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Daily Newsletter, Thursday, 05/02/2002

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The Option Investor Newsletter                Thursday 05-02-2002
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)
************************************************************ 
        05-02-2002        High      Low     Volume Advance/Decline
DJIA    10091.90 + 32.30 10117.50 10040.10 1363 mln   1831/1291
NASDAQ   1644.90 – 32.71  1695.07  1640.80 1849 mln   1705/1783
S&P 100   537.53 –  1.00   541.66   534.65   totals   3536/3074
S&P 500  1084.56 -  1.90  1091.42  1079.46
RUS 2000  513.37 +  2.54   514.17   509.80
DJ TRANS 2749.51 +  5.85  2773.98  2736.55
VIX        22.38 +  0.18    22.99    22.10
VIXN       44.52 +  0.70    45.03    43.11
Put/Call Ratio      0.93
************************************************************
Two Markets Under One Roof
by Leigh Stevens

The S&P Market began on a quiet note but tech fireworks in Nasdaq 
came shortly after. Two markets under one trading roof, sort of. 
There was a definite pause to blue chip buying of the past two 
days, as the market waited for further news on the business and 
economic front. It was touch and go as to whether key technical 
support in the S&P 500 (SPX) and S&P 100 (OEX) Indexes at 1080 
and 545, respectively, would be broken - they were not. Nor was 
100 in DJX. Meanwhile, the Nasdaq indices were down from the 
opening, falling to and beyond recent intraday lows.  

While the overall volume level was less than the two preceding up 
days, much of what there was of volume, was declining volume. On 
the Nasdaq downside volume ran 6 times that of advancing volume. 
On the NYSE it was about 50/50. Because of the lopsided volume 
measures, there were also high readings, indicating heavy selling 
pressures (above 1.50), in the Arms Index or TRIN (for TRading 
INdex) on the NYSE.  Nasdaq was the winner in HIGH Arms Index 
reading, advancing to a closing level of an extreme 5.65. The 
Nasdaq Arms Index was well above 3.50 most of the afternoon. 

GENERAL NEWS and INFLUENCES -
The morning's batch of economic numbers signaled that conditions 
in the labor market continue to be challenging. The market is 
looking to get a better read of the job market with the release 
of the April employment report on Friday. The overall market 
early caught strength from retail, paper and brokerage sectors, 
with brokerages getting some mileage from some positive press 
from a Street Analyst report that was circulating. Imagine, 
someone still listens to these folks -- and, about their own 
industry to boot!  No conflict of interest there. 


ECONOMIC FRONT - 
Reports that first-time filings for state unemployment benefits 
fell 10,000 to 418,000 in the week ending April 26th put new 
claims to the lowest level since mid- March. However, a consensus 
figure had economists predicting a lower initial jobless claims 
figure, more like 407,000. 

The four-week unemployment first-time filings average, which 
smoothes out the week-to-week numbers, fell to 435,750, from 
454,250. The number of workers continuing to collect unemployment 
benefits rose to 3.77 million, up from 3.69 million. 

Semiconductor stocks rallied early, falling after that -- the 
early influence was from the Semiconductor Industry Association 
(SIA) reported that worldwide sales of computer chips rose 7.2 
percent in March from February levels. SIA reported that this was 
the highest monthly sequential increase since April 1986. The SIA 
also assessed that the growth in sales indicates that inventory 
build-up has been worked through and that product demand is now 
beginning to pick up. 

STOCK/COMPANY EVENTS -
The boost from the upbeat chip report was not enough to help 
boost the "big 3" of tech: Intel (INTC), Cisco (CSCO) and 
Microsoft (MSFT) - MSFT popped up early, but couldn't keep a 
rally going.  Cisco is not attracting buying interest ahead of 
its earnings release next week. Qualcomm (QCOM), another NASD 
biggie, was trapped in listless trade - no help in techland from 
this one and NOT from Oracle (ORCL), which continued lower, 
losing a few more percentage points. The best that can be said 
for ORCL is a technical note, as the stock is approaching minor 
support implied by the low end of its downtrend channel at 8.6.  

Xerox (XRX) fell sharply after Moody's cut its credit ratings 
late-Wed. on concerns over "free cash flow generation in its core 
non-finance business, relative to its debt burden". Xerox 
responded by saying this cut was not consistent with their 
progress and sales momentum.

The brokerage group saw some upside action after Salomon Smith 
Barney upgraded Lehman Brothers (LEH) and Merrill Lynch (MER) to 
"buy" ratings from "outperform" and changed Goldman Sachs (GS) to 
a "buy" from a "neutral." Showing that the Street still "listens 
to its own" - these stocks rallied today and with them the 
Securities Broker Dealer Index ($XBD.X). 

Procter & Gamble (PG) continued to rocket higher, as did Philip 
Morris (MO) -- consumer stocks like PG, MO and KO (Coca Cola) 
have been in great favor.  So much money out of tech, so much 
into the consumer - we can still count on their spending, goes 
the thinking, can't we? 

TRADING STRATEGY - 
Today's trade had the appearance of a consolidation in the NYSE 
side of the market ahead of a possible move higher. Impressed a 
lot of traders - two back to back strong up Dow days -- followed 
by a slightly higher close in the Dow. No rout to the downside 
for the Standard & Poor type stocks. Nevertheless, even the high 
cap/blue chip averages are looking for a catalyst that could 
spark them higher. 

In the Nasdaq, continued selling in the biggest stocks in those 
indices, continues to pull it lower. The Nasdaq indices are again 
near lows at the bottom of their hourly downtrend channels.  From 
these lower levels, these indices may again rebound, but selling 
pressure may continue so great that it continues to knock down 
minor rallies, as even slightly higher price levels attract 
abundant selling, which sinks the index again.  

The close was positive in the big cap S&P and Dow Indices. There 
were a few dips under key support levels, but SPX, OEX and DXJ 
were still positive technically at the close.  They are also in 
minor oversold territory in terms of the hourly stochastics. 
Calls bought in the S&P, OEX and DJX could be kept, anticipating 
a further move higher.  

However, tech weakness in the big cap Nasdaq stocks, especially 
in the semiconductors, kept the Nasdaq Composite and the 100 
(NDX) and QQQ under pressure, with all falling to a new low close 
for the week. Those with puts can maintain a buoyant feeling in 
this down market. Swim with the tide, up or down.

There were two small rallies for call players in Nasdaq indexes 
this week, but nothing more extended like in the S&P.  For Nasdaq 
index traders with any long calls remaining, bought near price 
channel lows as identified here, exit on any rebound that 
generates overbought stochastic readings in the next couple of 
(trading) days. 

The underlying strategy for longer-term trend traders remains 
unchanged.  Keep some puts in play and use rally failures at the 
resistance levels in Nasdaq to add to positions.  The 1106-1110 
area in S&P 500 continues to look like the high end of the near-
term trading range, with a slimmer outside potential to the 1145-
1150 area.    

KEY SUPPORT/RESISTANCE AREAS & TRADING IDEAS FOR THEM:


S&P 500(SPX) Daily/Hourly: 


 

S&P 500:
Key near support - 1080; exit calls on its break; main support 1055
Resistance levels: 1100; 1103; 1106 -- sell in 1103 area and above; 
Stop puts at daily SPX close above 1106.

S&P 100:
Key near support: 535; exit calls on break 
Near resistance: 544-545 - sell in this area


Dow Industrial Average (INDU); (also, DJX) Daily/Hourly:  


 

 
DJX: 
Key near support: 100; near resistance: 101
Target to 103 area, as long as above 100
Below 100, support: 97.4


Nasdaq Composite Index (COMP) Daily/Hourly:


 


Nasdaq Composite:
Key near support: 1644; next lower support: 1608
Resistance levels: 1695; then 1724; 1728 is area to sell. 

Nasdaq 100 ($NDX.X):
Near support: 1200 
Near resistance: 1280-1288; 1320 is area to sell


QQQ - Nasdaq 100 Tracking stock daily/Hourly:


 

QQQ - Nasdaq 100 tracking stock:
Estimated support: 30
Minor resistance at 32; sell in 33 area


Leigh Stevens
Chief Market Strategist
LStevens@OptionInvestor.com


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

DOW BREAKOUT/TECH BREAKDOWN
by Leigh Stevens

The Dow Industrial Average rallied from an early sell off and 
ended higher, a minor miracle of late, especially after two 
strong back-to-back gains. Meanwhile, the tech rout continues. 
DJX this week has been showing the best relative strength of the 
averages, on the NYSE side of the Market. On the Nasdaq side of 
the street, SMALL price rises have led to BIG sell orders -- 
what's wrong with this picture!? 

We can start with the Index showing the recent best relative 
strength by taking a look at the mildly bullish Dow hourly chart 
picture. The hourly pattern suggests rally potential to the 103 
area, given any spark of bullish news real or imagined. This 
would be the case IF today's consolidation is about half way in a 
move as is typical with flag patterns. (A discussion involving 
the S&P 500 chart is part of the Option Investor market summary 
tonight.)  

Dow Industrials ($INDU & $DJX.X) Daily/Hourly Charts:

This is either a bullish flag type formation on the DJX, setting 
up prior to another upswing equal to the first leg up -- OR, 
given the upper channel line resistance, an Index begging to be 
sold. The consolidation and strong last hour close suggest a 
further move higher, if it happens without much delay. 

DJX seems poised to go one-way or the other. I've seen these flag 
patterns fall apart, but they are reliable more often than not.



 

If today's pause is a flag like consolidation, it may be the 
typical 1/2 way in a move -- if so, DJX gets up to 103 resistance 
and a likely great bear pounce. A classic flag was traced out on 
the way down below 100 last week -- see its cyan/blue outline. 

IF what happens next is a sharp turnabout at the hourly 
downtrend line, a break below 100 would likely soon follow and 
would negate a bullish "breakout" idea. This sets up the 
possibility that the rally falls apart and we run, not walk, to 
retrace the 3-point advance. The next buying point according to 
the hourly downtrend price channel, is in the 97.5 area.    


S&P 100 (OEX) Daily/Hourly Charts: 

An S&P 100 (OEX.X) objective continues to look like 544-545, at 
the top end of the hourly channel. We would have to see a daily 
close above 551.5 to suggest that this recent rally really had 
legs or staying power.



 


Looks like one more upswing can develop from where we closed on  
OEX today - a swing to the 550 area perhaps, which might also be 
a little bear fakeout-breakout above near resistance implied by 
the top of the hourly channel at 544. 

Today's action was a plus as a consolidation as it was at and 
above the key technical support at 536 - highlighted by the 
dashed level line on the daily chart). 

Add to some price pattern positives, is the 5-bar stochastic 
bullish crossover (from oversold levels) seen on the hourly chart 
riding on top of a bullish daily stochastic. Friday should tell 
the story. A spark of some positive news or positive spin, might 
come in economic reports breaking tomorrow. It feels like 
something is needed in the near-term if this fragile rally is 
going to keep going.

If OEX fails any such bullish outlook by a dive through 536, all 
bullish bets are off. Given a full-blown retracement with a 
vengeance, we again may be looking at a down swing objective to 
the low end of the channel in the 520 area. Time will tell. 
    

Nasdaq 100 Trust Stock (QQQ) Daily/Hourly Charts: 

QQQ seems headed down toward 30 at the bottom of the channel - 
the lower channel line as has been working as a place to cash in 
some puts and wait for the next oversold bounce in Nasdaq.  Can 
lightening strike twice? 



 


Those braver and hearty can also buy the 30 area, if reached, if 
you like playing for 1 point bounces. It looks like it is going 
to be easier to play the downside on rallies -- more potential to 
take 3 points by selling at 33, than it is by buying at 30.     

But a buy put strategy is attractive in the 33 area if reached -- 
probably the major downtrend reasserts itself no higher than in 
the 33 area. First the Q's have to get through closer resistance 
at 32-32.25. Bet we see 30 BEFORE we see 32!   

Only a long-shot daily close above 33.25, would then suggest some 
higher objectives, perhaps a couple of points higher, to 35-36 
again. Stay tuned.


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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

A Tale of Two Markets
By Eric Utley

The major market averages finished mixed in Thursday's session.
The blue chip heavy Dow Jones Industrial Average ($INDU) finished
in positive territory.  While the technology barometer in the
Nasdaq-100 (NDX.X) finished much lower.

The sector scorecard revealed a decidedly negative slant to the
technology sectors.  All eight of the tech sectors that I track
finished decidedly negative.  The Semiconductor Sector Index
(SOX.X) earned the day's worst performing sector spot with its
4.39 percent plunge.  What a reversal of role in that sector.
It wasn't too long ago that the chips were the go to sector for
the bulls, but not anymore.  Meanwhile, the Paper Index (FPP.X),
about as old economy as it gets, bolted higher to earn the day's
best performing sector spot.

It was the same story in the CBOE Market Volatility Index (VIX.X)
yesterday, when fear imploded like it normally does during days
of strength in stocks.  Quite simply, there's no wall of worry
for this market to climb.  Without it, rallies are nothing more
than opportunities to get short.  We are starting to see a tick
higher in the put/call data, but it seems that when the fear
hangs around for a day or two, it inevitably collapses in the
form of excessive call buying.

Such as has been the case this year, the only major bullishness
that I can find is due to the oversold nature of the market.
The ARMS Index is creeping towards extreme territory.  We're
starting to see the longer term numbers move towards extreme
oversold territory, which may be a harbinger of a bigger rally
on the horizon.

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

Market Averages

DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     : 10091

Moving Averages:
(Simple)

 10-dma: 10038
 50-dma: 10282
200-dma:  9928



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1085

Moving Averages:
(Simple)

 10-dma: 1090
 50-dma: 1126
200-dma: 1128



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1225

Moving Averages:
(Simple)

 10-dma: 1293
 50-dma: 1406
200-dma: 1487



Paper ($FPP)

Jefferson Smurfit (NYSE:JS), an Irish paper and packaging
company, said that it was in talks to be acquired.  That news
sparked a rally in the paper sector, sending the FPP higher by
2.05 percent for the day.  The sector was the best performing
on my screen.

Sector movers included Bowater (NYSE:BOW), Louisiana Pacific
(NYSE:LPX), Weyerhauser (NYSE:WY), Boise Cascade (NYSE:BCC),
and International Paper (NYSE:IP).

52-week High: 381
52-week Low : 270
Current     : 360

Moving Averages:
(Simple)

 10-dma: 355
 50-dma: 362
200-dma: 360


Semiconductor ($SOX)

The SOX was the day's worst performing sector with its 4.39
percent drop.  Micron's (NYSE:MU) formal withdrawal from buying
Hynix induced another round of selling.

Sector losers included Credence (NASDAQ:CMOS), KLA Tencor
(NASDAQ:KLAC), Applied Materials (NASDAQ:AMAT), PMC Sierra
(NASDAQ:PMCS), and Micron.

52-week High: 711
52-week Low : 344
Current     : 504

Moving Averages:
(Simple)

 10-dma: 537
 50-dma: 571
200-dma: 536

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

Market Volatility

Big surprise, the VIX continued imploding yesterday.  It gained
back a fraction today, but nothing really worth noting.  We'll
see if fear returns next week.

Meanwhile, the VXN has a bit more stick too it, probably because
of the wreck in the Nasdaq-100.

CBOE Market Volatility Index (VIX) - 22.38 +0.07
Nasdaq-100 Volatility Index  (VXN) - 44.43 +0.52

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.93        456,794       425,390
Equity Only    0.84        396,257       332,026
OEX            0.84         10,824         9,106
QQQ            0.60         50,024        30,023
 
-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          63      + 0     Bull Confirmed
NASDAQ-100    25      - 2     Bear Confirmed
DOW           50      + 0     Bear Alert
S&P 500       60      - 1     Bear Alert
S&P 100       54      - 2     Bear Alert

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  1.31
10-Day Arms Index  1.42
21-Day Arms Index  1.38
55-Day Arms Index  1.24

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      1844           1702
NASDAQ    1304           1773

        New Highs      New Lows
NYSE      248             41
NASDAQ    216             96

        Volume (in millions)
NYSE     1,364
NASDAQ   2,060

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

Commitments Of Traders Report: 04/16/02

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

The spread between S&P commercials and small traders narrowed
during the most recent reporting period.  Commercials added a
few more longs than shorts, resulting in a small reduction in the
group's net bearish position.  Meanwhile, small traders added
quite a few short positions, coming off of the group's yearly
high in bullishness.

Commercials   Long      Short      Net     % Of OI 
04/02/02      313,294   406,337   (93,403)  (13.0%)
04/09/02      320,101   411,075   (90,974)  (12.4%)
04/16/02      322,578   411,245   (88,667)  (12.1%)

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
04/02/02      149,449     43,139  106,310     55.2%
04/09/02      151,237     47,678  103,559     52.1%
04/16/02      150,529     50,424  100,105     49.8%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 107,702 - 3/26/02
 
NASDAQ-100

Nasdaq commercials grew less bearish during the most recent
reporting period.  The group added a number of long positions,
while maintaining last week's short position.  Net, however, the
group is still bearish.  Small traders went in the opposite
direction by adding more shorts than longs, for a decrease in
the group's net bullish position.

Commercials   Long      Short      Net     % of OI 
04/02/02       26,211     31,840    (5,629)   (9.7%)
04/09/02       28,985     35,221    (6,236)   (9.7%)
04/16/02       32,024     35,723    (3,699)   (5.5%)

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
04/02/02       10,615     7,769     2,846     15.5%
04/09/02       11,640     8,353     3,287     16.4%
04/16/02       12,458    10,572     1,878      8.2% 

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

Dow commercials grew less bullish during the most recent reporting
period by reducing their number of longs and increasing their
number of shorts.  The group's net bullish position dropped by
about 1,100 contracts.  Small traders added slightly more longs
than shorts for a reduction in the group's net bearish position.

Commercials   Long      Short      Net     % of OI
04/02/02       18,717    12,549    6,168     19.7%
04/09/02       19,393    13,445    5,948     16.7%
04/16/02       19,080    14,267    4,813     14.4% 

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
04/02/02        5,192     9,007    (3,815)   (26.9%)
04/09/02        5,459     9,340    (3,881)   (26.2%)
04/16/02        5,644     9,448    (3,804)   (25.2%) 

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
***********************

THE SECTOR BEAT - 5/2
by Leigh Stevens


SECTOR ACTIVITY/OUTLOOK:

Some selling pressure came (again) into the airlines and 
utilities. Gold and silver stocks were off a bit, along with oil 
early on, but XAU rebounded where Oil stocks did not. I took a 
look at some of the high-flying gold stocks recently in Sector 
Trader and found some technical cracks showing in the bull picture 
for some of the stocks in the Gold and Silver Index ($XAU.X). 
Maybe gold will have its year in the Sun!

Playing the XAI stocks seems to have developed as a risk hedge, 
against political turmoil.  Art Cashin used to tell the 
PaineWebber research group -- yes, I was one of those suspect Wall 
Street Analysts - that you should always have enough gold to buy 
your away across a closed border.  

OIL INFLUENCE - 

Oil prices were off today also.  Nearby June crude oil futures 
eased to as low as being off 80 cents, dipping under key support 
26.00 for a while, but managing to climb back to a closing 26.10.  
The continuous futures contract in crude oil, as seen in the chart 
below, has a potential double top going - today's nearby crude 
futures low at 25.55 was right on its up trendline. Weakness 
stemmed partly from an easing of tensions in the Middle East. 



 


However, looking at the Oil Services Sector ($OSX.X) price action 
today you would assume that the oil price dip never happened and 
these stocks are looking beyond the short-term crude price 
fluctuations and corrections.  



 

A calmer Arab street means loss of some of the risk premium built 
into the futures market. The oil price drop provided some support 
to the (Dow) Transportation average (TRAN), which outperformed 
the S&P today, but did little for the Airline Sector ($XAL.X), 
which is still in a substantial downtrend from its early March 
high in the 115 area (today closing at 91). We are hanging on to 
Southwest Airlines (LUV) while its still hanging in. 



 

Latest look at slow sales in plane travel is that the long lines 
and delays are holding back travel. People feel safer at the 
airport and in the air, but don't want the hassles involved get 
where and back. One recent trend: growth in services that will 
send your baggage ahead of you, so you don't have ANY checked or 
carry on bags. 
     


SECTOR TRADING IDEAS:

Healthcare Payors Index ($HMO.X) -- 
Continue to look at stocks that look strong in this group and at
 levels that may offer enough of a pullback to buy the stocks or 
call options:

Oxford Health (OHP) at $43 (4/30 close: 46.16).
Wellpoint (WLP) at current levels & pullbacks to 70 (4/18: 75.08)
United Health Group (UNH) on dips to 80 area (close: 87.8)
Humana (HUM) - in $14 area (close: 16.3)
Mid Atlantic Medical (MME) - in 30 area (close: 36.43)
Tenet Healthcare -- in $66 area (close: 73.37)
Aetna (AET) - in $40 area (close: 47.6)
PacifiCare Health Systems (PHSY)in 23.5-24.70 area (close: 30.26)


Biotechnology Index ($BTK.X) -- The biotech stocks were a recent 
strong performing group as sector index rebounded sharply earlier 
this week.  Biogen (BGEN) is a stock in this sector, that looks 
to have further upside potential, perhaps back up to the %53 area 
of the downside price gap.   

Buying the July 50 calls would be one way to participate in a 
recovery in this oversold sector:

Stocks favored in the Biotech group, assessed as having better 
than average upside potential within this sector also include: 
MLNM; PDLI; IMCL; GENZ; IDPH; and ADRX.   

 
>> DRG, the Pharmaceutical sector index ($DRG.X), (4/22 comment). 
Rebounding from low end of a probable trading range and oversold.  
Moreover, investor attention may focus on DRB due to strength in 
other healthcare areas.
  
DRG sector may be playable by the purchase of the May 60 Merck 
(MRK EL) calls, a prominent stock in this sector, especially on a 
pullback in the stock.

UPDATE: It may be the time to pull the trigger on this trade:


 



LONG/CALL TRADES, PREVIOUSLY RECOMMENDED:

>> Internet Sector index ($INX.X) - 4/17 Sector Trader 
suggestion: OPTION play: JNPR (Juniper Networks) May 15 Calls 
(JUX EC).JNPR objective is to $18, based on the stock having 
potential to retrace half of the Dec - Feb. downswing.

The May 12.5's (JUX EV) Calls were also recommended. 

Stock is not performing as expected, but it may recover. HOLD 
only.


>> Cyclical sector ($CYC.X) - 4/15 suggestion:
1.) iShares Cyclical Trust (IYC)  - 4/16 open: 56.95
Objective: new high above 63.00
2.) OPTION play: CYC Sector stock, - Alcoa (AA) 
May 40 calls (AA EH) - 4/16 open: .60  

CYC broke technical support recently and AA fell to low end of 
its trading range at $33.30, but is off these lows. HOLD only.   


>> Airline sector ($XAL.X) - 4/15 Sector Trader suggestion:
OPTION PLAY: XAL sector stock Southwest Airlines (LUV) 
Sept. 20 (LUV ID) call suggested at 1.25 or less.  
OBJECTIVE: $22 based on a rebound back toward the high end of the 
current uptrend channel.

UPDATE: LUV has been holding technical support, so we are 
standing pat.  Good upside action today. HOLD only.


>> Utilities Index - Holders trust shares (AMEX: UTH) 
Long at 95.25 
Stop: 91.00



OPEN SHORTS/PUT PLAYS:

>> RTH (AMEX: Retail sector trust stock)
SHORT at 99.00 
Stop: 100 


LIQUIDATIONS:

>> Telecom ($XTC.X) index - 4/15 suggestion:
OPTION play: Sector stock, Level 3 Communications (LVLT)-
1)June 5 Call (HGY FA) suggested at .60 and under
2)LVLT outright purchase, with stock under $5, also suggested. 
Objective on LVLT stock is to 5.5/6 based on upside potential 
based on the stock continuing to advance within its current 
uptrend channel.

UPDATE: We EXITED long stock and calls today on the opening.  


NOTE: RISK to REWARD guidelines -  
Determining an objective is important, even if it is a moving 
target, as this is the reward potential.   Determining reward 
potential is critical to establishing whether a stop that makes 
“sense” (e.g., a sell stop that was placed under a key support 
level) would, if triggered, result in a dollar loss that is in 
proportion to profit potential; e.g., 1/3 of it.  (On occasion, 
when the purchase price of call or put is equal to 1/3 or less of 
the estimated reward potential, there may not be a specific exit 
suggestion, as the cost of the option is equal to the amount that 
is being risked.)   


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                 Thursday 05-02-2002
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:
*****

None


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed    Thu

DGX      94.80   -1.05   1.89   2.86   0.05  Still going higher
SII      73.30   -0.64  -0.61   1.41   1.84  Broke out above $70
THC      73.35   -2.78   1.67   0.29  -0.31  Pulled back, profits
SRCL     71.50    0.09   0.98   1.46   2.51  Pushing higher still
FISV     44.16   -0.44   1.62   0.32  -0.62  Market weakness
WM       39.45   -0.29   1.00   0.43   1.29  New, breakout!!!
RTN      43.75    0.52   2.24   0.10   1.35  New, play defense 

PUTS

MU       23.36    0.45  -2.75   1.00  -1.34  Hynix deal is dead!!
ADI      36.16   -0.49   1.21  -0.16  -0.64  Tracking the SOX.X
PLCM     20.91   -0.08   1.69   0.00   0.29  Shorts covering
LRCX     24.58   -0.19   0.63  -0.08  -1.00  Watching the 200-dma
SEBL     21.65    1.09   0.51  -1.03  -1.51  Destined for $20
VRTS     26.02    2.03   0.09  -0.44  -1.88  Ready to breakdown
FLIR     38.00   -1.18  -2.41  -0.62  -1.26  Lower intraday highs
GS       80.71   -0.40   0.25   0.46   1.50  Ready to roll 10-dma


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

SII $73.30 +1.84 (+2.01) The Oil Service Index (OSX.X) traded up
to a new relative high in its advancing trend during today's
trading, sending SII above its short term resistance.  The OSX.X
finished higher today by 1.81 percent, certainly out pacing the
broader stock measures.  The strength in the broader energy
group helped to push SII out of its consolidation and onto new
relative highs, giving traders a very solid short term exit
point into the strength.  Traders who entered on the dip late
last week or earlier this week were rewarded for their sharp
entry points, and can look into booking those gains on further
strength tomorrow.  SII may have two or three days to the upside
left in the stock, so traders might want to use a tight trailing
stop to protect against any intraday downside risk.  For new
entry points, we favor the ole buy on the dip approach after the
last two days of upside.  Look for sector weakness to pressure
SII back down to the $70 platform, where traders can look to take
entries on weakness.

FISV $44.16 -0.62 (+0.88) FISV was held back once again in
today's session by the broader weakness in the Nasdaq market.
The stock attempted to breakout in yesterday's session, but
lacked the necessary push from the broader market in order to
make the breakout successful.  The stock was off only
fractionally in today's session, and volume continued to come in
very light relative to the recent trading activity we've
observed.  We continue to believe that it's going to take
strength in the Nasdaq in order for FISV to get going to the
upside, but that strength may be a few more days off with the
broader tech sector threatening to breakdown.  Traders should
continue playing this play with tight stops on open plays, and
careful entry points as long as the Nasdaq remains weak.  If on
the other hand the Nasdaq snaps back, then we'll look for FISV to
trade back up to its yearly highs above the $47 level.  Look for
broad market weakness to pressure FISV back into the $43.50 to
$44 area where the 10-dma and 50-dma come into play.  A rebound
from there may offer an entry point.

SRCL $71.50 +2.51 (+5.30) SRCL has gone near parabolic in the
last two days, advancing well above the $70 level, reaching as
high as the $73.85 level in today's action.  Volume has increased
in the last two days versus the daily average over the last
several weeks, which is positive to see that the buyers are
displaying conviction in the face of higher prices.  However, we
need to be careful about chasing the stock higher from here as
it appears extended in the near term.  Traders who took entries
early yesterday morning might start looking to book short term
gains on any strength tomorrow morning.  At the very least,
traders can start tightening stops on open positions to protect
against any profit taking pullback over the coming days.  In
terms of new entry points, we'd also favor a pullback from
current levels, followed by a day or two worth of short term
consolidation.  That way, the overbought nature of the stock will
be worked off and we can look for a resumption of trend.  A
pullback to the $68 level may be just the ticket for an entry
point on weakness.

DGX $94.80 +0.05 (+3.75) After another solid breakout on
Wednesday, DGX succumbed to the requisite round of profit
taking today, and to the bulls' credit, they managed to erase
the early loss to close out the day with a gain of a nickel.
Given that it was a weak day in the broad markets and even in
the red-hot Health Care sector (HMO.X), DGX held up remarkably
well.  After briefly eclipsing Wednesday's new high with yet
another new high of $95.60, DGX fell back to the $94.50 area and
meandered sideways for the remainder of the day.  All systems are
still go for DGX, as soon as it finishes this consolidation phase.
Look for a pullback to the $91.75-92.00 area to be an attractive
entry point for the next leg higher.  Otherwise, go with the flow,
entering the play on a volume-backed breakout to new highs.  Note
that our stop has been raised to $91.

THC $73.35 -0.31 (-1.13) Just biding its time, THC has been
drifting sideways since rebounding from Monday's sharp drop.  With
the Health Care index (HMO.X) seeing a big day of profit taking,
it was good to see our play essentially hold its ground.  Volume
has been rather light for the past week, a sign of a normal round
of consolidation, but if it picks up to the downside, then we'll
know it is time to pack our bags and leave.  There is no sign that
the HMO index is done with its run up the charts, and a healthy
pullback is definitely needed after the 11% rise in the prior 5
days.  While THC has been lagging a bit behind the HMO index for
the past few days, it also lagged behind in the loss column today,
losing only 0.42% vs. 1.42% for the HMO.  That keeps us looking at
this one with bullish bias intact.  Today's intraday weakness
provided a decent entry near the $72.25 level before the afternoon
rebound, and we'll continue to look for dips to provide entry into
the play.  Target today's lows and then the $71.50 level, keeping
in mind that our stop is still sitting at $71.  Those who want to
see another breakout before playing will want to wait for a trade
at $74.75 before playing.


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

WM - Washington Mutual $39.45 +1.29 (+2.43 this week)

Washington Mutual Inc. is a financial services company committed
to serving consumers and small to mid-sized businesses. Through
its subsidiaries, Washington Mutual engages in the following
lines of business: consumer banking, mortgage banking, commercial
banking, financial services and consumer finance. The Company's
principal banking subsidiaries are Washington Mutual Bank, FA,
Washington Mutual Bank and Washington Mutual Bank fsb.

Earlier this year, the market and many talking heads were
predicting that the Federal Reserve would begin raising
short term interest rates by this summer, or possibly later in
the early fall.  That belief stemmed from the rebound in the
U.S. economy as signaled by the strong economic data coming
out from the government.  The fear was that the U.S. economy
would rebound too quickly and cause a return of inflation.  The
bond market certainly shared that view as longer term yields
rallied earlier in the year.  But the belief that inflation
is going to be a problem this year is losing steam.  And with
it, the belief that short and long term interest rates were
going higher.  With the threat of rising interest rates out
of the way, the most interest rate sensitive stocks have
continued higher on industry fundamentals.  WM is a prime
example of this trend.  Speaking of trends, the housing
business has been one of the most consistent, which is where
WM continues to do incredibly well with its mortgage lending
business.  The stock recently broke out from a three week
consolidation, and could be moving into a new upward trend
with as solid as the housing market remains, and the threat
of rising interest rates now under control.  Traders can
look to get in early on the trend on further strength in
tomorrow's session.  Pullbacks down into the $38 area would
offer entry opportunities on weakness.  Stops are set at
$37.50.

BUY CALL MAY-37 WM-EU OI=   1 at $2.20 SL=1.00
BUY CALL MAY-40*WM-EH OI=2311 at $0.50 SL=0.25
BUY CALL JUN-37 WM-FU OI=   5 at $2.65 SL=1.25
BUY CALL JUN-40 WM-FH OI= 499 at $1.20 SL=0.50

Average Daily Volume = 3.92 mln


RTN – Raytheon Company $43.75 +1.35 (+3.74 this week)

Raytheon is a provider of defense electronics, including missiles,
radar, sensors and electro-optics, surveillance and
reconnaissance, and command, control, communication and
information systems.  Additionally, the company provides naval
systems, air traffic control systems and aircraft integration
systems.  RTN's commercial electronics businesses leverage
defense technologies in commercial markets.  Raytheon Aircraft
is a provider of business and special mission aircraft and
delivers a broad line of jet, turboprop and piston-powered
airplanes.

The unrelenting bullishness of the Defense sector (DFI.X) got
another shot of adrenaline on Tuesday following the news that the
US Navy selected a team led by Northrup Grumman (NOC) to complete
the system design for the Navy's DD(X) contract.  The initial
value of the contract is approximately $2.9 billion over four
years.  While NOC grabbed the headlines, investors have taken
notice of RTN's part in the contract as mission systems
integrator, entitling them to approximately 45% of the funding.
Sure enough, RTN popped through the $42 resistance level on
Tuesday and after a bit of back-and-forth volatility, the bulls
have powered the stock through the final vestige of resistance at
$43 to post a new all-time high.  Volume has been quite heavy on
this breakout, adding credence to the idea that this move is for
real.  Even before the news-related breakout, the stock had been
performing well and was rebounding from the $38 support level
(resistance prior to the March rally).  And the PnF chart
indicates that the stock is in a solid bullish trend with room to
run (bullish price target of $58).  While a pullback to the $42
level would make for the best entry for new positions, we won't
turn our nose up at the stock even if it pulls back all the way to
the $41 level before bouncing higher.  Of course with the strength
of the recent buying volume, RTN could just continue higher, and
so as not to miss the move, we'll want to consider new entries on
a rally through the $43.90 level.  Initial stops are rather wide
at $40.50 to allow for the possibility of a pullback heading into
the weekend.

BUY CALL MAY-42*RTN-EV OI=1439 at $1.95 SL=1.00
BUY CALL MAY-45 RTN-EI OI= 486 at $0.65 SL=0.25
BUY CALL JUN-42 RTN-FV OI= 462 at $2.75 SL=1.25
BUY CALL JUN-45 RTN-FI OI=  56 at $1.50 SL=0.75
BUY CALL JUN-47 RTN-FW OI=  10 at $0.80 SL=0.25

Average Daily Volume = 2.46 mln



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

ADI $36.16 -0.64 (-0.08) ADI tried and tried, but it could just
not get above its short term resistance area in the last two days
of trading.  The stock rolled over from its 10-dma just below the
$37.90 mark in today's session on further weakness in the broader
technology segment of the market.  The resistance area between the
$37 and $37.25 levels seemed to hold as ADI rolled from that
general area on each of its intraday rally attempts in the last
two days.  Traders who took entries on those intraday rollovers
can look to book quick short term profits on any follow through
to the downside into tomorrow's session.  One spot to look to
book quick gains is down near the $35 level where ADI has bounced
from twice over the last week.  Conversely, a breakdown below the
$35 level could lead to the next trend lower down into the $30
area, which is where ADI bottomed out last fall.  Take your cue
from the action in the broader tech sector when gaming a breakdown
below the $35 level as an entry point.  Otherwise, look for
another rollover from the 10-dma for new entry points.

LRCX $24.58 -1.00 (-0.59) LRCX turned lower in today's session,
following the broader market weakness to the downside.  We saw
an interesting development in the last three days at the $26
level.  During each intraday rally attempt above the $26 level,
LRCX was pressured back to the downside.  In other words, a big
seller remained above the market near the $26 level, which was
certainly encouraging for those of us leaning to the bearish
side.  We're hoping that the big seller gets some conviction and
forces LRCX below its 200-dma in the coming days.  We're expecting
the bulls to try and defend LRCX as it approaches its 200-dma,
which now sits below current levels right near the $24 mark.  A
breakdown below the 200-dma should open the way to further
institutional selling and possibly pressure LRCX down to its next
support level near the $22 mark.  Monitor the action in the
broader technology sector when picking entry points.  Look for
another rollover from the overhead descending 10-dma or a
breakdown below the 200-dma, depending on what the market is
doing tomorrow.

MU $23.36 -1.34 (-2.64) Micron formally announced this morning
that it had withdrawn acquisition talks with Hynix Semiconductor.
Today's announcement came just a few days after Hynix said that
it would no longer pursue the merger.  Investors didn't take to
the news friendly as MU sold off throughout the day on weakness
in the Semiconductor Sector Index (SOX.X).  The stock should
continue working lower as long as the SOX.X does the same, which
brings us to an interesting point of support.  The SOX.X is
precariously poised just above the very psychological 500 level.
A breakdown in the SOX below 500 could open the way for further
heavy selling in chip issues.  So, traders are best off focusing
on the SOX when managing the MU play, and the same could be said
for our other chip related put plays currently on the OI play
list.  Specific to MU, it should migrate to the $20 level judging
by its technicals this week.  New positions can be taken on
any intraday rollovers from the $25 level as long as the SOX
remains weak.

FLIR $38.00 -1.26 (-5.57) Proving that big breakdowns are not
events to be taken lightly, FLIR has remained under pressure the
past 2 days and appears close to a decisive break below the $38
level.  Recall that we added the play following Tuesday's big drop
on no news, but heavy volume.  The rebound ran out of steam even
before the end of amateur hour yesterday and the stock rolled over
near the $41 level.  Since then FLIR has been drifting lower and
it looks like the $38 support level is weakening.  Note that the
200-dma is now firmly in place overhead and will likely be a firm
barrier to any near-term rally attempts.  Look to initiate new
positions either on another failed rally attempt in the $39-40
area or else wait for the breakdown below $37.20 (just below the
recent intraday lows) before taking a position.  We are lowering
our stop to $41.50.

GS $80.71 +1.50 (+1.56) Good news arrived for bearish traders in
the Brokerage sector (XBD.X), as Salomon Smith Barney upgraded
several names in the group including GS.  Additionally, they
raised their price target for the stock from $95 to $100 based
on valuation.  Who says the brokers don't take care of their own?
Needless to say, this put a bid under the sector today and GS
managed to pop through the 50% retracement level at $80.25, but
not much further.  Yes, this is a good thing, as we needed
something to push prices higher so GS has further to fall when it
rolls over again.  Daily Stochastics are fast approaching
overbought and there is likely to be heavy resistance between
$81-82.  Give this upgrade-related move time to run its course
and then we can pounce on a fresh rollover near resistance.  The
underlying fundamentals haven't changed for the group or GS and
we're looking for renewed selling pressure to be felt as the
investigation into possible illegal actions in the industry
heats up.  Keep stops in place at $83.

PLCM $20.91 +0.29 (+1.90) Either the next entry point for our
PLCM is just around the corner or it is going to break out.  It
was rather interesting to note the stock's strength in an
otherwise weak Technology market on Thursday, and if it manages
to break out over the $21 level on Friday, we'll be dropping
coverage this weekend.  But given the weak market environment,
we're still betting on another rollover to head down and retest
those lows near $18.50.  Use a rollover from the $21 area (or as
high as $21.25, which was yesterday's intraday high) to initiate
new positions or wait for the stock to fall back through the $20
support level before playing.  Keep stops in place at $21 on a
closing basis.

SEBL $21.65 -1.51 (-0.94) Now that's the breakdown we've been
waiting for.  After popping up to the 10-dma on Tuesday, shares
of SEBL came under renewed selling pressure and that has been
consistent for the past two days.  The stock's weakness relative
to the rest of the broader Technology market can be explained by
looking at the Software sector (GSO.X), which broke below support
at $129 today and appears headed back to the September lows near
$116.  Following the GSO lower on Thursday, SEBL broke below the
$22 support level (also the site of the 62% retracement) and did
so on increasing volume.  While there could be a bit of support
near the $20 level, with the daily Stochastics still pointing
south and a bearish price target (from the PnF chart) of $13,
we'll continue to side with the bears.  Isn't it interesting to
note that the price target corresponds nicely with the lows in
September in the $12-13 area?  A reaction bounce near the $22 or
$23.50 resistance levels will make for solid entries going
forward.  Otherwise, consider new positions as SEBL breaks below
Thursday's low at $21.46.  We are lowering our stop tonight to
$25.

VRTS $26.02 -1.88 (-0.20) It took several attempts, but the bears
finally managed to breach the $26 support level on Thursday, at
least on an intraday basis.  After three consecutive days of
challenging resistance at its descending trendline (now at $28),
VRTS gave a solid rollover on Thursday, plunging more than 6.7%
to close just off the low of the day on strong volume.  It looks
like a sure thing that support will fail tomorrow, so high odds
entries can be taken on the breakdown below today's lows at
$25.75.  Note that the bullish reversal in daily Stochastics has
now been turned back and they now have plenty of room to fall
back into oversold territory.  Should we see one more bounce in
the morning, a rollover from the vicinity of the descending
trendline, (also the site of the 10-dma at $28.03) should also
provide solid entries ahead of the breakdown.  We are lowering
our stop tonight to $28.50.


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

None


************************Advertisement*************************
If you trade options online, then you need an online broker 
that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the 
option or stock
offers online spread order entry for net debit or credit
offers fast option executions

PreferredTrade offers these online option trading features and 
more; call 1-888-889-9178 or click for more information.

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                 Thursday 05-02-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.



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

SRCL - Stericycle $71.50 +2.51 (+5.30 this week)

Stericycle, Inc. is a regulated medical waste management company
in North America, serving approximately 269,000 customers
throughout the United States, Canada, Puerto Rico and Mexico.
Stericycle's services and operations are comprised of collection,
transportation, treatment, disposal and recycling, together with
related training and education programs, consulting services and
product sales.

Most Recent Update

SRCL has gone near parabolic in the last two days, advancing well
above the $70 level, reaching as high as the $73.85 level in
today's action.  Volume has increased in the last two days versus
the daily average over the last several weeks, which is positive
to see that the buyers are displaying conviction in the face of
higher prices.  However, we need to be careful about chasing the
stock higher from here as it appears extended in the near term.
Traders who took entries early yesterday morning might start
looking to book short term gains on any strength tomorrow
morning.  At the very least, traders can start tightening stops
on open positions to protect against any profit taking pullback
over the coming days.  In terms of new entry points, we'd also
favor a pullback from current levels, followed by a day or two
worth of short term consolidation.  That way, the overbought
nature of the stock will be worked off and we can look for a
resumption of trend.  A pullback to the $68 level may be just
the ticket for an entry point on weakness.

Comments

SCRL is screaming higher, sending the shorts running for cover.
It could have one more day to the upside before it pulls back
to consolidate its most recent move higher.  Look for an advance
past today's high to induce another pop higher.  Those who took
entries early yesterday can use any further weakness as an exit
opportunity.

BUY CALL MAY-65 URL-EM OI=521 at $7.20 SL=4.50
BUY CALL MAY-70*URL-EN OI=488 at $3.20 SL=2.25
BUY CALL JUN-65 URL-FM OI= 29 at $8.70 SL=6.75
BUY CALL JUN-70 URL-FN OI= 42 at $5.30 SL=3.00

Average Daily Volume = 286 K



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**************************************************************


**************
TRADERS CORNER
**************

Big Changes to the Big Picture
By Buzz Lynn
buzz@OptionInvestor.com

In "Gold Revisited", which we put in the Trader's Corner on 
Tuesday night, buried deep within the text, I made a comment about 
a long-term asset shift, which needs more explanation.  Read it 
here:  http://www.OptionInvestor.com/traderscorner/043002_1.asp 

Specifically, I noted, "There is a fundamental shift under way 
from over valued, inflated FINANCIAL assets (stocks, bonds, notes, 
interest swaps, mutual funds, even passbook savings) to hard, 
TANGIBLE assets like real estate, commodities, natural resources, 
and yes, even gold."  That's what I want to get to today.

Why is this interesting?  Because everyone I know wants to be on 
the right side of the trade - riding the right horse so to speak.  
Triple Crown investors and traders could or should care less about 
falling in love with a certain class of assets.  They really just 
steward their capital well and place it where it will be well 
rewarded, not mis-used.  So, if a certain class of assets shows 
low future promise compared to another class of assets, would good 
capital stewards keep their assets in the low future promise 
assets?  Of course not.  

Remember this idea of stewarding assets for highest reward 
potential is the big picture under which all else fits.

I unconsciously got this idea long ago.  But about two years ago 
when I lost a ton on naked puts by taking my eye off the ball, 
Fundamentals Guy (me) started asking questions looking for "pre-
problems" to his stock and option trading philosophy.  A pre-
problem is a problem that isn't really a problem yet.  But it 
could be.  And if it actually became a problem, what would I do to 
insure a good outcome while enjoying the process of the change?  
Read any book by Anthony Robbins or the book, "Who Moved My 
Cheese?" for more on that.

The idea here as always is to have a course of action for any 
situation.  Typical response to said question:  "The is not a 
problem.  I'll worry about it then if it happens".  Proper 
response to said question:  "I know there isn't a problem now.  
But if there was, what would it be and what can I do now to avoid 
it?"  (As an aside, this is what an exit strategy is all about 
before we ever enter a trade - what can go wrong and what's our 
course of action if it does?)  The answers you give yourself now 
to good questions will make you a fortune at a later date.

Anyway, one of the pre-problems I entertained was, "What if the 
experts are wrong and this is a real market top?"  It seemed so 
incredibly impossible, which is precisely why the contrarian in 
Fundamentals Guy didn't dismiss it out of hand.  After all, stocks 
were wildly overpriced as interests in a business, and had morphed 
into speculative pieces of paper.  Boiled down to the basics, lots 
of people were and still are speculating daily on the fractional 
worth of business represented by a piece of paper.  Hmmm. . . what 
if that paper becomes worthless?  Anybody see where this might 
have led had they doodled on this 2 years ago, especially 
concerning GX, MCOM, GSTFR, MFNX, and now WCOM?  Who's next?  
SUNW, ORCL?  The trading account and net worth might be a little 
bigger.  But other than that. . .

Then in mid-February, I stumbled into an article in the Gilder 
Technology site by John Rutledge (an economist by training but 
capital manager by profession), which had its roots in the 
American Spectator.

Rutledge wrote: "Between 1981 and 2001 people in the U.S. shifted 
more than $10 trillion out of their existing holdings of stuff-
tangible assets, like gold, commodities and property-and into 
financial assets including stocks, bonds and mutual funds. 
Responding to the collapse of inflation and to tax rate 
reductions, they drove the prices of paper assets up and hard 
assets down, creating the biggest bull market in history and 
forcing a massive restructuring of American industry. If you had 
gotten that one thing right in 1981, you would be reading this 
article on the beach. A $100,000 investment then in default-risk-
free, thirty-year zero-coupon Treasury bonds, the quintessential 
financial asset, would be worth more than $2 million today, more 
than twenty times your initial investment. How many of you can say 
that about your house?

It struck me then that he was building a theory that said people 
then had maxed-out on hard assets and sold financial assets into 
the dirt.  Look how we could have profited beginning 20 years ago 
knowing that a general shift was under way from hard to soft 
assets.

Rutledge goes on: "Portfolio balance refers to the situation where 
owners are just content to hold the stock of assets that exists.  
In that case asset prices will remain at current levels.  But 
anything that materially alters the relative risks or returns of 
the assets in the portfolio will cause investors to revise their 
preferred asset mix, forcing asset prices to change until 
investors are again content to own the existing assets."

In general terms, it's supply and demand all over again that 
determines what class of assets someone is going to hold.  Out of 
favor?  Dump it.  In favor?  Buy it.  The following is complete 
plagiarism that demonstrates this in more vivid terms.

Rutledge:  "The balance sheet for U.S. households and nonprofits 
showed $48.8 trillion of total assets on October 30, 2001. Roughly 
a third were held as tangible assets, the remaining two-thirds as 
financial assets-stocks, bonds and money market funds. The reason 
I split the household balance sheet into tangible and financial 
assets is that changes in tax rates and inflation affect tangible 
and financial assets in qualitatively different ways. Increased 
inflation, as we experienced during the 1970s, encourages 
households to increase the share of assets they hold as tangible 
assets at the expense of financial holdings. An increase in tax 
rates also shifts demand toward tangible goods by reducing the 
relative return of financial assets."

"The point is that inflation and tax rates exert powerful 
influence on asset markets and asset prices. Over the past twenty 
years, inflation and tax rates have both decreased, causing 
households to steadily reduce tangible holdings as a percentage of 
total assets. This shift in the national balance sheet has 
deflated commodity prices to their lowest levels in decades, 
pushed stock price multiples to historic highs and interest rates 
to today's low levels. It has also played havoc with the economics 
of durable-goods industries, which are forced to compete with 
their own previous products."

"Investors ignore this at their peril. During the 1980s, a basket 
of stocks, as represented by the S&P 500 Index, was valued at two 
median-priced U.S. homes. This stock-to-home ratio increased to 
four in 1996, and peaked at more than eight in late 1999, before 
falling to just under six today (which makes the stock market 
about fairly valued, at today's inflation and tax rates)."

I'll dispute that last comment since housing is also a Fed-induced 
bubble waiting to pop.  But that's for another column.  In other 
words, Rutledge is saying to forget about spending, GDP, money 
supply, and so forth.  Focus instead on the balance sheet - where 
you keep your assets and your liabilities.  If it's true, as 
Rutledge states, that two thirds of the assets are in financial 
instruments and only one third in hard assets, which represents a 
complete 180 from nearly 20 years ago, perhaps we are seeing the 
beginning of a return to hard assets under the supply/demand 
theory.

He concludes with some interesting implications of focusing on the 
makeup of the balance sheet that dovetail nicely with last night's 
case made for gold (as if the above isn't enough).

"Falling land prices are the heart of Japan's economic problems, 
implying that real interest rates, measured properly, have been 
extremely high for more than a decade. There will be no fix for 
the Japanese banks, and no Japanese recovery, until this deflation 
ends. Given the myopia at the Bank of Japan, the likely reason for 
that will be a major drop in the value of the yen, which will have 
important effects on the economies of China and other Asian 
nations."

My take:  no wonder Japanese investors are moving into gold.  
Their own currency is deflating and their cash accounts are no 
longer insured FDIC-like.  If their particular bank goes under, 
the money is gone.  They are trying to preserve what they've got, 
as bank runs become a real possibility.

Much as I hate to consider the prospect, could we be walking the 
same path.  Wacky yes, but precisely what we ought to be 
considering as good capital stewards engaged in capital 
preservation and rewards.  I'm not saying we should sell our 
financial instruments to buy gold, oil, dirt, and trees.  But we 
ignore that monster wave of asset shifting at our own peril.

All of a sudden the hot stock du jour seems insignificant when 
considered against this big picture.  Food for thought.  

My thanks to John Rutledge, Gilder.com, and the American Spectator 
for providing me a tribe-size box of fodder for this article.  
Questions always welcome.


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MARKET WATCH
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We’re noticing a trend of bearish plays being triggered on the 
watch list.  So we’re adding to more bearish candidates.


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**************
MARKET POSTURE
**************

Only minor slippage around levels in the major market averages.  
Tech sectors continue along their paths of lower lows.


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