
us the latest Swing Trade entries tracked over the close.


Featured Markets:
----------------
[60/30-Min Chart: OEX]


 

We had the channels drawn and waited for resistance near 558 to 
test & hold. Once price action failed there combined with 
stochastic value bearish reversal, it was a high-odds entry. Chart 
signals suggest we are early in this particular move.


[60/30-Min Chart: SPX]


 

As usual, the same for SPX. Pinched above 1100 level for a blip 
and rolled over from there. Both S&P 30-min charts show bear flag 
patterns (pink) that confirmed price failure with a close below at 
the bell. Appears to be early in this move.


[60/30-Min Chart: QQQ]


 

The QQQ popped above its resistance line of 37.00 for a tick and 
failed below right along with the S&Ps. Put play entry there was 
right below 37.00 level, and support lies near 35.50 from here.


Summation:
---------
Indexes got pretty noisy today on several rally attempts. 
Regardless, it still looks as if general price action will 
continue to chop its way lower from here. We track open put plays 
into Wednesday's action with trailed stops at or below entry 
levels and expect favorable action from there.


Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected 
based on volume, open interest and "Delta" values in that order. 
Our preference is usually OTM contracts except for the last few 
days of expiration when ATM or ITM contracts are preferred.

Entry triggers are points where plays are tracked when price 
action breaks above for calls or below for puts. Stops are the 
exact opposite of that. Sell targets are points to exit based on 
index levels or %gain on option contract price as noted.

*No entry targets listed mean the models are idle at that time.


New Play Targets:
----------------
         QQQ                          DJX
Feb Calls: 38 (QQQ-BL)            Feb Calls: 98 (DJV-BT)  
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 
                                

Feb Puts:  37 (QQQ-NK)            Feb Puts: 97 (DJV-NS) 
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 


=====


         OEX                         SPX
Feb Calls: 570 (OEB-BN)           Feb Calls: 1125 (SPT-BE)
Long: BREAK ABOVE none            Long: BREAK ABOVE none
Stop: Break Below                 Stop: Break Below 


Feb Puts: 550 (OEB-NJ)            Feb Puts: 1075 (SPQ-NO)
Long: BREAK BELOW none            Long: BREAK BELOW none
Stop: Break Above                 Stop: Break Above 



Open Plays:
----------
Feb Puts: 37 (QQQ-NK)             Feb Puts: 97 (DJV-NS) 
Long: BREAK BELOW 37.00           Long: BREAK BELOW 97.50
Stop: Break Above 37.50           Stop: Break Above 97.50

Feb Puts: 550 (OEB-NJ)            Feb Puts: 1100 (SPQ-NO)
Long: BREAK BELOW 557.00          Long: BREAK BELOW 1098.00
Stop: Break Above 555.00          Stop: Break Above 1095.00


IS Position Trade Model: Tuesday 2/05/2002
Failed Too Fast

News & Notes:
------------
Had today's dead-cat bounce late in the session managed to hold, 
it would have been our awaited put play entry near resistance. 
Instead the doomed move quickly failed and offered part-time 
traders a chance to enter at optimum points.


Featured Plays:
--------------
None


Summation:
---------
The next relief bounce that holds into a close is probably a high-
odds put play entry. The trend is decidedly down, and we'll play 
that way next available chance that arrives. Very tough time to be 
anything other than full-time trader following indexes as the 
ideal entries emerge at the most inopportune times.


Trade Management:
----------------
Option traders may choose listed In-The-Money (ITM) or Out-The-
Money (OTM) contracts by personal preference. They are selected 
based on volume, open interest and "Delta" values in that order. 
Position Trade model usually tracks OTM contracts with several 
weeks of time premium left until expiration for buy & hold plays.

Entry triggers are points where plays are tracked when price 
action breaks above for calls or below for puts. Stops are the 
exact opposite of that. 

*No entry targets listed means the model is idle at this time.


New Play Targets:
----------------
None


Open Plays:
----------
None


Sector Share Trade Model: Tuesday 2/05/2002
Whipsaw Session

News & Notes:
------------
Our current short plays tracked are working well and the long 
plays are hanging in there.


Featured Plays:
--------------
(Daily/Hourly Charts: RKH)


 

Regional Banking HOLDRs were a recent play we got stopped out on 
and since collapsed in breakdown fashion we were seeking. Must 
have crowded the stops a bit and got whipped out on an irrational 
rally before the plunge. Still plenty of downside room to roll, so 
we'll track it to the short side once more.


Summation:
---------
A slew of new short entries this time as weekly/daily charts 
suggest further downside action is ahead.


Trade Management:
----------------
Entry triggers are points where plays are tracked when price 
action breaks above for calls or below for puts. Stops are the 
exact opposite of that. Sell targets are points to exit based on 
index levels or %gain on share price as noted.

No entry targets listed mean the model is idle at that time.

* Asterisk means stop-loss level changed since prior posting


New Play Targets:
----------------
SHORT
XLV U.S. Consumer Staples
Short: BREAK BELOW 26.00 
Stop:  Break Above 27.50

XLV U.S. Cyclical/Transport
Short: BREAK BELOW 28.50 
Stop:  Break Above 29.50

SMH Semi-Conductor HOLDR
Short: BREAK BELOW 43.50 
Stop:  Break Above 45.75

UTH Utilities HOLDR
Short: BREAK BELOW 84.50 
Stop:  Break Above 87.00

RTH Retail HOLDR
Short: BREAK BELOW 96.40 
Stop:  Break Above 99.50

RKH Regional Banks HOLDR
Short: BREAK BELOW 106.90 
Stop:  Break Above 110.00

IDU Dow Jones U.S. Utilities
Short: BREAK BELOW 60.00 
Stop:  Break Above 62.50

IYF Dow Jones U.S. Financials
Short: BREAK BELOW 74.50 
Stop:  Break Above 77.50

IYR Dow Jones U.S. Real Estate
Short: BREAK BELOW 80.00 
Stop:  Break Above 82.50

IJJ Mid-Cap 400 BARRA SPDRs
Short: BREAK BELOW 88.20 
Stop:  Break Above 91.00

IJK Mid-Cap 400 BARRA Growth Index
Short: BREAK BELOW 88.20 
Stop:  Break Above 91.00

MDY Mid-Cap SPDRs
Short: BREAK BELOW 90.00 
Stop:  Break Above 93.00



Open Short Plays:
----------------
HHH Internet HOLDR
Short: BREAK BELOW 34.00 
Stop:  Break Above 29.00 *

SWH Software HOLDR
Short: BREAK BELOW 45.50 
Stop:  Break Above 43.50 *

IYV U.S. Internet
Short: BREAK BELOW 13.75 
Stop:  Break Above 12.75 *


Open Long Plays:
---------------
BBH Biotech HOLDR
Long: BREAK ABOVE 120.00 
Stop: Break below 116.00

PPH Pharmaceutical HOLDR
Long: BREAK ABOVE 97.00 
Stop: Break below 94.00 

IYH Dow Jones U.S. Healthcare
Long: BREAK ABOVE 60.90 
Stop: Break below 59.00

XLP Consumer Staples
Long: BREAK ABOVE 25.30 
Stop: Break below 24.75 *


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options,” claims author Larry Spears in his new compact guide 
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The Option Investor Newsletter                  Tuesday 02-05-2002
Copyright 2001, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

GILD $66.39 +0.64 (-3.42) Merrill Lynch and RBC Capital
Markets initiated neutral to bullish coverage on GILD Monday
morning but the analyst actions didn't help to stem the
weakness in the broader biotech sector.  Given the failure
of the BTK.X, we're dropping GILD early in the attempt to
avoid a breakdown in the stock.  Use a stop below $65 or
strength early tomorrow to exit plays.

DPMI $46.95 -1.25 (-2.13) Despite the flurry of conflicting
positive and negative news in the Chip sector so far this week,
it is clear that the bears are winning this fight.  After several
failed attempts to clear the $50 resistance level, DDPMI appears
to be losing ground in terms of both price and relative strength.
With today's close below our $47 stop, we have got to pull the
plug tonight.

NOK $21.50 -1.14 (-2.07) Even a helium-filled balloon goes down
in a descending elevator, and NOK has been that balloon this
week, riding the Wireless Sector (YLS.X) lower at a high rate of
speed.  No amount of bullish news in this particular stock could
overcome the flood of negative earnings news, and that point has
been driven home over the past two days as NOK has given up
nearly 9%.  Adding insult to injury is the fact that Tuesday's
session saw strong selling volume and our $22 stop (the reaction
low from last week) was violated.  Note that the stock is still
greatly outperforming its sector, but with the sector greatly
underperforming the broad market, NOK is a drop tonight.


PUTS:
*****

None


***********************************************************
DAILY RESULTS
***********************************************************

Please view this in COURIER 10 font for alignment
*************************************************

CALLS              Mon    Tue

TGH      76.99    0.78   2.60  Very nice, earnings Friday morning
DPMI     46.95   -0.88  -1.25  Dropped, weakness in the SOX.X
RATL     22.24   -0.76  -0.72  Growing oversold, trading at stop
UPS      56.90   -0.23   0.34  Remains tied to the broader market
NOK      21.50   -0.93  -1.14  Dropped, weak wireless and telecom
ASYT     16.32   -0.63  -0.02  Bounced from 10-dma, watch the SOX.X
GILD     66.39   -3.06   0.64  Dropped, weak biotech sector weighs
UNH      75.00   -1.07   1.10  Right sector and stock, pullbacks!

PUTS

IVGN     53.24   -3.04   2.13  Volatile, still trending lower
GNSS     53.71   -4.80  -1.10  On the verge of a big breakdown
CCMP     65.12   -1.11  -2.01  Working lower than the SOX.X, $60
GS       81.04   -2.90  -1.46  Acts very heavy, watch $80 level
AT       54.41   -0.94  -0.33  Tightly coiling, watch for a break
AGN      66.83   -5.41   3.33  Very volatile, watch for rollover
VRSN     26.45   -2.10  -2.45  Very nice, look for an exit point
EBAY     54.50   -2.49  -1.06  Short-term support at $54
TLAB     13.39   -0.96  -0.67  New, weak sector, weak stock
THQI     39.43   -0.80  -3.02  New, breakdown from consolidation


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********************
PLAY UPDATES - CALLS
********************

UPS $56.90 +0.34 (+0.11) UPS has a modest amount of relative
strength working for it, but won't trade measurably higher
without support from the broader market and the transportation
group.  Traders should be monitoring the S&P 500 and Dow
Jones Transports ($TRAN) for market and sector confirmation.
UPS' fractional gain in today's session reinforced the
stock's small amount of relative strength.  Its bounce from
the 50-dma in yesterday's session was encouraging as it
revealed that the buyers are still interested in this
stock.  Future bounces from significant support levels, such
as the 50-dma currently at $56.04, can be used to gain
entries on weakness into this play.  Given the current
defensive nature of the market, we're more comfortable with
entries near support as the strategy will help to minimize
risk and allow for a tight stop.  Plus, entries at support
will hold better reward potential ahead of any breakout
attempt.


ASYT $16.32 -0.02 (-0.65) A new insider sales report filed
Monday revealed selling on the part of Asyst officers.  The
report may have contributed to the stock's weakness during
the session.  ASYT continued lower in today's session,
reflecting the cautious state of the Semiconductor Sector
(SOX.X).  This play remains tied to the price action in the
SOX.X.  Without support from the broader chip sector, ASYT
will have difficulty advancing higher.  The stock remains
one of the strongest in the chip sector, but it still needs
support from the SOX.X to move higher.  Its relative
strength was displayed near the 10-dma Tuesday, when buyers
stepped in to prop higher ASYT into the close.  The stock
finished strongly and with support from the SOX.X, could
follow-through into tomorrow's session.  Traders who took
entries near the 10-dma at $16.15 can use a tight stop to
manage risk going forward.  With the weakness in the
broader market and tepid trading in the SOX.X, we're in
favor of picking up entries in ASYT near support until the
market favors more aggressive entries.

RATL $22.24 -0.72 (-1.48) Skating on thin ice, RATL is
threatening to break down as the Software sector (GSO.X)
continues to languish.  The $178 level failed as support on
Monday, and the GSO was under selling pressure throughout the
day on Tuesday, falling to its lowest point since early December
and closing right on the low of the day.  That pressured RATL to
touch just below our $22 stop before getting a mild bounce into
the close.  Whether support holds and gives us a bullish entry
is likely going to rest on the fate of the broader sector.  There
is strong support for the GSO at $170, and a bounce from that
level that accompanies a rebound in shares of RATL from current
levels looks good for new entries.  Just remember that a close
below $22 will have this one moving to the drop list.  Near-term
resistance is now at $23 and traders looking for a bit of
confirmation before playing will want to see the stock clear this
level on solid volume before venturing into new positions.

TGH $76.99 +2.60 (+3.38) The one bright spot (other than precious
metal stocks) in this market has been the Health Care sector
(HMO.X), which continues to defy gravity, completing its breakout
over the $480 level on Tuesday.  Our TGH play has performed
beautifully so far this week, holding up on Monday and rocketing
through the $75 resistance level today.  This bullish action is
likely due to two primary factors; bullish movement in the sector
and anticipation of a solid earnings report Friday morning.  With
the solid breakout on heavy volume (more than double the ADV) the
past two days, we are aggressively tightening our stop to $75
(just above today's low).  Conservative traders that got into the
play last week near $71 may even want to harvest profits near
current levels.  A push through the $77 level is tradable for
momentum players, but keep in mind that the stock will face stiff
resistance near the $80 level (highs from late 2000).  Since
we'll want to have all positions closed by Thursday's closing
bell, use caution in initiating new plays on a dip near support.
Profit taking may get started early and we don't want to be left
holding the bag.

UNH $75.00 +1.10 (+0.03) UNH continues to shine in bullish form
on the back of a solid breakout in the Health Care sector (HMO.X),
which blasted back through the $480 resistance level today after
some mild weakness on Monday.  That took HMO to a new 11-month
high, and UNH is flirting with a breakout over the $75 resistance
level.  The sector momentum looks like it could continue running
up to the year highs near $500, and that should easily propel UNH
through the $75.50 level (today's intraday highs).  Target new
entries on intraday pullbacks near $74 or wait for a breakout to
new highs to initiate momentum-based entries.  Keep an eye on
volume, as it will need to remain strong to support a breakout
move.  Move stops up to $73.


**************
NEW CALL PLAYS
**************

None


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*******************
PLAY UPDATES - PUTS
*******************

AGN $66.83 +3.33 (-2.09) AGN was knocked down in yesterday's
session based on the broader weakness in the biotech and
pharmaceutical sectors.  The Elan (NYSE:ELN) news added to
AGN's weakness.  The stock traded as low as $62.75 in
yesterday's session on significant volume.  Trading activity
was also heavy in today's session, when Banc of America
upgraded AGN.  The firm said that it liked the prospects for
its spin-off the medical device business that we've been
writing about.  AGN retraced the majority of its sell-off
from Monday, but slipped lower in the last hour of trading
today.  We're looking for the stock to head lower and
retest its low from Monday sometime later this week.  Traders
can look for entries at current levels with weakness in the
Drug Sector (DRG.X).

CCMP $62.00 -2.01 (-3.12) CCMP is slated to present at the
Goldman Sachs Technology Conference after the bell tomorrow.
Keep that in mind going into Thursday's session, especially
if you're holding gains in this play.  CCMP slipped lower
in the last three trading sessions after rolling over near
its converged 10-dma and 200-dma last week.  Its rollover
last week and subsequent price action should reinforce that
entering puts near resistance works in this market
environment.  If you missed last week's entry, don't worry,
we may have another in this play.  Those with open
positions should take your cues from the Semiconductor
Sector (SOX.X).  CCMP is trading poorly relative to the
SOX.X, which is a very positive development.  Ideally,
we'd like to see the SOX.X continue to weaken and breakdown
in the coming sessions.  That should open the selling in
CCMP.  If the SOX.X does substantially weaken, look for
CCMP to decline below the $60 level.  From there, we'll
target the high- to mid-$50s for a downside exit point.
Conversely, if the SOX.X advances in the coming sessions,
watch for CCMP to rollover near its 10-dma around $65.  We're
lowering our coverage stop on this play to $66.50.

AT $54.41 -0.33 (-1.27) The bearish news is mounting in the
telecom sector.  The latest warning came from Sprint (NYSE:FON).
We're waiting for the next warning.  Meantime, AT continues
to trade well relative to its sectors: North American
Telecom (XTC.X) and Wireless Services (YLS.X).  The two were
down by about 5.5% each in today's session, yet AT finished
only fractionally lower.  The stock is trading in a very
volatile fashion and on increased volume.  Hopefully the
excitement currently displayed in shares leads to a big
breakdown in the coming sessions.  AT continues to fail at
its 10-dma, currently at $55.66.  That level remains the best
place to search for new entries into this play as risk can
be managed with a tight stop just above $56 -- the new site
of our coverage stop.  The building wedge on the daily chart
portends a big move in AT.  To reiterate, we prefer entries
near the 10-dma, which would position traders ahead of a
breakdown and allow for easier risk management.  However, if
momentum is your game, then look for a breakdown below the
$53 level in a weak telecom market.

EBAY $54.50 -1.06 (-3.55) The breakdown we were waiting for
didn't waste any time appearing, as EBAY headed south at the
open on Monday and looks like it has more room to fall.  Once
the Internet index (INX.X) fell through support near $125, it
was purely a function of sector momentum, as EBAY gave up the
$58 support (now resistance and the location of our stop) level
with barely a whimper and then took out its 50% retracement at
$56.60.  The bulls have attempted two rallies off their lows
the past 2 days, and both of them ran into eager selling near
$56.50.  That's no coincidence, given that 50% retracement
level.  Bears now have their sights set on a test of the $52
support level and a dip and bounce near that level will make for
a good spot to harvest some short-term profits.  If you're
looking for a fresh entry, consider a failed rally near $56.50
or a breakdown under $52.  Look for selling volume to continue
to rise on a breakdown before playing and confirm the INX is
still feeling selling pressure.

GNSS $53.73 -1.08 (-6.07) Coming within a gnat's-hair of the drop
list last week as it flirted with the $61 level, GNSS finally got
moving in the bears' direction on Monday.  And boy, did it ever!
With a gap down on Monday and further losses today, the stock has
given up more than 10% so far this week and came to rest at the
close right on the 38% retracement level ($53.81).  This has been
a point of support for the past couple weeks, and a breakdown
below $52.50 (today's intraday lows) will likely usher in a fresh
round of selling.  Intraday resistance is building at $56, and
should be firm at $58.  Target new entries on either a rally
failure at resistance or a volume-backed breakdown under $52.50.
We're leaving our stop at $61 until we see the stock break down
to new relative lows.  Watch the Semiconductor index (SOX.X) for
confirmation of sector weakness.

GS $81.04 -1.46 (-4.36) Another day, another broken level of
support for the Broker/Dealer index (XBD.X), as market sentiment
continues to erode.  On Monday, the XBD fractionally broke below
the 200-dma ($480) and then today it plunged a bit further,
coming to rest right on the $473 level.  GS is following the XBD
lower, breaking below the $84.50 level at the open yesterday and
coming to rest just above the $82 support level.  Another
negative day in the markets was all we needed to see that support
level broken and GS is now closing in on the $80 level and if it
doesn't hold, we'll soon be looking at a test of the $78 target
from the PnF chart.  Daily Stochastics are still diving towards
oversold, so shorting the intraday rallies still makes sense.
Target a failed rally near $83 or even $84 for initiating new
positions and tighten stops to $85.40 (just above the top of
Monday's gap).  Momentum traders will want to be careful entering
on a break below recent lows ($80.50), as the risk of a bounce
increases as the stock nears major support.

IVGN $53.24 +2.13 (-0.91) After the severe pummeling that Biotech
stocks have taken over the past month, a bit of a bounce was to
be expected and IVGN got a decent one on Tuesday, recovering
right to the $54.50 level before the bears made it clear that
they aren't done yet.  Even with the afternoon buying surge, the
Biotech index (BTK.X) still closed in the red, finding resistance
at the 62% retracement of its fall rally and now resting
precariously above its $480 support level.  While there is some
intermediate support near $475, it looks like the BTK is destined
to test the $460 level sooner rather than later.  Moving back to
our IVGN play, we can see the well-established downtrend
continuing to control the stock's movements.  Intraday rallies
are being sold, and the 10-dma ($55.34) is providing solid
resistance.  Enter new positions on a rollover near $55 or on a
volume-backed breakdown below $50.50.

VRSN $26.45 -2.45 (-4.55) There's weakness, and then there's
weakness.  And then there's VRSN.  In just the past 6 sessions,
shares of the company have given up nearly 24% and today's 8.5%
slide took the stock to its lowest closing level since June of
1999.  And to make matters worse, the selling volume was heavy,
increasing into the close.  This is a momentum collapse, pure
and simple, and it is showing no signs of stopping.  The stock's
deeply oversold condition could give us a short-term bounce, but
that will likely just be another entry point.  Enter new positions
on a failed rally below our resistance at $30.50 or else target a
continued breakdown below $26.  If trading the breakdown, make
sure it is continuing to come on heavy volume.  We're lowering
our coverage stop to $31.


*************
NEW PUT PLAYS
*************

TLAB - Tellabs $13.39 -0.67 (-1.63 this week)

Tellabs, Inc. designs, manufactures, markets and services
optical networking, next-generation switching and broadband
access solutions. The Company also provides professional
services that support its solutions. Products provided by
Tellabs include optical networking systems, broadband access
systems and next-generation switching systems.

The service providers are reporting bearish developments.
The handset makers are reporting bearish developments.  Even
the equipment makers are reporting bearish developments.
Could the component suppliers be next?  The telecom sector
remains mired in a market that is oversupplied and lacks
demand.  Sprint (NYSE:FON) was the latest to report on that
trend.  With the end-market for wireless and networking
equipment slumping, components suppliers such as TLAB could
remain under selling pressure in the immediate future.  The
stock broke below double-bottom support at the $14 level in
today's session on active volume.  We're looking for this
low-priced stock to get more so.  Bearish traders can track
the stock's declining trend by watching first for a trade below
the $13 level.  From there, confirm weakness with a decline
below $12.50.  After that level, we can foresee TLAB trading
down to the $10 range.  Although it's not a big move in the
underlying, we think this is a high probability play.  Plus,
the low price of the underlying makes for relatively cheap
premium in the options.  We can get long some significant
delta in this play for less because of the lower cost to
carry the underlying.  With that said, it may be best to
use an in-the-money contract for this play.  Our stop is
at $15, which gives this play a higher reward potential than
risk. 

***February contracts expire next week***

BUY PUT FEB-15*TEQ-NC OI=2671 at $1.80 SL=1.00
BUY PUT MAR-15 TEQ-OC OI=2348 at $2.15 SL=1.25
BUY PUT MAR-12 TEQ-OV OI= 699 at $0.70 SL=0.25

Average Daily Volume = 5.60 mln



THQI – THQ Inc. $39.43 -3.02 (-3.82 this week)

THQ Incorporated is a developer, publisher and distributor of
interactive entertainment software for hardware platforms in
the home video game market.  The company publishes titles for
Sony's Playstation 2, Nintendo 64, Nintendo Game Boy Color and
personal computers in most interactive software genres,
including children's, action, adventure, driving, fighting,
puzzle, role playing, simulation, sports and strategy.  Its
customers include Wal-Mart, Toys "R" Us, Electronics Boutique,
Target, Kmart Stores, Best Buy, as well as other national and
regional retailers, discount store chains and specialty
retailers.

So many breakdowns, so little time!  When a plan works, don't
mess with it, and right now playing the breakdowns in Technology
stocks is providing consistent results.  Last month we played
the downside in shares of THQI on concerns of slowing game sales
following the holiday season.  That premise played out nicely
and we exited the play when it found support near $42.  Shortly
thereafter, THQI gapped up near $47, and since then has been
drifting lower, coming to rest on Monday just above the $42
support level.  That support came to an ignominious end on
Tuesday as heavy selling knocked the stock back for a 7% loss,
giving us another double-bottom breakdown on the PnF chart.  The
current bearish target from the PnF chart is $29, so there is
definitely some room to fall.  Use a failed rally near the $41
intraday resistance, or possibly as high as $42 and set stops at
$43.  Momentum traders can enter on a drop below Tuesday's lows
($39.25) on continued strong volume, but will want to watch for
a possible bounce as THQI approaches the September lows near $37.
This will be a necessarily short play due to the fact that THQI
announces earnings on February 13th (next Wednesday), so we only
have a week to play.

*** February contracts expire next week ***

BUY PUT FEB-40 QHI-NH OI= 766 at $2.45 SL=1.25
BUY PUT MAR-40*QHI-OH OI=1111 at $4.30 SL=2.75
BUY PUT MAR-35 QHI-OG OI= 522 at $2.00 SL=1.00

Average Daily Volume = 1.55 mln



************************Advertisement*************************
”If you haven’t traded options online – you haven’t really traded 
options,” claims author Larry Spears in his new compact guide 
book:  

“7 Steps to Success – Trading Options Online”.

Order today and save 25% (only $15) by clicking on PreferredTrade 
and clicking on the link to the book on its home page.

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


**********
DISCLAIMER
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support
The Option Investor Newsletter                  Tuesday 02-05-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.




**********************
PLAY OF THE DAY - CALL
**********************

GNSS - Genesis Microchip $53.73 -1.08 (-6.07 this week)

Genesis Microchip designs, develops and markets integrated
circuits that receive and process digital video and graphic
images.  Its integrated circuits are typically located inside a
display device and process images for viewing on that display.
The company also supplies reference boards and designs that
incorporate its proprietary integrated circuits.  GNSS is
focused on developing and marketing image-processing solutions
and targets the flat-panel computer monitor and other potential
mass markets.

Most Recent Update

Coming within a gnat's-hair of the drop list last week as it
flirted with the $61 level, GNSS finally got moving in the
bears' direction on Monday.  And boy, did it ever!  With a gap
down on Monday and further losses today, the stock has given up
more than 10% so far this week and came to rest at the close
right on the 38% retracement level ($53.81).  This has been
a point of support for the past couple weeks, and a breakdown
below $52.50 (today's intraday lows) will likely usher in a fresh
round of selling.  Intraday resistance is building at $56, and
should be firm at $58.  Target new entries on either a rally
failure at resistance or a volume-backed breakdown under $52.50.
We're leaving our stop at $61 until we see the stock break down
to new relative lows.  Watch the Semiconductor index (SOX.X) for
confirmation of sector weakness.

Comments

GNSS is on the verge of a major breakdown.  That move could be
completed in tomorrow's session.  It's a straightforward play:
look for a decline below $52.  Such a decline should open the
way to heavy institutional selling.  Importantly, watch for
weakness in the SOX.X.  Target $50 to the downside on a breakdown
tomorrow and $45 over the next several sessions.

***February contracts expire next week***

BUY PUT FEB-55*QFE-NK OI=1153 at $3.70 SL=2.25
BUY PUT MAR-55 QFE-OK OI= 827 at $6.10 SL=4.50

Average Daily Volume = 2.81 mln



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How to Keep Eight Fingers and Two Thumbs In One Easy Decision!
Buzz Lynn
buzz@OptionInvestor.com

Those who remember the now infamous Ginsu Knife - yes the one that 
slices, dices, cuts through steel plating, and then slices some 
more - would never get their fingers anywhere near those things 
lest they risk loss of limb and an expensive trip to the emergency 
room.  Keeping your fingers and thumbs was an easy decision to 
make since it only required that Chez John Q. Public keep his/her 
fingers away from the blades of Benihana.

So why then are investors so anxious to catch the falling knives 
offered up daily in the markets?  One word - Greed.  Control the 
greed monster and you'll keep those fingers and thumbs every time.  
Yes, we all have the temptation to enter long positions on some 
fallen angel of a stock when we think the bad news is overdone.  
After all, there are analysts galore talking about the compelling 
value at this new 52-wk low, the great EBITDA earnings (another 
word for pro-forma or not reporting real losses), the capable 
management, the hallucination-induced growth story about a 2001 
turnaround (Oops, wrong.  How about late 2002?  That sounds 
reasonable unless it doesn't work by then either.).

Unfortunately, correct assessment or not, the analysts have no 
clue where the bottom is.  Only the average citizen voting with 
the placement of his/her in stocks, bonds, real estate, gold, or 
cash has the power to know that.  When they believe it profitable 
to place their money back in the markets, they will.  But not 
until then.

Until then, the public sits in cash, or based on today's action, 
buys gold.  Until accounting scandals, or at least murky 
accounting issues are resolved, there will be no outpouring of 
cash into the equity market.

Still, many investors with the experience of the last 20 years 
under their belts were raised Pavlovian-style to listen to bullish 
analysts and buy dips.  At least it is called a dip when really, 
in fact, it is the resumption of the bear market after a reflexive 
rally.  Again I note that this is a primary bear market wherein a 
stocks primary movement is down.  It works just like the bull 
market did over the last 20 years, only in reverse.  20 years from 
now (OK, five or ten years or pick your favorite number), there 
will probably be a generation of investors that will think of 
stocks as a lousy investment because they "have not risen in 20 
years".  As I responded to an e-mail last night, "When the last 
holdout surrenders his last share at a fire sale price because he 
can take it no longer, I'll be buying everything in sight."  I 
believe that will be a while.

That said, many investors have Enron (ENE) on the brain and for 
good reason.  But ENE is merely symptomatic of a larger problem 
that falls under the heading of deceitful accounting, a tough 
violation to uncover, but clearly obvious once exposed.  I've 
spent a good amount of time talking about the deceptive intent of 
legitimizing "pro-forma" earnings while effortlessly burying "one-
time" charges in a footnote.  A series of "one-time" charges is a 
series of real charges, and that constitutes losing money.  It 
can't be called anything else if one is to remain honest.  

So what does this have to do with a falling knife?  Plenty.  
Another component of "Enronitis" that, to date, I have heard few 
talk about is the debt load associated with the violating company.  
Conspicuously absent from the suspicion or failure list are 
companies with zero or little debt.  Debt is a big killer that 
brings down the whole house of cards - GX, KM, ENE, and now TYC, 
PCS, WCOM all carry huge amounts of debt compared to the income 
they generate to service that debt.  [Editor's note:  As I write 
this, Bob Pisani on CNBC is talking about heavy debt bringing 
about big pressure on corporate stock - guess I'm no longer 
offering original thought].  This could even bring GE under 
suspicion.  New Mantra: Debtors will be scrutinized.

Now that we know that, I rhetorically ask, "Are low rates going to 
help spur the economy?"  Not if the qualifications for getting a 
loan (That's really what bonds are - a loan) are too tough for 
many to qualify.  Think of any company with heavy debt load as a 
falling knife.  Anybody interested in some charts of the heavily 
indebted or the now debt-crushed (remembering that $0 is ground on 
to which the knife falls)?  More to the point, anybody want to 
catch these fallen knives? 

*Some analyst ratings courtesy of Dave Berry.

Enron chart (ENE - daily):


 


For those wondering, the last chart value is $0.67 for ENE.

K-Mart chart (KM - daily):


 


Final Value for KM is $1.07.  A 52-wk low can always get lower as 
KM demonstrated.  Even Martha Stewart can't service K-Mart's debt 
load.  However, KM stands a good chance of emerging from Chapter 
11, as the bankruptcy court will allow it to reject leases on 
300+/- of its worst performing stores thereby saving hundreds of 
millions of $$$ on rent.

Global Crossing chart (GX - daily):


 


Final value on GX was $0.30 before trading was halted.  GX 
investors will never see a dime under any bankruptcy plan and 
subsequent dismissal.  Investors looking to catch the falling 
knife here lost both hands and can't even hope to pick up a butter 
knife in the future.

Here are two more on deathwatch.

WorldCom chart (WCOM - daily):


 


In fairness to WCOM, it has a good customer base and is probably 
the largest international data and voice carrier network.  Problem 
is that it also carries big debt and has shrinking voice traffic 
(former cash cow) and shrinking margins thanks to current industry 
overcapacity.

Sprint PCS chart (PCS - daily):


 


Nothing particularly wrong with PCS.  It merely has a product with 
slowing sales, and is yoked with debt - a staggering 12 times the 
amount of debt as equity.  Sprint (FON) is on the hook for much of 
it, which is having an effect on its stock price too.

While the next one is not on deathwatch yet, going long is pure 
speculation.  Cockroach theory applies here.  Where there is one 
roach, there are likely many.  The investing public is right to 
suspect that more roaches probably lurk currently unseen.  The 
good news is that this particular company appears to have real 
earnings.  Time will tell.  Heck, even Austin has intimated his 
interest (not commitment) when this one hits $20.  If you guessed 
Tyco (TYC), give yourself a gold star.

Tyco chart (TYC - daily):


 


TYC is another one that has been a consistent target of the 
accounting irregularities crowd.  So far, none of it has been 
proven.  But that hasn't kept investors and institutions alike 
from dumping it and asking questions later.  Even when analysts 
and the CEO were crowing about the compelling buy, shares were 
sinking like a stone.  CEO and CFO announcements to repurchase 
500K shares each mattered only momentarily - until it was 
discovered that $8 bln worth of purchases in smaller companies 
were made that went previously undisclosed.  Converting commercial 
paper to revolving lines of bank credit did not inspire 
confidence.

The point of all this?  What looks on the surface to be a 
compelling buy frequently isn't, especially if EBITDA or pro-forma 
earnings remain the reporting method of choice, and if those 
companies are laden with a heaping helping of debt.  These are not 
the only companies engaged in these practices.  There are many 
that have yet to surface.  But surface they will.  How long can it 
be kept secret?  Until the company discloses or the forensic 
accountants in the investing public sleuth it out.  Either way, 
there is every chance that the next case of Enronitis may afflict 
your company - a former compelling value.  

Newton's' law applies even in finance.  An object in motion will 
stay in motion until acted upon by an outside force.  Translating 
that to the every day world:  gravity will act on a falling knife 
until it hits the ground or something successfully grabs it in 
mid-air.  Unless you are the P.T Barnum knife juggler (even he 
gets cut every now and then), you are better off letting the knife 
hit the ground rather than attempt to catch it.  So for those that 
want fingers left to pick the discarded knives up off the ground 
another day, let them hit for now lest many fingers be lost in the 
process.

Just say no to the falling knife.

Until tomorrow, keep your wings level and trust your instruments!


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