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Daily Newsletter, Tuesday, 08/27/2002

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The Option Investor Newsletter                 Tuesday 08-27-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Point by Point
Index Trader Wrap: ECONOMIC MANIA
Market Sentiment: And So It Begins
Weekly Fund Screen: The New York Times' Fund Finder
Index Trader Game Plans: THE SECTOR BEAT - 8/27

Updated on the site tonight:
Swing Trader Game Plan: Fighting For Every Point


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************
      08-27-2002           High     Low     Volume Advance/Decline
DJIA     8824.41 - 94.60  9017.02  8782.03 1,48 bln   1276/1909
NASDAQ   1347.78 - 44.00  1396.40  1346.21 1,45 bln   1096/2303
S&P 100   471.15 -  6.44   482.13   468.56   Totals   2372/4212
S&P 500   934.82 - 13.13   955.82   930.36
RUS 2000  397.45 - 10.28   408.88   397.45
DJ TRANS 2383.36 - 41.20  2446.83  2378.11
VIX        32.73 +  0.44    33.35    31.58
VXN        50.01 +  1.59    51.50    50.65
Total Vol   3,127M
Total UpVol   840M
Total DnVol 2,258M
52wk Highs    91
52wk Lows    133
TRIN        1.57
PUT/CALL     .84
************************************************************

Point by Point

The bipolar markets reacted to economic news with triple digit
swings in both directions. The August slide was postponed until
afternoon despite several strong selling attempts. The bulls
are fighting for every point and every support level becomes
a new battleground. Despite the Intel bombshell the markets
reacted well and with no major economic reports on Wednesday
it will be interesting to see which way the tide will turn.

Dow Chart



Nasdaq Chart




The morning began with Intel CEO Craig Barrett, speaking at a
tech conference in Malaysia, saying that Intel only sees modest
growth in the third quarter. Barrett said not to count on the
typical fourth quarter rebound because companies were still
not spending money on computer equipment. The 4Q is typically
the best quarter for tech sales. He went even farther to
describe the slowdown in the US economy, the European continent
and Asia. He seemed to be building a case for a future
announcement. Intel will host its mid quarter update conference
call next Thursday. This could have been a preliminary warning
that they are going to lower guidance at that meeting. MSFT and
IBM closed down on the news but the HPQ earnings tonight were
also a negative factor.

HPQ announced earnings in line with estimates after the close
but the CFO said in the conference call that the slowdown in
the last quarter was worse than expected. He said everyone in
his industry were now seeing "new" signs of weakness. He also
said they were seeing some risks around the world other than
just in the US. They missed the revenue numbers slightly and
they affirmed estimates for the current quarter. This ought to
be good for at least one earnings warning going forward. If
you are seeing new weakness AND global risks, then affirming
estimates based on the expected year end rebound might seem
to some like a contradiction of terms. I think it was more
politically correct to affirm now in your first high profile
combined earnings report and then guide down later. You warn
now and your $14 stock becomes $10. Warn later after a post 9/11
rally and maybe your $18 stock becomes only $14 again. Who knows,
maybe the recovery will suddenly appear and you will not have
to warn as much. HPQ profit margins come in at -4.6% meaning
they sold their products for 4.6% less than the cost. No
problem, they will make it up in volume!

The good news today came from the Durable Goods report. The
headline number came in at +8.7% growth for August. This was
the largest number since October 2001. Analysts had only expected
+1.5% and suddenly all the bad news for the last three weeks
was forgotten. Forgotten also was the volatility of this number.
Last September the number dropped to over -6%, followed by +9% in
October and followed by a -6% again in November. Average those
numbers together and you get a modest +1% gain for three months.
Average today's +8.7 over the last three months and you get a
very tame +1.4% growth. Last month was revised down to a -4.5%
drop. What this shows is the volatility of the numbers and that
they cannot be relied upon as a single month indicator. Many
analysts thought last months loss would be recovered this month
and it appears the pendulum swung too far again. Next month I
would expect another negative number to bring everything back
to the +1% growth again. For instance it showed that computers
had increased +14% from last months -10% drop. Obviously the
computer manufacturers and chip makers have not seen this renewed
buying so the number to me is very doubtful.

The negative economic news came from Consumer Confidence which
fell to a nine month low at 93.5. When you consider the stock
market was in rally mode most of August you cannot blame the
falling confidence on stocks. The present situations and future
expectations components both fell for the third month in a row.
More consumers said they were planning on buying a house or
major appliance but fewer said they were going to buy a car.
Compared to the headline numbers only 22% of consumers felt
businesses would be better off six months from now. This is a
very bearish scenario. The market sold off on the news and
ignored the Durable Goods until a couple buy programs bounced
it off support around 11:00.

Retail stores took another hit after posting another week of
less than expected sales. Targets were lowered for this and the
fourth quarter based on fewer shopping days, no tax rebate and
the 9/11 anniversary, which is expected to keep consumers at
home watching TV. The back to school buying wave has not appeared
and the consumer has cut back on apparel spending. The consumer
appears to be conserving cash and putting off purchases not
necessary. Merrill Lynch cut its forecasts on 17 retailers
including TGT, WSM, JWN, BJ, TLB, LTD and ANN. Some analysts
think the extremely low interest rates are causing consumers
to buy houses and cars and saving for those down payments are
causing a shrinkage of discretionary spending. Restaurants are
also showing a decline in attendance. I can attest to this. I
took my daughter to an expensive Chinese restaurant last night
and we were one of only TWO tables of customers in the entire
building during the entire meal. Yes, there was a football game
on but when I questioned the management they said business had
been dropping for two months.

On another side note, one of my sons works for a nursery service
that deals in landscaping in Denver. Last year the owner told me
he kept two crews busy full time, 12 hrs a day, seven days a week.
He could bid anything he wanted and had to turn down business
even at rape and pillage prices. This year he can't keep two
people busy and has no jobs at all this week. Why? He said home
owners have no money. He still bids the jobs but when they see
how much it costs the common refrain is "I will have to wait for
the market to go back up." Definitely a sign of the times when
people cannot afford to have their bushes and trees trimmed
because of the market crash.

Another Fed member, William Poole, the St Louis Fed President,
said that although continued economic weakness would keep the
rates low he felt the next move would be a hike in rates. He
said the markets would keep the rates low without additional
cutting by the Fed. He saw the economy recovering slowly and
in a manner that would not cause Greenspan to waste his remaining
bullets. The Fed funds futures dropped to only a 14% chance
that there would be a cut by October. This was down from 30%
last week. This should not be positive for the markets even
though it means the economy is long term positive. The
congressional budget office lowered their estimates for the
GDP to only +2.2% for this year and to only +3.0% next year.

Citigroup announced today that their investment banking arm,
Salomon Smith Barney, did give large allotments of hard to
get IPO shares to Worldcom officers. Jack Grubman was copied
on the emails that outlined how many shares each got. This
brought up further accusations that he had something to do
with the allocations and that they were used as bribes for
lucrative contracts. Still C only dropped -.20 for the day.

Corporate earnings estimates are dropping like a rock with the
average for the 3Q now only +11.4%, down from 16.6% just last
month. Fourth quarter earnings are now estimated at +22.8%
and down from 27.6% last month. It is finally sinking in that
the economy is not recovering at the rate analysts had expected
and the continued earnings decline will eventually result in
further stock declines. These earnings reductions result in
negative pressure on prices. If a stock trades at a PE of 50
that means the stock price equals 50 x earnings. If earnings
are reduced by -5% a quarter then the stock price goes to 50
x reduced earnings or the PE escalates to a new level like
55 or 60. Granted these are estimates of future growth but
many stocks are valued on 50 X 2003 earnings or even 2004
earnings today. Cut earnings -5% every quarter and suddenly
2003 earnings are much lower and along with it the stock price.

Wednesday is a pivotal day. Don't you just love it when a
writer says that? Not another pivotal day! Can't we just go
back to normal? I would love to but normal is so long ago and
so boring most traders today would give up in disgust. There
are no major economic reports on Wednesday. We will be free
to trade on stock news and the HPQ earnings report. Remember
the one with "seeing new signs of weakness ahead"? The markets
closed right on critical numbers. 8000 for the Dow, 930 for
the S&P and 1350 for the Nasdaq. These are "make" or "break"
numbers and I am betting on break! Should the Dow fail
to hold 8750 the next real support is 8400. Could we hit
that tomorrow? I doubt it but this is the dog days of August.
There has been a bullish bid under the market and unless
this bid is pulled we are probably doomed to another day of
program trading pong which ends up on the downside. Breaking
critical levels like 8750 could accelerate those programs to
the sell side.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

ECONOMIC MANIA
By Leigh Stevens

TRADING ACTIVITY AND OUTLOOK -
First we get a record New-Home sales report yesterday - the
HIGHEST monthly level on record and the market rallies but sells
off some later. Then a huge jump in Durable Goods is reported
this morning, a pre-opening slump turns on a dime and the market
rallies.  Then in a 1-2-3 and you're OUT move, the market dives
on the release of the lowest consumer confidence reading in 9
months.

Since we know its not BUSINESS spending that is propping up the
economy and without the freely spending consumer we would be back
in recession, selling developed immediately. It is probably also
the case that the indices were struggling with an overbought
condition and needed some "excuse" to go down - and, down it
went.

It was also true that the S&P 500 held at pivotal technical
support at 930 and the decline was not a rout.  Weakness in the
Semiconductor sector also was an influence, especially in the
tech heavy Nasdaq, after cautious remarks from Intel's CEO about
the company's prospects ahead.  Retail stocks took a hit also,
after downgrades from Merrill Lynch.  The research gnomes of Wall
Street have been busy!

Some buying in gold, oil and defense was seen however. Not for
the reason that gladden investor's hearts however, as the
prospects for war with Iraq seemed to be back on the front burner
this week. P

Overall volume was on the light side - 1.2 and 1.5 billion shares
in NYSE and Nasdaq, respectively.  No doubt this is causing the
market to move more than would otherwise be the case.

I noted with interest UBS's Index of Investor Optimism survey -
investors' expectations for short-term gains fell to an all-time
low of 7.4%, from 9.6 in the previous month.  Hard to believe
that these numbers were gathered AFTER this recent rally - maybe
they weren’t.  And, when asked what could improve conditions in
the market, 2/3rds said:
- improvement in economic conditions; an equal number also said
- aggressive enforcement of laws against corporate fraud
63% said a significant improvement in earnings would.
Only 37% said a further Fed rate cut would help.

I always thought that economic conditions and earnings ruled, but
today fraud is in investors minds equally as much. Well, it's all
in the mind that's for sure.  Perceptions rule! And, this fact
makes it understandable that "confidence", a state of mind among
consumers, would create a strong effect in the market.


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




The essential aspect to the index is that the S&P 100 continues
to lose upside momentum on balance.  When we get into the
September period, a further cautionary attitude will probably
continue to prevail and the market continue to drift lower.

Near resistance is at the prior highs at 481-482, then 487.

Pivotal near support is the 468 prior low, which is also the
level of the "neckline" of a possible Head & Shoulder's (H&S)
top. A break of the neckline suggests a possible fall to the 450-
455 area.

The technical picture is suggesting a bearish trading strategy,
and to sell rallies, with a stop or exit point above 482.

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




Resistance is at the recent hourly high at 956, then at 965.
Unless SPX climbs back above 956, a bearish trading strategy is
suggested by the declining momentum and selling rallies is my
strategy of choice. The index has now fallen out of its hourly
uptrend channel.

930 continues to be the "line" of support I'm keying off from - a
break of this level activates the Head & Shoulder's (H&S) top
pattern - a decisive downside penetration of 930 suggests
potential for a decline to the 900-895 area, which fulfills a
"minimum" downside objective for the H&S top.

920-915 is a support area between 930 and 900.

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




DJX's lower trendline which yesterday acted as support, has now
been pierced, visually demonstrating that the Dow is losing
upside momentum and the trend has shifted to sideways at best.

89.9-90.2, at prior hourly highs is near resistance; 90.8-91.5 is
the next and "pivotal" resistance in terms of suggesting DJX was
back in an uptrend. Absent a move above 90.2, especially on an
hourly closing basis, I suggest a bearish trading strategy and to
sell rallies.

I would note however, that a final "confirming" bearish move
would be DJX also falling under its prior swing low at 87.6 -
such a move would confirm still lower prices ahead.

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




The QQQ, on the backs of the weakness in SOX, has both pierced
the lower boundary of its uptrend channel, but also taken out the
"neckline" of its Head & Shoulder's top formation, which suggests
an eventually "minimum" downside objective to 23.00.  The Q's
would need to climb back above its trendline at 25, then above
the prior swing high at 25.5, to suggest that the stock was back
into an uptrend.

I suggest selling rallies back up to the 25-25.50 area. QQQ is
oversold now on a short-term basis, but it continues to show
declining momentum on the daily stochastic model.

Near, and pivotal, support is in the 24 area, at the 21-day
moving average. A close under this average would be a good
indication that an objective to 23 or lower would be achieved.


Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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

And So It Begins
By Steven Price

This morning started out with good news on the durable goods
front, which are large ticket items, such as cars and machinery.
Durable goods orders rose 8.7% in July, the highest jump since
October 2001. Combined with record new home sales and increased
existing home sales, July appeared to have been a strong economic
month, in spite of the market decline.

However, later in the morning, Consumer Confidence was released.
This showed a sharp decline, to 93.5 in August, from a reading of
97.4 in July.  The news chipped away at the recent positive
economic numbers, since Consumer Confidence is usually a
reflection of consumers' willingness to spend.  This data teamed
up with a Merrill Lynch  downgrade of 16 retail stocks, citing a
lack of consumer spending and slow back-to-school sales, to take
the wind out of the sails of  the recent good news.  The
downgrades followed forecasts of lower sales by Wal-Mart, Sears,
May Department Stores and Target.

On top of the disappointing Consumer Confidence number, which had
been expected to come in at 97.1, Intel dropped a bomb on the
tech sector.  CEO Craig Barrett said Intel was expecting modest
growth over the third quarter and had not seen much improvement
in the computing environment.  With a September 5th mid-quarter
report around the corner, this sounded an awful lot like a
warning.

Tech stocks are not the only ones who are looking at a sea of red
lately.  The Congressional Budget Office projected that this
year's deficit will be around $157 billion.  This was due to a
decline in tax revenues and double digit increase in spending.
The CBO does not see a surplus until 2006.

An interesting development, which is in contrast to recent
activity, is the sell-off in the bond market today.  While this
could be selling ahead of the upcoming bond auction, it is a
change from what we have seen in the recent past.  As money has
flowed out of equities, it has generally flowed back into bonds.
Today, this was not the case, as both markets were hit.  This
could be viewed as a bullish sign, as the bonds sold off after
the durable goods orders were released, suggesting investors'
intention to move money back into the equities.

It is difficult to keep the  broad markets up when the world's
largest chipmaker sounds a negative tone.  This was most likely
the reason for today's sell-off, as the Nasdaq composite shed
3.15% and the NDX shed 4.16%.  The semiconductor run appears to
be over, as the Semiconductor Index (SOX.X) shed almost 6% and
appears headed back below 300, after a rebound to 366.  it
finished the day down 19.92 to close at 316.87.

The Dow and S&P 500 have held above their 50 day moving averages
and have not yet broken the upward sloping trend line begun at
the end of July.  The Nasdaq Composite, however, broke through
the 50-dma to the downside for the first time since all four
major indices broke above this average on August 19.  The same
thing happened to the NDX.  For the past few years, the techs
have led the rest of the market around by the nose.   Today's
break of this support may foreshadow a sell-off in the other
indices, as well.  While I have been talking about the support
from the 50-dmas recently, I have also talked about a pre-
September 11 sell-off.  With that anniversary only two weeks
away, any economic data that isn't particularly positive will
give nervous investors another reason not to remain long heading
into the anniversary.  We may be seeing the beginning of that
sell-off.  Preliminary GDP later this week could provide the
fulcrum for the market.  A growing economy could tip us toward
another rally, or at least a holding pattern until after
September 11.  If the number is disappointing, look out below.

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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8824

Moving Averages:
(Simple)

 10-dma: 8882
 50-dma: 8772
200-dma: 9716



S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  935

Moving Averages:
(Simple)

 10-dma:  940
 50-dma:  923
200-dma: 1068



Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     : 974

Moving Averages:
(Simple)

 10-dma: 1006
 50-dma:  986
200-dma: 1328



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

The Semiconductor Index (SOX.X): Intel dropped a bomb this
morning on the sector.  Comments from the world's largest
chipmaker indicated that there had not been much improvement in
the computing sector, and predicted modest third quarter growth.
These comments, combined with downgrades to the retail sector,
seemed to indicate that not many PCs will be in Santa's sleigh
this holiday season.  The index has given up almost 60% of its
recent gains, since bottoming on August 5.  The sector led the
NDX and Nasdaq Composite through their 50-dmas to the downside,
and may be foreshadowing a broader market sell-off heading into
the anniversary of September 11.

52-week High: 657
52-week Low : 282
Current     : 316

Moving Averages:
(Simple)

 10-dma: 341
 50-dma: 352
200-dma: 493
INSERT SECTOR SPECIFIC CONTENT HERE


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

Market Volatility

The VIX appears to have a solid floor on it at 30. We will most
likely see this level hold until after September 11.  Over the
next couple of weeks it is likely to creep up toward that
anniversary, unless there is some Earth shattering positive
economic data.  After Intel's negative comments this morning, and
a drop in Consumer Confidence, we are not likely to see such
numbers.  Once we cross that date, if there are no attacks or
negative news, expect to see a large one day volatility drop.

CBOE Market Volatility Index (VIX) = 32.73 +0.44
Nasdaq-100 Volatility Index  (VXN) = 50.01 +1.59

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.84        368,167       310,812
Equity Only    0.69        310,073       213,603
OEX            1.24         19,088        23,738
QQQ            1.61          7,241        11,667

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

Bullish Percent Data

           Current   Change   Status
NYSE          45      + 1     Bull Confirmed
NASDAQ-100    58      - 2     Bull Confirmed
DOW           60      + 0     Bull Confirmed
S&P 500       60      + 1     Bull Alert
S&P 100       58      + 0     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  1.32
10-Day Arms Index  1.06
21-Day Arms Index  1.22
55-Day Arms Index  1.30

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 they do, they can signal significant market turning
points.

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

Market Internals

        Advancers     Decliners
NYSE       1076          1686
NASDAQ     1016          2236

        New Highs      New Lows
NYSE         31              16
NASDAQ       22              49

        Volume (in millions)
NYSE     1,486
NASDAQ   1,483

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

Commitments Of Traders Report: 08/20/02

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

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

S&P 500

Commercials reduced both long and short positions by about 6000
contracts, as can be expected during the end of summer, a
notoriously slow time for the markets.  The got slightly longer,
but by only 500 contracts.  Small traders added to positions
slightly, with a net short increase of 500 contracts.


Commercials   Long      Short      Net     % Of OI
07/30/02      430,833   482,957   (52,124)   (5.7%)
08/06/02      431,590   478,879   (47,289)   (5.2%)
08/13/02      427,618   475,536   (47,918)   (5.3%)
08/20/02      422,100   469,556   (47,456)   (5.3%)

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
07/30/02      153,858    67,451    86,407     39.0%
08/06/02      159,561    67,434    92,127     40.5%
08/13/02      155,040    66,546    88,494     39.9%
08/20/02      156,974    69,071    87,903     38.9%

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 reduced both long and short positions slightly, with
500 more reductions on the short side.  Small Traders also
reduced slightly on both sides, with a net long reduction of 500
contracts.


Commercials   Long      Short      Net     % of OI
07/30/02       38,163     47,343    (9,180) (10.7%)
08/06/02       41,014     50,025    (9,011) ( 9.9%)
08/13/02       42,303     50,354    (8,051) ( 8.7%)
08/20/02       41,876     49,461    (7,585) ( 8.3%)

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
07/30/02       13,159     9,237     3,922    17.5%
08/06/02       11,547     8,782     2,765    13.6%
08/13/02       12,797     8,933     3,864    17.8%
08/20/02       11,321     7,980     3,341    17.3%

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 reduced long positions by about 1700 contracts, while
adding 1500 to the short side.  This led to a reduction of over
3000 contracts from their long positions.  Small traders added
1200 to the long side, while reducing shorts by only 200
contracts.  This led to a net reduction of 1300 short contracts.


Commercials   Long      Short      Net     % of OI
07/30/02       22,429    12,811    9,618      27.3%
08/06/02       23,491    14,290    9,201      24.4%
08/13/02       22,837    13,833    9,004      24.6%
08/20/02       21,160    15,349    5,811      15.9%

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
07/30/02        6,778     8,999    (2,221)   (14.1%)
08/06/02        7,981     9,258    (1,277)   ( 7.4%)
08/13/02        5,050     8,349    (3,299)   (24.6%)
08/20/02        6,216     8,163    (1,947)   (13.5%)

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

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


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******************
WEEKLY FUND SCREEN
******************

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For this week's screen, we're going to use the Net Assets feature
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funds may possibly have some survival risk - may be liquidated or
combined in with another fund.

One of the most appealing features of this Fund Finder is the way
that funds are categorized.  In contrast to Morningstar's 48 fund
categories, the NYTimes.com Fund Finder conveniently sorts mutual
funds into just nine fund types.  U.S. equity funds are sorted by
their style (growth, value or core) rather than the capital range
in which they invest (large-cap, mid-cap or small-cap).  The nine
fund types are summarized below:

 1. Growth
 2. Value
 3. Core
 4. Mixed
 5. Global
 6. Sector
 7. S&P 500
 8. Fixed Income
 9. Government Debt

Our mission this week is to show you how we would use this Fund
Finder to identify the potential strong candidates in each fund
type group, with emphasis on 10-year and 15-year performance to
provide more realistic long-term return expectations.  We might
not get to all fund types or all return time periods this week,
but we'll at least show you the process we would use to get the
most out of this online screener and find the potential winners
over the long-haul.

Growth Funds

Growth funds invest in growth stocks.  These companies have had
faster-than-average gains in earnings in recent periods and are
expected to continue to show high levels of profit growth.  Over
the long run, growth stocks have the potential to outpace slower
growing or stagnant stocks.  Growth stocks, however, are riskier
investments than average stocks, since they generally have above
average price valuations and make little or no dividend payments
to shareholders.

Below is a summary of the top "growth fund" performers over the
trailing 10-year and 15-year periods using the NYTimes.com Fund
Finder.

 Fund Type: Growth
 Return Time Period: 10 Years
 Net Assets: Over $500 Million

 18.6% Calamos Growth Fund (CVGRX)
 16.4% Sequoia Fund (SEQUX)
 16.1% Franklin California Growth Fund (FKCGX)
 15.7% Smith Barney Aggressive Growth Fund (SHRAX)
 15.5% Wasatch Small Cap Growth Fund (WAAEX)

 Fund Type: Growth
 Return Time Period: 15 Years
 Net Assets: Over $500 Million

 15.1% Kaufmann Fund (KAUFX)
 14.7% Sequoia Fund (SEQUX)
 12.7% Wasatch Small Cap Growth Fund (WAAEX)
 12.6% Smith Barney Aggressive Growth Fund (SHRAX)
 12.3% American Century Ultra Fund (TWCUX)

You can see that three funds overlap the top five funds over the
two long-term return periods: Sequoia, Wasatch Small Cap Growth,
and Smith Barney Aggressive Growth.  Each makes a strong case as
a long-term growth investment.  Calamos Growth Fund was launched
in 1990 and does not sport a 15-year track record.  Its trailing
5-year and 10-year average total return of 18.6%, however, ranks
it atop all other growth funds with net assets over $500 million.

What can you say about Kaufmann Fund?  Besides the Sequoia Fund,
no other growth fund with net assets over $500 million has even
come close to matching its 15.1% annualized return over the past
15 years.  Lawrence Auriana and Hans Utsch have managed the fund
for 17 years and have over 70 years combined investment industry
experience.  Its more of multi-cap growth fund today, due to its
large asset size, but that is alright with me.  That should make
it a little less volatile than its younger small-cap growth days.

Value Funds

Value funds invest in undervalued stocks.  These are securities
that are selling below their "liquidation value" or the "market
value" analysts believe they deserve - sometimes referred to as
"intrinsic value."  A company's stock may be undervalued because
its industry is out of favor, because the firm is not well known
or has an erratic earnings history, or other reasons.   Managers
and analysts, using fundamental analysis, try to spot securities
that are cheaply priced before they become fully valued in the
marketplace.  Value-driven funds tend to be less volatile than
other fund styles because of the lower average price valuations
of their holdings.

Below is a summary of the top "value fund" performers over the
trailing 10-year and 15-year periods, per the NYTimes.com Fund
Finder.

 Fund Type: Value
 Return Time Period: 10 Years
 Net Assets: Over $500 Million

 17.7% FPA Capital Fund (FPPTX)
 17.6% Berger Small-Cap Value Fund (BSVIX)
 17.3% Clipper Fund (CFIMX)
 16.9% Mairs & Power Growth Fund (MPGFX)
 16.3% Fidelity Low-Priced Stock Fund (FLPSX)

 Fund Type: Value
 Return Time Period: 15 Years
 Net Assets: Over $500 Million

 15.0% Clipper Fund (CFIMX)
 15.0% FPA Capital Fund (FPPTX)
 14.1% Longleaf Partners Fund (LLPFX)
 13.9% Mairs & Power Growth Fund (MPGFX)
 13.8% Weitz Value Portfolio (WVALX)

As with the growth fund group, there were three funds that made
both lists.  In the value fund group, Clipper Fund, FPA Capital
Fund and Mairs & Power Growth Fund were the three funds to rank
in the top five funds for the two long-term return periods (net
assets over $500 million).  Mairs & Power Growth Fund's name is
suggestive of a growth style, but it seeks growth through value
opportunities.  All three make a good case for a long-term value
fund investment.

Fidelity Low Priced Stock Fund, managed by Joel Tillinghast was
launched in 1989 and does not sport a 15-year history.  However,
its trailing 10-year return of 16.3% ranks in the top five value
funds with assets of over $500 million, and its trailing 5-year
return of 11.1% ranks in the group's top 20 funds.  I like this
fund so much, I use it personally in my old company 401(k) plan.

Core Funds

Core funds have a blend of value and growth characteristics and
land somewhere in between the two management styles in terms of
risk and reward potential.  For our purposes, we have chosen to
combine the S&P 500 fund type into this group since index funds
that track the large-cap index are in essence "core" in nature.

If you've ever logged on to Schwab's website, they offer a fund
strategy called core and explore.  Essentially what they say is
that you may want to consider investing initially in core funds,
then branch out or explore into either value or growth or other
categories.  Since value and growth can outperform at different
times in the economic cycle, many long-term investors invest in
several funds with different styles, while some opt to stick to
the core (blend) funds.

Below is a summary of the top "core/blend" performers over the
trailing 10-year and 15-year periods, per the NYTimes.com Fund
Finder.

 Fund Type: Core (Blend)
 Return Time Period: 10 Years
 Net Assets: Over $500 Million

 17.5% Wasatch Core Growth Fund (WGROX)
 15.6% Vanguard PRIMECAP Fund (VPMCX)
 14.5% Liberty Acorn Fund (ACRNX)
 14.1% AIM Mid Cap Equity Fund (GTAGX)
 13.7% DFA US Micro Cap Portfolio (DFSCX)

 Fund Type: Core (Blend)
 Return Time Period: 15 Years
 Net Assets: Over $500 Million

 13.9% Wasatch Core Growth Fund (WGROX)
 13.8% Fidelity Contrafund (FCNTX)
 13.0% Fidelity Advisor Equity Growth Fund (EQPGX)
 12.9% Liberty Acorn Fund (ACRNX)
 12.3% AIM Mid Cap Equity Fund (GTAGX)

Three funds again overlapped or made both lists: Wasatch Core
Growth Fund, Liberty Acorn Fund, and AIM Mid Cap Equity Fund.
When I see the term "core growth" I think of stocks of larger,
more established growth companies, but in the case of Wasatch
Core Growth Fund, manager Samuel Stewart invests primarily in
small-cap and mid-cap growth companies.  Liberty Acorn Fund's
style is also "small-cap growth" oriented.  So, while the P/E
ratios of underlying holdings may be in the middle, they have
small-cap sector focuses that qualify them more as an explore
fund, than a core fund.

If you're looking for a core fund with a large-cap blend tilt,
you may want to consider Vanguard PRIMECAP Fund (VPMCX), which
has been managed by Howard Schow since fund inception in 1984.
You'll need $25,000 to invest initially, however.  For people
with less money to invest, Fidelity Contrafund (FCNTX), which
costs $2,500 to invest initially, has a fine long-term record
under Bill Danoff's 12-year manager tenure.  Over the last 15
years, only one fund has narrowly outperformed the Contrafund,
one of Fidelity's crown jewels.

Note that all of the aforementioned funds beat the trailing 10-
year and 15-year average returns generated by the Vanguard 500
Index Fund (VFINX), which tracks the performance of the market
(as measured by the S&P 500 index).

Mixed Funds

I'm going to do one more mutual fund type, since it's one of my
favorites, then let you use the NYTimes.com Fund Finder to spot
the top performers in other fund type groups.

Mixed equity or partial equity funds have the dual goals of long
term growth (from stocks) and current income (from bonds).  They
seek to obtain the highest total return possible consistent with
a low-risk equity strategy.  This fund type includes traditional
balanced funds (60% stocks/40% bonds) and asset allocation funds.
Such funds typically offer a higher yield than a pure stock fund
and perform better when stocks are falling.  In a rising market,
however, mixed equity funds usually will not keep pace with 100%
stock funds.

Note that the vast majority of pension funds in America follow a
balanced approach to investing because of the strong risk-return
tradeoff the strategy offers.  Because they diversify net assets
across more than one asset class, these funds have "all-weather"
characteristics and are well suited to conservative stock market
investors who want a fund that allows them to sleep at night and
they can forget about for many years (and know it'll get the job
done for them).

Below is a summary of the top "mixed fund" performers over the
trailing 10-year and 15-year periods, using the NYTimes.com Fund
Finder.

 Fund Type: Mixed Equity
 Return Time Period: 10 Years
 Net Assets: Over $500 Million

 13.9% Scudder-Dreman High Return Equity Fund (KDHAX)
 12.6% Dodge & Cox Balanced Fund (DODBX)
 12.5% Van Kampen Equity Income Fund (ACEIX)
 12.0% Fidelity Advisor Equity Income Fund (EQPIX)
 11.9% Fidelity Convertible Securities Fund (FCVSX)

 Fund Type: Mixed Equity
 Return Time Period: 15 Years
 Net Assets: Over $500 Million

 12.0% Fidelity Convertible Securities Fund (FCVSX)
 11.2% American Funds: Capital Income Builder (CAIBX)
 11.2% Dodge & Cox Balanced Fund (DODBX)
 10.9% T. Rowe Price Equity Income Fund (PRFDX)
 10.6% Vanguard Wellesley Income Fund (VWINX)

You can see that "equity-income" funds and "convertible-bond"
funds are also placed in this fund type, per NYTimes.com and
Lipper.  In this group, two funds overlapped/made both lists:
Dodge & Cox Balanced Fund (DODBX) and the Fidelity Convertible
Securities Fund (FCVSX).  Dodge & Cox Balanced Fund was one of
the first mutual funds in America, dating back to 1931.  Long
term investors looking for a traditional balanced fund with a
value tilt have a superior choice in the Dodge & Cox offering.
Its conservative equity style and team management approach has
stood the test of time.

Long-term investors emphasizing yield over growth may find the
Fidelity Convertible Securities Fund to be an interesting fund
choice because it invests in preferred stock or bonds that are
convertible into common stock.  It is well suited to investors
who want higher income than is generally available from stocks
(equity funds), with greater appreciation potential than bonds
(fixed income funds) typically offer.  The only caveat here is
the fund manager that delivered the fund's superb track record
left the fund earlier this year.  Fidelity does a great job, I
feel, of recruiting and developing analysts into fund managers
and having personnel ready to step in to new management roles.

Summary

This week, I used a new fund screener from the New York Times
website (well, new to me) that is powered by Lipper data and
allows you to identify the top performing funds, in different
fund types, over various long-term return periods.  If you're
investing for the long run, the funds we identified this week
represent some potentially solid candidates for consideration.

I didn't get to all the fund types so I may pick this back up
next week.  The NYTimes.com Fund Finder is accessible online
(www.nytimes.com).  Click on the link for the Business section
and then for the Mutual Funds section.  Because this screener
only gives one piece of the puzzle (return), it's recommended
that you judge funds on other factors as well, such as risks,
costs/expenses, and funds management, and weigh those against
your individual goals, horizon, and tolerance for risk.


Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

THE SECTOR BEAT - 8/27
by Leigh Stevens

NEWS & VIEWS -
The notable sector stories today involved the weak getting weaker
- Semiconductors (SOX) - and the best performing suffering a
recent reversal also - the Biotech group (BTK).  Health stocks -
Health Providers (RXH) and the Health Payers (HMO) - have been
retracing more of their recent recovery rallies. Internet (INX)
and tech in general, as well as Airlines (XAL) were also under
selling pressure.

Some cautious comments from Intel's CEO put the entire sector
under pressure - his comments were of an expectation of only
"modest sequential earnings growth in the third-quarter" and that
he not seen "improvement in the PC environment as companies were
still not investing" - hey, exactly nothing new!  But when the
market is ready to correct, investors always find a reason to do
some selling.  Intel reports next week.

Bear Stearns had some comments: "When Intel gives its mid-quarter
update next week, we expect they will come down to the Wall
Street consensus range of about $6.6 billion or so [for third-
quarter revenue]. We think the stock is close to a bottom. We do
not think it will move significantly without a catalyst, but we
think it's well positioned," Bear told clients. This is Analyst
speak for maybe buy the stock IF the economy picks up.

Merrill Lynch issued a cautionary to negative note on Retail,
stating that the consumer is being more conservative with their
spending than they previously anticipated.  Mother Merrill thinks
a consumer slowdown is developing.  I guess no more "what ME
worry!"

Anyway, a number of retail stocks got hit on this assessment of
how we're going to spend our money or not.  Selling ensued in
stocks ranging from the high end clothiers like Ann Taylor (ANN)
and Nordstrom (JWN), to the lower, like Talbots (TLB); as well as
a mixed bag of companies ranging from CostCo (COST), Williams-
Sonoma (WSM), to Barnes & Noble (BKS) and Borders (BGP). No time
to read anymore or we can go to the library!

Meanwhile, resurging war talk boosted the Defense (DFI) sector,
although it is only back into a congestion (resistance) area -
ditto Oil Services (OSX) and the Gold sector (XAU) shares.

The Biotech, and Defense sector charts are highlighted below.

UP (or unchanged) on Tuesday -





DOWN (or unchanged) on Tuesday -





SECTOR TRADE RECOMMENDATIONS -

NEW/OPEN TRADE RECOMMENDATIONS -

NONE


TRADE LIQUIDATIONS -

NONE


SECTOR HIGHLIGHTS -

Biotechnology Index ($BTK.X)
STOCKS: ABGX; ADRX; AFFX; AMGN; BGEN; CELG; CEPH; CHIR; CRA; DNA;
ENZN; GENZ; GILD; HGSI; ICOS; IDPH; IMCL; IMNX; INCY; MEDI; MLNM;
MYGN; PDLI; TARO; TEVA; VRTX; XOMA




Readers of this column will recall these trendlines above - I
suggested a last week that the sector was close to breaking its
uptrend and it did, might head down to the lower trendlines again
at 333 in BTK and to the 76 area in the BBH HOLDR's. This is
still my view. What was previous resistance at the trendline, may
now act as a line of support.

Defense Index; Amex ($DFI.X)
STOCKS: ATK; BA; COL; DRS; EASI; EDO; ERJ; ESL; FLIR; GD; INVN;
ITT; LLL; LMT; NOC; OSIS; RTN; SSSS; TDY; TTN; UIC




The Defense sector has rebounded but needs to take out resistance
in the 575 area to suggest that the group was back into an
uptrend.  Stocks in the group as shown below, that look promising
on a technical basis, if this rally continues, includes: EASI and
NOC, both of which are having strong upside breakouts, and LLL.

Defense Sector Index (DFI) stocks -





Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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

Fighting For Every Point

The markets were handed a gift this morning with the Durable Goods
orders, which helped stop the August sell off in mid stride. After
30 min of euphoria the Consumer Confidence report spoiled the
party and the markets crashed back to reality near the yesterday
afternoon lows. Bulls fought back to positive territory again but
could not hold it and the selling accelerated slowly into the
close.


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The Option Investor Newsletter                  Tuesday 08-27-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: CHIR, EDS, ERTS
Dropped Puts: LMT, PIXR
Daily Results
Call Play Updates: PII
New Calls Plays: DRI
Put Play Updates: ADI, GS, MXIM, QLGC
New Put Plays: KSS, IBM, EBAY, UNH

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

CHIR $39.67 -1.22 (-1.10) The persistent weakness in the
Biotechnology index (BTK.X) this week is wearing down the bulls
in CHIR, and the stock has now decisively broken its steeply
ascending trendline.  While the stock is still finding support
near the $39 level (the site of our stop), it is somewhat
disconcerting to see today's violation of the 10-dma.  This is
CHIR's first close below the 10-dma in the past month, and
likely portends more weakness to follow.  CHIR is a drop tonight,
so use any rebound in the morning to exit open positions.

---

EDS $39.99 -0.91 (-1.46) The bulls gave it there best shot, but
in the end, the $44 resistance level proved to be too strong for
EDS.  The stock has been drifting lower over the past 3 days, and
came to rest a penny below our $40 stop.  While the ascending
trendline hasn't been violated yet, it looks like the bears have
gained the upper hand.  We want to take advantage of any rebound
from the $40 level tomorrow to exit open positions that weren't
stopped out today.

---

ERTS $64.24 -1.62 (-2.39 for the week)  Electronic Arts recently
hit new all time highs. It consolidated around $65 and then
rallied up to $67.75.  We put a stop in place at $65, as this
level would indicate a loss of support at the prior consolidation
level.  Although analysts are eventually predicting good sales
numbers with the holiday season around the corner, we are playing
for the near term. The stock traded below our stop and we are
closing the play.


PUTS:
*****

LMT  $62.22 +1.27 (+2.51 for the week) After lasts week's
statements by George Bush indicated that it may be a while before
the U.S. invaded Iraq, LMT took one on the chin.  That sentiment
changed this week, as Dick Cheney made strong comments about the
need for action in the near term. This was followed by an
encounter in the Iraqi no-fly zone.  Although LMT has not
exploded with the rest of the sector, we are not going to fight
the news, and will drop play in anticipation of more news related
items creating too much volatility for a trend play.

---

PIXR $49.64 -0.24 (+0.34) We added PIXR to the Put list to take
advantage of an expected bout of profit taking after the stock's
strong rally out of its base near $44.  That pullback did
materialize, with the stock trading down to just above the $48
level on Friday, but we've seen a series of higher lows over the
past 3 days, with the stock continuing to find willing buyers near
the 10-dma.  Each selloff has been bought at successively higher
levels and it looks like the necessary profit taking has run its
course.  We're dropping PIXR tonight, as a rebound in the broad
markets could lead to a strong rebound in the stock, taking it
back through near-term resistance at $50.  Use a morning dip to
effect a more favorable exit from the play.


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

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

CALLS              Mon    Tue

CHIR     39.67    0.09  -1.22  Drop, Biotech pullback
DRI      25.40    0.21   0.39  New, Green lights everywhere
EDS      39.99   -0.55  -0.91  Drop, back to start
ERTS     64.24   -0.75  -1.62  Drop, stopped out
PII      74.35    0.71   0.39  Great Relative Strength


PUTS

ADI      25.84    0.53  -0.52  Rolling with the punches
EBAY     57.20   -0.94  -2.04  New, back to Earth
GS       79.10    0.90  -0.65  Shaky hold under resistance
IBM      77.96   -0.98  -1.46  New, The harder they fall
KSS      69.27   -0.05  -2.12  New, Back to the sale rack
LMT      62.22    0.90   1.27  Drop, Cheney in charge
MXIM     33.88   -0.01  -2.04  Semis back through support
PIXR     49.64    0.66  -0.24  Drop, did its thing
QLGC     35.91    0.18  -1.31  Back in descending channel
UNH      88.25   -0.73  -2.12  New, Room to fall


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

PII $74.35 +0.39 (+1.24 for the week) Talk about relative
strength! This stock has proven resilient to each of the recent
market pullbacks on Friday, Monday morning and Tuesday. Even
Friday's pullback in PII found support at $73.  With a stock
trading around $74, this was less than a 1% loss on a day when
the Dow lost almost 200 points.  On Tuesday, the stock was up, in
spite of weak consumer confidence number, which shook the rest of
the market.  This may have been due to the 8.7% rise in durable
goods in July, which PII's products border on.  A profile on
CNBC, which showed demand for PII's products didn't hurt either.
A company that can sell expensive toys for adults at an
increasing profit over each quarter for more than four years,
including a recession, continues to look like a good bet.
Today's trade of $75.00 placed another "X" on the PnF chart and
continued the breakout from a bullish flag on the chart.  The new
bullish vertical count is $95.00.  A $20 move is above our
current target, however is not out of the question as an eventual
goal.  We remain bullish on PII and are raising our stop to
$71.00.


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

DRI – Darden Restaurants, Inc. $25.40 +0.39 (+0.60 this week)

Company Summary:
Darden Restaurants, Inc. is the largest publicly held Casual
Dining restaurant company in the United States.  The company
operates over 1100 restaurants in 49 states, including 629 Red
Lobster and 472 Olive Garden restaurants.  In addition, DRI
operates 37 restaurants in Canada.  The company operates all
of its North American restaurants, while Red Lobster Japan
Partners, a Japanese retailer unaffiliated with Darden, operates
34 Red Lobster restaurants pursuant to an Area Development and
Franchise Agreement.  DRI is the parent company of GMRI Inc.,
which along with other Darden subsidiaries, own the operating
assets of the restaurants.

Why We Like It:
Whether consumers have started to curtail their spending or not,
they don't seem to have cut back on how often they go out to eat.
People may be staying closer to home, but that doesn't mean they
don't feel the need to treat themselves to a relaxing meal in a
casual setting.  That much seems clear by looking at the stock
chart of DRI, the largest U.S. casual dining restaurant chain.
While earnings aren't scheduled to be released until September
19th, the recent price action in the stock indicates that
business is doing quite well, indeed.  In the past month, DRI has
gained more than 25%, and last Friday's breakout above the
200-dma (how many stock's can stake that claim?) seems to have
added more conviction for the bulls' case.  Volume is running
right at the ADV (which is pretty impressive for a low-volume
week), and last week's resistance at the $24 level now looks like
solid support.  Like everything else in this choppy market, this
trend could end at any time, but we don't think so.  Investors
appear to be bidding the stock higher in anticipation of solid
results when the company announces earnings.  So long as the
stock continues to post higher highs and higher lows, buying the
dips should make for a profitable trade.  Use an intraday
pullback near the $24 level to initiate new positions, using a
tight stop at $23.50.  Should DRI close below that level, we'll
know that the bullish trend has likely come to an end, as it
would break the lower boundary of the ascending channel that has
been supporting the rally for the past 3 weeks.

BUY CALL SEP-25 DRI-IE OI=459 at $1.25 SL=0.50
BUY CALL SEP-27 DRI-IY OI=  0 at $0.40 SL=0.00
BUY CALL OCT-25*DRI-JE OI=419 at $1.90 SL=1.00
BUY CALL OCT-27 DRI-JY OI= 82 at $0.85 SL=0.40

Average Daily Volume = 1.41 mln



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

ADI $25.84 -0.52 (-0.12 for the week) ADI continued its rollover
with the rest of the techs today.  After Intel's Chief Executive
Officer Craig Barrett rained on hopes of a holiday recovery,
citing predictions of only modest growth, the tech sector
continued south.  ADI's circuits are used in a wide variety of
technology products, including computers, peripherals and
consumer electronics.  Today's comments, which indicated a lack
of growth in computer sales, were just the start.  Merrill Lynch
downgraded a group of retailers, citing a lack of consumer
spending, which does not bode well for sales of products that use
ADI's internal components.  Add to this a very disappointing
Consumer Sentiment number of 93.5, versus expectations of 97.1,
and holiday shopping season could take an additional chunk out of
ADI's stock.  On the positive side for ADI, durable goods orders
saw an increase in July, which helps its automotive electronics
business.  Overall, ADI is still a tech company, and its fortunes
will be tied to that of the tech sector. Intel will be giving a
mid-quarter report on September 5 and today's CEO comments
certainly sounded like a warning.  We are looking for the sector
to continue to give back its recent gains, and ADI to go right
along with it.

---

GS $79.10 -0.65 (+0.80) It has been a nip and tuck battle between
the buyers and sellers in shares of GS over the past week, but it
looks like the bears are starting to get the upper hand.  The
Brokerage sector (XBD.X) caught a bid this morning along with the
rest of the market, and that drove shares of GS up to just below
the $81 level.  But that was all the bulls could muster, and the
bears took over from there.  By the end of the day, the XBD index
had fallen nearly 2%, coming to rest just above the 62%
retracement of last fall's rally.  For its part, GS held up pretty
tough in the early going, but eventually succumbed to the
sector-wide pressure (helped along by Salomon Smith Barney's
admission of doling out IPO shares to the favored few at Worldcom)
and closed back near $79.  This level has acted as a price magnet
over the past few days, but the real important price level seems
to be $80, which is also the 50% retracement of the fall rally.
Failed intraday rallies near the $80 level continue to provide the
best entry points, due to the underlying bids that seem to be
resting just below important support levels.  Our initial downside
target is still $77, followed by the possibility of a drop as low
as $74.  Momentum traders will want to see the XBD index drop
below its $408 support level before attempting new positions.
Should the bulls get a fresh shot of adrenaline, a close above
$80 will have us dropping the play.

---

MXIM $33.88 -2.04 (-1.65) The Semiconductor index (SOX.X) was
dealt another body blow this morning when Intel's CEO made it
clear that businesses are still not opening their coffers for new
IT spending.  That combined with the decline in Consumer
Confidence, had the SOX leading the NASDAQ lower throughout the
day.  By the closing bell, the SOX had shed nearly 6% and appears
headed back for a retest of the $300 support level.  Shares of
MXIM have been attempting to buck the bearish trend in the SOX,
but today's sector weakness was just too much.  After losing the
$35 support level midday, MXIM accelerated into the close, coming
to rest just above the 20-dma ($33.57).  As has been the case
with the SOX, MXIM has found formidable resistance at its 50-dma,
currently at $36.36.  Accordingly, we are lowering our stop to
$36.50, just above both today's high and the 50-dma.  Another
failed rally attempt below this level would make for a solid
entry into the play.  With a fair amount of intraday support
resting in roughly $1 increments below Tuesday's close, momentum
entries carry more risk, due to the possibility of a
short-covering rally.

---

QLGC $35.91 -1.31 (-0.69) The bulls have been stubbornly defending
the $36 support level in QLGC over the past week.  But they lost
control of that level at the end of the day on Tuesday, as the SOX
fell nearly 6%.  While QLGC did fall by 3.5% today, the minor
violation of support at the end of the day could be the setup for
a short covering rally tomorrow if the bulls come back to the SOX.
The stock has been consistently turned back at its descending
trendline (currently $38) and we would look for any rebound to
roll over near that level tomorrow.  Note that QLGC continues to
be pressured lower by its declining 50-dma ($38.67), giving us
confidence in our stop at the $39 level.  Note that the stock also
took out both its 10-dma and 20-dma in today's slide, placing it
below all of its moving averages.  Use a failed rally below $38
to initiate new positions.  Alternatively, use a decline under
the $35 level to initiate momentum-based positions, but only if
the SOX continues its decline.  Look for the $33.75 level (the
bottom of the 8/15 gap) to provide the next support level capable
of prompting the next oversold rebound.


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

KSS – Kohl's $$69.27 –2.12 (-2.25 this week)

Company Summary:
Based in Menomonee Falls, Wis., Kohl's is a family-focused,
value-oriented specialty department store offering moderately
priced national brand apparel, shoes, accessories and home
products. The company operates 420 stores in 32 states. (source:
company release)

Why We Like It:
Kohl's had experienced a meteoric run-up during the month of
August, as Wal-Mart's predictions for the rest of the year drove
the retailers higher.  That music has stopped.  A slow back to
school sales environment has forced many analysts to rethink the
retail sector.  Wal-Mart warned for the second week in a row
about slow apparel sales, accompanied by Federated's third
warning in as many weeks.  Merrill Lynch downgraded 16 retail
stocks this morning, citing slow sales and lack of consumer
spending.  Merrill Analyst Daniel Barry said, " Sales have
deteriorated sharply since early July, almost as if someone
turned off a switch."

That sentiment was echoed by this morning's Consumer Confidence
Index, which came in at 93.5, versus expectations of 97.1.  This
number usually affects retailers strongly, as a lower number
shows consumers are worried about the economy and concerned about
spending.  The disappointing Consumer Confidence number may
indicate we are finally seeing cracks in the consumer spending
armour, which has been solid up until now.  A look at the Retail
Index (RLX.X) shows the group rolling over as a whole.  After
plummeting from highs near a reading of 350 in June, all the way
down to 250 in July, the group had crawled back, just peaking at
over 300 last week.  What looked like support didn't last long,
as the index has rolled over and is showing a current reading of
294.96.

KSS's break of $70 support today on the daily chart coincided
with a four-box reversal on the point and figure chart.
Stochastics have also rolled over and are now giving a sell
signal, as well.  There may be some mild support around $65 and
again at $63, however our ultimate target on the play is $60.
Place stops at $72.50, above Friday's high of the day.

BUY PUT SEP-70*KSS-UN OI=1106 at $3.20 SL=1.60
BUY PUT OCT-70 KSS-VN OI=1355 at $4.40 SL=2.20

Average Daily Volume = 2.21 mil


---

IBM - International Business Machines $77.96 -1.46 (-2.44 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 enjoyed quite a breakout after its recent seven-week
consolidation.  After trading in a range between $66 and $74,
forming a rectangle for almost two months, IBM achieved its
measuring objective, on the breakout, of $82.  We closed our long
play on the stock for a profit and are now ready to jump on for
the ride back down.  Many times a rectangle breakout will result
in a similar pattern to the upside, with the stock re-testing the
breakout level, in this case $74.  While a four dollar drop would
be fine with us, we have bigger plans for the downside.

Much of IBM's gain was on very little news.  A look at the short
interest in the stock shows a high relative number, of
approximately 28%.  After the stock broke a significant
resistance level, it appears much of the rally was due to short-
covering, as not only the stock, but also the overall market was
in rally mode.  After the rally, the stock hung over $80, finding
a brief period of support.  That support is now gone and the
stock is heading back down.  While the $74 level of previous
resistance could serve as support, recent news indicates the tech
sector is headed for another downturn and could see IBM back
around $70.

On Monday, Deutsche Bank Securities cut three IT service stocks,
citing high valuations, and growing competition in the market.
DBS said it did not expect the business environment for computer
services, which is part of IBM's business plan, to improve during
the next six months.  This just underscores the comments that
have been made recently regarding profit goals for the tech
sector.  Estimates have been lowered for 2002 and 2003, and
predictions of a significant recovery are being put off until the
second half of next year.  This morning's comments from Intel
about only expecting modest growth this quarter, came in spite of
durable goods orders increasing in July, and sounded like a
warning for next week's mid-quarter update.

The server computer market is also shrinking.  Revenue from all
four industry leaders - IBM, HP, SUNW and DELL - shrank from
$11.6 billion in the second quarter last year, to $10.1 billion
this year.  The fact that IBM increased its market share by 1.7%
helps, but not enough to make up for a 13% decline in overall
revenue.  With plenty of room to fall after the recent rise, we
view the current level as a point to initiate short entries.
Place stops at $81.50, just above Friday's high of the day, as
this would signal a possible new round of short covering.

BUY PUT SEP-80*IBM-UP OI= 12834 at $4.10 SL=2.00
BUY PUT OCT-80 IBM-VP OI= 32217 at $5.60 SL=2.80


Average Daily Volume = 9.16 mil


---

EBAY – eBay, Inc. $57.20 -2.04 (-2.95 this week)

Company Summary:
After developing a Web-based community in which buyers and
sellers are brought together in an efficient format, EBAY has
emerged as the dominant online auction site.  The eBay dynamic
pricing format permits sellers to list items for sale, buyers to
bid on items of interest and all eBay users to browse through
listed items.  Items listed on eBay include collectibles,
automobiles, art objects, jewelry, consumer electronics and a
host of practical and miscellaneous items.  Although based in
the United States, through its subsidiaries, EBAY also operates
trading platforms in Germany, the United Kingdom, Australia,
Japan, Canada, France, Austria, Italy and South Korea.

Why We Like It:
There are few Technology stocks that can boast a triple-digit
P/E ratio after the incessant selling that has consumed that area
of the market over the past 2 years.  Those stocks that are still
richly valued, tend to lead the NASDAQ, both on the upside and on
the downside.  That has certainly been the case with EBAY, which
made a strong move over the past month, recovering from the $52
level to as high as $62 last week.  The stock's initial push
through the $60 level looked like a solid breakout move in
progress, but with the NASDAQ rolling over, EBAY has been picking
up speed to the downside this week.  The first real hint of
weakness came with yesterday's close back under the critical $60
level and with the NASDAQ-100 shedding more than 3% on Tuesday, a
lot of the bids in EBAY seemed to dry up, allowing the stock to
fall by 3.4%.  Today's decline dropped shares through all of its
moving averages, including the important 50-dma ($58.55) and
200-dma ($58.71).  So long as the NASDAQ continues to retrace its
recent gains, failed intraday rallies in EBAY will likely make
for attractive entries, particularly on a rollover near the
converged 50- and 200-dmas.  The next likely support for the
bears to contend with will be between $56 (historical support)
and the month-long ascending trendline at $56.50.  So traders
looking to take new momentum-based positions will want to wait
for a drop below $56 before playing.  We are initiating coverage
with our stop set at $60.

BUY PUT SEP-60*QXB-UL OI=4562 at $4.10 SL=2.50
BUY PUT SEP-55 QXB-UK OI=6013 at $1.70 SL=0.75

Average Daily Volume = 8.61 mln


---

UNH – UnitedHealth Group $88.25 -2.12 (-1.99 this week)

Company Summary:
Providing a broad range of resources to help people improve
their health through all stages of life, UNH forms and operates
markets for the exchange of health and well being services.
The company's Health Care Services segment consists of the
UnitedHealthcare and Ovations businesses.  UnitedHealthcare
coordinates network-based health services on behalf of local
employers and consumers in six broad regional U.S. markets.
Ovations is a business dedicated to advancing the health and
well-being goals of Americans over the age of 50.  Additionally,
the company's Ingenix business operates in the field of health
care data and information, analysis and application.

Why We Like It:
With The Health Care Payor's index (HMO.X) struggling with
formidable resistance near the $590 level recently, the negative
pronouncement out of Healthsouth (HRC) this morning sent the
index tumbling for a 3.5% loss.  The company's restructuring plan
was not well-received by the market, and led to a Merrill Lynch
downgrade, as well as Moody's putting the company on review for
a possible downgrade.  This looks like the first crack in the
bullish facade that has been building in the HMO sector since the
July lows.  While the HRC news was company-specific, we can't
ignore the effect it had on the overall sector.  We've been
watching shares of UNH recently, and sure enough, the stock rolled
over right at the $92 level late last week.  This is important,
because that was also the site of the 2-month descending
trendline.  Today's sector-wide selloff knocked UNH back by more
than $2, but more importantly it is now back under its 50-dma
($89.38).  If the HMO index continues to decline later this week
(as we expect it will), UNH should head lower as well.  While
there is potential support near $85, it appears the stock could
be headed back for a retest of its recent lows near $82.  The
best entries will come on the heels of a failed intraday rally,
which should fail in the $90-91 level if our bearish thesis is
correct.  Alternatively, we can consider momentum entries on a
decline under the $87 level, so long as the HMO index continues
to slide.  Initial stops are set at $91.50.

BUY PUT SEP-90 UHB-UR OI=3663 at $3.70 SL=2.25
BUY PUT SEP-85*UHB-UQ OI=3526 at $1.65 SL=0.75

Average Daily Volume = 2.63 mln



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The Option Investor Newsletter                  Tuesday 08-27-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Play of the Day: PUT - IBM
Traders Corner: The Main Event

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

IBM - International Business Machines $77.96 -1.46 (-2.44 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 enjoyed quite a breakout after its recent seven-week
consolidation.  After trading in a range between $66 and $74,
forming a rectangle for almost two months, IBM achieved its
measuring objective, on the breakout, of $82.  We closed our long
play on the stock for a profit and are now ready to jump on for
the ride back down.  Many times a rectangle breakout will result
in a similar pattern to the upside, with the stock re-testing the
breakout level, in this case $74.  While a four dollar drop would
be fine with us, we have bigger plans for the downside.

Much of IBM's gain was on very little news.  A look at the short
interest in the stock shows a high relative number, of
approximately 28%.  After the stock broke a significant
resistance level, it appears much of the rally was due to short-
covering, as not only the stock, but also the overall market was
in rally mode.  After the rally, the stock hung over $80, finding
a brief period of support.  That support is now gone and the
stock is heading back down.  While the $74 level of previous
resistance could serve as support, recent news indicates the tech
sector is headed for another downturn and could see IBM back
around $70.

On Monday, Deutsche Bank Securities cut three IT service stocks,
citing high valuations, and growing competition in the market.
DBS said it did not expect the business environment for computer
services, which is part of IBM's business plan, to improve during
the next six months.  This just underscores the comments that
have been made recently regarding profit goals for the tech
sector.  Estimates have been lowered for 2002 and 2003, and
predictions of a significant recovery are being put off until the
second half of next year.  This morning's comments from Intel
about only expecting modest growth this quarter, came in spite of
durable goods orders increasing in July, and sounded like a
warning for next week's mid-quarter update.

The server computer market is also shrinking.  Revenue from all
four industry leaders - IBM, HP, SUNW and DELL - shrank from
$11.6 billion in the second quarter last year, to $10.1 billion
this year.  The fact that IBM increased its market share by 1.7%
helps, but not enough to make up for a 13% decline in overall
revenue.  With plenty of room to fall after the recent rise, we
view the current level as a point to initiate short entries.
Place stops at $81.50, just above Friday's high of the day, as
this would signal a possible new round of short covering.

BUY PUT SEP-80*IBM-UP OI= 12834 at $4.10 SL=2.00
BUY PUT OCT-80 IBM-VP OI= 32217 at $5.60 SL=2.80

Average Daily Volume = 9.16 mil



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

The Main Event
By John Seckinger

Event risk refers to the potential loss in value that a trader may
suffer through unpredictable events causing large unexpected market
price moves.  Event risk can be caused by changes in political or
economic factors, as well as natural disasters.

Even mathematical finance is starting to have a great interest in
event risk.  The increasing level of global linkages and the growing
number of assets at risk has made large-scale event risk management
an essential function for the financial markets.

Taking things to a practical level, event risk can easily center
around Middle East or during the Congressional election season
Don't forget Uruguay in South America, a country that has closed
its banks for a week after a one day holiday. This crisis occurred
in the wake of problems in Argentina and Brazil.  So far there is
no evidence of this problem extending to Asia, Russia, or any other
markets, but I am sure it will.  The memory of 1997's and 1998's
Asian and Russian crises has not been wiped away from our memories.
When those two disasters began, not too many people were thinking
that they could expand.

Option traders understand event risk as Vega, the term for measuring
the relationship between an option's price and volatility.  Volatility
is a Wall Street word for fluctuation. Vega effects an option's time
value and its price.  It is the measurement of an option's change in
price relative to the change in the price of the underlying asset.
Simply put, Vega gives traders a concrete way to define risk in the
option as it relates to the asset.

Let's us revisit some prior events in the market place; beginning
with 1980.  The key, of course, is determine which was "actually an
event".  .





The main highlight in the 80's is the crash seen in 1987, followed
by the U.S. becoming a debtor nation in 1985 and tax reform enacted
one year later.  Why do I choose these as highlights?  Event risk,
to me, is when the market finds a catalyst and decides to mainly
ignore technical analysis.  If there is significant resistance
seen above for a few hundred points and an event takes place,
these levels will usually be immediately forgotten.  Therefore, in
an attempt to recognize the possibility of the marketplace worried
about event risk, traders should begin to pay close attention to
how support and resistance levels hold up in light of the recent
global concerns.  This is the most important lesson.





The 90's clearly went vertical.  Some noteworthy events included
the Jobless rate hitting 4.8 percent and the Asian economic crisis
beginning with the Thai baht and spreading globally.  This event
took even took on a new twist as the Malaysian government imposed
controls to prevent the outflow of foreign investment funds and
angering free market advocates.  These events are interesting
because they preceded a sharp sell off and went opposite of the
general trend.  Also preceding the sell off in 1998 was oil prices
plunging.  However, the Russian default came as the market found
a short-term bottom.  Was this an event "already priced into the
marketplace", similar to Japan confirming their recession in 1998?
Instead of answering the question, following price action makes
the most sense.  Either the event happens or prices begin to
"ignore" technical analysis.  Of course, technical patterns
should supercede all else.  If the technical patterns hold,
I would choose to ignore the event; regardless of how significant
it appears to be.





Notable events during this decade included the volatility and eventual
price compression as the Presidential Election ended.  Also noteworthy
was shareholders' reaction following the Appeals court reversing
Microsoft's breakup ruling.  The next event needs no explanation:
September 11th.  Lastly, blue-chip investors were forced to digest a
number of bankruptcies as the post-September lows cam back into focus.

Ok, the events are spelled out and the volatility illustrated.
Moreover, we have spelled out that once technical analysis becomes
"forgotten" we have either a fundamental occurrence or great threat
of an event.  Well, how can a trader become profitable before such
an event takes place?

In the current environment, it is my opinion that:

    The Dow leads all markets

   The Dollar is a coincident indicator and could be the first
   index outside the Dow to point towards a possible event.

   The Yield Curve is a better indicator than simply
   following the 30-year, since it takes out the volatility
   of the 30-year bond and looks at the five and ten-year
   spread instead.  Moreover, most foreign central banks use
   the five year; therefore, allowing us to possibly predict
   what they are thinking.

   Bond yields will become important once more if historical
   levels become tested.  Example:  2-year at 2.00 percent or 30-year
   at multi-year lows

Therefore, it is my hope that readers will begin to look at charts
of the dollar, bonds, better understand the yield curve, and of
course pay close attention to price action within the Dow.

For a review of the Intermarket Relationships, please read this Traders
Corner Article:

http://www.OptionInvestor.com/traderscorner/082202_3.asp

On a more practical level, these are levels in the Dow that should be
viewed as technically important and if "ignored" may either confirm
an event or point a possible event about to take place:

Dow Jones Industrial Average

Resistance:

Already has been proven 9000 holds weight.

9200

From 9350-9400 (more important than 9200)

Support:

Near 8740 - already acted as support a few days back

Not much until 7532.  Remember, we are looking for "events"; which are
pretty rare.

Dollar

Resistance:

108.50

111.00

Support:

106, but doesn't have to hold the next time down

104.50 (much more important)

Another point to remember:  Since both the dollar and the Dow are
in a downward trending channel (long-term view), if the aforementioned
resistance levels hold, it makes sense that there is not an "event
risk" and that prices (regardless of what is happening globally)
should continue their downward trend.

Ok, what if do have an "event"?  How should we trade it?  Depends.
If it forecasted by the dollar, then volatility may not be too high
in the Dow and buying a straddle makes sense; however, if the Dow
begins to skyrocket, traders should then remember to look for a trade
opposite of the move.  Example:  The Dow rises by 1,000 points and,
either before or after, an "event" takes place.  What to do now? Be
patient and look for any weakness to go short.  Notice, I did not say
"buy puts".  Volatility may be too high.  How will a trader know to
go short on the move just mentioned?  Exactly, by using technical
analysis.  Remember, once technical analysis begins to work again. .
 use it.


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