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Daily Newsletter, Thursday, 05/09/2002

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The Option Investor Newsletter                Thursday 05-09-2002
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)
************************************************************ 
        05-09-2002        High      Low     Volume Advance/Decline
DJIA    10037.40 –104.40 10144.70 10016.70 2153 mln   1117/2050
NASDAQ   1650.50 – 45.80  1762.28  1725.24 1580 mln   1189/2313
S&P 100   531.69 -  8.93   540.62   531.15   totals   2306/4363
S&P 500  1073.01 – 15.84  1088.85  1072.23
RUS 2000  501.39 -  8.36   509.85   501.37
DJ TRANS 2702.44 – 50.57  2753.93  2700.35
VIX        24.36 +  0.75    24.54    23.39
VIXN       48.08 +  0.28    48.66    47.01
Put/Call Ratio      0.77
************************************************************
Giving it back!
by Leigh Stevens

I saw one headline "where did my rally go!" Good question. The 
market gave back a portion of the gains made in yesterday's big 
rebound. All the indices reversed from areas of technical 
resistance of one type or another - either in the area of the 21-
day moving average or at the top of hourly downtrend channels, or 
both.  

Minor intraday rallies that set up after the fairly mild 
retracements of the recent big rebound (25% in the Nasdaq & 38% 
in the S&P), didn't get anywhere today and index levels settled 
back to the their daily lows by the close. The media talking 
heads seemed to be surprised, or disappointed today that there 
were not back-to-back up days and upside follow through. I was 
more surprised that there were not deeper retracements given how 
prior big rallies have fallen apart so fast.   

Even if we have seen a bottom, and the jury is still out on this 
subject, after a prolonged bear market, preceded by the excessive 
valuations (the infamous bubble) that preceded the bear, what we 
can expect is a lengthily bottoming process. A bottoming process, 
if thats where we are, would normally take time to complete and 
there would be a lot of ups and downs, not just a big prolonged 
up move.  I would anticipate even that if we have seen an 
important low, that it might be retested. Trading opportunities 
on both sides of the market will present in the meanwhile. If we 
go into free fall again, stay short and sell rallies. 

I've pointed out in recent comments that there are price areas 
that we could look at besides the absolute lows to measure 
whether the market is putting in a bottom. These areas being gaps 
created on the charts when stocks and the indices jumped 
substantially higher on Wednesday's opening, after Cisco's (CSCO) 
earnings came out the night before.   

And upside gap is simply the difference between one day's high 
and next day's low. There is a common saying that charts gaps 
tend to both get "filled in" (subsequent trading occurs in the 
gap area) and/or act as areas of future support in the case of 
upside gaps. 

If the upside chart gaps created over Tuesday-Wednesday, get 
filled in, in part or all, followed by a rally and no further 
downswings, this builds some evidence that a bottom is in place. 
What happens in this regard allows us to better judge the market 
on a technical basis. As there are no new fundamentals really, 
with still depressed or sluggish earnings and an economy that is 
recovering slowly, or quickly, depending on what and who you 
listen to, it useful to look at this latest rally technically for 
what clues we can garner.  

Conversely, if the index chart gap areas do not get filled in, 
this is valuable information also as a sign that major lows are 
in place; i.e., the indices will not see lower lows anytime soon. 

Stock or index prices often come back close to these gap areas 
but don't drop into them at all.  If you want a stock chart 
example just look at Amazon (AMZN), since it gapped higher on the 
24th. The gap between 4/23 and 4/24, was between 14.75 and 15.05.  
Doesn't seem like much, but the recent low in AMZN was 15.75, 
before the stock took off again in a big surge higher (close: 
17.73). 

What any gap means is that potential buyers were not able to 
start buying, during regular session hours anyway, until the 
price at the top of the gap, as that is where the lowest offers 
were. If the stock or the basket of stocks represented by an 
Index is still valuable to traders, they will want to buy when 
prices again approach a gap area, the price level that developed 
after the event or news that caused the big overnight jump. This 
then is the moment of truth, so to speak - do the buyers still 
want to snap up stocks at the same level? Or, not?

The gap areas are: S&P 500 (SPX): 1054-1056, as taken from the 
hourly chart. OEX: 520.5-521.8, also taken from the gap between 
the closing hour and the first hour of the next day's session. 
The Nasdaq Composite (COMP): 1594.6 - 1625.7 per the daily chart; 
The Nasdaq 100 (NDX): 1167.2-1212.8; The Nasdaq 100 QQQ tracking 
stock: 29.3-29.8  

News and market events come and go, these gap areas remain, for 
now anyway.  The bears are back on the prowl, so stay tuned. 

GENERAL NEWS and INFLUENCES -
Stocks fell today as former tech darlings Microsoft (MSFT), Cisco 
Systems (CSCO) and Oracle (ORCL), which had all had big gains on 
Wednesday, came off substantially and led the market lower.  
Although the Wednesday gain in the Nasdaq Composite (COMP) was 
almost 8% and the give back today was less than 3%, such a fall 
after the good spirits engendered by the trader high fives of the 
day before, was disquieting for a market looking for reasons to 
buy stocks.  
There have been these big days before, only for prices to resume 
sinking in subsequent days, and everyone remembers, big time! As 
there was no substantial change in the fundamental outlook for 
earnings in these big cap tech stocks, not even Cisco's -- due 
more to cost cutting and other accounting measures -- what went 
up on hope came down on fear. 

Within tech stocks, losses were recorded in the networking 
($NWX.X, -3.8%), software ($GSO.X, -4.2%), semiconductors 
($SOX.X, -3.6%), Fiber Optics ($FOP.X, -4.6%) and telecom sectors 
($XTC.X, -2.9%).  In the broad market, there were steep declines 
in biotech ($BTK.X, -4.8%), airline ($XAL.X, -3.6%), retail and 
oil services ($OSX.X). 

There were some gains again in prior favorite sectors like the 
gold stocks ($XAU.X, +2.1%) and in the defense sectors; e.g. 
Boeing, +1.3%. In the Dow, the prior themes favoring consumer 
defensive stocks led to gains in McDonalds (MCD), Johnson and 
Johnson (JNJ), Phillip Morris (MO), P&G (PG), and Eastman Kodak 
(ED).

This is a market that is now going to be lacking in news relating 
to stocks themselves and is likely to be unsettled by political 
events and news, especially anything relating to terrorism or 
possible terrorism.  The Mid East backdrop is not comforting as 
investor wait for the other (Israeli) shoe to fall in the Gaza, 
after the big suicide attack just as Sharon was meeting with 
Bush. 

Crude oil is on the rebound this week, which weighed heavily on 
the Dow Transportation Average, which gave back most of its gains 
from yesterday. Oil prices were the culprit. Oil was driven by 
the Mid East battles and for supply/demand reasons relating to 
the onset of the summer heavy gasoline usage. Nearby crude 
futures are up almost $2 this week. June oil futures went from 
around 26.00 to just under $28 today.   

Investors briefly relived prior days of terror when a report 
crossed the wires that some pieces of anthrax tainted mail had 
been found at a Federal Reserve off-site mail facility. The news 
hit hard at first, causing a Dow loss of over a 100 points. The 
averages were quick to bounce back, though sellers turned more 
aggressive in the final hour of trading.

Bonds ended with healthy gains after relinquishing massive ground 
on Wednesday. Weakness in the stock market was the main driver 
for bonds and the anthrax scare at the Fed, which motivated a 
"flight-to-quality" play.

ECONOMIC FRONT -

There was a release on weekly initial unemployment claims, which 
fell 11,000 to 411,000, making the lowest reading in two months. 
However, continuing unemployment claims jumped to another 
multiyear high of 3.8 million, even excluding 1.4 million workers 
who are getting extended benefits. 

Additionally, the April import price index climbed 1.4 percent 
its largest monthly increase in nearly two years due to soaring 
oil prices. News that could only gladden the bears return.  

Friday will see the release of the April producer price index, 
estimated for a rise of 0.4 percent and a 0.1 core rate. The core 
rate strips out the food and energy components. 

The Minutes of the mid-March FOMC meeting revealed that the 
central bank remained worried about the stock and energy markets, 
unemployment and soft business spending. NO KIDDING! The FOMC 
minutes also indicated that members felt they could push up rates 
slightly without first shifting to a tightening stance. 


AFTER HOURS - 
Shares of Electronic Arts (ERTS) had a strong rally after the  
company reported Q4 results of 39 cents a share, reversing a loss 
from a year ago. Revenue came in at $469.7 million, well above 
the $307.3 million a year earlier. The game sector has been hot 
lately. ERTS was the second video game maker to rally strongly in 
after hours trading this week. One of ERTS's rivals, Activision 
(ATVI) jumped 10% earlier this week after hours and after 
earnings came in well over estimates. Well, we always have games 
to take our mind off the economic and stock market woes!  

TRADING STRATEGY - 
My key general market indicators suggest that a bottom should be 
at hand. The only thing that bothers me still is that the 
volatility measures are not yet at the higher levels usually 
associated with major market bottoms.  The CBOE Volatility Index 
($VIX.X) is on an upward trend, having risen from the 20 area to 
intraday readings as high as 26.6 over the last 3 weeks. VIX 
closed at 24.4 today. My study of past market bottoms suggests 
that past major market lows have coincided with closing VIX 
levels of 27 or more. Getting closer, but not there yet.

Otherwise, the market is quite oversold on an advance-decline, 
volume and price basis.  However, oversold never makes a bottom 
by itself, just as the Nasdaq stayed extremely overbought for 
weeks while building a top. And oversold markets can get more 
oversold.  What to do?

Stay with put positions taken at higher levels. That is, as long 
as the Dow's down trendline as shown below is not decisively 
penetrated by a move to above the high of this week, at 10,144 -- 
a weekly close at 10,150 would do it. Otherwise, the Industrials 
continue to trade in a downtrend.  However, if the Dow does start 
to move up through this line, the other indices could start to 
follow the leader here.  That would be an occasion to start 
taking some money out of puts and placing some bets on a rising 
market.  

THE DOW -    


  

There are a couple of ways to look at momentum in the Dow, on a 
weekly basis. There has not been a close yet under the 40-week 
moving average. Such a close, below 9890, would be a definite 
technical negative. 9670 is a 38% retracement level and that 
becomes a possible downside target if we slipped below 9900.  
Hey, it doesn't seem likely now, but a move to this level would 
still only be relatively small retracement of the last big up 
move. 

The weekly MACD Indicator is a good visual measurement of the 
downward price momentum seen in the trend of lower weekly highs 
and lows.     

THE NASDAQ - 


 

The breakout point on the Weekly Nasdaq chart is at 1755-1750. 
Next week, a close at or above 1750 is needed to suggest that a 
bullish upside breakout (above the major weekly down trendline) 
has occurred. You can see we have some ways to go, unlike the 
Dow. 1500 is support implied by the low end of the weekly 
downtrend channel. At that juncture of course we are getting 
closer to the prior downswing low in the 1390 area; the weekly 
close was 1423.  

The daily chart indicates the recent oversold condition was not 
only suggested by a very low stochastic, but on a price basis, by 
the lower trading envelope set 7.5% below the 21-day moving 
average.  A daily close over the average, now at 1706, is needed 
to suggest a possible upside reversal, for at least a move up 
toward the upper band, in the 1800 area. My crystal ball is foggy 
on what would spark such a move. 

Keep in mind that the current momentum, as measured by the 14-day 
stochastic is up.  There is potential for some bullish surprises, 
although today's action is disappointing to the bulls. Meanwhile, 
the bears are licking their chops.  Stay tuned.    

Leigh Stevens
LStevens@OptionInvestor.com


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

WHERE IS THE BULL!
by Leigh Stevens

Besides the obvious, I mean the big charging straight ahead, up, 
up and way animal that was charging around yesterday.  

While the correction did not retrace a huge amount of the prior 
run up -- something on the order of 30% in the Nasdaq indices, 
and around 38% in the S&P indices.  The inability to get a rally 
going even after the early downturn brought the short-term hourly 
stochastic down to an oversold area and the close pretty much on 
the lows in all the indices, was not encouraging to the bulls.  
Further weakness in the early going tomorrow is likely.  

Once again rallies failed, in most cases, at the top end of the 
downtrend channels.  So, we're still in downtrends - no change 
there, until there is a decisive upside penetration of these 
channels and the ability to close above the 21-day moving 
averages.  

I favor buying if support holds and we get a little more oversold 
on the longer length (21) hourly stochastic.  I am also watching 
the chart gap areas described in the main OI summary tonight and 
last nights Index Trader wrap up. Momentum is still up on the 
daily stochastics, but buyers will have to come in to keep this 
going -- otherwise the bears are going to be a bold as ever -- 
why not, every rally falls apart! 

Repeating a summary of the gap areas here -

The gap areas are: S&P 500 (SPX): 1054-1056, as taken from the 
hourly chart. OEX: 520.5-521.8, also taken from the gap between 
the closing hour and the first hour of the next day's session. 
The Nasdaq Composite (COMP): 1594.6 - 1625.7 per the daily chart; 
The Nasdaq 100 (NDX): 1167.2-1212.8; The Nasdaq 100 QQQ tracking 
stock: 29.3-29.8  

If the gaps created over Tuesday-Wednesday, get filled in, in 
part or all, followed by a rally and no further downswings, this 
builds some evidence that a bottom is in place. 

Conversely, if the index chart gap areas do not get filled in, 
this gives an indication that major lows may be in place; i.e., 
the indices will not see lower lows anytime soon.

S&P 500 (SPX) Daily/Hourly Charts: 


 


Resistance came in right at the hourly downtrend line, the top of 
the channel and was today's high. Support comes in to play at 
1070, then 1060. The more bullish picture is presented if 1070 
develops as support.  

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


 

OEX resistance is expected at the top of the downtrend channel, 
now that the index is back into it. So, resistance is pegged now 
at 535, and the S&P 100 has to get, and stay, above this level to 
get some traction on the upside.  Notice how the prior support 
trendline became resistance when OEX got back up to it. 

Support is expected on a pullback to the around 528, then 525. If 
there is much of a decline below 530, we can consider that the 
bearish trend continues.  If so, the 521-522 gap area is of 
interest to see if it will act as support.     

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


 

Hey, failed right at the down trendline - who says that this 
market in not predictable! Key support is at 30.00, then 29, 
where the upside price gap would get filled in. I think 30 may 
hold as support.

Resistance is in the 31.5-32 area. A break out above this area is 
needed to get some upside momentum going and a possible move up 
to the 34-35 zone, where I favor selling.  

Index Trade Recommendations 

-Informal trade guidance offered recently only.  On the next 
pullback, will put out specific trade recs.  


Leigh Stevens
lstevens@OptionInvestor.com 


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

Bull Alert!
By Eric Utley

Tech bulls have been waiting for this day since 200 points ago in
the Nasdaq-100 (NDX.X).  That's right, ladies and gentleman, the
NDX is in bull alert.  It happened this morning with a simple
buy signal from one of the components.  The indicator actually
added four stocks today, but it only needed one based on
Wednesday's level.

We've been seeing signs of short term selling exhaustion (don't
confuse that with capitulation) for a more than a week now.
The ARMS Index (INDEX:TRIN) reached extreme levels, which were
worked off during Wednesday's blow-off, but more importantly
I had been keying off of the oversold nature of the $BPNDX.
Any time a bullish percent indicator gets below 30, I start
paying attention to the upside risk associated with such a
condition.  (The $BPNDX, by the way, reached as low as 17
recently.)

The reversal in itself doesn't say much for short term
direction.  Instead, it tells us that short term risk is
weighted to the upside.  Yes, that can translate into a
higher probability for upside, but it's not an absolute.

There are several things to think about tonight concerning
open Nasdaq-100 positions.  If you're short, you have to
start assessing where your upside risk lies.  If you're
sitting on healthy profits, for instance, now would be a good
time to start scaling out of positions.  Intraday weakness
from here may be a good place to start bringing in your
short positions, because you can bet that's what the
institutional players will be doing.

If you've been itching to get long tech names, now is the
time to start trying aggressive bullish positions in some of
the NDX's stronger names.  The types of stocks to look for are
ones on buy signals, preferably trading at or near meaningful
support levels.  Also, look for stocks that have achieved
vertical counts, and have since rebounded from them.  These
types of set ups allow for tighter risk management.

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

Market Averages

DJIA ($INDU)

52-week High: 11350
52-week Low :  8062
Current     : 10037

Moving Averages:
(Simple)

 10-dma:  9966
 50-dma: 10275
200-dma:  9914



S&P 500 ($SPX)

52-week High: 1316
52-week Low :  945
Current     : 1073

Moving Averages:
(Simple)

 10-dma: 1073
 50-dma: 1123
200-dma: 1124



Nasdaq-100 ($NDX)

52-week High: 2071
52-week Low : 1089
Current     : 1240

Moving Averages:
(Simple)

 10-dma: 1230
 50-dma: 1389
200-dma: 1474



Gold ($XAU)

The XAU returned to the best performing sector spot Thursday with
its 2.13 percent rebound.  Merger talk surfaced which may have
spurred a bid in the group, but the weakness in stocks also
contributed to the strength of this defensive group.

Sector leaders included Harmony Gold (NASDAQ:HGMCY), Barrick
(NYSE:ABX), Newmont Mining (NYSE:NEM), Anglogold (NYSE:AU), and
Meridian Gold (NYSE:MDG).

52-week High: 80
52-week Low : 49
Current     : 79

Moving Averages:
(Simple)

 10-dma: 77
 50-dma: 70
200-dma: 60


Biotech ($BTK)

The BTK went back out of favor during Thursday's retreat.  The
group shed 4.79 percent for the day, finishing at its low for
the session.

Sector movers included ImClone (NASDAQ:IMCL), Celera (NYSE:CRA),
Affymetrix (NASDAQ:AFFX), Sepracor (NASDAQ:SEPR), Millennium
(NASDAQ:MLNM), Human Genome (NASDAQ:HGSI), and Protein Design
Labs (NASDAQ:PDLI).

52-week High: 676
52-week Low : 375
Current     : 395

Moving Averages:
(Simple)

 10-dma: 412
 50-dma: 478
200-dma: 515

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

Market Volatility

Not by much surprise, the VIX turned lower on the strength in
stock's during Wednesday's session.  But the fear gauge did
turn higher Thursday, keeping its short term ascending trend
intact.

The VXN too turned lower in Wednesday's trading, but spiked
higher Thursday.  It too is still trending higher.

CBOE Market Volatility Index (VIX) - 24.33 +1.04
Nasdaq-100 Volatility Index  (VXN) - 48.08 +2.27

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.77        451,887       348,300
Equity Only    0.68        368,213       251,872
OEX            1.61         13,253        21,396
QQQ            0.67         32,639        21,922

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

Bullish Percent Data

           Current   Change   Status
NYSE          63      + 0     Bull Confirmed
NASDAQ-100    27      + 4     Bull Alert
DOW           53      + 3     Bear Confirmed
S&P 500       59      + 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  1.41
10-Day Arms Index  1.45
21-Day Arms Index  1.39
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      1114           2076
NASDAQ    1186           2315

        New Highs      New Lows
NYSE       96             30
NASDAQ    133             69

        Volume (in millions)
NYSE     1,154
NASDAQ   1,580

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

Commitments Of Traders Report: 04/30/02

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

Commercials grew less bearish again during the most recent
reporting period by adding more longs than shorts.  It was the
third week of decreased bearishness for the S&P commercials.
Meanwhile, small traders grew less bearish by adding more
short positions.

Commercials   Long      Short      Net     % Of OI 
04/09/02      320,101   411,075   (90,974)  (12.4%)
04/16/02      322,578   411,245   (88,667)  (12.1%)
04/30/02      340,936   421,673   (80,737)  (10.6%)

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
04/09/02      151,237     47,678  103,559     52.1%
04/16/02      150,529     50,424  100,105     49.8%
04/30/02      153,158     56,372   96,786     46.2%

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 by adding a number of
long positions last week.  The group is still net bearish, but
growing less so with each week.  On the other side, small
traders slipped from a net bullish to a net bearish position.

Commercials   Long      Short      Net     % of OI 
04/09/02       28,985     35,221    (6,236)   (9.7%)
04/16/02       32,024     35,723    (3,699)   (5.5%)
04/30/02       34,591     35,933    (1,342)   (9.7%)

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
04/09/02       11,640     8,353     3,287     16.4%
04/16/02       12,458    10,572     1,878      8.2% 
04/30/02       12,271    12,703     (432)      1.7%

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 traders reduced their net bullish position again during
the most recent reporting period.  The group grew less bullish
by dropping more longs than shorts.  Meanwhile, small traders went
in the opposite direction by reducing their net bearish position.

Commercials   Long      Short      Net     % of OI
04/09/02       19,393    13,445    5,948     16.7%
04/16/02       19,080    14,267    4,813     14.4% 
04/30/02       17,275    13,341    3,934     12.8%

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
04/09/02        5,459     9,340    (3,881)   (26.2%)
04/16/02        5,644     9,448    (3,804)   (25.2%) 
04/30/02        5,813     8,869    (3,056)   (20.8%)

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 - 5/9
by Leigh Stevens

A lot of red ink today - 
Within tech sectors, losses were seen in the networking 
($NWX.X, -3.8%), software ($GSO.X, -4.2%), semiconductors 
($SOX.X, -3.6%), Fiber Optics ($FOP.X, -4.6%) and telecom sectors 
($XTC.X, -2.9%).  In the broad market, there were steep declines 
in biotech ($BTK.X, -4.8%), airline ($XAL.X, -3.6%), retail and 
oil services ($OSX.X). 

There were some gains again in prior favorite sectors like the 
gold stocks ($XAU.X, +2.1%) and in the defense area; e.g. 
Boeing, +1.3%. In the Dow, the prior themes favoring consumer 
defensive stocks led to gains in McDonalds (MCD), Johnson and 
Johnson (JNJ), Phillip Morris (MO), P&G (PG), and Eastman Kodak 
(EK).


SECTOR TRENDS AND TRADING IDEAS - 

Healthcare Payors Index ($HMO.X): 

SECTOR HAS BEEN CORRECTING

The fact that the Healthcare sector ($HMO.X) was up at least part 
the day today, suggests that buying the recent correction may 
work out - IF that correction has run its course. That is the 
question and I don't THIN so.  

I am still a bit cautious as the HMO stocks have gone up so much 
in recent weeks and have had only a minor corrective pullback so 
far. 

Of the stocks in the HMO sector that I suggested in my 5/2 Sector 
Trader summary, only one, PacifiCare Health Systems (PHSY) 
dropped back into my suggested 23.5-24.7 buying zone on the 
recent correction when it got to as low as 23.85 yesterday. 

PHSY chart is shown with the August 30 calls plotted below -


 

I like Oxford Health Plans (OHP) as one of the stronger stocks in 
Healthcare sector, but was hoping for a deeper correction, such 
as back to 43 at least. The low point yesterday for OHP was 
43.88. Today for awhile, the stock appeared to have broken out of 
the recent sideways congestion area and was up strongly -- not to 
last as the stock gave back most gains. I think correction is 
still underway.  



 

Time will tell if it can take out the prior high at 48.30. If so, 
stock should get to the 50 area and above, next. If not, I think 
a deeper correction can happen.


UNITED HEALTH CARE (UNH) & WELLPOINT (WLP):


 

My prior suggested buy point on UNH looks to be too low, and 83 
may be a possible entry point.  

AETNA (AET) & HUMANA (HUM) - 


 

Time will tell as this correction goes on -- probably it will 
continue -- if my suggested buy in points need to be adjusted.

The upside gap in AET may "resist" being filled in, which 
suggests the stock may not dip below about 45.00

MID ATLANTIC MEDICAL (MME) & TENET HEALTHCARE (THC) - 


 

Mid Atlantic Medical is turned around and rallied sharply on an 
upside gap -- assume that was some news or other influence on the 
stock.  Looks like it may not correct much further, but momentum 
is still down on the stochastic.  Days ahead will tell the story.

THC looks like it may be building a top and could see a sharp 
pullback at some point. 
 

 
A POSSIBLE GOLD PLAY - 
 
Weekly XAU chart suggests that it may be into a resistance area, 
which implied potential for a correction that could take XAU 
down into a buying area for new positions. Rather than buying the 
XAU calls, buy Newmont Mining (NEM) around near support at 28.50 
-- yesterday low was 28.49, close today 29.55. WAIT, not chase 
the stock.  Trendline has been broken.  



 


LONG/CALL TRADES, PREVIOUSLY RECOMMENDED:

>> 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  

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.

EXIT if stock closes under 17.25. 



OPEN SHORTS/PUT PLAYS:

NONE


LIQUIDATIONS:

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

Sold UTH at 91.25, not gaining much improvement on our stop.  
For those waiting and watching, close was better price at 92.19. 
Our stop would have been elected, as low was 90.97

FROM TODAY'S MARKET MONITOR - 

"I missed getting out of UTH yesterday and the option has dropped 
dramatically in price. Should i consider holding for a day or two 
or take my lumps and go. Your thoughts please?" 

The Utilities Holders Trust (UTH), has retraced 50% of its last 
upswing and the overall market has been rallying. You could set a 
stop order under the low made yesterday and see how things 
unfold. For me, it had reached our risk point (stop) and it was 
time for exit. Had I bought into the 50% retracement, which can 
be a good entry point, I would risk to 90.70 just under the 5/8 
low. Looks like there may be significant resistance or supply 
coming in at 95 -- it you see UTH in this area, you may want to 
exit if it falters there. 



  

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 05-09-2002
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      92.62   -0.23  -0.05  -0.10  -1.91  Consolidating gains
SII      71.97   -2.97  -0.98   3.41  -1.83  Followed sector down
THC      72.65    1.18  -1.26   0.59  -1.46  Gyrating near highs
SRCL     72.50    0.65  -0.42   1.08  -0.91  Light volume trading
WM       37.81   -0.72  -0.62   0.17  -0.37  Higher rates hurt
RTN      44.30   -1.54   0.51   1.21   0.37  Defense trades well
AZO      76.28    0.40   1.10   0.32  -1.04  Retail pullback
SGR      33.13   -0.60  -0.12   0.46   1.38  New, bullish trend
LLL     131.97   -2.73   0.23   1.80   3.22  New, sector leader

PUTS               

ADI      36.85   -0.62   0.38   3.96  -1.30  Inside day set up
LRCX     25.02   -0.40  -0.16   2.24  -0.51  Break at $24.40
IDPH     49.11   -3.37   0.70   4.48  -2.94  Biotechs rollover
KMI      46.93   -0.86  -1.27   0.36   0.34  Natty gas failure
RE       64.29   -0.54  -1.25  -0.10  -1.31  New, 6 month break
BRCM     25.78   -0.06  -5.22   3.65  -2.59  New, big breakdown


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

SII $71.97 -1.83 (-2.37) SII tracked the Oil Service Sector Index
($OSX.X) closely during today's session.  Therefore, we're not too
worried about the sector related weakness in this play.  It
appeared to be a routine pullback, a digestion of yesterday's big
rally in the group.  As for SII, it pulled back down near its
upward sloping 10-dma which could result in a rebound during
tomorrow's session if the OSX.X catches some buying.  One level
to monitor is yesterday's low for risk management purposes.  SII
traded down to the $71.90 level in yesterday's session, which it
ticked towards today.  A breakdown below that level could result
in further downside pressure over the near term.  Traders with
open positions can use an aggressive stop at $71.90 to manage
short term downside risk.

SRCL $72.50 -0.91 (+0.40) SRCL continued to exert its relative
strength during today's session while the broader market gave a
little bit back.  The stock's strong trading versus the weakness
in the rest of stocks is encouraging, but it's nevertheless not
working any higher.  Judging by the decline in trading activity
over the last several days, we conclude that the stock is
consolidating its recent rally.  That's a positive development
for the longer term trend in this stock.  But as options
traders, we are most definitely concerned with time.  The longer
SRCL trades sideways, the more time premium we're going to see
erode in open positions.  It may be wise to consider your entry
and risk tolerance, and consider trimming positions on further
sideways trading.  Of course a spike higher during intraday
trading could also be used as a quick exit point into higher
prices.  As for new entry points, we still favor waiting for a
pullback down into the $70 level where the 10-dma is creeping
higher.

WM $37.81 -0.37 (-1.54) WM didn't participate in yesterday's
rally to the degree one might have expected.  The stock's under
performance was attributable to the rise in longer term interest
rates in conjunction with yesterday's stock rally.  The 10-year
Yield (TNX.X) spiked higher in yesterday's session, which itself
kept the broader savings and loan sector pressured for the day.
The thinking yesterday was the massive rebound in stocks might
have things looking up for the broader economy, and therefore
inflation could be around the corner to a very small extent.  And
where there's inflation, there's higher interest rates.  Obviously
higher rates adversely impact companies like WM.  The TNX.X ticked
higher still early during today's session, but it did rollover by
a large amount later in the day.  What we'll be watching for during
tomorrow's session is a follow through to the downside in yield to
get WM back into its upward trend.  Take your entry and exit cues
from the bond market, and start looking for entries into WM near
current levels.

AZO $76.28 -1.04 (+0.78) What's it going to be?  Shares of AZO
didn't really participate in yesterday's ramp in the broad
markets, indicating that there weren't a lot of shorts to get
scared out.  Then with the expected weakness in the broad market
on Thursday, the stock gradually drifted lower into the close.
There have been a few attempts to push the stock higher, but
without the conviction of strong volume, these rally attempts
haven't been able to stick.  Weighing on the stock was
significant weakness in the Retail sector, with the RLX index
giving back almost all of yesterday's gains.  Support has been
holding just above the $76 level and a bounce from here on Friday
still looks good for new entries.  Further weakness could even
give us a dip near the $75.50 level for a better entry.  But we
want to see solid volume on the rebound to give us the
confirmation that the rebound is for real.  Alternatively, look
for a move through the $78.50 level before initiating new
momentum-based positions.

DGX $92.62 -1.91 (-2.29) As the broad markets gave back about
a third of yesterday's gains, volatility was the name of the game
for DGX investors.  After gapping down to the $92 level, the
stock rebounded sharply to trade briefly above the $95 level.
But that didn't last long either, and the stock spent the
afternoon session drifting lower, coming to rest near the $92.50
level.  Competitor LH is moving to acquire lab-testing firm
Dynacare (DNCR) as the consolidation in the industry continues.
This comes on the heels of DGX's acquisition of Unilab for $1.1
billion and it seems clear that these two firms will be in a
good position to continue improving their already strong cash
flows.  We are still looking to initiate new positions near the
$92 support level, which has held up nicely over the past two
days.  But make sure the buying volume is strong as DGX lifts
off of that level.  More cautious investors will want to see the
stock clear the $96 resistance level before trying to game
momentum trades.  Keep stops in place at $91.50.

RTN $44.30 +0.37 (+0.55) Defense stocks got another bounce at
the open on the heels of strong earnings from ATK and RTN went
along for the ride, rising throughout the day to post another
all-time high.  While RTN closed slightly off its highs, it
was encouraging to see the lack of participation to the downside
as both the Defense index (DFI.X) and the broad markets weakened
significantly in the afternoon.  It was notable that RTN remained
strong throughout the day with news breaking in the afternoon
session that the $2.9 billion Northrup Grumman Navy deal will be
delayed by 100 days due to a contract dispute from GD, one of
the bidders for the contract.  With the breakout on Thursday, we
can consider new positions on a solid push through the $44.70
level, just above today's high.  Of course, if the broad market
weakness persists in the morning, a pullback to support could
provide a better entry point into the play.  Look to initiate
new positions on a bounce from support at $44 or even down at
$43.  Regardless of your entry strategy, continue monitoring the
DFI index, as RTN will need sector strength to support a
continued rally.  Raise stops to $42.

THC $72.65 -1.46 (-0.95) The bounce in the Health Care index
(HMO.X) on Wednesday didn't have any staying power, and despite
continuing upward at the open this morning, the bears ruled most
of the session.  By the closing bell, the HMO index was sitting
near unchanged.  Our THC play didn't fare as well, as its early
rally attempt was also turned back, but the result at the end of
the day was a 2% loss with the stock resting right on its 3-week
ascending trendline at $72.50.  This is a critical point for our
play, is it is also just below the 20-dma ($72.74).  Either
support holds and we rally from here, or we're looking at a
breakdown.  The daily stochastics is siding with the bears here,
as it has finally rolled over and appears headed for oversold
territory.  Use a strong bounce (read:volume) from current levels
to initiate new positions, but stand aside if the weakness in the
stock and HMO index persists.  We need to see THC clear the
$75.40 resistance level before contemplating new positions on
renewed strength.


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

SGR - Shaw Group $33.13 +1.38 (+1.12 this week)

The Shaw Group Inc. (Shaw) is a vertically integrated provider of
complete piping systems and comprehensive engineering, procurement
and construction services to the power generation industry. Shaw
has supplied fabricated piping systems in over 375 power plants
with an aggregate generation capacity in excess of 200,000
megawatts of piping systems in the United States and worldwide.

Post Enron, things keep heating up for the worse in the broader
energy sector.  Dynergy, who was considered one of Enron's
biggest competitors, has fallen under heavy investor scrutiny.
That stock is now flirting with single digits.  Elsewhere,
Williams Companies is under review by credit rating agencies for
its financial position.  Nevertheless, SGR continues trading very
well versus the rest of its sector.  It's this kind of bullish
divergence that we look for to exploit to the upside.
Technically, SGR is wedging up on its daily chart and looking
ready to breakout to the upside.  The stock has a short term
top defined by the $34 level, which is poised to be broken above
as early as tomorrow's session.  Traders can wait for such a move
to trigger bullish entries into this play, but just make sure that
the market environment at the time of a rally attempt is conducive
to entering plays into strength.  Moreover, confirm increased
volume on any move above the $34 level.  We want to see buyers
willing to pay higher prices for this stock on any breakout.  The
other entry option is to look for intraday pullbacks to support
as a means of getting in ahead of a potential breakout.  One such
entry level may come near the 10-dma now below near the $31.50
level.  Our stop is initially in place at the $30 mark.

***May contracts expire in two weeks***

BUY CALL MAY-30 SGR-EF OI=660 at $3.50 SL=1.50
BUY CALL JUN-30 SGR-FF OI=136 at $4.30 SL=2.75
BUY CALL JUN-35 SGR-FG OI=294 at $1.40 SL=0.75
BUY CALL JUL-35 SGR-GG OI=455 at $2.00 SL=1.00

Average Daily Volume = 620 K
 

LLL - L-3 Communications Holdings $131.97 +3.22 (+2.62 this week)

As a leading supplier of sophisticated secure communication
systems and specialized communication products, LLL provides
critical elements of virtually all major communication, command
and control, intelligence gathering and space systems.  The
company's high data rate communication, avionics, telemetry and
instrumentation systems and components are used to connect a
variety of airborne, space, ground-based and sea-based
communication systems.

The afterburners were turned back on the Defense Industry index
(DFI.X) early in the week, but with strong earnings from ATK
this morning, it is clear that this rocket still has more fuel
in its tanks.  The fuel driving this sector higher is the fact
that government Defense spending will be strong for the
foreseeable future.  Shares of LLL have been on a stellar run
since the lows of September, and that trend is showing no sign
of weakening just yet.  Except for a brief dip in late March,
the stock has been finding consistent support at the 20-dma
(currently $125.52).  Following its own solid earnings report
two weeks ago (along with a 2-1 split announcement), LLL has
since run to a fresh all-time high, consolidated and then
rallied back to that new high level again today.  With daily
Stochastics turning bullish without even dipping into oversold
territory this time, solid volume and sector momentum on its
side, LLL looks ready to break out over resistance once again.
We want to enter new positions on either a dip and bounce from
intraday support in the $128-129 area or a breakout over the
$133.50 level.  With the wide range the stock tends to trade in,
we are initiating coverage with a liberal stop at $126.50.

*** May contracts expire next week ***

BUY CALL MAY-130 LLL-EF OI= 426 at $4.10 SL=2.50
BUY CALL MAY-135 LLL-EG OI=1567 at $1.15 SL=0.50
BUY CALL JUN-130 LLL-FF OI= 155 at $7.20 SL=5.00
BUY CALL JUN-135*LLL-FG OI=  66 at $4.50 SL=2.75
BUY CALL JUN-140 LLL-FH OI= 237 at $2.70 SL=1.25

Average Daily Volume = 853 K



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

KMI $46.93 +0.34 (-1.43) There was quite the interesting technical
development in the Natural Gas Index (XNG.X) during today's
session.  The index traded right up to its 10-dma from where it
rolled over and traded lower during the rest of the day.  In fact
the index closed at its day low, which is encouraging for our
bearish play on KMI.  We're hoping that the last two days of
strength was merely a product of short covering on strength in
the broader markets.  As for KMI, it briefly traded above its
10-dma, then it rolled over following its sector.  The rollover
could have offered traders a sound entry into this play.  We're
now looking for a breakdown below the $46 level, which was
yesterday's low, as confirmation for further downside ahead.  Pay
close attention to the price action of the XNG.X in the coming
days as KMI seems to be tracking its sector very closely.

ADI $36.85 -1.30 (+2.42)  Wow, it's been a volatile couple of
days for our ADI play.  The stock exploded to the upside in
yesterday's session on the strength in the broader technology
sector, briefly trading above the $38 resistance level on an
intraday basis.  It was interesting to note that the stock
couldn't close the strong day above that resistance area.  As
it turned out, the stock rolled over during today's session
to take back part of yesterday's big rally.  In doing so, the
stock completed a wide ranging inside day, which makes looking
for new entries and managing risk much easier.  Plays taken
near current levels can be managed with a stop at yesterday’s
high at the $39 level.  To the downside, a breakdown below the
$36.36 level can be used as a new entry point into weakness,
provided that the broader market is trading poorly.  If the
inside day is broken from to the downside, then we'll target a
filling of the gap in next week's trading.

LRCX $25.02 -0.51 (+1.17) LRCX's price action tracked the PHLX
Semiconductor Sector Index (SOX.X) closely during the last two
sessions.  However, even on the big strength in the broader
market yesterday, LRCX was unable to even trade up to its
significant short term resistance at the $26 level, let alone
the ability to close above it.  That inherent relative weakness
in the stock could very well lead to a rollover beyond today's
weakness.  The way to play further give back is by watching for
a breakdown below the $24.40 level in the coming sessions.  That
mark was the low of the stock's trading range during yesterday's
big rally.  A breakdown from there would lead to a breakdown from
the stock's inside day that was traced during today's session.

IDPH $49.11 -2.94 (-1.76) With the strong rebound in the
Biotechnology sector (BTK.X) in the midst of yesterday's big
short-covering rally, it was looking like our stop might get
triggered.  But the short-covering ran out of steam near the
$52 level and we were left waiting for the opening action this
morning.  Popping higher at the open, IDPH hit its high of the
day in the first ten minutes and then the bears had their way
for the rest of the day.  Although closing off the worst level
of the day, the day's action showed that fading the opening pop
was a solid entry point.  Note that in addition to the weakness
in IDPH, the Biotechnology index (BTK.X) selling intensified
into the closing bell.  The BTK fell through the $400 level and
came to rest near where it opened yesterday.  While one could
make an argument for healthy consolidation in the broad market,
the picture is not nearly so rosy in the BTK, with the index
falling to retrace nearly 63% of yesterday's advance.  IDPH's
performance was even worse, with the stock giving up 67% of
yesterday's rally and falling into the gap left at yesterday's
open.  Now that IDPH has fallen into the gap, odds favor the
stock completely filling the gap down to the $48 level.  Use a
bounce back near intraday resistance ($50.50) to initiate new
positions.  If the BTK falls apart again, we'll look for IDPH
to challenge its lows from earlier in the week.  Watch for a
potential bounce as IDPH nears the bottom of the gap at $48,
as that would make for a good opportunity to lock in gains.


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

RE - Everest RE Group $64.29 -1.31 (-3.20 this week)

Everest Re Group, Ltd.'s principal business, conducted through
its operating subsidiaries, is the underwriting of reinsurance
and insurance in the United States, Bermuda and international
markets. The Company underwrites reinsurance both through
brokers and directly with ceding companies, giving it the
flexibility to pursue business regardless of the ceding
company's preferred reinsurance purchasing method.

Following the tragedy last fall, Americans began to recognize
the importance of insurance coverage.  That trend spurred a
rapid rise in the demand for coverage.  Along the way,
providers saw a snapback in their business.  But the losses
from last fall's devastation and the economic downturn are
still taking a toll on the bottom lines of many providers.  RE
is one such company taking a turn for the worse, at least the
stock's recent price action suggests as much.  Shares couldn't
even manage during yesterday's broad market ramp, finishing
lower by a dime.  The stock is starting to breakdown from a
long standing consolidation which it has traded within since
last September's lows.  A breakdown below today's low at the
$64.10 level confirmed with a decline below $64.00 would have
the stock breaking down from its six month consolidation.
From there, we will look for the stock to trade down to the $60
level over the near term.  Confirm market weakness when entering
on such a move lower.  We'll start with stops in place at $67.50.

***May contracts expire in two weeks***

BUY PUT MAY-65 RE-QM OI=1505 at $1.55 SL=0.75
BUY PUT JUN-65*RE-RM OI=  53 at $3.10 SL=1.75

Average Daily Volume = 528 K


BRCM – Broadcom Corporation $25.78 -2.59 (-4.22 this week)

Sitting in the sweet spot between the Broadband and
Semiconductor sectors, BRCM is a provider of highly integrated
silicon solutions that enable broadband digital transmission
of voice, video and data to and throughout the home and within
the business enterprise.  These integrated circuits permit the
cost-effective delivery of high-speed, high-bandwidth networking
using existing communications infrastructures that were not
originally designed for the transmission of broadband digital
content.  Using proprietary technologies, the company designs,
develops and supplies integrated circuits for several markets
including digital cable set top boxes, cable modems, high-speed
office networks, home networking, and digital subscriber lines.

As one of the best-performing sectors on Wednesday, with the
markets saw their best performance since October of last year,
the Semiconductor index (SOX.X) rocked higher by more than 11%.
So a bit of give back on Thursday was to be expected, and the
normal profit taking that ensued today does not yet negate the
bullish tone seen on Wednesday.  But the potential definitely
exists for further downside in the sector.  While BRCM exceeded
the gain in the SOX yesterday, the bears were back to their usual
tricks today, taking back most of the stock's short-covering
gains.  Even if the SOX is getting set to have a modest rally,
BRCM is significantly weaker and looks like it is headed back
for a retest of the September lows.  The selloff that commenced
earlier this week on the heels of news of Motorola announcing
that they will use Texas Instruments as a secondary supplier of
its cable modem chipsets, drove BRCM below the $25 level on
Tuesday.  That produced a fresh PnF sell signal and the bearish
price target is now $14, significantly below the September low.
Solid resistance now resides at $27 with even heavier resistance
at the $28 level.  Should BRCM catch a bid ahead of the weekend,
we want to initiate new positions on a rollover from whichever of
these resistance levels comes into play.  Alternatively, use a
breakdown below the $24.50 level to open new plays.  We are
initiating coverage with our stop set at $29.

*** May contracts expire next week ***

BUY PUT MAY-25 RCQ-QE OI=11099 at $1.30 SL=0.75
BUY PUT MAY-22 RCQ-QX OI= 8739 at $0.65 SL=0.25
BUY PUT JUN-25*RCQ-RE OI= 1526 at $2.70 SL=1.25
BUY PUT JUN-22 RCQ-RX OI= 1353 at $1.75 SL=1.00

Average Daily Volume = 13.4 mln



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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
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The Option Investor Newsletter                 Thursday 05-09-2002
Copyright 2001, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


*********************
PLAY OF THE DAY - PUT
*********************

ADI - Analog Devices $36.85 -1.30 (+2.42 last week)

Analog Devices, Inc. is engaged in the design, manufacture and
marketing of high-performance analog, mixed-signal and digital
signal processing integrated circuits (ICs) used in signal
processing applications. The Company produces a wide range of
products that meet the technology needs of a broad base of
customers and markets. 

Most Recent Update

Wow, it's been a volatile couple of days for our ADI play.  The
stock exploded to the upside in yesterday's session on the
strength in the broader technology sector, briefly trading above
the $38 resistance level on an intraday basis.  It was
interesting to note that the stock couldn't close the strong day
above that resistance area.  As it turned out, the stock rolled
over during today's session to take back part of yesterday's big
rally.  In doing so, the stock completed a wide ranging inside
day, which makes looking for new entries and managing risk much
easier.  Plays taken near current levels can be managed with a
stop at yesterday’s high at the $39 level.  To the downside, a
breakdown below the $36.36 level can be used as a new entry point
into weakness, provided that the broader market is trading
poorly.  If the inside day is broken from to the downside, then
we'll target a filling of the gap in next week's trading.

Comments

The SOX rolled back lower today, finishing on its day low.  If
today's action portends tomorrow's, we could see some follow
through to the downside.  Sector selling pressure could lead to
more downside in ADI.  The set up in the stock is favorable for
traders after today's inside day.  Simply look for a breakdown
below the $36.36 level in conjunction with further weakness in
the SOX.

***May contracts expire in two weeks***

BUY PUT MAY-35 ADI-QG OI=5823 at $1.00 SL=0.50
BUY PUT JUN-35*ADI-RG OI=3271 at $2.40 SL=1.50

Average Daily Volume = 2.91 mln
 


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***********
Options 101
***********

Why Incentive Stock Options Matter
By Buzz Lynn
buzz@OptionInvestor.com

Incentive Stock options?  What the heck are those?  Many readers 
are old hands when it comes to knowing the definition.  That's 
because many readers are employed by companies that offer them.  
But for those readers who run their own small businesses and thus 
have no need, or for those working for companies that don't offer 
them at all, an incentive stock option is the right but not the 
obligation to participate in the value growth of the company with 
no capital expenditure through the use of company-granted options.

To get more specific, typically an employee will "given" the right 
to buy shares of the company at a pre-set price (usually the price 
of the stock on the first date of employment or the average share 
price over the month in which the employee begins work, but there 
are 1,000 different nuances) after reaching milestones of tenure 
within the company.  Also, for most employees that have had or 
have them currently, they vest over a period of time, usually 
three to five years, thus the employee could never be 100% vested 
and able to cash in from day one.  The company generally wants 
some payoff from the employees' hard work before it makes the 
payoff.

The company makes the payoff?  Yep.  Isn't that an expense?  Yep.  
This is the part of the article where we make a ninety-degree 
turn.  While employee stock options in a company are a way to 
retain and get the best work out of an employee, the theory being 
that with a vested interest, employees will work harder for the 
company to achieve the ultimate payoff - buying company stock at a 
cheap price - I'm coming at this from a shareholder's point of 
view, and that is where we will focus our time here today.

Let's start with a simplified example.  Most companies will set 
aside a small percentage of stock for employee stock options so 
that they can participate and have a vested interest in the 
success of the business (or so the story goes).  But in reality, 
the cashing in takes place as follows:  the employee simply 
notifies the company of its intent to exercise, then 
simultaneously buys the shares at the exercise price of say $5 and 
sells the same shares at the current market price of $30.  The 
employee thus pockets $25 per share in the transaction.  The 
greater the number of shares exercised, the greater the reward.  
Wow!  $25 per share of free money from God!

Not so fast.  That $25 had to come from somewhere.  It wasn't 
created in thin air in Fed-like fashion.  It came courtesy of the 
shareholders who never knew it.  Back to our simplified example, 
which is grossly exaggerated to help make the point.  Say a 
company has 100 mln shares of outstanding stock from which it has 
set aside 2 mln shares for employee incentives.  That leaves 98 
mln of float in the hands of the general public and founding 
owners.  

Why not just authorize 2 mln shares above the 100 mln for a 102 
mln share total?  Because that would dilute the current 
shareholders' interest by 2% when the extra 2% of shares gets used 
up by employees cashing in.  Nope, have to be sneakier than that 
if you are going to put one over on the shareholders.

So instead, the company sells the shares to the employee at $5, 
but buys them back for $30 in a cashless transaction (except for 
the fortunate employee).  But look what that does.  The company 
has just effectively paid the employee an additional $25 per share 
cash over and above their regular salary.  It's the same thing as 
saying, "You give me $5 and I'll give you $30.  But to make it 
easy, I'll give you $25 so you don't have to come up with the 
exercise money."

Now to drive it home. . .let's really exaggerate and say that 
employees have the right to collectively buy 100 mln shares by 
exercising options at an exercise price of $5 per share.  
Meanwhile, there are 100 mln shares total outstanding at a current 
price of $30.  Then every employee decides to exercises their 
incentive stock options at the same time to cash in.  

Here's the math on that one.  The company has to go to the market 
to buy 100 mln shares at the market price of $30.  Why?  Because 
the company has no shares to grant since all 100 mln are owned by 
the public and (presumably) founding officers.  So the company 
spends $3 bln.  But the employees pay the company back at only $5 
per share for a total of $500 mln.  Thus this costs the company 
$2.5 bln to replace the shares granted to employees when the 
exercise is netted out.  

Everyone get that?  It just cost the company $2.5 bln of hard cash 
to buy replacement shares when the employees exercise.  Now it 
never happens in real life that every employee exercises at the 
same time for every outstanding share.  As noted above, this is 
exaggerated.  However the principle holds true.  EVERY EXERCISE AT 
LESS THAN MARKET PRICE COSTS THE COMPANY THE DIFFERENCE.  That is 
rarely reported as an expense in the P&L statements and usually 
considered an "off budget item".  Sounds like Congress!

But suppose an employee actually has the money to exercise his/her 
options and wants to own the shares instead of merely taking the 
cash?  Anyone work for Microsoft?  It's pretty frequent occurrence 
there and with many other companies too.  So the employee 
exercises and buys the shares from the company at $5.  All's well, 
right?  Nope.  The company can't just grant the shares.  For that 
would be dilutive to current shareholders.  No, in order to keep 
the shares outstanding from increasing, the company must buy the 
shares at $30 in the open market to replace the shares granted 
over to the employee.  Again, a $25 per share expense.

Now we are beginning to see the big picture.  Employee stock 
options are an expense to the granting company that often goes 
unreported.  In fact, the Federal Reserve has recently concluded 
that gross corporate earnings since 1997 (I think that's what I 
saw and now can't find the article) should be reduced by 9.5% 
annually to account for the corporate expense of stock options.  
Another survey (again can't find the article - someone let me know 
if they know the source) concluded that real percentage returns 
would actually be 2.5% lower if incentive options were shown on 
the corporate P&L's.  

Doubt those figures?  Microsoft was reported to have spent $6 bln 
buying back its shares to satisfy its incentive obligations to 
employees, which is to suggest that MSFT has over-reported 
earnings by under-reporting real expenses from incentive activity 
over the past X number of years by $6 bln.  Again, wish I could 
find those figures, but the characterization is accurate.  

Lest you think I'm the only one pointing out that the King is 
naked, Warren Buffet beat me to the punch.  He has been calling 
for years for companies to disclose their incentive option 
activity as an expense in the P&L in order to more accurately 
reflect a company's real return to its shareholders.

Fortunately, that debate is coming to the forefront of GAAP 
through FASB, FTC, and SEC accounting investigations.  While the 
practice may be generally accepted as an accounting principle, it 
isn't sound business practice nor is it fair to shareholders.  
It's deceptive if unreported and soon to meet the increased 
scrutiny of disgruntled owners.  "Surprise!  We've had to restate 
our earnings for the past three years because of incentive stock 
options!"  Get ready, it's coming to a company near you.


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************
MARKET WATCH
************

We are hedging our bets with a long and short.  Meanwhile, several 
candidates approached action points today.


To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/050902.asp


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

Major market averages were on the move during the last two days.  But 
the sectors were on hold.


To Read The Rest of The OptionInvestor.com Market Posture Click Here
http://www.OptionInvestor.com/marketposture/050902_1.asp


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