Option Investor
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Daily Newsletter, Monday, 08/19/2002

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The Option Investor Newsletter                   Monday 08-19-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Up Up and Away
Index Trader Wrap: WHY SO STRONG?
Weekly Fund Wrap: Second Straight Weekly Advance
Traders Corner: Reflections on Relative Strength and Divergence
Index Trader Game Plans: THE SECTOR BEAT - 8/19

Updated on the site tonight:
Swing Trader Game Plan: Up on Bad News Again?


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
08-19-2002               High    Low     Volume Advance/Decl
DJIA     8990.79 +212.73 8994.12  8753.52 1536 mln  1874/869
NASDAQ   1394.54 + 33.53 1397.06  1359.14 1574 mln  1977/1317
S&P 100   480.84 + 12.40  481.21  467.67   totals   3851/2186
S&P 500   950.70 + 21.93  951.17  927.21
RUS 2000  401.29 + 5.32   401.50  395.39
DJ TRANS 2364.02 + 24.62 2368.97  2326.32
VIX        31.57 -  1.25   33.41  30.89
VIXN       47.02  - 2.41   45.57  50.57 
Put/Call Ratio 0.82
*******************************************************************
Up Up and Away
by Steven Price

Up, up and away.   That is how this market has appeared recently.  
The Dow, S&P 500, Nasdaq 100 and Nasdaq Composite have all 
crossed significant levels today.  The 50-day moving average is a 
mark that has not been crossed in the Dow since May, in the S&P 
500 since April, in the Nasdaq 100 since March and in the Nasdaq 
Composite since April.

The patterns have all arrived at the same point on the same day, 
which is significant, and the double bottom patterns on all four 
charts now appear to be signaling a possible true bottom.  The 
patterns are slightly different, however.

A look at the Nasdaq patterns both show a tight, long-term 
descending channel.  The indices both experienced a break from 
these channels last Wednesday, and the hold above the upper trend 
lines on Thursday and Friday appeared bullish.  The NDX still had 
both the 1000-point barrier looming above, in addition to the 50-
dma of 999.28. Today, it crossed both of these resistance levels.  
A look at the NDX bullish percentage shows that 56% of the 100 
stocks in this index have now established point and figure buy 
signals, as well, which confirms the bullish signals we are 
seeing from the daily charts. This is a 10% increase from the 
close of business Friday.

Chart of the NDX



 



Looking at the Nasdaq Composite, the index has broken its 
descending channel and crossed its 50-dma, however it still has 
round number resistance at 1400 looming above.  The index gained 
33.53 points, to close at 1,394.54, as tech giants Microsoft 
($51.99 +1.99) and IBM ($82.94 +3.14) carried the rest of the 
sector with them.

Chart of the Nasdaq Composite


 

A look at the Dow and S&P 500 shows a series of higher highs and 
higher lows that fit neatly in the ascending channel begun with 
the 488 point gain on July 24th in the Dow, accompanied by a 45 
point gain in the S&P.  These ascending channels appear more 
bullish than either of the Nasdaq based indices, which have just 
recently broken out of descending channels, so investors looking 
to jump on the bandwagon may want to focus on old-school stocks, 
until the Nasdaq indices establish their own trend.  

Chart of the S&P 500


 


Chart of the Dow


 



Let's look at the long-term picture, now that we have established 
what appears to be a new ascending trend.  The next significant 
level in the Dow is now 9000.  A move above that level would most 
likely take the group over 9100, where it would approach a 38.2% 
retracement of its loss since it topped put at 11,750 in January 
2000.  A look at the big picture, since that high, certainly 
shows plenty of room to the upside. The other thing a look at the 
monthly chart shows is a possible double bottom last September 
and this past July.  This is not a textbook pattern, since the 
second drop landed below the first, however there are 30 stocks 
in the average, so we must allow for individual variations within 
the group.

Chart of the Dow Monthly Retracement


 

This morning started out with a release of the Conference Board's 
Leading Economic Indicators for the month of July.  The index was 
down 0.4%, which looked bearish for the market. The index now 
stands at 111.7, after a 0.2% decrease in June and 0.6% increase 
in May. A closer look at the individual components, however, may 
give some input on the reasons behind today's 212.73-point gain 
in the Dow.  There are ten indicators that make up the index. Six 
of these were negative.  The negative indicators in this 
morning's release, in order of largest negative contributor to 
the smallest, were stock prices, average weekly manufacturing 
hours, index of consumer expectations, interest rate spread, 
vendor performance, and building permits.  The largest negative 
indicator, the stock market, has made up 80% of July's losses.  
Therefore the biggest reason for the decline of the index has 
been virtually erased.

A look at the positive indicators is even more revealing.  They 
are, in order of largest positive contributor to smallest, real 
money supply, manufacturers’ new orders for non-defense capital 
goods, average weekly initial claims for unemployment insurance, 
and manufacturers’ new orders for consumer goods and materials.  
The fact that money supply, unemployment and new orders for 
consumer goods are all on the positive side is an indication that 
the recovery is on the right track.  

The Conference Board also released the Coincident Indicators and 
Lagging Indicators.  Three of the four indicators that make up 
the Coincident Indicators were also positive. The largest 
contributor to this gain was personal income less transfer 
payments, followed by industrial production and manufacturing and 
trade sales.  Once again, we see production and manufacturing on 
the positive side, along with personal income.  The Lagging 
Indicators also showed an increase, with the positive 
contributors in the index being average duration of unemployment 
and change in labor cost per unit of output.  

According to the Conference Board, "Although the incorporated 
data revisions deepened the depth of the decline in the 
coincident index in the most recent recession, the decline of 
this index remains mild by historical standards. The decline from 
the peak of the coincident index in December 2000 to its trough 
in November 2001 is only 1.7 percent compared to an average 
decline of 3.3 percent from peak to trough in the previous six 
recessions."  The Conference Board also predicts that economic 
growth will rise in the third and fourth quarters of 2002, 
allaying fears of a double dip recession.

The media made the numbers sound much worse than they were.  The 
positive results in unemployment, productivity and new orders 
gave the bulls what they were looking for to continue the recent 
run.

The Retail Index ($RLX.X) got a big boost, as Lowe's released 
estimates that beat analyst's expectations by $0.05 and raised 
third quarter guidance.  Second quarter earnings were up 40.5%, 
and sent the group flying, in spite of Wal-Mart stating that 
August sales would be at the lower end of estimates, due to 
warmer weather slowing back to school sales.  The index was up 
8.13, but more importantly broke through significant resistance 
at 300, to close at 300.14.  The RLX also broke through its 50-
dma of 299, keeping up with the trend established by the broader 
markets. This indication of health in a sector controlled by 
consumer spending could figure heavily into the market's 
direction as we try to avoid a double dip recession.  Remember 
that consumer spending makes up 2/3 of GDP, and a reluctance to 
spend during the back to school season could foreshadow a return 
trip toward 7500 in the Dow.  

On Sector that didn't fare so well was Biotech.  The first domino 
fell when AstraZeneca (AZN) announced disappointing results for 
its anti-cancer drug, Iressa. Iressa belongs to a class of drugs 
known as epidermal growth inhibitors.  They are supposed to 
interfere with uncontrolled growth of cancer cells, but 
apparently AstrZeneca saw no difference in survival rates between 
patients treated with chemotherapy and Iressa, and those treated 
with just chemotherapy. AstrZeneca lost $6.02 to close at $30.98.  
This finding also affected OSI pharmaceuticals (OSIP), which is 
currently in late stage testing of its drug, Tarceva, which is in 
the same class.  OSIP closed down $18.77, losing 57% to finish 
the day at $14.01.  The disappointment of this 'smart drug' 
failure dragged down the biotech sector, as the Biotechnology 
Index (BTK.X) lost 2% on a day when the rest of the market was in 
rally mode.

A look at the bullish percentages now shows a majority of stocks 
giving point and figure buy signals.  The Dow stands at 52%, the 
S&P 500 at 52% and the NDX at 56%.  If the Dow can make it past 
the 38.2% retracement of 9143.79, the next significant level 
would be a 50% retracement of its losses since January of 2000.  
This would land the index over 9600.  Just a month ago we were 
talking about whether 7500 would hold and the meteoric pace at 
which the market has rebounded seems unsustainable.  9000 is the 
next test and tomorrow will tell us a lot about how much strength 
the bulls can muster.  The fact that the rally fell just shy of 
this mark is not coincidence.  There will be a lot of selling 
pressure at this level and this should provide a real test of 
conviction.

We should know shortly after the open who has the upper hand from 
this point.  Keep in mind jittery investors who may not want to 
remain long heading toward September 11th and the fact that 
today's volume was not very heavy, with the NYSE trading about 
1.5 billion shares and the Nasdaq trading similar amounts.  On a 
true breakout, expect to see volume over 2 billion shares, which 
is something we probably won't see at the end of the summer.  Get 
ready, get your rally caps on, and keep a few puts in your back 
pocket.

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

WHY SO STRONG?
By Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 

As will be well-known to readers of my book, a major reason that 
I took up the study of technical analysis was that the 
"fundamentals" often provided me NO means in which to judge when 
a dominant trend had ended and a new one begun.  I am not at all 
sure that the market is out of the woods here in terms of a major 
turn to a bull market. We could still come back down and so on.  
But I don't try to figure out why the market is doing what it's 
doing and "fight" it by reflecting on all the reasons why it 
should NOT be going up.  

The market, in my experience is always anticipating things that 
may not yet be apparent. It starting accelerating in its downside 
momentum well before all the corporate scandals and before the 
economic reports suggested that the U.S. economy was not keeping 
a brisk economic pace, unlike the first quarter.  

Nor do I suggest that there is a "contradiction" between 
technical and fundamental analysis - on the contrary, I have 
found that technical analysis often points to fundamental factors 
that are not apparent yet or are not widely known. A technical 
study of the market does signal changes in sentiment or 
perceptions about the market - and, it is perceptions that tend 
to rule not the facts themselves, as should be well known by 
careful market observers.  

I am someone who acts on the technical picture that I see, and 
not someone who makes a more limited use of technical analysis to 
support their point of view derived from their analysis of the 
KNOWN fundamentals.  This way of trading the market only suffers 
from one flaw, which that it is always looking at what was - in a 
rear view mirror - and not what is unfolding.

The foregoing is by way of saying that I don't know why the 
market continues to rise against expectations that its too far 
too fast, its "overbought", not "justified", etc. I suggest just 
staying with the trend until there is a significant reversal or 
break of technical support.  And, I continue to have these 
targets that were WAY beyond what was thought possible - such as 
up near 500 in OEX - back when the technical pattern suggested 
that this was the potential. We'll see - time will tell!

I suggest looking at my Weekly commentary for Sunday (8/18) for 
some of its broader perspectives in case you did not have time to 
go through it previously.  By the way, a successful speculator 
interviewed on his trading practices, said that he trades during 
the market day but always has the sound off on CNBC as it paid to 
NOT listen to too many voices and opinions as it can just confuse 
you. Of course, you're reading this! 

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

I talked about the possible Head & Shoulder's (H&S) bottom 
pattern on the 60min. SPX chart but that the index needed to 
break out above resistance to suggest that we would get a next up 
"leg" in the S&P 500 index.  The 200+ point gain in the Dow today 
may makes it look like such a huge move to. The percent gain at 
2.4% was equal to the S&P 500 (+2.4%), but was less than the S&P 
100 (+2.65%).  As the Dow starts to get back toward 9-10,000, 200 
points is not a massive move. 

Not that a 2+ percent gain is minor, but the SPX is in effect 
just creeping up along and just under, the up trendline that 
represents the neckline I'm speaking about. The move today is not 
yet suggesting another sizable up leg lies ahead - the absence of 
selling is more notable than a sea change of bullish fervor.   



 
 
Only a breakout above the 952 neckline, the trendline level 
tomorrow morning, would suggest a further advance as far as 
toward the upper end of the hourly uptrend channel. 955 is 
pivotal resistance in terms of the trendlines on both the hourly 
and daily charts.  On a close above 955, there is a possible, 
best-case, upside potential to the 995 (maybe to 1000), based on 
a H&S upside objective.  

On the downside, SPX is vulnerable to a break back toward the 940 
to 933 area. A close under 915 suggests a reversal of the current 
up trend. 

I would be thinking of taking call profits on the first day of 
weakness - not necessarily the first weak opening, but the first 
day this week when there is also only limited or no recovery from 
a weak opening.   

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


 

The upside potential implied by the bull "flag" breakout on the 
daily chart looks more like a realistic objective today as the 
OEX closed slight over its September low (just) and well above 
its 50-day moving average.  I still have a target to as high as 
the 500 area - only 20 points away now.   

But I would also recognize that further upside potential is 
likely, at most, to be 20 points and the downside risk is also 20 
points - back to 460 support - the top of the last consolidation.  
So certainly, exit points on calls should be snug (e.g., exit at 
471) and for new long calls - FURGETABOUTIT! - at least from a 
favorable risk to reward standpoint as I measure it.  

OEX remains in its uptrend channel as long as it doesn't fall 
under 456 currently. Near support is 472, then 462-464.    

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


 


Nice breakout move above the top of consolidation triangle 
pattern outlined on the daily chart, which also carried the index 
above its pivotal 50-day moving average. I'm maintaining my 
bullish trading stance as long as the prior highs at 87.6-87.9 
provide support on pullbacks.  

The uptrend is intact as long as the 86 level holds on a dip, but 
the uptrend does not reverse unless the prior swing low at 83.7 
is penetrated. 

Art Cashin from the NYSE indicates that the floor pegs Dow 
resistance at 9,000.  I see it there and a couple of hundred 
points higher, at 9,200 or 92.0 in DJX. 94 is another area of 
potential resistance, based on it being a prior swing high.   

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



 
 
The Nasdaq 100 is in the area, at the top of its hourly up 
trendline, where I have suggested selling to take profits on long 
positions and reversing to the short side.  I did not make a 
formal recommendation on today's Market Monitor to sell at 25.25 
or higher, as I would like to see some evidence of a break and 
reversal. I think we may have been starting to see that near the 
close. 

The Q's are fully overbought on my longer hourly stochastic model 
and nearly so on the daily model. I suggest going ahead with the 
suggestion to short at 25.25 or better for aggressive short-term 
traders - risk to 26.00 initially.  I think the Q's are 
vulnerable to setting back to the 24 area and the prior hourly 
highs at 23.7-23.9. 

What tempers anything more than a view to a minor setback is the 
bullish action and upside resistance trendline breakout in MSFT 
and a move to above its most recent highs in INTC. Bellwether 
CSCO is facing a possible double top at 15 however.       

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com    



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

 
Second Straight Weekly Advance

The major markets advanced for the second straight week, with the 
Dow Industrials up about 1%, the NYSE up 1.8%, and the tech-heavy 
NASDAQ Composite picking up 4.2% in price performance terms.  The 
S&P 500 large-cap index had a 2.2% price gain for the week, while 
the Russell 2000 small-cap index finished about 1.9% higher.  The 
NASDAQ 100 Trust ("QQQ") recorded a 5.9% weekly price gain buoyed 
by strength in the tech sector.  Stock prices have risen the last 
two weeks as investors become less concerned over the possibility 
of a double-dip recession.     





U.S. stock fund indices reflect the positive market conditions 
last week.  All 17 equity fund indices in Lipper's Daily Index 
Update recorded gains for the week, ranging from a low of 0.8% 
for gold funds, to 5.9% for tech funds.  With tech leading the 
way, pro-growth style funds outperformed value-driven funds by 
wide margins across all market capitalization ranges.  The mid-
cap sector was the sweet spot in terms of capital sectors.

The MSCI EAFE index of developed foreign markets followed the 
U.S. market higher, rising about 1.1% in dollar terms for the 
week.  Per the Lipper index update, the average international 
equity fund picked up 1.1%, matching the EAFE index benchmark. 

The total U.S. bond market as measured by the Lehman Brothers 
Aggregate Bond Index declined 0.3% for the week as Fed policy 
makers voted not to ease interest rates again.  The long-term 
bond sector was flat to slightly higher on the week while the 
intermediate-term and short-term maturity sectors lost ground.  

According to Lipper, the average short- and intermediate-term 
bond funds lost 0.2% for the 5-day period.  Corporate A-rated 
bond funds declined by 0.4%, while high-yield bond funds lost 
0.6% on average.  International income funds generated strong 
gains, averaging up 1.1% for the week.  The dollar's slide in 
recent weeks has contributed positively to international bond 
fund returns.


Lipper Fund Indices


According to the Lipper Daily Index Update, the top and bottom 
five equity fund indices last week were as follows (data as of 
Friday, August 16, 2002):

 Top Five Equity Fund Indices:
 +5.8% Science & Technology Funds (YTD -38.5%)
 +3.9% Mid-Cap Growth Funds (YTD -25.2%)
 +3.5% Multi-Cap Growth Funds (YTD -26.5%) 
 +3.0% Small-Cap Growth Funds (YTD -26.3%)
 +3.0% Mid-Cap Core Funds (YTD -15.4%)

 Bottom Five Equity Fund Indices:
 +0.8% Gold Funds (YTD +34.1%)
 +1.1% International Funds (YTD -9.0%)
 +1.2% Balanced Funds (YTD -9.8%)
 +1.2% Small-Cap Value Funds (YTD -8.2%)
 +1.3% Equity Income Funds (YTD -13.3%)

With double-dip recession fears alleviated, investors favored 
mid-cap growth stocks and the tech sector in particular.  The 
average tech fund notched a 5.8% weekly gain, followed by the 
average mid-cap growth fund, up 3.9% on the week.  Some funds 
with aggressive growth styles finished the week with gains of 
over 4 percent, such as Fidelity Aggressive Growth Fund +4.4%.

T. Rowe Price Science and Technology Fund and Fidelity Select 
Electronics both returned 8.4% for the week, to lead the tech 
sector fund group.  Tech-heavy funds such as INVESCO Dynamics 
Fund and T. Rowe Price New Horizons gained over 5 percent for
the week, among the top diversified equity fund performers.

Turning now to the fixed income fund group, the top and bottom 
five bond fund indices last week were as follows, using Lipper 
data through Friday, August 16, 2002:   

 Top Five Fixed Income Fund Indices:
 +1.1% International Income Funds (YTD +11.0%)
 +0.4% Global Income Funds (YTD +5.3%)
 +0.2% General Muni Debt (YTD +6.2%)
 +0.1% Short Municipal (YTD +2.8%)
 -0.0% High Yield Municipal (YTD +4.3%)

 Bottom Five Fixed Income Fund Indices:
 -0.6% High Current Yield (YTD -9.5%)
 -0.4% Corporate A-Rated Debt (YTD +3.9%)
 -0.2% Short Investment-Grade (YTD +2.0%)
 -0.2% U.S. Government (YTD +6.4%)
 -0.2% Intermediate Investment-Grade (YTD +3.4%)

Bond investors banking on a Fed rate cut did not get what they 
wanted last week with Fed policy makers deciding to keep rates 
where they are, rather than lower them to spur economic growth 
and risk spurring inflation down the road.  With no Fed action 
and U.S. stocks higher, U.S. bond funds had losses on the week.  
Higher quality funds limited losses versus lower quality funds.

The dollar's slide in recent weeks has inflated the returns of 
international and global income funds relative to similar U.S. 
bond funds.  Bloomberg's website is hinting the dollar decline 
might continue considering a widening U.S. trade deficit which 
may ultimately hamper economic growth and keep foreign capital 
away.     


Largest Mutual Funds


The largest equity and partial equity funds in the country were 
all higher last week, while the largest taxable bond funds were 
all lower for the five days ended Friday, August 16, as follows:    

 Largest Stock Funds:
 +2.3% Vanguard 500 Index (VFINX) YTD -18.3%
 +2.8% Fidelity Magellan (FMAGX) YTD -18.7% 
 +1.9% Investment Company of America (AIVSX) YTD -12.1%
 +1.0% Washington Mutual Investors (AWSHX) YTD -11.2%
 +3.6% Growth Fund of America (AGTHX) YTD -20.7%
 +2.0% Fidelity Contrafund (FCNTX) YTD -5.9%
 +1.5% Fidelity Growth & Income (FGRIX) YTD -13.6%
 +1.1% EuroPacific Growth (AEPGX) YTD -11.2%
 +2.1% New Perspective (ANWPX) YTD -14.3%
 +1.2% Vanguard Windsor II (VWNFX) YTD -11.9%
 
 Largest Bond Funds:
 -0.3% PIMCo Total Return (PTTRX) YTD +5.1%
 -0.2% Vanguard GNMA (VFIIX) YTD +6.5%
 -0.2% Vanguard Total Bond Market (VBMFX) YTD +3.9%
 -0.1% Bond Fund of America (ABNDX) YTD -1.2%
 -0.3% Vanguard Short-Term Corporate (VFSTX) YTD +1.8%
 -0.3% Franklin U.S. Government (FKUSX) YTD +5.3%
 
 Largest Balanced Funds:
 +0.1% Income Fund of America (AMECX) YTD -6.3%
 +0.2% Vanguard Wellington (VWELX) YTD -6.0%
 +0.8% Fidelity Puritan (FPURX) YTD -7.6%
 +1.3% American Balanced (ABALX) YTD -6.1%
 +1.5% Fidelity Asset Manager (FASMX) YTD -9.5%

Looking at the largest stock funds, you can see the variance in 
weekly returns due to value vs. growth style.  Pro-growth funds 
such as Growth Fund of America, up 3.6%, outperformed the market 
while value-driven funds such as Fundamental Investors, up 1.0%, 
were among the diversified stock fund laggards in the up market.

The largest bond funds posted losses of up to 0.3% for the week, 
reducing their respective YTD total returns.  The largest mixed 
equity (balanced) funds enjoyed returns of up to 1.5% last week, 
with only the American Balanced Fund and Fidelity Asset Manager 
outperforming the Lipper balanced fund average of 1.2%.


Money Market Funds


The iMoneyNet.com taxable money market fund average fell by one 
basis point, to 1.26% as of Tuesday, August 13.  The three best 
current 7-day simple yields among prime retail money funds were 
PayPal MMF (1.84%), Touchstone MMF (1.73%), and TIAA-CREF Money 
Market Fund (1.61%).  

According to iMoneyNet.com, the five largest retail money market 
funds have the following current 7-day simple yields:

 Largest Retail Money Market Funds: 
 1.54% Fidelity Cash Reserves 
 1.16% Schwab Money Market Fund 
 1.53% Vanguard Prime MMF/Retail 
 1.47% Schwab Value Advantage Money Fund 
 1.41% Merrill Lynch CMA Money Fund

The key Fed funds rate ended the week at 1.62%, down from 1.69% 
the week before and 1.75% two weeks prior.  

The Investment Company Institute (ICI) reports that total money 
market mutual fund assets stand at to $2.29 trillion, including 
last week's $3.8 billion net increase.  Total institutional MMF 
assets rose by $7 billion to $1.23 trillion, while retail funds 
declined by about $3.2 billion to $1.06 trillion per the weekly 
survey.


Mutual Fund News


Putnam Investments, the fourth largest U.S. mutual fund company, 
made another round of job cuts last week according to a Reuters 
report.  The cuts included 32 employees and 1 money manager and 
came in the wake of declining asset management fees associated 
with the market's decline.  In April 2001, Putnam laid off 256 
employees, becoming one of the first in the industry to layoff 
money managers.  The money manager let go this year was on the 
Putnam Small Cap Value Fund.  A Putnam spokeswoman stated that 
she does not expect to see more reductions before year's end.

Per the Reuters article, Putnam's mutual fund assets were $261 
billion as of July 2002, down 17 percent from the $315 billion 
total assets managed at year-end 2001.  The equity decline has 
taken its toll on the total mutual fund industry, but how have 
non-regulated hedge funds fared through the recent bear market?

In another Reuters story, new data from hedge fund tracker CSFB 
(Credit Suisse First Boston)/Tremont indicates that hedge funds 
have also been struggling through these rough market conditions.  
According to the article, hedge fund losses increased from 0.8% 
in the month of June, to 1.4% in the month of July.  As of July 
2002, the average hedge fund was essentially flat on a 2002 YTD 
basis.  Still, that is better than the market and average stock
mutual fund this year.

The Reuters hedge fund story states that these turbulent market 
conditions have forced a number of hedge funds to scale back or 
close up shop altogether as they grapple with the ill effect of 
less fee income.   

That's it for this week's mutual fund wrap.



Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com

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

Reflections on Relative Strength and Divergence
by Mark Phillips
mphillips@OptionInvestor.com

Long-time readers know that I pay a lot of attention to Relative
Strength in my research, as it frequently keeps me out of hot
water.  This works in both directions, helping to identify
bearish trading candidates through identification of relative
weakness, as well as bullish candidates in cases of relative
strength.  But like all the other tools at our disposal, Relative
Strength studies aren't infallible.

As proof of this point, let's go back to last week's article,
where I talked about straddling the Fed.  With all the volatile
action in the market since that article, it doesn't seem like it
was only one short week ago.  Well, my mother told me that time
would go faster as I got older.  She wasn't kidding!

Recall that last week's straddle discussion that was prompted by
some recent reader emails.  I went down a rather unconventional
path in my discussion of potentially straddling the Fed
announcement with Calls on the Biotech HOLDR (BBH), which had
been showing relative strength and Puts on the Semiconductor
HOLDR (SMH), which had been exceedingly weak.  As I pointed out
in the article, I had no intention of taking the trade due to the
fact that the options were just too expensive to make for a
profitable trade without a HUGE move in one group or the other.
But I think revisiting the SMH and BBH this afternoon will make
for an interesting and hopefully educational visit.

Let's start with an hourly chart of each stock captured as of
last Monday night.  As you can see the SMH had been unable to get
out of its own way, while the BBH had been steadily chugging
higher in its ascending channel.

Hourly Chart of Semiconductor HOLDR (SMH)



 

Hourly Chart of Biotechnology HOLDR (BBH)


 

While we can clearly see that the BBH is the strongest of the
two, we can get a much better picture of the BBH's relative
strength by using a little feature available within Qcharts.
We can ratio any equity against any other to get an instant
picture of Relative Strength.  In this case, I just entered the
following string in the Symbol Field -- "BBH /SMH) and "Voila",
we have a very clear picture to work with.

Relative Strength Chart of BBH vs. SMH - Hourly


 

Through all the ups and downs in the market over the prior 3
weeks, the BBH had continued to strengthen against the SMH,
giving us a trend that we could work with.  So long as this
trend holds, bullish positions in the Biotech arena should
continue to work, as should bearish positions in the
Semiconductor sector.  So with the benefit of hindsight, let's
see what happened.

Current Relative Strength Chart of BBH vs. SMH - Hourly


 

Something fundamental changed at the open last Tuesday, with
the BBH/SMH dropping sharply.  That was the warning sign to
anyone thinking of employing the BBH/SMH straddle strategy, that
all bets were off.  The basic premise of the trade had been
altered.  While the scale on the relative strength chart is not
meaningful, I find it interesting that after the initial drop,
the chart clawed its way right back up to the 3.60 level,
creating a double-top, before rolling over at the trendline.
The relative strength chart has been heading south in a hurry
over the past 5 days.

While not the type of divergence I like to highlight when looking
at price action with respect to an oscillator like Stochastics or
MACD, this is clearly a divergence or inflection point, where the
behavior of the market has changed.  Another way to look at it is
in light of a broken chart pattern.  We have a 3-week trendline
that was decisively broken in the wake of the FOMC meeting.  The
important question is "How do we use this information to our
advantage?"

This inflection point told us that the BBH was no longer
outperforming to the upside relative to the SMH.  So bullish on
BBH was no longer a winning strategy.  Did that mean we should be
looking bearish on the BBH?  Not necessarily.  Recall that the
tone in the market had been turning more bullish overall, so
BBH's loss of relative strength was likely just telling us that
other sectors of the market (maybe SMH?) were getting ready to
play catch up.

Sure enough, 1 week later, the relative performance of the SMH
and BBH tells an interesting story.  Since the close on 8/12,
the BBH has lost 2.4%.  Not bullish by any stretch of the
imagination, but it would have been tough to make much pocket
change from that drop.  But the SMH has been a stellar performer
for the bulls in that same span of time, gaining 14.1%.  So
coming back to the broken trendline on that relative strength
chart and factoring in my thesis that the rest of the market was
ready to play catch-up, we can see that a bullish position in
the SMH would have paid off handsomely over the past week.

Let's put this discussion in the light of broken patterns, as
that is where I think the real value lies.  Bullish investors
could have put this relative strength chart to good use from
late July, right up to the day of the FOMC meeting, trading
bullish on the BBH and/or bearish the SMH (or any of their
components).  But when the relative strength trendline broke, it
was a clanging alarm bell that the climate had changed
substantially.  Traders able to shed the bias that had made them
money over the prior 3 weeks could have changed sides and
benefited as the SMH played catch up.  

Chart patterns are valuable both while they behave as expected
and when they fail to do so.  Remember the article I wrote a few
weeks ago, where we talked about broken channels?  If not,
here's the link, as I think it would be useful to review the key
points contained therein.  

Failure Is A Good Thing!

Chart patterns give us a reliable guide for trading decisions, as
long as the patterns remain unbroken.  Frequently, when those
patterns fail, it gives us an even better opportunity for profit.
So dust off those relative strength charts and slap on some
trendlines.  There's no telling what valuable nuggets you might
unearth.

Have a great week!

Mark



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

THE SECTOR BEAT - 8/19
by Leigh Stevens

No huge changes in the sectors today, except that the Software 
group (GSO: +4.9%) rallied nicely on the strength in Microsoft 
(MSFT). The Internet index (INX) and High tech (MSH) sectors 
continued its pattern of recent gains - MSH closed right at the 
pivotal 50-day moving average.  Financial continued strong, 
namely the Broker-dealer sector (XBD) and the Philly Bank Index 
(BKX).  No NEW themes emerged here relative to my more extensive 
comments on the Weekly Sector Wrap on Sunday (8/18).    

Analog Devices also ran up following its profit report while Dell 
(DELL) was good performer on the PC Boxmaker (BMX) sector - 
strength in Dell was quite supportive for the chip makers, as the 
more PC's shipped, the more semiconductor chips go out the 
factory door inside them.

There was buying that continued today, after the Semiconductor 
Index (SOX) climbed above it's Sept. 344 low on Friday, as SOX 
cleared a "line" of resistance at the July lows in the 350 area. 
Then SOX pierced its down trendline in the 358 area (at 28.15 in 
the SMH HOLDR's) - and managed to close at its 50-day moving 
average at 363. 

I continue to estimate that, given the upside momentum, that SOX 
could climb back to 407-408 and retest the July highs. In my 
weekly, Sunday commentary, I suggested buying SMH on a buy stop, 
above the Friday close, based on a breakout above its flag 
pattern on the 60 min. charts. 

The Biotech Sector (BTK), which has been best performing group in 
the current quarter so far - was off 2% today, closing at 371.7. 
The BTK intraday low at 366.8 took it down nearly to its up 
trendline - but it has not pierced this support. 

Biggest BTK weakness was in Abgenix (ABGX: -19.8%), ImClone 
(IMCL: -10.6%) and a number of others off 2-4%, such as Genentech 
(DNA), IDPH (IDEC Pharmaceuticals), and Cephalon (CEPH); Biogen 
(BGEN), which was down in the morning managed to close plus on 
the day and Amgen (AMGN) was off 2.3%.

I think profit taking in recently strong Biotechnology companies 
was part of the reason, but there was certainly also a 
fundamental influence from extreme weakness in OSI 
Pharmaceuticals (OSIP), off a whooping 57% - down $18.74 to 
14.05. The stock was hurt because U.K.-based pharmaceutical 
company AstraZeneca (AZN) announced disappointing results with 
its anti-cancer drug, Iressa. 

Iressa and OSI's key experimental compound, Tarceva, both belong 
to the same class of drugs known as epidermal growth factor 
inhibitors. These drugs are supposed to interfere with cancerous 
growth. Genentech, which has been helping OSI with development of 
Tarceva was off 8% but has pared those losses. By the way, OSIP 
is NOT in the Biotech (BTK) index. 

The Gold stocks (XAU) were weak, but the recent rally looked like 
a rebound only and NOT a resumption of its first half strength. 

UP on Monday –

 
 


DOWN on Monday – 


 


SECTOR TRADE RECOMMENDATIONS -

NEW/OPEN TRADE RECOMMENDATIONS -

Bought SMH at 27.90 on a 27.90 buy stop
(Semiconductor HOLDR)
Sell stop: 26.50
Close: 28.41


 
TRADE LIQUIDATIONS -

NONE



Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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

Up on Bad News Again?

The Leading Economic Indicators report was down again, the fourth time in
five months, and numerous retails stocks repeated their warnings that sales
would not meet estimates. Bulls rejoiced that somebody was still being paid
to keep track of the negative numbers and that the retailers had not yet
filed bankruptcy and bought stocks as gifts for their psychiatrists. This is
the only plausible excuse I could imagine for the mass delusion.

To read the rest of the Swing Trader Game Plan Click here:
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The Option Investor Newsletter                   Monday 08-19-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:
Stop Loss Updates: ADBE, IBM, NOC
Dropped Calls: None
Dropped Puts: None
Play of the Day: Put - GS

Updated on the site tonight:
Market Watch: What Resistance?
Market Posture: Onward and Upward

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

ADBE - call
Adjust from $18 up to $19

IBM - call
Adjust from $71.25 up to $79

NOC - call
Adjust from $110 up to $113

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

None


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

None


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traded options,” claims author Larry Spears in his new compact 
guide book:  

“7 Steps to Success – Trading Options Online”.  

Order today and save 25% (only $15) by clicking on PreferredTrade 
and clicking on the link to the book on its home page.

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


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

GS – Goldman Sachs Group $81.50 +1.97 (+1.97 this week)

Company Summary:
The Goldman Sachs Group is a global investment banking and
securities firm that provides a wide range of services worldwide
to a substantial and diversified client base that includes
corporations, financial institutions, governments and high
net-worth individuals. The company provides investment banking,
which includes financial advisory and underwriting, and trading
and principal investments, which includes fixed income, currency
and commodities, equities and principal investments.  GS
recently completed the acquisition of Spear, Leeds & Kellog,
which is engaged in securities clearing, execution and market
making, both floor-based and off-floor.

Why we like it:
The recovery in Brokerage stocks is due as much to a relaxation
of investigations into questionable analyst research as to the
broad market recovery that emerged last week.  After posting a
double-bottom near the $340, the Brokerage index (XBD.X) has
rebounded all the way to the $410 level.  While the recovery is
encouraging, a 20% move seems to be a bit much, especially with
the fundamentals of the industry unchanged and legal problems
likely to continue.  GS has had one of the most impressive runs
off its lows of any of the Brokerage, reaching the $80 level over
the past 2 days.  But therein lies the problem, as the $80 level
happens to be the site of the stock's long-term descending
trendline (beginning in January), and the site of the 50%
retracement level of the rally off last September's lows.  With
daily Stochastics now deep in overbought territory, it looks like
the stock is due for a pullback and we want to take advantage of
that expected run to the downside.  We want to wait for the
current rise in the stock to run its course before initiating new
positions, but a reversal from current levels seems likely and
would make for an attractive entry point.  Adding credence to our
bearish near-term thesis is the fact that the declining 200-dma is
just overhead at $82.41 and should add to the downward pressure on
the stock.  And should the group's legal problems resurface next
week, that will be the likely catalyst to knock GS back from
current levels.  Trader's looking for some confirmation before
playing will want to wait for GS to fall back under the $78 level,
which acted as intraday support on Friday.  Initial stops are set
at $82.50, just above the 200-dma.  We do need to be mindful that
the PnF chart is back on a Buy signal here, so the downside will
likely be limited to the $75 level over the near term.

Why This is our Play of the Day

With all the major indices blasting through their 50-dmas on
Monday, the day definitely had a bullish tone.  The Brokerage
sector played follow-the-leader all day, tacking on a healthy
3.67% as it pushed up from its 62% retracement at $408.  While
this is definitely a victory for the bulls, we've got our eye on
the 50% retracement at $435, which looks to also be heavy
historical resistance.  Against that backdrop, the $13 gain
(19.7%) in GS looks unsustainable over the near term.  We still
need to see some weakness before jumping into the play, and a
rollover below the 200-dma (currently $82.43) should give us an
attractive risk-reward ratio, especially with our stop set just
above that level at $82.50.  Initial downside target is the $79.50
area, where the stock consolidated on Friday.  Then we'll be
targeting $78 to the downside.  Remember to confirm sector
weakness before entering new positions.

BUY PUT SEP-80*GS-UP OI= 602 at $2.65 SL=1.25
BUY PUT SEP-75 GS-UO OI=7880 at $1.30 SL=0.75

Average Daily Volume = 5.64 mln



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

PreferredTrade offers these online option trading features and 
more; call 1-888-889-9178 or click for more information.

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


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

Some candidates have drifted away from action points, they've been 
dropped.  Mull over two new candidates this weekend.

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/081902.asp



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

Some candidates have drifted away from action points, they've been 
dropped.  Mull over two new candidates this weekend.

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/081902.asp


*******************
FREE TRIAL READERS
*******************

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.


We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

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or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


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