Option Investor

Daily Newsletter, Thursday, 08/29/2002

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The Option Investor Newsletter                 Tuesday 08-29-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Market Wrap: What Bad News?
Index Trader Wrap: NAS UP, DOW DOWN
Market Sentiment: Lack of Confidence
Weekly Manager Microscope: Ken Kam: Marketocracy Masters 100 Fund
Index Trader Game Plans: THE SECTOR BEAT - 8/29

Updated on the site tonight:
Swing Trader Game Plan: Chalk One Up For The Bulls

Posted online for subscribers at http://www.OptionInvestor.com
MARKET WRAP  (view in courier font for table alignment)
      08-29-2002           High     Low     Volume Advance/Decline
DJIA     8669.74 - 23.10  8742.01  8558.02 1.39 bln   1796/1376
NASDAQ   1334.75 + 21.39  1345.37  1295.79 1.38 bln   1914/1416
S&P 100   461.81 -  0.53   465.69   454.89   Totals   3710/2792
S&P 500   917.77 -  0.07   924.59   903.33
RUS 2000  394.50 +  5.02   396.10   387.23
DJ TRANS 2246.30 - 67.10  2312.80  2211.57
VIX        36.32 +  0.09    39.14    35.84
VXN        55.05 +  1.53    57.63    54.20
Total Vol   2,975M
Total UpVol 1,874M
Total DnVol 1,032M
52wk Highs   84
52wk Lows   209
TRIN        1.34
PUT/CALL     .93

What Bad News?

Multiple tech downgrades, European markets down strongly, GDP
lower than expected and higher jobless claims all failed to
hold the markets down after a triple digit opening drop. Short
covering, index fund markups or bargain hunting were given as
reasons for the rebound but the bottom line was a draw as
the Dow closed down about as much as the Nasdaq gained closing
the markets in a tie.

The morning started out just like any other August day. Multiple
downgrades of the chip sector along with a scattering of downgrades
on non tech companies. Morgan Stanley cut estimates on Micron,
ASML and Triquint Semi. UBS Warburg cut NVLS, LGVN, LRCX, NEWP
based on valuation and earnings. Soundview cut KLAC and TER on
worries that orders were down more than 10% below estimates.
Unbelievably the SOX rallied back to positive territory after
gapping down significantly at the open. Traders simply ignored
bad news again and bought tech stocks. The Nasdaq was the leader
all day but was held back by the broader averages.

Also hurting the markets was another downgrade on the transportation
sector. Goldman cut the airlines with downgrades on CAL,
DAL, AMR, UAL, ALK, NWAC, LUV and AWA. The said business travel
not returned and families were not using the airlines for vacations.
Did Goldman just come back from the twilight zone? This has been
the wet blanket on the sector for months. Roadway (ROAD) led the
shippers down with a warning that the economy was recovering
much slower than expected with business slowing even more in
July and August. ROAD was seeing more bugs on the windshield
than expected with less than full load bookings slowing instead
of increasing as fall approached.

Downgrades were flying with even GE being dropped for a loss
after Lehman lowered estimates on GE by a nickel. Lehman thought
that lowered expectations for pension income and the cost of
expensing stock options would cut net income for the giant.
Other analysts also commented on the weak aircraft engine
business as a possible drag on GE which lost nearly $1 in
light trading.

The economic news started with a larger than expected rise
in jobless claims to 403,000. The +8,000 gain was the third
consecutive week for gains and raised the continuing claims
to 3.588 million jobless. The GDP for the second quarter
remained unchanged at +1.1% growth, which was substantially
down from the +5.0% first quarter rate. Analysts were hoping
for an upward revision to show a stronger recovery but were
also relieved to not see a downward revision. Business
inventories rocketed to +$7.3 billion from only a +$1 billion
rate when the number was first reported. Consumer spending
fell from +3.1% in Q1 to +1.9% in Q2. Corporate profits were
revised down to +1.7% growth from +2.0% earlier forecasted.

In news after the bell SUNW CFO Steven McGowan said earnings
would come in at the very low end of guidance probably in the
-15% decrease range from last quarter. Instead of gaining
ground he said the overall market for business IT spending may
be worsening. SUNW guided analysts lower for the current
quarter and could be setting the stage for Intel to do the
same next Thursday. Following the bad news from SUNW was NVLS
who said it would miss earnings estimates for the quarter.
The outlook is "very, very murky and the feeling is negative"
CEO Richard hill said. They said they were experiencing
significant order delay from major customers as capex spending
continues to shrink. They said they expected to break even
this quarter, down from the +11 cents analysts had expected.
Sales were expected to be -10% to -15% less than previously
expected. They said they were seeing a very small uptick in
business spending but drastic drops in consumer spending was
more than offsetting the minor gains in business spending.

Let's review. Roadway says that shipments are down. Morgan
Stanley said back to school PC sales have been weak at best
and inventories of computers and memory are rising drastically.
Initial jobless claims are up three weeks in a row and the
GDP was barely positive. SUNW says the economy could be
worsening and Novellus said major customers are delaying
orders due to capex spending cuts. This same song with different
verses has been repeated daily for a month. Does this sound like
a recipe for a new bull market? Not to me but considering the
markets have been eating bad news for breakfast and rebounding
this should be good for a couple hundred points! (grin)

I feel like a bear crying wolf when the market rebounds on
news like we had this morning. No less than five different
brokerages cutting estimates on more than a dozen chip stocks
but the SOX rose from a -10 point opening dip to close positive
for the day. Goldman Sachs was the only broker to call chip
stocks attractive with a 12-18 month time horizon. I would
agree for 18 months from now but why buy before 9/11 and the
typical October bottom? The answer of course is that chip stocks
at $10 don't offer much risk to a long term trader. Still I
continue to stare in disbelief to rallies on bad news.

They get another chance for the breakfast of champions tomorrow
with Personal Income/Spending, Chicago PMI and Consumer Sentiment
reports. These should not be market movers but who can tell
anymore what will provide the spark for the implosion/explosion.
Historically this week produces negative results and leads into
a Tue/Wed rally after Labor Day. So far this week the Dow is
only down -200 points. This is definitely not a major move in
this day and age. With expectations of a rally next week I
expected traders to close short positions Friday afternoon
and start bargain hunting before the weekend. Also, the end
of the month is when Mutual Funds try to "mark up" their
biggest holdings by using recent cash inflows to aggressively
buy those stocks all at once. This raises the stock prices
and makes them look better on their month end statements. This
used to be a quarter end scenario but with competition among
funds at a fever pitch for the few meager deposits available
it has broadened to a monthly cycle. The question here is
"do they have any cash" and is it worth spending that cash if
we are going to see new lows soon?

My two cents for tomorrow looks like this. I would look for
a possible drop at the open followed by an afternoon bounce.
I would look to close any short positions on the morning drop
and look to go flat or long by the close. The problem with
going long is the low ceiling overhead. With the Dow likely
to top around 9000 again and the Nasdaq around 1400 there is
minimum upside potential. As long as you realize what the
possibilities are that is still a decent trade. Just don't
expect Dow 10,000 anytime soon. After any post Labor Day
bounce I still expect the markets to drift back to levels
around Dow 8400 or lower before 9/11. The Put/Call ratio
closed at .93 which would normally be positive. Volume is
expected to be very light tomorrow which means the morning
volatility could be extreme.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

Update on the Editors Play from last Sunday:

You should be fully invested on the DJX puts and depending
on how you executed the trades you should have an average
cost of around $1.40 per contract. The closing price today
was $1.95 and the high was $2.40. The initial exit point
was profiled at Dow 8100 over the next couple weeks. We are
facing the prospect of a bounce on Friday afternoon from a
higher level than I expected. I had projected 8400 for
Friday with the plan on riding out any post Labor Day
bounce and waiting for the lower levels before 9/11.

At this point I would want you to be aware that any bounce
from our close at 8669 could put us back near 9000 again
and make that eventual drop to 8100 less likely. Two things
to consider, the bounce may not occur or it may be less
than I expect. I am not suggesting that you close the position
but I am suggesting that it may decrease in value before we
see the next dip. Should we get a decent drop at the open on
Friday it might be prudent to close for a profit and reenter
on a failed rally on Tue/Wed. Be proactive as a trader and
don't let profits slip away if the markets don't follow the


By Leigh Stevens

Everyone seemed to be surprised that the Nasdaq rebounded and the
S&P and the Dow were down on the day - well, not by much, as the
Dow came back from a triple digit loss. Big deal. Guess there is
not much to focus on today as trader's thoughts turned not to
possible Boeing or Baseball strikes but those last days at the
beach, lake or just outdoors.

In techland, Networking and Internet sector strength led the
recovery - Net stocks were helped by strong gains in Yahoo
(YHOO).  The rally was not before the Nasdaq 100 tracking stock,
QQQ, met a downside technical objective (to 23) based on the Head
& Shoulder's top pattern that formed recently on its hourly

Gold stocks rallied, continuing to track the investor anxiety
level related to Iraq and the uncertainties related to the
ftermath of a U.S. invasion (I almost said a U.S. LED invasion -
we wish) and its effect on oil supplies and prices.

Volume continued to decline and only totaled 1.16 billion NYSE
shares and 1.38 billion on the Nasdaq.  Volume should slow even
more tomorrow (Friday).

The favorite game of the media talking heads is whether this
recent rally was a BEAR market rally or a rally that marked the
end of the bear market and the beginning of a new BULL market.
Hey, who cares as long as there are trading opportunities! I'll
just repeat my view that I "trust" an uptrend more once the prior
lows have been retested or a correction retraces a half to 2/3rds
of the first run up.

Technically, we could anticipate a correction developing due to
the lackluster volume on the later part of the rally and by the
bearish rising wedge chart patterns on the indexes, which forms
when there is a narrowing of the difference between succeeding
rally highs and downswing lows. Rallies with better technical
underpinnings don't tend to do this.

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

OEX slipped under its 50-day moving average today on the close.
Intraday, it also dipped under the pivotal 21-day average but
came back by the close. Pivotal resistance, as I've been saying
on the Market Monitor today is at the previously broken
"neckline" - in at 466 currently.

Unless there is a close above this level and further confirmed by
a move above 468-470, the chart and technical patterns continue
to suggest that the S&P is headed lower, with an objective to the
450 area in OEX based on my Head & Shoulder's (H&S) top
objective. I suggest staying short or in puts.

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

As with the 100 stock index, the S&P 500 (SPX) has pivotal
resistance at 930, or back to the neckline of its H&S top
formation. Absent a close back above 930, I also anticipate the
downside objective suggested by the H&S will be met, at a minimum
- this implies that SPX will work its way down to the 900 area.

The pattern traced out today looks like a bear flag - this is a
rebound within a trend that is still pointed LOWER.

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

DJX's downside technical objective is to 85. Objectives based on
a Head & Shoulder's (H&S) top are "minimum" suggested targets -
this rule of thumb measurement does not imply that the trend,
once in motion, will not carry still lower.  Sometimes the H&S
target is met sometimes it is exceeded.

But, when a index or stock traces out the triple dome shaped
outline like the charts above, its usually an excellent
indication that the buyers have taken prices as high as they are
able to given the current fundamentals.

On the upside, a close above 87.6 would suggest covering short
stock and long DJX put positions - if so, then resistance at the
trendline comes in at 89.5, for a bearish re-entry play.

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

My projected "minimum" downside objective of 23.00 based on the
Head & Shoulder's top was met on the decline within a couple of
ticks.  Usually, in a situation like this, I will have an order
in to buy at 23.05-23.10.

My thinking is "situational" - the market is oversold on a short-
term basis and on a next even number level like 23.00, the
sellers may step away and not look to press the thing further.
The buying from short-covering is my competition so to speak. If
I am in the index for a trade, I am not going to necessarily wait
for my objective to be exactly met, or exceeded.  In this case, I
think the Q's are going lower than we saw today but I am not
looking for more than my approximate trading objective.

Note that today's rally reversed at and right after the downside
chart gap was "filled in". A downside chart gap being the
distance between one day's low and the next day's high. Such
spaces or "gaps" often then act as resistance as sellers did not
PREVIOUSLY have a chance to sell as high as this area.  When they
get the chance by a price return to this area, it tends to bring
in renewed selling interest.

Pivotal resistance is at 24.60, doubly implied by the prior low
and by the intersection of the previously broken trendline
connecting prior lows - this also being the "neckline" of a Head
& Shoulder top formation. A move above 24.6 would suggest that a
rally could carry still higher and I would not suggest staying
short/long puts in this situation, as I would rather step aside
given the risk that a significant rally was developing.

Leigh Stevens
Chief Market Strategist

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Lack of Confidence
by Steven Price

This morning started out with a downgrade of several chip
equipment makers.  This development seemed to simply pile on the
recent slew of IT spending warnings, as UBS Warburg warned that
semiconductor production equipment order momentum has gone from
slowing to declining.   This accompanied an earnings estimate cut
for General Electric by Lehman Bros. Lehman cut its 2003
earning's estimate for GE from $1.81 to $1.76.  It cited pension
income problems, expensing stock options and the negative impact
of the firm's aircraft engines and power systems forecast.

Another triple digit down day was under way for the Dow.  Before
we knew it, though, the rally caps were on and we had bounced
strongly.  The Dow posted a rally of 183.99 from its lows, before
finishing down just 23.10 points for the day.  The Nasdaq, on the
other hand, posted a 50-point turnaround, before settling up
21.39 on the day.  The one sector to lag, however, was the
semiconductors.  The Semiconductor Index (SOX.X), which broke
support of 300, trading as low as 293.17, also experienced a
rebound, but ended with an increase of only 0.53 on the day, at
304.33.  After the bell, Novellus warned that third quarter
revenue would come in at $230 million, under previous estimates
of $250 million.  What was interesting about the company's
comments was that it said it saw a small uptick in IT spending.
It also said this small increase was not enough to overcome a
slowdown in consumer spending.  However, it has been quite some
time since a company has talked about increased IT spending.  It
still looks like this will send the semis back under 300, as a
warning is still a warning, regardless of the reason.

This revelation will be interesting to watch play out.  The
increase in IT spending is something the industry has been
waiting a long time for and is the first bullish sign in a while.
The fact that consumer spending is continuing its slowdown,
however, could have much larger implications.  Consumer spending
makes up 2/3 of GDP and with GDP at just 1.1%, a continued
slowdown could lead to a contraction in the economy.  Tuesday's
Consumer Confidence came out lower than expected, which is an
indication of consumers' willingness to spend.  Friday's
University of Michigan Consumer Sentiment will actually give a
more recent snapshot of consumers' current state of mind.  The
Conference Board's Consumer Confidence survey is actually mailed
out to 5,000 recipients at the beginning of the month, some who
fill it out then, and some who fill it out as the month goes on.
Much of the University of Michigan Survey is completed this week.
That report, just prior to the long weekend and less than two
weeks before the September 11 anniversary, could have great
impact.   If wee see a surprisingly high number, along with
Novellus's comments about an increase in IT spending, we could
see a significant rally into the weekend.  If not, there could be
a sell-off, as investors don't want to stay long over the four
days from Friday to Tuesday, knowing volume will pick up after
the holiday and any sell-off at that point would probably be much
more substantial.

Watch for weakness in the semiconductors tomorrow morning, and a
reversal of today's Nasdaq gains.  That is unless we get some
good news from the folks in Michigan.


Market Averages


52-week High: 10679
52-week Low :  7702
Current     :  8670

Moving Averages:

 10-dma: 8863
 50-dma: 8734
200-dma: 9707

S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  917

Moving Averages:

 10-dma:  938
 50-dma:  919
200-dma: 1006

Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  961

Moving Averages:

 10-dma: 1002
 50-dma:  980
200-dma: 1323


The Semiconductor Index (SOX.X): After this morning's downgrade
of semiconductor equipment makers by UBS Warburg, the group
looked poised to take out its recent low of 282.75.  However, the
Nasdaq rally lifted this group as well.  After the bell, however,
Novellus warned that revenue would come in 8% below previous
guidance.  This was blamed on continued weakness in consumer
spending, although they saw an uptick in IT spending.  This
conflicts with UBS's comments about semiconductor production
equipment order momentum declining. Guiding lower still is a
disappointment and should help push this group back below 300,
thus taking some shine off the Nasdaq with it.

52-week High: 657
52-week Low : 282
Current     : 304

Moving Averages:

 10-dma: 337
 50-dma: 347
200-dma: 491


Market Volatility

The Market Volatility Index is awfully high for a day in which
the Dow was only off by 23 points, and the Nasdaq finished up 21.
I sense a lack of confidence in today's bounce, ahead of the long
weekend.  The VIX seems to be predicting a sell-off, although the
high level may be due to today's initial drop.  Consumer
Sentiment should tip the scales in the morning.  We'll see just
how many investors are willing to hold long positions into the
long weekend with September 11 approaching.

CBOE Market Volatility Index (VIX) = 36.32 +0.09
Nasdaq-100 Volatility Index  (VXN) = 55.05 +1.53


          Put/Call Ratio  Call Volume   Put Volume

Total          0.92        366,947       339,306
Equity Only    0.75        269,656       203,499
OEX            1.13         18,858        21,264
QQQ            1.17         28,977        33,846


Bullish Percent Data

           Current   Change   Status
NYSE          49      + 4     Bull Confirmed
NASDAQ-100    52      - 6     Bull Correction
DOW           60      + 0     Bull Confirmed
S&P 500       58      - 2     Bull Alert
S&P 100       57      - 1     Bull Alert

Bullish percent measures the number of stocks in an index
currently trading on a buy signal on their point and figure
chart.  Readings above 70 are considered overbought, and readings
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend


 5-Day Arms Index  1.80
10-Day Arms Index  1.33
21-Day Arms Index  1.30
55-Day Arms Index  1.31

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


Market Internals

        Advancers     Decliners
NYSE       1512          1222
NASDAQ     1841          1336

        New Highs      New Lows
NYSE         28              27
NASDAQ       36              96

        Volume (in millions)
NYSE     1,361
NASDAQ   1,419


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


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

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


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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Ken Kam: Marketocracy Masters 100 Fund (MOFQX)

This week we're going to look at portfolio manager Ken Kam of the
Marketocracy Masters 100 Fund (MOFQX), a broadly diversified and
actively managed stock mutual fund seeking capital appreciation.
Launched less than a year ago on November 5, 2001, the offering
combines Kam's experience and expertise with a proprietary and
powerful research tool, called the m100 Index.  Ken Kam's m100
Index consists of the current ideas of the best performing
virtual investors and funds on the website Marketocracy.com.

According to the Marketocracy website, these virtual portfolios
are tracked using the same criteria as professional mutual fund
managers, and are the best among nearly 50,000 virtual funds on
the site.  We'll talk a little bit more about the fund strategy
and selections of the Marketocracy m100 index later.

New ventures are nothing new to Ken Kam.  Earlier in his career,
Kam was a co-founder and vice president of marketing and finance
for Novoste Corporation (Puerto Rico), a medical device company,
which was subsequently acquired by NAMIC Corporation.

In 1994, Kam was one of the technology industry
veterans that started the Silicon Valley-based
Firsthand Funds, a fund family devoted to the
technology sector.  He co-managed the Firsthand
Technology Value Fund (TVFQX), the family's first
mutual fund, along with Kevin Landis, from May
1994 inception to his September 1999 departure.
At the time of Kam's departure, Firsthand Funds
had over $1 billion in total assets.

Kam took his "firsthand industry experience" and
stock-picking philosophy and founded the firm Ingenuity Capital
Management, LLC, which is the registered investment advisor of
the Marketocracy family of funds.  Kam, president of Ingenuity
Capital Management, is portfolio manager for two Marketocracy
funds: Masters 100 Fund and Medical Specialists Fund.  Medical
Specialists Fund taps Kam's experience in the medical industry.

Kam holds a B.S. degree from Santa Clara University and earned
his M.B.A. degree from Stanford University.

Investment Overview

The Marketocracy website states that its mission is to isolate
investment talent wherever it may be.  Kam's firm does this by
identifying people with "firsthand industry experience" as well
as proven investment strategies.  By screening more people and
portfolios than anyone else, the firm's developing an extensive
"farm system" of investors, the website reports, to build their

Marketocracy Masters 100 Fund (MOFQX) seeks capital appreciation
by typically investing in common stocks of domestic and foreign
companies of any size.  Kam is not constrained by any particular
investment style and may tend to own growth stocks, value stocks
or both.  Morningstar, for example, puts the Masters 100 Fund in
its mid-cap growth category (where it landed in 2001), but their
portfolio analysis shows the fund recently had a small-cap blend
style bias as of March 31, 2002.

In security selection, Kam relies principally on the fundamental
analysis of the security issuer and its potential for success in
light of the firm's financial condition and position in industry
and current economic and market conditions.  He may also rely on
other factors such as growth potential, earnings estimates, firm
management, etc. when selecting holdings for the portfolio.

As stated earlier, Kam's approach is designed to be flexible and
is not constrained by any particular investment style or sector.
Here, it starts to get interesting.  The website states that Kam
expects to select stocks for the Masters 100 Fund based upon the
virtual investments of the m100 Index, which typically comprises
approximately 1,500 stocks.

Kam's firm constantly reviews the track records of nearly 50,000
investors, and the best become their "m100" investors.  To find
the highest caliber talent/stock pickers, Kam uses technology to
churn more data, faster, continuously reevaluating those in the
m100 to ensure that the group is comprised of investors that are
performing well in today's market, the website states.

As Morningstar's report suggests, Masters 100 Fund can and does
invest in small and mid-sized companies, which offer more long-
term growth potential, but are generally associated with higher
volatility.  Morningstar's report shows the fund had an average
market capitalization of $738 million recently, with roughly a
third of the fund's equity stake held in micro-cap stock.  The
fund's average P/E and P/B ratio of 0.7 (versus S&P 500 index)
lands it in Morningstar's small-cap "blend" style box.

This fund is unique in terms of its vast diversification.  Per
Morningstar's report, Kam's fund had 1,207 stock holdings with
just 7.7% of assets in the fund's top 10 holdings at March 31,
2002.  The fund's largest holding, Newmont Mining, represented
only 0.7% of net assets.  Such diversification among small-cap
and mid-cap funds is pretty rare.

The Marketocracy website states that the proof of their success
is in the m100's performance to date.  In the next section, we
see how successful the Masters 100 Fund has proven to be versus
the competition.

Investment Performance

Since December 31, Marketocracy Masters 100 Fund has declined in
value by nearly 10 percent, but compared to index benchmarks and
growth objective funds, its losses are limited.  For the year to
date period through August 28, 2002, the S&P 500 index (Vanguard
500 Index Fund) is down around 19.3%, and the Russell 2000 index
(Vanguard Small Cap Index Fund) is off by about 19.1%.  Below is
a summary of selected Morningstar YTD averages, using their data
as of August 28, 2002:

 Average Mid-Cap Blend Fund -15.1%
 Average Mid-Cap Growth Fund -25.5%
 Average Small-Cap Blend Fund -14.9%
 Average Small-Cap Growth Fund -26.7%

Since Kam's style has moved from mid-cap growth in 2001 to small-
cap blend in 2002, you can measure his 9.97% YTD decline against
any one of the category averages above and see that he preserved
capital better than his fund peers through the 2002 market slump.
His YTD loss of 10.0% ranked in the top 2% of the mid-cap growth
category, per Morningstar's category rankings.

Since November 2001 inception, the Marketocracy Masters 100 Fund
has lost less than 7% for investors.  Kam's wide diversification
(1,207 stock holdings) and core/growth style had helped the fund
avoid being torpedoed, like some other growth objective managers.
However, it remains to be seen how well Kam's m100 strategy will
perform in the up markets.  Over-diversification can limit stock
fund returns relative to other growth funds in advancing markets.

At 1.95%, Marketocracy Masters 100 Fund's current expense ratio
is relatively high.  And, it's not going to go down much either
as assets grow (near $7 million today) with a management fee of
1.50% of assets included in the expense ratio calculation.  The
Vanguard Small-Cap Index Fund (NAESX), which tracks the Russell
2000 small-cap index has an expense ratio of just 0.27%.  Kam's
investment technology, which allows them to track nearly 50,000
virtual investors, is the primary reason for the fund's greater
cost of ownership.


The Marketocracy site and Marketocracy Funds reflect Ken Kam's
vision and approach, and they are certainly unique in the fund
industry.  Kam has shown since inception that he can constrain
losses versus less well-diversified growth funds but time will
tell how well the m100 strategy fares in the next bull market.
Considering Kam's experience and expertise, including a 5-year
stint co-managing the Firsthand Technology Value Fund, there's
reason to be optimistic.

Proponents of "new" funds may wish to have a closer look, but
those wishing to see a longer history of fund performance may
prefer to look elsewhere.  For further information on Kam and
Marketocracy Masters 100 Fund, go to funds.marketocracyfunds.com.

Steve Wagner
Editor, Mutual Investor


by Leigh Stevens

Leading the tech/Nasdaq rebound was the Internet (INX) and
Networking (NWX) sectors - Internet stocks gained strength by a
sizable gain in Yahoo. Semiconductor stocks ended little changed
however - a lid was clamped on any potential rally by downgrades
in the group.

Shares of Micron Technology (MU) were lower after Morgan Stanley
lowered its rating on the chip maker to "underweight" from an
"equal weight" on belief that fundamentals relating to DRAM chips
have been weak and that prices for them peaked in mid-July.

Not that their Analyst was universally negative on the group and
in fact reiterated an "attractive view" on the semiconductor
industry as valuations were improving.  Revenue growth and
expanding profit margins are seen "driving the average chip
stocks higher over the next 12- to 18 months". I hope I live that
long! Guess I'm just not too INVESTMENT oriented these days.

I would not chase tech rallies these days and technically, the
two sectors rebounding today, are up near the top of their
downtrend channels and not far from resistance areas per my chart
highlights below.

You should now that I am not your typical gold "bug", but I also
call em as I see em and the Gold & Silver sector index (XAU) has
BROKEN OUT to the upside in a significant way, also per my
highlight below. I would be long, not wrong (& short) on this

UP (or unchanged) on Tuesday -

DOWN (or unchanged) on Tuesday -







Gold & Silver Sector Index ($XAU.X)

The upside XAU technical breakout was above resistance implied by
its 50 and 200-day moving averages as well as its down trendline
- all converging.  It looks to me that XAU could have a powerful
new rally here.

I think at minimum the sector index could get back up the 78-80
area.  Stay tuned on this one!  Make friends with a gold stock and
maybe hedge yourself against any "disasters" ahead that tend to
drive down the prices of financial assets.

Internet Index; CBOE ($INX.X)

Any rally that carries back up the upper boundary of the daily
chart downtrend channels in the Internet HOLDR's would be a
shorting opportunity - the current area of intersection is around
22. I suggest shorting the stock if HHH trades in this area.

Networking Index ($NWX.X)

I have similar short selling advice on the Networking stocks
based on what I am seeing in the technical picture here, as NWX
is into an area of resistance at its upper trend channel boundary
and is showing downward momentum on the 14-day stochastic.

Put plays on the stocks in the index that have similar patterns
is suggested unless there is a decisive upside penetration of 140
on the NWX Index which would be a bullish technical breakout.

Leigh Stevens
Chief Market Strategist

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Chalk One Up For The Bulls

In a remarkable display of bullishness the markets came back from
a triple digit loss on horribly bad tech news. At least five
brokers downgraded various chip stocks and the sector in general
before the bell and stocks ignored the news with the SOX finishing
positive for the day.

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The Option Investor Newsletter                 Thursday 08-29-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: None
Dropped Puts: KSS, EBAY
Daily Results
Call Play Updates: PII, DRI
New Calls Plays: PNRA, BRL
Put Play Updates: ADI, IBM, GS, MXIM, QLGC, UNH
New Put Plays: BJ, UTX


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.




KSS $68.89 +0.29 (-2.63 for the week)  Kohl's experienced quite a
rebound today from its low of $67, which was a break below its
50-dma.  After seeing other retailers, such as Home Depot and
Wal-Mart finding support at their 50-dmas as well, it appears the
sector may be experiencing some consolidation.  Rather than wait
around while our options decay, we will close this play and look
for better opportunities.


EBAY $57.09 +1.72 (-2.96) EBAY gave us a quick dip down to the
$55 area on Wednesday and nimble traders could have booked a
quick gain in the play.  But they would have needed to get out
quickly this morning, as the stock rocketed off that level when
the shorts figured out they couldn't press the stock any lower.
By the end of amateur hour, EBAY had erased most of the prior
day's loss and then gradually worked higher into the closing
bell.  While our $57.50 stop hasn't been violated yet, today's
engulfing candle is a strong bullish sign, and we don't want to
get trampled if the bulls decide to stampede higher from here.


Please view this in COURIER 10 font for alignment

CALLS              Mon    Tue    Wed   Thu   Week

BRL      68.30    1.25  -0.47   1.75  1.30  New, Generic pick
DRI      26.23    0.21   0.39   0.57  0.50  people gotta eat
PII      73.10    0.71   0.39  -1.90  0.90  Hanging in
PNRA     29.30   -0.51  -0.66  -0.55  1.84  New, Dough is rising


ADI      24.56    0.53  -0.52  -0.95  0.26  Weak rebound
BJ       24.79   -0.18  -0.25  -0.36  0.17  New, more sales less$
EBAY     57.09   -0.94  -2.04  -1.50  1.72  Drop, support at $55
GS       77.38    0.90  -0.65  -1.22  0.30  Resistance above
IBM      76.62   -0.98  -1.46   0.06  0.56  No IT spending
KSS      68.89   -0.05  -2.12   0.34  0.29  Drop, sympathy 4 WMT
MXIM     32.12   -0.01  -2.04  -1.41  0.56  Sector warning
QLGC     35.30    0.18  -1.31  -0.56  0.62  Back in channel
UNH      87.31   -0.73  -2.12  -1.35  0.76  still sick
UTX      58.76   -0.60   0.70  -0.91 –0.53  New, breaking down

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PII $73.10 +0.90 (+0.09 for the week)  Polaris has exhibited
great relative strength the last few days.  Although the stock
closed at $72.20 on Wednesday, it rebounded nicely today back
over $73 to close at $73.10.  While the stock has been
experiencing sideways movement, we see this as a positive, as the
Dow has given up ground and crashed through support the last
couple of days.  If there is a rebound, as it appeared there
would be today, PII should lead the pack. If not, the stock has
shown such strong support since breaking above $70, that the
downside to this play seems limited.  The stock was profiled on
CNBC (after we initiated our long play a couple of days earlier)
for its strength in light of a poor economy.  One of the reasons
behind this may be that PII continues to put out aggressive new
product lines that keep the buyers of toys for adults interested.
It has led to seventeen straight quarters of earnings growth,
including surpassing analysts expectations the last three
quarters.  As we head into winter, PII's core sales will simply
change with the season.  After selling plenty of four-wheel ATVs
and Personal Watercraft (PWC) during the summer, it is now time
for snowmobile purchases heading into wintertime.  There is no
reason to think a company that has not disappointed in over 4
years, will disappoint this year, as the economy improves and
pulls out of last year's recession.


DRI $26.23 +0.50 (+1.43) The bulls have got to be loving the
action in shares of DRI, as the casual dining company has been
plowing upwards now for the past 7 days.  That is a marked
contrast from the rest of the market, which has been heading
south this week.  Whether consumers are spending more or less,
they still appear to have an appetite for eating out and DHI
is benefiting from that trend.  Yesterday's dip at the open
gave us the best entry into the play that we've seen since we
began coverage on Tuesday, although the dip back to $25.50 this
morning was another possibility.  DRI seems to have a habit of
dropping in the morning and then recovering in the afternoon,
and it was certainly encouraging to see the stock go out tonight
at the high of the session.  Given the strong performance over
the past week, it looks like it could be due for a bout of
profit-taking ahead of the weekend, and a push up to the $27
resistance level might be just the catalyst for that occurrence.
Use such a move to take some partial profits on existing
positions and then look to re-enter on a dip and bounce back
down near the bottom of the ascending channel, currently $24.75.
Raise stops to $24.50, just below the lower channel line.


PNRA - Panera Bread Co. - $29.30 +1.84 (0.00 for the week)

Company Summary:

Panera Bread owns and franchises bakery-cafes under the Panera
Bread and Saint Louis Bread Co. names. The company is the leader
in the emerging specialty bread/cafe category due to its unique
bread combined with a quick, casual dining experience. As
previously reported, as of April 20, 2002, 390 Panera Bread
bakery-cafes (including one specialty bakery-cafe) were operating
in 30 states (117 company-owned and 273 franchised bakery-cafes).
(source: company release)

Why We Like It:
Normally OI would be hesitant to play a stock that had fallen
below its 200-dma and not made it back over yet.  Unlike most
stocks, however, a look at PNRA's chart shows that the 200-dma
means little, as the barrier has been crossed on an almost daily
basis since late July. The stock released July same store sales
today, which saw a 5.3% increase. This is especially promising
given the pattern of revenue versus income growth.  On August 22,
PNRA reported a monstrous 65% increase in second quarter net
income, on 43% growth in revenue.  So revenue growth is currently
contributing more than a 100% correlation to net income.

Panera is estimating net income will grow to 0.98/share in 2003,
as they plan on opening 115 new bakery-cafe's. On the heels of
the sales increase, the company was upgraded from "outperform" to
"strong buy" by Raymond James.

The stock found PnF support at $28 and remains on a PnF buy
signal, in spite of the current column of "O"s. The current
bullish vertical count is $50, but the stock will first have to
get over resistance at $35.  The $35 level has provided
resistance on both the daily and PnF charts, but a $6 move to
that level would be fine with us. Volume declined as the stock
dropped earlier in the week, and then jumped on today's breakout.
Today's gain eliminated all of the losses for the week. As volume
goes with the trend, the trend appears to have turned up.  The
stochastics have also turned up from oversold levels and are now
giving a buy signal.  OI sees the current level as a point to
initiate new entries.  Conservative traders may want to wait for
a pullback to support after today's big rally.  Look for that
support above $28.00.  Place stops at $27.00, just below
Wednesday's low.

BUY CALL SEP-25*UPA-IE OI= 111 at $4.90 SL=2.50
BUY CALL SEP-30 UPA-IF OI=1200 at $1.35 SL=0.00
BUY CALL OCT-25 UPA-JE OI=  58 at $5.60 SL=2.80
BUY CALL OCT-30 UPA-JF OI=  90 at $2.00 SL=1.00

Average Daily Volume = 807.6 K


BRL – Barr Laboratories $68.30 +1.30 (-3.12 this week)

Company Summary:
Barr Laboratories is a pharmaceutical company engaged in the
development, manufacture and marketing of generic and
proprietary prescription pharmaceuticals.  Barr markets
approximately 85 pharmaceutical products, representing various
dosage strengths and product forms of approximately 35 chemical
entities.  BRL's product line focuses principally on oncology
and female healthcare categories, including hormone replacement
and oral contraceptives.  The company's Duramed subsidiary
develops, manufactures and markets a line of prescription drug
products in tablet, capsule and liquid forms.

Why We Like It:
It has been an interesting week for the generic drug companies,
as they have gone on the offensive again.  On Monday, the Wall
Street Journal reported that generic drug-makers are pushing
Congress to pass legislation to make it easier to market generic
versions of Biotech drugs.  While that news was partially
responsible for the beating the Biotechnology sector has taken
this week, the benefit to the generics companies hasn't been
immediately apparent.  For instance, shares of our new play, BRL
tipped over with the rest of the market on Monday and fell to
just above the $66 level yesterday afternoon.  Then even with the
Pharmaceutical sector (DRG.X) still on the defensive throughout
much of today's action, BRL managed to gain nearly 2% on strong
volume (nearly 50% above the ADV).  Perhaps the reason for BRL's
strength lies in the PnF chart, which is strongly bullish.  After
bottoming in late July with the rest of the market, the stock ran
up to its bearish resistance line and then blasted through that
level ($61) earlier this month.  The current vertical count is
pointing to an eventual target of $84 and the fact that BRL pushed
back above its 200-dma ($67.72) today is a good sign for the
bulls.  Clearly investors haven't lost sight of the fact that the
company handily beat analyst estimates when they reported earnings
2 weeks ago.  This looks like a bullish trend that we can take
advantage of, but given the uncertain broad market climate, we're
going to start coverage with a tight stop at $66, which is just
below the lows of the past 2 days.  A renewed dip down to the $67
area would make for a solid entry, although more cautious
investors might want to wait for push back above the 10-dma
(currently $69.44).  Of course, then we have to contend with
resistance at $70, followed by the recent relative highs near
$72.  That's what makes buying the dips more attractive, as it
is easier to control risk.

BUY CALL SEP-65*BRL-IM OI=293 at $5.00 SL=3.00
BUY CALL SEP-70 BRL-IN OI=236 at $1.85 SL=1.00
BUY CALL OCT-70 BRL-JN OI=164 at $3.20 SL=1.50
BUY CALL OCT-75 BRL-JO OI= 29 at $1.35 SL=0.75

Average Daily Volume = 594 K

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ADI $24.56 +0.26 (-1.40 for the week) There was quite a rebound
in the Nasdaq today.  Whether it was short covering, or buying
ahead of the long weekend, it spread tech wide. While ADI fought
back from its low of $23.38, to finish up on the day, it still
could not make up Wednesday's losses, and did us the favor of
removing support at $24.00.  That level has held the stock up
toward Wednesday's close, but now does not look so daunting. In
fact, a look at the descending channel from the beginning of
March has now encompassed the last two days of trading for ADI.
Although Nasdaq Composite showed a gain of 21.36 points today,
lifting many of the tech stocks, the Semiconductor Sector Index
(SOX.X) was unable to hold its gains, managing only a 0.53
increase on the day.   This was most likely due to a downgrade by
UBS Warburg of four chip equipment makers, which cited the uneven
economy and weak orders.  The weak order flow reflects an overall
lack of IT spending, which directly affects ADI.  In the research
note, analyst Byron Walker said, "It's all about the economy...
Semiconductor production equipment order momentum has gone from
slowing to declining."  Until the economy heats up, ADI will
continue to see weak demand for its processors, which are used in
areas as wide as computers to consumer electronics and automotive
electronics.  We remain bearish on ADI, in spite of the tech
rally, as it managed only a 0.26 gain on such a big day for the


IBM $76.62 +0.56 (-3.78 for the week) For all the hoopla about
today's rally back up from the lows, IBM managed only a 0.56
gain, after yesterday's loss of $1.90.  The trend here is still
down.  This morning's downgrade of four equipment chip makers,
due to weak orders and the economy, simply underscores the
problems faced by Big Blue and the rest of the techs.  Tech
spending isn't simply slowing down, it is declining.  This
sentiment was echoed in Monday's downgrade by Deutsche Bank of
three IT service stocks, which is another sector of IBM's
business.  With the server business shrinking, there is not much
good news to keep IBM above its recent levels before the short
covering rally inflated its price.  The downturn in business has
led the company to cut 15,000 workers, and until we see an
increase in IT spending, or at least stabilization, IBM should
suffer along with the rest.  The difference here is that IBM has
more to give back.  While the stock rebounded from just over $75,
this level of support should be only psychological, as the first
real level of support should be closer to $74.  We are staying
short on IBM and have lowered our stop loss to $78.00 to lock in
profits on the play in case of a Dow rebound heading into the
long weekend.


GS $77.38 +0.30 (-0.13) As expected, the Brokerage sector
(XBD.X) has continued to weaken this week, and the important
$408 support level gave way yesterday in the market-wide
selloff.  It was interesting to see the XBD fall below $400
this morning, only to rally back pretty strongly.  This could
be just an oversold bounce, as the index rebounded right from
the converged 20-dma ($395.51) and 50-dma ($394.09), as the
bulls didn't have enough conviction (or volume) to push back
through the $408 level.  GS traded much the same as its sector,
breaking down under the $76 level this morning, only to rebound
strongly to actually end the day with a fractional gain.  But it
is interesting that the $77.75 level (prior support) is now
acting as resistance.  Both GS and the XBD index look like they
are in the bears' grip, and that means we should still be able
to use failed rallies as new entry points.  Target new entries
on a rollover near today's highs to as high as the bottom of
Wednesday's gap at $78.30.  Take note of the fact that our stop
has now moved down to $78.50.


MXIM $32.12 +0.56 (-3.41) Following the bearish comments from
Intel's CEO on Tuesday, the Semiconductor index (SOX.X) has been
hit by a series of analyst downgrades and negative comments.
That downward pressure drove the SOX back down to below the $300
level this morning before the bulls stepped back into the fray.
MXIM dropped below $31 early in the day before battling back to
above $32 at the close.  That rebound looks like it may have run
its course, especially in light of the NVLS mid-quarter update
this evening, which pointed to the company coming up light on
both revenues and earnings.  Of course, this news may have
already been factored into the market, and we'll have to wait to
see how it is greeted when the markets open tomorrow.  MXIM could
be trying to put in a bottom here, so we want to be careful with
new positions, particularly if the SOX is able to stay above the
$300 level.  New positions can be considered on another failed
rally below our $34 stop, but only if the SOX is once again
showing signs of weakness.  Use a drop near the $30 to at least
take partial profits on open positions.


QLGC $35.30 +0.62 (-1.30) QLGC has given us a nice ride this
week, falling down to the $34 area, as the stock has been
pressured by the persistent weakness of the Semiconductor sector
(SOX.X).  The technical rebound off the $300 level this morning
didn't have much conviction, and the SOX ended the day
essentially unchanged.  QLGC actually fared a bit better, posting
a 1.8% gain for the day.  The stock came to rest right at the
bottom of yesterday's gap, so the near term direction is still
up for grabs.  A rollover below $36 (the top of the gap and the
site of our stop) can still be used for initiating new positions,
but we need to closely monitor the action in the SOX.  If it
manages to hold support near the $300 level and recover from
there, then QLGC will likely work higher in sympathy with the
group.  Fade any failed rally, but keep those stops in place.


UNH $87.31 +0.76 (-2.93) Following its rollover at the descending
trendline, UNH took another hit to the downside yesterday,
falling below the 20-dma ($87.96).  Despite the sharp drop in the
broad markets this morning, UNH pulled itself up and staged a
gradual advance back up near the $88 level by midday.  Then the
bulls lost their momentum, the stock fell back near $86.25 and
then rallied in the afternoon.  In the end, UNH posted a
fractional gain on the day, but couldn't overcome resistance at
the 20-dma.  See what happens in the dog days of August?  With
daily Stochastics still pointing down and the HMO index still
pinned under its own 20-dma, it still looks like the bears are
in charge.  So we can continue to target new entries on failed
rallies, ideally below the $88 level, but possibly as high $90,
the site of the descending trendline.  Make sure to confirm
weakness in the HMO index before playing and keep stops in place
at $91.50.


BJ - BJ's Wholesale Club - $24.79 -0.03 (-1.46 for the week)

Company Summary:
BJ's Wholesale Club, Inc. introduced the wholesale club format to
New England in 1984 and has since expanded to become a leading
warehouse club in the eastern United States. BJ's currently
operates 138 clubs in sixteen states.

Why We Like It:

While retailers such as Wal-Mart and Home Depot have found recent
support from their 50 day moving averages, BJ has had no such
luck.  It hasn't approached that level since the end of May and
does not appear headed in that direction any time soon. Each
stochastic buy signal since its gap down on Aug 8 has quickly
been reversed, as the stock has seen very little green.

BJ released earnings on August 20, which showed a sales increase
of 14%.  The problem with this increase is that it resulted in an
earnings per share decline.  Not exactly a winning formula.  The
decrease was attributed to a shift to lower margin items and
increased competition.  While these results met current
expectations, it was only after BJ's had cut its estimates
earlier in the month.  Its previous guidance had been 52 to 54
cents.  On August 21, UBS Warburg downgraded the stock from a buy
to a hold and Morgan Stanley cut the eventual price target from
$60 to $40.

On Tuesday Merrill Lynch cut BJ, along with 15 other retailers.
It said, "Retail sales have deteriorated sharply since early
July," Merrill Lynch said. "Our concern is that the resiliency of
general merchandise sales over the past two years may be
cracking. In addition to a possible slowing economy, sales
momentum in the second half will be pressured by forecasted poor
fall weather, 9/11 anniversary disruptions, and six fewer
Christmas shopping days."

Today's low of $24.25 was BJ's lowest level since March 1999.  It
also traded below August 14 low of $24.50.  After the recent gap,
BJ made an attempt to close, but didn't come close before
continuing its descent.  OI sees the current level as a short
entry point.  Conservative traders may want to wait for a break
below today's low.  Place stops at $27, above the high of August
26, just before BJ's most recent gap.

BUY PUT SEP-25*BJ-UE OI= 94 at $1.50 SL=0.75
BUY PUT OCT-25 BJ-VE OI=259 at $1.95 SL=1.00

Average Daily Volume = 1.01 mil


UTX – United Technologies Corp. $58.76 -0.53 (-1.72 this week)

Company Summary:
As a diversified manufacturing company, UTX has four principal
operating segments: Otis (elevators and escalators), Carrier
(heating, ventilation and air conditioning systems), Pratt &
Whitney (aircraft engines and space propulsion), Flight Systems
(helicopter electrical systems).  Between the Pratt & Whitney
and Flight Systems divisions, UTX participates in virtually all
aspects of the design and manufacture of aircraft propulsion
systems, from engines and their associated flight controls to
auxiliary power units, compressors and instrumentation.

Why We Like It:
Don't look now, but the pending machinist strike at Boeing could
have more far reaching effects than an impairment of that
company's bottom line.  If there is a strike, that will bring
production to a screeching halt, meaning that the company won't
need to purchase parts from its suppliers.  UTX is integrally
involved in providing numerous parts for commercial aircraft
production, and judging by the stock's recent price action,
investors are already starting to factor in the likelihood of a
strike.  The stock's recent rollover from the $63 level
represented the 3rd lower high since the broad market rebounded
from its late-July lows.  But the really important development is
that UTX broke the $58 support level on an intraday basis,
generating a descending Triple-bottom breakdown on the PnF chart.
The PnF chart was already on a sell signal with a bearish price
target of $48, and today's action just reinforces the stock's
weakness.  Intraday resistance near $59 kept the bulls at bay on
Thursday, and then we have even stronger resistance in the $60-61
area.  Any failed rally at either of those levels can be used to
initiate new bearish positions.  Alternatively, look to enter the
play on a breakdown under the $57 level, just below Thursday's
intraday low.  Initial stops are set at $61.

BUY PUT SEP-60*UTX-UL OI=1835 at $3.50 SL=1.75
BUY PUT SEP-55 UTX-UK OI=2020 at $1.65 SL=0.75

Average Daily Volume = 2.93 mln

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The Option Investor Newsletter                 Thursday 08-29-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three:

Play of the Day: PUT - UTX
Traders Corner: Electrifying
Traders Corner: Pattern recognition - Reversal patterns: Wedges
Options 101: Probability, Empirical Evidence, and Wives Tales


UTX – United Technologies Corp. $58.76 -0.53 (-1.72 this week)

Company Summary:
As a diversified manufacturing company, UTX has four principal
operating segments: Otis (elevators and escalators), Carrier
(heating, ventilation and air conditioning systems), Pratt &
Whitney (aircraft engines and space propulsion), Flight Systems
(helicopter electrical systems).  Between the Pratt & Whitney
and Flight Systems divisions, UTX participates in virtually all
aspects of the design and manufacture of aircraft propulsion
systems, from engines and their associated flight controls to
auxiliary power units, compressors and instrumentation.

Why we like it:
Don't look now, but the pending machinist strike at Boeing could
have more far reaching effects than an impairment of that
company's bottom line.  If there is a strike, that will bring
production to a screeching halt, meaning that the company won't
need to purchase parts from its suppliers.  UTX is integrally
involved in providing numerous parts for commercial aircraft
production, and judging by the stock's recent price action,
investors are already starting to factor in the likelihood of a
strike.  The stock's recent rollover from the $63 level
represented the 3rd lower high since the broad market rebounded
from its late-July lows.  But the really important development is
that UTX broke the $58 support level on an intraday basis,
generating a descending Triple-bottom breakdown on the PnF chart.
The PnF chart was already on a sell signal with a bearish price
target of $48, and today's action just reinforces the stock's
weakness.  Intraday resistance near $59 kept the bulls at bay on
Thursday, and then we have even stronger resistance in the $60-61
area.  Any failed rally at either of those levels can be used to
initiate new bearish positions.  Alternatively, look to enter the
play on a breakdown under the $57 level, just below Thursday's
intraday low.  Initial stops are set at $61.

BUY PUT SEP-60*UTX-UL OI=1835 at $3.50 SL=1.75
BUY PUT SEP-55 UTX-UK OI=2020 at $1.65 SL=0.75

Average Daily Volume = 2.93 mln

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By John Seckinger

The Dow Jones Utility Average (UTY) might be the youngest of the
three Dow Jones Averages, having made its debut in January 1929;
however, this is one Index equity traders should pay close attention
to.  The other is Oil.

In theory, a rise in utility stock prices indicates investors
anticipate falling interest rates, since utility companies are
big borrowers and their profits are enhanced by lower interest
costs. Conversely, the utility average tends to decline when
investors expect rising interest rates.  Due to the Index’s interest-
rate sensitivity, the utility average is regarded by many as a
leading indicator for the stock market as a whole.

The Utility Sector is a capitalization-weighted index composed of
19 geographically diverse public utility stocks listed on the New York
Stock Exchange. Utility stocks have traditionally provided a haven
for investors who fear recession and unstable returns on other
investments as they tend to pay high cash dividends, a portion of
which may be tax-exempt. Utility stocks differ from other industry
groups not only in how they perform, but also in how they react to
market conditions. The UTY was set to an initial value of 200 on
May 1, 1987.

Originally, the utility average started with 18 stocks, and six months
later, on July 1, 1929, the number was increased to 20. The average
was than reduced to 15 stocks on June 2, 1938.  Unlike the industrial
average, which has undergone more than 100 changes in its nearly 104
years, the utility average has been relatively unaltered. Most of the
changes in recent years are the result of mergers and acquisitions.
The Dow Jones Utility Average is a price-weighted index.

Components of the Dow Jones Utility Average (UTY)

            Company Name                Ticker Symbol
Ameren Corporation                           AEE
American Electric Power Co. Inc.             AEP
Consolidated Edison Co. of N.Y.               ED
Dominion Resources                             D
DTE Energy Company                           DTE
Duke Energy Corp.                            DUK
Edison International Inc.                    EIX
Entergy Corp.                                ETR
Firstenergy Corp.                             FE
FPL Group Inc.                               FPL
Niagara Mohawk Power Corp.                   NMK
Northeast Utilities                           NU
PECO Energy Company                           PE
PG&E Corp.                                   PCG
Public Services Enterprise Group Inc.        PEG
Reliant Energy                               REI
Southern Co.                                  SO
Texas Utilities Co.                          TXU
Unicom Corp.                                 UCM

With regards to the Dow Utilities as a leading indicator of
equities, the correlations have become somewhat obvious since 1972.
In November of that year, the utilities peaked a few months before
the Dow and then also forming a bottom just before the Dow 10 months
later.  Moreover, the utilities peaked in the beginning of 1981,
while the blue chips formed a high only three months later.  These
similarities continued in 1982, with both averages bottoming and
rallying together until August 1987.

Research found in Technical Trends by John G. McGinley, Jr. has shown
that the Dow Utilities has led the Dow Jones at every peak since 1960
with only a few exceptions (most notably the 1977 peak).  When looking
at lead times, on average the Utility Index peaks three months prior,
with a variance of one to ten months.

Before we turn to the illustrations, let us take a quick look at
the Oil Sector, since this Index seems to fit nicely with both the
Utility Index and the Dow.  Theory holds that higher oil prices become
inflationary; thus having negative implications on the Dow.  However,
it is my opinion that, just like with Fed hikes, the Dow can trade in
step with higher oil prices for quite some time before inflation gets
out of control.

The Index in focus will be the Amex Oil Index (XOI), a price-weighted
index comprised of companies involved in the exploration, production,
and development of petroleum. The XOI Index was established with a
benchmark value of 125.00 on August 27, 1984.
Index Components
          Company Name             Ticker Symbol    Index Weighting
--------------------------------   ----------------------------------
ChevronTexaco Corporation          CHX	                   12.58%
Amerada Hess Corporation           AHC                   11.93%
Total Fina SA                      TOT                   11.75%
Phillips Petroleum Corporation     P                      8.35%
BP Amoco PLC                       BP                     7.90%
Kerr-McGee Corporation             KMG                    7.84%
Royal Dutch Petroleum Co.          RD                     7.51%
Exxon Mobil Corporation            XOM                    5.94%
Sun Company  Inc.                  SUN                    5.90%
Unocal Corporation                 UCL                    5.47%
Occidental Petroleum Corporation   OXY                    4.78%
USX-Marathon Group                 MRO                    4.03%
Conoco Inc.                        COC                    3.90%
Repsol                             REP                    2.12%

Looking at illustrations of the Utility, Oil, and Dow Index, there
are some striking similarities.  Note that all three set a relative
low around March 12th, 2000 with the Oil Index actually leading by a
few weeks.  Then, on May 20th 2001 all three indices set a significant
relative high together.  Continuing the similarities, all three
indices found a relative low around the week of September 24th, 2001.
Moreover, during March and April of 2002 all three indices formed
yet another relative high, this time with the Dow barely beating
out the Oil Index for the lead role.  Not surprisingly, both the
Oil Index and Dow Jones Industrial Average set a relative low during
the week of July 21st, 2002; beating out the Utility Index once more.

Are we seeing a pattern yet?  To me, this is more than just a
coincidence.  Going forward, traders should put both the Oil Index
(XOI.X) and the Utility Index (UTY.X) right in the middle of their
radar screen.

Other interesting notes include only the Utility Sector not indicating
a Bearish Divergence within the Relative Strength Indicator.  Of
course, the next time these three indicators test previous relative
highs, one of the first things to look for should be a higher RSI
reading out of the Utility Sector.  Why include the retracement
analysis?  It is interesting that both the Dow and Utility Index used
the retracement levels as support or resistance; however, the Oil Index
did not.  Furthermore, the Dow and Utility Index seemed to give the
most weight to the 61.8 retracement level.  Something to remember down
the road.

Even combining the Traders Corner article on Dollar, Bonds,
Commodities, and Equities with this one does not produce the Holy
Grail to trading.  What I try to do is wait until all indicators
line up before putting on a sizable position.  During other times,
I either look for a sector that needs to “catch up” or one that is
leading the way.

Chart of the Utility Sector Index, Weekly

Chart of the Dow Jones Industrial Average, Weekly

Chart of the Oil Index, Weekly


Pattern recognition - Reversal patterns: Wedges
By Leigh Stevens

While I have not exhausted all possible types of "continuation"
patterns in recent articles, I covered the most common ones. The
opposite of patterns that tend to predict the continuation of a
trend, after a pause or consolidation, are ones that tend to
predict upcoming reversals of the dominant trend.  Of these, very
well known are double and triple tops and bottoms, and Head and
Shoulder's tops and bottoms.  One seen less often but that is
predictive for a bottom or top are "wedge" patterns.

The wedges patterns of a "rising" bearish type are usually seen
after an uptrend has been underway for a while, but more often in
an intermediate to long-term up trend is well developed.
However, in the current market environment, while the indices are
not far off a multiyear low, a number of individual stocks and
stock indexes have traced out bearish rising wedges - so, a
discussion of this chart pattern is topical in the current
market. And, this current situation illustrates that sometimes a
wedge formation will suggest a potential trend reversal even
before the emerging trend has gone on very long; e.g., more than
a month.

In a rising wedge, prices move gradually higher but in converging
trendlines or a  "narrowing in" pattern of higher highs and lower
lows formed such as seen in the rising wedge pattern in recent
daily chart of DJX below:

There is a "measuring" rule of thumb for a downside objective
also - prices should decline to the start of the formation, or
the lowest low as a "minimum" downside objective.

To create a wedge, there should be at least 2-3 upswing highs and
downswing lows that comprise the points through which the
trendlines are drawn -- there typically are more points than this
minimum number for drawing the two converging lines.

A wedge pattern can also form over a lengthily period such as
shown below of a two year time frame.

What is being suggested in the rising, bearish wedge is that
buying is being met with stronger and stronger selling as prices
edge higher.  When prices fall below the lower up trendline that
of a rising wedge pattern, a trend reversal is suggested – prices
may rebound to the trendline again, but should not get back above
it.  Place a liquidating buy stop just above the broken
trendline, if a short position is established on the downside

When one index has a bearish rising wedge, its likely that you
may see the pattern in related indices - the first chart was of
the Dow, the chart below is of the same period in the S&P 500

The same wedge pattern was showing up as you might expect in
individual stock charts.  In the case of Cisco Systems (CSCO)
below, we have more technical indicators to "confirm" a likely
top - there was a double top that formed around $15, the stock
was overbought and most importantly, volume was FALLING as prices
were RISING - this was a classic price/volume bearish divergence.
Taken all together a short position or put play in CSCO looked
like a high probability bearish play.

A declining or falling wedge is typically a bullish pattern as it
suggests that selling is being met with increasing buying.
Eventually, this sets the stage for an upside reversal as can be
seen in our next chart.

There is an expectation that prices will at least rebound back to
the high point seen in the downward sloping wedge; i.e., the
highest high.  According to Thomas Bulkowski in his Encyclopedia
of Chart Patterns, an even higher percent of bullish falling
wedges result in upside breakouts, versus bearish rising wedges.

The foregoing suggests being ready to buy an upside breakout of
the declining wedge as soon as it occurs.  One tactic is that of
ongoing downward adjustments of a buy stop order so that it
remains just above the upper downtrend line  -- this way a
position can be taken in the market or particular item as soon as
prices achieve a decisive upside penetration above the falling

Liquidating stops are then placed just below the trendline that
was penetrated to the upside, as there should be no further
return to below this line, especially on a closing basis without
suggesting a pattern failure.


Probability, Empirical Evidence, and Wives Tales
Buzz Lynn

Ever heard of the Hirsch Organization?  They are the folks that
publish the Stock Traders Almanac, a great publication chock full
of historical information and market statistics.  From a recent
Forbes article, I learned that in the current issue of the Almanac
Investor newsletter, Jeffrey Hirsch noted that September has
historically been bad for stocks. "When portfolio managers get
back from the Hamptons after Labor Day, they tend to clean house.
It has been the worst month of the year since 1971 for the Dow,
S&P and NASDAQ, averaging monthly losses of 1.3%, 1.0% and 0.8%,
respectively," writes Hirsch.  "Basically, avoiding September can
be beneficial to your portfolio."

But that's a coin toss at best.  According to the Forbes piece,
The Almanac also suggests that the September-to-January period is
a good time to be invested in pharmaceutical, consumer and telecom
stocks, and recommends buying exchange-traded funds in each of
these sectors.  Again, repeating the Forbes article, the Almanac
Investor recommends Pharmaceutical HOLDRS (amex: PPH) and Dow
Jones Healthcare iShares (amex: IYH) in pharmaceuticals; in
consumer issues, it flogs Consumer SPDRs (amex: XLY) or iShares
Dow Jones Consumer Cyclical (amex: IYC) or Non-Cyclical (amex:
IYK); in telecom, it suggests to go for Telecom HOLDRS (amex: TTH)
or Telecom iShares (amex: IYZ).  How about semiconductor stocks?
Avoid them, as September has been a historically bad month for

Seems market history is all about seasonal timing.  The Forbes
article also goes on to point out, "Sy Harding of Street Smart
Report, uses what he calls his 'Seasonal Timing Strategy' which
says to exit the market on the 4th trading day of May and to buy
back in on the second to last trading day of October. Harding uses
MACD to confirm his entry and exit points so that he doesn't sell
a rising trend or buy into a declining one. As far as this
particular September goes, Harding is mixed. He believes the 'bear
market rally' could extend another two weeks, but that by the
fall, markets will retest the July 23 low."

Want more?  Quoted again in Forbes, "James Dines, editor of the
Dines Letter, puts at least some stock in seasonality.  Dines
turned from bull to bear last week based on what he sees as too
much bullishness as well as data showing that, since 1961, down
Septembers outnumber up Septembers by 2-to-1.  Dines also makes an
interesting observation about Labor Day: 'If the market declines
in the four-day week following Labor Day, one should postpone
buying for one month. It worked splendidly in 1994, 1998, 1999,
2000 and 2001, when postponed buying provided buyers with prices
near the bottom in all five Octobers. On the other hand, if there
is a gain in that four-day week, buy because the market will
probably keep going higher.'"

Interesting observation to which I'll pay attention beginning next

Conversely, Forbes wraps it up with the following contrary
opinion: "Marvin Appel at Systems and Forecasts dismisses the
importance of September's bad rap.  'To the extent that
seasonality matters, you make 1% less in September,' says Appel.
'When markets swing 2% to 3% a day, this doesn't seem
significant.'  Appel is bullish and sees the broader markets
gaining another 10% through the end of the year."

Confused yet?  Don't be.  On a statistical basis (Come to think of
it, Mark Twain had a great opinion on statistics.  "There are
three kinds of lies: lies, damned lies, and statistics.") there is
the probability to be correct a greater percentage of the time.

However, getting caught in the statistical minority will land us
in the poor house with the wrong bet or too large a bet.  Again,
the only lesson I take from this is to acknowledge the statistics
but don't wrap your trade in statistical dogma.  Sometimes, we are
going to wrong.  It's the nature of the game.  Better to cut our
losses if we are wrong and wait for a better trade.

In that regard, trading is just like baseball.  We wait for the
right pitch before taking a swing.  Whiffing a trade is a lot more
financially painful than whiffing a baseball for a strike.  But as
Warren Buffet points out, there are no "balls" and no penalties in
refraining from swinging at a lousy pitch.

Where am I going with this?  To dinner, of course.  Please pass
the crow and help me get my foot out of my mouth.  Seems that last
weeks expectation that the market would remain temporarily bullish
was flawed.  It's pretty difficult to demonstrate bullishness when
the S&P 500 fell from 962 to 917 in one week.  While I pointed out
that the stochastic was due to fall (it did) and the candles ought
to theoretically fall to support lines (they did, and then some),
my stochastic timing and candle lengths were off.  I was
anticipating that the next bullish trade would come when
stochastics bottomed in harmony with candles hitting support
lines.  I missed that by a long shot.  While there was money to be
made on Monday when the SPX bounced at 930 (direct hit!) all the
way to 950, 950 proved unsustainable, from which the index fell
for the rest of the week.

Can I still hold the notion that we're seeing a temporary bull
within a primary bear, a.k.a. bear market rally?  Maybe.  But the
greater weakness than expected certainly caught me off guard.  The
markets were failing to catch a bid.  Perhaps we could dismiss
this as just the market falling under its own weight from lack of
buyers, as many seem anxious to start the holiday weekend early.
Lack of volume would seem to confirm that.  However, I was uneasy
about the pickup in selling volume yesterday compared to buying
volume.  Overall, the rally seen since July's lows has been
"eyebrow raisingly" low.  That is not the stuff of sustainable
bullish movement, and in no way represents the beginning of a
secular bull market.

So what now?  Do we stick with the cyclical bull theory within the
secular bear market?  Or did July's rise not even count telling us
that the market merely encountered a short-lived relief rally?  I
don't have the answer.

But Consider this.  Richard Russell, 78-year-old grizzled market
veteran of 60 +/- years, and publisher of the Dow Theory Letters
since 1958, notes that corrections happen in much faster
timeframes than the primary trend.  Thus, if it took from March
through July -four months - for the Dow to sink from its high to
new lows, but shot upward for a 50% recovery in just one month,
we're still in a secular bear market.  The rate of market recovery
from the lows came twice as fast as the decline.  Ergo. . .bear
market.  That said, we must not trust bullish moves to last long,
or at least until they last longer than market declines.

On the other hand, what if we cheat a little bit and engage in
some rearview mirror analysis of the tealeaves, err, I mean
charts?  Can a case still be made for a bit more endurance of the
erstwhile cyclical bull?  I mean, if volumes are low, shouldn't
the return of vacationers next week pop the markets out of this
week's funk?  That will happen, right?  Charts please!

S&P 500 daily chart

Here's to the power of "fitting" trendlines to market action that
has already occurred.  I sometimes wish I'd never learned that
from Jeff Bailey, as it has given me, and I'm sure many other
traders, and excuse to stick with a trade when our expected
trendlines or retracements, or averages didn't pan out as we
originally thought.  The fact is, it's a great tool that opens our
eyes to other factors that our biased eyes would not see in the
heat of battle.  It helps for "next time".

So what can we learn here?  Maybe our red trendlines we drew last
week were off.  Well, yesterday, SPX bounced (barely) at the
horizontal trend line, a line for former resistance.  Since it
held, I considered giving myself another chance to be correct with
a bullish trend.  After all, I wasn't completely wrong. . .yet.
But I did note the close under the 50-dma (magenta line), which is
no pillar of strength.  Then again, the 5-period stochastic was
nearly oversold.  "Will it bounce?" goes through my head.

Better yet, how about I just redraw my trendline to "fit" the
current action.  Yeah, that's it.  Forget the wick at July's low
and just connect the body of the candles (solid blue line)!  How
about that!  A perfect fit at today's low almost exactly at 10
a.m. ET!  (Remember, today's candle that is now a doji was long
and red at that moment in time.)  Maybe that will hold as support
and the new, blue trendline is really more valuable under the
current circumstances than the old, red one.  Anyway, at this
moment, it really seems to fit better.  That new trendline may
actually be pivotal buy program entry for a number of large
traders.  It would certainly explain why the whole market caught a
bid at that time.

I might also now note that the candle now rests right at its 50
dma as of today's close, which may provide support, as the
stochastic is nearing oversold.  Perhaps I'll be safe remaining
cyclically bullish at this level.

Still, the other side of the stochastic coin is that it has not
hit oversold yet, is still in fairly steep decline, and buyers are
gone on an early vacation.  I'm not likely going to see my bullish
trade make "huge coinage" tomorrow.

Alright, so I justified staying bullish based on the blue trend
line.  But I still have an itchy trigger finger.  That was my line
of last resort and I have no other possible bullish lines to
"fit".  While I can create lines to fit candles, I have to stop
short of creating candles to justify my lines!  If that ever
happens, we'll begin publishing the until now secret
"Hallucination Trader (.com)"!  The dominant financial news media
already has plenty of analyst material available to make it a
rousing success.

All kidding aside, to be blunt, I have no idea if the bulls can
grab the ball back from here and move the candles up from here for
another stochastic run up the daily chart.  It is certainly
possible based on the new trendline and support at the 50-dma.  On
the other hand, that support line could fall under its own weight,
which would be decidedly bearish and would keep the stochastic
pointed down.  That will be a technical violation that I think
would hinder recovery.  Still, I can't put much faith in the move
in either direction as long as absent players keep the volume low.

From all this, the only conclusion I can draw is that I won't see
the pitch I'm looking for tomorrow.  So I'll likely sit out of
tomorrow's action - remember, no penalties for failing to swing at
bad pitches.  A friendly reminder that probability, empirical
evidence, and wives tales are never an exact science.

Make a great weekend for yourselves.  See you next week!

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