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Daily Newsletter, Thursday, 09/05/2002

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The Option Investor Newsletter                Thursday 09-05-2002
Copyright 2002, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.

In Section One:

Wrap: Not That Bad
Index Trader Wrap: Non-Responsive  
Market Sentiment: No Fundamental Difference
Weekly Manager Microscope: Val Jensen: The Jensen Portfolio (JENSX)
Index Trader Game Plans: (See Note)

Updated on the site tonight:
Swing Trader Game Plan: Jobs Control Our Fate


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      09-05-2002           High     Low     Volume Advance/Decline
DJIA     8283.70 -141.40  8420.20  8217.05 1.53 bln   1089/2066
NASDAQ   1251.01 - 41.30  1274.76  1251.01 1.46 bln    981/2362
S&P 100   439.14 -  8.84   447.98   435.65   Totals   2070/4428
S&P 500   879.15 - 14.25   893.40   870.50 
RUS 2000  381.06 -  8.69   389.75   380.91 
DJ TRANS 2204.26 -111.00  2314.26  2186.18   
VIX        42.23 +  2.29    44.87    41.79   
VXN        60.72 +  3.30    61.72    59.59 
Total Vol   3,205M
Total UpVol   663M
Total DnVol 2,511M
52wk Highs  110
52wk Lows   282
TRIN        1.41
PUT/CALL    0.89
************************************************************

Not That Bad

Despite the drops in retail sales, a falling ISM number and 
lower Productivity numbers the headline everyone waited from
came from Intel. The initial consensus was not that bad after
hearing they would lower numbers to only the midpoint of their
initial guidance. Now the question is why did they not bounce
higher after the announcement?

Dow Chart


 

Nasdaq Chart


 

The day started off with more negative news from the retailers.
Wal-Mart missed same store sales estimates again with only a 
+3.8% increase but other stores faired much worse. GDYS -8%, FTUS
-10.8%. Remember this is for the last week of back to school
sales and numbers were dropping in many cases instead of rising. 
The Chain Store Sales report showed August sales only grew +1.6%
and was the weakest number since last September. It appears the
zero interest car loans are continuing to close wallets for 
general retail goods. Retailers missing estimates include WMT,
GDYS, FTUS, JWN, AEOS, ROST, DG, KSS, TGT, FD, SKS. Even the 
discount stores posted losses which disturbed analysts who 
thought they would continue to thrive.

Other economic reports included Factory Orders, which surged
in July to 4.7% and offset a revised -2.5% drop in June. The
conflicting signals did not provide investors with confidence
that things have changed but that the low level of activity
made reporting very erratic. The majority of the gains were in
aircraft orders (+8.76%) and when that number is removed results
showed a much weaker +1.8% number. Obviously +1.8% for the 
broader manufacturing sector is very anemic. 

The Productivity numbers surprised to the upside at +1.5% but
it is due to manufacturers maintaining current production levels
with fewer employees. Continued cost cutting (layoffs) raises
productivity levels. However, unit labor costs rose +3.1%. 
New jobless claims came in +8,000 higher than expected at 403,000
and the second week over 400,000. The four-week moving average
also rose over 400,000 which was troubling for the broader trend. 
The initial claims from last week at 403,000 were revised upward
to 411,000. It appears that the downward trend in July has failed
and unemployment is accelerating upward. We will get the real 
story on Friday morning with the Non-Farm Payrolls which are
expected to increase by 30,000. I strongly doubt this but we 
will know at 8:35 in the morning. 

The big report of the day was the ISM non-mfg and it came in at
50.9 and well below consensus of 54.0. This was the third monthly
drop in a row. (60.1, 57.2, 53,1, 50.9) Anything below 50 represents
a contraction. The services section has normally been exempt from
severe recession drops but even that sector is suffering now. The
low for the year was 49.6 back in January and I would bet we see
another 49 number next month. This was the lowest number since 
January. New orders fell to 51.6% and inventories fell to 46.0%.
This indicates businesses are trying to lower inventory to offset
slowing sales. Exports fell -13.5% to 46.0% indicating that global
demand is also slowing. Getting the picture? The unemployment
numbers for Germany were released today showing a 9.9% unemployment
rate. This would confirm the global trend.

In the tech arena HPQ announced yesterday that the back to school
season was much weaker than expected at only 60% of the expected
increase. This appears to be the pattern across the board. TLAB 
warned today that this was the worst downturn they had ever 
experienced and said Q3 sales would be -15% to -25% less than prior
estimates. After the bell Motorola affirmed estimates and said 
they were making advances in cost cutting and were targeting 
93,000 employees in mid-2003 down from 150,000 in 2000. The CEO 
said the 3Q and 4Q estimates were in range. Banc America also
reiterated their estimates for the SOX to drop to 200. They said
chip earnings estimates were still 15% to 25% too high. 

On the Intel conference call they said sales were down across 
the board including the consumer products. They refused to answer 
any questions on servers individually. They avoided any detail 
about business demand. This would be negative to me. If business
demand was increasing they would want to brag about it. Intel said 
they were going to guide down to the lower mid point of their 
previous estimates. They refused to give guidance about the 4Q 
but said full year estimates were in still in the range of their
previous guidance. They also refused to give processor mix 
guidance. It was a very subdued call with questions being 
dodged constantly. 

When pressed by Dan Niles they said any 4Q seasonal bounce was 
not a sure bet meaning they were seeing weakness in 4Q orders. 
Also, they said their inventory levels were rising (sales slowing)
and that we should not expect any big sell into the pipeline 
for seasonal trends. They said their channel vendors were not
interested in ordering any more product than they could sell 
in a weakening environment. They were asked about pricing since 
they just cut prices drastically and they said the price cuts 
helped some but that pricing remains very aggressive. This 
means the channel will only order for inventory if they can 
steal it and that AMD is cutting their throat trying to hold 
market share. This is going to cause margins to drop and their 
new estimate is in the 51% range. AMD has already warned that 
it is only seeing a modest increase in demand for the 3Q. In my 
opinion it was very contentious with Intel avoiding any hardball
questions and any references to guidance past this quarter. The 
stock had run up slightly after the first announcement but then 
moved back to $15.50 in the middle of the call. Buy the end it 
spiked back up to 15.78 after a couple positive responses. 
Futures traded on both sides of zero during the call but were 
positive when the call ended. 

The impact to our markets tomorrow should be positive. The QQQs
were up +16 cents in after hours and Intel finished up about
+75 cents from the closing numbers. Most of the tech related 
stocks like BRCM, PMCS, CSCO, MSFT, DELL all saw decent increases
after the call with MSFT up over $1.00. If our future was left
up to Intel tomorrow we would probably see a positive bounce.
Dow component Phillip Morris was also up in after hours. 
However the bigger impact on the market will be the Non-Farm
Payroll report. If we get a negative jobs number tomorrow then
all bets are off. A negative number will telegraph even more 
weakness to the double dip crowd and bring back that recession
fear. A positive number, even if below estimates, should be 
ignored on the better than expected Intel news. 

If we get a decent jobs number I would expect a relief rally 
that could carry over into next week. The Intel bad news has 
been priced into the market and those waiting on the sidelines
will start moving back in. I have been expecting a post 9/11 
rally next week beginning with bargain hunting on Monday. This 
could jump start that rally. I will be giving serious thought
to going long on Friday instead of Monday depending on the 
market reaction to the jobs report. 

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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

Non-Responsive   
By John Seckinge 
Contact Support

By definition, a responsive market is one that adheres to support 
and resistance levels, as well as trading in a “rational nature”.  
For blue-chip investors, the Dow has been anything but responsive. 

Beginning with the Dow,  Thursday’s sell-off quickly nullified 
thoughts that Wednesday’s rally was possibly more than short
covering.  Furthermore, the sell-off on Thursday once again created 
a lower relative low in the Dow which may or may not be used in 
conjunction with the August low of 8214 (see chart).  The big 
question is: Should we look for support from a diagonal or 
horizontal standpoint?  What does this mean?  When determining 
what level(s) may hold as support for the Dow (or other major 
indices), should we look for support via a horizontal line 
(example: possible double-bottom near 8215) or from a diagonal 
line like the one drawn below from the August 7th low?  This
question haunts me every day, and I have come to the conclusion 
that markets which lose a significant percentage over a short 
period (as the Dow has recently done) tend not to find support 
via horizontal support.  This “horizontal support” can as be 
defined as rational or responsive, and it is my opinion the Dow 
is very non-responsive. 

Chart of the Dow Jones Industrial Average Index, Daily
  
 
Chart of the Dow Jones Industrial Average Index, 5 minute
 
 
Taking things to a more micro level, the last hour of trading in
the Dow shows prices compressing and traders anxiously awaiting 
both Intel’s mid-quarter guidance and Friday’s much anticipated 
non-farm report.  Looking ahead, if prices continue lower, support 
should be found near 8220 and then much lower between 7900-8000.  
If the after-hours interest continues (shares of Intel higher by 
0.70), resistance is felt at 8275 (area shorts will defend), 8420,
and then much higher at 8558 (old relative low now used for resistance).
Let us do a quick re-cap:  Clearly the non-farm payroll report 
will hold significant weight tomorrow.  The intermediate trend 
remains down for all indices; however, it does appear volatility 
will pick up and we have to be prepared for a move in either 
direction.  
 
Chart of the Nasdaq Combined Composite Index, Daily 
 

Looking at a daily chart of the tech-laden Nasdaq Index, short 
traders are most likely betting big that the MACD will continue 
its reversal and end up at levels near -50.  Of course, that also 
leads to speculation concerning a massive short squeeze if things
reverse.  What would trigger a sizable squeeze?  It should begin 
with a move above 1265, but penetrating the 22 DMA (1326) should 
be a much more important barometer for both intermediate and long
term traders.  

Chart of the Semiconductor Sector Index, Daily
 
 
It may not be a perfect fit, but using Bollinger Bands has worked 
out relatively well when looking at the SOX.  Of course, the index
has just set a new 52-week low and greatly underperformed the Dow 
during trading on Thursday.  Nevertheless, looking at Bollinger 
Bands points out that risk in selling the index is starting to 
increase.  Could the index go lower?  Of course, but if the market 
does find a bid, shares could quickly accelerate towards the 317 
level.  I will continue to be bearish on the SOX while under 
282.75, lowering that number if the index falls to 236.  
Since the main event tomorrow is the non-farm report, it makes 
sense to glance at a chart of the 30-year bond (TYX.X).  With 
yields on the long bond setting new 52-week lows, using “fitted 
retracement” analysis gives us a near term objective of 4.637 
percent.  This would represent a solid move higher in price and 
most likely come at the expense of weakening equity prices. 
Reminiscent to a chart of the SOX, resistance is much higher and 
if yields back up above 4.83 percent there could be a major shift 
in assets out of bonds and into stocks.  Like all charts we have 
seen, least resistance is lower and until prices prove otherwise; 
therefore, it makes sense to expect the trend to continue.  
 
Chart of 30-year Treasury Bond Index, Daily  

                                                                                                                                          



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

No Fundamental Difference
By Steven Price

So much for Wednesday's bounce.  The bears came back out of 
hibernation today and erased yesterday's gain and left the Dow 
down 25 points from Tuesday's close.  While yesterday's 117-point 
gain looked attractive to those investors picking a bottom, it 
turned out to be just a "dead cat bounce" after Tuesday's drop of 
over 350 points.  After the Dow, S&P 500 and Nasdaq all ruined a 
nice pattern of higher highs and higher lows by taking out the 
lows of August 14, the red flags went up and any rally looks 
suspect until we see a new higher high.

A look at the bullish percentages is revealing in the trend 
reversal.  We have seen a steady increase from oversold levels 
under 30% up to percent levels in the high 50s.  This indicates 
the number of stocks in an index that are currently giving point 
and figure buy signals.  The NDX, which usually leads the other 
indices, has reversed from a high of 60% earlier this month, to 
today's reading of 37%.  This shows almost half of the stocks that 
were giving buy signals just a couple of weeks ago, no longer 
doing so.  This trend in the NDX actually reversed several days 
ago, and was followed today by reversals down in the S&P 500 and 
the Dow.  While the Dow and S&P remain just over 50%, today's 
point and figure reversal was significant in that it reversed the 
trend of adding stocks with buy signals and instead subtracted 
from the total.  The OEX has reversed down as well, and finished 
the day at only 46%.  This index broke the 50% mark on Monday.

Today's jobs data showed the four week moving average for initial 
jobless claims climbing by 5,250 to 400,000.  The moving average 
is up 19,500 over the past four weeks, indicating a rising number 
of layoffs.  The ISM non-manufacturing index also fell from 53.1% 
in July to 50.9% in August.  While anything over 50% indicates 
growth, this drop showed growth slowing considerably and was far 
below expectations of 54.4%.

One of the main reasons for the recent sell-off in the past few 
days was the prediction that Intel would be cutting earnings 
estimates.  The Semiconductor index reached new 52-week intraday 
lows yesterday and again today.  Today's close of 275.36 was also 
a 52-week closing low.  Intel did not disappoint.  They lowered 
guidance and said microprocessor unit sales, the largest part of 
its business, are coming in at the lower end of their normal 
seasonal pattern for the quarter.  They also dropped the top end 
of their revenue target from $6.9 billion to $6.7 billion, leaving 
the bottom end unchanged at $6.3 billion.  While they stayed away 
from targeting net income, the news they did release was better 
than expectations.  The stock got a boost after hours, trading up 
to $15.82 after a close of  $15.11.  This could provide the 
impetus for another market bounce tomorrow, as it will certainly 
give the semiconductors something to rally on.  While this was 
still a lowering of guidance, it could have been much worse. 

Look for a rally in the tech sector tomorrow after the Intel news.  
The wrench in this prediction, however, is the August unemployment 
rate data due out tomorrow morning.  If this data follows in the 
footsteps of this morning's weekly numbers, we could see a 
continued sell-off.  We will most likely see some extreme 
volatility leading up to next Wednesday's Sept 11 anniversary and 
then somewhat of a rally afterwards, as long as there are no 
attacks.  However, after poor retail sales numbers today confirmed 
that consumers are spending less, the fundamentals appear to have 
not changed much.  Until we see some positive signs of spending in 
the economy, we will most likely be heading south in the near 
future.


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

Market Averages

DJIA ($INDU)

52-week High: 10679
52-week Low :  7702
Current     :  8283

Moving Averages:
(Simple)

 10-dma: 8671
 50-dma: 8665
200-dma: 9678



S&P 500 ($SPX)

52-week High: 1226
52-week Low :  797
Current     :  879

Moving Averages:
(Simple)

 10-dma:  918
 50-dma:  911
200-dma: 1061



Nasdaq-100 ($NDX)

52-week High: 1782
52-week Low :  892
Current     :  882

Moving Averages:
(Simple)

 10-dma:  960
 50-dma:  969
200-dma: 1309



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


The Semiconductor Index (SOX.X): The SOX set a new 52-week low 
today after setting a new intraday low on Wednesday.  The sell-
off was a result of predictions that Intel would lower their 
estimates after the bell.  Intel lowered its revenue guidance, 
but not as much as expected.  It also said nothing about profits.  
This semi-positive development could spark a bounce on tomorrow's 
open, but the floor has once again been lowered for the group.  
Banc of America said today that it expects the semis to cut 
current 2003 estimates by an additional 15-25% and predicts a 
bottom of 200 for the SOX.  It also said chip company valuations 
should reach the levels of the early 90s.

52-week High: 657
52-week Low : 275
Current     : 275

Moving Averages:
(Simple)

 10-dma: 316
 50-dma: 341
200-dma: 487


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

Market Volatility
9/11 here we come. Volatility is back over 40 as yesterday's 
bulls went into hibernation.  The "dead cat bounce" ended below 
where it started and landed the Dow 25 points below Tuesday's 
close.  Guess that 350-point drop was for real.  The only 
salvation may be Intel lowering guidance less than expected after 
the close today.  While this isn't terribly positive, it may be 
enough to spark a bounce on Friday.  Unless that bounce is over 
300 points, look for the VIX to fall no lower than the high 30s 
ahead of next week's solemn anniversary.  

CBOE Market Volatility Index (VIX) = 42.23 +2.29
Nasdaq-100 Volatility Index  (VXN) = 60.72 +3.30

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

          Put/Call Ratio  Call Volume   Put Volume

Total          0.89        468,422       418,229
Equity Only    0.69        346,198       240,272
OEX            0.60         25,257        15,141
QQQ            0.26         49,359        12,784

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

Bullish Percent Data

           Current   Change   Status
NYSE          42      - 2     Bull Confirmed
NASDAQ-100    37      - 5     Bull Correction
DOW           53      - 4     Bull Correction
S&P 500       52      - 2     Bear Confirmed
S&P 100       46      - 3     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  1.61
10-Day Arms Index  1.63
21-Day Arms Index  1.30
55-Day Arms Index  1.37

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        853          1879
NASDAQ      920          2281

        New Highs      New Lows
NYSE         38              50
NASDAQ       15             123

        Volume (in millions)
NYSE     1,524
NASDAQ   1,508

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

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 MANAGER MICROSCOPE
*************************

Val Jensen: The Jensen Portfolio (JENSX) 

Long-term investors seeking a conservative growth fund may wish 
to consider the Jensen Portfolio managed by Val Jensen and four 
other principals at Jensen Investment Management.  Founded in 
1988, Jensen's investment firm specializes in "private wealth" 
management.  The Jensen Portfolio (JENSX) is managed using the 
same investment discipline that's applied in managing separate 
accounts for institutional investors.

The Jensen Portfolio is team managed by an investment committee 
consisting of five principals, including Val Jensen, who serves 
as Chairman of both the committee and the firm.  Each committee 
member has broad business and investment experience and combined 
they have over 150 years of investment industry experience.  The 
Jensen website (www.jenseninvestment.com) has short profiles for 
each of the firm's five principals.

Val Jensen's bio reads that he is a graduate of Washington State 
University, and has been in the investment business for over 43 
years.  He founded Jensen Securities Company in 1983 and Jensen 
Investment Management in 1988.  Prior to that, he was President 
of Charter Investment Group.

The website states that firm's investment business is conducted 
in accordance with the highest principles of integrity, honesty, 
and quality of service.  This includes a well-defined "standards 
of practice" covering the following subject matters:

 - Professional Responsibility
 - Professional Qualifications
 - Compensation for Services
 - Investment Management Agreements
 - Confidentiality Agreements
 - Promotional Activities
  
For instance, it is the responsibility of each principal to 
render investment advice to clients that is "well-reasoned, 
unbiased, disciplined and continuous."  That includes Jensen 
Portfolio.  In the area of compensation, it's noteworthy that 
Jensen does not participate in any "soft-dollar" arrangements. 

These high fiduciary standards combined with the firm's more-
conservative approach to growth investing makes it a suitable 
choice for more conservative, growth-oriented fund investors.

Investment Discipline

At Jensen, the focus is on quality growth companies.  They start 
by screening for companies that have posted returns on equity or 
ROE of at least 15% in each of the last 10 years.  Morningstar's 
report says that Jensen's strict criterion eliminates around 99% 
of all publicly traded companies.

Jensen's team then purchases stocks of companies they think will 
sustain their 15% ROE in the future and are trading at least 40% 
below their estimated values at time of purchase.   Theses firms 
must also be in excellent financial condition and have increased 
dividends at a rate greater than inflation for the past 5 years.  
The Jensen Portfolio generally consists of 20 holdings, and must 
include at least 15 companies at any time.  It may invest in ADR 
securities (American Depository Receipts) and is registered as a 
"non-diversified" mutual fund with the SEC.

A holding is sold when its ROE dips below 15% or its stock price 
rises to above its estimated value.

Morningstar says the resulting portfolio looks different than the 
typical large-cap growth fund with below-average price valuations 
relative to the category group.  Below is a summary of the Jensen 
Portfolio's average price valuations, compared to Vanguard Growth 
Index Fund that mirrors the growth component of the S&P 500 index 
(using Morningstar data as of August 31, 2002).

 Average Price Valuations:
 Vanguard Growth Index Fund (P/B 6.8; P/E 30.0; P/C 17.5)
 Jensen Portfolio (P/B 5.9; P/E 23.3; P/C 15.8)

 Average Market Capitalization:
 Vanguard Growth Index Fund ($75.1 Billion)
 Jensen Portfolio ($18.5 Billion)

While Morningstar shows the fund has maintained a consistent bias 
to large-cap growth stocks, within the group it remains among the 
most conservative offerings in terms of risk due primarily to its 
price consciousness and its emphasis on quality (ROE).  These are 
characteristic of a portfolio with a long-term perspective and as 
the fund's ultra-low turnover rate of 7% suggests, this portfolio 
doesn't make sudden shifts.

Accordingly, Jensen Portfolio has had limited exposure to "techs" 
through the market downturn, resulting in a superior preservation 
of capital rating by Lipper.  Lipper Analytical Services says the 
Jensen Portfolio is a Lipper Leader for consistent, strong return 
performance and for capital preservation relative to all funds in 
its broad peer group (all equity funds).  Morningstar grades risk 
as "low" compared to its category group (large-cap growth funds).

Note that growth of dividend income is a secondary consideration 
in the management of the Jensen Portfolio but its main objective 
is long-term capital appreciation.  Jensen's fund attempts to be 
fully invested at all times   

Investment Performance

Investing in high-quality companies trading at relatively low 
valuations has paid off for shareholders, Morningstar reports, 
especially considering the decline in growth stock funds since 
2000.  Since April 2000, the Jensen Portfolio has lost just 3% 
for shareholders on an annualized basis compared to an annual-
equivalent decline of 24.2% by the Vanguard Growth Index Fund.




 



For the 3-year period through September 4, 2002, Jensen Portfolio 
had a positive average return of 4.2% compared to a 15.5% average 
loss for both the Vanguard Growth Index Fund and category average 
per Morningstar.  The fund's trailing 3-year performance ranks in 
the top 1% of the large-cap growth category, as does its trailing 
5-year returns.  For the 5-year period, Jensen Portfolio returned 
8.5% a year on average, versus a narrow 0.2% average gain for the 
Vanguard Growth Index Fund and a negative average 2.0% return for 
the average large-growth fund, per Morningstar.

Jensen's performance for the 10-year period ended August 31, 2002 
ranks in the category's top quartile (22nd percentile).  For that 
period, the fund has averaged 10% a year for shareholders, around 
2.2% more a year than the average large-cap growth fund according 
to Morningstar.  So, Jensen has outperformed his fund competitors 
by a wide margin over the trailing 10-year period with relatively 
low risk.  

Adding to the fund's appeal is its low 0.50% management fee, and 
its relatively low expense ratio of 0.95%.  Its turnover rate of 
7% per Morningstar is extremely low by even value fund standards, 
and makes it appropriate for use in both taxable and tax-deferred 
accounts, such as IRAs and other retirement programs.

Conclusion

Because Jensen tends to maintain a relatively low weight in tech 
stocks versus other growth style funds, the Jensen Portfolio may 
lag other growth funds during tech-led market advances, like the 
one that occurred between 1996 and 1999.  But, it's not going to 
lose the shirt off your back like many of its growth style peers 
did when tech stocks take a nosedive and lead the market down as 
has been the case largely since April 2000.

The stability of the fund's portfolio management team is a plus, 
with shareholders benefiting from the team's 150 years combined 
business and investment experience.  Long-term investors looking 
for a core growth holding have a fine choice here.    

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 9th.


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

Jobs Control Our Fate

The Intel news was better than expected but very low key. The 
Nasdaq leaders all posted gains in after hours but our fate is in 
the government's hands. The Non-Farm payrolls are expected to have 
increased by 30,000. A negative number could be disastrous to the 
Intel bounce


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The Option Investor Newsletter                 Thursday 09-05-2002
Copyright 2002, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.

In Section Two:

Dropped Calls: None
Dropped Puts: CYMI, A, MXIM, QLGC, UNH
Daily Results
Call Play Updates: BRL
New Calls Plays: SYK
Put Play Updates: AIG, IBM, EXC, UTX
New Put Plays: AA, WY

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

None


PUTS:
*****

CYMI $21.73 -1.11 (-2.59 for the week)  Cymer, originally picked 
at $22.95, has gone our way, trading down to $21.73. The future 
business prospects for the semis look bleak, therefore reducing 
their ability to purchase Cymer's products.  Based on warnings 
from National Semiconductor and predictions of earnings 
reductions from Intel, the sector has seen quite a sell-off the 
last few days.  Intel released its mid-quarter update after the 
close today, lowering their estimates, but not as much as some 
analysts had predicted.  A bounce in the SOX could follow the 
recent sell-off and we will close the play and take our profits.

---

A $13.72 +0.22 (+0.29) In a marked divergence from the rest of
the market, shares of A actually ticked modestly higher following
their gap lower this morning.  The last two days have seen
significant buying interest as the stock is beginning to recover
from the sharp slide over the past week.  Even with the
Networking sector (NWX.X) getting hit for a 4.4% loss, A
continued to find a bid from bargain shoppers.  This
demonstration of relative strength is a strong sign that the
bearish trend is taking a pause, so we'll take an early exit
from the play.  Use any early dip tomorrow to exit open
positions.

---

MXIM $27.97 -1.69 (-3.64) MXIM has been a stellar performer,
falling nearly $8 since we picked it up near $36.  With the stock
testing major support at the August lows and the SOX dropping to
new multi-year lows, this looks like a great spot to harvest
those gains.  In addition, judging from the after-hours reaction,
the INTC mid-quarter update wasn't as bad as everyone seemed to
be expecting.  This will likely lend a bid to the entire
Semiconductor group.  We'll elect to close MXIM out as a
successful play and then look for other opportunities elsewhere.

---

QLGC $32.41 -1.39 (-1.14) QLGC has continued to be driven lower
by the series of negative pronouncements in the Technology arena,
particularly in the Semiconductor sector (SOX.X).  With the SOX
hitting fresh multi-year lows on Thursday ahead of INTC's
mid-quarter update tonight, it is no surprise that QLGC lost
another 4% on the day.  But the stock stubbornly refused to break
the $32 support level, which could produce a rebound on tomorrow
following the milder than expected warning from INTC tonight.
We'll take advantage of the recent weakness to book a gain, and
suggest you do likewise.

---

UNH $86.25 -0.55 (-2.10) Tuesday's sharp selloff drove UNH down
to the $84 level, but the bulls came out swinging yesterday,
propelling the stock back above back above the $86 support level.
Then despite the broad market weakness on Thursday, UNH recovered
from the early drop and spent the day trading in a narrow range,
finally coming to rest above $86.  This looks like simple
consolidation of yesterday's rebound, and that is a warning to
bears that the risk has shifted to the upside.  Rather than wait
for our stop to be violated, we're pulling the plug tonight.
Exit open positions on any opening weakness tomorrow.  With the
downside pressure apparently easing, the prudent move is to
harvest any gains and move to the sidelines.


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

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

CALLS              Mon    Tue    Wed   Thu   Week

BRL      66.07    0.00  -3.23   0.38 –1.09  Holding above support
SYK      57.33    0.00  -0.80   0.80  1.03  New, clear of congestion


PUTS               

A        13.72    0.00  -0.58   0.44  0.22  Drop, too slow
AA       22.15    0.00  -0.93   0.23 –0.99  New, like it's 1999
AIG      58.32    0.00  -3.18   0.43 –1.93  9/11 ins. scare
CYMI     21.71    0.00  -1.24   0.16 –1.13  Drop, profits
EXC      44.00    0.00  -1.49   0.60 –0.65  still weighty
IBM      72.18    0.00  -3.03   1.38 –1.55  now below 50-dma
MXIM     27.97    0.00  -1.70   0.76 –1.69  Drop, profits
QLGC     32.41    0.00  -1.19   1.09 –1.39  Drop, profits
UNH      86.25    0.00  -3.83   2.03 –0.55  drop, profits
UTX      56.89    0.00  -2.71   0.61 –1.11  still trending down
WY       50.10    0.00  -2.05   0.05 –2.25  New, economic weakness


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

BRL $68.07 -1.09 (-2.64) Will it or won't it?  That's the
question on our minds tonight, as we look at BRL.  The stock has
attempted to breakout over resistance and been knocked back by
the bears, while the bulls have stubbornly defended support near
$66.  Clearly we're going to need to see the broad market move
upward in a convincing fashion for BRL to put together a
meaningful rally, but its refusal to break down is an encouraging
sign.  The 20-dma and 200-dma are now converged just below $68,
and that should lend support to the stock as we head into the
weekend.  Clearly trying to buy a breakout is not the way to go
in this uncertain market, so we want to continue to target shoot
new entries on a rebound from support in the $67 area.  With our
stop still set at $66, it makes risk much easier to manage.  Note
that a trade at $66 (or lower) would put the PnF chart back on a
Sell signal, and we would clearly want to exit the play if that
occurred.  


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

SYK – Stryker Corporation $57.33 +1.03 (+0.96 this week)

Company Summary:
Stryker Corporation and its subsidiaries develop, manufacture
and market specialty surgical and medical products, including
orthopaedic reconstructive implants. the company operates in two
reportable segments.  Orthopaedic Implants sells orthopaedic
reconstructive, trauma and spinal implants, bone cement and the
bone growth factor osteogenic protein-1.  The Medsurg Equipment
segment sells powered surgical instruments, endoscopic systems,
medical video imaging equipment, craniomaxillofacial implants,
image-guided surgical systems and hospital beds and stretchers.

Why We Like It:
Successful breakouts in the current volatile market have been
few and far between. In fact, breakdowns have been the more
common event.  So the relative strength demonstrated by today's
new call play is all the more impressive in light of the weakness
throughout the broad markets.  Shares of SYK put in an important
bottom near $44 with the rest of the market in late July, but
that's where the similarity ends.  While the broad market has
been giving back its gains and breaking support, SYK has been
steadily working higher.  After spending the past two weeks
solidifying its move above the 200-dma ($55.27), the stock
blasted off today, clearing the important $57 resistance level
and ending near the high of the day on strong volume.  The PnF
chart is a sight to behold, as it hasn't even shown a 3-box
reversal since the July lows.  The current column of X's points
to an eventual target of $84!  But let's not get ahead of
ourselves.  The next near-term hurdle for the stock to scale will
be the $59 resistance level, and a success there will likely have
SYK challenging its spring highs near $62.  We'd like to get a
dip down to the $56 level to provide for new entries, as a
successful bounce would confirm the validity of today's breakout.
We could even stomach a dip as low as the $55 level (intraday
support on Tuesday), which would give us an even better entry
into the play.  We're placing our stop at $54.50, as a close
below that level would put a serious dent in the bullish
enthusiasm that has been driving the stock higher.  Momentum
traders should be VERY careful here as overhead resistance at
$58, and then $59 will likely keep SYK advancing in a gradual
manner, rather than an explosive, runaway move.  With the
uncertain broad market environment, we want to wait and buy
the dips when they present themselves.

BUY CALL SEP-55 SYK-IK OI=1681 at $3.30 SL=1.75
BUY CALL SEP-60 SYK-IL OI=1123 at $0.55 SL=0.00
BUY CALL OCT-55*SYK-JK OI=   8 at $4.30 SL=2.75
BUY CALL OCT-60 SYK-JL OI= 262 at $1.50 SL=0.75

Average Daily Volume = 727 K



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

AIG  $58.32 -1.93 (-4.18 for the week) AIG  has continued its 
move lower after a failed rebound yesterday over $60.  As 
September 11 approaches next Wednesday, investors appear to be 
fleeing from the insurance stocks, in spite of rate hikes during 
the last year.  A look at the S&P Insurance Index also shows a 
rollover and break of support at 260.  The group found support 
there yesterday, but found resistance today after breaking 
beneath that level. AIG's chart shows some similarities.  In 
addition to the group looking negative ahead of the anniversary, 
AIG has now broken below its recent support level just over $60 
from August 14.  A look at today's short-term chart (5 min.) 
shows that $60 has not only become resistance, as the stock was 
turned away mid-morning, but that after breaking below $59, that 
this level also served the same purpose. A look at the point and 
figure chart shows the trade of $58 extending downward the sell 
signal that was triggered at $60. The bearish vertical count is 
now $47.  There was previous support on the PnF at $58 earlier 
this month, but below that level, the next support can be found 
all the way down at $48, which coincides closely with the 
vertical count.  We will most likely close this trade next week, 
ahead of the anniversary, but until then, both the stock and the 
sector look weak.  We are lowering our stop loss on the play to 
$61.00, as this would indicate a break of previous resistance 
just above Wednesday's high.  Our target on the play remains $50.

---

IBM $72.18 -1.55 (-4.44 for the week) Big Blue has been a big 
bust recently, continuing its downward path into its previous 
consolidation pattern.  Wednesday's high of $73.99 makes it 
appear as though that former rectangle, formed between $66 and 
$74, is now providing resistance to the upside.  The fact that 
Intel's news after the bell boosted many of the technology 
related stocks would normally make us think about closing this 
play.  However, IBM barely moved after the announcement.  The 
fact remains that IBM's business is shrinking, along with other 
large server companies.  However, IBM never reached oversold 
levels with the others.  It actually rallied with the Dow and is 
now coming back to earth, and its comfort zone between $66 and 
$74.  IBM did find previous resistance at $72, while forming the 
pattern between the end of June and middle of August, and this 
resistance may now be acting as mild support. However, today's 
intraday low of $71.50 indicates otherwise.  The other factor 
that had provided support the last couple of days was the 50-dma, 
currently $72.22.  While IBM closed just a few pennies underneath 
this level today, it nonetheless made it below and may now find 
the 50-dma acting as a ceiling as we move forward.  We will 
maintain our price target of $70.00, however if this level is 
broken, $66-$67 looks like a distinct possibility.  For now we 
will lower our stop loss once again to $74.00 to lock in 
additional profits and protect against a tech rally taking IBM 
back out of this previous consolidation pattern.

---

EXC $44.00 -0.65 (-2.82) Following its sharp slide in the past
week, the Utility sector (UTY.X) took a break from the limelight
over the past 2 days, consolidating near the $270 level.
Therefore, it should come as no surprise that shares of EXC have
been trying to consolidate as well.  But you'll notice that the
bulls haven't been as successful here, as the stock continues to
drift lower, coming to rest right at the $44 level on Thursday.
We're either setting up for a rebound or a breakdown, and it will
likely depend on the action in the UTY index, as well as the rest
of the broad market.  Given the stock's technical weakness, we're
voting for a breakdown, although we might be lucky enough to get
one more failed rally before that breakdown takes place.  Look to
initiate new positions on a rollover below the $46 level (near
the bottom of Tuesday's gap) or else on a volume-backed decline
under Thursday's low of $43.90.  This week's drop has put the PnF
chart back on a Sell signal, with a tentative price target of $35.
Watch out for a possible bounce from the $41 level, as that is
the site of the bullish support line and would make for a good
target for harvesting some gains.  If entering on a breakdown,
make sure to confirm broad market weakness before playing.  Lower
stops to $46.25, just above the bottom of Tuesday's gap.

---

UTX $56.89 -1.11 (-2.50) The attempted rally in the Dow
Transports ($TRAN) was severely reversed on Thursday, with the
index losing nearly 5%.  Rather than the Airlines taking the
brunt of the selling today, it was the Rail stocks' turn for
abuse by the bears.  The broad market selling pressure kept UTX
under water throughout the day, but it wasn't enough to generate
a breakdown.  Instead, the stock traced inside day, giving us a
couple of actionable points to watch.  A failed rally below
intraday resistance ($58) still looks good for new entries in
anticipation of a breakdown under recent support.  While we
aren't really excited about initiating new positions on a
breakdown, we'll want to be watching the low from Wednesday
($55.65).  A break below that level will help to confirm the
stock's weakness and intention to keep working towards the
bearish PnF price target of $48.  Keep in mind that UTX will
likely need to see broad market weakness to continue falling,
so we want to confirm broad market weakness before initiating
new positions.  Keep stops set at $59.


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

AA - Alcoa - $22.15 -0.99 (-2.53 for he week)

Company Summary:
Alcoa is the world's leading producer of primary aluminum, 
fabricated aluminum and alumina, and is active in all major 
aspects of the industry. Alcoa serves the aerospace, automotive, 
packaging, building and construction, commercial transportation 
and industrial markets, bringing design, engineering, production 
and other capabilities of Alcoa's businesses to customers. In 
addition to aluminum products and components, Alcoa also markets 
consumer brands including Reynolds Wrap« foils and plastic wraps, 
Alcoa« wheels, and Baco« household wraps. Among its other 
businesses are vinyl siding, closures, precision castings, and 
electrical distribution systems for cars and trucks. The company 
has 129,000 employees in 38 countries

Why We Like It:
Alcoa's business is suffering along with the rest of the economy.  
With their products used in so many different areas of 
production, this past week's manufacturing  numbers were 
especially disappointing.  With U.S. manufacturing barely growing 
in August, after a significant setback the previous month, it 
appears the economy is growing at an even slower pace than 
expected.  New orders, an important factor in future growth, 
dropped for the first time since last November.  

The aluminum industry, in particular, is seeing gloomy times, as 
a number of factors are weighing on supply/demand ratios. On July 
31, Alcoa announced it was permanently closing capacity at two of 
its U.S. smelters, and reducing capacity at a third. According to 
analyst Brook Hunt,  "the outlook for aluminium remains enveloped 
in uncertainty as faltering demand, gloomy sentiment over the 
health of the major economies and bulging warehouse stocks cast a 
shadow of doubt over a possible price recovery."  In addition to 
U.S. demand waning, China has stepped up aluminum production over 
the last two years, and is now causing concerns about oversupply.  
The country has gone from a net importer to a net exporter of the 
material. As of the end of August, the three-months aluminum 
contract had fallen to around $1320/tonne, down from $1,550 a 
year earlier.

A look at AA's chart shows the company has been hit hard and is a 
step ahead of the Dow in taking our recent lows.  While the Dow 
has broken below its August 14 low, prior to the latest rally, AA 
has taken out both the August 14 and August 5 lows. In fact, the 
stock is now trading at levels not seen since April of 1999. A 
look at the point and figure chart shows a new sell signal at 
$23. It has been so long since the stock established a higher 
high on the PnF that the stock long ago exceeded the bearish 
vertical count set last January. Our initial target on the play 
will be $17, the approximate level of support the stock found the 
last time it traded below this level.   Place stops at $24.50, 
Monday's high.

BUY PUT OCT-22.50 *AA-VX OI= 734 at $1.75 SL=0.75
BUY PUT OCT-25     AA-VE OI=2232 at $3.40 SL=1.70

Average Daily Volume = 4.26 MIL


---

WY – Weyerhaeuser Company $50.10 -2.25 (-4.41 this week)

Company Summary:
Weyerhaeuser is principally engaged in the growing and harvesting
of timber and the manufacture, distribution and sale of forest
products, real estate development and construction.  The company's
business segments are timberlands; wood products; pulp, paper and
packaging, and real estate and related assets.  WY is engaged in
the management of 5.9 million acres of company-owned and 0.5
million acres of leased commercial forestland in North America.
The company's wood products businesses produce and sell softwood
lumber, plywood and veneer, oriented strand board, composite and
other panels, hardwood lumber and treated products.  The firm's
pulp, paper and packaging businesses include pulp, paper,
containerboard packaging, paperboard and recycling.

Why We Like It:
Investors that believe the strong housing market is coming to
an end, need only look at the declining prices for lumber for
confirmation of their view.  Apparently Morgan Stanley sees the
same trend, as they came out and cut estimates for all the paper
companies this morning.  The rationale for the bearish comments
are based on the deteriorating lumber market, but the firm
believes downside risk is limited as the stock's have already
discounted much of the risk associated with a double dip in the
economy.  Judging by the price action in shares of our new put
play, WY, investors don't seem to agree on the limited downside
aspect of the call.  WY plunged more than 4% on Thursday, and
closed just above the $50 level.  This is a pivotal point for the
stock, as it represents its lowest level since early November of
last year.  More importantly, WY recently posted a triple bottom
breakdown on its PnF chart and a print of $50 (7-cents below
today's low) will generate another double-bottom breakdown.  With
today's breakdown, it looks like WY is headed back towards its
$46 support level and possibly a retest of the September lows
near $43 as investors proceed to fully discount a double-dip in
the economy.  The breakdown under $52 gives us added confidence
in playing the downside, despite the nearly-oversold daily
Stochastics.  Broken support should now act as resistance, so a
failed rally near the $52 level will make for an attractive entry
point.  Should the broad market stage a meaningful rally, we
could even see a jump as high as $53 before the rollover
commences.  That would make for an even better entry, as it is
even closer to major resistance at $53.50.  Alternatively, a
breakdown under $50 will likely generate more selling, so
momentum traders can consider new positions on a breakdown under
that level.  Initial stops are set at $53.50.

BUY PUT SEP-50 WY-UJ OI=606 at $2.55 SL=1.25
BUY PUT OCT-50*WY-VJ OI=981 at $3.50 SL=1.75

Average Daily Volume = 1.13 mln



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**********

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The Option Investor Newsletter                 Thursday 09-05-2002
Copyright 2002, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.

In Section Three: 

Play of the Day: Put - WY
Traders Corner: The Seven Deadly Sins – Plus One
Traders Corner: It’s all in your head
Options 101: Looking For an Event to Trade


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

WY – Weyerhaeuser Company $50.10 -2.25 (-4.41 this week)

Company Summary:
Weyerhaeuser is principally engaged in the growing and harvesting
of timber and the manufacture, distribution and sale of forest
products, real estate development and construction.  The company's
business segments are timberlands; wood products; pulp, paper and
packaging, and real estate and related assets.  WY is engaged in
the management of 5.9 million acres of company-owned and 0.5
million acres of leased commercial forestland in North America.
The company's wood products businesses produce and sell softwood
lumber, plywood and veneer, oriented strand board, composite and
other panels, hardwood lumber and treated products.  The firm's
pulp, paper and packaging businesses include pulp, paper,
containerboard packaging, paperboard and recycling.

Why We Like It:
Investors that believe the strong housing market is coming to
an end, need only look at the declining prices for lumber for
confirmation of their view.  Apparently Morgan Stanley sees the
same trend, as they came out and cut estimates for all the paper
companies this morning.  The rationale for the bearish comments
are based on the deteriorating lumber market, but the firm
believes downside risk is limited as the stock's have already
discounted much of the risk associated with a double dip in the
economy.  Judging by the price action in shares of our new put
play, WY, investors don't seem to agree on the limited downside
aspect of the call.  WY plunged more than 4% on Thursday, and
closed just above the $50 level.  This is a pivotal point for the
stock, as it represents its lowest level since early November of
last year.  More importantly, WY recently posted a triple bottom
breakdown on its PnF chart and a print of $50 (7-cents below
today's low) will generate another double-bottom breakdown.  With
today's breakdown, it looks like WY is headed back towards its
$46 support level and possibly a retest of the September lows
near $43 as investors proceed to fully discount a double-dip in
the economy.  The breakdown under $52 gives us added confidence
in playing the downside, despite the nearly-oversold daily
Stochastics.  Broken support should now act as resistance, so a
failed rally near the $52 level will make for an attractive entry
point.  Should the broad market stage a meaningful rally, we
could even see a jump as high as $53 before the rollover
commences.  That would make for an even better entry, as it is
even closer to major resistance at $53.50.  Alternatively, a
breakdown under $50 will likely generate more selling, so
momentum traders can consider new positions on a breakdown under
that level.  Initial stops are set at $53.50.

BUY PUT SEP-50 WY-UJ OI=606 at $2.55 SL=1.25
BUY PUT OCT-50*WY-VJ OI=981 at $3.50 SL=1.75

Average Daily Volume = 1.13 mln



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

The Seven Deadly Sins – Plus One
By Mike Parnos, Investing With Attitude

At the Couch Potato Trading Institute, it’s not our job to preach 
morality.  Actually, we’ve been known to cut a few corners, step 
on a few toes, and run a few stop signs on our journey from the 
couch to the refrigerator and back.  

There are seven deadly sins:  Pride, Envy, Greed, Wrath, Lust, 
Gluttony, and Sloth.  Although they sound like the names of the 
members of a rock band, believe me they are sins.  At least 
they’re the ones that get all the headlines.

Remember the movie “Seven?”  Well, it should have been titled 
“Eight” because they overlooked the most diabolical sin of them 
all.  We, in the trading community, know there is an eighth 
deadly sin. It’s worse than shredding documents, insider trading, 
getting caught with your secretary or taking the fifth.

What sin is so ghastly, so grievous, so despicable, and so 
contemptible that it is never whispered in the hallowed halls of 
Wall Street?  It’s the sin of buying RETAIL.

Would you shop at Lord & Taylor without the weekly “20% OFF” 
coupon?  Would you walk into a car dealership and pay sticker 
price for a new car? If you answered “yes” to either of these 
questions, you either have way too much money for your own good, 
or you need to be watered twice a day.

The object of trading is to make a profit.  You should look at 
your trading life as a business.  As in any business, if you pay 
too much for your inventory, you make less money.  It’s that 
simple.  What are your costs of doing business?  A few bucks for 
your computer, software (and, of course, your OI subscription), 
your commissions and your stock purchase.

At the CPTI, we don’t necessarily advocate buying stocks, but we 
also recognize that, despite the risk, some people are going to 
jump into the pool without checking the water level – then cry 
for help later.

We’re going to show you a way to perhaps satisfy your urges (if 
only life were that easy) – to make money and buy stock – and 
we’re going to do it at a discount!

So where do we start?  You've selected a stock.  It came to you 
in a vision.  Then you did your homework.  You checked the PE 
ratio, the debt ratio, sales to earnings, the book to sales, the 
book to earnings, the debt to earnings, the sales to debt, and on 
and on.  You even looked at a chart -- one with all those pretty 
indicators.  You put on a few moving average lines until the 
chart looked like a reheated bowl of Franco American Spaghetti.  
After your thorough investigation, there’s a full moon and you're 
still bullish on the stock.

For this example we'll use IBM.  At this writing, it's trading at 
$75.37.  You have $75,000 burning a hole in your pocket and you 
want to pick up the phone to call your broker and buy 1,000 
shares.  You feel confident that in the months to come, IBM will 
slowly move up in price to $85.  

IBM may or may not go up.  Nothing is guaranteed.  Here’s how you 
get your discount.  This is almost as good as ValPak and you 
don’t need a coupon.  You sell a January 2003 $75 strike price 
put and take in $6.70/share or $6,700.  That money hits your 
account the next business day.  Since you already have the cash 
in your account to cover the purchase of the stock at $75, this 
would be considered a cash-secured put.   You wouldn’t be able to 
use the $75,000 until the position is closed, but it will still 
be sitting there earning interest for you.

If you are correct in your analysis, and IBM ends up above $75 at 
January expiration, your $75 put will expire worthless and you’ve 
made $6,700.  Now you can do it again, if you still feel the same 
about IBM.

In essence, you’ve guaranteed yourself a profit of $6,700 if 
you’re right and have a $6,700 cushion if you’re wrong.

What happens if . . .

1.  IBM moves up to $82 in the next two months.  If you owned the 
stock, would you sell?  Or would you hold on for dear life 
waiting for the last three points you were hoping for?  In all 
likelihood, you would you ride it all the way back down to $75, 
perhaps lower.  Shame on you.  But that’s a subject for whole 
other column.

If you had sold the $75 put, the rise in the stock price would 
cause the value of the short $75 put to go from $6.70 to maybe 
$2.50.  You could buy back the put, lock in $4.20 ($6.70 - $2.50) 
and relieve yourself of the obligation to buy IBM at $75.  Then, 
if you are still bullish, you could sell the $85 and start the 
process all over again.  You’re participating in the upward move, 
which is what you wanted to do.  Why risk the entire $75,000 if 
you don’t have to.  Don’t bet the farm when a few cows will do.

2.  IBM moves down to $65 in the next two months.  If you owned 
the stock, hopefully you would have had a stop just below a 
support level and cut your loss long before IBM reached $65.  
That’ll be the day.

If you had sold the $75 put, you could bide your time and not cut 
your loss so quickly because you have a cushion of $6.70.  Should 
you ultimately be put the stock, your cost basis is $68.30.  If 
you’re put the stock, it’s at a nice discount from the $75.37 you 
were going to shell out.  

If you are stubborn, you could buy back the $75 put on expiration 
and roll it out another four or five months and pick up a little 
more premium while you wait for IBM to come back.  You can do 
this indefinitely as long as IBM doesn’t sink so far in the money 
that the time value disappears.  Then you are in danger of having 
the stock put to you prematurely.

If you chose to ignored all the warnings and continue to live 
dangerously, you could then start a covered call writing program 
on the stock or use one of the repair strategies while hoping IBM 
recovers.

Selling puts in order to get a discount on the ultimate purchase 
price of a stock is a common practice by corporations.  When you 
hear that a company has authorized a stock buyback, they don’t 
just rush out onto the open market and buy shares.  Notice that 
there usually isn’t a time limit on the buyback.  They take their 
sweet time and keep selling puts until their stock dips and it’s 
put to them.

Dell Computer’s balance sheet tells us that, during some 
quarters, they actually earned more money selling puts than 
selling computers.  Microsoft has also been known to profitably 
use this same strategy.

Now that you know how to buy stocks at a discount, you shall be 
sinners no more.  Repeat after me:  “RETAIL” is a four-letter 
word.

Warning: Couch Potato Trading Institute students who are caught 
buying stocks unhedged, outside of their IRA, will be expelled, 
taken out and shot, beaten to within an inch of their wife – or 
worse – lose their refrigertor privileges.
 
Happy trading!  The CPTI credo:  May your remote batteries and 
self-discipline last forever, but mierde happens.  Be prepared!  
In trading, as in life, it’s not the cards we’re dealt.  It’s how 
we play them. 

Your questions and comments are always welcome.  
mparnos@OptionInvestor.com
_________________________________________________________________

Iron Condor Update:  On Tuesday, we shorted 1,000 shares of BBH 
at $80.00 to protect the Oct. $80/$75 bull put spread we have on 
as the lower half of our hypothetical Iron Condor trade.  We will 
buy back the 1,000 shares to cover our short if BBH moves back 
above $80.  We may have to do this a few times until BBH picks a 
direction.  We’ll continue to keep a close eye on the position.

Another alternative would have been to buy back the Oct. $80 puts 
for $4.90 and sell the Oct. $75 puts for $2.90 – a debit of 
$2.00.  Then we roll the position out to January for a credit of 
$2.40.  You pick up an additional $.40 in premium, but January is 
three months further out.  When putting on Iron Condors, you’re 
not looking for long time exposure.  It’s like a going to the 
supermarket.  You want to see if the first quart of milk is 
sour before you commit to the cow.  I’m trying real hard to be 
politically correct in making this analogy, but you get my drift.


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

It’s all in your head 
By John Seckinger
jseckinger@OptionInvestor.com

Trading without guilt, anger, shame, or self-punishment.  How can 
this be accomplished?  By examining your trading behavior and 
learning to develop the proper mental discipline.  

Confusion, frustration, anxiety, and the pain of failure were 
similar themes back when I first started trading.  I wanted so 
bad to always have a position on, but soon after executing a 
trade powerful emotions quickly took over and made me immediately 
re-think the potential for profits.  I was glad that I began 
trading with money I could afford to lose; however, the trading 
capital was more limited than I would have liked.  The limited 
capital did make me trade less, since commissions did become 
significant after a while (yield curve trades usually ran $200 in 
commissions a round turn).  I bring this up because the “powerful
emotions” would be overwhelming if I had traded with capital that
I could not afford to lose.  

Putting on a trade and then feeling helpless was not what I had 
expected.  Heart rate would race, a cold sweat would take form, and 
a constant self-punishment took over.  The market would begin to 
trade in the opposite direction and I would tell myself how na´ve 
I was to have missed such obvious trade signals and put on such a 
“dumb” trade.  Then the month would end, hundreds of hours were 
considered “wasted”, and another cold sweat would take form as the 
idea of becoming a professional trader would quickly fade.  I then
began to serious consider using money from credit cards.  
Fortunately, it never came to that.  

Those thought occurred almost nine years ago.  What changed the
most was my self-confidence and self-trust, greatly increasing 
and allowing me to feel more in control of my trading.  I take my 
time, relax, define support and resistance levels before I put on 
a trade, and most importantly adhere to patience.  I do not chase 
the market, do not get too excited about a winning trade in 
progress, and sell a loss once under support without hesitation.  
I also have never added to a losing trade, ever.  

People ask me all the time, “So, where is the market going in the 
next few months?”  I usually just smile and explain I trade on a 
much more micro level.  Getting locked into a specific opinion 
about market direction can be too costly, and I take trading one 
day or one hour at a time.  Therefore, if I sense a change of 
market direction I am not “emotionally tied down” and can reverse 
my position without guilt.  

Another important thing I learned as a trader was learning to 
accept whatever the market offers.  Exiting a trade simply because 
the market is “unable to move” anymore.  Example:  I buy QQQ calls 
and everything looks bullish from the recent economic reports to 
intensive technical analysis.  What happens?  The QQQ’s go up 0.15 
and sits there.  Hours pass and nothing.  It then becomes my 
opinion that the 0.15 rise is all the market is offering.  Sure, I 
could put a stop in and wait, but something is usually wrong since 
it is evident that my analysis was flawed.  Therefore, time to 
exit and look at things from a “third party” (myself without have 
a trade on).

Fortunately, I do not mind spending endless hours looking at 
charts without thinking I should be paid for such research. 
Moreover, I have conditioned myself that if I lose money trading 
I do not think I am an “unintelligent or a bad business person.”  
I lose money, smile, take a deep breath, and then tell myself 
that the market will not scare me and force me to become paralyzed 
and fearful of trading again.  A trader’s results will usually 
reflect his true feelings, since the market has no vested interest 
in supporting anyone’s illusions about himself.  

We all know that the market is never wrong, but it is interesting 
that traders will usually find information to reinforce their 
position regardless of price movement.  Please try your hardest 
to avoid such pitfalls.  Price action is the only thing that 
matters.  

Another difficult thing to master is not beating yourself up 
for selling a position too early and then missing the entire 
move.  Nobody can predict every exact high and every exact low; 
therefore, be glad the trade was profitable and use it as a 
learning experience for better execution during the next trade.  
Also, honestly ask yourself what the odds could have been for 
capturing the entire move.  Most likely, the “last vertical move” 
was more short covering than expected or panic long liquidation.  
Those explosive moves are very hard to captured, do not worry.

Create rules, and then stick with them.  When I first started 
trading, I wrote down a list of 10 trading commandments.  Never 
add to a loser, define exit plan before entering a trade, cut 
losses quickly, relax and be professional, release yourself from 
negative emotional energy stored in memories of past trading 
experiences, be patient, etc. This list was placed in my trading 
jacket while at the CBOT and routinely taken out before, during, 
and after the trading session.  

There was one rule I didn’t add until much later:  Trade size 
should correlate to market conviction.  Usually I would trade 5 
or 10 contracts in the bond pit, regardless of volatility or 
conviction.  I have learned that is not a very efficient trading 
strategy.  Currently, if I believe the odds for the market to 
move in my direction is 60% I put on 5 contracts.  If “all moons” 
line up and I feel that there is a 90% chance the market will 
move in my favor, I put on 10 contracts.  Moreover, if I put on 
5 contracts and the market moves in my, I add an extra 5 contracts.  
When exiting, I almost always sell the entire position at once.  


***********
OPTIONS 101
***********

Looking For an Event to Trade
Buzz Lynn
buzz@OptionInvestor.com

Contrary to popular belief, even disciplined traders sometimes 
need shackles to keep from entering trades.  For those that hadn't 
noticed, or more impressively, had kept their fingers off the 
mouse button and not traded the whipsaws offered this week, the 
action has been enough to drive hyperactive trader crazy.  When 
you want to trade, you want to trade, and by golly, you're going 
to find something if it kills you!  Hence the need for shackles.  
Reminds of the two buzzards in the tree snag with one saying to 
the other, "Patience my [behind], I want to kill something."  I 
can relate.  So can a few others around here.

In fact, resident Rocket Scientist and LEAPS editor, Mark Phillips 
and I were having this conversation earlier today.  He called me 
and said, "OK, keep me from doing something stupid" to which I 
replied, "OK, the answer is 'no'".  After yuckin' it up for a few 
more minutes, we got down to business.  

Here was the proposition.  On the hunt to manufacture a trade - 
and there are many of them out there daily for those looking to 
make something happen, but it's like swing at a less-than-perfect 
pitch - Mark noted that Intel (INTC) loomed large on the event 
horizon.  The proposed trade was to buy calls on the semiconductor 
sector for a bounce.  

A bounce?  Yes, a bounce.  Before I go on, understand that there 
is no "right answer".  In the world of manufactured trades, we're 
not looking for home runs.  Only singles that can generate a bit 
of income for the risk we take in entering the trade.  They aren't 
conjured up to be killer plays, but merely tradable for some daily 
bread!   Just enough to keep the machine running while we wait for 
a profitable setup to come around.

So anyway, back to the news.  Everybody and their brother knew 
that INTC was going to give their mid-quarter update, as they do 
every quarter.  I might add that for those who have followed INTC 
for a number of years, their guidance isn't worth the price of the 
paper it's printed on.  It has a nasty habit - at least since I 
started paying attention in 1998 - of saying something like, 
"Business isn't going as well as we hoped, but we'll do better 
next quarter."  I don't think they've hit an honest earnings 
target in four years.  So why they continue to be trusted by Wall 
Street is beyond me.  Be that as it may, analysts and pundits were 
slobbering all over themselves half in fear that the numbers 
reported today in mid-quarter would sorely disappoint, and half in 
hopes that things wouldn't really be as bad as feared once 
corporate brass started squawking their usual lines.

The thinking as that for a short term play, all the bad news was 
priced into the stock.  Precisely because most believed the news 
would be dreadful, the contrarian would be on the correct side of 
play if he/she bought calls just before the close.  

Here's the nugget: Usually the hyped expectation of news in either 
direction results in a snap back move in the direction opposite of 
herd expectations.  It was on this logic that this potential 
bullish play was conceptualized.

So we think we want to put on this bullish trade and buy calls at 
the close with the expectation of bad news and a warning already 
priced in.  But take the chance on Intel only?  Let's look at the 
SOX chart.

Semiconductor Index chart - SOX (weekly/daily/60):


 


Very interesting.  Apparently, SOX traders were bracing for the 
worst and had sold off the index to new lows with red candles in 
nine of the last ten trading days.  If we are going to trade this 
bullishly, the daily 60-min stochastics in both the 5 and 10 
period timeframes are both buried and suggest that if we are going 
to trade with the bulls, this might not be a bad to do it.  Yes, 
the weekly chart shows a bearish stochastic cross.  So I certainly 
wouldn't trust this opportunity as a long-term trade.  However, as 
a scalper and a speculator, it might make sense to pick up some 
calls with a small amount of speculative money only.  If we are 
wrong, we don't want to jeopardize the whole trading account.

However, this was quite possibly a reasonable use of speculative 
capital in an effort to fade the crowd.  What's that mean?  

Think of natives in jungle who all turn simultaneously -
reflexively - toward the noise they just heard in the trees.  All 
the natives are keenly focused in one direction, spears up, hearts 
pumping, ready to kill the beast they have yet to see.  That's the 
focus of the tribe's attention.  Essentially, that danger is now 
recognized and acknowledged.  While the danger (though not 
completely known) is now understood to represent a threat, the 
tribe is poised to handle it.  Meanwhile, that hungry tiger at the 
tribes back is lurking in the bushes licking his chops for the 
kill.  The tribe isn't paying attention to a noise it doesn't 
hear.  The lion that the tribe turns its back on is the real 
danger.  The only guy who knows the presence of the until-now-
unseen lion is the smart native who recognized the real danger of 
what no one else currently saw because they had their backs 
turned.  That smart native must be willing to turn his back on the 
tribe and capitalize on the opportunity to live at the expense of 
the myopic tribesmen still focused on the beastly noise heard 
earlier.

The moral here is not to be one of the tribe, but to be the smart 
native who lets others handle the threat from the noise while he 
looks for what others don't see, and capitalizes on it.  That's 
what we had in mind as the Wall Street minions faced the danger of 
an Intel warning.  What they didn't see is that the news might not 
be as dire as most believed.  The charts certainly told a story of 
selling into the anticipated bad news.  With stochastic indicators 
crushed into oversold, buying calls for a bounce made sense.  We 
wouldn't get rich, but we'd make enough money to pay the monthly 
Q-Charts bill!

Anyway, rather than take our chances on just INTC, Mark figured it 
would have an impact on the whole chip sector.  I agree.  But SOX 
is expensive thanks to volatility.  So the broad index could be 
traded using the Semiconductor Holder (SMH), but it doesn't trade 
after hours.  No matter, we can buy it, hold it overnight and sell 
into the frenzy tomorrow morning as money trickles (maybe pours) 
temporarily into semi stocks again.  That's the plan.  Now to wait 
for INTC news!

Sure enough, we weren't disappointed.  After the bell, INTC noted 
that microprocessor sales were trending toward the lower end of 
seasonal patterns.  Other communications products, excepting flash 
business, remain soft (Business isn't going as well as we hoped.).  
Furthermore, it guided quarterly estimates down from $6.3-$6.9 bln 
range to the $6.3-$6.7 range (We WON'T do better next quarter, as 
originally planned.)  The good news is that it wasn't as negative 
as the "experts" thought.  Ahhhh, breath a sigh of relief!  Things 
will get worse.  Just not as bad as we thought.  Let's buy it!  
Based on after hours trading, INTC as proxy for the industry was 
trading up $0.70 from the close.  Tomorrow should show us a nice 
pop in INTC, the SOX and SMH, barring the unexpected nocturnal 
happenings overseas.

There's only one bit of bad news in this whole tale.  The first is 
that I didn't see enough upside to justify the seemingly low 
capital risk.  I stayed out - not much of a gambler these days.  
Still, Mark thought it would be worth a minor wager and entered 
the order.  Unfortunately, he wasn't filled.  So both of us walk 
away with no money, but we didn't lose any either.  Nonetheless, 
it's good education and a real life experience that reminds us 
there is potentially money to be made playing high profile news 
events.

That's it for this week.  Make a great weekend for yourselves!

Buzz


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