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Daily Newsletter, Tuesday, 08/06/2002

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The Option Investor Newsletter                 Tuesday 08-06-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Spring Forward, Fall Backward
Index Trader Wrap: Beat the Street
Market Sentiment: Destination Unknown
Weekly Fund Screen: Market Outperformers in Last Decade
Index Trader Game Plans: THE SECTOR BEAT - 8/6
Swing Trader Game Plans: The Coin Please

Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      08-06-2002           High     Low     Volume Advance/Decline
DJIA     8274.09 +230.50  8418.15  8049.03 1.76 bln   2341/ 854
NASDAQ   1259.55 + 53.50  1279.57  1224.80 1.45 bln   2422/1042
S&P 100   431.17 + 12.61   439.84   418.56   Totals   4763/1896
S&P 500   859.57 + 24.97   874.44   834.60 
RUS 2000  380.79 + 13.87   380.79   367.12 
DJ TRANS 2235.50 +103.20  2256.69  2132.71   
VIX        45.73 -  3.58    47.29    44.09   
VXN        64.18 -  3.34    67.08    61.94
Total UpVol 2,948M
Total DnVol   481M
52wk Highs    58
52wk Lows    371
TRIN        0.61
PUT/CALL     .76
*************************************************************  

Spring Forward, Fall Backward

That may be the key phrase for adjusting changes in daylight 
savings time but it is also the key phrase for our current 
market movement. The -269 point loss on Monday was countered 
by a +230 point gain today. That may be quite a gain but well
off the +374 point intraday high. The bounce came on strong 
short covering on the heels of a -700 point three day drop. 

Dow Chart


 

Chart of Nasdaq


 

No, stock fundamentals did not change. Corporate accountability
issues did not disappear. Cash did not come roaring back into 
mutual funds. The bounce today came after a huge asset allocation
program moved the markets overseas over night. A fund with 
a stated asset allocation of 70% stocks and 30% bonds for 
instance, may allow those ratios to slide with the market to 
60/40 or even 55/45 before a program is launched to bring them
back in line. If you have a fund with billions under management 
a 15% to 20% change is significant to the market. 

When your downside ratio threshold is reached a buy program 
is triggered to sell bonds and buy stocks. This can equate to 
millions of shares in hundreds of stocks. This is what happened
overnight in Germany. A fund was rumored to have increased their 
stock weighting by $5 billion to as much as $10 billion dollars.
Germany (+8%), France, Sweden and the UK, were up strongly 
overnight. The U.S. dollar was also up strongly against 17 
currencies in overnight trading. This was the only spark needed 
to cause some serious short covering but there was more!

Three brokers came out before the open with calls for the Fed
to cut interest rates again and quickly. Goldman Sachs, Lehman 
and Deutsche Bank all said a rate cut was what was needed now
to stave off a double dip. Lehman called for a 75 basis point
cut by year end. They said it was needed to prevent investor
confidence from the falling market to bleed over into consumer
spending habits. They also said there was a coming crisis in
the credit markets where companies can not borrow money due to 
very restrictive credit policies. Without loans there would be
a continued restraint on capital spending and a slower recovery. 
This united plea to the Fed prompted shorts to reconsider their
positions and attracted many buyers who feel another cut could 
energize the markets.

The Fed fund futures are pointing to an almost zero chance of
a rate cut at next weeks meeting but nearly 82% for the September
24th meeting. Traders with an eye on next Tuesday's meeting and 
hearing the unified call for a cut may have thought a Fed reaction
was imminent. Don't hold your breath. The Fed funds rate is 1.75%
and the lowest in recent memory (40 years). By making the -75 point
cut suggested it puts them very close to zero and for practical 
purposes below a zero effective rate. Essentially they have used 
up all their bullets with eleven rate cuts last year and they are 
very reluctant to pull the trigger on the last three in their clip. 
What if something really bad happened and they were out of ammo?
That is going to be weighing on their minds going forward. Also, 
for those with a little longer memory, a few brokers calling
for rate cuts has never prompted action before. The Fed tends
to call their own shots and could actually lean away from a cut
to avoid appearing to be influenced by outside sources. Many have
said a cut now could have the opposite impact on the market and
could be seen as a desperation act by the Fed.

The market mover after hours was of course Cisco. They announced
earnings that beat the street by two cents at $.14 cents. They 
missed the revenue estimates of $4.9 billion with $4.8 billion.
They attributed much of their gains to cost cutting not sales
increases. They said major customers remained cautious but steady
but the telecommunications market remained "challenged". They
admitted being hit by a slowdown in their enterprise customer
base but said the serious problems in telecommunications only 
impacted 20% of their income. They bumped their stock buyback
to $8 billion before Sept-12th, 2003 in an effort to blunt investor
criticism that they were hoarding $22 billion in cash. $8 billion
in $12 stock may seem like a lot but it is less than one percent
of the outstanding shares. Shares traded on both sides of positive
after the close before moving higher. During the conference call
it was announced that the CFO was going to retire as the rumors
had suggested last week. He will not however leave until May-2003
and the current controller will replace him. The stock dropped on 
the news but almost immediately rebounded to session highs near
$13.

John Chambers said in an interview that the gross margins were
as high (67%) as anytime during the bubble years and this was
a result of Cisco taking strong steps to cut back and prepare 
for the downturn early. I agree and I think he did a good job.
They will be very profitable when the recovery appears. However,
he also said he was more cautious about the future outlook than 
he had been in the past. Visibility was tightening and sales in 
other countries were slipping. He said it was a strong quarter
for Cisco and they had done everything possible for this quarter
but could not control the economy. (hinting of problems ahead)
He said book-to-bill numbers for next quarter could fall below
1.0, and another hint. This means fewer new orders than orders 
shipped.    

The Cisco news and related spin will be critical to the open 
on Wednesday. I think it was positive in a market expecting the
worst. It is too early to predict the end result but the 
lack of a smoking accounting gun or a multipage dumping of 
balance sheet items should be positive.

The market needs some long-term positive. Another brokerage went
public with its S&P predictions today. Julias Baer said the S&P
would be fully valued at 700 and target 750 for the year end. 
That is an exciting projection considering the S&P closed today
at 860. 

Martha Stewart has refused to testify about her IMCL stock trades
and congressional investigators have demanded her to turn over
phone and email records by August 20th. "We are through asking
nicely, clearly someone is lying to us and we are going to find
them," the committee spokesman said. Merrill Lynch brokerage
assistant Douglas Faneuil has testified that Martha's broker
ordered him to call her and tell her to sell because the Waksal's
were dumping their stock. This contradicts the previous stop
loss story and puts Martha in jeopardy. 

With the Sept-11th anniversary ahead of us the airlines are 
already making plans to deal with the lack of passenger traffic.
Load factors are quoted to be in the 20% range for the week 
surrounding the 11th. Sprit Airlines announced today that all
seats will be free on the 11th to any city they fly. Most other
airlines have not announced specific promotions since having
a 9/11 sale could be seen negatively. They are all going to 
fly drastically reduced schedules but cannot afford to just 
stay grounded. A minimum number of planes must keep circulating 
to meet contractual and operational requirements. The airlines
are already losing money in record fashion and with loads 
shrinking daily the losses are going to get worse until this
anniversary passes. The same thing is happening for hotels, 
rental cars, theme parks, cruises, etc. The economy is slowing
down even more as the fear of an anniversary event grows. In my 
opinion this is THE EVENT that will cause the Fed to cut rates 
again. As August economic numbers are reported the Fed may take
action to offset the economic impact of the anniversary. 

The markets tomorrow are up for grabs. The gains today were due
to an external event. Very rarely does any fund buy $5-$10 billion
in stocks in a single day. As I stated last night the VIX and TRIN
were very oversold and primed for a bounce. This buying spree 
exploded when it hit the oversold U.S. internals. Tonight the 
TRIN is only .61 and the VIX dropped to 45.73. The pressure 
has eased. The rate cut hype has faded and we are back to 
fundamentals again. The Cisco news, while they beat the street, 
was not overly outstanding. The futures were up +9 at one point 
and at 7:39 are now up only +1.00. I would love to see the 
rally continue tomorrow but there is significant resistance
above us. The institutional market on close orders were strongly
weighted to the sell side and that should tell us something. 
Continue to maintain tight stops whether you are long or short.
Tomorrow could be another exciting day 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

BEAT THE STREET
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
Do you suppose someone knew? Cisco beat the Street - earnings 
estimates I mean - by 2 cents. This put the stock higher after 
regular market hours by a few percentage points. So it goes on 
the Street of Dreams - first they whack it then they stack it 
back up.  

These rallies that come out of nowhere for no apparent reason - 
oh, I know there's talk that a Fed ease may occur and there is 
the fact that the dollar has gone and started an apparent second 
up "leg".  I knew this was coming - it was "obvious" from the 
Euro charts, at least in my mind.  Lets talk about the less 
obvious.  

These sharp rallies on less than stellar volume look, smell and 
feel a lot like bear market type rallies.  Rallies that stem 
largely from short covering and, at times, from index arbitrage 
program trading (if the stock index futures jump to inflated 
values).  

Why is short-covering buying so big? - because shorting of stocks 
and the sometimes rush to cover those shorts by buying, is a 
bigger factor these days, especially due to the ton of money 
sloshing around in "hedge" funds.  Especially so, given that the 
"public" is largely OUT of the market, which means that a smaller 
volume of buying moves the market more than it used to. 

The hedge funds are those private money pools the managers of 
which can short stocks and buy puts and all the stuff that we 
maybe wish our "public" mutual funds could do. Hedge funds can do 
all this "dangerous" stuff that we are "protected" from in public 
mutual and pension funds, cause they are not registered for 
unlimited sale to anyone who can cough up a few thousand - 
instead these investments are sold to a limited number of 
individuals with individual investment minimums of like a million 
bucks and more. Get the picture?  

However, the rich are NOT different than you and I, cause we can 
do all the same things that the hedge fund managers can do - 
short stocks, buy puts, etc.  You just have to do your homework. 
Now, I'm going to do mine!   

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


 

Where to next - I thought it was bye-bye from the line of support 
that started to be penetrated at the end of the day Monday.  The 
rally blew in from European trade and the currency markets - 
unusual, but we haven't so many U.S. fundamentals to trade off 
from this week.  

Resistance is at 870, 880, then around 885. I suggest selling 
rallies to the 880 area, risking to just over 885.  

Downside potential is to 835 - then, if exceeded - to the 820 to 
815 price zone.    

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


  

Not out of the bearish woods by any means - OEX encountered 
significant selling in the 440 area and reversed sharply near the 
close. 417 to 413 - call it 415, is the first area of support, 
but we could be headed for 410.  I would play the S&P 100 on the 
bearish side and think the final hour break demonstrates that 
rallies lack staying power.  

I suggest selling rallies back up to the 440 area, on up to 445, 
which is the next resistance above. Tech may get a bounce, but 
the S&P and Nasdaq have been going their separate ways to a 
significant degree. Again, 440 is key to the upside potential and 
a current "stopper" - at the 21-day moving average which tends to 
be "the" moving average to watch for trend direction.       

In terms of the stochastic level, it has been the pattern for 
market rallies to make the most and sustained headway when the 
rallies have started from an oversold daily stochastic level.  
Bucking the trend against this momentum indicator has been rarer 
than snow in summer in Arizona during the forest fires.     

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


 
 
I suggest selling rallies to the 84 area - notice how often the 
21-day moving average acts as a deflector, sooner or later.  If 
the DJX can pierce 84.25-84.50, there is potential perhaps to 
85.50, at the upper boundary of the hourly downtrend channel but 
this is the best I see for DJX currently and I would also be a 
seller in this area.  

The overall technical picture suggests follow though to the final 
hour break over a move back up through 84.  

An initial downside target is to 80 - perhaps back to the prior 
downswing low in the 79.50 area.  

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


 


There is resistance around 23, but if there is Cisco-led follow 
through to the Nas 100 tomorrow, the Q's could reach the 23.75-24 
area, where I suggest shorting and put plays. 

At some point I look for a move back into the gap area at a 
minimum, or to 21.50.  21-20.9 is next lower support in my 
estimation. I lean to buying at the lower trading band (this is 
set currently at 5.5%, under the 21-hour moving average which is 
how the envelope line is calculated although the "centered" 
moving average is not shown on the chart.), when this is ALSO 
accompanied by an oversold reading on the hourly stochastic.  

It is hard to equate a specific price level to an oversold 
reading in the oscillators - it depends on the length of time 
spent in a decline as well as the depth of a decline. 

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

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

Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com 


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

Destination Unknown
By Steve Price

I would love to offer our readers an explanation as to why the 
market rallied 375 points, before falling back to end the day up 
230.46, after a slew of bad economic news the last 4 days.  
Unfortunately I cannot see into the minds of all those buyers.  
What I can say is that the mind I do have access to, my own, was 
not among those buyers.  The economy is shrinking, unemployment 
remains constant, manufacturing is down, services are down, 
demand for technology products has been cut in half, and yet we 
had a huge rally.

The first reason being talked about is the possibility that the 
Fed will lower rates at next week's FOMC meeting.  While this is 
a distinct possibility, the bond market has already factored in a 
25 basis point move by the end of the year.  It is possible there 
will be a greater move, and this will certainly play a big part 
in any rally as the year moves forward.

There are some technical factors that may figure into this rally, 
as well.  First, the Dow support level of 8000.  I'm looking at 
the recent rally from a low of 7532.66 on July 24th, to the rally 
peak of 8736.72 on July 31st.  While 8000 was not a specific 
retracement level, it was awfully close to the 61.8% retracement 
level just below it, at 7992.61.  This factor, combined with the 
even number support level, may have provided a combined effect. 
If an investor is picking a bottom, there are two support factors 
here, rather than one.  Second, the last couple of times the 
Market Volatility Index (VIX.X) traded over 50, we experienced 
large rallies shortly thereafter.  On July 23, 2002, the VIX 
finished at 50.48.  The next day we experienced a rally of 488 
points.  On September 21, the VIX spiked to its recent high of 
57.31.  The following Monday we experienced a rally of 368.05.  
Going back to 1998, the connection is not as close, however worth 
noting.  The VIX traded over 50, reaching 52.12, on Friday 
October 9.  The following Wednesday we had a rally of 331 points.  
Third, the Nasdaq Composite had retraced almost it entire gain 
from July 24, trading yesterday within 14 points of that intraday 
low of 1192.42, and hovering above the 1200 mark, which was 
viewed as significant support.  The combination of support from 
8000, 61.8% retracement, the 1200 support in the Nasdaq and the 
high VIX reading may have combined to form their own trampoline.  
Remember, however, that even though you bounce pretty high off a 
trampoline, you eventually come back down.

Cisco's upcoming earnings, released today after the close, may 
have also factored into today's rally.  However, the fundamentals 
for the tech sector still look weak, with no upturn in PC sales 
seen until at least next year.  Cisco beat pro forma estimates by 
0.02, however revenue missed expectations by about 1%.  Also the 
$0.02 was just the pro forma number, and depending on how you 
view the release, they could be seen as having missed estimates 
by the same amount.  The company is also expanding its share buy 
back program.

GM announced that they are joining the ranks of companies that 
will be expensing stock options in the future.  The company 
stated this accounting change will reduce earnings by $0.15 per 
share in 2003,for a reduction of 2.4%. The other Dow stocks to 
have made the same announcement are Proctor and Gamble (PG), 
Coca-Cola (KO), and General Electric (GE).  Bear Stearns 
estimates that expensing options on all S&P 500 companies would 
reduce earnings by approximately 12% overall.  Tech companies 
usually compensate executives with a higher percentage of options 
than do other sectors.

It is hard to imagine this rally holding up, or continuing, after 
the slew of bad news in the last week.  Keep in mind, however, 
that the Dow had given up 700 points in the last week, so a 
bounce is not necessarily a shock to the system.  Interest rate 
speculation can move markets, and if investors are confident 
there will be a rate drop of more than 25 points next week, we 
may see the rally hold for a while.  The basic fundamentals, 
however, have not changed. I look for the rally to stall, if not 
tomorrow, then after whatever rally follows the FOMC announcement 
next week.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8274

Moving Averages:
(Simple)

 10-dma: 8390
 50-dma: 9045
200-dma: 9759



S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  860

Moving Averages:
(Simple)

 10-dma:  869
 50-dma:  858
200-dma: 1081



Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  902

Moving Averages:
(Simple)

 10-dma:  923
 50-dma: 1041
200-dma: 1362



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


The Semiconductor Index (SOX.X):  The semiconductor Index made 
its way back over 300 after dropping o a new low of 283 on 
Monday.  It will take a sustained rally in the tech sector to 
form a real bottom in this index.  The fundamentals, however, 
have not changed, and a re-test of the new low is a definite 
possibility.  Cisco's numbers are subject to interpretation, and 
tomorrow's trading will shed light on the company that many 
investors have been looking to for a rebound in the techs.

52-week High: 657
52-week Low : 283
Current     : 301

Moving Averages:
(Simple)

 10-dma: 319
 50-dma: 389
200-dma: 503


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

Market Volatility

A big day in the broader markets will take points off the VIX 
like a lawn mower cutting grass.  Of course each time we've seen 
what appears to be a significant rally lately, followed by a drop 
in the VIX, a subsequent drop in the market has brought the VIX 
back near 50.  So no predictions today.  We'd like to see how the 
market reacts heading into next Tuesday's FOMC meeting, when the 
Fed will announce its interest rate decision.  A continued rally 
will have the VIX back into the 30s.  A pullback, and subsequent 
fear of a 7500 re-test in the Dow will see it back near 50, or 
above.

CBOE Market Volatility Index (VIX) = 45.73 –3.58
Nasdaq-100 Volatility Index  (VXN) = 64.18 –3.34

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

          Put/Call Ratio  Call Volume   Put Volume
Total          0.76        633,215       480,564
Equity Only    0.62        486,692       300,630
OEX            0.71         43,004        30,379
QQQ            0.40         98,465        39,809

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

Bullish Percent Data

           Current   Change   Status
NYSE          29      - 1     Bull Correction
NASDAQ-100    25      - 3     Bull Correction
DOW           27      + 7     Bull Alert
S&P 500       25      - 1     Bull Alert
S&P 100       26      + 1     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  1.59
10-Day Arms Index  1.27
21-Day Arms Index  1.36
55-Day Arms Index  1.38

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       2331           791
NASDAQ     2346           994

        New Highs      New Lows
NYSE         25             125
NASDAQ       23             163

        Volume (in millions)
NYSE     1,794
NASDAQ   1,531

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

Commitments Of Traders Report: 07/30/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercials added significantly to their long positions.  While 
contracts were added on both sides, 25,000 were added to the 
longs, while only 11,000 were added to the short side.  Small 
Traders reduced both positions, however reduced long positions by 
an additional 6,000 contracts.


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%)
07/30/02      430,833   482,957   (52,124)   (5.7%)

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%
07/30/02      153,858    67,451    86,407     39.0%

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 4,000 short contracts to their positions, while 
adding only 1,000 long contracts.  Small Traders reduced short 
positions by 2,000 contracts, while adding less than 500 to their 
long contracts, for a 2,000 long contract increase overall.


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%)
07/30/02       38,163     47,343    (9,180) (10.7%)

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%
07/30/02       13,159     9,237     3,922     17.5%

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 kept their long positions approximately the same, 
while reducing their short positions by almost 2,000 contracts.  
Small Traders reduced both long and short positions dramatically.  
They reduced their long position by 2400 contracts and short 
position by almost 4,000 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%
07/30/02       22,429    12,811    9,618     27.3%

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%)
07/30/02        6,778     8,999    (2,221)   (14.1%)

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

Market Outperformers in Last Decade
Steve Wagner

This week, we identify top-performing funds that have outpaced 
the 10-year average annual return of the S&P 500 index through 
July 31, 2002.  The majority of large-cap equity funds measure 
their performance versus the S&P 500 index since it represents 
over 80% of the total U.S. equity market capitalization.  Mid- 
and small-cap funds may also be compared to the S&P 500 large-
cap index to ascertain the return advantage if any of investing 
in the riskier "extended market." 

Last week, we limited our universe of candidates to large-blend 
and large-growth funds.  This week, we're focused on funds that 
have specifically beaten the market (as measured by the S&P 500 
index) over the past decade regardless of their specific equity 
style or strategy.  From that pool of candidates, we'll look at 
their management and operations, plus their relative return and 
risk using Morningstar's online screen tools and fund database.

Per Standard & Poor's website, the S&P 500 Index consists of 500 
stocks chosen for 1) market size, 2) liquidity, and 3) industry 
group representation.  The 500 Index is a market value-weighted 
index (stock price times shares outstanding), with each stock's 
weight in the 500 Index proportionate to its market value.  S&P 
duly notes on its website that the 500 Index is one of the most 
widely used benchmarks of U.S. equity performance.  

According to Morningstar, the S&P 500 index generated an average 
annual total return of 10.08% over the last ten years as of July 
31, 2002.  That number is roughly in line with the historic norm 
for U.S. stocks, so right now is good time we feel to be judging 
equity funds for their long-term performance over market cycles, 
including ups and downs.  This exercise should also help to show 
how much outperformance one can realistically expect to get from 
an investment in an actively managed stock mutual fund over time.  

It's important to have realistic performance expectations, since 
you may find you need to contribute more to your plan or account 
to achieve your long-term investment goal.  The 90's bull market 
gave people the idea that they could average 25% a year in total 
return, but we know that is a myth.  The numbers we'll see today 
offer a much more realistic expectation of long-term performance.

Along that same line, it should also be noted that over the past 
10 years, the vast majority of stock mutual funds failed to beat 
the market as measured by the S&P 500 Index.  Morningstar's data 
shows for example that the Vanguard 500 Index Fund (VFINX) had a 
10.01% annual-equivalent return for the trailing 10-year period, 
ranking it in the top 25% of the large-cap blend category.  That 
means three out of four large-cap blend funds failed to beat the 
benchmark S&P 500 Index. 

In our opinion, the principal source of underperformance relative 
to the market (S&P 500 Index) is simply expenses.  A fund with an 
expense ratio of 2.00% of assets a year has to generate an annual 
total return that is 2.00% better than the S&P 500 index to match 
its return.  The bottom line is that most actively managed equity 
funds don't generate enough excess return to overcome their costs 
and expenses.  

The fact that the funds we'll look at this week have each beaten 
the market (S&P 500) should offer some hope that they can repeat 
the process and do it again over the next ten years.  While past 
performance is no guarantee of future results, ten-year averages 
may help to ascertain a fund's long-term appreciation potential. 

Screen Process

We performed our search using Morningstar's Fund Selector online 
tool, choosing the following screen criteria to quickly identify 
potential candidates:

 No-Load Only: Yes
 Minimum Initial Purchase: Less than or equal to $3,000
 Expense Ratio: Less than or equal to 2.00%
 Star Rating: Equal to 4 stars or 5 stars
 10-Year Return: Equal to or better than the S&P 500 Index

This selection criterion generated 90 fund results, too many to 
evaluate effectively, so we opted to limit the search to 5-star 
rated funds.  For funds with longer track records, Morningstar 
rates their 3-year, 5-year and 10-year records and then weights 
each of these ratings to come up with its overall "star" rating.  
Only the top 10% of funds in each category based on performance, 
as adjusted for risk, receive the highest 5-star overall rating.

That reduced the number of potential candidates to 32, across a 
range of Morningstar categories.  Below is a summary of results 
by Morningstar category:

 Domestic Hybrid: 6 Funds
 Foreign Stock: 1 Fund
 Large-Cap Blend: 6 Funds 
 Large-Cap Growth: 2 Funds
 Large-Cap Value: 4 Funds
 Long Government: 2 Funds (Actually 1 fund, two classes)
 Mid-Cap Blend: 1 Fund
 Mid-Cap Growth: 2 Funds
 Small-Cap Blend: 2 Funds
 Small-Cap Growth: 5 Funds
 Natural Resources: 1 Fund

You'll note no small-cap value or mid-cap value funds among the 
results, which is surprising considering how well the style has 
performed in recent years.  Rather, five small-cap growth funds 
made the list, going to show that if you base your decisions on 
what a fund has done lately, it may be a poor predictor of long-
term return potential.

American Century Target 2010 Maturity Fund (BTTNX and BTFTX) is 
the long-term government bond fund to make the list.  Since the 
fund specializes in zero-coupon bonds, it's not really the type 
of diversified bond fund we're looking for.  Similarly, we have 
opted to eliminate Vanguard Energy Fund, the one energy/natural 
resources fund to make the list, since it specializes in stocks 
of companies in the natural resources sector.  We're seeking to 
identify the diversified stock funds that have outperformed the 
market in the past decade and have a strong risk-reward profile.

Of the remaining 29 funds on the list, we identified five which 
are currently closed to new investors: Liberty Acorn Z (ACRNX), 
Neuberger Berman Genesis (NBGNX), Sequoia (SEQUX), Wasatch Core 
Growth (WGROX), and Wasatch Small Cap Growth (WAAEX).  So we're 
down to two dozen potential candidates at this point.

Rather than try to hone in any further, we have decided to show 
you all 24 funds that have made it this far, sorted by category 
so you can pick the investment style/strategy that may be right 
for you based on your individual situation.

Our 24 Screen Winners

Each of these funds cleared two difficult hurdles.  Each one is 
rated 5 stars by Morningstar, a distinction limited to only 10% 
of funds within their relative category.  These funds offer the 
best reward-risk tradeoffs for investors relative to comparable 
funds.  Further, each fund has proven over the past decade that 
they can outperform the benchmark S&P 500 index, giving hope to 
the belief that through active management, some funds can truly 
beat the market net of expenses.  The trick is identifying them 
ahead of time!


 Domestic Hybrid Funds:
 Dodge & Cox Balanced (DODBX) YTD -9.9%; 10-Yr Avg +12.1%
 Gabelli Westwood Bal. (WEBAX) YTD -9.4%; 10-Yr Avg +11.4%
 Mairs & Power Balanced (MAPOX) YTD -11.4%; 10-Yr Avg +10.7%
 T. Rowe Price Capital App. (PRWCX) YTD -6.0%; 10-Yr Avg +11.9% 
 Thompson Plumb Balanced (THPBX) YTD -14.6%; 10-Yr Avg +11.1%
 Vanguard Wellington (VWELX) YTD -11.0%; 10-Yr Avg +10.8%

 Foreign Stock Fund:
 Fidelity Diversified Intl (FDIVX) YTD -11.0%; 10-Yr Avg +10.3%

 Large-Cap Blend Funds:
 Elfun Trusts (ELFNX) YTD -26.1%; 10-Yr Avg +12.0%
 Fidelity Growth & Income (FGRIX) YTD -20.5%; 10-Yr Avg +11.3%
 MSB Fund (MSBFX) YTD -16.6%; 10-Yr Avg +11.8%
 Mairs & Power Growth (MPGFX) YTD -13.1%; 10-Yr Avg +16.5%
 Selected American (SLASX) YTD -21.4%; 10-Yr Avg +12.0%
 Thompson Plumb Growth (THPGX) YTD -30.3%; 10-Yr Avg +14.0%

 Large-Cap Growth Funds:
 Janus Growth & Income (JAGIX) YTD -24.9%; 10-Yr Avg +12.8%
 T. Rowe Price Growth Stock (PRGFX) YTD -28.9%; 10-Yr Avg +10.6%

 Large-Cap Value Funds:
 Dodge & Cox Stock (DODGX) YTD -17.7%; 10-Yr Avg +14.7%
 Oakmark Fund (OAKMX) YTD -16.9%; 10-Yr Avg +14.1%
 T. Rowe Price Equity Inc. (PRFDX) YTD -18.7%; 10-Yr Avg +11.3%
 
 Mid-Cap Blend Fund:
 Ariel Appreciation (CAAPX) YTD -14.6%; 10-Yr Avg +13.2%
 
 Mid-Cap Growth Funds:
 INVESCO Leisure (FLISX) YTD -22.9%; 10-Yr Avg +15.6%
 T. Rowe Price Mid-Cap (RPMGX) YTD -27.0%; 10-Yr Avg +14.7%

 Small-Cap Blend Fund:
 Third Avenue Value (TAVFX) YTD -16.7%; 10-Yr Avg +13.1%

 Small-Cap Growth Funds:
 Meridian Growth (MERDX) YTD -19.0%; 10-Yr Avg +12.6%
 Neuberger/Fasciano Fund (NBFSX) YTD -12.4%; 10-Yr Avg +10.5%


If you have followed our Weekly Fund Screens, many of the names 
should be familiar to you since we have profiled nearly all of 
them in the last year or so.  You can see that six hybrid funds 
made the list, as did six large-cap blend funds, lending support 
to the notion that diversification pays between asset classes as 
well as between value and growth sectors and securities.  Those 
looking to add mid/small-cap exposure to their portfolio have a 
few choices to consider here.

Summary

Because each individual is unique, there's no one-size-fits-all 
stock mutual fund.  Different investment styles, with different 
management and operations, produce different risks and rewards 
for investors.  This week, we identified equity funds across a 
variety of sub-asset classes that have delivered net return in 
excess of the market (using the S&P 500 index as the benchmark) 
over the last 10 years, while maintaining a superior return-to-
risk profile.

Because of the difficulty in beating the market (after expenses 
are deducted), many long-term investors put some money in index 
funds as the core component of their equity portfolio, and then 
seek to identify actively managed funds that have the potential 
to outpace the benchmark index over time.  Schwab, for instance, 
calls this strategy "core and explore," and it's one we believe 
may be appropriate for long-term investors with accumulation of 
asset goals such as investing for a secure retirement.

For more information or a fund prospectus, please contact the 
respective mutual fund company.


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

THE SECTOR BEAT - 8/6
by Leigh Stevens

A wild and crazy, flip-flopping market is reflected in a equal 
number of 180 degree turns in the sector indices from day to day 
lately. Today we had all sectors I follow UP on the day, versus 
all being DOWN yesterday. 

Price action today was constructive in terms of further upside 
potential in Biotech (BTK), the NYSE Financials (NF), Defense 
(DFI), Home Builders (DJUSHB) - making an apparent double bottom, 
Health care (HMO & RXH), Semiconductors (SOX), Software (GSO), 
Transportation stocks (TRAN), and Utilities (UTY).  

I will give wait another day for any suggested plays however - 
I've grown quite leery of getting "whipsawed".      
 
UP on Tuesday - 


 


DOWN on Tuesday - 

CAN YOU BELIEVE IT - NO SECTORS THAT I FOLLOW WERE DOWN ON THE 
DAY!  

SECTOR TRADE RECOMMENDATIONS -

NEW/OPEN TRADE RECOMMENDATIONS -

NONE

 
TRADE LIQUIDATIONS -

NONE


SECTOR HIGHLIGHT(S) -

Home Construction Index - (Home Builders: $DJUSHB) - Dow Jones
STOCKS: BZH; CLPO; CPH; CAV; CTX; CHB; CMH; DHI; DHOM; FRTG; HOV; 
KBH; WLS; MDC; MHO; MTH; MODT; NHCH; NUR; OH; OHCA; OHCB; OHB; 
PHHM; PHM; RYL; SKY; SEHI; SPF; TOL; WLT; WCI; WTMK; WLFO    


 


The Home Construction index or home builders, has made a double 
bottom low, which has been unusual among the sectors.  At the 
same time of the second low, at an equal price to the first, the 
Relative Strength Index (RSI) has made a higher relative low.  
This bullish divergence also gives technical evidence and support 
to the idea that this group has bottomed.  The play in this 
sector is with the individual stocks, only a few of which are big 
cap stocks.  
UPDATE: 8/6/02

One such stock is Centex (CTX) - see the chart below - and which 
has an identical pattern in terms of price and RSI divergence, to 
the index above.



 
 

Technical support has been established in the $43 area in Centex 
(CTX). Overhead resistance is suggested in the $52 area, at the 
intersection of both the 50 and 200-day moving averages - also 
corresponding approximately to the low end of the trading range 
of past months. 

The stock could be bought for a trade, on dips back toward the 43 
low, with an upside trading objective to the 51-52 area - and, 
possibly reachable in the next 2-3 week time frame judging on the 
last rebound. However, the last rally occurred on a strong week I 
the overall market and the outlook for a sustained second up leg 
is not clear relative to the S&P.   


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


***********************
SWING TRADER GAME PLANS
***********************

The Coin Please 
By Jim Brown

Anybody got a coin we can flip to determine Wednesday's 
market direction? The spin is in! Cisco has spent the last 
three hours trying to convince investors and analysts that 
it was a strong quarter and business is good despite 
narrowing visibility and a negative book-to-bill outlook for 
this quarter. Were they successful? The stock closed the 
extended session up about a dollar and the S&P futures were 
up +9.00. By 8:PM ET they were back to nearly unchanged. 
With plenty of dark before morning the eventual number is 
anybody's guess.

The European markets should be up on the U.S. bounce but 
they have their own profit taking to tackle. The +8% bounce 
in the German Dax yesterday and strong showings in Sweden, 
France and the U.K. as well will probably be met with some 
selling. I doubt another fund will ride to their rescue 
tomorrow. The U.S. markets are now back to trading on 
fundamentals and we have the Wholesale Inventory report at 
10:AM to help cloud the picture. Will they buy the Cisco 
story or sell the news?

The Dow has solid resistance above it at 8400 and not much 
support below until you near 8000. You can bet that any 
failure to continue the rally at the open will be met with a 
horde of hedge funds anxious to win back the money lost 
today when they closed their shorts in panic. The oversold 
internals from yesterday have eased and the market is 
literally free to trade in either direction without much 
indicator bias. If anything they are back in overbought 
after just one day. 

Until proven otherwise my market view is still down. The 
Tuesday event was simply an aberration and did not change 
anything fundamentally for the US markets. We have the 
continued fear of a double dip, the August 14th 
certifications and now the stories beginning to appear about 
a 9/11 anniversary slowdown.

Market View Chart: 




My market view, using the OEX as our guide, shows the 
failure at the top resistance today just below OEX 440. It 
shows a stop of the afternoon drop at support from last week 
of OEX 430. If you remember from Monday once 430 was broken 
the descent to 420 was pretty quick. Below 420 there is 
still a speed bump at 412-413 and then free fall to the 400 
range. Note the oscillators are already turning back to 
negative, which was prompted by the strong drop at the 
close. 

Should another rally breakout the resistance at 440 (Dow 
8450) should hold. The next resistance is the longer term 
down trend at about OEX 450. 

My initial target is OEX 420 and my secondary target is OEX 
400. This is where the retest buyers will start to appear. 

Game Plan:
The Swing Trade model is SHORT the broader market from OEX 
434.

My most likely scenario is a bounce at the open on the Cisco 
earnings with a failure at 435 or 440 again. Should that 
occur anyone not already short should use it as an 
opportunity to enter the play. 

Change the stop loss on the current short signal to OEX 441 
at the open. OEX 440 held today (Dow 8450) and should hold 
tomorrow. I know this is a wide stop and you may wish to 
exit earlier and get back in when the trend reverses. OEX 
436 would be my suggestion as it is just over the 5-DMA. 

The initial target on this signal is OEX 420 with a 
secondary target at OEX 400-403. I obviously do not think we 
will get to the secondary target tomorrow but that is my 
eventual goal. 

If the morning bounce does not occur, an entry point for a 
new position would be a break below OEX 429. OEX 430 was 
support last time through and we want to get under that 
support before opening a new position. 

Stop losses will be updated during the trading day on the 
Market Monitor. 

OEX Game Plan Chart: 




SPX Game Plan Chart:




DJX Game Plan Chart:





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The Option Investor Newsletter                  Tuesday 08-06-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: None
Daily Results
Call Play Updates: LTR
New Calls Plays: CHIR, IDPH
Put Play Updates: DD, JPM, KLAC, BBBY, BBOX, CCMP, DHR, JPM, SNE
New Put Plays: CB, NUE, QCOM, HD

****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

None


PUTS:
*****

None


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

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

CALLS              Mon    Tue    Wed    Thu   Week

CHIR     34.19   -0.71   1.57  New Past 50-dma, lookout 200
IDPH     41.63   -1.35   1.28  New, support at $40, rebound
LTR      46.19   -0.51   0.89  $45 support holds


PUTS               

BBBY     28.21   -0.96   1.26  Beyond help
BBOX     33.96   -0.92   1.67  Avoiding the stop
CB       59.36   -1.85  -0.04  New, weak under $60
CCMP     39.16   -1.14   2.16  $40 looks too tough
DD       39.76   -0.99   1.66  down, with the economy
DHR      57.37   -3.36   1.77  Inside day = consolidation
HD       28.03   -0.95   0.55  New, empty aisles
JPM      23.65   -1.50   1.30  Dark clouds overhead
KLAC     37.18   -1.98   2.13  Customers see no rebound
NUE      46.44   -4.05  -1.31  New, tariffs too much
QCOM     25.18   -1.51   1.43  New, questionable predictions
SNE      42.50   -0.70   0.49  Not much bounce on big day


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

LTR $46.19 +0.89 (+0.38) In marked contrast to the rest of the
market on Monday, Tobacco stocks held up remarkably well, due in
large part to the favorable California Supreme Court ruling,
that confirmed the liability protections during the 1988-1998
time frame.  That enabled our LTR call play to hold above its
$45 stop at the close.  Then with the favorable market action
today, the stock moved solidly higher until the profit taking
hit in the final hour.  Although the stock gave up a goodly
portion of its intraday gains, it still held above near-term
support at $46.  Use a rebound from the $46 level to initiate
new positions or else wait for a strong move through $48
resistance.  In either case, look for renewed strength in the
broad market and particularly other Tobacco stocks like MO and
UST to confirm strength in LTR.  Keep stops in place at $45.


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

CHIR – Chiron Corporation $34.23 +1.61 (+0.61 last week)

Company Summary:
Chiron Corporation is a global pharmaceutical company that is
focus on developing products for cancer and infectious disease.
The company continues to build upon its cancer franchise, which
has three dimensions; immune system modulators, monoclonal
antibodies and novel anti-cancer agents.  In the infectious
disease area, the CHIR has a broad range of products.  The
company commercializes its products through three business units,
which include biopharmaceuticals, vaccines and blood testing.
The Vaccines unit offers more than 30 vaccines for adults and
children.

Why We Like It:
While the Technology sector has continued to languish in a
seemingly vain search for a bottom over the past few weeks, the
Biotechnology sector has been quietly building its relative
strength.  Numerous stocks in the sector that had been
mercilessly sold down to new multi-year lows have been posting
higher lows and higher highs after putting successful
double-bottoms in place in July.  CHIR is one such stock, and
the recent rally has been particularly impressive.  After
finishing its double bottom formation near the $26.50 level, the
stock has had an impressive rebound over the past 2 weeks,
vaulting nearly 30% off its July 24th lows.  After the initial
surge higher, CHIR needed to consolidate its gains, and after
building support near the $32 level over the past week, it looks
ready to vault even higher.  While there could be a bit more
weakness before the stock gets moving, the PnF chart is certainly
voting in favor of the bulls, with its recent double-top breakout
above the $32 level.  The current vertical count is now pointing
to an eventual target of $49, so there is plenty of room to run.
Of course, before moving to such a lofty level, the bulls will
first have to scale the $35 and $37 resistance levels, not to
mention the formidable $40-41 area, which is the site of solid
historical resistance and the bottom of the late-April gap lower.
Because of all the overhead congestion, we don't want to focus on
buying a breakout, but would prefer to initiate new positions on
a pullback to support in the $32-33 area.  A drop below the $31.50
level would break the recent string of higher lows, so that is
the site of our stop.

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

BUY CALL AUG-32 CIQ-HZ OI=416 at $2.35 SL=1.25
BUY CALL AUG-35*CIQ-HG OI=515 at $0.95 SL=0.50
BUY CALL SEP-32 CIQ-IZ OI=142 at $3.80 SL=2.25
BUY CALL SEP-35 CIQ-IG OI=119 at $2.40 SL=1.25
BUY CALL SEP-37 CIQ-IU OI= 43 at $1.45 SL=0.75

Average Daily Volume = 2.71 mln


---

IDPH – IDEC Pharmaceuticals $41.63 +1.28 (-0.12 last week)

Company Summary:
IDEC Pharmaceuticals is a biopharmaceutical company engaged
primarily in the research, development and commercialization
of targeted therapies for the treatment of cancer, autoimmune
and inflammatory diseases.  IDPH's first commercial product,
Rituxan, and its most advanced product candidate, Zevalin
(formerly Y2B8), are for use in the treatment of certain B-cell
non-Hodgkin's lymphomas.  The company is also developing
products for the treatment of various autoimmune diseases such
as psoriasis, rheumatoid arthritis and lupus.

Why We Like It:
In a marked divergence from the rest of the Technology sector,
Biotech stocks, as measured by the BTK index, have been in
recovery mode now for close to a month.  That relative strength
shouldn't come as any great surprise, given the heavy, almost
oppressive, selling that engulfed the sector beginning in March.
Over the past month, the BTK index has posted a series of higher
lows and higher highs, beginning to build an ascending channel
with its lower boundary near $329 and the upper channel line near
$380.  A quick sector scan shows that the BTK index has almost
single-handedly kept the overall NASDAQ from plunging into the
abyss.  After posting a double-bottom near the $30 level in early
July, IDPH has been building its own series of higher lows and
higher highs as well.  IDPH's ascending channel is presenting
support near the $40 level, with resistance coming in near $48.
Apparently, that is just the beginning, as the mid-July buy signal
on the PnF chart is forecasting an eventual rise to the $67 level.
The recent pullback from near the $46 level comes as no surprise,
as that is the site of the bearish resistance line.  An ideal
entry would come from another dip and rebound from the $40 area
in conjunction with another dip and bounce in the BTK index.
Alternatively, we can consider momentum-based entries as the stock
pushes back through the $42 intraday resistance level.  Initial
stops are set at $38, as a trade at that level would negate the
current PnF buy signal.

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

BUY CALL AUG-40*IDK-HH OI=6115 at $3.30 SL=1.75
BUY CALL AUG-45 IDK-HI OI=4426 at $0.85 SL=0.25
BUY CALL SEP-40 IDK-IH OI=1206 at $5.20 SL=3.25
BUY CALL SEP-45 IDK-II OI=1487 at $2.70 SL=1.25
BUY CALL OCT-45 IDK-JI OI=3937 at $3.60 SL=1.75

Average Daily Volume = 6.01 mln



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

DD $39.76 +1.66 (+0.67 for the week) DuPont rallied with the rest 
of the Dow today. This company has exposure to the overall 
economy, which has received nothing but bad news in the last 
week, including Monday's lower than expected ISM.  With a 
shrinking economy affecting most sectors, demand for DD's 
products should continue to suffer across the board. The failed 
rally above $40 should provide additional entry for new shorts, 
IF the overall market experiences a pullback.  Because this is a 
Dow stock, a surge in the Dow will serve as a rising tide that 
lifts all boats, including DD.  Interest rate speculations ahead 
of next week's FOMC meeting could possibly maintain momentum.  
Violation of our stop loss of $41.25 would indicate a sustained 
rally, at least until Tuesday's interest rate announcement.  In 
addition to the overall market news affecting DD, they have 
reached a tentative settlement agreement on a class action suit, 
which was filed against the company in Canada.  The product 
liability suit relates to polybutylene plastic plumbing and 
heating systems, for which DuPont sold raw materials.  The 
settlement agreement provides for DD to fund up to $30 million 
Canadian for payments to class action members.

---

JPM $23.65  +1.30 (-0.20 for the week) JPM experienced the 
classic rising tide rally today, as the overall market rally 
lifted 90% of the Dow stocks.  It traded as high as $24.63, which 
would have violated our recently lowered stop with a close above 
$24.00, however was unable to hold onto its gains.  On Monday, 
Lehman downgraded JPM and Citigroup, citing economic uncertainty, 
a tough operating environment, and continuing "headline risk."  
Headline risk is a reference to the continuing stream of bad news 
that hangs like a dark cloud over these two stocks.  On top of 
more Enron problems, as a result of questionable loans to Enron 
pipeline subsidiaries, and ongoing concern about billions of 
dollars in derivatives risk, there is now concern over JPM's 
exposure to foundering economies in Latin America.  In addition, 
there was a report yesterday from a gold industry watchdog group 
called GATA (Gold Anti-Trust Action Committee) that JPM may have 
failed to report $45 billion in gold derivatives to the SEC.  
This stock's venture over $24 looks like a gift, however, a 
sustained rally in the Dow could possibly bring JPM along for the 
ride.  Look for new entries only if the overall market weakens.  
While we feel that JPM will have continuing problems, there is no 
reason to short a rally before it has run its course.  If today's 
rally holds, we will respect our stop loss of $24.00 and wait for 
the rally to run its course, which would most likely be until 
next Tuesday's interest rate announcement.

---

KLAC $37.19 +2.13 (+0.10 for the week) KLAC's drop on Monday 
certainly made more sense to us than today's rally.  The Nasdaq 
Composite approached support of 1200 yesterday, and the 
subsequent bounce rallied the index over 53 points today, taking 
KLAC with it.  Although the market may be experiencing a bounce 
after losing over 700 points in the Dow, and almost 140 points in 
the Nasdaq, the fundamentals have not changed.   Demand in the 
semiconductor sector is down, revenues have been cut in half, and 
KLAC's customers are lowering guidance not only for 2002, but 
into 2003 as well.  Today's bounce put KLAC just above the center 
of its recent descending channel, begun in the middle of April.  
The stock traded through our stop loss intraday, but was unable 
to hold its gains, falling back below $37.50. New entries should 
wait for an additional rollover in the stock from this level, as 
well as a pullback in the Nasdaq.  While the fundamentals have 
not changed, a continued rally ahead of next week's interest rate 
announcement is a possibility, and we do not want to get caught 
short in a continuing rally, even if we believe it will 
eventually fail. 

---

BBBY $28.25 +1.30 (+0.34) After BBBY broke to a new closing
low on Monday, bearish traders were thinking they had another
winner in the bag.  That was before the broad markets opened
strongly positive on Tuesday, sending the shorts running for
cover.  BBBY ran to just above $29 before the positive momentum
had run its course, and the stock drifted lower throughout the
afternoon, dropping sharply in the final hour.  Aggressive
traders may have used that rollover to initiate new positions,
but we need to be careful here, as BBBY still closed positive
on the day, perhaps indicating that the bottom is in.  If the
stock is going to head lower, it is first going to have to close
today's gap up, and a possible entry strategy will be to ounce as
price falls below $27.80, entering that gap.  If that level holds
as support, then we'll need to wait for another rollover below
our $29.50 stop before entering.  Note that July Retail sales
were weak in July and that should continue to weigh on both the
overall Retail sector (RLX.X), as well as our BBBY play.

---

BBOX $33.96 +1.67 (+0.76) Tuesday's short-covering rally in the
broad markets sent BBOX sharply higher along with the rest of
the Networking sector (NWX.X), and had us biting our nails
throughout most of the day, wondering whether we were going to
be stopped out at the close.  Fortunately, investor nervousness
won out ahead of the CSCO earnings report and BBOX fell below the
$34 level (the site of our stop) at the close.  But we're still
on thin ice here, with CSCO's earnings apparently well received in
the after-hours session, and BBOX sitting a mere 4-cents below our
stop.  We'll want to honor that stop tomorrow and only consider
new positions if the stock rolls back down from its current level.
Investors looking for a bit of confirmation before entering will
want to wait for a decline back under $33.50 before playing.  We
won't be solidly back into bear territory until the stock breaks
back under $32 on its way to our $30 target, and that breakdown
would make for an acceptable entry as well.

---

CCMP $39.16 +2.16 (+0.95) The 6% moves in the Semiconductor index
(SOX.X) have become a daily occurrence lately, although it was a
bit of a switch to see that move to the upside on Tuesday.
Shares of CCMP went along with the overall sector again today,
gaining about 5.8%, eliminating the losses suffered on Monday.
At the close, the stock was resting back over the 20-dma ($38.62),
so bears need to be careful here, even with the sharp drop from
the highs at the end of the day.  While it was good to see the
$40 resistance level keep any bullish hopes in check on Tuesday,
positive reception of CSCO's earnings could send CCMP back through
that level tomorrow.  If already in the position, honor the $40
stop, as short-covering could still be significant.  However, if
CCMP rolls over near the $40 level again, that could make for a
solid entry ahead of the stock filling today's gap by dropping
near the $37 level.  The SOX will be the key here.  If it follows
its recent trend of giving back short-covering gains on the
following day, tomorrow could be just the confirmation we need
to initiate new positions.  Those looking for some significant
weakness before entering will want to see CCMP move back below
$38 before playing.

---

DHR $57.37 +1.77 (-1.59) With the futures strongly positive this
morning, in the wake of yesterday's large decline, it was a
foregone conclusion that short-covering would be the theme for
the day.  Sure enough, DHR followed up its sharp decline yesterday
with an equally sharp rebound at the open as shorts rushed to
cover.  In contrast to the broader market though, the stock
wasn't really able to build on its gains throughout the day,
finally falling back a bit at the close.  It is interesting to
note that DHR never crested the $58 level today, keeping the
bearish trend intact.  In fact, we got a nice inside day setup,
which should facilitate entry/exit from the play tomorrow.  If
looking to initiate new positions, we want to either target a
rollover from below the $59 level (Monday's high was $58.96) or
a decline under Monday's low of $55.59.  Having the inside day
setup gives us confirmation related to the level of our stop,
currently $59.  Should DHR push through this level tomorrow, then
it will be a clear signal that it is time to exit the play and
move on.  On a renewed decline, look, watch out for possible
support near $54, the site of the July 24th lows.

---

JPM $23.65 +1.30 (-0.20) In the volatile markets we've seen
recently, the Bank index (BKX.X) has been one of the most active
sectors, and the past 2 days have certainly been no exception.
Yesterday's decline sent shares of JPM plunging under near-term
support near $23.50, and then that decline was completely reversed
today on short covering.  The rebound was so strong that until
the final-hour decline, we weren't sure if we were going to hold
the play or get stopped out.  Fortunately, the stock declined back
below our $24 stop at the close, but we're not out of the woods
yet.  While a decline from current levels can be used for
initiating new positions, we want to honor our stop and exit the
play if the buyers prevail and push the stock back above that
level.  A better entry strategy at this point will be to wait for
JPM to decline back under $23.25 (recent intraday support) before
playing.

---

SNE $42.50 +0.49 (-0.21) Adding evidence to the theory that the
consumer is weakening were two reports out today that July Retail
Sales were disappointing in July.  The official Retail Sales
report will be out on Thursday, but judging by the action in
shares of SNE, sales of consumer electronics products don't appear
to be strong.  Despite the strong short-covering rally on Tuesday,
the stock barely managed a gain of 1%, closing near its low of the
day.  The dominant downtrend line that has been in place since
early July is looming near $44, but unless there is some upside
surprise waiting in the wings, it is appearing unlikely that level
will be challenged over the near term.  A failed rally below that
level would make for a great entry point, but we may have to
settle for a drop to new lows (below $42) as our trigger for
initiating new positions.  Keep stops set at $44.50.


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

CB - Chubb Corporation $59.36 -0.04 (-2.04 this week)

Company Summary:
Chubb Corporation, incorporated in June 1967, is a holding
company with subsidiaries principally engaged in the property and
casualty insurance business. The Company presently underwrites
most forms of property and casualty insurance. The Company's
Property and Casualty Insurance Group writes non-participating
policies. Several members of the Property and Casualty Insurance
Group also write participating policies, particularly in the
workers' compensation class of business, under which dividends
are paid to the policyholders.

Why We Like It:
Following the rebound off the lows of a couple weeks ago,
Insurance stocks rallied sharply, reflecting the degree to which
the sector was oversold.  But it looks like that move has run
its course, as select Insurance stocks are showing pronounced
weakness, even in the face of today's sharp rally.  A perfect
example of this divergence is the action in shares of CB. 
Although the stock gapped up with the rest of the market, eager
sellers barely waited for the echo of the opening bell to fade
before leaning on the stock again.  Posting its high of the day
in the first 30 minutes, CB drifted lower throughout the day,
and the decline accelerated into the close, leaving the early
buyers shaking their heads in amazement as the stock actually
closed the day with a loss.  Looking at the big picture, the
weakness should come as no surprise, as investors are still
smarting from the earnings miss from last Monday.  Note that the
stock's rally off the recent lows (near $53) came to a screeching
halt at $65 last week, right at the 6-week descending trendline
that has now fallen to $63.50.  Once the gap from last Monday
($60.50-61.50) was filled yesterday, the selling accelerated into
the close.  So it didn't take much of a leap of faith for the
sellers to jump back in when today's rally began to fade.
Another failed rally would be a gift at this point, and a
rollover near either $61-62 would make for a great downside
entry.  Alternatively, look to initiate new positions on a drop
under the $59 level (just below the intraday lows of the past 2
days).  We are initiating coverage with a fairly wide stop at
$63.50, the site of solid overhead resistance and the descending
trendline.

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

BUY PUT AUG-60*CB-TL OI=403 at $2.60 SL=1.25
BUY PUT SEP-60 CB-UL OI=360 at $4.40 SL=2.75
BUY PUT SEP-55 CB-UK OI=125 at $2.45 SL=1.25

Average Daily Volume = 1.18 mln


---

NUE – Nucor Corporation $46.44 -1.31 (-4.45 this week)

Company Summary:
Nucor Corporation manufactures and sells steel products,
including hot-rolled steel, cold-rolled steel, cold-finished
steel, steel joists and joist girders, steel deck and steel
fasteners.  The company produces its rolled sheet steel to
satisfy customer orders, while other products are manufactured
in standard sizes and inventories are maintained.  While the
rolled steel products are sold primarily to steel service
centers, fabricators and manufacturers throughout the United
States, steel fasteners are sold to distributors and
manufacturers.  Steel joists , joist girders and steel deck
are primarily sold to general contractors and fabricators in
the United States.

Why We Like It:
Although initially deemed favorable to the industry, the Bush
administration's move to increase tariffs on steel imports has
had some detrimental consequences, not the least of which has
been a renewed decline in stock prices of the major steel
manufacturers.  After its initial move up to new 7-year highs in
early June, shares of NUE have gone into a sharp decline,
partially due to weakness in the dollar and partially due to
the resulting broad market decline.  After rebounding off the
$50 level 2 weeks ago, the stock ran into firm resistance just
below the 20-dma (then at about $59) and reversed sharply with
the rest of the market.  Bulls hoping for a successful retest of
the lows at $50 were sorely disappointed on Monday, as the stock
gapped below that level and continued to fall.  Even with the
broad market sharply positive today, NUE gave up more ground,
as investors continued to worry about the detrimental effects of
the administration's protectionist policies.  While the stock may
find some minor support near the $46 level (near today's intraday
lows), with the recent triple bottom breakdown on the PnF chart,
it is clear that supply is in control.  And the $50 level is going
to present some formidable overhead resistance.  Following the
heavy selling volume on Tuesday, an oversold bounce seems rather
unlikely, but we won't rule it out.  A failed rally below $50
(possibly as low as $48) can be used for initiating new positions,
as can a drop under $46 on continued heavy volume.  Our initial
downside target will be $40, the site of the next level of strong
support.  Set stops at $50.

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

BUY PUT AUG-50*NUE-TJ OI=186 at $4.70 SL=2.75
BUY PUT SEP-50*NUE-UJ OI= 30 at $5.90 SL=4.00
BUY PUT SEP-45 NUE-UI OI=  0 at $3.00 SL=1.50

Average Daily Volume = 793 K


---

QCOM – Qualcomm $25.18 +1.43 (-0.37 for the week)

Company Summary:
QUALCOMM Incorporated (www.qualcomm.com) is a leader in 
developing and delivering innovative digital wireless 
communications products and services based on the Company's CDMA 
digital technology. The Company's business areas include CDMA 
chipsets and system software; technology licensing; the Binary 
Runtime Environment for Wireless(TM) (BREW(TM)) applications 
platform; QChat(TM) push-to-talk technology; Eudora® e-mail 
software; digital cinema systems; and satellite-based systems 
including portions of the Globalstar(TM) system and wireless 
fleet management systems, OmniTRACS® and OmniExpress®. QUALCOMM 
owns patents that are essential to all of the CDMA wireless 
telecommunications standards that have been adopted or proposed 
for adoption by standards-setting bodies worldwide. QUALCOMM has 
licensed its essential CDMA patent portfolio to more than 100 
telecommunications equipment manufacturers worldwide. 
Headquartered in San Diego, Calif., QUALCOMM is included in the 
S&P 500 Index and traded on The Nasdaq Stock Market® under the 
ticker symbol QCOM. (source: company release)

Why We Like It:
Qualcomm has suffered along with the rest of the tech sector.  
The stock had found support at $25 going back to the beginning of 
May.  Although QCOM finished the day above $25, yesterday's drop 
through this level is a bearish sign for the stock.  This 
reinforces last Thursday's downgrade by Credit Suisse First 
Boston (CSFB).  The firm cut its rating on QCOM from a "buy" to a 
"hold."  There are very few sell ratings issued, and "hold" is 
generally considered to be one of the most bearish ratings a 
stock can receive. CSFB also lowered its price target on the 
stock a stunning 44%, from $45 to $25.  It said it expected slow 
growth for 2003 lowered its earnings per share estimate to $1, 
10% below the current consensus. 

Qualcomm beat earnings forecasts on July 25, and expects revenue 
to be at the high end of previous forecasts.  Many analysts, 
however, have expressed doubts about QCOM's sales expectations 
for its mobile phone chips. The research note from CSFB stated, 
"We think it will be difficult for (Qualcomm) to show upside in 
the next few quarters without a rebound in the end market... 
Until there is better visibility into 3G or significant ramps in 
new markets like China or India, we think growth will be 
limited."

A look at Qualcomm's point and figure chart shows a triple-bottom 
breakdown, established with yesterday's trade of $24, before 
closing at $23.78.  QCOM is working on a bearish vertical count 
of $16, although this may be an aggressive target, as a reversal 
at some point would be needed to cement this number.  However, 
each trade of a round number below $24 extends this count 
downward by $2.  One note about this chart.  A single "O" on a 
triple bottom breakdown can lead to a "bear trap."  A bear trap 
forms when the last holder of stock finally gives in, and is 
followed by a quick reversal up afterward.  The triple bottom 
breakdown is still bearish, but shorts may want to put on half a 
position here and half after the stock forms another "O" at $23.

We like this position for short entries under $25, as this will 
avoid the continuation of today's rally in the Nasdaq and broader 
markets.  QCOM's current downward trendline, begun July 17, 
provides resistance just over $25, and this entry will avoid 
violation of this trendline, as well.  Our initial target will be 
$20.

BUY PUT AUG-25 AAW-TE OI=12340 at $1.50 SL=0.75
BUY PUT SEP-25*AAW-UE OI= 3080 at $2.60 SL=1.30

Average Daily Volume = 16.5 mil


---

HD – Home Depot $28.03 +0.55 (-0.40 this week)

Company Summary:
Founded in 1978, The Home Depot® is the world's largest home 
improvement specialty retailer and the second largest retailer in 
the United States, with fiscal 2001 sales of $53.6 billion. The 
company employs more than 296,000 associates and has 1,437 stores 
in 49 states, Puerto Rico, seven Canadian provinces, and Mexico. 
Its stock is traded on the New York Stock Exchange and is 
included in the Dow Jones Industrial Average and Standard & 
Poor's 500 Index. (source: company release)

Why We Like It:
Home Depot gapped down on July 12, after a downgrade from Merrill 
Lynch, which lowered the company's rating from "strong buy" to 
"hold." The stock closed its gap in the middle of July and has 
not shown much strength since.  Although the stock has attempted 
a rebound it has failed repeatedly and fell through support of 
$28 in yesterday's session.  On a day when the Dow rebounded 
strongly, HD gained a mere $0.55.  The retailers have been fairly 
volatile, with strong showings by Wal-mart, Sears and Target 
during the 1200-point rally in the Dow.  These stocks gave back 
much of their gains last week, however Home Depot managed only a 
token effort during the rally phase and now looks tired from the 
effort.  If it can't find buyers during strong rallies with high 
volume, its prospects do not look good.

A look at the point and figure chart shows this stock on the 
verge of a triple bottom breakdown.  A trade of $27 would be 
needed for this pattern, however this looks possible in the near 
term.  After watching this stock mired in a narrow range while 
the other retailers rebounded, a recent trip to the local Home 
Depot revealed something you don't see on the charts.  The 
manager at the lumber department said not only was the store 
empty, but daily revenues, which had been $200,000.00 per day, 
were down to $150,000.00. While we don't hang our hat on the 
local lumber manager, it only underscored the problems the chain 
is having.  With a shrinking economy and existing home sales in 
the negative, the customer base for HD appears to be shrinking.  
The Retail Index (RLX.X) also appears weak, in spite of today's 
rebound.  It has taken out its 260 support level twice, and 
although some may see this as a double bottom, a one-day rebound 
on a big day for the overall market does not make a trend.

We will use a trade below $28 as a trigger to go short, with a 
stop-loss of $30. While there is resistance at $32, we want to 
make sure our risk/reward balance is in tact.  Our initial target 
on this play will be $25, however, after this support level is 
broken, there appears to be downside to the low 20s.

BUY PUT AUG-30 HD-TF OI=7364 at $2.45 SL=1.25
BUY PUT SEP-30*HD-UF OI= 584 at $3.30 SL=1.75

Average Daily Volume = 12.3 mln



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The Option Investor Newsletter                  Tuesday 08-06-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - CHIR

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

CHIR – Chiron Corporation $34.23 +1.61 (+0.61 last week)

Company Summary:
Chiron Corporation is a global pharmaceutical company that is
focus on developing products for cancer and infectious disease.
The company continues to build upon its cancer franchise, which
has three dimensions; immune system modulators, monoclonal
antibodies and novel anti-cancer agents.  In the infectious
disease area, the CHIR has a broad range of products.  The
company commercializes its products through three business units,
which include biopharmaceuticals, vaccines and blood testing.
The Vaccines unit offers more than 30 vaccines for adults and
children.

Why We Like It:
While the Technology sector has continued to languish in a
seemingly vain search for a bottom over the past few weeks, the
Biotechnology sector has been quietly building its relative
strength.  Numerous stocks in the sector that had been
mercilessly sold down to new multi-year lows have been posting
higher lows and higher highs after putting successful
double-bottoms in place in July.  CHIR is one such stock, and
the recent rally has been particularly impressive.  After
finishing its double bottom formation near the $26.50 level, the
stock has had an impressive rebound over the past 2 weeks,
vaulting nearly 30% off its July 24th lows.  After the initial
surge higher, CHIR needed to consolidate its gains, and after
building support near the $32 level over the past week, it looks
ready to vault even higher.  While there could be a bit more
weakness before the stock gets moving, the PnF chart is certainly
voting in favor of the bulls, with its recent double-top breakout
above the $32 level.  The current vertical count is now pointing
to an eventual target of $49, so there is plenty of room to run.
Of course, before moving to such a lofty level, the bulls will
first have to scale the $35 and $37 resistance levels, not to
mention the formidable $40-41 area, which is the site of solid
historical resistance and the bottom of the late-April gap lower.
Because of all the overhead congestion, we don't want to focus on
buying a breakout, but would prefer to initiate new positions on
a pullback to support in the $32-33 area.  A drop below the $31.50
level would break the recent string of higher lows, so that is
the site of our stop.

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

BUY CALL AUG-32 CIQ-HZ OI=416 at $2.35 SL=1.25
BUY CALL AUG-35*CIQ-HG OI=515 at $0.95 SL=0.50
BUY CALL SEP-32 CIQ-IZ OI=142 at $3.80 SL=2.25
BUY CALL SEP-35 CIQ-IG OI=119 at $2.40 SL=1.25
BUY CALL SEP-37 CIQ-IU OI= 43 at $1.45 SL=0.75

Average Daily Volume = 2.71 mln



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