Option Investor
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Daily Newsletter, Monday, 08/05/2002

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The Option Investor Newsletter                   Monday 08-05-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: What Puts Are For
Index Trader Wrap: Stuck in the Mud
Weekly Fund Wrap: Up and Down Week
Traders Corner: MOCO - An Encore Performance?
Index Trader Game Plans: The Sector Beat - 8/5


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
        08-05-2002        High      Low     Volume Advance/Decline
DJIA     8043.63 -269.50  8312.92  8030.82 1668 mln   751/2400
NASDAQ   1206.01 - 41.91  1247.84  1205.68 1341 mln   954/2348
S&P 100   418.56 - 15.49   434.05   417.78   totals   1705/4748
S&P 500   834.60 - 29.64   864.24   833.44
RUS 2000  367.12 -  9.33   376.77   367.12
DJ TRANS 2132.27 – 69.76  2203.38  2127.70
VIX        49.31 +  3.92    49.83    45.46
VIXN       67.52 +  2.08    68.58    65.67
Put/Call Ratio      0.87
*******************************************************************
What Puts Are For
by Steven Price

The "dead cat bounce" some had predicted, after last week’s 
precipitous fall on Thursday and Friday, never materialized this 
morning. Instead we opened down, and kept going. The Dow ended 
the day down 269.50, for a loss of 3.24%.  The S&P 500 fell by a 
similar percentage, losing 29.64, to finish at 834.60.  The 
Nasdaq lost 41.91 to close at 1206.01.   The non-manufacturing 
ISM indicated a slowdown in the service sector, as the index fell 
from 57.2% in June to 53.1% in July.  Anything over 50% indicates 
growth, but we are getting closer and closer to contraction.  The 
reading for new orders also declined from 56.9% to 52.6%.  This 
was on top of last week’s economic numbers showing manufacturing 
ISM at 50.5% and GDP at 1.1%.  The prevailing discussion of a 
double dip recession is gaining steam.  Last week’s revisions of 
2001 GDP quarterly results indicated we were in a definite 
recession, which we pulled out of in the fourth quarter.  
Although GDP has shown positive growth in the first two quarters 
of 2002, the second quarter was only positive by the same amount 
which was revised off of the first quarter numbers.  Overall, 
things continue to get worse, not better.

The large banks led today's drop, with Lehman cutting price 
targets on both J.P. Morgan and Citigroup.  Lehman cited a 
difficult business environment, "headline risk," a reference to 
the bad news that continues to flow regarding these two 
institutions, and economic uncertainty.  There is also concern 
over deteriorating economies in Brazil and Argentina, and the 
exposure these banks carry in those areas.  J.P. Morgan was down 
over 6% and Citigroup down over 7%.  J.P. Morgan seems to receive 
nothing but bad news lately, with Lehman also reducing its 2002 
and 2003 EPS estimates on J.P. Morgan based on expectations of 
weak trading results, continued losses in private equity and 
lower revenues in the structured finance business. This is on the 
heels of last week's revelations that the two banks may have 
helped Enron raise $1 billion by making loans to subsidiary 
pipelines, which illegally funneled the money to their parent, 
Enron, just before its bankruptcy filing.  In addition, a 
watchdog group called GATA (Gold Anti-Trust Action Committee) has 
now alleged that Morgan failed to report $45 billion in gold 
derivatives to the SEC.

Speaking of Enron, federal prosecutors are now looking into 
whether the company bribed foreign government officials to win 
contracts for its abroad operations.

There was much talk of the Dow bouncing from its 50% retracement 
level.  This level was calculated using the July 24 low of 
7532.66, before the market took off on its 1200 point rally, 
culminating on July 31 with a high of 8736.73.  This level meant 
little to the Dow today, as it blew right through it, heading for 
the next significant retracement level of 61.8%.  The next level 
would put the Dow back under 8000, what could be been thought of 
as a significant support level.  Of course the Dow shed almost 
300 points again today, and with 8000 only 43 points away, we 
could have no problem reaching this level on the open tomorrow.

Chart of the Dow Jones


 

The Nasdaq has been on a much quicker pace toward its July 24 
low, closing within 14 points of this number today.  The tech 
sector has been leading the market for the last several years, 
and this indication is not good for the broader indices.  The 
Nasdaq closed at a new 52-week closing low today.  The low on 
July 24 was established in the morning, before it began its 
ascent along with the Dow on a day when the Dow gained almost 500 
points.   The tech sector, however, has experienced a wave of 
warnings for both the rest of 2002 and into 2003.  The sector has 
been hit hard, and in spite of its recent rally, ending on July 
31, has remained mostly within the downward channel begun back in 
May.  The bottom of this channel falls below 1200, and could 
foreshadow continuing weakness before we see a rebound


Chart of the Nasdaq Composite


 

This decline has been led by the semiconductor stocks, which have 
seen better days.  Weak demand for PC sales has hurt not only the 
chip makers, but chip equipment makers and any other company that 
sells to these companies.  The warnings from the sector have been 
open-ended, without a target as to when the market will get 
better.  As a result, the Semiconductor Index (SOX.X) is now 
trading at new 52-week lows almost each day.  The index flirted 
with 300 and looked poised for a real rebound, only to watch the 
floor fall out from under it, culminating in today's drop of 
almost 6%, leaving 300 in the rear-view mirror.  While this may 
feel oversold for the sector, the SOX is still near the center of 
its descending channel, with more room to the downside before a 
rebound appears likely.  Bargain hunting investors may want to 
wait a little longer before jumping in long.  Of course, that's 
what puts are for.



 

The Federal Open market Committee meets next week, and many 
analysts are expecting an interest rate cut. It is debatable 
whether a cut will rally the market, or put more fear into it, as 
investors may see this as confirmation of the seriousness of the 
shrinking economy.  Goldman Sachs predicted possible rate cuts of 
up to 75 basis points by the end of the year.  They said that the 
risk of not doing so outweighed the risk of the cuts.  They also 
recommended an initial cut of 50 basis points, followed by 25, in 
addition to moving up tax cuts scheduled to take effect in 2004 & 
2006.

Tomorrow's earnings release from Cisco Systems (CSCO) should have 
a pronounced effect on the tech sector.  The stock was downgraded 
today by Lehman, and has announced that it will not expense its 
stock options.  This practice would have erased $1.7 billion from 
Cisco's bottom line in 2001. Cisco lost $0.53 today to close at 
$11.36

The good news today was that corporate layoffs fell 15% in July 
to a 14 month low of 80.966.  So far, layoffs are down 17% for 
the first seven months of the year, as compared to 2001.  While 
last week's employment numbers showed far fewer jobs created than 
hoped for, weekly claims have fallen to about 386,00 from their 
peak of 500,000.

Today's ratio of 10 down shares to one up share does not 
foreshadow a significant bounce tomorrow.  While we may see some 
bargain hunting at the open, we are more likely to take out 8000 
in the Dow and 1200 in the Nasdaq quickly if Cisco does not have 
a pleasant surprise up its sleeve.  Below 8000, we could be 
looking at a re-test in the 7500 range before the end of the 
week.  After tomorrow, we have wholesale inventories on August 7, 
PPI on August 8, and Productivity on Aug 9. The big number we are  
waiting for won't be until next week, when the Fed announces its 
interest rate decision.  If we manage to hold above 8000 
tomorrow, expect some sideways movement ahead of the 
announcement. Although the market has moved considerably lately 
and the Volatility Index (VIX) spiked back to 49.31, this is 
considered to be a slow trading week, as many market movers are 
on vacation.  This is evidenced by today's volume of 1.6 billion 
shares on the NYSE, which is light compared to the 2 billion 
share days we have experienced lately on days when we have seen 
triple digit moves in the Dow.  Don't be to anxious to buy a 
bounce tomorrow.  The last time we tested these levels, prior to 
2002, was 1998.  At that time we did, in fact, double dip.  After 
the first test, the Dow traded back over 9000, before falling 
again.  The second bounce resulted in a market which traded over 
11,500.  if we break 8000, wait for the next buying opportunity a 
few hundred points lower.  If the market does find a real bottom 
here, and climbs for the next 10 years, a few minute wait won't 
hurt that much.  Of course, as I mentioned earlier, down moves 
are what puts are for.


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

STUCK IN THE MUD
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 

The financial sector has always been a bellwether for the overall 
market - without the banks participating, the market is mired in 
mud. Analyst comments on Citigroup (C: -7%) and J.P. Morgan Chase 
(JPM: -6.3%) caused a dive in the Dow, along with weakness in 
American Express (AXP: -8%).  

An article on Disney in the Wall Street Journal reporting on the 
fact that the Disney (DIS: -7%) theme park business is not 
reviving - contrary to forecasts - and this also helped set the 
tone in the blue chips.  

Weak economic data from last week, was not eased either on the 
release of the July non-manufacturing index from the Institute of 
Supply Management (ISM), which reported a fall to 53.1, 57.2 in 
June.  New orders declined while the employment component gained 
a bit. More talk today on a possible double dip recession.  

Nasdaq bellwether Cisco (CSCO) systems fell to a new low for the 
move, dragging the Nasdaq with it. Their earnings are not 
released until tomorrow, but hey, why wait!? There was a 
downgrade on the stock and it had been falling anyway, by 
investor selling, perhaps with an eye to not wanting to be long 
through the earnings.

The VIX index (CBOE volatility) rose again with a new high close 
for the recent rebound - to 49.3.  It's pretty unusual for the 
VIX to "spike" up toward 50 (or above) in back-to-back run ups. 
Everyone is worried that the market weakness will eventually be 
self-fulfilling so to speak - where falling stock values will by 
itself "tip" the economy into recession. 

A backdrop to all this is the continued fighting in the mideast, 
with seemingly endless rounds of suicide attacks by the 
Palestinians (after the Israeli rocket attack recently), followed 
by Israeli counter-attacks and incursions - it seems never 
ending.  

MidEast troubles are especially unnerving to investors given the 
talk of how a U.S. invasion of Iraqi might further inflame the 
volatile Middle East situation - it's not hard to imagine given 
what's going on. Mr. President, in the words of Teddy Roosevelt, 
"talk" softly and carry a big stick - sorry, Teddy, I took 
liberties with the walk. 

There's a tendency for investors to hibernate during August - 
this year the tendency is especially acute ahead of NEXT 
September the 11th. A market that only the bears could love! 

S&P 5100 (SPXOEX) Index - Daily/Hourly charts:


 

The low from which the second up leg started in the S&P 500, in 
the 836 area, once seen again, did not attract the buyers this 
time around.  The next downswing low is down at 816, which is 
where SPX looks headed next - can 800 be far behind?  Or, a 
retest of the July low at 776!  

My "bellwether" for retracement versus retest, is whether a 62% 
retracement is exceeded, by a decline below 827. A fall exceeding 
this level of "retracement" in the S&P usually indicates a "round 
trip" back to the (rally) starting point. 

Resistance is at 853-855; then, 865.  It would take an hourly 
close above 865 to suggest a bullish turnaround was developing.  
If short, stay short.  The hourly oscillators are reading 
"oversold", but we're far from that on the daily charts as you 
can see by the next chart. 

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


 

It looks like OEX would have to fall all the way back to its low 
before it was again oversold on the daily stochastic. Depends on 
whether the index also goes sideways for a while.  However, this 
would take buying and the buyers seem to have gone on strike 
again.    

At a minimum I think OEX is headed back to the 400 area again if 
413, the 62% retracement level, is exceeded.  OEX is past the one 
half retracement. I thought we were seeing a rolling bottom, but 
its more roll than bottom.  

A retest of the prior 385 low also becomes a target now. There is 
little buying interest with the weak numbers and the war fears. 
This outlook is not showing up in a "war premium" for the oils 
(OIX fell 3.4%), which is the only mildly encouraging note from 
the sectors - nor is it showing up in gold, that other harbinger 
of fear (XAU: -6.4%!).   

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


 
 
Below 79-80, I see nothing buy "air" under the there - until we 
get back to the rally starting point at 75.3.

When the only Dow stocks up are McDonald's Corp. (MCD), 
reflecting the very "defensive" foods/restaurant sector, and 
Phillip Morris (MO), reflecting both food and cigarettes 
(tobaccos were up today) - it's enough to drive the bulls to 
drink and to maybe have a cigarette too!  

If short, thank your lucky stars and don't sell (puts) until you 
see the whites of their eyes, or a fully oversold daily 
stochastic again.     

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


 


The most "bullish" thing that can be said about Nasdaq indices is 
that they are still almost fully oversold.  However, my former 
QQQ target to the 20 area, which I thought "too" bearish, is now 
coming into view as a realistic downside objective - this is the 
low end of the long-standing downtrend channel. 

With INTC (Intel), CSCO (Cisco) and QCOM (Qualcomm) falling to 
new lows and MSFT in danger of the same, it leaves only ORCL 
still looking like it could rally - but only with the help of its 
"friends". All and all a still-bearish technical and fundamental 
outlook is presented by the action of the key Nasdaq stocks. 

22.3 is near resistance in QQQ; then, 22.9-23. A close over 23 is 
needed to suggest even a minor bullish turnaround.  


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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****************
WEEKLY FUND WRAP
****************

Up and Down Week

The markets started the week strong but faded later in the week 
on bad economic reports, resulting in mixed performance for the 
major market and fund indices.  For the week, the S&P 500 large-
cap index netted a 1.4 percent gain with the value component of 
the 500 index up 1.5% and the growth component of the 500 index 
up 1.2%.  Mutual fund indices were similar with large-cap value 
fund average rising 1.4%, and large-cap growth funds struggling 
to keep pace. 



 


Meanwhile, the Wilshire 4500 extended-market index of mid/small-
cap stocks closed the week 0.7% higher, while the Wilshire 5000 
Total Market Index, the broadest benchmark of U.S. stocks, rose 
by 1.2% over the 5-day period.  Where there was weakness was in 
the tech sector and in the small capitalization sector, causing 
stock mutual funds that invest heavily or solely in those areas 
to finish out the week under water.  According to Lipper, tech-
sector funds lost 1.7% for the week while the average small-cap 
growth fund tumbled 1.3%.  The Russell 2000 small-cap index was 
1.5% in the red.

Weaker-than-expected economic reports are often bad for stocks, 
but good for bonds and bond mutual funds.  So was the case last 
week with all Lipper (taxable) fixed income fund indices in the 
plus column.  According to Lipper, the best performing category 
was intermediate-term, investment-grade bond funds, up 0.9% for 
the week.  Corporate A-rated debt funds gained 0.7% on average, 
while U.S. Government funds averaged 0.6%, reflective of strong 
conditions in the government/corporate bond sector.  High-yield 
bonds and funds were higher, but returns weren't as strong (net 
net) compared to investment-grade bonds and funds.

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 
Balanced Index Fund invests 60% in the Total Stock Market Index 
Fund and 40% in the Total Bond Market Index Fund, and serves as 
an index benchmark for other balanced funds.   
 
    
 Vanguard Equity Index Benchmarks:
 Value Index (VIVAX) Week +1.5%; YTD -23.7%
 Growth Index (VIGRX) Week +1.2%; YTD -24.8% 
 500 Index (VFINX) Week +1.4%; YTD -24.1%
 Extended Market Index (VEXMX) Week +0.7%; YTD -20.7%
 Total Stock Market Index (VTSMX) Week +1.2%; YTD -23.0%
 Total International Stock Index (VGTSX) Week +0.6%; YTD -13.2%

 Vanguard Fixed Income Index Benchmarks:
 Short-Term Bond Index (VBISX) Week +0.4%; YTD +2.7%
 Interm-Term Bond Index (VBIIX) Week +0.6%; YTD +3.8%
 Long-Term Bond Index (VBLTX) Week +1.1%; YTD +4.8%
 Total Bond Market Index (VBMFX) Week +0.5%; YTD +3.7%

 Vanguard Balanced Index Benchmark:
 Balanced Index (VBINX) Week +0.9%; YTD -12.5% 


While Vanguard's index funds paint a pretty rosy picture of the
stock and bond markets last week, not all sectors enjoyed gains
Vanguard Small-Cap Index Fund (NAESX) which seeks to replicate 
the total return of the Russell 2000 small-cap index lost 1.5% 
over the 5-day period.  So, it was really the small-cap sector 
that was the drag on total stock market performance.  Mid-caps 
and large-caps were generally higher.   

On the fixed income side, you can see that 5-day total returns 
improved as you moved further out the yield curve, in terms of 
maturity/duration.  The best performing area of the U.S. fixed 
income market was long-term U.S. Treasuries, with the Vanguard 
Long-Term U.S. Treasury Index Fund reporting a 1.3% return for 
the week.  T. Rowe Price's long-term bond fund notched a 5-day 
total return of 1.6% to lead the long-term government category.

So while the week finished on a sour note for stocks at least, 
it was generally profitable for stock and bond fund investors.

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) selected
fund categories performed over the week, and since December 31.  
The Lipper fund indices below are as of Friday, August 2, 2002, 
per the Daily Lipper Index Update. 


 Lipper Equity Fund Indices:
 Balanced Funds: Week +1.0%; YTD -13.3% 
 Equity Income Funds: Week +1.8%; YTD -17.9%
 Large-Cap Value Funds: Week +1.4%; YTD -20.9%
 Large-Cap Core Funds: Week +1.2%; YTD -22.9%
 Large-Cap Growth Funds: Week +0.6%; YTD -28.2%
 Science & Technology Funds: Week -1.7%; YTD -43.8%
 International Funds: Week +1.6%; YTD -11.7% 
 Emerging Markets Funds: Week +0.4%; YTD -4.2%
 
 Lipper Fixed Income Fund Indices:
 GNMA Funds: Week +0.2%; YTD +5.9%
 U.S. Government Funds: Week +0.6%; YTD +6.4%
 Short-Term Investment-Grade Funds: Week +0.3%; YTD +2.3%
 Interm-Term Investment-Grade Funds: Week +0.9%; YTD +3.7%
 Corporate A-Rated Bond Funds: Week +0.7%; YTD +4.2%
 High Current Yield Funds: Week +0.4%; YTD -8.4%
 Global Income Funds: Week +0.3%; YTD +5.2%
 International Income Funds: Week +0.2%; YTD +10.6%


Note that we show the three large-cap fund categories since that 
is where the bulk of mutual fund assets are invested on the U.S. 
equity side.  You can see that large-cap growth funds struggled 
to keep pace with large-cap value/core funds due to their higher 
relative exposure to the volatile tech sector.  Lipper shows the 
average mid-cap growth fund lost 0.7% in the last five days with 
the average small-cap growth fund down 1.2% for the 5-day period.  
Generally speaking, the more exposure a fund had to small stocks 
and technology relative to other equity funds, the worse it did.  
Funds that tend to shy away from technology such as conservative 
equity-income funds produced 5-day total returns of 1.8% or more. 

The Lipper's fixed income indices show that bond funds produced 
average total returns of up to 1 percent for the week, with the 
intermediate-term investment-grade bond fund category reporting 
over the week a nifty 0.9% gain.  The Lipper Daily Index Update 
doesn't provide an average return of long-term investment-grade 
bond funds, but it would undoubtedly be higher, since long-term 
bonds were the best performing group in the fixed income market.

Where there was some fixed-income losses were in the municipal 
(tax-exempt) bond fund markets, which we don't talk about much.  
Muni bond fund losses were de minimus.   

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 week and year-
to-date periods through Friday, August 2, 2002.


 Largest Equity Funds:
 Vanguard 500 Index (VFINX) Week +1.4%; YTD -24.1%
 Fidelity Magellan (FMAGX) Week +1.2%; YTD -25.7% 
 Investment Company of America (AIVSX) Week +1.8%; YTD -16.8%
 Washington Mutual Investors (AWSHX) Week +2.7%; YTD -15.8%
 Growth Fund of America (AGTHX) Week +0.5%; YTD -26.0%
 Fidelity Contrafund (FCNTX) Week +1.5%; YTD -10.5%
 Fidelity Growth & Income (FGRIX) Week +2.0%; YTD -18.4%
 EuroPacific Growth (AEPGX) Week +0.9%; YTD -14.2%
 New Perspective (ANWPX) Week +1.1%; YTD -18.7%
 Vanguard Windsor II (VWNFX) Week +2.8%; YTD -17.1%
 American Century Ultra (TWCUX) Week +1.1%; YTD -22.5%
 Fidelity Equity Income (FEQIX) Week +1.5%; YTD -18.7%

 Largest Fixed Income Funds:
 Vanguard GNMA (VFIIX) Week +0.8%; YTD +6.6%
 Vanguard Total Bond Market (VBMFX) Week +0.5%; YTD +3.7%
 Bond Fund of America (ABNDX) Week +0.8%; YTD -0.6%
 Vanguard Short-Term Corporate (VFSTX) Week +0.3%; YTD +1.7%
 Franklin U.S. Government (FKUSX) Week +0.2%; YTD +5.7%
 
 Largest Balanced Funds:
 Vanguard Wellington (VWELX) Week +1.4%; YTD -8.8%
 Income Fund of America (AMECX) Week +1.9%; YTD -7.7%
 Fidelity Puritan (FPURX) Week +1.1%; YTD -11.0%
 American Balanced (ABALX) Week +1.9%; YTD -9.9%
 Fidelity Asset Manager (FASMX) Week +1.5%; YTD -13.2%


The stock and balanced fund bellwethers show the divergence in 
weekly total returns between value and growth funds.  American 
Funds: Washington Mutual Investors and the Vanguard Windsor II 
Fund, for example, returned upwards of 3% last week, while pro-
growth style funds like American Funds: Growth Fund of America 
netted just 0.5% over the 5-day period.  Can you tell which of 
the balanced funds have large-cap value tilts?  American Funds: 
Income Fund of America and American Balanced Fund both sported 
weekly returns of 1.9% to rank among the balanced fund leaders.

Money Market Funds

The iMoneyNet.com taxable money market fund average held steady 
at 1.28% as of Wednesday, July 30, 2002, with the three highest 
7-day simple yields coming from PayPal Money Market Fund 1.89%, 
Touchstone Money Market Fund 1.75%, and Flex-Fund Money Market 
Fund 1.66%.  The Bunker Hill Money Market Fund is right behind, 
at 1.65%.

According to iMoneyNet.com, the five largest retail money market 
funds as of July 30, 2002 had the following 5-day simple yields:


 Largest Retail Money Market Funds: 
 Fidelity Cash Reserves (FDRXX) 1.55%
 Schwab Money Market Fund (SWMXX) 1.19% 
 Vanguard Prime MMF/Retail (VMRXX) 1.56%
 Schwab Value Advantage MF (SWVXX) 1.51% 
 Merrill Lynch CMA Money Fund 1.44%


The key Fed funds rate remained at 1.75% where it has been for 
most of the past six months.  Although U.S. economic growth is 
cooling, there is no sign that the short-term money market has 
priced in a Fed rate ease.  Unless economic growth accelerates, 
look for money market yields to remain at current, low levels.  

Mutual Fund News

In Bloomberg fund news, Waddell & Reed is feeling the negative 
effect of a third consecutive down-year for stocks.  They cite 
that Waddell & Reed's 47 mutual funds (and other institutional 
and private accounts) are down to about $26 billion from their 
bull-market peak of $38 billion.  The weak market condition is 
also reflected in Waddell & Reed's stock price, which has slid 
43% since December 31, according to the Bloomberg story.  They 
are not alone, with other publicly traded firms, such as Janus 
Funds parent Stilwell Financial and Alliance Capital Management 
about 50% and 37% lower, respectively, since December 31, 2001.  

Bloomberg also reports that fund manager Neuberger & Berman is 
planning to launch three new muni-bond funds as it attempts to 
meet what they call a growing demand for fixed income products.  
Note that the three new Neuberger funds will be the closed-end 
variety, a first for Neuberger Berman.

Morningstar's Russel Kinnel announced the earlier favorites for 
2002 Bond Fund Manager of the Year.  Those that follow the bond 
mutual fund industry should not be surprised by any of the bond 
fund candidates named below:

  David Baldt, Deutsche Fixed Income (MFINX)
  Management Team, Dodge & Cox Income (DODIX)
  Bill Gross, PIMCO (PTTRX and HABDX)
  Bruce and Ernest Monrad, Northeast Investors (NTHEX)

They are all Morningstar favorites, and we think highly of them 
as well.  All three of Dodge & Cox's funds (Stock, Balanced and 
Income) are Morningstar 5-star rated, exemplifying the strength 
and consistency of their three principal investment strategies.

Baldt and Gross are two of the top managers in the field, doing 
better than other bond managers at exploiting inefficiencies in 
the fixed income market, while controlling portfolio risk.  The 
Monrad team has done exceptionally well versus its current high 
yield fund peers, gaining 4.5% since December 31, compared to a 
6.9% net loss by the average high-yield bond fund, according to 
Morningstar. 


Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com


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

MOCO - An Encore Performance?
by Mark Phillips
mphillips@OptionInvestor.com

All right, I was wrong.  I'm sure you recall the title of last
week's article "MOCO - The Final Installment", and are wondering
why we are batting around this tired old topic.  Well, you know
it's your fault.  [GRIN]  Seriously, I've had a lot of email from
readers that successfully played the rebound off the recent market
lows using my MOCO strategy and are wondering if we are setting
up to play the same song again.  My initial response when these
emails began flooding in last Thursday was "No, we aren't going to
sell off far enough to give us that setup again so soon."  Boy,
was I wrong!

Before we get into the gory details of where I think we go from
here, let's take a moment for those that are just joining us on
this journey.  In case you missed the earlier articles on the
topic, here are links to each of the prior articles where I laid
out the strategy and then updated our progress through the process
of the bottoming attempt that came to an end (isn't hindsight
great?) last Wednesday.

Getting Ready to Change Gears
Gearing Up For MOCO
MOCO - Phase I Complete
MOCO - The Final Installment

My attention was drawn over the past few days to my comments at
the end of that final article, where I stated that this VIX/market
interaction always works out this way, regardless of the cause:

"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."

Well, since it looks like we're getting another shot at soaring
fear levels, let's take a look at what's causing it.  As I
mentioned in my LEAPS commentary over the weekend, the selling
that has ensued in the past few days goes far beyond the ongoing
Crisis of Confidence on Wall Street.  Sure, it is still a major
factor, with the August 14th date looming large in the windscreen.
But with the abysmal economic reports from last week, investors
are now staring at an imminent double-dip recession.  In fact,
with the way the government continues to revise the economic
reports (it isn't just a game for corporate America), we are faced
with the very real possibility that we never left recession
territory.  Unfortunately, we won't know the answer to that
conundrum until well after the fact.  But it is fear of this
worst-case scenario that is currently causing investors to sell
first and ask questions later.

In terms of the tone in the markets, it certainly feels a lot
like the market of 2 short weeks ago, where investors, fearful
that support levels will only be speed bumps on the way to new
lows, are selling and generating an atmosphere of near-panic.
Rather than a healthy 30-50% pullback of those euphoric gains,
the market is giving them back just as quickly as they originally
accrued.  Market internals are terrible and there is a complete
lack of buying interest.  Sounds familiar, doesn't it?

As you have probably heard if you have been listening to CNBC
or reading this newsletter, it is looking increasingly likely
that the retest of the July 24th lows is going to occur sooner,
rather than later.  At the current rate of decline, we could be
there in another 2 days!  All of this begs the question (as have
many of you) of whether we are setting up for another explosive
rally.  My answer is an unqualified "Maybe".

Hopefully it is clear to you that my level of conviction isn't
nearly as high this time around.  Maybe my lack of conviction is
the final "capitulation" the market wants before putting in a
bottom and exploding upwards once again.  I certainly hope so,
but I can tell you that I am not implementing my MOCO strategy
this time around.  That isn't to say that I won't attempt to buy
this bottom, but I don't have the necessary confidence to begin
legging into the MOCO strategy like I did the last time around.
Heck, if I was doing that, I should already be deep into the
strategy, with the VIX closing just below the 50 level this
afternoon.

But for those of you with greater intestinal fortitude than I,
I thought I would lay out the bullish case that could be used to
try to game the bottom again.  I'm going to do this without the
benefit of charts tonight, partially because I want to keep you
focused on the concept and partially because my charts are not
responding, leaving me essentially blind as I write this.
Fortunately, I've spent so much time looking at them in the past
few weeks, that I can practically see them in my minds eye.

As Jim Brown pointed out last week, the VIX has a tendency to
post a double top (corresponding to a double-bottom in the market)
when putting important tradable bottoms in place.  Well, a week
ago, I wasn't sure, but I am now convinced this pattern is going
to play out this time.  One more good day of selling will likely
have the VIX nearing the levels it saw on July 24th.  The big
unknown is what level the market (I'm focusing on the DOW) will
be trading at when the VIX creates that double top.  Keep in mind
that a double top in the VIX could mean a slightly higher high, a
lower high, or an exact duplicate of the high from July 24th.  We
just don't know at this juncture.

The best case for the bulls, in my opinion, will be to see the
DOW fall to the area of its recent lows (anywhere between
7400-7600 will work), with the VIX moving up into the 55-58 area.
If the institutions step in to defend the market with those
conditions satisfied, I would view that as another attractive
tradable bottom and I would look to play it with OCT and DEC OTM
calls, similar to the way we played MOCO a few weeks ago.  The
big difference in my approach this time is that I am convinced
that we will fall to the 7500 area and test those lows at a
minimum.  So I see no incentive to stage into the trade all the
way down.  I guess another way to phrase my caution is that I
don't want to pull the trigger until I can see the white's of
the bear's eyes.  When I see him blink (i.e. begin to cover),
then I'll know the timing is right.

Let me be perfectly clear though.  MOCO was a mechanical strategy
that we could apply in an interactive manner as the setup
presented itself over a couple of weeks.  The scenario I have
described above is not for the timid or uninitiated to active
trading in VERY volatile markets.  This is in my opinion a higher
risk strategy than the MOCO of a few weeks ago due to the very
real possibility that support near 7500 could easily give way,
at least temporarily.  If it does, a free-fall to 7000 or even
lower could ensue.  I don't mean to sound like Chicken Little
here, but to my way of thinking, conditions are much less certain
than they were just one short week ago.

A week ago, we were target-shooting an oversold bounce ahead of
a decent tradable bottom in an environment of a recovering
economy.  We now know that we do not have the backdrop of a
recovering economy to rely on.  Does that mean I think we are
going to see the VIX shoot into triple digits?  Not hardly.  The
big unknown that is making me so cautious is that I'm not so sure
we'll get a strong snap-back this time around.  To be sure, that
rubber band will be stretched tight.  But this time, I think
we've got some stronger guys pulling on it and they might be able
to hold it in a tightly stretched position longer than a day or
two.

Unless you really are strongly convicted, I would recommend
sitting this one out.  The risk is that you'll miss another
short-covering rally that quickly tacks 800-1000 points onto the
DOW.  The reward is that if support fails to hold, you'll be in
cash on the sidelines, waiting for clearer trading conditions.

Now here's the educational part.  If I'm right about this time
being different, we'll have hard evidence that sometimes it
really IS different and I was wrong in stating that MOCO always
works when the VIX really gets stretched.  On the other hand, if
the bullish scenario I laid out above plays out the way I've
described it, resulting in another strong rebound, then we'll
have one more data point that confirms that MOCO always works,
regardless of the catalyst that creates the fear.

In my opinion, the value of the knowledge gained through watching
this story unfold is far greater than any trading gains that might
be gained through successfully applying the MOCO strategy.  That
is the primary reason that I'll be sitting this one out.  Each
of us needs to decide how much risk they can stand when the heat
is turned up.  This time, I can't take the heat, so I'm going to
get out of the kitchen.  If you do decide to attempt to trade the
bounce off the next bottom, please only do so with trading capital
that you can afford to lose, remembering that there will always
be another day to trade, so long as we preserve our capital.

Best Trading Wishes!

Mark


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

THE SECTOR BEAT - 8/5
by Leigh Stevens

Banks (BKX) took a further beating today, accelerating its recent 
reversal and its downside momentum, along with the Cyclicals, the 
NYSE Financial Index (NF), Forest Products, the Disk Drive Index 
(DDX), Fiber Optics (FOP), Healthcare (HMO), Natural Gas (XNG), 
Oils (OIX), the Brokers (XBD), and the Dow Transports (TRAN).  

Biotech (BTK) reversed from the end of its downtrend channel, per 
my suggestion of it being time to sell the HOLDR's. 

The Gold and Silver Index (XAU) reversed its recent rally, just 
near my 65 target, closing at 59.2) - NOTHING escapes the bear 
claws.  The same was true of in a reversal in the rally that was 
going in Drug sector (DRG). These later two were ones that have 
bearish technical chart patterns that I have highlighted recently 
and were candidates for to sell on rallies.  

Then there were the sectors making new lows today: (PC) Boxmaker 
Index (BMX); Computer technology (XCI); the High Tech Index 
(MSH); the Internet index (INX); the Semiconductors (SOX); 
Software (GSO); the Wireless telecoms (YLS); 

UP on Monday - 

FURGGETABOUTIT! - there weren't NO such major sector up on the 
day. 

DOWN on Monday - 


 

Lots in the red - even the former favorites that were bucking the 
bear trend at times, such as Gold and Healthcare were not to be 
found in the green.  


SECTOR TRADE RECOMMENDATIONS -

NEW/OPEN TRADE RECOMMENDATIONS -

NONE


TRADE LIQUIDATIONS -

NONE



Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                   Monday 08-05-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:
Stop Loss Updates: BBBY, BBOX, CCMP, DD, DHR, JPM, KLAC, SNE
Dropped Calls: ADP, BAX, MSFT, TXN
Dropped Puts: None
Play of the Day: Put - DHR

Updated on the site tonight:
Market Watch
Market Posture

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

BBBY - put
Adjust from $30 down to $29.50

BBOX - put
Adjust from $35 down to $34

CCMP - put
Adjust from $40 down to $39.25

DD - put
Adjust from $42 down to $41.25

DHR - put
Adjust from $64 down to $59

JPM - put
Adjust from $26 down to $24

KLAC - put
Adjust from $40 down to $37.50

SNE - put
Adjust from $45.50 down to $44.50


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

ADP $34.75 -1.45 (-1.45) As economic fears continued to weigh
on the broad markets and the recent rally faded into obscurity,
even those stocks that had been resisting the selling last week
fell victim to the bears.  Shares of ADP fell again at the open
on Monday and after a brief rally attempt fell to the $35 level,
the site of our stop.  After trading sideways for much of the
session, ADP finally broke under that level, violating our stop
at the close.  With the deteriorating mood in the broad markets
and our violated stop, we are dropping ADP tonight.

BAX $35.75 -2.49 (-2.49) Last week's battle at the $38 level in
shares of BAX went out in favor of the bulls, but just barely.
With the broad market heading south again this morning, led by
the Pharmaceutical sector (DRG.X), the bulls' victory was short
lived.  Shares of BAX plunged under our $38 stop in the first
hour of the day and never looked back, giving up more than 6.5%
on the day.  Clearly, with such a poor performance, we are
dropping BAX from the call list tonight.

MSFT $43.99 -0.94 (-0.94) Despite falling early in the day,
shares of MSFT tried valiantly to buck the broad market trend,
twice attempting to get a rally going.  But in the end, the broad
market pressure was too much to overcome and MSFT fell under our
$44 stop by a penny at the closing bell.  No doubt the approach
of CSCO's earnings is weighing heavily on the entire Technology
sector, and the fact that MSFT couldn't hold its ground today is
not a healthy sign.  We are dropping the play tonight, and
recommend using any opening strength tomorrow as an opportunity
to exit at a more favorable level.

TXN $18.20 -1.77 (-1.77) While TXN appeared to be showing some
relative strength compared to the Semiconductor sector (SOX.X)
last week, that became a moot point today as the SOX plunged to
a fresh multi-year low, losing nearly 6% in the process.  We
initiated the play with a tight stop to protect against such a
move today and given the fact that there was never any real
strength, new positions should not have been initiated.  We're
dropping the play tonight, as the potential catalyst for an
oversold rebound appears to have been nullified.


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

None


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and clicking on the link to the book on its home page.

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

DHR – Danaher Corp. $55.60 -3.36 (-3.36 this week)

Company Summary:
Danaher Corporation operates in two business areas: 
Process/Environmental Controls and Tools and Components.
The company's Tools and Components segment produces and
distributes general purpose mechanics' hand tools and automotive
specialty tools.  Among the household names they are responsible
for are Sears' Craftsman line, Allen wrenches, and NAPA hand
tools.  The Process Controls division, led by Veeder-Root, makes
leak detection systems for underground storage tanks, as well as
sensors, switches, measurement devices, and communications and
power protection products.


Why we like it:
Under pressure from the continuing broad market decline, DHR got
moving in the right direction on Friday, giving up nearly 2%.
When we added the play on Thursday, this looked like the high
odds outcome given the fact that DHR had already pulled back to
close below its 20-dma, dragging the daily Stochastics oscillator
back into a bearish decline.  While this is a good start to the
play, we need to be careful here, as the stock managed to find
support near the $58.50-59.00 level, the site of some price
congestion from a week ago.  A rebound next week is entirely
possible and based on the strength of that rebound, we'll know
whether it is an attractive entry point into the play or a
warning that the decline is coming to an end.  Use a failed rally
near the $60 level or up near the $62 level to initiate new
positions.  Alternatively, a decline below the $58 support level
can be used to initiate momentum-based positions so long as the
broad market continues its decline.

Why This is our Play of the Day
As poor as the action has been in the broad markets over the past
couple days, the action in DHR has been even worse.  With the
stock's 5.7% slide on Monday, DHR is now very close to having
retraced all of its gains following the low on July 24th.  With
the broad market failing to show any signs of strength this
afternoon, we could be looking at more bearish follow through over
the next couple days.  Since DHR has been falling so sharply over
the past 3 days, if it takes out near-term support at $54 (just
below the July 24 low), it will likely continue to outpace the
broad market to the downside.  That breakdown can be used one more
solid entry point, but we need to keep in mind that the vertical
count on the PnF chart is pointing to the $51 level as an eventual
target.  That means that we want to consider harvesting gains if
price begins to solidify near that level.  Alternatively, an
oversold bounce could allow even better entries on a fresh
rollover, either at the $57 intraday resistance from Monday or
even higher near the $58.75 resistance level from last Friday.
Lower stops to $59.

*** August contracts expire in less than 2 weeks ***

BUY PUT AUG-55*DHR-TK OI= 413 at $1.70 SL=0.75
BUY PUT SEP-55 DHR-UK OI=1121 at $3.40 SL=1.75

Average Daily Volume = 1.07 mln



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that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the 
option or stock
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offers fast option executions

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more; call 1-888-889-9178 or click for more information.

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


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

Whiplash

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/080502.asp


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

Trigger Points Close

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http://members.OptionInvestor.com/watchlist/080502.asp


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