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Daily Newsletter, Thursday, 08/15/2002

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The Option Investor Newsletter                Thursday 08-15-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Highest Close In A Month
Index Trader Wrap: Buoyant
Market Sentiment: Coming Up Roses
Weekly Manager Microscope: Warren Isabelle: ICM/Isabelle Small Cap Value
Index Trader Gameplans: The Sector Beat – 8/15

Updated on the site tonight:
Swing Trader Game Plan: Ping Pong Markets


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      08-15-2002           High     Low     Volume Advance/Decline
DJIA     8818.14 + 74.80  8854.21  8687.92 1.72 bln   1921/1234
NASDAQ   1345.01 + 10.70  1350.92  1322.11 1.71 bln   1732/1621
S&P 100   469.78 +  5.34   471.64   463.76   Totals   3653/2855
S&P 500   930.25 + 10.63   933.29   918.17 
RUS 2000  390.73 +  1.32   392.37   388.65 
DJ TRANS 2319.97 + 13.90  2328.77  2278.28   
VIX        33.07 -  3.29    36.57    33.07   
VXN        51.24 -  2.04    54.24    51.10 
Total Vol   3,665M
Total UpVol 2,376M
Total DnVol 1,230M
52wk Highs   99
52wk Lows   277
TRIN        0.62
PUT/CALL     .63
************************************************************

Highest Close In A Month

The Dow rallied back from a severely negative Philadelphia Fed 
Survey to close positive for the second day in a row and the 
highest close since July 10th. Could it be the trend have been
broken? It may be too soon to tell but the outlook is promising. 
Whenever markets rise on bad news the future is definitely 
looking up.

Chart of the Dow


 

Chart of the Nasdaq


 

The Philadelphia Fed Survey fell to a dramatic low and a 
continuation of a six month slide. The -3.1 headline number 
was the first negative number since December and down from a
high of 22 as recently as June. The August estimate was +7.6.
This is the first real evidence of a contraction of the 
manufacturing sector while most other indicators have been
hovering just on the brink of turning negative. New orders
fell from 6.6 to -2.7 in August and the labor component fell
to -13.4 from 6.8 in July. Both new orders and shipments fell 
as demand weakened. The six month outlook also worsened and
capital expenditures for that period dropped to 5.1 from 24.4.
This was by far the worst economic report yet and although it
is region specific it is assumed the other regions are seeing
the same results. 

Contrasting the Fed survey was the Industrial Production number
which came in slightly better than expected at +0.2%. Growth 
was weaker than June but still growth! It does indicate that 
the drop in July was not as severe as previously thought. 
Jobless claims rose slightly to 388,000 but well within the 
current trend. The number from last week was revised upward
from a drop of -15,000 to only -9,000. Continuing claims did
rise +73,000 from the prior week. When you factor in the 16,000
job cuts at IBM, 7,000 at AMR, 1,700 at PLAB among dozens of 
layoffs announced this week you can see that the longer term
picture is not improving.

The earnings after the close were positive with Dell announcing 
inline with estimates, beating revenue estimates and predicting
a 5% increase in sales for this quarter. They bordered on raising
guidance saying they were looking for $.20 to $.21 cents for next
quarter when analysts were only looking for $.20. They claimed
their business was good despite the down sector and they were
gaining share from competitors. Their inventory depth was only
four days when HPQ is sitting on 49 days of inventory. They
said they were seeing an increase in server sales although they
did not see business spending increasing on the whole. They 
attributed this to gaining share in a flat market. Dell was
trading up in after hours.

Retailer Kohls is exploding if you can believe their earnings.
They beat the street by two cents and increased sales +27%, 
earnings +44% and same store sales +10%. While this may be
incredible performance it was less than they had originally
projected and they said if back to school buying doesn't appear
soon they may have to lower guidance. This was the same story 
from Target who said earnings for the quarter could be at risk
if slowing sales trends continue. They said it was still too
soon to make the earnings call but the trend was definitely 
slowing. Other retailers posting strong gains included Nordstrom
which beat the street by +5 cents and ANN posted $.38 cents
from estimates of 29 cents. This followed wins by FD and WMT
yesterday. Federated also warned that estimates for this and
next quarter are too high compared to current slowing sales.
Are you noticing a trend here?

The certification period passed its initial hurdle with barely
a whimper. There were a few last minute restatements but mostly
from companies that were under suspicion already. There was no
smoking gun or major corporation going down in flames. This no
doubt contributed to the bullish sentiment we saw in the last
two days. The passing of this date does not in any way win us
a get out of jail free card. 

The problems still abound and the largest of which is the coming
9/11 anniversary. Everyone in the travel, lodging, retail and 
even the restaurant business has started warning of slower sales
and we are still three weeks away from the 11th. The struggling
economy has to weather this storm for another four weeks and then
we should start ramping into the holiday season using all that
pent up cash. This cloud has been overhanging the back to school
sales and restricting business and vacation travel over the next
three weeks. I don't expect anything to happen because the 
terrorists only want to strike when we least expect it. They
will not try to overcome substantially increased security and 
risk an increased chance of failure. Still the public will see
this as a potential disaster of unknown scale and stay home
until the anniversary passes.

The other continuing problem is still Brazil. The questionable 
candidates are still in the lead in the presidential election
for October and the wrong winner would be a sure disaster. Add
in the increasing likelihood that we will go after Saddam on
our own and risk having our oil cutoff from other Arab countries
and you can see why the Fed was not eager to spend its remaining 
rate cuts frivolously. 

Friday is a toss up. We finished the day over 8800 but well off
the highs. The Dell news is a positive but probably already 
priced in with today's gains. The retail earnings announcements
were excellent but almost all warned of slower sales trends.
Trading at new relative highs after a big decline puts us at 
risk of hitting new sell programs with every +25 point gain. 
Until the majority of traders turn bullish the remaining bears 
will continue to make our life miserable with every up tick. 
The bright side is every bear becomes a panic buyer if the 
markets continue to trend up. Tomorrow we have the CPI report, 
Housing starts and the Consumer Sentiment. Sentiment should 
have remained flat for the first two weeks of August since the 
market has been trending up. This is the number one cause of 
its decline. The housing starts should rise slightly due to 
the good weather and continued lower interest rates.  

The key for tomorrow is for the Dow to remain over 8750 and
close over 8850. This will keep the current short term up trend
in place and keep pressure on the shorts. The Nasdaq needs to
close over 1354 for the same reasons. Ralph Acompora came out
into the sunlight today and said the close over 8796 today 
indicated we could rally to 10,060. He has not been right for
a long time but he said the July-24th low was the bottom and
he expects +1000 to +1200 point gains from here. Let's hope
his luck has changed. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

BUOYANT
By Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
Like a buoyant cork, the market keeps bobbing back up after 
being sold down and today was another example.  This won't last 
either - we'll go back to more two-sided trading swings again, 
but for now we have a shift in professional sentiment - a 
willingness to buy at least "old economy" stocks. Tech of course 
is another story as the economy has to "catch up" to their still-
high valuations.  

As for the public - FURGETTABOUTIT! I'm not talking about you 
dear readers, the more sophisticated trader types, but the 
investor who will get in only when the barber, baker and 
candlestick maker are talking about the market.  Or, even more so 
when cocktail party conversations turn to the new bull market and 
charts are drawn on cocktail napkins. These folks are not buying 
although they may have some mutual/pension funds where the 
managers are doing some buying.  

Contrast price action this week with the past months of this year 
when the indexes kept falling after any minor rallies. How the 
worn has turned!  Well this price action matches what the bullish 
S&P chart patterns have been suggesting - this rally has "legs" 
and bullish upside potential to as high as 500 on the OEX, 1000 
in SPX and 9200 in the Dow are possibilities.  I'm not saying 
these kind of targets will be realized on this current move or 
even on this up leg.  But, this kind of price action is typical 
of market shifts.  There are not so many people on board yet.

By now, bears are not able to suddenly become bulls - its too big 
of a transformation to make psychologically.  Actually, when 
these unexpected countertrend moves start and keep going and 
going and going like that crazy bunny - well, what actually 
happens is that things kind of go quiet. I'm getting fewer e-mail 
than ever.  People don't know what to do. 

I myself find it hard to buy into an overbought market for 
example but this is where "momentum" type traders will do OK, 
although they will tend to be too quick to jump out also. 
Anyway, the type trader that jumps on board index trades anytime 
there is MO - will the day traders be back next!? - right now 
they have plenty of space in those trading rooms. 

Fundamentally, I think the shift we are seeing in due in large 
measure to asset allocation movement of relatively small 
percentage amounts from fixed income to equities.  There is an 
emerging perception that equities have at this juncture limited 
downside risk - we don't have serious money managers talking 
about Dow 5,000. Perhaps maybe 7,500 as the downside risk.  

And bonds, well THEY have limited upside potential in terms of 
appreciation - bonds yields are not going to go to zero or close 
to it like Japan. With the 10-year note yielding around 4%, MAYBE 
this could fall to 3% but that's a stretch.  

Investors are not used to lending their money to the government 
for a decade and be willing to accept only 3% normally, which 
hardly keeps pace with inflation. Bond holders usually demand 
more of an inflation premium.  One has to look at the capital 
markets in terms of two choices - fixed income and the variable 
return of equities.  

At some point, the risk in stocks starts to look attractive 
relative to the alternative. Well, there is real estate of 
course, but most people are only buying one home, and maybe one 
vacation place. They're not buying rental properties for the most 
part. So there you have it, the Steven primer on the investing.   
 
S&P 100 Index (OEX) - Daily/Hourly charts: 

A broad uptrend channel is starting to emerge on the hourly chart 
as the S&P 100 index appears to be consolidating in what may be 
the approximate midpoint of a range.  Double that range and you 
are at the top end of the hourly uptrend channel.  What gives 
good initial definition to a trend channel is when you have 3 
points to define one trendline - the lower one in this case. Then 
the tentative upper end of that channel is a line parallel to the 
first one that "touches" the highest high or highs - we have 2 or 
3 here although they are part of a cluster around 458.  



 

The other pattern we see is possible bullish flag type formations 
on both the daily and hourly charts.  As it happens, I have 
written my Trader's Corner column tonight on (chart) "pattern 
recognition", beginning with "continuation" type patterns 
like flags and triangles that are usually just back and forth 
price moves that are "pauses" in a trend that will continue.  
Often these pauses are about midpoint or midway in a move.  

A bull flag pattern is also more likely to "fall apart" in an 
index than they are in an individual stock - an index being 
infinitely more complex so to speak.  That said they often do 
work out - the key is that we usually see a move that KEEPS going 
AFTER prices break out above the top (in this case) of the narrow 
range consolidation that "forms" the flag.  

A "negation" of this bullish pattern is signaled by a decisive 
downside penetration of the LOW end of the flag pattern. In the 
case of the hourly OEX chart, a move below 464 suggests is 
bearish and an exit of calls - especially if there was an hourly 
close below this level or an intraday break of 460. The 460 area 
was the key "line" of resistance formed by repeat hour price 
peaks - resistance, once broken, "becomes" support or should if a 
rally is going to have a next leg up. 

Key resistance implied by the top end of the aforementioned 
hourly flag is 470-471 - this is the "breakout" point if 
penetrated. If pierced, a next upside objective is 480 initially, 
but the flag objective is higher, closer to 500.  I am giving the 
most bullish scenario or possibilities.   

A break of 464, then 460 gives a downside target to the low 450s.  
The hourly up trendline intersects at 450 - below here, key 
support is in the 440 area around the prior downswing low. 

I won't spend as much time on SPX and DJX as the patterns are 
similar - only the upside and downside numbers are different. 

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


 

While the upper channel line intersects close to the 1000 area, 
the upside implied by a measured move objective whereby the first 
up leg was at least equal to a second up leg is closer to 980.  
There is room on the upside - as Jim said today on our Market 
Monitor, nothing but "blue sky" overhead. Given the overbought 
condition on a near-term basis the risk of taking on new call 
positions is also high.  

If long, exit on a decisive downside penetration or move below 
the "line" of prior highs (912-914). Or, at 980 if reached - why 
fight for the last 20 points if there is that kind of upside 
potential on this current move.  

Support below 912-914 in SPX is 890.  A break of 890 would also 
break the up trendline and suggest that the prior low might be 
retested in the 875 area.   

DJ Industrial Index (1/100 of INDU) - $DJX - Daily/Hourly charts: 


 

I'm bullish as long at DJX can stay above the 87.6-87.9 area, 
especially on a closing basis both in terms of the hourly and 
daily closes.  Support under this area is 86, then some ways 
below - at the 84-83.7 area.  

Upside potential, and probably resistance is at 90 in DJX - 9000 
in the Dow is not only a number talked about on the floor, but is 
resistance implied by lows formed in late-June/early-July.  Above 
90, my upside target is 92.  I would be a seller in the 92-93 
price zone, if reached. 

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


 
 
We almost at resistance in QQQ - the technical picture is quite 
different than the S&P indices which have broken out above their  
prior recent highs.  I don't know how this will be resolved. I 
find it hard to imagine that the S&P soars and the Nasdaq is 
deflected right near closing levels.  The Composite chart looks a 
bit more bullish with upside potential to the 1380 area, maybe to 
1400 over the next 2-3 days.  

The 24.7-25.25 is my expected upside for QQQ - not much more 
until there is another pullback. Of course a new high above 24.7 
AND the ability to hold a new high does "confirm" an uptrend - 
and, the double bottom low for that matter.

The Nasdaq chart/technical picture keeps me more cautious on the 
market here, the S&P more bullish.  At some point tech will 
likely be somewhat of a "drag" on the NYSE market.  Whereas, 
there is a limit to how much the S&P will pull UP the Nasdaq 100 
and Composite - stay tuned!

23.7-23.9-24.0 is the key line of prior resistance in the Q's and 
should now act as support. A break of this area suggests further 
downside, with support looking like 23.5 then 23, which is a key 
support currently in terms of the emerging hourly uptrend line, 
with the prior swing low at 22.5 as the last ditch support to 
keep the emerging uptrend intact.  


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com    


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

Coming Up Roses
by Steven Price

Green lights everywhere! That's how the screen looked today, with 
even the Semiconductors posting a healthy gain.  Brocade released 
positive numbers yesterday after the bell, and the techs took 
off.  This was in spite of Goldman Sachs lowering estimates on 
four of the major hardware makers.  Goldman's targets were 
storage equipment maker EMC, business computer maker Sun 
Microsystems and Hewlett-Packard, which recently took over 
Compaq.

Today's action seems to indicate that after the SEC deadline for 
CEOs to certify financial results passed without any major 
surprises, investors felt comfortable jumping back into the 
market.  

A look at the Dow shows a confirmed PnF buy signal, after trading 
over 8800 to finish the day at 8818.14, up 74.83.  This coincides 
with the buy signal established yesterday by the S&P 500, with 
its trade of 920.  The S&P finished today's trading session at 
930.25, up 10.63.  These buy signals seem to confirm what has 
been developing in the bullish percentage charts  since late 
July.  A look at the bullish percentage for the S&P 500 shows a 
meteoric rise from a low of 12%, to a current reading of 44%, 
indicating the percentage of stocks in the index now generating 
buy signals.  The Dow bullish percentage rebounded from an even 
more oversold condition of only 4% of stocks generating buy 
signals, to a healthy 42% as of today's close.  The Nasdaq 100, 
which has been leading the market for the last several years,  
reflects a bullish percent of 38%, and a breakout to the upside 
from a bullish flag pattern.  The combination of turnarounds in 
all of these indicators is almost enough to convince this market 
skeptic that a precipitous fall may not be around the corner 
after all.  The fall I have been expecting at the end of August 
and beginning of September, as investors dump their long 
positions ahead of the 9/11 anniversary, may in fact take place 
from a much higher level than originally anticipated.

A release of the minutes from the  FOMC's June meeting showed 
that they were comfortable keeping rates low, as long as 
inflation co-operated.  According to the minutes, "Given their 
anticipation of strong productivity growth and continuing slack 
in labor and other markets, members expected inflation to remain 
low over the next several quarters."   In fact, instead of 
discussing further rate cuts, the members of the committee 
discussed how long they could keep rates at these 40 year lows 
before returning them to a more normal level.  This attitude may 
have changed between the June and August meetings, as reflected 
in the easing bias stated this past Tuesday.

After the bell, Dell released earnings which met expectations, 
and reported a double digit increase in shipments.  the company 
posted earnings of $0.19, on revenue of $8.5 billion.  This 
revenue beat the company's own estimates by $200 million. CEO 
Michael Dell stated that the company would also likely enter the 
PDA and printer markets, however would remain focused on its 
computer systems.  This news is bullish for the techs and should 
lead to continued strength in tomorrow's session.

Jack Grubman, the lead Salomon Smith Barney telecom analyst, who 
is being investigated for his role with World Com, resigned 
today, stating that he could no longer work under the pressure of 
the investigations and negative statements about his work.  he 
will have to somehow find contentment in a $32 million severance 
package, which includes forgiveness of a $19 million loan he 
received from the company 4 years ago.

The NASD fined and suspended the licenses of 2 Credit Suisse 
First Boston executives who were charging excessive commissions 
to buyers of initial public offerings.   J. Anthony Ehinger, 
global head of equity sales, and George Coleman, head of 
institutional listed sales, were fined $200,000.00 each and 
suspended for 60 days.

The pall over the market seems to be lifting, and the Dow's 
series of three higher lows, followed by higher highs,  seems to 
indicate we may not be in for a re-test of the 7500 low from last 
month.  The Nasdaq 100 has also broken out of its short-term 
descending channel, begun in late May (although the descending 
channel from the beginning of the year remains in tact ).  Look 
for continuing strength tomorrow, after Dell's revenue surprise.  
The basic fundamentals of a lack of IT spending and very slow 
growing economy have not changed, however.  We are not yet out of 
the woods, and a re-tracement of recent gains is still possible.  
However, let's stop and smell the roses for the moment, as things 
appear to be turning positive for the short term.  One note of 
warning, however.  Tomorrow is expiration, and I can't seem to 
remember many boring expirations.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8818

Moving Averages:
(Simple)

 10-dma: 8528
 50-dma: 8880
200-dma: 9735



S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  930

Moving Averages:
(Simple)

 10-dma:  889
 50-dma:  936
200-dma: 1074



Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  981

Moving Averages:
(Simple)

 10-dma:  925
 50-dma: 1005
200-dma: 1346



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



The Semiconductor Index (SOX.X): The Semiconductors have enjoyed 
a revival the last couple of days.  Dell released earnings after 
the bell that met expectations. The real surprise, however, was 
in the revenue, which beat Dell's own forecasts by $200 million.  
The index has popped out of its descending channel from the 
middle of May, and may have finally found a bottom after these 
stocks have been repeatedly crushed over a lack of IT spending.

52-week High: 657
52-week Low : 282
Current     : 327

Moving Averages:
(Simple)

 10-dma: 309
 50-dma: 367
200-dma: 498



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

Market Volatility

The VIX is back in territory it hasn't seen since the end of 
July, during the market rebound between July 24 and July 31.  the 
Fed meeting is behind us, the CEO certification deadline has 
passed, and the New York financial community is vacationing in 
the Hamptons.  Somehow I get the feeling we may be getting lulled 
into a false sense of security.  Of course the other explanation 
is that all of the high premium option holders are getting out as 
quickly as possible, as time decay is eroding their positions, 
and buyers are nowhere to be found.  They are most likely racing 
each other to hit bids, as the drop in volatility can be just as 
expensive as being short the explosion.  Traditionally, on the 
first day of a new expiration cycle, front month options tend to 
be sold en masse.  So expect Monday's VIX to be even lower if 
there is no major event in the next 72 hours.

CBOE Market Volatility Index (VIX) = 33.07 –3.29
Nasdaq-100 Volatility Index  (VXN) = 51.24 –2.04

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.63      1,003,642       634,444
Equity Only    0.42        728,145       307,451
OEX            0.87         59,105        51,659
QQQ            0.31        144,743        44,379

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

Bullish Percent Data

           Current   Change   Status
NYSE          36      + 3     Bull Confirmed
NASDAQ-100    39      + 10    Bull Confirmed
DOW           43      + 3     Bull Confirmed
S&P 500       44      + 9     Bull Alert
S&P 100       46      + 10    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  1.15
10-Day Arms Index  1.18
21-Day Arms Index  1.25
55-Day Arms Index  1.36

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       1713          1010
NASDAQ     1658          1573

        New Highs      New Lows
NYSE         22              51
NASDAQ       30              96

        Volume (in millions)
NYSE     1,745
NASDAQ   1,632

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

Commitments Of Traders Report: 08/06/02

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

The commercials reduced their short contracts position by 4,000, 
while increasing their long contracts slightly. Small traders, 
increased their long contracts by nearly 6,000, while leaving 
their short positions virtually unchanged.


Commercials   Long      Short      Net     % Of OI 
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%)
08/06/02      431,590   478,879   (47,289)   (5.2%)

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
07/16/02      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%
08/06/02      159,561    67,434    92,127     40.5%

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 increased both long and short contract positions 
equally, by just less than 3,000 contracts on each side.  Small 
traders reduced both positions, taking 1600 contracts from the 
long side, and 450 from their shorts.


Commercials   Long      Short      Net     % of OI 
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%)
08/06/02       41,014     50,025    (9,011) ( 9.9%)

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
07/16/02       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%
08/06/02       11,547     8,782     2,765    13.6%

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

DOW JONES INDUSTRIAL

Commercials added to both long and short contract totals.  They 
added 1,000 long contracts and about 1400 shorts.  Small Traders 
also added to both sides, increasing their long contracts by 
1200, while adding 250 to the short side. 


Commercials   Long      Short      Net     % of OI
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%
08/06/02       23,491    14,290    9,201      24.4%

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
07/16/02        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%)
08/06/02        7,981     9,258    (1,277)   ( 7.4%)

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 MANAGER MICROSCOPE
*************************

Warren Isabelle: ICM/Isabelle Small Cap Value

This week, we put Warren Isabelle, president and chief investment 
officer of Ironwood Capital Management LLC ("ICM"), and portfolio 
manager of the ICM/Isabelle Small Cap Value Fund under the scope.  
Isabelle's independent investment management firm specializes in 
investing in undervalued small cap stocks.  ICM seeks to combine 
the risk-adverse nature of value investing with the greater long-
term appreciation potential of small company stocks.

Warren Isabelle is perhaps best known for his years with Pioneer 
Management Corporation (13 years), where he was head of domestic 
equities and portfolio manager of the successful Pioneer Mid-Cap 
Value Fund (originally called Pioneer Capital Growth Fund) which 
he managed from July 1990 inception through January 1997.  While 
with Pioneer, Isabelle also managed another small cap value fund, 
Pioneer Small Company Fund, from November 1995 inception through 
January 1997.  At the time of his departure, the combined assets 
totaled nearly $3 billion, per company sources.

His performance at Pioneer garnered him national attention, the 
website states.  He has since appeared on Louis Rukeyser's Wall 
Street Week and been featured in articles in Barron's, Business 
Week, Individual Investor, Money, Smart Money, and USA Today.

Our primary focus this week is on Warren Isabelle's latest fund, 
the ICM/Isabelle Small Cap Value Fund (IZZYX).  Note that we'll 
be using the Investment Class shares of the fund for comparison 
and evaluation purposes.  The Investment Class Shares impose no 
front-end or back-end sales loads, and require a $1,000 minimum 
initial investment for both regular and IRA accounts.  Complete 
information on ICM's Isabelle Small Cap Value Fund is available 
by calling the ICM Series Trust at 1-800-472-6114 or by logging 
on to www.icmfunds.com.

The ICM website says this fund will close to new investors once 
assets equal or exceed $500 million.  Right now, there's plenty 
of room, with current net assets at $87 million per Morningstar.   

Additional Background

Warren Isabelle named his Portland (Maine) based firm after the 
Ironwood tree, described as a small hardy tree that yields very 
useful and solid wood.  The ICM website states that these trees 
remain under the forest canopy until taller neighbors fall, and 
once given the opportunity to grow, they grow quickly, reaching 
their full potential.  This imagery ICM says is appropriate for 
their firm, as well as their investment style.  We'll talk more 
about Isabelle's style/strategy shortly.

Prior to founding ICM in August 1997, Isabelle had a brief stint 
as chief investment officer and portfolio manager at Keystone 
Investment Management Company.  From June 1984 until his 
departure in January 1997, he was head of U.S. equities at 
Pioneer Management Company, one of the nation's leading money 
managers.  

Prior to joining Pioneer in 1984, he worked as an analyst at 
Hartford Insurance and Travelers Corporation.  Isabelle is a 
Chartered Financial Analyst (CFA).  He holds a MS Degree in 
Polymer Science and Engineering from the University of 
Massachusetts (1980) and a MBA Degree, Finance from Wharton 
Graduate School, University of Pennsylvania (1981).

Warren Isabelle has 19 years of investment industry experience.  

Investment Style/Strategy

The ICM website states that Isabelle has been committed through 
the years to delivering a consistent and disciplined investment 
style.  He takes a long-term horizon when choosing equities for 
the small-cap portfolio, selecting stocks utilizing an approach 
that combines proprietary research with a "fundamentals-driven" 
philosophy for determining what is described as "the real world 
economic value of each underlying business."  The website notes 
that Isabelle buys businesses, not the stock.

The ICM/Isabelle Small Cap Value Fund employs this time-tested 
management style.  If you go to the ICM Funds website, you can 
find out more about the fund's investment philosophy, approach, 
and portfolio characteristics.  We will cover what we feel are 
the highlights here.

The fund's investment philosophy is founded in the belief that 
investment potential is identified by ascertaining a company's 
long-term economic value (existing assets and future cash flow 
potential).  It follows a disciplined investment strategy that 
focuses on companies whose market value is substantially below 
their intrinsic business value at time of purchase.  Isabelle 
favors companies that have a strategically focused management 
team, potential to improve fundamentals and are positioned to 
benefit from internal or external catalysts.

When performing fundamental analysis on companies, ICM/Isabelle 
considers both qualitative and quantitative factors and takes a 
long-term investment view.  A clearly defined sell discipline is 
another important ingredient of Isabelle's disciplined approach.

In terms of portfolio characteristics, equity holdings include 
four types of stocks: turnaround situations, cyclical companies, 
transition situations, and emerging companies.  The site states 
that the fund will take large stakes in companies where there's 
extremely compelling fundamental valuation, great confidence in 
management, and conviction to the business strategy.

The result is a fairly concentrated portfolio of 40 to 50 small 
cap stocks.  According to the website, the Small Cap Value Fund 
had 45 holdings as June 30, 2002 with the top 10 stock holdings 
representing 37.8% of total portfolio assets.  The fund was 97% 
invested in stocks ("fully invested") at midyear for a weighted 
average market capitalization of $436 million.  The average P/E 
ratio of the fund at June 30, 2002 was 12.7x, while the average 
P/B ratio stood at 2.4x.  

According to Morningstar's style history, Isabelle maintained a 
small-cap value style bias in 1999 and 2000.  In 2001 and 2002, 
however, this fund has landed in the small-cap blend style box, 
although Morningstar still has it categorized as "small-value."  
The fund is categorized as "small-cap core" in Lipper's system.  
Whether you call it small-value, small-blend or small-core, the 
fund normally stays somewhere left of center (value bias versus 
growth tilt).

In the next section, we'll see how well Isabelle has performed 
compared to his category peers, using Morningstar data through 
August 14, 2002.  And we'll look at the fund's risk and return 
ratings to see how well Isabelle has performed after adjusting 
for risk (downside volatility) relative to similar funds.

Fund Risk and Performance

This fund got off to a terrific start, with Isabelle returning 
49.5% in 1999 while the average small-cap value fund picked up 
only 5.4% that year.  In 2000 and 2001, the fund returned 7.7% 
and 8.8%, respectively, but ranked in the last quartile of the 
small-value category.  On a 2002 YTD basis as of Aug. 14, 2002, 
the fund has a negative 7.6% return, ranking in the category's 
second quartile.

Below is a 3-year chart of the Investment Class shares of ICM 
Isabelle Small Cap Value Fund (IZZYX), where you can see fund 
volatility graphically displayed.    




 

According to Morningstar, the fund's risk has been "high" in 
comparison to the average small-cap value fund.  Morningstar 
dings managers heavily for downside volatility (risk) in its 
ratings system.  Despite having produced above average total 
returns compared to other small-cap value funds, Morningstar 
rates Isabelle's overall performance just 3 stars or average, 
after adjusting for risk.

If you have the stomach for high fluctuations in share price, 
then you may want to focus more on Isabelle's longer results, 
such as trailing 3-year performance.  There, you'll find that 
over the last three years, Isabelle produced an average total 
return of 10.8% (as of August 14, 2002) outpacing the average 
small-cap value fund by 3.1% a year and the average small-cap 
blend fund by 6.8% a year on average.  The S&P 500 index lost 
10.4% on an annualized basis during the same trailing period.

Considering Isabelle's strong showing in 1999, his ability to 
produce positive results in 2000 and 2001, and his long track 
record at Pioneer Funds employing a similar investment style, 
potential investors can be optimistic about the fund's longer 
term appreciation potential.    

Summary

The fund's low turnover rate, consistent with Isabelle's long 
term investment perspective, adds to its appeal, and makes it 
appropriate for use in both taxable and tax-deferred accounts.  
Because of its concentrated sector weightings, small-cap value 
bias, and large stock stakes, the ICM/Isabelle Small Cap Value 
Fund should not serve as the core component of your portfolio.

If the ICM Series Trust can get the fund's expense ratio down 
(currently 1.74%), it'll help the fund's relative performance.  
At 1.74%, it's a little high, but the Investment Class shares 
have no sales loads, and may be purchased with no transaction 
fees through leading fund networks, such as Schwab OneSource.  

All things considered, Isabelle's track record at Pioneer and 
Ironwood Capital Management (ICM) suggests that, in this case, 
the fund's potential benefits are worth the greater risks and 
costs of ownership.  With the number of small-cap value funds 
declining in 2002, this is one offering that has some room to 
grow before it'll shut its doors.  For more information, or a 
fund prospectus, log on to www.icmfunds.com.


Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

THE SECTOR BEAT - 8/15
by Leigh Stevens

More upside in some the favorite sectors of late and very few 
sectors in the red today, but Healthcare (HMO & RXH), Fiber 
Optics (FOP), Defense (DFI) and the Networking (NWX) indices did 
not manage to get plus on the day.  

Well believe or not the Airline index (XAL) eked out a 2+% gain 
today.  Guess my call to start flying again did some good or 
maybe or maybe it was the beginning of a trend, started by 
American, to start imitating the smaller profitable carriers to 
some extent - a radical idea! - that is, thinking you can learn 
from the upstarts just cause they make money.  

American, headquartered only 30 miles from Southwest, wanted to 
come over and check out what they do and how they do it.  Not 
sure SW extended an invitation - southern hospitality only 
extends so far when it comes to big brother breathing down your 
neck! 

Biotech (BTK) still moving higher, broke out above recent 
resistance.  Also continuing strong were the Amex Composite Index 
(XAX), the Bank index (BKX), Brokers (XBD), Computer Boxmakers 
(BMX).  Cyclicals (CYC) had a decent rally after languishing in 
recent days - don't want to be left behind as the economy may be 
perking a tiny bit according the latest industrial production 
figure (up slightly & not expected to be) and a pick up in Dell 
earnings. 

Gold stocks rallied - XAU advancing 4% on the ongoing tension 
around the Iraqi question and the oil price rise. The sector had 
a new high close for the current rebound.  I continue to think 
that XAU is heading to the 70 area.  

And Retail stocks (RLX) were on a tear to the upside with a 
strong move today - the sector benefited from some good news on 
Target (TGT), which rallied over 9% after reporting a better-
than-expected Q2 profit. Also, Nordstrom  (JWN) ran up almost 12% 
after reporting late-Wednesday an operating profit well above 
analysts' expectations. 

The Oil Index (OIX) & Oil Services (OSX) rallied as the stocks 
responded to crude futures (Sept) climbed 91 cents to $29.06 

Home builders (DJUSHB) had a strong rebound today, with the index 
going from the 310 area at yesterday's close to 328 today.  

UP on Thursday -


 


DOWN on Thursday - 


 


SECTOR TRADE RECOMMENDATIONS -

NEW/OPEN TRADE RECOMMENDATIONS -

NONE

 
TRADE LIQUIDATIONS -

NONE


SECTOR HIGHLIGHT(S) -

NONE 

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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

Ping Pong Markets

Some days you watch from the sidelines and others you get to 
participate in the action. I was very involved in today's market 
action as I was the ball in the ping-pong game between the bulls 
and bears. Fortunately the markets made it two in a row and the 
Dow posted the highest close since July 10th at 8818.


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The Option Investor Newsletter                  Tuesday 08-15-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: None
Dropped Puts: BA, AZO, QLGC, TMX
Daily Results
Call Play Updates: JNJ, NOC, TEVA
New Calls Plays: IBM, ADBE
Put Play Updates: HD, AIG, NKE, PHTN
New Put Plays: BAX

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

BA $37.49 +1.14 (-3.51 for the week)  Boeing has made up some of
its recent losses from the last couple of days.  Bad news from 
American Airlines and United weighed heavily on this stock and 
the prospect of more airlines heading for Chapter 11 does not 
look good either.  After today's bell, however, Boeing staged 
somewhat of a return from the dead, announcing it had landed a 
$9.7 billion contract with the U.S. Air Force for 60 C-17 
aircraft.  This should help it weather the coming storm, and we 
are closing the play with this new infusion of cash from a source 
with little chance of defaulting on its payments.

---

AZO $72.20 +2.95 (+4.92 for the week) The recent run in the 
overall market and strong retail numbers, has lifted AZO through 
our stop loss of $70.  Although the economic data released 
regarding retail sales showed that much of the sales increase was 
in NEW cars and trucks, which is bearish for AZO, investors seem 
to have scooped this stock with the rest of the sector.  The 
trade above the 200-dma of $70.60 has broken resistance and we 
will close the position as we look for better opportunities.

---

QLGC $35.72 +1.50 (-0.18) Negating the negative sentiment in the
Storage sector, BRCD reported positive earnings after the close
last night.  That, along with some decent follow-through to
yesterday's stellar afternoon rally in the Technology sector
pushed QLGC up through our $35 stop at the open this morning.
After meandering both north and south of that level throughout
the day, the bulls finally won the tug of war, enabling the stock
to end near its high of the day.  We're dropping QLGC tonight, due
to our violated stop.  Use any early weakness tomorrow morning to
exit any remaining open positions.

---

TMX $29.61 +0.73 (+1.21) The continued positive tone in the
Technology market on Thursday lent a bid to TMX at the open, but
with the fade of the early rally it looked like we might get a
rollover.  Such was not the case though, as TMX found support
right at the bottom of the morning's gap and powered higher into
the close with the rest of the market.  While our $30 stop wasn't
violated, the fact that the stock went out right at the high of
the day on strong buying volume leads us to believe that stop will
be taken out on Friday.  If you have open positions, consider
closing them at the open, or else honor your stop, whichever fits
your risk profile.


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

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

CALLS              Mon    Tue    Wed   Thu 

ADBE     19.94    0.54  -0.16   1.57  0.67  New, filling gap
IBM      76.50    0.72   0.35   2.97  1.58  New, breakout
JNJ      53.37    0.68  -1.21   2.01  0.47  Higher ground
NOC     111.56   -2.21  -2.55   3.71  0.14  Bounce off 200-dma
TEVA     68.55    1.47   0.64  -0.14  0.35  Relative strength


PUTS               

AIG      62.31   -0.49  -3.20   1.79  1.15  Not strong enough
AZO      66.15   -1.35   0.90   3.10  2.95  Drop, stopped 
BA       37.23    0.35  -3.27  -0.48  1.14  Drop, Air Force Rescue
BAX      35.45   -0.40  -0.91  -1.20  0.05  New, Bad medicine
HD       26.49   -0.32  -0.21   1.38  0.65  Lagging behind
NKE      43.00   -0.63   0.23   1.15  1.05  Order Slowdown
PHTN     18.85   -1.83  -1.02   0.91  0.84  lack of Demand
QLGC     32.14    0.05  -3.15   1.57  1.50  Drop, stopped
TMX      27.65    0.05  -0.40   0.98  0.73  Drop, pattern break


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

JNJ $55.97 +0.47 (+1.46 for the week) Johnson and Johnson has 
continued its rise, trading over resistance at both $55 and $56.  
After being turned back from $55 on four consecutive days, JNJ 
broke through yesterday with a close of $55.50. This also took 
the stock above resistance of $55.30 from June 25.  Today, it 
traded as high as $56.49, before settling at $55.97.  This trade 
placed it on its bearish resistance line of $56 on the point and 
figure chart, and a trade of $57 would put it through, 
establishing a new bullish support line. The stock has been 
establishing higher consolidation levels since hitting $50 at the 
end of July.  The first consolidation was between $50 and $52, 
during the end of July and beginning of August.  This was 
followed by support just over $53.  After JNJ's recent move, the 
new support level looks to be $55, as this served as resistance 
on several occasions.  The series of higher highs and higher lows 
continues on the stock's way toward its bullish vertical PnF 
count of $76.  JNJ is also one of the health stocks that Bill 
Gates has invested heavily in during the second quarter, as 
Cascade Investments, Gates' investment arm, purchased 600,000 
shares.  We will maintain $60 as our initial target on this play.  
However, given recent increasing support levels, this goal may be 
conservative. 

---

NOC $115.51 +0.14 (-1.06 for the week) Northrop Grumman pulled 
back, according to the OI master plan, although the pullback was 
below our target of $113.  The stock's drop to 109.60 made a 
strong case for support at the 200-dma of 109.44.  The bad news 
for the airlines bled into the aerospace sector as well, which 
took NOC down with it.  NOC, however, has a percentage of its 
business tied up in government contracts, and includes a large 
shipbuilding component. While commercial air travel may be taking 
a hit, the diversity of NOC's business should be able to weather 
the storm. NOC delivered its 17th Aegis guided missile destroyer 
to the Navy on Tuesday.  The stock experienced a 4-box reversal 
down on the point and figure chart yesterday, but has rebounded 
with another 3-box reversal up today, finding support on both PnF 
and daily charts at the 200-dma.  Today's close of 115.51 looks 
bullish back above yesterday's high.  The 50-dma of 115.61, which 
provided resistance yesterday, was also crossed intraday.  The 
stock's previous trade of $118 on August 9 broke through the 
bearish resistance line and the bullish vertical count of $150 
remains in tact, however our initial target remains $130.

---

TEVA $68.28 +0.35 (+0.69) While the past 2 days can't be labeled
as bullish for TEVA on the basis of price gains, you certainly
can't fault the bulls for their resilience.  They keep pressing
on the $69 resistance level, trying to gain a breakout.  Although
they haven't yet been successful, it is certainly encouraging
that they haven't given up any ground either.  TEVA has spent the
past 2 days in a fairly narrow $2 range, as support has been
building near the $67.50 level.  With the intraday highs moving
ever higher and squeezing the price action up against the $69
resistance level, it looks like a breakout is just around the
corner.  Use another rebound from support in the $67.50-68.00
area to initiate new positions or else wait for a volume-backed
breakout above $69.25 (today's intraday high).  Don't forget to
keep an eye on the Biotechnology index (BTK.X) to confirm bullish
action in the overall sector.


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

IBM - International Business Machines $76.50 +1.58 (+4.67 for the 
week)

Company Summary:
IBM is the world's largest information technology company, with 
80 years of leadership in helping businesses to innovate. IBM is 
a leading provider of e-business solutions and is dedicated to 
helping customers, IBM Business Partners, and developers leverage 
the potential of the Internet and network computing across a wide 
range of businesses and industries. The company offers a host of 
cross-industry and industry specific solutions designed to meet 
the needs of growing companies. (source: company press release)

Why We Like It:
IBM has been stuck in a consolidation rectangle pattern since the 
last week of June.  It has traded in a range between $66 and $74, 
venturing barely out of the range on only four occasions.  On 
Wednesday ,the stock posted a decisive breakout to close at 
$74.92, after trading as high as $75.02 intraday.  With the $75 
psychological barrier out of the way, Big Blue continued its rise 
with a close of $76.50 on Thursday.  The general rule on 
consolidation patterns is that the longer the pattern takes to 
form, the more significant the breakout. A look at the daily 
chart shows IBM approaching the top of this rectangle ($74) on 12 
different occasions (including 4 in the last week), before 
finally breaking through.  The measuring objective of an $8 wide 
rectangle would be $82 to the upside in this case.  

Although IBM had referred to employee layoffs in its most recent 
earnings report, last night's revelation that the amount would 
total more than 15,000 workers, or 5% of its workforce, showed a 
commitment to cost cutting that investors found encouraging. A 
look at the point and figure chart shows a decisive buy signal. 
The trade of $75 created a spread triple top breakout, followed 
by a break in bearish resistance with the trade of $76. IBM's 
bullish vertical count now sits at $85, and given the pent up 
pressure that has been building in the stock over the last 7 
weeks, this level does not seem unrealistic. This will be our 
initial target on the play, although conservative traders may 
want to take some profits at the measuring objective of $82. The 
congestion around $74 on the PnF chart goes all the way back to 
the triple bottom break down at that level in June.  This should 
now provide support on a pullback in the stock. We will use a 
stop loss of 71.25, as this level is below Wednesday's low of 
$71.35 and below IBM's 50-dma of $71.38.

BUY CALL SEP-75*IBM-IO OI= 14007 at $4.30 SL=2.50
BUY CALL SEP-80 IBM-IP OI=  8350 at $1.80 SL=1.00
BUY CALL OCT-75 IBM-J0 OI= 15483 at $5.80 SL=3.00
BUY CALL OCT-80 IBM-JP OI= 19762 at $3.20 SL=1.60

Average Daily Volume = 8.95 mil


---

ADBE – Adobe Systems $19.94 +0.67 (+2.23 this week)

Company Summary:
A long-time leader in desktop publishing software, ADBE
provides graphic design, publishing, and imaging software
for Web and print production.  Offering a line of application
software products for creating, distributing, and managing
information of all types, the company generates nearly 75% of
sales through publishing software products such as Photoshop,
Illustrator, and PageMaker.  Its Acrobat Reader, which uses
portable document format (PDF) is popping up all over the
Internet, as businesses shift from print to digital
communications.  In addition, ADBE licenses its industry
standard technologies to major hardware manufacturers,
software developers, and service providers, as well as
offering integrated software solutions to businesses of all
sizes.

Why We Like It:
Remember the Software sector?  This had been one of the weakest
sectors in the market as it fell to new lows last month, but
since then, we're starting to see some encouraging signs.  After
bottoming near the $84 level in late July, the GSO index has
been clawing its way back and we have the potential of a Head &
Shoulders bottom in the making with its impressive rally through
the $91 level yesterday.  Shares of ADBE have been one of the
hardest hit Software stocks, but even it is showing some strong
bullish signs.  After falling to the $16.50 level in the wake of
its earnings warning on July 31st, the stock has been marking
time, unable to move up or down.  Up until this week that is.
Helped along by the strong broad market recovery yesterday
afternoon, ADBE rallied through the $18.50 level, moving into
the gap left behind when the company warned.  Now that it has
moved into the gap, and with the improving technical condition
of the GSO index, it appears that the stock wants to close that
gap.  With the top of that gap up at the $24 level, there is
plenty of room to profit from the move.  Clearly we're looking
for the overall market to continue its current rally, so we're
going to play this one with a tight stop set at $18.  The best
case for new entries will come with a dip and bounce at recent
support near $19, or possibly as low as $18.50, the site of the
previous upswing high.  If the rally continues without pause,
aggressive traders can look to enter the play on a breakout
through the $20.25 level, just above Thursday's high.  Monitor
the GSO index for signs of continued strength before playing,
ensuring that it doesn't fall back below $90 before rebounding.

BUY CALL SEP-17 AEQ-IW OI=368 at $3.50 SL=1.75
BUY CALL SEP-20*AEQ-ID OI=502 at $1.95 SL=1.00
BUY CALL SEP-22 AEQ-IX OI=136 at $1.00 SL=0.50
BUY CALL OCT-20 AEQ-JD OI=255 at $2.75 SL=1.25
BUY CALL OCT-22 AEQ-JX OI=247 at $1.65 SL=0.75

Average Daily Volume = 5.04 mln



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

HD $28.93 +0.65 (+0.64 for the week) Home Depot has continued its 
struggle under $30.  Despite a recent surge for the retailers, 
with Wal-Mart up $7 in the last 2 days, Target up $4 in the last 
2 days, and  Lowe's up $3.75 in the same period, Home Depot has 
managed a gain of just over $2.00, and remains in a sideways 
pattern.  The recent revelation that Bill Gates has bought 1 
million shares was figured into that rally, which makes it look 
paltry by comparison. Home Depot is going to have to post decent 
sales and revenue numbers before finding buyers en masse again.  
If the retail surge and endorsement from the Microsoft Chairman 
can't help HD out of its funk, things do not look promising in 
the near term.  Tomorrow's preliminary consumer sentiment number 
could be bearish for this stock if it comes in below expectations 
of 89.0.  Keep an eye on building permits and housing starts as 
well. While new home purchases don't necessarily mean new 
business for Home Depot from homeowners, signs of weakness in the 
housing sector could drag it down, as those working on the new 
homes would not be shopping as heavily for supplies.  A pullback 
in the Dow could put this stock into the low 20's, as the recent 
strength has no doubt propped up this component.  We will 
maintain our short position in HD, with a stop loss of $30.

---

AIG $65.00 +1.15 (-1.95) Well, our AIG play certainly isn't
playing out the way we envisioned.  Yesterday's drop at the open
is the only bearish action we've seen since we initiated
coverage, with yesterday's afternoon ramp pushing shares of the
insurer back up to the $64 level on strong volume.  As was the
case in the broad markets, AIG had a rather directionless day on
Thursday after the opening gap, but after meandering in a fairly
tight range, managed to hold onto another 1.8% gain at the close.
With heavy open interest at the $65 strike it is entirely
possible that the pros will attempt to keep it pinned there on
Friday, in the absence of any other over-riding news developments.
Note that our stop remains in place at $65.50 and following the
bullish action of the past couple days, we don't want to initiate
new positions unless the bears can prove they are serious by
driving AIG back under the $64 level.  If the broad market
continues in rally mode on Friday, it will more than likely
propel AIG through our stop, meaning we'll have to drop it over
the weekend. 

---

NKE $45.30 +1.05 (+1.38) The mind-numbing rally off the lows
Wednesday afternoon gave a hint that the certification event
might be a non-event, and indeed it was.  Shares of NKE went
along for the ride into the close, helped in part by the
improving sentiment in the Retail sector, created by WMT's
solid earnings report.  NKE ramped higher into the close, but
promptly reversed course at the open this morning on news of a
significant decline in the future orders from Foot Locker, NKE's
largest customer. After trading briefly down to the $41 level,
the dip was over almost before it began, as NKE spent the
remainder of the day marching higher, capping it off with a
strong spurt of buying into the close.  Can you say volatility?
Such is the character of expiration week.  If you're wondering
if this is the end of the decline in NKE, you aren't alone.  NKE
saw heavy trading volume throughout the day, both on the early
decline and on the subsequent rebound.  It should come as no
surprise, that the stock came to rest right at its high of the
day, and at solid resistance near $45.40.  A continuation of
this afternoon's rally will likely take out our $46 stop, while
a rollover could have the stock testing its recent lows.  Stick
to your stops on further strength, and wait for a decline under
the $44 support level before initiating new positions.

---

PHTN $20.81 +0.84 (-1.63) Despite the recent bearish news in the
Semiconductor sector (SOX.X) buyers showed up in droves to buy
even this beaten-down sector when the broad markets reversed
yesterday afternoon.  PHTN's advance of its lows was rather tepid
yesterday, but the bulls followed through today, tacking on more
than 4%.  PHTN is now nearing significant overhead resistance
near the $21 level, backed up by the bottom of Monday's gap at
$21.70.  We can use a failure of the current rally below that gap
as a confirmation of our bearish stance and consider initiating
new positions on that rollover.  If PHTN moves into that gap
though, it is highly likely that it will push through our $22
stop.  So while aggressive traders can enter on the failed rally,
those with a more conservative bent will want to see the stock
fall back under the $20 level before entering.  Regardless of
your strategy, make sure the SOX is showing signs of weakness
before playing.


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

BAX – Baxter International $35.45 -0.05 (-2.44 this week)

Company Summary:
Baxter engages in the worldwide development, manufacture and
distribution of a diversified line of products, systems and
services used primarily in the healthcare field.  BAX's products
are used by hospitals, clinical and medical research laboratories,
blood and blood dialysis centers, rehabilitation centers, nursing
homes, doctor's offices and by patients at home, under physician
supervision.  The company manufactures products in over 28
countries and sells them in over 100 countries.

Why We Like It:
Despite the improving tone in the broader markets, Pharmaceutical
stocks (as denoted by the DRG index), just can't seem to make any
headway.  Perhaps it has something to do with the fact that the
DRG index is back to the point of its major breakdown at $308-315,
now the site of multi-year resistance (broken support).  Whatever
the cause, the DRG index has run into a veritable brick wall near
$308 for the last 5 days.  That's a marked divergence from the
broader market, which has broken out to new highs for this rally.
We featured shares of BAX on the call list last month, as it was
recovering from its lows near the $30 level.  It now looks like
that rally attempt has run its course, with the stock showing
significant weakness, even in contrast to the DRG index.  Sliding
lower throughout the week, BAX is back to the $35 level.  Note
that after drifting below the July 29th gap this week, that gap
came into play again today, with the bottom of the gap (near
$36.50) acting as resistance.  The pattern of lower highs and
lower lows over the past 2 weeks is pointing to another breakdown
in the stock.  Use a failed rally below the descending trendline
(currently $37) or a breakdown under $34.75 to initiate new
positions, and set stops at $37.50.  Monitor the DRG index to
confirm bearish action in BAX before playing.

BUY PUT SEP-40 BAX-UH OI= 64 at $5.40 SL=3.25
BUY PUT SEP-35*BAX-UG OI=916 at $2.25 SL=1.00
BUY PUT SEP-30 BAX-UF OI=280 at $0.80 SL=0.25

Average Daily Volume = 4.03 mln



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The Option Investor Newsletter                  Tuesday 08-15-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CALL - IBM
Traders Corner: Pattern recognition - Continuation patterns: Flags
Additional Traders Corner: Bond Basics, and then some
Options 101: Bull Confirmed?; Betting Against the Prince; Option Expense 
Perils

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

IBM - International Business Machines $76.50 +1.58 (+4.67 for the 
week)

Company Summary:
IBM is the world's largest information technology company, with 
80 years of leadership in helping businesses to innovate. IBM is 
a leading provider of e-business solutions and is dedicated to 
helping customers, IBM Business Partners, and developers leverage 
the potential of the Internet and network computing across a wide 
range of businesses and industries. The company offers a host of 
cross-industry and industry specific solutions designed to meet 
the needs of growing companies. (source: company press release)

Why We Like It:
IBM has been stuck in a consolidation rectangle pattern since the 
last week of June.  It has traded in a range between $66 and $74, 
venturing barely out of the range on only four occasions.  On 
Wednesday ,the stock posted a decisive breakout to close at 
$74.92, after trading as high as $75.02 intraday.  With the $75 
psychological barrier out of the way, Big Blue continued its rise 
with a close of $76.50 on Thursday.  The general rule on 
consolidation patterns is that the longer the pattern takes to 
form, the more significant the breakout. A look at the daily 
chart shows IBM approaching the top of this rectangle ($74) on 12 
different occasions (including 4 in the last week), before 
finally breaking through.  The measuring objective of an $8 wide 
rectangle would be $82 to the upside in this case.  

Although IBM had referred to employee layoffs in its most recent 
earnings report, last night's revelation that the amount would 
total more than 15,000 workers, or 5% of its workforce, showed a 
commitment to cost cutting that investors found encouraging. A 
look at the point and figure chart shows a decisive buy signal. 
The trade of $75 created a spread triple top breakout, followed 
by a break in bearish resistance with the trade of $76. IBM's 
bullish vertical count now sits at $85, and given the pent up 
pressure that has been building in the stock over the last 7 
weeks, this level does not seem unrealistic. This will be our 
initial target on the play, although conservative traders may 
want to take some profits at the measuring objective of $82. The 
congestion around $74 on the PnF chart goes all the way back to 
the triple bottom break down at that level in June.  This should 
now provide support on a pullback in the stock. We will use a 
stop loss of 71.25, as this level is below Wednesday's low of 
$71.35 and below IBM's 50-dma of $71.38.

BUY CALL SEP-75*IBM-IO OI= 14007 at $4.30 SL=2.50
BUY CALL SEP-80 IBM-IP OI=  8350 at $1.80 SL=1.00
BUY CALL OCT-75 IBM-J0 OI= 15483 at $5.80 SL=3.00
BUY CALL OCT-80 IBM-JP OI= 19762 at $3.20 SL=1.60

Average Daily Volume = 8.95 mil



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

Pattern recognition - Continuation patterns: Flags
By Leigh Stevens
lstevens@OptionInvestor.com

CONTINUTATION PATTERNS - 
The word continuation comes of course from the verb "to continue" 
– in technical analysis continuation patterns "consolidate" the 
prior movement within the dominant price trend. After an initial 
strong move up or down, there is typically a countertrend or 
sideways price movement before the trend renews itself and 
continues in the same direction as before the consolidation.   

After buying interest or selling interest has been satisfied, 
some participants with profits exit part or all their positions. 
Hence the idea of "profit-taking" that the financial press likes 
to say is something that goes on all the time - we wish there was 
as many profits taken as they say there is! 

The investors and traders on the losing side, who bought high and 
sold low, are trying to also help themselves – but in their case 
it’s to reduce their losses.  For example, in a decline, those 
long have decided to get out if they can sell on a rally at a 
higher price than the recent lows and will use future rallies to 
exit. In an advancing trend, those short will use price pullbacks 
or dips to exit or cover their short positions.   

This back and forth movement, after the initial strong surge of a 
trend, is what creates a consolidation pattern. The common types 
of consolidations are:
- flags
- triangles
- rectangles 

In this first of a series on continuation patterns, I will focus 
on bulls and bear FLAG formations. 

FLAG PATTERNS -
Flag patterns are very common continuation patterns and are 
considered bullish in an uptrend and bearish in a downtrend.  
Flags, and a variety of flag called a pennant – although I find 
it easier to just label them all "flags" -- are relatively short-
term sideways consolidations of or after a prior sharp move in 
prices. 

We need to think of duration in terms of the number of trading 
periods we're looking at (i.e., bars or candles) for the time-
frame we are looking at. So, a flag is formed over a duration of 
only 3-6, up to perhaps 20, periods. This could be 3-6 hours, 
days or weeks.      

A flag pattern’s outline is formed by a series of relatively 
narrow price range sessions AFTER a sharp, but relatively short, 
price spurt – the more or less "straight up" or "straight down" 
nature of this spurt resembles a "flagpole": long and narrow. 
These consolidations occur near the top or bottom of the first 
price spurt (pole).  

The narrow ranges that form the narrow price swings of the "flag" 
have tops and bottoms that allow drawing trendlines across the 
highs and lows – the two resulting trendlines will usually if not 
always slope in the opposite direction from the trend.  

Some examples can be seen in the following charts - as usual with 
technical or classical chart analysis a picture is worth a 
thousand words.



 

A flag formation composed of two sloping trendlines set rather 
close together, will generally slope against or opposite to the 
dominant trend.  Slope is not relevant to the "pennant" variation 
as it makes a triangular shape, but is usually of significantly 
shorter duration than a "triangle" pattern - which I will 
describe and discuss in my next week's Trader's Corner column.  

In an uptrend the slope of a flag will be down and in a downtrend, 
the slope of the flag will be up.  I find this rule less true in 
the commodities markets but quite true in stocks.   So generally 
we could say that when the thrust creating the "flagpole" is up 
and a subsequent flag slopes down, this pattern is a bull flag.  
When the thrust is downward and a subsequent flag formation slopes 
up, this pattern is called a bear flag.   

When a market is in a rapid price move and forms a series of 
flags, one after the other, there may not be a well-defined 
"pole" pattern as you can see below:
 


 


There is a measurement implication for the height of a further 
move after the breakout  – this minimum upside or downside 
objective is equal to the height of the "flagpole" added or 
subtracted to the breakout point – see the charts below. 
 


 


A more recent example is provided in the QQQ chart - at first it 
seemed that the upside objective implied by its bullish flag 
would NOT be met. 



 


I find the measuring method for a flag price objective to be 
quite accurate usually and flag patterns are among my favorite 
finds when I run across them - AND I’m in time to buy/sell the 
breakout and take a quick profit hopefully on the next run up.  

The stop out point, if the pattern fails, is just the other side 
of the breakout point -- which should be quite near the entry 
point if you buy only if prices exceed the breakout line (across 
the top or bottom of the "flag").  

My favorite trade is when the risk to reward ratio can be 
estimated at 3-4 to 1; i.e., for every dollar risked you can 
project a minimum upside profit of 3-4 times this based on the 
flag "breakout" objective. A series of reliable sell signals was 
provided by the series of flag formations seen on the chart 
below.



 
  

The measuring implication for the flag pattern is really a 
variation of the measured move concept – this is the rule of 
thumb that says that a next price swing will at least equal the 
extent the prior move.  Remember too that the measurement is a 
minimum objective only - but one that, if achieved, would make 
the next price swing at least equal to the prior swing.  

And, the subsequent price swing may be far greater than this 
minimum objective as we know, but having a minimum is valuable in 
order to establish some parameters as to price potential.  If a 
minimum move that I can somewhat reliably project is $30, I can 
see that a maximum could easily be $90.       

A flag that forms near either extreme in a trading range will 
usually be significant.  If a bull flag forms at the top end of 
recent price swing, it suggests there may be enough new buying 
coming in to kick off a second up "leg".  The reverse would be 
true at the low end of a trading range – a bear flag there would 
suggest that another secondary downswing could be starting.       


*************************
ADDITIONAL TRADERS CORNER
*************************

Bond Basics, and then some
By John Seckinger 

Have you ever wondered about the relationship between fixed-income 
securities and equities? Curious on how bonds are priced? 
Struggled with the concept of price, yield, and interest rates? 
Left puzzled why traders follow bond futures? Lost entirely on the 
concept of a yield curve?  If so, this article is for you. 

When somebody says “bonds”, what could they be talking about?  In 
the general sense, A certificate of debt issued by a government or 
corporation guaranteeing payment of the original investment plus 
interest by a specified future date.  When I say “bonds”, I am 
only referring to United States Treasury Bonds, unless otherwise 
noted.  So, what is the definition of a U.S. Treasury Bond?  A 
negotiable, coupon-bearing debt obligation issued by the U.S. 
government and backed by its full faith and credit, having a 
maturity of more than 7 years (if less than 7 years, the correct 
term is Treasury Notes). Interest on Government Bonds is paid 
semi-annually and exempt from state and local taxes.   



 

How does one calculate Yield?

For bonds and notes, it is the coupon rate divided by the market 
price.  

30-year yield at 4.91, equal to 5.375/107-02.  Remember 2/32 is 
0.06
So, are YIELDS and interest rates the same?
No.  A good practice is to watch the relationship between what the 
FOMC was doing and how YIELDS reacted.  A bond’s YIELD does not 
have to fall with interest rates, seen in practice as the Fed has 
raised rates while YIELDS actually fell.  YIELDS can have a life 
of their own, representing investor psychology and reflecting a 
perception of risk used to “grade the Fed” on how their monetary 
policy is working. Remember, in late 1999-early 2000, it sure 
didn't make sense that an investor would pass up stocks that were 
generating 30% annual gains for a small 30-year YIELD of 6.5%, 
then 6%, then 5.75%, especially when the Fed was RAISING interest 
rates.  Only in the past year do we find out "why" the MARKET was 
buying the higher YIELDS.  This was one example of Treasury YIELDS 
being a leading indicator to equity valuations.

The chart below should give a good illustration of how YIELDS and 
Rates differ:




 

As shown, the 30-year YIELD does not always track interest rates.  
Please keep this in mind down the road.  
Some Intermediate Concepts:
1.  Bonds with longer maturities fall or rise more than bonds with 
    shorter maturities. If, for example, interest rates fall 1%, 
    the price on a 20-year bond will rise more than a 5-year bond.

2.  Bonds with lower coupon rates will also move more in price than 
    bonds with higher coupon rates. The coupon rate is the 
    contractual interest obligation that a bond pays, usually    
    semi-annually. If interest rates rise, for example, a 9% bond 
    will not fall in price as much as a 4% bond

3.  Credit risk is the fourth determinant of all bond prices. 
    Credit risk is primarily the ability of the bond's issuer to 
    maintain interest or coupon payments on time and to repay 
    principal amounts on schedule. Credit risk can be gauged by a
    reputable bond rating agency such as Standard and Poors. A    
    ratings change from, say AA to BB, can seriously hurt the 
    price of the bond being downgraded.  BBB and higher are 
    referred to as Investment Grade.
A chart of the different maturities will produce a yield curve:  


 
A situation in which long-term debt instruments have higher yields 
than short-term debt instruments is referred to as a positive 
yield curve.  This is common.  If, however, long-term interest 
rates have lower yields than short-term interest rates, this is 
called a negative yield curve.

When the curve gets more positive, the term is “steepening”.  This 
can be done a variety of ways, but usually I look for buying of 
shorter-term maturities (lowering yields) and selling of longer-
term maturities (raising yields).  This could be analogous to 
lowering your left hand and raising your right.  The opposite is 
called “flattening”.  Unfortunately, curves steepen and flatten 
for a variety of reasons and there is no cookie-cutter reason.  
Currently, it seems as though investors are risk averse, 
preferring shorter-dated maturities and lowering long term 
exposure to either a depreciation of the U.S. dollar or lowering 
confidence.    

To get a yield curve number, use the formula below:  

Using cash quotes (see above), five-year is quoted at 100-08 
(110.25)
			             ten-year quoted at 102-11 (102.34)

I then multiply the 110.25 by 6, resulting in 661.50.  
The ten-year quote (102.34) is multiplied by 4, resulting in 
409.36

Subtracting the two (661.50 – 409.36) we get 252.14.  I encourage 
“bond followers” to calculate such a curve daily, eventually 
getting a sense of what numbers are psychologically important.  
Unfortunately, I do not have a chart available.  So, what can a 
trader do with such information then?  Look for patterns, and make 
mental notes such as:

From the 252.14 calculation, how does the stock market react if 
the number falls or rises?  Is the number rising by traders buying 
five-years, or is it longer-maturities that are coming under 
selling pressure?  Does the number get lower when trading is 
quiet?  Can I use this number for longer time periods?  What 
happens to the yield curve when the Fed does a refunding?  (Ok, 
that was unfair for me to throw an advanced concept in – grin).   

How are bonds priced?  

By textbook definition, the value of a bond equals the present 
value of its expected cash flows.  What is the definition of 
present value?  The current value of one or more future cash 
payments, discounted at some appropriate interest rate.  The 
buzzword I hope you picked up on was “appropriate interest rate”, 
since this rate fluctuation influences Present value.  This is 
what is called Time Value of Money.  When pricing bonds in the 
secondary market (remember from Finance 101, the Primary market is 
when a company goes public – IPO, while the secondary market is 
when an investor purchases a security from another investor rather 
than the issuer), the variables to consider are:  current market 
price of bond, number of years to maturity, annual coupon payments 
(remember: coupon payments do not change), Yield to Maturity, and 
par value.  

Ready for an example?  

The Present Value of a Bond	
=	
The Present Value of the Coupon Payments (an annuity)	
+ 	
The Present Value of the Par Value (time value of money)

Example

Par Value = $ 1,000
Maturity Date is in 5 years
Annual Coupon Payments of $100, which is 10% (100/1,000)
Market Interest rate of 8% - The Key Variable.  

The Present Value of the Coupon Payments (an annuity) = $399.27

The Present Value of the Par Value (time value of money) =$680.58

The Present Value of a Bond = $ 399.27 + $ 680.58 = $1,079.86

Unfortunately, there is not a simpler way to calculate the price, and I 
did spare the reader from looking at Present Value charts.   

Looking at the inverse relationship between interest rates and price 
Let’s say that you buy some OI bonds at 8%.  Then, say PI issues a 
bond that pays 8%.  The bonds will be the same cost since equally as 
attractive.  Now suppose that the economy deteriorates and interest 
rates fall to 6%.  Remember, the OI and PI bonds still pay 8% while 
the overall market can now only offer 6%.  OI and PI Bonds will then 
demand more than what they did before (called a premium).  However, 
investors that pay more to get the 8% (or 8 dollars per bond if par 
is 100) will still get a 6 percent return.  Why?  Let’s say the OI 
and PI bonds went from par of 100 to 133 dollars.  Then take the $8 
(coupon) and divide by 133.  Then multiply by 100.  This equals 6 
percent.  Of course, the OI and PI holders have a 33% capital gain 
they have to contend with.  Note:  I would re-read this paragraph a 
few times to get a solid grasp of the concept.  

So, what are bond futures? 

The September Bond (USU2) is a standardized futures instrument 
traded in Chicago as a hedging instrument for cash traders.  A 
futures account allows you to buy/sell a contract for much less 
than the 111-05 (111,050), with margin roughly 3,000 per bond 
contract.  Every tick (1/32) takes or adds 31.25 into your 
account.  There are no dividends paid, and very few traders hold 
the bond until delivery.  Futures, by definition, gives traders an 
idea where yields might be down the road.  

The “U” stands for September.  

The other main months are: Z for December, M for June, and H for 
March


 

What about the relationship to equities?   
Usually, periods of lower interest rates occur in parallel with rising 
stock.  Why? Under normal conditions, rising bond prices are a net 
positive to the stock market. Complex reason: The present value of a 
company's future cash flow becomes greater as interest rates fall. When 
the bond market and stocks move in opposite directions, usually we are 
in either (a) a deflationary period, or (b) experiencing a credit 
bubble. 

Looking at the following two charts (the dates should line up), the 
correlation may not be perfect; however, there is reason to believe 
that, in general, lower interest rates spell out higher equity prices.




 

   


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OPTIONS 101
***********

Bull Confirmed?; Betting Against the Prince; Option Expense Perils
Buzz Lynn
buzz@OptionInvestor.com

. . .And other tails of mystery and imagination.  Well, not 
really.  Originally, I'd planned to do a stream of consciousness 
tonight.  But upon reflection I figured that a more meaty, 
concise, and focused effort would be more useful.  After all, at 
the end of a stream of consciousness, the reader is usually 
unconscious, maybe even comatose with eyes glazed over.  Besides, 
nobody likes a writer-induced nap, especially the writer with a 
deadline!

Anyway, three items have grabbed my attention lately.  Today's 
confirmation of a Baby Bull is the most recent.  But I've also 
been stewing a bit since last week on a Richard Russell (Dow 
Theory Letters) snippet I received from a trading buddy, and a 
longer-lasting topic of expensing options.  On the latter, my 
focus has been in trying to answer the question as to why INTC and 
MSFT have declined to expense options in their income statement.  
None of this is rocket science, which we'll get to in a minute.  
But first. . .

Bull Confirmed?

We touched on this topic last week in the article about Baby Bull 
taunting Big Bear.  If you missed it last week, t can be found 
here: http://members.OptionInvestor.com/options101/080802_1.asp.  
Anyway, strange as it may seem since I've been leading the secular 
bears' chorus for the last year and a half, today I can sing with 
the bulls.  So how is that Fundamentals Guy drew this conclusion 
while building the ark for rough seas ahead?

Remember from last week, we know that cyclical bull markets can 
occur for weeks or even months within a larger bear market, and 
vice-versa (see 1997 and 1998).  While cyclical markets do not 
reverse the bigger market trend, they can certainly trick a number 
of unsuspecting investors into believing that happy days are here 
again.  Don't bet on it.  As earlier noted, consider this a 
potential day of sunshine between storm fronts.  

Now, about that sunshine - how do we know?  Like last week, let's 
go the Dow chart.

Dow Industrial chart - INDU (weekly/daily/60):


 


First, with the weekly chart, we can see the continuation of green 
candles and continuation of the rising stochastic on both the 5 
and 10 period lookbacks - bullish.  Aside from that, we see the 
breakout of today's green candle on the daily chart - bullish.  
While the daily stochastic is bobbling a bit around overbought, 
doesn't that look promising?  Careful.  The 60-min chart shows an 
ascending wedge, usually considered bearish.  But the 60-min chart 
deserves even more examination.  Is it really bearish?  Let's see 
by expanding it a bit.

Dow Industrial chart - INDU (60-min):


 


Hmmm. . .interesting.  On the 60 min chart, the Dow is at a 
crossroads.  We can't tell if the ascending pennant will drive the 
index temporarily bearish, or if the ascending wedge will drive 
the Dow bullish.  Though we don't see it on this particular chart, 
the 50-dma is just under 9000 and could act as strong resistance.  
Should the Dow clear 9000, I would say the bull is confirmed.

Furthermore, the ascending lows tell us that the trend is back up, 
though one more decline to 8400 might signal the next bullish 
buying opportunity.

What else for evidence?  Point and figure chart tells the same 
story with a triple top breakout.  For traders, this isn't a 
daytrade event.  But as a measure of risk and reward, the risk is 
now much reduced with the reward much higher thanks to the column 
of "X's".  The math: 9 "X's" times a 50 point box times 3 equals 
1350 points, plus 8450 equals 9800 price objective - bullish.  

That doesn't mean it will get there and if it does, it won't do so 
in a straight line.  But it is nonetheless bullish for the short-
term investor.  For the day or position trader, wait for the 3-box 
of "O's" pullback to line up with a stochastic oversold pullback 
to support.

Woops!  This just in, Ralph Acampora has called a bottom to the 
market!  For those who don't know Ralph, he was wrong at almost 
every turn over the last three years and quit making CNBC 
appearances because his prognostications became such a joke in the 
marketplace.  He made a great contrarian indicator.  Oh, well, 
maybe I should stay bearish %^)

Betting Against the Prince

What Prince?  Prince Alwaleed bin Talal bin Abdulaziz al Saud, 
etc. of course.  He's the Saudi Prince, who in most un-princely 
fashion bucked royalty to hustle large mid-east construction 
projects to earn his first billion dollars.  From there he 
branched out into passive investing large dollars in U.S. 
companies, most notably Citicorp, Disney, and AOL, and in the not 
so notable Teledisic and Priceline.com.  His wins in the first 
three make up for the losses on the latter two, though he would 
argue, ala Warren Buffet, that it isn't a loss until sold.  He has 
been very successful in the real estate development business too.  
Anyway, I can't argue with a $10 bln (give or take a few) net 
worth.  He has done well.

But I fear that his U.S. stock fortunes may be in danger, as may 
anyone's who also has a stake in C, DIS, or AOL.  Here's the deal.  
There has been innuendo and scuttlebutt - the U.S. government has 
not done a good job of keeping this a secret - that we could 
freeze Saudi Assets in the U.S. as a penalty on the Saudi's 
(mostly royalty, but who's discriminating?) for "harboring and 
sponsoring" terrorist acts against the U.S.  As a prince who 
earned his fortune the hard way, Alwaleed won't get any favorable 
treatment.  I might add that 600 families of 9/11 victims filed 
suit against the Saudi government today seeking $1 trillion in 
damages.  It's clearly heating up.

That said, if I were a prince, or any Saudi royalty for that 
matter, with assets about to be frozen in the U.S., would I sit 
idly by?  I don’t think so, Tim!  I'd be getting those shares off 
shore or sold and taking the cash off shore, or partially sold and 
taking the cash off shore.  Common element?  Getting the holdings 
out of the U.S.  Richard Russell brought this up last week, and it 
could amount to hundreds of billions of dollars or even $1 
trillion.  That is clearly not good for stocks in general just 
because of the sheer volume, but it might be particularly tough on 
C, DIS, and AOL (as if they didn't have enough troubles of their 
own) if word got out that the prince was selling.  It won't matter 
why.  When word gets out that a huge holder is liquidating shares, 
the twitchy are prone to sell now and ask questions later. . . 
something to think about if you own any of these three or others 
in which the prince is involved.  Caveat Emptor.

Option Expense Perils

Here's something else that's been bugging me for weeks.  That is, 
the failure of supposedly respectable companies failing to 
implement a policy of reporting employee stock options as an 
expense.  While Coke and General Electric have taken the high road 
and announced their intent to expense options, Microsoft and 
Intel, most notably have stated their intent NOT to do so.  Funny, 
this comes from respected tech companies who's earnings have taken 
a hit in the last 28 months.

Oh wait, did we just swerve into something noteworthy?  Their 
earnings have taken a hit in the last 28 months without expensing 
options?  By definition, wouldn't their earnings be lower than 
already announced, along with their guidance in coming quarters?  
Yes, is the correct answer.

Now here's something else I learned from John Mauldin in his 
August 1st letter (www.2000wave.com - a free read and worth 
infinitely more than every penny!):

"We did a simple spreadsheet. We analyzed the 15 largest NASDAQ 
companies, which represent about 37%, give or take, of the $2 
trillion NASDAQ index. We input their 2001 pro forma profits, 
their real profits, the fair value of the options expense and then 
let the computer tell us what affect this would have on their 
Price to Earnings ratio (P/E). (I rely upon the Bear Stearns 
report for the pro forma earnings and options expenses. The rest 
is from Yahoo/Finance, or company reports.)"

"But as an example, Microsoft had pro forma (operating) earnings 
of $11 billion, and real bottom line earnings of $7.3 billion.
 They also had $3.3 billion of option expense. At today's price, 
they have a P/E of 34.  Option expenses reduced their income by 
46%. This would increase the P/E to 63, based upon 2001 earnings." 

"For the group of 15 firms, total 2001 pro forma earnings added up 
to $25 billion. Real earnings were about half, or $13 billion. But 
total option expenses for the 15 firms were $12.5 billion. That 
means pro forma income was cut in half, and real, Honest-to-Pete 
profits were a mere $423 million, give or take a few million."

"These 15 firms have a total market cap of roughly $750 billion 
(the total value of their stock). That means the combined P/E 
ratio based upon 2001 earnings which deduct option expenses, and 
using their stock price today, is a little north of 1,789!"

"I should note that Comcast and Cisco do bring the average 
down. If you take away their $4.8 billion losses (after option 
expenses), the P/E after options expenses is a far more reasonable 
142."

"I should also note that if you take away Microsoft, the combined 
earnings of the remaining 14 is a NEGATIVE $3.5 billion. That 
means 14 of the largest NASDAQ firms could not combine to make a 
profit, if you deduct the expense of their options. Seven of these 
firms had negative earnings once options were deducted."

There you have it folks; data to match your hunch.  Collectively, 
these companies made no money even during their heyday.  They are 
worse off now, and to expense options is to admit much lower 
(MSFT) or no (nearly all others) profitability.  That, in my 
opinion is why we will not see tech companies expensing options 
anytime soon.  Caveat emptor here too.

Tales of Mystery and Imagination

Just for fun, I have to share this e-mail I got from a good friend 
of mine who works in a publicly traded company that supplies 
industry, from high tech to low tech, with raw materials.  
Apparently they just got some new software!  This is the Mission 
Statement:

"The Enterprise Design is an evolving sum of SAP functionality, 
configured for the processes that are intended to be globally 
consistent.  We will use versions of the Enterprise Design to 
designate the addition of functionality as we build on to the 
design. Each version will have a defined scope, and eventually the 
Enterprise Design version "n" will be equal to the functionality 
envisioned in the Global Blueprint (the definition of Company X's 
intended end state scope of functionality for the entire 
business)."

Anybody get that?  Me either.  But it reminds me of a maxim noted 
by John Rutledge (money manager, economist, Forbes columnist) many 
years ago.  "Every new buzzword introduced and used in the 
boardroom is good for a 10% decrease in earnings."  Umm, lets 
see...Enterprise Design, functionality, global consistency, 
version "n", envisioned, Global Blueprint...look for earnings to 
fall by more than half! ;^)

That's it for now.  Make a great weekend for yourselves!

Buzz


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