Option Investor
Newsletter

Daily Newsletter, Monday, 09/23/2002

HAVING TROUBLE PRINTING?
Printer friendly version
The Option Investor Newsletter                   Monday 09-23-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.

To view this email newsletter in HTML format with embedded
charts and graphs, click here:
http://www.OptionInvestor.com/htmlemail/x23c_1.asp

In Section One:

Wrap: Tumbling Down the Stairs
Index Trader Wrap: SPX, OEX and QQQ bears get their targets
Weekly Fund Wrap: Glass Half Empty
Traders Corner: Fundamental Technician


Updated Tonight on the site:
Swing Trade Gameplan: Blue Monday 


Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
09-23-2002                High    Low     Volume Advance/Decl
DJIA     7872.15 - 113.87 7984.77 7788.42  1592 mln   330/1250
NASDAQ   1184.93 -  36.16 1209.72 1177.41  1432 mln   228/1195
S&P 100   417.38 -  6.52  423.90  412.92   totals     558/2445
S&P 500   833.70 - 11.69  845.39  825.76
RUS 2000  358.68 -  8.60  367.28  356.73
DJ TRANS 2134.53 - 49.49 2185.12  2126.45
VIX        44.71 +  0.16   46.46  43.93
VIXN       59.85 +  0.77   61.46  57.65
Put/Call Ratio 0.88
*******************************************************************


Tumbling Down the Stairs
by Steven Price

We're bound to get good news from the market at some point, but 
faith in the most likely source seems to be fading.  The Federal 
Open Market Committee (FOMC), led by Chairman Alan Greenspan, 
meets on Tuesday.  It is at these meetings that interest rate 
decisions are generally made. The Dow tanked today, ahead of that 
meeting, indicating that investors are not confident in the 
possibility of a rate cut.  

Without the indication of a rate cut, investors were left to 
digest this morning's economic data, which brought more bad news.  
The index of leading economic indicators dropped 0.2% in August.  
This followed a 0.1% drop in July and exceeded analysts' 
expectations of a 0.1% drop. This is the third month in a row 
that the leading index has declined. Industrial production 
declined for the first time this year and the Coincident Index 
indicates a weak economic recovery.  Seven of the ten indicators 
were negative.  These negative indicators, from the largest 
negative contributor to the smallest, were interest rate spread, 
average weekly initial claims for unemployment insurance, vendor 
performance, manufacturers' new orders for non-defense capital 
goods, building permits, manufacturers' new orders for consumer 
goods and materials, and index of consumer expectations.  The 
positive indicators, in the same order, were real money supply, 
average weekly manufacturing hours, and stock prices.  Given the 
fact that the stock market has given back 80% of its gains from 
July 24 through August 22, we can discount the last positive 
indicator. The economy is still growing, but the Conference 
Board, which tracks the indicators, said that there is a 
heightened risk of a slowdown.  A separate report also indicated 
that help-wanted ads were down in July for the third straight 
month.

It certainly looks as though we will be re-testing the July lows 
in the Dow.  A look at the intraday charts for the last few days 
shows resistance being put in place at successively lower levels 
each day.  Today's rebound attempt was stopped and turned back at 
7900, after 8000 served the same purpose on Friday.  

Chart of the Dow



The Nasdaq traded below the July low of 1192 today, closing at 
1184.93, establishing a new 6 year low.  Going back to July 1996, 
1000 seems to be the next likely downside target.  The level was 
tested several times as the Nasdaq began its ascent to 5132.52 in 
March of 2000.  However, we have not yet seen this level tested 
in a downward trending market.  A level that once proved 
resilient as companies grew, may not be so resilient as business 
contracts.

Chart of the Nasdaq



If nothing else, the recent drop has reaffirmed the bearish 
nature of a head and shoulders neckline break, which occurred in 
all of the major indices. A look at the Dow and Nasdaq breakdowns 
shows the acceleration downward after the break.  We can also 
attempt to estimate the potential for the current drop by using 
the distance from the neckline to the top of the head, and 
projecting downward for the measuring objective of the drop.  
This objective is used as an eventual target, rather than a 
prediction that the current down move will head straight for 
these levels without any sort of bounce.  Because necklines can 
be drawn from different points, the targets are subject to 
individual interpretation, but these are the targets I see from 
the graphs below.  The Dow shows a downward objective just below 
7200, while the Nasdaq has an objective just under 1050, which 
coincides closely with the 1000 support level identified above.

Chart of Head and Shoulders in the Dow (INDU) and Nasdaq 
Composite (COMPX)




While we may see some bounce in the markets, we keep receiving 
negative news across several sectors.  This morning, Wal-Mart 
once again guided toward the low end of its growth range for the 
month. Target also announced same store sales were below 
expectations for last week, and were running below plan for the 
month-to-date.  Wal-Mart came in below expectations the last two 
months, following similar predictions.  Wal-Mart typically 
predicts 4%-6% growth, and has warned that sales would be at the 
low end of the range, after saying just last week that sales were 
on track.  Federated, which owns Bloomingdale's and Macy's, said 
that same store sales would be "at best" toward the low end of 
its 3%-5% increase guidance.  This may be foreshadowing another 
downturn in consumer spending. Wal-Mart is generally considered a 
good measure, since it carries products across a wide range of 
categories and provides a low cost alternative.  The fact that 
both Wal-Mart, at the low end of the pricing scale, and 
Federated, toward the upper end, are both lowering forecasts, 
seems to indicate consumers at all levels are cutting back.

Further evidence of this reduced spending came from Maytag, which 
after the bell warned that third-quarter earnings would fall shy 
of expectations. This is partially attributed to sluggish sales 
of appliances and lower production rates.  Office furniture maker 
Steelcase (SCS) also missed expectations by 0.02 per share.

Money continues to flow out of mutual funds. Investors withdrew 
$5.8 billion in the month of August, following a record drain of 
$53 billion in July.  While this may seem like an improvement, it 
was the first time in 14 years that stock funds saw money flow 
out in a month in which the stock market was up.  This lack of 
investor confidence shows that any rebound will be fighting an 
uphill battle.  In what looks like a vicious cycle, if investors 
are pulling money out of mutual funds when the market goes up, 
then one of the biggest sources of buying power is losing 
strength, even when other sources are getting back in.

The tech sector saw more downgrades this morning.  Deutsche Bank 
and Bank of America issued bearish commentary, highlighting the 
weak demand for computer production equipment and manufacturing 
services needed to build the latest high-tech products. Credit 
Suisse First Boston cut its estimates for several chip equipment 
makers, including Applied materials (AMT), KLA-Tencor (KLAC) and 
Novellus (NVLS).  Barrington Research reported that equipment 
orders have been weakening after seeing seven months of previous 
upturn.  Orders fell 5% from July to August.  Soundview 
Technology Group also lowered estimates on several techs, 
including Dell (DELL), Gateway (GTW), Apple (AAPL) and Hewlett 
Packard (HPQ).  In addition to these downgrades, JDS Uniphase 
also lowered its quarterly sales forecast by as much as 9%, due 
to contract cancellations.  All of this news combined to send the 
Semiconductor Sector to not only new 52-week lows, but also a new 
4-year low of 236.19. The index has now lost 35% of its value in 
the last month, since it traded up to 363.03 on August 20, during 
last month's rally.  After the bell, Palm beat earnings estimates 
by a penny, but missed revenue targets, and lowered revenue 
expectations for next quarter.

Apparently the financial community is beginning to feel the heat, 
as a report in the Wall Street Journal indicated that Lehman 
Brothers would be laying off 10% of its staff. Goldman Sachs may 
be laying off 10-15% of its investment banking staff, as well, 
according to the New York Post. With fewer mergers and 
acquisitions, and a virtual halt in IPOs, many of these 
investment bankers simply aren't needed anymore.

As reports have surfaced that Iraq will not be giving 
unconditional access to weapons inspectors and will not accept 
any new revisions to the 1999 U.N. resolution.  U.N. Secretary-
General Kofi Annan said that inspectors from the U.N. Monitoring, 
Verification and Inspections Commission would be bound by a new 
resolution and so should Iraq.  It sounds like Saddam is already 
playing games with the new inspections and the oil futures seem 
to agree. December Crude Oil Futures (CL02Z) broke above $30 a 
barrel today, to close at $30.50.  

The fuel pinch appears to be making its way to the airline 
industry.  The major airlines are seeking additional help from 
Congress, to help with the increased cost of security and 
insurance, as well as to deal with higher fuel costs.  There have 
been analyst warnings that this year's losses could exceed last 
year's, which amounted to a staggering $7.7 billion. According to 
Delta Chief Executive Leo Mullin, "Revenue is not coming back... 
It's not a pretty picture."

On the positive side, Black and Decker (BDK) came out and 
reaffirmed earnings guidance and Tenet Healthcare (THC) raised 
its guidance, exceeding previous forecasts by 0.05 per share. One 
other interesting note that may be foreshadowing a bounce in the 
near future is the fact that the Market Volatility Index (VIX.X) 
only increased by 0.16 on a triple-digit down day in the Dow. 
Volatility generally increases by a larger percentage on drops.   
This indicates to me that firms may have been selling volatility 
(option premium) as it tried to increase. This does not usually 
occur prior to big drops.  While it is not a specific indicator, 
and could simply be due to the end of day rally, it does arouse 
suspicion.  The put/call ratio also decreased from 1.16 to 0.88, 
demonstrating a return to more calls trading than puts.

I usually try to present both sides of the market, however today 
it was awfully tough to find a silver lining.  The fact that the 
Dow rebounded strongly from today's low of 7788.42 to close at 
7872.15 could be seen as a positive, but this bear is looking 
harder at the resistance at a lower level of 7900.  With the Fed 
getting together tomorrow, we could see another sell-off if rates 
are left unchanged, as expected.  The bond market has actually 
done most of the work for the FOMC, with mortgage rates 
continuing to seek out new lows.  With the economy still growing, 
albeit at a snail's pace, it is unlikely the Fed will use up its 
few possible remaining rate cuts, unless absolutely necessary. 
The Fed Funds rate stands at 1.75%, and that does not leave much 
room for action, if and when it is needed more than now. Expect 
the rate to remain unchanged, and the easing bias to remain in 
place, as well.  As we approach the July low, we are likely to 
experience a "dead cat bounce" at some point.  However, given the 
height of the fall, even a dead cat may bounce a few hundred Dow 
points.  I wouldn't be closing short positions just yet, as we 
still have some room to the downside, but a tight stop on your 
positions should serve to lock in profits when we finally do 
bounce.  That bounce may simply provide additional short 
opportunities on a rollover, until we get some good news from the 
economy.  And from the looks of things, it could be a while.
 

*********************
SPECIAL LIMITED OFFER -- ONLY TWO SYSTEMS LEFT!
*********************
 
Unbelievable Trading System.
 
We were upgrading some trading systems at the office and found
an incredible combination of circumstances. I have a 2.2GHZ PC
with four flat panel 20 inch monitors for my trading system.
I was buying some more monitors and computers for the office
and found a quantity of the monitors in one spot. When coupled
with a great multi-monitor video card and super fast PC they
make a great trading station.
 
I talked it over with James and we decided to buy the entire
lot of monitors and build 10 dual monitor trading systems for
any reader that wants one.
 
I am not going to list the complete specs here but it is an
Intel P4 2.53GHZ PC with 1GB ram, 80GB disk, DVD drive, CDRW
drive, V.92 Modem, 10/100 Lan card, 500W Subwoofer w/2 speakers,
Firewire card, Dual monitor GE-Force 440x video card
 
AND
 
Two 20-inch flat panel NEC monitors.
1280x1024 resolution, the monitors swivel from
horizontal to vertical depending on your preferences.
 
The cost of the system is $3,495 plus shipping.
The monitors alone are worth more than that.
 
This offer is limited to 10 systems because we were only able
to get 20 monitors at this price.
 
If you are interested click this link for a complete description
 
http://www.OptionInvestor.com/systemdeal/
 
We are down to just TWO systems LEFT!!!
 
We are not in the computer business but we receive enough questions
on how to get a system like this that we decided to make the offer.
 

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


SPX, OEX and QQQ bears get their targets

It was three days ago (including today's session) when "Dow 
bears" achieved a near-term bearish target of 8,043, and while 
the Dow Industrials (INDU) 7,872 -1.4% found a modest gain on 
Friday, the short-term momentum didn't hold today as the Dow fell 
113 points by session's end, but did recoup 84 points from their 
session lows.  The intra-day "recovery" in the Dow was partially 
helped by a late rebound in banking component Citigroup (NYSE:C) 
$27.57 +2.57% after the stock came close to trading a new 52-week 
low set on July 24th of $24.48.

Dow Industrials Chart - Daily Interval



About the only thing I found bullish by today's close for bears 
patiently waiting for a rally as new short/put entry was that 
component Citigroup (NYSE:C) $25.57 +2.75% finished with a gain 
and helped the S&P Banks Index (BIX.X) 273.62 +0.34% and KBW Bank 
Index (BKX.X) 689.54 +0.43% finish with a gain.  Many market 
participants look for "financials" to show leadership and the 
rally into the close after a brief piercing of C's 52-week low 
hints that some "financial" bears wanted to square some positions 
ahead of tomorrow's FOMC meeting.  With weaker economic data in 
recent weeks, a FOMC surprise rate cut tomorrow, might give 
financials a temporary boost.

Currently, the MARKET is expecting NO ACTION from the Fed at 
tomorrow's 02:15 PM EST interest rate decision.

Dow Industrials Bullish % ($BPINDU) - 2% box



There's only 30 stocks in the Dow Industrials and each stock's 
point and figure chart gets "1 equally weighted vote" as it 
relates to the bullish %.  Dow traders can perhaps get a feel for 
"risk" as it relates to the bullish %.  I've tried to show the 
53.33% (53.55 % of 30 stocks is 16 stocks) level from the 
September 11th close where we turned more bearish on the Dow 
Industrials.  Note that tonight's reading is 23.3% and how much 
"risk" has been taken out of the Dow from a bullish perspective.  
This does NOT mean it can't go lower, as the internals are very 
weak.  However, bears will perhaps understand how this indicator 
was used when initially turning bearish the Dow Industrials and 
the DIA and be able to assess "risk" currently.

S&P 500 Index Chart - Daily Interval




Uncertain how the MARKET will respond to tomorrow's interest rate 
decision, bears that did not lock in gains at our initial target 
of 835 in the SPX can continue to work down a stop just above the 
850 level.  The close below the August 5th close of 834.60 is 
just enough to have a bear hopeful near-term for further 
downside.  

In our September 12th Index Wrap 
http://members.OptionInvestor.com/itrader/marketwrap/091202_1.asp we talked about a "potential" head and shoulders pattern in all the indexes, and showed the pattern forming in the OEX. I've shown similar pattern in the above SPX chart, with ascending neckline mid-point at the 860 level (head at 950 and shoulders both at/near 915). I really like the way our newly rolled lower retracement (just like we did with the DIA from 09/19/02 wrap) "fits" some of these levels. For the head shoulder top to continue to be in play, the SPX should not close much above the 880 level and calculation from the pattern is bearish to 770. Aggressive bears wanting to put further pressure on the SPX and continue to trade bearish with tight stops to protect gains from the 900 level. A trader could look to short/put a rally back near the 61.8% retracement level, where risk can be controlled with a stop just above the 880 level. It should be noted that the current bearish vertical count from the SPX point and figure chart, with scale set at the conventional $10 box size, is currently 730. This bearish count would continue to grow to the downside unless a 3-box reversal at some point is found, which would then complete the bearish count column. As such, a trader should understand a 3-box reversal higher at any point would equate to 30 SPX points. Keep this in mind when establishing a bearish trade. S&P 100 Index Chart - Daily Interval With OEX bears achieving our initial bearish target of 419, it's also time to roll down retracement with 38.2% at the August 5th close, which was our initial bearish target. I kind of like how the "resulting" 0% retracement at 380.42 ties in with the bearish calculation we originally calculated from the head and shoulders pattern back on 09/12/02. While the OEX currently looks "destined" to trade the 380 level, understand how a bear should stay disciplined in his/her account. Yes, it is very tempting to take a "huge" position in the OEX puts with the thinking at 380 is a certainty. But understand perhaps the regression channel and for now and projection of the lower and upper ends. A trader that shorted/put the OEX back on the morning of September 11th was trading just below the upper end of trend. That sure worked out nice. Similar risk/reward type of trading would have the bear looking to short/put something back near OEX 440. Don't get your account OVERLY short/put in trades. What can happen on a rally is that a true bear today begins to question things on the rally, right near a good bearish entry point. If over leveraged, there's no money left in the account to short/put at resistance. While the indexes look lower, into October, stay disciplined with your account management. NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval QQQ bears saw the QQQ hit our initial target of $21.35 and today's "timing" by Microsoft's (NASDAQ:MSFT) $45.24 -4.67% CEO Steve Ballmer regarding "rough technology conditions in Europe" couldn't have come at a better time for a QQQ bear. For bears that decided to "lift their profit target" of $21.35, I've rolled down retracement to honor the past QQQ closing low at 38.2% retracement of $21.44. That level becomes a bear's stop (say $21.52) with mid-point of regression as outlined this weekend at roughly $20.75 or further downside at $20.20. Today's market action has the NASDAQ-100 Bullish % ($BPNDX) back in "bear confirmed" status at 24%. As it relates to our prior discussion regarding the Dow Industrials Bullish %, the NASDAQ- 100 Bullish % ($BPNDX) was reading "bull correction" at 38% the evening of September 11th. I think bears can continue to apply some pressure in the Q's to the downside. Qualcomm (NASDAQ:QCOM) $27.44 -2.27% traded a high of $27.90 this morning and continues to find sellers at/near the $28.00. Could use the bearish action in QCOM and apparent willing sellers despite recent "good news" in the stock to hint that there aren't a lot of bulls looking to pick a bottom in the QQQ. Nice correlation perhaps between a QCOM trade at $28.15 and QQQ trade at $21.51 to lock in some gains. "Rally entry" for the Q's for a bear would be back above $22, with a stop $23. Can be a volatile little bugger so a trader needs to be able to give some room to a stop. Subscribers wishing to look at some of the other bullish % charts can do so for free at www.stockcharts.com. The conventional 2% box size is to be used so that it takes a 6% reversal (3-boxes) to depict any type of meaningful change. The symbols are as follows ... SPX= $bpspx , OEX= $bpoex , NDX.X = $bpndx. It is notable that Microsoft (NASDAQ:MSFT) $45.24 -4.67% did trade the $45.00 level today and generated a "sell signal" at that level. This action turns MSFT's point and figure chart bearish vertical count to $38, which if achieved would be a 15.5% decline. If MSFT were to trade $38 eventually, then I could envision a QQQ also declining 15% from current levels and perhaps see the OEX and SPX each falling an additional 7 to 8%. First sign of meaningful strength in MSFT would be a trade at $52 to get the stock back on a "buy signal" and negate the current bearish vertical count. Jeff Bailey ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at PreferredTrade Inc. Stop Losses based on the option price or the stock price. Move your trading into the next millennium with PreferredTrade. Anything else is too slow! http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** **************** WEEKLY FUND WRAP **************** Glass Half Empty Stocks moved lower last week, with the S&P 500 index down five percent and all Lipper equity fund categories in the red. The threat of war plus downbeat earnings reports and economic data cast a shadow over investors. The weaker economic picture was bad for stocks but good for bond investors, with all the Lipper fixed income fund indices in the green, except for high current yield bond funds. Like last week, value stocks did worse than growth stocks, with the Value Index down 5.5% for the week and the Growth Index off 4.5 percent. Stock mutual funds followed suit with the average large-cap value fund losing 5.5% on the week per Lipper and the average large-cap growth fund 5.1% in the red. Large-cap "core" funds did a little better, losing 4.8% on average for the week. The MSCI EAFE index of foreign developed markets ended the week down 3.9%, using Vanguard's index fund (VDMIX) as the benchmark. The average international equity fund lost 3.9% during the week per Lipper, matching the EAFE benchmark's weekly decline. For the week, European stocks lost 5.6% in dollar terms, while the Pacific stock index finished the week with a narrow 0.3% gain. Bond funds gained upwards of 0.5% for the 5-day period, led by the long-term government bond sector. Lipper's weekly indices indicate there was a flight to quality last week, with highest quality treasury/government funds doing better than investment grade/corporate bond funds. The Lehman Aggregate Bond Market index picked up 0.3% for the week, using Vanguard's index fund (VBMFX) as the benchmark. The average high current yield fund lost 0.5% for the week, as the high yield sector moved lower along with the equity market. Lipper Equity Fund Indices According to Lipper's weekly index update, the best and worst equity fund indices for the 5-day period through September 20, 2002 were as follows: Top Five Equity Fund Indices: -0.6% Gold Funds (YTD +51.3%) -3.0% Balanced Funds (YTD -13.7%) -3.7% Emerging Markets Funds (YTD -8.3%) -3.9% International Funds (YTD -16.9%) -4.8% Large-Cap Core Funds (YTD -23.9%) Bottom Five Equity Fund Indices: -7.2% Science and Technology Funds (YTD -46.7%) -5.9% Multi-Cap Value Funds (YTD -21.3%) -5.7% Small-Cap Core Funds (YTD -22.8%) -5.6% Small-Cap Value Funds (YTD -14.3%) -5.5% Large-Cap Value Funds (YTD -23.5%) With stocks lower and bonds higher, balanced funds held their weekly loss to three percent on average, again displaying the benefit of asset class diversification in downturns. Foreign equity funds also limited their weekly losses relative to U.S. stock funds. Otherwise, losses for the week were at or above five percent, with tech funds doing the worse, losing 7.2% on average for the week. With no fast economic recovery in sight, small-cap stocks and funds were among the week's top decliners. Small-value funds, which were among the top performing categories earlier in the year, lost 5.6% on average last week per Lipper. Lipper Fixed Income Fund Indices The four best and worst Lipper fixed income fund indices last week were as follows: Top Four Fixed Income Fund Indices: +0.5% General Muni Debt Funds (YTD +8.7%) +0.4% U.S. Government Bond Funds (YTD +8.8%) +0.3% Corporate A-Rated Debt Funds (YTD +6.6%) +0.2% GNMA Funds (YTD +7.0%) Bottom Four Fixed Income Fund Indices: -0.5% High Current Yield Funds (YTD -6.6%) +0.0% International Income Funds (YTD +11.3%) +0.0% Global Income Funds (YTD +7.0%) +0.1% Short Municipal Funds (YTD +3.4%) You can see that the downbeat economic reports pushed most bond funds higher last week, except for high yield funds, which lost 0.5% on average. Meanwhile, high yield muni bond funds rose by 0.2% for the week. Vanguard's long-term Treasury bond index fund had a 0.7% weekly total return, evidence of a flight to quality last week. Funds with longer average durations did better than bond funds having shorter average durations/maturities. Largest Mutual Funds The nation's largest mutual funds based on net assets ended the week with the following total returns (losses): Largest Stock Funds: -5.0% Vanguard 500 Index (VFINX) YTD -25.6% -5.1% Fidelity Magellan (FMAGX) YTD -25.7% -4.7% Investment Company of America (AIVSX) YTD -18.3% -5.4% Washington Mutual Investors (AWSHX) YTD -18.9% -4.7% Growth Fund of America (AGTHX) YTD -25.6% -2.8% Fidelity Contrafund (FCNTX) YTD -9.5% -4.5% Fidelity Growth & Income (FGRIX) YTD -20.0% -3.2% EuroPacific Growth (AEPGX) YTD -18.0% -4.4% New Perspective (ANWPX) YTD -21.2% -5.3% Vanguard Windsor II (VWNFX) YTD -18.9% Largest Bond Funds: +0.3% PIMCo Total Return (PTTRX) YTD +7.5% +0.3% Vanguard GNMA (VFIIX) YTD +7.9% +0.3% Vanguard Total Bond Market (VBMFX) YTD +6.3% -0.1% Bond Fund of America (ABNDX) YTD +1.5% +0.3% Vanguard Short-Term Corporate (VFSTX) YTD +3.5% Largest Balanced Funds: -2.6% Income Fund of America (AMECX) YTD -8.9% -2.8% Vanguard Wellington (VWELX) YTD -10.7% -3.4% Fidelity Puritan (FPURX) YTD -12.1% -4.0% American Balanced (ABALX) YTD -11.0% -3.3% Fidelity Asset Manager (FASMX) YTD -12.4% Bill Danoff, Fidelity Contrafund, continues to preserve capital better than his equity fund peers through the current downswing, while Bob Stansky, Fidelity Magellan remains neck and neck with Vanguard 500 Index Fund. Most diversified stock funds finished the week lower by 5.0% or more. American Funds: Growth Fund of America with its large cash allocation (see Funds News) limited its weekly loss to 4.7 percent. The only way to truly limit equity losses last week was to have exposure to the fixed income sector (including cash). Vanguard Wellesley Income Fund, which normally keeps about 60% of assets in bonds, lost just 1.1% for the week. The exception again was the high yield sector, which fell on corporate credit jitters. High-yield exposure was the main cause of Bond Fund of America's lagging relative performance last week. Money Market Funds The iMoneyNet.com website indicates the all-taxable money market fund average (5-day simple yield) was 1.24% last week, unchanged from the week before. The top current yields among prime retail money funds were PayPal MMF (1.79%), Touchstone MMF (1.73%), and the INVESCO Treasurer's MM Reserves Fund (1.59%). PayPal's fund is down two basis points (0.02%) from the week before. Per iMoneyNet.com, the country's five largest retail money funds reported 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 1.44% Schwab Value Advantage Money Fund 1.42% Merrill Lynch CMA Money Fund Schwab's value advantage money fund slipped a basis point (0.01%) on the week but the other four funds were unchanged week to week. Mutual Fund News Last week, Morningstar's Russ Kinnel identified four great "cash heavy" equity funds that have moved some assets into cash due to the lack of quality stocks in today's market. Among them are as follows: Longleaf Partners (LLPFX) 18% Cash Third Avenue Small Cap Value (TASCX) 18% Cash American Funds: Growth Fund of America (AGTHX) 17% Cash Clipper Fund (CFIMX) While it might be tempting to buy one of these funds now, Kinnel says he prefers his stock funds to be more fully invested. Keep in mind that when portfolio managers raise the fund's cash stake, they're in effect timing the market and, accordingly, might miss some of the market's potential advance. Still it's difficult to argue with the great job these stock managers have done in terms of preserving capital for shareholders. It's true that over time cash can be a drag on fund performance (assuming the markets trend higher over time), but in the short term heavy cash balances can be a powerful means to limit stock losses. Some stingy managers would rather move to cash than put money into a stock that isn't worth its current price. This is one of those times where not all stocks smell like roses. Some pundits suggest that even with the market dive that U.S. stocks, especially large-caps, are still "overvalued." Morningstar's weekly feature on fund openings, closings, etc. is talking about some fund "adoptions" occurring recently, a recent trend whereby a fund family acquires a fund with a proven record or style, adding the fund to its lineup. For example, Evergreen Investments announced it will adopt Grantham, Mayo, Van Otterloo & Company’s GMO Global Balanced Allocation Fund (GMGAX) and then rename it Evergreen Asset Allocation Fund by year end. The John Hancock Funds will adopt Pzena Focused Value Fund (PZFVX), a $28 million mid-cap value fund that's performed well the past couple years. Go to www.morningstar.com for more information. That's it for this week's Weekly Fund Wrap. Steve Wagner Editor, Mutual Investor steve@mutualinvestor.com ************** TRADERS CORNER ************** Fundamental Technician by Mark Phillips mphillips@OptionInvestor.com Every trader that I've met or corresponded with over the years has taken a different path to success. I field numerous questions from traders, experienced and novice, every week. Each of these questions is unique, but it seems they all have the same underlying motivation. Like myself, many traders are trying to find the combination of tools that will provide consistently winning trades and investments. Initially approaching the financial markets from the perspective of an engineer, when I began my trading career, I was looking for the magic set of technical indicators that would allow me to pick one winning trade after another. Long time readers will recall that I have dabbled with a plethora of technical indicators, abandoning some as unreliable, using others as their originators initially intended, modifying still others to fit my trading style and even creating some of my own. Other traders I know entered this business from the other side, focusing almost exclusively on the fundamentals; things like cash-flow, earnings, market share growth, dividend yield, and the like. There are still traders, analysts and advisory services that lean heavily on this sort of information, while largely ignoring technical developments on the charts that you and I study on a daily basis. For much of my early trading career, I considered the two to be distinctly different and separate approaches that we could employ to achieve our eventual goal of capital appreciation. I would largely ignore what the fundamentals had to say and just look for favorable chart developments. With much assistance, prodding and encouragement from some of my more fundamentally-conversant colleagues, I came to understand that the two fields of study are not mutually exclusive, but are instead complimentary. In fact, I have modified my trading approach over the years as I have come to the conclusion that no trader can long survive in this business without adeptly blending the two approaches together. Buzz Lynn wrote a great article last Thursday, Differentiating Sow's Ears From Lemons and I want to extend that comparison today. Buzz did a great job of pointing out the striking difference in the fundamental strengths of MO and LU -- with the former being a consistent cash-generator and the latter being a consistent cash-burner. Very simple technical studies will give us great confirmation of the fact that MO will continue to reward its shareholders with a steady stream of cash and LU is likely headed for the scrap heap. Let's start by looking at a monthly chart of MO to further clarify the comparison. MO (along with most of the other Tobacco stocks) hit an important bottom in early 2000, when the litigation fears hit a fever pitch. But the stock didn't go to zero. Why? Fundamentals. A stock's price is simply the discounting of all future cash streams into a fair price for the company today. When the worst possible news was factored in and the stock refused to fall any further, the stock went up. I've shown a monthly chart here so that we have a long enough period of time to work with, and you can clearly see that over the past 2 1/2 year bear market, shares of MO have held up remarkably well. Traders that tried to short every overbought condition in this stock on the daily and weekly charts were, with very few exceptions, disappointed. On the other hand, every oversold alignment in the weekly timeframe has pointed to an attractive opportunity to buy the stock. This is the key to successful trading -- find an APPROPRIATELY VALUED stock (regardless of whether the market is in bull or bear mode) and buying the dips will provide solid returns. On the other hand, trying to buy the dips on a stock that is fundamentally unsound will be consistently frustrating to the technical trader. Take a look at the depressing LU chart below. There hasn't been a decent long entry into this stock since early 2000, as the fundamentals have crumbled like a sand castle slowly eaten away by the pounding surf. I can't tell you how many times in the past year I have heard the terms "compelling valuation" or "turnaround proceeding well" used to describe this stock in an attempt to lure unsuspecting traders in for a bit of bargain hunting. Buzz did a great job of showing why LU stinks as an investment -- when a company is valued at less than its cash value, we want to stay away! The reason this is so interesting is that traders operating in an environment devoid of the fundamental data that has been driving LU's share price lower, would have tried (unsuccessfully, I might add) to pick a bottom in the stock each time the weekly Stochastics tried to emerge from oversold territory. Isn't it interesting how in the same marketplace, one stock can march steadily higher, while another can march steadily lower? This is where it is absolutely critical that we (as technical traders) understand the fundamentals of a given company whose stock we want to buy or sell. The fundamentals of MO have been telling us that any significant drop in share price is an attractive value. On the other hand, what we SHOULD have gleaned from LU's fundamentals is that any rally in the share price was a selling opportunity. I have often heard it said that you can't trade the fundamentals, and for the most part that is true. But you can't ignore them either. Fundamentals tell us whether a stock is under or overvalued and hence whether it should move up or down relative to the market. Then all we have to do is apply our technical analysis to that particular stock entering and exiting short-term trades IN AGREEMENT WITH the picture provided by the fundamentals. Even after a brutal 2 1/2 year bear market, there are an incredible number of stocks that are ridiculously overvalued based on the fundamentals. But at the same time, there are stocks that are attractively priced based on metrics such as free cash flow, earnings, dividends and market share growth. Fundamental analysis is the study of separating the wheat from the chaff. Then all we have to do is look for attractive buying opportunities in the strong stocks using our Technical Analysis and attractive selling opportunities in the weak stocks. I think the important thing to realize is that this is how investing has been done for decades and I think Warren Buffet is the king of finding those attractive values, buying them and holding onto them as they increase in value and deliver a steady stream of cash.' It may not be as exciting as buying the latest momentum stock and watching it rocket 50% in 2 weeks, but employing Fundamental and Technical analysis together will provide a more consistent path to profits. I don't care whether you call me a Fundamental Technician or a Technical Fundamentalist, my trading account tells me I am both prudent and consistent, and that is music to my ears. Hopefully this comparison between a pearl and a lump of coal helps you to see how paying attention to the fundamentals can keep your trading account balance moving in the right direction. Have a great week! Mark ************************Advertisement************************* If you trade options online, then you need an online broker 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 ************************************************************** *********************** SWING TRADER GAME PLANS *********************** Blue Monday The sentiment was very negative and resulted in a lot of red. The Nasdaq broke to lows not seen in six years and well below the 1200 level. Even a last minute short covering bounce failed at the opening resistance levels. There was nothing positive to point at on the charts and nothing positive in the outlook. A Fed surprise here would be a real surprise. To read the rest of the Swing Trader Game Plan Click here: http://www.OptionInvestor.com/itrader/indexes/swing.asp ************************Advertisement************************* _If you haven_t traded options online _ you haven_t really traded options,_ claims author Larry Spears in his new compact guide book: _7 Steps to Success _ Trading Options Online_. Order today and save 25% (only $15) by clicking on PreferredTrade and clicking on the link to the book on its home page. http://www.PreferredTrade.com/CF/Home.CFM?ID=OIN ************************************************************** ******************* 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 ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html ************************************************************** ADVERTISING INFORMATION For more information on advertising in OptionInvestor Newsletter, or any Premier Investor Network newsletter please contact: Contact Support
The Option Investor Newsletter                   Monday 09-23-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:
Stop Loss Updates BRL, BSC, MXIM
Dropped Calls: None
Dropped Puts: None
Play of the Day: Call - MXIM

Updated on the site tonight:
Market Watch
Market Posture

************************Advertisement*************************
Tired of waiting on trades to execute?
Does your broker offer Stop Losses on Options?

Trade instantly with Stop Losses at PreferredTrade Inc.
Stop Losses based on the option price or the stock price.
Move your trading into the next millennium with PreferredTrade.

Anything else is too slow!

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


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

BRL - put
Adjust from $65.50 down to $63.75

BSC - put
Adjust from $61.00 down to $59.00

MXIM - put
Adjust from $28.50 down to $26.00

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

None


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

None

************************Advertisement*************************
_If you haven_t traded options online _ you haven_t really
traded options,_ claims author Larry Spears in his new compact
guide book:

_7 Steps to Success _ Trading Options Online_.

Order today and save 25% (only $15) by clicking on PreferredTrade
and clicking on the link to the book on its home page.

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


*********************
PLAY OF THE DAY - Put
*********************

MXIM - Maxim Integrated Products - $25.48 -0.89 (-2.42 for the 
week)

Company Summary:
Founded in 1983, Maxim Integrated Products (MXIM) designs, 
develops, manufactures, and markets a broad range of linear and 
mixed-signal integrated circuits (ICs) for use in a variety of 
electronic products. Maxim circuits "connect" the real world and 
the digital world by detecting, measuring, amplifying, and 
converting real-world and communications signals, such as 
temperature, pressure, sound, voice, or light to the digital 
signals necessary for computer and DSP processing. (source: 
company release)

Why We Like It:
The Semiconductor Sector Index (SOX.X) looked like it was ready 
for a bounce, as it had sold off from 300 down to what appeared 
to be support at 250.  The index closed at 252 yesterday and the 
bounce was good for all of 4 points before rolling over and 
breaking below 250, to close at 248.  This failed rebound makes 
the sector look even weaker.  Bank of America and Prudential 
recently cut 2002 and 2003 earnings outlooks on a combined 15 
stocks in the sector.  Not that this was really news, since 
earnings and revenues cuts for the semiconductors have become as 
common as rain in April.  However, last night's announcement by 
Qualcomm that it was raising estimates for mobile phone chip 
demand in the fourth quarter looked as though it might give the 
sector a boost.  The good vibes lasted until this morning, when 
Salomon Smith Barney downgraded Texas Instruments and cut its 
price target for the stock from $30 to $15.  The entire sector 
continues to look extremely weak, and although it is hard to 
imagine the downtrend to continue without some form of a bounce, 
there will need to be some overwhelming good news to achieve a 
meaningful rally.  Until then, we will continue to play it short 
with Maxim, which is continuing its slide from a triple bottom 
point and figure breakdown.  The series of lower highs and lower 
lows has turned into simply lower lows, with each failed rebound.  
The PnF bearish vertical count of $17 will be our eventual 
target, but it will have to get through $20 round number support 
first.  The stock attempted a rally early this morning, but was 
stopped at $25.01.  New entries can looked for another failed 
rally at $25 or simply go short at the current level.  

Why This Is Our Play of the Day:

The semiconductor equipment makers got another downgrade this 
morning.  Barrington Research reported that equipment orders have 
been weakening after seeing seven months of previous upturn.  
Orders fell 5% from July to August.  In addition Soundview 
Technology Group also lowered estimates on several techs, including 
Dell (DELL), Gateway (GTW), Apple (AAPL) and Hewlett Packard(HPQ).  
The Semiconductor Index (SOX.X) continues to seek out new 4 year 
lows, closing today at 236.19.  There seems to be little support 
for the index and no good news for the group.  With consumer 
spending showing signs of an even greater slowdown, as evidenced by 
disappointing news from several retailers this morning, computer 
sales will likely see a continued slowdown, as well. Maxim lost 
another 3% today and closed within 0.15 of its low, despite a broad 
market rally toward the end of the day.  This weakness in the 
stock, and the sector, combine to leave our bearish sentiment 
unchanged.

BUY PUT OCT-25 XIQ-VE OI= 1409 at $3.10 SL=1.60
BUY PUT NOV-25*XIQ-WE OI= 1493 at $4.00 SL=2.00

Average Daily Volume = 8.96 mil




************************Advertisement*************************
If you trade options online, then you need an online broker
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
**************

Losing Ugly

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/092302.asp


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

No Reason to Reconsider

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://members.OptionInvestor.com/watchlist/092302.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
**********

Please read our disclaimer at:
http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html


**************************************************************
ADVERTISING INFORMATION

For more information on advertising in OptionInvestor Newsletter,
or any Premier Investor Network newsletter please contact:

Contact Support


DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives