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Daily Newsletter, Tuesday, 09/03/2002

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The Option Investor Newsletter                 Tuesday 09-03-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Traders Came Back in a Bad Mood
Index Trader Wrap: Downside Momentum
Market Sentiment: Into the Deep End
Weekly Fund Screen: The New York Times' Fund Finder (Part Two)
Index Trader Game Plans: (See Note)

Updated on the site tonight:
Swing Trader Game Plan: Suddenly Fundamentals Matter


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      09-03-2002           High     Low     Volume Advance/Decline
DJIA     8308.05 -355.50  8659.27  8304.30 1,54 bln    742/2481
NASDAQ   1263.84 - 51.00  1302.67  1263.23 1,36 bln    847/2593
S&P 100   440.03 - 20.77   460.80   439.80   Totals   1589/5074
S&P 500   878.02 - 38.05   916.07   877.51 
RUS 2000  379.13 - 11.83   390.96   379.09 
DJ TRANS 2252.40 - 13.20  2308.28  2248.93   
VIX        43.86 +  8.06    44.13    39.16   
VXN        58.79 +  3.81    59.90    57.49
Total Vol   3,110M
Total UpVol   238M
Total DnVol 2,852M
52wk Highs    95
52wk Lows    283
TRIN        3.88
PUT/CALL    1.05
************************************************************

Traders Came Back in a Bad Mood

It appears that traders came back from vacation with a chip on 
their shoulder. That chip was Intel and numerous brokers took
turns trying to knock it off. Add to the tech sector worries a
blow to financials, some weaker than expected economic reports
and a high profile bankruptcy and the end result was never in 
doubt. 

Dow Chart


 

Nasdaq Chart


 

Lehman analyst Dan Niles took aim at Intel today saying he 
expected them to guide analysts to the lower end of its prior 
range. Lehman said they expected Intel to cut their 3Q earnings 
by several cents as a result of an extremely back end loaded 
quarter. This means they have not sold enough yet to make the
numbers and they hope orders for the holiday will pull them 
out at the last minute. Lehman also said the product mix was
almost all low end processors and unit growth was in the low
single digit rates. Intel dropped nearly $1 in regular trading
and was still dropping in after hours. 

The bad news continued after the bell with a warning from Fairchild
Semiconductor. They said slowing orders in computing and consumer
sectors would slash their revenue to flat or down for the 3Q. They
also said that the 4Q seasonal uptick was shaping up to be very
modest with lower pricing the only thing helping to increase 
demand slightly. In English, you can sell anything if you sell
it cheap enough but there is still a limit to how much product 
you can move if there is no demand. Fairchild sells a broad number 
of commodity style chips into many broad markets. If Fairchild
is in trouble then everyone is in trouble. EMC announced after the 
bell that they still "hoped" to return to profitability in the 4Q 
but visibility in the IT market still remained "incredibly murky." 
The bottom line continues to be no orders for computers or anything
related to the sector. 

Citigroup took a serious hit with a -10% -3.36 drop today after
Prudential cut the money center bank to a sell rating. The WSJ
reported that the New York attorney general was looking into 
the activity of senior Salomon executives who handed out shares
of hot IPO stocks like party favors. Analysts are worried there
could be criminal charges, sanctions and multibillion dollar
judgments. Other analysts are worried that the inquiry will 
spread out to other more active investment bankers and involve
other institutions as well. This could cause shareholder suits,
penalties and changes in the way this business is conducted. 

There are 38,000 fewer trucks on the road tonight after Consolidated
Freightways (CF) closed its doors today. Over 16,000 employees 
found out they were unemployed by a recorded phone call or over
the companies website. Lots were padlocked as the company suddenly
ceased operations. CF was the third largest less than full load
shipper in the country. Yellow and Roadway are expected to profit
from their demise. 

That was not the only announcement of layoffs today. The WSJ
reported that IBM was going to layoff another 4,000+ workers on
top of the 15,000 already announced. Things not going well in 
the tech sector? Actually this was as a result of its merger
with Price Waterhouse. BUT, according to the WSJ the companies 
were quoted as saying that the global demand for IT services was
still declining with an upturn not expected until the second
half of 2003 at the earliest. Surprise, surprise!

Economically speaking today was not a good day. The Challenger
Report announced that job cuts rose to the highest level in the
last six months in August. Job cuts rose to -118,067 and set the
tone for the next three months, which are the worst months of 
the year for layoffs. This year is shaping up to be the second 
worst year since 1989. The number averaged 50,000 a month in 
the 1990s but has averaged 100,000 a month since early 2001 as
the recession took hold. Weak profits are causing employers to
cut back staff and close excess capacity. This problem is far
from over and follows what I have been predicting for several
months. This also sets up the Friday Jobs Report to be weak at
best when you consider unemployment claims rose over 400,000
last week. 

Even worse than the Challenger news was the Institute of Supply
Management report for August, which came in lower than expected.
The headline 50.5 number, only .5 above recession levels, was
substantially below the 52.0 level expected. Even worse the new
orders component fell to 49.7 and the order backlog to 45.0. Both
recessionary levels. Inventories also rose from 41.8 to 45.2 and
showed that demand is simply not keeping up with even the current
weak supply levels. This all means that we may already be in the
second dip despite what the Fed keeps telling us. Surprisingly
inflation pressures are also beginning to build in the 
manufacturing sector. There just does not seem to be any good
news to be found. With two months of almost zero growth and a
deterioration of the internal components the chances of another
Fed rate cut doubled to 36% intraday as evidenced by the futures. 
The problem across all sectors appears to be rising inventory 
and decreasing demand with retailers refusing to take more 
product than they feel they can sell and manufacturers being 
forced to shutdown production lines as finished goods stack up. 

Last night the Japan market sank to an 18-year low at 9217. The
consumer confidence in Italy sank to a three year low. Investors
are pulling funds out of equities the world over as the global 
contagion from the US recession spreads. TrimTabs.com reported 
that money still flowed out of funds in the US in August at the
rate of -$7.1 billion. Granted this was much slower than the 
July rate of -$52 billion but it still meant funds had net
outflows and had to sell stocks to satisfy withdrawals. With the
market starting September off with a bang you can bet that fund
managers will be swamped with outflows again this week. With 
several other high profile economic reports leading up to the
NonFarm Payrolls on Friday as well as the Intel mid-quarter 
update on Thursday, this week is not shaping up as a winner.

As evidenced by the Fairchild announcement tonight we are moving
into the earnings warning season for the 3Q. There are just too
many negatives and no positives as we go forward. Investors are
just too skittish to hold stocks until after 9/11 and if the 
economic numbers do not improve they may not want to hold them
after 9/11 either. This was a very bad day in the markets with
decliners beating advancers better than 3:1 and down volume
beating up volume by 12:1. The VIX spiked to close near 44 with
a +8.06 gain for the day. The TRIN closed at 3.88 and the Put/Call
ratio at 1.05. Given just those numbers most traders would think
tomorrow would bring a huge rally. The problem remains, rally 
on what? We may be very oversold but remember we saw VIX readings
over 50 in July and TRIN readings over 6.00. Things are bad but
they can get worse. Use any rally as an entry point for new
short positions until next week.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


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

******************************************************************
Index Trader Wrap
Jim Brown

Leigh Stevens is on a personal leave from OIN for Sept. and Oct. 
as he travels back to New York for the various memorial services 
for Cantor Fitzgerald employees along with some well deserved 
vacation. He will continue to write for the Trader's Corner 
during this time as his schedule permits. In November he will 
resume contributing to OIN on a regular basis. 

I will write an abbreviated index wrap this week and Jeff Bailey 
will fill in for Leigh beginning next week when Jeff returns from 
vacation. 

Since this data is really a duplication of my OIN market wrap and 
my Swing Trade wrap I am going to keep it brief. Please bear with 
me until Jeff returns. 

Thanks
******************************************************************

Downside Momentum

The bulls felt like they tripped and fell on a ski slope today 
as all the points went to the bears. The down volume swamped the 
up volume 2.8 billion to 238 million. This 12:1 ratio in favor of
the bears would normally be capitulation numbers. Especially if 
you look at the other indicators as well.

The VIX spiked +8.06 points in one day to 43.86 and the TRIN to 
3.88. The put/call ratio stayed over 1.0 most of the day. Clearly
fear has returned to the markets. That fear is only just the 
beginning if the economic news is to be believed. 

The biggest fear of course is some repeat of last Septembers 
attacks and another year of cocooning for the US consumer. If
they were really able to pull off a big attack this year the
sentiment would quickly go back to bomb shelters and working
out of the house and it could take a long time before workers
would feel safe to be in crowds again. Investors who thought
last years drop was bad would be in for a real shock this year.

Fortunately I doubt we will see a new attack because security
is very tight. Terrorists do not want to go head to head with
armed defenders. They would rather wait until we least expected
it and be assured of the greatest number of casualties. While 
this is a long term negative it is short term positive in that
the market probably only has another week in the tank and 
sentiment over a quiet anniversary will change into "let's
roll!"

Until then we have to expect more weakness in the markets. Some
analysts are expecting a retest of the July lows while others
are just looking for weakness until 9/11. I am in the 9/11 camp.
I think that despite the bad economic reports the markets will
rally after a peaceful anniversary. Travel will pickup, consumers
will start buying for the holidays and the terrorists will fade
off into the distance. Between now and next Wednesday we will 
have to endure endless retest banter from the media but that
will actually work in our favor. This will increase the bearish
sentiment and possibly create that capitulation event everyone
always talks about. One thing everybody needs to be aware of, 
we do not have to drop to 7500 to retest. A strong drop to 8000
with adequate negative internals should be sufficient for the
market technicians to start saying bottom again. 

Dow chart


 

OEX Chart


 

SPX Chart


 


QQQ Chart


 


I have talked about the other indexes in my other articles tonight
but the QQQ seems to attract the most interest. I see no major
support if we breakdown from here (22.64) until we hit the intraday
bottoms from early August. This starts around 21.75 and would be
my choice of entry points for going long the QQQ.

If you do go long here please be aware that we could see a drop 
to the 21.30 low from August 5th and everyone in my Editors Play
from last Sunday hopes it does. I would only panic if we saw a 
move below the $21 level. Therefore this is where I would put my
stop loss, $21.00. (Actually 20.90 as I hate round numbers that
act as price magnets.)

My overall sentiment for Wednesday and the week is down. We could
have an oversold bounce at any moment but I think we will end the
week lower than we closed today. My downside target is 8100. 

Next week will be a different story. I am going to recommend going
long on Monday with total risk capital to play any post 9/11 bounce. 

If you are in doubt this week, save your money and get ready to
go long next week. 

Patience is a virtue of successful traders. (Wish I had it!)

Jim Brown


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

Into the Deep End 
by Steven Price

The September "calm before the storm" never materialized.  
Hurricane sell-off came in like a lion and will most likely roar 
for a while.   Today's drop broke six straight years of Dow 
increases following the Labor Day weekend.  These gains were 
followed by large losses for the month of September over the last 
four years.  If today's 355-point loss in the Dow is a sign of 
things to come, then we could be re-testing the July lows in a 
matter of days.  The main component that makes this year so 
different is what happened at this time last year.  We are just 8 
days away from the September 11 anniversary and apparently 
investors don't want to be around for what may happen.  The Dow 
crashed through support levels as though they were rice paper 
after today's ISM report came in at 50.5%, below expectations of 
52%.  While any number over 50% still shows expansion, this 
report was not received well; neither were the comments about 
managers not being confident in forecasts going forward.  The 
component that was most disturbing was new orders, which came in 
at 49.5, or a level that showed contraction.  

That was all the market needed to get rolling downhill, but it 
still got a little help elsewhere.  Lehman downgraded Intel, 
saying it thought revenue would come in lower than current 
projections, and predicted Intel would cut earnings estimates in 
its Thursday mid-quarter update. 

Other downgrades included a UBS cut of Ford to "reduce" from 
"hold," due to pension problems and non-competitive practices, 
which are likely to cause large cash outflows for years.  
Citigroup also fell under the ax.  Prudential cut the stock to a 
"sell," citing earnings predictions, Enron-related problems and 
continuing issues related to Salomon Smith Barney analyst 
activities.

All in all there was not much to keep the exit doors closed.  The 
Nasdaq Composite looks headed back to 1200, while the NDX has 
already broken below 900, finishing the day at 899.64.  The Dow, 
which had been holding support above 8500, took out the 8500 and 
8300 levels.  8000 looks like the next big number to the 
downside.  On the way up from the July crash, the Dow stopped at 
8030 on its pullback and took off from there.  Today's close of 
8308.05 has already broken the series of higher lows on each 
pullback and could be a signal that the tide is turning.  

Job cuts in August reached a 6 month high of 118,000, not 
including the 15,000 lost jobs at Consolidated Freightways, which 
announced a shut down and Chapter 11 filing this morning.  Nor 
did it include the speculation of 4,000 cuts by IBM as they 
acquire the consulting arm of Price Waterhouse Coopers.

What is also a telling reversal is a look at the bullish 
percentages, which show the ratio of stocks in an index that are 
currently on Point and Figure buy signals.  These percentages in 
the Dow, NDX and S&P 500 have all been over 50 since the middle 
of August.  After today, the NDX, which has led the other 
averages for the last few months, is back down to 42%.  This 
index encompasses many of the largest tech stocks, and could be 
foreshadowing a reversal in the other averages, as well.

Look for some type of bounce after such a large one-day loss 
today.  However, the month of September is usually a down month 
and with September 11 looming, don't expect that bounce to be too 
high.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8308

Moving Averages:
(Simple)

 10-dma: 8851
 50-dma: 8718
200-dma: 8663

http://www.OptionInvestor.com/charts/financial.asp?ticker=$INDU

S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  878

Moving Averages:
(Simple)

 10-dma:  930
 50-dma:  915
200-dma: 1063

http://www.OptionInvestor.com/charts/financial.asp?ticker=$SPX

Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  899

Moving Averages:
(Simple)

 10-dma:  984
 50-dma:  974
200-dma: 1316

http://www.OptionInvestor.com/charts/financial.asp?ticker=$NDX

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


The Semiconductor Index (SOX.X): Today's downgrade of Intel led a 
sell-off in the SOX.  Lehman cut its revenue forecasts and 
predicted an earnings cut by Intel in its mid-quarter update on 
Thursday.  The index fell through support at 300, and is now 
testing recent lows of 282.75, finishing today at 284.94. If the 
index breaks this level, we have to look back to 1998 to find 
support at 255. Below 250 and we could see 200 soon.  The index 
gave up a recent 80 point rally, so these levels may not be far 
off without some good news in the near future. 

52-week High: 657
52-week Low : 282
Current     : 284

Moving Averages:
(Simple)

 10-dma: 324
 50-dma: 344
200-dma: 488



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

Market Volatility

The VIX rocketed back up today, as the Dow plummeted and traders 
pumped up the premium ahead of 9/11.  While 43 appears high, it 
was only a couple of months ago that we saw 56.  Until fears of 
another attack are allayed, don't expect to see the VIX fall too 
far from this level.  The Dow is also taking out support levels, 
as are the Nasdaq and S&P 500.  As long as the downward momentum 
continues, the VIX should continue its upward climb.

CBOE Market Volatility Index (VIX) = 43.86 +8.06
Nasdaq-100 Volatility Index  (VXN) = 58.79 –3.81

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

          Put/Call Ratio  Call Volume   Put Volume

Total          1.06        434,896       459,741
Equity Only    1.46        135,480       197,290
OEX            1.35         30,237        40,764
QQQ            1.59         21,150        33,581

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

Bullish Percent Data

           Current   Change   Status
NYSE          44      + 0     Bull Confirmed
NASDAQ-100    42      -10     Bull Correction
DOW           57      + 0     Bull Confirmed
S&P 500       54      - 4     Bull Alert
S&P 100       49      - 7     Bear Confirmed

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  1.97
10-Day Arms Index  1.62
21-Day Arms Index  1.34
55-Day Arms Index  1.35

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        530          2882
NASDAQ      757          3479

        New Highs      New Lows
NYSE         30              45
NASDAQ       60             139

        Volume (in millions)
NYSE     1,498
NASDAQ   1,387

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

Commitments Of Traders Report: 08/27/02

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 added 3,000 contracts to their long positions, while 
small traders reduced longs by almost 4,000.  Small traders also 
added a similar amount to the short side.


Commercials   Long      Short      Net     % Of OI 
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%)
08/27/02      425,982   469,087   (43,105)   (4.8%)

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
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%
08/27/02      153,152    72,408    80,744     35.8%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
 
NASDAQ-100

Commercials increased their long contracts by 3,500 contracts, 
and added only 1,200 to the short side.  Small traders, on the 
other hand, reduced long contracts by 1,200, while leaving shorts 
relatively unchanged.


Commercials   Long      Short      Net     % of OI 
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%)
08/27/02       45,354     50,634    (5,280) ( 5.5%)

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
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%
08/27/02       10,156     8,040     2,116    11.6%

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

DOW JONES INDUSTRIAL

Commercials reduced their shorts by 1,000 contracts, while 
leaving long positions approximately the same.  Small traders 
increased both positions slightly. 


Commercials   Long      Short      Net     % of OI
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%
08/27/02       21,023    14,328    6,695      18.9%

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
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%)
08/27/02        6,825     8,438    (1,613)   (10.6%)

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

The New York Times' Fund Finder (Part Two) 

This week is a continuation of last week's fund screen using the 
the NYTimes.com website and Fund Finder tool, which we are using 
to identify the top performers across nine types of mutual funds, 
based on assets over different return time periods.  Last week's 
screen covered four stock mutual fund types: growth, value, core, 
and mixed (balanced).  S&P 500 objective funds, for our purposes, 
were included in the core stock fund screen last week since they 
have large-cap core styles by their very nature.  Passive (index) 
funds invest in the market (S&P 500) rather than try to beat the 
market through active management.

In this exercise, we will cover the other four fund mutual types 
using the NYTimes.com fund screener, powered by data from Lipper.  
The four fund types covered this week include global stock funds, 
sector funds, fixed income funds and government debt funds.  The 
fixed income fund type invests in government and corporate bonds, 
generally of investment-grade quality, while the government debt 
fund group typically limits investments to highest-quality (AAA-
rated) U.S. government securities.

Like last week, our mission is to use the Fund Finder to identify 
the strongest long-term performers among funds with net assets of 
over $500 million.  You can run the screen for funds of all sizes 
if you prefer.  When we say "long-term" performers, we mean funds 
that have at least 10 years of performance, and in some cases, 15 
years of returns to compare/evaluate.  If your goal is truly long 
term in nature, such as investing for retirement, then looking at 
these longer-range results may be appropriate.

When you look at long-term performance, however, you need to look 
to see whether the returns are attributable to the current mutual 
fund manager (or management team).  In many cases, the manager is 
gone, and you can't fully attribute the history of performance to 
the current fund advisor.  An example of that is the Strong fixed 
income funds, which recently announced the departure of two stars 
who deserved much of the credit for the superior relative returns 
the fund company delivered for bond investors in the past decade.

Global Funds

Global funds invest primarily in the common stock of foreign and 
domestic companies, with some mutual funds investing exclusively 
in foreign securities.  Most funds limit investments to developed 
foreign markets (Europe, Japan/Asia) while some invest a portion 
of assets in emerging markets for greater total return potential.  

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

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

 12.5% Morgan Stanley International Equity Fund I (MSIQX)
 11.3% Oppenheimer Global Fund (OPPAX)
 10.9% Templeton Growth Fund (TEPLX)
 10.9% Janus Worldwide Fund (JAWWX)
 10.9% SoGen Global Fund (SGENX)

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

 9.9% SoGen Global Fund (SGENX)
 9.8% Templeton Growth Fund (TEPLX)
 9.6% American Funds: New Perspective Fund (ANWPX)
 9.5% Oppenheimer Global Fund (OPPAX)
 8.6% Templeton World Fund (TEMFX)

You can see that three funds overlap both lists: SoGen Global, 
Templeton Growth, and Oppenheimer Global.  Both Morgan Stanley 
International Equity Fund (Institutional Class) and the Janus 
Worldwide Fund are currently closed to new investors.  As you 
see, none of the global funds (with assets above $500 million) 
have 15-year average annual total returns over 10.0% per year.  
Over the past 15 years, you would have fared better if you did 
not diversify your portfolio abroad, in spite of what advisors 
suggested.  A rising dollar in the 1990's put a dent in global 
and foreign fund performance relative to U.S. fund performance.

All five 15-year winners have value disciplines in addition to 
sales loads to consider.  SoGen Global Fund (SGENX) invests in 
bonds, real estate and gold securities besides stocks and that 
has allowed the fund to generate gains since 2000, while other 
global funds have produced capital losses.  Managers Eveillard 
and de Vaulx have managed the fund since 1979.   Oppenheimer's 
Global Fund (OPPAX) is another strong candidate and invests in 
common stocks of primarily non-U.S. companies.  Lead portfolio 
manager Wilby and the Oppenheimer international team have been 
the fund's advisor since 1992.  In both cases, there's history 
and stability.

Sector Funds

Sector funds are non-diversified and concentrate holdings in a 
particular sector such as technology.  They may be appropriate 
for investors wanting to add specific exposure to a portfolio.  
Sector funds should not serve the core component of your stock 
portfolio.  

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

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

 19.9% Fidelity Select: Electronics Portfolio (FSELX)
 19.4% Vanguard Health Care Fund (VGHCX)
 17.7% Eaton Vance Worldwide Health Sciences Fund (ETHSX)
 17.0% John Hancock Regional Bank Fund (FRBAX)
 16.8% Fidelity Select: Computer Services Portfolio (FSCSX)

 Fund Type: Sector
 Return Time Period: 15 Years
 Net Assets: Over $500 Million
 
 17.9% Vanguard Health Care Fund (VGHCX)
 16.0% INVESCO Financial Services Fund (FSFSX)
 15.7% John Hancock Regional Bank Fund (FRBAX)
 15.0% INVESCO Leisure Fund (FLISX)
 14.9% Eaton Vance Worldwide Health Sciences Fund (ETHSX)

Here you can see that no technology sector funds made either 
list, with the 10-year and 15-year lists dominated by health 
sector and financial sector funds.  If you're shopping for a 
health sector fund, you should be sure to include Vanguard's 
Health Care Fund (VGHCX) in your analysis.  Edward Owens, of 
Wellington Management Company, has managed the fund's assets 
since 1984.  At 0.31%, it has the lowest expense ratio among 
health sector funds, giving it a significant cost advantage.

If you're looking for exposure to banks and financial stocks, 
then you may want to look at John Hancock Regional Bank Fund 
(FRBAX), which has been team managed since 1985 and sports a 
strong track record of performance relative to similar sector 
funds.  INVESCO Financial Services Fund (FSFSX) has produced 
returns over the past 15 years that slightly exceed the John 
Hancock Regional Bank Fund; however, it has a new manager in 
2002.  Therefore, you can't attribute the fund's performance 
results and rankings to the current manager.

Fixed Income Funds

This fund type includes all bond funds that don't limit their 
investments to government securities only.  They pursue total 
return (yield and appreciation potential) by investing assets 
primarily in government bonds and investment grade corporates.  
Some funds invest or specialize in the high-yield sectors for 
greater total return potential (albeit with higher associated 
risk).  

Fixed income funds offer a higher yield and potential greater 
total return than stable money market funds, but fluctuate in 
share price (there's no free lunch).  Fixed income funds have 
lower volatility than stock mutual funds, but also less total 
return potential over time.  They are best suited to "income" 
investors and can be used to diversify a portfolio consisting 
primarily of equity securities (common stock and stock funds).

Below is a summary of the top "fixed income" funds during the 
trailing 10-year and 15-year periods per the NYTimes.com Fund 
Finder.  

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

 +9.2% Loomis Sayles Bond Fund (LSBDX)
 +8.3% Alliance Government Income Trust (ANAGX)
 +8.2% PIMCO Total Return Fund I (PTTRX)
 +8.0% Vanguard Long-Term Corporate Bond Fund (VWESX)
 +8.0% Janus Flexible Income Fund (JAFIX)

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

 +9.7% Vanguard Long-Term Corporate Bond Fund (VWESX)
 +9.5% PIMCO Total Return Fund I (PTTRX)
 +8.9% Dreyfus Premier Core Bond Fund (DSINX)
 +8.9% USAA Income Fund (USAIX)
 +8.9% FPA New Income Fund (FPNIX)

Here, you can see that two funds topped both lists: Vanguard 
Long-Term Corporate Bond Fund and the institutional class of 
PIMCO Total Return Fund.  As its name suggests, the Vanguard 
offering invests primarily in long-term corporate securities, 
which because to their longer duration are more sensitive to 
interest rate changes (riskier) than other fixed income fund 
types.  With interest rates at historic lows, long-term bond 
funds are in the most danger today of potential depreciation 
(rising rates means falling bond prices).

PIMCO Total Return Fund is the country's largest fixed income 
fund with combined assets of nearly $60 billion including all 
share classes.  The fund's "institutional and administrative" 
share classes account for the bulk of the fund's total assets 
under management.  If you can get into either class vis--vis 
your company-sponsored retirement plan, that's the best route 
since there are no sales charges and expense ratios are lower.  
Class A, B and C shares vary in their costs and fee structure.

William Gross is the Peter Lynch of bond funds, and his PIMCO 
fixed income team is perennial favorites for Morningstar fund 
manager of the year awards.  Morningstar's reports says "this 
fund towers over most of its fixed-income competition."  They 
mention that the fund has consistently outperformed its peers, 
without taking excessive risks.  While acknowledging that the 
retail class shares aren't cheap, Morningstar says that "those 
looking for a core-bond fund won't find many more-appealing 
choices."  We agree.  

FPA Capital Income Fund (FPNIX), managed by Robert Rodriguez 
since 1984, is another Morningstar favorite.  Recent returns, 
however, have been hampered by a large stake in lower credit 
quality (high yield) securities, which have been hurt in the 
recession since 2000.  The FPA Capital Income Fund has a 3.5% 
load, but sports a below average 0.58% expense ratio.

Government Debt Funds

Government bond funds invest principally in the highest credit 
tier ("AAA") so they have less credit risk than other types of 
bond funds, but they're subject to various other risks of bond 
investing and are not risk-free.  Government funds limit their 
investments to bonds issued/backed by the U.S. government, its 
agencies and instrumentalities.  Some invest a small amount of 
assets in high quality corporate bonds for their greater total 
return potential.   

Below is a summary of the top "government debt" funds over the 
last 10-year and 15-year periods, with net assets of over $500 
million, using the NYTimes.com mutual fund finder.  

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

 +8.8% Vanguard Long-Term Treasury Fund (VUSTX)
 +7.8% One Group Bond Fund (WOBDX)
 +7.6% Strong Government Securities Fund (STVSX)
 +7.6% Vanguard Intermediate-Term Treasury Fund (VFITX)
 +7.2% Smith Barney Managed Municipals Fund (SHMMX)

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

 +9.9% Vanguard Long-Term Treasury Fund (VUSTX)
 +9.2% Strong Government Securities Fund (STVSX)
 +8.2% Fidelity Government Income Fund (FGOVX)
 +8.0% State Street Research Government (SSGIX)
 +8.0% Lord Abbett US Government Securities (LAGVX)

Investors seeking the credit safety of U.S. treasury securities, 
with an intermediate-term average duration, have an appropriate 
offering in the Vanguard Intermediate-Term Treasury Fund (VFITX).  
It should be less sensitive to rate movements than its long-term 
treasury fund sibling.  

Strong Government Securities Fund (STVSX) sports a great record, 
but in July, Strong announced that manager Brad Tank (since 1990) 
was leaving the firm.  The NYTimes.com website shows that Bhatia 
and Sontag have managed the portfolio since 2001.  However, time 
will tell how well these two fare relative to their predecessor, 
Bradley Tank.  Tank was Strong's director of fixed income, a key 
member of that team.

Fidelity, State Street Research and Lord Abbett all have strong 
reputations today in the fixed income marketplace.  You may wish 
to consider one of them should you're shopping for a diversified 
government bond fund offering.    

Conclusion

Over the past two weeks, we've used the Fund Finder located at 
NYTimes.com (powered by Lipper data) to isolate top performing 
funds in different mutual fund types over the last 10-15 years.

We limited our screen results to funds with above $500 million 
assets, but you'll probably want to screen for all asset sizes 
(not just the most popular funds in each category).  

Unlike Morningstar, which has 48 categories, the NYTimes.com's 
fund finder conveniently classifies funds into just nine types, 
making comparisons a little easier (and more broad based).  If 
you want to start with a simple screener, the NYTimes.com does 
nicely and it is one of the few screeners online that lets you 
screen/sort results by trailing 10-year and 15-year performance.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


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

Due to Leigh Stevens being out of town, the Index Trader Game 
Plan, otherwise known as the Sector Beat, will not be updated for 
the remainder of this week.  Jeff Bailey will be updating the 
Sector Beat regularly starting September Ninth.


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

Suddenly Fundamentals Matter

The multiple downgrades of Intel and Citigroup along with weak 
economic reports finally converted traders into sellers. There was 
no buying pressure today and no bid under the market. Quite a 
change from the last couple weeks.


To read the rest of the Swing Trader Game Plan Click here:
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The Option Investor Newsletter                  Tuesday 09-03-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: PII, DRI
Dropped Puts: BJ
Daily Results
Call Play Updates: BRL
New Calls Plays: None
Put Play Updates: A, EXC, MXIM, QLGC, UNH, UTX, IBM, KBH, SYMC
New Put Plays: CYMI, AIG

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

PII $69.95 -3.40 (-3.40 for the week) Polaris has been hanging in 
pretty well, while the rest of the market was giving back.  The 
mounting sell pressure over the last few days finally overwhelmed 
this and many other resilient stocks.  In spite of increasing 
profits and a good track record, PII was unable to hold up in the 
face of a 355 point down day for the Dow.  This was a classic 
case of a sinking tide taking down even the big ships.  PII 
crossed our stop loss and we will close the play and re-assess 
this stock in a more positive market environment.

---

DRI $24.33 -1.30 (-1.30) Try as they might, the bulls just
couldn't keep DRI from sliding lower all day under the continuing
weight of the broad market slide.  There was a valiant attempt to
keep the stock above the $24.50 level, but that attempt failed
for the last time in the final hour of negativity.  With the
stock breaking down out of its ascending channel and violating
our stop, it is clear that it is time to move on.  If not stopped
out this afternoon, use any opening bounce in the morning to
close out open positions.


PUTS:
*****

BJ $23.89 -0.66 (-0.66 for the week) BJ has gone our way since 
picking it at $24.79.  When playing options, however, speed can 
be just as important as direction.  While the overall market has 
plunged, BJ has been creeping.  We would rather take a small 
profit and put our money on a play with more potential.   
Friday's trade of $23.30 looked promising, but the rebound and 
then slow move down has convinced us that a pattern of this 
nature would simply take too long to make our put premium as 
profitable as we originally planned.  We will close the play and 
keep the change.


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

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

CALLS              Mon    Tue

BRL      67.48    0.00  -3.23 Still above support
DRI      24.33    0.00  -1.30 Drop, stopped out
PII      69.95    0.00  -3.40 Drop, overwhelmed by market


PUTS               

A        12.85    0.00  -0.58  percentage winner
AIG      59.62    0.00  -3.18  New, sellers pre- 9/11
BJ       23.89    0.00  -0.66  Drop, profits on slow mover
CYMI     22.95    0.00  -1.24  New, technical breakdown
EXC      45.33    0.00  -1.49  No rebound in sight
IBM      72.35    0.00  -3.03  Back in range
KBH      45.08    0.00  -2.87  Testing 200-dma
MXIM     29.91    0.00  -1.70  Breakdown under $30
SYMC     27.67    0.00  -0.93  Fewer computers fewer viruses
QLGC     32.36    0.00  -1.19  Firmly back in descending channel
UNH      84.25    0.00  -3.83  Must be sick
UTX      56.68    0.00  -2.71  Couldn't make it back this time


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

BRL $67.48 -3.23 (-3.23) There was little joy on Wall Street on
Tuesday, as professional traders returned from vacation in a foul,
selling mood.  With the DOW and S&P indices sliding by more than
4% and taking out important levels of support, it is actually
amazing that BRL didn't get hit harder.  Sure, it slide by 4.5%,
but the bulls stepped up to defend the $66 support level early in
the session.  Rather than slide lower throughout the day like the
rest of the market, BRL actually inched higher in the afternoon,
closing more than $1 above the morning low.  This was the 3rd time
in the past four trading days that BRL has challenged the $66
level and rebounded.  If $66 fails as support, then it could be
the catalyst for a sharp move lower.  On the other hand, if the
bulls can successfully defend that level, it could make for a
springboard for a powerful move higher, if the broad market
cooperates.  Another rebound from above $66 can be used for new
entries, although more conservative traders will likely want to
wait for a move back through the $68 intraday resistance level
before entering.  Keep stops set at $66.

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

None


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

A $12.85 -0.58 (-0.58) With the NASDAQ taking another tumble on
Tuesday, and the Networking index (NWX.X) shedding more than
3.5%, it should come as no surprise that shares of A continued
their pattern of gapping down and then drifting lower.  By the
end of the day, the stock had outpaced the NWX to the downside,
giving up 4.3% and setting another all-time low.  With continued
concerns about IT spending making no recovery later this year,
investors aren't even waiting for a rally to sell into.  They
just want out, and that can be seen by another heavy volume day,
with A trading nearly twice its average daily number of shares.
After the sharp decline of the past week, A is due for an
oversold rebound, but that will likely set us up for the next
bearish entry.  Be very careful about initiating new positions
on further price weakness.  Instead, look for a failed rally in
the $13.50-14.00 to enter the play.  Lower stops to $14.50.

---

EXC $45.33 -1.49 (-1.49) Last week's weakness in Utility stocks
turned out to just be the opening act, as the Utility index
(UTY.X) plunged under both its 20-dma ($281) and 50-dma ($278)
on Tuesday, enroute to a 3% loss.  Shares of EXC were already
falling sharply last week, and took another beating today, ending
the session just above the $45 support level.  While lighter than
Friday's session, EXC still saw selling volume 30% above the
daily average and it is looking more likely that the July lows
will be tested sooner, rather than later.  Today's intraday low
of $44.51 generated a fresh PnF sell signal, and the vertical
count now points to an eventual target of $37.  Note that this
coincides nicely with a retest of the July low, which was $37.85.
A failed rally below the $47 level (the top of today's gap) can
be used to initiate new positions, as can a continued drop below
$44.50.  To guard against an oversold rebound, we are lowering
our stop to $47.25 tonight.

---

MXIM $29.91 -1.70 (-1.70) It was another day of painful losses in
the Semiconductor sector (SOX.X), as broad market selling
pressures combined with concerns about INTC's mid-quarter update
on Thursday to keep the bulls on the sidelines.  By the end of
the day, the SOX had shed another 5%, ending the day only about 2
points above the August 5th intraday low.  MXIM got pummeled with
the SOX, falling below $30 enroute to a 5.3% loss.  Note that the
$30 level was the site of important support 3 weeks ago, and
could very well motivate the bulls to try for an oversold bounce
from current levels.  Traders that opened new positions near the
$36 level may want to consider harvesting partial gains near
current levels, looking to re-enter the play on a failed rally
from a higher level.  Note that we are aggressively tightening
our stop to the $32 level, just above the top of today's gap down
move.  A failed rally below that level can be used for new
entries into the play.  Momentum traders will want to see MXIM
fall under $29.50, in conjunction with the SOX breaking below
its early August lows before opening new positions.

---

QLGC $32.36 -1.19 (-1.19) The NASDAQ was the bears' domain again
as the month of September got off to a rocky start.  Losing more
the 5%, the Semiconductor index (SOX.X) helped to lead the
NASDAQ-100 to a 4.5% decline.  The August rally has now been
almost completely wiped away and shares of QLGC came to rest just
above the critical $32 support level, after giving back another
3.5%.  Note that the $32 level provided support in early August,
and it is no coincidence that we are back there now, as it is the
site of the 62% retracement of the rally off the lows of last
September.  With daily Stochastics bottoming in oversold
territory, QLGC could be setting up for another oversold rebound,
but only if there is solid buying in the overall NASDAQ.  If the
SOX falls under the $282 support level (site of the August low),
look for QLGC to break the $32 level and seek out the next support
level near $30.  We've got a nice gain in the play, so we're
tightening our stop to $34.25, just above Friday's intraday
resistance.  Use a railed rally below $34 to initiate new
positions, or else target a breakdown under $32.  Keep in mind
that we only want to enter on a breakdown if the SOX breaks its
August lows.

---

UNH $84.52 -3.83 (-3.83) Bullish traders in the Health Care
sector may have thought they were stepping into a recovery trend
late last week, but those hopes were promptly dashed this
morning, as the Health Care Payor's index (HMO.X) fell sharply
at the open and then drifted lower into the close.  By the time
the closing bell rang, the HMO index had plunged more than 4%,
breaking the $540 support level.  Last week's rally attempt in
shares of UNH failed on Friday right at the $90 resistance level
and the stock plunged through the important $86 support level
today.  The only remaining support for the bulls to lean on is
$81.50-82.50, and if that fails we could see a rapid drop into
the $77-78 area, the consolidation zone from which UNH rallied
back in April.  With the VIX moving higher by more than 22% on
Tuesday, the markets could be setting up for a solid oversold
bounce later this week.  We don't want to enter new positions on
price weakness right now, as it is too difficult to manage risk.
We're lowering our stop to $88 tonight to protect against a
strong rebound.  Cautious traders may want to use a rally through
the $86 level (support up until today) to exit profitable
positions, looking to re-enter the play on a failed rally in the
$87-88 area.

---

UTX $56.68 -2.71 (-2.71) Breakdowns were the theme of the day as
investors returned from the 3-day weekend in a bearish mood.  The
DOW slid more than 350 points on continued negative economic news
and every DOW component lost ground.  Of the DOW 30, UTX finished
near the top of the loser board, with a 4.5% loss.  Last week's
sell signal on the PnF chart provided an early warning of the
weakness to come and the stock took out the $57 support level
today, moving ever closer to its $48 price target.  With volume
up near the daily average, it looks like the selling pressure is
on the rise again.  While there is some mild support near the
current level, the next strong support is down in the $54 area.
Look for an oversold rebound to provide the best new entries,
likely on a failed rally near today's $58 intraday resistance.
We're lowering our stop to $59, just above the bottom of today's
gap.  After today's sharp upward move in the VIX, we want to be
very careful about initiating new positions on weakness.  For
open positions, look to take partial profits off the table on
a drop near $54.

---

IBM $72.35 -3.03 (-3.03 for the week) Big Blue has been feeling 
more than a little blue lately.  In fact it has been downright 
sick.  This play, originally entered at $77.96 has performed 
admirably, with today's movement breaking a significant technical 
barrier. IBM had been in a rectangle pattern for seven weeks 
before its recent movement. IBM had seen resistance at $74 
beginning in June, up until its breakout in August.  The top of 
this rectangle could have provided support on the way down, but 
failed the stock today.   The re-entry into the previous range of 
$66-$74 looks bearish and should continue downward as the market 
sells off pre- 9/11.  In addition, this morning's downgrade to 
Intel looked even more bearish for technology stocks, both for 
the chipmakers and the hardware in which those chips go.  IBM 
could see support at its 50-dma of $72.20.  The stock finished 
near its low of the day, so this level was close to being tested 
and we should see a better indication tomorrow.  Some broad 
market bounce can be expected after such a large sell-off (355 
Dow points), and we may get a good look at $74 as a new level of 
resistance once again.

The Wall Street Journal reported that today that IBM would be 
cutting up to 4,000 additional jobs, as part of their acquisition 
of the consulting arm of PWC.   While the loss of jobs can be 
expected in any acquisition, this level of lay-offs was not 
entirely expected just a month before the deal is supposed to be 
completed.  

We will continue to hold our short position in IBM and will lower 
our stop loss to $75, just above today's high, in order to lock 
in significant profits on a rebound.  As any good trader lets 
his/her winners run, we will lower our target on this play to 
$70.  A break below $70 could land the stock back at $66, but 
we'll take it one step at a time.  Look to initiate new short 
entries on a failed rebound at $74.

---

KBH $45.08 -2.87 (-2.87 for the week) KB Homes went our way even 
faster than we had planned.  The stock opened at the same level 
it closed on Friday and headed south from there. The drop-off in 
purchasing applications, and new round of announced layoffs, 
makes the insiders who got out last quarter look even smarter.  
Today alone, IBM announced 4,000 layoffs and Consolidated Freight 
announced it would cease operations, which will affect another 
15,000 workers.  While trucking and homes are not directly 
related, paychecks and new homes are most definitely related. We 
are most likely going to see a continued drop in home sales as we 
head into the winter months and prime selling season ends. In 
addition, most homebuilders were pumped up on speculation of 
another rate cut, which doesn't look as likely anymore.  The Dow 
Jones Home Construction Index looked much like KBH's graph today, 
with a severe drop, as investors looked to get out of the market 
prior to 9/11.  The index is now trading 306.03 and will test 
support at 300.  KBH will also be testing support just below, at 
$45.  Look to initiate new short positions on a break below $45, 
and look at 300 in the DJUSHB for confirmation of the breakdown.  
A trade below $45 could see the stock quickly testing the next 
level of support around $41, which shows up on both the daily and 
point and figure charts.  We will lower our stop loss from $51.25 
to $48.00, just above today's high.  This should give the stock 
some room to rebound, before continuing its drop, while making 
sure we don't take a loss on the play.

---

SYMC  $27.67 -0.93 (-0.93 for the week) SYMC's action today 
confirmed its break below previous support.  The previous bounces 
from $29 were nowhere to be seen today, as the only attempt the 
buyers could muster in this stock came a penny below Friday's 
low.  This was to be expected after the stock closed on its low 
of the day last week.  After the spread triple bottom PnF 
breakdown on Friday, there was a chance of a "bear trap," which 
is a one box breakdown, followed by a quick reversal up.  Today's 
trade of $28 added another "O" to the column and got us out of 
the trap.  The previous support level of $29 may now act as 
resistance to the upside, especially after serving as support for 
over 2 months.  We will look for that resistance on a broad 
market bounce (of the dead cat variety), after today's massive 
sell-off.  Today's downgrade of Intel doesn't bode well for SYMC, 
as Lehman lowered its 3rd quarter revenue forecast and expects 
the company to lower profit forecasts in its mid-quarter update 
on Thursday.  Fewer Intel chips means fewer computers, which 
means less demands for SYMC's security products.  New entries may 
want to look at the Semiconductor Index (SOX.X), which is 
currently flirting with the recent low of 282.75 (currently 
trading 284.94).  A break below that level could signal a new 
wave of tech selling. We will maintain our short position on SYMC 
and stop loss of $31.00, just above the highs at the end of last 
week.


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

CYMI - Cymer Inc. - $22.95 -1.24 (-1.24 for the week)

Company Summary:
Cymer, Inc. is the world's leading supplier of excimer laser 
illumination sources, the essential light source for deep 
ultraviolet (DUV) photolithography systems. DUV lithography is a 
key enabling technology, which has allowed the semiconductor 
industry to meet the exacting specifications and manufacturing 
requirements for volume production of today's advanced 
semiconductor chips. (source: company release)

Why We Like It:
As the semiconductor stocks go, so goes Cymer.  While the company 
is not a chip manufacturer, its light source products are 
purchased by many semiconductor companies for use in 
manufacturing.  Today's downgrade of Intel put the Semiconductor 
Index (SOX.X) just above its recent low of 282.75 from August 5.  
Lehman lowered revenue forecasts for the chipmaker and said it 
expects Intel to lower profit guidance in Thursday's mid-quarter 
update.  This was just the latest in a long line of warnings and 
downgrades for this sector, which is one of Cymer's biggest 
clients.  While Cymer's products are also used elsewhere, the 
lack of demand for one of its major customer group's products has 
a large trickle down effect.  

The stock today closed below recent support levels from the 
beginning of August.  While it previously traded intraday below 
those levels, earning it a spot on the OI Watch List, today's 
close below $23 looks particularly bearish. the fact that the 
last 4 Septembers have seen the stock market significantly lower 
than where it began the month doesn't help, either.  A look at 
CYMI's PnF chart shows a significant technical breakdown for the 
stock.  While Cymer tested previous lows on the daily chart, it 
remained in PnF consolidation until today.  The trade of $23 
established a triple bottom breakdown, which is very bearish.  
According to professor Earl Davis of Purdue University, the 
formation is profitable 93.5% of the time for an average gain of 
23% over 3.4 months.  While we are looking at a shorter time 
frame, this probability only underscores what we are seeing on 
the daily chart.  The bearish vertical count is currently $14, 
however each $1 box below this level adds negatively to that 
number.  Our ultimate target on the play will be the September 
lows around $15.  However, $20 will most likely provide round 
number support on the way down, with technical support at $17 
below that. Place stops at $25.50, which is just above 
Wednesday's low and may signal a bounce from support.

BUY PUT SEP-25 CQG-UE OI= 974 at $3.00 SL=1.50
BUY PUT OCT-25*CQG-VE OI= 208 at $4.10 SL=2.20

Average Daily Volume = 1.8 mil


---

AIG - American International Group - $59.62 -3.18 (-3.18 for the 
week)

Company Summary:
AIG is the world's leading U.S.-based international insurance and 
financial services organization, the largest underwriter of 
commercial and industrial insurance in the United States, and 
among the top-ranked U.S. life insurers. Its member companies 
write a wide range of general insurance and life insurance 
products for commercial, institutional and individual customers 
through a variety of distribution channels in approximately 130 
countries and jurisdictions throughout the world. AIG's global 
businesses also include financial services, retirement savings 
and asset management. (source: company release)

Why We Like It:
The insurance sector rebounded well from the aftermath of 
September 11.  In fact, the disaster was the impetus for rate 
hikes that had been desired for some time. AIG rallied with the 
rest of the group immediately following the attacks, but has been 
in slow decline since the post 9/11 recovery in October 2001.  
While the market sell-off in July 2002 and subsequent bounce led 
many stocks to a "V" formation, recovering most or all of their 
losses, AIG actually just made it back to the top of a weekly 
descending channel begun last October.  The July crash dropped it 
out of that channel, but its rollover around $68.00 fit nicely 
into the pattern.  Today's break below $60 not only broke support 
but also appears to show the 50-day moving average is now 
resistance to the upside.  The 50-dma acted as resistance 
throughout the second half of June and month of July, but the 
August 5th rally for the broader markets eventually led AIG 
through that barrier on August 8.  Once the stock dropped back 
below it, however, on August 28, several failed attempts were 
made to close back above. this rollover got us interested and 
today's decisive break shows the lid is back on the jar.  

A look at the point and figure chart also shows today's trade of 
$60 establishing a new sell signal, as well as a break in the 
previously rising channel.  The current bearish vertical count is 
$51, however this number will decrease as new $1 boxes are 
achieved to the downside.  It is likely that investors will 
continue to release insurance holdings ahead of next week's 
anniversary of the attacks.  These technical breakdowns should 
lead to a pick up of downside momentum as the date approaches and 
the bulls go into hiding.  This play will most likely be exited 
before that date, as a post 9/11 rally could suck out profits 
from a successful short position.

There is some support on the daily chart at $57.20, and on the 
PnF at $58.  A break below these levels could land the stock back 
at $50, near its July lows. We will target $50 initially, however 
if the stock does not achieve this level quickly, we may close 
the play to avoid a 9/11 rebound.  Place stops at $63, which is 
the 50-dma and just above today's high.  A break above that level 
would show weakness from the 50-dma to the upside and signal 
renewed strength in the stock.

BUY PUT SEP-60 AIG-UL OI=11921 at $2.75 SL=1.40
BUY PUT OCT-60 AIG-VL OI= 1420 at $4.00 SL=2.00
Average Daily Volume = 7.39 mln



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The Option Investor Newsletter                  Tuesday 09-03-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: CYMI - PUT
Traders Corner: Flammable

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

CYMI - Cymer Inc. - $22.95 -1.24 (-1.24 for the week)

Company Summary:
Cymer, Inc. is the world's leading supplier of excimer laser 
illumination sources, the essential light source for deep 
ultraviolet (DUV) photolithography systems. DUV lithography is a 
key enabling technology, which has allowed the semiconductor 
industry to meet the exacting specifications and manufacturing 
requirements for volume production of today's advanced 
semiconductor chips. (source: company release)

Why We Like It:
As the semiconductor stocks go, so goes Cymer.  While the company 
is not a chip manufacturer, its light source products are 
purchased by many semiconductor companies for use in 
manufacturing.  Today's downgrade of Intel put the Semiconductor 
Index (SOX.X) just above its recent low of 282.75 from August 5.  
Lehman lowered revenue forecasts for the chipmaker and said it 
expects Intel to lower profit guidance in Thursday's mid-quarter 
update.  This was just the latest in a long line of warnings and 
downgrades for this sector, which is one of Cymer's biggest 
clients.  While Cymer's products are also used elsewhere, the 
lack of demand for one of its major customer group's products has 
a large trickle down effect.  

The stock today closed below recent support levels from the 
beginning of August.  While it previously traded intraday below 
those levels, earning it a spot on the OI Watch List, today's 
close below $23 looks particularly bearish. the fact that the 
last 4 Septembers have seen the stock market significantly lower 
than where it began the month doesn't help, either.  A look at 
CYMI's PnF chart shows a significant technical breakdown for the 
stock.  While Cymer tested previous lows on the daily chart, it 
remained in PnF consolidation until today.  The trade of $23 
established a triple bottom breakdown, which is very bearish.  
According to professor Earl Davis of Purdue University, the 
formation is profitable 93.5% of the time for an average gain of 
23% over 3.4 months.  While we are looking at a shorter time 
frame, this probability only underscores what we are seeing on 
the daily chart.  The bearish vertical count is currently $14, 
however each $1 box below this level adds negatively to that 
number.  Our ultimate target on the play will be the September 
lows around $15.  However, $20 will most likely provide round 
number support on the way down, with technical support at $17 
below that. Place stops at $25.50, which is just above 
Wednesday's low and may signal a bounce from support.

BUY PUT SEP-25 CQG-UE OI= 974 at $3.00 SL=1.50
BUY PUT OCT-25*CQG-VE OI= 208 at $4.10 SL=2.20

Average Daily Volume = 1.8 mil



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

Flammable 
By John Seckinger
jseckinger@OptionInvestor.com 

By watching both The Oil Index (XOI.X) and October Crude Oil 
Future’s contract, traders can look to capture an arbitrage 
opportunity between companies that rebound or peak at different 
times than the indices. 

In my last Traders Corner Article, I highlighted how both the Oil 
Index and Utility Sector can either lead the Dow or be a 
coincident indicator to the blue chips.  Questions then surfaced:  
Wouldn’t cheap oil prices be good for the Dow Jones Industrial 
Average?

Well, not really.  Cheap oil has the tendency to bankrupt small 
oil producers and oil equipment companies, especially those in the 
U.S.  These companies can usually only make a profit if oil prices 
are at least $16 to $18 a barrel.  Cheap oil increases the 
dependence of the West, and in particular the U.S., on foreign oil 
imports, resulting in larger trade deficits.  More important, it 
has resulted in the loss of more than 500,000 jobs in the oil and 
related industries of the U.S.  Moreover, several studies have 
indicated that there is a negative correlation between the 
fluctuations in the oil price and the gross national product of 
Western countries.  From 1982 to 1986, when oil prices were high, 
the economies of the U.S., Japan and Western Europe were 
expanding, whereas the second half of '80s, when prices collapsed, 
a recession took place.

Oil-producing countries must maintain a high level of revenue from 
oil sales if they are to continue developing their infrastructures 
and industrial basis, and at the same time invest in their oil 
industries to maintain and develop their resources to meet 
worldwide demand. Note:  Chemical and related industries 
contribute one-third of the United States' GNP.  Lastly, the 
environmental effects of cheap oil can be significant. Air and 
water pollution, global warming, and acid rain are all by-
products.  Cheap oil induces people to overuse it and thus 
discourages development of alternative sources of energy that are 
environmentally friendly.  This, in turn, usually leads to an 
upsurge in health care costs. 

Of course, there are price points that will most likely stall 
productively due to lessening consumer demand and increases in 
looking for alternative energy.  Because of such sensitive topics, 
OPEC tries to keep oil prices between $22-$26 a barrel.  

Quoting Greenspan:

"The spillover from oil prices have been modest...growth of 
consumer spending has remained firm...evidence that productivity 
growth has stopped increasing is still lacking...but a tapering 
off of productivity acceleration is inevitable at some point in 
the future...the technology's impact on productivity has made it 
more difficult to make monetary policy...oil prices should fall 
but that could take more time than some may expect... there is 
concern that OPEC may choose not to expand capacity 
adequately...concerns about the potential for political 
difficulties to impinge on available supplies persist as has been 
evident over the past few weeks".

Beginning with a chart of the Oil Index (XOI.X), the most 
important thing to notice is that this index actually led the 
futures contract, instead of lagging behind.  Most textbooks 
theorize that the futures market should almost always lead cash; 
however, the XOI index bottomed first in December 2000, September 
2001, and actually was the first to show a bullish technical 
pattern in February 2002.  

     
Chart of the Oil Index (XOI.X), Weekly 


 

Turning to a chart of the October’s futures contract, the most 
notable divergence has been the contract’s relative strength 
before August.  The XOI index fell sharply until the week of July 
21st as the futures market remained stable.  Both markets rallied 
in August; however, the futures contract started from a much 
higher plateau.  

As a trader, it makes sense to first look at the indices, their 
relationship to the Dow, and then individual stocks within the 
Index that either lead or lag the overall trend.  For an article 
on Oil’s relationship to the Dow, please click on the following 
link:

http://www.OptionInvestor.com/traderscorner/082902_1.asp

Chart of October Light, Sweet Crude Oil (CL02V), Weekly 


 

Below is the list of companies within the Oil Index (XOI):  

Company Name                    Ticker    Weighting    Versus XOI.X
------------------------------------------------------------------
ChevronTexaco Corporation         CVX       12.58%      slight lag 
Amerada Hess Corporation          AHC       11.93%      slight lead 
Total Fina SA                     TOT       11.75%      coincident
Phillips Petroleum Corporation    P          8.35%      slight lag 
BP Amoco PLC                      BP         7.90%      slight lead 
Kerr-McGee Corporation            KMG        7.84%         lag   
Royal Dutch Petroleum Co.         RD         7.51%         lag   
Exxon Mobil Corporation           XOM        5.94%      slight lag  
Sun Company Inc.                  SUN        5.90%      lead on peak 
Unocal Corporation                UCL        5.47%      lead on rebound 
Occidental Petroleum Corporation  OXY        4.78%      lead on rebound 
USX-Marathon Group                MRO        4.03%      lead on peak 
Conoco Inc. (in deal with P)      COC        3.90%      slight lag     
Repsol                            REP        2.12%      lead on both 

Taking things to a more practical level, traders can focus on 
shares of Sunoco (SUN) and Repsol (REP) as solid leading 
indicators.  Beginning with SUN, shares started its fall many 
months before the XOI index with traders apparenntly following 
retracement analysis.  With that said, a break underneath the 
38.2% level should portend weakness in the overall average.  A 
trader could, once he/she sees SUN breaking down underneath 
technical support, look to buy puts on a company that leads the 
overall index.   

Chart of Sunoco Inc. (SUN), Daily 


      

Shares of REP are highlighted because the company clearly led the 
descent lower, while also retracing much higher (over 84%) than 
other oil companies.  Currently descending from a top near the 
13.50 level, shares should be a solid barometer of both the XOI 
index and many companies within the sector.  

Chart of Repsol (REP), Daily 


 


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