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Daily Newsletter, Monday, 08/26/2002

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The Option Investor Newsletter                   Monday 08-26-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Don’t Get Too Comfortable
Index Trader Wrap: LATE SUMMER DOLDRUMS
Weekly Fund Wrap: Make That a Turkey
Traders Corner: Managing Risk With Stop Orders
Index Trader Game Plans: THE SECTOR BEAT - 8/26


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
08-26-2002                High    Low     Volume Advance/Decl
DJIA     8919.01 + 46.05 8949.53  8756.02 1231 mln  2001/745
NASDAQ   1391.74 + 32.66 1394.24  1360.43 1414 mln  2040/1180
S&P 100   477.59 +  3.09  479.23  468.25   totals   4041/1925
S&P 500   947.95 +  7.09  950.80  930.42
RUS 2000  407.73 +  7.60  407.73  397.71
DJ TRANS 2424.51 + 30.19 2425.05  2371.52
VIX        32.29 -  0.52   35.21  31.85
VIXN       48.42 + 0.80    48.24  50.93
Put/Call Ratio 0.81
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Don’t Get Too Comfortable

After reading Jim Brown's weekend commentary, I'm having a hard 
time keeping a rosy outlook for the next couple of months.  
Having also stood on the trading floor over the last several 
years during the fall swoons, I've been tempted to let my inner 
bear out of hibernation and start shorting everything in sight.  
However, I keep looking at these pesky charts of the Dow and 
Nasdaq, and seeing rising support lines. In spite of frequent 
tech warnings, a new wave of layoffs and shrinking economic 
growth numbers, the broader market keeps finding buyers at 
successively higher levels.   

The September 11 anniversary will only serve to increase the 
possibility of the "swan-dive" August-October pattern of previous 
years repeating itself, and at some point I expect a significant 
sell-off.  This makes things complicated for the short-term 
trader, who doesn't want to miss out on rallies in the meantime.  
This is generally considered one of the lightest trading weeks of 
the year, as many traders are on vacation heading into Labor Day 
weekend.  In fact, we saw only 1.2 billion shares traded on the 
NYSE and only 1.4 billion shares traded on the Nasdaq.  Advancing 
shares outnumbered declining shares on the NYSE 3 to 1, however, 
with such light volume, the significance is somewhat tempered.  
Nasdaq volume was much closer (7:6).

This morning, it looked like the 50-dma of 8789.47, which had 
provided support throughout last week, would finally give way and 
the September slide would get rolling. However, once again the 
buyers came back right around this 50-dma level.  Today that 
moving average coincided with the rising trend line from July 24, 
and lo and behold, that is exactly where we bounced.

Chart of the Dow Jones



A similar pattern has developed in the Nasdaq, although the 
upward sloping trend line is started later, on August 5.  The 
steep line in the Nasdaq will be harder to maintain, and any 
pullback could be seen more dramatically here.

Chart of the Nasdaq Composite



A look at the two channels these indices have been in since their 
latest respective rebounds indicates that the pull back on Friday 
and this morning simply followed the ascending patterns. 



Chart of Dow and Nasdaq Ascending Channels


The economy got some good news this morning with the release of 
record new home sales once again.  The record is actually 
somewhat misleading, as previous numbers have set records and 
then been revised downward, subsequently allowing these "records" 
to be broken once again.  Regardless of whether this is a record, 
it still shows that the housing market is going strong.    The 
housing "bubble" is usually the last to pop in a poor economic 
environment, as laid off homeowners are forced to cash in the 
equity on their homes, and would-be buyers use savings for paying 
bills, rather than down payments.   According to the Commerce 
Department, new single-family home sales rose 6.7% in July, to an 
annualized rate of 1.02 million.  Considering the stock market 
swoon in July, and the shrinking brokerage accounts as a result, 
this looks very bullish for the economy.  Estimates had been for 
an annualized rate of 975,000.  On the other hand, this may not 
be a coincidence, as investors who lost faith in the equity 
markets took money out of stocks and invested in real estate.  
This fact was reflected by a record $49 billion pulled out of 
U.S. stock mutual funds in July.  The July 2002 new home sales 
number topped 2001 by over 15%.    The number grows more 
impressive after June sales were revised to reflect a 2.6% drop.  
In addition, existing home sales were also up, by 4.5%.

In addition to new home sales being strong, inventories also 
dropped from a June reading of 4.2 to only 3.9 in July.  The 
median home price, however, dropped from $186,200 to $170,500, 
reflecting a shift from higher end homes to those at the lower 
end of the spectrum.  This can be interpreted in a couple of 
ways.  Bulls will see the shift to lower priced homes as evidence 
that those at the lower income levels (relatively speaking) are 
showing an increased ability to purchase homes.  Because a higher 
percentage of the population exists at lower income levels, this 
may demonstrate that lower rates are helping create equity for a 
larger number of people.  Bears, on the other hand, will note 
that the total amount of money spent on housing, and therefore 
used to build equity, has actually dropped.   According to the 
annualized rates, based on the June and July readings, multiplied 
by the median housing price, we will spend $173.9 billion on new 
homes according to July's reading, while we would have spent 
$181.5 billion under June's numbers.  Fewer dollars invested 
usually translates to smaller appreciation.  Because this 
calculation is based on the median price, as opposed to an 
average price, it should be used for comparison, rather than an 
actual calculation of dollars spent.

The U.S. government has essentially subsidized the homebuilding 
industry by keeping interest rates at their lowest level in 40 
years.  There has been much debate over whether the Fed will 
further lower the Fed Funds Rate at the September 24 FOMC 
meeting.  Last week, however, three Fed Governors gave 
indications that the economy was growing and further rate cuts 
may not be needed.  Today a fourth Governor chimed in with the 
same sentiment.  If there is another attack around September 11, 
all bets are off and we may see as many as 50-75 basis points 
taken off of the current 1.75%.  Outside of that possibility, 
however, the chance of another cut seems to be getting slimmer.  

On the flip side of the argument for a growing economy, the 
world's number two employment company, Manpower (MAN), released 
the results of a study that indicated U.S. firms do not plan on 
increasing the pace of hiring in the fourth quarter.  When viewed 
in light of recent layoff announcements from the likes of IBM, 
American Airlines and Lucent, these results suggest a recovery in 
the job market could still be a ways off.  Although wages are 
currently rising faster than inflation, continuing layoffs could 
wind up greatly affecting this equation. 


The defense stocks took off today, after comments from Dick 
Cheney indicated a more aggressive stance toward Iraq than George 
Bush had indicated last week.  Bush had stated that he was a 
patient man, and that he would consider non-military ways of 
removing Saddam Hussein.  Cheney, however, was whistling a very 
different tune.  He said that Hussein, now in control of 10% of 
the world's oil reserves, could be expected to seek domination of 
the entire Middle East and manipulate the world's energy supply.  
Cheney also stated that waiting for Saddam to possess nuclear 
weapons is a deeply flawed logic. "We realize wars are never won 
on the defensive... We must take the battle to the enemy. We must 
take every step necessary to make sure our country is secure, and 
we will prevail... We will not simply look away, hope for the 
best and leave the matter for some future administration to 
resolve," Cheney said. "As the president has said, 'Time is not 
on our side."  Sounds an awful lot like an eviction notice for 
Saddam is in the mail.  Although White House lawyers have 
concluded that Bush does not need Congressional approval to 
launch an attack, White House press Secretary Ari Fleischer added 
that Congress has an important role to play.  With many countries 
lukewarm on the idea of a U.S. invasion, Bush is not likely to 
attack without first receiving support from leaders at home.

Oil prices have maintained themselves, with the October crude oil 
futures still trading over $29 a barrel, pricing in a possible 
Iraqi invasion.  This is in spite of Saudi Arabia's pledge to 
increase supply if Iraq takes some oil off the market.  Rising 
oil prices will not help the economy, and could make the Fed 
rethink what appears to be a plan to leave rates unchanged until 
a possible increase is warranted at some point in the future.

The fuel that has kept the economy from collapsing is consumer 
spending, which accounts for 2/3 of GDP.  Evidence of this factor 
eroding came from Wal-Mart this morning, which warned that 
overall August same store sales will be at the low end of 
previous forecasts.  It attributes this to a drop in apparel 
sales due to unseasonably warm weather.  This is the second week 
in a row that the retail giant has echoed the same sentiment.  
Federated, which owns Macy's and Bloomingdale's chimed in with 
the same sentiment for the third week in a row.  With school 
starting, it is hard to believe that the slowdown in apparel 
sales is due more to weather, than to a reluctance to spend in 
light of the recent wave of layoff announcements.

The broader market is still going up on relatively light volumes, 
yet we see a historical cliff just ahead.  Add to this the 
likelihood that investors will begin dumping long positions as we 
close in on the September 11 anniversary, rather than risk 
holding stocks after another attack.  The technicals all seem to 
be pointing up, yet history and logic seem to be pointing the 
other direction.  The housing numbers this morning show the 
possibility that we are actually spending less on homes, in spite 
of the fact more homes are being sold.  All of this feels as 
though we are being lulled into a false sense of security. This 
hunch is underscored by the Market Volatility Index refusing to 
break 30 on a slow trading day at the end of the summer.  
Apparently I'm not the only one with this feeling - there are 
still put buyers around. The put/call ratio of .81 is also a 
little high for a sustained rally like we've had over the last 
month. I would be more confident in the recent rally if we 
weren't talking tough with Iraq two weeks before September 11, 
and if the bounces we've seen were on stronger volume.  While I 
don't want to fight the upward trend, I simply can't ignore all 
of the other factors weighing on the market.  I would not be 
playing with full long positions here, and looking for technical 
breakdowns before going fully short as well.  If this seems 
wishy-washy, that's because it is.  There is nothing wrong with 
capital preservation when it is called for.  Watch for heavier 
volumes after the holiday weekend before choosing a longer-term 
direction.  In the meantime, there may be plenty of swings to 
trade this week. Stay nimble, don't be stubborn and respect your 
stops.


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


LATE SUMMER DOLDRUMS
By Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
The late summer "doldrums" of August and the low volume 
associated with it, also means that a relatively small amount of 
buying or selling will push prices up or down more than usual.  
We saw prices rally a bit on the open, then decline, then rally 
again. Interest was primarily centered in financial stocks - on 
some positive assessments on the future economic course of 
Brazil, energy - more war talk related to Iraq, pushing up oil 
prices (& gold) again, and buying in the networking sector being  
noteworthy also. 

The economic reporting calendar is far more significant this week 
than is earnings news - HP (Hewlett-Packard) is a noteworthy 
exception as they report their Q3 earnings report tomorrow after 
the close. 

I don't listen to many Street-of-Dreams analysts, but do pay 
attention to old hand Barton Biggs, Chief Investment Strategist, 
at Morgan Stanley - not because he's always right, but because he 
has a lot of "Street smarts" - and I mean the Street that runs 
through the walls or canyons of lower Manhattan.  

Actually, no important big firms are on the actual Wall Street 
anymore, except JP Morgan bank still has its flagship office 
there dominating the SW corner of Broad & Wall. However, my first 
Wall Street job was at 80 Wall Street. Anyway, there I am in my 
dream and I want to mention Barton Biggs' latest thoughts on the 
market.  He has a Monday report that goes out to their clients. 

Barton indicated that he feels the recent equity rally will last 
longer given that the July lows were marked by a "parabolic 
decline and massive capitulation that has not been seen for 40 
years."  True, if you look only at this time frame. 

The Morgan Stanley guru also notes that auto sales have been 
strong, refinancings and home equity loans are surging, corporate 
profits have turned up and that money growth has accelerated. 
"I don't believe in the double dip," Biggs told clients. "Stay 
invested."

I do believe in a possible "double dip" in the market or a retest 
of the prior lows or maybe we just approach that area, especially 
if the invasion of Iraq happens - and, I think, its being "set 
up" for perhaps as early as Sept./Oct. Its usually also timed for 
the new moon - darkness is important as it was when we started 
bombing them in the first Gulf war. 

Alternatively, a 50 to 62% retracement of the initial advance 
would be "normal".  I tend to better "trust" bottoms that retest 
lows.  So do MANY others on the Street of Dreams - which is what 
makes a "double bottom" quite potent.  

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



I would note again that the OEX has not been able to close above 
its important post 9/11 low at 480, which is significant 
technically.  Key near resistance intraday is 487-490. Absent a 
close over 480, I anticipate that the S&P 100 will drift sideways 
to lower.  

As with the S&P 500 index, there is a possible Head & Shoulder's 
(H&S) top setting up on the hourly charts if we now get a 
sideways to lower move from the 480 area - such a top pattern 
would then tend to be "confirmed" on a break below the 470 area.  
Such a break would in turn suggest a fall to the 450-455 area. 

Pivotal near support remains as the 470 area; below 470, next 
lower chart support is at 460. 

I continue to anticipate that an absence of willing buyers ahead 
of the political and oil uncertainties will result in a sideways 
to lower drift.  

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


 
Exacting repeating my comments from yesterday: 930 is the key 
technical support at the low end of the hourly uptrend channel - 
the update is that the lower trendline provided picture perfect 
technical support. As long as this trendline is not broken, SPX 
remains in an uptrend. Resistance is 950, then 960-965. 

I would also note the possibility that a Head & Shoulder's top 
pattern is being set up - if SPX does not go above the 950-955 
area, and then trends sideways to lower, the resulting formation 
will have a H&S outline to it. The important "neckline" is at 930 
- a break of this level could lead to a move down to the 900-895 
area to fulfill the "minimum" downside objective implied by the 
H&S top pattern.    

920-915 is a support area between 930 and 900.  I favor selling 
rallies particularly if the longer stochastic again gets up toward 
an overbought extreme.  

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



DJX's lower trendline today acted as a "deflection" point as the 
important trendlines often do. The rebound from the lower channel 
line makes this trendline even more "important" technical 
support. Conversely, 90.8-91.5 is the key resistance.  

And, yes the converging trendlines do resemble the appearance of 
a rising bearish wedge, so this is another pattern that I am 
watching for its resolution.  I have no trading suggestions until 
we break out, one way or the other from this narrowing range.     

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


 
This is another one that is trading in its channel. I don't 
suggest any short commitment until or unless there is a breakdown 
below the hourly uptrend channel by a move that takes out 24.60.   
IF that were to happen, my next lower target is to chart support 
in the 23.70 area.  

Minor overhead resistance looks like 25.5, then the real key, 
more significant technical resistance is the downside chart gap 
area at 25.8-26.0.   


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com

 


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

Make That a Turkey



Stock mutual funds reported gains of 1% to 2% for the week ended 
August 23, 2002, climbing for the third week in a row along with 
the major markets.  All Lipper equity fund indices saw gains for 
the week, except for gold funds.  The leading category was multi-
cap value funds, up 2.1% for the 5-day period.  Category returns 
varied across capitalization sectors and equity styles.



 
The S&P 500 large-cap index had a 1.3% weekly total return using 
the Vanguard 500 Index Fund as the proxy.  Some battered sectors 
showed signs of life, including Internet, wireless and broadband.  
Small stocks as measured by the Russell 2000 index picked up 1.1% 
over the 5-day period, lagging slightly behind the S&P 500 index.  
The week ended on a sour note, however, with stocks off Friday on 
word of more accounting scandals (government probes into AOL Time 
Warner and Citigroup namely).  

Vanguard Developed Markets Index Fund, which tracks the MSCI EAFE 
index, rose by around 1 percent in dollar terms.  Lipper's equity 
indices show the average international stock returned 1.3%, ahead 
of the weekly return by the EAFE index benchmark and in line with 
comparable U.S. funds.  The developing (emerging) markets trailed 
the developed foreign markets of Europe and Asia/Pacific.  

The U.S. fixed income markets compensated investors for incurring 
risk, with long-duration funds and low-quality funds gaining over 
one percent for the week.  The total U.S. bond market as measured 
by the Lehman Brothers Aggregate Bond Index, using Vanguard Total 
Bond Market Fund as the proxy, rose by 0.5% for the week.  Lipper 
shows the average intermediate-term, investment grade fund gained 
0.9% for the week, while the average high-yield bond fund notched 
a 1.9% weekly return to lead all fixed income categories.

The average money market fund has a current 7-day simple yield of 
1.26%, according to iMoneynet.com.


Lipper Fund Indices


According to the Lipper index update, the best and worst equity 
mutual fund categories for the week were as follows (data as of 
Friday, August 23, 2002):

 Top Five Equity Fund Indices:
 +2.1% Multi-Cap Value Funds (YTD -13.1%)
 +1.7% Small-Cap Growth Funds (YTD -25.0%)
 +1.7% Mid-Cap Core Funds (YTD -13.9%) 
 +1.5% Science & Technology Funds (YTD -37.6%)
 +1.3% International Funds (YTD -7.8%)

 Bottom Five Equity Fund Indices:
 -3.2% Gold Funds (YTD +29.9%)
 +0.5% Emerging Markets Funds (YTD -2.4%)
 +0.7% Mid-Cap Growth Funds (YTD -25.6%)
 +0.9% Small-Cap Value Funds (YTD -7.4%)
 +1.1% Large-Cap Core Funds (YTD -16.2%)

You can see that there was no major style or sector leadership 
last week, with averages all over the place.  Small-cap growth 
funds gained 1.7% on average, among the leaders, while mid-cap 
growth funds returned just 0.7% on average, among the laggards 
for the week.  The top category has a value bias, and the next 
best group had a growth tilt.  The third best performing group 
has a core style.  The weekly indices reflect a market that is 
positive overall but still looking for leadership.

The top individual fund performers last week among stock funds 
with assets of $500 million or more were Legg Mason Opportunity 
Trust (LMOPX) +6.4%; Legg Mason Value Trust (LMVTX) +5.2%; and, 
Longleaf Partners International Fund (LLINX) +4.8%.   

Turning now to the fixed income fund group, the top and bottom 
Fixed income fund indices last week were as follows using data 
from Lipper through Friday, August 23, 2002:   

 Top Five Fixed Income Fund Indices:
 +1.9% High Current Yield (YTD -7.8%)
 +0.9% Intermediate-Term Investment-Grade (YTD +4.4%)
 +0.8% Corporate A-Rated Debt (YTD +4.8%)
 +0.5% U.S. Government (YTD +7.0%)
 +0.3% Short-Term Investment-Grade (YTD +2.3%) 

 Bottom Five Fixed Income Fund Indices:
 -0.9% International Fixed Income (YTD +10.0%)
 -0.0% High-Yield Municipal (YTD +4.2%)
 -0.0% General Municipal Debt (YTD +6.2%)
 +0.0% Short-Term Municipal (YTD +2.8%)
 +0.1% Global Fixed Income (YTD +5.4%)

In a reversal of the trend in 2002, the high yield sector was the 
week's strongest segment rather than high quality bonds, with the 
average high current yield fund producing a 1.9% total return per 
Lipper.  Lipper doesn't have a category for long-term investment-
grade funds or they would have likely come in second on the week.  
Vanguard Long-Term Bond Index Fund (VBLTX) had a 5-day return of 
1.4%, while its sibling Vanguard Long-Term Corporate Bond (VWESX) 
notched a weekly return of 1.2%.  The average intermediate-term, 
investment-grade bond fund rose by 0.9% over the last five days.   

The dollar climbed last week against the Yen and extended gains 
against the Euro as a rebounding stock market and strong demand 
for corporate debt issues fueled foreign demand for U.S. assets.  
That meant pressure on international income fund returns, which 
lost 0.9% on average for the week in U.S. dollar-reported terms.   

In terms of individual funds, Fidelity Capital and Income Fund 
(FAGIX), a high-yield bond fund, was the top performer for the 
week, with a 4.3% weekly total return.  Fidelity Advisor: High 
Yield Fund (FAHYX) +3.7%, came in second, followed by American 
Funds: High-Income Trust A (AHITX), up 3.1% over the five days. 


Largest Mutual Funds


Weekly returns for the largest mutual funds in the country are 
shown below.  You can see it was a positive week for all these 
fund bellwethers except for Fidelity Contrafund (FCNTX), which 
was down 0.4% for the week.  Manager Danoff has the ability to 
short stocks and those hedges may have caused the fund to lose 
value in the rising market.  Of the 10 largest stock funds, he 
(Danoff) still has the smallest YTD loss, down just 6.2% since 
December 31.
 
 Largest Stock Funds:
 +1.3% Vanguard 500 Index (VFINX) YTD -17.3%
 +1.4% Fidelity Magellan (FMAGX) YTD -18.2% 
 +1.2% Investment Company of America (AIVSX) YTD -11.1%
 +1.7% Washington Mutual Investors (AWSHX) YTD -9.7%
 +1.6% Growth Fund of America (AGTHX) YTD -19.4%
 -0.4% Fidelity Contrafund (FCNTX) YTD -6.2%
 +0.8% Fidelity Growth & Income (FGRIX) YTD -12.9%
 +0.0% EuroPacific Growth (AEPGX) YTD -11.1%
 +0.9% New Perspective (ANWPX) YTD -13.6%
 +1.6% Vanguard Windsor II (VWNFX) YTD -10.5%
 
 Largest Bond Funds:
 +0.7% PIMCo Total Return (PTTRX) YTD +5.6%
 +0.2% Vanguard GNMA (VFIIX) YTD +6.5%
 +0.5% Vanguard Total Bond Market (VBMFX) YTD +4.3%
 +1.3% Bond Fund of America (ABNDX) YTD -0.3%
 +0.5% Vanguard Short-Term Corporate (VFSTX) YTD +2.1%
 +0.4% Franklin U.S. Government (FKUSX) YTD +6.0%
 
 Largest Balanced Funds:
 +1.6% Income Fund of America (AMECX) YTD -4.8%
 +1.2% Vanguard Wellington (VWELX) YTD -4.9%
 +1.0% Fidelity Puritan (FPURX) YTD -6.7%
 +1.8% American Balanced (ABALX) YTD -4.4%
 +1.8% Fidelity Asset Manager (FASMX) YTD -7.9%

Among fixed income and balanced funds, the top performers were 
the funds with above-average exposure to the high yield sector, 
which performed relatively well last week.  That includes three 
funds from The American Funds Group: Bond Fund of America +1.3%; 
Income Fund of America +1.6%; and American Balanced up 1.8% for 
the 5-day period.   


Money Market Funds


iMoneyNet.com, the leading provider of money market mutual fund 
data, shows the average taxable money market fund has a current 
5-day simple yield of 1.26%.  That was unchanged from the prior 
week.  The three best current yields among "prime retail" money 
funds were PayPal MMF (at 1.83%), Touchstone MMF (at 1.75%) and 
INVESCO Treasurers MM Reserves (at 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: 
 1.53% Fidelity Cash Reserves 
 1.16% Schwab Money Market Fund 
 1.52% Vanguard Prime MMF/Retail 
 1.46% Schwab Value Advantage Money Fund 
 1.42% Merrill Lynch CMA Money Fund

The key Fed funds rate ended the week at 1.75%, the current peg 
rate for overnight lending transactions between large financial 
institutions.  


Mutual Fund News


Bloomberg posted an interesting story over the weekend on the 
founder of Vanguard, John Bogle, who made a simple $5 bet two 
years ago with Robert Markman, president of Markman Capital 
Management, that Vanguard 500 Index Fund would beat Markman's 
Aggressive Allocation Fund over the next five years.

Two years into the bet, it appears Mr. Bogle will win the $5.  
Since the bet began, Vanguard's fund is off 35 percent, while 
Markman's fund has lost two-thirds of its value.  The article 
states that Markman Aggressive Allocation Fund will be merged 
with two other funds, which have also have struggled the past 
couple of years.  Combining funds causes Markman's forfeiture.

Markman was one of several critics of index funds in the late 
1990s that predicted that index mutual funds would fare worse 
than actively managed ones in a declining market.  That marks 
Bogle's second bet win in as many years.

The Harbor Funds Group plans to combine its small-growth fund 
offering, Harbor Small Cap Growth (HASGX), with Harbor Growth 
Fund (HAGWX).  The combined fund will take Small Cap Growth's 
name, strategy and manager (William Muggia, Westfield Capital 
Management).  Harbor Small-Cap Growth Fund (HASGX) lost 11.6% 
over the past 12 months but ranked in the top quintile of the 
small-growth fund category, per Morningstar.

Morningstar reports that American Century Investments has lost 
another high-ranking investment professional - C. Kim Goodwin, 
co-manager of the American Century Growth Fund (TWCGX) and the 
head of American Century's large-cap growth team.  The article 
states that Goodwin leaves American Century Investments little 
more than 2 weeks after chief investment officer, Randall Merk 
resigned to become president, investment management at Charles 
Schwab.

That's it for this week's edition.   

 

Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com



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

Managing Risk With Stop Orders
by Mark Phillips
mphillips@OptionInvestor.com

I get a lot of reader email on a variety of topics every week,
and I try to respond individually to each of them.  But
sometimes, I find the same topic cropping up in numerous emails,
indicating to me that it is a topic worthy of sharing with
everyone.  That's the case with today's topic, that of
understanding the different types of stop orders and their
proper use.

We frequently mention the use of stop orders to minimize loss
and protect profits, but for those that are unfamiliar with the
attendant details, unpleasant surprises are possible.  So let's
take our time together tonight to cover the two basic types of
stop orders and how they work in different market conditions.

Stop Order:
This order is placed with your broker to buy/sell when a
predetermined price level is reached.  Designed to limit an
investor's loss on a security position, the way in which this
order is executed is important to understand.  The best way to
understand how it works is through example.

Let's say you own 100 shares of MSFT and the current price is
$52.  If you place a stop order at $50, the order will be
dormant until the Bid price reaches $50.  At that point in
time, the order is converted to a sell-to-close market order
and the stock will be sold at the prevailing market price.  In
normal market conditions, your 100 shares will be sold at $50,
although it is possible to lose a bit due to slippage, meaning
that your stock is actually sold at a slightly lower price, say
$49.75.

That brings us to the inherent risk of the stop order that many
investors may be unaware of.  What happens in the same situation
if an unexpected event occurs before the market opens (perhaps
MSFT is downgraded due to weakness in the PC market), sending the
stock tumbling to $46 in pre-market trade.  This will likely
result in the stock opening not at $52, but substantially lower,
probably near $46.  The first bid below $52 will trigger your
stop loss order, converting it into a market-sell order.  Since
MSFT is a very liquid stock, the sale would take place almost
instantly, likely at the prevailing bid.  If that bid is
significantly below the $50 level that triggered your stop order
(say around $46), it would result in a larger loss than you had
anticipated when originally placing the order.

What is important to understand about the stop order is that it
is designed to close your position at or below the specified stop
price.  In normal market conditions, the order will be filled
very near the specified price.  But in volatile markets like we
have seen in the recent past, it is possible to have the order
filled significantly below the stop price.  Fortunately there is
another type of stop order that is designed to take you out of a
position at a guaranteed price.

Stop Limit Order:
The stop limit order is designed to buy/sell at a specified
price or better.  This type of stop attempts to limit your loss
to a specified amount, but will not sell the stock for a price
lower than the stop limit.

Continuing with our MSFT example, let's continue with the
assumption that the stock is still trading at $52, and we want
to be stopped out of the trade if it reaches $50.  But, in
addition, we do NOT want to sell for less than $49.50.  In
placing the stop limit order with our broker, we need to specify
2 prices, first the stop price and then the limit price.  For
the levels specified above, we would place a stop limit order
with a stop price of $50 and a limit price of 49.50.

Now here's the mechanics of how the trade is processed.  If the
bid price on MSFT drops to $50, our order becomes active as a
limit sell, with the limit price set at $49.50.  That means that
the only way for the order to be filled is if there is a buyer
willing to pay $49.50 OR BETTER.  Taking the gap down scenario
that we outlined above, should MSFT gap down to $46, the first
bid at or below $50 will activate our order, and then we would
have a limit sell order in place to sell our 100 shares of MSFT at
$49.50 or better.  If the stock were to recover such that the
order can be filled at our limit price, then we will exit at no
less than $49.50.  However, if MSFT opens at $46 and continues
to slide lower, our stop limit order will NOT be filled.

So here we have the tale of two orders, each with advantages and
disadvantages.  The simple stop order will take you out of a
position as soon as the price moves against you through the
level of your stop.  The problem is that on a gap move, you may
be filled well below your stop price.  Adding insult to injury,
it sometimes seems as though the moment you are filled (seemingly
at the low of the day) the price begins to recover and you watch
in agony as it recovers to near the level where you originally
had your stop.

So you decide next time to utilize the stop limit order.  This
order guarantees that you won't sell your position for less than
your specified price, but you run the risk that your order will
never be filled should the stock continue to slide from the
opening move.

Unfortunately there is no way to get the best of both worlds and
this is a part of what keeps the trading profession both
challenging and frustrating, frequently in the same day.  My
intent here is not to tell you which type of stop order to
utilize for your trading, but to clarify how each of them work
so that you can make an informed decision as to which best suits
your trading needs.  In the long run, either approach will
probably serve you well, so long as you go in with your eyes
open.  And of course the most important point here is that even
with the attendant limitations of both types of stop orders, it
just doesn't make sense to play this game without them.

I hope you found this useful.


Mark


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

THE SECTOR BEAT - 8/26
by Leigh Stevens

While Gold has been in an overall downtrend since the Gold & 
Silver (XAU) sector peak in May, it still is the reflex 
investment and speculation of choice when war scares appear, as 
was the case for this best-performing sector today. 

XAU has been topping out in the 67 area recently, so this level 
becomes key. As you can see in the graphic of the best-performing 
sectors below, the XAU close was 65.49. 

UP (or unchanged) on Monday -





DOWN (or unchanged) on Monday - 




SECTOR NEWS - 

There was interest in the financial groups although they don't 
appear on the list of top gainers.  Speculation that Brazil would 
come through its latest economic crisis was positive for the big 
money center banks with significant loan exposure there - notably 
JP Morgan and Citigroup.  

Oil Service stocks (OSX) were up on the drumbeat of more war talk 
coming out of Washington - or, we could say justification of why 
we should attack Saddam and why the Pres would not necessarily 
need to go to Congress for its approval.  I would think the 
Administration would want the legislative branch on board - if it 
goes badly, they are going to take all the heat. 

While the Networking sector (NWX) was the second best performer 
of the major sector indices I follow, it has been topping out 
right at its 50-day moving average.  Tomorrow should tell the 
story on whether this sector can continue higher and advance 
above technical resistance.  

Substantially higher, on a percentage basis today (not on a point 
basis) were networking sector stocks LU (Lucent - +.37 or 25%); 
GLW (Corning +.26 or 13%); JDSU (JDS Uniphase +.26 or 8.5%); HLIT 
(Harmonic +.24 or 8.2%); and several others such as RBAK, SBL, 
TLAB, and CIEN - all up 5% or more.  

CIEN ran up after Soundview Technology Group raised it's rating 
on the fiber optic company to "outperform" from "neutral". 
Soundview based its increased estimate to a belief that "the July 
quarter represents a low point and that the company is about to 
return to profitability". 

You'll note that the Wireless sector was the third best 
performing stock group - Merrill Lynch told clients its most 
recent checks revealed that overall wireless bookings for Q3 
appeared to be up substantially, with stronger-than-expected 
order rates from Nokia (NOK) and a steady order flow from 
Motorola (MOT).

Mother Merrill said (and we believe these guys!?) that they 
"believe strength in orders from Nokia is a result of new cell 
phone introductions and the company's aggressive attempt to 
regain lost market share. We believe this has benefited Nokia 
suppliers such as Texas Instruments (TXN), RF Micro Devices 
(RFMD), Cypress Semiconductor (CY) and TriQuint Semiconductor 
(TQNT)."


SECTOR TRADE RECOMMENDATIONS -

NEW/OPEN TRADE RECOMMENDATIONS -

NONE


 
TRADE LIQUIDATIONS -

NONE



Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com



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

One Last Rally?

The markets pulled back from the brink of disaster with retail 
buying on support followed by short covering by program traders in 
the afternoon. When the markets failed to crater a few shorts 
decided to cover and look for a new entry point the next time 
weakness appears.

To read the rest of the Swing Trader Game Plan Click here:
http://www.OptionInvestor.com/itrader/indexes/swing.asp


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

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would welcome you as a permanent subscriber.

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The Option Investor Newsletter                   Monday 08-26-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:
Stop Loss Updates None
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - PII

Updated on the site tonight:
Market Watch
Market Posture

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

None


*************
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 - Call
*********************

PII – Polaris Industries $73.96 +0.95 (+0.95 this week)

Company Summary:
Polaris designs, engineers, manufactures and markets snowmobiles, 
all-terrain vehicles, personal watercraft, Victory motorcycles, 
and the Polaris RANGER for recreational and utility use with 
annual 2001 sales of $1.5 billion. Polaris is the largest 
snowmobile manufacturer in the world, and one of the largest U.S. 
manufacturers of ATVs and personal watercraft. Polaris markets a 
complete line of Pure Polaris(TM) apparel, accessories, and parts 
available at Polaris dealerships. Consumers can also purchase 
apparel and accessories around the clock online at 
www.purepolaris.com. The Polaris Professional Series, a line of 
heavy duty Workmobiles(TM) targeted at lawn and landscape 
companies, equipment rental companies and construction 
operations, marks Polaris' expansion into the commercial 
equipment marketplace. Polaris Industries Inc. trades on the New 
York Stock Exchange and Pacific Stock Exchange under the symbol 
"PII," and the company is included in the S&P SmallCap 600 stock 
price index. (source: company release)


Why We Like It:
PII  Polaris experienced a mild pullback with the rest of the 
broader markets on Friday.  This pullback, however, amounted to 
an "inside day" and after the recent series of green candles in 
this stock, we view this as evidence of consolidation on the trip 
up, rather than a significant reversal.  With seventeen straight 
quarters of earnings improvement, and great resiliency to the 
market's recent swings, this stock still appears to be a good 
long candidate. The hold above $73, which had served as minor 
resistance before Wednesday, looks like it may be building a new 
level of support after the recent gains. This looks very 
promising with the Dow down over 200 points intraday on Friday. 
If this is the case, then PII may be gearing up for another big 
run.  We see this test of support as evidence for initiating new 
entries at this level.  PII may experience some consolidation on 
a market pullback next week after a nice run.  Watch the broader 
markets before initiating a new entry here.  The stock continued 
to make money during last year's recession and a market stall 
should not affect the bottom line.  The Dow, however, has had 
quite a week, and may continue its pullback on Monday.  This will 
test a number of stocks that have rallied this week, however, 
seventeen straight quarters of growth are hard to argue with.

Why This is our Play of the Day

Dropping at the open, shares of PII gave us a choice entry this
morning by falling to and then rebounding from the site of its
10-dma.  While the initial bounce was rather tepid, once the
broad market got into the act, that seemed to give the bulls
the confidence they needed to propel the stock sharply higher at
the end of the day.  Not only did PII close out the session with
a solid gain, but it came right back up to resistance near the
$74 level.  While volume ran below the ADV today (likely due to
the light overall market volume), it was encouraging to see the
strong buying volume that propelled PII up the charts in the
final hour of the day, resulting in a close at the day's high.
The stock's relative outperformance relative to the broad market
hints that if the bulls continue to charge tomorrow, we could see
the stock break out above its recent highs.  If looking to take
advantage of a breakout move, look to enter on a breakout over
$75.  Should we get a morning pullback, then a renewed bounce
from the $72 level can be used for new entries.

BUY CALL SEP-70*PII-IN OI= 80 at $5.60 SL=3.50
BUY CALL SEP-75 PII-IO OI=184 at $2.25 SL=1.25
BUY CALL OCT-70 PII-JN OI=  5 at $6.70 SL=4.75
BUY CALL OCT-75 PII-JO OI= 15 at $3.80 SL=2.25

Average Daily Volume = 246 K



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If you trade options online, then you need an online broker
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
offers online spread order entry for net debit or credit
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
**************

Are You Ready?

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/082602.asp



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

On the Verge of a Breakdown

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/082602.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

www.OptionInvestor.com

and click on "subscribe" to use our secure credit
card server or you may simply send an email to

 "Contact Support"

with your credit card information,(number, exp date, name)
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


**********
DISCLAIMER
**********

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