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Daily Newsletter, Monday, 09/16/2002

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The Option Investor Newsletter                   Monday 09-16-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: What Didn't Happen
Index Trader Wrap: A day of atonement
Weekly Fund Wrap: Markets Suffer Third Weekly Loss
Traders Corner:  Technical Analysis: Science or Art?


Updated Tonight on the site:
Swing Trade Gameplan: Breakout!


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
09-16-2002                High    Low     Volume Advance/Decl
DJIA     8380.18 + 67.49 8389.26  8257.69  1183 mln   493/683
NASDAQ   1275.88 - 15.35 1292.73  1267.69  1089 mln   175/905
S&P 100   446.65 +  2.41  447.09  439.75   totals     668/1588
S&P 500   891.10 +  1.29  891.84  878.91
RUS 2000  386.13 -  3.86  389.99  385.91
DJ TRANS 2231.96 - 14.91 2246.58  2216.47
VIX        40.54 +  1.23   43.08  39.59
VIXN       57.73 +  1.88   59.60  56.59
Put/Call Ratio 1.09
*******************************************************************

What Didn't Happen
by Steven Price

A holiday session with low volume generally provides few clues as 
to where the market is headed.   However, we had a couple of 
significant moves, or in some cases, non-moves.

The day started out with a mixed bag of news.  On the positive 
side, Business Inventories and sales for July were both up.  
Inventories rose 0.4 percent at merchant wholesalers, 0.9 percent 
at retailers and were down 0.1 percent at factories.  The 
inventory to sales ratio, however, dropped to 1.35 from 1.43 a 
year ago.  This is bullish, as a lower number indicates that 
businesses are able to move the inventory they have accumulated.  
With higher inventories and a lower ratio, business appears to be 
better than last year, when we were in a recession.  Sales were 
up 2.2 percent, while inventories were down 3.7 percent from a 
year ago.

On the negative side, we saw a host of lowered expectations for 
the semiconductor stocks.  Bank of America cut its 2002 and 2003 
estimates for Taiwan Semiconductor (TSM) and United 
Microelectronics (UMC), citing weakness in the consumer segment. 
Prudential lowered earnings estimates for the fourth quarter and 
2003 for the following semiconductor stocks:


Anadigics (ANAD)
Broadcom (BRCM)
Emcore (EMKR)
LSI Logic (LSI)
Microchip Technology (MCHP)
Pericom Semiconductor (PSEM)
STMicroelectronics (STM)
Microtune (TUNE)
Texas Instruments (TXN)
Atmel (ATML)
Exar (EXAR)
Nvidia (NVDA)
PMC-Sierra (PMCS)
Vitesse (VTSS)

This development is very bearish for the sector, as the 
Semiconductor Index has now reached a new 52-week low for the 3rd 
time in six weeks.  The support level of 275, from the September 
6 low, appeared as though it would hold for a while, as the index 
ventured back over 300 as recently as last Wednesday.  Today's 
downgrades, however, showed renewed weakness and could lead to a 
new wave of selling. After the bell, however, Microchip 
Technology (MCHP), one of this morning's downgrades, announced 
that higher gross margins would help the company beat second 
quarter earnings targets. This may give the sector a lift 
tomorrow, however there has been damage done which news from a 
single company will be hard pressed to reverse. As the tech 
sector has been leading the market for several years, the 
breakdown in the SOX could be the first domino toward re-testing 
July's lows.  I realize this may seem like a leap of faith, but 
the scenario is developing in the following manner.

The Dow, S&P 500, NDX and Nasdaq Composite have all formed a 
classic head and shoulders reversal pattern beginning with the 
rally from July 24 to August 22.  Since then, the Dow and S&P 500 
collapsed, but found support at the 50% retracement of that 
rally.  The Nasdaq Composite and NDX gave back a larger 
percentage of the gains during the rally from July 24 to August 
22, but both found support above the July lows.  This recent 
support is the basis for the right shoulder of the formation in 
all three indices.  The charts of the Dow and Nasdaq Composite 
are below, and look very similar to their counterparts.

Chart of the Dow


Chart of the Nasdaq Composite (COMPX)


The last time the markets crossed significant resistance to the 
upside on the same day, was August 19, when all of the broad 
market indices crossed over their 50-dmas for the first time 
since spring.  The Semiconductor Index (SOX.X) failed at its 50-
dma, however.  This signaled a drop in the semis, which led the 
Nasdaq lower. It can be argued that the Nasdaq, heavily weighted 
with technology stocks, led the Dow lower as well, as technology 
has done throughout the late 1990s and early 2000s.

With the Semiconductor Index (SOX.X) now breaking support once 
again, the whole scenario may be re-starting.  If we experience 
another sell-off in the techs, led by the SOX, it will most 
certainly lead the Nasdaq through its neckline.  A neckline break 
will be a very bearish sign, and the weight of the techs falling 
would most likely drag the Dow down, as well. 

Chart of the Semiconductor Index  (SOX.X)


So where's the good news?  Well, both the Dow and Nasdaq 
Composite have both managed to avoid a neckline break.  Both 
averages have diverged in their direction for the last two days.  
The Nasdaq rallied, while the Dow fell on Friday.  Today was the 
opposite.  However, both appear to be consolidating just above 
their respective necklines and finished the day right around 
where they finished on Thursday.  The Dow finished the day on 
Thursday at 8379.41 and closed today within a point at 8380.18.  
The Nasdaq finished Thursday at 1279.68 and closed today within 
four points at 1275.88.  The Nasdaq closed slightly further away 
to the downside, but has just a pinch more breathing room before 
a breakdown than the Dow does.

Chart of the Dow and Nasdaq H&S Patterns


On a day when the both the NYSE and Nasdaq traded just barely 
over a billion shares, there was hardly enough trading to push 
these averages through significant levels.  However, there was 
enough trading to take out the previous lows in the SOX, so the 
technical developments, or in the case of the Dow and Nasdaq, 
non-developments, can still be viewed with significance.  These 
holds above the neckline are bullish signs, and although they are 
not so bullish as to attract my dollars to the upside, I have put 
the hammer back in the toolbox for the time being.

One of the reasons cited for the economy not slipping into a 
double-dip recession is the strength of the housing market. Last 
week we received data showing that foreclosure rates have reached 
record highs.  This level of 1.23% pales when compared to this 
morning's numbers released by the Federal Housing Administration.  
The FHA said that 4.7% of FHA borrowers are at least 90 days late 
on their loan payments.  This is almost twice the rate of 1995.  
It appears that low mortgage rates have resulted in a housing 
boom that may be sitting on a time bomb.  While the FHA takes on 
borrowers that may have more risk, a trend is still a trend.  
With lay-offs increasing, consumer debt growing, and foreclosures 
at an all-time high, this delinquency rate looks like another 
foot on the wrong side of the seesaw.  

A look at the Dow Jones U.S. Home Construction Index (DJUSHB) 
shows that after reaching all time highs earlier this year, the 
homebuilders experienced a sell-off and are once again 
experiencing resistance to the upside as the try to recover.  
With numbers like foreclosures and delinquent mortgages 
increasing, the group has a lot to overcome.  What had acted as 
support as the index rallied to all time highs earlier this year, 
is now acting as resistance.  Traders may want to keep an eye on 
increases in the above rates as indicators of short opportunities 
in the sector.

Chart of the Dow Jones U.S. Home Construction Index (DJUSHB)


After Iraq today said they would allow the unconditional return 
of weapons inspectors, Thursday's OPEC meeting will take on added 
significance.  With the price of oil already high, and the 
October Crude Oil Futures trading over $29 a barrel, the decision 
on whether to raise production quotas could have a pronounced 
effect on the stock market.   If we do go to war with Iraq, oil 
prices are likely to skyrocket.  This is a sure way to raise 
costs for many industries.  If OPEC shows that they are willing 
to help out by increasing production to keep prices in check, 
this will help alleviate some of the anxiety over the likely 
increase.  Even if OPEC does increase production, a war in the 
Middle East can interrupt shipment out of the region.  While the 
largest oil producer, Saudi Arabia, has said it supports 
increased production, other members, such as Venezuela, Iran and 
Kuwait have come out against the measure.  The OPEC members 
actually exceeded their current quotas by 1.7 million barrels per 
day in the month of August, according to the International Energy 
Agency.  Therefore, any increase would have to exceed this extra 
output before lowering costs.  Iraq produces about 2.7 million 
barrels per day, however it could affect prices by an even 
greater amount if it acted against neighboring Arab countries as 
a war escalated in the region.  With the return of inspectors, 
OPEC may not feel as compelled to increase quotas, as the threat 
of war may be lower.  While crude oil may drop slightly in the 
short-term, the specter of war still hangs over the region. There 
is no guarantee the U.S. will accept the return of inspectors as 
a solution to the problem and if President Bush does back off 
from threats of military action for the time being, we do not 
know what these inspectors will find, although it is likely that 
Iraq will clean up any evidence of a nuclear threat. 

Dow Jones and Company warned that third quarter earnings would 
come in below forecasts, due to a drop-off in advertising sales 
during the month of September at the Wall Street Journal. 

In an interesting development that turned into good news for 
Boeing, the machinists union was unable to muster enough votes 
for a strike in response to the airline's final contract offer.  
Although 62% of the 25,000 union workers voted against the 
contract, they fell just shy of the 2/3 needed for a strike.  
According to the union's bylaws, they are required to adopt the 
contract if the strike vote fails.  Therefore, they will now 
spend the next three years working under a contract that was 
rejected by a significant majority of its members. Both parties 
are still waiting for an arbitrator's ruling on whether Boeing 
subcontracting of work to outside companies, at the same time it 
issued layoffs, was a violation of the union's 1999 contract.  
Next up for Being is the contract of its second largest union, 
the Society of Professional Engineering Employees in Aerospace, 
representing technical workers and engineers, which expires in 
December.

Northrop Grumman (NOC) and General Dynamics (GD) each enjoyed 
banner days after the Pentagon announced late Friday that it had 
awarded the companies a $5 billion contract to build 10 Aegis 
destroyers.   NOC finished up $2.00 to $129.39 and GD tacked on 
$3.58 to close at $87.32.

The markets will likely react positively tomorrow to the news of 
Iraq's cooperation, although the President may say something 
between the time of publication and tomorrow morning that 
interferes with this theory.  I would expect a rally on the news, 
however in order to prevent a long term breakdown of the crucial 
levels described above, we will need to see a return of business 
spending to the tech sector.  MCHP's comments will help, but the 
news from one company in the face of the additional downgrade of 
thirteen companies in the sector is only a drop in the bucket.  
Look for a gap up in the morning and then a pause for Oracle's 
earning's after the bell.  Oracle is expected to meet 
expectations, but that is not always a catalyst to upward 
movement, as accompanying comments can send an industry reeling. 
Apparently, someone is expecting a fallout, as the Put/Call ratio 
has reached 1.09, reflecting the trading of more puts than calls.  
This reflects today's trading, however, which closed before the 
Iraq news broke.  Tomorrow should see some incredible volatility 
with the Iraqi news and Oracle announcement, so watch your stops 
and hang onto a few extra puts on a big rally, in case of 
negative statements after the bell.  

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

A day of atonement

Traders cited today's light volume of just under 1 million shares 
traded on the NYSE and rather light NASDAQ volume of 1.09 million 
shares on lack of participation by some investor's/trader's 
observation of the Jewish holiday Yom Kippur, in which many of 
the Jewish faith seek reconciliation from God.

Semiconductor and Networking stock investors may have also been 
seeking some penance as both the Semiconductor Index (SOX.X) 269 
-4.02% and Networking Index (NWX.X) 109 -4.36% traded and then 
closed at new 52-week lows, which weighed on the more tech-heavy 
NASDAQ Composite (COMPX) 1,275 -1.2% and NASDAQ-100 Index (NDX.X) 
908 -1.66%.  The NASDAQ-100 trust (AMEX:QQQ) $22.66 -1.43% was 
today's second most actively traded security on rather light 
volume of 88.0 million shares.

Breadth was slightly negative by session's end at the NYSE with 
decliners having a slight edge over advancers by a 17 to 14 
margin.  However, breadth at the NASDAQ was negative at slightly 
less than a 2 to 1 margin.

The big board ended with 43 stocks hitting new 52-week highs 
versus 76 stocks trading new lows, which looks rather strong when 
compared to the NASDAQ's 126 new lows versus just 26 new highs.

Major market average traders and especially QQQ traders may want 
to take some notes as it relates to Friday's and then today's 
networking sector action, particularly shares of ADC Telecom 
(NASDAQ:ADCT) $1.31 -10.27%, which is a QQQ and Networking Index 
component, which gave back all but 1-penny of Friday's gains.

While I would not say that ADCT is a "key stock" for traders to 
be monitoring, it is the gains found from what appeared to be 
Friday's short-covering in the stock, and then a giveback of 
those gains, which may hint of near-term importance to how the 
major indexes trade near-term.  

With some of the "bigger" names in the telecom equipment stocks 
like Lucent (NYSE:LU) $1.07 -15% breaking to yet another 52-week 
low and Nortel (NYSE:NT) $0.90 -5.26% getting close to its 52-
week low of $0.76 set on July 26th, technology bears want nothing 
more than to see the weakest of weak continue their decline and 
put psychological pressure on "bottom feeding bulls" that they 
may not yet have picked a bottom, despite some fundamental-based 
analysts saying there's good value in stocks with large net-loss 
carry forward's.

In all, of the 100 stocks comprising NASDAQ-100, breadth was 
negative with 82 of the components trading lower, while just 18 
traded higher.

Late news has Iraq agreeing to UN weapons inspection

In after-hours news, S&P futures rallied 18 points and NASDAQ 
futures gained 20 points after Iraq officials said that they 
would agree to allow UN weapons inspectors to return without 
preconditions.  However, CNN then reported that the White House 
is "dismissive" of Iraq's statement as it does not address many 
other issues.  

This is somewhat of a "good news/bad news" type of cycle that may 
further confuse/complicate a trader's life, similar to what 
played out just before the Gulf War.  Many believe that it is 
premature to assume that the threat of war with Iraq is anywhere 
near and end.

Major Index Coverage

QQQ bears did find some marginal gains in the QQQ to the downside 
today, but shorter-term technicals remain touch and go with the 
QQQ holding some near-term support at $22.19.  What may make 
things a bit "tough" for a bear tomorrow is tonight's guiding 
higher on Q2 earnings by semiconductor stock and QQQ component 
Microchip Technology (NASDAQ:MCHP) $15.36 -9.38%, which said it 
expects earnings per share of $0.17, to exceed prior guidance in 
its Q1 conference call $0.16, mostly due to increased gross 
margins, as revenues still look to be between $169-$171 million, 
versus guidance for $170.7 million.  This "good news" had today's 
fourth-worst performing NASDAQ-100 stock gaining back all of 
today's losses and then some to $17.45 (+13.6% from today's 
close). 

NASDAQ-100 Trust (QQQ) - Daily Interval



Like many of the major market averages, the QQQ just can't seem 
to break a key level of support or upward trend on a firm enough 
basis to get some type of meaningful move to the downside.  The 
current trading range looks to be $22-$24 and current strategy 
would be to be short/put only one-half positions, which would be 
more indicative of a cautious bear.  Stochastics traders that 
implement short/put positions Thursday morning when stochastics 
had just approached the "overbought" level now see stochastics 
approaching  the more "oversold" level.  

As a QQQ bear from last Wednesday's wrap, I would have felt more 
"bearish" this evening with the SOX.X and NWX.X closing at new 
lows, if the QQQ had at least broken the short-term upward trend 
from the August 5th close.  However, as we look at the S&P 100 
Index (OEX.X) 446.65 +0.54% back above our "conservative" trend 
and slowly edging up and trying to get back on our more 
"aggressive" trend, a short-term bear in the QQQ may want to play 
the Q's safe with a stop just above Friday's high of $23.08.

As we get "away" from the more volatile technology weighted 
NASDAQ-100, and move into the S&P 100 (OEX.X) 446.65 +0.54 and 
S&P 500 Index (SPX.X) 891.10 +014%, keep in mind perhaps how some 
bounces in recently pummeled Honeywell Intl. (NYSE:HON) $24.65 
+4.6% and McDonald's (NYSE:MCD) $21.69 +5.65%, which benefited 
from an "upgrade" by Morgan Stanley to "equal-weight" from 
"underweight" kept the OEX and SPX rather firm for the bulk of 
today's session, despite tech-weakness.

S&P 100 Index Chart - Daily Interval



Tonight's late news out Iraq will most likely have the OEX 
opening higher in the morning, and one has to wonder if the 
MARKET "knew" or anticipated that news as the OEX just wouldn't 
give up our more conservative trend (pink) and managed to once 
again close just above this trend.

It's these types of technicals that will test a bear's resolve.  
Much like the QQQ, a bear that was playing a near-term bearish 
target of 435 and 19.1% or a swing-trader's bearish target of 419 
is faced with a stochastics quickly approaching the "oversold" 
level.  

My only "advice" near-term would be toward September OEX put 
option traders with expiration rapidly approaching.  I would look 
to close out September expiration on any break back below today's 
close, and not try and "risk" potential volatility skews going 
into triple witching.  Currently, the OEX Bullish % ($BPOEX) from 
www.stockcharts.com remains in "bear confirmed" status at 46% 
bullish, after August's relative high reading of 58%.  A bearish 
trader that understands these bullish percent indications and 
still holds October expiration puts looks for a rolling 21-day 
SMA at 460 and still trending lower 50-day MA to keep bearish 
technicals in play.

S&P 500 Index Chart - Daily Interval



I've added tonight 18 point gain in the S&P futures to the close 
of the S&P 500 Index (SPX.X) close of 891 to come up with a 
potential open of 909, which would have the SPX opening just 
above its 50-day SMA, but just below horizontal resistance of 913 
and a rolling 21-day SMA.  The 900 level on a closing basis may 
be a key level this week.  The SPX September 900 calls (SXBIT) 
traded 5,871 in volume today, while a correlative 2,130 volume 
was traded in the SPX September 900 puts (SXBUT).  This may have 
been "triple-witching" related, but may hint that some bets are 
being placed for a SPX 900 close at week's end.

As a footnote, open interest for the Sep. 900 calls (SXBIT) was 
49,999 as of Monday evening, while the Sep. 900 puts (SXBUT) were 
51,995.  These are both the highest open interest contracts.  
What I will do tomorrow morning is take a "measurement" of what 
open interest is tomorrow.  Thinking here is that potential 
meaningful increase of more than 10,000 open interest from 
today's volume may be a near-term hint of more bullish close 
above SPX 900 by week's end.

Jeff Bailey





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

Markets Suffer Third Weekly Loss 

The major equity markets declined for a third consecutive week as 
the world marked the 9-11 anniversary and President Bush made his 
call to action in Iraq before the United Nations.  The U.S. stock 
market as measured by the S&P 500 index closed the week down 0.4% 
and has drifted lower by 4.1% over the past month.  The MSCI EAFE 
index of foreign stocks lost 2.3% in dollar terms last week, with 
European stocks down nearly three percent on the week.



Dissecting the S&P 500 index into value and growth components 
reveals that value stocks lost 0.9%, while growth stocks were 
unchanged.  Both components are down over four percent in the 
last month.

The U.S. bond market as measured by the Lehman Aggregate Bond 
index had a 5-day total return of 0.6%, with the current high 
yield market also enjoying gains.  Foreign bonds and funds in 
dollar-adjusted terms were in the red for the week.      


Lipper Fund Indices


According to Lipper's weekly index update, the best and worst 
stock fund indices for the five days as of September 13, 2002 
were as follows:

 Top Five Equity Fund Indices:
 +3.3% Gold Funds (YTD +52.1%)
 +0.7% Emerging Markets Funds (YTD -4.7%)
 +0.4% Multi-Cap Growth Funds (YTD -28.8%)
 +0.3% Mid-Cap Growth Funds (YTD -27.3%)
 +0.1% Large-Cap Growth Funds (YTD -25.2%)
  
 Bottom Five Equity Fund Indices:
 -1.8% International Funds (YTD -13.5%)
 -0.7% Equity Income Funds (YTD -16.1%)
 -0.6% Large-Cap Value Funds (YTD -19.0%)
 -0.6% Science and Technology Funds (YTD -42.6%)
 -0.5% Mid-Cap Core Funds (YTD -16.9%)

I find it interesting that technology sector funds were among the 
weakest performers last week, while pro-growth funds outperformed 
value-driven funds.  Growth funds generally have larger stakes in 
the technology sector than funds with value disciplines; thus you 
would expect growth funds to have lagged value last week, not the 
other way around.  That may be a sign of the times with many pro-
growth style managers looking for growth opportunities outside of 
the battered tech sector.

Gold funds continue to due well considering all the political and 
economic instability in recent weeks.  The category averaged 3.3% 
for the 5-day period and is again up over 50% on a YTD basis this 
year.  Oil prices remain volatile also due to the increasing risk 
of war against Iraq's Saddam Hussein.

The Lipper fixed income fund indices were generally higher on the 
week but not all categories participated in the gains as follows: 

 Top Three Bond Fund Indices:
 +0.7% Corporate A-Rated Debt Funds (YTD +6.3%)
 +0.6% Intermediate-Term, Investment-Grade Funds (YTD +5.8%)
 +0.5% High Current Yield Funds (YTD -6.2%)
 
 Bottom Three Bond Fund Indices:
 -0.9% International Income Funds (YTD +11.3%)
 -0.1% Global Income Funds (YTD +6.9%)
 +0.1% Short-Term Municipal Funds (YTD +3.3%)
 
Just as growth funds performed relatively well in spite of tech 
weakness, medium-grade and low quality funds outperformed other 
bond fund indices in spite of the volatility last week.  Weekly 
averages do not suggest a flight to quality at all, something I 
thought would be the more likely scenario considering the fears 
of further violence in the Middle East.

Much of the underperformance by global and international fixed 
income funds last week was currency related.  You can see that 
international bond funds remain the top YTD performers of 2002, 
up 11.3% since December 31.


Largest Mutual Funds


Weekly and YTD 2002 total returns as of September 13, 2002 for 
the nation's largest mutual funds were as follows:
 
 Largest Stock Funds:
 -0.4% Vanguard 500 Index (VFINX) YTD -21.7%
 -0.2% Fidelity Magellan (FMAGX) YTD -21.7% 
 -0.5% Investment Company of America (AIVSX) YTD -14.2%
 -1.0% Washington Mutual Investors (AWSHX) YTD -14.2%
 +0.6% Growth Fund of America (AGTHX) YTD -22.0%
 +0.6% Fidelity Contrafund (FCNTX) YTD -6.9%
 +0.1% Fidelity Growth & Income (FGRIX) YTD -16.1%
 -1.6% EuroPacific Growth (AEPGX) YTD -15.3%
 -0.6% New Perspective (ANWPX) YTD -17.6%
 -0.8% Vanguard Windsor II (VWNFX) YTD -14.3%
 
 Largest Bond Funds:
 +0.5% PIMCo Total Return (PTTRX) YTD +7.2%
 +0.4% Vanguard GNMA (VFIIX) YTD +7.6%
 +0.6% Vanguard Total Bond Market (VBMFX) YTD +6.0%
 +0.5% Bond Fund of America (ABNDX) YTD +1.6%
 +0.3% Vanguard Short-Term Corporate (VFSTX) YTD +3.2%
  
 Largest Balanced Funds:
 -0.4% Income Fund of America (AMECX) YTD -6.5%
 -0.1% Vanguard Wellington (VWELX) YTD -8.1%
 -0.1% Fidelity Puritan (FPURX) YTD -9.0%
 -0.2% American Balanced (ABALX) YTD -7.3%
 +0.6% Fidelity Asset Manager (FASMX) YTD -9.3%

Among diversified U.S. stock funds, Fidelity Magellan Fund and 
Vanguard 500 Index Fund are neck and neck on a 2002 YTD basis.  
Magellan is not a closet-index fund with its sector weightings 
deviating from that of the S&P 500 index, but its overall risk 
and portfolio characteristics are similar to the index, so its 
return performance (loss) is comparable.

You can see the generally more stable funds such as Washington 
Mutual Investors lost 1.0% last week among the week's laggards.  
Kudos to William Danoff of Fidelity Contrafund fame for ending 
the week 0.6% higher.  Danoff has lost only 6.9% for investors 
since December 31, considerably better than the average equity 
fund.  Only one of the five largest balanced funds shown above 
have lost less than Danoff this year.

Intermediate-term investment grade bond funds did particularly 
well last week as evidenced by the 0.6% total return posted by 
Vanguard Total Bond Market Index Fund.  The PIMCO Total Return 
Fund was right behind with a 0.5% total return during the week.  
Funds with longer average durations did even better.  The $3.6 
billion Vanguard Long-Term Corporate Bond Fund (VWESX) rose by 
1.7% last week to lead all bond mutual funds.  

Among the largest balanced funds, Fidelity Asset Manager Fund 
performed the best, rising 0.6% for the week.  However, Asset 
Manager still sports the largest YTD decline of the top funds, 
down 9.3% since December 31.

Other notables among billion-dollar funds include Marsico Focus 
(MFOCX) up 2.2% for the week and Legg Mason Opportunity Primary 
Shares (LMOPX) up 2.6%.  Some health sector funds did well also.  
One of them was Janus Global Life Sciences Fund (JAGLX) up 1.8% 
for the week.

Foreign equity fund laggards last week included T. Rowe Price 
International Stock (PRITX) off 2.1% and Artisan International 
(ARTIX) off 2.5%.  Morgan Stanley, Bernstein and SEI were also 
among the week's foreign equity laggards.    


Money Market Funds


iMoneyNet.com, a leading provider of money market mutual fund 
data, indicates the all taxable money market fund average was 
1.24% last week, giving back the three basis points (or 0.03%) 
the average rose by the prior week.  The average reflects the 
group's current 5-day simple yield.  

The best current yields among "prime retail" money funds were 
PayPal MMF at 1.81%, Touchstone MMF at 1.74%, and the INVESCO 
Treasurer's MM Reserves Fund at 1.59%.  

According to iMoneyNet.com, the nation's five largest retail 
money funds sport the following current 7-day simple yields:

 Largest Retail Money Market Funds: 
 1.52% Fidelity Cash Reserves 
 1.15% Schwab Money Market Fund 
 1.52% Vanguard Prime MMF/Retail 
 1.45% Schwab Value Advantage Money Fund 
 1.42% Merrill Lynch CMA Money Fund

Per the Investment Company Institute (www.ici.org) inflow to 
money market funds increased by $20 billion net for the week, 
with institutional money market assets growing $21.7 billion 
while retail money market assets experienced a net outflow of 
$1.9 billion for the week.


Mutual Fund News


The Wall Street Journal reports today that the SEC is mulling 
mutual fund regulation.  The headline reads "Measure would be 
significant setback for industry."  The issue, a consideration 
requiring mutual funds (and other investment managers) for the 
first time to disclose how they vote shares in their portfolios 
in corporate proxy contests.  The mutual fund industry has long 
argued that investors don't have a right to know how their fund 
managers vote and that such a ruling is really not needed.  But 
the SEC feels otherwise - seeking to increase public disclosure 
across the board to better protect investors.

"The Investment Company Institute, the fund industry’s lobbying 
arm, repeated its opposition to such a rule," reports the Wall 
Street Journal.  An ICI spokesperson reiterated their view that 
"proxy voting" is considered to be part of the fund "investment 
process" and consequently that shareholders do not need to know 
how their funds vote.  In the ICI view, proxy voting is already 
part of a fund’s fiduciary duty to vote in the best interest of 
shareholders.  The ICI believes it's not the kind of disclosure 
that helps investors to choose between funds.  

Note that while the ICI industry association will lobby against 
the proposed SEC measure, Vanguard and Fidelity are among those 
fund families that publish their proxy-voting policies on their 
website.  In my opinion, that's probably enough for the average 
mutual fund investor that laments having to read the prospectus 
before investing.  However, I do believe the fund manager has a 
fiduciary responsibility to disclose any material discrepancies 
between proxy voting and proxy policy that affects performance.

Further, I feel that sophisticated institutional investors are 
entitled to such information should they want to know.  Retail 
investors may not be concerned, but for some institutions, the 
lack of information is frustrating to them and their "internal" 
policies.  For instance, a pension fund that invests in one of 
Vanguard's institutional index funds has a right (IMO) to know 
the manager's proxy voting results.  In fact as a plan sponsor 
they may have a fiduciary responsibility to track how managers 
vote their proxies.

So, while it may prove out to be an unnecessary burden for the 
retail fund marketplace, large institutional investors who are 
lobbying for the SEC measure may ultimately win out here, with 
the SEC pushing for more, rather than less, public disclosure.

That's it for this week's edition of the Weekly Fund Wrap.


Steve Wagner
Editor, Mutual Investor 
steve@mutualinvestor.com



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

Technical Analysis: Science or Art?
by Mark Phillips
mphillips@OptionInvestor.com

Ask 10 different traders/investors that question and you're
likely to get 10 different answers, with most of the responses
falling somewhere in the middle.  Those of you that have read
my musings for awhile know that I am a big believer in the use
of Technical Analysis (TA), but as an engineer in a former life,
I would be hard pressed to call TA a "hard science".  I think a
more appropriate moniker would be that of 'Alchemy', the ancient
"science" of turning lead into gold.  To this day, there are
those that still believe it is possible, but to those of us that
are not 'in the know' it seems rather implausible.

Successful practitioners of TA know that it is a very important
tool, even if it does at times require somewhat of a subjective
feel to get it right.  Newer traders, on the other hand, will
frequently apply a certain study or chart pattern and be
repeatedly frustrated because the stock or index being studied
doesn't behave in the ideal manner depicted within various
educational articles or books.

Over the past several weeks, I've noticed the broad market has
been particularly resistant to following simple chart studies
and I've heard from more than one new trader that is struggling
with how to interpret market action.  In an attempt to answer
many of these questions in one fell swoop, I thought I would
take the time to show you a portion of the process I have gone
through over the past few weeks in trying to determine where the
broad market is headed.  If you read my weekend LEAPS column, it
should be clear that my fundamental (read:long-term) view is down,
but as traders we aren't so much concerned with the eventual
destination, but the path taken to get there.

Of the major indices we follow, I think the S&P 500 (SPX) is the
best index to watch for broad market direction, partially because
it has a fairly broad sample of the market, but also because this
is the Big Daddy, the one the pros use.  So without further ado,
let's get to it!

In order to keep things really simple today, I'm only going to
use two basic tools for our discussion: Trendlines and the
Stochastics oscillator.  So without further ado, let's jump into
the rambling analysis, beginning in the middle of August.

Daily Chart of the S&P 500 - Chart 1



Following the rebound off the July lows and the higher low in
the first week of August, the SPX allowed for the construction
of an ascending trendline.  Then when the SPX dipped to and
rebounded from that trendline in mid-August, it provided another
opportunity to go long.  Note that at the time of that long
signal (3), the daily Stochastics were already buried in
overbought.  Because this tool works best in rangebound markets,
it becomes far less useful in strongly trending markets.  We
take advantage of this knowledge by deferring to the signal given
to us by the bounce off the trendline.

Daily Chart of the S&P 500 - Chart 2



But that move was our last chance to play a successful bounce
off the trendline.  By the last week of August, the daily
Stochastics had released from their deep overbought condition
and crossed back below the 80 level the day after our ascending
trendline was violated.  The convergence of these two indicators
gave a strong, if somewhat short-lived short signal.  A week
later, with Stochastics entering oversold territory, it was time
to start looking for a tangible support level that would either
support a new long trade or that we could use for a fresh short
signal on a breakdown.

Daily Chart of the S&P 500 - Chart 3



Leaving the anchor point of the trendline unchanged, we are
able to define a new trendline using the intraday low on
September 5th as the second attachment point.  Daily Stochastics
are still showing no sign of life, so we don't just want to
blindly trade to the long side.  We now want to see the
Stochastics moving out of oversold, ideally accompanied by a
solid rebound from our new trendline.

Daily Chart of the S&P 500 - Chart 4



Well, now that is what I consider a failed rally!  Stochastics
released from oversold, but the lack of bullish enthusiasm
around the 9/11 anniversary brought the sellers back out of
the woodwork by the end of last week.  Most of the action last
Friday was below the trendline, but the bulls did manage to
recover right back to that level by the close.  Note the warning
signal being sent by the Stochastics oscillator, which is
threatening to roll over mid-cycle.  Since it looks like the
current trendline is in danger of being violated, I was motivated
to redraw that trendline.  Perhaps I picked the wrong anchor
points -- if so, I want to know about it before the market moves
out of its apparent consolidation.

Daily Chart of the S&P 500 - Chart 5



The red trendline in the above chart is the original trendline I
had on the previous chart.  Then I created the magenta line by
changing the initial anchor point to the bottom of the candle on
July 24th (as opposed to the bottom of the wick or shadow), using
the bottom of the wick on September 5th as the second attachment
point.  That comes in below the body of Friday's candle, but I
still wasn't satisfied.  One further iteration is possible (blue
line) by changing the initial anchor point to the bottom of the
candle from August 6th.  This is where the subjectivity of
trend-line construction becomes apparent.  We as Technical
Analysts can draw all the trendlines we want, but the important
point is that we THEN have to observe how the market behaves
around those lines that we have constructed.  The more I looked
at the 3 lines shown above, the more convinced I became that
they would NOT survive as meaningful support levels.  So, back
to the drawing board...

Daily Chart of the S&P 500 - Chart 6



By wiping away all of the prior lines, I noticed that the 875
level (horizontal red line) seemed to be a much more important
level.  It was the bounce point for the 3rd stage of the initial
rally (big green candle on August 14th), survived four tests in
early September and then another one last Friday.  Stochastics
are still somewhat troublesome, but a solid rebound off the 875
level (with another possible intraday dip to the 870 level) would
pull the oscillator back into a bullish ascent mode.

Daily Chart of the S&P 500 - Chart 7



There is one final (and slightly more complex) way to look at
the current SPX chart, and that involves the addition of a
possible Head & Shoulders (H&S) pattern, with the neckline shown
in blue.  That neckline is the same as the blue trendline in the
chart 2 charts above this one (confusing, huh?).  The neckline
on an H&S pattern connects the lows (or armpits) between the 2
shoulders.  A violation of this neckline (particularly on a
closing basis) becomes more significant than just a violation
of a run-of-the-mill trendline.

So what conclusions can we draw about where the SPX is headed
next?  Based on the charts here, the bulls still have the
advantage, albeit a slight one.  While the enthusiasm of the
rally that began weeks ago has faded significantly, the bears
have been unable to break the bullish sentiment that is
underlying the market.  Bullish traders can go cautiously long
on repeated rebounds from the site of either the neckline
(currently near 882) or from the horizontal support line (875),
so long as the daily Stochastics don't completely tip over.  On
the other hand, hungry bears will be watching for violations of
these same levels and for a bearish crossover in the Stochastics.

While it took us awhile to get through all of this, I hope it
helps to give you an idea of how a Technical Analyst (like me)
arrives at a meaningful action plan related to a given equity or
index.  It is not a cut-and-dried formula, as the markets are
dynamic and require both a bit of subjectivity, as well as the
ability to be flexible and not get locked into a particular
market view or bias.  Most importantly, properly applied TA
allows us to define an action plan that only gets implemented
when the market delivers the particular setup and confirmation
(price move through a trigger point) that our plan calls for.
Remember, our job is to do the analysis and then act in response
to what the market delivers to us, based on how that action
compares to our analysis.  I hope that helps.

Have a great week!

Mark


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

Breakout!

It certainly did not come during regular trading with 
the markets mixed at the close but at 18:35 Iraq 
notified the UN that they would accept UN weapons 
inspectors with no preconditions. Futures spikes +13 
within five minutes and it would appear the peace 
dividend is about to be cashed.

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*******************
FREE TRIAL READERS
*******************

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.


We would like to have you as a subscriber. You may
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The Option Investor Newsletter                   Monday 09-09-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.

In Section Two:
Stop Loss Updates LLL, FDX, MTG
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - MSFT

Updated on the site tonight:
Market Watch
Market Posture

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

LLL - call
Adjust from $54 up to $56.75

FDX - put
Adjust from $47 down to $46

MTG - put
Adjust from $58 down to $50

*************
DROPPED CALLS
*************

None


************
DROPPED PUTS
************

None

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traded options,_ claims author Larry Spears in his new compact
guide book:

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and clicking on the link to the book on its home page.

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**********************
PLAY OF THE DAY - Call
**********************

MSFT - Microsoft $47.78 -0.13 (-0.13 this week)

Company Summary:
Founded in 1975, Microsoft is the worldwide leader in software,
services and Internet technologies for personal and business
computing. The company offers a wide range of products and
services designed to empower people through great software -- any
time, any place and on any device (source: company release)


Why we like it:
Microsoft rebounded from its PnF bullish support line today, the
same way it has on each of the previous 5 times it tested that
line.  A trade of $46 would be needed to break this trend and
this would coincide with our stop loss.  Adobe's earnings
surprise was positive for the software sector and Microsoft is
the biggest fish in the pond.  We like the show of support and
the potential upside profit, making for a good risk/reward
scenario.  With Microsoft still selling the XP operating system
at a record clip and a new OS on the way, the long-term prospects
still look great for the company.  With Cisco's earnings coming
out on Tuesday, anything positive can give the techs a real
boost.  Today's rally into the close by both the Nasdaq and NDX
looks bullish, as the indices approached a head and shoulders
breakdown and found support.  A continued rally on Monday should
keep MSFT heading in the right direction. We will leave our stop
loss at $46, where the stock has strong support.  New entries
should look for a trade above today's high of $48.26.

Why This is our Play of the Day

Just when it seemed that there was nothing but bad news for the
markets to digest, Iraq agreed after the bell to allow weapons
inspectors back into the country.  The war risk seems to be
evaporating, with the S&P futures up 18 points above their 4pm
close.  That bodes well for a positive market tomorrow, so long
as the bloom doesn't fade off this rose overnight.  With its
prominent place on all of the major indices, MSFT looks to be a
principal beneficiary of this bullish bid.  MSFT has been hanging
around $47 support for the past few days, and should move strongly
at the open tomorrow.  It is unlikely that we'll get a dip to
enable new entries, so momentum traders will want to enter as
stock pushes through the top of its gap ($48.55) from last
Thursday.  Successfully clearing that hurdle will pave the way for
a move up to retest the $50 resistance level.  Traders already in
the play will want to use weakness near the $50 level as an
opportunity to harvest partial gains, as we have seen how quickly
rallies fade in the current market environment.  Note that we are
still listing September options tonight.  Since these expire in
only 4 days, they should only be used for intraday trades.

*** September contracts expire this week ***

BUY CALL SEP-45 MQF-II OI=13241 at $3.10 SL=1.50
BUY CALL SEP-47 MQF-IW OI=14878 at $1.20 SL=0.50
BUY CALL OCT-47*MQF-JW OI= 7537 at $3.10 SL=1.50
BUY CALL OCT-50 MQF-JJ OI=24068 at $1.80 SL=1.00

Average Daily Volume = 45.7 mln



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that:
offers true direct access to each option exchange
offers stop and stop loss online option orders
offers contingent option orders based on the price of the
option or stock
offers online spread order entry for net debit or credit
offers fast option executions

PreferredTrade offers these online option trading features and
more; call 1-888-889-9178 or click for more information.

http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN
**************************************************************


**************
MARKET POSTURE
**************

Gearing Up

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/090902.asp


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

Standing Still (but not for long)

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/090902.asp


*******************
FREE TRIAL READERS
*******************

If you like the results you have been receiving we
would welcome you as a permanent subscriber.

The monthly subscription price is 39.95. The quarterly
price is 99.95 which is $20 off the monthly rate.


We would like to have you as a subscriber. You may
subscribe at any time but your subscription will not
start until your free trial is over.

To subscribe you may go to our website at

www.OptionInvestor.com

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

 "Contact Support"

with your credit card information,(number, exp date, name)
or you may call us at 303-797-0200 and give us the
information over the phone.

You may also fax the information to: 303-797-1333


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

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