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Daily Newsletter, Tuesday, 07/30/2002

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The Option Investor Newsletter                 Tuesday 07-30-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Clinging to the High Ground
Index Trader Wrap: HANGING TOUGH!
Market Sentiment: Holding Firm
Weekly Fund Screen: Stock Funds with Strong Up-Market Potential
Index Trader Gameplans: THE SECTOR BEAT - 7/30


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      07-30-2002           High     Low     Volume Advance/Decline
DJIA     8680.03 - 31.90  8762.14  8540.12 2.16 bln   1713/1487
NASDAQ   1344.19 +  8.90  1354.48  1313.49 1.68 bln   1834/1600
S&P 100   452.90 +  2.03   455.87   443.53   Totals   3547/3087
S&P 500   902.78 +  3.82   909.81   884.70 
RUS 2000  400.91 +   .10   402.32   390.55 
DJ TRANS 2389.51 +  8.60  2417.55  2327.99   
VIX        35.15 +  1.42    36.73    33.74   
VXN        56.46 -  1.11    60.74    55.35
Total UpVol 2,614.3M
Total DnVol 1,439.4M
52wk Highs    59
52wk Lows    294
TRIN        0.89
PUT/CALL     .69
*************************************************************  

Clinging to the High Ground

Despite worse than expected economic reports and a +1200 
point move the Dow held its ground and even recovered 
significantly from the lows of the day. The Nasdaq was 
the hero and came back from a -29 point deficit to post
a +9 point gain. While traders may feel this was a draw
most were happy to avoid serious losses due to profit 
taking. 



 



 

The morning started off negative with a -134 point drop 
before the Consumer Confidence report and quickly lost 
another -37 points from there. The Conference Board 
Consumer Confidence survey dropped much more than expected
to 97.1 in July. The consensus estimates was for 102.0,
down from 106.3 in June. This was the largest drop since
October and the lowest level since February. The expectations
component dropped even more, falling from 107.2 to 95.7.
37.7% of the consumers polled expected the markets to fall
farther over the next 12 months. Jobs were seen as harder
to get and getting worse. Cars and homes remained in demand
as consumers planning on buying them remained slightly 
improved while those planning to buy consumer goods like
appliances and electronics began to drop. This is not good
news for the markets but they shook it off as old news and
attempted to rally into the afternoon. This will come back
to haunt us.

CSFB said a survey of mall traffic showed that it had fallen
in July and retail sales were suffering. Wal-Mart and Target
both said sales for last week were under plan and this was
the third week down for Target. I wrote about this coming 
for several weeks and the mainstream media is now picking 
up on it. The discount stores are typically the last to fail
since they offer a broad range of low level inexpensive 
consumable goods. The consumer has been the building block 
for the recovery since business spending is still dropping. 
If the consumer is now going into conservation mode the second 
dip may not be far ahead. The GDP report is expected to show 
growth of only +2.5% in the 2Q following the +6.1% 1Q surge. 
The reason for the 1Q numbers was inventory replenishment. 
That inventory cycle was over in the 2Q and final sales also 
slowed. A serious miss in this number would be very detrimental
to the markets. Some analysts are estimating numbers as low as 
+2.2%. 

Also on Wednesday we will get the Beige Book and the Chicago 
PMI report. The Beige Book reports regional economic conditions
and provides indications of orders and shipments across almost
all sectors except telecommunications. Last months report did
not provide any good news other than the economy was holding 
on to a very slight recovery. If this months report shows any
weakness it could accelerate the double dip uncertainty. 

After the close today IBM announced they were acquiring Price
Waterhouse Consulting for a little over $3 billion in cash and
stock. This is a move by IBM to add top line growth and was
seen by early analysts as a positive for IBM. The stock dropped
only -$1 in after hours. 

Also after the close NVDA warned that its revenue and earnings
for the just completed quarter would fall substantially below 
analyst expectations. They said they expect to report revenue
of $410-$430 million compared to estimates of $568 million. 
NVDA said as late as May that it expected revenue to rise +1%
to +3% from the $582 million in the first quarter. Something
happened between manufacturing and sales it appears. The NVDA
CEO said weak PC sales overall, a larger mix of low budget 
sales vs high-end sales and excess supply (lack of sales) 
contributed to the -30% shortfall. Quite a drop in two months!
Weak PC sales and those that did sell were the low-end models?
Sounds like more problems for Intel and the PC sector ahead.
Remember, TSM warned last week that weakness in a number of
sectors, including PC's and game consoles, had caused it to 
cut capital spending and would miss estimates. 

KLAC also announced earnings after the close and said it had a
six month backlog at current shipping levels but that the order
flow was flattening out. They said they had received bad news 
out of Taiwan with TSM cutting the budget -23% and UMC, the 
second largest chipmaker, by -19%. Both firms are large customers
of KLAC. The stock was flat in after hours.

There are multiple challenges for tomorrow. Bulls are still chomping
at the bit to buy but are being handicapped by current resistance
levels and the lack of oxygen at this level. The Qwest earnings
disclosure was repeated over and over again today along with 
constant pictures of Merrill Lynch employees taking the 5th 
before congress. We are getting closer to August 14th and the
rest of the week is an economic minefield. Companies are still
warning that orders are slowing and PC sales are dropping. These
are not conditions that give much hope to a continued rally. 
Still the bulls made a valiant effort today to hold the high 
ground.  The Dow has serious resistance between 8700-8800 and 
the Nasdaq has a solid top at 1400. The bulls need an event to 
provide a spark for the next leg up.  

The bears are becoming braver. There were a few more sell 
programs today and with no upward progress they will be joined
by many more. The majority of the short covering rallies over
the last two months failed on the fourth day. This one was by
far the strongest and from the most oversold. Today was the 
fifth day. Tomorrow will be driven by the GDP, Beige Book, PMI 
and the NVDA warning. While the bulls would just be happy to
hold Dow 8600 and Nasdaq 1300, they have to gain ground to 
convert new believers. The vast majority of investors are 
still on the sidelines and waiting to see if this one will
fail like all the rest. The bulls must gain ground, even if it
is just a little, in order to convince those investors. 

Institutional investors, firm in the understanding that the two
worst months of the year, September and August, are just ahead,
are not racing to commit money to the markets. Yes, they are 
spending some just in case this is the "one" but they are 
keeping much more in reserve. This will limit the success of
the rally until the company certifications have passed. They
have all the time in the world and when you are investing tens
to hundreds of millions of dollars you leave nothing to chance. 
It is my opinion that we have a retest in our future and until
that retest occurs we need to be constantly looking over our 
shoulder for the next shoe to drop. A breakout over 8800 would 
be great and could signal another wave up but without a much 
stronger than expected GDP report tomorrow I find it hard to 
imagine.   

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

HANGING TOUGH!   
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
The indices finished higher again today, except for the Dow, as 
the Presidential signing of the corporate reform bill offset a 
bearish drop in consumer confidence which fell to a 5-month low. 
Higher on the day, after bouncing around intraday, was the S&P 
100 (OEX) by a fraction of a percent and the S&P 500 (SPX) by a 
similar amount. 

The Nasdaq did the best, unlike yesterday, with the Nasdaq 100 up 
a little over 1%, which was more than the Composite at up .66%. 
The Nasdaq had 3 days in a row of higher prices - wow! - while 
the Dow was off on weakness in industrial stocks like Alcoa, 
DuPont, International Paper, and Caterpillar.

We have GDP figures released tomorrow - expectations are for a 
gain of about 2 - 2.3%. Stay tuned! 

The market is consolidating like this rally has staying power.   
A key thing you'll notice now is how the market reacts to "bad 
news" by largely shrugging it off.  This is showing us that 
perceptions of the market's prospects are seen as improved or 
improving - and, that money managers are putting funds to work. 
Individual investors still appear quite cautious.

There are mixed signals in how much higher we can go before we 
correct by going sideways to lower.  On one hand, one of the 
technical positives is that the S&P 100 and the Dow have cleared 
their 21-day moving average as you can see on the daily charts 
below - the broader 500 (SPX), and the Nasdaq indices are right 
AT the averages.  

Most often when the indices stay ABOVE this "pivotal" moving 
average, there will be a move up to my upper trading envelope 
lines, especially as they are set currently, reflecting an 
"extreme" that is only equal to the last bear market rally peak; 
i.e., in terms of its high point above the 21-day average.  

UPSIDE OBJECTIVES - 

Upside objectives are possible to 9000 in the Dow, to the 950 
area in SPX, perhaps to 473 or higher in the OEX - 480 is an 
important "test" relative to the Sept. low - and to around 26.50 
in QQQ - 27.00 is the key Sept. low.  Only the Dow has climbed 
above its Sept. bottom by the way.  

On the other hand, all the indices have yet to break out above 
the high end of the downtrend channels that they have been in for 
weeks, AND to move decisively above prior (up) swing highs. It is 
only a pattern of HIGHER rally peaks than what came before, that 
reverses a bearish pattern or trend - up until now we have had 
only LOWER relative highs and lower relative lows. 

Until we achieve a decisive upside penetration of the upper ends 
of the hourly downtrend channels  - see below - the market has 
not achieved this second bullish positive.  Because of this still 
mixed technical picture and the short-term overbought readings, 
I'm reluctant to recommend any NEW long positions. 

Better to wait and exit calls bought at lower levels, if there is 
this further move higher - and, then to look at bearish plays at 
the objectives I mention above, if reached.  I would also like to 
see the DAILY stochastics registering overbought, not just the 
hourly models. Merely having hourly overbought readings signaled 
a new put play in the bearish trend of past weeks and months, but 
the "tone" has changed to a much more bullish one.   

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


 

The objectives are clear to reverse the bearish trend, at least 
near-term: a move to above prior highs at 458, then 466.  The top 
of the hourly channel intersects in the 467 area. The upper daily 
chart envelope suggests that 473 might be an "extreme".  

It may become a compelling trade to buy puts around 466-467, 
risking say 5 points. Downside potential at that point on just a 
"modest" pullback or retracement of 38% would be 30 points from 
there. Such a trade suggestion will need to be made intraday as 
"transitional" markets are tricky - it's remains necessary to see 
how the next 1-2 days unfold.  

A less likely scenario is that OEX runs up first to as high as 
480 - back up to the Sept. low - before a deeper price correction 
develops. This 480 level is going to be a definite magnet at some 
point as important prior lows that were pierced, will tend to act 
as resistance or (if cleared) become a "go ahead signal" for a 
new intermediate up trend.  
 

S&P 500 (SPX) Index - Hourly chart:


 

IF we get a decisive upside penetration of 915, then 919-920, a 
bullish trend reversal is suggested. If so, a next potential 
target could be to 934-935, then perhaps to the 950 area.  I'm 
giving the MOST bullish scenario here in terms of the 
trading/trend possibilities.  

The bearish scenario is a downside reversal from where we go to 
today or from a further rally to the 915-920 price zone, such as 
might develop on an OK to bullish GDP number.  If so, take 
profits on calls if you have them - traders could then look to 
buy puts for a downside play.    

Best technical support is in the 850-855 area, which would be my 
downside objective. 
 
Dow Index (1/100: $DJX.X) - Daily/Hourly charts:


  
 
We're getting near resistance. If the DJX 87.2-87.6 area is not a 
"stopper", I look to 88.5 as a next target; then, to the 90-90.5 
area, where I favor selling calls as well as put plays in this 
area if reached.  

Support is at 82.50; then 81, although a pullback of this amount 
doesn't seem in the cards based on the current market tone - but, 
as you know, things happen that can still "shock" this market. 

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


 

Looks to me that QQQ has hit resistance at today's highs at 24.7, 
which was - surprise! - right at its hourly downtrend channel. 
Time will tell.  A close over 25 would be a definite bullish 
breakout move and suggest that upside was to 26.5-27.00.  27 is 
the level of the Sept. low - the first time there should give a 
high-potential short of the stock and/or a put buy, such as the 
nearby August at the money puts for a short-term play.  

I'd love to short the stock in the 26-27 price zone as I figure a 
good stop-loss point then is 27.50 and a downside objective is to 
23.5. I think The circled "gap" area will exert a definite 
downward "pull" on the Q's at some point and the stock may come 
back down to at least the top end of that gap. If I'm short the 
stock, I don't care so much about the time frame that it takes to 
get there.   

Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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


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

Holding Firm
By Steven Price


Another day, another Enron hearing.  In the continuing saga of 
"All My Enron Brokers," Merrill Lynch took the stand, and was 
quite contrite in admitting they would never have done business 
with Enron if they knew then what they know now.  Sounds like my 
description of several past relationships.  Unfortunately, in 
their case, a break-up doesn't solve the problem.  While Merrill 
Senior Vice President G. Kelly Martin claimed appropriate 
behavior based on knowledge at the time, former Merrill Managing 
Director Robert Furst and current Managing Director Schuyler 
Tilney each invoked the Fifth Amendment and refused to testify.  
Senator Carl Levin, who is chairing these hearings, referred to 
the Merrill deal in question, which netted a $750,000.00 profit, 
and allowed Enron to pad earnings by $12 million in 1999, as "an 
accounting sham."  These hearings are earning plenty of face time 
for the Senators, however the investing public seems to have 
gotten used to them and has shrugged off fears of more accounting 
problems to continue the broad market rally over the past week.

It appeared we would have a significant pullback today after the 
rally of over 1000 points in the last four days.  After release 
of the Consumer Confidence report, the Dow sank more than 170 
points, but recovered quickly and at one point was up more than 
50 points on the day.  The index finished down only 31.85 points 
on the day, which feels bullish, considering the gains it has 
managed to hold onto.  The S&P 500 finished up on the day by 
3.82, 16 points above its low for the day. This was in spite of 
Qwest's announcement that they are restating earnings for the 
years 1999-2001.  Apparently, Qwest insiders sold approximately 
half a billion dollars worth of stock during this period, 
including their legal counsel, which sold $13 million of the 
stock.

We expect more of these announcements as the August 14 period for 
CEOs and CFOs to sign their companies' financial statements 
approaches.  The idea of expensing executive stock options seems 
to be catching on with the talking heads, as this is another area 
where losses may be hidden.  If these options are expensed, and 
compensation is deducted from the bottom line, it could have a 
noticeable effect on earnings.

The most compelling news of the day was the Consumer Confidence 
report, which came in lower than expected.  There was a drop from 
June's reading of 106.3 to a July reading of 97.1, which was 
below expectations of 101.5.  This is troubling because it shows 
consumers' short-term outlook, which affects their spending 
habits.  The Confidence report is put together by the Conference 
Board Consumer Research Center, which also conducts surveys on 
consumers' expectations and employment outlook. According to the 
Center, these indicators were also negative. Those consumers 
expecting business conditions to deteriorate increased from 7.1% 
to 9.2%.  The percent of consumers expecting fewer jobs to become 
available in the next six months increased from 14.3% to 17.1%. 
The reason these numbers are important is that when people aren't 
sure about the reliability of their jobs or their brokerage 
accounts, they spend less.  Certain sectors, such as retail, are 
directly affected by quantifiable lack of purchases, while the 
economy as a whole is affected because the money we spend 
trickles into every sector.  Consumer spending makes up 
approximately 2/3 of GDP, so a reduction can lead to a major 
drain on the economy.

The president today signed into law the new corporate reform 
bill.  He pronounced the "era of low standards and false profits 
is over."  The law requires new reporting and disclosure rules 
and increases maximum penalties.  Bush hopes this will restore 
confidence in corporate reporting for timid investors who have 
seen the above referenced Senate soap opera each day on 
television.

After the bell, IBM announced their intention to buy Price 
Waterhouse Consulting for $3.5 billion. 

It was encouraging to watch investors shake off the poor 
Sentiment numbers today, but there is a slew of data due out this 
week.  Tomorrow is the GDP report, Beige Book and Chicago PMI.  
Thursday we have auto and truck sales, as well as initial 
unemployment claims for the week ending July 27 and construction 
spending.  On Friday, we have non-farm payrolls, unemployment for 
the month, personal income and factory orders.  Each day will re-
test the market's ability to hold gains.  
 
After the past week's rally, a pullback is likely.  Today 
however, the bulls saw the dip as a buying opportunity.  The VIX 
held steady, up only 1.42, but still in the mid 30s at 35.15.  At 
the end of the day, the charts appear to be moving sideways, 
however this does not tell the story.  If we retrace even half of 
the past weeks gains, this would be a drop of more than 500 
points.  The coming economic numbers will no doubt give 
ammunition to either the bears or bulls throughout the week.  If 
we rebound from intraday drops as we did today, the market may be 
forming a new bottom in this area.  A continuation of the rally 
is still a strong possibility given today's strength but the DJIA 
could see tough resistance between 8900 to 9000.  Yet let us not 
forget the ride down has taken several months, and the 
possibility of falling back to the 7500-point range in the Dow, 
from which we bounced, is a definite possibility.  

Keep an eye not only on closing prices, but also on the battle 
within the days' ranges this week.  After the next three days, we 
may have a better idea of whether we'll be wearing horns, or 
hibernating come winter.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8680

Moving Averages:
(Simple)

 10-dma: 8249
 50-dma: 9224
200-dma: 9781



S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  902

Moving Averages:
(Simple)

 10-dma:  858
 50-dma:  979
200-dma: 1085



Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  896
Current     :  980

Moving Averages:
(Simple)

 10-dma:  953
 50-dma: 1077
200-dma: 1373



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

The Semiconductor Index (SOX.X) seems to have found a bottom 
after setting new 52-week lows last week, after Taiwan 
Semiconductor announced it was slashing its 2002 budget.  The 
sector has rebounded with 2 straight gains, and is knocking on 
the 350 level once again.  This level will be a test as it 
provided support on several occasions on the way down, and should 
now serve as resistance on the way up.

52-week High: 657
52-week Low : 315
Current     : 346.46

Moving Averages:
(Simple)

 10-dma: 348
 50-dma: 410
200-dma: 507

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

Market Volatility
The VIX is holding stable, as the market has held its current 
level.  This morning's big drop reminded everyone of the downside 
possibilities ahead, which should keep the VIX in the thirties 
until traders are convinced we have found a new bottom.  A slew 
of economic data will also provide support for the index through 
the end of the week.

CBOE Market Volatility Index (VIX) = 35.15 +1.42
Nasdaq-100 Volatility Index  (VXN) = 56.46 –1.11

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.69        665,397       459,815
Equity Only    0.58        492,066       283,326
OEX            0.89         35,538        31,504
QQQ            0.35         72,324        24,982

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

Bullish Percent Data

           Current   Change   Status
NYSE          29      + 4     Bull Correction
NASDAQ-100    31      + 5     Bull Confirmed
DOW           23      +20     Bull Alert
S&P 500       25      +11     Bull Alert
S&P 100       26      +16     Bull 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  0.96
10-Day Arms Index  1.23
21-Day Arms Index  1.30
55-Day Arms Index  1.32

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       1679          1452
NASDAQ     1774          1544

        New Highs      New Lows
NYSE        25             84
NASDAQ      103           121

        Volume (in millions)
NYSE     2,163
NASDAQ   1,723

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


Commitments Of Traders Report: 07/23/02

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 increased both longs and shorts, however increased 
long contracts totals by an additional 10,000 contracts more than 
shorts. Small traders continued to get longer, while adding 2,800 
net longs to their position.


Commercials   Long      Short      Net     % Of OI 
07/09/02      396,321   456,164   (59,843)   (7.0%)
07/16/02      388,943   464,162   (75,219)   (8.8%)
07/23/02      405,969   471,704   (65,735)   (7.5%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 36,481) - 10/16/01

Small Traders Long      Short      Net     % of OI
07/09/02      145,017    71,402    73,615     34.0%
07/16/02      157,370    67,247    90,123     40.1%
07/23/02      166,713    73,778    92,935     38.6%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
 
NASDAQ-100

Commercials added contracts both long and short to their 
positions, maintaining approximately the same ratio, however 
increasing their positions by approximately 8,000 total 
contracts.  Small Traders added to their short positions reducing 
their net by approximately 400 contracts.


Commercials   Long      Short      Net     % of OI 
07/09/02       31,227     39,592    (8,725) (12.3%)
07/16/02       33,152     39,866    (6,714) ( 9.2%)
07/23/02       37,204     43,601    (6,397) ( 8.0%)

Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
07/09/02       12,520     8,348     4,175     20.0%
07/16/02       12,816    10,774     2,042      8.7%
07/23/02       12,756    11,152     1,604      6.7%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:   8,460  -  3/13/02

DOW JONES INDUSTRIAL

Commercials added 2,000 contracts to their long position, while 
adding only 671 to their shorts.  Small Traders increased both 
sides of their position, however added almost 2,000 more short 
contracts than long contracts. 


Commercials   Long      Short      Net     % of OI
07/09/02       20,761    14,122    6,639     19.0%
07/16/02       20,357    14,074    6,283     18.2%
07/23/02       22,369    14,745    7,624     20.5%

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
07/09/02        6,831     6,623       208     1.50%
07/16/02        8,524    10,133    (1,609)   (8.62%)
07/23/02        9,101    12,604    (3,503)   (16.1%)

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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******************
WEEKLY FUND SCREEN
******************

Stock Funds with Strong Up-Market Potential

This week we turn to Forbes' online fund screener and ratings to 
help us uncover large-cap blend/growth funds that have done well 
in past up-market cycles and have an above average risk-adjusted 
return grade.  Forbes gives letter grades to funds based on how 
well they have fared in both up and down markets (defined as the 
last four bull and bear market cycles).  That generally means an 
equity fund has lived through multiple cycles and a fixed income 
fund has lived at least five years. 

If you believe equities have turned the corner and may be headed 
generally higher from here, these funds have demonstrated in the 
past that they're capable of performing well in up-market cycles.  
Assuming the downside volatility in the market had largely ended, 
Forbes' down market grades are a secondary consideration.  Still, 
these funds must have strong Forbes' risk-adjusted return grades.  
So, we're looking to identify funds that have potential based on 
their past performance to lead in the next bull market cycle and 
have an above average risk-adjusted return profile when compared 
to similar funds over multiple market cycles.

While you could perform this screen on all equity funds or other 
fund types, we have chosen to limit our screen to two categories, 
large-cap blend funds and large-cap growth funds, to temper some 
of the risks associated with stock mutual fund investing.  Small 
cap funds have potential to outperform large-cap funds, but they 
are generally more volatile. 

In the next section, we summarize the simple but effective screen 
we used to quickly identify 11 large-blend and large-growth funds 
with strong up-market cycle and overall risk-adjusted performance 
versus similar funds.  

Screen Process

Forbes Fund Screener is the name of Forbes' online fund screening 
tool, which lets you sift through their database of over 11,000 
mutual funds.  Forbes' screener, like others, allow you to zero 
in on 5 to 10 funds that meet your investment goal, time horizon 
and desired risk level.  To find the Forbes Fund Screener, go to 
www.forbes.com and then follow the links to the Personal Finance 
and Funds sections.

In the first section of the screener, Fund Type and Category, we 
selected "equities" as the fund type, and then used the Ctrl key 
and mouse to select the two categories we want, large-cap growth 
and large-cap blend.  Over 2,500 funds met that simple criterion.

We did nothing in the next section named Fund Family.  You could 
use the section if you wished to hone in on one or more specific 
fund families.  This section would be great to evaluate funds in 
one fund family versus another (Fidelity v. Vanguard, let's say).  
We choose not to limit our search to any one fund family at this 
time.

The next section, Forbes Ratings, is the principal driver of our 
screen process.  Here we selected Forbes Up-Market Grade above B 
(in other words, those funds with A+ or A up-market grades).  We 
also selected Forbes Risk-Adjusted Return Grade above 3, meaning 
funds with a 1 (best) or 2 (above average) risk-adjusted return 
grade.  Forbes' screener does not give you an "equal to" choice, 
like Morningstar's tool, so you have to think in terms of above 
and below.

Without doing anything else, we ran the Forbes screener, and it 
produced 24 results.  To narrow the funds list, we clicked Edit 
Criteria, and went to the Costs and Expenses section.  Here, we 
selected the following costs and expenses criterion:

 Expense Ratio below 1.51% (1.50% or less)
 Load below 2.01% (2.00% or less)
 Minimum Initial Investment below $5,001 ($5,000 or less)

We used the Forbes' costs and expenses section to knock out the 
funds with above average operating expenses, since high expense 
ratios can result in sub-par performance.  We decided to limit 
the load to 2.00% to focus on no-load and low-load funds only, 
and capped the minimum initial investment at $5,000 to keep the 
initial purchase reasonable for the average individual investor.

Adding the costs and expenses criterion narrowed the list of 24 
funds down to 11 large-blend and large-growth funds with Forbes 
up-market grades of A+ or A, Forbes risk-adjusted return grades 
of 1 or 2, and reasonable costs and expenses (as we defined it).  
These 11 Forbes "bull market cycle" leaders are presented below.
 
 Forbes Fund Screen Results (11):
 Fidelity Freedom 2020 (FFFDX) Up Grade: A
 Northern Select Equity (NOEQX) Up Grade: A
 Janus Growth & Income (JAGIX) Up Grade: A
 Wilshire Target Large Co Growth (DTLGX) Up Grade: A
 Vanguard Growth Index (VIGRX) Up Grade: A
 Janus Twenty (JAVLX) Up Grade: A
 Preferred Large Cap Growth (PFGRX) Up Grade: A
 Harbor Capital Appreciation (HACAX) Up Grade: A
 Managers Capital Appreciation (MGCAX) Up Grade: A
 Janus Mercury (JAMRX) Up Grade: A
 Fidelity Growth Company (FDGRX) Up Grade: A

Note that 10 of the 11 funds sport a Forbes Down-Market Grade of 
D (below average).  Northern Select Equity (NOEQX) stands alone 
with its "C" down-market cycle grade (average).  These funds may 
not been the best funds to own in recent bear markets, but if we 
assume that U.S. stocks have bottomed and are moving higher then 
the fund's down-market grade is of less consequence today.

All of the funds are graded "A" by Forbes for their "up-market" 
performance over the last few bull market cycles.  These funds 
have already shown that they can lead in up markets, so now may 
be an appropriate time to be considering a growth-driven style.

Evaluation Process

Next, we checked the strength and consistency of performance of 
these 11 funds using the Lipper Leaders screen tool, located at 
www.lipper.com.  We entered the various ticker symbols into the 
Fund Search section, and then displayed the fund results sorted 
by their Lipper consistent return rating (1 highest, 5 lowest).

When we looked at the Lipper consistent return and preservation 
scores, we were surprised to see that one fund actually rated a 
"1" (Lipper Leader) for preservation, the Fidelity Freedom 2020 
Fund.  Lipper gives the fund a "3" score (average) for strength 
and consistency of performance.

Three funds on the list were rated "1" by Lipper for consistent 
strong returns.  These three Lipper Leaders for performance are 
the Janus Growth & Income Fund, Wilshire Target Large Co Growth, 
and Vanguard Growth Index Fund.  Northern Select Equity Fund is 
scored a "2" (above average) by Lipper for consistency/strength 
of relative returns.  

Janus Mercury is the one fund on the list with a "4" consistent 
return score (indicating below average performance consistency).  
Investors looking for consistent return performance may wish to 
look elsewhere.  Still, on a risk-reward basis, the risk may be 
worth the reward but only for investors with cast iron stomachs.

We compared Morningstar ratings next to see how they compare to 
Forbes' risk-adjusted return grades, using the Morningstar Fund 
Compare tool found at www.morningstar.com.  Again it was just a 
matter of entering ticker symbols and displaying screen results.

Of the 11 funds on the list, three are Morningstar 5-star rated 
(highest), four are 4-star rated (above average) and four are 3-
star rated (average) for risk-adjusted performance versus their 
relative category peers.  Fidelity Freedom 2020 Fund is rated 5 
stars in comparison to its large-cap blend category peers, with 
Janus Growth & Income Fund and Northern Select Equity Fund both 
rated 5 stars in relation to their large-cap growth fund peers.

The four funds given 4 stars per Morningstar are Harbor Capital 
Appreciation, Preferred Large Cap Growth, Vanguard Growth Index, 
and Wilshire Target Large Co Growth. 

Summarizing our findings so far, we began by identifying 11 funds 
that Forbes graded an "A" for up-market performance and that were 
above average in terms of risk-adjusted return performance.  Next 
we checked to see which of the 11 funds were Lipper Leaders based 
on consistent strong returns, noting three funds, and then seeing 
what funds have earned Morningstar's 5-star or 4-star ratings for 
risk-adjusted performance within their respective category group.

Our Favorite Funds

Based on their independent ratings, performance, risk, costs and 
expenses, we like the Fidelity Freedom 2020 Fund (FFFDX), Janus 
Growth & Income Fund (JAGIX) and the Northern Select Equity Fund 
(NOEQX) the best out of the 11 funds.  Each fund is 5-star rated 
by Morningstar, their highest rating for overall "risk-adjusted" 
performance.  Only the top 10% of funds within a category hold a 
5-star rating distinction.

Fidelity Freedom 2020 Fund (FFFDX) is categorized as a large-cap 
blend fund by Morningstar and as a multi-cap core fund by Lipper.  
That means it tends to be style neutral (no bias to growth or to 
value) and diversified across sectors and individual securities.

As of March 31, 2002, stocks made up 67% of the fund's holdings, 
with bonds and cash securities representing the other 33% of net 
assets, according to Morningstar.  That asset allocation is more 
deserved of classification in the balanced/hybrid fund category.



 


You can see the fund is bouncing off six-month lows, with a NAV 
of $10.70 as of July 29, 2002.  Over the trailing 3-year period, 
Fidelity Freedom 2020 Fund has limited its average loss to 4.7%, 
ranking in the top 10% of the large-blend category.  The fund's 
trailing 5-year average gain of 3.2% ranked it in the category's 
top 11% for performance.  

Ren Cheng, a vice president and portfolio manager with Fidelity 
Management Trust Company, has managed the Fidelity Freedom 2020 
Fund since its inception (October 17, 1996).  From 1985 to 1994, 
he was with Putnam Investments and his most recent position was 
senior vice president.  Cheng invests the assets of the Freedom 
2020 Fund in other Fidelity funds.  Compared to other large-cap 
blend funds, Cheng has generated above average returns with low 
risk.  

The other two funds we like are the Janus Growth and Income Fund 
(JAGIX) and the Northern Select Equity Fund (NOEQX).  Both funds 
hold Morningstar's highest 5-star rating in the large-cap growth 
category.  Janus Growth and Income Fund is a Lipper Leader based 
on consistent strong relative performance, while Northern Select 
Equity Fund has had above average consistency of performance per 
Lipper.  

David Corkins, an executive VP and portfolio manager with Janus, 
has managed the Janus Growth and Income Fund since Aug. 1, 1997.  
Prior to joining Janus, Corkins was CFO of the mortgage division 
with Chase Manhattan Bank.  Robert Streed, a vice president and 
senior investment counselor with The Northern Trust Company, has 
managed the Northern Select Equity Fund since its start on April 
6, 1994.  Previously, Streed was a portfolio manager for Capital 
Supervisors.

Over the trailing 3-year period through July 29, 2002, the Janus 
Growth & Income Fund lost an average of 6.7% per year, while the 
Northern Select Equity Fund's annual-equivalent decline was 6.6%.  
Both funds ranked in the top decile of the large-growth category 
per Morningstar, limiting losses relative to the average fund in 
the category.  Corkins with Janus has the better trailing 5-year 
average total return of 5.2%, compared to the 4.6% average total 
return by Streed with Northern Trust, but both managers' returns 
rank in the category's top decile.

Compared to the average large-cap growth fund, Janus Growth and 
Income Fund has produced below average risk and Northern Select 
Equity Fund has generated average risk according to Morningstar. 
Both funds sport "high" overall return ratings from Morningstar, 
to earn them their 5-star overall ratings.  Long-term investors 
seeking a core growth stock investment have two good candidates 
here.  

Summary

This week we ventured into the land of large-cap (blend/growth) 
funds to identify the ones that have done performed well in up 
markets and have done well compared to similar funds on a risk 
adjusted basis using different independent ratings.  All three 
funds profiled as potential best bets have been managed by the 
same portfolio manager over the last five years, so the 3-year 
and 5-year numbers can be attributed fully to each fund manager.

If you think the markets have turned or are turning the corner, 
now may be a good time to consider an investment in a large-cap 
growth fund with a good track record and a long manager tenure.  

Investors looking for something between a typical balanced fund 
and typical large-blend fund may like the Fidelity Freedom 2020 
Fund and its aggressive hybrid structure.  Those wanting a 100% 
equity investment that invests in large-cap growth stocks might 
favor the higher growth potential of Janus Growth & Income Fund 
or Northern Select Equity Fund.

For more information or a prospectus, go to the Fidelity, Janus 
or Northern Trust websites.


Steve Wagner
Editor, Mutual Investor steve@mutualinvestor.com


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

THE SECTOR BEAT - 7/30
by Leigh Stevens

Semiconductors, very important to the better performance in the 
Nasdaq today, was one of the better performing sectors - related 
buying in the disk drive sector was an influence as was a 
continuation of the perception that the chip stocks were 
oversold. Chip-maker Motorola (MOT) reconfirmed its guidance on 
profit and revenue targets for Q3 & Q4. 

Good buying also developed in the utility, natural gas, airline, 
biotech & gold groups - there was an analyst upgrade of the XAU  
sector and it "gapped" higher, but then fell down from the its 
best opening levels. Per my last night's comments, still see 
potential back up to 65, maybe 70, where I would turn seller. 

Overriding early trade was the Conference Board announcement that 
its confidence index dropped to 97.1 in July from 106.3 in June - 
this versus an expectation of a 101.1 reading.

Intense pressure on fiber-optic firm Corning (GLW) developed 
after it said Monday that it would price a $500 million 
convertible stock offering on July 31. As a result, both Moody's 
and Standard & Poor's cut its credit rating to "junk" status and 
the stock fell over 20%. 

It was surprising that the Fiber Optic sector didn't take a 
tumble, with Corning in it, but this is a diversified group and 
FOP was actually slightly plus on the day.  Networking stocks 
rallied in spite of the news also on Corning. 

In the telecom sector, Sprint jumped 13% after announcing that it 
had commitments for a new $1.5 billion revolving bank credit 
facility to replace an existing line that expires next year. 
Sprint also said it reduced its outstanding commercial paper from 
peak levels of nearly $4 billion earlier in the year to zero now.
Not bad - good cash flow in that business - you still got to call 
Mom, Dad and Aunt Sally.  

Banks continued firm, as did some of the energy stocks, 
especially natural gas, continuing their strong rebound from very 
oversold levels.  
  
Brokerage stocks, which I thought would get whacked with the 
Merrill controversy, was plus on the day after a top Merrill 
executive told a Senate committee hearing that its limited 
dealings with Enron were "appropriate and proper." I highlighted 
the sector last night as one that had a favorable chart pattern. 

As with the broad indices, we see a similar pattern in some of 
the sector indexes where they can shrug off "bad news". 
 

UP on Tuesday - 


 
     
DOWN (the most) on Tuesday - 


 

   
SECTOR TRADE RECOMMENDATIONS & REVIEW -

NEW/OPEN TRADE RECOMMENDATIONS -

Buy SMH at 27.35 
(Semiconductor HOLDR's)
Stop at 24.50

Upside potential is back up to the prior recent rally high in the 
32 area in my estimation 

 
TRADE LIQUIDATIONS -

NONE



Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                  Tuesday 07-30-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: LLTC
Daily Results
Call Play Updates: ADP, BAX, EFX, LLY, LTR, MMM, MSFT, WMT
New Calls Plays: CHKP
Put Play Updates: BBOX, CBE
New Put Plays: JPM, DD

****************
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:
*****

LLTC $28.36 +$1.53 (+3.20)  Linear Technology appears to have 
found its short-term bottom at $25 and has rebounded toward 
resistance at $30. It closed above our stop loss of $27.25, and we 
have closed this play. Investors appear to have shaken off 
Linear's 4th quarter results, released on July 23, showing net 
income that had fallen 41%.  The tech sector has benefited from a 
sector wide rise, and the tide appears to have lifted this boat as 
well.


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

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

CALLS              Mon    Tue

EFX      21.66    1.60  -0.57  Holding up, tight range
BAX      38.24    2.32  -0.66  Holding recent gains
ADP      37.33    1.40   0.22  Continuing to close gap
LTR      47.67    2.14   0.45  Surging above dmas
MMM     125.49    5.81  -1.17  Still holding 5% gain
LLY      58.25    3.45   1.10  Raise stop for profit
MSFT     48.10    2.90  -0.15  Nasdaq on shoulders
WMT      49.12    1.35  -0.41  Overcame bad news
CHKP     17.49    0.32   0.68  New, rounding up

PUTS               

BBOX     34.80   -0.02  -2.19  No support from rally
CBE      29.38    1.13   0.30  Playing with resistance
LLTC     28.38    1.64   1.55  Drop, stopped out
JPM      24.89    1.77  -0.21  New, large exposure ahead
DD       42.10    1.85  -1.85  New, rode rally – overbought


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

ADP $37.33 +0.22 (+1.62) After such a strong rebound off the lows
a week ago, it was truly impressive to see the broad markets
battle back from some relatively mild profit taking on Tuesday.
Our ADP play has been performing well so far this week, even
managing a fractional gain in today's mixed session.  Note that
intraday resistance came in at the $38 level, which just happens
to be the site of the 20-dma ($37.94).  The daily Stochastics
are starting to flatten out in overbought territory, and above
$38, we have resistance looming near $39.50-40.00, at the top of
the gap lower.  Prudent position management will guide us to
harvest gains near that level.  For that reason we don't want to
consider new positions on strength.  Instead, look for a pullback
to support near the $35 level to provide for new entries.  Raise
stops to $35.

---

BAX $38.24 -0.66 (+1.66) Shares of BAX really took off at the
open yesterday, gapping up by nearly $1.50 and then holding onto
those gains and adding to them by the close.  Normally, we'd look
for that gap to fill, but looking at the very healthy
consolidation today, this gap may take some time to fill.  Note
that the bottom of the gap is near $38 and except for a couple
of brief intraday dips, BAX held above that level throughout the
day.  If this fledgling market rally is going to extend, then
perhaps BAX posted a breakaway gap yesterday.  With daily
Stochastics already topped out in overbought territory, the stock
is definitely susceptible to a significant pullback.  We want to
protect against giving back our gains, but we don't want to get
stopped out prematurely either.  Those with gains in the play
right here may want to keep a tight stop at $37.50, just below
today's intraday lows.  An intraday rebound from above that level
can be used for new entries, but keep those stops in place.
There is significant overhead resistance in the $39-40 area, and
BAX looks like it may need to pull back further before taking a
serious run at resistance.  Our official stop is now set at $35,
and a sharp drop and bounce above this level would make for a
great entry going forward.

---

EFX $21.66 -0.57 (+1.03) Traders that entered the EFX play last
week got a very pleasant surprise yesterday when the stock gapped
strongly higher and then extended those gains into the close,
ending above the $22 level.  After such a strong one-day rally, a
bit of consolidation was to be expected and that is precisely
what transpired on Tuesday, as EFX traded within Monday's
intraday range.  That's right, another inside day setup.  That
means it makes perfect sense to leave our stop at $21, just below
yesterday's intraday low.  A breakout over $22.60 or an intraday
dip and bounce above $21 can both be used as triggers for
initiating new positions.  On a continuation of the rally, look
for initial resistance at the 20-dma (currently $23.47), with
stronger resistance looming in the $24-25 area, the area of
support that was broken roughly 2 weeks ago.  Keep in mind that
the broad market action is having a pronounced effect on most
stocks right now as it continues to recover from being deeply
oversold.  Make sure to trade in conjunction with the broad
market.

---

LTR $47.67 +0.45 (+2.59) With it's participation in both the
Insurance and Tobacco industries, it is interesting to see how
LTR is outperforming both of those sectors this week.  Even after
its sharp recovery off the $41 support level last week, the stock
surged higher on Monday along with the broader market, coming to
rest just below the 20-dma.  Rather than participate in the bout
of profit taking in the broad market on Tuesday, investors
propelled the stock fractionally higher, clearing the 20dma
($47.13) at the close.  The strength over the past week has now
brought LTR right up to major resistance at $48.  We should now
see a bit of back-and-filling before the stock is able to push
through that level.  Dip buyers can look to initiate new positions
near the $46 intraday support level, although we don't want to
rule out a more substantial dip near the $44 level (the current
level of our stop) before the bulls can muster the strength to
push through the $48 level.  We don't want to consider buying
strength here unless LTR can push through the current resistance
level and trade above $49 on solid volume.

---

WMT $49.12 -0.41 (+2.62 for the week) Originally picked at 
$48.18, WalMart has shown incredible resilience this week.  This 
week's chain store sales figure, released today, was down 0.4%, 
erasing its gain from last week. A separate measure of retail 
sales, released by Instinet research, showed an equivalent fall 
during the first 3 weeks of July.  This was a day after WalMart 
announced that its sales would come in at the low end of its 
previous 5%-7% guidance for the month of July.  Today's Consumer 
Confidence numbers were also disappointing coming in at 97.1, 
versus an expectation of 101.5.  A low Consumer Confidence number 
usually spells bad news for retailers, because it is a measure of 
consumers' short-term outlook, which directly affects their 
spending patterns.  Walmart's ability to hold its gains this week 
in spite of all this news is more evidence for its oversold 
condition.  The stock has been fairly recession proof, giving 
consumers an inexpensive place to buy household staples even in 
tough economic times.  We are holding this position and leaving 
our stop loss at $46.50.  However, traders looking for new 
entries might want to wait for shares of WMT to conquer the 
current overhead resistance at the $50 mark.  Otherwise a dip or 
bounce at the $48 level might be an alternative entry for new 
calls.

---

MMM  $125.49 -1.17 (+4.64 for the week) 3M has had a very 
volatile month.  The stock traded as high as $129.95 on July 8, 
before dropping 16% to $108.88.  The stock has mirrored the 
plummeting Dow Jones since the beginning of July, as it is 
(currently) the Dow's most heavily weighted component.  This 
factor has weighed heavily on the stock.  3M released earnings on 
July 22, which surpassed analysts' expectations by $0.02 per 
share.  The company's net income more than doubled from the 
previous year, an impressive statistic in a very difficult year 
for the U.S. economy.  3M also raised its profit forecasts for 
the third quarter and full year.  Prudential has raised their 
price target on 3m to $145 from $122, reflecting their belief 
that conversion to a digital business model should contribute to 
a sales growth rate of 5%-6% by the end of 2002, and 8%-10% by 
2003, from just over 2% in the 2nd quarter of this year. They 
also believe the company benefits from its ability to take market 
share, its solid financial condition and diversified product 
lines. As the Dow came out of its funk, 3M has followed along, 
jumping $5.81 on Monday, and holding most of its gain today.  We 
continue to see $130 as a target range, and we will raise our 
stop loss to $120.00.  While this stop is $5.49 to the downside, 
a stock priced over $100 can experience a $5 move rather easily 
and we do not want to be stopped out too early. New entries may 
want to wait until 3M again tests the $125 level, as it did 
today, before going long.

---

MSFT $48.10 -0.15 (+2.75 for the week) Microsoft continues to 
hold its gains of the last week.  The stock traded at a 52-week 
low of $41.41 just last Wednesday, and has since risen 16%.  
While it has followed the Dow, it has done its share to lead as 
well.  After announcing expansion plans for both its workforce 
and R&D budget, the stock took off. Microsoft also announced that 
its CRM expansion plans were on track, and should be available in 
North America by the fourth quarter of this year. This week the 
stock gapped up on Monday and has held that gain, above its 10-
dma.  The 50-dma of $51.87 seems attainable, and this level will 
be our target for MSFT. This level closely coincides with bearish 
resistance of $52 on the PnF chart.  We are maintaining our 
$45.00 stop loss, in the event the stock retests this round 
number support before continuing upward.

---

LLY $58.25 +1.10  (+4.55 for the week) Lilly has been rising ever 
since its erectile dysfunction drug Cialis won approval from a 
European scientific committee and will now be reviewed by the 
European Union, which is expected to give the drug marketing 
authorization later this year.  Originally picked at $53.70, 
short-term traders may want to take at some significant profits, 
as this stock nears our target of $60. There could be some 
resistance at this level, which was approached at the beginning of 
July, before the stock dropped to its low for the year.  There 
could be round number resistance there as well. We have raised our 
stop loss to $55 in order to lock in profits on a pullback.  Lilly 
announced yesterday that they have entered into an agreement to 
assist Algeria's state run Saidal firm in the installation of a 
$100 million insulin plant. It is expected to be operational by 
the end of 2003 and produce 4 million flasks per year. In 
addition, LLY's close above its 50-dma of $57.17 is a bullish 
sign. The Pharmaceutical Index ($DRG.X) has also been rebounding 
and is approaching resistance at the 300 level, so we will be 
keeping an eye on this as well.  


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

CHKP - Checkpoint Software $17.49 +0.68 (+1.79 for the week)

Company Summary:
Check Point Software Technologies is the worldwide leader in 
securing the Internet. It is the confirmed market leader of both 
the worldwide VPN and firewall markets. The company's Secure 
Virtual Network (SVN) architecture provides the VPN and security 
infrastructure that uniquely enables secure and reliable Internet 
communications. SVN solutions, as delivered in the company's Next 
Generation product family, secure business communications and 
resources for corporate networks, remote employees, branch 
offices and partner extranets. Extending the power of SVN is 
Check Point's Open Platform for Security (OPSEC), the industry's 
framework and alliance for integration and interoperability with 
"best-of-breed" solutions from over 300 leading companies. Check 
Point solutions are sold, integrated and serviced by a network of 
2,000 certified partners in 203 countries (source: company 
release )

Why We Like It:
Checkpoint has formed a saucer bottom and has been rounding up 
since the beginning of July.  This show of relative strength as 
compared to the rest of the market during the past month has been 
impressive.  It recently broke through resistance at $15 and 
continued upward through its 10, 21, and 50-dmas.  The next 
significant moving average is the 100-dma at $19.56.  Following 
that is the 200-dma of $27.91. While this may be a very 
aggressive view, it demonstrates the relative high ceiling above 
this stock's current level. 

Checkpoint announced earnings on July 22, which beat estimates by 
a penny, and posted revenue, which beat estimates by $600,000.00.  
The company president said Checkpoint continues to experience 
strong interest in its products, as evidenced by another key 
factor, market share, which is continuing to increase. The 
company also announced it expects to meet current earnings 
estimates for both the third and fourth quarters.

The company experienced software product revenue growth, as well 
as subscription growth.  Its level of large deals, defined as 
worth more than $50,000.00, also increased from 13% to 15% of 
total sales.  Another important factor is the company's ability 
to generate cash. In the past quarter, Checkpoint generated $75.6 
million to bring its total cash and interest bearing investments 
to $1.18 billion.

Our initial price target on Checkpoint is $20.00, where the stock 
encountered resistance in late May.  Beyond that level, $23.50 
would be the gap level from late March.  We will place our stop 
loss at $15.00 that should provide round number support, and is 
just below this stock's 10-dma and 50-dma.  

Trading note: More conservative investors may want to take an 
alternative approach to playing CHKP long.  Shares rebounded from 
current overhead resistance at $18.00 this afternoon but 
maintained the majority of its gains.  If the rally continues, 
some traders may feel more comfortable going long once CHKP is 
over the $18 level.  Others may prefer to wait and see if CHKP 
bounces again from the $16 mark.  This was previous resistance 
and should become new support.  In that same train of thought, 
those seeking to limit their risk can place their stop under 
$16.00 instead of the newsletter's stop at $15.00.

BUY CALL AUG-15   KEQ-HC OI=3333 at $2.95 SL=1.50
BUY CALL AUG-17.5 KEQ-HW OI=3834 at $1.15 SL=
BUY CALL SEP-15 * KEQ-IC OI= 228 at $3.60 SL=2.00
BUY CALL SEP-17.5 KEQ-IW OI= 962 at $2.05 SL=1.00

Average Daily Volume = 6.10 mil



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

BBOX $34.80 -2.19 (-2.12) A glaring beacon of relative weakness,
BBOX has fallen apart over the past 2 days, in contrast to the
strong performance of the broad market.  Even the Networking
index (NWX.X) has seen a solid 2-day rally, gaining more than
11%.  With that backdrop, it is truly impressive how BBOX has
fallen through major support at the $36 level.  We were dipped
off to the stock's weakness last week when it failed to
participate in the broad market rally, and that led to our
featuring it as the Play of the Day both over the weekend and
yesterday.  So where do we go from here?  The high-volume move
below $36 generated a fresh double-bottom breakdown, and the
price target is now $30, the site of strong support.  Ideal
entries will come on a failed rally below the $37.75 level (the
new site of our stop), but we don't want to rule out the
possibility BBOX could continue to fall from here due to its
relative weakness.  A drop under $34 on continued strong volume
would also make for a respectable entry into the play.

---

CBE $29.38 +0.30 (+1.43) The rising tide of the broad markets
has continued to buoy shares of CBE this week.  In fact, in the
middle of the day on Tuesday, it looked like the play might be
stopped out with the broad markets in positive territory and CBE
trading above our $30 stop.  But then the buying relaxed, and CBE
shed nearly $1.50 between its high of the day and the closing
price.  Not only did the bulls fail to hold the $30 level, but
the decline came on increasing volume at the end of the day.
Looks like we witnessed a great entry point, don't you think?
Another failure to break through the $30 resistance level can be
used to initiate new positions.  Traders looking to enter on a
breakdown will want to target a move below the $27 level, the
site of last week's lows.


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

JPM - J.P. Morgan Chase $24.89 -0.21 (+2.64 last week)

Company Summary:
JPMorgan Chase & Co. is a global financial services firm
with operations in over 60 countries. The Company's principal
bank subsidiaries are The Chase Manhattan Bank, Morgan Guaranty
Trust Company and Chase Manhattan Bank USA, National Association.
Its principal non-bank subsidiaries are its investment bank
subsidiaries, Chase Securities Inc. (CSI) and J.P. Morgan
Securities Inc. (JPMSI). The bank and non-bank subsidiaries of
JPMorgan Chase operate nationally, as well as through overseas
branches and subsidiaries, representative offices and affiliated
banks.

Why We Like It:
With the continuing scrutiny of the large money-center banks and
their dealings with shady corporate dealings at Enron, Worldcom,
Global Crossing, and the like, it is highly likely that the stocks
of these companies are likely to be under pressure over the near
term.  JPM and C avoided a repeat of last week's selloff by
delivering to the Senate's Permanent Subcommittee on
Investigations the required additional documentation related to
certain financing deals with failed energy concern, Enron.  But
there was another volley for this sector to parry on Tuesday, as
Merrill Lynch executives were grilled by Congress.  This spectacle
isn't going away anytime soon, and that likely means that we can
expect more price weakness in the near future.  Rumors have even
surfaced that Eliot Spitzer is going to go after JPM and C with
criminal charges stemming from their respective roles in the
Enron fiasco.  JPM has been recovering from last week's steep
selloff over the past few days and yesterday managed to claw its
way back to the $25 level.  While we haven't seen price weakness
materialize yet, this could be a good time to initiate new
positions in anticipation of another bombshell of bad news that
could very well drive the stock down to its relative lows from
last week.  We're looking to get into the play near current
levels, and another intraday pop up near the $25.50 level (the
intraday high both today and last Thursday) would make that entry
even better.  But we need to keep the play on a short leash.  The
reason why comes from the PnF chart, which shows that a trade
above $26 will generate a fresh buy signal.  That would motivate
us to get out of the play post-haste.  Those looking to enter
on weakness will want to wait for a break below Monday's low
($23.25) before playing.  Set stops at $26.

BUY PUT AUG-25*JPM-TE OI=7322 at $1.85 SL=1.00
BUY PUT AUG-22 JPM-TX OI=6446 at $0.95 SL=0.50

Average Daily Volume = 10.1 mln


---

DD – E.I. Dupont Nemours & Co $42.10 –1.85 (+0.12 this week)

Company Summary:
DuPont - the oldest industrial company listed on the Fortune 500 – 
was founded on July 19, 1802, by French immigrant Eleuthere Irenee 
du Pont as a small family operation which manufactured black 
powder for guns and blasting. Entering its third century today 
with 79,000 employees and operations in 70 nations, DuPont 
invented some of the world's best-known innovations and 
technologies. These include household names as nylon, Teflon® non-
stick coating, Stainmaster® carpet, Lycra® brand elastane, Kevlar® 
fiber, Corian® solid surfaces, Tyvek® protective materials and 
Solae(TM) soy protein. (Source: company release)

Why We Like It:
DuPont has been riding the Dow rebound in the last week.  It 
reached a low of $36.30 on July 22, before rallying through its 
10-dma, 21-dma and 50-dma.  It then was turned back sharply at the 
200-dma of $44.23, falling shy of this mark after trading $44.00.  
While the rest of the market has been able to hold its ground, DD 
has had no such luck. This stock appears overbought. 

Credit Suisse First Boston lowered its 12-month price target on DD 
by a dollar, from $55 to $54, however this stock will have its 
work cut out for it to reach that level.  In the short term this 
stock looks as though it could return to its pre-rally level below 
$40, which will be our initial price target.  Bears may look at 
DD's recently announced plan to acquire Chemfirst, a company that 
specializes in the production of electronic and other specialty 
chemicals for use in the semiconductor industry, as an investment 
in a sector which has uncertain prospects for the rest of 2002.  
DuPont will pay $408 million for Chemfirst.

At the time of its earnings release on July 24, the company said 
it expected the global recovery to continue, but at a slower pace 
than growth rates experienced in the first quarter, which 
benefited in part from inventory restocking.  DuPont also issued a 
cautious outlook, stating that while the pricing environment 
remains difficult, it appears to have generally stabilized in most 
DuPont businesses.  The company stated that recent U.S. stock 
market turmoil creates more uncertainty about the pace of 
recovery, however it is relying on low inflation, a weak dollar 
and strong housing and automotive markets to fuel growth.  The 
problems with this statement include the recent strength of the 
dollar, which has rebounded from a recent low of 103.54, to trade 
at 106.83, and the possible concerns over the housing bubble 
bursting as the last domino to fall in the U.S. economy. 

We are placing our stop loss at $44.25, just above the 200-dma, 
which could represent a significant breakthrough if passed.  A 
break below our target of $40 could land the stock back at $38.

BUY PUT AUG-45 DD-TI OI=318 at $3.60 SL=1.80
BUY PUT SEP-45*DD-UI OI= 34 at $4.20 SL=2.20
Average Daily Volume = 3.02 mil




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The Option Investor Newsletter                  Tuesday 07-30-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CHKP - Put

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

CHKP - Checkpoint Software $17.49 +0.68 (+1.79 for the week)

Company Summary:
Check Point Software Technologies is the worldwide leader in 
securing the Internet. It is the confirmed market leader of both 
the worldwide VPN and firewall markets. The company's Secure 
Virtual Network (SVN) architecture provides the VPN and security 
infrastructure that uniquely enables secure and reliable Internet 
communications. SVN solutions, as delivered in the company's Next 
Generation product family, secure business communications and 
resources for corporate networks, remote employees, branch 
offices and partner extranets. Extending the power of SVN is 
Check Point's Open Platform for Security (OPSEC), the industry's 
framework and alliance for integration and interoperability with 
"best-of-breed" solutions from over 300 leading companies. Check 
Point solutions are sold, integrated and serviced by a network of 
2,000 certified partners in 203 countries (source: company 
release )

Why We Like It:
Checkpoint has formed a saucer bottom and has been rounding up 
since the beginning of July.  This show of relative strength as 
compared to the rest of the market during the past month has been 
impressive.  It recently broke through resistance at $15 and 
continued upward through its 10, 21, and 50-dmas.  The next 
significant moving average is the 100-dma at $19.56.  Following 
that is the 200-dma of $27.91. While this may be a very 
aggressive view, it demonstrates the relative high ceiling above 
this stock's current level. 

Checkpoint announced earnings on July 22, which beat estimates by 
a penny, and posted revenue, which beat estimates by $600,000.00.  
The company president said Checkpoint continues to experience 
strong interest in its products, as evidenced by another key 
factor, market share, which is continuing to increase. The 
company also announced it expects to meet current earnings 
estimates for both the third and fourth quarters.

The company experienced software product revenue growth, as well 
as subscription growth.  Its level of large deals, defined as 
worth more than $50,000.00, also increased from 13% to 15% of 
total sales.  Another important factor is the company's ability 
to generate cash. In the past quarter, Checkpoint generated $75.6 
million to bring its total cash and interest bearing investments 
to $1.18 billion.

Our initial price target on Checkpoint is $20.00, where the stock 
encountered resistance in late May.  Beyond that level, $23.50 
would be the gap level from late March.  We will place our stop 
loss at $15.00 that should provide round number support, and is 
just below this stock's 10-dma and 50-dma.  

Trading note: More conservative investors may want to take an 
alternative approach to playing CHKP long.  Shares rebounded from 
current overhead resistance at $18.00 this afternoon but 
maintained the majority of its gains.  If the rally continues, 
some traders may feel more comfortable going long once CHKP is 
over the $18 level.  Others may prefer to wait and see if CHKP 
bounces again from the $16 mark.  This was previous resistance 
and should become new support.  In that same train of thought, 
those seeking to limit their risk can place their stop under 
$16.00 instead of the newsletter's stop at $15.00.

BUY CALL AUG-15   KEQ-HC OI=3333 at $2.95 SL=1.50
BUY CALL AUG-17.5 KEQ-HW OI=3834 at $1.15 SL=
BUY CALL SEP-15 * KEQ-IC OI= 228 at $3.60 SL=2.00
BUY CALL SEP-17.5 KEQ-IW OI= 962 at $2.05 SL=1.00

Average Daily Volume = 6.10 mil



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**********

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