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Daily Newsletter, Monday, 07/29/2002

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The Option Investor Newsletter                   Monday 07-29-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com

In Section One:

Market Wrap: Still Going...
Index Trader Wrap: UP, UP & AWAY!
Daily Fund Wrap: Blue-Chip Funds Battle Back
Index Trader Game plans: THE SECTOR BEAT - 7/29


*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
07-29-2002               High    Low     Volume Advance/Decl
DJIA     8711.88+447.49  8711.88 8267.99 2114 mln  2581/614
NASDAQ   1335.25 +73.13  1335.25 1272.46 1607 mln  2537/862
S&P 100   450.87 +23.94   450.87  426.93   totals  5118/1476
S&P 500   898.96 -27.90   898.96  852.84
RUS 2000  400.81 +18.55   400.82  382.26
DJ TRANS 2380.95+126.16  2382.16 2254.93
VIX        33.35 - 6.71    37.44   33.35
VIXN       57.57 -11.45    67.42   57.21 
Put/Call Ratio 0.69
*******************************************************************

Still Going...
by Steven Price

Last Wednesday I noted the almost 500 point gain in the Dow was 
quite impressive, however I also noted that the Dow had given up 
1800 points in three weeks, and that a 50% retracement in a bear 
market rally would add another 400 points.  Lo and behold, here 
we are three trading sessions later and the Dow has almost 
another 500 points to show for itself, 447.49 of which came on 
today's impressive rally.  The gains are well spread out, on a 
percentage basis, with only Dow component SBC Communications in 
the red (by -0.04).  So is this a retracement, or have we found a 
bottom?    This week, I'm going to look a little further back, to 
the Dow's most recent high, before it started rolling downhill.  
Going back to March 19, the Dow closed at 10,635.25.  It then 
began its slide to an intraday low of 7532.66 last Wednesday 
morning, before beginning a rise of 1179.22 points over 4 trading 
sessions, including Wednesday.  We are now just shy of the 38.2% 
Fibonacci retracement level, as you can see on the graph below. 

Chart of the Dow Jones Retracement Levels


 

This level may be significant, as we could see resistance here.  
Of course, with 30 stocks in the index, it is not easy for a bear 
looking to short the market to control all 30 stocks at once.  
What is also significant, however, is what could happen if we 
break this level.  We are just six points away from 8717, so a 
higher open tomorrow could take us through that level in the 
first minute of trading.  Looking at the next retracement level 
of 50%, we would need the index to trade over 9000.00 to attain 
it.

A look back at the last time the Dow traded down to the 7500s 
shows us just how much of a springboard this level can be.  The 
first time it traded down to this level was between October 1997 
and January 1998. It did so again in August of 1998.  Each of 
these times, the current 50% retracement level is exactly where 
it eventually ended up - above 9000.  

Monthly Chart of the Dow Jones


 

This pattern shows up once again in a look at the Market 
Volatility Index (VIX.X).  Each of these times, in late 1997 and 
again in August of 1998, the VIX traded over 50, only to decrease 
as the market rallied to 9000 points.  The only other times the 
VIX has been over 50 were last September, after which it rallied 
over 10,000 and this month.  A rally above 9000 would repeat this 
scenario once again, as the VIX has now receded to close at 
33.73.  This is not a coincidence.  The VIX measures the reaction 
to market moves, as option prices increase when fear of a market 
crash is present.  While large moves to the upside are possible, 
moves to the downside are usually quicker, which is why the VIX 
spikes tremendously when there is negative uncertainty in the 
market.

Chart of the VIX


 

A Dow trade over 8718, breaking through the 38.2% retracement 
bracket could certainly suggest a trip up 9000.  Of course with 
the 400-point days we've had recently, 9000 could be seen before 
noon.

The S&P 500 ($SPX.X) has also rebounded to a significant level.  
The index closed on its high of 898.96.  It was up 46.12 on the 
day, a gain of more than 5%.  The rally into the close suggests 
confidence, but it stopped just short of 900.  Had the market 
stayed open an extra ten minutes, there is no way to know if we 
would have seen selling at the 900 level, or a takeoff as the 
bulls pushed resistance aside.

So who led us higher?  Well the goats of just a week ago are 
looking much prettier today.  J.P. Morgan was up almost 13%, 
adding $2.85 to close at  $25.10, while Citigroup added more than 
8%, gaining $2.57 to close at $33.31. American Express was also 
sharply higher adding $3.32 to close at $33.49.  Citigroup and 
J.P. Morgan provided the Senate with sworn affidavits as to the 
nature of offshore entities that were involved with Enron. These 
affidavits were requested last week by Sen. Carl Levin, who is 
chairing the subcommittee that is looking into the Enron scandal.  
The Senate wanted these responses by today, and their 
presentation no doubt removed some questions investors may have 
had about what the institutions might be hiding.   

On a day when there were lots of winners, WorldCom got news that 
it would be delisted by the Nasdaq.  The No. 2 long-distance 
provider, who recently filed for bankruptcy, will most likely 
join the bulletin-board world of penny stocks.  

The retailers had a banner day. The Retail Index ($RLX.X), had 
had been in a free fall.  It was stuck below the 280 level, 
having been turned back on three separate occasions last week, 
but finally got through, and closed near its high of the day, 
knocking on 290's door.  The day started with Wal Mart announcing 
that last week's sales were lower than expected, however, the 
industry leader finished up $1.35 at $49.53.  It carried along 
with it Circuit City, Target, Home Depot, Best Buy and a host of 
others.

Microsoft (MSFT) continued its rise after announcing expansion of 
its workforce and R&D budget last week.  It was up $2.90 to 
$48.25, after setting a new 52-week low of $41.41 just last 
Wednesday morning.  Microsoft led the tech sector higher, as the 
Nasdaq composite (COMPX) closed up 73.13 to 1335.25, up over 5% 
for the day.  The index looks to have put in a solid bottom at 
the 1200 mark, but has a lot of congestion on the chart around 
1400 that could serve as resistance.  This would also coincide 
with the top of a descending channel from the beginning of April.

Chart of the Nasdaq Composite


 

While a few individual issues were left behind, such as Motorola 
(MOT), which received a downgrade, the only area seeing red were 
the treasuries. As money flowed out of bonds and into equities, 
all equity sectors were in the green today.  The dollar (DX00Y) 
rallied 1.41 to 106.71, and is continuing its gains with a 
reading of 107.06 as I write.  Even the gold sector ($XAU.X), 
which has suffered greatly in the last few weeks, got a reprieve, 
rebounding almost 7%, in spite of gold dropping 0.90.

On the NYSE, advancers outnumbered decliners 2,581 to 614, while 
the Nasdaq posted similar numbers with a margin of 2,522 to 870. 
Volume was heavy, once again trading over 2 billion shares. The 
CBOE Put/Call ratio also continues to decline, at .69, reflecting 
fewer puts being traded as compared to calls. The bulls are 
certainly out in force, and continuing strength is impressive.  
However we still have not recovered even 40% of the losses in the 
Dow since the end of March. This could still be considered a bear 
market rally.  That being said, there is still plenty of room to 
the upside within which to trade.  Shorting the rally could be 
dangerous.  Remember the adage that a trend is in effect until 
evidence presents itself otherwise.  Right now the short-term 
trend is up.  However, we have just experienced an 1100-point 
rally in four days. A market pullback is very possible, and a 50% 
retracement of the rally would bring us back down 500 points to 
the 8230 range. A pullback with support, and then another move 
up, would be more convincing to the conservative trader.  A more 
advanced trader, with plenty of time to track the intraday 
movements of the market, could play the range between Fibonacci 
levels if we break out to the upside.  This pace cannot maintain 
itself forever (otherwise the Dow 30,00 advocates would have been 
right a couple of years ago) and we are bound to experience 
pullbacks, even in a strong uptrend.  Remember to ride it, not 
defy it, and keep your stops in line with your account.


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

UP, UP & AWAY!   
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
The market theme song might have also been, "the market goes up, 
up, up, Volatility goes down, down, down"! What a time to have 
shorted puts - ahead of the weekend and I wish I had.  And, 
bought tons of those GE August 25 calls also - dream on Stevens! 



 

I commented on how the talking heads were already looking at the 
market through the rear-view mirror in terms of harping about how 
volatility was so high and "here to stay" - ya baby! - and Austin 
Powers was out & about in the weekend theatres. 

When I looked at the chart of the CBOE Volatility Index for the 
S&P 100 (OEX) options, I wished that it was a stock and I could 
have shorted it.  Of course, one strategy was to short puts in 
the financial stocks, GE, etc.  

My thought that VXN, the CBOE Nasdaq 100 volatility index, was 
making a "double top" was the right way to read the chart it 
appears by the look of it above. 

And, of course, the dollar continued strong per my chart read of 
it, which was a positive to the market "color" or the background 
influences. Read the charts or don't read em "and weep" I guess.  


S&P 100 (OEX) Index - Daily/Hourly charts:    


 

OEX has broken out above the resistance I thought would come into 
play in the 446 area, at the low end of the prior trading range 
on the hourly chart.  However, OEX is also right AT even more key 
technical resistance at its 21-day moving average at as you can 
see on its daily chart on the left above. What next?  Wish my 
crystal ball was a clear as it was when it said to look for a 
good-sized further rally.  

I do know that the 21-day average in the indices tends to be a 
quite "pivotal" trading point.  Rallies tend to fail right in the 
area of it, OR will keep going and move up toward the upper 
envelope line at least.  We want to keep an eye on those prior 
swing highs noted on the hourly chart also - at 458 and 466.

So, looks like there may be upside to 470, top of the hourly 
downtrend channel, or to around 475, at my upper envelope line on 
the DAILY chart.  In terms of the hourly envelope lines, there is 
more a tendency in big moves for prices to pop above/below them 
for a time.    

Key support is at 425 and looks like the area for a lower risk 
buy - any new buy NOT on a substantial pullback is high-risk with 
the near-term overbought situation as shown by the hourly 
stochastics.  On a daily basis, the daily oscillators are far 
from an overbought extreme.     
 
"Bellwether" GE - 


 

From Sunday - "GE has been typically the best "bellwether" or 
related predictor of the broader S&P indices. Its recent low, at 
the bottom of its down trendline on the daily chart, is a classic 
"V" bottom - and, on very heavy volume although this is not shown 
on the chart above. Looks like it was a climax type bottom - 
subsequent rebound paid handsomely in the nearby long calls."  

Unfortunately, the nearby August 25 calls were not as good a buy 
still at the opening due to the gap higher on the stock - it 
jumped quite a bit on the opening.  Thought I would update the 
chart, not for the "coulda-shoulda-woulda's" of it, but because 
its such a classic "bear trap" reversal and classic chart pattern 
to boot with the "touch" to the low end of its broad downtrend 
channel and big bounce from there - trendlines and channels - at 
times, worth their weight in GOLD! 

S&P 5100 (SPXOEX) Index - Hourly chart:


 

I thought SPX could get up to the 900 area - "A measured move 
objective for the S&P 500 is to the 900 area..... " - however, I 
didn't think it would be on Monday.  There is a lot of resistance 
showing around 919-920 I think - this is my area to take call 
money and run and rotate into index puts if reached. 

Good support should be found on pullbacks to the 850-855 area - 
but if SPX gets there, I would not get too bearish unless the S&P 
500 crashes through it.  
 
I had my ONE lower hourly channel line, which is a line parallel 
to the upper trendline, drawn though the most number of lows 
rather than the absolute lowest low - WRONG! - sometimes this 
technique is what "works" EXCEPT when the market gets real extreme 
in a move. If so, you want the lower boundary line touching the 
LOWEST most extreme low, which offered the best outcome here. 
"Pulling" the lower parallel trendline down to the prior "extreme" 
low at 982 - the one that "stuck out" as a kind of "panic" low – 
then intersected the area of the lows today. 

Sometimes, for comparison, I will draw two trendlines (forming a 
buy/sell "zone") on one end or the other of my channels, which is 
again the case in the way I have the SPX chart above. 

I suggested the 916 area - stop at 912 - as the potential buy area 
for SPX in last night's commentary. However, it is often the case 
that an index gets somehow "pulled" to the even 100/1000 levels as 
if by a magnet - this concept worked well today as SPX got within 
a hair's breadth of 900!

Dow Index (1/100: $DJX.X) - Daily/Hourly charts:


 


I suggesting selling in the 87 area - maybe, maybe not.  We 
should see in the early going tomorrow.  If the rally is going to 
falter, it should be around this area. If not, next DJX 
resistance is at 88.5, based on the prior hourly swing high. 
Then, above here, at 90-90.5. 

Key DJX technical support is a zone: 81 - 82.5.  I can't say that 
I would automatically be a buyer this area if it came about from 
a sharp fall. Since this is 450 Dow points lower I don't see a 
clear and present danger of it.      

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


 

Nasdaq is the stock index SHORT of choice in my mind as this 
market has lagged and will likely fall first and further to boot.  

The number is hidden on the daily chart (in red on the right 
scale) so you can’t read off the 21-day moving average - it's at 
24.4 currently. A move to this area puts the Q's into "pivotal" 
technical resistance - I'm inclined to short in this area on up 
to the top end of the hourly downtrend channel, which intersects 
in the 24.75 area currently. So, bearish strategies are suggested 
in the 24.40 - 24.75 area - and, puts are becoming a bit more 
reasonably prices. Stay tuned. 

22.75 to 23.12 makes up the upside chart gap from today and this 
area is a "minimum" downside objective - to 22.75.  Support 
continues to look like 22-22.50.  I think were in a "bottoming" 
process with Nasdaq, but the rallies are not likely to be as good 
as in the S&P and this is one to wait and short the rallies/buy 
puts in the Nas indices and stocks. 

Nasdaq "bellwether" stocks -


  
 
The commentary was right - Cisco had " a Bear trap" reversal 
pattern with the fall to a new low, followed by a sharp upside 
move from there within the same day.  Also, this low was not just 
ANY low, but one in the area of the low end of its recent trading 
range." 

However, I had an out of date chart due to my TradeStation 
application stopping its updates after 7/24.  I had the data, but 
the chart didn't seem to want to update until I deleted it and 
started over.  Maybe the genie in the machine was short! 

Cisco is such a bellwether for Nasdaq, it's worth updating the 
chart just to note the same upside gap apparent on the QQQ chart. 
So, watch the CSCO chart gap too - between 12.1 and 12.34 - stock 
looked very strong today - close on the high was a nice bullish 
touch.  

Wish my Oracle stock had done as well (up 2.2% versus a gain of 
+12%!) - sometimes you bet on the wrong horse!     

Let the stock break out above this resistance without me. I would 
rather short the rally at some point or buy the next dip than 
surrender a profit, at least in this market climate. Or, if I want 
to stay long I'll buy ORCL or MSFT on a further breakout if I want 
to play the tech darlings. 

Support is anticipated in the 23.5-24.0 area; then down around 22 
if there is another sharp break.  Above 25.5, resistance levels 
are at the prior highs at 26.5-26.8. 

Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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***************
DAILY FUND WRAP
***************

Brought to you by: www.MutualInvestor.com

Blue-Chip Funds Battle Back
By: Steve Wagner


The U.S. stock market took investors on a rollercoaster ride last 
week, with blue-chip stocks and funds battling back to post 5-day 
gains while the rest of the market was in the red.  The blue-chip 
Dow 30 index notched a 3% weekly rise, its best since Mid-May, as 
the tech-heavy Nasdaq tumbled 4.3% on the week.



 



The large-cap S&P 500 index finished the week 0.6% higher, while 
the next 4,500 stocks as measured by the Wilshire 4500 Index was 
1.8% lower, using the Vanguard Extended Market Index Fund as the 
proxy.  Losses were widespread among stock mutual funds, with 16 
out of 18 Lipper equity fund indices closing the week in the red.  
Still, the fact that the market bounced back Wednesday from near 
5-year lows and held the gains was a welcome sign on Wall Street.

According to Lipper, the hardest hit equity fund categories were 
science/technology funds (-7.8%), emerging-markets funds (-8.4%), 
and gold funds (-21.7%).  The two best groups were equity income 
funds (+0.2%) and large-cap core funds (+0.5%).  With the losses 
in recent weeks, the average gold fund's YTD return has withered 
to 14.7%.  No other Lipper equity index is above water this year.

Foreign equity funds were substantially lower for the week, with 
the total international stock index sliding 5.5% (using Vanguard 
Total International Stock Index Fund).  The developed markets of 
Europe and Asia held up better overall than the emerging markets 
did, but international equity fund losses were still widespread.

Lipper's fixed income fund indices were all over the place, with 
U.S. government funds up 0.6% on average for the week, while the 
average high current yield fund lost 2.7% of its net asset value.  
Global and international income funds posted losses between 1.0% 
and 2.0% over the last five days.  The U.S. dollar gained versus 
foreign currencies as Wednesday's stock rebound raised hope that 
the U.S. equity slump has ended.


Vanguard Index Fund Performance


The Vanguard index fund returns below show how well (or poorly) 
various benchmarks and indices performed on the week and since 
December 31.  The 500 Index is divided between the Value Index 
and the Growth Index.  The 500 Index and Extended Market Index 
(next 4,500 stocks) make up the Total Stock Market Index.  The 
MSCI EAFE index of developed foreign markets and the MSCI EAFE 
Select EMF Free index of emerging markets combine to equal the 
Total International Stock Index. 

The Short-Term Bond, Intermediate-Term Bond and Long-Term Bond 
Indexes track the various maturity sectors of the fixed income 
market, while the Total Bond Market Index replicates the total 
return performance of the Lehman Brothers Aggregate Bond Index, 
a primary benchmark for U.S. investment-grade bonds. 
 
    
 Vanguard Equity Index Benchmarks:
 Value Index (VIVAX) Week -1.8%; YTD -24.8%
 Growth Index (VIGRX) Week +3.0%; YTD -25.7% 
 500 Index (VFINX) Week +0.6%; YTD -25.1%
 Extended Market Index (VEXMX) Week -1.8%; YTD -21.3%
 Total Stock Market Index (VTSMX) Week +0.2%; YTD -23.9%
 Total International Stock Index (VGTSX) Week -5.5%; YTD -13.7%

 Vanguard Fixed Income Index Benchmarks:
 Short-Term Bond Index (VBISX) Week +0.1%; YTD +2.6%
 Interm-Term Bond Index (VBIIX) Week +0.2%; YTD +3.5%
 Long-Term Bond Index (VBLTX) -0.5% Week -0.1%; YTD +4.0%
 Total Bond Market Index (VBMFX) Week -0.2%; YTD +3.4%

 Balanced Index Benchmark:
 Vanguard Balanced Index (VBINX) Week +0.0%; YTD -13.3% 


Vanguard Balanced Index Fund is unique from other balanced funds 
because its 60% equity stake is invested in Vanguard Total Stock 
Market Index Fund, which mirrors the entire U.S. stock market as 
measured by the Wilshire 5000 index.  Most balanced funds invest 
primarily in large-cap stocks and use the S&P 500 index as bogey.

Still, you can see the potential benefit of diversification with 
the Balanced Index Fund breaking even for the week.  Considering 
last week's volatility, this simple strategy paid off handsomely, 
limiting losses to zero.    


Lipper Fund Indices


Just as the Vanguard index funds offer a great overview of the 
various market benchmarks and indices, the Lipper fund indices 
provide an excellent overview of how well (or poorly) different 
fund categories performed last week and on a year-to-date basis 
through Friday, July 26, 2002. 


 Lipper Equity Fund Indices:
 Balanced Funds: Week -0.4%; YTD -14.1% 
 Equity Income Funds: Week +0.2%; YTD -19.3%
 Large-Cap Value Funds: Week -0.3%; YTD -22.0%
 Large-Cap Core Funds: Week +0.5%; YTD -23.8%
 Large-Cap Growth Funds: Week -0.1%; YTD -28.6%
 Science & Technology Funds: Week -7.8%; YTD -42.8%
 International Funds: Week -6.7%; YTD -13.1% 
 Emerging Markets Funds: Week -8.4%; YTD -4.6%
 Gold Funds: Week -21.7%; YTD +14.7%

 Lipper Fixed Income Fund Indices:
 GNMA Funds: Week +0.4%; YTD +5.7%
 U.S. Government Funds: Week +0.6%; YTD +5.8%
 Short-Term Investment-Grade Funds: Week -0.1%; YTD +2.0%
 Intermediate-Term Investment-Grade Funds: Week -0.5%; YTD +2.8%
 Corporate A-Rated Bond Funds: Week -0.1%; YTD +3.5%
 High Current Yield Funds: Week -2.7%; YTD -8.7%
 Global Income Funds: Week -1.3%; YTD +4.9%
 International Income Funds: Week -1.9%; YTD +10.4%


You can see it was a topsy-turvy week for both the equity market 
and fixed income market.  Equity income funds and large-cap core 
equity funds generated gains for the week, thanks to Wednesday's 
sharp rebound.  Large-cap value funds and large-cap growth funds 
also rallied mid-week to minimize their weekly average declines.

Some diversified U.S. stock fund categories, such as the average 
multi-cap growth fund, lost over 2% on the week.  Tech funds for 
the week lost 7.8%, increasing their average loss to 42.8% since 
December 31.  You can see that the large-cap funds have declined 
by more than 20% this year.  Stock mutual funds are headed for a 
third consecutive down year.  Still, this past week offered many 
investors a ray of hope that the U.S. stock market has bottomed.

There was a general flight to quality in the fixed income market, 
with U.S. government funds notching a 0.6% weekly gain while the 
average intermediate-term investment-grade bond fund declined by 
0.5 on the week.  The Vanguard Long-Term U.S. Treasury Fund rose 
by 0.8% in the last five days, reflecting the flight to quality.  
The high yield sector experienced sharp price declines, with the 
average current high-yield fund down 2.7% on the week.  For bond 
funds, that is a significant weekly rise (fall).  A stronger U.S. 
dollar last week hurt the performance of global and international 
fixed income funds. 


Largest Mutual Funds


Like the market and fund indices, the largest mutual funds also 
serve as barometers of fund performance, since a large share of 
total U.S. fund assets are held in these fund bellwethers.  The 
largest equity funds and fixed income funds based on net assets 
produced the following net gains (losses) for the periods ended 
Friday, July 26, 2002.


 Largest Equity Funds:
 Vanguard 500 Index (VFINX) Week +0.6%; YTD -25.1%
 Fidelity Magellan (FMAGX) Week -0.1%; YTD -26.0% 
 Investment Company of America (AIVSX) Week -1.3%; YTD -18.2%
 Washington Mutual Investors (AWSHX) Week +0.0%; YTD -18.0%
 Growth Fund of America (AGTHX) Week -3.1%; YTD -26.4%
 Fidelity Contrafund (FCNTX) Week +1.5%; YTD -11.8%
 Fidelity Growth & Income (FGRIX) Week +2.4%; YTD -20.0%
 EuroPacific Growth (AEPGX) Week -5.5%; YTD -15.0%
 New Perspective (ANWPX) Week -4.8%; YTD -19.6%
 Vanguard Windsor II (VWNFX) Week +0.2%; YTD -19.4%
 American Century Ultra (TWCUX) Week +1.8%; YTD -23.4%
 Fidelity Equity Income (FEQIX) Week -0.2%; YTD -19.9%

 Largest Fixed Income Funds:
 Vanguard GNMA (VFIIX) Week +0.4%; YTD +6.1%
 Vanguard Total Bond Market (VBMFX) Week -0.2%; YTD +3.4%
 Bond Fund of America (ABNDX) Week -1.8%; YTD -1.5%
 Vanguard Short-Term Corporate (VFSTX) Week -0.2%; YTD +1.8%
 Franklin U.S. Government (FKUSX) Week +0.4%; YTD +5.4%
 
 Largest Balanced Funds:
 Vanguard Wellington (VWELX) Week +0.3%; YTD -10.1%
 Income Fund of America (AMECX) Week -1.7%; YTD -9.4%
 Fidelity Puritan (FPURX) Week -0.1%; YTD -11.9%
 American Balanced (ABALX) Week -1.2%; YTD -11.5%
 Fidelity Asset Manager (FASMX) Week -1.1%; YTD -14.4%


You can see why Vanguard Wellington is the largest balanced fund 
in the country.  The oldest traditional balanced fund with $21.4 
billion in assets invests primarily in blue-chip stocks and high-
grade bonds, proving to be the right tonic for last week's topsy-
turvy market.  The inclusion of high-yield bonds hurt the return 
performance of the American Funds Income Fund of America and its 
sibling, Balanced Fund.  Both funds lost over 1% during the week.

The five bond fund bellwethers illustrate last week's flight to 
quality, with the two government funds producing positive total 
returns while the three corporate bond funds generated negative 
total returns on the week.  Just as stock investors invested in 
quality blue-chip companies, bond investors invested in highest 
quality government debt securities last week. 


Money Market Funds


According to iMoneyNet.com, the taxable money market fund average 
stood at 1.28% as of Wednesday, July 23.  The three highest 7-day 
simple yields, per iMoneyNet, among prime retail money funds were 
PayPal Money Market Fund at 1.89%, Touchstone Money Market Fund 
at 1.77%, and HSBC Investor Money Market Fund (Class Y) at 1.74%. 

The simple 7-day yields for the five largest retail money market 
funds as of July 23, per iMoneyNet, were as follows:


 Largest Retail Money Market Funds: 
 Fidelity Cash Reserves (FDRXX) 1.56%; Avg Mat 65 Days
 Schwab Money Market Fund (SWMXX) 1.23%; Avg Mat 63 Days 
 Vanguard Prime MMF/Retail (VMRXX) 1.57%; Avg Mat 64 Days
 Schwab Value Advantage MF (SWVXX) 1.56%; Avg Mat 61 Days   
 Merrill Lynch CMA Money Fund 1.45%; Avg Mat (Unavailable)


According to Bloomberg, the key Fed Funds rate currently stands 
at 1.75%.  The Fed might not have to do much if the economy can 
move along at a slow steady pace.


Mutual Fund News


As of this writing on Monday, the equity markets are up sharply, 
looking like a repeat of Wednesday's buying frenzy.  Government 
bonds are down in price as investors move back into U.S. stocks.

With the fixed income markets doing well during the most recent 
economic downturn, some fund families are introducing more bond 
funds.  Bloomberg reports that fund giant Fidelity will launch a 
new bond fund called Fidelity Total Bond Fund, which seeks total 
return opportunities in all segments of the fixed income market.  
It will invest at least 80% of fund assets in all types of debt 
securities, and may invest up to 15% to high-yield and emerging 
market debt.

Bond investors that are interested in Fidelity Total Bond Fund 
may want to check out the risk and return of other broad funds, 
such as the American Funds Income Fund of America, which has a 
specific allocation to high-yield securities.  This week is an 
example of when quality outperforms yield and having a broader 
approach to bond investing doesn't pay off.  However, over the 
long-term, many argue that it pays to include riskier types of 
bond securities that pay higher yields and offer greater total 
return potential.


Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com


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

THE SECTOR BEAT - 7/29
by Leigh Stevens

The very strong rebound in the NYSE Financial stocks (NF), 
especially the Banks among the financials, such as represented by 
the BKX bank index, along with the Brokers (XBD), were major 
contributors to the continued strong market today, along with the 
Cyclicals, Home Builders, Forest Products,  - upside acieration 
was apparent in fact as percent gains were even better today.  

Even the recent worst "dogs" had their "day", such as Airlines, 
Telecoms, Semi's, Natural gas, Gold & Silver, and oils/oil 
services.  You can see the best percentage gainers below. There 
were no losing sectors of the ones I follow - which always makes 
be a bit "suspicious" as regards the potential for much follow 
through tomorrow as the rally looks "too" good.  

 
UP on Monday - 


 
     

DOWN on Monday - 

None, nada, NOT!

   
SECTOR TRADE RECOMMENDATIONS & REVIEW -

NEW/OPEN TRADE RECOMMENDATIONS -

NONE - cancel Biotech HOLDR buy rec. as I didn't get the pullback 
to buy that I was hoping for.

 
TRADE LIQUIDATIONS -

NONE


SECTOR HIGHLIGHT -

Broker Dealer Index ($XBD.X)
STOCKS: AGE; AMTD; BSC; ET; GS; JEF; LEH; LM; MER; MWD; NITE; 
RJF; SCH


 

Wish I had "bet" on this horse after all - XBD got right down to 
the low end of its downtrend channel and has rebounded strongly.  
420, at its 50-day moving average looks like a possible next 
upside objective. 
Update: 7/29 

Semiconductor Sector Index ($SOX.X)
STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; 
LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX



 


Guess what is back to its Sept. low - the Semiconductor HOLDR's - 
this is one to watch - the sector that wouldn't die.  Meanwhile 
the SOX index itself is rebounding from the low end of its 
uptrend channel.  We'll watch this sector another day and maybe 
look to buy a next dip in the BBH HOLDR's.   
Update: 7/29   


Gold & Silver Sector Index ($XAU.X)
STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL


 

Well, XAU is back into a support area in my estimation.  65-67 is 
a an area where XAU might "easily" get back up to on an oversold 
rebound.  I would not hold out home for a resumption of the 
sector's strong bull trend however.  With gold, once its over, 
its over.  Sort of like an ex!     
UPDATE: 7/29

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                   Monday 07-29-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Stop-Loss Updates
Dropped Calls: None
Dropped Puts: EXPE & MHK
Play of the Day: BBOX – Put
Weekend Leaps Section: V-Bottom Arrives Right On Schedule
Traders Corner: MOCO - The Final Installment

Updated On the Site Tonight:
Market Posture
Market Watch


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*****************
STOP-LOSS UPDATES
*****************

ADP - call
Adjust from $33.25 up to $34

BAX - call
Adjust from $32.50 up to $47

EFX - call
Adjust from $19.40 up to $21

LLY - call
Adjust from $50 up to $53.50

LTR - call
Adjust from $42.40 up to $44

MMM - call
Adjust from $117.50 up to $121.50

MSFT - call
Adjust from $42 up to $45

WMT - call
Adjust from $45.50 up to $46.50


*************
DROPPED CALLS
*************

None


************
DROPPED PUTS
************

EXPE $50.30 +3.10 (+3.10) Eager bears that were looking to short
into Friday's rally were in for a rude awakening this morning, as
the sharply positive futures presaged a big gap at the open.  But
that was just the opening act, as you can see on EXPE's intraday
chart.  After the opening volatility, the stock marched right up
the chart with the remainder of the market, taking out our stop
at $49.50 early in the day and then using that level as support
on the intraday dips before pushing through the $50 level.  Even
though we could see a rollover tomorrow, with the strong move
through our stop, it is clearly time to drop the play.  Use a dip
in the morning as an opportunity to exit remaining open plays.

MHK $46.81 +2.20 (+2.20) In a deeply oversold market, bearish
plays need to be kept on a short leash, and that was our thinking
with MHK, as we had a tight stop in place at $46.65, the site of
last week's highs.  As though they could sniff out that stop, the
bulls bought the stock just enough to nudge it through our stop
at the close on Monday.  While we certainly wouldn't be looking
bullish on the stock, we do need to abide by our stop and exit
the play tonight.


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

BBOX – Black Box Corporation $36.90 -0.02 (-0.02 this week)

Company Info:
As a technical services company, Black Box Corp. designs, builds
and maintains network infrastructure systems.  The Black Box
team serves more than 150,000 clients in 132 countries,
providing technical services on the phone, on site and online.
Through its catalogs and Website, the company offers more than
90,000 infrastructure and networking products, and designs and
builds more than 650,000 custom products each year.

Most Recent Write-Up
While the major market averages were looking pretty healthy at
the end of the day on Friday, there were some stocks that went
right back into reverse following Wednesday's snap-back rally.
Dragged lower by the carnage in the Semiconductor sector, the
Networking index (NWX.X) drilled down to new all-time lows on
Friday.  It should therefore come as no surprise that networking
company BBOX dropped to a new 3-year closing low on Friday on
fairly heavy volume.  Judging by the recent price action, BBOX
is headed substantially lower.  Note that the PnF chart is on
the edge of giving another triple-bottom sell signal, which
will come with a print of $36.  Not only that, but the current
bearish price target is down at $24.  With formidable resistance
now in place at $40 (prior support), we can limit our risk with
a stop at $40.  Use a failed rally below this level to initiate
new positions or else wait for a breakdown under $36 on
continued heavy volume.  Use the action in the NWX to confirm
weakness in BBOX before playing.

Why We Like It:
While it has frequently been said that a rising tide lifts all
boats, when we find an exception to that axiom, we need to pay
attention.  Monday's rally was truly impressive, with the DOW
launching higher by nearly 5.5%.  So what happened to BBOX?
Except for the opening pop, it was another downhill slide for
the stock.  Sure it only lost 2-cents on the day, but that is a
glaring sign of relative weakness in the face of the outsized
gains in the broad market.  In fact, had the market not been so
strongly positive today, it is highly likely that BBOX would have
broken the intraday low ($36.35) from last Wednesday.  Even early
in the day BBOX couldn't do much more than test the $37.50 level
before rolling over.  Another failed rally near this level or
even up near the $38.50-39.00 level would make for an even better
entry.  Of course, if profit taking hits in the morning, it might
not take long at all for the stock to set new lows.  Traders
looking to enter on the breakdown will want to target a drop
through the $36.25 level.

BUY PUT AUG-40 QBX-TH OI=161 at $4.70 SL=2.75
BUY PUT SEP-35*QBX-TG OI=405 at $2.05 SL=1.00

Average Daily Volume = 439 K



*********************
WEEKEND LEAPS SECTION
*********************

V-Bottom Arrives Right On Schedule
By Mark Phillips
mphillips@OptionInvestor.com

First off, let me offer my most humble apologies for the
tardiness of this column this week.  Without going into the
gory details, let's just say that I fell into Murphy's abyss
of technological challenges from which it took me the entire
weekend to recover.  As I sit here typing away late on Sunday
night, I am willing to cautiously state that the gremlins have
been sufficiently beaten for the time being.  But I'm keeping
a bat close at hand, just in case!

So how about that market action last week?  While I wouldn't be
so arrogant as to say I called that bottom (which I didn't), I
think we pretty much scripted what it should look like in some
of the recent commentary here, as well as the recent series on
the MOCO trade.  Simply put, all of the September lows got
violated, the VIX went parabolic and just when it seemed there
was no bottom in sight -- BOING!! -- the rubber band snaps back
just before it breaks.  For those interested in more discussion
on this topic, check out my Trader's Corner article tonight.

Our focus here is long-term LEAPS trades, and we've got a lot of
ground to cover.  If this huge reversal in the broad markets
(NASDAQ excluded, of course) is going to have any legs, then I
would expect a mild pullback over the next week before the bulls
latch on to weekly charts that by then are starting to turn up,
and we could be heading higher into Labor Day.  Before you run
out to buy a bunch of September calls, let me say that I do not
see that as the most likely scenario.  The reason why is the
spectre of what vile confessions will be released when all those
CEOs finally comply with Harvey Pitt's August 14th deadline?  We
could see a rash of downward earnings revisions, with prices
following suit.  That certainly seems to be the worst-case
scenario that the markets were factoring in up until last
Wednesday morning.

Always the glass half full type of guy that I am, I look at the
other side of the coin and see that perhaps the fear of just that
sort of fundamental development will give the broad markets the
wall of worry they need to climb in order to rally from here.
While the VIX has fallen nearly 17 points in the past 3 days of
trade, note that it is still north of 40 -- there is clearly
still plenty of fear in this market.  I'm going to feature a
detailed picture of the similarities I see between the recovery
off of the September lows and the fledgling recovery off of the
lows last Wednesday in my Trader's Corner article tonight.  

Alright, back to LEAPS.  To be honest, I really don't know which
way the current market volatility is going to resolve itself, but
I'm currently leaning towards a wobbly, tentative continuation of
the rally that began last week.  If I'm right, then we ought to
get some more attractive entry points for new LEAPS plays, but we
may find that the better times to venture into new positions will
be near the seasonal pattern of an October market bottom.  That
means we have about 3 months for the markets to finish this rally
leg and return to test (hopefully successfully!) last week's lows.
Knowing what to look for could fill a volume 50 pages thick and
we obviously don't have time for that here.  But hopefully I can
highlight some of the possible signposts in tonight's Trader's
Corner article.  Are you sensing a theme here?  Hey, enough
teasers and I'm sure many of you won't be able to pass up a double
dose of my witty prose (GAG!).  But seriously, I think the time
will be well spent.

This was not a pretty week for the LEAPS Portfolio, with both the
MSFT and QQQ plays getting stopped out.  Well you know what they
say...if at first you don't succeed, try, try again!  While we
had no choice but to abide by our stops on these 2 plays, I also
think that current levels are presenting attractive entries into
the plays.  So while they have been removed from the Portfolio
tonight, you'll notice that I've cycled both of them back onto
the Watch List, with some brief comments listed in the New Watch
List Plays section.

Aside from that, I've only added one new Watch List play tonight
-- partially due to the fact that I'm typing this around 1am on
Monday, but also due to the fact that I believe we are still too
early in this rebound to call it a real rebound without some
follow through.  Conveniently, my pick for the new Watch List
play dovetails nicely with the recent spate of requests for
Index LEAPS plays, as we are adding the DJX index as a new WL
play.



Let's review the action and developments in the current list
and see what action points may develop in the near future.

Portfolio:

MSFT - Sigh...there's nothing like getting out at nearly the
lowest closing price of the decline, just before the reversal
takes hold.  But that's what happened with MSFT.  I don't
necessarily see this as an issue of poor play management, so much
as the stock getting dragged down with the rest of the market.
That's precisely what stop losses are for.  But that doesn't
mean we can't jump right back onto that bucking bronco.  See the
Watch List section down below, and I think you'll agree that this
one deserves another chance.

QQQ - Different symbol, same theme.  Helped along by the
persistent weakness in the Semiconductor index, our QQQ play was
stopped out on Tuesday when it closed below $22.50.  But if the
SOX can hold above last week's lows, then this looks like an
attractive point to initiate new long-term positions in the QQQ.

BRCM - I've talked in recent weeks about the fact that it looked
like BRCM was building some relative strength, and I continue to
hold that view.  Even with the SOX dipping to new multi-year
lows, BRCM held well above its recent lows.  If the SOX can hold
above its lows from last week, that should pave the way for BRCM
to confirm support in the $16-17 area, before once again working
higher.  Of course, if the SOX breaks below recent lows, it is
highly likely that BRCM will violate its $16 stop.  If looking
to initiate new positions, wait for some positive price action
before entering.

GD - I said last week that GD was likely to be one of the
shortest-lived residents in our Portfolio, and that prediction
could very well come to pass this week.  With the broad market
trying to recover, last week's dip near the $80 level may turn
out to be the lows for this cycle.  Of course, it was encouraging
to see GD roll over right at the $87 level, the top of the July
18th gap lower.  The play definitely went our way right from the
outset, and according to the PnF chart, there is downside to the
$76 level.  We are lowering our stop to $87.50 (just above the
short-term descending trendline) in case of a continued recovery.
Afterall, we don't want to let a winning play become a loser.  At
this point, let's use a dip back to the $80 level or below as an
opportunity to close the play for a solid gain.

Watch List:

BA - Volatility anyone?  The price action in BA hasn't been this
wild since September, and arguably a part of the price strength
seen in the latter part of the week could be due to the fact that
the Transports made an awfully convincing show of rebounding from
just above the site of their September low.  What I really liked
in the BA price action was that the stock seems to have put in a
double bottom at the $37 level, which just happens to be the site
of the 62% retracement of the rally off the September lows.  We
could be looking at the beginning of a new bullish move, but the
PnF chart isn't convinced yet.  A print at $44 will be necessary
to put the PnF chart back on a buy signal, and that would likely
precede the next downswing on the daily chart.  I don't want to
chase it here, but neither do I want to be left behind.  Raise
the entry target to $40, but keep in mind that we'd prefer to
see that dip preceded by a brief move through $44.

WMT - Finally, we get to remove WMT from HOLD status.  After the
sharp decline below the $52 level, we needed to wait for a
near-term bottom to form before contemplating new positions, and
we're very close.  After putting in an apparent bottom near the
$44 level, the stock is very close to giving us a fresh PnF Buy
signal.  That event will require the stock to print $49.  Then
we'll want to target the subsequent pullback, ideally near the
$46 level for new positions.  Of course, impatient types can
consider buying a move through the $49 level, but will want to
keep the play on a shorter leash in the event the rally falls
apart.

GE - Last Wednesday's climactic selloff sent shares of GE
tumbling to levels not seen since late 1998, but bears that
tried to capitalize on that breakdown were certainly in for a
rude awakening.  While there is likely still some base-building
to do before GE is ready to run, the stock is certainly looking
attractive for new entries on another dip to support.  Either
that, or a breakout over near-term resistance at the $28.50
level.  Ideal entries would come from a dip and bounce near the
$26.50 level, although I'm breaking from tradition here, in
suggesting an alternate entry on a breakout over the $28.50
level.  On a dip-induced entry, stops will be set at $23.50,
while on a breakout, we'll set them at $26.

INTC - If looking just at the price action of INTC last week, we
could have entered a new position on the strong rebound on
Wednesday.  But the extremely poor action in the Semiconductor
index (SOX.X) gave me cold feet and kept me on the sidelines.
With the stock once again finding support near the $17 level on
Friday and the SOX holding its recent lows, I opted to take the
position at the close on Friday.  While it isn't a screaming buy,
I think it does fit the parameters that we were looking for when
we initially put the play on our Watch List.

As I sit here putting the finishing touches on this, I note that
the S&P futures are trading near $865, which is a far cry above
Friday's closing highs of $853.  I'll go out on a limb here,
saying that I expect Monday's session to have a nice bullish
tint.  And that could translate into some upside entries on
several of our Watch List plays.  Take the entries that look
appealing, but please don't get into a mode of chasing them
higher.  A missed opportunity is better than catching one that
turns out to be a stinker.  Entering the play correctly makes
it much easier to exit it for a profit at a later date.

Have a great week!


Mark


LEAPS Portfolio

Current Open Plays

SYMBOL OPENED     LEAPS    SYMBOL  ENTRY   CURRENT  CHANGE  STOP

Calls:
BRCM   07/10/02  '03 $ 20  RCQ-AD  $ 3.10  $ 3.50  +12.90%  $16
                 '04 $ 20  LGJ-AD  $ 6.00  $ 6.30  + 5.00%  $16
INTC   07/26/02  '03 $ 20  NQ -AD  $ 2.00  $ 2.00  + 0.00%  $15.50
                 '04 $ 20  LNL-AD  $ 4.10  $ 4.10  + 0.00%  $15.50


Puts:
None
GD     07/17/02  '03 $ 95  GD -MS  $11.70  $14.90  +27.35%  $87.50
                 '04 $ 90  KJD-MR  $13.50  $16.90  +25.19%  $87.50


LEAPS Watchlist

Current Possibles

SYMBOL  SINCE    TARGET PRICE  TARGETED LEAP  SYMBOL

CALLS:
WMT    03/31/02  $46           JAN-2003 $ 50  WMT-AJ
                 $49        CC JAN-2003 $ 45  WMT-AI
                               JAN-2004 $ 50  LWT-AJ
                            CC JAN-2004 $ 45  LWT-AI
BA     06/30/02  $40           JAN-2003 $ 45  BA -AI
                            CC JAN-2003 $ 40  BA -AH
                               JAN-2004 $ 45  LBO-AI
                            CC JAN-2004 $ 40  LBO-AH
                               JAN-2005 $ 50  ZBO-AJ
                            CC JAN-2005 $ 40  ZBO-AH
GE     07/14/02  $26.50        JAN-2003 $ 30  VGE-AF
                 $28.50     CC JAN-2003 $ 27  VGE-AY
                               JAN-2004 $ 30  LGR-AF
                            CC JAN-2004 $ 25  LGR-AE
DJX.X  07/28/02  $80-81        DEC-2002 $ 86  DJX-LH
                 $83        CC DEC-2002 $ 78  DJX-LZ
                               DEC-2003 $ 88  ZDJ-LJ
                            CC DEC-2003 $ 80  ZDJ-LB
MSFT   07/28/02  $44           JAN-2003 $ 45  MQF-AI
                 $46        CC JAN-2003 $ 40  MQF-AH
                               JAN-2004 $ 50  LMF-AJ
                            CC JAN-2004 $ 45  LMF-AI
                               JAN-2005 $ 50  ZMF-AJ
                            CC JAN-2005 $ 40  ZMF-AH
QQQ   07/28/02   $22           JAN-2003 $ 25  OZC-AY
                 $23.25     CC JAN-2003 $ 20  OZC-AS
                               JAN-2004 $ 25  LRI-AY
                            CC JAN-2004 $ 20  LRI-AE


PUTS:
None


New Portfolio Plays

INTC - Intel Corp. $17.81  **Call Play**

We've been watching INTC for a bottom for awhile now, expecting
the $16-17 area to provide the bottom from which the stock could
begin a meaningful recovery.  I actually found last week's price
action to be rather encouraging, as INTC held above the $17 level
(which was above the recent intraday lows.  This was in contrast
to the Semiconductor index (SOX.X) moving to new multi-year lows.
Can you say relative strength?  As I mentioned above, with the
SOX holding above its recent lows and INTC catching another
bounce off the $17 level on Friday was enough to convince me that
it is time to enter the play.  So Friday's closing price was our
entry into the play, with a stop set at $16, just below the lows
posted in early July.  While I don't expect the stock to test new
highs anytime soon, even just a rally back to the bottom of its
early June gap near $22.50 would make for a very nice gain.  If
we really are getting started down the recovery path similar to
what we saw in late September, then this should prove to be a
very good entry.  For those that missed that entry, look for
another dip to the $17 level or a breakout over $18 on strong
volume (and bullish action in the SOX) to initiate new positions.

BUY LEAP JAN-2003 $ 20 NQ -AD $2.00
BUY LEAP JAN-2004 $ 20 LNL-AD $4.10


New Watchlist Plays

DJX.X - Dow Jones Industrials $82.64  **Call Play**

Following up on my Options 101 article from last week, I thought
this weekend would be an excellent opportunity to add another
index LEAP to our Watch List.  My favorite of the indices for
LEAPS plays is the DJX, due to good upside potential combined with
the fact that the contracts are fairly reasonable in terms of
price, making for convenient and flexible position sizing.  It is
relatively easy to figure out movement in the DJX relative to the
Dow Jones Industrials, as the DJX is just 1/100 the size of the
actual DOW.  So a DOW of 8000 equates to a DJX of $80.  For those
of you that have been following my MOCO trade description, you
already understand the underlying reasons why I have been focusing
on the DOW rather than the Tech-related indices on that trade.
Technology definitely has a tough road ahead.  Now that we're
adding the DJX to our Watch List though, we have trade candidates
for all comers, whether they want to focus on Technology or the
more sedate DOW.  Last Wednesday's low had most of the earmarks
of a tradable capitulation bottom that I've been looking for, and
the initial rebound off the lows looks very much like what we saw
in the first few days after the bottom was reached in September.
While we don't want to chase this play higher, we also don't want
to miss out on the rally if it truly is just getting started.  A
renewed dip to the $80-81 would make for a steal of an entry point
in my opinion, but we may not get it based on the strong upward
move in the futures that I'm seeing tonight.  So to take advantage
of a runaway rally next week, let's put in an alternate entry,
initiating new positions on a rally through the $83 level.
Initial stops will be placed at $79, just below Thursday's
intraday low.

BUY LEAP DEC-2002 $86 DJX-LH
BUY LEAP DEC-2002 $78 DJX-LZ
BUY LEAP DEC-2003 $88 ZDJ-LJ
BUY LEAP DEC-2003 $80 ZDJ-LB

MSFT - Microsoft $45.00  **Call Play**

It seemed to me that most of the selling in MSFT last week was
due to investors throwing the good out with the bad.  There was
no negative news to focus on, yet MSFT plunged all the way to
just above $41 on Wednesday morning before finding some buying
support.  Sure enough, the rebound that came off of that level
appears to have some legs, and I expect the stock to be a leader
in any continued broad market recovery.  Additionally, we've
been offered a choice setup on the daily chart.  Note that we
have two consecutive inside days posted right now, which gives
us a couple of ways to consider new entries.  If the pattern
resolves with a breakout above Thursday's high ($45.72), that is
an acceptable entry.  On the lower end, a dip and bounce that
occurs above Thursday's low ($42.44) can be used for initiating
new positions.  We'll fine tune our stop next weekend, but
initially let's place it at $41, just below last week's intraday
lows.

BUY LEAP JAN-2003 $45 MQF-AI
BUY LEAP JAN-2003 $40 MQF-AH **Covered Call**
BUY LEAP JAN-2004 $50 LMF-AJ
BUY LEAP JAN-2004 $45 LMF-AI **Covered Call**
BUY LEAP JAN-2005 $50 ZMF-AJ
BUY LEAP JAN-2005 $40 ZMF-AH **Covered Call**


QQQ - NASDAQ-100 Trust $22.67  **Call Play**

Remember when we were hoping that the QQQ would get down to
the $25 level (the bearish PnF price target at the time) to give
us a great entry into the QQQ?  Well, I certainly jumped into
that play prematurely, as $25 was simply a speed bump on the way
to what looks to be at least a near-term bottom in the $21-22
area.  While cycling the play right back onto the Watch List is
partially colored by the fact that I hate to lose, it is also
based on the fact that I think we reached at least a tradable
capitulation bottom last week.  QQQ is the easiest way to play a
broad recovery in the NASDAQ, and with the Bullish Percent so
depressed, it looks like the downside risk is limited.  If this
bottom follows the pattern of what we saw in September, I do not
want to get caught sitting on the sidelines, so I am listing dual
triggers for the play.  Should we move up next week, then I want
to initiate new positions on a breakout over the $23.25 level.
Otherwise, a dip and bounce from the $22 level will be the entry
of choice.  We will start with a tight stop set at $21, just
below last week's lows.

BUY LEAP JAN-2003 $25 OZC-AY
BUY LEAP JAN-2003 $20 OZC-AS **Covered Call**
BUY LEAP JAN-2004 $25 LRI-AY
BUY LEAP JAN-2004 $20 LRI-AE **Covered Call**


Drops

None


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MOCO - The Final Installment
by Mark Phillips
mphillips@OptionInvestor.com

It seems my articles have been consumed with this MOCO strategy
for months now, but truth be known our rambling discussion has
only spanned 5 weeks.  In the process of sharing this concept
with you, I've had a number of insightful questions and
interesting discussions with numerous readers around the world
who chose to pursue the MOCO strategy.

As a benchmark for how successful this strategy can be, I was
only able to enter the trade at the 40, 45 and 50 VIX trigger
levels.  Due to previous plans, I completely missed the drop
and ramp that occurred last Wednesday due to being away from
the house from bell to bell.  Even with that limitation, the
overall trade is currently showing a 54% return.  There is no
doubt that had I been able to take advantage of the VIX 55
trigger, my gains would be well into triple digits.  But that's
nothing!  I've communicated with traders on the other side of
the world that traded off the bottom on Wednesday and closed
that portion of the trade for a nearly 200% gain on Thursday!

As I've stated several times over the past few weeks, it is all
about taking advantage of the strong rebound that occurs when
the rubber band is released from its position of maximum
extension.  Since the bottom on Wednesday, the VIX has
absolutely imploded, falling from north of 56 to below 34
today.  That's 22 points, or another way of stating it is that
it is a 40% decline.  These situations don't occur often (maybe
once per year), but when they do, the odds are strongly stacked
in our favor, with the potential for truly outsized gains a
strong possibility.

Having said that, I want to be absolutely clear in stating that
for this cycle, MOCO is now over.  The VIX is heading back into
its historical range, and anyone that followed the game plan
laid out in the MOCO strategy should now be sitting on some
solid gains.  From here on out, the trade reverts to position
management, which is a very individual issue.  The important
point is that the trade worked and we do not under any
circumstances want to allow the gain to lapse slip away or even
become a loss.  If you traded the strategy, look at your current
position tally and figure out where your break even on the trade
is.  Then set a stop loss on each of the positions such that the
overall trade cannot turn into a loss.

With that being said, I actually think there is still some
significant upside remaining in the trade.  I know you're
wondering how much of a rebound can be left after the DOW has
rallied nearly 1200 points in just the past 4 days.  To be sure,
the lion's share of the gains have now been seen, and I think
we'll run into formidable resistance near the 9000-9100 level on
the DOW.  That is the site of some significant historical
resistance, not to mention the 50% retracement of the drop that
began in late March.  Take a look at the chart below, and I
think you'll see the merits of looking for strong resistance
near that level.

Daily Chart of the DOW


 

After such a sharp rally off the lows, I'm expecting to see a
bit of a pullback from the site of the 38% retracement before
the rally continues to what I think is its ultimate goal.  It
will take REAL good news to propel the market through that
9000-9100 level, and that will likely have to wait until the
spectre of the August 14th deadline has come and gone.

But there's another interesting point that has me believing we
have a rally on our hands that can last more than a week.  I
spent a fair amount of time in the past couple days reviewing
the action as we rebounded off the September lows and comparing
that to the bounce that we are currently enjoying.  Let's look
at a graphical comparison, as I think that is the best way to
convey the points that have caught my attention.

First let's look at the recent rebound off the lows, comparing
the price action of the DOW to the movement of the VIX.  You can
see that the DOW has rebounded nearly 1200 points, while at the
same time, the VIX has collapsed by more than 22 points.

Daily Comparison of DOW and VIX - July 2002


 

To get an appreciation for how far we have come in so short a
time, we need to go back and look at the most recent comparable
move, the rebound off of the September lows.

Daily Comparison of DOW and VIX - September 2001


 

I think this comparison is really rather interesting, as it
took the DOW fully 3 weeks to vault 1200 points off of the
September lows, and investors were far more cautious during
that rally.  See how the VIX fell sharply to the 40 level and
then crept lower until it re-entered its historical range in
early November?  Don't look now, but if we get one more strong
up day, the VIX will be pushing back into its historical range,
and we aren't even a week beyond the lows.

There's another comparative aspect that I find very interesting
in comparing the September bottom to our current market bottom.
Note how in September, we got a strong upside day, followed by
2-3 days of consolidation before the rally continued?  The
picture is much the same for our current rebound.  Wednesday's
strong rally was followed by 2 days of consolidation before we
went vertical again this morning.  While there are differences,
the patterns are very similar.

Here's the interesting point from a macro view.  September's
market decline was due to a terrorist event, while this one was
caused by the "crisis of confidence".  Numerous pundits pounded
the drum saying it was different this time and that we weren't
going to get a strong rally off the lows.  To which I say
horse-puckey!  It never matters what generates the panic...it
is different EVERY time!  But when the fear rubber band gets
stretched this tightly, there's a winning trade just around the
corner.  These trades don't come along very often, but when they
do, it makes for a nice opportunity to augment your annual
cashflow.

Now whatever you do, don't let those gains slip away, while you
hold out for that last little bit of profit.  Manage the MOCO
trade just like you would any other trade that had delivered you
an xx% profit.  And then file this strategy away for future
reference.  The setup will come again, and now we all know how
to capitalize on it.

Best Trading Wishes!

Mark


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